Pub. 8 2020 Issue 3

ISSUE 3. 2020 7 John Berteau, Associate General Counsel John S. Berteau serves as Asso- ciate General Counsel for Com- pliance Alliance. He has nearly fifteen years of combined experi- ence in the financial services in- dustry. At Hancock Whitney Bank, he worked in the field of environmental risk management and compliance (CERCLA/RCRA/Wet- lands). At Alorica, the nation’s fastest-grow- ing BPO, John worked in tandem with some of the largest banks in the U.S., helping to evaluate financial risks. He holds Bache- lor’sand Master’s Degrees in History from the University of New Orleans, a Juris Doctorate from Loyola University New Orleans and is a licensed attorney in the State of Louisiana. In addition to being one of our featured authors, John has recently taken over the editor role for C/A’s Access magazine. As a hotline advisor, John helps C/A members with a wide range of regulatory and compliance. John S. Berteau serves as Associate General Counsel for Compliance Alliance, where he is one of our hotline advisors and featured contributors. Capital buffer requirements, as initially implemented, were intended to gradually limit the ability of banks to distribute capital if their capital ratios fell below certain levels. risk-weighted assets. On March 4 2020, the FRB introduced a stress capital buffer requirement, which provides that a cov- ered holding company will receive a new stress capital buffer requirement on an annual basis, which replaced the existing greater than 2.5% capital conservation buffer requirement. Under the capital rule, if a banking orga- nization’s capital ratios fall within its applicable minimum-plus-buffer require- ments, the maximum amount of capital distributions it can make is a function of its eligible retained income. Prior to the issuance of the March 20 2020, interim fi- nal rule, the capital rule generally defined eligible retained income as four quarters of net income, net of distributions and associated tax effects not already reflect- ed in net income. The interim final rule revised the definition to be: “(i) The eligible retained income of a national bank, or Federal savings association is the greater of: (A) The national bank’s or Federal savings association’s net income, calculated per the instructions to the Call Report, for the four calendar quarters preceding the current calen- dar quarter, net of any distributions and associated tax effects not already reflected in net income; and (B) The average of the national bank’s or Federal savings association’s net in- come, calculated per the instructions to the Call Report, for the four cal- endar quarters preceding the current calendar quarter.” The revised definition of “eligible re- tained income” under this final rule applies to all of an organization’s buffer requirements, including the fixed greater than 2.5% capital conservation buffer and the countercyclical capital buffer. Once the stress capital buffer requirements apply on October 1, 2020, the revised definition would also apply to all parts of a covered holding company’s buffer requirements. Having one definition of “eligible retained income” for all orga- nizations under the capital rule should simplify the regulatory capital framework and ensures fairness across organizations of all sizes. The requirements in the total loss-ab- sorbing capacity (TLAC) rule build on and complement the capital rule. Back in 2016, the FRB issued the TLAC rule to require the largest and most important bank holding companies (U.S. based) and foreign banking organizations (U.S. operations) to maintain a minimum TLAC amount, consisting of minimum amounts of long-term debt and tier 1 capital. In addition, the TLAC rule prescribed buffer requirements above the minimum TLAC amount, which institu- tions must maintain to avoid restrictions on capital distributions. As with the capital rule, the TLAC buffer requirements were established to en- courage better capital conservation and enhance the resilience of the banking system during stress periods. TLAC buffer requirements were implemented to gradually limit the ability of institu- tions to make capital distributions under certain circumstances, thereby strength- ening the ability of these institutions to continue lending and conducting other financial intermediation activities during stress periods. Institutions with a TLAC level that falls below the applicable minimum plus-buf- fer requirements face limitations on cap- ital distributions, in a manner designed to parallel the restrictions on capital distributions under the capital rule. The maximum amount of capital distribu- tions that a TLAC covered company can make is limited as a percentage of its eligible retained income, as defined in the TLAC rule. Prior to the issuance of the March 26 2020, interim final rule, the TLAC rule generally defined eligible retained income as net income for the four calendar quarters preceding the current calendar quarter, based on the globally systematic important U.S. bank holding companies’ FR Y-9C, net of any distributions and as- sociated tax effects not already reflected in net income. This final rule revised the definition to be: “(i) The eligible retained income of a global systemically important BHC is the greater of: (A) The global systemically important BHC’s net income, calculated per the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter, net of any distribu- tions and associated tax effects not already reflected in net income; and (B) The average of the global systemi- cally important BHC’s net income, calculated per the instructions to the FR Y-9C, for the four calendar quar- ters preceding.” These revised definitions of eligible re- tained income should allow institutions to gradually reduce distributions as they enter periods of stress and provide institu- tions with stronger incentives to contin- ue to lend and carry on other business functions. Although both interim final rules were effective as of the date they were published, the new final rule will be effective Jan. 1, 2021. n