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F
e d e r a l
R
e s e r v e
B
a n k
O F DALLAS
January 26, 1990
W ILL IA M
H. WALLACE
DALLAS, TEXAS 75222
FIRST V IC E PR ES ID EN T
AND CH IE F O PER ATING O FFICER
To:
Circular 90-05
The Chief Executive Officer of all
member banks and others concerned in
the Eleventh Federal Reserve District
SUBJECT
P r o p o se d C a p i t a l S t a n d a r d s
DETAILS
The Federal Reserve Board has announced that it is seeking public comment
on proposed minimum transition capital standards for state member banks and bank
holding companies to be applied through the end of 1990, as well as guidelines for
a new leverage ratio. The proposed guidelines set forth the Board’s preliminary
views on the appropriate leverage standard to be applied to banking organizations
in conjunction with the risk-based capital framework after year-end 1990.
In order to assist banking organizations in their capital planning process,
the Board has proposed that, through 1990, a banking organization may choose to
conform to either the existing minimum capital adequacy ratios or the year end
1990 risk-based capital standard. In addition, the Board is proposing to
establish and apply during this period a minimum ratio of 3 percent Tier 1 capital
to total assets (leverage ratio).
The Board is also proposing to drop the existing 5.5 percent primary and
6.0 percent total capital to total assets leverage ratios after year-end 1990.
The 3 percent Tier 1 capital to total assets ratio would then constitute the
minimum leverage standard for banking organizations.
Comments should be addressed to William W. Wiles, Secretary, Board of
Governors of the Federal Reserve System, Washington, D.C. 20551. All
correspondence should refer to Docket No. R-0683 and must be received by March 9,
1990.
ATTACHMENTS
The Federal Register is attached.
MORE INFORMATION
For more information, please contact Don Freeman at (214) 744-7408; Dorsey
Davis (214) 744-7420; or W. Arthur Tribble (214) 744-7479. For additional copies
of this circular, please contact the Public Affairs Department at (214) 651-6289.
Sincerely
For additional copies of any circu la r please co n ta ct the Public A ffa irs D epartment at (214) 651-6289. Banks and others are
encouraged to use the follow ing incom ing WATS numbers in con tacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
582
Federal Register / Vol. 55, No. 4 / Friday, January 5, 1990 / Proposed Rules
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulation H, Regulation Y; Docket No. R-
0383]
Capital; Capital Adequacy Guidelines
December 29,1989.
Board of Governors of tbs
Federal Reserve System.
a c t i o n : Notice of proposed guidelines.
agency:
When the Board of
Governors of the Federal Reserve
System (“Board”) issued final risk-based
capital guidelines on January 19,1989, it
indicated that the existing 5.5 percent
and 6 percent primary and total capital
to total assets (leverage) ratios would
stay in effect at least until the end of
1990, when the interim minimum riskbased capital ratios take effect. The
Board also indicated that it would
consider proposing a revised leverage
constraint that, if adopted, would
replace the existing leverage guidelines.
It w as contemplated that the definition
of capital for the new leverage
guidelines would be consistent with the
risk-based capital definition.
The Board is now proposing for public
comment transition capital guidelines to
be applied through the end of 1990, as
well as guidelines for a new leverage
constraint. The Board believes that
these steps, taken together, should assist
state-chartered member banks and bank
holding companies (collectively
"banking organizations”) in formulating
their capital planning process and in
strengthening their capital base.
Under the proposal, a banking
organization may choose up to the end
of 1990 to conform to either the existing
minimum capital adequacy ratios (5.5
percent primary capital and 6 percent
total capital to total assets) or to the 7.25
percent year-end 1990 risk-based capital
standard. In addition, the Board is
proposing to establish and apply during
this period a minimum ratio of 3 percent
Tier 1 capital to total assets (leverage
ratio). For leverage purposes, Tier 1
would be defined consistent with the
year-end 1992 risk-based capital
guidelines.
The Board is also proposing to drop
the existing 5.5 percent primary and 6.0
percent total capital to total assets
leverage ratios after year-end 1990. The
3 percent Tier 1 leverage ratio would
then constitute the minimum capital to
total assets standard for banking
organizations.
Under the Board’s proposal, these
standards would be minimum
requirements. Any institution operating
at or neai these levels would be
SUMMARY:
expected to have well-diversified risk,
including no undue interest rate risk
exposure, excellent asset quality, high
liquidity, good earnings and, in general,
would have to be considered a strong
banking organization, rated composite 1
under the appropriate bank or bank
holding company rating system. Any
institution experiencing or anticipating
significant growth would be expected to
maintain capital well above the
minimum levels as has been the case in
the past. For example, most such
banking organizations have generally
operated at capital levels ranging from
100 to 200 basis points above the stated
minimums. Higher capital ratios could
be required if w arranted by the
particular circumstances or risk profiles
of individual banking organizations. In
all cases, banking institutions should
hold capital commensurate with the
level and nature of all of the risks,
including the volume and severity of
problem loans, to which they are
exposed.
Whenever appropriate, in particular
when an organization is undertaking
expansion, seeking to engage in new
activities or otherwise facing unusual or
abnormal risks, the Board will continue
to consider, on a case-by-case basis, the
level of an organization’s tangible Tier 1
leverage ratio (after deducting all
intangibles) in making an overall
assessment of capital. This is consistent
with the Federal Reserve’s risk-based
capital guidelines and long-standing
Board policy and practice under the
current leverage guidelines.
Organizations experiencing growth,
whether internally or by acquisition, are
expected to maintain strong capital
positions substantially above minimum
supervisory levels, without significant
reliance on intangible assets.
DATE: Comments should be submitted
on or before March 9,1990.
ADDRESS: Comments, which should refer
to Docket No. R-0683, may be mailed to
the Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551, to the attention of Mr.
William W. Wiles, Secretary; or
delivered to room B-2223, Eccles
Building, between 8:45 a.m. and 5:15 p.m.
Comments may be inspected in room B1122 between 9:00 a.m. and 5:00 p.m.,
except as provided in § 261.8 of the
Board’s Rules Regarding Availability of
Information, 12 CFR 261.8.
FOR FURTHER INFORMATION CONTACT:
Richard Spillenkothen, Deputy
Associate Director (202/452-2594), Roger
Cole, Assistant Director (202/452-2618),
Rhoger H. Pugh, Manager (202/728
5883), or Norah Barger, Senior Financial
Analyst (202/452-2402), Division of
Banking Supervision and Regulation,
Board of Governors; Michael J.
O’Rourke, Senior Attorney (202/452
3288) or Mark J. Tenhundfeld, Attorney
(202/452-3612), Legal Division, Board of
Governors; or Donald E. Schmid,
Manager (212/720-6611) or Manuel J.
Schnaidman, Senior Financial Analyst
(212/720-6710), Federal Reserve Bank of
New York. For the hearing impaired
only, Telecommunication Device for the
Deaf (TDD), Eamestine Hill or Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
I. Background
The Federal Reserve’s risk-based
capital guidelines adopted January 27,
1989 (54 FR 4186) set forth an interim
target risk-based ratio effective year-end
1990 and a final risk-based standard
effective year-end 1992. In issuing its
risk-based capital guidelines, the Board
indicated that the existing 5.5 and 6.0
percent primary and total capital to total
assets (leverage) ratios would stay in
effect, at least until the end of 1990. A
principal reason for this was to retain a
capital constraint until the interim
minimum risk-based capital ratios take
effect.
The Board also indicated that even
after minimum risk-based capital ratios
become effective, retention of an overall
leverage constraint might be deemed
appropriate because the risk-based
capital framework does not incorporate
a comprehensive measure of interest
rate risk. A minimum ratio of capital to
total assets would help to address this
potential problem by imposing an
overall limitation on the extent to which
a banking organization could leverage
its equity capital base.
In addition to interest rate risk, capital
ratios may also not take full or explicit
account of certain other risk factors that
can affect a banking organization’s risk
profile. These factors include funding
and market risks; investment or loan
portfolio concentrations; asset quality;
and the adequacy of internal policies,
systems, and controls. These factors,
which must be taken into account in
determining the overall risk profile and
capital adequacy of a banking
organization, also suggest the need to
generally encourage banking
organizations to operate well above
minimum supervisory ratios.
In issuing its risk-based capital
guidelines, the Board indicated that
retention of the existing leverage ratios
would provide an element of stability
during the risk-based capital transition
period. The Board further stated that if
retention of an overall leverage
Federal Register / Vol. 55, Nq, 4 / Friday, January 5, 1990 / Proposed Rules
standard were deemed appropriate in
the long-run, the Federal Reserve would
consider replacing the existing primary
and total capital to total assets leverage
ratios with a standard that incorporates
a definition of capital that is consistent
with the definitions contained in the
risk-based capital framework. At the
time, the Board indicated that a leverage
standard based upon a revised
definition of capital, and used in
conjunction with a strong risk-based
capital requirement, could be set at a
level different from the existing leverage
standard it would replace.
The Board is now proposing for public
comment transition capital guidelines to
be applied through the end of 1990, as
well as guidelines for a new leverage
constraint which the Board believes
should replace the existing leverage
guidelines at the end of 1990. Taken
together, these steps should assist
banking organizations in their capital
planning process and, where necessary,
their efforts to raise additional capital
and strengthen their capital base.
II. Proposed Transition and Leverage
Standards
A. Transition Standards
The Board is proposing that during the
first phase of the risk-based capital
transition period, which ends at yearend 1990, a banking organization may
conform to either the existing minimum
capital adequacy ratios of 5.5 percent
primary capital and 6 percent total
capital to total assets, or to the 7.25
percent year-end 1990 minimum riskbased capital standard. It should be
emphasized that banking organizations
are not required to meet the interim riskbased standard prior to its year-end
1990 effective date. Rather,
organizations have the option of
complying with the risk-based standard
during 1990 in lieu of meeting the
existing primary' and total capita!
adequacy guidelines. Regardless of
which of these options a banking
organization chooses, during this period
banking organizations would also have
to meet the new proposed leverage
standard set forth below.
B, New Leverage Standard
The Board is also proposing to
establish and apply during 1990 and
thereafter a minimum Tier 1 capital to
total assets (leverage) ratio of 3 percent.
For this purpose, the definition of Tier 1
capital for year-end 1992, as set forth in
the risk-based capital guidelines, will be
used.1 Total assets would be defined for
1 A t the en d o f 1992, T ier 1 c ap ital for state
m em ber b a n k s includes com m on equity, minority
this purpose as total consolidated assets
(defined net of the allowance for loan
and lease losses), less goodwill and any
other intangible assets or investments in
subsidiaries that the primary regulator
determines should be deducted from
Tier 1 capital on a case-by-case basis.
Finally, the Board is also proposing
that at the end of 1990 the existing
leverage ratios, that is, the 5.5 percent
and 6.0 percent primary and total capital
to total assets leverage ratios, would be
dropped. The 3 percent Tier 1 capital to
total assets ratio would then constitute
the leverage standard for banking
organizations, and would be used
thereafter in conjunction with the riskbased ratio in determining the overall
capital adequacy of banking
organizations.
The proposed Tier 1 leverage ratio
differs in a number of respects from the
current primary and total capital ratios
as defined under the Federal Reserve’s
existing leverage guidelines. For
example, primary capital includes the
allowance for loan and lease losses
(without limitation), and total capital
includes limited amounts of
subordinated debt. Neither of these
elements, both of which are deemed to
be Tier 2 components under the riskbased capital framework, is included in
the definition of capital for the newly
proposed Tier 1 leverage ratio.
Moreover, the current primary and total
capital leverage standards do not
contain an absolute minimum for the
level of permanent shareholders’ equity
in relation to assets—a minimum that is
established by the proposed Tier 1
leverage standard. Thus, the proposed
Tier 1 leverage ratio reflects the amount
of core equity that is available to
support unanticipated losses—a key
prudential measure for determining the
health of individual banking
organizations. In addition to these
benefits, adoption of Tier 1 for the
interests in equity acco u n ts o f con solidated
subsidiaries, a n d qualifying noncum ulative
p erpetual preferred stock, less goodwill. It excludes
a n y oth er intangible asse ts an d in v estm ents in
su b sidiaries th a t the F ederal R eserve determ ines
should be d e d u cted from capital for supervisory
purp o ses on a case-by-case basis. For b a n k holding
com panies. T ier 1 c ap ital at the en d of 1992 includes
com m on equity, m inority interests in equity
acco u n ts o f conso lid ated subsidiaries, an d
qualifying cum ulative a n d noncum ulative p erpetual
p referred stock. (Perpetual p referred stock is limited
to 25 perccnt o f Tier 1 capital.) In addition, T ier 1
e xcludes goodw ill a s w ell as a n y o ther intangibles
a n d investm ents in su b sidiaries th a t the prim ary
regulator d eterm ines should b e d ed u cted from
c ap ital on a case-by-case basis. (This sum m ary of
T ier 1 cap ital definitions is purely illustrative in
nature. C om prehensive T ier 1 capital definitions are
set forth in A ppendix A to p a rt 208 of the B oard’s
R egulation H for state m em ber ba n k s a n d in
A p pendix A to p a rt 225 o f the Board’s R egulation Y
for b a n k holding companies.)
583
purpose of comparing capital to total
assets will have the advantage of
bringing the definition of capital for
leverage purposes into line with the
definition of capital for risk-based
capital purposes.
The Board emphasizes that in all
cases, the standards set forth above are
supervisory minimums. An institution
operating at or near these levels is
expected to have well-diversified risk,
including no undue interest rate risk
exposure; excellent asset quality; high
liquidity; good eamings; and in general
be considered a strong banking
organization, rated composite 1 under
the CAMEL rating system for banks or
the BOPEC rating system for bank
holding companies. Institutions with
high or inordinate levels of risk are
expected to operate wrell above
minimum capital standards. As has been
the case in the past, institutions
experiencing or anticipating significant
growth are also expected to maintain
capital well above the minimum levels.
For example, most such banking
organizations generally have operated
at capital levels ranging from 100 to 200
basis points above the stated minimums.
Higher capital ratios could be required if
warranted by the particular
circumstances or risk profiles of
individual banking organizations. In all
cases, banking institutions should hold
capital commensurate with the level and
nature of all of the risks, including the
volume and severity of problem loans, to
which they are exposed.
W henever appropriate, in particular
when an organization is undertaking
expansion, seeking to engage in new
activities or otherwise facing unusual or
abnormal risks, the Board will continue
to consider, on a case-by-case basis, the
level of an organization’s tangible Tier 1
leverage ratio (after deducting all
intangibles) in making an overall
assessment of capital. This is consistent
with the Federal Reserve’s risk-based
capital guidelines and long-standing
Board policy and practice under the
current leverage guidelines.
Organizations experiencing growth,
whether internally or by acquisition, are
expected to maintain strong capital
positions substantially above minimum
supervisory levels, without significant
reliance on intangible assets.
III. Regulatory Flexibility Act Analysis
The Federal Reserve Board does not
believe that adoption of this proposal
would have a significant economic
impact on a substantial number of small
business entities (in this case, small
banking organizations), in accord with
the spirit and purposes of the Regulatory
584
Federal Register / Vol. 55, No. 4 / Friday, January 5, 1990 / Proposed Rules
Flexibility Act (5 U.S.C. 601 et seq.). In
addition, consistent with current policy,
these guidelines generally will not apply
to bank holding companies with
consolidated assets of less than $150
million. Moreover, rather than requiring
all banking organizations to raise
additional capital, the guidelines are
directed at institutions whose capital
positions are less than fully adequate in
relation to their risk and leverage
profiles.
List of Subjects
12 CFR Part 208
Banks, Banking, Capital adequacy,
Federal Reserve System, Reporting and
recordkeeping requirements. State
member banks.
Appendix A—[Amended]
3. Footnote 1 to "I. O verview ” o f
Appendix A to part 208 is revised to
read as follows;
1 Supervisory ratios that relate capital to
total assets for state member banks are
outlined in Appendix B of this part and in
Appendix B to part 225 o f the Federal
Reserve's Regulation Y, 12 CFR part 225.
4. The last sentence of the first
paragraph to “IV. M inim um Supervisory
R atios and Standards" is removed; a
new paragraph is added immediately
following the first paragraph; the
existing second paragraph now becomes
the third paragraph and remains
unchanged. The new second paragraph
reads as follows:
12 CFR Part 225
Banks, Banking, Capital adequacy,
Federal Reserve System, Holding
companies. Reporting and recordkeeping
requirements. State member banks.
For the reasons set forth in this notice,
and pursuant to the Board’s authority
under section 5(b) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1844(b)),
and section 910 of the International
Lending Supervision Act of 1983 (12
U.S.C. 3909), the Board proposes to
amend 12 CFR parts 208 and 225 as
follows:
Institutions with high or inordinate levels
of risk are expected to operate w ell above
minimum capital standards. Banks
experiencing or anticipating significant
growth are also expected to maintain capital
w ell above the minimum levels. For example,
most such institutions generally have
operated at capital levels ranging from 100 to
200 basis points above the stated minimums.
Higher capital ratios could be required if
warranted by the particular circumstances or
risk profiles of individual banks. In all cases,
banks should hold capital commensurate
with the level and nature of all of the risks,
including the volume and severity of problem
loans, to which they are exposed.
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
5. A second paragraph is added to
"IV. B. Transition Arrangements” of
Appendix A to part 208 to read as
follows:
1. The authority citation for part 208
continues to read as follows:
Authority: Sections 9, 11(a), 11(c), 19, 21, 25,
and 25(a) of the Federal Reserve Act, as
amended (12 U.S.C. 321-338, 248(a), 248(c).
461, 481-486, 601, and 611, respectively):
sections 4 and 13(j) of the Federal Deposit
Insurance Act, as amended (12 U.S.C. 1814
and 1923(j), respectively); section 7(a) of the
International Lending Supervision Act of 1978
(12 U.S.C. 3105); sections 907-910 o f the
International Banking Act o f 1983 (12 U.S.C.
3906-3909); sections 2 . 12(b). 12(g), 12(i),
1513(c)(5), 1 7 ,17A, and 23 of the Securities
Exchange Act of 1934 (15 U.S.C. 78b, 78/(b),
787(g), 78/(i). 78/—4(c)(5), 78q. 78q-l, and 78w,
respeclivelv); and section 5155 o f the Revised
Statutes (12 U.S.C. 36) as amended by the
McFadden Act of 1927.
2. Section 208.13 is revised to read as
follows:
§ 208.13 Capital adequacy.
The sta n d a r d s and guidelines by
which the capital adequacy of state
member banks will be evaluated by the
Board are set forth in Appendix A to
part 208 for risk-based capital purposes,
and, with respect to the ratios relating
capital to total assets, in Appendix B to
part 208 and in Appendix B to the
Board's Regulation Y, 12 CFR part 225.
Through year-end 1990 banks have the
option of complying with the minimum 7.25
percent year-end 1990 risk-based capital
standard in lieu of the minimum 5.5 percent
primary and 6 percent total capital to total
assets capital ratios set forth in Appendix B
to part 225 of the Federal Reserve's
Regulation Y. In addition, as more fully set
forth in Appendix B to this part, banks are
expected to maintain a minimum ratio of 3
percent Tier 1 capital to total assets during
this transition period.
6. Appendix B is added after
"Attachment VI.—Summary" to part 208
to read as set forth below.
Appendix B to Part 208—Capital
Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
I. Overview
The Board of Governors of the Federal
Reserve System ha3 adopted a minimum ratio
of Tier 1 capital to total assets to assist in the
assessm ent of the capital adequacy of state
member banks.1 The principal objective of
1 Supervisory risk -b ased capital ra tio s that relate
cap ital to w eighted risk a ss e ts for state m em ber
ban k s are outlined in A ppendix A to this part.
this measure is to place a constraint on the
maximum degree to which a state member
bank can leverage its equity capital base.
The guidelines apply to all state member
banks on a consolidated basis and are to be
used in the examination and supervisory
process as well as in the analysis of
applications acted upon by the Federal
Reserve. The Board will review the guidelines
from time to time and will consider the need
for possible adjustments in light of any
significant changes in the economy, financial
markets, and banking practices.
II. The Tier 1 Leverage Ratio
The Board has established a minimum level
o f Tier 1 capital to total assets of 3 percent.
An institution operating at or near these
levels is expected to have well-diversified
risk, including no undue interest rate risk
exposure; excellent asset quality; high
liquidity; good earnings; and in general be
considered a strong banking organization,
rated composite 1 under the CAMEL rating
system of banks. Institutions not meeting
these characteristics, as w ell as institutions
with supervisory, financial, or operations
w eaknesses, are expected to operate well
above minimum capital standards.
Institutions experiencing or anticipating
significant growth also are expected to
maintain capital w ell above the minimum
levels. For example, most such banks
generally have operated at capital levels
ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios
could be required if warranted by the
particular circumstances or risk profiles of
individual banks. In all cases, banking
institutions should hold capital
commensurate with the level and nature of
all of the risks, including the volume and
severity of problem loans, to which they are
exposed,
A bank’s Tier 1 leverage ratio is calculated
by dividing its Tier 1 capital (the numerator
of the ratio) by its average total consolidated
assets (the denominator of the ratio). The
ratio will also be calculated using period-end
assets whenever necessary on a case-by-case
basis. For the purpose o f this leverage ratio,
the definition of Tier 1 capital for year-end
1992 as set forth in the risk-based capital
guidelines contained in Appendix A of this
Part will be used.2 Average total
consolidated assets are defined as the
quarterly average total assets (defined net of
the allowance for loan and lease losses)
reported on the bank's Reports of Condition
and Income ("Call Report”), less goodwill
and any other intangible assets and
investments in subsidiaries that the Federal
Reserve determines should be deducted from
Tier 1 capital on a case-by-case basis.3
* A t the en d o f 1992. T ier 1 cap ital for state
m em ber b a n k s includes common equity, minority
interests in equity accounts o f co n solidated
subsidiaries, a n d qualifying noncum ulative
perpetual preferred stock, less goodwill. In general,
no o ther deductions from capital a re m ade
autom atically. H ow ever, the F ederal R eserve may,
on a case-by-case basis, exclude certain other
intangibles a n d investm ents in su b sidiaries as
appropriate.
8 D eductions from T ier 1 c ap ital a n d other
adju stm en ts a re discu ssed more fully in section II.B.
o f A p pendix A to this part.
Federal Register / Vol. 55, No. 4 / Friday, January 5, 1990 / Proposed Rules
Whenever appropriate, in particular when
a bank is undertaking expansion, seeking to
engage in new activities or otherwise facing
unusual or abnormal risks, the Board will
continue to consider, on a case-by-case basis,
the level of an individual bank's tangible Tier
1 leverage ratio (after deducting all
intangibles) in making an overall assessm ent
of capital. This is consistent with the Federal
Reserve’s risk-based capital guidelines and
long-standing Board policy and practice with
regard to leverage guidelines. Banks
experiencing growth, whether internally or by
acquisition, are expected to m aintain strong
capital positions substantially above
minimum supervisory levels, without
significant reliance on intangible assets.
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
1. The authority citation for part 225
continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1816,
1843(c)(8), 1844(b), 3106, 3108. 3907, 3909.
Appendix A—[Amended]
2. Footnote 1 to "I. O verview" of
Appendix A to part 225 is revised to
read as follows:
1 Supervisory ratios that relate capital to
total assets for bank holding companies are
outlined in Appendices B and D of this part.
3. The last sentence of the first
paragraph to “IV. M inim um Supervisory
R atios and Standards" is removed: a
new paragraph is added immediately
following the first paragraph: the
existing second paragraph now becomes
the third paragraph and remains
unchanged. The new second paragraph
reads as follows:
Institutions with high or inordinate levels
of risk are expected to operate well above
minimum capital standards. Banking
organizations experiencing or anticipating
significant growth are also expected to
maintain capital well above the minimum
levels. For example, most such organizations
generally have operated at capital levels
ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios
could be required if warranted by the
particular circumstances or risk profiles of
individual banking organizations. In all cases,
organizations should hold capital
commensurate with the level and nature of
all of the risks, including the volume and
severity of problem loans, to which they are
exposed.
4. A second paragraph is added to
“IV. B. Transition Arrangements” of
Appendix A to part 225 to read as
follows:
Through year-end 1990 banking
organizations have the option of complying
with the minimum 7.25 percent year-end 1990
risk-based capital standard in lieu of the
minimum 5.5 percent primary and 6 percent
total capital to total assets ratios set forth in
Appendix B of this Part. In addition, as more
fully set forth in Appendix D to this Part,
banking organizations are expected to
maintain a minimum ratio of 3 percent Tier 1
capital to total assets during this transition
period.
Appendix B—[Amended]
5. Three new sentences are added to
the end of the first paragraph of
Appendix B to part 225 to read as
follows;
* * * In this regard, the Board has
determ ined that during the transition period
through year-end 1990 for implementation of
the risk-based capital guidelines contained in
Appendix A to this part and in Appendix A
to part 208, a banking organization may
choose to fulfill the requirements of the
guidelines relating capital to total assets
contained in this Appendix in one of two
m anners. Until year-end 1990, a banking
organization may choose to conform to either
the 5.5 percent and 6 percent minimum
primary an d total capital standards set forth
in this Appendix or the 7.25 percent year-end
1990 minim um risk-based capital standard set
forth in Appendix A to this part and
A ppendix A to part 208. Those organizations
that choose to conform during this period to
the 7.25 percent year-end 1990 risk-based
capital sta n d ard will be deemed to be in
compliance w ith the capital adequacy
guidelines se t forth in this Appendix.
6. Appendix D is added after
Appendix C to part 225 to read as set
forth below.
Appendix D to Part 225—Capital
Adequacy Guidelines for Bank Holding
Companies; Tier 1 Leverage Measure
/. Overview
The Board of Governors of the Federal
Reserve System has adopted a minimum ratio
of Tier 1 capital to total assets to assist in the
assessm ent of the capital adequacy of bank
holding companies (“banking
organizations”).1 The principal objective of
this measure is to place a constraint on the
maximum degree to which a banking
organization can leverage its equity capital
base.
The guidelines apply on a consolidated
basis to bank holding companies with
consolidated assets of $150 million or more.
For bank holding companies with less than
$150 million in consolidated assets, the
guidelines will be applied on a bank-only
basis unless: (a) The parent bank holding
company is engaged in nonbank activity
involving significant leverage; 2 or (b) the
1 Supervisory risk -b ased capital ratio s that relate
capital to w eighted risk a ss e ts for b a n k holding
com panies are outlined in A p pendix A to this Part.
2 A p aren t com pany that is engaged in significant
off-balance sh ee t activities w ould generally be
d eem ed to be engaged in activities th a t involve
significant leverage.
585
parent company has a significant amount of
outstanding debt that is held by the general
public.
The Tier 1 leverage guidelines are to be
used in the inspection and supervisory
process as well as in the analysis of
applications acted upon by the Federal
Reserve. The Board will review the guidelines
from time to time and will consider the need
for possible adjustments in light of any
significant changes in the economy, financial
markets, and banking practices,
II. The Tier 1 Leverage Ratio
The Board has established a minimum level
of Tier 1 capital to total assets of 3 percent. A
banking organization operating at or near
these levels is expected to have welldiversified risk, including no undue interest
rate risk exposure; excellent asset quality;
high liquidity; good earnings; and in general
be considered a strong banking organization,
rated composite 1 under the BOPEC rating
system for bank holding companies.
Organizations not meeting these
characteristics, as well as institutions with
supervisory, financial, or operations
w eaknesses, are expected to operate well
above minimum capital standards.
Organizations experiencing or anticipating
significant growth also are expected to
maintain capital w ell above the minimum
levels. For example, most such organizations
generally have operated at capital levels
ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios
could be required if warranted by the
particular circumstances or risk profiles of
individual banking organizations. In all cases,
banking organizations should hold capital
commensurate with the level and nature of
all of the risks, including the volume and
severity of problem loans, to which they are
exposed.
A banking organization’s Tier 1 leverage
ratio is calculated by dividing its Tier 1
capital (the numerator of the ratio) by its
average total consolidated assets (the
denominator of the ratio). The ratio will also
be calculated on the basis of period-end
assets whenever necessary on a case-by-case
basis. For the purpose of this leverage ratio,
the definition of Tier 1 capital for year-end
1992 as set forth in the risk-based capital
guidelines contained in Appendix A to this
part will be used.3 Average total
consolidated assets are defined as the
quarterly average total assets (defined net of
the allowance for loan and lease losses)
reported on the banking organization's
Consolidated Financial Statements (“FR Y 9C Report"), less goodwill and any other
intangible assets or investments in
3 At the end o f 1992, T ier 1 cap ital for bank
holding com panies includes com m on equity,
minority in terests in equity acco u n ts of
co n solidated subsidiaries, a n d qualifying
cum ulative a n d noncum ulative p erpetual preferred
stock. (Perpetual p referred stock is limited to 25
percen t of Tier 1 capital.) In addition, T ier 1
excludes goodwill. In general, no oth er deductions
from cap ital are m a d e autom atically. H ow ever, the
Federal R eserve may, on a case-by-case basis,
exclude c ertain oth er intangibles a n d investm ents in
su b sidiaries as appropriate.
586
Federal Register / Vol. 55, No. 4 / Friday, January 5, 1990 / Proposed Rules
subsidiaries that the Federal Reserve
determines should be deducted from Tier 1
capital on a case-by-case basis.*
Whenever appropriate, in particular when
an organization is undertaking expansion,
seeking to engage in new activities or
otherwise facing unusual or abnormal risks.
4 D eductions from T ier 1 capita! an d other
adju stm en ts are discu ssed more fuily in section !I.B.
o f A ppendix A to this part.
the Board will continue to consider, on a
case-by-case basis, the level of an individual
organization's tangible Tier 1 leverage ratio
(after deducting all intangibles) in making an
overall assessment of capital. This i3
consistent with the Federal Reserve's riskbased capital guidelines and long-standing
Board policy and practice with regard to
leverage guidelines. Organizations
experiencing growth, whether internally or by
acquisition, are expected to maintain strong
capita! positions substantially above
minimum supervisory levels, without
significant reliance on intangible assets,
‘Board of Governors of the Federal Reserve
System, December 29,1989.
William W. Wiles,
Secretary of the Board.
[FR Doc. 90-210 Filed 1-4-90; 8.45 ami
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