(a) Qualifying capital instruments—(1) General criteria. A qualifying capital instrument with respect to a building block parent is a capital instrument that meets the following criteria:

Ask a legal question, get an answer ASAP!
Click here to chat with a lawyer about your rights.

(i) The instrument is issued and paid-in;

(ii) The instrument is subordinated to depositors and general creditors of the building block parent;

(iii) The instrument is not secured, not covered by a guarantee of the building block parent or of an affiliate of the building block parent, 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 building block available capital is reduced by 20 percent of the original amount of the instrument (net of redemptions), and is excluded from building block available 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 building block parent to redeem the instrument prior to maturity; and

Note 1 to paragraph (a)(1)(iv):

A building block parent may replace qualifying capital instruments concurrent with the redemption of existing qualifying capital instruments.

(v) The instrument, by its terms, may be called by the building block parent 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 the building block parent’s company available capital or building block available 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 top-tier depository institution holding company must receive the prior approval of the Board to exercise a call option on the instrument.

(B) The building block parent 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 top-tier depository institution holding company must either: replace any amount called with an equivalent amount of an instrument that meets the criteria for qualifying capital instruments under this section; or demonstrate to the satisfaction of the Board that following redemption, the top-tier depository institution holding company would continue to hold an amount of capital that is commensurate with its risk.

Note 2 to paragraph (a)(1)(v)(C):

A building block parent may replace qualifying capital instruments concurrent with the redemption of existing qualifying capital instruments.

(vi) Redemption of the instrument prior to maturity or repurchase requires the prior approval of the Board.

(vii) The instrument meets the criteria in § 217.20(d)(1)(vi) through (ix) and (xi), except that each instance of “Board-regulated institution” is replaced with “building block parent” and, in § 217.20(d)(1)(ix), “tier 2 capital instruments” is replaced with “qualifying capital instruments”.

(2) Additional tier 1 capital instruments. Additional tier 1 capital instruments of a top-tier depository institution holding company are instruments issued by any inventory company that are qualifying capital instruments under paragraph (a)(1) of this section and meet all of the following criteria:

Note 3 to paragraph (a)(2) introductory text:

For purposes of this paragraph (a)(2), the supervised insurance organization evaluates the criteria in paragraph (a)(1) of this section with regard to the building block in which the issuing inventory company is a member.

(i) The instrument is subordinated to depositors, general creditors, and subordinated debt holders of the building block parent in a receivership, insolvency, liquidation, or similar proceeding;

(ii) The instrument is not secured, not covered by a guarantee of the building block parent or of an affiliate of the building block parent, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument;

(iii) 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

(iv) If callable by its terms, the instrument may be called 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 the building block parent’s company available capital or building block available 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 top-tier depository institution holding company must receive the prior approval of the Board to exercise a call option on the instrument.

(B) The building block parent does not create at issuance, through action or communication, an expectation that the call option will be exercised.

(C) Prior to exercising the call option, or immediately thereafter, the top-tier depository institution holding company must either: replace any amount called with an equivalent amount of an instrument that meets the criteria for additional tier 1 capital instruments or common equity tier 1 instruments under this section; or demonstrate to the satisfaction of the Board that following redemption, the top-tier depository institution holding company would continue to hold an amount of capital that is commensurate with its risk.

Note 4 to paragraph (a)(2)(iv)(C):

A building block parent may replace qualifying capital instruments concurrent with the redemption of existing qualifying capital instruments.

(v) Redemption or repurchase of the instrument requires prior approval of the Board.

(vi) The paid-in amount would be classified as equity under GAAP.

(vii) The instrument meets the criteria in § 217.20(c)(1)(vii) through (ix) and (xi) through (xiv), except that each instance of “Board-regulated institution” is replaced with “building block parent”.

(3) Common equity tier 1 capital instruments. Common equity tier 1 capital instruments of a top-tier depository institution holding company are instruments issued by any inventory company that are qualifying capital instruments under paragraph (a)(1) of this section and that meet all of the following criteria:

Note 5 to paragraph (a)(3) introductory text:

For purposes of this paragraph (a)(3), the supervised insurance organization evaluates the criteria in paragraph (a)(1) of this section with regard to the building block in which the issuing inventory company is a member.

(i) The holders of the instrument bear losses, as they occur, equally, proportionately, and simultaneously with the holders of all other qualifying capital instruments (other than additional tier 1 capital instruments or tier 2 capital instruments) before any losses are borne by holders of claims on the building block parent any with greater priority in a receivership, insolvency, liquidation, or similar proceeding.

(ii) The paid-in amount would be classified as equity under GAAP.

(iii) The instrument meets the criteria in § 217.20(b)(1)(i) through (vii) and (x) through (xiii).

(4) Tier 2 capital instruments. Tier 2 capital instruments of a top-tier depository institution holding company are instruments issued by any inventory company that are qualifying capital instruments under paragraph (a)(1) of this section and are not additional tier 1 capital instruments or common equity tier 1 capital instruments.

(b) Determination of building block available capital—(1) In general. For each building block parent, building block available capital means the sum of the items described in paragraphs (b)(1)(i) and (ii) of this section:

(i) The company available capital of the building block parent:

(A) Less the amount of downstreamed capital owned by any member of the building block parent’s building block; and

(B) Adjusted pursuant to paragraph (c) of this section.

(ii) For each downstream building block parent, the adjusted downstream building block available capital (BBACADJ), which is calculated according to the following formula:

Equation 1 to Paragraph (b)(1)(ii)BBACADJ = (BBACDS?UpInv + ACSM) ·AS Where:BBACDS is equal to the building block available capital of the downstream building block parent;UpInv is equal to the amount of any upstream investment held by that downstream building block parent in the building block parent;ACSM is equal to the appropriate available capital scaling modifier under § 217.606; and AS is equal to the building block parent’s allocation share of the downstream building block parent.

(2) Combining tiers of capital. If there is more than one tier of company available capital under a building block parent’s indicated capital framework, the amounts of company available capital from all tiers are combined in calculating building block available capital in accordance with paragraph (b) of this section.

(c) Adjustments in determining building block available capital. For purposes of the calculations required in paragraph (b) of this section, a supervised insurance organization must adjust the company available capital for any building block parent as follows:

(1) Nonqualifying capital instruments. A supervised insurance organization must deduct from the building block parent’s company available capital any accretion arising from any instrument issued by any company that is a member of the building block parent’s building block, where the instrument is not a qualifying capital instrument.

(2) Insurance underwriting RBC. When applying the U.S. Federal banking capital rules as the indicated capital framework for a building block parent, a supervised insurance organization must add back into the building block parent’s company available capital any amounts deducted pursuant to § 3.22(b)(3) of this title, § 217.22(b)(3), or § 324.22(b)(3) of this title, as applicable.

(3) Permitted accounting practices and prescribed accounting practices. A supervised insurance organization must adjust the building block parent’s company available capital by any difference between:

(i) The building block parent’s company available capital; and

(ii) The building block parent’s company available capital recalculated under the assumption that neither the building block parent, nor any company that is a member of that building block parent’s building block, had prepared its financial statements with the application of any permitted accounting practice, prescribed accounting practice, or other practice, including legal, regulatory, or accounting procedures or standards, that departs from a solvency framework as promulgated for application in a jurisdiction.

(4) Adjusting certain life insurance reserves. A supervised insurance organization must adjust the building block parent’s company available capital by any difference between:

(i) The building block parent’s company available capital; and

(ii) The building block parent’s company available capital recalculated based on using a 40 percent factor applied to all term life insurance accounted for using an approach based on the Valuation of Life Insurance Policies Model Regulation and a 90 percent factor applied to all secondary-guaranteed universal life insurance products accounted for using Actuarial Guideline XXXVIII—The Application of the Valuation of Life Insurance Policies Model Regulation.

(5) Deduction of investments in own capital instruments—(i) In general. A supervised insurance organization must deduct from the building block parent’s company available capital any investment by the building block parent in its own capital instrument(s), or any investment by any member of the building block parent’s building block in capital instruments of the building block parent, including any net long position determined in accordance with paragraph (c)(5)(ii) of this section, to the extent that such investment(s) would otherwise be accretive to the building block parent’s building block available capital.

(ii) Net long position. For purposes of calculating an investment in a building block parent’s own capital instrument under this section, the net long position is determined in accordance with § 217.22(h), provided that a separate account asset or associated guarantee is not regarded as an indirect exposure unless the net long position of the fund underlying the separate account asset (determined in accordance with § 217.22(h) without regard to this paragraph (c)(5)(ii)) equals or exceeds 5 percent of the value of the fund.

(6) Reciprocal cross holdings in the capital of financial institutions. A supervised insurance organization must deduct from the building block parent’s company available capital any investment(s) by the building block parent in the capital of unaffiliated 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, to the extent that such investment(s) would otherwise be accretive to the building block parent’s building block available capital.

(d) Limits on certain elements in building block available capital of top-tier depository institution holding companies—(1) Investment in capital of unconsolidated financial institutions. (i) A top-tier depository institution holding company must deduct from its building block available capital any accreted capital from an investment in the capital of an unconsolidated financial institution that is not an inventory company, that exceeds twenty-five percent of the amount of its building block available capital, prior to application of this adjustment, excluding tier 2 capital instruments. For purposes of this paragraph (d)(1), the amount of an investment in the capital of an unconsolidated financial institution is calculated in accordance with § 217.22(h), except that a separate account asset or associated guarantee is not an indirect exposure.

(ii) The deductions described in this paragraph (d)(1) are net of associated deferred tax liabilities in accordance with § 217.22(e).

(2) Adjustments to accretions from tier 2 capital instruments. A top-tier depository institution holding company must adjust accretions from tier 2 capital instruments in accordance with this paragraph (d)(2).

(i) A top-tier depository institution holding company must deduct any accretions from tier 2 capital instruments that, in the aggregate, exceed the greater of:

(A) 150 percent of the amount of its building block capital requirement; and

(B) The amount of instruments subject to paragraph (e) or (f) of this section that are outstanding as of the submission date; and

(ii) A top-tier depository institution holding company must increase accretions from tier 2 capital instruments by any amount deducted from accretions from additional tier 1 capital instruments by operation of paragraph (d)(3) of this section.

(3) Limitation on additional tier 1 capital instruments. A top-tier depository institution holding company must deduct any accretions from additional tier 1 capital instruments that, in the aggregate, exceed the greater of:

(i) 100 percent of the amount of its building block capital requirement; and

(ii) The amount of instruments subject to paragraph (f) of this section that are outstanding as of the submission date.

(e) Treatment of outstanding surplus notes. A surplus note issued by any company in a supervised insurance organization is deemed to meet the criteria in paragraphs (a)(1)(iii) and (vi) of this section if:

(1) The instrument was issued prior to the later of—

(i) November 1, 2019; and

(ii) The earliest date on which any depository institution holding company in the group became a depository institution holding company;

(2) The surplus note is a company capital element for the issuing company;

(3) The surplus note is not owned by an affiliate of the issuer; and

(4) The surplus note is outstanding as of the submission date.

(f) Treatment of certain callable instruments. Notwithstanding the criteria under paragraph (a)(1) of this section, an instrument with terms that provide that the instrument may be called earlier than five years upon the occurrence of a rating event does not violate the criterion in paragraph (a)(1)(v) of this section, provided that the instrument was a company capital element issued prior to January 1, 2014, and that such instrument satisfies all other criteria under paragraph (a)(1) of this section.

(g) Board approval of a capital instrument. (1) A supervised insurance organization must receive Board prior approval to include in its building block available capital for any building block an instrument (as listed in this section), issued by any company in the supervised insurance organization, unless the instrument:

(i) Was a capital element for the issuer prior to May 19, 2010, in accordance with the indicated capital framework that was effective as of that date and the underlying instrument meets the criteria to be a qualifying capital instrument (as defined in paragraph (a) of this section); or

(ii) Is equivalent, in terms of capital quality and ability to absorb losses with respect to all material terms, to a company capital element that the Board determined may be included in regulatory capital pursuant to paragraph (g)(2) of this section, or may be included in the regulatory capital of a Board-regulated institution pursuant to § 217.20(e)(3).

(2) After determining that an instrument may be included in a supervised insurance organization’s regulatory capital under this subpart, the Board will make its decision publicly available, including a brief description of the material terms of the instrument and the rationale for the determination.