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Federal Reserve bank
OF DALLAS
W ILLIA M
H. WALLACE
DALLAS, TEXAS 7 5 2 2 2
FIRST VIC E PR E S ID E N T
AND C H IE F O PER ATING O FFIC ER
September 5, 1990
Circular 90-66
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Amendments to Regulations H and Y
DETAILS
The Federal Reserve Board has announced approval in final form of
capital to total assets (leverage) guidelines and transitional capital
standards for state member banks (Regulation H) and bank holding companies
(Regulation Y). These final guidelines are essentially the same as the
proposals the Board issued for public comment late last year. The amendments
are effective September 10, 1990.
The Board believes these guidelines should assist state member banks
and bank holding companies in formulating their capital planning process and
in strengthening their capital base.
ATTACHMENT
The Board’s notice as it appears on pages 32828-33, Vol. 55, No.
155, of the Federal Register dated Friday, August 10, 1990, is attached.
MORE INFORMATION
For more information, please contact Don Freeman at (214) 744-7408
or Dorsey Davis at (214) 744-7420. For additional 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)
32828
Federal Register / Vol. 55, No. 155 / Friday, August 10, 1990 / Rules and Regulations
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulation H, Regulation Y; Docket No. R0683]
Capital Adequacy Guidelines; Minimum
Tier 1 Leverage Measure and
Transition Capital Standards
Board of Governors of the
Federal Reserve System.
A C TIO N : Final rule.
AGENCY:
On December 29,1989, the
Board proposed for public comment
transition capital guidelines to be
applied through the end of 1990, as well
as guidelines for a new capital to total
assets leverage ratio. The Board is now
issuing in final form transition capital
standards and capital leverage
guidelines that are substantially similar
to those proposed. The stan dards the
Board is adopting are minimum
requirements. Any institution
experiencing or anticipating significant
growth would be expected to maintain
capital ratios, including tangible capita!
positions, well above the minimum
levels. In all cases, banking institutions
should hold capital com mensurate with
the level an d nature of all of the risks,
including the volume and severity of
problem loans, to which they are
exposed.
EFFEC TIV E DATE: September 10,1990.
su m m ary :
F O R FU RTH ER IN FO RM ATIO N C O NTA CT:
Richard Spillenkothen, Deputy
A ssociate Director (202/452-2594), Roger
T. Cole, A ssistant Director (202/4522618), Rhoger H. Pugh, M anager (202/
728-5883), or Kelly S. Shaw, Senior
Financial Analyst (202/452-3054),
Division of Banking Supervision and
Regulation, Board of Governors; Michael
J. O'Rourke, Senior Attorney (202/4523288) or Mark J. Tenhundfeld, Attorney
(202/452-3612), Legal Division, Board of
Governors; or Donald E. Schmid,
Manager (212/720-6611) or Manuel J.
Schnaidman, Senior Financial Analyst
(212/720-6710), Federal Reserve Bank of
New York. For the hearing impaired
only. Telecommunication Device for the
Deaf (TDD), Earnestine Hill or Dorothea
Thompson (202/452-3544).
SU PPLE M E N T A RY INFORM ATION:
I. Overview and Summary
W hen the Board of Governors of the
Federal Reserve System ("Board”)
issued final risk-based capital guidelines
on January 19,1989, it indicated that the
existing 5.5 percent and 6 percent
primary and total capital to total assets
(leverage) ratios would stay in effect at
least until the end of 1990, w hen the
interim minimum risk-based capital
ratios take effect. The Board also
indicated that it would consider
proposing a revised leverage constraint
that, if adopted, would replace the
existing leverage guidelines. It w as
contemplated that the definition of
capital for the new leverage guidelines
would be consistent with the risk-based
capital definition.
On December 29,1989, the Board
proposed for public comment transition
capital guidelines to be applied through
the end of 1990, as well as guidelines for
a new leverage constraint. The comment
period for the Federal Reserve's
proposal ended on March 9,1990. The
Board received comments addressing
various aspects of the proposal from 45
public commenters.
Based upon the comments received,
and further consideration of the issues
involved, the Board is now issuing in
final form transition capital stand ards
and capital leverage guidelines that are
substantially similar to those proposed.
The Board believes that adoption of
these stan d ard s and guidelines should
assist state-chartered m em ber banks
and bank holding com panies
(collectively, “banking organizations”)
in formulating their capital planning
process and in strengthening their
capital base.
U nder the transition capital
standards, a banking organization may
choose up to the end of 1990 to conform
to either the existing minimum capital
adequacy ratios (5.5 percent primary
capital and 6 percent total capital to
total assets) or to the 7.25 percent yearend 1990 risk-based capital standard.
The board is also establishing and
applying during this period a minimum
ratio of 3 percent Tier 1 capital to total
assets (leverage ratio). For leverage
purposes, Tier 1 is defined consistent
with the year-end 1992 risk-based
capital guidelines.
The existing 5.5 percent primary and
6.0 percent total capital to total assets
leverage ratios will be dropped after
year-end 1990. The new Tier 1 leverage
ratio will then constitute the minimum
capital to total assets stand ard for
banking organizations.
The stan dard s the Board is adopting
are minimum requirements. Any
institution operating at or near these
levels would be expected to have welldiversified risk, including no undue
interest rate risk exposure, excellent
asset quality, high liquidity, good
earnings and, in general, would have to
be considered a strong banking
organization, rated composite 1 under
the appropriate b ank or bank holding
company rating system. A ny institutions
experiencing or anticipating significant
growth would be expected to maintain
capital ratios, including tangible capital
positions, well above the minimum
levels as has been the case in the past.
For example, most such banking
organizations generally have operated
at capital levels ranging from 100 to 200
basis points above the stated minimums.
Higher capital ratios could be required if
w arranted by the particular
circumstances or risk profiles of
individual banking organizations. Thus,
for all but the most highly-rated
institutions meeting the conditions set
forth above, the minimum Tier 1
leverage ratio is to be 3 percent plus an
additional cushion of at least 100 to 200
b asis points. In all cases, banking
institutions should hold capital
com mensurate with the level and nature
of all of the risks, including the volume
and severity of problem loans, to which
they are exposed.
W henever appropriate, including
w hen an organization is undertaking
expansion, seeking to engage in new
activities or otherwise facing unusual or
abnorm al risks, the Board will continue
to consider the level of an organization’s
tangible Tier 1 leverage ratio (after
deducting all intangibles) in making an
overall assessm ent of capital adequacy.
This is consistent with the Federal
Reserve's risk-based capital guidelines
an d long-standing Board policy and
practice under the current leverage
guidelines. Organizations experiencing
growth, w hether internally or by
acquisition, are expected to maintain
strong capital positions substantially
above minimum supervisory levels,
without significant reliance on
intangible assets.
II. Background
The Federal Reserve's risk-based
capital guidelines adopted in January
1989 set forth an interim minimum riskbased ratio effective year-end 1990 and
a final minimum risk-based standard
effective year-end 1992. In issuing its
risk-based capital guidelines, the Board
indicated that the existing 5.5 and 6.0
percent primary and total capital to total
assets (leverage) ratios would stay in
effect, at least until the end of 1990. A
principal reason for this w as to retain a
capital constraint until the interim
minimum risk-based capital ratios take
effect.
The Board also indicated that even
after minimum risk-based capital ratios
become effective, retention of an overall
leverage constraint might be deemed
appropriate because the risk-based
capital framework does not incorporate
a comprehensive measure of interest
rate risk. A minimun ratio of capital to
Federal Register / Vol. 55, No. 155 / Friday, August 10, 1990 / Rules and Regulations
total assets would help to address this
potential problem by imposing an
overall limitation on the extent to which
a banking organization could leverage
its equity capital base.
In addition to interest rate risk, capital
ratios may also not take full or explicit
account of certain other risk factors that
can affect a banking organization's risk
profile. These factors include funding
and market risks; investment or loan
portfolio concentrations; asset quality;
and the adequacy of internal policies,
systems, and controls. These factors,
which must be taken into account in
determining the overall risk profile and
capital adequacy of a banking
organization, also suggest the need to
encourage banking organizations to
operate well above minimum
supervisory ratios.
In issuing its risk-based capital
guidelines, the Board indicated that
retention of the existing leverage ratios
would provide an element of stability
during the risk-based capital transition
period. The Board further stated that if
retention of an overall leverage
stan d ard were deem ed appropriate in
the long-run, the Federal Reserve would
consider replacing the existing primary
and total capital to total assets leverage
ratios with a standard that incorporates
a definition of capital that is consistent
with the definitions contained in the
risk-based capital framework. At the
time, the Board indicated that a leverage
standard based upon a revised
definition of capital, and used in
conjunction with a strong risk-based
capital requirement, could be set at a
level different from the existing leverage
stand ard it would replace.
On December 29,1989, the Board
accordingly proposed for public
comment transition capital stand ards to
be applied to state member banks and
bank holding com panies through the end
of 1990, as well as guidelines for a new
leverage constraint to be applied to
banking organizations, which, if
adopted, would replace the existing
leverage guidelines, The comment
period for the proposal ended March 9,
1990. The Board received comments
from 45 public respondents that
ad dressed various aspects of the
proposal.1
Over 80 percent of the 39 respondents
that add ressed the proposed leverage
guidelines supported the concept of a
leverage constraint, although a number
had reservations on particular details of
1 A sum m ary o f the com m ents received is
contained in a m em orandum distributed at the
Federal R eserve's June 20,1990 public meeting, at
which the board a d opted the transition capital
sta n d a rd s an d leverage guidelines.
the Board's proposed leverage
guidelines. Among the issues
commenters raised in connection with
the leverage constraint w as its
relationship to banking organizations'
CAMEL/BOPEC ratings, the primacy of
the risk-based measure, and the
definition of capital.
Only nine commenters discussed the
Board's proposed transition capital
standards. All agreed that the proposal
to permit banking organizations a choice
of conforming to either the existing
minimum capital adequacy ratios or the
7.25 percent year-end 1990 risk-based
capital stan d ard would be beneficial.
Based on the comments received and
further consideration of the issues
involved, the Board is now issuing in
final form transition capital guidelines to
be applied through the end of 1990, as
well as guidelines for a n ew minimum
capital to total assets ratio which will
replace the existing leverage guidelines
at the end of 1990. T hese guidelines are
substantially similar to those proposed.
T aken together, the stan dard s the Board
is adopting should assist banking
organizations in their capital planning
process and, w here necessary, their
efforts to raise additional capital and
strengthen their capital base.
III. Transition and Leverage Standards
A. Transition Standards
The Board proposed transition capital
standards to apply during the first phase
of the risk-based capital transition
period, which ends at year-end 1990. All
respondents that commented on this
issue endorsed the standards.
Accordingly, the Board is issuing the
transition capital stand ard s in the form
proposed.
U nder the adopted transition capital
standards, a banking organization may
conform to either the existing minimum
capital adequacy ratios of 5.5 percent
primary capital and 6 percent total
capital to total assets, or to the 7.25
percent year-end 1990 minimum riskbased capital standard. It should be
em phasized that banking organizations
are not required to meet the interim riskb ased stan d ard prior to its year-end
1990
effective date. Rather,
organizations have the option of
complying with the risk-based standard
during 1990, in lieu of meeting the
existing primary and total capital
adequacy guidelines. Regardless of
which of these options is chosen during
this period banking organizations would
also have to meet the new proposed
leverage stan dard set forth below.
32829
B. N ew Leverage Standard
The Board also proposed to establish
and apply during 1990 and thereafter a
minimum Tier 1 capital to total assets
(leverage) ratio of 3 percent. The 3
percent Tier 1 to total assets ratio would
be a minimum for the top-rated banking
organizations without any supervisory,
financial or operational w eaknesses or
deficiencies. O ther organizations would
be expected to maintain capital ratios of
at least 100 to 200 basis points above the
minimum depending on their financial
condition. The Board also proposed that
at the end of 1990, the Tier 1 leverage
ratio would replace the existing 5.5
percent and 6.0 percent primary and
total capital to total assets leverage
ratios.
The vast majority of commenters,
while supporting the use of a leverage
constraint, expressed the view that the
risk-based capital ratio should serve as
the primary measure of an
organization’s capital adequacy.
Commenters w ere divided on the issue
of w hat would constitute an acceptable
minimum level of Tier 1 capital to total
assets. Some stated that any minimum
over 3 percent would be unduly
burdensome and undermine risk-based
capital, while others expressed concern
that the proposed 3 percent minimum
w as too low and could lead to an
erosion of capital levels. A few
respondents endorsed the Board's
proposed approach of setting a 3 percent
minimum ratio for top-rated
organizations and requiring higher
capital levels for other organizations
because it offered flexibility and placed
w hat they viewed as appropriate
reliance on the examination process. A
number of commenters, however, stated
their concerns that this approach could
result in an uneven or inconsistent
application of capital stan d ard s across
organizations and could lead to
uncertainty in the capital planning
process.
After reviewing the comments
received and further considering the
issues involved, the Board is adopting
its proposal to establish a minimum Tier
1 capital to total assets ratio. This
leverage constraint will be used as a
supplement to the risk-based capital
measure. The Board is also adopting its
proposal that the minimum Tier 1 ratio
only apply to top-rated organizations
without any operating, financial or
supervisory deficiencies. Other
organizations will be expected to hold
an additional capital cushion of at least
100 to 200 basis points, based on their
particular circumstances and risk
profiles. In the Board's view, this
32830
Federal Register / Vol. 55, No. 155 / Friday, August 10, 1990 / Rules and Regulations
approach strikes a reaso n ab le balance
betw een the need to set a floor that is
not so high as to undermine the riskb ased capital standard, and the need to
provide for an adequate limitation on
leverage.
The Board proposed that the
definition of Tier 1 capital for leverage
purposes b e consistent with the yearend 1992 risk-based capital definition. A
num ber of commenters endorsed the use
of consistent definitions because, in
their view, it would minimize confusion
and simplify the capital planning
process. Some commenters approved the
use of Tier 1 capital in the leverage ratio
specifically because it would establish
an equity standard. A small minority,
however, stated their preference for a
definition of capital for leverage
purposes that would include non-Tier 1
elements such as the allow ance for loan
and lease losses.
The Board is accordingly adopting its
proposal that the leverage stand ard
employ the year-end 1992 definition of
Tier 1 capital, as set forth in the riskb ased capital guidelines, 2 and exclude
any non-Tier 1 elements from its
definition of capital. Total assets is
defined for this purpose as total
consolidated assets (defined net of the
allow ance for loan and lease losses),
less goodwill and, on a case-by-case
basis, any other intangible assets or
investments in subsidiaries that the
primary regulator determines should be
deducted from Tier 1 capital.
As proposed, at the end of 1990 the
Board will drop the existing leverage
ratios, th at is, the 5.5 percent and 6.0
percent primary and total capital to total
assets leverage ratios. The n ew Tier 1
capital to total assets ratio will then
constitute the leverage stan d ard for
banking organizations, and will be used
2 At the end of 1822, T ier 1 capita! for state
m em ber banks includes common equity, minority
interests in equity accounts of consolidated
subsidiaries, and qualifying noncum uiative
perpetual preferred stock, less goodwill. It excludes
any other intangible asse ts and investm ents in
subsidiaries th a t the Federal Reserve determ ines
should be deducted from capital for supervisory
purposes. This ccuid be done on a case-by-case
b asis or for c ertain classes of intangible assets. For
bank holding com panies, T ier 1 capital at the en d of
1992 includes common equity, minority interests in
equity accounts of consolidated subsidiaries, and
qualifying perpetual preferred stock. (Perpetual
preferred stock is limited to 25 percent of Tier 1
capital.) In addition, T ier 1 excludes goodwill, and
o ther intangibles a n d investm ents in subsidiaries
that the prim ary regulator determ ines should be
deducted from capital. Such deductions could be
done on a case-by-case b asis or for certain classes
of intangible assets. (Ths summary of Tier 1 capital
definitions is purely illustrative in nature.
Com prehensive Tier 1 capital definitions are set
forth in A ppendix A to part 208 of the Board’s
Regulation H for s tate m em ber ban ks and in
A ppendix A to p art 225 of the B oard’s Regulation Y
for b ank holding companies.)
thereafter to supplement the risk-based
ratio in determining the overall capital
adequacy of banking organizations.
The n ew Tier 1 leverage ratio differs
in a number of respects from the current
primary and total capital ratios as
defined under the Federal Reserve’s
existing leverage guidelines. For
example, primary capital includes the
allow ance for loan and lease losses
(without limitation), and total capital
includes limited am ounts of
subordinated debt. Neither of these
elements, both of which are deem ed to
be Tier 2 components under the riskb ased capital framework, is included in
the definition of capital for the new Tier
1 leverage ratio. Moreover, the current
primary and total capital leverage
stan dards do not contain a n absolute
minimum for the level of perm anent
shareholders' equity in relation to
assets—a minimum that is established
by the Tier 1 leverage standard. Thus,
the n ew Tier 1 leverage ratio reflects the
am ount of core equity that is available
to support unanticipated losses— a key
prudential m easure for determining the
health of individual banking
organizations. In addition to these
benefits, adoption of Tier 1 for the
purpose of comparing capital to total
assets will h av e the advantage of
bringing the definition of capital for
leverage purposes into line w ith the
definition of capital for risk-based
capital purposes.
The Board em phasizes that in ail
cases, the stan dard s set forth above are
supervisory minimums. A n institution
operating at or n ea r these levels is
expected to hav e well-diversified risk,
including no undue interest rate risk
exposure; excellent asset quality; high
liquidity; good earnings; and in general
be considered a strong banking
organization, rated composite 1 under
the CAMEL rating system for banks or
the BOPEC rating system for bank
holding companies. Institutions with
high or inordinate levels of risk are
expected to operate well above
minimum, capital standards. As has been
the case in the past, institutions
experiencing or anticipating significant
growth are also expected to maintain
capital ratios, including tangible capital
positions, well above the minimum
levels. For example, most such banking
organizations generally have operated
at capital levels ranging from 100 to 200
basis points above the stated minimums.
Higher capital ratios could be required if
w arranted by the particular
circumstances or risk profiles of
individual banking organizations. Thus,
for all but the most highly-rated
institutions meeting the conditions set
forth above, the minimum Tier 1
leverage ratio is to be 3 percent plus an
additional cushion of at least 100 to 200
b asis points. In all cases, banking
institutions should hold capital
com m ensurate with the level and nature
of all of the risks, including the volume
and severity of problem loans, to which
they are exposed.
W henever appropriate, including
w hen an organization is undertaking
expansion, seeking to engage in new
activities or otherw ise facing unusual or
abnorm al risks, the Board will continue
to consider the level of an organization's
tangible Tier 1 leverage ratio (after
deducting all intangibles) in making an
overall assessm ent of capital adequacy.
This is consistent w ith the Federal
Reserve’s risk-based capital guidelines
arid long-standing Board policy and
practice under the current leverage
guidelines. Organizations experiencing
growth, w hether internally o r by
acquisition, are expected to maintain
strong capital positions substantially
above minimum supervisory levels,
w ithout significant reliance on
intangible assets.
IV. Regulatory Flexibility Act Analysis
The Federal Reserve Board certifies
that adoption of this proposal would not
have a significant economic impact 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 seq,). In
addition, consistent with current policy,
these guidelines generally will not apply
on a consolidated basis to bank holding
companies with consolidated assets of
less than $150 million. Moreover, rather
than requiring all banking organizations
to raise additional capital, the guidelines
are directed by institutions whose
capital positions are less than fully
adequate in relation to their risk and
leverage profiles.
List of Subjects
12 CFR Part 208
Accounting, Agricultural loan losses,
Applications, A ppraisals, Banks,
Banking, Branches. Capital adequacy,
Confidential business information,
Dividend payments, Federal Reserve
System, Flood insurance. Publication of
reports of condition, Reporting and
recordkeeping requirements, Securities,
State member banks.
12 CFR Part 225
Administrative practice and
procedure, Appraisals, Banks, Banking,
Capital adequacy. Federal Reserve
System, Holding companies, Reporting
Federal Register / Vol. 55, No. 155 / Friday, August 10, 1990 / Rules and Regulations
and recordkeeping requirements,
Securities, State member banks.
For the reasons set forth in this
document, and pursuant to the Board’s
authority under section 5(b) of the Bank
Holding Company Act of 1956 (12 U.S.C.
1844(b)), and section 910 of the
International Lending Supervision Act of
1983 (12 U.S.C. 3909), the Board am ends
12 CFR parts 208 and 225 as follows:
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
1. The authority citation for part 208
continues to read as follows:
Authority: Sections 9 ,11(a), 11(c), 19, 21, 25,
and 25(a) of the Federal Reserve Act, as
amended (12 U.S.C. 321-338, 248(a), 248(c),
481, 481—186, 601, and 611, respectively);
sections 4 and 13(j) of the Federal Deposit
Insurance Act, as amended (12 U.S.C. 1814
and 1823(j), respectively); section 7(a) of the
International Banking Act of 1978 (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/(i), 78o—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).
2. Section 208.13 is revised to read as
follows:
§208.13
Capital adequacy.
The stan dard s and guidelines by
which the capital adequacy of state
member banks will be evaluated by the
Board are set forth in appendix A to part
208 for risk-based capital purposes, and,
with respect to the ratios relating capital
to total assets, in appendix B to part 208
and in appendix B to the Board’s
Regulation Y, 12 CFR p art 225.
Appendix A—[Amended]
3. Footnote 1 to "I. O verview ” of
appendix A to part 208 is revised to
read as follows:
1 Supervisory ratios that relate capital to
total assets for state member banks are
outlined in Appendix B of this Part and in
appendix B to part 225 of the Federal
Reserve’s Regulation Y, 12 CFR Part 225.
4. The last sentence of the first
paragraph to “IV. Minimum Supervisory
Ratios and S tan d ard s” of appendix A to
part 208 is removed; the existing second
paragraph now becomes the third
paragraph and remains unchanged; and
a new paragraph is added immediately
following the first paragraph. The new
second paragraph reads as follows:
Institutions with high or inordinate levels
of risk are expected to operate well above
minimum capital standards. Banks
experiencing or anticipating significant
growth are also expected to maintain capital,
including tangible capital positions, well
above the minimum levels. For example, most
such institutions generally have operated at
capita! levels ranging from 100 to 200 basis
points above the stated minimums. Higher
capital ratios could be required if warranted
by the particular circumstances or risk
profiles of individual banks. In all cases,
banks should hold capital commensurate
with the level and nature of all of the risks,
including the volume and severity of problem
loans, to which they are exposed.
5. A second paragraph is added to
“IV. B. Transition Arrangem ents” of
A ppendix A to Part 208 to read as
follows:
Through year-end 1990, banks have the
option of complying with the minimum 7.25
percent year-end 1990 risk-based capital
standard, in lieu of the minimum 5.5 percent
primary and 6 percent total capital to total
assets capital ratios set forth in appendix B to
part 225 of the Federal Reserve’s Regulation
Y. In addition, as more fully set forth in
appendix B to this part, banks are expected
to maintain a minimum ratio of Tier 1 capital
total assets during this transition period.
6. Appendix B is ad d ed to part 208 to
read as set forth below.
A ppendix B To Part 208: Capital
A dequacy Guidelines for State M ember
Banks: Tier 1 Leverage M easure
I. Overview
The Board of Governors of the Federal
Reserve System has adopted a minimum ratio
to Tier 1 capital to total assets to assist in the
assessment of the capital adequacy of state
member banks.' The principal objective of
this measure is to place a constraint on the
maximum degree to which a state member
bank can leverage its equity capital base. It is
intended to be used as a supplement to the
risk-based capital measure.
The guidelines apply to all state member
banks on a consolidated basis and are to be
used in the examination and supervisory
process as well as in the analysis of
applications acted upon by the Federal
Reserve. The Board will review the guidelines
from time to time and will consider the need
for possible adjustments in light of any
significant changes in the economy, financial
markets, and banking practices.
II. The Tier 1 Leverage Ratio
The Board has established a minimum level
of Tier 1 capital to total assets of 3 percent.
An institution operating at or near these
levels is expected to have well-diversified
risk, including no undue interest rate risk
exposure; excellent asset quality; high
liquidity; good earnings; and in general be
considered a strong banking organization,
1 Supervisory risk-based capital ratios that relate
c apital to w eighted risk a sse ts for state m ember
b a n k s are outlined in A ppendix A to this Part.
32331
rated composite 1 under the CAMEL rating
system of banks. Institutions not meeting
these characteristics, as well as institutions
with supervisory, financial, or operational
weaknesses, are expected to operate well
above minimum capital standards.
Institutions experiencing or anticipating
significant growth also are expected to
maintain capital ratios, including tangible
capital positions, well above the minimum
levels. For example, most such banks
generally have operated at capital levels
ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios
could be required if warranted by the
particular circumstances or risk profiles of
individual banks. Thus, for all but the most
highly-rated banks meeting the conditions set
forth above, the minimum Tier 1 leverage
ratio is to be 3 percent plus an additional
cushion of at least 100 to 200 basis points. In
all cases, banking institutions should hold
capital commensurate with the level and
nature of all risks, including the volume and
severity of problem loans, to which they are
exposed.
A bank's Tier 1 leverage ratio is calculated
by dividing its Tier 1 capital (the numerator
of the ratio) by its average total consolidated
assets (the denominator of the ratio). The
ratio will also be calculated using period-end
assets whenever necessary, on a case-bycase basis. For the purpose of this leverage
ratio, the definition of Tier 1 capital for yearend 1992 as set forth in the risk-based capital
guidelines contained in appendix A of this
part will be used.2 Average total
consolidated assets are defined as the
quarterly average total assets (defined net of
the allowance for loan and lease losses)
reported on the bank's Reports of Condition
and Income (“Call Report"), less goodwill
and any other intangible assets and
investments in subsidiaries that the Federal
Reserve determines should be deducted from
Tier 1 capital.3
Whenever appropriate, including when a
bank is undertaking expansion, seeking to
engage in new activities or otherwise facing
unusual or abnormal risks, the Board will
continue to consider the level of an individual
bank's tangible Tier 1 leverage ratio (after
deducting all intangibles) in making an
overall assessment of capital adequacy. This
is consistent with the Federal Reserve's riskbased capital guidelines and long-standing
Board policy and practice with regard to
leverage guidelines. Banks experiencing
growth, whether internally or by acquisition,
are expected to maintain strong capital
positions substantially above minimum
supervisory levels, without significant
reliance on intangible assets.
2 At the end of 1992. T ier 1 capital for state
m ember banks includes common equity, minority
interests in equity accounts of consolidated
subsidiaries, and qualifying noncumulative
perpetual preferred stock, less goodwill. The
Federal Reserve may exclude certain other
intangibles and investm ents in subsidiaries as
appropriate.
3 Deductions from T ier 1 capital an d other
a djustm ents are discussed more fully in section U.B.
of appendix A to this part.
32832
Federal Register / Vol. 55, No. 155 / Friday, August 10, 1990 / Rules and Regulations
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
1. The authority citation for part 225
continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818,1831i,
1843(c)(8), 18-14(b), 3106, 3108, 3907, 3809,
3310, and 3331-3351.
Appendix A—[Amended]
2. Footnote 1 to “I. Overview" of
appendix A to part 225 is revised to read
as follows:
1 Supervisory ratios that relate capital to
total assets for bank holding companies are
outlined in appendices 8 and D of this part.
3. The last sentence of the first
paragraph to “IV. Minimum Supervisory
Ratios an d S tan dard s” of appendix A to
part 225 is removed: the existing second
p'aragraph now becomes the third
paragraph and remains unchanged: and
a new paragraph is added immediately
following the first paragraph. The new
second paragraph reads as follows:
Institutions with high or inordinate levels
of risk are expected to operate well above
minimum capital standards. Banking
organizations experiencing or anticipating
significant growth are also expected to
maintain capital, including tangible capital
positions, well above the minimum levels. For
example, most such organizations generally
have operated at capital levels ranging from
100 to 200 basis points above the stated
minimums. Higher capital ratios could be
required if warranted by the particular
circumstances or risk profiles of individual
banking organizations. In all cases,
organizations should hold capital
commensurate with the level and nature of
all of the risks, including the volume and
severity of problem loans, to which they are
exposed.
4. A second paragraph is added to
“IV. B. Transition Arrangem ents” of
appendix A to part 225 to read as
follows:
Through year-end 1990, banking
organizations have the option of complying
•with the minimum 7.25 percent year-end 1990
risk-based capita! standard, in lieu of the
minimum 5.5 percent primary and 6 percent
total capital to total assets ratios set forth in
appendix B of this Part. In addition, as mors
fully set forth in appendix D to this part,
banking organizations are expected to
maintain a minimum ratio of Tier 1 capital to
total assets during this transition period.
A ppendix B— [Amended]
5. Three new sentences are added to
the end of the first paragraph of
appendix B to part 225 to read as
follows:
* * * In this regard, the Board has
determined that during the transition period
through yearcend 1990 for implementation of
the risk-based capital guidelines contained in
appendix A to this part and in appendix A to
part 208, a banking organization may choose
to fulfill the requirements of the guidelines
relating capital to total assets contained in
this Appendix in one of two manners. Until
year-end 1990, a banking organization may
choose to conform to either the 5.5 percent
and 0 percent minimum primary and total
capital standards set forth in this Appendix,
or the 7.25 percent year-end 1980 minimum
risk-based capital standard set forth in
appendix A to this part and appendix A to
part 208. Those organizations that choose to
conform during this period to the 7.25 percent
year-end 1990 risk-based capital standard
will be deemed to be in compliance with the
capital adequacy guidelines set forth in this
appendix.
6. A p p e n d ix D is a d d e d to p a rt 225 to
r e a d a s s e t fo rth belo w .
Appendix D—Capital A dequacy
Guidelines for Bank Holding
Companies: Tier 1 Leverage M easure
I. Overview
The Board of Governors of the Federal
Reserve System has adopted a minimum ratio
of Tier 1 capita! to total assets to assist in the
assessment of the capital adequacy of bank
holding companies ("banking
organizations’’).1 The principal objective of
this measure is to place a constraint on the
maximum degree to which a banking
organization can leverage its equity capital
base. It is intended to be used as a
supplement to the risk-based capital measure.
The guidelines apply on a consolidated
basis to bank holding companies with
consolidated assets of $150 million or more.
For bank holding companies with less than
$150 million in consoiidated assets, the
guidelines will be applied on a bank-only
basis unless: a) the parent bank holding
company is engaged in nonbank activity
involving significant leverage; 2 or b) the
parent company has a significant amount of
outstanding debt that is held by the general
public.
The Tier 1 leverage guidelines are to be
used in the inspection and supervisory'
process as well as in the analysis of
applications acted upon by the Federal
Reserve. The Board will review the guidelines
from time to time and wiil consider the need
for possible adjustments in light of any
significant changes in the economy, Financial
markets, and banking practices.
II. The Tier 1 Leverage Ratio
The Board has established a minimum
level of Tier 1 capital to total assets of 3
percent. A banking organization operating at
or near these levels is expected to have welldiversified risk, including no undue interest
rate risk exposure: excellent asset quality;
high liquidity; good earnings; and in general
be considered a strong banking organization,
1 Supervisory risk-based capital ratios tha t relate
capital to w eighted risk assets for b a n k holding
com panies are outlined in A ppendix A to this Part.
2 A pare n t com pany tha t is engaged in significant
off-balance sheet activities w ould generally be
deem ed to b e engaged in activities that involve
significant leverage.
rated composite 1 under ths BOPEC rating
system for bank holding companies.
Organizations not meeting these
characteristics, as well as institutions with
supervisory, financial, or operational
weaknesses, are expected to operate well
above minimum capital standards.
Organizations experiencing or anticipating
significant growth also are expected to
maintain capital ratios, including tangible
capital positions, well above the minimum
levels. For example, most such organizations
generally have operated at capital levels
ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios
could be required if warranted by the
particular circumstances or risk profiles of
individual banking organizations. Thus, for
all but the most highly-rated organizations
meeting the conditions set forth above, the
minimum Tier 1 leverage ratio is to be 3
percent plus an additional cushion of at least
100 to 200 basis points. In all cases, banking
organizations should hold capital
commensurate with the level and nature of
ail risks, including the volume and severity of
problem loans, to which they are exposed.
A banking organization’s Tier 1 leverage
ratio is calculated by dividing its Tier 1
capital (the numerator of the ratio) by its
average total consolidated assets (the
denominator of the ratio). The ratio will also
be calculated on the basis of period-end
assets, whenever necessary on a case-bycase basis. For the purpose of this leverage
ratio, the definition of Tier 1 capital for yearend 1992 as set forth in the risk-based capital
guidelines contained in appendix A to this
part will be used.3 Average total
consolidated assets are defined as the
quarterly average total assets (defined net of
the allowance for loan and lease losses)
reported on the banking organization's
Consolidated Financial Statements (“FR YSC Report”), less goodwill and any other
intangible assets or investments in
subsidiaries that the Federal Reserve
determines should be deducted from Tier 1
capital.4
Whenever appropriate, including when an
organization is undertaking expansion,
seeking to engage in new activities or
otherwise facing unusual or abnormal risks,
the Board wiil continue to consider the level
of an individual organization's tangible Tier 1
leverage ratio (after deducting all intangibles)
in making an overall assessment of capital
adequacy. This is consistent with the Federal
Reserve's risk-based capital guidelines and
long-standing Board policy and practice with
regard to leverage guidelines. Organizations
experiencing growth, whether internally or by
acquisition, are expected to maintain strong
3 A t the end of 1992, Tier 1 capital for bank
holding com panies includes com m on equity,
minority interests in equity accounts of
consolidated subsidiaries, and qualifying perpetual
preferred stock. (Perpetual preferred stock is limited
to 25 p ercent of T ier 1 capital.) In addition, T ier 1
excludes goodwill. T he Federal R eserve m ay
exclude certain o ther intangibles a n d investm ents in
subsidiaries a s appropriate.
4 D eductions from Tier 1 capital and other
adjustm ents are discussed more fully in section (LB.
of A ppendix A to this Part.
Federal Register / Voi. 55, No. 155 / Friday, August 10, 1990 / Rules and Regulations
i apital positions substantially above
minimum supervisory levels, without
significant reliance on intangible assets,
By the order of the Board of Governors of
the Federal Reserve System, August 1,1990.
William W. WiSes,
Secretary o f the Board
(FR Doc. 90-1 *3404 Filed 9-9-90; 8:45 nm|
BILLING C O D E S S t O - O t - U
32833
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