(a) Regulatory
capital components. A Board-regulated institution’s regulatory
capital components are:
(1) Common equity tier 1 capital;
(2) Additional tier 1 capital; and
(3) Tier 2 capital.
(b) Common equity tier 1 capital. Common equity tier 1 capital is
the sum of the common equity tier 1 capital elements in this paragraph
(b), minus regulatory adjustments and deductions in section 217.22.
The common equity tier 1 capital elements are:
(1) Any common stock instruments (plus
any related surplus) issued by the Board-regulated institution, net
of treasury stock, and any capital instruments issued by mutual banking
organizations, that meet all the following criteria:
(i) The instrument is paid-in, issued
directly by the Board-regulated institution, and represents the most
subordinated claim in a receivership, insolvency, liquidation, or
similar proceeding of the Board-regulated institution;
(ii) The holder of the instrument is
entitled to a claim on the residual assets of the Board-regulated
institution that is proportional with the holder’s share of
the Board-regulated institution’s issued capital after all senior
claims have been satisfied in a receivership, insolvency, liquidation,
or similar proceeding;
(iii)
The instrument has no maturity date, can only be redeemed via discretionary
repurchases with the prior approval of the Board to the extent otherwise
required by law or regulation, and does not contain any term or feature
that creates an incentive to redeem;
(iv) The Board-regulated institution
did not create at issuance of the instrument through any action or
communication an expectation that it will buy back, cancel, or redeem
the instrument, and the instrument does not include any term or feature
that might give rise to such an expectation;
(v) Any cash dividend payments on the
instrument are paid out of the Board-regulated institution’s
net income, retained earnings, or surplus related to common stock,
and are not subject to a limit imposed by the contractual terms governing
the instrument. State member banks are subject to other legal restrictions
on reductions in capital resulting from cash dividends, including
out of the capital surplus account, under 12 U.S.C. 324 and 12 CFR
208.5.
(vi) The Board-regulated
institution has full discretion at all times to refrain from paying
any dividends and making any other distributions on the instrument
without triggering an event of default, a requirement to make a payment-in-kind,
or an imposition of any other restrictions on the Board-regulated
institution;
(vii) Dividend payments
and any other distributions on the instrument may be paid only after
all legal and contractual obligations of the Board-regulated institution
have been satisfied, including payments due on more senior claims;
(viii) The holders of the instrument
bear losses as they occur equally, proportionately, and simultaneously
with the holders of all other common stock instruments before any
losses are borne by holders of claims on the Board-regulated institution
with greater priority in a receivership, insolvency, liquidation,
or similar proceeding;
(ix) The
paid-in amount is classified as equity under GAAP;
(x) The Board-regulated institution,
or an entity that the Board-regulated institution controls, did not
purchase or directly or indirectly fund the purchase of the instrument;
(xi) The instrument is not secured,
not covered by a guarantee of the Board-regulated institution or of
an affiliate of the Board-regulated institution, and is not subject
to any other arrangement that legally or economically enhances
the seniority of the instrument;
(xii) The instrument has been issued in accordance with applicable
laws and regulations; and
(xiii)
The instrument is reported on the Board-regulated institution’s
regulatory financial statements separately from other capital instruments.
(2) Retained earnings.
(3) Accumulated other comprehensive
income (AOCI) as reported under GAAP.
11(4) Any common equity tier 1 minority interest,
subject to the limitations in section 217.21.
(5) Notwithstanding the criteria for common
stock instruments referenced above, a Board-regulated institution’s
common stock issued and held in trust for the benefit of its employees
as part of an employee stock ownership plan does not violate any of
the criteria in paragraph (b)(1)(iii), paragraph (b)(1)(iv) or paragraph
(b)(1)(xi) of this section, provided that any repurchase of the stock
is required solely by virtue of ERISA for an instrument of a Board-regulated
institution that is not publicly-traded. In addition, an instrument
issued by a Board-regulated institution to its employee stock ownership
plan does not violate the criterion in paragraph (b)(1)(x) of this
section.
(c) Additional
tier 1 capital. Additional tier 1 capital is the sum of additional
tier 1 capital elements and any related surplus, minus the regulatory
adjustments and deductions in section 217.22. Additional tier 1 capital
elements are:
(1) Instruments
(plus any related surplus) that meet the following criteria:
(i) The instrument is issued and
paid-in;
(ii) The instrument
is subordinated to depositors, general creditors, and subordinated
debt holders of the Board-regulated institution in a receivership,
insolvency, liquidation, or similar proceeding;
(iii) The instrument is not secured,
not covered by a guarantee of the Board-regulated institution or of
an affiliate of the Board-regulated institution, and not subject to
any other arrangement that legally or economically enhances the seniority
of the instrument;
(iv) The instrument
has no maturity date and does not contain a dividend step-up or any
other term or feature that creates an incentive to redeem; and
(v) If callable by its terms, the
instrument may be called by the Board-regulated institution only after
a minimum of five years following issuance, except that the terms
of the instrument may allow it to be called earlier than five years
upon the occurrence of a regulatory event that precludes the instrument
from being included in additional tier 1 capital, a tax event, or
if the issuing entity is required to register as an investment company
pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.). In addition:
(A) The Board-regulated institution must receive prior approval from
the Board to exercise a call option on the instrument.
(B) The Board-regulated institution does not
create at issuance of the instrument, through any action or communication,
an expectation that the call option will be exercised.
(C) Prior to exercising the call option, or
immediately thereafter, the Board-regulated institution must either:
replace the instrument to be called with an equal amount of instruments
that meet the criteria under paragraph (b) of this section or this
paragraph (c);
12 or demonstrate to the satisfaction of the Board that following
redemption, the Board-regulated institution will continue to hold
capital commensurate with its risk.
(vi) Redemption or repurchase of the
instrument requires prior approval from the Board.
(vii) The Board-regulated institution
has full discretion at all times to cancel dividends or other distributions
on the instrument without triggering an event of default, a requirement
to make a payment-in-kind, or an imposition of other restrictions
on the Board-regulated institution except in relation to any distributions
to holders of common stock or instruments that are pari passu with the instrument.
(viii)
Any distributions on the instrument are paid out of the Board-regulated
institution’s net income, retained earnings, or surplus related
to other additional tier 1 capital instruments. State member banks
are subject to other legal restrictions on reductions in capital resulting
from cash dividends, including out of the capital surplus account,
under 12 U.S.C. 324 and 12 CFR 208.5.
(ix) The instrument does not have a
credit-sensitive feature, such as a dividend rate that is reset periodically
based in whole or in part on the Board-regulated institution’s
credit quality, but may have a dividend rate that is adjusted periodically
independent of the Board-regulated institution’s credit quality,
in relation to general market interest rates or similar adjustments.
(x) The paid-in amount is classified
as equity under GAAP.
(xi) The
Board-regulated institution, or an entity that the Board-regulated
institution controls, did not purchase or directly or indirectly fund
the purchase of the instrument.
(xii) The instrument does not have any features that would limit
or discourage additional issuance of capital by the Board-regulated
institution, such as provisions that require the Board-regulated institution
to compensate holders of the instrument if a new instrument is issued
at a lower price during a specified time frame.
(xiii) If the instrument is not issued
directly by the Board-regulated institution or by a subsidiary of
the Board-regulated institution that is an operating entity, the only
asset of the issuing entity is its investment in the capital of the
Board-regulated institution, and proceeds must be immediately available
without limitation to the Board-regulated institution or to the Board-regulated
institution’s top-tier holding company in a form which meets
or exceeds all of the other criteria for additional tier 1 capital
instruments.
13(xiv) For an advanced approaches Board-regulated
institution, the governing agreement, offering circular, or prospectus
of an instrument issued after the date upon which the Board-regulated
institution becomes subject to this part as set forth in section 217.1(f)
must disclose that the holders of the instrument may be fully subordinated
to interests held by the U.S. government in the event that the Board-regulated
institution enters into a receivership, insolvency, liquidation, or
similar proceeding.
(2) Tier 1 minority interest, subject to the limitations in section
217.21, that is not included in the Board-regulated institution’s
common equity tier 1 capital.
(3) (i) Any and all instruments
that qualified as tier 1 capital under the Board’s general risk-based
capital rules under 12 CFR part 208, appendix A or 12 CFR part 225,
appendix A, as then in effect, that were issued under the Small Business
Jobs Act of 2010
14 or prior to October 4, 2010, under
the Emergency Economic Stabilization Act of 2008.
15(ii) Any preferred stock instrument issued under the U.S. Department
of the Treasury’s Emergency Capital Investment Program pursuant
to section 104A of the Community Development Banking and Financial
Institutions Act of 1994, added by the Consolidated Appropriations
Act, 2021.
16(4) Notwithstanding the criteria for additional tier 1 capital instruments
referenced above:
(i) An instrument issued by a Board-regulated institution and held
in trust for the benefit of its employees as part of an employee
stock ownership plan does not violate any of the criteria in paragraph
(c)(1)(iii) of this section, provided that any repurchase is required
solely by virtue of ERISA for an instrument of a Board-regulated institution
that is not publicly-traded. In addition, an instrument issued by
a Board-regulated institution to its employee stock ownership plan
does not violate the criteria in paragraph (c)(1)(v) or paragraph
(c)(1)(xi) of this section; and
(ii) An instrument with terms that provide that the instrument may
be called earlier than five years upon the occurrence of a rating
agency event does not violate the criterion in paragraph (c)(1)(v)
of this section provided that the instrument was issued and included
in a Board-regulated institution’s tier 1 capital prior to January
1, 2014, and that such instrument satisfies all other criteria under
this section 217.20(c).
(d) Tier 2 Capital. Tier 2 capital is the sum
of tier 2 capital elements and any related surplus, minus regulatory
adjustments and deductions in section 217.22. Tier 2 capital elements
are:
(1) Instruments (plus
related surplus) that meet the following criteria:
(i) The instrument is issued and
paid-in;
(ii) The instrument
is subordinated to depositors and general creditors of the Board-regulated
institution;
(iii) The instrument
is not secured, not covered by a guarantee of the Board-regulated
institution or of an affiliate of the Board-regulated institution,
and not subject to any other arrangement that legally or economically
enhances the seniority of the instrument in relation to more senior
claims;
(iv) The instrument has
a minimum original maturity of at least five years. At the beginning
of each of the last five years of the life of the instrument, the
amount that is eligible to be included in tier 2 capital is reduced
by 20 percent of the original amount of the instrument (net of redemptions)
and is excluded from regulatory capital when the remaining maturity
is less than one year. In addition, the instrument must not have any
terms or features that require, or create significant incentives for,
the Board-regulated institution to redeem the instrument prior to
maturity;
16 and
(v) The instrument, by its terms, may
be called by the Board-regulated institution only after a minimum
of five years following issuance, except that the terms of the instrument
may allow it to be called sooner upon the occurrence of an event that
would preclude the instrument from being included in tier 2 capital,
a tax event, or if the issuing entity is required to register as an
investment company pursuant to the Investment Company Act of 1940
(15 U.S.C. 80a-1 et seq.). In addition:
(A) The Board-regulated institution must receive
the prior approval of the Board to exercise a call option on the instrument.
(B) The Board-regulated institution does
not create at issuance, through action or communication, an expectation
the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter,
the Board-regulated institution must either: replace any amount called
with an equivalent amount of an instrument that meets the criteria
for regulatory capital under this section;
17 or
demonstrate to the satisfaction of the Board that following redemption,
the Board-regulated institution would continue to hold an amount of
capital that is commensurate with its risk.
(vi) The holder of the instrument must
have no contractual right to accelerate payment of principal or interest
on the instrument, except in the event of a receivership, insolvency,
liquidation, or similar proceeding of the state member bank or depository
institution holding company, as applicable, or of a major subsidiary
depository institution of the depository institution holding company.
(vii) The instrument has no credit-sensitive
feature, such as a dividend or interest rate that is reset periodically
based in whole or in part on the Board-regulated institution’s
credit standing, but may have a dividend rate that is adjusted periodically
independent of the Board-regulated institution’s credit standing,
in relation to general market interest rates or similar adjustments.
(viii) The Board-regulated institution,
or an entity that the Board-regulated institution controls, has not
purchased and has not directly or indirectly funded the purchase of
the instrument.
(ix) If the instrument
is not issued directly by the Board-regulated institution or by a
subsidiary of the Board-regulated institution that is an operating
entity, the only asset of the issuing entity is its investment in
the capital of the Board-regulated institution, and proceeds must
be immediately available without limitation to the Board-regulated
institution or the Board-regulated institution’s top-tier holding
company in a form that meets or exceeds all the other criteria for
tier 2 capital instruments under this section.
18(x) Redemption of the
instrument prior to maturity or repurchase requires the prior approval
of the Board.
(xi) For an advanced
approaches Board-regulated institution, the governing agreement, offering
circular, or prospectus of an instrument issued after the date on
which the advanced approaches Board-regulated institution becomes
subject to this part under section 217.1(f) must disclose that the
holders of the instrument may be fully subordinated to interests held
by the U.S. government in the event that the Board-regulated institution
enters into a receivership, insolvency, liquidation, or similar proceeding.
(2) Total capital minority
interest, subject to the limitations set forth in section 217.21,
that is not included in the Board-regulated institution’s tier
1 capital.
(3) ALLL or AACL, as
applicable, up to 1.25 percent of the Board-regulated institution’s
standardized total risk-weighted assets not including any amount of
the ALLL or AACL, as applicable (and excluding in the case of a market
risk Board-regulated institution, its standardized market risk-weighted
assets).
(4) (i)
Any instrument that qualified as tier 2 capital under the Board’s
general risk-based capital rules under 12 CFR part 208, appendix A,
12 CFR part 225, appendix A as then in effect, that were issued under
the Small Business Jobs Act of 2010,
19 or prior to October 4, 2010, under the
Emergency Economic Stabilization Act of 2008.
20(ii)
Any debt instrument issued under the U.S. Department of the Treasury’s
Emergency Capital Investment Program pursuant to section 104A of the
Community Development Banking and Financial Institutions Act of 1994,
added by the Consolidated Appropriations Act, 2021.
21(5) For a Board-regulated
institution that makes an AOCI opt-out election (as defined in paragraph
(b)(2) of section 217.22), 45 percent of pretax net unrealized gains
on available-for-sale preferred stock classified as an equity security
under GAAP and available-for-sale equity exposures.
(6) Notwithstanding the criteria for tier
2 capital instruments referenced above, an instrument with terms that
provide that the instrument may be called earlier than five years
upon the occurrence of a rating agency event does not violate the
criterion in paragraph (d)(1)(v) of this section provided that the
instrument was issued and included in a Board-regulated institution’s
tier 1 or tier 2 capital prior to January 1, 2014, and that such instrument
satisfies all other criteria under this paragraph (d).
(e) Board approval of a capital element.
(1) A Board-regulated
institution must receive Board prior approval to include a capital
element (as listed in this section) in its common equity tier 1 capital,
additional tier 1 capital, or tier 2 capital unless the element:
(i) Was included in
a Board-regulated institution’s tier 1 capital or tier 2 capital
prior to May 19, 2010 in accordance with the Board’s risk-based
capital rules that were effective as of that date and the underlying
instrument may continue to be included under the criteria set forth
in this section; or
(ii) Is equivalent,
in terms of capital quality and ability to absorb losses with respect
to all material terms, to a regulatory capital element the Board determined
may be included in regulatory capital pursuant to paragraph (e)(3)
of this section.
(2)
When considering whether a Board-regulated institution may include
a regulatory capital element in its common equity tier 1 capital,
additional tier 1 capital, or tier 2 capital, the Federal Reserve
Board will consult with the FDIC and OCC.
(3) After determining that a regulatory
capital element may be included in a Board-regulated institution’s
common equity tier 1 capital, additional tier 1 capital, or tier 2
capital, the Board will make its decision publicly available, including
a brief description of the material terms of the regulatory capital
element and the rationale for the determination.
(f) A Board-regulated institution may not repurchase or redeem any
common equity tier 1 capital, additional tier 1, or tier 2 capital
instrument without the prior approval of the Board to the extent such
prior approval is required by paragraph (b), (c), or (d) of this section,
as applicable.
