Frequently Asked Questions about Regulation Q
Capital Adequacy of Bank Holding Companies, Savings and Loan Holding Companies, and State Member Banks
Staff of the Board of Governors of the Federal Reserve System has developed the following frequently asked questions (FAQs) to assist entities in complying with the Board’s Regulation Q. Except as noted below, these FAQs are staff interpretations and have not been approved by the Board of Governors. Staff may supplement or revise these FAQs as necessary or appropriate in the future. Any questions regarding these FAQs, or requests for modification, rescission, or waiver, should be submitted through the Board’s Contact Us form.
In General
In General
Q1: Aside from this page, where can I find guidance, interpretations, and statements from the Board concerning Regulation Q—Capital Adequacy of Bank Holding Companies, Savings and Loan Holding Companies, and State Member Banks?
A1: Additional guidance and interpretations for Regulation Q may be found elsewhere on the Board’s website, available here. In particular, SR letter 15-6, “Interagency Frequently Asked Questions (FAQs) on the Regulatory Capital Rule” (April 6, 2015), available here, includes many relevant interpretations.
Posted: 9/28/2023
Q2: How should Board-regulated institutions that issue “credit-linked notes” treat those notes under the Board’s capital rule?
A2: There are various forms of instruments referred to as credit-linked notes, which firms can use to reduce their risk. However, the treatment under the capital rule of a transaction using credit-linked notes depends on the form of the transaction. In certain instances, the capital rule recognizes when a firm has utilized these instruments as a form of risk mitigation and permits a firm to reduce its risk-weighted assets to reflect the risk mitigation.
Credit-linked-note transactions generally involve the issuance of notes to investors for cash, where the principal amount due on the notes is reduced if there are losses on a reference pool of loans or other financial exposures. As a result, the note purchasers provide credit protection on the reference pool by paying cash for the notes and having their principal reduced as losses accrue on the reference exposures.
In some synthetic securitizations, a Board-regulated institution transfers the risk of a reference portfolio of on-balance sheet exposures to a special purpose vehicle using a guarantee or credit derivative. The special purpose vehicle issues credit-linked notes to investors, and the Board-regulated institution takes the cash proceeds of the notes as collateral supporting the special purpose vehicle’s performance on the guarantee or credit derivative.
Under the Board’s capital rule, a Board-regulated institution can recognize the credit risk mitigation of the collateral on the reference portfolio under the rules for synthetic securitizations provided that the requirements in section 41 or 141, as applicable (12 CFR 217.41, .141), are met and that the transactions satisfy the definition of “synthetic securitization” (12 CFR 217.2, “synthetic securitization”).
In contrast, when a Board-regulated institution directly issues credit-linked notes that reference loans or other financial exposures on its balance sheet (“directly issued credit-linked notes”), it is less clear that the transaction meets the definitional requirements in section 2 (12 CFR 217.2) to be considered a synthetic securitization and the operational requirements in section 41 or 141, as applicable (12 CFR 217.41, .141), to recognize the credit risk mitigation of the credit-linked notes in risk-weighted assets. First, a synthetic securitization must include a guarantee or credit derivative and, in the case of a credit derivative, the derivative must be executed under standard industry credit derivative documentation. Directly issued credit-linked notes frequently reference, but are not executed under, standard industry credit derivative documentation. Second, the operational criteria for the simplified supervisory formula approach (SSFA) require use of a recognized credit risk mitigant, such as collateral. The cash purchase consideration for directly issued credit-linked notes is property owned by the note issuer, not property in which the note issuer has a collateral interest.
The directly issued credit-linked-note transactions Board staff has reviewed generally do not satisfy the definition of synthetic securitization and generally do not satisfy the operational requirements of the SSFA. Board-regulated institutions that are issuers of directly issued credit-linked notes, or have consolidated subsidiaries that are issuers of directly issued credit-linked notes, would therefore not automatically be able to recognize such transactions as synthetic securitizations under the capital rule.
Source: 12 CFR 217.2, .41, and .141.
Posted: 9/28/2023
Q3: How may a Board-regulated institution request approval to treat a directly issued credit-linked-note transaction as a synthetic securitization and use the simplified supervisory formula approach under the capital rule?
A3: While the way a directly issued credit-linked-note transaction transfers risk is somewhat different from the capital rule’s criteria, it is similar to practices commonly used for mitigating credit risk that the Board recognizes in its capital rule. Through a directly issued credit-linked-note transaction, firms can, in principle, transfer a portion of the credit risk on the referenced assets to the credit-linked-note investors at least as effectively as the synthetic securitizations that qualify under the capital rule. Therefore, the Board, on appropriate facts, is willing to exercise a reservation of authority where the primary issues presented by the transaction are limited to the two common issues of directly issued credit-linked notes described in the answer to question 1 above.
A Board-regulated institution may request a reservation of authority under the capital rule for directly issued credit-linked notes in order to assign a different risk-weighted-asset amount to the reference exposures. To make such a request, a Board-regulated institution should contact supervisory staff at the appropriate Federal Reserve Bank. Board staff will review a request from an individual firm based on the facts and circumstances presented, including a review of the transaction documents that the firm is using. The Board’s response to the request will be communicated in writing to the firm, describing the action taken and any limitations or conditions related to the action. A firm may not rely on these FAQs or on written action issued to any other firm as the basis for the capital treatment of any transaction.
Source: 12 CFR 217.1(d)(3).
Posted: 9/28/2023
Q4: Is a Board-regulated mutual banking organization permitted to issue capital instruments that qualify as common equity tier 1, additional tier 1, or tier 2 regulatory capital?
A4: Yes. A Board-regulated mutual banking organization is permitted to issue qualifying common equity tier 1, additional tier 1, or tier 2 capital instruments, provided such instruments satisfy the relevant requirements of Regulation Q, and, as applicable, the mutual banking organization's charter, its bylaws, and Regulation MM. For example, if a mutual capital certificate, or other capital instrument issued by a mutual banking organization, satisfies the applicable additional tier 1 criteria under section 217.20(c) of Regulation Q, it would be eligible to qualify as additional tier 1 capital. Likewise, if a mutual capital certificate, or other capital instrument issued by a mutual banking organization, satisfies the applicable common equity tier 1 criteria under section 217.20(b) of Regulation Q, it would be eligible to qualify as common equity tier 1 capital.
Source: 78 FR 62018, 62051 (Oct. 11, 2013)
Posted: 10/8/2025
Q5: What factors should a Board-regulated mutual banking organization consider in order to ensure any mutual capital certificate or instrument would qualify as either common equity tier 1, additional tier 1, or tier 2 regulatory capital?
A5: A Board-regulated banking organization, including a mutual banking organization, should assess any proposed instrument's governing documents, and any offering circular or marketing communications, for their consistency with the requirements of section 217.20(b), (c), or (d) of Regulation Q.
For example, for a proposed additional tier 1 capital instrument, a Board-regulated mutual banking organization should assess the factors in section 217.20(c)(1). Additional tier 1 capital instruments are intended to be available to absorb losses on a going-concern basis, and can have a broader range of terms than common equity tier 1 instruments. To qualify as additional tier 1 capital, Regulation Q requires capital instruments to satisfy the following criteria:
- The instrument is paid in, has no maturity date, and is equity under U.S. GAAP.
- The instrument may be callable after 5 years of issuance (or earlier if there is a "regulatory event"), with the prior approval of the Board.
- The instrument cannot include terms that create an incentive for the issuer to redeem it (for example, a call option combined with a step-up dividend rate) and the issuer cannot create an expectation that it will redeem the instrument.
- The instrument cannot be secured, be guaranteed by the banking organization, or have terms that enhance its seniority.
- The instrument may be senior to common equity tier 1 instruments, but must be subordinated to depositors, general creditors, and to subordinated debt holders of the banking organization in a receivership, insolvency, liquidation or similar proceeding.
- Any redemptions or repurchases of the instrument require prior approval from the Board.
- Any dividends or other distributions paid on the instrument must be discretionary for the banking organization. Not paying dividends must not trigger default or other restrictions, other than restrictions on distributions on instruments of the same seniority or junior in seniority.
- The instrument cannot have any features that would limit or discourage additional issuance of capital by the banking organization (for example, down-round payments).
- The banking organization, or an entity it controls, cannot directly or indirectly fund the purchase of the instruments.
Mutual Banking Organization – Additional Tier 1 Term Sheet (PDF) is a template term sheet that can be used as a reference by a Board-regulated mutual banking organization that may want to issue additional tier 1 capital instruments. If a mutual banking organization that wishes to issue an additional tier 1 capital instrument has questions about the eligibility of the instrument in regulatory capital, it should reach out to its primary federal regulator.
The Board is interested in feedback and reactions to the proposed additional tier 1 capital template and will consider any comments or feedback received by June 30, 2026, after which updates or revisions to the template will be considered. Feedback or reactions on the proposed template may be sent to [email protected]. Comments received are subject to public disclosure. Any confidential information that would not be appropriate for public disclosure and for which commenters wish to request confidential treatment should be so labelled in accordance with the Board's Rules Regarding Availability of Information at 12 CFR 261.17.
Alternatively, for a proposed common equity tier 1 capital instrument, a Board-regulated mutual banking organization should assess the factors in section 217.20(b)(1). To qualify as common equity tier 1 capital, Regulation Q requires capital instruments to satisfy the following criteria:
- The instrument is paid-in, is issued directly by the banking organization, has no maturity date, and is classified as equity under U.S. GAAP.
- The instrument can only be redeemed at the banking organization's discretion, and only with the prior approval of the Board.
- The banking organization cannot create, at issuance of the instrument, an expectation that it would buy back, redeem, or cancel the instrument.
- The instrument cannot be secured, be guaranteed by the banking organization, or have terms that legally or economically enhance its seniority.
- Any dividends or other distributions paid on the instrument must be solely at the banking organization's discretion, and non-payment of any dividends or other distributions must not trigger an event of default or other restrictions.
- The instrument must represent the most subordinated claim in liquidation, receivership, insolvency, or similar proceeding. Instrument holders must bear losses equally and proportionally as they occur, together with other holders of common equity tier 1 capital instruments, before losses are borne by holders of other claims with higher priority.
- The banking organization, or an entity it controls, cannot directly or indirectly fund the purchase of the instruments.
Mutual Banking Organization – Common Equity Tier 1 Term Sheet (PDF) is a template term sheet that can be used as a reference by a mutual banking organization that may want to issue common equity tier 1 capital instruments. If a mutual banking organization that wishes to issue a common equity tier 1 capital instrument has questions about the eligibility of the instrument in regulatory capital, it should reach out to its primary federal regulator.
The Board is interested in feedback and reactions to the proposed template and will consider any comments or feedback received by June 30, 2026, after which updates or revisions to the template will be considered. Feedback or reactions on the proposed template may be sent to [email protected]. Comments received are subject to public disclosure. Any confidential information that would not be appropriate for public disclosure and for which commenters wish to request confidential treatment should be so labelled in accordance with the Board's Rules Regarding Availability of Information at 12 CFR 261.17.
Posted: 10/8/2025
Q6: How may a Board-regulated mutual banking organization obtain feedback from Board staff on a mutual capital instrument intended to qualify as common equity tier 1, additional tier 1, or tier 2 regulatory capital?
A6: A Board-regulated mutual banking organization is welcome to contact Federal Reserve staff with questions regarding whether a proposed mutual capital instrument would qualify as regulatory capital. In general, any review of a Board-regulated mutual banking organization's regulatory capital instruments would occur during the ordinary course of supervision.
Staff would evaluate whether the proposed instrument would satisfy each of the requirements of Regulation Q, including section 217.20(b), (c), or (d), as applicable, based on the specific facts and circumstances of the proposal, the proposed instrument's governing documents, and any offering circular or marketing communications for such instruments.
In seeking feedback from Federal Reserve staff, a mutual banking organization should, consistent with the regulation, expect to discuss how the terms of the instrument are consistent with the requirements applicable under section 217.20(b)-(d), as applicable, of Regulation Q.
Source: 12 CFR 217.20(b)-(d).
Posted: 10/8/2025