The combined amount of third-party capital instruments that a System institution may include in total (tier 1 and tier 2) capital is equal to the greater of the following:

(a) The then existing limit, if any; or

(b) The lesser of:

(1) Forty percent of total capital, calculated by taking two thirds of the average of the previous 4 quarters of total capital reported on the institution's Call Report filed with the FCA, less any amounts of third-party capital reported in total capital; or

(2) The average of the previous 4 quarters of CET1 capital reported on its Call Report filed with the FCA.

(c) Treatment of assets that are deducted. A System institution must exclude from total risk-weighted assets any item deducted from regulatory capital under this section.