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F

ed er a l

R

e s e r v e b a n k

O F DALLAS
W ILL IA M

H. WALLACE

DALLAS, TEXAS 7 5 2 2 2

FIRST V IC E p r e s i d e n t
AND C H IE F O P ER ATIN G O FFIC E R

,

November 1, 1990
Circular 90-81

TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Proposed Amendments to Risk-Based C apital G uidelines
DETAILS

The Federal Reserve Board has requested public comment on certain
clarifications, modifications, and technical changes to the B o a r d ’s risk-based
capital guidelines. The modifications and technical changes relate to the
(1) treatment of certain assets sold with recourse, (2) redemption of perpet­
ual preferred stock, (3) treatment of supervisory goodwill in the definition
of capital, and (4) treatment of claims on non-Organisation for Economic Co­
operation and Development central banks. The proposed changes are designed to
ensure that residential mortgages sold with recourse receive an adequate
capital charge under the framework and to clarify certain provisions of the
guidelines that call for prior supervisory approval before any redemption of
perpetual preferred stock.
Comments should be received by the Board by December 17, 1990, and
should be addressed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington,
D.C. 20551. All comments should refer to Docket No. R-0709.
ATTACHMENT

The B o a r d ’s notice is attached.
MORE INFORMATION

Questions concerning the B o a r d ’s proposal should be addressed to
Dorsey Davis at (214) 744-7420 or Don Freeman at (214) 744-7408.
For addi­
tional copies of this circular, please contact the Public Affairs Department
at (214) 651-6289.
Sincerely yours,

For additional copies of any circular, please contact the Public Affairs Department at (214) 651-6289. Bankers and others are encouraged to use the following
toll-free number in contacting the Federal Reserve Bank of Dallas: (800) 333-4460.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

42Q22

Federal Register / Vol. 55, No. 201 / Wednesday, October 17, 1990 / Proposed Rules

FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[R egulatio n H, Regulation Y; D ocket No. R -

0709]

Capital; Capital Adequacy Guidelines
Board of Governors of t h e
Federal Reserve System.
ACTION: Notice of proposed rulemaking.
AGENCY:

clarifications, and technical changes to
the risk-based capital guidelines. The
modifications an d technical changes
relate to the: (1) T reatm ent of certain
assets sold w ith recourse; (2)
redem ption of perpetual preferred stock;
(3) treatm ent of supervisory goodwill in
the definition of capital; an d (4)
treatm ent of claim s on ncn-OECD
central banks.
The purpose of these modifications,
clarifications, and technical changes is
to m ake the Board’s risk-based capital
fram ew ork consistent w ith recent
international interpretations of the riskb ased capital accord (Basel Accord] and
w ith the current or proposed treatm ent
of certain item s by the other federal
banking agencies. In addition, certain of
the proposed m odifications to the
language of the Board’s risk-based
capital guidelines are intended to bring
the guidelines into closer conformity
w ith current F ederal Reserve
supervisory practices. In light of the
im portance of the m odifications and
clarifications described in this Notice,
their overall consistency w ith the spirit
an d intent of the risk-based capital
fram ew ork an d the Basel Accord, and
the need to ensure that risks are backed
by an appropriate level of capital, it is
intended th a t the m odifications and
clarifications be incorporated into the
guidelines by the end of 1990, or as soon
as possible thereafter. Y ear-end 1990 is
the date upon w hich the interim riskb ased capital ratios first take effect; the
final guidelines ta k e effect a t the end of
1992. Because the m odifications and
clarifications require adjustm ents in the
language of the risk-based capital
guidelines, the Board w ill accept and
consider com m ents from the public for a
60-day com ment period.
B A TE S: Com ments on the modifications,
clarifications, an d technical changes
should b e subm itted on or before
D ecem ber 17,1990.
A D D R E SS E S : Comments, w hich should
refer to docket No. R-0703, m ay be
m ailed to Mr. W illiam W. Wiles,
Secretary, Board of G overnors of the
Federal Reserve System, 20th Street and
C onstitution Avenue, NW „ W ashington,
DC 20551; or delivered to room B-2223,
Eccles Building, betw een 8:45 a.m. and
5:15 p.m. w eekdays. Com ments m ay be
inspected in Room B-1122 b etw een 9
a m. and 5 p.m. w eekdays, except as
provided in § 261.8 of the Board’s Rules
Regarding A vailability of Information,
12 CFR 261.8.

SUMMARY: The Federal Reserve Board is

FOR FURTHER INFORMATION CONTACT:

proposing several modifications,

Roger T. Cole, A ssistant D irector (202/
452-2618), Rhoger H. Pugh, M anager
(202/728-5883), N orah Barger, Senior
Financial A nalyst (202/452-2402),

** See parag rap h (c)(26) o f sectio n 1 o f appendix
A to this part.

Thom as R. Boemio, Senior Financial
A nalyst (202/452-2982), Division of
Banking Supervision an d Regulation;
M ic h a e l}. O’Rourke, Senior A ttorney
(202/452-3288) or M ark J. Tenhundfeld,
A ttorney (202/452-3612), Legal Division.
For the hearing im paired only,
Telecom m unication Device for the D eaf
(TDD), E arnestine Hill or D orothea
Thom pson (202/452-3544).
SUPPLEMENTARY INFORMATION:

I. Background
Since the Board initially published its
risk-based capital guidelines, some
questions have arisen concerning how
certain recourse transactions involving
credit risk are to be captured by the
fram ew ork. In addition, certain
interpretations and clarifications have
em erged from international and
dom estic discussions among supervisory
authorities. Finally, the enactm ent of the
Financial Institutions, Reform, Recovery,
and Enforcem ent A ct of 1989 (FIRREA)
affects the treatm ent of goodwill for
capital purposes. Accordingly, the Board
has proposed the following
m odifications a n d clarifications in order
to ad d ress these developm ents.
The m odifications and clarifications
outlined in this notice will: (1) Ensure
th at certain off-balance sheet credit
exposures, particularly sales of
residential m ortgages w ith recourse, are
adequately captured in the risk-based
capital framework; (2) im plem ent
interpretations egreed to by supervisory
authorities represented on the Basle
Committee on Supervision; and (3 ) foster
consistency betw een the Federal
R eserve's treatm ent of certain
transactions for risk-based capital
purposes an d the current or proposed
trea tm ent of such transactions by the
other federal banking agencies.
II. M odifications, Clarifications, and
Technical Changes
1. T reatm ent o f S a le s o f A sse ts
(Including R esid en tia l M ortgages) W ith
R ecourse
It is a basic tenet of the Basle Accord,
an d of the risk-based capital guidelines
of the three federal banking agencies,
th a t all forms of credit risk, w hether onor off-balance s h e e t are to b e tak en into
account in calculating an institution’s
risk-based capital ratio .1 In view of this
1 In order to conform to the principles estab lish ed
in the B asie A ccord, the B oard’s risk-based capital
guidelines cover credit risk s re ta in e d w h en an
institution sells a n a s s e t obtain ed in the issuance of
a financial g uarantee, or acquired in any o ther
m anner. T his could b e done directly through the
issuance o f any form of direct credit enhancem ent
or indirectly through the acquisition of a n a sse t or
obligation.

Federal Register / Vol. 55. No. 201 / Wednesday, October 17, 1990 / Proposed Rules_____ 42023
principle and in light of questions that
have arisen regarding the application of
the risk-based guidelines to the sale of
certain assets w ith recourse, the Federal
Reserve Board believes that it is
necessary to modify the language of the
guidelines in ord er to clarify th a t credit
risks stemming from residential
mortgage recourse sales are subject to
an appropriate capital charge.
In general, so-called recourse “sales"
allow the buyer of a loan or pools of
loans to put back to the seller, th a t is,
require the seller to repurchase, loans
th at are not perform ing as agreed. This,
in effect, m eans th a t the credit risk
associated w ith the loans rem ains with
the “seller.” The m odifications and
clarifications to the language of the riskb ased capital guidelines could clarify
the treatm ent for risk-based capital
purposes of the sale of certain assets
w ith recourse, prim arily the sale of
residential m ortgages w ith recourse.
In defining assets sold w ith recourse
for risk-based capital purposes, the U.S.
banking agencies incorporated the
longstanding “general rule" definition
contained in the com mercial b an k Call
Report instructions. This general rule
states th a t a transfer of assets is to be
reported as a true sale, and, therefore,
tak en off the balance sheet, only if the
transferring (that is, selling) institution
(i) Retains no risk of loss from the assets
transferred resulting from any cause,
including a recourse provision, an d (ii)
h as no obligation to any p arty for the
paym ent of principal or interest on the
assets transferred.
U nder the longstanding general rule, a
transfer involving any retention by the
seller of recourse or risk of loss, even If
limited u n der the term s of the transfer
agreement, is considered a borrow ing
transaction, as opposed to a sale, and
the entire am ount of the assets
“transferred" m ust rem ain on the books
of the “selling” institution. The general
rule w as intentionally adopted by the
banking agencies for supervisory policy
reasons a n d h as been in effect for
reporting an d prim ary capital (leverage)
ratio purposes for m any years. The
principal reaso n for adopting the rule
w a s to ensure th a t institutions retaining
any credit risk through recourse
provisions w ould be required under
capital-to-total assets (leverage) ratios
to m aintain capital against these
transactions.
In 1985, the banking agencies
considered adopting FASB 77 for
regulatory reporting purposes in lieu of
the general Call Report rule.® However.
* GAAP, a s set forth in F inancial A ccounting
S ta n d a rd s Board S tatem en t No. 77 (FASB 77 ),
perm its a tra n sfe r o f a ss e ts w ith reco u rse to be

given capital adequacy considerations
and other supervisory concerns, the
banking agencies expressly decided not
to adopt FASB 77. Rather, the agencies,
under the auspices of the F.xamination
Council, chose to reaffirm the general
Call Report rule for ban k reporting and
leverage ratio purposes.
The regulatory (Call Report) definition
of sales of assets w ith recourse in the
special case of pools of residential
m ortgages differs from the general rule
just described. In particular, the Call
Report instructions state th a t for
regulatory reporting purposes, any
transfers of residential mortgage loan
pools u nder governm ent programs, such
as the Federal N ational Mortgage
A ssociation (FNMA) an d the Federal
Home Loan Mortgage C orporation
(FHLMC), w ill be treated as sales. It
should be noted th a t such treatm ent is
related to the reporting of these items
an d w ss n ever intended to preclude
taking account of the risks associated
w ith the tran sactio ns in assessing a
banking organization’s overall capital
adequacy. In addition, the Call Report
instructions state th a t transfers of pools
of residential m ortgages to private
obligors (not u n der the governm ent
program s) Ere to be reported as sales
w hen the selling b an k does n ot retain
any significant risk of loss.3
T hese regulatory reporting definitions
w ere developed at a tim e w hen the
disposition or transfer of residential
mortgages und er the governm ent
program s involved little or no recourse
an d the am ount of possible loss under
the private transactions w as considered
to be insignificant. Thus, no m ajor policy
concerns existed regarding the
possibility th a t the “selling” party in
these transactions could retain a
significant m easure of credit risk that
w as not adeq uately back ed by capital.
A s discussed below, how ever, this
situation h as changed over time.
The Board’s risk-based capita!
guidelines incorporated the general Call
Report definition of sales of assets w ith
recourse an d also m ade specific
reference to the Call Report treatm ent of
tre a te d a s a sa te if: {a} C ontrol of the future
econom ic b enefits is surrendered; (b) the am ount of
th e seller’s obligation u n d e r the recourse provisions
c an b e re a so n a b ly estim ated: a n d (c) the a sse ts
c a n n o t be re tu rn e d to the seller e x ce p t p u rsu a n t to
th e reco u rse provisions. W hen sale s treatm en t is
acco rd ed , the seller’s estim ated liability for any loss
un d er the recourse provisions m ust b e provided for.
8 T he C all R eport in structions s ta te th a t in a
p riv ate tran sactio n , recourse is considered
significant if a t the tim e of the tra n sfe r the
m axim um c o n tractu al exposure u n d e r the recourse
provision (or through retention of a subordinated
in te re st in the m ortgages) is gre a te r th a n the am ount
o f p ro b ab le loss th a t the b an k h a s reaso n ab ly
estim ated it w ill incur on the tra n sfe rre d m ortgages.

the sale of l-to-4 family residential
mortgages w ith recourse. The intent of
the guidelines w as to incorporate into
the risk-based capital fram ew ork the
supervisory principle implicit in the
general Call Report rule, that is, if the
seller retains any risk of loss, the
transaction w ould require capital
support. D espite this, the reference to
the Call Report treatm ent of the sale of
l-to-4 family residential mortgages has
apparently led some to believe that such
transactions could be excluded entirely
from the risk-based capital framework,
regardless of the am ount of credit risk
involved in these transactions.
The exclusion from capital
requirem ents of transactions w ith a
significant am ount of credit risk would
b e inconsistent w ith the principles of
risk-based capital and w as not intended
w hen the Board issued its risk-based
capita! guidelines. In this regard, it
should be noted that the Federal
Reserve’s risk-based capital guidelines
contain the statem ent th a t “ * * * asset
sales w ith recourse (to the extent not
included on the balance sheet) * * * are
converted a t 100 percent," This would
have the effect of applying a capital
charge to such transactions.
The treatm ent of asset sales with
recourse, including the transfer of
residential mortgages w ith recourse, is
of particular im portance since it has
becom e ap parent that the “sales" of
residential mortgages under the
governm ent program s can involve either
no recourse, or recourse of up to 100
percent to the "seller"—a distinct
departure from the situation th a t existed
w hen the regulatory reporting definition
of "residential m ortgages sold w ith
recourse” w a s initially adopted. Thus,
the incorporation in the risk-based
capital guidelines of the Call Report
definition of residential mortgages sold
w ith recourse h a s been interpreted by
some as allowing sales of residential
mortgages under the governm ent
program s w ith up to 100 percent
recourse to escape a capital charge.
If such treatm ent w ere permitted,
banking organizations w ould not have to
m aintain any capital to support the
credit risks associated w ith recourse
arrangem ents, even though these risks
associated w ith recourse arrangem ents,
even though these risks w ould be the
sam e as if they continued to hold the
assets directly on their books. For this
reason, the Federal Reserve is clarifying
the language in the risk-based capital
guidelines to ensure th a t l-to-4 family
residential mortgage sales w ith recourse
are not exem pt from an appropriate
capital charge,

42024

Federal Register / Vol. 55, No. 201 / Wednesday, October 17, 1990 / Proposed Rules

To achieve this objective, the
modified language w ould provide for
risk-based capital purposes th a t assets
sold w ith recourse (that are not already
on the balance sheet), including
residential mortgages, are to bn treated
hy the selling institution like any other
direct credit substitute or financial
guarantee. Thus, such off-balance sheet
obligations w ould be converted a t 100
percen t to an on-balance sheet credit
equivalent am ount an d assigned to the
appropriate risk category, typically 50
percent in the case of residential
mortgages. In general, this w ould have
the effect of putting a 4 percent capital
charge on th e entire am ount of
residential mortgage loans sold w ith
recourse.
A n exception under this proposal
w ould be allow ed w here the m axim um
possible recourse obligation, a t the time
of the transfer, is less th an the expected
loss on the transferred assets an d the
banking organization establishes and
m aintains a liability or specifically
identified (non-capital) reserve for an
am ount equal to the maximum loss
possible u n der the recourse provision.
Such a liability or reserve w ould m ean
th a t the maximum possible loss under
the recourse arrangem ent w ould in
effect be d educted from capital “up
front," and the originating or selling
institution w ould not suffer any further
loss under the recourse obligation.
U nder such conditions, no additional
capital w ould be required an d the
am ount of the liability created to cover
the maximum possible loss under the
recourse agreem ent w ould not be
included in capital.
Clarifying in the proposed m anner
that residential mortgage sales w ith
recourse incur a capital charge is
desirable for several reasons.
First, it w ould ensure th a t the Federal
R eserve’s treatm ent for risk-based
capital purposes of residential mortgage
sale w ith recourse is consistent w ith (i)
The general regulatory rule on asset
sales w ith recourse long em ployed by
the Federal banking agencies an d (ii) the
existing or proposed treatm ent of the
other Federal banking agencies.
Second, addressing the residential
mortgage issue will ensure consistency
w ith the intent of the Basle Accord,
w hich requires capital backing for all
on- an d off-balance sheet credit risks.
Third, addressing the mortgage
exception will enable the depository
institution regulatory agencies to deal
w ith a num ber of broad issues
pertaining to recourse in a consistent
fashion going forw ard.4
4 A s e x p lain ed m ore fully below , a p ro ject under
the au sp ices o f th e F ed eral F inancial in stitu tio n s

W ith reference to the second point
above regarding the consistency with
the Accord, it should be noted th a t the
term s an d provisions of the Basle
A ccord apply to com mercial ban ks on a
consolidated basis. In this regard, under
the approach described above,
com mercial bank s will be required to
back their recourse transactions with
capital w hen the interim risk-based
capital ratios becom e effective a t yearend 1990, or upon the effective date of
the clarification, w hichever is later.
W hile the Basle A ccord does not apply
to com panies that ow n banks, the
A ccord does caution th a t bank
ow nership structures or affiliations w ith
other firms not be allow ed to w eaken
the capital position of the bank or
expose the ban k to undue risks. The
Board has chosen to apply risk-based
capital requirem ents sim ilar to those in
the Basle A ccord to bank holding
com panies. In this regard, there are
certain lim ited differences betw een the
risk-based capital guidelines for banks
an d bank holding com panies. In view of
this, the Board invites com m ents on
w hether it might be appropriate in the
case of b ank holding com panies, as
distinct from com m ercial banks, to
consider a brief transition or phase-in
arrangem ent for the full risk-based
capital requirem ents w ith respect to the
sale of residential m ortgages with
recourse com pleted prior to the
publication of this Notice. Such
treatm ent w ould only be contem plated
in the case of assets sold w ith recourse
by bank holding com panies or their
nonbank subsidiaries. In considering
this point, com m enters are ask ed to
address w h ether the credit risks of the
recourse arrangem ents to the bank
holding com pany selling the assets are
any different from the risks to the
holding com pany if the assets w ere held
directly on the holding com pany's
books.
In general, und er the Board’s
recom m ended approach, 4 percent
capital w ould norm ally b e required
against the entire am ount of residential
m ortgages sold w ith recourse. However,
this approach w ould not m ean that
banking organizations w ould be unable
to sell or securitize residential
mortgages, or th a t they w ould be unable
to provide lim ited recourse or certain
other credit enhancem ents to support
sales of mortgage pools. For example,
banking organizations alw ays have the
E xam ination Council (FFIEC) is focusing o s the
ty p es o f recourse arrangem ents em ployed by
ban k in g organizations, th e incorporation of recourse
tra n sac tio n s into lending lim itations, the
supervisory a n d cap ital treatm en t of lim ited
recourse, a n d regulatory reporting im plications.

clear option to sell assets outright,
w ithout any recourse, thereby avoiding
a capital charge altogther. Moreover,
there are several w ays banking
organizations can provide credit
enhancem ents an d still sell assets
w ithout recourse, or w ith limited
recourse, an d either incur no capital
charge or a reduced capital charge.
First, banking organizations can
establish a spread account th at provides
e cushion of protection to the purchasers
of securitized assets, while a t the sam e
time insulating the selling banking
organization from losses arising from the
transaction. Funds can be placed in the
account directly by the selling
institution through a charge against
earnings or capital, or can accum ulate in
the account b ased upon the difference
betw een the rate p aid to the purchasers
of the securities and the higher yield
earned on the underlying assets. U nder
these arrangem ents, an y losses on the
underlying assets w ould be charged
against the sp read account. So long as
such losses can only be charged against
the spread account an d cannot
adversely affect the originating bank ’s
capital or future earnings, no additional
capital w ould be charged for
transactions employing this technique.
Indeed, the banking agencies do not
view such arrangem ents as recourse
transactions an d these spread accounts
have been u sed successfully to
securitize credit card an d autom obile
receivables. M oreover, these
arrangem ents can be supplem ented or
enhanced by the originating or selling
bank's purchase of a stan dby letter of
credit from a thiM party guarantor in
order to protect the purchasers from
losses on the securitized assets.
Second, transactions can be
structured in such a w ay th a t the seller
and the buyer proportionately share in
any losses, th a t is, on a pro ra ta basis.
For exam ple, if a bank sells assets of
$1,000,000 and the buyer agrees to
absorb 90 percent of an y losses while
the seller will absorb the other 10
percent, the selling b ank w ould only
have to m aintain capital against
$100,000, as opposed to the entire
am ount of the asset transferred.
Third, as noted above, w ith respect to
the sale of m ortgages either under the
governm ent program s or in private
transactions, banking organizations can
avoid a capital charge by (1) limiting
their m axim um recourse obligation to an
am ount th a t is less th an the expected
loss on the transferred pool of
mortgages a t the time of the transfer and
(2) establishing an d m aintaining a
liability or a specifically identified non­
capital reserve for the maximum am ount

Federal Register / Vo!. 55, No. 201 / Wednesday, October 17, 1990 / Proposed Rules
cf possible loss under the recourse
provision. This provision w ould give
banking organizations engaged in
recourse transactions an incentive to
limit recourse and take a charge against
capital for their maximum possible loss
under the recourse arrangem ent. Given
the uncertainties that can surround
recourse obligations, such incentives
would appear to have a sound
prudential and supervisory justification.
As a general rule, this treatm ent
should not result in extraordinary or
u nw arranted new capital requirem ents
for m ost banking organizations. This is
because prudently run institutions have
alw ays h ad the responsibility to m onitor
off-balance sheet risk-taking an d back
such activities w ith adequate capital,
regardless of how the transactions have
been treated for regulatory reporting or
regulatory capital purposes.
FFIEC Study on Recourse
In light of the m atters discussed in this
notice, as w ell as other emerging
concerns relating to recourse
transactions, the staffs of the banking
agencies recognize the need to address
in a com prehensive fashion the
reporting, supervisory, and capital
adequacy issues stemming from the sale
of assets w ith recourse. In this regard,
the federal depository institution
regulatory agencies, under the auspices
of the Federal Financial Institutions
E xam ination Council (FFIEC), have
requested public comment on how to
define recourse and how to trea t various
types of recourse for purposes of
regulatory reporting, capital adequacy,
an d lending limits. This interagency
effort is also focusing on a num ber of
related issues, including cases w here
assets are sold w ith limited recourse.
2. R edem ption o f P erpetual P referred
S to c k
The Board's risk-based capital
guidelines currently indicate that
banking organizations should consult
w ith the Federal Reserve before
redeeming perm anent equity
instrum ents or debt capital instrum ents
prior to their stated maturity. A limited
exception to this rule is provided for
instrum ents redeem ed w ith the proceeds
of a higher form of capital, if the capital
position of the banking organization is
deem ed fully adequate by the Federal
Reserve. A s a practical m atter, it has
long been expected that banking
organizations w ould consult w ith the
Federal Reserve w hen contemplating
redem ptions of core capital ia order to
give the Federal Reserve an opportunity
to determ ine the im pact of the
redem ption on the organization’s
financial condition.

T he Basle Committee on Supervision
has arrived a t a consensus that the
redem ption of perpetual preferred stock
should only be perm itted at the issuer's
option an d only w ith the prior approval
of the supervisory authority. This
approach is not inconsistent w ith the
Federal R eserve’s current practice as set
forth above, and is consistent with
requirem ents contained in letters sent
by the Board in connection w ith the
review of capita! plans subm itted by
b ank holding com panies seeking to
engage in Section 20 securities
underw riting activities. T hese letters
stipulated that any redem ption of
perpetual preferred stock could be only
a t the bank holding com panies’ option
and only w ith prior approval from the
Federal Reserve.
A s g result of the Basle interpretation,
the Federal Reserve Board is proposing
to am end the language of its risk-based
capital guidelines to clarify that the
approval of the Board is necessary prior
to the redem ption of any perpetual
preferred stock,
3. T reatm ent o f S u p erviso ry G oodw ill
Currently, the Board’s risk-based
capital guidelines, consistent w ith the
Basle Accord, require that goodwill be
deducted from Teir 1 capital. However,
the guidelines contain a footnote that
w as intended to give the Federal
Reserve the option to m ake an exception
in those very limited situtations in
w hich banking organizations acquired
goodwill in the p ast in connection w ith
supervisory m ergers w ith troubled or
failed depository institutions. The
w ording of the footnote could also be
interpreted s s accom m odating the
possible future inclusion in capital of
goodwill stemming from the m erger of
troubled or failed institutions. As a
m atter of policy, the Federal Reserve
does not give credit for goodwill in
assessing the capital of institutions
involved in supervisory mergers. Indeed,
institutions making acquisitions are
norm ally required to exceed minimum
capital levels w ithout undue reliance on
intangible assets, particularly goodwill.
In addition, FIRREA prohibits the
regulatory agencies from allowing
goodwill to be included in the
calculation of capital if the goodwill w as
acquired after April 12,1989. Thus, the
Board is proposing to delete the footnote
th at appears to suggest the possibility
th a t supervisory goodwill acquired in
the future could be included in the
definition of capital for risk-based
capital purposes.
4. C laim s on C entral B anks
The Basle A ccord assigns all claims
on OECD com mercial banks and short­

42025

term claims on non-OECD commercial
banks to the 20 percent risk category.
On the other hand, long-term claim s on
non-OECD com mercial banks, and all
claim s on non-OECD central
governm ents are assigned to the 100
percent risk category. Claims on OECD
governm ents an d central banks are
assigned to the zero percent risk
category.
In promulgating their risk-based
capital guidelines, the U.S. banking
agencies' allow ed claims on non-OECD
central banks to be in the sam e risk
category as short-term claims on nonOECD com mercial banks on the
assum ption that claims on central banks
should not be in a higher category than
claims on com mercial banks. However,
further discussions among international
supervisors have led to a consensus that
claims on central banks should be in the
sam e risk category as claims on the
corresponding central governments. This
will have little im pact on OECD central
banks since claims on OECD central
banks an d governm ents are already
assigned to the zero percent risk
category. On the other hand, the Basle
Committee on Supervision h as held that
claims on non-OECD central banks,
w hich could involve an elem ent of
transfer risk, should be assigned to the
sam e 100 percent risk category' as claims
on their central governments.
Incorporation of this change into the
U.S. banking agencies’ capital
guidelines, w hich is necessary to ensure
consistency w ith the Basle framework,
w ill have the practical effect of moving
claims on non-OECD central banks that
involve an elem ent of transfer risk from
the 20 percent to the 100 percent risk
category. A s already noted, this will
have no effect on the treatm ent of
claims on central banks in OECD
countries since all claim s on these
institutions are already assigned to the
sam e risk category as OECD central
governments, that is, to the zero percent
risk category.
A s a result of the Basle interpretation,
the Federal Reserve Board is proposing
to am end the language of its risk-based
capital guidelines to provide that claims
on central banks are to be assigned to
the sam e risk category as claims on the
respective central governments.
III. Regulatory Flexibility Act A nalysis
The Federal Reserve Board does not
believe th at adoption of this proposal
w ould have a significant economic
im pact on a substantial num ber of small
business entities (in this case, small
banking organizations), in accord w ith
the spirit and purposes of the Regulatory
Flexibility Act (5 U.S.C. 601 e t s e q ). In

42026

Federal Register / Vol. 55, No. 201 / Wednesday, October 17, 1990 / Proposed Rules

addition, consistent w ith current policy,
these guidelines generally w ill not apply
to b ank holding com panies w ith
consolidated assets of less than $150
million.

List of Subjects
12 CFR P art 203
Accounting, Agricultural loan losses.
A pplications, A ppraisals, Banks.
Banking, Capital adequacy, Confidential
business information, Currency,
Dividend paym ents, Federal Reserve
System, Publication of reports of
condition, Reporting and recordkeeping
requirem ents, Securities, State m em ber
banks.
12 CFR P art 225
A dm inistrative practice and
procedure, A ppraisals, Banks, Banking,
C apital adequacy, Federal Reserve
System, Holding com panies, Reporting
and recordkeeping requirem ents,
Securities, State m em ber banks.
For the reasons set forth in this notice,
an d pursuant to the Board’s authority
under section 5(b) of the Bank Holding
Com pany A ct of 1356 (12 U.S.C. 1844(b)),
an d section 910 of the International
Lending Supervision Act o f 1983 (12
U.S.C. 3909), the Board proposes to
am end 12 CFR parts 208 and 225 as
follows:

PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS !N THE
FEDERAL RESERVE SYSTEM
1. The authority citation for p art 208
continues to rea d as follows:
Authority; Sections 9, 11(a), life), 19, 21, 25,
and 25(a) of the Federal Reserve Act, as
amended (12 U.S.C. 321-338, 248(a), 248(e),
401,481-486, 601, and 611, respectively):
sections 4 and 13(j) of the Federal Deposit
Insurance Act, as amended (12 U.S.C. 1814
and 132.31j), respectively); section 7(a) of the
International Banking Act of 19/3 (12 U.S.C.
3105); sections 907-910 of the International
Lending Supervision Act of 1983 (12 U.S.C.
3906-3909); sections 2,12(b), 12(g), 12(i),
15B(c)(5), 17,17A, and 23 of the Securities
Exchange Act of 1934 (15 U.S.C. 78b, 78/(b),
78/(g), 78/(1), 78Q-4[c)(5), 78q, 78q~l, and 78w,
respectively); section 5155 of the Revised
Statutes (12 U.S.C. 36) as amended by the
McFadden Act of 1927; and sections 11011122 of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (12
U.S.C. 3310 and 3331-3351).

II. Definition o f Qualifying Capital for the
Risk-Based Capital Ratio
*
*
*
*
*
A. * * *

II. Definition o f Qualifying Capital for the
Risk Based Capital Ratio

b. * * * Consistent with these provisions,
any perpetual preferred stock with a
redemption feature may qualify as capital
only if the redemption is subject to prior
approval of the Federal Reserve. * * *

b. * * * Consistent with these provisions,
any perpetual preferred stock with a
redemption feature may qualify as capital
only if the redemption is subject to prior
approval of the Federal Reserve. * * *

1.*

**

*

*

*

*

*

A. * * *

| * * *

*

*

*

*

*

Appendix A [Amended]

Appendix A [Amended]

3. In appendix A to p art 208, in II. B.
1., the footnote designator 14 in the text
is rem oved and footnote 14 is rem oved
an d reserved.

3. In appendix A to p a rt 225, in II. B.,
the footnote designator 15 in the text is
rem oved an d footnote 15 is rem oved and
reserved.

Appendix A [Amended]

Appendix A [Amended]

4. The last tw o sentences of footnote
30 under "III. C. 2. Category 2: 20
percent" of appendix A to p art 208 are
removed.

4. The last tw o sentences of footnote
33 under “III. C. 2. Category 2: 20
percent” of appendix A to part 225 are
removed.

Appendix A [Amended]

Appendix A [Amended]

5. Tw o n ew sentences are added
im m ediately following the second
sentence of the seventh paragraph under
“II. D. 1, Item s w ith a 100 percent
conversion factor” of appendix A to p art
208 to rea d as follows:
III. Procedures for Computing W eighted Risk
A ssets and Off-Balance Sheet Items
*

*

*

*

*

D. * * *

1. * * *

* * * Accordingly, the entire amount of
any assets transferred with recourse that are
not already included on the balance sheet,
including pools of one-to-four family
residential mortgages, are to be converted at
100 percent and assigned to the risk weight
appropriate to the obligor, or if relevant, the
nature of any collateral or guarantees. The
only exception involves transfers of pools of
residential mortgages that have been made
with insignificant recourse for which a
liability or specific non-capital reserve has
been established and is maintained for the
maximum amount of possible loss under the
recourse provision. * * *
*

*

*

*

*

PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
1. The authority citation for part 225
continues to rea d as follows:
Authority: 12 U.S.C. 1817(j)(13), 1 8 ia 1831i,
1343(c)(8), 1844(b), 3106 ,3108, 3907, 3309,
3310, and 3331-3351.

Appendix A [Amended]

Appendix A [Amended]

2. A n ew sentence is added
im m ediately following the first sentence
of the first paragraph u nder “IL A. 1. b.
Perpetual preferred stock” of appendix
A to Part 203 to read as follows:

2. A new sentence is ad ded
im m ediately following the first sentence
of the first paragraph under "II. A. 1. b.
Perpetual preferred stock of appendix A
to p art 225 to read as follows:

5. Tw o new sentences are added to
the en d of footnote 48 un der “III. D. 1.
Item s w ith a 100 percent conversion
factor" of appendix A to p art 225 to read
es follows:
48 * * * Accordingly, the entire amount of
any assets transferred with recourse that are
not already included on the balance sheet,
including pools of one-to-four family
residential mortgages, are to be converted at
ICO percent and assigned to the risk weight
appropriate to the obligor, or if relevant, the
nature of any collateral or guarantees. The
only exception involves transfers of pools of
residential mortgages that have been made
with insignificant recourse for which a
liability or specific non-capital reserve has
been established and is maintained for the
maximum amount of possible loss under the
recourse provision.
Board of Governors of the Federal Reserve
System, October 11,1990.
William W. Wiles,
Secretary o f the Board.
[FR Doc. 90-24425 Filed 10-15-90; 8:45 am]
BSLLMG CODE 62!Q -01~U


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102