AGENCY:

The Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation.

ACTION:

Final rule.

SUMMARY:

The Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation are issuing a final rule to implement section 402 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Section 402 directs these agencies to amend the regulatory capital rule to exclude from the supplementary leverage ratio certain funds of banking organizations deposited with central banks if the banking organization is predominantly engaged in custody, safekeeping, and asset servicing activities.

DATES:

The rule is effective April 1, 2020.

FOR FURTHER INFORMATION CONTACT:

OCC: Venus Fan, Risk Expert, or Guowei Zhang, Risk Expert, Capital and Regulatory Policy, (202) 649-6370; or Patricia Dalton, Director for Asset Management (202) 649-6401; or Rima Kundnani, Attorney, or Christopher Rafferty, Attorney, Chief Counsel's Office, (202) 649-5490; the Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.

Board: Constance M. Horsley, Deputy Associate Director, (202) 452-5239; Teresa A. Scott, Manager, (202) 475-6316; Donald Gabbai, Lead Financial Institution Policy Analyst, (202) 452-3358; Division of Supervision and Regulation; or Benjamin W. McDonough, Assistant General Counsel, (202) 452-2036; Mark Buresh, Senior Counsel, (202) 452-5270; Mary Watkins, Senior Attorney, (202) 452-3722; Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf, (202) 263-4869.

FDIC: Benedetto Bosco, Chief, Capital Policy Section, bbosco@fdic.gov; Noah Cuttler, Senior Policy Analyst, ncuttler@fdic.gov; Dushan Gorechan, Financial Analyst, dgorechan@fdic.gov; Keith Bergstresser, Capital Markets Policy Analyst, kbergstresser@fdic.gov; or regulatorycapital@fdic.gov; Capital Markets Branch, Division of Risk Management Supervision, (202) 898-6888; Michael Phillips, Counsel, mphillips@fdic.gov; Catherine Wood, Counsel, cawood@fdic.gov; Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Overview of the Proposal

II. Background

A. The Supplementary Leverage Ratio

B. Fiduciary, Custody, Safekeeping, and Asset Servicing Activities

III. Discussion of the Comments and Final Rule

A. Scope of Applicability

1. Definition of Custodial Banking Organizations

2. Assets Under Custody to Total Assets Measure

3. Scope of Covered Entities

B. Mechanics of the Central Bank Deposit Exclusion

C. Central Bank Deposit Exclusion Limit

D. Regulatory Reporting Requirements

IV. OCC Statement Regarding Standalone Depository Institutions

V. Interaction of Section 402 With Other Rules

A. Total Loss-Absorbing Capacity

B. The Enhanced Supplementary Leverage Ratio and Other Comments on the Proposal

VI. Impact Analysis

VII. Regulatory Analysis

A. Paperwork Reduction Act

B. Regulatory Flexibility Act Analysis

C. Plain Language

D. Riegle Community Development and Regulatory Improvement Act of 1994

E. OCC Unfunded Mandates Reform Act of 1995 Determination

F. Congressional Review Act

I. Overview of the Proposal

In April 2019, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) published a notice of proposed rulemaking (proposal) ^[1] to implement section 402 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (section 402).^[2]

Section 402 requires the agencies to amend the supplementary leverage ratio, a measure of capital adequacy that applies to large banking organizations. Under section 402, the supplementary leverage ratio must not take into account funds of a custodial bank that are deposited with certain central banks, provided that any amount that exceeds the value of deposits of the custodial bank that are linked to fiduciary or custodial and safekeeping accounts must be taken into account when calculating the supplementary leverage ratio as applied to the custodial bank.^[3] Under section 402, central bank deposits that qualify for the exclusion include deposits of custodial banks placed with (1) the Federal Reserve System, (2) the European Central Bank, and (3) central banks of member countries of the Organisation for Economic Co-operation and Development (OECD),^[4] if the member country has been assigned a zero percent risk weight under the agencies' regulatory capital rule (capital rule) and the sovereign debt of such member country is not in default or has not been in default during the previous five years.^[5] Section 402 defines a custodial bank as “any depository institution holding company predominantly engaged in custody, safekeeping, and asset servicing activities, including any insured depository institution subsidiary of such a holding company.” ^[6]

The proposal would have implemented section 402 by defining the scope of banking organizations considered to be predominantly engaged in custody, safekeeping, and asset servicing activities and by providing the standard by which such banking organizations would determine the amount of central bank deposits that could be excluded from total leverage exposure, which is the denominator of the supplementary leverage ratio in the capital rule.

Under the proposal, a depository institution holding company with a ratio of assets under custody (AUC)-to-total assets of at least 30:1 would have been considered predominantly engaged in custody, safekeeping, and asset servicing activities. Such a banking organization would have been termed a “custodial banking organization.” A custodial banking organization would have excluded from the supplementary leverage ratio deposits placed at a “qualifying central bank,” which would have included a Federal Reserve Bank, the European Central Bank, or any central bank of a member country of the OECD if the member country meets certain criteria. The amount of central bank deposits that could have been excluded from total leverage exposure would have been limited by the amount of deposit liabilities of the custodial banking organization that are linked to fiduciary or custody and safekeeping accounts.

The agencies collectively received six comment letters on the proposal (from banking organizations and other interested parties). Some commenters were supportive of the agencies' proposal to implement section 402. Other commenters acknowledged that the agencies are required to implement section 402 but raised various concerns regarding the potential effect that implementation of section 402 would have on other aspects of the banking sector.

The agencies have considered all the comments received on the proposal. As described in more detail below, the agencies are adopting the proposal as a final rule without modification. The agencies are required under section 402 to amend the capital rule to exclude from the supplementary leverage ratio certain central bank deposits of banking organizations predominantly engaged in custody, safekeeping, and asset servicing activities. The agencies' adoption of the proposal fulfills this statutory requirement. The final rule becomes effective on April 1, 2020.

II. Background

A. The Supplementary Leverage Ratio

The supplementary leverage ratio measures tier 1 capital relative to total leverage exposure, which includes on-balance sheet assets (including deposits at central banks) and certain off-balance sheet exposures.^[7] A minimum supplementary leverage ratio of 3 percent applies to certain banking organizations and their depository institution subsidiaries.^[8] In addition, banking organizations that will be subject to Category I standards, which are the global systemically important bank holding companies (U.S. GSIBs), as well as their depository institution subsidiaries, are subject to enhanced supplementary leverage ratio (eSLR) standards. The eSLR standards require each U.S. GSIB to maintain a supplementary leverage ratio above 5 percent to avoid limitations on the firm's distributions and certain discretionary bonus payments and also require each of its insured depository institutions to maintain a supplementary leverage ratio of at least 6 percent to be deemed “well capitalized” under the prompt corrective action framework of each agency.^[9]

B. Fiduciary, Custody, Safekeeping, and Asset Servicing Activities

Certain banking organizations engage in fiduciary, custody, safekeeping, and asset servicing activities. Custody, safekeeping, and asset servicing activities generally involve holding securities or other assets on behalf of clients, as well as activities such as transaction settlement, income processing, and related record keeping and operational services. A banking organization may also act as a fiduciary by, for example, acting as trustee or executor, or by having investment discretion over the management of client assets. Banking organizations typically provide custody, safekeeping, and asset servicing to their fiduciary accounts. While many banking organizations offer some or all of these services, certain banking organizations specialize in these activities and often do not provide the same range or scale of traditional commercial or retail banking products as are provided by other banking organizations.^[10]

Fiduciary and custody clients often maintain cash deposits at the banking organization in connection with these services. Clients typically maintain cash positions consisting of funds awaiting investment or distribution that are often in the form of deposits placed in banking organizations. These cash deposits help facilitate the administration of the custody account. Under U.S. generally accepted accounting principles (U.S. GAAP), cash deposits at a banking organization are a deposit liability and thus appear on the banking organization's balance sheet.

Cash deposits that are linked to custody and fiduciary accounts at banking organizations fluctuate depending on the activities of the banking organization's custodial clients. For example, cash deposit balances of such banking organizations generally increase during periods when clients liquidate securities, such as during times of stress. To assist in managing these cash fluctuations, banking organizations may maintain significant cash deposits at central banks. Central bank deposits can be used as an asset-liability management strategy to facilitate these banking organizations' ability to support custodial clients' cash-related needs. Under U.S. GAAP, central bank deposits placed by the banking organization are on-balance sheet assets of the banking organization.

III. Discussion of the Comments and Final Rule

A. Scope of Applicability

1. Definition of Custodial Banking Organization

The proposal would have defined a depository institution holding company predominantly engaged in custody, safekeeping, and asset servicing activities, together with any subsidiary depository institution, as a “custodial banking organization.” ^[11] To qualify as a custodial banking organization under the proposal, a depository institution holding company would have been required to have a ratio of AUC-to-total assets of at least 30:1, calculated as an average over the prior four calendar quarters.

For the proposal, the agencies considered various measures that they could use to identify and define a custodial banking organization. As noted in the proposal, the agencies believe that the phrase “predominantly engaged in custodial, safekeeping, and asset servicing activities” suggests that the banking organization's business model is primarily focused on custody, safekeeping, and asset servicing activities, as compared to its commercial lending, investment banking, or other banking activities.^[12] Specifically, the agencies considered both an AUC-to-total assets measure and an income-based measure to implement section 402.^[13] AUC-to-total assets would provide a measure of a banking organization's custody, safekeeping, and asset servicing business relative to its other businesses. An income-based measure would show the percentage of a banking organization's income that it derives from custodial, safekeeping, and asset servicing activities. As described in the proposal, the agencies' analysis on both measures indicated a clear separation between The Bank of New York Mellon Corporation, Northern Trust Corporation, and State Street Corporation, and the other depository institution holding companies subject to the supplementary leverage ratio.^[14] The agencies' analysis also revealed a significant positive correlation between the AUC-to-total assets measure and the income-based measure.^[15] The agencies proposed the AUC-to-total assets measure to identify and define a custodial banking organization because it appeared to function well and minimized burden by relying on already reported data.

The agencies received several comments on the proposed definition of a custodial banking organization. One commenter supported adoption of the AUC-to-total assets measure under the proposal as a simple assessment that is consistent with legislative intent, and did not support the use of an income-based measure because it would increase reporting burden. Another commenter, however, supported an income-based measure to determine a custodial banking organization, arguing that an income-based measure would be more accurate than an asset-based measure in a stress environment.

While an income-based measure would show the percentage of a banking organization's income that it derives from custodial, safekeeping, and asset servicing activities, the agencies are concerned that such an approach would increase reporting burden for banking organizations subject to the supplementary leverage ratio, as banking organizations do not currently report income from custodial, safekeeping, and asset servicing activities separately from income derived from fiduciary activities. In addition and as noted above, an income-based measure likely would not result in a different outcome than an asset-based measure, as the agencies' analysis revealed a significant positive correlation between the AUC-to-total assets measure and the income-based measure.

As noted in the proposal, an AUC-to-total assets measure provides a metric for sizing a banking organization's custodial, safekeeping, and asset servicing business as compared with its other activities. Such a measure would compare assets held in custody—a major activity of banking organizations primarily focused on custody, safekeeping, and asset servicing activities—relative to on-balance sheet assets. The measure is objective because AUC often comprises marketable securities or other assets with widely quoted market values, and banking organizations typically exercise little or no valuation discretion when measuring AUC. In addition, the AUC-to-total assets measure is derived from items that are publicly reported and is subject to review by regulators, banking organizations, and the public.

For these reasons, the agencies are adopting as final the proposed use of an AUC-to-total assets measure as the basis for defining a custodial banking organization.

A commenter pointed out that the agencies omitted “asset servicing activities” from the definitions of “fiduciary or custodial and safekeeping account” and “custodial banking organization” in several parts of the proposal. Section 402 defines “custodial bank” as a “depository institution holding company predominantly engaged in custody, safekeeping, and asset servicing activities.” In contrast with the term “custodial banking organization” in section 402, the statute uses the term “fiduciary or custodial and safekeeping account” to describe the limit on the exclusion of deposits at qualifying central banks and does not include “asset servicing activities” in this context. Accordingly, the final rule does not use the phrase “asset servicing activities” in the context of the exclusion.

2. Assets Under Custody to Total Assets Measure

In defining a custodial banking organization, the proposal would have set a threshold for the AUC-to-total assets ratio at 30:1. This threshold represents the midpoint between the lowest AUC-to-total assets measure of banking organizations that are subject to the supplementary leverage ratio and that specialize in providing custody, safekeeping, and asset servicing services between second quarter of 2016 through the third quarter of 2018 (52:1) and the highest such measure experienced by other banking organizations subject to the supplementary leverage ratio (9:1) over the same period. This amount also takes into account potential changes in such banking organizations' ratio of AUC-to-total assets during a stress environment. As noted in the proposal, the agencies recognize that a banking organization's ratio of AUC-to-total assets may fluctuate significantly during a stress environment as client securities decline in value or as clients liquidate custodial securities and deposit the cash with the banking organization (thus increasing the banking organization's total assets). Among The Bank of New York Mellon, Northern Trust Corporation, and State Street Corporation, the lowest AUC-to-total assets ratio observed during the period from the second quarter of 2016 through the third quarter of 2018 was approximately 52:1.^[16] This means that the banking organization had approximately $52 in AUC for every $1 recognized in their total on-balance sheet assets. In comparison, among the other depository institution holding companies subject to the supplementary leverage ratio, the highest AUC-to-total assets ratio observed during that same period was approximately 9:1. An AUC-to-total assets ratio of 30:1 is also less than the minimum estimated ratio for The Bank of New York Mellon, Northern Trust Corporation, and State Street Corporation (35:1) over the period from 2004 through the third quarter of 2018, which includes the 2007-2009 financial crisis.^[17]

The proposal also incorporated use of a four-quarter average for the AUC-to-total assets measure. This approach would further minimize the effect of significant fluctuations in a banking organization's AUC-to-total assets ratio, which is a particular concern under stress conditions. The 30:1 AUC-to-total assets measure also would limit the potential for a banking organization subject to the supplementary leverage ratio that does not predominantly engage in custody, safekeeping, and asset servicing activities, as compared to its other activities, to qualify as a custodial banking organization. The agencies did not receive comments on the proposed threshold. In addition, expanding the analysis to include the first and second quarters of 2019 produces the same range of AUC-to-total assets ratios. For the reasons provided above, the agencies are adopting as final the proposed threshold of 30:1 for the AUC-to-total assets measure.

3. Scope of Covered Entities

Under the proposal, any subsidiary depository institution of a U.S. top-tier depository institution holding company that qualifies as a custodial banking organization also would be a custodial banking organization and therefore could exclude from total leverage exposure all deposits with a qualifying central bank that are recognized on its consolidated balance sheet in the same manner as its parent depository institution holding company.^[18] In other words, the proposal would not have required such a subsidiary depository institution to satisfy separately a ratio of AUC-to-total assets to be able to make this exclusion. The agencies believe this approach is both simple and consistent with section 402, which defines a “custodial bank” based on the characteristics of the holding company and provides that such a subsidiary depository institution may also exclude deposits at qualifying central banks from its supplementary leverage ratio, to the extent that these deposits do not exceed deposit liabilities of the banking organization that are linked to fiduciary or custodial and safekeeping accounts.

The agencies also sought comment on whether to expand the scope of application and definition of custodial banking organization to include a depository institution that is not controlled by a holding company and that has a ratio of AUC-to-total assets of at least 30:1.^[19] The agencies did not receive any comments on this issue. Accordingly, the scope of application and definition of custodial banking organization are adopted in this final rule as proposed.

B. Mechanics of the Central Bank Deposit Exclusion

Under the proposal, the amount of central bank deposits eligible for exclusion from total leverage exposure would have equaled the average daily balance over the reporting quarter of all deposits placed with a “qualifying central bank.” Under the proposal, and consistent with section 402, a qualifying central bank would have meant a Federal Reserve Bank, the European Central Bank, or a central bank of a member country of the OECD if an exposure to the member country receives a zero percent risk weight under section 32 of the capital rule and the sovereign debt of such member country is not in default or has not been in default during the previous five years.^[20] The proposal would have calculated the exclusion amount based on the average daily balance of deposits with a qualifying central bank over the reporting quarter to align with the calculation of on-balance sheet assets in total leverage exposure.^[21]

The agencies did not receive any comments addressing the mechanics of the central bank deposit exclusion. One commenter stated that custodial banking organizations should be permitted to distribute profits received from interest earned on excess reserves. The agencies note that this rulemaking does not affect the types of deposits that a bank may have with a Federal Reserve Bank, or the interest paid on those deposits.

In addition, as discussed in the Supplementary Information to the proposal, all deposits placed with a Federal Reserve Bank qualify for the rule's central bank deposit exclusion, including deposits in a master account, deposits in a term deposit account that offers an early withdrawal feature, and deposits in an excess balance account.^[22] Any deposits with a qualifying central bank denominated in a foreign currency should be measured in U.S. dollars to determine the amount of the deposits that can be excluded from total leverage exposure. Similarly, central bank deposits recognized on the consolidated balance sheet of a custodial banking organization may include cash placements with a central bank made by a foreign bank subsidiary. Although a foreign bank subsidiary itself will not be a custodial banking organization, any qualifying central bank deposits of the foreign bank subsidiary may be excluded from total leverage exposure of the parent organization to the extent that the central bank deposits are consolidated on the balance sheet of the parent organization and have satisfied the requirements for a qualifying central bank deposit.

The agencies are adopting as final the proposed mechanics of the central bank deposit exclusion.

C. Central Bank Deposit Exclusion Limit

Consistent with section 402, the proposal would have limited the amount of a custodial banking organization's deposits with a qualifying central bank that could have been excluded from total leverage exposure. In particular, the amount of such deposits that could have been excluded could not have exceeded an amount equal to the on-balance-sheet deposit liabilities of the custodial banking organization that were linked to fiduciary or custody and safekeeping accounts. After considering the comments discussed below, the agencies are adopting this aspect of the proposal without change.

The proposal would have defined a fiduciary or custodial and safekeeping account as an account administered by a custodial banking organization for which the custodial banking organization provides fiduciary or custodial and safekeeping services, as authorized by applicable federal and state law. Under the proposal, a deposit account would have been considered linked to a fiduciary or custodial and safekeeping account if the deposit account is used to facilitate the administration of the fiduciary or custody and safekeeping account.

The agencies sought comment on the advantages and disadvantages of using the FDIC exclusion limit or the reporting instructions to Schedule RC-O of the Call Report for purposes of determining linkage between a deposit account and a fiduciary or custody and safekeeping account to calculate the limit on the amount of deposits that could be excluded from total leverage exposure. In particular, the proposal noted that the asset exclusion limit for “custodial banks” provided under the FDIC's regulations for purposes of determining risk-based deposit insurance assessments (FDIC exclusion limit) includes the concept of a “linked” deposit and that the Call Report collects information related to such linked deposits on Schedule RC-O.^[23] In addition, the agencies sought comment on whether the proposed definition of fiduciary or custody and safekeeping account should explicitly reference the reporting instructions under Schedule RC-T.

One commenter supported defining the scope of fiduciary or custodial and safekeeping accounts in a manner that does not deviate materially from the current scope of fiduciary and custody and safekeeping accounts reported under schedule RC-T of the Call Report. To mitigate additional compliance obligations for the purpose of section 402, the commenter supported using the FDIC exclusion limit and reporting instructions in Schedule RC-O to determine whether a deposit account is linked to a fiduciary or custodial and safekeeping account.

The agencies are adopting as final the proposed definition of fiduciary or custodial and safekeeping accounts. As noted in the proposal, the agencies anticipate that the scope of the fiduciary or custodial and safekeeping accounts under the rule should not deviate materially from the current scope of the fiduciary and custody and safekeeping accounts reported under Schedule RC-T of the Call Report. However, the agencies are clarifying that because this final rule applies to both custodial banking organization holding companies and custodial banking organization subsidiary depository institutions, and because holding companies do not report Schedule RC-T of the Call Report, the agencies are not referring directly to schedule RC-T for the scope of fiduciary or custodial and safekeeping accounts.

The agencies are clarifying that the existing FDIC exclusion limit and the reporting instructions to Schedule RC-O are factors that a banking organization may take into account to determine linkage between a deposit account and a fiduciary or custody and safekeeping account. However, the agencies are not directly defining the linkage standard in the final rule by reference to the FDIC exclusion limit or Schedule RC-O.

The FDIC exclusion limit and the reporting instructions to Schedule RC-O were designed for the purpose of determining risk-based deposit insurance assessments for insured depository institutions. In addition, the FDIC exclusion limit and reporting instructions in Schedule RC-O were designed to limit the custodial bank deduction to transaction account deposit liabilities and therefore Schedule RC-O would not capture non-transaction account deposit liabilities.^[24] In contrast to the FDIC exclusion limit, this final rule applies to both custodial banking organization holding companies and custodial banking organization subsidiary depository institutions; uses a different standard to define a custodial banking organization; and applies only to custodial banking organizations that are subject to the supplementary leverage ratio. The agencies believe that not directly defining the linkage standard by reference to schedule RC-O and the FDIC exclusion limit is appropriate in light of the purpose served by section 402 (that is, prudential regulation of custodial banking organizations' regulatory capital) as compared to deposit insurance assessments, and because section 402 applies to a narrow set of the largest banking organizations (that is, banking organizations that qualify as custodial banking organizations that are subject to the supplementary leverage ratio). In light of these differences, the agencies are adopting as final the proposal's provision that a deposit account is considered linked to a fiduciary or custodial and safekeeping account if the deposit account is used to facilitate the administration of the fiduciary or custody and safekeeping account.

The fact that a client has both a deposit account and a fiduciary or custody and safekeeping account at the same custodial banking organization, or an affiliate or subsidiary of such custodial banking organization, would not by itself be sufficient for those accounts to be considered “linked” for purposes of the final rule. On the other hand, cash deposits may be used to facilitate the administration of a custody or fiduciary account, such as holding interest and dividend payments related to securities held in the custody or fiduciary account; cash transfers or distributions from the custody or fiduciary account; and the purchases and sale of securities for the account. Deposit accounts used in these ways would be considered linked for purposes of the final rule.

Consistent with section 402, under the final rule, a custodial banking organization may exclude from total leverage exposure the lesser of (1) the amount of central bank deposits placed at qualifying central banks by the custodial banking organization (including deposits placed by consolidated subsidiaries), and (2) the amount of on-balance sheet deposit liabilities of the custodial banking organization (including consolidated subsidiaries) that are linked to fiduciary or custodial and safekeeping accounts.^[25]

One commenter asked the agencies to clarify that the calculation of the central bank exclusion limit must be done on a quarterly basis, consistent with the calculations required under Schedule RC-T and RC-O.^[26] In calculating the central bank exclusion limit, a custodial banking organization should calculate the amount of deposit liabilities linked to a fiduciary or custody and safekeeping account as the average deposit liabilities for such accounts, calculated as of each day of the reporting quarter. This approach is consistent with the calculation of on-balance sheet assets for purposes of the supplementary leverage ratio.

D. Regulatory Reporting Requirements

Banking organizations report their supplementary leverage ratios on FFIEC Form 101, Schedule A and Form Y-9C, Schedule HC-R, and Call Reports, Schedule RC-R. The agencies recently proposed modifications to the regulatory reporting requirements for the supplementary leverage ratio in a separate publication in the Federal Register to reflect the implementation of the central bank deposit exclusion described in this final rule.^[27] The agencies' adoption of these regulatory reporting requirements would fulfill the disclosure requirements for purposes of the capital rule.^[28] In particular, custodial banking organizations subject to the supplementary leverage ratio would be subject to the corresponding disclosure requirements in section 173, and would exclude qualifying central bank deposits from total leverage exposure as reported under section 173.

IV. OCC Statement Regarding Standalone Depository Institutions

As discussed in section III, the agencies sought comment on whether to expand the scope of application and definition of “custodial banking organization” to include a depository institution that is not controlled by a holding company and that has a ratio of AUC-to-total assets of at least 30:1. For the reasons stated in the proposal,^[29] the OCC is considering this question for a future rulemaking.

V. Interaction of Section 402 With Other Rules

A. Total Loss-Absorbing Capacity

Under the Board's total loss-absorbing capacity (TLAC) rule, a covered company is subject to requirements that, in part, rely on the covered company's total leverage exposure.^[30] Thus, changes to the calculation of total leverage exposure under this final rule could affect the amount of eligible external TLAC required to be held by a covered company that is also a custodial banking organization. Under the proposal, the revised definition of total leverage exposure for custodial banking organizations would also apply for purposes of the TLAC rule.

Some commenters stated that the definition of total leverage exposure should be consistent across the supplementary leverage ratio and TLAC requirements. The commenters asserted that inconsistent treatment across the supplementary leverage ratio and TLAC requirements would be in tension with the legislative intent of section 402. Commenters stated that including central bank deposits in TLAC for custodial banking organizations could undermine the ability for such deposits to serve as a safe store of value for client cash during a stress event. In addition, commenters asserted that there is no compelling policy rationale for requiring a banking organization to include in TLAC an asset for which there is no corresponding capital requirement under the supplementary leverage ratio. Commenters also stated that the use of different measures for the supplementary leverage ratio and TLAC rule would increase complexity for bank capital allocation without improving risk assessment, because the differences between the measures would only reflect the amount of central bank placements.

The agencies are adopting as final the proposed treatment of total leverage exposure. This treatment will align the TLAC rule with the supplementary leverage ratio and reduce burden by not requiring separate calculations for total leverage exposure under each of the TLAC rule and the supplementary leverage ratio.

B. The Enhanced Supplementary Leverage Ratio and Other Comments on the Proposal

Several commenters acknowledged that the agencies are required to implement section 402 but raised various concerns regarding the potential effect that implementation of section 402 could have on other aspects of the banking sector. Two commenters raised concerns that implementation of section 402 would lead to a market concentration in custody services and provide custodial banking organizations with a competitive advantage relative to banking organizations that are subject to the supplementary leverage ratio but are not eligible to exclude central bank deposits. To help mitigate these concerns, these commenters urged for finalization of the proposal to recalibrate the eSLR standards issued by the Board and OCC.^[31]

The agencies did not propose recalibrating the eSLR standards as part of this rulemaking. Therefore, the agencies view comments on the eSLR standards as outside the scope of this rulemaking. Another commenter noted that while the agencies are required to implement section 402, the agencies are not prevented from using other authorities to counteract the potential effects of section 402 through making changes to other parts of the capital rule. As noted above, the proposal was designed to implement section 402, and the agencies did not seek comment on other changes. Changes to the capital rule that do not address the supplementary leverage ratio are outside of the scope of this rulemaking, but may be considered by the agencies in subsequent rulemakings.

VI. Impact Analysis

Under the final rule, a top-tier U.S. depository institution holding company that qualifies as a custodial banking organization, and any of its depository institution subsidiaries, will be able to exclude certain central bank deposits from total leverage exposure, subject to limits as described above. For custodial banking organization holding companies and their lead depository institution subsidiaries, the agencies estimate that central bank deposits eligible for exclusion represent between 20 and 28 percent of their total leverage exposure.^[32] Based on an exclusion of this amount from each of these banking organization's total leverage exposure, the final rule may result in an estimated decrease in the amount of tier 1 capital required by the supplementary leverage ratio of approximately $8 billion in aggregate across the top-tier U.S. depository institution holding companies and approximately $8 billion in aggregate across their lead depository institution subsidiaries.^[33] However, this estimate relates solely to the supplementary leverage ratio and does not take into account any other applicable capital constraints that would prevent a decrease in tier 1 capital. Rather, the binding capital requirement for a given banking organization is the capital requirement that requires the highest amount of regulatory capital.^[34] Holding companies are subject to leverage, risk-based, and post-stress capital requirements, and only one of these requirements binds an individual holding company at any given time.^[35] Similarly, only one of the applicable leverage and risk-based capital requirements binds a depository institution at any given time.^[36] The risk profile and the capital requirements for the activities and exposures of a banking organization determine which capital requirement is binding.

Thus, the final rule would reduce the amount of tier 1 capital that must be maintained by a custodial banking organization holding company only if the supplementary leverage ratio currently serves as the binding capital requirement for the banking organization.^[37] Data from the third quarter of 2018 shows that top-tier U.S. depository institution holding companies that are expected to qualify as custodial banking organizations currently are bound by post-stress capital requirements. The risk-based capital standards applicable to these organizations also require a higher amount of tier 1 capital than the amount of tier 1 capital that would be required under the final rule for purposes of the supplementary leverage ratio. Therefore, the final rule is not expected to decrease the amount of tier 1 capital maintained by such holding companies.

The supplementary leverage ratio as of the third quarter 2018 serves as the binding constraint for two depository institution subsidiaries of custodial banking organization holding companies. Accordingly, under the final rule, the amount of tier 1 capital required of those institutions to the supplementary leverage ratio will decrease by approximately $7 billion, which represents approximately 23 percent of the total amount of tier 1 capital that must be maintained by those institutions as of the third quarter 2018. As described above, given the applicable capital requirements for parent holding companies of these depository institutions, the final rule is not expected to decrease the amount of tier 1 capital maintained by such holding companies.

One commenter expressed concern that the rule might allow custodial banking organizations to reduce the amount of tier 1 capital and urged the agencies to use other authorities to offset the potential capital impact. As described above, the capital standards and other constraints applicable at the custodial banking organization holding company level are expected to limit the amount of capital that such a holding company could distribute outside of the consolidated organization, thus limiting any safety and soundness or financial stability concerns for the holding company as a whole due to reduced requirements at the depository institution level. In addition, the agencies have regulatory and supervisory tools to ensure that depository institutions and holding companies maintain appropriate amounts of capital for their operations and risk profile.

VII. Regulatory Analyses

A. Paperwork Reduction Act

The agencies' capital rule contains “collections of information” within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and the 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 OMB control number for the OCC is 1557-0318, Board is 7100-0313, and FDIC is 3064-0153. The information collections that are part of the agencies' capital rule will not be affected by this final rule and therefore no final submissions will be made by the FDIC or OCC to OMB under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and § 1320.11 of the OMB's implementing regulations (5 CFR part 1320) in connection with this rulemaking.

Related to the final rule, there are required changes to the Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031, FFIEC 041, and FFIEC 051), the Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101), and the Consolidated Financial Statements for Holding Companies (FR Y-9C; OMB No. 7100-0128 (Board)), which will be addressed through one or more separate Federal Register notices.^[38]

B. Regulatory Flexibility Act Analysis

OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), requires an agency, in connection with a proposed rule, to prepare an Initial Regulatory Flexibility Analysis describing the impact of the rule on small entities (defined by the Small Business Administration (SBA) for purposes of the RFA to include commercial banks and savings institutions with total assets of $600 million or less and trust companies with total revenue of $41.5 million or less) or to certify that the proposed rule would not have a significant economic impact on a substantial number of small entities. As of December 31, 2018, the OCC supervised 782 small entities. The rule would impose requirements on four OCC supervised entities that are subject to the advanced approaches risk-based capital rule, which typically have assets in excess of $250 billion, and therefore would not be small entities. Therefore, the OCC certifies that the final rule would not have a significant economic impact on a substantial number of OCC-supervised small entities.

Board: An initial regulatory flexibility analysis (IRFA) was included in the proposal in accordance with section 603(a) of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq. (RFA). In the IRFA, the Board requested comment on the effect of the proposed rule on small entities and on any significant alternatives that would reduce the regulatory burden on small entities. The Board did not receive any comments on the IRFA. The RFA requires an agency to prepare a final regulatory flexibility analysis unless the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. Based on its analysis, and for the reasons stated below, the Board certifies that the rule will not have a significant economic impact on a substantial number of small entities.^[39]

Under regulations issued by the Small Business Administration, a small entity includes a bank, bank holding company, or savings and loan holding company with assets of $600 million or less and trust companies with total assets of $41.5 million or less (small banking organization).^[40] On average since the second quarter of 2018, there were approximately 2,976 small bank holding companies, 133 small savings and loan holding companies, 70 small state member banks and no small trust companies.

As discussed in the Supplementary Information section, the final rule revises the capital rule to implement section 402 of EGRRCPA. Specifically, the final rule allows custodial banking organization to exclude from the denominator of the supplementary leverage ratio certain funds of the banking organization that are deposited with central banks. The supplementary leverage ratio applies only to advanced approaches banking organizations, which are very large banking organizations and their depository institution subsidiaries regardless of size.^[41] Therefore, the final rule is not expected to apply to a substantial number of small entities.^[42] The Board does not expect that the final rule will result in a material change in the level of capital maintained by small banking organizations or in the compliance burden on small banking organizations. For these reasons, the Board does not expect the rule to have a significant economic impact on a substantial number of small entities.

FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., generally requires an agency, in connection with a final rule, to prepare and make available for public comment a final regulatory flexibility analysis that describes the impact of a final rule on small entities.^[43] However, a regulatory flexibility analysis is not required if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. The Small Business Administration (SBA) has defined “small entities” to include banking organizations with total assets of less than or equal to $600 million if they are either independently owned and operated or owned by a holding company that also has less than $600 million in total assets.^[44]

As of June 30, 2019, there were 3,424 FDIC-supervised institutions, of which 2,665 are considered small entities for the purposes of RFA. These small entities hold $514 billion in assets, accounting for 16.6 percent of total assets held by FDIC-supervised institutions.^[45]

The final rule applies to only three advanced approaches banking organizations, one of which has an IDI subsidiary that is FDIC-supervised and has less than $600 million in total assets.^[46] However, that institution is not a small entity for the purposes of RFA since it is owned by a holding company with over $600 million in total assets. Since this final rule does not affect any FDIC-supervised institutions that are defined as small entities for the purposes of the RFA, the FDIC certifies that the rule will not have a significant economic impact on a substantial number of small entities.

C. Plain Language

Section 722 of the Gramm-Leach-Bliley Act ^[47] requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies sought to present the final rule in a simple and straightforward manner, and did not receive any comments on the use of plain language.

D. Riegle Community Development and Regulatory Improvement Act of 1994

Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act (RCDRIA),^[48] in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on IDIs, each Federal banking agency must consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and clients of depository institutions, as well as the benefits of such regulations. In addition, section 302(b) of RCDRIA requires new regulations and amendments to regulations that impose additional reporting, disclosures, or other new requirements on IDIs generally to take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form.^[49]

The agencies considered the administrative burdens and benefits of the rule in determining its effective date and administrative compliance requirements. As such, the final rule will be effective on April 1, 2020.

E. OCC Unfunded Mandates Reform Act of 1995 Determination

The OCC has analyzed the final rule under the factors in the Unfunded Mandates Reform Act of 1995 (UMRA).^[50] Under this analysis, the OCC considered whether the final rule includes a Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year (adjusted annually for inflation). The UMRA does not apply to regulations that incorporate requirements specifically set forth in law.

The OCC's estimated UMRA cost is near zero. Therefore, the OCC finds that the final rule does not trigger the UMRA cost threshold. Accordingly, the OCC has not prepared the written statement described in section 202 of the UMRA.

F. The Congressional Review Act

For purposes of Congressional Review Act, the Office of Management and Budget (OMB) makes a determination as to whether a final rule constitutes a “major” rule.^[51] If a rule is deemed a “major rule” by OMB, the Congressional Review Act generally provides that the rule may not take effect until at least 60 days following its publication.^[52]

The Congressional Review Act defines a “major rule” as any rule that the Administrator of the Office of Information and Regulatory Affairs of the OMB finds has resulted in or is likely to result in (A) an annual effect on the economy of $100,000,000 or more; (B) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies or geographic regions, or (C) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets.^[53] As required by the Congressional Review Act, the agencies will submit the final rule and other appropriate reports to Congress and the Government Accountability Office for review.

List of Subjects

12 CFR Part 3

• Administrative practice and procedure
• Capital
• National banks
• Risk

12 CFR Part 217

• Administrative practice and procedure
• Banks
• Banking
• Capital
• Federal Reserve System
• Holding companies

12 CFR Part 324

• Administrative practice and procedure
• Banks
• Banking
• Capital adequacy
• Savings associations
• State non-member banks

Office of the Comptroller of the Currency

For the reasons set out in the joint preamble, the OCC amends 12 CFR part 3 as follows:

PART 3—CAPITAL ADEQUACY STANDARDS

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

Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).

2. Section 3.2 is amended by adding the definitions of “Custody bank”, “Fiduciary or custodial and safekeeping account”, and “Qualifying central bank” in alphabetical order to read as follows:

3. Section 3.10 is amended by revising paragraph (c)(4)(ii) introductory text and adding paragraph (c)(4)(ii)(J) to read as follows:

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

For the reasons set forth in the preamble, chapter II of title 12 of the Code of Federal Regulations is amended as set forth below:

PART 217—CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)

4. The authority citation for part 217 continues to read as follows:

Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 3906-3909, 4808, 5365, 5368, 5371, and 5371 note.

5. Section 217.2 is amended by adding the definitions of “Custodial banking organization,” “Fiduciary or custodial and safekeeping accounts,” and “Qualifying central bank” in alphabetical order to read as follows:

6. Section 217.10 is amended by revising paragraph (c)(4)(ii) introductory text and adding paragraph (c)(4)(ii)(J) to read as follows:

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

For the reasons set forth in the preamble, chapter III of title 12 of the Code of Federal Regulations is amended as set forth below.

PART 324—CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

7. The authority citation for part 324 continues to read as follows:

Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).

8. Section 324.2 is amended by adding the definitions of “Custody bank,” “Fiduciary or custodial and safekeeping accounts,” and “Qualifying central bank” in alphabetical order as follows:

9. Section 324.10 is amended by revising paragraph (c)(4)(ii) introductory text and adding paragraph (c)(4)(ii)(J) to read as follows:

Footnotes