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F ederal r eser ve b a n k o f D allas DALLAS, TE X A S 75222 Circular No. 83-80 June 28, 1983 CAPITAL ADEQUACY MINIMUM CAPITAL GUIDELINES (Amendments) TO ALL STATE MEMBER BANKS AND HOLDING COMPANIES IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System and the Comptroller of the Currency announced, e ffe c tiv e June 13, 1983, amendments to their minimum capital guidelines. The am endments establish a five percent minimum ratio of primary capital to to ta l assets for the 17 designated banking multinationals and expand the definition of secondary capital in considering the capital adequacy of consolidated bank holding companies. Although the amend ments are effective immediately, the agencies will continue to a ccep t comments on the changes until August 12, 1983. A ttached are copies of the Board's joint press release, definition of capital, and minimum capital guidelines. Questions from sta te member banks should be directed to William C. Reddick in our Bank Supervision and Regulations D epartm ent, Extension 6274. Questions from bank holding companies should c o ntact Basil J. Asaro in our Holding Company Supervision D epartm ent, Extension 4345. Additional copies of this circular will be furnished upon request to the Public Affairs D epartm ent, Extension 6289. Sincerely yours, William H. Wallace First Vice President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Banks and others are encouraged to use the follow ing in com ing WATS numbers in con tacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extensio n referred to above. JOINT PRESS RELEASE COMPTROI1ER OF THE CURRENCY FEDERAL RESERVE BOARD For immediate release June 13, 1983 The Comptroller of the Currency and the Federal Reserve Board today announced amendments to their minimum capital guidelines. The guidelines, which were originally made public in December 1981, are used by the two agencies in examining and supervising national banks, state chartered banks that are members of the Federal Reserve System, and bank holding companies. The two agencies will be guided by the amendments effective immediately; however, they will continue to accept comments on the changes until August 12, 1983. The revisions would: — Establish a 5 percent minimum ratio of primary capital to total assets for the 17 banking organizations designated by the agencies as multinationals. — Expand the definition of secondary capital in considering the capital adequacy of consolidated bank holding companies. Definitions of primary and secondary capital are included in the attached revised guidelines. The agencies noted in connection with the amendments announced today that they had previously amended their policies to ensure that the - 4- capital positions of the 17 multinationals^/ would be strengthened. the past 18 months, Over the average primary capital ratio for these banking organizations increased from 4.63 percent to 5.35 percent through the issue of $450 million of common stock, $2.9 billion of preferred stock, and $1.3 billion of mandatory convertible securities. This substantial improvement means that most of these institutions are already in compliance or will not have far to go to come into compliance with the amended guidelines. In light of the progress made toward greater uniformity in the treatment of capital among banks and within the context of fostering continued improvement in bank capital ratios, the agencies are particularly interested in receiving comment on the question whether a further step would now be advisable, moving toward a closer alignment of capital ratios for all banking organizations, regardless of size. The guidelines for the multinationals are the same as those already used for regional banking organizations — companies with total assets exceeding $1 billion that are not designated as multinationals. The agencies recognized that the primary capital ratios of several multinationals currently were below desired levels. They emphasized that these organizations would be given a reasonable period of time to bring ^7 BankAmerica Corporation (Bank of America, NT&SA); Bank of Boston Corporation (The First National Bank of Boston); Bankers Trust New York Corporation (Bankers Trust Company); Chase Manhattan Corporation (Chase Manhattan Bank, N.A.); Chemical New York Corporation (Chemical Bank); Citicorp (Citibank, N.A.); Continental Illinois Corporation (Continental Illinois National Bank and Trust Company of Chicago); Crocker National Corporation (Crocker National Bank); First Chicago Corporation (The First National Bank of Chicago); First Interstate Bancorp (First Interstate Bank of California); Irving Bank Corporation (Irving Trust Company); Manufacturers Hanover Corporation (Manufacturers Hanover Trust Company); Marine Midland Banks, Inc. (Marine Midland Bank, N.A.); Mellon National Corporation (Mellon Bank, N.A.); Morgan, J. P. & Co., Incorporated (Morgan Guaranty Trust Company of New York); Security Pacific Corporation (Security Pacific National Bank); and Wells Fargo & Company (Wells Fargo Bank, N.A.). - 5- their ratios up to acceptable levels. The agencies noted that they will continue to administer the capital guidelines with appropriate flexibility, and will take into consideration the unique characteristics of individual banks . In the second major change, the agencies said that the unsecured long-term debt of the parent company and its nonbank affiliates could now be counted as secondary capital for purposes of evaluating the capital adequacy of the consolidated holding company. However, unlike bank-issued debt, the long-term debt of the parent company and its nonbank subsidiaries would not be required to be subordinated. In addition, such long-term debt would not be limited to 50 percent of holding company primary capital, whereas bank subordinated debt is limited to 50 percent of bank primary capital. The agencies will retain the 50 percent limit for bank subordinated debt, because lending limits of many banks are tied to capital, which includes subordinated debt. In amending the capital guidelines program, the agencies reemphasized that banking organizations generally are expected to operate above the minimum primary capital ratios. The agencies also said that some banking organizations will be expected to hold additional primary capital to compensate for additional risk. Such banks would include those that have a higher than average percentage of their assets exposed to risk or a greater than average amount of off-balance sheet risk. As techniques of financial analysis evolve, the agencies plan to review these guidelines and in particular will continue to review such issues as the level of intangibles, the role of debt as capital and the possible need for a single capital standard for all banks. The amended capital adequacy guidelines are attached. - Attachment 0- - 7- BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM OFFICE OF THE COMPTROLLER OF THE CURRENCY DEFINITION OF CAPITAL TO BE USEU IN DETERMINING CAPITAL ADEQUACY OF NATIONAL AND STATE MEMBER BANKS AND BANK HOLDING COMPANIES Primary Components of C a p i t a l The p r i ma r y components of c a p i t a l are: — common s t o c k - - per pet ual p r e f e r r e d stock -- surplus - - undivided p r o f i t s - - c o n t i n g e n c y and o t h e r c a p i t a l reserves — mandat or y c o n v e r t i b l e i n s t r u m e n t s ( c a p i t a l i n s t r u m e n t s wi t h c o v e n a n t s ma ndat i ng c o n v e r s i o n i n t o common o r p e r p e t u a l p r e f e r r e d s t o c k ) - - a l l o w a n c e f o r p o s s i D l e l oan and l e a s e l o s s e s - - m i n o r i t y i n t e r e s t i n e q u i t y a c c o u n t s of c o n s o l i d a t e d subsidiaries Secondar y Components of C a p i t a l It is recognized t h a t othe r f in a n cia l i n s t r u m e n t s c a n , wi t h c e r t a i n r e s t r i c t i o n s , be c o n s i d e r e d as p a r t o f c a p i t a l be c a u s e t h e y p o s s e s s some, t nough not a l l , of t h e f e a t u r e s o f c a p i t a l . These i n s t r u m e n t s a r e : — L i m i t e d - l i f e p ref er red stock — Bank s u b o r d i n a t e d n o t e s and d e b e n t u r e s and u n s e c u r e d l o n g - t e r m d e b t o f t h e p a r e n t company and i t s nonbank s u b s i d i a r i e s . R e s t r i c t i o n s R e l a t i n g t o Secondary Components The s e c o n d a r y components w i l l be c o n s i d e r e d as c a p i t a l under t h e c o n d i t i o n s l i s t e d below: - - The i s s u e must have an o r i g i n a l we i g h t e d a v e r a g e m a t u r i t y of a t l e a s t seven y e a r s . - - I f t h e i s s u e has a s e r i a l or i n s t a l l m e n t repayment pr ogr am, a l l s c h e d u l e d repayment s s h a l l be made a t a t l e a s t a n n u a l l y , once c o n t r a c t u a l repayment of p r i n c i p a l b e g i n s , and t h e amount r e p a i d in a gi ven y e a r s h a l l be no l e s s t h a n t h e amount r e p a i d i n t h e previous y e a r . - - For banks o n l y , t h e a g g r e g a t e amount of l i m i t e d - l i f e p r e f e r r e d s t o c k and s u b o r d i n a t e d d e b t q u a l i f y i n g as c a p i t a l may n ot exceed 50 p e r c e n t of t h e amount of t h e b a n k ' s pr i mar y c a p i t a l . - - As t h e s e c o n d a r y components appr oach m a t u r i t y , r edempt i on o r payment , t h e o u t s t a n d i n g b a l a n c e of a l l such i n s t r u m e n t s - - ! ncl udi ng t h o s e wi t h s e r i a l n o t e payment s , s i n k i n g f und p r o v i s i o n s , o r an a m o r t i z a t i o n s c h e d u l e - - w i 11 be a m o r t i z e d in a c c o r d a n c e wi t h t h e f o l l o w i n g s c h e d u l e : Years t o 1M a t u r i t y G r e a t e r t h a n or equal t o 5 Percent of Issue Co n s i d e r e d C a p i t a l 100 Less t h a n 5 but g r e a t e r t h a n o r equal t o 4 80 Less t h a n 4 but g r e a t e r t h a n or equal t o 3 60 Less t h a n 3 but g r e a t e r t h a n o r equal t o 2 40 Less t h a n 2 but g r e a t e r t h a n o r equal t o 1 20 Less t h a n 1 0 (No a d j u s t m e n t s in t h e book amount o f t h e i s s u e i s r e q u i r e d o r e x p e c t e d by t h i s schedule. Adj us t ment w i l l be made by a memorandum a c c o u n t ) . - 9- BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM OFFICE OF THE COMPTROLLER OF THE CURRENCY MINIMUM CAPITAL GUIDELINES The Feder al Reser ve and t h e O f f i c e of t h e C o m p t r o l l e r of t h e Curr ency have deve l o p e d minimum c a p i t a l g u i d e l i n e s t o p r o v i d e a framework f o r a s s e s s i n g t h e c a p i t a l o f wel l - managed n a t i o n a l b a n k s , s t a t e member banks and bank h o l d i n g c o mp a n i e s .1/ The g u i d e l i n e s a r e used i n t h e e x a m i n a t i o n and s u p e r v i s o r y p r o c e s s and w i l l be r evi ewed from t i me t o t i me f o r p o s s i b l e a d j u s t m e n t commensurate wi t n changes i n t h e economy, f i n a n c i a l ma r ke t s and banki ng p r a c t i c e s . O b j e c t i v e s of t h e minimum c a p i t a l guidelines are to: - I n t r o d u c e g r e a t e r u n i f o r m i t y , o b j e c t i v i t y and c o n s i s t e n c y i n t o t h e s u p e r v i s o r y appr oach f o r a s s e s s i n g c a p i t a l adequacy; - P r o v i d e d i r e c t i o n f o r c a p i t a l and s t r a t e g i c p l a n n i n g t o banks and bank h o l d i n g companies and f o r t h e a p p r a i s a l o f t h i s p l a n n i n g by t h e a g e n c i e s ; and - Per mi t some r e d u c t i o n of e x i s t i n g d i s p a r i t i e s in c a p i t a l r a t i o s between banki ng o r g a n i z a t i o n s of d i f f e r e n t s i z e . Two p r i n c i p a l capital to total r a t i o measurement s of c a p i t a l a r e us e d : a s s e t s ; a nd, (2) t o t a l capital to to tal c a p i t a l c o n s i s t s of common s t o c k , p e r p e t u a l assets. (1) p r i mar y Pri mar y preferred stock, capital surplus, u n d i v i d e d p r o f i t s , r e s e r v e s f o r c o n t i n g e n c i e s and o t h e r c a p i t a l reserves, mandat or y c o n v e r t i b l e i n s t r u m e n t s , t h e a l l o w a n c e f o r p o s s i b l e l oa n and l e a s e l o s s e s , and any m i n o r i t y i n t e r e s t i n t h e e q u i t y a c c o u n t s of c o n s o l i d a t e d s u b sidiaries. Tot al c a p i t a l i n c l u d e s t h e pr i mar y c a p i t a l components p l u s l i m i t e d l i f e p r e f e r r e d s t o c k and q u a l i f y i n g n o t e s and d e D e n t u r e s . 1 / I n s t i t u t i o n s t h a t a r e under s p e c i a l s u p e r v i s i o n and t h o s e t h a t have been in o p e r a t i o n f o r l e s s t h a n two y e a r s a r e not i n c l u d e d i n t h e progr am. - The c a p i t a l basis. 10- g u i d e l i n e s g e n e r a l l y w i l l be a p p l i e d on a c o n s o l i d a t e d However, f o r t h o s e bank h o l d i n g companies wi t h c o n s o l i d a t e d a s s e t s under $150 m i l l i o n , t h e c a p i t a l g u i d e l i n e s w i l l appl y onl y t o t h e bank i f : (1) t h e company does not engage d i r e c t l y o r i n d i r e c t l y i n any nonbanki ng a c t i v i t y i n v o l v i n g s i g n i f i c a n t l e v e r a g e ; a nd, (2) no s i g n i f i c a n t debt of t h e p a r e n t company i s h e l d by t h e g e n e r a l p u b l i c . Some bank h o l d i n g companies a r e engayed a c t i v i t i e s that require capital r a t i o s higher In t n e s e c a s e s , a p p r o p r i a t e a d j u s t m e n t s w i l l consolidated capital in s i g n i f i c a n t nonbanki ng t h a n t h o s e f o r t h e bank alone. be made in t h e a p p l i c a t i o n of t h e guidelines. I n s t i t u t i o n s a f f e c t e d by t h e g u i d e l i n e s a r e c a t e g o r i z e d as e i t h e r multinational organizations (as d e s i g n a t e d by t n e i r r e s p e c t i v e s u p e r v i s o r y agency); regional o rga ni za ti on s ( a l l o t h e r i n s t i t u t i o n s wi t h a s s e t s i n e x c e s s of $1 b i l l i o n ) ! . / ; or community o r g a n i z a t i o n s ( l e s s t h a n $1 b i l l i o n in t o t a l a s s e t s ). A minimum l e v e l o f p r i mar y c a p i t a l t o t o t a l a s s e t s is e s t a b l i s h e d at 5 p e r c e n t f o r m u l t i n a t i o n a l and r e g i o n a l o r g a n i z a t i o n s and 6 p e r c e n t f o r community o r g a n i z a t i o n s . G e n e r a l l y , banki ng o r g a n i z a t i o n s a r e e x p e c t e d t o o p e r a t e above t h e minimum p r i mar y c a p i t a l levels. Al s o, t h o s e banki ng o r g a n i z a t i o n s t h a t have a h i g h e r t h a n a v e r a g e p e r c e n t a g e o f t h e i r a s s e t s exposed t o r i s K , o r have a h i g h e r t h a n a v e r a g e amount of o f f - b a l a n c e s h e e t r i s k , may be e x p e c t e d t o h o l d a d d i t i o n a l p r i mar y c a p i t a l t o compensat e f o r t h i s r i s k . ]_/ May i n c l u d e some o t h e r i n s t i t u t i o n s l o c a t e d i n money c e n t e r s . - 11- The a g e n c i e s a l s o have e s t a b l i s h e d c a p i t a l capital to to tal assets ratio. guidelines for the total These g u i d e l i n e s c o n s i s t of t h r e e br oad zones : Multinational and Regi onal Zone 1 Above 6.5% Zone 2 5.5% t o 6.5% Zone 3 Below b.5% Community Above 7.0% 6.0% t o 7.0% Below 6.0% G e n e r a l l y , t n e n a t u r e and i n t e n s i t y o f s u p e r v i s o r y a c t i o n w i l l be d e t e r mi n e d by t h e zone i n which an i n s t i t u t i o n f a l l s . While an i n s t i t u t i o n ' s p o s i t i o n in t h e q u a n t i t a t i v e c a p i t a l zones w i l l n o r ma l l y t r i g g e r t h e below specified supervisory responses, q u a l i t a t i v e an aly sis will continue i n d e t e r m i n i n g minimum l e v e l s o f c a p i t a l t o be used f o r banki ng i n s t i t u t i o n s . For banki ng i n s t i t u t i o n s o p e r a t i n g i n Zone 1, t h e a g e n c i e s w i l l : ° presume t h a t c a p i t a l i s a d e q u a t e i f t h e p r i ma r y c a p i t a l ratio i s a c c e p t a b l e t o t h e r e g u l a t o r and i s above t h e minimum l e v e l ; ° i n t e n s i f y a n a l y s i s and a c t i o n when u n wa r r a n t e d d e c l i n e s in c a p i ta l r a t i o s occur. For banki ng i n s t i t u t i o n s o p e r a t i n g i n Zone 2, t h e a g e n c i e s w i l l : ° presume t n a t t h e i n s i t i t u t i o n may be u n a e r - c a p i t a l i z e d , p a r t i c u l a r l y i f t h e pr i mar y and t o t a l c a p i t a l r a t i o s a r e a t or n e a r t h e minimum g u i d e l i n e s ; ° engage in e x t e n s i v e c o n t a c t and d i s c u s s i o n w i t h t h e manage ment and r e q u i r e t h e s u b mi s s i o n of co mp r e h e n s i v e c a p i t a l plans acceptable to the r e g u l a t o r ; 0 c l o s e l y mo n i t o r t h e c a p i t a l p o s i t i o n over t i m e . The a g e n c i e s ' a ppr oac h t o i n s t i t u t i o n s o p e r a t i n g i n Zone 3 w i l l include: ° a ver y s t r o n g p r e s ump t i o n t h a t t h e i n s t i t u t i o n i s u n d e r capital ized; - 12- ° f r e q u e n t c o n t a c t wi t n management and a r e q u i r e m e n t t h a t t h e i n s t i t u t i o n submi t a compr ehens i ve c a p i t a l p l a n , i n c l u d i n g a c a p i t a l a u g me n t a t i o n program t h a t i s acceptable to the regulator; 0 c o n t i n u o u s a n a l y s i s , m o n i t o r i n g and s u p e r v i s i o n . The g u i d e l i n e s w i l l be a p p l i e d i n a f l e x i b l e manner wi t h e x c e p t i o n s as a p p r o p r i a t e . The a s s e s s m e n t of c a p i t a l adequacy w i l l c o n t i n u e t o be made on a c a s e - b y - c a s e b a s i s c o n s i d e r i n g v a r i o u s q u a l i t a t i v e f a c t o r s t h a t a f f e c t an i n s t i t u t i o n ' s overall financial condition. Thus, t h e a g e n c i e s r e t a i n t h e f l e x i b i l i t y t o make a p p r o p r i a t e a d j u s t m e n t s i n t h e a p p l i c a t i o n to individual institutions. of t h e g u i d e l i n e s
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