[Federal Register Volume 84, Number 108 (Wednesday, June 5, 2019)]
[Rules and Regulations]
[Pages 25975-25978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11715]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
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 The Code of Federal Regulations is sold by the Superintendent of Documents. 
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  Federal Register / Vol. 84, No. 108 / Wednesday, June 5, 2019 / Rules 
and Regulations  

[[Page 25975]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 50

[Docket ID OCC-2018-0013]
RIN 1557-AE36

FEDERAL RESERVE SYSTEM

12 CFR Part 249

[Docket No. R-1616]
RIN 7100-AF10

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 329

RIN 3064-AE77


Liquidity Coverage Ratio Rule: Treatment of Certain Municipal 
Obligations as High-Quality Liquid Assets

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury; 
Board of Governors of the Federal Reserve System (Board); and Federal 
Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The OCC, the Board, and the FDIC (collectively, the agencies) 
are jointly adopting as a final rule, without change, the August 31, 
2018, interim final rule, which amended the agencies' liquidity 
coverage ratio (LCR) rule to treat liquid and readily-marketable, 
investment grade municipal obligations as high-quality liquid assets. 
This treatment was mandated by section 403 of the Economic Growth, 
Regulatory Relief, and Consumer Protection Act.

DATES: The final rule is effective on July 5, 2019.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Christopher McBride, Director, James Weinberger, Technical 
Expert, or Ang Middleton, Bank Examiner (Risk Specialist), (202) 649-
6360, Treasury & Market Risk Policy; David Stankiewicz, Special 
Counsel, Lee Walzer, Counsel, Henry Barkhausen, Counsel, or Daniel 
Perez, Senior Attorney, (202) 649-5490, Chief Counsel's Office; or for 
persons who are deaf or hearing-impaired, TTY, (202) 649-5597, Office 
of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 
20219.
    Board: Constance Horsley, Deputy Associate Director, (202) 452-
5239, Peter Clifford, Manager, (202) 785-6057, J. Kevin Littler, Lead 
Financial Institution Policy Analyst, (202) 475-6677, or Christopher 
Powell, Senior Financial Institution Policy Analyst, (202) 452-3442, 
Division of Banking Supervision and Regulation; Laurie Schaffer, 
Associate General Counsel, (202) 452-2272, Benjamin W. McDonough, 
Assistant General Counsel, (202) 452-2036, Steve Bowne, Counsel, (202) 
452-3900, Laura Bain, Senior Attorney, (202) 736-5546, or Jeffery 
Zhang, Attorney, (202) 736-1968, Legal Division, Board of Governors of 
the Federal Reserve System, 20th and C Streets NW, Washington, DC 
20551. For the hearing impaired only, Telecommunication Device for the 
Deaf (TDD), (202) 263-4869, Board of Governors of the Federal Reserve 
System, 20th Street and Constitution Avenue NW, Washington, DC 20551.
    FDIC: Bobby R. Bean, Associate Director, (202) 898-6705, Michael E. 
Spencer, Chief, (202) 898-7041, Eric W. Schatten, Senior Policy 
Analyst, (202) 898-7063, Andrew D. Carayiannis, Senior Policy Analyst, 
(202) 898-6692, [email protected], Capital Markets Branch, 
Division of Risk Management Supervision; Suzanne J. Dawley, Counsel, 
(202) 898-6509, Gregory S. Feder, Counsel, (202) 898-8724, or Andrew B. 
Williams, II, Counsel, (202) 898-3591, Supervision and Corporate 
Operations Branch, Legal Division, Federal Deposit Insurance 
Corporation, 550 17th Street NW, Washington, DC 20429. For the hearing 
impaired only, Telecommunication Device for the Deaf (TDD), (800) 925-
4618.

SUPPLEMENTARY INFORMATION:

I. Background

    The Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (Board), and the Federal 
Deposit Insurance Corporation (FDIC) (collectively, the agencies) 
adopted the liquidity coverage ratio (LCR) rule \1\ in 2014. The LCR 
rule established a quantitative liquidity requirement that is designed 
to promote the short-term resilience of the liquidity risk profile of 
large and internationally active banking organizations. The intent of 
the agencies in issuing the LCR rule was to improve the U.S. banking 
sector's ability to absorb shocks arising from financial and economic 
stress and the measurement and management of liquidity risk.\2\ The LCR 
rule generally applies to a bank holding company, savings and loan 
holding company, or depository institution if: (1) It has total 
consolidated assets equal to $250 billion or more; (2) it has total 
consolidated on-balance sheet foreign exposure equal to $10 billion or 
more; or (3) it is a depository institution with total consolidated 
assets equal to $10 billion or more and is a consolidated subsidiary of 
a firm that is subject to the LCR rule (each, a covered company).\3\ 
Covered companies generally must maintain an amount of high-quality 
liquid assets (HQLA) equal to or greater than their projected total net 
cash outflows over a prospective 30 calendar-day period. The LCR rule 
defines three categories of HQLA--level 1, level 2A, and level 2B 
liquid assets--and sets forth qualifying criteria for HQLA and 
limitations for an asset's inclusion in a banking organization's HQLA 
amount.
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    \1\ 79 FR 61440 (Oct. 10, 2014), codified at 12 CFR part 50 
(OCC), 12 CFR part 249 (Board), and 12 CFR part 329 (FDIC).
    \2\ Id.
    \3\ See section 1 of the LCR rule. On December 21, 2018, the 
agencies invited comment on a proposed rule that would revise the 
framework for determining the applicability of the standardized 
liquidity requirements, including the LCR rule, for U.S. banking 
organizations. See Proposed Changes to Applicability Thresholds for 
Regulatory Capital and Liquidity Requirements, 83 FR 66024 (Dec. 21, 
2018). On May 24, 2019, the agencies published for comment a 
proposed rule to apply standardized liquidity requirements to 
foreign banking organizations with respect to their combined U.S. 
operations. See Proposed Changes to Applicability Thresholds for 
Regulatory Capital Requirements for Certain U.S. Subsidiaries of 
Foreign Banking Organizations and Application of Liquidity 
Requirements for Foreign Banking Organizations, Certain U.S. 
Depository Institution Holding Companies, and Certain Depository 
Institution Subsidiaries, 84 FR 24296 (May 24, 2019). These proposed 
rulemakings, if adopted, would revise the scope of application of 
the LCR rule.
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    In 2016, the Board amended its LCR rule to include certain U.S. 
municipal securities as HQLA, subject to certain

[[Page 25976]]

limitations (2016 Amendments).\4\ The 2016 Amendments permitted U.S. 
municipal securities to qualify as level 2B liquid assets if they were: 
(1) General obligation securities of public sector entities (that is, a 
state, local authority, or other governmental subdivision below the 
U.S. sovereign entity level); \5\ (2) investment grade under 12 CFR 
part 1 as of the calculation date; (3) issued or guaranteed by a public 
sector entity whose obligations have a proven record as a reliable 
source of liquidity in repurchase or sales markets during stressed 
market conditions; and (4) not be an obligation of a financial sector 
entity or a financial sector entity's consolidated subsidiary (unless 
only guaranteed by a financial sector entity or its consolidated 
subsidiary and otherwise eligible). The 2016 Amendments limited the 
inclusion of general obligation securities in the HQLA amount to 5 
percent of the covered company's total HQLA amount. The 2016 Amendments 
also limited the inclusion of general obligation securities of any 
single public sector entity to two times the average daily trading 
volume during the previous four quarters of all general obligation 
securities issued by that public sector entity.
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    \4\ 81 FR 21223 (Apr. 11, 2016).
    \5\ The 2016 Amendments defined a general obligation as a bond 
or similar obligation that is backed by the full faith and credit of 
a public sector entity. 12 CFR 249.20(c)(2).
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    The Economic Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA) was enacted on May 24, 2018.\6\ Section 403 of the EGRRCPA 
amended section 18 of the Federal Deposit Insurance Act \7\ and 
requires the agencies--for purposes of the LCR rule and any other 
regulation that incorporates a definition of the term ``high-quality 
liquid asset'' or another substantially similar term--to treat a 
municipal obligation as HQLA that is a level 2B liquid asset if that 
obligation is, as of the calculation date, liquid and readily-
marketable and investment grade. Section 403 defines ``municipal 
obligation'' as an obligation of a State or any political subdivision 
thereof; or any agency or instrumentality of a State or any political 
subdivision thereof. Section 403 defines ``liquid and readily-
marketable'' as having the meaning given the term in 12 CFR 249.3 or 
any successor thereto. Section 403 defines ``investment grade'' as 
having the meaning given the term in 12 CFR 1.2 or any successor 
thereto.
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    \6\ Public Law 115-174, 132 Stat. 1296-1368 (2018).
    \7\ 12 U.S.C. 1828(aa).
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II. Interim Final Rule

    On August 31, 2018, the agencies published an interim final rule 
amending the agencies' LCR rule to implement section 403 of the EGRRCPA 
and soliciting public comment.\8\
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    \8\ 83 FR 44451 (Aug. 31, 2018).
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    The interim final rule added a definition to the agencies' rule for 
the term ``municipal obligations,'' which, consistent with the EGRRCPA, 
means an obligation of (1) a state or any political subdivision thereof 
or (2) any agency or instrumentality of a state or any political 
subdivision thereof. In addition, the interim final rule amended the 
HQLA criteria with respect to level 2B liquid assets by adding 
municipal obligations that, as of the LCR calculation date, are both 
liquid and readily-marketable and investment grade (under 12 CFR part 
1) \9\ to the list of assets that are eligible for treatment as level 
2B liquid assets.\10\
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    \9\ The OCC's definition of ``investment grade'' under 12 CFR 
1.2 provides that ``[i]nvestment grade means the issuer of a 
security has an adequate capacity to meet financial commitments 
under the security for the projected life of the asset or exposure. 
An issuer has an adequate capacity to meet financial commitments if 
the risk of default by the obligor is low and the full and timely 
repayment of principal and interest is expected.'' 12 CFR 1.2.
    \10\ 12 CFR 50.20 (OCC); 12 CFR 249.20 (Board); 12 CFR 329.20 
(FDIC).
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    Consistent with section 403 of the EGRRCPA, the interim final rule 
also amended the definition of ``liquid and readily-marketable'' in the 
FDIC's and OCC's rules so that the term has the same meaning given to 
it under 12 CFR 249.3 of the Board's rule.\11\
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    \11\ Under the Board's rule, a liquid and readily-marketable 
security is a security that is traded in an active secondary market 
with: (1) More than two committed market makers; (2) a large number 
of non-market maker participants on both the buying and selling 
sides of transactions; (3) timely and observable market prices; and 
(4) a high trading volume. 12 CFR 249.3.
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    The interim final rule also rescinded the Board's 2016 Amendments 
so that municipal obligations under the Board's rule are treated 
consistently with section 403 of the EGRRCPA.

III. Comments Received

    The agencies received nine comment letters addressing the interim 
final rule, including letters from trade associations, private sector 
enterprises, and one individual. Commenters generally expressed support 
for the inclusion of certain municipal obligations as HQLA and the 
agencies' implementation of section 403 of the EGRRCPA through the 
interim final rule. Many commenters asserted that municipal obligations 
were a suitable asset class for HQLA eligibility, with qualities 
consistent with other level 2B liquid assets, and that the interim 
final rule effectively satisfied the underlying intent of section 403 
of the EGRRCPA. Some commenters suggested additional changes to the LCR 
rule for the agencies' consideration, including changes that were not 
addressed or affected by section 403 of the EGRRCPA.

Comments Regarding Eligibility and Treatment of Municipal Obligations 
as HQLA

    Some commenters requested that the agencies treat municipal 
obligations in the same manner as other asset types includable as HQLA, 
without imposing additional limitations, such as those in the Board's 
2016 Amendments.\12\
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    \12\ For example, the 2016 Amendments limited the inclusion of 
municipal obligations in a Board-supervised institution's HQLA 
amount to 5 percent of the institution's total HQLA amount and 
limited the inclusion as eligible HQLA of municipal obligations of 
any single issuer to two times the average daily trading volume of 
all general obligation securities of the issuer over the previous 
four quarters.
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    Other commenters argued that municipal obligations should not be 
subject to certain requirements and limitations applicable to HQLA, 
such as the haircuts and composition limits generally applicable to 
level 2B liquid assets.\13\ Alternatively, commenters argued that these 
requirements should be liberalized with respect to municipal 
obligations. Another commenter recommended that the definition of 
liquid and readily-marketable should be revised, because it would 
exclude from HQLA certain municipal obligation securities with a 
liquidity risk profile similar to other assets that currently qualify 
as level 2B liquid assets.
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    \13\ See 12 CFR 50.21 (OCC), 12 CFR 249.21 (Board), and 12 CFR 
329.21 (FDIC).
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    Section 403 requires the agencies to treat a municipal obligation 
as a level 2B liquid asset if the obligation, as of the calculation 
date, is liquid and readily-marketable and investment grade. The 
interim final rule implemented section 403, imposing only those 
restrictions on municipal obligations that also apply to other level 2B 
liquid assets.\14\ In addition, the interim final rule defined ``liquid 
and readily-marketable'' as having the meaning given the term in 12 CFR 
249.3, as specifically mandated by section 403. Accordingly, the 
agencies believe that it would not be appropriate to make changes to 
the restrictions applicable to municipal obligations as level 2B liquid 
assets or the definition of ``liquid and readily-marketable'' in this 
final rule.
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    \14\ As part of the interim final rule, the Board rescinded the 
2016 Amendments.

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[[Page 25977]]

Comments Regarding Broader Changes to the LCR Rule

    Several commenters, while supportive of the interim final rule, 
requested broad changes to the LCR rule beyond the treatment of 
municipal obligations as HQLA. For example, certain commenters argued 
that the agencies should tailor the application of the LCR rule based 
on the risk profile, operations, and complexity of the banking 
organization. These commenters argued that the current applicability 
thresholds are outdated and overly reliant on fixed asset thresholds. 
These commenters also urged the agencies to eliminate the $10 billion 
foreign exposure threshold as an interim measure.
    One commenter recommended that the agencies revise the scope of 
assets recognized as HQLA. The commenter also requested that the 
agencies review the LCR rule's inflow and outflow assumptions, 
including its stability assumptions. This commenter also recommended 
revising the LCR rule to better reflect market realities, including by 
revising maturity assumptions, the treatment of retail trusts, and the 
definition of operational deposits. This commenter also recommended 
that the agencies either ``remove or increase the lag time'' associated 
with LCR disclosures.
    The agencies are not adopting these broader proposed changes in 
this final rule.\15\ The interim final rule was issued to implement 
section 403 of the EGRRCPA, and broader revisions to the LCR rule fall 
outside of the scope of the changes that the agencies sought comment on 
in the interim final rule.
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    \15\ The agencies have proposed revisions to the LCR rule in 
separate rulemakings that would address certain comments regarding 
the scope and applicability thresholds. See supra n. 3.
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IV. Description of the Final Rule

    For the reasons described above, the agencies are adopting the 
interim final rule as final without change.
    The interim final rule's changes to the LCR rule provided covered 
companies greater flexibility in meeting the LCR rule's minimum 
requirements by expanding the types of assets that are eligible as 
HQLA. For FDIC- and OCC-regulated institutions, the interim final 
rule's changes marked the first time that such institution could treat 
any municipal obligations as HQLA. For Board-regulated institutions, 
those changes broadened the types of municipal obligations that could 
be included as HQLA. In particular, because the Board rescinded the 
2016 Amendments as part of the interim final rule, municipal 
obligations were no longer required to be general obligation securities 
and, as a result, many issuances of revenue bonds could qualify as 
municipal obligations. In adopting the interim final rule as final 
without change, the final rule does not impact the changes described 
above.
    This final rule does not otherwise affect which assets can count as 
HQLA under the LCR rule.

V. Regulatory Analysis

A. Administrative Procedure Act and Effective Date

    The Administrative Procedure Act (APA) generally requires that a 
final rule be published in the Federal Register no less than 30 days 
before its effective date.\16\ Therefore, the final rule will become 
effective on July 5, 2019. The interim final rule will remain in effect 
until the final rule becomes effective.
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    \16\ 5 U.S.C. 553(d).
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B. Riegle Community Development and Regulatory Improvement Act

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\17\ in determining the effective 
date and administrative compliance requirements for a new regulation 
that imposes additional reporting, disclosure, or other requirements on 
insured depository institutions (IDIs), each federal banking agency 
must consider any administrative burdens that such regulation would 
place on depository institutions and the benefits of such regulation. 
In addition, section 302(b) of the RCDRIA \18\ requires such new 
regulation to take effect on the first day of a calendar quarter that 
begins on or after the date on which the regulations are published in 
final form, with certain exceptions, including for good cause. The 
RCDRIA does not apply to the final rule because the rule does not 
impose any additional reporting, disclosures, or other new requirements 
on IDIs.
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    \17\ 12 U.S.C. 4802(a).
    \18\ 12 U.S.C. 4802(b).
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C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) does not apply to a rulemaking 
when a general notice of proposed rulemaking is not required.\19\ 
Because the agencies previously determined that it was unnecessary to 
publish a general notice of proposed rulemaking for the interim final 
rule, the RFA's requirements relating to an initial and final 
regulatory flexibility analysis do not apply to this final rule. 
Nonetheless, the agencies believe that, because size thresholds for 
covered companies under the final rule exceed the size limits of 
``small entities'' as defined in section 601(6) of the RFA, small 
entities are not affected by the final rule.\20\ Thus, the final rule 
does not have a significant economic impact on a substantial number of 
small entities.
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    \19\ 5 U.S.C. 603, 604.
    \20\ 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 total 
assets of $550 million or less and trust companies with total assets 
of $38.5 million or less.
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D. Paperwork Reduction Act of 1995

    The Paperwork Reduction Act of 1995 \21\ states that no agency may 
conduct or sponsor, nor is the respondent required to respond to, an 
information collection unless it displays a currently valid Office of 
Management and Budget (OMB) control number. The agencies have 
determined that this final rule does not create any new, or revise any 
existing, collections of information pursuant to the Paperwork 
Reduction Act and, therefore, no information collection request 
submission needs to be made to the OMB.
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    \21\ 44 U.S.C. 3501-3521.
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E. Use of Plain Language

    Section 722 of the Gramm-Leach Bliley Act \22\ requires the 
agencies to use plain language in all proposed and final rules 
published after January 1, 2000. Having received no comments with 
respect to making the interim final rule easier to understand, the 
agencies are adopting the final rule without change.
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    \22\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
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F. Unfunded Mandates Reform Act of 1995

    Consistent with section 202 of the Unfunded Mandates Reform Act of 
1995 (Unfunded Mandates Act),\23\ the OCC prepares an impact statement 
before promulgating any final rule for which a general notice of 
proposed rulemaking was published. Because the OCC did not publish a 
general notice of proposed rulemaking for the reasons described above 
in paragraph A of this section, the OCC has not prepared an impact 
statement for the final rule under the Unfunded Mandates Act.
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    \23\ 2 U.S.C. 1532.
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List of Subjects

12 CFR Part 50

    Administrative practice and procedure, Banks, Banking, Liquidity, 
Reporting and recordkeeping requirements, Savings associations.

[[Page 25978]]

12 CFR Part 249

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

12 CFR Part 329

    Administrative practice and procedure, Banks, Banking, Federal 
Deposit Insurance Corporation, Reporting and recordkeeping 
requirements.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

PART 50--LIQUIDITY RISK MEASUREMENT STANDARDS

0
The interim final rule amending 12 CFR part 50 of chapter I, title 12 
of the Code of Federal Regulations, which was published at 83 FR 44451 
on August 31, 2018, is adopted as a final rule without change.

Federal Reserve System

12 CFR Chapter II

PART 249--LIQUIDITY RISK MEASUREMENT STANDARDS (REGULATION WW)

0
The interim final rule amending 12 CFR part 249 of chapter II, title 12 
of the Code of Federal Regulations, which was published at 83 FR 44451 
on August 31, 2018, is adopted as a final rule without change.

Federal Deposit Insurance Corporation

12 CFR Chapter III

PART 329--LIQUIDITY RISK STANDARDS

0
The interim final rule amending 12 CFR part 329 of chapter III, title 
12 of the Code of Federal Regulations, which was published at 83 FR 
44451 on August 31, 2018, is adopted as a final rule without change.

    Dated: May 20, 2019.
Joseph M. Otting,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, May 28, 2019.
Ann E. Misback,
Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on May 28, 2019.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-11715 Filed 6-4-19; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P