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federal Re ser ve Ba n k DALLAS. T E X A S of D allas 75222 Circular No. 82-5 January 22, 1982 CAPITAL ADEQUACY G uidelines TO ALL STATE MEMBER BANKS AND BANK HOLDING COMPANIES IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board o f G overnors o f th e Federal R e serv e System and the O ffic e o f the Com ptroller o f the Currency have develop ed c a p ita l adequacy guidelines to provide a fram ework for a ssessin g th e c a p ita l o f w ell-m an aged national banks, s t a t e m em ber banks, and bank holding com p anies. Printed on the follow ing pages are c o p ies o f a joint a gen cy new s r e le a s e dated D e c e m b er 17, 1981, and the C apital A dequacy G uidelines. Q uestions relatin g to th e guidelines should be d ir ec te d to Marvin C. McCoy, Ext. 6657, or U. Anderson, Ext. 6275 o f this Bank's Bank Supervision and R egulations D ep artm en t. Additional c o p ies o f this circular will be furnished upon request to the D epartm ent o f C om m unications, Financial and Com m unity A ffairs, Ext. 6289. Sincerely yours, William H. W allace First Vice President Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) JOINT NEWS RELEASE COMPTROLLER OF THE CURRENCY FEDERAL RESERVF BOARD For immediate release December 17, 1981 The Comptroller of the Currency and the Federal Reserve Board today announced that they are issuing to the financial institutions they supervise guidelines to be used in assessing the adequacy of their capital. The capital adequacy guidelines — which are attached — will be used by the two agencies in their examination and supervision of national banks, state chartered banks that are members of the Federal Reserve System and bank holding companies. The agencies developed the guidelines in the interest of achieving greater consistency in their supervisory activities. The guidelines should also be helpful to banking organizations in their financial planning. The regulators stressed that the guidelines will be used in a manner that allows for consideration of differences in the situations of individual financial institutions. One of the objectives of the agencies was to address the sizable existing disparity in capital ratios among banking organizations of different size. To this end, the agencies considered both qualitative characteristics and practical economic and market constraints which often account for differences in capital ratios. The program adopted will permit somewhat lower capital ratios for smaller banks than most of these institutions currently maintain. At the same time, the agencies indicated that their policies with respect to the multinational banking organizations — with assets in excess of $15 billion — at present, 17 institutions would be amended to insure that appro priate steps are taken to improve over time the capital positions of banking organizations in this group. -0 - The guidelines will be reviewed from time to time for possible adjustment commensurate with changes in the economy, financial markets and banking practices. As conditions permit, further consideration will be given to the differences in the capital ratios by size of institution. - Attachment 0 - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM OFFICE OF THE COMPTROLLER OF THE CURRENCY CAPITAL ADEQUACY GUIDELINES The Federal R e s e r v e and th e O ff ic e o f t h e C om ptroller o f th e Currency have develop ed capital adequacy guidelines to provide a fram ew ork for assessing th e c a p ita l o f w ell-m a n a g ed national banks, s ta t e m em ber banks and bank holding com p an ies. - The guidelines will be used in the exam ination and supervisory p rocess and will be review ed from tim e to t im e for possible adjustm ent com m en su rate with changes in the eco n o m y , finan cial m arkets and banking p r a c tic e s. O b jectiv es o f th e c ap ital adequacy guidelines program are to: - address the lon g-term d e c lin e in ca p ita l ratios, particularly those o f th e m ultinational group; - introduce greater uniform ity, o b je c tiv ity and c o n siste n c y into th e supervisory approach for a ssessin g c a p ita l adequacy; - provide direction for capital and str a te g ic planning to banks and bank holding com p anies and for th e appraisal of this planning by the agen cies; and, - p erm it som e reduction of e x istin g disparities in c ap ital ratios b e tw e e n banking organizations o f d iffe r en t s iz e . Two principal ratio m easurem en ts o f c ap ital will be used: (1) primary cap ital to to ta l assets; and (2) to ta l c ap ital to t o ta l a s s e t s . Primary c ap ital c o n sists of com m on sto c k , perpetual preferred sto c k , c ap ital surplus, undivided p r o fits, reserves for c o n tin g e n c ie s and o th er c a p ita l re se r v e s, mandatory co n vertib le instrum ents and the allow an ce for possible loan lo sse s. Total capital includes the primary c a p ita l com p on en ts plus lim ited lif e preferred stock and qualifying subordinated n o te s and debentures. 1/ Institutions that are under sp ecial supervision and those th at have been in operation for less than tw o years are not included in th e program. - 2 - The c a p ita l gu id elin es g e n erally will be applied on a consolidated b asis. H ow ever, for th o se bank holding com p an ies with con solid ated a s s e ts under $150 m illion, th e c a p ita l guidelines will apply to th e bank only, if: (1) th e com p any does not e n gage d ir ec tly or in d ire c tly in any nonbanking a c tiv ity involving s ig n ific a n t lev e r a g e ; and (2) no s ig n ific a n t debt o f th e parent com pany is held by th e g en eral public. Som e bank holding com p an ies are engaged in sig n ific a n t nonbanking a c tiv itie s th a t require cap ital ratios higher than th o se for th e bank alone. In t h e se c a s e s , appropriate adjustm ents will be m ade in th e application o f the c on solid ated c a p ita l guidelines. Institutions a f f e c t e d by the guidelines are c a te g o r iz e d as e ith e r m ultinational organizations (as design ated by th eir r e sp e c tiv e supervisory agency); regional organizations (all other in stitu tion s w ith a s s e ts in e x c e s s of $1 billion)-^; or com m unity organizations (less than $1 billion in to ta l a ss e ts ). C apital guidelines for the r e la tiv e ly small number o f m ultinational organizations w ill continu e to be form ulated and m onitored on an individual basis, taking into accou n t their present and p r o sp e c tiv e finan cial condition. The supervisory a g e n c ie s are increasingly con cern ed about th e secular d e c lin e s in th e c a p ita l ratios o f th e nation's largest banking organizations, particularly in view o f increased risks both d o m e stica lly and in tern ation ally. In gen eral, supervisory p o lic ie s o f th e Federal R e se r v e and th e O ff ic e o f th e C om ptroller o f the Currency, designed to arrest th e secu lar d e c lin e in th e ca p ita l ratios o f this group o f in stitu tion s, will be m odified to insure th at appropriate step s are taken to improve over tim e th e c ap ital positions of this group. 1/ May include som e in stitu tion s lo ca te d in m oney c e n te r s . - 3- A minimum le v e l o f primary c a p ita l to to ta l a s s e ts is e stab lish ed at 5 p e r c en t for regional organizations and 6 p ercen t for com m unity organizations. G en erally, regional and com m unity banking organizations are e x p e c te d to o p e r a te above th e m inimum primary c ap ital le v e ls. The a g e n c ie s also have estab lish ed cap ital guidelines for regional and com m unity organizations for th e to ta l ca p ita l to to ta l a s s e ts ratio. These guidelines c o n sist of th r ee broad zones: R egional Com m unity Zone 1 Above 6.5% Above 7.0% Zone 2 5.5% to 6.5% 6.0% to 7.0% Zone 3 Below 5.5% Below 6.0% G en erally, th e nature and in ten sity o f supervisory a ction w ill be d eterm in ed by the zon e in which an institution falls. For banking institu tions operating in zone 1, the a g e n c ie s will: o presum e adequate cap ital if the primary capital ratio a c c e p ta b le to th e regulator and is above th e minimum level; is o in ten sify analysis and a ction c ap ital ratios occur. in when unwarranted d e c lin e s For banking in stitu tion s operating in zone 2, a g e n c ie s will: o presum e th at the institu tion may be und ercapitalized, particularly if the primary and to ta l c ap ital ratios are at or near th e minimum guidelines; o e n gage in e x te n s iv e c o n ta c t and discussion with the m anagem ent and require the submission of com p rehensive c a p ita l plans a c c e p ta b le to the regulator; o c lo se ly m onitor th e cap ital position over tim e . -4 - The agencies' approach to institutions operating in zone 3 will include: o a very strong presumption that the bank is undercapitalized; o frequent contact with management and a requirement that the bank submit a comprehensive capital plan, including a capital augmentation program that is acceptable to the regulator; o continous analysis, monitoring and supervision. The guidelines will be applied in a flexible manner with exceptions as appropriate. The assessment of capital adequacy will continue to be made on a case-by-case basis considering various qualitative factors that affect an institution's overall financial condition. Thus, the agencies retain the flexibility to recognize the unique characteristics of sound and well-managed banks.
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