[Federal Register Volume 77, Number 3 (Thursday, January 5, 2012)]
[Proposed Rules]
[Pages 594-663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-33364]



[[Page 593]]

Vol. 77

Thursday,

No. 3

January 5, 2012

Part III





Federal Reserve System





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12 CFR Part 252





 Enhanced Prudential Standards and Early Remediation Requirements for 
Covered Companies; Proposed Rule

  Federal Register / Vol. 77 , No. 3 / Thursday, January 5, 2012 / 
Proposed Rules  

[[Page 594]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 252

[Regulation YY; Docket No. 1438]
RIN 7100-AD-86


Enhanced Prudential Standards and Early Remediation Requirements 
for Covered Companies

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board is requesting comment on proposed rules that would 
implement the enhanced Prudential standards required to be established 
under section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act or Act) and the early remediation 
requirements established under section 166 of the Act. The enhanced 
standards include risk-based capital and leverage requirements, 
liquidity standards, requirements for overall risk management 
(including establishing a risk committee), single-counterparty credit 
limits, stress test requirements, and a debt-to-equity limit for 
companies that the Financial Stability Oversight Council has determined 
pose a grave threat to financial stability.

DATES: Comments: Comments should be received on or before March 31, 
2012.

ADDRESSES: You may submit comments, identified by Docket No. 1438 and 
RIN 7100-AD-86 by any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include docket 
and RIN numbers in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Streets NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Mark Van Der Weide, Senior Associate 
Director, (202) 452-2263, or Molly E. Mahar, Senior Supervisory 
Financial Analyst, (202) 973-7360, Division of Banking Supervision and 
Regulation; or Laurie Schaffer, Associate General Counsel, (202) 452-
2272, or Dominic A. Labitzky, Senior Attorney, (202) 452-3428, Legal 
Division.
    Risk-Based Capital Requirements and Leverage Limits: Anna Lee 
Hewko, Assistant Director, (202) 530-6260, or Meg Donovan, Supervisory 
Financial Analyst, (202) 872-7542, Division of Banking Supervision and 
Regulation; or April C. Snyder, Senior Counsel, (202) 452-3099, or 
Benjamin W. McDonough, Senior Counsel, (202) 452-2036, Legal Division.
    Liquidity Requirements: Mary Aiken, Manager, (202) 721-4534, or 
Chris Powell, Financial Analyst, (202) 921-4353, Division of Banking 
Supervision and Regulation; or April C. Snyder, Senior Counsel, (202) 
452-3099, Legal Division.
    Single-Counterparty Credit Limits: Mark Van Der Weide, Senior 
Associate Director, (202) 452-2263, or Molly E. Mahar, Senior 
Supervisory Financial Analyst, (202) 973-7360, Division of Banking 
Supervision and Regulation; or Pamela G. Nardolilli, Senior Counsel, 
(202) 452-3289, Patricia P. Yeh, Counsel, (202) 912-4304, or Anna M. 
Harrington, Attorney, (202) 452-6406, Legal Division.
    Risk Management and Risk Committee Requirements: Pamela A. Martin, 
Senior Supervisory Financial Analyst, (202) 452-3442, Division of 
Banking Supervision and Regulation; or Jonathan D. Stoloff, Senior 
Counsel, (202) 452-3269, or Jeremy C. Kress, Attorney, (202) 872-7589, 
Legal Division.
    Stress Test Requirements: Tim Clark, Senior Adviser, (202) 452-
5264, Lisa Ryu, Assistant Director, (202) 263-4833, Constance Horsley, 
Manager, (202) 452-5239 or David Palmer, Senior Supervisory Financial 
Analyst, (202) 452-2904, Division of Banking Supervision and 
Regulation; Dominic A. Labitzky, Senior Attorney, (202) 452-3428, or 
Christine E. Graham, Senior Attorney, (202) 452-3005, Legal Division.
    Debt-to-Equity Limits for Certain Covered Companies: Robert Motyka, 
Senior Project Manager, (202) 452-5231, Division of Banking Supervision 
and Regulation; or April C. Snyder, Senior Counsel, (202) 452-3099, or 
Benjamin W. McDonough, Senior Counsel, (202) 452-2036, Legal Division.
    Early Remediation Framework: Barbara J. Bouchard, Senior Associate 
Director, (202) 452-3072, or Molly E. Mahar, Senior Supervisory 
Financial Analyst, (202) 973-7360, Division of Banking Supervision and 
Regulation; or Paul F. Hannah, Counsel, (202) 452-2810, or Jay R. 
Schwarz, Counsel, (202) 452-2970, Legal Division.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
II. Overview of the Proposal
    A. Scope of Application
    B. Risk-Based Capital Requirements and Leverage Limits
    C. Liquidity Requirements
    D. Single-Counterparty Credit Limits
    E. Risk Management and Risk Committee Requirements
    F. Stress Testing Requirements
    G. Debt-to-Equity Limits for Certain Covered Companies
    H. Early Remediation Framework
    I. Transition Arrangements and Ongoing Compliance
    J. Reservation of Authority
    K. Common Definitions
III. Risk-Based Capital Requirements and Leverage Limits
    A. Background
    B. Overview of the Proposed Rule
    1. Capital Planning and Minimum Capital Requirements
    2. Quantitative Risk-Based Capital Surcharge
IV. Liquidity Requirements
    A. Background
    B. Overview of the Proposed Rule
    1. Key Definitions
    2. Corporate Governance Provisions
    3. Liquidity Requirements
V. Single Counterparty Exposure Limits
    A. Background
    B. Overview of the Proposed Rule
VI. Risk Management and Risk Committee Requirements
    A. Background
    B. Overview of the Proposed Rule
    1. Risk Committee Requirements
    2. Additional Enhanced Risk Management Standards for Covered 
Companies
VII. Stress Test Requirements
    A. Background
    B. Overview of the Proposed Rule
    1. Annual Supervisory Stress Tests Conducted by the Board
    2. Annual and Additional Stress Tests Conducted by the Companies
    C. Request for Comments
VIII. Debt-to-Equity Limit for Certain Covered Companies
    A. Background
    B. Overview of the Proposed Rule
IX. Early Remediation
    A. Background
    B. Overview of the Proposed Rule
    1. Early Remediation Requirements
    2. Early Remediation Triggering Events

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X. Administrative Law Matters
    A. Solicitation of Comments and Use of Plain Language
    B. Paperwork Reduction Act Analysis
    C. Regulatory Flexibility Act Analysis

I. Introduction

    The recent financial crisis showed that some financial companies 
had grown so large, leveraged, and interconnected that their failure 
could pose a threat to overall financial stability. The sudden 
collapses or near-collapses of major financial companies were among the 
most destabilizing events of the crisis. The crisis also demonstrated 
weaknesses in the existing framework for supervising, regulating and 
otherwise constraining the risks of major financial companies, as well 
as deficiencies in the government's toolkit for managing their failure.
    As a result of the imprudent risk taking of major financial 
companies and the severe consequences to the financial system and the 
economy associated with the disorderly failure of these interconnected 
companies, the U.S. government (and many foreign governments in their 
home countries) intervened on an unprecedented scale to reduce the 
impact of, or prevent, the failure of these companies and the attendant 
consequences for the broader financial system. Market participants 
before the crisis had assumed some probability that major financial 
companies would receive government assistance if they became troubled. 
But the actions taken by the government in response to the crisis, 
although necessary, have solidified that market view.
    The market perception that some companies are ``too big to fail'' 
poses threats to the financial system. First, it reduces the incentives 
of shareholders, creditors and counterparties of these companies to 
discipline excessive risk-taking. Second, it produces competitive 
distortions because companies perceived as ``too big to fail'' can 
often fund themselves at a lower cost than other companies. This 
distortion is unfair to smaller companies, damaging to competition, and 
tends to artificially encourage further consolidation and concentration 
in the financial system.
    A major thrust of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Dodd-Frank Act or Act) \1\ is mitigating the 
threat to financial stability posed by systemically important financial 
companies. The Dodd-Frank Act addresses this problem with a multi-
pronged approach: a new orderly liquidation authority for financial 
companies (other than banks and insurance companies); the establishment 
of the Financial Stability Oversight Council (Council) empowered with 
the authority to designate nonbank financial companies for Board 
oversight; stronger regulation of major bank holding companies and 
nonbank financial companies designated for Board oversight; and 
enhanced regulation of over-the-counter (OTC) derivatives, other core 
financial markets, and financial market utilities.
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
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Overview of Statutory Requirements

    The focus of this proposal is stronger regulation of major bank 
holding companies and nonbank financial companies designated by the 
Council for Board supervision. In particular, sections 165 and 166 of 
the Dodd-Frank Act require the Board to impose a package of enhanced 
prudential standards on bank holding companies with total consolidated 
assets of $50 billion or more \2\ and nonbank financial companies the 
Council has designated, pursuant to section 113 of the Dodd-Frank 
Act,\3\ for supervision by the Board (together, covered companies and 
each a covered company). By their terms, sections 165 and 166 of the 
Act apply to any foreign nonbank financial company designated by the 
Council for supervision by the Board \4\ and any foreign banking 
organization with total consolidated assets of $50 billion or more that 
is or is treated as a bank holding company for purposes of the Bank 
Holding Company Act of 1956 pursuant to section 8(a) of the 
International Banking Act of 1978.\5\ However, as explained in greater 
detail below, this proposal does not apply to foreign banking 
organizations, and the Board expects to issue a separate proposal 
shortly that would apply the enhanced standards of sections 165 and 166 
of the Act to foreign banking organizations. The definition of 
``covered company'' for purposes of the proposal would nonetheless 
include a foreign banking organization's U.S.-based bank holding 
company subsidiary that on its own has total consolidated assets of $50 
billion or more.\6\ This proposal would not extend to the U.S. 
operations of a foreign banking organization that are conducted outside 
of a U.S.-based bank holding company subsidiary.
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    \2\ The Board, pursuant to a Council recommendation, may raise 
the $50 billion asset threshold for bank holding companies with 
respect to the application of certain enhanced standards. See 12 
U.S.C. 5365(a)(2)(B).
    \3\ See 12 U.S.C. 5323. The Council proposed rules to implement 
its authority under section 113 in January 2011 and October 2011. 
See 76 FR 4555 (January 26, 2011) and 76 FR 64264 (October 18, 
2011).
    \4\ See 12 U.S.C. 5323(b). Section 102(c) limits the application 
of section 165 to only the U.S. activities and subsidiaries of a 
foreign nonbank financial company. 12 U.S.C. 5311(c).
    \5\ See 12 U.S.C. 5311(a)(1) (defining the term ``bank holding 
company'' for purposes of Title I of the Dodd-Frank Act). A foreign 
banking organization is treated as a bank holding company pursuant 
to section 8(a) of the International Banking Act if the foreign 
banking organization operates a branch, agency or commercial lending 
company in the United States.
    \6\ With the exception of the proposed liquidity and enterprise-
wide risk management requirements and the debt-to-equity limit for 
covered companies that the Council has determined pose a grave 
threat, 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) until July 21, 2015. This 
is 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.
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    The prudential standards for covered companies required under 
section 165 of the Dodd-Frank Act must include enhanced risk-based 
capital and leverage requirements, enhanced liquidity requirements, 
enhanced risk management and risk committee requirements, a requirement 
to submit a resolution plan, single-counterparty credit limits, stress 
tests, and a debt-to-equity limit for covered companies that the 
Council has determined pose a grave threat to financial stability. In 
general, the Act directs the Board to implement enhanced prudential 
standards that strengthen existing micro-prudential supervision \7\ and 
regulation of individual companies and incorporate macro-prudential 
considerations so as to reduce threats posed by covered companies to 
the stability of the financial system as a whole. Section 166 of the 
Act requires the Board to establish a regulatory framework for the 
early remediation of financial weaknesses of covered companies in order 
to minimize the probability that such companies will become insolvent 
and the potential harm of such insolvencies to the financial stability 
of the United States.\8\
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    \7\ Micro-prudential supervision focuses on surveillance of the 
safety and soundness of individual companies, whereas macro-
prudential supervision focuses on the surveillance of systemic risk 
posed by individual companies and systemic risks posed by 
interconnectedness among companies.
    \8\ See 12 U.S.C. 5366(b).
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    In addition to the required standards, the Act authorizes but does 
not require the Board to establish additional enhanced standards for 
covered companies relating to (i) contingent capital; (ii) public 
disclosures; (iii) short-term debt limits; and (iv) such other 
prudential standards as the Board

[[Page 596]]

determines appropriate.\9\ The Board is not proposing any of these 
supplemental standards at this time but continues to consider whether 
adopting any of these standards would be appropriate.
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    \9\ See 12 U.S.C. 5365(b)(1)(B).
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    The Act requires the enhanced standards established by the Board 
for covered companies under section 165 to be more stringent than those 
standards applicable to other bank holding companies and nonbank 
financial companies that do not present similar risks to U.S. financial 
stability.\10\ Section 165 also requires that the enhanced standards 
established pursuant to that section increase in stringency based on 
the systemic footprint and risk characteristics of individual covered 
companies.\11\
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    \10\ See 12 U.S.C. 5365(a)(1)(A).
    \11\ See 12 U.S.C. 5365(a)(1)(B). Under section 165(a)(1)(B), 
the enhanced standards must increase in stringency, based on the 
considerations listed in section 165(b)(3). These considerations are 
summarized in note 13, infra.
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    In prescribing prudential standards under section 165(b)(1) \12\ to 
covered companies, the Board is required to take into account 
differences among bank holding companies covered by the rule and 
nonbank financial companies supervised by the Board, based on certain 
considerations.\13\ The Board also has authority under section 165 to 
tailor the application of the standards, including differentiating 
among covered companies on an individual basis or by category.\14\ When 
differentiating among companies for purposes of applying the standards 
established under section 165, the Board may consider the companies' 
size, capital structure, riskiness, complexity, financial activities, 
and any other risk-related factor the Board deems appropriate.
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    \12\ 12 U.S.C. 5365(b)(1). The Board is separately required to 
issue regulations to implement the risk committee and stress test 
enhanced standards pursuant to sections 165(h) and 165(i), 
respectively.
    \13\ See 12 U.S.C. 5365(b)(3). The factors the Board must 
consider include--(i) The factors described in sections 113(a) and 
(b) of the Dodd-Frank Act (12 U.S.C. 5313(a) and (b)); (ii) whether 
the company owns an insured depository institution; (iii) 
nonfinancial activities and affiliations of the company; and (iv) 
any other risk-related factors that the Board determines 
appropriate. 12 U.S.C. 5365(b)(3)(A). The Board must, as 
appropriate, adapt the required standards in light of any 
predominant line business of a nonbank financial company for which 
particular standards may not be appropriate. 12 U.S.C. 
5365(b)(3)(D). Section 165(b)(3) also requires the Board, to the 
extent possible, to ensure that small changes in the factors listed 
in sections 113(a) and 113(b) of the Dodd-Frank Act would not result 
in sharp, discontinuous changes in the prudential standards 
established by the Board under section 165(b)(1). 12 U.S.C. 
5365(b)(3)(B). The statute also directs the Board to take into 
account any recommendations made by the Council pursuant to its 
authority under section 115 of the Dodd-Frank Act. 12 U.S.C. 
5365(b)(3)(C).
    \14\ See 12 U.S.C. 5365(a)(2)(A).
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II. Overview of the Proposal

    The Board is requesting comment on proposed rules to implement 
certain requirements of sections 165 and 166 of the Dodd-Frank Act.\15\ 
The Board consulted with the Council, including by providing periodic 
updates to members of the Council and their staff on the development of 
the proposed enhanced standards. The proposal reflects comments 
provided to the Board as a part of this consultation process. The Board 
also intends, before imposing prudential standards or any other 
requirements pursuant to section 165 that are likely to have a 
significant impact on a functionally regulated subsidiary or depository 
institution subsidiary of a covered company, to consult with each 
Council member that primarily supervises any such subsidiary.\16\
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    \15\ 12 U.S.C. 5365 and 5366.
    \16\ See 12 U.S.C. 5365(b)(4).
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    This proposal includes rules to implement the requirements under 
section 165 related to (i) risk-based capital and leverage; (ii) 
liquidity; (iii) single-counterparty credit limits; (iv) overall risk 
management and risk committees; (v) stress tests; and (vi) a debt-to-
equity limit for covered companies that the Council has determined pose 
a grave threat to financial stability. The proposal also includes rules 
to implement the early remediation requirements in section 166 of the 
Act related to establishing measures of financial condition and 
remediation requirements that increase in stringency as the financial 
condition of a covered company declines.
    Section 165(d) of the Act also establishes requirements that each 
covered company submit periodically to the Board and Federal Deposit 
Insurance Corporation (FDIC) a plan for rapid and orderly resolution 
under the Bankruptcy Code in the event of its material financial 
distress or failure, as well as a periodic report regarding credit 
exposures between each covered company and other significant financial 
companies. The Board and FDIC jointly issued a final rule to implement 
the resolution plan requirement that became effective on November 30, 
2011 and expect to implement periodic reporting of credit exposures at 
a later date.\17\
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    \17\ See 76 FR 67323 (November 1, 2011). In response to 
significant concerns expressed by commenters about the clarity of 
key definitions and the scope of the reporting requirement of the 
proposed credit exposure reporting requirement, the Board and FDIC 
postponed finalizing the credit exposure reporting requirement. The 
Board believes that robust reporting of a covered company's credit 
exposures to other significant bank holding companies and financial 
companies is critical to ongoing risk management by covered 
companies, as well as to the Board's ongoing supervision of covered 
companies and financial stability responsibilities, and the FDIC's 
responsibility to resolve failed covered companies. However, the 
agencies also recognize that these reports would be most useful and 
complete if developed in conjunction with the Dodd-Frank Act's 
single counterparty credit exposure limits. See 12 U.S.C. 5365(e).
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    By setting forth comprehensive enhanced prudential standards and an 
early remediation framework for covered companies, the proposal would 
create an integrated set of requirements that seeks to meaningfully 
reduce the probability of failure of systemically important companies 
and minimize damage to the financial system and the broader economy in 
the event such a company fails. The proposed rules, which increase in 
stringency with the level of systemic risk posed by and the risk 
characteristics of the covered company, would provide incentives for 
covered companies to reduce their systemic footprint and encourage 
covered companies to consider the external costs that their failure or 
distress would impose on the broader financial system, thus helping to 
offset any implicit subsidy they may have enjoyed as a result of market 
perceptions of implicit government support.
    This proposal provides a core set of concrete rules to complement 
the Federal Reserve's existing efforts to enhance the supervisory 
framework for covered companies. The Federal Reserve, since before the 
passage of the Dodd-Frank Act, has been taking steps to strengthen its 
supervision of the largest, most complex banking companies. For 
example, the Federal Reserve created a centralized multidisciplinary 
body called the Large Institution Supervision Coordinating Committee 
(LISCC) to oversee the supervision of these companies. This committee 
uses horizontal, or cross-company, evaluations to monitor 
interconnectedness and common practices among companies that could lead 
to greater systemic risk. The committee also uses additional and 
improved quantitative methods for evaluating the financial condition of 
companies and the risks they might pose to each other and to the 
broader financial system.

A. Scope of Application

    The Dodd-Frank Act requires the Board to apply enhanced standards 
established under section 165(b)(1) and early remediation requirements 
under

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section 166 of the Dodd-Frank Act to covered companies. As noted above, 
covered companies are described in the Act as bank holding companies 
with total consolidated assets of $50 billion or more (which would 
include any foreign banking organization that has banking operations in 
the United States and that has global consolidated assets of $50 
billion or more) and nonbank financial companies the Council has 
designated for supervision by the Board. The proposal incorporates this 
definition but, for reasons described below, at this time only covers 
U.S. bank holding companies and nonbank financial companies the Council 
has designated.
    Under section 165(i)(2), the requirements to conduct annual stress 
tests apply to any financial company with more than $10 billion in 
total consolidated assets and that is regulated by a primary federal 
financial regulatory agency.\18\ The Board, as the primary Federal 
financial regulatory agency for bank holding companies, savings and 
loan holding companies, and state member banks, proposes to apply the 
annual company-run stress test requirements to any bank holding 
company, savings and loan holding company,\19\ and state member bank 
with more than $10 billion in total consolidated assets. Moreover, the 
requirement to establish a risk committee under section 165(h) of the 
Act applies to any publicly traded bank holding company with $10 
billion or more in total consolidated assets.\20\
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    \18\ 12 U.S.C. 5365(i)(2). The Dodd-Frank Act defines primary 
financial regulatory agency in section 2 of the Act. See 12 U.S.C. 
5301(12). The Board, Office of the Comptroller of the Currency, and 
Federal Deposit Insurance Corporation have consulted on rules 
implementing section 165(i)(2).
    \19\ As discussed below, the Board proposes to delay the 
effective date of the portion of the proposal implementing section 
165(i)(2) for savings and loan holding companies until such time as 
the Board has implemented consolidated capital rules for savings and 
loan holding companies.
    \20\ 12 U.S.C. 5365(h).
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    For purposes of the definition of a covered company, a bank holding 
company is deemed to have met the $50 billion asset criterion based on 
the average of the company's total consolidated assets as reported on 
its four most recent quarterly reports to the Board, i.e., the 
Consolidated Financial Statements for Bank Holding Companies (Federal 
Reserve Form FR Y-9C).\21\ This calculation will be effective as of the 
due date of the bank holding company's most recent FR Y-9C.\22\ Under 
the proposal, a bank holding company that becomes a covered company 
would remain a covered company until its total consolidated assets, as 
reported to the Board on a quarterly basis on the FR Y-9C, fall and 
remain below $50 billion for four consecutive quarters.
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    \21\ With respect to a company that has been a bank holding 
company for less than four quarters, the Board would refer to the 
company's financial statements from quarters preceding the time that 
it began reporting on the FR Y-9C. For example, if a bank holding 
company had been reporting on the FR Y-9C for only one quarter, the 
Board would refer to its GAAP financial statements for the prior 
three quarters for purposes of calculating its average total 
consolidated assets.
    \22\ For purposes of subpart E of the proposed rule, the same 
calculation approach would be applied to any bank holding company in 
determining when it becomes an over $10 billion bank holding 
company. For purposes of subpart G of the proposed rule, the same 
calculation approach would be applied to any bank holding company, 
savings and loan holding company, or state member bank in 
determining when it becomes an over $10 billion company.
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    This proposal would apply the same set of enhanced prudential 
standards to covered companies that are bank holding companies and 
covered companies that are nonbank financial companies. As noted above, 
however, in applying the enhanced prudential standards to covered 
companies, the Board may determine, on its own or in response to a 
recommendation by the Council, to tailor the application of the 
enhanced standards to different companies on an individual basis or by 
category, taking into consideration their capital structure, riskiness, 
complexity, financial activities, size, and any other risk-related 
factors that the Board deems appropriate.\23\
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    \23\ 12 U.S.C. 5365(a)(2).
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    The Board notes that this authority will be particularly important 
in applying the enhanced standards to specific nonbank financial 
companies designated by the Council that are organized and operated 
differently from banking organizations.\24\ Under the Act,\25\ the 
Council generally may determine that a nonbank financial company, i.e., 
a company predominantly engaged in financial activities, should be 
subject to supervision by the Board and the enhanced standards 
established pursuant to section 165 and the early remediation 
requirements established pursuant to section 166, if material financial 
distress at such company, or the nature, scope, size, scale, 
concentration, interconnectedness, or mix of the activities of the 
nonbank financial company, could pose a threat to the financial 
stability of the United States. As such, the types of business models, 
capital structures, and risk profiles of companies that would be 
subject to designation by the Council could vary significantly.
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    \24\ To date, the Council has not designated any nonbank 
financial company for supervision by the Board.
    \25\ See 12 U.S.C. 5315. See also 76 FR 64264 (Oct. 18, 2011) 
(proposing to implement the Council's authority under section 113 of 
the Dodd-Frank).
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    While this proposal was largely developed with large, complex bank 
holding companies in mind, some of the standards nonetheless provide 
sufficient flexibility to be readily implemented by covered companies 
that are not bank holding companies. In prescribing prudential 
standards under section 165(b)(1), the Board would to take into account 
differences among bank holding companies and nonbank financial 
companies supervised by the Board.\26\ Following designation of a 
nonbank financial company by the Council, the Board would thoroughly 
assess the business model, capital structure, and risk profile of the 
designated company to determine how the proposed enhanced prudential 
standards and early remediation requirements should apply. The Board 
may, by order or regulation, tailor the application of the enhanced 
standards to designated nonbank financial companies on an individual 
basis or by category, as appropriate.\27\
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    \26\ See 12 U.S.C. 5365(b)(3). The factors the Board must take 
into consideration in prescribing the enhanced standards under 
section 165(b)(1) are described above. See supra note 13. Under 
section 171 of the Dodd-Frank Act, the Board is required to impose 
the same minimum risk-based and leverage capital requirements on 
bank holding companies and nonbank covered company as it imposes on 
insured depository institutions. 12 U.S.C. 5371.
    \27\ Following designation of nonbank financial companies by the 
FSOC, the Board also would consider the appropriate risk-based 
capital treatment of asset types with no explicit treatment under 
the current risk-based capital rules. See generally 76 FR 37620 
(June 28, 2011).
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    The Board solicits comment on alternative approaches for applying 
the enhanced prudential standards and the early remediation 
requirements the Dodd-Frank Act requires to nonbank covered companies.
    Question 1: What additional characteristics of a nonbank covered 
company--in addition to its business model, capital structure, and risk 
profile--should the Board consider when determining how to apply the 
enhanced standards and the early remediation requirements to such a 
company?
    Question 2: What are the potential unintended consequences and 
burdens associated with subjecting a nonbank covered company to the 
enhanced prudential standards and the early remediation requirements?
    The current proposal would apply only to U.S.-based bank holding 
companies that are covered companies and to nonbank covered companies, 
and would not apply to foreign banking

[[Page 598]]

organizations. As discussed above, however, foreign banking 
organizations that have U.S. banking operations (whether a U.S. branch, 
a U.S. agency, or a U.S. subsidiary bank holding company or bank) and 
have global total consolidated assets \28\ of $50 billion or more are 
subject to sections 165 and 166 of the Dodd-Frank Act. Section 165 
instructs the Board, in applying the enhanced prudential standards of 
section 165 to foreign financial companies, to give due regard to the 
principle of national treatment and equality of competitive 
opportunity, and to take into account the extent to which the foreign 
company is subject, on a consolidated basis, to home country standards 
that are comparable to those applied to financial companies in the 
United States.
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    \28\ For a foreign banking organization subject to section 165 
of the Dodd-Frank Act, total consolidated assets would be based on 
the foreign banking organization's Capital and Asset Reports for 
Foreign Banking Organizations (Federal Reserve Form FR Y-7Q).
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    Determining how to apply the enhanced prudential standards and 
early remediation framework established by the Dodd-Frank Act to 
foreign banking organizations in a manner consistent with the purposes 
of the statute and the Board's existing framework of supervising 
foreign banking organizations is difficult. The scope of enhanced 
prudential standards required under sections 165 and 166 extends beyond 
the set of prudential standards that are part of existing international 
agreements, and foreign banking organizations are subject to home 
country regulatory and supervisory regimes that employ a wide variety 
of approaches to prudential regulation. Further, foreign banking 
organizations operate in the United States through diverse structures, 
complicating the consistent application of the enhanced standards to 
the U.S. operations of a foreign banking organization. Finally, the 
risk posed to U.S. financial stability by foreign banking organizations 
that are subject to sections 165 and 166 varies widely. The Board is 
actively developing a proposed framework for applying the Act's 
enhanced prudential standards and early remediation requirement to 
foreign banking organizations, and expects to issue this framework for 
public comment shortly.
    While sections 165 and 166 generally do not apply to savings and 
loan holding companies, section 165(i)(2) requires the Board to issue 
regulations pursuant to which any financial company for which the Board 
is the primary federal financial regulatory agency and that has more 
than $10 billion in total consolidated assets must conduct an annual 
stress test.\29\ Thus, the proposal would apply annual company-run 
stress test requirements to any savings and loan holding company with 
more than $10 billion in consolidated assets. However, because the 
annual stress test requirement, as proposed, is predicated on a company 
being subject to consolidated capital requirements, this proposal would 
delay the effective date of the company-run stress test requirements 
for savings and loan holding companies until the Board has established 
risk-based capital requirements for savings and loan holding companies.
---------------------------------------------------------------------------

    \29\ Among entities covered by this part of the Dodd-Frank are 
state member banks, bank holding companies, and savings and loan 
holding companies with total consolidated assets of $10 billion or 
more.
---------------------------------------------------------------------------

    While the remaining parts of section 165 and section 166 do not 
specifically apply to savings and loan holding companies, the Board, as 
the primary supervisor of savings and loan holding companies, has the 
authority under the Home Owners' Loan Act to apply the enhanced 
standards to savings and loan holding companies to ensure their safety 
and soundness.\30\ The Board intends to issue a separate proposal for 
notice and comment to initially apply the enhanced standards and early 
remediation requirements to all savings and loan holding companies with 
substantial banking activities--i.e., any savings and loan holding 
company that (i) has total consolidated assets of $50 billion or more; 
and (ii)(A) has savings association subsidiaries which comprise 25 
percent or more of such savings and loan holding company's total 
consolidated assets, or (B) controls one or more savings associations 
with total consolidated assets of $50 billion or more. The Board 
believes that applying the enhanced prudential standards of this 
proposal to savings and loan holding companies that satisfy these 
criteria is an important aspect of ensuring their safety and soundness. 
The Board also may determine to apply the enhanced standards to any 
savings and loan holding company, if appropriate to ensure the safety 
and soundness of such company, on a case-by-case basis.
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    \30\ See 12 U.S.C. 1467a(g) (authorizing the Board to issue such 
regulations and orders as the Board deems necessary or appropriate 
to administer and carry out the purposes of section 10 of the Home 
Owners' Loan Act).
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    As is the case with stress testing, many of the other enhanced 
standards are predicated on a covered company being subject to 
consolidated capital requirements. Therefore, similar to the approach 
with respect to applying the annual company-run stress test requirement 
to savings and loan holding companies, the Board intends to impose 
enhanced prudential standards and early remediation requirements on 
savings and loan holding companies with substantial banking activities 
once the Board has established risk-based capital requirements for 
savings and loan holding companies.
    Question 3: The Board seeks comment on its proposed approach to the 
application of the company-run stress test requirements, including the 
delayed effective date, to savings and loan holding companies. Also, 
what additional or alternative criteria should the Board consider for 
determining which savings and loan holding companies initially would be 
subject to the enhanced prudential standards and early remediation 
requirements?

B. Risk-Based Capital Requirements and Leverage Limits

    The recent financial crisis exposed significant weaknesses in the 
regulatory capital requirements for large banking companies. The amount 
of capital held by many large, complex banking companies proved to be 
inadequate to cover the risks that had accumulated in the companies. 
For certain exposure types, such as trading positions, OTC derivatives, 
and securitization and re-securitization exposures, it became evident 
that capital requirements did not adequately cover the risk of loss 
from those activities. In addition, it became apparent that some of the 
instruments that qualified as tier 1 capital for banking companies, the 
core measure of capital adequacy, were not truly loss absorbing.
    Section 165(b)(1)(A)(i) of the Act directs the Board to establish 
enhanced risk-based capital and leverage standards for covered 
companies to address these weaknesses. The Board plans to meet this 
statutory requirement with a two-part effort. Under this proposal, the 
Board would subject all covered companies to the Board's capital plan 
rule, which currently requires all bank holding companies with $50 
billion or more in consolidated assets to submit an annual capital plan 
to the Board for review (capital plan rule).\31\ Under the capital plan 
rule, covered companies would have to demonstrate to the Board that 
they have robust, forward-looking capital planning processes that 
account for their unique risks and that permit continued operations 
during times of economic

[[Page 599]]

and financial stress. The supervisory and company-run stress tests that 
are part of this proposal and discussed in detail below are important 
aspects of this forward-looking process.\32\ The Board expects that a 
covered company will integrate into its capital plan, as one part of 
the underlying analysis, the results of the company-run stress tests 
conducted in accordance with section 165(i)(2) of the Dodd-Frank Act 
and the Board's proposed implementing rules. The results of those 
stress tests, as well as the annual supervisory stress test conducted 
by the Board under section 165(i)(1) of the Dodd-Frank, will be 
considered in the evaluation of a covered company's capital plan.
---------------------------------------------------------------------------

    \31\ 12 CFR 225.8.
    \32\ In June 2011, the Board, along with the OCC and FDIC, 
issued for comment proposed supervisory guidance on stress testing 
for banking organizations with more than $10 billion in total 
assets. 76 FR 35072 (June 15, 2011). That proposed guidance contains 
principles for an effective stress testing framework that would 
cover an organization's various stress testing activities, including 
capital and liquidity stress testing. The agencies issued the 
proposed guidance for comment separately from this proposal because 
the proposed guidance is intended to apply broadly to organizations' 
use of stress testing in overall risk management, not just to 
capital and liquidity stress testing, as is the case for the 
requirements of this proposed rule. The agencies are considering 
comments on the proposed guidance and expect to issue a final 
version shortly. The Board expects that companies would follow the 
principles set forth in the final stress testing guidance--as well 
as with other relevant supervisory guidance--when conducting capital 
and liquidity stress testing in accordance with requirements in this 
proposed rule.
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    Under the capital plan rule, covered companies would be required to 
demonstrate to the Board their ability to maintain capital above 
existing minimum regulatory capital ratios and above a tier 1 common 
ratio of 5 percent under both expected and stressed conditions over a 
minimum nine-quarter planning horizon.\33\ Covered companies with 
unsatisfactory capital plans would face limits on their ability to make 
capital distributions.
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    \33\ Under the capital plan rule, tier 1 common is defined 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. Specifically, non-common elements include the 
following items captured in the FR Y-9C reporting form: Schedule HC, 
line item 23 net of Schedule HC-R, line item 5; and Schedule HC-R, 
line items 6a, 6b, and 6c.
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    The Board intends to supplement the enhanced risk-based capital and 
leverage requirements included in this proposal with a subsequent 
proposal to implement a quantitative risk-based capital surcharge for 
covered companies or a subset of covered companies. Over the past few 
years, the Federal Reserve and other U.S. federal banking agencies have 
worked together with other members of the Basel Committee on Banking 
Supervision (BCBS) to strengthen the regulatory capital regime for 
internationally active banks and develop a framework for a risk-based 
capital surcharge for the world's largest, most interconnected banking 
companies. The new regime for internationally active banks, known as 
Basel III,\34\ materially improves the quality of regulatory capital 
and introduces a new minimum common equity requirement. Basel III also 
raises the numerical minimum capital requirements and introduces 
capital conservation and countercyclical buffers to induce banking 
organizations to hold capital in excess of regulatory minimums. In 
addition, Basel III establishes for the first time an international 
leverage standard for internationally active banks. The Board is 
working with the other U.S. banking regulators to implement the Basel 
III capital reforms in the United States.
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    \34\ See Basel Committee on Banking Supervision, Basel III: A 
global regulatory framework for more resilient banks and banking 
systems (revised June 2011), available at http://www.bis.org/publ/bcbs189.htm (hereinafter Basel III framework). See also Basel 
Committee on Banking Supervision, Basel III: International framework 
for liquidity risk measurement, standards and monitoring (December 
2010), available at www.bis.org/publ/bcbs188.htm (hereinafter Basel 
III liquidity framework); Enhancements to the Basel II framework 
(July 2009), available at www.bis.org/publ/bcbs157.htm; and 
Revisions to the Basel II market risk framework (July 2009), 
available at www.bis.org/publ/bcbs158.htm.
---------------------------------------------------------------------------

    Building on the Basel III reforms, the BCBS published a document in 
November 2011 entitled Global systemically important banks: Assessment 
methodology and the additional loss absorbency requirement (BCBS 
framework), which set forth an additional capital requirement for 
global systemically important banks (G-SIBs).\35\
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    \35\ See Basel Committee on Banking Supervision, Global 
systemically important banks: Assessment methodology and the 
additional loss absorbency requirement (November 2011), available at 
http://www.bis.org/publ/bcbs207.htm (hereinafter BCBS capital 
surcharge framework).
---------------------------------------------------------------------------

    The Basel III and BCBS frameworks, once implemented in the United 
States, are expected to significantly enhance risk-based capital and 
constrain the leverage of covered companies and will be a key part of 
the Board's overall approach to enhancing the risk-based capital and 
leverage standards applicable to these companies in accordance with 
section 165 of the Dodd-Frank Act. The Board intends to propose a 
quantitative risk-based capital surcharge in the United States based on 
the BCBS approach consistent with the BCBS's implementation timeframe. 
The forthcoming proposal would contemplate adopting implementing rules 
in 2014, and requiring G-SIBs to meet the capital surcharges on a 
phased-in basis from 2016-2019.

C. Liquidity Requirements

    The financial crisis revealed significant weaknesses in liquidity 
buffers and liquidity risk management practices throughout the 
financial system that directly contributed to the failure or near 
failure of many companies and exacerbated the crisis. Section 
165(b)(1)(A)(ii) addresses inadequacies in the existing regulatory 
liquidity requirements by directing the Board to establish liquidity 
standards for covered companies. Similar to enhanced risk-based capital 
and leverage requirements, the Federal Reserve intends to implement 
this statutory requirement through a multi-stage approach.
    This proposal would subject covered companies to a set of enhanced 
liquidity risk management standards, including liquidity stress 
testing.\36\ The proposal builds on guidance previously adopted by the 
Board and other U.S. federal banking agencies and proposes higher 
liquidity risk management standards for covered companies.\37\
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    \36\ See supra note 32.
    \37\ Supervision and Regulation Letter SR 10-6, Interagency 
Policy Statement on Funding and Liquidity Risk Management (March 17, 
2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1006.pdf; 75 FR 13656 (March 22, 2010). The Board, 
the Office of the Comptroller of the Currency (OCC), the FDIC, the 
Office of Thrift Supervision, the National Credit Union 
Administration, and the Conference of State Bank Supervisors jointly 
issued the Interagency Liquidity Risk Policy Statement. The 
Interagency Liquidity Risk Policy Statement incorporates principles 
of sound liquidity risk management that the agencies have issued in 
the past, and supplements them with the principles of sound 
liquidity risk management established by the Basel Committee on Bank 
Supervision (Basel Committee) in its document entitled ``Principles 
for Sound Liquidity Management and Supervision.'' Principles for 
Sound Liquidity Risk Management and Supervision (September 2008), 
available at https://ww.bis.org/publ/bcbs144.htm.
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    The proposal would require covered companies to conduct internal 
stress tests at least monthly to measure their liquidity needs at 30-
day, 90-day and one-year intervals during times of instability in the 
financial markets and to hold liquid assets that would be sufficient to 
cover 30-day stressed net cash outflows under their internal stress 
scenarios. Covered companies also would be required to meet specified 
corporate governance requirements around liquidity risk management, to 
project cash flow needs over various time horizons, to establish 
internal limits on certain liquidity metrics, and

[[Page 600]]

to maintain a contingency funding plan (CFP) that identifies potential 
sources of liquidity strain and alternative sources of funding when 
usual sources of liquidity are unavailable.
    In addition to the enhanced liquidity risk management standards 
included in this proposal, the Federal Reserve and other U.S. federal 
banking agencies have been working with the BCBS over the past few 
years to develop quantitative liquidity requirements to increase the 
capacity of internationally active banking firms to absorb shocks to 
funding relative to the liquidity risks they face. The BCBS approved 
two new liquidity rules as part of the Basel III reforms in December 
2010. The first rule is a Liquidity Coverage Ratio (LCR), which would 
require banks to hold an amount of high-quality liquid assets 
sufficient to meet expected net cash outflows over a 30-day time 
horizon under a supervisory stress scenario. The second rule is the Net 
Stable Funding Ratio (NSFR), which would require banks to enhance their 
liquidity risk resiliency out to one year. Under the terms of Basel 
III, global banks are required to comply with the LCR by 2015 and with 
the NSFR by 2018.
    The Basel III liquidity rules are currently in an international 
observation period as the U.S. federal banking agencies and other BCBS 
members assess the potential impact of the rules on banks and various 
financial markets. The Board intends, in conjunction with other federal 
banking agencies, to implement these standards in the United States 
through one or more separate rulemakings. Through implementation of 
these standards in the United States, the Board anticipates that the 
Basel III liquidity rules would then become a central component of the 
enhanced liquidity requirements for covered companies, or a subset of 
covered companies, under section 165 of the Dodd-Frank Act.

D. Single-Counterparty Credit Limits

    As demonstrated in the crisis, interconnectivity among major 
financial companies poses risks to financial stability. The effects of 
one large financial company's failure or near collapse may be 
transmitted and amplified by the bilateral credit exposures between 
large, systemically important companies. The financial crisis also 
revealed inadequacies in the structure of the U.S. regulatory framework 
for single-counterparty credit limits. Although banks were subject to 
single-borrower lending and investment limits, these limits did not 
apply to bank holding companies on a consolidated basis and did not 
adequately cover credit exposures generated by derivatives and some 
securities financing transactions.\38\
---------------------------------------------------------------------------

    \38\ Section 610 of the Dodd-Frank Act amends the term ``loans 
and extensions of credit'' for purposes of the lending limits 
applicable to national banks to include any credit exposure arising 
from a derivative transaction, repurchase agreement, reverse 
repurchase agreement, securities lending transaction, or securities 
borrowing transaction. See Dodd-Frank Act, Public Law 111-203, Sec.  
610, 124 Stat. 1376, 1611 (2010). As discussed in more detail below, 
these types of transactions are also all made subject to the single 
counterparty credit limits of section 165(e). 12 U.S.C. 5365(e)(3).
---------------------------------------------------------------------------

    In an effort to address concentration risk among large financial 
institutions, section 165(e) of the Dodd-Frank Act directs the Board to 
establish single-counterparty credit limits for covered companies in 
order to limit the risks that the failure of any individual company 
could pose to a covered company.\39\ This section directs the Board to 
prescribe regulations that prohibit covered companies from having 
credit exposure to any unaffiliated company that exceeds 25 percent of 
the capital stock and surplus of the covered company.\40\ This section 
also authorizes the Board to lower the 25 percent threshold if 
necessary to mitigate risks to the financial stability of the United 
States.\41\
---------------------------------------------------------------------------

    \39\ See 12 U.S.C. 5365(e)(1).
    \40\ 12 U.S.C. 5365(e)(2).
    \41\ See id.
---------------------------------------------------------------------------

    Credit exposure to a company is defined broadly in section 165(e) 
of the Act to cover all extensions of credit to the company; all 
repurchase and reverse repurchase agreements, and securities borrowing 
and lending transactions, with the company; all guarantees and letters 
of credit issued on behalf of the company; all investments in 
securities issued by the company; counterparty credit exposure to the 
company in connection with derivative transactions; and any other 
similar transaction that the Board determines to be a credit exposure 
for purposes of section 165(e).\42\ Section 165(e) also grants 
authority to the Board to exempt transactions from the definition of 
the term ``credit exposure'' if the Board finds that the exemption is 
in the public interest and consistent with the purposes of the 
subsection.\43\
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    \42\ See 12 U.S.C. 5365(e)(3).
    \43\ See 12 U.S.C. 5365(e)(5)-(6).
---------------------------------------------------------------------------

    The proposal implements these statutory provisions by defining key 
terms, such as covered company, unaffiliated counterparty, and capital 
stock and surplus. The proposal also targets the mutual 
interconnectedness of the largest financial companies by setting a 
stricter 10 percent limit for credit exposure between a covered company 
and a counterparty that each either have more than $500 billion in 
total consolidated assets or are a nonbank covered company. In 
addition, the proposal provides rules for measuring the amount of 
credit exposure generated by the various types of credit transactions. 
Notably, the proposal would allow covered companies to reduce their 
credit exposure to a counterparty for purposes of the limit by 
obtaining credit risk mitigants such as collateral, guarantees, and 
credit derivative hedges. The proposal describes the types of 
collateral, guarantees and derivative hedges that are eligible under 
the rule and provides valuation rules for reflecting such credit risk 
mitigants.

E. Risk Management and Risk Committee Requirements

    Sound, enterprise-wide risk management by covered companies reduces 
the likelihood of their material distress or failure and thus promotes 
financial stability. In addition to adopting enhanced risk management 
standards for covered companies, the Board is directed by section 
165(h) to require publicly traded covered companies and publicly traded 
bank holding companies with $10 billion or more in total consolidated 
assets to establish a risk committee of the board of directors that is 
responsible for oversight of enterprise-wide risk management, is 
comprised of an appropriate number of independent directors, and 
includes at least one risk management expert.
    The proposal would require all covered companies to implement 
robust enterprise-wide risk management practices that are overseen by a 
risk committee of the board of directors and chief risk officer with 
appropriate levels of independence, expertise and stature. The proposal 
also would require any publicly traded bank holding company with $10 
billion or more in total consolidated assets and that is not a covered 
company to establish a risk committee.

F. Stress Testing Requirements

    The crisis also revealed weaknesses in the stress testing practices 
of large banking organizations, as well as gaps in the regulatory 
community's approach to assessing capital adequacy. During the height 
of the crisis, the Federal Reserve began stress testing the capital 
adequacy of large, complex bank holding companies as a forward-looking 
exercise designed to estimate losses, revenues, regulatory capital 
ratios, and reserve needs under various macroeconomic

[[Page 601]]

scenarios.\44\ By looking at the broad needs of the financial system 
and the specific needs of individual companies, these stress tests 
provided valuable information to market participants and had an overall 
stabilizing effect.
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    \44\ In early 2009, the Federal Reserve led the Supervisory 
Capital Assessment Program (SCAP) as a key element of the plan to 
stabilize the U.S. financial system. Building on SCAP and other 
supervisory work coming out of the crisis, the Federal Reserve 
initiated the Comprehensive Capital Analysis and Review (CCAR) in 
late 2010 to evaluate the internal capital planning processes of 
large, complex bank holding companies. The CCAR represented a 
substantial strengthening of previous approaches to ensuring that 
large firms have thorough and robust processes for managing and 
allocating their capital resources. The CCAR also focused on the 
risk measurement and management practices supporting firms' capital 
adequacy assessments, including their ability to deliver credible 
inputs to their loss estimation techniques.
---------------------------------------------------------------------------

    Section 165(i)(1) directs the Board to implement rules requiring 
the Federal Reserve, in coordination with the appropriate primary 
Federal regulatory agencies and the Federal Insurance Office, to 
conduct an annual evaluation of whether each covered company has 
sufficient capital to absorb losses as a result of adverse economic 
conditions (supervisory stress tests). The Board is also required to 
publish a summary of the results of the supervisory stress tests. In 
addition, section 165(i)(2) directs the Board to implement rules 
requiring each covered company to conduct its own semi-annual stress 
tests and any state member bank, bank holding company or savings and 
loan holding company with more than $10 billion in total consolidated 
assets (that is not a covered company) to conduct its own annual stress 
tests (company-run stress tests). Companies must also publish a summary 
of the results of the company-run stress tests.
    The proposal would implement these statutory provisions by 
requiring the Federal Reserve to conduct annual supervisory stress 
tests of covered companies under baseline, adverse, and severely 
adverse scenarios and by requiring companies that are subject to 
company-run stress test requirements to conduct their own capital 
adequacy stress tests on an annual or semi-annual basis, as applicable. 
Under the proposal, the Board would publicly disclose information on 
the company-specific results of the supervisory stress tests.

G. Debt-to-Equity Limits for Certain Covered Companies

    Section 165(j) of the Dodd-Frank Act provides that the Board must 
require a covered company to maintain a debt-to-equity ratio of no more 
than 15-to-1, upon a determination by the Council that (i) such company 
poses a grave threat to the financial stability of the United States 
and (ii) the imposition of such a requirement is necessary to mitigate 
the risk that the company poses to U.S. financial stability. The 
proposal establishes procedures to notify a covered company that the 
Council has made a determination under section 165(j) that the company 
must comply with the 15-to-1 debt-to-equity ratio requirement, defines 
``debt'' and ``equity'' for purposes of calculating compliance with the 
ratio, and provides an affected company with a transition period to 
come into compliance with the ratio.

H. Early Remediation Framework

    The financial crisis revealed that the condition of large banking 
organizations can deteriorate rapidly even during periods when their 
reported regulatory capital ratios are well above minimum requirements. 
The crisis also revealed that financial companies that addressed 
incipient financial problems swiftly and decisively performed much 
better than companies that delayed remediation work.
    Section 166 of the Dodd-Frank Act directs the Board to prescribe 
regulations to provide for the early remediation of financial distress 
at covered companies so as to minimize the probability that the company 
will become insolvent and to reduce the potential harm of the 
insolvency of a covered company to the financial stability of the 
United States. The regulation must use measures of the financial 
condition of a covered company, including regulatory capital ratios, 
liquidity measures, and other forward-looking indicators as triggers 
for remediation actions. Remediation requirements must increase in 
stringency as the financial condition of a covered company 
deteriorates. Remedies must include, in the initial stages of financial 
decline of the covered company, limits on capital distributions, 
acquisitions, and asset growth. Remedies in the later stages of 
financial decline of the covered company must include a capital 
restoration plan and capital-raising requirements, limits on 
transactions with affiliates, management changes, and asset sales.
    The proposed rule implementing section 166 establishes a regime for 
the early remediation of financial distress at covered companies that 
includes several forward-looking triggers designed to identify emerging 
or potential issues before they develop into larger problems. In 
addition to regulatory capital triggers, the proposed rule includes 
triggers based on supervisory stress test results, market indicators 
and weaknesses in enterprise-wide and liquidity risk management. The 
proposed rule also describes the regulatory restrictions that a covered 
company must comply with in each remedial stage.

I. Transition Arrangements and Ongoing Compliance

    Another important aspect of the proposal is the timing of initial 
compliance and ongoing reporting to the Board in conjunction with the 
proposed enhanced standards. In order to reduce the burden on covered 
companies of coming into initial compliance with the standards, the 
Board is proposing to provide meaningful phase-in periods. In general, 
a company that is a covered company on the effective date of the final 
rule would be subject to the enhanced prudential standards beginning on 
the first day of the fifth quarter following the effective date of the 
final rule. A company that becomes a covered company after the 
effective date of the final rule generally would become subject to the 
enhanced standards beginning on the first day of the fifth quarter 
following the date that it became a covered company. For a variety of 
reasons, the proposed rule provides different transition arrangements 
for enhanced risk-based capital and leverage requirements, single-
counterparty credit limits and stress testing requirements. Transition 
arrangements for these standards are discussed in the relevant sections 
of the preamble below.
    To reduce the burden of ongoing compliance with the enhanced 
standards, the Board is also proposing to sequence the timing of 
required submissions. For example, the requirement that covered 
companies conduct stress tests is specifically timed to coordinate with 
the reporting requirements associated with the capital plan, and the 
capital plan and stress test requirements are specifically timed to 
minimize overlap with resolution plan update requirements.\45\
---------------------------------------------------------------------------

    \45\ See 12 CFR 243.3.
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    Question 4: Are there alternative approaches the Board should 
consider to phase in the proposed enhanced prudential standards for 
either bank holding companies or nonbank financial companies?

J. Reservation of Authority

    To address situations where compliance with the requirements of the 
proposed rule would not sufficiently mitigate the risks to U.S. 
financial

[[Page 602]]

stability posed by the failure or material financial distress of a 
covered company, the proposed rule includes a reservation of authority 
provision. This reservation of authority would permit the Board to 
implement additional or further enhanced prudential standards for a 
covered company, including, but not limited to, additional capital or 
liquidity requirements, corporate governance standards, concentration 
limits, stress testing requirements, activity limits, or other 
requirements or restrictions that the Board may deem necessary to carry 
out the purposes of the proposal or section 165 of the Dodd-Frank 
Act.\46\ The proposed rule also specifies that the Board may determine 
that a bank holding company that is not a covered company shall be 
subject to one or more of the standards established under the proposed 
rule if the Board determines that doing so is necessary or appropriate 
to protect the safety and soundness of the company or to promote 
financial stability.
---------------------------------------------------------------------------

    \46\ 12 U.S.C. 5365(b)(1)(B)(iv).
---------------------------------------------------------------------------

    In addition, the proposed rule would specifically state that 
nothing in the rule would limit the authority of the Board under any 
other provision of law or regulation to take supervisory or enforcement 
action, including action to address unsafe and unsound practices or 
conditions, deficient capital or liquidity levels, or violations of 
law.

K. Common Definitions

    A number of terms are used throughout the proposed rule. Some of 
these terms are generally given the same meaning as their definitions 
under other regulations issued by the Board. For example, under the 
proposal, the term ``company'' would be defined as a corporation, 
partnership, limited liability company, depository institution, 
business trust, special purpose entity, association, or similar 
organization. The term ``bank holding company'' generally would have 
the same meaning as in section 2 of the Bank Holding Company Act, as 
amended (12 U.S.C. 1841), and the Board's Regulation Y (12 CFR part 
225).\47\ Additional common definitions are detailed in the proposed 
rule.
---------------------------------------------------------------------------

    \47\ Control would have a different meaning under the proposed 
rules concerning single-counterparty credit limits.
---------------------------------------------------------------------------

    The Board solicits comment on these proposed definitions.

III. Risk-Based Capital Requirements and Leverage Limits

A. Background

    Section 165 of the Dodd-Frank Act directs the Board to establish 
risk-based capital and leverage standards for covered companies that 
are more stringent than the risk-based capital and leverage standards 
applicable to nonbank financial companies and bank holding companies 
that do not present similar risks to the financial stability of the 
United States and increase in stringency based on the systemic 
footprint of the company.
    As discussed above, in addition to implementing the broader Basel 
III capital reforms, the Board seeks to implement enhanced risk-based 
capital and leverage standards for covered companies in a two-stage 
process: (i) In this proposal, the application of the Board's capital 
plan rule to covered companies, including the requirement for covered 
companies to maintain capital above 5 percent tier 1 common risk-based 
capital ratio under both expected and stressed conditions; and (ii) in 
a separate future proposal, the introduction of a quantitative risk-
based capital surcharge for covered companies or a subset of covered 
companies based on the BCBS capital surcharge framework for G-SIBs.

B. Overview of the Proposed Rule

1. Capital Planning and Minimum Capital Requirements
    Under the proposal, all covered companies would be required to 
comply with, and hold capital commensurate with, the requirements of 
any regulations adopted by the Board relating to capital plans and 
stress tests. Thus, in addition to the stress testing requirements that 
are part of this proposal, this subpart would require all covered 
companies to comply with the capital plan rule recently adopted by the 
Board.\48\ In addition, the Board is proposing that nonbank covered 
companies be subject to the same minimum risk-based and leverage 
capital requirements that apply to covered companies that are bank 
holding companies.
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    \48\ 12 CFR 225.8. See 76 FR 74631 (December 1, 2011). The 
capital plan rule currently applies to all U.S. bank holding 
companies with $50 billion or more in total consolidated assets 
(large bank holding companies).
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    As discussed further below, the capital plan rule would enhance 
minimum capital standards for covered companies in several dimensions, 
including requiring firms to demonstrate capital adequacy over a 
minimum nine-quarter planning horizon under both expected and stressed 
conditions.\49\ The Board believes that the safety and soundness 
rationale that underlies the capital plan rule's enhanced risk-based 
capital and leverage standards for bank holding companies is also 
applicable to nonbank covered companies, and that compliance with this 
rule by such companies would help to promote their ongoing financial 
stability. By requiring covered companies to have robust capital plans 
and to hold capital commensurate with the risks they would face under 
stressful financial conditions, and by limiting capital distributions 
under certain circumstances, the proposed rule would reduce the 
probability of the failure of a covered company.
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    \49\ At present, the Board's rules for calculating minimum 
capital requirements are found at 12 CFR part 225, appendix A 
(general risk-based capital rule), 12 CFR part 225, appendix D 
(leverage rule), 12 CFR part 225, appendix E (market risk rule), and 
12 CFR part 225, appendix G (advanced approaches risk-based capital 
rule). A firm that met the applicability thresholds under the market 
risk rule or the advanced approaches risk-based capital rule would 
be required to use those rules to calculate its minimum risk-based 
capital requirements in addition to the general risk-based capital 
requirements and the leverage rule.
---------------------------------------------------------------------------

    The current capital plan rule imposes enhanced risk-based and 
leverage requirements on large bank holding companies in several ways. 
The rule requires such companies to submit board-approved annual 
capital plans to the Federal Reserve in which they demonstrate their 
ability to maintain capital above the Board's minimum risk-based 
capital ratios (total capital ratio of 8 percent, tier 1 capital ratio 
of 4 percent) and tier 1 leverage ratio (4 percent) under both baseline 
and stressed conditions over a minimum nine-quarter, forward-looking 
planning horizon. Each such plan must include a discussion of the bank 
holding company's sources and uses of capital reflecting the risk 
profile of the firm over the planning horizon. In addition, these bank 
holding companies must demonstrate the ability to maintain a minimum 
tier 1 common risk-based capital ratio of 5 percent over the same 
planning horizon (under both baseline and stressed conditions).\50\ The 
stressed scenarios must include any scenarios provided by the Federal 
Reserve (such as those discussed in section VII of this preamble) as 
well as at least one stressed scenario developed by the bank holding 
company appropriate to its business model. A capital plan must

[[Page 603]]

also include a description of all planned capital actions over the 
planning horizon.
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    \50\ Under the capital plan rule, tier 1 common is defined 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. Specifically, non-common elements include the 
following items captured in the FR Y-9C reporting form: Schedule HC, 
line item 23 net of Schedule HC-R, line item 5; and Schedule HC-R, 
line items 6a, 6b, and 6c.
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    In its capital plan, a large bank holding company must provide a 
detailed description of its process for assessing capital adequacy, 
including a description of how it will, under stressful conditions, 
maintain capital commensurate with its risks and 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. A large bank holding company that is 
unable to satisfy these requirements generally may not make any capital 
distributions until it provides a satisfactory capital plan to the 
Federal Reserve.\51\
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    \51\ See section VII supra on the enhanced prudential 
requirement that a covered company conduct certain stress tests for 
explanation of the relation between this enhanced prudential capital 
requirement and the stress test requirement under section 165.
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    In addition, a large bank holding company must obtain prior 
approval from the Federal Reserve before making a capital distribution 
in certain circumstances where the Federal Reserve had provided a non-
objection to the large bank holding company's capital plan. The bank 
holding company would be required to include certain information in the 
request, which may include, among other things, an assessment of the 
bank holding company's capital adequacy under a revised stress scenario 
provided by the Federal Reserve, a revised capital plan, and supporting 
data.
    As stated above, a nonbank covered company would be subject to the 
capital plan rule under this proposal. While a bank holding company 
that becomes a covered company over time is subject to the requirements 
of the capital plan rule as provided for in that rule,\52\ a nonbank 
covered company would become subject to the requirements of the capital 
plan rule in the calendar year that it was designated by the Council, 
if the nonbank covered company was designated by the Council more than 
180 days before September 30 of that calendar year.
---------------------------------------------------------------------------

    \52\ See generally 12 CFR 225.8(b). The final capital plan rule 
provides that a bank holding company that becomes subject to the 
final rule by operation of the asset threshold after the 5th of 
January of a calendar year will not be subject until January 1 of 
the next calendar year to the final rule's requirement to file a 
capital plan with the Federal Reserve, resubmit a capital plan under 
certain circumstances, or to obtain prior approval of capital 
distributions in excess of those described in the firm's capital 
plan. A bank holding company would be subject to all other 
requirements under the capital plan rule immediately upon becoming 
subject to that rule.
---------------------------------------------------------------------------

    In addition, 180 days following its designation by the Council, a 
nonbank covered company would be subject to minimum risk-based capital 
and leverage requirements. A nonbank covered company would be required 
to calculate its minimum risk-based and leverage capital requirements 
as if it were a bank holding company in accordance with any minimum 
capital requirements established by the Board for bank holding 
companies.\53\ Accordingly, the nonbank covered company would be 
required to hold capital sufficient to meet (i) a tier 1 risk based 
capital ratio of 4 percent and a total risk-based capital ratio of 8 
percent, as calculated according to the Board's risk-based capital 
rules,\54\ and (ii) a tier 1 leverage ratio of 4 percent as calculated 
under the leverage rule.\55\ Finally, each nonbank covered company 
would be required to report to the Board on a quarterly basis its risk-
based capital and leverage ratios. Upon ascertaining that it had failed 
to meet any of its minimum risk-based or leverage requirements, a 
nonbank covered company would be required to notify the Board 
immediately.\56\
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    \53\ See supra note 49.
    \54\ 12 CFR part 225, appendix A and G.
    \55\ 12 CFR part 225, appendix D, section II.
    \56\ Under section 171 of the Dodd-Frank Act, the Board is 
required to impose minimum risk-based and leverage capital 
requirements on bank holding companies and nonbank covered companies 
that are not less than the generally applicable capital requirements 
it imposes on insured depository institutions. 12 U.S.C. 5371. The 
Board recognizes that some aspects of its capital requirements may 
not take into account the characteristics of activities and assets 
of nonbank covered companies that are impermissible for banks and 
bank holding companies. When a nonbank covered company is designated 
by the Council, the Board may consider whether any adjustments to 
the minimum capital requirements applicable to the nonbank covered 
company may be appropriate, within the limits of section 171 of the 
Dodd-Frank Act.
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    Under the proposed rules' reservation of authority, the Board may 
require any covered company to hold additional capital or be subject to 
other requirements or restrictions if it determines that compliance 
with the requirements of the proposal does not sufficiently mitigate 
risks to U.S. financial stability posted by the failure or material 
financial distress of the covered company.
    The Board seeks comment on all aspects of the proposed enhanced 
risk-based capital and leverage requirements.
    In particular, the Board seeks comment on the appropriateness of 
requiring nonbank covered companies to have the same capital planning 
and stress testing, and regulatory capital requirements as bank holding 
companies.
    Question 5: What factors should the Board consider in deciding 
whether to impose different capital planning or stress testing 
requirements on nonbank covered companies?
    Question 6: What alternative enhanced capital requirements for 
nonbank covered companies should the Board consider? Should the Board 
consider a longer or shorter phase-in period for capital requirements 
for nonbank covered companies?
Conforming Amendment to Section 225.8 of Regulation Y
    To make the applicability of the Board's capital plan rule 
consistent with the applicability of the proposed enhanced capital 
standards under this proposed rule, the Board is considering whether to 
amend the capital plan rule to provide that a bank holding company 
subject to that rule would remain subject to that rule until its total 
consolidated assets fall below $50 billion for four consecutive 
calendar quarters.
2. Quantitative Risk-Based Capital Surcharge
    In November 2011, the BCBS agreed to require G-SIBs to hold an 
additional amount of common equity above the regulatory minimums to 
enhance their resiliency and ability to absorb losses under difficult 
economic conditions. The recently finalized BCBS framework establishes 
five capital surcharge categories, ranging from 100 to 350 basis 
points,\57\ and allocates G-SIBs to a specific surcharge category based 
on a twelve-factor formula. The formula includes measures of size, 
interconnectedness, complexity, lack of substitutes and cross-border 
activity. The capital surcharge must be met with common equity only and 
would operate to expand the Basel III capital conservation buffer. The 
BCBS framework would phase-in the G-SIB surcharge requirement in equal 
increments from 2016 to 2019, in parallel with the capital conservation 
buffer.
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    \57\ Initially, G-SIBs would be placed in 1 of 4 categories, 
with surcharges ranging from 100 to 250 basis points and the fifth 
category, with an associated surcharge of 350 basis points, would be 
left empty in order to leave room to apply higher surcharges to G-
SIBs that increase their systemic footprint further over time.
---------------------------------------------------------------------------

    Approximately 30 global banks would be subject initially to the G-
SIB surcharge under the BCBS framework. The BCBS has noted that the 
number of banks subject to the framework, and the surcharge category 
associated with different banks, would evolve over time as the systemic 
risk profiles of different

[[Page 604]]

banks change. The BCBS expects to refine and update the framework in 
the coming years as additional analysis is performed.
    The Board and other U.S. federal banking agencies worked closely 
with other members of the BCBS to develop the BCBS framework and the 
Board believes that it is consistent with the financial stability 
objectives of section 165 of the Dodd-Frank Act, including minimizing 
the threat to U.S. financial stability posed by systemically important 
financial companies. The Board believes that a U.S. capital surcharge 
framework based on the BCBS framework would meaningfully reduce the 
probability of failure of the largest, most complex financial companies 
and would minimize losses to the U.S. financial system and the economy 
if such a company should fail. A capital surcharge would help require 
that these companies account for the costs they impose on the broader 
financial system and would reduce the implicit subsidy they enjoy due 
to market perceptions of their systemic importance. The Board intends 
to issue a concrete proposal for implementation of a quantitative risk-
based capital surcharge for covered companies, or a subset thereof, 
based on the BCBS approach consistent with the BCBS's implementation 
timeframe. The forthcoming proposal would contemplate adopting 
implementing rules in 2014, and requiring G-SIBs to meet the capital 
surcharges on a phased-in basis from 2016-2019.
    Question 7: How should the Board implement the BCBS framework 
discussed above, or are there alternatives to the BCBS framework the 
Board should consider?
    Question 8: What is the appropriate scope of application of a 
quantitative capital surcharge in the United States in light of section 
165 of the Dodd-Frank Act? What adaptations to the BCBS framework, or 
alternative surcharge assessment methodologies, would be appropriate 
for determining a quantitative capital surcharge for covered companies 
that are not identified as global systemically important banks in the 
BCBS framework?
    Question 9: If the BCBS framework were to be applied to nonbank 
covered companies, how should the framework be modified to capture the 
systemic footprint of those companies?

IV. Liquidity Requirements

A. Background

    During the financial crisis that began in 2007, many solvent 
financial companies experienced significant financial stress because 
they did not manage their liquidity in a prudent manner. In some cases, 
these companies had difficulty in meeting their obligations as they 
became due because sources of funding became severely restricted. These 
events followed several years of ample liquidity in the financial 
system, during which liquidity risk management did not receive the same 
level of priority and scrutiny as management of other sources of risk. 
The rapid reversal in market conditions and availability of liquidity 
during the crisis illustrated how quickly liquidity can evaporate, and 
that illiquidity can last for an extended period, leading to a 
company's insolvency before its assets experience significant 
deterioration in value.
    Many of the liquidity-related difficulties experienced by financial 
companies were due to lapses in basic principles of liquidity risk 
management. This problem was evident from the horizontal reviews of 
financial companies conducted by the Senior Supervisors Group 
(``SSG''), which comprises senior financial supervisors from seven 
countries.\58\ The SSG found that failure of liquidity risk management 
practices contributed significantly to the financial crisis. In 
particular, the SSG noted that firms' inappropriate reliance on short-
term sources of funding and in some cases, the repo market, as well as 
inaccurate measurements of funding needs and lack of effective 
contingency funding were key factors in the liquidity crises many firms 
faced.\59\
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    \58\ See Senior Supervisors Group, Observations on Risk 
Management Practices During the Recent Market Turbulence (March 
2008), available at http://www.newyorkfed.org/newsevents/news/banking/2008/SSG_Risk_Mgt_doc_final.pdf (hereinafter 2008 SSG 
Report).
    \59\ See Senior Supervisors Group, Risk Management Lessons from 
the Global Banking Crisis of 2008 (October 2009), available at 
http://www.newyorkfed.org/newsevents/news_archive/banking/2009/SSG_report.pdf (hereinafter 2009 SSG Report).
---------------------------------------------------------------------------

    Given the direct link between liquidity risk management failures 
and the many strains on firms and the financial system experienced 
during the recent crisis, the Board believes that strong liquidity risk 
management is crucial to ensuring a company's resiliency during periods 
of financial market stress and that covered companies should be held to 
the highest liquidity standards, as well as capital standards.
    The Board also believes establishing minimum quantitative liquidity 
standards will improve the capacity of firms to remain viable during a 
liquidity stress. The Basel III Liquidity Framework establishes minimum 
requirements for funding liquidity that are designed to promote the 
resilience of a banking organization's liquidity risk profile.\60\ 
These minimum requirements are imposed through two ratios:
---------------------------------------------------------------------------

    \60\ Basel Committee on Bank Supervision, Basel III: 
International Framework for Liquidity Risk Measurement, Standards, 
and Monitoring (December 20, 2010), available at www.bis.org/publ/bcbs188.htm.
---------------------------------------------------------------------------

     A liquidity coverage ratio (LCR), which is designed to 
promote the short-term resiliency of a banking organization's liquidity 
risk profile by ensuring that it has sufficient high quality liquid 
resources to survive an acute stress scenario lasting for one month; 
and
     A net stable funding ratio (NSFR), which is designed to 
promote liquidity risk resilience over a longer time period and to 
create incentives for a banking organization to fund its activities 
with medium- and longer-term funding sources. The NSFR has a time 
horizon of one year, and is designed to provide a sustainable maturity 
structure of assets and liabilities.
    Under the terms of Basel III, the LCR and NSFR are to be 
implemented by Basel Committee member countries by 2015 and 2018, 
respectively.
    The Board intends to institute a liquidity regime for covered 
companies through a multi-stage process that would include a regulatory 
framework for strong liquidity risk management and quantitative 
liquidity requirements based on the Basel III liquidity ratios. In the 
first stage, covered companies would be subject to enhanced liquidity 
risk management standards under this proposal. The proposal builds on 
the core provisions of the Board's Supervision and Regulation (SR) 
letter 10-6, Interagency Policy Statement on Funding and Liquidity Risk 
Management issued in March 2010 (Interagency Liquidity Risk Policy 
Statement).\61\ As discussed in detail below, the proposed rules would 
require a covered company to take a number of prudential steps to 
manage liquidity risk. Significantly, the proposed rules introduce 
liquidity stress test requirements for covered companies and require 
them to maintain liquid assets sufficient to meet projected net cash 
flows under the stress tests. The proposed rules would also require a 
covered company to generate comprehensive cash flow projections, to 
establish and monitor its liquidity risk tolerance, and maintain 
contingency plans for funding where normal sources of funding may not 
be available.
---------------------------------------------------------------------------

    \61\ See supra note 37.
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    The Board believes liquidity requirements are vitally important to 
the

[[Page 605]]

overall goals of section 165 of the Dodd-Frank Act, to prevent or 
mitigate risks to the financial stability of the United States that 
could arise from the material financial distress or failure, or ongoing 
activities, of large, interconnected financial companies. The liquidity 
requirements in this proposal are also more stringent than liquidity 
standards applied to nonbank financial companies and bank holding 
companies that do not present similar risks to financial stability. 
Currently, the Board oversees liquidity risk management at bank holding 
companies primarily through supervisory guidance, and generally does 
not impose specific regulatory liquidity requirements on bank holding 
companies. The proposed rules would require covered companies to 
implement liquidity risk management practices that are encouraged, but 
not required, for non-covered companies.
    The requirements of the proposed rule are also designed to increase 
in stringency based on the systemic footprint of a company. For 
example, a covered company's capital structure, risk profile, 
complexity, activities, size, and other appropriate risk related 
factors would be considered in: (i) Setting the liquidity risk 
tolerance of the covered company; (ii) determining the amount of detail 
provided in cash flow projections; (iii) tailoring liquidity stress 
testing to the covered company; (iv) setting the size of the liquidity 
buffer; (v) formulating the contingency funding plan; and (vi) setting 
the size of the specific limits on potential sources of liquidity risk. 
In addition, the Board would reserve its authority to require a covered 
company to be subject to additional or further enhanced prudential 
standards if it determines that compliance with the rule does not 
sufficiently mitigate the risks to U.S. financial stability posed by 
the failure or material financial distress of the covered company.
    In addition to the enhanced liquidity risk management requirements 
of this proposal, the Board intends to implement the second stage of 
establishing a regulatory liquidity framework for covered companies 
through one or more future proposals that would require covered 
companies (or a subset of covered companies) to satisfy specific 
quantitative liquidity requirements that are derived from, or 
consistent with, the international liquidity standards incorporated 
into Basel III. The Board believes that the eventual introduction of 
the Basel III liquidity standards will be important to establish a 
rigorous liquidity framework and should further the important goal of 
buttressing systemically important companies from the possibility of 
failure due to liquidity shortfalls. These metrics are currently 
undergoing observation by the BCBS and may be modified depending on the 
results of that observation. The Board and other federal banking 
agencies have been working with banking organizations and other members 
of the BCBS to gather data and study the impact of the proposed 
standards on the banking system. The Board is carefully considering 
what changes to the standards it may recommend to the BCBS based on the 
results of this observation. The Board also is currently considering, 
along with the Office of the Comptroller of the Currency and the 
Federal Deposit Insurance Corporation, one or more joint rulemakings 
that would implement the Basel Liquidity Framework in the United 
States.
    Question 10: Is the Board's approach to enhanced liquidity 
standards for covered companies appropriate? Why or why not?
    Question 11: Are there other approaches that would effectively 
enhance liquidity standards for covered companies? If so, provide 
detailed examples and explanations.
    Question 12: The Dodd-Frank Act contemplates additional enhanced 
prudential standards, including a limit on short-term debt. Should the 
Board adopt a short-term debt limit in addition to or in place of the 
LCR and NSFR? Discuss why or why not?

B. Overview of the Proposed Rule

1. Key Definitions
    Under the proposed rule, liquidity is defined as a covered 
company's capacity to efficiently meet its expected and unexpected cash 
flows and collateral needs at a reasonable cost without adversely 
affecting the daily operations or the financial condition of the 
covered company. Liquidity risk is defined as the risk that a covered 
company's financial condition or safety and soundness will be adversely 
affected by its inability or perceived inability to meet its cash and 
collateral obligations.
2. Corporate Governance Provisions
    A critical element of sound liquidity risk management is effective 
corporate governance, consisting of oversight of the covered company's 
liquidity risk management by its board of directors, as well as senior 
management, and an independent review function. The proposed rule 
includes provisions addressing these aspects of a covered company's 
corporate governance with respect liquidity risk management.
a. Board of Directors and Risk Committee Responsibilities (Sec.  
252.52)
    A covered company's board of directors is ultimately responsible 
for the liquidity risk assumed by the covered company. Accordingly, the 
proposed rule at Sec.  252.52(a) would require that the board of 
directors (or the risk committee) \62\ must oversee the covered 
company's liquidity risk management processes, and must review and 
approve the liquidity risk management strategies, policies, and 
procedures established by senior management.
---------------------------------------------------------------------------

    \62\ The risk committee would be defined as the enterprise-wide 
committee established by a covered company's board of directors 
under proposed section 252.126 of the risk management rules subpart 
of this proposal.
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    The proposed rule would impose several specific duties on the board 
of directors. First, the board of directors would be required to 
establish the covered company's liquidity risk tolerance at least 
annually. The proposed rule would define liquidity risk tolerance as 
the acceptable level of liquidity risk the covered company may assume 
in connection with its operating strategies. In determining the 
liquidity risk tolerance, the board of directors would be required to 
consider the covered company's capital structure, risk profile, 
complexity, activities, size, and other appropriate risk related 
factors. These considerations should help to ensure that the 
established liquidity risk tolerance will be appropriate for the 
business strategy of the covered company and its role in the financial 
system, and will reflect the covered company's financial condition and 
funding capacity on an ongoing basis.
    The liquidity risk tolerance should reflect the board of directors' 
assessment of tradeoffs between the costs and benefits of liquidity. 
That is, inadequate liquidity can expose the covered company to 
significant financial stress and endanger its ability to meet 
contractual obligations. Conversely, too much liquidity can entail 
substantial opportunity costs and have a negative impact on the covered 
company's profitability. In establishing the covered company's 
liquidity risk tolerance, the Board would expect a covered company's 
board of directors to articulate the liquidity risk tolerance in such a 
way that all levels of management clearly would: (i) Understand the 
board of director's policy for managing the trade-offs between the risk 
of insufficient liquidity and generating profit; and (ii) properly 
apply this approach to all aspects of

[[Page 606]]

liquidity risk management throughout the organization.\63\ To ensure 
that a covered company is managed in accordance with the liquidity risk 
tolerance, the proposed rule would require the board of directors to 
review information provided by senior management at least semi-annually 
to determine whether the covered company is managed in accordance with 
the established liquidity risk tolerance.
---------------------------------------------------------------------------

    \63\ Under the proposed rule, the established liquidity risk 
tolerance would be considered in assessing new business strategies 
and products (proposed Sec.  252.52(b)(2)), in setting the size of 
the liquidity buffer (proposed Sec.  252.57(b)), in developing the 
CFP (proposed Sec.  252.58(a)), and in setting the specific limits 
on sources of liquidity (proposed Sec.  252.59(b)).
---------------------------------------------------------------------------

    Second, the risk committee or a designated subcommittee of the risk 
committee would be required to review and approve the liquidity costs, 
benefits, and risk of each significant new business line and each 
significant new product before the covered company may implement the 
line or offer the product. In connection with this review, the risk 
committee or a designated subcommittee would be required to consider 
whether the liquidity risk of the new strategy or product under current 
conditions and under a liquidity stress is within the established 
liquidity risk tolerance. At least annually, the risk committee or a 
designated subcommittee would be required to review approved 
significant business lines and products to determine whether each line 
or product has created any unanticipated liquidity risk, and to 
determine whether the liquidity risk of each line or product continues 
to be within the established liquidity risk tolerance.
    Third, the proposed rule would require the board of directors to 
review and approve the covered company's CFP at least annually and 
whenever the covered company materially revises the plan. As discussed 
below, the CFP is the covered company's compilation of policies, 
procedures, and action plans for managing liquidity stress events.
    Fourth, the risk committee or a designated subcommittee would be 
required to conduct the following reviews and approvals at least 
quarterly:
    (i) A review of cash flow projections produced under section 252.55 
of the proposed rule that use time periods in excess of 30 days to 
ensure that the covered company's liquidity risk is within the covered 
company's established liquidity risk tolerance;
    (ii) A review and approval of the liquidity stress testing 
described in section 252.56 of the proposed rule, including the covered 
company's stress testing practices, methodologies, and assumptions. The 
risk committee or a designated subcommittee would also be required to 
conduct this review and approval whenever the covered company 
materially revises its liquidity stress testing;
    (iii) A review of the liquidity stress testing results produced 
under section 252.56 of the proposed rule;
    (iv) Approval of the size and composition of the liquidity buffer 
established under section 252.57 of the proposed rule;
    (v) A review and approval of the specific limits on potential 
sources of liquidity risk established under section 252.59 of the 
proposed rule, and a review of the covered company's compliance with 
those limits; and
    (iv) A review of liquidity risk management information necessary to 
identify, measure, monitor, and control liquidity risk and to comply 
with the new liquidity rules.
    In addition, the risk committee or a designated subcommittee would 
be required to periodically review the independent validation of the 
stress tests produced under section 252.56(c)(2)(ii) of the proposed 
rule.
    The proposed rule establishes minimum requirements governing the 
frequency of certain reviews and approvals. It also would require the 
board of directors (or the risk committee) to conduct more frequent 
reviews and approvals as market and idiosyncratic conditions 
warrant.\64\ The risk committee or a designated subcommittee would also 
be required to establish procedures governing the content of senior 
management reports on the liquidity risk profile of the covered company 
and other information described in the senior management 
responsibilities section below.
---------------------------------------------------------------------------

    \64\ As used in this preamble, idiosyncratic conditions or 
events refer to conditions or events that are unique to the covered 
company. Market conditions or events refer to conditions or events 
that are market-wide.
---------------------------------------------------------------------------

b. Senior Management Responsibilities (Sec.  252.53)
    Under the proposed rule, senior management of a covered company 
would be required to establish and implement liquidity risk management 
strategies, policies and procedures. This would include overseeing the 
development and implementation of liquidity risk measurement and 
reporting systems, the cash flow projections, the liquidity stress 
testing, the liquidity buffer, the CFP, the specific limits, and the 
monitoring procedures required under the proposed rule.
    Senior management would also be required to report regularly to the 
risk committee or designated subcommittee thereof on the liquidity risk 
profile of the covered company, and to provide other relevant and 
necessary information to the board of directors (or risk committee) to 
facilitate its oversight of the liquidity risk management process. As 
noted above, the proposed rule would require the risk committee or a 
designated subcommittee to establish procedures governing the content 
of management reports on the liquidity risk profile of the covered 
company and other information regarding compliance with the proposed 
rule. The Board expects that management would be required under these 
procedures to report as frequently as conditions warrant, but no less 
frequently than quarterly.
c. Independent Review (Sec.  252.54)
    Under the proposed rule, a covered company would be required to 
establish and maintain an independent review function to evaluate its 
liquidity risk management. Under the proposal, this review function 
must be independent of management functions that execute funding (the 
treasury function). The independent review function would be required 
to review and evaluate the adequacy and effectiveness of the covered 
company's liquidity risk management processes regularly, but no less 
frequently than annually. It would also be required to assess whether 
the covered company's liquidity risk management complies with 
applicable laws, regulations, supervisory guidance, and sound business 
practices, and to report statutory and regulatory noncompliance and 
other material liquidity risk management issues to the board of 
directors (or the risk committee) in writing for corrective action.
    An appropriate internal review conducted by the independent review 
function should address all relevant elements of a covered company's 
risk management process, including adherence to its own policies and 
procedures, and the adequacy of its risk identification, measurement, 
and reporting processes. Personnel conducting these reviews should seek 
to understand, test, document, and evaluate the risk management 
processes, and recommend solutions to any identified weaknesses.

[[Page 607]]

3. Liquidity Requirements
a. Cash Flow Projections (Sec.  252.55)
    Comprehensive projections of a covered company's cash flows from 
the company's various operations are a critical tool for managing 
liquidity risk. To ensure that a covered company has a sound process 
for identifying and measuring liquidity risk, the proposed rule would 
require a covered company to produce comprehensive projections that 
forecast cash flows arising from assets, liabilities, and off-balance 
sheet exposures over appropriate time periods, and to identify and 
quantify discrete and cumulative cash flow mismatches over these time 
periods. The proposed rule would specifically require the covered 
company to provide cash flow projections over the short-term and long-
term time horizons that are appropriate to the covered company's 
capital structure, risk profile, complexity, activities, size and other 
risk-related factors.\65\
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    \65\ A covered company would be required to update short-term 
cash flow projections daily, and update long-term cash flow 
projections at least monthly.
---------------------------------------------------------------------------

    To make sure that the cash flow projections will analyze liquidity 
risk exposure to contingent events, the proposed rule would require 
that projections must include cash flows arising from contractual 
maturities, as well as cash flows from new business, funding renewals, 
customer options, and other potential events that may impact liquidity. 
Static projections based on the contractual cash flows of assets, 
liabilities, and off-balance sheet items are helpful in identifying 
liquidity gaps. However, such static projections may inadequately 
quantify important aspects of potential liquidity risk because these 
projections ignore new business, funding renewals, customer options, 
and other contingent events that have a significant impact on a covered 
company's liquidity risk profile. A dynamic analysis that incorporates 
management's reasoned assumptions regarding the future behavior of 
assets, liabilities, and off-balance sheet items in projected cash 
flows is far more useful than a static projection in identifying 
potential liquidity risk exposure.
    Under the proposed rule, a covered company would be required to 
develop cash flow projections that provide sufficient detail to reflect 
its capital structure, risk profile, complexity, activities, size, and 
other appropriate risk related factors. Such detail may include 
projections broken down by business line, legal entity, or 
jurisdiction, and cash flow projections that use more time periods than 
the two minimum time periods that would be required under the rule.
    The proposed rule states that a covered company must establish a 
robust methodology for making its cash flow projections,\66\ and must 
use reasonable assumptions regarding the future behavior of assets, 
liabilities, and off-balance sheet exposures in the projections. Given 
the critical importance that the methodology and underlying assumptions 
play in liquidity risk measurement, the covered company would also be 
required to adequately document the methodology and assumptions.\67\ In 
addition, the Board expects senior management to periodically review 
and approve the assumptions used in the cash flow projections to make 
sure that they are reasonable and appropriate.
---------------------------------------------------------------------------

    \66\ In its most basic form, a cash-flow-projection may be a 
worksheet-table with columns denoting the selected time periods or 
buckets for which cash flows are to be projected. The rows of this 
table may consist of various types of assets, liabilities, and off-
balance sheet items, often grouped by their cash-flow 
characteristics. Different groupings may be used to achieve 
different objectives of the cash-flow projection. For each row, net 
cash flows arising from the particular asset, liability, or off-
balance sheet activity may be projected across the time buckets. The 
detail and granularity of the rows, and thus the projections, should 
depend on the sophistication and complexity of the institution. 
Complex companies generally provide more detail, while less complex 
companies use higher levels of aggregation.
    \67\ See section 252.61 of the proposed rule, which states that 
a covered company must document all material aspects of its 
liquidity risk management process and its compliance with the 
requirements in the rule.
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b. Liquidity Stress Testing (Sec.  252.56)
    While financial companies typically manage their liquidity under 
normal circumstances with regular sources of liquidity readily 
available, they should also be prepared to manage liquidity under 
adverse conditions in which liquidity sources may be limited or 
nonexistent. Insufficient consideration of liquidity management under 
the conditions that arose during the financial crisis was a major 
contributor to the severe liquidity problems many financial companies 
faced at the time. Accordingly, rigorous and regular stress testing and 
scenario analysis, combined with comprehensive information about an 
institution's funding position, is an important tool for effective 
liquidity risk management that should reduce the risk of a firm's 
failure due to adverse liquidity conditions.
    To promote preparedness for adverse liquidity conditions, the 
proposed rule would require the covered company to regularly stress 
test its cash flow projections by identifying liquidity stress 
scenarios and assessing the effects of these scenarios on the covered 
company's cash flow and liquidity. By considering how adverse events, 
conditions, and outcomes, including extremes, affect the covered 
company's exposure to liquidity risk, a covered company can identify 
vulnerabilities, quantify the depth, source, and degree of potential 
liquidity strain, and analyze the possible impacts. Under the proposed 
rule, the covered company would use the results of the stress testing 
to determine the size of its liquidity buffer, and would incorporate 
information generated by stress testing in the quantitative component 
of the CFP.
    The proposed rule would require that liquidity stress testing 
comprehensively address a covered company's activities, exposures, and 
risks, including off-balance sheet exposures. To satisfy this 
requirement, stress testing would have to address the covered company's 
full set of activities, exposures and risks, both on- and off-balance 
sheet, and address non-contractual sources of risks, such as 
reputational risks. For example, stress testing should address 
potential liquidity issues arising from the covered company's use of 
sponsored vehicles that issue debt instruments periodically to the 
markets, such as asset-backed commercial paper and similar conduits. 
Under stress scenarios, the covered company may be contractually 
required, or compelled in the interest of mitigating reputational risk, 
to provide liquidity support to such a vehicle.
    The proposed rule would require a covered company to conduct the 
liquidity stress testing at least monthly. In addition to monthly 
stress testing, a covered company should have the flexibility to 
conduct ``ad hoc'' stress testing to address rapidly emerging risks or 
consider the impact of sudden events. Accordingly, the proposed rule 
specifies that the covered company must have the ability to perform 
stress testing more frequently than monthly, and the ability to vary 
underlying assumptions as conditions change. To facilitate effective 
supervision of the sufficiency of a covered company's liquidity 
management, under the proposed rule, a covered company may be required 
by the Federal Reserve to perform additional stress testing as 
conditions relating to the institution or the markets generally may 
warrant, or to address other supervisory concerns. The Federal Reserve 
may, for example, require a covered company to perform additional 
stress testing where there has been a significant deterioration in the 
covered company's earnings, asset quality, or overall financial 
condition; are negative

[[Page 608]]

trends or heighten risk associated with a particular product line; or 
are increased concerns over the covered company's funding of off-
balance sheet exposures.
    Effective stress testing should include scenario analysis that uses 
historical and hypothetical scenarios to assess the impact on liquidity 
of various events and circumstances, including extremes. Effective 
liquidity stress testing should also employ a range of stress scenarios 
involving macroeconomic, market-wide, and idiosyncratic events, and 
consider interactions and feedback effects. Accordingly, the proposed 
rule states that a covered company's stress testing must incorporate a 
range of stress scenarios that may significantly affect the covered 
company's liquidity, taking into consideration its on- and off-balance 
sheet exposures, business lines, organizational structure, and other 
characteristics. At a minimum, the proposed rule would require a 
covered company to incorporate stress scenarios to account for market 
stress, idiosyncratic stress, and combined market and idiosyncratic 
stresses. Additional scenarios should be used as needed to ensure that 
all of the significant aspects of liquidity risks to the covered 
company have been modeled. The proposed rule would also require that 
the stress scenarios address the potential impact of market disruptions 
on the covered company, and the potential actions of market 
participants experiencing liquidity stresses under the same market 
disruption.
    Under the proposed rule, a covered company's liquidity stress 
scenarios must be forward-looking and incorporate a range of potential 
changes to a covered company's exposures, activities, and risks as well 
as changes to the broader economic and financial environment. To meet 
this standard, the stress tests would need to be sufficiently dynamic 
to incorporate changes in the covered company's on- and off-balance 
sheet activities, portfolio composition, asset quality, operating 
environment, business strategy, and other risks that may arise over 
time from idiosyncratic events, macroeconomic and financial market 
developments, or some combination of thereof. The stress tests should 
look beyond assumptions based only on historical data, and incorporate 
new events and challenge conventional assumptions.
    Effective liquidity stress testing should be conducted over a 
variety of different time horizons to adequately capture rapidly 
developing events, and other conditions and outcomes that may 
materialize in the near or long term. To make sure that a covered 
company's stress testing captures such events, condition, and outcomes, 
the proposed rule would require that the covered company's stress 
scenarios use a minimum of four time horizons including an overnight, a 
30-day, a 90-day, and a one-year time horizon. A covered company may be 
required to use more time horizons where necessary to reflect the 
covered company's capital structure, risk profile, complexity, 
activities, size, and other appropriate risk-related factors.
    The proposed rule further provides that liquidity stress testing 
must be tailored to, and provide sufficient detail to reflect a covered 
company's capital structure, risk profile, complexity, activities, 
size, and other appropriate risk-related factors. This requirement is 
intended to ensure that stress testing will be tied directly to the 
covered company's business profile and the regulatory environment in 
which the covered company operates,\68\ and will address relevant risk 
areas, provide for the appropriate level of aggregation, and capture 
all appropriate risk drivers, internal and external influences, and 
other key considerations that may affect the covered company's 
liquidity position. This may require analyses by business line, legal 
entity, or jurisdiction, or stress scenarios that use time horizons in 
addition to the minimum number described above.
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    \68\ For example, applicable statutory and regulatory 
restrictions on covered companies, including restrictions on the 
transferability of assets between legal entities, would need to be 
incorporated. For bank holding companies these restrictions include 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 
371c-1) and Regulation W (12 CFR part 223), which govern covered 
transactions between banks and their affiliates.
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    The proposed rule would require a covered company to incorporate 
certain assumptions designed to ensure that stress testing will provide 
relevant information to support the establishment of the liquidity 
buffer (see section 252.56(b)(4) of the proposed rule). As discussed 
below, the liquidity buffer is composed of highly liquid assets that 
are unencumbered, and is designed to meet projected net cash outflows 
and the projected loss or impairment of existing funding sources for 30 
days during a range of liquidity stress scenarios. To reflect this 
design, the proposed rule would require that the covered company must 
assume that, for the first 30 days of a liquidity stress scenario, only 
highly liquid assets that are unencumbered may be used as cash flow 
sources to meet projected funding needs. For time periods beyond the 
first 30 days of a liquidity stress scenario, highly liquid assets that 
are unencumbered and other appropriate funding sources may be used.\69\
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    \69\ The liquidity buffer is discussed more fully below, as are 
the definitions of ``unencumbered'' and ``highly liquid asset.''
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    A covered company's liquidity stress testing should account for 
deteriorations in asset valuations when there is market stress. 
Accordingly, the proposed rule would require the covered company to 
impose a discount to the fair market value of an asset that is used as 
a cash flow source to offset projected funding needs in order to 
reflect any credit risk and market volatility of the asset. The 
proposed rule would also require that sources of funding used to 
generate cash to offset projected funding needs be sufficiently 
diversified throughout each stress test time horizon. Thus, if a 
covered company holds high quality assets other than cash and 
securities issued by the U.S. government, a U.S. government agency,\70\ 
or a U.S. government-sponsored entity,\71\ the assets should be 
diversified by collateral, counterparty, or borrowing capacity, and 
other liquidity risk identifiers.
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    \70\ A U.S. government agency is defined in the proposed rule as 
an agency or instrumentality of the U.S. government whose 
obligations are fully and explicitly guaranteed as to the timely 
payment of principal and interest by the full faith and credit of 
the U.S. government.
    \71\ A U.S. government-sponsored entity is defined in the 
proposed rule as an entity originally established or chartered by 
the U.S. government to serve public purposes specified by the U.S. 
Congress, but whose obligations are not explicitly guaranteed by the 
full faith and credit of the U.S. government.
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    The proposed rule would impose various process and system 
requirements for stress testing. Specifically, a covered company would 
be required to establish and maintain policies and procedures that 
outline its liquidity stress testing practices, methodologies, and 
assumptions; detail the use of each stress test employed; and provide 
for the enhancement of stress testing as risks change and techniques 
evolve. The proposed rule also states that a covered company must have 
an effective system of control and oversight over the stress test 
function to ensure that each stress test is designed in accordance with 
the rule, and the stress process and assumptions are validated. The 
validation function must be independent of functions that develop or 
design the liquidity stress testing, and independent of management 
functions that execute funding (e.g., the treasury function).
    In addition, the proposed rule would require a covered company to 
rely on reasonably high-quality data and information to produce 
creditable

[[Page 609]]

outcomes. Specifically, the proposed rule would require that the 
covered company must maintain management information systems and data 
processes sufficient to enable it to effectively and reliably collect, 
sort, and aggregate data and other information related to liquidity 
stress testing.
    Question 13: What challenges will covered companies face in 
formulating and implementing liquidity stress testing described in the 
proposed rule? What changes, if any, should be made to the proposed 
liquidity stress testing requirements (including the stress scenario 
requirements and required assumptions) to ensure that analyses of the 
stress testing will provide useful information for the management of a 
covered company's liquidity risk? What alternatives to the proposed 
liquidity stress testing requirements, including the stress scenario 
requirements and required assumptions, should the Board consider? What 
additional parameters for the liquidity stress tests should the Board 
consider defining?
c. Liquidity Buffer (Sec.  252.57)
    To withstand liquidity stress under adverse conditions, a company 
generally needs a sufficient supply of liquid assets that can be sold 
or pledged to obtain funds. During the financial crisis, financial 
companies that experienced severe liquidity difficulties often held 
insufficient liquid assets to meet their liquidity needs as market 
sources of funding were severely curtailed. The BCBS's LCR standard was 
developed to promote short-term resilience of a bank's liquidity risk 
profile by ensuring that it has sufficient high-quality liquid assets 
to survive an adverse stress scenario lasting for one month, providing 
time for appropriate corrective actions to be taken by management or 
supervisors, or to allow the institution to be resolved in an orderly 
way.\72\
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    \72\ See Basel III liquidity framework at paragraphs 4 and 15.
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    Consistent with the effort towards developing a comprehensive 
liquidity framework that would eventually incorporate the LCR standard, 
the proposed rule, in addition to requiring stress tests as described 
above, would require a covered company to continuously maintain a 
liquidity buffer of unencumbered highly liquid assets sufficient to 
meet projected net cash outflows and the projected loss or impairment 
of existing funding sources for 30 days over a range of liquidity 
stress scenarios.
    In addition to using the results of the liquidity stress testing to 
size a covered company's liquidity buffer, the proposed rule would 
require that the liquidity buffer would also be aligned to reflect the 
covered company's capital structure, risk profile, complexity, 
activities, size, and other appropriate risk related factors, as well 
as the covered company's established liquidity risk tolerance. These 
factors, however, could not justify reducing the buffer to a point 
where it would be insufficient to meet projected net cash outflows and 
the projected impairment of existing funding sources for 30 days under 
the range of liquidity stress scenarios incorporated into its stress 
testing. As explained above, under the proposal, the risk committee or 
a designated subcommittee of the risk committee would be required to 
approve the size and composition of the liquidity buffer at least 
quarterly.
    The proposed rule limits the type of assets that may be included in 
the buffer to highly liquid assets that are unencumbered. The 
definition of highly liquid assets would ensure that the assets in the 
liquidity buffer can easily and immediately be converted to cash with 
little or no loss of value. Thus, cash or securities issued or 
guaranteed by the U.S. government, a U.S. government agency, or a U.S. 
government-sponsored entity are included in the proposed definition of 
highly liquid assets. In addition, the proposed rule includes criteria 
that may be used to identify other assets that could be included in the 
buffer as highly liquid assets. Specifically, the proposed definition 
of highly liquid assets includes any other asset that a covered company 
demonstrates to the satisfaction of the Federal Reserve:
    (i) Has low credit risk (low risk of default) and low market risk 
(little or no price volatility); \73\
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    \73\ Generally, market risk is the risk of loss that could 
result from broad market movements, such as changes in the general 
level of interest rates, credit spreads, equity prices, foreign 
exchange rates, or commodity prices.
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    (ii) Is traded in an active secondary two-way market \74\ that has 
observable market prices, committed market makers, a large number of 
market participants, and a high trading volume; and
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    \74\ A two-way market would be defined as a market with 
independent bona fide offers to buy and sell so that a price 
reasonably related to the last sales price or current bona fide 
competitive bid and offer quotations can be determined within one 
day and settled at that price within a reasonable time period 
conforming to trade custom. This definition is consistent with the 
definition of ``two-way market'' contained in the interagency 
proposed rule on Risk-Based Capital Guidelines; Market Risk, 76 FR 
1890 (January 11, 2011) (Market Risk NPR).
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    (iii) Is a type of asset that investors historically have purchased 
in periods of financial market distress during which liquidity is 
impaired (flight to quality). For example, certain ``plain vanilla'' 
corporate bonds (that is, bonds that are neither structured products 
nor subordinated debt) issued by a non-financial company with a strong 
financial profile have been reliable sources of liquidity in the 
repurchase and sale market during past stressed conditions. Assets with 
the above characteristics could, as proposed, meet the definition of a 
highly liquid asset.
    The highly liquid assets in the liquidity buffer should be readily 
available at all times to meet a covered company's liquidity needs. 
Accordingly, the assets must be unencumbered. Under the proposed rule, 
unencumbered would be defined to mean, with respect to an asset, that: 
(i) The asset is not pledged, does not secure, collateralize or provide 
credit enhancement to any transaction, and is not subject to any lien; 
(ii) the asset is not designated as a hedge on a trading position; \75\ 
and (iii) there are no legal or contractual restrictions on the ability 
of the covered company to promptly liquidate, sell, transfer, or assign 
the asset.
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    \75\ A trading position would be defined as a position that is 
held by a covered company for the purpose of short-term resale or 
with the intent of benefiting from actual or expected short-term 
price movements, or to lock-in arbitrage profits. This definition is 
based on the definition of trading position in the Market Risk NPR.
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    Generally, an asset would be designated as a hedge on a trading 
position if the asset is held by a covered company directly to offset 
the market risk of another trading asset or group of trading assets 
held by the covered company. For example, if a covered company holds a 
position in a corporate bond index in its trading account, corporate 
bonds that hedge that index position may not be included in the 
liquidity buffer.
    To account for deteriorations in asset valuations when there is 
market stress, the proposed rule also would require a covered company 
to impose a discount to the fair market value of an asset included in 
the liquidity buffer to reflect the credit risk and market volatility 
of the asset. In addition, to ensure that the liquidity buffer is not 
concentrated in a particular type of highly liquid assets, the proposed 
rule requires that the pool of assets included in the liquidity buffer 
must be sufficiently diversified, as discussed above. Thus, these 
highly liquid assets should be diversified by instrument type, 
counterparties, geographic market, and other liquidity risk 
identifiers.

[[Page 610]]

    Question 14: The Board requests comment on all aspects of the 
proposed definitions of ``highly liquid assets'' and ``unencumbered.'' 
What, if any, other assets should be specifically listed in the 
definition of highly liquid assets? Why should these other assets be 
included (that is, describe how the asset is easily and immediately 
convertible into cash with little or no loss in value during liquidity 
stress events)? Are the criteria for identifying additional assets for 
inclusion in the definition of highly liquid assets appropriate? If 
not, how and why should the Board revise the criteria?
    Question 15: What changes, if any, should the Board make to the 
proposed definition of unencumbered to make sure that assets in the 
buffer will be readily available at all times to meet a covered 
company's liquidity needs? The rule would require a covered company to 
discount the fair market value of assets that are included in the 
liquidity buffer. Please describe the process that covered company will 
use to determine the amount of the discount.
d. Contingency Funding Plan (Sec.  252.58)
    The proposed rule would require a covered company to establish and 
maintain a CFP. A CFP is a compilation of policies, procedures, and 
action plans for managing liquidity stress events. The objectives of 
the CFP are to provide a plan for responding to a liquidity crisis, to 
identify alternate liquidity sources that a covered company can access 
during liquidity stress events, and to describe steps that should be 
taken to ensure that the covered company's sources of liquidity are 
sufficient to fund its operating costs and meet its commitments while 
minimizing additional costs and disruption.
    The proposed rule states that a covered company must establish and 
maintain a CFP that sets out the covered company's strategies for 
addressing liquidity needs during liquidity stress events. Under the 
proposed rule, the CFP would be required to be commensurate with the 
covered company's capital structure, risk profile, complexity, 
activities, size, and other appropriate risk related factors, and 
established liquidity risk tolerance. A covered company would be 
required to update the CFP at least annually or whenever changes to 
market and idiosyncratic conditions warrant an update.
    Under the proposed rule, the CFP includes four components: a 
quantitative assessment, an event management process, monitoring 
requirements, and testing requirements. These components are discussed 
in detail below.
a. Quantitative Assessment
    The first component of the CFP is the quantitative assessment of 
liquidity needs and funding sources. A covered company would be 
required to incorporate information generated by liquidity stress 
testing into this component of the CFP. The proposed rule would provide 
that the stress tests are used to: (i) Identify liquidity stress events 
that have a significant impact on the covered company's liquidity; (ii) 
assess the level and nature of impact on the covered company's 
liquidity that may occur during identified liquidity events; (iii) 
assess available funding sources and needs during the identified 
liquidity stress events; and (iv) identify alternative funding sources 
that may be used during the liquidity stress events.
    i. Identification of stress events. A covered company would be 
required to identify stress events that have a significant impact on 
the covered company's liquidity. Possible stress events may include 
deterioration in asset quality, ratings downgrades, widening of credit 
default swap spreads, operating losses, declining financial institution 
equity prices, negative press coverage, or other events that call into 
question the covered company's ability to meet its obligations.
    ii. Assessing the level and nature of impact. Once the liquidity 
stress events are identified, a covered company's CFP would incorporate 
an assessment of the level and nature of impact on the covered 
company's liquidity that may occur during the identified liquidity 
stress event. The CFP would delineate the various levels of stress 
severity that can occur during the stress event, and identify the 
various stages for each type of event. The events, stages, and severity 
levels should include temporary disruptions, as well as those that 
might be intermediate or longer term. The covered company may use the 
different levels of severity to design early warning indicators, to 
assess potential funding needs at various points in a developing 
crisis, and to specify comprehensive action plans.
    iii. Assessing available funding sources and needs. To meet the 
requirement of the proposal, the CFP must assess available funding 
sources and needs during identified liquidity stress events. This would 
require an analysis of the potential erosion of available funding at 
alternative stages or severity levels of each stress event, as well as 
the identification of potential cash flow mismatches that may occur 
during the various stress levels. A covered company is expected to base 
its analysis on realistic assessments of the behavior of funds 
providers during the event, and should incorporate alternative funding 
sources. The analysis should include all material on- and off-balance 
sheet cash flows and their related effects. The result should be a 
realistic analysis of the covered company's cash inflows, outflows, and 
funds availability at different time intervals during the identified 
liquidity stress event, which should permit the covered company to 
measure its ability to fund operations.
    iv. Identifying alternative funding sources. Liquidity pressures 
are likely to spread from one funding source to another during 
significant liquidity stress events. Accordingly, the proposed rule 
would require a covered company to identify alternative funding sources 
that may be accessed during identified liquidity stress events. Since 
some of these alternative funding sources will rarely be used in the 
normal course of business, a covered company should conduct advance 
planning and periodic testing (see discussion below) to make sure that 
the funding sources are available when needed. Administrative 
procedures and agreements are expected to also be in place before the 
covered company needs to access the alternative funding sources.
    Discount window credit may be incorporated into CFPs as a potential 
source of funds in a manner consistent with the terms provided by the 
Federal Reserve Banks. For example, primary credit is currently 
available on a collateralized basis for financially sound depository 
institutions as a backup source of funds for short-term funding needs. 
CFPs that incorporate borrowing from the discount window should specify 
the actions that the covered company will take to replace discount 
window borrowing with more permanent funding, including the proposed 
time frame for these actions.
b. Event Management Process
    Under the proposed rule, the CFP must also include an event 
management process that sets out its procedures for managing liquidity 
during identified liquidity stress events. This process must include an 
action plan that clearly describes the strategies the covered company 
would use to respond to liquidity shortfalls for identified liquidity 
stress events, including the methods that the covered company would use 
to access the alternative funding sources identified in the 
quantitative assessment.
    Under the proposed rule, the event management process must also 
identify

[[Page 611]]

a liquidity stress event management team and specify the process, 
responsibilities, and triggers for invoking the CFP, escalating the 
responses described in the action plan, decision-making during the 
identified liquidity stress events, and executing contingency measures 
identified in the action plan.
    In addition, to promote the flow of necessary information during a 
liquidity stress, the proposed rule would require the event management 
process to include a mechanism that ensures effective reporting and 
communication within the covered company and with outside parties, 
including the Federal Reserve and other relevant supervisors, 
counterparties, and other stakeholders.
c. Monitoring
    The proposal would also impose monitoring requirements on covered 
companies so that they are able to proactively position themselves into 
progressive states of readiness as liquidity stress events evolve. 
Specifically, the proposed rule would require the CFP to include 
procedures for monitoring emerging liquidity stress events, and for 
identifying early warning indicators of emerging liquidity stress 
events that are tailored to a covered company's capital structure, risk 
profile, complexity, activities, size, and other appropriate risk-
related factors. Such early warning indicators may include, but are not 
limited to, negative publicity concerning an asset class owned by 
covered company, potential deterioration in the covered company's 
financial condition, widening debt or credit default swap spreads, and 
increased concerns over the funding of off-balance-sheet items.
d. Testing
    The proposed rule would require a covered company to periodically 
test the components of the CFP to assess its reliability during 
liquidity stress events. Such testing would include trial runs of the 
operational elements of the CFP to ensure that they work as intended 
during a liquidity stress event. These tests would include operational 
simulations to test communications, coordination, and decision making 
involving relevant managers, including managers at relevant legal 
entities within the corporate structure.
    A covered company would also be required to periodically test the 
methods it will use to access alternate funding to determine whether 
these sources of funding will be readily available when needed. For 
example, the Board expects that a covered company would test the 
operational elements of a CFP that are associated with lines of credit, 
the Federal Reserve discount window, or other secured borrowings, since 
efficient collateral processing during a liquidity stress event is 
especially important for such funding sources.
    Question 16: Are the proposed CFP requirements appropriate for all 
covered companies? What alternative approaches to the CFP requirements 
outlined above should the Board consider? If not, how should the Board 
amend the requirements to make them appropriate for any covered 
company? Are there additional modifications the Board should make to 
the proposed rule to enhance the ability of a covered company to comply 
with the CFP and establish a viable and effective plan for the 
management of liquidity stress events?
e. Specific Limits (Sec.  252.59)
    To enhance management of liquidity risk, the proposed rule would 
require a covered company to establish and maintain limits on potential 
sources of liquidity risk, including three specified sources of 
liquidity risk. The size of each limit must reflect the covered 
company's capital structure, risk profile, complexity, activities, 
size, and other appropriate risk related factors, and established 
liquidity risk tolerance. The covered company would be required to 
establish limits on:
    (i) Concentrations of funding by instrument type, single 
counterparty, counterparty type, secured and unsecured funding, and 
other liquidity risk identifiers.
    (ii) The amount of specified liabilities that mature within various 
time horizons.
    (iii) Off-balance sheet exposures and other exposures that could 
create funding needs during liquidity stress events. Such exposures may 
be contractual or non-contractual exposures, and include such 
liabilities as unfunded loan commitments, lines of credit supporting 
asset sales or securitizations, collateral requirements for derivative 
transactions, and a letter of credit supporting a variable demand note.
    Question 17: Should covered companies be required to establish and 
maintain limits on other potential sources of liquidity risk in 
addition to the three specific sources listed in the proposed rule? If 
so, identify these additional sources of liquidity risk.
f. Monitoring (Sec.  252.60)
    The proposed rule would require a covered company to monitor 
liquidity risk related to collateral positions, liquidity risks across 
the enterprise, and intraday liquidity positions. In addition, the 
covered company would be required to monitor compliance with the 
specific limits established under Sec.  252.59.
a. Collateral Positions
    Under the proposed rule, a covered company would be required to 
establish and maintain procedures for monitoring assets it has pledged 
as collateral for an obligation or position, and assets that are 
available to be pledged. The procedures must address the covered 
company's ability to:
    (i) Calculate all of the covered company's collateral positions in 
a timely manner, including the value of assets pledged relative to the 
amount of security required under the contract governing the obligation 
for which the collateral was pledged, and the unencumbered assets 
available to be pledged;
    (ii) Monitor the levels of available collateral by legal entity, 
jurisdiction, and currency exposure;
    (iii) Monitor shifts between intraday, overnight, and term pledging 
of collateral; and
    (iv) Track operational and timing requirements associated with 
accessing collateral at its physical location (for example, the 
custodian or securities settlement system that holds the collateral).
b. Legal Entities, Currencies, and Business Lines
    Regardless of its organizational structure, it is critical that a 
covered company actively monitor and control liquidity risks at the 
level of individual legal entities and the group as a whole. This 
requires processes that aggregate data across multiple systems to 
develop an enterprise-wide view of liquidity risk exposure and identify 
constraints on the transferability of liquidity within the 
organization.
    To promote effective monitoring across the enterprise, the proposed 
rule would require a covered company to establish and maintain 
procedures for monitoring and controlling liquidity risk exposures and 
funding needs within and across significant legal entities, currencies, 
and business lines. In addition, the proposed rule would require the 
covered company to maintain sufficient liquidity with respect to each 
significant legal entity in light of legal and regulatory restrictions 
on the transfer of liquidity between legal entities.\76\ The covered 
company should

[[Page 612]]

ensure that legal distinctions and possible obstacles to cash movements 
between specific legal entities or between separately regulated 
entities are recognized. The Board expects a covered company to 
maintain sufficient liquidity to ensure such compliance in normal times 
and during liquidity stress events.
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    \76\ For example, for bank holding companies such restrictions 
include sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 
371c and 371c-1) and Regulation W (12 CFR part 223), which govern 
covered transactions between banks and their affiliates.
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c. Intraday Liquidity Positions
    Intraday liquidity monitoring is an important component of the 
liquidity risk management process for a covered company engaged in 
significant payment, settlement, and clearing activities. Given the 
interdependencies that exist among payment systems, large complex 
organizations' inabilities to meet critical payments have the potential 
to lead to systemic disruptions that can prevent the smooth functioning 
of payments systems and money markets.
    The proposed rule would require a covered company to establish and 
maintain procedures for monitoring their intraday liquidity risk 
exposure. These procedures would address how the covered company will:
    (i) Monitor and measure expected daily gross liquidity inflows and 
outflows;
    (ii) Manage and transfer collateral when necessary to obtain 
intraday credit;
    (iii) Identify and prioritize time-specific obligations so that the 
covered company can meet these obligations as expected;
    (iv) Settle less critical obligations as soon as possible;
    (v) Control the issuance of credit to customers where necessary; 
and
    (vi) Consider the amounts of collateral and liquidity needed to 
meet payment systems obligations when assessing its overall liquidity 
needs.
    The monitoring of intraday cash flows generally is an operational 
risk management function. To ensure that liquidity risk is also 
appropriately monitored, the Board expects a covered company to provide 
for integrated oversight of intraday exposures within the operational 
risk and liquidity risk functions. The Board also expects the 
procedures for monitoring and managing intraday liquidity positions to 
reflect in stringency and complexity, and scope of operations of the 
covered company.
d. Specific Limits
    The proposed rule would require a covered company to monitor 
compliance with the specific limits on potential sources of liquidity 
risk established under Sec.  252.59.
    Question 18: Should the Board require a covered company to monitor 
other areas of liquidity risk in addition to collateral positions, risk 
across entities, currencies, and business lines, and intraday liquidity 
positions? If so, what areas should be added to the list and why?
g. Documentation (Sec.  252.61)
    Comprehensive documentation is necessary to achieve good liquidity 
risk management and to support the supervisory process. The proposed 
rule would require a covered company to adequately document all 
material aspects of its liquidity risk management processes and its 
compliance with the requirements of the proposed rule, and submit such 
documentation to the risk committee. Material aspects of its liquidity 
risk management process would include, but would not be limited to, the 
methodologies and material assumptions used in cash flow projections 
and the liquidity stress testing, and all elements of the comprehensive 
CFP. The covered company must make this documentation available to the 
Federal Reserve upon request.
    Question 19: The Board requests comment on all aspects of the 
proposed rule. Specifically, what aspects of the proposed rule present 
implementation challenges and why? What alternative approaches to 
liquidity risk management should the Board consider? Are the liquidity 
management requirements of this proposal too specific or too narrowly 
defined? If, so explain how. Responses should be detailed as to the 
nature and impact of these challenges and should address whether the 
Board should consider implementing transitional arrangements in the 
rule to address these challenges.

V. Single-Counterparty Exposure Limits

A. Background

    During the recent financial crisis, some of the largest financial 
firms in the world collapsed or nearly did so, demonstrating the risk 
that the failure of large financial companies poses to the financial 
stability of the United States and the global financial system. The 
effect of one large financial institution's failure or near collapse 
was amplified by the interconnectedness of large, systemically 
important firms-the degree to which they extended each other credit and 
served as over-the-counter derivative counterparties to each other. 
Counterparties of a failing firm were placed under severe strain when 
the failing firm could not meet its financial obligations resulting in 
the counterparties' inability to meet their own obligations.
    The financial crisis also revealed inadequacies in the U.S. 
supervisory approach to single-counter party credit concentration 
limits, which failed to limit the interconnectedness among and 
concentration of similar risks within large financial companies that 
contributed to a rapid escalation of the crisis. While banks were 
subject to single-borrower lending and investment limits, these limits 
were applied at the bank level, rather than holding company level, and 
excluded credit exposures generated by derivatives and some securities 
financing transactions.\77\
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    \77\ Section 610 of the Dodd-Frank Act amends the term ``loans 
and extensions of credit'' for purposes of the lending limits 
applicable to national banks to include any credit exposure arising 
from a derivative transaction, repurchase agreement, reverse 
repurchase agreement, securities lending transaction, or securities 
borrowing transaction. See Dodd-Frank Act, Public Law 111-203, Sec.  
610, 124 Stat. 1376, 1611 (2010). As discussed in more detail below, 
these types of transactions are also all made subject to the single 
counterparty credit limits of section 165(e). 12 U.S.C. 5365(e)(3).
---------------------------------------------------------------------------

    In an effort to address single-counterparty concentration risk 
among large financial companies, section 165(e) of the Dodd-Frank Act 
directs the Board to establish single-counterparty credit concentration 
limits for covered companies in order to limit the risks that the 
failure of any individual firm could pose to a covered company.\78\ 
This section directs the Board to prescribe regulations that prohibit 
covered companies from having credit exposure to any unaffiliated 
company that exceeds 25 percent of the capital stock and surplus of the 
covered company.\79\ This section also authorizes the Board to lower 
the 25 percent threshold if necessary to mitigate the risks to the 
financial stability of the United States.\80\
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    \78\ See 12 U.S.C. 5365(e)(1).
    \79\ 12 U.S.C. 5365(e)(2).
    \80\ See id.
---------------------------------------------------------------------------

    Credit exposure to a company is defined in section 165(e) of the 
Dodd-Frank Act to mean all extensions of credit to the company, 
including loans, deposits, and lines of credit; all repurchase 
agreements, reverse repurchase agreements, securities borrowing and 
lending transactions with the company (to the extent that such 
transactions create credit exposure for the covered company); all 
guarantees, acceptances, or letters of

[[Page 613]]

credit (including endorsement or standby letters of credit) issued on 
behalf of the company; all purchases of or investments in securities 
issued by the company; counterparty credit exposure to the company in 
connection with a derivative transaction between the covered company 
and the company; and any other similar transaction that the Board, by 
regulation, determines to be a credit exposure for purposes of section 
165.\81\
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    \81\ See 12 U.S.C. 5365(e)(3).
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    Section 165(e) also grants authority to the Board (i) to issue such 
regulations and orders, including definitions consistent with section 
165(e), as may be necessary to administer and carry out that section; 
and (ii) to exempt transactions, in whole or in part, from the 
definition of the term ``credit exposure,'' if the Board finds that the 
exemption is in the public interest and consistent with the purposes of 
section 165(e).\82\ Section 165(e) states that its provisions and any 
implementing regulations and orders of the Board will not be effective 
until 3 years after the date of enactment of the Dodd-Frank Act, and 
the Board is authorized to extend the transition period for up to an 
additional 2 years.\83\
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    \82\ See 12 U.S.C. 5365(e)(5)-(6).
    \83\ See 12 U.S.C. 5365(e)(7).
---------------------------------------------------------------------------

    The concept of single-counterparty credit limits for covered 
companies is similar to, but also broader than, existing limits that 
operate at the depository institution level of banking organizations, 
including the investment securities limits and the lending limits 
imposed on depository institutions.\84\ A depository institution 
generally is limited, subject to certain exceptions, in the total 
amount of investment securities of any one obligor that it may purchase 
for its own account to no more than 10 percent of its capital stock and 
surplus.\85\ In addition, a depository institution's total outstanding 
loans and extensions of credit to one borrower may not exceed 15 
percent of the bank's capital stock and surplus, plus an additional 10 
percent of the bank's capital and surplus, if the amount that exceeds 
the bank's 15 percent general limit is fully secured by readily 
marketable collateral.\86\
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    \84\ See, e.g., 12 U.S.C. 24(7); 12 U.S.C. 84; 12 CFR parts 1 
and 32; see also 12 U.S.C. 335 (applying the provisions of 12 U.S.C. 
24(7) to state member banks).
    \85\ See 12 U.S.C. 24(7); 12 CFR part 1.
    \86\ See 12 U.S.C. 84(a); 12 CFR part 32.
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    Section 165(e) is a separate and independent limit from the 
investment securities limits and lending limits in the National Bank 
Act, and a covered company must comply with all of the limits that are 
applicable to it and its subsidiaries. The Board believes that a 
covered company should be able to comply with section 165(e) and the 
proposed rule implementing it on a consolidated basis, in addition to 
complying, as appropriate, with the investment securities limits and 
lending limits applicable to a bank subsidiary.
    Question 20: How would the limits of section 165(e) and the 
proposed rule interact with the other existing limits such as the 
investment and lending limits applicable to banks and what other 
conflicts might arise in complying with these different regimes?
    The financial crisis also revealed weaknesses in the large exposure 
limits in place in other major financial markets. These limits also 
failed to restrict interconnectedness among large global financial 
companies. In response, the BCBS has established a working group to 
examine challenges posed by weaknesses and inconsistencies in large 
exposure limit regimes across jurisdictions and to carefully evaluate 
the merits of reaching an international agreement on large exposure 
limits. If an international agreement on large exposure limits for 
banking firms is reached, the Board may amend this proposed rule, as 
necessary, to achieve consistency with the international approach.

B. Overview of the Proposed Rule

    The Board's proposal to implement section 165(e) introduces a two-
tier single-counterparty credit limit, with a more stringent single-
counterparty credit limit applied to the largest covered companies. The 
proposed rule includes limits on the exposures of the covered company 
as well as its subsidiaries--i.e., any company the parent company 
directly or indirectly controls. ``Control'', for purposes of this 
proposed rule, would exist when a covered company directly or 
indirectly owns or controls 25 percent or more of a class of a 
company's voting securities or 25 percent or more of a company's total 
equity, or consolidates the company for financial reporting purposes. 
The proposal would establish a general limit that prohibits a covered 
company from having aggregate net credit exposure to any single 
unaffiliated counterparty in excess of 25 percent of the covered 
company's capital stock and surplus.\87\ In addition, the proposed rule 
would establish a more stringent net credit exposure limit between a 
major covered company and any major counterparty, i.e., a major covered 
company's aggregate net credit exposure to any major counterparty would 
be limited to 10 percent of the capital stock and surplus of the major 
covered company.\88\ The proposal would define a ``major covered 
company'' as any nonbank covered company or any bank holding company 
with total consolidated assets of $500 billion or more.\89\ A ``major 
counterparty'' would be defined as any major covered company, as well 
as any foreign banking organization that is or is treated as a bank 
holding company and that has total consolidated assets of $500 billion 
or more.\90\
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    \87\ See proposed rule Sec.  252.93(a). This general limit in 
the proposed rule follows the 25 percent limit contained in section 
165(e) of the Dodd-Frank Act. See 12 U.S.C. 5365(e)(2). Section 
165(e) of the Dodd-Frank Act limits credit exposure of a covered 
company to any unaffiliated company. 12 U.S.C. 5365(e)(2). The 
proposed rule implements the statute by limiting the credit exposure 
of a covered company to an unaffiliated ``counterparty'' as defined 
in the proposed rule and as discussed further below. See proposed 
rule Sec.  252.92(k) (defining ``counterparty'').
    \88\ See proposed rule Sec.  252.93(b). Section 165(e)(2) grants 
the Board authority to lower the limit on net credit exposure below 
25 percent if necessary to mitigate risks to the financial stability 
of the United States. See 12 U.S.C. 5365(e)(2).
    \89\ See proposed rule Sec.  252.92(aa) (defining ``major 
covered company'').
    \90\ See proposed rule Sec.  252.92(z).
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    The proposed definition of a counterparty would include a natural 
person (including the person's immediate family), a company (including 
its subsidiaries); the United States (including all of its agencies and 
instrumentalities, but not including any State or political subdivision 
of a State); a State (including all of its agencies, instrumentalities, 
and political subdivisions); and a foreign sovereign entity (including 
its agencies, instrumentalities, political subdivisions). Under the 
proposal, credit exposures to sovereign entities are made subject to 
the credit exposure limits (unless specifically exempted) in the same 
manner as credit exposures to companies. As explained further below, 
the Board proposes to include sovereign entities in the definition of 
counterparty because the Board believes that credit exposures of a 
covered company to such governmental entities create risks to the 
covered company similar to those created by large exposures to other 
types of entities, e.g., privately owned companies.
    Both the general and more stringent credit limits would be measured 
in terms of a covered company's capital stock and surplus. The proposed 
rule would define ``capital stock and surplus'' of a covered company as 
its total regulatory capital plus excess loan loss reserves. Under the 
proposed rule, the single-counterparty credit limit

[[Page 614]]

would apply to a broad range of transactions with a counterparty, such 
as extensions of credit (including loans, deposits, and lines of 
credit), securities lending or securities borrowing transactions, as 
well as credit derivative or equity derivative transactions in which 
the covered company has sold protection to a third party referencing 
the counterparty. The proposed rule also would allow the Board to 
determine that any similar transaction should be a ``credit 
transaction''.
    The proposal also specifies how the gross credit exposure on a 
credit transaction should be calculated for each type of credit 
transaction defined in the proposed rule. For example, the proposed 
rule would require that the gross credit exposure of a securities 
borrowing transaction be valued at the amount of cash collateral plus 
the market value of securities collateral transferred by the covered 
company to the counterparty.
    The general limit (25 percent of capital stock and surplus) and the 
more stringent limit between major covered companies and major 
counterparties (10 percent of capital stock and surplus) apply to the 
aggregate net credit exposure between the covered company and the 
counterparty, or between major covered companies and major 
counterparties. The rule would specify how gross credit exposure 
amounts are converted to net credit exposure amounts by taking into 
account eligible collateral, eligible guarantees, eligible credit and 
equity derivative hedges, other eligible hedges (i.e., a short position 
in the counterparty's debt or equity security), and for securities 
financing transaction, the effect of bilateral netting agreements. 
Under the proposed rule, ``eligible collateral'' is generally defined 
to include cash on deposit with a covered company (including cash held 
for the covered company by a third-party custodian or trustee); debt 
securities (other than mortgage- or asset-backed securities) that are 
bank-eligible investments; equity securities that are publicly traded; 
or convertible bonds that are publicly traded.
    An ``eligible guarantee'' is a guarantee that meets certain 
criteria described in the proposed rule, including being written by an 
eligible protection provider. Similarly, eligible credit or equity 
derivative hedges would also be required to be written by an eligible 
protection provider and meet certain other criteria. For example, an 
eligible credit derivative hedge would have to be in simple form, 
including single-name or standard, non-tranched index credit 
derivatives. Moreover, an eligible equity derivative hedge would only 
include an equity-linked total return swap and would not include other, 
more complex equity derivatives, e.g., purchased equity-linked options.
Section-by-Section Analysis
a. Section 252.91: Applicability
    Section 252.91 states that, in general, the proposed rule would 
apply to a company on the first day of the fifth quarter following the 
date on which it became a covered company. Initially, the proposed rule 
would not apply to any covered company until October 1, 2013.\91\
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    \91\ See proposed rule Sec.  252.91(a)(2); see also 12 U.S.C. 
5365(e)(7)(A) (stating that regulations and orders under section 
165(e) shall not be effective until 3 years after the date of 
enactment of the Dodd-Frank Act).
---------------------------------------------------------------------------

    Question 21: Should the Board consider a longer phase-in for all or 
a subset of covered companies?
b. Section 252.92: Definitions
    Section 252.92 of the proposed rule defines the key terms used in 
the rule. As discussed above, the limits of the proposed rule apply to 
credit exposure of a covered company, including its subsidiaries to any 
unaffiliated counterparty. A ``subsidiary'' of a specified company 
means a company that is directly or indirectly controlled by the 
specified company.\92\ A company would control another company if it 
(i) Owns or controls with the power to vote 25 percent or more of a 
class of voting securities of the company; (ii) owns or controls 25 
percent or more of the total equity of the company; or (iii) 
consolidates the company for financial reporting purposes.\93\ The 
proposed rule's definition of control would differ from that in the 
Bank Holding Company Act and the Board's Regulation Y.\94\ The Board 
proposes to vary from the Bank Holding Company Act/Regulation Y 
definition of control for purposes of this proposed regulation because 
a simpler, more objective definition of control is more consistent with 
the objectives of single-counterparty credit limits.
---------------------------------------------------------------------------

    \92\ See proposed rule Sec.  252.92(jj).
    \93\ See proposed rule Sec.  252.92(i). This definition of 
control is similar to that in Appendix G of Regulation Y which 
states that a person or company controls a company if it (i) owns, 
controls, or holds with the power to vote 25 percent or more of a 
class of voting securities of the company; or (ii) consolidates the 
company for financial reporting purposes. See 12 CFR 225, App. G. 
The only difference between the definition from Appendix G and the 
proposed rule's definition of control is the addition of the prong 
to capture total equity in the proposed rule.
    \94\ See 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e)(1).
---------------------------------------------------------------------------

    Question 22: Is the approach of including all subsidiaries of a 
covered company in the definition of covered company for purposes of 
the proposed rule appropriate? \95\ If not, explain why not.
---------------------------------------------------------------------------

    \95\ As described below, the same approach to subsidiaries is 
used for counterparties that are companies. Such counterparties are 
defined to include a company and its subsidiaries, thus requiring 
aggregation of the entire organization's credit exposures to the 
covered company it faces.
---------------------------------------------------------------------------

    Question 23: Should the Bank Holding Company Act/Regulation Y 
definition of ``control'' be adopted for purposes of the proposed rule? 
Are there alternative approaches to defining when a company is a 
subsidiary of another the Board should consider?
    Under the proposed rule, a fund or vehicle that is sponsored or 
advised by a covered company would not be considered a subsidiary of 
the covered company unless it was ``controlled'' by that covered 
company. A covered company would not control a fund or vehicle that is 
sponsored or advised by the covered company if (i) it did not own or 
control more than 25 percent of the voting securities or total equity 
of the fund or vehicle; and (ii) the fund or vehicle would not be 
consolidated with the covered company for financial reporting 
purposes.\96\ If a fund or vehicle is not controlled by a covered 
company, the exposures of such fund or vehicle to its counterparties 
would not be aggregated with those of the covered company.\97\ Such 
arm's length treatment, however, may be at odds with the support that 
some companies provided during the financial crisis to the funds they 
advised and sponsored. For example, many money market mutual fund 
(MMMF) sponsors, including banking organizations, supported their MMMFs 
during the crisis in order to enable those funds to meet investor 
redemption requests without having to sell assets into then-fragile and 
illiquid markets.
---------------------------------------------------------------------------

    \96\ Financial Accounting Standards Board, ASC Section 810, 
Consolidation. Further, these requirements are currently under 
review. The Board may review the effect any change made to these 
consolidation requirements has on whether a covered company is 
required to consolidate such fund or vehicle for financial reporting 
purposes and amend this rule, as necessary.
    \97\ Instead, a non-controlled fund or vehicle would be treated 
as a counterparty of the covered company and any exposure or 
transaction between those entities would be subject to the limits of 
the proposed rule.
---------------------------------------------------------------------------

    Question 24: Since a covered company may have strong incentives to 
provide support in times of distress to MMMFs and certain other funds 
or vehicles that it sponsors or advises, the Board seeks comment on 
whether such funds or vehicles should be included as part of the 
covered company for purposes of this rule.\98\ Is the proposed

[[Page 615]]

rule's definition of ``control'' effective, and should the proposal's 
definition of ``subsidiary'' be expanded to include any investment fund 
or vehicle advised or sponsored by a covered company or any other 
entity?
---------------------------------------------------------------------------

    \98\ The same issued is raised with respect to the treatment of 
funds sponsored and advised by counterparties. Such funds or 
vehicles similarly would not be considered to be part of the 
counterparty under the proposed rule's definition of control.
---------------------------------------------------------------------------

    The proposed rule would establish limits on the credit exposure of 
a covered company to a single ``counterparty''.\99\ ``Counterparty'' 
would be defined to mean (i) With respect to a natural person, the 
person and members of the person's immediate family, collectively; 
\100\ (ii) with respect to a company, the company and all of its 
subsidiaries, collectively; (iii) with respect to the United States, 
the United States and all of its agencies and instrumentalities (but 
not including any State or political subdivision of a State), 
collectively; (iv) with respect to a State, the State and all of its 
agencies, instrumentalities, and political subdivisions (including 
municipalities), collectively; and (v) with respect to a foreign 
sovereign entity, the foreign sovereign entity and all of its agencies, 
instrumentalities, and political subdivisions, collectively.\101\
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    \99\ See proposed rule Sec.  252.93.
    \100\ ``Immediate family'' is defined in section 252.92(y) of 
the proposed rule.
    \101\ See proposed rule Sec.  252.92(k); see also proposed rule 
Sec.  252.92(hh) (defining ``sovereign entity'').
---------------------------------------------------------------------------

    Section 165(e) directs the Board to limit credit exposure of a 
covered company to ``any unaffiliated company''.\102\ The Board 
included sovereign entities in the definition of counterparty to limit 
the vulnerability of a covered company to default by a single sovereign 
state, because the Board believes that credit exposures of a covered 
company to such governmental entities create risks to the covered 
company that are similar to those created by large exposures to other 
types of entities. The severe distress or failure of a sovereign entity 
could have effects on a covered company that are comparable to those 
caused by the failure of a financial firm or nonfinancial corporation 
to which the covered company has a large credit exposure. For these 
reasons, credit exposures to sovereign governments are made subject to 
the credit exposure limits in the same manner as credit exposures to 
companies. The Board believes that the authority in the Dodd-Frank Act 
and the Board's general safety and soundness authority in associated 
banking laws are sufficient to encompass sovereign governments in the 
definition of counterparty in this manner.\103\
---------------------------------------------------------------------------

    \102\ 12 U.S.C. 5365(e)(2)-(3). ``Company'' is defined for 
purposes of the proposed rule to mean a corporation, partnership, 
limited liability company, depository institution, business trust, 
special purpose entity, association, or similar organization. See 
proposed rule Sec.  252.92(h).
    \103\ See 12 U.S.C. 5365(b)(1)(B)(iv) (allowing the Board to 
establish additional prudential standards for covered companies as 
the Board, on its own or pursuant to a recommendation made by the 
Council in accordance with section 115, determines are appropriate) 
and 5368 (providing the Board with general rulemaking authority); 
see also section 5(b) of the BHC Act of 1956, as amended (12 U.S.C. 
1844(b)); and section 8(b) of FDI Act (12 U.S.C. 1818(b)). Section 
5(b) of the BHC Act provides the Board with the authority to issue 
such regulations and orders as may be necessary to enable it to 
administer and carry out the purposes of the BHC Act. Section 8(b) 
of the FDI Act allows the Board to issue to bank holding companies 
an order to cease and desist from unsafe and unsound practices.
---------------------------------------------------------------------------

    As discussed below, certain credit exposures of a covered company 
to the U.S. government are exempt from the credit exposure limits.\104\ 
There is no similar exemption, however, for exposures to U.S. state or 
local governments or foreign sovereigns. Accordingly, credit exposures 
to U.S. state and local governments and foreign sovereigns would be 
subject to the proposed limits.
---------------------------------------------------------------------------

    \104\ See generally proposed rule Sec.  252.97 (exempting direct 
claims on, and portions of claims that are directly and fully 
guaranteed as to principal and interest by, the United States and 
its agencies and direct claims on, and portions of claims that are 
directly and fully guaranteed as to principal and interest by, the 
Federal National Mortgage Association and the Federal Home Loan 
Mortgage Corporation, only while operating under the conservatorship 
or receivership of the Federal Housing Finance Agency, and any 
additional obligations by a U.S. government sponsored entity as 
determined by the Board.)
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    Question 25: Should the definition of ``counterparty'' 
differentiate between types of exposures to a foreign sovereign entity 
including exposures to local governments? Should exposures to a company 
controlled by a foreign sovereign entity be included in the exposure to 
that foreign sovereign entity?
    Question 26: Should certain credit exposures to foreign sovereign 
entities be exempted from the limitations of the proposed rule--for 
example, exposures to foreign central banks necessary to facilitate the 
operation of a foreign banking business by a covered company?
    The Board also notes that difficult issues are raised in connection 
with the valuation of credit exposure arising from direct investments 
in or indirect exposures to a collateralized debt obligation (CDO) or 
other obligation issued by a special purpose vehicle (SPV). The failure 
to look through an SPV to its sponsor or to the issuer of the 
underlying assets may serve at times to improperly mask a covered 
company's exposure to those parties. Accordingly, under the proposed 
reservation of authority, the Board may look through some SPVs either 
to the issuer of the underlying assets in the vehicle or to the 
sponsor. In the alternative, the Board may require covered companies to 
look through to the underlying assets of an SPV but only if the SPV 
failed certain discrete concentration tests (such as having more than 
20 underlying exposures).
    Question 27: How should exposures to SPVs and their underlying 
assets and sponsors be treated? What other alternatives should the 
Board consider?
    The credit exposure of a covered company to an unaffiliated 
counterparty is limited to a percentage of the capital stock and 
surplus of the covered company.\105\ Under the proposed rule, ``capital 
stock and surplus'' of a bank holding company is the sum of the 
company's total regulatory capital as calculated under the risk-based 
capital adequacy guidelines applicable to that bank holding company 
under Regulation Y (12 CFR part 225) and the balance of the allowance 
for loan and lease losses of the bank holding company not included in 
tier 2 capital under the capital adequacy guidelines applicable to that 
bank holding company under Regulation Y (12 CFR part 225).\106\ This 
definition of capital stock and surplus is generally consistent with 
the definition of the same term in the Board's Regulations O and W and 
the OCC's national bank lending limit regulation.\107\ For a nonbank 
covered company, ``capital stock and surplus'' includes the total 
regulatory capital of such company on a consolidated basis, as 
determined under the risk-based capital rules the company is subject to 
by rule or order of the Board.\108\
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    \105\ See 12 U.S.C. 5365(e)(2); see also proposed rule Sec.  
252.93.
    \106\ See proposed rule Sec.  252.92(g); see also proposed rule 
Sec.  252.92(kk) (defining ``total capital'').
    \107\ See 12 CFR 12 CFR 215.3(i); 223.3(d); see also 12 CFR 
32.2(b).
    \108\ See proposed rule Sec.  252.92(g).
---------------------------------------------------------------------------

    An alternative measure of ``capital stock and surplus'' might focus 
on common equity and, in that respect, be consistent with the post-
crisis global regulatory move toward tier 1 common equity as the 
primary measure of loss absorbing capital for internationally active 
banking firms. For example, Basel III introduces for the first time a 
specific tier 1 common equity requirement and uses tier 1 common equity 
measures in its capital conservation buffer and

[[Page 616]]

countercyclical buffer.\109\ In addition the, the BCBS capital 
surcharge framework for G-SIBs builds on the tier 1 common equity 
requirement in Basel III.\110\ In addition, the Federal Reserve focused 
on tier 1 common equity in the SCAP conducted in early 2009 and again 
in the CCAR conducted in early 2011 to assess the capacity of bank 
holding companies to absorb projected losses.\111\
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    \109\ See Basel III framework, supra note 34.
    \110\ See BCBS capital surcharge framework, supra note 35.
    \111\ See, e.g., The Supervisory Capital Assessment Program: 
Overview of Results (May 7, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf 
(hereinafter SCAP Overview of Results); and 76 FR 74631, 74636 
(December 1, 2011).
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    Question 28: Are the measures of ``capital stock and surplus'' in 
the proposed rule effective in light of the intent and purpose of 
section 165(e) or would a measure of ``capital stock and surplus'' that 
focuses on tier 1 common equity be more effective? What other 
alternatives to the proposed definition of ``capital stock and 
surplus'' should the Board consider?
c. Section 252.93: Credit Exposure Limit
    Section 252.93 of the proposed rule contains the key quantitative 
limitations on credit exposure of a covered company to a single 
counterparty.\112\ As noted above, the Board has determined to limit 
the ``aggregate net credit exposure'' of a covered company to a 
counterparty. ``Aggregate net credit exposure'' is defined to mean the 
sum of all net credit exposures of a covered company to a single 
counterparty.\113\ As described in detail below, sections 252.94 and 
252.95 of the proposed rule explain how to calculate gross and net 
credit exposure in order to arrive at the aggregate net credit exposure 
relevant to the single-counterparty credit limit in section 
252.93.\114\
---------------------------------------------------------------------------

    \112\ See proposed rule Sec.  252.93.
    \113\ See proposed rule Sec.  252.92(c).
    \114\ See proposed rule Sec. Sec.  252.94 & 252.95.
---------------------------------------------------------------------------

    There are two separate limits contained in section 252.93 of the 
proposed rule. The general limit provides that no covered company may 
have aggregate net credit exposure to any unaffiliated counterparty 
that exceeds 25 percent of the capital stock and surplus of the covered 
company.\115\ There is also a second, more stringent limit for 
aggregate net credit exposure between major covered companies and major 
counterparties. Specifically, no major covered company may have 
aggregate net credit exposure to any unaffiliated major counterparty 
that exceeds 10 percent of the capital stock and surplus of the major 
covered company.\116\ As discussed above, the Dodd-Frank Act grants the 
Board authority to impose stricter limits on covered companies with a 
larger systemic footprint and indeed requires the Board to impose 
stricter single-counterparty credit limits on covered companies with a 
larger systemic footprint.
---------------------------------------------------------------------------

    \115\ See proposed rule Sec.  252.93(a).
    \116\ See proposed rule Sec.  252.93(b).
---------------------------------------------------------------------------

    Question 29: What other limits or modifications to the proposed 
limits on aggregate net credit exposure should the Board consider?
    In accord with the directive of section 165, the proposed rule 
imposes a more conservative limit on larger covered companies that have 
a larger systemic footprint.\117\ The Board recognizes, however, that 
size is only a rough proxy for the systemic footprint of a company. 
Additional factors specific to a firm, including the nature, scope, 
scale, concentration, interconnectedness, mix of its activities, its 
leverage, and its off-balance-sheet exposures, among other factors, may 
be determinative of a company's systemic footprint.\118\ The BCBS 
proposal on capital surcharges for systemically important banking 
organizations, for example, uses a twelve factor approach to determine 
the systemic importance of a global banking organization.\119\ 
Moreover, the Board recognizes that drawing one line through the 
covered company population and imposing stricter limits on exposures 
between major covered companies and major counterparties may not take 
into account nuances that might be captured by other approaches.
---------------------------------------------------------------------------

    \117\ See 12 U.S.C. 5365(a).
    \118\ See, e.g., 12 U.S.C. 5323(a).
    \119\ See BCBS capital surcharge framework, supra note 35.
---------------------------------------------------------------------------

    Question 30: Should the Board adopt a more nuanced approach, like 
the BCBS approach, in determining which covered companies should be 
treated as major covered companies or which counterparties should be 
considered major counterparties?
    Question 31: Should the Board introduce more granular categories of 
covered companies to determine to appropriate net credit exposure 
limit? If so, how could such granularity best be accomplished?
    Section 165(e) provides the Board with discretion to determine how 
a covered company measures the amount of credit exposure in various 
transaction types. As noted above, the proposed rule limits aggregate 
net credit exposure of a covered company to an unaffiliated 
counterparty. ``Aggregate net credit exposure'' is defined in the 
proposed rule to be a measure that recognizes certain credit risk 
mitigants, including netting agreements for certain types of 
transactions, most forms of collateral with a haircut, and guarantees 
and other forms of credit protection.\120\ The Board recognizes that 
while net credit exposure limits reduce the risk that the failure of a 
single counterparty could significantly undermine the financial 
strength of a covered company, net limits also understate the level of 
interconnectedness among financial companies. While gross credit 
exposure limits might more effectively capture interconnectedness among 
financial companies, the Board has not proposed supplementary gross 
limits at this time due to the tendency of gross limits to 
significantly overstate the credit risk inherent in any given 
transaction.
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    \120\ See proposed rule Sec.  252.92(c) (defining ``aggregate 
net credit exposure'') and Sec.  252.95 (describing how to calculate 
aggregate net credit exposure taking into accounting netting, 
collateral, guarantees and other forms of credit protection).
---------------------------------------------------------------------------

    Question 32: Should the Board supplement the net credit exposure 
limit with limits on gross credit exposure for all covered companies or 
a subset of covered company, i.e., major covered companies? Explain why 
or why not.
d. Section 252.94: Gross Credit Exposure
    Section 252.94 of the proposed rule explains how a covered company 
would be required calculate its ``gross credit exposure'' on a credit 
transaction with a counterparty. ``Gross credit exposure'' is defined 
to mean, with respect to any credit transaction, the credit exposure of 
the covered company to the counterparty before adjusting for the effect 
of qualifying master netting agreements, eligible collateral, eligible 
guarantees, eligible credit derivatives and eligible equity 
derivatives, and other eligible hedges, i.e., a short position in the 
counterparty's debt or equity security.\121\ Consistent with the 
statutory definition of credit exposure, the proposed rule defines 
``credit transaction'' to mean, with respect to a counterparty, any (i) 
Extension of credit to the counterparty, including loans, deposits, and 
lines of credit, but excluding advised or other uncommitted lines of 
credit; (ii) repurchase or reverse repurchase agreement with the 
counterparty; (iii) securities lending or securities borrowing 
transaction with the counterparty; (iv) guarantee, acceptance, or 
letter of credit (including any

[[Page 617]]

confirmed letter of credit or standby letter of credit) issued on 
behalf of the counterparty; (v) purchase of, or investment in, 
securities issued by the counterparty; (vi) credit exposure to the 
counterparty in connection with a derivative transaction between the 
covered company and the counterparty; (vii) credit exposure to the 
counterparty in connection with a credit derivative or equity 
derivative transaction between the covered company and a third party, 
the reference asset of which is an obligation or equity security issued 
by the counterparty; \122\ and (viii) any transaction that is the 
functional equivalent of the above, and any similar transaction that 
the Board determines to be a credit transaction for purposes of this 
subpart.\123\
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    \121\ See proposed rule Sec.  252.92(x). Section 252.95 of the 
proposed rule explains how these adjustments are made.
    \122\ ``Credit derivative'' and ``equity derivative'' are 
defined in sections 252.92(m) and (v) of the proposed rule, 
respectively.
    \123\ See proposed rule Sec.  252.92 (n). The definition of 
``credit transaction'' in the proposed rule is similar to the 
definition of ``credit exposure'' in section 165(e) of the Dodd-
Frank Act. See 12 U.S.C. 5365(e)(3).
---------------------------------------------------------------------------

    Question 33: Are the definitions of ``credit transaction'' 
appropriate in light of the purpose and intent of the Dodd-Frank Act? 
If not, explain why not?
    Question 34: What transactions, if any, should be exempt from the 
definition of credit transaction?
    Section 252.94 describes how the gross credit exposure of a covered 
company to a counterparty on a credit transaction should be calculated 
for each type of credit transaction described above.\124\ In 
particular, section 252.94(a) of the proposed rule provides that, for 
purposes of calculating gross credit exposure:
---------------------------------------------------------------------------

    \124\ See proposed rule Sec.  252.94(a)(1)-(12).
---------------------------------------------------------------------------

    (i) The value of loans by a covered company to a counterparty (and 
leases in which the covered company is the lessor and the counterparty 
is the lessee) is equal to the amount owed by the counterparty to the 
covered company under the transaction.
    (ii) The value of debt securities held by the covered company that 
are issued by the counterparty is equal to the greater of (i) the 
amortized purchase price or market value for trading and available for 
sale securities, or (ii) the amortized purchase price for securities 
held to maturity.
    (iii) The value of equity securities held by the covered company 
that are issued by the counterparty is equal to the greater of the 
purchase price or market value.
    (iv) The value of repurchase agreements is equal to (i) the market 
value of the securities transferred by the covered company to the 
counterparty plus (ii) an add-on equal to the market value of the 
securities transferred multiplied by the collateral haircut set forth 
in section 252.95 (Table 2) that is applicable to the securities 
transferred.
    (v) The value of reverse repurchase agreements is equal to the 
amount of cash transferred by the covered company to the counterparty.
    (vi) Securities borrowing transactions are valued at the amount of 
cash collateral plus the market value of securities collateral 
transferred by the covered company to the counterparty.
    (vii) Securities lending transactions are valued at (i) the market 
value of the securities lent by the covered company to the counterparty 
plus (ii) an add-on equal to the market value of the securities lent 
multiplied by the collateral haircut set forth in section 252.95 (Table 
2) that is applicable to the securities lent.
    (viii) Committed credit lines extended by a covered company to the 
counterparty are valued at the face amount of the credit line.
    (ix) Guarantees and letters of credit issued by a covered company 
on behalf of the counterparty are equal to the maximum potential loss 
to the covered company on the transaction.
    (x) Derivative transactions between the covered company and the 
counterparty not subject to a qualifying master netting agreement, are 
valued in an amount equal to the sum of (i) the current exposure of the 
derivatives contract equal to the greater of the mark-to-market value 
of the derivative contract or zero and (ii) the potential future 
exposure of the derivatives contract, calculated by multiplying the 
notional principal amount of the derivative contract by the appropriate 
conversion factor, set forth in section 252.94 (Table 1).
    (xi) Derivative transactions between the covered company and the 
counterparty subject to a qualifying master netting agreement, are 
valued in an amount equal to the exposure at default amount calculated 
under 12 CFR part 225, appendix G, Sec.  32(c)(6).
    (xii) Credit or equity derivative transactions between the covered 
company and a third party where the covered company is the protection 
provider and the reference asset is an obligation or equity security of 
the counterparty, are valued in an amount equal to the lesser of the 
face amount of the transaction or the maximum potential loss to the 
covered company on the transaction.
    Question 35: What alternative or additional valuation rules should 
the Board consider for calculating gross credit exposure?
    Question 36: What impediments to calculating gross credit exposure 
in the manner described above would covered companies face?
    In the valuation rules described above, trading and available-for-
sale debt securities held by the covered company are valued at the 
greater of amortized purchase price or market value in section 
252.94(a)(2) of the proposed rule. Similarly, equity securities held by 
the covered company are valued at the greater of purchase price or 
market value in section 252.94(a)(3) of the proposed rule. The 
valuation rule for these types of securities requires a covered company 
to revalue upwards the amount of an investment in such securities when 
the market value of the securities increases. In these circumstances, 
the valuation rule merely reflects the covered company's greater 
financial exposure to the counterparty and reduces the covered 
company's ability to engage in additional transactions with a 
counterparty as the covered company's exposure to the counterparty 
increases.
    The valuation rules also provide that the amount of the covered 
company's investment in these securities can be no less than the 
purchase price paid by the covered company for the securities, even if 
the market value of the securities declines below the purchase price. 
Using the purchase price of the securities as a floor for valuing them 
would appear to be appropriate for several reasons. First, it ensures 
that the value of the securities never falls below the amount of funds 
actually transferred by the covered company to the counterparty in 
connection with the investment. Second, the purchase price floor would 
limit the ability of a covered company to provide additional funding to 
a counterparty as the counterparty approaches insolvency. If the 
proposed rule were to value investments in securities issued by a 
counterparty strictly at market value, the covered company could lend 
substantially more funds to the counterparty as the counterparty's 
financial condition worsened. As the financial condition of the 
counterparty declines, the market value of the counterparty's 
securities held by the covered company would also likely decline, 
allowing the covered company to provide additional funding to the 
counterparty under the proposed rule. This type of increasing support 
for a counterparty in distress could vitiate the public policy goals of 
section 165(e) by permitting a covered company to exceed the regulatory 
single-counterparty limits through serial credit extensions to a 
collapsing counterparty.

[[Page 618]]

    Question 37: Does the requirement to use the greater of purchase 
price or market value introduce significant burden for covered 
companies? Would the use of the market value alone be consistent with 
the purposes of section 165(e)?
    The add-on included in the gross valuation rule for repurchase 
agreements and securities lending transactions (set forth in sections 
252.94(a)(4) and 252.94(a)(7)) of the proposed rule is intended to 
capture the market volatility (and associated potential increase in 
counterparty exposure amount) of the securities transferred or lent by 
the covered company in these transactions.
    The final gross credit exposure calculation amounts noted in 
sections 252.94(a)(10)-(12) of the proposed rule address derivative 
transactions. The proposed rule addresses both credit exposure of a 
covered company to a derivative counterparty, which is valued as the 
sum of the current exposure and the potential future exposure of the 
contract, and credit exposure of a covered company to the issuer of the 
reference obligation of certain credit and equity derivatives when the 
covered company is the protection provider, which is valued on a 
notional basis.\125\
---------------------------------------------------------------------------

    \125\ See proposed rule Sec.  252.94(a)(10)-(12). ``Credit 
derivative'' is defined in section 252.92(m) of the proposed rule, 
and ``equity derivative'' is defined in section 252.92(v) of the 
proposed rule. ``Derivative transaction'' is defined in section 
252.92(p) of the proposed rule in the same manner as it is defined 
in section 610 of the Dodd-Frank Act. See Dodd-Frank Act, Public Law 
111-203, Sec.  610, 124 Stat. 1376, 1611 (2010).
---------------------------------------------------------------------------

    Question 38: The Board seeks comment on all aspects of the proposed 
approach to calculating gross credit exposures for securities financing 
and derivative transactions, including the add-on in the proposed gross 
valuation rule for repurchase agreements and securities lending 
transactions.
     The Board recognizes that the credit risk targeted by the 
valuation rule for securities lending transactions and repurchase 
agreements--i.e., that a counterparty would fail at the same time that 
the underlying securities are rising in value--may be smaller than the 
credit risk associated with reverse repurchase agreements or securities 
borrowing transactions. Should the Board consider a lower add-on than 
the haircuts in section 252.95 (Table 2) to reflect this difference? If 
so, how should the Board calibrate the add-on?
     Will the proposed add-on approach to valuing credit 
exposure for securities lending transactions and repurchase agreements 
lead to significant changes in current practices in those markets?
     Is the valuation approach for a derivative transaction 
between a covered company and a counterparty--i.e., a combination of 
the current exposure and a measure of potential future exposure of the 
contract--appropriate? What alternative valuation approaches for 
derivative transactions should the Board consider?
     Is the valuation approach for a derivative transaction 
between a covered company and a third party appropriate in the case of 
a derivative transaction where the covered company is the protection 
provider and the reference asset is issued by the counterparty?
    The proposed rule generally allows covered companies to calculate 
gross credit exposure to a counterparty for derivatives contracts with 
that counterparty subject to a qualifying master netting agreement by 
using the Basel II-based exposure at default calculation set forth in 
the Board's advanced approaches capital rules (12 CFR part 225, 
appendix G, Sec.  32(c)(6)).\126\
---------------------------------------------------------------------------

    \126\ See proposed rule Sec.  252.95(a). ``Qualifying master 
netting agreement'' is defined in section 252.92(ee) of the proposed 
rule in a manner consistent with the Board's advanced risk-based 
capital rules for bank holding companies.
---------------------------------------------------------------------------

    With respect to cleared and uncleared derivatives, the amount of 
initial margin and excess variation margin (i.e., variation margin in 
excess of that needed to secure the mark-to-market value of a 
derivative) posted to a counterparty should be treated as credit 
exposure to the counterparty unless the margin is held in a segregated 
account at a third party custodian. In the case of cleared derivatives, 
a covered company's contributions to the guaranty fund of a central 
counterparty (CCP) would be considered a credit exposure to the CCP and 
valued at notional amount.\127\
---------------------------------------------------------------------------

    \127\ The Board notes that it has the authority to deem margin 
posted to be a credit exposure as such exposure is part of 
counterparty credit exposure to the covered company arising in 
connection with a derivative transaction. The Board also has broad 
authority in section 165(e) to determine that any similar 
transaction is a credit exposure. 12 U.S.C. 5365(e)(3)(E)-(F).
---------------------------------------------------------------------------

    Question 39: Should margin posted and contributions to a CCP 
guaranty fund be considered a credit exposure for purposes of the 
proposed rule? The Board recognizes that there are competing policy 
concerns in considering whether to limit a covered company's exposure 
to central counterparties. The Board seeks comment on the benefits and 
drawbacks of such limits.
    Section 252.94(b) of the proposed rule includes the statutory 
attribution rule that provides that a covered company must treat a 
transaction with any person as a credit exposure to a counterparty to 
the extent the proceeds of the transaction are used for the benefit of, 
or transferred to, that counterparty.\128\
---------------------------------------------------------------------------

    \128\ See proposed rule Sec.  252.94(b); see also 12 U.S.C. 
5365(e)(4).
---------------------------------------------------------------------------

    The Board notes that an overly broad interpretation of the 
attribution rule in the context of section 165(e) would lead to 
inappropriate results and would create a daunting tracking exercise for 
covered companies. For example, if a covered company makes a loan to a 
counterparty that in turn uses the loan to purchase goods from a third 
party, the attribution rule could be read to mean that the covered 
company would have a credit exposure to that third party, because the 
proceeds of the loan with the counterparty are used for the benefit of, 
or transferred to, the third party. The Board recognizes the difficulty 
in monitoring such transactions and the limited value in tracking such 
money flows for purposes of maintaining the integrity of the single-
counterparty credit limit regime. The Board thus proposes to minimize 
the scope of application of this attribution rule consistent with 
preventing evasion of the single-counterparty credit limit.
    Question 40: The Board requests comment on whether the proposed 
scope of the attribution rule is appropriate or whether additional 
regulatory clarity around the attribution rule would be appropriate. 
What alternative approaches to applying the attribution rule should the 
Board consider? What is the potential cost or burden of applying the 
attribution rule as described above?
e. Section 252.95: Net Credit Exposure
    As discussed above, the proposed rule imposes limits on a covered 
company's net credit exposure to a counterparty. ``Net credit 
exposure'' is defined to mean, with respect to any credit transaction, 
the gross credit exposure of a covered company calculated under section 
252.94, as adjusted in accordance with section 252.95.\129\ Section 
252.95 of the proposed rule explains how to convert gross credit 
exposure amounts to net credit exposure amounts by taking into account 
eligible collateral, eligible guarantees, eligible credit and equity 
derivatives, other eligible hedges (i.e., a short position in the 
counterparty's debt or equity security), and for securities financing 
transactions, the effect of bilateral netting agreements.\130\
---------------------------------------------------------------------------

    \129\ See proposed rule Sec.  252.92(bb).
    \130\ See proposed rule Sec.  252.95.

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[[Page 619]]

Collateral
    Section 252.95(b) of the proposed rule explains the impact of 
eligible collateral when calculating net credit exposure. ``Eligible 
collateral'' is defined to include (i) Cash on deposit with a covered 
company (including cash held for the covered company by a third-party 
custodian or trustee); (ii) debt securities (other than mortgage- or 
asset-backed securities) that are bank-eligible investments; (iii) 
equity securities that are publicly traded; or (iv) convertible bonds 
that are publicly traded.\131\ For any of these asset types to count as 
eligible collateral for a credit transaction, the covered company 
generally must have a perfected, first priority security interest in 
the collateral (or, if outside of the United States, the legal 
equivalent thereof). This list of eligible collateral is similar to the 
list of eligible collateral in the Basel II standardized capital rules.
---------------------------------------------------------------------------

    \131\ See proposed rule Sec.  252.92(q); see also proposed rule 
Sec.  252.92(dd) (defining ``publicly traded'').
---------------------------------------------------------------------------

    Question 41: Should the list of eligible collateral be broadened or 
narrowed?
    In computing its net credit exposure to a counterparty for a credit 
transaction, a covered company may reduce its gross credit exposure on 
a transaction by the adjusted market value of any eligible 
collateral.\132\ ``Adjusted market value'' is defined in section 
252.92(a) of the proposed rule to mean, with respect to any eligible 
collateral, the fair market value of the eligible collateral after 
application of the applicable haircut specified in section 252.95 
(Table 2) for that type of eligible collateral. The haircuts in Table 2 
are consistent with the standard supervisory market price volatility 
haircuts in Appendix G to Regulation Y.
---------------------------------------------------------------------------

    \132\ See proposed rule Sec.  252.95(b).
---------------------------------------------------------------------------

    Question 42: Should a covered company be able to use its own 
internal estimates for collateral haircuts as permitted under Appendix 
G to Regulation Y?
    A covered company has the choice of whether to reduce its gross 
credit exposure to a counterparty by the adjusted market value of any 
eligible collateral.\133\ If a covered company chooses to reduce its 
gross credit exposure by the adjusted market value of eligible 
collateral, however, the covered company would be required to include 
the adjusted market value of the eligible collateral when calculating 
its gross credit exposure to the issuer of the collateral. In effect, 
the covered company would have shifted its credit exposure from the 
original counterparty to the issuer of the eligible collateral. The 
amount of credit exposure to the original counterparty and the issuer 
of the eligible collateral will fluctuate over time based on the 
adjusted market value of the eligible collateral. Collateral that 
previously met the definition of eligible collateral under the proposed 
rule but over time ceases to do so would no longer be eligible to 
reduce gross credit exposure.
---------------------------------------------------------------------------

    \133\ The Board notes that it has the authority to treat 
eligible collateral as a gross credit exposure to the collateral 
issuer as a consequence of the broad grant of authority to the Board 
in section 165(e) to determine that any other similar transaction is 
a credit exposure. See 12 U.S.C. 5365(e)(3)(F).
---------------------------------------------------------------------------

    A covered company would have the option of whether or not to use 
eligible collateral as a credit risk mitigation tool in recognition of 
the fact that tracking the market movements of a diverse pool of 
collateral can, in some circumstances, be operationally burdensome. In 
this respect, a covered company may opt not to recognize eligible 
collateral and thus avoiding potentially burdensome tracking of 
collateral.
    Question 43: Is recognizing the fluctuations in the value of 
eligible collateral the correct approach, and what would be the burden 
on covered companies in calculating such changes on a daily basis?
    Question 44: What is the burden on a covered company associated 
with the proposed rule's approach to changes in the eligibility of 
collateral? Should the Board instead consider introducing stricter 
collateral haircuts for collateral that ceases to be eligible 
collateral?
    So as not to dis-incentivize overcollateralization, the credit 
exposure to the collateral issuer is capped so that it will never 
exceed the credit exposure to the original counterparty.\134\ A covered 
company would, in every case, continue to have credit exposure to the 
original counterparty to the extent that the adjusted market value of 
the eligible collateral does not equal the full amount of the credit 
exposure to the original counterparty.
---------------------------------------------------------------------------

    \134\ See proposed rule Sec.  252.95(b).
---------------------------------------------------------------------------

    For example, under the proposed rule, the treatment of eligible 
collateral would work as follows. Assume a covered company makes a 
$1,000 loan to a counterparty, creating $1,000 of gross credit exposure 
to that counterparty, and the counterparty provides eligible collateral 
issued by a third party that has $700 of adjusted market value. The 
covered company may choose to reduce its credit exposure to the 
original counterparty by the adjusted market value of the eligible 
collateral. As a result, the covered company would have gross credit 
exposure of $700 to the issuer of the collateral and $300 net credit 
exposure to the original counterparty that posted the collateral.
    As noted above, the amount of credit exposure to the original 
counterparty and the issuer of the eligible collateral will fluctuate 
over time based on movements in the adjusted market value of the 
eligible collateral. For example, if the adjusted market value of the 
eligible collateral decreases to $400 in the previous example, the 
covered company's net credit exposure to the original counterparty 
would increase to $600, and its gross credit exposure to the collateral 
issuer would decrease to $400. By contrast, in the event of an increase 
in the adjusted market value of the eligible collateral to $800, the 
covered company's gross credit exposure to the issuer of the eligible 
collateral would increase to $800 and its net credit exposure to the 
original counterparty would decline to $200. In each case, the covered 
company's credit exposure would be capped at the original amount of the 
exposure created by the loan or $1,000--even if the adjusted market 
value of the eligible collateral exceeded $1,000.
    Question 45: Is the approach to eligible collateral that allows the 
covered company to choose whether or not to recognize eligible 
collateral and shift credit exposure to the issuer of eligible 
collateral appropriate? What alternatives to this approach should the 
Board consider?
    Question 46: Alternatively, should eligible collateral be treated 
the same way eligible guarantees and eligible credit and equity 
derivative hedges are treated (as described below), thus requiring a 
mandatory look-through to eligible collateral?
Unused Credit Lines
    Section 252.95(c) of the proposed rule concerns the unused portion 
of certain extensions of credit. In computing its net credit exposure 
to a counterparty for a credit line or revolving credit facility, a 
covered company may reduce its gross credit exposure by the amount of 
the unused portion of the credit extension to the extent that the 
covered company does not have any legal obligation to advance 
additional funds under the facility until the counterparty provides 
qualifying collateral equal to or greater than the entire used portion 
of the facility.\135\ To qualify for this reduction, the credit 
contract must specify that any used portion of the credit extension 
must be fully secured at all times by collateral that is either (i) 
Cash; (ii)

[[Page 620]]

obligations of the United States or its agencies; or (iii) obligations 
directly and fully guaranteed as to principal and interest by, the 
Federal National Mortgage Association or the Federal Home Loan Mortgage 
Corporation, only while operating under the conservatorship or 
receivership of the Federal Housing Finance Agency, and any additional 
obligations issued by a U.S. government sponsored entity as determined 
by the Board.\136\
---------------------------------------------------------------------------

    \135\ See proposed rule Sec.  252.95(c).
    \136\ Id.
---------------------------------------------------------------------------

    Question 47: What alternative approaches, if any, to the proposed 
treatment of the unused portion of certain credit facilities should the 
Board consider?
Eligible Guarantees
    Section 252.95(d) of the proposed rule describes how to reflect 
eligible guarantees in calculations of net credit exposure to a 
counterparty.\137\ Eligible guarantees are guarantees that meet certain 
conditions, including having been written by an eligible protection 
provider.\138\ An eligible protection provider includes a sovereign 
entity, the Bank for International Settlements, the International 
Monetary Fund, the European Central Bank, the European Commission, a 
multilateral development bank, a Federal Home Loan Bank, the Federal 
Agricultural Mortgage Corporation, a depository institution, a bank 
holding company, a savings and loan holding company, a securities 
broker or dealer registered with the SEC, an insurance company that is 
subject to supervision by a State insurance regulator, a foreign 
banking organization, a non-U.S.-based securities firm or non-U.S.-
based insurance company that is subject to consolidated supervision and 
regulation comparable to that imposed on U.S. depository institutions, 
securities broker-dealers, or insurance companies (as the case may be), 
and a qualifying central counterparty.\139\
---------------------------------------------------------------------------

    \137\ See proposed rule Sec.  252.95(d).
    \138\ See proposed rule Sec.  252.92(t) for the definition of 
``eligible guarantee'' and for a description of the requirements of 
an eligible guarantee.
    \139\ See proposed rule Sec.  252.29(u). Eligible credit and 
equity derivatives, as described below, also must be written by 
eligible protection providers. ``Qualifying central counterparty'' 
is defined in section 252.92(ee) of the proposed rule.
---------------------------------------------------------------------------

    Question 48: In what ways should the definition of eligible 
protection provider be expanded or narrowed?
    Question 49: Are there any additional or alternative requirements 
the Board should place on eligible protection providers to ensure their 
capacity to perform on their guarantee obligations?
    In calculating its net credit exposure to the counterparty, a 
covered company would be required to reduce its gross credit exposure 
to the counterparty by the amount of any eligible guarantee from an 
eligible protection provider.\140\ The covered company would then have 
to include the amount of the eligible guarantee when calculating its 
gross credit exposure to the eligible protection provider.\141\ Also, 
as is the case with eligible collateral, in no event would a covered 
company's gross credit exposure to an eligible protection provider with 
respect to an eligible guarantee be in excess of its gross credit 
exposure to the original counterparty on the credit transaction prior 
to the recognition of the eligible guarantee.\142\ The exposure to the 
eligible protection provider is effectively capped at the amount of the 
credit exposure to the original counterparty even if the amount of the 
eligible guarantee is larger than the original exposure. A covered 
company would continue to have credit exposure to the original 
counterparty to the extent that the eligible guarantee does not equal 
the full amount of the credit exposure to the original counterparty.
---------------------------------------------------------------------------

    \140\ See proposed rule Sec.  252.95(d).
    \141\ See proposed rule Sec.  252.95(d)(1).
    \142\ See proposed rule Sec.  252.95(d)(2).
---------------------------------------------------------------------------

    For example, assume a covered company makes a $1,000 loan to an 
unaffiliated counterparty and obtains a $700 eligible guarantee on the 
loan from an eligible protection provider. The covered company would 
have gross credit exposure of $700 to the protection provider as a 
result of the eligible guarantee and $300 net credit exposure to the 
original counterparty. As a second example, assume a covered company 
makes a $1,000 loan to an unaffiliated counterparty and obtains a 
$1,500 eligible guarantee from an eligible protection provider. The 
covered company would have $1,000 gross credit exposure to the 
protection provider (capped at the amount of the original exposure), 
but the covered company would have no net credit exposure to the 
original counterparty as a result of the eligible guarantee.
    The Board proposes to require a covered company to reduce its gross 
exposure to a counterparty by the amount of an eligible guarantee in 
order to ensure that concentrations in exposures to guarantors are 
captured by the regime. This requirement is meant to limit the ability 
of a covered company to extend loans or other forms of credit to a 
large number of high risk borrowers that are guaranteed by a single 
guarantor. The proposed rule also would narrow the set of eligible 
protection providers to sovereign entities and regulated financial 
companies in order to limit the ability of covered companies to 
arbitrage the rule by obtaining multiple small guarantees (each beneath 
the covered company's limit) from high-risk guarantors to offset a 
large exposure (exceeding the covered company's limit) to a single 
counterparty.
    Question 50: Should covered companies have the choice of whether or 
not to fully shift exposures to eligible protection providers in the 
case of eligible guarantees or to divide an exposure between the 
original counterparty and the eligible protection provider in some 
manner?
    Question 51: Would a more conservative approach to eligible 
guarantees be more appropriate to penalize financial sector 
interconnectedness-for example, one in which the covered company would 
be required to recognize gross credit exposure both to the original 
counterparty and the eligible protection provider in the full amount of 
the original credit exposure? What other alternative approaches to the 
treatment of eligible guarantees should the Board consider?
Eligible Credit and Equity Derivative Hedges
    Section 252.95(e) describes the treatment of eligible credit and 
equity derivatives in the case where the covered company is the 
protection purchaser.\143\ In the case where a covered company is a 
protection purchaser, such derivatives can be used to mitigate gross 
credit exposure and are treated in the same manner as an eligible 
guarantee. A covered company may only recognize eligible credit and 
equity derivative hedges for purposes of calculating net credit 
exposure.\144\ These derivatives must meet certain criteria, including 
having been written by an eligible protection provider.\145\ An 
eligible credit derivative hedge must be simple in form, including 
single-name or standard, non-tranched index credit derivatives. An 
eligible equity derivative hedge may only include an

[[Page 621]]

equity-linked total return swap and does not include other more, 
complex forms of equity derivatives, such as purchased equity-linked 
options.
---------------------------------------------------------------------------

    \143\ See proposed rule Sec.  252.95(e).
    \144\ By contrast, in section 252.94(a)(12) of the proposed 
rule, where the covered company is the protection provider, any 
credit or equity derivative written by the covered company is 
included in the calculation of the covered company's gross credit 
exposure to the reference obligor.
    \145\ See proposed rule Sec.  252.92(r) and (s) defining 
``eligible credit derivative'' and ``eligible equity derivative'', 
respectively. ``Eligible protection provider'' is defined in Sec.  
252.92(u) of the proposed rule. The same types of organizations that 
are eligible protection providers for the purposes of eligible 
guarantees are eligible protection providers for purposes of 
eligible credit and equity derivatives.
---------------------------------------------------------------------------

    Question 52: What types of derivatives should be eligible for 
mitigating gross credit exposure and, in particular, are there are more 
complex forms of derivatives that should be eligible hedges?
    The treatment of eligible credit and equity derivative hedges in 
the proposed rule is much like that of guarantees. A covered company 
would be required to reduce its gross credit exposure to a counterparty 
by the notional amount of any eligible credit or equity derivative 
hedge that references the counterparty if the covered company obtains 
the derivative from an eligible protection provider.\146\ In these 
circumstances, the covered company would be required to include the 
notional amount of the eligible credit or equity derivative hedge in 
calculating its gross credit exposure to the eligible protection 
provider.\147\ As is the case for eligible collateral and eligible 
guarantees, the gross exposure to the eligible protection provider may 
in no event be greater than it was to the original counterparty prior 
to recognition of the eligible credit or equity derivative.\148\
---------------------------------------------------------------------------

    \146\ See proposed rule Sec.  252.95(e).
    \147\ See proposed rule Sec.  252.95(e)(1).
    \148\ See proposed rule Sec.  252.95(e)(2).
---------------------------------------------------------------------------

    For example, a covered company holds $1,000 in bonds issued by 
Company A, and the covered company purchases an eligible credit 
derivative in a notional amount of $800 from Protection Provider X, 
which is an eligible protection provider, to hedge its exposure to 
Company A. The covered company would now treat Protection Provider X as 
its counterparty, and has an $800 credit exposure to it. The covered 
company also continues to have credit exposure of $200 to Company A. 
Similarly, consider the case of an eligible equity derivative, where a 
covered company holds $1,000 in equity securities issued by Company B 
and purchases an eligible equity-linked total return swap in a notional 
amount of $700 from Protection Provider Y, an eligible protection 
provider, to hedge its exposure to Company B. The covered company would 
now treat Protection Provider Y as its counterparty, and has a credit 
exposure to it of $700. The covered company also has credit exposure to 
Company B of $300.
    The proposed rule generally treats eligible credit and equity 
derivatives in the same manner as non-derivative credit enhancement 
instruments such as eligible guarantees, and requires covered companies 
generally to consider themselves as having credit exposure to the 
protection provider in an amount equal to the notional or face value of 
the hedge instrument. In essence, the rule only recognizes simple 
derivative hedges on a transaction-to-transaction basis. The rule does 
not accommodate proxy hedging or portfolio hedging and uses a simple 
substitution approach of guarantor for obligor.
    Question 53: What alternative approaches, if any, should the Board 
consider to capture the risk mitigation benefits of proxy or portfolio 
hedges or to permit covered companies to use internal models to measure 
potential exposures to sellers of credit protection?
    Question 54: Should covered companies have the choice to recognize 
and shift exposures to protection providers in the case of eligible 
credit or equity derivative hedges or to apportion the exposure between 
the original counterparty and the eligible protection provider?
    Question 55: Would a more conservative approach to eligible credit 
or equity derivative hedges be more appropriate, such as one in which 
the covered company would be required to recognize gross notional 
credit exposure both to the original counterparty and the eligible 
protection provider?
Other Eligible Hedges
    In addition to eligible credit and equity derivatives, a covered 
company may reduce exposure to a counterparty by the face amount of a 
short sale of the counterparty's debt or equity security.
    Question 56: Rather than requiring firms to calculate gross trading 
exposures and offset that exposure with eligible credit and equity 
derivatives or short positions, should the Board allow covered 
companies to use internal pricing models to calculate the net mark-to-
market loss impact of an issuer default, applying a zero percent 
recovery rate assumption, to all instruments and positions in the 
trading book? Under this approach, gains and losses would be estimated 
using full revaluation to the greatest extent possible, and simply 
summed. For derivatives products, all pricing inputs other than those 
directly related to the default of the issuer would remain constant. 
Similar to the proposed approach, only single-name and index credit 
default swaps, total return swaps, or equity derivatives would be 
included in this valuation. Would such a models-based approach better 
reflect traded credit exposures? If so, why?
Netting of Securities Financing Transactions
    In calculating its credit exposure to a counterparty, a covered 
company may net the gross credit exposure amounts of (i) its repurchase 
and reverse repurchase transactions with a counterparty, and (ii) its 
securities lending and borrowing transactions with a counterparty, in 
each case, where the transactions are subject to a bilateral netting 
agreement with that counterparty.
e. Section 252.96: Compliance
    Section 252.96(a) of the proposed rule indicates that a covered 
company must comply with the requirements of the proposed rule on a 
daily basis as of the end of each business day and must submit a 
monthly compliance report.\149\ Section 252.96(b) addresses the 
consequences if a covered company fails to comply with the proposed 
rule.\150\ This section states that if a covered company is not in 
compliance with respect to a counterparty due to a decrease in the 
covered company's capital, the merger of a covered company with another 
covered company, or the merger of two unaffiliated counterparties of 
the covered company, the covered company will not be subject to 
enforcement actions with respect to such noncompliance for a period of 
90 days (or such shorter or longer period determined by the Board to be 
appropriate to preserve the safety and soundness of the covered company 
or financial stability) if the company uses reasonable efforts to 
return to compliance with the proposed rule during this period. The 
covered company may not engage in any additional credit transactions 
with such a counterparty in contravention of this rule during the 
compliance period, except in cases where the Board determines that such 
additional credit transactions are necessary or appropriate to preserve 
the safety and soundness of the covered company or financial stability. 
In granting approval for any such special temporary exceptions, the 
Board may impose supervisory oversight and reporting measures that it 
determines are appropriate to monitor compliance with the foregoing 
standards. The Board notes that section 165(e) of the Dodd-Frank Act 
contains a provision allowing the Board to exempt transactions, in 
whole or part, from the definition of the term ``credit exposure'' if 
the Board finds that the exemption is in the public

[[Page 622]]

interest and is consistent with the purposes of this subsection.\151\
---------------------------------------------------------------------------

    \149\ See proposed rule Sec.  252.96(a). Also, see supra note 
17.
    \150\ See proposed rule Sec.  252.96(b).
    \151\ See 12 U.S.C. 5365(e)(6).
---------------------------------------------------------------------------

    Question 57: Are there additional non-compliance circumstances for 
which some cure period should be provided?
    Question 58: Is the 90-day cure period appropriate and is it 
appropriate to generally prohibit additional credit transactions with 
the affected counterparty during the cure period? If not, why not?
Section 252.97: Exemptions
    Section 252.97 of the proposed rule sets forth certain 
exemptions.\152\ Section 165(e)(6) of the Dodd-Frank Act states that 
the Board may, by regulation or order, exempt transactions, in whole or 
in part, from the definition of the term ``credit exposure'' for 
purposes of this subsection, if the Board finds that the exemption is 
in the public interest and is consistent with the purposes of this 
subsection.\153\
---------------------------------------------------------------------------

    \152\ See proposed rule Sec.  252.97.
    \153\ See 12 U.S.C. 5365(e)(6).
---------------------------------------------------------------------------

    The first exemption is for direct claims on, and the portions of 
claims that are directly and fully guaranteed as to principal and 
interest by the United States and its agencies.\154\ The exemption in 
section 252.97 of the proposed rule clarifies that, despite the fact 
that the United States is defined as a counterparty, a covered 
company's credit exposures to the U.S. government are exempt. Thus, 
exposures to the U.S. government will not be subject to the limits of 
the proposed rule. This includes direct holdings of securities issued 
by the U.S. government and indirect exposure such as the case where 
U.S. government securities are pledged as collateral. Section 252.95(b) 
of the proposed rule provides a covered company with the option to 
shift credit exposure to the issuer of eligible collateral.\155\ Where 
the eligible collateral pledged is U.S. government securities that are 
directly and fully guaranteed as to principal and interest by the 
United States and its agencies, the credit exposure would be exempted.
---------------------------------------------------------------------------

    \154\ See proposed rule Sec.  252.97(a)(1).
    \155\ See proposed rule Sec.  252.95(b).
---------------------------------------------------------------------------

    Question 59: Is the scope of the exemption for direct claims on, 
and the portions of claims that are directly and fully guaranteed as to 
principal and interest by, the United States and it agencies 
appropriate? If not, explain the reasons why in detail and indicate 
whether there are alternatives the Board should consider. Are there 
other governmental entities that should receive an exemption from the 
limits of the proposed rule?
    A second exemption from the proposed rule is for direct claims on, 
and the portions of claims that are directly and fully guaranteed as to 
principal and interest by, the Federal National Mortgage Association 
and the Federal Home Loan Mortgage Corporation, while these entities 
are operating under the conservatorship or receivership of the Federal 
Housing Finance Agency.\156\ This provision reflects a policy decision 
that credit exposures to these government-sponsored entities should not 
be subject to a regulatory limit for so long as the entities are in the 
conservatorship or receivership of the U.S. government. As determined 
by the Board, obligations issued by another U.S. government-sponsored 
entity would also be exempt. The Board requests comment on whether 
these exemptions are appropriate.
---------------------------------------------------------------------------

    \156\ See proposed rule Sec.  252.97(a)(2).
---------------------------------------------------------------------------

    The third exemption from the proposed rule is for intraday credit 
exposure to a counterparty.\157\ As noted above, the proposed rule 
requires compliance on a daily end-of-business day basis.\158\ This 
exemption would help minimize the impact of the rule on the payment and 
settlement of financial transactions. The Board requests comment on 
whether the exemption for intraday transactions is appropriate in light 
of the intent and purpose of the proposed rule.
---------------------------------------------------------------------------

    \157\ See proposed rule Sec.  252.97(a)(3).
    \158\ See proposed rule Sec.  252.96(a).
---------------------------------------------------------------------------

    The fourth exemption implements section 165(e)(6) of the Dodd-Frank 
Act and provides a catchall category to exempt any transaction which 
the Board determines to be in the public interest and consistent with 
the purposes of section 165(e).\159\
---------------------------------------------------------------------------

    \159\ See 12 U.S.C. 5365(e)(6); proposed rule Sec.  
252.97(a)(4).
---------------------------------------------------------------------------

    Question 60: Should other credit exposures be exempted from the 
limitations of the proposed rule. If so, explain why?
    Section 252.97(b) of the proposed rule implements section 165(e)(6) 
of the Dodd-Frank Act, which provides an exemption for Federal Home 
Loan Banks.

VI. Risk Management

A. Background

    The recent financial crisis highlighted the need for large, complex 
financial companies to have more robust, enterprise-wide risk 
management. A number of companies that experienced material financial 
distress or failed during the crisis had significant deficiencies in 
key areas of risk management. Two recent reviews of risk management 
practices of banking companies conducted by the Senior Supervisors 
Group (SSG) illustrated these deficiencies.\160\
---------------------------------------------------------------------------

    \160\ See 2008 SSG Report and 2009 SSG, supra notes 58 and 59.
---------------------------------------------------------------------------

    The SSG found that effective oversight of an organization as a 
whole is one of the most fundamental requirements of prudent risk 
management. For example, the SSG found that business line and senior 
risk managers did not jointly act to address a company's risks on an 
enterprise-wide basis; business line managers made decisions in 
isolation and at times increased, rather than mitigated, risk; and 
treasury functions were not closely aligned with risk management 
processes, preventing market and counterparty risk positions from being 
readily assessed on an enterprise-wide basis.\161\
---------------------------------------------------------------------------

    \161\ See 2008 SSG Report, supra note 58, at 3-5.
---------------------------------------------------------------------------

    The SSG reviews also revealed that solid senior management 
oversight and engagement was a key factor that differentiated 
companies' performance during the crisis. Senior managers at successful 
companies were actively involved in risk management, which includes 
determining the company's overall risk preferences and creating the 
incentives and controls to induce employees to abide by those 
preferences. Successful risk management also depends on senior managers 
having access to adaptive management information systems to identify 
and assess risks based on a range of dynamic measures and assumptions. 
In addition, the SSG found that active involvement of the board of 
directors in determining a company's risk tolerance was critical to 
effective risk management and curbing of excessive risk taking. The SSG 
reported that ``firms are more likely to maintain a risk profile 
consistent with the board and senior management's tolerance for risk if 
they establish risk management committees that discuss all significant 
risk exposures across the firm * * * [and] meet on a frequent basis * * 
*.'' \162\
---------------------------------------------------------------------------

    \162\ See 2008 SSG Report, supra note 58, at 8; see also 2009 
SSG Report, supra note 59, at 2-5.
---------------------------------------------------------------------------

    Section 165(b)(1)(A) of the Dodd-Frank Act requires the Board to 
establish overall risk management requirements as part of the 
prudential standards to ensure that strong risk management standards 
are part of the regulatory and supervisory framework

[[Page 623]]

for covered companies.\163\ More generally, section 165(h) of the Dodd-
Frank Act directs the Board to issue regulations requiring publicly 
traded nonbank covered companies and publicly traded bank holding 
companies with total consolidated assets of $10 billion or more to 
establish risk committees.\164\ Under the statute, a risk committee 
required by section 165(h) must be responsible for the oversight of 
enterprise-wide risk management practices of the company, include such 
number of independent directors as the Board may determine appropriate, 
and include at least one risk management expert having experience in 
identifying, assessing, and managing risk exposures of large, complex 
financial firms.
---------------------------------------------------------------------------

    \163\ 12 U.S.C. 5365(b)(1)(A).
    \164\ 12 U.S.C. 5365(h).
---------------------------------------------------------------------------

    The Board is proposing to address the risk management weaknesses 
observed during the recent crisis and implement the risk management 
requirements of the Dodd-Frank Act by establishing risk management 
standards for all covered companies that would (i) Require oversight of 
enterprise-wide risk management by a stand-alone risk committee of the 
board of directors and chief risk officer (CRO); (ii) reinforce the 
independence of a firm's risk management function; and (iii) ensure 
appropriate expertise and stature for the chief risk officer. The 
proposal would also require bank holding companies with total 
consolidated assets of $10 billion or more that are publicly traded and 
are not covered companies (over $10 billion bank holding companies) to 
establish an enterprise-wide risk committee of the board of directors. 
Over $10 billion bank holding companies that are not covered companies 
and are not publicly traded would not be subject to the risk management 
requirements in this proposal.
    The proposed rule seeks to address the risk management problems 
noted by the SSG and others by mandating the major responsible parties 
within a company for its enterprise-wide risk management: the risk 
committee and the CRO. The proposal sets out certain responsibilities 
of a risk committee, which include the oversight and documentation of 
the enterprise-wide risk management practices of the company. The 
proposal also would establish various requirements for a risk 
committee, including membership with appropriate risk management 
expertise and an independent chair. The proposed rule also requires a 
covered company to employ a CRO who will implement appropriate 
enterprise-wide risk management practices and report to the covered 
company's risk committee and chief executive officer.
    These standards should help address the risk management failures 
observed during the crisis and their potential contribution to the 
failure or instability of financial companies by mandating an 
enterprise-wide structure for managing risk and identifying the 
responsible parties that supervisors will look to when evaluating a 
company's risk management practices. This should facilitate more 
effective identification and management of the company's risk as well 
as supervisors' ability to monitor the risk management of companies 
subject to the rule.
    In addition, the proposed standards seek to meet the requirements 
of the Dodd-Frank Act by imposing regulatory standards for risk 
management on covered companies and over $10 billion bank holding 
companies that are publicly traded. The Board does not currently impose 
regulatory risk management standards on bank holding companies 
generally; the Board traditionally has addressed risk management 
through supervisory guidance. The proposed standards would be more 
stringent for risk committees of covered companies than for risk 
committees of over $10 billion bank holding companies. The Board 
expects the expertise of the risk committee membership to be 
commensurate with the complexity and risk profile of the organizations. 
Thus, the requirements of the proposed rule would increase in 
stringency with the systemic footprint of the company.
    The Board emphasizes that the risk committee and overall risk 
management requirements contained in the proposed rule supplement the 
Board's existing risk management guidance and supervisory 
expectations.\165\ All banking organizations supervised by the Board 
should continue to follow such guidance to ensure appropriate oversight 
of and limitations on risk.
---------------------------------------------------------------------------

    \165\ See Supervision and Regulation Letter SR 08-8 (Oct. 16, 
2008), available at http://www.federalreserve.gov/boarddocs/srletters/2008/SR0808.htm, and Supervision and Regulation Letter SR 
08-9 (Oct. 16, 2008), available at http://www.federalreserve.gov/boarddocs/srletters/2008/SR0809.htm.
---------------------------------------------------------------------------

B. Overview of the Proposed Rule

1. Risk Committee Requirements
    The proposed rule would require that each covered company and each 
over $10 billion bank holding company establish a risk committee of the 
board of directors to document and oversee, on an enterprise-wide 
basis, the risk management practices of the company's worldwide 
operations. Additional proposed requirements relating to the structure 
and responsibilities of such risk committees are described below.
a. Structure of Risk Committee
    Section 252.126(b) of the proposed rule establishes requirements 
governing the membership and proceedings of a company's risk committee. 
Consistent with section 165(h)(3)(B) of the Act, the Board proposes 
that a covered company and over $10 billion bank holding company's risk 
committee must be chaired by an independent director. The Board views 
the active involvement of independent directors as vital to robust 
oversight of risk management and encourages companies generally to 
include additional independent directors as members of their risk 
committees.
    The concept of director independence is a concept familiar in 
federal securities law. To promote consistency, the Board proposes to 
refer to the definition of ``independent director'' in the Securities 
and Exchange Commission's (SEC) Regulation S-K for companies that are 
publicly traded in the United States. Under this definition, the Board 
would not consider a director to be independent unless the company 
indicates in its securities filings, pursuant to the SEC's Regulation 
S-K, that the director satisfies the applicable independence 
requirements of the securities exchange on which the company's 
securities are listed. These independence requirements generally 
include limitations on compensation paid to the director or director's 
family members by the company and prohibitions on material business 
relationships between the director and the company. In all cases, and 
consistent with the listing standards of many securities exchanges, the 
proposed rule excludes from the definition of ``independent director'' 
a director who is or recently was employed by the company or whose 
immediate family member is or recently was an executive officer of the 
company.
    In the case of a director of a covered company that is not publicly 
traded in the United States, the proposed rule would provide that the 
director is independent only if the company demonstrates to the 
satisfaction of the Federal Reserve that such director would qualify as 
an independent director under the listing standards of a securities 
exchange, if the company were publicly traded on such an exchange. The 
Board proposes to make these determinations on a case-by-case basis, as 
appropriate. At a minimum, the

[[Page 624]]

proposed rule provides that the Board would not find a director to be 
independent if the director or a member of the director's immediate 
family member is or recently was an executive officer of the company. 
In making independence determinations, the Board expects to analyze 
other indicia of independence, including compensation limitations and 
business relationship prohibitions discussed above.
    In addition to the independent director requirements, the proposed 
rule would require at least one member of a company's risk committee to 
have risk management expertise that is commensurate with the company's 
capital structure, risk profile, complexity, activities, size, and 
other appropriate risk-related factors. However, given the importance 
of risk management oversight, the Board expects that a risk committee's 
members generally will have an understanding of risk management 
principles and practices relevant to the company. Risk committee 
members should also have experience developing and applying risk 
management practices and procedures, measuring and identifying risks, 
and monitoring and testing risk controls with respect to banking 
organizations (or, if applicable, nonbank financial companies).
    The Board believes that the requisite level of risk management 
expertise for a company's risk committee can vary depending on the 
risks posed by the company to the stability of the U.S. financial 
system. The Board expects that a company's risk committee members 
should have risk management expertise commensurate with the company's 
capital structure, risk profile, complexity, activities, size and other 
appropriate risk-related factors. Thus, the Board expects that the risk 
committees of covered companies that pose greater risks to the U.S. 
financial system would have members with commensurately greater risk 
management expertise than the risk committees of other companies that 
pose less risk.
    The proposed rule also would establish certain procedural 
requirements for risk committees. Specifically, the proposed rule would 
require a company's risk committee to have a formal, written charter 
that is approved by the company's board of directors. In addition, the 
proposed rule would require that a risk committee meet regularly and as 
needed, and that the company fully document and maintain records of 
such proceedings, including risk management decisions. The Board 
expects that these procedural requirements will help ensure that a 
company's risk management has the appropriate stature within the 
company's corporate governance framework.
    Question 61: Should the Board consider specifying by regulation 
additional qualifications for director independence? If so, what 
factors should the Board consider in establishing these qualifications?
    Question 62: Would it be appropriate for the Board to require the 
membership of a risk committee to include more than one independent 
director under certain circumstances? If so, what factors should the 
Board consider in establishing these requirements?
    Question 63: Should the Board consider specifying by regulation the 
minimum qualifications, including educational attainment and 
professional experience, for risk management expertise on a risk 
committee?
    Question 64: What alternatives to the requirements for the 
structure of the risk committee and related requirements should the 
Board consider?
b. Responsibilities of Risk Committee
    Section 252.126(c) of the proposed rule sets out certain 
responsibilities of a risk committee. The proposed rule would generally 
require a company's risk committee to document and oversee the 
enterprise-wide risk management policies and practices of the company. 
Consistent with the enterprise-wide risk management requirement in 
section 165(h)(3)(A) of the Act, a company's risk committee would be 
required to take into account both its U.S. and foreign operations as 
part of its risk management oversight.
    The proposed rule would require a risk committee to review and 
approve an appropriate risk management framework that is commensurate 
with the company's capital structure, risk profile, complexity, 
activities, size, and other appropriate risk-related factors. The 
proposed rule specifies that a company's risk management framework must 
include: Risk limitations appropriate to each business line of the 
company; appropriate policies and procedures relating to risk 
management governance, risk management practices, and risk control 
infrastructure; processes and systems for identifying and reporting 
risks, including emerging risks; monitoring compliance with the 
company's risk limit structure and policies and procedures relating to 
risk management governance, practices, and risk controls; effective and 
timely implementation of corrective actions; specification of 
management's authority and independence to carry out risk management 
responsibilities; and integration of risk management and control 
objectives in management goals and the company's compensation 
structure.
    In general, the Board believes that larger and more complex 
companies should have more robust risk management practices and 
frameworks than smaller, less complex companies. Accordingly, as a 
company grows or increases in complexity, the company's risk committee 
should ensure that its risk management practices and framework adapt to 
changes in the company's operations and the inherent level of risk 
posed by the company to the U.S. financial system.
    Question 65: What is the appropriate role of the members of the 
risk committee in overseeing enterprise-wide risk management practices 
at the company and is that role effectively addressed by this proposal?
    Question 66: Is the scope of review of enterprise-wide risk 
management that this proposal would require appropriate for a committee 
of the board of directors? Why or why not?
    Question 67: How can the Board ensure that risk committees at 
companies have sufficient resources to effectively carry out the 
oversight role described in this proposal?
2. Additional Enhanced Risk Management Standards for Covered Companies
    Consistent with section 165(b)(1)(A)(iii) of the Dodd-Frank Act, 
the proposed rule establishes certain overall risk management standards 
for covered companies. These enhanced standards are in addition to, and 
in some cases expand upon, the risk committee requirements discussed 
above that apply to covered companies and over $10 billion bank holding 
companies.
a. Appointment of CRO
    The Board believes that, in light of the complexity and size of a 
covered company's operations, it is important for each covered company 
to have a designated executive officer in charge of implementing and 
maintaining the risk management framework and practices approved by the 
risk committee. Accordingly, section 252.126(d) of the proposed rule 
directs each covered company to appoint a CRO to implement and maintain 
appropriate enterprise-wide risk management practices for the company.
    The proposed rule provides that the specific responsibilities of a 
covered company's CRO must include direct oversight for: allocating 
delegated risk

[[Page 625]]

limits and monitoring compliance with such limits; establishing 
appropriate policies and procedures relating to risk management 
governance, practices, and risk controls; developing appropriate 
processes and systems for identifying and reporting risks, including 
emerging risks; managing risk exposures and risk controls; monitoring 
and testing risk controls; reporting risk management issues and 
emerging risks; and ensuring that risk management issues are 
effectively resolved in a timely manner. The proposed rule specifies 
that these responsibilities are to be executed on an enterprise-wide 
basis.
    Under the proposed rule, a CRO would be required to have risk 
management expertise that is commensurate with the covered company's 
capital structure, risk profile, complexity, activities, size, and 
other appropriate risk related factors. For example, the Board would 
expect that an executive whose qualifications and experience are highly 
focused in a specific area (e.g., an executive whose primary skills 
relate to the risks taken by a firm engaged predominantly in consumer 
or commercial lending) would be unlikely to possess the expertise 
necessary to effectively manage the risks taken by a firm engaged in 
more diverse activities (e.g., a large, more complex universal banking 
organization).
    In light of the CRO's central role in ensuring the effective 
implementation of a covered company's risk management practices, the 
proposed rule would require a covered company's CRO to report directly 
to the risk committee and the chief executive officer. Further, the 
proposed rule would require that the compensation of a covered 
company's CRO be appropriately structured to provide for an objective 
assessment of the risks taken by the covered company. This requirement 
supplements existing Board guidance on incentive compensation.
    Question 68: Should the Board consider specifying by regulation the 
minimum qualifications, including educational attainment and 
professional experience, for a CRO? If so, what type of additional 
experience or education is generally expected in the industry for 
positions of this importance?
    Question 69: What alternative approaches to implementing the risk 
committee requirements established pursuant to the Dodd-Frank Act 
should the Board consider?
b. Additional Risk Committee Requirements for Covered Companies
    The Board proposes that risk committees of covered companies should 
meet certain additional requirements beyond those described above to 
ensure that covered companies' risk committees are appropriately 
structured to oversee the risk of a company with a significant role in 
the U.S. financial system. Specifically, the Board believes that best 
practices for covered companies require a risk committee that reports 
directly to the Board and not as part of or combined with another 
committee. Thus, section 252.126(b)(5)(i) of the proposed rule would 
require that a covered company's risk committee not be housed within 
another committee or be part of a joint committee. In addition, section 
252.126(b)(5)(ii) of the proposed rule would require a covered 
company's risk committee to report directly to the covered company's 
board of directors.
    As mentioned above, the proposed rule requires a covered company's 
CRO to report to the company's risk committee. To ensure that a covered 
company's risk committee appropriately considers and evaluates the 
information it obtains from the CRO, the proposed rule would direct a 
covered company's risk committee to receive and review regular reports 
from the covered company's CRO.
Request for Comment
    The Board requests comment on all aspects of this proposal.

VII. Stress Test Requirements

A. Background

    As part of the effort during the recent crisis to stabilize the 
U.S. financial system, the Federal Reserve began stress testing large, 
complex bank holding companies as a forward-looking exercise designed 
to estimate losses, revenues, allowance for loan losses and capital 
needs under various economic and financial market scenarios. In early 
2009, the Federal Reserve led the Supervisory Capital Assessment 
Program (SCAP) as a key element of the plan to stabilize the U.S. 
financial system. By looking at the broad capital needs of the 
financial system and the specific needs of individual companies, these 
stress tests provided valuable information to market participants and 
had an overall stabilizing effect.
    Building on SCAP and other supervisory work coming out of the 
crisis, the Federal Reserve initiated the annual Comprehensive Capital 
Analysis and Review (CCAR) in late 2010 to assess the capital adequacy 
and evaluate the internal capital planning processes of large, complex 
bank holding companies. The CCAR represents a substantial strengthening 
of previous approaches to assessing capital adequacy and aiming to 
ensure that large organizations have thorough and robust processes for 
managing and allocating their capital resources. The CCAR also focuses 
on the risk measurement and management practices supporting 
organizations' capital adequacy assessments, including their ability to 
deliver credible inputs to their loss estimation techniques.
    Building on the SCAP and CCAR, the Board proposes to implement 
section 165(i)(1) of the Dodd-Frank Act, which requires the Board to 
conduct annual analyses of the financial condition of covered companies 
to evaluate the potential effect of adverse economic and financial 
market conditions on the capital of these companies (supervisory stress 
tests). The Board also proposes to implement section 165(i)(2) of the 
Act, which requires the Board to issue regulations that (i) require 
financial companies with total consolidated assets of more than $10 
billion and for which the Board is the primary federal financial 
regulatory agency to conduct stress tests on an annual basis, and (ii) 
require covered companies to conduct semi-annual stress tests (together 
company-run stress tests).
    The supervisory stress tests involve the Board's analyses of the 
capital of each covered company, on a total consolidated basis, and an 
evaluation of the ability of the covered company to absorb losses as a 
result of adverse economic and financial conditions. The Act requires 
the Board to provide for at least three different possible sets of 
conditions--baseline, adverse, and severely adverse conditions--under 
which the Board would conduct this evaluation.\166\ The Act also 
requires the Board to publish a summary of the supervisory stress test 
results.\167\
---------------------------------------------------------------------------

    \166\ See 12 U.S.C. 5365(i)(1).
    \167\ Id.
---------------------------------------------------------------------------

    For the company-run stress tests, the Act requires that the Board 
issue regulations that: (i) Define the term ``stress test'' for 
purposes of the regulations; (ii) establish methodologies for the 
conduct of the company-run stress tests that provide for at least three 
different sets of conditions, including baseline, adverse, and severely 
adverse conditions; (iii) establish the form and content of a required 
report on the company-run stress tests that companies subject to the 
regulation must submit to the Board; and (iv) require subject companies 
to publish a summary of the results of the required stress tests.\168\
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    \168\ See 12 U.S.C. 5365(i)(2).

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[[Page 626]]

B. Overview of the Proposed Rule

1. Annual Supervisory Stress Tests Conducted by the Board
a. Purpose
    The Board has long held the view that bank holding companies 
generally should operate with capital positions well above the minimum 
regulatory capital ratios, with an amount of capital that is 
commensurate with each bank holding company's risk profile.\169\ Bank 
holding companies should have internal processes for assessing their 
capital adequacy that reflect a full understanding of the risks 
associated with all aspects of their operations and ensure that they 
hold capital commensurate with those risks.\170\ Stress testing is one 
tool that helps both supervisors and supervised companies ensure that 
there is adequate capital through periods of stress.
---------------------------------------------------------------------------

    \169\ See 12 CFR part 225, appendix A; see also Supervision and 
Regulation Letter SR 99-18 (July 1, 1999), available at http://www.federalreserve.gov/boarddocs/srletters/1999/SR9918.htm 
(hereinafter SR 99-18).
    \170\ See Supervision and Regulation Letter SR 09-4 (revised 
March 27, 2009), available at http://www.federalreserve.gov/boarddocs/srletters/2009/SR0904.htm (hereinafter SR 09-4).
---------------------------------------------------------------------------

    The stress testing requirements described below are designed to 
work in tandem with the Board's capital plan rule \171\ to allow the 
Federal Reserve and covered companies to better understand the full 
range of their risks and the potential impact of stressful events and 
circumstances on their overall capital adequacy and financial 
condition. The Board and the other federal banking agencies previously 
have highlighted the use of stress testing as a means to better 
understand the range of a banking organization's potential risk 
exposures.\172\ The 2007-2009 financial crisis further underscored the 
need for banking organizations to incorporate stress testing into their 
risk management, as banking organizations that are unprepared for 
stressful events and circumstances are more vulnerable to acute threats 
to their financial condition and viability.\173\
---------------------------------------------------------------------------

    \171\ See 12 CFR 225.8.
    \172\ See, e.g., 76 FR 35072 (June 15, 2011); Supervision and 
Regulation Letter SR 10-6, Interagency Policy Statement on Funding 
and Liquidity Risk Management (March 17, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1006.htm; 
Supervision and Regulation Letter SR 10-1, Interagency Advisory on 
Interest Rate Risk (January 11, 2010), available at http://www.federalreserve.gov/boarddocs/srletters/2010/sr1001.htm; SR 09-4, 
supra note 170; Supervision and Regulation Letter SR 07-1, 
Interagency Guidance on Concentrations in Commercial Real Estate 
(January 4, 2007), available at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm; SR 99-18, supra note 169; 
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); SCAP Overview of 
Results, supra note 111; and Comprehensive Capital Analysis and 
Review: Objectives and Overview (March 18, 2011), available at 
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110318a1.pdf.
    \173\ See Basel Committee on Banking Supervision, Principles for 
Sound Stress Testing Practices and Supervision (May 2009), available 
at http://www.bis.org/publ/bcbs155.htm.
---------------------------------------------------------------------------

    The supervisory stress tests would provide supervisors with 
forward-looking information to help them identify downside risks and 
the potential impact of adverse outcomes on capital adequacy at covered 
companies. Supervisory stress tests would also provide a means to 
assess capital adequacy across companies more fully and support the 
Board's financial stability efforts. In addition, the publication of 
summary results from supervisory stress tests would enhance public 
disclosure of information about covered companies' financial condition 
and the ability of those companies to absorb losses as a result of 
adverse economic and financial conditions. Inputs from the supervisory 
stress tests, along with the results of any company-run stress tests, 
would be used by the Federal Reserve in its supervisory evaluation of a 
covered company's capital plan.

               Table 1--Process Overview of Annual Supervisory Stress Test and Capital Plan Cycle
----------------------------------------------------------------------------------------------------------------
      Supervisory stress test steps              Capital plan steps                  Proposed timeframe
----------------------------------------------------------------------------------------------------------------
Regulatory reports submitted (using data  ...............................  By Mid-November.
 as of Sept. 30 and other required
 information).
                                          Capital plan submitted           By January 5.
                                           (including individual results
                                           of company-run stress tests).
Board communicates results to each        ...............................  By early March.
 covered company.
                                          Federal Reserve response to      By March 31.
                                           capital plan.
Board publishes summary results of the    ...............................  By Mid-April.
 supervisory stress test.
----------------------------------------------------------------------------------------------------------------

    The design of the supervisory stress tests focuses on determining 
post-stress capital positions at covered companies to inform 
assessments of capital adequacy. Because the Board's supervisory stress 
tests would be standardized across covered companies and not adjusted 
for each company, they are not expected to fully capture all potential 
risks that may affect a specific company's capital position. 
Supervisory stress tests are one of several supervisory assessment 
tools, accordingly, a full assessment of a company's capital adequacy 
should be informed by a broad range of information including a covered 
company's internal capital adequacy processes and the results of its 
own internal stress tests. In particular, a full assessment of a 
company's capital adequacy must take into account a range of factors, 
including idiosyncratic aspects of individual companies that a 
standardized supervisory stress test applicable across companies cannot 
be expected to cover as sufficiently as the companies' internal stress 
testing practices. Idiosyncratic factors would include evaluation of a 
company's internal stress testing results, its capital planning 
processes, the governance over those processes, regulatory capital 
measures, and market assessments. As the parties primarily responsible 
for the financial condition of a covered company, its board of 
directors and senior management bear the primary responsibility for 
developing, implementing, and monitoring a covered company's capital 
planning strategies and internal capital adequacy processes and are in 
the best position to oversee these processes. Thus, along with the 
results of a covered company's capital plan, any company-run stress 
tests, and other supervisory information, the Board would use the 
results of the supervisory stress tests as one factor in the overall 
supervisory assessment of a covered company's capital adequacy.\174\
---------------------------------------------------------------------------

    \174\ The Board notes that the design of the supervisory stress 
tests focuses on capital adequacy and does not focus on all aspects 
of financial condition.

---------------------------------------------------------------------------

[[Page 627]]

b. Applicability
    Except as otherwise provided in the proposed rule, a bank holding 
company that becomes a covered company no less than 90 days before 
September 30 of a calendar year must comply with the requirements of 
the proposed rule regarding stress tests, including the timing of 
required submissions to the Board, from that September 30 forward. With 
respect to initial applicability, a bank holding company that is a 
covered company on the effective date of the proposed rule must comply 
with the proposed requirements as of the effective date of the rule, 
including the timing of required submissions to the Board. A company 
that the Council designates for supervision by the Board on a date 180 
days before September 30 of a calendar year must comply with the 
requirements of the proposed rule regarding stress tests, including the 
timing of required submissions to the Board, from that September 30 
forward.
    Question 70: Are the timing requirements of this proposal 
sufficient to allow a covered company or nonbank covered company to 
prepare, collect, and submit to the Board the information necessary to 
support the supervisory stress test? If not, what alternative timing 
should the Board consider?
c. Process Overview of Annual Supervisory Stress Test Cycle
    The Board expects to use the following general process and 
timetables in connection with the supervisory stress tests.
i. Information Collection From Covered Companies
    For a supervisory stress test conducted within any given calendar 
year, covered companies would be required to submit to the Board data 
and other information to support the conduct of that year's tests. To 
the greatest extent possible, the data schedules, and any other data 
requests, would be designed to minimize burden on the covered company 
and to avoid duplication, particularly in light of other reporting 
requirements that may be imposed by the Board. The Board envisions 
collecting the requisite information from covered companies primarily 
through the regulatory reporting process, and these reports may change 
from time to time. The confidentiality of any information submitted to 
the Board for the supervisory stress tests will be determined in 
accordance with the Board's rules regarding availability of 
information.\175\ As discussed below in section e.iv., the Board 
proposes to publish a summary of the results the supervisory stress 
test, as required by the Dodd-Frank Act.\176\ The Board may obtain 
supplemental information, as needed, through the supervisory process. 
The Board plans to publish for notice and comment any new or revised 
data requirements and related reporting instructions in a separate 
information collection proposal.\177\
---------------------------------------------------------------------------

    \175\ See generally 12 CFR part 261; see also 5 U.S.C. 552(b).
    \176\ 12 U.S.C. 5365(i)(1)(B)(v).
    \177\ To minimize burden on covered companies, the Board plans 
to leverage, to the extent possible, any pre-existing data 
collections that are relevant for the proposed rule's stress testing 
purposes (for example, see the proposed agency information 
collection available at http://www.federalreserve.gov/reportforms/formsreview/FRY14Q_FRY14A_20110907_ifr.pdf).
---------------------------------------------------------------------------

    Question 71: What is the potential burden on covered companies 
stemming from the requirements to submit internal data to support the 
supervisory stress tests?
ii. Publication of Scenarios and Methodologies
    The Board plans to publish the scenarios in advance of conducting 
the annual stress tests. The Board also plans to publish an overview of 
its related stress testing methodologies.
iii. Conducting Stress Tests
    The Board intends to conduct the supervisory stress tests using 
data collected from covered companies as well as supplemental 
information. In the course of conducting the stress tests, the Board 
intends to consult with covered companies as necessary throughout the 
process, particularly if the company's data submissions or other 
information provided are unclear or the supervisory stress test raises 
questions more generally. After conducting its analyses, the Board 
plans to communicate to each covered company the results within a 
reasonable period of time.
iv. Publishing Results
    Subsequent to communicating results of the analyses to each covered 
company, the Board would publish a summary of the supervisory stress 
test results, as discussed further below.
v. Proposed Steps for Annual and Additional Stress Tests
    Table 2 describes proposed steps in the Board's annual supervisory 
stress test cycle, including proposed general timeframes for each step. 
The Board devised this proposed process in conjunction with the 
proposed process outlined below for the company-run stress tests, given 
the overlap in applicability for certain companies. As noted above, the 
timeline is also intended to facilitate the use of supervisory stress 
tests to inform the Board's analysis of companies' capital plan 
submissions under the annual CCAR process, where applicable. The 
proposed timeframes are illustrative and are subject to change.

  Table 2--Process Overview of Annual Supervisory Stress Testing Cycle
    [Using data collected as of September 30, except for trading and
   counterparty data, for a planning horizon of at least nine calendar
                                quarters]
------------------------------------------------------------------------
              Step                          Proposed timeframe
------------------------------------------------------------------------
1. Board publishes scenarios     No later than mid-November.
 for upcoming annual cycle.
2. Covered companies submit      By mid-November.
 regulatory reports and any
 other required information.
3. Board completes supervisory   By mid-February.
 stress tests and compiles
 results.

[[Page 628]]

 
4. Board communicates            By early March.
 individual company results to
 covered companies.
5. Board publishes a summary of  By early April.
 the supervisory stress test
 results.
------------------------------------------------------------------------

d. General Approach to Supervisory Stress Tests
    The Board anticipates that its framework for conducting its annual 
stress test of covered companies would assess the impact of different 
economic and financial market scenarios on the consolidated capital of 
each covered company over a forward-looking planning horizon, taking 
into account all relevant exposures and activities of that company. The 
proposed rule defines the planning horizon as the period of time over 
which the supervisory stress test projections would extend, 
specifically at least nine quarters. The key feature of this framework 
would be an estimate of projected net income and other factors 
affecting capital in each quarter of the stress test planning horizon, 
leading to an estimate of how each covered company's capital resources 
would be affected under the scenarios. The primary outputs produced 
under the framework would be pro forma projections of capital positions 
(including capital levels and regulatory and other capital ratios) for 
each quarter-end over the planning horizon.
i. Scenarios
    Under the proposed rule, prior to conducting the analyses of 
covered companies, the Board would publish a minimum of three different 
sets of economic and financial conditions, including baseline, adverse, 
and severely adverse conditions (``scenarios''), under which the Board 
would conduct its annual analyses. As discussed above, the Board would 
update, make additions to, or otherwise revise these scenarios as 
appropriate, and would publish any such changes to the scenarios in 
advance of conducting each year's analyses. The Board expects that the 
stress test framework would produce at least three sets of projections 
using quarterly intervals over the planning horizon based upon the 
scenarios specified by the Board. The Board envisions that the 
scenarios would consist of future paths of a series of economic and 
financial variables over the stress test planning horizon, including 
projections for a range of macroeconomic and financial indicators, such 
as real GDP, the unemployment rate, equity and property prices, and 
various other key financial variables. The Board recognizes that 
certain trading positions and trading-related exposures are highly 
sensitive to adverse market events, potentially leading to large short-
term volatility in covered companies' earnings. As a result, to address 
these scenarios, the Board would supplement the scenarios in some cases 
with market price and rate ``shocks'' that are consistent with 
historical or other adverse market events specified by the Board. The 
scenarios, in some cases, may also include stress factors that may not 
be directly correlated to macroeconomic or financial assumptions but 
nevertheless can materially affect covered companies' risks, such as 
factors that affect operational risks.
    Each year, the scenarios specified by the Board would reflect 
changes in the outlook for economic and financial conditions. In 
general, the baseline scenario would consider the most recently 
available views of the macroeconomic outlook expressed by government 
agencies, other public-sector organizations, and private-sector 
forecasters as of the beginning of the annual stress-test cycle. The 
adverse scenario could include economic and financial conditions 
consistent with a recession of at least moderate intensity, including a 
shortfall of economic activity and increase in unemployment relative to 
the baseline scenario, weakness in household incomes, declines in asset 
prices (including equities, corporate bonds, and property prices) and 
changes in short- and long-term yields on government bonds. The 
severely adverse scenario would consist of economic and financial 
conditions that are more unfavorable than those of the adverse scenario 
and that also include, in some instances, salient factors that are 
likely to place notable strains on at least some lines of business. For 
example, such severely adverse conditions could include precipitous 
declines in property or other asset prices; shifts in the shape of the 
yield curve; marked changes in the propensity of households or firms to 
enter bankruptcy; or strains on households, businesses, or real 
property markets in particular regions of the United States.
ii. Data and Information Requirements of Covered Companies
    The Board's stress test framework would rely on consolidated data 
and other information supplied by each covered company. The proposed 
rule would require each covered company to provide data and information 
to the Board, generally no later than 40 days after the end of each 
calendar quarter, although some items may need to be collected only on 
an annual basis and others may need to be collected on a monthly basis. 
For data related to trading and counterparty exposures, the Board 
expects to communicate the as-of date for those exposures during the 
fourth quarter of each year. Covered companies would need to provide 
such data and other information in the manner and form prescribed by 
the Board to enable the Board to estimate net income, losses, and pro-
forma capital levels and ratios for those companies over the planning 
horizon under baseline, adverse, and severely adverse scenarios (or 
other such conditions as determined appropriate by the Board). This 
data would include information:
    (i) Related to the covered company's on- and off-balance sheet 
exposures, including in some cases information on individual items 
(such as loans and securities) held by the company, and including 
exposures in the covered 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--including counterparty credit exposures--to changes 
in market prices and interest rates;
    (ii) To assist the Board in estimating the sensitivity of the 
covered company's revenues and expenses to changes in economic and 
financial conditions; and
    (iii) To assist the Board in estimating the likely evolution of the 
covered company's balance sheet (such as the composition of its loan 
and securities portfolios) and allowance for loan losses, in response 
to changes in

[[Page 629]]

economic and financial conditions in each of the scenarios provided.
    As noted above, the Board plans to issue a separate information 
collection proposal to support its annual supervisory stress test 
analyses.\178\ The specific data requirements would be outlined in that 
proposal and the Board would publish any updates to its information 
requirements in a manner that provides covered companies with 
sufficient lead time to implement the changes. In addition, under the 
proposed rule, the Board may require a covered company to submit any 
other information the Board deems necessary in order to: (i) Ensure 
that the Board has sufficient information to conduct its analysis; and 
(ii) derive robust projections of a company's losses, pre-provision net 
revenues, allowance for loan losses, and future pro forma capital 
positions under the baseline, adverse, and severely adverse scenarios 
(or other such conditions as determined appropriate by the Board). The 
confidentiality of any information submitted to the Board for the 
supervisory stress tests will be determined in accordance with the 
Board's rules regarding availability of information.\179\ As discussed 
below in section e.iv., the Board proposes to publish a summary of the 
results of the supervisory stress test, as required by the Dodd-Frank 
Act.\180\
---------------------------------------------------------------------------

    \178\ 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.
    \179\ See generally 12 CFR part 261; see also 5 U.S.C. 552(b).
    \180\ 12 U.S.C. 5365(i)(1)(B)(v).
---------------------------------------------------------------------------

iii. Methodology for Estimating Losses and Revenues
    While the Board expects to publish an overview of its methodology 
for the supervisory stress tests, the Board believes it is useful to 
provide, as part of this proposal, a general overview of the 
anticipated methodology in advance of that publication. The Board would 
calculate each covered company's projected losses, revenues, and other 
factors affecting capital using a series of models and estimation 
techniques that relate the economic and financial variables in the 
baseline, adverse, and severely adverse scenarios to the company's 
losses and revenues. The Board would develop a series of models to 
estimate losses on various types of loans and securities held by the 
covered company, using data submitted by that company. These models may 
be adjusted over time. The Board would use a separate methodology or a 
combination of methodologies--potentially including covered companies' 
internal models, if appropriate--to estimate projected losses related 
to covered companies' trading portfolio or counterparty credit-risk 
exposures in the event of an adverse market shock, taking into account 
the complexity and idiosyncrasy of each covered company's positions. 
The framework may also incorporate an approach to estimate potential 
losses from stress factors specifically affecting the covered 
companies' other risks. Finally, the framework would include a set of 
methodologies to assess the impact of losses, pre-provision net 
revenue, allowance for loan losses, and other factors on future pro 
forma capital levels and ratios.
    Another element of the framework would be a set of models or rules 
to describe how a covered company's balance sheet would change over 
time, as well as a set of assumptions or models for other actions or 
decisions by the covered company that affect capital, such as its 
provisioning, dividend, and share repurchase policy. Information about 
planned future acquisitions and divestitures by the companies would 
also be incorporated. These projections would then be analyzed to 
assess their combined impact on the company's capital positions, 
including projected capital levels and capital ratios, at the end of 
each quarter in the planning horizon. The framework would thus 
incorporate all minimum regulatory capital requirements, including all 
appropriate limits and deductions. These projections used in the 
supervisory stress tests also would incorporate, as appropriate, any 
significant changes in or the significant effects of accounting 
requirements during the planning period.
    Question 72: What alternative models or methodologies for 
estimating a covered company's losses and revenues should the Board 
consider?
e. Results of Annual Analyses
i. Description of Supervisory Assessment
    The Board, through its annual analyses, would evaluate each covered 
company as to whether the covered company has the capital, on a total 
consolidated basis, necessary to absorb losses under economic and 
financial market conditions as contained in the designated scenarios. 
This evaluation would include, but would not be limited to, a review of 
the covered company's estimated losses, pre-provision net revenue, 
allowance for loan losses, and the extent of their impact on the 
company's capital levels and ratios, including regulatory capital 
ratios.
ii. Communication of Results to Covered Companies
    The Board notes that, under the Dodd-Frank Act, it is required to 
publish a summary of the results of its annual analyses.\181\ Under the 
proposed rule, prior to publishing a summary of the results of its 
annual analyses, the Board would convey to each covered company the 
results of the Board's analyses of that company and explain to the 
firms information that the Board expects to make public.
---------------------------------------------------------------------------

    \181\ 12 U.S.C. 5365(i)(1)(B)(v).
---------------------------------------------------------------------------

iii. Post-Assessment Actions by Covered Companies
    As a general matter, under the proposed rule, subsequent to 
receiving the results of the Board's annual analyses, each covered 
company must take the results of the analysis conducted by the Board 
under the proposed rule into account in making changes, as appropriate, 
to the company's capital structure (including the level and composition 
of capital); its exposures, concentrations, and risk positions; any 
plans of the company for recovery; and for improving overall risk 
management. In addition, each covered company must make such updates to 
its resolution plan (required to be submitted annually to the Board 
pursuant to the Board's Regulation QQ (12 CFR part 243)) as the Board, 
based on the results of its analyses of the company under this subpart, 
determines appropriate within 90 days of the Board publishing the 
results of its analyses. Additionally, each covered company that is 
subject to the requirement to submit a capital plan to the Board under 
section 225.8 of the Board's Regulation Y (12 CFR 225.8) would be 
required to consider the results of the analysis of the company 
conducted by the Board under the proposed rule when updating its 
capital plan. Stress testing results may also result in the application 
of early remediation requirements as described further below.
iv. Publication of Results by the Board
    Under the proposed rule, within a reasonable period of time after 
completing the annual analyses of covered companies (but no later than 
mid-April of a calendar year), the Board would publish a summary of the 
results of such analyses. The Board emphasizes that there are certain 
factors to bear in mind when interpreting any published

[[Page 630]]

results from the Board's annual analyses under the proposed rule. For 
example, the outputs of the analyses might not align with those 
produced by other parties conducting similar exercises, even if a 
similar set of assumptions were used. In addition, the outputs under 
the adverse and severely adverse scenarios should not be viewed as most 
likely forecasts or expected outcomes or as a measure of any covered 
company's solvency. Instead, those outputs are the resultant estimates 
from forward-looking exercises that consider possible outcomes based on 
a set of different hypothetical scenarios.
    The Board proposes to publish a high-level summary of supervisory 
stress test results for each covered company, i.e., company-specific 
results. This will support one of the key objectives of the supervisory 
stress tests, namely to enhance transparency of covered companies' 
risks and financial condition and its ability to absorb loss as a 
result of adverse economic and financial conditions. The annual set of 
published results for each company for each quarter-end over the 
specified planning horizon is expected to include:
     Estimated losses, including overall losses on loans by 
subportfolio, available-for-sale and held-to-maturity securities, 
trading portfolios, and counterparty exposures;
     Estimated pre-provision net revenue;
     Estimated allowance for loan losses;
     Estimated pro forma regulatory and other capital ratios.
    The Board recognizes that there are important considerations 
related to disclosure of such information that must be taken into 
account with respect to publishing company-specific results from 
supervisory stress tests, and has carefully analyzed the issues 
surrounding public disclosure of such results in formulating this 
proposal. The Board requests comment on its proposal to publish 
company-specific results.
    Question 73: What are the benefits and drawbacks associated with 
company-specific disclosures? What, if any, company-specific items 
relating to the supervisory stress tests would present challenges or 
raise issues if disclosed, and what is the nature of those challenges 
or issues? What specific concerns about the possible release of a 
company's proprietary information exist? What alternatives to the 
company-specific disclosures being proposed should the Board consider?
2. Annual and Additional Stress Tests Conducted by the Companies
a. Purpose
    The Board views the company-run stress tests under the proposed 
rule as having a shared purpose with the supervisory stress tests. The 
company-run stress tests would provide forward-looking information to 
supervisors to assist in their overall assessments of a company's 
capital adequacy, help to better identify downside risks and the 
potential impact of adverse outcomes on the company's capital adequacy, 
and assist in achieving the financial stability goals of the Dodd-Frank 
Act. Further, the company-run stress tests are expected to improve 
companies' stress testing practices with respect to their own internal 
assessments of capital adequacy and overall capital planning.
    The proposed rule would apply to two sets of companies: covered 
companies and over $10 billion companies, as defined below. Covered 
companies would be required to conduct semi-annual company-run stress 
tests and over $10 billion companies would be required to conduct 
annual company-run stress tests.
    For purposes of the company-run stress tests, the proposed rule 
defines a stress test as a process to assess the potential impact on a 
covered company or an over $10 billion company of economic and 
financial conditions (scenarios) on the consolidated earnings, losses 
and capital of the company over a set planning horizon, taking into 
account the current condition of the company and the company's risks, 
exposures, business strategies, and activities.
    The Board expects that the company-run stress tests required under 
the proposed rule would be one component of the broader stress testing 
activities conducted by covered companies and over $10 billion 
companies. The broader stress testing activities should address the 
impact of a broad range of potentially adverse outcomes across a wide 
set of risk types beyond capital adequacy, affecting other aspects of a 
company's financial condition (e.g., liquidity risk). In addition, a 
full assessment of a company's capital adequacy must take into account 
a range of factors, including evaluation of its capital planning 
processes, the governance over those processes, regulatory capital 
measures, results of supervisory stress tests where applicable, and 
market assessments, among others. The Board notes that the company-run 
stress tests described in this proposed rule focus on capital adequacy 
and do not focus on other aspects of financial condition.
b. Applicability
i. General
    The proposed rule would apply to covered companies and over $10 
billion companies. Over $10 billion companies are defined as any bank 
holding company (other than a bank holding company that is a covered 
company), any state member bank, or any savings and loan holding 
company that (i) has more than $10 billion in total consolidated 
assets, as determined based on the average of the total consolidated 
assets as reported on the bank holding company's four most recent FR Y-
9C reports, the state member bank's four most recent Consolidated 
Report of Condition and Income (Call Report), or the savings and loan 
holding company's four most recent relevant quarterly regulatory 
reports; and (ii) since becoming an over $10 billion company, has not 
had $10 billion or less in total consolidated assets for four 
consecutive calendar quarters as reported on the bank holding company's 
four most recent FR Y-9C reports, the state member bank's four most 
recent Call Reports, or the savings and loan holding company's four 
most recent relevant quarterly regulatory reports.\182\ This 
calculation will be effective as of the due date of the company's most 
recent regulatory report.
---------------------------------------------------------------------------

    \182\ Under section 165(i)(2), the requirements to conduct 
annual stress tests apply to any financial company with more than 
$10 billion in total consolidated assets and that is regulated by a 
primary federal financial regulatory agency. 12 U.S.C. 5365(i)(2). 
The Dodd-Frank Act defines primary financial regulatory agency in 
section 2 of the Act. See 12 U.S.C. 5301(12). The Board, Office of 
the Comptroller of the Currency, and Federal Deposit Insurance 
Corporation have consulted on rules implementing section 165(i)(2).
---------------------------------------------------------------------------

c. Process Overview
    Except as otherwise provided in the proposed rule, a bank holding 
company that becomes a covered company or a bank holding company, 
savings and loan holding company (subject to the delayed effective date 
for savings and loan holding companies) or state member bank that 
becomes an over $10 billion company no less than 90 days before 
September 30 of a calendar year must comply with the requirements, 
including the timing of required submissions to the Board, of the 
proposed rule from September 30 forward. In addition, except as 
otherwise provided in the rule, a bank holding company that becomes a 
covered company no less than 90 days before March 31 of a calendar year 
must

[[Page 631]]

comply with the requirements, including timing of required submissions 
to the Board, of the proposed rule from March 31 forward.
    A company that the Council has determined shall be supervised by 
the Board on a date no less than 180 days before September 30 of a 
calendar year must comply with the requirements of this subpart, 
including timing of required submissions, from September 30 of that 
calendar year and thereafter. Further, a company that the Council has 
determined shall be supervised by the Board on a date no less than 180 
days before March 31 of a calendar year must comply with the 
requirements of this subpart, including timing of the required 
submissions from March 31 of that calendar year and thereafter.
    With respect to initial applicability, a bank holding company that 
is a covered company or a bank holding company or state member bank 
that is an over $10 billion company on the effective date of the 
proposed rule would be subject to the proposed requirements as of the 
effective date, including timing of required submissions to the Board. 
Also with respect to initial applicability, a savings loan and holding 
company that is an over $10 billion company on or after the effective 
date of the rule would not be subject to the proposed requirements, 
including timing of required submissions to the Board, until savings 
and loan holding companies are subject to minimum risk-based capital 
and leverage requirements.
    The Board expects to use the following general process and 
timetables in connection with the company-run stress tests.
i. Reporting by Companies
    Under this proposal, the Board would collect the covered companies' 
and over $10 billion companies' stress test results and additional 
qualitative and quantitative information about the tests on a 
confidential basis and may require companies to provide other 
information on a supplemental basis. The Board plans to publish for 
comment both specific requirements for the report to be submitted to 
the Board, as described below, and related instructions in a separate 
information collection proposal before requiring companies to perform 
the company-run stress tests that would be required under the proposed 
rule.
    Following the stress test, each covered company and each over $10 
billion company would be required to publish a summary of its results 
as described further below.
ii. Annual Company-Run Stress Test
    Each year, in advance of the annual company-run stress test 
required of all covered companies and over $10 billion companies on a 
schedule to be established, the Board would provide to such companies 
at least three scenarios, including baseline, adverse, and severely 
adverse, that each covered company and each over $10 billion company 
must use to conduct its annual stress test required under the proposed 
rule. The Board expects that these will be the same scenarios published 
for use in supervisory stress tests also required by the Act.
iii. Additional Company-Run Stress Test Cycle for Covered Companies
    Within a given year, covered companies (but not over $10 billion 
companies) would be required to conduct one company-run stress test in 
addition to the annual stress test described above. For this additional 
company-run test, each covered company would be required to develop and 
employ scenarios reflecting a minimum of three sets of economic and 
financial conditions, including baseline, adverse, and severely adverse 
scenarios, and such additional conditions as the Board determines 
appropriate.
iv. Proposed Steps for Annual and Additional Company-Run Stress Tests
    Table 3 below describes proposed steps for the company-run stress 
test cycle for covered companies and over $10 billion companies, 
including proposed general timeframes for each step. The proposed 
timeframes are illustrative and are subject to change.

                Table 3--Process Overview of Annual and Additional Company-Run Stress Test Cycles
         [With annual test using data as of September 30 and additional test using data as of March 31]
----------------------------------------------------------------------------------------------------------------
                           Step                                              Proposed timeframe
----------------------------------------------------------------------------------------------------------------
          Annual company-run stress test cycle for all covered companies and over $10 billion companies
----------------------------------------------------------------------------------------------------------------
1. Board provides covered companies and over $10 billion   No later than mid-November.
 companies with scenarios for annual stress tests.
2. Covered companies and over $10 billion companies        By January 5.
 submit required regulatory report to the Board on their
 stress tests.
3. Covered companies and over $10 billion companies make   By early April.
 required public disclosures.
----------------------------------------------------------------------------------------------------------------
                         Additional company-run stress test cycle for covered companies
----------------------------------------------------------------------------------------------------------------
4. Covered companies submit required regulatory report to  By July 5.
 the Board on their additional stress tests.
5. Covered companies make required public disclosures....  By early October.
----------------------------------------------------------------------------------------------------------------

d. Overview of Stress Test Requirements
i. General Requirements for Company-Run Stress Tests
    Under the proposed rule, each covered company and each over $10 
billion company would be required to conduct annual stress tests using 
the company's financial data as of September 30 of that year, with the 
exception of trading and counterparty exposures, to assess the 
potential impact of different scenarios on the consolidated earnings 
and capital of that company and certain related items over at least a 
nine-quarter forward-looking planning horizon taking into account all 
relevant exposures and activities.\183\ The Board would communicate the 
required as of date for data related to trading and counterparty 
exposures of a company during the fourth quarter of each calendar year. 
Each covered company would also be required to conduct an additional 
stress test using the company's financial data as of March 31 of that 
year.
---------------------------------------------------------------------------

    \183\ The Board expects to communicate the as-of date for data 
on trading and counterparty exposures sometime in the fourth quarter 
of each year.
---------------------------------------------------------------------------

    The Board recognizes that certain parent company structures of 
covered companies and over $10 billion companies may include one or 
more subsidiary banks, each with total consolidated assets greater than 
$10 billion. The company-run stress test requirements of Section 
165(i)(2) would apply to the parent company and to each subsidiary 
regulated by a primary federal financial regulatory agency that

[[Page 632]]

has more than $10 billion in total consolidated assets. To minimize any 
undue burden associated with multiple entities within one parent 
structure having to meet the proposed rule's requirements, the Board 
intends to coordinate with the other federal financial regulatory 
agencies, as appropriate. For example, the Board would aim to 
coordinate with the other federal financial regulatory agencies in 
providing scenarios to be used by multiple entities within a holding 
company structure when meeting the requirements of the annual stress 
tests described in the proposed rule.
ii. Scenarios
    The proposed rule would require each covered company and each over 
$10 billion company to use a minimum of three sets of economic and 
financial conditions (scenarios), including baseline, adverse, and 
severely adverse conditions, or such additional conditions as the Board 
determines appropriate.
(1) Annual Company-Run Stress Tests
    In advance of the annual stress tests, the Board would provide at 
least three scenarios (baseline, adverse, and severely adverse) that 
all covered companies and over $10 billion companies would be required 
to use to conduct the stress tests required under the proposed rule. 
These scenarios would be expected to be the same as the scenarios used 
by the Board in conducting the supervisory stress tests.
(2) Additional Company-Run Stress Tests for Covered Companies
    The Board would not provide scenarios to covered companies for the 
additional company-run stress tests. Rather, for the additional stress 
test, a covered company would be required to develop and employ its own 
scenarios reflecting a minimum of three sets of economic and financial 
conditions--baseline, adverse, and severely adverse conditions--or such 
additional conditions as the Board determines appropriate.
iii. Methodologies and Practices
    Under the proposed rule, each covered company and each over $10 
billion company would be required to use the applicable scenarios 
discussed above in conducting its stress tests to calculate, for each 
quarter-end within the planning horizon, potential losses, pre-
provision revenues, allowance for loan losses, and future pro forma 
capital positions over the planning horizon, including the impact on 
capital levels and ratios. Each covered company and over $10 billion 
company would also be required to calculate, for each quarter-end 
within the planning horizon, the potential impact of the specific 
scenarios on its capital ratios, including regulatory and any other 
capital ratios specified by the Board.
    The proposed rule would require each covered company and over $10 
billion company to establish and maintain a system of controls, 
oversight, and documentation, including policies and procedures, 
designed to ensure that the stress testing processes used by the 
company are effective in meeting the requirements of the proposed rule. 
The company's policies and procedures must, at a minimum, outline the 
company's stress testing practices and methodologies, validation, use 
of stress test results and processes for updating the company's stress 
testing practices consistent with relevant supervisory guidance. Each 
covered company would also need to include in its policies information 
describing its processes for scenario development for the additional 
stress test required under the proposed rule. The board of directors 
and senior management of each covered company and each over $10 billion 
company must approve and annually review the controls, oversight, and 
documentation, including policies and procedures, of the company 
established pursuant to the proposed rule.
iv. Stress Test Information and Results
1. Required Report to the Board of Stress Test Results and Related 
Information
    On or before January 5 each year, each covered company and each 
over $10 billion company would be required to report to the Board, in 
the manner and form prescribed in the proposed rule, the results of the 
stress tests conducted by the company. To the extent possible and where 
relevant, a covered company would be able to refer to information 
submitted in connection with capital plan rule requirements when 
submitting the report required under this rule. The Board plans to 
publish for comment a description of items to be included in the 
required report to the Board. The Board anticipates that the report 
would include (but not necessarily be limited to) the following 
qualitative and quantitative information.
    Qualitative information:
     A general description of the use of stress tests required 
by the proposed rule in the company's capital planning and capital 
adequacy assessments;
     A description of the types of risks (e.g., credit, market, 
operational, etc.) being captured in the stress test;
     A general description of the methodologies employed to 
estimate losses, pre-provision net revenues, allowance for loan losses, 
changes in capital levels and ratios, and changes in the company's 
balance sheet over the planning horizon;
     Assumptions about potential capital distributions over the 
planning horizon;
     For covered companies subject to additional stress tests, 
a description of scenarios developed by the company for its additional 
test, including key variables used; and
     Any other relevant qualitative information to facilitate 
supervisory assessment of the tests, upon request by the Board.
    Quantitative information under each scenario:
     Estimated pro forma capital levels and capital ratios, 
including regulatory and any other capital ratios specified by the 
Board;
     Estimated losses by exposure category;
     Estimated pre-provision net revenue;
     Estimated allowance for loan losses;
     Estimated total assets and risk-weighted assets;
     Estimated aggregate loan balances;
     Potential capital distributions over the planning horizon; 
and
     Any other relevant quantitative information to facilitate 
supervisory understanding of the tests, upon request by the Board.
    A covered company subject to an additional stress test would also 
be required to report to the Board the results of its additional test 
on or before July 5 each year, in a manner similar to its report 
required for its annual stress test. The Board may also request 
supplemental information as needed. Under the Dodd-Frank Act, companies 
are required to publish a summary of their stress test results (see 
discussion in section 3. below).\184\
---------------------------------------------------------------------------

    \184\ 12 U.S.C. 5365(i)(2)(C)(iv).
---------------------------------------------------------------------------

2. Supervisory Review of Companies' Stress Test Processes and Results
    Based on information submitted by a covered company or an over $10 
billion company in the required report to the Board described above as 
well as other relevant information, the Board would conduct an analysis 
of the quality of the company's stress tests processes and related 
results. The Board envisions that feedback about such analysis would be 
provided to a company through the supervisory process. In addition, 
each covered company and each over $10 billion company would be 
required to take the results of the annual stress test (or additional 
stress tests in the case of a covered company), in conjunction

[[Page 633]]

with the Board's analyses of those results, into account in making 
changes, as appropriate, to the company's capital structure (including 
the level and composition of capital); its exposures, concentrations, 
and risk positions; any plans of the company for recovery and 
resolution; and to improve the overall risk management of the company. 
Additionally, each covered company would be required to consider the 
results of its company-run stress tests in developing and updating its 
capital plan. The Board may also require other actions consistent with 
safety and soundness of the company.
3. Publication of Results by the Company
    Consistent with the requirements of the Act, the proposed rule 
would require each covered company and each over $10 billion company to 
publish a summary of the results of its annual company-run stress tests 
within 90 days of submitting its required report to the Board. A 
covered company subject to the additional stress test would also be 
required to publish a summary of the results of its additional test 
within 90 days of submitting its required report to the Board for that 
test. The summary may be published on a covered company's or an over 
$10 billion company's Web site or in any other forum that is reasonably 
accessible to the public; further, it is expected that an over $10 
billion company that is a subsidiary of another covered company or 
another over $10 billion company could publish its summary on the 
parent company's Web site or in another form along with the parent 
company's summary. The required information publicly disclosed by each 
covered company and each over $10 billion company, as applicable, 
would, at a minimum, include:
    (i) A description of the types of risks being included in the 
stress test;
    (ii) For each covered company, a high-level description of 
scenarios developed by the company for its additional stress test, 
including key variables used (such as GDP, unemployment rate, housing 
prices);
    (iii) A general description of the methodologies employed to 
estimate losses, revenues, allowance for loan losses, and changes in 
capital positions over the planning horizon;
    (iv) Aggregate losses, pre-provision net revenue, allowance for 
loan losses, net income, and pro forma capital levels and capital 
ratios (including regulatory and any other capital ratios specified by 
the Board) over the planning horizon under each scenario;
    Question 74: What alternative to the public disclosure requirements 
of the proposed rule should the Board consider? What are the potential 
consequences of the proposed public disclosures of the company-run 
stress test results?

C. Request for Comments

    The Board requests comment on all aspects of the proposed rule for 
the annual and additional company-run stress testing cycles.
    Question 75: Is the proposed timing of stress testing appropriate, 
and why? If not, what alternatives would be more appropriate? What, if 
any, specific challenges exist with respect to the proposed steps and 
timeframes? What specific alternatives exist to address these 
challenges that still allow the Board to meet its statutory 
requirements? Please comment on the use of the ``as of'' date of 
September 30 (and March 31 for additional stress tests), the January 5 
reporting date (and July 5 for additional stress test) the publication 
date, and the sufficiency of time for completion of the stress tests.
    Question 76: Does the immediate effectiveness of the proposed rule 
provide sufficient time for an institution that is covered at the 
effective date of the rule to conduct its first annual stress test? 
Would over $10 billion companies, in particular, have sufficient time 
to prepare for the first annual stress test, under either the proposed 
initial or proposed ongoing applicability rules?

VIII. Debt-to-Equity Limits for Certain Covered Companies

A. Background

    Section 165(j) provides that the Board must require a covered 
company to maintain a debt-to-equity ratio of no more than 15-to-1, 
upon a determination by the Council that such company poses a grave 
threat to the financial stability of the United States and that the 
imposition of such requirement is necessary to mitigate the risk that 
such company poses to the financial stability of the Unites 
States.\185\ The Act requires that, in making its determination, the 
Council must take into consideration the criteria in Dodd-Frank Act 
sections 113(a) and (b). These criteria include, among other things, 
the extent of the leverage of the company, the nature, scope, size, 
scale, concentration, interconnectedness, and mix of the activities of 
the company, and the importance of the company as a source of credit 
for U. S. households, businesses, and State and local governments and 
as a source of liquidity for the U.S. financial system. The Board is 
required to promulgate regulations to establish procedures and 
timelines for compliance with section 165(j).\186\
---------------------------------------------------------------------------

    \185\ The statute expressly exempts any federal home loan bank 
from the debt-to-equity ratio requirement. See 12 U.S.C. 5366(j)(1).
    \186\ 12 U.S.C. 5366(j)(3).
---------------------------------------------------------------------------

    The Board seeks comment on this proposed rule that would establish 
procedures to notify a covered company that the Council has made a 
determination under section 165(j) that the company must comply with 
the 15-to-1 debt-to-equity ratio requirement (identified company), as 
well as procedures for terminating the requirement. The proposed rule 
also defines the components of the debt-to-equity requirement and 
establishes a time period of 180 days for an identified company to 
comply with the debt-to-equity ratio requirement, and provides that the 
time for compliance may be extended if an extension would be in the 
public interest.

B. Overview of the Proposed Rule

    The debt-to-equity limitation in section 165(j) applies to any 
covered company where the Council makes two findings: (i) That the 
covered company poses a grave threat to the financial stability of the 
United States; and (ii) that the imposition of the specified debt-to-
equity requirement is necessary to mitigate that systemic risk. Under 
the proposal, ``debt'' and ``equity'' would have the same meaning as 
``total liabilities'' and ``total equity capital'' respectively, as 
calculated in an identified company's reports of financial condition. 
The 15-to-1 debt-to-equity would be calculated as the ratio of total 
liabilities to total equity capital minus goodwill.
    Section 252.152(a) provides for notice to the identified company 
and establishes the maximum debt-to-equity ratio requirement for an 
identified company. An identified company would receive written notice 
from the Board that the Council has made a determination under section 
165(j) that the company poses a grave threat to the financial stability 
of the United States and that the imposition of the statutory debt-to-
equity ratio requirement is necessary. An identified company would be 
permitted 180 calendar days from the date of receipt of the notice to 
comply with the 15-to-1 debt-to-equity ratio requirement. The proposed 
rule does not establish a specific set of actions to be taken by a 
company in order to comply with the debt-to-equity ratio requirement; 
however, the Board would expect a company to come into compliance with 
the ratio in a manner

[[Page 634]]

that is consistent with the company's safe and sound operation and 
preservation of financial stability. For example, a company generally 
would be expected to make a good faith effort to increase equity 
capital through limits on distributions, share offerings, or other 
capital raising efforts prior to liquidating margined assets in order 
to achieve the required ratio.
    While it is important that a company that presents a grave threat 
to U.S. financial stability take prompt action to reduce risks to 
financial stability, section 252.152(b) provides that an identified 
company may request an extension of time to comply with the debt-to-
equity ratio requirement for up to two additional periods of 90 days 
each. Requests for an extension of time to comply must be received in 
writing by the Board not less than 30 days prior to the expiration of 
the existing time period for compliance, and must provide information 
sufficient to demonstrate that the company has made good faith efforts 
to comply with the debt-to-equity ratio requirement and that each 
extension would be in the public interest. The proposed 180-day period 
is intended to provide sufficient time for an identified company to 
take appropriate action to comply with the debt-to-equity ratio 
requirement. In the event that an extension of time is requested, the 
Board would review the request in light of the relevant facts and 
circumstances, including the extent of the identified company's efforts 
to comply with the ratio and whether the extension would be in the 
public interest.
    Section 252.152(c) provides that an identified company would no 
longer be subject to the debt-to-equity ratio requirement of this 
subpart as of the date it receives notice of a determination by the 
Council that the company no longer poses a grave threat to the 
financial stability of the United States and that the imposition of a 
debt-to-equity requirement is no longer necessary.
    The Board requests comment on all aspects of the proposed rule, and 
specifically on the definitions of debt and equity and on whether the 
proposed 180-day time period for compliance is appropriate.
    Question 77: What alternatives to the definitions and procedural 
aspects of this proposed rule should the Board consider?

IX. Early Remediation

A. Background

    The recent financial crisis revealed that the condition of large 
banking organizations can deteriorate rapidly even during periods when 
their reported capital ratios are well above minimum requirements. The 
crisis also revealed fundamental weaknesses in the U.S. regulatory 
community's tools to deal promptly with emerging issues. As detailed in 
the Government Accountability Office's (GAO) June 2011 study on the 
effectiveness of the prompt corrective action (PCA) regime, the PCA 
regime's triggers, based primarily on regulatory capital ratios, 
limited its ability to promptly address problems at insured depository 
intuitions.\187\ The study also concluded that the PCA regime failed to 
prevent widespread losses to the deposit insurance fund, and that while 
supervisors had the discretion to act more quickly, they did not 
consistently do so.\188\
---------------------------------------------------------------------------

    \187\ See Government Accountability Office, Modified Prompt 
Corrective Action Framework Would Improve Effectiveness, GAO-11-612 
(June 23, 2011), available at http://www.gao.gov/new.items/d11612.pdf (hereinafter GAO Study). PCA is required by section 38 of 
the Federal Deposit Insurance Act. 12 U.S.C. 1831(o). PCA applies 
only to insured depository institutions, rather than to consolidated 
banking organizations.
    \188\ See id.
---------------------------------------------------------------------------

    Section 166 of the Dodd-Frank Act was designed to address these 
problems by directing the Board to promulgate regulations providing for 
the early remediation of financial weaknesses at covered companies. The 
Dodd-Frank Act requires the Board to define measures of a covered 
company's financial condition, including, but not limited to, 
regulatory capital, liquidity measures and other forward-looking 
indicators that would trigger remedial action. The Act also mandates 
that remedial action requirements increase in stringency as the 
financial condition of a covered company deteriorates and include: (i) 
limits on capital distributions, acquisitions and asset growth in the 
early stages of financial decline; and (ii) capital restoration plans, 
capital raising requirements, limits on transactions with affiliates, 
management changes and asset sales in the later stages of financial 
decline.\189\
---------------------------------------------------------------------------

    \189\ 12 U.S.C. 5366.
---------------------------------------------------------------------------

B. Overview of the Proposed Rule

    The proposed rule establishes a regime for the early remediation of 
financial distress at covered companies that includes four levels of 
remediation requirements and several forward-looking triggers designed 
to identify emerging or potential issues before they develop into 
larger problems. The four levels of remediation are: (i) Heightened 
supervisory review, in which the Board would conduct a targeted review 
of the covered company to determine if it should be moved to the next 
level of remediation; (ii) initial remediation, in which a covered 
company would be subject to restrictions on growth and capital 
distributions; (iii) recovery, in which a firm would be subject to a 
prohibition on growth and capital distributions, limits on executive 
compensation, and requirements to raise additional capital, and 
additional requirements on a case-by-case basis; and (iv) recommended 
resolution, in which the Board would consider whether to recommend to 
the Treasury Department and the FDIC that the firm be resolved under 
the orderly liquidation authority provided for in Title II of the Dodd-
Frank Act.
    While the proposed framework includes regulatory capital triggers, 
which the Board recognizes can be a lagging indicator, non-
discretionary restrictions on growth and capital distributions would 
occur once a covered company's capital levels fall below the ``well 
capitalized'' threshold. In contrast, similar actions do not occur 
under the PCA regime until a depository institution falls below the 
``adequately capitalized'' level.\190\
---------------------------------------------------------------------------

    \190\ See 12 CFR 208.45.
---------------------------------------------------------------------------

    Further, in December 2010, the BCBS adopted a series of reforms 
directed at improving the quantity and quality of capital held by 
internationally active banking organizations. Specifically, the Basel 
III reforms introduce a minimum tier 1 common risk-based capital ratio, 
heighten the qualification standards for regulatory capital, introduce 
a capital conservation buffer on top of minimum regulatory capital 
ratios, and raise the minimum tier 1 capital risk-based requirement. In 
addition, under the Basel II-based advanced approaches rule, companies 
are required to estimate expected credit losses and deduct from capital 
the amount by which expected credit losses exceed eligible credit 
reserves, as defined in the rule.\191\ The reforms are expected to 
result in regulatory capital ratios that provide a more accurate 
reflection of a company's condition. As noted above, the Board and the 
other federal banking agencies are in the process of developing a 
proposal to implement the Basel III framework in the United States. The 
Board expects to evaluate the interaction between the early remediation 
framework for covered companies and any revised capital standards as 
those standards are incorporated into U.S. regulation, and may propose 
conforming changes to the

[[Page 635]]

early remediation framework at that time.
---------------------------------------------------------------------------

    \191\ See 12 CFR part 225, appendix G.
---------------------------------------------------------------------------

    In addition to regulatory capital-based triggers, the proposed rule 
includes forward-looking triggers based on (i) supervisory stress 
tests, which provide an assessment of the covered company's ability to 
withstand adverse economic and financial market conditions; and (ii) 
market indicators, which provide a third-party assessment of the 
covered company's financial position. The Board also has sought to 
harmonize the proposed rule with the risk management and risk committee 
requirements as well as the liquidity risk management standards that 
would be applicable to covered companies under this proposed rule. 
Identified weakness in any of the enhanced risk management and 
liquidity risk management standards may also trigger supervisory 
actions, including non-discretionary actions specified in the early 
remediation regime.
    The Board considered including an explicit quantitative liquidity 
trigger in the proposal, but is concerned that such a trigger could 
exacerbate funding pressures at affected covered companies, rather than 
provide for early remediation of issues. The Board also considered 
including certain balance sheet measures as triggers, including 
nonperforming loans and loan concentrations, in the early remediation 
regime. In its recent study, the GAO identified asset quality as an 
important predictor of future bank failure.\192\ However, the Board is 
concerned that such triggers would be inappropriate for firms engaged 
predominantly in activities other than commercial banking, and 
therefore would provide limited value in an early remediation regime 
applicable to all covered companies.
---------------------------------------------------------------------------

    \192\ See GAO Study, supra note 187, at 2.
---------------------------------------------------------------------------

    In implementing the proposed rule, the Board expects to notify the 
primary regulators of a covered company's subsidiaries and the FDIC as 
the covered company enters into or changes remediation levels.
    Question 78: The Board recognizes that liquidity ratios can provide 
an early indication of difficulties at a covered company and seeks 
comment on the costs and benefits of including a quantitative liquidity 
trigger in the early remediation regime. If the Board were to include a 
quantitative liquidity trigger in the regime, what quantitative 
liquidity trigger should be used and how should it be calibrated?
    Question 79: The Board also seeks comment on the value of including 
balance sheet measures, such as nonperforming loans and loan 
concentrations, in the early remediation regime as triggers. What 
balance sheet measures, if any, should the Board include, and how 
should they be calibrated?
    Tables 4 and 5 below provide a summary of all triggers and 
associated remediation actions in this proposed rule.

                                                           Table 4--Early Remediation Triggers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         Enhanced risk        Enhanced liquidity
                                       Risk-based capital/        Stress tests        management and risk      risk management       Market indicators
                                            leverage                                  committee standards         standards
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 1 (Heightened Supervisory      Meets all risk-based    Covered company's       Covered company has    Covered company has    The median value of
 Review (HSR)).                       and leverage            regulatory capital      manifested signs of    manifested signs of    any of the covered
                                      requirements for a      ratios exceed minimum   weakness in meeting    weakness in meeting    company's market
                                      well capitalized        requirements under      enhanced risk          the enhanced           indicators exceeds
                                      covered company:        the supervisory         management or risk     liquidity risk         the trigger
                                     Tier 1 RBC ratio >       stress test severely    committee              management standards   threshold for the
                                      6.0%.                   adverse scenario but    requirements for       for covered            entire breach
                                     Total RBC ratio >        it is otherwise in      covered companies.     companies.             period.
                                      10.0%.                  noncompliance with
                                     Tier 1 Leverage ratio    the Board's capital
                                      > 5.0%.                 plan or stress
                                     However, the covered     testing rules.
                                      company has
                                      demonstrated capital
                                      structure or capital
                                      planning weaknesses.
Level 2 (Initial Remediation)......  Fails to meet any one   Under the supervisory   Covered company has    Covered company has    n.a.
                                      of the Level 1          stress test severely    demonstrated           demonstrated
                                      capital levels and      adverse scenario, the   multiple               multiple
                                      maintains:              company's Tier 1        deficiencies in        deficiencies in
                                     Tier 1 RBC ratio >       common RBC ratio        meeting the enhanced   meeting the enhanced
                                      4.0%.                   falls below 5% during   risk management and    liquidity risk
                                     Total RBC ratio > 8.0%   any quarter of the      risk committee         management standards
                                     Tier 1 Leverage ratio    nine quarter planning   requirements for       for covered
                                      > 4.0%.                 horizon.                covered companies.     companies.

[[Page 636]]

 
Level 3 (Recovery).................  Fails to meet any one   Under the severely      Covered company is in  Covered company is in  n.a.
                                      of the Level 2          adverse scenario, the   substantial            substantial
                                      capital levels and      covered company's       noncompliance with     noncompliance with
                                      maintains:              Tier 1 common RBC       enhanced risk          enhanced liquidity
                                     Tier 1 RBC ratio >       ratio falls below 3%    management and risk    risk management
                                      3.0%.                   during any quarter of   committee              standards for
                                     Total RBC ratio > 6.0%   the nine quarter        requirements for       covered companies.
                                     Tier 1 Leverage ratio    planning horizon.       covered companies.
                                      > 3.0%.
                                     Or institution's risk-
                                      based capital ratios
                                      remain below 6.0%
                                      Tier 1 RBC, 10.0%
                                      Total RBC, or 5.0%
                                      Leverage, for more
                                      than two complete
                                      consecutive calendar
                                      quarters.
Level 4 (Recommended resolution)...  Covered company's       n.a...................  n.a..................  n.a..................  n.a.
                                      regulatory capital
                                      ratios are below any
                                      of the following
                                      thresholds:
                                     3.0% Tier 1 RBC.......
                                     6.0% Total RBC........
                                     3.0% Tier 1 Leverage
                                      ratio.
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                              Table 5--Remediation Actions
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         Enhanced risk
                                       Risk-based capital/                            management and risk     Enhanced liquidity
                                            leverage              Stress tests             committee           risk management       Market indicators
                                                                                          requirements            standards
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level 1 (Heightened Supervisory      Heightened Supervisory  HSR...................  HSR..................  HSR..................  HSR.
 Review).                             Review (HSR):
                                     The Board will produce
                                      an internal report on
                                      the elements
                                      evidencing
                                      deterioration within
                                      30 days of a Level 1
                                      trigger breach and
                                      determine whether the
                                      institution should be
                                      elevated to a higher
                                      level of remediation.
                                    ----------------------------------------------------------------------------------------------
Level 2 (Initial Remediation)......  All capital distributions (e.g., dividends and buybacks) are restricted to no more than 50%   n.a.
                                      of the average of the covered company's net income in the previous two quarters.
                                     Covered company faces restrictions on growth (no more than 5% growth in total assets or
                                      total RWA per quarter or per annum), and is generally prohibited from directly or
                                      indirectly acquiring controlling interest in any company.
                                     Covered company will be subject to a non-public MOU.
                                     Covered company may be subject to other limitations and conditions on its conduct or
                                      activities as the Board deems appropriate.
                                    ----------------------------------------------------------------------------------------------

[[Page 637]]

 
Level 3 (Recovery).................  Covered company is placed under a written agreement that prohibits all capital                n.a.
                                      distributions, any quarterly growth of total assets or RWA, and material acquisitions. The
                                      written agreement will also include a requirement to raise additional capital to restore
                                      the covered company's capital level to or above regulatory minimums. If written agreement
                                      timeframes are not met, the covered company may be subject to divestiture requirements.
                                     Covered company will also be subject to a prohibition on discretionary bonus payments and
                                      restrictions on pay increases.
                                     Supervisors may also remove culpable senior management and limit transactions between
                                      affiliates.
                                     Covered company may be subject to other limitations and conditions on its conduct or
                                      activities as the Board deems appropriate.
                                    ----------------------------------------------------------------------------------------------
Level 4 (Recommended Resolution)...  The Board will          n.a.                                                                  n.a.
                                      consider whether to
                                      recommend to the
                                      Treasury Department
                                      and the FDIC that the
                                      covered company be
                                      resolved under the
                                      orderly liquidation
                                      authority provided
                                      for in Title II of
                                      the Dodd-Frank Act.
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. Early Remediation Requirements
a. Level 1 Remediation (Heightened Supervisory Review)
    The proposed rule provides that the first level of remediation 
consists of heightened supervisory review. Level 1 remediation would be 
triggered when a covered company first shows signs of financial 
distress or material risk management weaknesses such that further 
decline of the company is probable. Level 1 remediation would require 
the Board to produce a report on the elements evidencing deterioration 
within 30 days and determine whether the institution should be elevated 
to a higher level of remediation.
    In determining whether to elevate the covered company to a higher 
level of remediation, the Board would consider the extent to which the 
factors giving rise to a triggering event were caused by financial 
weakness or material risk management weaknesses at the covered company, 
such that further decline of the company is probable. The Board may 
also use other supervisory authority to cause the covered company to 
take appropriate actions to address the problems reviewed by the Board 
under level 1 remediation.
b. Level 2 Remediation (Initial Remediation)
    The Dodd-Frank Act provides that remedial actions required of 
covered companies in the initial stages of financial decline shall 
include limits on capital distributions, acquisitions and asset growth. 
The proposed rule provides that a covered company that triggers level 2 
remediation (because it does not meet certain risk-based capital, 
leverage, or stress test thresholds, or has ongoing weaknesses in 
multiple requirements under the enhanced liquidity risk management 
standards and enterprise-wide risk management requirements included in 
this proposal) would be prohibited from distributing in any calendar 
quarter more than 50 percent of the average of its net income for the 
preceding two calendar quarters. The company would also be prohibited 
from permitting (i) its daily average total assets and daily average 
total risk-weighted assets in any calendar quarter to exceed daily 
average total assets and daily average total risk-weighted assets, 
respectively, during the preceding calendar quarter by more than 5 
percent; and (ii) its daily average total assets and daily average 
total risk-weighted assets in any calendar year to exceed daily average 
total assets and daily average total risk-weighted assets, 
respectively, during the preceding calendar year by more than 5 
percent.
    The covered company would also be prohibited from directly or 
indirectly acquiring a controlling interest in any company without the 
prior approval of the Board. This includes controlling interests in any 
nonbank company and the establishment or acquisition of any office or 
place of business. Non-controlling acquisitions, such as the 
acquisition of less than 5 percent of the voting shares of a company, 
generally would not require prior approval. The covered company would 
also be required to enter into a non-public memorandum of understanding 
or undergo another enforcement action acceptable to the Board.
    As part of level 2 remediation, the Board would also be able to 
impose limitations or conditions on the conduct or activities of the 
covered company or any of its affiliates as the Board deems appropriate 
and consistent with the purposes of Title I of the Dodd-Frank Act, 
including limitations or conditions deemed necessary to improve the 
safety and soundness of the covered company, promote financial 
stability, or limit the external costs of the potential failure of the 
covered company.
    The restriction on capital distributions under level 2 remediation 
would apply to all capital distributions (common stock dividends and 
share repurchases) and would help to ensure that covered companies 
preserve capital through retained earnings during the earliest periods 
of financial stress, thereby building a capital cushion to absorb 
losses that the covered company may continue to accrue due to the 
weaknesses that caused it to enter level 2 remediation. This cushion is 
important to making the covered company's failure less likely, and also 
to minimize the external costs that the

[[Page 638]]

covered company's distress or possible failure could impose on markets 
and the economy generally.
    In developing this proposed rule, the Board considered the impact 
of the proposed restriction on capital distributions under level 2 
remediation. According to data reviewed by the Board, prohibiting a 
weakened covered company from distributing more than 50 percent of its 
recent earnings should promote the important purpose of building a 
capital cushion at the covered company to absorb potential additional 
losses while still allowing the firm some room to pay dividends and 
repurchase shares. The Board notes that the capital conservation buffer 
under Basel III is similarly designed to impose increasingly stringent 
restrictions on capital distributions and employee bonus payments by 
banking organizations as their capital ratios approach regulatory 
minima.\193\
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    \193\ See Basel III framework, supra note 34, at 60.
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    Furthermore, the level 2 remediation restrictions on asset growth 
is intended to prevent covered companies that are encountering the 
initial stages of financial difficulties from growing at a rate 
inconsistent with preserving capital and focusing on resolving material 
financial or risk management weaknesses. A 5 percent limit should 
generally be consistent with reasonable growth in the normal course of 
a covered company's business.
    The level 2 remediation restriction on acquisitions of controlling 
interests in other companies without prior Board approval is also 
intended to prevent covered companies that are experiencing initial 
stages of financial difficulties from materially increasing their size 
or systemic interconnectedness. A company in early stages of financial 
stress needs to focus its energies on improving its financial 
condition, not on seeking major acquisition opportunities or 
integrating major new acquisitions. Under this provision, the Board 
would evaluate the materiality of acquisitions on a case-by-case basis 
to determine whether approval is warranted. Acquisition of non-
controlling interests would continue to be permitted to allow covered 
companies to proceed with ordinary business functions (such as equity 
securities dealing) that may involve acquisitions of shares in other 
companies that do not rise to the level of control.
    The proposed rule would also require covered companies that are 
subject to level 2 remediation to enter into a non-public memorandum of 
understanding with the Federal Reserve in order to facilitate the 
establishment of a reasonable action plan for the covered company to 
improve its condition.
c. Level 3 Remediation (Recovery)
    The Act provides that remediation actions required of covered 
companies in advanced stages of financial stress shall include a 
capital restoration plan and capital raising requirements, limits on 
transactions with affiliates, management changes and asset sales. 
Accordingly, under the proposed rule, a covered company that has 
entered level 3 remediation (because the covered company did not meet 
certain risk-based capital, leverage or stress test thresholds, or is 
in substantial non-compliance with the enhanced risk management or 
enhanced liquidity standards of this proposal) would be subject to a 
number of fixed limitations. The covered company would be prohibited 
from making any capital distributions and from increasing the 
compensation of, or paying any bonus to, its senior executive officers 
or directors. Additionally, the covered company could not permit its 
average total assets or average total risk-weighted assets during any 
calendar quarter to exceed average total assets or average total risk-
weighted assets during the previous quarter. The covered company would 
also be prohibited from (i) directly or indirectly acquiring any 
interest in any company; (ii) establishing or acquiring any office or 
other place of business; or (iii) engaging in any new line of business.
    Furthermore, the covered company would be required to enter into a 
written agreement or other form of formal enforcement action with the 
Board that would specify that it must raise capital and take other 
actions to improve capital adequacy. If the covered company 
subsequently did not satisfy the requirements of the written agreement, 
the Board could require the company to divest assets identified by the 
Board as contributing to the covered company's financial decline or 
that pose substantial risk of contributing to the company's further 
financial decline.
    Under the proposal, the Board could also require a covered company 
under level 3 remediation to conduct new elections for its board of 
directors, dismiss directors or senior executive officers that have 
been in office for more than 180 days, hire senior executive officers 
approved by the Board, or limit transactions with its affiliates.
    The Board believes that these restrictions would appropriately 
limit a covered company's ability to increase its risk profile and 
ensure maximum capital conservation when its condition or risk 
management failures have deteriorated to the point that it is subject 
to this level of remediation. These restrictions, while potentially 
disruptive to aspects of the company's business, are consistent with 
the purpose of section 166 of the Dodd-Frank Act: to arrest a covered 
company's decline and help to mitigate external costs associated with 
its potential failure.
    Furthermore, to the extent that a covered company's management is a 
primary cause of its level 3 remediation status, the proposal would 
allow the Board to take appropriate action to ensure that such 
management could not increase the risk profile of the company or make 
its failure more likely. Taken together, the mandatory and optional 
restrictions and actions of level 3 remediation provide the Board with 
important tools to make a covered company's failure less likely and if 
failure were to occur, less costly to the financial system.
d. Level 4 Remediation (Resolution Assessment)
    Under the proposed rule, if level 4 remediation is triggered 
(because the covered company did not meet certain risk-based capital or 
leverage requirements), the Board would consider whether to recommend 
to the Treasury Department and the FDIC that the firm be resolved under 
the orderly liquidation authority provided for in Title II of the Dodd-
Frank Act, based on whether the covered company is in default or in 
danger of default and poses a risk to the stability of the U.S. 
financial system pursuant to section 203 of the Dodd-Frank Act.
    Question 80: The Board seeks comment on the proposed mandatory 
actions that would occur at each level of remediation. What, if any, 
additional or different restrictions should the Board impose on 
distressed covered companies?
2. Early Remediation Triggering Events
    The proposed rule provides triggering events based on the Board's 
existing definitions of minimum risk-based capital and leverage ratios, 
the results of the Board's supervisory stress tests under this proposed 
rule, weaknesses in complying with enhanced risk management and 
liquidity standards under this proposed rule and market indicators.
a. Risk-Based Capital and Leverage
    The Act specifies that capital and leverage will be among the 
elements used to evaluate the financial condition of a covered company 
under the early

[[Page 639]]

remediation framework. The risk-based capital and leverage ratios for 
each covered company would be measured using periodic statements, in 
connection with inspections of a covered company, or upon request of 
the Board.
    Although there is no fixed capital-related threshold for level 1 
remediation, weaknesses in a covered company's capital structure or 
capital planning processes could lead to level 1 remediation, even 
where the covered company's capital ratios exceed the minimum levels 
for level 2 remediation. Thus, if a covered company maintains a total 
risk-based capital ratio of 10.0 percent or greater, a tier 1 risk-
based capital ratio of 6.0 percent or greater, and a tier 1 leverage 
ratio of 5.0 percent or greater, but the Board determines that its 
financial condition is not commensurate with the risks posed by its 
activities, then level 1 remediation would apply. Level 2 remediation 
(initial remediation) would apply if a covered company has a total 
risk-based capital ratio of less than 10.0 percent and greater than or 
equal to 8.0 percent, a tier 1 risk-based capital ratio of less than 
6.0 percent and greater than or equal to 4.0 percent, or a tier 1 
leverage ratio of less than 5.0 percent and greater than or equal to 
4.0 percent.
    A covered company would be subject to level 3 remediation 
(recovery) if:
    (i) For two complete consecutive quarters, the covered company has 
a total risk-based capital ratio of less than 10.0 percent, a tier 1 
risk-based capital ratio of less than 6.0 percent, or a tier 1 leverage 
ratio of less than 5.0 percent; or
    (ii) The covered company has a total risk-based capital ratio of 
less than 8.0 percent and greater than or equal to 6.0 percent, a tier 
1 risk-based capital ratio of less than 4.0 percent and greater than or 
equal to 3.0 percent or a tier 1 leverage ratio of less than 4.0 
percent and greater than or equal to 3.0 percent.
    Finally, a covered company would be subject to level 4 remediation 
(resolution assessment) if it has a total risk-based capital ratio of 
less than 6.0 percent, a tier 1 risk-based capital ratio of less than 
3.0 percent or a tier 1 leverage ratio of less than 3.0 percent. The 
Board believes that the remediation requirements listed above are 
reasonable restraints on covered companies that are unable to meet 
these regulatory capital thresholds.
    Question 81: The Board seeks comment on the proposed risk-based 
capital and leverage triggers. What alternative or additional risk-
based capital or leverage triggering events, if any, should the Board 
adopt? Provide a detailed explanation of such alternative triggering 
events with supporting data.
b. Stress Tests
    As discussed more fully in section VII of this proposal, the 
supervisory stress test gauges a covered company's capital adequacy 
under baseline, adverse and severely adverse scenarios. The proposed 
rule would use the results of the stress test under the severely 
adverse scenario to trigger early remediation. A covered company whose 
tier 1 common risk-based capital ratio falls below certain minimum 
thresholds under the severely adverse scenario during any quarter of 
the planning horizon (which extends for at least nine quarters) would 
be subject to early remediation. Under the rule as proposed, the lower 
the tier 1 common risk-based capital ratio under the stress test, the 
more stringent the required remedial actions would be. Specifically:
    (i) Level 1 remediation. A covered company would be subject to 
level 1 remediation if it is not in compliance with any regulations 
adopted by the Board relating to capital plans and stress tests.\194\ 
The Board believes that even if a covered company meets the minimum 
regulatory capital requirements under the severely adverse stress 
scenario, noncompliance with the Board's capital plan or stress testing 
regulations is sufficient to warrant level 1 remediation.
---------------------------------------------------------------------------

    \194\ See 12 CFR 225.8.
---------------------------------------------------------------------------

    (ii) Level 2 remediation. A covered company would be subject to 
level 2 remediation if, under the results of the severely adverse 
stress test in any quarter of the planning horizon, the covered 
company's tier 1 common risk-based capital ratio fell below 5.0 percent 
and remained above 3.0 percent.
    (iii) Level 3 remediation. A covered company would be subject to 
level 3 remediation if, under the results of the severely adverse 
stress test in any quarter of the planning horizon, the covered 
company's tier 1 common risk-based capital ratio fell below 3.0 
percent.
    Question 82: What additional factors should the Board consider when 
incorporating stress test results into the early remediation framework? 
Is the severely adverse scenario appropriately incorporated as a 
triggering event? Why or why not?
c. Risk Management
    The Board believes that material weaknesses and deficiencies in 
risk management could contribute significantly to a firm's decline and 
ultimate failure. The proposed rule provides that, if the Board 
determines that a covered company has failed to comply with the 
enhanced risk management provisions of Subpart E of this proposed rule, 
it would be subject to level 1, 2, or 3 remediation, depending on the 
severity of the compliance failure.
    Thus, for example, level 1 remediation would be appropriate if a 
covered company has manifested signs of weakness in meeting the 
proposal's enhanced risk management and risk committee requirements. 
Similarly, level 2 remediation would be appropriate if a covered 
company has demonstrated multiple deficiencies in meeting the enhanced 
risk management or risk committee requirements, and level 3 remediation 
would be appropriate if the covered company is in substantial 
noncompliance with the enhanced risk management and risk committee 
requirements.
    Question 83: The Board seeks comment on triggers tied to risk 
management weaknesses. Should the Board consider specific risk 
management triggers tied to particular events? If so, what might such 
triggers involve? How should failure to promptly address material risk 
management weaknesses be addressed by the early remediation regime? 
Under such circumstances, should companies be moved to progressively 
more stringent levels of remediation, or are other actions more 
appropriate? Provide a detailed explanation.
d. Liquidity
    The Dodd-Frank Act provides that the measures of financial 
condition to be included in the early remediation framework shall 
include liquidity measures. Under the proposal, a covered company would 
be subject to level 1, level 2, or level 3 remediation if the Board 
determines that the company's measurement or management of its 
liquidity risks is not in compliance with the requirements of Subpart C 
of this proposed rule. The level of remediation to which a covered 
company would be subject shall vary, at the discretion of the Board, 
depending on the severity of the compliance failure.
    Thus, for example, level 1 remediation would be appropriate if a 
covered company has manifested signs of weakness in meeting the 
proposal's enhanced liquidity risk management standards. Similarly, 
level 2 remediation would be appropriate if a covered company has 
demonstrated multiple deficiencies in meeting the enhanced liquidity 
risk management standards, and level 3 remediation would be appropriate 
if the covered

[[Page 640]]

company is in substantial noncompliance with the enhanced liquidity 
risk management standards.
e. Market Indicators
    Section 166(c)(1) of the Dodd-Frank Act directs the Board, in 
defining measures of a covered company's condition, to utilize ``other 
forward-looking indicators''. A review of market indicators in the lead 
up to the recent financial crisis reveals that market-based data often 
provided an early signal of deterioration in a company's financial 
condition. Moreover, numerous academic studies have concluded that 
market information is complementary to supervisory information in 
uncovering problems at financial companies.\195\ Accordingly, the Board 
proposes to use a variety of market-based triggers designed to capture 
both emerging idiosyncratic and systemic risk across covered companies 
in the early remediation regime. The Board proposes to implement a 
system of market-based triggers that prompts a heightened supervisory 
review (level 1 remediation) of a covered company's financial condition 
and risk management. The Board would produce a report on the elements 
evidencing deterioration within 30 days of a covered company hitting a 
market indicator trigger and determine whether the institution should 
be elevated to a higher level of remediation. In determining whether to 
elevate the covered company to a higher level of remediation, the Board 
would consider the extent the factors giving rise to a triggering event 
were caused by financial weakness or material risk management 
weaknesses at the covered company such that further decline of the 
company is probable. The Board may also use other supervisory authority 
to cause the covered company to take appropriate actions to address the 
problems reviewed by the Board under level 1 remediation.
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    \195\ See, e.g., Berger, Davies, and Flannery, Comparing Market 
and Supervisory Assessments of Bank Performance: Who Knows What 
When? Journal of Money, Credit, and Banking, 32 (3), at 641-667 
(2000). Krainer and Lopez, How Might Financial Market Information Be 
Used for Supervisory Purposes?, FRBSF Economic Review, at 29-45 
(2003). Furlong and Williams, Financial Market Signals and Banking 
Supervision: Are Current Practices Consistent with Research 
Findings?, FRBSF Economics Review, at 17-29 (2006).
---------------------------------------------------------------------------

    The Board recognizes that market-based early remediation triggers--
like all early warning metrics--have the potential to trigger 
remediation for firms that have no material weaknesses (false 
positives) and fail to trigger remediation for firms whose financial 
condition has deteriorated (false negatives), depending on the sample, 
time period and thresholds chosen. Further, the Board notes that if 
market indicators are used to trigger corrective actions in a 
regulatory framework, market prices may adjust to reflect this use and 
potentially become less revealing over time. Accordingly, the Board is 
not proposing to use market-based triggers to subject a covered company 
directly to early remediation levels 2, 3, or 4 at this time. The Board 
expects to review this approach after gaining additional experience 
with the use of market data in the supervisory process.
    Given that the informational content and availability of market 
data will change over time, the Board also proposes to publish for 
notice and comment the market-based triggers and thresholds on an 
annual basis (or less frequently depending on whether the Board 
determines that changes to an existing regime would be appropriate), 
rather than specifying these triggers in this rule. In order to ensure 
transparency, the Board's disclosure of market-based triggers would 
include sufficient detail to allow the process to be replicated in 
general form by market participants. The Board seeks comment on the use 
of market indicators described below. Before commencing use of any 
particular market-based indicator the Board intends to publish such 
indicators for notice and comment.
i. Proposed Market Indicators
    In selecting market indicators to incorporate into the early 
remediation regime, the Board focused on indicators that have 
significant information content, i.e. for which prices quotes are 
available, and provide a sufficiently early indication of emerging or 
potential issues. The Board proposes to use the following or similar 
market-based indicators in its early remediation framework:
1. Equity-Based Indicators
    Expected default frequency (EDF). The EDF measures the expected 
probability of default in the next 365 days. The Board uses EDFs 
calculated using Moody's KMV RISKCALC model.
    Marginal expected shortfall (MES). The MES of a financial 
institution is defined as the expected loss on its equity when the 
overall market declines by more than a certain amount. Each financial 
institution's MES depends on the volatility of its stock price, the 
correlation between its stock price and the market return, and the co-
movement of the tails of the distributions for its stock price and for 
the market return. The Board uses MES calculated following the 
methodology of Acharya, Pederson, Phillipon, and Richardson (2010). MES 
data are available at http://vlab.stern.nyu.edu/welcome/risk.
    Market Equity Ratio. The market equity ratio is defined as the 
ratio of market value of equity to market value of equity plus book 
value of debt.
    Option-implied volatility. The option-implied volatility of a 
firm's stock price is calculated from out-of-the-money option prices 
using a standard option pricing model, reported as an annualized 
standard deviation in percentage points by Bloomberg.
2. Debt-Based Indicators
    Credit default swaps (CDS). The Board uses CDS offering protection 
against default on a 5-year maturity, senior unsecured bond by a 
financial institution.
    Subordinated debt (bond) spreads. The Board uses financial 
companies' subordinated bond spreads with a remaining maturity of at 
least 5 years over the Treasury rate with the same maturity or the 
LIBOR swap rate published by Bloomberg.
    The Board recognizes that all market indicators for different 
covered companies are not traded with the same frequency and therefore 
may not contain the same level of informational content.
    Question 84: The Board seeks comment on the proposed approach to 
market-based triggers detailed below, alternative specifications of 
market-based indicators, and the potential benefits and challenges of 
introducing additional market-based triggers for levels 2, 3, or 4 of 
the proposed early remediation regime. In addition, the Board seeks 
comment on the sufficiency of information content in market-based 
indicators generally.
ii. Proposed Trigger Design
    The Board's proposed market indicator-based regime would trigger 
heightened supervisory review when any of the covered company's 
indicators cross a threshold based on different percentiles of 
historical distributions. The Board seeks comment on the use of both 
time-variant and time-invariant triggers, as follows:
    Time-variant triggers capture changes in the value of a company's 
market-based indicator relative to its own past performance and the 
past performance of its peers. Peer groups would be determined on an 
annual basis. Current values of indicators, measured in levels and 
changes, would be evaluated relative to a covered company's own time 
series (using a rolling 5-year window) and relative to the median of a 
group of predetermined low-risk peers

[[Page 641]]

(using a rolling 5-year window), and after controlling for market or 
systematic effects.\196\ The value represented by the percentiles for 
each signal varies over time as data is updated for each indicator.
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    \196\ Market or systemic effects are controlled by subtracting 
the median of corresponding changes from the peer group.
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    For all time-variant triggers, heightened supervisory review would 
be required when the median value of at least one market indicator over 
a period of 22 consecutive business days, either measured as its level, 
its 1-month change, or its 3-month change, both absolute and relative 
to the median of a group of predetermined low-risk peers, is above the 
95th percentile of the firm's or the median peer's market indicator 5-
year rolling window time series. The Board proposes to use time-variant 
triggers based on all six market indicators listed above.
    Time-invariant triggers capture changes in the value of a company's 
market-based indicators relative to the historical distribution of 
market-based variables over a specific fixed period of time and across 
a predetermined peer group. Time-invariant triggers are used to 
complement time-variant triggers since time-variant triggers could lead 
to excessively low or high thresholds in cases where the rolling window 
covers only an extremely benign period or a highly disruptive financial 
period. The Board acknowledges that a time-invariant threshold should 
be subject to subsequent revisions when warranted by circumstances.
    As currently contemplated, the Board would consider all pre-crisis 
panel data for the peer group (January 2000-December 2006), which 
contain observations from the subprime crisis in the late 1990s and 
early 2000s as well as the tranquil period of 2004-2006. For each 
market indicator, percentiles of the historical distributions would be 
computed to calibrate time-invariant thresholds. The Board would focus 
on five indicators for time-invariant triggers, calibrated to balance 
between their propensity to produce false positives and false 
negatives: CDS prices, subordinated debt spreads, option-implied 
volatility, EDF and MES. The market equity ratio is not used in the 
time-invariant approach because the cross-sectional variation of this 
variable was not found to be informative of early issues across 
financial companies. Time-invariant thresholds would trigger heightened 
supervisory review if the median value for a covered company over 22 
consecutive business days was above the threshold for any of the market 
indicators used in the regime.
    In considering all thresholds for each time-invariant trigger, the 
Board evaluated the tradeoff between early signals and supervisory 
burden associated with potentially false signals. Data limitations in 
the time-invariant approach also require the construction of different 
thresholds for different market indicators. The Board proposes the 
following calibration:
    CDS. The CDS price data used to create the distribution consist of 
an unbalanced panel of daily CDS price observations for 25 financial 
companies over the 2001- 2006 period. Taking the skewed distribution of 
CDS prices in the sample and persistent outliers into account, the 
threshold was set at 44 basis points, which corresponds to the 80th 
percentile of the distribution.
    Subordinated debt (bond) spreads. The data covered an unbalanced 
panel of daily subordinated debt spread observations for 30 financial 
companies. Taking the skewed distribution into account, the threshold 
was set to 124 basis points, which corresponds to the 90th percentile 
of the distribution.
    MES. The data covered a balanced panel of daily observations for 29 
financial companies. The threshold was set to 4.7 percent, which 
corresponds to the 95th percentile of the distribution.
    Option-implied volatility. The data covered a balanced panel of 
daily option-implied volatility observations for 29 financial 
companies. The threshold was set to 45.6 percent, which corresponds to 
the 90th percentile of the distribution.
    EDF. The monthly EDF data cover a balanced panel of 27 financial 
companies. The threshold was set to 0.57 percent, which corresponds to 
the 90th percentile of the distribution.
    The Board invites comment on the use of market indicators to prompt 
early remediation actions.
    Question 85: Should the Board include market indicators described 
above in the early remediation regime? If not, what other forward-
looking indicators should the Board include?
    Question 86: Are the indicators outlined above the correct set of 
indicators to consider? Should other market-based triggers be 
considered?
    Question 87: How should the Board consider the liquidity of an 
underlying security when it chooses indicators?
    Question 88: The Board proposes using both absolute levels and 
changes in indicators. Over what period should changes be calculated?
    Question 89: Should the Board use both time-variant and time-
invariant indicators? What are the comparative advantages of using one 
or the other?
    Question 90: Is the proposed trigger time (when the median value 
over a period of 22 consecutive business days crosses the predetermined 
threshold) to trigger heightened supervisory review appropriate? What 
periods should be considered and why?
    Question 91: Should the Board use a statistical threshold to 
trigger heightened supervisory review or some other framework?
    Question 92: Should the Board consider using market indicators to 
move covered companies directly to level 2 (initial remediation)? If 
so, what time thresholds should be considered for such a trigger? What 
would be the drawbacks of such a second trigger?
    Question 93: To what extent do these indicators convey different 
information about the short-term and long-term performance of covered 
companies that should be taken into account for the supervisory review?
    Question 94: Should the Board use peer comparisons to trigger 
heightened supervisory review? If so, should the Board consider only 
low-risk covered companies for the peer group or a broader range of 
financial companies? If a broader a range is more appropriate, how 
should the peer group be defined?
    Question 95: How should the Board account for overall market 
movements in order to isolate idiosyncratic risk of covered companies?

C. Notice and Remedies

    The proposed rule provides that the initiation of early remediation 
and the transfer of a covered company from one level of remediation to 
another would occur upon notice from the Board. Similarly, a covered 
company shall remain subject to the requirements imposed by early 
remediation until the Board notifies the covered company that its 
financial condition no longer warrants application of the requirement. 
Covered companies have an affirmative duty to notify the Board of 
triggering events and other changes in circumstances that could result 
in changes to the early remediation provisions that apply to it.

D. Relationship to Other Laws and Requirements

    The early remediation regime that would be established by the 
proposed rule would supplement rather than replace the Board's other 
supervisory processes with respect to covered companies. The proposed 
rule would not limit the existing supervisory authority vested in the 
Board, including the Federal Reserve's authority to

[[Page 642]]

initiate supervisory actions to address deficiencies, unsafe or unsound 
conduct, practices, or conditions, or violations of law. For example, 
the Board may respond to signs of a covered company's financial stress 
by requiring corrective measures in addition to remedial actions 
required under the proposed rule. The Board also may use other 
supervisory authority to cause a covered company to take remedial 
actions enumerated in the early remediation regime on a basis other 
than a triggering event.

X. Administrative Law Matters

A. Solicitation of Comments on the Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board has sought to present the proposed rule in a 
simple and straightforward manner, and invites comment on the use of 
plain language.

B. Paperwork Reduction Act Analysis

Request for Comment on Proposed Information Collection
    In accordance with section 3512 of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501-3521) (PRA), 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 Office of Management 
and Budget (OMB) control number. The Board reviewed the proposed rule 
under the authority delegated to the Board by OMB.
    The proposed rule contains requirements subject to the PRA. The 
reporting requirements are found in section 252.164(b); the 
recordkeeping requirements are found in sections 252.61 \197\ and 
252.145(b)(1); \198\ and the disclosure requirements are found in 
section 252.148. The recordkeeping burden for the following sections is 
accounted for in the section 252.61 burden: 252.52(b)(3), 252.56, 
252.58, 252.60(a), and 252.60(c). These information collection 
requirements would implement section 165 and 166 of the Dodd-Frank Act, 
as mentioned in the Abstract below.
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    \197\ Most of the recordkeeping requirements for Subpart C--
Liquidity Requirements have been addressed in the Funding and 
Liquidity Risk Management Guidance (FR 4198; OMB No. 7100-0326). 
Only new recordkeeping requirements are being addressed with this 
proposed rulemaking.
    \198\ Some of the recordkeeping requirements for Subpart G--
Company-Run Stress Test Requirements have been addressed in the 
proposed Recordkeeping and Disclosure Provisions Associated with 
Stress Testing Guidance (FR 4202). See the Federal Register notice 
published on June 15, 2011 (76 FR 35072). Only new recordkeeping 
requirements are being addressed with this proposed rulemaking.
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    The reporting requirements found in section 252.136(b) have been 
addressed in the Resolution Plans Required Regulation (Reg QQ).\199\ 
The reporting requirements found in sections 252.13(a), 252.96(a), 
252.134(a), 252.146(a), and 252.146(b) will be addressed in a separate 
Federal Register notice at a later date.
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    \199\ See 76 FR 67323 (November 1, 2011).
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    Comments are invited on:
    (a) Whether the proposed collections of information are necessary 
for the proper performance of the Federal Reserve's functions, 
including whether the information has practical utility;
    (b) The accuracy of the Federal Reserve's estimate of the burden of 
the proposed information collections, including the validity of the 
methodology and assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section. A copy of the comments may 
also be submitted to the OMB desk officer for the Federal banking 
agencies: By mail to U.S. Office of Management and Budget, 725 17th 
Street, NW., 10235, Washington, DC 20503 or by facsimile to 
(202) 395-5806, Attention, Commission and Federal Banking Agency Desk 
Officer.
Proposed Information Collection
    Title of Information Collection: Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Regulation YY.
    Frequency of Response: Annual, semiannual, and on occasion.
    Affected Public: Businesses or other for-profit.
    Respondents: U.S. bank holding companies, savings and loan holding 
companies, nonbank financial companies, and state member banks.
    Abstract: Section 165 of the Dodd-Frank Act requires the Board to 
implement enhanced prudential standards and section 166 requires the 
Board to implement an early remediation framework. The enhanced 
standards include risk-based capital and leverage requirements, 
liquidity standards, requirements for overall risk management 
(including establishing a risk committee), single-counterparty credit 
limits, stress test requirements, and debt-to-equity limits for 
companies that the Council has determined pose a grave threat to 
financial stability.
    Section 252.61 would require a covered company to adequately 
document all material aspects of its liquidity risk management 
processes and its compliance with the requirements of Subpart C and 
submit all such documentation to the risk committee.
    Section 252.145(b)(1) would require that each covered company or 
over $10 billion company must establish and maintain a system of 
controls, oversight, and documentation, including policies and 
procedures, designed to ensure that the stress testing processes used 
by the covered company or over $10 billion company are effective in 
meeting the requirements in Subpart G. These policies and procedures 
must, at a minimum, describe the covered company's or over $10 billion 
company's stress testing practices and methodologies, validation and 
use of stress tests results, and processes for updating the company's 
stress testing practices consistent with relevant supervisory guidance. 
Policies of covered companies must describe processes for scenario 
development for the additional stress test required under section 
252.144.
    Section 252.148 would require public disclosure of results required 
for stress tests of covered companies and over $10 billion companies. 
Within 90 days of submitting a report for its required stress test 
under section 252.143 and section 252.144, as applicable, a covered 
company and over $10 billion company shall disclose publicly a summary 
of the results of the stress tests required under section 252.143 and 
section 252.144, as applicable. The information disclosed by each 
covered company and over $10 billion company, as applicable, shall, at 
a minimum, include: (i) A description of the types of risks being 
included in the stress test; (ii) for each covered company, a high-
level description of scenarios developed by the company under section 
252.144(b), including key variables used (such as GDP, unemployment 
rate, housing prices); (iii) a general description of the methodologies 
employed to estimate losses, revenues, allowance for loan

[[Page 643]]

losses, and changes in capital positions over the planning horizon; and 
(iv) aggregate losses, pre-provision net revenue, allowance for loan 
losses, net income, and pro forma capital levels and capital ratios 
(including regulatory and any other capital ratios specified by the 
Board) over the planning horizon, under each scenario.
    Section 252.164(b) would require that when a covered company 
becomes aware of (i) one or more triggering events set forth in section 
252.163; or (ii) a change in condition that it believes should result 
in a change in the remediation provisions to which it is subject, such 
covered company must provide notice to the Board within 5 business 
days, identifying the nature of the triggering event or change in 
circumstances.
Estimated Paperwork Burden
    Estimated Burden per Response:
    Section 252.61 recordkeeping--200 hours (Initial setup 160 hours).
    Section 252.145(b)(1) recordkeeping--40 hours (Initial setup 280 
hours for U.S. bank holding companies $50 billion and over in total 
consolidated assets; 240 hours for institutions over $10 million in 
total consolidated assets).
    Section 252.148 disclosure--80 hour (Initial setup 200 hours).
    Section 252.164(b) reporting--2 hours.
    Number of respondents: 34 U.S. bank holding companies with total 
consolidated assets of $50 billion or more, 39 U.S. bank holding 
companies with total consolidated assets over $10 billion and less than 
$50 billion, 21 state member banks with total consolidated assets over 
$10 billion, 39 savings and loan holding companies with total 
consolidated assets over $10 billion.
    Total estimated annual burden: 97,736 hours (72,188 hours for 
initial setup and 25,548 hours for ongoing compliance).

C. Regulatory Flexibility Act Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
\200\ (RFA), the Board is publishing an initial regulatory flexibility 
analysis of the proposed rule. The RFA requires an agency either to 
provide an initial regulatory flexibility analysis with a proposed rule 
for which a general notice of proposed rulemaking is required or to 
certify that the proposed rule will not have a significant economic 
impact on a substantial number of small entities. Based on its analysis 
and for the reasons stated below, the Board believes that this proposed 
rule will not have a significant economic impact on a substantial 
number of small entities. Nevertheless, the Board is publishing an 
initial regulatory flexibility analysis. A final regulatory flexibility 
analysis will be conducted after comments received during the public 
comment period have been considered.
---------------------------------------------------------------------------

    \200\ 5 U.S.C. 601 et seq.
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    In accordance with sections 165 and 166 of the Dodd-Frank Act, the 
Board is proposing to adopt Regulation YY (12 CFR 252 et seq.) to 
establish enhanced prudential standards and early remediation 
requirements applicable for covered companies.\201\ The enhanced 
standards include risk-based capital and leverage requirements, 
liquidity standards, requirements for overall risk management 
(including establishing a risk committee), single-counterparty credit 
limits, stress test requirements, and debt-to-equity limits for 
companies that the Council has determined pose a grave threat to 
financial stability.
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    \201\ See 12 U.S.C. 5365 and 5366.
---------------------------------------------------------------------------

    Under regulations issued by the Small Business Administration 
(SBA), a ``small entity'' includes those firms within the ``Finance and 
Insurance'' sector with asset sizes that vary from $7 million or less 
in assets to $175 million or less in assets.\202\ The Board believes 
that the Finance and Insurance sector constitutes a reasonable universe 
of firms for these purposes because such firms generally engage in 
actives that are financial in nature. Consequently, bank holding 
companies or nonbank financial companies with assets sizes of $175 
million or less are small entities for purposes of the RFA.
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    \202\ 13 CFR 121.201.
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    As discussed in the SUPPLEMENTARY INFORMATION, the proposed rule 
generally would apply to a covered company, which includes only bank 
holding companies with $50 billion or more in total consolidated 
assets, and nonbank financial companies that the Council has determined 
under section 113 of the Dodd-Frank Act must be supervised by the Board 
and for which such determination is in effect. However, the enterprise 
wide risk committee requirements required under section 165(h) of the 
Act would apply to any publicly traded bank holding company with total 
assets of $10 billion or more. The company-run stress test requirements 
part of the proposal being established pursuant to section 165(i)(2) of 
the Act also would apply to any bank holding company, savings and loan 
holding company, and state member bank with more than $10 billion in 
total assets. Companies that are subject to the proposed rule therefore 
substantially exceed the $175 million asset threshold at which a 
banking entity is considered a ``small entity'' under SBA 
regulations.\203\ The proposed rule would apply to a nonbank financial 
company designated by the Council under section 113 of the Dodd-Frank 
Act regardless of such a company's asset size. Although the asset size 
of nonbank financial companies may not be the determinative factor of 
whether such companies may pose systemic risks and would be designated 
by the Council for supervision by the Board, it is an important 
consideration.\204\ It is therefore unlikely that a financial firm that 
is at or below the $175 million asset threshold would be designated by 
the Council under section 113 of the Dodd-Frank Act because material 
financial distress at such firms, or the nature, scope, size, scale, 
concentration, interconnectedness, or mix of it activities, are not 
likely to pose a threat to the financial stability of the United 
States.
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    \203\ The Dodd-Frank Act provides that the Board may, on the 
recommendation of the Council, increase the $50 billion asset 
threshold for the application of certain of the enhanced standards. 
See 12 U.S.C. 5365(a)(2)(B). However, neither the Board nor the 
Council has the authority to lower such threshold.
    \204\ See 76 FR 4555 (January 26, 2011).
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    As noted above, because the proposed rule is not likely to apply to 
any company with assets of $175 million or less, if adopted in final 
form, it is not expected to apply to any small entity 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 supervised. 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 sections 165 and 166 of the Dodd-
Frank Act.

List of Subjects in 12 CFR Part 252 and 12 CFR Chapter II

    Administrative practice and procedure, Banks, Banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

Authority and Issuance

    For the reasons stated in the SUPPLEMENTARY INFORMATION, the Board

[[Page 644]]

of Governors of the Federal Reserve System proposes to add the text of 
the rule as set forth at the end of the SUPPLEMENTARY INFORMATION as 
part 252 to 12 CFR chapter II as follows:

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

    1. The authority citation for part 252 shall read as follows:

    Authority:  12 U.S.C. 321-338a, 1467a(g), 1818, 1831p-1, 
1844(b), 5365, 5366.

    2. Part 252 is added to read as follows:

PART 252--ENHANCED PRUDENTIAL STANDARDS

Subpart A--General Provisions
Sec.
252.1 Authority, purpose, applicability, and reservation of 
authority.
252.2 through 252.9 [Reserved]
Subpart B--Risk-Based Capital Requirements and Leverage Limits
252.11 Applicability.
252.12 Definitions.
252.13 Enhanced risk-based capital and leverage requirements.
252.14 Nonbank covered companies: reporting and enforcement.
Subpart C--Liquidity Requirements
252.51 Definitions.
252.52 Board of directors and risk committee responsibilities.
252.53 Senior management responsibilities.
252.54 Independent review.
252.55 Cash flow projections.
252.56 Liquidity stress testing.
252.57 Liquidity buffer.
252.58 Contingency funding plan.
252.59 Specific limits.
252.60 Monitoring.
252.61 Documentation.
Subpart D--Single-Counterparty Credit Limits
252.91 Applicability.
252.92 Definitions.
252.93 Credit exposure limit.
252.94 Gross credit exposure.
252.95 Net Credit Exposure.
252.96 Compliance.
252.97 Exemptions.
Subpart E--Risk Management
252.125 Definitions.
252.126 Establishment of risk committee and appointment of chief 
risk officer.
Subpart F--Supervisory Stress Test Requirements
252.131 Applicability.
252.132 Definitions.
252.133 Annual analysis conducted by the Board.
252.134 Data and information required to be submitted in support of 
the Board's analyses.
252.135 Review of the Board's analysis; publication of summary 
results.
252.136 Post-assessment actions by covered companies.
Subpart G--Company-Run Stress Test Requirements
252.141 Applicability.
252.142 Definitions.
252.143 Annual stress test.
252.144 Additional stress test for covered companies.
252.145 Methodologies and practices.
252.146 Required report to the Board of stress test results and 
related information.
252.147 Post-assessment actions by covered companies.
252.148 Publication of results by covered companies and over $10 
billion companies.
Subpart H--Debt-to-Equity Limits for Certain Covered Companies
252.151 Definitions.
252.152 Debt-to-equity ratio limitation.
Subpart I--Early Remediation Framework
252.161 Definitions.
252.162 Remediation Actions.
252.163 Remediation triggering events.
252.164 Notice and remedies.

Subpart A--General Provisions


Sec.  252.1  Authority, purpose, applicability, and reservation of 
authority.

    (a) Authority. This part is issued by the Board of Governors of the 
Federal Reserve System (the Board) under sections 165 and 166 of Title 
I of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 (the Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376, 1423-32, 12 
U.S.C. 5365 and 5366); section 9 of the Federal Reserve Act (12 U.S.C. 
321-338a); section 5(b) of the Bank Holding Company Act of 1956, as 
amended (12 U.S.C. 1844(b)); section 10(g) of the Home Owners' Loan 
Act, as amended (12 U.S.C. 1467a(g)); and sections 8 and 39 of the 
Federal Deposit Insurance Act (12 U.S.C. 1818(b) and 1831p-1).
    (b) Purpose. This part implements certain provisions of sections 
165 and 166 of the Dodd-Frank Act (12 U.S.C. 5365 and 5366), which 
requires the Board to establish enhanced prudential standards for 
covered companies, as defined herein.
    (c) Applicability. (1) In general. Except as otherwise provided in 
this part, a covered company is subject to the requirements of this 
part beginning on the first day of the fifth quarter following the date 
on which it became a covered company.
    (2) Initial applicability. Except as provided in this part, a 
company that is a covered company on the effective date of this subpart 
is subject to the requirements of this subpart beginning on the first 
day of the fifth quarter following the effective date.
    (3) U.S. bank holding company subsidiaries of foreign banking 
organizations. Except with respect to the liquidity requirements in 
subpart C, the risk management requirements of subpart E, and the debt-
to-equity limits in subpart H, the requirements of this part will not 
apply to any bank holding company subsidiary of a foreign banking 
organization that is currently relying on Supervision and Regulation 
Letter SR 01-01 issued by the Board (as in effect on May 19, 2010) 
until July 21, 2015.
    (d) Reservation of authority. (1) In general. If the Board 
determines that compliance with the requirements of this part does not 
sufficiently mitigate the risks to U.S. financial stability posed by 
the failure or material financial distress of a covered company, the 
Board may require the covered company to be subject to additional or 
further enhanced prudential standards, including, but not limited to, 
additional capital or liquidity requirements, limits on exposures to 
single-counterparties, risk management requirements, stress tests, or 
other requirements or restrictions the Board deems necessary to carry 
out the purposes of this subpart or Title I of the Dodd-Frank Act.
    (2) Other supervisory authority. Nothing in this part limits the 
authority of the Board under any other provision of law or regulation 
to take supervisory or enforcement action, including action to address 
unsafe and unsound practices or conditions, or violations of law or 
regulation.
    (3) Application of enhanced prudential standards to bank holding 
companies in general. In order to preserve the safety and soundness of 
a bank holding company and thereby mitigate risks to the stability of 
the U.S. financial system, the Board may determine that a bank holding 
company that is not a covered company shall be subject to one or more 
of the standards established under this part based on the company's 
capital structure, size, complexity, risk profile, scope of operations, 
or financial condition and any other risk related factors that the 
Board deems appropriate.

Subpart B--Risk-Based Capital Requirements and Leverage Limits


Sec.  252.11  Applicability.

    (a) Applicability. A nonbank covered company is subject to the 
requirements of sections 252.13(b)(1) and (2) on the later of the 
effective date of this subpart or 180 days following the date on which 
the Council determined that the company shall be supervised by the 
Board. A company the Council has determined shall be supervised by the 
Board on a date no less than 180 days before September 30 of a calendar 
year

[[Page 645]]

must comply with the requirements of sections 252.13(b)(3) from 
September 30 of that calendar year and thereafter.


Sec.  252.12  Definitions.

    For purposes of this subpart:
    (a) Bank holding company is defined as in section 2 of the Bank 
Holding Company Act, as amended (12 U.S.C. 1841), and the Board's 
Regulation Y (12 CFR part 225).
    (b) Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    (c) Council means the Financial Stability Oversight Council 
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
    (d) Covered company means
    (1) Any company organized under the laws of the United States or 
any State that the Council has determined under section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and 
for which such determination is still in effect (nonbank covered 
company).
    (2) Any bank holding company (other than a foreign banking 
organization), that has $50 billion or more in total consolidated 
assets, as determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's Consolidated Financial Statements for Bank 
Holding Companies (the Federal Reserve's FR Y-9C (FR Y-9C)); or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters.
    (3) Once a covered company meets the requirements described in 
paragraph (2), the company shall remain a covered company for purposes 
of this part unless and until the company has less than $50 billion in 
total consolidated assets as determined based on each of the bank 
holding company's four most recent FR Y-9Cs.
    (4) Nothing in paragraph (3) shall preclude a company from becoming 
a covered company pursuant to paragraph (2).
    (5) A bank holding that has ceased to be a covered company under 
paragraph (3) is not subject to the requirements of this subpart 
beginning on the first day of the calendar quarter following the 
reporting date on which it ceased to be a covered company.
    (e) Foreign banking organization means any foreign bank or company 
that is a bank holding company or is treated as a bank holding company 
under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)).
    (f) Nonbank covered company means any company organized under the 
laws of the United States or any State that the Council has determined 
under section 113 of the Dodd-Frank Act (12 U.S.C. 5323) shall be 
supervised by the Board and for which such determination is still in 
effect.


Sec.  252.13  Enhanced risk-based capital and leverage requirements.

    (a) Bank holding companies. A covered company that is a bank 
holding company must comply with, and hold capital commensurate with 
the requirements of any regulations adopted by the Board relating to 
capital plans and stress tests.
    (b) Nonbank covered companies. A nonbank covered company must:
    (1) Calculate its minimum risk-based and leverage capital 
requirements as if it were a bank holding company in accordance with 
any minimum capital requirements established by the Board for bank 
holding companies, including 12 CFR part 225, appendix A (general risk-
based capital rule), 12 CFR part 225, appendix D (leverage rule), 12 
CFR part 225, appendix E (market risk rule), and 12 CFR part 225, 
appendix G (advanced approaches risk-based capital rule);
    (2) Hold capital sufficient to meet (i) a tier 1 risk based capital 
ratio of 4 percent and a total risk-based capital ratio of 8 percent, 
as calculated according to the general risk-based capital rules, and 
(ii) a tier 1 leverage ratio of 4 percent as calculated under the 
leverage rule; \205\ and
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    \205\ 12 CFR part 225, appendix D, section II.
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    (3) Comply with, and hold capital commensurate with, the 
requirements of any regulations adopted by the Board relating to 
capital plans and stress tests as if the covered company were a bank 
holding company, including but not limited to section 225.8 of the 
Board's Regulation Y (12 CFR 225.8).


Sec.  252.14  Nonbank covered companies: reporting and enforcement.

    (a) Reporting. Each nonbank financial company must report to the 
Board on a quarterly basis its risk-based capital and leverage ratios 
as calculated under section 252.13(b).
    (b) Notice of non-compliance. A nonbank financial company must 
notify the Board immediately upon ascertaining that it has failed to 
meet its enhanced risk-based capital and leverage requirements under 
section 252.13(b).

Subpart C--Liquidity Requirements


Sec.  252.51  Definitions.

    For purposes of this subpart:
    (a) Bank holding company is defined as in section 2 of the Bank 
Holding Company Act, as amended (12 U.S.C. 1841), and the Board's 
Regulation Y (12 CFR part 225).
    (b) Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    (c) Council means the Financial Stability Oversight Council 
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
    (d) Covered company means
    (1) Any company organized under the laws of the United States or 
any State that the Council has determined under section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and 
for which such determination is still in effect (nonbank covered 
company).
    (2) Any bank holding company (other than a foreign banking 
organization), that has $50 billion or more in total consolidated 
assets, as determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's Consolidated Financial Statements for Bank 
Holding Companies (the Federal Reserve's FR Y-9C (FR Y-9C)); or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters.
    (3) Once a covered company meets the requirements described in 
paragraph (2), the company shall remain a covered company for purposes 
of this subpart unless and until the company has less than $50 billion 
in total consolidated assets as determined based on each of the bank 
holding company's four most recent FR Y-9Cs.
    (4) Nothing in paragraph (3) shall preclude a company from becoming 
a covered company pursuant to paragraph (2).
    (5) A bank holding that has ceased to be a covered company under 
paragraph

[[Page 646]]

(3) is not subject to the requirements of this subpart beginning on the 
first day of the calendar quarter following the reporting date on which 
it ceased to be a covered company.
    (e) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
    (f) Foreign banking organization means any foreign bank or company 
that is a bank holding company or is treated as a bank holding company 
under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)).
    (g) Highly liquid assets means:
    (1) Cash;
    (2) Securities issued or guaranteed by the U.S. government, a U.S. 
government agency, or a U.S. government-sponsored entity; and
    (3) Any other asset that the covered company demonstrates to the 
satisfaction of the Federal Reserve:
    (i) Has low credit risk and low market risk;
    (ii) Is traded in an active secondary two-way market that has 
observable market prices, committed market makers, a large number of 
market participants, and a high trading volume; and
    (iii) Is a type of asset that investors historically have purchased 
in periods of financial market distress during which market liquidity 
is impaired.
    (h) Liquidity means, with respect to a covered company, the covered 
company's capacity to efficiently meet its expected and unexpected cash 
flows and collateral needs at a reasonable cost without adversely 
affecting the daily operations or the financial condition of the 
covered company.
    (i) Liquidity risk means the risk that a covered company's 
financial condition or safety and soundness will be adversely affected 
by its inability or perceived inability to meet its cash and collateral 
obligations.
    (j) Publicly traded means traded on:
    (1) Any exchange registered with the U.S. Securities and Exchange 
Commission as a national securities exchange under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within a 
reasonable time period conforming with trade custom.
    (k) Risk committee means the enterprise-wide risk committee 
established by a covered company's board of directors under section 
252.126 of subpart E of this part.
    (l) Trading position means a position that is held by a covered 
company for the purpose of short-term resale or with the intent of 
benefitting from actual or expected short-term price movements, or to 
lock-in arbitrage profits.
    (m) Two-way market means a market with independent bona fide offers 
to buy and sell so that a price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined within one day and settled at that price within a reasonable 
time period conforming with trade custom.
    (n) Unencumbered means, with respect to an asset, that:
    (1) The asset is not pledged, does not secure, collateralize, or 
provide credit enhancement to any transaction, and is not subject to 
any lien;
    (2) The asset is not designated as a hedge on a trading position; 
and
    (3) There are no legal or contractual restrictions on the ability 
of the covered company to promptly liquidate, sell, transfer, or assign 
the asset.
    (o) U.S. government agency means an agency or instrumentality of 
the U.S. government whose obligations are fully and explicitly 
guaranteed as to the timely payment of principal and interest by the 
full faith and credit of the U.S. government.
    (p) U.S. government-sponsored entity means an entity originally 
established or chartered by the U.S. government to serve public 
purposes specified by the U.S. Congress, but whose obligations are not 
explicitly guaranteed by the full faith and credit of the U.S. 
government.


Sec.  252.52  Board of directors and risk committee responsibilities.

    (a) Oversight. The covered company's board of directors (or the 
risk committee) must oversee the covered company's liquidity risk 
management processes, and must review and approve the liquidity risk 
management strategies, policies, and procedures established by senior 
management.
    (b) Actions.
    (1) Liquidity risk tolerance. (i) The board of directors must 
establish the covered company's liquidity risk tolerance at least 
annually. The liquidity risk tolerance is the acceptable level of 
liquidity risk the covered company may assume in connection with its 
operating strategies. In determining the covered company's liquidity 
risk tolerance, the board of directors must consider the covered 
company's capital structure, risk profile, complexity, activities, 
size, and other appropriate risk-related factors.
    (ii) The board of directors must review information provided by 
senior management at least semi-annually to determine whether the 
covered company is managed in accordance with the established liquidity 
risk tolerance.
    (2) Business strategies and products. (i) The risk committee or a 
designated subcommittee thereof must review and approve the liquidity 
costs, benefits, and risks of each significant new business line and 
each significant new product before the covered company implements the 
business line or offers the product. In connection with this review, 
the risk committee or a designated subcommittee thereof must consider 
whether the liquidity risk of the new business line or product under 
current conditions and under liquidity stress is within the covered 
company's established liquidity risk tolerance.
    (ii) At least annually, the risk committee or designated 
subcommittee thereof must review approved significant business lines 
and products to determine whether each line or product has created any 
unanticipated liquidity risk, and to determine whether the liquidity 
risk of each strategy or product continues to be within the covered 
company's established liquidity risk tolerance.
    (3) Contingency funding plan. The board of directors must review 
and approve the contingency funding plan described in section 252.58 at 
least annually, and whenever the covered company materially revises the 
plan.
    (4) Other reviews. (i) At least quarterly, the risk committee or 
designated subcommittee thereof must:
    (A) Review the cash flow projections produced under section 252.55 
of this subpart that use time periods in excess of 30-days to ensure 
that the covered company's liquidity risk is within the established 
liquidity risk tolerance;
    (B) Review and approve liquidity stress testing described in 
section 252.56 of this subpart, including stress testing practices, 
methodologies, and assumptions. The risk committee or designated 
subcommittee thereof must also review and approve liquidity stress 
testing whenever the covered company materially revises its liquidity 
stress testing;
    (C) Review liquidity stress testing results produced under section 
252.56 of this subpart;

[[Page 647]]

    (D) Approve the size and composition of the liquidity buffer 
established under section 252.57 of this subpart;
    (E) Review and approve the specific limits established under 
section 252.59 of this subpart and review the covered company's 
compliance with those limits; and
    (F) Review liquidity risk management information necessary to 
identify, measure, monitor, and control liquidity risk and to comply 
with this subpart.
    (ii) The risk committee or designated subcommittee thereof must 
periodically review the independent validation of the liquidity stress 
tests produced under section 252.56(c)(2)(ii) of this subpart.
    (iii) The risk committee or designated subcommittee thereof must 
establish procedures governing the content of senior management reports 
on the liquidity risk profile of the covered company and other 
information described at section 252.53(b) of this subpart.
    (c) Frequency of reviews. Paragraph (b) of this section establishes 
minimum requirements for the frequency of certain reviews and 
approvals. The board of directors (or the risk committee) must conduct 
more frequent reviews and approvals as market and idiosyncratic 
conditions warrant.


Sec.  252.53  Senior management responsibilities.

    (a) Senior management of a covered company must establish and 
implement strategies, policies, and procedures for managing liquidity 
risk. This includes overseeing the development and implementation of 
liquidity risk measurement and reporting systems, cash flow 
projections, liquidity stress testing, liquidity buffer, contingency 
funding plan, specific limits, and monitoring procedures required under 
this subpart.
    (b) Senior management must regularly report to the risk committee 
or designated subcommittee thereof on the liquidity risk profile of the 
covered company and must provide other relevant and necessary 
information to the board of directors (or risk committee) to facilitate 
its oversight of the liquidity risk management process.


Sec.  252.54  Independent review.

    (a) The covered company must establish and maintain a review 
function, independent of management functions that execute funding, to 
evaluate its liquidity risk management.
    (b) The independent review function must:
    (1) Regularly, but no less frequently than annually, review and 
evaluate the adequacy and effectiveness of the covered company's 
liquidity risk management processes;
    (2) Assess whether the covered company's liquidity risk management 
complies with applicable laws, regulations, supervisory guidance, and 
sound business practices; and
    (3) Report statutory and regulatory noncompliance and other 
material liquidity risk management issues to the board of directors or 
the risk committee in writing for corrective action.


Sec.  252.55  Cash flow projections.

    (a) Requirement. The covered company must produce comprehensive 
cash flow projections in accordance with the requirements of this 
section. The covered company must update short-term cash flow 
projections daily and must update long-term cash flow projections at 
least monthly.
    (b) Methodology. The covered company must establish a robust 
methodology for making cash flow projections. The methodology must 
include reasonable assumptions regarding the future behavior of assets, 
liabilities, and off-balance sheet exposures.
    (c) Cash flow projections. The covered company must produce 
comprehensive cash flow projections that:
    (1) Project cash flows arising from assets, liabilities, and off-
balance sheet exposures over short-term and long-term periods that are 
appropriate to the covered company's capital structure, risk profile, 
complexity, activities, size, and other risk related factors;
    (2) Identify and quantify discrete and cumulative cash flow 
mismatches over these time periods;
    (3) Include cash flows arising from contractual maturities, as well 
as cash flows from new business, funding renewals, customer options, 
and other potential events that may impact liquidity; and
    (4) Provide sufficient detail to reflect the covered company's 
capital structure, risk profile, complexity, activities, size, and any 
other risk related factors that are appropriate. Such detail may 
include cash flow projections broken down by business line, legal 
entity, or jurisdiction, and cash flow projections that use more time 
periods than the minimum required under paragraph (c)(1) of this 
section.


Sec.  252.56  Liquidity stress testing.

    (a) Requirement. (1) The covered company must regularly stress test 
its cash flow projections in accordance with the requirements of this 
section. Stress test analysis consists of identifying liquidity stress 
scenarios and assessing the effects of these scenarios on the covered 
company's cash flow and liquidity. The covered company must use the 
results of stress testing to determine the size of its liquidity buffer 
under section 252.57 of this subpart, and must incorporate the 
information generated by stress testing in the quantitative component 
of the contingency funding plan under section 252.58(b) of this 
subpart.
    (2) The covered company must conduct stress testing in accordance 
with the requirements of this section at least monthly. The covered 
company must be able to perform stress testing more frequently and to 
vary underlying assumptions as conditions change or as required by the 
Federal Reserve due to deterioration in the company's financial 
condition, market conditions, or to address other supervisory concerns.
    (b) Stress testing requirements.
    (1) Stress scenarios. (i) Stress testing must incorporate a range 
of stress scenarios that may significantly impact the covered company's 
liquidity, taking into consideration the covered company's balance 
sheet exposures, off-balance sheet exposures, business lines, 
organizational structure, and other characteristics.
    (ii) At a minimum, stress testing must incorporate separate stress 
scenarios to account for market stress, idiosyncratic stress, and 
combined market and idiosyncratic stresses.
    (iii) The stress scenarios must address the potential impact of 
market disruptions on the covered company and must address the 
potential actions of other market participants experiencing liquidity 
stresses under the same market disruptions.
    (iv) The stress scenarios must be forward-looking and must 
incorporate a range of potential changes in a covered company's 
activities, exposures, and risks, as well as changes to the broader 
economic and financial environment.
    (v) The stress scenarios must use a variety of time horizons. At a 
minimum, these time horizons must include an overnight time horizon, a 
30-day time horizon, 90-day time horizon, and a one-year time horizon.
    (2) Stress testing must comprehensively address the covered 
company's activities, exposures, and risks, including off-balance sheet 
exposures.
    (3) Stress testing must be tailored to, and provide sufficient 
detail to reflect, the covered company's capital structure, risk 
profile, complexity, activities, size, and any other risk related 
factors that are appropriate. This may require analyses by business 
line, legal entity, or jurisdiction, and stress scenarios that use more 
time horizons than the

[[Page 648]]

minimum required under paragraph (b)(1)(v) of this section.
    (4) A covered company must incorporate the following assumptions in 
its stress testing:
    (i) For the first 30 days of a liquidity stress scenario, only 
highly liquid assets that are unencumbered may be used as cash flow 
sources to offset projected funding needs.
    (ii) For time periods beyond the first 30 days of a liquidity 
stress scenario, highly liquid assets that are unencumbered and other 
appropriate funding sources may be used as cash flow sources to offset 
projected funding needs.
    (iii) If an asset is used as a cash flow source to offset projected 
funding needs, the fair market value of the asset must be discounted to 
reflect any credit risk and market volatility of the asset.
    (iv) Throughout each stress test time horizon, assets used as 
sources of funding must be sufficiently diversified.
    (c) Process and systems requirements. (1) The covered company must 
establish and maintain policies and procedures that outline its 
liquidity stress testing practices, methodologies and assumptions, 
detail the use of each stress test employed, and provide for the 
enhancement of stress testing practices as risks change and as 
techniques evolve.
    (2) The covered company must have an effective system of control 
and oversight over the stress test function to ensure that:
    (i) Each stress test is designed in accordance with the 
requirements of this section; and
    (ii) The stress process and assumptions are validated. The 
validation function must be independent of functions that develop or 
design the liquidity stress testing, and independent of management 
functions that execute funding.
    (3) The covered company must maintain management information 
systems and data processes sufficient to enable it to effectively and 
reliably collect, sort, and aggregate data and other information 
related to liquidity stress testing.


Sec.  252.57  Liquidity buffer.

    (a) A covered company must maintain a liquidity buffer of highly 
liquid assets that are unencumbered. The liquidity buffer must be 
sufficient to meet projected net cash outflows and the projected loss 
or impairment of existing funding sources for 30 days over a range of 
liquidity stress scenarios.
    (b) The covered company must determine the size of its liquidity 
buffer requirement using the results of its liquidity stress testing 
under section 252.56 of this subpart, and must align the size of the 
buffer to the covered company's capital structure, risk profile, 
complexity, activities, size, and any other risk related factors that 
are appropriate, and established liquidity risk tolerance.
    (c) In computing the amount of an asset included in the liquidity 
buffer, the covered company must discount the fair market value of the 
asset to reflect any credit risk and market volatility of the asset.
    (d) The pool of unencumbered highly liquid assets included in the 
liquidity buffer must be sufficiently diversified.


Sec.  252.58  Contingency funding plan.

    (a) Contingency funding plan. The covered company must establish 
and maintain a contingency funding plan that sets out the covered 
company's strategies for addressing liquidity needs during liquidity 
stress events. The contingency funding plan must be commensurate with 
the covered company's capital structure, risk profile, complexity, 
activities, size, and any other risk related factors that are 
appropriate, and established liquidity risk tolerance. The covered 
company must update the contingency funding plan at least annually, and 
must update the plan when changes to market and idiosyncratic 
conditions warrant an update.
    (b) Components of the contingency funding plan. The contingency 
funding plan must include the following components:
    (1) Quantitative Assessment. The contingency funding plan must 
incorporate information generated by liquidity stress testing described 
in section 252.56. The stress tests are used to:
    (i) Identify liquidity stress events that have a significant impact 
on the covered company's liquidity;
    (ii) Assess the level and nature of impact on the covered company's 
liquidity that may occur during identified liquidity stress events;
    (iii) Assess available funding sources and needs during the 
identified liquidity stress events; and
    (iv) Identify alternative funding sources that may be used during 
the liquidity stress events.
    (2) Event management process. The contingency funding plan must 
include an event management process that sets out the covered company's 
procedures for managing liquidity during identified liquidity stress 
events. This process must:
    (i) Include an action plan that clearly describes the strategies 
the covered company will use to respond to liquidity shortfalls for 
identified liquidity stress events, including the methods that the 
covered company will use to access alternative funding sources;
    (ii) Identify a liquidity stress event management team;
    (iii) Specify the process, responsibilities, and triggers for 
invoking the contingency funding plan, escalating the responses 
described in the action plan, decision-making during the identified 
liquidity stress events, and executing contingency measures identified 
in the action plan; and
    (iv) Provide a mechanism that ensures effective reporting and 
communication within the covered company and with outside parties, 
including the Federal Reserve and other relevant supervisors, 
counterparties, and other stakeholders.
    (3) Monitoring. The contingency funding plan must include 
procedures for monitoring emerging liquidity stress events. The 
procedures must identify early warning indicators that are tailored to 
the covered company's capital structure, risk profile, complexity, 
activities, size, and other appropriate risk related factors.
    (4) Testing. The covered company must periodically test the 
components of the contingency funding plan to assess the plan's 
reliability during liquidity stress events.
    (i) The covered company must test the operational elements of the 
contingency funding plan to ensure that the plan functions as intended. 
These tests must include operational simulations to test 
communications, coordination, and decision-making involving relevant 
managers, including managers at relevant legal entities within the 
corporate structure.
    (ii) The covered company must periodically test the methods it will 
use to access alternative funding sources to determine whether these 
funding sources will be readily available when needed.


Sec.  252.59  Specific limits.

    (a) Required limits. The covered company must establish and 
maintain limits on potential sources of liquidity risk including the 
following:
    (1) Concentrations of funding by instrument type, single 
counterparty, counterparty type, secured and unsecured funding, and 
other liquidity risk identifiers;
    (2) The amount of specified liabilities that mature within various 
time horizons; and
    (3) Off-balance sheet exposures and other exposures that could 
create

[[Page 649]]

funding needs during liquidity stress events.
    (b) Size of limits. The size of each limit described in paragraph 
(a) of this section must reflect the covered company's capital 
structure, risk profile, complexity, activities, size, other 
appropriate risk related factors, and established liquidity risk 
tolerance.


Sec.  252.60  Monitoring.

    (a) Collateral monitoring requirements. The covered company must 
establish and maintain procedures for monitoring assets that it has 
pledged as collateral for an obligation or position, and assets that 
are available to be pledged. These procedures must address the covered 
company's ability to:
    (1) Calculate all of the covered company's collateral positions in 
a timely manner, including: (i) the value of assets pledged relative to 
the amount of security required under the contract governing the 
obligation for which the collateral was pledged; and (ii) unencumbered 
assets available to be pledged;
    (2) Monitor the levels of available collateral by legal entity, 
jurisdiction, and currency exposure;
    (3) Monitor shifts between intraday, overnight, and term pledging 
of collateral; and
    (4) Track operational and timing requirements associated with 
accessing collateral at its physical location (for example, the 
custodian or securities settlement system that holds the collateral).
    (b) Legal entities, currencies and business lines.
    (1) The covered company must establish and maintain procedures for 
monitoring and controlling liquidity risk exposures and funding needs 
within and across significant legal entities, currencies, and business 
lines.
    (2) The covered company must maintain sufficient liquidity with 
respect to each significant legal entity in light of legal and 
regulatory restrictions on the transfer of liquidity between legal 
entities.
    (c) Intraday liquidity positions. The covered company must 
establish and maintain procedures for monitoring intraday liquidity 
risk exposure. These procedures must address how the covered company 
will:
    (1) Monitor and measure expected daily gross liquidity inflows and 
outflows;
    (2) Manage and transfer collateral when necessary to obtain 
intraday credit;
    (3) Identify and prioritize time-specific obligations so that the 
covered company can meet these obligations as expected;
    (4) Settle less critical obligations as soon as possible;
    (5) Control the issuance of credit to customers where necessary; 
and
    (6) Consider the amounts of collateral and liquidity needed to meet 
payment systems obligations when assessing the covered company's 
overall liquidity needs.
    (d) Monitoring of limits. The covered company must monitor its 
compliance with all limits established and maintained under section 
252.59 of this subpart.


Sec.  252.61  Documentation.

    The covered company must adequately document all material aspects 
of its liquidity risk management processes and its compliance with the 
requirements of this subpart and submit all such documentation to the 
risk committee.

Subpart D--Single-Counterparty Credit Limits


Sec.  252.91  Applicability.

    (a) Applicability. (1) In general. Except as otherwise provided in 
this subpart, a covered company is subject to the requirements of this 
subpart beginning on the first day of the fifth quarter following the 
date on which it became a covered company.
    (2) Initial applicability. A company that is a covered company on 
the effective date of this subpart will be subject to the requirements 
of this subpart beginning on October 1, 2013. A company that becomes a 
covered company after the effective date of this part and before 
September 30, 2012 will be subject to the requirements of this subpart 
beginning on October 1, 2013.


Sec.  252.92  Definitions.

    For purposes of this subpart:
    (a) Adjusted market value means, with respect to any eligible 
collateral, the fair market value of the eligible collateral after 
application of the applicable haircut specified in Table 2 of this 
subpart for that type of eligible collateral.
    (b) Affiliate means, with respect to a company, any company that 
controls, is controlled by, or is under common control with, the 
company.
    (c) Aggregate net credit exposure means the sum of all net credit 
exposures of a covered company to a single counterparty.
    (d) Applicable accounting standards means U.S. generally applicable 
accounting principles (GAAP), international financial reporting 
standards (IFRS), or such other accounting standards that a company 
uses in the ordinary course of its business in preparing its 
consolidated financial statements.
    (e) Bank eligible investments means investment securities that a 
national bank is permitted to purchase, sell, deal in, underwrite, and 
hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
    (f) Bank holding company is defined as in section 2 of the Bank 
Holding Company Act, as amended (12 U.S.C. 1841), and the Board's 
Regulation Y (12 CFR part 225).
    (g) Capital stock and surplus means with respect to a bank holding 
company, the sum of the following amounts in each case as reported by 
the bank holding company on the most recent FR Y-9C report, or with 
respect to a nonbank covered company, on the most recent regulatory 
report required by the Board:
    (1) The company's total capital, as calculated under the capital 
adequacy guidelines applicable to that bank holding company under 
Regulation Y (12 CFR part 225) or nonbank covered company under this 
subpart; and
    (2) The balance of the allowance for loan and lease losses of the 
bank holding company or nonbank covered company not included in tier 2 
capital under the capital adequacy guidelines applicable to that bank 
holding company under Regulation Y (12 CFR part 225) or that nonbank 
covered company under this subpart.
    (h) Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    (i) Control. A company controls another company if it (1) owns, 
controls, or holds with power to vote 25 percent or more of a class of 
voting securities of the company; (2) owns or controls 25 percent or 
more of the total equity of the company; or (3) consolidates the 
company for financial reporting purposes.
    (j) Council means the Financial Stability Oversight Council 
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
    (k) Counterparty means
    (1) With respect to a natural person, the person, and members of 
the person's immediate family;
    (2) With respect to a company, the company and all of its 
subsidiaries, collectively;
    (3) With respect to the United States, the United States and all of 
its agencies and instrumentalities (but not including any State or 
political subdivision of a State) collectively;

[[Page 650]]

    (4) With respect to a State, the State and all of its agencies, 
instrumentalities, and political subdivisions (including any 
municipalities) collectively; and
    (5) With respect to a foreign sovereign entity, the foreign 
sovereign entity and all of its agencies, instrumentalities, and 
political subdivisions, collectively;
    (l) Covered company means:
    (1) Any company organized under the laws of the United States or 
any State that the Council has determined under section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and 
for which such determination is still in effect (nonbank covered 
company); and
    (2) Any bank holding company (other than a foreign banking 
organization), that has $50 billion or more in total consolidated 
assets, as determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's Consolidated Financial Statements for Bank 
Holding Companies (the Federal Reserve's FR Y-9C (FR Y-9C)); or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters.
    (3) Once a covered company meets the requirements described in 
paragraph (2), the company shall remain a covered company for purposes 
of this subpart unless and until the company has less than $50 billion 
in total consolidated assets as determined based on each of the bank 
holding company's four most recent FR Y-9Cs.
    (4) Nothing in paragraph (3) shall preclude a company from becoming 
a covered company pursuant to paragraph (2).
    (5) A bank holding that has ceased to be a covered company under 
paragraph (3) is not subject to the requirements of this subpart 
beginning on the first day of the calendar quarter following the 
reporting date on which it ceased to be a covered company.
    (m) Credit derivative means a financial contract that allows one 
party (the protection purchaser) to transfer the credit risk of one or 
more exposures (reference exposure) to another party (the protection 
provider).
    (n) Credit transaction means, with respect to a counterparty:
    (1) Any extension of credit to the counterparty, including loans, 
deposits, and lines of credit, but excluding advised or other 
uncommitted lines of credit;
    (2) Any repurchase or reverse repurchase agreement with the 
counterparty;
    (3) Any securities lending or securities borrowing transaction with 
the counterparty;
    (4) Any guarantee, acceptance, or letter of credit (including any 
confirmed letter of credit or standby letter of credit) issued on 
behalf of the counterparty;
    (5) Any purchase of, or investment in, securities issued by the 
counterparty;
    (6) Any credit exposure to the counterparty in connection with a 
derivative transaction between the covered company and the 
counterparty;
    (7) Any credit exposure to the counterparty in connection with a 
credit derivative or equity derivative transaction between the covered 
company and a third party, the reference asset of which is an 
obligation or equity security of the counterparty; and
    (8) Any transaction that is the functional equivalent of the above, 
and any similar transaction that the Board determines to be a credit 
transaction for purposes of this subpart.
    (o) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
    (p) Derivative transaction means any transaction that is a 
contract, agreement, swap, warrant, note, or option that is based, in 
whole or in part, on the value of, any interest in, or any quantitative 
measure or the occurrence of any event relating to, one or more 
commodities, securities, currencies, interest or other rates, indices, 
or other assets.
    (q) Eligible collateral means collateral in which the covered 
company has a perfected, first priority security interest or, outside 
of the United States, the legal equivalent thereof (with the exception 
of cash on deposit and notwithstanding the prior security interest of 
any custodial agent) and is in the form of:
    (1) Cash on deposit with the covered company (including cash held 
for the covered company by a third-party custodian or trustee);
    (2) Debt securities (other than mortgage- or asset-backed 
securities) that are bank eligible investments;
    (3) Equity securities that are publicly traded; or
    (4) Convertible bonds that are publicly traded.
    (r) Eligible credit derivative means a single-name credit 
derivative or a standard, non-tranched index credit derivative provided 
that:
    (1) The derivative contract meets the requirements of an eligible 
guarantee and has been confirmed by the protection purchaser and the 
protection provider;
    (2) Any assignment of the derivative contract has been confirmed by 
all relevant parties;
    (3) If the credit derivative is a credit default swap, the 
derivative contract includes the following credit events:
    (i) Failure to pay any amount due under the terms of the reference 
exposure, subject to any applicable minimal payment threshold that is 
consistent with standard market practice and with a grace period that 
is closely in line with the grace period of the reference exposure; and
    (ii) Bankruptcy, insolvency, or inability of the obligor on the 
reference exposure to pay its debts, or its failure or admission in 
writing of its inability generally to pay its debts as they become due 
and similar events;
    (4) The terms and conditions dictating the manner in which the 
derivative contract is to be settled are incorporated into the 
contract;
    (5) If the derivative contract allows for cash settlement, the 
contract incorporates a robust valuation process to estimate loss with 
respect to the derivative reliably and specifies a reasonable period 
for obtaining post-credit event valuations of the reference exposure;
    (6) If the derivative contract requires the protection purchaser to 
transfer an exposure to the protection provider at settlement, the 
terms of at least one of the exposures that is permitted to be 
transferred under the contract provides that any required consent to 
transfer may not be unreasonably withheld; and
    (7) If the credit derivative is a credit default swap, the 
derivative contract clearly identifies the parties responsible for 
determining whether a credit event has occurred, specifies that this 
determination is not the sole responsibility of the protection 
provider, and gives the protection purchaser the right to notify the 
protection provider of the occurrence of a credit event.
    (s) Eligible equity derivative means an equity-linked total return 
swap, provided that:
    (1) The derivative contract has been confirmed by the 
counterparties;
    (2) Any assignment of the derivative contract has been confirmed by 
all relevant parties; and
    (3) The terms and conditions dictating the manner in which the 
derivative contract is to be settled are incorporated into the 
contract.
    (t) Eligible guarantee means a guarantee from an eligible 
protection provider that:

[[Page 651]]

    (1) Is written and is either unconditional or the enforceability of 
the guarantee is contingent only to the extent it is dependent upon 
affirmative action on the part of the beneficiary of the guarantee or a 
third party (for example, servicing requirements);
    (2) Covers all or a pro rata portion of all contractual payments of 
the obligor on the reference entity;
    (3) Gives the beneficiary a direct claim against the protection 
provider;
    (4) Is not unilaterally cancelable by the guarantor for reasons 
other than the breach of the contract by the beneficiary;
    (5) Is legally enforceable against the guarantor in a jurisdiction 
where the guarantor has sufficient assets against which a judgment may 
be attached and enforced;
    (6) Requires the guarantor to make payment to the beneficiary on 
the occurrence of a default (as defined in the guarantee) of the 
obligor on the reference entity in a timely manner without the 
beneficiary first having to take legal actions to pursue the obligor 
for payment; and
    (7) Does not increase the beneficiary's cost of credit protection 
on the guarantee in response to deterioration in the credit quality of 
the reference entity.
    (u) Eligible protection provider means:
    (1) A sovereign entity;
    (2) The Bank for International Settlements, the International 
Monetary Fund, the European Central Bank, the European Commission, or a 
multilateral development bank;
    (3) A Federal Home Loan Bank;
    (4) The Federal Agricultural Mortgage Corporation;
    (5) A depository institution;
    (6) A bank holding company;
    (7) A savings and loan holding company (as defined in 12 U.S.C. 
1467a);
    (8) A securities broker or dealer registered with the SEC under the 
Securities Exchange Act of 1934 (15 U.S.C. 78o et seq.);
    (9) An insurance company that is subject to the supervision by a 
State insurance regulator;
    (10) A foreign banking organization;
    (11) A non-U.S.-based securities firm or a non-U.S.-based insurance 
company that is subject to consolidated supervision and regulation 
comparable to that imposed on U.S. depository institutions, securities 
broker-dealers, or insurance companies; and
    (12) A qualifying central counterparty.
    (v) Equity derivative means an equity-linked swap, purchased 
equity-linked option, forward equity-linked contract, or any other 
instrument linked to equities that gives rise to similar counterparty 
credit risks.
    (w) Foreign banking organization means any foreign bank or company 
that is a bank holding company or is treated as a bank holding company 
under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)).
    (x) Gross credit exposure means, with respect to any credit 
transaction, the credit exposure of the covered company before 
adjusting for the effect of qualifying master netting agreements, 
eligible collateral, eligible guarantees, eligible credit derivatives 
and eligible equity derivatives.
    (y) Immediate family means the spouse of an individual, the 
individual's minor children, and any of the individual's children 
(including adults) residing in the individual's home.
    (z) Major counterparty is any
    (1) Major covered company and all of its subsidiaries, 
collectively; and
    (2) Any foreign banking organization (and all of its subsidiaries, 
collectively) that has total consolidated assets equal to or greater 
than $500 billion determined based on the foreign banking 
organization's total consolidated assets in the most recent year, for 
annual filers, or the average of the four most recent quarters, for 
quarterly filers, as reported on the foreign banking organization's 
Capital and Asset Reports for Foreign Banking Organizations (Federal 
Reserve Form FR Y-7Q).
    (aa) Major covered company is any
    (1) Covered company that is a bank holding company and that has 
total consolidated assets equal to or greater than $500 billion 
determined based on the average of the bank holding company's total 
consolidated assets in the four most recent quarters as reported 
quarterly on the bank holding company's FR Y-9C; and
    (2) Nonbank covered company.
    (bb) Net credit exposure means, with respect to any credit 
transaction, the gross credit exposure of a covered company calculated 
under section 252.94, as adjusted in accordance with section 252.95.
    (cc) Nonbank covered company means any company organized under the 
laws of the United States or any State that the Council has determined 
under section 113 of the Dodd-Frank Act (12 U.S.C. 5323) shall be 
supervised by the Board and for which such determination is still in 
effect.
    (dd) Publicly traded means traded on:
    (1) Any exchange registered with the U.S. Securities and Exchange 
Commission as a national securities exchange under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within a 
reasonable time period conforming with trade custom.
    (ee) Qualifying central counterparty means an entity that
    (1) Facilitates trades between counterparties in one or more 
financial markets by either guaranteeing trades or novating contracts;
    (2) Requires all participants in its arrangements to be fully 
collateralized on a daily basis; and
    (3) Is subject to effective oversight by a national supervisory 
authority.
    (ff) Qualifying master netting agreement means a legally 
enforceable bilateral agreement such that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default, including bankruptcy, insolvency, or similar proceeding of the 
counterparty;
    (2) The agreement provides the covered company the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set off collateral promptly 
upon an event of default, including upon event of bankruptcy, 
insolvency, or similar proceeding, of the counterparty, provided that, 
in any such case, any exercise of rights under the agreement will not 
be stayed or avoided under applicable law in the relevant jurisdiction;
    (3) The covered company has conducted sufficient legal review to 
conclude with a well-founded basis (and has maintained sufficient 
written documentation of that legal review) that the agreement meeting 
the requirements of paragraph (2) of this definition and that in the 
event of a legal challenge (including one resulting from default or 
from bankruptcy, insolvency or similar proceeding) the relevant court 
and administrative authorities would find the agreement to be legal, 
valid, binding, and enforceable under the law of the relevant 
jurisdiction;
    (4) The covered company establishes and maintains procedures to 
monitor possible changes in relevant law and to ensure that the 
agreement continues to

[[Page 652]]

satisfy the requirements of this definition; and
    (5) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make lower 
payments than it would make otherwise under the agreement, or no 
payment at all, to a defaulter or the estate of a defaulter, even if 
the defaulter is a net creditor under the agreement).\206\
---------------------------------------------------------------------------

    \206\ The Board considers the following jurisdictions to be 
relevant for a qualifying master netting agreement: The jurisdiction 
in which the counterparty is chartered or equivalent location in the 
case of non-corporate entities, and if a branch of a counterparty is 
involved, then also the jurisdiction in which the branch is located; 
the jurisdiction that governs the individual transactions covered by 
the agreement; and the jurisdiction that governs the agreement.
---------------------------------------------------------------------------

    (gg) Short sale means any sale of a security which the seller does 
not own or any sale which is consummated by the delivery of a security 
borrowed by, or for the account of, the seller.
    (hh) Sovereign entity means a central government (including the 
U.S. government) or an agency, department, ministry, or central bank.
    (ii) State means any State, territory or possession of the United 
States, and the District of Columbia.
    (jj) Subsidiary of a specified company means a company that is 
directly or indirectly controlled by the specified company.
    (kk) Total capital means qualifying total capital as defined in 12 
CFR part 225, appendix A or total qualifying capital as defined in 12 
CFR part 225, appendix G, as applicable, or any successor regulation 
thereto.


Sec.  252.93  Credit exposure limit.

    (a) General limit on aggregate net credit exposure. No covered 
company shall, together with its subsidiaries, have an aggregate net 
credit exposure to any unaffiliated counterparty that exceeds 25 
percent of the consolidated capital stock and surplus of the covered 
company.
    (b) Major covered company limits on aggregate net credit exposure. 
No major covered company shall, together with its subsidiaries, have 
aggregate net credit exposure to any unaffiliated counterparty that is 
a major counterparty that exceeds 10 percent of the consolidated 
capital stock and surplus of the major covered company.


Sec.  252.94  Gross credit exposure.

    (a) Calculation of gross credit exposure. Under this subpart, 
exposures of a covered company to a counterparty include the exposures 
of its subsidiaries to the counterparty. The amount of gross credit 
exposure of a covered company to a counterparty with respect to credit 
transactions is, in the case of:
    (1) Loans by a covered company to the counterparty and leases in 
which the covered company is the lessor and the counterparty is the 
lessee, equal to the amount owed by the counterparty to the covered 
company under the transaction.
    (2) Debt securities held by the covered company that are issued by 
the counterparty, equal to:
    (i) The greater of the amortized purchase price or market value, 
for trading and available for sale securities, and
    (ii) The amortized purchase price, for securities held to maturity.
    (3) Equity securities held by the covered company that are issued 
by the counterparty, equal to the greater of the purchase price or 
market value.
    (4) Repurchase agreements, equal to:
    (i) The market value of securities transferred by the covered 
company to the counterparty; plus
    (ii) The amount in paragraph (4)(i) multiplied by the collateral 
haircut in Table 2 applicable to the securities transferred by the 
covered company to the counterparty.
    (5) Reverse repurchase agreements, equal to the amount of cash 
transferred by the covered company to the counterparty.
    (6) Securities borrowing transactions, equal to the amount of cash 
collateral plus the market value of securities collateral transferred 
by the covered company to the counterparty.
    (7) Securities lending transactions, equal to:
    (i) The market value of securities lent by the covered company to 
the counterparty; plus
    (ii) The amount in paragraph (7)(i) multiplied by the collateral 
haircut in Table 2 applicable to the securities lent by the covered 
company to the counterparty.
    (8) Committed credit lines extended by a covered company to a 
counterparty, equal to the face amount of the credit line.
    (9) Guarantees and letters of credit issued by a covered company on 
behalf of a counterparty, equal to the lesser of the face amount or the 
maximum potential loss to the covered company on the transaction.
    (10) Derivative transactions between the covered company and the 
counterparty not subject to a qualifying master netting agreement, in 
an amount equal to the sum of (i) the current exposure of the 
derivatives contract equal to the greater of the mark-to-market value 
of the derivative contract or zero and (ii) the potential future 
exposure of the derivatives contract, calculated by multiplying the 
notional principal amount of the derivative contract by the appropriate 
conversion factor, set forth in Table 1.
    (11) Derivative transactions between the covered company and the 
counterparty subject to a qualifying master netting agreement, in an 
amount equal to the exposure at default amount calculated under 12 CFR 
part 225, appendix G, Sec.  32(c)(6).
    (12) Credit or equity derivative transactions between the covered 
company and a third party where the covered company is the protection 
provider and the reference asset is an obligation or equity security of 
the counterparty, equal to the lesser of the face amount of the 
transaction or the maximum potential loss to the covered company on the 
transaction.

                                           Table 1--Conversion Factor Matrix for OTC Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Credit (bank-
                                                                             eligible      Credit (non-                      Precious
         Remaining maturity \2\            Interest rate      Foreign       investment     bank-eligible      Equity      metals (except       Other
                                                           exchange rate     reference       reference                         gold)
                                                                           obligor) \3\      obligor)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................           0.00            0.01             0.05            0.10            0.06            0.07            0.10
Greater than one year and less than or             0.005           0.05             0.05            0.10            0.08            0.07            0.12
 equal to five years....................

[[Page 653]]

 
Greater than 5 years....................           0.015           0.075            0.05            0.10            0.10            0.08            0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
  derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
  the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
  with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A company must use the column labeled ``Credit (bank-eligible investment reference obligor)'' for a credit derivative whose reference obligor has an
  outstanding unsecured debt security that is a bank eligible investment. A company must use the column labeled ``Credit (non-bank-eligible investment
  reference obligor)'' for all other credit derivatives.

     (b) Attribution rule. A covered company must treat any of its 
transactions with any person as a credit exposure to a counterparty to 
the extent the proceeds of the transaction are used for the benefit of, 
or transferred to, that counterparty.


Sec.  252.95  Net credit exposure.

    (a) Calculation of initial net credit exposure for securities 
financing transactions.
    (1) Repurchase and reverse repurchase transactions. For repurchase 
and reverse repurchase transactions with a counterparty that are 
subject to a bilateral netting agreement with that counterparty, a 
covered company may use the net credit exposure associated with the 
netting agreement.
    (2) Securities lending and borrowing transactions. For a securities 
lending and borrowing transactions with a counterparty that are subject 
to a bilateral netting agreement with that counterparty, a covered 
company may use the net credit exposure associated with the netting 
agreement.
    (b) Market value adjustments. In computing its net credit exposure 
to a counterparty for any credit transaction (including securities 
financing transactions), a covered company may reduce its gross credit 
exposure (or as applicable, net credit exposure for securities 
financing transactions calculated under section 252.95(a)) on the 
transaction by the adjusted market value of any eligible collateral, 
provided that:
    (1) The covered company includes the adjusted market value of the 
eligible collateral when calculating its gross credit exposure to the 
issuer of the collateral;
    (2) The collateral used to adjust the covered company's gross 
credit exposure to a counterparty cannot be used to adjust the covered 
company's gross credit exposure to any other counterparty; and
    (3) In no event will the covered company's gross credit exposure to 
the issuer of collateral be in excess of its gross credit exposure to 
the counterparty on the credit transaction.
    (c) Unused portion of certain extensions of credit. (1) In 
computing its net credit exposure to a counterparty for a credit line 
or revolving credit facility, a covered company may reduce its gross 
credit exposure by the amount of the unused portion of the credit 
extension to the extent that the covered company does not have any 
legal obligation to advance additional funds under the extension of 
credit, until the counterparty provides the amount of adjusted market 
value of collateral required with respect to the entire used portion of 
the extension of credit.
    (2) To qualify for this reduction, the credit contract must specify 
that any used portion of the credit extension must be fully secured by 
collateral that is (i) cash, (ii) obligations of the United States or 
its agencies, or (iii) obligations directly and fully guaranteed as to 
principal and interest by, the Federal National Mortgage Association 
and the Federal Home Loan Mortgage Corporation, while operating under 
the conservatorship or receivership of the Federal Housing Finance 
Agency, and any additional obligations issued by a U.S. government 
sponsored entity as determined by the Board.
    (d) Eligible guarantees. In calculating net credit exposure to a 
counterparty for a credit transaction, a covered company must reduce 
its gross credit exposure to the counterparty by the amount of any 
eligible guarantees from an eligible protection provider that covers 
the transaction, provided that:
    (1) The covered company includes the amount of the eligible 
guarantees when calculating its gross credit exposure to the eligible 
protection provider; and
    (2) In no event will the covered company's gross credit exposure to 
an eligible protection provider with respect to an eligible guarantee 
be in excess of its gross credit exposure to the counterparty on the 
credit transaction prior to recognition of the eligible guarantee.
    (e) Eligible credit and equity derivatives. In calculating net 
credit exposure to a counterparty for a credit transaction, a covered 
company must reduce its gross credit exposure to the counterparty by 
the notional amount of any eligible credit or equity derivative from an 
eligible protection provider that references the counterparty, as 
applicable, provided that:
    (1) The covered company includes the face amount of the eligible 
credit and equity derivative when calculating its gross credit exposure 
to the eligible protection provider; and
    (2) In no event will the covered company's gross credit exposure to 
an eligible protection provider with respect to an eligible credit or 
equity derivative be in excess of its gross credit exposure to the 
counterparty on the credit transaction prior to recognition of the 
eligible credit or equity derivative.
    (f) Other eligible hedges. In calculating net credit exposure to a 
counterparty for a credit transaction, a covered company may reduce its 
gross credit exposure to the counterparty by the face amount of a short 
sale of the counterparty's debt or equity security.

[[Page 654]]



                      Table 2--Collateral Haircuts
                          [Sovereign entities]
------------------------------------------------------------------------
                                                        Haircut without
                                   Residual maturity   currency mismatch
                                                             \207\
------------------------------------------------------------------------
OECD Country Risk Classification  <= 1 year.........               0.005
 \208\ 0-1.
                                  >1 year, <= 5                    0.02
                                   years.
                                  > 5 years.........               0.04
OECD Country Risk Classification  <= 1 year.........               0.01
 2-3.
                                  >1 year, <= 5                    0.03
                                   years.
                                  > 5 years.........               0.06
------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \207\ In cases where the currency denomination of the collateral 
differs from the currency denomination of the credit transaction, an 
addition 8 percent haircut will apply.
    \208\ OECD Country Risk Classification means the country risk 
classification as defined in Article 25 of the OECD's February 2011 
Arrangement on Officially Supported Export Credits Arrangement.

    Corporate and Municipal Bonds That Are Bank-Eligible Investments
------------------------------------------------------------------------
                                   Residual maturity    Haircut without
                                  for debt securities  currency mismatch
------------------------------------------------------------------------
All.............................  <= 1 year..........               0.02
All.............................  >1 year, <= 5 years               0.06
All.............................  > 5 years..........               0.12
------------------------------------------------------------------------


                        Other Eligible Collateral
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Main index \209\ equities (including     0.15.
 convertible bonds).
Other publicly traded equities           0.25.
 (including convertible bonds).
Mutual funds...........................  Highest haircut applicable to
                                          any security in which the fund
                                          can invest.
Cash collateral held...................  0.
------------------------------------------------------------------------

Sec.  252.96  Compliance.

    (a) Scope of compliance. A covered company must comply with the 
requirements of this section on a daily basis at the end of each 
business day and submit on a monthly basis a report demonstrating its 
daily compliance.
---------------------------------------------------------------------------

    \209\ Main index means the Standard & Poor's 500 Index, the FTSE 
All-World Index, and any other index for which the covered company 
can demonstrate to the satisfaction of the Federal Reserve that the 
equities represented in the index have comparable liquidity, depth 
of market, and size of bid-ask spreads as equities in the Standard & 
Poor's 500 Index and FTSE All-World Index.
---------------------------------------------------------------------------

    (b) Noncompliance. Except as otherwise provided in this section, if 
a covered company is not in compliance with this subpart with respect 
to a counterparty solely due to the circumstances specified in this 
section 252.96, the covered company will not be subject to enforcement 
actions for a period of 90 days (or such other period determined by the 
Board to be appropriate to preserve the safety and soundness of the 
covered company or U.S. financial stability) if the company uses 
reasonable efforts to return to compliance with this subpart during 
this period. The covered company may not engage in any additional 
credit transactions with such a counterparty in contravention of this 
rule during the compliance period, except in cases where the Board 
determines that such credit transactions are necessary or appropriate 
to preserve the safety and soundness of the covered company or U.S. 
financial stability. In granting approval for such a special temporary 
credit exposure limit, the Board will consider the following:
    (1) A decrease in the covered company's capital stock and surplus.
    (2) The merger of the covered company with another covered company.
    (3) A merger of two unaffiliated counterparties.
    (4) Any other circumstance the Board determines is appropriate.
    The Board may impose supervisory oversight and reporting measures 
that it determines are appropriate to monitor compliance with the 
foregoing standards as set forth in this paragraph.


Sec.  252.97  Exemptions.

    (a) Exempted exposure categories. The following categories of 
credit transactions are exempt from the limits on credit exposure under 
this subpart:
    (1) Direct claims on, and the portions of claims that are directly 
and fully guaranteed as to principal and interest by, the United States 
and its agencies.
    (2) Direct claims on, and the portions of claims that are directly 
and fully guaranteed as to principal and interest by, the Federal 
National Mortgage Association and the Federal Home Loan Mortgage 
Corporation, only while operating under the conservatorship or 
receivership of the Federal Housing Finance Agency, and any additional 
obligations issued by a U.S. government sponsored entity as determined 
by the Board.
    (3) Intraday credit exposure to a counterparty.
    (4) Any transaction that the Board exempts if the Board finds that 
such exemption is in the public interest and is consistent with the 
purpose of this subsection.
    (b) Exemption for Federal Home Loan Banks. For purposes of this 
subpart, a covered company does not include any Federal Home Loan Bank.

Subpart E--Risk Management


Sec.  252.125  Definitions.

    For purposes of this subpart:
    (a) Bank holding company is defined as in section 2 of the Bank 
Holding

[[Page 655]]

Company Act, as amended (12 U.S.C. 1841), and the Board's Regulation Y 
(12 CFR part 225).
    (b) Chief risk officer means a management official of a covered 
company who fulfills the responsibilities described in section 
252.126(d) of this subpart.
    (c) Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    (d) Council means the Financial Stability Oversight Council 
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
    (e) Covered company means
    (1) Any company organized under the laws of the United States or 
any State that the Council has determined under section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and 
for which such determination is still in effect (nonbank covered 
company).
    (2) Any bank holding company (other than a foreign banking 
organization), that has $50 billion or more in total consolidated 
assets, as determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's Consolidated Financial Statements for Bank 
Holding Companies (the Federal Reserve's FR Y-9C (FR Y-9C)); or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters.
    (3) Once a covered company meets the requirements described in 
paragraph (2), the company shall remain a covered company for purposes 
of this subpart unless and until the company has less than $50 billion 
in total consolidated assets as determined based on each of the bank 
holding company's four most recent FR Y-9Cs.
    (4) Nothing in paragraph (3) shall preclude a company from becoming 
a covered company pursuant to paragraph (2).
    (5) A bank holding that has ceased to be a covered company under 
paragraph (3) is not subject to the requirements of this subpart 
beginning on the first day of the calendar quarter following the 
reporting date on which it ceased to be a covered company.
    (f) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
    (g) Enterprise-wide risk committee means a committee of a covered 
company's or over $10 billion bank holding company's board of directors 
that oversees the risk management practices of such company's worldwide 
operations.
    (h) Foreign banking organization means any foreign bank or company 
that is a bank holding company or is treated as a bank holding company 
under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)).
    (i) Independent director means
    (1) In the case of a covered company or over $10 billion bank 
holding company that has a class of securities outstanding that is 
traded on a national securities exchange, a member of the board such 
company who:
    (i) Is not an officer or employee of the company and has not been 
an officer or employee of the company during the previous three years; 
and
    (ii) Is not a member of the immediate family, as defined in section 
225.41(a)(3) of the Board's Regulation Y (12 CFR 225.41(a)(3)), of a 
person who is, or has been within the last three years, an executive 
officer of the company, as defined in section 215.2(e)(1) of the 
Board's Regulation O (12 CFR 215.2(e)(1)); and
    (iii) Is an independent director under Item 407 of the Securities 
and Exchange Commission's Regulation S-K, 17 CFR 229.407(a).
    (2) In the case of a director of a covered company or over $10 
billion bank holding company that does not have a class of securities 
outstanding that is traded on a national securities exchange, a member 
of the board of directors of such company who:
    (i) Meets the requirements of paragraphs (1)(i) and (ii) of this 
section; and
    (ii) The company demonstrates to the satisfaction of the Federal 
Reserve would qualify as an independent director under the listing 
standards of a national securities exchange if the company were 
publicly traded on a national securities exchange.
    (j) National securities exchange means any exchange registered with 
the U.S. Securities and Exchange Commission as a national securities 
exchange under section 6 of the Securities Exchange Act of 1934 (15 
U.S.C. 78f).
    (k) Publicly traded means traded on:
    (1) A national securities exchange; or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within a 
reasonable time period conforming with trade custom.
    (l) Risk management expertise means
    (1) An understanding of risk management principles and practices 
with respect to banking holding companies or depository institutions, 
or, if applicable, nonbank financial companies, and the ability to 
assess the general application of such principles and practices; and
    (2) Experience developing and applying risk management practices 
and procedures, measuring and identifying risks, and monitoring and 
testing risk controls with respect to banking organizations or, if 
applicable, nonbank financial companies.
    (m) Over $10 billion bank holding company means any bank holding 
company (other than a foreign banking organization) that is not a 
covered company, and that:
    (1) Has $10 billion or more in total consolidated assets, as 
determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's Consolidated Financial Statements for Bank 
Holding Companies (the Federal Reserve's FR Y-9C (FR Y-9C)); or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters.
    (2) Once an over $10 billion bank holding company meets the 
requirements described in paragraph (1), the company shall remain an 
over $10 billion bank holding company for purposes of this part unless 
and until the company has less than $10 billion in total consolidated 
assets as determined based on each of the bank holding company's four 
most recent FR Y-9Cs.
    (3) Nothing in paragraph (2) shall preclude a company from becoming 
an over $10 billion bank holding company pursuant to paragraph (1).

[[Page 656]]

    (4) A bank holding that has ceased to be an over $10 billion bank 
holding company under paragraph (2) is not subject to the requirements 
of this subpart beginning on the first day of the calendar quarter 
following the reporting date on which it ceased to be an over $10 
billion bank holding company.


Sec.  252.126  Establishment of risk committee and appointment of chief 
risk officer.

    (a) Risk committee. Each covered company and each publicly-traded 
over $10 billion bank holding company, shall maintain an enterprise-
wide risk committee consisting of members of its board of directors, 
and, for each covered company, that satisfies the requirements of 
section 252.126(d).
    (b) Structure of risk committee. An enterprise-wide risk committee 
shall:
    (1) Have a formal, written charter, approved by the company's board 
of directors;
    (2) Have at least one member with risk management expertise that is 
commensurate with the company's capital structure, risk profile, 
complexity, activities, size, and other appropriate risk related 
factors;
    (3) Be chaired by an independent director;
    (4) Meet with an appropriate frequency and as needed, and fully 
document and maintain records of its proceedings, including risk 
management decisions;
    (5) In addition, in the case of a covered company:
    (i) Not be housed within another committee or be part of a joint 
committee;
    (ii) Report directly to the covered company's board of directors; 
and
    (iii) Receive and review regular reports from the covered company's 
chief risk officer.
    (c) Responsibilities of risk committee. A risk committee shall 
document, review and approve the enterprise-wide risk management 
practices of the company. Specifically, the risk committee shall 
oversee the operation of, on an enterprise wide-basis, an appropriate 
risk management framework commensurate with the company's capital 
structure, risk profile, complexity, activities, size, and other 
appropriate risk-related factors. A company's risk management framework 
shall include:
    (1) Risk limitations appropriate to each business line of the 
company;
    (2) Appropriate policies and procedures relating to risk management 
governance, risk management practices, and risk control infrastructure 
for the enterprise as a whole;
    (3) Processes and systems for identifying and reporting risks and 
risk-management deficiencies, including emerging risks, on an 
enterprise-wide basis;
    (4) Monitoring of compliance with the company's risk limit 
structure and policies and procedures relating to risk management 
governance, practices, and risk controls across the enterprise;
    (5) Effective and timely implementation of corrective actions to 
address risk management deficiencies;
    (6) Specification of management and employees' authority and 
independence to carry out risk management responsibilities; and
    (7) Integration of risk management and control objectives in 
management goals and the company's compensation structure.
    (d) Chief risk officer. A covered company shall employ a chief risk 
officer who:
    (1) Has risk management expertise that is commensurate with the 
company's capital structure, risk profile, complexity, activities, 
size, and other risk-related factors that are appropriate;
    (2) Is appropriately compensated and incentivized to provide an 
objective assessment of the risks taken by the company;
    (3) Reports directly to both the risk committee and chief executive 
officer of the company; and
    (4) Directly oversees the following responsibilities on an 
enterprise-wide basis:
    (i) Allocating delegated risk limits and monitoring compliance with 
such limits;
    (ii) Implementation of and ongoing compliance with, appropriate 
policies and procedures relating to risk management governance, 
practices, and risk controls and monitoring compliance with such 
policies and procedures;
    (iii) Developing appropriate processes and systems for identifying 
and reporting risks and risk-management deficiencies, including 
emerging risks, on an enterprise-wide basis;
    (iv) Managing risk exposures and risk controls within the 
parameters of the company's risk control framework; and
    (v) Monitoring and testing of the company's risk controls;
    (vi) Reporting risk management deficiencies and emerging risks to 
the enterprise-wide risk committee; and
    (vii) Ensuring that risk management deficiencies are effectively 
resolved in a timely manner.

Subpart F--Supervisory Stress Test Requirements


Sec.  252.131  Applicability.

    (a) Applicability. (1) In general. A bank holding company that 
becomes a covered company no less than 90 days before September 30 of a 
calendar year must comply with the requirements of this subpart from 
September 30 of that calendar year and thereafter. A company the 
Council has determined shall be supervised by the Board on a date no 
less than 180 days before September 30 of a calendar year must comply 
with the requirements of this subpart from September 30 of that 
calendar year and thereafter.
    (2) Initial applicability. A bank holding company that is a covered 
company on the effective date of this subpart must immediately comply 
with the requirements, including timing of required submissions to the 
Board, of this subpart.


Sec.  252.132  Definitions.

    For purposes of this subpart:
    (a) Bank holding company is defined as in section 2 of the Bank 
Holding Company Act, as amended (12 U.S.C. 1841), and the Board's 
Regulation Y (12 CFR part 225).
    (b) Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    (c) Council means the Financial Stability Oversight Council 
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
    (d) Covered company means
    (1) Any company organized under the laws of the United States or 
any State that the Council has determined under section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and 
for which such determination is still in effect (nonbank covered 
company).
    (2) Any bank holding company (other than a foreign banking 
organization), that has $50 billion or more in total consolidated 
assets, as determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's Consolidated Financial Statements for Bank 
Holding Companies (the Federal Reserve's FR Y-9C (FR Y-9C)); or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters.
    (3) Once a covered company meets the requirements described in 
paragraph (2), the company shall remain a covered

[[Page 657]]

company for purposes of this subpart unless and until the company has 
less than $50 billion in total consolidated assets as determined based 
on each of the bank holding company's four most recent FR Y-9Cs.
    (4) Nothing in paragraph (3) shall preclude a company from becoming 
a covered company pursuant to paragraph (2).
    (5) A bank holding that has ceased to be a covered company under 
paragraph (3) is not subject to the requirements of this subpart 
beginning on the first day of the calendar quarter following the 
reporting date on which it ceased to be a covered company.
    (e) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
    (f) Foreign banking organization means any foreign bank or company 
that is a bank holding company or is treated as a bank holding company 
under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)).
    (g) Planning horizon means the period of time over which stress 
test projections must extend. The planning horizon cannot be less than 
nine quarters.
    (h) Publicly traded means traded on:
    (1) Any exchange registered with the U.S. Securities and Exchange 
Commission as a national securities exchange under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within a 
reasonable time period conforming with trade custom.
    (i) Scenarios are a set of economic and financial conditions that 
the Board publishes for the use in the supervisory stress tests 
annually, including baseline, adverse, and severely adverse.


Sec.  252.133  Annual analysis conducted by the Board.

    (a) In general. The Board, in coordination with the appropriate 
primary financial regulatory agencies, as defined in section 2(12) of 
Dodd-Frank Act (12 U.S.C. 5301(12)), and the Federal Insurance Office, 
will, on an annual basis, conduct an analysis of the capital, on a 
total consolidated basis and taking into account all relevant exposures 
and activities of each covered company to evaluate the ability of the 
covered company to absorb losses in adverse economic and financial 
conditions. The analysis will include the projected net income, losses, 
and pro forma, post-stress capital levels and ratios for the covered 
company and use the analytical techniques that the Board determines are 
appropriate to identify, measure, and monitor risks of the covered 
company and to the financial stability of the United States.
    (b) Economic and financial scenarios related to analyses. The Board 
will conduct its analysis under section 252.133(a) using a minimum of 
three different sets of economic and financial conditions (scenarios), 
including baseline, adverse, and severely adverse conditions. The Board 
will notify covered companies of the conditions the Board will apply in 
advance of conducting the analysis.


Sec.  252.134  Data and information required to be submitted in support 
of the Board's analyses.

    (a) Regular submissions. The Board will require each covered 
company to submit the data, on a consolidated basis, that the Board 
determines is necessary for it to estimate relevant pro forma estimates 
discussed in 252.133(a), of the covered company over a period of at 
least 9 calendar quarters under baseline, adverse, and severely adverse 
scenarios, or other such conditions as determined appropriate by the 
Board, including:
    (1) Information related to the covered company's on- and off-
balance sheet exposures, including in some cases information on 
individual items (such as loans and securities) held by the company, 
and including exposures in the covered 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 prices and 
interest rates.
    (2) Information to assist the Board in estimating the sensitivity 
of the covered company's revenues and expenses to changes in economic 
and financial conditions.
    (3) Information to assist the Board in estimating the likely 
evolution of the covered company's balance sheet (such as the 
composition of its loan and securities portfolios) and allowance for 
loan losses, in response to changes in economic and financial 
conditions.
    (b) Additional submissions required by the Board. The Board may 
require a covered company to submit any other information on a 
consolidated basis the Board deems necessary in order to:
    (1) Ensure that the Board has sufficient information to conduct its 
analysis under this subpart; and
    (2) Derive robust projections of a company's losses, pre-provision 
net revenue, allowance for loan losses, and future pro forma capital 
positions under the baseline, adverse, and severely adverse scenarios, 
or other such conditions as determined appropriate by the Board.
    (c) Confidential treatment of information submitted. The 
confidentiality of information submitted to the Board under this 
subpart and related materials shall be determined in accordance with 
applicable exemptions under the Freedom of Information Act (5 U.S.C. 
552(b)) and the Board's Rules Regarding Availability of Information (12 
CFR part 261).


Sec.  252.135  Review of the Board's analysis; publication of summary 
results.

    (a) Review of results. Based on the results of the analysis 
conducted under this subpart, the Board will evaluate each covered 
company to determine whether the covered company has the capital, on a 
total consolidated basis, necessary to absorb losses and continue to 
function as a credit intermediary as a result of adverse and severely 
adverse economic and financial market conditions.
    (b) Communication of results to covered companies. The Board will 
convey to each covered company the results of the Board's analyses of 
such covered company within a reasonable period of time.
    (c) Publication of results by the Board. Within a reasonable period 
of time after completing the analyses of the covered companies under 
this subpart, the Board will publish a summary of the results of such 
analyses.


Sec.  252.136  Post-assessment actions by covered companies.

    (a) In general. Each covered company shall take the results of the 
analysis conducted by the Board under this subpart into account in 
making changes, as appropriate, to the covered company's capital 
structure (including the level and composition of capital); its 
exposures, concentrations, and risk positions; any plans of the covered 
company for recovery; and for improving overall risk management.
    (b) Resolution plan updates. Each covered company shall make such 
updates to its resolution plan as the

[[Page 658]]

Board determines appropriate, based on the results of its analyses of 
the covered company under this subpart, within 90 days of the Board 
publishing the summary results of its analyses.

Subpart G--Company-Run Stress Test Requirements


Sec.  252.141  Applicability.

    (a) Applicability. (1) In general. (i) A bank holding company that 
becomes a covered company, or a bank holding company, a state member 
bank, or except as provided in paragraph (a)(2) of this section, a 
savings and loan holding company becomes an over $10 billion company no 
less than 90 days before September 30 of a calendar year must comply 
with the requirements of this subpart from September 30 of that 
calendar year and thereafter. A company that the Council has determined 
shall be supervised by the Board on a date no less than 180 days before 
September 30 of a calendar year must comply with the requirements of 
this subpart from September 30 of that calendar year and thereafter.
    (ii) A bank holding company that becomes a covered company no less 
than 90 days before March 31 of a calendar year must comply with the 
requirements of this subpart from March 31 of that calendar year and 
thereafter. A company that the Council has determined shall be 
supervised by the Board on a date no less than 180 days before March 31 
of a calendar year must comply with the requirements of this subpart 
from March 31 of that calendar year and thereafter.
    (2) Initial applicability. (i) In general. A bank holding company 
that is a covered company or an over $10 billion company on the 
effective date of this subpart must immediately comply with the 
requirements, including timing of required submissions to the Board, of 
this subpart.
    (ii) Savings and loan holding companies. A savings and loan holding 
company that is an over $10 billion company, before or after the 
effective date of this subpart, would not be subject to the proposed 
requirements, including timing of required submissions to the Board, 
until savings and loan holding companies are subject to minimum risk-
based capital and leverage requirements.


Sec.  252.142  Definitions.

    For purposes of this subpart:
    (a) Bank holding company is defined as in section 2 of the Bank 
Holding Company Act, as amended (12 U.S.C. 1841), and the Board's 
Regulation Y (12 CFR part 225).
    (b) Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    (c) Council means the Financial Stability Oversight Council 
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
    (d) Covered company means
    (1) Any company organized under the laws of the United States or 
any State that the Council has determined under section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and 
for which such determination is still in effect (nonbank covered 
company).
    (2) Any bank holding company (other than a foreign banking 
organization), that has $50 billion or more in total consolidated 
assets, as determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's Consolidated Financial Statements for Bank 
Holding Companies (the Federal Reserve's FR Y-9C (FR Y-9C)); or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters.
    (3) Once a covered company meets the requirements described in 
paragraph (2), the company shall remain a covered company for purposes 
of this subpart unless and until the company has less than $50 billion 
in total consolidated assets as determined based on each of the bank 
holding company's four most recent FR Y-9Cs.
    (4) Nothing in paragraph (3) shall preclude a company from becoming 
a covered company pursuant to paragraph (2).
    (5) A bank holding that has ceased to be a covered company under 
paragraph (3) is not subject to the requirements of this subpart 
beginning on the first day of the calendar quarter following the 
reporting date on which it ceased to be a covered company.
    (e) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
    (f) Foreign banking organization means any foreign bank or company 
that is a bank holding company or is treated as a bank holding company 
under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)).
    (g) Planning horizon means the period of time over which stress 
test projections must extend. The planning horizon cannot be less than 
nine quarters.
    (h) Publicly traded means traded on:
    (1) Any exchange registered with the U.S. Securities and Exchange 
Commission as a national securities exchange under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within a 
reasonable time period conforming with trade custom.
    (i) Over $10 billion company means any:
    (1) Bank holding company (other than a foreign banking 
organization) that is not a covered company and that has more than $10 
billion in total consolidated assets, as determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's FR Y-9C; or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters;
    (2) Savings and loan holding company that is not a covered company 
and that has more than $10 billion in total consolidated assets, as 
determined based on:
    (i) The average of the savings and loan holding company's total 
consolidated assets in the four most recent quarters as reported 
quarterly on the savings and loan holding company's relevant regulatory 
report; or
    (ii) The average of the savings and loan holding company's total 
consolidated assets in the most recent consecutive quarters as reported 
quarterly on the savings and loan holding company's relevant regulatory 
reports, if the savings and loan holding company has not filed such a 
report for

[[Page 659]]

each of the most recent four quarters; and
    (3) State member bank that has more than $10 billion in total 
consolidated assets, as determined based on:
    (i) The average of the state member bank's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
state member bank's Consolidated Report of Condition and Income (Call 
Report); or
    (ii) The average of the state member bank's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the state member bank's Call Report, if the state member bank has not 
filed a Call Report for each of the most recent four quarters.
    (4) Once a company or bank meets the requirements described in 
paragraphs (1), (2), or (3), the company shall remain an over $10 
billion company for purposes of this part unless and until the company 
has $10 billion or less in total consolidated assets as determined 
based on each of the bank holding company's four most recent FR Y-9Cs, 
the savings and loan holding company's four most recent relevant 
regulatory reports, or the bank's four most recent Call Reports.
    (5) Nothing in paragraph (2) shall preclude a company from becoming 
an over $10 billion company pursuant to paragraph (1).
    (6) A company or bank that has ceased to be an over $10 billion 
company under paragraphs (1), (2), or (3) is not subject to the 
requirements of this subpart beginning on the first day of the calendar 
quarter following the reporting date on which it ceased to be an over 
$10 billion company.
    (j) Scenarios are sets of economic and financial conditions used in 
the companies' stress tests, including baseline, adverse, and severely 
adverse.
    (k) State member bank has the same meaning as in section 208.2(g) 
of the Board's Regulation H (12 CFR 208.2(g)).
    (l) Stress test is a process to assess the potential impact on a 
covered company or an over $10 billion company of economic and 
financial conditions (scenarios) on the consolidated earnings, losses 
and capital of the company over a set planning horizon, taking into 
account the current condition of the company and the company's risks, 
exposures, strategies, and activities.


Sec.  252.143  Annual stress test.

    (a) In general.
    (1) Each covered company and each over $10 billion company shall 
complete an annual stress test of itself based on data of the covered 
company or the over $10 billion company as of September 30 of that 
calendar year, except for data related to the covered company's trading 
and counterparty exposures for which the Board will communicate the 
required as of date in the fourth quarter of each year.
    (2) The stress test shall be conducted in accordance with this 
section and the methodologies and practices described in section 
252.145.
    (b) Scenarios provided by the Board. In conducting its annual 
stress tests under this section, each covered company and each over $10 
billion company must use scenarios provided by the Board that reflect a 
minimum of three sets of economic and financial conditions, including a 
baseline, adverse, and severely adverse scenario. In advance of these 
stress tests, the Board will provide to all covered companies and over 
$10 billion companies a description of the baseline, adverse, and 
severely adverse scenarios that each covered company and each over $10 
billion company shall use to conduct its annual stress tests under this 
subpart.


Sec.  252.144  Additional stress test for covered companies.

    (a) Additional stress test requirement.
    (1) Each covered company must complete an additional stress test 
each year based on data of that company as of March 31 of that calendar 
year except for data related to the covered company's trading and 
counterparty exposures for which the Board will communicate the 
required as of date in the fourth quarter of each year.
    (2) The stress test shall be conducted in accordance with this 
section and the methodologies and practices described in section 
252.145.
    (b) Scenarios related to additional stress tests.
    (1) In general. Each company subject to a stress test under this 
section 252.144 shall develop and employ scenarios reflecting a minimum 
of three sets of economic and financial conditions, including a 
baseline, adverse, and severely adverse scenario, or such additional 
conditions as the Board determines appropriate, in conducting each 
stress test required under this paragraph.


Sec.  252.145  Methodologies and practices.

    (a) Potential impact on capital.
    (1) In conducting a stress test under section 252.143 and section 
252.144, each covered company and each over $10 billion company shall 
calculate how each of the following are impacted during each quarter of 
the stress test planning horizon, for each scenario:
    (i) Potential losses, pre-provision net revenues, allowance for 
loan losses, and future pro forma capital positions over the planning 
horizon; and
    (ii) Capital levels and capital ratios, including regulatory and 
any other capital ratios specified by the Board.
    (b) Controls and oversight of stress testing processes.
    (1) Each covered company and each over $10 billion company must 
establish and maintain a system of controls, oversight, and 
documentation, including policies and procedures, designed to ensure 
that the stress testing processes used by the covered company or over 
$10 billion company are effective in meeting the requirements in this 
subpart. These policies and procedures must, at a minimum, describe the 
covered company's or over $10 billion company's stress testing 
practices and methodologies, validation and use of stress tests 
results, and processes for updating the company's stress testing 
practices consistent with relevant supervisory guidance. Policies of 
covered companies must describe processes for scenario development for 
the additional stress test required under section 252.144.
    (2) The board of directors and senior management of each covered 
company and each over $10 billion company shall approve and annually 
review the controls, oversight, and documentation, including policies 
and procedures, of the covered company or the over $10 billion company 
established pursuant to this subpart.


Sec.  252.146  Required report to the Board of stress test results and 
related information.

    (a) Report required for stress tests. On or before January 5 of 
each year, each covered company and each over $10 billion company must 
report the results of the stress test required under section 252.143 to 
the Board in accordance with section 252.146(b). On or before July 5 of 
each year, each covered company must report the results of the stress 
test required under section 252.144 to the Board, in accordance with 
section 252.146(b).
    (b) Content of report for both annual and additional stress tests. 
Each covered company and each over $10 billion company must file a 
report in the manner and form established by the Board.
    (c) Confidential treatment of information submitted. The 
confidentiality of information submitted to the Board under this 
subpart and related materials shall be determined in accordance with 
applicable exemptions under the Freedom of Information Act (5 U.S.C. 
552(b)) and the Board's Rules Regarding Availability of Information (12 
CFR part 261).

[[Page 660]]

Sec.  252.147  Post-assessment actions by covered companies.

    (a) Each covered company and each over $10 billion company shall 
take the results of the stress tests conducted under section 252.143 
and, if applicable, section 252.144, into account in making changes, as 
appropriate, to the covered company's capital structure (including the 
level and composition of capital); its exposures, concentrations, and 
risk positions; any plans for recovery and resolution; and to improve 
overall risk management.


Sec.  252.148  Publication of results by covered companies and over $10 
billion companies.

    (a) Public disclosure of results required for stress tests of 
covered companies and of over $10 billion companies. Within 90 days of 
submitting a report for its required stress test under section 252.143 
and section 252.144, as applicable, a covered company and an over $10 
billion company shall disclose publicly a summary of the results of the 
stress tests required under section 252.143 and section 252.144, as 
applicable.
    (b) Information to be disclosed in the summary. The information 
disclosed by each covered company and each over $10 billion company, as 
applicable, shall, at a minimum, include--
    (1) A description of the types of risks being included in the 
stress test;
    (2) For each covered company, a high-level description of scenarios 
developed by the company under section 252.144(b), including key 
variables used (such as GDP, unemployment rate, housing prices);
    (3) A general description of the methodologies employed to estimate 
losses, pre-provision net revenue, allowance for loan losses, and 
changes in capital positions over the planning horizon; and
    (4) Aggregate losses, pre-provision net revenue, allowance for loan 
losses, net income, and pro forma capital levels and capital ratios 
(including regulatory and any other capital ratios specified by the 
Board) over the planning horizon, under each scenario.

Subpart H--Debt-to-Equity Limits for Certain Covered Companies


Sec.  252.151  Definitions.

    (a) Bank holding company is defined as in section 2 of the Bank 
Holding Company Act, as amended (12 U.S.C. 1841), and the Board's 
Regulation Y (12 CFR part 225).
    (b) Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    (c) Council means the Financial Stability Oversight Council 
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
    (d) Covered company means
    (1) Any company organized under the laws of the United States or 
any State that the Council has determined under section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and 
for which such determination is still in effect (nonbank covered 
company).
    (2) Any bank holding company (other than a foreign banking 
organization), that has $50 billion or more in total consolidated 
assets, as determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's Consolidated Financial Statements for Bank 
Holding Companies (the Federal Reserve's FR Y-9C (FR Y-9C)); or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters.
    (3) Once a covered company meets the requirements described in 
paragraph (2), the company shall remain a covered company for purposes 
of this part unless and until the company has less than $50 billion in 
total consolidated assets as determined based on each of the bank 
holding company's four most recent FR Y-9Cs.
    (4) Nothing in paragraph (3) shall preclude a company from becoming 
a covered company pursuant to paragraph (2).
    (5) A bank holding that has ceased to be a covered company under 
paragraph (3) is not subject to the requirements of this subpart 
beginning on the first day of the calendar quarter following the 
reporting date on which it ceased to be a covered company.
    (e) Debt-to-equity ratio means the ratio of a company's total 
liabilities to a company's total equity capital less goodwill.
    (f) Debt and equity have the same meaning as ``total liabilities'' 
and ``total equity capital'', respectively, as reported:
    (1) In the case of a nonbank financial company supervised by the 
Board, in a report of financial condition filed pursuant to section 
161(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(12 U.S.C. 5361(a)), or otherwise as required by the Board.
    (2) In the case of a bank holding company (other than a foreign 
banking organization), on the Federal Reserve's Form FR Y-9C 
(Consolidated Financial Statements for Bank Holding Companies) or any 
successor form.
    (g) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
    (h) Foreign banking organization means any foreign bank or company 
that is a bank holding company or is treated as a bank holding company 
under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)).
    (i) Publicly traded means traded on:
    (1) Any exchange registered with the U.S. Securities and Exchange 
Commission as a national securities exchange under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within a 
reasonable time period conforming with trade custom.


Sec.  252.152  Debt-to-equity ratio limitation.

    (a) Notice and maximum debt-to-equity ratio requirement. Beginning 
no later than 180 days after receiving written notice from the Council 
that it has made a determination, pursuant to section 165(j) of the 
Dodd-Frank Act that a covered company poses a grave threat to the 
financial stability of the United States (identified company) and that 
the imposition of a debt to equity requirement is necessary to mitigate 
such risk, an identified company shall achieve and maintain a debt to 
equity ratio of no more than 15-to-1.
    (b) Extension. The Board may, upon request by an identified 
company, extend the time period for compliance established under 
paragraph (a) for up to two additional periods of 90 days each, if the 
Board determines that the identified company has made good faith 
efforts to comply with the debt to equity ratio requirement and that 
each extension would be in the public interest.

[[Page 661]]

    (c) Termination. The debt to equity ratio requirement in paragraph 
(a) shall cease to apply to an identified company as of the date it 
receives notice from the Council of a determination, based on the 
factors described in subsections (a) and (b) of section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323), that the company no longer poses a 
grave threat to the financial stability of the United States and that 
the imposition of a debt to equity requirement is no longer necessary.

Subpart I--Early Remediation Framework


Sec.  252.161  Definitions.

    For purposes of this subpart:
    (a) Affiliate means, with respect to a company, any company that 
controls, is controlled by, or is under common control with, the 
company.
    (b) Bank holding company is defined as in section 2 of the Bank 
Holding Company Act, as amended (12 U.S.C. 1841), and the Board's 
Regulation Y (12 CFR part 225).
    (c) 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 Board determines to be in substance a 
distribution of capital.
    (d) Company means a corporation, partnership, limited liability 
company, depository institution, business trust, special purpose 
entity, association, or similar organization.
    (e) Control is defined as in section 2 of the Bank Holding Company 
Act, as amended (12 U.S.C. 1841), and the Board's Regulation Y (12 CFR 
part 225).
    (f) Council means the Financial Stability Oversight Council 
established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
    (g) Covered company means
    (1) Any company organized under the laws of the United States or 
any State that the Council has determined under section 113 of the 
Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and 
for which such determination is still in effect (nonbank covered 
company).
    (2) Any bank holding company (other than a foreign banking 
organization), that has $50 billion or more in total consolidated 
assets, as determined based on:
    (i) The average of the bank holding company's total consolidated 
assets in the four most recent quarters as reported quarterly on the 
bank holding company's Consolidated Financial Statements for Bank 
Holding Companies (the Federal Reserve's FR Y-9C (FR Y-9C)); or
    (ii) The average of the bank holding company's total consolidated 
assets in the most recent consecutive quarters as reported quarterly on 
the bank holding company's FR Y-9Cs, if the bank holding company has 
not filed an FR Y-9C for each of the most recent four quarters.
    (3) Once a covered company meets the requirements described in 
paragraph (2), the company shall remain a covered company for purposes 
of this part unless and until the company has less than $50 billion in 
total consolidated assets as determined based on each of the bank 
holding company's four most recent FR Y-9Cs.
    (4) Nothing in paragraph (3) shall preclude a company from becoming 
a covered company pursuant to paragraph (2).
    (5) A bank holding that has ceased to be a covered company under 
paragraph (3) is not subject to the requirements of this subpart 
beginning on the first day of the calendar quarter following the 
reporting date on which it ceased to be a covered company.
    (h) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act, 12 U.S.C. 1813(c).
    (i) Foreign banking organization means any foreign bank or company 
that is a bank holding company or is treated as a bank holding company 
under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)).
    (j) Net income means:
    (1) For a bank holding company (other than a foreign banking 
organization), the net income as reported on line 14 schedule HI of the 
company's FR Y-9C report.
    (2) For a nonbank covered company that is publicly traded, the net 
income as reported on the company's quarterly financial statements.
    (3) For a nonbank covered company that is not publicly traded, net 
income as reported on the company's most recent audited financial 
statement.
    (k) Planning horizon means the period of time over which stress 
test projections must extend. The planning horizon cannot be less than 
nine quarters.
    (l) Publicly traded means traded on:
    (1) Any exchange registered with the U.S. Securities and Exchange 
Commission as a national securities exchange under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within a 
reasonable time period conforming with trade custom.
    (m) Risk-weighted assets means total weighted risk assets, as 
calculated in accordance with 12 CFR part 225, appendix A or 12 CFR 
part 225, appendix G, as applicable, or any successor regulation 
thereto.
    (n) Senior executive officer of a covered company means a person 
who holds the title or, without regard to title, salary, or 
compensation, performs the function of one or more of the following 
positions: President, chief executive officer, executive chairman, 
chief operating officer, chief financial officer, chief investment 
officer, chief legal officer, chief lending officer, chief risk 
officer, or head of a major business line.
    (o) Severely adverse scenario has the same meaning as defined in 
the context of Subpart F of this part.
    (p) Tier 1 capital means tier 1 capital as defined in 12 CFR part 
225, appendix A or 12 CFR part 225, appendix G, as applicable, or any 
successor regulation thereto.
    (q) Tier 1 common risk-based capital ratio means the ratio of 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, to risk-weighted assets.
    (r) Tier 1 leverage ratio means the ratio of tier 1 capital to 
total assets as defined in 12 CFR part 225 appendix D, or any successor 
regulation thereto.
    (s) Tier 1 risk-based capital ratio means the ratio of tier 1 
capital to risk-weighted assets, as calculated in accordance with 12 
CFR part 225, appendix A or 12 CFR part 225, appendix G, as applicable, 
or any successor regulation thereto.
    (t) Total capital means qualifying total capital as defined in 12 
CFR part 225, appendix A or total qualifying capital as defined in 12 
CFR part 225, appendix G, as applicable, or any successor regulation 
thereto.

[[Page 662]]

    (u) Total assets means:
    (1) For a bank holding company (other than a foreign banking 
organization), total consolidated assets as reported quarterly on the 
bank holding company's FR Y-9C.
    (2) For a nonbank covered company that is publicly traded, total 
consolidated assets as reported nonbank covered company's quarterly 
financial statements.
    (3) For a nonbank covered company that is not publicly traded, 
total consolidated assets as determined based on the company's audited 
financial statements.
    (v) Total risk-based capital ratio means the ratio of total capital 
to risk-weighted assets, as calculated in accordance with 12 CFR part 
225, appendix A or 12 CFR part 225, appendix G, as applicable, or any 
successor regulation thereto.


Sec.  252.162  Remediation Actions.

    (a) Level 1 remediation (heightened supervisory review). Under 
level 1 remediation, the Board shall conduct a targeted supervisory 
review of a covered company to evaluate whether the covered company is 
experiencing financial distress or material risk management weaknesses 
such that further decline of the covered company is probable and that 
the covered company should be subject to initial remediation (level 2 
remediation).
    (1) The review required by this section 252.162(a) must be 
completed within 30 days of the company's entrance into level one 
remediation.
    (2) If, upon completion of the review, the Board determines that 
the covered company is experiencing financial distress or material risk 
management weaknesses such that further decline of the covered company 
is probable, the covered company shall be subject to initial 
remediation (level 2 remediation).
    (b) Level 2 remediation (initial remediation). A covered company 
subject to level 2 remediation:
    (1) Shall not make capital distributions during any calendar 
quarter in an amount that exceeds 50 percent of the average of the 
covered company's net income in the preceding two calendar quarters.
    (2) Shall not:
    (i) Permit its daily average total assets during any calendar 
quarter to exceed its daily average total assets during the preceding 
calendar quarter by more than 5 percent; or
    (ii) Permit its daily average total assets during any calendar year 
to exceed its daily average total assets during the preceding calendar 
year by more than 5 percent; or
    (iii) Permit its daily average risk-weighted assets during any 
calendar quarter to exceed its daily average risk-weighted assets 
during the preceding calendar quarter by more than 5 percent;
    (iv) Permit its daily average risk-weighted assets during any 
calendar year to exceed its daily average risk-weighted assets during 
the preceding calendar year by more than 5 percent;
    (v) Directly or indirectly acquire any controlling interest in any 
company (including an insured depository institution, establish or 
acquire any office or other place of business, or engage in any new 
line of business), without the prior approval the Board.
    (3) Shall be required to enter into a non-public memorandum of 
understanding, or other enforcement action acceptable to the Board.
    (4) In addition, may be subject to the following additional 
limitations imposed by the Board:
    (i) Limitations or conditions on the conduct or activities of the 
company or any of its affiliates that the Board finds to be appropriate 
and consistent with the purposes of Title I of the Dodd-Frank Act.
    (c) Level 3 remediation (recovery). A covered company subject to 
level 3 remediation:
    (1) May not make any capital distribution.
    (2) Shall not:
    (i) Permit its average total assets during any calendar quarter to 
exceed its average total assets during the preceding calendar quarter; 
or
    (ii) Permit its average total risk-weighted assets during any 
calendar quarter to exceed its average total risk-weighted assets 
during the preceding calendar quarter; or
    (iii) Directly or indirectly acquire any interest in any company 
(including any insured depository institution), establish or acquire 
any office (or other place of business), or engage in any new line of 
business;
    (3) Must enter into a written agreement or other form of 
enforcement action with the Board that specifies that the covered 
company must raise additional capital and take other appropriate 
actions to improve its capital adequacy.
    (i) If a covered company fails to satisfy the requirements of such 
a written agreement, the covered company may be required to divest 
assets identified by the Board as contributing to the covered company's 
financial decline or posing substantial risk of contributing to further 
financial decline of the covered company.
    (4) Shall not increase the compensation of, or pay any bonus to, 
its senior executive officers or directors.
    (5) May also be required by the Board to:
    (i) Conduct a new election for the institution's board of 
directors;
    (ii) Dismiss from office any director or senior executive officer 
of the covered company who had held office for more than 180 days 
immediately prior to receipt of notice pursuant to section 252.164 that 
the covered company is subject to level 3 remediation; or
    (iii) Employ qualified senior executive officers approved by the 
Board.
    (6) The Board may place restrictions on a covered company engaging 
in transactions with its affiliates if it is subject to level 3 
remediation.
    (d) Level 4 remediation (resolution assessment). The Board shall 
consider whether the covered company poses a risk to the stability of 
the U.S. financial system. If the Board determines, based on the 
covered company's financial decline and the risk posed to U.S. 
financial stability by the failure of the covered company or other 
relevant factors, that the covered company should be placed into 
receivership under Title II of the Dodd-Frank Act, the Board shall make 
a written recommendation that the covered company be placed in 
resolution under Title II of the Dodd-Frank Act.


Sec.  252.163  Remediation triggering events.

    (a) Capital and leverage.
    (1) Level 1 remediation triggering events. A covered company that 
has a total risk-based capital ratio of 10.0 percent or greater, a tier 
1 risk-based capital ratio of 6.0 percent or greater, and a tier 1 
leverage ratio of 5.0 percent or greater, is subject to level 1 
remediation (heightened supervisory review) if the Board determines 
that the covered company's capital structure, capital planning 
processes, or the amount of capital it holds is not commensurate with 
the level and nature of the risks to which it is exposed.
    (2) Level 2 remediation triggering events. A covered company is 
subject to level 2 remediation (initial remediation) if it has a total 
risk-based capital ratio of less than 10.0 percent and greater than or 
equal to 8.0 percent, a tier 1 risk-based capital ratio of less than 
6.0 percent and greater than or equal to 4.0 percent or a tier 1 
leverage ratio of less than 5.0 percent and greater than or equal to 
4.0 percent.
    (3) Level 3 remediation triggering events. A covered company is 
subject to level 3 remediation (recovery) if:
    (i) For two complete consecutive quarters, the covered company has 
a

[[Page 663]]

total risk-based capital ratio of less than 10.0 percent, a tier 1 
risk-based capital ratio of less than 6.0 percent or a tier 1 leverage 
ratio of less than 5.0 percent; or
    (ii) The covered company has a total risk-based capital ratio of 
less than 8.0 percent and greater than or equal to 6.0 percent, a tier 
1 risk-based capital ratio of less than 4.0 percent and greater than or 
equal to 3.0 percent or a tier 1 leverage ratio of less than 4.0 
percent and greater than or equal to 3.0 percent.
    (iii) Level 4 remediation triggering events. A covered company is 
subject to level 4 remediation (resolution assessment) if it has a 
total risk-based capital ratio of less than 6.0 percent, a tier 1 risk-
based capital ratio of less than 3.0 percent or a tier 1 leverage ratio 
of less than 3.0 percent.
    (b) Stress Tests.
    (1) Level 1 remedial triggering events. A covered company is 
subject to level 1 remediation if it is not in compliance with any 
regulations adopted by the Board relating to capital plans pursuant to 
12 CFR 225.8 and stress tests pursuant to Subparts F and G of this 
part.
    (2) Level 2 remediation triggering events. A covered company is 
subject to level 2 remediation (initial remediation) if its results 
under the severely adverse scenario in any quarter of the planning 
horizon produced pursuant to a stress test executed pursuant to Subpart 
F of this part reflect a tier 1 common risk-based capital ratio of less 
than 5.0 percent and greater than or equal to 3.0 percent.
    (3) Level 3 remediation triggering events. A covered company is 
subject to level 3 remediation (recovery) if its results under the 
severely adverse scenario in any quarter of the planning horizon 
produced pursuant to a stress test executed pursuant to Subpart F of 
this part reflect a tier 1 common risk-based capital ratio of less than 
3.0 percent.
    (c) Risk Management.
    (1) Level 1 remedial triggering events. A covered company is 
subject to level 1 remediation if it has manifested signs of weakness 
in meeting the enhanced risk management and risk committee requirements 
under Subpart E of this part.
    (2) Level 2 remediation triggering events. A covered company is 
subject to level 2 remediation if it has demonstrated multiple 
deficiencies in meeting the enhanced risk management or risk committee 
requirements under Subpart E of this part.
    (3) Level 3 remediation triggering events. A covered company is 
subject to level 3 remediation if it is in substantial noncompliance 
with the enhanced risk management and risk committee requirements under 
Subpart E of this part.
    (d) Liquidity.
    (1) Level 1 remedial triggering events. A covered company is 
subject to level 1 remediation if it has manifested signs of weakness 
in meeting the enhanced liquidity risk management requirements under 
Subpart C.
    (2) Level 2 remediation triggering events. A covered company is 
subject to level 2 remediation if it has demonstrated multiple 
deficiencies in meeting the enhanced liquidity risk management 
requirements under Subpart C.
    (3) Level 3 remediation triggering events. A covered company is 
subject to level 3 remediation if it is in substantial noncompliance 
with the enhanced liquidity risk management requirements under Subpart 
C.
    (e) Market indicators.
    (1) Definitions.
    (i) Market indicator means an indicator based on publicly available 
market data that is identified in the annual indicator list, as 
specified by the Board.
    (ii) Indicator list means a list of the market indicators and 
market indicator thresholds that will be used during a defined period, 
as specified by the Board.
    (iii) Breach period means the number of consecutive business days, 
as specified by the Board, over which the median value of a market 
indicator must exceed the market indicator threshold to trigger 
remediation.
    (iv) Market indicator threshold means, with respect to each market 
indicator described on the indicator list, the level, as specified by 
the Board, indicating that a covered company is experiencing financial 
distress or material risk management weaknesses such that further 
decline of the covered company is probable based on historic measures 
of data.
    (2) The Board shall publish for comment annually, or less 
frequently as appropriate, the indicator list, market indicator 
thresholds, and breach period that will be used during a twelve-month 
period.
    (3) A covered company shall be subject to level 1 remediation upon 
receipt of a notice indicating that the Board has found that, with 
respect to the covered company, any single market indicator has 
exceeded the market indicator threshold for the breach period.
    (f) Measurement and timing of remediation action events.
    (1) Capital. For the purposes of this subpart, the capital of a 
covered company is deemed to have been calculated as of the most recent 
of the following:
    (i) The FR Y-9C report;
    (ii) Calculations of capital by the covered company submitted to 
the Board, pursuant to a Board request to the covered company to 
calculate its ratios;
    (iii) A final inspection report is delivered to the covered company 
that includes capital ratios calculated more recently than the most 
recent FR Y-9C report submitted by the covered company to the Board.
    (2) Stress tests. For purposes of this paragraph, the ratios 
calculated under the supervisory stress test apply as of the date the 
Board's report of the test results is transmitted to the covered 
company pursuant to section 252.135(b) of Subpart F.


Sec.  252.164  Notice and remedies.

    (a) Notice to covered company of remediation action event. If the 
Board ascertains that a remediation triggering event set forth in 
section 252.163 has occurred with respect to a covered company, the 
Board shall notify the covered company of the event and the remediation 
action under section 252.162 applicable to the covered company as a 
result of the event.
    (b) Notification of Change in Status. If a covered company becomes 
aware of (i) one or more triggering events set forth in section 
252.163; or (ii) a change in condition that it believes should result 
in a change in the remediation provisions to which it is subject, such 
covered company must provide notice to the Board within 5 business 
days, identifying the nature of the triggering event or change in 
circumstances.
    (c) Termination of remediation action. A covered company subject to 
a remediation action under this subpart shall remain subject to the 
remediation action until the Board provides written notice to the 
covered company that its financial condition or risk management no 
longer warrants application of the requirement.

    By order of the Board of Governors of the Federal Reserve 
System, December 22, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-33364 Filed 1-4-12; 8:45 am]
BILLING CODE 6210-01-P