[Federal Register Volume 80, Number 229 (Monday, November 30, 2015)]
[Proposed Rules]
[Pages 74926-74964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29740]



[[Page 74925]]

Vol. 80

Monday,

No. 229

November 30, 2015

Part IV





Federal Reserve System





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12 CFR Parts 217 and 252





Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding 
Company Requirements for Systemically Important U.S. Bank Holding 
Companies and Intermediate Holding Companies of Systemically Important 
Foreign Banking Organizations; Regulatory Capital Deduction for 
Investments in Certain Unsecured Debt of Systemically Important U.S. 
Bank Holding Companies; Proposed Rule

Federal Register / Vol. 80 , No. 229 / Monday, November 30, 2015 / 
Proposed Rules

[[Page 74926]]


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FEDERAL RESERVE SYSTEM

12 CFR Parts 217 and 252

[Regulations Q and YY; Docket No. R-1523]
RIN 7100-AE37


Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding 
Company Requirements for Systemically Important U.S. Bank Holding 
Companies and Intermediate Holding Companies of Systemically Important 
Foreign Banking Organizations; Regulatory Capital Deduction for 
Investments in Certain Unsecured Debt of Systemically Important U.S. 
Bank Holding Companies

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

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board is inviting comment on a proposed rule to promote 
financial stability by improving the resolvability and resiliency of 
large, interconnected U.S. bank holding companies and the U.S. 
operations of large, interconnected foreign banking organizations 
pursuant to section 165 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) and related deduction 
requirements for all banking organizations subject to the Board's 
capital rules. Under the proposed rule, a U.S. top-tier bank holding 
company identified by the Board as a global systemically important 
banking organization (covered BHC) would be required to maintain 
outstanding a minimum amount of loss-absorbing instruments, including a 
minimum amount of unsecured long-term debt, and related buffer. 
Similarly, the proposed rule would require the top-tier U.S. 
intermediate holding company of a global systemically important foreign 
banking organization with $50 billion or more in U.S. non-branch assets 
(covered IHC) to maintain outstanding a minimum amount of intra-group 
loss-absorbing instruments, including a minimum amount of unsecured 
long-term debt, and related buffer. The proposed rule would also impose 
restrictions on the other liabilities that a covered BHC or covered IHC 
may have outstanding. Finally, the proposed rule would require state 
member banks, bank holding companies, and savings and loan holding 
companies that are subject to the Board's capital rules to apply a 
regulatory capital deduction treatment to their investments in 
unsecured debt issued by covered BHCs.

DATES: Comments should be received by February 1, 2016.

ADDRESSES: You may submit comments, identified by Docket No. R-1523 and 
RIN 7100 AE-37, by any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Robert deV. Frierson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room 3515, 1801 K Street (between 18th and 19th Streets 
NW.) Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Constance M. Horsley, Assistant 
Director, (202) 452-5239, Thomas Boemio, Senior Project Manager, (202) 
452-2982, Juan C. Climent, Manager, (202) 872-7526, Felton Booker, 
Senior Supervisory Financial Analyst, (202) 912-4651, Sean Healey, 
Senior Financial Analyst, (202) 912-4611, or Mark Savignac, Senior 
Financial Analyst, (202) 475-7606, Division of Banking Supervision and 
Regulation; or Laurie Schaffer, Associate General Counsel, (202) 452-
2272, Benjamin McDonough, Special Counsel, (202) 452-2036, Jay Schwarz, 
Senior Counsel, (202) 452-2970, Will Giles, Counsel, (202) 452-3351, 
Mark Buresh, Senior Attorney, (202) 452-5270, or Greg Frischmann, 
Senior Attorney, (202) 452-2803, Legal Division, Board of Governors of 
the Federal Reserve System, 20th and C Streets NW., Washington, DC 
20551. For the hearing impaired only, Telecommunications Device for the 
Deaf (TDD) users may contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Addressing Too-Big-to-Fail
    B. Approaches to Resolution
    C. Overview of the Proposal
    D. Consultation with the FDIC, the Council, and Foreign 
Authorities
    E. The FSB's Proposal on Total Loss-Absorbing Capacity for GSIBs
    F. Overview of Statutory Authority
II. External TLAC and LTD Requirements for U.S. GSIBs
    A. Scope of Application
    B. Calibration of the External TLAC and LTD Requirements
    C. Core Features of Eligible External TLAC
    D. External TLAC Buffer
    E. Core Features of Eligible External LTD
    F. Costs and Benefits
III. Internal TLAC and LTD Requirements for U.S. Intermediate 
Holding Companies of Foreign Banking Organizations
    A. Scope of Application
    B. Calibration of the Internal TLAC and LTD Requirements
    C. Core Features of Eligible Internal TLAC
    D. Internal TLAC Buffer
    E. Core Features of Eligible Internal LTD
IV. Clean Holding Company Requirements
    A. Third-Party Short-Term Debt Instruments
    B. Qualified Financial Contracts with Third Parties
    C. Guarantees that Are Subject to Cross-Defaults
    D. Upstream Guarantees and Offset Rights
    E. Cap on Other Third-Party Liabilities
    F. Disclosure Requirements
V. Consideration of Reporting Requirements for Eligible External and 
Internal TLAC and LTD
VI. Consideration of Domestic Internal TLAC Requirement
VII. Regulatory Capital Deduction for Investments in the Unsecured 
Debt of Covered BHCs
VIII. Transition Periods
IX. Regulatory Analysis
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act
    C. Riegle Community Development and Regulatory Improvement Act 
of 1994
    D. Solicitation of Comments on the Use of Plain Language

I. Introduction

A. Addressing Too-Big-to-Fail

    An important objective of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) \1\ is to mitigate risks to 
the financial stability of the United States that could arise from the 
material financial distress or failure of large, interconnected 
financial companies, including by ending market perceptions that 
certain financial companies are ``too big to fail'' and would therefore 
receive extraordinary government support to prevent their failure. Such 
perceptions reduce the

[[Page 74927]]

incentives of the shareholders, creditors, and counterparties of such a 
company to discipline excessive risk-taking by the company. Such 
perceptions also tend to fuel further growth by the largest financial 
companies, making them even more systemically important and leading to 
more financial sector concentration than would exist in the absence of 
market expectations of government support. Finally, such perceptions 
can produce competitive distortions by allowing the largest, most 
interconnected financial companies to fund themselves more cheaply than 
their smaller competitors can. These distortions are unfair to smaller 
companies and detrimental to competition.
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    \1\ The Dodd-Frank Act was enacted on July 21, 2010 (Pub. L. 
111- 203).
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    The Dodd-Frank Act establishes a framework to address the financial 
stability risks associated with major financial companies. The Act 
seeks to enhance financial stability through two approaches. First, the 
Act seeks to reduce major financial companies' probability of failure 
by requiring the Board to subject them to enhanced capital, liquidity, 
and other prudential requirements and to heightened supervision.\2\ 
Second, the Act seeks to reduce the risk that such a company's failure, 
were it to occur, would pose to the financial stability of the United 
States through resolution-planning requirements and a new statutory 
resolution framework for major financial companies.\3\ These approaches 
have also been followed in international regulatory reform efforts 
since the 2007-2009 financial crisis, which have been coordinated 
through the Basel Committee on Banking Supervision (BCBS) \4\ and the 
Financial Stability Board (FSB),\5\ at the direction of the Heads of 
State of the Group of Twenty (G20 Leaders).\6\
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    \2\ See 12 U.S.C. 5365(a)(1)(A).
    \3\ See 12 U.S.C. 5381-5394.
    \4\ The BCBS is a committee of banking supervisory authorities 
established by the central bank governors of the Group of Ten 
countries in 1975. The committee's membership consists of senior 
representatives of bank supervisory authorities and central banks 
from Argentina, Australia, Belgium, Brazil, Canada, China, France, 
Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, 
Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, 
Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the 
United Kingdom, and the United States. The BCBS usually meets at the 
Bank for International Settlements (BIS) in Basel, Switzerland, 
where its permanent Secretariat is located.
    \5\ The FSB was established in 2009 to coordinate at the 
international level the work of national financial authorities and 
international standard-setting bodies and to develop and promote the 
implementation of effective regulatory, supervisory, and other 
financial sector policies in the interest of financial stability. 
The FSB brings together national authorities responsible for 
financial stability in 24 countries and jurisdictions, as well as 
international financial institutions, sector-specific international 
groupings of regulators and supervisors, and committees of central 
bank experts. See generally Financial Stability Board, available at 
http://www.financialstabilityboard.org.
    \6\ The Group of Twenty was established in 1999 to bring 
together industrialized and developing economies to discuss key 
issues in the global economy. Members include finance ministers and 
central bank governors from Argentina, Australia, Brazil, Canada, 
China, France, Germany, India, Indonesia, Italy, Japan, Mexico, 
Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, the 
United Kingdom, and the United States and the European Union.
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    The Board has made considerable progress in implementing the first 
approach by reducing the probability that a major financial company 
will fail. Along with the Comptroller of the Currency (OCC) and the 
Federal Deposit Insurance Corporation (FDIC), the Board has implemented 
stronger capital standards \7\ and a new liquidity standard called the 
liquidity coverage ratio.\8\ The Board also has adopted leverage and 
risk-based capital surcharges for U.S. global systemically important 
banking organizations (GSIBs),\9\ established a robust stress testing 
framework for large banking organizations,\10\ and created a Large 
Institution Supervision Coordinating Committee to strengthen the 
supervision of the most systemically important financial institutions 
operating in the United States.\11\
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    \7\ The Board and the OCC issued a joint final rule on October 
11, 2013 (78 FR 62018) and the FDIC issued a substantially identical 
interim final rule on September 10, 2013 (78 FR 55340). The FDIC 
adopted the interim final rule as a final rule with no substantive 
changes on April 14, 2014. 79 FR 20754.
    \8\ 79 FR 61440 (October 10, 2014).
    \9\ See 80 FR 49082 (Aug. 14, 2015) (GSIB risk-based capital 
surcharge); 79 FR 24528 (May 1, 2014) (enhanced supplementary 
leverage ratio). The eight firms currently identified as U.S. GSIBs 
are Bank of America Corporation, The Bank of New York Mellon 
Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan 
Chase & Co., Morgan Stanley, State Street Corporation, and Wells 
Fargo & Company.
    \10\ 12 CFR 252.32 and 252.35.
    \11\ See Large Institution Supervision Coordinating Committee, 
available at http://www.federalreserve.gov/bankinforeg/large-institution-supervision.htm.
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    To further enhance firm-specific resiliency during periods of 
severe stress, the Board has also issued guidance on recovery planning 
to the most systemically important U.S. banking organizations.\12\ In 
addition, the Board has implemented a broad set of other enhanced 
prudential standards for bank holding companies and foreign banking 
organizations with total consolidated assets of $50 billion or 
more.\13\ Internationally, the BCBS has adopted a substantial set of 
post-crisis reforms, developed with significant participation from the 
Board and other U.S. bank regulatory agencies, which align well with 
the bank regulatory reforms implemented in the United States.
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    \12\ See Supervision and Regulation Letter 14-8, ``Consolidated 
Recovery Planning for Certain Large Domestic Bank Holding 
Companies'' (September 25, 2014).
    \13\ 79 FR 17240 (March 27, 2014).
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    U.S. regulators have also made substantial progress with respect to 
the second approach by implementing the Dodd-Frank Act's framework for 
resolution-planning for major financial companies. The Dodd-Frank Act 
provides significant new authorities to the FDIC and the Board to 
address the failure of large, interconnected financial companies.\14\ 
First, Section 165(d) of the Dodd-Frank Act requires bank holding 
companies with total consolidated assets of at least $50 billion and 
nonbank financial companies designated for supervision by the Board to 
prepare resolution plans, also known as ``living wills,'' that describe 
how they could be resolved in an orderly manner under the U.S. 
Bankruptcy Code if they were to fail.\15\ The Board and the FDIC have 
established resolution-planning requirements to implement section 
165(d).\16\
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    \14\ 12 U.S.C. 5365, 5384, and 5385.
    \15\ 12 U.S.C. 5365(d).
    \16\ 76 FR 67323 (November 1, 2011).
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    Second, Title II of the Dodd-Frank Act (Title II) establishes an 
alternative resolution framework for the largest financial companies, 
the Orderly Liquidation Authority. In general, if a major U.S. bank 
holding company or non-bank financial company were to fail, it would be 
resolved under the U.S. Bankruptcy Code.\17\ Congress recognized, 
however, that such a company might fail under extraordinary 
circumstances that would prevent it from being resolved in bankruptcy 
without serious adverse effects on the financial stability of the 
United States.\18\ Title II therefore provides the Secretary of the 
Treasury, upon recommendation from other government agencies, with the 
authority to place a major financial company into an FDIC receivership, 
rather than bankruptcy.\19\ The set of resolution powers created by 
Title II form a critical post-crisis toolkit for mitigating the 
negative effects that could follow from the failure of a systemically 
important financial institution.
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    \17\ See, e.g., 12 U.S.C. 5382(c), 5383(a)(2)(F) and (b)(4). 
Insurance companies, depository institutions, and broker dealers are 
resolved under different resolution mechanisms.
    \18\ See 12 U.S.C. 5384.
    \19\ See 12 U.S.C. 5383(b).
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    Since 2012, the largest bank holding companies and foreign banking 
organizations with U.S. operations have submitted annual resolution 
plans to the

[[Page 74928]]

Board and the FDIC as required by section 165(d). The Board and the 
FDIC review the resolution plans, provide feedback on their 
shortcomings, and set expectations for subsequent iterations of the 
plans that are intended to improve the organizations' resolvability. 
Each annual plan review cycle has yielded valuable information that is 
being used to assess and mitigate potential obstacles to orderly 
resolution under the U.S. Bankruptcy Code and to plan for the 
contingency of a resolution under Title II. The Board and the FDIC also 
consult regularly on regulatory actions intended to improve GSIB 
resolvability, including this proposed rule.

B. Approaches to Resolution

    Resolution of large financial firms will involve either a single-
point-of-entry (SPOE) resolution strategy or a multiple-point-of-entry 
(MPOE) resolution strategy.\20\ Most of the U.S. GSIBs are developing 
plans that facilitate an SPOE approach, including in their 2015 
resolution plans.
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    \20\ See FDIC, ``Resolution of Systemically Important Financial 
Institutions: The Single Point of Entry Strategy'' (6741-01-P) 
(December 10, 2013), available at http://www.fdic.gov/news/board/2013/2013-12-10_notice_dis-b_fr.pdf.
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    In an SPOE resolution of a banking organization, only the top-tier 
bank holding company would enter a resolution proceeding. The losses 
that caused the banking organization to fail would be passed up from 
the subsidiaries that incurred the losses and would then be imposed on 
the equity holders and unsecured creditors of the holding company, 
which would have the effect of recapitalizing the subsidiaries of the 
banking organization. An SPOE resolution could avoid losses to the 
third-party creditors of the subsidiaries and could thereby allow the 
subsidiaries to continue normal operations, without entering resolution 
or taking actions (such as asset firesales) that could pose a risk to 
the financial stability of the United States. The expectation that the 
holding company's equity holders and unsecured creditors would absorb 
the banking organization's losses in the event of its failure would 
also help to maintain the confidence of the operating subsidiaries' 
creditors and counterparties, reducing their incentive to engage in 
potentially destabilizing funding runs. An SPOE resolution would avoid 
the need for separate proceedings for separate legal entities run by 
separate authorities across multiple jurisdictions and the associated 
destabilizing complexity.\21\
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    \21\ See 78 FR 76614 (December 18, 2013).
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    Certain structural features of the U.S. GSIBs facilitate SPOE 
resolution. In the United States, the top-tier parent company of a 
large banking organization generally does not itself engage in material 
operations. Rather, it generally acts primarily as a holding company, 
by, for example, measuring and managing the consolidated risks of the 
organization, undertaking capital and liquidity planning, coordinating 
the operations of its subsidiaries, and raising equity capital and 
long-term debt to fund those operations. Its assets therefore consist 
largely of cash, liquid securities, and equity and debt investments in 
its subsidiaries. As a result of this organizational structure, in the 
context of SPOE resolution the liabilities of the parent holding 
company are generally ``structurally subordinated'' to the liabilities 
of the operating subsidiaries.\22\ Strengthening the loss-absorbing 
capacity of the parent holding company therefore improves the 
resiliency of the banking organization as a whole.
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    \22\ Generally, in an insolvency proceeding, direct third-party 
claims on a parent holding company's subsidiaries would be superior 
to the parent holding company's equity claims on the subsidiaries.
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    The alternative to an SPOE resolution is a multiple-point-of-entry 
(MPOE) resolution. An MPOE resolution would entail separate resolutions 
of different legal entities within the financial firm and could 
potentially be executed by multiple resolution authorities across 
multiple jurisdictions. The SPOE approach to resolution appears to 
offer substantial advantages, because it facilitates the continued 
operations of subsidiaries of a GSIB, reducing the material risk that 
the failure of the organization could have on U.S. financial stability. 
U.S. regulators nevertheless are cognizant of the need to prepare for 
other plausible contingencies, including the MPOE resolution of a GSIB. 
While this proposal is primarily focused on implementing the SPOE 
resolution strategy, it would also substantially improve the prospects 
for a successful MPOE resolution of a GSIB by requiring U.S. GSIBs and 
the IHCs of foreign GSIBs to maintain substantially more loss-absorbing 
capacity.

C. Overview of the Proposal

    The Board is inviting comment on this notice of proposed rulemaking 
to improve the resolvability and resiliency of U.S. banking 
organizations. The proposal would require the parent holding companies 
of U.S. GSIBs to maintain outstanding minimum levels of total loss-
absorbing capacity and long-term unsecured debt, and a related buffer. 
The proposal would also require the top-tier U.S. intermediate holding 
companies of foreign GSIBs to maintain outstanding minimum levels of 
total loss-absorbing capacity and long-term unsecured debt instruments 
issued to their foreign parent company, and related buffer. The 
proposal would subject the operations of the parent holding companies 
of U.S. GSIBs and the top-tier U.S. intermediate holding companies of 
foreign GSIBs to ``clean holding company'' limitations to further 
improve their resolvability and the resiliency of their operating 
subsidiaries. Finally, the proposal would require banking organizations 
subject to the Board's capital requirements to make certain deductions 
from capital.
    This proposal would further the goals of improving the resiliency 
and resolvability of GSIBs. Separately, the Board and the FDIC are 
continuing to work to mitigate the resolvability risks related to 
potential disorderly unwinds of financial contracts. Other actions for 
consideration include ensuring the adequacy of ``internal bail-in'' 
mechanisms through which operating subsidiaries can pass losses up to 
their parent holding company and the holding company can recapitalize 
the subsidiaries.
1. External Total Loss-Absorbing Capacity and Long-Term Debt 
Requirements for Covered U.S. Bank Holding Companies
    Under this proposal, a ``covered BHC'' would be required to 
maintain outstanding minimum levels of eligible external total loss-
absorbing capacity (external TLAC requirement) and eligible external 
long-term debt (external LTD requirement). The term ``external'' refers 
to the fact that the requirement would apply to loss-absorbing 
instruments issued by the covered BHC to third-party investors, and the 
instrument would be used to pass losses from the banking organization 
to those investors in case of failure. This is in contrast to 
``internal'' loss-absorbing capacity, which could be used to transfer 
losses among legal entities within a banking organization (for 
instance, from the operating subsidiaries to the parent holding 
company).
    The term ``covered BHC'' would be defined to include any U.S. top-
tier bank holding company identified as a GSIB under the Board's rule 
establishing risk-based capital surcharges for GSIBs (``GSIB surcharge 
rule'').\23\ Under the external TLAC requirement, a covered

[[Page 74929]]

BHC would be required to maintain outstanding eligible external total 
loss-absorbing capacity (``eligible external TLAC'') in an amount not 
less than the greater of 18 percent of the covered BHC's total risk-
weighted assets and 9.5 percent of the covered BHC's total leverage 
exposure.\24\ An external TLAC buffer that is similar to the capital 
conservation buffer in the Board's Regulation Q would apply in addition 
to the risk-weighted assets component of the external TLAC requirement.
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    \23\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015).
    \24\ The risk-weighted assets component of the external TLAC 
requirement would be phased in as follows: It would be equal to 16 
percent of the covered BHC's risk-weighted assets beginning on 
January 1, 2019, and would be equal to 18 percent of the covered 
BHC's risk-weighted assets beginning on January 1, 2022.
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    Under the external LTD requirement, a covered BHC would be required 
to maintain outstanding eligible external long-term debt instruments 
(``eligible external LTD'') in an amount not less than the greater of 6 
percent plus the surcharge applicable under the GSIB surcharge rule 
(expressed as a percentage) of total risk-weighted assets and 4.5 
percent of total leverage exposure.\25\
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    \25\ Total leverage exposure is defined in 12 CFR 
217.10(c)(4)(ii).
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    A covered BHC's eligible external TLAC would be defined to be the 
sum of (a) the tier 1 regulatory capital of the covered BHC issued 
directly by the covered BHC and (b) the covered BHC's eligible external 
LTD, as defined below.
    A covered BHC's eligible external LTD would generally be defined to 
be debt that is issued directly by the covered BHC, is unsecured, is 
``plain vanilla,'' \26\ and is governed by U.S. law. Eligible external 
LTD with a remaining maturity of between one and two years would be 
subject to a 50 percent haircut for purposes of the external LTD 
requirement, and eligible external LTD with a remaining maturity of 
less than one year would not count toward the external LTD requirement.
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    \26\ The term ``plain vanilla'' is defined in detail in section 
II.E.3 and excludes structured notes and most instruments that 
contain derivative-linked features.
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2. Internal Total Loss-Absorbing Capacity and Long-Term Debt 
Requirements for Covered U.S. Intermediate Holding Companies
    Under this proposal, a ``covered IHC'' would be required to 
maintain outstanding minimum levels of eligible internal total loss-
absorbing capacity (``internal TLAC requirement'') and eligible 
internal long-term debt (``internal LTD requirement''). The term 
``internal'' refers to the fact that these instruments would be 
required to be issued internally within the foreign banking 
organization, from the covered IHC to a foreign parent entity. The term 
``covered IHC'' would be defined to include any U.S. intermediate 
holding company that (a) is required to be formed under the Board's 
enhanced prudential standards rule \27\ and (b) is controlled by a 
foreign banking organization that would be designated as a GSIB under 
the Board's capital rules if it were subject to the Board's GSIB 
surcharge on a consolidated basis (``foreign GSIB'').
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    \27\ The Board's enhanced prudential standards rule generally 
requires any foreign banking organization with total consolidated 
non-branch U.S. assets of $50 billion or more to form a single U.S. 
intermediate holding company over its U.S. subsidiaries. 12 CFR 
252.153; 79 FR 17329 (May 27, 2014).
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    Under the internal TLAC requirement, the amount of eligible 
internal total loss-absorbing capacity (``eligible internal TLAC'') 
that a covered IHC would be required to maintain outstanding would 
depend on whether the covered IHC (or any of its subsidiaries) is 
expected to go into resolution in a failure scenario, rather than being 
maintained as a going concern while a foreign parent entity is instead 
resolved. In general, this means that the stringency of the internal 
TLAC and LTD requirements for a given covered IHC would be a function 
of whether the foreign GSIB parent of the covered IHC has an SPOE or an 
MPOE resolution strategy.
    Covered IHCs that are not expected to enter resolution themselves 
would be required to maintain eligible internal TLAC in an amount not 
less than the greater of: (a) 16 percent of the covered IHC's total 
risk-weighted assets; \28\ (b) for covered IHCs that are subject to the 
supplementary leverage ratio,\29\ 6 percent of the covered IHC's total 
leverage exposure; and (c) 8 percent of the covered IHC's average total 
consolidated assets, as computed for purposes of the U.S. tier 1 
leverage ratio.\30\
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    \28\ The risk-weighted assets component of the internal TLAC 
requirement would be phased in as follows: It would be equal to 14 
percent of the covered IHC's risk-weighted assets beginning on 
January 1, 2019, and would be equal to 16 percent of the covered 
IHC's risk-weighted assets beginning on January 1, 2022.
    \29\ Under the IHC rule, U.S. intermediate holding companies 
with total consolidated assets of $250 billion or more or on-balance 
sheet foreign exposure equal to $10 billion or more are required to 
meet a minimum supplementary leverage ratio of 3 percent. 12 CFR 
252.153(e)(2); 79 FR 17329 (March 27, 2014).
    \30\ The final rule imposes the same leverage capital 
requirements on U.S. intermediate holding companies as it does on 
U.S. bank holding companies. 12 CFR 252.153(e)(2); 79 FR 17329 
(March 27, 2014). These leverage capital requirements include the 
generally-applicable leverage ratio and the supplementary leverage 
ratio for U.S. intermediate holding companies that meet the scope of 
application for that ratio.
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    Covered IHCs that are expected to enter resolution themselves would 
be required to maintain outstanding eligible internal TLAC in an amount 
not less than the greater of: (a) 18 percent of the covered IHC's total 
risk-weighted assets; \31\ (b) 6.75 percent of the covered IHC's total 
leverage exposure (if applicable); and (c) 9 percent of the covered 
IHC's average total consolidated assets, as computed for purposes of 
the U.S. tier 1 leverage ratio.
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    \31\ The risk-weighted assets component of the internal TLAC 
requirement for covered IHCs of MPOE firms would be phased in as 
follows: It would be equal to 16 percent of the covered IHC's risk-
weighted assets beginning on January 1, 2019, and would be equal to 
18 percent of the covered IHC's risk-weighted assets beginning on 
January 1, 2022.
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    For all covered IHCs, an internal TLAC buffer that is similar to 
the capital conservation buffer in the Board's Regulation Q would apply 
in addition to the risk-weighted assets component of the internal TLAC 
requirement.
    Under the internal LTD requirement, a covered IHC would be required 
to maintain outstanding eligible internal long-term debt instruments 
(``eligible internal LTD'') in an amount not less than the greater of: 
(a) 7 percent of total risk-weighted assets; (b) 3 percent of the total 
leverage exposure (if applicable); and (c) 4 percent of average total 
consolidated assets, as computed for purposes of the U.S. tier 1 
leverage ratio.
    A covered IHC's eligible internal TLAC would generally be defined 
to be the sum of (a) the tier 1 regulatory capital issued from the 
covered IHC to a foreign parent entity that controls the covered IHC 
and (b) the covered IHC's eligible internal LTD, as defined below.
    A covered IHC's eligible internal LTD would generally be subject to 
the same requirements as would apply to eligible external LTD: It would 
be required to be debt that is issued directly from the covered IHC, is 
unsecured, is plain vanilla, and is governed by U.S. law. Eligible 
internal LTD with a remaining maturity of between one and two years 
would be subject to a 50 percent haircut for purposes of the internal 
LTD requirement, and eligible internal LTD with a remaining maturity of 
less than one year would not count toward the internal LTD requirement.
    However, several features distinguish eligible internal LTD from 
eligible external LTD: It would be required to be issued to a parent 
foreign entity that controls the covered IHC, to be contractually 
subordinated to all third-party liabilities of the covered IHC, and to 
include a contractual trigger pursuant

[[Page 74930]]

to which the Board could require the covered IHC to cancel the eligible 
internal LTD or convert or exchange it into tier 1 common equity on a 
going-concern basis (that is, without the covered IHC's entry into a 
resolution proceeding) if: (a) The Board determines that the covered 
IHC is ``in default or in danger of default''; and (b) any of the 
following circumstances apply (i) the top-tier foreign banking 
organization or any subsidiary outside the United States is placed into 
resolution proceedings, (ii) the home country supervisory authority 
consents to the cancellation, exchange, or conversion, or does not 
object to the cancellation, exchange, or conversion following 48 hours' 
notice, or (iii) the Board has made a written recommendation to the 
Secretary of the Treasury that the FDIC should be appointed as receiver 
of the covered IHC.
3. Clean Holding Company Requirements
    The Board is proposing to prohibit or limit covered BHCs from 
directly entering into certain financial arrangements that could impede 
an entity's orderly resolution. In an SPOE resolution of a U.S. GSIB, 
the covered BHC will go into a resolution proceeding while its 
subsidiaries continue their normal operations. These prohibitions and 
limitations would support the orderly resolution of a covered BHC, 
whether in an SPOE resolution or in an MPOE resolution involving the 
resolution of the covered BHC. The proposed requirements would also 
enhance the resiliency of the U.S. GSIB by reducing the covered BHC's 
complexity and reliance on short-term funding.
    Under the Board's clean holding company proposal, a covered BHC 
would be prohibited from issuing short-term debt instruments to third 
parties (including deposits); entering into ``qualified financial 
contracts'' (QFCs) with third parties; having liabilities that are 
subject to ``upstream guarantees'' from the covered BHC's subsidiaries 
or that are subject to contractual offset rights for its subsidiaries' 
creditors; or issuing guarantees of its subsidiaries' liabilities, if 
the issuance of the guarantee would result in the covered BHC's 
insolvency or entry into resolution operating as a default event on the 
part of the subsidiary. Additionally, the proposal would cap the value 
of a covered BHC's liabilities (other than those related to eligible 
external TLAC and eligible external LTD) that can be pari passu with or 
junior to its eligible external LTD at 5 percent of the value of its 
eligible external TLAC. Finally, the proposal would require covered 
BHCs to make certain public disclosures of the fact that their 
unsecured debt would be expected to absorb losses ahead of other 
liabilities, including the liabilities of the covered BHC's 
subsidiaries, in a failure scenario.
    An SPOE resolution of a foreign GSIB in its home jurisdiction would 
allow the GSIB's covered IHC to continue operating without itself 
entering into a resolution proceeding. However, to prepare for a 
scenario in which a covered IHC would enter U.S. resolution 
proceedings, the Board is proposing to prohibit covered IHCs from 
entering into certain financial arrangements that can impede such a 
resolution.
4. Consideration of Domestic Internal TLAC Requirement
    The SPOE resolution strategy assumes (a) that losses will be passed 
up from the subsidiaries that initially incur them to the covered BHC 
or covered IHC and (b) that they then will be passed on to either the 
external TLAC holders (in the case of a covered BHC) or a foreign 
parent entity (in the case of a covered IHC). This proposal would work 
to satisfy the second of these assumptions, but it does not address the 
first. As discussed further below, however, the Board is seeking 
comment on whether, and if so how, the Board should regulate the 
mechanisms used by a covered BHC or covered IHC to transfer losses up 
from the operating subsidiaries that incur them to the covered BHC or 
covered IHC.
5. Regulatory Capital Deduction for Investments in the Unsecured Debt 
of Covered BHCs
    To limit the potential for financial sector contagion in the event 
of the failure of a covered BHC, state member banks, certain bank 
holding companies and savings and loan holding companies with total 
consolidated assets of at least $1 billion, and intermediate holding 
companies formed pursuant to the Board's enhanced prudential standards 
for foreign banking organizations would be required to apply a 
regulatory capital deduction treatment to any investments in unsecured 
debt instruments issued by covered BHCs (including unsecured debt 
instruments that do not qualify as eligible external LTD).

D. Consultation With the FDIC, the Council, and Foreign Authorities

    In developing this proposal, the Board consulted with the FDIC, the 
Financial Stability Oversight Council (Council), and other U.S. 
financial regulatory agencies. The proposal reflects input that the 
Board received during this consultation process. The Board also intends 
to consult with the FDIC, the Council, and other financial regulatory 
agencies after it reviews comments on the proposal. Furthermore, the 
Board has consulted with, and expects to continue to consult with, 
foreign financial regulatory authorities regarding this proposal and 
the establishment of other standards that would maximize the prospects 
for the cooperative and orderly cross-border resolution of failed 
GSIBs.

E. The FSB's Proposal on Total Loss-Absorbing Capacity for GSIBs

    In 2013, the G20 Leaders called on the FSB to develop proposals on 
the adequacy of the loss-absorbing capacity of global systemically 
important financial institutions (``SIFIs'').\32\ In November 2014, the 
FSB published for consultation a set of principles and a term sheet to 
implement those principles in the form of an internationally negotiated 
minimum standard for the total loss-absorbing capacity (``TLAC'') of 
GSIBs.\33\ Under the FSB's proposed standard, GSIBs would be subject to 
a TLAC requirement equal to the greater of (a) a figure between 16 
percent and 20 percent of a banking organization's risk-weighted assets 
(with the specific figure within that range to be agreed upon later) 
and (b) twice the Basel III tier 1 leverage ratio requirement. The 
FSB's proposed standard also contains an expectation that a GSIB would 
meet at least one-third of its TLAC requirement with eligible long-term 
debt (``LTD'') rather than equity.
---------------------------------------------------------------------------

    \32\ The Group of 20, ``G20 Leaders' Declaration'' (September 
2013), available at https://g20.org/wp-content/uploads/2014/12/Saint_Petersburg_Declaration_ENG_0.pdf.
    \33\ See ``Adequacy of loss-absorbing capacity of global 
systemically important banks in resolution'' (November 10, 2014), 
available at http://www.financialstabilityboard.org/wp-content/uploads/TLAC-Condoc-6-Nov-2014-FINAL.pdf.
---------------------------------------------------------------------------

    This proposal is generally consistent with the FSB's proposed 
standard, although it includes a required LTD component that is more 
stringent than the expectation in the FSB's proposed standard.
    The Board considered whether to structure this proposal solely as a 
TLAC requirement--that is, as a single minimum requirement that could 
be satisfied by any mixture of capital and eligible LTD--without a 
specific LTD requirement. In the absence of an LTD requirement, a TLAC 
requirement would permit each covered firm to reduce its expected 
systemic impact

[[Page 74931]]

either by reducing its probability of default through increased going-
concern capital or by reducing the harm it would cause if it were to 
fail through increased gone-concern LTD.\34\
---------------------------------------------------------------------------

    \34\ See ``Calibrating the GSIB Surcharge'' at 3 (July 20, 
2015), available at www.federalreserve.gov/aboutthefed/boardmeetings/gsib-methodology-paper-20150720.pdf.
---------------------------------------------------------------------------

    This proposal includes a separate LTD requirement in order to 
address the too-big-to-fail problem. Unlike existing equity, LTD can be 
used as a fresh source of capital subsequent to failure. Imposing an 
LTD requirement would help to ensure that a covered firm would have a 
known and observable quantity of loss-absorbing capacity at the point 
of failure. Unlike common equity, that loss-absorbing capacity would 
not be at substantial risk of volatility or depletion before the 
covered BHC is placed into a resolution proceeding. Thus, the proposed 
LTD requirements would more assuredly enhance the prospects for the 
successful resolution of a failed GSIB and thereby better address the 
too-big-to-fail problem than would TLAC requirements alone.

F. Overview of Statutory Authority

    The Board is issuing this proposal under the authority provided by 
section 165 of the Dodd-Frank Act.\35\ Section 165 instructs the Board 
to impose enhanced prudential standards on bank holding companies with 
total consolidated assets of $50 billion or more ``[i]n order to 
prevent or mitigate risks to the financial stability of the United 
States that could arise from the material financial distress or 
failure, or ongoing activities, of large, interconnected financial 
institutions.'' \36\ These enhanced prudential standards must increase 
in stringency based on the systemic footprint and risk characteristics 
of individual covered firms.\37\ In addition to requiring the Board to 
impose enhanced prudential standards of several specified types, 
section 165 authorizes the Board to establish ``such other prudential 
standards as the Board of Governors, on its own or pursuant to a 
recommendation made by the Council, determines are appropriate.'' \38\
---------------------------------------------------------------------------

    \35\ 12 U.S.C. 5365.
    \36\ 12 U.S.C. 5365(a)(1).
    \37\ 12 U.S.C. 5365(a)(1)(B), (b)(3)(A)-(D).
    \38\ 12 U.S.C. 5365(b)(1)(B)(iv).
---------------------------------------------------------------------------

    The enhanced prudential standards in this proposal are appropriate 
because they are intended to prevent or mitigate risks to the financial 
stability of the United States that could arise from the material 
financial distress, failure, or ongoing activities of a GSIB. In 
particular, the proposed requirements would improve the resolvability 
of U.S. GSIBs under either the U.S. Bankruptcy Code or Title II and 
improve their resiliency. The proposed requirements would also improve 
the resiliency of covered IHCs and their subsidiaries, and thereby 
increase the likelihood that a failed foreign GSIB with significant 
U.S. operations would be successfully resolved under an SPOE approach 
without the failure of the U.S. subsidiaries or, failing that, that the 
foreign GSIB's U.S. operations could be separately resolved in an 
orderly manner.
    In addition to the authority identified above, section 165 of the 
Dodd-Frank Act also authorizes the Board to establish ``enhanced public 
disclosures'' and ``short-term debt limits.'' \39\ The proposal 
includes disclosure requirements and limits on the ability of covered 
BHCs and covered IHCs to issue short-term debt.
---------------------------------------------------------------------------

    \39\ 12 U.S.C. 5365(b)(1)(B)(ii) and (iii).
---------------------------------------------------------------------------

    Finally, the Board has tailored this proposal to apply only to 
those companies whose disorderly resolution would likely pose the 
greatest risk to the financial stability of the United States: The U.S. 
GSIBs and the U.S. intermediate holding companies of foreign GSIBs.\40\
---------------------------------------------------------------------------

    \40\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------

    Question 1: The Board invites comment on all aspects of this 
section.

II. External TLAC and LTD Requirements for U.S. GSIBs

A. Scope of Application (Section 252.60 of the Proposed Rule)

    The proposed rule would apply to all ``covered BHCs.'' The term 
``covered BHC'' would be defined to include any U.S. top-tier bank 
holding company identified as a GSIB under the Board's GSIB surcharge 
rule.\41\ Under the GSIB surcharge rule, a U.S. top-tier bank holding 
company subject to the advanced approaches rule must determine whether 
it is a GSIB by applying a multifactor methodology established by the 
Board.\42\ This methodology evaluates a banking organization's systemic 
importance on the basis of its attributes in five broad categories: 
Size, interconnectedness, cross-jurisdictional activity, 
substitutability, and complexity.
---------------------------------------------------------------------------

    \41\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015).
    \42\ 12 CFR part 217, subpart E.
---------------------------------------------------------------------------

    Accordingly, the methodology provides a tool for identifying as 
GSIBs those banking organizations that pose elevated risks. The 
proposal's focus on GSIBs is in keeping with the Dodd-Frank Act's 
mandate that more stringent prudential standards be applied to the most 
systemically important bank holding companies.\43\
---------------------------------------------------------------------------

    \43\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------

    Under the GSIB surcharge rule's methodology, eight U.S. bank 
holding companies would currently be identified as GSIBs. Those eight 
top-tier bank holding companies would therefore be covered BHCs under 
this proposal.\44\ In addition, because the GSIB surcharge methodology 
is dynamic, other banking organizations could become subject to the 
proposed rule in the future.
---------------------------------------------------------------------------

    \44\ The eight firms currently identified as U.S. GSIBs are Bank 
of America Corporation, The Bank of New York Mellon Corporation, 
Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan Chase & Co., 
Morgan Stanley, State Street Corporation, and Wells Fargo & Company.
---------------------------------------------------------------------------

    Question 2: The Board invites comment on alternative approaches for 
determining the scope of application of the proposed external TLAC and 
LTD requirements.

B. Calibration of the External TLAC and LTD Requirements (Sections 
252.62 and 252.63 of the Proposed Rule)

    Under the proposal's external TLAC requirement, a covered BHC would 
be required to maintain outstanding eligible external TLAC in an amount 
not less than the greater of 18 percent of the covered BHC's total 
risk-weighted assets \45\ and 9.5 percent of the covered BHC's total 
leverage exposure under the supplementary leverage ratio rule. As 
described below, an external TLAC buffer would apply in addition to the 
risk-weighted assets component of the external TLAC requirement.
---------------------------------------------------------------------------

    \45\ A covered BHC would calculate risk-weighted assets for 
purposes of the external TLAC requirement using the same methodology 
it uses to calculate risk-weighted assets under the Board's 
regulatory capital rules. See 12 CFR part 217, subparts D and E. The 
Board's regulatory capital rules require an advanced approaches 
banking organization (generally, a banking organization with $250 
billion or more in total consolidated assets or $10 billion or more 
in total on-balance sheet foreign exposure) that has successfully 
completed its parallel run to calculate each of its risk-based 
capital ratios using the standardized approach and the advanced 
approaches, and directs the banking organization to use the lower of 
each ratio as its governing ratio. See 12 CFR 217.10.
    The risk-weighted assets component of the external TLAC 
requirement would be phased in as follows: It would be equal to 16 
percent of the covered BHC's risk-weighted assets beginning on 
January 1, 2019, and would be equal to 18 percent of the covered 
BHC's risk-weighted assets beginning on January 1, 2022.
---------------------------------------------------------------------------

    Under the proposal's external LTD requirement, a covered BHC would 
be required to maintain outstanding eligible external LTD in an amount 
not less than the greater of 6 percent plus the surcharge applicable 
under the GSIB

[[Page 74932]]

surcharge rule (expressed as a percentage) of total risk-weighted 
assets and 4.5 percent of total leverage exposure. Covered BHCs would 
be prohibited from redeeming or repurchasing eligible external LTD 
prior to its stated maturity date without obtaining prior approval from 
the Board where the redemption or repurchase would cause the covered 
BHC's eligible external LTD to fall below its external LTD requirement.
    The calibration of the proposed external TLAC requirement is based 
in part on an analysis of the historical loss experience of major 
financial institutions during financial crises. First, a targeted 
analysis of losses of U.S. financial firms during the 2007-2009 
financial crisis was performed. The analysis considered the loss 
experiences of the 19 bank holding companies that participated in the 
Supervisory Capital Assessment Program (SCAP).\46\ This analysis 
combined the losses actually sustained by those firms during the 2007-
2008 period with their 2009 SCAP loss projections \47\ and the 
government recapitalization support that they received in order to 
estimate the level of losses that would likely have been sustained in 
the absence of extraordinary government intervention in the financial 
system, which likely prevented substantial losses that each firm would 
otherwise have incurred as a result of the material financial distress 
or failure of major counterparties. The purpose of a TLAC requirement 
is to ensure that GSIBs have sufficient loss-absorbing capacity to 
absorb significant losses and then be recapitalized to the level 
necessary for them to face the market on a going-concern basis without 
public-sector support. Therefore, the sum of losses and public-sector 
recapitalization provides a good comparator for a TLAC requirement.
---------------------------------------------------------------------------

    \46\ See Press Release, ``Federal Reserve, OCC, and FDIC release 
results of the Supervisory Capital Assessment Program'' (May 7, 
2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/20090507a.htm.
    \47\ See ``The Supervisory Capital Assessment Program: Overview 
of Results'' (May 7, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf.
---------------------------------------------------------------------------

    The analysis found that the bank holding company with the most 
severe loss experience incurred estimated losses and recapitalization 
needs of roughly 19 percent of risk-weighted assets. The risk-weighted 
assets component of the proposed external TLAC requirement is 
consistent with this high-water mark from the global financial crisis. 
This historical analysis provides further confirmation of the 
appropriateness of the proposed calibration.
    Additionally, a quantitative study of the experiences of 13 U.S. 
and foreign GSIBs and other major financial firms that incurred 
substantial losses during the 2007-2009 financial crisis and the 
Japanese financial crisis of the 1990s was conducted. With respect to 
each firm, the study considered both the peak losses incurred by the 
firm (measured in terms of total comprehensive income) over the loss 
period and public-sector capital support, incorporating both direct 
capital injections and asset relief transactions.
    The study examined losses and recapitalization in terms of both 
risk-weighted assets and total assets, which is relevant to the total 
leverage exposure component of the external TLAC requirement. The 
proposed calibration of the external TLAC requirement is consistent 
with the findings of this historical survey. The risk-weighted assets 
component of the proposed requirement exceeds a substantial majority of 
the loss-and-recapitalization experiences surveyed, while the total 
leverage exposure component of the proposed requirement is slightly 
higher than the most severe experience surveyed. These are appropriate 
results in light of the Dodd-Frank Act's focus on the mitigation of 
risks that could arise from the material financial distress or failure 
of the largest, most systemic financial institutions.
    The proposed external LTD requirement was calibrated primarily on 
the basis of a ``capital refill'' framework. According to the capital 
refill framework, the objective of the external LTD requirement is to 
ensure that each covered BHC has a minimum amount of eligible external 
LTD such that, if the covered BHC's going-concern capital is depleted 
and the covered BHC fails and enters resolution, the eligible external 
LTD will be sufficient to absorb losses and fully recapitalize the 
covered BHC by replenishing its going-concern capital. Fulfilling this 
objective is vital to the use of eligible external LTD to facilitate 
the orderly resolution of a covered BHC, because it is a prerequisite 
to an orderly SPOE resolution that the resolved firm have sufficient 
going-concern capital post-resolution to maintain market confidence in 
its solvency so that other market participants continue to do business 
with it.
    The proposed external LTD requirement was calibrated in accordance 
with this framework. In terms of risk-weighted assets, a covered BHC's 
common equity tier 1 capital level is an amount equal to a minimum 
requirement of 4.5 percent of risk-weighted assets plus a capital 
conservation buffer, which is itself equal to 2.5 percent plus a firm-
specific surcharge determined under the GSIB surcharge rule (expressed 
as a percentage) of risk-weighted assets.\48\ Thus, a covered BHC with 
a GSIB surcharge of 2 percent would have a common equity tier 1 capital 
minimum plus buffers of 9 percent.
---------------------------------------------------------------------------

    \48\ Under the Board's capital rules, the capital conservation 
buffer can be increased by an additional 2.5 percent of risk-
weighted assets through the activation of a countercyclical capital 
buffer. The proposed external LTD requirement does not incorporate 
any countercyclical capital buffer because it is likely that no such 
buffer would be active under the economic circumstances most likely 
to be associated with the failure and resolution of a covered BHC.
---------------------------------------------------------------------------

    Under the proposal, a covered BHC would be subject to an external 
LTD requirement equal to 7 percent of risk-weighted assets plus the 
applicable GSIB surcharge minus a 1 percentage point allowance for 
balance-sheet depletion. This results in a requirement of 6 percent 
plus the applicable GSIB surcharge (expressed as a percentage) of risk-
weighted assets. Without the 1 percentage point allowance for balance-
sheet depletion, the risk-weighted assets component of a covered BHC's 
external LTD requirement would require it to maintain outstanding an 
amount of eligible external LTD equal to its common equity tier 1 
capital minimum requirement plus buffers. The 1 percentage point 
allowance for balance-sheet depletion is appropriate under the capital 
refill theory because the losses that the covered BHC incurs leading to 
its failure will deplete its risk-weighted assets as well as its 
capital. Accordingly, the pre-failure losses would result in a smaller 
balance sheet for the covered BHC at the point of failure, meaning that 
a smaller dollar amount of capital would be required to restore the 
covered BHC's pre-stress capital level. Although the specific amount of 
eligible external LTD necessary to restore a covered BHC's pre-stress 
capital level in light of the diminished size of its post-failure 
balance sheet will vary slightly in light of the varying GSIB 
surcharges applicable to the covered BHCs, the Board is proposing to 
apply a uniform 1 percentage point allowance for balance-sheet 
depletion so as to avoid undue regulatory complexity.
    The application of the capital refill framework to the leverage 
ratio component of the external LTD requirement is analogous. Under the 
enhanced supplementary leverage ratio applicable to U.S. GSIBs, a 
covered BHC's tier 1 leverage ratio minimum plus buffer is 5 percent of 
its total

[[Page 74933]]

leverage exposure. Under the proposal, a covered BHC would be subject 
to an external LTD requirement equal to 4.5 percent of its total 
leverage exposure. This requirement, which incorporates a balance-sheet 
depletion allowance of 0.5 percentage points, is appropriate to ensure 
that a covered BHC that has depleted its tier 1 capital and failed will 
be able to refill its leverage ratio minimum requirement and buffer 
through the cancellation or the exchange or conversion into equity of 
its eligible external LTD.
    The proposed calibration of the external LTD requirement was also 
informed by an analysis of the extreme loss tail of the distribution of 
income for large U.S. bank holding companies over the past several 
decades. This analysis closely resembled the analysis that informed the 
calibration of the minimum risk-based capital requirements in the 
revised capital framework, but it involved looking farther into the 
tail of the income distribution.
    Question 3: The Board invites comment on all aspects of the 
calibration of the proposed external TLAC and LTD requirements. In 
particular, the Board invites comment on the probable impact of the 
proposed requirements on covered BHCs and on markets for senior 
unsecured debt instruments.

C. Core Features of Eligible External TLAC (Section 252.63(b) of the 
Proposed Rule)

    Under the proposal, a covered BHC's eligible external TLAC would be 
defined to be the sum of (a) the tier 1 regulatory capital (common 
equity tier 1 capital and additional tier 1 capital, excluding any tier 
1 minority interests) issued directly by the covered BHC and (b) the 
covered BHC's eligible external LTD, as defined below.\49\ Tier 2 
capital that meets the definition of eligible external LTD would count 
toward the external TLAC requirement.
---------------------------------------------------------------------------

    \49\ Although eligible external LTD with a remaining maturity 
between one and two years would be subject to a 50 percent haircut 
for purposes of the external LTD requirement, such eligible external 
LTD would continue to count at full value for purposes of the 
external TLAC requirement. As discussed below, eligible external LTD 
with a remaining maturity of less than one year would not count 
toward either the external TLAC requirement or the external LTD 
requirement.
---------------------------------------------------------------------------

    The requirement that regulatory capital be issued out of the 
covered BHC itself (rather than by a subsidiary) is intended to ensure 
that the total required amount of loss-absorbing capacity would be 
available to absorb losses incurred anywhere in the banking 
organization (through downstreaming of resources from the BHC to the 
subsidiary that has incurred the losses, if necessary). Regulatory 
capital that is issued by a subsidiary lacks this key feature of being 
available to flexibly absorb losses incurred by other subsidiaries.
    Question 4: The Board invites comment on all aspects of the 
proposed definition of eligible external TLAC.
    Question 5: In particular, the Board invites comment on the 
proposed requirement that regulatory capital be issued directly by the 
covered BHC in order to count as eligible external TLAC. Should the 
definition of eligible external TLAC be broadened to include minority 
interests?
    Question 6: Should eligible external LTD with a remaining maturity 
between one and two years be subject to a 50 percent haircut for 
purposes of the external TLAC requirement, by analogy to the treatment 
of such eligible external LTD for purposes of the external LTD 
requirement?
    Question 7: Do covered BHCs have outstanding tier 2 capital 
instruments that would not count as eligible external LTD? What 
features of such tier 2 capital instruments are inconsistent with the 
definition of eligible external LTD? Should such tier 2 capital 
instruments count as eligible external TLAC?

D. External TLAC Buffer (Section 252.63(c) of the Proposed Rule)

    An external TLAC buffer would apply in addition to the risk-
weighted assets component of the external TLAC requirement. A covered 
BHC's external TLAC buffer would be equal to the sum of 2.5 percent 
plus the GSIB surcharge applicable to the covered BHC under method 1 of 
the GSIB surcharge rule \50\ plus any applicable countercyclical 
capital buffer. The external TLAC buffer would be required to be filled 
solely with common equity tier 1 capital, and a covered BHC's breach of 
its external TLAC buffer would subject it to limits on capital 
distributions and discretionary bonus payments in accordance with Table 
1. Thus, the external TLAC buffer would be analogous to the capital 
conservation buffer applicable under the Board's Regulation Q, except 
that it would apply in addition to the external TLAC requirement rather 
than in addition to minimum risk-based capital requirements under 
Regulation Q and would incorporate only the applicable method 1 GSIB 
surcharge (rather than the greater of the applicable method 1 GSIB 
surcharge and the applicable method 2 GSIB surcharge).
---------------------------------------------------------------------------

    \50\ 80 FR 49082 (Aug. 14, 2015).

       Table 1--Calculation of Maximum External TLAC Payout Amount
------------------------------------------------------------------------
                                                Maximum external TLAC
                                                  payout ratio (as a
         External TLAC buffer level             percentage of eligible
                                                   retained income)
------------------------------------------------------------------------
Greater than the external TLAC buffer......  No payout ratio limitation
                                              applies.
Less than or equal to the external TLAC      60 percent.
 buffer, and greater than 75 percent of the
 external TLAC buffer.
Less than or equal to 75 percent of the      40 percent.
 external TLAC buffer, and greater than 50
 percent of the external TLAC buffer.
Less than or equal to 50 percent of the      20 percent.
 external TLAC buffer, and greater 25
 percent of the external TLAC buffer.
Less than or equal to 25 percent of the      0 percent.
 external TLAC buffer.
------------------------------------------------------------------------

    In order to determine whether it has met the external TLAC 
requirement and the external TLAC buffer, a covered BHC would calculate 
an outstanding TLAC amount and an external TLAC buffer level. In 
keeping with the definition of eligible external TLAC, a covered BHC's 
outstanding TLAC amount would be equal to the sum of its common equity 
tier 1 capital, its additional tier 1 capital, and its eligible 
external LTD. The covered BHC's external TLAC buffer level would be 
equal to the sum of its common equity tier 1 capital ratio minus that 
portion (if any) of its common equity tier 1 capital ratio (expressed 
as a percentage) that is used to meet the risk-weighted assets

[[Page 74934]]

component of the external TLAC requirement. To calculate its external 
TLAC buffer level, a covered BHC would subtract from its common equity 
tier 1 capital ratio the greater of 0 percent and the following figure: 
The risk-weighted assets component of the covered BHC's external TLAC 
requirement minus the ratio of its additional tier 1 capital to its 
risk-weighted assets (additional tier 1 capital ratio) and minus its 
eligible external LTD.
    In order to comply with the external TLAC requirement, the covered 
BHC would need to have an outstanding TLAC amount sufficient to meet 
both the risk-weighted assets component and the total leverage exposure 
component. In order to avoid limitations on capital distributions and 
discretionary bonus payments pursuant to Table 1, the covered BHC would 
also have to have an external TLAC buffer level in excess of its 
external TLAC buffer.
    For example, suppose that a covered BHC called ``BHC A'' has a 
common equity tier 1 capital ratio of 10 percent, an additional tier 1 
capital ratio of 2 percent, and an eligible external LTD amount equal 
to 8 percent of its risk-weighted assets. Suppose further that BHC A is 
subject to an external TLAC requirement of 18 percent and an external 
TLAC buffer of 5 percent of risk-weighted assets. BHC A would meet its 
external TLAC requirement because the sum of its common equity tier 1 
capital ratio, its additional tier 1 capital ratio, and the ratio of 
its eligible external TLAC to risk-weighted assets would be equal to 
20, which is greater than 18. Moreover, BHC A would have an external 
TLAC buffer level equal to 10 - (18 - 2 - 8) = 2. Because 2 is less 
than 50 percent and more than 25 percent of the applicable 5 percent 
external TLAC buffer, BHC A would be subject to a maximum external TLAC 
payout ratio of 20 percent of eligible retained income.
    Although the proposed external TLAC buffer must be met only with 
common equity tier 1 capital, under the proposal, any covered BHC that 
meets existing capital requirements and the existing capital 
conservation buffer would not need to increase its common equity tier 1 
capital to meet its external TLAC requirement and its external TLAC 
buffer. This is because (a) a covered BHC could meet its external TLAC 
requirement solely through the issuance of eligible external LTD, (b) a 
covered BHC could use the same common equity tier 1 capital that it 
uses to meet existing minimum capital requirements and the existing 
capital conservation buffer to meet the proposed external TLAC 
requirement and external TLAC buffer, and (c) a covered BHC's external 
TLAC buffer would always be less than or equal to its existing capital 
conservation buffer.\51\ A covered BHC could thus use its existing 
common equity tier 1 capital to meet the external TLAC buffer while 
issuing eligible external LTD as necessary to meet its external TLAC 
requirement.
---------------------------------------------------------------------------

    \51\ This is because, as discussed above, the external TLAC 
buffer and the existing capital conservation buffer would have the 
same components except that the external TLAC buffer would include 
only the applicable method 1 GSIB surcharge, while the existing 
capital conservation buffer includes the greater of the applicable 
method 1 GSIB surcharge and the applicable method 2 GSIB surcharge.
---------------------------------------------------------------------------

    The rationale for the external TLAC buffer is similar to the 
rationale for the capital conservation buffer established by the 
Board's Regulation Q. During the 2007-2009 financial crisis, some 
banking organizations continued to pay dividends and substantial 
discretionary bonuses even as their financial condition weakened. These 
capital distributions weakened the financial system and exacerbated the 
crisis. The external TLAC buffer would be intended to encourage covered 
BHCs to practice sound capital conservation and thus to enhance the 
resilience of covered BHCs and of the financial system as a whole. The 
external TLAC buffer would pursue this goal by providing covered BHCs 
with incentives to hold sufficient capital to reduce the risk that 
their eligible external TLAC would fall below the minimum external TLAC 
requirement during a period of financial stress.
    Question 8: The Board invites comment on the organization and 
placement of the external TLAC buffer. For example, would the external 
TLAC buffer be easier to understand if it were incorporated directly 
into the Board's regulatory capital rules (Regulation Q)?
    Question 9: The Board invites comment on an alternative calibration 
of the total leverage exposure component of the proposed external TLAC 
requirement pursuant to which covered BHCs would be subject to an 
external TLAC requirement equal to 7.5 percent of total leverage 
exposure and a capital conservation buffer equal to 2 percent of total 
leverage exposure would apply in addition to that external TLAC 
requirement, by analogy to the enhanced supplementary leverage ratio.

E. Core Features of Eligible External LTD (Section 252.61 of the 
Proposed Rule)

    Under the proposal, a covered BHC's eligible external LTD would be 
defined to be debt that is paid in and issued directly by the covered 
BHC, is unsecured, has a maturity of greater than one year from the 
date of issuance, is ``plain vanilla,'' and is governed by U.S. law. 
Eligible external LTD with a remaining maturity of between one and two 
years would be subject to a 50 percent haircut for purposes of the 
external LTD requirement, and eligible external LTD with a remaining 
maturity of less than one year would not count toward the external LTD 
requirement.
    As discussed below, the general purpose of these requirements is to 
ensure the adequacy of eligible external LTD instruments to absorb 
losses in a resolution of the covered BHC.
1. Issuance by the Covered BHC
    Eligible external LTD would be required to be paid in and issued 
directly by the covered BHC itself--that is, by the banking 
organization's top-tier holding company. Thus, debt instruments issued 
by a subsidiary would not qualify as eligible external LTD, even if 
they do qualify as regulatory capital.
    This restriction would serve two purposes. First, as with the 
requirement that regulatory capital be issued directly by the covered 
BHC in order to count as eligible external TLAC, this restriction helps 
to ensure that eligible external LTD can be used to absorb losses 
incurred anywhere in the banking organization. By contrast, loss-
absorbing debt issued by a subsidiary would lack this flexibility and 
would generally be available only to absorb losses incurred by that 
particular subsidiary.
    Second, issuance directly from the covered BHC would enable the use 
of the eligible external LTD in an SPOE resolution of the covered BHC. 
Under the SPOE approach, only the covered BHC itself would enter 
resolution. The covered BHC's eligible external LTD would be used to 
absorb losses incurred throughout the banking organization, enabling 
the recapitalization of operating subsidiaries that had incurred losses 
and enabling those subsidiaries to continue operating on a going-
concern basis. For this approach to be implemented successfully, the 
eligible external LTD must be issued directly by the covered BHC. Debt 
issued by a subsidiary generally cannot be used to absorb losses even 
at the issuing subsidiary itself unless that subsidiary enters a 
resolution proceeding, which would be contrary to the SPOE approach 
and, in the case of a material operating subsidiary of a covered BHC, 
would likely present risks to financial stability.
    Question 10: The Board invites comment on the benefits or drawbacks

[[Page 74935]]

of permitting long-term debt issued by a subsidiary of a covered BHC to 
count as eligible external LTD and on whether there are other means to 
ensure that the debt be available to absorb losses incurred anywhere 
within the banking organization.
2. Unsecured
    Eligible external LTD would be required to be unsecured, not 
guaranteed by the covered BHC or a subsidiary of the covered BHC, and 
not subject to any other arrangement that legally or economically 
enhances the seniority of the instrument (such as a credit enhancement 
provided by an affiliate). The primary rationale for this restriction 
is to ensure that eligible external LTD can serve its intended purpose 
of absorbing losses incurred by the banking organization in resolution. 
To the extent that a creditor is secured, it can avoid suffering losses 
by seizing the collateral that secures the debt. This would thwart the 
purpose of eligible external LTD by leaving losses with the covered BHC 
(which would lose the collateral) rather than imposing them on the 
eligible external LTD creditor (which could take the collateral).
    A secondary purpose of the restriction is to prevent eligible 
external LTD from contributing to the asset firesales that can occur 
when a financial institution fails and its secured creditors seize and 
liquidate collateral. Asset firesales can drive down the value of the 
assets being sold, which can undermine financial stability by 
transmitting contagion from the failed firm to other entities that hold 
similar assets.
    Finally, the requirement that eligible external LTD be unsecured 
ensures that losses can be imposed on that debt in resolution in 
accordance with the standard creditor hierarchy in bankruptcy, under 
which secured creditors are paid ahead of unsecured creditors.
    Question 11: The Board invites comment on whether eligible external 
LTD should be required to be contractually subordinated to the general 
unsecured liabilities of the covered BHC (such as senior unsecured 
debt). If so, should the subordination requirement apply to all or only 
to some portion of the debt used to satisfy the external LTD 
requirement?
3. ``Plain Vanilla''
    Eligible external LTD instruments would be required to be ``plain-
vanilla'' instruments. The purpose of this requirement is to ensure 
that eligible external LTD can be effectively used to absorb losses in 
resolution by prohibiting exotic features that could create complexity 
and thereby diminish the prospects for an orderly resolution.
    These prohibitions would help to ensure that a covered BHC's 
eligible external LTD represents loss-absorbing capacity with a 
definite value that can be quickly determined in resolution. In a 
resolution proceeding, claims represented by such plain-vanilla debt 
instruments are more easily ascertainable and relatively certain 
compared to more complex and volatile instruments. Permitting these 
features could engender uncertainty as to the level of the covered 
BHC's loss-absorbing capacity and could increase the complexity of the 
resolution proceeding, both of which could undermine market 
participants' confidence in an SPOE resolution and potentially result 
in a disorderly resolution. This could occur, for instance, if 
creditors and counterparties of the covered BHC's subsidiaries decided 
to reduce their exposures to the subsidiaries of the failed covered BHC 
by engaging in a funding run.
    Eligible external LTD instruments also would be prohibited from: 
(a) Being structured notes; (b) having a credit-sensitive feature; (c) 
including a contractual provision for conversion into or exchange for 
equity in the covered BHC; or (d) including a provision that gives the 
holder a contractual right to accelerate payment (including automatic 
acceleration), other than a right that is exercisable on a one or more 
dates specified in the instrument, in the event of the insolvency of 
the covered BHC, or the covered BHC's failure to make a payment on the 
instrument when due.\52\
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    \52\ This restriction would be subject to an exception that 
would permit eligible external LTD instruments to give the holder a 
future put right as of a date certain, subject to the remaining 
maturity provisions discussed below.
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    For purposes of this proposal, a ``structured note'' is a debt 
instrument that (a) has a principal amount, redemption amount, or 
stated maturity that is subject to reduction based on the performance 
of any asset,\53\ entity, index, or embedded derivative or similar 
embedded feature; (b) has an embedded derivative or similar embedded 
feature that is linked to one or more equity securities, commodities, 
assets, or entities; (c) does not specify a minimum principal amount 
due upon acceleration or early termination; or (d) is not classified as 
debt under U.S. generally accepted accounting principles. The proposed 
definition of a structured note is not intended to include non-dollar-
denominated instruments or instruments whose interest payments are 
linked to an interest rate index (for example, a floating-rate note 
linked to the federal funds rate or to LIBOR) that satisfy the proposed 
requirements in all other respects.
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    \53\ Assets would include loans, debt securities, and other 
financial instruments.
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    Structured notes would not count as eligible external LTD because 
they contain features that could make their valuation uncertain, 
volatile, or unduly complex, and because they are typically customer 
liabilities (as opposed to investor liabilities). To promote resiliency 
and market discipline, it is important that covered BHCs have a minimum 
amount of loss-absorbing capacity whose value is easily ascertainable 
at any given time. Moreover, in an orderly resolution of a covered BHC, 
debt instruments that will be subjected to losses must be able to be 
valued accurately and with minimal risk of dispute. The requirement 
that eligible external LTD not contain the features associated with 
structured notes advances these goals.
    Eligible external LTD would be prohibited from including 
contractual provisions for conversion into or exchange for equity prior 
to the covered BHC's resolution because the fundamental objective of 
the external LTD requirement is to ensure that covered BHCs will have 
at least a fixed minimum amount of loss-absorbing capacity available to 
absorb losses upon the covered BHC's entry into resolution. Debt 
instruments that could convert into equity prior to resolution may not 
serve this goal, since by doing so they would reduce the amount of debt 
that will be available to absorb losses in resolution.
    Finally, eligible external LTD would be prohibited from having a 
credit-sensitive feature or giving the holder of the instrument a 
contractual right to the acceleration of payment of principal or 
interest at any time prior to the instrument's stated maturity (an 
``acceleration clause''), other than upon the occurrence of either an 
insolvency event or a payment default event, except that eligible 
external LTD instruments would be permitted to give the holder a put 
right as of a future date certain, subject to the remaining maturity 
provisions discussed below. This proposed prohibition is similar to but 
moderately less stringent than the analogous restriction on tier 2 
regulatory capital. The main difference between eligible external LTD 
and tier 2 capital in this regard is that tier 2 capital is also 
prohibited from containing payment default event acceleration 
clauses.\54\

[[Page 74936]]

However, the Board is considering whether to instead impose a 
restriction on eligible external LTD that is identical to the one 
applicable to tier 2 capital by also prohibiting eligible external LTD 
from containing payment default event clauses.
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    \54\ See 12 CFR 217.20(d)(1)(vi).
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    This proposed restriction serves the same purpose as several of the 
other proposed restrictions discussed above: to ensure that the 
required amount of loss-absorbing capacity will indeed be available to 
absorb losses in resolution if the covered BHC fails. Early 
acceleration clauses, including cross-acceleration clauses, may 
undermine this prerequisite to orderly resolution by triggering and 
forcing the covered BHC to make payments prior to its entry into 
resolution, potentially depleting the covered BHC's eligible external 
LTD immediately prior to resolution. This concern does not apply to 
acceleration clauses that are triggered by an insolvency event, 
however, because the insolvency that triggers the clause would 
generally occur concurrently with the covered BHC's entry into a 
resolution proceeding, in which case the payment obligations would 
generally be stayed and the debt would remain available to absorb 
losses.
    Senior debt instruments issued by covered BHCs commonly also 
include payment default event clauses. These clauses provide the holder 
with a contractual right to accelerate payment upon the occurrence of a 
``payment default event''--that is, a failure by the covered BHC to 
make a required payment when due. Payment default event clauses, which 
are prohibited from tier 2 regulatory capital, raise more concerns than 
insolvency event clauses because a payment default event may occur 
(triggering acceleration) before the institution has entered a 
resolution proceeding and a stay has been imposed. Such a pre-
resolution payment default event could cause a decline in the covered 
BHC's loss-absorbing capacity.
    Nonetheless, the proposal would permit eligible external LTD to be 
subject to payment default event acceleration rights for two reasons. 
First, default or acceleration rights upon a borrower's default on its 
direct payment obligations are a standard feature of senior debt 
instruments, such that a prohibition on such rights could be unduly 
disruptive to the potential market for eligible external LTD. Second, 
the payment default of a covered BHC on an eligible external LTD 
instrument would likely be a credit event of such significance that 
whatever diminished capacity led to the payment default event would 
also be a sufficient trigger for an insolvency event acceleration 
clause, in which case a prohibition on payment default event 
acceleration clauses would have little or no practical effect.
    Question 12: The Board invites comment on the proposed definition 
of eligible external LTD, including whether such debt securities should 
be allowed to include any of the features discussed above. The Board 
also invites comment as to the impact that the proposed restrictions 
would have on the bindingness of the proposal for covered BHCs or on 
the markets for senior unsecured debt instruments of covered BHCs. 
Please provide data supporting your answer.
    Question 13: The Board invites comment on whether its proposed 
definition of eligible external LTD should exclude debt that is subject 
to a guarantee from any affiliate of the global systemically important 
BHC.
    Question 14: The Board invites comment on whether additional 
restrictions should be imposed on instruments that qualify as eligible 
external LTD in order to enhance the usefulness of eligible external 
LTD in an orderly resolution of the covered BHC.
    Question 15: Would an orderly resolution of a covered BHC be 
facilitated by additional requirements intended to facilitate the 
process of imposing losses on the claims of holders of eligible 
external LTD? If so, what additional requirements (e.g., requiring 
eligible external LTD to be held through a securities settlement 
system, requiring internal data systems to facilitate the claims 
process) are appropriate?
    Question 16: The Board invites comment on whether currently 
outstanding instruments that meet all other requirements should be 
allowed to count as eligible external LTD despite containing features 
that would be prohibited under the proposal. What is the amount of debt 
instruments now outstanding that would fall into this category, and 
what is the remaining maturity of those debt instruments? How 
burdensome would it be for covered BHCs to modify the terms of any such 
instruments to eliminate features that would be prohibited under the 
proposal?
    Question 17: The Board invites comment on whether eligible external 
LTD should be permitted to include acceleration clauses that relate to 
payment default events. The Board also invites comment on the impact of 
excluding instruments with such acceleration clauses from the 
definition of eligible external LTD, including any impact on debt 
markets for senior unsecured debt instruments.
    Question 18: The Board invites comment on whether debt instruments 
that are convertible into equity (with or without a regulatory 
conversion triggers) should be permitted to count as eligible external 
TLAC even if they are excluded from eligible external LTD and on 
whether such instruments would advance the objectives of an orderly 
resolution of a covered BHC.
4. Minimum Remaining Maturity and Amortization (Section 252.62(b) of 
the Proposed Rule)
    Eligible external LTD with a remaining maturity of between one and 
two years would be subject to a 50 percent haircut for purposes of the 
external LTD requirement, and eligible external LTD with a remaining 
maturity of less than one year would not count toward the external LTD 
requirement.
    The purpose of this restriction is to limit the debt that would 
fill the external LTD requirement to debt that will be reliably 
available to absorb losses in the event that the covered BHC fails and 
enters resolution. Debt with a remaining maturity of less than one year 
does not adequately serve this purpose because of the relatively high 
likelihood that the debt will mature during the period between the time 
when the covered BHC begins to experience extreme stress and the time 
when it enters a resolution proceeding. If the debt matures during that 
period, then the creditor will likely be unwilling to maintain its 
exposure to the covered BHC and will therefore refuse to roll over the 
debt or extend new credit and the distressed covered BHC will likely be 
unable to replace the debt with new long-term debt that would be 
available to absorb losses in resolution. This run-off dynamic could 
result in the covered BHC's entering resolution with materially less 
loss-absorbing capacity than would be required to recapitalize its 
subsidiaries, potentially resulting in a disorderly resolution. To 
protect against this outcome, eligible external LTD would cease to 
count toward the external LTD requirement upon falling below one year 
of remaining maturity so that the full required amount of loss-
absorbing capacity would be available in resolution even if the 
resolution period were preceded by a year-long stress period.\55\
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    \55\ This requirement also accords with market convention, which 
generally defines ``long-term debt'' as debt with maturity in excess 
of one year.
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    For analogous reasons, eligible external LTD with a remaining 
maturity of less than two years would be subject to a 50 percent 
haircut for purposes of the external LTD requirement, meaning

[[Page 74937]]

that only 50 percent of the value of its principal amount would count 
toward the external LTD requirement.\56\ This amortization provision is 
intended to protect a covered BHC's loss-absorbing capacity against a 
run-off period in excess of one year (as might occur during a financial 
crisis or other protracted stress period) in two ways. First, it 
requires covered BHCs that rely on eligible external LTD that is 
vulnerable to such a run-off period (because it has a remaining 
maturity of less than two years) to maintain additional loss-absorbing 
capacity. Second, it incentivizes covered BHCs to reduce or eliminate 
their reliance on loss-absorbing capacity with a remaining maturity of 
less than two years, since by doing so they avoid being required to 
issue additional eligible external LTD in order to account for the 
haircut. A covered BHC could reduce its reliance on eligible external 
LTD with a remaining maturity of less than two years by staggering its 
issuance, by issuing eligible external LTD with a relatively long 
initial maturity, or by redeeming and replacing eligible external LTD 
once its remaining maturity falls below two years.
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    \56\ As discussed above, the proposed amoritization would apply 
only to eligible external LTD, not to eligible external TLAC. Thus, 
an eligible external LTD instrument that counts for only half value 
toward the external LTD requirement because of the 50 percent 
amortization provision would continue to count for full value toward 
the external TLAC requirement, although debt with a remaining 
maturity of less than one year would not count toward either 
requirement.
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    The proposal also provides similar treatment for eligible external 
LTD that could become subject to a ``put'' right--that is, a right of 
the holder to require the issuer to redeem the debt on demand--prior to 
reaching its stated maturity. Such an instrument would be treated as if 
it were going to mature on the day on which it first became subject to 
the put right, since on that day the creditor would be capable of 
demanding payment and thereby subtracting the value of the instrument 
from the covered BHC's loss-absorbing capacity.\57\
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    \57\ The remaining maturity would be calculated from the date 
the put right would first be exerciseable regardless of whether the 
put right would only be exerciseable on that date if another event 
occurred (e.g., a credit rating downgrade).
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    Question 19: The Board invites comment on whether the proposed 
treatment of eligible external LTD with a remaining maturity of less 
than two years is appropriate. How would a different remaining maturity 
requirement or amortization schedule better achieve the objectives of 
the proposal?
    Question 20: The Board invites comment on whether a specific 
eligible external LTD issuance schedule or similar requirement should 
be imposed on covered BHCs by regulation. If so, how should the 
requirement be structured to maximize benefits and minimize costs?
    Question 21: The Board invites comment on the proposed treatment of 
debt instruments that could become subject to put rights in the future. 
Should such instruments be excluded entirely from the definition of 
eligible external LTD? If so, what impact would such a prohibition have 
on markets for senior unsecured debt of covered BHCs?
5. Governing Law
    Eligible long-term debt instruments should consist only of 
liabilities that can be effectively used to absorb losses during the 
resolution of a covered BHC under the U.S. Bankruptcy Code or Title II 
without giving rise to material risk of successful legal challenge. To 
this end, eligible external LTD must be governed by U.S. law, including 
the U.S. Bankruptcy Code and Title II.
    Question 22: The Board invites comment on the proposed governing 
law requirement, including whether such a requirement is necessary or 
appropriate. Should the proposed definition of eligible external LTD 
permit instruments to be governed by or subject to non-U.S. law in any 
respects? If so, how would that be consistent the purposes of the 
proposed rule?
6. Contractual Subordination
    The Board considered whether to require eligible external LTD 
instruments to be contractually subordinated to the claims of general 
creditors of a covered BHC. A contractual subordination requirement 
could improve the market discipline imposed on a covered BHC by 
increasing the clarity of treatment for eligible external LTD holders 
relative to other creditors.
    The proposal does not include a contractual subordination 
requirement for several reasons. First, as discussed above, the 
structural subordination of a covered BHC's creditors to the creditors 
and counterparties of the covered BHC's subsidiaries already generally 
ensures that the covered BHC's creditors would absorb losses ahead of 
the creditors of the covered BHC's subsidiaries in an SPOE resolution 
of the covered BHC.\58\ Second, the Board is proposing to subject 
covered BHCs to clean holding company provisions that would limit the 
amount of non- TLAC instruments that could be pari passu with or junior 
to eligible external LTD, which will further address any concerns with 
covered BHCs' unsecured creditor hierarchies.
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    \58\ As discussed above, in an insolvency proceeding, direct 
third-party claims on a parent holding company's subsidiaries would 
be superior to the parent holding company's equity claims on the 
subsidiaries.
---------------------------------------------------------------------------

    By limiting the criteria for eligible external LTD to those 
necessary to achieve the objectives of the proposal, the proposal seeks 
to retain the broadest possible market for eligible external LTD 
instruments. Allowing covered BHCs to retain the flexibility to satisfy 
the external LTD requirement with either senior or subordinated debt 
instruments should allow covered BHCs to comply with the requirement 
efficiently, to adapt to debt investors' risk preferences, and to avoid 
re-issuances of outstanding long-term senior debt instruments that 
would otherwise meet the criteria for eligible external LTD.
    Question 23: Should the Board require that eligible external LTD be 
contractually subordinated to the general unsecured liabilities of the 
covered BHC.

F. Costs and Benefits

    An analysis of the potential costs and benefits of the external 
TLAC and LTD requirements was conducted. To evaluate the costs 
attributable to the proposed requirements, this analysis estimated (a) 
the extent by which the covered BHCs' required capital and currently 
outstanding long-term debt fall short of the proposed requirements, (b) 
the increase in each U.S. GSIB's ongoing cost of funding that would 
result from meeting the proposed requirements, (c) the expected 
increase in the interest rates that the U.S. GSIBs would charge to 
borrowers to make up for their higher funding costs, and (d) any 
decline in the gross domestic product (GDP) of the United States that 
would result from these increased lending rates.
    The following components relevant to the benefits of the proposed 
requirements were evaluated: (a) The probability of a financial crisis 
occurring in a given year, (b) the cumulative economic cost that a 
financial crisis would impose if it were to occur, and (c) the extent 
to which the proposed requirements would decrease the likelihood and 
cost of a financial crisis.
    The analysis concluded that the estimated benefits would outweigh 
the estimated costs and that the proposed external TLAC and LTD 
requirements would yield a substantial net benefit for the U.S. 
economy.

[[Page 74938]]

1. Shortfall Analysis
    To evaluate the U.S. GSIBs' shortfalls relative to the proposed 
external TLAC and LTD requirements, information was collected on the 
long-term debt that covered BHCs had outstanding as of year-end 2014.
    Several assumptions were made for purposes of the shortfall 
analysis. First, to provide an accurate estimate of shortfalls relative 
to the proposed requirements using 2014 data, it was assumed that the 
covered BHCs were already compliant with the other capital requirements 
(including capital conservation buffers) that will be in effect as of 
2019, when the proposed external TLAC and LTD requirements would begin 
to take effect. This assumption was necessary to ensure that the 
analysis would attribute to the proposed external TLAC and LTD 
requirements only those costs that would result from those 
requirements, as distinct from other requirements that the Board has 
imposed but that were not fully phased in as of year-end 2014. As a 
result of this assumption, a certain amount of ``capital catch-up'' was 
allocated to five of the U.S. GSIBs to bring their capital levels into 
alignment with the rules that will be in effect as of 2019.
    Second, for purposes of this analysis, all of the U.S. GSIB debt 
that met the primary attributes of eligible external LTD was treated as 
eligible LTD, including issuance directly from the covered BHC, 
remaining maturity of at least one year, and the absence of derivative-
linked features. Although these instruments may not meet every one of 
the other proposed elements of eligible external LTD, it appears that 
the cost of meeting any remaining elements would be relatively minor.
    Under the proposal, covered BHCs would have an aggregate external 
LTD requirement of approximately $680 billion. This amounts to 
approximately 9.6 percent of aggregate risk-weighted assets and 4.9 
percent of aggregate total leverage exposure for the covered BHCs. The 
covered BHCs' aggregate shortfall relative to the proposed external 
TLAC requirement was approximately $100 billion. The covered BHCs' 
aggregate shortfall relative to the proposed external LTD requirement 
was approximately $90 billion. For four of the covered BHCs, the risk-
weighted assets component of the external LTD requirement was binding; 
for the other four covered BHCs, the supplementary leverage exposure 
component was binding.
    The covered BHCs' overall aggregate shortfall from the two proposed 
requirements was approximately $120 billion, or 1.7 percent of 
aggregate risk-weighted assets.\59\ The proposed external TLAC 
requirement was the binding requirement for three of the covered BHCs, 
while the proposed external LTD requirement was the binding requirement 
for the other five covered BHCs. Two of the covered BHCs had no 
shortfall under either requirement, while the largest overall shortfall 
for any covered BHC amounted to 3.2 percent of its risk-weighted 
assets.
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    \59\ This figure is less than the sum of the separate aggregate 
shortfalls for the external TLAC requirement and the external LTD 
requirement because of substantial overlap between the two 
requirements (that is, because eligible external LTD would also 
count toward the external TLAC requirement).
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2. Cost-of-Funding Analysis
    The analysis also considered the effect that filling the $120 
billion shortfall through the issuance of additional eligible external 
LTD would have on the covered BHCs' cost of funding. This analysis 
relied on additional information about the amounts and costs of funding 
of the debt that the covered BHCs and their subsidiaries currently have 
outstanding.
    Several additional assumptions were made at this stage of the 
analysis. First, it was assumed that covered BHCs would fill their 
shortfalls by replacing existing, ineligible debt with eligible 
external LTD during the period prior to the effective date of the 
proposed requirements, rather than by expanding their balance sheets by 
issuing the new debt while maintaining existing liabilities 
outstanding. Second, it was assumed that covered BHCs would minimize 
the cost associated with meeting the proposed external TLAC and LTD 
requirements by first replacing with eligible external LTD their 
``near-eligible debt''--that is, their outstanding debt that comes 
closest to meeting all requirements for eligible external LTD (and that 
therefore entails a cost of funding almost as high as that associated 
with eligible external LTD)--and by proceeding in this cost-minimizing 
fashion until the proposed requirements were met. Thus, the marginal 
cost of each additional dollar of eligible external LTD was assumed to 
be the surplus of the funding cost associated with eligible external 
LTD over the funding cost of the covered BHC's highest-cost remaining 
ineligible debt. Finally, if total near-eligible liabilities were 
insufficient to fill the shortfall, it was assumed that the covered BHC 
proceeded to replace more senior, short-term liabilities, such as 
deposits, with eligible external LTD.
    Roughly $65 billion of the aggregate $120 billion shortfall could 
be filled through the issuance of eligible external LTD in the place of 
existing near-eligible debt, most of which takes the form of long-term 
bonds issued by the covered BHCs' bank subsidiaries.\60\ Based on 
market data, it was estimated that the spread between this near-
eligible debt and eligible external LTD is between 20 and 30 basis 
points. The remaining $55 billion shortfall could then be filled 
through the issuance of eligible external LTD in the place of existing 
deposits or other lower-cost liabilities. It was estimated that the 
spread between these liabilities and eligible external LTD is 
approximately equal to the spread between the risk-free interest rate 
and the eligible external LTD rate, which is estimated to be between 
100 and 150 basis points.
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    \60\ For purposes of this analysis, structured notes were not 
treated as near-eligible debt. Structured notes could be viewed as 
near-eligible debt, but in many cases structured notes serve 
different purposes than debt that was treated as near-eligible (such 
as plain-vanilla bonds issued by covered BHCs' bank subsidiaries). 
As a result, the analysis assumed that covered BHCs would not 
replace their outstanding structured notes with eligible external 
LTD. On the assumption that covered BHCs would indeed replace their 
outstanding structured notes with eligible external LTD, covered 
BHCs would be able to meet roughly $100 billion of the aggregate 
$120 billion shortfall by replacing near-eligible debt with eligible 
external LTD, which would result in a lower estimated cost impact 
from the proposed requirements.
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    The figures at the low ends of these ranges--20 basis points for 
replacing near-eligible debt and 100 basis points for replacing lower-
cost liabilities such as deposits--result in an aggregate increased 
cost of funding for the covered BHCs of $680 million per year.
    A more conservative estimate was produced using figures at the high 
ends of these ranges and then further adjusted them upward to reflect a 
potential supply effect of 30 basis points (that is, an increase in the 
interest rate on eligible external LTD caused by the increase in the 
supply of eligible external LT as a result of the proposed external LTD 
requirement). The aggregate shortfall in eligible LTD amounts to 
approximately 20 percent of the covered BHCs' current eligible LTD, 
implying that the covered BHCs in the aggregate would need to increase 
their outstanding eligible external LTD by 3 to 4 percent each year 
through 2022, when the proposed requirements would be fully phased in. 
On the basis of both internal analysis and an international survey of 
market participants in which Board staff participated, it is estimated 
that this increase in supply would increase spreads of covered BHCs'

[[Page 74939]]

eligible external LTD by approximately 30 basis points.
    Using the resulting, higher figures--60 basis points for replacing 
near-eligible debt and 200 basis points for replacing lower-cost 
liabilities--resulted in an estimated aggregate increased cost of 
funding for the covered BHCs of approximately $1.5 billion per year.
    Thus, the aggregate increased cost of funding attributable to the 
proposed external TLAC and LTD requirement are estimated to be in the 
range of $680 million to $1.5 billion annually.
3. Increased Lending Rate Analysis
    To arrive at a conservative estimate of the effect of the proposed 
external TLAC and LTD requirements on lending rates, it was next 
assumed that the U.S. GSIBs would maintain their current return-on-
equity levels by passing all of their increased funding costs on to 
borrowers, holding constant their level of lending activity. The 
increased lending rates that the U.S. GSIBs would charge to borrowers 
were calculated by dividing both the low-end and the high-end estimated 
cost-of-funding increases by the U.S. GSIBs' aggregate outstanding 
loans of roughly $3.2 trillion. Under this analysis, covered BHCs would 
employ an increased lending rate of 1.3 to 3.1 basis points as a result 
of the proposed external TLAC and LTD requirements.
4. Macroeconomic Costs Analysis
    In prior assessments of the economic impact of regulations on 
banking organizations, increases in lending rates have been assumed to 
produce a drag on GDP growth. However, the very modest lending rate 
increases estimated above--from 1.3 to 3.1 basis points--do not rise to 
the level of increase that could be expected to meaningfully affect 
GDP. Thus, from the standpoint of the economy as a whole, it appears 
that the costs associated with the proposed external TLAC and LTD 
requirements would be minimal.
5. Macroeconomic Benefits Analysis
    To estimate the benefits of the proposed requirements, the analysis 
built on the framework considered in a recent study titled ``An 
assessment of the long-term economic impact of stronger capital and 
liquidity requirements'' (``LEI report'').\61\ The LEI report estimated 
that, prior to the regulatory reforms undertaken since 2009, the 
probability of a financial crisis occurring in a given year was between 
3.5 percent and 5.2 percent and the cumulative cost was between 20 
percent and 100 percent of annual economic output. Even assuming that 
the lower ends of these ranges are accurate, these estimates reflect 
the well-understood fact that financial crises impose very substantial 
costs on the real economy. And the disorderly failures of major 
financial institutions play a major role in causing and deepening 
financial crises, as Congress recognized in enacting section 165 of the 
Dodd-Frank Act.
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    \61\ Basel Committee on Banking Supervision, ``An assessment of 
the long-term economic impact of stronger capital and liquidity 
requirements'' (August 2010), available at http://www.bis.org/publ/bcbs173.pdf.
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    This proposal would materially reduce the risk that the failure of 
a covered BHC would pose to the financial stability of the United 
States by enhancing the prospects for the orderly resolution of such a 
firm. Moreover, by ensuring that the losses caused by the failure of 
such a firm are borne by private-sector investors and creditors (the 
holders of the covered BHC's eligible external TLAC), this proposal 
would materially reduce the probability that a covered BHC would fail 
in the first place by giving the firm's shareholders and creditors 
stronger incentives to discipline its excessive risk-taking. Both of 
these reductions would promote financial stability and concomitantly 
materially reduce the probability that a financial crisis would occur 
in any given year. The proposed rule would therefore advance a key 
objective of the Dodd-Frank Act and help protect the American economy 
from the substantial potential losses associated with a higher 
probability of financial crises.
    Question 24: The Board invites comment on all aspects of the 
foregoing evaluation of costs and benefits.

III. Internal TLAC and LTD Requirements for U.S. Intermediate Holding 
Companies of Foreign Banking Organizations

A. Scope of Application (Section 252.160 of the Proposed Rule)

    The proposed rule would apply to all ``covered IHCs.'' The term 
``covered IHC'' would be defined to include any U.S. intermediate 
holding company that (a) is required to be formed under the Board's 
enhanced prudential standards rule (IHC rule) and (b) is controlled by 
a foreign banking organization that would be designated as a GSIB under 
either the Board's capital rules if it were subject to the Board's GSIB 
surcharge on a consolidated basis or the BCBS assessment methodology 
(foreign GSIB).
    The purpose of these criteria is to identify those foreign banking 
organizations that are global systemically important banking 
organizations and that have substantial operations in the United 
States. The Board's IHC rule identifies foreign banking organizations 
with a substantial U.S. presence and requires them to form a single 
U.S. intermediate holding company over their U.S. subsidiaries.\62\ 
Thus, the fact that a foreign banking organization is required to form 
a U.S. intermediate holding company is an indicator of whether its U.S. 
presence is substantial.
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    \62\ The IHC rule generally requires any foreign banking 
organization with total consolidated non-branch U.S. assets of $50 
billion or more to form a single U.S. intermediate holding company 
over its U.S. subsidiaries. 12 CFR 252.153; 79 FR 17329 (May 27, 
2014).
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    The Board's GSIB surcharge rule identifies the most systemically 
important banking organizations. As discussed above with respect to 
covered BHCs, its methodology evaluates a banking organization's 
systemic importance on the basis of its size, interconnectedness, 
cross-jurisdictional activity, substitutability, and complexity. The 
firms that score the highest on these attributes are classified as 
GSIBs. While the GSIB surcharge rule itself applies only to U.S. BHCs, 
its methodology is equally well-suited to evaluating the systemic 
importance of foreign banking organizations. The Board's methodology 
for identifying GSIBs is aligned with that of the assessment 
methodology for the GSIB surcharge framework developed by the BCBS. 
Moreover, foreign jurisdictions collect information from banking 
organizations in connection with that framework that parallels the 
information collected by the Board for purposes of the Board's GSIB 
surcharge rule.
    Under the proposal, a foreign banking organization that controls a 
U.S. intermediate holding company would be required to determine 
whether it is a GSIB under that BCBS assessment methodology if the 
foreign banking organization already prepares or reports, for any 
purpose, the information necessary to determine whether it is a GSIB 
under the BCBS assessment methodology. A foreign banking organization 
that determines under this requirement that it is a GSIB would be a 
foreign GSIB under the proposal.
    A foreign banking organization that controls a U.S. intermediate 
holding company also would be a foreign GSIB under the proposal if the 
Board determines that the foreign banking organization has the 
characteristics of a GSIB under the BCBS assessment methodology or the 
Board's methodology for determining whether U.S. bank holding companies 
are GSIBs for purposes of the Board's capital rules,

[[Page 74940]]

or if the Board determines that the U.S. intermediate holding company 
would itself be a GSIB under the Board's methodology. The proposal 
would therefore require each top-tier foreign banking organization that 
controls an U.S. intermediate holding company to notify the Board by 
January first of each year whether its home country supervisor (or 
other appropriate home country regulatory authority) has adopted 
standards consistent with the BCBS assessment methodology, whether the 
organization prepares or reports the indicators used by the BCBS 
assessment methodology, and if it does prepare or report such 
indicators, whether the organization has determined that it has the 
characteristics of a global systemically important banking organization 
under the BCBS assessment methodology.\63\
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    \63\ Under the proposal, these notice and determination 
requirements would apply to the ``top-tier foreign banking 
organization.'' The proposal defines top-tier foreign banking 
organization, with respect to a foreign bank, as the top-tier entity 
that controls the foreign bank (if any) unless the Board specifies a 
subsidiary of such entity as the ``top-tier foreign banking 
organization.'' Thus, the definition would include the top-tier 
entity that controls a foreign bank, which would be the foreign bank 
if no entity controls the foreign bank, or the entity specified by 
the Board that is a subsidiary of the top-tier entity.
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    As with covered BHCs, the proposal's focus on GSIBs is in keeping 
with the Dodd-Frank Act's mandate that more stringent prudential 
standards be applied to the most systemically important bank holding 
companies.\64\ Furthermore, the use of the GSIB surcharge rule to 
identify foreign GSIBs as well as U.S. GSIBs (and thus to identify both 
covered BHCs and covered IHCs) promotes a level playing field between 
U.S. and foreign banking organizations.
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    \64\ 12 U.S.C. 5365(a)(1)(B).
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    Question 25: The Board invites comment on alternative approaches 
for determining the scope of application of the proposed internal TLAC 
and LTD requirements. Should the Board apply the proposed internal TLAC 
and LTD requirements to all U.S. intermediate holding companies 
required to be formed under the IHC rule rather than limiting it to 
U.S. intermediate holding companies that are controlled by foreign 
GSIBs?
    Question 26: Is the proposed method for determining whether a 
foreign banking organization is a foreign GSIB--application of the 
relevant portion of the Board's GSIB surcharge rule to the foreign 
banking organization's balance sheet--an appropriate method for making 
that determination? Would an alternative method for identifying foreign 
GSIBs--such as looking to whether the foreign banking organization has 
been classified as a GSIB by its home supervisory authority or by the 
FSB--be more appropriate?
    Question 27: What additional modifications, if any, would be 
appropriate to the definition ``top-tier foreign banking organization'' 
to sufficiently explain the types of entities that may be considered 
top-tier foreign banking organizations under the proposal?

B. Calibration of the Internal TLAC and LTD Requirements (Sections 
252.162 and 252.164 of the Proposed Rule)

    Under the internal TLAC requirement, the amount of eligible 
internal total loss-absorbing capacity (``eligible internal TLAC'') 
that a covered IHC would be required to maintain outstanding would 
depend on whether the covered IHC (or any of its subsidiaries) is 
expected to enter resolution if a foreign parent entity fails, rather 
than being maintained as a going concern while a foreign parent entity 
is resolved. If the home country resolution authority for the parent 
foreign banking organization of the covered IHC provides a 
certification to the Board indicating that the authority's planned 
resolution strategy for the foreign banking organization does not 
involve the covered IHC or any subsidiary of the covered IHC entering a 
resolution proceeding in the United States, then the covered IHC would 
be considered a ``non-resolution entity.'' \65\
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    \65\ If the home country resolution authority for the foreign 
banking organization that controls the covered IHC subsequently 
indicates that its planned resolution strategy for the foreign 
banking organization does involve the covered IHC or its 
subsidiaries being separately resolved in the United States, the 
covered IHC would cease to be a non-resolution entity one year after 
the Board provides the covered IHC with notice of the change.
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    Covered IHCs that are non-resolution entities would be required to 
maintain outstanding eligible internal TLAC in an amount not less than 
the greater of: (a) 16 percent of the covered IHC's total risk-weighted 
assets; \66\ (b) for covered IHCs that are subject to the supplementary 
leverage ratio,\67\ 6 percent of the covered IHC's total leverage 
exposure; and (c) 8 percent of the covered IHC's average total 
consolidated assets, as computed for purposes of the U.S. tier 1 
leverage ratio.\68\ All other covered IHCs would be required to 
maintain outstanding eligible internal TLAC in an amount not less than 
the greater of: (a) 18 percent of the covered IHC's total risk-weighted 
assets; \69\ (b) 6.75 percent of the covered IHC's total leverage 
exposure (if applicable); and (c) 9 percent of the covered IHC's 
average total consolidated assets, as computed for purposes of the U.S. 
tier 1 leverage ratio.
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    \66\ The risk-weighted assets component of the internal TLAC 
requirement would be phased in as follows: It would be equal to 14 
percent of the covered IHC's risk-weighted assets beginning on 
January 1, 2019, and would be equal to 16 percent of the covered 
IHC's risk-weighted assets beginning on January 1, 2022.
    \67\ Under the IHC rule, U.S. intermediate holding companies 
with total consolidated assets of $250 billion or more or on-balance 
sheet foreign exposure equal to $10 billion or more are required to 
meet a minimum supplementary leverage ratio of 3 percent. 12 CFR 
252.153(e)(2); 79 FR 17329 (March 27, 2014).
    \68\ The final rule imposes the same leverage capital 
requirements on U.S. intermediate holding companies as it does on 
U.S. bank holding companies. 12 CFR 252.153(e)(2); 79 FR 17329 
(March 27, 2014). These leverage capital requirements include the 
generally-applicable leverage ratio and the supplementary leverage 
ratio for U.S. intermediate holding companies that meet the scope of 
application for that ratio.
    \69\ The risk-weighted assets component of the internal TLAC 
requirement for covered IHCs of MPOE firms would be phased in as 
follows: It would be equal to 16 percent of the covered IHC's risk-
weighted assets beginning on January 1, 2019, and would be equal to 
18 percent of the covered IHC's risk-weighted assets beginning on 
January 1, 2022.
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    As described below, an internal TLAC buffer would apply to all 
covered IHCs in addition to the applicable risk-weighted assets 
component of the internal TLAC requirement.
    Under the internal LTD requirement, a covered IHC would be required 
to maintain outstanding eligible internal long-term debt instruments 
(``eligible internal LTD'') in an amount not less than the greater of: 
(a) 7 percent of total risk-weighted assets; (b) 3 percent of the total 
leverage exposure (if applicable); and (c) 4 percent of average total 
consolidated assets, as computed for purposes of the U.S. tier 1 
leverage ratio. Covered IHCs would be prohibited from redeeming 
eligible internal LTD prior to its stated maturity date without 
obtaining prior approval from the Board where such redemption would 
cause the covered IHC's eligible internal LTD to fall below its 
internal LTD requirement.
    The rationale for the proposed internal TLAC and LTD requirements 
is generally parallel to the rationale for the proposed external TLAC 
and LTD requirements, which is discussed above. Covered IHCs, other 
than those that are non-resolution entities, would be subject to an 
internal TLAC requirement with a risk-weighted assets component 
identical to the risk-weighted assets component of the proposed 
external TLAC requirement. They would be subject to a supplementary 
leverage ratio component (if applicable) that is lower than the 
supplementary leverage ratio component of the proposed

[[Page 74941]]

external TLAC requirement in recognition of the fact that covered IHCs 
are not U.S. GSIBs and so would not be subject to the enhanced 
supplementary leverage ratio that applies to U.S. GSIBs. Finally, 
because some covered IHCs may not be subject to the supplementary 
leverage ratio, a third component based on the U.S. tier 1 leverage 
ratio was added to the internal LTD requirement. The proposed 
calibration of this component is consistent with the proposed 
calibration of the supplementary leverage ratio component.\70\
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    \70\ Generally, a bank holding company is subject to a 4 percent 
on-balance sheet leverage ratio requirement and a 3 percent 
supplementary leverage ratio requirement (if the supplementary 
leverage ratio applies to the bank holding company). The proposed 
calibration of the on-balance sheet leverage ratio component of the 
proposed internal TLAC requirement, 8 percent, is twice the 4 
percent requirement because the proposed calibration of the 
supplementary leverage ratio requirement, 6 percent, is twice the 3 
percent requirement. The aim was to ensure that covered IHCs that 
are not subject to the supplementary leverage ratio would be subject 
to a roughly analogous component under the internal TLAC 
requirement.
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    Covered IHCs that are non-resolution entities would be subject to a 
slightly lower internal TLAC requirement. Most foreign GSIBs are 
expected to be resolved by their home jurisdiction resolution 
authorities through an SPOE resolution and are therefore expected to be 
non-resolution entities under the proposal. Were such an SPOE 
resolution to succeed, the covered IHC would avoid entering resolution 
and would continue as a going concern, with its eligible internal TLAC 
and eligible internal LTD used to pass up the covered IHC's going-
concern losses to the parent foreign GSIB, to the extent necessary. 
However, the Board also recognizes the need to plan for the contingency 
in which the covered IHC enters a U.S. resolution proceeding. The 
proposed calibration for such a covered IHC is based on the 
desirability of providing support for the preferred SPOE resolution of 
the foreign GSIB, which requires that the foreign GSIB be allowed to 
have some internal loss-absorbing capacity at the parent level that can 
be freely allocated to whichever subsidiaries have incurred the 
greatest losses (including non-U.S. subsidiaries), balanced with the 
need to ensure that sufficient loss-absorbing capacity is prepositioned 
with the covered IHC to ensure that it can be kept operating as a going 
concern or subjected to an orderly resolution in the United States if 
the foreign GSIB is not subjected to an SPOE resolution.
    By contrast, covered IHCs that are not designated as non-resolution 
entities are more analogous to covered BHCs, which are themselves 
resolution entities. For these covered IHCs, there is no need to apply 
a diminished eligible internal TLAC requirement in order to support an 
SPOE resolution of the parent foreign GSIB. These covered IHCs would 
therefore be subject to eligible internal TLAC requirements in line 
with the eligible external TLAC requirements that would apply to 
covered BHCs, as discussed above.
    The proposed internal LTD requirements are based on the capital 
refill framework discussed above with respect to the proposed external 
LTD requirements. Because covered IHCs are not U.S. GSIBs and are 
therefore not subject to a GSIB surcharge or to the enhanced 
supplementary leverage ratio, a covered IHC is subject to a common 
equity tier 1 capital level of 7 percent of risk-weighted assets (4.5 
percent plus a 2.5 percent capital conservation buffer) and, if the 
supplementary leverage ratio applies to the covered IHC, to a tier 1 
capital supplementary leverage ratio requirement of 3 percent of total 
leverage exposure. Because some covered IHCs may not be subject to the 
supplementary leverage ratio, a third component based on the U.S. tier 
1 leverage ratio was added to the internal LTD requirement. The 
applicable requirement under that leverage ratio is 4 percent of on-
balance sheet assets. The calibration of the proposed internal LTD 
requirements derives from the application of the capital refill 
framework described above to these requirements.
    Question 28: The Board invites comment on all aspects of the 
proposed calibration of the internal TLAC and LTD requirements, 
including any impact on the internal funding structures of the covered 
IHC's parent foreign bank.
    Question 29: The Board invites comment on its proposed method for 
identifying covered IHCs that are non-resolution entities.
    Question 30: The Board invites comment on whether, instead of being 
subject to differing internal TLAC requirements on the basis of whether 
or not they are non-resolution entities, all covered IHCs should be 
subject to either the lower proposed internal TLAC requirement or to 
the higher proposed internal TLAC requirement.
    Question 31: The Board invites comment on whether to eliminate the 
proposed internal TLAC requirement and subject covered IHCs to the 
proposed internal LTD requirement only.

C. Core Features of Eligible Internal TLAC (Section 252.164 of the 
Proposed Rule)

    The definition of eligible internal TLAC is similar to the 
definition of eligible external TLAC. A covered IHC's eligible internal 
TLAC would be defined to be the sum of (a) the tier 1 regulatory 
capital (common equity tier 1 capital and additional tier 1 capital) 
issued from the covered IHC to a foreign entity that directly or 
indirectly controls the covered IHC (``foreign parent entity'') and (b) 
the covered IHC's eligible internal LTD, as defined below.\71\ Similar 
to the definition of eligible external TLAC, tier 2 capital that meets 
the definition of eligible internal LTD would count toward the internal 
TLAC requirement.
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    \71\ Although eligible internal LTD with a remaining maturity 
between one and two years would be subject to a 50 percent haircut 
for purposes of the internal LTD requirement, such eligible internal 
LTD would continue to count at full value for purposes of the 
internal TLAC requirement. As discussed below, eligible internal LTD 
with a remaining maturity of less than one year would not count 
toward either the internal TLAC requirement or the internal LTD 
requirement.
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    The rationale for the requirement that regulatory capital be issued 
directly by the covered IHC, rather than by a subsidiary of the IHC, in 
order to count as eligible internal TLAC is identical to the rationale 
for the analogous requirement for eligible external TLAC: To ensure 
that the required quantity of loss-absorbing capacity will be available 
to absorb losses incurred anywhere by any subsidiary of the IHC. 
Regulatory capital that is issued by one subsidiary of the covered IHC 
would not necessarily be available to absorb losses incurred by another 
subsidiary.
    Regulatory capital must meet one additional requirements in order 
to count as eligible internal TLAC: It must be issued to a foreign 
parent entity of the covered IHC. The requirement of issuance to a 
foreign parent, rather than to a U.S. affiliate or to third parties, 
would ensure that losses incurred by the U.S. intermediate holding 
company of a foreign GSIB would be upstreamed to a foreign parent 
rather than being transferred to other U.S. entities. This requirement 
would minimize the risk that such losses pose to the financial 
stability of the United States, regardless of whether the covered IHC 
enters a resolution proceeding.
    The requirement of issuance to a foreign parent that controls the 
covered IHC, rather than to another foreign entity within the foreign 
GSIB or to a third party, would prevent the conversion of eligible 
internal TLAC into equity from effecting a change in

[[Page 74942]]

control over the covered IHC. A change in control could create 
additional and undesirable regulatory and management complexity during 
a failure scenario and would severely disrupt an SPOE resolution 
strategy.
    Question 32: The Board invites comment on all aspects of the 
proposed definition of eligible internal TLAC.
    Question 33: Should eligible internal LTD with a remaining maturity 
between one and two years be subject to a 50 percent haircut for 
purposes of the internal TLAC requirement, by analogy to the treatment 
of such eligible internal LTD for purposes of the internal LTD 
requirement?

D. Internal TLAC Buffer

    An internal TLAC buffer would apply in addition to the risk-
weighted assets component of the internal TLAC requirement. The 
internal TLAC buffer would be generally analogous to the proposed 
external TLAC buffer described above, although the internal TLAC buffer 
would not include a GSIB surcharge component because covered IHCs are 
not subject to the GSIB surcharge rule. A covered IHC's internal TLAC 
buffer would thus be equal to the sum of 2.5 percent plus any 
applicable countercyclical capital buffer.
    The internal TLAC buffer would be required to be filled solely with 
common equity tier 1 capital, and a covered IHC's breach of its 
internal TLAC buffer would subject it to limits on capital 
distributions and discretionary bonus payments in accordance with Table 
2. Thus, the internal TLAC buffer would be analogous to the capital 
conservation buffer applicable under the Board's Regulation Q, except 
that it would apply in addition to the internal TLAC requirement rather 
than in addition to minimum risk-based capital requirements under 
Regulation Q.
    As discussed above with respect to the external TLAC buffer, a 
covered IHC that already meets the applicable capital requirements and 
the existing capital conservation buffer would not need to increase its 
common equity tier 1 capital to meet its internal TLAC requirement and 
its internal TLAC buffer.

       Table 2--Calculation of Maximum Internal TLAC Payout Amount
------------------------------------------------------------------------
                                                Maximum internal TLAC
                                                  payout ratio (as a
         Internal TLAC buffer level             percentage of eligible
                                                   retained income)
------------------------------------------------------------------------
Greater than the internal TLAC buffer......  No payout ratio limitation
                                              applies.
Less than or equal to the internal TLAC      60 percent.
 buffer, and greater than 75 percent of the
 internal TLAC buffer.
Less than or equal to 75 percent of the      40 percent.
 internal TLAC buffer, and greater than 50
 percent of the internal TLAC buffer.
Less than or equal to 50 percent of the      20 percent.
 internal TLAC buffer, and greater than 25
 percent of the internal TLAC buffer.
Less than or equal to 25 percent of the      0 percent.
 internal TLAC buffer.
------------------------------------------------------------------------

E. Core Features of Eligible Internal LTD (Section 252.161 of the 
Proposed Rule)

    A covered IHC's eligible internal LTD would generally be subject to 
the same requirements as would apply to eligible external LTD: It would 
be required to be debt that is paid in and issued directly from the 
covered IHC, is unsecured, has a maturity of greater than one year from 
the date of issuance, is ``plain vanilla,'' and is governed by U.S. 
law. Eligible internal LTD with a remaining maturity of between one and 
two years would be subject to a 50 percent haircut for purposes of the 
internal LTD requirement, and eligible internal LTD with a remaining 
maturity of less than one year would not count toward the internal LTD 
requirement. The proposal would treat an instrument that could become 
subject to a put right in the future as if the first day on which the 
put right could be exercised were the instrument's stated maturity 
date. The rationales for these proposed provisions are generally the 
same as the rationales for the identical provisions in the context of 
eligible external LTD, which are discussed above.\72\
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    \72\ In addition, the proposal requires that eligible internal 
LTD be governed by U.S. law in order to clarify that the conversion, 
exchange, and cancellation provisions of these instruments, which 
would be held by foreign companies, are enforceable under U.S. law.
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    However, several additional requirements would apply to eligible 
internal LTD. Eligible internal LTD would be required to be issued to a 
foreign parent entity of the covered IHC, to be contractually 
subordinated to all third-party liabilities of the covered IHC, and to 
include a contractual trigger pursuant to which the Board could require 
the covered IHC to cancel the eligible internal LTD or convert or 
exchange it into tier 1 common equity on a going-concern basis under 
certain specified conditions.
    Question 34: The Board invites comment on the appropriateness of 
subjecting eligible internal LTD to the same requirements as apply to 
eligible external LTD.
    Question 35: The Board invites comment on the requirement that 
eligible internal LTD instruments be governed by U.S. law. Is this 
requirement adequate to ensure that losses can be imposed on such 
instruments under the U.S. Bankruptcy Code or Title II without undue 
legal risk? Are additional requirements appropriate? In particular, 
would a requirement that such instruments be subject to the contract 
law of one or more States be appropriate? Is it appropriate to permit 
such instruments to be governed by non-U.S. laws in any respects?
1. Issuance to a Foreign Parent Entity That Controls the Covered IHC
    Eligible internal LTD would be required to be paid in and issued to 
a foreign parent entity that controls the covered IHC. The rationale 
for this requirement is the same as the rationale for the identical 
requirement with respect to regulatory capital that counts as eligible 
internal TLAC, which is discussed above.
    Question 36: The Board invites comment on all aspects of the 
requirement that eligible internal LTD be issued to a foreign parent 
entity that controls the covered IHC. In particular, the Board invites 
comment with respect to whether covered IHCs that are expected to enter 
resolution themselves in a failure scenario should be permitted to 
issue eligible internal LTD to third parties, as covered BHCs would. 
Should internal LTD be required to be issued to the top-tier foreign 
parent of the covered IHC?
2. Contractual Subordination
    Eligible internal LTD would be required to be contractually

[[Page 74943]]

subordinated to all third-party liabilities of the covered IHC, with 
the exception of liabilities that are related to eligible internal 
TLAC. The exception for liabilities that are related to eligible 
internal TLAC applies to instruments that were eligible internal TLAC 
when issued and have ceased to be eligible solely because their 
remaining maturity is less than one year, because they have become 
subject to a put right, or because they could become subject to a put 
right within one year, as well as to payables (such as dividend- or 
interest-related payables) that are associated with such liabilities.
    The proposed contractual subordination requirement would ensure 
that the foreign parent generally would absorb the covered IHC's losses 
ahead of the third-party creditors and counterparties of the covered 
IHC and its subsidiaries. Such a requirement should reduce the risk of 
third-party challenges to the recapitalization of the covered IHC and 
reduce the risk that a change in control could result from the 
recapitalization of the covered IHC. Both legal challenges to the 
recapitalization and a change in control over the covered IHC could 
create obstacles to an orderly resolution.
    This requirement is more stringent than the requirements for 
eligible external LTD, which is allowed to be senior unsecured debt and 
to be senior to a limited amount of a capped amount of liabilities of 
the covered BHC that do not count as eligible external LTD. The Board 
is proposing to apply this more stringent requirement to eligible 
internal LTD because the costs of doing so are likely to be less than 
the costs of imposing an identical requirement on eligible external LTD 
and are likely to be outweighed by the benefits described above. In 
particular, the cost of imposing this contractual subordination 
requirement on covered IHCs should be substantially lower than the cost 
of imposing the same requirement on covered BHCs because a covered BHC 
must issue its long-term debt to third-party market participants, some 
of which do not invest in contractually subordinated debt instruments, 
whereas a covered IHC would issue its long-term debt to a parent entity 
in an internal transaction.\73\
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    \73\ While the Board does not propose to subject covered BHCs to 
this contractual subordination requirement, it does propose to 
impose a cap on the value of a covered BHC's non-eligible external 
LTD-related liabilities that can be pari passu with or junior to its 
eligible long-term debt. This aspect of the proposal is discussed 
below.
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    Question 37: The Board invites comment on the appropriateness of 
the proposed contractual subordination requirement for eligible 
internal LTD.
3. Contractual Conversion Trigger
    Eligible internal LTD would be required to include a contractual 
trigger pursuant to which the Board could require the covered IHC to 
cancel the eligible internal LTD or convert or exchange it into tier 1 
common equity on a going-concern basis (that is, without the covered 
IHC's entry into a resolution proceeding) if: (a) the Board determines 
that the covered IHC is ``in default or in danger of default''; \74\ 
and (b) any of the following circumstances apply (i) the top-tier 
foreign banking organization or any subsidiary outside of the United 
States is placed into resolution proceedings, (ii) the home country 
supervisory authority consents to the cancellation, exchange, or 
conversion, or does not object to the cancellation, exchange, or 
conversion following 48 hours' notice, or (iii) the Board has made a 
written recommendation to the Secretary of the Treasury that the FDIC 
should be appointed as receiver of the covered IHC under Title II.\75\ 
The terms in the debt instrument would have to be approved by the 
Board.
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    \74\ The phrase ``in default or in danger of default'' would be 
defined consistently with the standard provided by section 203(c)(4) 
of Title II of the Dodd-Frank Act. See 12 U.S.C. 5383. Consistent 
with section 203's definition of the phrase, a covered IHC would be 
considered to be in default or in danger of default upon a 
determination by the Board that (A) a case has been, or likely will 
promptly be, commenced with respect to the [covered IHC] under the 
U.S. Bankruptcy Code; (B) the covered IHC has incurred, or is likely 
to incur, losses that will deplete all or substantially all of its 
capital, and there is no reasonable prospect for the company to 
avoid such depletion; (C) the assets of the [covered IHC] are, or 
are likely to be, less than its obligations to creditors and others; 
or (D) the [covered IHC] is, or is likely to be, unable to pay its 
obligations (other than those subject to a bona fide dispute) in the 
normal course of business.
    \75\ See 12 U.S.C. 5383.
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    The principal purpose of this requirement is to ensure that losses 
incurred by the covered IHC are shifted to a foreign parent without the 
covered IHC's having to enter a resolution proceeding. If the covered 
IHC's eligible internal LTD is sufficient to recapitalize the covered 
IHC in light of the losses that the covered IHC has incurred, this goal 
could be achieved through conversion of the eligible internal LTD into 
equity upon the occurrence of the trigger conditions. The covered IHC's 
entry into a resolution proceeding could pose a risk to the financial 
stability of the United States, and so avoiding the need for such a 
resolution proceeding would advance the Dodd-Frank Act's goal of 
``mitigat[ing] risks to the financial stability of the United States 
that could arise from the material financial distress'' of the covered 
IHC.\76\
---------------------------------------------------------------------------

    \76\ 12 U.S.C. 5365(a)(1).
---------------------------------------------------------------------------

    The proposed trigger conditions represent a compromise between the 
interests of home and host regulators. From the perspective of a host 
regulator, it is desirable to have the power to impose losses on 
eligible internal LTD quickly and easily upon a determination that the 
hosted subsidiary is in danger of default, in order to remove those 
losses from the host jurisdiction's financial system and thereby 
promote financial stability in the host jurisdiction. The proposed 
trigger conditions advance this interest by giving the Board the power 
to do so upon a determination that the covered IHC is in danger of 
default where the home jurisdiction supervisory authority either 
consents or fails to object within 48 hours or where the home 
jurisdiction resolution authority has placed the parent foreign banking 
organization into resolution proceedings. At the same time, from the 
perspective of a home regulator, it is desirable that host regulators 
not impose losses on the top-tier parent entity except where doing so 
is appropriate to prevent the failure of the hosted subsidiary, since 
doing so drains loss-absorbing capacity from the top-tier parent entity 
that may be needed to support other subsidiaries in the home 
jurisdiction or in another host jurisdiction. The proposed trigger 
conditions advance this interest by giving the home jurisdiction 
supervisory authority the right to object to the triggering decision 
within 48 hours, except where the home jurisdiction resolution 
authority has placed the parent foreign banking entity into resolution 
proceedings. The United States is home to numerous U.S. GSIBs and also 
hosts substantial operations of numerous foreign GSIBs, making both 
considerations relevant to U.S. interests. U.S. financial regulatory 
agencies are discussing the application of similar standards by foreign 
regulatory authorities in jurisdictions that host the operations of 
U.S. GSIBs.
    Question 38: The Board invites comment on all aspects of the 
contractual conversion trigger requirement, including the 
appropriateness of the requirement for foreign GSIBs with SPOE and MPOE 
resolution strategies, whether an alternative to the ``in default or in 
danger of default'' standard would be more appropriate, and any legal 
risks associated with the Board's conversion of eligible internal LTD 
into equity in order to recapitalize the covered IHC.

[[Page 74944]]

    Question 39: The Board invites comment on its proposed method to 
identify the home jurisdiction supervisory authority of a foreign GSIB 
for purposes of issuing an internal debt conversion order.
    Question 40: The Board invites comment on whether the conversion 
condition that refers to the placement of a foreign banking 
organization that controls the covered IHC or any subsidiary of the 
top-tier-foreign banking organization being placed into resolution in 
its home country is appropriate in scope.

IV. Clean Holding Company Requirements (sections 252.64 and 252.165 of 
the proposed rule)

    To further facilitate the resolution of a covered BHC, a covered 
IHC, or a foreign parent entity of a covered IHC, the Board proposes to 
prohibit both covered BHCs and covered IHCs (together, ``covered 
holding companies'') from engaging in certain classes of transactions 
that could pose an obstacle to the orderly SPOE resolution of a covered 
holding company or increase the risk that financial market contagion 
would result from the resolution of a covered holding company.
    In particular, the Board proposes to prohibit covered holding 
companies from having outstanding liabilities in the following 
categories: Third-party debt instruments with an original maturity of 
less than one year, including deposits (``short-term debt''); qualified 
financial contracts with a third party (``third-party QFCs''); 
guarantees of a subsidiary's liabilities if the covered holding 
company's insolvency or entry into a resolution proceeding would create 
default rights for a counterparty of the subsidiary; and liabilities 
that are guaranteed by a subsidiary of the covered holding company 
(``upstream guarantees'') or are subject to rights that would allow a 
third party to offset its debt to a subsidiary upon the covered holding 
company's default on an obligation owed to the third party.
    Additionally, the Board proposes to cap the total value of each 
covered BHC's non-TLAC-related third-party liabilities that are either 
pari passu with or subordinated to any eligible external TLAC to 5 
percent of the value of the covered BHC's eligible external TLAC. (As 
discussed above, the Board proposes to prohibit covered IHCs from 
having any non-TLAC-related third-party liabilities that are pari passu 
with or subordinated to eligible internal LTD by requiring that 
eligible internal LTD be contractually subordinated to all third-party 
debt claims. Therefore, the proposed cap is not relevant to covered 
IHCs.)
    The proposed prohibitions and cap would apply only to the corporate 
practices and liabilities of the covered holding company itself. They 
would not directly restrict the corporate practices and liabilities of 
the subsidiaries of the covered holding company.
    These proposed clean holding company provisions would advance three 
related goals of SPOE resolution. First, a successful SPOE resolution 
proceeding requires the ability to impose losses on the creditors of 
the covered holding company without causing material disruption to the 
financial system. The proposed clean holding company restrictions would 
advance this goal by minimizing the risk of short-term funding runs, 
asset firesales, and severe losses to other large financial firms that 
might otherwise be associated with an SPOE resolution of a covered 
holding company.
    Second, the clean holding company provisions would limit the extent 
to which the subsidiaries of a covered holding company would experience 
losses as a result of the failure of the covered holding company. In 
particular, the prohibition on holding company liabilities that are 
subject to upstream guarantees or offset rights would prevent a failed 
covered holding company's creditors from passing their losses on to the 
covered holding company's subsidiaries. This would serve SPOE 
resolution's goal of ensuring that the failed holding company's 
operating subsidiaries are able to continue their normal operations 
throughout the resolution of the failed holding company by protecting 
those subsidiaries from losses that might threaten their viability.
    Third, SPOE resolution seeks to achieve the rapid recapitalization 
of the material subsidiaries of a covered holding company with minimal 
interruption to the ordinary operations of those subsidiaries. An 
entity's complexity can pose a major obstacle to rapid and orderly 
resolution. Limitations on the types of transactions that a covered 
holding company may enter into serve to limit its legal and operational 
complexity and thereby facilitate a prompt resolution and 
recapitalization with minimal uncertainty and delay.
    The proposed clean holding company provisions would also enhance 
the overall resiliency of covered holding companies by removing 
complexity from their balance sheets and limiting their reliance on 
short-term funding.

A. Third-Party Short-Term Debt Instruments (Sections 252.64(a)(1) and 
252.165(a) of the Proposed Rule)

    The Board proposes to prohibit covered holding companies from 
issuing debt instruments with an original maturity of less than one 
year to a third party (as opposed to an affiliate of the covered 
holding company). Such a liability would be considered to have an 
original maturity of less than one year if it would provide the 
creditor with the option to receive repayment within one year of the 
creation of the liability, or if it would create such an option or an 
automatic obligation to pay upon the occurrence of an event that could 
occur within one year of the creation of the liability (other than an 
event related to the covered holding company's insolvency). The 
proposed prohibition would also cover short-term and demand deposits at 
the covered holding company.\77\
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    \77\ For purposes of the proposal, deposits would include those 
that are captured in line item 11 of schedule PC of FR Y-9LP.
---------------------------------------------------------------------------

    One objective of SPOE resolution is to mitigate the risk of 
destabilizing funding runs. A funding run occurs when the short-term 
creditors of a financial company observe stress at that institution and 
seek to minimize their exposures to it by refusing to roll over its 
debts. The resulting liquidity stress can hasten the company's failure, 
including by forcing it to engage in asset firesales to come up with 
the liquidity to pay the short-term creditors. Because they reduce the 
value of similar assets held by other firms, asset firesales are a key 
channel for the propagation of stress throughout the financial system. 
The short-term creditors of a failing GSIB may also run on other 
counterparties that are similar to the failing firm in certain 
respects, weakening those firms and forcing further firesales. And 
depositors, who generally have the ability to demand their funds on 
short notice, present analogous issues.
    The Board's proposal seeks to mitigate these risks in two 
complementary ways. First, although the operating subsidiaries of 
covered holding companies rely on short-term funding, in an SPOE 
resolution, their short-term creditors would not bear losses incurred 
by the subsidiaries because those losses would instead be borne by the 
external TLAC holders of the covered holding company. To the extent 
that market participants view SPOE resolution as workable, the 
subsidiaries' short-term creditors should have reduced incentives to 
run because their direct counterparty will not default in such a 
resolution. Second, the covered holding

[[Page 74945]]

companies themselves--which would (or, in the case of a covered IHC, 
might) enter into resolution and default on certain of their debts in a 
failure scenario--would be prohibited from relying on short-term 
funding, reducing the run risk associated with the failure of such an 
entity. This is a particularly important objective in light of the 
likely liquidity needs of a GSIB during SPOE resolution, because a 
short-term funding run on a covered holding company would drain 
liquidity that might be needed to support the group's operating 
subsidiaries.
    The proposed prohibition applies to both secured and unsecured 
short-term borrowings. Although secured creditors are less likely to 
take losses in resolution than unsecured creditors, secured creditors 
may nonetheless be unwilling to maintain their exposures to a covered 
holding company that comes under stress. In particular, if the covered 
holding company were to enter into a resolution proceeding, the 
collateral used to secure the debt would be subject to a stay, 
preventing the creditor from liquidating it immediately. (Qualified 
financial contracts, which are not subject to a stay under the U.S. 
Bankruptcy Code but which present other potential difficulties for SPOE 
resolution, are discussed below.) The creditor would therefore face two 
risks: The risk that the value of the collateral would decline before 
it could be liquidated and the liquidity risk attributable to the fact 
that the creditor would be stayed from liquidating the collateral for 
some time. Knowing this, secured short-term creditors may well decide 
to withdraw funding from a covered holding company that comes under 
stress.
    Additionally, many short-term lenders to GSIBs are themselves 
maturity-transforming financial firms that are vulnerable to runs (for 
instance, money market mutual funds). If such firms incur losses, then 
they may be unable to meet their obligations to their own investors and 
counterparties, which would cause further losses throughout the 
financial system. Because SPOE resolution relies on imposing losses on 
the covered holding company's creditors while protecting the creditors 
and counterparties of its material operating subsidiaries, it is 
desirable that the holding company's creditors be limited to those 
entities that can be exposed to losses without materially affecting 
financial stability. This proposal seeks to further enhance the 
credibility of the SPOE approach by removing undue complexity from the 
resolution of a covered holding company.
    Finally, the proposed prohibition on short-term debt instruments 
would promote the resiliency of covered holding companies as well as 
their resolvability. As discussed above, reliance on short-term funding 
creates the risk of a short-term funding run that could destabilize the 
covered holding company by draining its liquidity and forcing it to 
engage in capital-depleting asset firesales. The increase in covered 
holding company resiliency yielded by the proposed prohibition provides 
a secondary justification for the proposal.
    Question 41: The Board invites comment on whether the proposed 
prohibition would advance SPOE resolution by helping to minimize the 
run risk and potential negative externalities associated with issuance 
of short-term debt by covered holding companies. In particular, the 
Board invites comment on the appropriate scope of the proposed 
prohibition and whether the prohibition is sufficiently clear.
    Question 42: The Board invites comment on whether the purpose of 
the proposed prohibition would be served by a further requirement that 
covered holding companies not redeem or buy back their liabilities 
without prior regulatory approval, to prevent covered holding companies 
from doing so to preserve their franchise in response to creditor 
requests, which could hasten a failure by draining liquidity or 
requiring asset firesales.
    Question 43: The Board invites comment on the appropriate treatment 
of pre-existing notes that would require redemption or create a put 
right upon the occurrence of an event that could (but might not) occur 
within one year of issuance.

B. Qualified Financial Contracts with Third Parties (Sections 
252.64(a)(3) and 252.165(c) of the Proposed Rule)

    Under the proposal, covered BHCs could only enter into qualified 
financial contracts (QFCs) with their subsidiaries and covered IHCs 
could only enter into QFCs with their affiliates. The proposal defines 
QFCs by reference to Title II of the Dodd-Frank Act, which defines QFCs 
to include securities contracts, commodities contracts, forward 
contracts, repurchase agreements, and swap agreements.\78\
---------------------------------------------------------------------------

    \78\ 12 U.S.C. 5390(c)(8)(D).
---------------------------------------------------------------------------

    The failure of a large financial organization that is a party to a 
material amount of third-party QFCs could pose a substantial risk to 
the stability of the financial system. Specifically, it is likely that 
many of that institution's QFC counterparties would respond to the 
institution's default by immediately liquidating their collateral and 
seeking replacement trades with other dealers, which could cause 
firesale effects and propagate financial stress to other firms that 
hold similar assets by depressing asset prices.
    The proposed restriction on third-party QFCs would mitigate this 
threat to financial stability by two means. First, covered holding 
companies' operating subsidiaries, which are parties to large 
quantities of QFCs, should remain solvent and not fail to meet any 
ordinary course payment or delivery obligations during a successful 
SPOE resolution. Therefore, assuming that the cross-default provisions 
of the QFCs engaged in by the operating subsidiaries of covered holding 
companies are appropriately structured, their QFC counterparties 
generally would have no contractual right to terminate or liquidate 
collateral on the basis of the covered holding company's entry into 
resolution proceedings.\79\ Second, the covered holding companies 
themselves would have no QFCs with external counterparties, and so 
their entry into resolution proceedings would not result in QFC 
terminations and related firesales. The proposed restriction on third-
party QFCs would therefore materially diminish the firesale risk and 
contagion effects associated with the failure of a covered holding 
company.
---------------------------------------------------------------------------

    \79\ See International Swaps and Derivatives Association's 
(``ISDA'') 2014 Resolution Stay Protocol (November 4, 2014).
---------------------------------------------------------------------------

    Question 44: The Board invites comment with respect to whether the 
prohibition on third-party QFCs should be subject to an exception for 
derivatives contracts that are intended to hedge the exposures of the 
covered holding company and, if so, the appropriate scope of any such 
exception. The Board also invites comment on whether the definition of 
``qualified financial contracts'' provides an appropriate scope for 
this prohibition and, in particular, whether the scope should be 
narrowed to permit covered holding companies to enter into certain 
third-party QFCs or broadened to prohibit additional classes of 
transactions.
    Question 45: The Board invites comment on the appropriate treatment 
of pre-existing third-party QFCs, some of which may be long-dated. 
Should some or all pre-existing third-party QFCs be included in the 
proposed restriction? Commenters are invited to provide information on 
the characteristics of existing third-party QFCs to which a covered 
holding company is a party.

[[Page 74946]]

C. Guarantees that Are Subject to Cross-Defaults (Sections 252.64(a)(4) 
and 252.165(d) of the Proposed Rule)

    The proposal would prohibit a covered holding company from 
guaranteeing (including by providing credit support) with respect to 
any liability between a direct or indirect subsidiary of the covered 
holding company and an external counterparty if the covered holding 
company's insolvency or entry into resolution (other than resolution 
under Title II of the Dodd-Frank Act) would directly or indirectly 
provide the subsidiary's counterparty with a default right.\80\ 
Guarantees by covered holding companies of liabilities that are not 
subject to such cross-default rights would be unaffected by the 
proposal.
---------------------------------------------------------------------------

    \80\ The proposal defines the term ``default right'' broadly.
---------------------------------------------------------------------------

    The proposed prohibition would advance the key SPOE resolution goal 
of ensuring that a covered holding company's subsidiaries would 
continue to operate normally upon the covered holding company's entry 
into resolution. This goal would be jeopardized if the covered holding 
company's entry into resolution or insolvency operated as a default by 
the subsidiary and empowered the subsidiary's counterparties to take 
default-related actions, such as ceasing to perform under the contract 
or liquidating collateral. Were the counterparty to take such actions, 
the subsidiary could face liquidity, reputational, or other stress that 
could undermine its ability to continue operating normally, for 
instance by prompting a short-term funding run on the subsidiary. The 
proposed prohibition would be a complement to other work that has been 
done or is underway to facilitate SPOE resolution through the stay of 
cross-defaults, including the ISDA 2014 Resolution Stay Protocol.\81\
---------------------------------------------------------------------------

    \81\ See ISDA 2014 Resolution Stay Protocol.
---------------------------------------------------------------------------

    Question 46: The Board invites comment on the appropriate 
definition of ``default right'' in the proposed regulations, and on 
whether the definition of this term should specifically exclude 
contracts that provide for termination on demand. The Board also 
invites comment on whether, for the purposes of this proposal, 
contractual provisions that require the parties to negotiate new terms 
(e.g., Annex III (Term Loans) of the Global Master Securities Lending 
Agreement) should be treated the same as a right to terminate on 
demand.
    Question 47: The Board invites comment on whether a covered holding 
company should be permitted to guarantee the liabilities of its 
subsidiaries if such liabilities permit a person to terminate the 
contract on demand or at its option at a specified time, or from time 
to time, without the need to show cause. Should a covered holding 
company be permitted to guarantee any particular class or classes of 
liabilities of its subsidiaries that include such provisions?
    Question 48: The Board invites comment on whether a covered IHC 
should be permitted to guarantee liabilities of affiliates of the 
covered IHC that are not subsidiaries of the covered IHC, and whether 
any prohibition should distinguish between the foreign banking 
organization's non-U.S. operations and its U.S. branches and agencies.
    Question 49: The Board invites comment on whether additional 
limitations or exceptions for guarantees by covered holding companies 
are necessary or appropriate.

D. Upstream Guarantees and Offset Rights (Sections 252.64(a)(2), (5) 
and 252.165(b)(e) of the Proposed Rule)

    The Board proposes to prohibit covered holding companies from 
having outstanding liabilities that are subject to a guarantee from any 
direct or indirect subsidiary of the holding company. SPOE resolution 
relies on imposing all losses incurred by the group on the covered 
holding company's eligible external TLAC holders while ensuring that 
its operating subsidiaries continue to operate normally. This 
arrangement could be undermined if a liability of the covered holding 
company is subject to an upstream guarantee, because the effect of such 
a guarantee is to subject the guaranteeing subsidiary (and, ultimately, 
its creditors) to the losses that would otherwise be imposed on the 
holding company's creditors. A prohibition on upstream guarantees would 
facilitate the SPOE resolution strategy by increasing the certainty 
that the covered holding company's eligible external TLAC holders will 
be exposed to loss ahead of the creditors of its subsidiaries.
    Upstream guarantees do not appear to be common among covered 
holding companies. Section 23A of the Federal Reserve Act already 
limits the ability of a U.S. insured depository institution to issue 
guarantees on behalf of its parent holding company.\82\ The principal 
effect of the proposed prohibition would therefore be to prevent the 
future issuance of such guarantees by material non-bank subsidiaries.
---------------------------------------------------------------------------

    \82\ Transactions subject to the quantitative limits of section 
23A of the Federal Reserve Act and Regulation W include guarantees 
issued by a bank on behalf of an affiliate. See 12 U.S.C. 
371c(b)(7); 12 CFR 223.3(h).
---------------------------------------------------------------------------

    For analogous reasons, the Board also proposes to prohibit covered 
holding companies from issuing an instrument if the holder of the 
instrument has a contractual right to offset its or its affiliates' 
liabilities to the covered holding company's subsidiaries against the 
covered holding company's liability under the instrument.\83\ The 
prohibition would include all such offset rights regardless of whether 
the right is provided in the instrument itself. Such offset rights are 
another device by which losses that should flow to the covered holding 
company's external TLAC holders in an SPOE resolution could instead be 
imposed on operating subsidiaries and their creditors.
---------------------------------------------------------------------------

    \83\ The prohibition for covered IHCs also would include 
contractual rights to offset against the covered IHC because the 
covered IHC itself may not enter resolution or insolvency 
proceedings.
---------------------------------------------------------------------------

    Question 50: The Board invites comment on the appropriate scope of 
the ``upstream guarantee'' prohibition and on whether any exceptions to 
the proposed prohibition on such guarantees are necessary or 
appropriate. The Board also invites comment on the appropriate scope of 
the offset rights prohibition, including whether the proposed 
prohibition is adequate to achieve the goals expressed above. For 
example, should this provision be limited to debt instruments that 
provide contractual offset rights? The Board invites comment with 
respect to whether any exceptions or limitations to the proposed 
restrictions on such rights, such as a limitation of the restriction to 
eligible external TLAC instruments, are necessary or appropriate.
    Question 51: The Board invites comment on the types of instruments 
that provide contractual offset rights and the amount of such 
instruments issued by covered BHCs.
    Question 52: The Board invites comment on whether arrangements 
other than upstream guarantees and offset rights could also have the 
effect of forcing the creditors of material operating subsidiaries to 
take losses before holding company creditors (for instance, a 
subsidiary's entry into a credit default swap referencing the debt of 
the covered holding company) and, if so, whether they should also be 
restricted by regulation. Finally, the Board invites comment on whether 
the prohibition should be limited to certain material operating 
subsidiaries rather than covering all subsidiaries of a covered holding 
company and, if so, the

[[Page 74947]]

appropriate scope of the limitation on the types of subsidiaries.

E. Cap on Other Third-Party Liabilities (section 252.64(b) of the 
proposed rule)

    Finally, the Board proposes to limit the total value of certain 
other liabilities of covered BHCs that could create obstacles to 
orderly resolution to 5 percent of the value of the covered BHC's 
eligible external TLAC. The cap would apply to non-contingent 
liabilities to third parties (i.e., persons that are not affiliates of 
the covered BHC) that would rank either pari passu with or junior to 
the covered BHC's eligible LTD in the priority scheme of either the 
U.S. Bankruptcy Code or Title II.\84\ The cap would not apply to 
eligible external TLAC; to instruments that were eligible external TLAC 
when issued and have ceased to be eligible (because their remaining 
maturity is less than one year) as long as the holder of the instrument 
does not have a currently exercisable put right; or to payables (such 
as dividend- or interest-related payables) that are associated with 
such liabilities.
---------------------------------------------------------------------------

    \84\ See 11 U.S.C. 507; 12 U.S.C. 5390(b).
---------------------------------------------------------------------------

    Because the Board proposes to require that a covered IHC's eligible 
internal LTD be contractually subordinated to all of the covered IHC's 
third-party liabilities, this proposed cap would have no relevance to 
those firms. The Board accordingly does not propose to apply the cap to 
covered IHCs.
    Liabilities that would be expected to be subject to the cap include 
debt instruments with derivative-linked features (i.e., structured 
notes); external vendor and operating liabilities, such as for 
utilities, rent, fees for services, and obligations to employees; and 
liabilities arising other than through a contract (e.g., liabilities 
created by a court judgment).
    The liabilities subject to the cap fall into two groups: Those that 
could be subjected to losses alongside eligible external TLAC without 
potentially undermining SPOE resolution or financial stability, and 
those that potentially could not.
    The first group includes structured notes. The proposal defines 
structured notes so as to avoid capturing debt instruments that pay 
interest based on the performance of a single index but to otherwise 
capture all debt instruments that have a principal amount, redemption 
amount, or stated maturity, that is subject to reduction based on the 
performance of any asset, entity, index, or embedded derivative or 
similar embedded feature.\85\ Such liabilities could be subjected to 
losses in resolution alongside eligible external TLAC, but the proposal 
would cap them in light of their greater complexity relative to the 
plain-vanilla debt that qualifies as external TLAC. In an orderly 
resolution of a covered BHC, debt instruments that will be subjected to 
losses should be able to be valued accurately and with minimal risk of 
dispute. Structured notes contain features that could make their 
valuation uncertain, volatile, or unduly complex. Additionally, 
structured notes are often customer products sold to purchasers who are 
primarily seeking exposure to a particular asset class and not seeking 
credit exposure to the covered BHC, and the need to impose losses on a 
financial institution's customers in resolution may create obstacles to 
orderly resolution. The proposed cap on structured notes would promote 
the resolvability of covered BHCs by limiting their issuance of 
instruments that present these issues. The cap would not limit a 
covered BHC's ability to issue structured notes out of subsidiaries.
---------------------------------------------------------------------------

    \85\ In addition, the definition captures debt instruments that 
have more than one embedded derivative (or similar embedded feature) 
or are not treated as debt under generally accepted accounting 
principles.
---------------------------------------------------------------------------

    The second group includes, for example, vendor liabilities and 
obligations to employees. Successful resolution may require that the 
covered BHC continue to perform on certain of its unsecured liabilities 
in order to ensure that it is not cut off from vital services and 
resources. If these vital liabilities were pari passu with eligible 
external LTD, protecting these vital liabilities from loss would entail 
treating these liabilities differently from eligible external LTD of 
the same priority, which could present both operational and legal risk. 
The operational risk flows from the need to identify such liabilities 
quickly in the context of a complex resolution proceeding, reducing the 
covered holding company's complexity by capping the amount of these 
liabilities that it can have outstanding mitigates this risk. The legal 
risk flows from the no-creditor-worse-off principle, according to which 
each creditor of a firm that enters resolution is entitled to recover 
at least as much as it would have if the firm had simply been 
liquidated under chapter 7 of the U.S. Bankruptcy Code.\86\ As 
creditors of a given priority receive special treatment (that is, as 
they are paid in full to ensure that the firm maintains access to vital 
external services and resources), the pool of resources available to 
other creditors of the same priority shrinks, making it more likely 
that those creditors will recover less than they would have in 
liquidation. Thus, imposing a cap on the total value of liabilities 
that are pari passu with or junior to eligible external TLAC but that 
might need to receive special treatment in resolution mitigates this 
no-creditor-worse-off risk.
---------------------------------------------------------------------------

    \86\ See, e.g., 11 U.S.C. 1129(a)(7); 12 U.S.C. 5390(d)(2).
---------------------------------------------------------------------------

    The rationale for calibrating the proposed cap to 5 percent of a 
covered BHC's eligible TLAC is as follows. The Board collected data 
from the U.S. GSIBs and determined that covered BHCs have outstanding 
certain third-party operational liabilities that may rank pari passu 
with eligible LTD and that could not be eliminated without substantial 
cost and complexity. These liabilities include (among other things) tax 
payables, compensation payables, and accrued benefit plan obligations. 
For the eight current U.S. GSIBs, the value of these operating 
liabilities ranges from 1 percent to 4 percent of the sum of the 
covered BHC's equity and long-term debt, which provides a reasonable 
proxy for the amount of eligible external TLAC it would have under this 
proposal. The cap was calibrated to allow these existing operational 
liabilities while limiting the excessive growth of these and other 
liabilities at the covered BHC so that the problems discussed in the 
preceding paragraphs may be avoided. In particular, several covered 
BHCs may need to limit the value of structured notes that they have 
outstanding. This result would be consistent with the rationale for the 
clean holding company requirements because, as noted above, such 
structured notes are customer liabilities rather than vital operating 
liabilities and because their presence at the holding company could 
create undue complexity during resolution.
    By subjecting the total value of a covered BHC's liabilities of 
both types to a single cap, the Board's proposal gives covered BHCs 
greater discretion to manage their own affairs than would a proposal 
that applied separate, smaller caps to the two types of liability.
    Question 53: The Board invites comment on the appropriate 
definition of ``structured notes,'' and whether the provisions of the 
definition are adequate to achieve the goals expressed above. The Board 
invites comment on use and scope of the term ``assets'' as used in the 
definition of structured note, and whether a different term would be 
more appropriate in this context.

[[Page 74948]]

    Question 54: Should liabilities subject to the proposed cap on 
certain third-party liabilities be netted against reserves held with 
respect to such liabilities for purposes of determining compliance with 
the proposed cap?
    Question 55: The Board invites comment on the appropriate size of 
the proposed cap. The Board also invites comment as to the appropriate 
scope of the cap, including the liabilities excluded from the cap and 
the formulation of the proposed exemption for certain liabilities 
associated with eligible external TLAC.
    Question 56: The Board invites comment regarding whether a 
grandfather of existing liabilities that would be subject to the 
proposed cap would be appropriate. In particular, the Board invites 
comment on the appropriate design of such a grandfather and the likely 
impact on covered BHCs and debt markets of the failure to include such 
a grandfather. Please support your response with data.
    Question 57: The Board invites comment on the appropriate 
accounting treatment to be used in determining the total value of the 
liabilities subject to the cap, including whether and to what extent 
guarantees by the resolution entity of the liabilities of its 
subsidiaries should be subject to the cap.
    Question 58: The Board invites comment on whether secured 
liabilities and liabilities that otherwise represent a claim that would 
be senior to eligible debt securities under bankruptcy proceedings or a 
Title II resolution should be subject to the limit on unrelated 
liabilities of the covered BHC.
    Question 59: The Board invites comment on what, if any, additional 
restrictions on corporate practices or operations of covered BHCs would 
be appropriate.

F. Disclosure Requirements (Section 252.65 of the Proposed Rule)

    The Board proposes to require each covered BHC to publicly disclose 
a description of the financial consequences to unsecured debtholders of 
the covered BHC's entry into a resolution proceeding in which the 
covered BHC is the only entity that would enter resolution.
    Consistent with the disclosure requirements imposed by the Board's 
capital regulations, the covered BHC would be permitted to make this 
disclosure on its Web site or in more than one public financial report 
or other public regulatory report, provided that the covered BHC 
publicly provides a summary table specifically indicating the 
location(s) of this disclosure.\87\ Because the disclosure requirement 
is primarily intended to inform holders of a covered BHC's eligible 
external LTD that they are subject to loss ahead of other creditors of 
the covered BHC or its subsidiaries, the proposal would also require 
the covered BHC to disclose the required information in the offering 
documents for all of its eligible external LTD.
---------------------------------------------------------------------------

    \87\ See 12 CFR 217.62(a), 12 CFR 217.172(c)(1).
---------------------------------------------------------------------------

    The Board has long supported meaningful public disclosure by 
banking organizations, with the objective of improving market 
discipline and encouraging sound risk-management practices.\88\ By 
helping holders of eligible external LTD and other unsecured debt 
issued by a covered BHC to understand that they will be allowed to 
suffer losses in a resolution and generally will absorb losses ahead of 
the creditors of the covered BHC's subsidiaries, the proposed 
disclosure requirement should encourage potential investors to 
carefully assess the covered BHC's risk profile when making investment 
decisions. This careful assessment should lead to an improvement in the 
market pricing of the unsecured debt of covered BHCs, including 
eligible external LTD, providing supervisors and market participants 
with more accurate market signals about the financial condition and 
risk profile of the covered BHC.
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    \88\ See, e.g., 78 FR 62018, 62128-29 (October 11, 2013).
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    Question 60: The Board invites comment on the proposed disclosure 
requirements, including whether additional disclosures would further 
advance the goals of this proposal. In particular, the Board invites 
comment on whether a covered BHC should be required to disclose that 
the public section of its most recent resolution plan is available 
online.
    Question 61: The Board invites comment on whether the proposed 
methods for a covered BHC to make the required disclosures are 
appropriate and on whether covered BHCs should be permitted to use 
additional methods to make the required disclosures.
    Question 62: Should the Board require covered BHCs to provide 
specific disclosure language that is designed to notify potential 
investors of the resolution-related risks of investing in unsecured 
debt instruments issued by covered BHCs? If so, what language would be 
appropriate?

V. Consideration of Public Reporting Requirements for Eligible External 
and Internal TLAC and LTD

    The Board intends to propose for a comment a requirement that 
covered BHCs and covered IHCs report publicly their amounts of eligible 
external TLAC and LTD and eligible internal TLAC and LTD, respectively, 
on a regular basis. By rendering each covered holding company's loss-
absorbing capacity transparent to regulators and market participants, 
public reporting requirements would promote both supervision and market 
discipline, which could be expected to disincentivize excessive risk-
taking by covered BHCs and covered IHCs and thereby mitigate risks to 
the financial stability of the United States.
    Question 63: The Board invites comment on its plan to propose a 
reporting requirement for eligible external TLAC and LTD and eligible 
internal TLAC and LTD.

VI. Consideration of Domestic Internal TLAC Requirement

    Under the SPOE resolution strategy, severe losses must be passed up 
from the operating subsidiaries that initially incur them to the 
covered holding company, and then on to the eligible external TLAC 
holders (in the case of a covered BHC) or the foreign parent (in the 
case of a covered IHC). Both steps are necessary to achieve the key 
goal of the SPOE resolution strategy: Allowing material operating 
subsidiaries to continue to operate normally by ensuring that losses 
that would otherwise fall on their creditors (potentially sparking 
contagious runs and other generators of financial instability) will 
instead be borne by the holders of the TLAC issued by the covered 
holding company. The proposed rule is intended to ensure that covered 
holding companies issue a sufficient amount of loss-absorbing resources 
to absorb such losses, but the proposed rule does not ensure that firms 
have in place adequate mechanisms for transferring severe losses up 
from their operating subsidiaries to the covered holding company--that 
is, domestic internal total loss-absorbing capacity (``domestic 
internal TLAC'').
    The Board is therefore considering the costs and benefits of 
imposing domestic internal TLAC requirements between covered holding 
companies and their subsidiaries. Such requirements could complement 
this proposed rule and could enhance the prospects for a successful 
SPOE resolution of a covered BHC or of the parent foreign GSIB of a 
covered IHC.

[[Page 74949]]

    The domestic internal TLAC framework that the Board is considering 
would require identification of covered holding companies' material 
operating subsidiaries (``covered subsidiaries''). The framework would 
then subject each covered holding company to a domestic internal TLAC 
requirement with respect to each of its covered subsidiaries. The size 
of the requirement with respect to a given covered subsidiary would 
depend on the subsidiary's total risk-weighted assets, its total 
leverage exposure, or both.\89\
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    \89\ See generally 12 CFR 217.10.
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    Under the framework that the Board is considering, domestic 
internal TLAC would be divided into two categories: ``contributable 
resources'' and ``prepositioned resources.'' Contributable resources 
would be assets that are held by the covered holding company and would 
enable the covered holding company to make contributions to covered 
subsidiaries that incur severe losses, which would have the effect of 
recapitalizing those subsidiaries. The principal benefit of 
contributable resources is that they avoid the ``misallocation risk'' 
associated with prepositioned resources: Whereas an investment that has 
been prepositioned with a particular subsidiary cannot easily be used 
to recapitalize a different subsidiary that incurs unexpectedly high 
losses, contributable resources can be flexibly allocated among 
subsidiaries in light of the losses they suffer. The rationale for 
requiring that contributable resources be held by the covered holding 
company (rather than allowing them to be held at its subsidiaries) 
would be that it could help to avoid operational risks and other 
potential limitations on the firm's ability to move the assets to the 
parts of the organization that need them most.
    To ensure that the contributable resources would retain sufficient 
value to recapitalize a subsidiary, including under conditions of 
severe market stress, a domestic internal TLAC framework could require 
that the contributable resources requirement be met entirely or 
substantially with assets that would qualify as high-quality liquid 
assets (HQLA) under the U.S. liquidity coverage ratio rule.\90\ 
Requiring a firm's contributable resources to be made up of HQLA, 
rather than a broader set of high-quality assets, would have two 
further advantages beyond helping to ensure that the assets remain 
valuable during a stress period. First, the contribution of such assets 
to a subsidiary would provide the subsidiary with additional liquidity 
as well as capital. Second, some subsidiaries are subject to 
limitations on the kinds of assets they are permitted to hold (for 
example, U.S. banks generally cannot hold equities).\91\ If a firm's 
contributable resources consist of HQLA, then these limitations should 
not pose an obstacle to recapitalization because the firm will be able 
to convert the assets into cash and then contribute the cash to its 
subsidiaries.
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    \90\ 79 FR 61440 (October 10, 2014).
    \91\ See 12 U.S.C. 24(7).
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    Prepositioned resources would be a covered holding company's debt 
and equity investments in a covered subsidiary (including investments 
made indirectly through lower-tier parent entities of the covered 
subsidiary). A covered holding company's equity investment in a 
subsidiary would transfer losses from the subsidiary to the holding 
company automatically, while a holding company's debt investment could 
be used to absorb losses incurred by the subsidiary through forgiveness 
of the debt, conversion of the debt into equity, or another 
economically similar procedure. To qualify as prepositioned resources, 
debt could be required to be unsecured, be plain vanilla, have a 
remaining maturity of at least one year, and be of lower priority than 
all third-party claims on the subsidiary. The rationale for these 
restrictions would be to ensure that the loss-absorbing capacity will 
indeed be available if and when it is needed, to reduce operational 
risk by eliminating unnecessary complexity, and to mitigate possible 
legal risk associated with insolvency law.
    Question 64: The Board invites comment on all aspects of this 
potential domestic internal TLAC framework. In particular, the Board 
invites comment on whether the Board should impose domestic internal 
TLAC requirements on covered holding companies. If so, how should the 
Board regulate the following key elements: The definition of ``covered 
subsidiary''; the calibration of the domestic internal TLAC requirement 
with respect to each covered subsidiary; the division of domestic 
internal TLAC between ``contributable resources'' and ``prepositioned 
resources''; the definition of ``contributable resources,'' including 
whether certain non-HQLA resources should be allowed to count toward 
the requirement; the definition of ``prepositioned resources,'' 
including any minimum maturity and subordination requirements; and the 
legal risks associated with passing losses from a subsidiary to a 
holding company by means of the mechanisms described above in the 
context of SPOE resolution, including risks under insolvency law, as 
well as potential mitigants for these risks.
    Question 65: The Board also seeks comment on whether, in a domestic 
internal TLAC framework, contributable resources and prepositioned debt 
should be required to be subject to a capital contribution agreement 
that would impose upon the covered holding company a legal obligation 
to recapitalize the subsidiary upon the occurrence of a trigger outside 
the firm's discretion (such as the current or projected insolvency of 
the subsidiary, or a government order), and on the appropriate design 
of such a trigger. Finally, the Board invites comment on whether any 
domestic internal TLAC framework proposed by the Board should treat 
foreign subsidiaries of covered holding companies differently from 
their domestic subsidiaries.

VII. Regulatory Capital Deduction for Investments in the Unsecured Debt 
of Covered BHCs

Background

    The Board's regulatory capital rules (Regulation Q) impose minimum 
capital requirements on all state member banks, as well as on certain 
bank holding companies, and certain savings and loan holding companies 
(``Board-regulated institutions'').\92\ These minimum requirements take 
the form of minimum ratios of various forms of regulatory capital to 
different measures of assets.\93\ The risk-based ratios are the common 
equity tier 1 ratio, the tier 1 risk-based capital ratio, and the total 
risk-based capital ratio.\94\ Regulation Q also includes a leverage 
ratio that measures the proportion of a Board-regulated institution's 
tier 1 capital to its total

[[Page 74950]]

assets.\95\ In addition, certain internationally active Board-regulated 
institutions are subject to a supplementary leverage ratio, which 
incorporates certain off-balance sheet exposures into the measure of 
total assets.\96\
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    \92\ See 12 CFR 217.1(c). Savings and loan holding companies 
that are substantially engaged in insurance underwriting or 
commercial activities are exempt temporarily from Regulation Q. See 
12 CFR 217.1(c)(1)(iii); and 12 CFR 217.2, definition of ``Covered 
savings and loan holding company.'' In addition, any bank holding 
company that is subject to the Board's Small Bank Holding Company 
Policy Statement (12 CFR part 225, appendix C) is exempt from 
Regulation Q. See 12 CFR 217.1(c)(1)(ii). In addition, any savings 
and loan holding company that meets the requirements of the Small 
Bank Holding Company Policy Statement ``as if the savings and loan 
holding company were a bank holding company and the savings 
association were a bank'' is exempt from Regulation Q. See 12 CFR 
217.1(c)(1)(iii).
    At this time, the proposed capital deduction will not apply to 
nonbank SIFIs. Following the finalization of the regulatory capital 
framework applicable to one or more nonbank SIFIs, the Board would 
determine whether, and how, the proposed capital deduction would 
apply to such companies.
    \93\ See 12 CFR 217.10.
    \94\ See 12 CFR 217.10(a)(1) through (3).
    \95\ See 12 CFR 217.10(a)(4).
    \96\ See 12 CFR 217.10(a)(5).
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    In calculating its capital ratios under these rules, a Board-
regulated institution is required to deduct fully from regulatory 
capital certain assets, such as goodwill and other intangible 
assets.\97\ Certain other assets must be deducted from regulatory 
capital to the extent they exceed a particular threshold, such as 
mortgage servicing assets and certain deferred tax assets.\98\
---------------------------------------------------------------------------

    \97\ See 12 CFR 217.22.
    \98\ Id.
---------------------------------------------------------------------------

    The regulatory capital rules include two broad categories of 
deductions related to investments in capital instruments. First, 
Regulation Q requires that a Board-regulated institution fully deduct 
any investment in its own regulatory capital instruments and 
investments in regulatory capital instruments held reciprocally with 
another financial institution.\99\ Second, Regulation Q requires that a 
Board-regulated institution deduct investments in capital instruments 
issued by other financial institutions that would be regulatory capital 
if issued by the Board-regulated institution.\100\ In this second case, 
a Board-regulated institution may be required to fully deduct the 
investment or may be required to deduct the investment above a 
particular threshold, depending on the circumstances.\101\ In both 
cases, the Board-regulated institution is required to make the 
deduction from the category of regulatory capital for which the 
instrument qualifies or would qualify if issued by the Board-regulated 
institution.\102\ Thus, a Board-regulated institution that purchases 
its own subordinated debt instrument that qualifies as tier 2 capital 
must deduct the debt instrument from its tier 2 capital. Similarly, a 
Board-regulated institution that owns less than 10 percent of the 
common equity of an unaffiliated bank must deduct from its common 
equity the amount, if any, by which the Board-regulated institution's 
investment exceeds 10 percent of the Board-regulated institution's 
common equity.
---------------------------------------------------------------------------

    \99\ 12 CFR 217.22(c)(1).
    \100\ See 12 CFR 217.22(c)(2).
    \101\ See 12 CFR 217.22(c)(3) through (5).
    \102\ See 12 CFR 217.22(c)(1) and (2).
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Proposed deductions from regulatory capital

    To address the potential contagion stemming from the failure of a 
GSIB, the proposal would amend Regulation Q to require a Board-
regulated institution to deduct from its regulatory capital the amount 
of any investment in, or exposure to, unsecured debt issued by a 
covered BHC. In particular, for purposes of the deductions, a Board-
regulated institution would be required to treat unsecured debt issued 
by a covered BHC in a similar manner to an investment in a tier 2 
capital instrument.\103\ The form and amount of the deduction would 
depend on the type of investment and various other factors, as 
described below.
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    \103\ Unsecured debt issued by a covered BHC may or may not 
qualify as tier 2 capital, depending on its characteristics. See 12 
CFR 217.20(d). Similarly, unsecured debt issued by a covered BHC may 
or may not qualify as eligible long term debt under this proposal, 
depending on its characteristics. See Proposed 12 CFR 252.61, 
252.161.
---------------------------------------------------------------------------

    Analysis conducted by Board staff has not indicated that Board-
regulated institutions currently own a substantial amount of unsecured 
debt issued by covered BHCs. The proposed deduction requirement would 
substantially reduce the incentive of a Board-regulated institution to 
invest in unsecured debt issued by a covered BHC, thereby increasing 
the prospects for an orderly resolution of a covered BHC by reducing 
the risk of contagion spreading to other Board-regulated institutions.
    To implement the proposed deduction requirements for investments in 
covered debt instruments, the proposal would add or amend certain 
definitions in Regulation Q. The proposal would add new definitions of 
``covered debt instrument'' and ``investment in a covered debt 
instrument'' to Sec.  217.2 of Regulation Q. A ``covered debt 
instrument'' would be defined as any unsecured debt security issued by 
a global systemically important BHC, excluding any instrument that 
qualifies as tier 2 capital. An ``investment in a covered debt 
instrument'' would be defined as a net long position in a covered debt 
instrument, including direct, indirect, and synthetic exposures to a 
covered debt instrument. This definition would exclude underwriting 
positions held for five or fewer business days for purposes of certain 
deductions. In addition, the proposal would amend the definitions of 
``indirect exposure'' and ``synthetic exposure'' in Regulation Q to add 
exposures to covered debt instruments. Further, the definition of 
``investment in the capital of an unconsolidated financial 
institution'' would be amended to correct a typographical error.
    In addition, as discussed more fully in the following section, the 
proposal would revise Sec.  217.22(c), (f), and (h) of Regulation Q to 
incorporate the proposed deductions for investments in covered debt 
instruments. The proposed revisions to Regulation Q would take effect 
on January 1, 2019, consistent with the other aspects of the proposal; 
provided that the proposed correction to the definition of ``investment 
in the capital of an unconsolidated financial institution'' would take 
effect on April 1, 2016.
    To be most effective, the proposed deduction approach for 
investments in unsecured debt instruments of a covered BHC would apply 
to all depository institution holding companies and insured depository 
institutions covered by the capital rules issued by the Board, OCC, and 
FDIC. The Board intends to consult with the OCC and FDIC on the 
proposed deductions for covered debt instruments in Regulation Q 
regarding consistent treatment among all banking organizations subject 
to the regulatory capital rules.

Section-by-Section Discussion of the Proposed Deductions for Covered 
Debt Instruments

    Under the Board's current regulatory capital rules, a Board-
regulated institution must deduct any investment in its own capital 
instruments and any investment in the capital of other financial 
institutions that it holds reciprocally under Sec.  217.22(c)(1) and 
(3) of Regulation Q.\104\ The proposal would amend Sec.  217.22(c)(1) 
and (3) of Regulation Q to require, respectively, a covered BHC to 
deduct from its tier 2 capital any investment in its own unsecured debt 
instruments that are not tier 2 capital and the carrying value of any 
investment in the unsecured debt issued by a covered BHC that is held 
reciprocally with the covered BHC.
---------------------------------------------------------------------------

    \104\ 12 CFR 217.22(c)(1) and 12 CFR 217.22(c)(3). The 
definition of ``financial institution'' in the Board's regulatory 
capital rules includes bank holding companies. Therefore, each 
covered BHC is a ``financial institution'' for purposes of these 
deductions. See 12 CFR 217.2.
---------------------------------------------------------------------------

    Under Sec.  217.22(c)(4) and (5) of Regulation Q, a Board-regulated 
institution must deduct certain investments in the capital of 
unconsolidated financial institutions.\105\ The amount of the deduction 
depends on whether or not the Board-regulated institution has a 
``significant'' investment in the unconsolidated financial institution, 
with ``significant'' defined as ownership of more than 10

[[Page 74951]]

percent of the common stock of the unconsolidated financial 
institution.\106\
---------------------------------------------------------------------------

    \105\ 12 CFR 217.22(c)(4) and (5).
    \106\ 12 CFR 217.2, (``significant investment in the capital of 
an unconsolidated financial institution'').
---------------------------------------------------------------------------

    If the Board-regulated institution has a ``non-significant 
investment'' in an unconsolidated financial institution, the Board-
regulated institution must deduct its investments in the capital of the 
unconsolidated financial institution to the extent that the Board-
regulated institution's investment exceeds 10 percent of the Board-
regulated institution's common equity tier 1 capital.\107\ The proposal 
would amend Sec.  217.22(c)(4) of Regulation Q to require a Board-
regulated institution with a non-significant investment in a covered 
BHC to deduct any investment in unsecured debt issued by the covered 
BHC in the same manner as if the unsecured debt were tier 2 capital.
---------------------------------------------------------------------------

    \107\ See 12 CFR 217.22(c)(4).
---------------------------------------------------------------------------

    If a Board-regulated institution has a significant investment in an 
unconsolidated financial institution, the Board-regulated institution 
must fully deduct under Sec.  217.22(c)(5) of Regulation Q any 
investment in the capital instruments of the unconsolidated financial 
institution that are not in the form of common stock.\108\ The proposal 
would amend Sec.  217.22(c)(5) of Regulation Q to require a Board-
regulated institution with a significant investment in a covered BHC to 
deduct any investment in unsecured debt issued by the covered BHC in 
the same manner as if the unsecured debt were tier 2 capital.
---------------------------------------------------------------------------

    \108\ See 12 CFR 217.22(c)(5).
---------------------------------------------------------------------------

    For each of the proposed deductions, the same rules and standards 
that apply to investments in capital instruments issued by financial 
institutions would also apply to an investment in a covered debt 
instrument. For example, the proposal would amend the ``corresponding 
deduction approach'' in Sec.  217.22(c)(2) of Regulation Q to specify 
that unsecured debt issued by a covered BHC would be treated as tier 2 
capital for purposes of deductions from capital. Under the 
corresponding deduction approach, a Board-regulated institution must 
make deductions from the component of capital for which the underlying 
instrument would qualify if it were issued by the Board-regulated 
institution making the deduction.\109\ If the Board-regulated 
institution does not have enough of the component of capital to carry 
out the deduction, the corresponding deduction approach provides that 
any amount of the investment not already deducted would be deducted 
from the next higher, that is, more subordinated, component of 
capital.\110\ If the next higher level is insufficient to effect the 
remaining deduction and there is a higher level of capital, any amount 
not already deducted is deducted from the highest level.\111\
---------------------------------------------------------------------------

    \109\ See 12 CFR 217.22(c)(2).
    \110\ See 12 CFR 217.22(c)(2); 12 CFR 217.22(f).
    \111\ See 12 CFR 217.22(f).
---------------------------------------------------------------------------

    Under Regulation Q, if a Board-regulated institution has an 
investment in the tier 2 capital of an unconsolidated financial 
institution that the Board-regulated institution is required to deduct 
from capital, the Board-regulated institution must make the deduction 
from its tier 2 capital. Under the proposal, if a Board-regulated 
institution has a significant investment in a covered BHC and also owns 
unsecured debt of the covered BHC, the Board-regulated institution 
would be required to deduct the unsecured debt amount from its tier 2 
capital. If the Board-regulated institution does not have sufficient 
tier 2 capital to complete this deduction, then the Board-regulated 
institution would be required to deduct any shortfall amount from its 
additional tier 1 capital. If the Board-regulated institution does not 
have sufficient additional tier 1 capital to complete this deduction, 
the institution would deduct any remaining amount of the investment 
from its common equity tier 1 capital.
    The proposal would follow the same general approach as under the 
current requirements in Regulation Q regarding the calculation of the 
amount of any deduction and the treatment of guarantees and indirect 
investments for purposes of the deductions. Under Regulation Q, the 
amount of a Board-regulated institution's investment in its own capital 
instrument or in the capital instrument of an unconsolidated financial 
institution is the Board-regulated institution's net long position in 
the capital instrument as calculated under Sec.  217.22(h) of 
Regulation Q.\112\ Under Sec.  217.22(h) of Regulation Q, a Board-
regulated institution may net certain gross short positions in a 
capital instrument against a gross long position in the instrument to 
determine the net long position. The proposal would modify Sec.  
217.22(h) of Regulation Q such that a Board-regulated institution would 
follow the same procedures to determine its net long position in an 
exposure to its own covered debt instrument or in a covered debt 
instrument issued by an unconsolidated financial institution. The 
calculation of the net long position, under the proposal, also would 
take into account direct investments in unsecured debt instruments as 
well as indirect exposures to covered debt instruments held through 
investment funds in the same manner as under the regulatory capital 
rules.
---------------------------------------------------------------------------

    \112\ See 12 CFR 217.22(h).
---------------------------------------------------------------------------

    With regard to an indirect exposure to a capital instrument in the 
form of, for example, a direct exposure to an investment fund, a Board-
regulated institution has three options under Regulation Q to measure 
its gross long position in the capital instrument.\113\ The proposal 
would amend Sec.  217.22(h)(2)(ii) of Regulation Q to provide the same 
three options to determine the gross long position in the form of an 
indirect fund investment in a covered debt instrument.
---------------------------------------------------------------------------

    \113\ See 12 CFR 217.22(h)(2).
---------------------------------------------------------------------------

    The first option would be to deduct the entire carrying value of 
the investment. The second option would be, with the prior approval of 
the Board, for the Board-regulated institution to use a conservative 
estimate of the amount of the investment in the unsecured debt 
instrument held through a fund. The third option would be to multiply 
the carrying value of the Board-regulated institution's investment in a 
fund by either the exact percentage of the unsecured debt issued by a 
covered BHC held by the investment fund or by the highest stated 
prospectus limit for such investments held by the investment fund. In 
each case, the amount of the gross long position may be reduced by the 
Board-regulated institution's qualified short positions to reach the 
net long position.\114\
---------------------------------------------------------------------------

    \114\ 12 CFR 217.22(h)(1).
---------------------------------------------------------------------------

    An investment in the unsecured debt of a covered BHC would be 
defined in Sec.  217.2 of Regulation Q to include synthetic exposures 
to covered debt instruments, including, for example, the issuance a 
guarantee of such debt or selling a credit default swap referencing 
such debt.\115\ For purposes of any deduction required for a Board-
regulated institution's investment in the capital of an unconsolidated 
financial institution, the amount of unsecured debt issued by a covered 
BHC would include any contractual obligations of the Board-regulated 
institution to purchase such instruments, but would exclude positions 
held in a bona fide underwriting capacity for five or fewer business 
days.\116\
---------------------------------------------------------------------------

    \115\ See 12 CFR 217.2 (``investment in the capital of an 
unconsolidated financial institution'' and ``investment in the 
Board-regulated institution's own capital instrument'').
    \116\ See 12 CFR 217.2 (``investment in the capital of an 
unconsolidated financial institution'').
---------------------------------------------------------------------------

    Question 66: The Board invites comment on the appropriateness of 
the proposed deduction for investments in a

[[Page 74952]]

covered BHC's unsecured debt instruments from regulatory capital, 
including (a) its implementation through amendment of the Board's 
regulatory capital rules and (b) whether such an approach would impact 
underwriting and market making for unsecured debt instruments of 
covered BHCs.
    Question 67: The Board invites comment on whether holdings of a 
covered BHC's debt instruments that result from dealing or market-
making activities should be exempt from the proposed deduction, 
including costs and benefits of such an exemption.
    Question 68: The Board invites comment on all aspects of the 
proposed capital deduction treatment for investments by banking 
organizations in debt instruments of a covered BHC, specifically, 
whether the debt instruments required to be deducted should be all 
unsecured debt directly issued by a covered BHC or only eligible long-
term debt? If the long-term debt instruments required to be deducted 
were limited to eligible long-term debt, how best to identify eligible 
long-term debt for the purposes of the deduction?
    Questions 69: The Board invites comment on alternatives to the 
proposed deduction approach, including a stringent risk-weighting 
approach, integrating eligible long-term debt into the Basel III 
threshold deduction system as a new class of regulatory capital, or an 
outright prohibition of bank ownership of covered BHC's unsecured debt 
instruments.
    Question 70: The Board invites comment on whether to expand the 
proposed capital deduction treatment to cover investments by banking 
organizations in debt instruments issued by nonbank financial companies 
supervised by the Board and non-U.S. GSIBs.

VIII. Transition Periods

    The Board proposes to generally require firms that are covered BHCs 
as of the date on which the final rule is issued to achieve compliance 
with the rule as of January 1, 2019. However, the Board proposes to 
phase in the risk-weighted assets component of the external TLAC 
requirement in two stages. A 16 percent requirement would apply as of 
January 1, 2019. The requirement would then increase to 18 percent as 
of January 1, 2022. The purpose of the proposed transition period is to 
minimize the effect of the implementation of the proposal on credit 
availability and credit costs in the U.S. economy.
    Firms that become covered BHCs after the date on which the final 
rule is issued would be required to comply by the later of three years 
after becoming covered BHCs and the effective date applicable to firms 
that are covered BHCs as of the date on which the final rule is issued.
    Foreign GSIBs that are required to form U.S. intermediate holding 
companies as of the date on which the final rule is issued would 
similarly be required to achieve compliance as of January 1, 2019. 
However, the Board proposes to phase in the risk-weighted assets 
component of the internal TLAC requirement applicable to covered IHCs 
that are expected to enter resolution in a failure scenario in two 
stages. A 16 percent requirement would apply as of January 1, 2019. The 
requirement would then increase to 18 percent as of January 1, 2022.
    Where a foreign banking organization becomes subject to a 
requirement to form a covered IHC after the date on which the final 
rule is issued,\117\ that covered IHC would be required to comply with 
the rule's requirements by the later of three years after the date on 
which the foreign banking organization first becomes subject to the 
requirement to form the U.S. intermediate holding company and the 
effective date applicable to foreign GSIBs that are required to form 
U.S. intermediate holding companies as of the date on which the final 
rule is issued. The Board may accelerate or extend this transition 
period in writing.
---------------------------------------------------------------------------

    \117\ This could occur where a foreign banking organization that 
is already required to form a U.S. intermediate holding company 
becomes a foreign GSIB (rendering its U.S. intermediate holding 
company a covered IHC) or where a foreign GSIB first becomes 
required to form a U.S. intermediate holding company (which would be 
a covered IHC upon formation).
---------------------------------------------------------------------------

    Board-regulated institutions would be required to comply with the 
proposed regulatory capital deduction for investments in the unsecured 
debt of a covered BHC as of January 1, 2019.
    Question 71: The Board invites comments on all aspects of the 
transition period, including whether the proposed phase-in period for 
the risk-weighted assets components of the proposed external and 
internal TLAC requirements is appropriate. Would it be appropriate to 
instead require compliance with those higher requirements as of January 
1, 2019?
    Question 72: The Board invites comment with respect to whether a 
grandfather provision is necessary or appropriate for any existing 
instruments. What types and volumes of outstanding long-term debt 
instruments of covered BHCs would fail to meet the proposed 
requirements for eligible external or internal LTD? How burdensome 
would it be for covered holding companies to modify the terms of such 
instruments to align with the proposed requirements?

IX. Regulatory Analysis

A. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501 through 3521). The Board 
reviewed the proposed rule under the authority delegated to the Board 
by OMB. The disclosure requirements are found in Sec.  252.65 and the 
reporting requirements are found in Sec.  252.153(b)(5). These 
information collection requirements would implement section 165 of the 
Dodd Frank Act, as described in the Abstract below. In accordance with 
the requirements of the PRA, the Board may not conduct or sponsor, and 
the respondent is not required to respond to, an information collection 
unless it displays a currently valid Office of Management and Budget 
(OMB) control number.
    The proposed rule would revise the Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Enhanced Prudential Standards 
(Regulation YY) (Reg YY; OMB No. 7100-0350). In addition, as permitted 
by the PRA, the Board proposes to extend for three years, with 
revision, the Reporting, Recordkeeping, and Disclosure Requirements 
Associated with Enhanced Prudential Standards (Regulation YY) (Reg YY; 
OMB No. 7100-0350).
    Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the Board's functions, including whether the 
information has practical utility;
    (b) The accuracy of the Board's estimates of the burden of the 
information collections, including the validity of the methodology and 
assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.

[[Page 74953]]

    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section. A copy of the comments may 
also be submitted to the OMB desk officer: By mail to U.S. Office of 
Management and Budget, 725 17th Street NW., #10235, Washington, DC 
20503 or by facsimile to 202-395-5806, Attention, Federal Reserve Desk 
Officer.
Proposed Revision, With Extension, of the Following Information 
Collection
    Title of Information Collection: Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Enhanced Prudential Standards 
(Regulation YY).
    Agency Form Number: Reg YY.
    OMB Control Number: 7100-0350.
    Frequency of Response: Annual, semiannual, quarterly, one-time, and 
on occasion.
    Affected Public: Businesses or other for-profit.
    Respondents: State member banks, U.S. bank holding companies, 
savings and loan holding companies, nonbank financial companies, 
foreign banking organizations, U.S. intermediate holding companies, 
foreign saving and loan holding companies, and foreign nonbank 
financial companies supervised by the Board.
    Abstract: Section 165 of the Dodd-Frank Act requires the Board to 
implement enhanced prudential standards for bank holding companies with 
total consolidated assets of $50 billion or more, including global 
systemically important foreign banking organizations with $50 billion 
or more in U.S. non-branch assets. Section 165 of the Dodd-Frank Act 
also permits the Board to establish such other prudential standards for 
such banking organizations as the Board determines are appropriate.
Disclosure Requirements
    Section 252.65 of the proposed rule would require a global 
systemically important BHC to publicly disclose a description of the 
financial consequences to unsecured debtholders of the global 
systemically important BHC entering into a resolution proceeding in 
which the global systemically important BHC is the only entity that 
would be subject to the resolution proceeding. A global systemically 
important BHC must provide the disclosure required of this section: (1) 
In the offering documents for all of its eligible debt securities; and 
(2) either on the global systemically important BHC's Web site, or in 
more than one public financial report or other regulatory reports, 
provided that the global systemically important BHC publicly provides a 
summary table specifically indicating the location(s) of this 
disclosure.
Reporting Requirements
    Section 252.153(b)(5) of the proposed rule would require each top-
tier foreign banking organization that controls a U.S. intermediate 
holding company to submit to the Board by January 1 of each calendar 
year through the U.S. intermediate holding company: (1) Notice of 
whether the home country supervisor (or other appropriate home country 
regulatory authority) of the top-tier foreign banking organization of 
the U.S. intermediate holding company has adopted standards consistent 
with the BCBS assessment methodology for identifying global 
systemically important banking organizations; and (2) notice of whether 
the top-tier foreign banking organization prepares or reports the 
indicators used by the BCBS assessment methodology to identify a 
banking organization as a global systemically important banking 
organization and, if it does, whether the top-tier foreign banking 
organization has determined that it has the characteristics of a global 
systemically important banking organization under the BCBS assessment 
methodology.
Estimated Paperwork Burden for Proposed Revisions
    Estimated Number of Respondents:
Disclosure Burden
    Section 252.65--8 respondents.
Reporting Burden
    Section 252.153(b)(5)--15 respondents.
    Estimated Burden per Response:
Disclosure Burden
    Section 252.65--1 hour (annual), 5 hours (one-time burden).
Reporting Burden
    Section 252.153(b)(5)--1 hour (annual).
    Total estimated one-time burden: 40 hours.
    Current estimated annual burden for Reporting, Recordkeeping, and 
Disclosure Requirements Associated with Enhanced Prudential Standards 
(Regulation YY): 118,546 hours.
    Proposed revisions estimated annual burden: 23 hours.
    Total estimated annual burden: 118,609 hours.

B. Regulatory Flexibility Act

    The Board is providing an initial regulatory flexibility analysis 
with respect to this proposed rule. The Regulatory Flexibility Act, 5 
U.S.C. 601 et seq. (RFA), generally requires that an agency prepare and 
make available an initial regulatory flexibility analysis in connection 
with a notice of proposed rulemaking. Under regulations issued by the 
Small Business Administration, a small entity includes a depository 
institution, bank holding company, or savings and loan holding company 
with assets of $550 million or less (small banking organizations).\118\ 
As of June 30, 2015, there were 628 small state member banks. As of 
June 30, 2015, there were approximately 180 small savings and loan 
holding companies and 3,351 small bank holding companies.
---------------------------------------------------------------------------

    \118\ See 13 CFR 121.201. Effective July 14, 2014, the Small 
Business Administration revised the size standards for banking 
organizations to $550 million in assets from $500 million in assets. 
79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------

    This proposed rule is designed to improve the resolvability of 
covered BHCs and covered IHCs by requiring such institutions maintain 
outstanding a minimum amount of loss-absorbing instruments, including a 
minimum amount of unsecured long-term debt, and imposing restrictions 
on the corporate practices and liabilities of such organizations. The 
proposed rule is also designed to help reduce the potential contagion 
stemming from the failure of a GSIB by requiring state member banks, 
bank holding companies, savings and loan holding companies, and 
intermediate holding companies subject to the Board's capital rules to 
deduct from their regulatory capital investments in unsecured debt 
issued by covered BHCs.
    The majority of the provisions of the proposed rule would apply to 
a top-tier bank holding company domiciled in the United States with $50 
billion or more in total consolidated assets and has been identified as 
a GSIB, and to a U.S. intermediate holding company of a foreign GSIB. 
Bank holding companies and U.S. intermediate holding companies of 
foreign GSIBs that are subject to the proposed rule therefore 
substantially exceed the $550 million asset threshold at which a 
banking entity would qualify as a small banking organization. However, 
small state member banks would be subject to the provisions of the 
proposed rule that impose regulatory capital deductions for investments 
in eligible external long-term debt of covered BHCs. The provisions of 
the proposed rule related

[[Page 74954]]

to regulatory capital deductions generally would not apply to small 
savings and loan holding companies and small bank holding companies.
    The proposed regulatory capital deductions for investments in the 
unsecured debt of covered BHCs would require small state member banks 
to deduct holdings of unsecured debt issued by a covered BHC from 
regulatory capital, in a similar manner as small state member banks 
must deduct investments in tier 2 capital instruments from their 
regulatory capital, as described in Part VII. State member banks would 
be required to make internal reporting changes to comply with the 
proposed capital rules and corresponding reporting requirements. As 
described in Part VII, these requirements would reduce the incentives 
of a small state member bank to invest in the unsecured debt of a 
covered BHC, and thereby increase the prospect for an orderly 
resolution not a covered BHC.
    Depository institutions do not presently report their holdings in 
the unsecured debt of U.S. GSIBs. However, regulatory reports filed by 
depository institutions provide a listing of the holdings by such 
institutions of ``other domestic debt,'' which would include holdings 
of unsecured debt issued by U.S. GSIBs. Therefore, the reported 
holdings of ``other domestic debt'' held by small depository 
institutions provides a conservative estimate of the amount of 
unsecured debt of GSIBs held by such institutions.
    As of June 30, 2015, such institutions held ``other domestic debt'' 
equal to approximately 0.5 percent of their total assets. Excluding 
depository institutions that report no holdings of ``other domestic 
debt,'' such depository institutions held ``other domestic debt'' equal 
to only 2.2 percent of their total assets. The low level of reported 
holdings of ``other domestic debt'' by such institutions supports the 
view that the proposed regulatory capital deductions would not have a 
material impact on small state member banks. In addition, in light of 
the reported holdings of ``other domestic debt'' by small depository 
institutions, such institutions should be able to replace their 
holdings of unsecured debt by GSIBs without a material economic impact.
    The proposed rule does not appear to duplicate, overlap, or 
conflict with any other Federal rules. In light of the foregoing, the 
Board does not believe that the proposed rule, if adopted in final 
form, would have a significant economic impact on a substantial number 
of small entities. Nonetheless, the Board invites comment on whether 
the proposed rule would impose undue burdens on, or have unintended 
consequences for, small organizations, and whether there are ways such 
potential burdens or consequences could be minimized in a manner 
consistent with the purpose of the proposed rule. A final regulatory 
flexibility analysis will be conducted after consideration of comments 
received during the public comment period.

C. Riegle Community Development and Regulatory Improvement Act of 1994

    In determining the effective date and administrative compliance 
requirements for new regulations that impose additional reporting, 
disclosure, or other requirements on state member banks, the Board is 
required to consider, consistent with the principles of safety and 
soundness and the public interest, any administrative burdens that such 
regulations would place on depository institutions, and the benefits of 
such regulations.\119\ In addition, new regulations that impose 
additional reporting disclosures or other new requirements on insured 
depository institutions generally must take effect on the first day of 
a calendar quarter which begins on or after the date on which the 
regulations are published in final form.\120\
---------------------------------------------------------------------------

    \119\ See Section 302 of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (RCDRIA), 12 U.S.C. 4802.
    \120\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

    The proposed regulatory capital deductions applicable to state 
member banks would take effect on the first day of a calendar quarter. 
The proposed rule would provide state member banks a reasonable period 
of time to make the incremental internal reporting changes necessary to 
comply with the proposed revisions to the regulatory capital rules. The 
proposed revisions to the regulatory capital rules would also be 
reflected in amendments to the Board's regulatory reporting forms, and 
the instructions to such forms. The internal reporting changes are 
expected to be minimal because the banking organizations subject to the 
proposed rule are already required to track similar information to 
comply with current capital rules and reporting requirements.
    As described above in Part IX.B, depository institutions do not 
presently report their holdings in the unsecured debt of U.S. GSIBs, 
but do report holdings of ``other domestic debt,'' which would include 
holdings of unsecured debt issued by U.S. GSIBs. Therefore, the 
reported holdings of ``other domestic debt'' held by depository 
institutions provides a conservative estimate of the amount of 
unsecured debt of GSIBs held by such institutions.
    As of June 30, 2015, state member banks held ``other domestic 
debt'' equal to approximately 0.57 percent of their total assets. 
Excluding state member banks that report no holdings of ``other 
domestic debt,'' such depository institutions held ``other domestic 
debt'' equal to only 0.77 percent of their total assets. The reported 
holdings of ``other domestic debt'' by such institutions supports the 
view that the incremental administrative reporting burden imposed by 
the proposed revisions to the Board's regulatory capital rules on such 
institutions is expected to be minimal. These administrative burdens 
are offset by the safety and soundness and financial stability benefits 
that will accrue to the financial system as a result of the proposed 
rule, as described herein.

D. Solicitation of Comments on the Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board has sought to present the proposed rule in a 
simple and straightforward manner, and invites comment on the use of 
plain language. For example:
     Have the agencies organized the material to suit your 
needs? If not, how could they present the proposed rule more clearly?
     Are the requirements in the proposed rule clearly stated? 
If not, how could the proposed rule be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would achieve that?
     Is the section format adequate? If not, which of the 
sections should be changed and how?
     What other changes can the Board incorporate to make the 
regulation easier to understand?

List of Subjects in 12 CFR Part 252

12 CFR Chapter II

    Administrative practice and procedure, Banks, banking, Federal

[[Page 74955]]

Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

Authority and Issuance

    For the reasons stated in the preamble, the Board of Governors of 
the Federal Reserve System proposes to amend 12 CFR parts 217 and 252 
as follows:

PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND 
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q).

0
1. The authority citation for part 217 continues to read as follows:

    Authority:  12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 
3906-3909, 4808, 5365, 5368, 5371.

0
2. In Sec.  217.2:
0
a. Add the definition of ``Covered debt instrument'' in alphabetical 
order;
0
b. Revise the definition of ``Indirect exposure'';
0
c. Add the definition of ``Investment in a covered debt instrument,'' 
in alphabetical order;
0
d. Revise the definition of ``Investment in the capital of an 
unconsolidated financial institution''; and
0
e. Revise the definition of ``Synthetic exposure;''
    The additions and revisions read as follows:


Sec.  217.2  Definitions.

* * * * *
    Covered debt instrument means an unsecured debt security issued by 
a global systemically important BHC, including direct, indirect, or 
synthetic exposures to such a debt security, other than an unsecured 
debt security that qualifies as tier 2 capital pursuant to Sec.  
217.20(d).
* * * * *
    Indirect exposure means an exposure that arises from the Board-
regulated institution's investment in an investment fund which holds an 
investment in the Board-regulated institution's own capital instrument, 
an investment in the capital of an unconsolidated financial 
institution, or an investment in a covered debt instrument.
* * * * *
    Investment in a covered debt instrument means a Board-regulated 
institution's net long position calculated in accordance with Sec.  
217.22(h) in a covered debt instrument, including direct, indirect, and 
synthetic exposures to the debt instrument, excluding for purposes of 
Sec.  217.22(c)(4) and (5) any underwriting positions held by the 
Board-regulated institution for five or fewer business days.
* * * * *
    Investment in the capital of an unconsolidated financial 
institution means a net long position calculated in accordance with 
Sec.  217.22(h) in an instrument that is recognized as capital for 
regulatory purposes by the primary supervisor of an unconsolidated 
regulated financial institution or in an instrument that is part of the 
GAAP equity of an unconsolidated unregulated financial institution, 
including direct, indirect, and synthetic exposures to the capital 
instruments, excluding underwriting positions held by the Board-
regulated institution for five or fewer business days.
* * * * *
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the Board-regulated institution's own capital 
instrument, to the value of an investment in the capital of an 
unconsolidated financial institution, or to the value of an investment 
in a covered debt instrument.
* * * * *
0
3. In Sec.  217.22, revise paragraphs (c) and its footnotes, (f), and 
(h) to read as follows:


Sec.  217.22  Regulatory capital adjustments and deductions.

* * * * *
    (c) Deductions from regulatory capital related to investments in 
capital instruments \23\--(1) Investment in the Board-regulated 
institution's own capital or covered debt instruments. A Board-
regulated institution must deduct an investment in the Board-regulated 
institution's own capital instruments or an investment in the Board-
regulated institution's own covered debt instruments as follows:
---------------------------------------------------------------------------

    \23\ The Board-regulated institution must calculate amounts 
deducted under paragraphs (c) through (f) of this section after it 
calculates the amount of ALLL includable in tier 2 capital under 
Sec.  217.20(d)(3).
---------------------------------------------------------------------------

    (i) A Board-regulated institution must deduct an investment in the 
Board-regulated institution's own common stock instruments from its 
common equity tier 1 capital elements to the extent such instruments 
are not excluded from regulatory capital under Sec.  217.20(b)(1);
    (ii) A Board-regulated institution must deduct an investment in the 
Board-regulated institution's own additional tier 1 capital instruments 
from its additional tier 1 capital elements;
    (iii) A Board-regulated institution must deduct an investment in 
the Board-regulated institution's own tier 2 capital instruments from 
its tier 2 capital elements; and
    (iv) A Board-regulated institution that is a global systemically 
important BHC must deduct an investment in the Board-regulated 
institution's own covered debt instruments from its tier 2 capital 
elements. If the Board-regulated institution does not have a sufficient 
amount of tier 2 capital to effect this deduction, the Board-regulated 
institution must deduct the shortfall amount from the next higher (that 
is, more subordinated) component of regulatory capital.
    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to reciprocal cross 
holdings (as described in paragraph (c)(3) of this section), non-
significant investments in the capital of unconsolidated financial 
institutions (as described in paragraph (c)(4) of this section), and 
non-common stock significant investments in the capital of 
unconsolidated financial institutions (as described in paragraph (c)(5) 
of this section). Under the corresponding deduction approach, a Board-
regulated institution must make deductions from the component of 
capital for which the underlying instrument would qualify if it were 
issued by the Board-regulated institution itself, as described in 
paragraphs (c)(2)(i) through (iii) of this section. If the Board-
regulated institution does not have a sufficient amount of a specific 
component of capital to effect the required deduction, the Board-
regulated institution must deduct the shortfall amount from its capital 
according to paragraph (f) of this section.
    (i) If an investment is in the form of an instrument issued by a 
financial institution that is not a regulated financial institution, 
the Board-regulated institution must treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
or represents the most subordinated claim in liquidation of the 
financial institution; and
    (B) An additional tier 1 capital instrument if it is subordinated 
to all creditors of the financial institution and is senior in 
liquidation only to common shareholders.
    (ii) If an investment is in the form of an instrument issued by a 
regulated financial institution and the instrument does not meet the 
criteria for common

[[Page 74956]]

equity tier 1, additional tier 1 or tier 2 capital instruments under 
Sec.  217.20, the Board-regulated institution must treat the instrument 
as:
    (A) A common equity tier 1 capital instrument if it is common stock 
included in GAAP equity or represents the most subordinated claim in 
liquidation of the financial institution;
    (B) An additional tier 1 capital instrument if it is included in 
GAAP equity, subordinated to all creditors of the financial 
institution, and senior in a receivership, insolvency, liquidation, or 
similar proceeding only to common shareholders; and
    (C) A tier 2 capital instrument if it is a covered debt instrument 
or if it is not included in GAAP equity but considered regulatory 
capital by the primary supervisor of the financial institution.
    (iii) If an investment is in the form of a non-qualifying capital 
instrument (as defined in Sec. 217.300(c)), the Board-regulated 
institution must treat the instrument as:
    (A) An additional tier 1 capital instrument if such instrument was 
included in the issuer's tier 1 capital prior to May 19, 2010; or
    (B) A tier 2 capital instrument if such instrument was included in 
the issuer's tier 2 capital (but not includable in tier 1 capital) 
prior to May 19, 2010.
    (3) Reciprocal cross holdings in the capital of financial 
institutions. A Board-regulated institution must deduct an investment 
in the capital of another financial institution that the Board-
regulated institution holds reciprocally with another financial 
institution and an investment in any covered debt instrument that the 
Board-regulated institution holds reciprocally with another financial 
institution, where such reciprocal cross holdings result from a formal 
or informal arrangement to swap, exchange, or otherwise intend to hold 
each other's capital instruments, by applying the corresponding 
deduction approach in paragraph (c)(2) of this section.
    (4) Non-significant investments in the capital of unconsolidated 
financial institutions. (i) If a Board-regulated institution has a non-
significant investment in the capital of an unconsolidated financial 
institution, the Board-regulated institution must deduct any such 
investment and must deduct, if the unconsolidated financial institution 
is a global systemically important BHC, any investment in a covered 
debt instrument issued by the unconsolidated financial institution, to 
the extent that the combined amount of the investment in capital and 
the investment in covered debt instruments exceed 10 percent of the sum 
of the Board-regulated institution's common equity tier 1 capital 
elements minus all deductions from and adjustments to common equity 
tier 1 capital elements required under paragraphs (a) through (c)(3) of 
this section (the 10 percent threshold for non-significant investments) 
by applying the corresponding deduction approach in paragraph (c)(2) of 
this section.\24\ The deductions described in this paragraph are net of 
associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the Board, a Board-
regulated institution that underwrites a failed underwriting, for the 
period of time stipulated by the Board, is not required to deduct from 
capital a non-significant investment in the capital of an 
unconsolidated financial institution or an investment in a covered debt 
instrument pursuant to this paragraph (c)(4) to the extent the 
investment is related to the failed underwriting.\25\
---------------------------------------------------------------------------

    \24\ With the prior written approval of the Board, for the 
period of time stipulated by the Board, a Board-regulated 
institution is not required to deduct a non-significant investment 
in the capital instrument of an unconsolidated financial institution 
or an investment in a covered debt instrument pursuant to this 
paragraph if the financial institution is in distress and if such 
investment is made for the purpose of providing financial support to 
the financial institution, as determined by the Board.
    \25\ Any non-significant investment in the capital of an 
unconsolidated financial institution or any investment in a covered 
debt instrument that is not required to be deducted under this 
paragraph (c)(4) or otherwise under this section must be assigned 
the appropriate risk weight under subparts D, E, or F of this part, 
as applicable.
---------------------------------------------------------------------------

    (ii) The amount to be deducted under this section from a specific 
capital component is equal to:
    (A) The Board-regulated institution's aggregate non-significant 
investments in the capital of an unconsolidated financial institution 
and, if applicable, any investments in a covered debt instrument 
subject to deduction under this paragraph (c)(4), exceeding the 10 
percent threshold for non-significant investments, multiplied by
    (B) The ratio of the Board-regulated institution's aggregate non-
significant investments in the capital of an unconsolidated financial 
institution (in the form of such capital component) to the Board-
regulated institution's total non-significant investments in 
unconsolidated financial institutions, with an investment in a covered 
debt instrument being treated as tier 2 capital for this purpose.
    (5) Significant investments in the capital of unconsolidated 
financial institutions that are not in the form of common stock. If a 
Board-regulated institution has a significant investment in the capital 
of an unconsolidated financial institution, the Board-regulated 
institution must deduct from capital any such investment and any 
covered debt instrument issued by the unconsolidated financial 
institution that is held by the Board-regulated institution other than 
an investment in the form of common stock by applying the corresponding 
deduction approach in paragraph (c)(2) of this section.\26\ The 
deductions described in this section are net of associated DTLs in 
accordance with paragraph (e) of this section. In addition, with the 
prior written approval of the Board, for the period of time stipulated 
by the Board, a Board-regulated institution that underwrites a failed 
underwriting is not required to deduct a significant investment in the 
capital of an unconsolidated financial institution or an investment in 
covered debt instruments pursuant to this paragraph (c)(5) if such 
investment is related to such failed underwriting.
---------------------------------------------------------------------------

    \26\ With prior written approval of the Board, for the period of 
time stipulated by the Board, a Board-regulated institution is not 
required to deduct a significant investment in the capital of an 
unconsolidated financial institution or an investment in a covered 
debt instrument under this paragraph (c)(5) or otherwise under this 
section if such investment is made for the purpose of providing 
financial support to the financial institution as determined by the 
Board.
---------------------------------------------------------------------------

* * * * *
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if a 
Board-regulated institution does not have a sufficient amount of a 
specific component of capital to effect the full amount of any 
deduction from capital required under paragraph (d) of this section, 
the Board-regulated institution must deduct the shortfall amount from 
the next higher (that is, more subordinated) component of regulatory 
capital. Any investment by a Board-regulated institution in a covered 
debt instrument must be treated as an investment in the tier 2 capital 
of the global systemically important BHC for purposes of this 
paragraph.
* * * * *
    (h) Net long position. (1) For purposes of calculating the amount 
of a Board-regulated institution's investment in the Board regulated 
institution's own capital instrument, investment in the capital of an 
unconsolidated financial institution, and investment in a covered debt 
instrument, the Board-regulated institution's net long position is its 
gross long position in the underlying instrument determined in 
accordance with paragraph (h)(2) of this section, as

[[Page 74957]]

adjusted to recognize any short position by the Board-regulated 
institution in the same instrument subject to paragraph (h)(3) of this 
section.
    (2) Gross long position. A gross long position is determined as 
follows:
    (i) For an equity exposure that is held directly by the Board-
regulated institution, the adjusted carrying value of the exposure as 
that term is defined in Sec. 217.51(b);
    (ii) For an exposure that is held directly and that is not an 
equity exposure or a securitization exposure, the exposure amount as 
that term is defined in Sec. 217.2; and
    (iii) For each indirect exposure, the Board-regulated institution's 
carrying value of its investment in an investment fund or, 
alternatively:
    (A) A Board-regulated institution may, with the prior approval of 
the Board, use a conservative estimate of the amount of its indirect 
investment in the Board-regulated institution's own capital 
instruments, its indirect investment in the capital of an 
unconsolidated financial institution, or its indirect investment in a 
covered debt instrument held through a position in an index, as 
applicable; or
    (B) A Board-regulated institution may calculate the gross long 
position for an indirect exposure by multiplying the Board-regulated 
institution's carrying value of its investment in the investment fund 
by either:
    (1) The highest stated investment limit (in percent) for an 
investment in the Board-regulated institution's own capital 
instruments, an investment in the capital of an unconsolidated 
financial institution, or an investment in a covered debt instrument, 
as applicable, as stated in the prospectus, partnership agreement, or 
similar contract defining permissible investments of the investment 
fund; or
    (2) The investment fund's actual holdings of the investment in the 
Board-regulated institution's own capital instruments, investment in 
the capital of an unconsolidated financial institution, or investment 
in an covered debt instrument, as applicable; and
    (iv) For a synthetic exposure, the amount of the Board-regulated 
institution's loss on the exposure if the reference capital instrument 
were to have a value of zero.
    (3) Adjustments to reflect a short position. In order to adjust the 
gross long position to recognize a short position in the same 
instrument under paragraph (h)(1) of this section, the following 
criteria must be met:
    (i) The maturity of the short position must match the maturity of 
the long position, or the short position must have a residual maturity 
of at least one year (maturity requirement); or
    (ii) For a position that is a trading asset or trading liability 
(whether on- or off-balance sheet) as reported on the Board-regulated 
institution's Call Report, for a state member bank, or FR Y-9C, for a 
bank holding company or savings and loan holding company, as 
applicable, if the Board-regulated institution has a contractual right 
or obligation to sell the long position at a specific point in time and 
the counterparty to the contract has an obligation to purchase the long 
position if the Board-regulated institution exercises its right to 
sell, this point in time may be treated as the maturity of the long 
position such that the maturity of the long position and short position 
are deemed to match for purposes of the maturity requirement, even if 
the maturity of the short position is less than one year; and
    (iii) For an investment in a Board-regulated institution's own 
capital instrument under paragraph (c)(1) of this section, an 
investment in a capital of an unconsolidated financial institution 
under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this section, and 
an investment in a covered debt instrument under paragraphs (c)(1), 
(c)(4), and (c)(5) of this section:
    (A) The Board-regulated institution may only net a short position 
against a long position in an investment in the Board-regulated 
institution's own capital instrument or own covered debt instrument 
under paragraph (c)(1) of this section if the short position involves 
no counterparty credit risk;
    (B) A gross long position in an investment in the Board-regulated 
institution's own capital instrument, an investment in the capital 
instrument of an unconsolidated financial institution, or an investment 
in a covered debt instrument due to a position in an index may be 
netted against a short position in the same index;
    (C) Long and short positions in the same index without maturity 
dates are considered to have matching maturities; and
    (D) A short position in an index that is hedging a long cash or 
synthetic position in an investment in the Board-regulated 
institution's own capital instrument, an investment in the capital 
instrument of an unconsolidated financial institution, or an investment 
in a covered debt instrument can be decomposed to provide recognition 
of the hedge. More specifically, the portion of the index that is 
composed of the same underlying instrument that is being hedged may be 
used to offset the long position if both the long position being hedged 
and the short position in the index are reported as a trading asset or 
trading liability (whether on- or off-balance sheet) on the Board-
regulated institution's Call Report, for a state member bank, or FR Y-
9C, for a bank holding company or savings and loan holding company, as 
applicable, and the hedge is deemed effective by the Board-regulated 
institution's internal control processes, which have not been found to 
be inadequate by the Board.

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY).

0
4. The authority citation for part 252 is revised to read as follows:

    Authority:  12 U.S.C. 321-338a, 481-486, 1467a(g), 1818, 1828, 
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3904, 3906-
3909, 4808, 5361, 5365, 5366, 5367, 5368, 5371.
0
5. In Sec.  252.2, redesignate paragraphs (t) through (z) as paragraphs 
(aa) through (gg) and redesignate paragraphs (n) through (s) as (t) 
through (y); and add new paragraphs (n) through (s) and (z).
    The additions read as follows:


Sec.  252.2  Definitions.

* * * * *
    (n) Global methodology means the assessment methodology and the 
higher loss absorbency requirement for global systemically important 
banks issued by the Basel Committee on Banking Supervision, as updated 
from time to time.
    (o) Global systemically important banking organization means a 
global systemically important bank, as such term is defined in the 
global methodology.
    (p) Global systemically important foreign banking organization 
means a top-tier foreign banking organization that is identified as a 
global systemically important foreign banking organization under Sec.  
252.153(b)(4) of this part.
    (q) Home country, with respect to a foreign banking organization, 
means the country in which the foreign banking organization is 
chartered or incorporated.
    (r) Home country resolution authority, with respect to a foreign 
banking organization, means the governmental entity or entities that 
under the laws of the foreign banking organization's home county has 
responsibility for the resolution of the top-tier foreign banking 
organization.
    (s) Home country supervisor, with respect to a foreign banking 
organization, means the governmental entity or entities that under the 
laws of the foreign banking organization's home county has 
responsibility for the

[[Page 74958]]

supervision and regulation of the top-tier foreign banking 
organization.
* * * * *
    (z) Top-tier foreign banking organization, with respect to a 
foreign bank, means the top-tier foreign banking organization or, 
alternatively, a subsidiary of the top-tier foreign banking 
organization designated by the Board.
* * * * *
0
6. Add subpart G to read as follows:

Subpart G--External Long-term Debt Requirement, External Total 
Loss-absorbing Capacity Requirement and Buffer, and Restrictions on 
Corporate Practices for U.S. Global Systemically Important Banking 
Organizations

Sec.
252.60 Applicability.
252.61 Definitions.
252.62 External long-term debt requirement.
252.63 External total loss-absorbing capacity requirement and 
buffer.
252.64 Restrictions on corporate practices of U.S. global 
systemically important banking organizations.
252.65 Disclosure requirements.


Sec.  252.60  Applicability.

    (a) General applicability. This subpart applies to any U.S. bank 
holding company that is identified as a global systemically important 
BHC.
    (b) Initial applicability. A global systemically important BHC 
shall be subject to the requirements of this subpart beginning on the 
later of:
    (1) January 1, 2019; or
    (2) 1095 days (three years) after the date on which the company 
becomes a global systemically important BHC.


Sec.  252.61  Definitions.

    For purposes of this subpart:
    Additional tier 1 capital has the same meaning as in 12 CFR 
217.20(c).
    Common equity tier 1 capital has the same meaning as in 12 CFR 
217.20(b).
    Common equity tier 1 capital ratio has the same meaning as in 12 
CFR 217.10(b)(1) and 12 CFR 217.10(c), as applicable.
    Common equity tier 1 minority interest has the same meaning as in 
12 CFR 217.2.
    Default right (1) Means any:
    (i) Right of a party, whether contractual or otherwise (including 
rights incorporated by reference to any other contract, agreement or 
document, and rights afforded by statute, civil code, regulation and 
common law), to liquidate, terminate, cancel, rescind, or accelerate 
the agreement or transactions thereunder, set off or net amounts owing 
in respect thereto (except rights related to same-day payment netting), 
exercise remedies in respect of collateral or other credit support or 
property related thereto (including the purchase and sale of property), 
demand payment or delivery thereunder or in respect thereof (other than 
a right or operation of a contractual provision arising solely from a 
change in the value of collateral or margin or a change in the amount 
of an economic exposure), suspend, delay or defer payment or 
performance thereunder, modify the obligations of a party thereunder or 
any similar rights; and
    (ii) Right or contractual provision that alters the amount of 
collateral or margin that must be provided with respect to an exposure 
thereunder, including by altering any initial amount, threshold amount, 
variation margin, minimum transfer amount, the margin value of 
collateral or any similar amount, that entitles a party to demand the 
return of any collateral or margin transferred by it to the other party 
or a custodian or that modifies a transferee's right to reuse 
collateral or margin (if such right previously existed), or any similar 
rights, in each case, other than a right or operation of a contractual 
provision arising solely from a change in the value of collateral or 
margin or a change in the amount of an economic exposure; and
    (2) Does not include any right under a contract that allows a party 
to terminate the contract on demand or at its option at a specified 
time, or from time to time, without the need to show cause.
    Discretionary bonus payment has the same meaning as under 12 CFR 
217.2.
    Distribution has the same meaning as under 12 CFR 217.2.
    Global systemically important BHC has the same meaning as in 12 CFR 
217.2.
    Eligible debt security means, with respect to a global systemically 
important BHC, a debt instrument that:
    (1) Is paid in, and issued by the global systemically important 
BHC;
    (2) Is not secured, not guaranteed by the global systemically 
important BHC or a subsidiary of the global systemically important BHC, 
and is not subject to any other arrangement that legally or 
economically enhances the seniority of the instrument;
    (3) Has a maturity of greater than 365 days (one year) from the 
date of issuance;
    (4) Is governed by the laws of the United States or any State 
thereof;
    (5) Does not provide the holder of the instrument a contractual 
right to accelerate payment of principal or interest on the instrument, 
except a right that is exercisable on one or more dates that are 
specified in the instrument or in the event of (i) a receivership, 
insolvency, liquidation, or similar proceeding of the global 
systemically important BHC or (ii) a failure of the global systemically 
important BHC to pay principal or interest on the instrument when due;
    (6) Does not have a credit-sensitive feature, such as an interest 
rate that is reset periodically based in whole or in part on the global 
systemically important BHC's credit quality, but may have an interest 
rate that is adjusted periodically independent of the global 
systemically important BHC's credit quality, in relation to general 
market interest rates or similar adjustments;
    (7) Is not a structured note; and
    (8) Does not provide that the instrument may be converted into or 
exchanged for equity of the global systemically important BHC.
    External TLAC buffer means, with respect to a global systemically 
important BHC, the sum of 2.5 percent, any applicable countercyclical 
capital buffer under 12 CFR 217.11(b) (expressed as a percentage), and 
the global systemically important BHC's method 1 capital surcharge.
    GAAP means generally accepted accounting principles as used in the 
United States.
    GSIB surcharge has the same meaning as in 12 CFR 217.2.
    Method 1 capital surcharge means, with respect to a global 
systemically important BHC, the most recent method 1 capital surcharge 
(expressed as a percentage) the global systemically important BHC was 
required to calculate pursuant to subpart H of Regulation Q (12 CFR 
217.400 through 217.406).
    Outstanding eligible external long-term debt amount is defined in 
Sec.  252.62(a).
    Person has the same meaning as in 12 CFR 225.2.
    Qualified financial contract has the same meaning as in Sec.  
210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)), including any 
``swap'' defined in section 1a(47) of the Commodities Exchange Act (7 
U.S.C. 1a(47)) and in any rules or regulations issued by the Commodity 
Futures Trading Commission pursuant to such section; any ``security-
based swap'' defined in section 3(a) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c(a)) and in any rules or regulations issued by the 
Securities and Exchange Commission pursuant to such section; and any 
securities contract, commodity contract, forward contract, repurchase 
agreement, swap agreement, and any

[[Page 74959]]

similar agreement that the Federal Deposit Insurance Corporation 
determines by regulation to be a qualified financial contract as 
provided in 12 U.S.C. 5390(c)(8)(D)(i).
    Structured note means a debt instrument that:
    (1) Has a principal amount, redemption amount, or stated maturity 
that is subject to reduction based on the performance of any asset, 
entity, index, or embedded derivative or similar embedded feature;
    (2) Has an embedded derivative or similar embedded feature that is 
linked to one or more equity securities, commodities, assets, or 
entities;
    (3) Does not specify a minimum principal amount due upon 
acceleration or early termination; or
    (4) Is not classified as debt under GAAP.
    Tier 1 minority interest has the same meaning as in 12 CFR 217.2.
    Tier 2 capital has the same meaning as in 12 CFR 217.20(d).
    Total leverage exposure has the same meaning as in 12 CFR 
217.10(c)(4)(ii).
    Total risk-weighted assets means the greater of total risk-weighted 
assets as calculated under 12 CFR 217, subpart D (the standardized 
approach) or 12 CFR 217, subpart E (the advanced approaches).


Sec.  252.62  External long-term debt requirement.

    (a) External long-term debt requirement. Except as provided under 
paragraph (c) of this section, a global systemically important BHC must 
maintain an outstanding eligible external long-term debt amount that is 
no less than the amount equal to the greater of:
    (1) The global systemically important BHC's total risk-weighted 
assets multiplied by the sum of 6 percent plus the global systemically 
important BHC's GSIB surcharge (expressed as a percentage); and
    (2) 4.5 percent of the global systemically important BHC's total 
leverage exposure.
    (b) Outstanding eligible external long-term debt amount. (1) A 
global systemically important BHC's outstanding eligible external long-
term debt amount is the sum of:
    (i) One hundred (100) percent of the unpaid principal amount of the 
outstanding eligible debt securities issued by the global systemically 
important BHC that have a remaining maturity greater than or equal to 
730 days (two years);
    (ii) Fifty (50) percent of the unpaid principal amount of the 
outstanding eligible debt securities issued by the global systemically 
important BHC that have a remaining maturity of greater than or equal 
to 365 days (one year) and less than 730 days (two years); and
    (iii) Zero (0) percent of the unpaid principal amount of the 
outstanding eligible debt securities issued by the global systemically 
important BHC that have a remaining maturity of less than 365 days (one 
year).
    (2) For purposes of paragraph (b)(1) of this section, the remaining 
maturity of an outstanding eligible debt security is calculated from 
the earlier of:
    (i) The final payment date of the principal, without respect to any 
right of the holder to accelerate payment of principal; and
    (ii) The date the holder of the instrument first has the 
contractual right to request or require payment of principal, provided 
that, with respect to a right that is exercisable on one or more dates 
that are specified in the instrument only on the occurrence of an event 
(other than an event of a receivership, insolvency, liquidation, or 
similar proceeding of the global systemically important BHC, or a 
failure of the global systemically important BHC to pay principal or 
interest on the instrument when due), the date for the outstanding 
eligible debt security under this paragraph (b)(2)(ii) will be 
calculated as if the event has occurred.
    (c) Redemption and repurchase. A global systemically important BHC 
may not redeem or repurchase any outstanding eligible debt security 
without the prior approval of the Board if, immediately after the 
redemption or repurchase, the global systemically important BHC would 
not meet its external long-term debt requirement under paragraph (a) of 
this section, or its external total loss-absorbing capacity requirement 
under Sec.  252.63(a).


Sec.  252.63  External total loss-absorbing capacity requirement and 
buffer.

    (a) External total loss-absorbing capacity requirement. A global 
systemically important BHC must maintain an outstanding external total 
loss-absorbing capacity amount that is no less than the amount equal to 
the greater of:
    (1)(i) From January 1, 2019 through December 31, 2021, 16 percent 
of the global systemically important BHC's total risk-weighted assets; 
and
    (ii) Beginning January 1, 2022, 18 percent of the global 
systemically important BHC's total risk-weighted assets; and
    (2) 9.5 percent of the global systemically important BHC's total 
leverage exposure.
    (b) Outstanding external total loss-absorbing capacity amount. A 
global systemically important BHC's outstanding external total loss-
absorbing capacity amount is the sum of:
    (1) The global systemically important BHC's common equity tier 1 
capital (excluding any common equity tier 1 minority interest);
    (2) The global systemically important BHC's additional tier 1 
capital (excluding any tier 1 minority interest); and
    (3) The global systemically important BHC's outstanding eligible 
external long-term debt amount plus 50 percent of the unpaid principal 
amount of outstanding eligible debt securities issued by the global 
systemically important BHC that have a remaining maturity, as 
calculated in Sec.  252.62(b)(2), of greater than or equal to 365 days 
(one year) but less than 730 days (two years).
    (c) External TLAC buffer--(1) Composition of the External TLAC 
buffer. The external TLAC buffer is composed solely of common equity 
tier 1 capital.
    (2) Definitions. For purposes of this paragraph, the following 
definitions apply:
    (i) Eligible retained income. The eligible retained income of a 
global systemically important BHC is the global systemically important 
BHC's net income for the four calendar quarters preceding the current 
calendar quarter, based on the global systemically important BHC's FR 
Y-9C, net of any distributions and associated tax effects not already 
reflected in net income. Net income, as reported in the FR Y-9C, 
reflects discretionary bonus payments and certain distributions that 
are expense items (and their associated tax effects).
    (ii) Maximum external TLAC payout ratio. The maximum external TLAC 
payout ratio is the percentage of eligible retained income that a 
global systemically important BHC can pay out in the form of 
distributions and discretionary bonus payments during the current 
calendar quarter. The maximum external TLAC payout ratio is based on 
the global systemically important BHC's external TLAC buffer level, 
calculated as of the last day of the previous calendar quarter, as set 
forth in Table 1 to Sec.  252.63.
    (iii) Maximum external TLAC payout amount. A global systemically 
important BHC's maximum external TLAC payout amount for the current 
calendar quarter is equal to the global systemically important BHC's 
eligible retained income, multiplied by the applicable maximum external 
TLAC

[[Page 74960]]

payout ratio, as set forth in Table 1 to Sec.  252.63.
    (3) Calculation of the external TLAC buffer level. (i) A global 
systemically important BHC's external TLAC buffer level is equal to the 
global systemically important BHC's common equity tier 1 capital ratio 
(expressed as a percentage) minus the greater of zero and the following 
amount:
    (A) (1) From January 1, 2019 through December 31, 2021, 16 percent; 
and
    (2) Beginning January 1, 2022, 18 percent; minus
    (B) The ratio (expressed as a percentage) of the global 
systemically important BHC's additional tier 1 capital (excluding any 
tier 1 minority interest) to its total risk-weighted assets; and minus
    (C) The ratio (expressed as a percentage) of the global 
systemically important BHC's eligible external long-term debt amount to 
total risk-weighted assets.
    (ii) Notwithstanding paragraph (c)(3)(i) of this section, if the 
ratio (expressed as a percentage) of a global systemically important 
BHC's external total loss-absorbing capacity amount as calculated under 
paragraph (b) of this section to its risk-weighted assets is less than 
or equal to, from January 1, 2019, through December 31, 2021, 16 
percent and beginning January 1, 2022, 18 percent, the global 
systemically important BHC's external TLAC buffer level is zero.
    (4) Limits on distributions and discretionary bonus payments. (i) A 
global systemically important BHC shall not make distributions or 
discretionary bonus payments or create an obligation to make such 
distributions or payments during the current calendar quarter that, in 
the aggregate, exceed the maximum external TLAC payout amount.
    (ii) A global systemically important BHC with an external TLAC 
buffer level that is greater than the external TLAC buffer is not 
subject to a maximum external TLAC payout amount.
    (iii) Except as provided in paragraph (c)(4)(iv) of this section, a 
global systemically important BHC may not make distributions or 
discretionary bonus payments during the current calendar quarter if the 
global systemically important BHC's:
    (A) Eligible retained income is negative; and
    (B) External TLAC buffer level was less than the external TLAC 
buffer as of the end of the previous calendar quarter.
    (iv) Notwithstanding the limitations in paragraphs (c)(4)(i) 
through (iii) of this section, the Board may permit a global 
systemically important BHC to make a distribution or discretionary 
bonus payment upon a request of the global systemically important BHC, 
if the Board determines that the distribution or discretionary bonus 
payment would not be contrary to the purposes of this section, or to 
the safety and soundness of the global systemically important BHC. In 
making such a determination, the Board will consider the nature and 
extent of the request and the particular circumstances giving rise to 
the request.

  Table 1 to Sec.   252.63--Calculation of Maximum External TLAC Payout
                                 Amount
------------------------------------------------------------------------
                                                Maximum External TLAC
                                                  payout ratio (as a
         External TLAC buffer level             percentage of eligible
                                                   retained income)
------------------------------------------------------------------------
Greater than the external TLAC buffer......  No payout ratio limitation
                                              applies.
Less than or equal to the external TLAC      60 percent.
 buffer, and greater than 75 percent of the
 external TLAC buffer.
Less than or equal to 75 percent of the      40 percent.
 external TLAC buffer, and greater than 50
 percent of the external TLAC buffer.
Less than or equal to 50 percent of the      20 percent.
 external TLAC buffer, and greater 25
 percent of the external TLAC buffer.
Less than or equal to 25 percent of the      0 percent.
 external TLAC buffer.
------------------------------------------------------------------------

    (v)(A) A global systemically important BHC is subject to the lowest 
of the maximum payout amounts as determined under 12 CFR 
217.11(a)(2)(iii) and (iv) and the maximum external TLAC payout amount 
as determined under this paragraph.
    (B) Additional limitations on distributions may apply to a global 
systemically important BHC under 12 CFR 225.4, 225.8, and 263.202.


Sec.  252.64  Restrictions on corporate practices of U.S. global 
systemically important banking organizations.

    (a) Prohibited corporate practices. A global systemically important 
BHC may not directly:
    (1) Issue any debt instrument with an original maturity of less 
than 365 days (one year), including short term deposits and demand 
deposits, to any person, unless the person is a subsidiary of the 
global systemically important BHC;
    (2) Issue any instrument, or enter into any related contract, with 
respect to which the holder of the instrument has a contractual right 
to offset debt owed by the holder or its affiliates to a subsidiary of 
the global systemically important BHC against the amount, or a portion 
of the amount, owed by the global systemically important BHC under the 
instrument;
    (3) Enter into a qualified financial contract with a person that is 
not a subsidiary of the global systemically important BHC;
    (4) Guarantee a liability of a subsidiary of the global 
systemically important BHC if such liability permits the exercise of a 
default right that is related, directly or indirectly, to the global 
systemically important BHC becoming subject to a receivership, 
insolvency, liquidation, resolution, or similar proceeding other than a 
receivership proceeding under Title II of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394); or
    (5) Enter into, or otherwise benefit from, any agreement that 
provides for its liabilities to be guaranteed by any of its 
subsidiaries.
    (b) Limit on unrelated liabilities. (1) The aggregate amount, on an 
unconsolidated basis, of unrelated liabilities of a global systemically 
important BHC owed to persons that are not affiliates of the global 
systemically important BHC may not exceed 5 percent of the systemically 
important BHC's external total loss-absorbing capacity amount, as 
calculated under Sec.  252.63(b).
    (2) For purposes of paragraph (b)(1) of this section, an unrelated 
liability is any non-contingent liability of the global systemically 
important BHC owed to a person that is not an affiliate of the global 
systemically important BHC other than:
    (i) The instruments that satisfy the global systemically important 
BHC's external total loss-absorbing capacity amount, as calculated 
under Sec.  252.63(b);

[[Page 74961]]

    (ii) Any dividend or other liability arising from the instruments 
that satisfy the global systemically important BHC's external total 
loss-absorbing capacity amount, as calculated under Sec.  252.63(b)(2);
    (iii) An eligible debt security that does not provide the holder of 
the instrument with a currently exercisable right to require immediate 
payment of the total or remaining principal amount; and
    (iv) A secured liability, to the extent that it is secured, or a 
liability that otherwise represents a claim that would be senior to 
eligible debt securities in Title II of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the 
Bankruptcy Code (11 U.S.C. 507).


Sec.  252.65  Disclosure requirements.

    (a) A global systemically important BHC must publicly disclose a 
description of the financial consequences to unsecured debtholders of 
the global systemically important BHC entering into a resolution 
proceeding in which the global systemically important BHC is the only 
entity that would be subject to the resolution proceeding.
    (b) A global systemically important BHC must provide the disclosure 
required by paragraph (a) of this section:
    (1) In the offering documents for all of its eligible debt 
securities; and
    (2) Either:
    (i) On the global systemically important BHC's Web site; or
    (ii) In more than one public financial report or other public 
regulatory reports, provided that the global systemically important BHC 
publicly provides a summary table specifically indicating the 
location(s) of this disclosure.
0
7. Add Sec.  252.153(b)(4), (5), and (6) to read as follows:


Sec.  252.153  U.S. intermediate holding company requirement for 
foreign banking organizations with U.S. non-branch assets of $50 
billion or more.

* * * * *
    (b) * * *
    (4) For purposes of this part, a top-tier foreign banking 
organization that controls a U.S. intermediate holding company is a 
global systemically important foreign banking organization if any of 
the following conditions are met:
    (i) The top-tier foreign banking organization determines, pursuant 
to paragraph (b)(6) of this section, that the top-tier foreign banking 
organization has the characteristics of a global systemically important 
banking organization under the global methodology; or
    (ii) The Board, using information reported by the top-tier foreign 
banking organization or its U.S. subsidiaries, information that is 
publicly available, and confidential supervisory information, 
determines:
    (A) That the top-tier foreign banking organization would be a 
global systemically important banking organization under the global 
methodology;
    (B) That the top-tier foreign banking organization, if it were 
subject to the Board's Regulation Q, would be identified as a global 
systemically important BHC under Sec.  217.402 of the Board's 
Regulation Q; or
    (C) That the U.S. intermediate holding company, if it were subject 
to Sec.  217.402 of the Board's Regulation Q, would be identified as a 
global systemically important BHC.
    (5) Each top-tier foreign banking organization that controls a U.S. 
intermediate holding company shall submit to the Board by January 1 of 
each calendar year through the U.S. intermediate holding company:
    (i) Notice of whether the home country supervisor (or other 
appropriate home country regulatory authority) of the top-tier foreign 
banking organization of the U.S. intermediate holding company has 
adopted standards consistent with the global methodology; and
    (ii) Notice of whether the top-tier foreign banking organization 
prepares or reports the indicators used by the global methodology to 
identify a banking organization as a global systemically important 
banking organization and, if it does, whether the top-tier foreign 
banking organization has determined that it has the characteristics of 
a global systemically important banking organization under the global 
methodology pursuant to paragraph (b)(6) of this section.
    (6) A top-tier foreign banking organization that controls a U.S. 
intermediate holding company and prepares or reports for any purpose 
the indicator amounts necessary to determine whether the top-tier 
foreign banking organization is a global systemically important banking 
organization under the global methodology must use the data to 
determine whether the top-tier foreign banking organization has the 
characteristics of a global systemically important banking organization 
under the global methodology.
* * * * *
0
8. Add subpart P to read as follows:

Subpart P--Internal Long-Term Debt Requirement, Internal Total 
Loss-absorbing Capacity Requirement and Buffer, and Restrictions on 
Corporate Practices for Intermediate Holding Companies of Global 
Systemic Foreign Banking Organizations

Sec.
252.160 Applicability.
252.161 Definitions.
252.162 Internal long-term debt requirement.
252.163 Internal debt conversion order.
252.164 Internal total loss-absorbing capacity requirement and 
buffer.
252.165 Restrictions on corporate practices of intermediate holding 
companies of foreign banking organizations.


Sec.  252.160  Applicability.

    (a) General applicability. This subpart applies to a U.S. 
intermediate holding company that is required to be established 
pursuant to Sec.  252.153 and is controlled by a global systemically 
important foreign banking organization (Covered IHC).
    (b) Initial applicability. A Covered IHC is subject to the 
requirements of this subpart beginning on the later of:
    (1) January 1, 2019; and
    (2) 1095 days (three years) after the earlier of date on which a:
    (i) Global systemically important foreign banking organization is 
required to establish a U.S. intermediate holding company pursuant to 
Sec.  252.153; and
    (ii) Foreign banking organization that is required to establish a 
U.S. intermediate holding company pursuant to Sec.  252.153 becomes a 
global systemically important foreign banking organization.


Sec.  252.161  Definitions.

    For purposes of this subpart:
    Additional tier 1 capital has the same meaning as in 12 CFR 
217.20(c).
    Average total consolidated assets means the denominator of the 
leverage ratio as described in 12 CFR 217.10(b)(4).
    Common equity tier 1 capital has the same meaning as in 12 CFR 
217.20(b).
    Common equity tier 1 capital ratio has the same meaning as in 12 
CFR 217.10(b)(1) and 12 CFR 217.10(c), as applicable.
    Common equity tier 1 minority interest has the same meaning as in 
12 CFR 217.2.
    Covered IHC is defined in Sec.  252.160.
    Default right (1) Means any:
    (i) Right of a party, whether contractual or otherwise (including 
rights incorporated by reference to any other contract, agreement or 
document, and rights afforded by statute, civil code, regulation and 
common law), to

[[Page 74962]]

liquidate, terminate, cancel, rescind, or accelerate such agreement or 
transactions thereunder, set off or net amounts owing in respect 
thereto (except rights related to same-day payment netting), exercise 
remedies in respect of collateral or other credit support or property 
related thereto (including the purchase and sale of property), demand 
payment or delivery thereunder or in respect thereof (other than a 
right or operation of a contractual provision arising solely from a 
change in the value of collateral or margin or a change in the amount 
of an economic exposure), suspend, delay or defer payment or 
performance thereunder, modify the obligations of a party thereunder or 
any similar rights; and
    (ii) Right or contractual provision that alters the amount of 
collateral or margin that must be provided with respect to an exposure 
thereunder, including by altering any initial amount, threshold amount, 
variation margin, minimum transfer amount, the margin value of 
collateral or any similar amount, that entitles a party to demand the 
return of any collateral or margin transferred by it to the other party 
or a custodian or that modifies a transferee's right to reuse 
collateral or margin (if such right previously existed), or any similar 
rights, in each case, other than a right or operation of a contractual 
provision arising solely from a change in the value of collateral or 
margin or a change in the amount of an economic exposure; and
    (2) Does not include any right under a contract that allows a party 
to terminate the contract on demand or at its option at a specified 
time, or from time to time, without the need to show cause.
    Discretionary bonus payment has the same meaning as under 12 CFR 
217.2.
    Distribution has the same meaning as under 12 CFR 217.2.
    Eligible internal debt security means a debt instrument that:
    (1) Is paid in, and issued by a Covered IHC to and remains held by 
a company that is incorporated or organized outside of the United 
States that directly or indirectly controls the Covered IHC;
    (2) Is unsecured and would represent the most subordinated debt 
claim in a receivership, insolvency, liquidation, or similar proceeding 
of the Covered IHC;
    (3) Has a maturity at issuance of greater than 365 days (one year) 
from the date of issuance;
    (4) Does not provide the holder of the instrument a contractual 
right to accelerate payment of principal or interest on the instrument;
    (5) Has a contractual provision that is approved by the Board that 
provides for the immediate conversion or exchange of the instrument 
into common equity tier 1 of the Covered IHC, or the cancellation of 
the instrument, in either case upon issuance by the Board of an 
internal debt conversion order;
    (6) Is governed by the laws of the United States or any State 
thereof; and
    (7) Is not a structured note.
    GAAP means generally accepted accounting principles as used in the 
United States.
    Internal debt conversion order, with respect to a Covered IHC, 
means an order by the Board to immediately convert or exchange all 
eligible internal debt securities of the Covered IHC to common equity 
tier 1 capital or immediately cancel all eligible internal debt 
securities of the Covered IHC.
    Internal TLAC buffer means, with respect to a Covered IHC, the sum 
of 2.5 percent and any applicable countercyclical capital buffer under 
12 CFR 217.11(b) (expressed as a percentage).
    Outstanding eligible internal long-term debt amount is defined in 
Sec.  252.162(b).
    Person has the same meaning as in 12 CFR 225.2.
    Qualified financial contract has the same meaning as in section 
210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)) including, any 
``swap'' defined in section 1a(47) of the Commodities Exchange Act (7 
U.S.C. 1a(47)) and in any rules or regulations issued by the Commodity 
Futures Trading Commission pursuant to such section; any ``security-
based swap'' defined in section 3(a) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c(a)) and in any rules or regulations issued by the 
Securities and Exchange Commission pursuant to such section; and any 
securities contract, commodity contract, forward contract, repurchase 
agreement, swap agreement, and any similar agreement that the Federal 
Deposit Insurance Corporation determines by regulation to be a 
qualified financial contract as provided in 12 U.S.C. 5390(c)(8)(D)(i).
    Standardized total risk-weighted assets has the same meaning as in 
12 CFR 217.2.
    Structured note means a debt instrument that:
    (1) Has a principal amount, redemption amount, or stated maturity 
that is subject to reduction based on the performance of any asset, 
entity, index, or embedded derivative or similar embedded feature;
    (2) Has an embedded derivative or other similar embedded feature 
that is linked to one or more equity securities, commodities, assets, 
or entities;
    (3) Does not specify a minimum principal amount due upon 
acceleration or early termination; or
    (4) Is not classified as debt under GAAP.
    Supplementary leverage ratio has the same meaning as in 12 CFR 
217.10(c)(4).
    Tier 1 minority interest has the same meaning as in 12 CFR 217.2.
    Tier 2 capital has the same meaning as in 12 CFR 217.20(d).
    Total leverage exposure has the same meaning as in 12 CFR 
217.10(c)(4)(ii).
    Total risk-weighted assets, with respect to a Covered IHC, is equal 
to the Covered IHC's standardized total risk-weighted assets.


Sec.  252.162  Internal long-term debt requirement.

    (a) Internal long-term debt requirement. A Covered IHC must have an 
outstanding eligible internal long-term debt amount that is no less 
than the amount equal to the greater of:
    (1) 7 percent of the Covered IHC's total risk-weighted assets;
    (2) If the Covered IHC is required to maintain a minimum 
supplementary leverage ratio, 3 percent of the Covered IHC's total 
leverage exposure; and
    (3) 4 percent of the Covered IHC's average total consolidated 
assets.
    (b) Outstanding eligible internal long-term debt amount. A Covered 
IHC's outstanding eligible internal long-term debt amount is the sum 
of:
    (1) One hundred (100) percent of the unpaid principal amount of the 
outstanding eligible internal debt securities issued by the Covered IHC 
that have a remaining maturity greater than or equal to 730 days (two 
years); and
    (2) Fifty (50) percent of the unpaid principal amount of the 
outstanding eligible internal debt securities issued by the Covered IHC 
that have a remaining maturity of greater than or equal to 365 days 
(one year) and less than 730 days (two years); and
    (3) Zero (0) percent of the unpaid principal amount of the 
outstanding eligible internal debt securities issued by the Covered IHC 
that have a remaining maturity of less than 365 days (one year).
    (c) Redemption and repurchase. Without the prior approval of the 
Board, a Covered IHC may not redeem or repurchase any outstanding 
eligible internal debt security if, immediately after the redemption or 
repurchase, the Covered IHC would not have an outstanding eligible 
internal long-term debt amount that is sufficient to meet its internal 
long-term debt requirement under paragraph (a) of this section.

[[Page 74963]]

Sec.  252.163  Internal debt conversion order.

    (a) The Board may issue an internal debt conversion order if:
    (1) The Board has determined that the Covered IHC is in default or 
danger of default; and
    (2) Any of the following circumstances apply:
    (i) A foreign banking organization that directly or indirectly 
controls the Covered IHC or any subsidiary of the top-tier foreign 
banking organization has been placed into resolution proceedings 
(including the application of statutory resolution powers) in its home 
country;
    (ii) The home country supervisor of the top-tier foreign banking 
organization has consented or not promptly objected after notification 
by the Board to the conversion, exchange, or cancellation of the 
eligible internal debt securities of the Covered IHC; or
    (iii) The Board has made a written recommendation to the Secretary 
of the Treasury pursuant to 12 U.S.C. 5383(a) regarding the Covered 
IHC.
    (b) For purposes of paragraph (a) of this section, the Board will 
consider:
    (1) A Covered IHC in default or danger of default if
    (i) A case has been, or likely will promptly be, commenced with 
respect to the Covered IHC under the Bankruptcy Code (11 U.S.C. 101 et 
seq.);
    (ii) The Covered IHC has incurred, or is likely to incur, losses 
that will deplete all or substantially all of its capital, and there is 
no reasonable prospect for the Covered IHC to avoid such depletion;
    (iii) The assets of the Covered IHC are, or are likely to be, less 
than its obligations to creditors and others; or
    (iv) The Covered IHC is, or is likely to be, unable to pay its 
obligations (other than those subject to a bona fide dispute) in the 
normal course of business; and
    (2) An objection by the home country supervisor to the conversion, 
exchange or cancellation of the eligible internal debt securities to be 
prompt if the Board receives the objection no later than 48 hours after 
the Board requests such consent or non-objection from the home country 
supervisor.


Sec.  252.164  Internal total loss-absorbing capacity requirement and 
buffer.

    (a) Internal total loss-absorbing capacity requirement. Except as 
provided in paragraph (b) of this section, a Covered IHC must have an 
outstanding internal total loss-absorbing capacity amount that is no 
less than the amount equal to the greater of:
    (1) (i) From January 1, 2019 through December 31, 2021, 16 percent 
of the Covered IHC's total risk-weighted assets; and
    (ii) Beginning January 1, 2022, 18 percent of the Covered IHC's 
total risk-weighted assets;
    (2) If the Board requires the Covered IHC to maintain a minimum 
supplementary leverage ratio, 6.75 percent of the Covered IHC's total 
leverage exposure; and
    (3) Nine (9) percent of the Covered IHC's average total 
consolidated assets.
    (b) Internal total loss-absorbing capacity requirement for a 
Covered IHCs that is a non-resolution entity. A Covered IHC that is a 
non-resolution entity must have an outstanding internal total loss-
absorbing capacity no less than the amount equal to the greater of:
    (1) (i) From January 1, 2019 through December 31, 2021, 14 percent 
of the Covered IHC's total risk-weighted assets; and
    (ii) Beginning January 1, 2022, 16 percent of the Covered IHC's 
total risk-weighted assets;
    (2) If the Board requires the Covered IHC to maintain a minimum 
supplementary leverage ratio, 6 percent of the Covered IHC's total 
leverage exposure; and
    (3) Eight (8) percent of the Covered IHC's average total 
consolidated assets.
    (c) Internal Total loss-absorbing capacity amount. A Covered IHC's 
internal total loss-absorbing capacity amount is equal to the sum of:
    (1) The Covered IHC's common equity tier 1 capital (excluding any 
common equity tier 1 minority interest) held by a company that is 
incorporated or organized outside of the United States and that 
directly or indirectly controls the Covered IHC;
    (2) The Covered IHC's additional tier 1 capital (excluding any tier 
1 minority interest) held by a company that is incorporated or 
organized outside of the United States and that directly or indirectly 
controls the Covered IHC; and
    (3) The Covered IHC's outstanding eligible internal long-term debt 
amount plus 50 percent of the unpaid principal amount of outstanding 
eligible internal debt securities issued by the Covered IHC that have a 
remaining maturity of greater than or equal to 365 days (one year) but 
less than 730 days (two years).
    (d) Identification of non-resolution entities. (1) A Covered IHC is 
a non-resolution entity for purposes of this section if the home 
country resolution authority for the top-tier foreign banking 
organization that controls the Covered IHC has certified to the Board 
that the authority's planned resolution strategy for the foreign 
banking organization does not involve the Covered IHC or the 
subsidiaries of the Covered IHC entering resolution, receivership, 
insolvency or similar proceedings in the United States.
    (2) A Covered IHC will cease to be a non-resolution entity 365 days 
(one year) from the date the Board first provided notice to the Covered 
IHC that the home country resolution authority for the top-tier foreign 
banking organization that controls the Covered IHC has indicated that 
the authority's planned resolution strategy for the foreign banking 
organization involves the Covered IHC or one or more of the 
subsidiaries of the Covered IHC entering resolution, receivership, 
insolvency or similar proceedings in the United States.
    (e) Internal TLAC buffer.--(1) Composition of the internal TLAC 
buffer. The internal TLAC buffer is composed solely of common equity 
tier 1 capital.
    (2) Definitions. For purposes of this paragraph, the following 
definitions apply:
    (i) Eligible retained income. The eligible retained income of a 
Covered IHC is its net income for the four calendar quarters preceding 
the current calendar quarter, based on the Covered IHC's FR Y-9C, or 
other applicable regulatory report as determined by the Board, net of 
any distributions and associated tax effects not already reflected in 
net income. Net income, as reported in the FR Y-9C, reflects 
discretionary bonus payments and certain distributions that are expense 
items (and their associated tax effects).
    (ii) Maximum internal TLAC payout ratio. The maximum internal TLAC 
payout ratio is the percentage of eligible retained income that a 
Covered IHC can pay out in the form of distributions and discretionary 
bonus payments during the current calendar quarter. The maximum 
internal TLAC payout ratio is based on the Covered IHC's internal TLAC 
buffer level, calculated as of the last day of the previous calendar 
quarter, as set forth in Table 1 to Sec.  252.164.
    (iii) Maximum internal TLAC payout amount. A Covered IHC's maximum 
internal TLAC payout amount for the current calendar quarter is equal 
to the Covered IHC's eligible retained income, multiplied by the 
applicable maximum internal TLAC payout ratio, as set forth in Table 1 
to Sec.  252.164.
    (3) Calculation of the internal TLAC buffer level. (i) A Covered 
IHC's internal TLAC buffer level is equal to the Covered IHC's common 
equity tier 1 capital ratio (expressed as a percentage) minus the 
greater of zero and the following amount:
    (A) (1) From January 1, 2019, through December 31, 2021, 14 percent 
for a

[[Page 74964]]

Covered IHC that is a non-resolution entity, and 16 percent for all 
other Covered IHCs; and
    (2) Beginning January 1, 2022, 16 percent for a Covered IHC that is 
a non-resolution entity, and 18 percent for all other Covered IHCs; 
minus
    (B) The ratio (expressed as a percentage) of the Covered IHC's 
additional tier 1 capital (excluding any tier 1 minority interest) held 
by a company that is incorporated or organized outside of the United 
States and that directly or indirectly controls the Covered IHC to its 
total risk-weighted assets; and minus
    (C) The ratio (expressed as a percentage) of the Covered IHC's 
eligible internal long-term debt to total risk-weighted assets.
    (ii) (A) Except as provided in paragraph (e)(3)(ii)(B) of this 
section and notwithstanding paragraph (e)(3)(i) of this section, if the 
ratio (expressed as a percentage) of the Covered IHC's internal total 
loss-absorbing capacity amount, as calculated under Sec.  252.164(a), 
to the Covered IHC's risk-weighted assets is less than or equal to, 
from January 1, 2019, through December 31, 2021, 16 percent and 
beginning January 1, 2022, 18 percent, the Covered IHC's internal TLAC 
buffer level is zero.
    (B) With respect to a Covered IHC that is a non-resolution entity, 
notwithstanding paragraph (e)(3)(i) of this section, if the ratio 
(expressed as a percentage) of the Covered IHC's internal total loss-
absorbing capacity amount, as calculated under Sec.  252.164(b), to the 
Covered IHC's risk-weighted assets is less than or equal to, from 
January 1, 2019, through December 31, 2021, 14 percent and beginning 
January 1, 2022, 16 percent, the Covered IHC's internal TLAC buffer 
level is zero.
    (4) Limits on distributions and discretionary bonus payments. (i) A 
Covered IHC shall not make distributions or discretionary bonus 
payments or create an obligation to make such distributions or payments 
during the current calendar quarter that, in the aggregate, exceed the 
maximum internal TLAC payout amount.
    (ii) A Covered IHC with an internal TLAC buffer level that is 
greater than the internal TLAC buffer is not subject to a maximum 
internal TLAC payout amount.
    (iii) Except as provided in paragraph (e)(4)(iv) of this section, a 
Covered IHC may not make distributions or discretionary bonus payments 
during the current calendar quarter if the Covered IHC's:
    (A) Eligible retained income is negative; and
    (B) Internal TLAC buffer level was less than the internal TLAC 
buffer as of the end of the previous calendar quarter.
    (iv) Notwithstanding the limitations in paragraphs (e)(4)(i) 
through (iii) of this section, the Board may permit a Covered IHC to 
make a distribution or discretionary bonus payment upon a request of 
the Covered IHC, if the Board determines that the distribution or 
discretionary bonus payment would not be contrary to the purposes of 
this section, or to the safety and soundness of the Covered IHC. In 
making such a determination, the Board will consider the nature and 
extent of the request and the particular circumstances giving rise to 
the request.

 Table 1 to Sec.   252.164--Calculation of Maximum Internal TLAC Payout
                                 Amount
------------------------------------------------------------------------
                                                Maximum internal TLAC
                                                  payout ratio (as a
         Internal TLAC buffer level             percentage of eligible
                                                   retained income)
------------------------------------------------------------------------
Greater than the internal TLAC buffer......  No payout ratio limitation
                                              applies
Less than or equal to the internal TLAC      60 percent.
 buffer, and greater than 75 percent of the
 internal TLAC buffer.
Less than or equal to 75 percent of the      40 percent.
 internal TLAC buffer, and greater than 50
 percent of the internal TLAC buffer.
Less than or equal to 50 percent of the      20 percent.
 internal TLAC buffer, and greater 25
 percent of the internal TLAC buffer.
Less than or equal to 25 percent of the      0 percent.
 internal TLAC buffer.
------------------------------------------------------------------------

    (v) (A) A Covered IHC is subject to the lowest of the maximum 
payout amounts as determined under 12 CFR 217.11(a)(2)(iii) and (iv) 
and the maximum internal TLAC payout amount as determined under this 
paragraph.
    (B) Additional limitations on distributions may apply to a Covered 
IHC under 12 CFR 225.4, 225.8, and 263.202.


Sec.  252.165  Restrictions on corporate practices of intermediate 
holding companies of foreign banking organizations.

    A Covered IHC may not directly:
    (a) Issue any debt instrument with an original maturity of less 
than 365 days (one year), including short term deposits and demand 
deposits, to any person, unless the person is an affiliate of the 
covered IHC;
    (b) Issue any instrument, or enter into any related contract, with 
respect to which the holder of the instrument has a contractual right 
to offset debt owed by the holder or its affiliates to the Covered IHC 
or a subsidiary of the Covered IHC against the amount, or a portion of 
the amount, owed by the Covered IHC under the instrument;
    (c) Enter into a qualified financial contract with a person that is 
not an affiliate of the Covered IHC;
    (d) Guarantee a liability of an affiliate of the Covered IHC if 
such liability permits the exercise of a default right that is related, 
directly or indirectly, to the Covered IHC becoming subject to a 
receivership, insolvency, liquidation, resolution, or similar 
proceeding other than a receivership proceeding under Title II of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 
5381 through 5394); or
    (e) Enter into, or otherwise benefit from, any agreement that 
provides for its liabilities to be guaranteed by any of its 
subsidiaries.

    By order of the Board of Governors of the Federal Reserve 
System, November 17, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-29740 Filed 11-27-15; 8:45 am]
 BILLING CODE P