SUPPLEMENTARY INFORMATION:

I. Background

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) adopted the liquidity coverage ratio (LCR) rule ^[1] in 2014. The LCR rule established a quantitative liquidity requirement that is designed to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organizations. The intent of the agencies in issuing the LCR rule was to improve the banking sector's ability to absorb shocks arising from financial and economic stress and the measurement and management of liquidity risk.^[2] The LCR rule generally applies to a bank holding company, savings and loan holding company, or depository institution if: (1) It has total consolidated assets equal to $250 billion or more; (2) it has total consolidated on-balance sheet foreign exposure equal to $10 billion or more; or (3) it is a depository institution with total consolidated assets equal to $10 billion or more and is a consolidated subsidiary of a firm that is subject to the LCR rule (each, a covered company).^[3] Covered companies generally must maintain an amount of high-quality liquid assets (HQLA) equal to or greater than their projected total net cash outflows over a prospective 30 calendar-day period.^[4] The LCR rule defines three categories of HQLA—level 1, level 2A, and level 2B liquid assets—and sets forth qualifying criteria for HQLA and limitations for an asset's inclusion in the HQLA amount.

In 2016, the Board amended its LCR rule to include certain U.S. municipal securities as HQLA, subject to certain limitations (2016 Amendments).^[5] To qualify as level 2B liquid assets under the 2016 Amendments, the U.S. municipal securities must be general obligation securities of public sector entities ( i.e., a state, local authority, or other governmental subdivision below the U.S. sovereign entity level).^[6] Under the 2016 Amendments, a general obligation is defined as a bond or similar obligation that is backed by the full faith and credit of a public sector entity.^[7] To be treated as HQLA, the general obligation securities also must: (1) Be investment grade under 12 CFR part 1 as of the calculation date; (2) be issued or guaranteed by a public sector entity whose obligations have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions; ^[8] and (3) not be an obligation of a financial sector entity or a financial sector entity's consolidated subsidiary, unless it is only guaranteed by a financial sector entity or its consolidated subsidiary and otherwise eligible.^[9] The 2016 Amendments limited the inclusion of general obligation securities in the HQLA amount to 5 percent of the covered company's total HQLA amount.^[10] The 2016 Amendments also limited the inclusion of general obligation securities of any single public sector entity to two times the average daily trading volume during the previous four quarters of all general obligation securities issued by that public sector entity.^[11]

The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) was enacted on May 24, 2018.^[12] Section 403 of the EGRRCPA amends section 18 of the Federal Deposit Insurance Act ^[13] and requires the agencies, for purposes of the LCR ( printed page 44453) rule and any other regulation that incorporates a definition of the term “high-quality liquid asset” or another substantially similar term, to treat a municipal obligation as HQLA that is a level 2B liquid asset if that obligation is, as of the calculation date, (A) liquid and readily-marketable and (B) investment grade. Section 403 defines “investment grade” as having the meaning given the term in § 1.2 of title 12, Code of Federal Regulations, or any successor thereto. Section 403 defines “liquid and readily-marketable” as having the meaning given the term in § 249.3 of title 12, Code of Federal Regulations, or any successor thereto. Section 403 defines “municipal obligation” as “an obligation of—(i) a State or any political subdivision thereof; or (ii) any agency or instrumentality of a State or any political subdivision thereof.”

II. Description of the Interim Final Rule

This interim final rule amends the agencies' LCR rule to implement section 403 of the EGRRCPA. Section 403 requires the agencies to treat a municipal obligation as a level 2B liquid asset if the obligation, as of the calculation date, is liquid and readily-marketable and investment grade.^[14] To effect this change, the interim final rule makes certain amendments to each agency's LCR rule that incorporate the provisions of section 403 of the EGRRCPA.

The interim final rule adds a definition to the agencies' rule for the term “municipal obligations,” which, consistent with the EGRRCPA, means an obligation of (1) a state or any political subdivision thereof or (2) any agency or instrumentality of a state or any political subdivision thereof.

The interim final rule amends the HQLA criteria with respect to level 2B liquid assets by adding municipal obligations that, as of the calculation date, are both (1) liquid and readily-marketable and (2) investment grade (under 12 CFR part 1) to the list of assets that are eligible for treatment as level 2B liquid assets.^[15] The OCC's definition of “investment grade” under 12 CFR 1.2 provides that “[i]nvestment grade means the issuer of a security has an adequate capacity to meet financial commitments under the security for the projected life of the asset or exposure. An issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely repayment of principal and interest is expected.” ^[16] A municipal obligation is required to meet this definition of “investment grade” as of the calculation date to be treated as a level 2B liquid asset under the interim final rule.

Consistent with section 403, the interim final rule also amends the definition of “liquid and readily-marketable” in the FDIC's and OCC's rules so that the term has the same meaning given to it under the Board's rules. Under this provision of the Board's rules, a “liquid and readily-marketable” security is a security that is traded in an active secondary market with: (1) More than two committed market makers; (2) a large number of non-market maker participants on both the buying and selling sides of transactions; (3) timely and observable market prices; and (4) a high trading volume.^[17] As described above, a municipal obligation is required to be liquid and readily-marketable as of the date of calculation to be treated as a level 2B liquid asset under the interim final rule.

As part of the interim final rule, the Board is rescinding the 2016 Amendments so that municipal obligations under the Board's LCR rule will be treated consistently with section 403 of the EGRRCPA. As a result of the above changes, covered companies will be able to count municipal obligations as HQLA that qualify as level 2B liquid assets, provided the municipal obligations meet the HQLA criteria under the LCR rule.^[18] Accordingly, covered companies will have greater flexibility in meeting the minimum requirements under the LCR rule as more types of assets will be eligible as HQLA. For FDIC- and OCC-regulated institutions, these changes will mark the first time that such institutions may treat any municipal obligations as HQLA. For Board-regulated institutions, these changes are expected to broaden the number of municipal obligations that can be counted as HQLA. In particular, for purposes of the types of assets eligible for treatment as HQLA, municipal obligations will no longer be required to be general obligation securities.^[19] As a result, many issuances of revenue bonds will now qualify as municipal obligations.

Only municipal obligations that meet the LCR rule's definition for liquid and readily-marketable and that are investment grade under 12 CFR part 1 will qualify for treatment as HQLA under this interim final rule.^[20] The interim final rule does not otherwise affect covered companies' obligations under the LCR rule.

III. Request for Comment

The definition of “municipal obligation” and the criteria for treating municipal obligations as level 2B liquid assets were established by section 403 of the EGRRCPA. Consistent with section 403, in what ways, if any, could the agencies clarify aspects of these provisions ( e.g., by clarifying the terms “state” or “political subdivision”)? The agencies invite comment on this question and all other aspects of this interim final rule.

IV. Regulatory Analysis

A. Administrative Procedure Act and Effective Date

The agencies are issuing the interim final rule without prior notice and the opportunity for public comment and the 30 day delayed effective date ordinarily prescribed by the Administrative Procedure Act (APA).^[21] Pursuant to section 553(b)(B) of the APA, general notice and the opportunity for public comment are not required prior to the issuance of a final rule if an agency, for good cause, finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that “notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” ^[22]

( printed page 44454)

As discussed above, this interim final rule implements the provisions of section 403 of the EGRRCPA, which became effective on May 24, 2018, and directs the agencies to make certain changes to the criteria for HQLA. The interim final rule adopts without change the statutory definition for “municipal obligations” and the requirement that municipal obligations be treated as level 2B liquid assets if the obligations are liquid and readily-marketable and investment grade. Because these changes to the LCR rule are mandated by the EGRRCPA, the agencies have determined that publishing a notice of proposed rulemaking is unnecessary. In addition, the agencies believe that the public interest is best served by implementing Congress's legislative directive as soon as possible because immediate implementation would provide clarity to the public regarding the liquidity rules and would be consistent with Congress's directive to the agencies under section 403(b) of the EGRRCPA to amend the LCR rule within 90 days after enactment of the EGRRCPA.

The effective date of this interim final rule is August 31, 2018. Pursuant to section 553(d)(3) of the APA, the required publication or service of a substantive rule shall be made not less than 30 days before its effective date, except as otherwise provided by the agency for good cause found and published with the rule.^[23] For the reasons described above in connection with APA section 553(b)(B), the agencies find good cause to publish the rule with an immediate effective date.

B. Riegle Community Development and Regulatory Improvement Act

Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act (RCDRIA),^[24] in determining the effective date and administrative compliance requirements for a new regulation that imposes additional reporting, disclosure, or other requirements on insured depository institutions, each federal banking agency must consider any administrative burdens that such regulation would place on depository institutions and the benefits of such regulation. In addition, section 302(b) of the RCDRIA ^[25] requires such new regulation to take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form, with certain exceptions, including for good cause. For the reasons described above in connection with the APA section 553(b)(B) requirement, the agencies find good cause exists under section 302 of RCDRIA to publish this interim final rule with an immediate effective date.

While the agencies believe there is good cause to issue the rules without advance notice and comment and with an immediate effective date, the agencies are interested in the views of the public and request comment on all aspects of the interim final rule.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) does not apply to a rulemaking when a general notice of proposed rulemaking is not required. 5 U.S.C. 603 and 604. As noted previously, the agencies have determined that it is unnecessary to publish a general notice of proposed rulemaking for this interim final rule. Accordingly, the RFA's requirements relating to an initial and final regulatory flexibility analysis do not apply. Nonetheless, the agencies observe that in light of the way the interim final rule operates, they believe that, with respect to the entities subject to the interim final rule and within each agency's respective jurisdiction, the interim final rule would not have a significant economic impact on a substantial number of small entities.^[26]

D. Paperwork Reduction Act of 1995

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

E. Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded Mandates Act), 2 U.S.C. 1532, requires the OCC to prepare a budgetary impact statement before promulgating any final rule for which a general notice of proposed rulemaking was published. As discussed above, the OCC has determined that the publication of a general notice of proposed rulemaking is unnecessary. Accordingly, this interim final rule is not subject to section 202 of the Unfunded Mandates Act.

Authority and Issuance

For the reasons stated in the preamble, the OCC amends 12 CFR part 50, the Board amends 12 CFR part 249, and the FDIC amends 12 CFR part 329 as follows:

Department of the Treasury

Office of the Comptroller of the Currency

1. The authority citation for part 50 is revised to read as follows:

Authority: 12 U.S.C. 1 et seq., 93a, 481, 1818, 1828, and 1462 et seq.

2. Section 50.3 is amended by revising the definition for “Liquid and readily-marketable” and adding the definition for “Municipal obligation” in alphabetical order to read as follows:

3. Section 50.20 is amended by:

a. Republishing paragraph (c) introductory text;

b. Removing the “or” at the end of paragraph (c)(1)(iii); ( printed page 44455)

c. Removing the period at the end of paragraph (c)(2)(vi) and adding “; or” in its place; and

d. Adding paragraph (c)(3).

The republication and addition read as follows:

Federal Reserve System

4. The authority citation for part 249 continues to read as follows:

Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1467a(g)(1), 1818, 1828, 1831p-1, 1831o-1, 1844(b), 5365, 5366, 5368.

5. Amend § 249.3 by removing the definition for “General obligation” and adding the definition for “Municipal obligation” in alphabetical order to read as follows:

6. Amend § 249.20 by republishing paragraph (c) introductory text, removing the “or” at the end of paragraph (c)(1)(iii), removing paragraph (c)(2), redesignating paragraph (c)(3) as (c)(2), removing the period at the end of newly redesignated paragraph (c)(2)(vi) and adding “; or” in its place, and adding a new paragraph (c)(3) to read as follows:

7. Amend § 249.21 by:

a. Removing paragraph (b)(4);

b. Removing “; plus” at the end of paragraph (c)(2) and adding in its place a period;

c. Removing paragraphs (c)(3), (f), and (g)(4);

d. Removing “; plus” at the end of paragraph (h)(2) and adding in its place a period;

e. Removing paragraphs (h)(3) and (k); and

f. Redesignating paragraphs (g) through (j) as paragraphs (f) through (i), respectively.

8. Amend § 249.22 by removing paragraph (c) and redesignating paragraph (d) as paragraph (c).

Federal Deposit Insurance Corporation

9. The authority citation for part 329 continues to read as follows:

Authority: 12 U.S.C. 1815, 1816, 1818, 1819, 1828, 1831p-1, 5412.

10. Section 329.3 is amended by revising the definition for “Liquid and readily-marketable” and adding the definition for “Municipal obligation” in alphabetical order to read as follows:

11. Section 329.20 is amended by:

a. Republishing paragraph (c) introductory text;

b. Removing the “or” at the end of paragraph (c)(1)(iii);

c. Removing the period at the end of paragraph (c)(2)(vi) and adding “; or” in its place; and

d. Adding paragraph (c)(3).

The republication and addition read as follows: