The Office of the Comptroller of the Currency (OCC), along with the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, on November 6 issued interagency guidance to banking organizations within their respective jurisdictions. The interagency guidance addresses the deduction from regulatory capital for certain investments in covered funds pursuant to section 13 of the Bank Holding Company Act, also known as the Volcker Rule. The guidance clarifies the interaction between the deduction for covered funds under the Volcker Rule and the deductions required for certain investments in non-consolidated financial institutions under the respective capital rules of the agencies.

The Volcker Rule deduction became effective on July 21 for investments in covered funds made after December 31, 2013. The September 30 call report was the first in which banking organizations were required to report Volcker Rule deduction amounts. For investments made before December 31, 2013, the Volcker Rule deduction does not become effective until July 21, 2017. The OCC release noted that community banks are subject to the Volcker Rule deduction only if they engage in covered fund activities that result in holding an ownership interest in covered funds.

Highlights from the interagency guidance:

• The interagency guidance describes the steps that a bank should follow to determine its deduction for covered funds subject to the Volcker Rule.

• An investment that must be deducted from regulatory capital because it is a covered fund under the Volcker Rule also may be subject to a deduction from regulatory capital because the investment meets the definition of an “investment in the capital of an unconsolidated financial institution” under the regulatory capital rule. Therefore, the Volcker Rule and regulatory capital rule deduction requirements may overlap. The purpose of the steps in the interagency guidance is to prevent a double deduction.

• Deductions made according to requirements of the regulatory capital rule at 12 CFR 3 take precedence and should be deducted first. To the extent the deduction requirements overlap, the interagency guidance clarifies that the 12 CFR 3 deductions may count toward the required Volcker Rule deduction at 12 CFR 44, which should be calculated after 12 CFR 3 deductions have been made.

• Amounts deducted according to the regulatory capital rule or the Volcker Rule are deducted from the numerator and the denominator for purposes of calculating regulatory capital ratios.