80 FR 75419 - Amendments to the Capital Plan and Stress Test Rules

FEDERAL RESERVE SYSTEM

Federal Register Volume 80, Issue 231 (December 2, 2015)

The Board is adopting a final rule that makes targeted amendments to its capital plan and stress test rules. For bank holding companies with more than $10 billion but less than $50 billion in total consolidated assets and savings and loan holding companies with total consolidated assets of more than $10 billion, the final rule modifies certain mandatory capital action assumptions in the stress test rules and delays the application of the company-run stress test requirements to savings and loan holding companies until January 1, 2017. For bank holding companies that have total consolidated assets of $50 billion or more and state member banks that are subject to the Board's advanced approaches capital requirements, the final rule delays the use of the supplementary leverage ratio for one year and indefinitely defers the use of the advanced approaches risk-based capital framework in the capital plan and stress test rules. For bank holding companies that have total consolidated assets of $50 billion or more, the final rule removes the tier 1 common capital ratio requirement, and modifies certain mandatory capital action assumptions. To reflect other recent rulemakings, the final rule also makes other amendments to the capital plan and stress test rules. All changes in the final rule apply as of January 1, 2016, which is the beginning of the next capital planning and stress test cycle.

[Federal Register Volume 80, Number 231 (Wednesday, December 2, 2015)]
[Rules and Regulations]
[Pages 75419-75426]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-30471]



========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 
Prices of new books are listed in the first FEDERAL REGISTER issue of each 
week.

========================================================================


Federal Register / Vol. 80, No. 231 / Wednesday, December 2, 2015 / 
Rules and Regulations

[[Page 75419]]



FEDERAL RESERVE SYSTEM

12 CFR Parts 225 and 252

[Regulations Y and YY; Docket No. R-1517]
RIN 7100 AE 33


Amendments to the Capital Plan and Stress Test Rules

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board is adopting a final rule that makes targeted 
amendments to its capital plan and stress test rules. For bank holding 
companies with more than $10 billion but less than $50 billion in total 
consolidated assets and savings and loan holding companies with total 
consolidated assets of more than $10 billion, the final rule modifies 
certain mandatory capital action assumptions in the stress test rules 
and delays the application of the company-run stress test requirements 
to savings and loan holding companies until January 1, 2017. For bank 
holding companies that have total consolidated assets of $50 billion or 
more and state member banks that are subject to the Board's advanced 
approaches capital requirements, the final rule delays the use of the 
supplementary leverage ratio for one year and indefinitely defers the 
use of the advanced approaches risk-based capital framework in the 
capital plan and stress test rules. For bank holding companies that 
have total consolidated assets of $50 billion or more, the final rule 
removes the tier 1 common capital ratio requirement, and modifies 
certain mandatory capital action assumptions. To reflect other recent 
rulemakings, the final rule also makes other amendments to the capital 
plan and stress test rules. All changes in the final rule apply as of 
January 1, 2016, which is the beginning of the next capital planning 
and stress test cycle.

DATES: Effective Date: January 1, 2016.

FOR FURTHER INFORMATION CONTACT: Lisa Ryu, Associate Director, (202) 
263-4833, Constance Horsley, Assistant Director, (202) 452-5239, Mona 
Touma Elliot, Manager, (202) 912-4688, Page Conkling, Senior 
Supervisory Financial Analyst, (202) 912-4647, Joseph Cox, Senior 
Financial Analyst, (202) 452-3216, Division of Banking Supervision and 
Regulation; Benjamin W. McDonough, Special Counsel, (202) 452-2036, or 
Julie Anthony, Counsel, (202) 475-6682, Legal Division, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue NW., Washington, DC 20551. Users of Telecommunication Device for 
Deaf (TDD) only, call (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

I. Background

    Capital planning and stress testing are two key components of the 
Board's supervisory framework for large financial companies.\1\ There 
are two related components of the framework: the Comprehensive Capital 
Analysis and Review (CCAR), which is conducted pursuant to the Board's 
capital plan rule (12 CFR 225.8), and stress testing, which is 
conducted pursuant to the Board's stress test rules (subparts E and F 
of Regulation YY) and section 165(i) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act).\2\ In CCAR, bank 
holding companies that have total consolidated assets of $50 billion or 
more (large bank holding companies) submit capital plans to the Board, 
and the Board assesses the internal capital planning processes and 
ability of these firms to maintain sufficient capital to continue their 
operations under expected and stressful conditions. If the Board 
objects to the capital plan of a large bank holding company, the 
company may only make capital distributions for which it has received a 
non-objection from the Board in writing.\3\
---------------------------------------------------------------------------

    \1\ The changes in this final rule will apply to any nonbank 
financial company supervised by the Board that become subject to the 
capital planning and stress test requirements. The changes also will 
apply to U.S. intermediate holding companies of foreign banking 
organizations in accordance with the transition provisions of the 
final rule adopting enhanced prudential standards for U.S. bank 
holding companies and foreign banking organizations with total 
consolidated assets of $50 billion or more. (79 FR 17240 (March 27, 
2014)). In the interest of brevity, references to ``large bank 
holding companies'' in the preamble should be read to include all of 
these companies.
    \2\ 12 U.S.C. 5365(i).
    \3\ 12 CFR 225.8(f)(2)(iv).
---------------------------------------------------------------------------

    As required under with the Dodd-Frank Act and as a complement to 
CCAR, the Board conducts annual supervisory stress tests of large bank 
holding companies, and these bank holding companies must conduct annual 
and mid-cycle company-run stress tests.\4\ In addition, bank holding 
companies that have total consolidated assets of more than $10 billion 
but less than $50 billion, savings and loan holding companies that have 
total consolidated assets of more than $10 billion, and state member 
banks that have total consolidated assets of more than $10 billion are 
all required to conduct annual company-run stress tests under the Dodd-
Frank Act.\5\
---------------------------------------------------------------------------

    \4\ See 12 U.S.C. 5365(i)(1) and 12 CFR part 252.
    \5\ 77 FR 62378 (October 12, 2012) (codified at 12 CFR part 252, 
subparts E and F). The stress test requirements apply to savings and 
loan holding companies that are subject to the minimum regulatory 
capital requirements in 12 CFR part 217. The Board has not applied 
capital requirements to savings and loan holding companies that are 
substantially engaged in commercial activities or insurance 
underwriting activities to date.
---------------------------------------------------------------------------

A. Overview of Proposed Changes

    On July 17, 2015, the Board issued a proposal to make targeted 
adjustments to the Board's capital plan and stress test rules for the 
2016 capital plan and stress test cycles.\6\ For bank holding companies 
with total consolidated assets of more than $10 billion but less than 
$50 billion and savings and loan holding companies that have total 
consolidated assets of more than $10 billion, the proposal would have 
modified certain mandatory capital action assumptions under the stress 
test rules and delayed the application of the company-run stress test 
requirements to these savings and loan holding companies until January 
1, 2017. For large bank holding companies and state member banks that 
are subject to the Board's advanced approaches capital requirements, 
the proposal would have delayed the use in capital planning and stress 
testing of the supplementary leverage ratio for one year and deferred 
the use of the advanced approaches risk-based capital framework 
indefinitely. For large bank holding companies, the proposal would have 
removed the tier 1 common capital ratio requirement; and

[[Page 75420]]

modified certain mandatory capital action assumptions under the stress 
test rules. The proposal also would have revised the capital plan and 
stress test rules to clarify the requirement that banking organizations 
take into account deductions required by 12 CFR 248.12(d) (the Volcker 
Rule) in calculating their capital ratios.
---------------------------------------------------------------------------

    \6\ 80 FR 43637 (July 23, 2015).
---------------------------------------------------------------------------

    The Board received five comments on the proposal from banking 
organizations and trade associations. Commenters generally expressed 
support for the proposal and also recommended certain additional 
changes to the capital plan and stress test framework that were not 
included in the proposal. This preamble provides a summary of comments 
received on the proposal and the Board's responses to those comments. 
With respect to the comments that fell outside of the scope of the 
targeted proposal, the Board will consider these comments if it makes 
changes to its overall capital plan and stress testing framework in the 
future.\7\
---------------------------------------------------------------------------

    \7\ See section VI of this preamble, which addresses comments 
that fell outside of the scope of the proposal.
---------------------------------------------------------------------------

    Section II of the preamble describes revisions to the stress test 
rules for bank holding companies that have total consolidated assets 
between $10 billion and $50 billion and savings and loan holding 
companies that have total consolidated assets of more than $10 billion. 
Section III of the preamble describes revisions to the capital plan and 
stress test rules for large bank holding companies and state member 
banks that are subject to the Board's advanced approaches capital 
requirements. Section IV of the preamble describes revisions to the 
capital plan and stress test rules for large bank holding companies. 
Section V of the preamble describes technical amendments to the capital 
plan and stress test rules.

B. Interaction of the Capital Plan and Stress Test Rules With the 
Regulatory Capital Rules

    The proposal stated that the Board was considering a broad range of 
issues relating to the capital plan and stress test rules, including 
how the rules interact with other elements of the regulatory capital 
rule and whether any modifications may be appropriate.\8\ The proposal 
also stated that the Board did not anticipate proposing further changes 
that would affect the 2016 capital plan and stress test cycle.
---------------------------------------------------------------------------

    \8\ 12 CFR part 217.
---------------------------------------------------------------------------

    The capital plan rule requires companies to assume that capital 
actions planned in baseline conditions will be executed throughout the 
adverse and severely adverse supervisory scenarios. While the proposal 
did not include changes to this requirement, commenters nevertheless 
provided views on it. In particular, commenters argued that this 
requirement does not reflect bank holding companies' internal capital 
management policies, and noted that the Board has supervisory authority 
to require banks to preserve capital in times of stress. In addition, 
commenters asserted that the assumption that planned capital 
distributions would be made in times of stress would be inconsistent 
with restrictions on capital distributions and certain discretionary 
bonus payments imposed by the regulatory capital rule's capital 
conservation buffer. Commenters recommended that the Board revise its 
approach to capital action assumptions before the next stress test and 
capital plan cycle in light of the phase-in of the capital conservation 
buffer. In addition, several commenters expressed the view that large 
bank holding companies' capital plans should continue to be evaluated 
with regard to only minimum regulatory capital requirements. The 
commenters stated that such firms should not be evaluated against post-
stress requirements that are increased by the amount of the capital 
conservation buffer or the risk-based capital surcharge for global 
systemically important bank holding companies (GSIB surcharge).
    In its assessment of a large bank holding company's capital plan, 
the Federal Reserve generally makes conservative assumptions to account 
for uncertainty in the timing and nature of losses that a large bank 
holding company may experience under stress. During a financial crisis, 
losses tend to occur suddenly and unpredictably. Because of this, the 
Federal Reserve requires large bank holding companies to assume that 
they continue to make capital distributions--even during a period of 
financial stress--until losses are unavoidable or realized. This 
assumption helps to ensure that a large bank holding company would 
remain sufficiently capitalized even if the timing of the losses were 
different or more sudden than those projected in the severely adverse 
scenario.
    With regard to the capital conservation buffer, the Board continues 
to assess how and to what extent, if any, to incorporate it into the 
capital plan and stress test rules. As noted, the conservative 
assumptions in the capital plan and stress test rules, such as the 
assumption that large bank holding companies will not cut dividends in 
a stress period, help to promote greater resiliency, and incorporating 
the capital conservation buffer into the rules in a mechanical manner 
could work at cross purposes with the goal of greater resiliency.

II. Revisions to Stress Test Rules for Bank Holding Companies With 
Total Consolidated Assets Between $10 Billion and $50 Billion, and 
Savings and Loan Holding Companies With Total Consolidated Assets of 
More Than $10 Billion

A. Modification of Mandatory Dividend Assumptions

    Since they were first adopted in 2012, the stress test rules have 
required bank holding companies and savings and loan holding companies 
to assume that they continue to pay dividends at their current rate and 
issue no capital (other than that related to expensed employee 
compensation) and redeem no capital instruments in the second through 
ninth quarters of the planning horizon. The proposed rule would have 
eliminated the requirement that bank holding companies that have total 
consolidated assets between $10 billion and $50 billion and savings and 
loan holding companies that have total consolidated assets of more than 
$10 billion use fixed assumptions regarding dividends in their stress 
tests.\9\ These bank holding companies and savings and loan holding 
companies instead would have been required to incorporate reasonable 
assumptions regarding payments of dividends consistent with internal 
capital needs and projections.
---------------------------------------------------------------------------

    \9\ The proposed rule and final rule maintain the mandatory 
assumptions relating to the redemption or repurchase of any 
regulatory capital instrument that is eligible for inclusion in the 
numerator of a regulatory capital ratio.
---------------------------------------------------------------------------

    This aspect of the proposal was intended to be responsive to 
concerns raised by banking organizations that dividends paid at the 
holding company level are often funded directly through a subsidiary 
bank's capital distributions to the holding company. Subsidiary banks 
may be subject to dividend restrictions, which would impair the funding 
of the holding company's dividends, and in such cases the assumptions 
required under the stress test rules would be inconsistent with the 
bank holding company's actual dividend capacity. Commenters generally 
supported the removal of fixed dividend assumptions in the stress 
testing requirements for these firms. After considering the comments, 
the Board is finalizing the revision as proposed.
    Commenters separately requested that the Board eliminate the fixed 
dividend

[[Page 75421]]

assumptions for large bank holding companies. Commenters argued that 
large bank holding companies also rely on their subsidiary banks to 
fund dividends at the holding company level. Several commenters 
asserted that this revision for large bank holding companies would make 
the dividend payment assumptions more realistic and would result in 
stress tests that more closely reflect large bank holding companies' 
internal policies and practices.
    Unlike bank holding companies with total consolidated assets 
between $10 billion and $50 billion, large bank holding companies are 
subject to the capital plan rule, and are required to incorporate their 
planned capital actions in their post-stress capital analysis. Thus, 
large bank holding companies already incorporate more realistic 
dividend assumptions into their capital plans. In addition, providing a 
common set of fixed dividend assumptions in the stress test rule for 
large bank holding companies supports the goal of comparability in 
stress test disclosures. Accordingly, the final rule does not eliminate 
fixed dividend assumptions for large bank holding companies.

B. Modification to the Mandatory Capital Action Issuance Assumptions

    The proposed rule would have modified the mandatory capital action 
assumptions in the stress test rules to permit a bank holding company 
or savings and loan holding company to assume that it issues capital 
associated with funding a planned acquisition.\10\ Specifically, to the 
extent that a bank holding company or savings and loan holding company 
includes a merger or acquisition in its balance sheet projections, it 
would have been required to reflect any related stock issuance in its 
stress test.
---------------------------------------------------------------------------

    \10\ While the preamble did not address this change, the 
proposed regulatory text applied this change to all holding 
companies.
---------------------------------------------------------------------------

    Commenters supported the proposed revisions to the issuance 
assumptions in the stress test rules, indicating that they would better 
align capital action assumptions. After considering the comments, the 
Board is finalizing these provisions as proposed.

C. Company Run Stress Test Transition Provisions for Certain Savings 
and Loan Holding Companies

    Savings and loan holding companies that have total consolidated 
assets of more than $10 billion must conduct annual company-run stress 
tests under the Dodd-Frank Act.\11\ Under the Board's stress test rule 
implementing this requirement, a savings and loan holding company that 
is subject to the Board's minimum regulatory capital requirements and 
that has total consolidated assets greater than $10 billion is subject 
to these requirements. The stress test rules that the Board adopted in 
October 2012 provided a two-year transition period for these savings 
and loan holding companies to comply with the stress test requirements. 
However, the October 2014 revisions to the capital plan and stress test 
rules (October 2014 revisions) resulted in a shortening of this initial 
transition period to one year.\12\
---------------------------------------------------------------------------

    \11\ Currently, savings and loan holding companies are not 
subject to the Board's capital plan rule or supervisory stress 
tests, regardless of size.
    \12\ 79 FR 64026 (October 27, 2014).
---------------------------------------------------------------------------

    The proposed rule would have delayed for one additional stress test 
cycle the application of the company-run stress test rules to saving 
and loan holding companies that have total consolidated assets of more 
than $10 billion, such that these savings and loan holding companies 
would have become subject to the stress test rules for the first time 
beginning on January 1, 2017. Accordingly, savings and loan holding 
companies that have total consolidated assets of more than $50 billion 
would have reported their stress test results by April 5, 2017, and 
those that have total consolidated assets of less than $50 billion 
would have reported results by July 31, 2017.
    Commenters supported the proposed delay in the initial application 
of the stress test requirements for these savings and loan holding 
companies, and requested that the application of the stress testing 
requirements to other savings and loan holding companies and nonbank 
financial companies supervised by the Board be delayed even further. 
Commenters argued that companies primarily engaged in insurance 
underwriting activity will need a reasonable amount of time to 
implement the stress testing requirements after becoming subject to 
regulatory capital requirements. One commenter suggested a minimum two-
year transition period for savings and loan holding companies engaged 
in insurance underwriting activity and for insurance companies 
designated as systemically important by the Financial Stability 
Oversight Council, which are not subject to the stress test rules 
unless made subject pursuant to a rule or order of the Board.
    Consistent with the proposal, under the final rule, savings and 
loan holding companies that are currently subject to the Board's 
regulatory capital rules would have an additional year, until 2017, to 
conduct their first stress test. Savings and loan holding companies 
that are not subject to the Board's regulatory capital rules will not 
be required to conduct their first stress test until after they become 
subject to the regulatory capital rules and thus should have adequate 
time to develop the systems necessary to conduct stress testing. With 
respect to nonbank financial companies supervised by the Board that are 
engaged in insurance activities, the Board will continue to monitor and 
assess their activities and would consider these activities, as well as 
their risk profile, in considering whether to apply the stress test 
rules to such companies by rule or order.

III. Revisions to the Capital Plan and Stress Test Rules for Large Bank 
Holding Companies and State Member Banks Subject to the Advanced 
Approaches

    The changes relating to the use of the supplementary leverage ratio 
and the advance approaches only apply to bank holding companies and 
state member banks that are subject to the advanced approaches risk-
based capital framework, as well as any savings and loan holding 
company that becomes subject to the advanced approaches in the future.

A. Delay of Inclusion of the Supplementary Leverage Ratio Requirement

    The supplementary leverage ratio requirement in the Board's capital 
rules applies to large bank holding companies and state member banks 
that are subject to the advanced approaches risk-based capital 
framework.\13\ For these banking organizations, the proposed rule would 
have delayed the incorporation of the supplementary leverage ratio 
requirement into the capital plan and stress test rules for one year, 
until 2017.
---------------------------------------------------------------------------

    \13\ Banking organizations that are subject to the advanced 
approaches risk-based capital framework are banking organizations 
with total consolidated assets of $250 billion or more, that have 
total consolidated on-balance sheet foreign exposure of $10 billion 
or more, are a subsidiary of a depository institution that uses the 
advanced risk-based capital approaches framework, or that elect to 
use the advanced risk-based capital approaches framework. See 12 CFR 
part 217, subpart E.
---------------------------------------------------------------------------

    Commenters were generally supportive of delaying the incorporation 
of the supplementary leverage ratio requirement until 2017, and noted 
that this provision would allow banking organizations time to develop 
the systems necessary to project the supplementary leverage ratio under

[[Page 75422]]

stressed conditions. One commenter argued that the supplementary 
leverage ratio requirement should be excluded indefinitely from the 
capital plan and stress test rules. The commenter asserted that the 
supplementary leverage ratio was intended to be a backstop to the 
Board's risk-based capital rule, and expressed concern that it could 
become a binding constraint on regulatory capital if included in the 
capital plan and stress test requirements. The commenter noted that a 
binding supplementary leverage ratio may distort firms' incentives with 
respect to risk-taking because it does not reflect the level of risk 
associated with particular assets in determining capital requirements, 
and could compromise other regulatory initiatives, such as the 
liquidity coverage ratio and margin requirements.
    Notwithstanding these arguments, a post-stress leverage ratio 
requirement has been a requirement in the stress test and capital plan 
rules since their inception. The leverage ratio requirement continues 
to serve as an important backstop as it guards against possible 
weaknesses in the risk-based capital requirements, such as the 
possibility of understating the risk of certain assets. The addition of 
the supplementary leverage ratio requirement in the capital plan and 
stress test rules will further strengthen this backstop function as it 
will include a measure of off-balance sheet exposures in addition to 
all on-balance sheet items. Accordingly, the final rule retains the 
one-year delay in implementation of the supplementary leverage ratio 
for purposes of capital planning and stress testing. The Federal 
Reserve will continue to monitor the amount of capital required under 
both the risk-based and leverage ratios in CCAR and under the related 
stress tests.

B. Deferral of Use of the Advanced Approaches

    The proposed rule would have deferred indefinitely the use of the 
advanced approaches for calculating risk-based capital ratios under the 
capital plan and stress test rules. Thus, large bank holding companies 
and state member banks that are subject to the advanced approaches 
risk-based capital framework would have been required to project risk-
weighted assets using only the standardized approach until such time as 
the Board requires the use of advanced approaches in stress testing and 
capital planning. The Board proposed this revision in light of banking 
organizations' concerns that the use of advanced approaches in the 
capital plan and stress test rules would require significant resources 
and would introduce complexity and opacity without a clear prudential 
benefit.
    Commenters supported the proposed revision to delay the use of 
advanced approaches until further notice. After reviewing these 
comments, the Board is finalizing this revision as proposed.

IV. Revisions to the Capital Plan and Stress Test Rules for Large Bank 
Holding Companies

A. Elimination of the Tier 1 Common Capital Ratio Requirement

    The proposed rule would have removed the requirement that a large 
bank holding company demonstrate its ability to maintain a pro forma 
tier 1 common capital ratio of five percent of risk-weighted assets 
under expected and stressed scenarios. The Board introduced the tier 1 
common capital ratio requirement in 2009 as part of the Supervisory 
Capital Assessment Program to assess the level of high-quality, loss-
absorbing capital held at the largest U.S. bank holding companies.\14\ 
At that time, the Board noted that it expected the tier 1 common 
capital ratio requirement to remain in force until the Board adopted a 
minimum common equity capital requirement.\15\ In 2013, the Board 
revised its regulatory capital rules to strengthen the quality and 
quantity of regulatory capital held by banking organizations and, 
introduced a minimum common equity tier 1 capital requirement of 4.5 
percent of risk-weighted assets.\16\
---------------------------------------------------------------------------

    \14\ See ``The Supervisory Capital Assessment Program: Overview 
of Results,'' May 7, 2009, available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf.
    \15\ Id.
    \16\ The Board and the OCC issued a joint final rule on October 
11, 2013 (78 FR 62018), and the FDIC issued a substantially 
identical interim final rule on September 10, 2013 (78 FR 55340). In 
April 2014, the FDIC adopted the interim final rule as a final rule 
with no substantive changes. 79 FR 20754 (April 14, 2014).
---------------------------------------------------------------------------

    Nearly all commenters expressed support for the proposed removal of 
the tier 1 common capital ratio requirement from the capital plan and 
stress test rules. The Board agrees with commenters that removing the 
tier 1 common capital ratio requirement at this time is appropriate in 
light of the implementation in the regulatory capital rules of the 
minimum common equity tier 1 capital requirement equal to 4.5 percent 
of risk-weighted assets, effective on January 1, 2015.\17\
---------------------------------------------------------------------------

    \17\ Id.
---------------------------------------------------------------------------

    The regulatory capital rule's required adjustments and deductions 
from common equity tier 1 capital will be fully phased in by January 1, 
2018, which is the ninth quarter of the planning horizon of the capital 
plan and stress test cycle that begins on January 1, 2016.\18\ Due to 
the implementation of these mandatory adjustments and deductions, the 
minimum common equity tier 1 capital requirement is generally expected 
to require more capital than the current tier 1 common capital ratio 
requirement in forthcoming stress test and capital plan cycles. 
Further, removing the tier 1 common capital ratio requirement would 
reduce the burden on large bank holding companies by no longer 
requiring them to maintain legacy systems and processes necessary for 
calculating the tier 1 common capital ratio requirement. The Board is 
therefore finalizing the provision as proposed.
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

B. Modification of Certain Mandatory Capital Action Assumptions

    As noted above, the stress test rules require large bank holding 
companies to assume that they continue to pay dividends at their 
current rate, issue no capital (other than that related to expensed 
employee compensation), and redeem no capital instruments in the second 
through ninth quarters of the planning horizon. These assumptions were 
designed to ensure that the publicly disclosed results of company run 
stress tests would be comparable across institutions, and to reflect 
common macroeconomic scenarios on firms' net income and capital rather 
than company-specific assumptions about capital issuances and 
redemptions.
    The proposal would have included two modifications to these capital 
action assumptions. First, it would have required a large bank holding 
company to assume it issues capital associated with funding a planned 
merger or acquisition. Under the proposal, to the extent that a large 
bank holding company is required to include an acquisition in its 
balance sheet projections, the large bank holding company would have 
been required to include any stock issuance associated with funding the 
acquisition in its stress test. Second, the proposal would have 
modified dividend assumptions in the stress test rules to require large 
bank holding companies to reflect dividends associated with expensed 
employee compensation. Specifically, the proposal would have required a 
firm to assume that it pays planned dividends on any issuance of stock 
related to expensed employee compensation.

[[Page 75423]]

    Commenters supported the proposed revisions to the dividend and 
issuance assumptions in the stress test rules. Commenters indicated 
that these changes would better align capital action assumptions with 
business plan changes required when a banking organization is 
considering an acquisition and would enhance the efficiency of the 
stress test process.
    While not included in the proposal, to remain consistent with the 
treatment of dividends related to expensed employee compensation 
discussed above, the final rule also requires a large bank holding 
company to assume that it pays planned dividends on any issuance of 
stock related to the funding of a planned merger or acquisition to the 
extent that the company is required to include such merger or 
acquisition in its balance sheet projections.
    The modification to the capital action assumptions in the stress 
test rules regarding dividends and issuances associated with business 
plan changes is in keeping with the general principle that stress tests 
should capture the expected impact to both assets and capital related 
to business plan changes. For example, the capital action assumptions 
allow a company to include planned issuances of stock associated with 
expensed employee compensation. This is because expensed employee 
compensation will appear as an expense, thus the company should also 
receive recognition for a related issuance of capital.

V. Technical Amendments to the Capital Plan and Stress Test Rules

    The proposed rule included amendments to the capital plan and 
stress test rules to incorporate changes related to other rulemakings. 
The proposed rule would have removed references to the risk-based 
capital rules in Regulation Y (12 CFR part 225) that were no longer 
operative. In addition, the proposal would have amended the definition 
of minimum regulatory capital ratio in 12 CFR 225.8(d)(8) and the 
definition of regulatory capital ratio in 12 CFR 252.12(n), 12 CFR 
252.42(m), and 12 CFR 252.52(n) to incorporate the deductions required 
under 12 CFR 248.12(d) (the Volcker Rule). Although the Volcker Rule 
requires a banking organization to deduct from tier 1 capital its 
aggregate investments in covered funds (as defined in 12 CFR. 
248.10(b)), these required deductions are not, however, reflected in 
Regulation Q (12 CFR part 217). Accordingly, the proposed rule would 
have revised the regulatory text of the above-referenced definitions to 
include the required deductions under the Volcker Rule in the 
definition of regulatory capital ratio and minimum regulatory capital 
ratio.
    Commenters expressed that the view that incorporating the Volcker 
Rule deductions into the capital plan and stress test rules was 
premature. At least one commenter argued that in issuing the proposed 
rule, the Board interpreted the Volcker deductions without the 
consensus of the other U.S. banking agencies, and that these 
interpretations could have implications for the broader industry beyond 
the institutions covered by the stress test and capital plan rules. 
These commenters requested that the Board delay incorporating 
deductions associated with the Volcker Rule in the capital plan and 
stress test rules until the U.S. banking agencies provide guidance 
regarding the operation and calculation of the deduction for purposes 
of the regulatory capital framework, subject to proper notice and 
comment.
    The proposed modifications to the capital plan and stress test 
rules would not establish new expectations or requirements regarding 
the interaction between the Volcker Rule and the regulatory capital 
framework. The Board has provided additional guidance to bank holding 
companies on how to reflect Volcker deductions in their pro forma 
regulatory capital ratios under the stress test and capital plan 
rules.\19\ Thus, the Board is finalizing these two aspects of the 
proposal, specifically, the deletion of references to Regulation Y and 
incorporation of deductions from capital required under the Volcker 
Rule, without change.
---------------------------------------------------------------------------

    \19\ See Supervision and Regulation Letter SR 15-13 (November 6, 
2015), available at: https://fedweb.frb.gov/fedweb/bsr/srltrs/sr1513.pdf.
---------------------------------------------------------------------------

VI. Other Comments Received on the Proposal

A. Regulatory Burden and Transparency

    Commenters encouraged the Board to continue efforts to increase 
transparency and understanding of the capital plan and stress test 
processes. In particular, commenters noted that in recent years, 
greater emphasis has been placed on qualitative factors in capital plan 
and stress test assessments and thus requested that the Board provide 
more information regarding the qualitative factors that are used to 
evaluate a firm's capital plan. These commenters requested that the 
Board provide instructions and scenarios as early as possible to 
facilitate a more robust capital planning process. A commenter noted 
that the Board's ``Capital Planning at Large Bank Holding Companies: 
Supervisory Expectations and Range of Current Practice'' document 
issued in August 2013 was extremely useful and requested that it be 
updated annually to aid large bank holding companies in improving their 
capital planning processes and preparing their annual capital plans. 
One commenter also supported efforts by the Board to review the 
regulatory burden placed on financial institutions as a result of the 
establishment of Dodd-Frank Act regulations.
    The Board continues to seek ways to improve its capital plan and 
stress test framework, including by taking into consideration industry 
feedback. For instance, last year, the Board adjusted the timeframe for 
the annual capital plan and stress test exercise in order to address 
resource constraints for banking organizations near the end of the 
year. This final rule also includes several changes that are responsive 
to public comments, including removal of the tier 1 common ratio and 
deferral of the supplementary leverage ratio for one year.

B. Uniform Tax Rate Assumption

    For purposes of the stress test and capital plan rules, the Board 
applies a uniform tax rate to project after-tax net income for all bank 
holding companies. One commenter raised the concern that this 
assumption could have a material impact on after-tax income, and 
accordingly, on capital positions and the Board's assessment decision 
of whether to object to a capital plan. The commenter further noted 
that there are a number of circumstances where a simplifying tax 
assumption could materially understate capital, and requested that the 
Board use the tax calculations prepared by the bank holding company in 
accordance with Generally Accepted Accounting Principles as a starting 
point for supervisory tax projections. The commenter also requested 
that the Board should only apply the common tax rate to the marginal 
pre-tax net income (loss) and pre-tax other comprehensive income that 
exceeds the firm's projections. As an alternative, the commenter 
suggested that additional tax information be collected in the annual 
submissions to inform the Board's tax calculations.
    The use of a common supervisory tax rate supports the consistent 
application of assumptions and models across firms. Accordingly, the 
final rule does not alter the assumption of a common supervisory tax 
rate.

[[Page 75424]]

VII. Administrative Law Matters

a. Riegle Act

    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Riegle Act) requires a federal banking agency 
to consider the benefits and any administrative burdens that new 
regulations and amendments to regulations prescribed by a federal 
banking agency that impose additional reporting, disclosures, or other 
new requirements on an insured depository institution, and, subject to 
certain exceptions, provides that such regulations shall take effect on 
the first day of a calendar quarter which begins on or after the date 
on which the regulations are published in final form.\20\ As noted, the 
final rule clarifies the interaction between the Volcker Rule and the 
regulatory capital framework but does not impose new requirements in 
this regard. In addition, the delay of the use of the supplementary 
leverage ratio and of the advanced approaches risk-based capital 
framework generally reduce burden on state member banks that are 
subject to the advanced approaches. Accordingly, the final rule does 
not impose any additional reporting or disclosure requirements on state 
member banks. In addition, consistent with Section 302 of the Riegle 
Act, the requirements in the final rule will take effect on the first 
day of a calendar quarter after the date on which the final rule is 
published in final form.
---------------------------------------------------------------------------

    \20\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

b. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
(PRA) of 1995 (44 U.S.C. 3501-3521), the Board may not conduct or 
sponsor, and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The Board reviewed this final rule 
under the authority delegated to the Board by the OMB and determined 
that it contains no collections of information. No public comments on 
the PRA were received when the proposed rule was published.

c. Regulatory Flexibility Act Analysis

    The Board has considered the potential impact of the final rule on 
small companies in accordance with the Regulatory Flexibility Act (5 
U.S.C. 603(b)). Based on its analysis and for the reasons stated below, 
the Board believes that the final rule will not have a significant 
economic impact on a substantial number of small entities. 
Nevertheless, the Board is publishing a final regulatory flexibility 
analysis.
    Under regulations issued by the Small Business Administration 
(``SBA''), a small entity includes a depository institution, bank 
holding company, or savings and loan holding company with total assets 
of $550 million or less (a small banking organization).\21\ The final 
rule will apply to bank holding companies, savings and loan holding 
companies, and state member banks with total consolidated assets of $10 
billion or more. Companies that will be subject to the final rule 
therefore substantially exceed the $550 million total asset threshold 
at which a company is considered a small company under SBA regulations. 
In light of the foregoing, the Board does not believe that the final 
rule will have a significant economic impact on a substantial number of 
small entities.
---------------------------------------------------------------------------

    \21\ See 13 CFR 121.201. Effective July 14, 2014, the SBA 
revised the size standards for banking organizations to $550 million 
in assets from $500 million in assets. 79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------

d. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board sought to present the proposed rule in a 
simple and straightforward manner and solicited comment on how to make 
the proposed rule easier to understand. No comments were received on 
the use of plain language.

List of Subjects

12 CFR Part 225

    Administrative practice and procedure, Banks, Banking, Capital 
planning, Holding companies, Reporting and recordkeeping requirements, 
Securities, Stress testing.

12 CFR Part 252

    Administrative practice and procedure, Banks, Banking, Capital 
planning, Federal Reserve System, Holding companies, Reporting and 
recordkeeping requirements, Securities, Stress testing.

Authority and Issuance

    For the reasons stated in the SUPPLEMENTARY INFORMATION, the Board 
of Governors of the Federal Reserve System amends 12 CFR chapter II as 
follows:

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

0
1. The authority citation for part 225 is revised to read as follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906, 
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.

Subpart A--General Provisions

0
2. Section 225.8 is amended by:
0
a. Revising paragraphs (c)(3) and (d)(8) and (11);
0
b. Removing paragraphs (d)(12) and (13);
0
c. Redesignating paragraph (d)(14) as paragraph (d)(12);
0
d. Removing and reserving paragraph (e)(2)(i)(B); and
0
e. Revising paragraphs (e)(2)(ii)(A), (f)(1)(i)(C), (f)(2)(ii)(C), and 
(g)(1)(i).
    The revisions read as follows:


Sec.  225.8  Capital planning.

* * * * *
    (c) * * *
    (3) Transition periods for bank holding companies subject to the 
supplementary leverage ratio. Notwithstanding paragraph (d)(8) of this 
section, only for purposes of the capital plan cycle beginning on 
January 1, 2016, a bank holding company shall not include an estimate 
of its supplementary leverage ratio.
    (d) * * *
    (8) Minimum regulatory capital ratio means any minimum regulatory 
capital ratio that the Federal Reserve may require of a bank holding 
company, by regulation or order, including the bank holding company's 
tier 1 and supplementary leverage ratios as calculated under 12 CFR 
part 217, including the deductions required under 12 CFR 248.12, as 
applicable, and the bank holding company's common equity tier 1, tier 
1, and total risk-based capital ratios as calculated under 12 CFR part 
217, including the deductions required under 12 CFR 248.12 and the 
transition provisions at 12 CFR 217.1(f)(4) and 217.300; except that 
the bank holding company shall not use the advanced approaches to 
calculate its regulatory capital ratios.
* * * * *
    (11) Tier 1 capital has the same meaning as under 12 CFR part 217.
* * * * *
    (e) * * *
    (2) * * *
    (i) * * *
    (B) [Reserved]
* * * * *

[[Page 75425]]

    (ii) * * *
    (A) A discussion of how the bank holding company will, under 
expected and stressful conditions, maintain capital commensurate with 
its risks, maintain capital above the minimum regulatory capital 
ratios, and serve as a source of strength to its subsidiary depository 
institutions;
* * * * *
    (f) * * *
    (1) * * *
    (i) * * *
    (C) The bank holding company's ability to maintain capital above 
each minimum regulatory capital ratio on a pro forma basis under 
expected and stressful conditions throughout the planning horizon, 
including but not limited to any scenarios required under paragraphs 
(e)(2)(i)(A) and (e)(2)(ii) of this section.
* * * * *
    (2) * * *
    (ii) * * *
    (C) The bank holding company has not demonstrated an ability to 
maintain capital above each minimum regulatory capital ratio on a pro 
forma basis under expected and stressful conditions throughout the 
planning horizon; or
* * * * *
    (g) * * *
    (1) * * *
    (i) After giving effect to the capital distribution, the bank 
holding company would not meet a minimum regulatory capital ratio;
* * * * *

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
3. The authority citation for part 252 continues to read as follows:

    Authority: 12 U.S.C. 321-338a, 1467a(g), 1818, 1831p-1, 1844(b), 
1844(c), 5361, 5365, 5366.

0
4. Section 252.12 is amended by revising paragraph (n) to read as 
follows:


Sec.  252.12  Definitions.

* * * * *
    (n) Regulatory capital ratio means a capital ratio for which the 
Board established minimum requirements for the company by regulation or 
order, including a company's tier 1 and supplementary leverage ratio as 
calculated under 12 CFR part 217, including the deductions required 
under 12 CFR 248.12, as applicable, and the company's common equity 
tier 1, tier 1, and total risk-based capital ratios as calculated under 
12 CFR part 217, including the deductions required under 12 CFR 248.12 
and the transition provisions at 12 CFR 217.1(f)(4) and 217.300; except 
that the company shall not use the advanced approaches to calculate its 
regulatory capital ratios.
* * * * *

0
5. Section 252.13 is amended by revising paragraphs (b)(2) and (3) to 
read as follows:


Sec.  252.13  Applicability.

* * * * *
    (b) * * *
    (2) Transition period for savings and loan holding companies. (i) A 
savings and loan holding company that is subject to minimum regulatory 
capital requirements and exceeds the asset threshold for the first time 
on or before March 31 of a given year, must comply with the 
requirements of this subpart beginning on January 1 of the following 
year, unless that time is extended by the Board in writing;
    (ii) A savings and loan holding company that is subject to minimum 
regulatory capital requirements and exceeds the asset threshold for the 
first time after March 31 of a given year must comply with the 
requirements of this subpart beginning on January 1 of the second year 
following that given year, unless that time is extended by the Board in 
writing; and
    (iii) Notwithstanding paragraph (b)(2)(i) of this section, a 
savings and loan holding company that is subject to minimum regulatory 
capital requirements and exceeded the asset threshold for the first 
time on or before March 31, 2015, must comply with the requirements of 
this subpart beginning on January 1, 2017, unless that time is extended 
by the Board in writing.
    (3) Transition periods for companies subject to the supplementary 
leverage ratio. Notwithstanding Sec.  252.12(n), for purposes of the 
stress test cycle beginning on January 1, 2016, a company shall not 
include an estimate of its supplementary leverage ratio.

0
6. Section 252.15 is amended by revising paragraph (b)(2) to read as 
follows:


Sec.  252.15  Methodologies and practices.

* * * * *
    (b) * * *
    (2) For each of the second through ninth quarters of the planning 
horizon, the bank holding company or savings and loan holding company 
must:
    (i) Assume no redemption or repurchase of any capital instrument 
that is eligible for inclusion in the numerator of a regulatory capital 
ratio;
    (ii) Assume no issuances of common stock or preferred stock, except 
for issuances related to expensed employee compensation or in 
connection with a planned merger or acquisition to the extent that the 
merger or acquisition is reflected in the company's pro forma balance 
sheet estimates; and
    (iii) Make reasonable assumptions regarding payments of dividends 
consistent with internal capital needs and projections.
* * * * *

0
7. Section 252.42 is amended by:
0
a. Revising paragraph (m); and
0
b. Removing paragraph (r).
    The revision reads as follows:


Sec.  252.42  Definitions.

* * * * *
    (m) Regulatory capital ratio means a capital ratio for which the 
Board established minimum requirements for the company by regulation or 
order, including the company's tier 1 and supplementary leverage ratios 
as calculated under 12 CFR part 217, including the deductions required 
under 12 CFR 248.12, as applicable, and the company's common equity 
tier 1, tier 1, and total risk-based capital ratios as calculated under 
12 CFR part 217, including the deductions required under 12 CFR 248.12 
and the transition provisions at 12 CFR 217.1(f)(4) and 217.300; except 
that the company shall not use the advanced approaches to calculate its 
regulatory capital ratios.
* * * * *

0
8. Section 252.43 is amended by revising paragraph (c) to read as 
follows:


Sec.  252.43  Applicability.

* * * * *
    (c) Transition periods for covered companies subject to the 
supplementary leverage ratio. Notwithstanding Sec.  252.42(m), only for 
purposes of the stress test cycle beginning on January 1, 2016, the 
Board will not include an estimate of a covered company's supplementary 
leverage ratio.

0
9. Section 252.44 is amended by revising paragraph (a)(2) to read as 
follows:


Sec.  252.44  Annual analysis conducted by the Board.

    (a) * * *
    (2) The analysis will include an assessment of the projected 
losses, net income, and pro forma capital levels and regulatory capital 
ratios and other capital ratios for the covered company and use such 
analytical techniques that the Board determines are appropriate to 
identify, measure, and monitor risks of the covered company that may 
affect the financial stability of the United States.
* * * * *

[[Page 75426]]


0
10. Section 252.45 is amended by revising paragraph (b)(2) to read as 
follows:


Sec.  252.45  Data and information required to be submitted in support 
of the Board's analyses.

* * * * *
    (b) * * *
    (2) Project a company's pre-provision net revenue, losses, 
provision for loan and lease losses, and net income; and pro forma 
capital levels, regulatory capital ratios, and any other capital ratio 
specified by the Board under the scenarios described in Sec.  
252.44(b).
* * * * *

0
11. Section 252.52 is amended by:
0
a. Revising paragraph (n); and
0
b. removing paragraph (t).
    The revision reads as follows:


Sec.  252.52  Definitions.

* * * * *
    (n) Regulatory capital ratio means a capital ratio for which the 
Board established minimum requirements for the company by regulation or 
order, including the company's tier 1 and supplementary leverage ratios 
as calculated under 12 CFR part 217, including the deductions required 
under 12 CFR 248.12, as applicable, and the company's common equity 
tier 1, tier 1, and total risk-based capital ratios as calculated under 
12 CFR part 217, including the deductions required under 12 CFR 248.12 
and the transition provisions at 12 CFR 217.1(f)(4) and 217.300; except 
that the company shall not use the advanced approaches to calculate its 
regulatory capital ratios.
* * * * *

0
12. Section 252.53 is amended by revising paragraph (b)(3) to read as 
follows:


Sec.  252.53  Applicability.

* * * * *
    (b) * * *
    (3) Transition periods for covered companies subject to the 
supplementary leverage ratio. Notwithstanding Sec.  252.52(n), only for 
purposes of the stress test cycle beginning on January 1, 2016, a bank 
holding company shall not include an estimate of its supplementary 
leverage ratio.
0
13. Section 252.56 is amended by revising paragraphs (a)(2), (b)(2)(i), 
and (b)(2)(iv) to read as follows:


Sec.  252.56  Methodologies and practices.

    (a) * * *
    (2) The potential impact on pro forma regulatory capital levels and 
pro forma capital ratios (including regulatory capital ratios and any 
other capital ratios specified by the Board), incorporating the effects 
of any capital actions over the planning horizon and maintenance of an 
allowance for loan losses appropriate for credit exposures throughout 
the planning horizon.
    (b) * * *
    (2) * * *
    (i) Common stock dividends equal to the quarterly average dollar 
amount of common stock dividends that the company paid in the previous 
year (that is, the first quarter of the planning horizon and the 
preceding three calendar quarters) plus common stock dividends 
attributable to issuances related to expensed employee compensation or 
in connection with a planned merger or acquisition to the extent that 
the merger or acquisition is reflected in the covered company's pro 
forma balance sheet estimates;
* * * * *
    (iv) An assumption of no issuances of common stock or preferred 
stock, except for issuances related to expensed employee compensation 
or in connection with a planned merger or acquisition to the extent 
that the merger or acquisition is reflected in the covered company's 
pro forma balance sheet estimates.
* * * * *

0
14. Section 252.58 is amended by revising paragraphs (b)(3)(v), (b)(4), 
and (c)(2) to read as follows:


Sec.  252.58  Disclosure of stress test results.

* * * * *
    (b) * * *
    (3) * * *
    (v) Pro forma regulatory capital ratios and any other capital 
ratios specified by the Board;
    (4) An explanation of the most significant causes for the changes 
in regulatory capital ratios; and
* * * * *
    (c) * * *
    (2) The disclosure of pro forma regulatory capital ratios and any 
other capital ratios specified by the Board that is required under 
paragraph (b) of this section must include the beginning value, ending 
value, and minimum value of each ratio over the planning horizon.

    By order of the Board of Governors of the Federal Reserve 
System, November 25, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-30471 Filed 12-1-15; 8:45 am]
 BILLING CODE P