[Federal Register Volume 84, Number 206 (Thursday, October 24, 2019)]
[Proposed Rules]
[Pages 57240-57301]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21978]



[[Page 57239]]

Vol. 84

Thursday,

No. 206

October 24, 2019

Part III





Federal Reserve System





-----------------------------------------------------------------------





12 CFR Parts 217 and 252





 Regulatory Capital Rules: Risk-Based Capital Requirements for 
Depository Institution Holding Companies Significantly Engaged in 
Insurance Activities; Proposed Rule

  Federal Register / Vol. 84 , No. 206 / Thursday, October 24, 2019 / 
Proposed Rules  

[[Page 57240]]


-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 217 and 252

[Docket No. R-1673]
RIN 7100-AF 56


Regulatory Capital Rules: Risk-Based Capital Requirements for 
Depository Institution Holding Companies Significantly Engaged in 
Insurance Activities

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is inviting comment on a proposal to establish risk-based capital 
requirements for depository institution holding companies that are 
significantly engaged in insurance activities. The Board is proposing a 
risk-based capital framework, termed the Building Block Approach, that 
adjusts and aggregates existing legal entity capital requirements to 
determine an enterprise-wide capital requirement, together with a risk-
based capital requirement excluding insurance activities, in compliance 
with section 171 of the Dodd-Frank Act. The Board is additionally 
proposing to apply a buffer to limit an insurance depository 
institution holding company's capital distributions and discretionary 
bonus payments if it does not hold sufficient capital relative to 
enterprise-wide risk, including risk from insurance activities. The 
proposal would also revise reporting requirements for depository 
institution holding companies significantly engaged in insurance 
activities.

DATES: Comments must be received on or before December 23, 2019.

ADDRESSES: You may submit comments, identified by Docket No. R-1673 and 
RIN 7100-AF 56, by any of the following methods:
     Agency website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments are available from the Board's website at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove sensitive 
personal identifying information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments may also be viewed electronically 
or in paper form in Room 146, 1709 New York Avenue NW, Washington, DC 
20006, between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Thomas Sullivan, Associate Director, 
(202) 475-7656; Linda Duzick, Manager, (202) 728-5881; Matti Peltonen, 
Supervisory Insurance Valuation Analyst, (202) 872-7587; Brad Roberts, 
Supervisory Insurance Valuation Analyst, (202) 452-2204; or Matthew 
Walker, Supervisory Insurance Valuation Analyst, (202) 872-4971; 
Division of Supervision and Regulation; or Laurie Schaffer, Associate 
General Counsel, (202) 452-2272; David Alexander, Senior Counsel, (202) 
452-2877; Andrew Hartlage, Counsel, (202) 452-6483; or Jonah Kind, 
Senior Attorney, (202) 452-2045; 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, (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
II. Background
    A. The Dodd-Frank Act and Capital Requirements for Insurance 
Depository Institution Holding Companies
    B. The 2016 Advanced Notice of Proposed Rulemaking on Capital 
Requirements for Supervised Institutions Significantly Engaged in 
Insurance Activities
    C. General Comments on the ANPR
    D. Comments on Particular Aspects of the ANPR
    1. Threshold for Determining a Firm to be Subject to the BBA
    2. Grouping of Companies in the BBA
    3. Treatment of Non Insurance, Non Banking Companies
    4. Adjustments
    5. Scalars
    6. Available Capital
III. The Proposal
    A. Overview of the BBA
    B. Dodd-Frank Act Capital Calculation
IV. The Building Block Approach
    A. Structure of the BBA
    B. Covered Institutions and Scope of the BBA
    C. Identification of Building Blocks and Building Block Parents
    1. Inventory
    2. Applicable Capital Framework
    3. Building Block Parents
    (a) Capital-Regulated Companies and Material Financial Entities 
as Building Block Parents
    (b) Other Instances of Building Block Parents
    D. Aggregation in the BBA
V. Scaling Under the BBA
    A. Key Considerations in Evaluating Scaling Mechanisms
    B. Identification of Jurisdictions and Frameworks Where Scalars 
Are Needed
    C. The BBA's Approach to Determining Scalars
    D. Approach Where Scalars Are Not Specified
VI. Determination of Capital Requirements Under the BBA
    A. Capital Requirement for a Building Block
    B. Regulatory Adjustments to Building Block Capital Requirements
    1. Adjusting Capital Requirements for Permitted and Prescribed 
Accounting Practices Under State Laws
    2. Certain Intercompany Transactions
    3. Adjusting Capital Requirements for Transitional Measures in 
Applicable Capital Frameworks
    4. Risks of Certain Intermediary Companies
    5. Risks Relating to Title Insurance
    C. Scaling and Aggregating Building Blocks' Adjusted Capital 
Requirements
VII. Determination of Available Capital Under the BBA
    A. Approach to Determining Available Capital
    1. Key Considerations in Determining Available Capital
    2. Aggregation of Building Blocks' Available Capital
    B. Regulatory Adjustments and Deductions to Building Block 
Available Capital
    1. Criteria for Qualifying Capital Instruments
    2. BBA Treatment of Deduction of Insurance Underwriting Risk 
Capital
    3. Adjusting Available Capital for Permitted and Prescribed 
Practices under State Laws
    4. Adjusting Available Capital for Transitional Measures in 
Applicable Capital Frameworks
    5. Deduction of Investments in Own Capital Instruments
    6. Reciprocal Cross Holdings in Capital of Financial 
Institutions
    C. Limit on Certain Capital Instruments in Available Capital 
Under the BBA
    D. Board Approval of Capital Elements
VIII. The BBA Ratio, Minimum Capital Requirement and Capital 
Conservation Buffer
    A. The BBA Ratio and Proposed Minimum Requirement
    B. Proposed Capital Conservation Buffer
IX. Sample BBA Calculation
    A. Inventory
    B. Applicable Capital Frameworks
    C. Identification of Building Block Parents and Building Blocks
    D. Identification of Available Capital and Capital Requirements 
under Applicable Capital Frameworks
    E. Adjustments to Available Capital and Capital Requirements

[[Page 57241]]

    1. Illustration of Adjustments to Capital Requirements
    2. Illustration of Adjustments to Available Capital
    F. Scaling Adjusted Available Capital and Capital Requirements
    G. Roll Up and Aggregation of Building Blocks
    H. Calculation of BBA Ratio and Application of Minimum 
Requirement and Buffer
X. Reporting Form and Disclosure Requirements
XI. Impact Assessment of Proposed Rule
    A. Analysis of Potential Benefits
    1. A Capital Requirement for the Board's Consolidated 
Supervision
    2. Going Concern Safety and Soundness of the Supervised 
Institution
    3. Protection of the Subsidiary Insured Depository Institution
    4. Improved Efficiencies Resulting from Better Capital 
Management
    5. Fulfillment of a Statutory Requirement
    B. Analysis of Potential Costs
    1. Initial and Ongoing Costs to Comply
    2. Review of Impacts Resulting from the BBA
    3. Impact on Premiums and Fees
    4. Impact on Financial Intermediation
    C. Assessment of Benefits and Costs
XII. Administrative Law Matters
    A. Solicitation of Comments on the Use of Plain Language
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
List of Subjects
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND 
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
Subpart A--General Provisions
Sec.  217.1 Purpose, applicability, reservations of authority, and 
timing.
Sec.  217.2 Definitions.
Subpart B--Capital Ratio Requirements and Buffers
Sec.  217.10 Minimum capital requirements.
Sec.  217.11 Capital conservation buffer, countercyclical capital 
buffer amount, and GSIB surcharge.
Subpart J--Capital Requirements for Board-regulated Institutions 
Significantly Engaged in Insurance Activities
Sec.  217.601 Purpose, applicability, reservations of authority, and 
scope
Sec.  217.602 Definitions: Capital Requirements
Sec.  217.603 BBA Ratio and Minimum Requirements
Sec.  217.604 Capital Conservation Buffer
Sec.  217.605 Determination of Building Blocks
Sec.  217.606 Scaling Parameters Aggregation of Building Blocks' 
Capital Requirement and Available Capital
Sec.  217.607 Capital Requirements under the Building Block Approach
Sec.  217.608 Available Capital Resources under the Building Block 
Approach
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
Subpart B--Company-Run Stress Test Requirements for Certain U.S. 
Banking Organizations with Total Consolidated Assets over $10 
Billion and Less Than $50 Billion

I. Introduction

    The Board of Governors of the Federal Reserve System (Board) is 
issuing this notice of proposed rulemaking (NPR) to seek comment on a 
proposal to establish risk-based capital requirements for certain 
depository institution holding companies significantly engaged in 
insurance activities (insurance depository institution holding 
companies).\1\ As discussed in further detail in the description of the 
proposal, insurance depository institution holding companies include 
depository institution holding companies that are insurance 
underwriters, and depository institution holding companies that hold a 
significant percentage of total assets in insurance underwriting 
subsidiaries. The proposal introduces an enterprise-wide risk-based 
capital framework, termed the ``building block'' approach (BBA), that 
incorporates legal entity capital requirements such as the requirements 
prescribed by state insurance regulators, taking into account 
differences between the business of insurance and banking. The Board 
proposes to establish an enterprise-wide capital requirement for 
insurance depository institution holding companies based on the BBA 
framework, and, separately, to apply a minimum risk-based capital 
requirement to the enterprise using the flexibility afforded under 
recent amendments to section 171 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank Act) to exclude certain state 
and foreign regulated insurance operations.\2\ The Board is also 
proposing to apply a buffer that limits an insurance depository 
institution holding company's capital distributions and discretionary 
bonus payments if it does not hold sufficient capital relative to 
enterprise-wide risk, including risk from insurance activities. The 
minimum risk-based capital requirement is proposed pursuant to the 
Board's authority under section 10 of the Home Owners' Loan Act (HOLA) 
\3\ and section 171 of the Dodd-Frank Act.\4\
---------------------------------------------------------------------------

    \1\ In this Supplementary Information, the term ``insurance 
depository institution holding company'' means a savings and loan 
holding company significantly engaged in insurance activities. 
Section IV.B below discusses the threshold proposed to determine 
when a depository institution holding company is significantly 
engaged in insurance activities. Although the approach described in 
this proposal was designed to be appropriate for bank holding 
companies that are significantly engaged in insurance activities, 
the Board does not propose to apply this rule to bank holding 
companies at this time. The Board's portfolio of depository 
institution holding companies that are significantly engaged in 
insurance activities is currently composed only of savings and loan 
holding companies. The Board intends to address the application of 
this approach to bank holding companies in the final rule.
    \2\ Public Law 111-203, 124 Stat. 1376, 1435-38 (2010), as 
amended by Public Law 113-279, 128 Stat. 3107 (2014).
    \3\ 12 U.S.C. 1467a.
    \4\ 12 U.S.C. 5371.
---------------------------------------------------------------------------

II. Background

A. The Dodd-Frank Act and Capital Requirements for Insurance Depository 
Institution Holding Companies

    In response to the 2007-09 financial crisis, Congress enacted the 
Dodd-Frank Act, which, among other objectives, was enacted to ensure 
fair and appropriate supervision of depository institutions without 
regard to the size or type of charter and streamline the supervision of 
depository institutions (DIs) and their holding companies. In 
furtherance of these objectives, Title III of the Dodd-Frank Act 
expanded the Board's supervisory role beyond bank holding companies 
(BHCs) by transferring to the Board all supervisory functions related 
to savings and loan holding companies (SLHCs) and their non-depository 
subsidiaries. As a result, the Board became the federal supervisory 
authority for all DI holding companies, including insurance depository 
institution holding companies.\5\ Concurrent with the expansion of the 
Board's supervisory role, section 616 of the Dodd-Frank Act amended 
HOLA to provide the Board express authority to adopt regulations or 
orders that set capital requirements for SLHCs.\6\
---------------------------------------------------------------------------

    \5\ Public Law 111-203, title III, 301, 124 Stat. 1520 (2010).
    \6\ Dodd-Frank Act Sec. 616(b); HOLA Sec. 10(g)(1). Under Title 
I of the Dodd-Frank Act, the Board also supervises any nonbank 
financial companies designated by the Financial Stability Oversight 
Council (FSOC) for supervision by the Board. Under section 113 of 
the Dodd-Frank Act, the FSOC may designate a nonbank financial 
company, including an insurance company, to be supervised by the 
Board. Currently, no firms are subject to the Board's supervision 
pursuant to this provision.
---------------------------------------------------------------------------

    Any capital requirements the Board may establish for SLHCs are 
subject to minimum standards under the Dodd-Frank Act. Specifically, 
section 171 of the Dodd-Frank Act requires the Board to establish 
minimum risk-based and leverage capital requirements on a consolidated 
basis for depository institution holding companies.\7\ These

[[Page 57242]]

requirements must be not less than the capital requirements established 
by the Federal banking agencies to apply to insured depository 
institutions (IDIs), nor quantitatively lower than the capital 
requirements that applied to IDIs when the Dodd-Frank Act was enacted. 
The Dodd-Frank Act sets a floor for any capital requirements 
established under section 171 that is based on the capital requirements 
established by the appropriate Federal banking agencies to apply to 
insured depository institutions under the prompt corrective action 
regulations implementing section 38 of the FDI Act.\8\
---------------------------------------------------------------------------

    \7\ Section 171 of the Dodd-Frank Act defines ``depository 
institution holding company'' to mean a bank holding company or 
savings and loan holding company, each as defined in section 3 of 
the Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1813. As 
mentioned above, the population of insurance depository institution 
holding companies only consists of SLHCs. In requiring minimum 
leverage capital requirements for depository institution holding 
companies, section 171 of the Dodd-Frank Act provides the Board with 
flexibility to develop leverage capital requirements that are 
tailored to the insurance business. The Board continues to consider 
a tailored approach to a leverage capital requirement for insurance 
depository institution holding companies.
    \8\ The floor for capital requirements established pursuant to 
section 171, referred to as the ``generally applicable'' 
requirements, is defined to include the regulatory capital 
components in the numerator of those capital requirements, the risk-
weighted assets in the denominator of those capital requirements, 
and the required ratio of the numerator to the denominator.
---------------------------------------------------------------------------

    The Board issued a revised capital rule in 2013, which served to 
strengthen the capital requirements applicable to banking organizations 
supervised by the Board by improving both the quality and quantity of 
regulatory capital and increasing risk-sensitivity. In consideration of 
requirements of section 171 of the Dodd-Frank Act, in 2012, the Board 
had sought comment on the proposed application of the revised capital 
rule to all firms supervised by the Board that are subject to 
regulatory capital requirements, including all savings and loan holding 
companies significantly engaged in insurance activities. In response, 
the Board received comments by or on behalf of supervised firms engaged 
primarily in insurance activities that requested an exemption from the 
capital rule in order to recognize differences in their business model 
compared with those of more traditional banking organizations. After 
considering these comments, the Board determined to exclude insurance 
SLHCs from the application of the rule.\9\ The Board committed to 
explore further whether and how the revised capital rule, hereinafter 
referred to as the ``banking capital rule,'' should be modified for 
insurance SLHCs in a manner consistent with section 171 of the Dodd-
Frank Act and safety and soundness concerns.
---------------------------------------------------------------------------

    \9\ 12 CFR part 217 (Regulation Q).
---------------------------------------------------------------------------

    Section 171 of the Dodd-Frank Act was amended in 2014 (2014 
Amendment) to provide the Board flexibility when developing 
consolidated capital requirements for insurance depository institution 
holding companies.\10\ The 2014 Amendment permits the Board to exclude 
companies engaged in the business of insurance and regulated by a state 
insurance regulator, as well as certain companies engaged in the 
business of insurance and regulated by a foreign insurance regulator.
---------------------------------------------------------------------------

    \10\ Public Law 113-279, 128 Stat. 3017 (2014).
---------------------------------------------------------------------------

    The 2014 Amendment to section 171 of the Dodd-Frank Act does not 
require the Board to exclude state-regulated, or certain foreign-
regulated, insurers from its risk-based capital requirements. The Board 
has considered that exclusion of these insurers from the measurement 
and application of all risk-based capital requirements could present 
challenges to the Board's ability to timely and accurately assess the 
risk profile and capital adequacy of the entire organization and 
fulfill the Board's responsibility as a prudential supervisor of the 
organization. A more effective regulatory capital framework, reflecting 
the Board's objectives as consolidated supervisor of insurance 
depository institution holding companies, would capture all risks that 
face the enterprise and potentially could jeopardize the organization's 
ability to serve as a source of financial strength to the subsidiary 
IDI. There is support for taking this approach in both section 171 of 
the Dodd-Frank Act and section 10 of HOLA.
    Section 171 of the Dodd-Frank Act also provides that the Board may 
not require, under its authority pursuant to section 171 of the Dodd-
Frank Act or HOLA, financial statements prepared in accordance with 
U.S. generally accepted accounting principles (GAAP) from a supervised 
firm that is also a state-regulated insurer and only files financial 
statements utilizing Statutory Accounting Principles (SAP).\11\ The 
Board notes that, unlike U.S. GAAP, SAP does not include an accounting 
consolidation concept. As discussed in detail in subsequent sections of 
this notice, the BBA is thus an aggregation-based approach and the 
Board's proposal is designed as a comprehensive approach to capturing 
risk, including all material risks, at the level of the entire 
enterprise or group.
---------------------------------------------------------------------------

    \11\ 12 U.S.C. 5371(c)(3)(A).
---------------------------------------------------------------------------

B. The 2016 Advanced Notice of Proposed Rulemaking on Capital 
Requirements for Supervised Institutions Significantly Engaged in 
Insurance Activities

    On June 14, 2016, the Board published in the Federal Register an 
advance notice of proposed rulemaking (ANPR) entitled ``Capital 
Requirements for Supervised Institutions Significantly Engaged in 
Insurance Activities.'' \12\ In the ANPR, the Board conceptually 
described the BBA as a capital framework, contemplated for insurance 
depository institution holding companies, based on aggregating 
available capital and capital requirements across the different legal 
entities in an insurance group to calculate these two amounts at the 
enterprise level.\13\ The ANPR described a number of potential 
adjustments that could be applied in the BBA, including adjustments to 
address variations in accounting practices across jurisdictions in 
which insurers operate, double leverage, aggregation across different 
jurisdictional capital frameworks, and defining loss-absorbing capital 
resources.\14\ In the ANPR, the Board asked questions on all aspects of 
the BBA, including key considerations in evaluating capital frameworks 
for insurance depository institution holding companies, whether the BBA 
was appropriate for these firms as well as advantages and disadvantages 
of this approach, and the adjustments contemplated for use in the 
BBA.\15\
---------------------------------------------------------------------------

    \12\ 81 FR 38631 (June 14, 2016).
    \13\ As used in this Supplementary Information, ``available 
capital'' refers to loss absorbing capital that qualifies for use as 
capital under a regulatory capital framework and ``capital 
requirement'' refers to a measurement of the loss absorbing 
resources the firm needs to maintain commensurate with its risks.
    \14\ As used in this Supplementary Information, ``capital 
resources'' refers to instruments and other capital elements that 
provide loss absorbency in times of stress.
    \15\ In the ANPR, the Board also described a framework that was 
contemplated for application to nonbank financial companies 
significantly engaged in insurance activities (systemically 
important insurance companies), the Consolidated Approach (CA). This 
framework, based on consolidated financial statement data prepared 
in accordance with U.S. GAAP, would categorize insurance 
liabilities, assets, and certain other exposures into risk segments, 
determine consolidated required capital by applying risk factors to 
the amounts in each segment, define available capital for the 
consolidated firm, and determine whether the firm has enough 
consolidated available capital relative to consolidated required 
capital. The Board appreciates the comments it has received 
regarding the CA. The Board continues to deliberate a capital 
requirement for systemically important insurance companies.
---------------------------------------------------------------------------

    Among other things, the ANPR provided stakeholders with an 
opportunity to comment on the Board's development of a capital 
framework for insurance depository institution holding companies at an 
early stage. This NPR builds upon the discussion in the ANPR and 
reflects the Board's review of comments submitted in response to the 
ANPR. The comments are generally addressed below.

[[Page 57243]]

C. General Comments on the ANPR

    The Board received 27 public comments on the ANPR from interested 
parties including supervised insurance companies, insurers not 
supervised by the Board, insurance and other trade associations, 
regulatory and actuarial associations, and others. Generally, 
commenters supported the Board's proposed tailoring of a capital 
requirement that is insurance-centric and appreciated the transparency 
and early opportunity to provide comment. Commenters agreed that 
capital frameworks should capture all material companies and risks 
faced by insurers, reflect on- and off-balance sheet exposures, and 
build on existing capital frameworks where possible. According to 
commenters, the Board's capital framework also should be informed by 
its potential effects on asset allocation decisions of insurers, not 
unduly incentivizing or disincentivizing allocation to certain asset 
classes. Commenters generally supported the Board's proposal to 
efficiently use legal entity capital requirements within an appropriate 
capital framework for both insurance depository institution holding 
companies and those insurance firms designated by the FSOC as 
systemically important. Commenters further suggested that the BBA 
should be built on principles that include minimal adjustments to 
already-applicable capital frameworks, indifference as to structure of 
the supervised firm, comparability across capital frameworks to which 
the supervised firm's entities are subject, appropriately reflecting 
insurance and non-insurance frameworks, and transparency. Commenters 
observed that the BBA would align relatively well with regulators' 
treatment of capital at individual companies and, consequently, the 
ways that capital may not be fungible.
    In the ANPR, the Board asked what capital requirement should be 
used for insurance companies, banking companies, and companies not 
subject to any company-level capital requirement, as used in the BBA. 
For insurance companies subject to the NAIC's risk-based capital (RBC) 
requirements, commenters generally supported the use of required 
capital at the Company Action Level (CAL) under the NAIC RBC framework, 
with some preferring the use of a greater threshold, often termed the 
``trend test'' level.\16\ In commenters' views, a key advantage of the 
BBA is compatibility with existing legal entity capital requirements. 
The BBA was also viewed as being reasonably able to capture the risks 
of non-homogenous products across jurisdictions and varying legal and 
regulatory environments. Since it is an approach that builds on 
existing legal entity capital requirements, the BBA would absorb the 
impact of how those requirements treat the subject entities' products.
---------------------------------------------------------------------------

    \16\ The ``company action level'' under state insurance RBC 
requirements is the amount of capital below which an insurer must 
submit a plan to its state insurance regulator demonstrating how the 
insurer will restore its capital adequacy. The ``trend test level'' 
adds a margin above the company action level, reflecting the 
company's current and recent preceding years' results.
---------------------------------------------------------------------------

    According to commenters, among the key disadvantages of the BBA 
would be that the framework must reconcile possibly divergent valuation 
and accounting practices. As an aggregated approach, the BBA may not 
align with the insurance depository institution holding company's own 
internal approach for risk assessment, which may be conducted on a 
consolidated basis. Commenters expressed varying views on whether the 
BBA would be prone to regulatory arbitrage, but many noted that this 
may not be a shortcoming of the BBA if capital movements are subject to 
restrictions. With regard to specific implementation issues, commenters 
noted, among other things, that the BBA may entail challenges in 
calibrating scalars (the mechanism used to bring divergent capital 
frameworks to a common basis), identifying scalars with a sufficient 
level of granularity, and addressing differences in global valuation 
practices. Furthermore, commenters noted that valuation bases for 
required capital may differ from valuation bases for available capital.
    Some commenters raised concerns about implementation costs and, 
noting that the BBA as set out may tend to have relatively low impact 
in terms of costs to regulators and the industry, suggested 
implementing the BBA over a timeframe in the range of one to two years. 
Multiple commenters agreed that the BBA is expected to have minimal 
setup and ongoing maintenance and compliance costs. One commenter noted 
that since the BBA is a tailored approach that uses a firm's existing 
books and records without compromising supervisory objectives, the 
BBA's design is anticipated to aid in controlling the burden.

D. Comments on Particular Aspects of the ANPR

1. Threshold for Determining a Firm To Be Subject to the BBA
    The Board sought comment on the criteria that should be used to 
determine which supervised firms would be subject to the BBA. 
Commenters generally did not disagree with the Board's proposal to 
apply the BBA to supervised firms with 25 percent or more of total 
consolidated assets attributable to insurance underwriting activities 
(other than assets associated with insurance underwriting for credit 
risk). One commenter suggested that insurance liabilities, rather than 
dedicated assets, should be considered the principal indicator of 
insurance activity. Some comments suggested that the Board should 
consider a depository institution holding company to be an insurance 
depository institution holding company subject to the BBA when either 
the ultimate parent of the enterprise is an operating insurance 
underwriting company, or, if this is not the case, by applying the 25 
percent threshold suggested in the ANPR.
    The Board's proposed threshold for treating a depository 
institution holding company as significantly engaged in insurance 
activities, and thus subject to the BBA, is set out in Section IV.B.
2. Grouping of Companies in the BBA
    A preliminary question in applying the BBA is whether and, if so, 
how, the individual companies under an insurance depository institution 
holding company should be grouped before they are aggregated.
    Some comments advocated an approach of keeping all companies 
together under a common parent as far up in the organizational 
structure as possible. Other comments saw merit to grouping a 
subsidiary IDI distinctly from an insurance parent. A number of 
commenters voiced views on standards for materiality or immateriality 
in determining whether to include companies under an insurance 
depository institution holding company when applying the BBA. More 
generally, commenters voiced openness to deeming companies immaterial 
if they do not pose significant risk to the insurance depository 
institution holding company.
    The Board's proposed approach to grouping companies in an insurance 
depository institution holding company's enterprise in applying the BBA 
is set out in Section IV.C.

[[Page 57244]]

3. Treatment of Non-Insurance, Non-Banking Companies
    In the ANPR, the Board suggested that subsidiaries not subject to 
capital requirements, such as some mid-tier holding companies, would be 
treated under the Board's banking capital rule. Commenters expressed 
concern that this treatment may not always be appropriate, depending on 
whether the subsidiary's activities are more closely aligned with 
insurance or banking activities in the enterprise. Commenters suggested 
that, where the subsidiary's activities are related to insurance 
operations, treating these companies under capital frameworks 
applicable to the operating insurance parent of such companies may be 
more appropriate.
    The Board's proposed treatment of non-insurance, non-banking 
companies under the BBA is discussed further in Section IV.C.
4. Adjustments
    Generally, commenters favored relatively few or modest adjustments 
to available capital and capital requirements under existing capital 
frameworks when applying the BBA. According to commenters, adjustments 
should be focused on addressing accounting mismatches or gaps or to 
eliminate double-counting. Among other things, commenters advocated 
adjustments to reverse intercompany transactions and ensure that 
adequate capital is held to reflect the risks in captive insurance 
companies. Specific proposed adjustments included, among others, 
addressing valuation differences, reversing intercompany loans and 
guarantees, and reversing the downstreaming of capital.
    Numerous commenters advocated the use of adjustments to eliminate 
state permitted and prescribed accounting practices, essentially 
reverting insurers' accounting treatment to that prescribed by the 
NAIC. With regard to implementation burden, one commenter noted that it 
likely would not be unduly burdensome to obtain the data related to 
permitted and prescribed practices for purposes of applying an 
adjustment under the BBA.
    In response to the ANPR's question on how the BBA should address 
intercompany transactions, commenters suggested that at least some 
adjustments for intercompany transactions would be necessary, with 
varying views on the types of transactions that should be addressed 
through adjustments. Commenters similarly expressed that assets and 
liabilities associated with intercompany transactions should not be 
charged twice for the risks they pose and that intercompany 
transactions that result in shifting risk from one subsidiary to 
another should be reviewed.
    Many commenters expressed views that unwinding of intercompany 
transactions should be limited to those needed to prevent double-
counting of capital. According to comments, capital should be counted 
only once as available capital. In particular, commenters highlighted 
double-leverage, whereby an upstream company's debt proceeds are 
infused into a downstream subsidiary as equity, resulting in equity at 
the subsidiary level that is offset by the liability at the parent and, 
hence, capital-neutral at the enterprise-level.
    The proposed treatment of adjustments in the BBA is addressed in 
Sections VI.B and VII.B.
5. Scalars
    In the BBA, existing capital requirements would be scaled to a 
common basis, addressing, among other things, cross-jurisdictional 
differences. Commenters advocated a framework for the BBA that 
distinguished between jurisdictions with capital frameworks suitable to 
be used and subjected to scalars (scalar-compatible frameworks) versus 
those with capital frameworks that should neither be used nor scaled 
(non-scalar-compatible frameworks).
    A number of commenters advocated that the distinction between 
scalar-compatible and non-scalar-compatible frameworks should rest on 
three attributes that the frameworks should possess: (1) Risk-
sensitivity; (2) clear regulatory intervention triggers; and (3) 
transparency in areas such as reserving, capital requirements, and 
reporting of capital measures. For material companies in a non-scalar-
compatible framework, commenters suggested that their data should be 
restated to a scalar-compatible framework and then scaled in the BBA.
    Section V of this NPR explains the Board's approach to scaling in 
the BBA, including the methodology adopted to produce this scaling 
approach.
6. Available Capital
    Generally, commenters suggested that available capital under the 
BBA should be closely aligned with available capital permitted under 
state insurance laws. In its ANPR, the Board asked whether the BBA 
should include more than one tier of capital.\17\ Commenters generally 
did not favor assigning available capital in the BBA to multiple tiers, 
citing reasons including the desire to minimize adjustments to existing 
capital requirements and audited financial statement data, simplicity 
in the BBA's design, and accounting standards' treatment of certain 
assets as non-admitted. Commenters further suggested that the Board can 
achieve its supervisory objectives with a BBA that includes a single, 
rather than more than one, tier of capital.
---------------------------------------------------------------------------

    \17\ 81 FR 38631, 38635 (June 14, 2016).
---------------------------------------------------------------------------

    The Board's proposed approach to determining available capital 
under the BBA is set out in Section VII.

III. The Proposal

A. Overview of the BBA

    The proposed BBA is an approach to a consolidated capital 
requirement that considers all material risks on an enterprise-wide 
basis by aggregating the capital positions of companies under an 
insurance holding company after expressing them in terms of a common 
capital framework.\18\ The BBA constructs ``building blocks''--or 
groupings of entities in the supervised firm--that are covered under 
the same capital framework. These building blocks are then used to 
calculate the combined, enterprise-level available capital and capital 
requirement. At the enterprise level, the ratio of the amount of 
available capital to capital requirement amount, termed the BBA ratio, 
is subject to a required minimum and buffer, with a proposed minimum of 
250 percent and a proposed total buffer of 235 percent.\19\
---------------------------------------------------------------------------

    \18\ To streamline implementation burden while reflecting all 
material risks, the proposed BBA uses the insurance risk-based 
capital framework promulgated by the National Association of 
Insurance Commissioners (NAIC) as the common capital framework. As 
used in this Supplementary Information, ``capital position'' refers 
to an expression of a firm's capitalization, typically expressed as 
a ratio of capital resources to a measurement of the firm's risk.
    \19\ The BBA, as proposed, would apply to insurance depository 
institution holding companies. Should the Board later decide that 
its supervisory objectives would be appropriately served by applying 
the BBA to other institutions, including a systemically important 
insurance company, the Board retains the right to subject such a 
firm to the BBA by order. In addition, the Board will continue to 
evaluate prudential standards applicable to insurance depository 
institution holding companies, including those that are triggered by 
minimum capital requirements. However, the Board does not propose to 
apply Board-run stress testing standards to insurance depository 
institution holding companies at this time.
---------------------------------------------------------------------------

    In each building block, the BBA generally applies the capital 
framework for that block to the subsidiaries in that block. For 
instance, in a life insurance building block, subsidiaries within this 
block would be treated in the BBA the way they would be treated under 
life insurance capital requirements. In a

[[Page 57245]]

depository institution building block, subsidiaries would be subject to 
Federal banking capital requirements. To address regulatory gaps and 
arbitrage risks, the BBA generally would apply banking capital 
requirements to material nonbank/non-insurance building blocks. Once 
the enterprise's entities are grouped into building blocks, and 
available capital and capital requirements are computed for each 
building block, the enterprise's capital position is produced by 
generally adding up the capital positions of each building block. The 
BBA is consistent with the Board's continuing emphasis on adopting 
tailored approaches to supervision and regulation in a manner that 
streamlines implementation burden.
    The BBA framework was designed to produce a consolidated risk-based 
capital requirement that is not less stringent than the results derived 
from the Board's banking capital rule. To enable aggregation of 
available capital and capital requirements across different building 
blocks, the BBA proposes a mechanism (scaling) to translate a capital 
position under one capital framework to its equivalent in another 
capital framework.\20\ At the enterprise level, the BBA applies a 
minimum risk-based capital requirement that leverages the minimum 
requirement from the Board's banking capital rule, expressed as its 
equivalent value in terms of the common capital framework. The minimum 
required capital ratio under the BBA begins with this equivalence value 
but includes a safety margin to provide a heightened degree of 
confidence that the BBA's requirement is not less than the generally 
applicable requirement. Thus, the BBA produces results that are not 
less stringent than the Board's banking capital rule.
---------------------------------------------------------------------------

    \20\ Two building blocks under two different capital frameworks 
cannot typically be added together if, as is frequently the case, 
each framework has a different scale for its ratios and thresholds. 
As discussed further below in section V, the BBA proposes to scale 
and equate capital positions in different frameworks through 
analyzing historical defaults under those frameworks.
---------------------------------------------------------------------------

    In designing the BBA, the Board considered, among other things, the 
activities and risks of insurance institutions, existing legal entity 
capital requirements, input from interested parties, comments to the 
ANPR, and the requirements of federal law. The Board sought to develop 
the BBA to reflect risks across the entire firm in a manner that is as 
standardized as possible, rather than relying predominantly on a 
supervised firm's internal capital models. Furthermore, the BBA is 
built on U.S. regulatory and valuation standards that are appropriate 
for the U.S. insurance industry.
    Board staff also met with interested parties, including members of 
the NAIC, to solicit their views on the overall development of the BBA. 
Input from the NAIC and states has helped identify areas of commonality 
between the BBA and the Group Capital Calculation (GCC) that is under 
development by the NAIC, achieve consistency between those frameworks 
wherever possible, and minimize burden upon firms that may be subject 
to both frameworks, while remaining respectful of the various 
objectives of the relevant supervisory bodies and legal environments.
    These considerations exist in the context of the Board's 
participation in the international insurance standard-setting process 
and development of the international Insurance Capital Standard (ICS), 
an approach the Board did not follow in designing the BBA. The ICS is 
being developed through the International Association of Insurance 
Supervisors (IAIS) as a consolidated group-wide prescribed capital 
requirement for internationally active insurance groups (IAIGs).\21\ In 
participating in this process, the Board remains committed to 
advocating, collaboratively with the NAIC, state insurance regulators, 
and the Federal Insurance Office, positions that are appropriate for 
the United States. In particular, this includes advocacy for 
development of an aggregation method akin to the BBA, and the GCC being 
developed by the NAIC, that can be deemed an outcome-equivalent 
approach for implementation of the ICS. In 2017, the IAIS decided to 
release the ICS in two phases: A five-year monitoring phase beginning 
in 2020, during which the ICS would be reported on a confidential basis 
to group-wide supervisors (the Monitoring Period), followed by an 
implementation phase. The IAIS released a public consultation document 
on ICS Version 2.0 in 2018,\22\ and is planning to release ICS Version 
2.0, for use in the Monitoring Period, in 2019.\23\
---------------------------------------------------------------------------

    \21\ Standards produced through the IAIS are not binding upon 
the United States unless implemented locally in accordance with 
relevant laws.
    \22\ IAIS, Risk-based Global Insurance Capital Standard Version 
2.0: Public Consultation Document (July 31, 2018), https://www.iaisweb.org/page/supervisory-material/insurance-capital-standard/file/76133/ics-version-20-public-consultation-document.
    \23\ IAIS, The IAIS Risk-based Global Insurance Capital Standard 
(ICS): Frequently Asked Questions on the Implementation of ICS 
Version 2.0 (January 26, 2018), https://www.iaisweb.org/file/71580/implementation-of-ics-version-20-qanda.
---------------------------------------------------------------------------

    The purpose of the ICS Monitoring Period is to monitor the 
performance of the ICS over time. It is not intended to be used as 
supervisory mechanism to evaluate the capital adequacy of IAIGs. The 
ICS Monitoring Period is intended to provide a period of stability for 
the design and calibration of the ICS so that group-wide supervisors, 
with the support of supervisory colleges, may compare the ICS to 
existing group standards or those in development, assess whether 
material risks are captured and appropriately calculated, and report 
any difficulties encountered. Reporting during the Monitoring Period 
will include a reference ICS as well as additional reporting at the 
request of the group-wide supervisor.
    The reference ICS is comprised of a market-adjusted valuation 
approach (MAV), which is a market-based balance sheet valuation 
approach similar to that used under the Solvency II framework, along 
with a standard method for determining capital requirements and common 
criteria for available capital. At the group-wide supervisor's request, 
ICS 2.0 will also include an alternative valuation approach, GAAP with 
Adjustments, that is based on local GAAP accounting rules and reporting 
with certain adjustments to produce results that are comparable to the 
reference ICS. In addition, supervisors may request information on 
internal models as an alternative approach for calculating risk 
weights. During the Monitoring Period, the IAIS will also continue with 
the collection of information and field-testing of the Aggregation 
Method.
    The reference ICS may not be optimal for the Board's supervisory 
objectives, considering the risks and activities in the U.S. insurance 
market. In the United States, financial firms frequently serve a 
substantial role in facilitating their customers' long-term financial 
planning. Insurers in the United States meet consumers financial 
planning needs with life insurance and annuity products in addition to 
property/casualty products to protect personal and real property and 
limit liability. Insurers match life insurance and annuity long-
duration products with a long-term investment strategy.
    As proposed, the BBA would appropriately reflect, rather than 
unduly penalize, long-duration insurance liabilities in the United 
States. In the United States, an aggregation-based approach like the 
BBA could also strike a better balance between entity-level, and 
enterprise-wide, supervision of insurance firms.
    Question 1: The IAIS is currently considering a MAV approach for 
the

[[Page 57246]]

ICS; in contrast, the BBA aggregates existing company-level capital 
requirements throughout an organization to assess capital adequacy at 
various levels of the organization, including at the enterprise level. 
What are the comparative strengths and weaknesses of the proposed 
approaches? How might an aggregation-based approach better reflect the 
risks and economics of the insurance business in the U.S.?
    Question 2: In what ways would an aggregation-based approach be a 
viable alternative to the ICS? What criteria should be used to assess 
comparability to determine whether an aggregation-based approach is 
outcome-equivalent to the ICS?
    The Board believes that the capital requirements proposed in this 
NPR advance the regulatory objectives of the Board as consolidated 
supervisor of insurance depository institution holding companies, 
including ensuring enterprise-wide safety and soundness, and protecting 
the subsidiary IDIs. Based on the Board's preliminary review, the Board 
does not anticipate that any currently supervised insurance depository 
institution holding company will initially need to raise capital to 
meet the requirements of the BBA. Moreover, the BBA is consistent with 
the Board's continuing emphasis on adopting a tailored approach to 
supervision and regulation in a manner that streamlines implementation 
burden.

B. Dodd-Frank Act Capital Calculation

    In light of the requirements of the Dodd-Frank Act, in addition to 
the BBA, the Board is proposing to apply a separate minimum risk-based 
capital requirement calculation (the Section 171 calculation) to 
insurance depository institution holding companies that uses the 
flexibility afforded under the 2014 amendments to section 171 of the 
Dodd-Frank Act to exclude certain state and foreign regulated insurance 
operations and to exempt top-tier insurance underwriting companies.
    As previously discussed, section 171 of the Dodd-Frank Act requires 
the Board to establish minimum risk-based and leverage capital 
requirements for depository institution holding companies. These 
requirements may not be less than the ``generally applicable'' capital 
requirements for IDIs, nor quantitatively lower than the capital 
requirements that applied to IDIs on July 21, 2010.\24\ Section 171 of 
the Dodd-Frank Act generally requires that the minimum risk-based 
capital requirements established by the Board for depository 
institution holding companies apply on a consolidated basis.
---------------------------------------------------------------------------

    \24\ Section 171 of the Dodd-Frank Act defines the ``generally 
applicable'' risk-based capital requirements as those established by 
the appropriate Federal banking agencies to apply to insured 
depository institutions under the prompt corrective action 
regulations implementing section 38 of the Federal Deposit Insurance 
Act (``FDI Act'') and ``includes the regulatory capital components 
in the numerator of those capital requirements, the risk-weighted 
assets in the denominator of those capital requirements, and the 
required ratio of the numerator to the denominator.''
---------------------------------------------------------------------------

    Notwithstanding the general requirement of section 171 of the Dodd-
Frank Act that the minimum risk-based capital requirements established 
by the Board for depository institution holding companies apply on a 
consolidated basis, section 171(c) provides that the Board is not 
required to include for any purpose of section 171 (including in any 
determination of consolidation) any entity regulated by a state 
insurance regulator or a regulated foreign subsidiary or certain 
regulated foreign affiliates of such entity engaged in the business of 
insurance.
    Currently, only a depository institution holding company that is a 
bank holding company or a ``covered savings and loan holding company'' 
\25\ is subject to the Board's banking capital rule, which serves as 
the generally applicable capital requirement for IDIs and sets a floor 
for any capital requirements established by the Board for depository 
institution holding companies. Insurance depository institution holding 
companies are excluded from the definition of covered savings and loan 
holding company and from the application of the Board's banking capital 
rule on a consolidated basis. As a result, a top-tier SLHC that is 
significantly engaged in insurance activities and its subsidiary SLHCs 
currently are not subject to a consolidated minimum risk-based capital 
requirement that complies with section 171 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \25\ 12 CFR 217.1(c) and 217.2. Covered savings and loan holding 
company means a top-tier savings and loan holding company other 
than: (1) A top-tier savings and loan holding company that is:
    (i) An institution that meets the requirements of section 
10(c)(9)(C) of HOLA (12 U.S.C. 1467a(c)(9)(C)); and
    (ii) As of June 30 of the previous calendar year, derived 50 
percent or more of its total consolidated assets or 50 percent of 
its total revenues on an enterprise-wide basis (as calculated under 
GAAP) from activities that are not financial in nature under section 
4(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k));
    (2) A top-tier savings and loan holding company that is an 
insurance underwriting company; or
    (3) A top-tier savings and loan holding company that, as of June 
30 of the previous calendar year, held 25 percent or more of its 
total consolidated assets in subsidiaries that are insurance 
underwriting companies (other than assets associated with insurance 
for credit risk).
---------------------------------------------------------------------------

    Under the proposed Section 171 calculation the Board's existing 
minimum risk-based capital requirements would generally apply to a top-
tier insurance SLHC on a consolidated basis when this company is not an 
insurance underwriting company. In the case of an insurance SLHC that 
is an insurance underwriting company, the requirements would instead 
apply to any insurance SLHC's subsidiary SLHC that is not itself an 
insurance underwriting company and is not a subsidiary of any SLHC 
other than the insurance SLHC, provided that the subsidiary SLHC is the 
farthest upstream non-insurer SLHC (i.e., the subsidiary SLHC's assets 
and liabilities are not consolidated with those of a holding company 
that controls the subsidiary for purposes of determining the parent 
holding company's capital requirements and capital ratios under the 
Board's banking capital rule) (an insurance SLHC mid-tier holding 
company). Except for the option to exclude insurance operations, which 
is described in further detail below, the minimum risk-based capital 
requirements that would apply for purposes of the Section 171 
calculation are the same requirements that are applied under the 
generally applicable capital rules, and therefore ensure compliance 
with Section 171 of the Dodd-Frank Act.\26\
---------------------------------------------------------------------------

    \26\ In its most basic form, for the Board's generally 
applicable minimum risk-based capital requirement, qualifying 
capital is the numerator of the ratio and risk-weighted assets (RWA) 
determine the denominator of the ratio. As used in this 
Supplementary Information, the terms ``qualifying capital,'' ``risk 
weight,'' and ``risk-weighted assets'' are used consistently with 
their uses under Federal banking capital rules. Under the Board's 
banking regulatory capital framework, the resulting ratio must be, 
at a minimum, 4.5 percent when considering common equity tier 1 
(CET1) capital, 6 percent when considering total tier 1 capital, and 
8 percent when considering total capital.
---------------------------------------------------------------------------

    The proposed Section 171 calculation would be implemented by 
amending the definition of ``covered savings and loan holding company'' 
for the purposes of the Board's banking capital rule.\27\ Under the 
proposal, an insurance SLHC would become a covered savings and loan 
holding company subject to the requirements of the Board's banking 
capital rule unless it is a grandfathered unitary savings and loan 
holding company that derives 50 percent or more of its total 
consolidated assets or 50 percent of its total revenues on an 
enterprise-wide basis (as calculated under GAAP) from activities that 
are not financial in nature.
---------------------------------------------------------------------------

    \27\ 12 CFR 217.2.

---------------------------------------------------------------------------

[[Page 57247]]

    As a result of this amendment to the definition of ``covered 
savings and loan holding company,'' insurance SLHCs generally would 
become subject to the minimum risk-based capital requirements in the 
Board's banking capital rule. However, under the proposed rule, top-
tier holding companies that are engaged in insurance underwriting and 
regulated by a state insurance regulator, or certain foreign insurance 
regulators, would not be required to comply with the generally 
applicable risk-based capital requirements.\28\ Instead, those 
requirements would apply to any insurance SLHC mid-tier holding 
companies, as defined in the proposed rule.
---------------------------------------------------------------------------

    \28\ In accordance with section 171 of the Dodd-Frank Act, a 
foreign insurance regulator that fall under this provision is one 
that ``is a member of the [IAIS] or other comparable foreign 
insurance regulatory authority as determined by the Board of 
Governors following consultation with the State insurance 
regulators, including the lead State insurance commissioner (or 
similar State official) of the insurance holding company system as 
determined by the procedures within the Financial Analysis Handbook 
adopted by the [NAIC].''
---------------------------------------------------------------------------

    As noted, under the proposed Section 171 calculation, an insurance 
SLHC subject to the generally applicable risk-based capital 
requirements (i.e., that is not a top-tier insurance underwriting 
company) could elect not to consolidate the assets and liabilities of 
all of its subsidiary state-regulated insurers and certain foreign-
regulated insurers. By making this election, an insurance SLHC could 
determine that assets and liabilities that support its insurance 
operations should not contribute to the calculation of risk-weighted 
assets or average total assets under the generally applicable capital 
requirements.
    With regard to the regulatory capital treatment of an insurance 
SLHC's (or insurance mid-tier holding company's) equity investment in 
subsidiary insurers that do not consolidate assets and liabilities with 
the holding company pursuant to the election, the proposal presents two 
alternative approaches for comment.\29\ Under the first alternative, 
the holding company could elect to deduct the aggregate amount of its 
outstanding equity investment in its subsidiary state- and certain 
foreign-regulated insurers, including retained earnings, from its 
common equity tier 1 capital elements. Under the second alternative, 
the holding company could include the amount of its investment in its 
risk-weighted assets and assign to the investment a 400 percent risk 
weight, consistent with the risk weight applicable under the simple 
risk-weight approach in section 217.52 of the Board's banking capital 
rule to an equity exposure that is not publicly traded.\30\ The Board 
recognizes that fully deducting from common equity tier 1 capital an 
insurance SLHC's equity investment in insurance subsidiaries in some 
cases could yield inaccurate or overly conservative results for the 
section 171 calculation, for example, where the holding company has 
issued debt to fund equity contributions to the insurance subsidiaries. 
Conversely, any risk weight approach for equity investments in 
insurance subsidiaries must be calibrated to reflect risk, facilitate 
comparability of capital requirements for insurance and non-insurance 
depository institution holding companies, and avoid creating incentives 
for regulatory arbitrage. The Board continues to consider these issues, 
and invites comment on optional approaches to exclude insurance 
operations from the calculation of consolidated regulatory capital 
requirements.
---------------------------------------------------------------------------

    \29\ The amount of the holding company's outstanding equity 
investment, including retained earnings, in a subsidiary insurer can 
be best determined as the equity of the subsidiary under U.S. GAAP.
    \30\ 12 CFR 217.52(b)(6).
---------------------------------------------------------------------------

    As previously noted, in addition to risk-based capital 
requirements, section 171 requires the Board to establish minimum 
leverage capital requirements for depository institution holding 
companies. The Board's banking capital rule includes a minimum leverage 
ratio of 4 percent tier 1 capital to average total assets.\31\ The 
Board is not currently proposing a leverage capital requirement for 
insurance SLHCs under the BBA framework or as part of the section 171 
compliance calculation, and continues to evaluate methodologies to 
apply leverage capital requirements to these institutions.
---------------------------------------------------------------------------

    \31\ Under the Board's banking capital rule, the leverage ratio 
is the ratio of tier 1 capital to average total consolidated assets 
as reported on the Call Report, for a state member bank, or the 
Consolidated Financial Statements for Bank Holding Companies (FR Y-
9C), for a bank holding company or savings and loan holding company, 
as applicable minus amounts deducted from tier 1 capital under 12 
CFR 217.22(a), (c) and (d). See 12 CFR 217.10(b)(4).
---------------------------------------------------------------------------

    Question 3: As an alternative to consolidation, what are the 
advantages or disadvantages of permitting a holding company to 
deconsolidate the assets and liabilities of its subsidiary state- and 
certain foreign-regulated insurers, and deduct from equity its 
investment in these subsidiary insurers?
    Question 4: As an alternative to consolidation, what are the 
advantages or disadvantages of permitting a holding company to 
deconsolidate the assets and liabilities of its subsidiary state- and 
certain foreign-regulated insurers, and risk weight the holding 
company's equity investment in these subsidiary insurers?
    Question 5: What is the appropriate risk weighting for a holding 
company's equity investment in its subsidiary state- and certain 
foreign-regulated insurers?
    Question 6: What other calculations, if any, should the Board 
consider to ensure that the minimum risk-based capital requirement for 
insurance depository institution holding companies complies with 
section 171 of the Dodd-Frank Act?
    Question 7: Should the generally applicable minimum leverage ratio 
be excluded from the section 171 calculation?
    Question 8: What are the advantages or disadvantages of applying 
the generally applicable minimum leverage capital requirement to an 
insurance SLHC or insurance SLHC mid-tier holding company, as defined 
in this proposal, with the same exclusion of insurance subsidiaries as 
set out in this proposal for the generally applicable minimum risk-
based capital requirement?
    Question 9: What are the advantages or disadvantages of applying a 
supplementary leverage ratio requirement to an insurance SLHC or 
insurance SLHC mid-tier holding company, as defined in this proposal, 
with the same exclusion of insurance subsidiaries as set out in this 
proposal for the generally applicable minimum risk-based capital 
requirement?
    A holding company electing to de-consolidate the assets and 
liabilities of all of its subsidiary state- and certain foreign 
regulated insurers would make this election, and indicate the manner in 
which it will account for its equity investment in such subsidiaries, 
on the applicable regulatory report filed by the holding company for 
the first reporting period in which it is subject to the Section 171 
calculation. A holding company seeking to make such an election at a 
later time, or to change its election due to a change in control, 
business combination, or other legitimate business purpose, would be 
required to receive the prior approval of the Board.
    Question 10: What would the benefits and costs be of allowing a 
holding company to elect not to consolidate some, but not all, of its 
subsidiary state- and certain foreign-regulated insurers?
    Question 11: When should the Board permit a holding company to 
request to change a prior election regarding the capital treatment of 
its insurance subsidiaries?

[[Page 57248]]

IV. The Building Block Approach

A. Structure of the BBA

    The proposed BBA is an approach to a consolidated capital 
requirement that aggregates the capital positions of companies under an 
insurance depository institution holding company, adjusted as 
prescribed in the proposed rule, and scaled to a common capital 
framework. The proposed BBA would group companies into subsets of the 
full enterprise, called building blocks, where the company that owns or 
controls each building block is termed a ``building block parent.'' The 
purpose of a building block is to group together companies generally 
falling under the same capital framework (namely, the framework of the 
building block parent). Each building block parent's applicable capital 
framework would be used to determine that parent's capital 
position.\32\ The proposed BBA would scale or convert the capital 
positions of non-insurance building block parents to their insurance 
building block parent equivalents and then aggregate the capital 
positions to reach an enterprise-wide capital position. In this manner, 
the BBA reflects the risks and resources of the subsidiaries within 
each building block and, thus, a consolidation of all material risks in 
the insurance depository institution holding company's enterprise.
---------------------------------------------------------------------------

    \32\ For instance, if a particular building block parent is a 
U.S. operating insurer, the applicable capital framework would be 
NAIC RBC as adopted by the insurer's domiciliary state. In the BBA, 
all of the parent's subsidiaries would be reflected in the manner 
that they are treated under NAIC RBC. If a building block parent is 
an insured depository institution, the applicable capital framework 
would be Federal bank capital rules. In the BBA, the IDI's 
subsidiaries would be consolidated and reflected through the IDI's 
capital position in accordance with the Federal banking capital 
rules.
---------------------------------------------------------------------------

    An important part of applying the BBA is identifying the building 
block parents in an insurance depository institution holding company's 
enterprise. Section IV.C below discusses the steps to determine the 
building block parents, including identifying an inventory of companies 
from which building block parents are identified based on the 
applicable capital framework assigned to the companies for use in the 
BBA. Ultimately, all of the building blocks are aggregated into the 
top-tier depository institution holding company's building block, 
thereby resulting in an amount of available capital and capital 
requirement for the top-tier depository institution holding company 
used to calculate its BBA ratio.

B. Covered Institutions and Scope of the BBA

    The proposed BBA would apply to depository institution holding 
companies significantly engaged in insurance activities. The Board 
proposed in the ANPR that a firm would be subject to the BBA if the 
top-tier parent were an insurance underwriting company or 25 percent of 
its total assets were in insurance underwriting subsidiaries. In this 
NPR, the Board proposes to leave this threshold unchanged. A firm would 
be subject to the BBA if: (1) The top-tier DI holding company is an 
insurance underwriting company; (2) the top-tier DI holding company, 
together with its subsidiaries, holds 25 percent or more of its total 
consolidated assets in insurance underwriting subsidiaries (other than 
assets associated with insurance underwriting for credit risk related 
to bank lending); \33\ or (3) the firm has otherwise been made subject 
to the BBA by the Board.
---------------------------------------------------------------------------

    \33\ For purposes of this threshold, a supervised firm would 
calculate its total consolidated assets in accordance with U.S. 
GAAP, or, if the firm does not calculate its total consolidated 
assets under U.S. GAAP for any regulatory purpose (including 
compliance with applicable securities laws), the company may 
estimate its total consolidated assets, subject to review and 
adjustment by the Board.
---------------------------------------------------------------------------

    As consolidated supervisor of the top-tier DI holding company of an 
insurance depository institution holding company, the Board proposes to 
include, within the scope of the BBA calculation, all owned or 
controlled subsidiaries of this top-tier parent.\34\ While the Board 
could have opted to exclude certain subsidiaries (e.g., those that are 
immaterial), the Board considers that a capital requirement including 
all owned or controlled companies within the scope of the BBA better 
reflects a consolidated, enterprise-wide perspective of the risks faced 
by the insurance depository institution holding company. Companies that 
are not owned or controlled by a top-tier DI holding company and that 
do not own or control an IDI would fall outside of the BBA's scope. For 
instance, a top-tier DI holding company may have a sister company that 
does not control an IDI. The sister company would fall outside of the 
scope of the BBA's application because it lacks the requisite 
connection to the IDI. Under a different structure, an insurance 
depository institution holding company may control an IDI that is also 
controlled by another insurance depository institution holding company, 
where both insurance depository institution holding companies are part 
of the same organization generally regarded as a single group. Both of 
these top-tier DI holding companies would be within the BBA's scope.
---------------------------------------------------------------------------

    \34\ The Board recognizes that, where a firm's structure 
includes a number of companies that control an IDI, it may be more 
practical and efficient, particularly in terms of reducing 
implementation burden, to treat, for purposes of the BBA, a mid-tier 
entity as the top-tier SLHC with the upstream controlling 
entity(ies) left outside of the BBA's scope. For instance, if an 
insurance institution is controlled by a company significantly 
engaged in non-insurance, commercial activities, it may be 
practical, and without compromising the quality of the Board's 
consolidated supervision, to focus the BBA's application on the 
insurance institution rather than the broader commercial enterprise.
---------------------------------------------------------------------------

    Currently, the insurance depository institution holding companies 
are all SLHCs and the current proposed definition of top-tier 
depository institution holding company in the BBA only encompasses 
SLHCs. However, it is possible for a bank holding company (which is 
also a depository institution holding company under the FDI Act) to be 
significantly engaged in insurance activities as determined by applying 
the threshold described earlier in this section. In particular, under 
the Economic Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA),\35\ Federal savings associations with total consolidated 
assets of up to $20 billion, as reported to the Office of the 
Comptroller of the Currency (OCC) as of year-end 2017, may elect to 
operate as a covered savings association.\36\ The Board is still 
considering these recent legislative changes. However, the Board 
presently does not see reason to apply different capital requirements 
to an insurance depository institution holding company that controls a 
covered savings association and an insurance depository institution 
holding company that controls any other IDI. Preliminarily, the Board 
anticipates harmonizing the regulation of BHCs and SLHCs significantly 
engaged in insurance activities, in each case determined by applying 
the threshold described earlier in this section. This could result in 
BHCs significantly engaged in insurance activities falling within the 
scope of the final rule implementing the BBA.
---------------------------------------------------------------------------

    \35\ Public Law 115-174, 132 Stat. 1296 (2018).
    \36\ EGRRCPA Section 206.
---------------------------------------------------------------------------

    Question 12: What are the advantages and disadvantages of including 
all insurance depository institution holding companies (including bank 
holding companies significantly engaged in insurance activities and 
insurance depository institution holding companies that control covered 
savings associations) within the scope of the final BBA rule, as 
planned?

[[Page 57249]]

C. Identification of Building Blocks and Building Block Parents

1. Inventory
    In order to identify the set of companies that would be grouped 
into building blocks and aggregated, an insurance depository 
institution holding company would first identify an inventory of all 
companies in its enterprise. Some of the companies in the inventory 
would be building block parents. The remaining companies would be 
assigned to building block parents.
    To construct the inventory, the Board prefers including a broad set 
of companies that reflects the firm's full enterprise under the BBA's 
scope and provides an appropriately wide range of candidates for 
building block parents. A framework for constructing the inventory that 
relied on, for instance, the definitions of ``control'' under U.S. GAAP 
may be burdensome to apply and set a relatively higher bar for 
inclusion of affiliates, resulting in too few companies appearing on 
the inventory. The Board notes that the NAIC's Schedule Y, filed 
annually as part of the SAP financial statements, is advantageous in 
utilizing a standard for ``control'' that enables more subsidiaries and 
affiliates to be included.
    Because it is possible that certain banking, SLHC, or nonbanking 
companies may not appear on the supervised firm's Schedule Y (but would 
appear on the firm's regulatory filings with the Board), the Board 
sought to augment the inventory by adding to the set of companies 
obtained from Schedule Y the companies appearing on the Board's Forms 
FR Y-6 and FR Y-10. These forms use a definition of control setting out 
scenarios where one company has control over another through a variety 
of ways, including ownership, control of voting securities, and 
management agreements. The Board considers that through the combination 
of companies appearing on Forms FR Y-6 and FR Y-10, and the NAIC's 
Schedule Y,\37\ the BBA would reflect a sufficiently wide set of 
companies as potential building block parents as well as capturing all 
material risks. Moreover, by utilizing reports already prepared by 
insurance depository institution holding companies, including those 
reported to state insurance regulators, the BBA proposal aims to 
minimize burden in the process of inventorying companies.
---------------------------------------------------------------------------

    \37\ The Schedule Y used for this purpose is the one included in 
the most recent statutory annual statement for an operating insurer 
in the insurance depository institution holding company's 
enterprise.
---------------------------------------------------------------------------

    While the inventory in the BBA will generally comprise the 
companies shown on the forms discussed above, the Board also seeks to 
ensure that the supervised firm's organizational and control structure 
does not materially alter the scope of risks that the BBA considers. 
Firms may engage in transactions with counterparties not shown on these 
forms, where these transactions have the effect of transferring risk or 
evading application the BBA. For such circumstances, the BBA includes a 
mechanism to include these counterparties in the inventory.
    As discussed below, applying the BBA and performing its 
calculations rests on identifying the building block parents among the 
companies in the inventory. Once these building block parents are 
identified, all of their subsidiaries, whether or not listed on the 
inventory, would fall within the scope of the BBA.
    An illustration of this step in applying the BBA is presented in 
Section IX.A.
2. Applicable Capital Framework
    In the BBA, the term ``applicable capital framework'' refers to a 
regulatory capital framework that is used to determine whether a 
company should be a building block parent, and, once a company is 
assigned to a building block, to measure the capital resources of that 
company and the amount of risk the company contributes to the overall 
enterprise. Once a company is identified as a building block parent, 
its applicable capital framework would be used to reflect the capital 
position across all of the subsidiaries in the building block, 
including subsidiaries that are not directly subject to any regulatory 
capital framework.
    For the insurance operations, insurance capital requirements are 
likely to best reflect the underlying risks.\38\ For instance, the 
applicable capital framework for U.S. insurance operating companies may 
be life or property and casualty (P&C) risk-based capital (RBC). The 
Board's proposal to use the regulatory capital framework promulgated by 
the NAIC for an insurance company or operation as the applicable 
capital framework (e.g., the P&C RBC for a P&C insurer) takes into 
consideration the NAIC capital framework's reflection of the potential 
impact of various risk exposures, including liabilities, on the 
solvency of that type of insurer. For material insurance companies that 
lack a regulatory capital framework for which scaling can be performed 
under the BBA, such as some captive insurance companies, the Board 
proposes to apply the NAIC's RBC, after restating such companies' 
financial information according to SAP.\39\
---------------------------------------------------------------------------

    \38\ As discussed further below, the insurance operations in an 
insurance building block can encompass operating insurers and 
subsidiaries that are not subject to a regulatory capital framework. 
Unless those subsidiaries are later assigned to a bank building 
block, through the operations discussed below, the treatment of 
these companies under insurance capital rules would be used in the 
BBA. To best reflect the risks in the enterprise while streamlining 
implementation burden, the Board proposes to apply this treatment 
rather than applying the Board's banking capital rule universally to 
noninsurance companies. As discussed below, those that are material 
may meet the definition of a material financial entity and, where 
applicable, be treated under the Board's banking capital rule.
    \39\ A discussion of the proposed BBA's definition of 
``material'' appears in Section IV.C.3.
---------------------------------------------------------------------------

    For banking companies, the Board was mindful of the reflection of 
risks in the banking capital requirements. The Board proposes to 
incorporate the regulatory capital framework established for a 
depository institution by its primary Federal banking regulator as the 
depository institution's applicable capital framework, because the 
capital framework has been calibrated to reflect the potential impact 
of various risk exposures common to banking organizations (primarily in 
the form of assets) on the risk profile of a depository institution. In 
particular, an IDI's applicable capital framework is determined as 
follows: \40\ For nationally-chartered IDIs, the applicable capital 
framework is the capital rule as set forth by the OCC.\41\ For state-
chartered IDIs that are members of the Federal Reserve System, the 
applicable capital framework is the Board's banking capital rule, and 
for those that are not members, the capital rule as set forth by the 
FDIC.\42\ In addition, applying bank capital requirements to certain 
other non-insurance subsidiaries, referred to in the BBA as ``material 
financial entities'' (MFEs), can mitigate the risk of regulatory 
arbitrage by disincentivizing the reallocation of assets between 
banking, insurance, and other companies in the institution. Where the 
rule proposes to apply Federal bank capital rules, insurance depository 
institution holding companies would apply them using the same elections 
(e.g., treatment of accumulated other

[[Page 57250]]

comprehensive income) as they would when applying bank capital rules to 
a subsidiary IDI.\43\
---------------------------------------------------------------------------

    \40\ Note that a foreign bank would typically not meet the 
definition of an IDI, which includes entities whose deposits are 
insured by the FDIC without regard to whether the entity's deposits 
are insured by any other program. In the BBA, any foreign bank would 
be subject to the Board's banking capital rule.
    \41\ 12 CFR part 3, 12 CFR part 167.
    \42\ 12 CFR part 324; 12 part CFR 217.
    \43\ This accords with the rule set out in 12 CFR 
217.22(b)(2)(iii), which specifies that ``Each depository 
institution subsidiary of a Board-regulated institution that is not 
an advanced approaches Board-regulated institution must elect the 
same option as the Board-regulated institution pursuant to [12 CFR 
217.22(b)(2)].''
---------------------------------------------------------------------------

    The Board proposes to include, within the scope of the BBA, the 
insurance depository institution holding company predominantly engaged 
in title insurance through a tailored application of the Board's 
banking capital rule.\44\ The NAIC has not promulgated a risk-based 
capital standard for title insurance companies. In the absence of an 
insurance capital framework for title insurance, and in light of the 
different nature of title insurance compared with life and P&C 
insurance, the Board has determined to apply the Board's banking 
capital rule to an insurance depository institution holding company 
predominantly engaged in title insurance. Currently, there is one 
insurance depository institution holding company that is predominantly 
engaged in title insurance. The Board's proposed application of the BBA 
to this firm is facilitated by the fact that the title insurance 
depository institution holding company, like other large title 
insurers, prepares consolidated financial statements in accordance with 
U.S. GAAP.
---------------------------------------------------------------------------

    \44\ Later sections in this Supplementary Information discuss 
aspects of applying the Board's banking capital rule to the 
insurance depository institution holding company predominantly 
engaged in title insurance.
---------------------------------------------------------------------------

    As a simplified example of the determination of companies' 
applicable capital frameworks, consider an insurance depository 
institution holding company consisting of a life insurance top-tier 
parent with two subsidiaries, a P&C insurer and the IDI. Each of these 
companies would fall under a different applicable capital framework, 
namely, for the top-tier parent, NAIC RBC for life insurance; for the 
P&C subsidiary, NAIC RBC for P&C insurance; and for the IDI, the 
appropriate Federal banking capital rule. A further illustration of 
this step in applying the BBA is presented in Section IX.B.
    Question 13: The Board invites comment on the proposed approach to 
determine applicable capital frameworks. What are the advantages and 
disadvantages of the approach? What is the burden associated with the 
proposed approach?
3. Building Block Parents
    Under the proposed BBA, a building block parent can be one of 
several different types of companies. The first is the top-tier 
depository institution holding company. In the absence of any other 
identified building block parents, the top-tier depository institution 
holding company's building block would contain all of the top-tier 
depository institution holding company's subsidiaries. A second type of 
building block parent is a mid-tier holding company that is a 
``depository institution holding company'' under U.S. law. Treating 
these companies as building block parents will allow for the 
calculation of a separate BBA ratio at the level of these companies in 
the enterprise and help to ensure that these companies remain 
appropriately capitalized. The balance of this subsection discusses the 
remaining types of building block parents.
(a) Capital-Regulated Companies and Material Financial Entities as 
Building Block Parents
    For two categories of companies that could be identified as 
building block parents, companies that are subject to company-level 
capital requirements (capital-regulated companies) and MFEs, the 
analysis is conducted in the same manner. For each of these companies 
in the inventory, the supervised firm analyzes whether that company's 
applicable capital framework differs from that of the next capital-
regulated company, MFE, or DI holding company encountered when 
proceeding upstream in the supervised firm's inventory. If so, that 
company is identified as a building block parent. The identification of 
building block parents, particularly capital-regulated companies and 
material financial entities, can be illustrated through the following 
decision tree, which would be applicable for each company in the 
insurance depository institution holding company's enterprise.

[[Page 57251]]

[GRAPHIC] [TIFF OMITTED] TP24OC19.026


[[Page 57252]]


    For example, if a firm's top-tier depository institution holding 
company is a life insurer that has two direct subsidiaries--a P&C 
insurer and the IDI--the firm would analyze whether the P&C company's 
applicable capital framework (NAIC RBC for P&C insurers) differs from 
that of the top-tier DI holding company (NAIC RBC for life insurers). 
Upon finding that the applicable capital frameworks are different, the 
P&C insurer would be a building block parent. The same would be the 
case for the IDI, whose applicable capital framework (a Federal banking 
capital rule) differs from the capital framework of its life insurance 
parent. However, if the P&C subsidiary has a further downstream P&C 
subsidiary, the firm would compare the latter P&C company's applicable 
capital framework only against that the P&C subsidiary immediately 
below the life insurer.\45\ Thus, the downstream P&C subsidiary would 
not be identified as a building block parent.
---------------------------------------------------------------------------

    \45\ Although the downstream P&C subsidiary has two companies 
upstream of it--the life parent and its direct subsidiary P&C 
insurer--the downstream P&C subsidiary's applicable capital 
framework would only be compared against the framework of the next-
upstream capital regulated company.
---------------------------------------------------------------------------

    If the capital framework of a capital-regulated company or MFE is 
the same as that of the next-upstream capital-regulated company, MFE, 
or DI holding company, generally the companies will remain in the same 
building block except for one case. This exceptional case is where a 
company's applicable capital framework treats the company's 
subsidiaries in a way that does not substantially reflect the 
subsidiary's risk. For instance, there are situations in which NAIC RBC 
may not fully reflect the risks in certain subsidiaries (typically, 
certain foreign subsidiaries) that assume risk from affiliates.\46\ In 
such cases, the subsidiary (which could be a capital-regulated company 
or MFE) would be identified as a building block parent so that its 
risks can more appropriately be reflected in the BBA.
---------------------------------------------------------------------------

    \46\ The BBA proposes to apply NAIC RBC to such subsidiaries. 
However, under state laws, the application of NAIC RBC on the parent 
would not normally operate to include the available and required 
capital from applying NAIC RBC to the subsidiary. However, when the 
is identified as a building block parent in the BBA, the 
subsidiary's available and required capital under NAIC RBC would be 
reflected by the parent after aggregation.
---------------------------------------------------------------------------

    While the current population of insurance depository institution 
holding companies does not include material non-U.S. operations, 
additional considerations in identifying capital-regulated companies as 
building block parents may arise in cases of an insurance depository 
institution holding company's insurance subsidiaries subject to non-
U.S. capital frameworks. Whether such companies can be identified as 
building block parents depends on whether the companies' applicable 
capital frameworks can be scaled to NAIC RBC, the common capital 
framework used in the BBA. If a scalar has been developed for the 
applicable capital framework, the capital-regulated non-U.S. insurance 
subsidiary would be identified as a building block parent. Where a 
scalar has not been developed for the applicable capital framework, but 
the aggregate of the enterprise's companies falling under the non-U.S. 
insurance capital framework is material,\47\ the BBA proposes a 
provisional scaling approach so that these companies could be 
identified as building block parents. In all other cases, capital-
regulated non-U.S. insurance subsidiaries would not be identified as 
building block parents.
---------------------------------------------------------------------------

    \47\ The proposed BBA's application of the term ``material'' is 
discussed below.
---------------------------------------------------------------------------

    As discussed above, an MFE is a financial entity that is material, 
subject to certain exclusions. The proposed definition of ``financial 
entity'' in the BBA enumerates several types of companies engaged in 
financial activity consistent with similar enumerations in other rules 
applied by the Board. To develop the proposed definition of ``financial 
entity,'' the Board began with the definition of the same term under 
the Board's existing rules,\48\ and made modifications to tailor to 
insurance enterprises and the BBA (principally, the removal of the 
prong for employee benefit plans, since these are unlikely to exist 
under insurance depository institution holding companies).
---------------------------------------------------------------------------

    \48\ See 12 CFR 252.71(r).
---------------------------------------------------------------------------

    The proposed definition of materiality consists of two parts. In 
the first part, a company is presumed to be material if the top-tier 
depository institution holding company has exposure to the company 
exceeding 1 percent of the top-tier's total assets.\49\ In this 
context, ``exposure'' includes:
---------------------------------------------------------------------------

    \49\ The supervised firm must calculate its total consolidated 
assets in accordance with U.S. GAAP, or if the firm does not 
calculate its total consolidated assets under U.S. GAAP for any 
regulatory purpose (including compliance with applicable securities 
laws), the company may estimate its total consolidated assets, 
subject to review and adjustment by the Board.
---------------------------------------------------------------------------

     The absolute value of the top-tier depository institution 
holding company's direct or indirect interest in the company's capital;
     the top-tier depository institution holding company or any 
of its subsidiaries providing an explicit or implicit guarantee for the 
benefit of the company; and
     potential counterparty credit risk to the top-tier 
depository institution holding company or any subsidiary arising from 
any derivatives or similar instrument, reinsurance or similar 
arrangement, or other contractual agreement.

There may be cases in which these enumerated presumptions may not fully 
capture subsidiaries that are otherwise material. To accommodate these 
cases, the second part of the proposed definition of ``material'' would 
consider a subsidiary to be material when it is significant in 
assessing the insurance depository institution holding company's 
available capital or capital requirements. Factors that indicate such 
significance include risk exposure, activities, organizational 
structure, complexity, affiliate guarantees or recourse rights, and 
size.\50\ This definition, tailored to insurance and the BBA, accords 
with the Board's prior rulemakings and actions utilizing considerations 
of materiality.\51\
---------------------------------------------------------------------------

    \50\ Here, the consideration of significance reflects the 
potential to influence the Board's supervisory judgments and 
assessments of the insurance depository institution holding company.
    \51\ See 12 CFR part 243 (Regulation QQ) and Reporting Form FR 
2052b.
---------------------------------------------------------------------------

    Question 14: What other definitions of materiality, if any, should 
the Board consider for use in the BBA? Examples may include a threshold 
based on size, off-balance sheet exposure, or activities including 
derivatives or securitizations.
    Question 15: What thresholds, other than the proposed threshold for 
exposure as a percentage of total assets, should the Board consider for 
use in the BBA's definition of materiality? What are advantages and 
disadvantages of using a threshold based on the top-tier depository 
institution holding company's building block capital requirement? \52\
---------------------------------------------------------------------------

    \52\ To reconcile a potential circularity of having a definition 
of materiality that relies on the current year's building block 
capital requirement, the threshold could be based on the company 
capital requirement of the capital-regulated company in the 
supervised insurance organization with the greatest assets, for the 
first year, and the prior year's building block capital requirement 
for the top-tier depository institution holding company for 
subsequent years.
---------------------------------------------------------------------------

    The notion of a material financial entity is proposed to address a 
variety of companies not subject to a capital requirement and that 
could pose risk to the safety and soundness of the insurance depository 
institution holding company or its subsidiary IDI. For instance, an 
insurance depository institution holding company may have a material 
derivatives trading subsidiary not presently subject to any capital 
framework. Additionally, a company under an insurance depository 
institution holding company may serve as a funding vehicle for other 
companies in the institution, borrowing and downstreaming funds to 
affiliates.

[[Page 57253]]

    Among other companies that could be MFEs are certain insurance 
companies that exist to reinsure risk from affiliates. The Board 
proposes that when such companies, and the insurance depository 
institution holding company's use of and transactions with such 
companies, could pose material financial risk to the insurance 
depository institution holding company, such companies' financial 
information should be restated in accordance with SAP.\53\ Such 
companies as restated should be subjected to capital treatment under 
RBC and included in the BBA as MFEs.
---------------------------------------------------------------------------

    \53\ This application of SAP would be consistent with the way 
SAP is applied in the BBA, reflecting the proposed adjustments. One 
such adjustment that is relevant is the use of Principle-Based 
Reserving (PBR) on business that is currently grandfathered. See 
section VI.B.3.
---------------------------------------------------------------------------

    The BBA includes certain exceptions whereby companies that are 
financial entities and material would nonetheless not be treated as 
MFEs. Where a company primarily functions as an intermediary through 
which other companies within the insurance depository institution 
holding company's enterprise conduct activities (e.g., manage or hedge 
risk through the use of reinsurance or derivatives or investment 
partnerships), the proposed BBA allows the insurance depository 
institution holding company to elect to not treat such a company as an 
MFE. In such a case, the firm would be required to allocate the 
company's risks to other companies within the insurance depository 
institution holding company's enterprise.
    In addition, the Board proposes that certain types of companies 
would be ineligible to be MFEs: A financial subsidiary as defined in 
GLBA Section 121 and a subsidiary primarily engaged in asset 
management. In the case of a financial subsidiary, the equity of these 
subsidiaries is deducted, and the assets and liabilities not 
consolidated, under the Board's banking capital rules. Treating such a 
subsidiary as an MFE, and calculating qualifying capital and RWA for 
such a subsidiary, may not fully accord with the Board's current 
banking capital rules.
    In the case of a subsidiary primarily engaged in asset management, 
the Board considers that a registered investment adviser under the 
Investment Advisers Act of 1940 would not be an MFE. As a non-insurance 
company, the applicable capital regime under the BBA for an investment 
adviser would be the Federal banking capital rules. These rules are 
built on the calculation of RWA and presently do not have dedicated, 
robust, and risk-sensitive treatment of operational risk. Moreover, 
investment advisers do not typically report all assets under management 
on their balance sheets and can face substantial operational risk. As 
such, measuring these subsidiaries' capital positions using the Board's 
banking capital rules may not provide a complete depiction of the 
subsidiaries' risks. Furthermore, in insurers' organizational 
structures, asset manager subsidiaries can exist under non-operating or 
shell holding companies. To the extent that such holding companies 
under insurance depository institution holding companies are not 
engaged in financial activities, they would not constitute financial 
entities under the BBA.
    Question 16: The Board invites comment on the use of the material 
financial entity concept. What are the advantages and disadvantages to 
the approach? What burden, if any, is associated with the proposed 
approach?
    Question 17: The Board invites comment on the proposed treatment of 
intermediaries. What are the advantages and disadvantages of the 
approach? What burden, if any, is associated with the proposed 
treatment?
    Question 18: What risk-sensitive approaches could be used to 
address the risks presented by asset managers in an insurance 
depository institution holding company's enterprise?
    Question 19: What forms or structures, if any, do asset managers or 
their holding companies take in insurance enterprises, such that they 
may fall within the proposed definition of an MFE?
(b) Other Instances of Building Block Parents
    The BBA allows for three additional cases in which a company is 
identified as a building block parent. First, a company is a building 
block parent when it is:
     Party to one or more reinsurance or derivative 
transactions with other inventory companies;
     Material; and
     Engaged in activities such that one or more inventory 
companies are expected to absorb more than 50 percent of its expected 
losses.
    Second, the case could arise where a company under an insurance 
depository institution holding company is jointly owned by more than 
one building block parent, where the jointly owned company is not 
itself a building block parent. Furthermore, the company may be 
consolidated in the applicable capital framework of one or more of the 
building block parents. In such a case, the aggregation in the BBA 
could result in double counting of the risks and resources of the 
jointly-owned company. To avoid this outcome, the proposed BBA would 
identify the jointly-owned company as a building block parent, 
whereupon the aggregation and consideration of allocation shares, 
discussed below, would avoid double-counting.
    Finally, depending on an insurance depository institution holding 
company's organizational structure, it may be more convenient or less 
burdensome to treat, as a building block parent, a company that is not 
identified as such through the operations described above, or vice 
versa.
    Each of these cases of identifying or declining to identify 
building block parents is achieved through the reservation of authority 
provision proposed in the BBA.\54\ Factors that the Board may consider 
in determining to treat or not treat a company in an insurance 
depository institution holding company's enterprise as a building block 
parent in this manner include, but are not limited to, operational ease 
or convenience in applying the BBA, adequate risk sensitivity and 
reflection of risks posed to the safety and soundness of the supervised 
institution and/or its subsidiary IDI, and minimizing implementation 
burden in the insurance depository institution holding company's 
fulfillment of regulatory reporting and compliance requirements.\55\ 
Moreover, certain transaction structures result in material risks being 
moved outside of regulatory capital frameworks, or moved to regulatory 
capital frameworks that do not fully reflect these risks.\56\ The BBA 
accommodates such scenarios by reserving for the Board the authority to 
make adjustments to the set of inventory companies that are building 
block parents.
---------------------------------------------------------------------------

    \54\ See proposed Section 601(d)(3).
    \55\ Likewise, this provision allows the Board to not treat a 
company as a building block parent where that company would be a 
building block parent by operation of the rule. The same 
considerations identified here could guide the Board in the exercise 
of this authority.
    \56\ Such transactions could include, among other things, 
certain reinsurance or derivative transactions involving a 
counterparty that was formed or acquired by or on behalf of the 
insurance depository institution holding company where no inventory 
company has more than a negligible ownership stake in the 
counterparty.
---------------------------------------------------------------------------

    An illustration of this step in applying the BBA is presented in 
Section IX.C below.
    Question 20: Are the additional instances where the Board proposed 
to identify building block parents appropriate? For example, with 
regard to a company that would be a building

[[Page 57254]]

block parent because it is a party to one or more reinsurance or 
derivative transactions with other inventory companies, is material, 
and is engaged in activities such that one or more inventory companies 
are expected to absorb more than 50 percent of its expected losses, 
would a different level of expected losses (i.e., a level other than 50 
percent) be more appropriate?

D. Aggregation in the BBA

    After identifying all of the building block parents and their 
applicable capital frameworks, the BBA would determine available 
capital and capital requirements, make appropriate adjustments and 
translate as needed to the common capital framework used in the BBA, 
the NAIC's RBC. The BBA uses a bottom up approach to aggregation. This 
approach will generate a BBA ratio for each company in the organization 
that is a depository institution holding company under the FDI Act, 
i.e., the top tier depository institution holding company and any mid-
tier depository institution holding company. The top tier parent and 
any subsidiary depository institution holding company may be subject to 
a capital framework other than the NAIC's RBC. In that instance, the 
building block available capital and building block capital requirement 
are scaled to NAIC RBC to compute the BBA ratio that those levels in 
the organizational structure.
    The purpose of aggregating companies within the BBA is to reflect 
the ownership interests of building block parents in subsidiaries and 
affiliates in order to provide an accurate measure of available capital 
without double counting. In the BBA, this is achieved by determining a 
building block parent's ``allocation share'' of any downstream building 
block parent. The following three examples may further illustrate the 
determination of allocation shares in the proposed BBA:
     An upstream company that is a building block parent 
(upstream building block parent) owns 100 percent of a subsidiary that 
is also a building block parent (downstream building block parent). The 
downstream building block parent's available capital is comprised 
solely of the equity owned by the upstream building block parent.
    [ssquf] The upstream building block parent's allocation share in 
the downstream building block parent is 100 percent.
     An upstream building block parent (BBP A), and another 
building block parent (BBP B) at the same level in the corporate 
hierarchy as BBP A, together own a downstream building block parent, 
where BBP A owns 30 percent and BBP B owns 70 percent.
    [ssquf] BBP A's allocation share in the downstream building block 
parent is 30 percent and BBP B's allocation share is 70 percent.
     Upstream building block parents BBP A and BBP B jointly 
own a downstream building block parent, where BBP A owns 30 percent and 
BBP B owns 70 percent. In addition, BBP A owns a surplus note issued by 
the downstream building block parent, which represents 20 percent of 
the downstream building block parent's available capital. Consider 
further that the carrying value of the downstream building block parent 
(and its capital excluding the surplus note) is $100 million and the 
surplus note is for $25 million.
    [ssquf] BBP A's allocation share is the surplus note ($25 million) 
plus its prorated share of the downstream building block parent's 
equity ($30 million), divided by the downstream building block parent's 
total available capital ($125 million), or 44 percent. BBP B's 
allocation share is 56 percent.
    As a simple example, consider the hypothetical insurance depository 
institution holding company presented in Section IV.C.2. Suppose the 
life parent's Total Adjusted Capital (TAC) is $500 million and its 
Authorized Control Level (ACL) RBC is $100 million. Suppose the P&C 
subsidiary's TAC and ACL are $40 million and $10 million, respectively. 
Aggregating the P&C subsidiary and life parent is seamless, since the 
life parent's RBC figures already include the P&C subsidiary, i.e. 
before and after aggregation of the P&C subsidiary under the BBA, the 
life parent's TAC and ACL are the same. For the life parent's 
subsidiary IDI, suppose the IDI's total capital is $27 million and its 
RWA is $150 million. After scaling (see the scaling parameters and 
explanation of this example in Section V below), its available capital 
is $17.5 million and its capital requirement is $1.6 million. Suppose 
the life parent's carrying value of the subsidiary IDI is $30 million, 
and the IDI's contribution to the life parent's ACL is $2 million. 
Aggregating the IDI into the life parent in accordance with the BBA 
results in available capital of $487.5 million,\57\ and capital 
requirement of $99.6 million.\58\
---------------------------------------------------------------------------

    \57\ This is calculated as the life parent's TAC ($500 million), 
minus its carrying value of the IDI ($30 million), plus the IDI's 
scaled total capital ($17.5 million).
    \58\ This is calculated as the life parent's ACL RBC ($100 
million), minus the contribution to ACL by the IDI ($2 million), 
plus the IDI's scaled capital requirement ($1.6 million).
---------------------------------------------------------------------------

    A further illustration of this step in applying the BBA is 
presented in Section IX.G.
    Question 21: How can the Board improve the calculation of 
allocation share? Should the Board further clarify the data sources for 
the inputs to the allocation share calculation? Would it be better to 
use a simpler methodology, such as relying only on common equity 
ownership percentages?

V. Scaling Under the BBA

A. Key Considerations in Evaluating Scaling Mechanisms

    In the BBA, the calculation referred to as ``scaling'' translates a 
company's capital position under one capital framework to its 
equivalent capital position in another framework. This translation 
allows appropriate comparisons and aggregation of metrics. In 
evaluating different approaches to determining scalars, the Board was 
primarily informed by considerations including reasonableness of the 
approaches' assumptions, ease of implementation, and stability of the 
parametrization resulting from the approaches. Reasonable assumptions 
include those that are reflective of supervisory experience, as opposed 
to those that are crude and unlikely to produce accurate translations. 
Ease of implementation refers to the ease with which scaling parameters 
can be derived in an approach, which can vary based on availability of 
data on companies' experience under a framework. The stability of 
parametrization refers to the extent to which changes in assumptions or 
data affect the value of scaling parameters.
    As an Appendix to this proposed rule, the Board is publishing a 
white paper that supplements the determination of the scaling 
parameters in this proposed rule.\59\ The white paper identifies and 
assesses a number of approaches to developing scalars, and helps 
explain the underlying assumptions and analytical framework supporting 
the scaling approach and equations proposed in this rule. The Board has 
incorporated that analysis in its consideration and is publishing the 
white paper to make it more accessible to the public.
---------------------------------------------------------------------------

    \59\ See Comparing Capital Requirements in Different Regulatory 
Frameworks (2019). The Board relied on the white paper, including 
the explanations and analysis contained therein, in this rulemaking 
and incorporates it by reference.
---------------------------------------------------------------------------

B. Identification of Jurisdictions and Frameworks Where Scalars Are 
Needed

    Because all of the current insurance depository institution holding

[[Page 57255]]

companies are U.S.-based insurers that own IDIs, which are subject to 
Federal bank capital rules, scaling from the Board's banking capital 
rule to the NAIC's RBC (and vice versa) will be needed in the BBA. The 
Board also performed an analysis to determine whether scaling between 
any other capital frameworks would currently be needed.
    With regard to scaling between U.S. and non-U.S. jurisdictions 
(e.g., non-U.S. insurance to U.S. insurance), the Board reviewed the 
companies under each insurance depository institution holding company 
that would be subject to this proposal using the Board's existing 
supervisory data cross-referenced with data available from the NAIC. 
Because all foreign non-insurance operations would be analyzed using 
the Board's banking capital rule, the Board focused on non-U.S. 
insurance operations. None of the non-U.S. insurance subsidiaries of 
current insurance depository institution holding companies appeared to 
be material to their group. The Board therefore is not presently 
proposing scaling for non-U.S. insurance capital frameworks.\60\
---------------------------------------------------------------------------

    \60\ The Board continues to review insurance depository 
institution holding companies' operations in non-U.S. jurisdictions 
and may later propose scaling for non-U.S. insurance capital 
frameworks, depending on further evaluation of these companies, 
frameworks, and risk and activities therein.
---------------------------------------------------------------------------

C. The BBA's Approach to Determining Scalars

    After considering potential scaling methods and the analysis in the 
referenced white paper, the Board proposes to use an approach to 
scaling in the BBA based on historical bank and insurer default data 
(the probability of default approach). The proposal uses historical 
default rates to analyze the meaning of solvency ratios and preserves 
this in translating values between capital frameworks. While default 
definitions can be difficult to align across capital frameworks, an 
underlying purpose of many solvency ratios is to assess the probability 
of a firm defaulting and default data currently appears to be the best 
available economic benchmark for capitalization metrics.
    Using the probability of default approach, the Board proposes to 
use the following scaling formulas, which are explained more fully in 
the referenced white paper. The first equation below calculates the 
equivalent ACL under NAIC RBC based on an amount of risk-weighted 
assets under Federal banking capital rules. The second equation below 
calculates TAC under NAIC RBC, based on an amount of tier 1 plus tier 2 
qualifying capital under Federal banking capital rules. The third and 
fourth equations cover scaling back from NAIC RBC to Federal banking 
capital rules.

1. NAIC ACL RBC = 0.0106 * RWA
2. NAIC TAC = (Banking Rule Total Capital)-0.063*RWA
3. RWA = 94.3* NAIC ACL RBC
4. Banking Rule Total Capital = NAIC TAC + 5.9* NAIC ACL RBC

    This scaling approach reflects a total balance sheet 
perspective.\61\ Available capital under two different frameworks may 
have differences that distort the picture of a firm's capital position 
in one framework compared with the other. U.S. GAAP is based on a 
going-concern assumption. By contrast, U.S. SAP is generally more 
conservative, based on a liquidation (realizable value or gone concern) 
assumption. To reflect accounting differences such as these, the 
proposed scaling approach scales available capital in addition to the 
capital requirement. Scaling from bank capital rules to insurance 
capital rules is applied to the total of combining common equity tier 
1, additional tier 1, and tier 2 capital under the Board's banking 
capital rule because there is only one tier of capital in the BBA and 
NAIC RBC.
---------------------------------------------------------------------------

    \61\ The notion of the ``total balance sheet perspective'' 
refers to the idea that an accounting framework affects valuations 
of assets, liabilities, and equity, and thus can affect calculation 
of required and available capital. From this standpoint, scaling 
required capital without also considering whether available capital 
needs to be scaled can result in an incomplete depiction of a 
company's capital position.
---------------------------------------------------------------------------

    In the example of a simple insurance depository institution holding 
company presented in Sections IV.C.2 and IV.D above, the life insurance 
parent's subsidiary IDI had total capital of $27 million and RWA of 
$150 million. To calculate scaled available capital and required 
capital, the IDI's amounts under Federal banking capital rules are used 
in the equations shown above. Specifically, scaled capital requirement 
= 0.0106 * $150 million = $1.59 million and scaled available capital = 
$27 million - (0.063 * $150 million) = $27 million - $9.45 million = 
$17.55 million.\62\
---------------------------------------------------------------------------

    \62\ The amounts in the example in Section IV.D above are 
rounded for convenience.
---------------------------------------------------------------------------

    A further illustration of this step in applying the BBA is 
presented in Section IX.F.

D. Approach Where Scalars Are Not Specified

    As proposed, the BBA only includes scaling between Federal bank 
capital rules and NAIC RBC. However, depending on how insurance 
depository institution holding companies change their structures and 
business mixes over time, or new insurance depository institution 
holding companies come under Board supervision, the BBA may need to 
include scaling from other frameworks. While the Board will not propose 
scalars for specific capital frameworks not present in the existing 
population of insurance depository institution holding companies, the 
proposed BBA includes a framework by which the scaling would be 
provisionally determined for a capital framework where no scalar is 
specified, should the need arise.
    This provisional approach would be used for a non-U.S. insurance 
subsidiary when its regulatory capital framework is scalar compatible, 
as defined in the proposed rule. The proposed rule defines ``scalar 
compatible framework'' as (1) a framework for which the Board has 
determined scalars or (2) a framework that exhibits the following three 
attributes: (a) The framework is clearly defined and broadly applicable 
to companies engaged in insurance; (b) the framework has an 
identifiable intervention point that can be used to calibrate a scalar; 
\63\ and (c) the framework provides a risk-sensitive measure of 
required capital reflecting material risks to a company's financial 
strength. Where the non-U.S. insurance subsidiary's regulatory capital 
framework is not scalar compatible, the BBA proposes to apply U.S. 
insurance capital rules to the company.
---------------------------------------------------------------------------

    \63\ As used in this Supplementary Information, ``intervention 
point'' refers to a threshold for the ratio of available capital to 
capital requirement at which the relevant regulator may take action 
against the supervised firm under applicable law.
---------------------------------------------------------------------------

    Question 22: The Board invites comment on the proposed approach to 
scalars and the associated white paper. What are the advantages and 
disadvantages of the approach? What is the burden associated with the 
proposed approach?
    Question 23: How should the Board develop scalars for international 
insurance capital frameworks if needed?

VI. Determination of Capital Requirements Under the BBA

A. Capital Requirement for a Building Block

    The proposed BBA determines aggregate capital requirements by 
beginning with the capital requirements at each building block. For 
building block parents that are subject to NAIC RBC in the BBA, the 
Board proposes to use the ACL amount of required capital under NAIC RBC 
as the input to

[[Page 57256]]

aggregation. For building block parents subject to the Board's banking 
capital rule, the Board proposes to use total risk-weighted assets as 
the input to aggregation. An illustration of this step in applying the 
BBA is presented in Section IX.D below.

B. Regulatory Adjustments to Building Block Capital Requirements

    The main categories of adjustments to capital requirements under 
the proposed BBA (the denominator in the BBA ratio) are discussed 
below.\64\
---------------------------------------------------------------------------

    \64\ The BBA proposes an adjustment to available capital 
requiring that building block parents deduct the amount of their 
investments in their own capital instruments along with any 
investments made by members of their building block, to the extent 
such instruments are not already excluded from available capital. In 
the proposed rule, a corresponding adjustment is made in determining 
building block available capital.
---------------------------------------------------------------------------

    Question 24: The Board invites comments on all aspects of the 
proposed adjustments to capital requirements. Should any of the 
adjustments be applied differently? What other adjustments should the 
Board consider?
    An illustration of this step in applying the BBA is presented in 
Section IX.E.2 below.
1. Adjusting Capital Requirements for Permitted and Prescribed 
Accounting Practices Under State Laws
    The accounting practices for insurance companies can vary from 
state to state due to permitted and prescribed practices, which can 
result in significant differences in financial statements between 
similar companies filing SAP financial statements in different states. 
Regulators both within and outside of the United States have the 
authority to take actions with respect to insurance companies in the 
form of variations from standard accounting practices. An issue for the 
BBA is whether and how to address international or state regulator-
approved variations in accounting or capital requirements for regulated 
insurance companies.
    The proposed BBA contains adjustments to address permitted 
practices, prescribed practices, or other practices, including legal, 
regulatory, or accounting, that departs from a capital framework as 
promulgated for application in a jurisdiction. To serve the Board's 
supervisory objectives, the Board proposes an adjustment to capital 
requirements (the denominator in the BBA ratio) to reverse state 
permitted and prescribed practices (and, where relevant, any approved 
variations applied by solvency regulators other than U.S. state and 
territory insurance supervisors). The Board considers that this 
proposed adjustment provides for a consistent representation of 
financial information across all companies in the jurisdiction.
    The Board anticipates that the majority of permitted and prescribed 
practices would primarily affect available capital, but includes the 
adjustment to capital requirements for completeness and because 
permitted practices to balance sheet items such as reserves can have 
secondary impacts on the NAIC RBC calculation. Extensions or other 
company-specific treatments may also affect capital requirements as 
calculated under non-U.S. insurance capital frameworks.
2. Certain Intercompany Transactions
    Although intercompany transactions are eliminated in consolidated 
accounting frameworks, in an aggregated framework like the BBA, some 
intercompany transactions could introduce redundancies in capital 
requirements or raise the potential to overstate risk at the 
aggregated, enterprise-wide level. Others could reduce the capital 
requirement of a company without reducing the overall risk to the 
institution. The Board considers that some adjustments to capital 
requirements for intercompany transactions may be appropriate for the 
BBA. For instance, intra-group reinsurance, loans, or guarantees can 
result in credit risk weights at the subsidiary level without 
generating additional risk at the enterprise level. In this scenario, 
eliminating risk weights in the appropriate companies' capital 
requirements may better reflect total enterprise-wide risk.
    The BBA thus proposes an adjustment for the elimination of charges 
for the possibility of default of the top-tier depository institution 
holding company or any subsidiary thereof. However, in many cases, the 
impact on enterprise-wide capital requirement from this reflection of 
risk may be small or immaterial. The Board thus proposes to make this 
adjustment optional, i.e., allowing the insurance depository 
institution holding company the option to eliminate the credit risk 
weight in capital requirements at one company party to the intercompany 
transaction.
3. Adjusting Capital Requirements for Transitional Measures in 
Applicable Capital Frameworks
    Similar to the availability of permitted and prescribed practices 
and other approved variations, transitional measures are sometimes 
included under capital frameworks during implementation.\65\ While such 
measures are important for application of regulatory capital 
frameworks, in practice, the framework, without applying the 
transitional measures, can provide a more accurate reflection of risk 
as intended by that framework. The BBA thus proposes an adjustment to 
remove the effects of any grandfathering or transitional measures under 
an applicable capital framework in determining capital requirements. 
Along with the adjustment for permitted and prescribed practices and 
other aspects of the rule, this adjustment is anticipated to help 
increase the comparability of results among supervised firms.
---------------------------------------------------------------------------

    \65\ In the United States insurance market, one prominent impact 
of this proposed adjustment would be to accelerate the application 
of principles-based reserving. This adjustment could also encompass 
transitional measures in Europe, such as the long-term 
grandfathering of disparate accounting of insurance liabilities, if 
a jurisdiction in Europe were to become relevant in the application 
of the BBA.
---------------------------------------------------------------------------

4. Risks of Certain Intermediary Companies
    As described in Section IV.C, an insurance depository institution 
holding company has the option to not treat as an MFE a company that 
meets the definition of an MFE. Typically, such a company would be one 
that serves as a pass-through or risk management intermediary for other 
companies under the insurance depository institution holding 
company.\66\ If an insurance depository institution holding company 
were to make this election, the risks posed by this company must 
nonetheless be reflected in the BBA. As proposed, the BBA would require 
the insurance depository institution holding company to allocate the 
risks that the company faces to the other companies in the enterprise 
with which the company engages in transactions.
---------------------------------------------------------------------------

    \66\ Frequently a pass-through company like this enters into 
transactions with affiliates (e.g., operating insurers) and enters 
into back-to-back transactions with third parties to manage risks on 
a portfolio basis
---------------------------------------------------------------------------

5. Risks Relating to Title Insurance
    For an insurance depository institution holding company 
predominantly engaged in title insurance, the risks are reflected in 
part in the company's claim reserve liability, but the Board's banking 
capital rule would not risk-weight this amount. To determine an 
appropriate risk weight to apply to this liability, the Board reviewed 
data from historical title claim reserves and observed a risk 
comparable to assets that have been assigned a 300 percent risk weight 
in the Board's banking capital rule. In order to tailor

[[Page 57257]]

the Board's banking capital rule to an insurance depository institution 
holding company predominantly engaged in title insurance, the Board 
proposes to adjust capital requirements by applying a risk weight of 
300 percent to the firm's claim reserves relating to title insurance 
business, as reflected in the firm's U.S. GAAP financial 
statements.\67\
---------------------------------------------------------------------------

    \67\ A significant asset of typical title insurers is an asset 
known as the title plant, which, under U.S. GAAP, would be 
considered an intangible asset (Financial Accounting Standards 
Board, Accounting Standards Codification Topic 950-350). The Board 
continues to see the U.S. GAAP treatment as appropriate in applying 
the Board's banking capital rule to the insurance depository 
institution holding company predominantly engaged in title 
insurance.
---------------------------------------------------------------------------

    Question 1: Is the proposed risk weighting approach for risks 
relating to title insurance appropriate? For example, would a different 
risk weight (i.e., a risk weight other than 300 percent) be more 
appropriate?

C. Scaling and Aggregating Building Blocks' Adjusted Capital 
Requirements

    In order to bring capital requirements from various frameworks to a 
comparable basis before aggregation, the BBA would scale capital 
requirements. Capital requirement amounts for building block parents 
would be scaled by application of the parameters set out in Section V 
above.
    The BBA aggregates a downstream building block's capital 
requirements into those of its upstream building block parent by 
scaling to the upstream parent's capital framework and adding to the 
upstream parent's capital requirement. This rollup includes adjusting 
for the parent's ownership of the building block prior to adding in the 
scaled capital requirement for the building block. In performing this 
rollup, building blocks are aggregated to achieve a consolidated, 
enterprise-wide reflection of capital requirements. Ultimately, all 
building blocks under the top-tier depository institution holding 
company would be scaled and rolled up into the capital position of the 
top-tier depository institution holding company.
    An illustration of this step in applying the BBA is presented in 
Section IX.H.

VII. Determination of Available Capital Under the BBA

A. Approach to Determining Available Capital

1. Key Considerations in Determining Available Capital
    A firm's capital resources should be accessible to absorb losses 
and not have features that cause the firm's financial condition to 
weaken in times of stress. In developing the BBA the Board was informed 
by its review of existing capital frameworks--including the NAIC's RBC, 
the Board's banking capital rules, and their objectives, taking into 
account, among other things, considerations of the permanence and 
subordination of capital resources; the right of the issuer to make, 
cancel, or defer payments under a capital instrument; and the absence 
of encumbrances.
    In many capital frameworks, including the Board's banking capital 
rule, qualifying capital is divided into tiers. In general, tiers of 
capital can represent different levels of capital resources' 
availability and loss-absorbency. Capital in a higher tier may 
represent the ability to absorb losses such that the institution can 
continue operations as a going concern, while capital in a lower tier 
may represent resources that serve as a supplementary cushion to a 
higher tier and aid the institution in the event of resolution (i.e., a 
gone/near-gone concern).
    By contrast, the state insurance capital framework uses one tier of 
capital. In the proposed BBA, the frameworks most often applicable to 
the supervised firms' building blocks will be U.S. state insurance 
capital frameworks. The NAIC RBC framework began as an early warning 
system, providing a risk sensitive ``safety net'' for insurers that 
provides for timely regulatory intervention in the case of insurer 
distress or insolvency.\68\ Among other things, intervention is based 
on a comparison of TAC to required capital at ACL. As such, the NAIC 
RBC framework and TAC, in part through reliance on SAP financial data 
for their development and implementation, reflect aspects of a ``gone 
concern'' or liquidation value standard.\69\ Moreover, TAC, as a single 
tier of capital, is a component of the RBC framework at intervention 
levels other than ACL.
---------------------------------------------------------------------------

    \68\ See NAIC, Risk-Based Capital, http://www.naic.org/cipr_topics/topic_risk_based_capital.htm.
    \69\ NAIC, NAIC Group Capital Calculation Recommendation, p. 2 
(2015), available at http://www.naic.org/documents/committees_e_grp_capital_wg_related_cap_calc_reccomendation.pdf.
---------------------------------------------------------------------------

    The proposed BBA contains one tier of available capital. This 
approach achieves the supervisory objectives sought to be achieved 
through the BBA in a manner that achieves simplicity of design.
2. Aggregation of Building Blocks' Available Capital
    The Board proposes to determine available capital in the BBA by 
aggregating available capital under the frameworks applicable to the 
companies in an insurance depository institution holding company, 
subject to certain limited adjustments, rather than applying a 
consistent definition or set of criteria to all capital instruments for 
inclusion in the BBA. Since the BBA will determine aggregate capital 
requirements by beginning with capital requirements from company 
capital frameworks (prior to adjustments and scaling), determining 
available capital in a different manner could introduce 
inconsistencies. Moreover, applying a single set of definitional 
criteria, as occurs in the Board's banking capital rule, may be 
facilitated when the subject firms prepare consolidated financial 
statements in accordance with U.S. GAAP or other rules. However, doing 
this may be more challenging in the context of differing bases of 
accounting across building blocks in the BBA applied to insurance 
depository institution holding companies.
    Mechanically, the proposed rule determines available capital under 
the BBA similarly to how it determines capital requirements, namely, by 
rolling up available capital from downstream building block parents 
into upstream building block parents, with certain adjustments and 
scaling. The aggregation of available capital eliminates double 
leverage or multiple leverage by deducting upstream parents' 
investments in subsidiaries that are building block parents.\70\
---------------------------------------------------------------------------

    \70\ In a case of double-leverage, for instance, the parent's 
investment in subsidiary, replaced by the building block available 
capital, will continue to have an offsetting liability from the 
parent's debt issuance. If double-leverage or double-gearing exists 
within a building block, where the upstream (capital-providing) 
company and downstream (capital-receiving) company are in the same 
building block, the double-leverage would not be inflating capital 
for the building block. If double-leverage occurs with the upstream 
company in one building block and the downstream in a different 
building block, the upstream building block parent would deduct its 
downstreamed capital to the capital-receiving company, thereby 
avoiding double-counting in the calculation.
---------------------------------------------------------------------------

    In addition, the proposal requires an insurance depository 
institution holding company to deduct upstream holdings within a 
building block, i.e., an investment by a subsidiary of a building block 
parent in the building block parent's capital instrument. The purpose 
of this deduction is to avoid the potential for inflation of a 
supervised firm's available capital through inter-affiliate 
transactions, and furthermore, to avoid a potential circularity in the 
BBA calculation.

[[Page 57258]]

B. Regulatory Adjustments and Deductions to Building Block Available 
Capital

    This section discusses adjustments in the BBA to determine 
available capital, performed at the level of each building block. The 
next section (subsection VII.C below) discusses two final adjustments, 
made at the level of the top-tier parent once all building block 
available capital is aggregated.
    Question 25: The Board invites comments on all aspects of the 
proposed adjustments to available capital. Should any of the 
adjustments be applied differently? What other adjustments should the 
Board consider?
    An illustration of adjusting available capital in applying the BBA 
is presented in Section IX.E.2.
1. Criteria for Qualifying Capital Instruments
    Adjustments at the level of determining building block available 
capital include deducting any capital instrument, issued by a company 
within the building block that fails one or more of the eleven criteria 
for Tier 2 capital under the Board's banking capital rule, as codified 
in section 217.20(d) of the Board's Regulation Q.\71\ While the current 
population of insurance depository institution holding companies has 
relatively less publicly issued capital or debt instruments compared to 
stock companies, the Board considers it appropriate to set these 
criteria to reflect the Board's supervisory goals and objectives, 
ensure adequate loss absorbency of available capital under the BBA with 
a measure of consistency, and take into account the possibility of 
changes to the population of insurance depository institution holding 
companies. The criteria apply a measure of consistency to capital 
instruments for inclusion as available capital under the BBA. Depending 
on their characteristics, capital instruments allowable as available 
capital under company-level capital frameworks may also satisfy these 
criteria, thereby qualifying under the BBA.
---------------------------------------------------------------------------

    \71\ The criteria are listed in Section 608(a) of the proposed 
rule.
---------------------------------------------------------------------------

    Question 26: What other criteria, if any, should the Board consider 
for determining available capital under the BBA?
    Question 27: One of the criteria, concerning capital instruments 
that contain certain call features, requires the top-tier depository 
institution holding company to obtain prior Board approval before 
exercising the call option. Should the Board apply a de minimis 
threshold below which this approval is not needed?
    The Board proposes that certain instruments frequently used by 
insurers, surplus notes,\72\ could be eligible for inclusion in 
available capital under the BBA, provided that the notes meet the 
criteria to qualify as capital under the BBA. Treatment of surplus 
notes under state insurance capital framework remains unaltered by the 
BBA. Moreover, it appears reasonable to conclude that issuers of 
surplus notes may or may not have contemplated all of the criteria for 
available capital under the BBA when issuing surplus notes that are 
presently outstanding.
---------------------------------------------------------------------------

    \72\ Surplus notes generally are financial instruments issued by 
insurance companies that are included in surplus for statutory 
accounting purposes as prescribed or permitted by state laws and 
regulations, and typically have the following features: (1) The 
applicable state insurance regulator approves in advance the form 
and content of the note; (2) the instrument is subordinated to 
policyholders, to claimant and beneficiary claims, and to all other 
classes of creditors other than surplus note holders; and (3) the 
applicable state insurance regulator is required to approve in 
advance any interest payments and principal repayments on the 
instrument.
---------------------------------------------------------------------------

    The Board is thus proposing to include a grandfathering provision 
for surplus notes issued by a top-tier depository institution holding 
company or its subsidiary to a non-affiliate prior to November 1, 2019. 
This allows existing and currently planned surplus notes to qualify 
without any modifications, but future surplus notes would be expected 
to comply with all requirements after a short notice period. Under this 
grandfathering, these notes are deemed to meet criteria set out in 
proposed Section 608(a) that they may not otherwise meet, provided that 
the surplus note is currently capital under state insurance capital 
frameworks (a company capital element as set out in the proposed rule) 
for the issuing company.
    Question 28: Are there other approaches, other than grandfathering, 
that the Board should consider to address surplus notes issued by 
insurance depository institution holding companies or their 
subsidiaries before November 1, 2019?
    Question 29: What grandfathering date should the Board use?
    Certain instruments used as capital resources may have call options 
that could be exercised within five years of the issuance of the 
instrument, specifically for a ``rating event.'' The Board proposes 
section 217.608(f) in the BBA to accommodate these capital resources.
2. BBA Treatment of Deduction of Insurance Underwriting Risk Capital
    As set out above, under application of the proposed BBA, certain 
capital-regulated companies, including IDIs and other companies subject 
to the Federal bank capital rules, would be identified as building 
block parents. In applying the Board's banking capital rule to 
determine available capital, one deduction from qualifying capital 
relates to the deduction of the amount of the capital requirement for 
insurance underwriting risks established by the regulator of any 
insurance underwriting activities of the bank, including such 
activities of a subsidiary of the bank. In the context of the BBA, an 
aggregation-based framework that is structurally and conceptually 
different from the Board's banking capital rule, the risk-sensitive 
amount of required capital is aggregated into the enterprise-wide 
capital requirement. Measuring enterprise-wide risk based on insurance 
underwriting activities is among the core supervisory objectives that 
the BBA serves. Deducting capital requirements for insurance 
underwriting activities, when aggregate capital requirements will 
reflect this risk, could overly penalize an insurance depository 
institution holding company.
    The Board's banking capital rule deducts, for a depository 
institution holding company insurance subsidiary, the RBC for 
underwriting risk from qualifying capital (and assets subject to risk 
weighting). In the BBA, this deduction would be eliminated in 
calculating building block available capital since the insurance risks 
are being aggregated, rather than deducted.
3. Adjusting Available Capital for Permitted and Prescribed Practices 
Under State Laws
    As explained above in section VI with regard to capital 
requirements, the accounting practices for insurance companies can vary 
from U.S. state to state due to permitted and prescribed practices, and 
can result in significant differences in financial statements between 
companies with similar financial profiles but domiciled in different 
states. An issue for the BBA is whether and how to address regulator-
approved variations in determining available capital. Similar to the 
adjustment described above to the calculation of building block capital 
requirements (the denominator of the calculation), the Board proposes 
to include adjustments to available capital (the numerator in the BBA 
ratio) to reverse the impact of these accounting

[[Page 57259]]

practices, as well as any other approved variation as proposed in the 
BBA.\73\
---------------------------------------------------------------------------

    \73\ In the proposed BBA, this refers to a permitted practice, 
prescribed practice, or other practice, including legal, regulatory, 
or accounting, that departs from a solvency framework as promulgated 
for application in a jurisdiction.
---------------------------------------------------------------------------

4. Adjusting Available Capital for Transitional Measures in Applicable 
Capital Frameworks
    As with the corresponding adjustment in determining capital 
requirements under the BBA, similar to the availability of permitted 
and prescribed practices or other approved variations, transitional 
measures are sometimes adopted in capital frameworks during 
implementation. While such measures are important for application of 
regulatory capital frameworks, in practice, the framework without 
applying the transitional measures can provide a more accurate 
reflection of loss absorbing capital as intended by that framework. The 
BBA thus proposes an adjustment for the removal of the effects of any 
grandfathering or transitional measures, under a regulatory capital 
framework, in determining available capital.
5. Deduction of Investments in Own Capital Instruments
    To avoid the double-counting of available capital, and in light of 
the Board's supervisory objectives in designing the BBA, the proposal 
requires building block parents to deduct the amount of their 
investments in their own capital instruments along with any such 
investments made by members of their building block, to the extent such 
instruments are not already excluded from available capital. In 
addition, under the proposal, a capital instrument issued by a company 
in an insurance depository institution holding company's enterprise 
that the firm could be contractually obligated to purchase also would 
have been deducted from capital elements. The proposal notes that if an 
insurance depository institution holding company has already deducted 
its investment in its own capital instruments from its available 
capital, it would not need to make such deductions twice.
    The proposed rule requires an insurance depository institution 
holding company to look through its holdings of an index to deduct 
investments in its own capital instruments, including synthetic 
exposures related to investments in own capital instruments. Gross long 
positions in investments in its own capital instruments resulting from 
holdings of index securities would have been netted against short 
positions in the same underlying index. Short positions in indexes to 
hedge long cash or synthetic positions could have been decomposed to 
recognize the hedge. More specifically, the portion of the index 
composed of the same underlying exposure that is being hedged could 
have been used to offset the long position only if both the exposure 
being hedged and the short position in the index were covered positions 
under the market risk rule and the hedge was deemed effective by the 
banking organization's internal control processes which would have been 
assessed by the primary federal supervisor of the banking organization 
or is reported as a highly effective hedge by insurance supervisors 
under Statement of Statutory Accounting Principle 86. If the insurance 
depository institution holding company found it operationally 
burdensome to estimate the investment amount of an index holding, the 
proposal permits the institution to use a conservative estimate with 
prior approval from the Board. In all other cases, gross long positions 
would be allowed to be deducted net of short positions in the same 
underlying instrument only if the short positions involved no 
counterparty risk. In determining such net long positions, the proposed 
BBA would exclude such positions held in a separate account asset or 
through an associated guarantee, unless the relevant separate account 
fund is concentrated in the company.
6. Reciprocal Cross-Holdings in Capital of Financial Institutions
    A reciprocal cross-holding results from a formal or informal 
arrangement between two financial institutions to swap, exchange, or 
otherwise hold or intend to hold each other's capital instruments. The 
use of reciprocal cross-holdings of capital instruments to artificially 
inflate the capital positions of each of the financial institutions 
involved would undermine the purpose of available capital, potentially 
affecting the safety and soundness of such financial institutions. 
Under the proposal, in light of the Board's supervisory objectives in 
designing the BBA, reciprocal cross-holdings of capital instruments of 
companies in an insurance depository institution holding company's 
enterprise are deducted from available capital. The proposed deduction 
encompasses reciprocal cross-holdings between building block parents 
and companies external to the insurance depository institution holding 
company, and such holdings between building block parents and other 
companies within the insurance depository institution holding company's 
enterprise.

C. Limit on Certain Capital Instruments in Available Capital Under the 
BBA

    In light of the Board's supervisory objectives in designing the 
BBA, the Board proposes to limit available capital under the BBA 
arising from investments in the capital of unconsolidated financial 
institutions. This treatment is consistent with the Board's banking 
capital rule and treatment of non-insurance SLHCs under the Board's 
rules. The proposed BBA incorporates the limit on investments in the 
capital of unconsolidated financial institutions in the manner 
currently done under the Board's banking capital rule.
    To operationalize this limitation in the context of the BBA, a 
proxy for consolidation is also needed because the U.S. GAAP definition 
is not presently applicable to the full population of current insurance 
depository institution holding companies. The proposed BBA would not 
treat a company appearing on the insurance depository institution 
holding company's inventory as an unconsolidated financial institution. 
Moreover, investments in the capital of unconsolidated financial 
institutions would be determined as the net long position calculated in 
accordance with 12 CFR 217.22(h), provided that separate account assets 
or associated guarantees would not be regarded as an indirect exposure. 
As a result, the look-through treatment under 12 CFR 217.22(h) would 
not be applied to separate account assets or associated guarantees.
    As noted above, the proposed BBA contains one tier of available 
capital, but as discussed in this Section VII.C, certain limitations 
may apply. The criteria set out in subsection VII.B.1 set a baseline 
threshold for capital instruments to be includable as available capital 
under the BBA. However, certain more stringent criteria for capital 
instruments can isolate instruments that are more loss absorbing and of 
higher quality. These criteria are reflected in the Board's banking 
capital rule corresponding to capital instruments includable as common 
equity tier 1 capital, as codified in section 217.20(b) of the Board's 
Regulation Q.\74\
---------------------------------------------------------------------------

    \74\ As noted in the proposed rule, two technical adjustments 
are proposed to adapt language under the Board's banking capital 
rule to the appropriate counterpart(s) in the BBA.
---------------------------------------------------------------------------

    Consistent with the Board's supervisory objectives, the Board aims 
to ensure that an insurance depository institution holding company does 
not

[[Page 57260]]

hold capital largely using capital instruments of lower quality or loss 
absorbing capability. In order to ensure that the majority of an 
insurance depository institution holding company's available capital 
consists of instruments meeting the criteria in this subsection VI.C, 
the proposed BBA would limit, at the level of building block available 
capital for the top-tier parent, capital instruments meeting the 
criteria in subsection VII.B.1, but not meeting the criteria in in 12 
CFR 217.20(b), as modified in the proposed BBA (tier 2 capital 
instruments), to be no more than 62.5 percent of the building block 
capital requirement for that top-tier parent.
    In reaching this proposal, the Board considered expressing this 
limit as a percentage of the top-tier parent's building block available 
capital excluding capital instruments qualifying for inclusion in the 
BBA but not meeting the criteria in 12 CFR 217.20(b), as modified in 
the proposed BBA. Ignoring any impact of scaling, in light of the 
Board's supervisory objectives in designing the BBA, this percentage of 
such available capital could be determined in the context of the 
minimum capital requirements under the Board's banking capital rule. 
The Board considered that a limit expressed in this manner was less 
favorable from a supervisory standpoint. In times of stress, in the 
Board's supervisory experience, available capital typically declines 
more rapidly than required capital. As a result, in such times, a 
supervised firm's capacity to count existing or newly issued tier 2 
capital instruments towards regulatory requirements generally would 
decline in tandem if they were limited as a percentage of other 
available capital. By contrast, expressing the limit as a percentage of 
capital requirement avoids much of this procyclicality. Supervised 
firms would also have a less volatile limit under which to count or 
issue tier 2 capital instruments in a case where the firm's capital 
levels fell close to or below the required minimum amounts.
    Question 30: What alternate formulations of the limit on tier 2 
capital may be more appropriate, while still ensuring appropriate 
quality of capital?
    Question 31: Aside from a limit on tier 2 capital instruments, are 
there other ways to ensure sufficiently loss absorbing available 
capital and/or prevent an institution from relying disproportionately 
on capital resources that are less loss absorbing?
    As discussed below, the minimum capital requirement under the BBA 
is for the top-tier parent to hold building block available capital at 
least equal to 250 percent of its building block capital requirement. 
In light of the Board's supervisory objectives in designing the BBA, 
this minimum requirement corresponds to, and is therefore at least as 
stringent as, the minimum requirement under the Board's banking capital 
rule of 8 percent of risk-weighted assets. In light of the BBA's limit 
on tier 2 capital instruments (62.5 percent of the top-tier parent's 
building block capital requirement), an insurance depository 
institution holding company holding exactly the minimum requirement 
level of available capital therefore holds at least 187.5 percent of 
the top-tier parent's building block capital requirement through 
available capital other than tier 2 instruments (e.g., instruments 
satisfying the criteria for common equity tier 1 capital, retained 
earnings, other elements of statutory surplus, etc.). This firm would 
therefore have this latter form of capital sufficient to cross a 
threshold of 6 percent of risk-weighted assets, in the context of the 
Board's banking capital rule.\75\
---------------------------------------------------------------------------

    \75\ Said differently, if the firm's available capital is 
distributed 187.5/250, or three-fourths, as resources other than 
tier 2 instruments, this available capital would, in the context of 
the Board's banking capital rule, amount to three-fourths of the 
minimum requirement, or 6 percent of risk-weighted assets. The 
firm's tier 2 capital, held in the amount of 62.5 percent of the 
top-tier parent's building block capital requirement, would be one-
fourth of available capital at the minimum requirement under the 
Board's banking capital rule, corresponding to 2 percent of risk-
weighted assets in the context of the Board's banking capital rule.
---------------------------------------------------------------------------

    Thus, the BBA's proposed limitation on tier 2 instruments means 
that insurance depository institution holding companies would 
effectively meet the requirements under the Board's banking capital 
rule applicable to additional tier 1 capital plus common equity tier 1 
capital using building block available capital excluding tier 2 
instruments.\76\ The Board considers that applying the proposed limit 
on tier 2 instruments achieves a simpler, more tractable application of 
minimum capital requirements under the BBA without introducing 
implementation costs outweighing these benefits. In addition, this 
approach facilitates the Board's use of only one tier of capital in the 
BBA.
---------------------------------------------------------------------------

    \76\ The BBA, as proposed, does not reflect or utilize the 
criteria for additional tier 1 capital under the Board's banking 
capital rule. However, in the Board's supervisory experience, the 
incidence of insurers utilizing capital instruments that meet the 
criteria of additional tier 1, but not the criteria of common equity 
tier 1 is not common, and when utilized, does not frequently 
represent a material proportion of the insurer's capital.
---------------------------------------------------------------------------

    As a simple illustration of these limits, consider further the 
example presented in Sections IV and V above. Suppose the life 
insurance parent did not hold any investment in the capital of 
unconsolidated financial institutions, but had issued $35 million in 
surplus notes owned by third parties. Suppose further that these 
surplus notes qualify for inclusion as available capital under the BBA, 
but are not grandfathered surplus notes. The life insurance parent's 
capital requirement of $99.6 million would be used to determine the 
limit on surplus notes and other tier 2 instruments that are includable 
as available capital. Here, the insurance depository institution 
holding company could not include more than $62.25 million of tier 2 
instruments in available capital,\77\ and as a result, the firm can 
include all of its external-facing surplus notes in available capital. 
A more fulsome illustration of this step in applying the BBA is 
presented in Section IX.G below.
---------------------------------------------------------------------------

    \77\ This amount is calculated as $99.6 * 62.5%.
---------------------------------------------------------------------------

D. Board Approval of Capital Elements

    The BBA proposal also includes a provision concerning Board 
approval of a capital instrument. In accordance with the proposal, 
existing capital instruments will be includable in available capital 
under the BBA. However, over time, capital instruments that are 
equivalent in quality and capacity to absorb losses to existing 
instruments may be created to satisfy different market needs. Proposed 
section 217.608(g) accommodates such instruments for inclusion in 
available capital. Similar authority exists under the Board's banking 
capital rule under section 217.20(e).\78\ In exercising its authority 
under proposed section 217.608(g), the Board expects to consider, among 
other things, the requirements for capital elements in the final rule; 
the size, complexity, risk profile, and scope of operations of the 
insurance depository institution holding company, and whether any 
public benefits in approving the instrument would be outweighed by risk 
to an IDI. Capital instruments already approved under the authority 
under the Board's banking capital rule remain eligible for inclusion as 
available capital under the BBA in accordance with this proposal. For 
purposes of the BBA, proposed section 217.608(g) would apply going 
forward.
---------------------------------------------------------------------------

    \78\ Proposed section 12 CFR 217.601(d)(1)(ii) parallels the 
existing section 12 CFR 217.1(d)(2)(ii).

---------------------------------------------------------------------------

[[Page 57261]]

VIII. The BBA Ratio, Minimum Capital Requirement and Capital 
Conservation Buffer

A. The BBA Ratio and Proposed Minimum Requirement

    Under the BBA, the Board's minimum capital requirement for an 
insurance depository institution holding company would be the ratio of 
aggregated building block available capital to the aggregated building 
block capital requirement (the BBA ratio):
[GRAPHIC] [TIFF OMITTED] TP24OC19.027

    In light of the Board's supervisory objectives and authorities in 
accordance with U.S. law, the Board proposes to require a minimum BBA 
ratio of 250 percent. The Board determined this minimum threshold by 
first translating the minimum total capital requirement of 8 percent of 
risk-weighted assets under the Board's banking capital rule to its 
equivalent under NAIC RBC. The Board then added a margin of safety to 
account for factors including any potential data or model parameter 
uncertainty in determining scaling parameters and an adequate degree of 
confidence in the stringency of the requirement. The Board notes that 
the proposed minimum ratio, 250 percent, aligns with the midpoint 
between two prominent, existing state insurance supervisory 
intervention points, the ``company action level'' and ``trend test 
level'' under state insurance RBC requirements.\79\
---------------------------------------------------------------------------

    \79\ See footnote 16 for explanation of company action level and 
trend-test level as used in the context of RBC.
---------------------------------------------------------------------------

    Question 32: The Board invites comment on the proposed minimum 
capital requirement. What are the advantages and disadvantages of the 
approach? What is the burden associated with the proposed approach?
    As a simple illustration of this minimum requirement, consider the 
example presented in Sections IV, V, and VII above. After aggregating 
the subsidiary building block parents, the life insurance top-tier 
parent had building block available capital of $487.5 million and 
building block capital requirement of $99.6 million. Its BBA ratio is 
thus 489 percent, above the required minimum 250 percent. A further 
illustration of this step in applying the BBA is presented in Section 
IX.H.

B. Proposed Capital Conservation Buffer

    To encourage better capital conservation by supervised firms and 
enhance the resiliency of the financial system, the proposed rule would 
limit capital distributions and discretionary bonus payments for 
insurance depository institution holding companies that do not hold a 
specified amount of available capital at the level of a top-tier parent 
or other depository institution holding company, in addition to the 
amount that is necessary to meet the minimum risk-based capital 
requirement proposed under the BBA. Insurance depository institution 
holding companies would be subject only to the proposed capital 
conservation buffer under the BBA, not the existing capital 
conservation buffer codified at section 217.11 of the Board's banking 
capital rule.
    To determine the appropriate threshold for a capital conservation 
buffer under the BBA, the Board took a similar approach to how it 
determined the minimum requirement. The analysis began with the 
threshold levels from the buffer under the Board's banking capital rule 
and translated them to their equivalents under NAIC RBC.\80\ The full 
amount of the buffer under the Board's banking capital rule, 2.5 
percent, translates to 235 percent under the NAIC RBC framework. This 
translated buffer threshold was applied in the BBA. An insurance 
depository institution holding company would need to hold a capital 
conservation buffer in an amount greater than 235 percent (which, 
together with the minimum requirement of 250 percent, results in a 
total requirement of at least 485 percent) to avoid limitations on 
capital distributions and discretionary bonus payments to executive 
officers. The proposal further provides for a maximum dollar amount 
(calculated as a maximum payout ratio multiplied by eligible retained 
income, as discussed below) that the insurance depository institution 
holding company could pay out in the form of capital distributions or 
discretionary bonus payments during the current calendar year. Under 
the proposal, an insurance depository institution holding company with 
a buffer of more than 235 percent would not be subject to a maximum 
payout amount pursuant to the above-referenced proposed provision; 
however, the Board would retain the ability to restrict capital 
distributions under other authorities and limitations on distributions 
under other regulatory frameworks would continue to apply.
---------------------------------------------------------------------------

    \80\ Because the thresholds here are part of a capital 
conservation buffer, which is inherently a provision to apply an 
added margin of safety, no uplift or margin of safety was built into 
the intervention points after translating those under the Board's 
banking capital rule to NAIC RBC.
---------------------------------------------------------------------------

    In order to tailor the capital conservation buffer to the insurance 
business, the proposal introduces a number of technical adaptations to 
the capital conservation buffer appearing in the Board's banking 
capital rule to apply this in the context of an insurance depository 
institution holding company. First, in light of the proposed annual 
reporting cycle for the BBA, discussed below, the proposed rule would 
apply the capital conservation buffer on a calendar year basis rather 
than quarterly. Second, the proposed rule broadens ``distributions'' to 
include discretionary dividends on participating insurance policies 
because, for mutual insurance companies, these payments are the 
equivalent of stock dividends. Third, rather than restrict the 
composition of the capital conservation buffer to solely common equity 
tier 1 capital, the proposal restricts the composition to building 
block available capital excluding tier 2 instruments. Moreover, the 
proposed rule replaces the thresholds appearing in 12 CFR 217.11, Table 
1, with corresponding amounts that have been scaled from the Board's 
banking capital rule to the common capital framework under the BBA.\81\
---------------------------------------------------------------------------

    \81\ Note that, as defined in the proposed rule, tier 2 capital 
instruments are those meeting the criteria for tier 2 capital under 
the Board's banking capital rule, but failing the criteria for 
common equity tier 1 capital.
---------------------------------------------------------------------------

    In addition, the proposal defines ``eligible retained income'' as 
``the annual change in building block available capital,'' excluding 
certain changes resulting from capital markets

[[Page 57262]]

transactions. This change significantly reduces operational burden 
because, unlike in the bank context, insurance depository institution 
holding companies do not necessarily calculate a consolidated retained 
earnings amount that could serve as the basis upon which to apply the 
definition of ``eligible retained income'' without modification.
    Question 33: The Board invites comment on the proposed minimum 
capital buffer. What are the advantages and disadvantages of the 
buffer? What is the burden associated with the buffer?

IX. Sample BBA Calculation

    In order to better illustrate the steps and application of the BBA, 
this NPR presents the example below based on a fictitious mutual life 
insurance company.

A. Inventory

    As described above in Section IV.C.1, the first step in applying 
the BBA is identifying an inventory of companies within the insurance 
depository institution holding company's enterprise. This would 
generally be performed by identifying the companies on the Board's Y-10 
and Y-6 forms together with companies on the Schedule Y, as prepared in 
accordance with the NAIC's SSAP No. 25, included in the most recent 
statutory annual statement for an operating insurer in the insurance 
depository institution holding company's enterprise. The organizational 
chart below illustrates the application of this step for the sample 
insurance firm presented here, Mutual Life Insurance Company (Mutual 
Life).
[GRAPHIC] [TIFF OMITTED] TP24OC19.028

    As can be seen from this organizational chart, Mutual Life Ins. Co. 
is the top-tier depository institution holding company of the insurance 
depository institution holding company's enterprise. In addition to two 
life insurance companies, this enterprise has two P&C insurance 
companies, a life captive insurance company, and an IDI (assume it is a 
nationally-chartered IDI), as well as a number of nonbank, non-
insurance companies, including life and P&C insurance agencies, 
investment vehicles, an asset manager, a broker/dealer, and a midtier 
holding company above the IDI.

B. Applicable Capital Frameworks

    As described in Section IV.C.2, the second step in applying the BBA 
is to determine the applicable capital frameworks for companies under 
the insurance depository institution holding company. As proposed in 
this rule, the applicable capital framework for a company other than 
one engaged in insurance or reinsurance underwriting, except for an 
IDI, is the Board's banking capital rule, while the applicable capital 
framework for a nationally-chartered IDI is the banking capital rule as 
set forth by the OCC. For companies engaged in insurance or reinsurance 
underwriting, the applicable capital framework is generally the 
regulatory capital framework under the laws or regulations to which 
that company is subject. The applicable capital frameworks for 
companies under Mutual Life Ins. Co. are presented below.

[[Page 57263]]

[GRAPHIC] [TIFF OMITTED] TP24OC19.029

    In the illustration above, the applicable capital frameworks are 
shown for certain key companies. For instance, the applicable capital 
frameworks for Mutual Life Insurance Co., the top-tier depository 
institution holding company, and P&C Insurance Co. are shown, but no 
frameworks are shown for Life Insurance Agency or P&C Insurance 
Agency--these two companies would be treated as they are under the 
capital frameworks applicable to their immediate parents. Assume that 
the life insurance captive was material in relation to the insurance 
depository institution holding company through Mutual Life Insurance 
Company guaranteeing the return on certain investments of the captive. 
The life insurance captive would be treated as an MFE and the 
applicable capital framework would be the NAIC's RBC applicable to life 
insurance companies.

C. Identification of Building Block Parents and Building Blocks

    As described in Section IV.C.3, the third step in applying the BBA 
is to identify the building block parents. Most often, this will occur 
as a result of having identified the applicable capital frameworks for 
the companies under the insurance depository institution holding 
company, where a capital-regulated company or MFE is assigned to a 
building block when its applicable capital framework differs from that 
of the next-upstream capital-regulated company, MFE, or DI holding 
company.
    As the top-tier depository institution holding company, Mutual Life 
Insurance Company itself is the first candidate to be a building block 
parent. Life Insurance Co. would fall under the same applicable capital 
framework as the top-tier depository institution holding company (NAIC 
life RBC), and therefore would not be identified as a building block 
parent; rather, it would remain in the same building block as the block 
for which Mutual Life Ins. Co. is building block parent. By contrast, 
the BBA proposes (for purposes of identification of building blocks) to 
treat NAIC RBC for life and P&C as distinct frameworks; thus, P&C 
Insurance Company is identified as a building block parent from Mutual 
Life Ins. Co. With it, the Subsidiary P&C Insurance Company, P&C 
Insurance Agency, and two investment subsidiaries would be members of 
this building block.
    The life insurance captive would be subject to NAIC RBC for life 
insurers. Because treatment of captives' risk can vary among insurers, 
the life insurance captive may not be reflected in the RBC capital 
calculations of its operating insurance parents. Assuming that, for 
purposes of this illustration, the life insurance captive's risk is not 
reflected in the RBC calculations of Mutual Life or Life Ins. Co., the 
captive would be made its own building block parent. The other 
subsidiaries of Life Insurance Co. would be assigned to the building 
block for which Mutual Life Ins. Co. is building block parent.
    Midtier Holdco is a depository institution holding company. Under 
the proposed rule, this company would be identified as a building block 
parent. Note that, as a non-insurance company, this company's 
applicable capital framework under the proposed BBA would be the 
Board's banking capital rule, which, in turn, would reflect the risks 
of the IDI. Therefore, the IDI would not be identified as a building 
block parent. The same would be the case for the broker/dealer, which, 
together with the IDI, would be assigned as a member of Midtier 
Holdco's building block.
    Thus, the building block parents in Mutual Life Ins. Co.'s 
enterprise are Mutual Life Ins. Co., P&C Ins. Co., Life Ins. Captive, 
and Midtier Holdco. The demarcation of building blocks for Mutual Life 
Ins. Co. is shown below:

[[Page 57264]]

[GRAPHIC] [TIFF OMITTED] TP24OC19.030

D. Identification of Available Capital and Capital Requirements Under 
Applicable Capital Frameworks

    Assume that, for the captive, an RBC calculation is performed and 
reported to the state regulator even though the captive generally would 
not be subject to the same generally applicable capital requirements as 
primary insurers. Assume further that, for Mutual Life Ins. Co., the 
available capital and capital requirement amounts for its four building 
blocks are as shown below. Determination of available capital and 
capital requirements would result as follows:
[GRAPHIC] [TIFF OMITTED] TP24OC19.031


[[Page 57265]]



E. Adjustments to Available Capital and Capital Requirements

1. Illustration of Adjustments to Capital Requirements
    As described in Section VI.B above, the BBA, as proposed, includes 
a number of possible adjustments to capital requirements at the level 
of each building block. Assume that no adjustments to capital 
requirements are applicable in the building block for which Mutual Life 
Insurance Company is the building block parent.
    The first possible adjustment is to reverse any permitted or 
prescribed practices that affect capital requirements. Suppose that the 
Life Ins. Captive benefits from a prescribed practice under its 
domiciliary jurisdiction, specifically, that assets in the form of 
conditional letters of credit are reported on the balance sheet without 
corresponding liabilities. This prescribed practice would be adjusted 
out of the capital requirement. Under the proposed BBA, these letters 
of credit would not be treated as assets and, hence, would face no risk 
weight. Additionally, the use of principles-based reserving from the 
elimination of transitional measures would impact the RBC calculation 
because reserves are used in different parts of the RBC calculation, 
including the calculation of exposure to mortality risk. Assume that 
the total impact on Life Insurance Company's RBC capital requirement 
from these adjustments to captives is $3 million.
    The second possible adjustment to capital requirements is an 
optional elimination of intercompany credit risk weights. Suppose that 
in Mutual Life Ins. Co., there is an inter-affiliate reinsurance 
arrangement whereby P&C Ins. Co. reinsures a portion of Sub P&C Ins. 
Co.'s book. Sub P&C Ins. Co. retains some risk, and faces a charge in 
its RBC requirement for its receivables from its parent. Suppose that 
this receivable is in the amount of $40 million, the RBC charge for Sub 
P&C Ins. Co. is $2 million, and Mutual Life Ins. Co. elects to make 
this adjustment.
    An additional possible adjustment to capital requirements relates 
to the insurance depository institution holding company's ability to 
elect to not treat as an MFE a company that otherwise meets the 
definition of this term, after which the insurance depository 
institution holding company must correspondingly allocate the risks of 
this company to other companies in the insurance depository institution 
holding company with which the company engages in transactions. Assume 
that Mutual Life Ins. Co. has no companies other than its Life 
Insurance Captive that would constitute MFEs and that Mutual Life Ins. 
Co opts to treat the Life Insurance Captive as an MFE. This adjustment 
to capital requirements is therefore not applicable in this case.
    Under the BBA as proposed, no adjustments would take place to total 
risk-weighted assets for building block parents subject to the Board's 
banking capital rule. Thus, the total impact of adjustments to capital 
requirements for Mutual Life Ins. Co. can be shown as follows:
[GRAPHIC] [TIFF OMITTED] TP24OC19.032


[[Page 57266]]


2. Illustration of Adjustments to Available Capital
    As described in Section VII.B above, the proposed BBA includes a 
number of possible adjustments to available capital. In the example of 
Mutual Life Ins. Co., assume that no adjustments to available capital 
are applicable in the building block for which Mutual Life Insurance 
Company is the building block parent.
    However, suppose that the P&C Insurance Co. subsidiary benefits 
from a permitted practice under its domiciliary jurisdiction. As 
described in Section VII.B.3, permitted and prescribed practices would 
be adjusted out of available capital, so that insurance companies are 
presented on a consistent basis in the BBA. Suppose that, for P&C 
Insurance Co., the increase to surplus arising from the permitted 
practice is $15 million. This amount would be deducted in determining 
building block available capital for P&C Insurance Co.
    Captive reinsurers typically would have at least two related 
adjustments. Suppose that, as noted above, the Life Ins. Captive has a 
prescribed practice that allows holding undrawn contingent letters of 
credit as assets without a corresponding liability. By application of 
the adjustment to available capital to reverse prescribed practices, 
described in Section VII.B.3, these letters of credit would not be 
treated as assets and, hence, would not contribute to available capital 
under the proposed BBA. Suppose that, for Life Ins. Captive, these 
letters of credit are held at $240 million. This amount would be 
deducted in determining building block available capital for Life Ins. 
Captive. Somewhat offsetting this, captives would typically benefit 
from the adjustment that removes transitional measures. Suppose that 
application of principles-based reserving to business in the captive 
results in reduced liabilities that increase surplus by $100 million. 
This would be added to available capital.
    Under the BBA, as proposed, the sole possible adjustment to 
building block parents, or their building blocks, subject to the 
Board's banking capital rule arises where the building block parent 
owns an insurer. Under the Board's banking capital rule, this ownership 
generally results in a deduction from qualifying capital in the amount 
of the insurance subsidiary's capital requirement for insurance 
underwriting risks.\82\ In the case of Mutual Life Ins. Co., neither 
the Midtier Holdco nor IDI have insurance underwriting subsidiaries, so 
no adjustment is needed to available capital for this building block.
---------------------------------------------------------------------------

    \82\ See 12 CFR 217.22(b)(3).
---------------------------------------------------------------------------

    The total impact of adjustments to available capital for Mutual 
Life Ins. Co. can be shown as follows:
[GRAPHIC] [TIFF OMITTED] TP24OC19.033

F. Scaling Adjusted Available Capital and Capital Requirements

    As described above in Section V, adjusted available capital and 
adjusted capital requirement for each building block are scaled, using 
the scaling approach proposed by the Board, to the applicable capital 
framework of the building block parent most immediately upstream. No 
scaling is proposed for translating between NAIC RBC as applicable to 
life and P&C insurance. Thus, in the case of Mutual Life Ins. Co., for 
the building blocks for which P&C Ins. Co. and Life Ins. Captive are

[[Page 57267]]

building block parents, no scaling is needed to translate to NAIC RBC 
as applied to Mutual Life Ins. Co. For these building blocks, the 
building block available capital are the adjusted available capital 
amounts and the building block capital requirements are the adjusted 
capital requirements.
    For the building block for which Midtier Holdco is building block 
parent, scaling is needed. This building block is under the Board's 
banking capital rule. The building block parent most immediately 
upstream, Mutual Life Ins. Co., is under NAIC RBC. Thus, scaling is 
needed between the Board's banking capital rule and NAIC RBC according 
to the equations set out in Section V.C above. The calculations are as 
follows:

Building block available capital = $272M - ($2,264M * 6.3%) = $129 
million
Building block capital requirements = $2,264M * 1.06% = $24 million

    The total impact of scaling for Mutual Life Ins. Co. can be shown 
as follows:
[GRAPHIC] [TIFF OMITTED] TP24OC19.034

G. Roll-Up and Aggregation of Building Blocks

    As described in Sections IV.D, VI.C, and VII.A.2 above, building 
block available capital and building block capital requirement, 
reflecting adjustments and scaling, are rolled up through successive 
upstream building blocks until the top-tier parent's building block is 
reached.
    At each step, when rolling up available capital, any downstreamed 
capital from the upstream parent is deducted. Assume that Mutual Life 
Ins. Co. provides no capital to P&C Ins. Co. or Midtier Holdco other 
than its equity investment in the subsidiary, and that Mutual Life Ins. 
Co. carries these subsidiaries at $698 million and $301 million, 
respectively. Assume that Mutual Life Ins. Co. treats the Life Ins. 
Captive as a nonadmitted asset. The total impact on Mutual Life Ins. 
Co.'s surplus is thus $999 million, which would be deducted in the 
roll-up prior to re-aggregating the building block available capital 
for P&C Ins. Co., Midtier Holdco, and Life Ins. Captive.
    When rolling up capital requirements, the amount of the upstream 
parent's capital requirement attributable to each downstream building 
block parent is deducted. Mutual Life Ins. Co.'s RBC required capital 
amount would include the unadjusted P&C RBC requirement for P&C Ins. 
Co., assumed to be $166 million, in its C0 component, but would include 
no amount attributable to Life Ins. Captive. Mutual Life Ins. Co.'s 
holding of Midtier Holdco would affect its life RBC calculation through 
the C1cs component, deriving from the carrying value of $301 million 
but also may reflect the impact of asset concentration charges, taxes, 
and the covariance adjustment as reflected in the life RBC calculation. 
Assume that extracting Midtier Holdco from Mutual Life Ins. Co.'s RBC 
calculation would reduce the amount (on the basis of the authorized 
control level of RBC) by $24 million. Assume that the total impact on 
Mutual Life Ins. Co.'s RBC requirement is thus $190 million, which 
would be deducted in the roll-up prior to re-aggregating the building 
block capital requirement for P&C Ins. Co., Life Ins. Captive, and 
Midtier Holdco.
    In each case, the roll-up is also done taking into account the 
upstream parent's allocation share of the downstream building block 
parent. For purposes of Mutual Life Ins. Co., assume

[[Page 57268]]

all subsidiaries are wholly owned, so that all allocation shares are 
100 percent.
    Taking into account the building block available capital amounts, 
building block capital requirements, and deductions of downstreamed 
capital and contributions to Mutual Life Ins. Co.'s RBC related to P&C 
Ins. Co., Life Ins. Captive, and Midtier Holdco, the resulting building 
block available capital and building block capital requirement amounts 
for Mutual Life Ins. Co. are as follows:

Building block available capital = $4,311 + (999) + 626 + 105 + 129 
= $4,172 million
Building block capital requirement = $454 + (190) + 164 + 37 + 24 = 
$489 million

    This can be shown as follows:
    [GRAPHIC] [TIFF OMITTED] TP24OC19.035
    
    As described in Section VII.C above, there is a remaining 
adjustment at the level of the top-tier depository institution holding 
company to determine whether capital instruments that meet the criteria 
set out in Section VII.B.1 above, but not the criteria in Section 
VII.C, exceed 62.5 percent of capital requirements. Assume that Mutual 
Life Ins. Co. has outstanding surplus notes that are grandfathered as 
proposed in the BBA, and thus are deemed to satisfy the criteria set 
out in Section VII.B.1 above. These surplus notes may not meet the 
criteria set out in Section VII.C above, but as proposed in the BBA, 
would be grandfathered such that the BBA would not limit the insurance 
depository institution holding company from treating all of these 
instruments as available capital under the BBA. Going forward, the 
unretired portion of these surplus notes would continue to be 
grandfathered, and Mutual Life Ins. Co. would treat as available 
capital any instruments meeting the criteria from Section VII.B.1, but 
not meeting the criteria in Section VII.C, not exceeding the greater of 
62.5 percent of capital requirements and the outstanding grandfathered 
surplus notes.

H. Calculation of BBA Ratio and Application of Minimum Requirement and 
Buffer

    As described in Sections III.A above, the ratio of building block 
available capital to building block capital requirements is the 
calculated BBA Ratio. This ratio is reviewed relative to the minimum 
requirement set out in the proposed BBA. In the example presented 
above, the ratio of building block available capital to building block 
capital requirements for Mutual Life Ins. Co. is $4,172 million/$489 
million = 853 percent. This can be shown as follows:
 BILLING CODE 6210-01-P

[[Page 57269]]

[GRAPHIC] [TIFF OMITTED] TP24OC19.036

 BILLING CODE 6210-01-C
Relative to the minimum capital requirement proposed in the BBA, 250 
percent, and the 235 percent buffer atop this minimum, Mutual Life Ins. 
Co. would be considered to have met the minimum requirement and buffer 
with a BBA ratio of 853 percent.

X. Reporting Form and Disclosure Requirements

    In connection with this proposed rule, the Board proposes to 
implement a new reporting form for use in the BBA. The proposed 
reporting form, titled ``Capital Requirements for Board-Regulated 
Institutions Significantly Engaged in Insurance Activities'' (Form FR 
Q-1), and instructions focus on information needed to carry out the BBA 
calculations.\83\ The proposed Form FR Q-1 is not intended to be 
exhaustive in terms of addressing supervisory needs other than the 
needs for the BBA.
---------------------------------------------------------------------------

    \83\ The proposed Form FR Q-1 and instructions are available at 
https://www.federalreserve.gov/apps/reportforms/review.aspx.
---------------------------------------------------------------------------

    The vast majority of the information reported to the Board through 
the proposed reporting form would not be public. The information that 
the Board proposes to make public would consist of the building block 
available capital, building block capital requirement, and BBA ratio 
for the top-tier parent of an insurance depository institution holding 
company's enterprise. The Board has long supported meaningful public 
disclosure by supervised firms with the objective of improving market 
discipline and encouraging sound risk management practices. The Board 
is also aware that a sizable amount of information is publicly 
disclosed by insurance firms pursuant to state laws and that IDIs 
disclose their Call Reports. At this stage, the Board does not see the 
need for the proposed BBA to require more detailed disclosure of 
information by an insurance depository institution holding company. The 
Board's consideration of market discipline is also informed by the fact 
that the current population of insurance depository institution holding 
companies represents a minority of the U.S. insurance market. 
Furthermore, the Board believes that the proposed disclosure 
requirements strike an appropriate balance between the need for 
meaningful disclosure and the protection of proprietary and 
confidential information.\84\ The Board has tailored the proposed 
disclosure requirements under the BBA so as to enable insurance 
depository institution holding companies to provide the disclosures 
without revealing proprietary and confidential information.
---------------------------------------------------------------------------

    \84\ Proprietary information encompasses information that, if 
shared with competitors, would render a supervised firm's investment 
in these products/systems less valuable, and, hence, could undermine 
its competitive position. Information about customers is often 
confidential, in that it is provided under the terms of a legal 
agreement or counterparty relationship.
---------------------------------------------------------------------------

    As set out in the proposed reporting form and instructions, the 
form would be sent to the Board annually by March 15 of each year. The 
Board may also choose to require reporting more frequently than 
annually if needed for the Board to fulfill its supervisory objectives. 
Instances calling for such more frequent reporting may include, among 
others, a significant change such that the most recent reported amounts 
are no longer reflective of the supervised firm's capital adequacy and 
risk profile, or a significant change in qualitative attributes (for 
example, the firm's risk management objectives and policies, nature of 
reporting system, and definitions).
    Question 34: What should the Board consider in determining the 
reporting cycle for the BBA?
    Question 35: Aside from what is currently proposed for public 
disclosure under the BBA and associated reporting form, should 
additional information submitted to the Board pursuant to the BBA be 
made public?

[[Page 57270]]

    To be transparent, gather additional input, and provide a valuable 
test of the proposed approach, the Board intends to conduct a 
quantitative impact study (QIS) of the BBA as part of its rulemaking 
process. The data collected through this QIS will be used to analyze 
the impact of various aspects of the proposed BBA. For instance, 
information collected through the QIS will allow further exploration of 
areas of thought and concern raised by commenters in response to the 
Board's ANPR of June 2016. In addition, the Board's analysis of the QIS 
results may inform its advocacy of positions in international insurance 
standard setting, including an aggregation method, akin to the BBA, 
that may be deemed comparable to the ICS. The analysis of QIS results 
may also assist in the Board's continued engagement with the NAIC and 
the NAIC's development of the GCC so as to minimize burden and achieve 
efficiencies with regard to firms that may be subject to more than one 
of these approaches.

XI. Impact Assessment of Proposed Rule

    This section presents a preliminary assessment of anticipated 
benefits and costs of the proposed BBA, were it to be adopted as 
proposed. The Board's review of potential costs and benefits of this 
proposal remains ongoing as the Board proceeds towards a final rule 
implementing the BBA. This assessment will be informed by a QIS. 
Furthermore, the Board remains mindful of the assistance commenters can 
provide in bringing to light anticipated costs and benefits. The Board 
has already reached a more informed preliminary assessment of benefits 
and costs because of the comments submitted in response to the ANPR. 
This preliminary analysis indicates that the proposed BBA achieves the 
statutory requirement to establish a consolidated capital requirement 
for insurance depository institution holding companies in a manner that 
streamlines burden such that the benefits should more than outweigh any 
initial or ongoing implementation costs. The Board invites comments on 
all potential benefits and costs, as well as balance between the two, 
arising from the BBA as proposed.
    To the greatest extent possible, the Board attempts to minimize 
regulatory burden in its rulemakings, consistent with the effective 
implementation of its statutory responsibilities. Moreover, the Board 
remains committed to transparency in this and all of its rulemaking 
processes, including engagement with interested parties and an 
appropriate balancing of benefits, costs, and economic impacts.

A. Analysis of Potential Benefits

1. A Capital Requirement for the Board's Consolidated Supervision
    One of the main elements of a program of supervision of financial 
institutions is a robust and risk-sensitive capital requirement, a key 
benefit provided by the BBA with respect to insurance depository 
institution holding companies. Maintaining sufficient capital is 
central to a financial institution's ability to absorb unexpected 
losses and continue to engage in financial intermediation. Ensuring the 
adequacy of a supervised firm's capital levels and a robust capital 
planning process for managing and allocating its capital resources are 
primary objectives of the Board's consolidated supervision, including 
supervision of insurance depository institution holding companies. In 
the absence of a capital rule for insurance depository institution 
holding companies, the Board's supervision of these firms has focused 
on the second of these objectives, evaluation of the supervised firms' 
capital planning. The Federal Reserve System's supervisory teams 
conduct capital adequacy inspections at insurance depository 
institution holding companies, evaluating processes and policies for 
capital planning including methodologies and controls. A more complete 
supervisory program includes a capital requirement, a need that this 
proposal aims to fill and a principal benefit it is intended to 
achieve.
2. Going Concern Safety and Soundness of the Supervised Institution
    With a capital requirement for insurance depository institution 
holding companies, the Board as a consolidated supervisor will have a 
risk-sensitive framework to assess going-concern safety and soundness 
for each insurance depository institution holding company and the 
population of these firms overall. This enables firm-specific capital 
adequacy review and horizontal reviews across firms. The Board remains 
cognizant that state insurance supervisors regulate the types of 
insurance products offered by insurance companies that are part of 
organizations that the Board supervises, as well as the manner in which 
the insurance is provided, and the capital adequacy of licensed 
insurers. The Board's consolidated supervision is complementary to, and 
in coordination with, existing legal-entity supervision by the states 
by providing a perspective that considers the risks across the entire 
firm.
    As a result, the Board's supervision will have the ability to 
consider risks at the enterprise level arising from an array of 
sources, including companies subject and not subject to a capital 
requirement, and insurance and non-insurance companies, under an 
insurance depository institution holding company. The BBA therefore has 
the benefit of not only providing a capital requirement for the Board's 
consolidated supervision, but also providing the Board with additional 
supervisory insights.
3. Protection of the Subsidiary Insured Depository Institution
    The Board believes that it is important that any company that owns 
and operates a depository institution be held to appropriate standards 
of capitalization. The Board's consolidated supervision of an insurance 
depository institution holding company encompasses the parent company 
and its subsidiaries, and allows the Board to understand the 
organization's structure, activities, resources, and risks, and to 
address financial, managerial, operational, or other deficiencies 
before they pose a danger to the insurance depository institution 
holding companies' subsidiary depository institutions. Using its 
authority, the Board proposes a consolidated capital requirement for 
insurance depository institution holding companies, helping to ensure 
that these institutions maintain adequate capital to support their 
group-wide activities and do not endanger the safety and soundness of 
their depository institution subsidiaries.
    The proposed BBA brings the benefit of contributing to the 
protection of the insurance depository institution holding companies' 
IDIs and, consequently, the FDIC and the U.S. system of deposit 
insurance. Deposit insurance has provided a safe and secure place for 
those households and small businesses with relatively modest amounts of 
financial assets to hold their transactional and other balances, and 
Congress designed deposit insurance mainly to protect the modest 
savings of unsophisticated depositors with limited financial assets.
4. Improved Efficiencies Resulting From Better Capital Management
    The proposed BBA brings the benefit of potential efficiencies at 
insurance depository institution holding companies through improved 
capital management practices by providing an enterprise-wide capital 
requirement and associated framework. For example, the application of a 
consolidated capital

[[Page 57271]]

requirement in the form of the BBA could result in an insurance 
depository institution holding company discovering that its aggregate, 
enterprise-wide capital position is different than previously 
estimated, resulting in the insurance depository institution holding 
company being able to manage and allocate its capital in a way that 
more accurately reflects its risks. If insurance depository institution 
holding companies are better able to manage risk, then over the long 
term, the proposed rule may result in decreased losses and related 
costs to insurance depository institution holding companies and their 
IDIs.
5. Fulfillment of a Statutory Requirement
    As noted above, the Board is charged by Congress to promulgate 
rules in accordance with statutory mandates, which reflect a 
deliberation of costs and benefits first performed by Congress. The 
framework proposed in this NPR fulfills a statutory mandate under 
Section 171 of the Dodd-Frank Act.

B. Analysis of Potential Costs

1. Initial and Ongoing Costs To Comply
    While insurers typically have internal capital planning processes, 
calculations, and metrics, insurance depository institution holding 
companies do not presently perform an enterprise-wide capital 
calculation mandated by a federal regulator. Compliance with the BBA 
will thus require some upfront setup and attendant maintenance to 
collect the requisite information, perform the calculations, and submit 
the required reports, as well as opportunity cost of management's time 
to undertake this setup. However, the BBA builds on existing legal 
entity capital requirements and, as a result, minimizes the amount of 
additional systems infrastructure development beyond what is already 
done by the insurance depository institution holding company to comply 
with its entity-level regulatory requirements. Implementation costs are 
thereby notably less relative to a ground-up capital requirement.
    Under the proposal, the BBA would require certain calculations of, 
and information pertaining to, the RBC requirements for certain 
operating insurance companies in the insurance depository institution 
holding company's enterprise. Generally, RBC reports that insurers file 
with state regulators are confidential under the applicable state laws. 
The proposed reporting form FR Q-1 aims to reflect this treatment under 
state law while still serving the Board's supervisory objectives.
    The attributes of the BBA as proposed are not anticipated to give 
rise to significant initial or ongoing implementation costs. Generally, 
compliance with the BBA may entail initial costs for an insurance 
depository institution holding company. In particular, the firm may 
need to set up certain systems for information collection and 
processing and, on an ongoing basis, maintain these systems, conduct 
certain review, and submit the regulatory reports required under the 
proposal. The analysis suggests that these costs will not be unduly 
burdensome.
    The BBA's proposed approach to grouping an insurance depository 
institution holding company's legal entities into building blocks is 
not anticipated to be unduly burdensome. Under the proposal, the 
insurance depository institution holding company would be required to 
inventory its legal entities, then review each capital-regulated 
company and material financial entity and ascertain whether each should 
be treated as a building block parent. The proposed BBA would use an 
insurance depository institution holding company's Schedule Y, as 
prepared in the institution's lead insurer's most recent statutory 
annual statement, together with its Forms Y-6 and Y-10 prepared for the 
Board, as the basis for the inventory. By leveraging information that 
the insurance depository institution holding company already prepares 
under current regulatory requirements, the proposed BBA would 
streamline implementation burden. The burden of evaluating each company 
against the BBA's proposed provisions on determining building block 
parents is anticipated to be minimal.
    The proposed rule also sets out a method and formula for scaling 
between Federal banking capital rules and NAIC RBC. Implementing this 
provision entails calculations that are not anticipated to be 
burdensome.
    Under the proposed rule, a material financial entity not engaged in 
insurance or reinsurance underwriting would be subject to the Board's 
banking capital rule prior to aggregation, unless the insurance 
depository institution holding company elects to not treat such a 
company as an MFE. While the burden of identifying a material financial 
entity is not expected to be sizable, an insurance depository 
institution holding company may face some initial implementation costs 
in preparing financial statement data for MFEs in accordance with U.S. 
GAAP, to the extent such data is not already prepared. Were the 
insurance depository institution holding company to decline to treat 
any such company as an MFE, the firm would be required to allocate the 
risks faced by the company to relevant affiliates. However, a financial 
report for an MFE, or allocation of an MFE's risks to affiliates with 
which it engages in certain transactions, would build on financial data 
anticipated to be already captured, thereby minimizing additional 
implementation burden. The costs associated with initial setup to 
produce financial statement data for MFEs, or allocating the risks of 
the MFE to relevant affiliates with any attendant recalculations of 
required capital amounts, could include, but may not be limited to, the 
opportunity cost of personnel and management's time to establish and 
oversee processes to generate this data, and the more direct costs of 
establishing or improving new management information systems to assure 
the timely and accurate presentation of information. Ongoing costs in 
either case may include system maintenance and additional staffing to 
produce the statements, potentially entailing ongoing payroll costs and 
the opportunity cost of the time spent operating the systems to produce 
MFEs' financial data or allocating its risks and potential constraints 
on flexibility in financial or corporate structure. However, none of 
these initial and ongoing costs is expected to be substantial.
    Under the proposal, an insurance depository institution holding 
company would be required to conform all permitted and prescribed 
practices, for any insurer in its enterprise, that depart from 
statutory accounting treatment as set out by the NAIC. An insurance 
depository institution holding company would also be required to remove 
the impact of any transitional measures available under applicable 
capital frameworks. The initial implementation costs of administering 
these adjustments are anticipated to be comparable to such ongoing 
costs since reviewing and making these adjustments would generally be 
done on an annual basis when performing the BBA's calculations. When 
permitted or prescribed accounting practices impact capital, surplus 
and/or net income, they are generally required to be disclosed in 
statutory annual statements prepared by regulated insurers. The 
identification of these and the remaining such practices is not 
anticipated to involve significant time beyond what is incurred by the 
insurance depository institution holding company in preparing its 
regulatory

[[Page 57272]]

filings for state supervisors. Conforming these accounting practices to 
the NAIC's SAP, and producing revised accounting and RBC information, 
may entail some implementation costs. The costs associated with these 
adjustments are expected to be modest within the context of the 
organizations and could include, but may not be limited to, the costs 
to recruit and hire staff, including ongoing payroll and benefits 
costs, and the costs of development and implementation of management 
information systems.
    Under the proposal, the insurance depository institution holding 
company would have the option to eliminate credit risk weights on 
intercompany transactions, including loans, guarantees, reinsurance, 
and derivatives transactions. Because this adjustment is at the option 
of the insurance depository institution holding company, the Board 
considers that the supervised institution would only elect for such 
adjustments if the benefits outweighed the costs. In any event, the 
costs associated with running entity-level capital requirements, 
including RBC, excluding intercompany credit risk weights are expected 
to be minimal, where such costs could include, but may not be limited 
to, changes in accounting or management information systems and costs 
of potentially rerunning certain capital calculations, with any 
attendant costs to recruit and hire staff, including ongoing payroll 
and benefits costs, to revise accounting treatment as needed.
2. Review of Impacts Resulting From the BBA
    Any capital requirement has the potential to influence a subject 
firm's actions. With regard to the BBA, the Board notes that it is 
generally less likely for an insurance depository institution holding 
company to fail an aggregation-based approach if it already meets each 
of its entity-level regulatory requirements. In concept, this outcome 
may not always hold after reflecting an aggregation-based approach's 
adjustments, inclusion of entities not subject to a regulatory capital 
framework, and the intervention levels used by the supervisor applying 
the aggregation-based approach. However, based on the Board's 
preliminary review, the Board does not presently anticipate that any 
currently supervised insurance depository institution holding company 
will initially need to raise capital to meet the requirements of the 
proposed BBA.
    In light of the Board's supervisory objectives in designing the 
BBA, the Board proposes in this NPR to subject capital instruments that 
may be included in the BBA to the criteria for tier 2 capital under the 
Board's banking capital rule. It is possible that, to the extent that a 
state's criteria for inclusion of capital instruments differs from the 
criteria in the Board's banking capital rule, instruments that qualify 
under legal entities' RBC requirements would not qualify under the BBA, 
which could result in an insurance depository institution holding 
company incurring costs (e.g., issuance costs and required interest or 
dividend payments) to raise capital resources meeting requirements 
under the BBA. However, it is relevant that insurance depository 
institution holding companies in many cases hold capital, in forms 
other than instruments that may not meet the criteria for tier 2 
capital under the Board's banking capital rule, already sufficient to 
meet the requirements under the BBA.
    Moreover, in order to mitigate any burdens arising from these 
proposed requirements applicable to capital resources, the Board 
proposes to grandfather existing surplus notes and treat them as 
available capital under the BBA, and treat as capital, on a going-
forward basis, newly issued surplus notes meeting the criteria set out 
in the BBA.
    The proposed BBA would also deduct any investments that an 
insurance depository institution holding company has in its own capital 
instruments, including upstream investments by subsidiaries in parents 
and any reciprocal cross-holdings in the capital of financial 
institutions. In the Board's supervisory experience, insurance 
depository institution holding companies tend to have few such 
investments, if any. The proposed BBA also includes a limitation on the 
investment by a top-tier parent or other depository institution holding 
company in instruments recognized as capital of unconsolidated 
financial institutions. The Board's supervisory experience suggests 
that insurance depository institution holding companies do not tend to 
hold such instruments. The Board therefore anticipates any costs or 
burden arising from these proposed provisions to be minimal or 
nonexistent.
    Under the proposal, the minimum capital requirement applied under 
the BBA would be the minimum requirement under the Board's banking 
capital rule, scaled to the BBA's common capital framework, plus a 
margin of safety. The proposal further includes the capital 
conservation buffer requirement under the Board's banking capital rule, 
tailored and scaled to the BBA's common capital framework. To minimize 
any burden and tailor the BBA to be an insurance-centric standard, the 
Board proposes to use, as the common capital framework for aggregation, 
the NAIC RBC framework. Based on the Board's preliminary review, the 
Board does not presently anticipate that any insurance depository 
institution holding company would immediately fail to meet the proposed 
BBA's minimum capital requirement or this requirement together with the 
BBA's proposed capital conservation buffer.
    The proposed BBA would limit the inclusion in the BBA of 
instruments meeting the criteria for tier 2 instruments under the 
Board's banking capital rule, but not meeting the banking capital 
rule's criteria for common equity tier 1, to 62.5 percent of required 
capital after aggregating to the level of the top-tier parent of the 
insurance depository institution holding company's enterprise. An 
insurance depository institution holding company may have issued 
instruments that would qualify as tier 2 capital under the banking 
capital rule, but would not qualify as common equity tier 1 under the 
same, exceeding 62.5 percent of required capital. In such a case, 
absent grandfathering, the firm would not be able to count the 
instruments in excess of 62.5 percent of required capital towards its 
BBA requirement.\85\ In concept, this could result in an insurance 
depository institution holding company needing to modify its capital 
structure to comply with this proposed provision. However, based on the 
Board's preliminary review, and the current insurance depository 
institution holding companies' overall capital positions, the Board 
does not anticipate any substantial burden arising from this 
limitation. Moreover, the proposed grandfathering of outstanding 
surplus notes issued by any company within an insurance depository 
institution holding company's enterprise, with the proposed BBA 
applying the limit on tier 2 instruments to only newly issued surplus 
notes, will reduce implementation burden.
---------------------------------------------------------------------------

    \85\ The supervised insurance institution, including the issuer 
within its enterprise, would remain able to count such instruments 
towards any other capital requirements.
---------------------------------------------------------------------------

    This proposal also includes the Section 171 calculation, as 
described above. The Board continues to deliberate the potential 
implementation costs of this calculation. In light of this, the Board 
has proposed two options by which subject DI holding companies can 
exclude certain insurance subsidiaries.

[[Page 57273]]

3. Impact on Premiums and Fees
    Any initial and ongoing costs of complying with the standard, if 
adopted as proposed, could nominally affect the premiums and fees that 
the insurance depository institution holding companies charge, since 
insurance products are priced to allow insurers to recover their costs 
and earn a fair rate of return on their capital. A capital requirement 
like the BBA, if adopted as proposed, could also affect the cost of 
capital borne by the insurance depository institution holding company, 
which in turn could affect premiums and an insurer's borrowing cost. In 
the long run, costs of providing a policy may be borne by 
policyholders.
    Because the expected costs associated with implementing the 
proposal, if adopted, are not expected to be substantial within the 
context of the insurance depository institution holding companies' 
existing budgets, there is not expected to be a substantial change in 
the pricing of insurance depository institution holding companies' 
products resulting from the proposed standards. In addition, because 
the Board does not presently anticipate that any supervised insurance 
depository institution holding company will need to initially raise 
capital to meet the requirements of the BBA, there is not expected to 
be a substantial change in the cost of capital faced by insurance 
depository institution holding companies. Moreover, the better 
identification of risk to the safety and soundness of the consolidated 
enterprise, as well as the subsidiary IDI, that is expected to result 
from the proposal may lead to improved efficiencies, fewer losses, and 
lower costs in the long term, which may offset any effects on premiums 
of any compliance costs.
4. Impact on Financial Intermediation
    The possibility of reduced financial intermediation or economic 
output in the United States related to the proposed BBA appears 
unlikely. In this regard, the Board recalls that capital requirements 
under the BBA are taken as they are under the jurisdictional capital 
frameworks, including NAIC RBC, subject to adjustment and scaling that 
does not alter the underlying capital charges. As a result, the BBA is 
not expected to operate to influence insurance depository institution 
holding companies' aggregate investment allocations among asset 
classes, or more generally affect insurance depository institution 
holding companies' role in risk assumption or other financial 
intermediation.

C. Assessment of Benefits and Costs

    Based on an initial assessment of available information, the 
benefits of the proposed BBA are expected to outweigh any costs. Most 
significantly, the intent of the proposed rule is to ensure the safety 
and soundness of the insurance depository institution holding company 
and protect the subsidiary IDI, in fulfillment of the Board's statutory 
mandate. The Board believes this objective would be accomplished, in 
accordance with the Board's supervisory goals, through the proposed BBA 
in a manner that is minimally burdensome and appropriately tailored.
    Question 36: The Board invites comment on all aspects of the 
foregoing evaluation of the costs and benefits of the proposed rule. 
Are there additional costs or benefits that the Board should consider? 
Would the magnitude of costs or benefits be different than as described 
above?

XII. Administrative Law Matters

A. Solicitation of Comments on the Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board has sought to present the proposed rule in a 
simple and straightforward manner, and invites comment on the use of 
plain language.

B. Paperwork Reduction Act

    In connection with the proposed rule, the Board proposes to 
implement a new reporting form that would constitute a ``collection of 
information'' within the meaning of the Paperwork Reduction Act (PRA) 
of 1995 (44 U.S.C. 3501-3521). In accordance with the requirements of 
the PRA, the Board may not conduct or sponsor, and a respondent is not 
required to respond to, an information collection unless it displays a 
currently valid Office of Management and Budget (OMB) control number. 
The OMB control number is 7100-NEW. The Board reviewed the proposed 
information collection under the authority delegated to the Board by 
the OMB.
    The proposed reporting form is subject to the PRA. The form would 
be implemented pursuant to section 171 of the Dodd-Frank Act and 
section 10 of HOLA for insurance depository institution holding 
companies.
    Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the Board's functions, including whether the 
information has practical utility;
    (b) The accuracy of the Board's estimate of the burden of the 
information collections, including the validity of the methodology and 
assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to the 
addresses listed in the ADDRESSES section. A copy of the comments may 
also be submitted to the OMB desk officer: By mail to U.S. Office of 
Management and Budget, 725 17th Street NW, #10235, Washington, DC 20503 
or by facsimile to (202) 395-5806.
Proposed Information Collection
    Title of Information Collection: Reporting Form for the Capital 
Requirements for Board-regulated Institutions Significantly Engaged in 
Insurance Activities.
    Agency Form Number: FR Q-1.
    OMB Control Number: 7100-NEW.
    Frequency of Response: Annual.
    Affected Public: Businesses or other for-profit.
    Respondents: Insurance depository institution holding companies.
    Abstract: Section 171 of the Dodd-Frank Act requires, and section 
10 of the Home Owners' Loan Act authorizes, the Board to implement 
risk-based capital requirements for depository institution holding 
companies, including those that are significantly engaged in insurance 
activities.
    Current Actions: Pursuant to section 171 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act and section 10 of HOLA, the 
Board is proposing the application of risk-based capital requirements 
to certain depository institution holding companies. The Board is 
proposing an aggregation-based approach, the Building Block Approach, 
that would aggregate capital resources and capital requirements across 
the different legal entities under an insurance depository institution 
holding company to calculate consolidated, enterprise-wide

[[Page 57274]]

qualifying and required capital. The proposed BBA utilizes, to the 
greatest extent possible, capital frameworks already in place for the 
entities in the enterprise of a depository institution holding company 
significantly engaged in insurance activities and is tailored to the 
supervised firm's business model, capital structure, and risk profile. 
The new reporting form FR Q-1 would require a depository institution 
holding company to produce certain information required for the 
application of the BBA. The proposed reporting form and instructions 
are available on the Board's public website at https://www.federalreserve.gov/apps/reportforms/review.aspx.
Estimated Paperwork Burden
    Estimated number of respondents: 8.
    Estimated average hours per response: 40 (Initial set-up 160).
    Estimated annual burden hours: 1,600 (1,280 for initial set-up and 
320 for ongoing compliance).

C. Regulatory Flexibility Act

    In accordance with section 3(a) of the Regulatory Flexibility Act 
\86\ (RFA), the Board is publishing an initial regulatory flexibility 
analysis of the proposed rule. The RFA requires an agency to either 
provide an initial regulatory flexibility analysis with a proposed rule 
for which a general notice of proposed rulemaking is required, or 
certify that the proposed rule will not have a significant economic 
impact on a substantial number of small entities. Based on its analysis 
and for the reasons stated below, the Board believes that this proposed 
rule will not have a significant economic impact on a substantial 
number of small entities. Nevertheless, the Board is publishing an 
initial regulatory flexibility analysis. A final regulatory flexibility 
analysis will be conducted after comments received during the public 
comment period have been considered.
---------------------------------------------------------------------------

    \86\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    In accordance with section 171 of the Dodd-Frank Act and section 10 
of HOLA, the Board is proposing to adopt subpart J to 12 CFR part 217 
(Regulation Q) to establish risk-based capital requirements for 
insurance depository institution holding companies.\87\ An insurance 
depository institution holding company's aggregate capital requirements 
generally would be the sum of the capital requirements applicable to 
the top-tier parent and certain subsidiaries of the insurance 
depository institution holding company, where the capital requirements 
for regulated financial subsidiaries would generally be based on the 
regulatory capital rules of the subsidiaries' functional regulators--
whether a state or foreign insurance regulator for insurance 
subsidiaries or a Federal banking regulator for IDIs. The BBA would 
then build upon and aggregate capital resources and requirements across 
groups of legal entities in the insurance depository institution 
holding company's enterprise (insurance, non-insurance financial, non-
financial, and holding company), subject to adjustments.
---------------------------------------------------------------------------

    \87\ See 12 U.S.C. 1467a and 5371.
---------------------------------------------------------------------------

    Under Small Business Administration (SBA) regulations, the finance 
and insurance sector includes direct life insurance carriers, direct 
title insurance carriers, and direct P&C insurance carriers, which 
generally are considered ``small'' for the purposes of the RFA if a 
life insurance carrier or title insurance carrier has assets of $38.5 
million or less or if a P&C insurance carrier has less than 1,500 
employees.\88\ The Board believes that the finance and insurance sector 
constitutes a reasonable universe of firms for these purposes because 
this proposal would only apply to depository institution holding 
companies significantly engaged in insurance activities, as discussed 
in the SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

    \88\ 13 CFR 121.201.
---------------------------------------------------------------------------

    Life insurance companies and title insurance companies that would 
be subject to the proposed rule all substantially exceed the $38.5 
million asset threshold at which they would be considered a ``small 
entity'' under SBA regulations. P&C insurance companies subject to the 
proposed rule exceed the less than 1,500 employee threshold at which a 
P&C entity is considered a ``small entity'' under SBA regulations.
    Because the proposed rule is not likely to apply to any life 
insurance carrier or title insurance carrier with assets of $38.5 
million, or P&C carrier with less than 1,500 employees, if adopted in 
final form, it is not expected to apply to a substantial number of 
small entities for purposes of the RFA. The Board does not believe that 
the proposed rule duplicates, overlaps, or conflicts with any other 
federal rules. In light of the foregoing, the Board does not believe 
that the proposed rule, if adopted in final form, would have a 
significant economic impact on a substantial number of small entities 
supervised. Nonetheless, the Board seeks comment on whether the 
proposed rule would impose undue burdens on, or have unintended 
consequences for, small organizations, and whether there are ways such 
potential burdens or consequences could be minimized in a manner 
consistent with section 171 of the Dodd-Frank Act and section 10 of 
HOLA.

List of Subjects

12 CFR Part 217

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

12 CFR Part 252

    Administrative practice and procedure, Banks, banking, Credit, 
Federal Reserve System, Holding companies, Investments, Qualified 
financial contracts, Reporting and recordkeeping requirements, 
Securities.

Authority and Issuance

    For the reasons set forth in the preamble, the Board of Governors 
of the Federal Reserve System proposes to amend chapter II of title 12 
of the Code of Federal Regulations as follows:

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

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

     Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1851, 3904, 
3906-3909, 4808, 5365, 5368, 5371.

Subpart A--General Provisions

0
2. Section 217.1 is amended by:
0
a. Revising paragraphs (c)(1)(ii) and (iii);
0
b. Redesignating paragraphs (c)(2) through (5) as paragraphs (c)(3) 
through (6); and
0
c. Adding new paragraph (c)(2).
    The revisions and additions read as follows:


Sec.  217.1   Purpose, applicability, reservations of authority, and 
timing.

* * * * *
    (c) * * *
    (1) * * *
    (ii) A bank holding company domiciled in the United States that is 
not subject to the Small Bank Holding Company and Savings and Loan 
Holding Company Policy Statement (part 225, appendix C of this 
chapter), provided that the Board may by order apply any or all of this 
part to any bank holding company, based on the institution's size, 
level of complexity,

[[Page 57275]]

risk profile, scope of operations, or financial condition; or
    (iii) A covered savings and loan holding company domiciled in the 
United States that is not subject to the Small Bank Holding Company and 
Savings and Loan Holding Company Policy Statement (part 225, appendix C 
of this chapter). For purposes of compliance with the capital adequacy 
requirements and calculations in this part, savings and loan holding 
companies that do not file the FR Y-9C should follow the instructions 
to the FR Y-9C.
    (2) Insurance Savings and Loan Holding Companies. (i) In the case 
of a covered savings and loan holding company that does not calculate 
consolidated capital requirements under subpart B of this part because 
it is a state regulated insurer, subpart B of this part applies to a 
savings and loan holding company that is a subsidiary of such covered 
savings and loan holding company, provided:
    (A) The subsidiary savings and loan holding company is an insurance 
SLHC mid-tier holding company; and
    (B) The subsidiary savings and loan holding company's assets and 
liabilities are not consolidated with those of a savings and loan 
holding company that controls the subsidiary for purposes of 
determining the parent savings and loan holding company's capital 
requirements and capital ratios under subparts B through F of this 
part.
    (ii) Insurance savings and loan holding companies and treatment of 
subsidiary state regulated insurers, regulated foreign subsidiaries and 
regulated foreign affiliates.
    (A) In complying with the capital adequacy requirements of this 
part (except for the requirements and calculations of subpart J of this 
part), including any determination of applicability under Sec.  217.100 
or Sec.  217.201, an insurance savings and loan holding company, or an 
insurance SLHC mid-tier holding company, may elect to:

Option 1: Deduction

    (1) Not consolidate the assets and liabilities of its subsidiary 
state-regulated insurers, regulated foreign subsidiaries and regulated 
foreign affiliates; and
    (2) Deduct the aggregate amount of its outstanding equity 
investment, including retained earnings, in such subsidiaries and 
affiliates.

Option 2: Risk-Weight

    (1) Not consolidate the assets and liabilities of its subsidiary 
state-regulated insurers, regulated foreign subsidiaries and regulated 
foreign affiliates;
    (2) Include in the risk-weighted assets of the Board-regulated 
institution the aggregate amount of its outstanding equity investment, 
including retained earnings, in such subsidiaries and affiliates and 
assign to these assets a 400 percent risk weight in accordance with 
Sec.  217.52.
    (B) Nonconsolidation election for state regulated insurers, 
regulated foreign subsidiaries and regulated foreign affiliates. (1) An 
insurance savings and loan holding company or insurance SLHC mid-tier 
holding company may elect not to consolidate the assets and liabilities 
of all of its subsidiary state regulated insurers, regulated foreign 
subsidiaries and regulated foreign affiliates by indicating that it has 
made this election on the applicable regulatory report, filed by the 
insurance savings and loan holding company or insurance SLHC mid-tier 
holding company for the first reporting period in which it is an 
insurance savings and loan holding company or insurance SLHC mid-tier 
holding company.
    (2) An insurance savings and loan holding company or insurance SLHC 
mid-tier holding company that has not made an effective election 
pursuant to paragraph (C)(2)(B)(1) of this section, or that seeks to 
change its election due to a change in control, business combination, 
or other legitimate business purpose, may do so only with the prior 
approval of the Board, effective as of the reporting date of the first 
reporting period after the period in which the Board approves the 
election, or such other date specified in the approval.
* * * * *
0
3. In Sec.  217.2,
0
a. Revising the definition of ``Covered savings and loan holding 
company, '' and
0
b. Adding the definitions of ``Capacity as a regulated insurance 
entity'', ``Insurance savings and loan holding company'', ``Insurance 
SLHC mid-tier holding company'', ``Regulated foreign subsidiary and 
regulated foreign affiliate'', and ``State regulated insurer''.
    The revision and additions read as follows:


Sec.  217.2   Definitions.

* * * * *
    Capacity as a regulated insurance entity has the meaning in section 
171(a)(7) of the Dodd-Frank Act (12 U.S.C. 5371(a)(7)).
* * * * *
    Covered savings and loan holding company means a top-tier savings 
and loan holding company other than:
    (1) An institution that meets the requirements of section 
10(c)(9)(C) of HOLA (12 U.S.C. 1467a(c)(9)(C)); and
    (2) As of June 30 of the previous calendar year, derived 50 percent 
or more of its total consolidated assets or 50 percent of its total 
revenues on an enterprise-wide basis (as calculated under GAAP) from 
activities that are not financial in nature under section 4(k) of the 
Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)).
* * * * *
    Insurance savings and loan holding company means:
    (1) A top-tier savings and loan holding company that is an 
insurance underwriting company; or
    (2)(i) A top-tier savings and loan holding company that, as of June 
30 of the previous calendar year, held 25 percent or more of its total 
consolidated assets in subsidiaries that are insurance underwriting 
companies (other than assets associated with insurance underwriting for 
credit risk); and
    (ii) For purposes of this definition, the company must calculate 
its total consolidated assets in accordance with GAAP, or if the 
company does not calculate its total consolidated assets under GAAP for 
any regulatory purpose (including compliance with applicable securities 
laws), the company may estimate its total consolidated assets, subject 
to review and adjustment by the Board.
    Insurance SLHC mid-tier holding company means a savings and loan 
holding company domiciled in the United States that:
    (1) Is a subsidiary of an insurance savings and loan holding 
company to which subpart J applies; and
    (2) Is not an insurance underwriting company that is subject to 
state-law capital requirements.
    Regulated foreign subsidiary and regulated foreign affiliate has 
the meaning in section 171(a)(6) of the Dodd-Frank Act (12 U.S.C. 
5371(a)(6)) and any subsidiary of such a person other than a state 
regulated insurer.
* * * * *
    State regulated insurer means a person regulated by a state 
insurance regulator as defined in section 1002(22) of the Dodd-Frank 
Act (12 U.S.C. 5481(22)), and any subsidiary of such a person, other 
than a regulated foreign subsidiary and regulated foreign affiliate.
* * * * *

[[Page 57276]]

Subpart B--Capital Ratio Requirements and Buffers

0
4. Section 217.10 is amended by adding paragraphs (a)(4), (6) and (7), 
to read as follows:


Sec.  217.10   Minimum capital requirements.

* * * * *
    (a) * * *
    (4) For a Board-regulated institution other than an insurance 
savings and loan holding company or insurance SLHC mid-tier holding 
company, a leverage ratio of 4 percent.
* * * * *
    (6) An insurance savings and loan holding company that is a state 
regulated insurer is not required to meet the minimum capital ratio 
requirements in paragraphs (a)(1) through (5) of this section, if the 
company uses subpart J of this part for purposes of compliance with the 
capital adequacy requirements and calculations in this part.
    (7) An insurance savings and loan holding company is not required 
to meet the buffer in Sec.  217.11, if the company uses subpart J of 
this part for purposes of compliance with the calculation of its 
capital conservation buffer.
* * * * *
0
5. Section 217.11 is amended by revising paragraph (a)(3) to read as 
follows:


Sec.  217.11   Capital conservation buffer, countercyclical capital 
buffer amount, and GSIB surcharge.

    (a) * * *
* * * * *
    (3) Calculation of Capital Conservation Buffer. (i) For a Board-
regulated institution (other than an insurance savings and loan holding 
company that uses subpart J of this part for the purpose of calculating 
its capital conservation buffer) the capital conservation buffer is 
equal to the lowest of the following ratios, calculated as of the last 
day of the previous calendar quarter based on the Board-regulated 
institution's most recent Call Report, for a state member bank, or FR 
Y-9C, for a bank holding company or savings and loan holding company, 
as applicable:
* * * * *
0
6. In part 217, add subpart J, to read as follows:
Subpart J--Capital Requirements for Board-regulated Institutions 
Significantly Engaged in Insurance Activities
Sec.
207.601 Purpose, applicability, reservations of authority, and scope
207.602 Definitions
207.603 Capital Requirements
207.604 Capital Conservation Buffer
217.605 Determination of Building Blocks
217.606 Scaling Parameters
217.607 Capital Requirements under the Building Block Approach
217.608 Available Capital Resources under the Building Block 
Approach

Subpart J--Capital Requirements for Board-regulated Institutions 
Significantly Engaged in Insurance Activities


Sec.  217.601   Purpose, applicability, reservations of authority, and 
scope

    (a) Purpose. This subpart establishes a framework for assessing 
overall risk-based capital for Board-regulated institutions that are 
significantly engaged in insurance activities. The framework in this 
subpart is used to measure available capital resources and capital 
requirements across a Board-regulated institution and its subsidiaries 
that are subject to diverse applicable capital frameworks, aggregate 
available capital resources and capital requirements, and calculate a 
ratio that reflects the overall capital adequacy of the Board-regulated 
institution. This subpart includes minimum BBA ratio and capital buffer 
requirements, public disclosure requirements, and transition provisions 
for the application of this subpart.
    (b) Applicability. This section applies to every Board-regulated 
institution that is:
    (1) (i) A top-tier depository institution holding company that is 
an insurance underwriting company; or
    (ii) A top-tier depository institution holding company, that, as of 
June 30 of the previous calendar year, held 25 percent or more of its 
total consolidated assets in insurance underwriting companies (other 
than assets associated with insurance underwriting for credit risk). 
For purposes of this subparagraph (b)(ii), the Board-regulated 
institution must calculate its total consolidated assets in accordance 
with U.S. GAAP, or if the Board-regulated institution does not 
calculate its total consolidated assets under U.S. GAAP for any 
regulatory purpose (including compliance with applicable securities 
laws), the company may estimate its total consolidated assets, subject 
to review and adjustment by the Board; or
    (2) An institution that is otherwise subject to this subpart, as 
determined by the Board.
    (c) Exclusion of certain SLHCs. This subpart shall not apply to a 
top-tier depository institution holding company that
    (i) Exclusively files financial statements in accordance with SAP;
    (ii) Is not subject to a State insurance capital requirement; and
    (iii) Has no subsidiary depository institution holding company that
    (A) Is subject to a capital requirement; or
    (B) Does not exclusively file financial statements in accordance 
with SAP.
    (d) Reservation of authority.
    (1) Regulatory capital resources.
    (i) If the Board determines that a particular company capital 
element has characteristics or terms that diminish its ability to 
absorb losses, or otherwise present safety and soundness concerns, the 
Board may require the supervised insurance organization to exclude all 
or a portion of such element from building block available capital for 
a depository institution holding company in the supervised insurance 
organization.
    (ii) Notwithstanding the provisions set forth in Sec.  217.608, the 
Board may find that a capital resource may be included in the building 
block available capital of a depository institution holding company on 
a permanent or temporary basis consistent with the loss absorption 
capacity of the capital resource and in accordance with Sec.  
217.608(g).
    (2) Required capital amounts. If the Board determines that the 
building block capital requirement for any depository institution 
holding company is not commensurate with the risks of the depository 
institution holding company, the Board may adjust the building block 
capital requirement and building block available capital for the 
supervised insurance organization.
    (3) Structural requirements. In order to achieve the appropriate 
application of this subpart, the Board may require a supervised 
insurance organization to take any of the following actions with 
respect to the application of this subpart, if the Board determines 
that such action would better reflect the risk profile of an inventory 
company or the supervised insurance organization:
    (i) Identify an inventory company that is a depository institution 
holding company as a top-tier depository institution holding company, 
or vice versa;
    (ii) Identify any company as an inventory company, material 
financial entity, or building block parent;
    (iii) Reverse the identification of a building block parent; or
    (iv) Set a building block parent's allocation share of a downstream 
building block parent equal to 100 percent.
    (e) Other reservation of authority. With respect to any treatment 
required under this subpart, the Board may require a different 
treatment, provided

[[Page 57277]]

that such alternative treatment is commensurate with the supervised 
insurance organization's risk and consistent with safety and soundness.
    (f) Notice and response procedures. In making any determinations 
under this subpart, the Board will apply notice and response procedures 
in the same manner as the notice and response procedures in section 
263.202 of this chapter.


Sec.  217.602   Definitions

    (a) Terms that are set forth in Sec.  217.2 and used in this 
subpart have the definitions assigned thereto in Sec.  217.2.
    (b) For the purposes of this subpart, the following terms are 
defined as follows:
    Allocation share means the portion of a downstream building block's 
available capital or building block capital requirement that a building 
block parent must aggregate in calculating its own building block 
available capital or building block capital requirement, as applicable.
    Applicable capital framework is defined in Sec.  217.605, provided 
that for purposes of Sec.  217.605(b)(2), the NAIC RBC frameworks for 
life insurance, fraternal insurers, property and casualty insurance, 
and health insurance companies are different applicable capital 
frameworks.
    Assignment means the process of associating an inventory company 
with one or more building block parents for purposes of inclusion in 
the building block parents' building blocks.
    BBA ratio is defined in Sec.  217.603.
    Building block means a building block parent and all downstream 
companies and subsidiaries assigned to the building block parent.
    Building block available capital has the meaning set out in Sec.  
217.608.
    Building block capital requirement has the meaning set out in Sec.  
217.607.
    Building block parent means the lead company of a building block 
whose applicable capital framework must be applied to all members of a 
building block for purposes of determining building block available 
capital and the building block capital requirement.
    Capital-regulated company means a company in a supervised insurance 
organization that is directly subject to a regulatory capital 
framework.
    Common capital framework means NAIC RBC.
    Company available capital means, for a company, the amount of its 
company capital elements, net of any adjustments and deductions, as 
determined in accordance with the company's applicable capital 
framework.
    Company capital element means, for purposes of this subpart, any 
part, item, component, balance sheet account, instrument, or other 
element qualifying as regulatory capital under a company's applicable 
capital framework prior to any adjustments and deductions under that 
framework.
    Company capital requirement means:
    (1) For a company whose applicable capital framework is NAIC RBC, 
the Authorized Control Level risk-based capital requirement;
    (2) For a company whose applicable capital framework is a U.S. 
federal banking capital rule, the total risk-weighted assets; and
    (3) For any other company, a risk-sensitive measure of required 
capital used to determine the jurisdictional intervention point 
applicable to that company.
    Downstream building block parent means a building block parent that 
is a downstream company of another building block parent.
    Downstream company means a company whose company capital element is 
directly or indirectly owned, in whole or in part by, another company 
in the supervised insurance organization.
    Downstreamed capital means direct ownership of a downstream 
company's company capital element that is accretive to a downstream 
building block parent's building block available capital.
    Engaged in insurance or reinsurance underwriting means, for a 
company, to be regulated as an insurance or reinsurance underwriting 
company, other than insurance underwriting companies that primarily 
underwrite title insurance or insurance for credit risk.
    Financial entity means:
    (1) A bank holding company; a savings and loan holding company as 
defined in section 10(n) of the Home Owners' Loan Act (12 U.S.C. 
1467a(n)); a U.S. intermediate holding company established or 
designated for purposes of compliance with this part;
    (2) A depository institution as defined in section 3(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that 
is organized under the laws of a foreign country and that engages 
directly in the business of banking outside the United States; a 
federal credit union or state credit union as defined in section 2 of 
the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); a national 
association, state member bank, or state nonmember bank that is not a 
depository institution; an institution that functions solely in a trust 
or fiduciary capacity as described in section 2(c)(2)(D) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(c)(2)(D)); an industrial 
loan company, an industrial bank, or other similar institution 
described in section 2(c)(2)(H) of the Bank Holding Company Act of 1956 
(12 U.S.C. 1841(c)(2)(H));
    (3) An entity that is state-licensed or registered as:
    (i) A credit or lending entity, including a finance company; money 
lender; installment lender; consumer lender or lending company; 
mortgage lender, broker, or bank; motor vehicle title pledge lender; 
payday or deferred deposit lender; premium finance company; commercial 
finance or lending company; or commercial mortgage company; except 
entities registered or licensed solely on account of financing the 
entity's direct sales of goods or services to customers;
    (ii) A money services business, including a check casher; money 
transmitter; currency dealer or exchange; or money order or traveler's 
check issuer;
    (4) Any person registered with the Commodity Futures Trading 
Commission as a swap dealer or major swap participant pursuant to the 
Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that 
is registered with the U.S. Securities and Exchange Commission as a 
security-based swap dealer or a major security-based swap participant 
pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et 
seq.);
    (5) A securities holding company as defined in section 618 of the 
Dodd-Frank Act (12 U.S.C. 1850a); a broker or dealer as defined in 
sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(4)-(5)); an investment company registered with the U.S. 
Securities and Exchange Commission under the Investment Company Act of 
1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be 
regulated as a business development company pursuant to section 54(a) 
of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
    (6) A private fund as defined in section 202(a) of the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an 
investment company under section 3 of the Investment Company Act of 
1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is 
deemed not to be an investment company under section 3 of the 
Investment Company Act of 1940 pursuant to Investment Company Act Rule 
3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
    (7) A commodity pool, a commodity pool operator, or a commodity 
trading

[[Page 57278]]

advisor as defined, respectively, in sections 1a(10), 1a(11), and 
1a(12) of the Commodity Exchange Act (7 U.S.C. 1a(10), 1a(11), and 
1a(12)); a floor broker, a floor trader, or introducing broker as 
defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the 
Commodity Exchange Act (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a 
futures commission merchant as defined in section 1a(28) of the 
Commodity Exchange Act (7 U.S.C. 1a(28));
    (8) An entity that is organized as an insurance company, primarily 
engaged in underwriting insurance or reinsuring risks underwritten by 
insurance companies;
    (9) Any designated financial market utility, as defined in section 
803 of the Dodd-Frank Act (12 U.S.C. 5462); and
    (10) An entity that would be a financial entity described in 
paragraphs (1) through (9) of this definition, if it were organized 
under the laws of the United States or any State thereof.
    Inventory has the meaning set out in paragraph (a) of Sec.  
217.602(b)(2).
    Material means, for a company in the supervised insurance 
organization:
    (1) Where the top-tier depository institution holding company's 
total exposure exceeds 1 percent of total consolidated assets of the 
top-tier depository institution holding company. The supervised firm 
must calculate its total consolidated assets in accordance with U.S. 
GAAP, or if the firm does not calculate its total consolidated assets 
under U.S. GAAP for any regulatory purpose (including compliance with 
applicable securities laws), the company may estimate its total 
consolidated assets, subject to review and adjustment by the Board. For 
purposes of this definition, total exposure includes:
    (a) The absolute value of the top-tier depository institution 
holding company's direct or indirect interest in the company capital 
elements of the company;
    (b) The top-tier depository institution holding company or any 
other company in the supervised insurance organization providing an 
explicit or implicit guarantee for the benefit of the company; and
    (c) Potential counterparty credit risk to the top-tier depository 
institution holding company or any other company in the supervised 
insurance organization arising from any derivative or similar 
instrument, reinsurance or similar arrangement, or other contractual 
agreement; or
    (2) The company is otherwise significant in assessing the building 
block available capital or building block capital requirement of the 
top-tier depository institution holding company based on factors 
including risk exposure, activities, organizational structure, 
complexity, affiliate guarantees or recourse rights, and size.
    Material financial entity means a financial entity that, together 
with its subsidiaries, but excluding any subsidiary capital-regulated 
company (or subsidiary thereof), is material, provided that an 
inventory company is not eligible to be a material financial entity if:
    (1) The supervised insurance organization has elected pursuant to 
Sec.  217.605(c) to not treat the company as a material financial 
entity.
    (2) The inventory company is a financial subsidiary, as defined in 
section 121 of the Gramm-Leach-Bliley Act;
    (3) The inventory company is properly registered as an investment 
adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et 
seq.), or with any state.
    Member means, with respect to a building block, the building block 
parent or any of its downstream companies or subsidiaries that have 
been assigned to a building block.
    NAIC means the National Association of Insurance Commissioners.
    NAIC RBC means the most recent version of the Risk-Based Capital 
(RBC) For Insurers Model Act, together with the RBC instructions, as 
adopted in a substantially similar manner by an NAIC member and 
published in the NAIC's Model Regulation Service.
    Permitted Accounting Practice means an accounting practice 
specifically requested by a state regulated insurer that departs from 
SAP and state prescribed accounting practices, and has received 
approval from the state regulated insurer's domiciliary state 
regulatory authority.
    Prescribed Accounting Practice means an accounting practice that is 
incorporated directly or by reference to state laws, regulations and 
general administrative rules applicable to all insurance enterprises 
domiciled in a particular state.
    Recalculated building block capital requirement means, for a 
downstream building block parent and an upstream building block parent, 
the downstream building block parent's building block capital 
requirement recalculated assuming that the downstream building block 
parent had no upstream investment in the upstream building block 
parent.
    Regulatory capital framework means, with respect to a company, the 
applicable legal requirements, excluding this subpart, specifying the 
minimum amount of total regulatory capital the company must hold to 
avoid restrictions on distributions and discretionary bonus payments, 
regulatory intervention on the basis of capital adequacy levels for the 
company, or equivalent standards; provided that for purposes of this 
subpart, the NAIC RBC frameworks for life insurance, fraternal 
insurance, property and casualty insurance, and health insurance 
companies are different regulatory capital frameworks.
    SAP means Statutory Accounting Principles as promulgated by the 
NAIC and adopted by a jurisdiction for purposes of financial reporting 
by insurance companies.
    Scaling means the translation of building block available capital 
and building block capital requirement from one applicable capital 
framework to another by application of Sec.  217.606.
    Scalar-compatible means a capital framework:
    (1) For which the Board has determined scalars; or
    (2) That is an insurance capital regulatory framework, and exhibits 
each of the following three attributes:
    (a) the framework is clearly defined and broadly applicable;
    (b) The framework has an identifiable intervention point that can 
be used to calibrate a scalar; and
    (c) The framework provides a risk-sensitive measure of required 
capital reflecting material risks to a company's financial strength.
    Submission date means the date as of which Form FR Q-1 is filed 
with the Board.
    Supervised insurance organization means:
    (1) In the case of a depository institution holding company, the 
set of companies consisting of:
    (i) A top-tier depository institution holding company that is an 
insurance underwriting company, together with its inventory companies; 
or
    (ii) A top-tier depository institution holding company, together 
with its inventory companies, that, as of June 30 of the previous 
calendar year, held 25 percent or more of its total consolidated assets 
in insurance underwriting companies (other than assets associated with 
insurance underwriting for credit risk). For purposes of this paragraph 
(1)(ii) of this definition, the supervised firm must calculate its 
total consolidated assets in accordance with U.S. GAAP, or if the firm 
does not calculate its total consolidated assets under U.S. GAAP for 
any regulatory purpose (including compliance with applicable securities 
laws), the company may estimate its total consolidated assets, subject 
to review and adjustment by the Board; or

[[Page 57279]]

    (2) An institution that is otherwise subject to this subpart, as 
determined by the Board.
    Tier 2 capital instruments, for purposes of this subpart, has the 
meaning set out in Sec.  217.608(a).
    Top-tier depository institution holding company means a savings and 
loan holding company that is not controlled by another savings and loan 
holding company.
    Upstream building block parent means an upstream company that is a 
building block parent.
    Upstream company means a company within a supervised insurance 
organization that directly or indirectly controls a downstream company, 
or directly or indirectly owns part or all of a downstream company's 
company capital elements.
    Upstream investment means any direct or indirect investment by a 
downstream building block parent in an upstream building block parent.
    U.S. federal banking capital rules mean this part, other than this 
subpart, and the regulatory capital rules promulgated by the Federal 
Deposit Insurance Corporation and the Office of the Comptroller of the 
Currency.


Sec.  217.603   Capital Requirements

    (a) Generally. A supervised insurance organization must determine 
its BBA ratio, subject to the minimum requirement set out in this 
section and buffer set out in Sec.  217.604, for each depository 
institution holding company within its enterprise by:
    (1) Establishing an inventory that includes the supervised 
insurance organization and every company that meets the requirements of 
Sec.  217.605(b)(1);
    (2) Identifying all building block parents as required under Sec.  
217.605(b)(3);
    (3) Determining the available capital and capital requirement for 
each building block parent in accordance with its applicable capital 
framework;
    (4) Determining the building block available capital and building 
block capital requirement for each building block, reflecting 
adjustments and scaling as set out in this subpart;
    (5) Rolling up building block available capital and building block 
capital requirement amounts across all building blocks in the 
supervised insurance organization's enterprise to determine the same 
for any depository institution holding companies in the enterprise; and
    (6) Determining the ratio of building block available capital to 
building block capital requirement for each depository institution 
holding company in the supervised insurance organization.
    (b) Determination of BBA ratio. For a depository institution 
holding company in a supervised insurance organization, the BBA ratio 
is the ratio of the company's building block available capital to the 
company's building block capital requirement, each scaled to the common 
capital framework in accordance with Sec.  217.606. Expressed 
formulaically:
[GRAPHIC] [TIFF OMITTED] TP24OC19.037

    (c) Minimum capital requirement. A depository institution holding 
company in a supervised insurance organization must maintain a BBA 
ratio of at least 250 percent.
    (d) Capital adequacy. (1) Notwithstanding the minimum requirement 
in this subpart, a depository institution holding company in a 
supervised insurance organization must maintain capital commensurate 
with the level and nature of all risks to which the supervised 
insurance organization is exposed. The supervisory evaluation of the 
depository institution holding company's capital adequacy is based on 
an individual assessment of numerous factors, including the character 
and condition of the company's assets and its existing and prospective 
liabilities and other corporate responsibilities.
    (2) A depository institution holding company in a supervised 
insurance organization must have a process for assessing its overall 
capital adequacy in relation to its risk profile and a comprehensive 
strategy for maintaining an appropriate level of capital.


Sec.  217.604   Capital Conservation Buffer

    (a) Application of Sec.  217.11(a). A top-tier depository 
institution holding company in a supervised insurance organization must 
comply with Sec.  217.11(a) as modified solely for application in this 
subpart by:
    (1) Replacing the term ``calendar quarter'' with ``calendar year;''
    (2) Including in the definition of ``distribution'' discretionary 
dividend payments on participating insurance policies;
    (3) In Sec.  217.11(a)(1), replacing ``common equity tier 1 
capital'' with ``building block available capital excluding tier 2 
instruments;''
    (4) Replacing Sec.  217.11(a)(2)(i) in its entirety with the 
following: ``Eligible retained income. The eligible retained income of 
a depository institution holding company in a supervised insurance 
organization is the annual change in the company's building block 
available capital, calculated as of the last day of the current and 
immediately preceding calendar years based on the supervised insurance 
organization's most recent Form FR Q-1, net of any distributions and 
accretion to building block available capital from capital instruments 
issued in the current or immediately preceding calendar year, excluding 
issuances corresponding with retirement of capital instruments under 
paragraph (1) of this section of the definition of distribution;
    (5) Replacing Sec.  217.11(a)(3) in its entirety with the 
following: ``The capital conservation buffer for a depository 
institution holding company in a supervised insurance organization is 
the greater of its BBA ratio, calculated as of the last day of the 
previous calendar year based on the supervised insurance organization's 
most recent Form FR Q-1, minus the minimum capital requirement under 
Sec.  217.603(c), and zero;''
    (6) Replacing Sec.  217.11(a)(4)(ii) in its entirety with the 
following: ``A depository institution holding company in a supervised 
insurance organization with a capital conservation buffer that is 
greater than 235 percent is not subject to a maximum payout amount 
under this section;
    (7) In Sec.  217.11(a)(4)(iii)(B), replacing ``2.5 percent'' with 
``235 percent;''
    (8) Replacing Table 1 to Sec.  217.11 in its entirety with the 
following:

     Table 1 to Sec.   217.604--Calculation of Maximum Payout Amount
------------------------------------------------------------------------
                                             Maximum payout ratio (as a
        Capital conservation buffer            percentage of eligible
                                                  retained income)
------------------------------------------------------------------------
Greater than 235 percent..................  No payout ratio limitation
                                             applies.
Less than or equal to 235 percent, and      60 percent.
 greater than 177 percent.

[[Page 57280]]

 
Less than or equal to 177 percent, and      40 percent.
 greater than 118 percent.
Less than or equal to 118 percent, and      20 percent.
 greater than 59 percent.
Less than or equal to 59 percent..........  0 percent.
------------------------------------------------------------------------

Sec.  217.605  Determination of Building Blocks

    (a) General. A supervised insurance organization must identify each 
building block parent and its allocation share of any downstream 
building block parent, as applicable.
    (b) Operation. To identify building block parents and determine 
allocation shares, a supervised insurance organization must take the 
following steps in the following order:
    (1) Inventory of companies. A supervised insurance organization 
must identify as inventory companies: (i) All companies that are
    (A) Required to be reported on the FR Y-6;
    (B) Required to be reported on the FR Y-10; or
    (C) Classified as affiliates in accordance with NAIC Statement of 
Statutory Accounting Principles (SSAP) No. 25 and the preparation of 
Schedule Y;
    (ii) Any company, special purpose entity, variable interest entity, 
or similar entity that:
    (A) Enters into one or more reinsurance or derivative transactions 
with inventory companies identified pursuant to paragraph (b)(1)(i) of 
this section;
    (B) Is material;
    (C) Is engaged in activities such that one or more inventory 
companies identified pursuant to paragraph (b)(1)(i) of this section 
are expected to absorb more than 50 percent of its expected losses; and
    (D) Is not otherwise identified as an inventory company; and
    (iii) Any other company that the Board determines must be 
identified as an inventory company.
    (2) Determination of applicable capital framework. (i) A supervised 
insurance organization must:
    (A) Determine the applicable capital framework for each inventory 
company; and
    (B) Identify inventory companies that are subject to a regulatory 
capital framework.
    (ii) The applicable capital framework for an inventory company is:
    (A) If the inventory company is not engaged in insurance or 
reinsurance underwriting, the U.S. federal banking capital rules, in 
particular:
    (1) If the inventory company is not a depository institution, 
subparts A through F of this part; and
    (2) If the inventory company is a depository institution, the 
regulatory capital framework applied to the depository institution by 
the appropriate primary federal regulator, i.e., subparts A through F 
of this part (Board), parts 3 of this title (Office of the Comptroller 
of the Currency), or part 324 of this title (Federal Deposit Insurance 
Corporation), as applicable;
    (B) If the inventory company is engaged in insurance or reinsurance 
underwriting and subject to a regulatory capital framework that is 
scalar-compatible, the regulatory capital framework; and
    (C) If the inventory company is engaged in insurance or reinsurance 
underwriting and not subject to a regulatory capital framework that is 
scalar-compatible, then NAIC RBC for life insurers, fraternal insurers, 
health insurers, or property & casualty insurers based on the company's 
primary source of premium revenue.
    (3) Identification of building block parents. A supervised 
insurance organization must identify all building block parents 
according to the following procedure:
    (i) (A) Identify all top-tier depository institution holding 
companies in the supervised insurance organization.
    (B) Any top-tier depository institution holding company is a 
building block parent
    (ii) (A) Identify any inventory company that is a depository 
institution holding company;
    (B) An inventory company identified in paragraph (b)(3)(ii)(A) of 
this section is a building block parent.
    (iii) Identify all inventory companies that are capital-regulated 
companies (i.e., inventory companies that are subject to a regulatory 
capital framework) or material financial entities.
    (iv) (A) Of the inventory companies identified in paragraph 
(b)(3)(iii) of this section, identify any inventory company that:
    (1) Is assigned an applicable capital framework that is different 
from the applicable capital framework of any next upstream inventory 
company identified in paragraphs (b)(3)(i) through (iii) of this 
section; \1\ and
---------------------------------------------------------------------------

    \1\ In a simple structure, an inventory company would compare 
its applicable capital framework to the applicable capital framework 
of its parent company. However, if the parent company does not meet 
the criteria to be identified as a building block parent, the 
inventory company must compare its capital framework to the next 
upstream company that is eligible to be identified as a building 
block parent. For purposes of this paragraph (b)(3)(iv) of this 
section, a company is ``next upstream'' to a downstream company if 
it owns, in whole or in part, the downstream company either 
directly, or indirectly other than through a company identified in 
paragraphs (b)(3)(ii) through (iii) of this section.
---------------------------------------------------------------------------

    (2) Is assigned an applicable capital framework for which the Board 
has determined a scalar or, if the company in aggregate with all other 
companies subject to the same applicable capital framework are 
material, a provisional scalar;
    (B) Of the inventory companies identified in paragraph (b)(3)(iii) 
of this section, identify any inventory company that:
    (1) Is assigned an applicable capital framework that is the same as 
the applicable capital framework of each next upstream inventory 
company identified in paragraphs (b)(3)(i) through (iii) of this 
section;
    (2) Is assigned an applicable capital framework for which the Board 
has determined a scalar or, if the company in aggregate with all other 
companies subject to the same applicable capital framework are 
material, a provisional scalar; and
    (3) Is owned, in whole or part, by an inventory company that is 
subject to the same regulatory capital framework and the owner:
    (i) Applies a charge on the inventory company's equity value in 
calculating its company capital requirement; or
    (ii) Deducts all or a portion of its investment in the inventory 
company in calculating its company available capital.
    (C) An inventory company identified in paragraph (b)(3)(iv)(A) 
through (B) of this section is a building block parent.
    (v) Include any inventory company identified in paragraph 
(b)(1)(ii) of this section as a building block parent.
    (vi) (A) Identify any inventory company
    (1) For which more than one building block parent, as identified 
pursuant to paragraphs (b)(3)(i) through (v) of this section, owns a 
company capital element either directly or indirectly other than 
through another such building block parent; and
    (2) (i) Is consolidated under any such building block parent's 
applicable capital framework; or

[[Page 57281]]

    (ii) Owns downstreamed capital.
    (B) An inventory company identified in paragraph (b)(3)(vi)(A) of 
this section is a building block parent.
    (4) Building blocks. (A) Except as provided in paragraph (b)(4)(B) 
of this section, a supervised insurance organization must assign an 
inventory company to the building block of any building block parent 
that owns a company capital element of the inventory company, or of 
which the inventory company is a subsidiary,\2\ directly or indirectly 
through any company other than a building block parent, unless the 
inventory company is a building block parent.
---------------------------------------------------------------------------

    \2\ For purposes of this section, subsidiary includes a company 
that is required to be reported on the FR Y-6, FR Y-10, or NAIC's 
Schedule Y, as applicable.
---------------------------------------------------------------------------

    (B) A supervised insurance organization is not required to assign 
to a building block any inventory company that is not a downstream 
company or subsidiary of a top-tier depository institution holding 
company.
    (5) Financial Statements. The supervised insurance organization 
must:
    (i) For any inventory company whose applicable capital framework is 
NAIC RBC, prepare financial statements in accordance with SAP; and
    (ii) For any building block parent whose applicable capital 
framework is subparts A through F of this part:
    (A) Apply the same elections and treatment of exposures as are 
applied to the subsidiary depository institution;
    (B) Apply subparts A through F of this part, to the members of the 
building block of which the building block parent is a member, on a 
consolidated basis, to the same extent as if the building block parent 
were a Board-regulated institution; and
    (C) Where the building block parent is not the top-tier depository 
institution holding company, not deduct investments in capital of 
unconsolidated financial institutions, nor exclude these investments 
from the calculation of risk-weighted assets.
    (6) Allocation share. A supervised insurance organization must, for 
each building block parent, identify any downstream building block 
parent owned directly or indirectly through any company other than a 
building block parent, and determine the building block parent's 
allocation share of these downstream building block parents pursuant to 
paragraph (d) of this section.
    (c) Material financial entity election. (1) A supervised insurance 
organization may elect to not treat an inventory company meeting the 
criteria in paragraph (c)(2) of this section as a material financial 
entity. An election under this section must be included with the first 
financial statements submitted to the Board after the company is 
included in the supervised insurance organization's inventory.
    (2) The election in paragraph (c)(1) of this section is available 
as to an inventory company if:
    (i) That company engages in transactions consisting solely of 
either (A) transactions for the purpose of transferring risk from one 
or more affiliates within the supervised insurance organization to one 
or more third parties; or (B) transactions to invest assets contributed 
to the company by one or more affiliates within the supervised 
insurance organization, where the company is established for purposes 
of limiting tax obligation or legal liability; and
    (ii) The supervised insurance organization is able to calculate the 
adjustment required in Sec.  217.607(b)(4).
    (d) Allocation share. (1) Except as provided in paragraph (d)(2) of 
this section, a building block parent's allocation share of a 
downstream building block parent is calculated as Allocation Share 
UpBBP =
[GRAPHIC] [TIFF OMITTED] TP24OC19.038

(i) UpBBP = The building block parent that owns a company capital 
element of DownBBP directly or indirectly through a member of 
UpBBP's building block.
(ii) DownBBP = The building block parent whose company capital 
element is owned by UpBBP directly or indirectly through a member of 
UpBBP's building block.
(iii) Tier2 = The value of tier 2 instruments issued by DownBBP, 
where Tier2UpBBP is the amount that is owned by any 
member of UpBBP's building block and Tier2Total is the 
total amount issued by DownBBP.\3\
---------------------------------------------------------------------------

    \3\ The amounts of Tier2 should be valued consistently with how 
the instruments are reported in DownBBP's financial statements.
---------------------------------------------------------------------------

(iv) UpInvestment = Any upstream investment by DownBBP in UpBBP.\4\
---------------------------------------------------------------------------

    \4\ The amount of the upstream investment is calculated as the 
impact, excluding any impact on taxes, on DownBBP's company 
available capital if DownBBP were to deduct the investment.
---------------------------------------------------------------------------

(v) ProRataAllocationUpBBP = UpBBP's share of DownBBP 
based on equity ownership of DownBBP, including associated paid-in 
capital.
(vi) DownAC = Total building block available capital of DownBBP.

    (2) The top-tier depository institution's allocation share of a 
building block parent identified under paragraph (b)(3)(v) of this 
section is 100 percent. Any other building block parent's allocation 
share of such building block parent is zero.


Sec.  217.606   Scaling Parameters

    (a) Scaling specified by the Board.
    (1) Scaling between the U.S. federal banking capital rules and NAIC 
RBC.
    (i) Scaling capital requirement. When calculating (in accordance 
with Sec.  217.607) the building block capital requirement for a 
building block parent, the applicable capital framework which is NAIC 
RBC or the U.S. federal banking capital rules, and where the applicable 
capital framework of the appropriate downstream building block parent 
is NAIC RBC or the U.S. federal banking capital rules, the capital 
requirement scaling modifier is provided by Table 1 to Sec.  217.606.

  Table 1 to Sec.   217.606--Capital Requirement Scaling Modifiers for
           NAIC RBC and the U.S. Federal Banking Capital Rules
------------------------------------------------------------------------
                                     Upstream building block parent's
                                       applicable capital framework:
    Downstream building block    ---------------------------------------
   parent's applicable capital                           U.S. federal
           framework:                  NAIC RBC        banking  capital
                                                             rules
------------------------------------------------------------------------
U.S. federal banking capital      1.06 percent        1.
 rules.                            (i.e., 0.0106).

[[Page 57282]]

 
NAIC RBC........................  1.................  94.3.
------------------------------------------------------------------------

    (ii) Scaling available capital. When calculating (in accordance 
with Sec.  217.608) the building block available capital for a building 
block parent, the applicable capital framework which is NAIC RBC or the 
U.S. federal banking capital rules, and where the applicable capital 
framework of the appropriate downstream building block parent is NAIC 
RBC or the U.S. federal banking capital rules, the available capital 
scaling modifier is provided by Table 2 to Sec.  217.606.

 Table 2 to Sec.   217.606--Available Capital Scaling Modifiers for NAIC
             RBC and the U.S. Federal Banking Capital Rules
------------------------------------------------------------------------
                                     Upstream building block parent's
                                       applicable capital framework:
    Downstream building block    ---------------------------------------
   parent's applicable capital                           U.S. federal
           framework:                  NAIC RBC         banking capital
                                                             rules
------------------------------------------------------------------------
U.S. federal banking capital      Recalculated        0.
 rules.                            building block
                                   capital
                                   requirement * -
                                   6.3 percent
                                   (i.e., -0.063).
NAIC RBC........................  0.................  Recalculated
                                                       building block
                                                       capital
                                                       requirement *
                                                       5.9.
------------------------------------------------------------------------

    (2) [Reserved]
    (b) Scaling not specified by the Board but framework is scalar-
compatible. Where scaling modifier to be used in Sec.  217.607 or Sec.  
217.608 is not specified in paragraph (a) of this section, and the 
building block parent's applicable capital framework is scalar-
compatible, the scaling modifier is determined as follows:
    (1) Definitions. For purposes of this section, the following 
definitions apply:
    (i) Jurisdictional intervention point. The jurisdictional 
intervention point is the capital level, under the laws of the 
jurisdiction, at which the supervisory authority in the jurisdiction 
may intervene as to a company subject to the applicable capital 
framework by imposing restrictions on distributions and discretionary 
bonus payments by the company or, if no such intervention may occur in 
a jurisdiction, then the capital level at which the supervisory 
authority would first have the authority to take action against a 
company based on its capital level; and
    (ii) Jurisdiction adjustment. The jurisdictional adjustment is the 
risk adjustment set forth in Table 3 to Sec.  217.606, based on the 
country risk classification set by the Organization for Economic 
Cooperation and Development for the jurisdiction.

  Table 3 to Sec.   217.606--Jurisdictional Adjustments by OECD Country
                           Risk Classification
------------------------------------------------------------------------
                                                         Jurisdictional
                       OECD CRC                            Adjustment
                                                           (percent)
------------------------------------------------------------------------
0-1, including jurisdictions with no OECD country                      0
 risk classification.................................
2....................................................                 20
3....................................................                 50
4-6..................................................                100
7....................................................                150
------------------------------------------------------------------------

    (2) Scaling capital requirement. When calculating (in accordance 
with Sec.  217.607) the building block capital requirement for a 
building block parent, where the applicable capital framework of the 
appropriate downstream building block parent is a scalar-compatible 
framework for which the Board has not specified a capital requirement 
scaling modifier, the capital requirement scaling modifier is equal to:
[GRAPHIC] [TIFF OMITTED] TP24OC19.039

Where:

Adjustmentscaling from is equal to the jurisdictional adjustment of 
the downstream building block parent;
Requirementscaling from is equal to the jurisdictional intervention 
point of the downstream building block parent; and
Requirementscaling to is equal to the jurisdictional intervention 
point of the upstream building block parent.

    (3) Scaling available capital. When calculating (in accordance with 
Sec.  217.608) the building block available capital for a building 
block parent, where the applicable capital framework of the appropriate 
downstream building block parent is a scalar-compatible framework for 
which the Board has not specified an available capital scaling 
modifier, the available capital scaling modifier is equal to zero.


Sec.  217.607  Capital Requirements under the Building Block Approach

    (a) Determination of building block capital requirement. For each 
building block parent, building block capital requirement means the sum 
of the items

[[Page 57283]]

in paragraphs (a)(1) through (2) of this section:
    (1) The company capital requirement of the building block parent;
    (i) Recalculated under the assumption that members of the building 
block parent's building block had no investment in any downstream 
building block parent; and
    (ii) Adjusted pursuant to paragraph (b) of this section;
    (2) For each downstream building block parent, the adjusted 
downstream building block capital requirement (BBCRADJ), which equals:

BBCRADJ = BBCRDS [middot] CRSM [middot] AS

Where:

(i) BBCRDS = The building block capital requirement of the 
downstream building block parent recalculated under the assumption 
that the downstream building block parent had no upstream investment 
in the building block parent;
(ii) CRSM = The appropriate capital requirement scaling modifier 
under Sec.  217.606; and
(iii) AS = The building block parent's allocation share of the 
downstream building block parent.

    (b) Adjustments in determining the building block capital 
requirement. A supervised insurance organization subject to this 
subpart must adjust the company capital requirement for any building 
block parent as follows:
    (1) Internal credit risk charges. A supervised insurance 
organization must deduct from the building block parent's company 
capital requirement any difference between:
    (i) The building block parent's company capital requirement; and
    (ii) The building block parent's company capital requirement 
recalculated excluding capital requirements related to potential for 
the possibility of default of any company in the supervised insurance 
organization.
    (2) Permitted accounting practices and prescribed accounting 
practices. A supervised insurance organization must deduct from the 
building block parent's company capital requirement any difference 
between:
    (i) The building block parent's company capital requirement, after 
making any adjustment in accordance with paragraph (b)(1) of this 
section; and
    (ii) The building block parent's company capital requirement, after 
making any adjustment in accordance with paragraph (b)(1) of this 
section, recalculated under the assumption that neither the building 
block parent, nor any company that is a member of that building block 
parent's building block, had prepared its financial statements with the 
application of any permitted accounting practice, prescribed accounting 
practice, or other practice, including legal, regulatory, or accounting 
procedures or standards, that departs from a solvency framework as 
promulgated for application in a jurisdiction.
    (3) Transitional measures in applicable capital frameworks. A 
supervised institution must deduct from the building block parent's 
company capital requirement any difference between:
    (i) The building block parent's company capital requirement; and
    (ii) The building block parent's company capital requirement 
recalculated under the assumption that neither the building block 
parent, nor any company that is a member of the building block parent's 
building block, had prepared its financial statements with the 
application of any grandfathering or transitional measures under the 
building block parent's applicable capital framework, unless the 
application of these measures has been approved by the Board.
    (4) Risks of certain intermediary entities. Where a supervised 
insurance organization has made an election with respect to a company 
not to treat that company as a material financial entity pursuant to 
Sec.  217.605(c), the supervised insurance organization must add to the 
company capital requirement of any building block parent, whose 
building block contains a member, with which the company engages in one 
or more transactions, and for which the company engages in one or more 
transactions described in Sec.  217.605(c)(2) with a third party, any 
difference between:
    (i) The building block parent's company capital requirement; and
    (ii) The building block parent's company capital requirement 
recalculated with the risks of the company, excluding internal credit 
risks described in paragraph (b)(1) of this section, allocated to the 
building block parent, reflecting the transaction(s) that the company 
engages in with any member of the building block parent's building 
block.\1\
---------------------------------------------------------------------------

    \1\ The total allocation of the risks of the intermediary entity 
to building block parents must capture all material risks and avoid 
double counting.
---------------------------------------------------------------------------

    (5) Investments in own capital instruments.
    (i) A supervised insurance organization must deduct from the 
building block parent's company capital requirement any difference 
between:
    (A) The building block parent's company capital requirement; and
    (B) The building block parent's company capital requirement 
recalculated after assuming that neither the building block parent, nor 
any company that is a member of the building block parent's building 
block, held any investment in the building block parent's own capital 
instrument(s), including any net long position determined in accordance 
with paragraph (b)(5)(ii) of this section.
    (ii) Net long position. For purposes of calculating an investment 
in a building block parent's own capital instrument under this section, 
the net long position is determined in accordance with Sec.  217.22(h), 
provided that a separate account asset or associated guarantee is not 
regarded as an indirect exposure unless the net long position of the 
fund underlying the separate account asset (determined in accordance 
with Sec.  217.22(h) without regard to this paragraph) equals or 
exceeds 5 percent of the value of the fund.
    (6) Risks relating to title insurance. A supervised insurance 
organization must add to the building block parent's company capital 
requirement the amount of the building block parent's reserves for 
claims pertaining to title insurance, multiplied by 300 percent.


Sec.  217.608   Available Capital Resources under the Building Block 
Approach

    (a) Qualifying capital instruments.
    (1) Under this subpart, a qualifying capital instrument with 
respect to a building block parent is a capital instrument that meets 
the following criteria:
    (i) The instrument is issued and paid-in;
    (ii) The instrument is subordinated to depositors and general 
creditors of the building block parent;
    (iii) The instrument is not secured, not covered by a guarantee of 
the building block parent or of an affiliate of the building block 
parent, and not subject to any other arrangement that legally or 
economically enhances the seniority of the instrument in relation to 
more senior claims;
    (iv) The instrument has a minimum original maturity of at least 
five years. At the beginning of each of the last five years of the life 
of the instrument, the amount that is eligible to be included in 
building block available capital is reduced by 20 percent of the 
original amount of the instrument (net of redemptions), and is excluded 
from building block available capital when the remaining maturity is 
less than one year. In addition, the instrument must not have any terms 
or features that require, or create significant incentives

[[Page 57284]]

for, the building block parent to redeem the instrument prior to 
maturity.\1\
---------------------------------------------------------------------------

    \1\ An instrument that by its terms automatically converts into 
a qualifying capital instrument prior to five years after issuance 
complies with the five-year maturity requirement of this criterion.
---------------------------------------------------------------------------

    (v) The instrument, by its terms, may be called by the building 
block parent only after a minimum of five years following issuance, 
except that the terms of the instrument may allow it to be called 
sooner upon the occurrence of an event that would preclude the 
instrument from being included in the building block parent's company 
available capital or building block available capital, a tax event, or 
if the issuing entity is required to register as an investment company 
pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et 
seq.). In addition:
    (A) The top-tier depository institution holding company must 
receive the prior approval of the Board to exercise a call option on 
the instrument.
    (B) The building block parent does not create at issuance, through 
action or communication, an expectation the call option will be 
exercised.
    (C) Prior to exercising the call option, or immediately thereafter, 
the Board-regulated institution must either: Replace any amount called 
with an equivalent amount of an instrument that meets the criteria for 
regulatory capital under this section; \2\ or demonstrate to the 
satisfaction of the Board that following redemption, the Board-
regulated institution would continue to hold an amount of capital that 
is commensurate with its risk.
---------------------------------------------------------------------------

    \2\ A building block parent may replace qualifying capital 
instruments concurrent with the redemption of existing qualifying 
capital instruments.
---------------------------------------------------------------------------

    (vi) Redemption of the instrument prior to maturity or repurchase 
requires the prior approval of the Board.
    (vii) The instrument meets the criteria in Sec.  217.20(d)(1)(vi) 
through (ix) and Sec.  217.20(d)(1)(xi), except that each instance of 
``Board-regulated institution'' is replaced with ``building block 
parent'' and, in Sec.  217.20(d)(1)(ix), ``tier 2 capital instruments'' 
is replaced with ``qualifying capital instruments''.
    (2) Differentiation of tier 2 capital instruments. For purposes of 
this subpart, tier 2 capital instruments of a top-tier depository 
institution holding company are instruments issued by any inventory 
company that are qualifying capital instruments under paragraph (a)(1) 
of this section,\3\ other than those qualifying capital instruments 
that meet all of the following criteria:
---------------------------------------------------------------------------

    \3\ For purposes of this paragraph (a)(2) of this section, the 
supervised insurance organization evaluates the criteria in 
paragraph (a)(1) of this section with regard to the building block 
in which the issuing inventory company is a member.
---------------------------------------------------------------------------

    (i) The holders of the instrument bear losses as they occur 
equally, proportionately, and simultaneously with the holders of all 
other qualifying capital instruments (other than tier 2 capital 
instruments) before any losses are borne by holders of claims on the 
top-tier depository institution holding company with greater priority 
in a receivership, insolvency, liquidation, or similar proceeding.
    (ii) The paid-in amount would be classified as equity under GAAP.
    (iii) The instrument meets the criteria in Sec.  217.20(b)(1)(i) 
through (vii) and in Sec.  217.20(b)(1)(x) through (xiii).
    (b) Determination of building block available capital. (1) For each 
building block parent, building block available capital means the sum 
of the items described in paragraphs (b)(1)(i) and (b)(1)(ii) of this 
section:
    (i) The company available capital of the building block parent:
    (A) Less the amount of downstreamed capital owned by any member of 
the building block parent's building block; \4\ and
---------------------------------------------------------------------------

    \4\ The amount of the downstreamed capital is calculated as the 
impact, excluding any impact on taxes, on the company available 
capital of the building block parent of the building block of which 
the owner is a member, if the owner were to deduct the downstreamed 
capital.
---------------------------------------------------------------------------

    (B) Adjusted pursuant to paragraph (c) of this section;
    (ii) For each downstream building block parent, the adjusted 
downstream building block available capital (BBACADJ), which equals:

BBACADJ = (BBACDS - UpInv + ACSM) [middot] AS

Where:

(A) BBACDS = The building block available capital of the downstream 
building block parent;
(B) UpInv = the amount of any upstream investment held by that 
downstream building block parent in the building block parent; \5\
---------------------------------------------------------------------------

    \5\ The amount of the upstream investment is calculated as the 
impact, excluding any impact on taxes, on the downstream building 
block parent's building block available capital if the owner were to 
deduct the investment.
---------------------------------------------------------------------------

(C) ACSM = The appropriate available capital scaling modifier under 
Sec.  217.606; and
(D) AS = The building block parent's allocation share of the 
downstream building block parent.

    (2) Single tier of capital. If there is more than one tier of 
company available capital under a building block parent's applicable 
capital framework, the amounts of company available capital from all 
tiers are combined in calculating building block available capital in 
accordance with paragraph (b) of this section.
    (c) Adjustments in determining building block available capital. 
For purposes of the calculations required in paragraph (b) of this 
section, a supervised insurance organization must adjust the company 
available capital for any building block parent as follows:
    (1) Non-qualifying capital instruments. A supervised insurance 
organization must deduct from the building block parent's company 
available capital any accretion arising from any instrument issued by 
any company that is a member of the building block parent's building 
block, where the instrument is not a qualifying capital instrument.
    (2) Insurance underwriting RBC. When applying the U.S. federal 
banking capital rules as the applicable capital framework for a 
building block parent, a supervised insurance organization must add 
back into the building block parent's company available capital any 
amounts deducted pursuant to section _.22(b)(3) of those rules.
    (3) Permitted accounting practices and prescribed accounting 
practices. A supervised insurance organization must deduct from the 
building block parent's company available capital any difference 
between:
    (i) The building block parent's company available capital; and
    (ii) The building block parent's company available capital 
recalculated under the assumption that neither the building block 
parent, nor any company that is a member of that building block 
parent's building block, had prepared its financial statements with the 
application of any permitted accounting practice, prescribed accounting 
practice, or other practice, including legal, regulatory, or accounting 
procedures or standards, that departs from a solvency framework as 
promulgated for application in a jurisdiction.
    (4) Transitional measures in applicable capital frameworks. A 
supervised institution must deduct from the building block parent's 
company available capital any difference between:
    (i) The building block parent's company available capital; and
    (ii) The building block parent's company available capital 
recalculated under the assumption that neither the building block 
parent, nor any company that is a member of the building block parent's 
building block, had prepared its financial statements with the 
application of any grandfathering or transitional measures under the 
building block parent's applicable capital framework, unless the

[[Page 57285]]

application of these measures has been approved by the Board.
    (5) Deduction of investments in own capital instruments.
    (i) A supervised insurance organization must deduct from the 
building block parent's company available capital any investment by the 
building block parent in its own capital instrument(s), or any 
investment by any member of the building block parent's building block 
in capital instruments of the building block parent, including any net 
long position determined in accordance with paragraph (c)(5)(ii) of 
this section, to the extent that such investment(s) would otherwise be 
accretive to the building block parent's building block available 
capital.
    (ii) Net long position. For purposes of calculating an investment 
in a building block parent's own capital instrument under this section, 
the net long position is determined in accordance with Sec.  217.22(h), 
provided that a separate account asset or associated guarantee is not 
regarded as an indirect exposure unless the net long position of the 
fund underlying the separate account asset (determined in accordance 
with Sec.  217.22(h) without regard to this paragraph) equals or 
exceeds 5 percent of the value of the fund.
    (6) Reciprocal cross holdings in the capital of financial 
institutions. A supervised insurance organization must deduct from the 
building block parent's company available capital any investment(s) by 
the building block parent in the capital of unaffiliated financial 
institutions that it holds reciprocally, where such reciprocal cross 
holdings result from a formal or informal arrangement to swap, 
exchange, or otherwise intend to hold each other's capital instruments, 
to the extent that such investment(s) would otherwise be accretive to 
the building block parent's building block available capital.
    (d) Limits on certain elements in building block available capital 
of top-tier depository institution holding companies.
    (1) Investment in capital of unconsolidated financial institutions. 
(A) A top-tier depository institution holding company must deduct, from 
its building block available capital, any accreted capital from an 
investment in the capital of an unconsolidated financial institution 
that is not an inventory company, that exceeds twenty-five percent of 
the amount of its building block available capital, prior to 
application of this adjustment, excluding tier 2 capital instruments. 
For purposes of this paragraph, the amount of an investment in the 
capital of an unconsolidated financial institution is calculated in 
accordance with Sec.  217.22(h), except that a separate account asset 
or associated guarantee is not an indirect exposure.
    (B) The deductions described in paragraph (d)(1)(A) of this section 
are net of associated deferred tax liabilities in accordance with Sec.  
217.22(e).
    (2) Limitation on tier 2 capital instruments. A top-tier depository 
institution holding company must deduct any accretions from tier 2 
capital instruments that, in the aggregate, exceed the greater of:
    (i) 62.5 percent of the amount of its building block capital 
requirement; and
    (ii) The amount of instruments subject to paragraphs (e) or (f) of 
this section that are outstanding as of the submission date.
    (e) Treatment of outstanding surplus notes. A surplus note issued 
by any company in a supervised insurance organization prior to November 
1, 2019, is deemed to meet the criteria in paragraphs (a)(1)(iii) and 
(vi) of this section if:
    (1) The surplus note is a company capital element for the issuing 
company;
    (2) The surplus note is not owned by an affiliate of the issuer; 
and
    (3) The surplus note is outstanding as of the submission date.
    (f) Treatment of certain callable instruments. Notwithstanding the 
criteria under paragraph (a)(1) of this section, an instrument with 
terms that provide that the instrument may be called earlier than five 
years upon the occurrence of a rating event does not violate the 
criterion in paragraph (a)(1)(v) of this section, provided that the 
instrument was a company capital element issued prior to January 1, 
2014, and that such instrument satisfies all other criteria under 
paragraph (a)(1) of this section.
    (g) Board approval of a capital instrument.
    (1) A supervised insurance organization must receive Board prior 
approval to include in its building block available capital for any 
building block an instrument (as listed in this section), issued by any 
company in the supervised insurance organization, unless the 
instrument:
    (i) Was a company capital element for the issuer prior to May 19, 
2010, in accordance with the applicable capital framework that was 
effective as of that date and the underlying instrument meets the 
criteria to be a qualifying capital instrument (as defined in paragraph 
(a) of this section); or
    (ii) Is equivalent, in terms of capital quality and ability to 
absorb losses with respect to all material terms, to a company capital 
element that the Board determined may be included in regulatory capital 
under this subpart pursuant to paragraph (g)(2) of this section, or may 
be included in the regulatory capital of a Board-regulated institution 
pursuant to Sec.  217.20(e)(3).
    (2) After determining that an instrument may be included in a 
supervised insurance organization's regulatory capital under this 
subpart, the Board will make its decision publicly available, including 
a brief description of the material terms of the instrument and the 
rationale for the determination.
* * * * *

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
7. The authority citation to part 252 continues 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.

Subpart B--Company-Run Stress Test Requirements for Certain U.S. 
Banking Organizations with Total Consolidated Assets over $10 
Billion and Less Than $50 Billion

0
8. Section 252.13 is amended by revising paragraphs (b)(1)(ii) to read 
as follows:


Sec.  252.13   Applicability.

* * * * *
    (b) * * *
* * * * *
    (ii) Any savings and loan holding company with average total 
consolidated assets (as defined in Sec.  252.12(d)) of greater than $10 
billion, excluding companies subject to part 217, subpart J of this 
chapter; and''
* * * * *

    Editorial Note: The following Exhibit will not publish in the 
Code of Federal Regulations.

Exhibit

    Editorial Note: This section will not publish in the Code of 
Federal Regulations.

Capital Requirements for Insurance Depository Institution Holding 
Companies Comparing Capital Requirements in Different Regulatory 
Frameworks

Preface

    The Board of Governors of the Federal Reserve System is responsible 
for protecting the safety and soundness of depository institutions 
affiliated with

[[Page 57286]]

holding companies. This responsibility requires regulating the capital 
of holding companies of groups that conduct both depository and 
insurance operations.\1\ Unfortunately, the insurance and banking 
sectors do not share any common capital assessment methodology. 
Existing capital assessment methodologies are tailored to either 
banking or insurance and unsuitable for application to the other 
sector.\2\
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5371.
    \2\ Insurance methodologies are also generally country specific.
---------------------------------------------------------------------------

    The Board proposes relying on these existing sectoral capital 
assessment methodologies to assess capital for most holding companies 
that own both insured depository institutions and insurers. In this 
proposed approach, capital requirements would be aggregated across 
sectors to calculate a group-wide capital requirement. Just as adding 
money denominated in different currencies requires exchange rates, 
meaningfully aggregating capital resources and requirements calculated 
under different regulatory frameworks requires some translation 
mechanism between them. We refer to this process of translating capital 
measures between regulatory frameworks as ``scaling.''

Executive Summary

    This white paper examines scaling. Scaling has not previously been 
the subject of academic research, and industry practitioners don't 
agree on the best methodology.
    This paper introduces a scaling method based on historical 
probability of default (PD) and explains why the Board's proposal uses 
this approach. This method uses historical default rates as a shared 
economic language to enable translation. Concretely, scalars pair 
solvency ratios that have identical estimated historical insolvency 
rates. An analysis of U.S. data produces the simple scaling formulas 
below.

NAIC Authorized Control Level Risk Based Capital = .0106 * Risk 
Weighted Assets
NAIC Total Adjusted Capital = Bank Tier 1 Capital + Bank Tier 2 
Capital-.063 * Risk Weighted Assets

    This paper also compares the PD method and alternatives, including 
those suggested by commenters in response to the Board's advance notice 
of proposed rulemaking (ANPR).\3\ While other implementable methods 
make broad assumptions regarding equivalence, the historical PD method 
only assumes that companies have equivalent financial strength when 
defaulting.\4\ The major disadvantage of the PD approach is that it 
needs extensive data. Plentiful data exists on U.S. markets but not 
many international markets. Because of this and because the Board's 
current population of supervised insurance groups has immaterial 
international insurance operations, scalars for other jurisdictions 
were not developed.
---------------------------------------------------------------------------

    \3\ Capital Requirements for Supervised Institutions 
Significantly Engaged in Insurance Activities, 81 FR 38,631 (June 
14, 2016), https://www.gpo.gov/fdsys/pkg/FR-2016-06-14/pdf/2016-14004.pdf.
    \4\ See the Historical Probability of Default Section for 
details of this method. An empirical check on the assumption 
regarding companies defaulting at similar levels of financial 
strength can be found at [reasonableness of assumptions discussion].
---------------------------------------------------------------------------

Key Concepts

     Scaling can be simplified into the calculation of two 
parameters: (1) A required capital scalar and (2) an available capital 
scalar.
     There are at least three considerations of importance in 
assessing the scaling methods: (1) Reasonableness of the assumptions, 
(2) ease of implementation, and (3) stability of the parameterization.
     Our analysis identifies a trade-off between the 
reasonableness of a methodology's assumptions and the easiness of its 
implementation. Easily producing stable results generally requires bold 
assumptions about the comparability of regulatory frameworks.
     The Board's recommended scaling approach (PD method) 
relies on an analysis of historical default rates in the different 
regulatory frameworks.

Introduction

    In its ANPR of June 2016, the Board proposed a building block 
approach (BBA) for regulating the capital of banking organizations with 
substantial insurance operations.\5\ For these institutions, the 
building block approach would first calculate the capital resources and 
requirements of its subsidiary institutions in different sectors. After 
making adjustments that provide consistency on key items and ensure 
risks are not excluded or double counted, the building blocks would be 
scaled to a standard basis and then aggregated to calculate enterprise-
level available capital and required capital.
---------------------------------------------------------------------------

    \5\ This approach is expanded upon in the Board's proposed rule.
---------------------------------------------------------------------------

    Building blocks originate in regulatory frameworks, referred to as 
``regimes,'' with different metrics and scales. They need to be 
standardized before they can be stacked together. We refer to the 
process of translating capital measures from different regimes into a 
common standard as ``scaling.'' Based on the firms that would be 
subject to the proposed rule currently, only two regimes would be 
material: the regime applicable to U.S. banks and the regime applicable 
to U.S. insurers, which is the National Association of Insurance 
Commissioner (NAIC) Risk-Based Capital (RBC) requirements.\6\ These 
regimes use starkly different rules, accounting standards, and risk 
measures. While both the banking and insurance risk-based capital 
standards use risk factors or weights to derive their capital 
requirements, they differ in the risks captured, the risk factors used, 
and the base measurement that is multiplied by these factors. In 
banking, the regulatory risk measure applies risk weights to assets and 
off-balance-sheet activities. This produces risk-weighted assets (RWA). 
In insurance, the reported risk metric--``Authorized Control Level Risk 
Based Capital Requirement (ACL RBC)''--uses a different methodology. 
Among other differences, this methodology emphasizes risks on 
liabilities and gives credit for diversification between assets and 
liabilities.
---------------------------------------------------------------------------

    \6\ Where material, unregulated financial activity would also be 
assessed under one of those regimes and aggregated.
---------------------------------------------------------------------------

Scaling Framework and Assessment Criteria

    Scaling translates available capital (AC) and required capital (RC) 
between two different regimes. We refer to the original regime as the 
applicable regime and the output regime--under which comparisons are 
ultimately made--as the common regime. The Board's proposal uses NAIC 
RBC as the common regime.
    The scaling formulas below provide a generalized scaling framework 
with two parameters and enough flexibility to represent our proposal 
and all scaling methods suggested by commenters. One parameter, which 
we refer to as the required capital or SRC, applies to RC in 
the applicable regime and captures the average difference in the 
``stringency'' of the regimes' RC calculations and the units used to 
express the RC. We assume that differences in stringency between 
regimes' risk measurements can be modeled by a single multiplicative 
factor. The second parameter, which we refer to as the available 
capital scalar or SAC, adjusts for the relative conservatism 
of the AC. This parameter represents the additional amount of 
conservatism in the calculation of AC in the applicable regime relative 
to the common regime. Unlike the multiplicative scaling of

[[Page 57287]]

required capital, we assume available capital is an additive adjustment 
that varies based on a company's risk. This allows the issuance of 
additional capital instruments, such as common stock, to increase 
available capital equally in both regimes, while still allowing for the 
regimes to value risky assets and liabilities with differing degrees of 
conservatism.

RCcommon = SRC * RCapplicable
ACcommon = ACapplicable + SAC 
RCapplicable

    These scaling parameters also have graphical interpretations that 
illustrate their meaning. An equivalency line between the solvency 
ratios of regimes (AC divided by RC) has a slope of SRC and 
intercept of -SACwhen plotted with the common regime as the 
x-axis. Figure 1 depicts this relationship, and appendix 1 shows a full 
derivation of this graphical interpretation.
[GRAPHIC] [TIFF OMITTED] TP24OC19.040

    In this two-parameter framework, a scaling methodology represents a 
way of calculating SRC and SAC. Possible scaling 
methodologies range from making very simple assumptions about 
equivalence to using complex methods involving data to estimate these 
relationships. There are at least three considerations of importance in 
assessing the scaling methods. We identify these as the reasonableness 
of the assumptions, ease of implementation, and stability of the 
parameterization.
    The first of these is the reasonableness of the assumptions. 
Methodologies that make crude assumptions likely won't produce accurate 
translations. Accurate translations between regimes enable a more 
meaningful aggregation of metrics, thus allowing the Board to better 
assess the safety and soundness of institutions and ultimately to 
better mitigate unsafe or unsound conditions.
    Another important consideration is the method's ease of 
implementation. The most theoretically sound methodology would lack 
practical value if it cannot be parameterized.
    A final consideration is the stability of their parameterization--
the extent to which changes in assumptions or data affect the value of 
the scalars. Scaling should be robust across time unless the underlying 
regimes change. This stability provides predictability to firms and 
facilities planning.

Historical Probability of Default

    A sensible economic benchmark for solvency ratios is the insolvency 
or default rates associated with them, and this method uses these rates 
as a Rosetta stone for translating ratios between regimes. For example, 
under this method a bank solvency ratio that has historically resulted 
in a 5 percent PD translates to the insurance solvency ratio with an 
estimated 5 percent PD.\7\
---------------------------------------------------------------------------

    \7\ We need the PD to be monotonic on the financial strength 
ratios for this approach to produce a single mapping.
---------------------------------------------------------------------------

    Mechanically, this calculation uses (logistic) regressions to 
estimate the relationship between the solvency ratios and default 
probability.\8\ Setting the logit of PD in both regimes equal to each 
other gives an equation that relates the solvency ratios in the two 
regimes as shown below.
---------------------------------------------------------------------------

    \8\ The logistic transformation is used because the regression 
involves probabilities. If ordinary least squares were used instead, 
estimated probabilities of default could be lower than 0 percent or 
higher than 100 percent for some solvency ratios.
[GRAPHIC] [TIFF OMITTED] TP24OC19.041

    In these formulas, ``b'' represents the slope of the estimated 
relationship between a regime's solvency ratio and (logistic) default 
probability and ``a'' represents the intercept. Simplifying this 
equation produces the equations below, as demonstrated in appendix 2.

[[Page 57288]]

[GRAPHIC] [TIFF OMITTED] TP24OC19.042

    This section will illustrate the approach and describe how it was 
used to derive the proposed scalars for U.S. banking and U.S. 
insurance. The approach will then be discussed in terms of the three 
identified considerations for scaling methods. This analysis reveals 
that the method generally can provide an accurate and stable 
translation of regimes for which robust data are available, which is 
why the Board has proposed to rely on the method for setting the scalar 
between the U.S. banking regime and the U.S. insurance regime.

Application to U.S. Banking and Insurance

    To apply this approach, we obtained financial data on depository 
institutions and insurers. Insurance financial data came from statutory 
financial statements. Bank data came from year-end Call Reports.\9\ The 
Call Report, which is filed by the operating depository institutions, 
provides the best match for the insurance data, which is only for the 
operating insurance companies as of year end. The usage of operating 
company data also comports with the Board's proposed grouping scheme, 
which would be at a level below the holding company. For the solvency 
ratios, we used ACL RBC for insurers because it can easily be 
calculated from reported information and serves as the basis for state 
regulatory interventions in the NAIC's Risk-Based Capital for Insurer's 
Model Act.\10\ Many different solvency ratios are calculated for banks. 
We used the total capitalization ratio. This broad regulatory capital 
ratio is the closest match in banking for ACL RBC for insurance in 
terms of which instruments are included.\11\
---------------------------------------------------------------------------

    \9\ Call report data were downloaded from the publicly available 
Federal Financial Institutions Examination Council database and 
supplemented with internal data. See ``Bulk Data Download,'' Federal 
Financial Institutions Examination Council, https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx.
    \10\ The BBA would not be impacted by using different multiples 
of these amounts because the required capital scalar is 
multiplicative. For instance, Company Action Level (CAL) RBC is two 
times ACL RBC. If this were used in the scaling regressions, all 
insurance solvency ratios would be cut in half. This would produce 
corresponding changes to the scaling equations and required capital 
ratios, but the overall capital requirement would remain constant 
when expressed in terms of dollars. Similarly, the rule would not be 
impacted by using some fraction of risk-weighted assets (for 
example, 8 percent) for banks.
    \11\ The proposed rule uses limits and other adjustments to 
further align the definition of regulatory capital between the two 
regimes and ensure sufficient quality of capital.
---------------------------------------------------------------------------

    Several filters were applied to the data. Only data after 1998 and 
before 2015 were used based on data availability, state adoption of 
insurance risk-based capital laws, and the three-year default horizon 
discussed below.\12\ Very small entities--those with less than $5 
million in assets--were excluded from both sectors. These firms had 
total asset size only sufficient to pay a handful of claims or large 
loan losses; their default data appeared unreliable and could not 
generally be corroborated by news articles or other sources. 
Organizations with very high and low capital ratios were also excluded 
(insurance ratios < -200% or >1500% ACL RBC; banks with total 
capitalization <3% or >20% RWA). Additionally, carriers not subject to 
capital regulation and those that fundamentally differ from other 
insurers were excluded. These included captive insurers (for example, 
an insurer owned by a manufacturer that insures only that 
manufacturer); government-sponsored enterprises (for example, workers 
compensation state funds); and monoline group health or medical 
malpractice insurers. P&C fronting companies were also removed. Summary 
statistics showing the magnitude of these exclusions can be seen in 
appendix 3
---------------------------------------------------------------------------

    \12\ For state adoption dates, see ``Risk Based Capital (RBC) 
for Insurers Model Act,'' National Association of Insurance 
Commissioners, http://www.naic.org/store/free/MDL-312.pdf, 15-20.
---------------------------------------------------------------------------

    We also obtained default data for the banking and insurance 
sectors. A three-year time horizon for defaults was used in both 
regimes to balance the competing considerations of wanting to observe a 
reasonable number of defaults beyond the most weakly capitalized 
companies and maximizing the number of data points that could be used 
in the regression.\13\ Because of the Board's supervisory mission, 
``default'' was defined as ceasing to function as a going concern due 
to financial distress. This definition did not always align with the 
point of regulatory intervention or commonly available data. 
Consequently, existing regulatory default data sets were supplemented 
to best align with the default definition.\14\
---------------------------------------------------------------------------

    \13\ The impact of this assumption was analyzed and is discussed 
in the context of the stability of the method's parameterization at 
in the subsection Stability of Parameterization.
    \14\ An empirical check on the reasonableness of these 
assumptions and alignment can be found on in the section below on 
reasonableness of assumptions.
---------------------------------------------------------------------------

    Insurance default data were obtained from the NAIC's Global 
Insurance Receivership Information Database (GRID).\15\ Because some 
insurers cease to function as going concerns without being reported in 
this data set, which is voluntary and impacted by confidentiality, a 
supplemental analysis was also performed.\16\ An insurer was also 
considered to be in default if it fell below the minimum capital 
requirement and (1) had its license suspended in any state, (2) was 
acquired, or (3) discontinued underwriting new businesses. Extensive 
checks were performed on random companies as well as all outliers 
(those with high RBC ratios that default and low RBC ratios that do not 
default). This resulted in the development of criteria above and the 
identification of some additional defaults based on news articles and 
other data sources.\17\
---------------------------------------------------------------------------

    \15\ The NAIC's GRID database can be accessed at https://i-site.naic.org/grid/gridPA.jsp.
    \16\ The NAIC describes GRID as ``a voluntary database provided 
by the state insurance departments to report information on insurer 
receiverships for consumers, claimants, and guaranty funds'' at 
https://eapps.naic.org/cis/. See also NAIC, GRID FAQs, available at 
https://i-site.naic.org/help/html/GRID%20FAQs.html (``In some states 
a court ordered conservation may be confidential.'')
    \17\ A handful of companies were identified as no longer being 
going concerns based on qualitative sources such as news articles, 
rating agency publications, or in notes to the financial statements 
that could not easily be applied to all companies. Additionally, 
several companies were removed who appear to have ceased functioning 
as going concerns at a time prior to the sample based on the volume 
of premiums written. Two companies were dropped from the data set 
for having aberrant data.
---------------------------------------------------------------------------

    For banking organizations, default data were extracted from the 
FDIC list of failures.\18\ For this analysis, banking organizations 
were also considered to be

[[Page 57289]]

in default if they were significantly undercapitalized (total 
capitalization below 6 percent of RWA) and did not recover, which might 
occur in a voluntary liquidation. Additionally, banking organizations 
with total capitalization ratios under 6 percent of RWA for multiple 
years were manually checked for indications that operations ceased. The 
different default rates by industry are shown in table 1 and figure 2.
---------------------------------------------------------------------------

    \18\ See https://www.fdic.gov/bank/individual/failed/banklist.csv.

                   Table 1--Default Rates by Industry
------------------------------------------------------------------------
                                                   Insurance     Bank
                      Year                         defaults    defaults
------------------------------------------------------------------------
2000............................................          23           4
2001............................................          23           3
2002............................................          27           6
2003............................................          28           3
2004............................................          17           3
2005............................................          10           0
2006............................................           8           0
2007............................................           5           1
2008............................................           6          19
2009............................................          12         112
2010............................................          10         122
2011............................................           9          80
2012............................................          11          40
2013............................................           9          12
2014............................................           8          11
2015............................................           3           5
2016............................................           2           6
2017............................................           2           3
------------------------------------------------------------------------

                                                              [GRAPHIC] [TIFF OMITTED] TP24OC19.043
                                                              
    To estimate the probabilities of default from these data, we used a 
logistic regression, which is commonly used with binary data, to 
estimate the parameters a and b in the equation below. The regression 
used cluster-robust standard errors with clustering by company. 
Additional details about these regressions can be found in table 2 with 
a discussion of their goodness of fit and robustness following in the 
sections below.
[GRAPHIC] [TIFF OMITTED] TP24OC19.044

    The parameters on the P&C and life insurance regressions were 
analyzed separately because the regimes are distinct; however, the 
regression results were very close to each other with no significant 
statistical difference..\19\ The results of the combined insurance and 
banking regressions are displayed in table 2.
---------------------------------------------------------------------------

    \19\ Because the two slope values are very close (-.662 and 
-.714), the p value of a test of differences is close to 50 
percent). The constant terms show larger differences (-.402 vs. 
-.602) and could indicate that P&C companies have slightly less 
balance sheet conservatism compared with life insurers; however, the 
difference is not statistically significant either (p ~ .44).

                                   Table 2--Insurance and Banking Regressions
----------------------------------------------------------------------------------------------------------------
                                                                                       Life          Combined
                                                      Banking     P&C  insurance     insurance       insurance
----------------------------------------------------------------------------------------------------------------
Slope (b).......................................         -66.392          -0.714          -0.662          -0.704
Robust Std. Err.................................         (1.854)         (0.052)         (0.102)         (0.046)
Intercept (a)...................................           3.723          -0.402          -0.602          -0.432
Robust Std. Err.................................         (0.201)         (0.178)         (0.440)         (0.164)
Observations....................................          92,215          21,031           6,862          27,893
Pseudo R\2\.....................................           24.9%           23.3%           20.3%           23.3%
----------------------------------------------------------------------------------------------------------------

    Using the formulas from the start of this section that relate 
logistic regression output to scaling parameters, SRC = 
1.06% and SAC = 6.3%.
    These results appear reasonable and suggest that the banking 
capital requirement is approximately equivalent to the insurance 
capital requirement but that the regimes differ in their structure. The 
insurance regime's conservative accounting rules lead to a conservative 
calculation of

[[Page 57290]]

available capital. These rules set life insurance reserves at above the 
best-estimate level, don't allow P&C carriers to defer acquisition 
expenses on policies, and don't give any credit for certain types of 
assets. Because of this conservative calculation of available capital, 
the required capital calculation is relatively lower with ACLR RBC 
translating to only about 1 percent of RWA.

Reasonableness of Assumptions

    Because regulators design solvency ratios to identify companies in 
danger of failing, default rates are a natural benchmark for assessing 
them economically. Comparing solvency ratios based on this benchmark is 
more reasonable than the alternatives, but it does have limitations.
    One important limitation is that definitions of default across 
sectors may be difficult to compare. To some extent, defaults are 
influenced by regulatory actions, which are entwined with the 
underlying regime itself. Although adjustments can be made (as we do 
with our default definition in the U.S. markets), there is likely still 
some endogeneity. However, defaults still provide a more objective 
assessment of the regime than the alternatives discussed in the Review 
of Other Scaling Methods under which these differences would be assumed 
not to exist. For instance, one primary alternative would be to scale 
by assuming the equivalency of regulatory intervention points. Another 
would assume that the accounting is comparable.
    As a test of the comparability of the default definitions, we 
estimated each sector's loss given default. If the default definitions 
in both sectors were equivalent economically, then the cost of these 
defaults should also be close. Based on data from the FDIC, the average 
bank insolvency in the period studied was approximately 10.7% of assets 
with a median of 22.4%. The median is significantly higher than the 
mean because of the very large Washington Mutual failure. Excluding 
Washington Mutual, the mean insolvency cost was 18.7%. We estimated the 
cost of insurance insolvencies by comparing the cost to insurance 
guarantee fund assessments during the sample period with the assets of 
insurers that defaulted using our definition. This produced an estimate 
of insolvency costs of 16.9% of net admitted assets. This is between 
the median and mean of the bank distribution and close to the bank mean 
when Washington Mutual is excluded. This supports our assumption that 
institutions identified as defaulting can be considered to have 
comparable financial strength.
    Historical insolvency rates also do not reflect regime changes and 
can be influenced by government support. In the application to U.S. 
banking and insurance, no adjustment was made for these factors, which 
are difficult to quantify and would likely offset each other to some 
extent over the period studied. Banking organizations have been more 
affected by past government support, which might imply the regressions 
underestimate PD, but there has recently been a significant tightening 
of the regime after the 2008 financial crisis, which would have an 
opposite effect.\20\ Additionally, support from the major government 
programs during the financial crisis depended on the firm being able to 
survive without it. On the insurance side, government support during 
the crisis was much less extensive, but there has also not been a 
similar recent strengthening of the regime.\21\ To the extent the 
regimes were to have material, directional changes, this assumption 
would be less reasonable and likely need to be revisited in a future 
study.
---------------------------------------------------------------------------

    \20\ Since the crisis, a number of reforms have been made to the 
banking capital requirements in the United States, including a 
reduction in the importance of internal models and additional 
regulation of liquidity. These reforms would make banks less likely 
to default at a given total capitalization ratio.
    \21\ The major changes to insurance regulation following the 
crisis have been the introduction of an Own Risk and Solvency 
Assessment along with some enterprise-wide monitoring. These would 
make insurers safer at a given capital ratio. The recently passed 
principle-based reserving requirements, which generally lowered 
reserves on many insurance products, would have the opposite effect.
---------------------------------------------------------------------------

    An additional limitation is the assumption of linearity in the 
relationship between solvency ratios and default probabilities after 
the logistic transformation. Figure 3 shows the goodness of fit of the 
PD estimation for U.S. banking and insurance. The blue dots represent 
actual observed default rates. The light red line represents the output 
from the regressions discussed above. The figures on the left are the 
same as those on the right after the logistic transformation.
 BILLING CODE 6210-01-P

[[Page 57291]]

[GRAPHIC] [TIFF OMITTED] TP24OC19.045

    The regressions produce a reasonably good fit to the available 
data, but the linear fit breaks down for very highly capitalized 
companies in both sectors (see blue circles). Consistent with other 
research, beyond a certain point, capital does not appear to have a 
large impact on the probability of a company defaulting. We considered 
a piece-wise fit to address this issue, but decided against it for 
three reasons. First, this issue has little practical impact because it 
only affects very strongly capitalized companies. Differentiating 
between these companies is not the focus of the capital rule. Second, a 
piece-wise function would drastically increase the complexity of the 
process. Simple scaling formulas can be derived if a single logistic 
regression is used for each.\22\ Translating piece-wise regressions 
into workable scaling formulas would require simplifications that could 
outweigh any otherwise improved accuracy. Third, the required number of 
parameters needed to fit a piece-wise model would more than double and 
introduce additional uncertainty about the parameters.
---------------------------------------------------------------------------

    \22\ See appendix 2 for the derivation of the simple formulas if 
no piece-wise regression is used.
---------------------------------------------------------------------------

Ease of Implementation

    The biggest disadvantage of this approach is data availability. The 
approach requires a large number of default events to calibrate the 
impact of the solvency ratio accurately. Although these data are 
available on the currently needed regimes, they may not be available in 
other regimes for which scalars could be needed in the future.

Stability of Parameterization

    The parameter estimates appear stable and robust. As one basic 
measure of stability and robustness, we estimated the standard error of 
the scaling estimates by simulating from normal distributions with the 
mean of the underlying regression parameters and standard deviation of 
their standard error. This measure indicated a 95 percent confidence 
interval of between .010 and .013 for SRC and between -.054 
and -.071 for SAC. This confidence interval is a fairly 
tight range given the spread of other methods.
    We also tested the robustness of the methodology on out of sample 
data. To do this, we split the sample at the year

[[Page 57292]]

2010. Data from prior to 2010 was used to parameterize the model while 
data from 2010 and subsequent years was used to assess the goodness of 
fit. Figure 4 displays the results of this test. The model performs 
fairly well on this test. The goodness of fit on the out of sample data 
appears comparable to those within the entire data set.
[GRAPHIC] [TIFF OMITTED] TP24OC19.046

 BILLING CODE 6210-01-C
    We also tested the parameterization for sensitivity to key 
assumptions, which would not be captured by the estimated standard 
errors. A description of these tests and the resulting scalars are 
displayed in table 3. We also attempted to test the impact of the 
exclusion of some data, including companies with very high or very low 
solvency ratios, but we found that the regression showed little 
relationship between the capital ratios and default probabilities in 
both regimes when outlier entities that have ratios that are orders of 
magnitude apart from typical companies are included.

[[Page 57293]]



                          Table 3--Results of Robustness Tests of Historical PD Method
----------------------------------------------------------------------------------------------------------------
                                                                                     AC scalar       RC scalar
                    Name                                 Description                 (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Baseline...................................  Assumptions used in the proposal...           -6.26            1.06
Excluding firms under $100 million.........  Firms with a largest size of less             -6.51            1.17
                                              than $100 million in assets are
                                              excluded.
Wider solvency ratio bounds................  Insurance bounds are to allow                 -6.06            1.10
                                              ratios between -300% to 2000% of
                                              ACL RBC to be used in the
                                              regression. Banking bounds are
                                              similarly moved to 2% and 30% of
                                              RWA.
Largest half of companies..................  The smallest 50% of companies as              -5.72            2.21
                                              measured by their peak total asset
                                              size are excluded from both the
                                              banking and insurance samples.
1 year default definition..................  A one year default horizon is used            -6.15            0.96
                                              in place of the baseline three
                                              year window.
No crisis..................................  The financial crisis (2009-2010) is           -5.60            0.91
                                              excluded from the sample by using
                                              a one-year default horizon and
                                              excluding observations from year
                                              end 2008 and year-end 2009.
----------------------------------------------------------------------------------------------------------------

Summary and Conclusion

    The use of historical default probabilities can produce a 
reasonable scalar for U.S. banking and insurance. The primary 
disadvantage is the data required, which may not be available for other 
jurisdictions. Because this method has a relatively robust 
parameterization, the parameters would not need to be updated on a set 
schedule and could be instead be revisited if new data or conditions 
suggest a change is warranted.

Review of Other Scaling Methods

    Other methods exist for calibrating the scaling parameters. This 
section gives a description of these methods and compares them to the 
historical PD method based on the desired characteristics described 
before. The methods are arranged roughly in order of their ease of 
parameterization. At one end of the spectrum, not scaling is very 
simple, but it is not likely to produce an accurate translation. At the 
other end of the spectrum, scaling based on market-derived 
probabilities of default and scaling based on a granular analysis of 
each regime's methodologies have theoretical advantages but cannot be 
parameterized even for U.S. banking and U.S. insurance. Between these 
extremes, some methods can be parameterized but generally have less 
reasonable assumptions than the historical PD method.

Not Scaling

    One scaling method would be to assume that no scaling is required, 
as might be tempting for solvency ratios of the same order of 
magnitude. This method would be equivalent to assuming that 
Sac were equal to zero and Src were equal to one.
    Although this approach would be very stable and not require 
parameterization, the assumption generally appears unreasonable because 
of the many differences between regimes. A typical ACL RBC ratio would 
be hundreds of percent. The average bank operates with an RWA ratio 
near 16 percent. Furthermore, although the numerators in these ratios 
might be deemed as comparable under certain circumstances, the 
denominators are conceptually very different. The denominator in 
insurance is required capital; the denominator in banking is risk-
weighted assets.

Scaling by Interpolating Between Assumed Equivalent Points

    This category of methods would take two assumed equivalent solvency 
ratios and use interpolation between these to produce an assumed 
equivalence line and the implied scaling parameters. The methods in 
this category would vary primarily in terms of how they derive the 
assumed equivalency points.

                          Table 4--Analysis of Potential Simple Equivalency Assumptions
----------------------------------------------------------------------------------------------------------------
                                         Reasonableness of             Ease of                Stability of
        Assumed equivalence                 assumptions            parameterization         parameterization
----------------------------------------------------------------------------------------------------------------
Available capital calculations....  Regimes are known to        Parameterized by       Very stable by
                                     differ materially in how    assumption.            assumption.
                                     they compute key aspects
                                     of available capital
                                     including insurance
                                     reserves.
Regulatory intervention levels....  Regulatory objectives       Very easy............  Very stable because
                                     vary, which could justify                          regulatory intervention
                                     intervening at different                           points do not frequently
                                     levels.                                            change.
Industry average capital levels...  Corporate structure         Easy.................  Least stable--the
                                     considerations in each of                          industry's capital ratio
                                     these industries are very                          frequently changes and
                                     different, and the                                 the ratio of U.S.
                                     average financial                                  industry averages has
                                     strength is unlikely                               varied by almost 50%
                                     going to be comparable.                            between 2002 and 2007.
----------------------------------------------------------------------------------------------------------------

    It is possible to mix and match from these assumptions to produce a 
scaling methodology as illustrated in figure 5. In this figure, each of 
the three assumptions is plotted as an assumed equivalence point. For 
example, an 8 percent level of bank capital and 200 percent of ACL RBC 
translate to comparable regulatory interventions so (200 percent, 8 
percent) is shown as the regulatory intervention equivalence point. An 
assumption that scaling is not required on available capital translates 
to equivalence at (0 percent, 0 percent) because a company with no 
available capital in one regime would also have no available capital 
after scaling. Three different lines are illustrated which show the 
three different ways these assumptions could be combined to produce 
scaling methodology.

[[Page 57294]]

[GRAPHIC] [TIFF OMITTED] TP24OC19.047

    Most commenters on the ANPR suggested one of these methods, but 
commenters were split as to which assumption was better. A plurality of 
commenters suggested not assuming equivalence in available capital 
calculations because, as the Board noted in the ANPR, regimes do differ 
significantly in how they calculate available capital. However, one 
disadvantage of this method is that the average capital levels in a 
regime may not always be available, so it might not be possible to 
parameterize it for all regimes.
    It is also possible to add different adjustments to these methods. 
For instance, rather than directly using the regulatory intervention 
points, one could first adjust these to make them more comparable. To 
the extent that one knew that the regulatory intervention point was set 
at a given level (for example, 99.9 percent over 1 year vs. 99.5 
percent over one year) then it would be possible to adjust the 
intervention point in one regime to move it to a targeted confidence 
level that aligns with another regime. However, given that these 
targeted calibration levels are more aspiration than likely to 
ultimately be supported by empirical data, this adjustment does not 
significantly improve the reasonableness of the underlying assumptions.
    Some other adjustments could marginally improve the analysis. For 
instance, although it is plausible that industries in similarly 
developed economies could be similar, assuming equivalence across 
starkly different economies is less reasonable. In particular, the 
level of general country risk within a jurisdiction is likely to affect 
both insurance companies and insurance regulators, and some adjustment 
for this could improve the method.
    Although these adjustments do marginally improve the methods, 
methods in this category would still not be making as reasonable of 
assumptions as the historical PD method. We do not consider it 
appropriate to use any method in this category in setting the scalar 
between the Board's bank capital rule and NAIC RBC. This category of 
methods could, however, have utility where simple assumptions are 
needed to support calibration.

Scaling Based on Accounting Analysis

    A different data-based method that was considered would use 
accounting data in place of default data. Under this method, the 
distribution of companies' income and surplus changes would be analyzed 
similarly to how the Board calibrated the surcharge on systemically 
important banks.\23\ If companies routinely lost multiples of the 
regulatory capital requirement, the regulatory capital requirement 
likely is not stringent.
---------------------------------------------------------------------------

    \23\ Board of Governors of the Federal Reserve System, 
Calibrating the GSIB Surcharge, (Washington: Board of Governors, 
July 20, 2015), https://www.federalreserve.gov/aboutthefed/boardmeetings/gsib-methodology-paper-20150720.pdf.
---------------------------------------------------------------------------

    Turning this intuition into a scaling methodology requires an 
additional assumption about equivalent ratios.\24\ Numbers can be 
scaled to preserve the probability of having this ratio (or worse) 
after a given time horizon. For example, if we define insolvency as 
having assets equal to liabilities and assume this definition is 
comparable in both regimes, then we can scale capital ratios based on 
the probability of a loss larger than the capital ratio being observed. 
If historically x percent of banks have experienced losses larger than 
their current capital ratio over a given time horizon, then this ratio 
would be scaled to the insurance solvency ratio that x percent of 
insurers have observed losses larger than. A derivation of scaling 
formulas from these assumptions is contained in appendix 4.
---------------------------------------------------------------------------

    \24\ This parameter and assumption were not necessary in 
calibrating the surcharge on systemically important banks because 
that only depended on the change in default probability as capital 
changes, rather than the absolute magnitude of the default 
probability.
---------------------------------------------------------------------------

    Although this method appears more reasonable than the simple 
interpolation methods, the assumptions are not as sound as for the 
historical PD method. Although there is some endogeneity with defaults, 
there is much more with accounting data. Regimes differ greatly in how 
they calculate net income and surplus changes such that benchmarking 
against a distribution of these values may not bring the desired 
comparability. The additional assumption required on equivalence is 
also problematic as it would essentially require incorporating one of 
the

[[Page 57295]]

problematic assumptions discussed in the previous section on 
interpolation.
    In terms of the ease of parameterization, the method ranks 
somewhere between the historical PD method and the simple methods based 
on interpolation. Income data are plentiful relative to both historical 
default data and market-derived default data. This ubiquity of the data 
could allow for calibration of additional regimes and allow changes in 
regimes to be picked up before default experience emerges.
    To parameterize this method for U.S. banking and insurance, we 
started with the distribution of bank losses discussed in the 
calibration of the systemic risk charge for banks (see figure 6).
[GRAPHIC] [TIFF OMITTED] TP24OC19.048

    To apply this method to insurance, historical data on statutory net 
income relative to a company's authorized control level were extracted 
from SNL. Data were collected on the 95 insurance groups with the 
relevant available data in SNL and over $10 billion in assets as of 
2006.\26\ Quarterly data points were used over the period of time for 
which they were available (2002 to 2016). A regression was then run on 
the estimated percentiles and log of the net income values to smooth 
the distribution and allow extrapolation. Figure 7 shows the 
distribution of ACL RBC returns resulting from this analysis.
---------------------------------------------------------------------------

    \25\ Federal Reserve, GSIB Surcharge, at 8
    \26\ Ninety-five groups met the size criteria, but three of 
these groups did not have RBC or income data and produced errors 
when attempting to pull the data. Two of these companies were 
financial guarantors.

---------------------------------------------------------------------------

[[Page 57296]]

[GRAPHIC] [TIFF OMITTED] TP24OC19.049

    Unlike with historical PD, an analysis of the top 50 life and P&C 
groups based on year-end 2006 assets under this method strongly 
suggested a different calibration. Historically, P&C carriers are 
significantly less likely than life carriers to experience large losses 
relative to their risk-based capital requirements. In 2008, nearly half 
the largest life insurance groups experienced losses that were above 
their authorized control level regulatory capital requirement. P&C 
insurers were much less likely to experience comparable losses. Table 5 
shows the scalars produced when the NAIC RBC life regime is used as the 
base.

          Table 5--Scalars Based on Accounting Analysis Results
------------------------------------------------------------------------
                                             AC scalar       RC scalar
                                             (percent)       (percent)
------------------------------------------------------------------------
P&C NAIC RBC............................          -12.82            20.5
Bank Capital............................             -.7             1.6
------------------------------------------------------------------------

Scaling Based on a Sample of Companies in Both Regimes

    Another scaling method would be to analyze a group of companies in 
both regimes. From a sample of companies in both regimes, it would be 
possible to run a regression to parameterize an equivalency line that 
represents the expected value in the common regime based on their 
information in the applicable regime.
    Although analyzing a single group of companies under both regimes 
would provide a solid foundation for assuming equivalence 
theoretically, there are problems with this method under the stated 
criteria.
    One issue is that calculating a given company's ratio under both 
regimes would likely not be appropriate because it would involve 
applying the regime outside of its intended domain. Applying the bank 
capital rules to insurers or the insurance capital rules to banks for 
calculating the scalar will not necessarily give comparable results. 
Although a result for a bank could be calculated under the insurance 
capital rules, this result may not really be comparable to insurers 
scoring similarly because their risk profiles differ. Indeed, the lack 
of a suitable regime for companies in both sectors is the primary 
reason the Board is proposing the BBA rather than applying one of the 
existing sectoral methodologies to the consolidated group.
    Another disadvantage of this method is the difficulty of 
implementation. Companies typically do not calculate their results 
under multiple regimes. The limited available data, including the data 
from the Board's prior QIS, do not statistically represent the 
situations where a scalar is needed. Barriers to obtaining a 
representative sample of companies make this method very difficult to 
parameterize.\27\
---------------------------------------------------------------------------

    \27\ The limitations of this method may not apply in the 
international insurance context where the development of an 
appropriate international capital standard for insurance companies 
might make it possible to benchmark various insurance regimes.
---------------------------------------------------------------------------

    Because of these problems, we do not recommend using this 
methodology as a basis for scaling under the proposal.

Scaling Based on Market-Derived PDs

    The intuition of this method is similar to the historical 
probability of default method, but it would use market data to 
calibrate the relationship between solvency ratios and expected 
defaults. Market data can be used to calculate implied default 
probabilities with some additional assumptions. Credit default swap 
(CDS) prices or bond spreads depend heavily on default probabilities, 
and a Merton model can translate equity prices and volatilities into 
default probabilities.
    Using market-derived default probabilities in place of historical 
data would have theoretical advantages over the recommended method. 
Because market signals are forward looking, this method could better 
capture changes in regimes. It might also be better able to address 
issues with past government support if the market no longer perceives 
institutions as likely to be rescued.
    Although theoretically appealing, the data limitations prevent this 
method from being used. Bonds are heterogenous and not frequently 
traded; equity prices are difficult to translate into default 
probabilities. Even in the largest markets where CDS data exists, only 
on a handful of companies have CDS information, and these companies

[[Page 57297]]

are not necessarily representative of the broader market. For US 
insurance, an additional issue is that regulatory ratios are not 
available at the holding company level and market data are unavailable 
at the operating company level.\28\
---------------------------------------------------------------------------

    \28\ Although in some cases a sum of the capital of subsidiaries 
may be a reasonable proxy for the capital of the group, this 
approach would not be true for many entities including those with 
large foreign operations or using affiliated reinsurance 
transactions (captives). Only a handful of companies have reasonable 
proxies available for both NAIC RBC and the market-implied default 
rate of the company.
---------------------------------------------------------------------------

    We attempted to parameterize the scalar for the U.S. market using 
CDS data from Bloomberg and simple assumptions on recovery rates, but 
were unable to produce sensible results. Although the historical data 
show a strong relationship between capital levels and default 
probabilities, the strong relationship did not hold in our CDS 
analysis.
    Several data restrictions might explain this issue. Only a small 
number of issuers have observable credit default spreads. Additionally, 
these are generally at the holding company level, which necessitated 
making assumptions for insurers as no group solvency ratio exists. 
Additionally, only relatively well-capitalized banking organizations 
appear to have CDSs traded currently, potentially creating a section 
bias. The historical PD data demonstrates that beyond a certain point, 
capital does not strongly affect default probability.
    Other potential explanations of this result exist. Changes in risk 
aversion and liquidity premiums across the panel period could also 
explain the results. Time-fixed effects were included in some 
specifications of the regressions, but they did not improve the outcome 
of this method. Endogeneity between banks' held capital and their 
stress testing results may also contribute to the lack of sensible 
results. Because of the lack of sensible results, we do not recommend 
using this method to set the scalars.

Scaling Based on Regime Methodology Analysis

    Another method would be to try to derive the appropriate scalars 
from a bottom-up analysis of the regimes, including the factors applied 
to specific risks and the components of available capital. 
Unfortunately, the differences between the regimes can be inventoried, 
but such an inventory cannot theoretically or practically be turned 
into a scaling methodology. In each regime, the risks captured are 
tailored to those present in the sector. The insurance methodology has 
complex rules around the calculation of natural catastrophe losses, and 
the bank regime has complex rules that apply for institutions that have 
significant market-making operations. Deriving an appropriate scaling 
methodology from the bottom up based on these differences would require 
quantifying each of them and then weighting to these differences to 
calculate an average. This calculation would be infeasible between 
banking and insurance regimes given the number of differences. 
Additionally, there are theoretical problems with trying to derive a 
weighting methodology from the differences that appropriately reflects 
the risk profiles of both banks and insurers.

Conclusion

    This white paper describes our attempt to identify and evaluate 
different scaling methodologies. We find the PD approach based on 
historical data could be used to translate information between regimes 
in a way that preserves the economic meaning of solvency ratios. This 
method, however, requires data that are not currently available for 
some regimes outside of the United States. The election of the scaling 
approach is therefore a choice between using a single simple approach 
to scaling in all economies or differentiating the scaling approach by 
country and using the historical PD domestically. We recommend the 
latter. Although this approach will involve more work and some 
uncertainty for companies operating in countries with limited data, it 
should allow for scaling that is more accurate and aid comparability.
    Scalars for non-U.S. regimes are not specified in the proposed rule 
given the Board's supervisory population. These may be set through 
individual rulemakings as needed. For the scalar between Regulation Q 
and NAIC RBC, the Board's proposal relies on the historical probability 
of default method.
    We believe that the historical PD method derived in this paper will 
produce the most faithful translation of financial information between 
the U.S. banking and insurance regimes. Historical insolvency rates are 
currently the most credible economic benchmark to assess regimes 
against, and the long track record and excellent data on both the 
insurance and the bank U.S. regimes make this analysis feasible.
BILLING CODE 6210-01-P

[[Page 57298]]

[GRAPHIC] [TIFF OMITTED] TP24OC19.050


[[Page 57299]]


[GRAPHIC] [TIFF OMITTED] TP24OC19.051


[[Page 57300]]


[GRAPHIC] [TIFF OMITTED] TP24OC19.052


[[Page 57301]]


[GRAPHIC] [TIFF OMITTED] TP24OC19.053


    By order of the Board of Governors of the Federal Reserve 
System, October 2, 2019.
Ann Misback,
Secretary of the Board.
[FR Doc. 2019-21978 Filed 10-23-19; 8:45 am]
 BILLING CODE 6210-01-C