[Federal Register Volume 82, Number 14 (Tuesday, January 24, 2017)]
[Rules and Regulations]
[Pages 8266-8315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00431]
[[Page 8265]]
Vol. 82
Tuesday,
No. 14
January 24, 2017
Part II
Federal Reserve System
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12 CFR Part 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; Final Rule
Federal Register / Vol. 82 , No. 14 / Tuesday, January 24, 2017 /
Rules and Regulations
[[Page 8266]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 252
[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
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 to require a U.S. top-tier
bank holding company identified under the Board's rules as a global
systemically important bank holding company (covered BHC) to maintain
outstanding a minimum amount of loss-absorbing instruments, including a
minimum amount of unsecured long-term debt. In addition, the final rule
prescribes certain additional buffers, the breach of which would result
in limitations on the capital distributions and discretionary bonus
payments of a covered BHC. The final rule applies similar requirements
to 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). The final rule also
imposes restrictions on other liabilities that a covered BHC or covered
IHC may have outstanding in order to improve their resolvability and
resiliency; these restrictions are referred to in the final rule as
``clean holding company requirements.''
DATES: The final rule is effective on March 27, 2017.
FOR FURTHER INFORMATION CONTACT: Sean Campbell, Associate Director, 202
452-3760, Thomas Boemio, Senior Project Manager, (202) 452-2982, or
Anna Harrington, Senior Supervisory Financial Analyst, (202) 452-6406,
Division of 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, Senior Counsel, (202) 452-3351, Greg Frischmann, Counsel, (202)
452-2803, or Mark Buresh, Senior Attorney, (202) 452-5270, 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. Background
B. Notice of Proposed Rulemaking and General Summary of Comments
C. Overview of the Final Rule
D. Consultation With the Federal Deposit Insurance Corporation,
the Financial Stability Oversight Council, and Foreign Authorities
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. TLAC and LTD Requirements for U.S. Intermediate Holding
Companies of Global Systemically Important Foreign Banking
Organizations
A. Eligible External and Internal Issuance of TLAC and LTD by
Covered IHCs
B. Scope of Application
C. Resolution and Non-Resolution IHCs
D. Calibration of the TLAC and LTD Requirements
E. Core Features of Eligible TLAC
F. TLAC Buffer for Covered IHCs
G. Core Features of Eligible Internal and External LTD for
Covered IHCs
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 Certain Liabilities
F. Disclosure Requirements
V. Regulatory Capital Deduction for Investments in the Unsecured
Debt of Covered BHCs
VI. Transition Periods
VII. Consideration of Domestic Internal TLAC Requirements and Public
Reporting Requirements for Eligible Internal TLAC and LTD
VIII. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Invitation for Comments on Use of Plain Language
I. Introduction
A. Background
In October 2015, the Board invited public comment on a notice of
proposed rulemaking (proposal) to require the largest domestic and
foreign banks operating in the United States to maintain a minimum
amount of total loss-absorbing capacity (TLAC), consisting of a minimum
amount of long-term debt (LTD) and tier 1 capital.\1\ In addition, the
proposed rule prescribed certain buffers, the breach of which would
result in limitations on the capital distributions and discretionary
bonus payments of the firm. The proposal also included a separate
requirement that these companies maintain a minimum amount of LTD. The
TLAC and LTD requirements in the proposal had two overall objectives:
Improving the resiliency of these companies and improving their
resolvability in the event of their failure or material financial
distress. Both objectives help to reduce risks to financial stability,
as provided in section 165 of the Dodd-Frank Act.\2\
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\1\ See 80 FR 74926 (November 30, 2015).
\2\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111- 203, 124 Stat. 1376. (2010); 12 U.S.C. 5365.
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Improving the resiliency of banking organizations, and in
particular large banking organizations, has long been a goal of the
Board. The Board has had a long-standing practice of requiring large
bank holding companies to maintain minimum amounts of regulatory
capital in order to absorb losses.\3\ Banking organizations subject to
the Board's regulatory capital rules (Regulation Q) must maintain a
minimum amount of regulatory capital and maintain a capital buffer
above the minimum capital requirements in order to avoid restrictions
on capital distributions and discretionary bonus payments.\4\ The
largest and most complex banking organizations are subject to
additional capital buffers because of their greater systemic risk.\5\
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\3\ See 12 CFR part 225, Appendix A (superseded as of January 1,
2015, by 12 CFR part 217).
\4\ 12 CFR 217.11(a). The capital conservation buffer is
composed entirely of common equity tier 1 capital.
\5\ These are the countercyclical capital buffer and the buffer
in the Board's risk-based capital surcharge for global systemically
important bank holding companies.
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The minimum capital requirements in Regulation Q take the form of
minimum ratios of different forms of regulatory capital to risk-based
and total-leverage-based measures of assets.\6\ The risk-based ratios
are the common equity tier 1 ratio (common equity tier 1 capital to
risk-weighted assets), the tier 1 risk-based capital ratio (tier 1
capital to risk-weighted assets), and the total risk-based capital
ratio (tier 1 capital plus tier 2 capital to risk-weighted assets).\7\
Regulation Q also includes a leverage ratio that relates a company's
tier 1 capital to its total assets.\8\
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\6\ See 12 CFR 217.10.
\7\ See 12 CFR 217.10(a)(1) through (3).
\8\ See 12 CFR 217.10(a)(4). In addition, certain
internationally active banking organizations are subject to a
supplementary leverage ratio, which incorporates certain off-balance
sheet exposures into the measure of total assets. 12 CFR
217.10(a)(5).
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[[Page 8267]]
The TLAC and LTD requirements in the final rule build on, and serve
as a complement to, the regulatory capital requirements in Regulation
Q. While regulatory capital requirements are intended to ensure that a
banking organization has sufficient capital to remain a going concern,
the objective of the TLAC and LTD requirements in the final rule is to
reduce the financial stability impact of a failure by requiring
companies to have sufficient loss-absorbing capacity on both a going
concern and a gone-concern basis.
A company's gone-concern loss-absorbing capacity is different from
the company's going-concern capacity in a few fundamental respects.
Although regulatory capital theoretically can absorb losses after a
firm has entered resolution, the firm's regulatory capital, and
especially its equity capital, is likely to be significantly or
completely depleted in the lead up to a bankruptcy or resolution. Thus,
if the ultimate goal is to have a failed firm re-emerge from resolution
with sufficient capital to successfully operate as a going concern,
there will need to be a new source of capital for the firm. In this
regard, debt instruments, which count in regulatory capital in limited
amounts and are subject to restrictions on their terms, are capable of
absorbing losses in resolution. This is because the debt holders' claim
on a company's assets may be reduced in a resolution or bankruptcy
proceeding. This would increase the size of a company's assets relative
to the size of its liabilities and thereby increase the company's
equity. Certain debt instruments are better able to absorb losses in a
resolution proceeding and only these eligible debt instruments count
toward the TLAC and LTD requirement in the final rule.
As in the proposal, the TLAC and LTD requirements in the final rule
focus on the largest and most systemic U.S. banking organizations and
the U.S. operations of the largest and most systemic foreign banking
organizations, because, as shown in the recent financial crisis, the
failure or material financial distress of these companies has the
greatest potential to disrupt U.S. financial stability.
The TLAC requirements in the final rule are based on many of the
same measures as those that are in Regulation Q. For example, the TLAC
requirements include both risk-based and leverage-based measures and
include buffer requirements on top of the minimum TLAC requirements
that function in a manner similar to the capital conversation buffer in
Regulation Q. The risk-based measures of TLAC help to ensure that the
amount of TLAC held by a company would be commensurate with its overall
risks, while the leverage-based measures of TLAC act as a backstop to
the risk-based measures. Companies that do not meet a TLAC buffer face
limitations on capital distributions and discretionary bonus payments
(in a manner similar to the restrictions in Regulation Q).
Improving resolvability was also an important goal of the proposal,
and remains an important goal of the final rule. Efforts to ensure the
orderly resolution of firms subject to the rule enhances financial
stability. To further this objective, the largest domestic and foreign
banks operating in the United States will be required to maintain a
minimum amount of outstanding LTD instruments. This LTD also will count
toward the TLAC requirements in the final rule. In the event that a
company had significant losses such that it was experiencing
significant financial distress or had depleted its equity capital, the
LTD that the company had outstanding could be used to replenish the
company's equity. This could occur in a resolution proceeding, or, in
the case of the U.S. operations of certain foreign banks, by order of
the Board.\9\ Like the minimum TLAC requirements and for the same
reasons as noted above, the minimum LTD requirements include both risk-
based and leverage-based measures.
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\9\ See, e.g., 80 FR 74928-30 (November 30, 2015).
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If a company subject to the final rule experiences losses, the
losses would be passed on first to shareholders of the parent company
and, if the losses exceed the parent company's equity, to the holders
of the parent company's debt. In this way, the TLAC and LTD
requirements would increase market discipline for banking organizations
subject to the requirements by making them bear the costs of issuing a
minimum amount of LTD instruments that are capable of absorbing losses
in a manner that would enhance the resiliency and resolvability of the
organization.
Foreign jurisdictions have been pursuing similar approaches to the
approach adopted by the Board in the final rule since the 2007-2009
financial crisis.\10\ In November 2015, the Financial Stability Board
(FSB) finalized an internationally negotiated minimum standard for the
total loss-absorbing capacity of global systemically important banks
(GSIBs) (the FSB standard).\11\
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\10\ These efforts have been coordinated through the Basel
Committee on Banking Supervision (BCBS) and the Financial Stability
Board (FSB), at the direction of the Heads of State of the Group of
Twenty (G20 Leaders). Representatives of the United States have
taken an active role in these efforts.
\11\ Principles on Loss-absorbing and Recapitalisation Capacity
of G-SIBs in Resolution, Total Loss-absorbing Capacity (TLAC) Term
Sheet, November 9, 2015 (hereinafter ``FSB Standard''), available at
http://www.fsb.org/wp-content/uploads/TLAC-Principles-and-Term-Sheet-for-publication-final.pdf.
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The final rule also is generally consistent with the FSB standard,
although the final rule adopts a minimum LTD requirement, unlike the
FSB standard.\12\ Several commenters noted that the proposed rule
deviated from the FSB standard in various respects. These comments are
addressed in greater detail below in the description of the
requirements of the final rule, including those aspects of the final
rule that were modified in response to issues raised by commenters. As
described further below, the final rule requires full compliance by
January 1, 2019.
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\12\ Under the FSB standard, GSIBs would be subject to a minimum
TLAC requirement equal to 16 percent of the banking organization's
risk weighted assets (risk-weighted assets) as of January 1, 2019
and 18 percent as of January 1, 2022 plus any applicable regulatory
capital (Basel III) buffers, which must be met in addition to the
TLAC risk-weighted assets minimum. Minimum TLAC must also be at
least 6 percent of the Basel III leverage ratio denominator as of
January 1, 2019, and at least 6.75 percent as of January 1, 2022.
The FSB standard also contains an expectation that a GSIB would meet
at least one-third of its TLAC requirement with eligible LTD rather
than equity.
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The Board is issuing the final rule under section 165 of the Dodd-
Frank Act. Section 165 authorizes 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.'' \13\ These enhanced
prudential standards must increase in stringency based on the systemic
footprint and risk characteristics of individual covered firms.\14\ In
addition, 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.\15\
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\13\ 12 U.S.C. 5365(a)(1).
\14\ 12 U.S.C. 5365(a)(1)(B), (b)(3).
\15\ 12 U.S.C. 5365(b)(1)(B)(iv).
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In implementing other portions of the Dodd-Frank Act, the Board has
taken important steps to protect U.S. financial stability by making
major financial companies more resolvable--that is, to take measures so
that a failed firm could be dealt with in an orderly manner, without
the destructive effects on other
[[Page 8268]]
important financial firms that were caused by the failures and near-
failures of major financial firms in 2008. These steps include
heightened regulatory capital and capital planning requirements for
large, systemically important banks holding companies and resolution
planning requirements.\16\ In addition, Title II of the Dodd-Frank Act
established a new statutory resolution framework for major financial
companies as an alternative to bankruptcy.\17\ The enhanced prudential
standards in the final rule 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
covered BHC or covered IHC. In particular, the final rule would improve
the resolvability of a covered BHC under either the U.S. Bankruptcy
Code or Title II of the Dodd-Frank Act and improve their resiliency.
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\16\ See, e.g., 12 CFR part 217, subpart H; 12 CFR 225.8; and 12
CFR part 243.
\17\ See 12 U.S.C. 5381-5394.
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Similarly, the final rule would improve the resiliency of covered
IHCs and their subsidiaries, and thereby increase the likelihood that a
failed foreign bank with significant U.S. operations could be
successfully resolved without the failure of the U.S. subsidiaries or,
failing that, that the 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 authorizes the Board to establish ``enhanced public
disclosures'' and ``short-term debt limits.'' \18\ The final rule
includes disclosure requirements and limits on the ability of covered
BHCs and covered IHCs to issue short-term debt.
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\18\ 12 U.S.C. 5365(b)(1)(B)(ii) and (iii).
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Finally, as noted, the Board has tailored the final rule to apply
to companies that, if resolved in a disorderly manner, would likely
pose the greatest risk to the financial stability of the United
States.\19\
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\19\ 12 U.S.C. 5365(a)(1)(B).
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B. Notice of Proposed Rulemaking and General Summary of Comments
As noted, the proposal contained requirements regarding LTD and
TLAC for large, interconnected U.S. bank holding companies and the U.S.
operations of large, interconnected foreign banking organizations.\20\
The proposal included four interrelated requirements for these
organizations.
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\20\ 80 FR 74926 (November 30, 2015).
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First, the top-tier parent holding companies of U.S. GSIBs (covered
BHCs) would be required to maintain outstanding minimum levels of total
loss-absorbing capacity (external TLAC) and long-term unsecured debt
(external LTD). In addition, the proposal included a related buffer on
top of the risk-weighted asset component of external TLAC, the breach
of which would result in limitations on a covered BHC's capital
distributions and discretionary bonus payments. The proposal defined
external LTD as unsecured debt that is issued directly by a covered
BHC, is ``plain vanilla'' (that is, the debt instrument has no features
that would interfere with a smooth resolution proceeding),\21\ and is
governed by U.S. law. External TLAC, under the proposal, was defined as
the sum of the tier 1 regulatory capital issued directly by the covered
BHC (excluding minority interests) and the external LTD of the covered
BHC.
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\21\ ``Plain vanilla'' is described in detail in section II.E.3
and generally excludes exotic features that could impact the loss
absorbing capacity of the LTD and thereby diminish the prospects for
an orderly resolution of a covered BHC, such as structured notes and
most instruments that contain derivative-linked features.
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Second, under the proposal, the top-tier U.S. intermediate holding
companies of foreign GSIBs (covered IHCs) would have been required to
maintain outstanding minimum levels of total loss-absorbing capacity
(internal TLAC) and long-term unsecured debt instruments (internal LTD)
issued to their foreign parent company. In addition, the proposal
included a related buffer on top of the risk-weighted asset component
of internal TLAC, the breach of which would result in limitations on a
covered IHC's capital distributions and discretionary bonus payments.
The proposal defined internal TLAC and LTD for covered IHCs similarly
to external TLAC and LTD for covered BHCs, with a few key differences
for internal LTD. These included the requirements that internal LTD had
to be issued to a parent foreign entity that controls the covered IHC,
be contractually subordinated to all third-party liabilities of the
covered IHC, and contain a contractual conversion trigger pursuant to
which the Board could require the covered IHC to cancel the eligible
internal LTD or convert or exchange it into common equity tier 1
capital under certain circumstances. In addition, the minimum amount of
internal TLAC required under the proposal varied based on whether the
covered IHC was expected to adopt either an SPOE or MPOE resolution
strategy, though both types of firms were required to issue the same
amounts of internal LTD.
Third, the operations of the covered BHCs and covered IHCs would
have been subject to ``clean holding company'' limitations to further
improve their resolvability and the resiliency of their operating
subsidiaries. In particular, the proposal would have prohibited covered
BHCs 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
guarantee provided that the covered BHC's insolvency or entry into
resolution was an event of default on the part of the subsidiary. The
proposal applied a similar prohibition to covered IHCs. Additionally,
the proposal capped the value of a covered BHC's liabilities (other
than those related to external TLAC and external LTD) that can be pari
passu with or junior to its external LTD at 5 percent of the value of
its external TLAC. This cap on liabilities was not relevant to covered
IHCs under the proposal because the proposal required that a covered
IHC's eligible internal LTD be contractually subordinated to all of the
covered IHC's third-party liabilities.
Fourth and finally, banking organizations subject to the Board's
capital requirements would have been required to make certain
deductions from capital for holding of unsecured debt issued by covered
BHCs to limit the potential for financial sector contagion in the event
of the failure of a covered BHC.
The Board received approximately 50 comments on the proposed rule
from banking organizations, trade associations, public interest
advocacy groups, members of Congress, and private individuals. Board
staff also met with some commenters at their request to discuss their
comments on the proposal and summaries of these meetings may be found
on the Board's public Web site.
Commenters generally supported the proposal, including the proposed
minimum TLAC and LTD requirements. Certain commenters, however, argued
that the calibration of the proposed TLAC and LTD requirements under
the proposal was too high for both covered BHCs and covered IHCs. A
number of these commenters encouraged the Board to reduce or eliminate
certain proposed requirements. In particular, a number of commenters
urged the Board to eliminate the separate LTD requirement
[[Page 8269]]
and allow covered BHCs and covered IHCs the option to meet the proposed
TLAC requirements with equity or debt.
Commenters also expressed concerns about the eligibility
requirements for LTD. These commenters urged the Board to permit a
broader set of instruments to qualify as eligible long-term debt,
including debt with various types of acceleration clauses, debt issued
under foreign law, principal-protected structured notes, and trust
preferred securities (``TruPS''). In the alternative, to mitigate the
impact of the requirements, commenters urged the Board to grandfather
as eligible LTD existing outstanding long-term debt, which often
contains features that would cause disqualification as eligible LTD
under the proposal. The Board also received comment requesting that the
leverage component of external TLAC be reduced and include a buffer
similar to that placed on the risk-weighted asset component.
Foreign bank commenters raised a number of concerns related to the
proposed internal TLAC and LTD requirements. These commenters expressed
general concerns about national treatment and competitive equality.\22\
In particular, some commenters argued that, given their relative size,
covered IHCs should not be subject to TLAC and LTD requirements under
the proposed rule considering that similarly-sized U.S. institutions
would not be subject to these requirements. Commenters also urged the
Board to permit covered IHCs to issue debt externally on the same terms
as covered BHCs. Commenters expressed particular concerns about
additional costs resulting from certain features of internal LTD that
the proposal would not require for external LTD. According to the
commenters, these features would make internal LTD relatively more
costly than external LTD. In particular, foreign bank commenters
requested the removal of the acceleration clause prohibition, the
contractual subordination requirement, and the contractual conversion
trigger requirement. Commenters argued that these requirements for
internal LTD could cause eligible LTD to be characterized as equity,
rather than debt, for U.S. income tax purposes.
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\22\ The Board is required to give due regard to the principle
of national treatment and equality of competitive opportunity in
developing enhanced prudential standards under the Dodd-Frank Act.
12 U.S.C. 5365(b)(2).
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While commenters generally supported the proposed clean holding
company requirements, certain commenters urged the Board to modify the
proposal to allow certain types of guarantees that are subject to
cross-default rights. Commenters also requested that the Board include
a market-making exception from the proposed capital deduction and
provide additional time for companies to come into compliance with the
requirements of the final rule. Comments on the proposal and the
changes in the final rule are described in more detail throughout the
remainder of this SUPPLEMENTARY INFORMATION.
C. Overview of the Final Rule
The Board is adopting this final rule to improve the resiliency and
resolvability of GSIBs and thereby reduce threats to financial
stability. The Board has made a number of changes to the proposal in
response to concerns raised by commenters, as further described below.
The final rule is intended to improve the resolvability of the most
systemically important banking firms--global systemically important
banking organizations (GSIBs) without extraordinary government support
or taxpayer assistance by establishing ``total loss-absorbing
capacity'' standards for the GSIBs and requiring them to issue a
minimum amount of LTD.\23\ The final rule requires the top-tier holding
companies of U.S. GSIBs to maintain outstanding minimum levels of TLAC
and eligible LTD. In addition, the final rule establishes a buffer on
top of both the risk-weighted asset and leverage components of the
external TLAC requirements, the breach of which would result in
limitations on a covered BHC's capital distributions and discretionary
bonus payments.
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\23\ Separately, the Board is continuing to work with the OCC
and FDIC to mitigate the resolvability risks related to potential
disorderly unwinds of financial contracts.
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The final rule requires 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. In
addition, the final rule establishes a buffer on top of the risk-
weighted asset component of the internal TLAC requirements, the breach
of which would result in limitations on a covered IHC's capital
distributions and discretionary bonus payments.
The final rule applies ``clean holding company'' limitations to the
operations of the top-tier holding companies of U.S. GSIBs and the top-
tier U.S. intermediate holding companies of foreign GSIBs to further
improve their resolvability and the resiliency of their operating
subsidiaries. The Board has decided to defer adoption of capital
deduction requirements for Board-regulation institutions that hold
unsecured LTD. The Board will work with the other federal banking
agencies to adopt the deduction requirements on a coordinated basis as
further described below.
After analyzing the expected impact of the final rule with the
modifications adopted to address concerns of commenters, the Board has
determined to establish an effective date of January 1, 2019, for the
rule. While this provides a shorter transition period than originally
proposed, the changes adopted by the Board, including grandfathering
outstanding LTD and other changes discussed below, mitigate the actions
firms must take to comply with the final rule.
1. External Total Loss-Absorbing Capacity and Long-Term Debt
Requirements for Covered U.S. Bank Holding Companies
Under the final rule, a ``covered BHC'' is defined to mean a U.S.
GSIB identified under the Board's rule establishing risk-based capital
surcharges for global systemically important bank holding companies
(GSIB surcharge rule).\24\ A covered BHC will be required to maintain
outstanding minimum levels of eligible TLAC and eligible external LTD
beginning on January 1, 2019. Consistent with the proposal, a covered
BHC's eligible external TLAC is defined to be the sum of the tier 1
regulatory capital issued directly by the covered BHC and the amount of
the covered BHC's eligible external LTD that is due to be paid after
one year or more.\25\
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\24\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015).
\25\ The proposal was based on the ``remaining maturity'' of the
debt, while the final rule is based on the unpaid principal amount
``due to be paid'' for reasons discussed below.
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Also consistent with the proposal, eligible external LTD is defined
under the final rule as debt that is issued directly by the covered
BHC, is unsecured, is ``plain vanilla,'' and is governed by U.S. law.
Only 50 percent of the amount of eligible external LTD that is due to
be paid between one and two years can be used for purposes of the
external LTD requirement (though such debt would count in full for
purposes of the external TLAC requirement). The amount of eligible
external LTD due to be paid in less than one year will not count toward
the external TLAC requirement or the external LTD requirement.
In response to comments and to mitigate the impact of the
requirements, the final rule differs from the proposal
[[Page 8270]]
by providing a grandfather for certain outstanding LTD of covered BHCs
issued prior to December 31, 2016, to count towards the external LTD
and external TLAC requirements in the final rule. The final rule also
includes a provision that would allow the Board, after notice and an
opportunity to respond, to order a global systemically important BHC to
exclude from its outstanding eligible long-term debt amount any debt
securities with features that would significantly impair the ability of
such debt securities to take losses.
Under the external TLAC requirement of the final rule, a covered
BHC is 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 7.5 percent of the covered BHC's total leverage
exposure.\26\ In addition, external TLAC buffers that are similar to
the capital buffers in the Board's Regulation Q \27\ will apply in
addition to the risk-weighted asset component and leverage component of
the external TLAC requirement. These requirements generally are the
same as under the proposal, except the leverage component of the
external TLAC requirement has been reduced from 9.5 percent under the
proposal to 7.5 percent in the final rule, and the Board has adopted a
2 percent buffer on top of the leverage component of the external TLAC
requirement to better align with the risk-weighted asset component and
the Board's regulatory capital rules.
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\26\ Total leverage exposure is defined in 12 CFR
217.10(c)(4)(ii).
\27\ 12 CFR part 217.
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Under the external LTD requirement of the final rule, a covered BHC
is 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. These requirements
are the same as under the proposal. The external LTD requirement is
calibrated by reference to a ``capital refill'' framework that helps to
ensure that the covered BHC could be effectively recapitalized to the
individual capital levels expected of each covered BHC to be
sufficiently capitalized in the event that all or most of its capital
were depleted. Because the capital requirements that apply to covered
BHCs depend, in part, on idiosyncratic measures of a covered BHC's
risks and, in part, on standardized measures of risk that are common
across all bank holding companies, the LTD requirements that apply to a
particular covered BHC will vary. To the extent that these capital
requirements are updated over time, the Board would also expect to
consider updating the associated external LTD requirement in an effort
to preserve the general alignment between the Board's capital rules and
the external LTD requirements.
2. Total Loss-Absorbing Capacity and Long-Term Debt Requirements for
Covered U.S. Intermediate Holding Companies
The term ``covered IHC'' is defined in the final rule to include
any U.S. IHC that (a) is required to be formed under the Board's
enhanced prudential standards rule, and (b) is controlled by a foreign
banking organization that has been designated as a GSIB or would be
designated as a GSIB under the Board's capital rules.\28\ Under the
final rule, a ``covered IHC'' is required to maintain outstanding
minimum levels of eligible total loss-absorbing capacity and eligible
long-term debt beginning on January 1, 2019. A covered IHC's eligible
TLAC generally is 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 LTD, as
defined below.
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\28\ 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 final rule, the amount of eligible total loss-absorbing
capacity (``eligible TLAC'') and long-term debt that a covered IHC is
required to maintain outstanding, as well as whether the eligible long-
term debt component may be issued externally, depends on whether the
covered IHC (or any of its subsidiaries) is expected to enter
resolution (resolution covered IHC) in a multiple-point-of-entry (MPOE)
resolution strategy, or to continue to operate outside of resolution
proceedings (non-resolution covered IHC) while a foreign parent entity
is resolved under a single-point-of-entry (SPOE) resolution
strategy.\29\ A key modification to the proposal is that, under the
final rule, a resolution covered IHC that adopts an MPOE resolution
strategy would have the option to issue capital and LTD externally to
third parties in a fashion similar to covered BHCs (and consistent with
their resolution strategy) as described below. Non-resolution covered
IHCs continue to be required under the final rule to issue LTD
internally.
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\29\ In developing the TLAC and LTD requirements in the proposal
and final rule, the Board considered the two scenarios under which
large financial firms are likely to be resolved following failure.
In one scenario, an SPOE resolution, only the top-tier holding
company would enter a resolution proceeding. An SPOE resolution thus
would avoid the need for separate proceedings for separate legal
entities run by separate authorities across multiple jurisdictions
and the associated destabilizing complexity. The losses that caused
the banking organization to fail would be passed up from the
subsidiaries that incurred the losses using one of several potential
mechanisms 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 fire sales) 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.
Most of the U.S. GSIBs, as well as most foreign GSIBs, are
developing plans that facilitate an SPOE approach, including in
their most recent resolution plans.
The other likely resolution scenario is an MPOE resolution. An
MPOE resolution involves separate resolutions of different legal
entities within a financial firm and could potentially be executed
by multiple resolution authorities across multiple jurisdictions.
The final rule would improve the prospects for a successful MPOE
resolution of a GSIB by requiring U.S. GSIBs and the intermediate
holding company of a foreign GSIBs to maintain substantially more
loss-absorbing capacity. The final rule also includes certain
features that would facilitate the resolution of a foreign GSIB
under an MPOE resolution. Moreover, an MPOE resolution strategy
involving the resolution of a covered IHC may often effectively be
an SPOE resolution strategy of their U.S. operations.
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In particular, under the final rule, the capital and long-term debt
of a non-resolution covered IHC will be required to be issued either to
a foreign company that controls the covered IHC (a ``foreign parent'')
or to a directly or indirectly wholly-owned foreign subsidiary of the
top-tier foreign parent (internal TLAC and LTD) consistent with the
SPOE resolution strategy. The proposal, by contrast, required a foreign
parent to hold internal TLAC and LTD issued by covered IHCs. In
response to comments, the final rule was changed from the proposal to
allow any directly or indirectly wholly owned subsidiary of the top-
tier foreign parent to hold eligible internal TLAC and LTD issued by
covered IHCs. This change is consistent with the overall objectives of
the proposal that a non-resolution
[[Page 8271]]
covered IHC upstream any losses outside of the United States to a
parent foreign banking organization. By contrast, under the final rule,
a resolution covered IHC will have the option to issue its LTD
internally to its foreign affiliates or externally to third-party
investors consistent with an MPOE resolution strategy.
Under the final rule, beginning on January 1, 2019, non-resolution
covered IHCs are 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; (b) 6 percent of the covered IHC's
total leverage exposure (for covered IHCs that are subject to the
supplementary leverage ratio); \30\ 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.\31\ For all covered IHCs, a buffer that
is similar to the capital conservation buffer in the Board's Regulation
Q will apply in addition to the risk-weighted assets component of the
TLAC requirement. These requirements for non-resolution covered IHCs
are the same as under the proposal. In addition, under the final rule
and as explained above, a non-resolution covered IHC is required to
issue internal LTD to a foreign parent that controls the IHC as under
the proposal, or to a directly or indirectly wholly owned foreign
subsidiary of the top-tier foreign parent.
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\30\ 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).
\31\ 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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Under the final rule, beginning on January 1, 2019, resolution
covered IHCs are required to maintain outstanding eligible TLAC in an
amount not less than the greater of (a) 18 percent of the covered IHC's
total risk-weighted assets; (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. As noted above, for all covered IHCs, a
TLAC buffer that is similar to the capital conservation buffer in the
Board's Regulation Q applies in addition to the risk-weighted assets
component of the TLAC requirement. These requirements are generally the
same as under the proposal.
In response to comments, the minimum eligible LTD requirements have
been adjusted downward to reflect the same balance-sheet depletion
assumption afforded to the calibration of the eligible external LTD
requirements of U.S. bank holding companies. Accordingly, all covered
IHCs (whether or not a resolution entity) will be required under the
final rule to maintain outstanding eligible LTD in an amount not less
than the greater of (a) 6 percent of total risk-weighted assets; (b)
2.5 percent of the total leverage exposure (if applicable); and (c) 3.5
percent of average total consolidated assets, as computed for purposes
of the U.S. tier 1 leverage ratio. As discussed in more detail below,
the final rule also includes a provision that would allow the Board,
after notice and an opportunity to respond, to order a covered IHC to
exclude from its outstanding long-term debt amount any debt securities
with features that would significantly impair the ability of such debt
securities to take losses.
A covered IHC's eligible LTD generally is subject to the same
requirements as the requirements that apply to eligible external LTD
for U.S. GSIBs: The eligible LTD must be issued directly from the
covered IHC, be unsecured, have only ``plain vanilla'' features, and be
governed by U.S. law. The amount of eligible LTD that is due to be paid
between one and two years is subject to a 50 percent haircut for
purposes of the LTD requirement, and eligible LTD amounts due to be
paid in less than one year will not count toward the LTD requirement.
In addition, the final rule has been modified to allow eligible LTD
issued by covered IHCs, whether external or internal LTD, to have the
same acceleration clauses that are permitted for eligible external LTD
issued by covered BHCs. Moreover, under the final rule, covered IHCs
will have the option to adopt contractual subordination or structural
subordination for their eligible long-term debt; under the proposal
covered IHCs were required to contractually subordinate their long-term
debt. These modifications will allow covered IHCs to issue eligible
long-term debt, whether internal or external, on similar terms as
covered BHCs under the final rule and therefore reduce burden on
covered IHCs and help ensure national treatment and competitive
equality. In response to comments and to mitigate the impact of the
requirements, the final rule differs from the proposal by providing a
grandfather for certain outstanding eligible external LTD of resolution
covered IHCs issued prior to December 31, 2016.
However, one key feature will continue to distinguish eligible
internal LTD from eligible external LTD for covered IHC's (both for
non-resolution covered IHCs and for resolution covered IHCs that
exercise their option to issue their LTD internally). Eligible internal
LTD must include a contractual trigger pursuant to which the Board
could require the covered IHC to convert or exchange the LTD into
common equity tier 1 capital without the covered IHC's entry into a
resolution proceeding in certain circumstances. These circumstances are
(a) the Board determines that the covered IHC is ``in default or in
danger of default''; and (b) any of the following situations 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 conversion, or does not
object to the conversion following 24 hours' notice, or (iii) the Board
makes a written recommendation to the Secretary of the Treasury that
the Federal Deposit Insurance Corporation (FDIC) should be appointed as
receiver of the covered IHC.
In response to comments, the final rule includes certain changes to
the requirement that the Board must be able to cause a covered IHC to
convert its LTD to equity. Under the proposed rule, the contractual
conversion trigger would have allowed the Board to cancel or convert
the covered IHC's LTD. The final rule includes only the requirement
that LTD be convertible into equity and does not include the
requirement that LTD be subject to cancellation. Thus, under the final
rule, a covered IHC must include a contractual conversion provision in
its LTD that would allow the Board to order the conversion of the long-
term debt into equity. In addition, the final rule has been modified to
allow the Board to convert all or part of a covered IHC's LTD into
equity. The intended purpose of these changes, along with allowing
certain acceleration clauses and structural subordination, is to
provide flexibility consistent with the purposes of the rule and to
respond to concerns raised by commenters regarding the contractual
conversion trigger as further discussed below. The Board believes that
these changes respond to comments on the proposed rule and serve to
mitigate the costs of the conversion feature on covered IHCs.
[[Page 8272]]
3. Clean Holding Company Requirements
The final rule prohibits or limits covered BHCs and covered IHCs
from directly entering into certain financial arrangements that could
impede an entity's orderly resolution. These prohibitions and
limitations will enhance resiliency by reducing complexity and reliance
on short-term funding and are intended to support the orderly
resolution of a covered BHC and covered IHC.
Under the final rule, a covered BHC and covered IHC are 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 guaranteed by the covered
BHC's subsidiaries or subject to contractual offset rights for its
subsidiaries' creditors; or issuing certain guarantees of its
subsidiaries' liabilities if the liability provides default rights
based on the resolution of the covered BHC or covered IHC. This last
prohibition has been revised from the proposal to exempt guarantees of
liabilities that are subject to any future rule of the Board or another
Federal banking agency restricting default rights.
Additionally, the final rule caps the amount of a covered BHC's
third-party 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. The final rule includes a similar cap for covered IHCs
that choose structural subordination of their long-term debt though
with certain differences for non-resolution covered IHCs and resolution
covered IHCs described further below. In each case, under the final
rule, both covered BHCs and covered IHCs have the option under the
final rule to contractually subordinate their eligible long-term debt
to other third-party liabilities without the need for the 5 percent
cap. Finally, the final rule requires covered BHCs and covered IHCs
that issue long-term debt externally to make certain public
disclosures.
4. Capital Deduction
The final rule does not adopt the requirement in the proposal that
state member banks, bank holding companies, and savings and loan
holding companies and IHCs formed to comply with the Board's enhanced
prudential standards for foreign banking organizations deduct
investments in the unsecured debt of covered BHCs that exceed certain
thresholds from regulatory capital. The Board intends to address these
elements of the proposal jointly with the Office of the Comptroller of
the Currency (OCC) and FDIC at a later time, in order to apply these
requirements consistently to all entities subject to the regulatory
capital requirements of the federal banking agencies.
E. Consultation With the FDIC, the Council, and Foreign Authorities
In developing this final rule, the Board consulted with the FDIC,
the Financial Stability Oversight Council (Council), and other U.S.
financial regulatory agencies. The final rule reflects input that the
Board received during this consultation process. Furthermore, the Board
has consulted with foreign financial regulatory authorities regarding
this final rule and the establishment of other standards that would
maximize the prospects for the cooperative and orderly cross-border
resolution of failed GSIBs.
II. External TLAC and LTD Requirements for U.S. GSIBs
A. Scope of Application (Section 252.60 of the Final Rule)
The final rule, like the proposal, applies to all ``covered BHCs.''
The term ``covered BHC'' is defined in the final rule in the same
manner as the proposal to include any U.S. top-tier bank holding
company identified as a global systemically important BHC under the
Board's GSIB surcharge rule.\32\ 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 global systemically important BHC by
applying a multifactor methodology established under the Board's
regulatory capital rules.\33\ 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. Accordingly, the
methodology provides a tool for identifying as global systemically
important BHCs those banking organizations that pose elevated risks.
The final rule's focus on global systemically important BHCs 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.\34\
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\32\ 12 CFR 217.402; 80 FR 49106 (August 14, 2015).
\33\ 12 CFR part 217, subpart H.
\34\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------
Under the methodology in the GSIB surcharge rule, eight U.S. bank
holding companies are currently identified as GSIBs. Those eight top-
tier bank holding companies will therefore be covered BHCs subject to
this final rule.\35\ In addition, because the GSIB surcharge
methodology is dynamic, other banking organizations could become
subject to the final rule in the future. As under the proposal, a
covered BHC will become subject to the requirements of the final rule
on the later of January 1, 2019, or three years after the date on which
the firm becomes a covered BHC.
---------------------------------------------------------------------------
\35\ 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.
---------------------------------------------------------------------------
The Board did not receive any comments on the proposed methodology
for identifying those U.S. BHCs subject to the rule. Accordingly, the
Board is adopting this methodology in the final rule without
modification.
B. Calibration of the External TLAC and LTD Requirements (Sections
252.62 and 252.63 of the Final Rule)
Under the proposal, a covered BHC would have been required to
maintain outstanding eligible external TLAC in an amount not less than
the greater of 18 percent of its total risk-weighted assets and 9.5
percent of its total leverage exposure under the supplementary leverage
ratio rule.\36\ Under the final rule's external TLAC requirement, a
covered BHC is 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 \37\ and
[[Page 8273]]
7.5 percent of the covered BHC's total leverage exposure.
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\36\ See 12 CFR 217.10(c)(4)(ii). Under the proposal, the risk-
weighted assets component of the external TLAC requirement would
have been 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.
\37\ 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.
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As described below, the reduction of the leverage component of the
external TLAC requirement is intended to account for revisions to the
proposal. As revised, the final rule includes a buffer over the minimum
external TLAC leverage exposure requirement that is being added in the
final rule for parallelism with the buffer over the risk-weighted asset
measure of external TLAC and with the Board's Regulation Q. As a
result, two separate external TLAC buffers apply in addition to both
the risk-weighted assets component and leverage component of the
external TLAC requirement under the final rule.
Under the final rule's external LTD requirement, as under the
proposal, a covered BHC is 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 surcharge rule (expressed as a
percentage) of total risk-weighted assets and 4.5 percent of total
leverage exposure. Covered BHCs are 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. A summary table of the final rule's
calibrations for eligible external TLAC and LTD appears below.
Table 1--Eligible External TLAC and LTD Calibrations Under the Final Rule for Covered BHCs
----------------------------------------------------------------------------------------------------------------
Risk-weighted assets Leverage
----------------------------------------------------------------------------------------------------------------
Covered BHCs:
External TLAC...................... 18 percent plus buffer.... 7.5 percent plus buffer.
External LTD....................... 6 percent plus GSIB 4.5 percent.
surcharge.
----------------------------------------------------------------------------------------------------------------
In developing the final rule, the Board considered comments on the
calibration of the proposed external TLAC and LTD requirements. A
number of commenters supported the external TLAC and LTD requirements
in the proposed rule, and some commenters suggested that the
requirements were appropriately calibrated to support U.S. financial
stability. A few commenters, however, suggested that higher minimum
TLAC requirements would provide additional financial stability
benefits. Certain commenters argued that the external TLAC requirement
should be calibrated using a more severe set of loss assumptions than
the historical loss experience of major financial institutions during
past financial crises, or set at a significantly higher percentage of a
covered BHC's risk-weighted assets. For example, one commenter argued
that the requirements should be well above a requirement informed by
the most recent financial crisis and recommended a minimum TLAC
requirement of 30 percent of risk-weighted assets.
A few commenters argued that the calibration of the external TLAC
and external LTD requirements in the proposed rule was higher than
necessary to support a successful resolution, did not take into account
other regulatory efforts to address financial stability, and would
impede economic growth and access to capital. These commenters
generally supported adjusting the calibration of the external TLAC and
LTD requirements by lowering the minimum external TLAC and LTD
percentages levels. For example, certain commenters suggested reducing
the risk-weighted asset component of the TLAC requirement from 18
percent to 14 percent and reducing the supplementary leverage ratio
component of the TLAC requirement from 9.5 percent to 6.75, 7.5 or 8
percent. Similarly, one commenter suggested reducing the leverage
component of LTD from 4.5 percent to 2.5 percent.
In addition, some commenters urged the Board to eliminate or
significantly reduce the component of the external TLAC and external
LTD requirement calculated as a percentage of the covered BHC's total
leverage exposure in light of the lack of risk sensitivity of this
measure. The commenters that objected to the calibrations as too high
argued that superequivalent external TLAC and LTD requirements of the
proposal relative to the FSB standard would put U.S. firms at a
competitive disadvantage. Other commenters, however, expressed the view
that superequivalence relative to the FSB requirements would enhance
the competitive position of U.S. institutions and U.S. financial
stability.
Certain commenters urged that the separate long-term debt
requirement in the proposed rule be eliminated and that covered BHCs
should be permitted to meet TLAC requirements with either equity or
debt. These commenters argued that equity capital is the best way to
ensure that firms are well capitalized and can absorb losses and that
equity can act as a going-concern or gone-concern form of capital.
These commenters further argued that if a separate LTD requirement were
retained in the final rule, the final rule should include a one-year
cure period for any breaches of the LTD requirement. Other commenters,
however, including a member of Congress, expressed support for a
separate long-term debt requirement to strengthen the resilience of
covered firms and support recapitalization in a resolution, which would
likely only occur after equity capital is depleted.
With regard to the calibration in the final rule, the Board
balanced the need to help ensure the orderly resolution of a GSIB
without imposing unduly high costs on the economy, against the need to
ensure that firms can manage their overall liability structure in a
cost effective manner that fits with their overall mix of business
lines and funding needs. The final rule retains the overall calibration
of the external TLAC and external LTD requirements set forth in the
proposal but with certain modifications, discussed below, including a
buffer for the leverage component of the external TLAC requirement.
As suggested by some commenters, the Board considered whether to
structure the final rule solely around a minimum TLAC requirement--that
is, as a single minimum requirement that could be satisfied by any
mixture of capital and eligible LTD--without a specific minimum LTD
requirement. In the absence of an LTD requirement, a TLAC requirement
would permit each covered firm to reduce its expected systemic impact
by striking its own balance between reducing its probability of default
(by issuing additional going-concern equity capital above regulatory
capital minimum requirements) or by reducing the harm it would cause if
it were to fail (by issuing additional gone-concern LTD above
regulatory capital minimum requirements).\38\
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\38\ See ``Calibrating the GSIB Surcharge'' at 3 (July 20,
2015), available at www.federalreserve.gov/aboutthefed/boardmeetings/gsib-methodology-paper-20150720.pdf.
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[[Page 8274]]
The Board has determined that it is appropriate for the final rule
to include both a minimum LTD requirement and a minimum TLAC
requirement. Unlike existing equity, LTD can be ``bailed-in'' to create
additional equity capital subsequent to a firm's failure. Imposing an
LTD requirement would help to ensure that a covered firm would have a
known and observable quantity of loss-absorbing capacity in excess of
its going-concern equity capital. Unlike common equity, that loss-
absorbing capacity would not be at substantial risk of volatility or
depletion before the covered BHC fails or enters a resolution
proceeding. Thus, the LTD requirements of the final rule would enhance
the prospects for the successful resolution of a failed GSIB and
thereby better address the too-big-to-fail problem, as compared with an
approach that relied solely on a minimum TLAC requirement.
The availability of long-term debt that can serve as a fresh source
of capital is vital to ensure a successful recapitalization of a
failing firm experiencing stress without relying on government or
taxpayer support to provide additional equity capital. The calibration
of the TLAC and LTD requirements in the final rule takes into account
the various statutory and regulatory requirements applicable to covered
BHCs and other financial institutions, including those designed to
enhance the stability of the United States financial system and support
a successful resolution. In addition, the empirical analysis underlying
the final rule's calibration described below suggests it would be
sufficient to support the viability of a covered BHC during a period of
severe economic stress.
The final rule also retains the proposed leverage-related TLAC and
LTD requirements. Capital requirements based on simple measures of
equity to total assets and capital requirements based on risk are
complementary tools. Risk-based capital requirements reflect the
different risk characteristics of different assets, while leverage
capital requirements act as a backstop and act as a counterweight to
potential arbitrage of risk-based capital requirements. For these
reasons, the required TLAC and LTD requirements in the final rule
include both risk-weighted and leverage-related components to ensure a
robust set of requirements that are not overly dependent on a single
risk measurement framework.
The calibration of the external TLAC requirement in the final rule
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).\39\ This analysis
combined the losses actually sustained by those firms during the 2007-
2008 period with their 2009 SCAP loss projections \40\ and the
government recapitalization support that they received. This provided
an estimate of the level of losses that would 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 measure for the approximate level of
TLAC necessary to achieve this purpose.
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\39\ 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.
\40\ See ``The Supervisory Capital Assessment Program: Overview
of Results'' (May 7, 2009), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf.
One commenter indicated that it conducted a similar internal
analysis and determined that the calibration for external TLAC under
the proposed rule is well-sized and would be more than sufficient to
restore firms to solvency based on last financial crisis.
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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 external TLAC requirement is consistent with
this high-water mark from the global financial crisis. This historical
analysis confirms the appropriateness of the calibration under the
final rule.
Additionally, a separate 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 needs 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
calibration of the external TLAC requirement in the final rule is
consistent with the findings of this historical survey. The risk-
weighted assets component of the final rule exceeds a substantial
majority of the loss-and-recapitalization experiences surveyed, while
the total leverage exposure 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, and further supports the
calibration of the final rule.\41\
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\41\ See 12 U.S.C. 5365.
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The calibration of the external LTD requirement in the final rule
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 further into
the loss tail of the income distribution.
Like the proposal, the final rule's 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. The amount of eligible external LTD required by
the final rule is the amount estimated to be necessary for a covered
BHC that has depleted all of its equity capital to return to a
sufficient level of going concern capital level without any government
assistance or outside investment. Thus, even if a covered BHC were
unable to identify outside sources of funding, the company would be
capitalized at a level sufficient
[[Page 8275]]
to support all of the operations that had been in place before
resolution proceedings were initiated. This enhanced level of
resiliency is appropriate because of the size, interconnectedness, and
complexity of covered BHCs. Fulfilling this objective is vital to the
use of eligible external LTD to facilitate the orderly resolution of a
covered BHC, because an orderly SPOE resolution requires that a firm
exiting from resolution have sufficient going-concern capital to
maintain market confidence in its solvency so that other market
participants will do business with it.
The external LTD requirement was calibrated in accordance with this
framework. Under the Board's regulatory capital requirements, a covered
BHC must maintain a minimum ratio of common equity tier 1 capital to
risk-weighted assets of 4.5 percent. In addition, a covered BHC is
subject to a capital conservation buffer of 2.5 percent of risk-
weighted assets plus a firm-specific surcharge determined under the
GSIB surcharge rule (expressed as a percentage) of risk-weighted
assets.\42\ Thus, a covered BHC with a GSIB surcharge of 2 percent
would be subject to a combined common equity tier 1 capital minimum
plus buffers of 9 percent.
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\42\ See 12 CFR 217.10(a)(1); 217.11. 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 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.
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Since the calibration of the external LTD requirement is based on
the capital refill framework, and the capital refill framework depends
on the precise structure and calibration of bank capital requirements,
the Board expects to consider updating the external LTD requirement in
the event that the Board updates bank capital requirements in a way
that materially changes their precise structure or calibration.
Under the final rule, a covered BHC is 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 the full amount of its minimum
common equity tier 1 capital ratio plus buffer. 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 in light of the firm-specific GSIB surcharges
applicable to the covered BHCs, the Board is applying 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
component of the external LTD requirement is analogous. The
supplementary leverage ratio requires that bank holding companies
maintain a ratio of tier 1 capital to total leverage exposure of at
least 3 percent.\43\ The enhanced supplementary leverage standards
applicable to global systemically important BHCs add to a covered BHC's
supplementary leverage ratio minimum a buffer of 2 percent of its total
leverage exposure for a total tier 1 capital to total leverage exposure
requirement plus buffer of 5 percent.\44\ Under the final rule, a
covered BHC is 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 percent, is
appropriate to ensure that a covered BHC that has depleted its tier 1
capital and failed would be able to refill its capital to meet the
minimum leverage ratio requirement and buffer through the exchange or
conversion of its eligible external LTD into equity.
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\43\ 12 CFR 217.10(a)(5).
\44\ The supplementary leverage ratio requirement and buffer
become effective January 1, 2018. See 12 CFR 217.1(f)(1)(iii)(B).
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The proposed rule would have prohibited a covered BHC from
redeeming or repurchasing any outstanding eligible external LTD without
the prior approval of the Board, if after the redemption the covered
BHC would not meet its external LTD requirement or its external TLAC
requirement. One commenter generally supported the proposed prior
approval requirement, and, in particular, its limited application to
cases where a BHC would fail to meet its external LTD requirement or
its external TLAC requirement following redemption or repurchase.
The final rule adopts as proposed the prior approval requirement
for redemptions and repurchases of a covered BHC's outstanding eligible
external LTD. Allowing a covered BHC to redeem or repurchase its
eligible external LTD without prior Board approval, where such
redemption or repurchase would not result in the covered BHC failing to
comply with the external TLAC and LTD requirements of the final rule,
gives the covered BHC flexibility to manage its outstanding debt levels
without interfering with the underlying purpose of the rule. In
addition and as discussed below, the final rule includes a provision
that would allow the Board, after notice and an opportunity to respond,
to order a global systemically important BHC to exclude from its
outstanding eligible long-term debt amount any debt securities with
features that would significantly impair the ability of such debt
securities to take losses.\45\
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\45\ Section 263.83 of the Board's rules of procedures describes
the notice and response procedures that apply if the Board
determines that a company's capital levels are not adequate. See 12
CFR 263.83. The Board would follow the same procedures under the
final rule to determine that a covered BHC must exclude from its
eligible LTD amount securities with features that would
significantly impair the ability of such debt securities to take
losses. For example, the Board would provide notice to a company of
its intention to require the company to exclude certain securities
from its eligible LTD amount and up to 14 days to respond before the
Board would issue a final notice requiring that company exclude the
securities from its eligible LTD amount, unless the Board determines
that a shorter period is necessary.
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In addition, the final rule does not include a grace period during
which a covered BHC that breaches its external LTD requirement could
take voluntary actions to come into compliance with such requirement
without being subject to any other regulatory consequences, such as an
enforcement action, as suggested by certain commenters. The Board
expects covered BHCs subject to the final rule to comply with
applicable minimum external LTD requirements at all times. The key
purpose of the eligible external LTD requirement is to have debt
available to absorb losses; a one-year cure period would defeat this
purpose by providing a period of time during which covered BHCs would
not be required to meet the minimum requirements of the final rule.
[[Page 8276]]
C. Core Features of Eligible External TLAC (Section 252.63(b) of the
Final Rule)
The core features of eligible external TLAC under the final rule
are the same as under the proposal. Under the final rule, 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) issued directly by the covered BHC (excluding any tier
1 minority interests), and (b) the covered BHC's eligible external LTD,
as defined below.\46\ Tier 2 capital that meets the definition of
eligible external LTD would continue to count toward the external LTD
and TLAC requirements.
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\46\ Although eligible external LTD due to be paid 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 in the same manner as under the proposal. As discussed
below, eligible external LTD due to be paid in less than one year
would not count toward either the external TLAC requirement or the
external LTD requirement.
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Certain commenters urged the Board to harmonize the proposed TLAC
requirement with the Basel III Capital framework by not disqualifying
minority interests in consolidated subsidiaries from counting as TLAC.
These commenters argued that the qualifying criteria imposed on
minority interests in consolidated subsidiaries in the U.S. capital
rules and Basel capital framework significantly haircut the amount of
minority interest in a consolidated subsidiary that may be included in
a parent organization's regulatory capital, thus mitigating any concern
that the subsidiary's loss absorbing capacity would be unavailable to
absorb losses anywhere in an banking organization.
Like the proposal, the final rule does not permit minority
interests in consolidated subsidiaries to count as TLAC. 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).
D. External TLAC Buffers (Section 252.63(c) of the Final Rule)
The proposal would have imposed a buffer over the external TLAC
requirement measured as a percentage of risk-weighted assets, but did
not include a buffer over the external TLAC requirement measured as a
percentage of total leverage exposure. The final rule retains the
proposed buffer for the risk-weighted assets component of the external
TLAC requirement and adds a buffer for the leverage component of the
external TLAC requirement to address concerns raised by commenters
regarding burden of the proposal's total leverage exposure requirement
and for better parallelism with the regulatory capital framework in
Regulation Q.
The Board received several comments on the proposed external TLAC
buffer. The Board received comment arguing that the buffer should be
broadened to apply to the leverage component of the external TLAC
requirement, as well as the external LTD requirement, so that similar
limitations on capital distributions and discretionary bonus payments
would apply to each of the minimum requirements under the rule. A
commenter also urged the Board to align the leverage component of the
external TLAC requirement with the enhanced supplementary leverage
ratio standard in Regulation Q by reducing the leverage component of
the external TLAC requirement by 2 percent and adding a 2 percent
buffer over this component. Commenters noted that, where the leverage
component of the external TLAC requirement was binding, a buffer over
this component of the external TLAC requirement would impose
progressively more stringent limits on a firm's ability to make capital
distribution and discretionary bonus payments as its capital was
depleted, in parallel with the proposed buffer over the risk-weighted
assets component of the external TLAC requirement. Another commenter
suggested that breaches of the TLAC buffer should bar any capital
distributions and discretionary bonus payments until the firm has
refilled its TLAC buffer, rather than only resulting in the incremental
limits to the firm's ability to make such payments. A commenter further
urged the Board to study how the proposed TLAC buffer would interact
with any incentive-based compensation rules issued by the Board and
whether the rules were duplicative.
In response to comments received on the proposal, the final rule
reduces the minimum amount of the leverage component of the external
TLAC requirement and adds, in an equal amount, a TLAC buffer to the
leverage component of the external TLAC requirement. Specifically,
under the final rule, the leverage component of the external TLAC
requirement has been reduced to 7.5 percent from 9.5 percent and a 2
percent buffer has been added over the leverage component of the
external TLAC requirement. These changes should address the major
concern raised by commenters to create a buffer for the leverage
component of external TLAC to better parallel the buffer for the risk-
weighted asset component of external TLAC and the Board's regulatory
capital rules.
The purpose of the external TLAC buffers is to reduce the risk of
insolvency by limiting the ability of a covered bank holding company to
make capital distributions and discretionary bonus payments as its
capital levels decline in the same manner as capital buffers in the
Board's regulatory capital framework limits capital distributions and
discretionary bonus payments. The buffer over the leverage component of
the external TLAC requirement is designed to operate in a similar
manner to the buffer in the enhanced supplementary leverage ratio
standards, which functions similarly to the capital conservation buffer
by limiting the ability of a company to make capital distributions and
discretionary bonus payments as its capital levels decline.
Since the TLAC buffers are intended to be analogous to the capital
buffers in Regulation Q, the final rule does not prohibit all
discretionary bonus payments and dividends for breach of the applicable
buffer, as suggested by one commenter, or include separate buffers on
top of the long-term debt requirements. The Board notes that a covered
BHC subject to this final rule may also be subject to future rules
related to incentive compensation and that covered BHCs must comply
with all applicable regulatory requirements.\47\
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\47\ See 12 U.S.C. 956; 81 FR 37670 (June 10, 2016).
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A covered BHC's external TLAC buffer for the risk-weighted asset
component (TLAC risk-weighted assets buffer) is 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 \48\ plus any applicable
countercyclical capital buffer. The external TLAC risk-weighted assets
buffer must be filled solely with common equity tier 1 capital, and a
covered BHC's breach of its external TLAC risk-weighted assets buffer
would subject it to limits on capital distributions and discretionary
bonus payments in accordance with Table 1 to section 252.63 of the
final rule. Thus, the external TLAC risk-weighted asset buffer is
analogous to the capital conservation buffer applicable under the
Board's Regulation Q, except that it applies in addition to the
external TLAC requirement rather than in addition to
[[Page 8277]]
minimum risk-based capital requirements under Regulation Q and
incorporates only the applicable GSIB surcharge amount required under
method 1 of the GSIB surcharge rule (rather than the greater of the
applicable GSIB surcharge under method 1 and method 2).\49\
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\48\ 80 FR 49082 (Aug. 14, 2015); 12 CFR part 217, subpart H.
\49\ See 12 CFR 217, subpart H.
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A covered BHC's external TLAC buffer for the total leverage
exposure component of the external TLAC requirement (TLAC leverage
buffer) is equal to 2 percent of total leverage exposure, the same as
the buffer set by the enhanced supplementary leverage ratio standards.
The TLAC leverage buffer must be filled solely with tier 1 capital, and
a covered BHC's breach of its TLAC leverage buffer also subjects it to
similar limits on capital distributions and discretionary bonus
payments, as described in Table 2 to section 252.63 of the final rule.
Accordingly, the TLAC leverage buffer is analogous to the buffer
established under the enhanced supplementary leverage ratio standards
except that it would apply in addition to the external TLAC
requirement.\50\
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\50\ See 79 FR 24528 (May 1, 2014); 80 FR 49082 (August 14,
2015).
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Finally, since under the final rule a covered BHC is subject to
both the TLAC risk-weighted assets and TLAC leverage buffers, any
limitations on distributions and discretionary bonus payments would be
based on the more restrictive of the buffers. As an example, if a
covered BHC had an amount of TLAC in excess of the TLAC risk-weighted
asset requirement and in excess of the TLAC risk-weighted assets buffer
but had an amount of TLAC in excess of the TLAC leverage requirement
but less than the TLAC leverage buffer, the covered BHC's distributions
and discretionary bonus payments would be limited by the level of its
TLAC leverage buffer.
Table 2--Calculation of Maximum External TLAC Risk-Weighted Asset Payout
Amount
------------------------------------------------------------------------
Maximum external TLAC risk-
weighted payout ratio (as
External TLAC risk-weighted buffer level a percentage of eligible
retained income)
------------------------------------------------------------------------
Greater than the external TLAC risk- No payout ratio limitation
weighted buffer. applies.
Less than or equal to the external TLAC 60 percent.
risk-weighted buffer, and greater than 75
percent of the external TLAC risk-weighted
buffer.
Less than or equal to 75 percent of the 40 percent.
external TLAC risk-weighted buffer, and
greater than 50 percent of the external
TLAC risk-weighted buffer.
Less than or equal to 50 percent of the 20 percent.
external TLAC risk-weighted buffer, and
greater than 25 percent of the external
TLAC risk-weighted buffer.
Less than or equal to 25 percent of the 0 percent.
external TLAC risk-weighted buffer.
------------------------------------------------------------------------
Table 3--Calculation of Maximum External TLAC Leverage Payout Amount
------------------------------------------------------------------------
Maximum external TLAC
leverage payout ratio (as
External TLAC leverage buffer level a percentage of eligible
retained income)
------------------------------------------------------------------------
Greater than 2.0 percent................... No payout ratio limitation
applies.
Less than or equal to 2.0 percent, and 60 percent.
greater than 1.5 percent.
Less than or equal to 1.5 percent, and 40 percent.
greater than 1.0 percent.
Less than or equal to 1.0 percent, and 20 percent.
greater than 0.5 percent.
Less than or equal to 0.5 percent.......... 0 percent.
------------------------------------------------------------------------
A covered BHC's external TLAC risk-weighted asset buffer level will
be equal to 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 could be used to meet the risk-weighted assets
component of the external TLAC requirement. To calculate its external
TLAC risk-weighted assets buffer level, a covered BHC will 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 (excluding tier 1 minority interest) to its
risk-weighted assets and minus the ratio of its outstanding eligible
external LTD to its risk-weighted assets.
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, an outstanding eligible external LTD amount
equal to 8 percent of its risk-weighted assets, and no tier 1 minority
interest. Suppose further that BHC A is subject to an external risk-
weighted asset TLAC requirement of 18 percent and an external risk-
weighted assets TLAC buffer of 5 percent of risk-weighted assets. BHC A
would meet its external risk-weighted asset 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 LTD to risk-
weighted assets would be equal to 20, which is greater than 18.
Moreover, BHC A would have an external TLAC risk-weighted assets buffer
level equal to 10 - (18 - 2 - 8) = 2 percent. Because 2 percent 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
risk-weighted payout ratio of 20 percent of eligible retained income.
The covered BHC's external TLAC leverage buffer level would be
equal to its supplementary leverage ratio minus that portion (if any)
of its supplementary leverage ratio (expressed as a percentage) that is
used to meet the leverage component of the external TLAC requirement.
To calculate its external TLAC leverage buffer level, a
[[Page 8278]]
covered BHC would subtract from its supplementary leverage ratio the
greater of 0 percent and the following figure: 7.5 percent (the
leverage component of the covered BHC's external TLAC requirement)
minus the ratio of its outstanding eligible external LTD amount to its
total leverage exposure.
For example, suppose that a covered BHC called ``BHC B'' has a
ratio of common equity tier 1 capital to total leverage exposure of 5
percent, a ratio of additional tier 1 capital to total leverage
exposure of 1 percent, a ratio of outstanding eligible external LTD
amount to total leverage exposure of 3 percent, and no tier 1 minority
interest. BHC B will be subject to an external TLAC leverage
requirement of 7.5 percent and a TLAC leverage buffer of 2 percent. BHC
B would meet its external TLAC leverage requirement because the ratio
of its common equity tier 1 capital and additional tier 1 capital plus
outstanding eligible external LTD amount to total leverage exposure
would be equal to 9 percent. Moreover, BHC B would have a TLAC leverage
buffer level equal to 5 - (7.5 - 1 - 3) = 1.5 percent. Because 1.5
percent is less than or equal to 1.5 percent and greater than 1.0
percent, BHC B would be subject to a 40 percent maximum external TLAC
leverage payout ratio for making distributions or discretionary bonus
payments.
Finally, it is important to note that if the two examples provided
above described a single BHC's TLAC risk-weighted assets buffer level
and TLAC leverage buffer level then the BHC would be bound by the TLAC
risk-weighted assets buffer because it would be more restrictive.
In order to comply with the external TLAC requirement and satisfy
the TLAC risk-weighted assets buffer and TLAC leverage buffer, a
covered BHC would need to have an outstanding TLAC amount sufficient to
satisfy both the risk-weighted assets component and the total leverage
exposure component of the TLAC requirement, as well as additional
capital sufficient to satisfy both buffers. A covered BHC generally may
use the same regulatory capital to satisfy its external TLAC
requirement and the minimum ratios under Regulation Q. Therefore, a
covered BHC that satisfies the minimum requirements and buffers under
Regulation Q, and complies with the external LTD requirement, generally
will satisfy the external TLAC requirement and the TLAC risk-weighted
assets buffer and TLAC leverage buffer.
The rationale for the external TLAC buffers 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 buffers are 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 buffers 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.
E. Core Features of Eligible External LTD (section 252.61 of the final
rule)
Under the final rule, a covered BHC's eligible external LTD is
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, has ``plain vanilla'' features, and is governed by
U.S. law. While the core features of eligible external LTD are
generally the same under the final rule as under the proposal, eligible
external LTD under the final rule also includes certain debt
instruments issued prior to December 31, 2016 that do not meet all the
same requirements of eligible external LTD as described further below.
Principal due to be paid on eligible external LTD in one year or more
and less than two years is subject to a 50 percent haircut for purposes
of the external LTD requirement, and principal due to be paid on
eligible external LTD in less than one year would not count toward the
external LTD requirement.
Commenters expressed general concerns about the criteria that long-
term debt would be required to meet in order to count towards a firm's
external long-term debt requirement. Some commenters suggested that the
definition of eligible external LTD should be expanded to include a
broader set of debt securities that may be available to absorb losses
and recapitalize the covered BHC in a Title II resolution or
bankruptcy. Several commenters suggested that the definition of
eligible external LTD should include all capital structure liabilities,
which would include all debt instruments available to absorb losses
that have a reasonably determinable claim in bankruptcy, including
instruments with standard acceleration clauses, instruments issued
under foreign law, and principal-protected structured notes. Certain
commenters, for example, urged the Board to permit all instruments that
satisfy the Board's tier 2 regulatory capital requirements to qualify
as eligible LTD, including preferred stock.\51\ Commenters also noted
that the criteria proposed for eligible external LTD would disqualify a
significant amount of the existing, outstanding long-term debt issued
by covered BHCs.
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\51\ Commenters requested that preferred stock be allowed as
eligible external LTD and eligible internal LTD. The Board is
declining to allow preferred stock for either form of LTD for the
same reasons as described below.
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Several commenters suggested that the existing, outstanding long-
term debt issued by covered BHCs should qualify as eligible external
LTD, even if such debt does not meet all of the requirements for
eligible external LTD. Some of these commenters noted that other
actions covered BHCs would need to take to conform outstanding debt to
the requirements for eligible external LTD in lieu of grandfathering--
such as tendering and replacing outstanding debt, exchanging
outstanding debt, or acquiring bondholder consent to amend the terms of
outstanding debt--would impose significant costs on covered BHCs, costs
that would be significantly reduced if the Board permitted such debt to
qualify as eligible external LTD for even a short transitional period
after the effective date of the final rule. Many of these commenters
proposed that all external debt issued by covered BHCs before the
effective date of the final rule should be permanently grandfathered to
qualify as eligible external LTD. Other commenters proposed permitting
outstanding long-term debt to qualify as eligible external LTD if such
debt would be ineligible only due to one of the following features: The
inclusion of otherwise impermissible acceleration clauses, such debt
being subject to foreign law, or debt that was ineligible due to
inclusion of a market-based redemption feature (e.g., a security with a
survivor put provision). Certain commenters noted that nearly all
outstanding long-term debt issued by covered BHCs includes standard
market acceleration clauses that would be impermissible under the
proposal absent an explicit grandfathering provision in the final rule
and that a significant fraction of currently outstanding long-term debt
issued by covered IHCs has been issued under foreign law.
As discussed below, the general purpose of the proposed limitations
on eligible long-term debt was to ensure the adequacy of the
instruments to absorb losses in a resolution of the covered
[[Page 8279]]
BHC. As a consequence, the final rule largely retains the eligibility
criteria for eligible external LTD set forth in the proposal, with
important modifications to address concerns raised by commenters. The
modifications provided in the final rule to the eligibility criteria
for eligible external LTD should mitigate the impact on covered BHCs
and preserve the marketability of such debt, without adversely
impacting its loss-absorbing capacity in resolution.
In response to concerns raised by comments, and to mitigate the
impact of the requirements, the final rule includes as eligible
external LTD those long-term debt instruments that are issued by a
covered BHC prior to December 31, 2016 even if these instruments
contain otherwise impermissible acceleration clauses or are subject to
foreign law as described below. This grandfathering provision would
largely eliminate the costs of modifying the terms of existing,
outstanding debt or issuing new debt to meet the minimum requirements
as cited by commenters. Over time, debt that is grandfathered will
mature and be replaced by long-term debt that meets the eligibility
criteria of the final rule. As noted above, the final rule also
contains a provision that would allow the Board, after notice and an
opportunity to respond, to exclude from a covered BHC's outstanding
long-term debt, the amount of any debt securities with features that
would impair the ability of the debt to absorb losses.
1. Issuance by the Covered BHC and Prohibition on Own Holdings
Consistent with the proposal, 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 would qualify as regulatory capital.
Two commenters requested that the final rule make explicit whether
TruPS would be classified as eligible external LTD in the final rule.
In a typical TruPS structure, a trust holds assets consisting solely of
junior subordinated notes issued by the bank holding company to the
trust, and the trust issues the TruPS to investors. Therefore, TruPS,
as typically structured, would not meet the requirement in the final
rule that the debt be issued externally by the covered BHC. In
addition, TruPS do not meet the criteria that such debt be ``plain
vanilla,'' given the somewhat complex structure used to issue TruPS to
the market, and the fact that TruPS are hybrid equity-debt instruments.
One commenter, who argued that TruPS should count as LTD, noted
that its existing TruPS had impermissible acceleration clauses, another
feature that would disqualify the securities from counting as eligible
external LTD. In addition, information provided by commenters and the
Board's review of available information regarding outstanding TruPS
issued by U.S. covered BHCs suggests that the effect of not counting
TruPS as eligible long-term debt would have a relatively minor impact
on covered BHCs.
The requirement that eligible external LTD be issued by the covered
BHC itself serves 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 requirement allows eligible
external LTD to 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 a 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. Therefore, permitting debt issued by a
subsidiary to qualify as eligible external LTD would be contrary to the
SPOE approach and potentially would create risks to the orderly
resolution of a covered BHC.
2. Unsecured
Eligible external LTD is 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). As no commenters raised issues regarding the requirement
that eligible LTD must be unsecured, the final rule retains this
requirement with no changes from the proposal.
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 fire sales that can occur
when a financial institution fails and its secured creditors seize and
liquidate collateral. Asset fire sales can drive down the value of the
assets being sold, which can undermine financial stability by
transmitting financial stress 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.
3. ``Plain Vanilla''
As under the proposal, eligible external LTD instruments are
required to be ``plain-vanilla'' instruments under the final rule.
Exotic features could create complexity and thereby diminish the
prospects for an orderly resolution of a covered BHC. These limitations
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
severing business relationships and
[[Page 8280]]
refusing to provide additional funding to such subsidiaries.
Under the final rule, eligible external LTD instruments are
prohibited from (1) being structured notes; (2) having a credit-
sensitive feature; (3) including a contractual provision for conversion
into or exchange for equity in the covered BHC; or (4) 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 that continues for
30 days or more.\52\
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\52\ As under the proposal, 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 provisions discussed below regarding when the debt is due to be
paid.
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In response to comments requesting that the Board permit all tier 2
capital to count as eligible LTD, the Board has determined not to
include as eligible LTD any instrument that qualifies as tier 2
capital. Certain of these instruments (e.g., certain forms of preferred
stock and convertible debt) would not meet the requirement to be
``plain vanilla'' or other aspects of the requirements of eligible LTD
(e.g., the prohibition on convertibility features described below). An
instrument that qualifies as tier 2 capital will only qualify as
eligible LTD under the final rule if it meets the applicable
qualification requirements.
a. Structured Notes
The final rule retains the prohibition on counting structured
notes, including principal-protected structured notes, as eligible
external LTD. Structured notes contain features that could make their
valuation uncertain, volatile, or unduly complex. In addition, they are
often liabilities of retail customers (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.
For purposes of the final rule, a ``structured note'' is defined 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 have a minimum principal amount that
becomes due and payable upon acceleration or early termination; or (d)
is not classified as debt under U.S. generally accepted accounting
principles. The definition of a structured note does not include a non-
dollar-denominated instrument or an instrument whose interest payments
are based on an interest rate index (for example, a floating-rate note
linked to the federal funds rate or to LIBOR) that satisfies the
proposed requirements in all other respects.\54\
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\53\ Assets would include loans, debt securities, and other
financial instruments.
\54\ One commenter recommended that the final rule clarify that
instruments denominated in a currency other that U.S. dollars would
not constitute ``structured notes'' and therefore may qualify as
eligible external LTD. The same commenter noted that the final rule
should clarify that an instrument whose interest payments are linked
to an interest rate index would not be a structured note merely due
to inclusion of this feature. The preamble to the proposed rule
addressed these points and changes to provide further clarity are
reflected in the final rule.
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Several commenters proposed modifying the ``plain vanilla''
requirement for eligible external LTD to include a broader array of
long-term debt securities issued by covered BHCs. In particular,
certain commenters suggested that the final rule expand the definition
of eligible external LTD to include structured notes that are
principal-protected at par, as these notes by their terms require the
issuer to pay 100 percent of the stated principal amount of the
structured note upon early termination or acceleration and at maturity.
As a result, these commenters argued that principal-protected
structured notes do not present the same type of valuation issues as
other structured notes whose value may be more volatile or uncertain
since the minimum amount of any claim in a bankruptcy or Title II
proceeding for a principal-protected structured note will always be the
stated principal amount of the structured note.
Structured notes with principal protection often combine a zero-
coupon bond, which pays no interest until the bond matures, with an
option or other derivative product, whose payoff is linked to an
underlying asset, index, or benchmark.\55\ The derivative feature
violates the intent of the clean holding company requirements
(described below), which prohibits derivatives entered into by the
covered bank holding company with third parties. Moreover, investors in
structured notes tend to pay less attention to issuer credit risk than
investors in other long-term debt, because structured note investors
use structured notes to gain exposure unrelated to the covered BHC. As
a result, these investors are less likely to contribute to the market
discipline objective of the minimum LTD requirements.
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\55\ https://www.sec.gov/investor/alerts/structurednotes.htm.
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For these same reasons, the final rule does not grandfather
existing outstanding structured notes as eligible external TLAC. These
products may not serve in a loss absorbing capacity consistent with the
intended purposes of the final rule's long-term debt requirement.
Moreover, based on figures provided by commenters and the Board's
review of available information, the impact of not counting principal-
protected structured notes as eligible external LTD is likely to be
limited, especially in light of the grandfathering provided in the
final rule for other outstanding long-term debt instruments.
b. Contractual Provision for Conversion Into or Exchange for Equity
Consistent with the proposal, the final rule retains the
requirement that eligible external LTD be prohibited from including
contractual provisions for conversion into or exchange for equity. Some
commenters supported the requirement that the eligible external LTD not
exclude debt that is convertible or exchangeable into equity of the
covered BHC, arguing that such a conversion feature would reduce the
financial stability benefits of the debt and increase risks to
investors. By contrast, other commenters pointed out that tier 2
capital includes debt that may convert into tier 1 capital, but under
the proposed rule would not count towards a firm's LTD or TLAC
requirements even though such securities would be ``loss-absorbing''
either on an as-converted basis, or as outstanding debt. Consequently,
these commenters contended that such securities should count as
eligible external LTD (or, at a minimum, count towards a covered BHC's
TLAC requirement). These commenters also stated that, while covered
BHCs currently do not have long-term debt with such convertibility
features outstanding, covered BHCs may wish to issue debt securities
with such convertibility features in the future, particularly in times
of stress when issuing other forms of capital could be difficult.
[[Page 8281]]
The fundamental objective of the external LTD requirement is to
ensure that covered BHCs will have a 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. In addition, debt with features to allow conversion into
equity are often complex and thus may not be characterized as ``plain
vanilla.'' Convertible debt instruments may be viewed as debt
instruments with an embedded stock call option. The embedded stock call
option introduces a derivative-linked feature to the debt instrument
that is inconsistent with the purpose of the clean holding company
requirements (described below) and introduces uncertainty and
complexity into the value of such securities. For these reasons, under
the final rule, eligible external LTD may not include contractual
provisions allowing for the conversion into or exchange for equity
prior to the covered BHC's resolution. Moreover, in light of the fact
that commenters indicate that existing outstanding debt generally does
not contain such convertibility features, the impact of such a
prohibition is likely to be immaterial.
c. Credit-Sensitive Features and Acceleration Clauses
Under the proposal, eligible external LTD was 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.
Several commenters expressed concerns with the proposed limitations
on acceleration clauses. These commenters contended that the Board's
final rule should permit more classes of acceleration clauses. In
particular, these commenters argued that a covered BHC is unlikely to
breach any traditional covenants that result in acceleration unless it
were on the brink of insolvency. Traditional covenants range from
covenants that are impossible to breach inadvertently, such as those
not to enter a merger transaction or sell all or substantially all of
their assets unless the successor assumes the debt securities subject
to the covenant or to pledge the stock of material subsidiaries, to
those that are administrative in nature and easy to comply with or cure
breaches of, such as maintaining paying agents in certain locations.
Commenters also argued that some classes of acceleration clauses that
would be barred by the proposal would be unlikely to frustrate the
purposes of the rule, and should therefore be permitted, including, for
example, clauses permitting acceleration upon the event of non-payment
of principal or interest (subject to a period during which the covered
BHC could ``cure'' the failure to pay), restrictions on mergers or
asset transfers, limits on the sale of principal subsidiaries, and
other procedural covenants intended to facilitate payments on, and
registration and transfer of, the debt securities. Moreover, commenters
argued that these traditional covenants and related acceleration rights
are important to investors and have traditionally been demanded and
given in the markets for investment-grade senior long-term debt
securities issued by covered BHCs.
Commenters contended that nearly all currently outstanding long-
term debt of covered BHCs includes standard acceleration clauses, which
would not qualify as eligible external LTD under the proposed rule, and
that it would be impossible or very expensive to conform or redeem. For
these reasons, commenters argued that the impact of this requirement
was significant. The commenters asserted that, to the extent such debt
is not grandfathered, covered BHCs would have a projected shortfall, as
of January 1, 2019, of almost three times the estimated shortfall
projected in the proposal. A number of commenters suggested that
grandfathering outstanding debt would be helpful to mitigate the impact
of the requirements.
A few commenters expressed the view that the final rule should
prohibit all acceleration clauses in eligible external LTD, including
the insolvency or payment default acceleration clauses permitted under
the proposal. These commenters argued that because acceleration clauses
related to payment default or insolvency are highly unlikely to protect
creditors from losses upon insolvency of a covered BHC, their inclusion
could be deceptive for investors.
Under the final rule, eligible external LTD is prohibited from
having a credit-sensitive feature or an acceleration clause--a
contractual right to the acceleration of payment of principal or
interest at any time prior to the instrument's stated maturity, other
than upon the occurrence of either an insolvency event or a payment
default event that continues for 30 days or more--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 provisions discussed
below related to when the debt is due to be paid.\56\
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\56\ This final rule's 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. See 12
CFR 217.20(d)(1)(vi).
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The final rule does not broaden the list of acceleration clauses
that are permissible for long-term debt (and limits the permissibility
of payment default acceleration clauses to those that include a cure
period as described below). This restriction on acceleration clauses
serves the same purpose as several of the other 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, could undermine an orderly resolution by forcing a covered BHC
to make payment on the full value of the debt prior to the entry of the
covered IHC 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.
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 not permitted in 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 final rule permits eligible external LTD to be
subject to payment default event acceleration
[[Page 8282]]
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.
In addition, the final rule revises this aspect of the proposal to
provide that an acceleration clause relating to a failure to pay
principal or interest must include a ``cure period'' of at least 30
days. During this cure period, the covered BHC could make payment on
the eligible external LTD before such debt could be accelerated and if
the covered BHC satisfies its obligations on the eligible external LTD
within the cure period, the instrument could not be accelerated. The
purpose of this modification is to ensure that an accidental or
temporary failure to pay principal or interest does not trigger
immediate acceleration. Moreover, this cure period for interest
payments is found in many existing debt instruments and is consistent
with current market practice.
As discussed, the final rule's definition of ``eligible debt
security'' has been modified to allow debt instruments issued prior to
December 31, 2016 that contain otherwise impermissible acceleration
clauses to count as eligible long-term debt. This change significantly
mitigates the impact of the requirements, because, based on information
provided by commenters, nearly all existing outstanding long-term debt
issued by covered BHCs contains acceleration clauses that would
otherwise be prohibited under the final rule.
Certain commenters argued that the inclusion of acceleration causes
could be misleading to investors that hold long-term debt. The
disclosure requirements (described below) require a covered BHC to
publicly disclose a description of the financial consequences to
unsecured debtholders of the covered IHC entering into a resolution
proceeding. Accordingly, the disclosure requirements should address the
concerns raised by commenters regarding transparency.
Commenters also noted that the proposal does not impose limits on
the rights of holders of internal LTD to file suit in the event of non-
payment or that such holders would have to waive those rights. However,
because of the limitations on acceleration provisions, commenters
requested that the Board clarify that the rule does not also limit such
rights. The final rule does not require the holder of an eligible debt
security to waive the holder's rights to file suit to enforce their
ordinary creditor remedies. However, if a covenant involves a
redemption or repurchase by the covered BHC (e.g., upon sale of a
principal subsidiary), any such covenant would be subject to the
restrictions on repurchase described elsewhere in this SUPPLEMENTARY
INFORMATION, including 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.
4. Minimum Remaining Maturity and Amortization (Section 252.62(b) of
the Final Rule)
Under the proposal, 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.
Some commenters recommended that debt with a remaining maturity of
at least one year, but less than two years, should not be subject to a
haircut for purposes of the external LTD requirement. These commenters
argued that this haircut incorrectly assumes that a covered BHC could
be cut off from capital markets for a period of up to two years. One
commenter noted, for example, that this proposed haircut would depart
from the FSB standard, and would thus contribute to unequal treatment
of covered BHCs subject to the U.S. requirements and foreign GSIBs
subject to rules of foreign jurisdictions that adhere to the FSB
standard. Another commenter, however, expressed the view that the
proposed haircut is appropriately conservative, and would help to
ensure that loss-absorbing resources will likely always exceed a
covered BHC's total loss-absorbing capacity needs. One commenter urged
the Board to require that LTD have a maturity of considerably longer
than one year.
In addition, some commenters suggested that the Board should take
into consideration maturity date concentrations in the issuances of
covered BHCs. One commenter suggested that the Board should establish a
mandatory minimum maturity to which all eligible external LTD would
have to comply at issuance. Other commenters, however, urged the Board
not to mandate a particular issuance schedule for external LTD of
covered BHCs.
The final rule adopts the proposed amortization haircut
requirements applicable to eligible external LTD. However, the final
rule modifies the terminology from the remaining maturity of the unpaid
principal amount to the amount due to be paid. The purpose of this
intended change is to clarify that it is the amount of debt due to be
paid that counts as eligible LTD under the final rule.\57\ Under the
final rule, the amount of eligible external LTD that is due to be paid
between one and two years would be subject to a 50 percent haircut for
purposes of the external LTD requirement, and the amount of eligible
external LTD that is due to be paid in less than one year would not
count toward the external LTD requirement. The amount of eligible
external LTD that is due to be paid in more than two years would count
at 100 percent of the unpaid principal amount.
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\57\ The final rule makes clear that when principal payments are
due, rather than the remaining maturity, governs the amount of LTD
that counts toward the minimum requirements under the final rule. A
covered BHC may only count the unpaid principal amount that is due
to be paid as eligible external LTD. For amortizing debt, when the
covered BHC pays back principal, that amount would not count toward
the minimum LTD requirements in the final rule.
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The purpose of these restrictions 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 that is due to be paid in 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 it is likely that the creditors would be unwilling to
maintain their 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 a case where the covered BHC enters resolution with
materially less loss-absorbing capacity than would be required to
recapitalize its subsidiaries, potentially resulting in a disorderly
[[Page 8283]]
resolution. To protect against this outcome, eligible external LTD
would cease to count toward the external LTD requirement upon being due
to be paid in less than on year, 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.\58\
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\58\ 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 the same reasons, eligible external LTD that is due to be paid
in less than two years but greater than or equal to one year is subject
to a 50 percent haircut under the final rule for purposes of the
external LTD requirement, meaning that only 50 percent of the value of
its principal amount would count toward the external LTD
requirement.\59\ 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 due to be paid in 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
that is due to be paid 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 that is due to be paid in less than two years by
staggering its issuance, by issuing eligible external LTD that is due
to be paid after a longer period, or by redeeming and replacing
eligible external LTD once the amount due to be paid falls below two
years.
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\59\ As discussed above, the proposed amortization 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 final rule 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. As under the proposal,
such an instrument would be treated as if it were due to be paid 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.\60\
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\60\ The date on which principal is due to be paid would be
calculated from the date the put right would first be exercisable
regardless of whether the put right would only be exercisable on
that date if another event occurred (e.g., a credit rating
downgrade).
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One commenter also recommended that the Board permit or grandfather
long-term debt with a ``survivor put'' feature--that is, a provision
that says that, on the death of the holder, the named holder's
representative may require the issuer to repay the security within a
designated period after the primary holder's death--to count as
eligible external LTD. Under the final rule, the date on which debt is
due to be paid of an outstanding eligible debt security is the date
that the holder first has a 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, the date will be calculated as if
the event has occurred. Therefore, under the final rule, debt with a
survivor put right would be treated as having matured on the first day
it became subject to a put right, which would be the day of issuance.
Because eligible external LTD must have a maturity of greater than one
year, debt with a survivor put would therefore not qualify as eligible
external LTD. For similar reasons, the final rule does not grandfather
as eligible LTD outstanding long-term debt with such survivor put
features.
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, the proposal would have required eligible external LTD to be
governed by the laws of the United States or any State, which would
include the U.S. Bankruptcy Code and Title II.
Several commenters argued that long-term debt subject to foreign
law should not be excluded from the definition of eligible external
LTD. These commenters contended that a significant fraction (over 10
percent) of existing, outstanding long-term debt securities would be
ineligible due to the restriction on foreign governing law. These
commenters expressed the view that there is no material risk that any
actions taken in a U.S. bankruptcy or Title II proceeding to impose
losses on long-term debt securities governed by foreign law would be
subject to a successful legal challenge or not upheld by a court in
foreign jurisdictions. These commenters pointed out that the United
Kingdom, Japan and Australia, which commenters said account for 98
percent of the foreign-law governed LTD outstanding as of September 30,
2015, all have statutes that provide a judicial mechanism for
recognizing and giving effect to actions taken in a U.S. bankruptcy or
Title II proceeding. Certain commenters recommended that any material
risk of a successful legal challenge could be eliminated by including
clauses in eligible long-term debt securities that result in investors
consenting to any actions taken in U.S. bankruptcy or Title II
proceedings in the event of a covered BHC's failure as suggested by the
FSB standard which provides that eligible external TLAC may be made
subject to the laws of a foreign jurisdiction if the application of the
home country's resolution tools is made ``enforceable on the basis of
binding statutory provisions or legally enforceable contractual
provisions for recognition of resolution actions.'' \61\
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\61\ FSB Standard at 17.
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The final rule retains the requirement that long-term debt subject
to foreign law does not qualify as eligible external LTD. Long-term
debt that is subject to foreign law would potentially be subject to
legal challenge in a foreign jurisdiction, which could jeopardize the
orderly resolution of a covered BHC. Foreign courts might not defer to
actions of U.S. courts or U.S. resolution authorities requiring the
debt be converted into equity, for example, where the conversion
negatively impacts foreign bondholders or foreign shareholders. While
the presence of recognition regimes abroad does improve the likelihood
that these actions would be enforced, it does not guarantee it.
However, to mitigate the impact of this requirement, the final
rule's definition of ``eligible debt security'' has been modified to
allow debt instruments issued prior to December 31, 2016 that are
governed by foreign law to count as eligible long-term debt. Thus,
long-term debt that is governed by foreign law and issued before
December 31, 2016, may count toward the minimum LTD and TLAC
requirements in the final rule.
6. Contractual Subordination
The final rule, like the proposal, does not include a requirement
that eligible LTD instruments be contractually
[[Page 8284]]
subordinated. Covered BHCs would have the option of contractual
subordination or structural subordination.
A number of commenters expressed support for the approach taken in
the proposal to not require contractual subordination of eligible
external LTD. Some commenters expressed concern that if the final rule
required eligible external LTD to be either contractually or
structurally subordinated to other liabilities of a covered BHC, long-
term debt that failed to meet this criteria would not be available to
absorb losses in the event of a resolution of a covered BHC. These
commenters expressed the view that structural subordination would
sufficiently ensure that eligible external LTD would absorb losses
ahead of the liabilities of subsidiaries in an SPOE resolution. These
commenters further argued that giving covered BHC's flexibility to
comply with the external LTD requirement by either contractual or
structural subordination allows for efficient compliance and adaptation
to investor risk preferences, and limits the need to re-issue LTD that
would otherwise be outstanding and available to absorb losses. By
contrast, other comments expressed the view that the failure to include
a contractual subordination provision might improve marketability but
could be deceptive to investors. One commenter recommended that the
Board should prohibit such debt from being called ``senior debt,''
which commenter argued was a title that could further mislead
unsophisticated investors.
After reviewing the comments, the Board again 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
as suggested by certain commenters.
There continue to be several reasons to not require eligible LTD be
contractually subordinated to the claims of third-party creditor.
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.\62\
Second, the final rule includes clean holding company requirements that
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. In order to
provide additional flexibility, the final rule provides that a covered
BHC that chooses to issue all of its external LTD with a contractual
subordination provision would not be subject to such a cap as described
further below.
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\62\ 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.
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By limiting the criteria for eligible external LTD to those
necessary to achieve the objectives of the final rule, the final rule
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.
7. Explicit Bail-In Mechanisms
Several commenters recommended that the final rule include an
express mechanism by which a covered BHC's eligible external LTD would
be ``bailed in'' in the event of the covered BHC's bankruptcy or
resolution. These commenters argued that additional detail would
facilitate the orderly resolution of a covered BHC and reduce investor
uncertainty. For example, such commenters sought clarification that the
``bail in'' of eligible external LTD would wipe out existing equity
holders of a covered BHC in a resolution scenario. Other commenters
encouraged the Board to mandate that a covered BHC's eligible external
LTD could not be bailed in prior to the failure of the firm. One
commenter suggested that a covered BHC emerging from bankruptcy or
resolution should be required to be significantly simpler.
Under the final rule, eligible external LTD would be ``bailed in''
to absorb losses of the covered BHC only in bankruptcy or resolution
proceedings of the firm. In contrast to the debt conversion mechanism
that applies to the internal LTD of covered IHCs, as discussed below,
the final rule does not require that a covered BHC's eligible external
LTD include a specific conversion mechanism that could be triggered
outside of bankruptcy or resolution. The requirements in the final rule
are written under the assumptions that a covered BHC would recapitalize
its subsidiaries in the event of distress so that the subsidiaries
could remain operational outside of a bankruptcy or resolution
proceedings and that losses the covered BHC sustained by such
recapitalization could be imposed on holders of TLAC through a
bankruptcy or resolution proceeding. However, the final rule does not
prescribe any specific requirements for how a covered BHC would enter
into bankruptcy or resolution, as any resolution would be dependent on
the specific facts and circumstances of a covered BHC at the time of
failure, and would be within the purview of the bankruptcy court (in a
proceeding under the U.S. Bankruptcy Code) or the FDIC (in a Title II
resolution).
8. Other Comments
Certain commenters argued that a covered BHC's eligible external
LTD should be a required component of its executive compensation
program. These commenters argued that requiring executives of a covered
BHC to be compensated with such debt would help align the incentives of
a covered BHC's management with the incentives of other holders of
eligible external LTD.
The final rule does not include a requirement that a covered BHC
compensate management with eligible external LTD. The intended purpose
of this final rule is to improve the resolvability of covered BHCs by
requiring them to issue long-term debt. Achieving this policy objective
does not, as a general matter, require certain parties to hold the
long-term debt of covered BHCs. Moreover, other rules may apply to the
incentive compensation practices of covered BHCs.\63\
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\63\ Recently, the Board jointly issued with the OCC, the FDIC,
the National Credit Union Administration, the Securities and
Exchange Commission, and the Federal Housing Finance Agency, joint
proposed rules that would implement the incentive compensation
requirements of the Dodd-Frank Act. See 12 U.S.C. 956; 81 FR 37670
(June 10, 2016).
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F. Costs and Benefits
An analysis of the potential costs and benefits of the external
TLAC and external LTD requirements was conducted at the time of the
release of the proposal. To evaluate the costs attributable to the
proposed requirements, this analysis estimated (a)
[[Page 8285]]
the extent by which each covered BHCs' required capital and currently
outstanding long-term debt fell 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. In evaluating the costs and benefits of the final rule it is
important to consider the state of covered BHC's at the time of the
proposal. Importantly, while covered BHC's have closed some of the
shortfall in their TLAC requirements since the time of the proposal,
this activity does not reduce the costs of complying with the
requirements. In particular, information reviewed by the Board suggests
that covered BHC's aggregate TLAC shortfall has fallen from roughly
$120 billion at the time of the proposal to roughly $70 billion as of
the third quarter of 2016.\64\ This reduction in shortfall, however,
does not reduce the overall cost of the requirements but rather
demonstrates that covered BHCs have already begun to bear the cost of
the requirements of the final rule. Moreover, since the requirements of
the final rule have been finalized largely as proposed, the overall
estimated costs and benefits of the requirements as described in the
final rule have not materially changed from the proposal. Several
features of the final rule that differ from the proposal have impacted
overall costs and we discuss these below.
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\64\ The TLAC proposal reported a total shortfall of $120BN as
of year-end 2014 that was based on different data and assumptions
than the estimates presented above.
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A few commenters suggested that the Board underestimated the cost
of the rule in the proposal because the proposal's analysis assumed
that covered firms' existing long-term debt is eligible under the rule
even though much of the existing long-term debt would not have met the
eligibility requirements under the proposal. Existing debt containing
impermissible acceleration clauses was identified by certain commenters
to be present in nearly all of the covered BHC's outstanding
traditional long-term debt as of September 30, 2015. Similarly,
commenters argued that a significant portion (over 10 percent) of the
covered BHC's outstanding LTD would be ineligible under the proposal
because it had been issued under foreign law. Commenters estimated that
absent any grandfathering of this debt to satisfy the LTD requirements,
the resulting shortfall would be in the range of $500 to $700 billion
rather than the Board's estimated shortfall of $120 billion under the
proposal. The Board believes that these comments on impact have been
addressed and the costs of the final rule mitigated in large part by
the fact that, as described above, eligible LTD in the final rule
includes debt issued prior to December 31, 2016, that contains
impermissible acceleration clauses or that is governed by foreign law.
As a result the estimated shortfall of $120 billion that was reported
in the original proposal is appropriate for considering the economic
costs of the final rule.
1. Shortfall Analysis
An analysis of information collected and reviewed by the Board
suggested that the total TLAC shortfall of U.S. GSIBs at the time of
the proposal was roughly $120 billion.\65\ This estimate includes debt
with impermissible acceleration clauses and debt that is issued under
foreign law but that is included in eligible LTD due to grandfathering
of these features under the final rule. In addition, U.S. GSIBs have
taken steps to reduce their overall shortfall since the release of the
proposal. Information received and reviewed by the Board suggests that
the aggregate TLAC shortfall has declined to roughly $70 billion as of
the third quarter of 2016. This reduction in the shortfall indicates
that the TLAC requirements are manageable as firms have made
considerable progress in reducing their shortfalls in the relatively
short period of time since the proposal. However, this also indicates
that firms have already begun bearing the costs of the final rule by
beginning to alter their capital structures after the proposal. The
Board estimates that $120 billion is the relevant amount for purposes
of considering the cost of the final rule because this is the shortfall
that existed at the time of the proposal before covered entities had an
opportunity to adjust their capital structure in response to the
proposal.
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\65\ See 80 FR 74926 at 74938.
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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 have
outstanding. For the same reasons that were discussed above, the
estimated cost of filling the $120 billion shortfall that was described
in the proposal is appropriate for estimating the costs of the final
rule: It captures the cost that covered entities will bear to fill the
shortfall that existed at the time the proposal was released and before
covered entities made any changes to their capital structure in
response to the proposal's requirements.
One reason that would cause the proposal's cost estimate to be
inaccurate would be if the cost of long term debt relative to short
term debt changed markedly between the time of the proposal and the
final rule. Such a change would indicate that the current costs of
filling the shortfall at the time of the release of the final rule
would be significantly different from the costs that prevailed at the
time of the proposal. One simple measure of the cost of long term
versus short term financing is the spread between five-year and three-
month U.S. Treasury debt. At the time of the proposal, this yield
spread was roughly 1.45 percent and as of November 2016 this spread is
roughly 1.1 percent. Accordingly, the cost of exchanging short term
debt for long term debt has declined somewhat, which suggests that the
estimates provided in the proposal represent a somewhat conservative
estimate of filling the estimated shortfall. Accordingly, the estimated
cost of filling the shortfall has not been decreased to reflect the
modest narrowing in funding spreads.
Several additional assumptions were made to estimate the cost of
filling the $120 billion shortfall. 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
[[Page 8286]]
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 would be the form of long-
term bonds issued by the covered BHCs' bank subsidiaries.\66\ 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. Some commenters provided independent estimates of the cost of
replacing this near-eligible debt with eligible debt. In particular, a
group of commenters estimated that the cost of subordinating near-
eligible debt would range from 25 to 100 basis points.\67\ 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 would be 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. One commenter provided independent estimates of the
cost of lengthening the duration of a bank's funding profile, but these
estimates compared the costs of three to five year debt versus debt
with a ten year maturity, rather than the relative costs of short term,
deposit-like funding with longer-term debt.
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\66\ 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.
\67\ This particular estimate was provided by foreign bank
commenters that were required under the proposal to contractually
subordinate their debt. They indicated these costs reflected arm's
length market terms for these transactions and, accordingly, the
Board has considered these costs in evaluating the total cost of
subordinating the debt.
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The funding cost estimates at the low ends of the ranges described
above--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 can be produced using figures at the
high ends of these ranges and then further adjusting them upward to
reflect a potential supply effect of 30 basis points.\68\ Using the
resulting, higher figures--130 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 $2.0 billion per year. The Board notes
that this amount is roughly $500 million larger than the estimate that
was provided in the proposal since the high estimate of the cost of
replacing near-eligible debt with eligible debt has been taken from the
higher estimate provided by one group of commenters which was 100 basis
points rather than the 30 basis points that was cited in the proposal.
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\68\ This accounts for an increase in the interest rate on
eligible external LTD caused by the increase in the supply of
eligible external LTD as a result of the 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' eligible external LTD by approximately 30 basis
points.
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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 $2.0 billion annually.
3. Increased Lending Rate Analysis
The Board conducted an analysis of increased lending rates using
the updated values described previously that was similar to the
analysis conducted under the proposal. To arrive at a conservative
estimate of the effect of the final rule's 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 6.3 basis points as a result of the external TLAC and LTD
requirements of the final rule. The total dollar value of this increase
in funding rates is between $4.2 and $20.2 billion per year in
increased lending costs across the entire U.S. economy.
4. Macroeconomic Costs Analysis
The Board also conducted the analysis of macroeconomic costs
similar to that conducted for the proposal using the updated values
described previously. 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 6.3 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 and consistent with the analysis in the proposal, it appears that
the costs associated with the external TLAC and LTD requirements would
be minimal.
5. Macroeconomic Benefits Analysis
To estimate the benefits of the final rule's 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).\69\ The LEI report estimated
that, prior to the regulatory reforms undertaken since 2009, the
probability of a financial crisis occurring in a given
[[Page 8287]]
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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\69\ 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 final rule will 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 a covered BHC's eligible external TLAC), the final rule will
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 will promote financial stability and materially reduce the
probability that a financial crisis would occur in any given year. The
final rule will 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.
III. TLAC and LTD Requirements for U.S. Intermediate Holding Companies
of Global Systemically Important Foreign Banking Organizations
A. Eligible External and Internal Issuance of TLAC and LTD by covered
IHCs
One of the key elements of the proposed rule was that it would have
required a covered IHC, regardless of its resolution strategy, to issue
internal TLAC and LTD--i.e., to issue TLAC and LTD, directly or
indirectly, to its foreign parent. A U.S. covered BHC, by contrast,
would have been required to issue its TLAC and LTD externally to third-
party investors. A number of commenters, particularly foreign banks
with MPOE resolution strategies, urged the Board, consistent with the
FSB standard, to permit a covered IHC the flexibility to satisfy its
TLAC and LTD requirements with instruments issued either to
unaffiliated third parties or to foreign parents. These commenters
argued that requiring covered IHCs that intend to serve as a point of
entry for resolution to maintain internal TLAC issued solely to a
parent entity is inconsistent with an MPOE resolution strategy and, in
fact, makes it impossible to pursue an MPOE resolution strategy by
creating dependencies between the U.S. operations and the larger
foreign banking organization. One commenter urged the Board to allow
any covered IHC, regardless of its resolution strategy, to issue LTD
externally to third-party investors in the same manner as U.S. GSIBs.
This commenter suggested that an IHC with an SPOE resolution strategy
should be permitted to issue LTD externally, provided that a cap is
established to ensure that less than a majority of the covered IHC's
LTD is issued to third parties. The purpose of the cap would be to
ensure that, in the event that the long-term debt is converted to
equity, the foreign parent would remain the controlling owner, thereby
preserving alignment of interests between the covered IHC and its
parent. Certain commenters also noted that the requirement to issue
internally under the proposal limited the funding options available to
covered IHCs.
In response to these comments, the proposed rule has been modified
to allow a resolution covered IHC, which expects to enter into
resolution in the U.S. based on its FBO parent's MPOE resolution
strategy, to have the option to issue its capital and debt internally
to the FBO parent or to a foreign wholly owned subsidiary of the FBO
parent,\70\ or externally to third-party investors. The purpose of this
change is to ensure that covered IHCs can issue TLAC and LTD in a
manner that best fits their adopted resolution strategy. For the same
reason, the final rule, like the proposed rule, requires non-resolution
covered IHCs that are not expected to enter resolution proceedings in
the U.S. (because their foreign parent has adopted an SPOE resolution
strategy) to issue debt internally to the FBO parent or to a wholly
owned subsidiary of the FBO parent. Requiring internal issuance by
these covered IHCs is consistent with their resolution strategy to
upstream losses to their home country FBO parent or a wholly owned
subsidiary of the FBO parent.
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\70\ While the proposed rule required the internal debt to be
issued, directly or indirectly, to the parent FBO, the final rule
also allows covered IHCs the option to issue internal debt to other
foreign affiliates that are wholly owned by the parent FBO, as
described below.
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B. Scope of Application (Sections 252.153 and 252.160 of the Final
Rule)
The proposed rule would have applied to ``covered IHCs,'' defined
to include any U.S. intermediate holding company that is (a) required
to be formed under the Board's enhanced prudential standards rule (IHC
rule) and (b) controlled by a foreign GSIB.
The proposed rule would have established three methods by which the
top-tier foreign banking organization that controls a covered IHC would
be deemed a foreign GSIB. First, the proposed rule would have required
foreign banking organizations that already provide the information used
for the BCBS assessment methodology to use such information to
determine whether they have the characteristics of a GSIB under that
methodology. Accordingly, the proposed rule would have required a
foreign banking organization that controls a U.S. intermediate holding
company to notify the Board each year whether its home country
regulatory authority has adopted standards consistent with the BCBS
assessment methodology; whether the organization, for any reason,
prepares or reports the information required for the BCBS assessment
methodology; and whether, after using such information, the
organization has determined that it is a GSIB under the BCBS assessment
methodology.\71\ Any foreign banking organization that determined it is
a GSIB under the BCBS assessment methodology would have been a foreign
GSIB under the proposed rule.
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\71\ As discussed in the supplementary information section to
the proposed rule, these notice and determination requirements would
have applied to the ``top-tier foreign banking organization,'' which
would have been defined as, with respect to a foreign bank, 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 have included 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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Second, a foreign banking organization would have been deemed a
foreign GSIB under the proposed rule if the Board determined that the
organization either was a GSIB under the BCBS assessment methodology,
or would be a GSIB under the Board's capital rules if the foreign
banking organization were a domestic, top-tier bank holding company.
Third, a foreign banking organization would have been deemed a
foreign GSIB under the proposed rule if the Board determined that the
organization's intermediate holding company, formed pursuant to the IHC
rule, would be a GSIB under the Board's capital rules if the
intermediate holding company were a top-tier bank holding company.
[[Page 8288]]
Several commenters expressed concern with the proposal's method of
identifying whether a covered IHC is controlled by a foreign GSIB. In
particular, commenters argued that the TLAC requirements should apply
only to covered IHCs of foreign banking organizations that have been
identified as GSIBs by the FSB. These commenters argued that the
additional requirement for covered IHCs to conduct their own assessment
using both the Board's methodology and the global methodology and
report to the Federal Reserve is overly complex and burdensome,
especially where the covered IHC and its top-tier FBO are not close to
the GSIB threshold. One commenter requested that the Board confirm it
will determine which FBOs are subject to the final rule's requirements
by relying exclusively on the method 1 GSIB surcharge calculation and
not the method 2 GSIB surcharge calculation.
The final rule adopts the same methodology as the proposal for
determining whether a covered IHC is controlled by a foreign GSIB. The
methodology in the GSIB surcharge rule identifies the most systemically
important U.S. banking organizations. As discussed above with respect
to covered BHCs, this 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 method 1 methodology
in the GSIB surcharge rule for identifying GSIBs is consistent with the
methodology developed by the BCBS to identify GSIBs. 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.
Given that the global methodology and the method 1 methodology in
the GSIB surcharge rule to identify GSIBs are virtually identical, the
two methodologies should lead to the same outcomes, and the
requirements in the final rule to identify whether a foreign banking
organization is a GSIB should entail minimal additional burden for
foreign banking organizations.
The Board received a number of comments arguing that covered IHCs
should not be subject to the requirements of the final rule. Commenters
contended that the U.S. operations of covered IHCs are not significant
enough to justify applying the proposed rule to them and that the Board
did not explain its basis for subjecting covered IHCs to the proposal.
In particular, certain commenters argued that the proposed internal
TLAC and LTD requirements have no relationship to the systemic risk to
the U.S. financial system posed by covered IHCs and discriminated
against covered IHCs compared to covered BHCs with similar systemic
significance based solely on ownership of the covered IHC by a global
systemically important FBO. These commenters generally recommended that
covered IHCs should be treated more like non-GSIB, similarly sized,
domestic bank holding companies, which are not subject to TLAC or LTD
requirements under the final rule. These commenters argued that the
proposed rules conflicted with the statutory requirements to give due
regard to the principle of national treatment and equality of
competitive opportunity and take into account the extent to which the
financial company is subject on a consolidated basis to home country
standards that are comparable to those applied to financial
institutions in the United States.\72\
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\72\ 12 U.S.C. 5635(b)(2).
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The Dodd-Frank Act requires the Board to give due regard to
national treatment and equality of competitive opportunity. This
generally means that the Board must, in establishing standards
applicable to foreign banking organizations operating in the United
States, consider the standards applicable to similarly situated U.S.
banking organizations and explain any differences in treatment between
the two. The purpose of this requirement is to encourage competition in
the U.S. banking market so that neither U.S. banking organizations nor
the U.S. operations of foreign banking organizations are unfairly
disadvantaged. The requirement does not mean, however, that the same
standards must always apply to U.S. banking organizations and foreign
banking organizations of a similar size and complexity.
For example, in the context of resolution, covered IHCs are not
similarly situated to U.S. banking organizations of a similar size and
complexity. Unlike U.S. banking organizations, covered IHCs are
connected to foreign GSIBs, which affects the potential impact of their
resolution, the contexts under which they will be resolved, and how
their resolution will be conducted. Foreign GSIBs, whose failure would
impact the financial stability of the global financial system, also
pose risks to the financial stability of the United States. Therefore,
covered IHCs are more similarly situated to the U.S. GSIBs, and the
final rule treats the two groups similarly, with appropriate
adjustments to reflect their differences.
The Board's enhanced prudential standards rules identify foreign
banking organizations with a substantial U.S. presence and require each
of them to form a single U.S. intermediate holding company over their
respective U.S. subsidiaries.\73\ Thus, whether 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. As with the
application of the requirements in the final rule to covered BHCs,
which are the largest, most systemically important U.S. banking
organizations, the final rule's focus on IHCs held by foreign 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.\74\ Furthermore, as discussed in more detail below,
the use of the methodology in the GSIB surcharge rule to identify both
foreign and U.S. GSIBs (and to identify both covered BHCs and covered
IHCs) promotes a level playing field between U.S. and foreign banking
organizations. Thus, the final rule applies to the U.S. operations of
those foreign banking organizations that would be considered GSIBs
under the Board's GSIB surcharge rule and that have substantial
operations in the United States.
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\73\ 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).
\74\ 12 U.S.C. 5365(a)(1)(B).
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Additionally, while some covered IHCs may be subject to comparable
TLAC standards in their home jurisdiction, the final rule is tailored
to the potential risks presented by the U.S. operations of foreign
GSIBs to the U.S. financial system. In this regard, the final rule
mandates that a covered IHC have sufficient loss absorbing capacity
present in the United States to support a successful recapitalization
or resolution of the covered IHC.
C. Resolution and Non-Resolution IHCs (Section 12 CFR 252.164 of the
Final Rule)
Under the final rule, as explained above, whether or not a covered
IHC has the option to issue debt externally to
[[Page 8289]]
third-party investors depends on whether the covered IHC (or any of its
subsidiaries) is expected to enter resolution if a foreign parent
entity fails (an MPOE strategy), rather than continuing to operate
outside of resolution proceedings while a foreign parent entity is
resolved (an SPOE strategy). In addition, under the final rule like
under the proposal, the amount of eligible total loss-absorbing
capacity 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 the covered IHC continuing to operate outside of resolution
proceedings.
Under the proposal, the home country resolution authority for the
parent foreign banking organization of the covered IHC would have been
required to provide a certification to the Board indicating that the
authority's planned resolution strategy for the foreign banking
organization did not involve the covered IHC or any subsidiary of the
covered IHC entering a resolution proceeding in the United States for
the covered IHC to have been considered a ``non-resolution entity.'' A
few commenters objected to the requirement in the proposal that this
determination require the home country resolution authority to provide
such a certification to the Board. These commenters generally argued
that this requirement created an unnecessary administrative burden that
home country resolution authorities may not be able to satisfy--for
example, due to internal policies or requirements that would not permit
them to make an official certification. These commenters also pointed
out that the Board already has enough information to make such a
determination. In particular, these commenters noted the Board reviews
FBO resolution plans that specify whether their resolution strategy is
SPOE or MPOE, and participates in Crisis Management Groups for all
covered IHCs of FBOs.
To address these concerns, the final rule modifies the proposal to
require the top-tier foreign banking organization with U.S. non-branch
assets equal to or greater than $50 billion, rather than the home
country resolution authority, to certify to the Board whether the
planned resolution strategy of the top-tier foreign banking
organization involves the covered IHC or its subsidiaries entering
resolution, receivership, insolvency, or similar proceedings in the
United States. The certification must be provided by the top-tier
foreign banking organization to the Board on the later of June 30, 2017
or one year prior to the date on which the covered IHC is required to
comply with the covered IHC TLAC and LTD requirements of the final
rule.\75\ In addition, the top-tier foreign banking organization with
U.S. non-branch assets equal to or greater than $50 billion must
provide an updated certification to the Board upon a change in
resolution strategy.
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\75\ Under the final rule, a covered IHC is required to comply
with the rule's requirements by the later of three years after the
date on which the U.S. non-branch assets of the foreign banking
organization that controls the covered IHC equal or exceed $50
billion, and the date on which the foreign banking organization that
controls the covered IHC first became a GSIB.
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A covered IHC is a ``resolution covered IHC'' under the final rule
if the certification provided indicates that the top-tier foreign
banking organization's planned resolution strategy involves the covered
IHC or its subsidiaries entering into resolution, receivership,
insolvency or similar proceeding. A covered IHC is a ``non-resolution
covered IHC'' under the final rule if the certification provided to the
Board indicates that the top-tier foreign banking organization's
planned resolution strategy does not involve the covered IHC or its
subsidiaries entering into resolution, receivership, insolvency, or
similar proceedings in the United States.
In addition, under the final rule, the Board may determine in its
discretion that an entity that is certified to be a non-resolution
covered IHC is a resolution covered IHC, or that an entity that is
certified to be a resolution covered IHC is a non-resolution covered
IHC.
In reviewing certifications provided with respect to covered IHCs,
the Board would expect to review all the information available to it
regarding a firm's resolution strategy, including information provided
to it by the firm. The Board would also expect to consult with the
firm's home country resolution authority in connection with this
review. In addition, the Board may consider a number of factors
suggested by commenters including but not limited to whether a foreign
banking organization conducts substantial U.S. activities outside of
the IHC chain; whether the group's capital and liability structure is
set up in a way to allow for losses to be upstreamed to the top-tier
parent; whether the top-tier parent or foreign affiliates provide
substantial financial or other forms of support to the U.S. operations
(e.g., guarantees, contingent claims and other exposures between group
entities); whether the covered IHC is operationally independent (e.g.,
costs are undertaken by the IHC itself and whether the IHC is able to
fund itself on a stand-alone basis); whether the covered IHC depends on
the top-tier parent or foreign affiliates for the provision of critical
shared services or access to infrastructure; whether the covered IHC is
dependent on the risk management or risk-mitigating hedging services
provided by the top-tier parent or foreign affiliates; and the location
where financial activity that is conducted in the United States is
booked.
A covered IHC would have one year or a longer period determined by
the Board to comply with the requirements of the final rule if it
changes its resolution strategy or if the Board determines that the
firm certified to the wrong strategy. For example, if the Board
determines that a firm that had certified it is a non-resolution
covered IHC, which is subject to a lower TLAC requirement under the
final rule, is a resolution covered IHC for purposes of the final rule,
the IHC would have up to one year from the date on which the Board
notifies the covered IHC in writing of such determination to raise
additional capital or long-term debt to comply with the requirements of
the final rule. Similarly, a firm that certified it was a resolution
covered IHC that is determined to be a non-resolution covered IHC would
have one year to comply with the requirements of the final rule. Since
under the final rule a resolution covered IHC has the option to issue
TLAC and LTD externally to third-parties, the one-year period would
provide the covered IHC with time to make any necessary adjustments to
the composition of its TLAC and LTD, for example by issuing internal
LTD to its foreign parent.
As noted, under the final rule, the Board may extend the one-year
period discussed above. In acting on any requests for extensions of
this time period, the Board would consider whether the covered IHC had
made a good faith effort to comply with the requirements of the final
rule.
D. Calibration of the TLAC and LTD Requirements (Sections 252.162 and
252.165 of the Final Rule)
The proposed rule would have imposed different minimum internal
loss-absorbing capacity (eligible internal TLAC) requirements for
covered IHCs expected to enter into resolution proceedings if their
foreign parent entity fails (resolution covered IHCs), and covered IHCs
not expected to enter resolution proceedings under the same
circumstances (non-resolution covered IHCs). The proposed rule would
have treated all covered IHCs as resolution
[[Page 8290]]
entities unless the home country resolution authority for the foreign
GSIB that controls the covered IHC certified to the Board that the
authority's resolution plan for the foreign GSIB adopted an SPOE
approach.\76\
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\76\ As described above, the final rule has modified this aspect
of the proposal.
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Under the proposed rule, covered IHCs that were resolution entities
would have been required to maintain a minimum amount of outstanding
eligible internal TLAC no less than the greatest of (a) 18 percent of
the covered IHC's total risk-weighted assets; \77\ (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. Covered IHCs
that were non-resolution entities would have been required to maintain
a minimum amount of outstanding eligible internal TLAC no less than the
greater of (a) 16 percent of the covered IHC's total risk-weighted
assets; \78\ (b) 6 percent of the covered IHC's total leverage exposure
(if applicable); 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.\79\ The proposed rule also would have applied an
internal TLAC buffer to all covered IHCs in addition to the applicable
risk-weighted assets component of the internal TLAC requirement.
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\77\ Under the proposed rule, the risk-weighted assets component
of the internal TLAC requirement for covered IHCs of MPOE firms
would have been 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.
\78\ Under the proposed rule, the risk-weighted assets component
of the internal TLAC requirement would have been 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.
\79\ 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). 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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Under the proposed internal LTD requirement, a covered IHC would
have been required to maintain outstanding eligible internal long-term
debt instruments in an amount not less than the greatest 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 would have been prohibited from redeeming
eligible internal LTD prior to the stated maturity date without
obtaining prior approval from the Board if after such redemption the
covered IHC's eligible internal LTD would fall below its internal LTD
requirement.
Some commenters argued that, based on the size of their U.S.
operations, covered IHCs should be treated like domestic U.S. bank
holding companies that are not subject to the requirements of the final
rule. These commenters questioned whether TLAC and LTD requirements for
covered IHCs are even necessary, particularly where ownership by a
major foreign bank parent would add a source of strength for covered
IHCs and where other prudential standards, including robust capital,
liquidity, stress testing, and risk management requirements, already
address the risk to U.S. financial stability posed by covered IHCs. A
few commenters suggested that the Board reserve the power to alter TLAC
and LTD requirements for institutions on a case-by-case basis based on
the relative importance of the U.S. operations of a foreign banking
organization to U.S. financial stability.
Commenters expressed a number of concerns with the proposal's
calibration of internal TLAC and LTD for covered IHCs. In general,
commenters requested a reduction in the calibration of internal TLAC
and LTD for both resolution covered IHCs and non-resolution covered
IHCs. Commenters contended that the levels of internal TLAC and LTD
under the proposal were far higher than necessary to promote
resolvability and resiliency of covered IHCs. Several commenters
expressed concern that prepositioning too much capital and LTD at a
covered IHC would prevent a foreign banking group from putting
resources to better use, either by providing more services to the
market or using the capital to assist the covered IHC's foreign
affiliates in times of stress.
Other commenters suggested that the requirements could potentially
discourage cooperation between U.S. and foreign banking regulators, and
perhaps encourage foreign banking regulators to impose more stringent
requirements for foreign affiliates of U.S. banking organizations in
retaliation for the proposed rule. Commenters concerned about the
reaction of foreign regulators to the proposed rule suggested that the
Board set the minimum TLAC requirements applicable to covered IHCs in
consultation with foreign regulators. Several commenters also suggested
that the requirements were so high that they would negatively impact
credit markets and thereby decrease economic activity. Commenters
argued that the calibration for non-resolution covered IHCs, in
particular, was too high and that the Board should follow the approach
described in the FSB standard and establish internal TLAC calibration
levels for non-resolution covered IHCs based only on the need to ensure
home-host country cooperation. These commenters urged that the internal
TLAC requirements applicable to non-resolution covered IHCs should be
reduced from the proposed level of approximately 90 percent of the TLAC
requirements applicable to resolution covered IHCs, the top end of the
range set by the FSB standard, to not more than 75 percent of such
requirements applicable to resolution covered IHCs, representing the
low end of the range recommended by the FSB standard, in order to
appropriately incentivize SPOE resolution strategy.\80\ These
commenters contended that the proposal's higher calibration would not
provide enough flexibility to allocate a foreign parent's loss-
absorbing capacity wherever necessary within the firm in the case of
failure, and that the potential ring-fencing of excessive amounts of
capital would reduce, and not enhance, the resilience of the firm.
These commenters also argued that non-resolution covered IHCs do not
pose the same risks to U.S. financial stability because these firms
would receive support from their foreign parents in times of stress.
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\80\ FSB standard at 19.
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A number of commenters argued that covered IHCs that are subject to
the SLR requirement should not be subject to the additional prong of
the covered IHC TLAC and LTD requirements in the proposal that required
covered IHCs to maintain TLAC and LTD levels greater than or equal to a
percentage of average total consolidated assets, as there is no
corresponding requirement imposed on covered BHCs. These commenters
urged the Board to remove the average total consolidated assets-based
leverage ratio test for covered IHCs subject to the supplemental
leverage ratio component of TLAC and LTD.
In addition, commenters urged the Board to allow a portion of
internal TLAC to be satisfied through collateralized guarantees, as
contemplated in the FSB standard. These commenters suggested that such
guarantees would address concerns motivating the proposed internal TLAC
requirements in a manner less likely to lead to going-concern ring
fencing and ``misallocation risk'' (i.e., trapping
[[Page 8291]]
resources that may not be needed in a covered IHC through pre-
positioning). To reduce misallocation risk, a few commenters argued
that the Board should permit a covered IHC to satisfy minimum TLAC and
LTD requirements with capital contribution agreements which would
obligate a foreign GSIB parent to contribute an amount of assets up to
the minimum amount required in order to recapitalize the covered IHC
upon the occurrence of certain events. These commenters also
recommended that the Board permit covered IHCs to satisfy a portion of
their internal TLAC requirements with other forms of parent support
that have similar characteristics to such guarantees and satisfy the
Board's policy objectives, such as keepwell agreements and
uncollateralized guarantees.
A number of commenters argued that the Board should eliminate
separate long-term debt requirements for covered IHCs. According to the
commenters, separate long-term debt requirements are not necessary to
ensure that covered IHCs have enough loss-absorbing capacity to be
recapitalized. These commenters asserted that equity can absorb losses
equally well both inside and outside of a bankruptcy or Title II
proceeding, and can function as both going-concern and gone-concern
capital. As a result, these commenters argued that covered IHCs should
be able to satisfy their minimum TLAC requirements by freely
substituting equity for LTD. A few commenters suggested that,
consistent with the FSB standard, LTD for non-resolution IHCs be
established as a supervisory expectation, rather than a formal minimum
requirement, and that internal LTD be required to comprise no more than
33 percent of internal TLAC. Other commenters, however, noted that
requiring covered IHCs to maintain a minimum amount of LTD represents a
departure from the FSB standards, which do not require that any portion
of internal TLAC consist of long-term debt instruments.
A number of commenters also pointed out that the Board did not
apply the ``balance sheet'' depletion approach to calibrate the
proposed internal LTD and TLAC requirements that the Board used for
determining the calibration levels for the external LTD and TLAC
requirements. These commenters urged the Board, consistent with the
principle of national treatment, to include this adjustment to the
calibration of LTD and TLAC requirements for covered IHCs.
As noted, covered IHCs are more similarly situated to covered BHCs
than to U.S. banking organizations of a similar size, and the LTD and
TLAC requirements should therefore apply to covered IHCs. Thus, the
rationale for the internal LTD and TLAC requirements in the final rule
is generally parallel to the rationale for the TLAC and LTD
requirements for covered BHCs, as discussed above. Resolution covered
IHCs would be subject to a TLAC requirement with a risk-weighted assets
component identical to the risk-weighted assets component of the TLAC
requirement applicable to covered BHCs. They would be subject to a
supplementary leverage ratio component (if applicable) that is lower
than the supplementary leverage ratio component of the proposed TLAC
requirement applicable to covered BHCs, 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, covered IHCs are also subject to TLAC and LTD requirements
that are based on the U.S. tier 1 leverage ratio.\81\
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\81\ 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 final
rule's calibration of the on-balance sheet leverage ratio component
of the proposed internal TLAC requirement, 8 percent, is twice the 4
percent requirement to be conceptually consistent with the proposed
calibration of the supplementary leverage ratio requirement, 6
percent, which is twice the 3 percent requirement.
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The calibrations for TLAC and LTD under the final rule applicable
to covered IHCs are reflected below:
Table 4--Covered IHC TLAC and LTD Final Rule Calibrations
----------------------------------------------------------------------------------------------------------------
Leverage:
RWA Leverage: SLR Total assets
(%)
----------------------------------------------------------------------------------------------------------------
Non-Resolution Covered IHC....... Covered IHC TLAC... 16 percent plus 6 percent (if 8
Covered IHC LTD.... buffer. applicable). 3.5
6 percent.......... 2.5 percent (if
applicable)..
Resolution Covered IHC........... Covered IHC TLAC... 18 percent plus 6.75 percent (if 9
Covered IHC LTD.... buffer. applicable). 3.5
6.................. 2.5 percent (if
applicable).
----------------------------------------------------------------------------------------------------------------
Other than the adjustment to the LTD calibration to reflect balance
sheet depletion, the final rule does not reduce or eliminate the TLAC
and LTD requirements in the manner suggested by commenters. However,
the final rule does reflect a number of changes intended to address
concerns raised by commenters and mitigate the burden of the final rule
on covered IHCs. In particular, resolution covered IHCs are permitted
under the final rule to issue external debt in the same manner as
covered BHCs. Resolution covered IHCs are therefore subject to similar
calibrations as covered BHCs under the final rule, because these IHCs
are analogous to covered BHCs, which are themselves resolution
entities.
The final rule provides that non-resolution covered IHCs are
subject to slightly lower TLAC requirements than resolution covered
IHCs. However, the final rule does not further reduce the requirement
relative to the proposal as requested by commenters. The final rule's
calibration of TLAC for non-resolution covered IHCs is the same as
under the proposal and within (though toward the higher end) of the
recommended range in the FSB standard.
The Board considered comments requesting that the final rule lower
the calibration for non-resolution covered IHCs. 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 transmit the covered IHC's going-
concern losses to the parent foreign GSIB, to the extent necessary.
However, the final rule 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 was based on the
desirability of providing support for the preferred SPOE resolution of
the foreign GSIB. This approach is most effective when a
[[Page 8292]]
foreign GSIB parent has internal loss-absorbing capacity that can be
freely allocated to whichever subsidiaries have incurred the greatest
losses (including non-U.S. subsidiaries). The value of this flexibility
must, however, be balanced against the need to maintain sufficient
loss-absorbing capacity in the United States so that a covered IHC can
be maintained as a going concern or subjected to an orderly resolution
in the United States if the foreign GSIB is not successfully resolved
in an SPOE resolution or is otherwise unable to provide support to a
non-resolution covered IHC.
For these reasons, the final rule retains the proposed calibrations
in order to maximize the likelihood that a non-resolution or resolution
covered IHC could be resolved in an orderly manner in the United
States. For similar reasons, collateralized guarantees and other forms
of contingent support do not count toward the minimum TLAC requirements
under the final rule as requested by commenters. These forms of
contingent support would not be pre-positioned in the United States and
available for use during a period of stress without additional actions
by the foreign GSIB parent.
To ensure that the LTD requirements are sufficient to replace a
covered IHC's capital in a manner consistent with the Board's existing
capital requirements, the LTD requirements are based on each of the
three regulatory capital measures applicable to covered IHCs. The final
rule does not eliminate, as requested by certain commenters, the total
consolidated asset measure for covered IHCs that are subject to the
total leverage exposure component because covered IHC's are generally
subject to U.S. tier 1 leverage ratio capital requirement and basing
the LTD requirements on this capital measure is consistent with the
underlying capital refill framework that motivates the
requirements.\82\
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\82\ Covered BHCs are not subject to a TLAC or LTD requirement
that references total average consolidated assets as is the case for
covered IHC's. This is because the U.S. tier 1 leverage ratio
requirement applicable to covered IHCs is 4 percent, which is lower
than the 5 percent enhanced supplementary leverage ratio
requirement. Accordingly, adding a total consolidated assets TLAC or
LTD requirement in the case of covered BHCs would be superfluous
since the enhanced supplementary leverage ratio based requirement
would always be larger than the U.S. tier 1 leverage ratio
requirement. This is because both the U.S. tier 1 leverage ratio
requirement of 4 percent is lower than the enhanced supplementary
leverage ratio requirement of 5 percent, and the total consolidated
assets amount is always less than the total leverage exposure
amount. This reasoning does not apply in the case of covered IHCs.
Covered IHCs are not subject to the enhanced supplementary leverage
ratio of 5 percent but are subject to the supplementary leverage
ratio of 3 percent. Accordingly, there can be cases in which the
U.S. tier 1 leverage ratio based requirement would be larger than
the supplementary leverage ratio-based requirement. Since covered
IHCs are subject to both the U.S. tier 1 leverage ratio and the
supplementary leverage ratio and since the U.S. tier 1 based
requirement is not redundant, the final rule requires that the TLAC
and LTD requirements reference both the U.S. tier 1 and
supplementary leverage ratio capital measures.
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The proposal has been modified to reduce the minimum LTD
requirement applicable to covered IHCs to reflect the same balance
sheet depletion approach that was used to calibrate the requirements in
the final rule applicable to the covered bank holding companies. Thus,
under the final rule, the risk-weighted asset component of the LTD
requirements has been reduced from 7 percent under the proposal to 6
percent (4.5 percent plus a 2.5 percent capital conservation buffer
with a 1 percentage point allowance for balance sheet depletion); the
SLR component from 3 percent to 2.5 percent; and the total assets
component from 4 percent to 3.5 percent.
With respect to the comment that the Board should reserve the power
to adjust TLAC and LTD requirements for institutions on an case-by-case
basis based on the relative importance of the U.S. operations of a
foreign banking organization to U.S. financial stability, the final
rule, like the proposal, establishes a minimum baseline requirement
applicable to all covered IHCs, The possibility of adjusting these
requirements on a case-by-case basis is something the Board may
consider in the future based on the risk of the particular institution
in question as the Board gains more experience with the application of
the requirements.
The final rule adds a new provision for covered IHCs to describe
the treatment of long-term debt subject to a put right--that is, a
right of the holder to require the issuer to redeem the debt on
demand--that is the same as the applicable provision for covered BHCs
under the final rule. In particular, such an instrument would be
treated as if it were due to be paid 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. Also
like the provision applicable to covered BHCs, the Board may order a
covered IHC, after notice and an opportunity to respond, to exclude
from its outstanding eligible long-term debt amount any debt securities
with features that would significantly impair the ability of such debt
securities to take losses.
The Board has consulted with, and expects to continue to consult
with, foreign financial regulatory authorities regarding the
requirements of the final rule. In addition, as noted above, the Board
intends to update required TLAC and LTD calibration requirements in
light of any future changes to the framework of applicable capital
requirements.
E. Core Features of Eligible TLAC (Section 252.165 of the Final Rule)
Under the proposal, a covered IHC's eligible internal TLAC was
defined to be the sum of 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 the covered IHC's eligible
LTD.\83\ Only those tier 2 capital instruments that meet the definition
of eligible LTD would have counted toward the TLAC requirement
applicable to covered IHCs.
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\83\ Although eligible internal LTD with a remaining maturity
between one and two years would have been subject to a 50 percent
haircut for purposes of the LTD requirement, such eligible LTD would
have counted 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 have counted
toward either the internal TLAC requirement or the internal LTD
requirement. These requirements are the same under the final rule as
under the proposal other than the fact that the final rule considers
the date debt is due to be paid rather than the remaining maturity
of the debt for reasons described above.
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Requiring that regulatory capital be issued directly by a covered
IHC, rather than by a subsidiary of the IHC, in order to count as
eligible internal TLAC means that a covered IHC would have loss-
absorbing capacity available to absorb losses incurred by any
subsidiary of the IHC. In contrast, regulatory capital that is issued
by one subsidiary of a covered IHC would not necessarily be available
to absorb losses incurred by another subsidiary.
Under the proposal, regulatory capital and long-term debt were also
required to be issued to a foreign parent entity of the covered IHC. As
noted, a number of commenters urged the Board to permit covered IHCs,
particularly resolution covered IHCs, to issue capital and long-term
debt externally under the final rule. In addition, a few commenters
argued that covered IHCs should be permitted to issue capital or long-
term debt to any foreign affiliate (i.e., any foreign entity within the
foreign GSIB majority owned by the same top-tier foreign parent) rather
than just a foreign parent as under the proposal. These
[[Page 8293]]
commenters pointed out that internal TLAC and LTD issued to foreign
affiliates would transfer losses outside the U.S. just as well as if
the internal TLAC or LTD was issued to a foreign parent. Moreover,
these commenters argued that broadening TLAC and LTD eligibility to
include instruments held by any non-U.S. affiliate of the covered IHC
would provide covered IHCs with greater flexibility to satisfy their
TLAC and LTD requirements in a manner consistent with global operations
and funding structures.
In response to comments, the final rule makes two changes to the
proposed internal TLAC requirements. First, resolution covered IHCs
have the option to issue capital and long-term debt externally to
third-parties under the final rule or to issue it internally to a
foreign parent or foreign wholly owned subsidiary of the foreign parent
consistent with their resolution strategy.
Second, covered IHCs may issue internal TLAC and LTD to any foreign
affiliate of the covered IHC that is wholly owned, directly or
indirectly, by the top-tier parent foreign banking organization, in
addition to foreign parent entities of the covered IHC. This
modification to the proposal provides additional flexibility to foreign
banking organizations without compromising the principle that losses
incurred by a covered IHC with an SPOE strategy should be upstreamed to
a foreign parent or another foreign affiliate rather than being
transferred to other U.S. entities. It will also prevent the conversion
of eligible LTD into equity from effecting a change in control over the
covered IHC in the case of a non-resolution entity IHC that is required
to issue internal LTD. A change in control of a covered IHC could
create additional and undesirable regulatory and management complexity
during a failure scenario, and could severely disrupt an SPOE
resolution strategy.
F. TLAC Buffer for Covered IHCs
The proposed rule would have required covered IHCs to maintain a
buffer of common equity tier 1 capital in addition to the risk-weighted
assets component of the minimum internal TLAC requirement. This buffer
would have been similar to the buffer in the proposed rule that would
have applied to covered BHCs, except that the internal TLAC buffer
would not have included a GSIB surcharge component because covered IHCs
are not subject to the Board's 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. Under the proposed rule,
a covered IHC that breached its buffer would be subject to the limits
on capital distributions and discretionary bonus payments.
Commenters questioned whether the internal TLAC buffer was
necessary for covered IHCs. These commenters argued that the buffer
imposed additional burden with no corresponding benefits and encouraged
the Board to eliminate the buffer, particularly for covered IHCs that
issued TLAC only to their affiliates. Certain commenters recommended
that a breach of the buffer should be addressed by the Board as part of
the supervisory process rather than through self-executing restrictions
on an IHC's capital distributions and discretionary bonus payments. One
commenter argued that the 50 percent haircut on long-term debt operates
as a de facto buffer, making the internal TLAC buffer duplicative and
unnecessary. This commenter also argued that the TLAC buffer would
unnecessarily strain liquidity at the covered IHCs.
The covered IHC TLAC buffer serves the same purpose as the TLAC
buffer applicable to covered BHCs: It limits capital distributions and
discretionary bonus payments as a firm approaches its minimum TLAC
requirements, thereby helping to preserve capital. Consistent with this
principle and the proposal, the final rule includes a buffer that for
covered IHCs that must be satisfied with common equity tier 1 capital.
Also, consistent with the proposal, a covered IHC's breach of its
TLAC buffer would result in limits on capital distributions and
discretionary bonus payments in accordance with Table 5. As discussed
above with respect to the external TLAC risk-weighted assets buffer, a
covered IHC that meets the applicable capital requirements, the
existing capital conservation buffer, and the covered IHC LTD
requirements generally would not need to increase its common equity
tier 1 capital to meet its covered IHC TLAC requirement and its TLAC
buffer.
The Board is not adding a buffer over the leverage component of the
covered IHC TLAC requirement as described previously for covered BHCs.
The buffers in the final rule are designed to be consistent with the
buffers in Regulation Q, which only includes a buffer over a leverage
requirement for the covered BHCs.
Table 5--Calculation of Maximum Covered IHC TLAC Payout Amount
------------------------------------------------------------------------
Maximum covered IHC TLAC
payout ratio (as a
Covered IHC TLAC buffer level percentage of eligible
retained income)
------------------------------------------------------------------------
Greater than the Covered IHC TLAC buffer... No payout ratio limitation
applies.
Less than or equal to the Covered IHC TLAC 60 percent.
buffer, and greater than 75 percent of the
Covered IHC TLAC buffer.
Less than or equal to 75 percent of the 40 percent.
Covered IHC TLAC buffer, and greater than
50 percent of the Covered IHC TLAC buffer.
Less than or equal to 50 percent of the 20 percent.
Covered IHC TLAC buffer, and greater 25
percent of the Covered IHC TLAC buffer.
Less than or equal to 25 percent of the 0 percent.
Covered IHC TLAC buffer.
------------------------------------------------------------------------
G. Core Features of Eligible Internal and External LTD for Covered IHCs
(Section 252.161 of the Final Rule)
Under the proposal, a covered IHC's eligible internal LTD would
have been defined as 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.\84\ These are generally the same requirements as applied under the
proposal to eligible external LTD issued by covered BHCs.
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\84\ The proposal required that eligible internal LTD be
governed by U.S. law in order to clarify that the conversion and
exchange provisions of these instruments, which would be held by
foreign companies, are enforceable under U.S. law.
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A few additional requirements applied to eligible internal LTD
under the proposal. Eligible internal LTD would be required to be
issued, directly or indirectly, to a foreign parent entity
[[Page 8294]]
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.
Eligible internal LTD was also prohibited from having any acceleration
clauses.
In general, commenters argued that the Board should conform the
eligibility requirements of internal LTD for covered IHCs with those of
external LTD for covered BHCs because the additional features were
costly, unnecessary, and thereby placed covered IHCs at a significant
competitive disadvantage relative to covered BHCs. In particular,
commenters recommended that the Board eliminate the contractual
subordination and contractual trigger requirements and to permit
eligible internal LTD to contain the same acceleration events as
permitted by long-term debt issued by covered BHCs. Commenters argued
that covered IHCs transact with foreign parents on an arm's length
basis, and that these features would require covered IHCs to pay a
significant premiums for these features. Commenters also argued that
these features of eligible internal LTD under the proposal would
significantly increase the risk that the debt would be characterized as
equity for U.S. income tax purposes and therefore significantly
increase costs for covered IHCs. Each of these features, relevant
comments, and changes to the final rule to address these concerns are
discussed in more detail below.
1. Issuance to a Foreign Parent Entity that Controls the Covered IHC
Under the proposal, eligible internal LTD was required to be paid
in and issued, directly or indirectly, to a foreign parent entity that
controls the covered IHC. As discussed above, a number of commenters
urged the Board to allow external issuance for resolution covered IHCs
consistent with their resolution strategy. In response to these
comments, the final rule permits resolution covered IHCs to issue
eligible long-term debt externally to third-party investors as
discussed above. The final rule defines a new term ``eligible external
debt security'' with generally the same terms as eligible debt
securities issued by covered BHCs.\85\ As it would for eligible
external LTD issued by covered BHCs, the final rule would also permit
an eligible external debt instrument issued prior to December 31, 2016
by a resolution covered IHC that contains otherwise impermissible
acceleration clauses and is issued under foreign law to qualify as an
eligible external debt security.
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\85\ In particular, eligible external debt security is defined
as a debt instrument that is paid in, and issued by the covered IHC
to and remains held by a company that does not directly or
indirectly control the covered IHC and is not a wholly owned
subsidiary; is not secured, not guaranteed by the covered IHC or a
subsidiary of the covered IHC, and is not subject to any other
arrangement that legally or economically enhances the seniority of
the instrument; has a maturity of greater than or equal to 365 days
(one year) from date of issuance; is governed by the laws of the
United States or any State thereof; does not provide the holder of
the instrument a contractual right to accelerate payment of
principal or interest on the instrument, except for a right that is
exercisable on one or more dates that are specified in the
instrument or in the event of a receivership, insolvency,
liquidation or similar proceeding of the covered IHC or a failure of
the covered IHC to pay principal or interest on the instrument when
due and payable that continues for 30 days or more; and does not
include structured notes.
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Resolution covered IHCs also have the option to issue debt
internally to a foreign parent or foreign wholly owned subsidiary of a
global systemically important foreign banking organization that
directly or indirectly controls the covered IHC. Non-resolution covered
IHCs are required under the final rule to issue debt internally to a
foreign parent or foreign wholly owned subsidiary of a global
systemically important foreign banking organization that directly or
indirectly controls the covered IHC, for the reasons described above.
The definition of ``eligible internal debt'' security is the same for
both types of covered IHCs. The requirements for an ``eligible internal
debt security'' are generally the same as the terms for an ``eligible
external debt security'' for a resolution covered IHC and ``eligible
debt security'' for a covered BHC with a few key differences described
below.
The proposal prohibited an eligible internal debt security from
having any acceleration clauses. Under the final rule, both an eligible
external debt security and an eligible internal debt security would be
permitted to have the same types of acceleration clauses permitted for
an eligible debt security of a covered BHC. However, unlike for
eligible external debt securities, the final rule does not allow
eligible internal debt of covered IHCs issued prior to December 31,
2016, to have impermissible acceleration clauses or be issued under
foreign law. The Board does not believe that covered IHCs have
substantial amounts of internal long-term debt outstanding since the
requirement to establish a covered IHC became effective on July 1,
2016. Moreover, the Board believes that covered IHCs could modify the
terms of existing outstanding internal debt issued to a foreign parent
or another foreign affiliate with relative ease and low cost.
Another difference from the proposal is that neither an eligible
internal debt security nor an eligible external debt security would be
required to be contractually subordinated under the final rule. Under
the final rule, a covered IHC like a covered BHC would have the option
of structural subordination, subject to a similar cap on unrelated
liabilities applicable to covered BHCs described further below.
However, eligible internal debt securities would continue to have
two key distinctions from eligible external debt securities under the
final rule. First, an ``eligible internal debt security'' must be
issued to and remain held by a company that is incorporated and
organized outside of the United States that directly or indirectly
controls the covered IHC, or a foreign, wholly owned subsidiary of a
global systemically important foreign banking organization that
directly or indirectly controls the covered IHC. Second, the internal
debt security must have a contractual provision that is approved by the
Board that provides for immediate conversion or exchange of the
instrument into common equity tier 1 capital of the covered IHC upon
issuance by the Board of an internal debt conversion order.
In response to comments by a number of foreign banks, the Board
consulted with the U.S. Department of the Treasury on the possibility
that internal LTD could be considered equity--rather than debt--for
purposes of U.S. tax law, and therefore increase the cost of the debt
relative to the external LTD required of covered BHCs.\86\ Four changes
to the proposal should mitigate the concerns raised by commenters on
the proposal.
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\86\ Commenters noted that, regardless of the characterization
of internal LTD as equity under U.S. tax law, coupon payments on
internal LTD are likely to be treated as debt in an FBO's home
jurisdiction. The commenters argued that the overall result would
therefore be the incurrence by FBOs of tax costs in respect of
internal LTD substantially in excess of those that would arise from
either conventional debt or conventional equity.
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First, the final rule removes the ability of the Board to require
cancellation of the debt and only retains the ability of the Board to
require its conversion or exchange. Second, eligible internal debt
securities under the final rule are permitted to have the same
acceleration clauses as eligible external LTD. Third, eligible internal
debt securities are not required to be contractually
[[Page 8295]]
subordinated under the final rule. Fourth, the final rule allows the
Board to require the partial conversion or exchange of less than all of
the eligible internal debt securities of the IHC, whereas the proposal
only contemplated 100 percent conversion. A more detailed explanation
of these changes follows.
2. Acceleration Clauses
The proposal would have prohibited an eligible internal debt
security issued by a covered IHC from having any contractual provision
giving the holder of the instrument a contractual right to accelerate
payment of principal or interest on the instrument. Many commenters
expressed concern with this aspect of the proposal as being stricter
than the requirements for covered BHCs and argued that eligible LTD
issued by covered IHCs should be permitted to contain the same
acceleration events as permitted for eligible debt securities issued by
covered BHCs (i.e., acceleration clauses for insolvency and payment
default). These commenters explained that covered IHCs may not have
more flexibility than covered BHCs to price internal debt because
covered IHCs and their non-U.S. affiliates transact on market terms.
These commenters also noted that prohibiting all acceleration clauses
further increases the risk that eligible LTD would be characterized as
equity rather than debt for U.S. federal income tax purposes, creating
uncertainty about the tax deductibility of interest payments on
eligible internal LTD and whether these payments are subject to
withholding tax. These commenters argued that an instrument is more
likely to be considered debt for U.S. tax purposes if its holder has
adequate legal remedies, such as acceleration rights or the right to
sue (e.g., for breaches of debt covenants).
As explained above, the final rule permits both eligible external
debt securities and eligible internal debt securities issued by covered
IHCs to have the same acceleration clauses permitted under the final
rule for covered BHCs. In particular, the eligible long-term debt
issued by covered IHCs would not be permitted to 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 (A) a receivership, insolvency, liquidation, or similar proceeding
of the covered IHC or (B) a failure of the covered IHC to pay principal
or interest on the instrument when due and payable that continues for
30 days or more. The rationale for these requirements is explained in
more detail above in connection with the discussion of requirements for
eligible long-term debt for covered BHCs.
As for eligible external LTD issued by covered BHCs, the final rule
would also permit an eligible external debt instrument issued prior to
December 31, 2016 by a resolution covered IHC that contains otherwise
impermissible acceleration clauses or is subject to foreign law to
count for eligible external LTD. This allowance should mitigate
compliance costs on resolution covered IHCs that have outstanding
unsecured debt with acceleration clauses or subject to foreign law. The
same treatment does not apply to internal LTD. The Board does not
believe that covered IHCs have substantial amounts of internal long-
term debt outstanding since the requirement to establish a covered IHC
became effective on July 1, 2016. Moreover, the Board believes that
covered IHCs could modify the terms of existing outstanding internal
debt issued to a foreign parent or another foreign affiliate with
relative ease and low cost.
Commenters also noted that the proposal does not impose limits on
the rights of holders of internal LTD to file suit in the event of non-
payment or that such holders would have to waive those rights. However,
because of the limitations on acceleration provisions, commenters
requested that the Board clarify that the rule does not also limit such
rights. The final rule does not require the holder of an eligible
internal debt security, eligible external debt security, or eligible
debt security to waive the holder's rights to file suit to enforce
their ordinary creditor remedies. However, if a covenant involves a
redemption or repurchase by the covered IHC of eligible LTD (e.g., upon
sale of a principal subsidiary), any such covenant would be subject to
the restrictions on redemption and repurchase described elsewhere in
this SUPPLEMENTARY INFORMATION, including prior approval from the Board
if after redemption or repurchase of eligible LTD, a covered IHC would
not meet its LTD requirement.
3. Contractual Subordination
Under the proposal, eligible internal LTD was required to be
contractually subordinated to all third-party liabilities of the
covered IHC, with the exception of liabilities that are related to
eligible internal TLAC.\87\ A number of commenters objected to the
requirement under the proposal that internal LTD was required to be
contractually subordinated. These commenters encouraged the Board,
consistent with the FSB standard and principles of national treatment
and equality of competitive opportunity, to permit covered IHCs the
flexibility afforded to covered BHCs to rely on either structural or
contractual subordination. These commenters suggested that covered IHCs
relying on structural subordination should be permitted a similar 5
percent allowance for unrelated liabilities to that permitted for
covered BHCs under the proposal.\88\ Commenters argued that these
modifications would enable covered IHCs to avoid added costs associated
with contractual subordination. One commenter, for example, provided an
estimate of the cost of contractual subordination ranging from an
additional 25 to 100 basis points with an average of 59 additional
basis points. Commenters also indicated that the deep subordination
requirements of the proposal would contribute to uncertainty over
whether eligible long-term debt would be characterized as debt and not
equity for purposes of U.S. federal and state tax laws.
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\87\ The exception for liabilities that are related to eligible
internal TLAC applied 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.
\88\ While the Board did not propose to subject covered BHCs to
this contractual subordination requirement, it did 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 final rule is discussed
below.
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The Board has modified the proposal to permit covered IHCs the
option to contractually or structurally subordinate their debt. For the
same reasons discussed above with respect to covered BHCs, a covered
IHC will have flexibility under the final rule to choose between
contractual subordination and structural subordination. This
modification also provides parity between covered BHCs and covered IHCs
and thus should mitigate the costs of contractual subordination raised
by comments under the proposal. If a covered IHC opts to contractually
subordinate all of its eligible long-term debt, it will not be required
to have a cap on unrelated liabilities.\89\ If a covered IHC has any
eligible long-term debt that is structurally subordinated,
[[Page 8296]]
the long-term debt would be allowed to be senior unsecured debt and to
be senior to a capped amount of liabilities of the covered IHC that do
not count as eligible external LTD.\90\
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\89\ A covered BHC similarly would have the option under the
final rule to contractually subordinate all of its eligible external
LTD and not have a cap on unrelated liabilities as described below.
\90\ The applicability of the cap to resolution covered IHCs and
non-resolution covered IHCs is described in more detail below.
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4. Contractual Conversion Trigger
Under the proposal, eligible internal LTD was 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) under certain
circumstances. These were if the Board determines that the covered IHC
is ``in default or in danger of default'' and any of three additional
circumstances applied.\91\ First, the top-tier foreign banking
organization or any of its subsidiaries was placed into resolution
proceedings. Second, the home country supervisory authority consented
to the cancellation, exchange, or conversion, or did not object to the
cancellation, exchange, or conversion following 48 hours' notice. Third
and finally, the Board 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 of the Dodd-Frank Act.\92\
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\91\ 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.
\92\ See 12 U.S.C. 5383.
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A number of commenters requested that the Board eliminate the
contractual conversion trigger. These commenters argued that the
conversion trigger was unnecessary to achieve the Board's objectives,
would unfairly increase the funding costs of covered IHCs as compared
to covered BHCs and could unfairly increase tax costs of covered IHCs
as compared to covered BHCs. In particular, these commenters indicated
that this feature posed a substantial risk of the LTD being
characterized as equity, rather than debt, for U.S. tax purposes,
further increasing the cost of compliance for covered IHCs, especially
when combined with the contractual subordination requirement and
prohibition on any acceleration clauses under the proposal.
One commenter estimated the cost of the contractual conversion
feature would range from a minimum of 20 additional basis points to a
maximum of 85 basis points with an average increase in cost of 50 basis
points. Another commenter estimated that a covered IHC's pre-tax cost
would increase by a range of $10.5 million to $105 million as a result
of the contractual conversion feature for a hypothetical covered IHC
with risk-weighted assets of $100 billion. These commenters argued that
the costs of this feature outweigh its benefits. In particular, certain
commenters argued that a conversion trigger is not necessary to ensure
an IHC can withstand losses, as the FBO parent would have every
incentive to preserve the value of the IHC and recapitalize the IHC to
avoid its entry into insolvency or resolution. Commenters also argued
that the conversion trigger contravenes principles of national
treatment and equality of competitive opportunity required under the
Dodd-Frank Act.
Commenters recommended that the Board, if it retained the
contractual conversion trigger in any final rule, coordinate with the
U.S. Treasury to ensure that the long-term debt would be treated as
debt for U.S. federal income tax purposes. Commenters also suggested a
number of modifications to the conversion trigger to increase the
likelihood that the long-term debt would be treated as debt. In
particular, commenters urged the Board to remove the ability to cancel
the long-term debt, since cancellation is not necessary to ensure that
a covered IHC can be recapitalized outside of insolvency (i.e.,
conversion alone can achieve that end). These commenters argued that
the provision providing for the cancellation of the debt instrument
would be inconsistent with the principle that debt must retain its
priority over equity, because the cancellation of internal LTD would
result in the subordination of LTD to existing equity. These commenters
also indicated that this same concern arose from the requirement that
internal LTD convert into equity while any existing equity remains
outstanding. As a result, these commenters urged the Board to clarify
in the preamble of the final rule that covered IHCs could adopt ``self-
help'' measures to preserve the priority of internal LTD when it
converts into equity (e.g., all classes of a covered IHC's going
concern equity may contain a transfer provision that allows the equity
to be transferred for no consideration to the covered IHC, which is
able to cancel the equity, prior to conversion of LTD into equity).
Commenters also indicated that allowing internal LTD to have
provisions (e.g., acceleration clauses and covenants) on the same terms
as external LTD would make it more likely that the internal LTD would
be characterized as debt and not equity. Further, commenters argued
that not requiring internal LTD to be contractually subordinated,
rather allowing it to be structurally subordinated, would further help
the characterization of internal LTD as debt and not equity.
As an initial matter, the final rule gives resolution covered IHCs
the option to issue debt externally to third-party investors under the
final rule on the same terms as covered BHCs. The external debt issued
by resolution covered IHCs is not required to contain a contractual
conversion trigger.
After considering all of the information provided by commenters,
the Board has determined that the benefits of a conversion trigger
requirement for internal debt outweigh its potential costs. A
conversion trigger will allow covered IHCs that are in default or
danger of default to be recapitalized through the conversion of
eligible internal LTD to equity upon the occurrence of the trigger
conditions in light of the losses that the covered IHC has incurred.
Under certain circumstances, entry of a covered IHC into a resolution
proceeding could pose a risk to the financial stability of the United
States. Recapitalizing such a covered IHC outside of a resolution
proceeding, and thereby reducing systemic risk, 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 without the need for government or
taxpayer support.\93\
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\93\ 12 U.S.C. 5365(a)(1).
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The final rule contains certain targeted changes suggested by
commenters that are consistent with the policy objectives of the final
rule that internal LTD be characterized as debt and not equity and that
are intended to mitigate associated potential costs with respect to the
proposed conversion feature raised by commenters.
First, the Board has modified the requirement that the internal
eligible long-term debt instrument allow the Board to require either
the cancellation or conversion of the debt under the proposal. Under
the final rule, the Board
[[Page 8297]]
would only have the ability to require the conversion of the debt into
equity. This change does not prejudice the Board's policy objective of
transferring the losses suffered by the covered IHC to the holder of
the eligible internal LTD through the conversion of eligible internal
LTD into equity.
Second, under the proposal, the Board would have had to require
conversion of all eligible internal debt. Under the final rule, the
Board would have the ability to require the conversion of some or all
of the eligible internal debt. This change gives the Board the
flexibility to respond to losses or stress at a covered IHC in a more
targeted manner.
Third, as noted, the final rule allows all eligible LTD to have
acceleration clauses on the same terms as eligible external LTD.
Fourth, also as noted, the final rule allows internal LTD to be
structurally subordinated in a similar manner as eligible external LTD.
The combination of these changes represent a number of adjustments that
commenters indicated would ameliorate the characterization of internal
LTD as equity under U.S. tax law. In addition, nothing in this final
rule restricts the ability of a covered IHC to build terms that are
consistent with applicable law into its equity or debt instruments
(e.g., terms that provide that existing equity would be transferred to
the covered IHC and canceled upon transfer if the long-term debt
converts to equity or debt covenants on the same terms permissible for
covered BHCs described above).
Under the proposal, the Board was required to consider an objection
by the home country supervisor to the conversion, exchange or
cancellation of eligible internal debt securities if the Board received
the objection no later than 48 hours after the Board requested such
consent or non-objection from the home country supervisor. A few
commenters argued that this period was too short for the home country
regulator of a covered IHC's parent FBO to play a meaningful role in
the decision to recapitalize or resolve a covered IHC, particularly
during a period of market stress.
After giving additional consideration to this issue and consulting
with certain foreign regulatory authorities, the Board has determined
to reduce the 48-hour-period in the proposal to 24 hours in the final
rule. As exhibited during the last financial crisis, a firm can
collapse precipitously meaning that time may be of the essence. The
Board expects to be in close coordination with regulators in other
jurisdictions if a firm with a covered IHC begins to exhibit losses or
stress, meaning the 24-hour period should be a sufficient amount of
time for the home country regulator to object to the conversion of the
covered IHC's LTD into equity. These early communications between the
Board and the home country regulators should address the concerns
raised by commenters about ensuring that a home country regulator has
enough time and notice to be able to play a meaningful role in a
decision regarding the covered IHC.
For all these reasons, the final rule requires internal debt,
whether issued by resolution covered IHCs or non-resolution covered
IHCs, to contain a contractual conversion feature. As under the
proposal, the terms of the contractual conversion provision in the debt
instrument would have to be approved by the Board.
The conversion trigger in the final rule represents 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 conversion
trigger advances 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 24 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 conversion trigger requirement advances this interest by giving the
home jurisdiction supervisory authority the right to object to the
triggering decision within 24 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,
thereby making both considerations relevant to the Board's role as both
a home and host country supervisor.
5. Haircuts
Under the proposal, eligible internal LTD with a remaining maturity
of between one and two years was 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.
A number of commenters recommended that the Board eliminate the 50
percent haircut applicable to eligible debt securities with a remaining
maturity between one and two years, to make the proposed requirements
more consistent with the FSB standard. These commenters argued that the
haircut is less appropriate in the context of internal LTD for covered
IHCs because there would be no refinancing risk--i.e., risk that the
covered IHC will lose market risk and be unable to replace the internal
LTD as it approaches maturity since it can simply replace internal LTD
with a new issuance of internal LTD to a foreign affiliate. These
commenters argued that foreign parents and foreign affiliates can be
expected to continue to roll over debt or extend credit to a covered
IHC in a period of stress so that the covered IHC could continue to
meet any applicable LTD requirements. One commenter also recommended
that the Board reduce the haircut for internal debt with a remaining
maturity of less than one year from 100 percent to 50 percent.
The Board is not modifying the proposed rule in response to these
comments. The Board has modified the proposal to change ``remaining
maturity'' of the principal amount to the amount ``due to be paid.''
Like for covered BHCs, this clarification is intended to make clear
that only the remaining principal amount due to be paid counts as
eligible LTD. Under the final rule, eligible external LTD or internal
LTD issued by covered IHCs that is due to be paid between one and two
years is subject to a 50 percent haircut for purposes of the internal
LTD requirement, and eligible LTD that is due to be paid in less than
one year would not count toward the internal LTD requirement. These
requirements are the same as those applicable to covered BHCs.
The purpose of these requirements is to ensure the ability of LTD
instruments to absorb losses. The rationale for the haircut is to
incentivize a firm to have enough debt of sufficient maturity to avoid
issuing debt in unfavorable market circumstances or in the event
[[Page 8298]]
that the covered IHC is experiencing financial difficulties. With
respect to internal LTD in particular, based on the information
provided by commenters it appears covered IHCs should be able to easily
roll over their one-year or two-year debt to avoid haircuts if that is
the manner in which they choose to fund themselves. Moreover, the
argument that foreign parents will always be incentivized to rollover
or refinance the debt of covered IHCs, even when a third party would
not do so, is inconsistent with other comments provided by foreign
GSIBs indicated that covered IHCs generally transact with their FBO
parents on an arm's-length terms.
The final rule applies the same treatment as the proposal to an
internal debt instrument that could become subject to a put right in
the future. Under the final rule, such instruments would be treated as
due to be paid on the first day on which the put right could be
exercised. The rationale for this approach is the same as the rationale
for the identical provisions that apply to eligible external LTD issued
by covered BHCs, as discussed above. No comments were received on this
aspect of the proposal.
IV. Clean Holding Company Requirements (Sections 252.64 and 252.166 of
the Final Rule)
The proposed rule would have prohibited covered BHCs and covered
IHCs (together, covered holding companies) from engaging in certain
transactions that could impede the orderly resolution of a covered
holding company or increase the risk that financial market contagion
would result from the resolution of a covered holding company.
Specifically, the proposal would have prohibited covered holding
companies from having the following categories of outstanding
liabilities: 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 (other than resolution
under Title II of the FDI Act) would create default rights for a
counterparty of the subsidiary (subsidiary guarantees with cross-
defaults rights); and liabilities that are guaranteed by a subsidiary
of the covered holding company (upstream guarantees) or that 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 proposal would have limited 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 (5
percent cap). With respect to covered IHCs, the proposal would have
prohibited 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 was not relevant to covered IHCs under the proposal.
The Board received comments on the proposed prohibitions on short-
term debt, third-party QFCs, and subsidiary guarantees with cross-
defaults rights. The final rule generally adopts these requirements of
the proposal with modifications to address comments received on the
proposal.
A. Third-Party Short-Term Debt Instruments (Sections 252.64(a)(1) and
252.166(a)(1) of the Final Rule)
Like the proposal, the final rule prohibits covered holding
companies from issuing debt instruments with an original maturity of
less than one year to a third party. (Issuances to an affiliate of the
covered holding company are permitted under the final rule.) Under the
final rule, a liability has 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 prohibition of the final rule would also cover short-
term and demand deposits at the covered holding company.\94\
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\94\ For purposes of the final rule, deposits would include
those that are captured in line item 11 of schedule PC of FR Y-9LP.
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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 the
debts of the financial company. The resulting liquidity stress can
hasten a company's failure, including by forcing the company to engage
in asset fire sales to pay obligations due to short-term creditors.
Because they reduce the value of similar assets held by other firms,
asset fire sales can be a key channel for the propagation of stress
throughout the financial system. The short-term creditors of a failing
GSIB may also run on counterparties that are similar to a failing firm,
thereby weakening those firms and forcing further fire sales.
Similarly, certain depositors, who generally have the ability to demand
their funds on short notice, present analogous funding issues.
The final rule 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, the short-
term creditors of operating subsidiaries would not bear losses incurred
by the subsidiaries because those losses would instead be transferred
to the covered holding company and therefore borne by the external TLAC
holders during the bankruptcy or resolution 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 would not default
in such a resolution. Second, the covered holding companies themselves
would be prohibited from relying on short-term funding, reducing the
run risk associated with the failure of such an entity. This goal is
particularly important 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 may be needed to support the
group's operating subsidiaries.
One commenter argued that the proposal was unnecessarily
restrictive and could prevent covered BHCs from obtaining liquidity via
temporary secured lending. The prohibition against short-term funding
in the final rule 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 exposure 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
[[Page 8299]]
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 in
stressful conditions, 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. The final rule would enhance
the credibility of the SPOE approach by reducing these risks and
simplifying the types of creditors and funding of a covered holding
company in resolution.
Finally, the prohibition of the final rule 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 fire sales. The
increase in covered holding company resiliency yielded by the
prohibition provides a secondary justification for the proposal.
One commenter contended that the proposed prohibition on short-term
debt might prohibit covered holding companies from obtaining secured
liquidity from the FDIC and requested the final rule except from the
prohibition secured liquidity provided by the FDIC during periods of
market distress or to facilitate an SPOE resolution. The Board would
not expect the prohibition under the final rule to interfere with the
orderly resolution of covered holding companies under Title II or other
forms of governmental liquidity support and therefore is adopting the
prohibition as proposed.
B. Qualified Financial Contracts With Third Parties (Sections
252.64(a)(3) and 252.166(a) of the Final Rule)
Under the proposal, covered BHCs could have only entered into
qualified financial contracts (QFCs) with their subsidiaries and
covered IHCs could have only entered into QFCs with their affiliates.
The proposal defined 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.\95\
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\95\ 12 U.S.C. 5390(c)(8)(D).
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One commenter expressed support for this aspect of the rule arguing
that it is best for all holding company swap transactions to be
executed with internal entities to minimize the impact of external
market disruption and reduce complexity. Other commenters noted that
the prohibition on third-party QFCs not only would bar a covered
holding company from directly entering into a swap, repurchase
agreement, or other QFC but also would prohibit the covered company
from guaranteeing or otherwise providing a credit enhancement for such
a contract between a subsidiary of the covered holding company and a
third party. The proposed third-party QFC prohibition would have
prohibited credit enhancements provided by covered holding companies
because the definition of QFC in Title II of the Dodd-Frank Act, which
the proposal incorporated by reference, includes credit enhancements of
swap agreements, repurchase agreements, and the other financial
contracts identified in the definition.
Some commenters suggested that the Board permit covered BHCs to
enter into QFCs with third parties if the QFCs were cleared through a
central counterparty (CCP). This commenter argued that the risk-
minimizing requirements in place at CCPs (that is, requirements to post
initial and variation margin and the maintenance of a guaranty or
default fund) limit concerns over the termination of QFCs and related
fire sales as well as any concern that the CCP counterparty would
itself become insolvent and contribute to contagion risk.
In response to these comments, the Board notes that, like
counterparties to uncleared transactions, a CCP counterparty may
respond to an institution's default by immediately liquidating the
institution's collateral and seeking replacement trades with other
dealers. Even less drastic actions, such as increasing collateral
requirements, could have a significant impact on the liquidity of a
failing clearing member. Therefore, cleared QFC activities have the
potential to complicate the resolution of the covered holding company.
Moreover, the potential imposition of losses on CCPs could itself cause
contagion and fire sale risk. For these reasons, the final rule
prohibits covered holding companies from entering into cleared QFCs
with third parties.
Certain commenters requested the final rule permit covered BHCs to
enter QFCs for hedging purposes including to engage in risk-management
of eligible long-term debt. These commenters pointed out that new
margin requirements on swaps and security-based swaps limit the
potential build-up of risk from third-party derivatives.
In response, while QFCs entered into for hedging purposes are
intended to reduce or mitigate risk of the underlying position being
hedged, a material amount of third-party QFCs poses risk to resolution
of covered holding companies regardless of the purpose for which they
are entered. Moreover, the final rule does not restrict the covered
holding company from entering into QFCs with its affiliates for hedging
purposes nor does the final rule prohibit other affiliates from
engaging in QFCs for hedging purposes and risk management.
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 U.S. financial system. The restriction on third-
party QFCs would mitigate this threat to financial stability in two
ways. First, covered holding companies' operating subsidiaries, which
are parties to large quantities of QFCs, are expected to remain solvent
under an SPOE resolution and not expected 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.\96\
[[Page 8300]]
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 fire
sales. The restriction on third-party QFCs would therefore materially
diminish the fire sale risk and contagion effects associated with the
failure of a covered holding company.
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\96\ See Restrictions on Qualified Financial Contracts of
Systemically Important U.S. Banking Organizations and the U.S.
Operations of Systemically Important Foreign Banking Organizations;
Revisions to the Definition of Qualifying Master Netting Agreement
and Related Definitions, 81 FR 29169 (May 11, 2016) (Board QFC Stay
Proposal).
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For all these reasons, the final rule prohibits third-party QFC,
provided that, as requested by commenters, the final rule clarifies
that the prohibition on third-party QFCs does not include credit
enhancements of QFCs. The clean holding company requirements of the
final rule separately address the provision of credit support to QFCs
(and other liabilities) by covered holding companies as described
below.\97\
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\97\ The final rule adds a new definition of ``credit
enhancement'' to mean enhancement means a qualified financial
contract of the type set forth in section 210(c)(8)(D)(ii)(XII),
(iii)(X), (iv)(V), (v)(VI), or (vi)(VI) of Title II of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5390(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI)) or
a credit enhancement that the FDIC determines by regulation is a
qualified financial contract pursuant to section 210(c)(8)(D)(i) of
Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)).
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C. Guarantees That Are Subject to Cross-Defaults (Sections 252.64(a)(4)
and 252.166(a)(3) of the Final Rule)
The proposal would have prohibited a covered holding company from
guaranteeing (including by providing credit support) 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 have directly or indirectly provided
the subsidiary's counterparty with a default right.\98\
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\98\ The proposal defined the term ``default right'' broadly.
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The proposed prohibition was intended to complement other work that
has been done or is underway to facilitate resolution through the stay
of cross-defaults, including the International Swaps and Derivatives
Association (ISDA) 2014 Resolution Stay Protocol.\99\ Commenters urged
the Board to limit the scope of the prohibition on guarantees with
cross defaults to those that are inconsistent with the Board's expected
rule restricting default rights in QFCs or the ISDA Protocol. These
commenters noted that the ISDA Protocol overrides cross-default rights
in instruments subject to the ISDA Protocol with counterparties that
have signed the ISDA Protocol if certain conditions are satisfied.
These commenters argued that the prohibition in the proposed rule would
be overbroad and unnecessary for any guarantees of instruments covered
by the ISDA Protocol if the guaranteed subsidiary's counterparty had
agreed to the ISDA Protocol. Some commenters argued that the exception
to the guarantee prohibition should apply to all liabilities, even if
the Board's expected stay rule only applied to QFCs. Some commenters
also requested the Board delay imposing prohibitions on covered holding
companies until regulations requiring stays of cross-default provisions
in QFCs of banking organizations were finalized.
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\99\ This protocol was subsequently replaced by the ISDA 2015
Universal Resolution Stay Protocol (ISDA Protocol). The ISDA
Protocol and its annexes enable parties to amend the terms of their
QFCs ``to contractually recognize the cross-border application of
special resolution regimes applicable to certain financial companies
until comprehensive statutory regimes are adopted and to support the
resolution of certain financial companies under the United States
Bankruptcy Code.'' Internal Swaps and Derivatives Association, ISDA
2015 Universal Resolution Stay Protocol available at https://www2.isda.org/functional-areas/protocol-management/protocol/22.
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Commenters also argued that, even for instruments not subject to
the same conditions as the ISDA Protocol, the prohibition in the
proposal would be unnecessary in a resolution proceeding under Title II
of the Dodd-Frank Act. Section 210(c)(16) of Title II gives the FDIC
authority to override any cross-defaults if they are triggered by a
covered BHC's insolvency or entry into resolution under Title II and
certain conditions are satisfied.\100\
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\100\ These commenters noted that the prohibition may likewise
become unnecessary in a U.S. bankruptcy proceed if certain bills
pending in both Houses of Congress are passed that would amend the
Bankruptcy Code to override such cross-defaults if certain
conditions are satisfied.
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As noted, the proposed prohibition on subsidiary guarantees with
cross-defaults rights was intended to complement other efforts to
facilitate SPOE resolution through the stay of cross-defaults,
including the ISDA Protocol. Since the TLAC proposal was issued, the
Board and other banking agencies (OCC and FDIC) have proposed QFC stay
rules, which require covered holding companies and their subsidiaries
to restrict the default rights of their QFCs that are subject to the
rule.\101\ The QFC stay proposal issued by the Board would permit,
under limited circumstances, covered holding companies to provide
guarantees of their subsidiaries' covered QFCs with default rights
based, directly or indirectly, on the resolution of the covered holding
company (or another affiliate). The comment period to the proposed QFC
stay rule closed on August 5, 2016, and the Board is considering the
comments thereto.
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\101\ Board QFC Stay Proposal; Mandatory Contractual Stay
Requirements on Qualified Financial Contracts, 81 FR 55381 (Aug. 19,
2016); Restrictions on Qualified Financial Contracts of Certain
FDIC-Supervised Institutions; Revisions to the Definition of
Qualifying Master Netting Agreement and Related Definitions, 81 FR
74326 (Oct. 26, 2016).
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To ensure consistent treatment of financial contracts among the
Board's regulations, the final rule prohibits subsidiary guarantees
with cross-default rights, but exempts guarantees subject to a rule of
the Board restricting such defaults rights or any similar rule of
another U.S. federal banking agency.\102\ Although the Board has not
adopted a rule regarding cross-default provisions of financial
contracts (including those regarding the applicability of Title II of
the Dodd-Frank Act), this final rule leaves open the possibility that
in the future certain guarantees would be permitted to the extent they
are authorized under a rule of the Board or another federal banking
agency.\103\
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\102\ Liabilities would be considered ``subject to'' such a rule
even if those liabilities were exempted from one or more of the
requirements of the rule.
\103\ Because QFCs subject to the final stay rule of the Board
or other banking agencies are exempted from the prohibition, these
QFCs would be required to conform to the stay rule on the time
period specified therein.
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Commenters also requested the Board confirm that the prohibition
would only apply prospectively. The text of the regulation has been
amended to clarify that the prohibition applies only to new agreements.
Finally, the scope of contracts subject to the exception will be
co-extensive with the scope of contracts subject to the final stay
rule, which the proposed stay rule specifically sought comment on, to
align the Board's rulemakings with respect to these requirements. The
prohibition under the final rule advances 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
[[Page 8301]]
prompting a short-term funding run on the subsidiary. As in the
proposal, guarantees by covered holding companies of liabilities that
are not subject to such cross-default rights are unaffected by the
final rule.
D. Upstream Guarantees and Offset Rights (Sections 252.64(a)(2), (5)
and 252.166(a)(2), (5) of the Final Rule)
The proposed rule would have prohibited 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 is premised on the assumption that holders of eligible
external TLAC will bear all losses incurred by the issuing covered
holding company on a consolidated basis 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 expose 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.\104\ The principal
effect of the prohibition would therefore be to prevent the future
issuance of such guarantees by material non-bank subsidiaries. For
these reasons, the final rule prohibits covered holding companies from
having outstanding liabilities that are subject to a guarantee from any
direct or indirect subsidiary.\105\
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\104\ 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).
\105\ In response to comments, the regulatory text of the
prohibition has been modified slightly from the proposed to clarify
the prohibition only applies prospectively.
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For analogous reasons, the final rule prohibits covered holding
companies from issuing an instrument if the holder of the instrument
has a contractual right to offset its liabilities, or the liabilities
of an affiliate of the holder, to the covered holding company's
subsidiaries against the covered holding company's liability under the
instrument.\106\ The prohibition includes 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 are expected
to flow to the covered holding company's external TLAC holders in an
SPOE resolution could instead be imposed on operating subsidiaries and
their creditors.
---------------------------------------------------------------------------
\106\ The prohibition for covered IHCs also includes contractual
rights to offset against the covered IHC because the covered IHC
itself may not enter resolution or insolvency proceedings.
---------------------------------------------------------------------------
One commenter requested confirmation that this prohibition does not
affect the ability of a subsidiary of the covered BHC to provide an
offset right to a counterparty where the covered BHC has guaranteed the
subsidiary's underlying obligations. In response, the prohibition in
the final rule does not extend to offset rights provided by a
subsidiary to its counterparties. However, as noted by the commenter,
the prohibition does prevent a covered holding company from
guaranteeing an obligation of its subsidiary if the guarantee may be
offset against obligations of a subsidiary of the covered holding
company.
E. Cap on Certain Liabilities (Sections 252.64(b)-(c) and 252.166(b)-
(c) of the Final Rule)
Cap on liabilities of Covered BHCs. As noted, the proposed rule
would have limited the total value of certain other liabilities of
covered BHCs to 5 percent of the value of the covered BHC's eligible
external TLAC. The proposed cap would have applied to non-contingent,
non-TLAC liabilities (that is, liabilities that were not eligible LTD)
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.\107\
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\107\ See 11 U.S.C. 507; 12 U.S.C. 5390(b).
---------------------------------------------------------------------------
The final rule generally adopts these requirements as proposed. To
provide additional flexibility to covered BHCs, and for consistency
with the treatment of covered IHCs (described below), the final rule
adds a new provision to make clear that in the event the covered bank
holding company chooses to contractually subordinate all of its long-
term debt, there is no cap on the amount of its non-contingent
liabilities.\108\
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\108\ As discussed above, covered BHCs have the option under the
final rule to structurally subordinate or contractually subordinate
their long-term debt.
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Commenters requested that certain liabilities that could be loss-
absorbing in an orderly resolution not count toward the 5 percent cap
(i.e., not be ``unrelated liabilities'' under the proposal). Requests
for exclusion included all equity, hybrid and long-term debt securities
that can absorb losses without threatening financial stability. In
particular, commenters urged that long term debt securities that
contain any impermissible acceleration provisions, long-term debt
securities governed by foreign law, long-term structured notes, and
long term convertible debt securities and hybrid securities should not
count as unrelated liabilities under the final rule. One commenter
provided figures indicating that without these changes covered BHCs
would have outstanding unrelated liabilities nearly 8 times over the 5
percent cap on January 1, 2019. This commenter recommended the Board
allow at least a one year cure period for inadvertent breaches of the 5
percent cap.
As noted, debt issued on or before December 31, 2016, with standard
acceleration clauses or under foreign law counts as eligible LTD for
purposes of the LTD requirements and TLAC requirements of the final
rule. As such, this outstanding debt is not an ``unrelated liability''
subject to the 5 percent cap under the final rule. Other forms of debt
that do not count as eligible LTD under the final rule would continue
to be subject to the cap under the final rule including 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).\109\ Covered BHCs will have until January 1, 2019, to
conform these liabilities with the 5 percent cap.
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\109\ Commenters requested the Board clarify the scope of
judgment liabilities that would be subject to the cap. In general,
all administrative penalties and court judgments for which the
covered BHC has completed any applicable appeals process would be
included. The Board may address other questions regarding these
kinds of liabilities based on the facts and circumstances of the
liability.
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The liabilities subject to the cap fall into two groups: Those that
could be subjected to losses alongside eligible external TLAC
potentially without undermining SPOE resolution or financial stability,
and those that potentially could not.
The first group includes structured notes. The final rule defines
structured notes so as to avoid capturing debt instruments merely
because the debt instrument is non-dollar denominated
[[Page 8302]]
or pays 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.\110\ 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 cap on structured notes
promotes the resolvability of covered BHCs by limiting their issuance
of instruments that present these issues.\111\ The cap does not limit a
covered BHC's ability to issue structured notes out of subsidiaries.
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\110\ 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.
\111\ See also discussion of structured notes in section
II.E.3.a.
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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 liabilities were pari passu with eligible external
LTD, protecting these 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. 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.\112\ 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 the no-
creditor-worse-off risk.
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\112\ See, e.g., 11 U.S.C. 1129(a)(7); 12 U.S.C. 5390(d)(2).
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As indicated in the preamble to the proposal to justify the
calibration of the 5 percent cap, the Board collected data from 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 that a covered BHC would
have had under the proposal.
The 5 percent cap was calibrated to allow these existing
operational liabilities to continue while limiting the growth of these
and other liabilities at the covered BHC so that the problems discussed
above may be avoided or mitigated. 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 overall rationale
for the clean holding company requirements in the final rule because,
as noted, such structured notes are not liabilities for the performance
of vital services (for example, vendor liabilities) and because their
presence at the holding company could create undue complexity during
resolution. For these reasons, the rationale for the calibration
remains appropriate and the expanded scope of debt that counts as
eligible LTD, discussed above, should address the comments regarding
calibration.
As in the proposal, the cap under the final rule does not apply to
(1) eligible external TLAC; (2) 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 (3)
payables (such as dividend- or interest-related payables) that are
associated with such liabilities. As described in the proposal, the cap
on other third-party liabilities is intended to limit the amount of
third party liabilities that should not be subjected to losses as part
of an orderly resolution (e.g., vendor liabilities) relative to the
amount of liabilities that both could be subjected to losses (e.g.,
LTD) and is pari passu with the liabilities that should not be
subjected to losses. Imposing losses only on certain creditors within
the same priority shrinks the pool of resources available to other
creditors of the same priority and therefore makes it more likely that
the distribution would conflict with the no-creditor-worse-off
requirements of Title II of the Dodd-Frank Act and Chapter 11 of the
U.S. Bankruptcy Code. The final rule also clarifies that if a covered
BHC chooses to contractually subordinate all of its long-term debt, the
cap on unrelated liabilities does not apply.
Cap on Liabilities of Covered IHCs. The proposal would not have
applied the 5 percent cap to covered IHC's because internal LTD would
have been contractually subordinated to all third-party liabilities of
the covered IHC. Therefore, treating internal LTD differently from
vendor liabilities and other third-party liabilities that had the
potential to be important to a holding company following resolution
would not have violated the no-creditor-worse-off principle. However,
as described above, the final rule provides covered IHCs with the
option to choose structural subordination or contractual subordination
of external and internal long-term debt issued by covered IHCs, as
requested by many commenters. The commenters that requested structural
subordination generally recognized that covered IHCs that are permitted
to adopt structural subordination would need to be subject to a cap in
a manner similar to covered BHCs.
The final rule adopts different caps for non-resolution covered
IHCs and resolution covered IHCs because resolution covered IHCs are
able to issue eligible debt externally to third-parties under the final
rule whereas non-resolution covered IHCs must issue eligible long-term
debt internally to certain foreign affiliates. For non-resolution
covered IHCs, the final rule provides that the aggregate amount of
unrelated liabilities that a non-resolution covered IHC owes to persons
that are not affiliates of the covered IHC
[[Page 8303]]
may not exceed 5 percent of the covered IHC's total loss-absorbing
capacity amount. The cap for non-resolution covered IHCs thus functions
as a cap on unrelated liabilities to non-affiliates like the cap for
covered BHCs. Some non-resolution covered IHCs may have external debt
outstanding that would not count as eligible LTD (since these firms
must issue internal LTD), the amount of which could be well above the 5
percent cap. Non-resolution covered IHCs have two years to conform any
external debt issuance to the requirements of the final rule.
Contractual subordination is also available as another possible
alternative for non-resolution covered IHCs to conform to the final
rule.
The 5 percent cap for non-resolution covered IHCs does not include
liabilities owed to foreign affiliates because the eligible long-term
debt held by the parent FBO generally should convert to equity, either
through actions of the parent or the Board. Therefore, in contrast to
resolution covered IHCs (discussed below), concern about the short-term
liabilities owed to the FBO parent or other affiliated parties is
minimal.
In the case of resolution covered IHCs, the final rule adopts a cap
equal to 5 percent of the covered IHC's total loss-absorbing capacity
on the aggregate amount of unrelated liabilities that a resolution
covered IHC may owe to any person other than a subsidiary of the
covered IHC. The cap for resolution covered IHCs applies to unrelated
liabilities owed to parents and sister affiliates, as well as third
parties, because these IHCs have the option to issue external LTD.
Thus, these firms may owe significant amounts of short-term debt or
other unrelated liabilities to the FBO parent or another affiliate that
would remain outstanding when the IHC enters resolution, because such
entities are not anticipated to support the IHC under the resolution
plan of the parent FBO.\113\ The cap on unrelated liabilities owed to
parents and sister affiliates limits the amount of these liabilities
that would remain outstanding upon the conversion of long-term debt to
equity. Moreover, resolution covered IHCs could choose to issue all
eligible LTD, whether internal or external, as contractually
subordinated debt to avoid the cap altogether.
---------------------------------------------------------------------------
\113\ This inclusion of liabilities owed to parents of the
resolution covered IHC also is on par with the cap on liabilities of
covered BHCs, which would include liabilities held by shareholders
of the covered BHC.
---------------------------------------------------------------------------
As with covered BHCs, debt issued prior to December 31, 2016 with
standard acceleration clauses or issued under foreign law counts as
eligible LTD for purposes of the LTD requirements and TLAC requirements
of the final rule. As such, this outstanding debt would not be included
as an unrelated liability subject to the cap under the final rule.
F. Disclosure Requirements (Sections 252.65 and 252.167 of the Final
Rule)
The final rule, like the proposal, requires 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. In addition, the final rule adopts a new section requiring
resolution covered IHCs that issue external debt to be subject to the
same disclosure requirement applicable to covered BHCs.
Consistent with the disclosure requirements imposed by the Board's
capital rules, the covered BHC or covered IHC is 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 or
covered IHC publicly provides a summary table specifically indicating
the location(s) of this disclosure.\114\ Because the disclosure
requirement is primarily intended to inform holders of a covered BHC's
or covered IHCs' eligible external LTD that they are subject to loss
ahead of other creditors of the covered BHC or covered IHC or its
subsidiaries, the proposal would also require the covered BHC or
covered IHC to disclose the required information in the offering
documents for all of its eligible external LTD.
---------------------------------------------------------------------------
\114\ See 12 CFR 217.62(a), 12 CFR 217.172(c)(1).
---------------------------------------------------------------------------
A few commenters argued that comprehensive and clear disclosure is
essential to ensure that potential investors are fully informed of the
risks of the long-term debt and aware of potential losses. These
commenters contended that the risks of misleading investors without
such meaningful disclosure could lead to investors grossly underpricing
the risk of these new instruments. Certain commenters recommended that
the Board prescribe text for a specific warning about the nature of the
debt and only allow the debt to be sold to qualified, sophisticated
investors. One commenter, for example, urged the Board to mandate
comprehensive, plain English disclosures to accompany this new debt
with a front page warning in large red lettering to make clear in one
sentence ``If the bank fails, your full investment is subject to a
complete loss.'' A few commenters also suggested that the contract
should describe expressly how and when the regulators could or would
convert the debt, including the possible future scenarios where this
debt might become convertible in Title I bankruptcy. One commenter
argued that unless the Board specifies the circumstances and mechanism
by which this unsecured debt will absorb losses, the mere disclosure of
an ``expectation'' that this debt will absorb losses will be
insufficient to force holders of the debt to take this expectation
seriously and price for risk accordingly. Another commenter recommended
that the required disclosure should include a list of liabilities of
both eligible and non-eligible TLAC, and its relative position in the
creditor hierarchy.
The Board has long supported meaningful public disclosure by
banking organizations, with the objective of improving market
discipline and encouraging sound risk-management practices.\115\ By
helping holders of eligible external LTD and other unsecured debt
issued by a covered BHC or covered IHC 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 or covered IHC's
subsidiaries, the disclosure requirement of the final rule should
encourage potential investors to carefully assess the covered BHC or
covered IHC'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 and covered IHCs, 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 or covered IHC. In response to
comments, the final rule does not specify the exact circumstances under
which eligible LTD will convert to equity--such a provision would be
inconsistent with the intent and purpose of the final rule that such
debt be available to absorb losses in a flexible manner. However, the
final rule states that the Board may order that internal debt be
converted into equity only if the Board determines that the covered IHC
is in default or danger of default.
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\115\ See, e.g., 78 FR 62018, 62128-29 (October 11, 2013).
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[[Page 8304]]
V. Regulatory Capital Deduction for Investments in the Unsecured Debt
of Covered BHCs
The final rule does not include the proposal's requirement for 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, including unsecured debt instruments that do not qualify
as eligible external LTD. A number of comments urged the Board to,
among other things, increase or have separate thresholds for deductions
of unsecured debt holdings, allow for deductions of the unsecured debt
holdings to be applied to outstanding eligible external LTD instead of
regulatory capital, and recognize an exemption for market-making
activity in the debt instruments. Certain commenters recommended that
the Board postpone the effective date of these requirements.
The Board is considering these comments, as well as a recent
standard related to the regulatory capital treatment of TLAC holdings
that was issued by the BCBS.\116\ The Board intends to work with the
OCC and FDIC towards a proposed interagency approach regarding the
regulatory capital treatment of debt instruments issued by covered
BHCs.
---------------------------------------------------------------------------
\116\ Basel Committee on Banking Supervision, Standard TLAC
Holdings Amendments to the Basel III standard on the definition of
capital (October 2016), available at: https://www.bis.org/bcbs/publ/d387.pdf.
---------------------------------------------------------------------------
VI. Transition Periods
Under the proposal, the Board generally would have required covered
BHCs to achieve compliance with the rule as of January 1, 2019.
However, the proposal would have phased in the risk-weighted assets
component of the external TLAC requirement in two stages: 16 percent
effective January 1, 2019 and 18 percent effective January 1, 2022.
Similarly, under the proposal, the Board generally would have
required covered IHCs to achieve compliance as of January 1, 2019.
However, the proposal would have phased in the risk-weighted assets
component of the internal TLAC requirement applicable to resolution
covered IHCs in the same manner as for covered BHCs: 16 percent
effective January 1, 2019 and 18 percent effective January 1, 2022.
Certain commenters requested that the leverage component of TLAC be
subject to a phase-in until January 1, 2022, like the risk-weighted
asset component under the proposal and consistent with the FSB
standard. Other commenters urged the Board to adopt a phase-in period
for LTD in the final rule or delay other aspects of the proposal.
Other than the certification regarding resolution strategy for FBO
GSIBs that is due on June 30, 2017, the requirements of the final rule
will become effective on January 1, 2019, which will give firms
approximately two years from the date of the issuance of the final rule
to comply. In this respect, the final rule eliminates the proposed
January 1, 2022, phase-in for the risk-weighted asset component of the
TLAC requirements. The Board has monitored the shortfalls of covered
firms as described above and noted significant declines in the amount
of additional capital and long-term debt necessary to meet the
requirements of the final rule. Based on available information and
given the relatively small estimated shortfalls, requiring full
compliance by 2019 should have only a modest incremental impact. In
particular, the phase-in period was provided in part to allow firms
additional time to adjust their capital structures and issue additional
long-term debt. Furthermore, the final rule will grandfather a
significant portion of outstanding long-term debt that would not
otherwise qualify as eligible internal or external LTD, which
significantly reduces the additional time necessary for firms to come
into full compliance with the rule.
Consistent with the proposal, firms that become covered BHCs after
the date on which the final rule is issued will be required to comply
with it on 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.
Also consistent with the proposal, an intermediate holding company
controlled by a foreign banking organization becomes subject to the
requirements of the final rule on the later of January 1, 2019, and
three years from the date on which the foreign banking organization
becomes a foreign GSIB and the foreign banking organization is required
to establish an intermediate holding company pursuant to section
252.153 of Regulation YY.
VII. Consideration of Domestic Internal TLAC Requirements and Public
Reporting Requirements for Eligible Internal TLAC and LTD
In the proposed rule, the Board indicated that it intends to
propose for public comment a requirement that covered BHCs and covered
IHCs report publicly their amounts of TLAC and LTD on a regular basis.
The Board also indicated its consideration of imposing domestic
internal TLAC requirements between certain holding companies and their
subsidiaries to ensure firms have in place adequate mechanisms for
transferring severe losses up to their operating subsidiaries from the
holding company. Such requirements would complement this final rule and
enhance the prospects for a successful SPOE resolution of a covered BHC
or of the parent foreign GSIB of a covered IHC. The Board received a
number of comments on potential public reporting and eligible internal
TLAC and LTD requirements. If the Board determines that it would be
appropriate to propose public reporting requirements related to TLAC
and LTD, or domestic internal TLAC requirements, the Board will invite
public comment at that time.
VIII. Regulatory Analysis
A. Paperwork Reduction Act
Certain provisions of the final 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 final rule under the authority delegated to the Board by
OMB. The disclosure requirements are found in Sec. 252.65 and Sec.
252.167 and the reporting requirements are found in Sec. 252.153(b)(5)
and 252.164. 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 OMB control number
for this collection is 7100-0350.
The final 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 is extending for three years, with revision, the
Reporting, Recordkeeping, and Disclosure Requirements Associated with
Enhanced Prudential Standards (Regulation YY) (Reg YY; OMB No. 7100-
0350). The Board received no comments on the PRA.
The Board has a continuing interest in the public's opinions of
collections of information. At any time, commenters may submit comments
regarding the burden estimate, or any other aspect of this collection
of information, including suggestions for reducing the burden to the
ADDRESSES section. All comments will become a matter of public record.
[[Page 8305]]
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.
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 final rule would require a U.S. 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. Section 252.167 of the final rule would impose these
requirements on certain intermediate holding companies of non-U.S.
global systemically important BHC that issue long term debt to third
parties.
Reporting Requirements
Section 252.153(b)(5) of the final 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.
Section 252.164 of the final rule would require each top-tier
global systemically important foreign banking organization with U.S.
non-branch assets that equal or exceed $50 billion to submit to the
Board a certification indicating whether the planned resolution
strategy of the top-tier foreign banking organization involves the U.S.
intermediate holding company or its subsidiaries entering resolution,
receivership, insolvency, or similar proceedings in the United States.
The rule requires the top-tier foreign banking organization to update
this certification when its resolution strategy changes.
Estimated Paperwork Burden for Proposed Revisions
Estimated Number of Respondents:
Disclosure Burden
Section 252.65--8 respondents.
Section 252.167--3 respondents.
Reporting Burden
Section 252.153(b)(5)--15 respondents.
Section 252.164--8 respondents.
Estimated Burden per Response:
Disclosure Burden
Section 252.65--1 hour (annual), 5 hours (one-time burden).
Section 252.167--1 hour (annual), 5 hours (one-time burden).
Reporting Burden
Section 252.153(b)(5)--10 hours (annual).
Section 252.164--10 hours.
Total estimated one-time burden: 55 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: 241 hours.
Total estimated annual burden: 118,842 hours.
B. Regulatory Flexibility Act
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.
The Board solicited public comment on this rule in a notice of
proposed rulemaking \117\ and has since considered the potential impact
of this rule on small entities in accordance with section 604 of the
RFA. Based on the Board's analysis, and for the reasons stated below,
the Board believes the final rule will not have a significant economic
impact on a substantial number of small entities.
---------------------------------------------------------------------------
\117\ 80 FR 74,926 (Nov. 30, 2015).
---------------------------------------------------------------------------
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, 2016, there were
approximately 3,203 top-tier small bank holding companies. As the
threshold for forming an intermediate holding company in the United
States is $50 billion in total U.S. non-branch assets, there would be
no small covered IHCs.
---------------------------------------------------------------------------
\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).
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1. Statement of the Need for, and Objectives of the Final Rule
As discussed in the SUPPLEMENTARY INFORMATION, the final rule is
designed to improve the resolvability of covered BHCs and covered IHCs
by requiring
[[Page 8306]]
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 Board is not finalizing at this
time the provisions of the proposed rule that would have required small
state member banks and certain SLHCs and BHCS to make deductions from
regulatory capital for investments in eligible external long-term debt
of covered BHCs. As such, the final rule will only apply to entities
that are not small entities as further explained below.
2. Summary of the Significant Issues Raised by Public Comment on the
Board's Initial Analysis, the Board's Assessment of Any Such Issues,
and a Result of Such Comments
The Board did not receive a comments to the initial regulatory
flexibility analysis relating to the elements of the proposal that are
being finalized at this time. The final rule does not impact small
entities as described below.
3. Small Entities Affected by the Final Rule and Compliance
Requirements
The provisions of the final rule will 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.
4. Significant Alternatives to the Final Rule
In light of the foregoing, the Board does not believe that this
final rule will have a significant negative economic impact on any
small entities and therefore believes that there are no significant
alternatives to the final rule that would reduce the impact on small
entities.
C. Invitation for Comments on Use of Plain Language
Section 722 of the Gramm-Leach Bliley Act of 1999 requires the
Federal banking agencies to use plain language in all proposed and
final rules published after January 1, 2000. The Board received no
comments on these matters and believes that the final rule is written
plainly and clearly.
List of Subjects in 12 CFR Part 252
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
Authority and Issuance
For the reasons stated in the SUPPLEMENTARY INFORMATION, the Board
amends part 252 of chapter II of title 12 of the Code of Federal
Regulations as follows:
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
0
1. The authority citation for part 252 is revised to read as follows:
Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828,
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq.,
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367,
5368, 5371.
0
2. In Sec. 252.2:
0
a. Redesignate paragraphs (t) through (z) as paragraphs (bb) through
(hh), respectively;
0
b. Redesignate paragraphs (n) through (s) as paragraphs (u) through
(z), respectively;
0
c. Redesignate paragraphs (i) through (m) as paragraphs (j) through
(n), respectively;
0
d. Add new paragraphs (i) and (o) through (t), and add paragraph (aa).
The additions read as follows:
Sec. 252.2 Definitions.
* * * * *
(i) Credit enhancement means a qualified financial contract of the
type set forth in section 210(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V),
(v)(VI), or (vi)(VI) of Title II of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)(ii)(XII),
(iii)(X), (iv)(V), (v)(VI), or (vi)(VI)) or a credit enhancement that
the Federal Deposit Insurance Corporation determines by regulation is a
qualified financial contract pursuant to section 210(c)(8)(D)(i) of
Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)).
* * * * *
(o) 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.
(p) Global systemically important banking organization means a
global systemically important bank, as such term is defined in the
global methodology.
(q) 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).
(r) Home country, with respect to a foreign banking organization,
means the country in which the foreign banking organization is
chartered or incorporated.
(s) 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.
(t) 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 supervision and regulation of the top-tier
foreign banking organization.
* * * * *
(aa) 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
3. 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.
[[Page 8307]]
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:
(1) A debt instrument that:
(i) Is paid in, and issued by the global systemically important
BHC;
(ii) 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;
(iii) Has a maturity of greater than or equal to 365 days (one
year) from the date of issuance;
(iv) Is governed by the laws of the United States or any State
thereof;
(v) 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:
(A) A receivership, insolvency, liquidation, or similar proceeding
of the global systemically important BHC; or
(B) A failure of the global systemically important BHC to pay
principal or interest on the instrument when due and payable that
continues for 30 days or more;
(vi) 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;
(vii) Is not a structured note; and
(viii) Does not provide that the instrument may be converted into
or exchanged for equity of the global systemically important BHC; and
(2) A debt instrument issued prior to December 31, 2016 that:
(i) Is paid in, and issued by the global systemically important
BHC;
(ii) 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;
(iii) Has a maturity of greater than or equal to 365 days (one
year) from the date of issuance;
(iv) 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;
(v) Is not a structured note; and
(vi) 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(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)).
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 that becomes due
upon acceleration or early termination; or
(4) Is not classified as debt under GAAP, provided that an
instrument is not a structured note solely because it is one or both of
the following:
(i) An instrument that is not denominated in U.S. dollars; or
(ii) An instrument where interest payments are based on an interest
rate index.
Supplementary leverage ratio has the same meaning as in 12 CFR
217.10(c)(4).
[[Page 8308]]
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 part 217, subpart D (the standardized
approach) or 12 CFR part 217, subpart E (the internal ratings-based and
advanced measurement 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 amount due to be paid of
unpaid principal of the outstanding eligible debt securities issued by
the global systemically important BHC in greater than or equal to 730
days (two years);
(ii) Fifty (50) percent of the amount due to be paid of unpaid
principal of the outstanding eligible debt securities issued by the
global systemically important BHC in greater than or equal to 365 days
(one year) and less than 730 days (two years); and
(iii) Zero (0) percent of the amount due to be paid of unpaid
principal of the outstanding eligible debt securities issued by the
global systemically important BHC in less than 365 days (one year).
(2) For purposes of paragraph (b)(1) of this section, the date on
which principal is due to be paid on an outstanding eligible debt
security is calculated from the earlier of:
(i) The date on which payment of principal is required under the
terms governing the instrument, 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 the amount 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.
(3) After notice and response proceedings consistent with 12 CFR
part 263, subpart E, the Board may order a global systemically
important BHC to exclude from its outstanding eligible long-term debt
amount any debt security with one or more features that would
significantly impair the ability of such debt security to take losses.
(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) 18 percent of the global systemically important BHC's total
risk-weighted assets; and
(2) 7.5 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 amount due to be
paid of unpaid principal of outstanding eligible debt securities issued
by the global systemically important BHC in, as calculated in Sec.
252.62(b)(2), 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
risk-weighted buffer. The external TLAC risk-weighted 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 risk-weighted payout ratio. The maximum
external TLAC risk-weighted 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 risk-weighted
payout ratio is based on the global systemically important BHC's
external TLAC risk-weighted 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 risk-weighted payout amount. A global
systemically important BHC's maximum external TLAC risk-weighted 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 risk-weighted payout ratio, as set
forth in Table 1 to Sec. 252.63.
(iv) Maximum external TLAC leverage payout ratio. The maximum
external TLAC leverage 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 leverage payout
ratio is based on the global systemically important BHC's external TLAC
leverage buffer level, calculated as of the last day of the
[[Page 8309]]
previous calendar quarter, as set forth in Table 2 to Sec. 252.63.
(v) Maximum external TLAC leverage payout amount. A global
systemically important BHC's maximum external TLAC leverage payout
amount for the current calendar quarter is equal to the global
systemically important BHC's eligible retained income, multiplied by
the applicable maximum TLAC leverage payout ratio, as set forth in
Table 2 to Sec. 252.63.
(3) Calculation of the external TLAC risk-weighted buffer level.
(i) A global systemically important BHC's external TLAC risk-weighted
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) 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 outstanding 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 18 percent, the global systemically important BHC's
external TLAC risk-weighted 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 risk-weighted payout
amount or the maximum external TLAC leverage payout amount.
(ii) A global systemically important BHC with an external TLAC
risk-weighted buffer level that is greater than the external TLAC risk-
weighted buffer and an external TLAC leverage buffer that is greater
than 2.0 percent, in accordance with paragraph (c)(5) of this section,
is not subject to a maximum external TLAC risk-weighted payout amount
or a maximum external TLAC leverage 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 risk-weighted buffer level was less than the
external TLAC risk-weighted buffer as of the end of the previous
calendar quarter or external TLAC leverage buffer level was less than
2.0 percent 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.
(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),
the maximum external TLAC risk-weighted payout amount as determined
under this paragraph, and the maximum external TLAC leverage 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.
(5) External TLAC leverage buffer--(i) General. A global
systemically important BHC is subject to the lower of the maximum
external TLAC risk-weighted payout amount as determined under paragraph
(c)(2)(iii) of this section and the maximum external TLAC leverage
payout amount as determined under paragraph (c)(2)(v) of this section.
(ii) Composition of the external TLAC leverage buffer. The external
TLAC leverage buffer is composed solely of tier 1 capital.
(iii) Calculation of the external TLAC leverage buffer level. (A) A
global systemically important BHC's external TLAC leverage buffer level
is equal to the global systemically important BHC's supplementary
leverage ratio (expressed as a percentage) minus the greater of zero
and the following amount:
(1) 7.5 percent; minus
(2) The ratio (expressed as a percentage) of the global
systemically important BHC's outstanding eligible external long-term
debt amount to total leverage exposure.
(B) Notwithstanding paragraph (c)(5)(iii) 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 total leverage exposure is less
than or equal to 7.5 percent, the global systemically important BHC's
external TLAC leverage buffer level is zero.
Table 1 to Sec. 252.63--Calculation of Maximum External TLAC Risk-
Weighted Payout Amount
------------------------------------------------------------------------
Maximum External TLAC risk-
weighted payout ratio (as a
External TLAC risk-weighted buffer level percentage of eligible
retained income)
------------------------------------------------------------------------
Greater than the external TLAC risk- No payout ratio limitation
weighted buffer. applies.
Less than or equal to the external TLAC 60 percent.
risk-weighted buffer, and greater than 75
percent of the external TLAC risk-weighted
buffer.
Less than or equal to 75 percent of the 40 percent.
external TLAC risk-weighted buffer, and
greater than 50 percent of the external
TLAC risk-weighted buffer.
Less than or equal to 50 percent of the 20 percent.
external TLAC risk-weighted buffer, and
greater 25 percent of the external TLAC
risk-weighted buffer.
Less than or equal to 25 percent of the 0 percent.
external TLAC risk-weighted buffer.
------------------------------------------------------------------------
[[Page 8310]]
Table 2 to Sec. 252.63--Calculation of Maximum External TLAC Leverage
Payout Amount
------------------------------------------------------------------------
Maximum External TLAC leverage
External TLAC leverage buffer level payout ratio (as a percentage
of eligible retained income)
------------------------------------------------------------------------
Greater than 2.0 percent................ No payout ratio limitation
applies.
Less than or equal to 2.0 percent, and 60 percent.
greater than 1.5 percent.
Less than or equal to 1.5 percent, and 40 percent.
greater than 1.0 percent.
Less than or equal to 1.0 percent, and 20 percent.
greater than 0.5 percent.
Less than or equal to 0.5 percent....... 0 percent.
------------------------------------------------------------------------
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 that is not a credit
enhancement with a person that is not a subsidiary of the global
systemically important BHC;
(4) Enter into an agreement in which the global systemically
important BHC guarantees 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) unless
the liability is subject to requirements of the Board restricting such
default rights or subject to any similar requirements of another U.S.
federal banking agency; or
(5) Enter into, or otherwise begin to 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 are used to satisfy the global
systemically important BHC's external total loss-absorbing capacity
amount, as calculated under Sec. 252.63(b);
(ii) Any dividend or other liability arising from the instruments
that are used to satisfy the global systemically important BHC's
external total loss-absorbing capacity amount, as calculated under
Sec. 252.63(b);
(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).
(c) A Covered BHC is not subject to paragraph (b) of this section
if all of the eligible debt securities issued by the Covered BHC would
represent the most subordinated debt claim in a receivership,
insolvency, liquidation, or similar proceeding of the Covered BHC.
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
4. 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 with U.S. non-branch assets that equal or exceed $50
billion 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 available to the Board,
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 12 CFR 217.402 of the Board's
Regulation Q; or
(C) That the U.S. intermediate holding company, if it were subject
to 12 CFR 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:
[[Page 8311]]
(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
5. Add subpart P to read as follows:
Subpart P--Covered IHC Long-Term Debt Requirement, Covered IHC
Total Loss absorbing Capacity Requirement and Buffer, and
Restrictions on Corporate Practices for Intermediate Holding
Companies of Global Systemically Important Foreign Banking
Organizations
Sec.
252.160 Applicability.
252.161 Definitions.
252.162 Covered IHC long-term debt requirement.
252.163 Internal debt conversion order.
252.164 Identification as a resolution Covered IHC or a non-
resolution Covered IHC
252.165 Covered IHC total loss-absorbing capacity requirement and
buffer.
252.166 Restrictions on corporate practices of intermediate holding
companies of global systemically important foreign banking
organizations.
252.167 Disclosure requirements for resolution Covered IHCs.
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 Sec. Sec. 252.162, 252.163, 252.165, 252.166, and
252.167 beginning on the later of:
(1) January 1, 2019; and
(2) 1095 days (three years) after the earlier of the date on which:
(i) The U.S. non-branch assets of the global systemically important
foreign banking organization that controls the Covered IHC equaled or
exceeded $50 billion; and
(ii) The foreign banking organization that controls the Covered IHC
became a global systemically important foreign banking organization.
(c) Applicability of Sec. 252.164. Section 252.164 applies to a
global systemically important foreign banking organization with U.S.
non-branch assets that equal or exceed $50 billion.
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.
Covered IHC 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).
Covered IHC Total loss-absorbing capacity amount is defined in
Sec. 252.165(c).
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
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 external debt security means:
(1) A debt instrument that:
(i) Is paid in, and issued by the Covered IHC to, and remains held
by, a person that does not directly or indirectly control the Covered
IHC and is not a wholly owned subsidiary;
(ii) Is not secured, not guaranteed by the Covered IHC or a
subsidiary of the Covered IHC, and is not subject to any other
arrangement that legally or economically enhances the seniority of the
instrument;
(iii) Has a maturity of greater than or equal to 365 days (one
year) from the date of issuance;
(iv) Is governed by the laws of the United States or any State
thereof;
(v) 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:
(A) A receivership, insolvency, liquidation, or similar proceeding
of the Covered IHC; or
(B) A failure of the Covered IHC to pay principal or interest on
the
[[Page 8312]]
instrument when due and payable that continues for 30 days or more;
(vi) Does not have a credit-sensitive feature, such as an interest
rate that is reset periodically based in whole or in part on the
Covered IHC's credit quality, but may have an interest rate that is
adjusted periodically independent of the Covered IHC's credit quality,
in relation to general market interest rates or similar adjustments;
(vii) Is not a structured note; and
(viii) Does not provide that the instrument may be converted into
or exchanged for equity of the covered IHC; and
(2) A debt instrument issued prior to December 31, 2016 that:
(i) Is paid in, and issued by the Covered IHC to, and remains held
by, a person that does not directly or indirectly control the Covered
IHC and is not a wholly owned subsidiary;
(ii) Is not secured, not guaranteed by the Covered IHC or a
subsidiary of the Covered IHC, and not subject to any other arrangement
that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to 365 days (one
year) from the date of issuance;
(iv) Does not have a credit-sensitive feature, such as an interest
rate that is reset periodically based in whole or in part on the
Covered IHC's credit quality, but may have an interest rate that is
adjusted periodically independent of the Covered IHC's credit quality,
in relation to general market interest rates or similar adjustments;
(v) Is not a structured note; and
(vi) Does not provide that the instrument may be converted into or
exchanged for equity of the Covered IHC.
Eligible Covered IHC debt security with respect to a non-resolution
Covered IHC means eligible internal debt securities issued by the non-
resolution Covered IHC, and with respect to a resolution Covered IHC
means eligible internal debt securities and eligible external debt
securities issued by the resolution Covered IHC.
Eligible internal debt security means a debt instrument that:
(i) Is paid in, and issued by the Covered IHC;
(ii) Is not secured, not guaranteed by the Covered IHC or a
subsidiary of the Covered IHC, and is not subject to any other
arrangement that legally or economically enhances the seniority of the
instrument;
(iii) Has a maturity of greater than or equal to 365 days (one
year) from the date of issuance;
(iv) Is governed by the laws of the United States or any State
thereof;
(v) 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:
(A) A receivership, insolvency, liquidation, or similar proceeding
of the Covered IHC; or
(B) A failure of the Covered IHC to pay principal or interest on
the instrument when due and payable that continues for 30 days or more;
(vi) Is not a structured note;
(vii) Is issued to and remains held by a company that is
incorporated or organized outside of the United States, and directly or
indirectly controls the Covered IHC or is a wholly owned subsidiary;
and
(viii) 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 upon issuance
by the Board of an internal debt conversion order.
GAAP means generally accepted accounting principles as used in the
United States.
Internal debt conversion order means an order by the Board to
immediately convert to, or exchange for, common equity tier 1 capital
an amount of eligible internal debt securities of the Covered IHC
specified by the Board in its discretion, as described in Sec.
252.163.
Non-resolution Covered IHC means a Covered IHC identified as or
determined to be a non-resolution Covered IHC pursuant to Sec.
252.164.
Outstanding eligible Covered IHC 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)).
Resolution Covered IHC means a Covered IHC identified as or
determined to be a resolution Covered IHC pursuant to Sec. 252.164.
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 that becomes due
and payable upon acceleration or early termination; or
(4) Is not classified as debt under GAAP, provided that an
instrument is not a structured note solely because it is one or both of
the following:
(i) A non-dollar-denominated instrument, or
(ii) An instrument whose interest payments are based on an interest
rate index.
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.
U.S. non-branch assets has the same meaning as in 12 CFR
252.152(b)(2).
Wholly owned subsidiary means an entity, all of the outstanding
ownership interests of which are owned directly or indirectly by a
global systemically important foreign banking organization that
directly or indirectly controls a Covered IHC, except that up to 0.5
percent of the entity's outstanding ownership interests may be held by
a third party if the ownership interest is acquired or retained by the
third party for the purpose of establishing corporate separateness or
addressing bankruptcy, insolvency, or similar concerns.
Sec. 252.162 Covered IHC long-term debt requirement.
(a) Covered IHC long-term debt requirement. A Covered IHC must have
an outstanding eligible Covered IHC long-term debt amount that is no
less than the amount equal to the greatest of:
(1) 6 percent of the Covered IHC's total risk-weighted assets;
(2) If the Covered IHC is required to maintain a minimum
supplementary leverage ratio, 2.5 percent of the Covered IHC's total
leverage exposure; and
(3) 3.5 percent of the Covered IHC's average total consolidated
assets.
(b) Outstanding eligible Covered IHC long-term debt amount. (1) A
Covered IHC's outstanding eligible Covered IHC long-term debt amount is
the sum of:
(i) One hundred (100) percent of the amount of the outstanding
eligible Covered IHC debt securities issued by the Covered IHC due to
be paid in greater than or equal to 730 days (two years); and
[[Page 8313]]
(ii) Fifty (50) percent of the amount of the outstanding eligible
Covered IHC debt securities issued by the Covered IHC due to be paid in
greater than or equal to 365 days (one year) and less than 730 days
(two years); and
(iii) Zero (0) percent of the amount of the outstanding eligible
Covered IHC debt securities issued by the Covered IHC due to be paid in
less than 365 days (one year).
(2) For purposes of paragraph (b)(1) of this section, the date on
which principal is due to be paid on an outstanding eligible Covered
IHC debt security is calculated from the earlier of:
(i) The date on which payment of principal is required under the
terms governing the instrument, 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 the amount 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 Covered IHC, or a
failure of the Covered IHC to pay principal or interest on the
instrument when due), the date for the outstanding eligible Covered IHC
debt security under this paragraph (b)(2)(ii) will be calculated as if
the event has occurred.
(3) After notice and response proceedings consistent with 12 CFR
part 263, subpart E, the Board may order a Covered IHC to exclude from
its outstanding eligible Covered IHC long-term debt amount any debt
security with one or more features that would significantly impair the
ability of such debt security to take losses.
(c) Redemption and repurchase. Without the prior approval of the
Board, a Covered IHC may not redeem or repurchase any outstanding
eligible Covered IHC debt security if, immediately after the redemption
or repurchase, the Covered IHC would not have an outstanding eligible
Covered IHC long-term debt amount that is sufficient to meet its
Covered IHC long-term debt requirement under paragraph (a) of this
section.
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 or exchange 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
or exchange of the eligible internal debt securities to be prompt if
the Board receives the objection no later than 24 hours after the Board
requests such consent or non-objection from the home country
supervisor.
Sec. 252.164 Identification as a resolution Covered IHC or a non-
resolution Covered IHC.
(a) Initial certification. The top-tier global systemically
important foreign banking organization with U.S. non-branch assets that
equal or exceed $50 billion must certify to the Board on the later of
June 30, 2017, or one year prior to the date on which a Covered IHC
becomes subject to the requirements of this subpart pursuant to Sec.
252.160(b) whether the planned resolution strategy of the top-tier
foreign banking organization involves the Covered IHC or the
subsidiaries of the Covered IHC entering resolution, receivership,
insolvency, or similar proceedings in the United States.
(b) Certification update. The top-tier global systemically
important foreign banking organization with U.S. non-branch assets that
equal or exceed $50 billion must provide an updated certification to
the Board upon a change in the resolution strategy described in the
certification provided pursuant to paragraph (a) of this section.
(c) Identification of a resolution Covered IHC. A Covered IHC is a
resolution Covered IHC if the most recent certification provided
pursuant to paragraphs (a) and (b) of this section indicates that the
top-tier foreign banking organization's planned resolution strategy
involves the Covered IHC or the subsidiaries of the Covered IHC
entering resolution, receivership, insolvency, or similar proceedings
in the United States.
(d) Identification of a non-resolution Covered IHC. A Covered IHC
is a non-resolution Covered IHC if the most recent certification
provided pursuant to paragraphs (a) and (b) of this section indicates
that the top-tier foreign banking organization's planned resolution
strategy involves neither the Covered IHC nor the subsidiaries of the
Covered IHC entering resolution, receivership, insolvency, or similar
proceedings in the United States.
(e) Board determination. The Board may determine in its discretion
that a non-resolution Covered IHC identified pursuant to paragraph (d)
of this section is a resolution Covered IHC, or that a resolution
Covered IHC identified pursuant to paragraph (c) of this section is a
non-resolution Covered IHC.
(f) Transition. (1) A Covered IHC identified as a resolution
Covered IHC pursuant to paragraph (b) of this section or determined by
the Board to be a resolution Covered IHC pursuant to paragraph (e) of
this section must comply with the requirements in this subpart
applicable to a resolution Covered IHC within 365 days (one year) after
such identification or determination, unless such time period is
extended by the Board in its discretion.
(2) A Covered IHC identified as a non-resolution Covered IHC
pursuant to paragraph (b) of this section or determined by the Board to
be a non-resolution Covered IHC pursuant to paragraph (e) of this
section must comply with the requirements in this subpart applicable to
a non-resolution Covered IHC 365 days (one year) after such
identification or determination, unless such time period is extended by
the Board in its discretion.
Sec. 252.165 Covered IHC total loss-absorbing capacity requirement
and buffer.
(a) Covered IHC total loss-absorbing capacity requirement for a
resolution Covered IHC. A resolution Covered IHC must have an
outstanding Covered IHC
[[Page 8314]]
total loss-absorbing capacity amount that is no less than the amount
equal to the greatest of:
(1) 18 percent of the resolution Covered IHC's total risk-weighted
assets;
(2) If the Board requires the resolution Covered IHC to maintain a
minimum supplementary leverage ratio, 6.75 percent of the resolution
Covered IHC's total leverage exposure; and
(3) Nine (9) percent of the resolution Covered IHC's average total
consolidated assets.
(b) Covered IHC total loss-absorbing capacity requirement for a
non-resolution Covered IHC. A non-resolution Covered IHC must have an
outstanding Covered IHC total loss-absorbing capacity amount that is no
less than the amount equal to the greatest of:
(1) 16 percent of the non-resolution Covered IHC's total risk-
weighted assets;
(2) If the Board requires the non-resolution Covered IHC to
maintain a minimum supplementary leverage ratio, 6 percent of the non-
resolution Covered IHC's total leverage exposure; and
(3) Eight (8) percent of the non-resolution Covered IHC's average
total consolidated assets.
(c) Covered IHC Total loss-absorbing capacity amount. (1) A non-
resolution Covered IHC's Covered IHC total loss-absorbing capacity
amount is equal to the sum of:
(i) 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;
(ii) 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
(iii) The Covered IHC's outstanding eligible Covered IHC long-term
debt amount, plus 50 percent of the amount of unpaid principal of
outstanding eligible Covered IHC debt securities issued by the Covered
IHC due to be paid in greater than or equal to 365 days (one year) but
less than 730 days (two years).
(2) A resolution Covered IHC's Covered IHC total loss-absorbing
capacity amount is equal to the sum of:
(i) The Covered IHC's common equity tier 1 capital (excluding any
common equity tier 1 minority interest);
(ii) The Covered IHC's additional tier 1 capital (excluding any
tier 1 minority interest); and
(iii) The Covered IHC's outstanding eligible Covered IHC long-term
debt amount, plus 50 percent of the amount of unpaid principal of
outstanding eligible Covered IHC debt securities issued by the Covered
IHC due to be paid in greater than or equal to 365 days (one year) but
less than 730 days (two years).
(d) Covered IHC TLAC buffer--(1) Composition of the Covered IHC
TLAC buffer. The Covered IHC 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 Covered IHC TLAC payout ratio. The maximum Covered IHC
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 Covered
IHC TLAC payout ratio is based on the Covered IHC's Covered IHC TLAC
buffer level, calculated as of the last day of the previous calendar
quarter, as set forth in Table 1 to Sec. 252.165.
(iii) Maximum Covered IHC TLAC payout amount. A Covered IHC's
maximum Covered IHC TLAC payout amount for the current calendar quarter
is equal to the Covered IHC's eligible retained income, multiplied by
the applicable maximum Covered IHC TLAC payout ratio, as set forth in
Table 1 to Sec. 252.165.
(3) Calculation of the Covered IHC TLAC buffer level. (i) A Covered
IHC's Covered IHC 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) 16 percent for a non-resolution Covered IHC, and 18 percent for
a resolution Covered IHC; minus
(B)(1) For a non-resolution Covered IHC, 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 the Covered IHC's total risk-weighted
assets;
(2) For a resolution Covered IHC, the ratio (expressed as a
percentage of the Covered IHC's additional tier 1 capital (excluding
any tier 1 minority interest) to the Covered IHC's total-risk weighted
assets; and minus
(C) The ratio (expressed as a percentage) of the Covered IHC's
outstanding eligible Covered IHC long-term debt amount to total risk-
weighted assets.
(ii)(A) Notwithstanding paragraph (d)(3)(i) of this section, with
respect to a resolution Covered IHC, if the ratio (expressed as a
percentage) of the resolution Covered IHC's Covered IHC total loss-
absorbing capacity amount, as calculated under Sec. 252.165(a), to the
resolution Covered IHC's risk-weighted assets is less than or equal to,
18 percent, the Covered IHC's Covered IHC TLAC buffer level is zero.
(B) Notwithstanding paragraph (d)(3)(i) of this section, with
respect to a non-resolution Covered IHC, if the ratio (expressed as a
percentage) of the non-resolution Covered IHC's Covered IHC total loss-
absorbing capacity amount, as calculated under Sec. 252.165(b), to the
Covered IHC's risk-weighted assets is less than or equal to 16 percent,
the non-resolution Covered IHC's Covered IHC 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 Covered IHC TLAC payout amount.
(ii) A Covered IHC with a Covered IHC TLAC buffer level that is
greater than the Covered IHC TLAC buffer is not subject to a maximum
Covered IHC TLAC payout amount.
(iii) Except as provided in paragraph (d)(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) Covered IHC TLAC buffer level was less than the Covered IHC
TLAC buffer as of the end of the previous calendar quarter.
(iv) Notwithstanding the limitations in paragraphs (d)(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
[[Page 8315]]
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. 252.165--Calculation of Maximum Covered IHC TLAC
Payout Amount
------------------------------------------------------------------------
Maximum Covered IHC TLAC payout
Covered IHC TLAC buffer level ratio (as a percentage of
eligible retained income)
------------------------------------------------------------------------
Greater than the Covered IHC TLAC No payout ratio limitation
buffer. applies.
Less than or equal to the Covered IHC 60 percent.
TLAC buffer, and greater than 75
percent of the Covered IHC TLAC buffer.
Less than or equal to 75 percent of the 40 percent.
Covered IHC TLAC buffer, and greater
than 50 percent of the Covered IHC
TLAC buffer.
Less than or equal to 50 percent of the 20 percent.
Covered IHC TLAC buffer, and greater
25 percent of the Covered IHC TLAC
buffer.
Less than or equal to 25 percent of the 0 percent.
Covered IHC 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) and the maximum Covered
IHC 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. 252.166 Restrictions on corporate practices of intermediate
holding companies of global systemically important foreign banking
organizations.
(a) Prohibited corporate practices. A Covered IHC 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 an affiliate of the
Covered IHC;
(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 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;
(3) Enter into a qualified financial contract that is not a credit
enhancement with a person that is not an affiliate of the Covered IHC;
(4) Enter into an agreement in which the Covered IHC guarantees 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) unless
the liability is subject to requirements of the Board restricting such
default rights or subject to any similar requirements of another U.S.
federal banking agency; 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 Covered IHC may not
exceed 5 percent of the Covered IHC's Covered IHC total loss-absorbing
capacity amount, as calculated under Sec. 252.165(c).
(2) For purposes of paragraph (b)(1) of this section, an unrelated
liability includes:
(i) With respect to a non-resolution Covered IHC, any non-
contingent liability of the non-resolution Covered IHC owed to a person
that is not an affiliate of the non-resolution Covered IHC other than
those liabilities specified in paragraph (b)(3) of this section, and
(ii) With respect to a resolution Covered IHC, any non-contingent
liability of the resolution Covered IHC owed to a person that is not a
subsidiary of the resolution Covered IHC other than those liabilities
specified in paragraph (b)(3) of this section.
(3)(i) The instruments that are used to satisfy the Covered IHC's
Covered IHC total loss-absorbing capacity amount, as calculated under
Sec. 252.165(a);
(ii) Any dividend or other liability arising from the instruments
that are used to satisfy the Covered IHC's Covered IHC total loss-
absorbing capacity amount, as calculated under Sec. 252.165(c)(2);
(iii) An eligible Covered IHC 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 Covered IHC 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).
(c) A Covered IHC is not subject to paragraph (b) of this section
if all of the eligible Covered IHC debt securities issued by the
Covered IHC would represent the most subordinated debt claim in a
receivership, insolvency, liquidation, or similar proceeding of the
Covered IHC.
Sec. 252.167 Disclosure requirements for resolution Covered IHCs.
(a) A resolution Covered IHC that has any outstanding eligible
external debt securities must publicly disclose a description of the
financial consequences to unsecured debtholders of the resolution
Covered IHC entering into a resolution proceeding in which the
resolution Covered IHC is the only entity in the United States that
would be subject to the resolution proceeding.
(b) A resolution Covered IHC must provide the disclosure required
by paragraph (a) of this section:
(1) In the offering documents for all of its eligible external debt
securities; and
(2) Either:
(i) On the resolution Covered IHC's Web site; or
(ii) In more than one public financial report or other public
regulatory reports, provided that the resolution Covered IHC publicly
provides a summary table specifically indicating the location(s) of
this disclosure.
By order of the Board of Governors of the Federal Reserve
System, January 6, 2017.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2017-00431 Filed 1-23-17; 8:45 am]
BILLING CODE 6210-01-P