Title 12—Banks and Banking--Volume 1
PART 217—CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
§ 217.301   Current expected credit losses (CECL) transition.
(a) CECL transition provision. (1) Except as provided in paragraph (d) of this section, a Board-regulated institution may elect to use a CECL transition provision pursuant to this section only if the Board-regulated institution records a reduction in retained earnings due to the adoption of CECL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL.
(2) Except as provided in paragraph (d) of this section, a Board-regulated institution that elects to use the CECL transition provision must elect to use the CECL transition provision in the first Call Report or FR Y-9C that includes CECL filed by the Board-regulated institution after it adopts CECL.
(3) A Board-regulated institution that does not elect to use the CECL transition provision as of the first Call Report or FR Y-9C that includes CECL filed as described in paragraph (a)(2) of this section may not elect to use the CECL transition provision in subsequent reporting periods.
(b) Definitions. For purposes of this section, the following definitions apply:
(1) Transition period means the three-year period beginning the first day of the fiscal year in which a Board-regulated institution adopts CECL and reflects CECL in its first Call Report or FR Y-9C filed after that date; or, for the 2020 CECL transition provision under paragraph (d) of this section, the five-year period beginning on the earlier of the date a Board-regulated institution was required to adopt CECL for accounting purposes under GAAP (as in effect January 1, 2020), or the first day of the fiscal year that begins during the 2020 calendar year in which the Board-regulated institution files regulatory reports that include CECL.
(2) CECL transitional amount means the difference net of any DTAs, in the amount of a Board-regulated institution's retained earnings as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL from the amount of the Board-regulated institution's retained earnings as of the closing of the fiscal year-end immediately prior to the Board-regulated institution's adoption of CECL.
(3) DTA transitional amount means the difference in the amount of a Board-regulated institution's DTAs arising from temporary differences as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL from the amount of the Board-regulated institution's DTAs arising from temporary differences as of the closing of the fiscal year-end immediately prior to the Board-regulated institution's adoption of CECL.
(4) AACL transitional amount means the difference in the amount of a Board-regulated institution's AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL and the amount of the Board-regulated institution's ALLL as of the closing of the fiscal year-end immediately prior to the Board-regulated institution's adoption of CECL.
(5) Eligible credit reserves transitional amount means the difference in the amount of a Board-regulated institution's eligible credit reserves as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL from the amount of the Board-regulated institution's eligible credit reserves as of the closing of the fiscal year-end immediately prior to the Board-regulated institution's adoption of CECL.
(c) Calculation of the three-year CECL transition provision. (1) For purposes of the election described in paragraph (a)(1) of this section and except as provided in paragraph (d) of this section, a Board-regulated institution must make the following adjustments in its calculation of regulatory capital ratios:
(i) Increase retained earnings by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase retained earnings by fifty percent of its CECL transitional amount during the second year of the transition period, and increase retained earnings by twenty-five percent of its CECL transitional amount during the third year of the transition period;
(ii) Decrease amounts of DTAs arising from temporary differences by seventy-five percent of its DTA transitional amount during the first year of the transition period, decrease amounts of DTAs arising from temporary differences by fifty percent of its DTA transitional amount during the second year of the transition period, and decrease amounts of DTAs arising from temporary differences by twenty-five percent of its DTA transitional amount during the third year of the transition period;
(iii) Decrease amounts of AACL by seventy-five percent of its AACL transitional amount during the first year of the transition period, decrease amounts of AACL by fifty percent of its AACL transitional amount during the second year of the transition period, and decrease amounts of AACL by twenty-five percent of its AACL transitional amount during the third year of the transition period; and
(iv) Increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by twenty-five percent of its CECL transitional amount during the third year of the transition period.
(2) For purposes of the election described in paragraph (a)(1) of this section, an advanced approaches or Category III Board-regulated institution must make the following additional adjustments to its calculation of its applicable regulatory capital ratios:
(i) Increase total leverage exposure for purposes of the supplementary leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase total leverage exposure for purposes of the supplementary leverage ratio by twenty-five percent of its CECL transitional amount during the third year of the transition period; and
(ii) An advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to § 217.121(d) must decrease amounts of eligible credit reserves by seventy-five percent of its eligible credit reserves transitional amount during the first year of the transition period, decrease amounts of eligible credit reserves by fifty percent of its eligible credit reserves transitional amount during the second year of the transition provision, and decrease amounts of eligible credit reserves by twenty-five percent of its eligible credit reserves transitional amount during the third year of the transition period.
(d) 2020 CECL transition provision. Notwithstanding paragraph (a) of this section, a Board-regulated institution that adopts CECL for accounting purposes under GAAP as of the first day of a fiscal year that begins during the 2020 calendar year may elect to use the transitional amounts and modified transitional amounts in paragraph (d)(1) of this section with the 2020 CECL transition provision calculation in paragraph (d)(2) of this section to adjust its calculation of regulatory capital ratios during each quarter of the transition period in which a Board-regulated institution uses CECL for purposes of its Call Report or FR Y-9C. A Board-regulated institution may use the transition provision in this paragraph (d) if it has a positive modified CECL transitional amount during any quarter ending in 2020, and makes the election in the Call Report or FR Y-9C filed for the same quarter. A Board-regulated institution that does not calculate a positive modified CECL transitional amount in any quarter is not required to apply the adjustments in its calculation of regulatory capital ratios in paragraph (d)(2) of this section in that quarter.
(1) Definitions. For purposes of the 2020 CECL transition provision calculation in paragraph (d)(2) of this section, the following definitions apply:
(i) Modified CECL transitional amount means:
(A) During the first two years of the transition period, the difference between AACL as reported in the most recent Call Report or FR Y-9C, and the AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL, multiplied by 0.25, plus the CECL transitional amount; and
(B) During the last three years of the transition period, the difference between AACL as reported in the Call Report or Y-9C at the end of the second year of the transition period and the AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL, multiplied by 0.25, plus the CECL transitional amount.
(ii) Modified AACL transitional amount means:
(A) During the first two years of the transition period, the difference between AACL as reported in the most recent Call Report or FR Y-9C, and the AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL, multiplied by 0.25, plus the AACL transitional amount; and
(B) During the last three years of the transition period, the difference between AACL as reported in the Call Report or FR Y-9C at the end of the second year of the transition period and the AACL as of the beginning of the fiscal year in which the Board-regulated institution adopts CECL, multiplied by 0.25, plus the AACL transitional amount.
(2) Calculation of 2020 CECL transition provision. (i) A Board-regulated institution that has elected the 2020 CECL transition provision described in this paragraph (d) may make the following adjustments in its calculation of regulatory capital ratios:
(A) Increase retained earnings by one-hundred percent of its modified CECL transitional amount during the first year of the transition period, increase retained earnings by one hundred percent of its modified CECL transitional amount during the second year of the transition period, increase retained earnings by seventy-five percent of its modified CECL transitional amount during the third year of the transition period, increase retained earnings by fifty percent of its modified CECL transitional amount during the fourth year of the transition period, and increase retained earnings by twenty-five percent of its modified CECL transitional amount during the fifth year of the transition period;
(B) Decrease amounts of DTAs arising from temporary differences by one-hundred percent of its DTA transitional amount during the first year of the transition period, decrease amounts of DTAs arising from temporary differences by one hundred percent of its DTA transitional amount during the second year of the transition period, decrease amounts of DTAs arising from temporary differences by seventy-five percent of its DTA transitional amount during the third year of the transition period, decrease amounts of DTAs arising from temporary differences by fifty percent of its DTA transitional amount during the fourth year of the transition period, and decrease amounts of DTAs arising from temporary differences by twenty-five percent of its DTA transitional amount during the fifth year of the transition period;
(C) Decrease amounts of AACL by one-hundred percent of its modified AACL transitional amount during the first year of the transition period, decrease amounts of AACL by one hundred percent of its modified AACL transitional amount during the second year of the transition period, decrease amounts of AACL by seventy-five percent of its modified AACL transitional amount during the third year of the transition period, decrease amounts of AACL by fifty percent of its AACL transitional amount during the fourth year of the transition period, and decrease amounts of AACL by twenty-five percent of its AACL transitional amount during the fifth year of the transition period; and
(D) Increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by one-hundred percent of its modified CECL transitional amount during the first year of the transition period, increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by one hundred percent of its modified CECL transitional amount during the second year of the transition period, increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by seventy-five percent of its modified CECL transitional amount during the third year of the transition period, increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by fifty percent of its modified CECL transitional amount during the fourth year of the transition period, and increase average total consolidated assets as reported on the Call Report or FR Y-9C for purposes of the leverage ratio by twenty-five percent of its modified CECL transitional amount during the fifth year of the transition period.
(ii) An advanced approaches or Category III Board-regulated institution that has elected the 2020 CECL transition provision described in this paragraph (d) may make the following additional adjustments to its calculation of its applicable regulatory capital ratios:
(A) Increase total leverage exposure for purposes of the supplementary leverage ratio by one-hundred percent of its modified CECL transitional amount during the first year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by one hundred percent of its modified CECL transitional amount during the second year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by seventy-five percent of its modified CECL transitional amount during the third year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by fifty percent of its modified CECL transitional amount during the fourth year of the transition period, and increase total leverage exposure for purposes of the supplementary leverage ratio by twenty-five percent of its modified CECL transitional amount during the fifth year of the transition period; and
(B) An advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to § 217.121(d) must decrease amounts of eligible credit reserves by one-hundred percent of its eligible credit reserves transitional amount during the first year of the transition period, decrease amounts of eligible credit reserves by one hundred percent of its eligible credit reserves transitional amount during the second year of the transition period, decrease amounts of eligible credit reserves by seventy-five percent of its eligible credit reserves transitional amount during the third year of the transition period, decrease amounts of eligible credit reserves by fifty percent of its eligible credit reserves transitional amount during the fourth year of the transition period, and decrease amounts of eligible credit reserves by twenty-five percent of its eligible credit reserves transitional amount during the fifth year of the transition period.
(e) Eligible credit reserves shortfall. An advanced approaches Board-regulated institution that has completed the parallel run process and that has received notification from the Board pursuant to § 217.121(d), whose amount of expected credit loss exceeded its eligible credit reserves immediately prior to the adoption of CECL, and that has an increase in common equity tier 1 capital as of the beginning of the fiscal year in which it adopts CECL after including the first year portion of the CECL transitional amount (or modified CECL transitional amount) must decrease its CECL transitional amount used in paragraph (c) of this section (or modified CECL transitional amount used in paragraph (d) of this section) by the full amount of its DTA transitional amount.
(f) Business combinations. Notwithstanding any other requirement in this section, for purposes of this paragraph (f), in the event of a business combination involving a Board-regulated institution where one or both Board-regulated institutions have elected the treatment described in this section:
(1) If the acquirer Board-regulated institution (as determined under GAAP) elected the treatment described in this section, the acquirer Board-regulated institution must continue to use the transitional amounts (unaffected by the business combination) that it calculated as of the date that it adopted CECL through the end of its transition period.
(2) If the acquired company (as determined under GAAP) elected the treatment described in this section, any transitional amount of the acquired company does not transfer to the resulting Board-regulated institution.
§ 217.302   Exposures Related the Money Market Mutual Fund Liquidity Facility.
Notwithstanding any other section of this part, a Board-regulated institution may exclude exposures acquired pursuant to a non-recourse loan that is provided as part of the Money Market Mutual Fund Liquidity Facility, announced by the Board on March 18, 2020, from total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets, as applicable. For the purpose of this provision, a board-regulated institution's liability under the facility must be reduced by the purchase price of the assets acquired with funds advanced from the facility.
§ 217.303   Temporary exclusions from total leverage exposure.
(a) In general. Subject to paragraphs (b) through (g) of this section and notwithstanding any other requirement in this part, when calculating on-balance sheet assets as of each day of a reporting quarter for purposes of determining the Board-regulated institution's total leverage exposure under § 217.10(c), a Board-regulated institution that is a depository institution holding company or a U.S. intermediate holding company must, and a Board-regulated institution that is a state member bank may, exclude the balance sheet carrying value of the following items:
(1) U.S. Treasury securities; and
(2) Funds on deposit at a Federal Reserve Bank.
(b) Opt-in period. Before applying the relief provided in paragraph (a) of this section, a state member bank must first notify the Board before July 1, 2020.
(c) Calculation of relief. When calculating on-balance sheet assets as of each day of a reporting quarter, the relief provided in paragraph (a) of this section applies from the beginning of the reporting quarter in which the state member bank filed an opt-in notice through the termination date specified in paragraph (d) of this section.
(d) Termination of exclusions. This section shall cease to be effective after the reporting period that ends March 31, 2021.
(e) Custodial banking organizations. A custodial banking organization must reduce the amount in § 217.10(c)(2)(x)(A) (to no less than zero) by any amount excluded under paragraph (a)(2) of this section.
(f) Disclosure. Notwithstanding Table 13 to § 217.173, a Board-regulated institution that is required to make the disclosures pursuant to § 217.173 must exclude the items excluded pursuant to paragraph (a) of this section from Table 13 to § 217.173.
(g) Board approval for distributions. During the calendar quarter beginning on July 1, 2020, and until March 31, 2021, no state member bank that has opted in to the relief provided under paragraph (a) of this section may make a distribution, or create an obligation to make such a distribution, without prior Board approval. When reviewing a request under this paragraph (g), the Board will consider all relevant factors, including whether the distribution would be contrary to the safety and soundness of the state member bank; the nature, purpose, and extent of the request; and the particular circumstances giving rise to the request.
§ 217.304   Temporary changes to the community bank leverage ratio framework.
(a)(1) A Board-regulated institution that is not an advanced approaches Board-regulated institution and that meets all the criteria to be a qualifying community banking organization under § 217.12(a)(2) but for § 217.12(a)(2)(i) is a qualifying community banking organization if it has a leverage ratio equal to or greater than 8 percent.
(2) Notwithstanding § 217.12(a)(1), a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under § 217.12(a)(3) shall be considered to have met the minimum capital requirements under § 217.10, the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1) of this chapter, if applicable, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio equal to or greater than 8 percent.
(b) Notwithstanding § 217.12(c)(6) and subject to § 217.12(c)(5), a Board-regulated institution that has a leverage ratio of 7 percent or greater has the grace period described in § 217.12(c)(1) through (4). A Board-regulated institution that has a leverage ratio of less than 7 percent does not have a grace period and must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it reports a leverage ratio of less than 7 percent.
(c) Pursuant to section 4012 of the Coronavirus Aid, Relief, and Economic Security Act, the requirements provided under paragraphs (a) and (b) of this section are effective during the period beginning on April 23, 2020 and ending on the sooner of:
(1) The termination date of the national emergency concerning the novel coronavirus disease outbreak declared by the President on March 13, 2020, under the National Emergencies Act (50 U.S.C. 1601 et seq. ); or
(2) December 31, 2020.
(d) Upon the termination of the requirements in paragraphs (a) and (b) of this section as provided in paragraph (c) of this section, a Board-regulated institution is subject to the following:
(1) Through December 31, 2020:
(i) A Board-regulated institution that is not an advanced approaches Board-regulated institution and that meets all the criteria to be a qualifying community banking organization under § 217.12(a)(2) but for § 217.12(a)(2)(i) is a qualifying banking organization if it has a leverage ratio greater than 8 percent.
(ii) Notwithstanding § 217.12(a)(1), a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under § 217.12(a)(3) shall be considered to have met the minimum capital requirements under § 217.10, the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1) of this chapter, if applicable, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio greater than 8 percent.
(iii) Notwithstanding § 217.12(c)(6) and subject to § 217.12(c)(5), a Board-regulated institution that has a leverage ratio of greater than 7 percent has the grace period described in § 217.12(c)(1) through (4). A Board-regulated institution that has a leverage ratio of 7 percent or less does not have a grace period and must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it reports a leverage ratio of 7 percent or less.
(2) From January 1, 2021, through December 31, 2021:
(i) A Board-regulated institution that is not an advanced approaches Board-regulated institution and that meets all the criteria to be a qualifying community banking organization under § 217.12(a)(2) but for § 217.12(a)(2)(i) is a qualifying banking organization if it has a leverage ratio greater than 8.5 percent.
(ii) Notwithstanding § 217.12(a)(1), a qualifying community banking organization that has made an election to use the community bank leverage ratio framework under § 217.12(a)(3) shall be considered to have met the minimum capital requirements under § 217.10, the capital ratio requirements for the well capitalized capital category under § 208.43(b)(1) of this chapter, if applicable, and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it has a leverage ratio greater than 8.5 percent.
(iii) Notwithstanding § 217.12(c)(6) and subject to § 217.12(c)(5), a Board-regulated institution that has a leverage ratio of greater than 7.5 percent has the grace period described in § 217.12(c)(1) through (4). A Board-regulated institution that has a leverage ratio of 7.5 percent or less does not have a grace period and must comply with the minimum capital requirements under § 217.10(a)(1) and must report the required capital measures under § 217.10(a)(1) for the quarter in which it reports a leverage ratio of 7.5 percent or less.
§ 217.305   Exposures related to the Paycheck Protection Program Lending Facility.
Notwithstanding any other section of this part, a Board-regulated institution may exclude exposures pledged as collateral for a non-recourse loan that is provided as part of the Paycheck Protection Program Lending Facility, announced by the Board on April 7, 2020, from total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets, as applicable. For the purpose of this section, a Board-regulated institution's liability under the facility must be reduced by the principal amount of the loans pledged as collateral for funds advanced under the facility.
§ 217.306   Building Block Approach (BBA) capital conservation buffer transition.
(a) Notwithstanding any provision of this part and subject to paragraph (b) of this section, an insurance bank holding company, or insurance savings and loan holding company, that, on January 1, 2023, was not subject to this part is not subject to any restrictions on distributions or discretionary bonus payments under §§ 217.11 and 217.604.
(b) This section ceases to be effective after March 31, 2026.
§ 217.400   Purpose and applicability.
(a) Purpose. This subpart implements provisions of section 165 of the Dodd-Frank Act (12 U.S.C. 5365), by establishing a risk-based capital surcharge for global systemically important bank holding companies.
(b) Applicability —(1) General. This subpart applies to a bank holding company that:
(i) Is an advanced approaches Board-regulated institution or a Category III Board-regulated institution;
(ii) Is not a consolidated subsidiary of a bank holding company; and
(iii) Is not a consolidated subsidiary of a foreign banking organization.
(2) Effective date of calculation and surcharge requirements. (i) A bank holding company identified in § 217.400(b)(1) is subject to § 217.402 of this part and must determine whether it qualifies as a global systemically important BHC by December 31 of the year immediately following the year in which the bank holding company becomes an advanced approaches Board-regulated institution or a Category III Board-regulated institution; and
(ii) A bank holding company that becomes a global systemically important BHC pursuant to § 217.402 must calculate its GSIB surcharge pursuant to § 217.403 by December 31 of the year in which the bank holding company is identified as a global systemically important BHC and must use that GSIB surcharge for purposes of determining its maximum payout ratio under Table 1 to § 217.11 beginning on January 1 of the year that is immediately following the full calendar year after it is identified as a global systemically important BHC.
(c) Reservation of authority. (1) The Board may apply this subpart to any Board-regulated institution, in whole or in part, by order of the Board based on the institution's capital structure, size, level of complexity, risk profile, scope of operations, or financial condition.
(2) The Board may adjust the amount of the GSIB surcharge applicable to a global systemically important BHC, or extend or accelerate any compliance date of this subpart, if the Board determines that the adjustment, extension, or acceleration is appropriate in light of the capital structure, size, complexity, risk profile, and scope of operations of the global systemically important BHC. In increasing the size of the GSIB surcharge for a global systemically important BHC, the Board shall follow the notice and response procedures in 12 CFR part 263, subpart E.
§ 217.401   Definitions.
As used in this subpart:
(a) Aggregate global indicator amount means, for each systemic indicator, the aggregate measure of that indicator, which is equal to the most recent annual dollar figure published by the Board that represents the sum of systemic indicator values of:
(1) The 75 largest global banking organizations, as measured by the Basel Committee on Banking Supervision; and
(2) Any other banking organization that the Basel Committee on Banking Supervision includes in its sample total for that year.
(b) Assets under custody means assets held as a custodian on behalf of customers, as reported by the bank holding company on the FR Y-15.
(c) Average risk-weighted assets means the four-quarter average of the measure of total risk-weighted assets associated with the lower of the bank holding company's common equity tier 1 risk-based capital ratios, as reported on the bank holding company's FR Y-9C for each quarter of the previous calendar year.
(d) Brokered deposit has the meaning set forth in 12 CFR 249.3.
(e) Consolidated subsidiary has the meaning set forth in 12 CFR 249.3.
(f) Covered asset exchange means a transaction in which a bank holding company has provided assets of a given liquidity category to a counterparty in exchange for assets of a higher liquidity category, and the bank holding company and the counterparty agreed to return such assets to each other at a future date. Categories of assets, in descending order of liquidity, are level 1 liquid assets, level 2A liquid assets, level 2B liquid assets, and assets that are not HQLA. Covered asset exchanges do not include secured funding transactions.
(g) Financial sector entity has the meaning set forth in 12 CFR 249.3.
(h) GAAP means generally accepted accounting principles as used in the United States.
(i) High-quality liquid asset (HQLA) has the meaning set forth in 12 CFR 249.3.
(j) Cross-jurisdictional claims means foreign claims on an ultimate risk basis, as reported by the bank holding company on the FR Y-15.
(k) Cross-jurisdictional liabilities means total cross-jurisdictional liabilities, as reported by the bank holding company on the FR Y-15.
(l) Intra-financial system assets means total intra-financial system assets, as reported by the bank holding company on the FR Y-15.
(m) Intra-financial system liabilities means total intra-financial system liabilities, as reported by the bank holding company on the FR Y-15.
(n) Level 1 liquid asset is an asset that qualifies as a level 1 liquid asset pursuant to 12 CFR 249.20(a).
(o) Level 2A liquid asset is an asset that qualifies as a level 2A liquid asset pursuant to 12 CFR 249.20(b).
(p) Level 2B liquid asset is an asset that qualifies as a level 2B liquid asset pursuant to 12 CFR 249.20(c).
(q) Level 3 assets means assets valued using Level 3 measurement inputs, as reported by the bank holding company on the FR Y-15.
(r) Notional amount of over-the-counter (OTC) derivatives means the total notional amount of OTC derivatives, as reported by the bank holding company on the FR Y-15.
(s) Operational deposit has the meaning set forth in 12 CFR 249.3.
(t) Payments activity means payments activity, as reported by the bank holding company on the FR Y-15.
(u) Retail customer or counterparty has the meaning set forth in 12 CFR 249.3.
(v) Secured funding transaction has the meaning set forth in 12 CFR 249.3.
(w) Securities outstanding means total securities outstanding, as reported by the bank holding company on the FR Y-15.
(x) Short position means a transaction in which a bank holding company has borrowed or otherwise obtained a security from a counterparty and sold that security, and the bank holding company must return the security to the initial counterparty in the future.
(y) Systemic indicator includes the following indicators included on the FR Y-15:
(1) Total exposures;
(2) Intra-financial system assets;
(3) Intra-financial system liabilities;
(4) Securities outstanding;
(5) Payments activity;
(6) Assets under custody;
(7) Underwritten transactions in debt and equity markets;
(8) Notional amount of over-the-counter (OTC) derivatives;
(9) Trading and available-for-sale (AFS) securities;
(10) Level 3 assets;
(11) Cross-jurisdictional claims; or
(12) Cross-jurisdictional liabilities.
(z) Total exposures means total exposures as reported by the bank holding company on the FR Y-15.
(aa) Trading and AFS securities means total adjusted trading and available-for-sale securities as reported by the bank holding company on the FR Y-15.
(bb) Underwritten transactions in debt and equity markets means total underwriting activity as reported by the bank holding company on the FR Y-15.
(cc) Unsecured wholesale funding has the meaning set forth in 12 CFR 249.3.
(dd) Wholesale customer or counterparty has the meaning set forth in 12 CFR 249.3.
§ 217.402   Identification as a global systemically important BHC.
A bank holding company is a global systemically important BHC if its method 1 score, as calculated under § 217.404, equals or exceeds 130 basis points. Subject to § 217.400(b)(2), a bank holding company must calculate its method 1 score on an annual basis by December 31 of each year.
§ 217.403   GSIB surcharge.
(a) General. Subject to § 217.400(b)(2), a company identified as a global systemically important BHC pursuant to § 217.402 must calculate its GSIB surcharge on an annual basis by December 31 of each year. For any given year, subject to paragraph (d) of this section, the GSIB surcharge is equal to the greater of:
(1) The method 1 surcharge calculated in accordance with paragraph (b) of this section; and
(2) The method 2 surcharge calculated in accordance with paragraph (c) of this section.
(b) Method 1 surcharge —(1) General. The method 1 surcharge of a global systemically important BHC is the amount set forth in Table 1 of this section that corresponds to the global systemically important BHC's method 1 score, calculated pursuant to § 217.404.
Table 1 to § 217.403—Method 1 Surcharge
(2) Higher method 1 surcharges. To the extent that the method 1 score of a global systemically important BHC equals or exceeds 630 basis points, the method 1 surcharge equals the sum of:
(i) 4.5 percent; and
(ii) An additional 1.0 percent for each 100 basis points that the global systemically important BHC's score exceeds 630 basis points.
(c) Method 2 surcharge —(1) General. The method 2 surcharge of a global systemically important BHC is the amount set forth in Table 2 of this section that corresponds to the global systemically important BHC's method 2 score, calculated pursuant to § 217.405.
Table 2 to § 217.403: Method 2 Surcharge
(2) Higher method 2 surcharges. To the extent that the method 2 score of a global systemically important BHC equals or exceeds 1130 basis points, the method 2 surcharge equals the sum of:
(i) 6.5 percent; and
(ii) An additional 0.5 percent for each 100 basis points that the global systemically important BHC's score exceeds 1130 basis points.
(d) Effective date of an adjusted GSIB surcharge —(1) Increase in GSIB surcharge. An increase in the GSIB surcharge of a global systemically important BHC will take effect ( i.e., be incorporated into the maximum payout ratio under Table 1 to § 217.11) on January 1 of the year that is one full calendar year after the increased GSIB surcharge was calculated.
(2) Decrease in GSIB surcharge. A decrease in the GSIB surcharge of a global systemically important BHC will take effect ( i.e., be incorporated into the maximum payout ratio under Table 1 to § 217.11) on January 1 of the year immediately following the calendar year in which the decreased GSIB surcharge was calculated.
§ 217.404   Method 1 score.
(a) General. A bank holding company's method 1 score is the sum of its systemic indicator scores for the twelve systemic indicators set forth Table 1 of this section, as determined under paragraph (b) of this section.
(b) Systemic indicator score. (1) Except as provided in paragraph (b)(2) of this section, the systemic indicator score in basis points for a given systemic indicator is equal to:
(i) The ratio of:
(A) The amount of that systemic indicator, as reported by the bank holding company as of December 31 of the previous calendar year; to
(B) The aggregate global indicator amount for that systemic indicator published by the Board in the fourth quarter of that year;
(ii) Multiplied by 10,000; and
(iii) Multiplied by the indicator weight corresponding to the systemic indicator as set forth in Table 1 of this section.
(2) Maximum substitutability score. The sum of the systemic indicator scores for the indicators in the substitutability category (assets under custody, payments systems activity, and underwriting activity) will not exceed 100 basis points.
Table 1 to § 217.404—Systemic Indicator Weights
§ 217.405   Method 2 score.
(a) General. A global systemically important BHC's method 2 score is equal to:
(1) The sum of:
(i) The global systemically important BHC's systemic indicator scores for the nine systemic indicators set forth Table 1 of this section, as determined under paragraph (b) of this section; and
(ii) The global systemically important BHC's short-term wholesale funding score, calculated pursuant to § 217.406.
(b) Systemic indicator score. A global systemically important BHC's score for a systemic indicator is equal to:
(1) The amount of the systemic indicator, as reported by the bank holding company as of December 31 of the previous calendar year, expressed in billions of dollars;
(2) Multiplied by the coefficient corresponding to the systemic indicator set forth in Table 1 of this section.
Table 1 to § 217.405—Coefficients for Systemic Indicators
§ 217.406   Short-term wholesale funding score.
(a) General. Except as provided in § 217.400(b)(3)(ii), a global systemically important BHC's short-term wholesale funding score is equal to:
(1) The average of the global systemically important BHC's weighted short-term wholesale funding amount (defined in paragraph (b) of this section);
(2) Divided by the global systemically important BHC's average risk-weighted assets; and
(3) Multiplied by a fixed factor of 350.
(b) Weighted short-term wholesale funding amount. (1) To calculate its weighted short-term wholesale funding amount, a global systemically important BHC must calculate the amount of its short-term wholesale funding on a consolidated basis for each business day of the previous calendar year and weight the components of short-term wholesale funding in accordance with Table 1 of this section.
(2) Short-term wholesale funding includes the following components, each as defined in paragraph (c) of this section:
(i) All funds that the bank holding company must pay under each secured funding transaction, other than an operational deposit, with a remaining maturity of 1 year or less;
(ii) All funds that the bank holding company must pay under all unsecured wholesale funding, other than an operational deposit, with a remaining maturity of 1 year or less;
(iii) The fair value of an asset as determined under GAAP that a bank holding company must return under a covered asset exchange with a remaining maturity of 1 year or less;
(iv) The fair value of an asset as determined under GAAP that the bank holding company must return under a short position to the extent that the borrowed asset does not qualify as a Level 1 liquid asset or a Level 2A liquid asset; and
(v) All brokered deposits held at the bank holding company provided by a retail customer or counterparty.
(3) For purposes of calculating the short-term wholesale funding amount and the components thereof, a bank holding company must assume that each asset or transaction described in paragraph (b)(2) of this section matures in accordance with the criteria set forth in 12 CFR 249.31.
Table 1 to § 217.406—Short-Term Wholesale Funding Components and Weights
§ 217.501   The Board's Regulatory Capital Framework for Depository Institution Holding Companies Organized as Non-Stock Companies.
(a) Applicability. (1) This section applies to all depository institution holding companies that are organized as legal entities other than stock corporations and that are subject to this part (Regulation Q, 12 CFR part 217). 1
1 See 12 CFR 217.1(c)(1) through (3).
(2) Notwithstanding §§ 217.2 and 217.10, a bank holding company or covered savings and loan holding company that is organized as a legal entity other than a stock corporation and has issued capital instruments that do not qualify as common equity tier 1 capital under § 217.20 by virtue of the requirements set forth in this section may treat those capital instruments as common equity tier 1 capital until July 1, 2016.
(b) Common equity tier 1 capital criteria applied to capital instruments issued by non-stock companies. (1) Subpart C of this part provides criteria for capital instruments to qualify as common equity tier 1 capital. This section describes how certain criteria apply to capital instruments issued by bank holding companies and covered savings and loan holding companies that are organized as legal entities other than stock corporations, such as limited liability companies (LLCs) and partnerships.
(2) Holding companies are organized using a variety of legal structures, including corporate forms, LLCs, partnerships, and similar structures. 2 In the Board's experience, some depository institution holding companies that are organized in non-stock form issue multiple classes of capital instruments that allocate profit and loss from a distribution differently among classes, which may affect the ability of those classes to qualify as common equity tier 1 capital. 3
2 A stock corporation's common stock should satisfy the CET1 criteria so long as the common stock does not have unusual features, such as a limited duration.
3 Notably, voting powers or other means of exercising control are not relevant for purposes of satisfying the CET1 eligibility criteria. Thus, the fact that a particular partner or member controls a holding company, for instance, due to serving as general partner or managing member, is not material to qualification of particular interests as CET1.
(3) Common equity tier 1 capital is defined in § 217.20(b). To qualify as common equity tier 1 capital, capital instruments must satisfy a number of criteria. This section provides examples of the application of certain common equity tier 1 capital criteria that relate to the economic interests in the company represented by particular capital instruments.
(c) Examples. The following examples show how the criteria for common equity tier 1 capital apply to particular partnership or LLC structures. 4
4 Although the examples refer to specific types of legal entities for purposes of illustration, the substance of the Regulation Q criteria reflected in the examples applies to all types of legal entities.
(1) LLC with one class of membership interests. (i) An LLC issues one class of membership interests that provides that all holders of the interests bear losses and receive dividends proportionate to their levels of ownership.
(ii) Provided that the other criteria in § 217.20(b) are met, the membership interests would qualify as common equity tier 1 capital.
(2) Partnership with limited and general partners. (i) A partnership has two classes of interests: General partnership interests and limited partnership interests. The general partners and the limited partners bear losses and receive distributions allocated proportionately to their capital contributions. In addition, the general partner has unlimited liability for the debts of the partnership.
(ii) Provided that the other criteria in § 217.20(b) are met, the general and limited partnership interests would qualify as common equity tier 1 capital. The fact of unlimited liability of the general partner is not relevant in the context of the eligibility criteria of common equity tier 1 capital instruments, provided that the general partner and limited partners share losses equally to the extent of the assets of the partnership, and the general partner is liable after the assets of the partnership are exhausted. In this regard, the general partner's unlimited liability is similar to a guarantee provided by the general partner, rather than a feature of the general partnership interest.
(3) Senior and junior classes of capital instruments. (i) An LLC issues two types of membership interests, Class A and Class B. Holders of Class A and Class B interests participate equally in operating distributions and have equal voting rights. However, in liquidation, holders of Class B interests must receive the entire amount of their contributed capital in order for any distributions to be made to holders of Class A interests.
(ii) Class B interests have a preference over Class A interests in liquidation and, therefore, would not qualify as common equity tier 1 capital as the Class B interests are not the most subordinated claim (criterion (i)) and do not share losses proportionately (criterion (viii) (§ 217.20(b)(1)(i) and (viii), respectively).
(A) If all other criteria are satisfied, Class A interests would qualify as common equity tier 1 capital.
(B) Class B interests may qualify as additional tier 1 capital, or tier 2 capital, if the Class B interests meet the applicable criteria (§ 217.20(c) and (d)).
(4) LLC with two classes of membership interests. (i) An LLC issues two types of membership interests, Class A and Class B. To the extent that the LLC makes a distribution, holders of Class A and Class B interests share proportionately in any losses and receive proportionate shares of contributed capital. To the extent that a capital distribution includes an allocation of profits, holders of Class A and Class B interests share proportionately up to the point where all holders receive a specific annual rate of return on capital contributions, and, if the distribution exceeds that point, holders of Class B interests receive double their proportional share and holders of Class A interests receive the remainder of the distribution.
(ii) Class A and Class B interests would both qualify as common equity tier 1 capital, provided that under all circumstances they share losses proportionately, as measured with respect to each distribution, and that they satisfy the common equity tier 1 capital criteria. The holders of Class A and Class B interests may receive different allocations of profits with respect to a distribution, provided that the distribution is made simultaneously to all members of Class A and Class B interests. Despite the potential for disproportionate profits, Class A and Class B interests have the same level of seniority with regard to potential losses and therefore they both satisfy all the criteria in § 217.20(b), including criterion (ii) (§ 217.20(b)(1)(ii)).
(5) Alternative LLC with two classes of membership interests. (i) An LLC issues two types of membership interests, Class A and Class B. In the event that the LLC makes a distribution, holders of Class A interests bear a disproportionately low level of any losses, such that the Class B interests bear a disproportionately high level of losses at the distribution. In contrast to the example in paragraph (c)(4) of this section, the different participation rights apply to distributions in situations where losses are allocated, including losses at liquidation.
(ii) Because holders of the Class A interests do not bear a proportional interest in the losses (criterion (ii) (§ 217.20(b)(1)(ii)), the Class A interests would not qualify as common equity tier 1 capital.
(A) Companies with such structures may revise their capital structures in order to provide for a sufficiently large class of capital instruments that proportionally bear first losses in liquidation (that is, the Class B interests in this example).
(B) Alternatively, companies with such structures could revise their capital structure to ensure that all classes of capital instruments that are intended to qualify as common equity tier 1 capital share equally in losses in liquidation consistent with criteria (i), (ii), (vii), and (viii) in § 217.20(b)(1)(i), (ii), (vii), respectively, even if each class of capital instruments has different rights to allocations of profits, as in paragraph (c)(4) of this section.
(6) Mandatory distributions. (i) A partnership agreement contains provisions that require distributions to holders of one or more classes of capital instruments on the occurrence of particular events, such as upon specific dates or following a significant sale of assets, but not including any final distributions in liquidation.
(ii) Any class of capital instruments that provides holders with rights to mandatory distributions would not qualify as common equity tier 1 capital because a holding company must have full discretion at all times to refrain from paying any dividends and making any other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of any other restriction on the holding company (criterion (vi) in § 217.20(b)(1)(vi)). Companies must ensure that they have a sufficient amount of capital instruments that do not have such rights and that meet the other criteria of common equity tier 1 capital, in order to meet the requirements of Regulation Q.
(7) Features that Reallocate Prior Distributions. (i) An LLC issues two types of membership interests, Class A and Class B. The terms of the LLC's membership interests provide that, under certain circumstances, holders of Class A interests must return a portion of earlier distributions, which are then distributed to holders of Class B interests (sometimes called a “clawback”).
(ii) If the reallocation of prior distributions described in paragraph (c)(7)(i) of this section could result in holders of the Class B interests bearing fewer losses on an aggregate basis than Class A interests, the Class B interests would not qualify as common equity tier 1 capital. However, where the membership interests provide for disproportionate allocation of profits, such as described in the example in paragraph (c)(4) of this section, and the reallocation of prior distributions would be limited to reversing the disproportionate portions of prior distributions, both the Class A and Class B interests could qualify as common equity tier 1 capital provided that they met all the other criteria in § 217.20(b).
§ 217.502   Application of the Board's Regulatory Capital Framework to Employee Stock Ownership Plans that are Depository Institution Holding Companies and Certain Trusts that are Savings and Loan Holding Companies.
(a) Employee Stock Ownership Plans. Notwithstanding § 217.1(c), a bank holding company or covered savings and loan holding company that is an employee stock ownership plan is exempt from this part until the Board adopts regulations that directly relate to the application of capital regulations to employee stock ownership plans.
(b) Personal or Family Trusts. Notwithstanding § 217.1(c), a covered savings and loan holding company is exempt from this part if it is a personal or family trust and not a business trust until the Board adopts regulations that apply capital regulations to such a covered savings and loan holding company.
§ 217.601   Purpose, applicability, and reservations of authority.
(a) Purpose. This subpart establishes a framework for assessing overall risk-based capital for Board-regulated institutions that are significantly engaged in insurance activities. The framework in this subpart is used to measure available capital resources and capital requirements across a Board-regulated institution and its subsidiaries that are subject to diverse capital frameworks, aggregate available capital resources and capital requirements and calculate a ratio that reflects the overall capital adequacy of the Board-regulated institution.
(b) Applicability. This subpart applies to every Board-regulated institution that is:
(1) A top-tier depository institution holding company that is an insurance underwriting company; or
(2) A top-tier depository institution holding company, that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in insurance underwriting companies (other than assets associated with insurance underwriting for credit risk). For purposes of this paragraph (b)(2), the Board-regulated institution must calculate its total consolidated assets in accordance with GAAP, or if the Board-regulated institution does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board; or
(3) Depository institution holding company in a supervised insurance organization; or
(4) An institution that is otherwise made subject to this subpart by the Board.
(c) Exclusion of certain depository institution holding companies. Notwithstanding paragraph (b) of this section, this subpart does not apply to a top-tier depository institution holding company that—
(1) Exclusively files financial statements in accordance with Statutory Accounting Principles (SAP);
(2) Is not subject to a state insurance capital requirement; and
(3) Has no subsidiary depository institution holding company that—
(i) Is subject to a capital requirement; or
(ii) Does not exclusively file financial statements in accordance with SAP.
(d) Reservation of authority —(1) Regulatory capital resources. (i) If the Board determines that a particular company capital element has characteristics or terms that diminish its ability to absorb losses, or otherwise present safety and soundness concerns, the Board may require the supervised insurance organization to exclude all or a portion of such element from building block available capital for a depository institution holding company in the supervised insurance organization.
(ii) Notwithstanding any provision of § 217.608, the Board may find that a capital resource may be included in the building block available capital of a depository institution holding company on a permanent or temporary basis consistent with the loss absorption capacity of the capital resource and in accordance with § 217.608(g).
(2) Required capital amounts. If the Board determines that the building block capital requirement for any depository institution holding company is not commensurate with the risks of the depository institution holding company, the Board may adjust the building block capital requirement and building block available capital for the supervised insurance organization.
(3) Structural requirements. In order to achieve the appropriate application of this subpart, the Board may require a supervised insurance organization to take any of the following actions with respect to the application of this subpart, if the Board determines that such action would better reflect the risk profile of an inventory company or the supervised insurance organization:
(i) Identify components under this subpart differently than as done by the supervised insurance organization. This could include a different identification of a top-tier depository institution holding company, an inventory company, a material financial entity, or a building block parent, then that made by the supervised insurance organization; or
(ii) Set a building block parent's allocation share of a downstream building block parent equal to 100 percent.
(4) Other reservation of authority. With respect to any treatment required under this subpart, the Board may require a different treatment, provided that such alternative treatment is commensurate with the supervised insurance organization's risk and consistent with safety and soundness.
(e) Notice and response procedures. In making any determinations under paragraph (d) of this section, the Board will apply notice and response procedures in the same manner as the notice and response procedures in § 263.202 of this chapter.
§ 217.602   Definitions.
(a) Terms that are set forth in § 217.2 and used in this subpart have the definitions assigned thereto in § 217.2.
(b) For the purposes of this subpart, the following terms are defined as follows:
Allocation share means the portion of a downstream building block's available capital or building block capital requirement that a building block parent must aggregate in calculating its own building block available capital or building block capital requirement, as applicable, and calculated in accordance with § 217.605(d).
Assignment means the process of associating an inventory company with one or more building block parents for purposes of inclusion in the building block parents' building blocks.
BBA ratio is defined in § 217.603.
Building block means a building block parent and all downstream companies and subsidiaries assigned to the building block parent.
Building block available capital has the meaning set out in § 217.608.
Building block capital requirement has the meaning set out in § 217.607.
Building block parent means the lead company of a building block whose indicated capital framework must be applied to all members of a building block for purposes of determining building block available capital and the building block capital requirement.
Capital-regulated company means a company that is—
(i) A depository institution, foreign bank, or company engaged in the business of insurance in a supervised insurance organization; and
(ii) Directly subject to a regulatory capital framework.
Common capital framework means NAIC RBC.
Company available capital means, for a company, the amount of its capital elements, net of any adjustments and deductions, as determined in accordance with the company's indicated capital framework.
Company capital element means any part, item, component, balance sheet account, instrument, or other element qualifying as regulatory capital under a company's indicated capital framework prior to any adjustments and deductions under that framework.
Company capital requirement means:
(i) For a company whose indicated capital framework is NAIC RBC, the Authorized Control Level risk-based capital requirement as set forth in NAIC RBC;
(ii) For a company whose indicated capital framework is a U.S. Federal banking capital rule, the total risk-weighted assets; and
(iii) For any other company, a risk-sensitive measure of required capital used to determine the jurisdictional intervention point applicable to that company.
Downstream building block parent means a building block parent that is a downstream company of another building block parent.
Downstream company means a company whose company capital element is directly or indirectly owned, in whole or in part, by another company in the supervised insurance organization.
Downstreamed capital means direct ownership of a downstream company's company capital element that is accretive to a downstream building block parent's building block available capital. When calculating building block available capital, the amount of the downstreamed capital is calculated as the amount, excluding any impact on taxes, of the company available capital of the building block parent of the upstream building block, if the owner were to deduct the downstreamed capital.
Financial entity means:
(i) A bank holding company; a savings and loan holding; a U.S. intermediate holding company established or designated for purposes of compliance with part 252 of this chapter;
(ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a Federal credit union or state credit union; a national association, state member bank, or state nonmember bank that is not a depository institution; an institution that functions solely in a trust or fiduciary capacity; an industrial loan company, an industrial bank, or other similar institution;
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity's direct sales of goods or services to customers; or
(B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler's check issuer;
(iv) Any person registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act (7 U.S.C. 1 et seq. ), or an entity that is registered with the U.S. Securities and Exchange Commission as a security-based swap dealer or a major security-based swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq. );
(v) A securities holding company as defined in section 618 of the Dodd-Frank Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. ); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(vi) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C) of that Act; or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to 17 CFR 270.3a-7 (Investment Company Act Rule 3a-7 of the U.S. Securities and Exchange Commission);
(vii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act (7 U.S.C. 1a(28));
(viii) An entity that is organized as an insurance company, primarily engaged in underwriting insurance or reinsuring risks underwritten by insurance companies;
(ix) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Act (12 U.S.C. 5462); and
(x) An entity that would be a financial entity described in paragraphs (i) through (ix) of this definition, if it were organized under the laws of the United States or any State thereof.
Indicated capital framework is defined in § 217.605, provided that for purposes of § 217.605(b)(2), the NAIC RBC frameworks for life insurance and fraternal insurers, property and casualty (P&C) insurance, and health insurance companies are different indicated capital frameworks.
Inventory company means a company identified pursuant to § 217.605(b)(1).
Material means, for a company in the supervised insurance organization:
(i) Where the top-tier depository institution holding company's total exposure to the company exceeds 5 percent of the maximum of—
(A) Top-tier depository institution holding company's company available capital; and
(B) The largest company available capital of all capital regulated companies reported in the supervised insurance organization's inventory; or
(ii) The company is otherwise significant when assessing the building block available capital or building block capital requirement of the top-tier depository institution holding company based on factors including risk exposure, activities, organizational structure, complexity, affiliate guarantees or recourse rights, and size.
(iii) For purposes of this definition, total exposure includes:
(A) The absolute value of the top-tier depository institution holding company's direct or indirect interest in the company capital elements of the company;
(B) The maximum possible loss from a guarantee (explicit or implicit) the top-tier depository institution holding company or any other company in the supervised insurance organization provides for the benefit of the company; and
(C) Maximum potential counterparty credit risk to the top-tier depository institution holding company or any other company in the supervised insurance organization arising from any derivative or similar instrument, reinsurance or similar arrangement, or other contractual agreement.
Material financial entity means a financial entity that, together with its subsidiaries, but excluding any subsidiary capital-regulated company (or subsidiary thereof), is material, provided that an inventory company is not eligible to be a material financial entity if:
(i) The supervised insurance organization has elected pursuant to § 217.605(c) not to treat the company as a material financial entity; or
(ii) The inventory company is a financial subsidiary, as defined in section 121 of the Gramm-Leach-Bliley Act.
Member means, with respect to a building block, the building block parent or any of its downstream companies or subsidiaries that have been assigned to a building block.
NAIC means the National Association of Insurance Commissioners.
NAIC RBC means the most recent version of the Risk-Based Capital (RBC) For Insurers Model Act, together with the RBC instructions, as adopted in a substantially similar manner by an NAIC member and published in the NAIC's Model Regulation Service.
Permitted accounting practice means an accounting practice, specifically requested by a state-regulated insurer, that departs from SAP and state prescribed accounting practices and has been approved by the state-regulated insurer's domiciliary state regulatory authority.
Prescribed accounting practice means an accounting practice that is incorporated directly or by reference to state laws, regulations, and general administrative rules applicable to all insurance companies domiciled in a particular state.
Principles based reserving (PBR) means the valuation standard adopted for certain life insurance reserves by the NAIC effective as of January 1, 2020.
Recalculated building block capital requirement means, for a downstream building block parent and an upstream building block parent, the downstream building block parent's building block capital requirement recalculated assuming that the downstream building block parent had no upstream investment in the upstream building block parent.
Regulatory capital framework means, with respect to a company, the applicable legal requirements, excluding this subpart, specifying the minimum amount of total regulatory capital the company must hold to avoid restrictions on distributions and discretionary bonus payments, regulatory intervention on the basis of capital adequacy levels for the company, or equivalent standards; provided that the NAIC RBC frameworks for life and fraternal insurance, P&C insurance, and health insurance companies are different regulatory capital frameworks.
SAP means Statutory Accounting Principles as promulgated by the NAIC and adopted by a jurisdiction for purposes of financial reporting by insurance companies.
Scalar compatible means a capital framework:
(i) For which the Board has determined scalars; or
(ii) That is an insurance capital regulatory framework, and exhibits each of the following three attributes:
(A) The framework is clearly defined and broadly applicable;
(B) The framework has an identifiable regulatory intervention point that can be used to calibrate a scalar; and
(C) The framework provides a risk-sensitive measure of required capital reflecting material risks to a company's financial strength.
Scaling means the translation of building block available capital and building block capital requirement from one indicated capital framework to another by application of § 217.606.
Submission date means the date as of which form FR Q-1 is filed with the Board.
Supervised insurance organization means:
(i) In the case of a depository institution holding company, the set of companies consisting of:
(A) A top-tier depository institution holding company that is an insurance underwriting company, together with its inventory companies; or
(B) A top-tier depository institution holding company, together with its inventory companies, that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in insurance underwriting companies (other than assets associated with insurance underwriting for credit risk). For purposes of this paragraph (i)(B), the supervised firm must calculate its total consolidated assets in accordance with GAAP, or if the firm does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board; or
(ii) An institution that is otherwise subject to this subpart, as determined by the Board, together with its inventory companies.
Tier 2 capital instruments has the meaning set out in § 217.608(a).
Top-tier depository institution holding company means a depository institution holding company that is not controlled by another depository institution holding company.
Upstream building block parent means an upstream company that is a building block parent.
Upstream company means a company within a supervised insurance organization that directly or indirectly controls a downstream company, or directly or indirectly owns part or all of a downstream company's company capital elements.
Upstream investment means any direct or indirect investment by a downstream building block parent in an upstream building block parent. When calculating adjusted downstream building block available capital, the amount of the upstream investment is calculated as the impact, excluding any impact on taxes, on the downstream building block parent's building block available capital if the owner were to deduct the investment.
U.S. Federal banking capital rules mean this part, other than this subpart, and the regulatory capital rules promulgated by the Federal Deposit Insurance Corporation at chapter III of this title and the Office of the Comptroller of the Currency at chapter I of this title.
§ 217.603   BBA ratio and minimum requirements.
(a) In general. A supervised insurance organization must determine its BBA ratio, subject to the minimum requirement set out in this section and buffer set out in § 217.604, for each depository institution holding company within its enterprise by:
(1) Establishing an inventory that includes the supervised insurance organization and every company that meets the requirements of § 217.605(b)(1);
(2) Identifying all building block parents as required under § 217.605(b)(3);
(3) Determining the available capital and capital requirement for each building block parent in accordance with its indicated capital framework;
(4) Determining the building block available capital and building block capital requirement for each building block, reflecting adjustments and scaling as set out in this subpart;
(5) Rolling up building block available capital and building block capital requirement amounts across all building blocks in the supervised insurance organization's enterprise to determine the same for any depository institution holding companies in the enterprise; and
(6) Determining the ratio of building block available capital to building block capital requirement for each depository institution holding company in the supervised insurance organization.
(b) Determination of BBA ratio. For a depository institution holding company in a supervised insurance organization, the BBA ratio is the ratio of the company's building block available capital to the company's building block capital requirement, each scaled to the common capital framework in accordance with § 217.606.
(c) Minimum capital requirement. A depository institution holding company in a supervised insurance organization must maintain a BBA ratio of at least 250 percent.
(d) Capital adequacy. (1) Notwithstanding the minimum requirement in this subpart, a depository institution holding company in a supervised insurance organization must maintain capital commensurate with the level and nature of all risks to which it is exposed. The supervisory evaluation of the depository institution holding company's capital adequacy is based on an individual assessment of numerous factors, including the character and condition of the company's assets and its existing and prospective liabilities and other corporate responsibilities.
(2) A depository institution holding company in a supervised insurance organization must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital.
§ 217.604   Capital conservation buffer.
(a) Capital conservation buffer —(1) Composition of the capital conservation buffer. The capital conservation buffer is composed solely of building block available capital excluding tier 2 capital instruments and additional tier 1 capital instruments.
(2) Definitions. For purposes of this section, the following definitions apply:
(i) Distribution means:
(A) A reduction of tier 1 capital through the repurchase of a tier 1 capital instrument or by other means, except when a Board-regulated institution, within the same quarter when the repurchase is announced, fully replaces a tier 1 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for:
( 1 ) A common equity tier 1 capital instrument if the instrument being repurchased was part of the Board-regulated institution's common equity tier 1 capital; or
( 2 ) A common equity tier 1 or additional tier 1 capital instrument if the instrument being repurchased was part of the Board-regulated institution's tier 1 capital;
(B) A reduction of tier 2 capital through the repurchase, or redemption prior to maturity, of a tier 2 capital instrument or by other means, except when a Board-regulated institution, within the same quarter when the repurchase or redemption is announced, fully replaces a tier 2 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for a tier 1 or tier 2 capital instrument;
(C) A dividend declaration or payment on any tier 1 capital instrument;
(D) A dividend declaration or interest payment on any tier 2 capital instrument if the Board-regulated institution has full discretion to permanently or temporarily suspend such payments without triggering an event of default;
(E) A discretionary dividend payment on participating insurance policies; or
(F) Any similar transaction that the Board determines to be in substance a distribution of capital.
(ii) Eligible retained income means, for a depository institution holding company in a supervised insurance organization, the annual change in the company's building block available capital, calculated as of the last day of the current and immediately preceding calendar years based on the supervised insurance organization's most recent form FR Q-1, net of any distributions and accretion to building block available capital from capital instruments issued in the current or immediately preceding calendar year, excluding issuances corresponding with retirement of capital instruments under paragraph (a)(2)(i)(A) of this section.
(iii) Maximum payout amount means, for the current calendar year, is equal to the Board-regulated institution's eligible retained income, multiplied by its maximum payout ratio.
(iv) Maximum payout ratio means the percentage of eligible retained income that a Board-regulated institution can pay out in the form of distributions and discretionary bonus payments during the current calendar year. The maximum payout ratio is determined by the Board-regulated institution's capital conservation buffer, calculated as of the last day of the previous calendar year, as set forth in table 1 to this section.
(3) C alculation of capital conservation buffer. The capital conservation buffer for a depository institution holding company in a supervised insurance organization is the greater of its BBA ratio, calculated as of the last day of the previous calendar year based on the supervised insurance organization's most recent form FR Q-1, minus the minimum capital requirement under § 217.603(c), and zero.
(4) Limits on distributions and discretionary bonus payments. (i) A top-tier depository institution holding company in a supervised insurance organization shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar year that, in the aggregate, exceed its maximum payout amount.
(ii) A top-tier depository institution holding company in a supervised insurance organization and that has a capital conservation buffer that is greater than 150 percent is not subject to a maximum payout amount under this section.
(iii) Except as provided in paragraph (a)(4)(iv) of this section, a top-tier depository institution holding company in a supervised insurance organization may not make distributions or discretionary bonus payments during the current calendar year if the Board-regulated institution's:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 150 percent as of the end of the previous calendar year.
(iv) Notwithstanding the limitations in paragraphs (a)(4)(i) through (iii) of this section, the Board may permit a top-tier depository institution holding company in a supervised insurance organization to make a distribution or discretionary bonus payment upon a request of the depository institution holding company, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the depository institution holding company. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request.
(b) [Reserved]
Table 1 to § 217.604—Calculation of Maximum Payout Amount
§ 217.605   Determination of building blocks.
(a) In general. A supervised insurance organization must identify each building block parent and its allocation share of any downstream building block parent, as applicable.
(b) Operation. To identify building block parents and determine allocation shares, a supervised insurance organization must take the following steps in the following order:
(1) Inventory of companies. A supervised insurance organization must identify as inventory companies:
(i) All companies that are—
(A) Required to be reported on the FR Y-6;
(B) Required to be reported on the FR Y-10; or
(C) Classified as affiliates in accordance with NAIC Statement of Statutory Accounting Principles (SSAP) No. 25 and Schedule Y;
(ii) Any company, special purpose entity, variable interest entity, or similar entity that:
(A) Enters into one or more reinsurance or derivative transactions with inventory companies identified pursuant to paragraph (b)(1)(i) of this section;
(B) Is material;
(C) Is engaged in activities such that one or more inventory companies identified pursuant to paragraph (b)(1)(i) of this section are expected to absorb more than 50 percent of its expected losses; and
(D) Is not otherwise identified as an inventory company; and
(iii) Any other company that the Board determines must be identified as an inventory company.
(2) Determination of indicated capital framework. (i) A supervised insurance organization must:
(A) Determine the indicated capital framework for each inventory company; and
(B) Identify inventory companies that are subject to a regulatory capital framework.
(ii) The indicated capital framework for an inventory company is:
(A) If the inventory company is not engaged in insurance or reinsurance underwriting, the U.S. Federal banking capital rules, in particular:
( 1 ) If the inventory company is not a depository institution, subparts A through F of this part; and
( 2 ) If the inventory company is a depository institution, the regulatory capital framework applied to the depository institution by the appropriate primary Federal regulator—that is, subparts A through F of this part (Board), part 3 of this title (Office of the Comptroller of the Currency), or part 324 of this title (Federal Deposit Insurance Corporation), as applicable;
(B) If the inventory company is engaged in insurance or reinsurance underwriting and subject to a regulatory capital framework that is scalar compatible, the regulatory capital framework; and
(C) If the inventory company is engaged in insurance or reinsurance underwriting and not subject to a regulatory capital framework that is scalar compatible, then NAIC RBC for life and fraternal insurers, health insurers, or property & casualty insurers based on the company's primary source of premium revenue.
(3) Identification of building block parents. A supervised insurance organization must identify all building block parents according to the following procedure:
(i)(A) Identify all top-tier depository institution holding companies in the supervised insurance organization.
(B) Any top-tier depository institution holding company is a building block parent.
(ii)(A) Identify any inventory company that is a depository institution holding company.
(B) An inventory company identified in paragraph (b)(3)(ii)(A) of this section is a building block parent.
(iii) Identify all inventory companies that are capital-regulated companies (that is, inventory companies that are subject to a regulatory capital framework) or material financial entities.
(iv)(A) Of the inventory companies identified in paragraph (b)(3)(iii) of this section, identify any inventory company that:
( 1 ) Is assigned an indicated capital framework that is different from the indicated capital framework of any next upstream inventory company identified in paragraphs (b)(3)(i) through (iii) of this section or does not have a next upstream inventory company; and
( i ) In a simple structure, an inventory company would compare its indicated capital framework to the indicated capital framework of its parent company. However, if the parent company does not meet the criteria to be identified as a building block parent, the inventory company must compare its capital framework to the next upstream company that is eligible to be identified as a building block parent. For purposes of this paragraph (b)(3)(iv), a company is “next upstream” to a downstream company if it controls or owns, in whole or in part, a company capital element of the downstream company either directly, or indirectly other than through a company identified in paragraphs (b)(3)(ii) and (iii) of this section.
( ii ) [Reserved]
( 2 ) Is assigned an indicated capital framework for which the Board has determined a scalar or, if the company in aggregate with all other companies subject to the same indicated capital framework are material, a provisional scalar;
(B) Of the inventory companies identified in paragraph (b)(3)(iii) of this section, identify any inventory company that:
( 1 ) Is assigned an indicated capital framework that is the same as the indicated capital framework of each next upstream inventory company identified in paragraphs (b)(3)(i) through (iii) of this section;
( 2 ) Is assigned an indicated capital framework for which the Board has determined a scalar or, if the company in aggregate with all other companies subject to the same indicated capital framework is material, a provisional scalar; and
( 3 ) Is owned, in whole or part, by an inventory company that is subject to the same regulatory capital framework, and the owner:
( i ) Applies a charge on the inventory company's equity value in calculating its company capital requirement; or
( ii ) Deducts all or a portion of its investment in the inventory company in calculating its company available capital.
(C) An inventory company identified in paragraph (b)(3)(iv)(A) through (B) of this section is a building block parent.
(v) Include any inventory company identified in paragraph (b)(1)(ii) of this section as a building block parent.
(vi)(A) Identify any inventory company—
( 1 ) For which more than one building block parent, as identified pursuant to paragraphs (b)(3)(i) through (v) of this section, owns a company capital element either directly or indirectly other than through another such building block parent; and
( 2 )( i ) Is consolidated under any such building block parent's indicated capital framework; or
( ii ) Owns downstreamed capital.
(B) An inventory company identified in paragraph (b)(3)(vi)(A) of this section is a building block parent.
(4) Building blocks. (i) Except as provided in paragraph (b)(4)(ii) of this section, a supervised insurance organization must assign an inventory company to the building block of any building block parent that owns a company capital element of the inventory company, or of which the inventory company is a subsidiary, directly or indirectly through any company other than a building block parent, unless the inventory company is a building block parent.
(A) For purposes of this section, subsidiary includes a company that is required to be reported on the FR Y-6, FR Y-10, or NAIC's Schedule Y, as applicable.
(B) [Reserved]
(ii) A supervised insurance organization is not required to assign to a building block any inventory company that is not a downstream company or subsidiary of a top-tier depository institution holding company.
(5) Financial statements. The supervised insurance organization must:
(i) For any inventory company whose indicated capital framework is NAIC RBC, prepare financial statements in accordance with SAP; and
(ii) For any building block parent whose indicated capital framework is subparts A through F of this part:
(A) Apply the same elections and treatment of exposures as are applied to the subsidiary depository institution;
(B) Apply subparts A through F of this part, to the members of the building block of which the building block parent is a member, on a consolidated basis, to the same extent as if the building block parent were a Board-regulated institution; and
(C) Where the building block parent is not the top-tier depository institution holding company, not deduct investments in capital of unconsolidated financial institutions, nor exclude these investments from the calculation of risk-weighted assets.
(6) Allocation share. A supervised insurance organization must, for each building block parent, identify any downstream building block parent owned directly or indirectly through any company other than a building block parent, and determine the building block parent's allocation share of these downstream building block parents pursuant to paragraph (d) of this section.
(c) Material financial entity election. (1) A supervised insurance organization may elect not to treat an inventory company meeting the criteria in paragraph (c)(2) of this section as a material financial entity. An election under this paragraph (c)(1) must be included with the first financial statements submitted to the Board after the company is included in the supervised insurance organization's inventory.
(2) The election in paragraph (c)(1) of this section is available to an inventory company if:
(i) The company engages in transactions consisting solely of either—
(A) Transactions for the purpose of transferring risk from one or more affiliates within the supervised insurance organization to one or more third parties; or
(B) Transactions to invest assets contributed to the company by one or more affiliates within the supervised insurance organization, where the company is established for purposes of limiting tax obligation or legal liability; and
(ii) The supervised insurance organization is able to calculate the adjustment required in § 217.607(b)(4).
(d) Allocation share. (1) Except as provided in paragraph (d)(2) of this section, a building block parent's allocation share of a downstream building block parent is calculated as the percentage of equity ownership of a downstream building block parent, including associated paid-in capital, held by an upstream building block parent directly or indirectly through a member of the upstream building block parent's building block.
(2) The top-tier depository institution holding company's allocation share of a building block parent that has no outstanding common equity or that is identified under paragraph (b)(3)(v) of this section is 100 percent. Any other building block parent's allocation share of such building block parent is zero.
§ 217.606   Scaling parameters.
(a) Scaling specified by the Board —(1) Scaling between the U.S. Federal banking capital rules and NAIC RBC —(i) Scaling capital requirement. When calculating the building block capital requirement for a building block parent in accordance with § 217.607, where the indicated capital framework is NAIC RBC or the U.S. Federal banking capital rules, and where the indicated capital framework of the appropriate downstream building block parent is NAIC RBC or the U.S. Federal banking capital rules, the capital requirement scaling modifier is provided by table 1 to this paragraph (a)(1)(i).
Table 1 to Paragraph (a)(1)(i) —Capital Requirement Scaling Modifiers for NAIC RBC and the U.S. Federal Banking Capital Rules
(ii) Scaling available capital. When calculating the building block available capital for a building block parent in accordance with § 217.608, where the indicated capital framework is NAIC RBC or the U.S. Federal banking capital rules, and where the indicated capital framework of the appropriate downstream building block parent is NAIC RBC or the U.S. Federal banking capital rules, the available capital scaling modifier is provided by table 2 to this paragraph (a)(1)(ii).
Table 2 to Paragraph (a)(1)(ii) —Available Capital Scaling Modifiers for NAIC RBC and the U.S. Federal Banking Capital Rules
(2) Scaling to determine BBA ratio. For purposes of determining the BBA ratio under § 217.603(b)—
(i) A depository institution holding company for which the indicated capital framework is the U.S. Federal banking capital rules scales its building block available capital and building block capital requirement the common capital framework by using the methods described in paragraphs (a)(1) of this section. For purposes of scaling under this paragraph (a)(2)(i), the downstream building block parent's indicated capital framework is the U.S. Federal banking capital rules and the upstream building block parent's indicated capital framework is NAIC RBC; and
(ii) A depository institution holding company for which the indicated capital framework is NAIC RBC does not scale its building block available capital or building block capital requirement.
(b) Scaling not specified by the Board but framework is scalar compatible. Where a scaling modifier to be used in § 217.607 or § 217.608 is not specified in paragraph (a) of this section, and the building block parent's indicated capital framework ( i.e., jurisdictional capital framework) is scalar compatible, a building block parent determines the scaling modifier as follows:
(1) Definitions. For purposes of this section, the following definitions apply:
(i) Jurisdictional intervention point. The jurisdictional intervention point is the capital level, under the laws of the jurisdiction for its domestic insurers, at which the supervisory authority in the jurisdiction may intervene as to a company subject its capital framework by imposing restrictions on distributions and discretionary bonus payments by the company or, if no such intervention may occur in a jurisdiction, then the capital level at which the supervisory authority would first have the authority to take action against a company based on its capital level.
(ii) Jurisdiction adjustment. The jurisdictional adjustment is the risk adjustment set forth in table 3 to this paragraph (b)(1)(ii), based on the country risk classification set by the Organization for Economic Cooperation and Development (OECD) for the jurisdiction. This adjustment is applied to the jurisdictional intervention point.
Table 3 to Paragraph ( b )(1)( ii )—Jurisdictional Adjustments by OECD Country Risk Classification
(2) Scaling capital requirement. When calculating the building block capital requirement for a building block parent in accordance with § 217.607, where the indicated capital framework of the appropriate downstream building block parent is a scalar-compatible framework for which the Board has not specified a capital requirement scaling modifier, the capital requirement scaling modifier is calculated according to the following formula:
(3) Scaling available capital. When calculating the building block available capital for a building block parent in accordance with § 217.608, where the indicated capital framework of the appropriate downstream building block parent is a scalar-compatible framework for which the Board has not specified an available capital scaling modifier, the available capital scaling modifier is equal to zero.
§ 217.607   Capital requirements under the Building Block Approach.
(a) Determination of building block capital requirement. For each building block parent, building block capital requirement means the sum of the items in paragraphs (a)(1) and (2) of this section:
(1) The company capital requirement of the building block parent; that is:
(i) Recalculated under the assumption that members of the building block parent's building block had no investment in any downstream building block parent; and is:
(ii) Adjusted pursuant to paragraph (b) of this section;
(2) For each downstream building block parent, the adjusted downstream building block capital requirement ( BBCR ADJ ), which is calculated according to the following formula:
(b) Adjustments in determining the building block capital requirement. A supervised insurance organization must adjust the company capital requirement for any building block parent as follows:
(1) Internal credit risk charges. A supervised insurance organization must deduct from the building block parent's company capital requirement any difference between:
(i) The building block parent's company capital requirement; and
(ii) The building block parent's company capital requirement recalculated excluding capital requirements related to potential for the possibility of default of any company in the supervised insurance organization.
(2) Permitted accounting practices and prescribed accounting practices. A supervised insurance organization must adjust the building block parent's company capital requirement by any difference between:
The adjustment can be either positive or negative depending on the permitted or prescribed practices. In most cases, the reversal of the permitted or prescribed practice would result in an increase in the building block parent's company required capital. In rare cases, a permitted or prescribed practice could increase the insurers required capital. In this instance, this adjustment would reduce the building block parent's company required capital.
(i) The building block parent's company capital requirement, after making any adjustment in accordance with paragraph (b)(1) of this section; and
(ii) The building block parent's company capital requirement, after making any adjustment in accordance with paragraph (b)(1) of this section, recalculated under the assumption that neither the building block parent, nor any company that is a member of that building block parent's building block, had prepared its financial statements with the application of any permitted accounting practice, prescribed accounting practice, or other practice, including legal, regulatory, or accounting procedures or standards, that departs from a solvency framework as promulgated for application in a jurisdiction.
(3) Risks of certain intermediary entities. Where a supervised insurance organization has made an election with respect to a company not to treat that company as a material financial entity pursuant to § 217.605(c), the supervised insurance organization must add to the company capital requirement of any building block parent, whose building block contains a member, with which the company engages in one or more transactions, and for which the company engages in one or more transactions described in § 217.605(c)(2) with a third party, any difference between:
(i) The building block parent's company capital requirement; and
(ii) The building block parent's company capital requirement recalculated taking into account the risks of the company, excluding internal credit risks described in paragraph (b)(1) of this section, allocated to the building block parent, reflecting the transaction(s) that the company engages in with any member of the building block parent's building block. Note, the total allocation of the risks of the intermediary entity to building block parents must capture all material risks and avoid double counting.
(4) Investments in own capital instruments —(i) In general. A supervised insurance organization must deduct from the building block parent's company capital requirement any difference between:
(A) The building block parent's company capital requirement; and
(B) The building block parent's company capital requirement recalculated after assuming that neither the building block parent, nor any company that is a member of the building block parent's building block, held any investment in the building block parent's own capital instrument(s), including any net long position determined in accordance with paragraph (b)(5)(ii) of this section.
(ii) Net long position. For purposes of calculating an investment in a building block parent's own capital instrument under this section, the net long position is determined in accordance with § 217.22(h), provided that a separate account asset or associated guarantee is not regarded as an indirect exposure unless the net long position of the fund underlying the separate account asset (determined in accordance with § 217.22(h) without regard to this paragraph (b)(4)(ii)) equals or exceeds 5 percent of the value of the fund.
(5) Risks relating to title insurance. A supervised insurance organization must add to the building block parent's company capital requirement the amount of the building block parent's reserves for claims pertaining to title insurance, multiplied by 300 percent.
§ 217.608   Available capital resources under the Building Block Approach.
(a) Qualifying capital instruments —(1) General criteria. A qualifying capital instrument with respect to a building block parent is a capital instrument that meets the following criteria:
(i) The instrument is issued and paid-in;
(ii) The instrument is subordinated to depositors and general creditors of the building block parent;
(iii) The instrument is not secured, not covered by a guarantee of the building block parent or of an affiliate of the building block parent, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument in relation to more senior claims;
(iv) The instrument has a minimum original maturity of at least five years. At the beginning of each of the last five years of the life of the instrument, the amount that is eligible to be included in building block available capital is reduced by 20 percent of the original amount of the instrument (net of redemptions), and is excluded from building block available capital when the remaining maturity is less than one year. In addition, the instrument must not have any terms or features that require, or create significant incentives for, the building block parent to redeem the instrument prior to maturity; and
A building block parent may replace qualifying capital instruments concurrent with the redemption of existing qualifying capital instruments.
(v) The instrument, by its terms, may be called by the building block parent only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called sooner upon the occurrence of an event that would preclude the instrument from being included in the building block parent's company available capital or building block available capital, a tax event, or if the issuing entity is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. ). In addition:
(A) The top-tier depository institution holding company must receive the prior approval of the Board to exercise a call option on the instrument.
(B) The building block parent does not create at issuance, through action or communication, an expectation the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter, the top-tier depository institution holding company must either: replace any amount called with an equivalent amount of an instrument that meets the criteria for qualifying capital instruments under this section; or demonstrate to the satisfaction of the Board that following redemption, the top-tier depository institution holding company would continue to hold an amount of capital that is commensurate with its risk.
A building block parent may replace qualifying capital instruments concurrent with the redemption of existing qualifying capital instruments.
(vi) Redemption of the instrument prior to maturity or repurchase requires the prior approval of the Board.
(vii) The instrument meets the criteria in § 217.20(d)(1)(vi) through (ix) and (xi), except that each instance of “Board-regulated institution” is replaced with “building block parent” and, in § 217.20(d)(1)(ix), “tier 2 capital instruments” is replaced with “qualifying capital instruments”.
(2) Additional tier 1 capital instruments. Additional tier 1 capital instruments of a top-tier depository institution holding company are instruments issued by any inventory company that are qualifying capital instruments under paragraph (a)(1) of this section and meet all of the following criteria:
For purposes of this paragraph (a)(2), the supervised insurance organization evaluates the criteria in paragraph (a)(1) of this section with regard to the building block in which the issuing inventory company is a member.
(i) The instrument is subordinated to depositors, general creditors, and subordinated debt holders of the building block parent in a receivership, insolvency, liquidation, or similar proceeding;
(ii) The instrument is not secured, not covered by a guarantee of the building block parent or of an affiliate of the building block parent, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) The instrument has no maturity date and does not contain a dividend step-up or any other term or feature that creates an incentive to redeem; and
(iv) If callable by its terms, the instrument may be called only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called earlier than five years upon the occurrence of a regulatory event that precludes the instrument from being included in the building block parent's company available capital or building block available capital, a tax event, or if the issuing entity is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. ). In addition:
(A) The top-tier depository institution holding company must receive the prior approval of the Board to exercise a call option on the instrument.
(B) The building block parent does not create at issuance, through action or communication, an expectation that the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter, the top-tier depository institution holding company must either: replace any amount called with an equivalent amount of an instrument that meets the criteria for additional tier 1 capital instruments or common equity tier 1 instruments under this section; or demonstrate to the satisfaction of the Board that following redemption, the top-tier depository institution holding company would continue to hold an amount of capital that is commensurate with its risk.
A building block parent may replace qualifying capital instruments concurrent with the redemption of existing qualifying capital instruments.
(v) Redemption or repurchase of the instrument requires prior approval of the Board.
(vi) The paid-in amount would be classified as equity under GAAP.
(vii) The instrument meets the criteria in § 217.20(c)(1)(vii) through (ix) and (xi) through (xiv), except that each instance of “Board-regulated institution” is replaced with “building block parent”.
(3) Common equity tier 1 capital instruments. Common equity tier 1 capital instruments of a top-tier depository institution holding company are instruments issued by any inventory company that are qualifying capital instruments under paragraph (a)(1) of this section and that meet all of the following criteria:
For purposes of this paragraph (a)(3), the supervised insurance organization evaluates the criteria in paragraph (a)(1) of this section with regard to the building block in which the issuing inventory company is a member.
(i) The holders of the instrument bear losses, as they occur, equally, proportionately, and simultaneously with the holders of all other qualifying capital instruments (other than additional tier 1 capital instruments or tier 2 capital instruments) before any losses are borne by holders of claims on the building block parent any with greater priority in a receivership, insolvency, liquidation, or similar proceeding.
(ii) The paid-in amount would be classified as equity under GAAP.
(iii) The instrument meets the criteria in § 217.20(b)(1)(i) through (vii) and (x) through (xiii).
(4) Tier 2 capital instruments. Tier 2 capital instruments of a top-tier depository institution holding company are instruments issued by any inventory company that are qualifying capital instruments under paragraph (a)(1) of this section and are not additional tier 1 capital instruments or common equity tier 1 capital instruments.
(b) Determination of building block available capital —(1) In general. For each building block parent, building block available capital means the sum of the items described in paragraphs (b)(1)(i) and (ii) of this section:
(i) The company available capital of the building block parent:
(A) Less the amount of downstreamed capital owned by any member of the building block parent's building block; and
(B) Adjusted pursuant to paragraph (c) of this section.
(ii) For each downstream building block parent, the adjusted downstream building block available capital ( BBAC ADJ ), which is calculated according to the following formula:
(2) Combining tiers of capital. If there is more than one tier of company available capital under a building block parent's indicated capital framework, the amounts of company available capital from all tiers are combined in calculating building block available capital in accordance with paragraph (b) of this section.
(c) Adjustments in determining building block available capital. For purposes of the calculations required in paragraph (b) of this section, a supervised insurance organization must adjust the company available capital for any building block parent as follows:
(1) Nonqualifying capital instruments. A supervised insurance organization must deduct from the building block parent's company available capital any accretion arising from any instrument issued by any company that is a member of the building block parent's building block, where the instrument is not a qualifying capital instrument.
(2) Insurance underwriting RBC. When applying the U.S. Federal banking capital rules as the indicated capital framework for a building block parent, a supervised insurance organization must add back into the building block parent's company available capital any amounts deducted pursuant to § 3.22(b)(3) of this title, § 217.22(b)(3), or § 324.22(b)(3) of this title, as applicable.
(3) Permitted accounting practices and prescribed accounting practices. A supervised insurance organization must adjust the building block parent's company available capital by any difference between:
(i) The building block parent's company available capital; and
(ii) The building block parent's company available capital recalculated under the assumption that neither the building block parent, nor any company that is a member of that building block parent's building block, had prepared its financial statements with the application of any permitted accounting practice, prescribed accounting practice, or other practice, including legal, regulatory, or accounting procedures or standards, that departs from a solvency framework as promulgated for application in a jurisdiction.
(4) Adjusting certain life insurance reserves. A supervised insurance organization must adjust the building block parent's company available capital by any difference between:
(i) The building block parent's company available capital; and
(ii) The building block parent's company available capital recalculated based on using a 40 percent factor applied to all term life insurance accounted for using an approach based on the Valuation of Life Insurance Policies Model Regulation and a 90 percent factor applied to all secondary-guaranteed universal life insurance products accounted for using Actuarial Guideline XXXVIII—The Application of the Valuation of Life Insurance Policies Model Regulation.
(5) Deduction of investments in own capital instruments —(i) In general. A supervised insurance organization must deduct from the building block parent's company available capital any investment by the building block parent in its own capital instrument(s), or any investment by any member of the building block parent's building block in capital instruments of the building block parent, including any net long position determined in accordance with paragraph (c)(5)(ii) of this section, to the extent that such investment(s) would otherwise be accretive to the building block parent's building block available capital.
(ii) Net long position. For purposes of calculating an investment in a building block parent's own capital instrument under this section, the net long position is determined in accordance with § 217.22(h), provided that a separate account asset or associated guarantee is not regarded as an indirect exposure unless the net long position of the fund underlying the separate account asset (determined in accordance with § 217.22(h) without regard to this paragraph (c)(5)(ii)) equals or exceeds 5 percent of the value of the fund.
(6) Reciprocal cross holdings in the capital of financial institutions. A supervised insurance organization must deduct from the building block parent's company available capital any investment(s) by the building block parent in the capital of unaffiliated financial institutions that it holds reciprocally, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other's capital instruments, to the extent that such investment(s) would otherwise be accretive to the building block parent's building block available capital.
(d) Limits on certain elements in building block available capital of top-tier depository institution holding companies —(1) Investment in capital of unconsolidated financial institutions. (i) A top-tier depository institution holding company must deduct from its building block available capital any accreted capital from an investment in the capital of an unconsolidated financial institution that is not an inventory company, that exceeds twenty-five percent of the amount of its building block available capital, prior to application of this adjustment, excluding tier 2 capital instruments. For purposes of this paragraph (d)(1), the amount of an investment in the capital of an unconsolidated financial institution is calculated in accordance with § 217.22(h), except that a separate account asset or associated guarantee is not an indirect exposure.
(ii) The deductions described in this paragraph (d)(1) are net of associated deferred tax liabilities in accordance with § 217.22(e).
(2) Adjustments to accretions from tier 2 capital instruments. A top-tier depository institution holding company must adjust accretions from tier 2 capital instruments in accordance with this paragraph (d)(2).
(i) A top-tier depository institution holding company must deduct any accretions from tier 2 capital instruments that, in the aggregate, exceed the greater of:
(A) 150 percent of the amount of its building block capital requirement; and
(B) The amount of instruments subject to paragraph (e) or (f) of this section that are outstanding as of the submission date; and
(ii) A top-tier depository institution holding company must increase accretions from tier 2 capital instruments by any amount deducted from accretions from additional tier 1 capital instruments by operation of paragraph (d)(3) of this section.
(3) Limitation on additional tier 1 capital instruments. A top-tier depository institution holding company must deduct any accretions from additional tier 1 capital instruments that, in the aggregate, exceed the greater of:
(i) 100 percent of the amount of its building block capital requirement; and
(ii) The amount of instruments subject to paragraph (f) of this section that are outstanding as of the submission date.
(e) Treatment of outstanding surplus notes. A surplus note issued by any company in a supervised insurance organization is deemed to meet the criteria in paragraphs (a)(1)(iii) and (vi) of this section if:
(1) The instrument was issued prior to the later of—
(i) November 1, 2019; and
(ii) The earliest date on which any depository institution holding company in the group became a depository institution holding company;
(2) The surplus note is a company capital element for the issuing company;
(3) The surplus note is not owned by an affiliate of the issuer; and
(4) The surplus note is outstanding as of the submission date.
(f) Treatment of certain callable instruments. Notwithstanding the criteria under paragraph (a)(1) of this section, an instrument with terms that provide that the instrument may be called earlier than five years upon the occurrence of a rating event does not violate the criterion in paragraph (a)(1)(v) of this section, provided that the instrument was a company capital element issued prior to January 1, 2014, and that such instrument satisfies all other criteria under paragraph (a)(1) of this section.
(g) Board approval of a capital instrument. (1) A supervised insurance organization must receive Board prior approval to include in its building block available capital for any building block an instrument (as listed in this section), issued by any company in the supervised insurance organization, unless the instrument:
(i) Was a capital element for the issuer prior to May 19, 2010, in accordance with the indicated capital framework that was effective as of that date and the underlying instrument meets the criteria to be a qualifying capital instrument (as defined in paragraph (a) of this section); or
(ii) Is equivalent, in terms of capital quality and ability to absorb losses with respect to all material terms, to a company capital element that the Board determined may be included in regulatory capital pursuant to paragraph (g)(2) of this section, or may be included in the regulatory capital of a Board-regulated institution pursuant to § 217.20(e)(3).
(2) After determining that an instrument may be included in a supervised insurance organization's regulatory capital under this subpart, the Board will make its decision publicly available, including a brief description of the material terms of the instrument and the rationale for the determination.