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FE D E R A L RESER VE BA N K O F DALLAS
DALLAS. TEX AS

75222

C irc u la r No. 75-105
J u ly 22, 1975
American Revolution Bicentennial

PROPOSED AMENDMENTS TO REGULATIONS D AND Q

TO A L L MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE D ISTRICT:
The Board of Governors of the Federal Reserve System has
proposed amendments to its Regulation D, "Reserves of Member B anks,"
and Regulation Q, "Interest on Deposits," with respect to the issuance of
subordinated debt.
In connection with the proposed amendments, the Board also
issued for comment guidelines to be applied by the Board in evaluating
requests from State member banks for approval of new subordinated debt
issues as an addition to the bank's capital s tru c tu re .
To aid in the consideration of the proposed amendments and to
facilitate the evaluation of the appropriateness and effectiveness of the
guid elin e c r ite r ia , interested persons are invited to submit relevant data,
view s, or argum ents. A n y such material should be submitted in w ritin g
to the S e c re ta ry , Board of Governors of the Federal Reserve System,
Washington, D . C . 20551 , to be received not later than August 29, 1975.
The Board's proposal is p rinted on the enclosed pages as it
appeared in the FEDERAL REGISTER on Ju ly 15, 1975. Additional copies
w ill be furnished upon request to the S e creta ry 's Office of this Bank.

Sincerely y o u rs,
T . W. P la n t
F i r s t V ic e P r e s i d e n t
Enclosure

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Extract From
FEDERAL REGISTER,
VO L. 40, No. 136,
Tuesday, July 15, 1975,
pp. 29732 - 29735
FEDERAL RESERVE SYSTEM
[ 12 CFR Part 204 and 217 ]
[Reg. D and Reg. Q]

RESERVES OF MEMBER BANKS AND
INTEREST ON DEPOSITS
Definition of Deposits— Subordinated
Notes

The Board of Governors proposes to
amend Regulations D (12 CFR 204) and
Q (12 CFR 217) to provide greater flexi­
bility to the requirements for exemption
from deposit treatment under both regu­
lations where a member bank issues cer­
tain subordinated notes and debentures
for the purpose of adding to the bank’s
capital structure. These amendments
would (1) modify the present require­
ment that an obligation have an original
maturity of seven years or more to per­
mit an obligation (or an issue of obli­
gations) to have an average maturity of
seven years or more under certain con­
ditions; (2) modify the present require­
ment that an obligation must be in an
amount of at least $500 to permit excep­
tions to be made by the appropriate
Federal banking agency to the $500 mini­
mum denomination (a) to facilitate sale
of convertible debt where, in order to
satisfy preemptive rights of sharehold­
ers, the bank would be required to issue
a convertible obligation of less than $500
face amount; (b) to maintain a ratable
unit offering to holders of preemptive
rights where a subordinated debt obliga­
tion is issued exclusively as a part of a
unit including shares of stock which are
subject to such preemptive rights; (c)
to satisfy shareholders’ ratable claims
where an obligation is issued wholly or
partially in exchange for shares of vot­
ing stock or assets pursuant to a plan
of merger, consolidation, reorganization,
or other transaction where the issuer
will acquire either a majority of such
shares of voting stock or all or substan­
tially all of the assets of the entity whose
assets are being acquired; and (3) re­
quire the issuing bank to receive the
approval of the appropriate Federal
banking agency of any redemption prior
to maturity or any payment pursuant to
acceleration of maturity in event of de­
fault. Under the proposal, the Board
would retain the option to deny a re­
quest that it waive the amount limita­
tion in those instances in which it deter­
mines that reasonable alternatives are
available to the party seeking the waiver.
If adopted, the amendments would ap­
ply to applications for new debt issues
acted upon after the effective date of
the amendments and would not affect
the status of any outstanding issues. In
all cases, the appropriate Federal bank­
ing agency is the Comptroller of the
Currency for national banks and the
Board of Governors for State member
banks.

Since 1966, the Board has exempted
from reserve requirements of Regulation
D and Interest rate limits of Regulation
Q certain subordinated debt Issues of
member banks by providing an excep­
tion to the definition of deposits under
Regulations D and Q. Upon review of the
existing regulation, the Board believes
that, in certain circumstances, greater
flexibility should be available to permit
member banks to receive approval from
the appropriate Federal banking agency
for subordinated note and debenture is­
sues that may not conform to the exist­
ing regulatory requirements.
Under the proposal, regular debt
amortization or retirement could begin
at any time so long as the weighted av­
erage maturity of the obligation or issue
of obligations would be at least seven
years and so long as once the reduction
of principal begins, all scheduled repay­
ments of principal shall be made an­
nually in an amount no less than the
previous scheduled payment. As an alter­
native, the Board is considering whether
the seven-year minimum maturity should
be retained for unamortized issues and a
ten-year minimum maturity be set for
amortized issues, with repayment begin­
ning at any time after the date of issue
provided that once repayment of princi­
pal begins, all scheduled repayments shall
be made annually in an amount no less
than the prior scheduled repayment.
The proposed exception to the $500
minimum denomination would facilitate
sale of convertible debt where, in order
to satisfy preemptive rights of stock­
holders, an issuing bank would be re­
quired to issue obligations in face
amounts less than $500. An exception to
the $500 minimum denomination is also
proposed where, in order to maintain a
ratable unit offering to holders of pre­
emptive rights in the case of a subordi­
nated debt obligation issued exclusively
as part of a unit which includes shares
of stock which are subject to such pre­
emptive rights, an issuing bank would be
required to issue obligations in face
amounts less than $500. The third pro­
posed exception to the $500 minimum de­
nomination requirement would apply
where an issuing bank would be required
to issue obligations in face amounts less
than $500 in order to satisfy sharehold­
ers’ ratable claims in the case of an ob­
ligation which is issued wholly or par­
tially in exchange for shares of voting
stock or assets pursuant to a plan of
merger, consolidation, reorganization, or
• other transaction in which the issuer will
acquire either a majority of such share
of voting stock or all or substantially all
the assets of another entity.
The provisions requiring prior approval
of redemption and payment pursuant to
acceleration of maturity are meant to
permit the appropriate Federal banking
agency to assess the impact of such pay­
ment on the capital structure of the bank.
Pursuant to its authority under sec­
tion 19 of the Federal Reserve Act (12
U.S.C. 461) to define the terms used in
that section, its authority to examine
member banks under section 9 of the
Federal Reserve Act (12 U.S.C. 325), its

authority C take action to stop unsafe
o
and unsound banking practices (12
U.S.C. 1818b), and related provisions of
the law, the Board proposes to amend
Regulation D (12 CFR 204) and Regula­
tion Q (12 CFR 217) as follows:
1. Section 204.1 would be amended by
revising paragraph (f) (3) as follows:
§ 2 0 4 .1

*

D efin itio n s.

*

*

*

*

(f) Deposits

as including certain
promissory notes and other obligations.

For the purposes of this Part, the term
“deposits” also includes a member bank’s
liability on any promissory note, ac­
knowledgement of advance, due bill,
banker’s acceptance, or similar obligation
(written or oral) that Is issued or un­
dertaken by a member bank as a means
of obtaining funds to be used in its thank­
ing business, except any such obligation
that:
*

*

*

*

♦

(3) (i) Bears on its face, in bold-face
type, the following: “This obligation is
not a deposit and is not insured by the
Federal Deposit Insurance Corporation”;
is subordinated to the claims of deposi­
tors, is unsecured, and is ineligible as
collateral for a loan by the issuing bank
and also expressly states said provisions
on its face; has a maturity of at least
seven years, or, in the case of an obliga­
tion or issue that provides for scheduled
repayments of principal, has an average
maturity* of at least seven years* and
provides that once repayment of princi­
pal begins, all scheduled repayments
shall be made annually in an amount no
less than the prior scheduled repay­
ment; is issued subject to a requirement
that no repayment (other than an ap­
proved regularly scheduled repayment),
including but not limited to a payment
pursuant to acceleration of maturity,
may be made without the prior written
approval of the appropriate Federal
banking agency;Tis in an amount of at
least $500 except that the appropriate
Federal banking agency may approve the
issuance of an obligation that is less
than $500 if the obligation is convertible
into common stock and, in order to satis­
fy the preemptive rights of shareholders,
the issuing bank would be required to is­
sue obligations in an amount of less than
$500, or if the obligation is issued exclu­
sively as part of a unit including shares
6 The “average m a tu rity ” of an obligation
or issue repayable in scheduled periodic pay­
m ents shall be th e tim e-w eighted average of
all such scheduled paym ents.
* T he Board is also considering w h eth er
th e 7-year m in im u m m a tu rity should be re ­
tain e d for u nam ortized issues and a 10-year
m inim um m a tu rity be set for am ortized is­
sues w ith repaym ent beginning a t any tim e
a fte r th e date of issue provided th a t, once
rep ay m ent of principal begins, all scheduled,
repaym ents shall be m ade a n n ually in a n
a m o u n t no less th a n th e prior scheduled
repaym ent.
TFor th e purposes of th is p art, th e "ap ­
p ro p riate Federal b a n k ing agency" is t h e
Com ptroller of th e Currency In th e case of
a n a tio n a l ban k a nd th e Board of Gover­
nors in th e case of a S ta te m em ber bank.

at least seven years* and provides that
once repayment of principal begins, all
scheduled repayments shall be made an­
nually in an amount no less than the
prior scheduled repayment; is issued sub­
ject to a requirement that no repayment
(other than an approved regularly sched­
uled repayment), including but not lim­
ited to a payment pursuant to accelera­
tion of maturity, may be made without
the prior written approval of the appro­
priate Federal banking agency;7 is in an
amount of at least $500 except that the
appropriate Federal banking agency may
approve the issuance of an obligation
that is less than $500 if the obligation is
convertible into common stock and, in
order to satisfy the preemptive rights of
shareholders, the issuing bank would be
required to issue obligations in an
amount of less than $500, or if the obliga­
tion is issued exclusively as part of a unit
including shares of stock which are sub­
ject to such preemptive rights and, in
order to maintain a ratable unit offering
to holders of preemptive rights, the issu­
ing bank would be required to issue obli­
gations in an amount of less than $500, or
where, in the case of an obligation issued
wholly or partially in exchange for shares
of voting stock or assets pursuant to a
*
*
*
*
*
plan of merger, consolidation, reorga­
2. Section 217.1 of Regulation Q would nization, or other transaction where the
be amended by revising the introductory issuer will acquire either a majority of
paragraph in paragraph (f) & (f) (3) as such shares of voting stock or all or sub­
stantially all of the assets of the entity
follows:
whose assets are being acquired, and in
§ 2 1 7 .1 D efin ition s
order to satisfy shareholders’ ratable
*
*
*
*
*
claims, the issuing bank would be re­
(f)
Deposits as including certainquired to issue obligations in an amount
promissory notes and other obligations. of less than $500; and has been approved
For the purposes of this Part, the term by the appropriate Federal banking
“deposits” also includes a member agency as an addition to the capital
bank’s liability on any promis­ structure of the issuing bank; or (ii)
sory note, acknowledgment of advance, meets all of the requirements in the pre­
due bill, or similar obligation (written ceding clause except maturity and with
or oral) that is issued or undertaken by respect to which the appropriate Federal
a member bank principally as a means of banking agency has determined that ex­
obtaining funds to be used in its bank­ igent circumstances require the issuance
ing business, except any such obligation of such obligation without regard to the
that:
provisions of this part; or (iii) was issued
*
*
*
*
*
or publicly offered before June 30, 1970,
(3) (i) Bears on its face, in bold-face with an original maturity of more than
type, the following: "This obligation is two years.
*
*
*
*
*
not a deposit and is not insured
by the Federal Deposit Insurance Cor­
In connection with its consideration of
poration”; is subordinated to the claims the regulatory amendments proposed
of depositors, is unsecured, and is in­ herein, the Board also has determined
eligible as collateral for a loan by that State member banks should be pro­
the issuing bank and also expressly vided with guidance as to the criteria to
states said provisions on its face; has a be applied by the Board in evaluating
maturity of at least seven years, or, in requests for approval of new issues of
the case of an obligation or issue that subordinated notes and debentures “as
provides for scheduled repayments of an addition to the bank’s capital
principal, has an average maturity" of structure.”
In acting upon requests from State
•T h e “average m a tu rity ” of a n obligation
or issue repayable in scheduled periodic p ay­ member banks for approval of proposed
m en ts shall be th e tim e-w eighted average or issues of subordinated notes and de­
bentures, the Board takes into account
all such scheduled paym ents.
•T h e Board is also considering w hether various aspects of the applicant’s finan­
th e 7-year m in im u m m a tu rity should be cial condition and its prospective ca­
re ta in ed for un am o rtized issues an d a 10year m in im u m m a tu rity be set for am ortized pacity to service the proposed debt in
of stock which are subject to such pre­
emptive rights and, in order to maintain
a ratable unit offering to holders of pre­
emptive rights, the issuing bank would
be required to issue obligations in an
amount of less than $500, or where, in
the case of an obligation issued wholly
or partially in exchange for shares of
voting stock or assets pursuant to a plan
of merger, consolidation, reorganization,
or other transaction where the issuer will
acquire either a majority of such shares
of voting stock or all or substantially all
of the assets of the entity whose assets
are being acquired, and in order to sat­
isfy shareholders’ ratable claims, the is­
suing bank would be required to issue ob­
ligations in an amount of less than $500;
and has been approved by the appropri­
ate Federal banking agency as an addi­
tion to the capital structure of the issu­
ing bank; or (ii) meets all of the require­
ments in the preceding clause except ma­
turity and with respect to which the ap­
propriate Federal banking agency has
determined that exigent circumstances
require the issuance of such obligation
without regard to the provisions of this
part; or (iii) was issued or publicly of­
fered before June 30, 1970, with an orig­
inal maturity of more than two years; or

issues, w ith repaym ent beginning a t any tim e
afte r th e d a te of issue provided t h a t once re ­
p ay m en t of p rin cipal begins, all scheduled
repaym ents shall be m ade a n nu ally in an
a m o u n t no less th a n th e prior scheduled re­
paym ent.

’ For th e purposes of th is p a rt, th e “a p ­
p ro p riate Federal ban k ing agency” is th e
Com ptroller of th e Currency in th e case of a
n atio nal b an k an d th e Board of Governors in
th e case of a S ta te m em ber bank.

view of the bank’s earnings history and
capital structure. Application of these
criteria is intended also to promote the
accumulation by debt-issuing banks of
an adequate cushion of equity capital,
protect against undue concentrations of
maturing debt in any one year, and pre­
vent the inclusion of terms in such is­
sues that could be regarded as In con­
flict with the public interest. In addition,
it is stressed that the guidelines set forth
below, as applied by the Board are not
intended to provide or be administered
in a manner resulting in a rigid set of
requirements in addition to those set
forth in Regulations D and Q. Rather,
they are to be administered flexibly, tak­
ing into account the special circum­
stances of particular applicants. (These
might include the urgency of the bank’s
need for additional capital and. the ac­
cessibility of additional equity, the
prospective growth of the bank, the im­
pact of unusual income and expense de­
velopments on recent earnings, and the
relative strength of earnings of nonbank
affiliates or subsidiaries.)
By publication of these guidelines
which the Board intends to use in its
evaluation of applications for such ex­
emption, the Board also invites com­
ments from the public on these criteria
at the same time as comments are re­
ceived on the regulatory amendments
proposed herein.
The Comptroller of the Currency has
advised the Board that he is considering
use of the same guidelines in evaluating
applications from national banks for ap­
proval of subordinated debt issues
pursuant to 12 CFR 14.5.
G u id e l in e -C riteria fo r E valuating D ebt
I s su e s as A d d it io n to a S tate M ember
B a n k ’s C apital S tru ctu re

1. M axim um ratio o f debt to equity.

The total amount of subordinated notes
and debentures outstanding, including
the debt proposed to be issued, should not
exceed 50 per cent of a bank’s equity
capital base. However, banks with signifi­
cant asset or management problems gen­
erally would not be presumed to be en­
titled to issue debt capital up to the 50
per cent ceiling. A bank’s equity capital
base, for purposes of this test, is con­
sidered to include capital stock, surplus,
undivided profits, capital reserves, and all
reserves for losses on loans and securities.
2. Earnings coverage test. The total of
fixed charges as a result of any issue of
subordinated notes or debentures should
not exceed 33% per cent of a State mem­
ber bank’s average net income before
taxes and before fixed charges over the
preceding five years. Therefore, in gen­
eral, average adjusted net income should
exceed total fixed charges by a multiple
of at least three. For purposes of this test,
before-tax net income would include
securities gains or losses, exclude extra­
ordinary charges and credits, and would
be adjusted where necessary to reflect
actual loan loss experience rather than
other “provision for loan loss.” Total
fixed charges include annual interest

charges before taxes on all existing debt program aimed at replacing shorteras well as the new debt proposed to be term debt with longer-term debt.
issued. Fixed charges on existing debt
4. Accumulation of equity over the life
would include interest on all outstanding of the debt. Each State member bank
mortgage debt and subordinated notes issuing subordinated notes and deben­
and debentures, plus one-third of lease tures would be expected to accumulate
contracts.
equity, in equal annual installments
In applying this test to a bank that is from retained earnings, in an amount
a subsidiary of a holding company which sufficient to increase equity capital by the
shows a net deficit on its nonbank oper­ full amount of outstanding and newly
ations, the amount of such deficit, cal­ issued debt over the lifetime of the debt.
culated on a before-tax basis, would be In effect, this requirement would provide
substracted from net income as derived for replacement of each debt issue with
from the paragraph above. To determine equity by maturity.
the amount, if any, of net deficit on non­
5. Provision for debt retirement. Where
bank operations, net income before taxes the residual amount of a proposed new
of the bank would be substracted from debt issue to be repaid at maturity, to­
consolidated net income before taxes of gether with scheduled repayments in
the holding company. For multibank that year on other debt-type capital and
holding companies, the nonbank net defi­ mortgage indebtedness, would exceed 15
cit generally would be allocated among per cent of the bank’s present capital
subsidiary banks in proportion to their base, the bank shall either provide for
net income. Ordinarily, the adjustment reducing the amount of debt outstand­
would be based on data for the most re­ ing at maturity by a sinking fund or
cent year, but, in some cases, an average other debt-retirement arrangement or
(covering not more than the most recent have the right to call such obligations
fi(ve years) would be more representative for redemption at least five years before
of prospective earnings experience. This maturity.
adjustment, in effect, would reduce the
6. Approval of interbank debt transac­
allowable amount of new fixed interest tions. In general, the Board does not in­
expense which could be asumed by any tend to approve a subordinated note or
bank whose nonbank affiliates, including debenture issued by a State member
the parent holding company, incur an bank directly or indirectly (through a
aggregate net deficit. The offset against holding company or otherwise) to
the bank’s earnings recognizes the pos­ another bank as an addition to the issu­
sibility that the parent might have to ing bank’s capital structure unless spe­
rely on dividends from the bank in cifically authorized as such an addition
order to cover a nonbank deficit, thereby by the Board of Governors upon a pres­
reducing the bank’s ability to maintain entation and finding of compelling cir­
or build its equity capital.
cumstances. Such transactions provide
3.
Retained earnings test. Annual prono additional capital protection for the
forma amortization on all subordinated banking system as a whole and ordinar­
notes and debentures, including the pro­ ily will be discouraged.
posed debt issue, should not exceed 50
7. Covenants in conflict with the public
per cent of a State member bank’s aver­ interest. No indenture or other contract
age retained earnings over the preceding covering the issuance of a subordinated
five years. Retained earnings under this note or debenture by a State member
criterion are considered to include net bank shall include any covenants, re­
income after taxes minus dividends de­ strictions, or other terms which are de­
clared on common and preferred stock. termined by the Board to be inconsistent
For each issue of subordinated debt, in­ with the public interest. Examples of
cluding a proposed new issue, annual pro such terms are those regarded as im­
forma amortization would be calculated pairing the ability of the bank to comply
by dividing the original amount of the with statutory or regulatory require­
issue by the number of years from date ments regarding disposition of assets or
of issue to maturity. Total pro forma incurrence of additional debt, limiting
amortization would be the sum of annual the ability of the Board or the chartering
pro forma amortization for all outstand­ authority to take any necessary action
ing and proposed issues.
to resolve a problem bank situation, un­
Considerable discretion would be used duly interfering with the ability of the
In the administration of this test. In bank to conduct normal banking opera­
some circumstances, banks which have tions, or imposing terms and conditions
issued additional shares of equity capi­ on the bank that are unduly harsh or
tal during the five-year period for which onerous.
average retained earnings are calculated E x a m p l e s o p P r o p o s e d G u i d e l i n e C r i t e r i a
would receive credit for these new issues
1, 2 AND 3
as if they had been part of retained earn­
dem
ings. In addition, some banks which have th The followingof calculations a n d 3o n strate
e app lication
T ests 1, 2,
of th e
outstanding substantial amounts of rel­ g uideline-criteria for evaluating d e b t issues.
atively short-term subordinated debt T he d a ta used in th e calculations are fo r a
prior to the issuance of these guidelines h yp o th etical bank, wholly-owned by a onewould be granted special consideration b a n k h olding company. W here applicable,
item
a a re rep rted In th e Consolidated
In the application of the retained earn­ R ep osrtt hof t Incom e oan d Consolidated R eport
ings test to proposed new issues, so long of C ondition are designated by th e ir lin e
as the new Issues were part of a specified n um bers on th e req u ired reports. For ex­

ample, [RI-A10] refers to n e t incom e as re­
ported in Section A, line 10 of th e Report
of Income. T otal assets, as reported on line
14 of th e R eport of C ondition would be
identified as [RC-14]. All dollar am o u n ts are
in th o u sa n d s of dollars. (Banks t h a t are re ­
q uired to file a C onsolidated Report of Con­
d itio n including foreign an d dom estic su b ­
sidiaries would use a m o u n ts show n in t h a t
rep o rt, ra th e r t h a n those show n in th e
Consolidated R eport of C ondition including
only dom estic subsidiaries.)
The h yp o th etical ban k presently has o u t­
sta n d in g two issues of sub ord in ated d eb t:
(1) $8,000—8 percen t S ubordinated d eben­
tures, due Sept. 15, 1987.
(2) $7,000—10 percent Capital notes, due
Ju n e 30, 1980.
I t proposes, on Ja n u a ry 1, 1975, to issue $9
m illion of ad ditional subo rdin ated d eb t on
term s described in th e illu stratio n s t h a t
follow.
TEST

1:

M A X IM U M

R A T IO

OF

DEBT

TO

E Q U IT Y

Guideline. T he to ta l a m o u n t of sub o rd i­

n a te d notes an d d ebentu res o u tstand in g ,
including su b o rd in ated deb t proposed to be
issued, should n o t exceed 50 p ercen t of a
b a n k ’s eq u ity capital base.
Calculations

1. Sub ord in ated notes and deben­
tu re s o utstan d in g , Dec. 31, 1974
(RC-34) ____________________ $15,000
2. E quity capital, total, Dec. 31,
1974 (R C -35)________________ 50,000
3. Total reserves on loans and se­
curities, Dec. 31, 1974 (RC— _
33)
4. E quity capital base (line 2 plus
line 3 ) ______________________
5. C u rren t ra tio of subordinated
d eb t to equity capital base (line
1 divided by line 4 ) __________
6. A m ount of proposed new issue-

10,000
60, 000
.25
9, 000

7. S ub o rd in ated debt, including
proposed new issue (line 1 plus
line 6 ) ______________________ 24, 000
8. R atio of subordinated debt, in ­
cluding proposed new issue, to
eq u ity capital base (line 7 d i­
.40
vided by line 4 ) ____________
Conclusion. Since th e ra tio of sub o rd in ated
debt, including th e proposed new issue (line
8), does n o t exceed 50 percent, te s t 1 is m et.
T E S T 2 : E A R N I N G S COVERAGE T E S T

Guideline. I n general, average a n n u al a d ­

ju ste d n e t Income over th e p a st 5 years
shou ld exceed to ta l fixed charges, Including
th e a n n u a l in te re st charge o n th e proposed
new issue, by a m u ltip le of a t least 3.
Calculations

9. Incom e before incom e taxes an d
securities gains or losses, 1970-74
average (R I-A 3 )____ ,__________$9, 740
10. Net securities gains or losses, be­
fore tax effect, 1970-74 average
(RI-A6 (col. 1 ) ) _______________
290
11. Provision for lo an losses, 1970-74
average (RI-A21)1______________
230
12. Net chargeoffs on loans, 1970-74
average (RI-D6 (col. 1 p lu s 2)
m in u s RI-D3 (col. 1 p lu s 2 ) ) 1—
260
1 B anks usin g a ctu a l n e t chargeoffs as th e
a m o u n t of th e ir provision fo r lo an losses
need m ake no en trie s in lines 11 a n d 12.

13. N onbank deficit of hold in g com ­
pany, If any, 1974 * (e n te r only if
n egative n u m b e r)_____________
14. Average ad ju ste d n e t incom e be­
fore incom e taxes, 1970-74 (line
9 p lu s line 10 plus lin e 11 m in u s
lin e 12 p lu s line 13 )____________

(800)

9,200

15. In te re st o n su b o rd in ated notes
a n d debentures, 1974 (R I-A 2f)_
16. In te re st on m ortgage debt, 197417.% of lease paym ents o n ban k
prem ises an d equipm ent, 1974—
18. Fixed charges on p resen t obliga­
tio n s (line 15 p lu s lin e 16 plus
(line 17)............................................

1,340
660
1, 000

3,000

19. Average a d ju ste d n e t incom e be­
fore fixed charges o n p resen t
o bligations (line 14 p lu s lin e 18) 12,200
20. C u rre n t earn ing s coverage ra tio
(line 19 divided by lin e 1 8)____
4.07
21. A nnual in te re st charge o n p ro ­
posed new issue (assum es a 9
p e rce n t a n n u a l r a te ) _________
810
1 T his a d ju s tm e n t to n e t Incom e is m ade
only If th e ban k is a subsidiary of a h olding
com pany t h a t In cu rs a n e t deficit in Its n o n ­
b a n k operations. T he n o n b an k deficit, cal­
cu la ted o n a before-tax basis, is th e negative
difference o b tain ed by su b tra c tin g th e con­
solidated n e t Incom e of th e ban k from th e
consolidated n e t Incom e of th e h olding
com pany, b o th a d ju ste d in th e m an n e r Il­
lu stra te d in lin es 9 th ro u g h 12 of th is ex­
am ple. O rdinarily, th e a d ju s tm e n t fo r a n o n ­
b a n k deficit would be based on d a ta fo r th e
m o st re ce n t year, b u t in som e cases, a n aver­
age covering no m ore th a n th e m o st re ce n t 5
years would be m ore rep resen tativ e of pro­
spective earn ing s experience.

22. Average a d ju ste d n e t income,
before fixed charges o n p resen t
o bligations an d In tere st charge
o n proposed new issue (lin e 19
p lu s lin e 2 1 )__________________ 13,010
23. Fixed charges on p resen t obliga­
tio n s an d Interest charge on p ro ­
posed new issue (line 18 plus
lin e 2 1 ) ............ ...............................

3,810

24. E arn ing s coverage ratio , in c lu d ­
ing In tere st charge on proposed
new issue (line 22 divided by
lin e 2 3 )______________________
3.41
Conclusion. T he earnin g s coverage ratio,
includ in g th e in te re st charge o n th e pro­
posed new Issue (line 24) equ als 3.41 an d
th erefo re m eets th e req u ire m en ts of te s t 2.
T E S T 3 : R E T A IN E D E A R N I N G S T E S T

G uideline. Average a n n u a l re ta in ed e a rn ­

ings over th e p a st 5 years sh o uld exceed th e
a n n u a l p ro form a a m o rtizatio n on all su b ­
o rd in ated no tes an d deb en tures, in clu d ing
th e proposed new issue, by a m u ltip le of a t
lea st 2. Two illu stra tio n s are provided below.
T he first exam ple (lines 30a th ro u g h 32a) as­
sum es a final m a tu rity of 10 years. T h e sec­
o n d exam ple (lines 30b th ro u g h 32b) a s­
sum es a final m a tu rity of 20 years.
Calculations

25. N et incom e, 1970-74 average
(RI-A10) ................................ ........$8,000

31a. T o tal pro form a am ortization,
in clu d in g propo6ed new issue
lin e 38 plus line 30 a)________

2, 433

32a. R etained earnings ratio, in c lu d ­
ing proposed new issue (line
27 divided by line 3 1 a)_______
1. 64
Conclusion. U nder a n assum ed final m a ­
tu r ity of 10 years for th e proposed new issue,
t h e b a n k ’s re ta in ed earn ing s ra tio of 1.64
(line 32a) would n o t m eet th e m in im um re ­
q u irem e n t of te s t 3.
Calculations

Assum ing a 20-year final m a tu rity
o n proposed new Issue:
30b. Pro form a am o rtizatio n of p ro ­
posed new issue (line 6 divided
by a final m a tu rity of 20
years) ______________________

$450

31b. T otal pro form a am ortization,
including proposed new issue
(line 28 plus line 3 0 b )_______

1,983

32b. R etain ed earn ing s ratio , in clu d ­
in g proposed new issue (line 27
divided by line 3 1 b )__________
2. 02
Conclusion. T he longer final m a tu rity of
20 years resu lts in a re ta in ed earn ing s ra tio
of 2.02 (line 32b) w hich passes th e m in i­
m u m acceptable ra tio for te s t 3.

To aid in the consideration of the pro­
posed amendments to Regulations D and
Q by the Board and to facilitate the
evaluation of the appropriateness and
effectiveness of the guideline-criteria set
27. Average a n n u a l re ta in ed e a rn ­
forth herein, Interested persons are re­
ings, 1970-74 (lin e 25 m in u s lin e
quested to submit relevant data, views, or
26)
.............................. .................... 4,000
arguments. Any such material should be
28. P ro form a a m o rtiza tio n of ex ist­
submitted in writing to the Secretary,
in g d e b t (to ta l of col. 4 b elow ). 1, 533
Board of Governors of the Federal Re­
serve System, Washington, D.C. 20551, to
(2)
(3)
(4)
(l)
be received not later than August 29,
Years from
Pro forma
1975. Such material will be made avail­
Description of issue
Amount of
date of issue
amortization
original issue
to date of
(col. 2 divide
able for inspection and copying upon
maturity
by ooL 1)
request, except as provided In 9 261.6(a)
8 percent subordinated debentures_______ $8,000
18
$533 of the Board’s rules regarding avail­
10 percent capital notes......... ....... ........................ 7,000
7
1,000 ability of Information.
Total____________________;..............16,000 ________________________________
1,633
By order of the Board of Governors,
July 1,1975.
29. C u rre n t re ta in ed earnings ra tio
80a. P ro form a a m o rtizatio n of p ro (lln e 27 divided by lin e 2 8 )___
A ssum ing a 10-year final m a tu rity
on proposed new issue:

3.61
------------

26. C ash dividends declared o n com ­
m o n a n d preferred stock, 1970­
74 average (R I-B 3a p lu s R IB3b) _______________________4,000

posed new Issue (line 6 divided
by a final m a tu rity of 10
years) _______________________

[ s e a l]
$900
— ———

T h e o d o re E . A llis o n ,

Secretary of the Board.
[FR D oc,75-18178Filed 7-14-75;8:45 am ]


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102