Board of Governors of the Federal Reserve System (Board), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC).
Interim final rule with request for comments.
In light of recent disruptions in economic conditions caused by the coronavirus disease 2019 (COVID–19) and current strains in U.S. financial markets, the Board, OCC and FDIC (together, the agencies) are issuing an interim final rule that revises the definition of eligible retained income for all depository institutions, bank holding companies, and savings and loan holding companies subject to the agencies' capital rule (together, a banking organization or banking organizations). The revised definition of eligible retained income will make any automatic limitations on capital distributions that could apply under the agencies' capital rules more gradual.
The interim final rule is effective March 20, 2020. Comments on the interim final rule must be received no later than May 4, 2020.
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Under the capital rule, a banking organization
The agencies are adopting an interim final rule that revises the definition of eligible retained income. The interim final rule also addresses the impact of recent dislocations in the U.S. economy as a result of COVID–19. By modifying the definition of eligible retained income and thereby allowing banking organizations to more freely use their
During this stress period, the agencies encourage banking organizations to make prudent decisions regarding capital distributions. In addition, this interim final rule does not make changes to any other rule or regulation that may limit capital distributions or discretionary bonus payments. For instance, under the prompt corrective action framework, an insured depository institution that becomes less than adequately capitalized will be subject to dividend restrictions.
In addition, S-corporation banks do not pay Federal income taxes. Income and losses are attributed to shareholders, potentially increasing their personal tax liability when the S-corporation has income and potentially reducing their personal tax liability if the S-corporation has losses. In a situation where the S-corporation has income but does not pay dividends, its shareholders are responsible for meeting the increased tax liability from their own resources. A situation in which S-corporation shareholders' dividends would be insufficient to pay their share of taxes on the banks' income because of the capital conservation buffer is most likely to occur when the bank is adequately capitalized but one or more of its risk-based capital ratios breach the capital conservation buffer requirements.
The capital rule requires a banking organization to maintain minimum risk-based capital and leverage ratios.
Under the capital rule, if a banking organization's capital ratios fall within its buffer requirements, the maximum amount of capital distributions and discretionary bonus payments it can make is a function of its eligible retained income. For example, a banking organization in the bottom quartile of its capital conservation buffer may not make any capital distributions without prior approval from the Board, OCC, or FDIC, as applicable. The countercyclical capital buffer, the GSIB surcharge, and enhanced supplementary leverage ratio standards use the same definition of eligible retained income. As adopted, eligible retained income was defined as four quarters of net income,
Under a benign business environment when banking organizations have significant capital cushions above their capital requirements, some banking organizations decide to distribute all or nearly all of their net income. Because the measure of eligible retained income subtracts capital distributions made during the previous year, a period of sudden stress following a period of relatively benign conditions could result in very low or zero eligible retained income. Similarly, if a banking organization with eligible retained income that is very low or negative experiences an increase in its stress capital buffer requirement, because, for example, the banking organization's risk profile changed, then the banking organization's capital levels might not be sufficient to meet the stress capital buffer requirement. In either scenario, the banking organization could face sudden and severe distribution limitations even if its capital ratios only marginally fall below applicable buffer requirements.
To address this concern, the SCB final rule revised the definition of eligible retained income for the stress loss portion of a covered holding company's capital conservation buffer requirement. Under the SCB final rule, if a covered holding company's capital ratios are above minimum requirements plus the fixed 2.5 percent portion of the capital conservation buffer plus any applicable GSIB surcharge and countercyclical capital buffer, the covered holding company's eligible retained income is defined as the average of its previous four quarters of net income. Under the SCB final rule, if a covered holding company's capital ratios are below its minimum requirements plus the fixed 2.5 percent portion of the capital conservation buffer plus any applicable GSIB surcharge and countercyclical capital buffer, the covered holding company's eligible retained income is defined as net income for the four preceding calendar quarters, net of any distributions.
Recent events have suddenly and significantly impacted financial markets. The spread of the COVID–19 virus has disrupted economic activity in many countries. In addition, financial markets have experienced significant volatility. The magnitude and
To better allow a banking organization to continue lending during times of stress, the agencies are issuing the interim final rule to revise the definition of eligible retained income to the greater of (1) a banking organization's net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a banking organization's net income over the preceding four quarters. This definition will apply with respect to all of a banking organization's buffer requirements, including the fixed 2.5 percent capital conservation buffer, and, if applicable, the countercyclical capital buffer, the GSIB surcharge, and enhanced supplementary leverage ratio standards. Once the SCB final rule is effective, this definition will also apply to all parts of a covered holding company's buffer requirements, including the stress loss portion of a covered holding company's capital conservation requirement. The agencies believe that having one definition for all banking organizations as described in this interim final rule simplifies the regulatory capital framework and ensures fairness across banking organizations of all sizes.
This interim final rule is intended to strengthen the incentives for a banking organization to use its capital buffers as intended in adverse conditions and serve as a financial intermediary and source of credit to the economy. This revision would reduce the likelihood that a banking organization is suddenly subject to abrupt and restrictive distribution limitations in a scenario of lower than expected capital levels.
In ordinary economic circumstances, many banking organizations will pay out a significant portion of their net income, and retain the rest to support growth. As banking organizations enter stress periods, the restrictions in the capital buffers limit distributions and help to preserve capital and support lending. However, if the limits to distributions are too restrictive, banking organizations can face a sharp increase in their distribution limitations when they enter the buffer due to stress. This may create an incentive for banking organizations to reduce lending or take other actions to avoid falling into the buffer. The revised definition of eligible net income in the interim final rule allows banking organizations to more gradually reduce distributions as they enter stress, and provides banking organizations with stronger incentives to continue to lend in such a scenario. On the other hand, by enabling banking organizations to gradually decrease capital distributions in stress (rather than mandating a sharp decrease), the rule could incrementally reduce the banking organization's loss-absorption capacity in stress.
The definition of eligible retained income affects the distributions of banking organizations within their capital conservation or stress capital buffers. It does not have an impact on minimum capital requirements,
The agencies are issuing the interim final rules without prior notice and the opportunity for public comment and the delayed effective date ordinarily prescribed by the Administrative Procedure Act (APA)).
The agencies believe that the public interest is best served by implementing the interim final rule immediately upon publication in the
The APA also requires a 30-day delayed effective date, except for (1) substantive rules which grant or recognize an exemption or relieve a restriction; (2) interpretative rules and
While the agencies believe that there is good cause to issue the rule without advance notice and comment and with an immediate effective date, the agencies are interested in the views of the public and requests comment on all aspects of the interim final rule.
For purposes of Congressional Review Act, the OMB makes a determination as to whether a final rule constitutes a “major” rule.
The Congressional Review Act defines a “major rule” as any rule that the Administrator of the Office of Information and Regulatory Affairs of the OMB finds has resulted in or is likely to result in (A) an annual effect on the economy of $100,000,000 or more; (B) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies or geographic regions, or (C) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets.
For the same reasons set forth above, the agencies are adopting the interim final rule without the delayed effective date generally prescribed under the Congressional Review Act. The delayed effective date required by the Congressional Review Act does not apply to any rule for which an agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rule issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.
As required by the Congressional Review Act, the agencies will submit the final rule and other appropriate reports to Congress and the Government Accountability Office for review.
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3521) (PRA) 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 OMB control number. The interim final rule affects the agencies' current information collections for the Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031, FFIEC 041, and FFIEC 051). The OMB control numbers for the agencies are: OCC OMB No. 1557–0081; Board OMB No. 7100–0036; and FDIC OMB No. 3064–0052. The Board has reviewed this interim final rule pursuant to authority delegated by the OMB.
Although there is a substantive change to the actual calculation of retained income for purposes of the Call Reports, the change should be minimal and result in a zero net change in hourly burden under the agencies' information collections. Submissions will, however, be made by the agencies to OMB. The changes to the Call Reports and their related instructions will be addressed in a separate
The Board's delegated authority requires that the Board, after temporarily approving a collection, solicit public comment on a proposal to extend the temporary collection for a period not to exceed three years. Therefore, the Board is inviting comment on a proposal to extend the FR Y–9 reports for three years, with revision. The Board invites public comment on the FR Y–9 reports, which are being reviewed under authority delegated by the OMB under the PRA. Comments are invited on the following:
a. Whether the proposed collection of information is 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 proposed information collection, 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 information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information.
Comments must be submitted on or before May 19, 2020. At the end of the comment period, the comments and recommendations received will be analyzed to determine the extent to which the Board should modify the proposal.
FR Y–9C (non AA HCs) with less than $5 billion in total assets—155,
FR Y–9C (non AA HCs) with $5 billion or more in total assets—189,
FR Y–9C (AA HCs)—19,
FR Y–9LP—434,
FR Y–9SP—3,960,
FR Y–9ES—83,
FR Y–9CS—236.
FR Y–9C (non AA HCs) with less than $5 billion in total assets—40.48,
FR Y–9C (non AA HCs) with $5 billion or more in total assets—46.34,
FR Y–9C (AA HCs)—47.59,
FR Y–9LP—5.27,
FR Y–9SP—5.40,
FR Y–9ES—0.50,
FR Y–9CS—0.50.
Recordkeeping
FR Y–9C (non AA HCs) with less than $5 billion in total assets—1,
FR Y–9C (non AA HCs) with $5 billion or more in total assets—1,
FR Y–9C (AA HCs)—1,
FR Y–9LP—1,
FR Y–9SP—0.50,
FR Y–9ES—0.50,
FR Y–9CS—0.50.
FR Y–9C (non AA HCs) with less than $5 billion in total assets—25,098,
FR Y–9C (non AA HCs) with $5 billion or more in total assets—35,033,
FR Y–9C (AA HCs)—3,617,
FR Y–9LP—9,149,
FR Y–9SP—42,768,
FR Y–9ES—42,
FR Y–9CS—472.
FR Y–9C (non AA HCs) with less than $5 billion in total assets—620,
FR Y–9C (non AA HCs) with $5 billion or more in total assets—756,
FR Y–9C (AA HCs)—76,
FR Y–9LP—1,736,
FR Y–9SP—3,960,
FR Y–9ES—42,
FR Y–9CS—472.
With respect to the FR Y–9C report, Schedule HI's memoranda data item 7(g) “FDIC deposit insurance assessments,” Schedule HC–P's data item 7(a) “Representation and warranty reserves for 1–4 family residential mortgage loans sold to U.S. government agencies and government sponsored agencies,” and Schedule HC–P's data item 7(b) “Representation and warranty reserves for 1–4 family residential mortgage loans sold to other parties” are considered confidential commercial and financial information. Such treatment is appropriate under exemption 4 of the Freedom of Information Act (FOIA) (5 U.S.C. 552(b)(4)) because these data items reflect commercial and financial information that is both customarily and actually treated as private by the submitter, and which the Board has previously assured submitters will be treated as confidential. It also appears that disclosing these data items may reveal confidential examination and supervisory information, and in such instances, this information would also be withheld pursuant to exemption 8 of the FOIA (5 U.S.C. 552(b)(8)), which protects information related to the supervision or examination of a regulated financial institution.
In addition, for both the FR Y–9C report and the FR Y–9SP report, Schedule HC's memorandum item 2.b., the name and email address of the external auditing firm's engagement partner, is considered confidential commercial information and protected by exemption 4 of the FOIA (5 U.S.C. 552(b)(4)) if the identity of the engagement partner is treated as private information by HCs. The Board has assured respondents that this information will be treated as confidential since the collection of this data item was proposed in 2004.
Aside from the data items described above, the remaining data items on the FR Y–9C report and the FR Y–9SP report are generally not accorded confidential treatment. The data items collected on FR Y–9LP, FR Y–9ES, and FR Y–9CS reports, are also generally not accorded confidential treatment. As provided in the Board's Rules Regarding Availability of Information (12 CFR part 261), however, a respondent may request confidential treatment for any data items the respondent believes should be withheld pursuant to a FOIA exemption. The Board will review any such request to determine if confidential treatment is appropriate, and will inform the respondent if the request for confidential treatment has been denied.
To the extent the instructions to the FR Y–9C, FR Y–9LP, FR Y–9SP, and FR Y–9ES reports each respectively direct the financial institution to retain the workpapers and related materials used in preparation of each report, such material would only be obtained by the Board as part of the examination or supervision of the financial institution. Accordingly, such information is considered confidential pursuant to exemption 8 of the FOIA (5 U.S.C. 552(b)(8)). In addition, the workpapers and related materials may also be protected by exemption 4 of the FOIA, to the extent such financial information is treated as confidential by the respondent (5 U.S.C. 552(b)(4)).
The Board also proposes to extend the FR Y–9 reports for three years, with the revisions discussed above.
The Regulatory Flexibility Act (RFA)
Nevertheless, the agencies seek comment on whether, and the extent to which, the interim final rule would affect a significant number of small entities.
Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act (RCDRIA),
As such, the final rule will be effective on March 20, 2020. Nevertheless, the agencies seek comment on RCDRIA.
Section 722 of the Gramm-Leach-Bliley Act
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As a general matter, the Unfunded Mandates Act of 1995 (UMRA), 2 U.S.C. 1531
Administrative practice and procedure, Capital, Federal savings associations, National banks, Risk.
Administrative practice and procedure, Banks, Banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Risk, Securities.
Administrative practice and procedure, Banks, banking, Reporting and recordkeeping requirements, Savings associations.
For the reasons set out in the joint preamble, the OCC amends part 3 of chapter I, title 12 of the CFR as follows:
12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
(a) * * *
(2) * * *
(i)
(A) The national bank's or Federal savings association's net income, calculated in accordance with the instructions to the Call Report, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and
(B) The average of the national bank's or Federal savings association's net income, calculated in accordance with the instructions to the Call Report, for the four calendar quarters preceding the current calendar quarter.
12 CFR Chapter II
For the reasons stated in the joint preamble, the Board of Governors of the Federal Reserve System amends 12 CFR chapter II as follows:
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, and 5371 note.
(a) * * *
(2) * * *
(i)
(A) The Board-regulated institution's net income, calculated in accordance with the instructions to the FR Y–9C or Call Report, as applicable, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and
(B) The average of the Board-regulated institution's net income, calculated in accordance with the instructions to the FR Y–9C or Call Report, as applicable, for the four calendar quarters preceding the current calendar quarter.
12 CFR Chapter III
For the reasons set forth in the joint preamble, chapter III of title 12 of the Code of Federal Regulations is amended as follows:
12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102–233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102–242, 105 Stat. 2236, 2355, as amended by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. 2236, 2386, as amended by Pub. L. 102–550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); Pub. L. 111–203, 124 Stat. 1376, 1887 (15 U.S.C. 78o–7 note).
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(2) * * *
(i)
(A) The FDIC-supervised institution's net income, calculated in accordance with the instructions to the Call Report, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and
(B) The average of the FDIC-supervised institution's net income, calculated in accordance with the instructions to Call Report, for the four calendar quarters preceding the current calendar quarter.
By order of the Board of Governors of the Federal Reserve System.
By order of the Board of Directors.