74926 Federal Register / Vol. 80, No. 229 / Monday, November 30, 2015 / Proposed Rules

FEDERAL RESERVE SYSTEM DATES: Comments should be received by Table of Contents February 1, 2016. 12 CFR Parts 217 and 252 I. Introduction ADDRESSES: You may submit comments, A. Addressing Too-Big-to-Fail identified by Docket No. R–1523 and B. Approaches to Resolution [Regulations Q and YY; Docket No. R–1523] RIN 7100 AE–37, by any of the C. Overview of the Proposal following methods: D. Consultation with the FDIC, the RIN 7100–AE37 • Council, and Foreign Authorities Agency Web site: http:// E. The FSB’s Proposal on Total Loss- Total Loss-Absorbing Capacity, Long- www.federalreserve.gov. Follow the Absorbing Capacity for GSIBs Term Debt, and Clean Holding instructions for submitting comments at F. Overview of Statutory Authority Company Requirements for http://www.federalreserve.gov/ II. External TLAC and LTD Requirements for Systemically Important U.S. Bank generalinfo/foia/ProposedRegs.cfm. U.S. GSIBs Holding Companies and Intermediate • Federal eRulemaking Portal: http:// A. Scope of Application www.regulations.gov. Follow the B. Calibration of the External TLAC and Holding Companies of Systemically LTD Requirements Important Foreign Banking instructions for submitting comments. • C. Core Features of Eligible External TLAC Organizations; Regulatory Capital Email: regs.comments@ D. External TLAC Buffer Deduction for Investments in Certain federalreserve.gov. Include the docket E. Core Features of Eligible External LTD Unsecured Debt of Systemically number in the subject line of the F. Costs and Benefits Important U.S. Bank Holding message. III. Internal TLAC and LTD Requirements for Companies • Fax: (202) 452–3819 or (202) 452– U.S. Intermediate Holding Companies of 3102. Foreign Banking Organizations AGENCY: Board of Governors of the • Mail: Robert deV. Frierson, A. Scope of Application Federal Reserve System (Board). B. Calibration of the Internal TLAC and Secretary, Board of Governors of the LTD Requirements ACTION: Notice of proposed rulemaking. Federal Reserve System, 20th Street and C. Core Features of Eligible Internal TLAC Constitution Avenue NW., Washington, SUMMARY: D. Internal TLAC Buffer The Board is inviting DC 20551. comment on a proposed rule to promote E. Core Features of Eligible Internal LTD All public comments will be made IV. Clean Holding Company Requirements financial stability by improving the available on the Board’s Web site at A. Third-Party Short-Term Debt resolvability and resiliency of large, http://www.federalreserve.gov/ Instruments interconnected U.S. bank holding generalinfo/foia/ProposedRegs.cfm as B. Qualified Financial Contracts with companies and the U.S. operations of submitted, unless modified for technical Third Parties large, interconnected foreign banking C. Guarantees that Are Subject to Cross- reasons. Accordingly, your comments organizations pursuant to section 165 of Defaults will not be edited to remove any the Dodd-Frank Wall Street Reform and D. Upstream Guarantees and Offset Rights identifying or contact information. Consumer Protection Act (Dodd-Frank E. Cap on Other Third-Party Liabilities Public comments may also be viewed Act) and related deduction requirements F. Disclosure Requirements electronically or in paper form in Room V. Consideration of Reporting Requirements for all banking organizations subject to 3515, 1801 K Street (between 18th and for Eligible External and Internal TLAC the Board’s capital rules. Under the 19th Streets NW.) Washington, DC and LTD proposed rule, a U.S. top-tier bank 20006 between 9:00 a.m. and 5:00 p.m. VI. Consideration of Domestic Internal TLAC holding company identified by the on weekdays. Requirement Board as a global systemically important VII. Regulatory Capital Deduction for banking organization (covered BHC) FOR FURTHER INFORMATION CONTACT: Investments in the Unsecured Debt of would be required to maintain Constance M. Horsley, Assistant Covered BHCs outstanding a minimum amount of loss- Director, (202) 452–5239, Thomas VIII. Transition Periods absorbing instruments, including a Boemio, Senior Project Manager, (202) IX. Regulatory Analysis A. Paperwork Reduction Act minimum amount of unsecured long- 452–2982, Juan C. Climent, Manager, (202) 872–7526, Felton Booker, Senior B. Regulatory Flexibility Act term debt, and related buffer. Similarly, C. Riegle Community Development and the proposed rule would require the Supervisory Financial Analyst, (202) Regulatory Improvement Act of 1994 top-tier U.S. intermediate holding 912–4651, Sean Healey, Senior D. Solicitation of Comments on the Use of company of a global systemically Financial Analyst, (202) 912–4611, or Plain Language Mark Savignac, Senior Financial important foreign banking organization I. Introduction with $50 billion or more in U.S. non- Analyst, (202) 475–7606, Division of branch assets (covered IHC) to maintain Banking Supervision and Regulation; or A. Addressing Too-Big-to-Fail Laurie Schaffer, Associate General outstanding a minimum amount of An important objective of the Dodd- Counsel, (202) 452–2272, Benjamin intra-group loss-absorbing instruments, Frank Wall Street Reform and Consumer McDonough, Special Counsel, (202) including a minimum amount of Protection Act (Dodd-Frank Act) 1 is to 452–2036, Jay Schwarz, Senior Counsel, unsecured long-term debt, and related mitigate risks to the financial stability of (202) 452–2970, Will Giles, Counsel, buffer. The proposed rule would also the United States that could arise from (202) 452–3351, Mark Buresh, Senior impose restrictions on the other the material financial distress or failure Attorney, (202) 452–5270, or Greg liabilities that a covered BHC or covered of large, interconnected financial Frischmann, Senior Attorney, (202) IHC may have outstanding. Finally, the companies, including by ending market 452–2803, Legal Division, Board of proposed rule would require state perceptions that certain financial Governors of the Federal Reserve member banks, bank holding companies are ‘‘too big to fail’’ and System, 20th and C Streets NW., companies, and savings and loan would therefore receive extraordinary Washington, DC 20551. For the hearing holding companies that are subject to government support to prevent their impaired only, Telecommunications the Board’s capital rules to apply a failure. Such perceptions reduce the regulatory capital deduction treatment Device for the Deaf (TDD) users may contact (202) 263–4869. to their investments in unsecured debt 1 The Dodd-Frank Act was enacted on July 21, issued by covered BHCs. SUPPLEMENTARY INFORMATION: 2010 (Pub. L. 111– 203).

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incentives of the shareholders, creditors, Heads of State of the Group of Twenty adopted a substantial set of post-crisis and counterparties of such a company to (G20 Leaders).6 reforms, developed with significant discipline excessive risk-taking by the The Board has made considerable participation from the Board and other company. Such perceptions also tend to progress in implementing the first U.S. bank regulatory agencies, which fuel further growth by the largest approach by reducing the probability align well with the bank regulatory financial companies, making them even that a major financial company will fail. reforms implemented in the United more systemically important and Along with the Comptroller of the States. leading to more financial sector Currency (OCC) and the Federal Deposit U.S. regulators have also made concentration than would exist in the Insurance Corporation (FDIC), the Board substantial progress with respect to the absence of market expectations of has implemented stronger capital second approach by implementing the government support. Finally, such standards 7 and a new liquidity standard Dodd-Frank Act’s framework for perceptions can produce competitive called the liquidity coverage ratio.8 The resolution-planning for major financial distortions by allowing the largest, most Board also has adopted leverage and companies. The Dodd-Frank Act interconnected financial companies to risk-based capital surcharges for U.S. provides significant new authorities to fund themselves more cheaply than global systemically important banking the FDIC and the Board to address the their smaller competitors can. These organizations (GSIBs),9 established a failure of large, interconnected financial distortions are unfair to smaller robust stress testing framework for large companies.14 First, Section 165(d) of the companies and detrimental to banking organizations,10 and created a Dodd-Frank Act requires bank holding competition. Large Institution Supervision companies with total consolidated The Dodd-Frank Act establishes a Coordinating Committee to strengthen assets of at least $50 billion and framework to address the financial the supervision of the most systemically nonbank financial companies stability risks associated with major important financial institutions designated for supervision by the Board financial companies. The Act seeks to operating in the United States.11 to prepare resolution plans, also known enhance financial stability through two To further enhance firm-specific as ‘‘living wills,’’ that describe how they approaches. First, the Act seeks to resiliency during periods of severe could be resolved in an orderly manner reduce major financial companies’ stress, the Board has also issued under the U.S. Bankruptcy Code if they probability of failure by requiring the guidance on recovery planning to the were to fail.15 The Board and the FDIC Board to subject them to enhanced most systemically important U.S. have established resolution-planning capital, liquidity, and other prudential banking organizations.12 In addition, the requirements to implement section requirements and to heightened Board has implemented a broad set of 165(d).16 supervision.2 Second, the Act seeks to other enhanced prudential standards for Second, Title II of the Dodd-Frank Act reduce the risk that such a company’s bank holding companies and foreign (Title II) establishes an alternative failure, were it to occur, would pose to banking organizations with total resolution framework for the largest the financial stability of the United consolidated assets of $50 billion or financial companies, the Orderly States through resolution-planning more.13 Internationally, the BCBS has Liquidation Authority. In general, if a requirements and a new statutory major U.S. bank holding company or resolution framework for major financial committees of central bank experts. See generally non-bank financial company were to companies.3 These approaches have Financial Stability Board, available at http:// fail, it would be resolved under the U.S. www.financialstabilityboard.org. Bankruptcy Code.17 Congress also been followed in international 6 The Group of Twenty was established in 1999 regulatory reform efforts since the 2007– to bring together industrialized and developing recognized, however, that such a 2009 financial crisis, which have been economies to discuss key issues in the global company might fail under extraordinary coordinated through the Basel economy. Members include finance ministers and circumstances that would prevent it central bank governors from Argentina, Australia, from being resolved in bankruptcy Committee on Banking Supervision Brazil, Canada, China, France, Germany, India, 4 (BCBS) and the Financial Stability Indonesia, Italy, Japan, Mexico, Russia, Saudi without serious adverse effects on the Board (FSB),5 at the direction of the Arabia, South Africa, Republic of Korea, Turkey, financial stability of the United States.18 the United Kingdom, and the United States and the Title II therefore provides the Secretary European Union. 2 See 12 U.S.C. 5365(a)(1)(A). of the Treasury, upon recommendation 7 The Board and the OCC issued a joint final rule 3 See 12 U.S.C. 5381–5394. on October 11, 2013 (78 FR 62018) and the FDIC from other government agencies, with 4 The BCBS is a committee of banking supervisory issued a substantially identical interim final rule on the authority to place a major financial authorities established by the central bank September 10, 2013 (78 FR 55340). The FDIC governors of the Group of Ten countries in 1975. company into an FDIC receivership, adopted the interim final rule as a final rule with rather than bankruptcy.19 The set of The committee’s membership consists of senior no substantive changes on April 14, 2014. 79 FR representatives of bank supervisory authorities and 20754. resolution powers created by Title II central banks from Argentina, Australia, Belgium, 8 79 FR 61440 (October 10, 2014). form a critical post-crisis toolkit for Brazil, Canada, China, France, Germany, Hong Kong 9 SAR, India, Indonesia, Italy, Japan, Korea, See 80 FR 49082 (Aug. 14, 2015) (GSIB risk- mitigating the negative effects that could Luxembourg, Mexico, the Netherlands, Russia, based capital surcharge); 79 FR 24528 (May 1, 2014) follow from the failure of a systemically Saudi Arabia, Singapore, South Africa, Spain, (enhanced supplementary leverage ratio). The eight firms currently identified as U.S. GSIBs are Bank of important financial institution. Sweden, Switzerland, Turkey, the United Kingdom, Since 2012, the largest bank holding and the United States. The BCBS usually meets at America Corporation, The Bank of New York the Bank for International Settlements (BIS) in Mellon Corporation, Citigroup Inc., Goldman Sachs companies and foreign banking Basel, Switzerland, where its permanent Secretariat Group, Inc., JP Morgan Chase & Co., Morgan organizations with U.S. operations have is located. Stanley, State Street Corporation, and Wells Fargo submitted annual resolution plans to the & Company. 5 The FSB was established in 2009 to coordinate 10 12 CFR 252.32 and 252.35. at the international level the work of national 14 12 U.S.C. 5365, 5384, and 5385. financial authorities and international standard- 11 See Large Institution Supervision Coordinating 15 12 U.S.C. 5365(d). setting bodies and to develop and promote the Committee, available at http:// 16 implementation of effective regulatory, supervisory, www.federalreserve.gov/bankinforeg/large- 76 FR 67323 (November 1, 2011). and other financial sector policies in the interest of institution-supervision.htm. 17 See, e.g., 12 U.S.C. 5382(c), 5383(a)(2)(F) and financial stability. The FSB brings together national 12 See Supervision and Regulation Letter 14–8, (b)(4). Insurance companies, depository institutions, authorities responsible for financial stability in 24 ‘‘Consolidated Recovery Planning for Certain Large and broker dealers are resolved under different countries and jurisdictions, as well as international Domestic Bank Holding Companies’’ (September 25, resolution mechanisms. financial institutions, sector-specific international 2014). 18 See 12 U.S.C. 5384. groupings of regulators and supervisors, and 13 79 FR 17240 (March 27, 2014). 19 See 12 U.S.C. 5383(b).

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Board and the FDIC as required by United States, the top-tier parent the top-tier U.S. intermediate holding section 165(d). The Board and the FDIC company of a large banking organization companies of foreign GSIBs to maintain review the resolution plans, provide generally does not itself engage in outstanding minimum levels of total feedback on their shortcomings, and set material operations. Rather, it generally loss-absorbing capacity and long-term expectations for subsequent iterations of acts primarily as a holding company, by, unsecured debt instruments issued to the plans that are intended to improve for example, measuring and managing their foreign parent company, and the organizations’ resolvability. Each the consolidated risks of the related buffer. The proposal would annual plan review cycle has yielded organization, undertaking capital and subject the operations of the parent valuable information that is being used liquidity planning, coordinating the holding companies of U.S. GSIBs and to assess and mitigate potential operations of its subsidiaries, and the top-tier U.S. intermediate holding obstacles to orderly resolution under the raising equity capital and long-term debt companies of foreign GSIBs to ‘‘clean U.S. Bankruptcy Code and to plan for to fund those operations. Its assets holding company’’ limitations to further the contingency of a resolution under therefore consist largely of cash, liquid improve their resolvability and the Title II. The Board and the FDIC also securities, and equity and debt resiliency of their operating consult regularly on regulatory actions investments in its subsidiaries. As a subsidiaries. Finally, the proposal intended to improve GSIB resolvability, result of this organizational structure, in would require banking organizations including this proposed rule. the context of SPOE resolution the subject to the Board’s capital liabilities of the parent holding requirements to make certain B. Approaches to Resolution company are generally ‘‘structurally deductions from capital. Resolution of large financial firms subordinated’’ to the liabilities of the This proposal would further the goals will involve either a single-point-of- operating subsidiaries.22 Strengthening of improving the resiliency and entry (SPOE) resolution strategy or a the loss-absorbing capacity of the parent resolvability of GSIBs. Separately, the multiple-point-of-entry (MPOE) holding company therefore improves Board and the FDIC are continuing to resolution strategy.20 Most of the U.S. the resiliency of the banking work to mitigate the resolvability risks GSIBs are developing plans that organization as a whole. related to potential disorderly unwinds facilitate an SPOE approach, including The alternative to an SPOE resolution of financial contracts. Other actions for in their 2015 resolution plans. is a multiple-point-of-entry (MPOE) consideration include ensuring the In an SPOE resolution of a banking resolution. An MPOE resolution would adequacy of ‘‘internal bail-in’’ organization, only the top-tier bank entail separate resolutions of different mechanisms through which operating holding company would enter a legal entities within the financial firm subsidiaries can pass losses up to their resolution proceeding. The losses that and could potentially be executed by parent holding company and the caused the banking organization to fail multiple resolution authorities across holding company can recapitalize the would be passed up from the multiple jurisdictions. The SPOE subsidiaries. subsidiaries that incurred the losses and approach to resolution appears to offer would then be imposed on the equity substantial advantages, because it 1. External Total Loss-Absorbing holders and unsecured creditors of the facilitates the continued operations of Capacity and Long-Term Debt holding company, which would have subsidiaries of a GSIB, reducing the Requirements for Covered U.S. Bank the effect of recapitalizing the material risk that the failure of the Holding Companies subsidiaries of the banking organization. organization could have on U.S. Under this proposal, a ‘‘covered BHC’’ An SPOE resolution could avoid losses financial stability. U.S. regulators would be required to maintain to the third-party creditors of the nevertheless are cognizant of the need to outstanding minimum levels of eligible subsidiaries and could thereby allow the prepare for other plausible external total loss-absorbing capacity subsidiaries to continue normal contingencies, including the MPOE (external TLAC requirement) and operations, without entering resolution resolution of a GSIB. While this eligible external long-term debt or taking actions (such as asset firesales) proposal is primarily focused on (external LTD requirement). The term that could pose a risk to the financial implementing the SPOE resolution ‘‘external’’ refers to the fact that the stability of the United States. The strategy, it would also substantially requirement would apply to loss- expectation that the holding company’s improve the prospects for a successful absorbing instruments issued by the equity holders and unsecured creditors MPOE resolution of a GSIB by requiring covered BHC to third-party investors, would absorb the banking organization’s U.S. GSIBs and the IHCs of foreign and the instrument would be used to losses in the event of its failure would GSIBs to maintain substantially more pass losses from the banking also help to maintain the confidence of loss-absorbing capacity. organization to those investors in case of the operating subsidiaries’ creditors and C. Overview of the Proposal failure. This is in contrast to ‘‘internal’’ counterparties, reducing their incentive loss-absorbing capacity, which could be to engage in potentially destabilizing The Board is inviting comment on used to transfer losses among legal funding runs. An SPOE resolution this notice of proposed rulemaking to entities within a banking organization would avoid the need for separate improve the resolvability and resiliency (for instance, from the operating proceedings for separate legal entities of U.S. banking organizations. The subsidiaries to the parent holding run by separate authorities across proposal would require the parent company). multiple jurisdictions and the holding companies of U.S. GSIBs to The term ‘‘covered BHC’’ would be associated destabilizing complexity.21 maintain outstanding minimum levels defined to include any U.S. top-tier Certain structural features of the U.S. of total loss-absorbing capacity and bank holding company identified as a GSIBs facilitate SPOE resolution. In the long-term unsecured debt, and a related GSIB under the Board’s rule establishing buffer. The proposal would also require risk-based capital surcharges for GSIBs 20 See FDIC, ‘‘Resolution of Systemically (‘‘GSIB surcharge rule’’).23 Under the Important Financial Institutions: The Single Point 22 Generally, in an insolvency proceeding, direct of Entry Strategy’’ (6741–01–P) (December 10, third-party claims on a parent holding company’s external TLAC requirement, a covered 2013), available at http://www.fdic.gov/news/board/ subsidiaries would be superior to the parent 2013/2013-12-10_notice_dis-b_fr.pdf. holding company’s equity claims on the 23 12 CFR 217.402; 80 FR 49106 (August 14, 21 See 78 FR 76614 (December 18, 2013). subsidiaries. 2015).

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BHC would be required to maintain issued internally within the foreign Covered IHCs that are expected to outstanding eligible external total loss- banking organization, from the covered enter resolution themselves would be absorbing capacity (‘‘eligible external IHC to a foreign parent entity. The term required to maintain outstanding TLAC’’) in an amount not less than the ‘‘covered IHC’’ would be defined to eligible internal TLAC in an amount not greater of 18 percent of the covered include any U.S. intermediate holding less than the greater of: (a) 18 percent of BHC’s total risk-weighted assets and 9.5 company that (a) is required to be the covered IHC’s total risk-weighted percent of the covered BHC’s total formed under the Board’s enhanced assets; 31 (b) 6.75 percent of the covered leverage exposure.24 An external TLAC prudential standards rule 27 and (b) is IHC’s total leverage exposure (if buffer that is similar to the capital controlled by a foreign banking applicable); and (c) 9 percent of the conservation buffer in the Board’s organization that would be designated covered IHC’s average total consolidated Regulation Q would apply in addition to as a GSIB under the Board’s capital assets, as computed for purposes of the the risk-weighted assets component of rules if it were subject to the Board’s U.S. tier 1 leverage ratio. the external TLAC requirement. GSIB surcharge on a consolidated basis For all covered IHCs, an internal Under the external LTD requirement, (‘‘foreign GSIB’’). TLAC buffer that is similar to the capital a covered BHC would be required to Under the internal TLAC requirement, conservation buffer in the Board’s maintain outstanding eligible external the amount of eligible internal total loss- Regulation Q would apply in addition to long-term debt instruments (‘‘eligible absorbing capacity (‘‘eligible internal the risk-weighted assets component of external LTD’’) in an amount not less TLAC’’) that a covered IHC would be the internal TLAC requirement. than the greater of 6 percent plus the required to maintain outstanding would Under the internal LTD requirement, surcharge applicable under the GSIB depend on whether the covered IHC (or a covered IHC would be required to surcharge rule (expressed as a any of its subsidiaries) is expected to go maintain outstanding eligible internal percentage) of total risk-weighted assets into resolution in a failure scenario, long-term debt instruments (‘‘eligible and 4.5 percent of total leverage rather than being maintained as a going internal LTD’’) in an amount not less exposure.25 concern while a foreign parent entity is than the greater of: (a) 7 percent of total A covered BHC’s eligible external instead resolved. In general, this means risk-weighted assets; (b) 3 percent of the TLAC would be defined to be the sum that the stringency of the internal TLAC total leverage exposure (if applicable); of (a) the tier 1 regulatory capital of the and LTD requirements for a given and (c) 4 percent of average total covered BHC issued directly by the covered IHC would be a function of consolidated assets, as computed for covered BHC and (b) the covered BHC’s whether the foreign GSIB parent of the purposes of the U.S. tier 1 leverage ratio. eligible external LTD, as defined below. covered IHC has an SPOE or an MPOE A covered IHC’s eligible internal A covered BHC’s eligible external resolution strategy. TLAC would generally be defined to be LTD would generally be defined to be Covered IHCs that are not expected to the sum of (a) the tier 1 regulatory enter resolution themselves would be debt that is issued directly by the capital issued from the covered IHC to required to maintain eligible internal covered BHC, is unsecured, is ‘‘plain a foreign parent entity that controls the 26 TLAC in an amount not less than the vanilla,’’ and is governed by U.S. law. covered IHC and (b) the covered IHC’s greater of: (a) 16 percent of the covered Eligible external LTD with a remaining eligible internal LTD, as defined below. IHC’s total risk-weighted assets; 28 (b) for maturity of between one and two years A covered IHC’s eligible internal LTD covered IHCs that are subject to the would be subject to a 50 percent haircut would generally be subject to the same supplementary leverage ratio,29 6 for purposes of the external LTD requirements as would apply to eligible percent of the covered IHC’s total requirement, and eligible external LTD external LTD: It would be required to be leverage exposure; and (c) 8 percent of with a remaining maturity of less than debt that is issued directly from the the covered IHC’s average total one year would not count toward the covered IHC, is unsecured, is plain external LTD requirement. consolidated assets, as computed for purposes of the U.S. tier 1 leverage vanilla, and is governed by U.S. law. 2. Internal Total Loss-Absorbing ratio.30 Eligible internal LTD with a remaining Capacity and Long-Term Debt maturity of between one and two years Requirements for Covered U.S. 27 The Board’s enhanced prudential standards would be subject to a 50 percent haircut Intermediate Holding Companies rule generally requires any foreign banking for purposes of the internal LTD organization with total consolidated non-branch requirement, and eligible internal LTD Under this proposal, a ‘‘covered IHC’’ U.S. assets of $50 billion or more to form a single with a remaining maturity of less than would be required to maintain U.S. intermediate holding company over its U.S. one year would not count toward the outstanding minimum levels of eligible subsidiaries. 12 CFR 252.153; 79 FR 17329 (May 27, internal LTD requirement. internal total loss-absorbing capacity 2014). 28 The risk-weighted assets component of the However, several features distinguish (‘‘internal TLAC requirement’’) and internal TLAC requirement would be phased in as eligible internal LTD from eligible eligible internal long-term debt follows: It would be equal to 14 percent of the external LTD: It would be required to be (‘‘internal LTD requirement’’). The term covered IHC’s risk-weighted assets beginning on issued to a parent foreign entity that ‘‘internal’’ refers to the fact that these January 1, 2019, and would be equal to 16 percent of the covered IHC’s risk-weighted assets beginning controls the covered IHC, to be instruments would be required to be on January 1, 2022. contractually subordinated to all third- 29 Under the IHC rule, U.S. intermediate holding party liabilities of the covered IHC, and 24 The risk-weighted assets component of the companies with total consolidated assets of $250 external TLAC requirement would be phased in as billion or more or on-balance sheet foreign exposure to include a contractual trigger pursuant follows: It would be equal to 16 percent of the equal to $10 billion or more are required to meet covered BHC’s risk-weighted assets beginning on a minimum supplementary leverage ratio of 3 for U.S. intermediate holding companies that meet January 1, 2019, and would be equal to 18 percent percent. 12 CFR 252.153(e)(2); 79 FR 17329 (March the scope of application for that ratio. of the covered BHC’s risk-weighted assets beginning 27, 2014). 31 The risk-weighted assets component of the on January 1, 2022. 30 The final rule imposes the same leverage internal TLAC requirement for covered IHCs of 25 Total leverage exposure is defined in 12 CFR capital requirements on U.S. intermediate holding MPOE firms would be phased in as follows: It 217.10(c)(4)(ii). companies as it does on U.S. bank holding would be equal to 16 percent of the covered IHC’s 26 The term ‘‘plain vanilla’’ is defined in detail in companies. 12 CFR 252.153(e)(2); 79 FR 17329 risk-weighted assets beginning on January 1, 2019, section II.E.3 and excludes structured notes and (March 27, 2014). These leverage capital and would be equal to 18 percent of the covered most instruments that contain derivative-linked requirements include the generally-applicable IHC’s risk-weighted assets beginning on January 1, features. leverage ratio and the supplementary leverage ratio 2022.

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to which the Board could require the external TLAC. Finally, the proposal agencies. The proposal reflects input covered IHC to cancel the eligible would require covered BHCs to make that the Board received during this internal LTD or convert or exchange it certain public disclosures of the fact consultation process. The Board also into tier 1 common equity on a going- that their unsecured debt would be intends to consult with the FDIC, the concern basis (that is, without the expected to absorb losses ahead of other Council, and other financial regulatory covered IHC’s entry into a resolution liabilities, including the liabilities of the agencies after it reviews comments on proceeding) if: (a) The Board determines covered BHC’s subsidiaries, in a failure the proposal. Furthermore, the Board that the covered IHC is ‘‘in default or in scenario. has consulted with, and expects to danger of default’’; and (b) any of the An SPOE resolution of a foreign GSIB continue to consult with, foreign following circumstances apply (i) the in its home jurisdiction would allow the financial regulatory authorities top-tier foreign banking organization or GSIB’s covered IHC to continue regarding this proposal and the any subsidiary outside the United States operating without itself entering into a establishment of other standards that is placed into resolution proceedings, resolution proceeding. However, to would maximize the prospects for the (ii) the home country supervisory prepare for a scenario in which a cooperative and orderly cross-border authority consents to the cancellation, covered IHC would enter U.S. resolution resolution of failed GSIBs. exchange, or conversion, or does not proceedings, the Board is proposing to object to the cancellation, exchange, or prohibit covered IHCs from entering E. The FSB’s Proposal on Total Loss- conversion following 48 hours’ notice, into certain financial arrangements that Absorbing Capacity for GSIBs or (iii) the Board has made a written can impede such a resolution. In 2013, the G20 Leaders called on the recommendation to the Secretary of the 4. Consideration of Domestic Internal FSB to develop proposals on the Treasury that the FDIC should be TLAC Requirement adequacy of the loss-absorbing capacity appointed as receiver of the covered of global systemically important IHC. The SPOE resolution strategy assumes financial institutions (‘‘SIFIs’’).32 In (a) that losses will be passed up from November 2014, the FSB published for 3. Clean Holding Company the subsidiaries that initially incur them Requirements consultation a set of principles and a to the covered BHC or covered IHC and term sheet to implement those The Board is proposing to prohibit or (b) that they then will be passed on to principles in the form of an limit covered BHCs from directly either the external TLAC holders (in the internationally negotiated minimum entering into certain financial case of a covered BHC) or a foreign standard for the total loss-absorbing arrangements that could impede an parent entity (in the case of a covered capacity (‘‘TLAC’’) of GSIBs.33 Under entity’s orderly resolution. In an SPOE IHC). This proposal would work to the FSB’s proposed standard, GSIBs resolution of a U.S. GSIB, the covered satisfy the second of these assumptions, would be subject to a TLAC requirement BHC will go into a resolution but it does not address the first. As equal to the greater of (a) a figure proceeding while its subsidiaries discussed further below, however, the between 16 percent and 20 percent of a continue their normal operations. These Board is seeking comment on whether, banking organization’s risk-weighted prohibitions and limitations would and if so how, the Board should regulate assets (with the specific figure within support the orderly resolution of a the mechanisms used by a covered BHC that range to be agreed upon later) and covered BHC, whether in an SPOE or covered IHC to transfer losses up (b) twice the Basel III tier 1 leverage resolution or in an MPOE resolution from the operating subsidiaries that ratio requirement. The FSB’s proposed involving the resolution of the covered incur them to the covered BHC or standard also contains an expectation BHC. The proposed requirements would covered IHC. that a GSIB would meet at least one- also enhance the resiliency of the U.S. 5. Regulatory Capital Deduction for third of its TLAC requirement with GSIB by reducing the covered BHC’s eligible long-term debt (‘‘LTD’’) rather complexity and reliance on short-term Investments in the Unsecured Debt of Covered BHCs than equity. funding. This proposal is generally consistent Under the Board’s clean holding To limit the potential for financial with the FSB’s proposed standard, company proposal, a covered BHC sector contagion in the event of the although it includes a required LTD would be prohibited from issuing short- failure of a covered BHC, state member component that is more stringent than term debt instruments to third parties banks, certain bank holding companies the expectation in the FSB’s proposed (including deposits); entering into and savings and loan holding standard. ‘‘qualified financial contracts’’ (QFCs) companies with total consolidated The Board considered whether to with third parties; having liabilities that assets of at least $1 billion, and structure this proposal solely as a TLAC are subject to ‘‘upstream guarantees’’ intermediate holding companies formed requirement—that is, as a single from the covered BHC’s subsidiaries or pursuant to the Board’s enhanced minimum requirement that could be that are subject to contractual offset prudential standards for foreign banking satisfied by any mixture of capital and rights for its subsidiaries’ creditors; or organizations would be required to eligible LTD—without a specific LTD issuing guarantees of its subsidiaries’ apply a regulatory capital deduction requirement. In the absence of an LTD liabilities, if the issuance of the treatment to any investments in requirement, a TLAC requirement guarantee would result in the covered unsecured debt instruments issued by would permit each covered firm to BHC’s insolvency or entry into covered BHCs (including unsecured reduce its expected systemic impact resolution operating as a default event debt instruments that do not qualify as on the part of the subsidiary. eligible external LTD). 32 The Group of 20, ‘‘G20 Leaders’ Declaration’’ Additionally, the proposal would cap D. Consultation With the FDIC, the (September 2013), available at https://g20.org/wp- the value of a covered BHC’s liabilities content/uploads/2014/12/Saint_Petersburg_ (other than those related to eligible Council, and Foreign Authorities Declaration_ENG_0.pdf. external TLAC and eligible external In developing this proposal, the Board 33 See ‘‘Adequacy of loss-absorbing capacity of global systemically important banks in resolution’’ LTD) that can be pari passu with or consulted with the FDIC, the Financial (November 10, 2014), available at http:// junior to its eligible external LTD at 5 Stability Oversight Council (Council), www.financialstabilityboard.org/wp-content/ percent of the value of its eligible and other U.S. financial regulatory uploads/TLAC-Condoc-6-Nov-2014-FINAL.pdf.

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either by reducing its probability of particular, the proposed requirements Frank Act’s mandate that more stringent default through increased going-concern would improve the resolvability of U.S. prudential standards be applied to the capital or by reducing the harm it would GSIBs under either the U.S. Bankruptcy most systemically important bank cause if it were to fail through increased Code or Title II and improve their holding companies.43 gone-concern LTD.34 resiliency. The proposed requirements Under the GSIB surcharge rule’s This proposal includes a separate LTD would also improve the resiliency of methodology, eight U.S. bank holding requirement in order to address the too- covered IHCs and their subsidiaries, and companies would currently be big-to-fail problem. Unlike existing thereby increase the likelihood that a identified as GSIBs. Those eight top-tier equity, LTD can be used as a fresh failed foreign GSIB with significant U.S. bank holding companies would source of capital subsequent to failure. operations would be successfully therefore be covered BHCs under this Imposing an LTD requirement would resolved under an SPOE approach proposal.44 In addition, because the help to ensure that a covered firm without the failure of the U.S. GSIB surcharge methodology is would have a known and observable subsidiaries or, failing that, that the dynamic, other banking organizations quantity of loss-absorbing capacity at foreign GSIB’s U.S. operations could be could become subject to the proposed the point of failure. Unlike common separately resolved in an orderly rule in the future. equity, that loss-absorbing capacity manner. Question 2: The Board invites would not be at substantial risk of In addition to the authority identified comment on alternative approaches for volatility or depletion before the above, section 165 of the Dodd-Frank determining the scope of application of covered BHC is placed into a resolution Act also authorizes the Board to the proposed external TLAC and LTD proceeding. Thus, the proposed LTD establish ‘‘enhanced public disclosures’’ requirements. requirements would more assuredly and ‘‘short-term debt limits.’’ 39 The enhance the prospects for the successful proposal includes disclosure B. Calibration of the External TLAC and resolution of a failed GSIB and thereby requirements and limits on the ability of LTD Requirements (Sections 252.62 and better address the too-big-to-fail covered BHCs and covered IHCs to issue 252.63 of the Proposed Rule) problem than would TLAC short-term debt. Under the proposal’s external TLAC requirements alone. Finally, the Board has tailored this requirement, a covered BHC would be proposal to apply only to those F. Overview of Statutory Authority required to maintain outstanding companies whose disorderly resolution eligible external TLAC in an amount not The Board is issuing this proposal would likely pose the greatest risk to the less than the greater of 18 percent of the under the authority provided by section financial stability of the United States: covered BHC’s total risk-weighted 35 165 of the Dodd-Frank Act. Section The U.S. GSIBs and the U.S. assets 45 and 9.5 percent of the covered 165 instructs the Board to impose intermediate holding companies of BHC’s total leverage exposure under the enhanced prudential standards on bank foreign GSIBs.40 supplementary leverage ratio rule. As holding companies with total Question 1: The Board invites described below, an external TLAC consolidated assets of $50 billion or comment on all aspects of this section. buffer would apply in addition to the more ‘‘[i]n order to prevent or mitigate risk-weighted assets component of the risks to the financial stability of the II. External TLAC and LTD Requirements for U.S. GSIBs external TLAC requirement. United States that could arise from the Under the proposal’s external LTD material financial distress or failure, or A. Scope of Application (Section 252.60 requirement, a covered BHC would be ongoing activities, of large, of the Proposed Rule) required to maintain outstanding interconnected financial institutions.’’ 36 The proposed rule would apply to all eligible external LTD in an amount not These enhanced prudential standards ‘‘covered BHCs.’’ The term ‘‘covered less than the greater of 6 percent plus must increase in stringency based on the BHC’’ would be defined to include any the surcharge applicable under the GSIB systemic footprint and risk U.S. top-tier bank holding company characteristics of individual covered 43 12 U.S.C. 5365(a)(1)(B). 37 identified as a GSIB under the Board’s firms. In addition to requiring the 44 GSIB surcharge rule.41 Under the GSIB The eight firms currently identified as U.S. Board to impose enhanced prudential surcharge rule, a U.S. top-tier bank GSIBs are Bank of America Corporation, The Bank standards of several specified types, of New York Mellon Corporation, Citigroup Inc., holding company subject to the section 165 authorizes the Board to Goldman Sachs Group, Inc., JP Morgan Chase & Co., advanced approaches rule must Morgan Stanley, State Street Corporation, and Wells establish ‘‘such other prudential determine whether it is a GSIB by Fargo & Company. standards as the Board of Governors, on 45 applying a multifactor methodology A covered BHC would calculate risk-weighted its own or pursuant to a assets for purposes of the external TLAC established by the Board.42 This recommendation made by the Council, requirement using the same methodology it uses to 38 methodology evaluates a banking calculate risk-weighted assets under the Board’s determines are appropriate.’’ regulatory capital rules. See 12 CFR part 217, The enhanced prudential standards in organization’s systemic importance on the basis of its attributes in five broad subparts D and E. The Board’s regulatory capital this proposal are appropriate because rules require an advanced approaches banking they are intended to prevent or mitigate categories: Size, interconnectedness, organization (generally, a banking organization with risks to the financial stability of the cross-jurisdictional activity, $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign United States that could arise from the substitutability, and complexity. Accordingly, the methodology exposure) that has successfully completed its material financial distress, failure, or parallel run to calculate each of its risk-based provides a tool for identifying as GSIBs ongoing activities of a GSIB. In capital ratios using the standardized approach and those banking organizations that pose the advanced approaches, and directs the banking organization to use the lower of each ratio as its 34 elevated risks. The proposal’s focus on See ‘‘Calibrating the GSIB Surcharge’’ at 3 (July governing ratio. See 12 CFR 217.10. 20, 2015), available at www.federalreserve.gov/ GSIBs is in keeping with the Dodd- The risk-weighted assets component of the aboutthefed/boardmeetings/gsib-methodology- external TLAC requirement would be phased in as paper-20150720.pdf. 39 12 U.S.C. 5365(b)(1)(B)(ii) and (iii). follows: It would be equal to 16 percent of the 35 12 U.S.C. 5365. 40 12 U.S.C. 5365(a)(1)(B). covered BHC’s risk-weighted assets beginning on 36 12 U.S.C. 5365(a)(1). 41 12 CFR 217.402; 80 FR 49106 (August 14, January 1, 2019, and would be equal to 18 percent 37 12 U.S.C. 5365(a)(1)(B), (b)(3)(A)–(D). 2015). of the covered BHC’s risk-weighted assets beginning 38 12 U.S.C. 5365(b)(1)(B)(iv). 42 12 CFR part 217, subpart E. on January 1, 2022.

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surcharge rule (expressed as a appropriateness of the proposed requirement of 4.5 percent of risk- percentage) of total risk-weighted assets calibration. weighted assets plus a capital and 4.5 percent of total leverage Additionally, a quantitative study of conservation buffer, which is itself exposure. Covered BHCs would be the experiences of 13 U.S. and foreign equal to 2.5 percent plus a firm-specific prohibited from redeeming or GSIBs and other major financial firms surcharge determined under the GSIB repurchasing eligible external LTD prior that incurred substantial losses during surcharge rule (expressed as a to its stated maturity date without the 2007–2009 financial crisis and the percentage) of risk-weighted assets.48 obtaining prior approval from the Board Japanese financial crisis of the 1990s Thus, a covered BHC with a GSIB where the redemption or repurchase was conducted. With respect to each surcharge of 2 percent would have a would cause the covered BHC’s eligible firm, the study considered both the peak common equity tier 1 capital minimum external LTD to fall below its external losses incurred by the firm (measured in plus buffers of 9 percent. LTD requirement. terms of total comprehensive income) Under the proposal, a covered BHC over the loss period and public-sector would be subject to an external LTD The calibration of the proposed capital support, incorporating both requirement equal to 7 percent of risk- external TLAC requirement is based in direct capital injections and asset relief weighted assets plus the applicable part on an analysis of the historical loss transactions. GSIB surcharge minus a 1 percentage experience of major financial The study examined losses and point allowance for balance-sheet institutions during financial crises. recapitalization in terms of both risk- depletion. This results in a requirement First, a targeted analysis of losses of U.S. weighted assets and total assets, which of 6 percent plus the applicable GSIB financial firms during the 2007–2009 is relevant to the total leverage exposure surcharge (expressed as a percentage) of financial crisis was performed. The component of the external TLAC risk-weighted assets. Without the 1 analysis considered the loss experiences requirement. The proposed calibration percentage point allowance for balance- of the 19 bank holding companies that of the external TLAC requirement is sheet depletion, the risk-weighted assets participated in the Supervisory Capital consistent with the findings of this 46 component of a covered BHC’s external Assessment Program (SCAP). This historical survey. The risk-weighted LTD requirement would require it to analysis combined the losses actually assets component of the proposed maintain outstanding an amount of sustained by those firms during the requirement exceeds a substantial eligible external LTD equal to its 2007–2008 period with their 2009 SCAP majority of the loss-and-recapitalization common equity tier 1 capital minimum 47 loss projections and the government experiences surveyed, while the total requirement plus buffers. The 1 recapitalization support that they leverage exposure component of the percentage point allowance for balance- received in order to estimate the level of proposed requirement is slightly higher sheet depletion is appropriate under the losses that would likely have been than the most severe experience capital refill theory because the losses sustained in the absence of surveyed. These are appropriate results that the covered BHC incurs leading to extraordinary government intervention in light of the Dodd-Frank Act’s focus its failure will deplete its risk-weighted in the financial system, which likely on the mitigation of risks that could assets as well as its capital. Accordingly, prevented substantial losses that each arise from the material financial distress the pre-failure losses would result in a firm would otherwise have incurred as or failure of the largest, most systemic smaller balance sheet for the covered a result of the material financial distress financial institutions. BHC at the point of failure, meaning that or failure of major counterparties. The The proposed external LTD a smaller dollar amount of capital purpose of a TLAC requirement is to requirement was calibrated primarily on would be required to restore the covered ensure that GSIBs have sufficient loss- the basis of a ‘‘capital refill’’ framework. BHC’s pre-stress capital level. Although absorbing capacity to absorb significant According to the capital refill the specific amount of eligible external losses and then be recapitalized to the framework, the objective of the external LTD necessary to restore a covered level necessary for them to face the LTD requirement is to ensure that each BHC’s pre-stress capital level in light of market on a going-concern basis without covered BHC has a minimum amount of the diminished size of its post-failure public-sector support. Therefore, the eligible external LTD such that, if the balance sheet will vary slightly in light sum of losses and public-sector covered BHC’s going-concern capital is of the varying GSIB surcharges recapitalization provides a good depleted and the covered BHC fails and applicable to the covered BHCs, the comparator for a TLAC requirement. enters resolution, the eligible external Board is proposing to apply a uniform The analysis found that the bank LTD will be sufficient to absorb losses 1 percentage point allowance for holding company with the most severe and fully recapitalize the covered BHC balance-sheet depletion so as to avoid loss experience incurred estimated by replenishing its going-concern undue regulatory complexity. losses and recapitalization needs of capital. Fulfilling this objective is vital The application of the capital refill roughly 19 percent of risk-weighted to the use of eligible external LTD to framework to the leverage ratio assets. The risk-weighted assets facilitate the orderly resolution of a component of the external LTD component of the proposed external covered BHC, because it is a requirement is analogous. Under the TLAC requirement is consistent with prerequisite to an orderly SPOE enhanced supplementary leverage ratio this high-water mark from the global resolution that the resolved firm have applicable to U.S. GSIBs, a covered financial crisis. This historical analysis sufficient going-concern capital post- BHC’s tier 1 leverage ratio minimum provides further confirmation of the resolution to maintain market plus buffer is 5 percent of its total confidence in its solvency so that other market participants continue to do 48 Under the Board’s capital rules, the capital 46 See Press Release, ‘‘Federal Reserve, OCC, and business with it. conservation buffer can be increased by an FDIC release results of the Supervisory Capital additional 2.5 percent of risk-weighted assets Assessment Program’’ (May 7, 2009), available at The proposed external LTD through the activation of a countercyclical capital http://www.federalreserve.gov/newsevents/press/ requirement was calibrated in buffer. The proposed external LTD requirement bcreg/20090507a.htm. accordance with this framework. In does not incorporate any countercyclical capital 47 See ‘‘The Supervisory Capital Assessment terms of risk-weighted assets, a covered buffer because it is likely that no such buffer would Program: Overview of Results’’ (May 7, 2009), be active under the economic circumstances most available at http://www.federalreserve.gov/ BHC’s common equity tier 1 capital likely to be associated with the failure and newsevents/press/bcreg/bcreg20090507a1.pdf. level is an amount equal to a minimum resolution of a covered BHC.

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leverage exposure. Under the proposal, regulatory capital (common equity tier 1 Question 7: Do covered BHCs have a covered BHC would be subject to an capital and additional tier 1 capital, outstanding tier 2 capital instruments external LTD requirement equal to 4.5 excluding any tier 1 minority interests) that would not count as eligible external percent of its total leverage exposure. issued directly by the covered BHC and LTD? What features of such tier 2 This requirement, which incorporates a (b) the covered BHC’s eligible external capital instruments are inconsistent balance-sheet depletion allowance of 0.5 LTD, as defined below.49 Tier 2 capital with the definition of eligible external percentage points, is appropriate to that meets the definition of eligible LTD? Should such tier 2 capital ensure that a covered BHC that has external LTD would count toward the instruments count as eligible external depleted its tier 1 capital and failed will external TLAC requirement. TLAC? be able to refill its leverage ratio The requirement that regulatory minimum requirement and buffer capital be issued out of the covered BHC D. External TLAC Buffer (Section through the cancellation or the itself (rather than by a subsidiary) is 252.63(c) of the Proposed Rule) intended to ensure that the total exchange or conversion into equity of its An external TLAC buffer would apply required amount of loss-absorbing eligible external LTD. in addition to the risk-weighted assets The proposed calibration of the capacity would be available to absorb component of the external TLAC external LTD requirement was also losses incurred anywhere in the banking requirement. A covered BHC’s external informed by an analysis of the extreme organization (through downstreaming of TLAC buffer would be equal to the sum loss tail of the distribution of income for resources from the BHC to the of 2.5 percent plus the GSIB surcharge large U.S. bank holding companies over subsidiary that has incurred the losses, applicable to the covered BHC under the past several decades. This analysis if necessary). Regulatory capital that is method 1 of the GSIB surcharge rule 50 closely resembled the analysis that issued by a subsidiary lacks this key informed the calibration of the feature of being available to flexibly plus any applicable countercyclical minimum risk-based capital absorb losses incurred by other capital buffer. The external TLAC buffer requirements in the revised capital subsidiaries. would be required to be filled solely framework, but it involved looking Question 4: The Board invites with common equity tier 1 capital, and farther into the tail of the income comment on all aspects of the proposed a covered BHC’s breach of its external distribution. definition of eligible external TLAC. TLAC buffer would subject it to limits Question 3: The Board invites Question 5: In particular, the Board on capital distributions and comment on all aspects of the invites comment on the proposed discretionary bonus payments in calibration of the proposed external requirement that regulatory capital be accordance with Table 1. Thus, the TLAC and LTD requirements. In issued directly by the covered BHC in external TLAC buffer would be particular, the Board invites comment order to count as eligible external TLAC. analogous to the capital conservation on the probable impact of the proposed Should the definition of eligible external buffer applicable under the Board’s requirements on covered BHCs and on TLAC be broadened to include minority Regulation Q, except that it would apply markets for senior unsecured debt interests? in addition to the external TLAC instruments. Question 6: Should eligible external requirement rather than in addition to LTD with a remaining maturity between minimum risk-based capital C. Core Features of Eligible External one and two years be subject to a 50 requirements under Regulation Q and TLAC (Section 252.63(b) of the Proposed percent haircut for purposes of the would incorporate only the applicable Rule) external TLAC requirement, by analogy method 1 GSIB surcharge (rather than Under the proposal, a covered BHC’s to the treatment of such eligible external the greater of the applicable method 1 eligible external TLAC would be LTD for purposes of the external LTD GSIB surcharge and the applicable defined to be the sum of (a) the tier 1 requirement? method 2 GSIB surcharge).

TABLE 1—CALCULATION OF MAXIMUM EXTERNAL TLAC PAYOUT AMOUNT

Maximum external TLAC payout ratio (as a External TLAC buffer level percentage of eligible retained income)

Greater than the external TLAC buffer ...... No payout ratio limitation applies. Less than or equal to the external TLAC buffer, and greater than 75 percent of the external 60 percent. TLAC buffer. Less than or equal to 75 percent of the external TLAC buffer, and greater than 50 percent of 40 percent. the external TLAC buffer. Less than or equal to 50 percent of the external TLAC buffer, and greater 25 percent of the ex- 20 percent. ternal TLAC buffer. Less than or equal to 25 percent of the external TLAC buffer ...... 0 percent.

In order to determine whether it has definition of eligible external TLAC, a external TLAC buffer level would be met the external TLAC requirement and covered BHC’s outstanding TLAC equal to the sum of its common equity the external TLAC buffer, a covered amount would be equal to the sum of its tier 1 capital ratio minus that portion (if BHC would calculate an outstanding common equity tier 1 capital, its any) of its common equity tier 1 capital TLAC amount and an external TLAC additional tier 1 capital, and its eligible ratio (expressed as a percentage) that is buffer level. In keeping with the external LTD. The covered BHC’s used to meet the risk-weighted assets

49 Although eligible external LTD with a eligible external LTD would continue to count at would not count toward either the external TLAC remaining maturity between one and two years full value for purposes of the external TLAC requirement or the external LTD requirement. would be subject to a 50 percent haircut for requirement. As discussed below, eligible external 50 80 FR 49082 (Aug. 14, 2015). purposes of the external LTD requirement, such LTD with a remaining maturity of less than one year

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component of the external TLAC requirement and external TLAC buffer, directly by the covered BHC, is requirement. To calculate its external and (c) a covered BHC’s external TLAC unsecured, has a maturity of greater TLAC buffer level, a covered BHC buffer would always be less than or than one year from the date of issuance, would subtract from its common equity equal to its existing capital conservation is ‘‘plain vanilla,’’ and is governed by tier 1 capital ratio the greater of 0 buffer.51 A covered BHC could thus use U.S. law. Eligible external LTD with a percent and the following figure: The its existing common equity tier 1 capital remaining maturity of between one and risk-weighted assets component of the to meet the external TLAC buffer while two years would be subject to a 50 covered BHC’s external TLAC issuing eligible external LTD as percent haircut for purposes of the requirement minus the ratio of its necessary to meet its external TLAC external LTD requirement, and eligible additional tier 1 capital to its risk- requirement. external LTD with a remaining maturity weighted assets (additional tier 1 capital The rationale for the external TLAC of less than one year would not count ratio) and minus its eligible external buffer is similar to the rationale for the toward the external LTD requirement. LTD. capital conservation buffer established As discussed below, the general In order to comply with the external by the Board’s Regulation Q. During the purpose of these requirements is to TLAC requirement, the covered BHC 2007–2009 financial crisis, some ensure the adequacy of eligible external would need to have an outstanding banking organizations continued to pay LTD instruments to absorb losses in a TLAC amount sufficient to meet both dividends and substantial discretionary resolution of the covered BHC. the risk-weighted assets component and bonuses even as their financial 1. Issuance by the Covered BHC the total leverage exposure component. condition weakened. These capital In order to avoid limitations on capital distributions weakened the financial Eligible external LTD would be distributions and discretionary bonus system and exacerbated the crisis. The required to be paid in and issued directly by the covered BHC itself—that payments pursuant to Table 1, the external TLAC buffer would be intended is, by the banking organization’s top-tier covered BHC would also have to have to encourage covered BHCs to practice holding company. Thus, debt an external TLAC buffer level in excess sound capital conservation and thus to instruments issued by a subsidiary of its external TLAC buffer. enhance the resilience of covered BHCs would not qualify as eligible external For example, suppose that a covered and of the financial system as a whole. LTD, even if they do qualify as BHC called ‘‘BHC A’’ has a common The external TLAC buffer would pursue regulatory capital. equity tier 1 capital ratio of 10 percent, this goal by providing covered BHCs an additional tier 1 capital ratio of 2 This restriction would serve two with incentives to hold sufficient capital purposes. First, as with the requirement percent, and an eligible external LTD to reduce the risk that their eligible amount equal to 8 percent of its risk- that regulatory capital be issued directly external TLAC would fall below the by the covered BHC in order to count as weighted assets. Suppose further that minimum external TLAC requirement BHC A is subject to an external TLAC eligible external TLAC, this restriction during a period of financial stress. requirement of 18 percent and an helps to ensure that eligible external Question 8: The Board invites external TLAC buffer of 5 percent of LTD can be used to absorb losses comment on the organization and risk-weighted assets. BHC A would meet incurred anywhere in the banking placement of the external TLAC buffer. its external TLAC requirement because organization. By contrast, loss-absorbing For example, would the external TLAC the sum of its common equity tier 1 debt issued by a subsidiary would lack buffer be easier to understand if it were capital ratio, its additional tier 1 capital this flexibility and would generally be incorporated directly into the Board’s ratio, and the ratio of its eligible available only to absorb losses incurred regulatory capital rules (Regulation Q)? external TLAC to risk-weighted assets by that particular subsidiary. Question 9: The Board invites would be equal to 20, which is greater Second, issuance directly from the than 18. Moreover, BHC A would have comment on an alternative calibration covered BHC would enable the use of an external TLAC buffer level equal to of the total leverage exposure the eligible external LTD in an SPOE 10 ¥ (18 ¥ 2 ¥ 8) = 2. Because 2 is component of the proposed external resolution of the covered BHC. Under less than 50 percent and more than 25 TLAC requirement pursuant to which the SPOE approach, only the covered percent of the applicable 5 percent covered BHCs would be subject to an BHC itself would enter resolution. The external TLAC buffer, BHC A would be external TLAC requirement equal to 7.5 covered BHC’s eligible external LTD subject to a maximum external TLAC percent of total leverage exposure and a would be used to absorb losses incurred payout ratio of 20 percent of eligible capital conservation buffer equal to 2 throughout the banking organization, retained income. percent of total leverage exposure would enabling the recapitalization of Although the proposed external TLAC apply in addition to that external TLAC operating subsidiaries that had incurred buffer must be met only with common requirement, by analogy to the losses and enabling those subsidiaries to equity tier 1 capital, under the proposal, enhanced supplementary leverage ratio. continue operating on a going-concern any covered BHC that meets existing E. Core Features of Eligible External basis. For this approach to be capital requirements and the existing LTD (Section 252.61 of the Proposed implemented successfully, the eligible capital conservation buffer would not Rule) external LTD must be issued directly by need to increase its common equity tier the covered BHC. Debt issued by a 1 capital to meet its external TLAC Under the proposal, a covered BHC’s subsidiary generally cannot be used to requirement and its external TLAC eligible external LTD would be defined absorb losses even at the issuing buffer. This is because (a) a covered to be debt that is paid in and issued subsidiary itself unless that subsidiary BHC could meet its external TLAC enters a resolution proceeding, which 51 This is because, as discussed above, the requirement solely through the issuance external TLAC buffer and the existing capital would be contrary to the SPOE of eligible external LTD, (b) a covered conservation buffer would have the same approach and, in the case of a material BHC could use the same common equity components except that the external TLAC buffer operating subsidiary of a covered BHC, tier 1 capital that it uses to meet existing would include only the applicable method 1 GSIB would likely present risks to financial surcharge, while the existing capital conservation minimum capital requirements and the buffer includes the greater of the applicable method stability. existing capital conservation buffer to 1 GSIB surcharge and the applicable method 2 GSIB Question 10: The Board invites meet the proposed external TLAC surcharge. comment on the benefits or drawbacks

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of permitting long-term debt issued by a create complexity and thereby diminish instruments or instruments whose subsidiary of a covered BHC to count as the prospects for an orderly resolution. interest payments are linked to an eligible external LTD and on whether These prohibitions would help to interest rate index (for example, a there are other means to ensure that the ensure that a covered BHC’s eligible floating-rate note linked to the federal debt be available to absorb losses external LTD represents loss-absorbing funds rate or to LIBOR) that satisfy the incurred anywhere within the banking capacity with a definite value that can proposed requirements in all other organization. be quickly determined in resolution. In respects. a resolution proceeding, claims 2. Unsecured Structured notes would not count as represented by such plain-vanilla debt eligible external LTD because they Eligible external LTD would be instruments are more easily contain features that could make their required to be unsecured, not ascertainable and relatively certain valuation uncertain, volatile, or unduly guaranteed by the covered BHC or a compared to more complex and volatile complex, and because they are typically subsidiary of the covered BHC, and not instruments. Permitting these features customer liabilities (as opposed to subject to any other arrangement that could engender uncertainty as to the investor liabilities). To promote legally or economically enhances the level of the covered BHC’s loss- resiliency and market discipline, it is seniority of the instrument (such as a absorbing capacity and could increase important that covered BHCs have a credit enhancement provided by an the complexity of the resolution minimum amount of loss-absorbing affiliate). The primary rationale for this proceeding, both of which could capacity whose value is easily restriction is to ensure that eligible undermine market participants’ ascertainable at any given time. external LTD can serve its intended confidence in an SPOE resolution and Moreover, in an orderly resolution of a purpose of absorbing losses incurred by potentially result in a disorderly covered BHC, debt instruments that will the banking organization in resolution. resolution. This could occur, for be subjected to losses must be able to be To the extent that a creditor is secured, instance, if creditors and counterparties valued accurately and with minimal risk it can avoid suffering losses by seizing of the covered BHC’s subsidiaries of dispute. The requirement that eligible the collateral that secures the debt. This decided to reduce their exposures to the external LTD not contain the features would thwart the purpose of eligible subsidiaries of the failed covered BHC associated with structured notes external LTD by leaving losses with the by engaging in a funding run. advances these goals. Eligible external LTD instruments also covered BHC (which would lose the Eligible external LTD would be would be prohibited from: (a) Being collateral) rather than imposing them on prohibited from including contractual structured notes; (b) having a credit- the eligible external LTD creditor provisions for conversion into or sensitive feature; (c) including a (which could take the collateral). exchange for equity prior to the covered A secondary purpose of the restriction contractual provision for conversion BHC’s resolution because the is to prevent eligible external LTD from into or exchange for equity in the fundamental objective of the external contributing to the asset firesales that covered BHC; or (d) including a LTD requirement is to ensure that can occur when a financial institution provision that gives the holder a covered BHCs will have at least a fixed fails and its secured creditors seize and contractual right to accelerate payment minimum amount of loss-absorbing liquidate collateral. Asset firesales can (including automatic acceleration), capacity available to absorb losses upon drive down the value of the assets being other than a right that is exercisable on the covered BHC’s entry into resolution. sold, which can undermine financial a one or more dates specified in the Debt instruments that could convert into stability by transmitting contagion from instrument, in the event of the equity prior to resolution may not serve the failed firm to other entities that hold insolvency of the covered BHC, or the this goal, since by doing so they would similar assets. covered BHC’s failure to make a Finally, the requirement that eligible payment on the instrument when due.52 reduce the amount of debt that will be external LTD be unsecured ensures that For purposes of this proposal, a available to absorb losses in resolution. losses can be imposed on that debt in ‘‘structured note’’ is a debt instrument Finally, eligible external LTD would resolution in accordance with the that (a) has a principal amount, be prohibited from having a credit- standard creditor hierarchy in redemption amount, or stated maturity sensitive feature or giving the holder of bankruptcy, under which secured that is subject to reduction based on the the instrument a contractual right to the creditors are paid ahead of unsecured performance of any asset,53 entity, acceleration of payment of principal or creditors. index, or embedded derivative or interest at any time prior to the Question 11: The Board invites similar embedded feature; (b) has an instrument’s stated maturity (an comment on whether eligible external embedded derivative or similar ‘‘acceleration clause’’), other than upon LTD should be required to be embedded feature that is linked to one the occurrence of either an insolvency contractually subordinated to the or more equity securities, commodities, event or a payment default event, except general unsecured liabilities of the assets, or entities; (c) does not specify a that eligible external LTD instruments covered BHC (such as senior unsecured minimum principal amount due upon would be permitted to give the holder debt). If so, should the subordination acceleration or early termination; or (d) a put right as of a future date certain, requirement apply to all or only to some is not classified as debt under U.S. subject to the remaining maturity portion of the debt used to satisfy the generally accepted accounting provisions discussed below. This external LTD requirement? principles. The proposed definition of a proposed prohibition is similar to but structured note is not intended to moderately less stringent than the 3. ‘‘Plain Vanilla’’ include non-dollar-denominated analogous restriction on tier 2 regulatory Eligible external LTD instruments capital. The main difference between would be required to be ‘‘plain-vanilla’’ 52 This restriction would be subject to an eligible external LTD and tier 2 capital instruments. The purpose of this exception that would permit eligible external LTD in this regard is that tier 2 capital is also requirement is to ensure that eligible instruments to give the holder a future put right as prohibited from containing payment of a date certain, subject to the remaining maturity 54 external LTD can be effectively used to provisions discussed below. default event acceleration clauses. absorb losses in resolution by 53 Assets would include loans, debt securities, prohibiting exotic features that could and other financial instruments. 54 See 12 CFR 217.20(d)(1)(vi).

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However, the Board is considering trigger for an insolvency event Question 18: The Board invites whether to instead impose a restriction acceleration clause, in which case a comment on whether debt instruments on eligible external LTD that is identical prohibition on payment default event that are convertible into equity (with or to the one applicable to tier 2 capital by acceleration clauses would have little or without a regulatory conversion triggers) also prohibiting eligible external LTD no practical effect. should be permitted to count as eligible from containing payment default event Question 12: The Board invites external TLAC even if they are excluded clauses. comment on the proposed definition of from eligible external LTD and on This proposed restriction serves the eligible external LTD, including whether whether such instruments would same purpose as several of the other such debt securities should be allowed advance the objectives of an orderly proposed restrictions discussed above: to include any of the features discussed resolution of a covered BHC. to ensure that the required amount of above. The Board also invites comment loss-absorbing capacity will indeed be as to the impact that the proposed 4. Minimum Remaining Maturity and available to absorb losses in resolution restrictions would have on the Amortization (Section 252.62(b) of the if the covered BHC fails. Early bindingness of the proposal for covered Proposed Rule) acceleration clauses, including cross- BHCs or on the markets for senior Eligible external LTD with a acceleration clauses, may undermine unsecured debt instruments of covered remaining maturity of between one and this prerequisite to orderly resolution by BHCs. Please provide data supporting two years would be subject to a 50 triggering and forcing the covered BHC your answer. percent haircut for purposes of the to make payments prior to its entry into Question 13: The Board invites external LTD requirement, and eligible resolution, potentially depleting the comment on whether its proposed external LTD with a remaining maturity covered BHC’s eligible external LTD definition of eligible external LTD of less than one year would not count immediately prior to resolution. This should exclude debt that is subject to a toward the external LTD requirement. concern does not apply to acceleration guarantee from any affiliate of the The purpose of this restriction is to clauses that are triggered by an global systemically important BHC. limit the debt that would fill the insolvency event, however, because the Question 14: The Board invites external LTD requirement to debt that insolvency that triggers the clause comment on whether additional will be reliably available to absorb would generally occur concurrently restrictions should be imposed on losses in the event that the covered BHC with the covered BHC’s entry into a instruments that qualify as eligible fails and enters resolution. Debt with a resolution proceeding, in which case the external LTD in order to enhance the remaining maturity of less than one year payment obligations would generally be usefulness of eligible external LTD in an does not adequately serve this purpose stayed and the debt would remain orderly resolution of the covered BHC. because of the relatively high likelihood available to absorb losses. Question 15: Would an orderly that the debt will mature during the Senior debt instruments issued by resolution of a covered BHC be period between the time when the covered BHCs commonly also include facilitated by additional requirements covered BHC begins to experience payment default event clauses. These intended to facilitate the process of extreme stress and the time when it clauses provide the holder with a imposing losses on the claims of holders enters a resolution proceeding. If the contractual right to accelerate payment of eligible external LTD? If so, what debt matures during that period, then upon the occurrence of a ‘‘payment additional requirements (e.g., requiring the creditor will likely be unwilling to default event’’—that is, a failure by the eligible external LTD to be held through maintain its exposure to the covered covered BHC to make a required a securities settlement system, requiring BHC and will therefore refuse to roll payment when due. Payment default internal data systems to facilitate the over the debt or extend new credit and event clauses, which are prohibited claims process) are appropriate? the distressed covered BHC will likely from tier 2 regulatory capital, raise more Question 16: The Board invites be unable to replace the debt with new concerns than insolvency event clauses comment on whether currently long-term debt that would be available because a payment default event may outstanding instruments that meet all to absorb losses in resolution. This run- occur (triggering acceleration) before the other requirements should be allowed to off dynamic could result in the covered institution has entered a resolution count as eligible external LTD despite BHC’s entering resolution with proceeding and a stay has been containing features that would be materially less loss-absorbing capacity imposed. Such a pre-resolution payment prohibited under the proposal. What is than would be required to recapitalize default event could cause a decline in the amount of debt instruments now its subsidiaries, potentially resulting in the covered BHC’s loss-absorbing outstanding that would fall into this a disorderly resolution. To protect capacity. category, and what is the remaining against this outcome, eligible external Nonetheless, the proposal would maturity of those debt instruments? How LTD would cease to count toward the permit eligible external LTD to be burdensome would it be for covered external LTD requirement upon falling subject to payment default event BHCs to modify the terms of any such below one year of remaining maturity so acceleration rights for two reasons. First, instruments to eliminate features that that the full required amount of loss- default or acceleration rights upon a would be prohibited under the absorbing capacity would be available borrower’s default on its direct payment proposal? in resolution even if the resolution obligations are a standard feature of Question 17: The Board invites period were preceded by a year-long senior debt instruments, such that a comment on whether eligible external stress period.55 prohibition on such rights could be LTD should be permitted to include For analogous reasons, eligible unduly disruptive to the potential acceleration clauses that relate to external LTD with a remaining maturity market for eligible external LTD. payment default events. The Board also of less than two years would be subject Second, the payment default of a invites comment on the impact of to a 50 percent haircut for purposes of covered BHC on an eligible external excluding instruments with such the external LTD requirement, meaning LTD instrument would likely be a credit acceleration clauses from the definition event of such significance that whatever of eligible external LTD, including any 55 This requirement also accords with market diminished capacity led to the payment impact on debt markets for senior convention, which generally defines ‘‘long-term default event would also be a sufficient unsecured debt instruments. debt’’ as debt with maturity in excess of one year.

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that only 50 percent of the value of its Question 20: The Board invites subject covered BHCs to clean holding principal amount would count toward comment on whether a specific eligible company provisions that would limit the external LTD requirement.56 This external LTD issuance schedule or the amount of non- TLAC instruments amortization provision is intended to similar requirement should be imposed that could be pari passu with or junior protect a covered BHC’s loss-absorbing on covered BHCs by regulation. If so, to eligible external LTD, which will capacity against a run-off period in how should the requirement be further address any concerns with excess of one year (as might occur structured to maximize benefits and covered BHCs’ unsecured creditor during a financial crisis or other minimize costs? hierarchies. protracted stress period) in two ways. Question 21: The Board invites By limiting the criteria for eligible First, it requires covered BHCs that rely comment on the proposed treatment of external LTD to those necessary to on eligible external LTD that is debt instruments that could become achieve the objectives of the proposal, vulnerable to such a run-off period subject to put rights in the future. the proposal seeks to retain the broadest (because it has a remaining maturity of Should such instruments be excluded possible market for eligible external less than two years) to maintain entirely from the definition of eligible LTD instruments. Allowing covered additional loss-absorbing capacity. external LTD? If so, what impact would BHCs to retain the flexibility to satisfy Second, it incentivizes covered BHCs to such a prohibition have on markets for the external LTD requirement with reduce or eliminate their reliance on senior unsecured debt of covered BHCs? either senior or subordinated debt instruments should allow covered BHCs loss-absorbing capacity with a 5. Governing Law remaining maturity of less than two to comply with the requirement years, since by doing so they avoid Eligible long-term debt instruments efficiently, to adapt to debt investors’ being required to issue additional should consist only of liabilities that risk preferences, and to avoid re- eligible external LTD in order to account can be effectively used to absorb losses issuances of outstanding long-term during the resolution of a covered BHC for the haircut. A covered BHC could senior debt instruments that would under the U.S. Bankruptcy Code or Title reduce its reliance on eligible external otherwise meet the criteria for eligible II without giving rise to material risk of LTD with a remaining maturity of less external LTD. successful legal challenge. To this end, than two years by staggering its Question 23: Should the Board eligible external LTD must be governed issuance, by issuing eligible external require that eligible external LTD be by U.S. law, including the U.S. LTD with a relatively long initial contractually subordinated to the Bankruptcy Code and Title II. maturity, or by redeeming and replacing general unsecured liabilities of the Question 22: The Board invites covered BHC. eligible external LTD once its remaining comment on the proposed governing law maturity falls below two years. requirement, including whether such a F. Costs and Benefits The proposal also provides similar requirement is necessary or appropriate. An analysis of the potential costs and treatment for eligible external LTD that Should the proposed definition of benefits of the external TLAC and LTD could become subject to a ‘‘put’’ right— eligible external LTD permit instruments requirements was conducted. To that is, a right of the holder to require to be governed by or subject to non-U.S. evaluate the costs attributable to the the issuer to redeem the debt on law in any respects? If so, how would proposed requirements, this analysis demand—prior to reaching its stated that be consistent the purposes of the estimated (a) the extent by which the maturity. Such an instrument would be proposed rule? covered BHCs’ required capital and treated as if it were going to mature on 6. Contractual Subordination currently outstanding long-term debt the day on which it first became subject fall short of the proposed requirements, to the put right, since on that day the The Board considered whether to (b) the increase in each U.S. GSIB’s creditor would be capable of demanding require eligible external LTD ongoing cost of funding that would payment and thereby subtracting the instruments to be contractually result from meeting the proposed value of the instrument from the subordinated to the claims of general requirements, (c) the expected increase covered BHC’s loss-absorbing creditors of a covered BHC. A in the interest rates that the U.S. GSIBs 57 capacity. contractual subordination requirement would charge to borrowers to make up Question 19: The Board invites could improve the market discipline for their higher funding costs, and (d) comment on whether the proposed imposed on a covered BHC by any decline in the gross domestic treatment of eligible external LTD with increasing the clarity of treatment for product (GDP) of the United States that a remaining maturity of less than two eligible external LTD holders relative to would result from these increased years is appropriate. How would a other creditors. lending rates. different remaining maturity The proposal does not include a The following components relevant to requirement or amortization schedule contractual subordination requirement the benefits of the proposed better achieve the objectives of the for several reasons. First, as discussed requirements were evaluated: (a) The proposal? above, the structural subordination of a probability of a financial crisis covered BHC’s creditors to the creditors occurring in a given year, (b) the 56 As discussed above, the proposed amoritization and counterparties of the covered BHC’s cumulative economic cost that a would apply only to eligible external LTD, not to subsidiaries already generally ensures eligible external TLAC. Thus, an eligible external financial crisis would impose if it were LTD instrument that counts for only half value that the covered BHC’s creditors would to occur, and (c) the extent to which the toward the external LTD requirement because of the absorb losses ahead of the creditors of proposed requirements would decrease 50 percent amortization provision would continue the covered BHC’s subsidiaries in an the likelihood and cost of a financial to count for full value toward the external TLAC SPOE resolution of the covered BHC.58 requirement, although debt with a remaining crisis. maturity of less than one year would not count Second, the Board is proposing to The analysis concluded that the toward either requirement. estimated benefits would outweigh the 57 The remaining maturity would be calculated 58 As discussed above, in an insolvency estimated costs and that the proposed from the date the put right would first be proceeding, direct third-party claims on a parent exerciseable regardless of whether the put right holding company’s subsidiaries would be superior external TLAC and LTD requirements would only be exerciseable on that date if another to the parent holding company’s equity claims on would yield a substantial net benefit for event occurred (e.g., a credit rating downgrade). the subsidiaries. the U.S. economy.

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1. Shortfall Analysis requirements was approximately $120 Roughly $65 billion of the aggregate To evaluate the U.S. GSIBs’ shortfalls billion, or 1.7 percent of aggregate risk- $120 billion shortfall could be filled 59 relative to the proposed external TLAC weighted assets. The proposed through the issuance of eligible external and LTD requirements, information was external TLAC requirement was the LTD in the place of existing near- collected on the long-term debt that binding requirement for three of the eligible debt, most of which takes the covered BHCs had outstanding as of covered BHCs, while the proposed form of long-term bonds issued by the 60 year-end 2014. external LTD requirement was the covered BHCs’ bank subsidiaries. Several assumptions were made for binding requirement for the other five Based on market data, it was estimated purposes of the shortfall analysis. First, covered BHCs. Two of the covered BHCs that the spread between this near- to provide an accurate estimate of had no shortfall under either eligible debt and eligible external LTD shortfalls relative to the proposed requirement, while the largest overall is between 20 and 30 basis points. The requirements using 2014 data, it was shortfall for any covered BHC amounted remaining $55 billion shortfall could assumed that the covered BHCs were to 3.2 percent of its risk-weighted assets. then be filled through the issuance of already compliant with the other capital 2. Cost-of-Funding Analysis eligible external LTD in the place of requirements (including capital existing deposits or other lower-cost The analysis also considered the liabilities. It was estimated that the conservation buffers) that will be in effect that filling the $120 billion effect as of 2019, when the proposed spread between these liabilities and shortfall through the issuance of eligible external LTD is approximately external TLAC and LTD requirements additional eligible external LTD would would begin to take effect. This equal to the spread between the risk-free have on the covered BHCs’ cost of interest rate and the eligible external assumption was necessary to ensure that funding. This analysis relied on the analysis would attribute to the LTD rate, which is estimated to be additional information about the between 100 and 150 basis points. proposed external TLAC and LTD amounts and costs of funding of the The figures at the low ends of these requirements only those costs that debt that the covered BHCs and their would result from those requirements, subsidiaries currently have outstanding. ranges—20 basis points for replacing as distinct from other requirements that Several additional assumptions were near-eligible debt and 100 basis points the Board has imposed but that were not made at this stage of the analysis. First, for replacing lower-cost liabilities such fully phased in as of year-end 2014. As it was assumed that covered BHCs as deposits—result in an aggregate a result of this assumption, a certain would fill their shortfalls by replacing increased cost of funding for the amount of ‘‘capital catch-up’’ was existing, ineligible debt with eligible covered BHCs of $680 million per year. allocated to five of the U.S. GSIBs to external LTD during the period prior to A more conservative estimate was bring their capital levels into alignment the effective date of the proposed produced using figures at the high ends with the rules that will be in effect as requirements, rather than by expanding of these ranges and then further of 2019. their balance sheets by issuing the new adjusted them upward to reflect a Second, for purposes of this analysis, debt while maintaining existing potential supply effect of 30 basis points all of the U.S. GSIB debt that met the liabilities outstanding. Second, it was (that is, an increase in the interest rate primary attributes of eligible external assumed that covered BHCs would on eligible external LTD caused by the LTD was treated as eligible LTD, minimize the cost associated with increase in the supply of eligible including issuance directly from the meeting the proposed external TLAC external LT as a result of the proposed covered BHC, remaining maturity of at and LTD requirements by first replacing external LTD requirement). The least one year, and the absence of with eligible external LTD their ‘‘near- aggregate shortfall in eligible LTD derivative-linked features. Although eligible debt’’—that is, their outstanding amounts to approximately 20 percent of these instruments may not meet every debt that comes closest to meeting all the covered BHCs’ current eligible LTD, one of the other proposed elements of requirements for eligible external LTD implying that the covered BHCs in the eligible external LTD, it appears that the (and that therefore entails a cost of aggregate would need to increase their cost of meeting any remaining elements funding almost as high as that outstanding eligible external LTD by 3 would be relatively minor. associated with eligible external LTD)— to 4 percent each year through 2022, Under the proposal, covered BHCs and by proceeding in this cost- when the proposed requirements would would have an aggregate external LTD minimizing fashion until the proposed be fully phased in. On the basis of both requirement of approximately $680 requirements were met. Thus, the internal analysis and an international billion. This amounts to approximately marginal cost of each additional dollar survey of market participants in which 9.6 percent of aggregate risk-weighted of eligible external LTD was assumed to Board staff participated, it is estimated assets and 4.9 percent of aggregate total be the surplus of the funding cost that this increase in supply would leverage exposure for the covered BHCs. associated with eligible external LTD increase spreads of covered BHCs’ The covered BHCs’ aggregate shortfall over the funding cost of the covered relative to the proposed external TLAC BHC’s highest-cost remaining ineligible 60 For purposes of this analysis, structured notes requirement was approximately $100 debt. Finally, if total near-eligible were not treated as near-eligible debt. Structured billion. The covered BHCs’ aggregate notes could be viewed as near-eligible debt, but in liabilities were insufficient to fill the many cases structured notes serve different shortfall relative to the proposed shortfall, it was assumed that the purposes than debt that was treated as near-eligible external LTD requirement was covered BHC proceeded to replace more (such as plain-vanilla bonds issued by covered approximately $90 billion. For four of senior, short-term liabilities, such as BHCs’ bank subsidiaries). As a result, the analysis the covered BHCs, the risk-weighted assumed that covered BHCs would not replace their deposits, with eligible external LTD. outstanding structured notes with eligible external assets component of the external LTD LTD. On the assumption that covered BHCs would requirement was binding; for the other 59 This figure is less than the sum of the separate indeed replace their outstanding structured notes four covered BHCs, the supplementary aggregate shortfalls for the external TLAC with eligible external LTD, covered BHCs would be leverage exposure component was requirement and the external LTD requirement able to meet roughly $100 billion of the aggregate because of substantial overlap between the two $120 billion shortfall by replacing near-eligible debt binding. requirements (that is, because eligible external LTD with eligible external LTD, which would result in The covered BHCs’ overall aggregate would also count toward the external TLAC a lower estimated cost impact from the proposed shortfall from the two proposed requirement). requirements.

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eligible external LTD by approximately 3.5 percent and 5.2 percent and the organizations and that have substantial 30 basis points. cumulative cost was between 20 percent operations in the United States. The Using the resulting, higher figures— and 100 percent of annual economic Board’s IHC rule identifies foreign 60 basis points for replacing near- output. Even assuming that the lower banking organizations with a substantial eligible debt and 200 basis points for ends of these ranges are accurate, these U.S. presence and requires them to form replacing lower-cost liabilities—resulted estimates reflect the well-understood a single U.S. intermediate holding in an estimated aggregate increased cost fact that financial crises impose very company over their U.S. subsidiaries.62 of funding for the covered BHCs of substantial costs on the real economy. Thus, the fact that a foreign banking approximately $1.5 billion per year. And the disorderly failures of major organization is required to form a U.S. Thus, the aggregate increased cost of financial institutions play a major role intermediate holding company is an funding attributable to the proposed in causing and deepening financial indicator of whether its U.S. presence is external TLAC and LTD requirement are crises, as Congress recognized in substantial. estimated to be in the range of $680 enacting section 165 of the Dodd-Frank The Board’s GSIB surcharge rule million to $1.5 billion annually. Act. identifies the most systemically 3. Increased Lending Rate Analysis This proposal would materially important banking organizations. As reduce the risk that the failure of a discussed above with respect to covered To arrive at a conservative estimate of covered BHC would pose to the BHCs, its methodology evaluates a the effect of the proposed external TLAC financial stability of the United States banking organization’s systemic and LTD requirements on lending rates, by enhancing the prospects for the importance on the basis of its size, it was next assumed that the U.S. GSIBs orderly resolution of such a firm. interconnectedness, cross-jurisdictional would maintain their current return-on- Moreover, by ensuring that the losses activity, substitutability, and equity levels by passing all of their caused by the failure of such a firm are complexity. The firms that score the increased funding costs on to borrowers, borne by private-sector investors and highest on these attributes are classified holding constant their level of lending creditors (the holders of the covered as GSIBs. While the GSIB surcharge rule activity. The increased lending rates BHC’s eligible external TLAC), this itself applies only to U.S. BHCs, its that the U.S. GSIBs would charge to proposal would materially reduce the methodology is equally well-suited to borrowers were calculated by dividing probability that a covered BHC would evaluating the systemic importance of both the low-end and the high-end fail in the first place by giving the firm’s foreign banking organizations. The estimated cost-of-funding increases by shareholders and creditors stronger Board’s methodology for identifying the U.S. GSIBs’ aggregate outstanding incentives to discipline its excessive GSIBs is aligned with that of the loans of roughly $3.2 trillion. Under this risk-taking. Both of these reductions assessment methodology for the GSIB analysis, covered BHCs would employ would promote financial stability and surcharge framework developed by the an increased lending rate of 1.3 to 3.1 concomitantly materially reduce the BCBS. Moreover, foreign jurisdictions basis points as a result of the proposed probability that a financial crisis would collect information from banking external TLAC and LTD requirements. occur in any given year. The proposed organizations in connection with that 4. Macroeconomic Costs Analysis rule would therefore advance a key framework that parallels the information collected by the Board for purposes of In prior assessments of the economic objective of the Dodd-Frank Act and help protect the American economy the Board’s GSIB surcharge rule. impact of regulations on banking Under the proposal, a foreign banking from the substantial potential losses organizations, increases in lending rates organization that controls a U.S. associated with a higher probability of have been assumed to produce a drag on intermediate holding company would GDP growth. However, the very modest financial crises. Question 24: The Board invites be required to determine whether it is lending rate increases estimated above— a GSIB under that BCBS assessment comment on all aspects of the foregoing from 1.3 to 3.1 basis points—do not rise methodology if the foreign banking evaluation of costs and benefits. to the level of increase that could be organization already prepares or reports, expected to meaningfully affect GDP. III. Internal TLAC and LTD for any purpose, the information Thus, from the standpoint of the Requirements for U.S. Intermediate necessary to determine whether it is a economy as a whole, it appears that the Holding Companies of Foreign Banking GSIB under the BCBS assessment costs associated with the proposed Organizations methodology. A foreign banking external TLAC and LTD requirements organization that determines under this A. Scope of Application (Section would be minimal. requirement that it is a GSIB would be 252.160 of the Proposed Rule) 5. Macroeconomic Benefits Analysis a foreign GSIB under the proposal. The proposed rule would apply to all A foreign banking organization that To estimate the benefits of the ‘‘covered IHCs.’’ The term ‘‘covered controls a U.S. intermediate holding proposed requirements, the analysis IHC’’ would be defined to include any company also would be a foreign GSIB built on the framework considered in a U.S. intermediate holding company that under the proposal if the Board recent study titled ‘‘An assessment of (a) is required to be formed under the determines that the foreign banking the long-term economic impact of Board’s enhanced prudential standards organization has the characteristics of a stronger capital and liquidity rule (IHC rule) and (b) is controlled by GSIB under the BCBS assessment requirements’’ (‘‘LEI report’’).61 The LEI a foreign banking organization that methodology or the Board’s report estimated that, prior to the would be designated as a GSIB under methodology for determining whether regulatory reforms undertaken since either the Board’s capital rules if it were U.S. bank holding companies are GSIBs 2009, the probability of a financial crisis subject to the Board’s GSIB surcharge on for purposes of the Board’s capital rules, occurring in a given year was between a consolidated basis or the BCBS assessment methodology (foreign GSIB). 62 The IHC rule generally requires any foreign 61 Basel Committee on Banking Supervision, ‘‘An The purpose of these criteria is to banking organization with total consolidated non- assessment of the long-term economic impact of branch U.S. assets of $50 billion or more to form stronger capital and liquidity requirements’’ identify those foreign banking a single U.S. intermediate holding company over its (August 2010), available at http://www.bis.org/publ/ organizations that are global U.S. subsidiaries. 12 CFR 252.153; 79 FR 17329 bcbs173.pdf. systemically important banking (May 27, 2014).

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or if the Board determines that the U.S. method for identifying foreign GSIBs— leverage exposure; and (c) 8 percent of intermediate holding company would such as looking to whether the foreign the covered IHC’s average total itself be a GSIB under the Board’s banking organization has been consolidated assets, as computed for methodology. The proposal would classified as a GSIB by its home purposes of the U.S. tier 1 leverage therefore require each top-tier foreign supervisory authority or by the FSB—be ratio.68 All other covered IHCs would be banking organization that controls an more appropriate? required to maintain outstanding U.S. intermediate holding company to Question 27: What additional eligible internal TLAC in an amount not notify the Board by January first of each modifications, if any, would be less than the greater of: (a) 18 percent of year whether its home country appropriate to the definition ‘‘top-tier the covered IHC’s total risk-weighted supervisor (or other appropriate home foreign banking organization’’ to assets; 69 (b) 6.75 percent of the covered country regulatory authority) has sufficiently explain the types of entities IHC’s total leverage exposure (if adopted standards consistent with the that may be considered top-tier foreign applicable); and (c) 9 percent of the BCBS assessment methodology, whether banking organizations under the covered IHC’s average total consolidated the organization prepares or reports the proposal? assets, as computed for purposes of the indicators used by the BCBS assessment B. Calibration of the Internal TLAC and U.S. tier 1 leverage ratio. As described below, an internal TLAC methodology, and if it does prepare or LTD Requirements (Sections 252.162 buffer would apply to all covered IHCs report such indicators, whether the and 252.164 of the Proposed Rule) organization has determined that it has in addition to the applicable risk- the characteristics of a global Under the internal TLAC requirement, weighted assets component of the systemically important banking the amount of eligible internal total loss- internal TLAC requirement. organization under the BCBS absorbing capacity (‘‘eligible internal Under the internal LTD requirement, assessment methodology.63 TLAC’’) that a covered IHC would be a covered IHC would be required to As with covered BHCs, the proposal’s required to maintain outstanding would maintain outstanding eligible internal focus on GSIBs is in keeping with the depend on whether the covered IHC (or long-term debt instruments (‘‘eligible Dodd-Frank Act’s mandate that more any of its subsidiaries) is expected to internal LTD’’) in an amount not less stringent prudential standards be enter resolution if a foreign parent entity than the greater of: (a) 7 percent of total applied to the most systemically fails, rather than being maintained as a risk-weighted assets; (b) 3 percent of the important bank holding companies.64 going concern while a foreign parent total leverage exposure (if applicable); Furthermore, the use of the GSIB entity is resolved. If the home country and (c) 4 percent of average total surcharge rule to identify foreign GSIBs resolution authority for the parent consolidated assets, as computed for as well as U.S. GSIBs (and thus to foreign banking organization of the purposes of the U.S. tier 1 leverage ratio. identify both covered BHCs and covered covered IHC provides a certification to Covered IHCs would be prohibited from IHCs) promotes a level playing field the Board indicating that the authority’s redeeming eligible internal LTD prior to between U.S. and foreign banking planned resolution strategy for the its stated maturity date without organizations. foreign banking organization does not obtaining prior approval from the Board Question 25: The Board invites involve the covered IHC or any where such redemption would cause the comment on alternative approaches for subsidiary of the covered IHC entering covered IHC’s eligible internal LTD to determining the scope of application of a resolution proceeding in the United fall below its internal LTD requirement. the proposed internal TLAC and LTD States, then the covered IHC would be The rationale for the proposed 65 requirements. Should the Board apply considered a ‘‘non-resolution entity.’’ internal TLAC and LTD requirements is the proposed internal TLAC and LTD Covered IHCs that are non-resolution generally parallel to the rationale for the requirements to all U.S. intermediate entities would be required to maintain proposed external TLAC and LTD requirements, which is discussed above. holding companies required to be outstanding eligible internal TLAC in an Covered IHCs, other than those that are formed under the IHC rule rather than amount not less than the greater of: (a) non-resolution entities, would be limiting it to U.S. intermediate holding 16 percent of the covered IHC’s total 66 subject to an internal TLAC requirement companies that are controlled by foreign risk-weighted assets; (b) for covered with a risk-weighted assets component GSIBs? IHCs that are subject to the 67 Question 26: Is the proposed method supplementary leverage ratio, 6 identical to the risk-weighted assets for determining whether a foreign percent of the covered IHC’s total component of the proposed external banking organization is a foreign TLAC requirement. They would be GSIB—application of the relevant 65 If the home country resolution authority for the subject to a supplementary leverage foreign banking organization that controls the portion of the Board’s GSIB surcharge ratio component (if applicable) that is covered IHC subsequently indicates that its planned lower than the supplementary leverage rule to the foreign banking resolution strategy for the foreign banking organization’s balance sheet—an organization does involve the covered IHC or its ratio component of the proposed appropriate method for making that subsidiaries being separately resolved in the United States, the covered IHC would cease to be a non- 68 The final rule imposes the same leverage determination? Would an alternative resolution entity one year after the Board provides capital requirements on U.S. intermediate holding the covered IHC with notice of the change. companies as it does on U.S. bank holding 63 Under the proposal, these notice and 66 The risk-weighted assets component of the companies. 12 CFR 252.153(e)(2); 79 FR 17329 determination requirements would apply to the internal TLAC requirement would be phased in as (March 27, 2014). These leverage capital ‘‘top-tier foreign banking organization.’’ The follows: It would be equal to 14 percent of the requirements include the generally-applicable proposal defines top-tier foreign banking covered IHC’s risk-weighted assets beginning on leverage ratio and the supplementary leverage ratio organization, with respect to a foreign bank, as the January 1, 2019, and would be equal to 16 percent for U.S. intermediate holding companies that meet top-tier entity that controls the foreign bank (if any) of the covered IHC’s risk-weighted assets beginning the scope of application for that ratio. unless the Board specifies a subsidiary of such on January 1, 2022. 69 The risk-weighted assets component of the entity as the ‘‘top-tier foreign banking 67 Under the IHC rule, U.S. intermediate holding internal TLAC requirement for covered IHCs of organization.’’ Thus, the definition would include companies with total consolidated assets of $250 MPOE firms would be phased in as follows: It the top-tier entity that controls a foreign bank, billion or more or on-balance sheet foreign exposure would be equal to 16 percent of the covered IHC’s which would be the foreign bank if no entity equal to $10 billion or more are required to meet risk-weighted assets beginning on January 1, 2019, controls the foreign bank, or the entity specified by a minimum supplementary leverage ratio of 3 and would be equal to 18 percent of the covered the Board that is a subsidiary of the top-tier entity. percent. 12 CFR 252.153(e)(2); 79 FR 17329 (March IHC’s risk-weighted assets beginning on January 1, 64 12 U.S.C. 5365(a)(1)(B). 27, 2014). 2022.

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external TLAC requirement in more analogous to covered BHCs, which C. Core Features of Eligible Internal recognition of the fact that covered IHCs are themselves resolution entities. For TLAC (Section 252.164 of the Proposed are not U.S. GSIBs and so would not be these covered IHCs, there is no need to Rule) subject to the enhanced supplementary apply a diminished eligible internal The definition of eligible internal leverage ratio that applies to U.S. GSIBs. TLAC requirement in order to support TLAC is similar to the definition of Finally, because some covered IHCs an SPOE resolution of the parent foreign eligible external TLAC. A covered IHC’s may not be subject to the supplementary GSIB. These covered IHCs would eligible internal TLAC would be defined leverage ratio, a third component based therefore be subject to eligible internal to be the sum of (a) the tier 1 regulatory on the U.S. tier 1 leverage ratio was TLAC requirements in line with the capital (common equity tier 1 capital added to the internal LTD requirement. eligible external TLAC requirements and additional tier 1 capital) issued The proposed calibration of this that would apply to covered BHCs, as from the covered IHC to a foreign entity component is consistent with the discussed above. that directly or indirectly controls the proposed calibration of the covered IHC (‘‘foreign parent entity’’) supplementary leverage ratio The proposed internal LTD 70 requirements are based on the capital and (b) the covered IHC’s eligible component. internal LTD, as defined below.71 Covered IHCs that are non-resolution refill framework discussed above with Similar to the definition of eligible entities would be subject to a slightly respect to the proposed external LTD external TLAC, tier 2 capital that meets lower internal TLAC requirement. Most requirements. Because covered IHCs are the definition of eligible internal LTD foreign GSIBs are expected to be not U.S. GSIBs and are therefore not would count toward the internal TLAC resolved by their home jurisdiction subject to a GSIB surcharge or to the resolution authorities through an SPOE enhanced supplementary leverage ratio, requirement. The rationale for the requirement that resolution and are therefore expected to a covered IHC is subject to a common regulatory capital be issued directly by be non-resolution entities under the equity tier 1 capital level of 7 percent the covered IHC, rather than by a proposal. Were such an SPOE resolution of risk-weighted assets (4.5 percent plus subsidiary of the IHC, in order to count to succeed, the covered IHC would a 2.5 percent capital conservation as eligible internal TLAC is identical to avoid entering resolution and would buffer) and, if the supplementary the rationale for the analogous continue as a going concern, with its leverage ratio applies to the covered requirement for eligible external TLAC: eligible internal TLAC and eligible IHC, to a tier 1 capital supplementary internal LTD used to pass up the leverage ratio requirement of 3 percent To ensure that the required quantity of covered IHC’s going-concern losses to of total leverage exposure. Because some loss-absorbing capacity will be available the parent foreign GSIB, to the extent covered IHCs may not be subject to the to absorb losses incurred anywhere by necessary. However, the Board also supplementary leverage ratio, a third any subsidiary of the IHC. Regulatory recognizes the need to plan for the component based on the U.S. tier 1 capital that is issued by one subsidiary contingency in which the covered IHC leverage ratio was added to the internal of the covered IHC would not enters a U.S. resolution proceeding. The LTD requirement. The applicable necessarily be available to absorb losses proposed calibration for such a covered requirement under that leverage ratio is incurred by another subsidiary. Regulatory capital must meet one IHC is based on the desirability of 4 percent of on-balance sheet assets. The additional requirements in order to providing support for the preferred calibration of the proposed internal LTD count as eligible internal TLAC: It must SPOE resolution of the foreign GSIB, requirements derives from the be issued to a foreign parent entity of which requires that the foreign GSIB be application of the capital refill allowed to have some internal loss- the covered IHC. The requirement of framework described above to these issuance to a foreign parent, rather than absorbing capacity at the parent level requirements. that can be freely allocated to whichever to a U.S. affiliate or to third parties, Question 28: The Board invites subsidiaries have incurred the greatest would ensure that losses incurred by the comment on all aspects of the proposed losses (including non-U.S. subsidiaries), U.S. intermediate holding company of a balanced with the need to ensure that calibration of the internal TLAC and foreign GSIB would be upstreamed to a sufficient loss-absorbing capacity is LTD requirements, including any impact foreign parent rather than being prepositioned with the covered IHC to on the internal funding structures of the transferred to other U.S. entities. This ensure that it can be kept operating as covered IHC’s parent foreign bank. requirement would minimize the risk a going concern or subjected to an Question 29: The Board invites that such losses pose to the financial orderly resolution in the United States comment on its proposed method for stability of the United States, regardless if the foreign GSIB is not subjected to an identifying covered IHCs that are non- of whether the covered IHC enters a SPOE resolution. resolution entities. resolution proceeding. The requirement of issuance to a By contrast, covered IHCs that are not Question 30: The Board invites designated as non-resolution entities are foreign parent that controls the covered comment on whether, instead of being IHC, rather than to another foreign subject to differing internal TLAC 70 Generally, a bank holding company is subject entity within the foreign GSIB or to a to a 4 percent on-balance sheet leverage ratio requirements on the basis of whether or third party, would prevent the requirement and a 3 percent supplementary not they are non-resolution entities, all conversion of eligible internal TLAC leverage ratio requirement (if the supplementary covered IHCs should be subject to either into equity from effecting a change in leverage ratio applies to the bank holding the lower proposed internal TLAC company). The proposed calibration of the on- balance sheet leverage ratio component of the requirement or to the higher proposed 71 Although eligible internal LTD with a proposed internal TLAC requirement, 8 percent, is internal TLAC requirement. remaining maturity between one and two years twice the 4 percent requirement because the would be subject to a 50 percent haircut for proposed calibration of the supplementary leverage Question 31: The Board invites purposes of the internal LTD requirement, such ratio requirement, 6 percent, is twice the 3 percent comment on whether to eliminate the eligible internal LTD would continue to count at requirement. The aim was to ensure that covered proposed internal TLAC requirement full value for purposes of the internal TLAC IHCs that are not subject to the supplementary and subject covered IHCs to the requirement. As discussed below, eligible internal leverage ratio would be subject to a roughly LTD with a remaining maturity of less than one year analogous component under the internal TLAC proposed internal LTD requirement would not count toward either the internal TLAC requirement. only. requirement or the internal LTD requirement.

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control over the covered IHC. A change D. Internal TLAC Buffer TLAC buffer would subject it to limits in control could create additional and on capital distributions and undesirable regulatory and management An internal TLAC buffer would apply discretionary bonus payments in complexity during a failure scenario and in addition to the risk-weighted assets accordance with Table 2. Thus, the component of the internal TLAC would severely disrupt an SPOE internal TLAC buffer would be requirement. The internal TLAC buffer resolution strategy. analogous to the capital conservation would be generally analogous to the buffer applicable under the Board’s Question 32: The Board invites proposed external TLAC buffer Regulation Q, except that it would apply comment on all aspects of the proposed described above, although the internal in addition to the internal TLAC definition of eligible internal TLAC. TLAC buffer would not include a GSIB requirement rather than in addition to Question 33: Should eligible internal surcharge component because covered minimum risk-based capital LTD with a remaining maturity between IHCs are not subject to the GSIB requirements under Regulation Q. one and two years be subject to a 50 surcharge rule. A covered IHC’s internal As discussed above with respect to percent haircut for purposes of the TLAC buffer would thus be equal to the the external TLAC buffer, a covered IHC internal TLAC requirement, by analogy sum of 2.5 percent plus any applicable that already meets the applicable capital to the treatment of such eligible internal countercyclical capital buffer. requirements and the existing capital LTD for purposes of the internal LTD The internal TLAC buffer would be conservation buffer would not need to requirement? required to be filled solely with increase its common equity tier 1 capital common equity tier 1 capital, and a to meet its internal TLAC requirement covered IHC’s breach of its internal and its internal TLAC buffer.

TABLE 2—CALCULATION OF MAXIMUM INTERNAL TLAC PAYOUT AMOUNT

Maximum internal TLAC payout ratio (as a per- Internal TLAC buffer level centage of eligible retained income)

Greater than the internal TLAC buffer ...... No payout ratio limitation applies. Less than or equal to the internal TLAC buffer, and greater than 75 percent of the internal 60 percent. TLAC buffer. Less than or equal to 75 percent of the internal TLAC buffer, and greater than 50 percent of 40 percent. the internal TLAC buffer. Less than or equal to 50 percent of the internal TLAC buffer, and greater than 25 percent of 20 percent. the internal TLAC buffer. Less than or equal to 25 percent of the internal TLAC buffer ...... 0 percent.

E. Core Features of Eligible Internal LTD However, several additional more States be appropriate? Is it (Section 252.161 of the Proposed Rule) requirements would apply to eligible appropriate to permit such instruments A covered IHC’s eligible internal LTD internal LTD. Eligible internal LTD to be governed by non-U.S. laws in any would generally be subject to the same would be required to be issued to a respects? foreign parent entity of the covered IHC, requirements as would apply to eligible 1. Issuance to a Foreign Parent Entity to be contractually subordinated to all external LTD: It would be required to be That Controls the Covered IHC debt that is paid in and issued directly third-party liabilities of the covered Eligible internal LTD would be from the covered IHC, is unsecured, has IHC, and to include a contractual trigger required to be paid in and issued to a a maturity of greater than one year from pursuant to which the Board could foreign parent entity that controls the the date of issuance, is ‘‘plain vanilla,’’ require the covered IHC to cancel the covered IHC. The rationale for this and is governed by U.S. law. Eligible eligible internal LTD or convert or requirement is the same as the rationale internal LTD with a remaining maturity exchange it into tier 1 common equity for the identical requirement with of between one and two years would be on a going-concern basis under certain respect to regulatory capital that counts subject to a 50 percent haircut for specified conditions. as eligible internal TLAC, which is purposes of the internal LTD Question 34: The Board invites comment on the appropriateness of discussed above. requirement, and eligible internal LTD Question 36: The Board invites with a remaining maturity of less than subjecting eligible internal LTD to the same requirements as apply to eligible comment on all aspects of the one year would not count toward the requirement that eligible internal LTD internal LTD requirement. The proposal external LTD. Question 35: The Board invites be issued to a foreign parent entity that would treat an instrument that could comment on the requirement that controls the covered IHC. In particular, become subject to a put right in the eligible internal LTD instruments be the Board invites comment with respect future as if the first day on which the governed by U.S. law. Is this to whether covered IHCs that are put right could be exercised were the requirement adequate to ensure that expected to enter resolution themselves instrument’s stated maturity date. The losses can be imposed on such in a failure scenario should be rationales for these proposed provisions instruments under the U.S. Bankruptcy permitted to issue eligible internal LTD are generally the same as the rationales Code or Title II without undue legal to third parties, as covered BHCs would. for the identical provisions in the risk? Are additional requirements Should internal LTD be required to be context of eligible external LTD, which appropriate? In particular, would a issued to the top-tier foreign parent of are discussed above.72 requirement that such instruments be the covered IHC? subject to the contract law of one or 72 In addition, the proposal requires that eligible 2. Contractual Subordination internal LTD be governed by U.S. law in order to clarify that the conversion, exchange, and would be held by foreign companies, are Eligible internal LTD would be cancellation provisions of these instruments, which enforceable under U.S. law. required to be contractually

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subordinated to all third-party liabilities proposed contractual subordination that could arise from the material of the covered IHC, with the exception requirement for eligible internal LTD. financial distress’’ of the covered IHC.76 of liabilities that are related to eligible 3. Contractual Conversion Trigger The proposed trigger conditions internal TLAC. The exception for represent a compromise between the liabilities that are related to eligible Eligible internal LTD would be interests of home and host regulators. internal TLAC applies to instruments required to include a contractual trigger From the perspective of a host regulator, that were eligible internal TLAC when pursuant to which the Board could it is desirable to have the power to issued and have ceased to be eligible require the covered IHC to cancel the impose losses on eligible internal LTD solely because their remaining maturity eligible internal LTD or convert or quickly and easily upon a determination is less than one year, because they have exchange it into tier 1 common equity that the hosted subsidiary is in danger become subject to a put right, or because on a going-concern basis (that is, of default, in order to remove those they could become subject to a put right without the covered IHC’s entry into a losses from the host jurisdiction’s within one year, as well as to payables resolution proceeding) if: (a) the Board financial system and thereby promote (such as dividend- or interest-related determines that the covered IHC is ‘‘in financial stability in the host 74 payables) that are associated with such default or in danger of default’’; and jurisdiction. The proposed trigger liabilities. (b) any of the following circumstances conditions advance this interest by The proposed contractual apply (i) the top-tier foreign banking giving the Board the power to do so subordination requirement would organization or any subsidiary outside upon a determination that the covered ensure that the foreign parent generally of the United States is placed into IHC is in danger of default where the resolution proceedings, (ii) the home would absorb the covered IHC’s losses home jurisdiction supervisory authority country supervisory authority consents ahead of the third-party creditors and either consents or fails to object within to the cancellation, exchange, or counterparties of the covered IHC and 48 hours or where the home jurisdiction conversion, or does not object to the its subsidiaries. Such a requirement resolution authority has placed the cancellation, exchange, or conversion should reduce the risk of third-party parent foreign banking organization into following 48 hours’ notice, or (iii) the challenges to the recapitalization of the resolution proceedings. At the same Board has made a written covered IHC and reduce the risk that a time, from the perspective of a home recommendation to the Secretary of the change in control could result from the regulator, it is desirable that host Treasury that the FDIC should be recapitalization of the covered IHC. regulators not impose losses on the top- appointed as receiver of the covered IHC tier parent entity except where doing so Both legal challenges to the under Title II.75 The terms in the debt is appropriate to prevent the failure of recapitalization and a change in control instrument would have to be approved the hosted subsidiary, since doing so over the covered IHC could create by the Board. obstacles to an orderly resolution. The principal purpose of this drains loss-absorbing capacity from the This requirement is more stringent requirement is to ensure that losses top-tier parent entity that may be than the requirements for eligible incurred by the covered IHC are shifted needed to support other subsidiaries in external LTD, which is allowed to be to a foreign parent without the covered the home jurisdiction or in another host senior unsecured debt and to be senior IHC’s having to enter a resolution jurisdiction. The proposed trigger to a limited amount of a capped amount proceeding. If the covered IHC’s eligible conditions advance this interest by of liabilities of the covered BHC that do internal LTD is sufficient to recapitalize giving the home jurisdiction supervisory not count as eligible external LTD. The the covered IHC in light of the losses authority the right to object to the Board is proposing to apply this more that the covered IHC has incurred, this triggering decision within 48 hours, stringent requirement to eligible internal goal could be achieved through except where the home jurisdiction LTD because the costs of doing so are conversion of the eligible internal LTD resolution authority has placed the likely to be less than the costs of into equity upon the occurrence of the parent foreign banking entity into imposing an identical requirement on trigger conditions. The covered IHC’s resolution proceedings. The United eligible external LTD and are likely to entry into a resolution proceeding could States is home to numerous U.S. GSIBs be outweighed by the benefits described pose a risk to the financial stability of and also hosts substantial operations of above. In particular, the cost of the United States, and so avoiding the numerous foreign GSIBs, making both imposing this contractual subordination need for such a resolution proceeding considerations relevant to U.S. interests. requirement on covered IHCs should be would advance the Dodd-Frank Act’s U.S. financial regulatory agencies are substantially lower than the cost of goal of ‘‘mitigat[ing] risks to the discussing the application of similar imposing the same requirement on financial stability of the United States standards by foreign regulatory covered BHCs because a covered BHC authorities in jurisdictions that host the must issue its long-term debt to third- 74 The phrase ‘‘in default or in danger of default’’ operations of U.S. GSIBs. party market participants, some of would be defined consistently with the standard Question 38: The Board invites provided by section 203(c)(4) of Title II of the Dodd- comment on all aspects of the which do not invest in contractually Frank Act. See 12 U.S.C. 5383. Consistent with subordinated debt instruments, whereas section 203’s definition of the phrase, a covered IHC contractual conversion trigger a covered IHC would issue its long-term would be considered to be in default or in danger requirement, including the debt to a parent entity in an internal of default upon a determination by the Board that appropriateness of the requirement for 73 (A) a case has been, or likely will promptly be, transaction. commenced with respect to the [covered IHC] under foreign GSIBs with SPOE and MPOE Question 37: The Board invites the U.S. Bankruptcy Code; (B) the covered IHC has resolution strategies, whether an comment on the appropriateness of the incurred, or is likely to incur, losses that will alternative to the ‘‘in default or in deplete all or substantially all of its capital, and danger of default’’ standard would be there is no reasonable prospect for the company to 73 While the Board does not propose to subject avoid such depletion; (C) the assets of the [covered more appropriate, and any legal risks covered BHCs to this contractual subordination IHC] are, or are likely to be, less than its obligations associated with the Board’s conversion requirement, it does propose to impose a cap on the to creditors and others; or (D) the [covered IHC] is, of eligible internal LTD into equity in value of a covered BHC’s non-eligible external LTD- or is likely to be, unable to pay its obligations (other order to recapitalize the covered IHC. related liabilities that can be pari passu with or than those subject to a bona fide dispute) in the junior to its eligible long-term debt. This aspect of normal course of business. the proposal is discussed below. 75 See 12 U.S.C. 5383. 76 12 U.S.C. 5365(a)(1).

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Question 39: The Board invites proposed cap is not relevant to covered A. Third-Party Short-Term Debt comment on its proposed method to IHCs.) Instruments (Sections 252.64(a)(1) and identify the home jurisdiction The proposed prohibitions and cap 252.165(a) of the Proposed Rule) supervisory authority of a foreign GSIB would apply only to the corporate The Board proposes to prohibit for purposes of issuing an internal debt practices and liabilities of the covered covered holding companies from issuing conversion order. holding company itself. They would not debt instruments with an original Question 40: The Board invites directly restrict the corporate practices maturity of less than one year to a third comment on whether the conversion and liabilities of the subsidiaries of the party (as opposed to an affiliate of the condition that refers to the placement of covered holding company. covered holding company). Such a a foreign banking organization that liability would be considered to have an controls the covered IHC or any These proposed clean holding company provisions would advance original maturity of less than one year subsidiary of the top-tier-foreign if it would provide the creditor with the banking organization being placed into three related goals of SPOE resolution. First, a successful SPOE resolution option to receive repayment within one resolution in its home country is year of the creation of the liability, or if appropriate in scope. proceeding requires the ability to impose losses on the creditors of the it would create such an option or an IV. Clean Holding Company covered holding company without automatic obligation to pay upon the Requirements (sections 252.64 and causing material disruption to the occurrence of an event that could occur 252.165 of the proposed rule) financial system. The proposed clean within one year of the creation of the To further facilitate the resolution of holding company restrictions would liability (other than an event related to a covered BHC, a covered IHC, or a advance this goal by minimizing the risk the covered holding company’s foreign parent entity of a covered IHC, of short-term funding runs, asset insolvency). The proposed prohibition the Board proposes to prohibit both firesales, and severe losses to other large would also cover short-term and financial firms that might otherwise be demand deposits at the covered holding covered BHCs and covered IHCs 77 (together, ‘‘covered holding associated with an SPOE resolution of a company. One objective of SPOE resolution is to companies’’) from engaging in certain covered holding company. mitigate the risk of destabilizing funding classes of transactions that could pose Second, the clean holding company runs. A funding run occurs when the an obstacle to the orderly SPOE provisions would limit the extent to short-term creditors of a financial resolution of a covered holding which the subsidiaries of a covered company observe stress at that company or increase the risk that holding company would experience institution and seek to minimize their financial market contagion would result losses as a result of the failure of the exposures to it by refusing to roll over from the resolution of a covered holding covered holding company. In particular, its debts. The resulting liquidity stress company. the prohibition on holding company can hasten the company’s failure, In particular, the Board proposes to liabilities that are subject to upstream prohibit covered holding companies including by forcing it to engage in asset guarantees or offset rights would firesales to come up with the liquidity from having outstanding liabilities in prevent a failed covered holding the following categories: Third-party to pay the short-term creditors. Because company’s creditors from passing their they reduce the value of similar assets debt instruments with an original losses on to the covered holding maturity of less than one year, including held by other firms, asset firesales are a company’s subsidiaries. This would key channel for the propagation of stress deposits (‘‘short-term debt’’); qualified serve SPOE resolution’s goal of ensuring financial contracts with a third party throughout the financial system. The that the failed holding company’s short-term creditors of a failing GSIB (‘‘third-party QFCs’’); guarantees of a operating subsidiaries are able to subsidiary’s liabilities if the covered may also run on other counterparties continue their normal operations that are similar to the failing firm in holding company’s insolvency or entry throughout the resolution of the failed into a resolution proceeding would certain respects, weakening those firms holding company by protecting those and forcing further firesales. And create default rights for a counterparty subsidiaries from losses that might depositors, who generally have the of the subsidiary; and liabilities that are threaten their viability. ability to demand their funds on short guaranteed by a subsidiary of the notice, present analogous issues. covered holding company (‘‘upstream Third, SPOE resolution seeks to achieve the rapid recapitalization of the The Board’s proposal seeks to mitigate guarantees’’) or are subject to rights that these risks in two complementary ways. would allow a third party to offset its material subsidiaries of a covered holding company with minimal First, although the operating debt to a subsidiary upon the covered subsidiaries of covered holding holding company’s default on an interruption to the ordinary operations of those subsidiaries. An entity’s companies rely on short-term funding, obligation owed to the third party. in an SPOE resolution, their short-term Additionally, the Board proposes to complexity can pose a major obstacle to creditors would not bear losses incurred cap the total value of each covered rapid and orderly resolution. by the subsidiaries because those losses BHC’s non-TLAC-related third-party Limitations on the types of transactions would instead be borne by the external liabilities that are either pari passu with that a covered holding company may TLAC holders of the covered holding or subordinated to any eligible external enter into serve to limit its legal and company. To the extent that market TLAC to 5 percent of the value of the operational complexity and thereby participants view SPOE resolution as covered BHC’s eligible external TLAC. facilitate a prompt resolution and workable, the subsidiaries’ short-term (As discussed above, the Board proposes recapitalization with minimal creditors should have reduced to prohibit covered IHCs from having uncertainty and delay. incentives to run because their direct any non-TLAC-related third-party The proposed clean holding company counterparty will not default in such a liabilities that are pari passu with or provisions would also enhance the resolution. Second, the covered holding subordinated to eligible internal LTD by overall resiliency of covered holding requiring that eligible internal LTD be companies by removing complexity 77 For purposes of the proposal, deposits would contractually subordinated to all third- from their balance sheets and limiting include those that are captured in line item 11 of party debt claims. Therefore, the their reliance on short-term funding. schedule PC of FR Y–9LP.

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companies themselves—which would Finally, the proposed prohibition on institution’s default by immediately (or, in the case of a covered IHC, might) short-term debt instruments would liquidating their collateral and seeking enter into resolution and default on promote the resiliency of covered replacement trades with other dealers, certain of their debts in a failure holding companies as well as their which could cause firesale effects and scenario—would be prohibited from resolvability. As discussed above, propagate financial stress to other firms relying on short-term funding, reducing reliance on short-term funding creates that hold similar assets by depressing the run risk associated with the failure the risk of a short-term funding run that asset prices. of such an entity. This is a particularly could destabilize the covered holding The proposed restriction on third- important objective in light of the likely company by draining its liquidity and party QFCs would mitigate this threat to liquidity needs of a GSIB during SPOE forcing it to engage in capital-depleting financial stability by two means. First, resolution, because a short-term funding asset firesales. The increase in covered covered holding companies’ operating run on a covered holding company holding company resiliency yielded by subsidiaries, which are parties to large would drain liquidity that might be the proposed prohibition provides a quantities of QFCs, should remain needed to support the group’s operating secondary justification for the proposal. solvent and not fail to meet any subsidiaries. Question 41: The Board invites ordinary course payment or delivery The proposed prohibition applies to comment on whether the proposed obligations during a successful SPOE both secured and unsecured short-term prohibition would advance SPOE resolution. Therefore, assuming that the borrowings. Although secured creditors resolution by helping to minimize the cross-default provisions of the QFCs are less likely to take losses in run risk and potential negative engaged in by the operating subsidiaries resolution than unsecured creditors, externalities associated with issuance of of covered holding companies are secured creditors may nonetheless be short-term debt by covered holding appropriately structured, their QFC unwilling to maintain their exposures to companies. In particular, the Board counterparties generally would have no a covered holding company that comes invites comment on the appropriate contractual right to terminate or under stress. In particular, if the covered scope of the proposed prohibition and liquidate collateral on the basis of the holding company were to enter into a whether the prohibition is sufficiently covered holding company’s entry into resolution proceeding, the collateral clear. resolution proceedings.79 Second, the used to secure the debt would be subject Question 42: The Board invites covered holding companies themselves to a stay, preventing the creditor from comment on whether the purpose of the would have no QFCs with external liquidating it immediately. (Qualified proposed prohibition would be served counterparties, and so their entry into financial contracts, which are not by a further requirement that covered resolution proceedings would not result subject to a stay under the U.S. holding companies not redeem or buy in QFC terminations and related Bankruptcy Code but which present back their liabilities without prior firesales. The proposed restriction on other potential difficulties for SPOE regulatory approval, to prevent covered third-party QFCs would therefore resolution, are discussed below.) The holding companies from doing so to materially diminish the firesale risk and creditor would therefore face two risks: preserve their franchise in response to contagion effects associated with the The risk that the value of the collateral creditor requests, which could hasten a failure of a covered holding company. would decline before it could be failure by draining liquidity or requiring Question 44: The Board invites liquidated and the liquidity risk asset firesales. comment with respect to whether the attributable to the fact that the creditor Question 43: The Board invites prohibition on third-party QFCs should would be stayed from liquidating the comment on the appropriate treatment be subject to an exception for collateral for some time. Knowing this, of pre-existing notes that would require derivatives contracts that are intended secured short-term creditors may well redemption or create a put right upon to hedge the exposures of the covered decide to withdraw funding from a the occurrence of an event that could holding company and, if so, the covered holding company that comes (but might not) occur within one year of appropriate scope of any such under stress. issuance. exception. The Board also invites Additionally, many short-term B. Qualified Financial Contracts with comment on whether the definition of lenders to GSIBs are themselves ‘‘qualified financial contracts’’ provides maturity-transforming financial firms Third Parties (Sections 252.64(a)(3) and 252.165(c) of the Proposed Rule) an appropriate scope for this that are vulnerable to runs (for instance, prohibition and, in particular, whether money market mutual funds). If such Under the proposal, covered BHCs the scope should be narrowed to permit firms incur losses, then they may be could only enter into qualified financial covered holding companies to enter into unable to meet their obligations to their contracts (QFCs) with their subsidiaries certain third-party QFCs or broadened own investors and counterparties, and covered IHCs could only enter into to prohibit additional classes of which would cause further losses QFCs with their affiliates. The proposal transactions. throughout the financial system. defines QFCs by reference to Title II of Question 45: The Board invites Because SPOE resolution relies on the Dodd-Frank Act, which defines comment on the appropriate treatment imposing losses on the covered holding QFCs to include securities contracts, of pre-existing third-party QFCs, some company’s creditors while protecting commodities contracts, forward of which may be long-dated. Should the creditors and counterparties of its contracts, repurchase agreements, and some or all pre-existing third-party 78 material operating subsidiaries, it is swap agreements. QFCs be included in the proposed desirable that the holding company’s The failure of a large financial restriction? Commenters are invited to creditors be limited to those entities that organization that is a party to a material provide information on the can be exposed to losses without amount of third-party QFCs could pose characteristics of existing third-party materially affecting financial stability. a substantial risk to the stability of the QFCs to which a covered holding This proposal seeks to further enhance financial system. Specifically, it is likely company is a party. the credibility of the SPOE approach by that many of that institution’s QFC removing undue complexity from the counterparties would respond to the 79 See International Swaps and Derivatives resolution of a covered holding Association’s (‘‘ISDA’’) 2014 Resolution Stay company. 78 12 U.S.C. 5390(c)(8)(D). Protocol (November 4, 2014).

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C. Guarantees that Are Subject to Cross- company should be permitted to therefore be to prevent the future Defaults (Sections 252.64(a)(4) and guarantee the liabilities of its issuance of such guarantees by material 252.165(d) of the Proposed Rule) subsidiaries if such liabilities permit a non-bank subsidiaries. The proposal would prohibit a person to terminate the contract on For analogous reasons, the Board also covered holding company from demand or at its option at a specified proposes to prohibit covered holding guaranteeing (including by providing time, or from time to time, without the companies from issuing an instrument if credit support) with respect to any need to show cause. Should a covered the holder of the instrument has a liability between a direct or indirect holding company be permitted to contractual right to offset its or its subsidiary of the covered holding guarantee any particular class or classes affiliates’ liabilities to the covered company and an external counterparty of liabilities of its subsidiaries that holding company’s subsidiaries against if the covered holding company’s include such provisions? the covered holding company’s liability insolvency or entry into resolution Question 48: The Board invites under the instrument.83 The prohibition (other than resolution under Title II of comment on whether a covered IHC would include all such offset rights the Dodd-Frank Act) would directly or should be permitted to guarantee regardless of whether the right is indirectly provide the subsidiary’s liabilities of affiliates of the covered IHC provided in the instrument itself. Such counterparty with a default right.80 that are not subsidiaries of the covered offset rights are another device by which Guarantees by covered holding IHC, and whether any prohibition losses that should flow to the covered companies of liabilities that are not should distinguish between the foreign holding company’s external TLAC subject to such cross-default rights banking organization’s non-U.S. holders in an SPOE resolution could would be unaffected by the proposal. operations and its U.S. branches and instead be imposed on operating agencies. The proposed prohibition would subsidiaries and their creditors. Question 49: The Board invites advance the key SPOE resolution goal of Question 50: The Board invites ensuring that a covered holding comment on whether additional limitations or exceptions for guarantees comment on the appropriate scope of company’s subsidiaries would continue the ‘‘upstream guarantee’’ prohibition to operate normally upon the covered by covered holding companies are necessary or appropriate. and on whether any exceptions to the holding company’s entry into proposed prohibition on such resolution. This goal would be D. Upstream Guarantees and Offset guarantees are necessary or appropriate. jeopardized if the covered holding Rights (Sections 252.64(a)(2), (5) and The Board also invites comment on the company’s entry into resolution or 252.165(b)(e) of the Proposed Rule) appropriate scope of the offset rights insolvency operated as a default by the The Board proposes to prohibit prohibition, including whether the subsidiary and empowered the covered holding companies from having proposed prohibition is adequate to subsidiary’s counterparties to take outstanding liabilities that are subject to achieve the goals expressed above. For default-related actions, such as ceasing a guarantee from any direct or indirect example, should this provision be to perform under the contract or subsidiary of the holding company. limited to debt instruments that provide liquidating collateral. Were the SPOE resolution relies on imposing all contractual offset rights? The Board counterparty to take such actions, the losses incurred by the group on the invites comment with respect to whether subsidiary could face liquidity, covered holding company’s eligible any exceptions or limitations to the reputational, or other stress that could external TLAC holders while ensuring proposed restrictions on such rights, undermine its ability to continue that its operating subsidiaries continue such as a limitation of the restriction to operating normally, for instance by to operate normally. This arrangement eligible external TLAC instruments, are prompting a short-term funding run on could be undermined if a liability of the necessary or appropriate. the subsidiary. The proposed covered holding company is subject to Question 51: The Board invites prohibition would be a complement to an upstream guarantee, because the other work that has been done or is comment on the types of instruments effect of such a guarantee is to subject that provide contractual offset rights underway to facilitate SPOE resolution the guaranteeing subsidiary (and, through the stay of cross-defaults, and the amount of such instruments ultimately, its creditors) to the losses issued by covered BHCs. including the ISDA 2014 Resolution that would otherwise be imposed on the 81 Question 52: The Board invites Stay Protocol. holding company’s creditors. A Question 46: The Board invites comment on whether arrangements prohibition on upstream guarantees comment on the appropriate definition other than upstream guarantees and would facilitate the SPOE resolution of ‘‘default right’’ in the proposed offset rights could also have the effect of strategy by increasing the certainty that regulations, and on whether the forcing the creditors of material the covered holding company’s eligible definition of this term should operating subsidiaries to take losses external TLAC holders will be exposed specifically exclude contracts that before holding company creditors (for to loss ahead of the creditors of its provide for termination on demand. The subsidiaries. instance, a subsidiary’s entry into a Board also invites comment on whether, Upstream guarantees do not appear to credit default swap referencing the debt for the purposes of this proposal, be common among covered holding of the covered holding company) and, if contractual provisions that require the companies. Section 23A of the Federal so, whether they should also be parties to negotiate new terms (e.g., Reserve Act already limits the ability of restricted by regulation. Finally, the Annex III (Term Loans) of the Global a U.S. insured depository institution to Board invites comment on whether the Master Securities Lending Agreement) issue guarantees on behalf of its parent prohibition should be limited to certain should be treated the same as a right to holding company.82 The principal effect material operating subsidiaries rather terminate on demand. of the proposed prohibition would than covering all subsidiaries of a Question 47: The Board invites covered holding company and, if so, the comment on whether a covered holding 82 Transactions subject to the quantitative limits of section 23A of the Federal Reserve Act and 83 The prohibition for covered IHCs also would 80 The proposal defines the term ‘‘default right’’ Regulation W include guarantees issued by a bank include contractual rights to offset against the broadly. on behalf of an affiliate. See 12 U.S.C. 371c(b)(7); covered IHC because the covered IHC itself may not 81 See ISDA 2014 Resolution Stay Protocol. 12 CFR 223.3(h). enter resolution or insolvency proceedings.

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appropriate scope of the limitation on embedded feature.85 Such liabilities that the firm maintains access to vital the types of subsidiaries. could be subjected to losses in external services and resources), the resolution alongside eligible external pool of resources available to other E. Cap on Other Third-Party Liabilities TLAC, but the proposal would cap them creditors of the same priority shrinks, (section 252.64(b) of the proposed rule) in light of their greater complexity making it more likely that those Finally, the Board proposes to limit relative to the plain-vanilla debt that creditors will recover less than they the total value of certain other liabilities qualifies as external TLAC. In an orderly would have in liquidation. Thus, of covered BHCs that could create resolution of a covered BHC, debt imposing a cap on the total value of obstacles to orderly resolution to 5 instruments that will be subjected to liabilities that are pari passu with or percent of the value of the covered losses should be able to be valued junior to eligible external TLAC but that BHC’s eligible external TLAC. The cap accurately and with minimal risk of might need to receive special treatment would apply to non-contingent dispute. Structured notes contain in resolution mitigates this no-creditor- liabilities to third parties (i.e., persons features that could make their valuation worse-off risk. that are not affiliates of the covered uncertain, volatile, or unduly complex. The rationale for calibrating the BHC) that would rank either pari passu Additionally, structured notes are often proposed cap to 5 percent of a covered with or junior to the covered BHC’s customer products sold to purchasers BHC’s eligible TLAC is as follows. The eligible LTD in the priority scheme of who are primarily seeking exposure to Board collected data from the U.S. either the U.S. Bankruptcy Code or Title a particular asset class and not seeking GSIBs and determined that covered II.84 The cap would not apply to eligible credit exposure to the covered BHC, and BHCs have outstanding certain third- external TLAC; to instruments that were the need to impose losses on a financial party operational liabilities that may eligible external TLAC when issued and institution’s customers in resolution rank pari passu with eligible LTD and have ceased to be eligible (because their may create obstacles to orderly that could not be eliminated without remaining maturity is less than one resolution. The proposed cap on substantial cost and complexity. These year) as long as the holder of the structured notes would promote the liabilities include (among other things) instrument does not have a currently resolvability of covered BHCs by tax payables, compensation payables, exercisable put right; or to payables limiting their issuance of instruments and accrued benefit plan obligations. (such as dividend- or interest-related that present these issues. The cap would For the eight current U.S. GSIBs, the payables) that are associated with such not limit a covered BHC’s ability to value of these operating liabilities liabilities. issue structured notes out of ranges from 1 percent to 4 percent of the subsidiaries. sum of the covered BHC’s equity and Because the Board proposes to require The second group includes, for that a covered IHC’s eligible internal long-term debt, which provides a example, vendor liabilities and reasonable proxy for the amount of LTD be contractually subordinated to all obligations to employees. Successful eligible external TLAC it would have of the covered IHC’s third-party resolution may require that the covered under this proposal. The cap was liabilities, this proposed cap would BHC continue to perform on certain of calibrated to allow these existing have no relevance to those firms. The its unsecured liabilities in order to operational liabilities while limiting the Board accordingly does not propose to ensure that it is not cut off from vital excessive growth of these and other apply the cap to covered IHCs. services and resources. If these vital liabilities at the covered BHC so that the liabilities were pari passu with eligible Liabilities that would be expected to problems discussed in the preceding external LTD, protecting these vital be subject to the cap include debt paragraphs may be avoided. In liabilities from loss would entail instruments with derivative-linked particular, several covered BHCs may treating these liabilities differently from features (i.e., structured notes); external need to limit the value of structured vendor and operating liabilities, such as eligible external LTD of the same priority, which could present both notes that they have outstanding. This for utilities, rent, fees for services, and result would be consistent with the obligations to employees; and liabilities operational and legal risk. The operational risk flows from the need to rationale for the clean holding company arising other than through a contract requirements because, as noted above, (e.g., liabilities created by a court identify such liabilities quickly in the context of a complex resolution such structured notes are customer judgment). liabilities rather than vital operating The liabilities subject to the cap fall proceeding, reducing the covered holding company’s complexity by liabilities and because their presence at into two groups: Those that could be the holding company could create subjected to losses alongside eligible capping the amount of these liabilities that it can have outstanding mitigates undue complexity during resolution. external TLAC without potentially By subjecting the total value of a undermining SPOE resolution or this risk. The legal risk flows from the no-creditor-worse-off principle, covered BHC’s liabilities of both types financial stability, and those that according to which each creditor of a to a single cap, the Board’s proposal potentially could not. firm that enters resolution is entitled to gives covered BHCs greater discretion to The first group includes structured recover at least as much as it would manage their own affairs than would a notes. The proposal defines structured have if the firm had simply been proposal that applied separate, smaller notes so as to avoid capturing debt liquidated under chapter 7 of the U.S. caps to the two types of liability. instruments that pay interest based on Bankruptcy Code.86 As creditors of a Question 53: The Board invites the performance of a single index but to given priority receive special treatment comment on the appropriate definition otherwise capture all debt instruments (that is, as they are paid in full to ensure of ‘‘structured notes,’’ and whether the that have a principal amount, provisions of the definition are adequate redemption amount, or stated maturity, 85 In addition, the definition captures debt to achieve the goals expressed above. that is subject to reduction based on the instruments that have more than one embedded The Board invites comment on use and performance of any asset, entity, index, derivative (or similar embedded feature) or are not scope of the term ‘‘assets’’ as used in the treated as debt under generally accepted accounting or embedded derivative or similar principles. definition of structured note, and 86 See, e.g., 11 U.S.C. 1129(a)(7); 12 U.S.C. whether a different term would be more 84 See 11 U.S.C. 507; 12 U.S.C. 5390(b). 5390(d)(2). appropriate in this context.

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Question 54: Should liabilities subject the location(s) of this disclosure.87 V. Consideration of Public Reporting to the proposed cap on certain third- Because the disclosure requirement is Requirements for Eligible External and party liabilities be netted against primarily intended to inform holders of Internal TLAC and LTD reserves held with respect to such a covered BHC’s eligible external LTD The Board intends to propose for a liabilities for purposes of determining that they are subject to loss ahead of comment a requirement that covered compliance with the proposed cap? other creditors of the covered BHC or its BHCs and covered IHCs report publicly Question 55: The Board invites subsidiaries, the proposal would also their amounts of eligible external TLAC comment on the appropriate size of the require the covered BHC to disclose the and LTD and eligible internal TLAC and proposed cap. The Board also invites required information in the offering LTD, respectively, on a regular basis. By comment as to the appropriate scope of documents for all of its eligible external rendering each covered holding the cap, including the liabilities LTD. company’s loss-absorbing capacity excluded from the cap and the The Board has long supported transparent to regulators and market formulation of the proposed exemption meaningful public disclosure by participants, public reporting for certain liabilities associated with banking organizations, with the requirements would promote both eligible external TLAC. objective of improving market discipline supervision and market discipline, Question 56: The Board invites and encouraging sound risk- which could be expected to comment regarding whether a management practices.88 By helping disincentivize excessive risk-taking by grandfather of existing liabilities that holders of eligible external LTD and covered BHCs and covered IHCs and would be subject to the proposed cap other unsecured debt issued by a thereby mitigate risks to the financial would be appropriate. In particular, the covered BHC to understand that they stability of the United States. Board invites comment on the will be allowed to suffer losses in a Question 63: The Board invites appropriate design of such a resolution and generally will absorb comment on its plan to propose a grandfather and the likely impact on losses ahead of the creditors of the reporting requirement for eligible covered BHCs and debt markets of the covered BHC’s subsidiaries, the external TLAC and LTD and eligible failure to include such a grandfather. internal TLAC and LTD. proposed disclosure requirement should Please support your response with data. encourage potential investors to VI. Consideration of Domestic Internal Question 57: The Board invites carefully assess the covered BHC’s risk TLAC Requirement comment on the appropriate accounting profile when making investment treatment to be used in determining the Under the SPOE resolution strategy, decisions. This careful assessment severe losses must be passed up from total value of the liabilities subject to the should lead to an improvement in the cap, including whether and to what the operating subsidiaries that initially market pricing of the unsecured debt of incur them to the covered holding extent guarantees by the resolution covered BHCs, including eligible entity of the liabilities of its subsidiaries company, and then on to the eligible external LTD, providing supervisors and should be subject to the cap. external TLAC holders (in the case of a market participants with more accurate covered BHC) or the foreign parent (in Question 58: The Board invites market signals about the financial comment on whether secured liabilities the case of a covered IHC). Both steps condition and risk profile of the covered are necessary to achieve the key goal of and liabilities that otherwise represent a BHC. claim that would be senior to eligible the SPOE resolution strategy: Allowing debt securities under bankruptcy Question 60: The Board invites material operating subsidiaries to proceedings or a Title II resolution comment on the proposed disclosure continue to operate normally by should be subject to the limit on requirements, including whether ensuring that losses that would unrelated liabilities of the covered BHC. additional disclosures would further otherwise fall on their creditors (potentially sparking contagious runs Question 59: The Board invites advance the goals of this proposal. In particular, the Board invites comment and other generators of financial comment on what, if any, additional instability) will instead be borne by the restrictions on corporate practices or on whether a covered BHC should be required to disclose that the public holders of the TLAC issued by the operations of covered BHCs would be covered holding company. The appropriate. section of its most recent resolution plan is available online. proposed rule is intended to ensure that F. Disclosure Requirements (Section covered holding companies issue a Question 61: The Board invites 252.65 of the Proposed Rule) sufficient amount of loss-absorbing comment on whether the proposed resources to absorb such losses, but the The Board proposes to require each methods for a covered BHC to make the proposed rule does not ensure that firms covered BHC to publicly disclose a required disclosures are appropriate have in place adequate mechanisms for description of the financial and on whether covered BHCs should be transferring severe losses up from their consequences to unsecured debtholders permitted to use additional methods to operating subsidiaries to the covered of the covered BHC’s entry into a make the required disclosures. holding company—that is, domestic resolution proceeding in which the Question 62: Should the Board internal total loss-absorbing capacity covered BHC is the only entity that require covered BHCs to provide specific (‘‘domestic internal TLAC’’). would enter resolution. disclosure language that is designed to The Board is therefore considering the Consistent with the disclosure notify potential investors of the costs and benefits of imposing domestic requirements imposed by the Board’s resolution-related risks of investing in internal TLAC requirements between capital regulations, the covered BHC unsecured debt instruments issued by covered holding companies and their would be permitted to make this covered BHCs? If so, what language subsidiaries. Such requirements could disclosure on its Web site or in more would be appropriate? complement this proposed rule and than one public financial report or other could enhance the prospects for a public regulatory report, provided that 87 See 12 CFR 217.62(a), 12 CFR 217.172(c)(1). successful SPOE resolution of a covered the covered BHC publicly provides a 88 See, e.g., 78 FR 62018, 62128–29 (October 11, BHC or of the parent foreign GSIB of a summary table specifically indicating 2013). covered IHC.

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The domestic internal TLAC some subsidiaries are subject to resolution, including risks under framework that the Board is considering limitations on the kinds of assets they insolvency law, as well as potential would require identification of covered are permitted to hold (for example, U.S. mitigants for these risks. 91 holding companies’ material operating banks generally cannot hold equities). Question 65: The Board also seeks subsidiaries (‘‘covered subsidiaries’’). If a firm’s contributable resources comment on whether, in a domestic The framework would then subject each consist of HQLA, then these limitations internal TLAC framework, contributable covered holding company to a domestic should not pose an obstacle to resources and prepositioned debt internal TLAC requirement with respect recapitalization because the firm will be should be required to be subject to a to each of its covered subsidiaries. The able to convert the assets into cash and capital contribution agreement that size of the requirement with respect to then contribute the cash to its would impose upon the covered holding a given covered subsidiary would subsidiaries. company a legal obligation to depend on the subsidiary’s total risk- Prepositioned resources would be a recapitalize the subsidiary upon the weighted assets, its total leverage covered holding company’s debt and exposure, or both.89 equity investments in a covered occurrence of a trigger outside the firm’s Under the framework that the Board subsidiary (including investments made discretion (such as the current or is considering, domestic internal TLAC indirectly through lower-tier parent projected insolvency of the subsidiary, would be divided into two categories: entities of the covered subsidiary). A or a government order), and on the ‘‘contributable resources’’ and covered holding company’s equity appropriate design of such a trigger. ‘‘prepositioned resources.’’ investment in a subsidiary would Finally, the Board invites comment on Contributable resources would be assets transfer losses from the subsidiary to the whether any domestic internal TLAC that are held by the covered holding holding company automatically, while a framework proposed by the Board company and would enable the covered holding company’s debt investment should treat foreign subsidiaries of holding company to make contributions could be used to absorb losses incurred covered holding companies differently to covered subsidiaries that incur severe by the subsidiary through forgiveness of from their domestic subsidiaries. losses, which would have the effect of the debt, conversion of the debt into VII. Regulatory Capital Deduction for recapitalizing those subsidiaries. The equity, or another economically similar Investments in the Unsecured Debt of principal benefit of contributable procedure. To qualify as prepositioned Covered BHCs resources is that they avoid the resources, debt could be required to be ‘‘misallocation risk’’ associated with unsecured, be plain vanilla, have a Background prepositioned resources: Whereas an remaining maturity of at least one year, investment that has been prepositioned and be of lower priority than all third- The Board’s regulatory capital rules with a particular subsidiary cannot party claims on the subsidiary. The (Regulation Q) impose minimum capital easily be used to recapitalize a different rationale for these restrictions would be requirements on all state member banks, subsidiary that incurs unexpectedly to ensure that the loss-absorbing as well as on certain bank holding high losses, contributable resources can capacity will indeed be available if and companies, and certain savings and loan be flexibly allocated among subsidiaries when it is needed, to reduce operational holding companies (‘‘Board-regulated in light of the losses they suffer. The risk by eliminating unnecessary institutions’’).92 These minimum rationale for requiring that contributable complexity, and to mitigate possible requirements take the form of minimum resources be held by the covered legal risk associated with insolvency ratios of various forms of regulatory holding company (rather than allowing law. capital to different measures of assets.93 them to be held at its subsidiaries) Question 64: The Board invites The risk-based ratios are the common would be that it could help to avoid comment on all aspects of this potential equity tier 1 ratio, the tier 1 risk-based operational risks and other potential domestic internal TLAC framework. In capital ratio, and the total risk-based limitations on the firm’s ability to move particular, the Board invites comment capital ratio.94 Regulation Q also the assets to the parts of the on whether the Board should impose includes a leverage ratio that measures organization that need them most. domestic internal TLAC requirements the proportion of a Board-regulated To ensure that the contributable on covered holding companies. If so, institution’s tier 1 capital to its total resources would retain sufficient value how should the Board regulate the to recapitalize a subsidiary, including following key elements: The definition 92 See 12 CFR 217.1(c). Savings and loan holding under conditions of severe market of ‘‘covered subsidiary’’; the calibration companies that are substantially engaged in stress, a domestic internal TLAC of the domestic internal TLAC insurance underwriting or commercial activities are framework could require that the requirement with respect to each exempt temporarily from Regulation Q. See 12 CFR 217.1(c)(1)(iii); and 12 CFR 217.2, definition of contributable resources requirement be covered subsidiary; the division of ‘‘Covered savings and loan holding company.’’ In met entirely or substantially with assets domestic internal TLAC between addition, any bank holding company that is subject that would qualify as high-quality liquid ‘‘contributable resources’’ and to the Board’s Small Bank Holding Company Policy assets (HQLA) under the U.S. liquidity ‘‘prepositioned resources’’; the Statement (12 CFR part 225, appendix C) is exempt 90 from Regulation Q. See 12 CFR 217.1(c)(1)(ii). In coverage ratio rule. Requiring a firm’s definition of ‘‘contributable resources,’’ addition, any savings and loan holding company contributable resources to be made up of including whether certain non-HQLA that meets the requirements of the Small Bank HQLA, rather than a broader set of high- resources should be allowed to count Holding Company Policy Statement ‘‘as if the quality assets, would have two further toward the requirement; the definition savings and loan holding company were a bank of ‘‘prepositioned resources,’’ including holding company and the savings association were advantages beyond helping to ensure a bank’’ is exempt from Regulation Q. See 12 CFR that the assets remain valuable during a any minimum maturity and 217.1(c)(1)(iii). stress period. First, the contribution of subordination requirements; and the At this time, the proposed capital deduction will such assets to a subsidiary would legal risks associated with passing not apply to nonbank SIFIs. Following the provide the subsidiary with additional losses from a subsidiary to a holding finalization of the regulatory capital framework applicable to one or more nonbank SIFIs, the Board liquidity as well as capital. Second, company by means of the mechanisms would determine whether, and how, the proposed described above in the context of SPOE capital deduction would apply to such companies. 89 See generally 12 CFR 217.10. 93 See 12 CFR 217.10. 90 79 FR 61440 (October 10, 2014). 91 See 12 U.S.C. 24(7). 94 See 12 CFR 217.10(a)(1) through (3).

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assets.95 In addition, certain Proposed deductions from regulatory amended to correct a typographical internationally active Board-regulated capital error. institutions are subject to a To address the potential contagion In addition, as discussed more fully in supplementary leverage ratio, which stemming from the failure of a GSIB, the the following section, the proposal incorporates certain off-balance sheet proposal would amend Regulation Q to would revise § 217.22(c), (f), and (h) of exposures into the measure of total require a Board-regulated institution to Regulation Q to incorporate the assets.96 deduct from its regulatory capital the proposed deductions for investments in covered debt instruments. The proposed In calculating its capital ratios under amount of any investment in, or revisions to Regulation Q would take these rules, a Board-regulated exposure to, unsecured debt issued by a covered BHC. In particular, for purposes effect on January 1, 2019, consistent institution is required to deduct fully with the other aspects of the proposal; from regulatory capital certain assets, of the deductions, a Board-regulated institution would be required to treat provided that the proposed correction to such as goodwill and other intangible the definition of ‘‘investment in the assets.97 Certain other assets must be unsecured debt issued by a covered BHC in a similar manner to an capital of an unconsolidated financial deducted from regulatory capital to the institution’’ would take effect on April extent they exceed a particular investment in a tier 2 capital instrument.103 The form and amount of 1, 2016. threshold, such as mortgage servicing To be most effective, the proposed 98 the deduction would depend on the assets and certain deferred tax assets. deduction approach for investments in type of investment and various other unsecured debt instruments of a covered The regulatory capital rules include factors, as described below. two broad categories of deductions Analysis conducted by Board staff has BHC would apply to all depository related to investments in capital not indicated that Board-regulated institution holding companies and instruments. First, Regulation Q institutions currently own a substantial insured depository institutions covered requires that a Board-regulated amount of unsecured debt issued by by the capital rules issued by the Board, institution fully deduct any investment covered BHCs. The proposed deduction OCC, and FDIC. The Board intends to in its own regulatory capital requirement would substantially reduce consult with the OCC and FDIC on the instruments and investments in the incentive of a Board-regulated proposed deductions for covered debt regulatory capital instruments held institution to invest in unsecured debt instruments in Regulation Q regarding reciprocally with another financial issued by a covered BHC, thereby consistent treatment among all banking institution.99 Second, Regulation Q increasing the prospects for an orderly organizations subject to the regulatory requires that a Board-regulated resolution of a covered BHC by reducing capital rules. institution deduct investments in the risk of contagion spreading to other Section-by-Section Discussion of the capital instruments issued by other Board-regulated institutions. Proposed Deductions for Covered Debt financial institutions that would be To implement the proposed Instruments regulatory capital if issued by the Board- deduction requirements for investments regulated institution.100 In this second in covered debt instruments, the Under the Board’s current regulatory case, a Board-regulated institution may proposal would add or amend certain capital rules, a Board-regulated be required to fully deduct the definitions in Regulation Q. The institution must deduct any investment investment or may be required to deduct proposal would add new definitions of in its own capital instruments and any the investment above a particular ‘‘covered debt instrument’’ and investment in the capital of other threshold, depending on the ‘‘investment in a covered debt financial institutions that it holds circumstances.101 In both cases, the instrument’’ to § 217.2 of Regulation Q. reciprocally under § 217.22(c)(1) and (3) 104 Board-regulated institution is required A ‘‘covered debt instrument’’ would be of Regulation Q. The proposal would to make the deduction from the category defined as any unsecured debt security amend § 217.22(c)(1) and (3) of of regulatory capital for which the issued by a global systemically Regulation Q to require, respectively, a instrument qualifies or would qualify if important BHC, excluding any covered BHC to deduct from its tier 2 issued by the Board-regulated instrument that qualifies as tier 2 capital any investment in its own institution.102 Thus, a Board-regulated capital. An ‘‘investment in a covered unsecured debt instruments that are not institution that purchases its own debt instrument’’ would be defined as a tier 2 capital and the carrying value of subordinated debt instrument that net long position in a covered debt any investment in the unsecured debt qualifies as tier 2 capital must deduct instrument, including direct, indirect, issued by a covered BHC that is held the debt instrument from its tier 2 and synthetic exposures to a covered reciprocally with the covered BHC. Under § 217.22(c)(4) and (5) of capital. Similarly, a Board-regulated debt instrument. This definition would Regulation Q, a Board-regulated institution that owns less than 10 exclude underwriting positions held for institution must deduct certain percent of the common equity of an five or fewer business days for purposes investments in the capital of unaffiliated bank must deduct from its of certain deductions. In addition, the unconsolidated financial institutions.105 common equity the amount, if any, by proposal would amend the definitions which the Board-regulated institution’s of ‘‘indirect exposure’’ and ‘‘synthetic The amount of the deduction depends investment exceeds 10 percent of the exposure’’ in Regulation Q to add on whether or not the Board-regulated Board-regulated institution’s common exposures to covered debt instruments. institution has a ‘‘significant’’ equity. Further, the definition of ‘‘investment in investment in the unconsolidated the capital of an unconsolidated financial institution, with ‘‘significant’’ defined as ownership of more than 10 95 See 12 CFR 217.10(a)(4). financial institution’’ would be 96 See 12 CFR 217.10(a)(5). 103 104 12 CFR 217.22(c)(1) and 12 CFR 217.22(c)(3). 97 See 12 CFR 217.22. Unsecured debt issued by a covered BHC may The definition of ‘‘financial institution’’ in the 98 Id. or may not qualify as tier 2 capital, depending on its characteristics. See 12 CFR 217.20(d). Similarly, Board’s regulatory capital rules includes bank 99 12 CFR 217.22(c)(1). unsecured debt issued by a covered BHC may or holding companies. Therefore, each covered BHC is 100 See 12 CFR 217.22(c)(2). may not qualify as eligible long term debt under a ‘‘financial institution’’ for purposes of these 101 See 12 CFR 217.22(c)(3) through (5). this proposal, depending on its characteristics. See deductions. See 12 CFR 217.2. 102 See 12 CFR 217.22(c)(1) and (2). Proposed 12 CFR 252.61, 252.161. 105 12 CFR 217.22(c)(4) and (5).

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percent of the common stock of the is, more subordinated, component of instruments as well as indirect unconsolidated financial institution.106 capital.110 If the next higher level is exposures to covered debt instruments If the Board-regulated institution has insufficient to effect the remaining held through investment funds in the a ‘‘non-significant investment’’ in an deduction and there is a higher level of same manner as under the regulatory unconsolidated financial institution, the capital, any amount not already capital rules. Board-regulated institution must deduct deducted is deducted from the highest With regard to an indirect exposure to its investments in the capital of the level.111 a capital instrument in the form of, for unconsolidated financial institution to Under Regulation Q, if a Board- example, a direct exposure to an the extent that the Board-regulated regulated institution has an investment investment fund, a Board-regulated institution’s investment exceeds 10 in the tier 2 capital of an unconsolidated institution has three options under percent of the Board-regulated financial institution that the Board- Regulation Q to measure its gross long institution’s common equity tier 1 regulated institution is required to position in the capital instrument.113 capital.107 The proposal would amend deduct from capital, the Board-regulated The proposal would amend § 217.22(c)(4) of Regulation Q to require institution must make the deduction § 217.22(h)(2)(ii) of Regulation Q to a Board-regulated institution with a from its tier 2 capital. Under the provide the same three options to non-significant investment in a covered proposal, if a Board-regulated determine the gross long position in the BHC to deduct any investment in institution has a significant investment form of an indirect fund investment in unsecured debt issued by the covered in a covered BHC and also owns a covered debt instrument. BHC in the same manner as if the unsecured debt of the covered BHC, the The first option would be to deduct unsecured debt were tier 2 capital. Board-regulated institution would be the entire carrying value of the If a Board-regulated institution has a required to deduct the unsecured debt investment. The second option would significant investment in an amount from its tier 2 capital. If the be, with the prior approval of the Board, unconsolidated financial institution, the Board-regulated institution does not for the Board-regulated institution to Board-regulated institution must fully have sufficient tier 2 capital to complete use a conservative estimate of the deduct under § 217.22(c)(5) of this deduction, then the Board-regulated amount of the investment in the Regulation Q any investment in the institution would be required to deduct unsecured debt instrument held through capital instruments of the any shortfall amount from its additional a fund. The third option would be to unconsolidated financial institution that tier 1 capital. If the Board-regulated multiply the carrying value of the are not in the form of common stock.108 institution does not have sufficient Board-regulated institution’s investment The proposal would amend additional tier 1 capital to complete this in a fund by either the exact percentage § 217.22(c)(5) of Regulation Q to require deduction, the institution would deduct of the unsecured debt issued by a a Board-regulated institution with a any remaining amount of the investment covered BHC held by the investment significant investment in a covered BHC from its common equity tier 1 capital. fund or by the highest stated prospectus to deduct any investment in unsecured The proposal would follow the same limit for such investments held by the debt issued by the covered BHC in the general approach as under the current investment fund. In each case, the same manner as if the unsecured debt requirements in Regulation Q regarding amount of the gross long position may were tier 2 capital. the calculation of the amount of any be reduced by the Board-regulated For each of the proposed deductions, deduction and the treatment of institution’s qualified short positions to the same rules and standards that apply guarantees and indirect investments for reach the net long position.114 to investments in capital instruments purposes of the deductions. Under An investment in the unsecured debt issued by financial institutions would Regulation Q, the amount of a Board- of a covered BHC would be defined in also apply to an investment in a covered regulated institution’s investment in its § 217.2 of Regulation Q to include debt instrument. For example, the own capital instrument or in the capital synthetic exposures to covered debt proposal would amend the instrument of an unconsolidated instruments, including, for example, the ‘‘corresponding deduction approach’’ in financial institution is the Board- issuance a guarantee of such debt or § 217.22(c)(2) of Regulation Q to specify regulated institution’s net long position selling a credit default swap referencing 115 that unsecured debt issued by a covered in the capital instrument as calculated such debt. For purposes of any 112 BHC would be treated as tier 2 capital under § 217.22(h) of Regulation Q. deduction required for a Board- for purposes of deductions from capital. Under § 217.22(h) of Regulation Q, a regulated institution’s investment in the Under the corresponding deduction Board-regulated institution may net capital of an unconsolidated financial approach, a Board-regulated institution certain gross short positions in a capital institution, the amount of unsecured must make deductions from the instrument against a gross long position debt issued by a covered BHC would component of capital for which the in the instrument to determine the net include any contractual obligations of underlying instrument would qualify if long position. The proposal would the Board-regulated institution to it were issued by the Board-regulated modify § 217.22(h) of Regulation Q such purchase such instruments, but would institution making the deduction.109 If that a Board-regulated institution would exclude positions held in a bona fide the Board-regulated institution does not follow the same procedures to underwriting capacity for five or fewer 116 have enough of the component of determine its net long position in an business days. capital to carry out the deduction, the exposure to its own covered debt Question 66: The Board invites corresponding deduction approach instrument or in a covered debt comment on the appropriateness of the provides that any amount of the instrument issued by an unconsolidated proposed deduction for investments in a investment not already deducted would financial institution. The calculation of 113 be deducted from the next higher, that the net long position, under the See 12 CFR 217.22(h)(2). proposal, also would take into account 114 12 CFR 217.22(h)(1). 115 See 12 CFR 217.2 (‘‘investment in the capital 106 direct investments in unsecured debt 12 CFR 217.2, (‘‘significant investment in the of an unconsolidated financial institution’’ and capital of an unconsolidated financial institution’’). ‘‘investment in the Board-regulated institution’s 107 See 12 CFR 217.22(c)(4). 110 See 12 CFR 217.22(c)(2); 12 CFR 217.22(f). own capital instrument’’). 108 See 12 CFR 217.22(c)(5). 111 See 12 CFR 217.22(f). 116 See 12 CFR 217.2 (‘‘investment in the capital 109 See 12 CFR 217.22(c)(2). 112 See 12 CFR 217.22(h). of an unconsolidated financial institution’’).

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covered BHC’s unsecured debt Firms that become covered BHCs after of covered BHCs would fail to meet the instruments from regulatory capital, the date on which the final rule is proposed requirements for eligible including (a) its implementation issued would be required to comply by external or internal LTD? How through amendment of the Board’s the later of three years after becoming burdensome would it be for covered regulatory capital rules and (b) whether covered BHCs and the effective date holding companies to modify the terms such an approach would impact applicable to firms that are covered of such instruments to align with the underwriting and market making for BHCs as of the date on which the final proposed requirements? unsecured debt instruments of covered rule is issued. IX. Regulatory Analysis BHCs. Foreign GSIBs that are required to Question 67: The Board invites form U.S. intermediate holding A. Paperwork Reduction Act comment on whether holdings of a companies as of the date on which the Certain provisions of the proposed covered BHC’s debt instruments that final rule is issued would similarly be rule contain ‘‘collection of information’’ result from dealing or market-making required to achieve compliance as of requirements within the meaning of the activities should be exempt from the January 1, 2019. However, the Board Paperwork Reduction Act (PRA) of 1995 proposed deduction, including costs proposes to phase in the risk-weighted (44 U.S.C. 3501 through 3521). The and benefits of such an exemption. assets component of the internal TLAC Board reviewed the proposed rule under Question 68: The Board invites requirement applicable to covered IHCs the authority delegated to the Board by comment on all aspects of the proposed that are expected to enter resolution in OMB. The disclosure requirements are capital deduction treatment for a failure scenario in two stages. A 16 found in § 252.65 and the reporting investments by banking organizations in percent requirement would apply as of requirements are found in debt instruments of a covered BHC, January 1, 2019. The requirement would § 252.153(b)(5). These information specifically, whether the debt then increase to 18 percent as of January collection requirements would instruments required to be deducted 1, 2022. implement section 165 of the Dodd Where a foreign banking organization should be all unsecured debt directly Frank Act, as described in the Abstract becomes subject to a requirement to issued by a covered BHC or only eligible below. In accordance with the form a covered IHC after the date on long-term debt? If the long-term debt requirements of the PRA, the Board may which the final rule is issued,117 that instruments required to be deducted not conduct or sponsor, and the covered IHC would be required to were limited to eligible long-term debt, respondent is not required to respond comply with the rule’s requirements by how best to identify eligible long-term to, an information collection unless it the later of three years after the date on debt for the purposes of the deduction? displays a currently valid Office of which the foreign banking organization Questions 69: The Board invites Management and Budget (OMB) control first becomes subject to the requirement comment on alternatives to the number. to form the U.S. intermediate holding proposed deduction approach, The proposed rule would revise the company and the effective date including a stringent risk-weighting Reporting, Recordkeeping, and applicable to foreign GSIBs that are approach, integrating eligible long-term Disclosure Requirements Associated required to form U.S. intermediate debt into the Basel III threshold with Enhanced Prudential Standards holding companies as of the date on deduction system as a new class of (Regulation YY) (Reg YY; OMB No. which the final rule is issued. The regulatory capital, or an outright 7100–0350). In addition, as permitted by Board may accelerate or extend this prohibition of bank ownership of the PRA, the Board proposes to extend transition period in writing. covered BHC’s unsecured debt for three years, with revision, the Board-regulated institutions would be instruments. Reporting, Recordkeeping, and required to comply with the proposed Question 70: The Board invites Disclosure Requirements Associated regulatory capital deduction for comment on whether to expand the with Enhanced Prudential Standards investments in the unsecured debt of a proposed capital deduction treatment to (Regulation YY) (Reg YY; OMB No. cover investments by banking covered BHC as of January 1, 2019. Question 71: The Board invites 7100–0350). organizations in debt instruments issued comments on all aspects of the Comments are invited on: by nonbank financial companies transition period, including whether the (a) Whether the collections of supervised by the Board and non-U.S. proposed phase-in period for the risk- information are necessary for the proper GSIBs. weighted assets components of the performance of the Board’s functions, including whether the information has VIII. Transition Periods proposed external and internal TLAC requirements is appropriate. Would it be practical utility; The Board proposes to generally (b) The accuracy of the Board’s appropriate to instead require require firms that are covered BHCs as estimates of the burden of the compliance with those higher of the date on which the final rule is information collections, including the requirements as of January 1, 2019? issued to achieve compliance with the Question 72: The Board invites validity of the methodology and rule as of January 1, 2019. However, the comment with respect to whether a assumptions used; Board proposes to phase in the risk- grandfather provision is necessary or (c) Ways to enhance the quality, weighted assets component of the appropriate for any existing utility, and clarity of the information to external TLAC requirement in two instruments. What types and volumes of be collected; stages. A 16 percent requirement would outstanding long-term debt instruments (d) Ways to minimize the burden of apply as of January 1, 2019. The information collections on respondents, requirement would then increase to 18 117 This could occur where a foreign banking including through the use of automated percent as of January 1, 2022. The organization that is already required to form a U.S. collection techniques or other forms of purpose of the proposed transition intermediate holding company becomes a foreign information technology; and period is to minimize the effect of the GSIB (rendering its U.S. intermediate holding (e) Estimates of capital or start-up company a covered IHC) or where a foreign GSIB implementation of the proposal on first becomes required to form a U.S. intermediate costs and costs of operation, credit availability and credit costs in the holding company (which would be a covered IHC maintenance, and purchase of services U.S. economy. upon formation). to provide information.

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All comments will become a matter of important BHC’s Web site, or in more B. Regulatory Flexibility Act public record. Comments on aspects of than one public financial report or other The Board is providing an initial this notice that may affect reporting, regulatory reports, provided that the regulatory flexibility analysis with recordkeeping, or disclosure global systemically important BHC respect to this proposed rule. The requirements and burden estimates publicly provides a summary table Regulatory Flexibility Act, 5 U.S.C. 601 should be sent to the addresses listed in specifically indicating the location(s) of et seq. (RFA), generally requires that an the ADDRESSES section. A copy of the this disclosure. agency prepare and make available an comments may also be submitted to the Reporting Requirements initial regulatory flexibility analysis in OMB desk officer: By mail to U.S. Office connection with a notice of proposed of Management and Budget, 725 17th Section 252.153(b)(5) of the proposed rulemaking. Under regulations issued by Street NW., #10235, Washington, DC rule would require each top-tier foreign the Small Business Administration, a 20503 or by facsimile to 202–395–5806, banking organization that controls a small entity includes a depository Attention, Federal Reserve Desk Officer. U.S. intermediate holding company to institution, bank holding company, or submit to the Board by January 1 of each Proposed Revision, With Extension, of savings and loan holding company with calendar year through the U.S. the Following Information Collection assets of $550 million or less (small intermediate holding company: (1) banking organizations).118 As of June 30, Title of Information Collection: Notice of whether the home country 2015, there were 628 small state Reporting, Recordkeeping, and supervisor (or other appropriate home member banks. As of June 30, 2015, Disclosure Requirements Associated country regulatory authority) of the top- there were approximately 180 small with Enhanced Prudential Standards tier foreign banking organization of the savings and loan holding companies (Regulation YY). U.S. intermediate holding company has and 3,351 small bank holding Agency Form Number: Reg YY. adopted standards consistent with the OMB Control Number: 7100–0350. companies. BCBS assessment methodology for This proposed rule is designed to Frequency of Response: Annual, identifying global systemically semiannual, quarterly, one-time, and on improve the resolvability of covered important banking organizations; and BHCs and covered IHCs by requiring occasion. (2) notice of whether the top-tier foreign Affected Public: Businesses or other such institutions maintain outstanding a banking organization prepares or reports for-profit. minimum amount of loss-absorbing the indicators used by the BCBS Respondents: State member banks, instruments, including a minimum assessment methodology to identify a U.S. bank holding companies, savings amount of unsecured long-term debt, banking organization as a global and loan holding companies, nonbank and imposing restrictions on the systemically important banking financial companies, foreign banking corporate practices and liabilities of organization and, if it does, whether the organizations, U.S. intermediate holding such organizations. The proposed rule is top-tier foreign banking organization has companies, foreign saving and loan also designed to help reduce the determined that it has the holding companies, and foreign potential contagion stemming from the characteristics of a global systemically nonbank financial companies failure of a GSIB by requiring state important banking organization under supervised by the Board. member banks, bank holding Abstract: Section 165 of the Dodd- the BCBS assessment methodology. companies, savings and loan holding Frank Act requires the Board to Estimated Paperwork Burden for companies, and intermediate holding implement enhanced prudential Proposed Revisions companies subject to the Board’s capital standards for bank holding companies rules to deduct from their regulatory with total consolidated assets of $50 Estimated Number of Respondents: capital investments in unsecured debt billion or more, including global Disclosure Burden issued by covered BHCs. systemically important foreign banking The majority of the provisions of the organizations with $50 billion or more Section 252.65—8 respondents. proposed rule would apply to a top-tier in U.S. non-branch assets. Section 165 Reporting Burden bank holding company domiciled in the of the Dodd-Frank Act also permits the United States with $50 billion or more Section 252.153(b)(5)—15 Board to establish such other prudential in total consolidated assets and has been respondents. standards for such banking identified as a GSIB, and to a U.S. organizations as the Board determines Estimated Burden per Response: intermediate holding company of a are appropriate. Disclosure Burden foreign GSIB. Bank holding companies and U.S. intermediate holding Disclosure Requirements Section 252.65—1 hour (annual), 5 companies of foreign GSIBs that are Section 252.65 of the proposed rule hours (one-time burden). subject to the proposed rule therefore would require a global systemically Reporting Burden substantially exceed the $550 million important BHC to publicly disclose a asset threshold at which a banking description of the financial Section 252.153(b)(5)—1 hour entity would qualify as a small banking consequences to unsecured debtholders (annual). organization. However, small state of the global systemically important Total estimated one-time burden: 40 member banks would be subject to the BHC entering into a resolution hours. provisions of the proposed rule that proceeding in which the global Current estimated annual burden for impose regulatory capital deductions for systemically important BHC is the only Reporting, Recordkeeping, and investments in eligible external long- entity that would be subject to the Disclosure Requirements Associated term debt of covered BHCs. The resolution proceeding. A global with Enhanced Prudential Standards provisions of the proposed rule related systemically important BHC must (Regulation YY): 118,546 hours. provide the disclosure required of this Proposed revisions estimated annual 118 See 13 CFR 121.201. Effective July 14, 2014, burden: 23 hours. the Small Business Administration revised the size section: (1) In the offering documents standards for banking organizations to $550 million for all of its eligible debt securities; and Total estimated annual burden: in assets from $500 million in assets. 79 FR 33647 (2) either on the global systemically 118,609 hours. (June 12, 2014).

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to regulatory capital deductions the Board invites comment on whether ‘‘other domestic debt’’ held by generally would not apply to small the proposed rule would impose undue depository institutions provides a savings and loan holding companies burdens on, or have unintended conservative estimate of the amount of and small bank holding companies. consequences for, small organizations, unsecured debt of GSIBs held by such The proposed regulatory capital and whether there are ways such institutions. deductions for investments in the potential burdens or consequences As of June 30, 2015, state member unsecured debt of covered BHCs would could be minimized in a manner banks held ‘‘other domestic debt’’ equal require small state member banks to consistent with the purpose of the to approximately 0.57 percent of their deduct holdings of unsecured debt proposed rule. A final regulatory total assets. Excluding state member issued by a covered BHC from flexibility analysis will be conducted banks that report no holdings of ‘‘other regulatory capital, in a similar manner after consideration of comments domestic debt,’’ such depository as small state member banks must received during the public comment institutions held ‘‘other domestic debt’’ deduct investments in tier 2 capital period. equal to only 0.77 percent of their total instruments from their regulatory assets. The reported holdings of ‘‘other C. Riegle Community Development and capital, as described in Part VII. State domestic debt’’ by such institutions Regulatory Improvement Act of 1994 member banks would be required to supports the view that the incremental make internal reporting changes to In determining the effective date and administrative reporting burden comply with the proposed capital rules administrative compliance requirements imposed by the proposed revisions to and corresponding reporting for new regulations that impose the Board’s regulatory capital rules on requirements. As described in Part VII, additional reporting, disclosure, or other such institutions is expected to be these requirements would reduce the requirements on state member banks, minimal. These administrative burdens incentives of a small state member bank the Board is required to consider, are offset by the safety and soundness to invest in the unsecured debt of a consistent with the principles of safety and financial stability benefits that will covered BHC, and thereby increase the and soundness and the public interest, accrue to the financial system as a result prospect for an orderly resolution not a any administrative burdens that such of the proposed rule, as described covered BHC. regulations would place on depository herein. Depository institutions do not institutions, and the benefits of such presently report their holdings in the regulations.119 In addition, new D. Solicitation of Comments on the Use unsecured debt of U.S. GSIBs. However, regulations that impose additional of Plain Language regulatory reports filed by depository reporting disclosures or other new Section 722 of the Gramm-Leach- institutions provide a listing of the requirements on insured depository Bliley Act (Pub. L. 106–102, 113 Stat. holdings by such institutions of ‘‘other institutions generally must take effect 1338, 1471, 12 U.S.C. 4809) requires the domestic debt,’’ which would include on the first day of a calendar quarter Federal banking agencies to use plain holdings of unsecured debt issued by which begins on or after the date on language in all proposed and final rules U.S. GSIBs. Therefore, the reported which the regulations are published in published after January 1, 2000. The holdings of ‘‘other domestic debt’’ held final form.120 Board has sought to present the by small depository institutions The proposed regulatory capital proposed rule in a simple and provides a conservative estimate of the deductions applicable to state member straightforward manner, and invites amount of unsecured debt of GSIBs held banks would take effect on the first day comment on the use of plain language. by such institutions. of a calendar quarter. The proposed rule For example: As of June 30, 2015, such institutions would provide state member banks a • Have the agencies organized the held ‘‘other domestic debt’’ equal to reasonable period of time to make the material to suit your needs? If not, how approximately 0.5 percent of their total incremental internal reporting changes could they present the proposed rule assets. Excluding depository institutions necessary to comply with the proposed more clearly? that report no holdings of ‘‘other revisions to the regulatory capital rules. • Are the requirements in the domestic debt,’’ such depository The proposed revisions to the regulatory proposed rule clearly stated? If not, how institutions held ‘‘other domestic debt’’ capital rules would also be reflected in could the proposed rule be more clearly equal to only 2.2 percent of their total amendments to the Board’s regulatory stated? assets. The low level of reported reporting forms, and the instructions to • Do the regulations contain technical holdings of ‘‘other domestic debt’’ by such forms. The internal reporting language or jargon that is not clear? If such institutions supports the view that changes are expected to be minimal the proposed regulatory capital so, which language requires because the banking organizations deductions would not have a material clarification? subject to the proposed rule are already • Would a different format (grouping impact on small state member banks. In required to track similar information to and order of sections, use of headings, addition, in light of the reported comply with current capital rules and paragraphing) make the regulation holdings of ‘‘other domestic debt’’ by reporting requirements. easier to understand? If so, what small depository institutions, such As described above in Part IX.B, changes would achieve that? institutions should be able to replace depository institutions do not presently • Is the section format adequate? If their holdings of unsecured debt by report their holdings in the unsecured not, which of the sections should be GSIBs without a material economic debt of U.S. GSIBs, but do report changed and how? impact. • The proposed rule does not appear to holdings of ‘‘other domestic debt,’’ What other changes can the Board duplicate, overlap, or conflict with any which would include holdings of incorporate to make the regulation other Federal rules. In light of the unsecured debt issued by U.S. GSIBs. easier to understand? Therefore, the reported holdings of foregoing, the Board does not believe List of Subjects in 12 CFR Part 252 that the proposed rule, if adopted in 119 See Section 302 of the Riegle Community 12 CFR Chapter II final form, would have a significant Development and Regulatory Improvement Act of economic impact on a substantial 1994 (RCDRIA), 12 U.S.C. 4802. Administrative practice and number of small entities. Nonetheless, 120 12 U.S.C. 4802(b). procedure, Banks, banking, Federal

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Reserve System, Holding companies, purposes of § 217.22(c)(4) and (5) any (iii) A Board-regulated institution Reporting and recordkeeping underwriting positions held by the must deduct an investment in the requirements, Securities. Board-regulated institution for five or Board-regulated institution’s own tier 2 fewer business days. capital instruments from its tier 2 Authority and Issuance * * * * * capital elements; and For the reasons stated in the Investment in the capital of an (iv) A Board-regulated institution that preamble, the Board of Governors of the unconsolidated financial institution is a global systemically important BHC Federal Reserve System proposes to means a net long position calculated in must deduct an investment in the amend 12 CFR parts 217 and 252 as accordance with § 217.22(h) in an Board-regulated institution’s own follows: instrument that is recognized as capital covered debt instruments from its tier 2 capital elements. If the Board-regulated PART 217—CAPITAL ADEQUACY OF for regulatory purposes by the primary supervisor of an unconsolidated institution does not have a sufficient BANK HOLDING COMPANIES, amount of tier 2 capital to effect this SAVINGS AND LOAN HOLDING regulated financial institution or in an instrument that is part of the GAAP deduction, the Board-regulated COMPANIES, AND STATE MEMBER institution must deduct the shortfall BANKS (REGULATION Q). equity of an unconsolidated unregulated financial institution, including direct, amount from the next higher (that is, more subordinated) component of ■ 1. The authority citation for part 217 indirect, and synthetic exposures to the capital instruments, excluding regulatory capital. continues to read as follows: (2) Corresponding deduction underwriting positions held by the Authority: 12 U.S.C. 248(a), 321–338a, approach. For purposes of subpart C of Board-regulated institution for five or 481–486, 1462a, 1467a, 1818, 1828, 1831n, this part, the corresponding deduction fewer business days. 1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, approach is the methodology used for 3904, 3906–3909, 4808, 5365, 5368, 5371. * * * * * the deductions from regulatory capital ■ 2. In § 217.2: Synthetic exposure means an related to reciprocal cross holdings (as ■ a. Add the definition of ‘‘Covered debt exposure whose value is linked to the described in paragraph (c)(3) of this instrument’’ in alphabetical order; value of an investment in the Board- section), non-significant investments in ■ b. Revise the definition of ‘‘Indirect regulated institution’s own capital the capital of unconsolidated financial exposure’’; instrument, to the value of an institutions (as described in paragraph ■ c. Add the definition of ‘‘Investment investment in the capital of an (c)(4) of this section), and non-common in a covered debt instrument,’’ in unconsolidated financial institution, or stock significant investments in the alphabetical order; to the value of an investment in a capital of unconsolidated financial ■ d. Revise the definition of covered debt instrument. institutions (as described in paragraph ‘‘Investment in the capital of an * * * * * (c)(5) of this section). Under the unconsolidated financial institution’’; ■ 3. In § 217.22, revise paragraphs (c) corresponding deduction approach, a and and its footnotes, (f), and (h) to read as Board-regulated institution must make ■ e. Revise the definition of ‘‘Synthetic follows: deductions from the component of exposure;’’ capital for which the underlying The additions and revisions read as § 217.22 Regulatory capital adjustments and deductions. instrument would qualify if it were follows: issued by the Board-regulated * * * * * § 217.2 Definitions. institution itself, as described in (c) Deductions from regulatory capital paragraphs (c)(2)(i) through (iii) of this * * * * * related to investments in capital section. If the Board-regulated Covered debt instrument means an instruments 23—(1) Investment in the unsecured debt security issued by a institution does not have a sufficient Board-regulated institution’s own amount of a specific component of global systemically important BHC, capital or covered debt instruments. A including direct, indirect, or synthetic capital to effect the required deduction, Board-regulated institution must deduct the Board-regulated institution must exposures to such a debt security, other an investment in the Board-regulated than an unsecured debt security that deduct the shortfall amount from its institution’s own capital instruments or capital according to paragraph (f) of this qualifies as tier 2 capital pursuant to an investment in the Board-regulated § 217.20(d). section. institution’s own covered debt (i) If an investment is in the form of * * * * * instruments as follows: an instrument issued by a financial Indirect exposure means an exposure (i) A Board-regulated institution must institution that is not a regulated that arises from the Board-regulated deduct an investment in the Board- financial institution, the Board- institution’s investment in an regulated institution’s own common regulated institution must treat the investment fund which holds an stock instruments from its common instrument as: investment in the Board-regulated equity tier 1 capital elements to the (A) A common equity tier 1 capital institution’s own capital instrument, an extent such instruments are not instrument if it is common stock or investment in the capital of an excluded from regulatory capital under represents the most subordinated claim unconsolidated financial institution, or § 217.20(b)(1); in liquidation of the financial an investment in a covered debt (ii) A Board-regulated institution must institution; and instrument. deduct an investment in the Board- (B) An additional tier 1 capital * * * * * regulated institution’s own additional instrument if it is subordinated to all Investment in a covered debt tier 1 capital instruments from its creditors of the financial institution and instrument means a Board-regulated additional tier 1 capital elements; is senior in liquidation only to common institution’s net long position calculated shareholders. in accordance with § 217.22(h) in a 23 The Board-regulated institution must calculate (ii) If an investment is in the form of amounts deducted under paragraphs (c) through (f) covered debt instrument, including of this section after it calculates the amount of an instrument issued by a regulated direct, indirect, and synthetic exposures ALLL includable in tier 2 capital under financial institution and the instrument to the debt instrument, excluding for § 217.20(d)(3). does not meet the criteria for common

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equity tier 1, additional tier 1 or tier 2 exceed 10 percent of the sum of the institution has a significant investment capital instruments under § 217.20, the Board-regulated institution’s common in the capital of an unconsolidated Board-regulated institution must treat equity tier 1 capital elements minus all financial institution, the Board- the instrument as: deductions from and adjustments to regulated institution must deduct from (A) A common equity tier 1 capital common equity tier 1 capital elements capital any such investment and any instrument if it is common stock required under paragraphs (a) through covered debt instrument issued by the included in GAAP equity or represents (c)(3) of this section (the 10 percent unconsolidated financial institution that the most subordinated claim in threshold for non-significant is held by the Board-regulated liquidation of the financial institution; investments) by applying the institution other than an investment in (B) An additional tier 1 capital corresponding deduction approach in the form of common stock by applying instrument if it is included in GAAP paragraph (c)(2) of this section.24 The the corresponding deduction approach equity, subordinated to all creditors of deductions described in this paragraph in paragraph (c)(2) of this section.26 The the financial institution, and senior in a are net of associated DTLs in accordance deductions described in this section are receivership, insolvency, liquidation, or with paragraph (e) of this section. In net of associated DTLs in accordance similar proceeding only to common addition, with the prior written with paragraph (e) of this section. In shareholders; and approval of the Board, a Board-regulated addition, with the prior written (C) A tier 2 capital instrument if it is institution that underwrites a failed approval of the Board, for the period of a covered debt instrument or if it is not underwriting, for the period of time time stipulated by the Board, a Board- included in GAAP equity but stipulated by the Board, is not required regulated institution that underwrites a considered regulatory capital by the to deduct from capital a non-significant failed underwriting is not required to primary supervisor of the financial investment in the capital of an deduct a significant investment in the institution. unconsolidated financial institution or capital of an unconsolidated financial (iii) If an investment is in the form of an investment in a covered debt institution or an investment in covered a non-qualifying capital instrument (as instrument pursuant to this paragraph debt instruments pursuant to this defined in §217.300(c)), the Board- (c)(4) to the extent the investment is paragraph (c)(5) if such investment is regulated institution must treat the related to the failed underwriting.25 related to such failed underwriting. instrument as: (ii) The amount to be deducted under (A) An additional tier 1 capital * * * * * this section from a specific capital (f) Insufficient amounts of a specific instrument if such instrument was component is equal to: regulatory capital component to effect included in the issuer’s tier 1 capital (A) The Board-regulated institution’s deductions. Under the corresponding prior to May 19, 2010; or aggregate non-significant investments in (B) A tier 2 capital instrument if such deduction approach, if a Board- the capital of an unconsolidated regulated institution does not have a instrument was included in the issuer’s financial institution and, if applicable, tier 2 capital (but not includable in tier sufficient amount of a specific any investments in a covered debt component of capital to effect the full 1 capital) prior to May 19, 2010. instrument subject to deduction under (3) Reciprocal cross holdings in the amount of any deduction from capital this paragraph (c)(4), exceeding the 10 required under paragraph (d) of this capital of financial institutions. A percent threshold for non-significant Board-regulated institution must deduct section, the Board-regulated institution investments, multiplied by must deduct the shortfall amount from an investment in the capital of another (B) The ratio of the Board-regulated financial institution that the Board- the next higher (that is, more institution’s aggregate non-significant subordinated) component of regulatory regulated institution holds reciprocally investments in the capital of an with another financial institution and capital. Any investment by a Board- unconsolidated financial institution (in regulated institution in a covered debt an investment in any covered debt the form of such capital component) to instrument that the Board-regulated instrument must be treated as an the Board-regulated institution’s total investment in the tier 2 capital of the institution holds reciprocally with non-significant investments in another financial institution, where global systemically important BHC for unconsolidated financial institutions, purposes of this paragraph. such reciprocal cross holdings result with an investment in a covered debt * * * * * from a formal or informal arrangement instrument being treated as tier 2 capital to swap, exchange, or otherwise intend (h) Net long position. (1) For purposes for this purpose. of calculating the amount of a Board- to hold each other’s capital instruments, (5) Significant investments in the regulated institution’s investment in the by applying the corresponding capital of unconsolidated financial Board regulated institution’s own deduction approach in paragraph (c)(2) institutions that are not in the form of capital instrument, investment in the of this section. common stock. If a Board-regulated (4) Non-significant investments in the capital of an unconsolidated financial institution, and investment in a covered capital of unconsolidated financial 24 With the prior written approval of the Board, institutions. (i) If a Board-regulated for the period of time stipulated by the Board, a debt instrument, the Board-regulated institution has a non-significant Board-regulated institution is not required to institution’s net long position is its gross investment in the capital of an deduct a non-significant investment in the capital long position in the underlying instrument of an unconsolidated financial instrument determined in accordance unconsolidated financial institution, the institution or an investment in a covered debt Board-regulated institution must deduct instrument pursuant to this paragraph if the with paragraph (h)(2) of this section, as any such investment and must deduct, financial institution is in distress and if such if the unconsolidated financial investment is made for the purpose of providing 26 With prior written approval of the Board, for financial support to the financial institution, as the period of time stipulated by the Board, a Board- institution is a global systemically determined by the Board. regulated institution is not required to deduct a important BHC, any investment in a 25 Any non-significant investment in the capital significant investment in the capital of an covered debt instrument issued by the of an unconsolidated financial institution or any unconsolidated financial institution or an unconsolidated financial institution, to investment in a covered debt instrument that is not investment in a covered debt instrument under this required to be deducted under this paragraph (c)(4) paragraph (c)(5) or otherwise under this section if the extent that the combined amount of or otherwise under this section must be assigned such investment is made for the purpose of the investment in capital and the the appropriate risk weight under subparts D, E, or providing financial support to the financial investment in covered debt instruments F of this part, as applicable. institution as determined by the Board.

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adjusted to recognize any short position a residual maturity of at least one year being hedged and the short position in by the Board-regulated institution in the (maturity requirement); or the index are reported as a trading asset same instrument subject to paragraph (ii) For a position that is a trading or trading liability (whether on- or off- (h)(3) of this section. asset or trading liability (whether on- or balance sheet) on the Board-regulated (2) Gross long position. A gross long off-balance sheet) as reported on the institution’s Call Report, for a state position is determined as follows: Board-regulated institution’s Call member bank, or FR Y–9C, for a bank (i) For an equity exposure that is held Report, for a state member bank, or FR holding company or savings and loan directly by the Board-regulated Y–9C, for a bank holding company or holding company, as applicable, and the institution, the adjusted carrying value savings and loan holding company, as hedge is deemed effective by the Board- of the exposure as that term is defined applicable, if the Board-regulated regulated institution’s internal control in §217.51(b); institution has a contractual right or processes, which have not been found to (ii) For an exposure that is held obligation to sell the long position at a be inadequate by the Board. directly and that is not an equity specific point in time and the exposure or a securitization exposure, counterparty to the contract has an PART 252—ENHANCED PRUDENTIAL the exposure amount as that term is obligation to purchase the long position STANDARDS (REGULATION YY). defined in §217.2; and if the Board-regulated institution ■ 4. The authority citation for part 252 (iii) For each indirect exposure, the exercises its right to sell, this point in is revised to read as follows: Board-regulated institution’s carrying time may be treated as the maturity of value of its investment in an investment the long position such that the maturity Authority: 12 U.S.C. 321–338a, 481–486, fund or, alternatively: of the long position and short position 1467a(g), 1818, 1828, 1831n, 1831o, 1831p– (A) A Board-regulated institution are deemed to match for purposes of the l, 1831w, 1835, 1844(b), 1844(c), 3904, 3906– may, with the prior approval of the 3909, 4808, 5361, 5365, 5366, 5367, 5368, maturity requirement, even if the 5371. Board, use a conservative estimate of the maturity of the short position is less ■ 5. In § 252.2, redesignate paragraphs amount of its indirect investment in the than one year; and (t) through (z) as paragraphs (aa) Board-regulated institution’s own (iii) For an investment in a Board- through (gg) and redesignate paragraphs capital instruments, its indirect regulated institution’s own capital (n) through (s) as (t) through (y); and investment in the capital of an instrument under paragraph (c)(1) of add new paragraphs (n) through (s) and unconsolidated financial institution, or this section, an investment in a capital (z). its indirect investment in a covered debt of an unconsolidated financial The additions read as follows: instrument held through a position in institution under paragraphs (c)(4), an index, as applicable; or (c)(5), and (d)(1)(iii) of this section, and § 252.2 Definitions. (B) A Board-regulated institution may an investment in a covered debt * * * * * calculate the gross long position for an instrument under paragraphs (c)(1), (n) Global methodology means the indirect exposure by multiplying the (c)(4), and (c)(5) of this section: assessment methodology and the higher Board-regulated institution’s carrying (A) The Board-regulated institution loss absorbency requirement for global value of its investment in the may only net a short position against a systemically important banks issued by investment fund by either: long position in an investment in the the Basel Committee on Banking (1) The highest stated investment Board-regulated institution’s own Supervision, as updated from time to limit (in percent) for an investment in capital instrument or own covered debt time. the Board-regulated institution’s own instrument under paragraph (c)(1) of (o) Global systemically important capital instruments, an investment in this section if the short position banking organization means a global the capital of an unconsolidated involves no counterparty credit risk; systemically important bank, as such financial institution, or an investment in (B) A gross long position in an term is defined in the global a covered debt instrument, as investment in the Board-regulated methodology. applicable, as stated in the prospectus, institution’s own capital instrument, an (p) Global systemically important partnership agreement, or similar investment in the capital instrument of foreign banking organization means a contract defining permissible an unconsolidated financial institution, top-tier foreign banking organization investments of the investment fund; or or an investment in a covered debt that is identified as a global systemically (2) The investment fund’s actual instrument due to a position in an index important foreign banking organization holdings of the investment in the Board- may be netted against a short position under § 252.153(b)(4) of this part. regulated institution’s own capital in the same index; (q) Home country, with respect to a instruments, investment in the capital of (C) Long and short positions in the foreign banking organization, means the an unconsolidated financial institution, same index without maturity dates are country in which the foreign banking or investment in an covered debt considered to have matching maturities; organization is chartered or instrument, as applicable; and and incorporated. (iv) For a synthetic exposure, the (D) A short position in an index that (r) Home country resolution authority, amount of the Board-regulated is hedging a long cash or synthetic with respect to a foreign banking institution’s loss on the exposure if the position in an investment in the Board- organization, means the governmental reference capital instrument were to regulated institution’s own capital entity or entities that under the laws of have a value of zero. instrument, an investment in the capital the foreign banking organization’s home (3) Adjustments to reflect a short instrument of an unconsolidated county has responsibility for the position. In order to adjust the gross financial institution, or an investment in resolution of the top-tier foreign banking long position to recognize a short a covered debt instrument can be organization. position in the same instrument under decomposed to provide recognition of (s) Home country supervisor, with paragraph (h)(1) of this section, the the hedge. More specifically, the portion respect to a foreign banking following criteria must be met: of the index that is composed of the organization, means the governmental (i) The maturity of the short position same underlying instrument that is entity or entities that under the laws of must match the maturity of the long being hedged may be used to offset the the foreign banking organization’s home position, or the short position must have long position if both the long position county has responsibility for the

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supervision and regulation of the top- to same-day payment netting), exercise dates that are specified in the tier foreign banking organization. remedies in respect of collateral or other instrument or in the event of (i) a * * * * * credit support or property related receivership, insolvency, liquidation, or (z) Top-tier foreign banking thereto (including the purchase and sale similar proceeding of the global organization, with respect to a foreign of property), demand payment or systemically important BHC or (ii) a bank, means the top-tier foreign banking delivery thereunder or in respect thereof failure of the global systemically organization or, alternatively, a (other than a right or operation of a important BHC to pay principal or subsidiary of the top-tier foreign contractual provision arising solely from interest on the instrument when due; banking organization designated by the a change in the value of collateral or (6) Does not have a credit-sensitive Board. margin or a change in the amount of an feature, such as an interest rate that is reset periodically based in whole or in * * * * * economic exposure), suspend, delay or part on the global systemically ■ 6. Add subpart G to read as follows: defer payment or performance thereunder, modify the obligations of a important BHC’s credit quality, but may Subpart G—External Long-term Debt party thereunder or any similar rights; have an interest rate that is adjusted Requirement, External Total Loss- and periodically independent of the global absorbing Capacity Requirement and (ii) Right or contractual provision that systemically important BHC’s credit Buffer, and Restrictions on Corporate alters the amount of collateral or margin quality, in relation to general market Practices for U.S. Global Systemically that must be provided with respect to an interest rates or similar adjustments; Important Banking Organizations exposure thereunder, including by (7) Is not a structured note; and altering any initial amount, threshold (8) Does not provide that the Sec. amount, variation margin, minimum instrument may be converted into or 252.60 Applicability. transfer amount, the margin value of exchanged for equity of the global 252.61 Definitions. collateral or any similar amount, that systemically important BHC. 252.62 External long-term debt entitles a party to demand the return of External TLAC buffer means, with requirement. any collateral or margin transferred by respect to a global systemically 252.63 External total loss-absorbing important BHC, the sum of 2.5 percent, capacity requirement and buffer. it to the other party or a custodian or 252.64 Restrictions on corporate practices that modifies a transferee’s right to reuse any applicable countercyclical capital of U.S. global systemically important collateral or margin (if such right buffer under 12 CFR 217.11(b) banking organizations. previously existed), or any similar (expressed as a percentage), and the 252.65 Disclosure requirements. rights, in each case, other than a right global systemically important BHC’s method 1 capital surcharge. § 252.60 Applicability. or operation of a contractual provision arising solely from a change in the value GAAP means generally accepted (a) General applicability. This subpart of collateral or margin or a change in the accounting principles as used in the applies to any U.S. bank holding amount of an economic exposure; and United States. company that is identified as a global (2) Does not include any right under GSIB surcharge has the same meaning systemically important BHC. a contract that allows a party to as in 12 CFR 217.2. (b) Initial applicability. A global terminate the contract on demand or at Method 1 capital surcharge means, systemically important BHC shall be its option at a specified time, or from with respect to a global systemically subject to the requirements of this time to time, without the need to show important BHC, the most recent method subpart beginning on the later of: cause. 1 capital surcharge (expressed as a (1) January 1, 2019; or Discretionary bonus payment has the percentage) the global systemically (2) 1095 days (three years) after the same meaning as under 12 CFR 217.2. important BHC was required to date on which the company becomes a Distribution has the same meaning as calculate pursuant to subpart H of global systemically important BHC. under 12 CFR 217.2. Regulation Q (12 CFR 217.400 through Global systemically important BHC 217.406). § 252.61 Definitions. has the same meaning as in 12 CFR Outstanding eligible external long- For purposes of this subpart: 217.2. term debt amount is defined in Additional tier 1 capital has the same Eligible debt security means, with § 252.62(a). meaning as in 12 CFR 217.20(c). respect to a global systemically Person has the same meaning as in 12 Common equity tier 1 capital has the important BHC, a debt instrument that: CFR 225.2. same meaning as in 12 CFR 217.20(b). (1) Is paid in, and issued by the global Qualified financial contract has the Common equity tier 1 capital ratio has systemically important BHC; same meaning as in § 210(c)(8)(D) of the same meaning as in 12 CFR (2) Is not secured, not guaranteed by Title II of the Dodd-Frank Wall Street 217.10(b)(1) and 12 CFR 217.10(c), as the global systemically important BHC Reform and Consumer Protection Act applicable. or a subsidiary of the global (12 U.S.C. 5390(c)(8)(D)), including any Common equity tier 1 minority systemically important BHC, and is not ‘‘swap’’ defined in section 1a(47) of the interest has the same meaning as in 12 subject to any other arrangement that Commodities Exchange Act (7 U.S.C. CFR 217.2. legally or economically enhances the 1a(47)) and in any rules or regulations Default right (1) Means any: seniority of the instrument; issued by the Commodity Futures (i) Right of a party, whether (3) Has a maturity of greater than 365 Trading Commission pursuant to such contractual or otherwise (including days (one year) from the date of section; any ‘‘security-based swap’’ rights incorporated by reference to any issuance; defined in section 3(a) of the Securities other contract, agreement or document, (4) Is governed by the laws of the Exchange Act of 1934 (15 U.S.C. 78c(a)) and rights afforded by statute, civil United States or any State thereof; and in any rules or regulations issued by code, regulation and common law), to (5) Does not provide the holder of the the Securities and Exchange liquidate, terminate, cancel, rescind, or instrument a contractual right to Commission pursuant to such section; accelerate the agreement or transactions accelerate payment of principal or and any securities contract, commodity thereunder, set off or net amounts owing interest on the instrument, except a contract, forward contract, repurchase in respect thereto (except rights related right that is exercisable on one or more agreement, swap agreement, and any

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similar agreement that the Federal global systemically important BHC that (b) Outstanding external total loss- Deposit Insurance Corporation have a remaining maturity of greater absorbing capacity amount. A global determines by regulation to be a than or equal to 365 days (one year) and systemically important BHC’s qualified financial contract as provided less than 730 days (two years); and outstanding external total loss-absorbing in 12 U.S.C. 5390(c)(8)(D)(i). (iii) Zero (0) percent of the unpaid capacity amount is the sum of: Structured note means a debt principal amount of the outstanding (1) The global systemically important instrument that: eligible debt securities issued by the BHC’s common equity tier 1 capital (1) Has a principal amount, global systemically important BHC that (excluding any common equity tier 1 redemption amount, or stated maturity have a remaining maturity of less than minority interest); that is subject to reduction based on the 365 days (one year). (2) The global systemically important performance of any asset, entity, index, (2) For purposes of paragraph (b)(1) of BHC’s additional tier 1 capital or embedded derivative or similar this section, the remaining maturity of (excluding any tier 1 minority interest); embedded feature; an outstanding eligible debt security is and (2) Has an embedded derivative or calculated from the earlier of: (3) The global systemically important similar embedded feature that is linked (i) The final payment date of the BHC’s outstanding eligible external to one or more equity securities, principal, without respect to any right of long-term debt amount plus 50 percent commodities, assets, or entities; the holder to accelerate payment of of the unpaid principal amount of (3) Does not specify a minimum principal; and outstanding eligible debt securities principal amount due upon acceleration (ii) The date the holder of the issued by the global systemically or early termination; or instrument first has the contractual right important BHC that have a remaining (4) Is not classified as debt under to request or require payment of maturity, as calculated in § 252.62(b)(2), GAAP. principal, provided that, with respect to of greater than or equal to 365 days (one Tier 1 minority interest has the same a right that is exercisable on one or more year) but less than 730 days (two years). meaning as in 12 CFR 217.2. dates that are specified in the (c) External TLAC buffer—(1) Tier 2 capital has the same meaning instrument only on the occurrence of an Composition of the External TLAC as in 12 CFR 217.20(d). event (other than an event of a buffer. The external TLAC buffer is Total leverage exposure has the same receivership, insolvency, liquidation, or composed solely of common equity tier meaning as in 12 CFR 217.10(c)(4)(ii). 1 capital. Total risk-weighted assets means the similar proceeding of the global (2) Definitions. For purposes of this greater of total risk-weighted assets as systemically important BHC, or a failure paragraph, the following definitions calculated under 12 CFR 217, subpart D of the global systemically important apply: (the standardized approach) or 12 CFR BHC to pay principal or interest on the (i) Eligible retained income. The 217, subpart E (the advanced instrument when due), the date for the eligible retained income of a global approaches). outstanding eligible debt security under this paragraph (b)(2)(ii) will be systemically important BHC is the § 252.62 External long-term debt calculated as if the event has occurred. global systemically important BHC’s net requirement. (c) Redemption and repurchase. A income for the four calendar quarters (a) External long-term debt global systemically important BHC may preceding the current calendar quarter, requirement. Except as provided under not redeem or repurchase any based on the global systemically paragraph (c) of this section, a global outstanding eligible debt security important BHC’s FR Y–9C, net of any systemically important BHC must without the prior approval of the Board distributions and associated tax effects maintain an outstanding eligible if, immediately after the redemption or not already reflected in net income. Net external long-term debt amount that is repurchase, the global systemically income, as reported in the FR Y–9C, no less than the amount equal to the important BHC would not meet its reflects discretionary bonus payments greater of: external long-term debt requirement and certain distributions that are (1) The global systemically important under paragraph (a) of this section, or its expense items (and their associated tax BHC’s total risk-weighted assets external total loss-absorbing capacity effects). multiplied by the sum of 6 percent plus requirement under § 252.63(a). (ii) Maximum external TLAC payout the global systemically important BHC’s ratio. The maximum external TLAC GSIB surcharge (expressed as a § 252.63 External total loss-absorbing payout ratio is the percentage of eligible capacity requirement and buffer. percentage); and retained income that a global (2) 4.5 percent of the global (a) External total loss-absorbing systemically important BHC can pay out systemically important BHC’s total capacity requirement. A global in the form of distributions and leverage exposure. systemically important BHC must discretionary bonus payments during (b) Outstanding eligible external long- maintain an outstanding external total the current calendar quarter. The term debt amount. (1) A global loss-absorbing capacity amount that is maximum external TLAC payout ratio is systemically important BHC’s no less than the amount equal to the based on the global systemically outstanding eligible external long-term greater of: important BHC’s external TLAC buffer debt amount is the sum of: (1)(i) From January 1, 2019 through level, calculated as of the last day of the (i) One hundred (100) percent of the December 31, 2021, 16 percent of the previous calendar quarter, as set forth in unpaid principal amount of the global systemically important BHC’s Table 1 to § 252.63. outstanding eligible debt securities total risk-weighted assets; and (iii) Maximum external TLAC payout issued by the global systemically (ii) Beginning January 1, 2022, 18 amount. A global systemically important BHC that have a remaining percent of the global systemically important BHC’s maximum external maturity greater than or equal to 730 important BHC’s total risk-weighted TLAC payout amount for the current days (two years); assets; and calendar quarter is equal to the global (ii) Fifty (50) percent of the unpaid (2) 9.5 percent of the global systemically important BHC’s eligible principal amount of the outstanding systemically important BHC’s total retained income, multiplied by the eligible debt securities issued by the leverage exposure. applicable maximum external TLAC

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payout ratio, as set forth in Table 1 to (expressed as a percentage) of a global systemically important BHC may not § 252.63. systemically important BHC’s external make distributions or discretionary (3) Calculation of the external TLAC total loss-absorbing capacity amount as bonus payments during the current buffer level. (i) A global systemically calculated under paragraph (b) of this calendar quarter if the global important BHC’s external TLAC buffer section to its risk-weighted assets is less systemically important BHC’s: level is equal to the global systemically than or equal to, from January 1, 2019, (A) Eligible retained income is important BHC’s common equity tier 1 through December 31, 2021, 16 percent negative; and capital ratio (expressed as a percentage) and beginning January 1, 2022, 18 (B) External TLAC buffer level was minus the greater of zero and the percent, the global systemically less than the external TLAC buffer as of following amount: important BHC’s external TLAC buffer the end of the previous calendar quarter. (A) (1) From January 1, 2019 through level is zero. (iv) Notwithstanding the limitations December 31, 2021, 16 percent; and (4) Limits on distributions and in paragraphs (c)(4)(i) through (iii) of (2) Beginning January 1, 2022, 18 discretionary bonus payments. (i) A this section, the Board may permit a percent; minus global systemically important BHC shall global systemically important BHC to (B) The ratio (expressed as a not make distributions or discretionary make a distribution or discretionary percentage) of the global systemically bonus payments or create an obligation bonus payment upon a request of the important BHC’s additional tier 1 to make such distributions or payments global systemically important BHC, if capital (excluding any tier 1 minority during the current calendar quarter that, the Board determines that the interest) to its total risk-weighted assets; in the aggregate, exceed the maximum distribution or discretionary bonus and minus external TLAC payout amount. payment would not be contrary to the (C) The ratio (expressed as a (ii) A global systemically important purposes of this section, or to the safety percentage) of the global systemically BHC with an external TLAC buffer level and soundness of the global important BHC’s eligible external long- that is greater than the external TLAC systemically important BHC. In making term debt amount to total risk-weighted buffer is not subject to a maximum such a determination, the Board will assets. external TLAC payout amount. consider the nature and extent of the (ii) Notwithstanding paragraph (iii) Except as provided in paragraph request and the particular circumstances (c)(3)(i) of this section, if the ratio (c)(4)(iv) of this section, a global giving rise to the request.

TABLE 1 TO § 252.63—CALCULATION OF MAXIMUM EXTERNAL TLAC PAYOUT AMOUNT

Maximum External TLAC payout ratio (as a External TLAC buffer level percentage of eligible retained income)

Greater than the external TLAC buffer ...... No payout ratio limitation applies. Less than or equal to the external TLAC buffer, and greater than 75 percent of the external 60 percent. TLAC buffer. Less than or equal to 75 percent of the external TLAC buffer, and greater than 50 percent of 40 percent. the external TLAC buffer. Less than or equal to 50 percent of the external TLAC buffer, and greater 25 percent of the ex- 20 percent. ternal TLAC buffer. Less than or equal to 25 percent of the external TLAC buffer ...... 0 percent.

(v)(A) A global systemically important which the holder of the instrument has (5) Enter into, or otherwise benefit BHC is subject to the lowest of the a contractual right to offset debt owed from, any agreement that provides for its maximum payout amounts as by the holder or its affiliates to a liabilities to be guaranteed by any of its determined under 12 CFR subsidiary of the global systemically subsidiaries. 217.11(a)(2)(iii) and (iv) and the important BHC against the amount, or a (b) Limit on unrelated liabilities. (1) maximum external TLAC payout portion of the amount, owed by the The aggregate amount, on an amount as determined under this global systemically important BHC unconsolidated basis, of unrelated paragraph. under the instrument; liabilities of a global systemically (B) Additional limitations on important BHC owed to persons that are (3) Enter into a qualified financial distributions may apply to a global not affiliates of the global systemically contract with a person that is not a systemically important BHC under 12 important BHC may not exceed 5 subsidiary of the global systemically CFR 225.4, 225.8, and 263.202. percent of the systemically important important BHC; § 252.64 Restrictions on corporate BHC’s external total loss-absorbing practices of U.S. global systemically (4) Guarantee a liability of a capacity amount, as calculated under important banking organizations. subsidiary of the global systemically § 252.63(b). (a) Prohibited corporate practices. A important BHC if such liability permits (2) For purposes of paragraph (b)(1) of global systemically important BHC may the exercise of a default right that is this section, an unrelated liability is any not directly: related, directly or indirectly, to the non-contingent liability of the global (1) Issue any debt instrument with an global systemically important BHC systemically important BHC owed to a original maturity of less than 365 days becoming subject to a receivership, person that is not an affiliate of the (one year), including short term deposits insolvency, liquidation, resolution, or global systemically important BHC other and demand deposits, to any person, similar proceeding other than a than: unless the person is a subsidiary of the receivership proceeding under Title II of (i) The instruments that satisfy the global systemically important BHC; the Dodd-Frank Wall Street Reform and global systemically important BHC’s (2) Issue any instrument, or enter into Consumer Protection Act (12 U.S.C. external total loss-absorbing capacity any related contract, with respect to 5381 through 5394); or amount, as calculated under § 252.63(b);

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(ii) Any dividend or other liability (ii) The Board, using information Subpart P—Internal Long-Term Debt arising from the instruments that satisfy reported by the top-tier foreign banking Requirement, Internal Total Loss- the global systemically important BHC’s organization or its U.S. subsidiaries, absorbing Capacity Requirement and external total loss-absorbing capacity information that is publicly available, Buffer, and Restrictions on Corporate amount, as calculated under and confidential supervisory Practices for Intermediate Holding § 252.63(b)(2); information, determines: Companies of Global Systemic Foreign (iii) An eligible debt security that does (A) That the top-tier foreign banking Banking Organizations not provide the holder of the instrument organization would be a global Sec. with a currently exercisable right to systemically important banking require immediate payment of the total 252.160 Applicability. organization under the global 252.161 Definitions. or remaining principal amount; and methodology; 252.162 Internal long-term debt (iv) A secured liability, to the extent (B) That the top-tier foreign banking requirement. that it is secured, or a liability that organization, if it were subject to the 252.163 Internal debt conversion order. otherwise represents a claim that would Board’s Regulation Q, would be 252.164 Internal total loss-absorbing be senior to eligible debt securities in capacity requirement and buffer. identified as a global systemically Title II of the Dodd-Frank Wall Street 252.165 Restrictions on corporate practices of important BHC under § 217.402 of the Reform and Consumer Protection Act intermediate holding companies of Board’s Regulation Q; or (12 U.S.C. 5390(b)) and the Bankruptcy foreign banking organizations. (C) That the U.S. intermediate holding Code (11 U.S.C. 507). § 252.160 Applicability. company, if it were subject to § 217.402 § 252.65 Disclosure requirements. of the Board’s Regulation Q, would be (a) General applicability. This subpart (a) A global systemically important identified as a global systemically applies to a U.S. intermediate holding BHC must publicly disclose a important BHC. company that is required to be established pursuant to § 252.153 and is description of the financial (5) Each top-tier foreign banking controlled by a global systemically consequences to unsecured debtholders organization that controls a U.S. important foreign banking organization of the global systemically important intermediate holding company shall (Covered IHC). BHC entering into a resolution submit to the Board by January 1 of each (b) Initial applicability. A Covered proceeding in which the global calendar year through the U.S. IHC is subject to the requirements of systemically important BHC is the only intermediate holding company: entity that would be subject to the this subpart beginning on the later of: (i) Notice of whether the home resolution proceeding. (1) January 1, 2019; and country supervisor (or other appropriate (b) A global systemically important (2) 1095 days (three years) after the home country regulatory authority) of BHC must provide the disclosure earlier of date on which a: the top-tier foreign banking organization required by paragraph (a) of this section: (i) Global systemically important of the U.S. intermediate holding (1) In the offering documents for all of foreign banking organization is required company has adopted standards its eligible debt securities; and to establish a U.S. intermediate holding consistent with the global methodology; (2) Either: company pursuant to § 252.153; and and (i) On the global systemically (ii) Foreign banking organization that important BHC’s Web site; or (ii) Notice of whether the top-tier is required to establish a U.S. (ii) In more than one public financial foreign banking organization prepares or intermediate holding company pursuant report or other public regulatory reports, reports the indicators used by the global to § 252.153 becomes a global provided that the global systemically methodology to identify a banking systemically important foreign banking important BHC publicly provides a organization as a global systemically organization. important banking organization and, if it summary table specifically indicating § 252.161 Definitions. the location(s) of this disclosure. does, whether the top-tier foreign For purposes of this subpart: ■ 7. Add § 252.153(b)(4), (5), and (6) to banking organization has determined Additional tier 1 capital has the same read as follows: that it has the characteristics of a global systemically important banking meaning as in 12 CFR 217.20(c). § 252.153 U.S. intermediate holding organization under the global Average total consolidated assets company requirement for foreign banking methodology pursuant to paragraph means the denominator of the leverage organizations with U.S. non-branch assets (b)(6) of this section. ratio as described in 12 CFR of $50 billion or more. 217.10(b)(4). (6) A top-tier foreign banking * * * * * Common equity tier 1 capital has the organization that controls a U.S. (b) * * * same meaning as in 12 CFR 217.20(b). intermediate holding company and (4) For purposes of this part, a top-tier Common equity tier 1 capital ratio has prepares or reports for any purpose the foreign banking organization that the same meaning as in 12 CFR indicator amounts necessary to controls a U.S. intermediate holding 217.10(b)(1) and 12 CFR 217.10(c), as determine whether the top-tier foreign company is a global systemically applicable. banking organization is a global important foreign banking organization Common equity tier 1 minority systemically important banking if any of the following conditions are interest has the same meaning as in 12 organization under the global met: CFR 217.2. methodology must use the data to (i) The top-tier foreign banking Covered IHC is defined in § 252.160. determine whether the top-tier foreign organization determines, pursuant to Default right (1) Means any: banking organization has the paragraph (b)(6) of this section, that the (i) Right of a party, whether characteristics of a global systemically top-tier foreign banking organization has contractual or otherwise (including important banking organization under the characteristics of a global rights incorporated by reference to any the global methodology. systemically important banking other contract, agreement or document, organization under the global * * * * * and rights afforded by statute, civil methodology; or ■ 8. Add subpart P to read as follows: code, regulation and common law), to

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liquidate, terminate, cancel, rescind, or of the instrument into common equity (3) Does not specify a minimum accelerate such agreement or tier 1 of the Covered IHC, or the principal amount due upon acceleration transactions thereunder, set off or net cancellation of the instrument, in either or early termination; or amounts owing in respect thereto case upon issuance by the Board of an (4) Is not classified as debt under (except rights related to same-day internal debt conversion order; GAAP. payment netting), exercise remedies in (6) Is governed by the laws of the Supplementary leverage ratio has the respect of collateral or other credit United States or any State thereof; and same meaning as in 12 CFR 217.10(c)(4). support or property related thereto (7) Is not a structured note. Tier 1 minority interest has the same (including the purchase and sale of GAAP means generally accepted meaning as in 12 CFR 217.2. property), demand payment or delivery accounting principles as used in the Tier 2 capital has the same meaning thereunder or in respect thereof (other United States. as in 12 CFR 217.20(d). Internal debt conversion order, with than a right or operation of a contractual Total leverage exposure has the same respect to a Covered IHC, means an provision arising solely from a change meaning as in 12 CFR 217.10(c)(4)(ii). order by the Board to immediately in the value of collateral or margin or a Total risk-weighted assets, with convert or exchange all eligible internal change in the amount of an economic respect to a Covered IHC, is equal to the debt securities of the Covered IHC to exposure), suspend, delay or defer Covered IHC’s standardized total risk- common equity tier 1 capital or payment or performance thereunder, weighted assets. modify the obligations of a party immediately cancel all eligible internal thereunder or any similar rights; and debt securities of the Covered IHC. § 252.162 Internal long-term debt (ii) Right or contractual provision that Internal TLAC buffer means, with requirement. alters the amount of collateral or margin respect to a Covered IHC, the sum of 2.5 (a) Internal long-term debt that must be provided with respect to an percent and any applicable requirement. A Covered IHC must have exposure thereunder, including by countercyclical capital buffer under 12 an outstanding eligible internal long- altering any initial amount, threshold CFR 217.11(b) (expressed as a term debt amount that is no less than amount, variation margin, minimum percentage). the amount equal to the greater of: transfer amount, the margin value of Outstanding eligible internal long- (1) 7 percent of the Covered IHC’s collateral or any similar amount, that term debt amount is defined in total risk-weighted assets; § 252.162(b). entitles a party to demand the return of (2) If the Covered IHC is required to Person has the same meaning as in 12 any collateral or margin transferred by maintain a minimum supplementary it to the other party or a custodian or CFR 225.2. Qualified financial contract has the leverage ratio, 3 percent of the Covered that modifies a transferee’s right to reuse same meaning as in section 210(c)(8)(D) IHC’s total leverage exposure; and collateral or margin (if such right of Title II of the Dodd-Frank Wall Street (3) 4 percent of the Covered IHC’s previously existed), or any similar Reform and Consumer Protection Act average total consolidated assets. rights, in each case, other than a right (12 U.S.C. 5390(c)(8)(D)) including, any (b) Outstanding eligible internal long- or operation of a contractual provision ‘‘swap’’ defined in section 1a(47) of the term debt amount. A Covered IHC’s arising solely from a change in the value Commodities Exchange Act (7 U.S.C. outstanding eligible internal long-term of collateral or margin or a change in the 1a(47)) and in any rules or regulations debt amount is the sum of: amount of an economic exposure; and (1) One hundred (100) percent of the (2) Does not include any right under issued by the Commodity Futures Trading Commission pursuant to such unpaid principal amount of the a contract that allows a party to outstanding eligible internal debt terminate the contract on demand or at section; any ‘‘security-based swap’’ defined in section 3(a) of the Securities securities issued by the Covered IHC its option at a specified time, or from that have a remaining maturity greater time to time, without the need to show Exchange Act of 1934 (15 U.S.C. 78c(a)) and in any rules or regulations issued by than or equal to 730 days (two years); cause. and Discretionary bonus payment has the the Securities and Exchange Commission pursuant to such section; (2) Fifty (50) percent of the unpaid same meaning as under 12 CFR 217.2. principal amount of the outstanding Distribution has the same meaning as and any securities contract, commodity eligible internal debt securities issued under 12 CFR 217.2. contract, forward contract, repurchase by the Covered IHC that have a Eligible internal debt security means a agreement, swap agreement, and any remaining maturity of greater than or debt instrument that: similar agreement that the Federal (1) Is paid in, and issued by a Covered Deposit Insurance Corporation equal to 365 days (one year) and less IHC to and remains held by a company determines by regulation to be a than 730 days (two years); and that is incorporated or organized outside qualified financial contract as provided (3) Zero (0) percent of the unpaid of the United States that directly or in 12 U.S.C. 5390(c)(8)(D)(i). principal amount of the outstanding indirectly controls the Covered IHC; Standardized total risk-weighted eligible internal debt securities issued (2) Is unsecured and would represent assets has the same meaning as in 12 by the Covered IHC that have a the most subordinated debt claim in a CFR 217.2. remaining maturity of less than 365 receivership, insolvency, liquidation, or Structured note means a debt days (one year). similar proceeding of the Covered IHC; instrument that: (c) Redemption and repurchase. (3) Has a maturity at issuance of (1) Has a principal amount, Without the prior approval of the Board, greater than 365 days (one year) from redemption amount, or stated maturity a Covered IHC may not redeem or the date of issuance; that is subject to reduction based on the repurchase any outstanding eligible (4) Does not provide the holder of the performance of any asset, entity, index, internal debt security if, immediately instrument a contractual right to or embedded derivative or similar after the redemption or repurchase, the accelerate payment of principal or embedded feature; Covered IHC would not have an interest on the instrument; (2) Has an embedded derivative or outstanding eligible internal long-term (5) Has a contractual provision that is other similar embedded feature that is debt amount that is sufficient to meet its approved by the Board that provides for linked to one or more equity securities, internal long-term debt requirement the immediate conversion or exchange commodities, assets, or entities; under paragraph (a) of this section.

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§ 252.163 Internal debt conversion order. (ii) Beginning January 1, 2022, 18 similar proceedings in the United (a) The Board may issue an internal percent of the Covered IHC’s total risk- States. debt conversion order if: weighted assets; (2) A Covered IHC will cease to be a (1) The Board has determined that the (2) If the Board requires the Covered non-resolution entity 365 days (one Covered IHC is in default or danger of IHC to maintain a minimum year) from the date the Board first default; and supplementary leverage ratio, 6.75 provided notice to the Covered IHC that (2) Any of the following percent of the Covered IHC’s total the home country resolution authority circumstances apply: leverage exposure; and for the top-tier foreign banking (i) A foreign banking organization that (3) Nine (9) percent of the Covered organization that controls the Covered directly or indirectly controls the IHC’s average total consolidated assets. IHC has indicated that the authority’s Covered IHC or any subsidiary of the (b) Internal total loss-absorbing planned resolution strategy for the top-tier foreign banking organization has capacity requirement for a Covered IHCs foreign banking organization involves been placed into resolution proceedings that is a non-resolution entity. A the Covered IHC or one or more of the (including the application of statutory Covered IHC that is a non-resolution subsidiaries of the Covered IHC entering resolution powers) in its home country; entity must have an outstanding internal resolution, receivership, insolvency or (ii) The home country supervisor of total loss-absorbing capacity no less similar proceedings in the United the top-tier foreign banking organization than the amount equal to the greater of: States. has consented or not promptly objected (1) (i) From January 1, 2019 through (e) Internal TLAC buffer.—(1) after notification by the Board to the December 31, 2021, 14 percent of the Composition of the internal TLAC conversion, exchange, or cancellation of Covered IHC’s total risk-weighted assets; buffer. The internal TLAC buffer is the eligible internal debt securities of and composed solely of common equity tier the Covered IHC; or (ii) Beginning January 1, 2022, 16 1 capital. (2) Definitions. For purposes of this (iii) The Board has made a written percent of the Covered IHC’s total risk- paragraph, the following definitions recommendation to the Secretary of the weighted assets; Treasury pursuant to 12 U.S.C. 5383(a) apply: (2) If the Board requires the Covered (i) Eligible retained income. The regarding the Covered IHC. IHC to maintain a minimum (b) For purposes of paragraph (a) of eligible retained income of a Covered supplementary leverage ratio, 6 percent IHC is its net income for the four this section, the Board will consider: of the Covered IHC’s total leverage (1) A Covered IHC in default or calendar quarters preceding the current exposure; and calendar quarter, based on the Covered danger of default if (3) Eight (8) percent of the Covered (i) A case has been, or likely will IHC’s FR Y–9C, or other applicable IHC’s average total consolidated assets. regulatory report as determined by the promptly be, commenced with respect (c) Internal Total loss-absorbing to the Covered IHC under the Board, net of any distributions and capacity amount. A Covered IHC’s associated tax effects not already Bankruptcy Code (11 U.S.C. 101 et seq.); internal total loss-absorbing capacity (ii) The Covered IHC has incurred, or reflected in net income. Net income, as amount is equal to the sum of: is likely to incur, losses that will deplete reported in the FR Y–9C, reflects (1) The Covered IHC’s common equity all or substantially all of its capital, and discretionary bonus payments and tier 1 capital (excluding any common there is no reasonable prospect for the certain distributions that are expense equity tier 1 minority interest) held by Covered IHC to avoid such depletion; items (and their associated tax effects). a company that is incorporated or (iii) The assets of the Covered IHC are, (ii) Maximum internal TLAC payout organized outside of the United States or are likely to be, less than its ratio. The maximum internal TLAC and that directly or indirectly controls obligations to creditors and others; or payout ratio is the percentage of eligible the Covered IHC; (iv) The Covered IHC is, or is likely retained income that a Covered IHC can to be, unable to pay its obligations (2) The Covered IHC’s additional tier pay out in the form of distributions and (other than those subject to a bona fide 1 capital (excluding any tier 1 minority discretionary bonus payments during dispute) in the normal course of interest) held by a company that is the current calendar quarter. The business; and incorporated or organized outside of the maximum internal TLAC payout ratio is (2) An objection by the home country United States and that directly or based on the Covered IHC’s internal supervisor to the conversion, exchange indirectly controls the Covered IHC; and TLAC buffer level, calculated as of the or cancellation of the eligible internal (3) The Covered IHC’s outstanding last day of the previous calendar debt securities to be prompt if the Board eligible internal long-term debt amount quarter, as set forth in Table 1 to receives the objection no later than 48 plus 50 percent of the unpaid principal § 252.164. hours after the Board requests such amount of outstanding eligible internal (iii) Maximum internal TLAC payout consent or non-objection from the home debt securities issued by the Covered amount. A Covered IHC’s maximum country supervisor. IHC that have a remaining maturity of internal TLAC payout amount for the greater than or equal to 365 days (one current calendar quarter is equal to the § 252.164 Internal total loss-absorbing year) but less than 730 days (two years). Covered IHC’s eligible retained income, capacity requirement and buffer. (d) Identification of non-resolution multiplied by the applicable maximum (a) Internal total loss-absorbing entities. (1) A Covered IHC is a non- internal TLAC payout ratio, as set forth capacity requirement. Except as resolution entity for purposes of this in Table 1 to § 252.164. provided in paragraph (b) of this section if the home country resolution (3) Calculation of the internal TLAC section, a Covered IHC must have an authority for the top-tier foreign banking buffer level. (i) A Covered IHC’s internal outstanding internal total loss-absorbing organization that controls the Covered TLAC buffer level is equal to the capacity amount that is no less than the IHC has certified to the Board that the Covered IHC’s common equity tier 1 amount equal to the greater of: authority’s planned resolution strategy capital ratio (expressed as a percentage) (1) (i) From January 1, 2019 through for the foreign banking organization minus the greater of zero and the December 31, 2021, 16 percent of the does not involve the Covered IHC or the following amount: Covered IHC’s total risk-weighted assets; subsidiaries of the Covered IHC entering (A) (1) From January 1, 2019, through and resolution, receivership, insolvency or December 31, 2021, 14 percent for a

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Covered IHC that is a non-resolution from January 1, 2019, through December to a maximum internal TLAC payout entity, and 16 percent for all other 31, 2021, 16 percent and beginning amount. Covered IHCs; and January 1, 2022, 18 percent, the Covered (iii) Except as provided in paragraph (2) Beginning January 1, 2022, 16 IHC’s internal TLAC buffer level is zero. (e)(4)(iv) of this section, a Covered IHC percent for a Covered IHC that is a non- (B) With respect to a Covered IHC that may not make distributions or resolution entity, and 18 percent for all is a non-resolution entity, discretionary bonus payments during other Covered IHCs; minus notwithstanding paragraph (e)(3)(i) of the current calendar quarter if the (B) The ratio (expressed as a this section, if the ratio (expressed as a Covered IHC’s: percentage) of the Covered IHC’s percentage) of the Covered IHC’s (A) Eligible retained income is additional tier 1 capital (excluding any internal total loss-absorbing capacity negative; and tier 1 minority interest) held by a amount, as calculated under company that is incorporated or § 252.164(b), to the Covered IHC’s risk- (B) Internal TLAC buffer level was organized outside of the United States weighted assets is less than or equal to, less than the internal TLAC buffer as of and that directly or indirectly controls from January 1, 2019, through December the end of the previous calendar quarter. the Covered IHC to its total risk- 31, 2021, 14 percent and beginning (iv) Notwithstanding the limitations weighted assets; and minus January 1, 2022, 16 percent, the Covered in paragraphs (e)(4)(i) through (iii) of (C) The ratio (expressed as a IHC’s internal TLAC buffer level is zero. this section, the Board may permit a percentage) of the Covered IHC’s eligible (4) Limits on distributions and Covered IHC to make a distribution or internal long-term debt to total risk- discretionary bonus payments. (i) A discretionary bonus payment upon a weighted assets. Covered IHC shall not make request of the Covered IHC, if the Board (ii) (A) Except as provided in distributions or discretionary bonus determines that the distribution or paragraph (e)(3)(ii)(B) of this section and payments or create an obligation to discretionary bonus payment would not notwithstanding paragraph (e)(3)(i) of make such distributions or payments be contrary to the purposes of this this section, if the ratio (expressed as a during the current calendar quarter that, section, or to the safety and soundness percentage) of the Covered IHC’s in the aggregate, exceed the maximum of the Covered IHC. In making such a internal total loss-absorbing capacity internal TLAC payout amount. determination, the Board will consider amount, as calculated under (ii) A Covered IHC with an internal the nature and extent of the request and § 252.164(a), to the Covered IHC’s risk- TLAC buffer level that is greater than the particular circumstances giving rise weighted assets is less than or equal to, the internal TLAC buffer is not subject to the request.

TABLE 1 TO § 252.164—CALCULATION OF MAXIMUM INTERNAL TLAC PAYOUT AMOUNT

Maximum internal TLAC payout ratio (as a per- Internal TLAC buffer level centage of eligible retained income)

Greater than the internal TLAC buffer ...... No payout ratio limitation applies Less than or equal to the internal TLAC buffer, and greater than 75 percent of the internal 60 percent. TLAC buffer. Less than or equal to 75 percent of the internal TLAC buffer, and greater than 50 percent of 40 percent. the internal TLAC buffer. Less than or equal to 50 percent of the internal TLAC buffer, and greater 25 percent of the in- 20 percent. ternal TLAC buffer. Less than or equal to 25 percent of the internal TLAC buffer ...... 0 percent.

(v) (A) A Covered IHC is subject to the and demand deposits, to any person, the Covered IHC becoming subject to a lowest of the maximum payout amounts unless the person is an affiliate of the receivership, insolvency, liquidation, as determined under 12 CFR covered IHC; resolution, or similar proceeding other 217.11(a)(2)(iii) and (iv) and the (b) Issue any instrument, or enter into than a receivership proceeding under maximum internal TLAC payout any related contract, with respect to Title II of the Dodd-Frank Wall Street amount as determined under this which the holder of the instrument has Reform and Consumer Protection Act paragraph. a contractual right to offset debt owed (12 U.S.C. 5381 through 5394); or (B) Additional limitations on by the holder or its affiliates to the (e) Enter into, or otherwise benefit distributions may apply to a Covered Covered IHC or a subsidiary of the from, any agreement that provides for its IHC under 12 CFR 225.4, 225.8, and Covered IHC against the amount, or a 263.202. portion of the amount, owed by the liabilities to be guaranteed by any of its Covered IHC under the instrument; subsidiaries. § 252.165 Restrictions on corporate (c) Enter into a qualified financial By order of the Board of Governors of the practices of intermediate holding Federal Reserve System, November 17, 2015. companies of foreign banking contract with a person that is not an organizations. affiliate of the Covered IHC; Robert deV. Frierson, (d) Guarantee a liability of an affiliate A Covered IHC may not directly: Secretary of the Board. of the Covered IHC if such liability (a) Issue any debt instrument with an [FR Doc. 2015–29740 Filed 11–27–15; 8:45 am] permits the exercise of a default right original maturity of less than 365 days BILLING CODE P that is related, directly or indirectly, to (one year), including short term deposits

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