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F ederal Reserve Bank of Dallas ROBERT D. McTEER, JR. DALLAS, TEXAS P R E S ID E N T 75265-5906 AN D C H IE F E X E C U T IV E O F F IC E R June 17, 1998 Notice 98-48 TO: The Chief Executive Officer of each financial institution and others concerned in the Eleventh Federal Reserve District SUBJECT Amendment to Tier 1 Leverage Capital Standard for Bank Holding Companies DETAILS The Board of Governors of the Federal Reserve System has issued an amendment to its Tier 1 leverage capital standard for bank holding companies. The amendment, which be comes effective June 30, 1998, simplifies the Board’s leverage capital standard for bank holding companies and incorporates the market risk capital rule into the leverage standard. ATTACHMENT A copy of the Board’s notice as it appears on pages 30369-70, Vol. 63, No. 107 of the Federal Register dated June 4, 1998, is attached. MORE INFORMATION For more information, please contact Dorsey Davis at (214) 922-6051. For additional copies of this Bank’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, J 9 ■ ■ For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 30369 Rules and Regulations Federal Register Vol. 63, No. 107 Thursday, June 4, 1998 FEDERAL RESERVE SYSTEM 12CFR Part 225 [Regulation Y; Docket No. R-0948] Leverage Capital Standards: Tier 1 Leverage Ratio B oard of G overnors of the F ederal Reserve System . ACTION: F in al rule. AGENCY: SUMMARY: T he B oard of G overnors of th e F ederal Reserve System (Board) is a m en d in g its T ier 1 leverage capital s ta n d ard for b a n k h o ld in g com panies. T he effect of th is final ru le is to sim plify th e B oard’s leverage capital sta n d a rd for b a n k h o ld in g co m p an ies a n d to in c o rp o rate th e m ark et risk capital ru le in to th e leverage stan dard. EFFECTIVE DATE: June 30, 1998. FOR FURTHER INFORMATION CONTACT: N o rah Barger, A ssistan t D irector (202/ 45 2-2 402 ), B arbara B ouchard, M anager (202/452-3072), T. Kirk O degard, F in an c ial A naly st (202/530-6225), D ivision of B anking S u p erv isio n an d R egulation. For th e hearin g im p aired only, T elec o m m u n ic atio n D evice for the D eaf (TDD), D iane Jenkins (2 0 2 /4 5 2 3544), B oard of G overnors of th e F ederal Reserve System , 20th a n d C Streets, N.W ., W ashington, D.C. 20551. SUPPLEMENTARY INFORMATION: Background O n O ctober 27, 1997, th e B oard issu ed a pro p o sal to am e n d its risk-based an d T ier 1 leverage cap ital sta n d ard s for b an k h o ld in g co m p anies (62 FR 55692). T his pro p o sal ste m m e d in large p art from a n interagency effort to stream line capital sta n d ard s p u rsu a n t to section 303 of the Riegle C om m un ity D ev elopm ent a n d R egulatory Im pro vem ent A ct of 1994 (CDRI A ct).1 1 The Board has worked w ith the Office of the Com ptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift T h at A ct req u ired th e A gencies to review th e ir o w n reg ulatio ns an d w ritte n p olicies an d to stream line those regu lation s w h ere possible, a n d also req u ired th e A gencies to w ork jointly to m ake u n ifo rm all regulations an d g u id elin es im p lem en tin g com m on statuto ry or su p erv iso ry policies. To fulfill th e sectio n 303 m a n d ate , th e A gencies rev ie w ed th e ir capital sta n d ard s for b an k s an d th rifts to id e n tify areas w h ere th e y h a d su b stan tiv ely different capital treatm en ts or w h ere stream lin in g w as appro priate. As a resu lt of these review s, th e A gencies p ro p o sed conform ing am en d m e n ts to th e ir riskb ased a n d leverage cap ital sta n d ard s for banks an d thrifts (62 FR 55686) c o n c u rre n tly w ith th e B o ard’s p ro p o sal for ban k h o ld in g co m panies on O ctober 27, 1997. W hile n o t te ch n ic ally m a n d ate d u n d e r sectio n 303 of th e CDRI Act, th e B oard d e c id e d to am e n d th e risk-based a n d leverage cap ital sta n d ard s for ban k h o ld in g co m p an ies to m ake th e m m ore u n ifo rm w ith th o se for b an k s a n d thrifts. T he co n c u rre n tly issu e d interagency a n d B oard p ro p o sals w ere id e n tic al w ith resp ect to risk-based cap ital sta n d a rd s,2 b u t differed w ith resp e ct to T ier 1 leverage cap ital stan dards. Specifically, th e B o ard ’s p ro p o sal for b an k h o ld ing c o m p an ies in c o rp o rated th e B oard’s m arket risk capital rule, w h ic h becam e effective th is year. T he A gencies are c u rren tly w orking to co m p lete a final ru le b ased on th e pro p o sal for banks an d thrifts. T he B oard in te n d s to im p lem en t a m en d m e n ts to th e risk-based capital stan d ard s for b a n k h o ld in g co m panies co n c u rre n tly w ith th e im p lem en ta tio n of th e interag en cy CDRI A ct rulem ak in g for b an ks an d thrifts. B ecause th e B o ard’s p ro p o sal to am e n d th e leverage capital sta n d a rd for b an k h o lding com panies differed from th e interagency p ro p o sal for bank s an d thrifts, how ever, th e Board has d ec id e d th a t it is n o t n ecessary to w ait for the co m p letio n of th e interagency ru lem aking to finalize its ru lem akin g on th e b a n k h o ldin g co m p an y leverage cap ital standard. Supervision (collectively, the Agencies) to fulfill the CDRI Act section 303 m andate. 2 Both proposals w ould m ake uniform the riskbased capital treatm ent of construction loans on presold residential properties, loans secured by junior liens on 1- to 4-family residential properties, and investm ents in m utual funds. The Board’s Proposal T he B o ard’s pro p o sal estab lish ed a m in im u m T ier 1 leverage ratio (Tier 1 capital to to tal assets) of 3.0 p erc en t for all b an k h o ld in g co m p an ies th a t are rated a com po site “ 1” u n d e r the BOPEC 3 ratin g system or th a t have im p le m e n te d th e risk-based capital m ark et risk m easu re set forth in th e B oard’s ca p ita l ad eq u acy g u id elin es (12 CFR 225, A p p e n d ix E). A ll other b an k h o ld in g com panies m u st m a in ta in a m in im u m T ier 1 leverage ratio of 4.0 percent. H igher cap ital ratios c o u ld be re q u ire d for b a n k h o ld in g com panies th a t h a d significant financial an d /o r o p eratio n al w eaknesses, h a d a high risk profile, or w ere u n d ergoing or an ticip atin g ra p id grow th. P rior to im p le m e n ta tio n of th is final rule, ban k h o ld in g co m panies th a t w ere n o t “ 1” rate d u n d e r th e BOPEC sy stem w ere req u ired to m a in ta in a m in im u m leverage ratio o f 3.0 p ercen t, p lu s an a d d itio n a l 100 to 200 b asis points. T his p ro p o sal differed from th e interagency pro p o sal for ban k s in th a t the in teragency p ro p o sal d id n o t low er th e m in im u m leverage cap ital sta n d a rd for bank s th a t h a d a d o p ted th e m arket risk capital rule. Comments Received T he B oard received th ree pub lic com m en ts o n th e T ier 1 leverage c o m p o n en t of th e b a n k h o lding co m p an y p ro p o sal (two from ban k h o ld in g com p an ies an d one from an in d u stry trad e group), all of w h ic h su p p o rte d th e p ro p o sal.4 T w o of these com m enters su p p o rte d im m ed iate a d o p tio n of th e pro p o sal to red u c e regulatory b u rd e n o n b a n k h o ld in g com panies engaged in significant trad in g activities. M oreover, these com m enters encourag ed th e Board to d isc o n tin u e en tirely th e u se of the leverage ratio as an in d icato r of safety an d so u n d n e ss for su c h in stitution s. T hey argued th a t th e leverage ratio w as an in a d eq u a te m easu re of relative risk, an d w as u n n ec essary in light of strict in tern atio n al risk-based cap ital stan dards. M oreover, these com m enters 3 The BOPEC rating system is used by supervisors to sum m arize their evaluations of the strength and soundness of bank holding com panies in a com prehensive and uniform m anner. 4 In addition, a bank holding com pany com m enting on the proposal for banks and thrifts expressed support for the Tier 1 leverage com ponent of th e bank holding com pany proposal. 30370 Federal Register/Vol. 63, No. 107/Thursday, June 4, 1998/Rules and Regulations argu ed th a t th e existence of th e leverage c apital req u irem en t pla ce d d om estic in stitu tio n s at a com petitive disad vantage relative to broker-dealers a n d foreign b an k in g organizations th at w ere n o t subject to m in im u m leverage requirem ents. In th e absence of elim in atio n of th e leverage ratio, how ever, th e se com m enters su p p o rted th e p ro p o se d re d u c tio n of th e m in im u m re q u ire d leverage ratio for b a n k ho ld in g co m p an ies th a t have a d o p ted th e m arket risk capital rule. T hese com m enters also req u e sted th a t th e Agencies: (a) ap ply th e leverage ratio re d u c tio n to b an ks th a t h av e a d o p te d th e m ark et risk capital rule; a n d (b) exclu de th e leverage ratio req u irem en t en tirely from the p ro m p t corrective actio n guid e lin e s for banks. F inal Rule T he B oard h as d eterm in e d to a d o p t a final ru le th a t is co n siste n t w ith the original p ro p o sal w ith resp e ct to the b a n k h o ld in g co m p an y leverage capital stan d ard . T h e final ru le p ro v id es th a t th e m in im u m T ier 1 leverage ratio for th e m o st h ig h ly -rated b an k h o ld in g com panies, as w ell as th o se th a t have im p le m e n te d th e m ark et risk capital rule, is 3.0 percent. T he m in im u m leverage ratio for all o th er b a n k h o ld in g co m panies is 4.0 percent. T he final ru le also inco rp o rates certain changes in w o rd in g to ad ju st for these n ew provisio ns. T hese stylistic changes are n o t in te n d e d to alter in a n y su b stan tial w ay th e other pro v isio n s of th e leverage capital sta n d a rd for b an k h o ld in g com panies. T he B oard acknow ledges co m m en ter co ncern s abou t the u sefulness of th e leverage ratio as a sup erv iso ry tool for th o se in stitu tio n s th a t h av e a d o p ted th e m ark et risk capital m easure. A lth o u g h fu rther m o difications to th e leverage ratio are b ey o n d the scope of th is final rule, the B oard m ay co n sid er w h e th e r the leverage req u irem en ts sh o u ld b e fu rth e r m o d ifie d in th e future. Regulatory Flexibility Act A nalysis P u rsu a n t to section 605(b) of th e Regulatory F lexib ility Act, th e Board h as d eterm in e d th a t th is final ru le w o u ld n o t h av e a significant econom ic im p act on a su b stan tial n u m b e r of sm all entities w ith in th e m eaning of th e Regulatory F lexib ility A ct (5 U.S.C. 601 et seq.). T he effect of th e final ru le w ill b e to red u c e regulatory b u rd e n on b an k h o ld in g co m p an ies b y sim p lifying the T ier 1 leverage stand ard. T he m ost h ighly-rated b an k h o ld in g com panies, as w ell as th ose th at have a d o p te d the m arket risk capital rule, w ill be req u ired to m e et a lo w er leverage cap ital sta n d a rd u n d e r th is rule. A ccordingly, a regulatory flexibility analysis is not requ ired . Paperwork Reduction Act T he B oard h as d eterm in e d th a t the final ru le does n o t involve a collection of in fo rm atio n p u rsu a n t to the p ro v isions of th e P ap erw ork R e du ctio n A ct of 1995 (44 U.S.C. 3501 et seq.). Deferred Effective Date T he B oard has d eterm in e d th a t the d elay ed effective date req u irem en ts of th e A d m in istrativ e P ro ced u re A ct (5 U.S.C. 553) do n o t a p p ly w ith resp ect to th is final rule. A d elay ed effective date is n o t re q u ire d w ith resp e ct to agency a ction th a t relieves a restric tio n (5 U.S.C. 553(d)(1)). B ecause th is final rule w o u ld relieve a restric tio n on certain b an k h o ld in g co m p an ies a n d w o u ld n o t im p o se an y n e w restrictio n s on ban k h o ld in g com panies, th e Board c o n c lu d e s th a t th e req u irem en ts of sectio n 553 do n o t a p p ly to th is final rule. List of Subjects in 12 CFR Part 225 A d m in istrativ e p ractice an d p ro ce d u re , Banks, banking, F ederal Reserve System , H olding com panies, R eporting a n d reco rdk eeping req u irem en ts, Securities. F or th e reaso ns set fo rth in the pream ble, p a rt 225 of ch a p te r II of title 12 of th e Code of F ed eral R egulations is a m e n d e d as set fo rth below . PART 225— BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 1. T he a u th o rity citation for p art 225 is rev ise d to rea d as follows: Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1 8 3 1 p -l, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 3909. 2. In a p p e n d ix D to p art 225, section II.a. is rev ised to read as follow s: Appendix D To Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Tier 1 Leverage Measure * * J J * * * * * * a. The Board has established a m inim um ratio of Tier 1 capital to total assets of 3.0 percent for strong bank holding companies (rated composite “ 1” under the BOPEC rating system of bank holding companies), and for bank holding companies that have im plem ented the Board’s risk-based capital measure for market risk as set forth in appendices A and E of this part. For all other bank holding companies, the m inim um ratio of Tier 1 capital to total assets is 4.0 percent. Banking organizations w ith supervisory, financial, operational, or managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth, are expected to m aintain capital ratios w ell above the m inim um levels. Moreover, higher capital ratios may be required for any bank holding company if w arranted by its particular circumstances or risk profile. In all cases, bank holding com panies should hold capital com mensurate w ith the level and nature of the risks, including the volum e and severity of problem loans, to w hich they are exposed. * * * * * By order of the Board of Governors of the Federal Reserve System, May 29, 1998. Jennifer J. Johnson, Deputy Secretary o f the Board. [FR Doc. 98-14808 Filed 6 -3-98; 8:45 am] BILLING CODE 6210-01-P
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