(a) Purpose. This subpart establishes a framework for assessing overall risk-based capital for Board-regulated institutions that are significantly engaged in insurance activities. The framework in this subpart is used to measure available capital resources and capital requirements across a Board-regulated institution and its subsidiaries that are subject to diverse capital frameworks, aggregate available capital resources and capital requirements and calculate a ratio that reflects the overall capital adequacy of the Board-regulated institution.

(b) Applicability. This subpart applies to every Board-regulated institution that is:

(1) A top-tier depository institution holding company that is an insurance underwriting company; or

(2) A top-tier depository institution holding company, that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in insurance underwriting companies (other than assets associated with insurance underwriting for credit risk). For purposes of this paragraph (b)(2), the Board-regulated institution must calculate its total consolidated assets in accordance with GAAP, or if the Board-regulated institution does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board; or

(3) Depository institution holding company in a supervised insurance organization; or

(4) An institution that is otherwise made subject to this subpart by the Board.

(c) Exclusion of certain depository institution holding companies. Notwithstanding paragraph (b) of this section, this subpart does not apply to a top-tier depository institution holding company that—

(1) Exclusively files financial statements in accordance with Statutory Accounting Principles (SAP);

(2) Is not subject to a state insurance capital requirement; and

(3) Has no subsidiary depository institution holding company that—

(i) Is subject to a capital requirement; or

(ii) Does not exclusively file financial statements in accordance with SAP.

(d) Reservation of authority—(1) Regulatory capital resources. (i) If the Board determines that a particular company capital element has characteristics or terms that diminish its ability to absorb losses, or otherwise present safety and soundness concerns, the Board may require the supervised insurance organization to exclude all or a portion of such element from building block available capital for a depository institution holding company in the supervised insurance organization.

(ii) Notwithstanding any provision of § 217.608, the Board may find that a capital resource may be included in the building block available capital of a depository institution holding company on a permanent or temporary basis consistent with the loss absorption capacity of the capital resource and in accordance with § 217.608(g).

(2) Required capital amounts. If the Board determines that the building block capital requirement for any depository institution holding company is not commensurate with the risks of the depository institution holding company, the Board may adjust the building block capital requirement and building block available capital for the supervised insurance organization.

(3) Structural requirements. In order to achieve the appropriate application of this subpart, the Board may require a supervised insurance organization to take any of the following actions with respect to the application of this subpart, if the Board determines that such action would better reflect the risk profile of an inventory company or the supervised insurance organization:

(i) Identify components under this subpart differently than as done by the supervised insurance organization. This could include a different identification of a top-tier depository institution holding company, an inventory company, a material financial entity, or a building block parent, then that made by the supervised insurance organization; or

(ii) Set a building block parent's allocation share of a downstream building block parent equal to 100 percent.

(4) Other reservation of authority. With respect to any treatment required under this subpart, the Board may require a different treatment, provided that such alternative treatment is commensurate with the supervised insurance organization's risk and consistent with safety and soundness.

(e) Notice and response procedures. In making any determinations under paragraph (d) of this section, the Board will apply notice and response procedures in the same manner as the notice and response procedures in § 263.202 of this chapter.

(a) Terms that are set forth in § 217.2 and used in this subpart have the definitions assigned thereto in § 217.2.

(b) For the purposes of this subpart, the following terms are defined as follows:

Allocation share means the portion of a downstream building block's available capital or building block capital requirement that a building block parent must aggregate in calculating its own building block available capital or building block capital requirement, as applicable, and calculated in accordance with § 217.605(d).

Assignment means the process of associating an inventory company with one or more building block parents for purposes of inclusion in the building block parents' building blocks.

BBA ratio is defined in § 217.603.

Building block means a building block parent and all downstream companies and subsidiaries assigned to the building block parent.

Building block available capital has the meaning set out in § 217.608.

Building block capital requirement has the meaning set out in § 217.607.

Building block parent means the lead company of a building block whose indicated capital framework must be applied to all members of a building block for purposes of determining building block available capital and the building block capital requirement.

Capital-regulated company means a company that is—

(i) A depository institution, foreign bank, or company engaged in the business of insurance in a supervised insurance organization; and

(ii) Directly subject to a regulatory capital framework.

Common capital framework means NAIC RBC.

Company available capital means, for a company, the amount of its capital elements, net of any adjustments and deductions, as determined in accordance with the company's indicated capital framework.

Company capital element means any part, item, component, balance sheet account, instrument, or other element qualifying as regulatory capital under a company's indicated capital framework prior to any adjustments and deductions under that framework.

Company capital requirement means:

(i) For a company whose indicated capital framework is NAIC RBC, the Authorized Control Level risk-based capital requirement as set forth in NAIC RBC;

(ii) For a company whose indicated capital framework is a U.S. Federal banking capital rule, the total risk-weighted assets; and

(iii) For any other company, a risk-sensitive measure of required capital used to determine the jurisdictional intervention point applicable to that company.

Downstream building block parent means a building block parent that is a downstream company of another building block parent.

Downstream company means a company whose company capital element is directly or indirectly owned, in whole or in part, by another company in the supervised insurance organization.

Downstreamed capital means direct ownership of a downstream company's company capital element that is accretive to a downstream building block parent's building block available capital. When calculating building block available capital, the amount of the downstreamed capital is calculated as the amount, excluding any impact on taxes, of the company available capital of the building block parent of the upstream building block, if the owner were to deduct the downstreamed capital.

Financial entity means:

(i) A bank holding company; a savings and loan holding; a U.S. intermediate holding company established or designated for purposes of compliance with part 252 of this chapter;

(ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a Federal credit union or state credit union; a national association, state member bank, or state nonmember bank that is not a depository institution; an institution that functions solely in a trust or fiduciary capacity; an industrial loan company, an industrial bank, or other similar institution;

(iii) An entity that is state-licensed or registered as:

(A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity's direct sales of goods or services to customers; or

(B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler's check issuer;

(iv) Any person registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act (7 U.S.C. 1 et seq.), or an entity that is registered with the U.S. Securities and Exchange Commission as a security-based swap dealer or a major security-based swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.);

(v) A securities holding company as defined in section 618 of the Dodd-Frank Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));

(vi) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C) of that Act; or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to 17 CFR 270.3a-7 (Investment Company Act Rule 3a-7 of the U.S. Securities and Exchange Commission);

(vii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act (7 U.S.C. 1a(28));

(viii) An entity that is organized as an insurance company, primarily engaged in underwriting insurance or reinsuring risks underwritten by insurance companies;

(ix) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Act (12 U.S.C. 5462); and

(x) An entity that would be a financial entity described in paragraphs (i) through (ix) of this definition, if it were organized under the laws of the United States or any State thereof.

Indicated capital framework is defined in § 217.605, provided that for purposes of § 217.605(b)(2), the NAIC RBC frameworks for life insurance and fraternal insurers, property and casualty (P&C) insurance, and health insurance companies are different indicated capital frameworks.

Inventory company means a company identified pursuant to § 217.605(b)(1).

Material means, for a company in the supervised insurance organization:

(i) Where the top-tier depository institution holding company's total exposure to the company exceeds 5 percent of the maximum of—

(A) Top-tier depository institution holding company's company available capital; and

(B) The largest company available capital of all capital regulated companies reported in the supervised insurance organization's inventory; or

(ii) The company is otherwise significant when assessing the building block available capital or building block capital requirement of the top-tier depository institution holding company based on factors including risk exposure, activities, organizational structure, complexity, affiliate guarantees or recourse rights, and size.

(iii) For purposes of this definition, total exposure includes:

(A) The absolute value of the top-tier depository institution holding company's direct or indirect interest in the company capital elements of the company;

(B) The maximum possible loss from a guarantee (explicit or implicit) the top-tier depository institution holding company or any other company in the supervised insurance organization provides for the benefit of the company; and

(C) Maximum potential counterparty credit risk to the top-tier depository institution holding company or any other company in the supervised insurance organization arising from any derivative or similar instrument, reinsurance or similar arrangement, or other contractual agreement.

Material financial entity means a financial entity that, together with its subsidiaries, but excluding any subsidiary capital-regulated company (or subsidiary thereof), is material, provided that an inventory company is not eligible to be a material financial entity if:

(i) The supervised insurance organization has elected pursuant to § 217.605(c) not to treat the company as a material financial entity; or

(ii) The inventory company is a financial subsidiary, as defined in section 121 of the Gramm-Leach-Bliley Act.

Member means, with respect to a building block, the building block parent or any of its downstream companies or subsidiaries that have been assigned to a building block.

NAIC means the National Association of Insurance Commissioners.

NAIC RBC means the most recent version of the Risk-Based Capital (RBC) For Insurers Model Act, together with the RBC instructions, as adopted in a substantially similar manner by an NAIC member and published in the NAIC's Model Regulation Service.

Permitted accounting practice means an accounting practice, specifically requested by a state-regulated insurer, that departs from SAP and state prescribed accounting practices and has been approved by the state-regulated insurer's domiciliary state regulatory authority.

Prescribed accounting practice means an accounting practice that is incorporated directly or by reference to state laws, regulations, and general administrative rules applicable to all insurance companies domiciled in a particular state.

Principles based reserving (PBR) means the valuation standard adopted for certain life insurance reserves by the NAIC effective as of January 1, 2020.

Recalculated building block capital requirement means, for a downstream building block parent and an upstream building block parent, the downstream building block parent's building block capital requirement recalculated assuming that the downstream building block parent had no upstream investment in the upstream building block parent.

Regulatory capital framework means, with respect to a company, the applicable legal requirements, excluding this subpart, specifying the minimum amount of total regulatory capital the company must hold to avoid restrictions on distributions and discretionary bonus payments, regulatory intervention on the basis of capital adequacy levels for the company, or equivalent standards; provided that the NAIC RBC frameworks for life and fraternal insurance, P&C insurance, and health insurance companies are different regulatory capital frameworks.

SAP means Statutory Accounting Principles as promulgated by the NAIC and adopted by a jurisdiction for purposes of financial reporting by insurance companies.

Scalar compatible means a capital framework:

(i) For which the Board has determined scalars; or

(ii) That is an insurance capital regulatory framework, and exhibits each of the following three attributes:

(A) The framework is clearly defined and broadly applicable;

(B) The framework has an identifiable regulatory intervention point that can be used to calibrate a scalar; and

(C) The framework provides a risk-sensitive measure of required capital reflecting material risks to a company's financial strength.

Scaling means the translation of building block available capital and building block capital requirement from one indicated capital framework to another by application of § 217.606.

Submission date means the date as of which form FR Q-1 is filed with the Board.

Supervised insurance organization means:

(i) In the case of a depository institution holding company, the set of companies consisting of:

(A) A top-tier depository institution holding company that is an insurance underwriting company, together with its inventory companies; or

(B) A top-tier depository institution holding company, together with its inventory companies, that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in insurance underwriting companies (other than assets associated with insurance underwriting for credit risk). For purposes of this paragraph (i)(B), the supervised firm must calculate its total consolidated assets in accordance with GAAP, or if the firm does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board; or

(ii) An institution that is otherwise subject to this subpart, as determined by the Board, together with its inventory companies.

Tier 2 capital instruments has the meaning set out in § 217.608(a).

Top-tier depository institution holding company means a depository institution holding company that is not controlled by another depository institution holding company.

Upstream building block parent means an upstream company that is a building block parent.

Upstream company means a company within a supervised insurance organization that directly or indirectly controls a downstream company, or directly or indirectly owns part or all of a downstream company's company capital elements.

Upstream investment means any direct or indirect investment by a downstream building block parent in an upstream building block parent. When calculating adjusted downstream building block available capital, the amount of the upstream investment is calculated as the impact, excluding any impact on taxes, on the downstream building block parent's building block available capital if the owner were to deduct the investment.

U.S. Federal banking capital rules mean this part, other than this subpart, and the regulatory capital rules promulgated by the Federal Deposit Insurance Corporation at chapter III of this title and the Office of the Comptroller of the Currency at chapter I of this title.

(a) In general. A supervised insurance organization must determine its BBA ratio, subject to the minimum requirement set out in this section and buffer set out in § 217.604, for each depository institution holding company within its enterprise by:

(1) Establishing an inventory that includes the supervised insurance organization and every company that meets the requirements of § 217.605(b)(1);

(2) Identifying all building block parents as required under § 217.605(b)(3);

(3) Determining the available capital and capital requirement for each building block parent in accordance with its indicated capital framework;

(4) Determining the building block available capital and building block capital requirement for each building block, reflecting adjustments and scaling as set out in this subpart;

(5) Rolling up building block available capital and building block capital requirement amounts across all building blocks in the supervised insurance organization's enterprise to determine the same for any depository institution holding companies in the enterprise; and

(6) Determining the ratio of building block available capital to building block capital requirement for each depository institution holding company in the supervised insurance organization.

(b) Determination of BBA ratio. For a depository institution holding company in a supervised insurance organization, the BBA ratio is the ratio of the company's building block available capital to the company's building block capital requirement, each scaled to the common capital framework in accordance with § 217.606.

(c) Minimum capital requirement. A depository institution holding company in a supervised insurance organization must maintain a BBA ratio of at least 250 percent.

(d) Capital adequacy. (1) Notwithstanding the minimum requirement in this subpart, a depository institution holding company in a supervised insurance organization must maintain capital commensurate with the level and nature of all risks to which it is exposed. The supervisory evaluation of the depository institution holding company's capital adequacy is based on an individual assessment of numerous factors, including the character and condition of the company's assets and its existing and prospective liabilities and other corporate responsibilities.

(2) A depository institution holding company in a supervised insurance organization must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital.

(a) Capital conservation buffer—(1) Composition of the capital conservation buffer. The capital conservation buffer is composed solely of building block available capital excluding tier 2 capital instruments and additional tier 1 capital instruments.

(2) Definitions. For purposes of this section, the following definitions apply:

(i) Distribution means:

(A) A reduction of tier 1 capital through the repurchase of a tier 1 capital instrument or by other means, except when a Board-regulated institution, within the same quarter when the repurchase is announced, fully replaces a tier 1 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for:

(1) A common equity tier 1 capital instrument if the instrument being repurchased was part of the Board-regulated institution's common equity tier 1 capital; or

(2) A common equity tier 1 or additional tier 1 capital instrument if the instrument being repurchased was part of the Board-regulated institution's tier 1 capital;

(B) A reduction of tier 2 capital through the repurchase, or redemption prior to maturity, of a tier 2 capital instrument or by other means, except when a Board-regulated institution, within the same quarter when the repurchase or redemption is announced, fully replaces a tier 2 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for a tier 1 or tier 2 capital instrument;

(C) A dividend declaration or payment on any tier 1 capital instrument;

(D) A dividend declaration or interest payment on any tier 2 capital instrument if the Board-regulated institution has full discretion to permanently or temporarily suspend such payments without triggering an event of default;

(E) A discretionary dividend payment on participating insurance policies; or

(F) Any similar transaction that the Board determines to be in substance a distribution of capital.

(ii) Eligible retained income means, for a depository institution holding company in a supervised insurance organization, the annual change in the company's building block available capital, calculated as of the last day of the current and immediately preceding calendar years based on the supervised insurance organization's most recent form FR Q-1, net of any distributions and accretion to building block available capital from capital instruments issued in the current or immediately preceding calendar year, excluding issuances corresponding with retirement of capital instruments under paragraph (a)(2)(i)(A) of this section.

(iii) Maximum payout amount means, for the current calendar year, is equal to the Board-regulated institution's eligible retained income, multiplied by its maximum payout ratio.

(iv) Maximum payout ratio means the percentage of eligible retained income that a Board-regulated institution can pay out in the form of distributions and discretionary bonus payments during the current calendar year. The maximum payout ratio is determined by the Board-regulated institution's capital conservation buffer, calculated as of the last day of the previous calendar year, as set forth in table 1 to this section.

(3) Calculation of capital conservation buffer. The capital conservation buffer for a depository institution holding company in a supervised insurance organization is the greater of its BBA ratio, calculated as of the last day of the previous calendar year based on the supervised insurance organization's most recent form FR Q-1, minus the minimum capital requirement under § 217.603(c), and zero.

(4) Limits on distributions and discretionary bonus payments. (i) A top-tier depository institution holding company in a supervised insurance organization shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar year that, in the aggregate, exceed its maximum payout amount.

(ii) A top-tier depository institution holding company in a supervised insurance organization and that has a capital conservation buffer that is greater than 150 percent is not subject to a maximum payout amount under this section.

(iii) Except as provided in paragraph (a)(4)(iv) of this section, a top-tier depository institution holding company in a supervised insurance organization may not make distributions or discretionary bonus payments during the current calendar year if the Board-regulated institution's:

(A) Eligible retained income is negative; and

(B) Capital conservation buffer was less than 150 percent as of the end of the previous calendar year.

(iv) Notwithstanding the limitations in paragraphs (a)(4)(i) through (iii) of this section, the Board may permit a top-tier depository institution holding company in a supervised insurance organization to make a distribution or discretionary bonus payment upon a request of the depository institution holding company, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the depository institution holding company. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request.

(b) [Reserved]

(a) In general. A supervised insurance organization must identify each building block parent and its allocation share of any downstream building block parent, as applicable.

(b) Operation. To identify building block parents and determine allocation shares, a supervised insurance organization must take the following steps in the following order:

(1) Inventory of companies. A supervised insurance organization must identify as inventory companies:

(i) All companies that are—

(A) Required to be reported on the FR Y-6;

(B) Required to be reported on the FR Y-10; or

(C) Classified as affiliates in accordance with NAIC Statement of Statutory Accounting Principles (SSAP) No. 25 and Schedule Y;

(ii) Any company, special purpose entity, variable interest entity, or similar entity that:

(A) Enters into one or more reinsurance or derivative transactions with inventory companies identified pursuant to paragraph (b)(1)(i) of this section;

(B) Is material;

(C) Is engaged in activities such that one or more inventory companies identified pursuant to paragraph (b)(1)(i) of this section are expected to absorb more than 50 percent of its expected losses; and

(D) Is not otherwise identified as an inventory company; and

(iii) Any other company that the Board determines must be identified as an inventory company.

(2) Determination of indicated capital framework. (i) A supervised insurance organization must:

(A) Determine the indicated capital framework for each inventory company; and

(B) Identify inventory companies that are subject to a regulatory capital framework.

(ii) The indicated capital framework for an inventory company is:

(A) If the inventory company is not engaged in insurance or reinsurance underwriting, the U.S. Federal banking capital rules, in particular:

(1) If the inventory company is not a depository institution, subparts A through F of this part; and

(2) If the inventory company is a depository institution, the regulatory capital framework applied to the depository institution by the appropriate primary Federal regulator—that is, subparts A through F of this part (Board), part 3 of this title (Office of the Comptroller of the Currency), or part 324 of this title (Federal Deposit Insurance Corporation), as applicable;

(B) If the inventory company is engaged in insurance or reinsurance underwriting and subject to a regulatory capital framework that is scalar compatible, the regulatory capital framework; and

(C) If the inventory company is engaged in insurance or reinsurance underwriting and not subject to a regulatory capital framework that is scalar compatible, then NAIC RBC for life and fraternal insurers, health insurers, or property & casualty insurers based on the company's primary source of premium revenue.

(3) Identification of building block parents. A supervised insurance organization must identify all building block parents according to the following procedure:

(i)(A) Identify all top-tier depository institution holding companies in the supervised insurance organization.

(B) Any top-tier depository institution holding company is a building block parent.

(ii)(A) Identify any inventory company that is a depository institution holding company.

(B) An inventory company identified in paragraph (b)(3)(ii)(A) of this section is a building block parent.

(iii) Identify all inventory companies that are capital-regulated companies (that is, inventory companies that are subject to a regulatory capital framework) or material financial entities.

(iv)(A) Of the inventory companies identified in paragraph (b)(3)(iii) of this section, identify any inventory company that:

(1) Is assigned an indicated capital framework that is different from the indicated capital framework of any next upstream inventory company identified in paragraphs (b)(3)(i) through (iii) of this section or does not have a next upstream inventory company; and

(i) In a simple structure, an inventory company would compare its indicated capital framework to the indicated capital framework of its parent company. However, if the parent company does not meet the criteria to be identified as a building block parent, the inventory company must compare its capital framework to the next upstream company that is eligible to be identified as a building block parent. For purposes of this paragraph (b)(3)(iv), a company is “next upstream” to a downstream company if it controls or owns, in whole or in part, a company capital element of the downstream company either directly, or indirectly other than through a company identified in paragraphs (b)(3)(ii) and (iii) of this section.

(ii) [Reserved]

(2) Is assigned an indicated capital framework for which the Board has determined a scalar or, if the company in aggregate with all other companies subject to the same indicated capital framework are material, a provisional scalar;

(B) Of the inventory companies identified in paragraph (b)(3)(iii) of this section, identify any inventory company that:

(1) Is assigned an indicated capital framework that is the same as the indicated capital framework of each next upstream inventory company identified in paragraphs (b)(3)(i) through (iii) of this section;

(2) Is assigned an indicated capital framework for which the Board has determined a scalar or, if the company in aggregate with all other companies subject to the same indicated capital framework is material, a provisional scalar; and

(3) Is owned, in whole or part, by an inventory company that is subject to the same regulatory capital framework, and the owner:

(i) Applies a charge on the inventory company's equity value in calculating its company capital requirement; or

(ii) Deducts all or a portion of its investment in the inventory company in calculating its company available capital.

(C) An inventory company identified in paragraph (b)(3)(iv)(A) through (B) of this section is a building block parent.

(v) Include any inventory company identified in paragraph (b)(1)(ii) of this section as a building block parent.

(vi)(A) Identify any inventory company—

(1) For which more than one building block parent, as identified pursuant to paragraphs (b)(3)(i) through (v) of this section, owns a company capital element either directly or indirectly other than through another such building block parent; and

(2)(i) Is consolidated under any such building block parent's indicated capital framework; or

(ii) Owns downstreamed capital.

(B) An inventory company identified in paragraph (b)(3)(vi)(A) of this section is a building block parent.

(4) Building blocks. (i) Except as provided in paragraph (b)(4)(ii) of this section, a supervised insurance organization must assign an inventory company to the building block of any building block parent that owns a company capital element of the inventory company, or of which the inventory company is a subsidiary, directly or indirectly through any company other than a building block parent, unless the inventory company is a building block parent.

(A) For purposes of this section, subsidiary includes a company that is required to be reported on the FR Y-6, FR Y-10, or NAIC's Schedule Y, as applicable.

(B) [Reserved]

(ii) A supervised insurance organization is not required to assign to a building block any inventory company that is not a downstream company or subsidiary of a top-tier depository institution holding company.

(5) Financial statements. The supervised insurance organization must:

(i) For any inventory company whose indicated capital framework is NAIC RBC, prepare financial statements in accordance with SAP; and

(ii) For any building block parent whose indicated capital framework is subparts A through F of this part:

(A) Apply the same elections and treatment of exposures as are applied to the subsidiary depository institution;

(B) Apply subparts A through F of this part, to the members of the building block of which the building block parent is a member, on a consolidated basis, to the same extent as if the building block parent were a Board-regulated institution; and

(C) Where the building block parent is not the top-tier depository institution holding company, not deduct investments in capital of unconsolidated financial institutions, nor exclude these investments from the calculation of risk-weighted assets.

(6) Allocation share. A supervised insurance organization must, for each building block parent, identify any downstream building block parent owned directly or indirectly through any company other than a building block parent, and determine the building block parent's allocation share of these downstream building block parents pursuant to paragraph (d) of this section.

(c) Material financial entity election. (1) A supervised insurance organization may elect not to treat an inventory company meeting the criteria in paragraph (c)(2) of this section as a material financial entity. An election under this paragraph (c)(1) must be included with the first financial statements submitted to the Board after the company is included in the supervised insurance organization's inventory.

(2) The election in paragraph (c)(1) of this section is available to an inventory company if:

(i) The company engages in transactions consisting solely of either—

(A) Transactions for the purpose of transferring risk from one or more affiliates within the supervised insurance organization to one or more third parties; or

(B) Transactions to invest assets contributed to the company by one or more affiliates within the supervised insurance organization, where the company is established for purposes of limiting tax obligation or legal liability; and

(ii) The supervised insurance organization is able to calculate the adjustment required in § 217.607(b)(4).

(d) Allocation share. (1) Except as provided in paragraph (d)(2) of this section, a building block parent's allocation share of a downstream building block parent is calculated as the percentage of equity ownership of a downstream building block parent, including associated paid-in capital, held by an upstream building block parent directly or indirectly through a member of the upstream building block parent's building block.

(2) The top-tier depository institution holding company's allocation share of a building block parent that has no outstanding common equity or that is identified under paragraph (b)(3)(v) of this section is 100 percent. Any other building block parent's allocation share of such building block parent is zero.

(a) Scaling specified by the Board—(1) Scaling between the U.S. Federal banking capital rules and NAIC RBC—(i) Scaling capital requirement. When calculating the building block capital requirement for a building block parent in accordance with § 217.607, where the indicated capital framework is NAIC RBC or the U.S. Federal banking capital rules, and where the indicated capital framework of the appropriate downstream building block parent is NAIC RBC or the U.S. Federal banking capital rules, the capital requirement scaling modifier is provided by table 1 to this paragraph (a)(1)(i).

(ii) Scaling available capital. When calculating the building block available capital for a building block parent in accordance with § 217.608, where the indicated capital framework is NAIC RBC or the U.S. Federal banking capital rules, and where the indicated capital framework of the appropriate downstream building block parent is NAIC RBC or the U.S. Federal banking capital rules, the available capital scaling modifier is provided by table 2 to this paragraph (a)(1)(ii).

(2) Scaling to determine BBA ratio. For purposes of determining the BBA ratio under § 217.603(b)—

(i) A depository institution holding company for which the indicated capital framework is the U.S. Federal banking capital rules scales its building block available capital and building block capital requirement the common capital framework by using the methods described in paragraphs (a)(1) of this section. For purposes of scaling under this paragraph (a)(2)(i), the downstream building block parent's indicated capital framework is the U.S. Federal banking capital rules and the upstream building block parent's indicated capital framework is NAIC RBC; and

(ii) A depository institution holding company for which the indicated capital framework is NAIC RBC does not scale its building block available capital or building block capital requirement.

(b) Scaling not specified by the Board but framework is scalar compatible. Where a scaling modifier to be used in § 217.607 or § 217.608 is not specified in paragraph (a) of this section, and the building block parent's indicated capital framework (i.e., jurisdictional capital framework) is scalar compatible, a building block parent determines the scaling modifier as follows:

(1) Definitions. For purposes of this section, the following definitions apply:

(i) Jurisdictional intervention point. The jurisdictional intervention point is the capital level, under the laws of the jurisdiction for its domestic insurers, at which the supervisory authority in the jurisdiction may intervene as to a company subject its capital framework by imposing restrictions on distributions and discretionary bonus payments by the company or, if no such intervention may occur in a jurisdiction, then the capital level at which the supervisory authority would first have the authority to take action against a company based on its capital level.

(ii) Jurisdiction adjustment. The jurisdictional adjustment is the risk adjustment set forth in table 3 to this paragraph (b)(1)(ii), based on the country risk classification set by the Organization for Economic Cooperation and Development (OECD) for the jurisdiction. This adjustment is applied to the jurisdictional intervention point.

(2) Scaling capital requirement. When calculating the building block capital requirement for a building block parent in accordance with § 217.607, where the indicated capital framework of the appropriate downstream building block parent is a scalar-compatible framework for which the Board has not specified a capital requirement scaling modifier, the capital requirement scaling modifier is calculated according to the following formula:

Equation 1 to Paragraph (b)(2) Where: Adjustmentscaling from is equal to the jurisdictional adjustment of the downstream building block parent; Requirementscaling from is equal to the jurisdictional intervention point of the downstream building block parent; and Requirementscaling to is equal to the jurisdictional intervention point of the upstream building block parent.

(3) Scaling available capital. When calculating the building block available capital for a building block parent in accordance with § 217.608, where the indicated capital framework of the appropriate downstream building block parent is a scalar-compatible framework for which the Board has not specified an available capital scaling modifier, the available capital scaling modifier is equal to zero.

(a) Determination of building block capital requirement. For each building block parent, building block capital requirement means the sum of the items in paragraphs (a)(1) and (2) of this section:

(1) The company capital requirement of the building block parent; that is:

(i) Recalculated under the assumption that members of the building block parent's building block had no investment in any downstream building block parent; and is:

(ii) Adjusted pursuant to paragraph (b) of this section;

(2) For each downstream building block parent, the adjusted downstream building block capital requirement (BBCRADJ), which is calculated according to the following formula:

Equation 1 to Paragraph (a)(2) BBCRADJ = BBCRDS · CRSM · AS Where: BBCRDS is equal to the building block capital requirement of the downstream building block parent recalculated under the assumption that the downstream building block parent had no upstream investment in the building block parent; CRSM is equal to the appropriate capital requirement scaling modifier under § 217.606; and AS is equal to the building block parent's allocation share of the downstream building block parent.

(b) Adjustments in determining the building block capital requirement. A supervised insurance organization must adjust the company capital requirement for any building block parent as follows:

(1) Internal credit risk charges. A supervised insurance organization must deduct from the building block parent's company capital requirement any difference between:

(i) The building block parent's company capital requirement; and

(ii) The building block parent's company capital requirement recalculated excluding capital requirements related to potential for the possibility of default of any company in the supervised insurance organization.

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

Note 1 to paragraph (b)(2) introductory text:

The adjustment can be either positive or negative depending on the permitted or prescribed practices. In most cases, the reversal of the permitted or prescribed practice would result in an increase in the building block parent's company required capital. In rare cases, a permitted or prescribed practice could increase the insurers required capital. In this instance, this adjustment would reduce the building block parent's company required capital.

(i) The building block parent's company capital requirement, after making any adjustment in accordance with paragraph (b)(1) of this section; and

(ii) The building block parent's company capital requirement, after making any adjustment in accordance with paragraph (b)(1) of this section, 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.

(3) Risks of certain intermediary entities. Where a supervised insurance organization has made an election with respect to a company not to treat that company as a material financial entity pursuant to § 217.605(c), the supervised insurance organization must add to the company capital requirement of any building block parent, whose building block contains a member, with which the company engages in one or more transactions, and for which the company engages in one or more transactions described in § 217.605(c)(2) with a third party, any difference between:

(i) The building block parent's company capital requirement; and

(ii) The building block parent's company capital requirement recalculated taking into account the risks of the company, excluding internal credit risks described in paragraph (b)(1) of this section, allocated to the building block parent, reflecting the transaction(s) that the company engages in with any member of the building block parent's building block. Note, the total allocation of the risks of the intermediary entity to building block parents must capture all material risks and avoid double counting.

(4) Investments in own capital instruments—(i) In general. A supervised insurance organization must deduct from the building block parent's company capital requirement any difference between:

(A) The building block parent's company capital requirement; and

(B) The building block parent's company capital requirement recalculated after assuming that neither the building block parent, nor any company that is a member of the building block parent's building block, held any investment in the building block parent's own capital instrument(s), including any net long position determined in accordance with paragraph (b)(5)(ii) of this section.

(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 (b)(4)(ii)) equals or exceeds 5 percent of the value of the fund.

(5) Risks relating to title insurance. A supervised insurance organization must add to the building block parent's company capital requirement the amount of the building block parent's reserves for claims pertaining to title insurance, multiplied by 300 percent.

(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:

(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.