(a) Regulatory capital deductions from common equity tier 1 capital. A Board-regulated institution must deduct from the sum of its common
equity tier 1 capital elements the items set forth in this paragraph
(a):
(1) Goodwill, net of associated
deferred tax liabilities (DTLs) in accordance with paragraph (e) of
this section, including goodwill that is embedded in the valuation
of a significant investment in the capital of an unconsolidated financial
institution in the form of common stock (and that is reflected in
the consolidated financial statements of the Board-regulated institution),
in accordance with paragraph (d) of this section;
(i) Goodwill,
net of associated deferred tax liabilities (DTLs) in accordance with
paragraph (e) of this section; and
(ii) For an advanced approaches Board-regulated
institution, goodwill that is embedded in the valuation of a significant
investment in the capital of an unconsolidated financial institution
in the form of common stock (and that is reflected in the consolidated
financial statements of the advanced approaches Board-regulated institution),
in accordance with paragraph (d) of this section;
(2) Intangible assets,
other than MSAs, net of associated DTLs in accordance with paragraph
(e) of this section;
(3) Deferred tax assets (DTAs) that arise from net operating loss
and tax credit carryforwards net of any related valuation allowances
and net of DTLs in accordance with paragraph (e) of this section;
(4) Any gain-on-sale in
connection with a securitization exposure;
(5) (i)
Any defined benefit pension fund net asset, net of any associated
DTL in accordance with paragraph (e) of this section, held by a depository
institution holding company. With the prior approval of the Board,
this deduction is not required for any defined benefit pension fund
net asset to the extent the depository institution holding company
has unrestricted and unfettered access to the assets in that fund.
(ii) For an insured
depository institution, no deduction is required.
(iii) A Board-regulated institution
must risk weight any portion of the defined benefit pension fund asset
that is not deducted under paragraphs (a)(5)(i) or (a)(5)(ii) of this
section as if the Board-regulated institution directly holds a proportional
ownership share of each exposure in the defined benefit pension fund.
(6) For
an advanced approaches Board-regulated institution that has completed
the parallel run process and that has received notification from the
Board pursuant to section 217.121(d), the amount of expected credit
loss that exceeds its eligible credit reserves; and
(7) Financial
subsidiaries.
(i) A state member bank must deduct
the aggregate amount of its outstanding equity investment, including
retained earnings, in its financial subsidiaries (as defined in 12 CFR
208.77) and may not consolidate the assets and liabilities of a financial
subsidiary with those of the state member bank.
(ii) No other deduction is required
under section 217.22(c) for investments in the capital instruments
of financial subsidiaries.
(b) Regulatory adjustments to common equity
tier 1 capital.
(1) A Board-regulated institution must
adjust the sum of common equity tier 1 capital elements pursuant to
the requirements set forth in this paragraph (b). Such adjustments
to common equity tier 1 capital must be made net of the associated
deferred tax effects.
(i) A Board-regulated institution that
makes an AOCI opt-out election (as defined in paragraph (b)(2) of
this section), must make the adjustments required under section 217.22(b)(2)(i).
(ii) A Board-regulated
institution that is an advanced approaches Board-regulated institution,
and a Board-regulated institution that has not made an AOCI opt-out
election (as defined in paragraph (b)(2) of this section), must deduct
any accumulated net gains and add any accumulated net losses on cash
flow hedges included in AOCI that relate to the hedging of items that
are not recognized at fair value on the balance sheet.
(iii) A Board-regulated
institution must deduct any net gain and add any net loss related
to changes in the fair value of liabilities that are due to changes
in the Board-regulated institution’s own credit risk. An advanced
approaches Board-regulated institution must deduct the difference
between its credit spread premium and the risk-free rate for derivatives
that are liabilities as part of this adjustment.
(2) AOCI opt-out election.
(i) A Board-regulated
institution that is not an advanced approaches Board-regulated institution
may make a one-time election to opt out of the requirement to include
all components of AOCI (with the exception of accumulated net gains
and losses on cash flow hedges related to items that are not fair-valued
on the balance sheet) in common equity tier 1 capital (AOCI opt-out
election). A Board-regulated institution that makes an AOCI opt-out
election in accordance with this paragraph (b)(2) must adjust common
equity tier 1 capital as follows:
(A) Subtract any net unrealized
gains and add any net unrealized losses on available-for-sale securities;
(B) Subtract any net unrealized
losses on available-for-sale preferred stock classified as an equity
security under GAAP and available-for-sale equity exposures;
(C) Subtract any accumulated
net gains and add any accumulated net losses on cash flow hedges;
(D) Subtract any amounts
recorded in AOCI attributed to defined benefit postretirement plans
resulting from the initial and subsequent application of the relevant
GAAP standards that pertain to such plans (excluding, at the Board-regulated
institution’s option, the portion relating to pension assets
deducted under paragraph (a)(5) of this section); and
(E) Subtract any net unrealized gains and
add any net unrealized losses on held-to-maturity securities that
are included in AOCI.
(ii) A Board-regulated institution that
is not an advanced approaches Board-regulated institution must make
its AOCI opt-out election in the Call Report, for a state member bank,
FR Y-9C, for bank holding companies or savings and loan holding companies:
(A) If the Board-regulated institution is a Category III Board-regulated
institution or Category IV Board-regulated institution, during the
first reporting period after the Board-regulated institution meets
the definition of a Category III Board-regulated institution or Category
IV Board-regulated institution in section 217.2; or
(B) If the A Board-regulated institution is
not a Category III Board-regulated institution and not a Category
IV Board-regulated institution, during the first reporting period
after the Board-regulated institution is required to comply with subpart
A of this part as set forth in section 217.1(f).
(iii) Each depository
institution subsidiary of a Board-regulated institution that is not
an advanced approaches Board-regulated institution must elect the
same option as the Board-regulated institution pursuant to paragraph
(b)(2).
(iv) With
prior notice to the Board, a Board-regulated institution resulting
from a merger, acquisition, or purchase transaction may make a new
AOCI optout election in the Call Report (for a state member bank),
or FR Y-9C or FR Y-9SP, as applicable (for bank holding companies
or savings and loan holding companies) filed by the resulting Board-regulated
institution for the first reporting period after it is required to
comply with subpart A of this part as set forth in section 217.1(f)
if:
(A) Other than as set forth in paragraph
(b)(2)(iv)(C)
of this section, the merger, acquisition, or purchase transaction
involved the acquisition or purchase of all or substantially all of
either the assets or voting stock of another banking organization
that is subject to regulatory capital requirements issued by the Board
of Governors of the Federal Reserve, the Federal Deposit Insurance
Corporation, or the Office of the Comptroller of the Currency;
22(B) Prior to the merger, acquisition, or purchase transaction, only
one of the banking organizations involved in the transaction made
an AOCI opt-out election under this section; and
(C) A Board-regulated institution may, with
the prior approval of the Board, change its AOCI opt-out election
under this paragraph (b) in the case of a merger, acquisition, or
purchase transaction that meets the requirements set forth at paragraph
(b)(2)(iv)(B) of this section, but does not meet the requirements
of paragraph (b)(2)(iv)(A). In making such a determination, the Board
may consider the terms of the merger, acquisition, or purchase transaction,
as well as the extent of any changes to the risk profile, complexity,
and scope of operations of the Board-regulated institution resulting
from the merger, acquisition, or purchase transaction.
(3) Regulatory capital requirement for insurance
underwriting risks. A bank holding company or savings and loan
holding company must deduct an amount equal to the regulatory capital
requirement for insurance underwriting risks established by the regulator
of any insurance underwriting activities of the company. The bank
holding company or savings and loan holding company must take the
deduction 50 percent from tier 1 capital and 50 percent from tier
2 capital. If the amount deductible from tier 2 capital exceeds the
Board-regulated institution’s tier 2 capital, the Board-regulated
institution must deduct the excess from tier 1 capital.
(c)
Deductions from regulatory
capital related to investments in capital instruments or covered debt
instruments.23(1) Investment
in the Board-regulated institution’s own capital or covered
debt instruments. A Board-regulated institution must deduct an
investment in the Board-regulated institution’s own capital
instruments, and an advanced approaches Board-regulated institution
also must deduct an investment in the Board-regulated institution’s
own covered debt instruments, as follows:
(i) A Board-regulated
institution must deduct an investment in the Board-regulated institution’s
own common stock instruments from its common equity tier 1 capital
elements to the extent such instruments are not excluded from regulatory
capital under section 217.20(b)(1);
(ii) A Board-regulated institution must
deduct an investment in the Board-regulated institution’s own
additional tier 1 capital instruments from its additional tier 1 capital
elements;
(iii)
A Board-regulated institution must deduct an investment in the Board-regulated
institution’s own tier 2 capital instruments from its tier 2
capital elements; and
(iv) An advanced approaches Board-regulated institution must deduct
an investment in the institution’s own covered debt instruments
from its tier 2 capital elements, as applicable. If the advanced approaches
Board-regulated institution does not have a sufficient amount of tier
2 capital to effect this deduction, the institution must deduct the
shortfall amount from the next higher (that is, more subordinated)
component of regulatory capital.
(2) Corresponding
deduction approach. For purposes of subpart C of this part, the
corresponding deduction approach is the methodology used for the deductions
from regulatory capital related to reciprocal cross holdings (as described
in paragraph (c)(3) of this section), investments in the capital of
unconsolidated financial institutions for a Board-regulated institution
that is not an advanced approaches Board-regulated institution (as
described in paragraph (c)(4) of this section), nonsignificant investments
in the capital of unconsolidated financial institutions for an advanced
approaches Board-regulated institution (as described in paragraph
(c)(5) of this section), and non-common stock significant investments
in the capital of unconsolidated financial institutions for an advanced
approaches Board-regulated institution (as described in paragraph
(c)(6) of this section). Under the corresponding deduction approach,
a Board-regulated institution must make deductions from the component
of capital for which the underlying instrument would qualify if it
were issued by the Board-regulated institution itself, as described
in paragraphs (c)(2)(i) through (iii) of this section. If the Board-regulated
institution does not have a sufficient amount of a specific component
of capital to effect the required deduction, the shortfall must be
deducted according to paragraph (f) of this section.
(i) If
an investment is in the form of an instrument issued by a financial
institution that is not a regulated financial institution, the Board-regulated
institution must treat the instrument as:
(A) A common equity tier
1 capital instrument if it is common stock or represents the most
subordinated claim in a liquidation of the financial institution;
and
(B) An additional
tier 1 capital instrument if it is subordinated to all creditors of
the financial institution and is senior in liquidation only to common
shareholders.
(ii) If an investment is in the form
of an instrument issued by a regulated financial institution and the
instrument does not meet the criteria for common equity tier 1, additional
tier 1 or tier 2 capital instruments under section 217.20, the Board-regulated
institution must treat the instrument as:
(A) A common equity tier
1 capital instrument if it is common stock included in GAAP equity
or represents the most subordinated claim in liquidation of the financial
institution;
(B) An additional
tier 1 capital instrument if it is included in GAAP equity, subordinated
to all creditors of the financial institution, and senior in a receivership,
insolvency, liquidation, or similar proceeding only to common shareholders;
(C) A tier 2 capital instrument
if it is not included in GAAP equity but considered regulatory capital
by the primary supervisor of the financial institution; and
(D) For an advanced approaches
Board-egulated institution, a tier 2 capital instrument if it is a
covered debt instrument.
(iii) If an investment is in the form
of a non-qualifying capital instrument (as defined in section 217.300(c)),
the Board-regulated institution must treat the instrument as:
(A) An additional
tier 1 capital instrument if such instrument was included in the issuer’s
tier 1 capital prior to May 19, 2010; or
(B) A tier 2 capital instrument if such instrument
was included in the issuer’s tier 2 capital (but not includable
in tier 1 capital) prior to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial institutions.
(i) A Board-regulated institution must
deduct an investment in the capital of other financial institutions
that it holds reciprocally, where such reciprocal cross holdings result
from a formal or informal arrangement to swap, exchange, or otherwise
intend to hold each other’s capital instruments, by applying
the corresponding deduction approach in paragraph (c)(2) of this section.
(ii) An advanced approaches
Board-regulated institution must deduct an investment in any covered
debt instrument that the institution holds reciprocally with another
financial institution, where such reciprocal cross holdings result
from a formal or informal arrangement to swap, exchange, or otherwise
intend to hold each other’s capital or covered debt instruments,
by applying the corresponding deduction approach in paragraph (c)(2)
of this section.
(4)
Investments
in the capital of unconsolidated financial institutions. A Board-regulated
institution that is not an advanced approaches Board-regulated institution
must deduct its investments in the capital of unconsolidated financial
institutions (as defined in section 217.2) that exceed 25 percent
of the sum of the Board-regulated institution’s common equity
tier 1 capital elements minus all deductions from and adjustments
to common equity tier 1 capital elements required under paragraphs
(a) through
(c)(3) of this section by applying the corresponding deduction
approach in paragraph
(c)(2) of this section.
24 The deductions described in this section are net of associated
DTLs in accordance with paragraph (e) of this section. In addition,
with the prior written approval of the Board, a Board-regulated institution
that underwrites a failed underwriting, for the period of time stipulated
by the Board, is not required to deduct an investment in the capital
of an unconsolidated financial institution pursuant to this paragraph
(c) to the extent the investment is related to the failed underwriting.
25(5) Non-significant investments in the
capital of unconsolidated financial institutions.
(i) An advanced
approaches Board-regulated institution must deduct its non-significant
investments in the capital of unconsolidated financial institutions
(as defined in section 217.2) that, in the aggregate and together
with any investment in a covered debt instrument (as defined in section
217.2) issued by a financial institution in which the Board-regulated
institution does not have a significant investment in the capital
of the unconsolidated financial institution (as defined in section
217.2), exceeds 10 percent of the sum of the advanced approaches Board-regulated
institution’s common equity tier 1 capital elements minus all
deductions from and adjustments to common equity tier 1 capital elements
required under paragraphs (a) through
(c)(3) of this section (the
10 percent threshold for non-significant investments) by applying
the corresponding deduction approach in paragraph
(c)(2) of this section.
26 The deductions described in this paragraph are net
of associated DTLs in accordance
with paragraph (e) of this section. In addition,
with the prior written approval of the Board, an advanced approaches
Board-regulated institution that underwrites a failed underwriting,
for the period of time stipulated by the Board, is not required to
deduct from capital a non-significant investment in the capital of
an unconsolidated financial institution or an investment in a covered
debt instrument pursuant to this paragraph
(c)(5) to the extent the
investment is related to the failed underwriting.
27 For any calculation
under this paragraph
(c)(5)(i), an advanced approaches Board-regulated
institution may exclude the amount of an investment in a covered debt
instrument under paragraph
(c)(5)(iii) or (iv) of this section, as
applicable.
(ii)
For an advanced approaches Board-regulated institution, the amount
to be deducted under this paragraph (c)(5) from a specific capital
component is equal to:
(A) The advanced approaches Board-regulated
institution’s aggregate nonsignificant investments in the capital
of an unconsolidated financial institution and, if applicable, any
investments in a covered debt instrument subject to deduction under
this paragraph (c)(5), exceeding the 10 percent threshold for non-significant
investments, multiplied by
(B) The ratio of the advanced approaches Board-regulated institution’s
aggregate non-significant investments in the capital of an unconsolidated
financial institution (in the form of such capital component) to the
advanced approaches Board-regulated institution’s total non-significant
investments in unconsolidated financial institutions, with an investment
in a covered debt instrument being treated as tier 2 capital for this
purpose.
(iii) For purposes of applying the deduction
under paragraph (c)(5)(i) of this section, an advanced approaches
Board-regulated institution that is not a global systemically important
BHC or a subsidiary of a global systemically important banking organization,
as defined in 12 CFR 252.2, may exclude from the deduction the amount
of the Board-regulated institution’s gross long position, in
accordance with section 217.22(h)(2), in investments in covered debt
instruments issued by financial institutions in which the Board-regulated
institution does not have a significant investment in the capital
of the unconsolidated financial institutions up to an amount equal
to 5 percent of the sum of the Board-regulated institution’s
common equity tier 1 capital elements minus all deductions from and
adjustments to common equity tier 1 capital elements required under
paragraphs (a) through (c)(3) of this section, net of associated DTLs
in accordance with paragraph (e) of this section.
(iv) Prior to applying the deduction
under paragraph (c)(5)(i) of this section:
(A) A global systemically
important BHC or a Board-regulated institution that is a subsidiary
of a global systemically important BHC may designate any investment
in a covered debt instrument as an excluded covered debt instrument,
as defined in section 217.2.
(B) A global systemically important BHC or a Board-regulated institution
that is a subsidiary of a global systemically important BHC must deduct,
according to the corresponding deduction approach in paragraph (c)(2)
of this section, its gross long position, calculated in accordance
with paragraph (h)(2) of this section, in a covered debt instrument
that was originally designated as an excluded covered debt instrument,
in accordance with paragraph (c)(5)(iv)(A) of this section, but no
longer qualifies as an excluded covered debt instrument.
(C) A global systemically important
BHC or a Board-regulated institution that is a subsidiary of a global
systemically important BHC must deduct according to the corresponding
deduction approach in paragraph (c)(2) of this section the amount of its gross
long position, calculated in accordance with paragraph (h)(2) of this
section, in a direct or indirect investment in a covered debt instrument
that was originally designated as an excluded covered debt instrument,
in accordance with paragraph (c)(5)(iv)(A) of this section, and has
been held for more than thirty business days.
(D) A global systemically important BHC or
a Board-regulated institution that is a subsidiary of a global systemically
important BHC must deduct according to the corresponding deduction
approach in paragraph (c)(2) of this section its gross long position,
calculated in accordance with paragraph (h)(2) of this section, of
its aggregate position in excluded covered debt instruments that exceeds
5 percent of the sum of the Board-regulated institution’s common
equity tier 1 capital elements minus all deductions from and adjustments
to common equity tier 1 capital elements required under paragraphs
(a) through (c)(3) of this section, net of associated DTLs in accordance
with paragraph (e) of this section.
(6)
Significant investments in the capital of unconsolidated financial
institutions that are not in the form of common stock. If an
advanced approaches Board-regulated institution has a significant
investment in the capital of an unconsolidated financial institution,
the advanced approaches Board-regulated institution must deduct from
capital any such investment issued by the unconsolidated financial
institution that is held by the Board-regulated institution other
than an investment in the form of common stock, as well as any investment
in a covered debt instrument issued by the unconsolidated financial
institution, by applying the corresponding deduction approach in paragraph
(c)(2) of this section.
28 The deductions described in this section are net of
associated DTLs in accordance with paragraph (e) of this section.
In addition, with the prior written approval of the Board, for the
period of time stipulated by the Board, an advanced approaches Board-regulated
institution that underwrites a failed underwriting is not required
to deduct the significant investment in the capital of an unconsolidated
financial institution or an investment in a covered debt instrument
pursuant to this paragraph
(c)(6) if such investment is related to
such failed underwriting.
(d) MSAs and certain DTAs subject to common equity
tier 1 capital deduction thresholds.
(1) A Board-regulated institution that
is not an advanced approaches Board-regulated institution must make
deductions from regulatory capital as described in this paragraph
(d)(1).
(i) The Board-regulated institution
must deduct from common equity tier 1 capital elements the amount
of each of the items set forth in this paragraph
(d)(1) that, individually,
exceeds 25 percent of the sum of the Board-regulated institution’s
common equity tier 1 capital elements, less adjustments to and deductions
from common equity tier 1 capital required under paragraphs (a) through
(c)(3) of this section (the 25 percent common equity tier 1 capital
deduction threshold).
29(ii) The Board-regulated institution must deduct from common equity
tier 1 capital elements the amount of DTAs arising from temporary
differences that the Board-regulated institution could not realize
through net operating loss carrybacks, net of any related valuation
allowances and net of DTLs, in accordance with paragraph (e) of this
section. A Board-regulated institution is not required to deduct from
the sum of its common equity tier 1 capital elements DTAs (net of
any related
valuation allowances and net of DTLs, in accordance with section 217.22(e))
arising from timing differences that the Board-regulated institution
could realize through net operating loss carrybacks. The Board-regulated
institution must risk weight these assets at 100 percent. For a state
member bank that is a member of a consolidated group for tax purposes,
the amount of DTAs that could be realized through net operating loss
carrybacks may not exceed the amount that the state member bank could
reasonably expect to have refunded by its parent holding company.
(iii) The Board-regulated
institution must deduct from common equity tier 1 capital elements
the amount of MSAs net of associated DTLs, in accordance with paragraph
(e) of this section.
(iv) For purposes of calculating the amount of DTAs subject to deduction
pursuant to paragraph (d)(1) of this section, a Board-regulated institution
may exclude DTAs and DTLs relating to adjustments made to common equity
tier 1 capital under paragraph (b) of this section. A Board-regulated
institution that elects to exclude DTAs relating to adjustments under
paragraph (b) of this section also must exclude DTLs and must do so
consistently in all future calculations. A Board-regulated institution
may change its exclusion preference only after obtaining the prior
approval of the Board.
(2) An advanced approaches Board-regulated
institution must make deductions from regulatory capital as described
in this paragraph (d)(2).
(i) An advanced approaches Board-regulated
institution must deduct from common equity tier 1 capital elements the amount
of each of the items set forth in this paragraph (d)(2) that, individually,
exceeds 10 percent of the sum of the advanced approaches Board-regulated
institution’s common equity tier 1 capital elements, less adjustments
to and deductions from common equity tier 1 capital required under
paragraphs (a) through (c) of this section (the 10 percent common
equity tier 1 capital deduction threshold).
(A) DTAs arising
from temporary differences that the advanced approaches Board-regulated
institution could not realize through net operating loss carrybacks,
net of any related valuation allowances and net of DTLs, in accordance
with paragraph (e) of this section. An advanced approaches Board-regulated
institution is not required to deduct from the sum of its common equity
tier 1 capital elements DTAs (net of any related valuation allowances
and net of DTLs, in accordance with section 217.22(e)) arising from
timing differences that the advanced approaches Board-regulated institution
could realize through net operating loss carrybacks. The advanced
approaches Board-regulated institution must risk weight these assets
at 100 percent. For a state member bank that is a member of a consolidated
group for tax purposes, the amount of DTAs that could be realized
through net operating loss carrybacks may not exceed the amount that
the state member bank could reasonably expect to have refunded by
its parent holding company.
(B) MSAs net of associated DTLs, in accordance with paragraph (e)
of this section.
(C) Significant
investments in the capital of unconsolidated financial institutions
in the form of common stock, net of associated DTLs in accordance
with paragraph (e) of this section.
30 Significant investments in the
capital of unconsolidated financial institutions in the form of common
stock subject to the 10 percent common equity tier 1 capital deduction
threshold may be reduced by any goodwill embedded in the valuation
of such investments deducted by the advanced approaches Board-regulated
institution
pursuant to paragraph
(a)(1) of this section. In addition,
with the prior written approval of the Board, for the period of time
stipulated by the Board, an advanced approaches Board-regulated institution
that underwrites a failed underwriting is not required to deduct a
significant investment in the capital of an unconsolidated financial
institution in the form of common stock pursuant to this paragraph
(d)(2) if such investment is related to such failed underwriting.
(ii)
An advanced approaches Board-regulated institution must deduct from
common equity tier 1 capital elements the items listed in paragraph
(d)(2)(i) of this section that are not deducted as a result of the
application of the 10 percent common equity tier 1 capital deduction
threshold, and that, in aggregate, exceed 17.65 percent of the sum
of the advanced approaches Board-regulated institution’s common
equity tier 1 capital elements, minus adjustments to and deductions
from common equity tier 1 capital required under paragraphs (a) through
(c) of this section, minus the items listed in paragraph
(d)(2)(i)
of this section (the 15 percent common equity tier 1 capital deduction
threshold). Any goodwill that has been deducted under paragraph
(a)(1)
of this section can be excluded from the significant investments in
the capital of unconsolidated financial institutions in the form of
common stock.
31(iii) For purposes of calculating
the amount of DTAs subject to the 10 and 15 percent common equity
tier 1 capital deduction thresholds, an advanced approaches Board-regulated
institution may exclude DTAs and DTLs relating to adjustments made
to common equity tier 1 capital under paragraph (b) of this section.
An advanced approaches Board-regulated institution that elects to
exclude DTAs relating to adjustments under paragraph (b) of this section
also must exclude DTLs and must do so consistently in all future calculations.
An advanced approaches Board-regulated institution may change its
exclusion preference only after obtaining the prior approval of the
Board.
(e) Netting of DTLs against assets subject to deduction.
(1) Except as described in
paragraph (e)(3) of this section, netting of DTLs against assets that
are subject to deduction under this section is permitted, but not
required, if the following conditions are met:
(i) The
DTL is associated with the asset; and
(ii) The DTL would be extinguished if
the associated asset becomes impaired or is derecognized under GAAP.
(2) A DTL
may only be netted against a single asset.
(3) For purposes of calculating the amount
of DTAs subject to the threshold deduction in paragraph (d) of this
section, the amount of DTAs that arise from net operating loss and
tax credit carryforwards, net of any related valuation allowances,
and of DTAs arising from temporary differences that the Board-regulated
institution could not realize through net operating loss carrybacks,
net of any related valuation allowances, may be offset by DTLs (that
have not been netted against assets subject to deduction pursuant
to paragraph (e)(1) of this section) subject to the conditions set
forth in this paragraph (e).
(i) Only the DTAs and DTLs that relate
to taxes levied by the same taxation authority and that are eligible
for offsetting by that authority may be offset for purposes of this
deduction.
(ii) The
amount of DTLs that the Board-regulated institution nets against DTAs
that arise from net operating loss and tax credit carryforwards, net
of any related valuation allowances, and against DTAs arising from
temporary differences that the Board-regulated institution could not
realize through net operating loss carrybacks, net of any related
valuation allowances, must be allocated in proportion to the amount
of DTAs that arise from net operating loss and tax credit carryforwards
(net of any related valuation allowances, but before any offsetting
of DTLs) and of DTAs arising from temporary differences that the Board-regulated
institution could not realize through net operating loss carrybacks
(net of any related valuation allowances, but before any offsetting
of DTLs), respectively.
(4) A Board-regulated institution may offset
DTLs embedded in the carrying value of a leveraged lease portfolio
acquired in a business combination that are not recognized under GAAP
against DTAs that are subject to paragraph (d) of this section in
accordance with this paragraph (e).
(5) A Board-regulated institution must
net DTLs against assets subject to deduction under this section in
a consistent manner from reporting period to reporting period. A Board-regulated
institution may change its preference regarding the manner in which
it nets DTLs against specific assets subject to deduction under this
section only after obtaining the prior approval of the Board.
(f) Insufficient amounts
of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if a Board-regulated
institution does not have a sufficient amount of a specific component
of capital to effect the full amount of any deduction from capital
required under paragraph (d) of this section, the Board-regulated
institution must deduct the shortfall amount from the next higher
(that is, more subordinated) component of regulatory capital. Any
investment by an advanced approaches Board-regulated institution in
a covered debt instrument must be treated as an investment in the
tier 2 capital for purposes of this paragraph (f). Notwithstanding
any other provision of this section, a qualifying community banking
organization (as defined in section 217.12) that has elected to use
the community bank leverage ratio framework pursuant to section 217.12
is not required to deduct any shortfall of tier 2 capital from its
additional tier 1 capital or common equity tier 1 capital.
(g) Treatment of assets that
are deducted. A Board-regulated institution must exclude from
standardized total risk-weighted assets and, as applicable, advanced
approaches total risk-weighted assets any item that is required to
be deducted from regulatory capital.
(h) Net long position.
(1) In general. For purposes of calculating the amount of a Board-regulated institution’s
investment in the Board regulated institution’s own capital
instrument, investment in the capital of an unconsolidated financial
institution, and investment in a covered debt instrument under this
section, the institution’s net long position is the gross long
position in the underlying instrument determined in accordance with
paragraph (h)(2) of this section, as adjusted to recognize any short
position by the Board-regulated institution in the same instrument
subject to paragraph (h)(3) of this section.
(2) Gross long
position. A gross long position is determined as follows:
(i) For an equity exposure that is held directly by the Board-regulated
institution, the adjusted carrying value of the exposure as that term
is defined in section 217.51(b);
(ii) For an exposure that is held directly
and that is not an equity exposure or a securitization exposure, the
exposure amount as that term is defined in section 217.2;
(iii) For each indirect
exposure, the Board-regulated institution’s carrying value of
its investment in an investment fund or, alternatively:
(A) A Board-regulated
institution may, with the prior approval of the Board, use a conservative
estimate of the amount of its indirect investment in the Board-regulated
institution’s own capital instruments, its indirect investment
in the capital of an unconsolidated financial institution, or its
indirect investment in a covered debt instrument held through a position
in an index, as applicable; or
(B) A Board-regulated institution may calculate
the gross long position for an indirect exposure to the Board-regulated
institution’s own capital instruments, the capital of an unconsolidated
financial institution, or a covered debt instrument by multiplying
the Board-regulated institution’s carrying value of its investment
in the investment fund by either:
(1) The highest stated investment limit (in percent) for an
investment in the Board-regulated institution’s own capital
instruments, an investment in the capital of an unconsolidated financial
institution, or an investment in a covered debt instrument, as applicable,
as stated in the prospectus, partnership agreement, or similar contract
defining permissible investments of the investment fund; or
(2) The investment fund’s
actual holdings (in percent) of the investment in the Board-regulated
institution’s own capital instruments, investment in the capital
of an unconsolidated financial institution, or investment in a covered
debt instrument, as applicable; and
(iv) For a synthetic
exposure, the amount of the Board-regulated institution’s loss
on the exposure if the reference capital or covered debt instrument
were to have a value of zero.
(3) Adjustments
to reflect a short position. In order to adjust the gross long
position to recognize a short position in the same instrument under
paragraph (h)(1) of this section, the following criteria must be met:
(i) The maturity of the short position must match the maturity of
the long position, or the short position must have a residual maturity
of at least one year (maturity requirement); or
(ii) For a position that is a trading
asset or trading liability (whether on- or off-balance sheet) as reported
on the Board-regulated institution’s Call Report, for a state
member bank, or FR Y-9C, for a bank holding company, savings and loan
holding company, or intermediate holding company, as applicable, if
the Board-regulated institution has a contractual right or obligation
to sell the long position at a specific point in time and the counterparty
to the contract has an obligation to purchase the long position if
the Board-regulated institution exercises its right to sell, this
point in time may be treated as the maturity of the long position
such that the maturity of the long position and short position are
deemed to match for purposes of the maturity requirement, even if
the maturity of the short position is less than one year; and
(iii) For an investment
in a Board-regulated institution’s own capital instrument under
paragraph (c)(1) of this section, an investment in the capital of
an unconsolidated financial institution under paragraphs (c)(4) through
(6) and (d) of this section (as applicable), and an investment in
a covered debt instrument under paragraphs (c)(1), (5), and (6) of
this section:
(A) The Board-regulated institution may only
net a short position against a long position in an investment in the
Board-regulated institution’s own capital instrument or own
covered debt instrument under paragraph (c)(1) of this section if
the short position involves no counterparty credit risk;
(B) A gross long position in an
investment in the Board-regulated institution’s own capital
instrument, an investment in the capital of an unconsolidated financial
institution, or an investment in a covered debt instrument due to
a position in an index may be netted against a short position in the
same index;
(C) Long and
short positions in the same index without maturity dates are considered
to have matching maturities; and
(D) A short position in an index that is hedging
a long cash or synthetic position in an investment in the Board-regulated
institution’s own capital instrument, an investment in the capital
instrument of an unconsolidated financial institution, or an investment
in a covered debt instrument can be decomposed to provide recognition
of the hedge. More specifically, the portion of the index that is
composed of the same underlying instrument that is being hedged may
be used to offset the long position if both the long position being hedged
and the short position in the index are reported as a trading asset
or trading liability (whether on- or off-balance sheet) on the Board-regulated
institution’s Call Report, for a state member bank, or FR Y-9C,
for a bank holding company, savings and loan holding company, or intermediate
holding company, as applicable, and the hedge is deemed effective
by the Board-regulated institution’s internal control processes,
which have not been found to be inadequate by the Board.
