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Federal R eserve Bank
OF DALLAS
ROBERT
D. M C T E E R , J R .
PRESIDENT
DALLAS, TEXAS 7 5 2 2 2
AND CH IE F E X EC U TIV E O F F IC E R
July 27, 1992
Notice 92-62
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Request for Comments on Proposed Amendments to
Regulation H (Membership of State Banking Institutions
in the Federal Reserve System)
DETAILS
The Federal Reserve Board has requested public comment on proposals
to implement prompt corrective action for undercapitalized state member banks
in accordance with Section 131 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA).
The proposed amendments to the Bo ar d’s Regulation H (Membership of
State Banking Institutions in the Federal Reserve System) would:
•
Adopt definitions of the capital measures and capi
tal thresholds for each of the five capital catego
ries established in the statute;
•
Establish a schedule for filing and review of capi
tal restoration plans required to be filed by under
capitalized institutions;
•
Clarify certain aspects of the capital guarantee
required to be made by any company that controls an
undercapitalized institution as part of an accept
able plan;
•
Establish a procedure for providing institutions
with notice of, and an opportunity to respond to, a
proposed agency directive to apply to supervisory
requirements committed by the statute to agency
di scretion;
•
Establish procedures for downgrading an institution
to a lower capital category based on supervisory
factors other than capital; and,
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
- 2 -
•
Establish procedures by which senior executive
officers and directors who are ordered dismissed by
the Board may petition for reinstatement.
The Board must receive comments by August 14, 1992. Comments should
be addressed to William W. Wiles, Secretary, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C.
20551. All comments should refer to Docket No. R-0763.
ATTACHMENT
Attached is a copy of the Bo ar d’s notice as it appears on pages
29226-44, Vol. 57, No. 127, of the Federal Register dated July 1, 1992.
MORE INFORMATION
For more information, please contact Gayle Teague at (214) 744-7224.
For additional copies of this Ba n k ’s notice, please contact the Public Affairs
Department at (214) 922-5254.
Sincerely yours,
29226_______Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 263
[Docket No. R-0763; Regulation H]
Membership of State Banking
Institutions in the Federal Reserve
System; Rules of Practice for
Hearings; Prompt Corrective Action
AGENCY: Board o f Governors of the
Federal Reserve System.
ACTION; Notice o f proposed rulemaking.
su m m ary : The Board i9 proposing to
revise Regulation H to implement for
state member banks the system of
prompt corrective action established by
section 38 of the Federal Deposit
Insurance Act (FDI Act) as added by
section 131 of the Federal Deposit
Insurance Corporation Improvement Act
of 1991 (FDICIA). Section 38 requires
each federal banking agency to
implement prompt corrective action for
the institutions that it regulates. The
Board is also proposing to revise its
rules of practice for hearings to establish
procedures for the issuance o f directives
and other actions required under prompt
corrective action.
Section 38 requires or permits the
Board to take certain supervisory
actions when a state member bank falls
within one of five specifically
enumerated capital categories. It also
restricts or prohibits certain activities
and requires the submission of a capital
restoration plan when an insured
institution becom es undercapitalized.
The proposed amendments to the
Board's regulations are necessary to
establish the capital levels at which
state member banks will be deemed to
come within the five capital categories,
The proposed amendments also
establish procedures for issuing and
contesting prompt corrective action
directives including directives requiring
the dismissal of directors and senior
executive officers.
The Board is seeking comment on all
aspects of its proposal.
OATES: Written comments must be
received on or before August 14,1992,
ADDRESSES: Comments, which should
refer to Docket No. R-0763, may be
mailed to Mr. William W iles, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW„ Washington,
DC 20551. Comments addressed to Mr.
W iles may also be delivered to the
Board’s mail room betw een 8:45 ajm.
and 5j15 p.m., and to the security control
room outside of those hours. Both the
mail room and the security control room
are accessible from the courtyard
Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules_______29227
several instances, procedures governing
extent feasible in implementing the
agency review have already been
prompt corrective action framework of
established in other agency regulations.
section 38. The agencies believe that a
uniform approach to capital definitions
The agencies request comment on all
and capital categories would simplify
aspects of this proposal, including the
the tasks facing bank and thrift
specific numbered questions presented
management of monitoring and
below. In addition, the agencies request
maintaining the capital levels of insured comment on whether other provisions of
depository institutions, and would
section 38 require clarification or should
remove any competitive distortions that
be implemented by regulation. The
might arise if different standards were
agencies stress that comments may
applied to competing institutions.
address any aspect of the proposal and
In order to implement the provisions
need not be confined to the numbered
of section 38, the agencies have
questions set out below. Commenters
proposed regulations that have uniform
are invited to submit comments to any
provisions. The agencies propose to
or all of the federal banking agencies.
define in the same manner the capital
II. Summary o f Statutory Framework
measures and capital thresholds for
each of the five capital categories
The following fs a brief summary of
established in the statute. The agencies
the supervisory framework established
also propose to establish a uniform
by section 38. This summary has been
schedule for filing and review of capital
prepared in order to give context to the
restoration plans. In addition, the
agency proposal and request for
agencies propose to adopt identical
comment. The summary is not intended
provisions clarifying certain aspects of
to be complete description of the
the capital guarantee required to be
requirements of section 38, and
made by companies that control an
commenters may find it useful to consult
undercapitalized institution as part of an the provisions of section 38, contained
I. Background
acceptable capital plan, including the
at 12 U.S.C. 1831o, in preparing their
Section 131 of FDICIA, Public Law
limit on the liability of such companies.
comments.
102-242, created a new statutory
The agencies’ proposal establishes a
Section 38 provides a framework of
framework that applies to every insured procedure under which institutions are
supervisory actions based on the capital
depository institution a system of
provided advance notice of a proposed
level of an insured depository
supervisory actions indexed to the
agency action under section 38 and
institution. Section 38 establishes five
capital level of the individual institution. provided an opportunity to respond to
capital categories: w ell capitalized,
The stated purpose of this statutory
the proposed action. A separate
adequately capitalized,
provision is to resolve the problems of
procedure is proposed that governs
undercapitalized, significantly
insured depository institutions at the
decisions by the appropriate federal
undercapitalized, and critically
least possible long-term loss to the
banking agency to change the capital
undercapitalized. The statute deems an
deposit insurance fund. The new
category to which the institution is
insured depository institution to be:
framework is contained in section 38 of
assigned after review of supervisory
the FDI Act. This framework and the
W eil capitalized if the institution
factors other than capital. Finally, the
authority it confers on the federal
significantly exceeds the required minimum
proposal implements the statutory
level for each relevant capital measure:
banking agencies are meant to
requirement that officers and directors
Adequately capitalized if the institution
supplement the existing supervisory
who are subject to dism issal as a result
fails to meet the required minimum level for
authority vested in the agencies, and do
of an agency order issued under section
any relevant capital measure;
not limit in any w ay their existing
38 be afforded agency review of the
U ndercapitalized if the institution fails to
authority under other statutes or
dismissal.
meet the required minimum level for any
regulations to initiate supervisory
Many of the provisions of section 38
relevant capital measure;
actions to address capital deficiencies,
apply without the need for agency
Significantly undercapitalized if the
unsafe or unsound conduct, practices, or action, or impose requirements or
institution is significantly below the required
conditions, or violations of law.
minimum level for any relevant capital
limitations on an agency in the exercise
Section 38 requires the federal
measure; or,
of its discretion. These provisions have
Critically undercapitalized if the institution
banking agencies, within 9 months of the not been repeated in the proposed
has a ratio of tangible equity to total assets of
enactment of FDICIA, to promulgate
regulation. The proposal implements
final regulations necessary to carry out
only those portions of section 38 that the 2 percent or less, or otherwise fails to meet
the critical capital level established pursuant
the purposes of that section. Under the
agencies believe require regulatory
to section 38(c)(3)(A).
statute, these regulations must become
specification or clarification.
The applicability of supervisory
effective within one year after the date
Where procedures have not been
actions provided in section 38 to an
of enactment of FDICIA, or no later than established in this proposal, such as
individual institution depends on the
December 19,1992.
procedures for review of a stock
It is the goal of the Board of
redemption or an expansion proposal by institution’s classification within one of
these five categories.
Governors of the Federal Reserve
an undercapitalized institution, each
System (“Federal Reserve Board”), the
agency w ill implement a procedure
A. P rovisions A pplica ble to A ll
Federal Deposit Insurance Corporation
governing agency review. Such
Institutions
(“FDIC”), the Office of the Comptroller
procedures w ill be established by
Section 38 prohibits are insured
of the Currency (“OCC"), and the Office regulation or through instructions to its
depository institution from declaring
of Thrift Supervision (“OTS”) to
appropriate field offices or examiners
any individuals, making any other
and to the institutions involved. In
promulgate uniform regulations to the
entrance on 20th Street betw een
Constitution Avenue and C Street, NW.
Comments may be inspected in room
B-1122 betw een 9 a.m. and 5 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:
Frederick M. Struble, A ssociate Director
(202/452-3794), Norah Barger,
Supervisory Financial Analyst (202/4522402), Division of Banking Supervision
and Regulation; Scott G. Alvarez,
A ssociate General Counsel (202/4523583), Gregory A. Baer, Senior Attorney
(202/452-3236), Legal Division; Myron L.
Kwast, Assistant Director, Division of
Research and Statistics, Board of
Governors of the Federal Reserve
System. For the hearing impaired only,
Telecommunication Device for the D eaf
(TDD), Dorothea Thompson (202/4523544), Board of Governors of the Federal
Reserve System, 20th and C Streets,
NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
29228_______Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
capital distribution, or paying a
management fee to a controlling person
if, following the distribution or payment,
the institution would be within any of
the three undercapitalized categories.
The statute provides a limited exception
to this prohibition for stock redemptions
that do not result in any decrease in an
institution’s capital and would improve
the institution's financial condition
provided the redemption has been
approved by the institution's
appropriate federal banking agency
after consultation with the FDIC.
B. P rovisions A pp lia b le to
U n dercapitalized Institutions
Institutions that are classified as
undercapitalized are subject to a
number of additional mandatory
supervisory actions. These include.
• Increased monitoring by the
appropriate federal banking agency for
the institution and periodic review of the
institution's efforts to restore its capital;
• A requirement that the institution
submit, generally within 45 days, a
capital restoration plan acceptable to
the appropriate federal banking agency
for the insitution and implement that
plan;
• A restriction on growth of the
institution's total assets; and
• A limitation on the institution’s
ability to make any acquisition, open
any new branch offices, or engage in
any new line of business without the
prior approval of the appropriate federal
banking agency for the institution.
Section 38 also provides that the
appropriate federal banking agency for
an undercapitalized institution may take
any a number of discretionary
supervisory actions if the agency
determines that any of these actions is
necessary to resolve the problems of the
institution at the least possible long
term cost to the deposit insurance fund.
These discretionary supervisory actions
include requiring the institution to raise
additional capital, restricting
transactions with affiliates, restricting
interest rales paid by the institution on
deposits, requiring replacement of senior
executive officers and directors,
restricting the activities of the institution
and its affiliates, requiring divestiture of
the institution or the sale of the
institution to a willing purchaser, and
any other supervisory action that the
agency deems appropriate. Because
these discretionary actions are also
applicable to significantly
undercapitalized institutions (as w ell as
to critically undercapitalized
institutions), these actions are described
more fully in the next section.
C. P rovisions A p plicab le to
S ignificantly U n dercapitalized
Institutions
Section 38 provides that significantly
undercapitalized institutions are subject
to the four mandatory provisions listed
above that are applicable to
undercapitalized institutions. Sections
38 also provides that a significantly
undercapitalized institution must restrict
the payment of bonuses and raises to
senior executive officers of the
institution.
In addition to these mandatory
requirements, section 38 specifies that
the appropriate federal banking agency
for the institution shall impose one or
more restrictions on an institution that is
significantly undercapitalized. These
discretionary actions include:
• Requiring the institution to sell
enough additional capital, including
voting shares, so that the institution
would be adequately capitalized after
the sale;
• Restricting transactions between
the institution and its affiliates,
including transactions with its insured
depository institution affiliates;
• Restricting the interest rates paid on
deposits collected by the institution to
the prevailing rates in the region where
the institution is located;
• Restricting the institution's asset
growth or requiring the institution to
reduce its total assets;
• Requiring the institution or any
subsidiary of the institution to
terminate, reduce or alter any activity
that the agency determines poses
excessive risk to the institution;
• Requiring the institution to hold a
new election of its board of directors;
• Requiring the institution to dismiss
any director or senior executive officer
who had held office at the institution for
more than 180 days immediately before
the institution became undercapitalized
if the agency deems such dismissal to be
appropriate, and to employ new officers
who may be subject to agency approval;
• Prohibiting the institution from
accepting deposits from correspondent
depository' institutions;
• Prohibiting any bank holding
company that controls the institution
from making any dividend payment
without prior approval of the Federal
Reserve Board;
• Requiring the institution to accept
an offer to be acquired by another
institution or company, or requiring any
company that controls the institution to
divest the institution;
• Requiring the institution to divest or
liquidate any subsidiary that is in
danger of becoming insolvent and poses
a significant risk to the institution, or
that is likely to cause significant
dissipation of the institution's assets or
earnings;
• Requiring any company that
controls the institution to divest or
liquidate any affiliate of the institution
(other than another insured depository
institution) if the appropriate federal
banking agency for the holding company
determines that the affiliate is in danger
of becoming insolvent and poses a
significant risk to the institution, or is
likely to cause significant dissipation of
the institution’s assets or earnings; and
• Requiring the institution to take any
other action that the agency determines
would better carry out the purposes of
section 38.
While the statute generally provides
the agency with discretion to determine
whether these actions are appropriate In
connection with a particular institution,
the statute establishes certain
presumptions and requirements with
respect to the agency’s consideration of
these actions. Section 38 requires that
the agency take at least one of the
above discretionary supervisory actions
in connection with every institution that
is significantly undercapitalized or
critically undercapitalized. The statute
also establishes a presumption that the
agency require each significantly
undercapitalized or critically
undercapitalized institution to (1) be
acquired by another institution or
company or sell sufficient shares to
restore the institution's capital to at
least the minimum acceptable capital
level, (2) restrict transactions with
affiliates of the institution, including
transactions with depository institution
affiliates, and (3) restrict interest rates
paid by the institution on deposits. The
agency must impose each of these three
actions unless the agency determines
that the action would not further the
purpose of section 38.
A s discussed above, each of the
discretionary actions listed above may
also be taken in connection with
undercapitalized institutions if a finding
is made by the agency that the action is
necessary to carry out the purposes of
section 38. In addition, these
discretionary actions may be taken in
connection with any undercapitalized
institution that fails to submit or
materially implement a capital
restoration plan, as if the institution
were a significantly undercapitalized
institution.
In addition to the discretionary
actions discussed above, section 38 also
provides that the appropriate federal
banking agency may require a
significantly undercapitalized institution
or an undercapitalized institution that
Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules_______29229
has failed to submit or implement an
acceptable capital restoration plan to
comply with one or more of the
restrictions established by the FD1C on
the activities of critically
undercapitalized institutions.
O. P rovision s A p p lica b le to C ritica lly
U n dercapitalized Institutions
Section 38 requires that an insured
depository Institution that is critically
undercapitalized be placed in
conservatorship or receivership within
90 days, unless the appropriate federal
banking agency for the institution and
the FDIC concur that other action would
better achieve the purposes of section
38. A determination by the agency to
defer placing a critically
undercapitalized institution in
receivership or conservatorship must be
reviewed every 90 days and must
document the reasons the agency
believes other action would better
achieve the purposes of section 38.
The statute requires that the
institution be placed in receivership if
the institution continues to be critically
undercapitalized on average during the
fourth quarter after the institution
initially becam e critically
undercapitalized, unless certain specific
statutory requirements are met. To be
eligible for the exception, the institution
must (1) have positive net worth, (2) be
in substantial compliance with an
approved capital restoration plan. (3) b e
profitable or have an upward trend in
earnings, and (4) have reduced its ratio
of nonperforming loans to total loans. In
addition, the head of the appropriate
federal banking agency for the
institution and the Chairperson of the
FDIC must both certify that the
institution is viable and not expected to
fa il
Critically undercapitalized institutions
are also prohibited, beginning 60 days
after becoming critically
undercapitalized, from making any
payment of principal or interest on
subordinated debt issued by the
institution without the prior approval of
the FDIC. Section 38 does not prevent
unpaid interest from accruing on
subordinated debt under the terms of
the debt instrument
Section 38{i) of the FDI Act also
provides that the FDIC, by regulation or
order, must restrict the activities of
critically undercapitalized institutions.
At a minimum, the FDIC must prohibit a
critically undercapitalized institution
from doing any of the following without
the prior written approval of the FDIC:
• Entering into any material
transaction other than in the usual
course of business. Such activities
include any investment, expansion.
acquisition, sale of a ssets or other
similar action where the institution
would have to notify its appropriate
federal banking agency;
• Extending credit for any highly
leveraged transaction;
• Amending the institution's charter
or bylaw s unless required to do so in
order to carry out any other requirement
of any law, regulation or order:
• Making any material change in its
accounting methods;
• Engaging in any "covered
transactions" within the meaning of
§ 23A(b) of the Federal Reserve Act (12
U.S.C. 371c), which concerns affiliate
transactions;
• Paying excessive compensation or
bonuses; and
• Paying interest on new or renewed
liabilities at a rate which would increase
the institution’s weighted average cost
of funds to a level significantly
exceeding the prevailing rates in the
institution's normal market areas.
Pursuant to section 38(j) of the FDI
Act, none of these restrictions apply to
institutions in conservatorship or to any
bridge bank that is w holly owned by the
FDIC or the RTC.
Pursuant to section 38(o)(2) of the FDI
Act, none of these restrictions shall
apply, before July 1,1994, to any insured
savings association if:
(a) The savings association had
submitted a plan meeting the
requirements of section 5(t)(A)(ii) of the
Home Owners’ Loan Act;
(b) The Director of OTS had accepted
the plan; and
(c) The savings association remains in
compliance with the plan or is operating
under a written agreement with the
appropriate federal banking agency.
III. Proposal and Request for Comment
A.
C apita l M easures
For purposes of defining each of the
capital categories (except for the
critically undercapitalized category),
section 38(c) requires the agencies to
prescribe capital standards that include
a leverage limit and a risk-based capital
requirement The agencies may establish
additional capital measures for these
categories if additional capital measures
would serve the purposes of section 38.
In addition, section 38 permits the
agencies to rescind the leverage limit or
the risk-based capital measure if the
federal banking agencies concur that
either measure is no longer an
appropriate m eans for carrying out the
purposes of section 38.
The agencies are proposing to adopt
the leverage limit and the total riskbased capital measure in defining the
capital categories other than the
critically undercapitalized category. In
addition, the agencies propose to adopt
the Tier 1 risk-based capital ratio as a
capital measure in defining these capital
categories. These measures are
generally used by the federal banking
agencies in determining the adequacy of
capital of insured depository
institutions.
Com m ent 1: The agencies request
comment on whether adoption of these
three capital measures is appropriate to
carry out the purpose of section 38.
The agencies note that the capital
requirements applicable to insured
depository institutions may be affected
by section 305 of FDICIA, which amends
section 18 of the Federal Deposit
Insurance Act (“FDI Act") to require the
agencies to revise their risk-based
capital standards to take into account
interest rate risk, concentration of credit
risk, and the risks of nontraditional
activities. The statutory deadline for
implementation of these revisions is i"
June 1993.
A s the revisions required under
section 18 of the FDI Act are
implemented, it might prove necessary
of appropriate to review the capital
measures and thresholds specified for
the various capital categories. In
particular, the agencies note that one of
the rationales for retaining a leverage
ratio after the risk-based capital
measure w as introduced w as that the
risk-based capital measure is focused on
credit-related risk, and does not
explicitly factor in other risks,
particularly interest rate risk. The
agencies w ill address in an appropriate
and expeditious manner the need for
lowering or eliminating the leverage
capital component from the definitions
of w ell capitalized, adequately
capitalized, undercapitalized, and
significantly undercapitalized after the
risk-based capital standards have been
revised by each Federal banking agency
to take account o f interest rate risk as
required by section 305 of FDICIA.
B. D efinition o f C ap ital Term s
The agencies propose to adopt the
same definitions of capital terms for
purposes of the prompt corrective action
provisions o f section 38 as are currently
used under the capital adequacy
guidelines or regulations adopted by the
agencies. The definition of the riskbased and leverage capital ratios for
purposes of the prompt corrective action
subpart would refer to the definitions of
Tier 1 capital, total capital, total riskweighted assets, adjusted total assets,
and total assets as those terms are
defined in the agencies' current capital
adequacy guidelines and regulations.
29230
Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
C. S pecific C ap ital L evels fo r Five
This proposal attempts to reduce
C apital C ategories
complexity that could result from the
use of new or modified capital
Section 38 requires the agencies to
definitions, and to minimize confusion
establish specific capital thresholds for
and the possibility that an institution
each capital category and sets general
may be uncertain regarding its capital
standards, as described above, for each
levels for purposes of section 38.
of these categories. Under these
Com m ent 2: The agencies request
standards, an institution is adequately
public comment regarding whether this
capitalized if it meets the required
approach is appropriate or whether the
minimum level for each relevant capital
agencies should modify the existing
measure. Thus, capital levels set for the
capital definitions for purposes of
adequately capitalized category
applying section 38. If adjustments of
generally would be the same as the
modifications to the capital definitions
minimum ratios established under the
currently used are deemed to be
existing minimum capital adequacy
appropriate, the agencies request
rules and guidelines adopted by the
comment on what type of adjustments
agencies. These minimums are 8 percent
or modifications should be made.
for the total risk-based capital ratio, 4
Com m ent 3: The agencies also request percent for the Tier 1 risked-based
comment regarding the appropriate
capital ratio, and 4 percent for the Tier 1
period for calculation of capital levels.
leverage ratio (3 percent for composite
Under current practice and
1-rated banks and savings associations,
requirements, die level of capital of an
subject to appropriate federal banking
institution is calculated on the basis of
agency guidelines). An institution would
the amount of capital held by the
have to meet all these minimums in
institution on a given day as a ratio of
order to be deemed adequately
the most recent quarterly average of
capitalized.
total assets or quarter-end risk-weighted
The statute also provides specific
assets for the institution. A daily
guidance as to the capital level for
calculation of both capital and assets
defining a critically undercapitalized
may facilitate prompt action under
institution. Section 38 requires that a
section 38. However, the agencies note
critically undercapitalized institution be
that insured depository institutions are
defined by reference to the institution’s
not currently required to make daily
ratio of tangible equity to total assets.
calculations of capital, and such a
The statute requires the agencies to
requirement would increase the
establish the threshold ratio for defining
reporting burden on many institutions.
a critically undercapitalized institution
In addition, a daily calculation may
at no lower than 2 percent. A s discussed
distort capital calculations by focusing
below, the agencies are proposing that a
on individual daily events (such as a
critically under capitalized institution be
decline in the market value of certain
defined as any institution that has a Tier
investments on a given day) rather than
1 leverage ratio of 2 percent or less.
on related actions taken during a given
Taking the capital levels for the
period or remedial actions that are
adequately capitalized and critically
readily available to the institution (such
undercapitalized categories as
as a decline in market value in one
benchmarks, the agencies are proposing
investment followed by a gain realized
that the capital levels for the
on the sale of another investment).
undercapitalized category be defined as
Com m ent 4: The agencies request
any level under 8 percent for the total
comment on whether, for purposes of
risk-based capital ratio, under 4 percent
applying the prompt corrective action
for the Tier 1 risk-based capital ratio, or
requirements of section 38, the use of
under 4 percent for the Tier 1 leverage
quarterly average total assets or
ratio (under 3 percent for composite 1quarter-end risk-weighted assets in
rated banks and savings associations,
calculating capital levels is appropriate,
subject to appropriate federal banking
or whether the capital calculations for
agency guidelines). An institution would
an institution should be based on an
be considered undercapitalized if it
actual daily measure or quarter-end
were below the specified capital level
measure of the institution’s capital and
for any of the three capital measures.
Further, the capital levels for
assets.
Com m ent 5: The agencies also request significantly undercapitalized
comment on whether a daily calculation institutions would be defined as any
level under 6 percent for the total riskof total assets and risk-weighted assets
based capital ratio, under 3 percent for
is feasible, and whether a requirement
the Tier 1 risk-based capital ratio, or
that an institution make daily
under 3 percent for the Tier 1 leverage
calculations would impose significant
ratio. An institution would be
added burden on insured depository
considered significantly
institutions.
undercapitalized if it were below the
specified capital level for any of the
three capital measures. Under the
proposed definitions, an institution thai
is significantly undercapitalized also
would be deemed to be
undercapitalized. Similarly, an
institution that is critically
undercapitalized also would be deemed
to be significantly undercapitalized and
undercapitalized. The overlap between
these categories is contemplated by the
statute and has the effect of applying to
significantly undercapitalized
institutions and to critically
undercapitalized institutions any
provisions of section 38 that are
applicable to undercapitalized
institutions.
The agencies are proposing to
establish the minimum total risk-based
capital level for the w ell capitalized
category at 10 percent and to set the
minimum leverage capital level for this
category at 5 percent. To emphasize the
importance the agencies place on Tier 1
capital, it is proposed that for the w ell
capitalized category the minimum level
for the Tier 1 risk-based capital ratio be
set at 6 percent. The specifications of
the minimum ratios for the w ell
capitalized category are proposed at
levels that are 25 percent to 50 percent
higher than the minimum for the
adequately capitalized category to
promote safe and sound banking
conditions, giving due consideration to
the international capital standards to
which the United States and other G-10
Countries have agreed, and to the
competitive pressures faced by U.S.
banks operating in international markets
with foreign banks adhering to these
standards.
Capital ratios alone, of course, are not
fully indicative of the capital strength of
an institution. In particular, in proposing
these minimum capital levels, the
agencies are aware that some poorlyrated depository institutions have
capital ratios above the specified
minimums for the w ell capitalized and
adequately capitalized categories. One
reason that some poorly-rated
institutions qualify as w ell capitalized
for prompt corrective action purposes is
that capital is a lagging indicator of
problems of insured depository
institutions.
Some institutions are subject to a
written order or directive that
establishes a higher capital level for the
institution. The agencies are proposing
that for an institution to be w ell
capitalized, it must not be subject to any
written capital order or directive. This
proposal reflects the view that an
institution that is subject to a written
Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules_______29231
capital directive from the appropriate
federal banking agency does not have
capital that significantly exceeds the
required minimum level for the relevant
capital measures.
The agencies also intend to assess
carefully all aspects of a troubled
institution's condition, and to exercise
their reclassification authority under
section 38(g) of FDICIA. Section 38(g)
gives the agencies discretion to
downgrade, where appropriate, a "well
capitalized" institution by one category
and require an “adequately capitalized”
or "undercapitalized” institution to
comply with supervisory actions as if it
were in the next lower category if that
institution has received a less-thansatisfactory examination rating for asset
quality, management, earnings, or
liquidity without correcting the
deficiency. Any institution would be
subject to downgrading on the basis of
the components of the institution’s
examination rating, including an
institution that has been deemed not to
be within the w ell capitalized category
because the institution is subject to a
written capital order, or directive.
W hile the prompt corrective action
framework constitutes an additional
supervisory tool, the federal banking
agencies continue to have available ail
supervisory tools traditionally used to
supervise institutions. The agencies also
fully intend to use these tools as
appropriate in supervising institutions.
These include appropriate enforcement
actions and supervisory follow-up
measures based upon the institution’s
overall condition and the existence of
any financial, operational, or other
supervisory w eaknesses, irrespective of
the organization’s capital category for
purposes of the prompt corrective action
provisions of section 38.
Accordingly, the assignment of an
institution to a particular capital
category—including the w ell capitalized
category— does not prevent the
appropriate federal banking agency from
taking other supervisory action that the
agency deems to be appropriate.
Moreover, in light of the intended
limited purpose of a capital category
designation, the agencies are proposing
to limit a given insured depository
institution’s use of its capital category,
except when permitted by the
appropriate federal banking agency or
otherwise required by statute or
regulation. This is intended to limit the
ability of insured depository institutions
to advertise their category.
Com m ent 6: The agencies invite
comment on this limitation on
advertising.
Traditionally, examiners have
reached judgments on an institution's
requires a deduction from equity capital
for most intangible assets, including
goodwill. The use of Tier 1 capital also
focuses primarily on common equity
rather than other forms of equity and,
therefore, represents the most secure
form of equity available to absorb losses
that may be incurred by an insured
depository institution.
In addition, because Tier 1 capital is
an element of the existing capital
adequacy guidelines and is included in
the definition of the other capital
measures proposed under section 38, use
of the Tier 1 capital definition would
promote consistency and simplicity and,
therefore, minimize the potential for
confusion in the capital computations
required to be made by insured
depository institutions. It would also
reduce the potential for distortion in the
capital raising efforts of insured
depository institutions and for
anomalies in the classification o f
institutions under section 38 that might
result from use of a substantially
different definition of capital for the
critically undercapitalized category than
is used for the other capital categories.
C om m ent 9: The agencies request
public comment on this definition.
D. C ritica lly U n dercapitalized
Com m ent 10: The agencies also
In stitutions
request comment on whether the
The statute requires that the critically
definition of tangible equity should
undercapitalized category be based on
reflect additional adjustments to deduct
the ratio of tangible equity to total
intangible
assets. The agencies note that
assets o f the institution. Section 38
section 475 of FDICIA requires the
requires that the minimum ratio for this
federal banking agencies to determine
category be established at a level of
whether a portion of certain purchased
tangible equity that is no less than 2
mortgage servicing rights should be
percent of the institution’s total assets,
and that is no higher than the ratio equal included in the calculation ot tangible
capital. The agencies also recently
to 65 percent of the required minimum
sought public comment on a proposal to
level of capital under the leverage lim it
The agencies may, be regulation, specify permit insured depository institutions to
include a portion of certain purchased
additional capital measures (such as a
credit-card relationships in the
risk-based capital ratio) in defining the
critically undercapitalized category. Any calculation o f tangible capital for
purposes of meeting applicable
such measures may not, without the
minimum capital adequacy standards.
concurrence of the FDIC, be set at a
Com m ent 11: The agencies request
level lower than the level specified by
comment on whether purchased
the FDIC for insured state-chartered
mortgage servicing rights and purchased
banks that are not members of the
credit-card relationships should be
Federal Reserve System.
excluded from the definition of tangible
The agencies are proposing to define
equity for purposes of section 38.
critically undercapitalized institutions
Similarly, investm ents in certain types
as institutions that have a ratio of Tier 1
of subsidiaries, which savings
capital to total assets of 2 percent or
associations are required to deduct for
less. The agencies do not at this time
purposes of their general capital
propose to establish any additional
calculations, represent realizable assets
capital measures for the critically
which buffer the exposure of the deposit
undercapitalized category.
insurance funds.
Under this proposal, the agencies
Com m ent 12: The agencies request
would define tangible equity to be Tier 1
comment on whether these investments
capital as defined under the agencies'
should be deducted in computing the
existing capital adequacy guidelines or
regulations. The use of the Tier 1 capital relevant capital ratio for purposes o f
definition has been proposed for several determining whether an institution is
critically undercapitalized.
reasons. The definition o f Tier 1 capital
capital needs by also taking intc
account a range of factors such as
interest rate risk and concentration risk.
The agencies have initiatives under w ay
mandated by FDICIA to review their
risk-based capital standards to ensure
that they take more adequate account of
such risks, and also have been engaged
in a project under the Federal Financial
Institutions Examination Council
(“FFIEC”) to refine and improve
procedures for assessing the reserving
policies and practices of individual
institutions. After those projects have
been completed and improvements
implemented and assessed, the agencies
intend to revisit the question of how the
specifications for the w ell capitalized
category may need to be modified or
adjusted.
C om m ent 7: The agencies request
comment on all aspects of the capital
levels proposed in the draft regulation.
Com m ent 8: In particular, the agencies
seek comment on whether the specific
levels set for each capital category are
appropriate, as w ell as whether it is
appropriate to require that wellcapitalized institutions not be subject to
a capital order or directive.
29232______ Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
Com m ent 13: In addition, the agencies
request comment on whether tangible
equity should be defined to take into
account broader forms of equity beyond
those included in the definition of Tier 1
capital.
Com m ent 14: In particular, the
agencies request comment on whether
cumulative perpetual preferred stock
should be included in determining
whether an institution is critically
undercapitalized.
Com m ent 15: Because the agencies are
not proposing to include this form of
equity in determining whether an
institution is critically undercapitalized,
the agencies also request comment on
whether a transition period should be
permitted for institutions that are
permitted to rely on cumulative
perpetual preferred stock under
currently outstanding agency orders.
Com m ent 16: The agencies also
request comment on whether a higher
threshold should be established than the
proposed 2 percent leverage limit. By
statute, this ratio may not exceed 65
percent of the minimum leverage ratio
established by the agencies.
Com m ent 17: Finally, the agencies
request comment on whether it is
appropriate to establish additional
capital measures for the critically
undercapitalized category. A s noted
above, section 38 permits the agencies to
establish additional capital measures in
defining the critically undercapitalized
category. The agencies are proposing the
use the total risk-based capital measure
and the Tier 1 risk-based capital
measure for all other categories, but are
not proposing to use these capital
measures in defining critically
undercapitalized institutions.
E. Calculation o f C apital L evels an d
N otice o f C apital L evels
Under the proposal, an institution
would be expected to monitor its capital
levels continually and to notify the
appropriate federal banking agency
promptly if the institution’s capital
levels fall into a lower capital category.
In addition, capital levels would be
periodically determined on the basis of
information filed by each insured
depository institution in its quarterly
Consolidated Report of Condition and
Income (“Call Report”), or on the basis
of information obtained in an
examination or inspection of the
institution. Capital levels may also be
determined by the appropriate federal
banking agency for an institution on the
basis of other information obtained by
the agency from any source. This
information may include data provided
by the institution to the agency on a
voluntary basis, information obtained in
connection with an application,
calculations based on a report that the
institution must file other than a Call
Report or adjustments that are
appropriate bused on publicly
announced events that may affect the
institution’s capital.
Under the proposal, an institution
would be deemed to be aware of
information that it files in a Call Report
as of the date that the Call Report is
required to be filed. Similarly, the
institution would be deemed to be
notified of capital levels calculated in
the examination or inspection process
as of the date that the examination
report or inspection report is provided to
the institution. In the event that the
agency determines the capital levels of
the institution on the basis of other
information, the agencies are proposing
to notify the institution in writing of the
calculation and the information used as
a basis for the capital calculation.
The agencies are concerned that,
while the proposed arrangement for
calculating the capital levels of an
institution on the basis of Call Reports
and reports of examination and
inspection may be reliable and in most
instances timely, this procedure may not
alw ays lead to a prompt calculation of
capital levels for a given institution. For
example, an institution may become
aware of information that affects its
capital calculation betw een the time
that Call Reports are required to be filed
and when an examination is not in
process or another report may not be
required. This could result in delay in
application of the supervisory
requirements of section 38, including the
provisions that are mandated by the
statute.
In order to address changes in capital
promptly, the agencies propose to
require insured depository institutions to
notify the appropriate federal banking
agency within 5 days of any event that
would cause the institution to be
assigned to a different capital category
than the category assigned on the basis
of the most recent Call Report or report
of examination or inspection. The
institution would be deemed to be
aware of a necessary adjustment when
its senior management determines that
the adjustment is appropriate, even if
the adjustment is not required to be
reported in an official report of
otherwise disclosed for some period of
time. Under the proposal, the agency
would review the information provided
by the institution, along with any
explanation provided by the institution,
to determine whether the institution
should be assigned to a different capital
category for purposes of the provisions
of section 38. This procedure would
apply to both upward and downward
adjustments to capital that occur
betw een the filing of Call Reports or
examinations.
C om m ent 18: The agencies invite
public comment on all aspects of this
approach to the capital calculations.
C om m ent 19: In particular, the
agencies request comment on the use of
Call Reports and examination reports a9
the primary b ases for capital
calculations.
Com m ent 20: In addition, the agencies
request comment on the procedures that
have been proposed for self-monitoring
and agency notification of changes in
capital levels, including comment on the
burden associated with this procedure
and comment on whether any other
procedure to permit the timely
monitoring of an institution’s capital
levels is appropriate.
F. R eclassification B a sed on
S u pervisory C riteria O th er Than
C apital S tandards
Section 38 provides that the
appropriate federal banking agency
may, under certain circumstances,
reclassify a w ell capitalized insured
depository institution as adequately
capitalized and require an adequately
capitalized or undercapitalized
institution to comply with supervisory
actions as if it were in the next lower
category (but not treat a significantly
undercapitalized institution as critically
undercapitalized) based on supervisory
information other than the capital levels
of the institution. (Reclassification to the
adequately capitalized category and
treatment of an institution as if it were
in the next lower capital category are
referred to collectively herein as a
“reclassification.") The statute permits
the agency to reclassify an institution
where the agency has determined, after
notice and opportunity for hearing, that
the institution is in unsafe or unsound
condition. Section 38 also provides that
an institution may be reclassified if the
agency deems the institution to be
engaged in an unsafe or unsound
practice under section 8(b)(8) of the FDI
Act. 12 U.S.C. 1818(b)(8). Section 8(b)(8)
of the FDI Act w as amended by FDICIA
to provide that an institution may be
deemed to be engaged in an unsafe or
unsound practice if the institution has
received a less-than-satisfactory rating
in its most recent examination report in
any of the categories for assets,
m anagem ent earnings, or liquidity, and
the institution has not corrected the
deficiency.
Under the proposed rule, an
institution would be reclassified on any
o f these supervisory grounds only after
Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules_______29233
receiving prior yvritten notice of the
proposed reclassification from the
agency and having an opportunity to
respond to the proposed reclassification.
In the case of a proposed
reclassification based on a
determination that the institution is in
unsafe or unsound condition, the
agencies also propose, pursuant to
section 38, to accord the institution an
opportunity for an informal oral hearing
prior to the reclassification.
Because section 38 expressly provides
for notice and opportunity for hearing in
connection with a reclassification on the
ground of unsafe and unsound condition
but does not with respect to the
reclassification based on examination
ratings, the agencies are not proposing
to provide an opportunity for an oral
hearing prior to reclassification based
on an institution’s examination rating. In
the case of a reclassification proposed
on the basis of an examination rating of
the institution, the agencies are
proposing to provide the institution an
opportunity to present written
arguments and information prior to the
agency’s reclassification of the
institution.
Under the proposal, the appropriate
federal banking agency would provide
an institution with written notice of the
agency’s intention to reclassify the
institution. The institution would be
provided at least 14 days to respond to
the proposed reclassification unless the
agency determines that the condition of
the institution warrants a shorter time
period for response. In its response, the
institution should set forth any reasons
w hy the proposed reclassification would
not be appropriate, and provide the
agency with any information that the
institution believes supports its position
on the reclassification. The agency
would consider the response in deciding
whether to proceed with the
reclassification.
Com m ents 21: The agencies invite
comment on all aspects of these
procedures for reclassifying institutions
based on supervisory criteria other than
capital.
G. Timing o f M an datory P rovision s
Under section 38, an institution
becomes subject to certain mandatory
provisions on the basis of the capital
levels of the institution. These
mandatory provisions apply
immediately without agency action. As
noted above, an undercapitalized
institution is immediately subject to a
restriction on the payment o f dividends
and management fees, a limitation on
asset growth, and an obligation to file
an acceptable capital restoration plan.
In addition to these requirements, an
institution that is significantly
undercapitalized or critically
undercapitalized is subject to a
limitation on the payment of bonuses or
raises to senior executive officers.
Under the proposal, once an
institution is deem ed to have notice of
its capital levels and category or is given
actual notice by the agency of the
institution's capital category, the
institution is deem ed immediately to be
subject to the mandatory provisions that
apply to institutions within the
corresponding capital category without
any further action by the appropriate
federal banking agency for the
institution. A s explained above, the
agencies propose to deem an institution
to have notice of its capital category
whenever a Call Report is due to be
filed by the institution, or an
examination report or report of
inspection has been provided to the
institution. The agencies w ill provide
actual notice to the institution of its
capital categorization if the category is
based on an adjustment to capital
betw een the filing of Call Reports or
examinations; if the agency determines
the capital levels of the institution based
on information other than information
contained in the Call Reports or an
examination report; or if the agency
determines to reclassify the institution
based on supervisory criteria other than
capital.
H. P rocedures fo r Issuing Prom pt
C orrective A ction D irectives
Section 38 also provides the agencies
with discretion to impose other
requirements or restrictions on an
insured institution that is
undercapitalized, significantly
undercapitalized or critically
undercapitalized, as w ell as on any
company that controls such an
institution. These discretionary
supervisory actions are described
above.
Because these provisions rely on an
agency determination that certain action
is appropriate, the agencies are
proposing a procedure under which a
federal banking agency would issue a
written directive w henever the agency
has determined that a discretionary
supervisory action is appropriate. The
agencies propose to provide written
notice to an institution prior to issuing
any directive to take an action
committed by section 38 to the agency’s
discretion. The notice would describe
the action contemplated by the agency
and would provide the institution or
company with 14 calendar days to
respond to the proposed agency action,
unless the agency determines that a
shorter response period is appropriate in
light of the condition of the institution.
Under the proposal, the institution or
company would be permitted to submit
written arguments regarding whether
the directive is an appropriate exercise
of the agency’s discretion, along with
any information or evidence supporting
the respondent’s position, Failure to file
a timely response would constitute
consent to the issuance of the directive
and a waiver of the opportunity to
appeal. The agency would consider the
institution’s response prior to issuing a
final directive to take action under
section 38.
The agencies are also proposing to
permit the appropriate federal banking
agency to issue a final directive without
notice or opportunity to respond where
immediate supervisory action is
appropriate. In cases where immediate
action is necessary, the agencies
propose to provide the institution with
an opportunity to appeal the action to
the agency and request modification or
rescission of the agency action following
issuance o f the directive. An institution
that seeks to appeal an immediately
effective directive would be required to
file a written appeal with the agency
within 14 calendar days of the effective
date of the directive. The agency would
be required to consider and take action
regarding a timely appeal within 60 days
of receiving the appeal.
The agencies believe that these
procedures w ill afford an adequate and
fair opportunity to obtain agency review
of the agency’s action. See, e.q., FDIC v.
M allen, 486 U.S. 230 (1988) (upholding
post-deprivation hearing in case of
suspension or removal of a bank officer
charged with a felony); F ederal D eposit
Ins. Corp. v. B ank o f Coushatta, 930 F.2d
1122 (5th Cir. 1991), cert, denied, 112 S.
Ct. 170 (1992) (affirming procedures for
issuance of capital directives).
In proposing these procedures, the
agencies have attempted to adhere to
the mandate of section 38 that the
agencies take prompt corrective action
to resolve the problems of insured
depository institutions at the least
possible long-term loss to the deposit
insurance fund while providing
institutions with an opportunity for
agency review of disputed factual
claims. These procedures generally
permit an institution advance notice of a
proposed directive and an opportunity
to present written information and
argument to the agency prior to final
agency action regarding the directive.
The agencies would not be required to
follow these procedures, and the
respective time periods would not apply,
if an institution consented to the action
29234______ Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
to be taken by the agency either as
initially proposed by the agencies or as
modified by mutual agreem ent Actions
taken with such consent would have the
sam e legal affect and be enforceable to
the sam e extent and by the same means
as actions taken upon exhaustion of
these procedures.
The agencies are not proposing an
oral hearing in connection with the
issuance of a prompt corrective action
directive for several reasons. First, the
terms and legislative history of section
38 indicate that Congress intended
agency action under section 38 to be
taken as promptly as possible. 12 U.S.C.
1831o(a)(2); see also S. Rep. No. 102-167,
102d Cong., 1st Sess. 32-38 (1991) ("The
prompt corrective action system will
require regulators to act at the first sign
of trouble."). Second, Congress clearly
indicated several occasions when it
believed that a hearing w as appropriate
in connection with actions taken under
section 38, such as orders requiring
dism issal of a director or senior
executive officer. Congress gave no
indication in either the statutory
language or legislative history that it
intended to provide for an agency
hearing in connection with supervisory
actions committed to agency discretion
under section 38. Third, a requirement
that an agency hold a hearing in each
case involving action committed to
agency discretion under section 38
would cause the prompt corrective
action provisions of section 38 largely to
duplicate the existing cease-and-desist
authority grant to the agencies under
section 8(b) of the FDI A c t
Com m ent 22: The agencies request
comment on all aspects of the proposal
to issue prompt corrective action
directives where the agency determines
to apply the provisions of section 38
committed to the discretion of the
agency.
Com m ent 23: In particular, the
agencies request comment on the
sufficiency of the proposal to provide
notice and opportunity for written
response in connection with these
directives.
Com m ent 24: The agencies also
request comment on w ays that these
procedures can be improved to give an
institution or company that is subject to
a prompt corrective action directive a
fair opportunity to contest such a
directive, while at the same time
adhering to the statutory mandate to
take prompt action to resolve the
problems of inadequately capitalized
institutions.
I. Enforcem ent o f D irectives
Section 8 of the FDI Act, as amended
by FDICIA, includes prompt corrective
action directives issued pursuant to
section 38 among the orders that may be
enforced in the courts pursuant to
section 8(i)(l), and also makes any
depository institution, company, or
institution-affiliated party that violates
such a directive subject to civil money
penalties pursuant to section 8(i)(2)(A).
12 U.S.C. 1818(i). The proposed
regulation makes clear that failure o f a
depository institution to implement a
capital restoration plan or the failure of
a company having control of a
depository institution to fulfill a
guarantee that the company has given in
connection with a capital plan accepted
by the appropriate federal banking
agency w ill subject responsible parties
to civil money penalties.
/. D ism issa l o f D irectors or Senior
E xecu tive O fficers
Section 38 provides that a director or
senior executive officer dism issed by an
insured depository institution in
compliance with an agency directive
under section 38 may obtain review of
the dism issal by filing with the
appropriate federal banking agency a
petition of reinstatement. The statute
also provides that the petitioner shall
have the opportunity to submit written
materials in support of the petition and
to appear at a hearing before m em bers)
or designated employee(s) of the agency.
The hearing shall occur within 30 days
of the filing of the petition unless the
petitioner requests a later date. The
agency decision shall issue within 60
days of the date of the closing of the
hearing record.
The statute appears to envision on a
post-dismissal hearing procedure, as it
refers to the appeal as a “petition for
reinstatement” and sets a short time for
agency decision. Accordingly, the
proposed regulation contemplates that
an institution ordered to dismiss a
senior executive officer or director w ill
take that action immediately upon
receiving a final directive requiring that
action. The agencies are proposing that
any officer or director that is dismissed
in compliance with an agency directive
under section 38 be provided an
opportunity to petition the appropriate
federal banking agency for
reinstatement within the statutorilyprescribed period.
The proposed regulation permits the
affected officer or director an
opportunity for an informal agency
hearing. The agency will designate a
presiding officerfs) to conduct the
hearing. The petitioner will have the
right to appear at the hearing, with
counsel, and to submit written materials
and present oral argument. The
petitioner may present oral testimony or
w itnesses only with the consent of the
presiding officers).
The proposed regulation incorporates
the statutory burdens of proof imposed
upon an officer or director seeking
reinstatem ent When the dism issal order
is based upon an institution's capital
category or its failure to submit or
implement a capital restoration plan, the
petitioner must prove that his or her
continued employment would materially
strengthen the institution's ability to
become adequately capitalized. When
the dism issal order is based upon a
reclassification of an institution on
grounds o f unsafe or unsound condition
or practice, the petitioner must prove
that his or her continued employment
would materially strengthen the
institutions’ ability to correct the
condition or practice. H ie agencies
propose to restrict the ability of an
officer or director seeking reinstatement
to challenge the capital category to
which the institution has been assigned.
Com m ent 25: The agencies seek
comment on these procedures.
K. C ap ital R estoration Plans
1. Information Required
Section 38 requires an institution that
is under-capitalized, significantly under
capitalized, or critically
undercapitalized to submit a plan to the
appropriate federal banking agency to
restore the institution’s capital at least
to the minimum capital levels required
for adequately capitalized institutions.
The statute requires that this capital
restoration plan be submitted in writing
and specify:
(1) The steps the institution will take
to becom e adequately capitalized;
(2) The levels of capital the institution
expects to attain in each year that the
plan is in effect;
(3) How the institution will comply
with the restrictions and requirements
imposed on the institution under section
38;
(4) The types and levels of activities
in which the institution w ill engage; and
(5) Any other information required by
the appropriate federal banking agency.
The agencies do not propose at this
time to require by regulation any
additional information in a capital
restoration plan submitted under section
38. The agencies may, in individual
cases, require an institution to provide
additional information based on
particular circumstances.
Com m ent 26: The agencies request
comment on whether and what
additional information should be
required by regulation for all capital
Federal Register / Vol. 57, No. 127 / Wednesday, July 1. 1992 / Proposed Rules_______29235
restoration plans submitted under
section 38.
2. Schedule for Submission and Review
of Capital Plans
The statute requires the agencies to
establish by regulation deadlines for the
submission and review of capital
restoration plans. The agencies propose
to adopt the schedule generally
established in the statute. Under this
schedule, an institution would generally
be required to submit a capital
restoration plan within 45 days of
receiving notice or having been deemed
to have notice that the institution is
undercapitalized, significantly
undercapitalized or critically
undercapitalized. A s discussed above,
an institution is deem ed to have been
notified of its capital category on the
date that it is required to file its Call
Report, the date that the institution
receives its final report of examination
or inspection, or the date that the
appropriate federal banking agency
notifies the institution of the institution's
capital category (based on an
adjustment to capital reported by the
institution or on other information
obtained by the agency). Under the
proposal, the appropriate federal
banking agency may change this period
in individual cases, in which case the
agency would notify the institution that
a different schedule has been adopted.
The proposed schedule would require
the appropriate federal banking agency
to review each capital restoration plan
within 60 days o f submission of the plan
unless the agency extends the time for
review. The agencies propose to provide
written notice to the institution
regarding whether the agency has
approved or rejected the capital plan.
The agency would also provide a copy
of each acceptable capital restoration
plan, or amendments thereto, to the
FDIC within 45 days of accepting the
plan.
Com m ent 27: The agencies request
comment on the proposed time
schedules for submission and review of
a capital restoration pjan.
3. Failure to Submit or Implement an
Acceptable Capital Plan
In the event that the appropriate
federal banking agency has disapproved
an institution’s capital restoration plan,
the proposal would require the
institution to submit a new capital
restoration plan within a time specified
by the appropriate federal banking
agency. During the period following
notice of such disapproval and prior to
approval by the agency of a new or
revised capital plan, the institution
would be subject to all of the provisions
in section 38 that apply to
undercapitalized institutions that have
failed to submit and implement, in any
material respect, an acceptable capital
restoration plan.
The proposed regulation incorporates
the provision of section 38 that makes
any insured depository institution that is
undercapitalized and fails to submit or
implement a capital restoration plan
within the required time subject to the
provisions applicable to significantly
undercapitalized institutions. Under the
proposal these provisions apply
immediately upon expiration of the time
for submission of a capital restoration
plan. Accordingly, under the proposal,
an undercapitalized institution that fails
to submit a capital restoration plan
within the required time would, upon the
expiration of that period, become
subject to the mandatory and
discretionary provisions of section 38
outlined above that are applicable to
significantly undercapitalized
institutions, including limitations on the
compensation paid to senior executive
officers. An undercapitalized institution
that fails to implement, in any material
respect, its capital restoration plan
would immediately be subject to these
same provisions upon the institution’s
failure to implement the plan.
C om m ent 28-. The agencies invite
comment on each of these aspects of the
proposed rule,
4. Content of Capital Restoration Plans
Section 38 provides that the
appropriate federal banking agency may
not accept a capital restoration plan
unless the plan:
(1) Contains the information required
by statute;
(2) Is based on realistic assumptions
and is likely to succeed in restoring the
institution’s capital; and
(3) Would not appreciably increase
the risk (including credit risk, interestrate risk, and other types of risk) to
which the institution is exposed.
The statute also provides that the
appropriate federal banking agency may
not approve a capital restoration plan
unless each company that controls the
institution guarantees the institution’s
compliance with the plan until the
institution has been adequately
capitalized for each o f four consecutive
calendar quarters, and provides
appropriate assurances of performance.
This guarantee by any controlling
company is independent of any liability
of affiliates of the depository institution
pursuant to the cross-guarantee
provision of the FDI Act.
5. Capital Plan Performance Guarantee
The agencies propose to implement
the performance guarantee provision,
contained in section 38(e)(2)(E), by
requiring each company to submit a
written guarantee of any capital plan
submitted by an undercapitalized,
significantly undercapitalized, or
critically undercapitalized institution
controlled by the company. This
guarantee would include assurance that
the institution would fulfill any
commitments to raise capital made in
the plan. Each company that provides
the guarantee would be jointly and
severally liable for fulfillment of the
guarantee. Liability could extend to the
amount necessary (up to the statutory
limit of liability) to restore the
institution to applicable capital
standards. Failure of any company that
controls an undercapitalized institution
to provide the required guarantee causes
the institution to become subject to the
provisions of section 38 applicable to
significantly undercapitalized
institutions.
Com m ent 29: The agencies request
comment on whether the rule should
provide greater detail regarding the
content and form of the guarantee.
Com m ent 30: In addition, the agencies
request comment on what assurances
the agencies should find to be
"appropriate assurances of
performance” of the capital plan and
guarantee. Section 38 appears to permit
the agencies to determine the
appropriateness of assurances in
connection with the agency's review of
the capital restoration plan.
Com m ent 31: The agencies seek
comment on whether there are
particular assurances that the agencies
should require by regulation in all cases.
For example, should the agencies
require a guarantor to demonstrate that
it has sufficient financial resources to
honor the guarantee?
The statute limits the aggregate
liability under the capital performance
guarantee of all companies that control
a given insured depository institution to
the lesser of:
(1) An amount equal to 5 percent of
the institution's total assets at the time
the institution became undercapitalized;
or
(2) The amount necessary (or that
would be necessary) to bring the
institution into compliance with all
capital standards applicable with
respect to such institution as of the time
the institution fails to comply with its
capital restoration plan.
In incorporating this provision into the
regulation, the agencies propose to
29236______ Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
adopt the same definition of total assets liability, and, if so, when that
for purposes of computing the first
calculation should be made.
component o f the limit on liability as
Com m ent 36: In addition, the agencies
would be used in determining the capital request comment on whether any
category of the institution.
additional regulatory clarifications of
Com m ent 32: Accordingly, as
the holding company guarantee are
necessary.
discussed above in connection with the
definition of capital categories, the
6. Priority in Bankruptcy
agencies request comment on whether
It should be noted that the FDIC will
the definition of total assets should be
have a priority claim in any bankruptcy
based on a period average of total
assets (as proposed above) or should be proceedings of a holding company that
has guaranteed an institution’s
based on a daily report of the
compliance with a capital restoration
institution’s total assets.
plan. The FDIC’s claim against a holding
The agencies also propose that the
company's estate would have priority
second component of the limit on
over the claims of unsecured creditors
liability refers to the amount necessary
to restore the capital of the institution to and is provided for in section 507(a)(8)
the applicable minimum capital levels as of title 11 of the United States Code, as
amended by the Crime Control Act of
those levels were defined at the time
1990, Public Law 101-647,104 Stat. 4789.
that the institution initially failed to
Sections 365(o) and 523(a)(12) of title 11
comply with its capital plan. The
amount of a capital guarantee would not of the United States Code, as amended
change if the minimum capital adequacy by the Crime Control Act of 1990, also
provide special protections for the FDIC,
requirements change after the time the
institution initially failed to comply with 7. Submission of Plans by Reclassified
its capital restoration plan.
Institutions
Com m ent 33: The agencies request
Section 38(g) provides that an
comment on this clarification of the
institution that has been reclassified to a
statutory provision.
different capital category as a result of
The proposed rule also implements
an agency determination that the
the statutory provision that limits the
institution is in an unsafe or unsound
duration of a guarantee of a capital plan. condition or is engaged in an unsafe or
Under the proposal, the appropriate
unsound practice must describe the
federal banking agency would provide
steps the institution will take to address
notice to the company that the
these deficiencies. Section 38(g) also
guarantee has expired once the
provides that an institution that
depository institution has remained
nominally has adequate capital but has
adequately capitalized for four
been reclassified to the under
consecutive calendar quarters. The
capitalized category because of its
proposal makes clear that expiration of
condition or practices is not required to
a guarantee or fulfillment of a guarantee submit a capital restoration plan. The
given by a company in connection with
portions of the proposed regulation
one capital restoration plan does not
regarding capital restoration plans
relieve the company from the obligation
reflect these provisions.
to guarantee another capital restoration
Com m ent 37: While section 38 does
plan that may be required at a future
not require an institution that nominally
date for the same institution if it again
has adequate capital but has been
becom es undercapitalized. Similarly, the reclassified to the undercapitalized
fact that a company has, at one time,
category to file a capital restoration
fulfilled a guarantee by providing
plan, the agencies request comment
resources to an institution up to the
regarding whether it is appropriate for
statutory limit would not reduce the
the agencies to exercise their general
amount of any guarantee of a future
supervisory authority to require such an
capital plan for the same institution.
institution to submit a description of the
Moreover, the provision or fulfillment by steps the institution will take to address
a company of a guarantee for one
the deficiencies in the institution’s
institution does not affect the obligation condition.
of that company to guarantee a capital
8. Revised Capital Restoration Plans
plan in connection with any other
insured depository institution.
Under the proposal, and insured
Com m ent 34: The agencies request
depository institution that is operating
comment on these provisions of the
under a capital restoration plan that has
proposal.
been approved by the appropriate
Com m ent 3& The agencies also
federal banking agency would not
request comment on whether the
generally be required to submit an
agencies should establish by regulation
additional or a revised capital
a time for computing the limit on
restoration plan if the institution’s
capital classification changes, unless the
agency notifies the institution that a
new or revised capital restoration plan
is required. Under this proposal, for
example, an undercapitalized institution
that is implementing an approved
capita] restoration plan would not be
required to submit a second or revised
capital restoration plan if the institution
experienced further declines in its
capital levels unless the appropriate
federal banking agency determined that
a new plan w as appropriate in light of
the particular circumstances.
Com m ent 38: The agencies request
comment on this approach and on
whether the agencies should, by
regulation, require each insured
depository institution to file a new or
revised capital restoration plan in the
event that the institution’s capital
category has changed.
L O ther M atters
1. Definition o f "Management Fee"
Section 38 of the FDI Act prohibits
any institution from paying management
fees to a controlling person if, following
the payment of those fees, the institution
would be undercapitalized. The statute
does not provide a definition of
management fees. The agencies have
proposed to define management fees to
include any payment of money or
provision of any other thing of value to «
company or individual for the provision
of management services or advice other
than compensation paid to an individual
in the individual’s capacity as an officer
or employee of the institution. This
definition covers all companies,
including consulting firms, companies
owned by the principal shareholder of
an institution, and servicing
corporations owned by bank holding
companies. Under the proposal,
compensation for duties performed by
an officer or em ployee of the institution
would not be deemed to be a
management fee for purposes of section
38.
Com m ent 39: The agencies request
comment on the proposal’s provisions
regarding management fees and
compensation in light of the purpose of
section 38 of limiting losses to the
deposit insurance funds that might result
from the payment o f dividends or the
payment of management fees by an
undercapitalized institution or an
institution that would be
undercapitalized after the payment.
2. Definition of “Control”
Certain provisions o f section 38 apply
to companies that “control’’ ah insured
depository institution. Section 38 of the
Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules_______29237
FDI A ct does not define the term
"control". However, section 3 of the FDI
A ct adopts the definition of "control”
contained in section 2 of the Bank
Holding Company Act ("BHC A ct”) (12
U.S.C. 1841(a)(2)). Under the BHC Act, a
company controls an institution if (1) the
company ow ns or controls 25 percent or
more of any class of voting securities of
that institution; (2) the company controls
in any manner the election of a majority
of the board of directors of the
institution; or (3) the agency determines,
after notice and opportunity for hearing,
that the company exercises a controlling
influence over the management or
policies of the institution.
Other provisions of the BHC Act
exclude certain types of share
ownership from the provisions of the
BHC Act, including shares acquired by a
company in satisfaction of a debt
previously contracted (“DPC”) or shares
held by a company in a fiduciary
capacity.
Com m ent 40: The agencies request
comment on whether it would be
appropriate under section 38 to provide,
by regulation, an exception from the
definition of “control” for shares
acquired DPC or shares held in a
fiduciary capacity.
Com m ent 41: In particular, the
agencies request comment on whether
the agencies should by regulation adopt
the DPC and fiduciary ownership
exceptions contained in section 2(a)(5)
of the Bank Holding Company Act.
Section 2(a)(5) of the BHC Act (12 U.S.C.
1841(a)(5)) permits a company to hold
shares of a depository institution
acquired DPC without becoming subject
to the restrictions of that Act provided
that the company disposes of the shares
within two years (with the possibility of
three one-year extensions). Section
2(a)(5) also permits a company to hold
shares of a depository institution in a
fiduciary capacity without becoming
subject to the restrictions of the BHC
Act provided that the company does not
retain sole right to vote the shares.
Com m ent 42: Finally, in the event that
an exception for shares acquired DPC is
included in the regulations implementing
section 38, the agencies request
comment on whether the exception
should include conditions similar to
those contained in the DPC exception to
section 5 of the FDI Act (12 U.S.C.
1815(e)), which imposes cross-guarantee
requirements on affiliated institutions.
Section 5 of the FDI Act contains an
exception for the acquisition by an
insured depository institution of shares
of another depository institution in
satisfaction of a debt previously
contracted. That exception is
conditioned on the requirement that all
transactions betw een the controlling
institution or any affiliate of the
controlling institution and the subsidiary
institution comply with the restrictions
contained in sections 23A and 23B of the
Federal Reserve Act.
3. Applicability of Capital Categories to
Bank Holding Companies and Savings
and Loan Holding Companies
Section 38 applies capital-based
prompt corrective action to insured
depository institutions but not to holding
companies that control such institutions.
However, various provisions of section
38 apply to companies that control
insured depository institutions. These
provisions appear to apply to holding
companies regardless of the capital level
of those holding companies.
The Federal Reserve Board and the
OTS do not propose to adopt a parallel
framework of capital categories for
holding companies. Instead, the Federal
Reserve intends to consult with the
federal banking agency for each insured
depository institution subsidiary of the
holding company to monitor supervisory
actions required under section 38, and,
in the supervision of the holding
company, to take appropriate action at
the holding company level based on an
assessm ent of these developments. In
supervising savings and loan holding
companies, the OTS w ill also take
appropriate action at the holding
company level based on an assessm ent
of the actions taken under section 38
regarding its savings association
subsidiaries.
Com m ent 43: The agencies request
comment on whether it is appropriate
for the agencies to exercise their
supervisory authority under other
provisions of law to establish a
framework of supervisory actions for
bank holding companies and savings
and loan holding companies similar to
those established in section 38 for
insured depository institutions.
4. Restrictions on Activities of Critically
Undercapitalized Institutions
Section 38(i) of the FDI Act provides
that the FDIC must, by regulation or
order, restrict the activities of critically
undercapitalized institutions. The
activities that must be restricted are
described above. In order to facilitate
state member banks providing
comments on the FDIC’s proposal to
implement the restrictions on section
38(i), the following discussion of the
FDIC proposal has been provided.
The FDIC proposes to rely on existing
industry or regulatory guidance, to the
extent possible, when evaluating and
applying each of the restrictive
provisions of section 38(i) and to
continue to coordinate closely with the
primary Federal and/or State banking
regulators. The interagency procedures
implemented will be similar to those
already in place at both the Federal
agency and state banking department
levels. For example, prior to imposing
any order restricting or prohibiting an
institution from engaging in any of the
activities that can be restricted, the
FDIC would consult with the
appropriate federal banking agency and
State banking agency, as appropriate.
FDICIA does not provide specific
guidance on how to interpret and
implement each of the above restrictive
provisions. Consequently, the FDIC is
considering a number of options.
The prohibition on entering into "any
material transaction other than in the
usual course of business” can be
interpreted in a general fashion relying
on outstanding case law in the area of
securities disclosures. The concept of
materiality also could be defined from
an accounting perspective by
establishing specific limits for
determining materiality. For example,
the FDIC could, by regulation, require
that any prospective transaction other
than one that is in the usual course of
business that results or could result in a
5 percent change in an institution’s
tangible equity capital account or net
income account would automatically be
considered a material transaction
requiring the FDIC’s prior approval.
Other transactions could be defined as
material on a case by case basis.
Com m ent 44: The FDIC solicits
comment on how to define the terms
"material” and “usual course of
business" as w ell as what specific
guidance, if any, should be provided by
the FDIC to the banking industry.
The FDIC proposes to define the term
"highly leveraged transaction” by
utilizing the currently outstanding
interagency definition published in the
Federal Register (57 FR 5040, February
11,1992). The FDIC proposes to rely on
existing generally accepted accounting
principles w hen interpreting the
restriction on making any “material
change in accounting method.”
Section 39(c) of the FDI Act requires
the federal banking agencies to
prescribe standards for determining
when compensation paid to employees,
directors and principal shareholders of
insured depository institutions is
excessive. An advance notice of
proposed rulemaking is expected to be
published in the Federal Register in the
near future. The FDIC intends to
interpret the restrictive provision of
section 38(i) involving the payment of
excessive compensation or bonuses in a
29238_______Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 f Proposed Rules
manner that is consistent with the
FDIC’s actions in fulfilling the
requirements of section 39(c) of the FDI
Act.
The provision that restricts “paying
interest on new or renewed liabilities at
a rate that would increase the
institution’s weighted average cost of
funds to a level significantly exceeding
the prevailing rates of interest on
insured deposits in the institution's
normal market areas" contains terms
that relate to the changes mandated by
section 301 of FDICIA and the revisions
of § 337.6 of the FDIC’s regulations as
recently implemented by the FDIC. The
FDIC proposes to interpret the phrase
"significantly exceeding the prevailing
rates” the same as defined in § 337.6.
The prevailing effective yields of
interest are the effective yields on
insured deposits of comparable
maturities offered by other insured
depository institutions in the market
area in which deposits are being
solicited. A rate of interest on a deposit
with an odd maturity will be considered
excessive if it is more than 75 basis
points higher than the yield calculated
by interpolating betw een the yields
offered by other depository institutions
on deposits of the next longer and
shorter maturities offered in the market.
A market area is any readily defined
geographic area in which the rates
offered by any one insured depository
institution operating in the area may
affect the raters offered by other
institution operating in the same area.
The FDIC invites comments on all
aspects of these proposed
interpretations.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) requires an initial
regulatory flexibility analysis with any
notice of proposed rulemaking. A
description of the reasons why the
action by the Board is being considered
and a statement of the objectives of, and
legal basis for, the proposed rule are
contained in the supplementary
information above. There are no
relevant federal rules that duplicate,
overlap, or conflict with the proposed
rule.
The proposed rule implements the
prompt corrective action provisions of
section 131 of FDICIA for all state
member banks, regardless of size. The
regulation requires each bank to monitor
its capital levels and to report to the
Board any event that would change the
bank’s capital category. The proposed
rule requires that a bank that becom es
undercapitalized, significantly
undercapitalized, or critically
undercapitalized submit a capital
restoration plan.
The proposal is not expected to have
a significant economic impact on a
substantial number of small entities
within the meaning of the Regulatory
Flexibility Act. The filing of the capital
plan is a requirement imposed by statute
and occurs only w hen an institution
initially becom es undercapitalized,
significantly undercapitalized, or
critically undercapitalized. In
establishing a mechanism for gathering
sufficient information to determine the
appropriate capital category for each
state member bank, the Board has
attempted to reduce the burden imposed
on such banks by relying primarily on
the call report that must already be filed
and on reports of examination that
would otherwise take place. No
additional regular reporting requirement
has been proposed. Rather, each state
member bank is required to monitor its
capital levels— an effort that analysts at
an institution should already be
undertaking—and report to the Board
only when an event occurs that would
change the capital category in which the
banks w as previously placed.
Paperwork Reduction
The proposal would require certain
state member banks to file capital
restoration plans and would require all
banks to monitor their capital levels and
report any event that would result in a
change in capital category under prompt
corrective action. A s described above,
the filing of a capital plan occurs only
under limited circumstances and is
required by statute. The requirement
that a state member bank notify the
Board of an event that would change its
capital category is intended to
supplement existing call report data and
reports of examination, and should be
triggered infrequently. The institution
should not be required to engage in
significant additional recordkeeping to
comply with this requirement.
List of Subjects
12 CFR P art 208
Accounting, Agriculture, Banks,
Banking, Confidential business
information, Currency, Federal Reserve
System, Reporting and recordkeeping
requirements, Securities.
12 CFR P art 263
Administrative practice and
procedure, Federal Reserve System.
For the reasons outlined above, the
Board of Governors proposes to amend
12 CFR parts 208 and 263 as set forth
below:
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
1. The authority citation for 12 CFR
part 208 is revised to read as follows:
Authority: Secs. 9 ,11(a), 11(c), 19, 21, 25
and 25(a) of the Federal Reserve Act, as
am ended (12 U.S.C. 321-338, 248(a), 248(c),
461, 481-480, 601, and 611, respectively); secs.
4 ,13(j) and .38 of the Federal Deposit
Insurance Act, as am ended (12 U.S.C. 1814,
1823(j), and 1831o, respectively); sec. 7(a) of
the International Banking Act of 1978 (12
U.S.C. 3105); secs. 907-910 of the
International Lending Supervision Act of 1983
(12 U.S.C. 3906-3909); secs. 2 ,12(b), 12(g),
12(i), 15B(c)(5), 17,17A, and 23 of the
Securities Exchange Act of 1934 (15 U.S.C.
78b, 781(b), 1781(g), 781(i), 78o-4(c)(5), 78q,
78q-l, and 78w, respectively); sec. 5155 of the
Revised Statutes (12 U.S.C. 36) as am ended
by the McFadded Act of 1927; and secs. 11011122 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (12
U.S.C. 3310 and 3331-3351).
2. The undesignated centerheading
preceding § 208.1 is removed, §§ 208.1
through 208.19 are designated as subpart
A to part 208, and the subpart A heading
is added to read as follows:
Subpart A—General Provisions
3. Subpart B, comprising § § 208.30
through 208.35, is added to part 208 to
read as follows:
Subpart B—Prompt Regulatory Action
Sec.
208.30 Authority, purpose, applicability and
other supervisory authority.
208.31 Definitions.
208.32 Financial data calculations and
notice of capital category.
208.33 Capital measures and capital
category definitions.
208.34 Capital restoration plans.
208.35 M andatory and discretionary
supervisory actions and section 38.
Subpart B—Prompt Regulatory Action
§ 208.30 Authority, purpose, applicability
and other supervisory authority.
(a) A uthority. This subpart is issued
by the Board of Governors of the
Federal Reserve System (Board)
pursuant to section 38 (section 38) of the
Federal Deposit Insurance Act (FDI
Act), as added by section 131 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (Pub. L. 102242,105 Stat. 2236 (1991)) (12 U.S.C.
1831o).
(b) Purpose. Section 38 of the FDI Act
establishes a framework of supervisory
actions for insured depository
institutions that are not adequately
capitalized. The principal purpose of
this subpart is to define, for state
member banks, the capital measures
Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules_______29239
and capital levels that are used for
determining the supervisory actions
authorized under section 38 of the FDI
Act. This subpart also establishes
procedures for submission and review of
capital restoration plans and for
issuance and review of orders pursuant
to that section.
(c) A p p lica b ility. This subpart
implements the provisions of section 38
of the FDI Act as they apply to state
member banks. Certain of these
provisions also apply to officers,
directors and em ployees of state
member banks. Other provisions apply
to any company that controls a state
member bank and to the affiliates of a
state member bank.
(d) O th er S u pervisory A uthority.
Neither section 38 nor this subpart in
any w ay limits the authority of the
Board under any other provision of law
to take supervisory actions to address
unsafe or unsound practices, deficient
capital levels, violations of law or
regulation, unsafe or unsound
conditions, or other practices. Action
under section 38 of the FDI A ct and this
subpart may be taken independently of,
in conjunction with, or in addition to
any other enforcement action available
to the Board, including issuance of cease
and desist orders, capital directives,
approval or denial of applications or
notices, assessm ent of civil money
penalties, or any other actions
authorized by law.
(e) L im ited S cope o f C ap ital
Categories. The assignment of a bank
under this subpart within a particular
capital category is for purposes of
implementing and applying the
provisions of section 38 and, unless
permitted by the Board or otherwise
required by law or regulation, may not
be used by, for, or on behalf of a state
member bank for any other purpose.
§208.31 Definitions.
For purposes of this subpart, except as
modified in this section or unless the
context otherwise requires, the terms
used in this subpart have the same
meanings as set forth in sections 38 and
3 of the FDI Act.
(a) L everage ra tio means the ratio of
Tier 1 capital to average total
consolidated assets, as calculated in
accordance with the Board’s Capital
Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
(appendix B to part 208).
(b) M anagem ent fe e m eans any
payment of money or provision of any
other thing of value to a company or
individual for the provision of
management services or advice to the
bank, other than com pensation to an
individual in the individual’s capacity as
an officer or employee of the bank.
(c) R isk-w eigh ted a sse ts m eans total
weighted risk assets, as calculated in
accordance with the Board’s Capital
Adequacy Guidelines for State Member
Banks: Risk-Based Measure (appendix A
to part 208).
(d) Tangible eq u ity m eans the amount
of Tier 1 capital as calculated in
accordance with the Board’s Capital
A dequacy Guidelines for State Member
Banks: Risk-Based Measure (appendix A
to part 208).
(e) T ier 1 ca p ita l means the amount of
Tier 1 capital as defined in the Board’s
Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
(appendix A to part 208).
(f) T ier 1 risk -b a sed c a p ita l ratio
m eans the ratio of Tier 1 capital to
w eighted risk assets, as calculated in
accordance with the Board’s Capital
A dequacy Guidelines for State Member
Banks: Risk-Based Measure (appendix A
to part 208).
(g) T otal a sse ts m eans average total
consolidated assets as calculated in
accordance with the Board’s Capital
Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
(appendix B to part 208).
(h) T otal risk -b a sed c a p ita l ratio
m eans the ratio of qualifying total
capital to risk-weighted assets, as
calculated in accordance with the
Board’s Capital Adequacy Guidelines
for State Member Banks: Risk-Based
Measure (appendix A to part 208).
purposes of section 38 of the FDI Act
and this subpart; or
(5) The date any written notice is
served in the bank that the bank's
capital category has been changed
pursuant to § 208.33(c).
(c) Adjustments of reported capital
levels and category— (1) N o tice o f
adju stm ent to be p ro v id e d b y bank. A
state member bank shall provide the
Board with written notice that an
adjustment to the bank’s capital
category may have occurred no later
than 5 calendar days following the
earlier of the date that the bank:
(1) Reports, or has determined to
report, any event that would cause the
bank to be placed in a different capital
category from the category assigned to
the bank for purposes of section 38 and
this subpart on the basis of the bank’s
most recent Call Report or report of
examination or inspection; or
(ii) Determines that any event has
occurred that would cause the bank to
be placed in a different capital category
from the category assigned to the bank
for purposes of section 38 and this
subpart on the basis of the bank's most
recent Call Report or report of
Examination or inspection.
(2) D eterm ination to change ca p ita l
category. After receiving notice
pursuant to paragraph (c)(1) of this
section, the Board shall determine
whether the capital category of the bank
should be changed and shall notify the
bank of the Board’s determination.
§ 208.32 Financial data calculations and
notice of capital category.
(a) E ffective d a te o f determ ination o f
c a p ita l category. A state member bank
shall be deem ed to be within a given
capital category for purposes of section
38 of the FDI Act and this subpart as of
the date the bank is notified of, or is
deemed to have notice of, its capital
category, pursuant to paragraph (b) of
this section.
(b) N o tice o f c a p ita l category. A state
member bank shall be deem ed to have
notice of its capital levels and its capital
category as of the most recent of:
(1) The date of Report of Condition
and Income (“Call Report”) is required
to be filed with the Board;
(2) The date a final report of
examination or report of inspection is
delivered to the bank;
(3) The date that the Board provides
written notice to the bank that the
bank's capital category has changed as
provided in paragraph (C) of this
section;
(4) The date that the Board provides
written notice to the bank of its capital
levels and its capital category for
§ 208.33 Capital m easures and capital
category definitions.
(a) C apital m easures. For purposes of
section 38 and this subpart the relevant
capital measures shall be:
(1) The total risk-based capital ratio;
(2) The Tier 1 risk-based capital ratio;
and
(3) The leverage ratio.
(b) C apital categories. For purposes of
the provisions of section 38 and this
subpart, a state member bank shall be
deemed to be:
(1) “W ell capitalized” if the bank:
(1) Has a total risk-based capital ratio
of 10.0 percent or greater;
(ii) Has a Tier 1 risk-based capital
ratio of 6.0 percent or greater;
(iii) Has a leverage ratio of 5.0 percent
or greater, and
(iv) Is not subject to any order of final
capital directive by the Board to meet
and maintain a specific capital level for
any capital measure.
(2) "Adequately capitalized” if the
bank:
(i)
Has a total risk-based capital ratio
of 8.0 percent or greater;
29240______ Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
(ii) Has a Tier 1 risk-based capital
ratio of 4.0 percent or greater;
(iii) Has—
(A) A leverage ratio of 4.0 percent or
greater, or
(B) A leverage ration of 3.0 percent or
greater if the bank is rated composite 1
under the CAMEL rating system in the
most recent examination or inspection
of the bank and is not experiencing or
anticipating significant growth; and
(iv) Does not meet the definition of a
“well capitalized" bank.
(3) “undercapitalized” if the bank—
(i) Has a total risk-based capital ratio
that is less than 8.0 percent; or
(ii) Has a Tier 1 risk-based capital
ratio that is less than 4.0 percent; or
(iii) (A) Except as provided in clause
(B), has a leverage ratio that is less than
4.0 percent; or
(B) If the bank is rated composite 1
under the CAMEL rating system in the
most recent examination or inspection
of the bank, has a leverage ratio that is
less than 3.0 percent.
(4) “Significantly undercapitalized” if
the bank has—
(i) A total risk-based capital ratio that
is less than 6.0 percent; or
(ii) A Tier 1 risk-based capital ratio
that is less than 3.0 percent; or
(iii) A leverage ratio that is less than
3.0 percent.
(5) “Critically undercapitalized" if the
bank has a ratio of tangible equity to
total assets that is equal to or less than
2.0 percent.
(c)
C lassification b a sed on
su p ervisory criteria oth er than capital.
The Board may reclassify a well
capitalized state member bank as
adequately capitalized and may require
an adequately capitalized or an
undercapitalized state member bank to
comply with supervisory actions as if it
were in the next lower capital category
(except that the Board may not
reclassify a significantly
undercapitalized bank as critically
undercapitalized) in the following
circumstances:
(1) Unsafe or unsound conditions. The
Board has determined, after notice and
opportunity for hearing pursuant to
§ 263.202(a) of this chapter, that the
bank is in unsafe or unsound condition;
or
(2) Unsafe or unsound practice. The
Board has determined, after notice and
opportunity for response pursuant to
§ 263.202(b) of this chapter, that the
bank has received, and not corrected, a
less-than-satisfactory rating for any of
the categories of asset quality,
management, earnings, or liquidity in
the most recent examination or
inspection of the bank.
§ 208.34 Capital restoration plans.
(a) Schedule o f filin g plan —(1) In
general. A state member bank must file
a written capital restoration plan with
the appropriate Reserve Bank within 45
days of the date that the bank receives
notice or is deemed to have notice that
the bank is undercapitalized,
significantly undercapitalized, or
critically undercapitalized, unless the
Board notifies the bank in writing that
the plan must be filed within a different
period. A bank that has been
reclassified as undercapitalized
pursuant to § 208.33(c) is not required to
submit a capital restoration plan solely
by virtue of the reclassification.
(2) A d ditio n al ca p ita l restoration
plan s. Notwithstanding paragraph (a)(1)
of this section, a bank that has already
submitted and is operating under a
capital restoration plan approved under
section 38 and this subpart is not
required to submit an additional capital
restoration plan based on a revised
calculation of its capital measures
unless the Board notifies the bank that it
must submit a new or revised capital
plan. A bank that is notified that it must
submit a new or revised capital
restoration plan shall file the plan in
writing with the appropriate Reserve
bank within 45 days of receiving such
notice, unless the Board notifies the
bank in writing that the plan is to be
filed within a different period.
(b) Contents o f plan. All financial data
submitted in connection with a capital
restoration plan shall be prepared in
accordance with the instructions
provided on the Call Report, unless the
Board instructs otherwise. The capital
restoration plan shall include all of the
information required to be filed under
section 38(e)(2) of the FDI Act, including
any performance guarantee required to
be executed under section 38(e)(2)(C) of
that Act by each company that controls
the bank. A bank that is required to
submit a capital restoration plan as the
result of a reclassification of the bank
pursuant to § 208.33(c) shall include a
description of the steps the bank will
take to correct the unsafe or unsound
condition or practice.
(c) R e view o f ca p ita l restoration
plan s. Within 60 days after receiving a
capital restoration plan under this
subpart, the Board will provide written
notice to the bank of whether the plan
has been approved. The Board may
extend the time within which notice
regarding approval of a plan shall be
provided.
(d) D isapproval o f ca p ita l plan. If a
capital restoration plan is not approved
by the Board, the bank must submit a
revised capital restoration plan within
the time specified by the Board. Upon
receiving notice that its capital
restoration plan has not been approved,
any undercapitalized state member
bank (as defined in § 208.33(b)(3)) shall
be subject to all of the provisions of
section 38 and this subpart applicable to
significantly undercapitalized
institutions. These provisions shall be
applicable until such time as a new or
revised capital restoration plan
submitted by the bank has been
approved by the Board.
(e) Failure to su bm it a ca p ita l
restoration plan. A state member bank
that is undercapitalized (as defined in
§ 208.33(b)(3)) and that fails to submit a
written capital restoration plan within
the period provided in this section shall,
upon the expiration of that period, be
subject to all of the provisions of section
38 and this subpart applicable to
significantly undercapitalized
institutions.
(f) Failure to im plem en t a ca p ita l
restoration plan. Any undercapitalized
state member bank that fails in any
material respect to implement a capital
restoration plan shall be subject to all of
the provisions of section 38 and this
subpart applicable to significantly
undercapitalized institutions.
(g) A m endm ent o f ca p ita l plan. A
bank that has filed an approved capital
restoration plan may, after prior written
notice to and approval by the Board,
amend the plan to reflect a change in
circumstance. Until such time as a
proposed amendment has been
approved, the bank shall implement the
capital restoration plan as approved
prior to the proposed amendment.
(h) N otice to FDIC. With 45 days of
the effective date of Board approval of a
capital restoration plan, or any
amendment to a capital restoration plan,
the Board w ill provide a copy of such
plan or amendment to the Federal
Deposit Insurance Corporation.
(i) Perform ance guarantee b y
com panies th at control a bank.—(1)
L im itation on lia b ility .— (i) Am ount
lim itation. The aggregate liability under
the guarantee provided under section 38
and this subpart for all companies that
control a specific state member bank
that is required to submit a capital
restoration plan under this subpart shall
be limited to the lesser of:
(A) An amount equal to 5.0 percent of
the bank’s total assets at the time the
bank w as notified or deem ed to have
notice that the bank w as
undercapitalized; or
(B) The amount necessary to restore
the relevant capital measures of the
bank to the levels required for the bank
to be classified as adequately
capitalized, as those capital measures
Federal Register / VoL 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
29241
undercapitalized, the bank shall become designated as subpart E of part 208, and
subject to the provisions of section 38 of the subpart E heading is added to read
as follows:
the FDI Act—
(i) Restricting payment of capital
Subpart E—Interpretations
distributions and management fees
(section 38(d));
PART 263—RULES OF PRACTICE FOR
(ii) Requiring that the Board monitor
HEARINGS
the condition of the bank (section
38(e)(1));
1. The authority citation for 12 CFR
(iii) Requiring submission of a capital
part 263 is revised to read as follows:
restoration plan within the schedule
Authority: 5 U.S.C. 504; 12 U.S.C. 248. 324,
established in this subpart (section
504, 505,1817(j), 1818.1828(c), 18310,1847(b),
38(e)(2));
1847(d), 1884(b), 1972(2)(F), 3105, 3107, 3108,
(iv) Restricting the growth of the
3907, 3909,15 U.S.C. 21, 78o-4, 78o-5, and
bank’s assets (section 38(e)(3)); and
78u—2.
(v) Requiring prior approval of certain
2. Section 263.50(b) is amended by
expansion proposals (section 38(e)(4)).
removing the word “and” at the end of
(3) A d d itio n a l p ro visio n s ap plicable
paragraph (b)(9), removing the period at
to sig n ifican tly u n dercapitalized, an d
the end of paragraph (b)(10) and adding
c ritic a lly u n d ercapitalized banks. In
in its place a semicolon, and by adding
addition to the provisions of section 38
paragraphs (b )(ll) through (b)(14) to
of the FDI Act described in paragraph
read as follows:
(a)(2) of this section, immediately upon
receiving notice or being deemed to
§ 263.50 Purpose and scope.
have notice, as provided in § 208.32 or
*
*
*
*
*
§ 208.34 of this subpart, that the bank is
(b) * * *
significantly undercapitalized, or
(11) Issuance of a prompt corrective
critically undercapitalized, the bank
shall become subject to the provisions of action directive to a member bank under
section 38 of the FDI Act (12 U.S.C.
section 38 of the FDI Act that restrict
1831o);
compensation paid to senior executive
(12) Reclassification of a member
officers of the institution (section
bank on grounds of unsafe or unsound
38(f)(4)).
(4) A d d itio n a l p ro visio n s ap plicable
condition under section 38(g)(1) of the
to c ritic a lly u n dercapitalized banks. In
FDI Act (12 U.S.C. 18310(g)(1));
addition to the provisions of section 38
(13) Reclassification of a member
of the FDI Act described in paragraphs
bank on grounds of unsafe and unsound
(a) (2) and (3) of this section,
practice under section 38(g)(1) of the FDI
immediately upon receiving notice of
Act (12 U.S.C. 1831o(g)91)); and
being deem ed to have notice, as
(14) Issuance of an order requiring a
provided in § 208.32 or § 208.34 of this
member bank to dismiss a director or
subpart, that the bank is critically
senior executive officer under section
undercapitalized, the bank shall become 38(e)(5) and 38(f)(2)(F)(ii) of the FDI Act
subject to the provisions of section 38 of (12 U.S.C. 18310(e)(5) and
the FDI Act—
1831o(f)(2)(F)(ii)).
(i) Restricting the activities of the
3. A new subpart H is added to part
bank (section 38(h)(1)); and
263 to read as follows:
(ii) Restricting payments on
Subpart H—Issuance and Review of Orders
subordinated debt of the bank (section
Pursuant to Prompt Regulatory Action
38(h)(2)).
(b) D iscretio n ary su p erviso ry actions. Sec.
§ 208.35 Mandatory and discretionary
In taking any action under section 38
§ 263.200 Scope.
supervisory actions under section 38.
§ 263.201 Directives to take prompt
that is within the Board’s discretion to
regulatory action
(a) M an datory su p erviso ry action s.—
take in connection with a state member
| 263.202 Procedures for reclassifying a state
bank that is deemed to be
(1) P rovision s app licab le to a ll banks.
member bank based on criteria other
All state member banks are subject to
undercapitalized, significantly
than capital.
the restrictions contained in section
undercapitalized or critically
S 263.203 Order to dismiss a director or
undercapitalized, an officer or director
38(d) of the FDI Act on payment of
senior executive officer.
of such bank, or a company that controls I 263.204 Enforcement of directives.
capital distributions and management
fees.
such bank, the Board will follow the
(2) P rovision s applicable to
procedures for issuing directives under
SUBPART H—INSURANCE AND
undercapitalized, sign ifican tly
§ § 263.201 and 263.203 of this chapter,
REVIEW OF ORDERS PURSUANT TO
u n dercapitalized, an d c ritic a lly
unless otherwise provided in section 38
PROMPT REGULATORY ACTION
u n d ercap italized banks. Immediately
or this subpart.
4.
Subparts C and D are added to part § 263.200 Scope.
upon receiving notice or being deemed
(a) The rules and procedures set forth
208
and
reserved, the undesignated
to have notice, as provided in § 208.32 or
in this subpart apply to state member
centerhead preceding 5 208.116 is
§ 208.34 of this subpart, that the bank is
banks, companies that control state
removed, §§ 208.116,208.117,208.122,
undercapitalized, significantly
member banks or are affiliated with
and 208.124 through 208.128 are
undercapitalized, or critically
and levels are defined at the time that
the bank initially fails to comply with a
capital restoration plan under this
subpart.
(ii) L im it on duration. The guarantee
and limit of liability under section 38
and this subpart shall expire after the
Board notifies the bank that it has
remained adequately capitalized for
each of four consecutive calendar
quarters. The expiration or fulfillment
by a company of a guarantee of a capital
restoration plan shall not limit the
liability of the company under any
guarantee required or provided in
connection with any capital restoration
plan filed by the same bank after
expiration of the first guarantee.
(iii) Collection on guarantee. Each
company that controls a given bank
shall be jointly and severally liable for
the guarantee for such bank as required
under section 38 and this subpart, and
the Board may require and collect
payment of the full amount of that
guarantee from any or all of the
companies issuing the guarantee.
(2) Failure to p ro vid e guarantee. In the
event that a bank that is controlled by
any company submits a capital
restoration plan that does not contain
the guarantee required under section
38(e)(2) of the FDI Act, the bank shall,
upon submission of the plan, be subject
to the provisions of section 38 and this
subpart that are applicable to banks that
have not submitted an approved capital
restoration plan.
(3) Failure to perform guarantee.
Failure by any company that controls a
bank to perform fully its guarantee of
any capital plan shall constitute a
material failure to implement the plan
for purposes of section 38(f) of the FDI
Act. Upon such failure, the bank shall be
subject to the provisions of section 38
and this subpart that are applicable to
banks that have failed in a material
respect to implement a capital
restoration plan.
29242______ Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
such banks, and senior executive
officers and directors of state member
banks that are subject to the provisions
o f section 38 of the Federal Deposit
Insurance Act (section 38) and subpart B
of part 208 of this chapter.
§ 263.201 Directives to take prompt
regulatory action.
(a) N otice o f in ten t to issu e a
d irective.—(1) In General. The Board
w ill provide an undercapitalized,
significantly undercapitalized, or
critically undercapitalized state member
bank or, where appropriate, any
company that controls the bank, prior
written notice of the Board’s intention to
issue a directive requiring such bank or
company to take actions or to follow
proscriptions described in section 38
that are within the Board’s discretion to
require or impose under section 38(e)(5),
(f)(2), (f)(3), or (f)(5) of the FDI Act.
(2) Im m ediate issuan ce o f fin a l
directive. If the propose Board finds it
necessary in order to carry out the
purposes of section 38 of die FDI Act,
the Board may, without providing the
notice prescribed in paragraph (a)(1) of
this section, issue a directive requiring a
state member bank or any company that
controls a state member bank
immediately to take actions or to follow
proscriptions described in section 38
that are within the Board’s direction to
require or impose under section 38(e)(5),
(f)(2), (f)(3), or (f)(5) of the FDI Act. A
bank or company that is subject to such
an immediately effective directive may
submit a written appeal of the directive
of the Board. Such an appeal must be
received by the Board within 14
calendar days of the issuance of the
directive. The Board shall consider any
such appeal, if filed in a timely matter,
within 60 days of receiving the appeal.
During such period of review, the
directive shall remain in effect unless
the Board, in its sole discretion, stays
the effectiveness of the directive.
(b) Contents o f n o tice.—A notice of
intention to issue a directive shall
include:
(1) A statement of the bank’s capital
measures and capital levels;
(2) A description of the restrictions,
prohibitions or affirmative actions that
the Board proposes to impose or require;
(3) The proposed date w hen such
restrictions or prohibitions would be
effective or the proposed date for
completion of such affirmative actions;
and
(4) The date by which the bank or
company subject to the directive may
file with the Board a written response to
the notice.
(c) R espon se to n otice.— (1) Tim e fo r
R esponse. A bank or company may file
w ere in the next lower capital category
a written response to a notice of intent
pursuant to section 38(g) of the FDI Act
to issue a directive within the time
and § 208.33(c)(1) of Regulation H (12
period set by the Board. The date shall
CFR 208.33(c)(1)) because the Board
be at least 14 calendar days from the
deems the bank to be in unsafe or
date of the notice unless the Board
unsound condition (each of the foregoing
determines that a shorter period is
referred to hereinafter as a
appropriate in light of the financial
‘‘reclassification’’), the Board will issue
condition of the bank or other relevant
and serve on the bank a written notice
circumstances.
(2)
Content o f R esponse. The response of the Board’s intention to reclassify the
should include:
bank.
(i) An explanation why the action
(2) Contents o f notice. A notice of
proposed by the Board is not an
intention to reclassify a bank based on
appropriate exercise of discretion under unsafe or unsound condition will
section 38;
include:
(ii) Any recommended modification of
(i) A statement of the bank’s capital
the proposed directive; and
measures and capital levels and the
(iii) Any other relevant information,
category to which the bank would be
mitigating circumstances,
reclassified;
documentation, or other evidence in
(ii) The reasons for reclassification of
support of the position of the bank or
the bank;
company regarding the proposed
(iii) The date by which the bank
directive.
subject to the notice of reclassification
(d) Failure to file agen cy response.
may file with the Board a written appeal
Failure by a bank or company to file
of the proposed reclassification and a
with the Board, within the specified time request for a hearing, which shall be at
period, a written response to a proposed least 14 calendar days from the date of
directive shall constitute a waiver of the service of the notice unless the Board
opportunity to respond and shall
determines that a shorter period is
constitute consent to the issuance of the appropriate in light of the financial
directive.
condition of the bank or other relevant
(e) B oard con sideration o f response.
circumstances.
After considering the response, the
(3) R esponse to n otice o f p ro p o sed
Board may:
reclassification. A bank may file a
(1) Issue the directive as proposed or
written response to a notice of proposed
in modified form;
reclassification within the time period
(2) Determine not to issue the
set by the Board. The response should
directive and so notify the bank or
include:
company; or
(i) An explanation of w hy the bank is
(3) Seek additional information or
not in unsafe or unsound condition or
clarification of the response from the
otherwise should not be reclassified;
bank or company, or any other relevant
(ii) Any other relevant information,
so u rc e.
mitigating circumstances,
(f) R equest fo r m odification or
documentation, or other evidence in
rescissio n o f directive. Any bank or
support of the position of the bank or
company that is subject to a directive
company regarding the reclassification.
under this subpart may, upon a change
(4) Failure to file response. Failure by
in circumstances, request in writing that
a bank to file, within the specified time
the Board reconsider the terms of the
period, a written response with the
directive, and may propose that the
Board to a notice of proposed
directive be rescinded or modified.
reclassification shall constitute a waiver
Unless otherwise ordered by the Board,
of the opportunity to respond and shall
the directive shall continue in place
constitute consent to the
while such request is pending before the
reclassification.
Board.
(5) R equ est fo r hearing an d
p resen tation o f o ra l testim o n y o r
§ 263.202 Procedures for reclassifying a
state member bank based on criteria other
w itn esses. The response may include a
than capital.
request for an informal hearing before
(a) C lassification o f a sta te m em ber the Board or its designee under this
section. If the bank desires to present
bank b a se d on unsafe o r unsound
oral testimony or w itnesses at the
condition—(1)Issuance o f n otice o f
hearing, the bank must include a request
p ro p o sed reclassification . If the Board
to do so with the request for an informal
determines to reclassify a w ell
hearing. A request to present oral
capitalized state member bank as
testimony or w itnesses shall specify the
adequately capitalized or to require an
names of the w itnesses and the general
adequately capitalized or
nature of their expected testimony.
undercapitalized state member bank to
Failure to request a hearing shall
comply with supervisory actions as if it
Federal Register / Vol. 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules_______29243
constitute a w aiver of any right to a
adequately capitalized or to require
hearing, and failure to request the
an adequately capitalized or
opportunity to present oral testimony or undercapitalized state member
w itnesses shall constitute a waiver of
bank to comply with supervisory actions
any right to present oral testimony or
as if it were in the next lower capital
w itnesses.
category pursuant to section 38(g) of the
(8) O rder fo r inform al hearing. Upon
FDI Act and § 208.33(c)(2) of Regulation
receipt of a timely written request
H (12 CFR 208.33(c)(2)) because the
including a request for a hearing, the
Board deems the bank to be engaging in
Board shall issue an order directing an
an unsafe or unsound practice (each of
informal hearing to commence no later
the foregoing referred to hereinafter as a
than 30 days after receipt of the request, “reclassification”), the Board w ill issue
unless the bank requests a later date.
and serve on the bank a written notice
The hearing shall be held in
of the Board’s intention to reclassify the
Washington, DC or at such other place
bank.
as may be designated by the Board,
(2) C ontents o f notice. A notice of
before a presiding officer(s) designated
intention to reclassify a bank will
by the Board to conduct the hearing.
include:
(7) H earing procedures, (i) The bank
(i) A statement of the bank’s capital
shall have the right to introduce relevant measures and capital levels and the
written materials and to present oral
category to which the bank would be
argument at the hearing. The bank may
reclassified;
introduce oral testimony and present
(ii) The reasons for reclassification of
w itnesses only if expressly authorized
the bank;
by the Board or the presiding officer(s).
(iii) The date by which the bank
Neither the provisions of the
subject to the notice of reclassification
Administrative Procedure Act governing may file with the Board a written appeal
adjudications required by statute to be
of the proposed reclassification, which
determined on the record nor the
shall be at least 14 calendar days from
Uniform Rules of Practice and Procedure the date of service of the notice unless
in subpart A of this part apply to an
the Board determines that a shorter
informal hearing under this section
period is appropriate in light of the
unless the Board orders that such
financial condition of the bank or other
procedures shall apply.
relevant circumstances.
(ii) The informal hearing shall be
(3) R espon se to n otice o f p ro p o sed
recorded, and a transcript shall be
reclassification b a se d on unsafe and
furnished to the bank upon and payment
unsound practice. A bank may file a
of the cost thereof. W itnesses need not
written response to a notice of proposed
be sworn, unless specifically requested
reclassification issued under this
by a party or the presiding officer(s).
subsection within the time period set by
The presiding officer(s) may ask
the Board. The response should include:
questions of any witness.
(i) An explanation of the steps taken
(iii) The presiding officer(s) may order
by
the bank to address the deficiency
that the hearing be continued for a
described in the notice of proposed
reasonable period (normally five
reclassification or of the reasons that
business days) following completion of
the reclassification is not otherwise
oral testimony or argument to allow
appropriate;
additional written submissions to the
(ii) Any other relevant information,
hearing record.
mitigating circumstances,
(8) R ecom m endation o f presidin g
documentation, or other evidence in
officers. Within 20 calendar days
support of the position of the bank or
following the date the hearing and the
company regarding the reclassification.
record on the proceeding are closed, the
(4) Faiure to file response. Failure by
presiding officer(s) shall make a
a bank to file, within the specified time
recommendation to the Board on the
period, a written response with the
reclassification.
(9) Tim e fo r decision. No later than 60 Board to a notice of proposed
reclassification under this subsection
calendar days after the date the record
is closed or the date of the response in a shall constitute a waiver of the
opportunity to respond and shall
case where no hearing w as requested,
constitute consent to the
the Board w ill decide whether to
reclassification.
reclassify the bank and notify the bank
(5) B oard con sideration o f response.
of the Board’s decision.
After considering the response, the
(b) P rocedures fo r reclassifyin g a
sta te m em ber tyank b a se d on unsafe an d Board may:
(i)
Issue a written order to the bank
unsound p ra ctice.— (1) Issuance o f
reclassifying the bank to a different
n otice o f p ro p o sed reclassification . If
capital category as provided in section
the Board determines to reclassify a
38(g) of the FDI Act;
w ell capitalized state member bank as
(ii) Determine not to reclassify the
bank and so notify the bank; or
(iii) Seek additional information or
clarification of the response from the
bank or company, or any other relevant
source.
(c)
R equ est fo r rescission o f
reclassification . Any bank that has been
reclassified under this section, may,
upon a change in circumstances, request
in writing that the Board reconsider the
reclassification, and may propose that
the reclassification be rescinded and
that any directives issued in connection
with that reclassification be modified,
rescinded, or removed. U nless otherwise
ordered by the Board, the bank shall
remain subject to the reclassification
and to any directives issued in
connection with that reclassification
while such request is pending before the
Board.
§ 263.203 Order to dism iss a director or
senior executive officer.
(a) S ervice o f notice. When the Board
issues and serves a directive on a state
member bank pursuant to § 263.201
requiring the bank to dismiss from office
any director or senior executive officer
under section 38(f)(2) (F)(ii) of the FDI
Act, the Board w ill also serve a copy of
the directive, or the relevant portions of
the directive where appropriate, upon
the person to be dismissed.
(b) R espon se to directive. A director
or senior executive officer who has been
served with a directive under paragraph
(a) of this section (“Respondent”) may
file a written request for reinstatement.
The request for reinstatement must be
filed within 10 calendar days of the
receipt of the directive by the
Respondent, unless further time is
allowed by the Board at the request of
the Respondent. The request for
reinstatement should include reasons
w hy the Respondent should be
reinstated, and may request an informal
hearing before the Board or its designee
under this section. If the Respondent
desires to present oral testimony or
w itnesses at the hearing, the
Respondent must include a request to do
so with the request for an informal
hearing. The request to present oral
testimony or w itnesses shall specify the
names of the w itnesses and the general
nature of their expected testimony.
Failure to request a hearing shall
.constitute a waiver of any right to a
hearing and failure to request the ,
opportunity to present oral testimony or
w itnesses shall constitute a waiver of
any right or opportunity to present oral
testimony or w itnesses. U nless
otherwise ordered by the Board, the
dism issal shall remain in effect while a
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Federal Register / VoL 57, No. 127 / Wednesday, July 1, 1992 / Proposed Rules
request for reinstatement made under
this section is pending.
(c) O rder fo r inform al hearing. Upon
receipt of a timely written request from
a Respondent for an informal hearing on
the portion of a directive requiring a
bank to dismiss from office any director
or senior executive officer, the Board
shall issue an order directing an
informal hearing to commence no later
than 30 days after receipt of the request,
unless the Respondent requests a later
date. The hearing shall be held in
Washington, D.C., or at such other place
as may be designated by the Board,
before a presiding officers) designated
by the Board to conduct the hearing.
(d) H earing procedures. (1) A
Respondent may appear at the hearing
personally or through counsel. A
Respondent shall have the right to
introduce relevant written materials and
to present oral argument A Respondent
may introduce oral testimony and
present w itnesses only if expressly
authorized by the Board or the presiding
officers). Neither the provisions of the
Administrative Procedure Act governing
adjudications required by statute to be
determined on the record nor the
Uniform R ules of Practice and Procedure
in subpart A of this part apply to an
informal hearing under this section
unless the Board orders that such
procedures shall apply.
(2) The informal hearing shall be
recorded, and a transcript shall be
furnished to the Respondent upon
request and payment of the cost thereof.
W itnesses need not be sworn, unless
specifically requested by a party or the
presiding officers). The presiding
officer^) may ask questions of any
w itness.
(3) The presiding officer(s) may order
that the hearing be continued for a
reasonable period (normally five
business days) following completion of
oral testimony or argument to allow
additional written submissions to the
hearing record.
(e) S tandard fo r review . A
Respondent shall bear the burden of
demonstrating that his or her continued
employment by or service with the bank
would materially strengthen the bank’s
ability—
(1) To become adequately capitalized,
to the extent that the directive w as
issued as a result of the bank’s capital
level or failure to submit or implement a
capital restoration plan; and
(2) To correct the unsafe or unsound
condition or unsafe or unsound practice,
to the extent that the directive w as
issued as a result of classification of the
bank based on supervisory criteria other
than capital, pursuant to section 38(g) of
the FDI A c t
(f) L im itation on sco p e o f review . The
level of capital or the capital category
assigned to the state member bank with
which a Respondent is associated shall
not be subject to review in any
proceeding under this section.
(g) R ecom m endation o f presidin g
officers. Within 20 calendar days
following the date the hearing and the'
record on the proceeding are closed, the
presiding officer(s) shall make a
recommendation to the Board
concerning the Respondent’s request for
reinstatement with the bank.
(h) Tim e fo r decision. Not later than
60 calendar days after the date the
record is closed or the date of the
response in a case where no hearing has
been requested, the Board shall grant or
deny the request for reinstatement and
notify the Respondent of the Board’s
decision. If the Board denies the request
for reinstatement, the Board shall set
forth in the notification the reasons for
the Board’s action.
§ 263.204 Enforcement of directives.
(a) Judicial rem edies. W henever a
state member bank or company that
controls a state member bank fails to
comply with a directive issued under
section 38, the Board may seek
enforcement of the directive in the
appropriate United States district court
pursuant to section 8(i)(l) of the FDI A c t
(b) A d m in istra tive rem edies. Pursuant
to section 8(i)(2)(A) of the FDI Act, the
Board may a ssess a civil money penalty
against any state member bank or
company that controls a state member
bank that violates or otherwise fails to
comply with any final directive issued
under section 38 and against any
institution-affiliated party who
participates in such violation or
noncompliance. The failure of a bank to
implement a capital restoration plan
required under section 38, subpart B of
Regulation H (12 CFR part 208, subpart
B), or this subpart, or the failure of a
company having control of a bank to
fulfill a guarantee of a capital
restoration plan made pursuant to
section 38(e)(2) of the FDI Act shall
subject the bank or company to the
assessm ent of civil money penalties
pursuant to section 8(i)(2)(A) of the FDI
A ct
(c) O th er enforcem ent action. In
addition to the actions described in
paragraphs (a) and (b) of this section,
the Board may seek enforcement of the
provisions of section 38 or subpart B of
Regulation H (12 CFR part 208, subpart
B) through any other judicial or
administrative proceeding authorized by
law.
By order of the Board of Governors of the
Federal Reserve System.
Dated: June 25,1992.
Jennifer J. Johnson,
Associate Secretory of the Board.
[FR Doc. 92-15307 Filed 6-26-92; 3:33 pm]
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