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FEDERAL R ESER V E BANK OF DALLAS
Station K, Dallas, Texas 7 5 2 2 2
Circular No. 84-87
August 15, 1984
TO:
All state member banks and bank holding companies in
the Eleventh Federal Reserve District
ATTENTION:
Chief Executive Officer
SUBJECT:
Proposed revision to capital adequacy guidelines
SUMMARY:
The Board of Governors of the Federal Reserve System
has requested comment on a proposed revision of its
capital adequacy guidelines.
In addition, the Board
is
requesting
comment on a proposed supporting
regulation establishing procedures
for
requiring
compliance
with
capital
requirements.
Complete
details are provided in the Board's press release and
notice as published in the Federal Register. Written
comments should be addressed to Mr. William W. Wiles,
Secretary, Board of Governors of the Federal Reserve
System, Washington, D.C., 20551.
All correspondence
must be received by September 24, 1984, and should
refer to Docket No. R-0526.
ATTACHMENTS:
Board's press release and Federal Register document
MORE INFORMATION:
State member banks should contact Marvin C. McCoy,
Extension 6657; bank holding companies may direct
inquiries to Richard J. Burda, Extension 6472
ADDITIONAL COPIES:
Public Affairs Department, Extension 6289
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
Banks and others are encouraged to use the follow ing in com ing W A T S numbers in contacting this Bank: 1-800-442-7140
(intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above.
FEDERALRESERVEpressrelease
For immediate release
July 26, 1984
The Federal Reserve Beard today asked for comment on a proposed revision
of its guidelines regarding capital adequacy for State member banks and bank holding
companies, as well as on a proposed supporting regulation establishing procedures for
requiring compliance with capital requirements.
The Board asked for canment during the 60-day period ending September 24,
1984.
The Board's proposed guidelines would increase minimum required primary
and total capital for all but smaller State member banks and bank holding companies
and would parallel proposed minimum bank capital adequacy requirements being
considered by the other federal bank regulators.
In addition, the Board proposed to continue using —
capitalization for larger banks and bank holding companies —
at higher levels of
its "zone" concept of
appropriate capital for those institutions under its supervision, with the objective
of encouraging State member banks and bank holding companies of all sizes to meet
higher than minimum standards of total capital adequacy.
I.
Proposed Policy Statement on Capital Adequacy
The Board proposed:
All State member banks and all bank holding companies should have
minimum primary capital equal to 5.5 percent of total assets and
total capital equal to 6 percent of total adjusted assets.
For both regional and multinational State member banks and for bank
holding companies this would be an increase in minimum capital requirements of
one-half of one percent in minimum primary and total capital requirements.
For com
munity banks and bank holding companies (with assets of under $1 billion), there
would be a decrease of one-half of one percent in the minimum primary capital require
ments by comparison to current requirements. The minimum total capital requirement
for these institutions would not be changed.
-2 -
The Board proposed the reduction in minimum primary capital requirements
for smaller banking institutions under its supervision in order to achieve uniformity
with capital adequacy requirements being considered by the Federal Deposit
Insurance
Corporation and the Comptroller of the Currency for institutions they supervise.
At the same time the Board proposed continued supervisory use of its
"zone" standards of appropriate total capitalization for all State member banks
and all bank holding companies, regardless of size, as follows:
Zone 1 —
Institutions with capital equal to at least 7 percent of
total assets would be considered adequately capitalized.
Zone 2 —
Institutions operating with total capital equal to 6 to 7
percent of their total assets would be considered
marginally capitalized, subject to consideration of other
financial factors.
Zone 3 —
Banking organizations with total capital equal to less than
6 percent of their total assets may be considered under
capitalized, in the absence of clear extenuating
circumstances.
The Board also considered a number of definitional changes affecting its
capital adequacy guidelines for State member banks:
— Intangible asetsV would not be counted among the components of
primary capital, or of assets, in determining the capital adequacy
of State member banks. Equity commitment notes£/ would not be
included in determining the primary capital of banks. Reserves for
loan and lease losses would be added to total assets in computing
all capital ratios.
(
Primary capital of banks would thus include:
common stock; perpetual preferred stock; capital
surplus; undivided profits; contingency and other
capital reserves; instruments mandating conversion
into coirmon or perpetual preferred stock; reserves
for loan and lease losses and the bank's minority
interest in the equity accounts of consolidated
subsidiaries.)
17 As defined in the quarterly report of condition (Call Report) banks file with
their federal supervisors — roughly, any amount over and above intrinsic value.
2/ A type of mandatory convertible security.
-3 -
— Intangible assets would continue to be counted as part of
the total capital of banks.
(
Total capital of banks would thus include the
intangible assets deducted fran primary capital,
the other components of primary capital and
limited-life preferred stock and qualifying
subordinated notes and debentures.)V
These definitions and minimum requirements for bank capitalization are
consistent with those being considered by the other federal bank regulators.
— In assessing the primary and total capital of bank holding
companies the Board proposed:
Intangible assets would not be required to be netted
out of primary capital. Instead, the amount and
character of intangible assets would be taken into
account in determining a company's compliance with
the guidelines. Equity commitment notes would be
included in primary capital. Also — the only new
element — the asset base for calculating the
primary and total capital ratios of bank holding
companies would include the companies' reserves
set aside for possible loan and lease losses,
conforming to the calculation of primary and
total capital of state member banks.
Thus, except for the treatment of intangible
assets and equity commitment notes, primary com
ponents would be the same for both State member
banks and for bank holding companies.
The Board's guidelines for capital adequacy of bank holding companies
are designed to retain the flexibility in the Board's current guidelines by the
inclusion of equity commitment notes and moderate amounts of intangibleassets
as a part of a bank holding company's primarycapital.
The Board requested that corrmentersfocus specifically on the
differences between these proposed guidelines and those being proposed by
the
1/ Certain restrictions and maturity requirements — set forth in the attached
capital adequacy policy statements — apply to and limit the use of these
secondary components of capital.
-4 -
other federal bank regulators. These issues include:
1.
Issuing substantive capital requirements in a regulation or
in the form of guidelines.
2.
Relying upon the concept of capital zones as embodied in
the Board's guidelines or only on a requirement of a
"mininum capital" level.
3.
Deducting intangible assets in deriving primary capital ratios.
4.
Whether to include equity corrmitment notes as a component of
primary capital.
The Board's proposed capital guidelines for banks and for bank holding
companies, currently in one document, would be separated into separate guidelines.
Hie Board is proposing to increase the minimum required primary capital
for regional and multinational banks in the light of the Board's concern with
fostering improvements in the capital ratios of large banking organizations and
the concern the Congress has indicated in the directions for improving capital ratios
embodied in the International Lending Supervision Act of 1983.
The Board's further objectives in revising its guidelines are to achieve
uniformity in capital requirements for Statemember banks and bank holding companies
regardless of size, and uniformity among all federally insured banks.
The Board's proposed embodiment of its capital adequacy rules in a
guideline, rather than a regulation, is designed to preserve the Board's flexibility
in determining both appropriate capital levels of particular tanks and bank holding
companies and in defining the components of capital.
-5 -
The Beard regards determination of capital adequacy as a major
objective of its supervision of banks and bank holding companies.
It views
maintenance of adequate capital levels as a key to protecting depositors and to
ensuring the stability of the banking system.
II.
The Proposed Procedural Regulation in connection with the Board's capital
adequacy guidelines
The supporting procedural regulation proposes a number of supervisory
actions such as submission of a plan for achieving capital adequacy and possible
administrative enforcement actions, including possible denial of applications, that
may be taken in the event a banking organization falls below required minimum ratios.
The proposed rules place emphasis upon giving the Board flexibility to deal with
situations of under-capitalization in the practical light of the circumstances of
particular banks or bank holding companies, while insisting upon current and
continued progress toward adequate capitalization.
The regulation refers to the Board's capital adequacy guidelines as
setting the substantive capitalization standards.
The rules (set forth in detail in the attached Board notice)
establish the procedures under which the Board, as provided for in ILSA, may issue
a directive to a bank or bank holding company to increase its capital to a minimum
or higher level, by written agreement, cease and desist order or otherwise.
The main elements of the proposed procedures include:
— All State member banks, and bank holding companies, that
do not meet the Board's capital adequacy standards on the
day of final promulgation of the regulation would be
required to file a plan with the Board, within 90 days,
to meet minimum capital requirements.
-6 -
— Banks or holding companies that subsequently fail to
guideline requirements may be subject to a procedure
notice and opportunity to canment that could lead to
issuance, by the Board, of a directive mandating and
a time limit for compliance, as well as specifying a
for achieving the required capitalization or the way
it is to be achieved.
meet the
after
the
setting
schedule
in which
Attached are the Board's capital adequacy guidelines for banks and for
bank holding companies, and the Board's proposed procedural regulations.
-
Attachments
0
-
Federal Register / Vol. 49, No. 147 / M onday, July 30, 1984 / Proposed Rules
James E. Scott, Senior Attorney, Legal
Division (202/452-3513), or Richard
Spillenkothen, Manager. Projects and
Planning Section, Division of Banking
Supervision and Regulation (202/452
2594), or Anthony G. Comyn, Section
Chief, Financial Analysis and Special
Studies Section, Division of Banking
Supervision and Regulation (202/452
3450).
Institution Rating System used by each
of the federal bank supervisory
agencies. In short, maintenance of
adequate capital levels plays a key role
in the programs and policies of the
Board and other banking agencies in
protecting depositors and ensuring the
stability of the banking system.
This recognition of the importance of
capital and a concern about the gradual
decline in the ratio of capital to bank
assets prior to 1981, particularly in the
nation’s largest banking organizations,
prompted the Board and the Comptroller
in December 1981, to adopt Capital
Adequacy Guidelines for national and
state member banks and bank holding
companies. These Guidelines were
designed to set a range of substantive
capital levels for use by the Board and
Comptroller in defining institutions that
are adequately capitalized, those that
are capitalized in a minimally
acceptable fashion and those that are
presumed to be undercapitalized, absent
clear extenuating circumstances. The
Guidelines provide national and state
member banks and bank holding
companies with targets or objectives to
be reached over time. The Board has
noted that many banks and bank
holding companies, including the
nation's largest banking organizations,
have improved their capital position in
order to comply with these Guidelines.
The Board revised the Guidelines in
June 1983 to provide specific ratio
guidelines for multinational
organizations. In December 1983, the
Board reaffirmed the Guidelines (49 FR
794, incorporating the Guidelines as
Appendix A of Regulation Y, 12 CFR
Part 225).
SUPPLEMENTARY INFORMATION:
Purpose of the Proposed Rulemaking
Need for Capital Adequacy Standards
The Board, as a part of its
responsibilities as a banking regulator,
has acted to promote the maintenance of
adequate capital in individual banks, in
bank holding companies and in the
banking system in general. In the
Board's view, adequate capital performs
several important functions in banking
institutions, including providing
additional protection against unforeseen
losses, helping to maintain public
confidence in particular institutions and
in the banking system, partially
protecting depositors from a threat of
insolvency, and supporting reasonable
growth of such institutions. As a result,
the Board considers a determination of
capital adequacy to be one of the major
objectives of a bank examination or
bank holding company inspection.
Capital is one of the components that
form the basis of the Uniform Financial
In November 1983, Congress enacted
the International Lending Supervision
Act of 1983 (12 U.S.C. 3901 et seq.)
("ILSA”), which directed that the federal
banking agencies “. . . shall cause
banking institutions to achieve and
maintain adequate capital by
establishing minimum levels of capital
for such banking institutions and by
such other methods as the appropriate
Federal banking agency deems
appropriate." (Section 908,12 U.S.C.
3907). Pursuant to this authority and that
contained in the Bank Holding Company
Act, the Federal Reserve Act and the
Financial Institutions Supervisory Act of
1966, the Board is proposing to amend
its Capital Adequacy Guidelines to
conform with changes in capital
adequacy provisions currently under
consideration by the Comptroller and
the FDIC. Thus, uniform minimum
capital levels will be established for all
in a manner consistent with the
provisions of capital adequacy under
consideration by the Federal Deposit
Insurance Corporation (“FDIC") and the
Comptroller of the Currency
{“Comptroller”) in order to establish
uniform minimum capital requirements
for federally supervised banks. The
Board also proposes revised Capital
Adequacy Guidelines for bank holding
companies. Finally, the Board proposes
to issue a regulation setting forth
procedures under which the Board may
require compliance with the minimum
capital requirements contained in the
Guidelines.
DATE: Comments must be received by
September 24,1984.
a d d r e s s : All comments, which should
refer to Docket No. R-0526, should be
mailed to William W. Wiles, Secretary
of the Board of Governors of the Federal
Reserve System, 20th and Constitution
Avenue, N'W., Washington, D.C. 20551,
or deliver comments to the Office of the
Secretary, Room 2200, Eccles Building,
20th and Constitution Avenue, NW„
between the hours of 8:45 a.m. and 5:15
p.m. weekdays. Comments may be
inspected in Room 1122, Eccle3 Building
between 8:45 a.m. and 5:15 p.m.
weekdays.
FOR FURTHER INFORMATION CONTACT:
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 225, and 263
[D ocket No. R-0526]
Capital Maintenance
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Proposed rulemaking.
SUMMARY: Capital adequacy is one of
the critical factors the Board of
Governors of the Federal Reserve
System is required to analyze in taking
action on various types of applications,
such as mergers and acquisitions by
bank holding companies, and in the
conduct of the Board’s various
supervisory activities related to the
safety and soundness of individual
banks and bank holding companies and
the banking system. This proposal
establishes Guidelines for required and
appropriate levels of capital for bank
holding companies and state chartered
banks that are members of the Federal
Reserve System. The Board proposes to
amend its Capital Adequacy Guidelines
30317
30318
Federal Register / Vol. 49, No. 147 / M onday, July 30, 1984 / Proposed Rules
bank holding companies and all
federally regulated banks, regardless of
size or primary federal supervisory
agency.
The Board proposes to revise its
Guidelines with respect to state member
banks for two additional reasons: (1) To
increase the required minimum primary
and total capital levels for regional and
multinational banks and (2) to establish
uniform capital requirements for all
state member banks regardless of size.
The Board is also proposing procedural
regulations which provide a mechanism
to enforce the substantive requirements
of the Guidelines.
The Board will also continue to
require bank holding companies to meet
minimum capital ratios. The Board has
made a finding pursuant to section
910(a)(2) of ILSA (12 U.S.C. 3090(a)(2))
that uniform application of the capital
requirements to bank holding companies
is necessary to prevent evasions of the
purposes of ILSA. The Board believes
that it serves no purpose to increase
bank capital at the expense of its parent
holding company. The financial
condition of a bank holding company
continues to be a primary factor
influencing the financial condition of its
subsidiary bank or banks. The Board
has repeatedly stated that a holding
company must be a source of strength to
its subsidiary banks, and has so
required in its Regulation Y. The Board's
proposed revisions of the Capital
Adequacy Guidelines for bank holding
companies are designed to increase the
required minimum primary and total
capital levels for the larger regional and
multinational bank holding companies,
and to establish uniform capital
requirements for all bank holding
companies regardless of size.
Amended Capital Adequacy Guidelines
The Board proposes to embody the
substantive capital requirements and
definitions in amended Capital
Adequacy Guidelines that parallel the
regulations being considered by the
FDIC and Comptroller insofar as they
require a minimum ratio of primary
capital to adjusted total assets of 5.5
percent and a minimum ratio of total
capital to total assets of 6 percent. The
Board will continue to view total capital
to asset ratios in terms of three “zones.”
Those institutions with total capital to
total assets of less than 6.0 may be
considered to be undercapitalized,
absent clear extenuating circumstances.
Those institutions with a total capital to
total assets ratio of 6.0 to 7.0 percent are
considered to be capitalized in a
minimally acceptable fashion, subject to
evaluation of other financial factors.
Finally, those institutions with a total
capital to total assets ratio of above 7.0
are presumed adequately capitalized. In
all cases, the ratio of primary capital to
adjusted total assets must be at least 5.5
percent.
Changes From Existing Guidelines for
State Member Banks
The principal differences between the
Board’s current guidelines and the
proposed guidelines for state member
banks are found in the definitions of
capital, as well as in the guideline ratios.
The changes in the proposed definitions
are: (1) The proposed definition of
primary capital does not include equity
commitment notes: (2) intangible assets
are excluded from the sum of total
primary capital components in deriving
the numerator of the primary capital
ratio: (3) the denominator of the prim aiy
capital ratio (total assets) includes the
allowance for possible loan and lease
losses but excludes intangible assets:
and (4) the denominator of the total
capital ratio (total assets) includes the
allowance for possible loan and lease
losses.
The changes proposed in the
definitions of primary and total capital
are to conform the Board’s definitions
with those under consideration by the
Comptroller and the FDIC. The Board
questions whether these changes are
improvements in the definitions,
especially the exclusion of equity
commitment notes and all intangible
assets, regardless of character, from the
definition of primary capital. The
Board’s current guidelines provide
flexibility in determining both the level
and the type of intangible assets that
may be included in calculating primary
capital ratios. However, the Board
believes that uniformity of definitions
may be desirable ii> this area and it is,
therefore, proposing capital definitions
for state member banks that are the
same as those being considered by the
Comptroller and FDIC.
The changes in the substantive
guidelines are: (1) The minimum
adequate primary capital ratio for
regional and multinational banks is
increased from 5.0 to 5.5 percent; (2) the
minimum adequate primary capital ratio
for community banks is decreased from
6.0 to 5.5 percent; and (3) the minimum
total capital ratio for regional and
multinational banks (Zone 3) is
increased from 5.5 to 6.0 percent, and (4)
the Zone 1 and Zone 2 guidelines for
total capital ratios for multinational and
regional banks are each increased by
one-half a percentage point.
The Board believes that the increase
in the minimum required primary capital
ratio for regional and multinational
banks is appropriate given the Board's
concern with fostering improvements in
the capital ratios of large banking
organizations and the Congressional
concern embodied in ILSA for improving
capital ratios. Consistent with this view,
the Board has also increased each zone
measuring the adequacy of total capital
of multinational and regional banks by
one-half a percentage point.
The minimum primary capital ratio of
5.5 percent represents a decrease in the
minimum capital requirement for
smaller community state member banks
(assets under $1.0 billion). The Board is
proposing this decrease in the interest of
establishing a single uniform primary
capital requirement for large and small
banking institutions as well as an
overriding interest in establishing a
uniform minimum capital ratio with the
FDIC and Comptroller of the Currency
for all federally regulated banks. The
Board notes, however, that the new
Guidelines emphasize that banking
organizations are expected to operate
above the minimum primary capital
level. Finally, the minimum total capital
to total asset level that define Zones 1, 2
and 3 remain unchanged for small
banking organizations.
Proposed Change From Existing
Guidelines for Bank Holding Companies
Currently, the Board’s Capital
Adequacy Guidelines for both state
member banks and bank holding
companies are contained in one
document. While the Board believes that
conformity of the defintions and ratios
used for all federally regulated banks
serves an important policy purpose, the
Board also believes that is it is desirable
to retain certain features of the current
guidelines for bank holding companies.
Accordingly, the Board is proposing, in
addition to the guidelines for state
member banks, separate guidelines for
bank holding companies.
The only change from existing
Guidelines in the calculation of the
capital ratios in the Guidelines for bank
holding companies is that the asset base
for calculating the primary and total
capital ratios includes the allowance for
possible loan and lease losses. As noted
above, this is a conforming change being
made for the calculation of these ratios
for state member banks, and the Board
believes that, for purposes of
consistency, these reserves should also
be included for these calculations in the
asset base of bank holding companies.
The differences in the guideline ratios
parallel those made for state member
banks; i.e., (1) The minimum adequate
primary capital ratio for multinational
and regional bank holding companies is
increased from 5.0 to 5.5 percent; (2) the
Federal Register / ‘Vol. 49, No. 147 / M onday, July 30, 1984 / Proposed Rules
minimum adequate primary capital ratio
for community bank holding companies
is decreased from 6.0 to 5.5 percent; and
(3) the minimum total capital ratios for
mulitnational and regional bank holding
companies is increased from 5.5 to 6.0
percent, and (4) the Zone 1, Zone 2, and
Zone 3, guidelines for total capital for
these bank holding companies are each
increased by one-half a percentage
point. The reasons for the changes in
these rations parallel those discussed
above for state member banks.
Differences in Treatment of State
Members Banks and Bank Holding
Companies
There are two significant differences
in the proposed Guidelines regarding the
treatment afforded banks and bank
holding companies. These differences
relate to the treatment of intangible
assets and mandatory convertible
securities. In computing the primary
capital ratios of state member banks,
adjustments would be made to reflect
the existence of any intangible assets.
Specifically, intangible assets would be
deducted from the sum of the
components of primary capital to derive
the numerator of the primary capital
ratio and would be deducted from the
sum of total assets and the allowance
for possible loan and lease losses to
derive the denominator of the ratio. The
Board believes that the specific
deduction of intangibles from primary
capital and total assets for the purpose
of deriving primary capita! ratios of both
banks and bank holding companies may
be undesirable because it reduces the
flexibility of these institutions in
structuring acquisitions. The Board
currently takes the level and specific
character of intangible assets into
consideration in assessing the capital of
individual banks and bank holding
companies. However, the Board
proposes to exclude intangibles when
calculating the primary capital ratios of
state member banks. The proposed
capital guidelines for bank holding
companies do not require intangibles to
be deducted from either the sum of the
total components of primary capital or
from total assets to derive the primary
capital ratio. The Board proposes not to
exclude intangibles in computing
primary capital ratios of bank holding
companies in order to provide bank
holding companies with additional
flexibility. The Board does, however,
intend to continue to take the level and
specific character of intangible assets
into consideration in evaluating the
overall financial condition and capital
adequacy of a bank holding company.
With respect to the treatment of
equity commitment notes (a type of
mandatory convertible security), the
Board proposes to allow such
instruments to continue to be counted as
a form of primary capital for bank
holding companies but to disallow these
instruments as a form of primary capital
in state member banks. The proposed
exclusion of these instruments as a form
of primary capital for banks is designed
to achieve interagency uniformity in the
definition of primary capital for banks.
In deciding to continue to treat equity
commitment notes as primary capital for
bank holding companies, the Board
notes that such instruments encourage
the issuance of common and perpetual
preferred stock over time and represent
an attractive vehicle for raising long
term capital. The Board has limited the
use of such instruments, however, to 10
percent of the bank holding company’s
primary capital exclusive of mandatory
convertible securities.
The Proposed Procedural Regulation
The proposed regulation requires that
any state member bank or bank holding
company that does not meet the
minimum capital standards (set forth in
the Capital Adequacy Guidelines) when
the regulation becomes effective, must
submit to the appropriate Reserve Bank
within 90 days a plan for increasing its
capital to the minimum required level.
Certain administrative and judicial
enforcement procedures are outlined in
the regulation in the event of the failure
to submit a capital plan.
The Board may also require particular
banks or bank holding companies to
maintain more than the minimum level
of capital if the financial condition,
management, or future prospects of the
institution make a higher capital level
necessary and appropriate. Moreover,
the Board will pay particular attention
to liquidity and will discourage tlie
practice of meeting capital guidelines by
reducing the level of liquid assets
relative to total assets of the institution.
The process of determining the
adequacy of an institution’s capital will
begin with a qualitative evaluation of
the critical variables that directly bear
on its overall financial condition. These
variables include the quality, type and
diversification of assets: current and
historical earnings; liquidity; appropriate
policies for loan charge-offs; risks
arising from interest rate mismatches;
the quality of management; and the
existence of other activities that may
expose the bank to risks, including off
balance sheet risks. Institutions with
significant weaknesses in one or more of
these areas will be expected to maintain
higher capital levels than the minimum
set forth in the regulation. Institutions
that are currently or prospectively under
30319
any formal administrative action, final
order, or condition or agreement that
sets forth a more stringent capital
requirement shall continue to meet the
requirement contained therein.
In addition to the traditional
procedures used by the Board to set a
higher capital level (e.g. written
agreements or memoranda between the
Board and the financial institution,
cease and desist orders, and conditions
attached to orders issued on
applications or notices), the proposed
regulation provides for a specific notice
and comment procedure. The Board also
reserves the right to consider failure to
meet the minimum capital requirement
established by the Guidelines, or such
higher capital requirement set by the
Board, as bearing adversely upon
applications or notices that a bank or
bank holding company may file.
Directives
Section 908 of ILSA (12 U.S.C. 3907)
authorizes the appropriate banking
agency to issue a directive to a banking
institution that fails to maintain the
minimum capital requirement. A
directive may require a bank to submit
and adhere to a plan for achieving such
requirement. A directive, including a
capital adequacy plan submitted
thereunder, is a final order enforceable
in the appropriate United States district
court in the same manner and to the
same extent as a final cease and desist
order issued under 12 U.S.C. 1818(b).
The issuance of a directive is
discretionary, and a directive may be
issued in lieu of, in conjunction with, or
in addition to existing enforcement tools
available to the agencies. The Board has
proposed procedures leading to the
issuance of a directive including notice
and opportunity to comment.
Differences Among Proposed Agency
Regulations
The major difference between the
Board’s proposal and those being
considered by the FDIC and the
Comptroller is the decision of the Board
to embody the substantive capital
requirements in a set of guidelines
rather than in a regulation. The Board’s
experience with its Capital Adequacy
Guidelines during the past 2 Vi years has
demonstrated the need for flexibility in
applying minimum capital ratios and
even in defining "capital.” The Board
believes that rigidly defining failure to
meet certain capital levels in all cases
as a per se violation of law could
hamper the Board’s efforts in working
with banks and bank holding companies
to strengthen their capital positions and
in evaluating capital adequacy in the
30320
Federal Register / VqL 49, No. 147 / M onday, July 30, 1984 / Proposed Rules
context of a broader range of factors it
must consider in acting upon
applications. In addition, the Board
recognizes the difficulty of imposing a
static definition on the components of
capital. The use of flexible guidelines
will permit the Board to adjust capital
requirements and definitions more
rapidly to changes in the economy, in
financial markets and in banking
practices. The FDIC has chosen to issue
a regulation containing its substantive
capital requirements. The Board,
however, specifically requests comment
on whether the capital requirements
proposed in the Guidelines should be
incorporated in a regulation.
The concern for flexibility has also led
the Board’s proposal to differ from those
being considered by the other agencies
in eschewing any general time deadlines
in the enforcement process. The Board
has reserved the right to decide how
quickly a particular bank or bank
holding company must respond to the
notice of a directive and how quickly
the Board must take action. The Board
proposes to set time limits in each case
based upon the unique circumstances of
that case.
A third difference between the
proposals of the Board and the FDIC is
the Board’s recognition of the need to
treat total capital requirements for the
spectrum of banks and bank holding
companies in terms of broader zones
rather than solely by means of a single
minimum capital level. The zone
concept provides banks with a general
target range that defines more strongly
capitalized institutions as well as those
that are capitalized in a marginally
adequate fashion and those that may be
undercapitalized.
The Board's, regulation provides an
administrative procedure to establish
higher than minimal capital for
individual banks and bank holding
companies. The FDIC would use the
traditional cease and desist procedures
to establish higher capital levels rather
than the notice and directive procedure
of the Board’s regulation.
The Board also believes that banks
and bank holding companies should be
given 90 days from the effective date of
this regulation to prepare a plan to
increase capital. The FDIC has proposed
60 days.
Finally, the Board has decided to issue
guidelines for bank holding companies
that differ slightly from the bank
guidelines of the Board and regulations
of the FDIC. These differences, notably
in the treatment of intangible assets and
bank equity commitment notes, are
described above in more detail.
The adoption of these proposed
regulations is not expected to impose an
additional capital requirement on a
large number of institutions. Based on
the December 31,1983 Call Reports
(which do not necessarily reflect
adjustments for assets classified loss),
more than 96 percent of all state
member banks had primary capital
ratios in excess of 5.5 percent, the
primary capital requirement established
by the Board’s guidelines. In addition,
most of the larger multinational and
regional banks and bank holding
companies (which were previously
permitted lower capital ratios than
smaller institutions) had primary capital
ratios and total capital ratios that would
exceed the proposed minimum capital
ratio guidelines. It is recognized that
there are a few large banks and bank
holding companies that will be faced
with a relatively large dollar shortfall in
their capital accounts. While the Board
will expect all institutions to make every
effort to achieve compliance as rapidly
as possible, in analyzing plans
submitted to achieve compliance the
Board will consider the individual
circumstances and the reasonable
capacity of these institutions to achieve
compliance. Finally, the Board will
continue to exempt from the Guidelines
bank holding companies with under $150
million in consolidated assets, unless (1)
the holding company or any nonbank
subsidiary is engaged directly or
indirectly in any nonbank activity
involving significant leverage, or (2) the
holding company or any nonbank
subsidiary has outstanding debt held by
the general public.
The Board stresses that capital
requirements set forth in this proposed
regulation are minimums and that all
state member banks and bank holding
companies are encouraged to maintain
higher levels of capital. This will
provide protection against unforeseen
adversities as well as provide a greater
measure of flexibility in terms of being
able to take advantage of opportunities
for sound growth as they arise.
Issues for Specific Comment
The Board requests that commenters
specifically focus on the differences
between these proposed Guidelines and
those being considered by the FDIC and
the Comptroller. These issues, as
discussed above, include:
1. Issuing the substantive capital
requirements within a regulation or in
the form of Guidelines;
2. Relying upon the concept of capital
zones as embodied in the Board’s
Guidelines or only upon a requirement
of a “minimum capital” level;
3. Deducting intangible assets in
deriving primary capital ratios; and
4. Including equity commitment notes
as a component of primary capital.
Regulatory Flexibility Analysis Act
The Board certifies that the adoption
of these proposals is not expected to
have a significant economic impact on a
substantial number of small entities
within the meaning of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.). In
carrying out its responsibilities for
supervising member banks and bank
holding companies the Board has
always considered the capital adequacy
of banks and bank holding companies.
In December 1981, the Board
promulgated a written policy, its Capital
Adequacy Guidelines, to inform banks,
bank holding companies, and the public
of its beliefs concerning capital and
capital adequacy. The Board now
proposes to amend its Guidelines to
establish more uniform standards for
large and small banking institutions and
to attempt to establish uniformity among
the federal banking agencies in the
imposition of capital adequacy
requirements.
Historically, the Board has required
higher capital ratios in smaller banks
and bank holding companies. To the
extent that this regulation equalizes
those requirements it will lessen the
burden on small banks and bank holding
companies.
This proposal does not duplicate,
overlap or conflict with any existing
federal laws and regulations governing
state member banks and bank holding
companies.
List of Subjects in 12 CFR Parts 208, 225
and 263
Banks, banking; Federal Reserve
System; Holding companies; Capital
adequacy; State member banks.
Pursuant to the Board’s Authority
Under the International Lending
Supervision Act of 1983 (ILSA), 12 U.S.C.
3907, 3909; section 5(b) of the Bank
Holding Company Act (BHC Act), 12
U.S.C. 1844(b); the Financial Institutions
Supervisory Act of 1966 (FIS Act), 12
U.S.C. 1818; and sections 9 and 11(a) of
the Federal Reserve Act (12 U.S.C. 248,
324, 329), the Board hereby proposes to
adopt Capital Adequacy Guidelines for
state member banks, to be reprinted in a
new Appendix A to the Board’s
Regulation H, Membership of State
Banking Institutions in the Federal
Reserve System, 12 CFR Part 208; to
adopt Capital Adequacy Guidelines for
bank holding companies to be
substituted for Appendix A of the
Board’s Regulation Y, 12 CFR Part 225;
and to adopt a new Subpart D to its
Federal Register / Vol. 49, No. 147 / M onday. |u ly 30, 1984 / Proposed Rules
Rules of Practice for Hearings, 12 CFR
Part 263, as follows:
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
1. Authority for 12 CFR Part 208 is
proposed to be revised as follows:
Authority: 12 U.S.C. 248, 321-338, 486,1814,
3907, 3909, unless otherwise noted.
2.12 CFR Part 208 is proposed to be
amended by adding an Appendix A to
read as follows:
Appendix A—Capital Adequacy
Guidelines
Definition of Capital to be used in
Determining Capital Adequacy of State
Member Banks
Primary Capital Components
The components of primary capital are:
—Common stock
—Perpetual preferred stock
—Surplus
—Undivided profits
—Contingency and other capital reserves
—Mandatory convertible instruments (capital
instruments with covenants mandating
conversion into common or perpetual
preferred stock)
—Allowance for possible loan and lease
losses
—Minority interest in equity accounts of
consolidated Subsidiaries
For the purpose of calculating a bank’s
primary capital, intangible assets (as defined
in the instructions to the bank Call Report)
are deducted from the sum of the components
of primary capital set forth above.
Secondary Capital Components
It is recognized that other financial
instruments can, with certain restrictions, be
considered part of capital bacause they
possess some, though not all, of the features
of capital. These instruments are:
—Limited-life preferred stock
—Qualifying subordinated notes and
debentures
For the purpose of determining aggregate
secondary and total capital, the amount of
intangible assets deducted from primary
capital is added back to the components of
secondary capital set forth above.
Restrictions Relating to Secondary
Components
The secondary components will be
considered as capital under the conditions
listed below:
—The security issue must have an original
weighted average maturity of at least seven
years.
—The aggregate amount of secondary capital
may not exceed 50 percent of the amount of
the bank's primary capital.
—As subordinated debt or limited-life
preferred stock approaches maturity,
redemption or repayment, the outstanding
balance of all such instruments—including
those with serial note payments, sinking
fund provisions, or an amortization
schedule—will be amortized in accordance
with the following schedule:
Years to maturity
Greater than or equal to 5 .....................
Less than 5 but greater than or equal
to 4.
Less than 4 but greater than or equal
to 3.
Less than 3 but greater than or equal
to 2.
Less than 2 but greater than or equal
to 1.
Percent of issue
considered capital
100
60
60
40
20
0
(No adjustments in the book amount of the
issue is required or expected by this
schedule. Adjustment will be made by a
memorandum account.)
Minimum Capital Guidelines for State
Member Banks
The Board of Governors of the Federal
Reserve System has adopted minimum
capital ratios and guidelines to provide a
framework for assessing the capital of wellmanaged state member banks with no
significant financial weaknesses.1 The
guidelines apply to all state member banks
regardless of size and are to be used in the
examination and supervisory process as well
as in the analysis of applications acted upon
by the Board. The Board will review the
guidelines from time to time for possible
upward adjustments commensurate with
changes in the economy, financial markets
and banking practices.
Objectives of the minimum capital
guidelines are to:
—Introduce uniformity, objectivity and
consistency into the supervisory approach
for assessing capital adequacy;
—Provide direction for capital and strategic
planning and for the appraisal of this
planning by the Board; and
—Permit the elimination of disparities in
capital ratios between banking
organizations of different sizes. _
_
Two principal ratio measurements of
capital are used: (1) Primary capital to
adjusted total assets (i.e., total assets plus the
allowance for possible loan and lease losses
less intangible assets), and (2) total capital to
total assets plus the allowance for possible
loan and lease losses. For the purpose of
calculating these ratios, primary capital is
defined as the sum of common stock,
perpetual preferred stock, capital surplus,
undivided profits, reserves for contingencies
and other capital reserves, mandatory
convertible instruments (excluding equity
commitment notes), the allowance for
possible loan and lease losses, and any
minority interest in the equity accounts of
consolidated subsidiaries, minus intangible
assets. Total capital is calculated by adding
to primary capital (as defined above) limitedlife preferred stock, qualifying subordinated
notes and debentures and the amount of
intangible assets deducted from primary
1 Banks with significant weaknesses or those
under special supervision may be subject to higher
capital requirements than the guideline minimums.
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capital for the purpose of determining the
primary capital ratio.
A minimum level of primary capital to
adjusted total assets is established at S.S
percent of all state member banks. Generally,
these banks are expected to operate above
the minimum primary capital ratio. Also,
those state member banks that have a higher
than average or excessive amount of their
assets exposed to risk or a higher than
average or excessive amount of off-balance
sheet risk, will be expected to hold additional
primary capital to compensate for this risk.
Moreover, the Board will pay particular
attention to liquidity and would discourage
the practice of meeting the guidelines by
decreasing the level of liquid assets relative
to total assets. Banks with primary capital
ratios below the 5.5 percent minimum will
generally be considered to be
undercapitalized unless they can
demonstrate clear extenuating circumstances.
Such banks, as described in greater detail
below, will be required to submit an
acceptable capital plan and will be subject to
appropriate supervisory enforcement action.
The Board has also established a minimum
total capital ratio of 6.0 percent for all state
member banks and has raised the Zone 1
total capital ratio guideline for regional and
multinational banks to 7.0 percent. These
ratios establish three broad zones for total
capita! that apply to state member banks of
all sizes:
Zone 1—Above 7.0%
Zone 2—6.0% to 7.0%
Zone 3 (Minimum Total Capital Ratio),—
Below 6.0%
Generally, the nature and intensity of
supervisory action will be determined by a
bank's compliance with the required
minimum primary capital ratio as well as by
the zone in which a bank’s total capital ratio
falls. While- an institution’s position in the
quantitative capital zones will normally
trigger the below specified supervisory
responses, qualitative analysis will continue
to be used in determing minimum levels of
capital for state member banks.
For banks operating in Zone 1, the Board
will:
—Presume that capital is adequate if the
primary capital ratio is acceptable to the
Board and is above the 5.5 percent
minimum
For banks operating in Zone 2. the Board
will:
—Pay particular attention to other financial
factors such as asset quality, liquidity, and
interest rate risk as they relate to the
adequacy of capital and, if they are not
safisfactory and the Board concludes
capital is not adequate, intensify its
analysis and action.
Banks operating in Zone 3:
—May be considered undercapitalized,
absent clear extenuating circumstances
—Would be required to submit a
comprehensive capital plan that is
acceptable to the Board and that includes a
program for achieving compliance with the
required minimum ratios within a
reasonable time period
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Federal Register / Vol. 49, No. 147 / M onday, July 30, 1984 / Proposed Rules
—Would be subject to appropriate
supervisory and/or administrative
enforcement action, or the issuance of a
capital directive, by the Board
—Would generally be subject to denial of
applications by the Board unless a
reasonable capital plan that is acceptable
to the Board has been adopted.
In addition to compliance with the
minimum primary and minimum total capital
ratios, the assessment of capital adequacy
will continue to be made on a case-by-case
basis considering various qualitative factors
that affect an institution's overall financial
condition. Thus, the Board retains the
flexibility to make appropriate adjustments in
the application of the guidelines to individual
institutions.
The Board will issue regulations for
enforcing the minimum capital requirements
set forth above and for implementing the
authority to issue capital directives as
provided in the International Lending
Supervision Act of 1983.
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
3. Authority for 12 CFR Part 225 is
proposed to be revised as follows:
Authority: 12 U.S.C. 1844(b), 3106, 3108,
1817(j)(13), 1818(b), 3907, 3909: and Pub. L. 98
181, Title IX.
4.12 CFR Part 225 is proposed to be
amended by revising Appendix A to
read as follows:
Appendix A—Capital Adequacy
Guidelines for Bank Holding Companies
Introduction
In adopting the capital adequacy guidelines
program in December of 1981, the Board
expressed concern about the secular decline
in the capital ratios of the nation's largest
banking organizations and stated that its
supervisory policies would be modified to
achieve a strengthening over time of the
capital positions of the multinational group.
Since the implementation of the capital
guidelines program and the establishment of
the 5.0 percent primary capital ratio guideline
for the multinational banking organizations,
considerable progress has been made in
improving the capital ratios of the nation’s
largest bank holding companies. In particular!
as of March 31,1984, all of the multinational
holding companies had primary capital ratios
that exceeded 5.0 percent, and most of these
organizations have achieved primary capital
ratios that are significantly above this level.
The Board has stated on a number of
occasions that capital adequacy is an
extremely important financial factor and it
believes that, as part of its ongoing effort to
improve the capital positions of banking
organizations, additional steps are
appropriate at this time to encourage further
strengthening of capital ratios. Moreover.
Congress addressed the issue of capital
adequacy in enacting the International
Lending Supervision Act of 1983 ("ILSA").
This legislation requires the Federal banking
agencies to establish appropriate minimum
levels of capital for banking organizations, to
cause banking organizations to achieve and
maintain the minimum capital requirements
and grants the agencies the authority to issue
capital directives to assist in enforcing the
minimum8. In addition, ILSA provides that
“The Chairman of the Board of Governors
and the Secretary of the Treasury shall
encourage governments, central banks, and
regulatory authorities of other major banking
countries to work toward maintaining and,
where appropriate, strengthening the capital
bases of banking institutions involved in
International lending."
Capital Guidelines Program
In light of these developments and within
the context of its continuing efforts to foster
improvement in the capital ratios of large
bank holding companies, the Board has made
the following changes to the minimum capital
ratios and guidelines that apply to
multinational and regional bank holding
companies:
—The minimum ratio of primary capital to
total assets has been increased from 5.0 to
5.5 percent.1
—The minimum ratio of total capital to total
assets (i.e., the Zone 3 minimum total
capital ratio) has been increased from 5.5
to 6.0 percent.
—The Zone 1 total capital ratio guideline for
multinational and regional bank holding
companies is being raised from 6.5 to 7.0
percent, and the Zone 2 total capital
guideline range will now be between 6.0
and 7.0 percent.
With respect to community bank holding
companies, the Board has established a new
minimum ratio of primary capital to total
assets of 5.5 percent. This minimum is
identical to the new primary capital
requirement that has been established for
multinational and regional bank holding
companies. The minimum total capital ratio
and guidelines that apply to community bank
holding companies have not been changed.
In taking these steps, the Board has
encouraged the strengthening of the capital
ratios of large bank holding companies and
has eliminated the existing disparities in the
supervisory requirements for holding
companies of different sizes.*
1 Primary capital for bank holding companies
consists of common stock, perpetual preferred
stock, capital surplus, undivided profits, reserves for
contingencies and other capital reserves, mandatory
convertible instruments including equity
commitment notes, the allowance for possible loan
and lease losses, and any minority interest in the
equity accounts of consolidated subsidiaries. Total
capital for holding companies consists of the
primary components plus limked-life preferred
stock and unsecured long-term debt of the holding
company or its nonbank subsidiaries. To qualify,
such debt must have an original weighted average
maturity of seven years or more. For capital
adequacy purposes,-unsecured long-term debt of the
holding company or its nonbank subsidiaries is also
subject to the amortization adjustments that are
made as the debt approaches maturity. Total assets
for the purposes of calculating the primary and total
capital guideline ratios is total assets plus the
allowance for possible loan and lease losses.
* In separate but related actions with respect to
commercial banks, the Federal Reserve, the Federal
Deposit Insurance Corporation and the Office of the
In light of the progress that has been made
in improving capital ratios since the adoption
of the guidelines program, most of the largest
bank holding companies have primary capital
ratios that exceed the new 5.5. percent
minimum guideline. Those holding companies
below the minimum guideline will be given a
reasonable amount of time to implement
plans for achieving compliance.
The capital guidelines program establishes
minimum levels of primary capital and,
generally, banking organizations are
expected to operate above the minimums.
The guidelines program assumes moderate
amounts of on- and off-balance sheet risk and
intangible assets. Banking organizations that
have a higher than normal or excessive
percentage of their assets exposed to risk, a
higher than normal or excessive amount of
off-balance sheet risk, or a higher than
normal or excessive amount of intangible
assets, will be expected to hold additional
primary capital to compensate for these
characteristics. In addition to the quality of
loans, investments and other assets, the
nature and amount of off-balance sheet risk
and intangible assets will be taken into
consideration in determining a holding
company's compliance with the capital
guidelines program. Moreover, the Board will
pay particular attention to liquidity and
would discourage the practice of meeting the
guidelines by decreasing the relative level of
liquid assets to total assets.
The increase in the capital guidelines for
multinational and regional bank holding
companies should be viewed in the context of
the Board's continuing efforts to strengthen
capital ratios, the ongoing discussions with
foreign supervisory officials as required by
ILSA and the on- and off-balance sheet risk
factors discussed above. In light of these
ongoing efforts and considerations, the Board
will continue to review the capital positions
and risk characteristics of the large bank
holding companies and may consider
additional steps, including further increases
in the capital guidelines, to sustain the
progress that has been made in strengthening
the capital ratios of these institutions. As part
of this process, the Board will continue to
review the need for increases in capital
guideline ratios to compensate for excessive
amounts of off-balance sheet risk or
intangible assets.
The capital guidelines generally apply to
bank holding companies on a consolidated
basis. The guidelines will not apply to
holding companies under $150 million in
consolidated assets unless (1) the holding
company or any nonbank subsidiary is
engaged directly or indirectly in any nonbank
activity involving significant leverage or (2)
the holding company or any nonbank
subsidiary has outstanding significant debt
held by the general public.
Comptroller of the Currency have established
minimum primary and total capital ratios of S.5
percent and 8.0 percent, respectively, for banks of
all sizes. These actions increase the minimum
supervisory capital requirements for large banks
and generally permit community banks to operate at
the same capital levels as regional and
multinational banks.
Federal Register / Vol. 49, No. 147 / M onday, July 30, 1984 / Proposed Rules
Some holding com panies are engaged in
significant nonbanking activities that
typically require capital ratios higher than
those of comm ercial banking organizations.
The Board believes that, a s a m atter of both
safety an d soundness and competitive equity,
the degree of leverage comm on in banking
should not autom atically ex tend to
nonbanking activities. Consequently, in
evaluating the consolidated capital positions
of bank holding companies, the Board is
placing greater weight on the building block
approach for assessing capital requirem ents.
This approach generally provides that
nonbank subsidiaries of a banking
organization should m aintain levels of capital
consistent with the levels that have been
established by industry norms. Federal or
State regulatory agencies for sim ilar firms
th at are not affiliated with banking
organizations or that may be establish ed by
the Board taking into account risk factors of a
particular industry. The assessm ent of a
holding com pany's consolidated capital
a dequacy m ust take into account the amount
a nd nature of all nonbank activities, and a
holding com pany’s consolidated capital
position should generally reflect the sum of
the capital requirem ents of the organization's
b an k and nonbank subsidiaries a s well as
those of the p arent holding company. The
Board intends to be guided by these
principles in determining compliance with the
capital guidelines program.
Bank holding com panies affected by the
guidelines are categorized a s either
m ultinational com panies (as designated by
their respective supervisory agency); regional
com panies (all other institutions with assets
in excess of $1 billion); or community holding
com panies (less than $1 billion in total
assets). The minimum ratios an d guidelines
set forth below apply to bank holding
com panies of all size categories.
Minimum Guideline Ratios
The Board h a s established a minimum ratio
of prim ary capital to total assets of 5.5
percent for all bank holding companies.
Holding com panies with primary capital
ratios below the 5.5 percent minimum will
generally be considered to be
undercapitalized unless they can
dem onstrate clear extenuating circum stances.
Such companies, a s described in greater
detail below, will be required to submit an
acceptable capital plan and will be subject to
appropriate supervisory enforcem ent action.
A minimum ratio of total capital to total
assets of 6.0 p ercent h as been established for
all bank holding companies. In addition, the
Zone 1 total capital ratio guideline for
m ultinational and regional holding companies
is being raised to 7.0 percent, w hich is the
Zone 1 ratio for community organizations.
The total capital ratio guidelines establish
three broad zones for total capital that apply
to holding com panies of all sizes:
Zone 1—Above 7.0%
Zone 2—6.0% to 7.0%
Zone 3 (Minimum Total Capital Ratio)—
Below 6.0%
Generally, the nature a n d intensity of
supervisory action will be determ ined by a
holding com pany's compliance with the
required minimum prim ary capital ratio as
well as by the zone in which a holding
com pany's total capital ratio falls. W hile a
com pany's position in the quantitative capital
zones will norm ally trigger the below
specified supervisory responses, qualitative
analysis will continue to be used in
determining minimum levels of capital for
banking institutions.
For holding com panies operating in Zone 1.
the Board will:
—presum e that capital is a d equ ate if the
prim ary capital ratio is acceptable and is
above the 5.5 percent minimum
For com panies operating in Zone 2, the
Board will:
—p ay particular attention to other financial
factors such as asset quality, liquidity, and
interest ra te risk as they relate to the
ad equacy of capital and if they are not
satisfactory a n d the Federal Reserve
concludes capital is not adequate, intensify
its analysis and action
Bank holding com panies operating in Zone
3:
—May be considered undercapitalized.
absent clear extenuating circum stances
—W ould be required to submit a
com prehensive capital plan that is
acceptable to the Board and that includes a
program for achieving com pliance with the
minimum required ratios within a
reasonable time period
—W ould be subject to appropriate
supervisory a n d /o r adm inistrative
enforcem ent action, or the issuance of a
capital directive
—W ould generally be subject to denial of
applications unless a reasonable capital
plan that is acceptable to the Board has
been adopted.
W hile the critical first test of a holding
com pany's capital adequacy is its compliance
with the minimum supervisory guideline
ratios, the Board will continue to take into
account the Various qualitative factors that
affect an institution's overall level of risk and
financial condition. The Board retains the
flexibility to m ake appropriate adjustm ents in
the application of the guidelines to individual
institutions.
The Board will issue regulations for
enforcing the minimum capital requirem ents
set forth above and for exercising the
authority to issue capital directives as
provided in the International Lending
Supervision Act of 1983.
PART 263— RULES OF PRACTICE FOR
HEARINGS
5.12 CFR Part 263 is proposed to be
amended by revising the authority for
the part, and by adding a new Subpart D
to read as follows:
*
*
*
*
*
Subpat t 0 —P ro ced u res for Issu ance and
Enforcem ent of D irectives To Require
Compliance With the B oard’s Capital
Guidelines
Sec.
263.35 Authority, purpose and scope.
283.36 Definitions.
263.37 Establishm ent of minimum capital
levels.
30323
Sec.
263.38 Procedures for requiring m aintenance
of adeq uate capital.
263.39 Enforcement of directive.
263.40 Establishm ent of increased capital
level for individual bank or bank holding
company.
Authority: 12 U.S.C. 248, 324, 329,1818,
1828, 1844, 3907, 3909,15 U.S.C. 19.
Subpart D—Procedures for Issuance
and Enforcement of Directives To
Require Compliance With the Board’s
Capital Guidelines
§ 263.35
Authority, p urpose, and scope.
(a) Authority. This subpart is issued
under authority of the International
Lending Supervision Act of 1983
(“ILSA"), 12 U.S.C. 3907, 3909; section
5(b) of the Bank Holding Company Act
("BHC ACT"), 12 U.S.C. 1844(b); the
Financial Institutions Supervisory Act of
1966 (“FIS ACT”), 12 U.S.C. 1818(b)-(n);
and sections 9 and ll(i) of the Federal
Reserve Act, 12 U.S.C. 248, 324, 329.
(b) Purpose and scope. This subpart
establishes procedures under which the
Board may issue a directive or take
other action to require a state member
bank or a bank holding company to
achieve and maintain adequate capital.
§ 2C3.36 Definitions.
(a) “Bank holding company” means
any company that controls a bank as
defined in section 2 of the BHC Act, 12
U.S.C. 1841, and in the Board’s
Regulation Y (12 CFR 225.2(b)).
(b) “Capital Adequacy Guidelines”
means those guidelines contained in
Appendix A to the Board's Regulation H
(12 CFR part 208) in the case of state
member banks and in Appendix A to the
Board's Regulation Y (12 CFR Part 225)
in the case of bank holding companies.
• (c) “Directive'' means a final order
issued by the Board pursuant to ILSA
(12 U.S.C. 3907(b)(2)) requiring a state
member bank or bank holding company
to increase capita] to or maintain capital
at the minimum level set forth in the
Board’s Capital adequacy Guidelines or
as otherwise established under
procedures described in § 263.40 of this
subpart.
(d) “State member bank” means any
stale chartered bank that is a member of
the Federal Reserve System.
§ 263.37
levels.
E stablishm ent of minimum capital
The Board has established minimum
capital levels for state member banks
and bank holding companies in its
Capital Adequacy Guidelines. The
Board may set higher capital levels as
necessary and appropriate for a
particular state member bank or bank
holding company based upon its
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Federal Register / Vol. 49, No. 147 / M onday, July 30, 1984 / Proposed Rules
financial condition, managerial
resources, prospects, or similar factors,
pursuant to the procedures set forth in
§ 263.40 of this subpart.
§ 263.38 P rocedures for requiring
m aintenance of adequate capital.
(a) Submission o f capital
improvement plan. Any state member
bank or bank holding company that may
not be in compliance with the Board's
Capital Adequacy Guidelines on the
date that this regulation becomes
effective shall, within 90 days, submit to
its appropriate Federal Reserve Bank for
review a plan describing the means and
the time schedule by which the bank or
bank holding company shall achieve the
required minimum level of capital.
(b) Issuance o f directive —(1) Notice
o f intent to issue directive. If a state
member bank or bank holding company
is operating with less than the minimum
level of capital established in the
Board's Capital Adequacy Guidelines, or
as otherwise established under the
procedures described in § 263.40 of this
subpart, the Board may issue and serve
upon such state member bank or bank
holding company written notice of the
Board’s intent to issue a directive to
require the bank of bank holding
company to achieve and maintain
adequate capital within a specified time
period.
(2) Contents of notice. The notice of
intent to issue a directive shall include:
(i) The required minimum level of
capital to be achieved or maintained by
the institution:
(ii) Its current level of capital;
(iii) The proposed increase in capital
needed to meet the minimum
requirements;
(iv) The proposed date or schedule for
meeting these minimum requirements:
(v) When deemed appropriate,
specific details of a proposed plan for
meeting the minimum capital
requirements: and
(vi) The date for a written response by
the bank or bank holding company to
the proposed directive, which shall be at
least 14 days from the date of issuance
of the notice unless the Board
determines a shorter period is necessary
because of the financial condition of the
bank or bank holding company.
(3) Response to notice. The bank or
bank holding company may file a
written response to the notice within the
time period set by the Board. The
response may include:
(i) An explanation why a directive
should not issue;
(ii) Any proposed modification of the
terms of the directive;
(iii) Any relevant information,
mitigating circumstances,
documentation or other evidence in
support of the institution's position
regarding the proposed directive; and
(iv) The institution's plan for attaining
the required level of capital.
(4) Failure to file response. Failure by
the bank or bank holding company to
file a written response to the notice of
intent to issue a directive within the
specified time period shall constitute a
waiver of the opportunity to respond
and shall constitute consent to the
issuance of such directive.
(5)
Board consideration o f response.
After considering the response of the
bank or bank holding company, the
Board may:
(i) Issue the directive as originally
proposed or in modified form:
(ii) Determine not to issue a directive
and so notify the bank or bank holding
company; or
(iii) Seek additional information or
clarification of the response by the bank
or bank holding company.
( 6 ) Contents o f directive. Any
directive issued by the Board may order
the bank or bank holding company to:
(i) Achieve or maintain the minimum
capital requirement established
pursuant to the Board’s Capital
Adequacy Guidelines or the procedures
in this subpart by a certain date;
(ii) Submit for approval and adhere to
a plan for achieving the minimum
capital requirement by a certain date;
(iii) Take other specific action as the
Board directs to achieve the minimum
capital levels, including requiring a
redaction of assets or asset growth or
restriction on the payment of dividends;
or
(iv) A combination of the above
actions.
(7) Request for reconsideration of
directive. Any state member bank or
bank holding company, upon a change
in circumstances, may request the Board
to reconsider the terms of a directive
and may propose changes in the plan
under which it is operating to meet the
required minimum capita! level. The
directive and plan continue in effect
while such request is pending before the
Board.
§ 263.39 Enforcement of directive.
(a) Judicial and administrative
remedies.—(1) Whenever a bank or
bank holding company fails to follow a
directive issued under this subpart, or to
submit or adhere to a capital adequacy
plan submitted pursuant to such
directive, the Board may seek
enforcement of the directive, including
the capital adequacy plan, in the
appropriate United States district court,
pursuant to section 8(i)(2) of the Federal
Deposit Insurance Act (12 U.S.C.
1818(i)(2)), in the same manner and to
the same extent as if the directive were
a final cease and desist order.
(2) The Board may also assess civil
money penalties for violation of the
directive against any bank or bank
holding company and any officer,
director, employee, agent, or other
person participating in the conduct of
the affairs of the bank or bank holding
company, in the same manner and to the
same extent as if the directive were a
final cease and desist order.
(b) Other enforcement actions. A
directive may be issued separately, in
conjunction with, or in addition to any
other enforcement actions available to
the Board, including issuance of cease
and desist orders, the approval or denial
of applications or notices, or any other
actions authorized by law.
(c) Consideration in application
proceedings. In acting upon any
application or notice submitted to the
Board pursuant to any statute
administered by the Board, the Board"
may consider the progress of a state
member bank or bank holding company
or any subsidiary thereof in adhering to
any directive or capital adequacy plan
required by the Board pursuant to this
subpart, or by any other appropriate
banking agency pursuant to ILSA. The
Board shall consider whether approval
or a notice of intent not to disapprove
would divert earnings, diminish capital,
or otherwise impede the bank or bank
holding company in achieving its
required minimum capital level or
complying with its capital adequacy
plan.
§ 263.40 Establishm ent of increased
capital level for Individual bank o r bank
holding com pany.
(a) Establishment o f capital levels for
individual institutions. The Board may
establish a capital level higher than that
specified in the Board's Capital
Adequacy Guidelines for an individual
bank or bank holding company pursuant
to:
(1) A written agraement or
memorandum of understanding between
the Board or the appropriate Federal
Reserve Bank and the bank or bank
holding company;
(2) A temporary or final cease and
desist order issued pursuant to section 8
(b) or (c) of the FIS Act (12 U.S.C. 1818
(b) or (c)):
(3) A condition for approval of an
application or issuance of a notice of
intent not to disapprove a proposal;
(4) Or other similar means; or
(5) The procedures set forth in
subsection (b) of this section.
Federal Register / Vol. 49, No. 147 / M onday, July 30, 1984 / Proposed Rules
(b) Procedure to establish higher
capital requirement—(1) Notice. When
the Board determines that capital levels
above those in the Board's Capital
Adequacy Guidelines may be necessary
and appropriate for a particular bank or
bank holding company under the
circumstances, the Board shall give the
bank or bank holding company notice of
the proposed higher capital requirement
and shall permit the bank or bank
holding company an opportunity to
comment upon the proposed capital
level, whether it should be required and,
if so, under what time schedule. The
notice shall contain the Board’s reasons
for proposing a higher level of capital.
(2) Response. The bank or bank
holding company shall be allowed at
least 14 days to respond, unless the
Board determines that a shorter period
is necessary because of the financial
condition of the bank or bank holding
company.
(3) Board decision. After considering
the response of the institution, the Board
shall issue a written decision to the
bank or bank holding company as to the
appropriate capital level and the date on
which this capital level will become
effective. The Board may require the
bank or bank holding company to
submit a plan for achieving such higher
capital level as the Board may set.
(4) Enforcement o f higher capital
level. The Board may enforce the capital
level established pursuant to the
procedures described in this section and
any plan submitted to achieve that
capital level through the procedures set
forth in § 263.38 of this subpart.
By order o f the Board of Governors,
effective July 24,1984.
William W. Wiles,
Secretary of the Board.
[FR Doc. 84-19965 Filed 7-27-84; 8:45 n |
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