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Federal Reserve Bank OF DALLAS R O B E R T D. M c T E E R , J R . DA LLAS, TEXAS p r e s id e n t AND C H IE F E X E C U T I V E O F F I C E R JailUciry 12 1995 7 5 2 6 5 -5 9 0 6 Notice 95-05 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Final Amendments to the Risk-based Capital Guidelines DETAILS The Board of Governors of the Federal Reserve System has issued final amendments to the risk-based capital guidelines for state member banks and bank holding companies. Under this final rule, institutions are generally directed not to include in Tier 1 capital the component, "net unrealized holding gains and losses on securities available for sale." This component of common stockholders’ equity was created by the Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Net unrealized losses on marketable equity securities (equity securities with readily determinable fair values), however, will continue to be deducted from Tier 1 capital. This rule has the general effect of valuing available-for-sale securities at amortized cost (based on historical cost), rather than at fair value (generally at market value), for purposes of calculating the risk-based and leverage capital ratios. ATTACHMENT A copy of the Board’s notice as it appears on pages 63241-45, Vol. 59, No. 235, of the Federal Register dated December 8, 1994, is attached. 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) 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, Rules and Regulations Federal Register Vol. 59, No. 235 Thursday, December 8, 1994 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. The Code of Federal Regulations is sold by the Superintendent of Documents. Prices of new books are listed in the first FEDERAL REGISTER issue of each week. FEDERAL RESERVE SYSTEM 12 CFR Parts 208 and 225 [Regulations H and Y; Docket No. R-0823] Capital; Capital Adequacy Guidelines AGENCY: B oard of G overnors of the F ederal Reserve. System . ACTION: F inal rule. SUMMARY: T he Board of G overnors of the F ederal Reserve System is am ending its risk-based capital g uidelin es for state m em ber banks an d ban k holding com panies. U nder th is final rule, in stitu tio n s are generally directed to not in c lu d e in regulatory capital the “ net u nrealized ho lding gains (losses) on securities available for sale,” the new com m on stockhold ers’ equity account created by S tatem ent of F inancial A ccounting S tandards N um ber 115 (FAS 115), A c c o u n tin g fo r Certain In vestm en ts in D ebt a n d E quity Securities. Net u n realized losses on m arketable equity securities (i.e., equity securities w ith readily determ inable fair values), how ever, w ill co n tinue to be d ed u cted from T ier 1 capital. T his rule h as the general effect of valuing available-for-sale securities at am ortized cost (i.e., based o n h istorical cost), rather than at fair value (i.e., generally at m arket value), for purposes of calculating the risk-based an d leverage capital ratios. EFFECTIVE DATE: D ecem ber 31,1994. 3544), Board of G overnors of the Federal Reserve System , 20th and C Streets NVV, W ashington, DC 20551. SUPPLEMENTARY INFORMATION: Background O n D ecem ber 28 ,1 9 9 3 , th e Board of G overnors issued for pu b lic com m ent a proposal to am end its risk-based capital guidelines 1 for state m em ber banks and b ank holding com panies to include in T ier 1 capital th e “ net unrealized holding gains a n d losses on securities available for sa le” (58 FR 68563, D ecem ber 28,1993). T he proposal w o u ld have h ad th e effect of valuing securities available for sale at market value for purp o ses of calculating the risk-based an d leverage capital ratios. In its proposal, the Board offered several alternative treatm ents, one of w hich w as to n o t in clu d e such net u nrealized gains an d losses in the calculation of regulatory capital. It is th is alternative treatm ent that th e Board is adopting as a final rule. T he com m ent period ended on January 21,1994. T he proposal w as in response to the issuance of FAS 115 on May 31,1993, w h ich established “n et unrealized h o ld in g gains (losses) on securities available for sale” as a new elem ent of com m on stockhold ers’ equity. All b anking organizations w ere required to ad o p t FAS 115, for both generally accepted accounting p rin cip les (GAAP) an d regulatory reporting purposes, as of January 1 ,1 9 9 4 , or the beginning of th e ir first fiscal year thereafter, if later. E arlier adoption w as perm itted. Since th e final capital treatm ent of su ch net u n realized gains an d losses on available-for-sale securities w as not in effect by year-end 1993, the Board directed state m em ber banks and bank holding com pan ies to co ntinue calculating th e risk-based and leverage capital ratios on a pre-FA S 115 basis. A ccordingly, th e n et unrealized holding FOR FURTHER INFORMATION CONTACT: Rhoger H Pugh, A ssistaiit D irector (202/ 728-5883), N orah M. Barger, M anager (202/452-2402), A rleen E. Lustig, Supervisory F in an cial A nalyst (202/ 452-2987), an d John M. Freeh, S upervisory F inancial A nalyst (202/ 452-2275), D ivision o f Banking S upervision an d R egulation, Board atf G overnors of the F ederal Reserve System . For the hearing im p aired only, T elecom m unication D evice for the Deaf (TDD), D orothea T hom pson (202/452- 1 The Board’s risk-based capital guidelines implement, for state member banks and bank holding companies, the international bank capital standards as set forth in the Basle Accord. The Basle Accord is a risk-based capital framework that w as proposed by the Basle Committee on Banking Regulations and Supervisory Practicss and endorsed by the central bank governors of the Group of Ten (G— 10) countries in July 1988. The Committee is comprised of representatives of the central banks an d supervisory authorities from the G -10 countries (Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the United States) and Luxembourg. gains and losses on available-for-sale debt securities w ere not included in regulatory capital, an d th e am ortized cost rather iiian th e fair value of available-for-sale debt securities generally co n tin u ed to be used in the calculation of both capital ratios. M oreover, equity secu rities w ith readily determ in able fair values continued to be valued at the low er of cost or fair value for regulatory capital purposes. Both the F ederal D eposit In su rance Corporation (FDIC) and the Office of the Com ptroller of th e C urrency (OCC) followed this interim capital treatm ent. FAS 115 FAS 115 divides securities held by banking organizations am ong three categories: (1) Securities held to m aturity; (2) trading account securities: an d (3) securities available for sale. U nder FAS 115, tradin g securities are d efined as those securities that an institu tio n buys an d h o ld s principally for the p urp ose of selling in the near term . As u n d e r earlier accounting standards, these securities are to be reported at fair value (i.e., generally at m arket value), w ith net unrealized changes in th eir value reported directly in th e incom e statem ent as part of an in stitu tio n ’s earnings. U nder FAS 115, securities held to m aturity are to be recorded at am ortized cost. However, FAS 115 states that a banking organization m ay include a security in the held-to-m aturity category only if m anagem ent h as “the positive in ten t and ability to ho ld the security to m atu rity .” Securities m eeting th e definition of th e available-for-sale category (i.e., all securities not h eld for trading that an in stitu tio n can n o t justify categorizing as held-to-m aturity) are to be reported at fair value. Changes in th e fair value of securities available for sale are to be reported, n et o f tax effects, directly in a separate co m ponent o f com m on stockholders’ equity. C onsequently, any unrealized ap p reciatio n or depreciation in th e value of securities in the available-for-sale category has no im pact on th e reported earnings of an in stitu tio n , b u t affects its GAAP equity capital position. Initial Proposal In late D ecem ber 1993, the Board proposed am ending th e capital adequacy guidelines for state m em ber b an k s and bank ho ld in g com panies to 63242 Federal Register / Vol. 59, No. 235 / Thursday, December 8, 1994 / Rules and Regulations reflect the provisions of FAS 115 (58 FR 68563, Decem ber 28,1993). U nder the proposed am endm ent, th e net am ount of unrealized gains an d losses, adjusted for th e effects o f incom e taxes, on securities held in the available-for-sale account w o u ld be in clu d ed in T ier 1 c a p ita l2 an d such securities w o uld be booked at fair value rather than at am ortized cost for purp oses o f calculating the riskbased a n d leverage capital ratios. T h e Board proposed in clu sio n of net unrealized gains an d losses on available-for-sale securities in T ier 1 capital because it w ould m ake the d efinition of T ier 1 capital m ore equivalent to the GAAP definition of equity capital. In ad dition, th e proposed T ier 1 capital treatm ent for unrealized changes in the value of securities available for sale co u ld be view ed as an extension of the capital treatm ent cu rren tly ap p lied to net unrealized gains and losses on trading securities, w h ich are recognized in T ier 1 capital. T h is recognition h as long been view ed as co nsisten t w ith the Basle Accord. T h u s, it co u ld be argued that inclusion of unrealized gains and losses on securities available for sale in T ier 1 cap ital is also consistent w ith th e Basle A ccord. T he Board also noted in its initial proposal that th e in clusion of net unrealized changes in th e value of securities available for sale in T ier 1 capital w o u ld affect the calculation of capital for purposes o f a n u m b er of law s an d regulations th a t are based, in part, on th e in stitu tio n ’s capital levels. Such law s an d regulations in c lu d e prom pt corrective action (12 CFR p art 208, S ubpart B), brokered d ep o sit restrictions (12 CFR 337.6), a n d the risk-related insurance prem ium system (12 CFR part 327). W hile proposing T ier 1 capital treatm ent for n et u nrealized gains and losses on available-for-sale securities, th e Board also sought p u b lic com m ent on several alternative treatm ents. The o th e r options in cluded: (a) E xcluding from regulatory capital all changes in the value of securities available for sale, w h ich w o u ld have th e sam e effect as valuing th ese securities on a n am ortized cost basis; (b) Inclu ding losses in T ier 1 capital, w hile not recognizing any gains for capital purposes, w h ich w o u ld have th e 2 The Board’s risk-based capital guidelines set forth a definition of Tier 1 capital that includes common stockholders’ equity. These guidelines further state that common stockholders' equity includes: (1) Common stock; (2) related surplus; and (3) retained earnings, including capital reserves and adjustm ents for the cum ulative effect of foreign currency translation, net of treasury stock. effect of valuing securities available for sale on low er of cost or m arket basis; (c) Including both the gains and losses in T ier 2 capital; and (d) Including losses in T ier 1 capital, w h ile including gains in T ier 2 capital. C om m ents Received T he Federal Reserve received letters from 59 public com m enters. Com m ents w ere received from 17 m u ltinational and large regional banking organizations, 24 com m unity banking organizations, seven foreign banks, six banking trade associations, tw o state banking supervisors., tw o consultants, an d one law firm. T w enty-one of the pu b lic com m enters su p p o rted the proposal to in clu d e “n et unrealized holding gains (losses) on securities available for sale,” in T ier 1 capital, w h ile 38 opposed the proposal, in clu d in g all seven foreign banks. P ublic com m enters o pposed to the proposal included 18 out of th e 24 co m m un ity banks, 5 out of th e 17 m u ltin ational an d large regional banking organizations, all seven foreign banking organizations, th ree banking trade associations, tw o state banking supervisory organizations, tw o consu ltants, and one law firm. Som e of th e com m on reasons cited for opposing th e proposal included: (1) T he additional volatility to capital resu lting from m arking-to-m arket the available-for-sale securities an d consequent fluctuations for som e in stitu tio n s in th e ir single borrow er le n d er limits; (2 ) T he potential for tem porary changes in interest rates to have an adverse effect on th e risk-based and leverage capital ratios that w o u ld result in a low er prom pt corrective action category or higher FDIC risk-based insu ran ce prem ium s; (3) T he aistorting effect of applying m arket value accounting to som e item s on o nly one sid e o f the in stitu tio n ’s b alance sheet, particularly since interest rate changes that cau se changes in asset values often give rise to offsetting changes to the value o f th e deposit base, w h ich existing accounting sta n d ard s do not recognize; and (4) T he potential for organizations to becom e critically u n d ercapitalized and subject to closure as a result of tem porary changes in th e m arket values of Securities that the banking organization has n o in ten tio n o f selling. A ll seven foreign b anks that com m ented on th e proposal opposed th e in clusion o f th e n e t u n rea liz ed gains an d losses on available-for-sale securities in T ier 1 on th e grounds that su ch treatm ent for th e new equity account is inconsistent w ith th e Basle A ccord. In th eir view, th is account is m ore com parable to securities revaluation reserves, w hich, u n d er the A ccord, are substantially disco unted and accorded T ier 2 status, rather than disclosed reserves, w hich receive an un lim ited T ier 1 treatm ent u n d er the Accord. Tw elve of the 17 m ultinational and large regional banking organizations com m ented favorably on th e proposal, as did three banking trade associations. H ow ever, five m ultinational an d large regional banking organizations opposed th e proposal citing concerns sim ilar to those given by sm aller institutions. T he 21 com m enters favoring the proposal gave tw o m ain reasons for th eir support: (1) T he proposed T ier 1 treatm ent of th e new account w ould parallel the GAAP equity treatm ent for unrealized gains an d losses and, thus, institutions could avoid having to m aintain tw o sets of accounting records for available-forsale securities; and (2) T ier 1 treatm ent w ould be consistent w ith the inten t of section 121 of the Federal Deposit Insurance C orporation Im provem ent A ct o f 1991 (FDICIA), w hich stipulates th a t regulatory accounting standards be no less stringent than GAAP. In its proposal, the Board asked for specific com m ent on six issues. T en pu b lic com m enters com m ented on the first issue, w hich concerned th e extent to w hich FAS 115 m ay perm it an in stitution to sell securities from the held-to-m aturity account w ith o u t calling into question th e in stitu tio n ’s in ten t or ability to co n tin u e to ho ld other securities repo rted in th at account A ll 10 com m enters stated th a t FAS 115 prov ides a specific set o f circum stances u n d e r w hich banking organizations can sell securities from th e held-to-m aturity acco unt w ithout taintin g th e rem aining securities in th a t account. Seven banking in stitu tio n s com m ented on the second issue, w hich co ncerned requests for exam ples of isolated, nonrecurring, an d u n u su al events involving dem ands for liquid ity th a t w o u ld p erm it the sale or transfer of held-to-m aturity securities u n d e r FAS 115. T h e m ost com m on exam ples cited w ere changes in tax law, deterioration in th e credit-w orthiness o f a security issuer, and natu ral disasters. T he th ird issue concerned alternatives to th e proposed T ier 1 ca p ita l treatm ent. T.wenty-three organizations com m ented on th e alternatives in clu d ed in the B oard’s request for public com m ent. Thd&e alternatives included: E xcluding all such changes from capital; d edu cting losses from T ier 1 capital, an d eith er not recognizing any gains for capital p u rp o ses or includ ing them in T ier 2 Federal Register / Vol. 59, No. 235 / Thursday, December 8, 1994 / Rules and Regulations capital; an d including both the gains and losses in T ier 2 capital. O f th e 23 com m enters, six w ere m u ltin atio n al or large regional banking organizations that supp orted th e proposal. G enerally, these organizations d id n o t favor any of th e alternatives. H owever, 13 com m enters, in clu d in g the seven foreign banks that o pposed the p roposal, stated th a t they preferred Tier 2 treatm en t for n et u nrealized gains and losses on available-for sale securities over T ier 1 treatm ent. F our com m enters preferred n o t including th e n et u nrealized gains an d losses on available-for-sale securities in regulatory capital. T he fourth issue co ncerned the extent to w h ich th e above alternatives m ight create an incentive for banking organizations to sell securities that have appreciated to realize the gains in Tier 1 capital, w h ile holding securities that have depreciated to avoid red u ctio n s in T ier 1 capital. Six com m enters offered view s on th is issue. M ost of these com m enters felt th a t in clu d in g . unrealized gains an d losses in regulatory capital w ould provide some disin cen tiv e for banks n o t to pursue such a strategy. A nother com m enter stated th a t w h ile th e exclusion of the n et u nrealized gains and losses could lead a com pany to selectively sell only securities in w h ich it h a d a gain, the Securities a n d Exchange Com m ission (SEC) w o u ld question such a practice. In setting forth th e fifth issue, the Board asked com m enters to suggest the app ro p riate m an n er for m aintaining an A llocated T ransfer Risk Reserve (ATRR) for certain foreign debt securities (e.g., "B rady B on ds”) held as securities available for sale. Three m ultinational banking in stitu tio n s resp o n d ed to this issue. A ll th ree organizations stated that th e ATRR sh ould not be ap p lied to such foreign securities since such securities are reflected o n b an k s’ financial statem ents at m arket value. T he last issue concerned th e im portance of m aintaining consistent ap p lication of th e Basle capital standards. F ourteen banking organizations an d associations com m ented on this issue. Seven com m enters, all of w hich w ere foreign banks, stated that the proposal to in clu d e th e new com m on equity co m ponent in T ier 1 w as inconsistent w ith the provisions of th e Basle Accord. They stated that T ier 1 treatm ent could create com petitive inequality w ith international banks. M oreover, they stated th a t T ier 1 treatm ent co u ld cause inconsistency betw een th e T ier 1 m easure ap p lied to U.S. ban ks and the T ier 1 m easure ap p lied by other banks regulated by different accounting rules, 63243 agencies at th e tim e FAS 115 w as proposed, th a t th e standard could produce distorted financial statem ents because it m arked som e balance sheet item s to m arket b u t ignored changes in the m arket value of other item s, in clud ing liabilities, that could have offsetting price changes. In ad d ition , the Board h as long opposed proposals to Fin al R ule adopt m ark-to-m arket accounting After consideration of the public because of th e difficulty in determ ining com m ents an d further deliberation on th e m arket values of various assets and th e issues involved, the Board is liabilities an d the inappropriateness of adopting a final ru le th a t am en d s the using th is accounting m eth od for risk-based capital guidelines to in stitu tio n s th a t do not actively trade in explicitly state th a t n et unrealized gains m arketable financial assets. a n d losses on available-for-sale T he Board believes th a t n o t including securities generally are not be in clu d ed th e FAS 115 n et unrealized gains and in capital. U n der th e final rule, losses in capital is consistent w ith the how ever, unrealized losses on Basle A ccord, w hich (except for trading m arketable equity securities w ould account assets) generally does not co n tin u e to be d ed u cted from T ier 1 perm it T ier 1 capital to be increased by capital. T his final ru le w as developed in unrealized gains on securities. In close coordination w ith th e other ad d ition, th e Board finds that FDICIA federal banking agencies and resu lts in 121’s requirem ent th at the accounting a capital treatm ent for n et unrealized p rin cip les u se d in regulatory reports be gains an d losses on securities available no less stringent th a n GAAP does not for sale th a t is the sam e as th e interim apply to the B oard’s definition of capital treatm ent agreed to by the regulatory capital. T his finding suggests agencies in D ecem ber 1993. that excluding n et gains a n d losses from T he Board is adopting one of the regulatory capital is consistent w ith alternative capital treatm ents suggested FDICIA 121. M oreover, consistent w ith in D ecem ber 1993 as a final rule rather past o p in io n s expressed by the Board, th an the T ier 1 treatm ent p roposed for the Board is not convinced th a t m arking a num ber of reasons. First, m ost to m arket available-for-sale securities as com m enters op posed the B oard’s FAS 115 requires is necessarily a more proposal to in c lu d e the FAS 115 net stringent reporting treatm ent th an unrealized gains and losses in riskvaluing such securities at am ortized based capital calculations because of cost. W hile m ark-to-m arket treatm ent concerns about th e potential volatility results in th e recognition of unrealized in regulatory capital. As discussed losses in GAAP equity capital, it also u n d e r the section en titled “ Com m ents perm its th e un lim ited recognition of R eceived,” com m enters n oted th a t the unrealized gains in such capital in c lu sio n o f the n et unrealized gains F urtherm ore, the Board believes that and losses on available-for-sale concerns about not d educting net securities w o u ld result in fluctuations unrealized losses on available-for-sale in regulatory capital d u e to tem porary securities are overstated since the changes in interest rates. T hus, an regulatory reports filed by banking in stitu tio n ’s capital as calculated for organizations that are available to the ,prom pt corrective action, risk-based p u b lic have long collected inform ation insurance deposit prem ium s, lending on th e am ortized cost an d m arket value lim its, a n d o ther lim its based on capital w ould be affected by u nrealized changes o f all securities held in th e ir portfolios (including those held as long-term in th e value of securities th at it m ay not investm ents). T hus, exam iners and in ten d or n eed to sell. analysts can readily take any Sgune com m enters also expressed d epreciation, as w ell as any concerns .about having to reflect in regulatory capital changes in th e m arket appreciation, in a banking organization’s securities portfolio into valu e o f selected item s on one side of co nsideration in th e determ ination of th e balance sheet b u t n o t the o th e r side. the in stitu tio n ’s overall capital In th is regard, th e Board notes th a t it and the o ther banking agencies opposed adequacy. Finally, th e Board has decid ed to FAS 115 as representing piecem eal co ntinue to d educt net unrealized losses ad optio n of m ark-to-m arket accounting w hen it w as issued for p u b lic com m ent. on m arketable equity securities since, unlike debt securities, equities have no By n o t adopting FAS 115 for regulatory m aturity d ate an d an u n certain final capital p urposes, the Board is taking an value. T h is decision is co nsistent w ith action th a t is consistent w ith th e longstanding supervisory practice. position, w h ich w as taken by the reducing th e m eaningfulness of the capital adequacy com parisons. H owever, th ree banking organizations, all of w h ich su p p o rted th e T ier 1 proposal, stated that the proposal w as consistent w ith the Basle A ccord and, therefore, w o u ld n o t reduce the m eaningfulness of com parisons. 63244 Federal Register / Vol. 59, No. 235 / Thursday, December 8, 1994 / Rules and Regulations Regulatory Flexibility Act Analysis 12 CFR Part 225 P ursuant to section 605(b) of the Regulatory F lexibility Act, th e Board hereby certifies th a t th is final rule w ill not have a significant im pact on a substantial n u m b e r of sm all business entities (in th is case, sm all banking organizations). T h e risk-based capital guidelines generally do not apply to bank holding com p an ies w ith consolidated assets of less th a n $150 m illion: thus, the final ru le w ill not affect such com panies. A dm inistrative practice and procedure, Banks, Banking, Federal Reserve System , H olding com panies, Reporting and recordkeeping requirem ents, Securities. For the reasons set forth in the pream ble, the Board is am ending 12 CFR parts 208 an d 225 as set forth below: Paperwork Reduction Act and Regulatory Burden T he Board h as determ in ed that th is final rule w ill riot increase the regulatory pap erw ork b u rd en of banking organizations p u rsu an t to th e provisions of the P aperw ork R eduction Act (44 U.S.C. 3501 e t seq.). Section 302 of the Riegle C om m unity D evelopm ent an d Regulatory . Im provem ent A ct of 1994 (Pub. L. 1 0 3 3 2 5 ,1 0 8 Stat. 2160) provides th a t the federal banking agencies m ust con sider the adm inistrative b u rd e n s and benefits of any n ew regulations th a t im pose additional req uirem ents a n insured depository in stitu tio n s. Section 302 also requires such a rule to take effect on the first day of th e ca le n d ar quarter follow ing final pu b licatio n of th e rule, unless the agency, for good cause, determ ines an earlier effective date is appropriate. T he new capital ru le does n o t im pose any new requirem ents on depository in stitutions of ban k ho ld in g com panies for purposes of calculating th e ir riskbased and leverage capital ratios. T he am ended ru le clarifies th e capital treatm ent of a com m on stockho lders’ equity com ponent, “ n et un realized holding gains (losses) on securities available for sale,” created by FAS 115, but do es not change cu rren t treatm ent For these reasons, th e Board has determ ined th a t an effective d ate of Decem ber 31,1 9 9 4 , is appropriate. For these sam e reasons, in acco rdance w ith 5 U .S.C 553(d)(3), th e B oard finds there is good cause n o t to follow th e 30-day notice requirem ents o f 5 U.S.C. 553(d) an d to m ake th e ru le effective c h i D ecember 31,1994. List o f Subjects 12 CFR Part 208 Accounting, Agriculture, Banks, Banking, Confidential business information, Crime, Currency, Federal Reserve System, Mortgages, Reporting and recordkeeping requirements. Securities. PART 208—MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 1. T he auth ority citation for part 208 is revised to read as follows: Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461, 481-486, 601, 611, 1814, 1823(j), 1828(0), 18310,1831p-l, 3105, 3310, 3331-3351 and 3906-3909; 15 U.S.C 78b, 781(b), 781(g), 78l(i), 78o-4(c)(5), 78q, 78q-l and 78w; 31 U.S.C 5318. appreciation, as well as any depreciation, in specific asset values as additional considerations in assessing overall capital strength and financial condition. PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 1. T he authority citatio n for part 225 is revised to read as follows: Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-l, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 3909. 2. A ppendix A to part 225 is am ended by revising sections II.A.I.a. and II.A.2.f to read as follows: Appendix A to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure 2. A p pendix A to part 208 is am ended by revising sections II.A .I.a. an d II.A.2.f to read as follows: ■ Appendix A to Part 208—Capital Adequacy Guidelines for State Member Banks: Risk-Based Measure II. * A. a. Common stockholders’ equity For purposes of calculating the risk-based capital ratio, common stockholders’ equity is limited to common stock; related surplus, and retained earnings, including capital reserves and adjustments for the cumulaUve effect of foreign currency translation, net of any treasury stock; less net unrealized holding losses on available-for-sale equity securities with readily determinable fair values. For this purpose, net unrealized holding gains on such equity securities and net unrealized r holding gains (losses) on available-for-sale debt securities are not included in common stockholders’ equity II. * * * A. * * * | * * * a. Common stockholders’ equity For purposes of calculating the risk-based capital ratio, common stockholders’ equity is limited to common stock; related surplus; and retained earnings, including capital reserves and adjustments for the cumulative effect of foreign currency translation, net of any treasury stock, less net unrealized holding losses on available-for-sale equity securities with readily determinable fair values. For this purpose, net unrealized holding gains on such equity securities and net unrealized holding gains (losses) on available-for-sale debt securities are not included ip common stockholders’ equity * * 2 * * * * * * f. Revaluation reserves i. Such reserves reflect the formal balance sheet restatement or revaluation for capital purposes of asset carrying values to reflect current market values. The Federal Reserve generally has not * * * * * included unrealized asset appreciation in 2 * * * capital ratio calculations, although it has long f. Revaluation reserves i Such reserves taken such values into account as a separate reflect the formal balance sheet restatement factor in assessing the overall financial or revaluation for capital purposes of asset strength of a banking organization carrying values to reflect current market ii Consistent with long-standing values. The federal banking agencies supervisory practice, the excess of market generally have not included unrealized asset values over book values for assets held by appreciation in capital ratio calculations, although they have long taken such values bank holding companies will generally not be into account as a separate factor in assessing recognized in supplementary capital or in the the overall financial strength of a bank. ^calculation of the risk-based capital ratio. ii. Consistent with long-standing However, all bank holding companies are supervisory practice, the excels of market encouraged to disclose their equivalent of values over book values for assets hetd by premises (building) and security revaluation state member banks will generally not be reserves The Federal Reserve will consider recognized in supplementary capital or in the any appreciation, as well as any depreciation, calculation of the risk-based capital ratio. in specific asset values as additional However, all banks are encouraged to considerations in assessing overall capital disclose their equivalent of premises strength and financial condition. (building) and security revaluation reserves. The Federal Reserve will consider any Federal Register / Vol. 59, No. 235 / Thursday, December 8, 1994 / Rules and Regulations Board of Governors of the Federal Reserve System. December 2,1994. B arbara R. Lowrev, Associate Secretary o f the Board. IFR Doc. 94-30156; Filed 12-7-94: 8:45 amj BILLING CO DE 6 2 1 0 -0 1 -P 63245