FDIC Agencies Adopt Final Rule on Qualified Financial Contracts; Propose Changes to Capital Rule

Industry Updates  »  FDIC Agencies Adopt Final Rule on Qualified Financial Contracts; Propose Changes to Capital Rule

The Federal Deposit Insurance Corporation (FDIC) adopted a final rule to enhance the resilience and safety and soundness of state savings associations and banks supervised by the FDIC that are affiliated with systemically important U.S. and foreign banking organizations (“covered FDIC-supervised institutions”).

Under the final rule, covered FDIC-supervised institutions are required to ensure that their qualified financial contracts (QFCs) do not allow for immediate cancellation or termination under certain circumstances. QFCs include derivatives, securities lending, and short-term funding transactions, such as repurchase agreements. These transactions can pose a threat to financial stability in times of market stress.

The final rule requires that QFCs of covered FDIC-supervised institutions, including those with foreign counterparties, clarify that they are subject to temporary stays under U.S. resolution regimes. In addition, QFCs of covered FDIC-supervised institutions are prohibited from allowing the exercise of default rights against, or imposing transfer restrictions on, the covered FDIC-supervised institution based on the entry of an affiliate of the covered institution into bankruptcy.

The final rule also amends the definitions of “qualifying master netting agreement” and related terms in the FDIC’s capital and liquidity rules to account for the final rule.

The FDIC issued a proposed rule on this issue last year. The final rule reflects changes made to the proposal in response to comments received by the FDIC. Requirements of this final rule are substantively identical to those contained in the final rule recently adopted by the Federal Reserve Board.

The rule can be accessed here:

Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996

The federal banking regulatory agencies (the agencies) have jointly issued a proposal intended to simplify aspects of the generally applicable capital rules related to the treatment of acquisition, development or construction (ADC) loans, items subject to threshold deduction, and minority interests includable in regulatory capital, and would make a number of technical corrections. The agencies indicated their intent to address these matters in their joint report to Congress pursuant to the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA).


ADC exposures

  • The proposed rule would replace the definition of a high volatility commercial real estate (HVCRE) exposure in the standardized approach with a new high volatility acquisition, development, or construction (HVADC) exposure category.
  • The definition would apply a 130 percent risk weight to HVADC exposures.
  • The proposal would grandfather existing ADC exposures.

Threshold deduction items

  • The proposal would simplify the treatment of threshold deduction items and increases the individual common equity tier 1 deduction threshold for Mortgage Servicing Assets and temporary difference Deferred Tax Assets to 25 percent.
  • The proposal would create a single regulatory capital deduction treatment for all investments in the capital of unconsolidated financial institutions and increase the threshold deduction for these items to 25 percent of common equity tier 1 capital.
  • The proposal would remove the aggregate 15 percent common equity tier 1 limitation previously applicable to certain threshold deduction items.

Minority interest

  • The proposal would simplify the calculation for the amount of capital that can count toward regulatory requirements in cases in which a banking organization’s consolidated subsidiary has issued capital that is held by third parties (minority interest).

National Call

The agencies are planning to host a national banker call on October 12. Details to follow.


Helpful links for more information can be accessed below:


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