[Federal Register Volume 80, Number 231 (Wednesday, December 2, 2015)]
[Rules and Regulations]
[Pages 75419-75426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-30471]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 80, No. 231 / Wednesday, December 2, 2015 /
Rules and Regulations
[[Page 75419]]
FEDERAL RESERVE SYSTEM
12 CFR Parts 225 and 252
[Regulations Y and YY; Docket No. R-1517]
RIN 7100 AE 33
Amendments to the Capital Plan and Stress Test Rules
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Final rule.
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SUMMARY: The Board is adopting a final rule that makes targeted
amendments to its capital plan and stress test rules. For bank holding
companies with more than $10 billion but less than $50 billion in total
consolidated assets and savings and loan holding companies with total
consolidated assets of more than $10 billion, the final rule modifies
certain mandatory capital action assumptions in the stress test rules
and delays the application of the company-run stress test requirements
to savings and loan holding companies until January 1, 2017. For bank
holding companies that have total consolidated assets of $50 billion or
more and state member banks that are subject to the Board's advanced
approaches capital requirements, the final rule delays the use of the
supplementary leverage ratio for one year and indefinitely defers the
use of the advanced approaches risk-based capital framework in the
capital plan and stress test rules. For bank holding companies that
have total consolidated assets of $50 billion or more, the final rule
removes the tier 1 common capital ratio requirement, and modifies
certain mandatory capital action assumptions. To reflect other recent
rulemakings, the final rule also makes other amendments to the capital
plan and stress test rules. All changes in the final rule apply as of
January 1, 2016, which is the beginning of the next capital planning
and stress test cycle.
DATES: Effective Date: January 1, 2016.
FOR FURTHER INFORMATION CONTACT: Lisa Ryu, Associate Director, (202)
263-4833, Constance Horsley, Assistant Director, (202) 452-5239, Mona
Touma Elliot, Manager, (202) 912-4688, Page Conkling, Senior
Supervisory Financial Analyst, (202) 912-4647, Joseph Cox, Senior
Financial Analyst, (202) 452-3216, Division of Banking Supervision and
Regulation; Benjamin W. McDonough, Special Counsel, (202) 452-2036, or
Julie Anthony, Counsel, (202) 475-6682, Legal Division, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue NW., Washington, DC 20551. Users of Telecommunication Device for
Deaf (TDD) only, call (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
Capital planning and stress testing are two key components of the
Board's supervisory framework for large financial companies.\1\ There
are two related components of the framework: the Comprehensive Capital
Analysis and Review (CCAR), which is conducted pursuant to the Board's
capital plan rule (12 CFR 225.8), and stress testing, which is
conducted pursuant to the Board's stress test rules (subparts E and F
of Regulation YY) and section 165(i) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act).\2\ In CCAR, bank
holding companies that have total consolidated assets of $50 billion or
more (large bank holding companies) submit capital plans to the Board,
and the Board assesses the internal capital planning processes and
ability of these firms to maintain sufficient capital to continue their
operations under expected and stressful conditions. If the Board
objects to the capital plan of a large bank holding company, the
company may only make capital distributions for which it has received a
non-objection from the Board in writing.\3\
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\1\ The changes in this final rule will apply to any nonbank
financial company supervised by the Board that become subject to the
capital planning and stress test requirements. The changes also will
apply to U.S. intermediate holding companies of foreign banking
organizations in accordance with the transition provisions of the
final rule adopting enhanced prudential standards for U.S. bank
holding companies and foreign banking organizations with total
consolidated assets of $50 billion or more. (79 FR 17240 (March 27,
2014)). In the interest of brevity, references to ``large bank
holding companies'' in the preamble should be read to include all of
these companies.
\2\ 12 U.S.C. 5365(i).
\3\ 12 CFR 225.8(f)(2)(iv).
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As required under with the Dodd-Frank Act and as a complement to
CCAR, the Board conducts annual supervisory stress tests of large bank
holding companies, and these bank holding companies must conduct annual
and mid-cycle company-run stress tests.\4\ In addition, bank holding
companies that have total consolidated assets of more than $10 billion
but less than $50 billion, savings and loan holding companies that have
total consolidated assets of more than $10 billion, and state member
banks that have total consolidated assets of more than $10 billion are
all required to conduct annual company-run stress tests under the Dodd-
Frank Act.\5\
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\4\ See 12 U.S.C. 5365(i)(1) and 12 CFR part 252.
\5\ 77 FR 62378 (October 12, 2012) (codified at 12 CFR part 252,
subparts E and F). The stress test requirements apply to savings and
loan holding companies that are subject to the minimum regulatory
capital requirements in 12 CFR part 217. The Board has not applied
capital requirements to savings and loan holding companies that are
substantially engaged in commercial activities or insurance
underwriting activities to date.
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A. Overview of Proposed Changes
On July 17, 2015, the Board issued a proposal to make targeted
adjustments to the Board's capital plan and stress test rules for the
2016 capital plan and stress test cycles.\6\ For bank holding companies
with total consolidated assets of more than $10 billion but less than
$50 billion and savings and loan holding companies that have total
consolidated assets of more than $10 billion, the proposal would have
modified certain mandatory capital action assumptions under the stress
test rules and delayed the application of the company-run stress test
requirements to these savings and loan holding companies until January
1, 2017. For large bank holding companies and state member banks that
are subject to the Board's advanced approaches capital requirements,
the proposal would have delayed the use in capital planning and stress
testing of the supplementary leverage ratio for one year and deferred
the use of the advanced approaches risk-based capital framework
indefinitely. For large bank holding companies, the proposal would have
removed the tier 1 common capital ratio requirement; and
[[Page 75420]]
modified certain mandatory capital action assumptions under the stress
test rules. The proposal also would have revised the capital plan and
stress test rules to clarify the requirement that banking organizations
take into account deductions required by 12 CFR 248.12(d) (the Volcker
Rule) in calculating their capital ratios.
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\6\ 80 FR 43637 (July 23, 2015).
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The Board received five comments on the proposal from banking
organizations and trade associations. Commenters generally expressed
support for the proposal and also recommended certain additional
changes to the capital plan and stress test framework that were not
included in the proposal. This preamble provides a summary of comments
received on the proposal and the Board's responses to those comments.
With respect to the comments that fell outside of the scope of the
targeted proposal, the Board will consider these comments if it makes
changes to its overall capital plan and stress testing framework in the
future.\7\
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\7\ See section VI of this preamble, which addresses comments
that fell outside of the scope of the proposal.
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Section II of the preamble describes revisions to the stress test
rules for bank holding companies that have total consolidated assets
between $10 billion and $50 billion and savings and loan holding
companies that have total consolidated assets of more than $10 billion.
Section III of the preamble describes revisions to the capital plan and
stress test rules for large bank holding companies and state member
banks that are subject to the Board's advanced approaches capital
requirements. Section IV of the preamble describes revisions to the
capital plan and stress test rules for large bank holding companies.
Section V of the preamble describes technical amendments to the capital
plan and stress test rules.
B. Interaction of the Capital Plan and Stress Test Rules With the
Regulatory Capital Rules
The proposal stated that the Board was considering a broad range of
issues relating to the capital plan and stress test rules, including
how the rules interact with other elements of the regulatory capital
rule and whether any modifications may be appropriate.\8\ The proposal
also stated that the Board did not anticipate proposing further changes
that would affect the 2016 capital plan and stress test cycle.
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\8\ 12 CFR part 217.
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The capital plan rule requires companies to assume that capital
actions planned in baseline conditions will be executed throughout the
adverse and severely adverse supervisory scenarios. While the proposal
did not include changes to this requirement, commenters nevertheless
provided views on it. In particular, commenters argued that this
requirement does not reflect bank holding companies' internal capital
management policies, and noted that the Board has supervisory authority
to require banks to preserve capital in times of stress. In addition,
commenters asserted that the assumption that planned capital
distributions would be made in times of stress would be inconsistent
with restrictions on capital distributions and certain discretionary
bonus payments imposed by the regulatory capital rule's capital
conservation buffer. Commenters recommended that the Board revise its
approach to capital action assumptions before the next stress test and
capital plan cycle in light of the phase-in of the capital conservation
buffer. In addition, several commenters expressed the view that large
bank holding companies' capital plans should continue to be evaluated
with regard to only minimum regulatory capital requirements. The
commenters stated that such firms should not be evaluated against post-
stress requirements that are increased by the amount of the capital
conservation buffer or the risk-based capital surcharge for global
systemically important bank holding companies (GSIB surcharge).
In its assessment of a large bank holding company's capital plan,
the Federal Reserve generally makes conservative assumptions to account
for uncertainty in the timing and nature of losses that a large bank
holding company may experience under stress. During a financial crisis,
losses tend to occur suddenly and unpredictably. Because of this, the
Federal Reserve requires large bank holding companies to assume that
they continue to make capital distributions--even during a period of
financial stress--until losses are unavoidable or realized. This
assumption helps to ensure that a large bank holding company would
remain sufficiently capitalized even if the timing of the losses were
different or more sudden than those projected in the severely adverse
scenario.
With regard to the capital conservation buffer, the Board continues
to assess how and to what extent, if any, to incorporate it into the
capital plan and stress test rules. As noted, the conservative
assumptions in the capital plan and stress test rules, such as the
assumption that large bank holding companies will not cut dividends in
a stress period, help to promote greater resiliency, and incorporating
the capital conservation buffer into the rules in a mechanical manner
could work at cross purposes with the goal of greater resiliency.
II. Revisions to Stress Test Rules for Bank Holding Companies With
Total Consolidated Assets Between $10 Billion and $50 Billion, and
Savings and Loan Holding Companies With Total Consolidated Assets of
More Than $10 Billion
A. Modification of Mandatory Dividend Assumptions
Since they were first adopted in 2012, the stress test rules have
required bank holding companies and savings and loan holding companies
to assume that they continue to pay dividends at their current rate and
issue no capital (other than that related to expensed employee
compensation) and redeem no capital instruments in the second through
ninth quarters of the planning horizon. The proposed rule would have
eliminated the requirement that bank holding companies that have total
consolidated assets between $10 billion and $50 billion and savings and
loan holding companies that have total consolidated assets of more than
$10 billion use fixed assumptions regarding dividends in their stress
tests.\9\ These bank holding companies and savings and loan holding
companies instead would have been required to incorporate reasonable
assumptions regarding payments of dividends consistent with internal
capital needs and projections.
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\9\ The proposed rule and final rule maintain the mandatory
assumptions relating to the redemption or repurchase of any
regulatory capital instrument that is eligible for inclusion in the
numerator of a regulatory capital ratio.
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This aspect of the proposal was intended to be responsive to
concerns raised by banking organizations that dividends paid at the
holding company level are often funded directly through a subsidiary
bank's capital distributions to the holding company. Subsidiary banks
may be subject to dividend restrictions, which would impair the funding
of the holding company's dividends, and in such cases the assumptions
required under the stress test rules would be inconsistent with the
bank holding company's actual dividend capacity. Commenters generally
supported the removal of fixed dividend assumptions in the stress
testing requirements for these firms. After considering the comments,
the Board is finalizing the revision as proposed.
Commenters separately requested that the Board eliminate the fixed
dividend
[[Page 75421]]
assumptions for large bank holding companies. Commenters argued that
large bank holding companies also rely on their subsidiary banks to
fund dividends at the holding company level. Several commenters
asserted that this revision for large bank holding companies would make
the dividend payment assumptions more realistic and would result in
stress tests that more closely reflect large bank holding companies'
internal policies and practices.
Unlike bank holding companies with total consolidated assets
between $10 billion and $50 billion, large bank holding companies are
subject to the capital plan rule, and are required to incorporate their
planned capital actions in their post-stress capital analysis. Thus,
large bank holding companies already incorporate more realistic
dividend assumptions into their capital plans. In addition, providing a
common set of fixed dividend assumptions in the stress test rule for
large bank holding companies supports the goal of comparability in
stress test disclosures. Accordingly, the final rule does not eliminate
fixed dividend assumptions for large bank holding companies.
B. Modification to the Mandatory Capital Action Issuance Assumptions
The proposed rule would have modified the mandatory capital action
assumptions in the stress test rules to permit a bank holding company
or savings and loan holding company to assume that it issues capital
associated with funding a planned acquisition.\10\ Specifically, to the
extent that a bank holding company or savings and loan holding company
includes a merger or acquisition in its balance sheet projections, it
would have been required to reflect any related stock issuance in its
stress test.
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\10\ While the preamble did not address this change, the
proposed regulatory text applied this change to all holding
companies.
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Commenters supported the proposed revisions to the issuance
assumptions in the stress test rules, indicating that they would better
align capital action assumptions. After considering the comments, the
Board is finalizing these provisions as proposed.
C. Company Run Stress Test Transition Provisions for Certain Savings
and Loan Holding Companies
Savings and loan holding companies that have total consolidated
assets of more than $10 billion must conduct annual company-run stress
tests under the Dodd-Frank Act.\11\ Under the Board's stress test rule
implementing this requirement, a savings and loan holding company that
is subject to the Board's minimum regulatory capital requirements and
that has total consolidated assets greater than $10 billion is subject
to these requirements. The stress test rules that the Board adopted in
October 2012 provided a two-year transition period for these savings
and loan holding companies to comply with the stress test requirements.
However, the October 2014 revisions to the capital plan and stress test
rules (October 2014 revisions) resulted in a shortening of this initial
transition period to one year.\12\
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\11\ Currently, savings and loan holding companies are not
subject to the Board's capital plan rule or supervisory stress
tests, regardless of size.
\12\ 79 FR 64026 (October 27, 2014).
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The proposed rule would have delayed for one additional stress test
cycle the application of the company-run stress test rules to saving
and loan holding companies that have total consolidated assets of more
than $10 billion, such that these savings and loan holding companies
would have become subject to the stress test rules for the first time
beginning on January 1, 2017. Accordingly, savings and loan holding
companies that have total consolidated assets of more than $50 billion
would have reported their stress test results by April 5, 2017, and
those that have total consolidated assets of less than $50 billion
would have reported results by July 31, 2017.
Commenters supported the proposed delay in the initial application
of the stress test requirements for these savings and loan holding
companies, and requested that the application of the stress testing
requirements to other savings and loan holding companies and nonbank
financial companies supervised by the Board be delayed even further.
Commenters argued that companies primarily engaged in insurance
underwriting activity will need a reasonable amount of time to
implement the stress testing requirements after becoming subject to
regulatory capital requirements. One commenter suggested a minimum two-
year transition period for savings and loan holding companies engaged
in insurance underwriting activity and for insurance companies
designated as systemically important by the Financial Stability
Oversight Council, which are not subject to the stress test rules
unless made subject pursuant to a rule or order of the Board.
Consistent with the proposal, under the final rule, savings and
loan holding companies that are currently subject to the Board's
regulatory capital rules would have an additional year, until 2017, to
conduct their first stress test. Savings and loan holding companies
that are not subject to the Board's regulatory capital rules will not
be required to conduct their first stress test until after they become
subject to the regulatory capital rules and thus should have adequate
time to develop the systems necessary to conduct stress testing. With
respect to nonbank financial companies supervised by the Board that are
engaged in insurance activities, the Board will continue to monitor and
assess their activities and would consider these activities, as well as
their risk profile, in considering whether to apply the stress test
rules to such companies by rule or order.
III. Revisions to the Capital Plan and Stress Test Rules for Large Bank
Holding Companies and State Member Banks Subject to the Advanced
Approaches
The changes relating to the use of the supplementary leverage ratio
and the advance approaches only apply to bank holding companies and
state member banks that are subject to the advanced approaches risk-
based capital framework, as well as any savings and loan holding
company that becomes subject to the advanced approaches in the future.
A. Delay of Inclusion of the Supplementary Leverage Ratio Requirement
The supplementary leverage ratio requirement in the Board's capital
rules applies to large bank holding companies and state member banks
that are subject to the advanced approaches risk-based capital
framework.\13\ For these banking organizations, the proposed rule would
have delayed the incorporation of the supplementary leverage ratio
requirement into the capital plan and stress test rules for one year,
until 2017.
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\13\ Banking organizations that are subject to the advanced
approaches risk-based capital framework are banking organizations
with total consolidated assets of $250 billion or more, that have
total consolidated on-balance sheet foreign exposure of $10 billion
or more, are a subsidiary of a depository institution that uses the
advanced risk-based capital approaches framework, or that elect to
use the advanced risk-based capital approaches framework. See 12 CFR
part 217, subpart E.
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Commenters were generally supportive of delaying the incorporation
of the supplementary leverage ratio requirement until 2017, and noted
that this provision would allow banking organizations time to develop
the systems necessary to project the supplementary leverage ratio under
[[Page 75422]]
stressed conditions. One commenter argued that the supplementary
leverage ratio requirement should be excluded indefinitely from the
capital plan and stress test rules. The commenter asserted that the
supplementary leverage ratio was intended to be a backstop to the
Board's risk-based capital rule, and expressed concern that it could
become a binding constraint on regulatory capital if included in the
capital plan and stress test requirements. The commenter noted that a
binding supplementary leverage ratio may distort firms' incentives with
respect to risk-taking because it does not reflect the level of risk
associated with particular assets in determining capital requirements,
and could compromise other regulatory initiatives, such as the
liquidity coverage ratio and margin requirements.
Notwithstanding these arguments, a post-stress leverage ratio
requirement has been a requirement in the stress test and capital plan
rules since their inception. The leverage ratio requirement continues
to serve as an important backstop as it guards against possible
weaknesses in the risk-based capital requirements, such as the
possibility of understating the risk of certain assets. The addition of
the supplementary leverage ratio requirement in the capital plan and
stress test rules will further strengthen this backstop function as it
will include a measure of off-balance sheet exposures in addition to
all on-balance sheet items. Accordingly, the final rule retains the
one-year delay in implementation of the supplementary leverage ratio
for purposes of capital planning and stress testing. The Federal
Reserve will continue to monitor the amount of capital required under
both the risk-based and leverage ratios in CCAR and under the related
stress tests.
B. Deferral of Use of the Advanced Approaches
The proposed rule would have deferred indefinitely the use of the
advanced approaches for calculating risk-based capital ratios under the
capital plan and stress test rules. Thus, large bank holding companies
and state member banks that are subject to the advanced approaches
risk-based capital framework would have been required to project risk-
weighted assets using only the standardized approach until such time as
the Board requires the use of advanced approaches in stress testing and
capital planning. The Board proposed this revision in light of banking
organizations' concerns that the use of advanced approaches in the
capital plan and stress test rules would require significant resources
and would introduce complexity and opacity without a clear prudential
benefit.
Commenters supported the proposed revision to delay the use of
advanced approaches until further notice. After reviewing these
comments, the Board is finalizing this revision as proposed.
IV. Revisions to the Capital Plan and Stress Test Rules for Large Bank
Holding Companies
A. Elimination of the Tier 1 Common Capital Ratio Requirement
The proposed rule would have removed the requirement that a large
bank holding company demonstrate its ability to maintain a pro forma
tier 1 common capital ratio of five percent of risk-weighted assets
under expected and stressed scenarios. The Board introduced the tier 1
common capital ratio requirement in 2009 as part of the Supervisory
Capital Assessment Program to assess the level of high-quality, loss-
absorbing capital held at the largest U.S. bank holding companies.\14\
At that time, the Board noted that it expected the tier 1 common
capital ratio requirement to remain in force until the Board adopted a
minimum common equity capital requirement.\15\ In 2013, the Board
revised its regulatory capital rules to strengthen the quality and
quantity of regulatory capital held by banking organizations and,
introduced a minimum common equity tier 1 capital requirement of 4.5
percent of risk-weighted assets.\16\
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\14\ See ``The Supervisory Capital Assessment Program: Overview
of Results,'' May 7, 2009, available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf.
\15\ Id.
\16\ 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). In
April 2014, the FDIC adopted the interim final rule as a final rule
with no substantive changes. 79 FR 20754 (April 14, 2014).
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Nearly all commenters expressed support for the proposed removal of
the tier 1 common capital ratio requirement from the capital plan and
stress test rules. The Board agrees with commenters that removing the
tier 1 common capital ratio requirement at this time is appropriate in
light of the implementation in the regulatory capital rules of the
minimum common equity tier 1 capital requirement equal to 4.5 percent
of risk-weighted assets, effective on January 1, 2015.\17\
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\17\ Id.
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The regulatory capital rule's required adjustments and deductions
from common equity tier 1 capital will be fully phased in by January 1,
2018, which is the ninth quarter of the planning horizon of the capital
plan and stress test cycle that begins on January 1, 2016.\18\ Due to
the implementation of these mandatory adjustments and deductions, the
minimum common equity tier 1 capital requirement is generally expected
to require more capital than the current tier 1 common capital ratio
requirement in forthcoming stress test and capital plan cycles.
Further, removing the tier 1 common capital ratio requirement would
reduce the burden on large bank holding companies by no longer
requiring them to maintain legacy systems and processes necessary for
calculating the tier 1 common capital ratio requirement. The Board is
therefore finalizing the provision as proposed.
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\18\ Id.
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B. Modification of Certain Mandatory Capital Action Assumptions
As noted above, the stress test rules require large bank holding
companies to assume that they continue to pay dividends at their
current rate, issue no capital (other than that related to expensed
employee compensation), and redeem no capital instruments in the second
through ninth quarters of the planning horizon. These assumptions were
designed to ensure that the publicly disclosed results of company run
stress tests would be comparable across institutions, and to reflect
common macroeconomic scenarios on firms' net income and capital rather
than company-specific assumptions about capital issuances and
redemptions.
The proposal would have included two modifications to these capital
action assumptions. First, it would have required a large bank holding
company to assume it issues capital associated with funding a planned
merger or acquisition. Under the proposal, to the extent that a large
bank holding company is required to include an acquisition in its
balance sheet projections, the large bank holding company would have
been required to include any stock issuance associated with funding the
acquisition in its stress test. Second, the proposal would have
modified dividend assumptions in the stress test rules to require large
bank holding companies to reflect dividends associated with expensed
employee compensation. Specifically, the proposal would have required a
firm to assume that it pays planned dividends on any issuance of stock
related to expensed employee compensation.
[[Page 75423]]
Commenters supported the proposed revisions to the dividend and
issuance assumptions in the stress test rules. Commenters indicated
that these changes would better align capital action assumptions with
business plan changes required when a banking organization is
considering an acquisition and would enhance the efficiency of the
stress test process.
While not included in the proposal, to remain consistent with the
treatment of dividends related to expensed employee compensation
discussed above, the final rule also requires a large bank holding
company to assume that it pays planned dividends on any issuance of
stock related to the funding of a planned merger or acquisition to the
extent that the company is required to include such merger or
acquisition in its balance sheet projections.
The modification to the capital action assumptions in the stress
test rules regarding dividends and issuances associated with business
plan changes is in keeping with the general principle that stress tests
should capture the expected impact to both assets and capital related
to business plan changes. For example, the capital action assumptions
allow a company to include planned issuances of stock associated with
expensed employee compensation. This is because expensed employee
compensation will appear as an expense, thus the company should also
receive recognition for a related issuance of capital.
V. Technical Amendments to the Capital Plan and Stress Test Rules
The proposed rule included amendments to the capital plan and
stress test rules to incorporate changes related to other rulemakings.
The proposed rule would have removed references to the risk-based
capital rules in Regulation Y (12 CFR part 225) that were no longer
operative. In addition, the proposal would have amended the definition
of minimum regulatory capital ratio in 12 CFR 225.8(d)(8) and the
definition of regulatory capital ratio in 12 CFR 252.12(n), 12 CFR
252.42(m), and 12 CFR 252.52(n) to incorporate the deductions required
under 12 CFR 248.12(d) (the Volcker Rule). Although the Volcker Rule
requires a banking organization to deduct from tier 1 capital its
aggregate investments in covered funds (as defined in 12 CFR.
248.10(b)), these required deductions are not, however, reflected in
Regulation Q (12 CFR part 217). Accordingly, the proposed rule would
have revised the regulatory text of the above-referenced definitions to
include the required deductions under the Volcker Rule in the
definition of regulatory capital ratio and minimum regulatory capital
ratio.
Commenters expressed that the view that incorporating the Volcker
Rule deductions into the capital plan and stress test rules was
premature. At least one commenter argued that in issuing the proposed
rule, the Board interpreted the Volcker deductions without the
consensus of the other U.S. banking agencies, and that these
interpretations could have implications for the broader industry beyond
the institutions covered by the stress test and capital plan rules.
These commenters requested that the Board delay incorporating
deductions associated with the Volcker Rule in the capital plan and
stress test rules until the U.S. banking agencies provide guidance
regarding the operation and calculation of the deduction for purposes
of the regulatory capital framework, subject to proper notice and
comment.
The proposed modifications to the capital plan and stress test
rules would not establish new expectations or requirements regarding
the interaction between the Volcker Rule and the regulatory capital
framework. The Board has provided additional guidance to bank holding
companies on how to reflect Volcker deductions in their pro forma
regulatory capital ratios under the stress test and capital plan
rules.\19\ Thus, the Board is finalizing these two aspects of the
proposal, specifically, the deletion of references to Regulation Y and
incorporation of deductions from capital required under the Volcker
Rule, without change.
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\19\ See Supervision and Regulation Letter SR 15-13 (November 6,
2015), available at: https://fedweb.frb.gov/fedweb/bsr/srltrs/sr1513.pdf.
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VI. Other Comments Received on the Proposal
A. Regulatory Burden and Transparency
Commenters encouraged the Board to continue efforts to increase
transparency and understanding of the capital plan and stress test
processes. In particular, commenters noted that in recent years,
greater emphasis has been placed on qualitative factors in capital plan
and stress test assessments and thus requested that the Board provide
more information regarding the qualitative factors that are used to
evaluate a firm's capital plan. These commenters requested that the
Board provide instructions and scenarios as early as possible to
facilitate a more robust capital planning process. A commenter noted
that the Board's ``Capital Planning at Large Bank Holding Companies:
Supervisory Expectations and Range of Current Practice'' document
issued in August 2013 was extremely useful and requested that it be
updated annually to aid large bank holding companies in improving their
capital planning processes and preparing their annual capital plans.
One commenter also supported efforts by the Board to review the
regulatory burden placed on financial institutions as a result of the
establishment of Dodd-Frank Act regulations.
The Board continues to seek ways to improve its capital plan and
stress test framework, including by taking into consideration industry
feedback. For instance, last year, the Board adjusted the timeframe for
the annual capital plan and stress test exercise in order to address
resource constraints for banking organizations near the end of the
year. This final rule also includes several changes that are responsive
to public comments, including removal of the tier 1 common ratio and
deferral of the supplementary leverage ratio for one year.
B. Uniform Tax Rate Assumption
For purposes of the stress test and capital plan rules, the Board
applies a uniform tax rate to project after-tax net income for all bank
holding companies. One commenter raised the concern that this
assumption could have a material impact on after-tax income, and
accordingly, on capital positions and the Board's assessment decision
of whether to object to a capital plan. The commenter further noted
that there are a number of circumstances where a simplifying tax
assumption could materially understate capital, and requested that the
Board use the tax calculations prepared by the bank holding company in
accordance with Generally Accepted Accounting Principles as a starting
point for supervisory tax projections. The commenter also requested
that the Board should only apply the common tax rate to the marginal
pre-tax net income (loss) and pre-tax other comprehensive income that
exceeds the firm's projections. As an alternative, the commenter
suggested that additional tax information be collected in the annual
submissions to inform the Board's tax calculations.
The use of a common supervisory tax rate supports the consistent
application of assumptions and models across firms. Accordingly, the
final rule does not alter the assumption of a common supervisory tax
rate.
[[Page 75424]]
VII. Administrative Law Matters
a. Riegle Act
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (Riegle Act) requires a federal banking agency
to consider the benefits and any administrative burdens that new
regulations and amendments to regulations prescribed by a federal
banking agency that impose additional reporting, disclosures, or other
new requirements on an insured depository institution, and, subject to
certain exceptions, provides that such regulations shall 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.\20\ As noted, the
final rule clarifies the interaction between the Volcker Rule and the
regulatory capital framework but does not impose new requirements in
this regard. In addition, the delay of the use of the supplementary
leverage ratio and of the advanced approaches risk-based capital
framework generally reduce burden on state member banks that are
subject to the advanced approaches. Accordingly, the final rule does
not impose any additional reporting or disclosure requirements on state
member banks. In addition, consistent with Section 302 of the Riegle
Act, the requirements in the final rule will take effect on the first
day of a calendar quarter after the date on which the final rule is
published in final form.
---------------------------------------------------------------------------
\20\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
b. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
(PRA) of 1995 (44 U.S.C. 3501-3521), the Board may not conduct or
sponsor, and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The Board reviewed this final rule
under the authority delegated to the Board by the OMB and determined
that it contains no collections of information. No public comments on
the PRA were received when the proposed rule was published.
c. Regulatory Flexibility Act Analysis
The Board has considered the potential impact of the final rule on
small companies in accordance with the Regulatory Flexibility Act (5
U.S.C. 603(b)). Based on its analysis and for the reasons stated below,
the Board believes that the final rule will not have a significant
economic impact on a substantial number of small entities.
Nevertheless, the Board is publishing a final regulatory flexibility
analysis.
Under regulations issued by the Small Business Administration
(``SBA''), a small entity includes a depository institution, bank
holding company, or savings and loan holding company with total assets
of $550 million or less (a small banking organization).\21\ The final
rule will apply to bank holding companies, savings and loan holding
companies, and state member banks with total consolidated assets of $10
billion or more. Companies that will be subject to the final rule
therefore substantially exceed the $550 million total asset threshold
at which a company is considered a small company under SBA regulations.
In light of the foregoing, the Board does not believe that the final
rule will have a significant economic impact on a substantial number of
small entities.
---------------------------------------------------------------------------
\21\ See 13 CFR 121.201. Effective July 14, 2014, the SBA
revised the size standards for banking organizations to $550 million
in assets from $500 million in assets. 79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------
d. Solicitation of Comments on 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 sought to present the proposed rule in a
simple and straightforward manner and solicited comment on how to make
the proposed rule easier to understand. No comments were received on
the use of plain language.
List of Subjects
12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Capital
planning, Holding companies, Reporting and recordkeeping requirements,
Securities, Stress testing.
12 CFR Part 252
Administrative practice and procedure, Banks, Banking, Capital
planning, Federal Reserve System, Holding companies, Reporting and
recordkeeping requirements, Securities, Stress testing.
Authority and Issuance
For the reasons stated in the SUPPLEMENTARY INFORMATION, the Board
of Governors of the Federal Reserve System amends 12 CFR chapter II as
follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
1. The authority citation for part 225 is revised to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
Subpart A--General Provisions
0
2. Section 225.8 is amended by:
0
a. Revising paragraphs (c)(3) and (d)(8) and (11);
0
b. Removing paragraphs (d)(12) and (13);
0
c. Redesignating paragraph (d)(14) as paragraph (d)(12);
0
d. Removing and reserving paragraph (e)(2)(i)(B); and
0
e. Revising paragraphs (e)(2)(ii)(A), (f)(1)(i)(C), (f)(2)(ii)(C), and
(g)(1)(i).
The revisions read as follows:
Sec. 225.8 Capital planning.
* * * * *
(c) * * *
(3) Transition periods for bank holding companies subject to the
supplementary leverage ratio. Notwithstanding paragraph (d)(8) of this
section, only for purposes of the capital plan cycle beginning on
January 1, 2016, a bank holding company shall not include an estimate
of its supplementary leverage ratio.
(d) * * *
(8) Minimum regulatory capital ratio means any minimum regulatory
capital ratio that the Federal Reserve may require of a bank holding
company, by regulation or order, including the bank holding company's
tier 1 and supplementary leverage ratios as calculated under 12 CFR
part 217, including the deductions required under 12 CFR 248.12, as
applicable, and the bank holding company's common equity tier 1, tier
1, and total risk-based capital ratios as calculated under 12 CFR part
217, including the deductions required under 12 CFR 248.12 and the
transition provisions at 12 CFR 217.1(f)(4) and 217.300; except that
the bank holding company shall not use the advanced approaches to
calculate its regulatory capital ratios.
* * * * *
(11) Tier 1 capital has the same meaning as under 12 CFR part 217.
* * * * *
(e) * * *
(2) * * *
(i) * * *
(B) [Reserved]
* * * * *
[[Page 75425]]
(ii) * * *
(A) A discussion of how the bank holding company will, under
expected and stressful conditions, maintain capital commensurate with
its risks, maintain capital above the minimum regulatory capital
ratios, and serve as a source of strength to its subsidiary depository
institutions;
* * * * *
(f) * * *
(1) * * *
(i) * * *
(C) The bank holding company's ability to maintain capital above
each minimum regulatory capital ratio on a pro forma basis under
expected and stressful conditions throughout the planning horizon,
including but not limited to any scenarios required under paragraphs
(e)(2)(i)(A) and (e)(2)(ii) of this section.
* * * * *
(2) * * *
(ii) * * *
(C) The bank holding company has not demonstrated an ability to
maintain capital above each minimum regulatory capital ratio on a pro
forma basis under expected and stressful conditions throughout the
planning horizon; or
* * * * *
(g) * * *
(1) * * *
(i) After giving effect to the capital distribution, the bank
holding company would not meet a minimum regulatory capital ratio;
* * * * *
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
0
3. The authority citation for part 252 continues to read as follows:
Authority: 12 U.S.C. 321-338a, 1467a(g), 1818, 1831p-1, 1844(b),
1844(c), 5361, 5365, 5366.
0
4. Section 252.12 is amended by revising paragraph (n) to read as
follows:
Sec. 252.12 Definitions.
* * * * *
(n) Regulatory capital ratio means a capital ratio for which the
Board established minimum requirements for the company by regulation or
order, including a company's tier 1 and supplementary leverage ratio as
calculated under 12 CFR part 217, including the deductions required
under 12 CFR 248.12, as applicable, and the company's common equity
tier 1, tier 1, and total risk-based capital ratios as calculated under
12 CFR part 217, including the deductions required under 12 CFR 248.12
and the transition provisions at 12 CFR 217.1(f)(4) and 217.300; except
that the company shall not use the advanced approaches to calculate its
regulatory capital ratios.
* * * * *
0
5. Section 252.13 is amended by revising paragraphs (b)(2) and (3) to
read as follows:
Sec. 252.13 Applicability.
* * * * *
(b) * * *
(2) Transition period for savings and loan holding companies. (i) A
savings and loan holding company that is subject to minimum regulatory
capital requirements and exceeds the asset threshold for the first time
on or before March 31 of a given year, must comply with the
requirements of this subpart beginning on January 1 of the following
year, unless that time is extended by the Board in writing;
(ii) A savings and loan holding company that is subject to minimum
regulatory capital requirements and exceeds the asset threshold for the
first time after March 31 of a given year must comply with the
requirements of this subpart beginning on January 1 of the second year
following that given year, unless that time is extended by the Board in
writing; and
(iii) Notwithstanding paragraph (b)(2)(i) of this section, a
savings and loan holding company that is subject to minimum regulatory
capital requirements and exceeded the asset threshold for the first
time on or before March 31, 2015, must comply with the requirements of
this subpart beginning on January 1, 2017, unless that time is extended
by the Board in writing.
(3) Transition periods for companies subject to the supplementary
leverage ratio. Notwithstanding Sec. 252.12(n), for purposes of the
stress test cycle beginning on January 1, 2016, a company shall not
include an estimate of its supplementary leverage ratio.
0
6. Section 252.15 is amended by revising paragraph (b)(2) to read as
follows:
Sec. 252.15 Methodologies and practices.
* * * * *
(b) * * *
(2) For each of the second through ninth quarters of the planning
horizon, the bank holding company or savings and loan holding company
must:
(i) Assume no redemption or repurchase of any capital instrument
that is eligible for inclusion in the numerator of a regulatory capital
ratio;
(ii) Assume no issuances of common stock or preferred stock, except
for issuances related to expensed employee compensation or in
connection with a planned merger or acquisition to the extent that the
merger or acquisition is reflected in the company's pro forma balance
sheet estimates; and
(iii) Make reasonable assumptions regarding payments of dividends
consistent with internal capital needs and projections.
* * * * *
0
7. Section 252.42 is amended by:
0
a. Revising paragraph (m); and
0
b. Removing paragraph (r).
The revision reads as follows:
Sec. 252.42 Definitions.
* * * * *
(m) Regulatory capital ratio means a capital ratio for which the
Board established minimum requirements for the company by regulation or
order, including the company's tier 1 and supplementary leverage ratios
as calculated under 12 CFR part 217, including the deductions required
under 12 CFR 248.12, as applicable, and the company's common equity
tier 1, tier 1, and total risk-based capital ratios as calculated under
12 CFR part 217, including the deductions required under 12 CFR 248.12
and the transition provisions at 12 CFR 217.1(f)(4) and 217.300; except
that the company shall not use the advanced approaches to calculate its
regulatory capital ratios.
* * * * *
0
8. Section 252.43 is amended by revising paragraph (c) to read as
follows:
Sec. 252.43 Applicability.
* * * * *
(c) Transition periods for covered companies subject to the
supplementary leverage ratio. Notwithstanding Sec. 252.42(m), only for
purposes of the stress test cycle beginning on January 1, 2016, the
Board will not include an estimate of a covered company's supplementary
leverage ratio.
0
9. Section 252.44 is amended by revising paragraph (a)(2) to read as
follows:
Sec. 252.44 Annual analysis conducted by the Board.
(a) * * *
(2) The analysis will include an assessment of the projected
losses, net income, and pro forma capital levels and regulatory capital
ratios and other capital ratios for the covered company and use such
analytical techniques that the Board determines are appropriate to
identify, measure, and monitor risks of the covered company that may
affect the financial stability of the United States.
* * * * *
[[Page 75426]]
0
10. Section 252.45 is amended by revising paragraph (b)(2) to read as
follows:
Sec. 252.45 Data and information required to be submitted in support
of the Board's analyses.
* * * * *
(b) * * *
(2) Project a company's pre-provision net revenue, losses,
provision for loan and lease losses, and net income; and pro forma
capital levels, regulatory capital ratios, and any other capital ratio
specified by the Board under the scenarios described in Sec.
252.44(b).
* * * * *
0
11. Section 252.52 is amended by:
0
a. Revising paragraph (n); and
0
b. removing paragraph (t).
The revision reads as follows:
Sec. 252.52 Definitions.
* * * * *
(n) Regulatory capital ratio means a capital ratio for which the
Board established minimum requirements for the company by regulation or
order, including the company's tier 1 and supplementary leverage ratios
as calculated under 12 CFR part 217, including the deductions required
under 12 CFR 248.12, as applicable, and the company's common equity
tier 1, tier 1, and total risk-based capital ratios as calculated under
12 CFR part 217, including the deductions required under 12 CFR 248.12
and the transition provisions at 12 CFR 217.1(f)(4) and 217.300; except
that the company shall not use the advanced approaches to calculate its
regulatory capital ratios.
* * * * *
0
12. Section 252.53 is amended by revising paragraph (b)(3) to read as
follows:
Sec. 252.53 Applicability.
* * * * *
(b) * * *
(3) Transition periods for covered companies subject to the
supplementary leverage ratio. Notwithstanding Sec. 252.52(n), only for
purposes of the stress test cycle beginning on January 1, 2016, a bank
holding company shall not include an estimate of its supplementary
leverage ratio.
0
13. Section 252.56 is amended by revising paragraphs (a)(2), (b)(2)(i),
and (b)(2)(iv) to read as follows:
Sec. 252.56 Methodologies and practices.
(a) * * *
(2) The potential impact on pro forma regulatory capital levels and
pro forma capital ratios (including regulatory capital ratios and any
other capital ratios specified by the Board), incorporating the effects
of any capital actions over the planning horizon and maintenance of an
allowance for loan losses appropriate for credit exposures throughout
the planning horizon.
(b) * * *
(2) * * *
(i) Common stock dividends equal to the quarterly average dollar
amount of common stock dividends that the company paid in the previous
year (that is, the first quarter of the planning horizon and the
preceding three calendar quarters) plus common stock dividends
attributable to issuances related to expensed employee compensation or
in connection with a planned merger or acquisition to the extent that
the merger or acquisition is reflected in the covered company's pro
forma balance sheet estimates;
* * * * *
(iv) An assumption of no issuances of common stock or preferred
stock, except for issuances related to expensed employee compensation
or in connection with a planned merger or acquisition to the extent
that the merger or acquisition is reflected in the covered company's
pro forma balance sheet estimates.
* * * * *
0
14. Section 252.58 is amended by revising paragraphs (b)(3)(v), (b)(4),
and (c)(2) to read as follows:
Sec. 252.58 Disclosure of stress test results.
* * * * *
(b) * * *
(3) * * *
(v) Pro forma regulatory capital ratios and any other capital
ratios specified by the Board;
(4) An explanation of the most significant causes for the changes
in regulatory capital ratios; and
* * * * *
(c) * * *
(2) The disclosure of pro forma regulatory capital ratios and any
other capital ratios specified by the Board that is required under
paragraph (b) of this section must include the beginning value, ending
value, and minimum value of each ratio over the planning horizon.
By order of the Board of Governors of the Federal Reserve
System, November 25, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-30471 Filed 12-1-15; 8:45 am]
BILLING CODE P