[Federal Register Volume 79, Number 40 (Friday, February 28, 2014)]
[Rules and Regulations]
[Pages 11300-11317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-04331]


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DEPARTMENT OF THE TREASURY

Comptroller of the Currency

12 CFR Parts 1, 4, 5, 16, 23, 24, 28, 32, 34, 46, 116, 143, 145, 
159, 160, 161, 163 and 192

[Docket ID OCC-2014-0004]
RIN 1557-AD73


Basel III Conforming Amendments Related to Cross-References, 
Subordinated Debt and Limits Based on Regulatory Capital

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Interim final rule and request for comments.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is making 
technical and conforming amendments to its regulations governing 
national banks and Federal savings associations to make those 
regulations consistent with the recently adopted Basel III Capital 
Framework. As part of these technical amendments, the OCC is revising 
and clarifying its regulations governing subordinated debt applicable 
to national banks and Federal savings associations.

DATES: This interim final rule is effective March 31, 2014. Comments 
must be received by March 31, 2014.

ADDRESSES: Because paper mail in the Washington, DC area and at the OCC 
is subject to delay, commenters are encouraged to submit comments 
through the Federal eRulemaking Portal or email, if possible. Please 
use the title ``Basel III Conforming Amendments Related to Cross-
References, Subordinated Debt and Limits Based on Regulatory Capital'' 
to facilitate the organization and distribution of the comments. You 
may submit comments by any of the following methods:
     Federal eRulemaking Portal--``regulations.gov'': Go to 
http://www.regulations.gov. Enter ``Docket ID OCC-2014-0004'' in the 
Search Box and click ``Search.'' Results can be filtered using the 
filtering tools on the left side of the screen. Click on ``Comment 
Now'' to submit public comments.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW., Suite 
3E-218, Mail Stop 9W-11, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, 
Mail Stop 9W-11, Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2014-0004'' in your comment. In general, OCC will enter 
all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov. Enter ``Docket ID OCC-2014-0004'' in the Search 
box and click ``Search.'' Comments can be filtered by Agency using the 
filtering tools on the left side of the screen.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
viewing public comments, viewing other supporting and related 
materials, and viewing the docket after the close of the comment 
period.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 649-
6700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.

FOR FURTHER INFORMATION CONTACT: Jean Campbell, Senior Attorney, 
Legislative and Regulatory Activities Division, (202) 649-5490; and 
Patricia D. Goings, Senior Licensing Analyst, or Patricia Roberts, 
Senior Licensing Analyst, Licensing Division, (202) 649-6260.

SUPPLEMENTARY INFORMATION: 

[[Page 11301]]

I. Background

A. Basel III Capital Framework

    On October 11, 2013, the OCC published in the Federal Register the 
Basel III final rule (Basel III Capital Framework),\1\ which revised 
the OCC's regulatory capital rules for national banks and Federal 
savings associations. The Basel III Capital Framework revised the 
capital framework at 12 CFR part 3 applicable to national banks, which 
included adding a new common equity tier 1 ratio requirement, revising 
the definitions of tier 1 and tier 2 capital, adopting a new 
standardized approach for certain banks, revising the advanced 
approaches, revising the market risk requirements, and integrating 
Federal savings associations into part 3. In addition, the Basel III 
Capital Framework amended the prompt corrective action rules at part 6 
and integrated Federal savings associations into part 6.
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    \1\ See 78 FR 62018 (Oct. 11, 2013).
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1. Need for Conforming and Technical Amendments
    As part of the process of implementing the Basel III Capital 
Framework, the OCC restructured the regulatory capital rules in part 3, 
which included redesignation of the risk-based capital rules, market 
risk requirements, and the advanced approaches, codified at appendixes 
A, B and C, as new subparts to part 3. Accordingly, this interim final 
rule makes technical, clarifying, and conforming amendments to the 
OCC's rules applicable to national banks and Federal savings 
associations, by providing new cross-references to parts 3 and 6, where 
necessary, and by deleting obsolete references to tier 3 capital, which 
was eliminated in the market risk rule.\2\ In addition, this interim 
final rule makes various substantive and technical changes to the 
subordinated debt rules to clarify the applicable requirements, 
processes and procedures. Finally, the OCC notes that one consequence 
of revising the cross-references to the definitions of tier 1 and tier 
2 capital in the new Basel III Capital Framework is that new 
definitions of tier 1 and tier 2 capital will be applicable with 
respect to the calculation of various statutory and regulatory limits 
in other rules that referenced the risk-based capital requirements in 
part 3. As part of the revisions to those cross-references, the OCC has 
looked at the effect that the changes in the risk-based capital would 
have on numerical limits in other regulations that are based on 
regulatory capital. As discussed in greater detail below, the OCC 
believes that the new definitions of capital in the Basel III Capital 
Framework are appropriate measures for the calculation of other various 
statutory and regulatory limits. However, the OCC is aware of the 
possibility of indirect effects of these regulatory changes and 
requests comment on this aspect of the new definition of capital.
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    \2\ See 77 FR 53060, 53069 (Aug. 30, 2012).
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2. Timing of Basel III Capital Framework Changes
    The mandatory compliance date for the Basel III Capital Framework 
is January 1, 2014, for advanced approaches national banks and Federal 
savings associations,\3\ and January 1, 2015, for all other national 
banks and Federal savings associations. In order to accommodate these 
different compliance dates, the OCC has retained the existing 
regulatory capital rules for calendar year 2014 for non-advanced 
approaches national banks and Federal savings associations. Therefore, 
the existing risk-based capital requirements and the market risk 
requirements will stay in place as 12 CFR part 3, appendixes A and B 
for non-advanced approaches national banks and 12 CFR part 167 for non-
advanced approaches Federal savings associations, until January 1, 
2015. Thereafter, the OCC may initiate a rulemaking to remove then-
obsolete provisions of the rule.
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    \3\ The Basel III Capital Framework, at 12 CFR 3.100(b)(1), 
defines an advanced approaches national bank or Federal savings 
association to mean a national bank or Federal savings association 
that:
    1. Has consolidated total assets, as reported on its most recent 
year-end Consolidated Reports of Condition and Income (Call Report) 
equal to $250 billion or more;
    2. Has consolidated total on-balance sheet foreign exposure on 
its most recent year-end Call Report equal to $10 billion or more 
(where total on-balance sheet foreign exposure equals total cross-
border claims less claims with a head office or guarantor located in 
another country plus redistributed guaranteed amounts to the country 
of head office or guarantor plus local country claims on local 
residents plus revaluation gains on foreign exchange and derivative 
products, calculated in accordance with the Federal Financial 
Institutions Examination Council (FFIEC) 009 Country Exposure 
Report);
    3. Is a subsidiary of a depository institution that uses the 
advanced approaches pursuant to subpart E of 12 CFR part 3 (OCC), 12 
CFR part 217 (Board of Governors of the Federal Reserve System) 
(Board), or 12 CFR part 325 (Federal Deposit Insurance Corporation) 
(FDIC) to calculate its total risk-weighted assets;
    4. Is a subsidiary of a bank holding company or savings and loan 
holding company that uses the advanced approaches pursuant to 12 CFR 
part 217 to calculate its total risk-weighted assets; or
    5. Elects to use subpart E of 12 CFR part 3 to calculate its 
total risk-weighted assets.
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II. Description of the Interim Final Rule

A. Technical and Conforming Amendments

    The Basel III Capital Framework includes major revisions to the 
capital adequacy rules applicable to national banks and Federal savings 
associations. Apart from its role in establishing minimum regulatory 
capital requirements for the purposes of capital adequacy, regulatory 
capital historically also has served as a useful measure for numerous 
statutory and regulatory limits used as supervisory tools for safety 
and soundness purposes. Examples of such measures are the legal lending 
limits (12 CFR part 32) and limits on investment securities (12 CFR 
part 1).
    While conforming amendments typically are straightforward, the 
Basel III Capital Framework introduced an additional level of 
complexity. As described above, the Basel III Capital Framework 
provided different mandatory compliance dates for advanced approaches 
national banks and Federal savings associations and non-advanced 
approaches national banks and Federal savings associations. As a 
result, from January 1, 2014, through December 31, 2014, the current 
regulatory capital rules at 12 CFR part 3, appendixes A and B and 12 
CFR part 167 will apply to non-advanced approaches national banks and 
Federal savings associations, respectively. Accordingly, this interim 
final rule amends the OCC's rules to replace cross-references to the 
current regulatory capital rules with cross-references to both the 
Basel III final rule and the current regulatory capital rules, where 
appropriate.
    The Basel III Capital Framework also integrated Federal savings 
associations into part 6, ``Prompt Corrective Action.'' Accordingly, 
this interim final rule replaces cross-references in various 
regulations to part 165, the Prompt Corrective Action rule formerly 
applicable to Federal savings associations, with cross-references to 
part 6, which applies to both national banks and Federal savings 
associations effective January 1, 2014. Finally, this interim final 
rule makes other non-substantive technical corrections.

B. Subordinated Debt

1. Basel III Requirements for Tier 2 Capital
    This interim final rule clarifies and revises the OCC's rules 
governing subordinated debt to make those rules consistent with the 
Basel III Capital Framework. Unlike the current

[[Page 11302]]

regulatory capital rules, the Basel III Capital Framework does not 
identify specific types of instruments that are included in regulatory 
capital. Instead, the Basel III Capital Framework lists criteria that 
an instrument must satisfy to be included in regulatory capital. While 
the OCC acknowledges that a national bank or Federal savings 
association may want to issue subordinated debt for liquidity or 
reasons other than raising regulatory capital, the OCC expects that 
most subordinated debt generally would qualify as tier 2 capital. A 
list of the criteria for an instrument to qualify as tier 2 capital can 
be found at 12 CFR 3.20(d):
     The instrument is issued and paid-in;
     The instrument is subordinated to depositors and general 
creditors of the national bank or Federal savings association;
     The instrument is not secured, not covered by a guarantee 
of the national bank or Federal savings association or of an affiliate 
of the national bank or Federal savings association, and not subject to 
any other arrangement that legally or economically enhances the 
seniority of the instrument in relation to more senior claims;
     The instrument has a minimum original maturity of at least 
five years. At the beginning of each of the last five years of the life 
of the instrument, the amount that is eligible to be included in tier 2 
capital is reduced by 20 percent of the original amount of the 
instrument (net of redemptions) and is excluded from regulatory capital 
when the remaining maturity is less than one year. In addition, the 
instrument must not have any terms or features that require, or create 
significant incentives for, the national bank or Federal savings 
association to redeem the instrument prior to maturity; and
     The instrument, by its terms, may be called by the 
national bank or Federal savings association only after a minimum of 
five years following issuance, except that the terms of the instrument 
may allow it to be called sooner upon the occurrence of an event that 
would preclude the instrument from being included in tier 2 capital, a 
tax event, or if the issuing entity is required to register as an 
investment company pursuant to the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.). In addition, with respect to any call option:
    [cir] The national bank or Federal savings association must receive 
the prior approval of the OCC to exercise a call option on the 
instrument.
    [cir] The national bank or Federal savings association does not 
create at issuance, through action or communication, an expectation the 
call option will be exercised.
    [cir] Prior to exercising the call option, or immediately 
thereafter, the national bank or Federal savings association must 
either: Replace any amount called with an equivalent amount of an 
instrument that meets the criteria for regulatory capital under Sec.  
3.20; or demonstrate to the satisfaction of the OCC that following 
redemption, the national bank or Federal savings association would 
continue to hold an amount of capital that is commensurate with its 
risk.
     The holder of the instrument must have no contractual 
right to accelerate payment of principal or interest on the instrument, 
except in the event of a receivership, insolvency, liquidation, or 
similar proceeding of the national bank or Federal savings association.
     The instrument has no credit-sensitive feature, such as a 
dividend or interest rate that is reset periodically based in whole or 
in part on the national bank's or Federal savings association's credit 
standing, but may have a dividend rate that is adjusted periodically 
independent of the national bank's or Federal savings association's 
credit standing, in relation to general market interest rates or 
similar adjustments.
     The national bank or Federal savings association, or an 
entity that the national bank or Federal savings association controls, 
has not purchased and has not directly or indirectly funded the 
purchase of the instrument.
     If the instrument is not issued directly by the national 
bank or Federal savings association or by a subsidiary of the national 
bank or Federal savings association that is an operating entity, the 
only asset of the issuing entity is its investment in the capital of 
the national bank or Federal savings association, and proceeds must be 
immediately available without limitation to the national bank or 
Federal savings association or the national bank's or Federal savings 
association's top-tier holding company in a form that meets or exceeds 
all the other criteria for tier 2 capital instruments under this 
section.
     Redemption of the instrument prior to maturity or 
repurchase requires the prior approval of the OCC.
     For an advanced approaches national bank or Federal 
savings association, the governing agreement, offering circular, or 
prospectus of an instrument issued after the date on which the advanced 
approaches national bank or Federal savings association becomes subject 
to 12 CFR part 3 under Sec.  3.1(f) must disclose that the holders of 
the instrument may be fully subordinated to interests held by the U.S. 
government in the event that the national bank or Federal savings 
association enters into a receivership, insolvency, liquidation, or 
similar proceeding.
2. Integration of Subordinated Debt Rules for National Banks and 
Federal Savings Associations
    The OCC currently has separate rules for subordinated debt issued 
by national banks and Federal savings associations (12 CFR 5.47 and 12 
CFR 163.81, respectively). In order to minimize confusion, this interim 
final rule does not integrate those rules. Instead, integration of 
those rules into a single subordinated debt rule applicable to both 
national banks and Federal savings associations may occur as part of a 
future rulemaking.
3. Subordinated Debt for National Banks
i. Summary of Current Sec.  5.47
    A national bank's issuance and prepayment of subordinated debt and 
inclusion of subordinated debt in tier 2 capital is governed by 12 CFR 
5.47, Subordinated debt as capital. Section 5.47 provides procedural 
and substantive requirements applicable to subordinated debt. Under 
paragraph (b) of the current rule, an eligible national bank \4\ is 
required to obtain prior OCC approval to issue or prepay subordinated 
debt only if: (1) The bank will not be an eligible bank after the 
transaction; (2) the OCC has previously notified the bank that prior 
approval is required; or (3) prior approval is required by law. All 
other national banks must receive prior OCC approval to issue or prepay 
subordinated debt. The major provisions of Sec.  5.47 are summarized 
below.
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    \4\ An eligible bank is defined in 12 CFR 5.3 to mean a national 
bank that is ``well capitalized'' as defined in 12 CFR 6.4(b)(1); 
has a composite rating of 1 or 2 under the Uniform Financial 
Institutions Rating System; has a Community Reinvestment Act rating 
of ``Outstanding'' or ``Satisfactory''; and is not subject to a 
cease and desist order, consent order, formal written agreement, or 
Prompt Corrective Action directive or, if subject to any such order, 
agreement or directive, is informed in writing by the OCC that the 
bank may be treated as an ``eligible bank'' for purposes of part 5.
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    Paragraph (e) provides that in order to qualify for inclusion in 
tier 2 capital, subordinated debt must meet the requirements in the 
OCC's regulatory capital rules (12 CFR part 3, appendix A, section 
2(b)(4)) and must comply with the ``OCC Guidelines for Subordinated 
Debt'' in the OCC's Licensing Manual.

[[Page 11303]]

    The regulatory capital rules in 12 CFR part 3, appendix A, limit 
the amount of subordinated debt that a bank may include in tier 2 
capital, provide that in each of the last five years of the life of the 
instrument the amount eligible to be included in tier 2 capital is 
reduced by 20 percent of the original amount of that instrument, and 
require that subordinated debt included in tier 2 capital must meet the 
requirements of 12 CFR 3.100(f)(1) (2013).\5\ By cross-reference, Sec.  
3.100(f)(1) (2013) further requires that issues of subordinated debt 
must: (1) Have original weighted average maturities of at least five 
years; (2) be subordinated to the claims of depositors; (3) state on 
the face of the instrument that it is not a deposit and is not insured 
by the FDIC; (4) be unsecured; (5) be ineligible as collateral for a 
loan by the issuing bank; (6) provide that once any scheduled payments 
of principal begin, all scheduled payments shall be made at least 
annually and the amount repaid in each year shall be no less than in 
the prior year; and (7) provide that no prepayment (including payment 
pursuant to an acceleration clause or redemption prior to maturity) 
shall be made without prior OCC approval unless the bank remains an 
eligible bank after the prepayment.
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    \5\ The Basel III Capital Framework redesignated 12 CFR 3.100 as 
12 CFR 3.701 effective January 1, 2014. Therefore, to avoid 
confusion, this interim final rule refers to 12 CFR 3.100 as 12 CFR 
3.100 (2013).
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    Paragraphs (f), (g), and (i) generally address automatic approval, 
information requested to be included in the after-the-fact notice, and 
compliance with securities offering disclosure rules.
ii. Structural Changes to Sec.  5.47 To Comply With the Basel III 
Capital Framework
    In order to accommodate the different compliance dates for an 
advanced approaches bank and a non-advanced approaches bank, this 
interim final rule retains the current provisions of Sec.  5.47 and 
makes amendments to clarify that the current rules will continue to 
apply to a non-advanced approaches bank prior to January 1, 2015. In 
addition, this interim final rule adds new paragraphs (j) through (p) 
that are based on the Basel III Capital Framework and provides that 
those paragraphs will be applicable to an advanced approaches bank 
beginning on the effective date of this interim final rule and to a 
non-advanced approaches bank on January 1, 2015. The OCC notes that 
these changes will apply to an advanced approaches bank when it files 
the Call Report for the first quarter of 2014. The OCC further notes 
that while paragraphs (b) through (i) and paragraphs (j) through (p) 
seem duplicative, this structure is intended to be temporary. Section 
5.47 has been designed so that the paragraph numbering in the current 
rules remains unchanged until January 1, 2015. After January 1, 2015, 
when paragraphs (b) through (i) are no longer necessary, the OCC 
intends to delete them, along with all references to advanced 
approaches banks and non-advanced approaches banks.
    Because the Basel III Capital Framework requires prior OCC approval 
for prepayment of subordinated debt, the interim final rule reorganizes 
paragraphs (j) through (p) by transaction type. As described in more 
detail below, the interim final rule retains current procedures for the 
issuance of subordinated debt, including the distinction between 
eligible and non-eligible banks, while the OCC adds new procedures for 
prepayment of subordinated debt included in tier 2 capital and 
prepayment in the form of a call option.
iii. Description of Changes to Sec.  5.47
    As mentioned above, paragraphs (b) through (j) represent the 
current version of Sec.  5.47, which needs to be retained until January 
1, 2015. With respect to those provisions, the OCC makes minimal 
technical and clarifying changes.
    A new paragraph (a)(2), ``Applicability,'' explains which banks are 
subject to which set of rules, and when they are subject to the rules. 
Specifically, an advanced approaches bank will be required to use the 
new set of rules reflecting the new Basel III Capital Framework for 
tier 2 capital beginning as of the effective date of this interim final 
rule. Non-advanced approaches banks (generally speaking, standardized 
approach banks) will not be subject to the new rules until January 1, 
2015. In the meantime, standardized approach banks will continue to use 
the current rules (in paragraphs (b) through (i)).
    Consistent with the Basel III Capital Framework, an advanced 
approaches bank is defined as a national bank that is subject to 12 CFR 
part 3, subpart E; a non-advanced approaches bank is defined as a 
national bank that is not subject to 12 CFR part 3, subpart E.
    Based on a review of Sec. Sec.  5.47 and 3.100(f) (2013), the OCC 
believes the current rules will benefit from clarifications regarding 
what, if any, requirements apply to subordinated debt that is not 
included in tier 2 capital. While Sec.  5.47 itself does not 
specifically apply any requirements to such subordinated debt, through 
Sec.  3.100(f) (2013) the OCC's longstanding practice has been to apply 
those requirements to all subordinated debt. From a safety and 
soundness perspective, the OCC believes that it is important to apply 
certain basic requirements to all subordinated debt, regardless of 
whether it is included in tier 2 capital. Accordingly, new paragraph 
(l)(1) clarifies the list of requirements applicable to all 
subordinated debt. The interim final rule carries over the requirements 
in Sec.  3.100(f) (2013) into paragraph (l)(1), with one minor change. 
Section 3.100(f) (2013) requires that subordinated debt must have an 
``original weighted average maturity'' of at least five years. In order 
to be consistent with the Basel III Capital Framework, this interim 
final rule, in paragraph (l)(1)(i), adopts the phrase ``minimum 
original maturity'' of at least five years.\6\ This interim final rule 
carries over in paragraph (l)(1)(vi) the requirement in Sec.  
3.100(f)(1)(v) (2013) that once any scheduled payments of principal 
begin, all scheduled payments shall be made at least annually and the 
amount repaid in each year shall be no less than in the prior year. 
This requirement appears to have been intended to ensure that an 
instrument that counted as secondary capital would have a sufficient 
degree of permanence and predictability to justify including it in 
secondary capital.\7\ The OCC is considering whether to delete this 
requirement as no longer necessary from a supervisory perspective.
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    \6\ We note that for amortizing bonds (or bonds with a sinking 
fund) a minimum original maturity of five years could be calculated 
as an original weighted average maturity of at least five years. For 
most bonds, the weighted average life is simply the time until 
maturity. For amortizing bonds, however, weighted average maturity 
must be calculated, with each repayment time weighted by the 
repayment amount. First, weighted payments must be determined by 
multiplying each principal repayment by the number of each payment 
period. For example, if a bond has an outstanding principal of $100, 
and $10 was repaid in the first year, $20 in the second year, $30 in 
the third year, and the remaining $40 in the fourth year, then 
multiplying each payment period's number by its repayment amount 
results in $10 ($10 x 1), $40 ($20 x 2), $90 ($30 x 3), and $160 
($40 x 4). Next the weighted payments are added. In this example the 
weighted total principal repayments equal $300. Finally, the 
weighted total principal repayment is divided by the outstanding 
principal or face value of the bond. In this example, $300 is 
divided by $100, and the weighted average maturity of the amortizing 
bond is three years.
    \7\ See 46 FR 32498 (June 23, 1981). This requirement was 
included as part of a proposal by the FFIEC to promote a uniform 
definition of capital for use by the Federal bank supervisory 
agencies (Board, FDIC and OCC).
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    Question 1: The OCC invites comment on whether this payment 
requirement designed to ensure that a subordinated

[[Page 11304]]

debt instrument has a sufficient degree of permanence and 
predictability is necessary, especially in light of the five year 
minimum maturity requirement.
    Finally, the OCC notes that this interim final rule also carries 
over, in new paragraph (l)(1), the requirement in paragraph (i) of the 
current rule that a national bank must comply with the Securities 
Offering Disclosures Rules in 12 CFR part 16 when issuing subordinated 
debt.
    Question 2: Given the clarifications in this interim final rule, 
are there any other requirements that the OCC should include?
iv. New Subordinated Debt Rules Revised To Reflect the Basel III 
Capital Framework
    New paragraph (l) clarifies the substantive requirements for 
subordinated debt to qualify as tier 2 capital. Specifically, paragraph 
(l)(2)(i) requires subordinated debt included in tier 2 capital to meet 
the requirements set forth in 12 CFR 3.20(d) of the Basel III Capital 
Framework and comply with applicable OCC guidance for subordinated 
debt. The requirements in 12 CFR 3.20(d) are described in II.B.1. of 
this Supplementary Information.
    By virtue of the cross-reference to 12 CFR 3.20(d), the interim 
final rule makes clear that any subordinated debt intended to count as 
tier 2 capital must satisfy the Basel III Capital Framework. While the 
interim final rule does not enumerate each and every requirement, the 
new requirements related to acceleration and prepayment are worth 
noting. Under the tier 2 capital requirements in the Basel III Capital 
Framework, the holder of a subordinated debt instrument must have no 
contractual right to accelerate principal or interest on the 
instrument, except in the event of a receivership, insolvency, 
liquidation, or other similar proceeding of the bank. Thus, the interim 
final rule makes clear that subordinated debt that the bank does not 
intend to count as tier 2 capital may have broader acceleration clause 
triggers, while subordinated debt included in tier 2 capital may 
provide for acceleration only in the event of receivership, insolvency, 
liquidation, or similar proceedings.
    With respect to call options, the Basel III Capital Framework 
provides that any exercise of a call option in the first five years 
following issuance is limited to: (1) A change in the applicable 
regulatory capital rules or policies that would preclude the instrument 
from being included in tier 2 capital; (2) the occurrence of a tax 
event; or (3) if the issuing entity is required to register as an 
investment company pursuant to the Investment Company Act of 1940. A 
bank may exercise a call option at any time after five years following 
issuance of the instrument. In addition, under the Basel III Capital 
Framework, prior to exercising a call option, or immediately 
thereafter, the bank must either: (1) Replace any amount called with an 
equivalent amount of an instrument that meets the criteria for tier 1 
or tier 2 capital under 12 CFR 3.20; or (2) demonstrate to the 
satisfaction of the OCC that following redemption, the bank would 
continue to hold an amount of capital commensurate with its risk. The 
Basel III Capital Framework further clarifies in a footnote that a bank 
may replace tier 2 capital instruments concurrent with the redemption 
of existing tier 2 capital instruments.\8\ In order to remain 
consistent with the Basel III Capital Framework, the interim final rule 
incorporates this interpretation as footnote 1 in new paragraph 
(n)(2)(ii).
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    \8\ See 12 CFR 3.20(d)(1)(v)(C), footnote 13.
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    Assuming that the subordinated debt satisfies the substantive 
requirements in paragraph (l), paragraph (m) sets out the procedural 
requirements that a bank must follow in order to issue or prepay 
subordinated debt. Specifically, as to prior OCC approval, these 
procedural requirements reflect, to a large extent, the requirements of 
the current subordinated debt rule and the approval requirements in the 
Basel III Capital Framework.
    Under the current subordinated debt rule, prior OCC approval 
generally is required for the issuance and prepayment of all 
subordinated debt, except in limited instances where the bank qualifies 
as an ``eligible bank.'' The Basel III Capital Framework also 
explicitly requires prior OCC approval for the exercise of a call 
option, redemption prior to maturity, and repurchase of subordinated 
debt.
    This interim final rule attempts to reconcile these varying 
approval requirements while carrying forward the existing exception for 
eligible banks. Consequently, this interim final rule clarifies that, 
while prior approval generally is required for the issuance and 
prepayment of all subordinated debt, in certain areas where the bank is 
an eligible bank, this requirement may be satisfied by an after-the-
fact notice. One important qualification to the eligible bank 
exception, however, concerns the prepayment of subordinated debt. The 
prior approval requirements for such prepayments are set out in 
paragraph (m)(2), which distinguishes between prepayments on 
subordinated debt included in tier 2 capital and subordinated debt not 
included in tier 2 capital.
    With respect to prepayment of subordinated debt that is not 
included in tier 2 capital, paragraph (m)(2)(i) adds a new threshold 
requirement, which provides that even if a bank is an eligible bank, 
prior OCC approval is required to prepay subordinated debt that is not 
included in tier 2 capital if the amount of the proposed prepayment is 
equal to or greater than one percent of the bank's total capital, as 
defined in 12 CFR 3.2. The OCC is adding this threshold because of a 
concern that, even in the case of an eligible bank, from a safety and 
soundness perspective the subordinated debt being prepaid may be 
significant enough, as a percentage of the bank's total capital, that 
the OCC should have a prior opportunity to review the prepayment.
    Question 3: Is the new threshold appropriate? Should the percentage 
of total capital be higher or lower? Is there a different threshold 
that would serve the same purpose?
    With respect to prepayment of subordinated debt that is included in 
tier 2 capital, consistent with the Basel III Capital Framework, the 
interim final rule requires all national banks to obtain prior OCC 
approval to prepay subordinated debt in accordance with the procedures 
in paragraph (n). New paragraph (n)(1)(i) sets forth the information 
that a bank must include in an application to issue or prepay 
subordinated debt. The information is nearly identical to the OCC 
current application requirements to issue or prepay subordinated debt, 
except for additional submission requirements necessary to implement 
the substantive Basel III Capital Framework requirements on the 
exercise of call options. Specifically, in addition to the general 
information required to be submitted under paragraph (n)(1)(ii)(A), 
paragraph (n)(1)(ii)(B) requires a national bank to submit either: (1) 
A statement explaining why the bank believes that following the 
proposed prepayment the bank would continue to hold an amount of 
capital commensurate with its risk; or (2) a description of the 
replacement capital instrument that meets the criteria for tier 1 or 
tier 2 capital under 12 CFR 3.20, including the amount of such 
instrument and the time frame for issuance.
    New paragraph (n)(1)(iii) provides that the OCC retains the right 
to request additional relevant information as appropriate. Although 
there is no similar provision in the current rule, this right to 
request additional relevant

[[Page 11305]]

information is consistent with the OCC's current licensing authority.
    New paragraph (n)(2)(i) carries over the current automatic 30-day 
approval provisions which provide that an application is deemed 
approved by the OCC as of the 30th day after the filing is received by 
the OCC, unless the OCC notifies the bank prior to that date that the 
filing presents a significant supervisory or compliance concern, or 
raises a significant legal or policy issue. This is identical to the 
procedure in the current rule, with the addition of procedures to 
address call options set out in new paragraph (n)(2)(ii). A special 
procedure is required because, as described above, the Basel III 
Capital Framework requires a bank exercising a call option either to 
replace the instrument or satisfy the OCC that following redemption the 
bank would continue to hold an amount of capital commensurate with its 
risk. Therefore, the ``deemed approved'' procedure in paragraph 
(n)(2)(i) applicable for all other applications for prepayment is not 
consistent with the Basel III Capital Framework when call options are 
involved. Accordingly, new paragraph (n)(2)(ii) states that the bank 
must receive affirmative approval to exercise the call option and, if 
the OCC requires the bank to replace the subordinated debt, requires 
the bank to receive affirmative approval that the replacement capital 
instrument meets the criteria for tier 1 or tier 2 capital under 12 CFR 
3.20. In addition, consistent with the Basel III Capital Framework, 
paragraph (n)(2)(ii) further requires that the bank must issue the 
replacement instrument prior to exercising the call option, or 
immediately thereafter, and clarifies in footnote 1 that a bank may 
replace tier 2 capital instruments concurrent with the redemption of 
existing tier 2 capital instruments.\9\
---------------------------------------------------------------------------

    \9\ In order to ensure enforceability of the requirement to 
issue a replacement instrument, consistent with longstanding 
practice, the OCC approval letter may provide that approval of the 
application is conditioned upon the bank issuing the replacement 
instrument within a specified period of time and that the condition 
is ``imposed in writing by a Federal banking agency in connection 
with any action on any application, notice, or other request'' 
within the meaning of 12 U.S.C. 1818, and as such, is enforceable 
under 12 U.S.C. 1818.
---------------------------------------------------------------------------

    New paragraph (n)(2)(iv) carries over the current transaction 
timing requirements, which provide that approval expires if a national 
bank does not complete the sale of the subordinated debt within one 
year of approval. This provision is generally the same as the current 
rule, with the addition of clarifying language necessary to address the 
issuance of replacement capital instruments.
    The OCC notes that, consistent with longstanding practice, this 
interim final rule does not require the bank to notify the OCC or 
receive OCC prior approval to redeem subordinated debt in accordance 
with the stated maturity in the instrument.
    Question 4: Do commenters agree with this approach? Are there any 
circumstances where the OCC should require notice or prior approval to 
redeem a subordinated debt instrument at maturity?
4. Subordinated Debt for Federal Savings Associations
i. Background Information Regarding Sec.  163.81
    A Federal savings association's issuance of subordinated debt and 
mandatorily redeemable preferred stock (collectively referred to as 
``covered securities'') to be included in supplementary (tier 2) 
capital is governed by Sec.  163.81, ``Inclusion of subordinated debt 
securities and mandatorily redeemable preferred stock as supplementary 
capital.'' This interim final rule amends Sec.  163.81 to make it 
consistent with the Basel III Capital Framework and to make other non-
substantive technical amendments. The Basel III Capital Framework's 
requirements for tier 2 capital are set forth at 12 CFR 3.20(d) and 
listed above in Section II.B.1. of the Supplementary Information. The 
OCC notes that this interim final rule does not create a single 
subordinated debt rule applicable to both national banks and Federal 
savings associations. The OCC may integrate the two rules into a single 
subordinated debt rule applicable to both national banks and Federal 
savings associations as part of a future rulemaking.
ii. Structural Changes to Sec.  163.81 To Comply With Basel III Capital 
Framework
    To comply with the Basel III Capital Framework, this interim final 
rule makes structural changes to Sec.  163.81 that mirror the 
structural changes to the national bank rules for subordinated debt in 
Sec.  5.47 described in Section II.B.3.ii. of the Supplementary 
Information. Specifically, this interim final rule retains the current 
structure of Sec.  163.81 and makes amendments to clarify that the 
current rule will continue to apply to a non-advanced approaches 
savings association prior to January 1, 2015. In addition, this interim 
final rule adds new paragraphs (h) through (q) that comply with the 
Basel III Capital Framework and provides that those paragraphs are 
applicable to an advanced approaches savings association beginning on 
March 31, 2014, and a non-advanced approaches savings association on 
January 1, 2015. The OCC notes that, similar to the amendments to Sec.  
5.47, the amendments to Sec.  163.81 are intended to be temporary. 
Section 163.81 has been structured in a manner so that the paragraph 
numbering in the current rules will remain unchanged, and after January 
1, 2015, when paragraphs (a) through (g) are no longer necessary, the 
OCC intends to delete those paragraphs, along with all references to 
advanced approaches and non-advanced approaches savings associations. 
After paragraphs (a) through (g) are deleted, paragraphs (h) through 
(q) will be redesignated as paragraphs (a) through (j).
    Because the Basel III Capital Framework requires prior OCC approval 
for prepayment of subordinated debt and imposes additional requirements 
when the prepayment is in the form of a call option, neither of which 
are included in the current Sec.  163.81, this interim final rule adds 
new provisions requiring prior approval for prepayment of covered 
securities included in tier 2 capital. As described in more detail 
below, the interim final rule retains current procedures for the 
issuance of covered securities included in tier 2 capital and the 
distinction between expedited and standard processing, while new 
procedures are being added for prepayment of subordinated debt included 
in tier 2 capital and prepayment in the form of a call option.
iii. Description of Changes to Sec.  163.81
(a) Changes to the Current Rule
    For a non-advanced approaches savings association prior to January 
1, 2015, the OCC retains the current rule with no substantive changes. 
The interim final rule revises paragraph (a) by renaming it 
``Applicability and scope'' and adding a new paragraph (a)(1), 
``Applicability.'' New paragraph (a)(1)(i) defines an advances 
approaches savings association as a Federal savings association that is 
subject to 12 CFR part 3, subpart E, and a non-advanced approaches 
savings association as a Federal savings association that is not 
subject to 12 CFR part 3, subpart E. New paragraph (a)(1)(ii) provides 
that an advanced approaches savings association must comply with new 
paragraphs (h) through (q) of this section beginning on March 31, 2014. 
New paragraph (a)(1)(iii) provides that a non-advanced approaches 
savings

[[Page 11306]]

association, prior to January 1, 2015, must comply with paragraphs (a) 
through (g) of this section, and beginning on January 1, 2015, must 
comply with paragraphs (h) through (q) of this section. This interim 
final rule redesignates the scope section as paragraph (a)(2) and 
amends it to clarify that paragraphs (a) through (g) of Sec.  163.81 
apply to a non-advanced approaches savings association prior to January 
1, 2015. In addition, this interim final rule adds a sentence at the 
end of paragraph (a)(2) clarifying that covered securities not included 
in tier 2 capital are subject to the requirements of Sec.  163.80, 
``Borrowing limitations.'' The OCC is adding this sentence, which 
appears in the thrift supervision applications handbook,\10\ to clarify 
that there are some requirements that apply to covered securities not 
included in tier 2 capital. Finally, the interim final rule makes non-
substantive, technical amendments to the current rule.
---------------------------------------------------------------------------

    \10\ See Office of Thrift Supervision Applications Handbook, 
section 610, ``Subordinated Debt and Mandatorily Redeemable 
Preferred Stock'' (April 2001).
---------------------------------------------------------------------------

(b) New Provisions To Comply With the Requirements of the Basel III 
Capital Framework
    To comply with the requirements of the Basel III Capital Framework, 
this interim final rule adds new paragraphs (h) through (q), which are 
applicable to an advanced approaches savings association beginning on 
March 31, 2014, and a non-advanced approaches savings association 
beginning on January 1, 2015. Under new paragraph (h), ``Scope,'' a new 
paragraph (h)(1) provides the relevant dates on which advanced 
approaches and non-advanced approaches savings associations must comply 
with paragraphs (h) through (q) and, in order to comply with the Basel 
III Capital Framework, adds that those paragraphs also apply to the 
prepayment of covered securities included in tier 2 capital. In 
addition, this interim final rule adds the identical sentence described 
in Section II.B.4.iii.a. of the Supplementary Information, at the end 
of paragraph (h)(2) clarifying that covered securities not included in 
tier 2 capital are subject to the requirements of Sec.  163.80, 
``Borrowing limitations.'' This interim final rule adds new paragraph 
(h)(3) that carries over the definition of mandatorily redeemable 
preferred stock from the current regulatory capital rules for savings 
associations.\11\ This is necessary because the Basel III Capital 
Framework does not define this term and the current regulatory capital 
rules for savings associations will sunset after the Basel III Capital 
Framework becomes effective for all savings associations.
---------------------------------------------------------------------------

    \11\ See 12 CFR 167.5(b)(2)(iv).
---------------------------------------------------------------------------

    To comply with the Basel III requirement that Federal savings 
associations must obtain prior OCC approval to prepay instruments 
included in tier 2 capital, this interim final rule adds new paragraph 
(i). Paragraph (i) provides that a savings association must obtain 
prior OCC approval to prepay covered securities included in tier 2 
capital. Consistent with Basel III, paragraph (i) further provides 
that, for the purposes of this requirement, the term ``prepayment'' 
includes acceleration of a covered security, repurchase of a covered 
security, redemption of a covered security prior to maturity, and 
exercise of a call option in connection with a covered security.
    New paragraph (j), ``Application and notice procedures,'' is 
divided into two parts: (1) An application or notice to include covered 
securities in tier 2 capital, and (2) an application to prepay covered 
securities included in tier 2 capital. The requirements for an 
application to prepay covered securities included in tier 2 capital 
contain general rules, and rules that apply if the prepayment is in the 
form of a call option. The requirements in paragraph (j)(1) for an 
application or notice to include covered securities in tier 2 capital 
remain the same as the requirements in the current rule. The final rule 
adds a new paragraph (j)(2), ``Application to prepay covered securities 
included in tier 2 capital.'' Because the Basel III Capital Framework 
requires OCC prior approval to prepay all instruments included in tier 
2 capital, paragraph (j)(2)(i), ``General,'' provides that such a 
filing is subject to standard treatment under 12 CFR part 116, subpart 
E. Paragraph (j)(2)(ii)(A) implements the Basel III Capital Framework 
requirement that, prior to exercising a call option, or immediately 
thereafter, a Federal savings association must either: Replace any 
amount called with an equivalent amount of an instrument that meets the 
criteria for regulatory capital under 12 CFR 3.20, or demonstrate to 
the satisfaction of the OCC that following redemption, the savings 
association would continue to hold an amount of capital that is 
commensurate with its risk. The language in this provision mirrors the 
new language in the subordinated debt rule applicable to national 
banks. When the prepayment is in the form of a call option, paragraph 
(j)(2)(ii)(B) provides a special requirement that, if the OCC 
conditions its approval of repayment in the form of a call option on a 
requirement that a savings association must replace the covered 
security with a covered security of an equivalent amount that satisfies 
the requirements for a tier 1 or tier 2 instrument, the savings 
association must file an application to issue the replacement covered 
security and must receive prior OCC approval.
    This interim final rule adds a new paragraph (k), ``General 
requirements,'' which provides that a covered security issued under 
this Sec.  163.81 must satisfy the requirements for tier 2 capital in 
12 CFR 3.20(d).
    This interim final rule adds new paragraph (l), ``Securities 
requirements for inclusion in tier 2 capital,'' which addresses the 
form of a certificate evidencing a covered security and the disclosure 
of certain information. This interim final rule carries forward the 
disclosures required under the current rule, with an amendment to the 
requirement that a certificate must disclose that the savings 
association is required to obtain OCC approval before the acceleration 
of payment of principal on subordinated debt securities. In addition to 
acceleration, the Basel III Capital Framework requires prior OCC 
approval in the case of redemption prior to maturity, repurchase, or 
exercising a call option. Accordingly, this interim final rule adds 
those transactions to the disclosure. Also, since not all subordinated 
debt may include the ability to prepay in those circumstances, this 
interim final rule also adds the phrase, ``where applicable'' to 
clarify that the disclosure should include only those transactions that 
are provided for in the subordinated debt security.
    New paragraph (l) carries over two provisions under the securities 
requirements of the current rule in paragraph (c)(2) and (3). The first 
requirement that is being removed is a requirement that covered 
securities must have an original weighted average maturity or original 
weighted average period to required redemption of at least five years. 
The OCC is removing this requirement because the Basel III Capital 
Framework already requires that an instrument included in tier 2 
capital must have a minimum original maturity of at least five years. 
The second requirement we are removing addresses mandatory prepayment 
and provides the circumstances under which covered securities may 
provide for events of default or contain other provisions that could 
result in a mandatory prepayment of principal. This provision is being 
removed because it is inconsistent with the requirement in the Basel 
III Capital

[[Page 11307]]

Framework that the holder of an instrument included in tier 2 capital 
must have no contractual right to accelerate payment of principal or 
interest on the instrument, except in the event of a receivership, 
insolvency, liquidation, or other similar proceeding of the Federal 
savings association.
    This interim final rule carries over with no substantive changes 
the provisions that address review by the OCC, amendments, sale of 
covered securities, and reports as new paragraphs (m), (n), (o), and 
(q), respectively.
    In order to comply with the Basel III Capital Framework, this 
interim final rule adds new paragraph (p), ``Issuance of a replacement 
regulatory capital instrument in connection with exercising a call 
option.'' Paragraph (p) provides that when a Federal savings 
association seeks prior approval to exercise a call option in 
connection with a covered security included in tier 2 capital, the OCC 
may require the savings association to issue a replacement covered 
security of an equivalent amount that qualifies as tier 1 or tier 2 
capital under 12 CFR 3.20. If the OCC imposes such a requirement, 
paragraph (p) requires the savings association to complete the sale of 
the covered security prior to, or immediately after, the prepayment. As 
discussed in Section II.B.3.iv. of the Supplemental Information, 
consistent with the Basel III Capital Framework and amendments to the 
subordinated debt rule for national banks, the interim final rule adds 
a footnote clarifying that a savings association may replace tier 2 
capital instruments concurrent with the redemption of existing tier 2 
capital instruments.

C. Limitations Based on Capital

    The OCC's rules currently cross-reference the part 3 definitions of 
tier 1 and tier 2 regulatory capital as the basis for limits in other 
regulations that are based on capital. Examples of such limits are the 
lending limit and the limit applicable to investment securities. One 
consequence of this final rule, which revises cross-references to the 
definitions of tier 1 and tier 2 capital to pick up the definitions in 
the new Basel III Capital Framework, is that the new definitions of 
tier 1 and tier 2 capital will be applicable with respect to the 
calculation of these other regulatory limits for advanced approaches 
banks and advanced approaches savings associations on the effective 
date of this interin final rule and for non-advanced approaches banks 
and savings associations on January 1, 2015. In determining to revise 
the cross-references, the OCC looked at the potential effect of the 
changes in capital on numerical limits that are based on regulatory 
capital.
    The OCC has reviewed the effect of cross-referencing the Basel III 
Capital Framework on other OCC limits based on the amount of a bank's 
or savings association's capital and surplus.\12\ Our overall 
assessment of the effect of these changes is that for most FDIC-insured 
institutions, we do not expect reliance on the Basel III Capital 
Framework to have a significant impact on lending limits or other 
components of a bank's or savings association's activities that are 
linked to the amount of a bank's or savings association's capital and 
surplus. While the Basel III rule is tightening the definition of what 
may count towards a bank's or savings association's capital and 
surplus, we expect that banks and savings associations generally will 
increase the amount of capital rather than reduce the amount of assets, 
in order to comply with minimum capital requirements under the capital 
rules. In addition, we further anticipate that banks and savings 
associations generally will choose to hold an additional 2.5 percent of 
total risk-weighted assets, for a total of 10.5 percent of total risk-
weighted assets, in order to remain ``well capitalized'' and avoid 
limitations on distributions and discretionary bonus payments imposed 
by the new capital conservation buffer. Therefore, the OCC believes 
that under the Basel III Capital Framework, banks and savings 
associations holding capital at minimum required amounts generally will 
be holding more capital than under current rules, and thus, their 
lending limits and other limits tied to the amount of their capital and 
surplus will be unambiguously higher.
---------------------------------------------------------------------------

    \12\ For national banks, the limitations based on capital use 
the term ``capital and surplus,'' which is defined as tier 1 capital 
and tier 2 capital plus the amount of the allowance for loan and 
lease losses (ALLL) not included in the bank's tier 2 capital. For 
Federal savings associations, except for lending limits, which are 
based on ``capital and surplus,'' the limitations based on capital 
use the term ``total capital,'' which is defined as tier 1 capital 
plus tier 2 capital. The OCC determined that the difference between 
the two definitions was de minimis and therefore its analysis uses 
the term ``capital and surplus'' for both national banks and Federal 
savings associations.
---------------------------------------------------------------------------

    Even with respect to national banks and Federal savings 
associations that experience decreasing capital-linked limits because 
of the Basel III changes, the OCC does not expect this to be a problem 
for most institutions. First, based on our analysis, most banks and 
savings associations will experience little change in capital and 
surplus under the Basel III Capital Framework relative to current 
rules. Second, most banks and Federal savings associations typically 
hold capital in excess of regulatory minimums. The Basel III changes 
could cause capital amounts to decrease or increase for these 
institutions.\13\ Banks that encounter lower limits on capital-linked 
activities because of the Basel III changes can increase these activity 
limits by increasing the amount of capital they hold, which is 
generally the intent of capital-linked activity regulations. Finally, a 
number of banks and savings associations have internal limits on 
activities far below the statutory limit; for those institutions, there 
would be no impact on their level of activity. However, even if the 
reduced statutory limit becomes a binding constraint, those 
institutions can make appropriate adjustments to their capital.
---------------------------------------------------------------------------

    \13\ In particular, inclusion of accumulated other comprehensive 
income (AOCI) could increase the volatility of capital and surplus 
for those institutions required to include AOCI in common equity 
tier 1 capital. However, the OCC notes that under the Basel III 
Capital Framework, a bank or savings association that is not an 
advanced approaches bank or savings association may make a one-time 
election to opt out of the requirement to include all components of 
AOCI in common equity tier 1. For those institutions, the treatment 
of AOCI will remain the same.
---------------------------------------------------------------------------

    In addition, we note that, due to differing compliance dates in the 
Basel III Capital Framework, non-advanced approaches banks and savings 
associations will not experience any impact on the limits based on 
capital until January 1, 2015. Furthermore, the Basel III Capital 
Framework provides various transitions for the capital conservation and 
countercyclical capital buffers, regulatory capital adjustments and 
deductions, and non-qualifying capital instruments, which provides 
institutions an opportunity to adjust their capital and surplus levels 
to accommodate desired levels of any capital-linked activities. 
Nevertheless, we advise any banks or savings associations that have 
concerns about the potential negative impact of these conforming 
amendments, particularly advanced approaches banks during 2014, to 
discuss those concerns with their supervisors.
    While the OCC does not anticipate that the definitional changes to 
capital in the Basel III Capital Framework will have a material impact 
on a significant number of national banks and Federal savings 
associations, the OCC is sensitive to potential concerns about the 
impact of these changes on limitations based on capital. To address 
these concerns, the OCC intends to closely monitor and assess the 
impact of the implementation of the Basel III Capital

[[Page 11308]]

Framework on such limitations. As part of this process, the OCC may 
issue a separate notice of proposed rulemaking if the OCC sees specific 
safety and soundness or other supervisory concerns.
    Question 5: To assist the OCC in information gathering, we are 
requesting comments on the impact of changes in the definition of 
capital on a bank's or savings association's limits based on capital.

III. Request for Comments

    In addition to the specifically enumerated questions in the 
preamble, the OCC requests comment on all aspects of this interim final 
rule. The OCC requests that, for the specifically enumerated questions, 
commenters include the number of the question in their response to make 
review of the comments more efficient.

IV. Regulatory Analysis

A. Administrative Procedure Act

    Pursuant to sections 553(b) and (d) of the Administrative Procedure 
Act (APA),\14\ the OCC finds that there is good cause for issuing this 
interim final rule. The Basel III Capital Framework made major 
revisions to the capital adequacy rules applicable to national banks 
and Federal savings associations, including the substantive criteria 
and approval process for instruments included in tier 2 capital. All of 
those revisions to the OCC's capital adequacy rules were adopted 
through the notice and comment procedure in accordance with the APA. As 
described in the preamble to the Basel III Capital Framework, the 
agencies revised their regulatory capital requirements to promote safe 
and sound banking practices and implement Basel III and other aspects 
of the Basel III Capital Framework by adopting, among other things, 
rules intended to improve both the quality and quantity of a banking 
organization's capital.
---------------------------------------------------------------------------

    \14\ See 5 U.S.C. 553(b) and (d).
---------------------------------------------------------------------------

    This interim final rule revises Sec. Sec.  5.47 and 163.81 to be 
consistent with those rules and makes other necessary clarifying and 
technical amendments to various regulations that impose regulatory 
limits based on capital. Because the mandatory compliance date for the 
Basel III Capital Framework is January 1, 2014, for advanced approaches 
nationals banks and Federal savings associations, such institutions 
will be required to comply with the Basel III Capital Framework when 
they file their Call Report for the first quarter of 2014. It is 
necessary to publish this interim final rule in order to clarify for 
banks and savings associations which capital rules are applicable with 
respect to subordinated debt and the various limits based on capital. 
For these reasons, the OCC has determined that issuing a notice of 
proposed rulemaking would be impracticable, unnecessary, or contrary to 
the public interest. Accordingly, the OCC finds good cause to issue 
this interim final rule.

B. Riegle Community Development and Regulatory Improvement Act

    The Riegle Community Development and Regulatory Improvement Act of 
1994 requires that the effective date of new regulations and amendments 
to regulations that impose additional reporting, disclosures, or other 
new requirements on insured depository institutions shall be the first 
day of a calendar quarter that begins on or after the date the 
regulations are published in final form.\15\ For the reasons described 
above, the OCC finds good cause to make this interim final rule 
effective March 31, 2014.
---------------------------------------------------------------------------

    \15\ See 12 U.S.C. 4802(b)(1).
---------------------------------------------------------------------------

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \16\ generally requires an 
agency that is issuing a proposed rule to prepare and make available 
for public comment an initial regulatory flexibility analysis that 
describes the impact of the proposed rule on small entities. The RFA 
does not apply to a rulemaking where a general notice of proposed 
rulemaking is not required.\17\ For the reasons described above, the 
OCC has determined, for good cause, that it is unnecessary to publish a 
notice of proposed rulemaking for this interim final rule. Accordingly, 
the RFA's requirements relating to an initial and final regulatory 
flexibility analysis do not apply.
---------------------------------------------------------------------------

    \16\ See 5 U.S.C. 601 et seq.
    \17\ See 5 U.S.C. 603 and 604.
---------------------------------------------------------------------------

D. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 
1532, requires that an agency prepare a budgetary impact statement 
before promulgating any rule likely to result in a Federal mandate that 
may result in the expenditure by State, local, and tribal governments, 
in the aggregate, or by the private sector of $100 million or more, as 
adjusted for inflation, in any one year. The Unfunded Mandates Reform 
Act only applies when an agency issues a general notice of proposed 
rulemaking. Because the OCC is not publishing a notice of proposed 
rulemaking, this final rule is not subject to section 202 of the 
Unfunded Mandates Reform Act.

E. Paperwork Reduction Act

    Under the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501, et 
seq.), the OCC may not conduct or sponsor, and a person is not required 
to respond to, an information collection unless the information 
collection displays a valid Office of Management and Budget (OMB) 
control number. The OCC has submitted the information collection 
requirements contained in this rule to OMB.
    This interim final rule amends a number of regulatory provisions 
that have currently approved collections of information under the 
PRA.\18\ The amendments adopted today do not change the rules in a way 
that substantively modifies the collections of information that OMB has 
approved. Therefore, the changes to these collections will be limited 
to adjustments in the number of responses or frequency of response.
---------------------------------------------------------------------------

    \18\ OMB Control Nos. 1557-0014, 1557-0190, 1557-0243, and 1557-
0310.
---------------------------------------------------------------------------

    One new collection of information is introduced by the interim 
final rule. In order to prepay subordinated debt in the form of a call 
option, in addition to the general information required to be submitted 
by a national bank under Sec.  5.47(n)(1)(ii)(A) and by a Federal 
savings association under 12 CFR part 116, subpart A, a bank or savings 
association must submit either a statement explaining why it believes 
that, following the proposed prepayment, it would continue to hold an 
amount of capital commensurate with its risk, or a description of the 
replacement capital instrument that meets the criteria for tier 1 or 
tier 2 capital under Sec.  3.20, including the amount of such 
instrument and the time frame for issuance.
    Title: Prepayment of Subordinated Debt in the Form of a Call 
Option.
    Frequency of Response: Event generated.
    Affected Public: Businesses or other for-profit organizations.
    Total Burden for Sec.  5.47 after issuance of interim final rule:
    Number of Respondents: 184.
    Burden per Respondent: 1.30 hours.
    Total Burden: 239 hours.
    The OCC requests comment on:
    a. Whether the information collection is necessary for the proper 
performance of the OCC's functions, and how the instructions can be 
clarified so that information gathered has more practical utility;

[[Page 11309]]

    b. The accuracy of the OCC's estimates of the burdens of the 
information collection, 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 collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    e. Estimates of capital or startup costs and costs of operation, 
maintenance, and purchase of services to provide information.

List of Subjects in 12 CFR

Part 1

    Banks, banking, National banks, Reporting and recordkeeping 
requirements, Securities.

Part 4

    Administrative practice and procedure, Freedom of information, 
Individuals with disabilities, Minority businesses, Organization and 
functions (Government agencies), Reporting and recordkeeping 
requirements, Women.

Part 5

    Administrative practice and procedure, National banks, Reporting 
and recordkeeping requirements, Securities.

Part 16

    National banks, Reporting and recordkeeping requirements, 
Securities.

Part 23

    National banks.

Part 24

    Community development, Credit, Investments, Low and moderate income 
housing, National banks, Reporting and recordkeeping requirements, 
Rural areas, Small businesses.

Part 28

    Foreign banking, National banks, Reporting and recordkeeping 
requirements.

Part 32

    National banks, Reporting and recordkeeping requirements.

Part 34

    Mortgages, National banks, Reporting and recordkeeping 
requirements.

Part 46

    Banking, Banks, Capital, Disclosures, National banks, 
Recordkeeping, Reporting, Risk, Stress test.

Part 116

    Administrative practice and procedure, Reporting and recordkeeping 
requirements, Savings associations.

Part 143

    Reporting and recordkeeping requirements, Savings associations.

Part 145

    Consumer protection, Credit, Electronic funds transfers, 
Investments, Manufactured homes, Mortgages, Reporting and recordkeeping 
requirements, Savings associations.

Part 159

    Reporting and recordkeeping requirements, Savings associations, 
Subsidiaries.

Part 160

    Consumer protection, Investments, Manufactured homes, Mortgages, 
Reporting and recordkeeping requirements, Savings associations, 
Securities.

Part 161

    Administrative practice and procedure, Savings associations.

Part 163

    Accounting, Administrative practice and procedure, Advertising, 
Conflict of interests, Crime, Currency, Investments, Mortgages, 
Reporting and recordkeeping requirements, Savings associations, 
Securities, Surety bonds.

Part 192

    Reporting and recordkeeping requirements, Savings associations, 
Securities.

    For the reasons set forth in the preamble, the Office of the 
Comptroller of the Currency amends 12 CFR Chapter I as follows:

PART 1--INVESTMENT SECURITIES

0
1. The authority citation for part 1 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 24 (Seventh), and 93a.

0
2. Section 1.2 is amended by:
0
i. Revising paragraph (a)(1) to read as follows; and
0
ii. In paragraph (j)(4), removing the phrase ``12 CFR 6.4(b)(1)'' and 
adding the phrase ``12 CFR 6.4'' in its place.
    The revision is set forth below.


Sec.  1.2  Definitions.

    (a) * * *
    (1) A bank's tier 1 and tier 2 capital calculated under the OCC's 
risk-based capital standards set forth in 12 CFR part 3, as applicable 
(or comparable capital guidelines of the appropriate Federal banking 
agency), as reported in the bank's Consolidated Reports of Condition 
and Income (Call Report) filed under 12 U.S.C. 161 (or under 12 U.S.C. 
1817 in the case of a state member bank); plus
* * * * *

PART 4--ORGANIZATION AND FUNCTIONS, AVAILABILITY AND RELEASE OF 
INFORMATION, CONTRACTING OUTREACH PROGRAM, POST-EMPLOYMENT 
RESTRICTIONS FOR SENIOR EXAMINERS

0
3. The authority citation for part 4 is revised to read as follows:

    Authority:  12 U.S.C. 1, 12 U.S.C. 93a, 12 U.S.C. 5321, 12 
U.S.C. 5412, and 12 U.S.C. 5414. Subpart A also issued under 5 
U.S.C. 552. Subpart B also issued under 5 U.S.C. 552; E.O. 12600 (3 
CFR 1987 Comp., p. 235). Subpart C also issued under 5 U.S.C. 301, 
552; 12 U.S.C. 161, 481, 482, 484(a), 1442, 1462a, 1463, 1464, 
1817(a)(2) and (3), 1818(u) and (v), 1820(d)(6), 1820(k), 1821(c), 
1821(o), 1821(t), 1831m, 1831p-1, 1831o, 1867, 1951 et seq., 2601 et 
seq., 2801 et seq., 2901 et seq., 3101 et seq., 3401 et seq.; 15 
U.S.C. 77uu(b), 78q(c)(3); 18 U.S.C. 641, 1905, 1906; 29 U.S.C. 
1204; 31 U.S.C. 5318(g)(2), 9701; 42 U.S.C. 3601; 44 U.S.C. 3506, 
3510. Subpart D also issued under 12 U.S.C. 1833e. Subpart E is also 
issued under 12 U.S.C. 1820(k).

0
4. Section 4.7(b)(1)(iii)(A) is revised to read as follows:


Sec.  4.7  Frequency of examination of Federal agencies and branches.

* * * * *
    (b) * * *
    (1) * * *
    (iii) * * *
    (A) The foreign bank's most recently reported capital adequacy 
position consists of, or is equivalent to, common equity tier 1, tier 1 
and total risk-based capital ratios that satisfy the definition of 
``well capitalized'' set forth at 12 CFR 6.4, respectively, on a 
consolidated basis; or
* * * * *

PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES

0
5. The authority citation for part 5 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 93a, 215a-2, 215a-3, 481, 3907, 
and section 5136A of the Revised Statutes (12 U.S.C. 24a).

0
6. Section 5.3 is amended by:
0
i. Revising paragraph (d)(1) to read as follows; and
0
ii. In paragraph (g)(1), removing the phrase ``12 CFR 6.4(b)(1)'' and 
adding the phrase ``12 CFR 6.4'' in its place.

[[Page 11310]]

    The revision is set forth below.


Sec.  5.3  Definitions.

* * * * *
    (d) * * *
    (1) A bank's tier 1 and tier 2 capital calculated under the OCC's 
risk-based capital standards set forth in 12 CFR part 3, as applicable, 
as reported in the bank's Consolidated Reports of Condition and Income 
(Call Report) filed under 12 U.S.C. 161; plus
* * * * *


Sec.  5.34  [Amended]

0
7. Section 5.34(d)(2) is amended by removing the phrase ``12 CFR 
6.4(b)(1)'' and adding the phrase ``12 CFR 6.4'' in its place.


Sec.  5.36  [Amended]

0
8. Section 5.36(c)(2) is amended by removing the phrase ``12 CFR 
6.4(b)(1)'' and by adding the phrase ``12 CFR 6.4'' in its place.


Sec.  5.39  [Amended]

0
9. Section 5.39(d)(10) is amended by removing the phrase ``12 CFR 
6.2(g)'' and adding the phrase ``12 CFR 6.2'' in its place.


Sec.  5.46  [Amended]

0
10. Section 5.46(e)(1) is amended by removing the phrase ``, including 
a plan to achieve minimum capital ratios filed with the appropriate 
district office under 12 CFR 3.7''.
0
11. Section 5.47 is revised to read as follows:


Sec.  5.47  Subordinated debt as capital.

    (a) Authority and applicability. (1) Authority. 12 U.S.C. 93a.
    (2) Applicability. (i) For purposes of this section, an advanced 
approaches bank means a national bank that is subject to 12 CFR part 3, 
subpart E, and a non-advanced approaches bank means a national bank 
that is not subject to 12 CFR part 3, subpart E.
    (ii) An advanced approaches bank, beginning on March 31, 2014, must 
comply with paragraphs (j) through (p) of this section.
    (iii) A non-advanced approaches bank, prior to January 1, 2015, 
must comply with paragraphs (b) through (i) of this section. Beginning 
on January 1, 2015, a non-advanced approaches bank must comply with 
paragraphs (j) through (p) of this section.
    (b) Licensing requirements for non-advanced approaches banks prior 
to January 1, 2015. A national bank does not need prior OCC approval to 
issue subordinated debt, or to prepay subordinated debt (including 
payment pursuant to an acceleration clause or redemption prior to 
maturity) provided the bank remains an eligible bank after the 
transaction, unless the OCC has previously notified the bank that prior 
approval is required, or unless prior approval is required by law. No 
prior approval is required for an eligible bank to count the 
subordinated debt as tier 2. However, an eligible bank issuing 
subordinated debt shall notify the OCC after issuance if the debt is to 
be counted as tier 2.
    (c) Scope. For non-advanced approaches banks prior to January 1, 
2015, paragraphs (b) through (i) of this section set forth the 
procedures for OCC review and approval of an application to issue or 
prepay subordinated debt and inclusion of subordinated debt in tier 2 
capital.
    (d) Definitions. (1) Capital plan means a plan describing the means 
and schedule by which a national bank will attain specified capital 
levels or ratios, including a capital restoration plan filed with the 
OCC under 12 U.S.C. 1831o and 12 CFR 6.5.
    (2) Tier 2 capital has the same meaning as set forth in 12 CFR part 
3, appendix A, section (2)(b).
    (e) Qualification as regulatory capital. (1) A national bank's 
subordinated debt qualifies as tier 2 capital if the subordinated debt 
meets the requirements in 12 CFR part 3, appendix A, section 2(b)(4), 
and complies with the ``OCC Guidelines for Subordinated Debt'' (see 
Comptroller's Licensing Manual, Subordinated Debt booklet, Appendix A).
    (2) [Reserved]
    (3) If the OCC notifies a national bank that it must obtain OCC 
approval before issuing subordinated debt, the subordinated debt will 
not qualify as tier 2 until the bank obtains OCC approval for its 
inclusion in capital.
    (f) Prior approval procedure. (1) Application. A national bank 
required to obtain OCC approval before issuing or prepaying 
subordinated debt shall submit an application to the appropriate 
district office. The application must include:
    (i) A description of the terms and amount of the proposed issuance 
or prepayment;
    (ii) A statement of whether the bank is subject to a capital plan 
or required to file a capital plan with the OCC and, if so, how the 
proposed change conforms to the capital plan;
    (iii) A copy of the proposed subordinated note format and note 
agreement; and
    (iv) A statement of whether the subordinated debt issue complies 
with all laws, regulations, and the ``OCC Guidelines for Subordinated 
Debt'' (see Comptroller's Licensing Manual, Subordinated Debt booklet, 
Appendix A).
    (2) Approval. (i) General. The application is deemed approved by 
the OCC as of the 30th day after the filing is received by the OCC, 
unless the OCC notifies the bank prior to that date that the filing 
presents a significant supervisory, or compliance concern, or raises a 
significant legal or policy issue.
    (ii) Tier 2. When the OCC notifies the bank that the OCC approves 
the bank's application to issue or prepay the subordinated debt, it 
also notifies the bank whether the subordinated debt qualifies as tier 
2.
    (iii) Expiration of approval. Approval expires if a national bank 
does not complete the sale of the subordinated debt within one year of 
approval.
    (g) Notice procedure. If a national bank is not required to obtain 
approval before issuing subordinated debt, the bank shall notify the 
appropriate district office in writing within ten days after issuing 
subordinated debt that is to be counted as tier 2. The notice must 
include:
    (1) The terms of the issuance;
    (2) The amount and date of receipt of funds;
    (3) A copy of the final subordinated note format and note 
agreement; and
    (4) A statement that the issue complies with all laws, regulations, 
and the ``OCC Guidelines for Subordinated Debt Instruments'' (see 
Comptroller's Licensing Manual, Subordinated Debt booklet, Appendix A).
    (h) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to the issuance of subordinated debt.
    (i) Issuance of subordinated debt. A national bank shall comply 
with the Securities Offering Disclosure Rules in 12 CFR part 16 when 
issuing subordinated debt even if the bank is not required to obtain 
prior approval to issue subordinated debt.
    (j) Scope. For advanced approaches banks beginning March 31, 2014 
and non-advanced approaches banks beginning January 1, 2015, paragraphs 
(j) through (p) of this section set forth the procedures for OCC review 
and approval of an application to issue or prepay subordinated debt and 
a notice to include subordinated debt in tier 2 capital.
    (k) Definitions.
    Capital plan means a plan describing the means and schedule by 
which a national bank will attain specified capital levels or ratios, 
including a capital restoration plan filed with the OCC under 12 U.S.C. 
1831o and 12 CFR 6.5.

[[Page 11311]]

    Tier 2 capital has the same meaning as set forth in 12 CFR 3.20(d).
    (l) Requirements applicable to subordinated debt for advanced 
approaches banks beginning March 31, 2014 and non-advanced approaches 
banks beginning January 1, 2015. (1) All subordinated debt issued by a 
national bank must:
    (i) Have a minimum original maturity of at least five years;
    (ii) Not be a deposit and not insured by the Federal Deposit 
Insurance Corporation;
    (iii) Be subordinated to the claims of depositors;
    (iv) Be unsecured;
    (v) Be ineligible as collateral for a loan by the issuing bank;
    (vi) Provide that once any scheduled payments of principal begin, 
all scheduled payments shall be made at least annually and the amount 
repaid in each year shall be no less than in the prior year;
    (vii) Where applicable, provide that no prepayment (including 
payment pursuant to an acceleration clause, redemption prior to 
maturity, repurchase, or exercising a call option) shall be made 
without prior OCC approval; and
    (viii) Comply with the Securities Offering Disclosure Rules in 12 
CFR part 16.
    (2) Additional requirements to qualify as tier 2 capital. In order 
to qualify as tier 2 capital, a national bank's subordinated debt must 
meet the requirements in 12 CFR 3.20(d) and must comply with applicable 
OCC guidance for subordinated debt.
    (m) Licensing requirements for advanced approaches banks beginning 
March 31, 2014 and non-advanced approaches banks beginning January 1, 
2015. (1) Issuance of subordinated debt. (i) Approval. (A) Eligible 
bank. An eligible bank is required to receive prior approval from the 
OCC to issue any subordinated debt, in accordance with paragraph (n) of 
this section, if:
    (1) The bank will not continue to be an eligible bank after the 
transaction;
    (2) The OCC has previously notified the bank that prior approval is 
required; or
    (3) Prior approval is required by law.
    (B) Bank not an eligible bank. A bank that is not an eligible bank 
must receive prior OCC approval to issue any subordinated debt, in 
accordance with paragraph (n) of this section.
    (ii) Notice to include subordinated debt in tier 2 capital. All 
national banks must notify the OCC, in accordance with paragraph (o) of 
this section, within ten days after issuing subordinated debt that is 
to be counted as tier 2 capital. Where a bank's application to issue 
subordinated debt has been deemed to be approved, in accordance with 
paragraph (n)(2)(i) of this section, the bank must notify the OCC, 
pursuant to paragraph (o) of this section, after issuance of the 
subordinated debt. A national bank may not include subordinated debt as 
tier 2 capital unless the bank has filed the notice with the OCC and 
received notification from the OCC that the subordinated debt issued by 
the bank qualifies as tier 2 capital.
    (2) Prepayment of subordinated debt. (i) Subordinated debt not 
included in tier 2 capital. (A) Eligible bank. An eligible bank is 
required to receive prior approval from the OCC to prepay any 
subordinated debt that is not included in tier 2 capital (including 
acceleration, repurchase, redemption prior to maturity, and exercising 
a call option), in accordance with paragraph (n)(1)(i) of this section, 
only if:
    (1) The bank will not be an eligible bank after the transaction;
    (2) The OCC has previously notified the bank that prior approval is 
required;
    (3) Prior approval is required by law; or
    (4) The amount of the proposed prepayment is equal to or greater 
than one percent of the bank's total capital, as defined in 12 CFR 3.2.
    (B) Bank not an eligible bank. A bank that is not an eligible bank 
must receive prior OCC approval to prepay any subordinated debt that is 
not included in tier 2 capital (including acceleration, repurchase, 
redemption prior to maturity, and exercising a call option), in 
accordance with paragraph (n)(1)(i) of this section.
    (ii) Subordinated debt included in tier 2 capital.
    (A) General. Notwithstanding paragraph (m)(2)(i)(B) of this 
section, all national banks must receive prior OCC approval to prepay 
subordinated debt included in tier 2 capital, in accordance with 
paragraph (n)(1)(ii)(A) of this section.
    (B) Call Option. Notwithstanding this paragraph (m)(2)(ii)(A), a 
national bank must receive prior OCC approval to prepay subordinated 
debt included in tier 2 capital, in accordance with paragraph 
(n)(2)(ii)(B) of this section, when the prepayment is a result of 
exercising a call option.
    (n) Prior approval procedure.
    (1) Application.
    (i) Issuance of subordinated debt. A national bank required to 
obtain OCC approval before issuing subordinated debt shall submit an 
application to the appropriate OCC Licensing office. The application 
must include:
    (A) A description of the terms and amount of the proposed issuance;
    (B) A statement of whether the bank is subject to a capital plan or 
required to file a capital plan with the OCC and, if so, how the 
proposed change conforms to the capital plan;
    (C) A copy of the proposed subordinated note format and note 
agreement; and
    (D) A statement that the subordinated debt issue complies with all 
laws, regulations, and applicable OCC guidance for subordinated debt.
    (ii) Prepayment of subordinated debt. (A) General. A national bank 
required to obtain OCC approval before prepaying subordinated debt, 
pursuant to paragraph (m)(2) of this section, shall submit an 
application to the appropriate OCC Licensing office. The application 
must include:
    (1) A description of the terms and amount of the proposed 
prepayment;
    (2) A statement of whether the bank is subject to a capital plan or 
required to file a capital plan with the OCC and, if so, how the 
proposed change conforms to the capital plan; and
    (3) A copy of the subordinated debt instrument the bank is 
proposing to prepay.
    (B) Call Option. (1) Before prepaying subordinated debt if the 
prepayment is in the form of a call option, a national bank is required 
to obtain OCC approval, pursuant to paragraph (n)(2)(ii), by submitting 
an application to the appropriate OCC Licensing office.
    (2) In addition to the information required in this paragraph 
(n)(1)(ii)(A), the application must include:
    (i) A statement explaining why the bank believes that following the 
proposed prepayment the bank would continue to hold an amount of 
capital commensurate with its risk; or
    (ii) A description of the replacement capital instrument that meets 
the criteria for tier 1 or tier 2 capital under 12 CFR 3.20, including 
the amount of such instrument, and the time frame for issuance.
    (iii) Additional information. The OCC reserves the right to request 
additional relevant information, as appropriate.
    (2) Approval. (i) General. The application is deemed approved by 
the OCC as of the 30th day after the filing is received by the OCC, 
unless the OCC notifies the bank prior to that date that the filing 
presents a significant supervisory, or compliance concern, or raises a 
significant legal or policy issue.
    (ii) Call option. Notwithstanding this paragraph (n)(2)(i), if the 
application for prior approval is for prepayment in the form of a call 
option, the bank must receive affirmative approval to exercise

[[Page 11312]]

the call option. If the OCC requires the bank to replace the 
subordinated debt, the bank must receive affirmative approval that the 
replacement capital instrument meets the criteria for tier 1 or tier 2 
capital under 12 CFR 3.20 and must issue the replacement instrument 
prior to exercising the call option, or immediately thereafter.\2\
---------------------------------------------------------------------------

    \2\ A national bank may replace tier 2 capital instruments 
concurrent with the redemption of existing tier 2 capital 
instruments.
---------------------------------------------------------------------------

    (iii) Tier 2 capital. Following notification to the OCC pursuant to 
paragraph (m)(1)(ii) that the bank has issued the subordinated debt, 
the OCC will notify the bank whether the subordinated debt qualifies as 
tier 2 capital.
    (iv) Expiration of approval. Approval expires if a national bank 
does not complete the sale of the subordinated debt within one year of 
approval.
    (o) Notice procedure for inclusion in tier 2 capital. (1) All 
national banks shall notify the appropriate OCC Licensing office in 
writing within ten days after issuing subordinated debt that it intends 
to include as tier 2 capital. A national bank may not include such 
subordinated debt in tier 2 capital unless the bank has received 
notification from the OCC that the subordinated debt qualifies as tier 
2 capital.
    (2) The notice must include:
    (i) The terms of the issuance;
    (ii) The amount and date of receipt of funds;
    (iii) A copy of the final subordinated note format and note 
agreement; and
    (iv) A statement that the issuance complies with all laws, 
regulations, and applicable OCC guidance for subordinated debt.
    (p) Exceptions to rules of general applicability. Sections 5.8, 
5.10, and 5.11 do not apply to transactions governed by this section.

PART 16--SECURITIES OFFERING DISCLOSURE RULES

0
12. The authority citation for part 16 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq. and 93a.


Sec.  16.15  [Amended]

0
13. Section 16.15(d) is amended by removing the phrase ``part 3 of this 
chapter'' and adding the phrase ``12 CFR part 3, as applicable'' in its 
place.

PART 23--LEASING

0
14. The authority citation for part 23 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 24(Seventh), 24(Tenth), and 
93a.

0
15. Section 23.2(b)(1) is revised to read as follows:


Sec.  23.2  Definitions.

* * * * *
    (b) * * *
    (1) A bank's tier 1 and tier 2 capital calculated under the OCC's 
risk-based capital standards set forth in 12 CFR part 3, as applicable, 
as reported in the bank's Consolidated Reports of Condition and Income 
(Call Report) filed under 12 U.S.C. 161; plus
* * * * *

PART 24--COMMUNITY AND ECONOMIC DEVELOPMENT ENTITIES, COMMUNITY 
DEVELOPMENT PROJECTS, AND OTHER PUBLIC WELFARE INVESTMENTS

0
16. The authority citation for part 24 continues to read as follows:

    Authority:  12 U.S.C. 24(Eleventh), 93a, 481 and 1818.


0
17. Section 24.2 is amended by revising paragraphs (b)(1) and (b)(2) to 
read as follows:


Sec.  24.2  Definitions.

    (b) * * *
    (1) A bank's tier 1 and tier 2 capital calculated under the OCC's 
risk-based capital standards set forth in 12 CFR part 3, as applicable, 
as reported in the bank's Consolidated Reports of Condition and Income 
(Call Report) as filed under 12 U.S.C. 161; plus
    (2) The balance of a bank's allowance for loan and lease losses not 
included in the bank's tier 2 capital, for purposes of the calculation 
of risk-based capital described in paragraph (b)(1) of this section, as 
reported in the bank's Call Report as filed under 12 U.S.C. 161.
* * * * *

PART 28--INTERNATIONAL BANKING ACTIVITIES

0
18. The authority citation for part 28 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 24(Seventh), 93a, 161, 602, 
1818, 3101 et seq., and 3901 et seq.


Sec.  28.14  [Amended]

0
19. Section 28.14(b) is amended by adding the phrase ``subpart C,'' 
after the phrase ``12 CFR part 3,''.

PART 32--LENDING LIMITS

0
20. The authority citation for part 32 continues to read as follows:

    Authority:  12 U.S.C. 1 et seq., 84, 93a, 1462a, 1463, 1464(u), 
and 5412(b)(2)(B).


Sec.  32.2  [Amended]

0
21. Sections 32.2 is amended by:
0
i. In paragraphs (i), (s), and (u), by removing the phrase ``12 CFR 
part 3, appendix C, section 2'' and adding the phrase ``12 CFR 3.2'' in 
its place;
0
ii. In paragraph (m)(1), by removing the phrase ``12 CFR part 3, 
appendix C,'' and adding ``12 CFR 3.2,'' in its place;


Sec.  32.3  [Amended]

0
22. Section 32.3(d)(2)(i)(A) is amended by removing the phrase ``part 
167 of this chapter.'' and adding the phrase ``12 CFR part 3, part 167, 
part 390, subpart Z, or part 324, as applicable.'' in its place.


Sec.  32.4  [Amended]

0
23. Section 32.4(a)(2) is amended by removing the phrase ``12 CFR 
165.3'' and adding the phrase ``12 CFR 324.402'' in its place.


Sec.  32.9  [Amended]

0
24. Section 32.9 is amended:
0
i. In paragraph (b)(1)(i)(C)(1)(i), by removing the phrase ``12 CFR 
part 3, Appendix C, Section 32(d), 12 CFR Part 167, Appendix C, Section 
32(d), or 12 CFR Part 390, subpart Z, Appendix A, Section 32(d)'' and 
adding ``12 CFR 3.132(d) or 324.132(d)'' in its place;
0
ii. In paragraph (b)(1)(iii), by removing the phrase ``12 CFR Part 3, 
Appendix C, Sections 32(c)(5), (6) and (7); 12 CFR Part 167, Appendix 
C, Sections 32(c)(5), (6), and (7); or 12 CFR Part 390, subpart Z, 
Appendix A, Sections 32(c)(5), (6) and (7)'' and adding the phrase ``12 
CFR 3.132(c)(5), (6), and (7) or 324.132(c)(5), (6), and (7)'' in its 
place;
0
iii. In paragraph (c)(1)(i)(A)(1), by removing the phrase ``12 CFR Part 
3, Appendix C, Section 32(b); 12 CFR Part 167, Appendix C, Section 
32(b); or 12 CFR Part 390, subpart Z, Appendix A, Section 32(b)'' and 
adding the phrase ``12 CFR 3.132(b) or 324.132(b)'' in its place; and
0
iv. In paragraph (c)(1)(iii), by removing ``12 CFR Part 3, Appendix C, 
Sections 32(b)(2)(i) and (ii); 12 CFR Part 167, Appendix C, Sections 
32(b)(2)(i) and (ii); or 12 CFR Part 390, subpart Z, Appendix A, 
Sections 32(b)(2)(i) and (ii)'' and adding ``12 CFR 3.132(b)(2)(i) and 
(ii) or 324.132(b)(2)(i) and (ii)'' in its place.

PART 34--REAL ESTATE LENDING AND APPRAISALS

0
25. The authority citation for part 34 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 25b, 29, 93a, 371, 1465, 1701j-
3, 1828(o), 3331 et seq., 5101 et seq., and 5412(b)(2)(B).


0
26. Appendix A to subpart D of part 34 is amended by revising footnote 
2 to read as follows:

[[Page 11313]]

Appendix A to Subpart D of Part 34--Interagency Guidelines for Real 
Estate Lending

* * * * *
    \2\ For the state member banks, the term ``total capital'' means 
``total risk-based capital'' as defined in appendix A to 12 CFR part 
208. For insured state non-member banks, ``total capital'' refers to 
that term described in table I of appendix A to 12 CFR part 325. For 
national banks, the term ``total capital'' is defined at 12 CFR 
3.2(e). For savings associations, the term ``total capital'' is 
defined at 12 CFR 567.5(c).
    The cross-references in the first paragraph of this footnote 
were originally adopted in an interagency rulemaking and are out of 
date as a result of revisions to capital rules implementing the 
Basel III Capital Framework. See 57 FR 63889 (December 31, 1992). 
For national banks and Federal savings associations, the term 
``total capital'' is defined at 12 CFR 3.2, 3.2(e), or 167.5, as 
applicable. See 78 FR 62018 (October 11, 2013).
* * * * *
0
27. Section 34.81 is amended by revising paragraphs (a)(1) and (a)(2) 
to read as follows:


Sec.  34.81  Definitions.

    (a) * * *
    (1) A bank's tier 1 and tier 2 capital calculated under the OCC's 
risk-based capital standards set forth in 12 CFR part 3, as applicable, 
as reported in the bank's Consolidated Reports of Condition and Income 
(Call Report) as filed under 12 U.S.C. 161; plus
    (2) The balance of a bank's allowance for loan and lease losses not 
included in the bank's tier 2 capital, for purposes of the calculation 
of risk-based capital described in paragraph (a)(1) of this section, as 
reported in the bank's Call Report.
* * * * *

PART 46--ANNUAL STRESS TEST

0
28. The authority citation for part 46 continues to read as follows:

    Authority: 12 U.S.C. 93a; 12 U.S.C. 1463(a)(2); 12 U.S.C. 
5365(i)(2); 12 U.S.C. 5412(b)(2)(B).


Sec.  46.4  [Amended]

0
29. Section 46.4(c) is amended by removing the phrase ``3.12, as 
appropriate'' and adding ``3.404'' in its place.

PART 116--APPLICATION PROCESSING PROCEDURES

0
30. The authority citation for part 116 continues to read as follows:

    Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464, 2901 
et seq., 5412(b)(2)(B).


Sec.  116.5  [Amended]

0
31. Section 116.5(f) is amended by removing the phrase ``part 167 of 
this chapter'' and adding the phrase ``12 CFR part 3 or part 167, as 
applicable'' in its place.

PART 143--FEDERAL MUTUAL SAVINGS ASSOCIATIONS--INCORPORATION, 
ORGANIZATION, AND CONVERSION

0
32. The authority citation for part 143 continues to read as follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 2901 et 
seq., 5412(b)(2)(B).


Sec.  143.3  [Amended]

0
33. Section 143.3(c)(2)(iii) is amended by removing the phrase ``12 CFR 
parts 165 and 167'' and adding the phrase ``12 CFR parts 3, 6, 165, and 
167, as applicable'' in its place.

PART 145--FEDERAL SAVINGS MUTUAL SAVINGS ASSOCIATIONS--CHARTER AND 
BYLAWS

0
34. The authority citation for part 145 continues to read as follows:

    Authority: 12 U.S.C. 1462a, 1463, 1464, 1828, 5412(b)(2)(B).


Sec.  145.93  [Amended]

0
35. Section 145.93(b)(3)(i) is amended by removing the phrase ``part 
167 of this chapter'' and adding the phrase ``12 CFR part 3 or part 
167, as applicable'' in its place.


Sec.  145.95  [Amended]

0
36. Section 145.95(b)(1)(i) is amended by:
0
i. Removing the phrase ``part 167 of this chapter'' and adding the 
phrase ``12 CFR part 3 or part 167, as applicable'' in its place;
0
ii. Removing the phrase ``Sec.  165.4(b)(2) of this chapter,'' and 
adding the phrase ``12 CFR 6.4,'' in its place; and
0
iii. Removing the phrase ``Sec.  165.4(b)(3) of this chapter,'' and 
adding the phrase ``12 CFR 6.4,'' in its place.

PART 159--SUBORDINATE ORGANIZATIONS

0
37. The authority citation for part 159 continues to read as follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828, 
5412(b)(2)(B).


Sec.  159.3  [Amended]

0
38. Section 159.3 is amended by:
0
i. In paragraph 159.3(j) removing the phrase ``(part 167 of this 
chapter)'' and adding the phrase ``12 CFR part 3 or part 167, as 
applicable'' in its place; and
0
ii. In paragraph 159.3(j)(2) removing the phrase ``(part 167 of this 
chapter)'' and adding the phrase ``12 CFR part 3 or part 167, as 
applicable'' in its place.


Sec.  159.13  [Amended]

0
39. Section 159.13(c) is amended by removing the phrase ``part 167 of 
this chapter'' and adding the phrase ``12 CFR part 3 or part 167, as 
applicable'' in its place.

PART 160--LENDING AND INVESTMENT

0
40. The authority citation for part 160 continues to read as follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3, 
1828, 3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.


Sec.  160.100  [Amended]

0
41. Section 160.100 is amended by removing the phrase ``12 CFR 167.1'' 
and adding the phrase ``12 CFR 3.22(a)(8)(iv) or 167.1, as applicable'' 
in its place.

0
42. Section 160.101 is amended by revising footnote 2 to read as 
follows:

Appendix to Sec.  160.101 --Interagency Guidelines for Real Estate 
Lending Policies

* * * * *
    \2\ For the state member banks, the term ``total capital'' means 
``total risk-based capital'' as defined in Appendix A to 12 CFR part 
208. For insured state non-member banks, ``total capital'' refers to 
that term described in table I of Appendix A to 12 CFR part 325. For 
national banks, the term ``total capital'' is defined at 12 CFR 
3.2(e). For savings associations, the term ``total capital'' as 
described in part 167 of this chapter.
    The cross-references in the first paragraph of this footnote 
were originally adopted in an interagency rulemaking and are out of 
date as a result of revisions to capital rules implementing the 
Basel III Capital Framework. See 57 FR 63889 (December 31, 1992). 
For national banks and Federal savings associations, the term 
``total capital'' is defined at 12 CFR 3.2, 3.2(e), or 167.5, as 
applicable. See 78 FR 62018 (October 11, 2013).
* * * * *

PART 161--DEFINITION FOR REGULATIONS AFFECTING ALL SAVINGS 
ASSOCIATIONS

0
43. The authority citation for part 161 continues to read as follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 
5412(b)(2)(B).


Sec.  161.55  [Amended]

0
44. Section 161.55(c) is amended by removing the phrase ``part 167 of 
this chapter'' and adding the phrase ``12 CFR part 3 or part 167, as 
applicable'' in its place.

[[Page 11314]]

PART 163--SAVINGS ASSOCIATION OPERATIONS

0
45. The authority citation for part 163 continues to read as follows:

    Authority:  12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1817, 
1820, 1828, 1831o, 3806, 5101 et seq., 5412(b)(2)(B); 31 U.S.C. 
5318; 42 U.S.C. 4106.

Sec.  163.74  [Amended]

0
46. Section 163.74 is amended by:
0
i. In paragraph (i)(2)(iv) removing the phrase ``part 167 of this 
chapter if a Federal savings association or 12 CFR part 390, subpart Z 
if a state savings association'' and adding the phrase ``12 CFR part 3 
or part 167, as applicable, if a Federal savings association, or 12 CFR 
part 324 or part 390, subpart Z, as applicable, if a state savings 
association'' in its place; and
0
ii. In paragraph (i)(2)(v) removing the phrase ``part 167 of this 
chapter if a Federal savings association or 12 CFR part 390, subpart Z 
if a state savings association'' and adding the phrase ``12 CFR part 3 
or part 167, as applicable, if a Federal savings association, or 12 CFR 
part 324 or part 390, subpart Z, as applicable, if a state savings 
association'' in its place.


Sec.  163.80  [Amended]

0
47. Section 163.80(e)(1) is amended by:
0
i. Removing the phrase ``part 167 of this chapter'' and adding the 
phrase ``12 CFR part 3 or part 167, as applicable'' in its place; and
0
ii. Removing the phrase ``12 CFR part 390, subpart Z'' and adding the 
phrase ``12 CFR part 324 or part 390, subpart Z, as applicable,''.
0
48. Section 163.81 is revised to read as follows:


Sec.  163.81  Inclusion of subordinated debt securities and mandatorily 
redeemable preferred stock as supplementary (tier 2) capital.

    (a) Applicability and scope. (1) Applicability. (i) For purposes of 
this section, an advanced approaches savings association means a 
Federal savings association that is subject to 12 CFR part 3, subpart 
E, and a non-advanced approaches savings association means a Federal 
savings association that is not subject to 12 CFR part 3, subpart E.
    (ii) An advanced approaches savings association, beginning on March 
31, 2014, must comply with paragraphs (h) through (q) of this section.
    (iii) A non-advanced approaches savings association, prior to 
January 1, 2015, must comply with paragraphs (a) through (g) of this 
section. Beginning on January 1, 2015, a non-advanced approaches 
savings association must comply with paragraphs (h) through (q) of this 
section.
    (2) Scope. Prior to January 1, 2015, a non-advanced approaches 
savings association must comply with paragraphs (a) through (g) of this 
section in order to include subordinated debt securities or mandatorily 
redeemable preferred stock (``covered securities'') in supplementary 
capital (tier 2 capital) under part 167 of this chapter. If a savings 
association does not include covered securities in supplementary 
capital, it is not required to comply with this section. Covered 
securities not included in tier 2 capital are subject to the 
requirements of Sec.  163.80.
    (b) Application and notice procedures. (1) A Federal savings 
association must file an application or notice under 12 CFR part 116, 
subpart A seeking the OCC's approval of, or non-objection to, the 
inclusion of covered securities in supplementary capital. The savings 
association may file its application or notice before or after it 
issues covered securities, but may not include covered securities in 
supplementary capital until the OCC approves the application or does 
not object to the notice.
    (2) A savings association must also comply with the securities 
offering rules at 12 CFR part 197 by filing an offering circular for a 
proposed issuance of covered securities, unless the offering qualifies 
for an exemption under that part.
    (c) Securities requirements. To be included in supplementary 
capital, covered securities must meet the following requirements:
    (1) Form. (i) Each certificate evidencing a covered security must:
    (A) Bear the following legend on its face, in bold type: ``This 
security is not a savings account or deposit and it is not insured by 
the United States or any agency or fund of the United States;''
    (B) State that the security is subordinated on liquidation, as to 
principal, interest, and premium, to all claims against the savings 
association that have the same priority as savings accounts or a higher 
priority;
    (C) State that the security is not secured by the savings 
association's assets or the assets of any affiliate of the savings 
association. An affiliate means any person or company which controls, 
is controlled by, or is under common control with the savings 
association;
    (D) State that the security is not eligible collateral for a loan 
by the savings association;
    (E) State the prohibition on the payment of dividends or interest 
at 12 U.S.C. 1828(b) and, in the case of subordinated debt securities, 
state the prohibition on the payment of principal and interest at 12 
U.S.C. 1831o(h), 12 CFR 3.11, and any other relevant restrictions;
    (F) For subordinated debt securities, state or refer to a document 
stating the terms under which the savings association may prepay the 
obligation; and
    (G) State or refer to a document stating that the savings 
association must obtain OCC's approval before the voluntary prepayment 
of principal on subordinated debt securities, the acceleration of 
payment of principal on subordinated debt securities, or the voluntary 
redemption of mandatorily redeemable preferred stock (other than 
scheduled redemptions), if the savings association is undercapitalized, 
significantly undercapitalized, or critically undercapitalized as 
described in Sec.  6.4 of this chapter, fails to meet the regulatory 
capital requirements at 12 CFR part 167, or would fail to meet any of 
these standards following the payment.
    (ii) A Federal savings association must include such additional 
statements as the OCC may prescribe for certificates, purchase 
agreements, indentures, and other related documents.
    (2) Maturity requirements. Covered securities must have an original 
weighted average maturity or original weighted average period to 
required redemption of at least five years.
    (3) Mandatory prepayment. Subordinated debt securities and related 
documents may not provide events of default or contain other provisions 
that could result in a mandatory prepayment of principal, other than 
events of default that:
    (i) Arise from the Federal savings association's failure to make 
timely payment of interest or principal;
    (ii) Arise from its failure to comply with reasonable financial, 
operating, and maintenance covenants of a type that are customarily 
included in indentures for publicly offered debt securities; or
    (iii) Relate to bankruptcy, insolvency, receivership, or similar 
events.
    (4) Indenture. (i) Except as provided in paragraph (c)(4)(ii) of 
this section, a Federal savings association must use an indenture for 
subordinated debt securities. If the aggregate amount of subordinated 
debt securities publicly offered (excluding sales in a non-public 
offering as defined in 12 CFR 197.4) and sold in any consecutive 12-
month or 36-month period exceeds $5,000,000 or $10,000,000 respectively 
(or such lesser

[[Page 11315]]

amount that the Securities and Exchange Commission shall establish by 
rule or regulation under 15 U.S.C. 77ddd), the indenture must provide 
for the appointment of a trustee other than the savings association or 
an affiliate of the savings association (as defined in subsection 
(c)(1)(i)(C) of this section) and for collective enforcement of the 
security holders' rights and remedies.
    (ii) A Federal savings association is not required to use an 
indenture if the subordinated debt securities are sold only to 
accredited investors, as that term is defined in 15 U.S.C. 77d(6). A 
savings association must have an indenture that meets the requirements 
of paragraph (c)(4)(i) of this section in place before any debt 
securities for which an exemption from the indenture requirement is 
claimed, are transferred to any non-accredited investor. If a savings 
association relies on this exemption from the indenture requirement, it 
must place a legend on the debt securities indicating that an indenture 
must be in place before the debt securities are transferred to any non-
accredited investor.
    (d) Review by the OCC. (1) The OCC will review notices and 
applications under 12 CFR part 116, subpart E.
    (2) In reviewing notices and applications under this section, the 
OCC will consider whether:
    (i) The issuance of the covered securities is authorized under 
applicable laws and regulations and is consistent with the savings 
association's charter and bylaws.
    (ii) The savings association is at least adequately capitalized 
under Sec.  6.4 of this chapter and meets the regulatory capital 
requirements at part 167 of this chapter.
    (iii) The savings association is or will be able to service the 
covered securities.
    (iv) The covered securities are consistent with the requirements of 
this section.
    (v) The covered securities and related transactions sufficiently 
transfer risk from the Deposit Insurance Fund.
    (vi) The OCC has no objection to the issuance based on the savings 
association's overall policies, condition, and operations.
    (3) The OCC's approval or non-objection is conditioned upon no 
material changes to the information disclosed in the application or 
notice submitted to the OCC. The OCC may impose such additional 
requirements or conditions as it may deem necessary to protect 
purchasers, the savings association, the OCC, or the Deposit Insurance 
Fund.
    (e) Amendments. If a Federal savings association amends the covered 
securities or related documents following the completion of the OCC's 
review, it must obtain the OCC's approval or non-objection under this 
section before it may include the amended securities in supplementary 
capital.
    (f) Sale of covered securities. The Federal savings association 
must complete the sale of covered securities within one year after the 
OCC's approval or non-objection under this section. A savings 
association may request an extension of the offering period by filing a 
written request with the OCC. The savings association must demonstrate 
good cause for the extension and file the request at least 30 days 
before the expiration of the offering period or any extension of the 
offering period.
    (g) Reports. A Federal savings association must file the following 
information with the OCC within 30 days after the savings association 
completes the sale of covered securities includable as supplementary 
capital. If the savings association filed its application or notice 
following the completion of the sale, it must submit this information 
with its application or notice:
    (1) A written report indicating the number of purchasers, the total 
dollar amount of securities sold, the net proceeds received by the 
savings association from the issuance, and the amount of covered 
securities, net of all expenses, to be included as supplementary 
capital;
    (2) Three copies of an executed form of the securities and a copy 
of any related documents governing the issuance or administration of 
the securities; and
    (3) A certification by the appropriate executive officer indicating 
that the savings association complied with all applicable laws and 
regulations in connection with the offering, issuance, and sale of the 
securities.
    (h) Scope. (1) Beginning March 31, 2014, an advanced approaches 
savings association must comply with paragraphs (h) through (q) of this 
section in order to include subordinated debt securities or mandatorily 
redeemable preferred stock (``covered securities'') in tier 2 capital 
under 12 CFR 3.20(d) and to prepay covered securities included in tier 
2 capital.
    (2) Beginning January 1, 2015, a non-advanced approaches savings 
association must comply with paragraphs (h) through (q) of this section 
in order to include covered securities in tier 2 capital under 12 CFR 
3.20(d) and to prepay covered securities included in tier 2 capital. A 
Federal savings association that does not include covered securities in 
tier 2 capital is not required to comply with this section. Covered 
securities not included in tier 2 capital are subject to the 
requirements of Sec.  163.80.
    (3) For purposes of this section, mandatorily redeemable preferred 
stock means mandatorily redeemable preferred stock that was issued 
before July 23, 1985 or issued pursuant to regulations and memoranda of 
the Federal Home Loan Bank Board and approved in writing by the Federal 
Savings and Loan Insurance Corporation for inclusion as regulatory 
capital before or after issuance.
    (i) Prior approval required for prepayment of covered securities 
included in tier 2 capital. A Federal savings association must obtain 
prior OCC approval to prepay covered securities included in tier 2 
capital. For purposes of this requirement, prepayment includes 
acceleration of a covered security, repurchase of a covered security, 
redemption of a covered security prior to maturity, and exercising a 
call option in connection with a covered security.
    (j) Application and notice procedures. (1) Application or notice to 
include covered securities in tier 2 capital. (i) A Federal savings 
association must file an application or notice under 12 CFR part 116, 
subpart A seeking the OCC's approval of, or non-objection to, the 
inclusion of covered securities in tier 2 capital. The savings 
association may file its application or notice before or after it 
issues covered securities, but may not include covered securities in 
tier 2 capital until the OCC approves the application or does not 
object to the notice.
    (ii) A savings association also must comply with the securities 
offering rules at 12 CFR part 197 by filing an offering circular for a 
proposed issuance of covered securities, unless the offering qualifies 
for an exemption under that part.
    (2) Application to prepay covered securities included in tier 2 
capital. (i) General. A Federal savings association must file an 
application under 12 CFR part 116, subpart A seeking the OCC's prior 
approval to prepay covered securities included in tier 2 capital. The 
filing is subject to standard treatment under 12 CFR part 116, subpart 
E.
    (ii) Prepayment in the form of a call option. (A) In addition to 
the information required by paragraph (j)(2) of this section, the 
application must include:
    (1) A statement explaining why the Federal savings association 
believes that following the proposed prepayment the

[[Page 11316]]

savings association would continue to hold an amount of capital 
commensurate with its risk; or
    (2) A description of the replacement capital instrument that meets 
the criteria for tier 1 or tier 2 capital under 12 CFR 3.20, including 
the amount of such instrument, and the time frame for issuance.
    (B) Notwithstanding paragraph (j)(1)(i) of this section, if the OCC 
conditions approval of prepayment in the form of a call option on a 
requirement that a Federal savings association must replace the covered 
security with a covered security of an equivalent amount that satisfies 
the requirements for a tier 1 or tier 2 instrument, the savings 
association must file an application to issue the replacement covered 
security and must receive prior OCC approval.
    (k) General requirements. A covered security issued under this 
section must satisfy the requirements for tier 2 capital in 12 CFR 
3.20(d).
    (l) Securities requirements for inclusion in tier 2 capital. To be 
included in tier 2 capital, covered securities must satisfy the 
requirements in 12 CFR 3.20(d). In addition, such covered securities 
must meet the following requirements:
    (1) Form. (i) Each certificate evidencing a covered security must:
    (A) Bear the following legend on its face, in bold type: ``This 
security is not a savings account or deposit and it is not insured by 
the United States or any agency or fund of the United States;''
    (B) State that the security is subordinated on liquidation, as to 
principal, interest, and premium, to all claims against the savings 
association that have the same priority as savings accounts or a higher 
priority;
    (C) State that the security is not secured by the savings 
association's assets or the assets of any affiliate of the savings 
association. An affiliate means any person or company which controls, 
is controlled by, or is under common control with the savings 
association;
    (D) State that the security is not eligible collateral for a loan 
by the savings association;
    (E) State the prohibition on the payment of dividends or interest 
at 12 U.S.C. 1828(b) and, in the case of subordinated debt securities, 
state the prohibition on the payment of principal and interest at 12 
U.S.C. 1831o(h), 12 CFR 3.11, and any other relevant restrictions;
    (F) For subordinated debt securities, state or refer to a document 
stating the terms under which the savings association may prepay the 
obligation; and
    (G) Where applicable, state or refer to a document stating that the 
savings association must obtain OCC's prior approval before the 
acceleration of payment of principal or interest on subordinated debt 
securities, redemption of subordinated debt securities prior to 
maturity, repurchase of subordinated debt securities, or exercising a 
call option in connection with a subordinated debt security.
    (ii) A Federal savings association must include such additional 
statements as the OCC may prescribe for certificates, purchase 
agreements, indentures, and other related documents.
    (2) Indenture. (i) Except as provided in paragraph (c)(4)(ii) of 
this section, a Federal savings association must use an indenture for 
subordinated debt securities. If the aggregate amount of subordinated 
debt securities publicly offered (excluding sales in a non-public 
offering as defined in 12 CFR 197.4) and sold in any consecutive 12-
month or 36-month period exceeds $5,000,000 or $10,000,000 respectively 
(or such lesser amount that the Securities and Exchange Commission 
shall establish by rule or regulation under 15 U.S.C. 77ddd), the 
indenture must provide for the appointment of a trustee other than the 
savings association or an affiliate of the savings association (as 
defined in subsection (c)(1)(i)(C) of this section) and for collective 
enforcement of the security holders' rights and remedies.
    (ii) A Federal savings association is not required to use an 
indenture if the subordinated debt securities are sold only to 
accredited investors, as that term is defined in 15 U.S.C. 77d(6). A 
savings association must have an indenture that meets the requirements 
of paragraph (c)(4)(i) of this section in place before any debt 
securities for which an exemption from the indenture requirement is 
claimed, are transferred to any non-accredited investor. If a savings 
association relies on this exemption from the indenture requirement, it 
must place a legend on the debt securities indicating that an indenture 
must be in place before the debt securities are transferred to any non-
accredited investor.
    (m) Review by the OCC. (1) The OCC will review notices and 
applications under 12 CFR part 116, subpart E.
    (2) In reviewing notices and applications under this section, the 
OCC will consider whether:
    (i) The issuance of the covered securities is authorized under 
applicable laws and regulations and is consistent with the savings 
association's charter and bylaws;
    (ii) The savings association is at least adequately capitalized 
under Sec.  6.4 of this chapter and meets the regulatory capital 
requirements at 12 CFR 3.10;
    (iii) The savings association is or will be able to service the 
covered securities;
    (iv) The covered securities are consistent with the requirements of 
this section;
    (v) The covered securities and related transactions sufficiently 
transfer risk from the Deposit Insurance Fund; and
    (vi) The OCC has no objection to the issuance based on the savings 
association's overall policies, condition, and operations.
    (3) The OCC's approval or non-objection is conditioned upon no 
material changes to the information disclosed in the application or 
notice submitted to the OCC. The OCC may impose such additional 
requirements or conditions as it may deem necessary to protect 
purchasers, the savings association, the OCC, or the Deposit Insurance 
Fund.
    (n) Amendments. If a Federal savings association amends the covered 
securities or related documents following the completion of the OCC's 
review, it must obtain the OCC's approval or non-objection under this 
section before it may include the amended securities in tier 2 capital.
    (o) Sale of covered securities. The Federal savings association 
must complete the sale of covered securities within one year after the 
OCC's approval or non-objection under this section. A savings 
association may request an extension of the offering period by filing a 
written request with the OCC. The savings association must demonstrate 
good cause for the extension and file the request at least 30 days 
before the expiration of the offering period or any extension of the 
offering period.
    (p) Issuance of a replacement regulatory capital instrument in 
connection with exercising a call option. Pursuant to 12 CFR 
3.20(d)(1)(v)(C), the OCC may require a Federal savings association 
seeking prior approval to exercise a call option in connection with a 
covered security included in tier 2 capital to issue a replacement 
covered security of an equivalent amount that qualifies as tier 1 or 
tier 2 capital under 12 CFR 3.20. If the OCC imposes such a 
requirement, the savings association must complete the sale of such 
covered security prior to, or immediately after, the prepayment.\1\
---------------------------------------------------------------------------

    \1\ A Federal savings association may replace tier 2 capital 
instruments concurrent with the redemption of existing tier 2 
capital instruments.
---------------------------------------------------------------------------

    (q) Reports. A Federal savings association must file the following

[[Page 11317]]

information with the OCC within 30 days after the savings association 
completes the sale of covered securities includable as tier 2 capital. 
If the savings association filed its application or notice following 
the completion of the sale, it must submit this information with its 
application or notice:
    (1) A written report indicating the number of purchasers, the total 
dollar amount of securities sold, the net proceeds received by the 
savings association from the issuance, and the amount of covered 
securities, net of all expenses, to be included as tier 2 capital;
    (2) Three copies of an executed form of the securities and a copy 
of any related documents governing the issuance or administration of 
the securities; and
    (3) A certification by the appropriate executive officer indicating 
that the savings association complied with all applicable laws and 
regulations in connection with the offering, issuance, and sale of the 
securities.


Sec.  163.141  [Amended]

0
49. Section 163.141 is amended by:
0
i. In paragraph (b) removing the phrase ``part 167 of this chapter'' 
and adding the phrase ``12 CFR part 3 or part 167, as applicable'' in 
its place; and
0
ii. In paragraph (d) removing the phrase ``Sec.  165.4(b)(1) of this 
chapter'' and adding the phrase ``12 CFR 6.4'' in its place.


Sec.  163.142  [Amended]

0
50. Section 163.142 is amended by:
0
i. In the definition of ``Affiliate'', removing the phrase ``Sec.  
563.41(b) until superseded by'' and adding after the phrase ``with 
affiliates'', the phrase ``, 12 CFR part 223 (Regulation W)''.
0
ii. In the definition for ``Capital'', removing the phrase ``part 167 
of this chapter'' and adding the phrase ``12 CFR part 3 or part 167, as 
applicable'' in its place.


Sec.  163.143  [Amended]

0
51. Section 163.143 is amended by:
0
i. In paragraph (a)(3) by removing the phrase ``Sec.  165.4(b)(2) of 
this chapter,'' and adding the phrase ``12 CFR 6.4'' in its place; and
0
ii. In paragraph (b)(1) removing the phrase ``Sec.  165.4(b)(1),'' and 
adding the phrase ``12 CFR 6.4,'' in its place; and
0
iii. In paragraph (b)(2) removing the phrase ``under part 167 of this 
chapter'' and adding the phrase ``12 CFR part 3 or part 167, as 
applicable'' in its place.


Sec.  163.146  [Amended]

0
52. Section 163.146(a) is amended by removing the phrase ``Sec.  
165.4(b) of this chapter,'' and adding the phrase ``12 CFR 6.4'' in its 
place.


Sec.  163.560  [Amended]

0
53. Section 163.560 is amended by:
0
i. In paragraph (a)(1) removing the phrase ``part 167 of this 
chapter,'' and adding the phrase ``12 CFR part 3 or part 167, as 
applicable,'' in its place; and
0
ii. In paragraph (a)(3) removing the phrase ``part 165 of this 
chapter'' and adding the phrase ``12 CFR part 6'' in its place.

PART 192--CONVERSIONS FROM MUTUAL TO STOCK FORM

0
54. The authority citation for part 192 continues to read as follows:

    Authority:  12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 2901, 
5412(b)(2)(B); 15 U.S.C. 78c, 78l. 78m, 78n, 78w.


Sec.  192.200  [Amended]

0
55. Section 192.200(a)(2) is amended by removing the phrase ``part 167 
of this chapter'' and adding the phrase ``12 CFR part 3, part 324, or 
part 390, subpart Z, as applicable'' in its place.


Sec.  192.500  [Amended]

0
56. Section 192.500 is amended by:
0
i. In paragraph (a)(12), removing the phrase ``Sec.  165.4 of this 
chapter'' and adding the phrase ``12 CFR 6.4 or 324.403, as 
applicable'' in its place.
0
ii. In paragraph (a)(12), removing the phrase ``Sec.  165.7 of this 
chapter'' and adding the phrase ``12 CFR part 6, subpart B or 12 CFR 
308.201, as applicable'' in its place.


Sec.  192.520  [Amended]

0
57. Section 192.520(b) is amended by removing the phrase ``part 167 of 
this chapter'' and adding the phrase ``12 CFR part 3 or part 167, as 
applicable'' in its place.


    Dated: February 24, 2014.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2014-04331 Filed 2-27-14; 8:45 am]
BILLING CODE 4810-33-P