OCC BULLETIN 2019-18
Subject: Regulatory Capital Rule
Date: April 8, 2019
To: Chief Executive Officers of All National Banks and Federal Savings Associations, Department and Division Heads, All Examining Personnel, and Other Interested Parties
Description: Notice of Proposed Rulemaking
The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), and the Federal Deposit Insurance Corporation (collectively, the agencies) are issuing a notice of proposed rulemaking that would be applicable to advanced approaches banking organizations. The OCC’s proposed rule would apply to national banks and federal savings associations (collectively, banks) that have or that are subsidiaries of banking organizations that have at least $250 billion in total consolidated assets or at least $10 billion in total consolidated foreign financial exposures (advanced approaches banks).
In 2017, the Federal Reserve published a final a rule to require the largest and most systemically important domestic and foreign-owned bank holding companies operating in the United States to maintain a minimum amount of TLAC. The Federal Reserve’s rule is generally consistent with international standards published by the Basel Committee on Banking Supervision.
Under the Federal Reserve’s regulations, a covered entity’s TLAC consists of its common equity tier 1 capital (excluding minority interest), additional tier 1 capital (excluding minority interest), and eligible LTD. Covered bank holding companies (BHC) and intermediate holding companies (IHC) must meet a portion of their TLAC requirements with a minimum amount of eligible LTD.
To qualify as eligible LTD, an instrument must be issued directly by the BHC or IHC, be unsecured, “plain vanilla,” and governed by U.S. law. Additionally, the instrument must have a remaining maturity of greater than one year. Debt with a remaining maturity between one and two years will be subject to a 50 percent haircut.
The Federal Reserve’s TLAC regulations became effective on January 1, 2019. Under the regulations, a covered organization that does not meet the minimum TLAC requirement will face limitations on its ability to make capital distributions and discretionary bonus payments.
The OCC’s current capital regulations do not impose any special requirements for holdings of LTD instruments. Under the generally applicable risk-based capital rules, an investment in an LTD instrument issued by a BHC or IHC generally would be treated as an investment in a corporate bond, which is subject to a risk weight of 100 percent. This proposal would increase the capital requirements for an advanced approaches bank that invests in an LTD instrument issued pursuant to the Federal Reserve’s TLAC requirements and, therefore, would reduce incentives for an advanced approaches bank to invest in such instruments.
Please contact David Elkes, Senior Risk Expert, Capital Policy Division, at (202) 649-6370; or Carl Kaminski, Special Counsel, Chief Counsel’s Office, at (202) 649-5490.
Jonathan V. Gould