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Federal R eserve Bank
OF DALLAS
R O B E R T D. M c T E E R , J R .
PRESIDENT
AND CHIEF EXECUTIVE O F FIC E R
DALLAS, TEXAS 75222
Octob er 15, 1992
No tice 92-96
TO:
The Chief Executive Officer of each
me mber bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Final Rule Regarding Prompt Correctiv e Action
DETAILS
The Federal Reserve Board has issued a final rule to carry out the
Prompt Corrective Action provisions of the Federal Deposit Insurance C o r p o r a
tion Improvement Act (FDICIA) of 1991 (Section 131). The rule applies to
state m embe r banks and becomes effective on December 19, 1992.
Section 131 created a system of supervisory actions based primarily
on the capital levels of individual institutions. The system is intended to
resolve problems of insured institutions at the least possible lon g-term loss
to the deposit insurance fund. The regulation adopted by the Board
•
Defines capital measures and the capital thresholds for each of
the five categories established in FDICIA.
•
Establishes a uniform schedule for filing of capital restoration
plans by undercapitalized institutions and agency review of those
plans.
Clarifies aspects of the capital guarantees made as part of an
_
acceptable capital plan by companies that control an undercap
italized institution.
•
Establishes procedures for providing institutions with advance
notice of a proposed supervisory directive and an o pportunity for
response and review.
•
Establishes procedures for reclassifying an institution to
lower capital category based on supervisory factors other than
capital.
•
a
Establishes procedures by which officers and directors who
are
dismissed as a result of an agency order may obtain review of the
- dismissal and possible reinstatement.
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 {BOO) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
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2
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ATTACHMENT
At tached is a copy of the B o a r d ’s notice as it appears on pages
44866-909, Vol. 57, No. 189, of the Federal Register dated Sept ember 29, 1992.
MORE INFORMATION
For more information, please contact Gayle Teague at (214) 922-6151.
For additional copies of this B a n k ’s notice, please contact the Public Affairs
Department at (214) 922-5254.
Sincerely yours,
FINAL RULE TO CARRY OUT THE
PROMPT CORRECTIVE ACTION PROVISIONS
ON THE
FEDERAL DEPOSIT INSURANCE CORPORATION
IMPROVEMENT ACT
(DOCKET R-0763)
44866
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 6 and 19
[Docket No. 92-19]
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 263
[Docket No. R-0763; Regulation H]
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 308 and 325
RIN 3064-AB16
categories. It also restricts or prohibits
certain activities and requires the
submission of a capital restoration plan
when an insured institution becomes
undercapitalized. The revisions adopted
by the agencies are necessary to
establish the capital levels at which
institutions will be deemed to come
within the five capital categories. The
revisions also establish procedures for
issuing and contesting prompt corrective
action directives including directives
requiring the dismissal of directors and
senior executive officers.
The agencies sought public comment
on this proposal in July 1992. The final
rule reflects a number of changes to the
original proposal to address concerns
raised by the commenters.
EFFECTIVE DATE:
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 565
[Resolution No. 92-403]
RIN 1550-AA57
Prompt Corrective Action; Rules of
Practice for Hearings
AGENCIES: Board of Governors of the
Federal Reserve System; Office of the
Comptroller of the Currency, Treasury;
Federal Deposit Insurance Corporation;
and Office of Thrift Supervision,
Treasury.
ACTION: Final rules.
The Board of Governors of
the Federal Reserve System (Board of
Governors), the Office of the
Comptroller of the Currency (OCC), the
Federal Deposit Insurance Corporation
(FDIC), and the Office of Thrift
Supervision (OTS) (collectively “the
agencies”) have adopted final rules
revising their regulations to implement
for the institutions that they supervise
the system of prompt corrective action
established by section 38 of the Federal
Deposit Insurance Act (FDI Act) as
added by section 131 of the Federal
Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA).
Section 38 requires each Federal
banking agency to implement prompt
corrective action for the institutions that
it regulates. The agencies have also
revised their rules of practice for
hearings to establish procedures for the
issuance of directives and other actions
required under prompt corrective action.
Section 38 requires or permits the
agencies to take certain supervisory
actions when an insured depository
institution falls within one of five
specifically enumerated capital
s u m m a ry :
December 19,1992.
FOR FURTHER INFORMATION CONTACT:
Federal R eserve Board: Frederick M.
Struble, Associate Director (202/4523794), Norah Barger, Supervisory
Financial Analyst (2C2/452-2402),
Division of Banking Supervision and
Regulation; Scott G. Alvarez, Associate
General Counsel (202/452-3583),
Gregory A. Baer, Senior Attorney (202/
452-3236), Legal Division; Myron L
Kwast, A ssistant Director, Division of
Research and Statistics, Board of
Governors of the Federal Reserve
System. For the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), Dorothea Thompson (202/4523544), Board of Governors of the Federal
Reserve System, 20th and C Streets,
NW„ Washington, DC 20551.
OTS: John Connolly, Program
Manager, (202) 906-6465, Policy;
Lorraine E. Waller, Counsel (Banking
and Finance), (202) 906-6457, Deborah
Dakin, A ssistant Chief Counsel, (202)
906-6445, Regulations and Legislation
Division, Office of Thrift Supervision,
1700 G Street, NW., Washington, DC
20552.
FDIC: Daniel M. Gautsch,
Examination Specialist (202-898-6912),
Stephen G. Pfeifer, Examination
Specialist (202-898-8904), Division of
Supervision; Valerie Jean Best, Counsel
(202-898-3812), Claude A. Rollin,
Counsel (202-898-3985), Legal Division,
Federal Deposit Insurance Corporation,
550 17th Street, NW„ Washington, DC
20429.
OCC: Kevin J. Bailey, Executive
Assistant, Senior Deputy Comptroller
for Bank Supervision Operations, (202)
874-5030; Daniel Berkland, National
Bank Examiner, Special Supervision,
(202) 874-4450; or Beth Kirby, Senior
Attorney, Corporate Organization and
Resolutions Division, (202) 874-5300,
Office of Comptroller of the Currency.
/
Rules and Regulations
SUPPLEMENTARY INFORMATION:
I. Background
In early July, the Board of Governors
of the Federal Reserve System (Federal
Reserve Board) (57 FR 29226, July 1,
1992), the Federal Deposit Insurance
Corporation (FDIC) (57 FR 29662, July 6,
1992), the Office of the Comptroller of
the Currency (OCC) (57 FR 29808, July 7,
1992), and the Office of Thrift
Supervision (OTS) (57 FR 29826, July 7,
1992) proposed regulations to implement
the provisions of section 131 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) (Pub.
L. 102-242), which is entitled "Prompt
Corrective Action”. Section 131 of
FDICIA created a new statutory
framework that applies to every insured
depository institution a system of
supervisory actions indexed to the
capital level of the individual institution.
The stated purpose of this statutory
provision is to resolve the problems of
insured depository institutions at the
least possible long-term loss to the
deposit insurance fund. The new
framework is contained in section 38 of
the FDI Act (12 U.S.C. 1831o) ("section
38”). This framework and the authority
it confers on the Federal banking
agencies are meant to supplement the
existing supervisory authority vested in
the agencies, and do not limit in any
way the agencies’ existing authority
under other statutes or regulations to
initiate supervisory actions to address
capital deficiencies, unsafe or unsound
conduct, practices, or conditions, or
violations of law.
Section 38 requires the Federal
banking agencies, within 9 months of the
enactment of FDICIA, to promulgate
final regulations necessary to carry out
the purposes of that section. Under the
statute, these regulations must become
effective within one year after the date
of enactment of FDICIA, or no later than
December 19,1992.
IL Summary of Final Rules
The agencies have received 92
comments from interested persons, and
have reviewed the original proposal in
light of those comments. As an initial
matter, the commenters strongly
supported the agencies’ efforts to adopt
uniform rules implementing the
provisions of section 38. The agencies
believe that a uniform approach to
capital definitions and capital
categories, as well as a uniform
framework of procedures, will simplify
the tasks facing bank and thrift
management of monitoring and
maintaining the capital levels of insured
depository institutions, and will remove
any competitive distortions that might
Federal R egister / Vol. 57, No. 189 / T uesday, Septem ber 29, 1992
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arise if different standards w ere applied
to competing institutions. Accordingly,
the agencies have adopted substantially
the same rules.
The final rules that have been
adopted by the agencies are
substantially as originally proposed by
the agencies, with modifications to
address concerns and issues raised by
the commenters. In particular, the final
rules define the relevant capital
measures for the categories of wellcapitalized, adequately capitalized,
undercapitalized, and significantly
undercapitalized, to be the ratio of total
capital to risk-weighted assets, the ratio
of Tier 1 capital to risk-weighted assets,
and the ratio of Tier 1 capital to total
average assets (the leverage ratio}.1 The
ratio of tangible equity to total assets
has been adopted as the sole relevant
capital measure for defining the
critically undercapitalized category.
The capital thresholds that have been
adopted for each of the five capital
categories are the thresholds that were
originally proposed by the agencies.
Under the final rules, an institution will
be deemed to be:
• W ell-capitalized if the institution
has a total risk-based capital ratio of
10.0 percent or greater, a Tier 1 riskbased capital ratio of 6.0 percent or
greater, and a leverage ratio of 5.0
percent or greater, and the institution is
not subject to an order, written
agreement, capital directive, or prompt
corrective action directive to meet and
maintain a specific capital level for any
capital measure;
• A dequately capitalized if the
institution has a total risk-based capital
ratio of 8.0 percent or greater, a Tier 1
risk-based capital ratio of 4.0 percent or
greater, and a leverage ratio of 4.0
percent or greater (or a leverage ratio of
3.0 percent or greater if the institution is
rated composite 1 in its most recent
report of examination, subject to
appropriate Federal banking agency
guidelines), and the institution does not
meet the definition of a well-capitalized
institution;
• Undercapitalized if the institution
has a total risk-based capital ratio that
is less than 8.0 percent, a Tier 1 riskbased capital ratio that is less than 4.0
percent, or a leverage ratio that is less
than 4.0 percent (or a leverage ratio that
is less than 3.0 percent if the institution
is rated composite 1 in its most recent
1 For savings associations, all references to Tier 1
capital should be read as core capital, as defined in
part 587 of the OTS's regulations, which is the thrift
capital m easure comparable to Tier 1 capital. 12
CFR part 567. In addition, all references to total
average assets should be read as adjusted total
assets, as defined in part 567 of the OTS's
regulations.
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Rules and Regulations 441167
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A separate procedure has been
report of examination, subject to
adopted in the case of proposals by the
appropriate Federal banking agency
appropriate Federal banking agency to
guidelines);
• Significantly undercapitalized if the subject an institution to more stringent
treatment based on supervisory factors
institution h as a total risk-based capital
other than capital. The proposed
ratio that is less than 6,0 percent, a Tier
procedures were modified at the request
1 risk-based capital ratio that is less
of commenters to provide an informal
than 3.0 percent, or a leverage ratio that
hearing whether the treatment is based
is less than 3.0 percent.
on a determination that the institution is
• Critically undercapitalized if the
in unsafe or unsound condition or based
institution has a ratio of tangible equity
on an institution’s failure to correct
to total assets that is equal to or less
deficient ratings received in an
than 2.0 percent.
examination. The final rules also
To the extent possible, the final rules
implement the statutory requirement
define capital terms in the same way as
that officers and directors dismissed as
they are defined under existing capital
a result of an agency order issued under
adequacy standards. The final rules also section 38 be afforded agency review of
generally rely on the most recent
the dismissal, including an opportunity
Consolidated Report of Condition and
for an informal hearing.
Income (Call Report) 2 and examination
The final rules and the public
report for determining the capital
comments are discussed in more detail
category of an institution, and provide
below.
that the appropriate banking agency will
III. Summary of Statutory Framework
provide written notice to an institution
in the event that the agency determines
In the request for comment, the
the capital category of the institution on agencies provided a brief summary of
the basis of other information. The final
the statutory framework established by
rules also establish a procedure for an
section 38. That summary is reprinted
institution to notify the appropriate
here in order to give context to the
agency in the event that a material event agencies’ final rules. The summary is not
occurs that would result in the
intended to be a complete description of
reclassification of the institution to a
the requirements of section 38, and
lower capital category. This procedure
insured institutions and other persons
has been modified in several respects to affected by section 38 should consult the
address concerns raised by commenters. provisions of section 38.
The final rules do not adopt a
Section 38 provides a framework of
requirement that an institution calculate supervisory actions based on the capital
its capital position on a daily basis.
level of an insured depository
The final rules establish a uniform
institution. Section 38 establishes five
schedule for filing and reviewing capital capital categories; well capitalized,
restoration plans. In addition, the rules
adequately capitalized,
adopt several provisions clarifying
undercapitalized, significantly
certain aspects of the capital guarantee
undercapitalized, and critically
required to be m ade as part of an
undercapitalized. The statute deems an
acceptable capital plan by companies
insured depository institution to be:
that control an undercapitalized
“W ell capitalized ” if the institu tio n
institution, including the limit on the
significantly e x ceed s the req u ired minimum
liability of such companies.
level for each re le v an t capital m easure;
"A d eq uately cap italized " if the institution
The agencies have adopted uniform
procedures for the issuance of directives m eets th e req u ired minim um level for eac h
by the appropriate agency under section re le v an t c ap ital m easure;
“U n dercapitalized" ii the institution fails to
38. Under these procedures, an
m eet the req u ired m inim um level for an y
institution will generally be provided
re le v an t c ap ital m easure;
advance notice when the appropriate
"Significantly u nd ercap italized” if the
agency proposes that the institution take institution is significantly b elo w the required
one or more of the actions committed to m inim um level for any re le v an t capital
agency discretion under section 38.
m easure; or,
“Critically un d ercap italized " if the
These procedures provide an
opportunity for the institution to respond institution h a s a ratio of tangible equity to
to the proposed agency action, or, w here total asse ts of 2 percen t o r less, or o th erw ise
fails to m eet the critical c ap ital level
circumstances w arrant immediate
e stab lish e d p ursu an t to section 38 (c)(3)(A).
agency action, an opportunity for
Section 38 requires the Federal
administrative review of the agency’s
banking agencies to specify, by
action.
regulation, the levels at which an
*
Savings associations report their capital levels institution would be within each of
these five categories. The applicability
on Thrift Financial Reports.
44868
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
of supervisory actions provided in
section 38 to an individual institution
depends on the institution’s
classification within one of these five
categories.3
A. Provisions Applicable to A ll
Institutions
Section 38 prohibits an insured
depository institution from declaring
any dividends, making any other capital
distribution, or paying a management
fee to a controlling person if, following
the distribution or payment, the
institution would be within any of the
three undercapitalized categories.4 The
statute provides a limited exception to
this prohibition for stock redemptions
that do not result in any decrease in an
institution’s capital and would improve
the institution’s financial condition,
provided that the redemption has been
approved by the institution’s
appropriate Federal banking agency
after consultation with the FDIC.
B. Provisions Applicable to
U ndercapitalized Institutions
Institutions that are classified as
undercapitalized are subject to
additional mandatory supervisory
actions. These include:
• In c rea se d m onitoring by the app ro p riate
F ederal b anking agency for th e institution
a n d perio dic review of the in stitution 's efforts
to resto re its capital:
• A requ irem ent th at the institution subm it,
generally w ith in 45 d ays, a cap ital resto ratio n
p lan accep tab le to the app ro p riate Federal
b anking agency for the institution and
im plem ent that plan;
• A restriction on grow th of the
in stitu tio n ’s total assets; and
• A lim itation on th e institu tio n’s ability to
m ake any acquisition, open any n ew b ran ch
offices, or engage in an y n ew line of b u siness
w ith ou t the p rio r app ro v al of the app rop riate
F ederal banking agency for the institution or
th e FDIC.
Section 38 also provides that the
appropriate Federal banking agency for
3 A savings association operating in accordance
with a capital plan approved by the OTS before
December 19.1991, is subject to certain exceptions
from provisions of section 36 (12 U.S.C. 1831o(o)(2)).
However, neither section 38 nor this regulation in
any way limits the authority of the OTS under any
other provision of law to take supervisory actions to
address unsafe or unsound practices, deficient
capital levels, violations of law or regulation, unsafe
or unsound conditions or other practices.
4 The OTS intends that the permissibility of
capital distributions will be determined by the
prompt corrective action regulations. A savings
association permitted to make a capital distribution
under the prompt corrective action regulations may
do so if the amount and type of distribution would
be permitted under section 563.134 of the OTS's
regulations. The OTS will review its capital
distributions regulations and consider making
amendments that m ay be necessary based on
section 38 of the FDI Act.
an undercapitalized institution may take
any of a number of discretionary
supervisory actions if the agency
determines that any of these actions is
necessary to resolve the problems of the
institution at the least possible long
term cost to the deposit insurance fund.
These discretionary supervisory actions
include requiring the institution to raise
additional capital, restricting
transactions with affiliates, restricting
interest rates paid by the institution on
deposits, requiring replacement of senior
executive officers and directors,
restricting the activities of the institution
and its affiliates, requiring divestiture of
the institution or the sale of the
institution to a willing purchaser, and
any other supervisory action that the
agency believes would better carry out
the purpose of section 38. Because these
discretionary actions are also applicable
to significantly undercapitalized
institutions (as well as to critically
undercapitalized institutions}, these
actions are described more fully in the
next section.
C. Provisions A pplicable to
Significantly U ndercapitalized
Institutions
Section 38 provides that significantly
undercapitalized institutions are subject
to the four m andatory provisions listed
above that are applicable to
undercapitalized institutions. Section 38
also restricts the ability of a
significantly undercapitalized institution
to pay bonuses or raises to senior
executive officers of the institution. A
significantly undercapitalized institution
may pay bonuses and raises to senior
executive officers of the institution with
the prior written approval of the
appropriate Federal banking agency,
unless the institution has failed to
submit an acceptable capital restoration
plan. For so long as an institution has
failed to submit an acceptable capital
restoration plan, the institution is
prohibited from paying any bonus or
raise to any senior executive officer.
In addition to these mandatory
requirements, section 38 specifies that
the appropriate Federal banking agency
shall impose one or more restrictions on
an institution that is significantly
undercapitalized. These discretionary
actions include:
• Requiring the institution to sell enough
add itio n al cap ital, including voting shares, so
th at the institution w ould be a deq u ately
cap italized a fter the sale;
• Restricting tran sac tio n s b e tw ee n the
institution a n d its affiliates, including
tran sac tio n s w ith its insured depository
institution affiliates;
• R estricting the interest ra te s p a id on
d e p o sits collected by the institution to the
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Rules and Regulations
prevailing ra te s in the region w h ere the
institution is located;
• R estricting the in stitu tio n ’s asset growth
or requiring the institution to reduce its total
assets;
• Requiring the institution or any
subsidiary of the institution to term inate,
reduce or a lte r an y activity th at the agency
determ ines po ses excessive risk to the
institution;
• Requiring the institution to hold a new
election of its b o a rd of directors;
• R equiring the institution to dism iss any
director or senior executive officer w ho h ad
held office a t the institution for m ore than 180
d ay s im m ediately before the institution
b ecam e u n d ercap italized if the agency deem s
such dism issal to be appropriate, a n d to
em ploy n e w officers w ho m ay be subject to
agency approval;
• Prohibiting the institution from accepting
dep osits from co rresp o nd ent depository
institutions;
• Prohibiting any b a n k holding com pany
th a t controls the institution from m aking any
dividend p ay m en t w ithout prior ap pro val of
the Federal R eserve Board;
• Requiring the institution to accept an
offer to be acqu ired by an o th er institution or
com pany, or requiring any com pany that
controls the institution to divest the
institution;
• Requiring the institution to divest or
liquidate any subsidiary th at is in dang er of
becom ing insolvent and p o se s a significant
risk to the institution, or th at is likely to
cau se significant d issipation of the
institution’s a sse ts or earnings;
• Requiring any com pany th at controls the
institution to divest or liquidate any affiliate
of the institution (other th an a n o th er insured
d ep ository institution) if the ap p ro p riate
F ederal b anking agency for the holding
com pany d eterm ines th at th e affiliate is in
d an g er of becom ing insolvent a n d poses a
significant risk to the institution, or is likely
to cause significant dissipatio n of the
in stitu tio n 's asse ts or earnings; and
• Requiring the institution to tak e any
other action th at the agency determ ines
w ould b e tte r carry out the purpo ses of
section 38.
While the statute generally provides
the agency with discretion to determine
whether these actions are appropriate in
connection with a particular institution,
the statute establishes certain
presumptions and requirements with
respect to the agency’s consideration of
these actions. Section 38 requires that
the appropriate agency take at least one
of the above discretionary supervisory
actions in connection with an institution
that is significantly undercapitalized or
critically undercapitalized. The statute
also establishes a presumption that the
agency require each significantly
undercapitalized or critically
undercapitalized institution to (1} be
acquired by another institution or
company or sell sufficient shares to
restore the institution's capital to at
least the minimum acceptable capital
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
level, (2) restrict transactions with
affiliates of the institution, including
transactions with depository institution
affiliates, and (3} restrict the interest
rates the institution pays on deposits.
The agency must impose each of these
three actions unless the agency
determines that the action would not
further the purpose of section 38.
As discussed above, each of the
discretionary actions listed above may
also be taken, by issuance of a prompt
corrective action directive, in
connection with undercapitalized
institutions if a finding is made by the
agency that the action is necessary to
carry out the purposes of section 38. In
addition, these discretionary actions
may be taken in connection with any
undercapitalized institution that fails to
submit or implement in any material
respect a capital restoration plan, as if
the institution were a significantly
undercapitalized institution. As noted
above, the provision restricting the
payment of bonuses and raises to senior
executive officers applies to any
undercapitalized institution that has
failed to submit a capital restoration
plan that is acceptable to the
appropriate agency.
In addition to the discretionary
actions discussed above, section 38 also
provides that, where the appropriate
agency finds it necessary to carry out
the purposes of section 38, the agency
may require, by issuance of a prompt
corrective action directive, a
significantly undercapitalized institution
to comply with one or more of the
restrictions established by the FDIC on
the activities of critically
undercapitalized institutions. The same
actions may be taken in the case of an
undercapitalized institution that has
failed to submit or implement, in any
material respect, an acceptable capital
restoration plan.
D. Provisions Applicable to C ritically
U ndercapitalized Institutions
Section 38 requires that an insured
depository institution that is critically
undercapitalized be placed in
conservatorship (with the concurrence
of the FDIC) or receivership within 90
days, unless the appropriate Federal
banking agency for the institution and
the FDIC concur that other action would
better achieve the purposes of section
38. A determination by the agency to
defer placing a critically
undercapitalized institution in
receivership or conservatorship must be
reviewed every 90 days and must
document the reasons the agency
believes other action would better
achieve the purposes of section 38.
The statute requires that the
institution be placed in receivership if
the institution continues to be critically
undercapitalized on average during the
fourth quarter after the institution
initially became critically
undercapitalized, unless certain specific
statutory requirements are met. To be
eligible for the exception, the institution
must: (1) Have positive net worth, (2) be
in substantial compliance with an
approved capital restoration plan, (3) be
profitable or have an upward trend in
earnings, and (4) have reduced its ratio
of nonperforming loans to total loans. In
addition, the head of the appropriate
Federal banking agency for the
institution and the Chairperson of the
FDIC must both certify that the
institution is viable and not expected to
fail.
Critically undercapitalized institutions
are also prohibited, beginning 60 days
after becoming critically
undercapitalized, from making any
payment of principal or interest on
subordinated debt issued by the
institution without the prior approval of
the FDIC. Section 38 does not prevent
unpaid interest from accruing on
subordinated debt under the terms of
the debt instrument.
Section 38(i) of the FDI Act also
provides that the FDIC, by regulation or
order, must restrict the activities of
critically undercapitalized institutions.
At a minimum, the FDIC must prohibit a
critically undercapitalized institution
from doing any of the following without
the prior written approval of the FDIC;
• E ntering into a n y m aterial tran sac tio n
other th an in the usual course of business.
Such activ ities include a n y investm ent,
expansion, acquisition, sa le of a sse ts or oth er
sim ilar actio n w here the institution w ould
h a v e to noUfy its ap p ro p riate Federal
banking agency;
• E xtending credit for any highly leveraged
tran sac tio n (HLT);
• A m ending the institution's c h arter or
b y law s u n less required to do so in o rd e r to
c arry out a n y o th er requirem ent of any law ,
regulation or order,
• M aking any m aterial change in its
accounting m ethods;
• Engaging in a n y "cov ered tra n sa c tio n s”
w ithin the m eaning of section 23A(b) of the
F ederal R eserve A ct (12 U.S.C. 371c), w hich
concerns affiliate transactions;
• Paying excessive com pensation or
bonuses; an d
• Paying interest on new o r renew ed
liabilities at a ra te w hich w ould in crease the
in stitu tio n 's w eighted av erag e co st of funds
to a level significantly exceeding the
prevailing ra te s in the institu tio n's norm al
m ark e t areas.
Pursuant to section 38(j) of the FDI
Act, none of these restrictions apply (1)
to institutions in conservatorship for
/
Rules and Regulations 44869
which the FDIC or RTC has been
appointed the conservator or (2) to any
bridge bank that is wholly owned by the
FDIC or the RTC. Pursuant to section
38(o)(2) of the FDI Act, none of these
restrictions shall apply, before July 1,
1994, to any insured savings association
if:
(a) The savings association had
submitted a plan meeting the
requirements of section 5(t)(A)(ii) of the
Home Owners' Loan Act (12 U.S.C.
1464(t)(A)(ii));
(b) The Director of OTS had accepted
the plan; and
(c) The savings association remains in
compliance with the plan or is operating
under a written agreement with the
appropriate Federal banking agency.
IV. Discussion of Final Rules and Public
Comments
The agencies received a total of 92
comment letters from interested persons
regarding the proposed rules
implementing section 38. Sixty of the
commenters were from banks, thrifts
and bank and thrift holding companies,
while nineteen were from industry trade
associations and organizations. Eight
were from Federal Reserve Banks. In
addition, there were five from law firms
and other organizations and individuals.
The comments provided a number of
suggestions for clarifying or modifying
the proposed rule. These are discussed
below.
Many of the commenters supported
the underlying purpose of prompt
corrective action. However, several
expressed concern that section 38
unduly restricts regulatory flexibility
and discretion. Several commenters
urged, as a general matter, that the
agencies retain as much flexibility as
possible in implementing the rules
governing prompt corrective action and
in administering the requirements of
section 38. These commenters argued
that capital alone is an inexact measure
of the financial strength of an institution,
and is only one of a number of measures
that must be considered in determining
the financial strength of an insured
institution. Commenters argued that a
narrow focus on capital levels to the
exclusion of other indications of
financial strength could result in
unnecessary and counterproductive
actions being taken against financially
sound institutions. To avoid this result,
many commenters argued that the
agencies should adopt flexible rules that
permit the agencies as much discretion
as possible in determining w hen to take
action under section 38 and what
actions are appropriate.
44870 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
The agencies have attempted to
address this concern to the extent
possible under the statute. Section 38
establishes a framework that is triggered
by the capital levels of insured
institutions, and subjects an insured
institution that has capital below the
regulatory minimum levels to several
m andatory provisions that apply
without any agency action. Section 38
also authorizes the agencies, in their
discretion, to impose a number of
additional requirements and
proscriptions on an institution that is
undercapitalized, significantly
undercapitalized, or critically
undercapitalized. The statute permits
the agencies to tailor these discretionary
supervisory actions to the specific
problems faced by individual
institutions, and the final rules retain
this flexibility.
In addition, commenters generally
were concerned that the agencies
provide adequate procedural protections
to insured institutions and individuals
prior to taking any discretionary actions
under section 38. The agencies have
established procedures in the rule to
give affected institutions and persons
notice of, and a right to participate in
the process for determining,
discretionary actions taken by the
agency under section 38. These
procedures include the general right to
advance notice of any action
contemplated by the agency, and the
right to provide the agency with any
information that an affected institution
or person believes should be considered
by the agency in exercising its discretion
under the statute. These procedures
provide a mechanism for an institution
to identify facts and circumstances that
the agency should consider in
determining appropriate action for that
institution, and are intended to
supplement informal discussions that
ordinarily occur between an institution
that has less than adequate capital and
the institution’s appropriate Federal
banking agency.
A. C apital M easures
For purposes of defining each of the
capital categories (except for the
critically undercapitalized category),
section 38(c) requires the agencies to
prescribe capital standards that include
a leverage limit and a risk-based capital
requirement. The agencies may establish
additional capital measures for these
categories if additional capital measures
would serve the purposes of section 38.
In addition, section 38 permits the
agencies to rescind the leverage limit or
the risk-based capital measure if the
Federal banking agencies concur that
either measure is no longer an
appropriate means for carrying out the
purposes of section 38.
The agencies proposed to adopt the
leverage limit and the total risk-based
capital measure in defining the capital
categories other than the critically
undercapitalized category. In addition,
the agencies proposed to adopt the Tier
1 risk-based capital ratio as a capital
measure in defining these capital
categories.
Most commenters supported or did
not object to the proposal to adopt these
three capital measures. Commenters
expressed a strong preference for using
capital measures and definitions that
are currently in place in order to reduce
the burden and costs associated with
calculating the capital category of an
institution.
Several commenters suggested that
the agencies eliminate one or more of
the proposed capital measures. In
particular, a small number of
commenters argued that the agencies
should not adopt a leverage ratio as a
capital measure. Several other
commenters argued that the agencies
should not establish a separate
threshold for Tier 1 capital to riskweighted assets. A few commenters
argued that the agencies should rely
solely on the ratio of Tier 1 capital to
risk-weighted assets and should
eliminate use of the ratio of total capital
to risk-weighted assets and the leverage
ratio. Finally, one commenter suggested
that the agencies rely only on the
leverage ratio for smaller institutions
that are not internationally active,
dropping the risk-based capital tests for
these institutions.
The agencies have determined to
adopt the three capital measures
originally proposed for defining whether
an institution is well-capitalized,
adequately capitalized,
undercapitalized, or significantly
undercapitalized. Section 38 requires the
agencies to employ a risk-based capital
requirement and the leverage ratio as
capital measures for each capital
category unless the agencies all agree
that these capital measures are no
longer an appropriate means for
carrying out the purposes of section 38,
The agencies continue to believe that
the ratio of total capital to risk-weighted
assets represents an appropriate capital
measure. In addition, the ratio of Tier 1
capital to total assets, which is a
component of the total risk-weighted
capital ratio, represents an important
measure of the highest quality capital
available to the institution to absorb
losses. Both the total risk-weighted
capital ratio and the Tier 1 riskweighted capital ratios are recognized in
/
Rules and Regulations
the Basle Accord and are elements of
the minimum capital adequacy
standards currently employed by the
Federal banking agencies.
The agencies have considered the
suggestion of commenters that the
leverage ratio be eliminated as an
appropriate capital measure. The
agencies do not believe that elimination
of the leverage ratio is appropriate at
this time. One of the rationales for
retaining a leverage ratio after the riskbased capital measure w as introduced
w as that the risk-based capital measure
is focused on credit-related risk, and
does not explicitly factor in other risks,
particularly interest rate risk.
However, the agencies noted in the
request for comment that revisions to
the risk-based capital standards
mandated by FDICIA may warrant
review of the capital measures and
thresholds specified under section 38 at
a later date. Section 305 of FDICIA,
which amends section 18 of the FDI Act,
requires the agencies to revise their riskbased capital standards by no later than
June 1993 to take into account interest
rate risk, concentration of credit risk,
and the risks of nontraditional activities
and multi-family mortgages. The
agencies intend to lower or eliminate the
leverage capital component from the
definitions of “well capitalized,”
“adequately capitalized,” and
“undercapitalized” after the risk-based
capital standards have been revised by
each Federal banking agency to take
into account interest rate risk as
required by section 305 of FDICIA and
after experience has been gained with
such standards. The agencies
acknowledge the requirements of
section 38(c) of the FDI Act and would
comply with those requirements, to the
extent they apply, before taking any
such action.5 Several commenters
supported reconsideration of the need
for the leverage ratio after completion of
the review required by section 305.
B. D efinition o f Capital Terms
The agencies had proposed to adopt
the same definitions of capital terms for
purposes of the prompt corrective action
6 Section 38(c) of the FDI Act requires that the
capital standards prescribed under that section by
each appropriate Federal banking agency shall
include a leverage limit and a risk-based capital
requirement, as well as any other additional
relevant capital m easures needed to carry out the
purpose of section 38 and implemented by
regulation. However, an appropriate Federal
banking agency may, by regulation, rescind any
relevant capital measure required by section 38,
upon determining (with the concurrence of the other
Federal banking agencies) that the measure is no
longer an appropriate m eans for carrying out the
purpose of section 38.
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
provisions of section 38 as are currently
used under the capital adequacy
guidelines or regulations adopted by the
agencies. The commenters strongly
favored this approach because it would
reduce the burden and complexity that
could result from the use of new or
modified capital definitions, and would
minimize the possibility that an
institution may be uncertain regarding
its capital levels for purposes of section
38. Accordingly, the final rules adopt the
definitions of the various capital
elements and terms currently used in the
agencies’ existing capital adequacy
guidelines and regulations.
The agencies requested comment
regarding the appropriate period for
calculation of capital levels. Under
current reporting requirements, as
specified in the instructions to the Call
Report, the level of capital of an
institution is generally calculated as the
ratio of the institution’s quarter-end
capital to the quarterly average of its
total assets (in the case of the leverage
ratio] or its quarter-end risk-weighted
assets (in the case of the risk-based
capital ratios).6 The agencies sought
comment on whether capital
calculations should be based on the
same period calculations for purposes of
section 38. The agencies also requested
comment on the feasibility of requiring
institutions to make a daily calculation
of various capital measures.
Commenters generally supported
applying the same periods for capital
calculations under section 38 as are
currently used under the agencies’
capital adequacy standards. The
commenters also strongly objected to
any requirement that capital
calculations be required on a daily basis
for purposes of implementing section 38.
The commenters argued that daily
calculations would substantially
increase the reporting burden and costs
for many institutions. In addition,
commenters contended that daily
calculations present a distorted picture
of the capital position of an institution
by focusing on individual daily events
(such as a temporary increase in
deposits in connection with a lock-box
operation) and do not take account of
related actions that occur within a
reasonably short period or remedial
actions that are readily available to the
institution (such as a scheduled
withdrawal of deposits from a lock-box
account). The commenters argued that
the calculation periods currently
adopted by the agencies in their capital
* Savings associations report their capital
amounts on their Thrift Financial Reports based on
end of the quarter total assets and total riskweighted assets.
/
Rules and Regulations 44871
institutions were defined as any level
under 6 percent for the total risk-based
capital ratio, under 3 percent for the Tiet
1 risk-based capital ratio, or under 3
percent for the Tier 1 leverage ratio. An
institution would be considered
significantly undercapitalized if it were
below the specified capital level for any
of the three capital measures. Under the
proposed definitions, an institution that
is significantly undercapitalized also
would be deemed to be
C. Specific Capital Levels fo r Five
undercapitalized. Similarly, an
Capital Categories
institution that is critically
The agencies proposed specific capital undercapitalized also would be deemed
levels defining each capital category.
to be significantly undercapitalized and
Under the standards set forth in section
undercapitalized. The overlap between
these categories is contemplated by the
38, an institution is deemed to be
statute and has the effect of applying to
adequately capitalized if it meets the
significantly undercapitalized
required minimum level for each
institutions and to critically
relevant capital measure. Thus, the
undercapitalized institutions any
agencies proposed to set the capital
provisions of section 38 that are
levels for the adequately capitalized
applicable to undercapitalized
category generally at the same levels as
institutions.
the minimum ratios established under
the existing minimum capital adequacy
The agencies proposed establishing
the minimum total risk-based capital
rules and guidelines adopted by the
agencies. These minimums are 8 percent level for the well capitalized category at
10 percent and setting the minimum
for the total risk-based capital ratio, 4
leverage capital level for this category at
percent for the Tier 1 risk-based capital
5 percent. To emphasize the importance
ratio, and 4 percent for the Tier 1
the agencies place on Tier 1 capital, the
leverage ratio (3 percent for composite
agencies proposed that the minimum
1-rated banks and savings associations,
level for the Tier 1 risk-based capital
subject to appropriate Federal banking
agency guidelines). An institution would ratio be set at 6 percent for the well
capitalized category.
have to meet all these minimums in
order to be deemed adequately
Many commenters indicated
capitalized.
agreement with the capital thresholds
The statute provides specific guidance proposed by the agencies. Several
commenters were concerned that the
as to the capital level for defining a
levels be applied equally to institutions
critically undercapitalized institution.
of all sizes. Other commenters argued
Section 38 requires that a critically
that the capital levels set for the wellundercapitalized institution be defined
capitalized category were established at
by reference to the institution's ratio of
too high a level. These commenters
tangible equity to total assets. The
statute requires the agencies to establish noted that the standard for well
capitalized institutions would require an
the threshold ratio for defining a
institution to hold 25 percent more total
critically undercapitalized institution at
risk-based capital, 50 percent more Tier
no lower than 2 percent.
1 capital, and 66 percent more leverage
Taking the capital levels for the
capital than an adequately capitalized
adequately capitalized and critically
institution.
undercapitalized categories as
Commenters stated that they were
benchmarks, the agencies proposed that
particularly concerned about the wellthe capital levels for the
undercapitalized category be defined as capitalized levels because several of the
newly proposed rules required by
any level under 8 percent for the total
risk-based capital ratio, under 4 percent FDICIA impose new constraints on
for the Tier 1 risk-based capital ratio, or institutions that are not within the wellcapitalized category. Commenters
under 4 percent for the Tier 1 leverage
believe that these provisions will have
ratio (under 3 percent for composite 1the practical effect of establishing the
rated banks and savings associations,
well-capitalized category as the
subject to appropriate Federal banking
agency guidelines). An institution would minimum acceptable capital category for
most institutions. Several commenters
be* considered undercapitalized if it
argued that high capital thresholds for
were below the specified capital level
the well-capitalized category would
for any of the three capital measures.
have significant implications in the near
Further, the capital levels for
term for the availability of credit in the
significantly undercapitalized
a d e q u a c y s t a n d a r d s p r o v id e a m o re
accurate and reliable estimation of the
capital levels of institutions.
Based on these comments, the final
rules use the same calculation periods
for purposes of section 38 as are
currently employed under the agencies’
capita! adequacy standards. The
agencies have determined not to require
the daily calculation of capital for
purposes of section 38 at this time.
44872
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
United States, as depository institutions
attempt to meet the higher capital levels
of the well-capitalized category through
slower asset growth or shrinkage of
assets. These commenters also argued
that establishing high capital thresholds
for this category would significantly
impair the ability of domestic depository
institutions to compete against foreign
institutions that are not subject to this
capital-based regulatory and
supervisory framework. In order to
address these potential effects, these
commenters argued that the capital
thresholds should be lowered, or
phased-in over a period of time.
On the other hand, a few commenters
argued that the capital levels proposed
by the agencies were too low. In
particular, these commenters contended
that a higher threshold for the definition
of the critically undercapitalized
category w as necessary in order to
minimize potential losses to the federal
deposit insurance funds. One
commenter argued that, at the
thresholds in the proposal, the number
of institutions that would qualify for the
well-capitalized category w as too high
and included a large number of
institutions that had received
unsatisfactory examination ratings.
These commenters argued that higher
thresholds for each of the capital
categories would permit the agencies to
initiate supervisory actions under
section 38 against a greater number of
institutions, thereby permitting action
while an institution is still sufficiently
healthy to reverse its deterioration.
After considering the comments, the
agencies have determined at this time to
adopt the capital thresholds as
proposed. In the agencies’ view the
proposed thresholds strike a reasonable
balance between the statutory
requirements on the one hand, and the
need to promote safe and sound banking
conditions in a manner that gives due
consideration to the international
capital standards to which the United
States and the other G-10 countries
have agreed on the other hand. The
agencies believe that such consideration
is appropriate in view of the competitive
pressures faced by U.S. banks operating
in international markets with foreign
banks adhering to these standards. In
this regard, as with the capital adequacy
standards currently adopted by the
agencies, the thresholds adopted in the
final rules under section 38 will apply to
each insured depository institution,
regardless of the size of the institution.
Comparable thresholds are applied to
insured branches of foreign banks.
In establishing these thresholds, the
agencies recognize that capital ratios
/
Rules and Regulations
inadequate or minimally adequate.
alone are not fully indicative of the
Accordingly, the agencies have adopted
capital strength of an institution. The
the definition of the well-capitalized
agencies are aware, for example, that
category as proposed, and have retained
some poorly-rated depository
the provision disqualifying from the
institutions have capital ratios above
well-capitalized category any institution
the specified minimums for the wellthat is subject to an agency order or
capitalized and adequately capitalized
directive to meet and maintain a specific
categories. One reason that some
capital category. The agencies have
poorly-rated institutions qualify as well
modified the language of this section to
capitalized for prompt corrective action
clarify that the provision applies only to
purposes is that capital is a lagging
written agreements, orders, capital
indicator of problems of insured
directives, and prompt corrective action
depository institutions. In part for this
directives that are issued under certain
reason, examiners traditionally have
provisions of the FDI Act, the
reached judgments on an institution's
International Lending Supervision Act,
capital needs by also taking into
the Home O w ners’ Loan Act, or
account a range of factors such as
interest rate risk and concentration risk. regulations implementing these laws.
As noted above, the agencies have
D. C ritically U ndercapitalized
under way initiatives m andated by
Institutions
FDICIA to review their risk-based
The statute requires that the critically
capital standards to ensure that they
take adequate account of such risks, and undercapitalized category be based on
the ratio of tangible equity to total
also have been engaged in a project
assets of the institution. Section 38
under the Federal Financial Institutions
requires that the minimum ratio for this
Examination Council (FFIEC) to refine
category be established at a level of
and improve procedures for assessing
tangible equity that is no less than 2
the reserving policies and practices of
percent of the institution's total assets,
individual institutions. After those
and that is no higher than the ratio equal
projects have been completed and
to 65 percent of the required minimum
improvements implemented and
level of capital under the leverage lim it
assessed, the agencies intend to revisit
The agencies may, by regulation, specify
the question of how the specifications
additional capital measures (such as a
for the well-capitalized category may
risk-based capital ratio) in defining the
need to be modified or adjusted.
critically undercapitalized category. Any
Several commenters argued that an
such measures may not, without the
institution that nominally has capital
above the threshold for well-capitalized concurrence of the FDIC, be set at a
institutions should not be excluded from level lower than the level specified by
the FDIC for insured state-chartered
that category because the institution is
banks that are not members of the
subject to an agency order or directive
Federal Reserve System.
to raise additional capital. These
The agencies proposed to define the
commenters argued that use of capital
level for the critically undercapitalized
directives or agency orders to raise
additional capital as a means of defining category as a ratio of tangible equity to
total assets of 2 percent or less. The
the well-capitalized category is not
agencies did not propose to establish
contemplated by section 38, and is not
any additional capital measures for the
consistent with the statute’s instruction
critically undercapitalized category. The
that capital categories be defined by
commenters that addressed these
reference to the actual capital level of
matters favored the capital level
an institution.
proposed by the agencies for this capital
To qualify as a well-capitalized
category and generally agreed that no
institution under section 38, the capital
levels of an institution must significantly additional capital measure w as
necessary to define this category.
exceed the required minimum level for
Accordingly, the final rules adopt the
each relevant capital category. The
original proposal to define an institution
agencies believe that an institution that
is subject to an agency order or directive as critically undercapitalized if the
institution has a ratio of tangible equity
to raise capital or to maintain capital at
to total assets of 2.0 percent or less.
a higher capital level does not meet the
Section 38 provides that the critically
statutory definition of a well-capitalized
undercapitalized category must be
institution. Instead, institutions that
defined by reference to the ratio of
have been ordered to raise capital or
tangible equity to total assets of an
maintain a higher level of capital are
subject to an agency determination that, institution. However, section 38 does not
define the term “tangible equity.”
given the particular circumstances and
financial condition of the institution, the Moreover, the term is not currently
defined by the Federal banking agencies
capital level of the institution is
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
in connection with their capital
adequacy standards or by the
accounting profession. To implement
this provision, the agencies had
proposed to define the ratio of tangible
equity to total assets in the same
manner as the leverage ratio currently
established by the agencies by
regulation or guideline, which is the
ratio of Tier 1 capital to total average
assets.
A significant number of commenters
argued that the agencies should modify
the proposed definition of tangible
equity to permit the inclusion of all
forms of equity capital, in particular
cumulative perpetual preferred stock.
These commenters noted that the OCC
recognizes the level of cumulative
perpetual preferred stock in determining
whether a national bank is insolvent for
purposes of the National Bank Act.
In adopting the final rules, the
agencies have determined to define
tangible equity to include the core
capital elements recognized in the
calculation of Tier 1 capital. In addition,
the final rule includes cumulative
perpetual preferred stock issued by the
institution and related surplus. The
agencies recognize that cumulative
perpetual preferred stock provides a
cushion against losses suffered by the
institution and provides protection to
the deposit insurance funds. The
agencies have determined not to include
other instruments, however. The
agencies are concerned that the
inclusion of other types of instruments,
in particular instruments that are
hybrids of equity and debt, will distort
the capital raising efforts of depository
institutions and result in the
development and issuance of
instruments that, while providing some
protection against loss, place a
significant burden on the earnings of the
institution over the life of the instrument
and on the ability of the institution to
raise additional capital.
Several commenters also argued that
the agencies should not require the
deduction of all intangible assets in
determining whether an institution is
critically undercapitalized. These
commenters argued that many assets
that are considered intangible in fact
have significant value and serve as a
ready and marketable source of liquidity
to troubled institutions.
In determining whether equity is
‘‘tangible" for purposes of the final rule
under section 38, the agencies have
determined to require the deduction of
all intangible assets with one
exception.7 The agencies have sought
1 For savings associations, pursuant to section 5(t)
of the Home Owners' Loan Act (12 U.S.C. 1464(t)).
public comment on a proposal to amend
their capital adequacy standards
regarding inclusion of certain purchased
mortgage servicing rights in the
calculation of Tier 1 capital. This
proposal is in response to section 475 of
FDICIA, which requires the Federal
banking agencies to determine whether
a portion of certain purchased mortgage
servicing rights should be included in
the definition of “tangible capital.”
To comply with this statutory
provision, the agencies must determine
whether certain purchased mortgage
servicing rights have sufficient value to
w arrant a determination that these
assets should not be treated as
intangible assets for purposes of the
calculation of tangible capital. The
agencies believe that, to the extent that
purchased mortgage servicing rights are
determined under this statutory
provision to be properly included in
“tangible capital,” these assets should
be given identical treatment in the
calculation of tangible equity under
section 38.®
/
Rules and Regulations 44873
the institution discretion to take a
number of supervisory actions to
address the problems of the institution.
The final rules include provisions for
an institution and its appropriate
Federal banking agency to determine the
capital category of the institution, and,
thereby to determine when the
provisions of section 38 are applicable.
Commenters supported the agencies’
proposal to base capital calculatio«s
principally on the Call Report filed by
each institution and on an institution’s
examination.
Accordingly, the final rules retain
provisions that deem an institution to be
aware of its capital category as of the
date that the Call Report is required to
be filed. Similarly, the institution is
deemed to be notified of its capital
category as of the date that the
examination report is provided to the
institution.
The final rules also retain the
provision permitting the agencies to
determine the capital category of an
institution based on other information
E.N otice o f Capital C a te g o r y
available to the agency, including
information obtained in the applications
Under section 38, an institution
process, through other reports filed by
becomes subject to certain mandatory
the institution under the banking laws or
provisions on the basis of the capital
the securities laws, or in public
category of the institution. These
announcements by the institution. The
mandatory provisions apply
final rules provide that, in the event that
immediately without agency action. As
the agency determines the capital
noted above, an undercapitalized
category of the institution on the basis
institution is immediately subject to a
of other information, the agency must
restriction on the payment of dividends
notify the institution in writing of its
and management fees, a limitation on
asset growth and expansion, and an
determination.
obligation to file an acceptable capital
The agencies also requested comment
restoration plan. In addition to these
on whether to require capital
requirements, an institution that is
calculations to be made daily or
significantly undercapitalized or
monthly for purposes of applying the
critically undercapitalized is subject to a provisions of section 38. A significant
limitation on the payment of bonuses or
number of commenters opposed any
raises to senior executive officers. A
requirement that institutions make daily
number of other mandatory restrictions
calculations of capital. A number of
are imposed on critically
commenters also argued that daily
undercapitalized institutions. Moreover, calculations of capital would present a
once an institution is deemed to be
distorted view of the capital position of
undercapitalized, significantly
an institution because daily calculations
undercapitalized or critically
emphasize the timing of events and do
undercapitalized, section 38 grants the
not permit consideration of offsetting
appropriate Federal banking agency for
events that are reasonably expected to
occur at a later date. These commenters
enacted as part of the Financial Institutions Reform.
also argued that requiring institutions to
Recovery and Enforcement Act of 1989, certain
calculate capital levels on a daily basis
qualifying supervisory goodwill will also be
would
be impractical, particularly for
included in "tangible equity.’’
institutions with extensive branch
®Several commenters argued that the definition
of tangible equity should include investments in
networks or with foreign offices, and
certain types of subsidiaries, which savings
would impose significant added costs
associations are required to deduct for purposes of
and burdens on insured institutions. As
their general capital calculations. The OTS has
explained above, the agencies have not
determined that investments in these subsidiaries
will be included in the definition of tangible equity
adopted provisions requiring institutions
only to the extent permitted in the definition of Tier
to make daily calculations or file daily
1 capital under the Home Ow ners’ Loan Act's
reports of capital levels for purposes of
transitional rule, which expires July 1,1994.12
section 38.
U.S.C. 1404(t)(5)(D).
44874
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
Several commenters argued that
similar burden would result from the
agencies’ proposal to establish a
procedure that requires an institution to
notify the appropriate agency within 5
days of any change in the institution’s
capital position that would cause the
institution to be within a different
capital category. The agencies had
proposed this notification procedure as
a means of supplementing the use of
Call Reports and periodic examinations
for determining the capital category of
insured institutions.
The agencies have made several
revisions to the proposed notification
procedures to address commenters’
concerns. The final rules have been
modified to require an institution to
notify the appropriate agency only of
material events that affect the capital
position of the institution. The notice
period has also been extended to 15
days from the 5 days originally
proposed. The determination of whether
the capital category of the institution
has changed may be made by reference
to the most recent Call Report or
examination rep o rt
The rule retains the original proposal
that the capital category of the
institution will not change until the
appropriate agency has reviewed the
data provided by the institution along
with any explanation offered by the
institution. Following review of this
information, the agency will determine
whether an adjustment to the capital
category of the institution is appropriate.
Finally, in response to several
comments, the rule has been modified to
eliminate the requirement that the
institution notify the agency of events
that improve the capital level of the
institution. Because an institution’s
capital category is based on the
information filed in the most recent Call
Report or report of examination,
however, an institution that has
improved its capital position prior to the
time that a new Call Report has been
filed or examination report completed
would continue to be considered within
the capital category reflected in the
most recent Call Report Or examination
report unless the institution voluntarily
sought a determination by the agency
that the institution is in a different
capital category.
The agencies believe that the revised
notification procedures address the
concerns raised by these commenters
while at the same time still providing
adequate notice to the appropriate
Federal banking agency when an
institution's capital category has
changed betw een filing of Call Reports
or examinations. The agencies believe
that failure to recognize material events
/
Rules and Regulations
undercapitalized, or critically
undercapitalized. The statute also
provides the agencies with discretion to
impose a number of supervisory
requirements or restrictions on an
insured institution that is
F. Procedures Governing A gency A ction
undercapitalized, significantly
1. In General
undercapitalized or critically
undercapitalized,
as well as on any
The final rules establish procedures
company that controls such an
governing four types of agency action
institution. These discretionary
that may be taken under section 38.® In
supervisory actions are described
three cases, the final rules generally
above. The system enacted in section 38
require the appropriate agency to
is based on Congress’s belief that
provide notice to an insured institution
prompt action must be taken to resolve
or company of proposed agency action
and an opportunity for the institution or problems at insured depository
institutions at an early enough stage to
company to submit to the agency
minimize costs to the federal deposit
information that is relevant to the
insurance funds, and ultimately the
agency’s decision before the agency
takes final action. In particular, the final taxpayer.
TTie agencies do not believe that the
rules establish these procedures for: (1)
purpose and mandate of section 38 are
Issuing a directive under section 38 that
compromised by, as a general matter,
imposes requirements or restrictions
providing institutions notice of proposed
committed to agency discretion on an
agency action under section 38 and an
undercapitalized institution or a
opportunity to submit relevant
company that controls an
information to the agency for its
undercapitalized institution; (2)
determining that an institution should be consideration. Under the final rules, the
appropriate agency will provide written
subject to more stringent treatment
notice to an institution or company prior
because the institution is in unsafe or
to issuing a directive as a general
unsound condition; and (3) determining
that an institution should be subject to
matter. The notice must describe the
action contemplated by the agency. The
more stringent treatment because the
institution or company is then provided
agency deems the institution to be
engaged in an unsafe or unsound
at least 14 calendar days to submit
practice based on the institution's
written arguments and evidence in
failure to correct certain deficient
response to the proposed agency action.
ratings received in an examination. The
Failure to file a timely response
final rules also establish a special
constitutes consent to the issuance of
procedure, as required by section 38,
the directive and a waiver of the
permitting senior executive officers and
opportunity to appeal. The agency will
directors who have been dismissed from consider the submission in determining
an institution as a result of an agency
whether to issue the directive.
directive an opportunity to petition for
The agencies reserve the right to issue
reinstatement.
directives that are effective immediately
In establishing these procedures, the
when the circumstances of a particular
agencies have attempted to comply with case indicate that immediate action is
the statutory m andate that the agencies
necessary to serve the purpose of
take prompt action to resolve the
prompt corrective action. In these cases,
problems of troubled institutions while
the final rules provide the institution an
also providing affected institutions,
opportunity to seek modification or
companies, and persons the opportunity rescission of the directive on an
to be heard at a meaningful time and in
expedited basis. An institution or
a meaningful manner.
company that appeals an immediately
effective directive is required to file a
2. Procedures for Issuing Prompt
written appeal within 14 days of
Corrective Action Directives
receiving the notice, and the agency
Section 38 imposes certain mandatory
must consider the appeal within 60 days
restrictions on institutions that are
of receiving it.
undercapitalized, significantly
The agencies believe that these
procedures afford an adequate and fair
9 The agencies will not be required to grant
opportunity for affected persons to
administrative review if an institution, company, or
present the agency with argument and
person consents to the action to be taken by the
information relevant to the agency's
agency either as initially proposed by the agencies
or as modified by mutual agreement. Actions taken
action. The procedures adhere to the
with such consent have the same legal affect and
m andate of section 38 that the agencies
are enforceable to the same extent and by the same
take prompt corrective action to resolve
m eans as actions taken upon exhaustion of these
procedures.
the problems of insured depository
that occur during this period could result
in delay in application of the
supervisory requirements of section 38,
including the m andatory provisions of
the statute.
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
institutions at the least possible long
term loss to the deposit insurance fund
while providing institutions with an
opportunity for agency review.
Commenters raised various objections
to the procedures proposed by the
agencies for issuing .directives under
section 38. Some commenters stated that
an oral hearing is required by principles
of due process and fundamental fairness
before an agency can issue a prompt
corrective action directive. Certain other
commenters expressed concern about
the agencies’ proposal to allow issuance
of a directive without prior notice to the
institution in limited cases; other
commenters recommended that such an
immediately effective directive be
issued only after a determination by the
agency head that exigent circumstances
require immediate action.
The final rules do not adopt'the
suggestion of several commenters that
the agencies provide for an oral hearing
in connection with the issuance of a
prompt corrective action directive. The
agencies believe that the procedures for
prior notice and an opportunity for
submission of written argument and
information are sufficient in light of the
purpose and m andate of section 38. As
explained above, the language and
legislative history of section 38 indicate
that Congress intended agency action
under section 38 to be taken as promptly
as possible. 12 U.S.C. 1831o(a)(2); see
also S. Rep. No. 102-167,102d Cong., 1st
Sess. (1991) (‘T h e prompt corrective
action system will require regulators to
act at the first sign of trouble.”).
In addition, Congress clearly
indicated those occasions when it
believed that an oral hearing is
appropriate in connection with actions
taken under section 38. Congress gave
no indication in either the statutory
language or legislative history that it
intended to require an oral hearing in
connection with supervisory actions
committed to agency discretion under
section 38.
Finally, the agencies believe that the
provision for written submissions prior
to issuance of a directive affords
adversely affected parties an
opportunity to be heard "at a meaningful
time and in a meaningful manner.”
M athew s v. Eldridge, 424 U.S. 319, 333
(1976); see FDIC v. M allen, 486 U.S. 230
(1988) (upholding post-deprivation
hearing in case of suspension or removal
of a bank officer charged with a felony);
Federal D eposit Ins. Corp. v. Bank o f
Coushatta, 930 F.2d 1122 (5th Cir. 1991),
c e rt denied. 112 S. Ct. 170 (1992)
(affirming hearing procedures for FDIC
capital directive).
In special cases where immediate
action is necessary and prior notice has
/
Rules and Regulations 44875
The p r o p o s e d r e g u l a t i o n also
incorporated the statutory burden of
proof imposed upon an officer or
director seeking reinstatement. When
the dismissal order is based upon an
institution’s capital category or its
failure to submit or implement a capital
restoration plan, the petitioner must
prove that his or her continued
employment would materially
strengthen the institution's ability to
become adequately capitalized. When
the dismissal order is based upon a
reclassification of an institution on
grounds of unsafe or unsound condition
or practice, the petitioner must prove
that his or her continued employment
would materially strengthen the
institution’s ability to correct the
condition or practice. The agencies
proposed to restrict the ability of an
3. Dismissal of Directors or Senior
officer or director seeking reinstatement
Executive Officers
to challenge the capital category to
Section 38 provides that a director or
which the institution has been assigned.
senior executive officer who is
Commenters generally recognized that
dismissed by an institution in
most of the procedures for review of a
compliance with an agency directive
dismissal are set out in the statute and
may obtain review of the dismissal by
that the agency proposal adopted these
filing, within ten days, a petition for
statutory standards. Several
reinstatement with the agency that
commenters urged the agencies to
ordered the dismissal. The statute also
amend the proposal to allow dismissed
provides that the petitioner shall have
officers and directors to present, as a
the opportunity to submit written
matter of right, oral testimony or
materials in support of the petition and
witnesses at the agency hearing. The
to appear at a hearing before member(s) proposal permitted the presentation of
or designated employee(s) of the agency.
oral testimony or witnesses only with
Under the statute, the hearing shall
the permission of the presiding officer.
occur within 30 days of the filing of the
The commenters argued that the
petition unless the petitioner requests a
petitioner must meet a heavy burden of
later date. Under the final rules, within
proof in order to be reinstated, and
20 days of the closing of the hearing
should be permitted to meet that burden
record, the presiding officer must make
through the presentation of oral
a recommendation to the agency
testimony.
regarding the petition for reinstatement,
The agencies have decided to retain
and the agency shall issue a decision
the provision providing that petitioners
within 60 days of the date of the closing
may present oral testimony and
of the hearing record.
The statute envisions a post-dismissal witnesses with the permission of the
presiding officer without providing an
hearing procedure, as it refers to the
absolute right to presentation of oral
appeal as a “petition for reinstatement”
and sets a short time for agency decision testimony. Under the proposed
procedures, petitioners have the right to
following the hearing. Accordingly, the
submit affidavits or other written
proposed regulation required that an
statements from any person in making
institution ordered to dismiss a senior
their case. In addition, petitioners may
executive officer or director take that
request permission of the presiding
action immediately upon receiving a
officer to present oral testimony or
final directive requiring that action.
witnesses. Any decision by a presiding
The agencies also proposed that any
officer not to permit oral testimony is
officer or director who is dismissed in
subject to review when the agency
compliance with an agency directive
determines the action that is appropriate
under section 38 be provided an
on the basis of the record compiled at
opportunity to petition the agency for
the hearing.
reinstatement within the statutorily
Commenters also expressed concern
prescribed period, and be afforded an
that neither the statute nor the proposed
opportunity for an informal agency
hearing. The petitioner w as provided the rule requires an agency to identify any
connection between the conduct of the
right to appear at the hearing, with
counsel, and to submit written materials officer or director and the financial
deficiencies experienced by the insured
and present oral argument.
not been given, the institution is given
prompt post-directive administrative
review. The courts have found similar
post-deprivation procedures to be
adequate when necessary to protect the
public interest. See M allen, 486 U.S. at
243; Soranno’s Casco, Inc. v. Morgan,
874 F.2d 1310,1317-18 (9th Cir. 1989)
(power to suspend permit immediately is
necessitated by state’s interest in
enforcing pollution control laws).
Several commenters argued that the
14-day deadline for submission of a
response to a proposed directive was
too short, favoring deadlines from 30 to
90 days. The final rule provides at least
14 days for submission of a response,
but permits the agency to extend that
period in individual cases as
appropriate.
44076
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
institution before dismissing or
upholding the dismissal of the officer or
director. Commenters urged that the ~
agencies consider whether the conduct
of an officer or director contributed to
the troubled condition of the institution
in deciding whether to dismiss the
officer or director and in considering a
petition for reinstatement.
The agencies note that the burden of
proof necessary for reinstatement is
established by statute for all petitions
for reinstatement. The agencies do not
have discretion to establish an
alternative burden of proof for cases in
which an officer or director believes that
he or she has not contributed to the
financial w eakness of the institution.
However, the agencies note that the
statute does not limit the types of
arguments or evidence that may be
presented by a petitioner in meeting the
statutory burden of proof. In this regard,
the agencies believe that evidence
concerning the past performance of the
director or officer at the institution may
be relevant to determining whether a
director or officer would materially
strengthen an institution's ability to
address its problems. Accordingly, the
final rules adopt the procedures for
review of petitions for reinstatement as
proposed by the agencies.
Finally, one commenter argued that a
dismissed officer or director should be
allowed to challenge the bank's capital
category, since the bank’s capital
category is the basis for the dismissal.
The agencies have decided not to adopt
. this restriction in the final rule.
4. More Stringent Treatment Based on
Non-Capital Supervisory Criteria
In establishing a system of prompt
corrective action based primarily on the
capital level of each institution.
Congress recognized that factors other
than capital should in certain
circumstances be used to assess the
financial condition of an institution. In
providing for more stringent treatment
based on non-capital indications of
financial condition, Congress appears to
have had the same concern that
underlies prompt corrective action
generally: preventing loss to the deposit
insurance funds. See S. Rep No. 102-167.
32-38 (giving regulators “flexibility to
discipline institutions based on criteria
other than capital * * * will help reduce
deposit insurance losses * * *."). If
actions taken based on criteria other
than capital are to be effective, they
must be taken promptly.
Section 38 provides that the
appropriate Federal banking agency
may, under certain circumstances,
reclassify a well capitalized insured
depository institution as adequately
capitalized. Section 38 also permits the
appropriate agency to require an
adequately capitalized or
undercapitalized institution to comply
with the supervisory provisions as if the
institution were in the next lower
category (but not treat a significantly
undercapitalized institution as critically
undercapitalized) based on supervisory
information other than the capital levels
of the institution. (While the agencies
recognize that these provisions are not
strictly a reclassification of the
institution in all cases, reclassification
to the adequately capitalized category
and treatment of an institution as if it
were in the next lower capital category
are referred to collectively in this
document and in the final rules as a
“reclassification.")
The statute provides that an
institution may be reclassified if the
appropriate Federal banking agency
determines (after notice and opportunity
for hearing) that [the institution] is in an
unsafe or unsound condition or,
pursuant to section 8(b) (8), deems the
institution to be engaging in an unsafe or
unsound practice. 12 U.S.C. 1831o(g).
Section 8(b)(8) of the FDI Act was
amended by FDICIA to provide that an
institution may be deemed to be
engaged in an unsafe or unsound
practice if (1) the institution has
received a less-than-satisfactory rating
in its most recent examination report for
assets, m anagem ent earnings or
liquidity 10, and (2) the institution has
not corrected the deficiency. 12 U.S.C.
1818(b)(8).
Relying on the statutory language, the
proposed rule provided different
procedures for review of
reclassifications based on unsafe or
unsound condition and those based on
unsafe or unsound practice. In the case
of unsafe or unsound condition, the
proposed regulation provided for notice
to the institution and an opportunity for
an informal hearing prior to the
reclassification; in the case of unsafe or
unsound practice, the proposed
regulation provided for notice to the
institution, a 14-day period in which the
institution could make a written
submission objecting to the
reclassification, and agency review of
that submission prior to any
reclassification.
Several commenters argued that the
agencies should provide a formal
administrative hearing in connection
with reclassifications that are based on
a finding that the institution is in unsafe
or unsound condition. Commenters
10 For savings associations, the equivalent
categories are the m anagem ent assets, risk, and
operations components of the MACRO rating.
/
Rules and Regulations
argued that the provision in section 38
requiring that this type of
reclassification occur only "after notice
and opportunity for hearing” indicates a
Congressional intent that a full
administrative hearing be given in these
cases. Commenters also contended that
principles of fundamental fairness
require a full hearing in these cases.
The agencies do not believe that the
statute or the principles of fairness
require that a formal administrative
hearing be afforded in the case of
reclassifications based on a finding of
unsafe and unsound condition. The
courts have determined that the
statutory language—“after notice and
opportunity for hearing”—does not
require a formal hearing. See, e.g..
U nited States v. Florida East Coast Ry.,
410 U.S. 224, 240 (1973) (use of the word
“hearing” in statute “does not
necessarily embrace either the right to
present evidence orally and to crossexamine opposing witnesses, or the right
to present oral argument to the agency's
decisionmaker”). Where, as here, the
statute does not contain the phrase
“hearing on the record” and the
legislative history does not indicate a
Congressional intent to provide for a
formal hearing, the agency may meet the
statutory requirements by providing an
informal hearing. See, e.g., Independent
U.S. Tanker O wner Comm. v. Lewis. 890
F.2d 908, 922 n.63 (D.C. Cir. 1982).
The final rules adopt the agencies
proposal to provide institutions with an
opportunity for an informal hearing in
connection with a reclassification based
on the institution’s condition. Under the
procedures adopted by the agencies, an
institution will be provided prior written
notice of any intention by the agencies
to reclassify the institution, along with
an explanation of the reasons for the
proposed reclassification. The
institution is provided an opportunity to
present written testimony and argument
end an opportunity for an informal
hearing prior to the reclassification. The
informal hearing is available as a matter
of right. At the informal hearing, the
institution may present written and oral
argument, written evidence and
testimony, and, where appropriate, oral
testimony.
The agencies believe that these
procedures, which include an
opportunity for an informal hearing,
provide institutions with an adequate
opportunity to be heard prior to agency
action. These procedures also ensure
that agency action in connection with an
institution whose nominal capital levels
do not provide an accurate indication of
the condition of the institution, will be
prompt, as mandated by section 38.
Federal Register / Vol. 57, No. 189 / Tuesday. September 29, 1992
Several commenters objected to the
agency proposal to establish a different
procedure—without an opportunity for a
hearing—for the reclassification of an
institution that has received an
unsatisfactory examination rating and
failed to correct the deficiency. These
commenters favored providing at least
an informal hearing in the case of both
types of reclassification. Commenters
argued that the consequences of
reclassification were identical, whether
based on an examination rating or on a
finding that the institution is in unsafe or
unsound condition, and, therefore, a
hearing should be provided in both
cases.
Commenters also argued that the
apparent difference in the wording of
the statute in authorizing the two
methods for reclassification of insured
institutions did not indicate a
Congressional intent to deprive
institutions of a hearing in connection
with a reclassification based on an
examination rating. Rather, commenters
argued that insured institutions should
be afforded an opportunity for a hearing
prior to reclassification based on an
unsatisfactory examination rating
because examinations are inherently
subjective and the consequences to the
institution of reclassification,
particularly for an institution that is
nominally adequately capitalized, could
be significant Accordingly, commenters
contended that principles of
fundamental fairness required that an
opportunity for a hearing be provided
prior to a reclassification based on an
examination rating.
Following consideration of the
comments, the agencies have modified
the final rules to provide an opportunity
for an informal hearing in the case of
both types of reclassifications. The
agencies believe that providing an
opportunity for an informal hearing prior
to reclassification based on an
unsatisfactory examination rating will
provide the institution with an adequate
and meaningful opportunity to provide
the agency with information and
argument relevant to the agency's
decision without substantially delaying
the ability of the agencies to take
prompt action as required by section 38.
The agencies do not believe that a
formal hearing is required in connection
with reclassifications based on an
unsatisfactory examination rating. The
statute does not require a formal hearing
on the record in the case of these types
of reclassifications. Instead, the statute
grants the agencies significant discretion
in reclassifying an institution that has
received an unsatisfactory examination
rating and failed to correct the
deficiency.
In addition, the agencies believe that
the availability of an informal hearing
meets any requirement of fundamental
fairness or due process when viewed in
co ntext The examination rating that
serves as the trigger for a
reclassification is the result of a process
that involves substantial participation
by the affected institution. This
participation includes an opportunity to
provide all relevant information to the
examiner, and to meet with the
examiner with regard to issues that
arise during the examination. Moreover,
following the examination, each of the
agencies provides an informal appeals
process whereby an institution can seek
review of an examiner's decision at a
higher level of the agency. Thus, an
institution that has been reclassified
based on its examination ratings will
have already been afforded substantial
opportunity to present evidence and
argument prior to any reclassification
procedure.
The agencies also note that
reclassification of an institution based
on an examination rating is not an
automatic result of receiving an
unsatisfactory rating. Instead, each
agency retains discretion to initiate the
procedures for reclassification and will
do so based on the facts of each case.
Finally, no restrictions or
requirements become effective
automatically as a result of
reclassification. As commenters noted,
section 38 does not make institutions
that have been reclassified immediately
subject to the m andatory provisions of
section 38. Instead, section 38 authorizes
the appropriate agency, in its discretion,
to impose requirements or proscriptions
contained in section 38.
Several commenters expressed
concern that any use of the
reclassification procedures would result
in public disclosure of an institution's
examination rating. Consequently, these
commenters contended that the agencies
should never reclassify an institution on
the basis o f ratings received in an
examination report. Several other
commenters argued that examination
ratings are subjective in nature and
should not serve as the basis of
reclassification of an institution under
section 38.
Tire agencies expect to use the
reclassification provisions of section 38
when appropriate. The agencies believe
that steps can be taken to prevent public
disclosure of examination ratings, and
that use of the reclassification
provisions of section 38 is important to
ensuring prompt corrective action. The
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Rules and Regulations 44877
agencies also believe that examination
ratings a r e a proper basis fo.
reclassification under section 38. As
noted above, depository institutions
participate in the examination process
and are afforded an informal appeal of
an examiner’s judgment Furthermore,
reclassification based on a less-thansatisfactory rating is not automatic, and
is left to the agency's discretion, with
corresponding procedural protections.
A small number of commenters
favored other changes to the
reclassification procedures. In
particular, one commenter urged that the
period for filing a response to a
proposed reclassification be lengthened
from 14-days to 45 or 60 days. In light of
the agencies’ decision to provide an
opportunity for an informal hearing in
connection with reclassifications based
on an examination rating, the agencies
have determined not to lengthen the
time within which an institution may
provide its initial written response to a
proposed reclassification.
Another commenter suggested
delaying the effective date of any
reclassification to allow the institution
to adjust to new restrictions on its
activities. The agencies believe th a t
because reclassification does not result
in the automatic application of any
mandatory provision under section 38, it
is not necessary to delay the effective
date of any reclassification.
Finally, one commenter requested that
the agencies provide by regulation that
the presiding officer at a hearing not be
an individual that has served as an
examiner of the institution. The agencies
expect to select presiding officers that
may render a qualified recommendation
to the agency regarding whether
reclassification is appropriate, and do
not believe that it is necessary or
appropriate to specify in the regulation
the qualifications of the presiding
officer.
5. Enforcement of Directives
Section 8 of the FDI Act, as am ended
by FDICIA, includes prompt corrective
action directives issued pursuant to
section 38 among the orders that may be
enforced in the courts pursuant to
section 8(i)(l), and also m akes any
depository institution, company, or
institution-affiliated party that violates
such a directive subject to civil money
penalties pursuant to section 8(i)(2)(A).
12 U.S.C. T818(i). The final rules adopt
the proposed clarification that the
failure of a depository institution to
implement, in any material respect, a
capital restoration plan, o r the failure of
a company having control of a
depository institution to fulfill a
44878
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
guarantee that the company has given in
connection with a capital plan accepted
by the appropriate Federal banking
agency, will subject responsible parties
to civil money penalties. Commenters
did not object to this proposal.
G. Capital Restoration Plans
1. Information Required
Section 38 requires an institution that
is undercapitalized, significantly
undercapitalized, or critically
undercapitalized to submit a plan to the
appropriate Federal banking agency to
restore the institution’s capital at least
tc the minimum capital levels required
for adequately capitalized institutions.
The statute requires that this capital
restoration plan be submitted in writing
and specify:
(1) The steps the institution will take to
becom e a deq u ately capitalized;
(2) T he levels of cap ital the institution
expects to atta in in each y e ar th at the p l a n 's
in effect;
(3) H ow the institution will com ply w ith 'h e
restrictions a n d requirem ents im posed on tLe
institution u nder section 38;
(4) T he types a n d levels of activities in
w hich the institution will engage; a n d
(5) A n y oth er inform ation required by the
ap prop riate F ederal banking agency.
Section 38 provides that the
appropriate Federal banking agency
may not accept a capital restoration
plan unless the plan:
(1) C ontains the inform ation req u ired by
statute;
(2) Is b a se d on realistic assum ptions and is
likely to succeed in restoring the institution’s
capital; and
(3) W ould n ot ap preciab ly in crease the risk
(including credit risk, in terest-rate risk, and
o th er types of risk) to w hich the institution is
exposed.
The agencies did not propose to
require by regulation any additional
information in a capital restoration plan
submitted under section 38, and the
commenters generally agreed that the
agencies should not impose additional
reporting requirements by regulation.
The commenters argued that the
agencies could require additional
information in cases in which
circumstances warranted.
2. Schedule for Submission and Review
of Capital Plans
The agencies proposed adopting the
schedule for submission and review of
capital restoration plans that is
generally established in the statute. This
schedule provided an institution with 45
days to submit a capital restoration plan
after the institution has received notice
or been deemed to have notice that the
institution is undercapitalized,
significantly undercapitalized or
critically undercapitalized.11 The
proposal permitted the appropriate
Federal banking agency to change this
period in individual cases, provided that
the agency notified the institution that a
different schedule had been adopted.
The proposed schedule also required
the appropriate Federal banking agency
to review each capital restoration plan
within 60 days of submission of the plan
unless the agency extends the time for
review. The agencies would be required
to provide w ritten notice to the
institution regarding whether the agency
had approved or rejected the capital
plan. The agency would also provide a
copy of each acceptable capital
restoration plan, or amendments thereto,
to the FDIC within 45 days of accepting
the plan.
The commenters addressing this
proposal generally supported adopting
the schedule provided in section 38,
without revision. Two commenters
argued that the agencies should be
required to review capital restoration
pians in less than 60 days.
The final rules adopt the schedule for
filing and review of capital restoration
plans as proposed. The agencies have
determined not to shorten the review
period for capital plans as a general
m atter because the longer period will
permit the agencies to discuss revisions
to the plan with the institution before
the agency is required to take final
action on the plan. The agencies expect,
however, not to delay action on capital
plans, and to act on these plans well
within the regulatory schedule.
3. Failure to Submit or Implement an
Acceptable Capital Plan
Section 38 provides that an
undercapitalized institution that fail* to
submit or implement, in any mated:? i
respect, an acceptable capital plan shall
be subject to the same restrictions
applicable to an institution that is
significantly undercapitalized. In the
event that the appropriate Federal
banking agency has disapproved an
institution’s capital restoration plan, the
proposal would require the institution to
submit a new capital restoration plan
within a time specified by the
appropriate Federal banking agency.
During the period following notice of
such disapproval and prior to approval
11 As discussed above, an institution is deemed
have been notified of its capital category on the
date that it is required to file its Call Report, the
date that the institution receives its final report of
examination or inspection, or the date that the
appropriate federal banking agency notifies the
institution of the institution’s capital category
(based on an adjustment to capital reported by the
institution or on other information obtained by the
agency).
/
Rules and Regulations
by the agency of a new or revised
capital plan, the statute treats the
institution in the same manner as a
significantly undercapitalized
institution. Institutions that fail to
submit any capital restoration plan
within the required period also are
subject to the provisions applicable to
significantly undercapitalized
institutions. Included in these provisions
is the statutory prohibition on payment
by the institution of any bonus or raise
to any senior executive officer.
Several commenters argued that the
rule should be revised to permit an
undercapitalized institution that had
submitted its original capital restoration
plan in good faith an opportunity to
formulate and submit a revised capital
plan before becoming subject to the
provisions applicable to significantly
undercapitalized institutions.
Commenters expressed concern that
rejection of the capital plan by the
institution’s appropriate agency, and
corresponding treatment of the
institution as significantly
undercapitalized, pre supposes an
unwillingness on the part of the
institution to devise and implement an
acceptable capital plan. Commenters
argued that a capital restoration plan
may be found by an agency to be
unacceptable for reasons that are
unrelated to the willingness or ability of
the institution to devise an accept'M e
capital plan. For example, commente/s
were concerned that a capital plan may
be rejected because an institution was
unaware that the appropriate agency
expected the institution to take certain
steps in addition to the steps proposed
by the institution, or because
developments may have occurred during
the period that the plan is under review
by the agency that were not reasonably
foreseeable by the institution at the time
the plan was submitted.
As an initial matter, the agencies
believe that it is important that an
undercapitalized institution discuss the
development of its capital restoration
plan with the appropriate banking
agency during the period that the plan is
being developed. The agencies have
adopted the maximum time periods
permitted by section 38 for the formal
submission and review cf a capital
restoration plan in order to permit an
opportunity for informal discussions
to between institutions and the appropriate
agency. The adoption of a schedule for
formal action does not, and is not
intended to, preclude informal
discussions between the institution and
the appropriate agency regarding the
elements of the plan prior to the time
that the plan is formally submitted.
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
Further, as noted above, the agencies
expect discussions to continue during
the period that the agency reviews the
plan. These discussions should
eliminate the chances that a capital
restoration plan will be rejected by the
agency for a reason that is not
anticipated by the institution.
In cases in which an undercapitalized
institution nonetheless has failed to
submit a capital restoration plan or a
plan submitted by an institution is
rejected by the appropriate agency, the
statute provides that the institution is
subject to the provisions applicable to
significantly undercapitalized
institutions. This treatment has two
consequences under section 38.12 First,
the institution is subject to restrictions
on its ability to pay bonuses or salary
increases to the institution’s senior
executive officers. In this regard, section
33 specifically prohibits any institution
that has failed to submit a capital
restoration plan that is acceptable to its
appropriate agency from paying any
bonus or raise to its senior executive
officers. The purpose of this restriction
appears to be to prevent senior officers
of an undercapitalized institution from
receiving any increase in pay if the
officers have not devised and submitted
a capital restoration plan that the
agency agrees will address the problems
faced by the institution.
Second, the appropriate Federal
banking agency for the institution is
permitted to take, and must consider
taking, a number of additional
discretionary actions in connection with
the institution. In determining whether
to exercise its discretion to take
additional supervisory actions, the
agencies believe that they may consider
the types of factors noted by the
commenters, including events that have
occurred after submission of the original
plan, the efforts of management to
devise a realistic and acceptable plan,
and other factors.
In light of the statutory language and
the ability of the agencies to consider
the factors identified by commenters on
a case-by-case basis in determining
appropriate action that the agency
should take, the agencies believe that it
is appropriate to retain in the final rules
the provision indicating that an
undercapitalized institution is subject to
the provisions applicable to significantly
undercapitalized institutions in the
event the institution has submitted a
capital restoration plan that is rejected
by the appropriate agency. Similarly, an
12 As explained above, a significantly
undercapitalized institution is subject to the same
mandatory and discretionary provisions that apply
to undercapitalized institutions.
undercapitalized institution that fails to
implement, in any material respect, its
capital restoration plan would
immediately be subject to these same
provisions upon the institution’s failure
to implement the plan.
4. Guarantee of Performance of Capital
Restoration Plan
Section 38 provides that the
appropriate agency may not accept a
capital restoration plan submitted by an
undercapitalized institution unless each
company that controls the institution
has guaranteed that the institution will
comply with the plan until the institution
has been adequately capitalized on
average during each of four consecutive
calendar quarters, and each such
company has provided appropriate
assurances of performance. This
guarantee by any controlling company is
independent of any liability of affiliates
of the depository institution pursuant to
the cross-guarantee provision of the FDI
Act (12 U.S.C. 1815(e)).
The agencies proposed to implement
the performance guarantee provision by
providing that the agencies will not
approve a capital restoration plan
required to be submitted by an
undercapitalized, significantly
undercapitalized, or critically
undercapitalized institution under
section 38, unless each company that
controls the institution submits a written
guarantee of the plan.13 The
performance guarantee would include a
commitment to take actions required by
the capital plan, including, for example,
assuring that competent management
will be selected, restricting transactions
between the institution and the
controlling company, and discontinuing
certain risky activities within the
institution or an affiliate. This guarantee
would also include assurances that the
institution would fulfill any
commitments to raise capital made in
the plan. Each company that provides
the financial guarantee would be jointly
and severally liable for fulfillment of the
guarantee, up to the statutory limit of
liability. Failure of any company that
controls an undercapitalized institution
to provide the required guarantee causes
the institution to become subject to the
provisions of section 38 applicable to
significantly undercapitalized
institutions.
Section 38 also requires each
company that controls an
undercapitalized institution to provide
adequate assurances that the institution
will perform under its capital plan.
Providing adequate assurances will
13 A capital restoration plan does not supersede
an existing net worth m aintenance agreement.
/
Rules and Regulations 44879
include committing to take whatever
steps are necessary to ensure that the
capital restoration plan is fully
implemented.
The agencies requested comment
regarding w hether it w as appropriate to
specify by regulation the types of
performance assurances that would be
required. In addition, the agencies
proposed a number of clarifications to
the capital guarantee in the original
proposal.
Most of the commenters that
addressed the guarantee provisions
suggested that the agencies determine
on a case-by-case basis, and not specify
by regulation, the form of guarantee that
would be acceptable and whether
adequate assurances of performance
had been given by companies that
control an undercapitalized institution.
At this time, the agencies agree with the
commenters that the adequacy of a
capital guarantee and of the assurances
of performance should be determined on
a case-by-case basis in connection with
an agency’s review of capital restoration
plans, and not by regulation. This will
provide the agencies and companies
that control undercapitalized
institutions with flexibility to devise
guarantees that are appropriate for
individual cases, and permit the
agencies and the industry to gain
experience with the types of assurances
that are adequate. As the agencies and
the industry gain experience in this area,
the agencies will reconsider whether it
is appropriate to establish regulatory
requirements in this area.
The commenters generally did not
object to the agencies’ interpretation
that each company that provides a
performance guarantee under section 38
would be jointly and severally liable for
fulfillment of the guarantee. However,
several commenters requested
clarification regarding whether
companies that are intermediate shell
holding companies would be permitted
to fulfill their guarantee requirement by
providing a certification that the parent
of the intermediate companies would
guarantee performance. Similarly, these
commenters sought agency guidance
regarding whether intermediate shell
holding companies would be permitted
to rely on the financial resources of the
parent company or of a third party as
adequate assurance of performance on
the guarantee.
The agencies believe that a guarantee
that is backed by the contractual pledge
of resources of a parent company may,
particularly in situations involving the
ownership of an insured institution by a
company through a wholly owned
domestic shell holding company, satisfy
44880
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
the requirements of section 38. In other
situations, a third party guarantee made
by a party with adequate financial
resources may be satisfactory for
purposes of section 38. The agencies will
consider the type of guarantee that
would be appropriate in multi-tier
holding companies on a case-by-case
basis. The agencies will also consider on
a case-by-case basis the type of
guarantee that is necessary in the case
of a parent holding company that is a
shell company or has limited resources.
Section 38 limits the aggregate
liability under the capital performance
guarantee of all companies that control
a given insured depository institution to
the lesser of:
(1) A n am ount equal to 5 percen t of the
institution's total a sse ts a t the time the
institution b ecam e undercapitalized: or
(2) The am ount n e ce ssary (or th at w ould be
n ecessary) to bring the in stitution into
com pliance w ith all capital sta n d a rd s
applicable w ith resp ect to such institution as
of the time the institution fails to com ply w ith
its capital resto ratio n plan.
In incorporating this provision into the
regulation, the agencies proposed to
adopt the same definition of total assets
for purposes of computing the first
component of the limit on liability as
would be used in determining the capital
category of the institution. As discussed
above, the commenters unanimously
favored using the same definition of
capital terms to the extent possible in
implementing section 38, and argued
against the use of definitions that would
require daily calculation of riskweighted assets or capital. The final
rules rely on existing definitions and
capital calculation procedures in
implementing the capital guarantee
provisions.
The agencies also proposed to clarify
that the second component of the limit
on liability refers to the amount
necessary to restore the capital of the
institution to the applicable minimum
capital levels as those levels were
defined at the time that the institution
initially failed to comply with its capital
plan. The amount of a capital guarantee
would not change if the minimum capital
adequacy standards changed after the
time the institution initially failed to
comply with its capital restoration
plan. 14 The commenters that addressed
this issue favored this approach, and the
agencies have adopted the proposal in
the final rules.
14 Any modification of the minimum capital
requirement for savings associations, required by
F1RREA‘8 transition schedules, is not a change of
the minimum capita! adequacy requirements for
purposes of section 38 and this part.
The final rules also include the
agencies’ proposal for implementing the
statutory provision that limits the
duration of a guarantee of a capital plan.
Under the proposal, the appropriate
Federal banking agency would provide
notice to the company that the
guarantee has expired once the
depository institution has remained
adequately capitalized for four
consecutive calendar quarters. This
approach permits the agency and the
institution to verify that the limit of
liability under the guarantee has
expired.
The final rules adopt provisions that
make clear that expiration of a
guarantee or fulfillment of a guarantee
given by a company in connection with
one capital restoration plan does not
relieve the company from the obligation
to guarantee another capital restoration
plan that may be required at a future
date for the same institution if it again
becomes undercapitalized. Similarly, the
fact that a company has, at one time,
fulfilled a guarantee by providing
resources to an institution up to the
statutory limit would not reduce the
amount of any guarantee of a future
capital plan for the same institution.
Moreover, the provision or fulfillment by
a company of a guarantee for one
institution does not affect the obligation
of that company to guarantee a capital
plan in connection with any other
insured depository institution.
Commenters generally did not disagree
with these provisions.
One commenter asked that a company
that has performed on a guarantee of a
capital plan be granted a two-year grace
period before being required to
guarantee another plan by the same
institution. The agencies do not believe
that the statute contemplates such an
exception.
5. Priority, in Bankruptcy
In the original proposal for comment,
the agencies noted that the FDIC will
have a priority claim in any bankruptcy
proceedings of a holding company that
has guaranteed an institution’s
compliance with a capital restoration
plan. The FDIC’s claim against a holding
company's estate would have priority
over the claims of unsecured creditors
and is provided for in section 507(a)(8)
of Title 11 of the United States Code, as
amended by the Crime Control Act of
1990, Public Law 101-647,104 Stat. 4789.
Sections 365(o) and 523(a)(l2) of Title 11
of the United States Code, as amended
by the Crime Control Act of 1990, also
provide special protections for the FDIC.
The agencies did not receive any
comment on this matter.
/
Rules and Regulations
6. Submission of Plans by Reclassified
Institutions
Section 38(g) provides that an
institution that has been reclassified to a
different capital category as a result of
an agency determination that the
institution is in an unsafe or unsound
condition or is engaged in an unsafe or
unsound practice must describe the
steps the institution will take to address
these deficiencies. The final rules reflect
this statutory requirem ent
Section 38(g) also provides that an
institution is not required to submit a
capital restoration plan if the institution
nominally has adequate capital but has,
because of its condition or practices,
been made subject to provisions
applicable to an undercapitalized
institution. The agencies requested
comment on whether it w as appropriate
to require by regulation that all
adequately capitalized institutions that
are subject to provisions as if the
institution were undercapitalized file a
plan describing the steps that would be
required to address its deficiencies. The
commenters strongly urged that this
provision not be adopted in the
regulation and that the agencies reserve
authority to require plans on a case-bycase basis. The agencies agree that
these plans may not always be
appropriate and have determined to
consider the need for these plans on a
case-by-case basis as provided in
section 38.
7. Revised Capital Restoration Plans
The agencies requested comment
regarding whether the final rules should
require in all cases that an insured
depository institution that is operating
under a capital restoration plan that has
been approved by the appropriate
Federal banking agency must submit an
additional or a revised capital
restoration plan if the institution’s
capital classification changes.
Commenters generally believed that an
inflexible rule would result in requiring
an institution to file capital plans more
frequently than necessary to address the
institution’s problems. On the other
hand, commenters agreed that the
agencies had discretion under section 38
to require a capital plan in individual
cases as appropriate.
The final rules do not adopt a
regulatory requirement that an
institution file a new or revised capital
restoration plan in the event that the
institution’s capital category changes.
Instead, the agencies have adopted a
provision in the final rules retaining
discretion to determine on a case-bycase basis that an institution must
Federal Register / Vol.
57,
No. 189 / Tuesday, September 29, 1992
policymaking functions.” The agencies
believe that this formulation covers the
types of fees identified by the statute
without affecting fees paid for non
management services, which are not
prohibited by the mandatory provisions
of section 38.
H. M onitoring U ndercapitalized
The final rules generally adopt the
Institutions.
language suggested by the commenter
Section 38 requires the agencies to
and define management fees to include
monitor closely institutions that are
any payment of money or provision of
undercapitalized, significantly
any other thing of value to a company or
undercapitalized, or critically
individual for the provision of
undercapitalized. The agencies must
management services or advice to the
also monitor compliance by these
bank, or related overhead expenses,
institutions with their capital restoration including payments related to
plans and with restrictions and
supervisory, executive, managerial, or
requirements imposed under section 38.
policymaking functions, other than
This monitoring will be carried out
compensation to an individual in the
through review of the reports filed by
individual’s capacity as an officer or
the institution, examinations of the
employee of the bank. The definition
institution on an appropriate time
does not include payments to a
schedule, and informal discussions with controlling person for such things as
the institution regarding the steps that it electronic data processing, trust
is taking to improve its condition,
activities, mortgage servicing, audit and
develop and implement an acceptable
accounting services, property
capital restoration plan, and comply
management, or other similar service
with applicable requirements.
fees.
As part of this monitoring program,
The agencies point out that while fees
the appropriate Federal agency will
paid for nonmanagement services
discuss with the institution any
provided by an affiliate are not
revisions that may need to be made by
prohibited by the mandatory provisions
an institution to its capital plan. The
of section 38, the agencies have
appropriate agency also will discuss
discretion under several provisions of
elimination of restrictions that are no
section 38 to restrict any fees paid to an
longer needed as an institution
affiliate by an undercapitalized
successfully implements its capital plan
institution or any transaction between
and improves its financial condition.
the undercapitalized institution and an
Once an institution has fulfilled its
affiliate. The agencies also stress that
capital restoration plan and returned to
all management fees and servicing fees
at least the adequately capitalized
paid by an insured institution to an
category, directives issued pursuant to
affiliate are subject to the restrictions
section 38 will be removed.
and requirements of sections 23A and
23B of the Federal Reserve Act (12
I. O ther M atters
U.S.C. 371c, 371 c-1), regardless of the
1. Definition of "Management Fee"
institution’s capital category under
section 38. Sections 23A and 23B require
Section 38 of the FDI Act prohibits
any institution from paying management that services that are provided to an
insured institution be provided on terms
fees to a controlling person if, following
the payment of those fees, the institution that are at least as favorable to the
insured institution as would be
would be undercapitalized. The
available from a third party.
agencies had proposed to define a
management fee to be any payment for
2. Definition of “Control" and
management services or advice, other
“Controlling Person”
than payments to individuals in their
The agencies requested comment
capacity as employees of the institution.
regarding the definition of “control,”
Commenters expressed concern that
particularly whether an exception
this definition could be interpreted to
preclude payments for non-management should be provided for persons that
services obtained from an affiliate, such have acquired control of an institution in
a fiduciary capacity or in satisfaction of
as data processing services. In order to
a debt previously contracted (DPC). The
address this concern, one commenter,
word “control” is used in two provisions
representing a group of insured
of the regulation: first, in the definition
institutions, suggested defining a
of controlling person, noted below, and
management fee to be any payment
second, in the requirement that for any
made for the provision of management
capital restoration plan to be
services or advice in connection with
acceptable, the plan must be guaranteed
"supervisory, executive, managerial, or
submit a new or revised capital plan.
Under the final rules, in the event that
the agency determines that a new or
revised plan must be submitted, the
agency will provide notice to the
institution.
/
Rules and ^Regulations 44881
b y e a c h c o m p a n y h a v in g c o n tr o l o f t h e
institution.
Section 38 does not define the term
"control." Section 3 of the FDI Act,
however, adopts the definition of
“control" contained in section 2 of the
Bank Holding Company Act (BHC Act)
(12 U.S.C. 1841(a)(2)). Under the BHC
Act, a company controls an institution if
the company owns or controls 25
percent or more of the voting securities
of that institution, controls the board of
directors of the institution; or exercises
a controlling influence over the
management or policies of the
institution.
The BHC Act also provides exclusions
for certain types of share ownership
from the applicability of the control
provisions. Section 2(a)(5)(A) of the BHC
Act (12 U.S.C. 1841(a)(5)(A)) states that
a bank or company is not deemed to be
a bank holding company by virtue of its
ownership or control of shares in a
fiduciary capacity, provided that the
bank or company does not retain sole
right to vote the shares. Additionally,
section 2(a)(5)(D) of the BHC Act (12
U.S.C. 1841(a)(5)(D)) permits a company
to hold shares of a depository institution
acquired DPC without being deemad to
be a bank holding company, provided
that the company disposes of the shares
within two years (with the possibility of
three one-year extensions).
The proposed rules noted that the FDI
Act also contains a DPC exception.
Section 5 of the Act (12 U.S.C. 1815),
addresses the liability of commonly
controlled depository institutions for
“cross-guarantee” claims. Section 5(e)(7)
of the FDI Act (12 U.S.C. 1815(e) (7))
contains an exception for the acquisition
by an insured depository institution of
shares of another depository institution
in satisfaction of a debt previously
contracted. That exception is
conditioned on the requirement that all
transactions between the controlling
institution or any affiliate of the
controlling institution and the subsidiary
institution comply with the restrictions
contained in sections 23A and 23B of the
Federal Reserve Act.
The agencies requested comment on
whether it would be appropriate under
section 38 to provide, by regulation, an
exception‘from the definition of
"control” for shares held in a fiduciary
capacity or for shares acquired DPC.
The agencies also requested comment
on whether, assuming there were an
exception for shares acquired DPC, the
exception should be subject to the
conditions established in the FDI Act
regarding compliance with sections 23A
and 23B.
44882
Federal Register / Vol. 57, No. 189 /' Tuesday, September 29, 1992
The agencies received 18 comment
letters on this matter. All 18 comment
letters supported the adoption of a
definition of ‘'control” similar to that
found presently in the BHC Act.
Seventeen comment letters also
supported the adoption of fiduciary
ownership and DPC exceptions from the
definition of ‘‘control". Commenters
strongly supported adopting these
exceptions and argued that without
these exceptions companies would be
unlikely to hold stock from an insured
institution in a fiduciary capacity or
accept such stock as collateral for a loan
because of the potential liability under
section 38. Seven comment letters
supported the inclusion of conditions
similar to those contained in section 5(e)
(7) of the FDI Act in the DPC exception,
with one comment letter opposed.
The agencies have included in the
final rules implementing section 38 a
definition of the term “control" identical
to that provided in section 2 of the BHC
Act and an exception from that
definition for shares held in a fiduciary
capacity and for shares acquired DPC.
Similar to section 2(a) (5) (A) of the BHC
Act, the fiduciary exception is premised
on the condition that the bank or
company holding the shares not retain
the sole right to vote the shares. The
DPC exception in the final rule parallels
section 2(a) (5) (D) of the BHC Act m
that the shares held DPC must be
disposed of within two years, with the
possibility of three one-year extensions.
The agencies did not consider it
necessary to include conditions similar
to those contained in the DPC exception
to section 5 of the FDI Act (12 U.S.C.
1815(e) (7)) in the final rule.
Qualification for an exemption from
the definition of control, however, does
not exempt the depository institution
whose shares are held by another
company or depository institution from
the provisions of section 38. W hether or
not it is "controlled" by another entity, a
depository institution whose stock is
held DPC or in a fiduciary capacity will
still be subject to all relevant provisions
of section 38 in accordance with its
capital category. For example, an
undercapitalized institution whose stock
is held DPC may not pay dividends.
The final rules add a definition of the
term ■“controlling person.” The term
"controlling person” is defined as any
person having control of an insured
depository institution and any company
controlled by that person. Thus, the
prohibition on payment of management
fees covers paym ent to any company,
including a consulting firm, owned by
the principal shareholder of an
institution, and any servicing company
owned by a bank holding company.
3. Restrictions on Advertising
The proposed rule limited an insured
depository institution's use of its capital
category for any purpose, except when
permitted by the appropriate Federal
banking agency or otherwise required
by law. This provision w as intended to
restrict the ability of insured depository
institutions to advertise their capital
category.
The agencies received eleven
comments in support of this limitation
on u se of the capital category. Twelve
commenters objected and urged that
financial institutions be allowed to
advertise their capital category.
Some commenters expressed concern
about the practicality of such a
prohibition given that disclosure of the
category may be required for purposes
of risk-based deposit insurance
premiums, brokered deposits, and
interbank liabilities. Disclosure may
ulso be necessary in securities filings.
The agencies recognize that disclosure
may be appropriate under some
circumstances. The prompt corrective
action framework in section 38 was
designed, however, to be a supervisory
tool, not a marketing vehicle. The
agencies have long held that capital
levels are a lagging indicator of
problems in financial institutions. An
advertisement that cites a financial
institution’s capital category under
section 38 could be misleading to the
genera! public. Depositors, investors and
other affected persons could improperly
\ievv the capita! category designation as
the regulator’s definitive assessm ent of
the insured depository institution's true
financial condition.
Taking account of the concerns
expressed by the commenters, the final
rule has narrowed the disclosure
restriction to prohibit the advertising of
the capital category assigned to an
institution pursuant to section 38. The
final rule does not restrict advertising of
the institution's capital levels or
financial condition. The institution may
not, however, describe itself in an
advertisement or in promotional
material as falling within the well
capitalized category, as that category is
defined by the Federal banking agencies
pursuant to section 38. Nor may the
institution advertise that its appropriate
Federal banking agency has determined
it to be well capitalized.
4. Applicability of Capital Categories to
Bank Holding Companies and Savings
and Loan Holding Companies
Section 38 applies capital-based
prompt corrective action to insured
/
Rules and Regulations
depository institutions but not to holding
companies that control such institutions.
The commenters strongly urged the
Federal Reserve Board and the OTS not
to impose the framework of section 38 to
bank holding companies and to savings
and loan holding companies. Several
commenters argued that the enactment
of section 38 provided the agencies with
an opportunity to eliminate the capital
adequacy standards that are currently
applicable to bank holding companies
and savings and loan holding
companies.
The Board and the OTS have
determined not to apply section 38 to
bank holding companies and savings
and loan holding companies. The
statute, by its terms, applies only to
insured depository institutions, and
Congress has provided no indication
that it intended the framework to be
extended. The agencies also have
authority under a number of other
statutory provisions to supervise the
activities and financial condition of
holding companies.
The agencies note, however, that,
while the complete supervisory
framework of section 38 does not govern
holding companies, various provisions
of section 38 apply to companies that
control insured depository institutions.
These provisions, including the
provisions regarding guarantee of a
capital restoration plan, appear to apply
to holding companies regardless of the
capital level of those holding companies.
The Federal Reserve Board intends to
consult with the Federal banking agency
for each insured depository institution
subsidiary of a bank holding company to
monitor supervisory actions required
under section 38, and, in the supervision
of the holding company, to take
appropriate action at the holding
company level based on an assessment
of these developments. In supervising
savings and loan holding companies, the
OTS will concentrate on ensuring that
subsidiary savings associations are well
managed and well capitalized and that
transactions and relationships between
savings associations and their holding
companies satisfy fiduciary
requirements and do not negatively
affect the safety and soundness of the
subsidiary associations. OTS will
supervise holding companies in a
manner consistent with the
effectiveness of supervisory actions
required under section 38 imposed upon
subsidiary associations.
5. Restrictions on Activities of Critically
Undercapitalized Institutions
Section 38(i) of the FDI Act provides
that the FDIC must, by regulation or
Federal Register / VoL 57, No. 189 / Tuesday, September 29, 1992
order, restrict the activities of critically
undercapitalized institutions. The
activities that must be restricted are
described above. FDICIA does not
provide specific guidance on how to
interpret and implement each of the
restrictive provisions of section 38(i).
Consequently, the FDIC considered a
number of options.
The prohibition on entering into "any
material transaction other than in the
usual course of business” can be
interpreted in a general fashion relying
on outstanding case law in the area of
securities disclosures. The concept of
materiality also could be defined from
an accounting perspective by
establishing specific limits for
determining materiality. For example,
the FDIC could, by regulation, require
that any prospective transaction other
than one that is in the usual course of
business that results or could result in a
5 percent change in an institution’s
tangible equity capital account or net
income account would automatically be
considered a material transaction
requiring the FDIC’s prior approval.
Other transactions could be defined as
material on a case by case basis. The
FDIC solicited comment on how to
define the terms "m aterial” and "usual
course of business” as well as what
specific guidance, if any, should be
provided by the FDIC to the banking
industry.
The FDIC received two comments on
the materiality issue. One respondent
suggested the definition be based on
market capitalization as opposed to a
percentage based on equity capital. The
range suggested w as between 5 and 10
percent. The other respondent suggested
that the denominator for defining a
material transaction be based on 10
percent of total assets.
After consideration of the above
comments, the FDIC has decided to
define a material transaction on a caseby-case basis. The FDIC believes dial
defining a material transaction using a
fixed percentage of capital or assets
could be arbitrary and exclude those
transactions that initially may be de
minimus in amount or not easily
subjected to a quantifiable measure but
“m aterial” in substance such as a
proposal to engage in a new serviceoriented activity. A fixed measurement
also could be inconsistent with the
statutory requirement that a material
transaction includes those activities
where the institution would have to
notify its appropriate Federal banking
agency.
The FDIC did not receive any
comments on how to apply the phrase
"usual course of business" or what
specific guidance, if any, to provide to
the banking industry. The FDIC intends
to interpret this phrase to mean any
activity currently engaged in by the
specific institution. Therefore, any new
activity not currently exercised by the
specific institution, though permissible
and approved by the appropriate
regulator(s), would require the FDIC’s
prior written approval. For example, a
critically undercapitalized institution
that wishes to engage for the first time
in commercial real estate lending and to
establish a new commercial real estate
loan department would be required to
obtain the FDIC’s prior written approval
under this section.
The FDIC recognizes that the types of
activities considered “usual" for a
particular institution are contingent on
its size, location, management expertise,
business strategy, etc. Consequently,
what may be "usual" for a large urban
institution may not be “usual” for a
smaller rural institution and vice versa.
The FDIC believes that this definition of
new activity is consistent with the
statutory intent that troubled
institutions should focus their attention
on their existing problems and existing
lines of business.
The FDIC proposed to define the term
“highly leveraged transaction” by
utilizing the interagency definition
published in the Federal Reqister (57 FR
5040. February 11,1992). Due to the
uncertainty over whether the HLT
definition will remain in effect, the FDIC
has decided to adopt in the final rule an
abbreviated definition for HLTs that will
apply to critically undercapitalized
institutions. The FDIC also intends to
rely on existing generally accepted
accounting principles when interpreting
the restriction on making any “material
change in accounting methods.”
Section 39(c) of the FDI Act requires
the Federal banking agencies to
prescribe standards for determining
when compensation paid to employees,
directors and principal shareholders of
insured depository institutions is
excessive. An advance notice of
proposed rulemaking w as recently
published in the Federal Register (52 FR
31336, July 15,1992). The FDIC intends
to interpret the restrictive provision in
section 38(i)(2)(F) involving the payment
of excessive compensation or bonuses in
a manner that is consistent with the
FDIC’s actions in fulfilling the
requirements of section 39(c) of the FDI
Act. In the interim, the FDIC intends to
enforce section 38(i) by requiring prior
written approval of any change in the
institution's compensation of any of its
executive officers (as defined in Federal
Regulation O (12 CFR part 215),
directors and principal shareholders and
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Rules and Regulations 44883
w ill c o n s i d e r e x i s t i n g c o m p e n s a t i o n
levels on a case-by-case basis.
The provision that restricts “paying
interest on new or renewed liabilities al
a rate that would increase the
institution’s weighted average cost of
funds to a level significantly exceeding
the prevailing rates of interest on
insured deposits in the institution's
normal market areas” contains terms
that are similar to those mandated by
section 301 of FDICIA and the revisions
of § 337.6 of the FDIC’s regulations (12
CFR 337.6) as recently implemented by
the FDIC. Specifically, the FDIC intends
to interpret the phrase “significantly
exceeding the prevailing rates" the same
as defined in § 337.6. The prevailing
effective yields of interest are the
effective yields on insured deposits of
comparable maturities offered by other
insured depository institutions in the
market area in which deposits are being
solicited. A market area is any readily
defined geographic area in which the
rates offered by any one insured ’
depository institution soliciting deposits
in the area may affect the rates offered
by other institutions soliciting deposits
in the same area.
6. Application of Prompt Corrective
Action to Insured Branches
Section 38(a)(2) of the FDI Act, as
added by section 131 of FDICIA,
provides that each appropriate Federal
banking agency and the FDIC (acting in
the FDIC’s capacity as the insurer of
depository institutions) shall take
prompt corrective action to resolve the
problems of insured depository
institutions.
Section 3(c)(2) of the FDI Act defines
the term “insured depository institution"
as any bank or savings association the
deposits of which are insured by the
FDIC pursuant to the FDI Act. 12 U.S.C.
1813(c)(2). The term “bank" is defined,
in section 3(a)(1) of the FDI Act, to
include, inter alia, any “insured
branch.” 12 U.S.C. 1813(a)(1). Section
3(s)(3) defines the term "insured branch”
to mean any branch (as defined in
section 1(b)(3) of the International
Banking Act of 1978) of a foreign bank
any deposits in which are insured
pursuant to the FDI A c t 12 U.S.C.
1813{s)(3).
The plain language of these statutory
provisions requires the application of
the prompt corrective action provisions
to insured branches of foreign banks,
including insured federal branches.
Insured branches, however, are not
required to maintain minimum capital
levels under the FDICs capital
maintenance regulations, 12 CFR part
325. In fact, they are expressly excluded
44884
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
from the definition of “insured
depository institution” which is used in
the FDIC's capital maintenance
regulations. 12 CFR 325.2(f). Insured
branches, however, are required to
maintain a pledge of assets, pursuant to
12 CFR" 346.19, and a certain volume of
eligible assets, pursuant to 12 CFR
346.20.
Insured federal branches, likewise,
are not required to maintain minimum
capital levels under the OCC’s capital
maintenance regulations, 12 CFR part 3.
See 50 FR 10215, March 14,1985. In
addition to the asset pledge and asset
maintenance requirements to which all
insured branches are subject, all federal
branches are required by section 4 of the
International Banking Act of 1978 (12
U.S.C. 3102(g)(2)) to establish capital
equivalency deposits which generally
must equal at least 5 percent of the
branch’s third party liabilities. Federal
branches also may be required by the
OCC to maintain a certain quantity of
specified assets in the states in which
they operate.
In an effort to promote competitive
equality between insured federal and
state branches of foreign banks, the
OCC and the FDIC proposed a uniform
definition of capital categories for all
insured branches of foreign banks based
upon the FDIC’s asset pledge and asset
maintenance requirements which apply
to all insured branches.
The OCC and the FDIC recognize that
the eligible assets and, more
particularly, the pledge of assets are not
perfect substitutes for capital.Nonetheless, the FDIC has long taken
the position that the asset maintenance
requirement is analogous to a domestic
bank’s required capital. Therefore, the
OCC and the FDIC have decided to
utilize FDIC’s regulations governing the
pledge of assets and the level of eligible
assets to determine a n insured branch's
capital category.
For prompt corrective action
purposes, an insured federal branch will
be deemed:
“Well capitalized” if it:
1. Maintains the pledge of assets
required under 12 CFR 346.19: and
2. Maintains the eligible assets
prescribed under 12 CFR 346.20 at 108
percent or more of the preceding
quarter’s average book value of the
insured branch’s third-party liabilities:
and
3. Has not received written
notification from (1) the OCC to increase
its capital equivalency deposit pursuant
to 12 CFR 28.6(a), or to comply with the
asset maintenance requirements
pursuant to 12 CFR 28.9 or {2) the FDIC
to pledge additional assets pursuant to
12 CFR 346.19 or to maintain a higher
ratio of eligible assets pursuant to 12
CFR 346.20.
“Adequately capitalized” if it:
1. Maintains the pledge of assets
required under 12 CFR 346.19:
2. Maintains the eligible assets
prescribed under 12 CFR 346.20 at 106
percent or more of the preceding
quarter's average book value of the
insured branch's third-party liabilities;
and
3. Does not meet the definition of a
“well capitalized” insured branch.
“Undercapitalized" if it:
1. Fails to maintain the pledge of
assets required under 12 CFR 346.19; or
2. Fails to maintain the eligible assets
prescribed under 12 CFR 346.20 at 106
percent or more of the preceding
quarter’s average book value of the
insured branch’s third-party liabilities.
"Significantly undercapitalized" if it
fails to maintain the eligible assets
prescribed under 12 CFR 346.20 at 104
percent or more of the preceding
quarter’s average book value of the
insured branch's third-party liabilities.
“Critically undercapitalized" if it fails
to maintain the eligible assets
prescribed under 12 CFR 346.20 at 102
percent or more of the preceding
quarter's average book value of the
insured branch’s third-party liabilities.
Section 38 of the FDI Act enumerates
the corrective measures that the
appropriate Federal banking agency
may or must take against, and w hat
restrictions apply to, institutions in each
of the five capital categories. Some of
the prescribed measures and applicable
restrictions may not be practical or
appropriate in dealing with insured
branches of foreign banks.
Therefore, it is the intent of the OCC
and the FDIC to apply to insured
branches as many of the prompt
corrective measures and restrictions as
practical and appropriate, given the
unique characteristics of insured
branches.
Several respondents expressed the
view that the prompt corrective action
provisions in section 38 of the FDI Act
should apply to insured branches of
foreign banks and that the capital levels
should be comparable with those for
domestic banks. The FDIC and OCC, as
the primary federal regulators of insured
branches, concur with this approach. As
a result, the prompt corrective action
rules of the FDIC and OCC intend to
accomplish this objective by using the
asset pledge and asset maintenance
tests noted above for purposes of
determining an insured branch’s capital
category.
/
Rules and Regulations
Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act, it is hereby
certified that these final rules will not
have a significant impact on a
substantial number of small entities.
The final rules impose the minimum
burdens necessary to implement the
prompt corrective action provisions of
section 131 of FDICIA for all insured
depository institutions, regardless of
size. The regulation requires each
insured depository institution to monitor
its capital levels and to report to the
appropriate Federal banking agency any
material event that would cause the
institution to be classified within a
lower capital category. In addition, the
final rules require an institution that
becomes undercapitalized, significantly
undercapitalized, or critically
undercapitalized to submit a capital
restoration plan.
The filing of the capital plan is a
requirement imposed by statute and
occurs only when an institution initially
becomes undercapitalized, significantly
undercapitalized, or critically
undercapitalized. In establishing a
mechanism for gathering sufficient
information to determine the
appropriate capital category for each
insured depository institution, the
Federal banking agencies have
attempted to reduce the burden imposed
on such institutions by relying primarily
on the Call Report that must already be
filed and on reports of examination that
would otherwise take place. No
additional regular reporting requirement
has been imposed.
Executive Order 12291
The OCC and OTS have determined
that these final rules are not major
regulations as defined in Executive
Order 12291. These final rules
implements section 131 of FDICIA,
which established a new statutory
framework for resolving the problems of
insured depository institutions at the
least long-term cost to the FDIC.
List of Subjects
12 CFR Part 6
Banks, Banking, Capital adequacy.
National banks.
12 CFR Part 19
Administrative practice and
procedure, Crime, Dismissals,
Investigations, National banks.
Penalties, Reclassification, Securities.
12 CFR Part 208
Accounting, Agriculture. Banks,
hanking, Confidential business
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
information. Currency, Federal Reserve
Sy9tem, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 263
Administrative practice and
procedure, Federal Reserve System.
12 CFR Part 308
Administrative practice and
procedure, claims, equal access to
justice, lawyers, penalties.
12 CFR Part 325
Bank deposit insurance. Banks,
Banking, Capital adequacy, Reporting
and recordkeeping requirements, State
nonmember banks, Savings
associations.
12 CFR Part 565
Administrative practice and
procedure, Capital, Savings
associations.
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 263
For the reasons outlined above, the
Board of Governors amends 12 CFR
parts 208 and 263 as set forth below:
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
1. The authority citation for 12 CFR
part 208 is revised to read as follows:
Authority: Secs. 9, 11(a), 11(c), 19. 21, 25
an d 25(a) of the Federal R eserve Act, as
am end ed (12 U.S.C. 321-338, 248(a), 248(c),
461, 481^486, 601, a n d 611, respectively); secs.
4 , 13(j) a n d 38 of th e F ederal Deposit
Insurance Act, a s a m en d ed (12 U.S.C. 1814,
1823(j), a n d 18310, respectively); sec. 7(a) of
the Internation al Banking A ct of 1978 (12
U.S.C. 3105); secs. 907-910 of the
Internation al Lending Supervision A ct of 1983
(12 U.S.C. 3906-3909); secs. 2 , 12(b). 12(g),
12(i), 15B(c) (5), 1 7 ,17A, and 23 of the
Securities E xchange Act of 1934 (15 U.S.C.
78b, 781(b), 1781(g), 781(i), 78o-4(c) (5). 78q,
7 0 q -l, and 78w, respectively); sec. 5155 of the
Revised S tatutes (12 U.S.C. 36) a s am ended
by the M cFadden A ct of 1927; a n d secs. 11011122 of the F inancial Institutions Reform,
Recovery, a n d E nforcem ent A ct of 1989 (12
U.S.C. 3310 a n d 3331-3351).
Subpart A—General Provisions
2. The undesignated centerheading
preceding § 208.1 is removed, §§ 2081
through 208.19 are designated as subpart
A to part 208, and the subpart A heading
is added to read as set forth above.
3. Subpart B, comprising § § 208.30
through 208.35, is added to part 208 to
read as follows:
Subpart B—Prompt Corrective Action
Sec.
Authority, purpose, scope, other
supervisory authority, and disclosure of
c a p ita l categories.
208.31 Definitions.
208.32 Notice of capital category.
208.33 Capital measures and capital
category definitions.
208J4 Capital restoration plans.
208.35 Mandatory and discretionary
supervisory actions under section 38.
208.30
Subpart B—Prompt Corrective Action
§ 208.30 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
/
Rules and Regulations 44885
(e) Disclosure o f capital categories.
The assignment of a bank under this
subpart within a particular capital
category is for purposes of implementing
and applying the provisions of section
38. Unless permitted by the Board or
otherwise required by law, no bank may
state in any advertisement or
promotional material its capital category
under this subpart or that the Board or
any other Federal banking agency has
assigned the bank to a particular capital
category.
§ 208.31
Definitions.
For purposes of this subpart, except 3s
modified in this section or unless the
(a) A uthority. This subpart is issued
context otherwise requires, the terms
by the Board of Governors of the
used have the same meanings as set
Federal Reserve System (Board)
forth in section 38 and section 3 of the
pursuant to section 38 (section 38) of the
FDI Act.
Federal Deposit Insurance Act (FDI Act)
(a) (1) Control has the same meaning
as added by section 131 of the Federal
assigned
to it in section 2 of the Bank
Deposit Insurance Corporation
Holding Company Act (12 U.S.C. 1841).
Improvement Act of 1991 (Pub. L. 102and the term “controlled'’ shall be
242,105 Stat. 2236 (1991)) (12 U.S.C.
construed consistently with the term
18310.).
“control.”
(b) Purpose. Section 38 of the FDI Act
(2) Exclusion fo r fiduciary ownership.
establishes a framework of supervisory
No insured depository institution or
actions for insured depository
company controls another insured
institutions that are not adequately
depository institution or company by
capitalized. The principal purpose of
virtue of its ownership or control of
this subpart is to define, for state
shares in a fiduciary capacity. Shares
member banks, the capital measures
shall not be deemed to have been
and capital levels that are used for
acquired in a fiduciary capacity if the
determining the supervisory actions
acquiring insured depository institution
authorized under section 38 of the FDI
or company has sole discretionary
Act. This subpart also establishes
procedures for submission and review of authority to exercise voting rights with
respect thereto.
capital restoration plans and for
(3) Exclusion fo r debts previously
issuance and review of directives and
contracted.
No insured depository
orders pursuant to section 38.
institution or company controls another
(c) Scope. This subpart implements
insured depository institution or
the provisions of section 38 of the FDI
company by virtue of its ownership or
Act as they apply to state member
control of shares acquired in securing or
banks. Certain of these provisions also
collecting a debt previously contracted
apply to officers, directors and
in g o o d faith, until two years after the
employees of state member banks.
date o f acquisition. The two-year period
Other provisions apply to any company
may be extended at the discretion of the
that controls a state member bank and
appropriate Federal banking agency for
to the affiliates of a state member bank.
up to three one-year periods.
(d) O ther supervisory authority.
(b) Controlling person means any
Neither section 38 nor this subpart in
person having control of an insured
any way limits the authority of the
depository institution and any company
Board under any other provision of law
controlled by that person.
to take supervisory actions to address
(c) Leverage ratio means the ratio of
unsafe or unsound practices, deficient
Tier 1 capital to average total
capital levels, violations of Law, unsafe
consolidated assets, as calculated in
or unsound conditions, or other
practices. Action under section 38 of the accordance with the Board’9 Capital
Adequacy Guidelines for State Member
FDI Act and this subpart may be taken
independently of, in conjunction with, or Banks: Tier 1 Leverage Measure
(appendix B to part 208).
in addition to any other enforcement
(d) M anagem ent fe e means any
action available to the Board, including
payment of money or provision of any
issuance of cease and desist orders,
capital directives, approval or denial of
other thing of value to a company or
applications or notices, assessment of
individual for the provision of
civil money penalties, or any other
management services or advice to the
actions authorized by law.
bank or related overhead expenses,
44836
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
including payments related to
supervisory, executive, managerial, or
policymaking functions, other than
compensation to an individual in the
individual’s capacity as an officer or
employee of the bank.
(e) R isk-w eighted assets means total
weighted risk assets, as calculated in
accordance with the Board’s Capital
Adequacy Guidelines for State Member
Banks: Risk-Based Measure (appendix A
to part 208).
(f) Tangible equity means the amount
of core capital elements in the Board’s
Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
(appendix A to part 208), plus the
amount of outstanding cumulative
perpetual preferred stock (including
related surplus), minus all intangible
assets except purchased mortgage
servicing rights to the extent that the
Board determines pursuant to section
475 of the Federal Deposit Insurance
Corporation Improvement Act of 1991
(12 U.S.C. 1828 note) that purchased
mortgage servicing rights may be
included in calculating the bank’s Tier 1
capital.
(g) Tier 1 capital means the amount of
Tier 1 capital as defined in the Board's
Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
(appendix A to part 208).
(h) Tier 1 risk-based capital ratio
means the ratio of Tier 1 capital to
weighted risk assets, as calculated in
accordance with the Board’s Capital
Adequacy Guidelines for State Member
Banks: Risk-Based Measure (appendix A
to part 208).
(i) Total assets means quarterly
average total assets as reported in a
bank's Report of Condition and Income
(Call Report), minus intangible assets as
provided in the definition of tangible
equity.
(j) Total risk-based capital ratio
means the ratio of qualifying total
capital to weighted risk assets, as
calculated in accordance with the
Board's Capital Adequacy Guidelines
for State Member Banks: Risk-Based
Measure (appendix A to part 208).
§ 208.32
Notice of capital category.
(a) E ffective date o f determ ination o f
capital category. A state member bank
shall be deemed to be within a given
capital category for purposes of section
38 of the FDI Act and this subpart as of
the date the bank is notified of, or is
deemed to have notice of, its capital
category, pursuant to paragraph (b) of
this section.
(b) N otice o f capital category\ A state
member bank shall be deemed to have
been notified of its capital levels and its
capital category as of the most recent
date:
(1) A Report of Condition and Income
(Call Report) is required to be filed with
the Board;
(2) A final report of examination is
delivered to the bank; or
(3) Written notice is provided by the
Board to the bank of its capital category
for purposes of section 38 of the FDI Act
and this subpart or that the bank’s
capital category has changed as
provided in paragraph (c) of this section
or § 208.33(c).
(c) A djustm ents to reported capital
levels and capital category.— (1) N otice
o f adjustm ent b y bank. A state member
bank shall provide the Board with
written notice that an adjustment to the
bank's capital category may have
occurred no later than 15 calendar days
following the date that any material
event has occurred that would cause the
bank to be placed in a lower capital
category from the category assigned to
the bank for purposes of section 38 and
this subpart on the basis of the bank’s
most recent Call Report or report of
examination.
(2) D eterm ination b y the Board to
change capital category. After receiving
notice pursuant to paragraph (c)(1) of
this section, the Board shall determine
w hether to change the capital category
of the bank and shall notify the bank of
the Board’s determination.
§ 208.33 Capital measures and capital
category definitions.
(a) C apital m easures. For purposes of
section 38 and this subpart, the relevant
capital measures shall be:
(1) The total risk-based capital ratio:
(2) The Tier 1 risk-based capital ratio;
and
(3) The leverage ratio.
(b) C apital categories. For purposes of
section 38 and this subpart, a state
member bank shall be deemed to be:
(1) ‘‘Well capitalized” if the bank:
(1) Has a total risk-based capital ratio
of 10.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital
ratio of 6.0 percent or greater; and
(iii) Has a leverage ratio of 5.0 percent
or greater; and
(iv) Is not subject to any written
agreement, order, capital directive, or
prompt corrective action directive
issued by the Board pursuant to section
8 of the FDI Act, the International
Lending Supervision Act of 1983 (12
U.S.C. 3907), or section 38 of the FDI
Act, or any regulation thereunder, to
meet and maintain a specific capital
level for any capital measure.
(2) "Adequately capitalized” if the
bank:
/
Rules and Regulations
(i) Has a total risk-based capital ratio
of 8.0 percent or greater: and
(ii) Has a Tier 1 risk-based capital
ratio of 4.0 percent or greater; and
(iii) Has—
(A) A leverage ratio of 4.0 percent or
greater, or
(B) A leverage ratio of 3.0 percent or
greater if the bank is rated composite 1
under the CAMEL rating system in the
most recent examination of the bank
and is not experiencing or anticipating
significant growth; and
(iv) Does not meet the definition of a
“well capitalized” bank.
(3) “Undercapitalized” if the bank:
(i) Has a total risk-based capital ratio
that is less than 8.0 percent; or
(ii) Has a Tier 1 risk-based capital
ratio that is less than 4.0 percent; or
(iii) (A) Except as provided in clause
(B), has a leverage ratio that is less than
4.0 percent; or
(B) Has a leverage ratio that is less
than 3.0 percent, if the bank is rated
composite 1 under the CAMEL rating
system in the most recent examination
of the bank and is not experiencing or
anticipating significant growth.
(4) “Significantly undercapitalized" if
the bank has—
(i) A total risk-based capital ratio that
is less than 6.0 percent; or
(ii) A Tier 1 risk-based capital ratio
that is less than 3.0 percent; or
(iii) A leverage ratio that is less than
3.0 percent.
(5) “Critically undercapitalized" if the
bank has a ratio of tangible equity to
total assets that is equal to or less than
2.0 percent.
(c) R eclassification based on
supervisory criteria other than capital.
The Board may reclassify a well
capitalized state member bank as
adequately capitalized and may require
an adequately capitalized or an
undercapitalized state member bank to
comply with certain mandatory or
discretionary supervisory actions as if
the bank were in the next lower capital
category (except that the Board may not
reclassify a significantly
undercapitalized bank as critically
undercapitalized) (each of these actions
are hereinafter referred to generally as
“reclassifications") in the following
circumstances:
(1) Unsafe or unsound condition. The
Board has determined, after notice and
opportunity for hearing pursuant to
§ 263:203 of this chapter, that the bank is
in unsafe or unsound condition; or
(2) Unsafe or unsound practice. The
Board has determined, after notice and
opportunity for hearing pursuant to
§ 263.203 of this chapter, that, in the
most recent examination of the bamc.
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
the bank received and has not corrected,
a less-than-satisfactory rating for any of
the categories of asset quality,
management, earnings, or liquidity.
§ 208.34 Capital restoration plans.
(a) Schedule fo r filing plan— (1) In
general. A state member bank shall file
a written capital restoration plan with
the appropriate Reserve Bank within 45
days of the date that the bank receives
notice or is deemed to have notice that
the bank is undercapitalized,
significantly undercapitalized, or
critically undercapitalized, unless the
Board notifies the bank in writing that
the plan is to be filed within a different
period. An adequately capitalized bank
that has been required pursuant to
§ 208.33(c) to comply with supervisory
actions as if the bank were
undercapitalized is not required to
submit a capital restoration plan solely
by virtue of the reclassification.
(2) A dditional capital restoration
plans. Notwithstanding paragraph (a)(1)
of this section, a bank that has already
submitted and is operating under a
capital restoration plan approved under
section 38 and this subpart is not
required to submit an additional capital
restoration plan based on a revised
calculation of its capital measures or a
reclassification of the institution under
§ 208.33(c) unless the Board notifies the
bank that it must submit a new or
revised capital plan. A bank that is
notified that it must submit a new or
revised capital restoration plan shall file
the plan in writing with the appropriate
Reserve Bank within 45 days of
receiving such notice, unless the Board
notifies the bank in writing that the plan
is to be filed within a different period.
(b) Contents o f plan. All financial data
submitted in connection with a capital
restoration plan shall be prepared in
accordance with the instructions
provided on the Call Report, unless the
Board instructs otherwise. The capital
restoration plan shall include all of the
information required to be filed under
section 38(e)(2) of the FDI Act. A bank
that is required to submit a capital
restoration plan as the result of a
reclassification of the bank pursuant to
§ 208.33(c) shall include a description of
the steps the bank will take to correct
the unsafe or unsound condition or
practice. No plan shall be accepted
unless it includes any performance
guarantee described in section
38(e)(2)(C) of that Act by each company
that controls the bank.
(c) R eview o f capital restoration
plans. Within 60 days after receiving a
capital restoration plan under this
subpart, the Board shall provide written
notice to the bank of w hether the plan
has been approved. The Board may
extend the time within which notice
regarding approval of a plan shall be
provided.
(d) D isapproval o f capital plan. If a
capital restoration plan is not approved
by the Board, the bank shall submit a
revised capital restoration plan within
the time specified by the Board. Upon
receiving notice that its capital
restoration plan has not been approved,
any undercapitalized state member
bank (as defined in § 208.33(b)(3)) shall
be subject to all of the provisions of
section 38 and this subpart applicable to
significantly undercapitalized
institutions. These provisions shall be
applicable until such time as a new or
revised capital restoration plan
submitted by the bank has been
approved by the Board.
(e) Failure to submit, capital
restoration plan. A state member bank
that is undercapitalized (as defined in
§ 208.33(b)(3)) and that fails to submit a
written capital restoration plan within
the period provided in this section shall,
upon the expiration of that period, be
subject to all of the provisions of section
38 and this subpart applicable to
significantly undercapitalized
institutions.
(f) Failure to im plem ent capital
restoration plan. Any undercapitalized
state member bank that fails in any
material respect to implement a capital
restoration plan shall be subject to all of
the provisions of section 38 and this
subpart applicable to significantly
undercapitalized institutions.
(g) A m endm ent o f capital plan. A
bank that has filed an approved capital
restoration plan may. after prior written
notice to and approval by the Board,
amend the plan to reflect a change in
circumstance. Until such time as a
proposed amendment has been
approved, the bank shall implement the
capital restoration plan as approved
prior to the proposed amendment.
(h) N otice to FDIC. Within 45 days of
the effective date of Board approval of a
capital restoration plan, or any
amendment to a capital restoration plan,
the Board shall provide a copy of the
plan or amendment to the Federal
Deposit Insurance Corporation.
(i) Perform ance guarantee b y
com panies that control a bank—(1)
Lim itation on L iability—(i) A m ount
lim itation. The aggregate liability under
the guarantee provided under section 38
and this subpart for all companies that
control a specific state member bank
that is required to submit a capital
restoration plan under this subpart shall
be limited to the lesser of:
(A) An amount equal to 5.0 percent of
the bank's total assets at the time the
/
Rules and Regulations 44887
bank was notified or deemed to have
notice that the bank was
undercapitalized: or
(B) The amount necessary to restore
the relevant capital measures of the
bank to the levels required for the bank
to be classified as adequately
capitalized, as those capital measures
and levels are defined at the time that
the bank initially fails to comply with a
capital restoration plan under this
subpart.
(ii) Lim it on duration. The guarantee
and limit of liability under section 38
and this subpart shall expire after the
Board notifies the bank that it has
remained adequately capitalized for
each of four consecutive calendar
quarters. The expiration or fulfillment
by a company of a guarantee of a capital
restoration plan shall not limit the
liability of the company under any
guarantee required or provided in
connection with any capital restoration
plan filed by the same bank after
expiration of the first guarantee.
(iii) Collection on guarantee. Each
company that controls a given bank
shall be jointly and severally liable for
the guarantee for such bank as required
under section 38 and this subpart, and
the Board may require and collect
payment of the full amount of that
guarantee from any or all of the
companies issuing the guarantee.
(2) Failure to provide guarantee. In the
event that a bank that is controlled by
any company submits a capital
restoration plan that does not contain
the guarantee required under section
38(e) (2) of the FDI Act, the bank shall,
upon submission of the plan, be subject
to the provisions of section 38 and this
subpart that are applicable to banks that
have not submitted an acceptable
capital restoration plan.
(3) Failure to perform guarantee.
Failure by any company that controls a
bank to perform fully its guarantee of
any capital plan shall constitute a
material failure to implement the plan
for purposes of section 38(f) of the FDI
Act. Upon such failure, the bank shall be
subject to the provisions of section 38
and this subpart that are applicable to
banks that have failed in a material
respect to implement a capital
restoration plan.
§ 208.35 Mandatory and discretionary
supervisory actions under section 38.
(a) M andatory supervisory actions—
(1) Provisions applicable to a ll banks.
All state member banks are subject to
the restrictions contained in section
38(d) of the FDI Act on payment of
capital distributions and management
fees.
44888
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
(2) Provisions applicable to
undercapitalized, significantly
undercapitalized, and critically
undercapitalized banks. Immediately
upon receiving notice or being deemed
to have notice, as provided in section
§ 208.32 or section § 208.34 of this
sub p art that the bank is
undercapitalized, significantly
undercapitalized, or critically
undercapitalized, the bank shall become
subject to the provisions of section 38 of
the FDI Act;
(i) Restricting payment of capital
distributions and management fees
(section 38(d));
(ii) Requiring that the Board monitor
the condition of the bank (section 38(e)
( 1 )):
(iii) Requiring submission of a capital
restoration plan within the schedule
established in this subpart (section
38(e)(2));
(iv) Restricting the growth of the
bank's assets (section 38(e)(3)); and
(v) Requiring prior approval of certain
expansion proposals (section 3(e)(4)).
(3) A dditional provisions applicable
to significantly undercapitalized, and
critically undercapitalized banks. In
addition to the provisions of section 38
of the FDI Act described in paragraph
(a)(2) of this section, immediately upon
receiving notice or being deemed to
have notice, as provided in § 208.32 or
§ 208.34 of this subpart, that the bank is
significantly undercapitalized, or
critically undercapitalized, or that the
bank is subject to the provisions
applicable to institutions that are
significantly undercapitalized because
the bank failed to submit or implement
in any material respect an acceptable
capital restoration plan, the bank shall
become subject to the provisions of
section 38 of the FDI Act that restrict
compensation paid to senior executive
officers of the institution (section
38(f)(4)).
(4) A dditional provisions applicable
to critically undercapitalized banks. In
addition to the provisions of section 38
of the FDI Act described in paragraphs
(a) (2) and (3) of this section,
immediately upon receiving notice or
being deemed to have notice, as
provided in § 208.32 of this subpart, that
the bank is critically undercapitalized,
the bank shall become subject to the
provisions of section 38 of the FDI Act:
(i) Restricting the activities of the
bank (section 38(h)(1)); and
(ii) Restricting payments on
subordinated debt of the bank (section
38(h)(2)).
(b) D iscretionary supervisory actions.
In taking any action under section 38
that is within the Board's discretion to
take in connection with: A state member
bank that is deemed to be
undercapitalized, significantly
undercapitalized, or critically
undercapitalized, or has been
reclassified as undercapitalized, or
significantly undercapitalized; an officer
or director of such bank; or a company
that controls such bank, the Board shall
follow the procedures for issuing
directives under §§ 263.202 and 263.204
of this chapter, unless otherwise
provided in section 38 or this subpart.
Subparts C and D—(Reserved]
/
Rules and Regulations
Subpart H—Issuance and Review of Orders
Pursuant to Prompt Corrective Action
Provisions of the Federal Deposit
Insurance Act
Sec.
§ 263.201 Scope.
§ 263.202 D irectives to tak e prom pt
corrective action.
§ 263.203 Procedures for reclassifying a
state m em ber bank b a se d on criteria
o ther th an capital.
§ 263.204 O rd er to dism iss a director or
senior executive officer.
§ 263.205 Enforcem ent of directives.
Subpart H—Issuance and Review of
Orders Pursuant to Prompt Corrective
Action Provisions of the Federal
Subparts C and D are added to part Deposit Insurance Act
Subpart E—Interpretations
4.
208 and reserved, the undesignated
centerhead preceding section 208.116 is
removed, § § 208.116, 208.117, 208.122,
and 208.124 through 208.128 are
designated as subpart E of part 208, and
the subpart E heading is added to read
as set forth above.
PART 263—RULES OF PRACTICE FOR
HEARINGS
1. The authority citation for 12 CFR
Part 263 is revised to read as follows:
Authority: 5 U.S.C. 504:12 U.S.C. 248, 324,
504, 5 05 .1817(j), 1818,1828(c), 16310, 1847(b),'
1847(d), 1684(b), 1972(2) (F), 3105, 3107, 3108,
3907, 3909; 15 U.S.C. 21. 78o-4. 78o-5. a n d 78u2.
2. Section 263.50(b) is amended by
removing the w ord “an d” at the end of
paragraph (b)(9), removing the period at
the end of paragraph (b)(10) and adding
in its place a semicolon, and by adding
paragraphs (b)(ll) through (b)(14) to
read as follows:
§ 263.50
*
•*
Purpose and scope.
*
*
*
(b)* * *
(11) Issuance of a prompt corrective
action directive to a member bank under
section 38 of the FDI Act (12 U.S.C.
1831o);
(12) Reclassification of a member
bank on grounds of unsafe or unsound
condition under section 38(g)(1) of the
FDI Act (12 U.S.C. 18310(g)(1));
(13) Reclassification of a member
bank on grounds of unsafe and unsound
practice under section 38(g)(1) of the FDI
Act (12 U.S.C. 1831o(g)(l)); and
(14) Issuance of an order requiring a
member bank to dismiss a director or
senior executive officer under section 38
(e)(5) and 38(f)(2) (F)(ii) of the FDI Act
(12 U.S.C. 1831o(e)(5) and 1831o(f)(2)
(F)(ii)).
3. A new subpart H is added to part
263 to read as follows:
§ 263.201
Scope.
(a) The rules and procedures set forth
in this subpart apply to state member
banks, companies that control state
member banks or are affiliated with
such banks, and senior executive
officers and directors of state member
banks that are subject to the provisions
of section 38 of the Federal Deposit
Insurance Act (section 38) and subpart B
of part 208 of this chapter.
§ 263.202 Directives to take prompt
regulatory action.
(a) N otice o f intent to issue
directive.—(1) In general. The Board
shall provide an undercapitalized,
significantly undercapitalized, or
critically undercapitalized state member
bank or, where appropriate, any
company that controls the bank, prior
written notice of the Board’s intention to
issue a directive requiring such bank or
company to take actions or to follow
proscriptions described in section 38
that are within the Board's discretion to
require or impose under section 38 of the
FDI Act, including sections 38(e)(5),
(f)(2), (f)(3), or (f)(5). The bank shall have
such time to respond to a proposed
directive as provided by the Board
under paragraph (c) of this section.
(2) Im m ediate issuance o f fin a l
directive. If the Board finds it necessary
in order to carry out the purposes of
section 38 of the FDI Act, the Board
may, without providing the notice
prescribed in paragraph (a)(1) of this
section, issue a directive requiring a
state member bank or any company that
controls a state member bank
immediately to take actions or to follow
proscriptions described in section 38
that are within the Board's discretion to
require or impose under section 38 of the
FDI Act, including section 38(e)(5). (f)(2),
(f)(3), or (f)(5). A bank or company that
is subject to such an immediately
effective directive may submit a written
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
appeal of the directive to the Board.
Such an appeal must be received by the
Board within 14 calendar days of the
issuance of the directive, unless the
Board permits a longer period. The
Board shall consider any such appeal, if
filed in a timely matter, within 60 days
of receiving the appeal. During such
period of review, the directive shall
remain in effect unless the Board, in its
sole discretion, stays the effectiveness
of the directive.
(b) Contents o f notice. A notice of
intention to issue a directive shall
include:
(1) A statement of the bank's capital
measures and capital levels:
(2) A description of the restrictions,
prohibitions, or affirmative actions that
the Board proposes to impose or require;
(3) The proposed date when such
restrictions or prohibitions would be
effective or the proposed date for
completion of such affirmative actions;
and
(4) The date by which the bank or
company subject to the directive may
file with the Board a written response to
the notice.
(c) R esponse to notice—(1) Time fo r
response. A bank or company may file a
written response to a notice of intent to
issue a directive within the time period
set by the Board. The date shall be at
least 14 calendar days from the date of
the notice unless the Board determines
that a shorter period is appropriate in
light of the financial condition of the
bank or other relevant circumstances.
(2) Content o f response. The response
should include:
(i) An explanation why the action
proposed by the Board is not an
appropriate exercise of discretion under
section 38;
(ii) Any recommended modification of
the proposed directive; and
(iii) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the bank or
company regarding the proposed
directive.
(d) Board consideration o f response.
After considering the response, the
Board may:
(1) Issue the directive as proposed or
in modified form;
(2) Determine not to issue the
directive and so notify the bank or
company; or
(3) Seek additional information or
clarification of the response from the
bank or company, or any other relevant
source.
(e) Failure to file response. Failure by
^ bank or company to file with the
Board, within the specified time period,
a written response to a proposed
/
Rules and Regulations 44889
(3) R esponse to notice o f proposed
reclassification. A bank may file a
written response to a notice of proposed
reclassification within the time period
set by the Board. The response should
include:
(i) An explanation of why the bank is
not in unsafe or unsound condition or
otherwise should not be reclassified;
(ii) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the bank or
company regarding the reclassification.
(4) Failure to file response. Failure by
a bank to file, within the specified time
period, a written response with the
§ 263.203 Procedures for reclassifying a
Board to a notice of proposed
state member bank based on criteria other
reclassification shall constitute a waiver
than capital.
(a) R eclassification based on unsafe of the opportunity to respond and shall
constitute consent to the
or unsound condition or practice—(1)
reclassification.
Issuance o f notice o f proposed
(5) R equest fo r hearing and
reclassification—(i) Grounds fo r
presentation o f oral testim ony or
reclassification. (A) Pursuant to
witnesses. The response may include a
§ 208.33(c) of Regulation H (12 CFR
request for an informal hearing before
208.33(c)), the Board may reclassify a
the Board or its designee under this
well capitalized bank as adequately
section. If the bank desires to present
capitalized or subject an adequately
oral testimony or witnesses at the
capitalized or undercapitalized
hearing,
the bank shall include a request
institution to the supervisory actions
to do so with the request for an informal
applicable to the next lower capital
hearing. A request to present oral
category if:
testimony or witnesses shall specify the
(1) The Board determines that the
names
of the witnesses and the general
bank is in unsafe or unsound condition;
nature of their expected testimony.
or
Failure to request a hearing shall
(2) The Board deems the bank to be
constitute a waiver of any right to a
engaged in an unsafe or unsound
hearing, and failure to request the
practice and not to have corrected the
opportunity to present oral testimony or
deficiency.
witnesses shall constitute a waiver of
(B) Any action pursuant to this
any right to present oral testimony or
paragraph (a)(l)(i) shall hereinafter be
witnesses.
referred to as “reclassification.”
(6) Order fo r inform al hearing. Upon
(ii) Prior notice to institution. Prior to
receipt of a timely written request that
taking action pursuant to § 208.33(c) of
includes a request for a hearing, the
this chapter, the Board shall issue and
serve on the bank a w ritten notice of the Board shall issue an order directing an
informal hearing to commence no later
Board’s intention to reclassify the bank.
than 30 days after receipt of the request,
(2) Contents o f notice. A notice of
unless the bank requests a later date.
intention to reclassify a bank based on
The hearing shall be held in
unsafe or unsound condition shall
Washington, DC or at such other place
include:
as may be designated by the Board,
(i) A statem ent of the bank’s capital
before a presiding officers) designated
measures and capital levels and the
by the Board to conduct the hearing.
category to which the bank would be
(7) Hearing procedures, (i) The bank
reclassified;
shall have the right to introduce relevant
(ii) The reasons for reclassification of
written materials and to present oral
the bank;
argument at the hearing. The bank may
(iii) The date by which the bank
introduce oral testimony and present
subject to the notice of reclassification
may file with the Board a written appeal witnesses only if expressly authorized
by the Board or the presiding officer(s).
of the proposed reclassification and a
Neither the provisions of the
request for a hearing, which shall be at
Administrative Procedure Act (5 U.S.C.
least 14 calendar days from the date of
554-557) governing adjudications
service of the notice unless the Board
required by statute to be determined on
determines that a shorter period is
the record nor the Uniform Rules of
appropriate in light of the financial
Practice and Procedure in subpart A of
condition of the bank or other relevant
this part apply to an informal hearing
circumstances.
directive shall constitute a waiver of the
opportunity to respond and shall
constitute consent to the issuance of the
directive.
(f) Request fo r m odification or
rescission o f directive. Any bank or
company that is subject to a directive
under this subpart may, upon a change
in circumstances, request in writing that
the Board reconsider the terms of the
directive, and may propose that the
directive be rescinded or modified.
Unless otherwise ordered by the Board,
the directive shall continue in place
while such request is pending before the
Board.
44890
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
under this section unless the Board
orders that such procedures shall apply.
(ii) The informal hearing shall be
recorded, and a transcript shall be
furnished to the bank upon request and
payment of the cost thereof. W itnesses
need not be sworn, unless specifically
requested by a party or the presiding
officers). The presiding officer(s) may
ask questions of any witness.
(iii) The presiding officers) may order
that the hearing be continued for a
reasonable period (normally five
business days) following completion of
ora! testimony or argument to allow
additional written submissions to the
hearing record.
(8) Recom m endation o f presiding
officers. Within 20 calendar days
following the date the hearing and the
record on the proceeding are closed, the
presiding officer(s) shall make a
recommendation to the Board on the
reclassification.
(9) Tim e fo r decision. Not later than
60 calendar days after the date the
record is closed or the date of the
response in a case where no hearing
w as requested, the Board will decide
whether to reclassify the bank and
notify the bank of the Board’s decision.
(b )
R equest fo r rescission o f
reclassification. Any bank that has been
reclassified under this section, may,
upon a change in circumstances, request
in writing that the Board reconsider the
reclassification, and may propose that
the reclassification be rescinded and
that any directives issued in connection
with the reclassification be modified,
rescinded, or removed. Unless otherwise
ordered by the Board, the bank shall
remain subject to the reclassification
and to any directives issued in
connection with that reclassification
while such request is pending before the
Board.
§ 263.204 Order to dismiss a director or
senior executive officer.
(a) Service o f notice. When the Board
issues and serves a directive on a state
member bank pursuant to § 283.202
requiring the bank to dismiss from office
any director or senior executive officer
under section 38(f) (2) (F) (ii) of the FDI
Act, the Board shall also serve a copy of
the directive, or the relevant portions of
the directive where appropriate, upon
the person to be dismissed.
(b) R esponse to directive—(1) Request
fo r reinstatem ent. A director or senior
executive officer who has been served
with a directive under paragraph (a) of
this section (Respondent) may file a
written request for reinstatement. The
request for reinstatement shall be filed
within 10 calendar days of the receipt of
the directive by the Respondent, unless
further time is allowed by the Board at
the request of the Respondent.
(2) Contents o f request; inform al
hearing. The request for reinstatement
shall include reasons why the
Respondent should be reinstated, and
may include a request for an informal
hearing before the Board or its designee
under this section. If the Respondent
desires to present oral testimony or
witnesses at the hearing, the
Respondent shall include a request to do
so with the request for an informal
hearing. The request to present oral
testimony or witnesses shall specify the
names of the witnesses and the general
nature of their expected testimony.
Failure to request a hearing shall
constitute a waiver of any right to a
hearing and failure to request the
opportunity to present oral testimony or
witnesses shall constitute a waiver of
any right or opportunity to present oral
testimony or witnesses.
(3) E ffective date. Unless otherwise
ordered by the Board, the dismissal
shai! remain in effect while a request for
reinstatem ent is pending.
(c) Order fo r inform al hearing. Upon
receipt of a timely written request from
a Respondent for an informal hearing on
the portion of a directive requiring a
bank to dismiss from office any director
or senior executive officer, the Board
shall issue an order directing an
informal hearing to commence no later
than 30 days after receipt of the request,
unless theRespondent requests a later
date. The hearing shall be held in
Washington, D.C., or at such other place
as may be designated by the Board,
before a presiding officer(s) designated
by the Board to conduct the hearing.
(d) Hearing procedures. (1) A
Respondent may appear at the hearing
personally or through counsel. A
Respondent shall have the right to
introduce relevant written materials and
to present oral argument. A Respondent
may introduce oral testimony and
present witnesses only if expressly
authorized by the Board or the presiding
officer(s). Neither the provisions of the
Administrative Procedure Act governing
adjudications required by statute to be
determined on the record nor the
Uniform Rules of Practice and Procedure
in subpart A of this part apply to an
informal hearing under this section
unless the Board orders that such
procedures shall apply.
(2) The informal hearing shall be
recorded, and a transcript shall be
furnished to the Respondent upon
request and payment of the cost thereof.
W itnesses need not be sworn, unless
specifically requested by a party or the
presiding officer(s). The presiding
/
Rules and Regulations
officer(s) may ask questions of any
witness.
(3) The presiding officers) may order
■that the hearing be continued for a
reasonable period (normally five
business days) following completion of
oral testimony or argument to allow
additional written submissions to,the
hearing record.
(e) Standard fo r review. A
Respondent shall bear the burden of
demonstrating that his or her continued
employment by or service with the bank
would materially strengthen the bank's
ability:
(1) To become adequately capitalized,
to the extent that the directive w as
issued as a result of the bank's capital
level or failure to submit or implement a
capital restoration plan; and
(2) To correct the unsafe or unsound
condition or unsafe or unsound practice,
to the extent that the directive was
issued as a result of classification of the
bank based on supervisory criteria other
than capital, pursuant to section 38(g) of
the FDI Act.
(f) Recom m endation o f presiding
officers. Within 20 calendar days
following the date the hearing and the
record on the proceeding are closed, the
presiding officer(s) shall make a
recommendation to the Board
concerning the Respondent’s request for
reinstatement with the bank.
(g) Tim e fo r decision. Not later than
60 calendar days after the date the
record is closed or the date of the
response in a case where no hearing
w as requested, the Board shall grant or
deny the request for reinstatement and
notify the Respondent of the Board’s
decision. If the Board denies the request
for reinstatem ent the Board shall set
forth in the notification the reasons for
the Board's action.
§ 263.205
Enforcement of directives.
(a) Judicial rem edies. Whenever a
state member bank or company that
controls a state member bank fails to
comply with a directive issued under
section 38, the Board may seek
enforcement of the directive in the
appropriate United States district court
pursuant to section 8(i) (1) of the FDI
Act.
(b) A dm inistrative rem edies—(1)
Failure to com ply with directive.
Pursuant to section 8(i) (2) (A) of the FDI
Act, the Board may assess a civil money
penalty against any state member bank
or company that controls a state
member bank that violates or otherwise
fails to comply with any final directive
issued under section 38 and against any
institution-affiliated party who
Federal Register / Vol. 57. No. 189 / Tuesday, September 29, 1992
participates in such violation or
noncompliance.
(2) Failure to im plem ent capita/
restoration plan. The failure of a bank to
implement a capital restoration plan
required under section 38, subpart B of
Regulation H (12 CFR part 208, subpart
B), or this subpart, or the failure of a
company having control of a bank to
fulfill a guarantee of a capital
restoration plan made pursuant to
section 38 (e) (2) of the FDI Act shall
subject the bank or company to the
assessment of civil money penalties
pursuant to section 8(i) (2) (A) of the FDI
Act.
(c) O ther enforcem ent action. In
addition to the actions described in
paragraphs (a) and (b) of this section,
the Board may seek enforcement of the
provisions of section 38 or subpart B of
Regulation H (12 CFR part 208, subpart
B) through any other judicial or
administrative proceeding authorized by
law.
Subpart A—Capital Categories
§6.1 Authority, purpose, scope, and other
supervisory authority.
(a) Authority. Tnis part is issued by
the Office of the Comptroller of the
Currency (OCC) pursuant to section 38
(section 38) of the Federal Deposit
Insurance Act (FDI Act) as added by
section 131 of the Federal Deposit
Insurance Corporation Improvement Act
of 1991 (Pub. L. 102-242,105 Stat. 2238
(1991)) (12 U.S.C. 1831c).
(b) Purpose. Section 38 of the FDI Act
establishes a framework of supervisory
actions for insured depository
institutions that are not adequately
capitalized. The principal purpose of
this subpart is to define, for insured
national banks, the capital measures
and capital levels, and for insured
federal branches, comparable assetbased measures and levels, that are
used for determining the supervisory
actions authorized under section 38 of
the FDI Act. This part 6 also establishes
procedures for submission and review of
By o rd e r of the Board o f G overnors of the
capital restoration plans and for
Federal R eserve System .
issuance and review of directives and
orders pursuant to section 38.
Dated: Septem ber 18,1992.
(c) Scope. This subpart implements
W illiam VV. W iles,
the provisions of section 38 of the FDI
Secretary o f the Board.
Act as they apply to insured national
DEPARTMENT OF THE TREASURY
banks and insured federal branches.
Certain of these provisions also apply to
Office of the Comptroller of the Currency
officers, directors and employees of
12 CFR Parts 6 and 19
these insured institutions. Other
provisions apply to any company that
For the reasons set forth in the
controls an insured national bank or
preamble, chapter I of title 12 of the
Code of Federal Regulations is amended insured federal branch and to the
affiliates of an insured national bank or
as set forth below:
insured federal branch.
1.
Part 6 is added to read as follows: (d) O ther supervisory authority.
Neither section 38 nor this part in any
PART 6—PROMPT CORRECTIVE
way limits the authority of the OCC
ACTION
under any other provision of law to take
supervisory actions to address unsafe or
Subpart A—Capital Categories
unsound practices, deficient capital
Sec.
levels, violations of law, unsafe or
6.1
A uthority, purpose, scope, a n d other
unsound conditions, or other practices.
supervisory authority.
Action under section 38 of the FDI Act
G.2 Definitions.
and this part may be taken
6.3 N otice of capital category.
independently of, in conjunction with, or
6.4 C apital m easu res a n d capital category
in addition to any other enforcement
definitions.
action available to the OCC, including
6.5 C apital restoratio n plans.
issuance of cease and desist orders,
6.6 M a n d a to ry a n d d iscretio nary
capital directives, approval or denial of
supervisory action s a n d section 38.
applications or notices, assessment of
Subpart B— Directives To Take Prompt
civil money penalties, or any other
Corrective Action
actions authorized by law.
(e) D isclosure o f capital categories.
6.20 Scope.
The assignment of an insured national
6.21 N otice o f in ten t to issu e a directive.
bank or insured federal branch under
6.22 Response to notice.
6.23 D ecision a n d issuan ce o f a prom pt
this subpart within a particular capital
corrective action directive.
category is for purposes of implementing
6.24 R equest for m odification or rescission
and applying the provisions of section
o f directive.
38. Unless permitted by the OCC or
6.25 E nforcem ent o f directive.
otherwise required by law. no bank may
Authority: 12 U .S .C 93a. 1831o.
state in any advertisement or
/
Rules and Regulations 44891
promotional material its capital category
under this subpart or that the OCC or
any other federal banking agency has
assigned the bank to a particular capital
category.
§ 6.2 Definitions.
For purposes of section 38 and this
part, the definitions related to capital in
part 3 of this chapter shall apply. In
addition, except as modified in this
section or unless the context otherwise
requires, the terms used in this subpart
have the same meanings as set forth in
section 38 and section 3 of the FDI Act.
(a) Bank means all insured national
banks and all insured federal branches,
except where otherwise provided in this
subpart.
(b) (1) Control has the same meaning
assigned to it in section 2 of the Bank
Holding Company Act (12 U.S.C. 1841),
and the term controlled shall be
construed consistently with the term
control.
(2) Exclusion fo r fiduciary ownership.
No insured depository institution or
company controls another insured
depository institution or company by
virtue of its ownership or control of
shares in a fiduciary capacity. Shares
shall not be deemed to have been
acquired in a fiduciary capacity if the
acquiring insured depository institution
or company has sole discretionary
authority to exercise voting rights with
respect thereto.
(3) Exclusion fo r debts previously
contracted. No insured depository
institution or company controls another
insured depository institution or
company by virtue of its ownership or
control of shares acquired in securing or
collecting a debt previously contracted
in good faith, until two years'after the
date of acquisition. The two-year period
may be extended at the discretion of the
appropriate federal banking agency for
up to three one-year periods.
(c) Controlling person means any
person having control of an insured
depository institution and any company
controlled by that person.
(d) Leverage ratio means the ratio of
Tier 1 capital to adjusted total assets, as
calculated in accordance with the
OCC's Minimum Capital Ratios in part 3
of this chapter.
(e) M anagem ent fe e means any
payment of money or provision of any
other thing of value to a company or
individual for the provision of
management services or advice to the
bank or related overhead expenses,
including payments related to
supervisory, executive, managerial, or
policymaking functions, other than
compensation to an individual in the
44892
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
individual’s capacity as an officer or
employee of the bank.
(f) R isk-w eighted assets means total
risk weighted assets, as calculated in
accordance with the OCC’s Minimum
Capital Ratios in part 3 of this chapter.
(g) Tangible equity means the amount
of Tier 1 capital elements in the OCC’s
Risk-Based Capital Guidelines
(appendix A to part 3 of this chapter)
plus the amount of outstanding
cumulative perpetual preferred stock
(including related surplus) minus all
intangible assets except purchased
mortgage servicing rights to the extent
that the OCC determines pursuant to
section 475 of the Federal Deposit
Insurance Corporation Improvement Act
of 1991 that purchased mortgage
servicing rights may be included in
calculating the bank’s Tier 1 capital.
(h) Tier 1 capital means the amount of
Tier 1 capital as defined in the OCC’s
Minimum Capital Ratios in part 3 of this
chapter.
(i) Tier 1 risk-based capital ratio
means the ratio of Tier 1 capital to risk
weighted assets, as calculated in
accordance with the OCC’s Minimum
Capital Ratios in part 3 of this chapter.
(j) Total assets means quarterly
average total assets as reported in a
bank’s Consolidated Reports of
Condition and Income (Call Report),
minus intangible assets as provided in
the definition of tangible equity. The
OCC reserves the right to require a bank
to compute and maintain its capital
ratios on the basis of actual, rather than
average, total assets when computing
tangible equity.
(k) Total risk-based capital ratio
means the ratio of qualifying total
capital to risk-weighted assets, as
calculated in accordance with the
OCC’s Minimum Capital Ratios in part 3
of this chapter.
§ 6.3 Notice of capital category.
(a) E ffective date o f determ ination o f
capital category. A bank shall be
deemed to be within a given capital
category for purposes of section 38 of
the FDI Act and this part as of the date
the bank is notified of, or is deemed to
have notice of, its capital category
pursuant to paragraph (b) of this section.
(b) N otice o f capital category. A bank
shall be deemed to have been notified of
its capital levels and its capital category
as of the most recent date:
(1) A Consolidated Report of
Condition and Income (Call Report) is
required to be filed with the OCC;
(2) A final report of examination is
delivered to the bank; or
(3) W ritten notice is provided by the
OCC to the bank of its capital category
for purposes of section 38 of the FDI Act
/
Rules and Regulations
(i) Has a total risk-based capital ratio
that is less than 8.0 percent; or
(ii) Has a Tier 1 risk-based capital
ratio that is less than 4.0 percent; or
(iii) (A) Except as provided in
paragraph (b)(3)(iii) (B) of this section,
has a leverage ratio that is less than 4.0
percent; or
(B) If the bank is rated 1 in the most
recent examination of the bank, has a
leverage ratio that is less than 3.0
percent.
(4) Significantly undercapitalized if
the bank has:
(i) A total risk-based capital ratio that
is less than 6.0 percent; or
(ii) A Tier 1 risk-based capital ratio
that is less than 3.0 percent; or
(iii) A leverage ratio that is less than
3.0 percent.
(5) C ritically undercapitalized if the
bank has a ratio of tangible equity to
total assets that is equal to or less than
2.0 percent.
(c) C apital categories fo r insured
federa l branches. For purposes of the
provisions of section 38 of the FDI Act
§ 6.4 Capital measures and capital
and this part, an insured federal branch
category definitions.
shall be deemed to be:
(a) Capital m easures. For purposes of
(1) W ell capitalized if the insured
section 38 and this part, the relevant
federal branch:
capital measures shall be:
(1) Maintains the pledge of assets
(1) The total risk-based capital ratio;
required under 12 CFR 346.19; and
(2) The Tier 1 risk-based capital ratio:
(ii) Maintains the eligible assets
(3) The leverage ratio.
prescribed
under 12 CFR 346.20 at 108
(b) C apital categories. For purposes of
percent or more of the preceding
the provisions of section 38 and this
quarter’s average book value of the
part, a bank shall be deemed to be:
insured branch’s third-party liabilities;
(1) W ell capitalized if the bank:
and
(1) Has a total risk-based capital ratio
(iii) Has not received written
of 10.0 percent or greater; and
notification from:
(ii) Has a Tier 1 risk-based capital
(A) The OCC to increase its capital
ratio of 6.0 percent or greater; and
(iii) Has a leverage ratio of 5.0 percent equivalency deposit pursuant to
§ 28.6(a) of this chapter, or to comply
or greater; and
with asset maintenance requirements
(iv) Is not subject to any written
pursuant to § 28.9 of this chapter; or
agreement, order or capital directive, or
(B) The FDIC to pledge additional
prompt corrective action directive
issued by the OCC pursuant to section 8 assets pursuant to 12 CFR 346.19 or to
of the FDI Act, the International Lending maintain a higher ratio of eligible assets
Supervision Act of 1983 (12 U.S.C. 3907), pursuant to 12 CFR 346.20.
(2) A d eq u a tely C apitalized if the
or section 38 of the FDI Act, or any
insured federal branch:
regulation thereunder, to meet and
(i) Maintains the pledge of assets
maintain a specific capital level for any
prescribed under 12 CFR 346.19; and
capital measure.
(ii) Maintains the eligible assets
(2) A dequately capitalized if the bank:
prescribed under 12 CFR 346.20 at 106
(i) Has a total risk-based capital ratio
percent or more of the preceding
of 8.0 percent or greater; and
quarter’s average book value of the
(ii) Has a Tier 1 risk-based capital
insured branch's third-party liabilities;
ratio of 4.0 percent or greater; and
and
(iii) Has:
(iii) Does not meet the definition of a
(A) A leverage ratio of 4.0 percent or
well capitalized insured federal branch.
greater; or
(3) U ndercapitalized if the insured
(B) A leverage ratio of 3.0 percent or
greater if the bank is rated 1 in the most federal branch:
(i) Fails to maintain the pledge of
recent examination of the bank; and
(iv) Does not meet the definition of a
assets required under 12 CFR 346.19; or
(ii) Fails to maintain the eligible
well capitalized bank.
assets prescribed under 12 CFR 346.20 at
(3) U ndercapitalized if the bank:
and this part or that the bank’s capital
category has changed as provided in
paragraph (c) of this section or § 6.1 of
this subpart and subpart M of part 19 of
this chapter.
(c) A djustm ents to reported capital
levels and capital category—(1) N otice
o f adjustm en t b y bank. A bank shall
provide the OCC with written notice
that an adjustment to the bank’s capital
category may have occurred no later
than 15 calendar days following the date
that any material event has occurred
that would cause the bank to be placed
in a lower capital category from the
category assigned to the bank for
purposes of section 38 and this part on
the basis of the bank’s most recent Call
Report or report of examination.
(2) D eterm ination to change capital
category. After receiving notice
pursuant to paragraph (c)(1) of this
section, the OCC shall determine
whether to change the capital category
of the bank and shall notify the bank of
the OCC's determination.
Federal Register / Vol. 57, No. 169 / Tuesday, September 29, 1992
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Rules and Regulations 44893
undercapitalized (as defined in § 6.4)
(2) A dditional capital restoration
plans. Notwithstanding paragraph (a)(1) and that fails to submit a written capital
restoration plan within the period
of this section, a bank that has already
provided in this section shall, upon the
submitted and is operating under a
expiration of that period, be subject to
capital restoration plan approved under
section 38 and this subpart is not
all of the provisions of section 38 and
this part applicable to significantly
required to submit an additional capita!
restoration plan based on a revised
undercapitalized banks.
calculation of its capital measures or a
(f) Failure to im plem ent a capital
reclassification of the institution under
restoration plan. Any undercapitalized
§ 6.4 and subpart M of part 19 of this
bank that fails, in any material respect,
chapter unless the OCC notifies the
to implement a capital restoration plan
bank that it must submit a new or
shall be subject to all of the provisions
revised capital plan. A bank that is
of section 38 and this part applicable to
notified that it must submit a new or
significantly undercapitalized banks.
revised capital restoration plan shall file
(g) A m endm ent o f capital restoration
the plan in writing with the OCC within plan. A bank that has submitted an
45 days of receiving such notice, unless
approved capital restoration plan may.
the OCC notifies the bank in writing that after prior written notice to and
the plan must be filed within a different
approval by the OCC, amend the plan to
period.
reflect a change in circumstance. Until
(b) Contents o f plan. All financial data such time as a proposed amendment has
submitted in connection with a capital
been approved, the bank shall
restoration plan shall be prepared in
implement the capital restoration plan
accordance with the instructions
as approved prior to the proposed
provided on the Call Report, unless the
amendment.
OCC instructs otherwise. The capital
(h) N otice to FDIC. Within 45 days of
restoration plan shall include all of the
the effective date of OCC approval of a
information required to be filed under
capital restoration plan, or any
section 38(e)(2) of the FDI A c t A bank
amendment to a capital restoration plan,
that is required to submit a capital
the OCC shall provide a copy of the plan
restoration plan as the result of a
or amendment to the Federal Deposit
reclassification of the bank, pursuant to
Insurance Corporation.
§ 6.4 and subpart M of part 19 of this
(i) Performance guarantee by
chapter, shall include a description of
com panies that control a bank—(1)
the steps the bank will take to correct
Lim itation on liability—(i) Am ount
the unsafe or unsound condition or
lim itation. The aggregate liability under
practice. No plan shall be accepted
the guarantee provided under section 38
unless it includes any performance
and this subpart for all companies that
guarantee described in section
control a specific bank that is required
38(e)(2)(C) of that Act by each company
to submit a capital restoration plan
that controls the bank.
under this subpart shall be limited to the
(c) R eview o f capital restoration
lesser of:
plans. Within 60 days after receiving a
(A) An amount equal to 5.0 percent of
capital restoration plan under this
the bank's total assets at the time the
subpart, the OCC shall provide written
bank w as notified or deemed to have
notice to the bank of whether the plan
notice that the bank was
has been approved. The OCC may
undercapitalized: or
extend the time within which notice
(B) The amount necessary to restore
regarding approval of a plan shall be
§ 6.5 Capital restoration plans.
the relevant capital measures of the
provided,
bank to the levels required for the bank
(a) Schedule fo r filing plan—(1) In
(d) D isapproval o f capital restoration
to be classified as adequately
general. A bank shall file a written
plan. If a capital restoration plan is not
capitalized, as those capital measures
capita] restoration plan with the OCC
approved by the OCC, the bank shall
within 45 days of the date that the bank
submit a revised capital restoration plan and levels are defined at the time that
the bank initially fails to comply with a
receives notice or is deemed to have
within the time specified by the OCC.
capital restoration plan under this
notice that the bank is undercapitalized, Upon receiving notice that its capital
subpart.
significantly undercapitalized, or
restoration plan has not been approved,
(ii) Lim it on duration. The guarantee
critically undercapitalized, unless the
any undercapitalized bank (as defined
and limit of liability under section 38
OCC notifies the bank in writing that the in § 6.4) shall be subject to all of the
and this subpart shall expire after the
plan is to be filed within a different
provisions of section 38 and this part
OCC notifies the bank that it has
period. An adequately capitalized bank
applicable to significantly
remained adequately capitalized for
that has been required pursuant to § 6.4
undercapitalized institutions. These
and subpart M of part 19 of this chapter
provisions shall be applicable until such each of four consecutive calendar
quarters. The expiration or fulfillment
to comply with supervisory actions as if time as a new or revised capital
by a company of a guarantee of a capital
the bank were undercapitalized is not
restoration plan submitted by the bank
restoration plan shall not limit the
required to submit a capita! restoration
has been approved by the OCC.
liability of the company under any
plan solely by virtue of the
(e) Failure to subm it a capital
guarantee required or provided in
reclassification.
restoration plan. A bank that is
106 percent or more of the preceding
quarter’s average book value of the
insured branch’s third-party liabilities.
(4) Significantly undercapitalized if it
fails to maintain the eligible assets
prescribed under 12 CFR 346.20 at 104
percent or more of the preceding
quarter's average book value of the
insured federal branch's third-party
liabilities.
(5) C ritically undercapitalized if it
fails to maintain-the eligible assets
prescribed under 12 CFR 346.20 at 102
percent or more of the preceding
quarter's average book value of the
insured federal branch's third-party
liabilities.
(d) Reclassification based on
supervisory criteria other than capital.
The OCC may reclassify a well
capitalized bank as adequately
capitalized and may require an
adequately capitalized or an
undercapitalized bank to comply with
certain mandatory or discretionary
supervisory actions as if the bank were
in the next lower capital category
(except that the OCC may not reclassify
a significantly undercapitalized bank as
critically undercapitalized} (each of
these actions are hereinafter referred to
generally as reclassifications) in the
following circumstances:
(1) Unsafe or unsound condition. The
OCC has determined, after notice and
opportunity for hearing pursuant to
subpart M of part 19 of this chapter, that
the bank is in unsafe or unsound
condition; or
(2) Unsafe or unsound practice. The
OCC has determined, after notice and
opportunity for hearing pursuant to
subpart M of part 19 of this chapter, that
in the most recent examination of the
bank, the bank received, and has not
corrected a less-than-satisfactory rating
for any of the categories of asset quality
management, earnings, or liquidity.
44894
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
connection with any capital restoration
plan filed by the same bank after
expiration of the first guarantee.
(iii) Collection on guarantee. Each
company that controls a given bank
shall be jointly and severally liable for
the guarantee for such bank as required
under section 38 and this subpart, and
the OCC may require payment of the full
amount of that guarantee from any or all
of the companies issuing the guarantee.
(2) Failure to provide guarantee. In the
event that a bank that is controlled by
any company submits a capital
restoration plan that does not contain
the guarantee required under section
38(e)(2) of the FDI Act, the bank shall,
upon submission of the plan, be subject
to the provisions of section 38 and this
part that are applicable to banks that
have not submitted an acceptable
capital restoration plan.
(3) Failure to perform guarantee.
Failure by any company that controls a
bank to perform fully its guarantee of
any capital plan shall constitute a
material failure to implement the plan
for purposes of section 38(f) of the FDI
Act. Upon such failure, the bank shall be
subject to the provisions of section 38
and this part that are applicable to
banks that have failed in a material
respect to implement a capital
restoration plan.
(j) Enforcem ent o f capital restoration
plan. The failure of a bank to implement,
in any material respect, a capital
restoration plan required under section
38 and this section shall subject the
bank to the assessment of civil money
penalties pursuant to section 8(i)(2)(A)
of the FDI Act.
(iii) Requiring submission of a capital
restoration plan within the schedule
established in this subpart (section
38(e)(2));
(iv) Restricting the growth of the
bank's assets (section 38(e)(3)); and
(v) Requiring prior approval of certain
expansion proposals (section 38(e)(4)).
(3) A dditional provisions applicable
to significantly undercapitalized, and
critically undercapitalized banks. In
addition to the provisions of section 38
of the FDI Act described in paragraph
(a)(2) of this section, immediately upon
receiving notice or being deemed to
have notice, as provided in this subpart,
that the bank is significantly
undercapitalized, or critically
undercapitalized or that the bank is
subject to the provisions applicable to
institutions that are significantly
undercapitalized because it has failed to
submit or implement, in any material
respect, an acceptable capital
restoration plan, the bank shall become
subject to the provisions of section 38 of
the FDI Act that restrict compensation
paid to senior executive officers of the
institution (section 38(f)(4)).
(4) A dditional provisions applicable
to critically undercapitalized banks. In
addition to the provisions of section 38
of the FDI Act described in paragraphs
(a) (2) and (3) of this section,
immediately upon receiving notice or
being deemed to have notice, as
provided in § 6.3, that the bank is
critically undercapitalized, the bank
shall become subject to the provisions of
section 38 of the FDI Act—
(i) Restricting the activities of the
bank (section 38(h)(1)); and
(ii) Restricting payments on
subordinated debt of the bank (section
§ 6.6 Mandatory and discretionary
supervisory actions under section 38.
38(h)(2)).
(b) D iscretionary supervisory actions.
(a) M andatory supervisory actions—
In taking any action under section 38
(1) Provisions applicable to all banks.
that is within the OCC’s discretion to
All banks are subject to the restrictions
contained in section 38(d) of the FDI Act take in connection with a bank that is
deemed to be undercapitalized,
on payment of capital distributions and
significantly undercapitalized, or
management fees.
critically undercapitalized, or has been
(2) Provisions applicable to
reclassified as undercapitalized or
undercapitalized, significantly
significantly undercapitalized; an officer
undercapitalized, and critically
or director of such bank; or a company
undercapitalized banks. Immediately
that controls such bank, the OCC shall
upon receiving notice or being deemed
follow the procedures for issuing
to have notice, as provided in § 6.3, that
directives under subpart B of this part
the bank is undercapitalized,
and subpart N of part 19 of this chapter,
significantly undercapitalized, or
unless otherwise provided in section 38
critically undercapitalized, the bank
shall become subject to the provisions of or this part.
section 38 of the FDI Act—
Subpart B—Directives To Take Prompt
(i) Restricting payment of capital
Corrective Action
distributions and management fees
(section 38(d));
§ 6.20 Scope.
(ii) Requiring that the OCC monitor
The rules and procedures set forth in
the condition of the bank (section
this subpart apply to insured national
38(e)(1));
banks, insured federal branches and
/
Rules and Regulations
senior executive officers and directors
of banks that are subject to the
provisions of section 38 of the Federal
Deposit Insurance Act (section 38) and
subpart A of this part.
§ 6.21
Notice of intent to issue a directive.
(a) N otice o f intent to issue a
directive—(1) In general. The OCC shall
provide an undercapitalized,
significantly undercapitalized, or
critically undercapitalized bank prior
written notice of the OCC’s intention to
issue a directive requiring such bank or
company to take actions or to follow
proscriptions described in section 38
that are within the OCC’s discretion to
require or impose under section 38 of the
FDI Act, including section 38 (e)(5),
(f)(2), (f)(3), or (f)(5). The bank shall have
such time to respond to a proposed
directive as provided under § 6.22.
(2) Im m ediate issuance o f fin a l
directive. If the OCC finds it necessary
in order to carry out the purposes of
section 38 of the FDI Act, the OCC may,
without providing the notice prescribed
in paragraph (a)(1) of this section, issue
a directive requiring a bank immediately
to take actions or to follow proscriptions
described in section 38 that are within
the OCC’s discretion to require or
impose under section 38 of the FDI Act,
including section 38 (e)(5), (f)(2), (f)(3), or
(f)(5). A bank that is subject to such an
immediately effective directive may
submit a written appeal of the directive
to the OCC. Such an appeal must be
received by the OCC within 14 calendar
days of the issuance of the directive,
unless the OCC permits a longer period.
The OCC shall consider any such
appeal, if filed in a timely matter, within
60 days of receiving the appeal. During
such period of review, the directive shall
remain in effect unless the OCC, in its
sole discretion, stays the effectiveness
of the directive.
(b) Contents o f notice. A notice of
intention to issue a directive shall
include:
(1) A statement of the bank’s capital
measures and capital levels;
(2) A description of the restrictions,
prohibitions or affirmative actions that
the OCC proposes to impose or require;
(3) The proposed date when such
restrictions or prohibitions would be
effective or the proposed date for
completion of such affirmative actions;
and
(4) The date by which the bank
subject to the directive may file with the
OCC a written response to the notice.
§ 6.22 Response to notice.
(a) Time fo r response. A bank may file
a written response to a notice of intent
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
to issue a directive within the time
period set by the OCC. The date shall be
at least 14 calendar days from the date
of the notice unless the OCC determines
that a shorter period is appropriate in
light of the financial condition of the
bank or other relevant circumstances.
(b) Content o f response. The response
should include:
(1) An explanation why the action
proposed by the OCC is not an
appropriate exercise of discretion under
section 38;
(2) Any recommended modification of
the proposed directive; and
(3) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the bank
regarding the proposed directive
(c) Failure to file response. Failure by
a bank to file with the OCC, within the
specified time period, a w ritten response
to a proposed directive shall constitute a
waiver of the opportunity to respond
and shall constitute consent to the
issuance of the directive.
§ 6.23 Decision and Issuance of a prompt
corrective action directive.
(a) OCC consideration o f response.
After considering the response, the OCC
may:
(1) Issue the directive as proposed or
in modified form;
(2) Determine not to issue the
directive and so notify the bank; or
(3) Seek additional information or
clarification of the response from the
bank, or any other relevant source.
§ 6.24 Request for modification or
rescission of directive.
Any bank that is subject to a directive
under this subpart may, upon a change
in circumstances request in writing that
the OCC reconsider the terms of the
directive, and may propose that the
directive be rescinded or modified.
Unless otherwise ordered by the OCC,
the directive shall continue in place
while such request is pending before the
OCC.
§ 6.25
Enforcement of directive.
(a) Judicial remedies. W henever a
bank fails to comply with a directive
issued under section 38, the OCC may
seek enforcement of the directive in the
appropriate United States district court
pursuant to section 8(i)(l) of the FDI Act.
(b) A dm inistrative remedies. Pursuant
to section 8(i)(2)(A) of the FDI A ct, the
OCC may assess a civil money penalty
against any bank that violates or
otherwise fails to comply with any final
directive, issued under section 38 and
against any institution-affiliated party
who participates in such violation or
noncompliance.
(c)
O ther enforcem ent action. In
addition to the actions described in
paragraphs (a) and (b) of this section,
the OCC may seek enforcement of the
provisions of section 38 or this part
through any other judicial or
administrative proceeding authorized by
law.
PART 19—[AMENDED]
2. The authority citation for part 19 of
this chapter is revised to read as
follows:
Authority: 5 U.S.C. 504, 554-557; 12 U.S.C.
93(b), 164, 505,1817,1818,1820,18310,1972,
3102. 3108(a), and 3909; 15 U.S.C. 78(h) and (i).
78o—4(c), 780-5, 78q-l, 78u, 78u-2, 78u-3, and
78w; a n d 31 U.S.C. 330.
3. Part 19 is amended by adding
subparts M and N to read as follows:
Subpart M—Procedures for Reclassifying a
Bank Based on Criteria Other Than Capital
Sec.
19.220 Scope.
19.221 R eclassification of a b a n k b a se d on
u n safe or un so un d condition or practice.
19.222 R equest for rescission of
reclassification.
Subpart N—Order To Dismiss a Director or
Senior Executive Officer
19.230 Scope.
19.231 O rd er to dism iss a d irector or senior
executive officer.
Subpart M—Procedures for
Reclassifying a Bank Based on Criteria
Other Than Capital
§ 19.220 Scope.
This subpart applies to the procedures
afforded to any bank that has been
reclassified to a lower capital category
by a notice or order issued by the OCC
pursuant to section 38 of the Federal
Deposit Insurance Act and this'part.
§ 19.221 Reclassification of a bank based
on unsafe or unsound condition or
practice.
(a)
Issuance o f notice o f proposed
reclassification—(1) Grounds fo r
reclassification, (i) Pursuant to § 6.4 of
this chapter, the OCC may reclassify a
well capitalized bank as adequately
capitalized or subject an adequately
capitalized bank or undercapitalized
bank to the supervisory actions
applicable to the next lower capital
category if:
(A) The OCC determines that the
bank is in an unsafe or unsound
condition; or
(B) The OCC deems the bank to be
engaging in an unsafe or unsound
practice and not to have corrected the
deficiency.
/
Rules and Regulations 44895
(ii) Any action pursuant to this
paragraph (a)(1) shall hereinafter be
referred to as “reclassification.”
(2) Prior notice to institution. Prior to
taking action pursuant to § 6.4 of this
chapter, the OCC shall issue and serve
on the bank a written notice of the
OCC’s intention to reclassify the bank.
(b) Contents o f notice. A notice of
intention to reclassify a bank based on
unsafe or unsound condition will
include:
(1) A statement of the bank’s capital
measures and capital levels and the
category to which the bank would be
reclassified;
(2) The reasons for reclassification of
the bank;
(3) The date by which the bank
subject to the notice of reclassification
may file with the OCC a written appeal
of the proposed reclassification and a
request for a hearing, which shall be at
least 14 calendar days from the date of
service of the notice unless the OCC
determines that a shorter period is
appropriate in light of the financial
condition of the bank or other relevant
circumstances.
(c) R esponse to notice o f proposed
reclassification. A bank may file a
written response to a notice of proposed
reclassification within the time period
set by the OCC. The response should
include:
(1) An explanation of why the bank is
not in unsafe or unsound condition or
otherwise should not be reclassified;
(2) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the bank or
company regarding the reclassification.
(d) Failure to file response. Failure by
a bank to file, within the specified time
period, a written response with the OCC
to a notice of proposed reclassification
shall constitute a waiver of the
opportunity to respond and shall
constitute consent to the
reclassification.
(e) Request fo r hearing and
presentation o f oral testim ony or
w itnesses. The response may include a
request for an informal hearing before
the OCC under this section. If the bank
desires to present oral testimony or
witnesses at the hearing, the bank shall
include a request to do so with the
request for an informal hearing. A
request to present oral testimony or
witnesses shall specify the names of the
witnesses and the general nature of their
expected testimony. Failure to request a
hearing shall constitute a waiver of any
right to a hearing, and failure to request
the opportunity to present oral
testimony or witnesses shall constitute a
44896
Federal Register / Vol. 57, No. 189 / Tuesday, September 29. 1992
waiver of any right to present oral
reclassification be rescinded and that
testimony or witnesses.
any directives issued in connection with
(f) Order fo r inform al hearing. Upon
the reclassification be modified,
receipt of a timely written request that
rescinded, or removed. Unless otherwise
includes a request for a hearing, the
ordered by the OCC, the bank shall
OCC shall issue an order directing an
remain subject to the reclassification
informal hearing to commence no later
and to any directives issued in
than 30 days after receipt of the request, connection with that reclassification
unless the OCC allows further time at
while such request is pending before the
the request of the bank. The hearing
OCC.
shall be held in Washington, DC or at
Subpart N— Order To Dismiss a
such other place as may be designated
by the OCC, before a presiding officers) Director or Senior Executive Officer
designated by the OCC to conduct the
§ 19.230 Scope.
hearing.
This subpart applies to informal
(g) H earing procedures. (1) The bank
shall have the right to introduce relevant hearings afforded to any director or
senior executive officer dismissed
w ritten materials and to present oral
pursuant to an order issued under 12
argument at the hearing. The bank may
U.S.C. 1831o and part 6 of this chapter.
introduce oral testimony and present
w itnesses only if expressly authorized
§ 19.231 Order to dismiss a director or
by the OCC or the presiding officers).
senior executive officer.
Neither the provisions of the
(a) Service o f notice. W hen the OCC
Administrative Procedure Act {5 U.S.C.
issues and serves a directive on a bank
554-557) governing adjudications
pursuant to subpart B of part 6 of this
required by statute to be determined on
chapter requiring the bank to dismiss
the record nor the Uniform Rules of
from office any director or senior
Practice and Procedure in subpart A of
executive officer under section
this part apply to an informal hearing
38(f)(2)(F)(ii) of the FDI Act. the OCC
under this section unless the OCC
orders that such procedures shall apply. shall also serve a copy of the directive,
or the relevant portions of the directive
(2) The informal hearing shall be
where
appropriate, upon the person to
recorded, and a transcript furnished to
be dismissed.
the bank upon request and payment of
[b) R esponse to directive—(1) Request
the cost thereof. W itnesses need not be
fo r reinstatem ent. A director or senior
sworn, unless specifically requested by
executive officer who has been served
a party or the presiding officers). The
presiding officers) may ask questions of with a directive under paragraph (a) of
this section (Respondent) may file a
any witness.
written
request for reinstatem ent The
(3) The presiding officers) may order
request for reinstatement shall be filed
that the hearing be continued for a
within 10 calendar days of the receipt of
reasonable period (normally five
the directive by the Respondent unless
business days) following completion of
further time is allowed by the OCC at
oral testimony or argument to allow
the request of the R espondent
additional written submissions to the
(2) C ontents o f request; inform al
hearing record.
hearing. The request for reinstatement
(h) Recom m endation o f presiding
shall include reasons why the
officerfs). Within 20 calendar days
Respondent should be reinstated, and
following the date the hearing and the
record on the proceeding are closed, the may include a request for an informal
hearing before the OCC or its designee
presiding officerfs) shall make a
under this section. If the Respondent
recommendation to the OCC on the
desires to present oral testimony or
reclassification.
(i) Tim e fo r decision. Not later than 60 witnesses at the hearing, the
Respondent shall include a request to do
calendar days after the date the record
is closed or the date of the response in a so with the request for an informal
hearing. The request to present oral
case where no hearing w as requested,
testimony or witnesses shall specify the
the OCC will decide whether to
names of the witnesses and the general
reclassify the bank and notify the bank
nature of their expected testimony.
of the OCC’8 decision.
Failure to request a hearing shall
§ 19.222 Request for rescission of
constitute a w aiver of any right to a
reclassification.
hearing and failure to request the
Any bank that has been reclassified
opportunity to present oral testimony or
under part 6 of this chapter and this
witnesses shall constitute a waiver of
subpart, may, upon a change in
any right or opportunity to present oral
circumstances, request in writing that
testimony or witnesses.
the OCC reconsider the reclassification,
(3) E ffective date. Unless otherwise
and may propose that the
ordered by the OCC, the dismissal shall
/
Rules and Regulations
remain in effect while a request for
reinstatement is pending.
(c) Order fo r inform al hearing. Upon
receipt of a timely written request from
a Respondent for an informal hearing on
the portion of a directive requiring a
bank to dismiss from office any director
or senior executive officer, the OCC
shall issue an order directing an
informal hearing to commence no later
than 30 days after receipt of the request,
unless the Respondent requests a later
date. The hearing shall be held in
Washington, DC, or at such other place
as may be designated by the OCC,
before a presiding officer(s) designated
by the OCC to conduct the hearing.
(d) H earing procedures. (1) A
Respondent may appear at the hearing
personally or through counsel. A
Respondent shall have the right to
introduce relevant written materials and
to present oral argument. A Respondent
may introduce oral testimony and
present witnesses only if expressly
authorized by the OCC or the presiding
officer(s). Neither the provisions of the
Administrative Procedure Act governing
adjudications required by statute to be
determined on the record nor the
Uniform Rules of Practice and Procedure
in subpart A of this part apply to an
informal hearing under this section
unless the OCC orders that such
procedures shall apply.
(2) The informal hearing shall be
recorded, and a transcript furnished to
the Respondent upon request and
payment of the cost thereof. W itnesses
need not be sworn, unless specifically
requested by a party or the presiding
officer(s). The presiding officerfs) may
ask questions of any witness.
(3) The presiding officer(s) may order
that the hearing be continued for a
reasonable period (normally five
business days) following completion of
oral testimony or argument to allow
additional written submissions to the
hearing record.
(e) Standard fo r review. A
Respondent shall bear the burden of
demonstrating that his or her continued
employment by or service with the bank
would materially strengthen the bank's
ability:
(1) To become adequately capitalized,
to the extent that the directive was
issued as a result of the bank’s capital
level or failure to submit or implement a
capital restoration plan; and
(2) To correct the unsafe or unsound
condition or unsafe or unsound practice,
to the extent that the directive was
issued as a result of classification of the
bank based on supervisory criteria other
than capital, pursuant to Section 38(g) of
the FDI Act.
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
(f) Recom m endation o f presiding
officer. Within 20 calendar days
following the date the hearing and the
record on the proceeding are closed, the
presiding officer(s) shall make a
recommendation to the OCC concerning
the Respondent's request for
reinstatement with the bank.
•(g) Time fo r decision. Not later than
60 calendar days after the date the
record is closed or the date of the
response in a case where no hearing
w as requested, the OCC shall grant or
deny the request for reinstatement and
notify the Respondent of the OCC’s
decision. If the OCC denies the request
for reinstatement, the OCC shall set
forth in the notification the reasons for
the OCC’s action.
D ated: Septem ber 11,1992.
S tephen R. Steinbrink,
Acting Comptroller of the Currency.
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 308 and 325
For the reasons set forth in the
preamble, the Board of Directors of the
Federal Deposit Insurance Corporation
amends parts 308 and 325 of title 12 of
the Code of Federal Regulations as
fo llo w s :
PART 308—RULES OF PRACTICE AND
PROCEDURE
1. The authority citation for part 308 is
revised to re a d as follows:
A uthority: 5 U.S.C. 504: 5 U.S.C. 554-557:12
U.S.C. 1815(e), 1817(a) a n d 18180). 1818.1820.
1828(j), 1829, 1831i, 18310; 15 U.S.C. 781(h),
78m, 78n(a), 78n(c), 78n(d), 78n(f). 78o. 78o4(c)(5), 78p, 78q, 78q-l, 78s.
2. Part 308 is amended by adding a
new subpart Q to read as follows:
Subpart Q—Issuance and Review of Orders
Pursuant to the Prompt Corrective Action
Provisions of the Federal Deposit
Insurance Act
Sec.
308.200 Scope.
308.201 D irectives to tak e prom pt corrective
action.
308.202 Procedures for reclassifying a bank
b a se d on criteria other th an capital.
308.203 O rd er to dism iss a director or senior
executive officer.
308.204 Enforcem ent of directives.
Subpart Q— Issuance and Review of
Orders Pursuant to the Prompt
Corrective Action Provisions of the
Federal Deposit Insurance Act
§ 308.200
Scope.
The rules and procedures set forth in
this subpart apply to banks, insured
branches of foreign banks and senior
executive officers and directors of banks
/
Rules and Regulations 44897
directive within the time period set by
the FDIC. The date shall be at least 14
calendar days from the date of the
notice unless the FDIC determines that a
shorter period is appropriate in light of
the financial condition of the bank or
§ 308.201 Directives to take prompt
other relevant circumstances.
corrective action.
(2) Content o f response. The response
(a) N otice o f intent to issue
should include:
directive.—(1) In general. The FDIC
(i) An explanation why the action
shall provide an undercapitalized,
proposed by the FDIC is not an
significantly undercapitalized, or
appropriate exercise of discretion under
critically undercapitalized bank prior
section 38;
written notice of the FDIC’s intention to
(ii) Any recommended modification of
issue a directive requiring such bank to
the
proposed directive; and
take actions or to follow proscriptions
(iii) Any other relevant information,
described in section 38 that are within
mitigating circumstances,
the FDIC’s discretion to require or
documentation, or other evidence in
impose under section 38 of the FDI Act,
support of the position of the bank
including sections 38 (e)(5), (f)(2), (f)(3),
regarding the proposed directive.
or (f)(5). The bank shall have such time
(d) FDIC consideration o f response.
to respond to a proposed directive as
After
considering the response, the FDIC
provided by the FDIC under paragraph
may:
(c) of this section.
(1) Issue the directive as proposed or
(2) Im m ediate issuance o f fin a l
in modified form;
directive. If the FDIC finds it necessary
(2) Determine not to issue the
in order to carry out the purposes of
section 38 of the FDI Act, the FDIC may, directive and so notify the bank; or
(3) Seek additional information or
without providing the notice prescribed
clarification of the response from the
in paragraph (a)(1) of this section, issue
a directive requiring a bank immediately bank or any other relevant source.
(e) Failure to file response. Failure by
to take actions or to follow proscriptions
a bank to file with the FDIC, within the
described in section 38 that are within
specified time period, a written response
the FDIC's discretion to require or
to a proposed directive shall constitute a
impose under section 38 of the FDI A c t
including section 38 (e)(5), (f)(2), (f)(3), or waiver of the opportunity to respond
and shall constitute consent to the
(f)(5). A bank that is subject to such an
issuance of the directive.
immediately effective directive may
(f) R equest fo r m odification or
submit a written appeal of the directive
rescission o f directive. Any bank that is
to the FDIC. Such an appeal must be
received by the FDIC within 14 calendar subject to a directive under this subpart
may, upon a change in circumstances,
days of the issuance of the directive,
unless the FDIC permits a longer period. request in writing that the FDIC
reconsider the terms of the directive,
The FDIC shall consider any such
appeal, if filed in a timely matter, within and may propose that the directive be
rescinded or modified. Unless otherwise
60 days of receiving the appeal. During
such period of review, the directive shall ordered by the FDIC, the directive shall
continue in place while such request is
remain in effect unless the FDIC, in its
pending before the FDIC.
sole discretion, stays the effectiveness
of the directive.
§ 308.202 Procedures for reclassifying a
(b) Contents o f notice. .A notice of
bank based on criteria other than capital.
intention to issue a directive shall
(a) R eclassification based on unsafe
include:
or unsound condition or practice.—(1)
(1) A statement of the bank's capital
Issuance o f notice o f proposed
measures and capital levels:
reclassification.—(i) Grounds for
(2) A description of the restrictions,
reclassification. (A) Pursuant to
prohibitions or affirmative actions that
§ 325.103(d) of this chapter, the FDIC
the FDIC proposes to impose or require:
may reclassify a well capitalized bank
(3) The proposed date when such
as adequately capitalized or subject an
restrictions or prohibitions would be
adequately capitalized or
effective or the proposed date for
undercapitalized institution to the
completion of such affirmative actions:
supervisory actions applicable to the
and
next lower capital category if:
(4) The date by which the bank
(.Z) The FDIC determines that the bank
subject to the directive may file with the
is in unsafe or unsound condition; or
FDIC a written response to the notice.
(2) The FDIC, pursuant to section
(c) Response to notice.—(1) Time fo r
8(b)(8) of the FDI Act (12 U.S.C.
response. A bank may file a written
1818(b)(8)), deems the bank to be
response to a notice of intent to issue a
that are subject to the provisions of
section 38 of the Federal Deposit
Insurance Act (section 38) (12 U.S.C.
1831o) and subpart 9 of Part 325 of this
chapter.
44898
Federal Register / Vol. 57, No. 109 / Tuesday, September 29, 1992
engaged in an unsafe or unsound
practice and not to have corrected the
deficiency.
(B) Any action pursuant to this
paragraph (a)(l)(i) shall hereinafter be
referred to as “reclassification."
(ii) Prior notice to institution. Prior to
taking action pursuant to § 325.103(d) of
this chapter, the FDIC shall issue and
serve on the bank a written notice of the
FDIC’s intention to reclassify the bank.
(2) Contents o f notice. A notice of
intention to reclassify a bank based on
unsafe or unsound condition shall
include:
(i) A statement of the bank’s capital
measures and capital levels and the
category to which the bank would be
reclassified:
(ii) The reasons for reclassification of
the bank;
(iii) The date by which the bank
subject to the notice of reclassification
may file with the FDIC a written appeal
of the proposed reclassification and a
request for a hearing, which shall be at
least 14 calendar days from the date of
service of the notice unless the FDIC
determines that a shorter period is
appropriate in light of the financial
condition of the bank or other relevant
circumstances.
J3) Response to notice o f proposed
reclassification. A bank may file a
written response to a notice of proposed
reclassification within the time period
set by the FDIC. The response should
include:
(i) An explanation of why the bank is
not in an unsafe or unsound condition or
otherwise should not be reclassified;
and
(ii) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the bank
regarding the reclassification.
(4) Failure to file response. Failure by
a bank to file, within the specified time
period, a written response with the FDIC
to a notice of proposed reclassification
shall constitute a waiver of the
opportunity to respond and shall
constitute consent to the
reclassification.
(5) R equest fo r hearing and
presentation o f oral testim ony or
w itnesses. The response may include a
request for an informal hearing before
me FDIC under this section. If the bank
desires to present oral testimony or
witnesses at the hearing, the bank shall
include a request to do so with the
request for an informal hearing. A
request to present oral testimony or
witnesses shall specify the names of the
witnesses and the general nature of their
expected testimony. Failure to request a
hearing shall constitute a waiver of any
right to a hearing, and failure to request
the opportunity to present oral
testimony or witnesses shall constitute a
waiver of any right to present oral
testimony or witnesses.
(6) O rder fo r inform al hearing. Upon
receipt of a timely written request that
includes a request for a hearing, the
FDIC shall issue an order directing an
informal hearing to commence no later
than 30 days after receipt of the request,
unless the bank requests a later date.
The hearing shall be held in
Washington, DC or at such other place
as may be designated by the FDIC,
before a presiding officer(s) designated
by the FDIC to conduct the hearing.
(7) Hearing procedures, (i) The bank
shall have the right to introduce relevant
written materials and to present oral
argument at the hearing. The bank may
introduce oral testimony and present
witnesses only if expressly authorized
by the FDIC or the presiding officers).
Neither the provisions of the
Administrative Procedure Act (5 U.S.C.
554-557) governing adjudications
required by statute to be determined on
the record nor the Uniform Rules of
Practice and Procedure in this part apply
to an informal hearing under this section
unless the FDIC orders that such
procedures shall apply.
(ii) The informal hearing shall be
recorded, and a transcript shall be
furnished to the bank upon request and
payment of the cost thereof. W itnesses
need not be sworn, unless specifically
requested by a party or the presiding
officer(s). The presiding officer(s) may
ask questions of any witness.
(iii) The presiding officer(s) may order
that the hearing be continued for a
reasonable period (normally'five
business days) following completion of
oral testimony or argument to allow
additional written submissions to the
hearing record.
(8) Recom m endation o f presiding
officers. W ithin 20 calendar days
following the date the hearing and the
record on the proceeding are closed, the
presiding officer(s) shall make a
recommendation to the FDIC on the
reclassification.
(9) Tim e fo r decision. Not later than
60 calendar days after the date the
record is closed or the date of the
response in a case where no hearing
w as requested, the FDIC will decide
whether to reclassify the bank and
notify the bank of the FDIC's decision.
(b) Request fo r rescission o f
reclassification. Any bank that has been
reclassified under this section, may,
upon a change in circumstances, request
in writing that the FDIC reconsider the
reclassification, and may propose that
the reclassification be rescinded and
/
Rules and Regulations
that any directives issued in connection
with the reclassification be modified,
rescinded, or removed. Unless otherwise
ordered by the FDIC, the bank shall
remain subject to the reclassification
and to any directives issued in
connection with that reclassification
while such request is pending before the
FDIC.
§ 308.203 Order to dismiss a director or
senior executive officer.
(a) Service o f notice. W hen the FDIC
issues and serves a directive on a bank
pursuant to § 308.201 of this part
requiring the bank to dismiss from office
any director or senior executive officer
under § 38(f)(2)(F)(ii) of the FDI Act, the
FDIC shall also serve a copy of the
directive, or the relevant portions of the
directive where appropriate, upon the
person to be dismissed.
(b) Response to directive.—(1)
R equest fo r reinstatem ent. A director or
senior executive officer who has been
served with a directive under paragraph
(a) of this section (Respondent) may file
a written request for reinstatement. The
request for reinstatement shall be filed
within 10 calendar days of the receipt of
the directive by the Respondent unless
further time is allowed by the FDIC at
the request of the Respondent.
(2) Contents o f request; inform al
hearing. The request for reinstatement
shall include reasons why the
Respondent should be reinstated and
may include a request for an informal
hearing before the FDIC under this
section. If the Respondent desires to
present oral testimony or witnesses at
the hearing, the Respondent shall
include a request to do so with the
request for an informal hearing. The
request to present oral testimony or
witnesses shall specify the names of the
witnesses and the general nature of their
expected testimony. Failure to request a
hearing shall constitute a waiver of any
right to a hearing and failure to request
the opportunity to present oral
testimony or witnesses shall constitute a
waiver of any right or opportunity to
present oral testimony or witnesses.
(3) E ffective date. Unless otherwise
ordered by the FDIC, the dismissal shall
remain in effect while a request for
reinstatement is pending.
(c) Order fo r inform al hearing. Upon
receipt of a timely written request from
a Respondent for an informal hearing on
the portion of a directive requiring a
bank to dismiss from office any director
or senior executive officer, the FDIC
shall issue an order directing an
informal hearing to commence no later
than 30 days after receipt of the request,
unless the Respondent requests a later
Federal Register / V 01, 57, No. 189 / Tuesday, September 29. 1992
date. The hearing shall be held in
Washington, DC, or at such other place
as may be designated by the FDIC,
before a presiding officers) designated
by the FDIC to conduct the hearing.
(d) H earing procedures.—(1) A
Respondent may appear at the hearing
personally or through counsel. A
Respondent shall have the right to
introduce relevant written materials and
to present oral argument. A Respondent
may introduce oral testimony and
present witnesses only if expressly
authorized by the FDIC or the presiding
officer(s). Neither the provisions of the
Administrative Procedure Act governing
adjudications required by statute to be
determined on the record nor the
Uniform Rules of Practice and Procedure
in this part apply to an informal hearing
under this section unless the FDIC
orders that such procedures shall apply.
(2) The informal hearing shall be
recorded, and a transcript shall be
furnished to the Respondent upon
request and payment of the cost thereof.
W itnesses need not be sworn, unless
specifically requested by a party or the
presiding officer(s). The presiding
officer(s) may ask questions of any
witness.
(3) The presiding officer(s) may order
that the hearing be continued for a
reasonable period (normally five
business days) following completion of
oral testimony or argument to allow
additional written submissions to the
hearing record.
(e) Standard fo r review. A
Respondent shall bear the burden of
demonstrating that his or her continued
employment by or service with the bank
would materially strengthen the bank's
ability:
(1) To become adequately capitalized,
to the extent that the directive was
issued as a result of the bank’s capital
level or failure to submit or implement a
capital restoration plan; and
(2) To correct the unsafe or unsound
condition or unsafe or unsound practice,
to the extent that the directive was
issued as a result of classification of the
bank based on supervisory criteria other
than capital, pursuant to section 38(g) of
the FDI A c t
(f) Recom m endation o f presiding
officers. Within 20 calendar days
following the date the hearing and the
record on the proceeding are closed, the
presiding officers) shall make a
recommendation to the FDIC concerning
the Respondent’s request for
reinstatement with the bank.
(g) Time fo r decision. Not later than
60 calendar days after the date the
record is d o se d or the date of the
response in a case where no hearing
w as requested, the FDIC shall grant or
/
Rules ami Regulations 44899
deny t h e r e q u e s t for r e i n s t a t e m e n t a n d
notify the Respondent of the FD lCs
decision. If the FDIC denies the request
for reinstatement, the FDIC shall set
forth in the notification the reasons for
the FDIC's action.
____
Appendix A to Subpart A of Part 325—
§ 308.204 Enforcement of directives.
4. Section 325.2 is amended by
redesignating paragraphs (e), (f), (g), (h),
(>)■ (j). (k), (1), (m), (n) and (o) as
paragraphs (h). (i), (j), (m). (n), (o), (p).
(r), (t), (v) and (x), respectively, and by
adding new paragraphs (e), (f), (g), (k).
(1), (q), (s), (u) and (w) to read as
follows:
(a) Judicial rem edies. W henever a
bank fails to comply with a directive
issued under section 38, the FDIC may
seek enforcement of the directive in the
appropriate United States district court
pursuant to section 8(i)(l) of the FDI Act
(12 U.S.C. 1818(i){l)).
(b) A dm inistrative rem edies—(1)
Failure to com ply with directive.
Pursuant to section 8(i)(2)(A) of the FDI
A c t the FDIC may assess a civil money
penalty against any bank that violates
or otherwise fails to comply with any
final directive issued under section 38
and against any institution-affiliated
party who participates in such violation
or nonc.ompliance.
(2) Failure to im plem ent capital
restoration plan. The failure of a bank to
implement a capital restoration plan
required under section 3S, or subpart B
of part 325 of this chapter, or the failure
of a company having control of a bank
to fulfill a guarantee of a capital
restoration plan made pursuant to
section 38(e)(2) of the FDI Act shall
subject the bank to the assessm ent of
civil money penalties pursuant to
section 8(i)(2)(A) of the FDI Act.
(c) O ther enforcem ent action. In
addition to the actions described in
paragraphs (a) and (b) of this section,
the FDIC may seek enforcement of the
provisions of section 38 or subpart 8 of
part 325 of this chapter through any
other judicial or administrative
proceeding authorized by law.
PART 325—CAPITAL MAINTENANCE
1. The authority citation for part 325 is
revised to read as follows:
A uthority: 12 U.S.C. 1815(a), 1815(b), 1816,
1818(a), 1818(b). 1818(c), 1818{t), 1819(Tenth),
1828(c), 1828(d), 1828{i), 1828(n), 1828{o),
1831o; 3907, 3909; Pub. L. 102-233, 105 Stat.
1761,1790 (12 U.S.C. 1831n note): Pub. L. 102242.105 Stat. 2236, 2386 (12 U.S.C. 1828 note).
Subpart A—Minimum Capital
Requirements
2. Part 325 is am ended by designating
§ § 325.1 through 325.6 as subpart A and
adding the subpart heading to read as
set forth above.
3. Appendixes A and B to part 325 are
redesignated as appendixes A and B to
subpart A of part 325 and the appendix
headings are revised to read as follows:
S ta te m en t o f P o lic y o n R isk -B a se d
Capital
Appendix B to Subpart A of Part 325—
Statement of Policy on Capital
Adequacy
§ 325.2
*
*
Definitions.
*
*
*
(e)(1) Control has the same meaning
assigned to it in section 2 of the Bank
Holding Company Act (12 U.S.C. 1841).
and the term controlled shall be
construed consistently with the term
control.
(2) Exclusion fo r fiducia ry ownership.
No insured depository institution or
company controls another insured
depository institution or company by
virtue of its ownership or control of
shares in a fiduciary capacity. Shares
shall not be deemed to have been
acquired in a fiduciary capacity if the
acquiring insured depository institution
or company has sole discretionary
authority to exercise voting rights with
respect thereto.
(3) Exclusion fo r debts previously
contracted. No insured depository
institution or company controls another
insured depository institution or
company by virtue of its ownership or
control of shares acquired in securing or
collecting a debt previously contracted
in good faith, until two years after the
date of acquisition. The two-year period
may be extended at the discretion of the
appropriate federal banking agency for
up to three one-year periods.
(f) Controlling person means any
person having control of an insured
depository institution and any company
controlled by that person.
(g)(1) H ighly leveraged transaction
means an extension of credit to or
investment in a business by an insured
depository institution where the
financing transaction involves a buyout,
acquisition, or recapitalization of an
existing business and one of the
following criteria is m e t
(i) The transaction results in a
liabilities-to-assets leverage ratio higher
than 75 percent; or
(ii) The transaction at least doubles
the subject company’s liabilities and
results in a liabilities-to-assets leverage
ratio higher than 50 percent; or
44900
F edeial Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
(iii) The transaction is designated an
HLT by a syndication agent or a federal
oank regulator.
(2) Notwithstanding paragraph (g)(1)
of this section, loans and exposures to
any obligor in which the total financing
package, including all obligations held
by all participants is $20 million or more,
or such lower level as the FDIC may
establish by order on a case-by-case
basis, will be excluded from this
definition.
*
*
*
*
*
(k) Leverage ratio means the ratio of
Tier 1 capital to total assets, as
calculated under this part.
(1)
M anagem ent fe e means any
payment of money or provision of any
other thing of value to a company or
individual for the provision of
management services or advice to the
bank or related overhead expenses,
including payments related to
supervisory, executive, managerial, or
policymaking functions, other than
compensation to an individual in the
individual’s capacity as an officer or
employee of the bank.
*
*
*
*
*
(q) R isk-w eighted assets means total
risk-weighted assets, as calculated in
accordance with the FDIC’s Statement
of Policy on Risk-Based Capital
(appendix A to subpart A of part 325).
*
*
*
*
*
(s) Tangible equity means the amount
of core capital elements as defined in
section I.A.l of the FDIC’s Statement of
Policy on Risk-based Capital (appendix
A to subpart A of part 325), plus the
amount of outstanding cumulative
perpetual preferred stock (including
related surplus), minus all intangible
assets except purchased mortgage
servicing rights to the extent that the
FDIC determines pursuant to section 475
of the Federal Deposit Insurance
Corporation Improvement Act of 1991
(12 U.S.C. 1828 note) and § 325.5(f) of
this part that purchased mortgage
servicing rights may be included in
calculating the bank’s Tier 1 capital.
*
*
*
*
*
(u) Tier lsisk -b a se d capital ratio
means the ratio of Tier 1 capital to riskweighted assets, as calculated in
accordance with the FDIC’s Statement
of Policy on Risk-Based Capital
(appendix A to subpart A of part 325).
*
*
*
*
*
(w) Total risk-based capital ratio
m eans the ratio of qualifying total
capital to risk-weighted assets, as
calculated in accordance with the
FDIC’s Statement of Policy on Risk-
Based Capital (appendix A to subpart A
of part 325).
*
*
*
*
*
5.
Part 325 is amended by adding a
new subpart B to read as follows:
Subpart B—Prompt Corrective Action
Sec.
325.101 A uthority, purpose, scope, o ther
supervisory authority, a n d disclosure of
c ap ital categories.
325.102 N otice o f cap ital category.
325.103 C apital m easu res a n d capital
category definitions.
325.104 C apital resto ratio n plans.
325.105 M an d ato ry and d iscretio n ary
supervisory actions u n d e r section 38.
Subpart B— Prompt Corrective Action
§ 325.101 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
(a) Authority. This subpart is issued
by the FDIC pursuant to section 38
(section 38) of the Federal Deposit
Insurance Act (FDI Act), as added by
section 131 of the Federal Deposit
Insurance Corporation Improvement Act
of 1991 (Pub. L. 102-242,105 Stat. 2236
(1991)) (12 U.S.C. 1831o).
(b) Purpose. Section 38 of the FDI Act
establishes a framework of supervisory
actions for insured depository
institutions that are not adequately
capitalized. The principal purpose of
this subpart is to define, for FDICinsured state-chartered nonmember
banks, the capital measures and capital
levels, and for insured branches of
foreign banks, comparable asset-based
measures and levels, that are used for
determining the supervisory actions
authorized under section 38 of the FDI
Act. This subpart also establishes
procedures for submission and review of
capital restoration plans and for
issuance and review of directives and
orders pursuant to section 38.
(c) Scope. This subpart implements
the provisions of section 38 of the FDI
Act as they apply to FDIC-insured statechartered nonmember banks and
insured branches of foreign banks for
which the FDIC is the appropriate
Federal banking agency. Certain of
these provisions also apply to officers,
directors and employees of those
insured institutions. In addition, certain
provisions of this subpart apply to all
insured depository institutions that are
deemed critically undercapitalized.
(d) O ther supervisory authority.
Neither section 38 nor this subpart in
any w ay limits the authority of the FDIC
under any other provision of law to take
supervisory actions to address unsafe or
unsound practices, deficient capital
levels, violations of law, unsafe or
unsound conditions, or other practices.
/
Rules and Regulations
Action under section 38 of the FDI Act
and this subpart may be taken
independently of, in conjunction with or
in addition to any other enforcement
action available to the FDIC, including
issuance of cease and desist orders,
capital directives, approval or denial of
applications or notices, assessment of
civil money penalties, or any other
actions authorized by law.
(e) D isclosure o f capital categories.
The assignment of a bank or insured
branch under this subpart within a
particular capital category is for
purposes of implementing and applying
the provisions of section 38. Unless
permitted by the FDIC or otherwise
required by law, no bank may state in
any advertisement or promotional
material its capital category under this
subpart or that the FDIC or any other
federal banking agency has assigned the
bank to a particular capital category.
§ 325.102
Notice of capital category.
(a) E ffective date o f determ ination o f
capital category. A bank shall be
deemed to be within a given capital
category for purposes of section 38 of
the FDI Act and this subpart as of the
date the bank is notified of, or is deemed
to have notice of, its capital category,
pursuant to paragraph (b) of this section.
(b) N otice o f capital category. A bank
shall be deemed to have been notified of
its capital levels and its capital category
as of the most recent date:
(1) A Consolidated Report of
Condition and Income (Call Report) is
required to be filed with the FDIC;
(2) A final report of examination is
delivered to the bank; or
(3) W ritten notice is provided by the
FDIC to the bank of its capital category
for purposes of section 38 of the FDI Act
and this subpart or that the bank's
capital category has changed as
provided in § 325.103(d).
(c) A djustm ents to reported capital
levels and capital category—(1) N otice
o f adjustm ent b y bank. A bank shall
provide the appropriate FDIC regional
director with written notice that an
adjustment to the bank’s capital
category may have occurred no later
than 15 calendar days following the date
that any material event has occurred
that would cause the bank to be placed
in a lower capital category from the
category assigned to the bank for
purposes of section 38 and this subpart
on the basis of the bank's most recent
Call Report or report of examination.
(2) D eterm ination b y the FDIC to
change capital category. After receiving
notice pursuant to paragraph (c)(1) of
this section, the FDIC shall determine
whether to change the capital category
Federal Register / Vol. 57, No. 189 / Tuesday. September 29, 1992
(ii)A Tier 1 risk-based capital ratio
that is less than 3.0 percent; or
(iii) A leverage ratio that is less than
§ 325.103 Capital measures and capital
3.0 percent
category definitions.
(5) C ritically undercapitalized if the
(a) C apital measures. For purposes of
insured depository institution has a ratio
section 38 and this subpart, the relevant of tangible equity to total assets that is
capital measures shall be:
equal to or less than 2.0 percent.
(1) The total risk-based capital ratio;
(c) Capital categories fo r insured
(2) The Tier 1 risk-based capital ratio; branches o f foreign banks. For purposes
and
of the provisions of section 38 and this
(3) The leverage ratio.
subpart, a insured branch of a foreign
(b) Capital categories. For purposes of bank shall be deemed to be:
section 38 and this subpart, a bank shall
(1) W ell capitalized if the insured
be deemed to be:
branch:
(1) W e11.capitalized if the bank:
(1) Maintains the pledge of assets
(i) Has a total risk-based capital ratio
required under 12 CFR 346.19; and
of 10.0 percent or greater; and
(ii) Maintains the eligible assets
(ii) Has a Tier 1 risk-based capital
prescribed under 12 CFR 346.20 at 108
ratio of 6.0 percent or greater; and
percent or more of the preceding
(iii) Has a leverage ratio of 5.0 percent quarter's average book value of the
or greater; and
insured branch’s third-party Liabilities;
(iv) Is not subject to any written
and
agreement, order, capital directive, or
(iii) Has not received written
prompt corrective action directive
notification from:
issued by the FDIC pursuant to section 8
(A) The OCC to increase its capital
of the FDI Act (12 U.S.C. 1818), the
equivalency deposit pursuant to 12 CFR
International Lending Supervision Act of 28.6(a), or to comply with asset
1983 (12 U.S.C. 3907), or section 38 of the maintenance requirements pursuant to
FDI Act (12 U.S.C. 1831o), or any
12 CFR 28.9; or
regulation thereunder, to meet and
(B) The FDIC to pledge additional
maintain a specific capital level for any
assets pursuant to 12 CFR 346.19 or to
capital measure.
maintain a higher ratio of eligible assets
(21 A dequately capitalized if the bank: pursuant to 12 CFR 346.20.
(i) Has a total risk-based capital ratio
(2) A dequately capitalized if the
of 8.0 percent or greater; and
insured branch:
(ii) Has a Tier 1 risk-based capital
(i) Maintains the pledge of assets
ratio of 4.0 percent or greater; and
required under 12 CFR 346.19; and
(iii) Has:
(ii) Maintains the eligible assets
(A) A leverage ratio of 4.0 percent or
prescribed under 12 CFR 346.20 at 106
greater or
percent or more of the preceding
(B) A leverage ratio of 3.0 percent or
quarter’s average book value of the
greater if the bank is rated composite 1
insured branch's third-party liabilities;
under the CAMEL rating system in the
and
most recent examination of the batik
(iii) Does not meet the definition of a
and is not experiencing or anticipating
w ell capitalized insured branch.
significant growth; and
(3) U ndercapitalized if the insured
(iv) DoeB not meet the definition of a
branch:
w ell capitalized bank.
(i) Fails to maintain the pledge of
(3) U ndercapitalized if the bank:
assets required under 12 CFR 346.19; or
(i) Has a total risk-based capital ratio
(ii) Fails to maintain the eligible
that is less than 8.0 percent; or
assets prescribed under 12 CFR 346.20 at
(ii) Has a Tier 1 risk-based capital
106 percent or more of the preceding
ratio that is less than 4.0 percent or
quarter’s average book value of the
(iii)(A) Except as provided in
insured branch's third-party liabilities.
paragraph (b)(3)(iii)(B) of this section,
(4) Significantly undercapitalized if it
has a leverage ratio that is less than 4.0
fails to maintain the eligible assets
percent; or
prescribed under 12 CFR 346.20 at 104
(B) Has a leverage ratio that is less
percent or more of the preceding
than 3.0 percent if the bank is rated
quarter's average book value of the
composite 1 under the CAMEL rating
insured branch's third-party liabilities.
system in the most recent examination
(5) C ritically undercapitalized if the
of the bank and is not experiencing or
insured depository institution fails to
anticipating significant growth.
maintain the eligible assets prescribed
(4) Significantly undercapitalized if
under 12 CFR 346.20 at 102 percent or
the bank has:
more of the preceding quarter’s average
(i)
A total risk-based capital ratio that book value of the insured branch's thirdis less than 6D percent; or
party liabilities.
of the bank and shall notify the bank of
the FDIC’s determination.
/
Rules and Regulations
44901
(d) R eclassifications based on
supervisory criteria other than capital.
The FDIC may reclassify a well
capitalized bank as adequately
capitalized and may require an
adequately capitalized bank or an
undercapitalized bank to comply with
certain mandatory or discretionary
supervisory actions as if the bank were
in the next lower capital category
(except that the FDIC may not reclassify
a significantly undercapitalized bank as
critically undercapitalized) (each of
these actions are hereinafter referred to
generally as “reclassifications") in the
following circumstances:
(1) Unsafe or unsound condition. The
FDIC has determined, after notice and
opportunity for hearing pursuant to
§ 308.202(a) of this chapter, that the
bank is in unsafe or unsound condition;
or
(2) Unsafe or unsound practice. The
FDIC has determined, after notice and
opportunity for hearing pursuant to
§ 308.202(a) of this chapter, that, in the
most recent examination of the bank,
the bank received and has not corrected
a less-than-satisfactory rating for any of
the categories of asset quality,
management, earnings, or liquidity.
§ 325.104
Capital restoration plan*.
(a) Schedule fo r filin g plan—(1) In
general. A bank shall file a written
capital restoration plan with the
appropriate FDIC regional director
within 45 days of the date that the bank
receives notice or is deemed to have
notice that the bank is undercapitalized,
significantly undercapitalized, or
critically undercapitalized, unless the
FDIC notifies the bank in writing that
the plan is to be filed within a different
period. An adequately capitalized bank
that has been required pursuant to
§ 325.103(d) of this subpart to comply
with supervisory actions as if the bank
were undercapitalized is not required to
submit a capital restoration plan solely
by virtue of the reclassification.
(2) A dditional capital restoration
plans. A. Notwithstanding paragraph
(a)(1) of this section, a bank that has
already submitted and is operating
under a capital restoration plan
approved under section 38 and this
subpart is not required to submit an
additional capital restoration plan based
on a revised calculation of its capital
measures or a reclassification of the
institution under § 325.103 unless the
FDIC notifies the bank that it must
submit a new or revised capital plan. A
bank that is notified that it must submit
a new or revised capital restoration plan
shall file the plan in writing with the
appropriate FDIC regional director
44902
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
/
Rules and Regulations
within 45 days of receiving such notice,
(3) Failure to perform guarantee.
(g) A m endm ent o f capital restoration
unless the FDIC notifies the bank in
Failure by any company that controls a
plan. A bank that has filed an approved
writing that the plan must be filed within capital restoration plan may, after prior
bank to perform fully its guarantee of
a different period.
any capital plan shall constitute a
w ritten notice to and approval by the
(b) Contents o f plan. All financial data FDIC, amend the plan to reflect a change material failure to implement the plan
submitted in connection with a capital
in circumstance. Until such time as a
for purposes of section 38(f) of the FDI
restoration plan shall be prepared in
proposed amendment has been
Act. Upon such failure, the bank shall be
accordance with the instructions
approved, the bank shall implement the
subject to the provisions of section 38
provided on the Call Report, unless the
capital restoration plan as approved
and this subpart that are applicable to
FDIC instructs otherwise. The capital
prior to the proposed amendment.
banks that have failed in a material
restoration plan shall include all of the
(h) Perform ance guarantee by
respect to implement a capital
information required to be filed under
com panies that control a bank—(1)
restoration plan.
section 38(e)(2) of the FDI Act. A bank
Lim itation on lia b ility—(i) A m ount
§ 325.105 Mandatory and discretionary
that is required to submit a capital
lim itation. The aggregate liability under
restoration plan as a result of a
the guarantee provided under section 38 supervisory actions under section 38.
reclassification of the bank pursuant to
(a) M andatory supervisory actions—
and this subpart for all companies that
I 325.103(d) of this subpart shall include control a specific bank that is required
(1) Provisions applicable to all banks.
a description of the steps the bank will
to submit a capital restoration plan
All banks are subject to the restrictions
take to correct the unsafe or unsound
under this subpart shall be limited to the contained in section 38(d) of the FDI Act
condition or practice. No plan shall be
lesser of:
on payment of capital distributions and
accepted unless it includes any
(A) An amount equal to 5.0 percent of management fees.
performance guarantee described in
the bank’s total assets at the time the
(2) Provisions applicable to
section 38(e)(2)(C) of the FDI Act by
bank w as notified or deemed to have
undercapitalized, significantly
each company that controls the bank.
notice that the bank w as
undercapitalized, and critically
(c) R eview o f capital restoration
undercapitalized: or
undercapitalized banks. Immediately
plans. Within 60 days after receiving a
(B) The amount necessary to restore
upon receiving notice or being deemed
capital restoration plan under this
the relevant capital measures of the
to have notice, as provided in § 325.102
subpart, the FDIC shall provide written
bank to the levels required for the bank
of this subpart, that the bank is
notice to the bank of w hether the plan
to be classified as adequately
undercapitalized, significantly
has been approved. The FDIC may
capitalized,
as
those
capital
measures
undercapitalized, or critically
extend the time within which notice
and levels are defined at the time that
undercapitalized, the bank shall become
regarding approval of a plan shall be
the
bank
initially
fails
to
comply
with
a
subject to the provisions of section 38 of
provided.
capital restoration plan under this
the FDI Act:
(d) D isapproval o f capital plan. If a
subpart.
(i) Restricting payment of capital
capital restoration plan is not approved
(ii) Lim it on duration. The guarantee
distributions and management fees
by the FDIC, the bank shall submit a
and limit of liability under section 38
(section 38(d));
revised capital restoration plan within
and this subpart shall expire after the
the time specified by the FDIC. Upon
(ii) Requiring that the FDIC monitor
FDIC notifies the bank that it has
receiving notice that its capital
the condition of the bank (section
remained adequately capitalized for
restoration plan has not been approved,
38(e)(1));
each of four consecutive calendar
any undercapitalized bank (as defined
(iii) Requiring submission of a capital
quarters. The expiration or fulfillment
in § 325.103(b) of this subpart) shall be
restoration plan within the schedule
subject to ail of the provisions of section by a company of a guarantee of a capital established in this subpart (section
restoration plan shall not limit the
38 and this subpart applicable to
38(e)(2));
liability of the company under any
significantly undercapitalized
(iv) Restricting the growth of the
guarantee
required
or
provided
in
institutions. These provisions shall be
bank’s assets (section 38(e)(3)); and
connection with any capital restoration
applicable until such time as a new or
(v) Requiring prior approval of certain
plan filed by the same bank after
revised capital restoration plan
expansion proposals (section 38(e)(4)).
expiration of the first guarantee.
submitted by the bank has been
(3) A dditional provisions applicable
(iii) Collection on guarantee. Each
approved by the FDIC.
to significantly undercapitalized, and
company that controls a given bank
(e) Failure to subm it capital
critically undercapitalized banks. In
shall be jointly and severally liable for
restoration plan. A bank that is
addition to the provisions of section 38
the guarantee for such bank as required
undercapitalized (as defined in
of the FDI Act described in paragraph
under section 33 and this subpart, and
§ 325.103(b) of this subpart) and that
(a)(2) of this section, immediately upon
the FDIC may require and collect
fails to submit a written capital
receiving notice or being deemed to
payment of the full amount of that
restoration plan within the period
have notice, as provided in § 325.102 of
guarantee from any or all of the
provided in this section shall, upon the
this subpart, that the bank is
companies issuing the guarantee.
expiration of that period, be subject to
(2) Failure to provide guarantee. In thesignificantly undercapitalized, or
all of the provisions of section 38 and
critically undercapitalized, or that the
event that a bank that is controlled by
this subpart applicable to significantly
bank is subject to the provisions
any company submits a capital
undercapitalized institutions.
applicable to institutions that are
restoration plan that does not contain
(f) Failure to im plem ent capital
significantly undercapitalized because
restoration plan. Any undercapitalized
the guarantee required under section
the bank failed to submit or implement
bank that fails in any material respect to 38(e)(2) of the FDI Act, the bank shall,
in any material respect an acceptable
implement a capital restoration plan
upon submission of the plan, be subject
capital restoration plan, the bank shall
shall be subject to all of the provisions
to the provisions of section 38 and this
of section 38 and this subpart applicable subpart that are applicable to banks that become subject to the provisions of
section 38 of the FDI Act that restrict
to significantly undercapitalized
have not submitted an acceptable
institutions.
compensation paid to senior executive
capital restoration plan.
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
officers of the institution (section
38(f)(4)).
(4) A dditional provisions applicable
to critically undercapitalized
institutions, (i) In addition to the
provisions of section 38 of the FDI Act
described in paragraphs (a)(2) and (a)(3)
of this section, immediately upon
receiving notice or being deemed to
have notice, as provided in § 325.102 of
this subpart, that the insured depository
institution is critically undercapitalized,
the institution is prohibited from doing
any of the following without the FDIC’s
prior written approval:
(A) Entering into any material
transaction other than in the usual
course of business, including any
investment, expansion, acquisition, sale
of assets, or other similar action with
respect to which the depository
institution is required to provide notice
to the appropriate Federal banking
agency;
(B) Extending credit for any highly
leveraged transaction;
(C) Amending the institution’s charter
or bylaws, except to the extent
necessary to carry out any other
requirement of any law, regulation, or
order;
(D) Making any material change in
accounting methods;
(E) Engaging in any covered
transaction (as defined in section 23A(b)
of the Federal Reserve Act (12 U.S.C.
371c(b));
(F) Paying excessive compensation or
bonuses;
(G) Paying interest on new or renewed
liabilities at a rate that would increase
the institution's weighted average cost
of funds to a levei significantly
exceeding the prevailing rates of interest
on insured deposits in the institution's
normal market etveas; and
(H) Making any principal or interest
payment on subordinated debt
beginning 60 days after becoming
critically undercapitalized except that
this restriction sball not apply, until July
15,1996, with respect to any
subordinated debt outstanding on July
15', 1991, and not extended or otherwise
renegotiated after July 15,1991.
(ii) In addition, the FDIC may further
restrict the activities of any critically
undercapitalized institution to carry out
the purposes of section 38 of the FDI
Act.
(5) Exception for certain savings
associations. The restrictions in
paragraph (aj(4) ci this section shall not
apply, before July 1.1994, to any insured
savings association if:
(i)
The savings association had
submitted a plan meeting the
requirements of section 5(t)(6)(A)(ii) of
the Home Owners' Loan Act (12 U.S.C.
/
Rules and Regulations 44S03
§ 565.1 Authority, purpose, scope, other
1464(t)(6)(A)(ii)) prior to December 19,
Supervisory authority, and disclosure of
1991;
capital categories.
(ii) The Director of OTS had accepted
the plan prior to December 19,1991; and
(a) Authority. This part is issued by
(iii) The savings association remains
the OTS pursuant to section 38 (section
in compliance with the plan or is
38) of the Federal Deposit Insurance Act
operating under a written agreement
(FDI Act) as added by section 131 of the
with the appropriate federal banking
Federal Deposit Insurance Corporation
agency.
Improvement Act of 1991 (Pub. L. 102(b)
D iscretionary supervisory actions. 242,105 Stat. 2236 (1991)) (12 U.S.C.
In taking any action under section 38
1831o).
that is within the FDIC's discretion to
(b) Purpose. Section 38 of the FDI Act
take in connection with:
establishes a framework of supervisory
(1) An insured depository institution
actions for insured depository
that is deemed to be undercapitalized,
institutions that are not adequately
significantly undercapitalized, or
capitalized. The principal purpose of
critically undercapitalized, or has been
this part is to define, for savings
reclassified as undercapitalized, or
associations, the capital measures and
significantly undercapitalized; or
capital levels that are used for
(2) An officer or director of such
determining the supervisory actions
institution, the FDIC shall follow the
authorized under section 38 of the FDI
procedures for issuing directives under
Act. This part also establishes
§ § 308.201 and 308.203 of this chapter,
procedures for submission and review of
unless otherwise provided in section 38
capital restoration plans and for
or this subpart.
issuance and review of directives and
orders pursuant to section 38.
By o rd er of the B oard of Directors.
D ated a t W ashington, DC, this 15th day of
(c) Scope. This part implements the
Septem ber, 1992.
provisions of section 38 of the FDI Act
Federal D eposit Insurance C orporation.
as they apply to savings associations.
Certain of these provisions also apply to
Robert E. Feldman,
officers, directors and employees of
Deputy Executive Secretary.
savings associations. Other provisions
DEPARTMENT OF THE TREASURY
apply to any company that controls a
Office of Thrift Supervision
savings association and to the affiliates
of a savings association.
12 CFR Part 565
(d) O ther supervisory authority.
Accordingly, the Office of Thrift
Neither
section 38 nor this part in any
Supervision hereby amends subchapter
way limits the authority of the OTS
D, chapter V, title 12, Code of Federal
under any other provision of law to take
Regulations, by adding part 565 as set
supervisory actions to address unsafe or
forth below.
unsound practices, deficient capital
SUBCHAPTER D—REGULATIONS
levels, violations of law, unsafe or
APPLICABLE TO ALL SAVINGS
unsound conditions, or other practices.
ASSOCIATIONS
Action under section 38 of the FDI Act
1.
A new part 565 is added to read as and this part may be taken
follows:
independently of, in conjunction with, or
in addition to any other enforcement
PART 565-PROMPT CORRECTIVE
action available to the OTS, including
ACTION
issuance of cease and desist orders,
capital directives, approval or denial of
Sec.
565.1 A uthority, purpose, scope, o ther
applications or notices, assessment of
supervisory authority, a n d disclosure of
civil money penalties, or any other
capital categories.
actions authorized by law.
565.2 Definitions.
(e) D isclosure o f capital categories.
565.3 Notice of capital category.
565.4 C apital m easu res a n d capital category The assignment of a savings association
under this part within a particular
definitions.
capital category is for purposes of
565.5 C apital resto ratio n plans.
565.6 M and atory a n d discretion ary
implementing and applying the
supervisory actions u n der section 38.
provisions of section 38. Unless
565.7 D irectives to tak e prom pt corrective
permitted by the OTS or otherwise
action.
required by law, no savings association
565.8 Procedures for reclassifying a s a v i n g
may state in any advertisement or
a sso ciatio n b a se d on criteria other than
promotional material its capital category
capital.
under this subpart or that the OTS or
565.9 O rder to dism iss a director or senior
any other federal banking agency has
executive officer.
565.10 E nforcem ent of directives.
assigned the savings association to a
particular category.
Authority: 12 U.S.C. 1831o.
44904
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
§ 585,2 Definitions.
For purposes of this part, except as
modified in this section or unless the
context otherwise requires, the terms
used in this part have the same
meanings as set forth in sections 38 and
3 of the FDI A c t
(a)(1) Control has the same meaning
assigned to it in section 2 of the Bank
Holding Company Act (12 U.S.C. 1841),
and the term “controlled” shall be
construed consistently with the term
“control."
(2) Exclusion fo r fiduciary ownership.
No insured depository institution or
company controls another insured
depository institution or company by
virtue of its ownership or control of
shares in a fiduciary capacity. Shares
shall not be deemed to have been
acquired in a fiduciary capacity if the
acquiring insured depository institution
or company has sole discretionary
authority to exercise voting rights with
respect thereto.
(3) Exclusion fo r debts previously
contracted. No insured depository
institution or company controls another
insured depository institution or
company by virtue of its ownership or
control of shares acquired in securing or
collecting a debt previously contracted
in good faith, until two years after the
date of acquisition. The two-year period
may be extended at the discretion of the
appropriate federal banking agency for
up to three one-year periods.
(b) Controlling person means any
person having control of an insured
depository institution and any company
controlled by that person.
(c) Leverage ratio means the ratio of
Tier 1 capital to adjusted total assets, as
calculated in accordance with part 567
of this subchapter.
(d) M anagem ent fe e means any
payment of money or provision of any
other thing of value to a company or
individual for the provision of
management services or advice to the
savings association or related overhead
expenses, including payments related to
supervisory, executive, managerial or
policymaking functions, other than
compensation to an individual in the
individual's capacity as an officer or
employee of the savings association.
(e) R isk-w eighted assets means total
nsk-weighted assets, as calculated in
accordance with part 567 of this
subchapter.
(f) Tangible equity means the amount
of a savings association’s core capital as
defined in part 567 of this subchapter
plus the amount of outstanding
cumulative perpetual preferred stock
(including related surplus), minus all
intangible assets not previously
deducted except:
(1) Purchased mortgage servicing
rights to the extent that the OTS
determines pursuant to section 475 of
FDICIA that purchased mortgage
servicing rights may be included in
calculating the savings association’s
core capital; and
(2) Qualifying supervisory goodwill
authorized for inclusion in core capital
pursuant to 12 CFR Part 567.
(g) Tier 1 capital means the amount of
core capital as defined in part 567 of this
subchapter.
(h) Tier 1 risk-based capital ratio
means the ratio of Tier 1 capital to riskweighted assets, as calculated in
accordance with part 567 of this
subchapter.
(i) Total assets, for purposes of
§ 565.4(b)(5), means adjusted total
assets as calculated in accordance with
part 567 of this subchapter, minus
intangible assets as provided in the
definition of tangible equity.
(j) Total risk-based capital ratio
means the ratio of total capital to riskweighted assets, as calculated in
accordance with part 567 of this
subchapter.
§ 565.3 Notice of capital category.
(a) E ffective date o f determ ination o f
capital category. A savings association
shall be deemed to be within a given
capital category for purposes of section
38 of the FDI Act and this part as of the
date the savings association is notified
of, or is deemed to have notice of, its
capital category, pursuant to paragraph
(b) of this section.
(b) N otice o f capital category. A
savings association shall be deemed to
have been notified of its capital levels
and its capital category as of the most
recent date:
(1) A Thrift Financial Report (TFR) is
required to be filed with the OTS;
(2) A final report of examination is
delivered to the savings association; or
(3) W ritten notice is provided by the
OTS to the savings association of its
capital category for purposes of section
38 of the FDI Act and this part or that
the savings association's capital
category has changed as provided in
paragraph (c) of this section or
§ 565.4(c).
(c) A djustm ents to reported capital
levels and category—(1) N otice o f
adjustm ent b y savings association. A
savings association shall provide the
OTS with written notice that an
adjustment to the savings association's
capital category may have occurred no
later than 15 calendar days following
the date that any material event has
occurred that would cause the savings
association to be placed in a lower
capital category from the category
/
Rules and Regulations
assigned to the savings association for
purposes of section 38 and this part on
the basis of the savings association's
most recent TFR or report of
examination.
(2) D eterm ination b y the O TS to
change capital category. After receiving
notice pursuant to paragraph (c)(1) of
this section, the OTS shall determine
whether to change the capital category
of the savings association and shall
notify the savings association of the
OTS's determination.
§ 565.4 Capital measures and capita)
category definitions.
(a) Capital m easures. For purposes of
section 38 and this part, the relevant
capital measures shall be:
(1) The total risk-based capital ralio:
(2) The Tier 1 risk-based capital ratio,
and
(3) The leverage ratio.
(b) Capital categories. For purposes of
section 38 and this part, a savings
association shall be deemed to be:
(1) W ell capitalized if the savings
association:
(1) Has a total risk-based capital ratio
of 10.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital
ratio of 6.0 percent or greater, and
(iii) Has a leverage ratio of 5.0 percent
or greater; and
(iv) Is not subject to any written
agreement, order, capital directive, or
prompt corrective action directive
issued by the OTS pursuant to section 8
of the FDI Act, the International Lending
Supervision Act of 1983 (5 U.S.C. 3907),
the Home Owners’ Loan Act (12 U.S.C.
1464(t)(6)(A)(ii)), or section 38 of the FDI
Act, or any regulation thereunder, to
meet and maintain a specific capital
level for any capital measure.
(2) A dequately capitalized if the
savings association:
(i) Has a total risk-based capital ratio
of 8.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital
ratio of 4.0 percent or greater; and
(iii) Has:
(A) A leverage ratio of 4.0 percent or
greater; or
(B) A leverage ratio of 3.0 percent or
greater if the savings association is
rated composite 1 under the MACRO
rating system in the most recent
examination of the savings association;
and
(iv) Does not meet the definition Of a
w ell capitalized savings association.
(3) U ndercapitalized if the savings
association:
(i) Has a total risk-based capital ratio
that is less than 8.0 percent; or
(ii) Has a Tier 1 risk-based capital
ratio that is less than 4.0 percent; or
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
(iii) (A) Except as provided in
paragraph (b)(3)(iii) (B) of this section,
has a leverage ratio that is less than 4.0
percent; or
(B) Has a leverage ratio that is less
than 3.0 percent if the savings
association is rated composite 1 under
the MACRO rating system in the most
recent examination of the savings
association.
(4) Significantly undercapitalized if
the savings association has:
(i) A total risk-based capital ratio that
is less than 6.0 percent; or
(ii) A Tier 1 risk-based capital ratio
that is less than 3.0 percent; or
(iii) A leverage ratio that is less than
3.0 percent.
(5) C ritically undercapitalized if the
savings association has a ratio of
tangible equity to total assets that is
equal to or less than 2.0 percent.
(c) Reclassification based on
supervisory criteria other than capital.
The OTS may reclassify a well
capitalized savings association as
adequately capitalized and may require
an adequately capitalized or
undercapitalized savings association to
comply with certain mandatory or
discretionary supervisory actions as if
the savings association were in the next
lower capital category (except that the
OTS may not reclassify a significantly
undercapitalized savings association as
critically undercapitalized) (each of
these actions are hereinafter referred to
generally as “reclassifications") in the
following circumstances:
(1) Unsafe or unsound condition. The
OTS has determined, after notice and
opportunity for hearing pursuant to
§ 565.8(a) of this part, that the savings
association is in an unsafe or unsound
condition; or
(2) .Unsafe or unsound practice. The
OTS has determined, after notice and
opportunity for hearing pursuant to
§ 565.8(a) of this part, that, in the most
recent examination of the savings
association, the savings association
received, and has not corrected, a lessthan-satisfactory rating for any of the
equivalent MACRO rating categories for
asset quality, management, earnings, or
liquidity.
writing that the plan is to be filed within
a different period. An adequately
capitalized savings association that has
been required pursuant to § 565.4(c) to
comply with supervisory actions as if
the savings association were
undercapitalized is not required to
submit a capital restoration plan solely
by virtue of the reclassification.
(2) A dditional capital restoration
plans. Notwithstanding paragraph (a)(1)
of this section, a savings association
that has already submitted and is
operating under a capital restoration
plan approved under section 38 and this
part is not required to submit an
additional capital restoration plan based
on a revised calculation of its capital
measures or a reclassification of the
institution under § 565.4(c) unless the
OTS notifies the savings association
that it must submit a new or revised
capital plan. A savings association that
is notified that it must submit a new or
revised capital restoration plan shall file
the plan in writing with the appropriate
Regional Office within 45 days of
receiving such notice, unless the OTS
notifies the savings association in
writing that the plan is to be filed within
a different period.
(b) C ontents o f plan. All financial data
submitted in connection with a capital
restoration plan shall be prepared in
accordance with the instructions
provided on the TFR, unless the OTS
instructs otherwise. The capital
restoration plan shall include all of the
information required to be filed under
section 38(e)(2) of the FDI A c t A
savings association that is required to
submit a capital restoration plan as the
result of a reclassification of the savings
association pursuant to 5 565.4(c) of this
part shall include a description of the
steps the savings association will take
to correct the unsafe or unsound
condition or practice. No plan shall be
accepted unless it includes any
performance guarantee described in
section 38(e)(2)(C) of the FDI Act by
each company that controls the savings
association.
(c) R eview o f capital restoration
plans. Within 60 days after receiving a
capital restoration plan under this p a r t
the OTS shall provide written notice to
§ 565.5 Capital restoration plans.
the savings association of whether the
(a) Schedule fo r filing plan—(1) In
plan has been approved. The OTS may
general. A savings association shall file
extend the time within which notice
a written capital restoration plan with
regarding approval of a plan shall be
the appropriate Regional Office within
provided.
(d) D isapproval o f capital plan. If a
45 days of the date that the savings
association receives notice or is deemed capital restoration plan is not approved
by the OTS, the savings association
to have notice that the savings
shall submit a revised capital
association is undercapitalizied,
restoration plan, when directed to do so,
significantly undercapitalized, or
within the time specified by the OTS.
critically undercapitalized, unless the
Upon receiving notice that its capital
OTS notifies the savings association in
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Rules and Regulations 44905
restoration plan has not been approved,
any undercapitalized savings
association (as defined in § 565.4(b)(3)
of this part) shall be subject to all of the
provisions of section 38 and this part
applicable to significantly
undercapitalized institutions. These
provisions shall be applicable until such
time as a new or revised capital
restoration plan submitted by the
savings association has been approved
by the OTS.
(e) Failure to subm it a capital
restoration plan. A savings association
that is undercapitalized (as defined in
I 565.4(b)(3) of this part) and that fails to
submit a written capital restoration plan
within the period provided in this
section shall, upon the expiration of that
period, be subject to all of the provisions
of section 38 and this part applicable to
significantly undercapitalized
institutions.
(f) Failure to im plem ent a capital
restoration plan. Any undercapitalized
savings association that fails in any
material respect to implement a capital
restoration plan shall be subject to all of
the provisions of section 38 and this part
applicable to significantly
undercapitalized institutions.
(g) A m endm ent o f capital plan. A
savings association that has filed an
approved capital restoration plan may,
after prior written notice to and
approval by the OTS, amend the plan to
reflect a change in circumstance. Until
such time as a proposed amendment has
been approved, the savings association
shall implement the capital restoration
plan.as approved prior to the proposed
amendment.
(h) N otice to FDIC. Within 45 days of
the effective date of OTS approval of a
capital restoration plan, or any
amendment to a capital restoration plan,
the OTS shall provide a copy of the plan
or amendment to the FDIC.
(i) Perform ance guarantee b y
com panies that control a savings
association.—(1) Lim itation on
liability.— (i) A m ount lim itation. The
aggregate liability under the guarantee
provided under section 38 and this part
for all companies that control a specific
savings association that is required to
submit a capital restoration plan under
this part shall be limited to the lesser of:
(A) An amount equal to 5.0 percent of
the savings association’s total assets at
the time the savings association was
notified or deemed to have notice that
the savings association w as
undercapitalized; or
(B) The amount necessary to restore
the relevant capital measures of the
savings association to the levels
required for the savings association to
44906
Federal Register
f
Vol. 57, No. 189 / Tuesday, September 29, 1992
be classified as adequately capitalized,
as those capital measures and levels are
defined at the time that the savings
association initially fails to comply with
a capital restoration plan under this
part.
(ii) Lim it on duration. The guarantee
and limit of liability under section 38
and this part shall expire after the OTS
notifies the savings association that it
has remained adequately capitalized for
each of four consecutive calendar
quarters. The expiration or fulfillment
by a company of a guarantee of a capital
restoration plan shall not limit the
liability of the company under any
guarantee required or provided in
connection with any capital restoration
plan filed by the same savings
association after expiration of the first
guarantee.
(iii) Collection on guarantee. Each
company that controls a given savings
association shall be jointly and
severally liable for the guarantee for
such savings association as required
under section 38 and this part, and the
OTS may require and collect payment of
the full amount of that guarantee from
any or all of the companies issuing the
guarantee.
(2) Failure to provide guarantee. In the
event that a savings association that is
controlled by any company submits a
capital restoration plan that does not
contain the guarantee required under
section 38(e)(2) of the FDI Act, the
savings association shall, upon
submission of the plan, be subject to the
provisions of section 38 and this part
that are applicable to savings
associations that have not submitted an
acceptable capital restoration plan.
(3) Failure to perform guarantee.
Failure by any company that controls a
savings association to perform fully its
guarantee of any capital plan shall
constitute a material failure to
implement the plan for purposes of
section 38(f) of the FDI Act. Upon such
failure, the savings association shall be
subject to the provisions of section 38
and this part that are applicable to
savings associations that have failed in
a material respect to implement a
capital restoration plan.
§ 565.8 Mandatory and discretionary
supervisory actions under section 38.
(a) M andatory supervisory actions.—
(1) Provisions applicable to all savings
associations. All savings associations
are subject to the restrictions contained
in section 38(d) of the FDI Act on
payment of capital distributions and
management fees.
(2) Provisions applicable to
undercapitalized, significantly
undercapitalized, an d critically
undercapitalized savings associations.
Immediately upon receiving notice or
being deemed to have notice, as
provided in § 565.3 or § 565.5 of this
part, that the savings association is
undercapitalized, significantly
undercapitalized, or critically
undercapitalized, the savings
association shall become subject to the
provisions of section 38 of the FDI Act:
(i) Restricting payment of capital
distributions and management fees
(section 38(d));
(ii) Requiring that the OTS monitor the
condition of the savings association
(section 38(e)(1));
(iii) Requiring submission of a capital
restoration plan within the schedule
established in this part (section 38(e)(2));
(iv) Restricting the growth of the
savings association's assets (section
38(e)(3)); and
(v) Requiring prior approval of certain
expansion proposals (section 38(e)(4)).
(3) A dditional provisions applicable
to significantly undercapitalized, and
critically undercapitalized savings
associations. In addition to the
provisions of section 38 of the FDI Act
described in paragraph (a)(2) of this
section, immediately upon receiving
notice or being deemed to have notice,
as provided in § 565.3 or § 565.5 of this
part, that the savings association is
significantly undercapitalized, or
critically undercapitalized, or that the
savings association is subject to the
provisions applicable to institutions that
are significantly undercapitalized
because the savings association failed to
submit or implement in any material
respect an acceptable capital restoration
plan, the savings association shall
become subject to the provisions of
section 38 of the FDI Act that restrict
compensation paid to senior executive
officers of the institution (section
38(f)(4)).
(4) A dditional provisions applicable
to critically undercapitalized savings
associations. In addition to the
provisions of section 38 of the FDI Act
described in paragraphs (a)(2) and (a)(3)
of this section, immediately upon
receiving notice or being deemed to
have notice, as provided in § 565.3 of
this part, that the savings association is
critically undercapitalized, the savings
association shall become subject to the
provisions of section 38 of the FDI Act:
(i) Restricting the activities of the
savings association (section 38(h)(l});
and
(ii) Restricting payments on
subordinated debt of the savings
association (section 38(h)(2)).
(b) D iscretionary supervisory actions.
In taking any action under section 38
that is within the OTS’s discretion to
/
Rules and Regulations
take in connection with: A savings
association that is deemed to be
undercapitalized, significantly
undercapitalized or critically
undercapitalized, or has been
reclassified as undercapitalized, or
significantly undercapitalized; an officer
or director of such savings association;
or a company that ccfatrols such savings
association, the OTS shall follow the
procedures for issuing directives under
f§ 565.7 and 565.9 of this part unless
otherwise provided in section 38 or this
part.
§ 565.7 Directives to take prompt
corrective action.
(a) N otice o f intent to issue a
directive.—(1) In general. The OTS shall
provide an undercapitalized,
significantly undercapitalized, or
critically undercapitalized savings
association or, where appropriate, any
company that controls the savings
association, prior written notice of the
OTS’s intention to issue a directive
requiring such savings association or
company to take actions or to follow
proscriptions described in section 38
that are within the OTS’s discretion to
require or impose under section 38 of the
FDI Act, including sections 38(e)(5),
(f)(2), (f)(3), or (f)(5). The savings
association shall have such time to
respond to a proposed directive as
provided by the OTS under paragraph
(c) of this section.
(2) Im m ediate issuance o f fin a l
directive. If the OTS finds it necessary
in order to carry out the purposes of
section 38 of the FDI Act, the OTS may,
without providing the notice prescribed
in paragraph (a)(1) of this section, issue
a directive requiring a savings
association or any company that
controls a savings association
immediately to take actions or to follow
proscriptions described in section 38
that are within the OTS’s discretion to
require or impose under section 38 of the
FDI Act, including section 38(e)(5), (f)(2),
(f)(3), or (f)(5). A savings association or
company that is subject to such an
immediately effective directive may
submit a written appeal of the directive
to the OTS. Such an appeal must be
received by the OTS within 14 calendar
days of the issuance of the directive,
unless the OTS permits a longer period.
The OTS shall consider any such
appeal, if filed in a timely matter, within
60 days of receiving the appeal. During
such period of review, the directive shall
remain in effect unless the OTS, in its
sole discretion, stays the effectiveness
of the directive.
Federal R eg s ter / Vol. 57, No, 189 / Tuesday, September 29. 1992
(b) Contents o f notice. A notice of
intention to issue a directive shall
include:
(1) A statement of the savings
association's capital measures and
capital levels;
(ZJ A description of the restrictions,
prohibitions or affirmative actions that
the OTS proposes to impose or require;
(3) The proposed date when such
restrictions or prohibitions would be
effective or the proposed date for
completion of such affirmative actions;
and
(4) The date by which the savings
association or company subject to the
directive may file with the OTS a
written response to the notice.
(c) R esponse to notice.—(1) Tim e fo r
response. A savings association or
company may file a written response to
a notice of intent to issue a directive
within the time period set by the OTS.
The date shall be at least 14 calendar
days from the date of the notice unless
the OTS determines that a shorter
period is appropriate in light of the
financial condition of the. savings
association or other relevant
circumstances;
(2) Content o f response. The response
should include:
fi) An explanation why the action
proposed by the OTS is not an
appropriate exercise of discretion under
sectiott3fl;
(ii) Any recommended modification of
the proposed directive; and
(iii) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the savings
association or company regarding the
proposed directive.
(d) OTS consideration o f response.
After considering the response, the OTS
may.
(1) Issue the directive as proposed or
in modified farm;
(2) Determine not to issue the
directive and so notify the savings
association or company; at
(3) Seek additional information or
clarification of the response from the
savings association or company, or any
other relevant source(ej Failure to file response. Failure by
a savings association or company to file
with the OTS, within the specified timp
period, a written response to a proposed
directive shall constitute a waiver o£ the
opportunity to respond and shall
constitute consent to the issuance of the
directive.
Jf), R equest fo r m odification or
rescission o f directive. Any savings
association or company that is subject
to a directive under this part may, upon
a change hi. circumstances, request in
/
Rules and Regulations 44907
(i) An explanation of why the savings
association, is not in unsafe or unsound
condition or otherwise should not be
reclassified; and
(ii) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the savings
§ 565.8 Procedures for reclassifying a
association or company regarding the
savings association based on criteria other
r e d assifi cation.
than capital
[4} Failure to file response. Failure by
(a) R eclassification based on unsafe a savings association to file; within the
or unsound condition or practice—fl)
specified time period, a written response
Issuance o f notice o f proposed
with the OTS to a notice of proposed
reclassification—p) Grounds fo r
reclassification shall constitutes waiver
reclassification. (A) Pursuant to
of the opportunity to respond and shall
§ 565.4(c) of this part, the OTS may
constitute consent to the
reclassify a well capitalized savings
reclassification.
association as adequately capitalized or
(5) R equest fo r hearing and
subject an adequately capitalized or
presentation o f oral testim ony or
undercapitalized institution to the
witnesses. The response may include a
supervisory actions applicable to the
request for an informal hearing before
next lower capital category if:
the OTS or its designee under this
(T) The OTS determines that the
section. If the savings association
savings association is in unsafe or
desires to present oral testimony or
unsound condition; or
witnesses at the hearing, the savings
(2) The OTS deems die savings
association shall include a request to do
association to be engaged in an unsafe
so with the request for an informal
or unsound practice and not to have
hearing. A request to present oral
corrected the deficiency.
testimony or witnesses shall specify the
(B) Any action pursuant to this
names of the witnesses and the general
paragraph [a)(I)(i) shall hereinafter be
nature of their expected testimony.
referred to as “reclassification.’*
Failure to request a hearing shall
(ii) Prior notice to institution. Prior to constitute a w aiver of any right to a
taking action pursuant to § 565.4(c)(1),
hearing, and failure to request the
the OTS shall issue and serve on the
opportunity to present oral testimony or
savings association a written notice of
witnesses shall constitute a waiver of
the OTS's intention to reclassify the
any right to present oral testimony or
savings association.
witnesses.
(2) C ontents o f notice. A notice of
(6) O rder fo r inform al hearing. Upon
intention to reclassify a savings
receipt of a timely written request that
association based on unsafe or unsound includes a request for a hearing, the
condition shall include:
OTS shall issue an order directing an
(ij A statem ent of the savings
informal hearing to commence no later
association's capital measures and
than 30 days after receipt of the request,
capital levels and the category to which
unless the OTS allows farther time at
the savings association would be
the request of the savings association.
reclassified;
The hearing shall be held in
(ii) The reasons for reclassification of Washington; DC or a t such other place
the savings association;
as may be designated by the OTS,
before a presiding officer(s) designated
(in) The date by w hich the savings
by the OTS to conduct the hearing.
association subject to the notice of
(7) Hearing procedures, (i) The
reclassification may file w ith the OTS a
savings association shall have the right
w ritten appeal of the proposed
to introduce relevant written materials
reclassification and a request for a
hearing, which shall be at least 14
and to present oral argument a t the
calendar days from the date of service
hearing. The savings association may
of the notice unless the OTS determines introduce oral testimony and present
that a shorter period is appropriate in
w itnesses only if expressly authorized
by the OTS or the presiding officer(s).
light o f the financial condition of the
Neither the provisions of the
savings association or other relevant
Administrative Procedure Act (5 U.S.C.
circumstanr.es>
554-557} governing adjudications
(3) Response to notice o f proposed
required by statute to be determined an
reclassification- A savings association
the record nor part 503 of this chapter
may file a written response to a notice
apply to an informal hearing under this
of proposed reclassification within the
section unless the OTS orders that such
time period set by the OTS. The
procedures shaU apply.
response should include:
writing that the OTS reconsider the
terms of the directive, «rni may propose
th at the directive be rescinded or
modified. Unless otherwise ordered by
the OTS, the directive shall continue in
place w hile such request is pending
before the OTS.
44908
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
(ii) The informal hearing shall be
recorded and a transcript furnished to
the savings association upon request
and payment of the cost thereof.
W itnesses need not be sworn, unless
specifically requested by a party or the
presiding officer(s). The presiding
officer(s) may ask questions of any
witness.
(iii) The presiding officer(s) may order
that the hearing be continued for a
reasonable period (normally five
business days) following completion of
oral testimony or argument to allow
additional written submissions to the
hearing record.
(8) Recom m endation o f presiding
officers. Within 20 calendar days
following the date the hearing and the
-record on the proceeding are closed, the
presiding officer(s) shall make a
recommendation to the OTS on the
reclassification.
(9) Time fo r decision. Not later than
60 calendar days after the date the
record is closed or the date of the
response in a case where no hearing
w as requested, the OTS will decide
whether to reclassify the savings
association and notify the savings
association of the OTS's decision.
(b) R equest fo r rescission o f
reclassification. Any savings
association that has been reclassified
under this section, may, upon a change
in circumstances, request in writing that
the OTS reconsider the reclassification,
and may propose that the
reclassification be rescinded and that
any directives issued in connection with
the reclassification be modified,
rescinded, or removed. Unless otherwise
ordered by the OTS, the savings
association shall remain subject to the
reclassification and to any directives
issued in connection with that
reclassification while such request is
pending before the OTS.
within 10 calendar days of the receipt of
the directive by the Respondent, unless
further time is allowed by the OTS at
the request of the Respondent.
(2) Contents o f request; inform al
hearing. The request for reinstatement
should include reasons why the
Respondent should be reinstated, and
may include a request for an informal
hearing before the OTS or its designee
under this section. If the Respondent
desires to present oral testimony or
witnesses at the hearing, the
Respondent shall include a request to do
so with the request for an informal
hearing. The request to present oral
testimony or witnesses shall specify the
names of the witnesses and the general
nature of their expected testimony.
Failure to request a hearing shall
constitute a waiver of any right to a
hearing and failure to request the
opportunity to present oral testimony or
witnesses shall constitute a waiver of
any right or opportunity to present oral
testimony or witnesses.
(3) E ffective date. Unless otherwise
ordered by the OTS, the dismissal shall
remain in effect while a request for
reinstatement is pending.
(c) O rder fo r inform al hearing. Upon
receipt of a timely written request from
a Respondent for an informal hearing on
the portion of a directive requiring a
savings association to dismiss from
office any director or senior executive
officer, the OTS shall issue an order
directing an informal hearing to
commence no later than 30 days after
receipt of the request, unless the
Respondent requests a later date. The
hearing shall be held in Washington,
DC. or at such other place as may be
designated by the OTS, before a
presiding officer(s) designated by the
OTS to conduct the hearing.
(d) Hearing procedures. (1) A
Respondent may appear at the hearing
§ 565.9 Order to dismiss a director or
personally or through counsel. A
senior executive officer.
Respondent shall have the right to
introduce relevant written materials and
(a) Service o f notice. W hen the OTS
to present oral argument. A Respondent
issues and serves a directive on a
may introduce oral testimony and
savings association pursuant to section
present w itnesses only if expressly
565.8 requiring the savings association
authorized by the OTS or the presiding
to dismiss any director or senior
officer(s). Neither the provisions of the
executive officer under section
Administrative Procedure Act governing
38(f)(2)(F)(ii) of the FDI Act, the OTS
adjudications required by statute to be
shall also serve a copy of the directive,
determined on the record nor part 509 of
or the relevant portions of the directive
this chapter apply to an informal hearing
where appropriate, upon the person to
under this section unless the OTS orders
be dismissed.
(b) R esponse to directive—(1) Request that such procedures shall apply.
fo r reinstatem ent. A director or senior
(2) The informal hearing shall be
executive officer who has been served
recorded and a transcript furnished to
with a directive under paragraph (a) of
the Respondent upon request and
this section (Respondent) may file a
payment of the cost thereof. W itnesses
written request for reinstatement. The
need not be sworn, unless specifically
request for reinstatement shall be filed
requested by a party or the presiding
/
Rules and Regulations
officer(s). The presiding officer(s) may
ask questions of any witness.
(3) The presiding officer(s) may order
that the hearing be continued for a
reasonable period (normally five
business days) following completion of
oral testimony or argument to allow
additional written submissions to the
hearing record.
(e) Standard fo r review. A
Respondent shall bear the burden of
demonstrating that his or her continued
employment by or service with the
savings association would materially
strengthen the savings association’s
ability:
(1) To become adequately capitalized,
to the extent that the directive was
issued as a result of the savings
association's capital level or failure to
submit or implement a capital
restoration plan; and
(2) To correct the unsafe or unsound
condition or unsafe or unsound practice,
to the extent that the directive was
issued as a result of classification of the
savings association based on
supervisory criteria other than capital,
pursuant to section 38(g) of the FDI Act.
(f) Recom m endation o f presiding
officers. Within 20 calendar days
following the date the hearing and the
record on the proceeding are closed, the
presiding officer(s) shall make a
recommendation to the OTS concerning
the Respondent’s request for
reinstatement with the savings
association.
(g) Time fo r decision. Not later than
60 calendar days after the date the
record is closed or the date of the
response in a case where no hearing has
been requested, the OTS shall grant or
deny the request for reinstatement and
notify the Respondent of the OTS's
decision. If the OTS denies the request
for reinstatement, the OTS shall set
forth in the notification the reasons for
the OTS's action.
§ 565.10
Enforcement of directives.
(a) Judicial rem edies. W henever a
savings association or company that
controls a savings association fails to
comply with a directive issued under
section 38, the OTS may seek
enforcement of the directive in the
appropriate United States district court
pursuant to section 8(i)(l) of the FDI Act.
(b) A dm inistrative rem edies—(1)
Failure to com ply with directive.
Pursuant to section 8(i)(2)(A) of the FDI
Act, the OTS may assess a civil money
penalty against any savings association
or company that controls a savings
association that violates or otherwise
fails to comply with any final directive
issued under section 38 and against any
Federal Register / y 0 I.
57,
institution-affiliated party who
participates in such violation or
noncompliance.
(2) Failure to im plem ent capital
restoration plan. The failure of a savings
association to implement a capital
restoration plan required under section
38, or this part, or the failure of a
company having control of a savings
association to fulfill a guarantee of a
capital restoration plan made pursuant
No. 189 / Tuesday, September 29, 1992
to section 38(e)(2) of the FDI Act shall
subject the savings association or
company to the assessment of civil
money penalties pursuant to section
8(i)(2)(A) of the FDI Act.
(c) O ther enforcem ent action. In
addition to the actions described in
paragraphs (a) and (b) of this section,
the OTS may seek enforcement of the
provisions of section 38 or this part
through any other judicial or
/
Rules and Regulations 44909
administrative proceeding authorized by
law.
Dated: Septem ber 16,1992.
By the Office of Thrift Supervision.
Timothy Ryan,
Director.
[FR Doc. 92-23182 Filed 9-28-92: 8:45 am]
BILUNG CODE 4810-33 (Vi), <210-01 ('/<), *714-01 (% ),
6720-01 (y«M*
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