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Federal R eserve Bank
OF DALLAS
ROBERT

D. M C T E E R , J R .
D A LLA S , TE X A S

p r e s id e n t

AND

C H IE F e x e c u t i v e

o ffic e r

7 5 2 6 5 -5 9 0 6

October 17,1997

Notice 97-90

TO:

The Chief Executive Officer of
each financial institution in the
Eleventh Federal Reserve District

SUBJECT
Revised Pamphlets for
Capital Adequacy Guidelines, Regulation C
(Home Mortgage Disclosure), and Regulation M
(Consumer Leasing)
DETAILS
The Board of Governors of the Federal Reserve System
has published revised pamphlets for Capital Adequacy Guidelines,
with various effective dates; Regulation C, effective July 1, 1997;
and Regulation M, effective April 1,1997.
ENCLOSURES
The revised pamphlets are enclosed. Please insert them
in your Regulations binders.

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 Intraslate
(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-

MORE INFORMATION
For more information regarding Capital Adequacy
Guidelines, please contact Dorsey Davis at (214) 922-6051. For
more information regarding Regulation C or Regulation M, please
contact Eugene Coy at (214) 922-6201.
For additional copies of this Bank’s notice or the revised
pamphlets, contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,

J

9

.

.

Board of Governors of the Federal Reserve System

Regulation C
Home Mortgage Disclosure
12 CFR 203; as amended effective July 1, 1997

Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank in the
District in which the inquiry arises.
August 1997

Contents

Page
Section 203.1—Authority, purpose, and
scope ........................................................... 1
(a) Authority ............................................. 1
(b) Purpose ................................................. 1
(c) Scope ................................................... 1
(d) Loan aggregation and central data
depositories.......................................... 1
Section203.2—Definitions ........................... 1
Section 203.3—Exemptinstitutions .......... 2
(a) Exemption based on location,
asset size, or number of
home-purchase loans .......................... 2
(b) Exemption based on state law ........ 2
(c) Loss of exemption .............................. 2
Section 203.4— Compilation of loan
data
.............................................. 3
(a) Data format and itemization ............. 3
(b) Collection of data on race or
national origin, sex, and income . . . 3
(c) Optional data ...................................... 3
(d) Excluded data .................................... 3
(e) Data reporting under CRA ............... 3

Page
Section 203.5—Disclosure and reporting .. 4
(a) Reporting to agency ..........................4
(b) Public disclosure of statement .........4
(c) Public disclosure of loan
application register ............................ 4
(d) Availability of data ............................4
(e) Notice of availiability ....................... 4
Section 203.6—Enforcement ........................ 4
(a) Administrative enforcement .............4
(b) Bona fide errors .................................. 4
Appendix A—Form and instructions
for completion of HMDA loan/
application register ..................................... 4
Appendix B—Form and instructions
for data collection on race or
national origin and sex .......................... 17

STATUTORY PR O V ISIO N S
Home Mortgage Disclosure A c t................. 19
Public Law 96-399, Title III, Section
340 .............................................................. 26

Regulation C
Home Mortgage Disclosure
12 CFR 203*; as amended effective July 1, 1997

SECTION 203.1— Authority, Purpose,
and Scope
(a) Authority. This regulation is issued by the
Board of Governors of the Federal Reserve
System ( “ Board” ) pursuant to the Home
Mortgage Disclosure Act (12 USC 2801 et
seq.), as amended. The information-collection
requirements have been approved by the U.S.
Office of Management and Budget under 44
USC 3501 et seq. and have been assigned
OMB No. 7100-0247.
(b) Purpose.
(1) This regulation implements the Home
Mortgage Disclosure Act, which is intended
to provide the public with loan data that
can be used—
(i) to help determine whether financial
institutions are serving the housing needs
of their communities;
(ii) to assist public officials in distribut­
ing public-sector investments so as to at­
tract private investment to areas where it
is needed; and
(iii) to assist in identifying possible dis­
criminatory lending patterns and enforc­
ing antidiscrimination statutes.
(2) Neither the act nor this regulation is
intended to encourage unsound lending
practices or the allocation of credit.
(c) Scope. This regulation applies to certain
financial institutions, including banks, saving
associations, credit unions, and other mortgage
lending institutions, as defined in section
203.2(e). It requires an institution to report
data to its supervisory agency about homepurchase and home-improvement loans it
originates or purchases, or for which it re­
ceives applications; and to disclose certain
data to the public.
(d) Loan aggregation and central data de­
positories. Using the loan data made available
by financial institutions, the Federal Financial
Institutions Examination Council will prepare
*
203.

Code of Federal Regulations, title 12, chapter II, part

disclosure statements and will produce various
reports for individual institutions for each
metropolitan statistical area (MSA), showing
lending patterns by location, age of housing
stock, income level, sex, and racial character­
istics. The disclosure statements and reports
will be available to the public at central data
depositories located in each MSA. A listing of
central data depositories can be obtained from
the Federal Financial Institutions Examination
Council, Washington, D.C. 20006.

SEC T IO N 203.2— D efinitions
In this regulation—
(a) A ct means the Home Mortgage Disclosure
Act (12 USC 2801 et seq.), as amended.
(b) Application means an oral or written re­
quest for a hom e-purchase or homeimprovement loan that is made in accordance
with procedures established by a financial in­
stitution for the type of credit requested.
(c) Branch office means—
(1) any office of a bank, savings associa­
tion, or credit union that is approved as a
branch by a federal or state supervisory
agency, but excludes free-standing elec­
tronic terminals such as automated teller
machines;
(2) any office of a mortgage-lending insti­
tution (other than a bank, savings associa­
tion, or credit union) that takes applications
from the public for home-purchase or
hom e-im provem ent loans. A mortgagelending institution is also deemed to have a
branch office in an MSA if, in the preced­
ing calendar year, it received applications
for, originated, or purchased five or more
home-purchase or home-improvement loans
on property located in that MSA.
(d) Dwelling means a residential structure
(whether or not it is attached to real property)
located in a state of the United States of
America, the District of Columbia, or the
Commonwealth of Puerto Rico. The term in-

§ 203.2
eludes an individual condominium unit, coop­
erative unit, or mobile or manufactured home.
(e) Financial institution means—
(1) a bank, savings association, or credit
union that originated in the preceding calen­
dar year a home-purchase loan (other than
temporary financing such as a construction
loan) including a refinancing of a homepurchase loan, secured by a first lien on a
one- to four-family dwelling if—
(i) the institution is federally insured or
regulated; or
(ii) the loan is insured, guaranteed, or
supplemented by any federal agency; or
(iii) the institution intended to sell the
loan to the Federal National Mortgage
Association or the Federal Home Loan
Mortgage Corporation;
(2) a for-profit mortgage-lending institution
(other than a bank, savings association, or
credit union) whose home-purchase loan
originations (including refinancings of
home-purchase loans) equaled or exceeded
10 percent of its loan-origination volume,
measured in dollars, in the preceding calen­
dar year.
(f) Home-improvement loan means any loan
that—
(1) is for the purpose, in whole or in part,
of repairing, rehabilitating, remodeling or
improving a dwelling or the real property
on which it is located; and
(2) is classified by the financial institution
as a home-improvement loan.
(g) Home-purchase loan means any loan se­
cured by and made for the purpose of pur­
chasing a dwelling.
(h) M etropolitan statistical area or MSA
means a metropolitan statistical area or a pri­
mary metropolitan statistical area, as defined
by the U.S. Office of M anagement and
Budget.

SECTION 203.3— Exempt Institutions

Regulation C
this regulation for a given calendar year if
on the preceding December 31—
(i) the institution had neither a home of­
fice nor a branch office in an MSA; or
(ii) the institution’s total assets were at
or below the asset threshold established
by the Board. For data collection in
1997, the asset threshold is $28 million
as of December 31, 1996. For subsequent
years, the Board will adjust the threshold
based on the year-to-year change in the
average of the Consumer Price Index for
Urban Wage Earners and Clerical Work­
ers, not seasonally adjusted, for each 12month period ending in November, with
rounding to the nearest million. The
Board will publish any adjustment in the
asset figure in December.
(2) A for-profit mortgage lending institution
(other than a bank, savings association, or
credit union) is exempt from the require­
ments of this regulation for a given calen­
dar year if—
(i) the institution had neither a home of­
fice nor a branch office in an MSA on
the preceding December 31; or
(ii) the institution’s total assets combined
with those of any parent corporation were
$10 million or less on the preceding De­
cember 31, and the institution originated
fewer than 100 home-purchase loans in
the preceding calendar year.
(b) Exemption based on state law.
(1) A state-chartered or state-licensed finan­
cial institution is exempt from the require­
ments of this regulation if the Board deter­
mines that the institution is subject to a
state disclosure law that contains require­
ments substantially similar to those imposed
by this regulation and contains adequate
provisions for enforcement.
(2) Any state, state-chartered, or statelicensed financial institution, or association
of such institutions may apply to the Board
for any exemption under this paragraph.
(3) An institution that is exempt under this
paragraph shall submit the data required by
the state disclosure law to its state supervi­
sory agency for purposes of aggregation.

(a) Exemption based on location, asset size,
or number o f home-purchase loans.
(1) A bank, savings association, or credit (c) Loss o f exemption.
union is exempt from the requirements of
(1) An institution losing an exemption that
2

Regulation C
was based on the criteria set forth in para­
graph (a) of this section shall comply with
this regulation beginning with the calendar
year following the year in which it lost its
exemption.
(2) An institution losing an exemption that
was based on state law under paragraph (b)
of this section shall comply with this regu­
lation beginning with the calendar year fol­
lowing the year for which it last reported
loan data under the state disclosure law.

SECTION 203.4— Compilation of Loan
Data
(a) Data form at and itemization. A financial
institution shall collect data regarding applica­
tions for, and originations and purchases of,
home-purchase and home-improvement loans
(including refinancings of both) for each cal­
endar year. These transactions shall be re­
corded, within 30 calendar days after the end
of each calendar quarter in which final action
is taken (such as origination or purchase of a
loan, or denial or withdrawal of an applica­
tion), on a register in the format prescribed in
appendix A of this part and shall include the
following items:
(1) A number for the loan or loan applica­
tion, and the date the application was
received.
(2) The type and purpose of the loan.
(3) The owner-occupancy status of the
property to which the loan relates.
(4) The amount of the loan or application.
(5) The type of action taken, and the date.
(6) The location of the property to which
the loan relates, by MSA, state, county, and
census tract, if the institution has a home or
branch office in that MSA.
(7) The race or national origin and sex of
the applicant or borrower, and the gross
annual income relied upon in processing the
application.
(8) The type of entity purchasing a loan
that the institution originates or purchases
and then sells within the same calendar
year.
(b) Collection o f data on race or national
origin, sex, and income.
(1) A financial institution shall collect data

§ 203.4
about the race or national origin and sex of
the applicant or borrower as prescribed in
appendix B. If the applicant or borrower
chooses not to provide the information, the
lender shall note the data on the basis of
visual observation or surname, to the extent
possible.
(2) Race or national origin, sex, and in­
come data may but need not be collected
for—
(i) loans purchased by the financial insti­
tution; or
(ii) applications received or loans origi­
nated by a bank, savings association, or
credit union with assets on the preceding
December 31 of $30 million or less.
(c) Optional data. A financial institution may
report the reasons it denied a loan application.
(d) Excluded data. A financial institution shall
not report—
(1) loans originated or purchased by the fi­
nancial institution acting in a fiduciary ca­
pacity (such as trustee);
(2) loans on unimproved land;
(3) temporary financing (such as bridge or
construction loans);
(4) the purchase of an interest in a pool of
loans (such as mortgage-participation cer­
tificates); or
(5) the purchase solely of the right to ser­
vice loans.
(e) Data reporting under CRA fo r banks and
savings associations with total assets o f $250
million or more and banks and savings asso­
ciations that are subsidiaries o f a holding
company whose total banking and thrift assets
are $1 billion or more. As required by agency
regulations that implement the Community
Reinvestment Act, banks and savings associa­
tions that had total assets of $250 million or
more (or are subsidiaries of a holding com­
pany with total banking and thrift assets of $1
billion or more) as of December 31 for each
of the immediately preceding two years, shall
also collect the location of property located
outside the MSAs in which the institution has
a home or branch office, or outside any
MSAs.
3

§ 203.5

SECTION 203.5— Disclosure and
Reporting
(a) Reporting to agency. By March 1 follow­
ing the calendar year for which the loan data
are compiled, a financial institution shall send
its complete loan application register to the
agency office specified in appendix A of this
regulation, and shall retain a copy for its
records for a period of not less than three
years.
(b) Public disclosure o f statement.
(1) A financial institution shall make its
mortgage loan disclosure statement (to be
prepared by the Federal Financial Institu­
tions Examination Council) available to the
public at its home office no later than three
business days after receiving it from the
Examination Council.
(2) In addition, a financial institution shall
either—
(i) make its disclosure statement avail­
able to the public (within 10 business
days of receiving it) in at least one
branch office in each additional MSA
where the institution has offices (the dis­
closure statement need only contain data
relating to the MSA where the branch is
located); or
(ii) post the address for sending written
requests for the disclosure statement in
the lobby of each branch office in an
MSA where the institution has offices,
and mail or deliver a copy of the disclo­
sure statement, within 15 calendar days
of receiving a written request (the disclo­
sure statement need only contain data re­
lating to the MSA for which the request
is made). Including the address in the
general notice required under paragraph
(e) of this section satisfies this
requirement.
(c) Public disclosure o f loan application reg­
ister. A financial institution shall make its loan
application register available to the public af­
ter modifying it in accordance with appendix
A. An institution shall make its modified reg­
ister available following the calendar year for
which the data are compiled, by March 31 for
a request received on or before March 1, and
within 30 days for a request received after
4

Regulation C
March 1. The modified register need only
contain data relating to the MSA for which
the request is made.
(d) Availability o f data. A financial institution
shall make its modified register available to
the public for a period of three years and its
disclosure statement available for a period of
five years. An institution shall make the data
available for inspection and copying during
the hours the office is normally open to the
public for business. It may impose a reason­
able fee for any cost incurred in providing or
reproducing the data.
(e) Notice o f availability. A financial institu­
tion shall post a general notice about the
availability of its HMDA data in the lobby of
its home office and of each branch office lo­
cated in an MSA. It shall promptly upon re­
quest provide the location of the institution’s
offices where the statement is available for
inspection and copying, or it may include the
location in its notice.

SECTION 203.6— Enforcement
(a) Administrative enforcement. A violation of
the act or this regulation is subject to admin­
istrative sanctions as provided in section 305
of the act, including the imposition of civil
money penalties, where applicable. Compli­
ance is enforced by the agencies listed in ap­
pendix A of this regulation.
(b) Bona fide errors. An error in compiling or
recording loan data is not a violation of the
act or this regulation if it was unintentional
and occurred despite the maintenance of pro­
cedures reasonably adopted to avoid such
errors.

APPENDIX A— Form and Instructions
for Completion of HMDA Loan/
Application Register
Paperwork Reduction Act Notice
Public reporting burden for collection of this
information is estimated to vary from 10 to
10,000 hours per response, with an average of
202 hours per response, for state member

Regulation C
banks and 160 hours per response for mort­
gage banking subsidiaries, including time to
gather and maintain the data needed and to
review instructions and complete the informa­
tion collection. This report is required by law
(12 USC 2801-2810 and 12 CFR 203). An
agency may not conduct or sponsor, and an
organization is not required to respond to, a
collection of information unless it displays a
currently valid OMB control number. The
OMB control number for this information col­
lection is 7100-0247. Send comments regard­
ing this burden estimate or any other aspect of
this collection of information, including sug­
gestions for reducing the burden, to Secretary,
Board of Governors of the Federal Reserve
System, Washington, D.C. 20551; and to the
Office of Information and Regulatory Affairs,
Office of Management and Budget, Washing­
ton, D.C. 20503.

I. Who Must File a Report
A. Depository institutions.
1. Subject to the exception discussed be­
low, banks, savings associations, and credit
unions must complete a register listing data
about loan applications received, loans
originated, and loans purchased if on the
preceding December 31 an institution—
a. had assets of more than the asset
threshold for coverage as published by
the Board each year in December, and
b. had a home or a branch office in a
“metropolitan statistical area” or a “pri­
mary metropolitan statistical area” (both
are referred to in these instructions by the
term “MSA” ).
2. For data collection in 1997, the asset
threshold is $28 million in total assets as of
December 31, 1996.
3. Example: If on December 31 you had a
home or branch office in an MSA and your
assets exceeded the asset threshold, you
must complete a register that lists the
hom e-purchase and hom e-im provem ent
loans that you originate or purchase (and
also lists applications that did not result in
an origination) beginning January 1.
B. D epository institutions—exception. You
need not complete a register—even if you
meet the tests for asset size and location— if

Appendix A
your institution is a bank, savings association,
or credit union that made no first-lien homepurchase loans (including refinancings) on
one- to four-family dwellings in the preceding
calendar year. This exception does not apply
in the case of nondepository institutions.
C. Other lending institutions. Subject to the
exception discussed below, for-profit mortgage
lending institutions (other than banks, savings
associations, and credit unions) must complete
a register listing data about loan applications
received, loans originated, and loans pur­
chased if the institution had a home or branch
office in an MSA on the preceding December
31, and—
1. had assets of more than $10 million
(based on the combined assets of the insti­
tution and any parent corporation) on the
preceding December 31, or
2. originated 100 or more home-purchase
loans (including refinancings of such loans)
during the preceding calendar year, regard­
less of asset size.
D. Other lending institutions—exception. You
need not complete a register—even if you
meet the tests for location and asset size or
number of home-purchase loans—if your in­
stitution is a for-profit mortgage lender (other
than a bank, savings association, or credit
union) and the home-purchase loans that you
originated in the preceding calendar year (in­
cluding refinancings) came to less than 10
percent of your total loan-origination volume,
measured in dollars.
E. If you are the subsidiary of a bank or
savings association, you must complete a
separate register for your institution. You will
submit the register, directly or through your
parent, to the agency that supervises your par­
ent. (See paragraph VI.)
F. Institutions that are specifically exempted
by the Federal Reserve Board from complying
with the federal Home Mortgage Disclosure
Act because they are covered by a similar
state law on mortgage loan disclosures must
use the disclosure form required by their state
law and submit the data to their state supervi­
sory agency.
5

Appendix A

II. Required Format and Reporting
Procedures
A. Institutions must submit data to their su­
pervisory agencies in an automated, machinereadable form. The format must conform ex­
actly to that of form FR HMDA-LAR,
including the order of columns, column head­
ings, etc. Contact your federal supervisory
agency for information regarding procedures
and technical specifications for automated data
submission; in some cases, agencies also
make software for automated data submission
available to institutions. The data must be ed­
ited before submission, using the edits in­
cluded in the agency-supplied software or
equivalent edits in software available from
vendors or developed in-house. (Institutions
that report 25 or fewer entries on their
HMDA-LAR may collect and report the data
in paper form. An institution that submits its
register in nonautomated form must send two
copies that are typed or computer printed and
must use the format of form FR HMDA-LAR
(but need not use the form itself). Each page
must be numbered, and the total number of
pages must be given (for example, “Page 1 of
3” ).
B. The required data are to be entered in the
register for each loan origination, each appli­
cation acted on, and each loan purchased dur­
ing the calendar year. Your institution should
decide on the procedure it wants to follow—
for example, whether to begin entering the
required data when an application is received,
or to wait until final action is taken (such as
when a loan goes to closing or an application
is denied). Keep in mind that an application is
to be reported in the calendar year when final
action is taken. Report loan originations in the
year they go to closing; if an application has
been approved but has not yet gone to closing
at year-end, report it the following year.
C. Your institution may collect the data on
separate registers at different branches, or on
separate registers for different loan types
(such as for hom e-purchase or homeimprovement loans, or for loans on multifam­
ily dwellings). But make sure the application
or loan numbers (discussed under paragraph
V.A.I., below) are unique.
6

Regulation C
D. Entries need not be grouped on your regis­
ter by MSA, or chronologically, or by census
tract numbers, or in any other particular order.
E. Applications and loans must be recorded
on your register within 30 calendar days after
the end of the calendar quarter in which final
action (such as origination or purchase of a
loan, or denial or withdrawal of an applica­
tion) is taken. The type of purchaser for loans
sold need not be included in these quarterly
updates.

III. Submission of HMDA-LAR and
Public Release of Data
A. You must submit the data for your institu­
tion to the office specified by your supervi­
sory agency no later than March 1 following
the calendar year for which the data are com­
piled. A list of the agencies appears at the end
of these instructions.
B. You must submit all required data to your
supervisory agency in one complete package,
with the prescribed transmittal sheet. An of­
ficer of your institution must certify to the
accuracy of the data. Any additional data sub­
missions that become necessary (for example,
because you discover that data were omitted
from the initial submission, or because revi­
sions are called for) also must be accompa­
nied by a transmittal sheet.
C. The transmittal sheet must state the total
number of line entries contained in the accom­
panying data submission. If the data submis­
sion involves revisions or deletions of previ­
ously submitted data, state the total of all line
entries contained in that submission, including
both those representing revisions or deletions
of previously submitted entries, and those that
are being resubmitted unchanged or are being
submitted for the first time. If you are a de­
pository institution, you also are asked to in­
clude a list of the MSAs where you have a
home or branch office.
D. Availability o f disclosure statement.
1.The Federal Financial Institutions Ex­
amination Council (FFIEC) will prepare a
disclosure statement from the date you sub­
mit. Your disclosure statement will be re­
turned to the name and address indicated on

Appendix A

Regulation C
the transmittal sheet. Within three business
days of receiving the disclosure statement,
you must make a copy available at your
home office for inspection by the public.
For these purposes, a business day is any
calendar day other than a Saturday, Sunday,
or legal public holiday. You also must
either—
a. make your disclosure statement avail­
able to the public, within 10 business
days of receiving it from the FFIEC, in
at least one branch office in each addi­
tional MSA where you have offices (the
disclosure statement need only contain
data relating to properties in the MSA
where the branch office is located); or
b. post in the lobby of each branch of­
fice in an MSA the address where a writ­
ten request for the disclosure statement
may be sent, and mail or deliver a copy
of the statement to any person requesting
it, within 15 calendar days of receiving a
written request. The disclosure statement
need only contain data relating to the
MSA for which the request is made.
2. You may make the disclosure statement
available in paper form or, if the person
requesting the data agrees, in automated
form (such as by PC diskette or computer
tape).
E. Availability o f modified loan application
register.
1. To protect the privacy of applicants and
borrowers, an institution must modify its
loan application register by removing the
following information before releasing it to
the public: the application or loan number,
date application received, and date of action
taken.
2. You may make the modified register
available in paper or automated form (such
as by PC diskette or computer tape). Al­
though you are not required to make the
modified loan application register available
in census-tract order, you are strongly en­
couraged to do so in order to enhance its
utility to users.
3. You must make your modified register
available following the calendar year for
which the data are compiled, by March 31
for a request received on or before March

1, and within 30 days for a request received
after March 1. You are not required to pre­
pare a modified loan application register in
advance of receiving a request from the
public for this information, but must be
able to respond to a request within 30 days.
A modified register need only reflect data
relating to the MSA for which the request
is made.
F.

Posters.
1. Suggested language. Some of the agen­
cies provide HMDA posters that you can
use to inform the public of the availability
of your HMDA data, or you may create
your own posters. If you print your own,
the following language is suggested but is
not required:
HOME MORTGAGE DISCLOSURE
ACT NOTICE
The HMDA data about our residential mort­
gage lending are available for review. The data
show geographic distribution of loans and appli­
cations; race, gender, and income of applicants
and borrowers; and information about loan ap­
provals and denials. Inquire at this office regard­
ing the locations where HMDA data may be
inspected.

2. Additional language fo r institutions mak­
ing the disclosure statement available upon
request. An institution that makes its disclo­
sure statement available upon request in­
stead of at branch offices must post a notice
informing the public of the address to
which a request should be sent. For ex­
ample, the institution could include the fol­
lowing sentence in its general notice; “To
receive a copy of these data send a written
request to [address].”

IV. Types of Loans and Applications
Covered and Excluded by HMDA
A. Types o f loans and applications to be
reported
1. Report the data on home-purchase and
home-improvement loans that you origi­
nated (that is, loans that were closed in
your name) and loans that you purchased
during the calendar year covered by the re­
port. Report these data even if the loans
were subsequently sold by your institution.
Include refinancings of home-purchase and
home-improvement loans.
7

Appendix A
2. Report the data for applications for
hom e-purchase and hom e-im provem ent
loans that did not result in originations—for
example, applications that your institution
denied or that the applicant withdrew dur­
ing the calendar year covered by the report.
3. In the case of brokered loan applications
or applications forwarded to you through a
correspondent, report as originations loans
that you approved and subsequently ac­
quired according to a preclosing arrange­
ment (whether or not they closed in your
institution’s name). Additionally, report the
data for all applications that did not result
in originations— for example, applications
that your institution denied or that the ap­
plicant withdrew during the calendar year
covered by the report (whether or not they
would have closed in your institution’s
name). For all of these loans and applica­
tions, report the race or national origin, sex,
and income information, unless your institu­
tion is a bank, savings association, or credit
union with assets of $30 million or less on
the preceding December 31.
4. Originations are to be reported only
once. If you are the loan broker or corre­
spondent, do not report as originations
loans that you forwarded to another lender
for approval prior to closing, and that were
approved and subsequently acquired by that
lender (whether or not they closed in your
name).
5. Report applications that were received in
the previous calendar year but were acted
upon during the calendar year covered by
the current register.
B. Data to be excluded. Do not report loans
or applications for loans of the following
types:
1. Loans that, although secured by real es­
tate, are made for purposes other than home
purchase, home improvement, or refinanc­
ing (For example, do not report a loan se­
cured by residential real property for pur­
poses of financing college tuition, a
vacation, or goods for business inventory.)
2. Loans made in a fiduciary capacity (for
example, by your trust department)
3. Loans on unimproved land

Regulation C
4. Construction or bridge loans and other
temporary financing
5. The purchase of an interest in a pool of
loans (such as m ortgage-participation
certificates)
6. The purchase solely of the right to ser­
vice loans

V. Instructions for Completion of Loan/
Application Register
A. Application or loan information
1. Application or loan number. Enter an
identifying number that can be used later to
retrieve the loan or application file. It can
be any number of your choosing (not ex­
ceeding 25 characters). You may use letters,
numerals, or a combination of both.
Make sure that all numbers are unique
within your institution. If your register con­
tains data for branch offices, for example,
you could use a letter or a numerical code
to identify the loans or applications of dif­
ferent branches, or could assign a certain
series of numbers to particular branches to
avoid duplicate numbers. You are strongly
encouraged not to use the applicant’s or
borrower’s name or Social Security number,
for privacy reasons.
2. Date application received. Enter the date
the loan application was received by your
institution by month, day, and year, using
numerals in the form MM/DD/YY (for ex­
ample, 01/15/92). If your institution nor­
mally records the date shown on the appli­
cation form, you may use that date instead.
Enter “NA” for loans purchased by your
institution.
3. Type. Indicate the type of loan or appli­
cation by entering the applicable code from
the following:
1—Conventional (any loan other than
FHA, VA or FmHA loans)
2—FHA-insured (Federal Housing
Administration)
3—VA-guaranteed (Veterans
A dm inistration)
4— FmHA-insured (Farmers Home
Administration)

Regulation C
4. Purpose. Indicate the purpose of the loan
or application by entering the applicable
code from the following:
1— Home purchase (one- to four-family)
2— Home improvement (one- to fourfamily)
3—Refinancing (home purchase or home
improvement, one- to four-family)
4— Multifamily dwelling (home purchase,
home improvement, and refinancings)
5. Explanation o f purpose codes
Code 1: Home purchase
a. This code applies to loans and ap­
plications made for the purpose of pur­
chasing a residential dwelling for one
to four families, if the loan is to be
secured by the dwelling being pur­
chased or by another dwelling.
b. At your option, you may use code 1
for loans that are made for homeimprovement purposes but are secured
by a first lien, if you normally classify
such first-lien loans as home-purchase
loans.
Code 2: Home improvement
a. Code 2 applies to loans and applica­
tions for loans if (i) a portion of the
proceeds is to be used for repairing,
rehabilitating, remodeling, or improv­
ing a one- to four-family residential
dwelling, or the real property upon
which it is located, and (ii) the loan is
classified as a home-improvement loan.
b. Report both secured and unsecured
loans.
c. At your option, you may report data
about home-equity lines of credit—
even if the credit line is not recorded
on your institution’s books as a homeimprovement loan. If you choose to do
so, you may report a home-equity line
of credit as a home-improvement loan
if the borrower or applicnt indicates, at
the time of application or when the
account is opened, that some portion
of the proceeds will be used for home
improvement. (See paragraph 8. “Loan
amount,” below.) If you report origina­
tions of home-equity lines of credit,

Appendix A
you must also report applications
for such loans that did not result in
originations.
Code 3: Refinancings
a. Use this code for refinancings (and
applications for refinancings) of loans
secured by one- to four-family residen­
tial dwellings. A refinancing involves
the satisfaction of an existing obliga­
tion that is replaced by a new obliga­
tion undertaken by the same borrower.
But do not report a refinancing if, un­
der the loan agreement, you are uncon­
ditionally obligated to refinance the
obligation, or you are obligated to refi­
nance the obligation subject to condi­
tions within the borrower’s control.
b. Use this code whether or not you
were the original creditor on the loan
being refinanced, and whether or not
the refinancing involves an increase in
the outstanding principal.
c. You may report all refinancings of
loans secured by one- to four-family
residential dwellings, regardless of the
purpose of or amount outstanding on
the original loan, and regardless of the
amount of new money (if any) that
is for hom e-purchase or homeimprovement purposes.
Code 4: Multifamily dwelling
a. Use this code for loans and loan
applications on dwellings for five or
more fam ilies, including homepurchase loans, refinancings, and loans
for repairing, rehabilitation, and remod­
eling purposes.
b. Do not use this code for loans on
individual condominium or cooperative
units; use codes 1, 2, or 3 for such
loans, as applicable.
6. Owner occupancy. Indicate whether the
property to which the loan or loan applica­
tion relates is to be owner-occupied as a
principal dwelling by entering the appli­
cable code from the following:

1—Owner-occupied as a principal
dwelling
2—Not
owner-occupied
3—Not applicable
9

Appendix A
7. Explanation o f codes
a. Use code 2 for second homes or vaca­
tion homes, as well as rental properties.
b. Use code 2 only for nonoccupant
loans, or applications for nonoccupant
loans, related to one- to four-family
dwellings (including individual condo­
minium or cooperative units).
c. Use code 3 if the property to which
the loan relates is a multifamily dwelling;
is not located in an MSA; or is located in
an MSA in which your institution has
neither a home nor a branch office.
d. For purchased loans, you may assume
that the property will be owner-occupied
as a principal dwelling (code 1) unless
the loan documents or application contain
information to the contrary.
8. Loan amount. Enter the amount of the
loan or application. Do not report loans be­
low $500. Show the amount in thousands,
rounding to the nearest thousand ($500
should be rounded up to the next $1,000).
For example, a loan for $167,300 should be
entered as 167 and one for $15,500 as 16.
a. For home-purchase loans that you
originate, enter the principal amount of
the loan as the loan amount. For homepurchase loans that you purchase, enter
the unpaid principal balance of the loan
at the time of purchase as the loan
amount.
b. For home-improvement loans (both
originations and purchases), you may in­
clude unpaid finance charges in the loan
amount if that is how you record such
loans on your books. For a multiple-purpose loan classified by you as a homeimprovement loan because it involves a
home-improvement purpose, enter the full
amount of the loan, not just the amount
specified for home improvement.
c. For home-equity lines of credit (if you
have chosen to report them), enter as the
loan amount only that portion of the line
that is for home improvement. Report the
loan amount for applications that did not
result in originations in the same manner.
Report only in the year the line is
established.
d. For refinancings of dwelling-secured
loans, indicate the total amount of the
10

Regulation C
refinancing, including the amount out­
standing on the original loan and the
amount of new money (if any).
e. For a loan application that was denied
or withdrawn, enter the amount applied
for.
f. If you make a counteroffer for an
amount different from the amount ini­
tially applied for, and the counteroffer is
accepted by the applicant, report it as an
origination for the amount of the loan
actually granted. If the applicant turns
down the counteroffer or fails to respond,
report it as a denial for the amount ini­
tially requested.
B. Action taken
1. Type o f action. Indicate the type of ac­
tion taken on the application or loan by
using one of the following codes. Do not
report any loan application still pending at
the end of the calendar year. You will re­
port that application on your register for the
year in which final action is taken.
1—Loan originated
2—Application approved but not
accepted
3—Application denied
4—Application withdrawn
5—File
closed for incompleteness
6—Loan purchased by your institution
2. Explanation o f codes.
a. Use code 1 for a loan that is origi­
nated, including one resulting from a
counteroffer (your offer to the applicant
to make the loan on different terms or in
a different amount than initially applied
for) that the applicant accepts.
b. Use code 2 when an application is
approved but the applicant (or a loan bro­
ker or correspondent) fails to respond to
your notification of approval or your
commitment letter within the specified
time.
c. Use code 3 when an application is
denied. This includes the situation when
an applicant turns down or fails to re­
spond to your counteroffer. Do not report
as a withdrawn application or as an ap­
plication that was approved but not
accepted.

Regulation C
d. Use code 4 only when an application
is expressly withdrawn by the applicant
before a credit decision was made.
e. Use code 5 if you sent a written no­
tice of incompleteness under section
202.9(c)(2) of Regulation B (Equal Credit
Opportunity) and the applicant failed to
respond to your request for additional in­
formation within the period of time
specified in your notice.
3. Date o f action. Enter the date by month,
day, and year, using numerals in the form
MM/DD/YY (for example, 02/22/92).
a. For loans originated, enter the settle­
ment or closing date. For loans pur­
chased, enter the date of purchase by
your institution.
b. For applications denied, applications
approved but not accepted by the appli­
cant, and files closed for incompleteness,
enter the date that the action was taken
by your institution or the date the notice
was sent to the applicant.
c. For applications withdrawn, enter the
date you received the applicant’s express
withdrawal; or you may enter the date
shown on the notification from the appli­
cant, in the case of a written withdrawal.
C. Property location. In these columns enter
the applicable codes for the MSA, state,
county, and census tract for the property to
which a loan relates. For home-purchase loans
secured by one dwelling, but made for the
purpose of purchasing another dwelling, report
the property location for the property in which
the security interest is to be taken. If the
home-purchase loan is secured by more than
one property, report the location data for the
property being purchased. (See paragraphs 5,
6, and 7 of paragraph V.C. of this appendix
for treatment of loans on property outside the
MSAs in which you have offices.)
1. MSA. For each loan or loan application,
indicate the location of the property by the
MSA number. Enter only the MSA number,
not the MSA name. MSA boundaries are
defined by the U.S. Office of Management
and Budget; use the boundaries that were in
effect on January 1 of the calendar year for
which you are reporting. A listing of MSAs
is available from your regional supervisory

Appendix A
agency or the FFIEC. (In these instructions,
the term MSA refers to both metropolitan
statistical area and primary metropolitan
statistical area.)
2. State and county. You must use the Fed­
eral Information Processing Standard (FIPS)
two-digit numerical code for the state and
the three-digit numerical code for the
county. These codes are available from your
regional supervisory agency or the FFIEC.
Do not use the letter abbreviations used by
the U.S. Postal Service.
3. Census tract. Indicate the census tract
where the property is located.
a. Enter the code “NA” if the property is
located in an area not divided into census
tracts on the U.S. Census B ureau’s
census-tract outline maps (see paragraph
4 below).
b. If the property is located in a county
with a population of 30,000 or less in the
1990 census (as determined by the Cen­
sus Bureau’s 1990 CPH-2 population se­
ries), enter “NA” (even if the population
has increased above 30,000 since 1990),
or you may enter the census tract
number.
4. Census-tract number. For the censustract number, consult the U.S. Census Bu­
reau’s Census Tract/Street Index for 1990,
and for addresses not listed in the index,
consult the Census Bureau’s census-tract
outline maps. You must use the maps from
the Census Bureau’s 1990 CPH-3 series, or
equivalent 1990 census data from the Cen­
sus Bureau (such as the Census TIGER/
Line File) or from a private publisher.
5. Outside MSA. For loans on property lo­
cated outside the MSAs in which you have
a home or branch office (or outside any
MSA), you have two options. Under option
1, you may enter the MSA, state, and
county codes and the census tract number.
You may enter “NA” in the MSA or census
tract column if no code or number exists
for the property. (Codes exist for all states
and counties.) If you choose option 1, the
codes and tract number must accurately
identify the location for the property in
question. Under option 2, you may enter
“NA” in all four columns, whether or not
the codes or number exist for the property.
11

Appendix A
6. Nondepository lenders. If you are a forprofit mortgage lending institution (other
than a bank, savings association, or credit
union), and in the preceding calendar year
you received applications for, or originated
or purchased, loans for home purchase or
home improvement adding up to a total of
five or more for a given MSA, you are
deemed to have a branch office in that
MSA, whether or not you have a physical
office there. As a result, you will have to
enter the MSA, state, county, and
censustract numbers for any transactions in
that MSA. Because you must keep accurate
records about lending within MSAs in the
current calendar year in order to report data
accurately the following year, to comply
with this rule you may find it easier to
enter the geographic information routinely
for any property located within any MSA.
7. Data reporting under CRA fo r banks and
savings associations with total assets o f
$250 million or more and banks and sav­
ings associations that are subsidiaries o f a
holding company whose total banking and
thrift assets are $1 billion or more. If you
are a bank or savings association with total
assets of $250 millon or more as of Decem­
ber 31 for each of the immediately preced­
ing two years, you must also enter the loca­
tion of property located outside the MSAs
in which you have a home or branch office,
or outside any MSA. You must also enter
this information if you are a bank or sav­
ings association that is a subsidiary of a
holding company with total banking and
thrift assets of $1 billion or more as of
December 31 for each of the immediately
preceding two years.
D. Applicant information—race or national
origin, sex, and income. Appendix B of Regu­
lation C contains instructions for the collec­
tion of data on race or national origin and sex,
and also contains a sample form for data col­
lection. The form is substantially similar to
the form prescribed by section 202.13 of
Regulation B (Equal Credit Opportunity) and
contained in appendix B to that regulation.
You may use either form.
1. Applicability. You must report this appli­
cant information for loans that you originate
12

Regulation C
as well as for applications that do not result
in an origination.
a. You need not collect or report this in­
formation for loans purchased. If you
choose not to, enter the codes specified
in paragraphs 3, 4, and 5 below for “not
applicable.”
b. If your institution is a bank, savings
association, or credit union that had as­
sets of $30 million or less on the preced­
ing December 31, you may—but need
not—collect and report these data. If you
choose not to, enter the codes specified
in paragraphs 3, 4, and 5 below for “not
applicable.”
c. If the borrower or applicant is not a
natural person (a corporation or partner­
ship, for example), use the codes speci­
fied in paragraphs 3, 4, and 5 below for
“not applicable.”
2. Mail and telephone applications. Any
loan applications mailed to applicants must
contain a collection form similar to that
shown in appendix B, and you must record
on your register the data on race or national
origin and sex if the applicant provides it.
If the applicant chooses not to provide the
data, enter the code for “information not
provided by applicant in mail or telephone
application” specified in paragraphs 3 and 4
below. If an application is taken entirely by
telephone, you need not request this infor­
mation. (See appendix B for complete infor­
mation on the collection of this data in mail
or telephone applications.)
3. Race or national origin o f borrower or
applicant. Use the following codes to indi­
cate the race or national origin of the appli­
cant or borrower under column “A” and of
any co-applicant or co-borrower under col­
umn “CA.” If there is more than one co­
applicant, provide this information only for
the first co-applicant listed on the applica­
tion form. If there are no co-applicants or
co-borrowers, enter code 8 for “not applic­
able” in the co-applicant column.
1—American Indian or Alaskan Native
2—Asian
or Pacific Islander
3—Black
4— Hispanic
5—White

Regulation C
6— Other
7—Information not provided by applicant
in mail or telephone application
8—Not
applicable
4. Sex o f borrower or applicant. Use the
following codes to indicate the sex of the
applicant or borrower under column “A”
and of any co-applicant or co-borrower un­
der column “CA.” If there is more than
one co-applicant, provide this information
only for the first co-applicant listed on the
application form. If there are no co­
applicants or co-borrowers, enter code 4 for
“not applicable.”
1—Male
2—Female
3— Information not provided by applicant
in mail or telephone application
4— Not
applicable
5. Income. Enter the gross annual income
that your institution relied upon in making
the credit decision.
a. Round all dollar amounts to the near­
est thousand (round $500 up to the next
$1,000), and show in terms of thousands.
For example, $35,500 should be reported
as 36.
b. For loans on multifamily dwellings,
enter “NA.”
c. If no income information is asked for
or relied on in the credit decision, enter
“NA.”
E. Type o f purchaser
1. Enter the applicable code to indicate
whether a loan that your institution origi­
nated or purchased was then sold to a sec­
ondary market entity within the same calen­
dar year:
0—Loan was not originated or was not
sold in calendar year covered by
register
1—FNMA (Federal National Mortgage
Association)
2—GNMA (Government National Mort­
gage Association)
3—FHLMC (Federal Home Loan Mort­
gage Corporation)
4— FmHA (Farmers Home
Administration)

Appendix A
5—Commercial bank
6— Savings
bank or savings association
7—Life
insurance company
8—Affiliate institution
9—Other type of purchaser
2. Explanation o f codes
a. Enter the code 0 for applications that
were denied, withdrawn, or approved but
not accepted by the applicant; and for
files closed for incompleteness.
b. If you originated or purchased a loan
and did not sell it during that same cal­
endar year, enter the code 0. If you sell
the loan in a succeeding year, you need
not report the sale.
c. If you conditionally assign a loan to
GNMA in connection with a mortgagebacked security transaction, use code 2.
d. Loans “ sw apped” for m ortgagebacked securities are to be treated as
sales; enter the type of entity receiving
the loans that are swapped as the
purchaser.
e. Use code 8 for loans sold to an insti­
tution affiliated with you, such as your
subsidiary or a subsidiary of your parent
corporation.
F. Reasons fo r denial
1. You are not required to enter the reasons
for the denial of an application. But if you
choose to do so, you may indicate up to
three reasons by using the following codes:
1—Debt-to-income ratio
2—Employment history
3— Credit
history
4— Collateral
5—Insufficient cash (downpayment, clos­
ing costs)
6—Unverifiable information
7—Credit
application incomplete
8—Mortgage insurance denied
9—Other
2. Leave this column blank if the “action
taken” on the application is not a denial.
For example, do not complete this column
if the application was withdrawn or the file
was closed for incompleteness.
3. If your institution uses the model form
for adverse action contained in the appendix
13

Appendix A
to Regulation B (Form C -l in appendix C,
Sample Notification Form, which offers
some 20 reasons for denial), the following
list shows which codes to enter.
a. Code 1 corresponds to: Income insuf­
ficient for amount of credit requested,
and Excessive obligations in relation to
income.
b. Code 2 corresponds to: Temporary or
irregular employment, and Length of
employment.
c. Code 3 corresponds to: Insufficient
number of credit references provided;
Unacceptable type of credit references
provided; No credit file; Limited credit
experience; Poor credit performance with
us; Delinquent past or present credit obli­
gations with others; Garnishment, attach­
ment, foreclosure, repossession, collection
action, or judgment; and Bankruptcy.
d. Code 4 corresponds to: Value or type
of collateral not sufficient.
e. Code 6 corresponds to: Unable to
verify credit references. Unable to verify
employment, Unable to verify income,
and Unable to verify residence.
f. Code 7 corresponds to: Credit applica­
tion incomplete.
g. Code 9 corresponds to: Length of
residence, Temporary residence, and
Other reasons specified on notice.

VI. Federal Supervisory Agencies
Send your loan/application register and direct
any questions to the office of your federal
supervisory agency as specified below. If you
are the nondepository subsidiary of a bank,
savings association, or credit union, send the
register to the supervisory agency for your
parent institution. Terms that are not defined
in the Federal Deposit Insurance Act (12 USC
1813(s)) shall have the meaning given to them
in the International Banking Act of 1978 (12
USC 3101).
A. National banks and their subsidiaries and
federal branches and federal agencies o f fo r­
eign banks. District office of the Office of the

Regulation C
Comptroller of the Currency for the district in
which the institution is located.
B. State member banks o f the Federal Re­
serve System, their subsidiaries, subsidiaries
o f bank holding companies, branches and
agencies o f foreign banks (other than federal
branches, federal agencies, and insured state
branches o f foreign banks), commercial lend­
ing companies owned or controlled by foreign
banks, and organizations operating under sec
tion 25 or 25A o f the Federal Reserve Act.
Federal Reserve Bank serving the District in
which the state member bank is located; for
institutions other than state member banks, the
Federal Reserve Bank specified by the Board
of Governors.
C. Nonmember insured banks (except fo r fe d ­
eral savings banks) and their subsidiaries and
insured state branches o f foreign banks. Re­
gional director of the Federal Deposit Insur­
ance Corporation for the region in which the
institution is located.
D. Savings institutions insured under the Sav­
ings Association Insurance Fund o f the FDIC,
federally chartered savings banks insured un­
der the Bank Insurance Fund o f the FDIC
(but not including state-chartered savings
banks insured under the Bank Insurance
Fund), their subsidiaries, and subsidiaries o f
savings institution holding companies. Re­
gional or other office specified by the Office
of Thrift Supervision.
E. Credit unions. National Credit Union Ad­
ministration, Office of Examination and Insur­
ance, 1776 G Street, N.W., Washington, D.C.
20456.
F. Other depository institutions. Regional di­
rector of the Federal Deposit Insurance Corpo­
ration for the region in which the institution is
located.
G. Other mortgage-lending institutions. Assis­
tant Secretary for Housing, HMDA Report­
ing—Room 9233, U.S. Department of Hous­
ing and Urban Development, 451 7th Street,
S.W., Washington, D.C. 20410.

Regulation C

Appendix A

Form FR HMDA-LAR.
OMB No. 7100-0247. Approval expires May 31,2000.

LOAN/APPLICATION REGISTER
TRANSMITTAL SHEET
You must complete this transmittal sheet (please type or print) and attach it to the Loan/Application
Register, required by the Home Mortgage Disclosure Act, that you submit to your supervisory agency.
Agency
Code

Reporter’s Identification Number

L1 I 1 I I I I I I l-U

Total line entries contained in
attached Loan/Application Register

Reporter's Tax Identification Number

I I l- l I I I 1 I I i

_ _ _ _ _
_ _ _ _

The Loan/Application Register that is attached covers activity during the y e a r_____ and contains a total o f ______
pages.
Enter the name and address of your institution. The disclosure statement that is produced by the Federal Financial
Institutions Examination Council will be mailed to the address you supply below:

Name of Institution

Address

City, State, ZIP

Enter the name, telephone number, and facsimile number of a person who may be contacted about questions
regarding your register:

___________________
Name

( _ ) _______________
Telephone Number

(__)_______________
Facsimile Number (if applicable)

If your institution is a subsidiary of another institution or corporation, enter the name of your parent:

Name

Address

City, State, ZIP

An officer of your institution must complete the following section.
I certify to the accuracy of the data contained in this register.

Name o f O fficer

Signature

Date

15

Page____o f ______

™ h m d a - la r

Name of Reporting In s titu tio n

A gent

Code

City. State, ZIP

A ll colum ns (except Reasons fo r D enial) m ust be com pleted for each entry. See the instructions for details.
Application or
Loan Information

Action Taken

Applicant Information
A = Applicant
CA = Co-Appiicant

Properly L ocaton

Race or
National Origin
Date
Applicator.
Received
(mnVdd/yyl

Applicat on or
Loan Number

Pur­
Type pose

ST

smount
in
thou­
sands

Type

Date
(mrrVdd/yy)

Digit
MSA
Number

Digit
State
Code

Appendix A

LOAN/APPLICATION REGISTER

_______________________________________________________ ____________ _____________________________________________________ Reporter's Identification Number

ThreeDigit
County
Cede

Six-Digit
Census
Tract

Sex

Annual
Income

A

CA

A

CA

Type of
Pur-

Reason*
for

of Loan

(Optional

thou-

E x a m p le o f L o a n O r i g i n a t e d
0 1 /1 5 /9 2

2

1

i

65

1

0 2 /2 2 /9 2

8840

51

0S9

4 ,2 , 1 , 9 1 . 1 8 , 5

3

8

1

4

24

7

0 3 /2 0 /9 2

1

1

i

125

3

0 4 /3 0 /9 2

0450

01

015

0 ] 0 | 2 | 1 | . | 0 , 0

5

4

2

1

55

0

E x a m p le o f A p p l i c a t i o n D e n i e d
0 , 1 , 2 , 3 , 4 1 5 , 6 , 7 , 8 1 9 , - , 9 , 8 , 7 , 6 1 5 , 4

3 , 2 ,1 ,0 ,

,

,

,

i

1

1

1

1

1

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1

1

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1• 1 1 _
....

1

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• 1

1

1

1

1- 1

1

1

1

1

1• 1

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1

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1• 1

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1 1• 1

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—

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Regulation C

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Regulation C

Appendix B

Loan/Application Register Code Sheet

Sex:

Use the following codes to complete the loan/
application register. The instructions to the
HMDA-LAR explain the proper use of each
code.

1—Male
2—Female
3—Information not provided by applicant in
mail or telephone application
A Not applicable
—

Application or Loan Information
Type:
1— Conventional (any loan other than FHA,
VA or FmHA loans)
2—FHA-insured (Federal Housing
Administration)
3— VA-guaranteed (Veterans Administration)
A FmHA-insured (Farmers Home
—
Administration)
Purpose:
1— Home purchase (one- to four-family)
2— Home improvement (one- to four-family)
3—Refinancing (home purchase or home
improvement, one- to four-family)
4— Multifamily dwelling (home purchase,
home improvement, and refinancings)
Owner Occupancy:
1— Owner-occupied as a principal dwelling
2— Not
owner-occupied
3—Not applicable
Action Taken:
1— Loan originated
2—Application approved but not accepted
3—Application denied by financial institution
4— Application withdrawn by applicant
5—File
closed for incompleteness
6— Loan purchased by your institution

Applicant Information
Race or National Origin:
1—American Indian or Alaskan Native
2—Asian
or Pacific Islander
3—Black
4— Hispanic
5—White
6—Other
7—Information not provided by applicant in
mail or telephone application
8—Not
applicable

Type o f Purchaser
0— Loan was not sold in calendar year
covered by register
1— FNMA (Federal National Mortgage
Association)
2—GNMA (Government National Mortgage
Association)
3—FHLMC (Federal Home Loan Mortgage
Corporation)
A FmHA (Farmers Home Administration)
—
5—Commercial bank
6— Savings
bank or savings association
7— Life
insurance company
8—Affiliate institution
9—Other type of purchaser
Reasons fo r Denial (optional)
1—Debt-to-income ratio
2—Employment history
3—Credit
history
4— Collateral
5—Insufficient cash (downpayment, closing
costs)
6— Unverifiable information
7—Credit
application incomplete
8—Mortgage insurance denied
9—Other

APPENDIX B— Form and Instructions
for Data Collection on Race or National
Origin and Sex
I. Instructions on Collection o f Data on Race
or National Origin and Sex
A. Format. You may list questions regarding
the race or national origin and sex of the
applicant on your loan application form, or on
a separate form that refers to the application.
(See the sample form below for recommended
language.)

Appendix B
B. Procedures
1. You must ask for this information, but
cannot require the applicant to provide it.
2. If the applicant chooses not to provide
the information for an application taken in
person, note this fact on the form and note
the data, to the extent possible, on the basis
of visual observation or surname.
3. Inform the applicant that the federal
government is requesting this information in
order to monitor compliance with federal
statutes that prohibit lenders from discrimi­
nating against applicants on these bases. In­
form the applicant that if the information is
not provided where the application is taken
in person, you are required to note the data
on the basis of visual observation or
surname.
4. If an application is made entirely by
telephone, you need not request this infor­
mation. And you need not provide the data
when you take an application by mail, if
the applicant fails to answer these questions
on the application form. You should indi­
cate whether an application was received by
mail or telephone, if it is not otherwise
evident on the face of the application.
5. The “other” block is available only to
the applicant who chooses to indicate some
other appropriate category for race or na­
tional origin. If completing the form based
on visual observation, do not use this cat­
egory; use one of the other five categories.

Sample Data-Collection Form
INFORMATION FOR GOVERNMENT
MONITORING PURPOSES
The following information is requested by the
federal government for certain types of loans
related to a dwelling in order to monitor the
lender’s compliance with equal credit opportu­
nity, fair housing, and home mortgage disclo­

Regulation C
sure laws. You are not required to furnish this
information, but are encouraged to do so. The
law provides that a lender may not discrimi­
nate on the basis of this information, or on
whether you choose to furnish it. However, if
you choose not to furnish the information and
you have made this application in person, un­
der federal regulations the lender is required
to note race or national origin and sex on the
basis of visual observation or surname. If you
do not wish to furnish the information, please
check below.
APPLICANT:
□

I do not wish to furnish this information.

Race or National Origin:
□
□
□
□
□
□

American Indian, Alaskan Native
Asian, Pacific Islander
Black
Hispanic
White
Other (specify)______________________

Sex:
□
□

Female
Male

CO-APPLICANT:
□

I do not wish to furnish this information.

Race or National Origin:
□
□
□
□

American Indian, Alaskan Native
Asian. Pacific Islander
Black
Hispanic

□

W hite

□

Other (specify)______________________

Sex:
□
□

Female
Male

Home Mortgage Disclosure Act
12 USC 2801 et seq.; 89 Stat. 1125; Pub. L. 94-200, Title 111 (December 31, 1975)

Section
301 Short title
302 Findings and purposes
303 Definitions
304 Maintenance of records and public
disclosure
305 Enforcement
306 Relation to state laws
307 Research and improved methods
308 Study
309 Effective date
310 Compilation of aggregate data
311 Disclosure by the secretary

SECTION 301— Short Title
This title may be cited as the “Home Mort­
gage Disclosure Act of 1975.”
[12 USC 2801 note.]

SECTION 302— Findings and Purposes
(a) The Congress finds that some depository
institutions have sometimes contributed to the
decline of certain geographic areas by their
failure pursuant to their chartering responsi­
bilities to provide adequate home financing to
qualified applicants on reasonable terms and
conditions.
(b) The purpose of this title is to provide the
citizens and public officials of the United
States with sufficient information to enable
them to determine whether depository institu­
tions are filling their obligations to serve the
housing needs of the communities and neigh­
borhoods in which they are located and to
assist public officials in their determination of
the distribution of public sector investments in
a manner designed to improve the private in­
vestment environment.
(c) Nothing in this title is intended to, nor
shall it be construed to, encourage unsound
lending practices or the allocation of credit.
[12 USC 2801.]

SECTION 303— Definitions
For purposes of this title—
(1) the term “mortgage loan” means a loan
which is secured by residential real property
or a home improvement loan;
(2) the term “depository institution”—
(A) means—
(i) any bank (as defined in section
3(a)(1) of the Federal Deposit Insur­
ance Act);
(ii) any savings association (as defined
in section 3(b)(1) of the Federal De­
posit Insurance Act); and
(iii) any credit union,
which makes federally related mortgage
loans as determined by the Board; and
(B) includes any other lending institution
(as defined in paragraph (4)) other than
any institution described in subparagraph
(A);
(3) the term “ com pleted application”
means an application in which the creditor
has received the information that is regu­
larly obtained in evaluating applications for
the amount and type of credit requested;
(4) the term “ other lending institutions”
means any person engaged for profit in the
business of mortgage lending;
(5) the term “Board” means the Board of
Governors of the Federal Reserve System;
and
(6) the term “ Secretary” means the Secre­
tary of Housing and Urban Development.
[12 USC 2802. As amended by acts of Feb. 5, 1988 (101
Stat. 1945) and Aug. 9, 1989 (103 Stat. 525).]

SECTION 304— Maintenance of Records
and Public Disclosure
(a) (1) Each depository institution which has a
home office or branch office located within
a primary metropolitan statistical area, met­
ropolitan statistical area, or consolidated
metropolitan statistical area that is not com­
prised of designated primary metropolitan
statistical areas, as defined by the Depart­
19

§ 304
ment of Commerce shall compile and make
available, in accordance with regulations of
the Board, to the public for inspection and
copying at the home office, and at least one
branch office within each primary metro­
politan statistical area, metropolitan statisti­
cal area, or consolidated metropolitan statis­
tical area that is not com prised of
designated primary metropolitan statistical
areas in which the depository institution has
an office the number and total dollar
amount of mortgage loans which were (A)
originated (or for which the institution re­
ceived completed applications), or (B) pur­
chased by that institution during each fiscal
year (beginning with the last full fiscal year
of that institution which immediately pre­
ceded the effective date of this title.)
(2) The information required to be main­
tained and made available under paragraph
(1) shall also be itemized in order to clearly
and conspicuously disclose the following:
(A) The number and dollar amount for
each item referred to in paragraph (1), by
census tracts for mortgage loans secured
by property located within any county
with a population of more than 30,000,
within that primary metropolitan statisti­
cal area, metropolitan statistical area, or
consolidated metropolitan statistical area
that is not comprised of designated pri­
mary metropolitan statistical areas, other­
wise, by county, for mortgage loans se­
cured by property located within any
other county within that primary metro­
politan statistical area, metropolitan sta­
tistical area, or consolidated metropolitan
statistical area that is not comprised of
designated primary metropolitan statisti­
cal areas.
(B) The number and dollar amount for
each item referred to in paragraph (1) for
all such mortgage loans which are se­
cured by property located outside that
primary metropolitan statistical area, met­
ropolitan statistical area, or consolidated
metropolitan statistical area that is not
comprised of designated primary metro­
politan statistical areas.
For the purpose of this paragraph, a deposi­
tory institution which maintains offices in
more than one primary metropolitan statisti­
20

Home Mortgage Disclosure Act
cal area, metropolitan statistical area, or
consolidated metropolitan statistical area
that is not comprised of designated primary
metropolitan statistical areas shall be re­
quired to make the information required by
this paragraph available at any such office
only to the extent that such information re­
lates to mortgage loans which were origi­
nated or purchased (or for which completed
applications were received) by an office of
that depository institution located in the pri­
mary metropolitan statistical area, metro­
politan statistical area, or consolidated met­
ropolitan statistical area that is not com­
prised of designated primary metropolitan
statistical areas in which the office making
such information available is located. For
purposes of this paragraph, other lending
institutions shall be deemed to have a home
office or branch office within a primary
metropolitan statistical area, metropolitan
statistical area, or consolidated metropolitan
statistical area that is not comprised of des­
ignated primary metropolitan statistical ar­
eas if such institutions have originated or
purchased or received completed applica­
tions for at least 5 mortgage loans in such
area in the preceding calendar year.
(b) Any item of information relating to mort­
gage loans required to be maintained under
subsection (a) shall be further itemized in or­
der to disclose for each such item—
(1) the number and dollar amount of mort­
gage loans which are insured under title II
of the National Housing Act or under title
V of the Housing Act of 1949 or which are
guaranteed under chapter 37 of title 38,
United States Code;
(2) the number and dollar amount of mort­
gage loans made to mortgagors who did
not, at the time of execution of the mort­
gage, intend to reside in the property secur­
ing the mortgage loan;
(3) the number and dollar amount of home
improvement loans; and
(4) the number and dollar amount of mort­
gage loans and completed applications in­
volving mortgagors or mortgage applicants
grouped according to census tract, income
level, racial characteristics, and gender.
(c) Any information required to be compiled

Home Mortgage Disclosure Act
and made available under this section, other
than loan application register information un­
der subsection (j), shall be maintained and
made available for a period of five years after
the close of the first year during which such
information is required to be maintained and
made available.
(d) Notwithstanding the provisions of subsec­
tion (a)(1), data required to be disclosed under
this section for 1980 and thereafter shall be
disclosed for each calendar year. Any deposi­
tory institution which is required to make dis­
closures under this section but which has been
making disclosures on some basis other than a
calendar year basis shall make available a
separate disclosure statement containing data
for any period prior to calendar year 1980
which is not covered by the last full year
report prior to the 1980 calendar year report.
(e) Subject to subsection (h), the Board shall
prescribe a standard format for the disclosures
required under this section.
(f) The Federal Financial Institutions Exami­
nation Council in consultation with the Secre­
tary, shall implement a system to facilitate
access to data required to be disclosed under
this section. Such system shall include ar­
rangements for a central depository of data in
each primary metropolitan statistical area,
metropolitan statistical area, or consolidated
metropolitan statistical area that is not com­
prised of designated primary metropolitan sta­
tistical areas. Disclosure statements shall be
made available to the public for inspection
and copying at such central depository of data
for all depository institutions which are re­
quired to disclose information under this sec­
tion (or which are exempted pursuant to sec­
tion 306(b)) and which have a home office or
branch office within such primary metropoli­
tan statistical area, metropolitan statistical
area, or consolidated metropolitan statistical
area that is not comprised of designated pri­
mary metropolitan statistical areas.
(g) The requirements of subsections (a) and
(b) shall not apply with respect to mortgage
loans that are—
(1) made (or for which completed applica­
tions are received) by any mortgage bank­
ing subsidiary of a bank holding company

§ 304
or savings and loan holding company or by
any savings and loan service corporation
that originates or purchases mortgage loans;
and
(2) approved (or for which completed ap­
plications are received) by the secretary for
insurance under title I or II of the National
Housing Act.
(h) The data required to be disclosed under
subsection (b)(4) shall be submitted to the ap­
propriate agency for each institution reporting
under this title. Notwithstanding the require­
ment of section 304(a)(2)(A) for disclosure by
census tract, the Board, in cooperation with
other appropriate regulators, including—
(1) the Office of the Comptroller of the
Currency for national banks and Federal
branches and Federal agencies of foreign
banks;
(2) the Director of the Office of Thrift Su­
pervision for savings associations;
(3) the Federal Deposit Insurance Corpora­
tion for banks insured by the Federal De­
posit Insurance Corporation (other than
members of the Federal Reserve System),
m utual savings banks, insured State
branches of foreign banks, and any other
depository institution described in section
303(2)(A) which is not otherwise referred
to in this paragraph;
(4) the National Credit Union Administra­
tion Board for credit unions; and
(5) the Secretary of Housing and Urban
Development for other lending institutions
not regulated by the agencies referred to in
paragraphs (1) through (4),
shall develop regulations prescribing the for­
mat for such disclosures, the method for sub­
mission of the data to the appropriate regula­
tory agency, and the procedures for disclosing
the information to the public. These regula­
tions shall also require the collection of data
required to be disclosed under subsection
(b)(4) with respect to loans sold by each insti­
tution reporting under this title, and, in addi­
tion, shall require disclosure of the class of
the purchaser of such loans. Any reporting
institution may submit in writing to the appro­
priate agency such additional data or explana­
tions as it deems relevant to the decision to
originate or purchase mortgage loans.
21

§ 304
(i) The requirements of subsection (b)(4) shall
not apply with respect to any depository insti­
tution described in section 303(2)(A) which
has total assets, as of the most recent full
fiscal year of such institution, of $30,000,000
or less.
(j) Loan application register information.
(1) In addition to the information required
to be disclosed under subsections (a) and
(b), any depository institution which is re­
quired to make disclosures under this sec­
tion shall make available to the public,
upon request, loan application register infor­
mation (as defined by the Board by regula­
tion) in the form required under regulations
prescribed by the Board.
(2) (A) Subject to subparagraph (B), the
loan application register information de­
scribed in paragraph (1) may be disclosed
by a depository institution without editing
or compilation and in the format in
which such information is maintained by
the institution.
(B) The Board shall require, by regula­
tion, such deletions as the Board may
determine to be appropriate to protect—
(i) any privacy interest of any appli­
cant, including the deletion of the ap­
plicant’s name and identification num­
ber, the date of the application, and the
date of any determination by the insti­
tution with respect to such application;
and
(ii) a depository institution from liabil­
ity under any Federal or State privacy
law.
(C) It is the sense of the Congress that a
depository institution should provide loan
register information under this section in
a format based on the census tract in
which the property is located.
(3) A depository institution meets the dis­
closure requirement of paragraph (1) if the
institution provides the information required
under such paragraph in the form in which
the institution maintains such information.
(4) Any depository institution which pro­
vides information under this subsection may
impose a reasonable fee for any cost in­
curred in reproducing such information.
(5) The disclosure of the loan application
22

Home Mortgage Disclosure Act
register information described in paragraph
(1) for any year pursuant to a request under
paragraph (1) shall be made—
(A) in the case of a request made on or
before March 1 of the succeeding year,
before April 1 of the succeeding year;
and
(B) in the case of a request made after
March 1 of the succeeding year, before
the end of the 30-day period beginning
on the date the request is made.
(6) Notwithstanding subsection (c), the loan
application register information described in
paragraph (1) for any year shall be main­
tained and made available, upon request, for
3 years after the close of the 1st year dur­
ing which such information is required to
be maintained and made available.
(7) In prescribing regulations under this
subsection, the Board shall make every ef­
fort to minimize the costs incurred by a
depository institution in complying with this
subsection and such regulations.
(k) Disclosure o f statements by depository
institutions.
(1) In accordance with procedures estab­
lished by the Board pursuant to this section,
any depository institution required to make
disclosures under this section—
(A) shall make a disclosure statement
available, upon request, to the public no
later than 3 business days after the insti­
tution receives the statement from the
Federal Financial Institutions Examina­
tion Council; and
(B) may make such statement available
on a floppy disc which may be used with
a personal computer or in any other me­
dia which is not prohibited under regula­
tions prescribed by the Board.
(2) Any disclosure statement provided pur­
suant to paragraph (1) shall be accompanied
by a clear and conspicuous notice that the
statement is subject to final review and re­
vision, if necessary.
(3) Any depository institution which pro­
vides a disclosure statement pursuant to
paragraph (1) may impose a reasonable fee
for any cost incurred in providing or repro­
ducing such statement.
(I) Prompt disclosures.

Home Mortgage Disclosure Act
(1) Any disclosure of information pursuant
to this section or section 310 shall be made
as promptly as possible.
(2) (A) Except as provided in subsections
(j)(5) and (k)(l) and regulations pre­
scribed by the Board and subject to subparagraph (B), any information required
to be disclosed for any year beginning
after December 31, 1992, under—
(i) this section shall be made available
to the public before September 1 of the
succeeding year; and
(ii) section 310 shall be made avail­
able to the public before December 1
of the succeeding year.
(B) With respect to disclosures of infor­
mation under this section or section 310
for any year beginning after December
31, 1993, every effort shall be made—
(i) to make information disclosed un­
der this section or section 310 avail­
able to the public before July 1 of the
succeeding year; and
(ii) to make information required to be
disclosed under section 310 available
to the public before September 1 of the
succeeding year.
(3) The Federal Financial Institutions Ex­
amination Council shall make such changes
in the system established pursuant to sub­
section (f) as may be necessary to carry out
the requirements of this subsection.
(m) O pportunity to reduce com pliance
burden.
(1) (A) A depository institution shall be
deemed to have satisfied the public avail­
ability requirements of subsection (a) if
the institution compiles the information
required under that subsection at the
home office of the institution and pro­
vides notice at the branch locations speci­
fied in subsection (a) that such informa­
tion is available from the home office of
the institution upon written request.
(B) Not later than 15 days after the re­
ceipt of a written request for any infor­
mation required to be compiled under
subsection (a), the home office of the
depository institution receiving the re­
quest shall provide the information perti­
nent to the location of the branch in

§ 305
question to the person requesting the
information.
(2) In complying with paragraph (1), a de­
pository institution shall, in the sole discre­
tion of the institution, provide the person
requesting the information with—
(A) a paper copy of the information re­
quested; or
(B) if acceptable to the person, the infor­
mation through a form of electronic me­
dium, such as a computer disk.
[12 USC 2803. As amended by acts o f Oct. 8, 1980 (94
Stat. 1657); Nov. 30, 1983 (97 Stat. 1266); Feb. 5, 1988
(101 Stat. 1945, 1950); Aug. 9, 1989 (103 Stat. 524, 525,
526); Dec. 19, 1991 (105 Stat. 2299); Oct. 28, 1992 (106
Stat. 3889, 3891); and Sept. 30, 1996 (110 Stat. 3009416).]

SECTION 305— Enforcement
(a) The Board shall prescribe such regulations
as may be necessary to carry out the purposes
of this title. These regulations may contain
such classifications, differentiations, or other
provisions, and may provide for such adjust­
ments and exceptions for any class of transac­
tions, as in the judgment of the Board are
necessary and proper to effectuate the pur­
poses of this title, and prevent circumvention
or evasion thereof, or to facilitate compliance
therewith.
(b) Compliance with the requirements im­
posed under this title shall be enforced
under—
(1) section 8 of the Federal Deposit Insur­
ance Act, in the case of—
(A) national banks and Federal branches
and Federal agencies of foreign banks, by
the Office of Com ptroller of the
Currency;
(B) member banks of the Federal Re­
serve System (other than national banks),
branches and agencies of foreign banks
(other than Federal branches, Federal
agencies, and insured State branches of
foreign banks), commercial lending com­
panies owned or controlled by foreign
banks, and organizations operating under
section 25 or 25A of the Federal Reserve
Act, by the Board; and
(C) banks insured by the Federal Deposit
Insurance Corporation (other than mem­
23

§ 305
bers of the Federal Reserve System), mu­
tual savings banks as defined in section
3(f) of the Federal Deposit Insurance Act
(12 U.S.C. 1813(f)), insured State
branches of foreign banks, and any other
depository institution not referred to in
this paragraph or paragraph (2) or (3) of
this subsection, by the Board of Directors
of the Federal D eposit Insurance
Corporation;
(2) section 8 of the Federal Deposit Insur­
ance Act, by the Director of the Office of
Thrift Supervision, in the case of a savings
association the deposits of which are in­
sured by the Federal Deposit Insurance
Corporation;
(3) the Federal Credit Union Act, by the
Administrator of the National Credit Union
Administration with respect to any credit
union; and
(4) other lending institutions, by the Secre­
tary of Housing and Urban Development.
The terms used in paragraph (1) that are not
defined in this title or otherwise defined in
section 3(s) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(s)) shall have the mean­
ing given to them in section 1(b) of the Inter­
national Banking Act of 1978 (12 U.S.C.
3101).
(c) For the purpose of the exercise by any
agency referred to in subsection (b) of its
powers under any Act referred to in that sub­
section, a violation of any requirement im­
posed under this title shall be deemed to be a
violation of a requirement imposed under that
Act. In addition to its powers under any pro­
vision of law specifically referred to in sub­
section (b), each of the agencies referred to in
that subsection may exercise, for the purpose
of enforcing compliance with any requirement
imposed under this title, any other authority
conferred on it by law.
[12 USC 2804. As amended by acts of Aug. 9, 1989 (103
Stat. 440, 526) and Dec. 19, 1991 (105 Stat. 2299).]

SECTION 306— Relation to State Laws
(a) This title does not annul, alter, or affect,
or exempt any State-chartered depository insti­
tution subject to the provisions of this title
24

Home Mortgage Disclosure Act
from complying with the laws of any state or
subdivision thereof with respect to public dis­
closure and recordkeeping by depository insti­
tutions, except to the extent that those laws
are inconsistent with any provision of this
title, and then only to the extent of the incon­
sistency. The Board is authorized to determine
whether such inconsistencies exist. The Board
may not determine that any such law is incon­
sistent with any provision of this title if the
Board determines that such law requires the
maintenance of records with greater geo­
graphic or other detail than is required under
this title, or that such law otherwise provides
greater disclosure than is required under this
title.
(b) The Board may by regulation exempt
from the requirements of this title any statechartered depository institution within any
state or subdivision thereof if it determines
that, under the law of such state or subdivi­
sion, that institution is subject to requirements
substantially similar to those imposed under
this title, and that such law contains adequate
provisions for enforcement. Notwithstanding
any other provision of this subsection, compli­
ance with the requirements imposed under this
subsection shall be enforced under—
(1) section 8 of the Federal Deposit Insur­
ance Act in the case of national banks, by
the Comptroller of the Currency; and
(2) section 8 of the Federal Deposit Insur­
ance Act, by the Director of the Office of
Thrift Supervision in the case of a savings
association the deposits of which are in­
sured by the Federal Deposit Insurance
Corporation.
[12 USC 2805. As amended by act of Aug. 9, 1989 (103
Stat. 440).]

SECTION 307— Research and Improved
Methods
(a) (1) The Director of the Office of Thrift
Supervision, with the assistance of the Sec­
retary, the Director of the Bureau of the
Census, the Comptroller of the Currency,
the Board of Governors of the Federal Re­
serve System, the Federal Deposit Insurance
Corporation, and such other persons as the

Home Mortgage Disclosure Act
Director of the Office of Thrift Supervision
deems appropriate, shall develop, or assist
in the improvement of, methods of match­
ing addresses and census tracts to facilitate
compliance by depository institutions in as
economical a manner as possible with the
requirements of this title.
(2) There is authorized to be appropriated
such sums as may be necessary to carry out
this subsection.
(3) The Director of the Office of Thrift Su­
pervision is authorized to utilize, contract
with, act through, or compensate any person
or agency in order to carry out this
subsection.
(b) The Director of the Office of Thrift Su­
pervision shall recommend to the Committee
on Banking, Finance and Urban Affairs of the
House of Representatives and the Committee
on Banking, Housing, and Urban Affairs of
the Senate such additional legislation as the
Director of the Office of Thrift Supervision
deems appropriate to carry out the purpose of
this title.
[12 USC 2806. As amended by H. Res. 5 of Jan. 4. 1977
and acts o f Nov. 7, 1988 (102 Stat. 3280) and Aug. 9, 1989
(103 Stat. 440).]

§ 310
sentence (as determined without regard to the
adjustment made by subsedtion (b)).
(b) CPI adjustments.
(1) Subject to paragraph (2), the dollar
amount applicable with respect to institu­
tions described in section 303(2)(A) under
the 2d sentence of subsection (a) shall be
adjusted annually after December 31, 1996,
by the annual percentage increase in the
Consumer Price Index for Urban Wage
Earners and Clerical Workers published by
the Bureau of Labor Statistics.
(2) The first adjustment made under para­
graph (1) after the date of the enactment of
the Economic Growth and Regulatory Pa­
perwork Reduction Act of 1996 shall be the
percentage by which—
(A) the Consumer Price Index described
in such paragraph for the calendar year
1996, exceeds
(B) such Consumer Price Index for the
calendar year 1975.
(3) The dollar amount applicable under
paragraph (1) for any calendar year shall be
the amount determined in accordance with
subparagraphs (A) and (B) of paragraph (2)
and rounded to the nearest multiple of
$ 1,000 ,000 .

SECTION 308— Study
The Board, in consultation with the Secretary
of Housing and Urban Development, shall re­
port annually to the Congress on the utility of
the requirements of section 304(b)(4).
[12 USC 2807. As amended by acts of Nov. 30, 1983 (97
Stat. 1266) and Aug. 9, 1989 (103 Stat. 526).]

SECTION 309— Effective Date
(a) In general. This title shall take effect on
the one hundred and eightieth day beginning
after the date of its enactment. Any institution
specified in section 303(2)(A) which has total
assets as of its last full fiscal year of
$10,000,000 or less is exempt from the provi­
sions of this title. The Board, in consultation
with the Secretary, may exempt institutions
described in section 303(2)(B) that are compa­
rable within their respective industries to insti­
tutions that are exempt under the preceding

[12 USC 2808. As amended by acts of Dec. 19, 1991 (105
Stat. 2307) and Sept. 30, 1996 (110 Stat. 3009-415).]

SECTION 310— Compilation of
Aggregate Data
(a) Beginning with data for calendar year
1980, the Federal Financial Institutions Ex­
amination Council shall compile each year, for
each primary metropolitan statistical area,
metropolitan statistical area, or consolidated
metropolitan statistical area that is not com­
prised of designated primary metropolitan sta­
tistical areas, aggregate data by census tract
for all depository institutions which are re­
quired to disclose data under section 304 or
which are exempt pursuant to section 306(b).
The Council shall also produce tables indicat­
ing, for each primary metropolitan statistical
area, metropolitan statistical area, or consoli­
dated metropolitan statistical area that is not
comprised of designated primary metropolitan
25

Home Mortgage Disclosure Act

§ 310
statistical areas, aggregate lending patterns for
various categories of census tracts grouped ac­
cording to location, age of housing stock, in­
come level, and racial characteristics.
(b) The Board shall provide staff and data
processing resources to the Council to enable
it to carry out the provisions of subsection (a).
(c) The data and tables required pursuant to
subsection (a) shall be made available to the
public by no later than December 31 of the
year following the calendar year on which the
data is based.
[12 USC 2809. As added by act o f Oct. 8, 1980 (94 Stat.
1658) and amended by act of Nov. 30, 1983 (97 Stat.
1266).]

SECTION 311— Disclosure by the
Secretary
Beginning with data for calendar year 1980,
the Secretary shall make publicly available
data in the Secretary’s possession for each
mortgagee which is not otherwise subject to
the requirements of this title and which is not
exempt pursuant to section 306(b) (and for
each mortgagee making mortgage loans ex­
empted under section 304(g)), with respect to
mortgage loans approved (or for which com­
pleted applications are received) by the Secre­
tary for insurance under title I or II of the
National Housing Act. Such data to be dis­
closed shall consist of data comparable to the
data which would be disclosed if such mort­
gagee were subject to the requirements of sec­
tion 304. Disclosure statements containing
data for each such mortgage for a primary
metropolitan statistical area, metropolitan sta­
tistical area, or consolidated metropolitan sta­
tistical area that is not comprised of desig­
nated primary metropolitan statistical areas
shall, at a minimum, be publicly available at
the central depository of data established pur­
suant to section 304(f) for such primary met­
ropolitan statistical area, metropolitan statisti­
cal area, or consolidated m etropolitan
statistical area that is not comprised of desig­
nated primary metropolitan statistical areas.
The Secretary shall also compile and make
publicly available aggregate data for such

mortgagees by
ing aggregate
comparable to
made publicly
section 310.

census tract, and tables indicat­
lending patterns, in a manner
the information required to be
available in accordance with

[12 USC 2810. As added by act o f Oct. 8, 1980 (94 Stat.
1658) and amended by acts of Nov. 30, 1983 (97 Stat.
1266); Feb. 5, 1988 (101 Stat. 1945); and Aug. 9, 1989
(103 Stat. 525).]

PUBLIC LAW 96-399, TITLE III
SECTION 340
(d) The Federal Financial Institutions Exami­
nation Council, in consultation with the Ad­
ministrator of the Small Business Administra­
tion, shall conduct a study to assess the
feasibility and usefulness of requiring deposi­
tory institutions which make small business
loans to compile and publicly disclose infor­
mation regarding such loans. The Council
shall submit a report on the results of such
study, together with recommendations, to the
Committee on Banking, Housing, and Urban
Affairs of the Senate and the Committee on
Banking, Finance and Urban Affairs of the
House of Representatives not later than March
1, 1981.
[12 USC 3305 note.]

(e) To promote efficiency and avoid duplica­
tion to the maximum extent feasible, the Fed­
eral Financial Institutions Examination Coun­
cil shall transmit a report to the Congress not
later than September 30, 1982, on the feasibil­
ity and desirability of establishing a unified
system for enforcing fair lending laws and
regulations, implementing the Community Re­
investment Act of 1977, and satisfying the
public disclosure purposes of the Home Mort­
gage Disclosure Act of 1975. Such report
shall evaluate the status and effectiveness of
data collection and analysis systems of such
agencies involving fair lending and commu­
nity reinvestment, and shall outline possible
specific timetables for implementing such a
unified system.
[12 USC 3305 note.]

Board of Governors of the Federal Reserve System

Regulation M
Consumer Leasing
12 CFR 213; as amended effective April 1, 1997

Any inquiry relating to Regulation M should be addressed to the Federal Reserve Bank of the
District in which the inquiry arises.
July 1997

Contents

Page

Page

Section 213.1—Authority, scope,
purpose, and enforcement ....................... 1
Section 213.2—Definitions .......................... 1
Section 213.3—General disclosure
requirements ............................................... 2
(a) General requirem ents.......................... 2
(b) Additional information;
nonsegregated disclosures ................. 3
(c) Multiple lessors or lessees ............... 3
(d) Use of estimates ................................ 3
(e) Effect of subsequent occurrence . . . . 3
(f) Minor variations ................................ 3
Section 213.4—Content of disclosures . . . . 3
(a) Description of property ..................... 3
(b) Amount due at lease signing ........... 3
(c) Payment schedule and total
amount of periodic payments ........... 3
(d) Other charges ...................................... 3
(e) Total of payments .............................. 3
(f) Payment calculation ............................ 3
(g) Early termination ................................ 4
(h) Maintenance responsibilities .............4
(i) Purchase option .................................. 4
(j) Statement referencing
nonsegregated disclosures ................. 4
(k) Liability between residual and
realized values .................................... 5
(/) Right of appraisal .............................. 5
(m) Liability at end of lease term
based on residual v a lu e ..................... 5
(n) Fees and taxes .................................... 5
(o) Insurance ............................................. 5
(p) Warranties or guarantees ................... 5
(q) Penalties and other charges for
delinquency ........................................ 5
(r) Security interest .................................. 5
(s) Limitations on rate information . . . . 5
(t) Non-motor vehicle open-end leases . 5

Section 213.5—Renegotiations,
extensions, and assumptions ................... 6
(a) Renegotiation ..................................... 6
(b) Extension ........................................... 6
(c) A ssum ption......................................... 6
(d) Exceptions ......................................... 6
Section 213.6 [Reserved]
Section 213.7—Advertising .......................... 6
(a) General rule ......................................... 6
(b) Clear-and-conspicuous standard . . . . 6
(c) Catalogs and multipage
advertisements .................................... 6
(d) Advertisement of terms that
require additionaldisclosure ............... 6
(e) Alternative disclosures—
merchandise tags .............................. 7
(f) Alternative disclosures—television
or radio advertisements ..................... 7
Section 213.8—Record rete n tio n .................... 7
Section 213.9—Relation to state laws . . . . 7
(a) Inconsistent statelaw ........................ 7
(b) Exemptions ......................................... 7
Appendix A—Model forms .............................9
Appendix B—Federal enforcement
agencies .................................... ................ 15
Appendix C—Issuance of staff
interpretations .......................................... 15

TRUTH IN LE N D IN G A C T
Section
181 Definitions ..........................................
182 Consumer lease disclosures ............
183 Lessee’s liability on expiration
or termination of lease .....................
184 Consumer lease advertising ............
185 Civil liability .....................................
186 Relation to state laws .......................
187 Regulations .......................................

17
17
18
18
19
19
20

Regulation M
Consumer Leasing
12 CFR 213; as amended effective April 1, 1997*

SECTION 213.1— Authority, Scope,
Purpose, and Enforcement
(a) Authority. The regulation in this part,
known as Regulation M, is issued by the
Board of Governors of the Federal Reserve
System to implement the consumer leasing
provisions of the Truth in Lending Act, which
is title I of the Consumer Credit Protection
Act, as amended (15 USC 1601 et seq.).
Information-collection requirements contained
in this regulation have been approved by the
Office of Management and Budget under the
provisions of 44 USC 3501 et seq. and have
been assigned OMB control number
7100-0202.
(b) Scope and purpose. This part applies to
all persons that are lessors of personal prop­
erty under consumer leases as those terms are
defined in section 213.2(e)(1) and (h). The
purpose of this part is—
(1) to ensure that lessees of personal prop­
erty receive meaningful disclosures that en­
able them to compare lease terms with
other leases and, where appropriate, with
credit transactions;
(2) to limit the amount of balloon payments
in consumer lease transactions; and
(3) to provide for the accurate disclosure of
lease terms in advertising.
(c) Enforcement and liability. Section 108 of
the act contains the administrative enforce­
ment provisions. Sections 112, 130, 131, and
185 of the act contain the liability provisions
for failing to comply with the requirements of
the act and this part.

SECTION 213.2— Definitions
For the purposes of this part the following
definitions apply;
(a) Act means the Truth in Lending Act (15
USC 1601 et seq.) and the Consumer Leasing
Act is chapter 5 of the Truth In Lending Act.
* Compliance with the revised version is optional until
October 1, 1997.

(b) Advertisement means a commercial mes­
sage in any medium that directly or indirectly
promotes a consumer lease transaction.
(c) Board refers to the Board of Governors of
the Federal Reserve System.
(d) Closed-end lease means a consumer lease
other than an open-end lease as defined in this
section.
(e) (1) Consumer lease means a contract in
the form of a bailment or lease for the use
of personal property by a natural person
primarily for personal, family, or household
purposes, for a period exceeding four
months and for a total contractual obliga­
tion not exceeding $25,000, whether or not
the lessee has the option to purchase or
otherwise become the owner of the property
at the expiration of the lease. Unless the
context indicates otherwise, in this part
“lease” means “consumer lease.”
(2) The term does not include a lease that
meets the definition of a credit sale in
Regulation Z (12 CFR 226.2(a)). It also
does not include a lease for agricultural,
business, or commercial purposes or a lease
made to an organization.
(3) This part does not apply to a lease
transaction of personal property which is
incident to the lease of real property and
which provides that—
(i) the lessee has no liability for the
value of the personal property at the end
of the lease term except for abnormal
wear and tear, and
(ii) the lessee has no option to purchase
the leased property.
(f) Gross capitalized cost means the amount
agreed upon by the lessor and the lessee as
the value of the leased property and any items
that are capitalized or amortized during the
lease term, including but not limited to taxes,
insurance, service agreements, and any out­
standing prior credit or lease balance. Capital­
ized cost reduction means the total amount of
any rebate, cash payment, net trade-in allow­
ance, and noncash credit that reduces the

§ 213.2
gross capitalized cost. The adjusted capital­
ized cost equals the gross capitalized cost less
the capitalized cost reduction, and is the
amount used by the lessor in calculating the
base periodic payment.
(g) Lessee means a natural person who enters
into or is offered a consumer lease.
(h) Lessor means a person who regularly
leases, offers to lease, or arranges for the
lease of personal property under a consumer
lease. A person who has leased, offered, or
arranged to lease personal property more than
five times in the preceding calendar year or
more than five times in the current calendar
year is subject to the act and this part.
(i) Open-end lease means a consumer lease in
which the lessee’s liability at the end of the
lease term is based on the difference between
the residual value of the leased property and
its realized value.
(j) Organization means a corporation, trust,
estate, partnership, cooperative, association, or
government entity or instrumentality.
(k) Person means a natural person or an
organization.
(/) Personal property means any property that
is not real property under the law of the state
where the property is .located at the time it is
offered or made available for lease.
(m) Realized value means—
(1) the price received by the lessor for the
leased property at disposition;
(2) the highest offer for disposition of the
leased property; or
(3) the fair market value of the leased
property at the end of the lease term.
(n) Residual value means the value of the
leased property at the end of the lease term,
as estimated or assigned at consummation by
the lessor, used in calculating the base peri­
odic payment.
(o) Security interest and security mean any
interest in property that secures the payment
or performance of an obligation.
(p) State means any state, the District of Co­
lumbia, the Commonwealth of Puerto Rico,
2

Regulation M
and any territory or possession of the United
States.

SECTION 213.3— General Disclosure
Requirements
(a) General requirements. A lessor shall make
the disclosures required by section 213.4, as
applicable. The disclosures shall be made
clearly and conspicuously in writing in a form
the consumer may keep, in accordance with
this section.
(1) Form o f disclosures. The disclosures re­
quired by section 213.4 shall be given to
the lessee together in a dated statement that
identifies the lessor and the lessee; the dis­
closures may be made either in a separate
statement that identifies the consumer lease
transaction or in the contract or other docu­
ment evidencing the lease. Alternatively, the
disclosures required to be segregated from
other information under paragraph (a)(2) of
this section may be provided in a separate
dated statement that identifies the lease, and
the other required disclosures may be pro­
vided in the lease contract or other docu­
ment evidencing the lease. In a lease of
multiple items, the property description re­
quired by section 213.4(a) may be given in
a separate statement that is incorporated by
reference in the disclosure statement re­
quired by this paragraph.
(2) Segregation o f certain disclosures. The
following disclosures shall be segregated
from other information and shall contain
only directly related information: section
213.4(b) through (f), (g)(2), (h)(3), (i)(l),
(j), and (m)(l). The headings, content, and
format for the disclosures referred to in this
paragraph (a)(2) shall be provided in a
manner substantially similar to the appli­
cable model form in appendix A of this
part.
(3) Timing o f disclosures. A lessor shall
provide the disclosures to the lessee prior to
the consummation of a consumer lease.
(4) Language o f disclosures. The disclo­
sures required by section 213.4 may be
made in a language other than English pro­
vided that they are made available in En­
glish upon the lessee’s request.

Regulation M
(b) Additional information; nonsegregated
disclosures. Additional information may be
provided with any disclosure not listed in
paragraph (a)(2) of this section, but it shall
not be stated, used, or placed so as to mislead
or confuse the lessee or contradict, obscure, or
detract attention from any disclosure required
by this part.
(c) Multiple lessors or lessees. When a trans­
action involves more than one lessor, the dis­
closures required by this part may be made by
one lessor on behalf of all the lessors. When a
lease involves more than one lessee, the lessor
may provide the disclosures to any lessee who
is primarily liable on the lease.
(d) Use o f estimates. If an amount or other
item needed to comply with a required disclo­
sure is unknown or unavailable after reason­
able efforts have been made to ascertain the
information, the lessor may use a reasonable
estimate that is based on the best information
available to the lessor, is clearly identified as
an estimate, and is not used to circumvent or
evade any disclosures required by this part.
(e) Effect o f subsequent occurrence. If a re­
quired disclosure becomes inaccurate because
of an event occurring after consummation, the
inaccuracy is not a violation of this part.
(f) Minor variations. A lessor may disregard
the effects of the follow ing in making
disclosures:
(1) that payments must be collected in
whole cents;
(2) that dates of scheduled payments may
be different because a scheduled date is not
a business day;
(3) that months have different numbers of
days; and
(4) that February 29 occurs in a leap year.

SECTION 213.4— Content o f Disclosures
For any consumer lease subject to this part,
the lessor shall disclose the following infor­
mation, as applicable:
(a) Description o f property. A brief descrip­
tion of the leased property sufficient to iden­
tify the property to the lessee and lessor.

§ 213.4
(b) Amount due at lease signing or delivery.
The total amount to be paid prior to or at
consummation or by delivery, if delivery oc­
curs after consummation, using the term
“ amount due at lease signing or delivery.”
The lessor shall itemize each component by
type and amount, including any refundable se­
curity deposit, advance monthly or other peri­
odic payment, and capitalized cost reduction;
and in motor vehicle leases, shall itemize how
the amount due will be paid, by type and
amount, including any net trade-in allowance,
rebates, noncash credits, and cash payments in
a format substantially similar to the model
forms in appendix A of this part.
(c) Payment schedule and total amount o f p e­
riodic payments. The number, amount, and
due dates or periods of payments scheduled
under the lease, and the total amount of the
periodic payments.
(d) Other charges. The total amount of other
charges payable to the lessor, itemized by type
and amount, that are not included in the peri­
odic payments. Such charges include the
amount of any liability the lease imposes upon
the lessee at the end of the lease term; the
potential difference between the residual and
realized values referred to in paragraph (k) of
this section is excluded.
(e) Total o f payments. The total of payments,
with a description such as “the amount you
will have paid by the end of the lease.” This
amount is the sum of the amount due at lease
signing (less any refundable amounts), the to­
tal amount of periodic payments (less any por­
tion of the periodic payment paid at lease
signing), and other charges under paragraphs
(b), (c), and (d) of this section. In an openend lease, a description such as “you will
owe an additional amount if the actual value
of the vehicle is less than the residual value”
shall accompany the disclosure.
(f) Payment calculation. In a motor vehicle
lease, a mathematical progression of how the
scheduled periodic payment is derived, in a
format substantially similar to the applicable
model form in appendix A of this part, which
shall contain the following:
(1) Gross capitalized cost. The gross capi­
talized cost, including a disclosure of the
3

§ 213.4
agreed-upon value of the vehicle, a descrip­
tion such as “the agreed-upon value of the
vehicle [state the amount] and any items
you pay for over the lease term (such as
service contracts, insurance, and any out­
standing prior credit or lease balance),” and
a statement of the lessee’s option to receive
a separate written itemization of the gross
capitalized cost. If requested by the lessee,
the itemization shall be provided before
consummation.
(2) Capitalized cost reduction. The capital­
ized cost reduction, with a description such
as “the amount of any net trade-in allow­
ance, rebate, noncash credit, or cash you
pay that reduces the gross capitalized cost.”
(3) Adjusted capitalized cost. The adjusted
capitalized cost, with a description such as
“the amount used in calculating your base
[periodic] payment.”
(4) Residual value. The residual value, with
a description such as “the value of the ve­
hicle at the end of the lease used in calcu­
lating your base [periodic ] payment.”
(5) D epreciation and any am ortized
amounts. The depreciation and any amor­
tized amounts, which is the difference be­
tween the adjusted capitalized cost and the
residual value, with a description such as
“the amount charged for the vehicle’s de­
cline in value through normal use and for
any other items paid over the lease term.”
(6) Rent charge. The rent charge, with a
description such as “the amount charged in
addition to the depreciation and any amor­
tized amounts.” This amount is the differ­
ence between the total of the base periodic
payments over the lease term minus the de­
preciation and any amortized amounts.
(7) Total o f base periodic payments. The
total of base periodic payments with a de­
scription such as “depreciation and any am­
ortized amounts plus the rent charge.”
(8) Lease term. The lease term with a de­
scription such as “the number of [periods
of repayment] in your lease.”
(9) Base periodic payment. The total of the
base periodic payments divided by the num­
ber of payment periods in the lease.
(10) Itemization o f other charges. An item­
ization of any other charges that are part of
the periodic payment.

Regulation M
(11) Total periodic payment. The sum of
the base periodic payment and any other
charges that are part o f the periodic
payment.
(g) Early termination.
(1) Conditions and disclosure o f charges.
A statement of the conditions under which
the lessee or lessor may terminate the lease
prior to the end of the lease term; and the
amount or a description of the method for
determining the amount of any penalty or
other charge for early termination, which
must be reasonable.
(2) Early-termination notice. In a motor ve­
hicle lease, a notice substantially similar to
the following: “Early Termination. You may
have to pay a substantial charge if you end
this lease early. The charge may be up to
several thousand dollars. The actual charge
will depend on when the lease is termi­
nated. The earlier you end the lease, the
greater this charge is likely to be.”
(h) Maintenance responsibilities. The follow­
ing provisions are required:
(1) Statement o f responsibilities. A state­
ment specifying whether the lessor or the
lessee is responsible for maintaining or ser­
vicing the leased property, together with a
brief description of the responsibility;
(2) Wear-and-use standard. A statement of
the lessor’s standards for wear and use (if
any), which must be reasonable; and
(3) Notice o f wear-and-use standard. In a
motor vehicle lease, a notice regarding wear
and use substantially similar to the follow­
ing: “Excessive Wear and Use. You may be
charged for excessive wear based on our
standards for normal use.” The notice shall
also specify the amount or method for de­
termining any charge for excess mileage.
(i) Purchase option. A statement of whether
or not the lessee has the option to purchase
the leased property, and:
(1) End o f lease term. If at the end of the
lease term, the purchase price; and
(2) During lease term. If prior to the end
of the lease term, the purchase price or the
method for determining the price and when
the lessee may exercise this option.
(j) Statement referencing nonsegregated dis­

Regulation M
closures. A statement that the lessee should
refer to the lease documents for additional
information on early termination, purchase op­
tions and maintenance responsibilities, warran­
ties, late and default charges, insurance, and
any security interests, if applicable.
(k) Liability between residual and realized
values. A statement of the lessee’s liability, if
any, at early termination or at the end of the
lease term for the difference between the re­
sidual value of the leased property and its
realized value.
(/) Right o f appraisal. If the lessee’s liability
at early termination or at the end of the lease
term is based on the realized value of the
leased property, a statement that the lessee
may obtain, at the lessee’s expense, a profes­
sional appraisal by an independent third party
(agreed to by the lessee and the lessor) of the
value that could be realized at sale of the
leased property. The appraisal shall be final
and binding on the parties.
(m) Liability at end o f lease term based on
residual value. If the lessee is liable at the
end of the lease term for the difference be­
tween the residual value of the leased property
and its realized value:
(1) Rent and other charges. The rent and
other charges, paid by the lessee and re­
quired by the lessor as an incident to the
lease transaction, with a description such as
“the total amount of rent and other charges
imposed in connection with your lease
[state the amount].”
(2) Excess liability. A statement about a re­
buttable presumption that, at the end of the
lease term, the residual value of the leased
property is unreasonable and not in good
faith to the extent that the residual value
exceeds the realized value by more than
three times the base monthly payment (or
more than three times the average payment
allocable to a monthly period, if the lease
calls for periodic payments other than
monthly); and that the lessor cannot collect
the excess amount unless the lessor brings a
successful court action and pays the lessee’s
reasonable attorney’s fees, or unless the ex­
cess of the residual value over the realized
value is due to unreasonable or excessive

§ 213.4
wear or use of the leased property (in
which case the rebuttable presumption does
not apply).
(3) Mutually agreeable final adjustment. A
statement that the lessee and lessor are per­
mitted, after termination of the lease, to
make any mutually agreeable final adjust­
ment regarding excess liability.
(n) Fees and taxes. The total dollar amount
for all official and license fees, registration,
title, or taxes required to be paid in connec­
tion with the lease.
(o) Insurance. A brief identification of insur­
ance in connection with the lease including:
(1) Through the lessor. If the insurance is
provided by or paid through the lessor, the
types and amounts of coverage and the cost
to the lessee; or
(2) Through a third party. If the lessee
must obtain the insurance, the types and
amounts of coverage required of the lessee.
(p) Warranties or guarantees. A statement
identifying all express warranties and guaran­
tees from the manufacturer or lessor with re­
spect to the leased property that apply to the
lessee.
(q) Penalties and other charges fo r delin­
quency. The amount or the method of deter­
mining the amount of any penalty or other
charge for delinquency, default, or late pay­
ments, which must be reasonable.
(r) Security interest. A description of any se­
curity interest, other than a security deposit
disclosed under paragraph (b) of this section,
held or to be retained by the lessor; and a
clear identification of the property to which
the security interest relates.
(s) Limitations on rate information. If a lessor
provides a percentage rate in an advertisement
or in documents evidencing the lease transac­
tion, a notice stating that “this percentage
may not measure the overall cost of financing
this lease” shall accompany the rate disclo­
sure. The lessor shall not use the term “an­
nual percentage rate,” “annual lease rate,” or
any equivalent term.
(t) N on -m otor vehicle open-end leases.
Non-motor vehicle open-end leases remain
5

§ 213.4
subject to section 182(10) of the act regarding
end-of-term liability.

SECTION 213.5— Renegotiations,
Extensions, and Assumptions
(a) Renegotiation. A renegotiation occurs
when a consumer lease subject to this part is
satisfied and replaced by a new lease under­
taken by the same consumer. A renegotiation
requires new disclosures, except as provided
in paragraph (d) of this section.
(b) Extension. An extension is a continuation,
agreed to by the lessor and the lessee, of an
existing consumer lease beyond the originally
scheduled end of the lease term, except when
the continuation is the result of a renegotia­
tion. An extension that exceeds six months
requires new disclosures, except as provided
in paragraph (d) of this section.
(c) Assumption. New disclosures are not re­
quired when a consumer lease is assumed by
another person, whether or not the lessor
charges an assumption fee.
(d) Exceptions. New disclosures are not re­
quired for the following, even if they meet the
definition of a renegotiation or an extension:
(1) a reduction in the rent charge;
(2) the deferment of one or more payments,
whether or not a fee is charged;
(3) the extension of a lease for not more
than six months on a month-to-month basis
or otherwise;
(4) a substitution of leased property with
property that has a substantially equivalent
or greater economic value, provided no
other lease terms are changed;
(5) the addition, deletion, or substitution of
leased property in a multiple-item lease,
provided the average periodic payment does
not change by more than 25 percent; or
(6) an agreement resulting from a court
proceeding.

SECTION 213.6
[Reserved]
6

Regulation M

SECTION 213.7— Advertising
(a) General rule. An advertisement for a con­
sumer lease may state that a specific lease of
property at specific amounts or terms is avail­
able only if the lessor usually and customarily
leases or will lease the property at those
amounts or terms.
(b) Clear-and-conspicuous standard. Disclo­
sures required by this section shall be made
clearly and conspicuously.
(1) Amount due at lease signing. Except for
the statement of a periodic payment, any
affirmative or negative reference to a charge
that is a part of the disclosure required un­
der paragraph (d)(2)(ii) of this section shall
not be more prominent than that disclosure.
(2) Advertisement o f a lease rate. If a les­
sor provides a percentage rate in an adver­
tisement, the rate shall not be more promi­
nent than any of the disclosures in section
213.4, with the exception of the notice in
section 213.4(s) required to accompany the
rate; and lessor shall not use the term “an­
nual percentage rate,” “annual lease rate,”
or equivalent term.
(c) Catalogs and multipage advertisements. A
catalog or other multipage advertisement that
provides a table or schedule of the required
disclosures shall be considered a single adver­
tisement if, for lease terms that appear without
all the required disclosures, the advertisement
refers to the page or pages on which the table
or schedule appears.
(d) Advertisement o f terms that require addi­
tional disclosure.
(1) Triggering terms. An advertisement that
states any of the following items shall con­
tain the disclosures required by paragraph
(d)(2) of this section, except as provided in
paragraphs (e) and (f) of this section:
(i) the amount of any payment; or
(ii) a statement of any capitalized cost
reduction or other payment required prior
to or at consummation or by delivery, if
delivery occurs after confirmation.
(2) Additional terms. An advertisement stat­
ing any item listed in paragraph (d)(1) of
this section shall also state the following
items:

Regulation M
(i) that the transaction advertised is a
lease;
(ii) the total amount due prior to or at
consummation or by delivery, if delivery
occurs after consummation;
(iii) the number, amounts, and due dates
or periods of scheduled payments under
the lease;
(iv) a statement of whether or not a se­
curity deposit is required; and
(v) a statement that an extra charge may
be imposed at the end of the lease term
where the lessee’s liability (if any) is
based on the difference between the re­
sidual value of the leased property and its
realized value at the end of the lease
term.
(e) Alternative disclosures—merchandise tags.
A merchandise tag stating any item listed in
paragraph (d)(1) of this section may comply
with paragraph (d)(2) of this section by refer­
ring to a sign or display prominently posted in
the lessor’s place of business that contains a
table or schedule of the required disclosures.
(f) Alternative disclosures—television or radio
advertisements.
(1) Toll-free number or print advertisement.
An advertisement made through television
or radio stating any item listed in paragraph
(d)(1) of this section complies with para­
graph (d)(2) of this section if the advertise­
ment states the items listed in paragraphs
(d)(2)(i) through (iii) of this section, and—
(i) lists a toll-free telephone number
along with a reference that such number
may be used by consumers to obtain the
information required by paragraph (d)(2)
of this section; or
(ii) directs the consumer to a written ad­
vertisement in a publication of general
circulation in the community served by
the media station, including the name and
the date of the publication, with a state­
ment that information required by para­
graph (d)(2) of this section is included in
the advertisement. The written advertise­
ment shall be published beginning at
least three days before and ending at
least ten days after the broadcast.
(2) Establishment o f toll-free number.
(i) The toll-free telephone number shall

§ 213.9
be available for no fewer than ten days,
beginning on the date of the broadcast,
(ii) The lessor shall provide the informa­
tion required by paragraph (d)(2) of this
section orally, or in writing upon request.

SECTION 213.8— Record Retention
A lessor shall retain evidence of compliance
with the requirements imposed by this part,
other than the advertising requirements under
section 213.7, for a period of not less than
two years after the date the disclosures are
required to be made or an action is required
to be taken.

SECTION 213.9— Relation to State
Laws
(a) Inconsistent state law. A state law that is
inconsistent with the requirements of the act
and this part is preempted to the extent of the
inconsistency. If a lessor cannot comply with
a state law without violating a provision of
this part, the state law is inconsistent within
the meaning of section 186(a) of the act and
is preempted, unless the state law gives
greater protection and benefit to the consumer.
A state, through an official having primary
enforcement or interpretative responsibilities
for the state consumer leasing law, may apply
to the Board for a preemption determination.
(b) Exemptions.
(1) Application. A state may apply to the
Board for an exemption from the require­
ments of the act and this part for any class
of lease transactions within the state. The
Board will grant such an exemption if the
Board determines that—
(i) the class of leasing transactions is
subject to state-law requirements substan­
tially similar to the act and this part or
that lessees are afforded greater protec­
tion under state law; and
(ii) there is adequate provision for state
enforcement.
(2) Enforcement and liability. After an ex­
emption has been granted, the requirements
7

§ 213.9
of the applicable state law (except for addi­
tional requirements not imposed by federal
law) will constitute the requirements of the

Regulation M
act and this part. No exemption will extend
to the civil liability provisions of sections
130, 131, and 185 of the act.

Appendix A

Regulation M

APPENDIX A— Model Forms
A -l— Model Open-End or Finance Vehicle Lease Disclosures

A ppendix A -l M odel O pen-End o r Finance V ehicle Lease Disclosures

Federal Consumer Leasing Act Disclosures
Date
L esso rs)
A m ount D u e at
L ease Signing
o r D elivery
(Itemized below)*

Lessee(s)

Your first monthly payment of $
is due on
the

s

O ther Charges (not part o f your m onthly
paym ent)

M onthly Paym ents

. followed bv

Disposition fee (if you do
not purchase the vehicle^

$

payments of $
due on
of each month. The total of your

monthly payments is S
Total

A m ount D ue A t L ease S ign ing or D elivery:
C apitalized cost reduction
First m onthly paym ent
Refundable security deposit
T itle fees
R egistration fees

$ _
_
_
_
_

T otal o f Paym ents
(The am ount you will have
paid by the end o f the lease)

X

You will ow e an additional
am ount if the actual value o f
the vehicle is less than the
residual value.

H ow the A m ount D ue at L ease S ign ing or D elivery w ill be paid:
N et trade-in allow ance
Rebates and noncash credits
A m ount to be paid in cash

$ __________________
__________________
__________________

Gross capitalized cost. T he agreed upon value o f the vehicle ($ ____________________ ) and any item s
you pay over the lease term (such as service contracts, insurance, and any outstanding prior credit
or lease balance) ...............................................................................................................................................................................................
If you w ant an item ization o f this am ount, please check this box.

$ .

EH

C apitalized cost reduction. The am ount o f any net trade-in allow ance, rebate, noncash credit, o r cash you pay
that reduces the gross capitalized cost ....................................................................................................................................................... ”

-

Adjusted capitalized cost. The am ount used in calculating your base m onthly p a y m e n t.........................................................
Residual value. The value o f the vehicle at the end o f the lease used in calculating your base m onthly paym ent .........
D epreciation and any am ortized am ounts. T he am ount charged fo r the vehicle’s decline in value
through norm al use and fo r other item s paid over the lease term ....................................................................................................
R ent charge. The am ount charged in addition to the depreciation and any am ortized am ounts ............................................
T otal o f base m onthly paym ents. T he depreciation and any am ortized am ounts plus the rent charge ..............................
L ease term . T he num ber o f m onths in your lease ................................................................. .............................................................

+

B ase monthly p a y m e n t..............................................................................................................................................................................................
M onthly sales/use tax ...................................................................................................................................................................................

+
............................ ....................................................................................................... =$ '
Total m onthly paym ent .............................................................................................................................................................................................
R ent and oth er charges. The total am ount o f rent and other charges im posed in connection w ith your lease $ _

E xcessive W ear and Use. You m ay be charged for excessive w ear based on our standards for norm al use [and for m ileage in excess
o f ___________ m iles per year at the rate o f __________p er mile].
Purchase O ption a t E nd o f L ease T erm . [You have an option to purchase the vehicle at the end o f the lease term for $ _____________
[and a purchase option fee o f $ ___________________ ].] [You do not have an option to purchase the vehicle at the end o f the lease term.]
O ther Im portant T erm s. S ee your lease docum ents fo r additional inform ation on early term ination, purchase options and m aintenance
responsibilities, w arranties, late and default charges, insurance, and any security interest, i f applicable.
_____________ _____

9

Appendix A

Regulation M

A p p e n d ix A - 1 M o d el O p e n -E n d o r F in a n c e V e h ic le L e a s e D is c lo su re s

Page 2 of 2

[The following provisions are the nonsegregated disclosures required under R egulation M .]

Y e ar

M ak e

M o d el

B o d y S ty le

V e h ic le ID #

Official Fees and Taxes. The total amount you will pay for official and license fees, registration, title, and taxes over the term of your lease, whether
included with your monthly payments or assessed otherwise: $__________________ .
Insurance. The following types and amounts of insurance will be acquired in connection with this lease:

_________ We (lessor) will provide the insurance coverage quoted above for a total premium cost of $ _________________ .
_________ You (lessee) agree to provide insurance coverage in the amount and types indicated above.

End of Term Liability.

(a) The residual value ($______________ ) of the vehicle is based on a reasonable, good faith estimate of the value of the vehicle at the
end of the lease term. If the actual value of the vehicle at that time is greater than the residual value, you will have no further liability under this lease, except for
other charges already incurred [and are entitled to a credit or refund of any surplus.] If the actual value of the vehicle is less than the residual value, you will be
liable for any difference up to $_________________(3 times the monthly payment). For any difference in excess of that amount, you will be liable only if:
1. Excessive use or damage [as described in paragraph____] [representing more than normal wear and use] resulted in an unusually low value at the end of
the term.
2. The matter is not otherwise resolved and we win a lawsuit against you seeking a higher payment.
3. You voluntarily agree with us after the end of the lease term to make a higher payment.
Should we bring a lawsuit against you, we must prove that our original estimate of the value of the leased property at the end of the lease term was reasonable and
was made in good faith. For example, we might prove that the actual was less than the original estimated value, although the original estimate was reasonable,
because of an unanticipated decline in value for that type of vehicle. We must also pay your attorney’s fees.
(b) If you disagree with the value we assign to the vehicle, you may obtain, at your own expense, from an independent third party agreeable to both of us, a
professional appraisal of th e____________ value of the leased vehicle which could be realized at sale. The appraised value shall then be used as the actual value.

Standards for Wear and Use. The following standards are applicable for determining unreasonable or excess wear and use of the leased vehicle:
Maintenance.
[You are responsible for the following maintenance and servicing of the leased vehicle:

------------------------------------------------------------------------------------------------------------------------- ].
[We are responsible for the following maintenance and servicing of the leased vehicle:

-- ---------------------------------------------------------------------------------------------------- ].
Warranties. The leased vehicle is subject to the following express warranties:
Early Termination and Default,

(a) You may terminate this lease before the end of the lease term under the following conditions:

The charge for such early termination is:

(b) We may terminate this lease before the end of the lease term under the following conditions:

Upon such termination we shall be entitled to the following charge(s) for:

(c) To the extent these charges take into account the value of the vehicle at termination, if you disagree with the value we assign to the vehicle, you may obtain,
at your own expense, from an independent third party agreeable to both of us, a professional appraisal of the___________________ value of the leased vehicle
which could be realized at sale. The appraised value shall then be used as the actual value.

Security Interest.
Late Payments.

We reserve a security interest of the following type in the property listed below to secure performance of your obligation under this lease:

The charge for late payments is :____________________________________________________________________________________________

Option to Purchase Leased Property Prior to the End of the Lease.

[You have an option to purchase the leased vehicle prior to the end of the term.
The price will be [$_______________________ /[the method of determining the price].] [You do not have an option to purchase the leased vehicle.]

10

Regulation M

Appendix A

A-2— Model Closed-End or Net Vehicle Lease Disclosures

A ppendix A-2 M odel C losed-End or N et V ehicle Lease Disclosures

Federal Consumer Leasing Act Disclosures
Date
L essor(s)
A m ount D ue at
L ease Signing
or D elivery
(Itemized below)*

L essee(s)
M onthly Paym ents

O ther C harges (not part o f your m onthly
paym ent)

Your first monthly payment of $
is due on
payments of $

$

Total

A m ount D u e A t L ease Signing or D elivery:
$ _
_
_
_
_
Total

Disposition fee (if you do
not purchase the vehicle)

$

due on

monthly payments is $

C apitalized cost reduction
First m onthly paym ent
Refundable security deposit
Title fees
Registration fees

. followed bv

T otal o f Paym ents
(The am ount you w ill have
paid by the end o f the lease)

$

H ow th e A m ount D ue a t L ease Signing or D elivery w ill be paid:
Net trade-in allow ance
Rebates and noncash credits
A m ount to be paid in cash

$ __________________
__________________
__________________

$ .

G ross capitalized c o s t The agreed upon value o f the vehicle ($ ____________________ ) and any items
you pay over the lease term (such as service contracts, insurance, and any outstanding prior credit
o r lease balance) ...............................................................................................................................................................................................

$ _

If you want an item ization o f this am ount, please check this box. Q
C apitalized cost reduction. The am ount o f any net trade-in allow ance, rebate, noncash credit, o r cash you pay
that reduces the gross capitalized cost ....................................................................................................................................................... “

_

Adjusted capitalized cost. The am ount used in calculating your base m onthly p a y m e n t........................................................
Residual value. The value o f the vehicle at the end o f the lease used in calculating your base m onthly paym ent .............

”

_

-

-

B ase m onthly p a y m e n t..................................................................................................................................................................................

”

.

M onthly sales/use tax ...................................................................................................................................................................................

+

_

D epreciation and any am ortized am ounts. T he am ount charged for the vehicle’s decline in value
through norm al use and for other item s paid over the lease term ......................................................................................................
R ent charge. The am ount charged in addition to the depreciation and any am ortized am ounts ...........................................
T otal o f base m onthly paym ents. The depreciation and any am ortized am ounts plus the rent charge ..............................
L ease term . T he num ber o f m onths in your lease ...............................................................................................................................

...............................................................................
T otal m onthly paym ent .................................................................................................................................................................................

+

E xcessive W ear and U se. You m ay be charged for excessive w ear based on our standards for norm al use [and for m ileage in excess
o f ___________ m iles per year at the rate o f __________per mile].
Purchase O ption a t E nd o f L ease T erm . [You have an option to purchase the vehicle at the end o f the lease term for $ _____________
[and a purchase option fee o f $ ___________________ ].] [You do not have an option to purchase the vehicle at the end o f the lease term.]
O ther Im portant T erm s. See your lease docum ents for additional inform ation on early term ination, purchase options and m aintenance
responsibilities, w arranties, late and default charges, insurance, and any security interest, i f applicable.

11

Appendix A

Regulation M

A p pend ix A -2 M od el C losed -E n d or N et V e h ic le L ease D isclo su res

Page 2 of 2

[The follow ing p rovisions are the nonsegregated disclosures required under R egulation M .]

Y ear

M ake

■: DeSCHpUOB <3# L eased Property
B od y S ty le
M od el

...................
V e h icle ID #

Official Fees and Taxes. The total amount you will pay for official and license fees, registration, title, and taxes over the term of your lease, whether
included with your monthly payments or assessed otherwise: $__________________ .

Insurance. The following types and amounts of insurance will be acquired in connection with this lease:

_________ We (lessor) will provide the insurance coverage quoted above for a total premium cost of $ __________________ .
_________ You (lessee) agree to provide insurance coverage in the amount and types indicated above.

Standards for Wear and Use. The following standards are applicable for determining unreasonable or excess wear and use of the leased vehicle:
Maintenance.
[You are responsible for the following maintenance and servicing of the leased vehicle:

_____________________________________________________________ ].
[We are responsible for the following maintenance and servicing of the leased vehicle:
____________________________________________________________________________________________________________________ ___________________

.]•

Warranties. The leased vehicle is subject to the following express warranties:
Early Termination and Default,

(a) You may terminate this lease before the end of the lease term under the following conditions:

The charge for such early termination is:

(b) We may terminate this lease before the end of the lease term under the following conditions:

Upon such termination we shall be entitled to the following charge(s) for:

(c) To the extent these charges take into account the value of the vehicle at termination, if you disagree with the value we assign to the vehicle, you may obtain,
at your own expense, from an independent third party agreeable to both of us, a professional appraisal of the___________________ value of the leased vehicle
which could be realized at sale. The appraisal value shall then be used as the actual value.

Security Interest.
Late Payments.

We reserve a security interest of the following type in the property listed below to secure performance of your obligation under this lease:

The charge for late payments is :_____________________________________________________________________________________________ •

Option to Purchase Leased Property Prior to the End of the Lease.

[You have an option to purchase the leased vehicle prior to the end of the term.
The price will be [$_______________________ /[the method of determining the price].] [You do not have an option to purchase the leased vehicle.]

12

Appendix A

Regulation M

A-3— Model Furniture Lease Disclosures

A ppendix A -3 M odel Furniture Lease Disclosures

Federal Consumer Leasing Act Disclosures

D a te _____
L essor(s)

Lessee(s)

D e scrip tio n o f L eased P ro p e rty
C olor________ __________ Stock #____________________________Mfg.

A m o u n t D u e a t L ease Signing

M o n th ly P aym ents

First monthly payment

Your first monthlv payment of $

O th e r C h arg e s (not part of
your m onthly paym ent)

Refundable security deposit
Delivery/Installation fee
Total

the
of each month. The total of vour
monthlv pavments is $

Quantity

T o tal o f P aym ents
(T he am ount you
w ill have paid by
the end o f the lease)

$
Total $

P u rc h a se O p tio n a t E n d o f L e ase T e rm . [You have an option to purchase the leased property at the end o f the lease term for $ __________
[and a purchase option fee o f $ ________________].] [You do not have an option to purchase the leased property at the end o f the lease term.]
O th e r Im p o rta n t T e rm s. S ee your lease docum ents fo r additional inform ation on early term ination, purchase options and m aintenance
responsibilities, w arranties, late and default charges, insurance, and any security interest, i f applicable.

[T h e f o llo w in g p r o v is io n s a r e th e n o n s e g re g a te d d is c lo s u r e s r e q u ir e d u n d e r R e g u la tio n M .]

O fficial F ees a n d T axes. The total amount you will pay for official fees, and taxes over the term of your lease, whether included with your monthly
payments or assessed otherwise: $ ________________ .
In s u ra n c e . The following types and amounts of insurance will be acquired in connection with this lease: .

______We (lessor) will provide the insurance coverage quoted above for a total premium cost of $ _________________ .
______You (lessee) agree to provide insurance coverage in the amount and types indicated above.
S ta n d a rd s f o r W e a r a n d Use. The following standards are applicable for determining unreasonable or excess wear and use of the leased property:

M ain ten a n ce .
[You are responsible for the following maintenance and servicing of the leased property:

[We are responsible for the following maintenance and servicing of the leased property:

W a rra n tie s . The leased property is subject to the following express warranties:

E a rly T e rm in a tio n a n d D efau lt, (a) You may terminate this lease before the end of the lease term under the following conditions:

The charge for such early termination is: .
(b) We may terminate this lease before the end of the lease term under the following conditions: _
Upon such termination we shall be entitled to the following charge(s) fo r:___________________

13

Appendix A

Regulation M

Appendix A -3 M odel Furniture Lease Disclosures

Page 2 o f 2

E arly T erm ination and D efault, (continued)
(c) To the extent these charges take into account the value of the leased property at termination, if you disagree with the value we assign to the
property, you may obtain, at your own expense, from an independent third party agreeable to both of us, a professional appraisal of the
value of the property which could be realized at sale. The appraised value shall then be used as the actual value.
Security Interest. We reserve a security interest of the following type in the property listed below to secure performance of your obligations under this lease:

L ate Paym ents. The charge for late payments is: __________________________________________________________________________________________
Purchase O ption Prior to th e E nd o f th e L ease Term .
[You have an option to purchase the leased property prior to the end of the term. The price will be [$ ________ ]/the method of determining the price].]
[You do not have an option to purchase the leased property.]

14

Regulation M

APPENDIX B— Federal Enforcement
Agencies
I The following list indicates which federal
agency enforces Regulation M (12 CFR 213)
for particular classes of business. Any ques­
tions concerning compliance by a particular
business should be directed to the appropriate
enforcement agency. Terms that are not de­
fined in the Federal Deposit Insurance Act (12
USC 1813(s)) shall have the meaning given to
them in the International Banking Act of 1978
(12 USC 3101).
1. National banks and federal branches and
federal agencies o f foreign banks
District office of the Office of the Comptroller
of the Currency for the district in which the
institution is located.
2. State member banks, branches and agen­
cies o f foreign banks (other than federal
branches, federal agencies, and insured state
branches o f foreign banks), commercial lend­
ing companies owned or controlled by foreign
banks, and organizations operating under sec­
tion 25 or 25A o f the Federal Reserve Act
Federal Reserve Bank serving the District in
which the institution is located.
3. Nonmember insured banks and insured
state branches o f foreign banks
Federal Deposit Insurance Corporation Re­
gional Director for the region in which the
institution is located.
4. Savings institutions insured under the Sav­
ings Association Insurance Fund o f the FDIC
and federally chartered savings banks insured
under the Bank Insurance Fund o f the FDIC
(but not including state-chartered savings
banks insured under the Bank Insurance
Fund)
Office of Thrift Supervision regional director
for the region in which the institution is
located.
5. Federal credit unions
Regional office of the National Credit Union

Appendix C
Administration serving the area in which the
federal credit union is located.
6. A ir carriers
Assistant General Counsel for
Aviation Enforcement and Proceedings
Department of Transportation
400 Seventh Street, S.W.
Washington, D.C. 20590
7. Those subject to Packers and Stockyards
Act
Nearest Packers and Stockyards Administra­
tion area supervisor.
8. Federal Land Banks, Federal Land Bank
Associations, Federal Interm ediate Credit
Banks, and Production Credit Associations
Farm Credit Administration
490 L’Enfant Plaza, S.W.
Washington, D.C. 20578
9. A ll other lessors (lessors operating on a
local or regional basis should use the address
o f the FTC regional office in which they
operate)
Division of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
Washington, D.C. 20580

APPENDIX C— Issuance of Staff
Interpretations
Officials in the Board’s Division of Consumer
and Community Affairs are authorized to issue
official staff interpretations of this Regulation
M (12 CFR 213). These interpretations pro­
vide the formal protection afforded under sec­
tion 130(f) of the act. Except in unusual cir­
cumstances, interpretations will not be issued
separately but will be incorporated in an offi­
cial commentary to Regulation M (supplement
I of this part),'which will be amended periodi­
cally. No staff interpretations will be issued
approving lessor’s forms, statements, or calcu­
lation tools or methods.

15

Truth in Lending Act
15 USC 1601 et seq.; 82 Stat. 146; Pub. L. 90-321 (May 29, 1968)

CHAPTER 5— CONSUMER LEASES
SECTION 181— Definitions
For purposes of this chapter—
(1) The term "consumer lease” means a
contract in the form of a lease or bailment
for the use of personal property by a natu­
ral person for a period of time exceeding
four months, and for a total contractual ob­
ligation not exceeding $25,000, primarily
for personal, family, or household purposes,
whether or not the lessee has the option to
purchase or otherwise become the owner of
the property at the expiration of the lease,
except that such term shall not include any
credit sale as defined in section 103(g).
Such term does not include a lease for agri­
cultural, business, or commercial purposes,
or to a government or governmental agency
or instrumentality, or to an organization.
(2) The term “lessee" means a natural per­
son who leases or is offered a consumer
lease.
(3) The term “lessor” means a person who
is regularly engaged in leasing, offering to
lease, or arranging to lease under a con­
sumer lease.
(4) The term “
personal property” means
any property which is not real property un­
der the laws of the State where situated at
the time offered or otherwise made avail­
able for lease.
(5) The terms “security” and "security in­
terest” mean any interest in property which
secures payment or performance of an
obligation.
[15 USC 1667. As added by act o f March 23, 1976 (90
Stat. 257).]

SECTION 182— Consumer Lease
Disclosures
Each lessor shall give a lessee prior to the
consummation of the lease a dated written
statement on which the lessor and lessee are
identified setting out accurately and in a clear

and conspicuous manner the following infor­
m ation with respect to that lease, as
applicable:
(1) A brief description or identification of
the leased property;
(2) The amount of any payment by the les­
see required at the inception of the lease;
(3) The amount paid or payable by the les­
see for official fees, registration, certificate
of title, or license fees or taxes;
(4) The amount of other charges payable
by the lessee not included in the periodic
payments, a description of the charges and
that the lessee shall be liable for the differ­
ential, if any, between the anticipated fair
market value of the leased property and its
appraised actual value at the termination of
the lease, if the lessee has such liability;
(5) A statement of the amount or method of
determining the amount of any liabilities
the lease imposes upon the lessee at the end
of the term and whether or not the lessee
has the option to purchase the leased prop­
erty and at what price and time;
(6) A statement identifying all express war­
ranties and guarantees made by the manu­
facturer or lessor with respect to the leased
property, and identifying the party respon­
sible for maintaining or servicing the leased
property together with a description of the
responsibility;
(7) A brief description of insurance pro­
vided or paid for by the lessor or required
of the lessee, including the types and
amounts of the coverages and costs;
(8) A description of any security interest
held or to be retained by the lessor in con­
nection with the lease and a clear identifica­
tion of the property to which the security
interest relates;
(9) The number, amount, and due dates or
periods of payments under the lease and the
total amount of such periodic payments;
(10) Where the lease provides that the les­
see shall be liable for the anticipated fair
market value of the property on expiration
of the lease, the fair market value of the
property at the inception of the lease, the
17

§ 182

Truth in Lending Act

aggregate cost of the lease on expiration, age to the property beyond reasonable wear
and the differential between them; and
and use, or to excessive use, and the lease
(11)
A statement of the conditions under may set standards for such wear and use 4f
which the lessee or lessor may terminate such standards are not unreasonable. Nothing
the lease prior to the end of the term and in this subsection shall preclude the right of a
the amount or method of determining any willing lessee to make any mutually agreeable
penalty or other charge for delinquency, de­ final adjustment with respect to such excess
residual liability, provided such an agreement
fault, late payments, or early termination.
The disclosures required under this section is reached after termination of the lease.
may be made in the lease contract to be
(b) Penalties or other charges for delinquency,
signed by the lessee. The Board may provide
default, or early termination may be specified
by regulation that any portion of the informa­
in the lease but only at an amount which is
tion required to be disclosed under this section
reasonable in the light of the anticipated or
may be given in the form of estimates where
actual harm caused by the delinquency, de­
the lessor is not in a position to know exact
fault, or early termination, the difficulties of
information.
proof of loss, and the inconvenience or
nonfeasibility of otherwise obtaining an ad­
[15 USC 1667a. As added by act of March 23, 1976 (90
Stat. 258).]
equate remedy.

SECTION 183— Lessee’s Liability on
Expiration or Termination of Lease
(a) Where the lessee’s liability on expiration
of a consumer lease is based on the estimated
residual value of the property such estimated
residual value shall be a reasonable approxi­
mation of the anticipated actual fair market
value of the property on lease expiration.
There shall be a rebuttable presumption that
the estimated residual value is unreasonable to
the extent that the estimated residual value
exceeds the actual residual value by more than
three times the average payment allocable to a
monthly period under the lease. In addition,
where the lessee has such liability on expira­
tion of a consumer lease there shall be a re­
buttable presumption that the lessor’s esti­
mated residual value is not in good faith to
the extent that the estimated residual value
exceeds the actual residual value by more than
three times the average payment allocable to a
monthly period under the lease and such les­
sor shall not collect from the lessee the
amount of such excess liability on expiration
of a consumer lease unless the lessor brings a
successful action with respect to such excess
liability. In all actions, the lessor shall pay the
lessee’s reasonable attorney’s fees. The pre­
sumptions stated in this section shall not apply
to the extent the excess of estimated over
actual residual value is due to physical dam18

(c) If a lease has a residual value provision at
the termination of the lease, the lessee may
obtain at his expense, a professional appraisal
of the leased property by an independent third
party agreed to by both parties. Such appraisal
shall be final and binding on the parties.
[15 USC 1667b. As added by act of March 23, 1976 (90
Stat. 259).]

SECTION 184— Consumer Lease
Advertising
(a) In general. If an advertisement for a con­
sumer lease includes a statement of the
amount of any payment or a statement that
any or no initial payment is required, the ad­
vertisement shall clearly and conspicuously
state, as applicable—
(1) the transaction advertised is a lease;
(2) the total amount of any initial payments
required on or before consummation of the
lease or delivery of the property, whichever
is later;
(3) that a security deposit is required;
(4) the number, amount, and timing of
scheduled payments; and
(5) with respect to a lease in which the
liability of the consumer at the end of the
lease term is based on the anticipated re­
sidual value of the property, that an extra
charge may be imposed at the end of the
lease term.

§ 186

Truth in Lending Act
(b) Advertising medium not liable. No owner
or employee of any entity that serves as a
medium in which an advertisement appears or
through which an advertisement is dissemi­
nated, shall be liable under this section.
(c) Radio advertisements.
(1) An advertisement by radio broadcast to
aid, promote, or assist, directly or indirectly,
any consumer lease shall be deemed to be
in compliance with the requirements of sub­
section (a) if such advertisement clearly and
conspicuously—
(A) states the information required by
paragraphs (1) and (2) of subsection (a);
(B) states the number, amounts, due
dates or periods of scheduled payments,
and the total of such payments under the
lease;
(C) includes—
(i) a referral to—
(I) a toll-free telephone number es­
tablished in accordance with para­
graph (2) that may be used by con­
sumers to obtain the information
required under subsection (a); or
(II) a written advertisement that—
(aa) appears in a publication in
general circulation in the commu­
nity served by the radio station on
w hich such advertisem ent is
broadcast during the period begin­
ning 3 days before any such
broadcast and ending 10 days af­
ter such broadcast; and
(bb) includes the information re­
quired to be disclosed under sub­
section (a); and
(ii) the name and dates of any publica­
tion referred to in clause (i)(II); and
(D) includes any other information which
the Board determines necessary to carry
out this chapter.
(2) (A) In the case of a radio broadcast ad­
vertisement described in paragraph (1)
that includes a referral to a toll-free tele­
phone number, the lessor who offers the
consumer lease shall—
(i) establish such a toll-free telephone
number not later than the date on
which the advertisement including the
referral is broadcast;

(ii) maintain such telephone number
for a period of not less than 10 days,
beginning on the date of any such
broadcast; and
(iii) provide the information required
under subsection (a) with respect to the
lease to any person who calls such
number.
(B) The information required to be pro­
vided under subparagraph (A)(iii) shall
be provided verbally or, if requested by
the consumer, in written form.
(3) Nothing in this subsection shall affect
the requirements of Federal law as such
requirements apply to advertisement by any
medium other than radio broadcast.
[15 USC 1667c. As added by act of March 23, 1976 (90
Stat. 259) and amended by acts of Sept. 23, 1994 (108 Stat.
2234) and Sept. 30, 1996 (110 Stat. 3009-473).]

SECTION 185— Civil Liability
(a) Any lessor who fails to comply with any
requirement imposed under section 182 or 183
of this chapter with respect to any person is
liable to such person as provided in section
130.
(b) Any lessor who fails to comply with any
requirement imposed under section 184 of this
chapter with respect to any person who suffers
actual damage from the violation is liable to
such person as provided in section 130. For
the purposes of this section, the term “credi­
tor” as used in sections 130 and 131 shall
include a lessor as defined in this chapter.
(c) Notwithstanding section 130(e), any action
under this section may be brought in any
United States district court or in any other
court of competent jurisdiction. Such actions
alleging a failure to disclose or otherwise
comply with the requirements of this chapter
shall be brought within one year of the termi­
nation of the lease agreement.
[15 USC 1667d. As added by act of March 23, 1976 (90
Stat. 260).]

SECTION 186— Relation to State Laws
(a) This chapter does not annul, alter, or af­
fect, or exempt any person subject to the pro19

§ 186

Truth in Lending Act

visions of this chapter from complying with,
the laws of any State with respect to con­
sumer leases, except to the extent that those
laws are inconsistent with any provision of
this chapter, and then only to the extent of the
inconsistency. The Board is authorized to de­
termine whether such inconsistencies exist.
The Board may not determine that any State
law is inconsistent with any provision of this
chapter if the Board determines that such law
gives greater protection and benefit to the
consumer.

extent that the Board determines such ac­
tion to be necessary—
(A) to carry out this chapter;
(B) to prevent any circumvention of this
chapter; or
(C) to facilitate compliance with the re­
quirements of the chapter.
(2) Any regulations prescribed under para­
graph (1) may contain classifications and
differentiations, and may provide for adjust­
ments and exceptions for any class of trans­
actions, as the Board considers appropriate.

(b) The Board shall by regulation exempt
from the requirements of this chapter any
class of lease transactions within any State if
it determines that under the law of that State
that class of transactions is subject to require­
ments substantially similar to those imposed
under this chapter or that such law gives
greater protection and benefit to the consumer,
and that there is adequate provision for
enforcement.

(b) Model disclosure.
(1) The Board shall establish and publish
model disclosure forms to facilitate compli­
ance with the disclosure requirements of
this chapter and to aid the consumer in
understanding the transaction to which the
subject disclosure form relates.
(2) In establishing model forms under this
subsection, the Board shall consider the use
by lessors of data processing or similar au­
tomated equipment.
(3) A lessor may utilize a model disclosure
form established by the Board under this
subsection for purposes of compliance with
this chapter, at the discretion of the lessor.
(4) Any lessor who properly uses the mate­
rial aspects of any model disclosure form
established by the Board under this subsec­
tion shall be deemed to be in compliance
with the disclosure requirements to which
the form relates.

[15 USC 1667e. As added by act of March 23, 1976 (90
Stat. 260).]

SECTION 187— Regulations
(a) Regulations authorized.
(1) The Board shall prescribe regulations to
update and clarify the requirements and
definitions applicable to lease disclosures
and contracts, and any other issues specifi­
cally related to consumer leasing, to the

[15 USC 1667f. As added by act of Sept. 30, 1996 (110
Stat. 3009-472).]

Board of Governors of the Federal Reserve System

Capital Adequacy Guidelines
12
12
12
12
12
12
12

CFR
CFR
CFR
CFR
CFR
CFR
CFR

208, Appendix A; as amended
effective January 1, 1997
208, Appendix B; as amended
effective August 1, 1995
208, Appendix E; effective January 1, 1997
225, Appendix A; as amended effective October 1, 1995
225, Appendix B; as amended effective September 1, 1995
225, Appendix D; asamended
effective August 1, 1995
225, Appendix E; effective January 1, 1997

Any inquiry relating to these guidelines should be addressed to the Federal Reserve Bank of
the Federal Reserve District in which the inquiry arises.
July 1997

Contents

Page

Page
Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
(Regulation H, Appendix A) ......................... 1

Capital Adequacy Guidelines for Bank
Holding Companies: Tier 1 Leverage
Measure (Regulation Y, Appendix D)

Capital Adequacy Guidelines for Bank
Holding Companies: Risk-Based Measure
(Regulation Y, Appendix A) ..................... 33

Capital Adequacy Guidelines for State
Member Banks: Market-Risk Measure
(Regulation H, Appendix E) ................. .. 79

Capital Adequacy Guidelines for Bank
Holding Companies and State Member
Banks: Leverage Measure (Regulation Y,
Appendix B) ................................................. 67

Capital Adequacy Guidelines for Bank
Holding Companies: Market-Risk
Measure (Regulation Y, Appendix E) . . . . 87

Capital Adequacy Guidelines for State
Member Banks: Tier 1 Leverage Measure
(Regulation H, Appendix B) ..................... 75

. . 77

Capital Adequacy Guidelines for State Member Banks:
Risk-Based Measure
12 CFR 208, appendix A; as amended effective January 1, 1997

I. Overview
The Board of Governors of the Federal Re­
serve System has adopted a risk-based capital
measure to assist in the assessment of the
capital adequacy of state member banks.' The
principal objectives of this measure are to (i)
make regulatory capital requirements more
sensitive to differences in risk profiles among
banks; (ii) factor off-balance-sheet exposures
into the assessment of capital adequacy; (iii)
minimize disincentives to holding liquid, lowrisk assets; and (iv) achieve greater consis­
tency in the evaluation of the capital adequacy
of major banks throughout the world.2
In addition, when certain banks that engage
in trading activities calculate their risk-based
capital ratio under this appendix A, they must
also refer to appendix E of this part, which
incorporates capital charges for certain market
risks into the risk-based capital ratio. When
calculating their risk-based capital ratio under
this appendix A, such banks are required to
refer to appendix E of this part for supple­
mental rules to determine qualifying and ex­
cess capital, calculate risk-weighted assets,
calculate market-risk-equivalent assets, and
calculate risk-based capital ratios adjusted for
market risk.
The risk-based capital guidelines include
both a definition of capital and a framework
for calculating weighted-risk assets by assign­
ing assets and off-balance-sheet items to broad
risk categories. A bank’s risk-based capital ra­
tio is calculated by dividing its qualifying
capital (the numerator of the ratio) by its
weighted-risk assets (the denominator).3 The
1 Supervisory ratios that relate capital to total assets for
state member banks are outlined in appendix B of this part
and in appendix B to part 225 of the Federal Reserve's
Regulation Y, 12 CFR 225.
2 The risk-based capital measure is based upon a frame­
work developed jointly by supervisory authorities from the
countries represented on the Basle Committee on Banking
Regulations and Supervisory Practices (Basle Supervisors’
Committee) and endorsed by the Group o f Ten Central
Bank Governors. The framework is described in a paper
prepared by the BSC entitled “ International Convergence of
Capital Measurement,” July 1988.
3 Banks will initially be expected to utilize period-end
amounts in calculating their risk-based capital ratios. When

definition of “qualifying capital” is outlined
below in section II, and the procedures for
calculating weighted-risk assets are discussed
in section III. Attachment I illustrates a
sample calculation of weighted-risk assets and
the risk-based capital ratio.
The risk-based capital guidelines also estab­
lish a schedule for achieving a minimum su­
pervisory standard for the ratio of qualifying
capital to weighted-risk assets and provide for
transitional arrangements during a phase-in
period to facilitate adoption and implementa­
tion of the measure at the end of 1992. These
interim standards and transitional arrange­
ments are set forth in section IV.
The risk-based guidelines apply to all state
member banks on a consolidated basis. They
are to be used in the examination and supervi­
sory process as well as in the analysis of
applications acted upon by the Federal Re­
serve. Thus, in considering an application
filed by a state member bank, the Federal
Reserve will take into account the bank’s riskbased capital ratio, the reasonableness of its
capital plans, and the degree of progress it has
demonstrated toward meeting the interim and
final risk-based capital standards.
The risk-based capital ratio focuses princi­
pally on broad categories of credit risk, al­
though the framework for assigning assets and
off-balance-sheet items to risk categories does
incorporate elements of transfer risk, as well
as limited instances of interest-rate and market
risk. The framework incorporates risks arising
from traditional banking activities as well as
risks arising from nontraditional activities. The
risk-based ratio does not, however, incorporate
other factors that can affect an institution’s
financial condition. These factors include
overall interest-rate exposure; liquidity, fund­
ing, and market risks; the quality and level of
earnings; investment, loan portfolio, and other
concentrations of credit; certain risks arising
necessary and appropriate, ratios based on average balances
may also be calculated on a case-by-case basis. Moreover,
to the extent banks have data on average balances that can
be used to calculate risk-based ratios, the Federal Reserve
will take such data into account.

1

Regulation H, Appendix A
from nontraditional activities; the quality of
loans and investments; the effectiveness of
loan and investment policies; and manage­
ment’s overall ability to monitor and control
financial and operating risks, including the
risks presented by concentrations of credit and
nontraditional activities.
In addition to evaluating capital ratios, an
overall assessment of capital adequacy must
take account of those factors, including, in
particular, the level and severity of problem
and classified assets as well as a bank’s expo­
sure to declines in the economic value of its
capital due to changes in interest rates. For
this reason, the final supervisory judgment on
a bank’s capital adequacy may differ signifi­
cantly from conclusions that might be drawn
solely from the level of its risk-based capital
ratio.
The risk-based capital guidelines establish
minimum ratios of capital to weighted-risk as­
sets. In light of the considerations just dis­
cussed, banks generally are expected to oper­
ate well above the minimum risk-based ratios.
In particular, banks contemplating significant
expansion proposals are expected to maintain
strong capital levels substantially above the
minimum ratios and should not allow signifi­
cant diminution of financial strength below
these strong levels to fund their expansion
plans. Institutions with high or inordinate lev­
els of risk are also expected to operate well
above minimum capital standards. In all cases,
institutions should hold capital commensurate
with the level and nature of the risks to which
they are exposed. Banks that do not meet the
minimum risk-based standard, or that are oth­
erwise considered to be inadequately capital­
ized, are expected to develop and implement
plans acceptable to the Federal Reserve for
achieving adequate levels of capital within a
reasonable period of time.
The Board will monitor the implementation
and effect of these guidelines in relation to
domestic and international developments in
the banking industry. When necessary and ap­
propriate, the Board will consider the need to
modify the guidelines in light of any signifi­
cant changes in the economy, financial mar­
kets, banking practices, or other relevant
factors.
2

Capital Adequacy (SMBs: Risk-Based Measure)

II. Definition of Qualifying Capital for
the Risk-Based Capital Ratio
A bank’s qualifying total capital consists of
two types of capital components: “core capital
elements” (comprising tier 1 capital) and
“supplementary capital elements” (comprising
tier 2 capital). These capital elements and the
various limits, restrictions, and deductions to
which they are subject, are discussed below
and are set forth in attachment II.
To qualify as an element of tier 1 or tier 2
capital, a capital instrument may not contain
or be covered by any covenants, terms, or
restrictions that are inconsistent with safe and
sound banking practices.
Redemptions of permanent equity or other
capital instruments before stated maturity
could have a significant impact on a bank’s
overall capital structure. Consequently, a bank
considering such a step should consult with
the Federal Reserve before redeeming any eq­
uity or debt capital instrument (prior to matu­
rity) if such redemption could have a material
effect on the level or composition of the insti­
tution’s capital base.4
A. The Components o f Qualifying Capital
1. Core capital elements (tier 1 capital). The
tier 1 component of a bank’s qualifying capi­
tal must represent at least 50 percent of quali­
fying total capital and may consist of the fol­
lowing items that are defined as core capital
elements:
i. common stockholders’ equity
ii. qualifying noncumulative perpetual pre­
ferred stock (including related surplus)
iii. minority interest in the equity accounts of
consolidated subsidiaries
Tier 1 capital is generally defined as the sum
of core capital elements5 less goodwill and
other intangible assets required to be deducted
in accordance with section II.B.l.b. of this
appendix.
4 Consultation would not ordinarily be necessary if an
instrument were redeemed with the proceeds of, or replaced
by, a like amount of a similar or higher-quality capital
instrument and the organization’s capital position is consid­
ered fully adequate by the Federal Reserve.
5 During the transition period and subject to certain limi­
tations set forth in section IV below, tier 1 capital may also
include items defined as supplementary capital elements.

Capital Adequacy (SMBs: Risk-Based Measure)
a. Common stockholders’ equity. For pur­
poses of calculating the risk-based capital
ratio, common stockholders’ equity is lim­
ited to common stock; related surplus; and
retained earnings, including capital reserves
and adjustments for the cumulative effect of
foreign-currency translation, net of any trea­
sury stock; less net unrealized holding
losses on available-for-sale equity securities
with readily determinable fair values. For
this purpose, net unrealized holding gains
on such equity securities and net unrealized
holding gains (losses) on available-for-sale
debt securities are not included in common
stockholders’ equity.
b. Perpetual preferred stock. Perpetual pre­
ferred stock is defined as preferred stock
that does not have a maturity date, that can­
not be redeemed at the option of the holder
of the instrument, and that has no other pro­
visions that will require future redemption
of the issue. Consistent with these provi­
sions, any perpetual preferred stock with a
feature permitting redemption at the option
of the issuer may qualify as capital only if
the redemption is subject to prior approval
of the Federal Reserve. In general, preferred
stock will qualify for inclusion in capital
only if it can absorb losses while the issuer
operates as a going concern (a fundamental
characteristic of equity capital) and only if
the issuer has the ability and legal right to
defer or eliminate preferred dividends.
The only form of perpetual preferred
stock that state member banks may consider
as an element of tier 1 capital is noncumulative perpetual preferred. While the guide­
lines allow for the inclusion of noncumulative perpetual preferred stock in tier 1, it is
desirable from a supervisory standpoint that
voting common stockholders’ equity remain
the dominant form of tier 1 capital. Thus,
state member banks should avoid over­
reliance on preferred stock or nonvoting eq­
uity elements within tier 1.
Perpetual preferred stock in which the
dividend is reset periodically based, in
whole or in part, upon the bank’s current
credit standing (that is, auction rate per­
petual preferred stock, including so-called
D utch auction, money m arket, and
remarketable preferred) will not qualify for

Regulation H, Appendix A
inclusion in tier 1 capital.6 7 Such instru­
ments, however, qualify for inclusion in tier
2 capital.
c. Minority interest in equity accounts o f
consolidated subsidiaries. This element is
included in tier 1 because, as a general rule,
it represents equity that is freely available
to absorb losses in operating subsidiaries.
While not subject to an explicit sublimit
within tier 1, banks are expected to avoid
using minority interest in the equity ac­
counts of consolidated subsidiaries as an
avenue for introducing into their capital
structures elements that might not otherwise
qualify as tier 1 capital or that would, in
effect, result in an excessive reliance on
preferred stock within tier 1.
2. Supplementary capital elements (tier 2
capital). The tier 2 component of a bank’s
qualifying total capital may consist of the fol­
lowing items that are defined as supplemen­
tary capital elements:
i. allowance for loan and lease losses (sub­
ject to limitations discussed below)
ii. perpetual preferred stock and related sur­
plus (subject to conditions discussed
below)
iii. hybrid capital instruments (as defined be­
low) and mandatory convertible debt
securities
iv. term subordinated debt and intermediateterm preferred stock, including related sur­
plus (subject to lim itations discussed
below)
The maximum amount of tier 2 capital that
may be included in a bank’s qualifying total
capital is limited to 100 percent of tier 1
capital (net of goodwill and other intangible
assets required to be deducted in accordance
with section II.B.l.b. of this appendix).
The elements of supplementary capital are
discussed in greater detail below.8
6 Reserved.
7 Adjustable-rate noncumulative perpetual preferred stock
(that is, perpetual preferred stock in which the dividend rate
is not affected by the issuer’s credit standing or financial
condition but is adjusted periodically according to a for­
mula based solely on general market interest rates) may be
included in tier 1.
8 The Basle capital framework also provides for the in­
clusion of “ undisclosed reserves” in tier 2. As defined in
Continued

3

Regulation H, Appendix A
a. Allowance fo r loan and lease losses. Al­
lowances for loan and lease losses are re­
serves that have been established through a
charge against earnings to absorb future
losses on loans or lease financing receiv­
ables. Allowances for loan and lease losses
exclude “allocated transfer risk reserves,”9
and reserves created against identified
losses.
During the transition period, the riskbased capital guidelines provide for reduc­
ing the amount of this allowance that may
be included in an institution’s total capital.
Initially, it is unlimited. However, by yearend 1990, the amount of the allowance for
loan and lease losses that will qualify as
capital will be limited to 1.5 percent of an
institution’s weighted risk assets. By the
end of the transition period, the amount of
the allowance qualifying for inclusion in
tier 2 capital may not exceed 1.25 percent
of weighted risk assets.10
b. Perpetual preferred stock. Perpetual pre­
ferred stock, as noted above, is defined as
preferred stock that has no maturity date,
that cannot be redeemed at the option of
the holder, and that has no other provisions
that will require future redemption of the
issue. Such instruments are eligible for in­
clusion in tier 2 capital without limit.1
1
Continued
the framework, undisclosed reserves represent accumulated
after-tax retained earnings that are not disclosed on the
balance sheet o f a bank. Apart from the fact that these
reserves are not disclosed publicly, they are essentially of
the same quality and character as retained earnings, and, to
be included in capital, such reserves must be accepted by
the bank’s home supervisor. Although such undisclosed re­
serves are common in some countries, under generally ac­
cepted accounting principles (GAAP) and long-standing su­
pervisory practice, these types o f reserves are not
recognized for state member banks.
9 Allocated transfer risk reserves are reserves that have
been established in accordance with section 905(a) of the
International Lending Supervision Act of 1983, 12 USC
3904(a), against certain assets whose value U.S. supervisory
authorities have found to be significantly impaired by pro­
tracted transfer risk problems.
10 The amount of the allowance for loan and lease losses
that may be included in tier 2 capital is based on a percent­
age of gross weighted-risk assets. A bank may deduct re­
serves for loan and lease losses in excess of the amount
permitted to be included in tier 2 capital, as well as allo­
cated transfer risk reserves, from the sum o f gross
weighted risk assets and use the resulting net sum of
weighted-risk assets in computing the denominator of the
risk-based capital ratio.
11 Long-term preferred stock with an original maturity of
20 years or more (including related surplus) will also
4

Capital Adequacy (SMBs: Risk-Based Measure)
c. Hybrid capital instruments and manda­
tory convertible debt securities. Hybrid
capital instruments include instruments that
are essentially permanent in nature and that
have certain characteristics of both equity
and debt. Such instruments may be included
in tier 2 without limit. The general criteria
hybrid capital instruments must meet in or­
der to qualify for inclusion in tier 2 capital
are listed below:
1. The instrument must be unsecured; fully
paid up; and subordinated to general
creditors and must also be subordinated
to claims of depositors.
2. The instrument must not be redeemable
at the option of the holder prior to matu­
rity, except with the prior approval of
the Federal Reserve. (Consistent with the
Board’s criteria for perpetual debt and
mandatory convertible securities, this re­
quirement implies that holders of such
instruments may not accelerate the pay­
ment of principal except in the event
of
bankruptcy,
insolvency,
or
reorganization.)
3. The instrument must be available to par­
ticipate in losses while the issuer is oper­
ating as a going concern. (Term subordi­
nated debt would not m eet this
requirement.) To satisfy this requirement,
the instrument must convert to common
or perpetual preferred stock in the event
that the accumulated losses exceed the
sum of the retained earnings and capital
surplus accounts of the issuer.
4. The instrument must provide the option
for the issuer to defer interest payments
if (a) the issuer does not report a profit
in the preceding annual period (defined
as combined profits for the most recent
four quarters) and (b) the issuer elimi­
nates cash dividends on common and
preferred stock.
Mandatory convertible debt securities in
the form of equity contract notes that meet
qualify in this category as an element of tier 2. If the
holder of such an instrument has a right to require the
issuer to redeem, repay, or repurchase the instrument prior
to the original stated maturity, maturity would be defined,
for risk-based capital purposes, as the earliest possible date
on which the holder can put the instrument back to the
issuing bank.

Capital Adequacy (SMBs: Risk-Based Measure)
the criteria set forth in 12 CFR 225, appen­
dix B also qualify as unlimited elements of
tier 2 capital. In accordance with that ap­
pendix, equity commitment notes issued
prior to May 15, 1985, also qualify for in­
clusion in tier 2.
d. Subordinated debt and intermediate-term
preferred stock. The aggregate amount of
term subordinated debt (excluding manda­
tory convertible debt) and intermediate-term
preferred stock that may be treated as
supplementary capital is limited to 50 per­
cent of tier 1 capital (net of goodwill and
other intangible assets required to be de­
ducted in accordance with section II.B.l.b.
of this appendix). Amounts in excess of
these limits may be issued and, while not
included in the ratio calculation, will be
taken into account in the overall assessment
of a bank’s funding and financial condition.
Subordinated debt and intermediate-term
preferred stock must have an original
weighted average maturity of at least five
years to qualify as supplementary capital.
(If the holder has the option to require the
issuer to redeem, repay, or repurchase the
instrument prior to the original stated matu­
rity, maturity would be defined, for riskbased capital purposes, as the earliest pos­
sible date on which the holder can put the
instrument back to the issuing bank.)
In the case of subordinated debt, the in­
strument must be unsecured and must
clearly state on its face that it is not a
deposit and is not insured by a federal
agency. To qualify as capital in banks, debt
must be subordinated to general creditors
and claims of depositors. Consistent with
current regulatory requirements, if a state
member bank wishes to redeem subordi­
nated debt before the stated maturity, it
must receive prior approval of the Federal
Reserve.
e. Discount o f supplementary capital instru­
ments. As a limited-life capital instrument
approaches maturity it begins to take on
characteristics of a short-term obligation.
For this reason, the outstanding amount of
term subordinated debt and any long- or
intermediate-life, or term, preferred stock
eligible for inclusion in tier 2 is reduced, or
discounted, as these instruments approach

Regulation H, Appendix A
maturity: one-fifth of the original amount,
less any redemptions, is excluded each year
during the instrument’s last five years be­
fore maturity.12
f. Revaluation reserves.
1. Such reserves reflect the formal
balance-sheet restatement or revaluation
for capital purposes of asset carrying val­
ues to reflect current market values. The
federal banking agencies generally have
not included unrealized asset appreciation
in capital-ratio calculations, although they
have long taken such values into account
as a separate factor in assessing the over­
all financial strength of a bank.
2. Consistent with long-standing supervi­
sory practice, the excess of market values
over book values for assets held by state
member banks will generally not be rec­
ognized in supplementary capital or in
the calculation of the risk-based capital
ratio. However, all banks are encouraged
to disclose their equivalent of premises
(building) and security revaluation re­
serves. The Federal Reserve will consider
any appreciation, as well as any deprecia­
tion, in specific asset values as additional
considerations in assessing overall capital
strength and financial condition.
B. Deductions from Capital and Other
Adjustments
Certain assets are deducted from a bank’s
capital for the purpose of calculating the riskbased capital ratio.13 These assets include—
i. a. Goodwill— deducted from the sum of
core capital elements
b. Certain identifiable intangible assets,
12 For example, outstanding amounts of these instruments
that count as supplementary capital include 100 percent of
the outstanding amounts with remaining maturities of more
than five years; 80 percent of outstanding amounts with
remaining maturities of four to five years; 60 percent of
outstanding amounts with remaining maturities of three to
four years; 40 percent of outstanding amounts with remain­
ing maturities of two to three years; 20 percent of outstand­
ing amounts with remaining maturities of one to two years;
and 0 percent of outstanding amounts with remaining
maturities of less than one year. Such instruments with a
remaining maturity of less than one year are excluded from
tier 2 capital.
13 Any assets deducted from capital in computing the
numerator of the ratio are not included in weighted-risk
assets in computing the denominator of the ratio.
5

Regulation H, Appendix A

Capital Adequacy (SMBs: Risk-Based Measure)

that is, intangible assets other than
goodwill— deducted from the sum of
core capital elements in accordance with
section H.B.l.b. of this appendix.
ii. investments in banking and finance sub­
sidiaries that are not consolidated for ac­
counting or supervisory purposes and, on
a case-by-case basis, investments in other
designated subsidiaries or associated com­
panies at the discretion of the Federal Re­
serve— deducted from total capital
components
iii. reciprocal holdings of capital instruments
of banking organizations—deducted from
total capital components
iv. deferred tax assets—portions are deducted
from the sum of core capital elements in
accordance with section II.B.4 of this ap­
pendix A.
1. Goodwill and other intangible assets
a. Goodwill. Goodwill is an intangible asset
that represents the excess of the purchase
price over the fair market value of identifi­
able assets acquired less liabilities assumed
in acquisitions accounted for under the pur­
chase method of accounting. State member
banks generally have not been allowed to
include goodwill in regulatory capital under
current supervisory policies. Consistent with
this policy, all goodwill in state member
banks will be deducted from tier 1 capital.
b. Other intangible assets, i. The only types
of identifiable intangible assets that may be
included in, that is, not deducted from, a
bank ’s capital are readily m arketable
mortgage-servicing rights and purchased
credit-card relationships, provided that, in
the aggregate, the total amount of these as­
sets included in capital does not exceed 50
percent of tier 1 capital. Purchased creditcard relationships are subject to a separate
sublimit of 25 percent of tier 1 capital.14
14 Amounts o f mortgage-servicing rights and purchased
credit-card relationships in excess of these limitations, as
well as all other identifiable intangible assets, including
core deposit intangibles and favorable leaseholds, are to be
deducted from a bank’s core capital elements in determin­
ing tier 1 capital. However, identifiable intangible assets
(other than mortgage-servicing rights and purchased creditcard relationships) acquired on or before February 19,
1992, generally will not be deducted from capital for super­
visory purposes, although they will continue to be deducted
for applications purposes.
6

ii. For purposes of calculating these limi­
tations on mortgage-servicing rights and
purchased credit-card relationships, tier 1
capital is defined as the sum of core capital
elements, net of goodwill and all identifi­
able intangible assets other than mortgageservicing rights and purchased credit-card
relationships, regardless of the date ac­
quired. This method of calculation could re­
sult in mortgage-servicing rights and pur­
chased credit-card relationships being
included in capital in an amount greater
than 50 percent— or in purchased creditcard relationships being included in an
amount greater than 25 percent— of the
amount of tier 1 capital used to calculate an
institution’s capital ratios. In such instances,
the Federal Reserve may determine that a
bank is operating in an unsafe and unsound
manner because of overreliance on intan­
gible assets in tier 1 capital.
iii. Banks must review the book value of
all intangible assets at least quarterly and
make adjustments to these values as neces­
sary. The fair market value of mortgageservicing rights and purchased credit-card
relationships also must be determined at
least quarterly. The fair market value gener­
ally shall be determined by applying an ap­
propriate market discount rate to the ex­
pected future net cash flows. This
determination shall include adjustments for
any significant changes in original valuation
assumptions, including changes in prepay­
ment estimates or account attrition rates.
iv. Examiners will review both the book
value and the fair market value assigned to
these assets, together with supporting docu­
mentation, during the examination process.
In addition, the Federal Reserve may re­
quire, on a case-by-case basis, an indepen­
dent valuation of a bank’s intangible assets.
v. The amount of mortgage-servicing
rights and purchased credit-card relation­
ships that a bank may include in capital
shall be the lesser of 90 percent of their
fair market value, as determined in accor­
dance with this section, or 100 percent of
their book value, as adjusted for capital pur­
poses in accordance with the instructions in
the commercial bank Consolidated Reports
of Condition and Income (call report). If

Capital Adequacy (SMBs: Risk-Based Measure)
both the application of the lim its on
mortgage-servicing rights and purchased
credit-card relationships and the adjustment
of the balance-sheet amount for these intan­
gibles would result in an amount being de­
ducted from capital, the bank would deduct
only the greater of the two amounts from
its core capital elements in determining tier
1 capital.
vi. The treatment of identifiable intan­
gible assets set forth in this section gener­
ally will be used in the calculation of a
bank’s capital ratios for supervisory and ap­
plications purposes. However, in making an
overall assessment of a bank’s capital ad­
equacy for applications purposes, the Board
may, if it deems appropriate, take into ac­
count the quality and composition of a
bank’s capital, together with the quality and
value of its tangible and intangible assets.
vii. Consistent with long-standing Board
policy, banks experiencing substantial
growth, whether internally or by acquisi­
tion, are expected to maintain strong capital
positions substantially above minimum su­
pervisory levels, without significant reliance
on intangible assets.
2. Investments in certain subsidiaries. The ag­
gregate amount of investments in banking or
finance subsidiaries15 whose financial state­
ments are not consolidated for accounting or
bank regulatory reporting purposes will be de­
ducted from a bank’s total capital compo­
nents.16 Generally, investments for this pur­
pose are defined as equity and debt capital
investments and any other instruments that are
deemed to be capital in the particular
subsidiary.
Advances (that is, loans, extensions of
credit, guarantees, commitments, or any other
forms of credit exposure) to the subsidiary
that are not deemed to be capital will gener­
15 For this purpose, a banking and finance subsidiary
generally is defined as any company engaged in banking or
finance in which the parent institution holds directly or
indirectly more than 50 percent of the outstanding voting
stock, or which is otherwise controlled or capable o f being
controlled by the parent institution.
16 An exception to this deduction would be made in the
case of shares acquired in the regular course of securing or
collecting a debt previously contracted in good faith. The
requirements for consolidation are spelled out in the in­
structions to the call report.

Regulation H, Appendix A
ally not be deducted from a bank’s capital.
Rather, such advances generally will be in­
cluded in the bank’s consolidated assets and
be assigned to the 100 percent risk category,
unless such obligations are backed by recog­
nized collateral or guarantees, in which case
they will be assigned to the risk category ap­
propriate to such collateral or guarantees.
These advances may, however, also be de­
ducted from the bank’s capital if, in the judg­
ment of the Federal Reserve, the risks stem­
ming from such advances are comparable to
the risks associated with capital investments
or if the advances involve other risk factors
that warrant such an adjustment to capital for
supervisory purposes. These other factors
could include, for example, the absence of
collateral support.
Inasmuch as the assets of unconsolidated
banking and finance subsidiaries are not fully
reflected in a bank’s consolidated total assets,
such assets may be viewed as the equivalent
of off-balance-sheet exposures since the opera­
tions of an unconsolidated subsidiary could
expose the bank to considerable risk. For this
reason, it is generally appropriate to view the
capital resources invested in these unconsoli­
dated entities as primarily supporting the risks
inherent in these off-balance-sheet assets, and
not generally available to support risks or ab­
sorb losses elsewhere in the bank.
The Federal Reserve may, on a case-by-case
basis, also deduct from a bank’s capital, in­
vestments in certain other subsidiaries in order
to determine if the consolidated bank meets
minimum supervisory capital requirements
without reliance on the resources invested in
such subsidiaries.
The Federal Reserve will not automatically
deduct investments in other unconsolidated
subsidiaries or investments in joint ventures
and associated companies.17 Nonetheless, the
resources invested in these entities, like in­
vestments in unconsolidated banking and fi­
nance subsidiaries, support assets not consoli­
dated with the rest of the bank’s activities
and, therefore, may not be generally available
17 The definition of such entities is contained in the
instructions to the commercial bank call report. Under regu­
latory reporting procedures, associated companies and joint
ventures generally are defined as companies in which the
bank owns 20 to 50 percent of the voting stock.

7

Regulation H, Appendix A
to support additional leverage or absorb losses
elsewhere in the bank. Moreover, experience
has shown that banks stand behind the losses
of affiliated institutions, such as joint ventures
and associated companies, in order to protect
the reputation of the organization as a whole.
In some cases, this has led to losses that
have exceeded the investments in such
organizations.
For this reason, the Federal Reserve will
monitor the level and nature of such invest­
ments for individual banks and on a case-bycase basis may, for risk-based capital pur­
poses, deduct such investments from total
capital components, apply an appropriate riskweighted capital charge against the bank’s
proportionate share of the assets of its associ­
ated companies, require a line-by-line consoli­
dation of the entity (in the event that the
bank’s control over the entity makes it the
functional equivalent of a subsidiary), or oth­
erwise require the bank to operate with a riskbased capital ratio above the minimum.
In considering the appropriateness of such
adjustments or actions, the Federal Reserve
will generally take into account whether—
1. the bank has significant influence over the
financial or managerial policies or opera­
tions of the subsidiary, joint venture, or
associated company;
2. the bank is the largest investor in the affili­
ated company; or
3. other circumstances prevail that appear to
closely tie the activities of the affiliated
company to the bank.
3. Reciprocal holdings o f banking organiza­
tions’ capital instruments. Reciprocal holdings
of banking organizations’ capital instruments
(that is, instruments that qualify as tier 1 or
tier 2 capital)18 will be deducted from a
bank’s total capital components for the pur­
pose of determining the numerator of the riskbased capital ratio.
Reciprocal holdings are cross-holdings re­
sulting from formal or informal arrangements
in which two or more banking organizations
swap, exchange, or otherwise agree to hold
each other’s capital instruments. Generally, de18 See 12 CFR 225, appendix A for instruments that
qualify as tier 1 and tier 2 capital for bank holding compa­
nies.

Capital Adequacy (SMBs: Risk-Based Measure)
ductions will be limited to intentional cross­
holdings. At present, the Board does not in­
tend to require banks to deduct nonreciprocal
holdings of such capital instruments.19
4. D eferred-tax assets. The am ount of
deferred-tax assets that are dependent upon
future taxable income, net of the valuation
allowance for deferred-tax assets, that may be
included in, that is, not deducted from, a
bank’s capital may not exceed the lesser of (i)
the amount of these deferred-tax assets that
the bank is expected to realize within one
year of the calendar quarter-end date, based
on its projections of future taxable income for
that year,20 or (ii) 10 percent of tier 1 capital.
The reported amount of deferred-tax assets,
net of any valuation allowance for deferredtax assets, in excess of the lesser of these two
amounts is to be deducted from a bank’s core
capital elements in determining tier 1 capital.
For purposes of calculating the 10 percent
limitation, tier 1 capital is defined as the sum
of core capital elements, net of goodwill and
all identifiable intangible assets other than
m ortgage-servicing rights and purchased
credit-card relationships, before any disal­
lowed deferred-tax assets are deducted. There
generally is no limit in tier 1 capital on the
amount of deferred-tax assets that can be real­
ized from taxes paid in prior carry-back years
or from future reversals of existing taxable
19 Deductions of holdings of capital securities also would
not be made in the case of interstate “ stake out” invest­
ments that comply with the Board’s policy statement on
nonvoting equity investments, 12 CFR 225.143. In addition,
holdings of capital instruments issued by other banking
organizations but taken in satisfaction of debts previously
contracted would be exempt from any deduction from capi­
tal. The Board intends to monitor nonreciprocal holdings of
other banking organizations’ capital instruments and to pro­
vide information on such holdings to the Basle Supervisors’
Committee as called for under the Basle capital framework.
20 To determine the amount of expected deferred-tax as­
sets realizable in the next 12 months, an institution should
assume that all existing temporary differences fully reverse
as of the report date. Projected future taxable income
should not include net operating-loss carry-forwards to be
used during that year or the amount of existing temporary
differences a bank expects to reverse within the year. Such
projections should include the estimated effect of taxplanning strategies that the organization expects to imple­
ment to realize net operating losses or tax-credit carry­
forwards that would otherwise expire during the year.
Institutions do not have to prepare a new 12-month projec­
tion each quarter. Rather, on interim report dates, institu­
tions may use the future-taxable-income projections for
their current fiscal year, adjusted for any significant
changes that have occurred or are expected to occur.

Capital Adequacy (SMBs: Risk-Based Measure)
temporary differences, but, for banks that have
a parent, this may not exceed the amount the
bank could reasonably expect its parent to
refund.

III. Procedures for Computing
Weighted-Risk Assets and
Off-Balance-Sheet Items

Regulation H, Appendix A
The terms “claims” and “ securities” used
in the context of the discussion of risk
weights, unless otherwise specified, refer to
loans or debt obligations of the entity on
whom the claim is held. Assets in the form of
stock or equity holdings in commercial or
nancial firms are assigned to the 100 percent
risk category, unless some other treatment is
explicitly permitted.

A. Procedures
Assets and credit-equivalent amounts of offbalance-sheet items of state member banks are
assigned to one of several broad risk catego­
ries, according to the obligor, or, if relevant,
the guarantor or the nature of the collateral.
The aggregate dollar value of the amount in
each category is then multiplied by the risk
weight associated with that category. The re­
sulting weighted values from each of the risk
categories are added together, and this sum is
the bank’s total weighted-risk assets that com­
prise the denominator of the risk-based capital
ratio. A ttachm ent I provides a sample
calculation.
Risk weights for all off-balance-sheet items
are determined by a two-step process. First,
the “credit-equivalent amount” of off-balancesheet items is determined, in most cases by
multiplying the off-balance-sheet item by a
credit-conversion factor. Second, the creditequivalent amount is treated like any balancesheet asset and generally is assigned to the
appropriate risk category according to the ob­
ligor, or, if relevant, the guarantor or the na­
ture of the collateral.
In general, if a particular item qualifies for
placement in more than one risk category, it is
assigned to the category that has the lowest
risk weight. A holding of a U.S. municipal
revenue bond that is fully guaranteed by a
U.S. bank, for example, would be assigned the
20 percent risk weight appropriate to claims
guaranteed by U.S. banks, rather than the 50
percent risk weight appropriate to U.S. mu­
nicipal revenue bonds.21

B. Collateral, Guarantees, and Other
Considerations
1. Collateral. The only forms of collateral
that are formally recognized by the risk-based
capital framework are cash on deposit in the
bank; securities issued or guaranteed by the
central governments of the OECD-based
group of countries,22 U.S. government agen­
cies, or U.S. government-sponsored agencies;

with its stated investment objectives. However, in no case
will indirect holdings through shares in such funds be as­
signed to the zero percent risk category. For example, if a
fund is permitted to hold U.S. Treasuries and commercial
paper, shares in that fund would generally be assigned the
100 percent risk weight appropriate to commercial paper,
regardless of the actual composition of the fund’s invest­
ments at any particular time. Shares in a fund that may
invest only in U.S. Treasury securities would generally be
assigned to the 20 percent risk category. If, in order to
maintain a necessary degree of short-term liquidity, a fund
is permitted to hold an insignificant amount of its assets in
short-term, highly liquid securities of superior credit quality
that do not qualify for a preferential risk weight, such
securities will generally not be taken into account in deter­
mining the risk category into which the bank’s holding in
the overall fund should be assigned. Regardless of the
composition of the fund’s securities, if the fund engages in
any activities that appear speculative in nature (for ex­
ample, use of futures, forwards, or option contracts for
purposes other than to reduce interest-rate risk) or has any
other characteristics that are inconsistent with the preferen­
tial risk weighting assigned to the fund’s investments, hold­
ings in the fund will be assigned to the 100 percent risk
category. During the examination process, the treatment of
shares in such funds that are assigned to a lower risk
weight will be subject to examiner review to ensure that
they have been assigned an appropriate risk weight.
22 The OECD-based group of countries comprises all full
members of the Organization for Economic Cooperation
and Development (OECD), as well as countries that have
concluded special lending arrangements with the Interna­
tional Monetary Fund (IMF) associated with the Fund’s
General Arrangements to Borrow. The OECD includes the
following countries: Australia, Austria, Belgium, Canada,
Denmark, the Federal Republic of Germany, Finland,
21 An investment in shares of a fund whose portfolio France, Greece, Iceland, Ireland, Italy, Japan, Luxembourg,
consists solely of various securities or money market instru­
Netherlands, New Zealand, Norway, Portugal, Spain, Swe­
ments that, if held separately, would be assigned to differ­
den, Switzerland, Turkey, the United Kingdom, and the
ent risk categories, is generally assigned to the risk cat­
United States. Saudi Arabia has concluded special lending
egory appropriate to the highest risk-weighted security or
arrangements with the IMF associated with the Fund’s Gen­
instrument that the fund is permitted to hold in accordance
eral Arrangements to Borrow.

9

Regulation H, Appendix A
and securities issued by multilateral lending
institutions or regional development banks.
Claims fully secured by such collateral gener­
ally are assigned to the 20 percent risk-weight
category. Collateralized transactions meeting
all the conditions described in section III.C.l.
may be assigned a zero percent risk weight.
With regard to collateralized claims that
may be assigned to the 20 percent risk-weight
category, the extent to which qualifying secu­
rities are recognized as collateral is deter­
mined by their current market value. If such a
claim is only partially secured, that is, the
market value of the pledged securities is less
than the face amount of a balance-sheet asset
or an off-balance-sheet item, the portion that
is covered by the market value of the qualify­
ing collateral is assigned to the 20 percent
risk category, and the portion of the claim that
is not covered by collateral in the form of
cash or a qualifying security is assigned to the
risk category appropriate to the Obligor or, if
relevant, the guarantor. For example, to the
extent that a claim on a private-sector obligor
is collateralized by the current market value of
U.S. government securities, it would be placed
in the 20 percent risk category, and the bal­
ance would be assigned to the 100 percent
risk category.
2. Guarantees. Guarantees of the OECD and
non-OECD central governments, U.S. govern­
ment agencies, U.S. government-sponsored
agencies, state and local governments of the
OECD-based group of countries, multilateral
lending institutions and regional development
banks, U.S. depository institutions, and for­
eign banks are also recognized. If a claim is
partially guaranteed, that is, coverage of the
guarantee is less than the face amount of a
balance-sheet asset or an off-balance-sheet
item, the portion that is not fully covered by
the guarantee is assigned to the risk category
appropriate to the obligor or, if relevant, to
any collateral. The face amount of a claim
covered by two types of guarantees that have
different risk weights, such as a U.S. govern­
ment guarantee and a state guarantee, is to be
apportioned between the two risk categories
appropriate to the guarantors.
The existence of other forms of collateral or
guarantees that the risk-based capital frame10

Capital Adequacy (SMBs: Risk-Based Measure)
work does not formally recognize may be
taken into consideration in evaluating the risks
inherent in a bank’s loan portfolio—which, in
turn, would affect the overall supervisory as­
sessment of the bank’s capital adequacy.
3. M ortgage-backed securities. M ortgagebacked securities, including pass-throughs and
collateralized mortgage obligations (but not
stripped mortgage-backed securities), that are
issued or guaranteed by a U.S. government
agency or U.S. governm ent-sponsored
agency are assigned to the risk-weight cat­
egory appropriate to the issuer or guarantor.
Generally, a privately issued mortgage-backed
security meeting certain criteria set forth in
the accompanying footnote23 is treated as es­
sentially an indirect holding of the underlying
assets, and assigned to the same risk category
as the underlying assets, but in no case to the
zero percent risk category. Privately issued
mortgage-backed securities whose structures
do not qualify them to be regarded as indirect
holdings of the underlying assets are assigned
to the 100 percent risk category. During the
exam ination process, privately issued
mortgage-backed securities that are assigned
to a lower risk-weight category will be subject
to examiner review to ensure that they meet
the appropriate criteria.
While the risk category to which mortgagebacked securities are assigned will generally
be based upon the issuer or guarantor or, in
23 A privately issued mortgage-backed security may be
treated as an indirect holding of the underlying assets pro­
vided that (1) the underlying assets are held by an indepen­
dent trustee and the trustee has a first priority, perfected
security interest in the underlying assets on behalf of the
holders of the security; (2) either the holder of the security
has an undivided pro rata ownership interest in the underly­
ing mortgage assets or the trust or single-purpose entity (or
conduit) that issues the security has no liabilities unrelated
to the issued securities; (3) the security is structured such
that the cash flow from the underlying assets in all cases
fully meets the cash flow requirements of the security with­
out undue reliance on any reinvestment income; and (4)
there is no material reinvestment risk associated with any
funds awaiting distribution to the holders of the security. In
addition, if the underlying assets of a mortgage-backed
security are composed of more than one type of asset, for
example, U.S. government-sponsored agency securities and
privately issued pass-through securities that qualify for the
50 percent risk category, the entire mortgage-backed secu­
rity is generally assigned to the category appropriate to the
highest risk-weighted asset underlying the issue. Thus, in
this example, the security would receive the 50 percent risk
weight appropriate to the privately issued pass-through
securities.

Capital Adequacy (SMBs: Risk-Based Measure)
the case of privately issued mortgage-backed
securities, the assets underlying the security,
any class of a mortgage-backed security that
can absorb more than its pro rata share of loss
without the whole issue being in default (for
example, a so-called subordinated class or re­
sidual interest), is assigned to the 100 percent
risk category. Furtherm ore, all stripped
mortgage-backed securities, including interestonly strips (IOs), principal-only strips (POs),
and similar instruments are also assigned to
the 100 percent risk-weight category, regard­
less of the issuer or guarantor.
4. Maturity. Maturity is generally not a factor
in assigning items to risk categories with the
exception of claims on non-OECD banks,
commitments, and interest-rate and foreignexchange-rate contracts. Except for commit­
ments, short-term is defined as one year or
less remaining maturity and long-term is de­
fined as over one year remaining maturity. In
the case of commitments, short-term is de­
fined as one year or less original maturity and
long-term is defined as over one year original
maturity.24
5. Small-business loans and leases on per­
sonal property transferred with recourse.
a. Notwithstanding other provisions of this
appendix A, a qualifying bank that has
transferred small-business loans and leases
on personal property (small-business obliga­
tions) with recourse shall include in
weighted-risk assets only the amount of re­
tained recourse, provided two conditions are
met. First, the transaction must be treated as
a sale under GAAP and, second, the bank
must establish pursuant to GAAP a
noncapital reserve sufficient to meet the
bank’s reasonably estimated liability under
the recourse arrangement. Only loans and
leases to businesses that meet the criteria
for a small-business concern established by
the Small Business Administration under
section 3(a) of the Small Business Act are
eligible for this capital treatment.
b. For purposes of this appendix A, a bank
is qualifying if it meets the criteria set forth
in the B oard’s prom pt-corrective-action
24 Through year-end 1992, remaining, rather than origi­
nal, maturity may be used for determining the maturity of
commitments.

Regulation H, Appendix A
regulation (12 CFR 208.30) for well capi­
talized or, by order of the Board, ad­
equately capitalized. For purposes of deter­
mining whether a bank meets the criteria,
its capital ratios must be calculated without
regard to the preferential capital treatment
for transfers of small-business obligations
with recourse specified in section III.B.5.a.
of this appendix A. The total outstanding
amount of recourse retained by a qualifying
bank on transfers of small-business obliga­
tions receiving the preferential capital treat­
ment cannot exceed 15 percent of the
bank’s total risk-based capital. By order, the
Board may approve a higher limit.
c. If a bank ceases to be qualifying or ex­
ceeds the 15 percent capital limitation, the
preferential capital treatment will continue
to apply to any transfers of small-business
obligations with recourse that were consum­
mated during the time that the bank was
qualifying and did not exceed the capital
limit.
d. The risk-based capital ratios of the bank
shall be calculated without regard to the
preferential capital treatment for transfers of
small-business obligations with recourse
specified in section M.B.5.a. of this appen­
dix A for purposes of—
i. determ ining w hether a bank is ad­
equately capitalized, undercapitalized,
significantly undercapitalized, or criti­
cally undercapitalized under prompt cor­
rective action (12 CFR 208.33(b)); and
ii. reclassifying a well-capitalized bank to
adequately capitalized and requiring an
adequately capitalized bank to comply
with certain mandatory or discretionary
supervisory actions as if the bank were
in the next lower prompt-correctiveaction capital category (12 CFR
208.33(c)).
C. Risk Weights
Attachment III contains a listing of the risk
categories, a summary of the types of assets
assigned to each category and the weight as­
sociated with each category, that is, 0 percent,
20 percent, 50 percent, and 100 percent. A
brief explanation of the components of each
category follows.
11

Regulation H, Appendix A
1. Category 1: zero percent. This category in­
cludes cash (domestic and foreign) owned and
held in all offices of the bank or in transit and
gold bullion held in the bank’s own vaults or
in another bank’s vaults on an allocated basis,
to the extent it is offset by gold bullion li­
abilities.25 The category also includes all di­
rect claims (including securities, loans, and
leases) on, and the portions of claims that are
directly and unconditionally guaranteed by, the
central governments26 of the OECD countries
and U.S. government agencies,27 as well as all
direct local currency claims on, and the por­
tions of local currency claims that are directly
and unconditionally guaranteed by, the central
governments of non-OECD countries, to the
extent that the bank has liabilities booked in
that currency. A claim is not considered to be
unconditionally guaranteed by a central gov­
ernment if the validity of the guarantee is
dependent upon some affirmative action by
the holder or a third party. Generally, securi­
ties guaranteed by the U.S. government or its
agencies that are actively traded in financial
markets, such as GNMA securities, are con­
sidered to be unconditionally guaranteed.
This category also includes claim s
collateralized by cash on deposit in the bank
25 All other holdings o f bullion are assigned to the 100
percent risk category.
26 A central government is defined to include depart­
ments and ministries, including the central bank, of the
central government. The U.S. central bank includes the 12
Federal Reserve Banks, and the stock held in these banks
as a condition o f membership is assigned to the zero per­
cent risk category. The definition of central government
does not include state, provincial, or local governments; or
commercial enterprises owned by the central government.
In addition, it does not include local government entities or
commercial enterprises whose obligations are guaranteed by
the central government, although any claims on such enti­
ties guaranteed by central governments are placed in the
same general risk category as other claims guaranteed by
central governments. OECD central governments are de­
fined as central governments of the OECD-based group of
countries; non-OECD central governments are defined as
central governments of countries that do not belong to the
OECD-based group o f countries.
27 A U.S. government agency is defined as an instrumen­
tality of the U.S. government whose obligations are fully
and explicitly guaranteed as to the timely payment o f prin­
cipal and interest by the full faith and credit o f the U.S.
government. Such agencies include the Government Na­
tional Mortgage Association (GNMA), the Veterans Admin­
istration (VA), the Federal Housing Administration (FHA),
the Export-Import Bank (Exim Bank), the Overseas Private
Investment Corporation (OPIC), the Commodity Credit
Corporation (CCC), and the Small Business Administration
(SBA).

Capital Adequacy (SMBs: Risk-Based Measure)
or by securities issued or guaranteed by
OECD central governments or U.S. govern­
ment agencies for which a positive margin of
collateral is maintained on a daily basis, fully
taking into account any change in the bank’s
exposure to the obligor or counterparty under
a claim in relation to the market value of the
collateral held in support of that claim.
2. Category 2: 20 percent. This category in­
cludes cash items in the process of collection,
both foreign and domestic; short-term claims
(including demand deposits) on, and the por­
tions of short-term claims that are guaran­
teed28 by, U.S. depository institutions29 and
foreign banks;30 and long-term claims on, and
the portions of long-term claims that are guar­
anteed by, U.S. depository institutions and
OECD banks.31
This category also includes the portions of
claims that are conditionally guaranteed by
OECD central governments and U.S. govern­
ment agencies, as well as the portions of local
currency claims that are conditionally guaran­
28 Claims guaranteed by U.S. depository institutions and
foreign banks include risk participations in both banker’s
acceptances and standby letters of credit, as well as partici­
pations in commitments, that are conveyed to other U.S.
depository institutions or foreign banks.
29 U.S. depository institutions are defined to include
branches (foreign and domestic) of federally insured banks
and depository institutions chartered and headquartered in
the 50 states of the United States, the District of Columbia,
Puerto Rico, and U.S. territories and possessions. The defi­
nition encompasses banks, m rtual or stock savings banks,
savings or building and loan associations, cooperative
banks, credit unions, and international banking facilities of
domestic banks. U .S.-chartered depository institutions
owned by foreigners are also included in the definition.
However, branches and agencies of foreign banks located in
the U.S., as well as all bank holding companies, are
excluded.
30 Foreign banks are distinguished as either OECD banks
or non-OECD banks. OECD banks include banks and their
branches (foreign and domestic) organized under the laws
of countries (other than the U.S.) that belong to the OECDbased group of countries. Non-OECD banks include banks
and their branches (foreign and domestic) organized under
the laws of countries that do not belong to the OECDbased group of countries. For this purpose, a bank is de­
fined as an institution that engages in the business of bank­
ing; is recognized as a bank by the bank supervisory or
monetary authorities of the country of its organization or
principal banking operations; receives deposits to a substan­
tial extent in the regular course of business; and has the
power to accept demand deposits.
31 Long-term claims on, or guaranteed by, non-OECD
banks and all claims on bank holding companies are as­
signed to the 100 percent risk category, as are holdings of
bank-issued securities that qualify as capital of the issuing
banks.

Capital Adequacy (SMBs: Risk-Based Measure)
teed by non-OECD central governments, to
the extent that the bank has liabilities booked
in that currency. In addition, this category also
includes claims on, and the portions of claims
that are guaranteed by, U.S. governmentsponsored32 agencies and claims on, and the
portions of claims guaranteed by, the Interna­
tional Bank for Reconstruction and Develop­
ment (World Bank), the International Finance
Corporation, the Inter-American Development
Bank, the Asian Development Bank, the Afri­
can Development Bank, the European Invest­
ment Bank, the European Bank for Recon­
struction and D evelopm ent, the Nordic
Investment Bank, and other multilateral lend­
ing institutions or regional development banks
in which the U.S. government is a shareholder
or contributing member. General obligation
claims on, or portions of claims guaranteed by
the full faith and credit of, states or other
political subdivisions of the United States or
other countries of the OECD-based group are
also assigned to this category.33
This category also includes the portions of
claims (including repurchase transactions)
collateralized by cash on deposit in the bank
or by securities issued or guaranteed by
OECD central governments or U.S. govern­
ment agencies that do not qualify for the zero
percent risk-weight category; collateralized by
securities issued or guaranteed by U.S. govern­
ment-sponsored agencies; or collateralized by
securities issued by multilateral lending insti­
tutions or regional development banks in
which the U.S. government is a shareholder or
contributing member.
3. Category 3: 50 percent. This category in32 For this purpose, U.S. government-sponsored agencies
are defined as agencies originally established or chartered
by the federal government to serve public purposes speci­
fied by the U.S. Congress but whose obligations are not
explicitly guaranteed by the full faith and credit of the U.S.
government. These agencies include the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal Na­
tional Mortgage Association (FNMA), the Farm Credit Sys­
tem, the Federal Home Loan Bank System, and the Student
Loan Marketing Association (SLMA). Claims on U.S.
government-sponsored agencies include capital stock in a
Federal Home Loan Bank that is held as a condition of
membership in that Bank.
33 Claims on, or guaranteed by, states or other political
subdivisions of countries that do not belong to the OECDbased group of countries are placed in the 100 percent risk
category.

Regulation H, Appendix A
eludes loans fully secured by first liens34 on
one- to four-family residential properties, ei­
ther owner-occupied or rented, or on multi­
family residential properties,35 that meet cer­
tain criteria.36 Loans included in this category
must have been made in accordance with pru­
dent underwriting standards;37 be performing
in accordance with their original terms; and
not be 90 days or more past due or carried in
34 If a bank holds the first and junior lien(s) on a resi­
dential property and no other party holds an intervening
lien, the transaction is treated as a single loan secured by a
first lien for the purpose of determining the loan-to-value
ratio.
35 Loans that qualify as loans secured by one- to fourfamily residential properties or multifamily residential prop­
erties are listed in the instructions to the commercial bank
call report. In addition, for risk-based capital purposes,
loans secured by one- to four-family residential properties
include loans to builders with substantial project equity for
the construction of one- to four-family residences that have
been presold under firm contracts to purchasers who have
obtained firm commitments for permanent qualifying mort­
gage loans and have made substantial earnest-money
deposits.
The instructions to the call report also discuss the treat­
ment of loans, including multifamily housing loans, that are
sold subject to a pro rata loss-sharing arrangement. Such an
arrangement should be treated by the selling bank as sold
(and excluded from balance-sheet assets) to the extent that
the sales agreement provides for the purchaser of the loan
to share in any loss incurred on the loan on a pro rata basis
with the selling bank. In such a transaction, from the stand­
point of the selling bank, the portion of the loan that is
treated as sold is not subject to the risk-based capital stan­
dards. In connection with sales of multifamily housing
loans in which the purchaser of a loan shares in any loss
incurred on the loan with the selling institution on other
than a pro rata basis, these other loss-sharing arrangements
are taken into account for purposes of determining the
extent to which such loans are treated by the selling bank
as sold (and excluded from balance-sheet assets) under the
risk-based capital framework in the same manner as pre­
scribed for reporting purposes in the instructions to the call
report.
36 Residential property loans that do not meet all the
specified criteria or that are made for the purpose of specu­
lative property development are placed in the 100 percent
risk category.
37 Prudent underwriting standards include a conservative
ratio of the current loan balance to the value of the prop­
erty. In the case of a loan secured by multifamily residen­
tial property, the loan-to-value ratio is not conservative if it
exceeds 80 percent (75 percent if the loan is based on a
floating interest rate). Prudent underwriting standards also
dictate that a loan-to-value ratio used in the case of origi­
nating a loan to acquire a property would not be deemed
conservative unless the value is based on the lower of the
acquisition cost of the property or appraised (or if appropri­
ate, evaluated) value. Otherwise, the loan-to-value ratio
generally would be based upon the value of the property as
determined by the most current appraisal or, if appropriate,
the most current evaluation. All appraisals must be made in
a manner consistent with the federal banking agencies’ real
estate appraisal regulations and guidelines and with the
bank’s own appraisal guidelines.

13

Regulation H, Appendix A
nonaccrual status. The following additional
criteria must also be applied to a loan secured
by a multifamily residential property that is
included in this category: all principal and
interest payments on the loan must have been
made on time for at least the year preceding
placement in this category, or in the case
where the existing property owner is refinanc­
ing a loan on that property, all principal and
interest payments on the loan being refinanced
must have been made on time for at least the
year preceding placement in this category;
amortization of the principal and interest must
occur over a period of not more that 30 years
and the minimum original maturity for repay­
ment of principal must not be less than 7
years; and the annual net operating income
(before debt service) generated by the prop­
erty during its most recent fiscal year must
not be less than 120 percent of the loan’s
current annual debt service (115 percent if the
loan is based on a floating interest rate) or, in
the case of a cooperative or other not-forprofit housing project, the property must gen­
erate sufficient cash flow to provide compa­
rable protection to the institution. Also
included in this category are privately issued
mortgage-backed securities provided that (1)
the structure of the security meets the criteria
described in section 111(B)(3) above; (2) if the
security is backed by a pool of conventional
mortgages, on one- to four-family residential
or multifamily residential properties, each un­
derlying mortgage meets the criteria described
above in this section for eligibility for the 50
percent risk category at the time the pool is
originated; (3) if the security is backed by
privately issued mortgage-backed securities,
each underlying security qualifies for the 50
percent risk category; and (4) if the security is
backed by a pool of multifamily residential
mortgages, principal and interest payments on
the security are not 30 days or more past due.
Privately issued mortgage-backed securities
that do not meet these criteria or that do not
qualify for a lower risk weight are generally
assigned to the 100 percent risk category.
Also assigned to this category are revenue
(nongeneral obligation) bonds or similar obli­
gations, including loans and leases, that are
obligations of states or other political subdivi­
sions of the U.S. (for example, municipal rev14

Capital Adequacy (SMBs: Risk-Based Measure)
enue bonds) or other countries of the OECDbased group, but for which the government
entity is committed to repay the debt with
revenues from the specific projects financed,
rather than from general tax funds.
Credit-equivalent amounts of derivative
contracts involving standard risk obligors (that
is, obligors whose loans or debt securities
would be assigned to the 100 percent risk
category) are included in the 50 percent cat­
egory, unless they are backed by collateral or
guarantees that allow them to be placed in a
lower risk category.
4. Category 4: 100 percent. All assets not in­
cluded in the categories above are assigned to
this category, which comprises standard risk
assets. The bulk of the assets typically found
in a loan portfolio would be assigned to the
100 percent category.
This category includes long-term claims on,
or guaranteed by, non-OECD banks, and all
claims on non-OECD central governments that
entail some degree of transfer risk.38 This cat­
egory also includes all claims on foreign and
domestic private-sector obligors not included
in the categories above (including loans to
nondepository financial institutions and bank
holding companies); claims on commercial
firms owned by the public sector; customer
liabilities to the bank on acceptances outstand­
ing involving standard risk claims;39 invest­
ments in fixed assets, premises, and other real
estate owned; common and preferred stock of
corporations, including stock acquired for
debts previously contracted; commercial and
consumer loans (except those assigned to
lower risk categories due to recognized guar­
antees or collateral and loans for residential
property that qualify for a lower risk weight);
mortgage-backed securities that do not meet
38 Such assets include all nonlocal currency claims on, or
guaranteed by, non-OECD central governments and those
portions o f local currency claims on, or guaranteed by,
non-OECD central governments that exceed the local cur­
rency liabilities held by the bank.
39 Customer liabilities on acceptances outstanding involv­
ing nonstandard risk claims, such as claims on U.S. deposi­
tory institutions, are assigned to the risk category appropri­
ate to the identity of the obligor or, if relevant, the nature
of the collateral or guarantees backing the claims. Portions
of acceptances conveyed as risk participations to U.S. de­
pository institutions or foreign banks are assigned to the 20
percent risk category appropriate to short-term claims guar­
anteed by U.S. depository institutions and foreign banks.

Capital Adequacy (SMBs: Risk-Based Measure)
criteria for assignment to a lower risk weight
(including any classes of mortgage-backed se­
curities that can absorb more than their pro
rata share of loss without the whole issue
being in default); and all stripped mortgagebacked and similar securities.
Also included in this category are indus­
trial development bonds and similar obliga­
tions issued under the auspices of states or
political subdivisions of the OECD-based
group of countries for the benefit of a pri­
vate party or enterprise where that party or
enterprise, not the government entity, is ob­
ligated to pay the principal and interest, and
all obligations of states or political subdivi­
sions of countries that do not belong to the
OECD-based group.
The following assets also are assigned a
risk weight of 100 percent if they have not
been deducted from capital: investments in
unconsolidated companies, joint ventures, or
associated companies; instruments that qualify
as capital issued by other banking organiza­
tions; and any intangibles, including those that
may have been grandfathered into capital.
D. Off-Balance-Sheet Items
The face amount of an off-balance-sheet item
is incorporated into the risk-based capital ratio
by multiplying it by a credit-conversion factor.
The resultant credit-equivalent amount is as­
signed to the appropriate risk category accord­
ing to the obligor, or, if relevant, the guaran­
tor or the nature of the collateral.40
Attachment IV sets forth the conversion fac­
tors for various types of off-balance-sheet
items.
1. Items with a 100 percent conversion factor.
a. A 100 percent conversion factor applies
to direct credit substitutes, which include
guarantees, or equivalent instruments, back­
ing financial claims, such as outstanding se­
curities, loans, and other financial liabilities,
or that back off-balance-sheet items that re40 The sufficiency o f collateral and guarantees for offbalance-sheet items is determined by the market value of
the collateral or the amount of the guarantee in relation to
the face amount of the item, except for derivative contracts,
for which this determination is generally made in relation
to the credit-equivalent amount. Collateral and guarantees
are subject to the same provisions noted under section
III.B. of this appendix A.

Regulation H, Appendix A
quire capital under the risk-based capital
framework. Direct credit substitutes include,
for example, financial standby letters of
credit, or other equivalent irrevocable un­
dertakings or surety arrangements, that guar­
antee repayment of financial obligations
such as commercial paper, tax-exempt secu­
rities, commercial or individual loans or
debt obligations, or standby or commercial
letters of credit. Direct credit substitutes
also include the acquisition of risk partici­
pations in banker’s acceptances and standby
letters of credit, since both of these transac­
tions, in effect, constitute a guarantee by
the acquiring bank that the underlying ac­
count party (obligor) will repay its obliga­
tion to the originating, or issuing, institu­
tion.41 (Standby letters of credit that are
performance related are discussed below
and have a credit-conversion factor of 50
percent.)
b. The full amount of a direct credit substi­
tute is converted at 100 percent and the
resulting credit-equivalent amount is as­
signed to the risk category appropriate to
the obligor or, if relevant, the guarantor or
the nature of the collateral. In the case of a
direct credit substitute in which a risk par­
ticipation42 has been conveyed, the full
amount is still converted at 100 percent.
However, the credit-equivalent amount that
has been conveyed is assigned to whichever
risk category is lower: the risk category ap­
propriate to the obligor, after giving effect
to any relevant guarantees or collateral, or
the risk category appropriate to the institu­
tion acquiring the participation. Any re­
mainder is assigned to the risk category ap­
propriate to the obligor, guarantor, or
collateral. For example, the portion of a
direct credit substitute conveyed as a risk
participation to a U.S. domestic depository
institution or foreign bank is assigned to the
risk category appropriate to claims guaran­
teed by those institutions, that is, the 20
41 Credit-equivalent amounts of acquisitions of risk par­
ticipations are assigned to the risk category appropriate to
the account-party obligor, or, if relevant, the nature of the
collateral or guarantees.
42 That is, a participation in which the originating bank
remains liable to the beneficiary for the full amount of the
direct credit substitute if the party that has acquired the
participation fails to pay when the instrument is drawn.

15

Regulation H, Appendix A
percent risk category.43 This approach rec­
ognizes that such conveyances replace the
originating bank’s exposure to the obligor
with an exposure to the institutions acquir­
ing the risk participations.44
c. In the case of direct credit substitutes
that take the form of a syndication as de­
fined in the instructions to the commercial
bank call report, that is, where each bank is
obligated only for its pro rata share of the
risk and there is no recourse to the originat­
ing bank, each bank will only include its
pro rata share of the direct credit substitute
in its risk-based capital calculation.
d. Financial standby letters of credit are
distinguished from loan commitments (dis­
cussed below) in that standbys are irrevo­
cable obligations of the bank to pay a thirdparty beneficiary when a customer (account
party) fails to repay an outstanding loan or
debt instrument (direct credit substitute).
Performance standby letters of credit (per­
formance bonds) are irrevocable obligations
of the bank to pay a third-party beneficiary
when a customer (account party) fails to
perform some other contractual nonfinancial
obligation.
e. The distinguishing characteristic of a
standby letter of credit for risk-based capital
purposes is the combination of irrevocabil­
ity with the fact that funding is triggered by
some failure to repay or perform an obliga­
tion. Thus, any commitment (by whatever
name) that involves an irrevocable obliga­
tion to make a payment to the customer or
to a third party in the event the customer
fails to repay an outstanding debt obligation
or fails to perform a contractual obligation
is treated, for risk-based capital purposes, as
respectively, a financial guarantee standby
letter of credit or a performance standby.
f. A loan commitment, on the other hand,
involves an obligation (with or without a
material adverse change or similar clause)
43 Risk participations with a remaining maturity of over
one year that are conveyed to non-OECD banks are to be
assigned to the 100 percent risk category, unless a lower
risk category is appropriate to the obligor, guarantor, or
collateral.
44 A risk participation in banker’s acceptances conveyed
to other institutions is also assigned to the risk category
appropriate to the institution acquiring the participation or,
if relevant, the guarantor or nature of the collateral.
16

Capital Adequacy (SMBs: Risk-Based Measure)
of the bank to fund its customer in the
normal course of business should the cus­
tomer seek to draw down the commitment.
g. Sale and repurchase agreements and as­
set sales with recourse (to the extent not
included on the balance sheet) and forward
agreements also are converted at 100 per­
cent. The risk-based capital definition of the
sale of assets with recourse, including the
sale of one- to four-family residential mort­
gages, is the same as the definition con­
tained in the instructions to the commercial
bank call report. Accordingly, the entire
amount of any assets transferred with re­
course that are not already included on the
balance sheet, including pools of one- to
four-family residential mortgages, are to be
converted at 100 percent and assigned to
the risk weight appropriate to the obligor,
or if relevant, the nature of any collateral or
guarantees. The terms of a transfer of assets
with recourse may contractually limit the
amount of the institutions’s liability to an
amount less than the effective risk-based
capital requirement for the assets being
transferred with recourse. If such a transac­
tion (including one that is reported as a fi­
nancing, i.e., the assets are not removed
from the balance sheet) meets the criteria
for sales treatm ent under GAAP, the
amount of total capital required is equal to
the maximum amount of loss possible under
the recourse provision. If the transaction is
also treated as a sale for regulatory report­
ing purposes, then the required amount of
capital may be reduced by the balance of
any associated non-capital liability account
established pursuant to GAAP to cover esti­
mated probable losses under the recourse
provision. So-called loan strips (that is,
short-term advances sold under long-term
commitments without direct recourse) are
defined in the instructions to the commer­
cial bank call report and for risk-based cap­
ital purposes as assets sold with recourse.
h. Forward agreements are legally binding
contractual obligations to purchase assets
with certain drawdown at a specified future
date. Such obligations include forward pur­
chases, forward forward deposits placed,45
45
Forward forward deposits accepted are treated as
interest-rate contracts.

Capital Adequacy (SMBs: Risk-Based Measure)
and partly paid shares and securities; they
do not include commitments to make resi­
dential mortgage loans or forward foreignexchange contracts.
i. Securities lent by a bank are treated in
one of two ways, depending upon whether
the lender is at risk of loss. If a bank, as
agent for a customer, lends the customer’s
securities and does not indemnify the cus­
tomer against loss, then the transaction is
excluded from the risk-based capital calcu­
lation. If, alternatively, a bank lends its own
securities or, acting as agent for a customer,
lends the customer’s securities and indemni­
fies the customer against loss, the transac­
tion is converted at 100 percent and as­
signed to the risk-w eight category
appropriate to the obligor, to any collateral
delivered to the lending bank, or, if appli­
cable, to the independent custodian acting
on the lender’s behalf. Where a bank is
acting as agent for a customer in a transac­
tion involving the lending or sale of secu­
rities that is collateralized by cash delivered
to the bank, the transaction is deemed to be
collateralized by cash on deposit in the
bank for purposes of determining the appro­
priate risk-weight category, provided that
any indemnification is limited to no more
than the difference between the market
value of the securities and the cash collat­
eral received and any reinvestment risk as­
sociated with that cash collateral is borne
by the customer.
2. Items with a 50 percent conversion factor.
Transaction-related contingencies are con­
verted at 50 percent. Such contingencies in­
clude bid bonds, performance bonds, warran­
ties, standby letters of credit related to
particular transactions, and perform ance
standby letters of credit, as well as acquisi­
tions of risk participations in performance
standby letters of credit. Performance standby
letters of credit represent obligations backing
the performance of nonfinancial or commer­
cial contracts or undertakings. To the extent
permitted by law or regulation, performance
standby letters of credit include arrangements
backing, among other things, subcontractors’
and suppliers’ performance, labor and materi­
als contracts, and construction bids.

Regulation H, Appendix A
The unused portion of commitments with
an original maturity exceeding one year,46 in­
cluding underwriting commitments, and com­
mercial and consumer credit commitments
also are converted at 50 percent. Original ma­
turity is defined as the length of time between
the date the commitment is issued and the
earliest date on which (1) the bank can, at its
option, unconditionally (without cause) cancel
the commitment47 and (2) the bank is sched­
uled to (and as a normal practice actually
does) review the facility to determine whether
or not it should be extended. Such reviews
must continue to be conducted at least annu­
ally for such a facility to qualify as a short­
term commitment.
Commitments are defined as any legally
binding arrangements that obligate a bank to
extend credit in the form of loans or leases; to
purchase loans, securities, or other assets; or
to participate in loans and leases. They also
include overdraft facilities, revolving credit,
home equity and mortgage lines of credit, and
similar transactions. Normally, commitments
involve a written contract or agreement and a
commitment fee, or some other form of con­
sideration. Commitments are included in
weighted-risk assets regardless of whether
they contain “ m aterial adverse change”
clauses or other provisions that are intended to
relieve the issuer of its funding obligation un­
der certain conditions. In the case of commit­
ments structured as syndications, where the
bank is obligated solely for its pro rata share,
only the bank’s proportional share of the syn­
dicated commitment is taken into account in
calculating the risk-based capital ratio.
Facilities that are unconditionally cancel­
lable (without cause) at any time by the bank
are not deemed to be commitments, provided
the bank makes a separate credit decision be­
fore each drawing under the facility. Commit­
ments with an original maturity of one year or
46 Through year-end 1992, remaining maturity may be
used for determining the maturity of off-balance-sheet loan
commitments; thereafter, original maturity must be used.
47 In the case of consumer home equity or mortgage
lines of credit secured by liens on one- to four-family
residential properties, the bank is deemed able to uncondi­
tionally cancel the commitment for the purpose of this
criterion if, at its option, it can prohibit additional exten­
sions of credit, reduce the credit line, and terminate the
commitment to the full extent permitted by relevant federal
law.
17

Regulation H, Appendix A

Capital Adequacy (SMBs: Risk-Based Measure)

less are deemed to involve low risk and,
therefore, are not assessed a capital charge.
Such short-term commitments are defined to
include the unused portion of lines of credit
on retail credit cards and related plans (as
defined in the instructions to the commercial
bank call report) if the bank has the uncondi­
tional right to cancel the line of credit at any
time, in accordance with applicable law.
Once a commitment has been converted at
50 percent, any portion that has been con­
veyed to U.S. depository institutions or OECD
banks as participations in which the originat­
ing bank retains the full obligation to the bor­
rower if the participating bank fails to pay
when the instrument is drawn, is assigned to
the 20 percent risk category. This treatment is
analogous to that accorded to conveyances of
risk participations in standby letters of credit.
The acquisition of a participation in a commit­
ment by a bank is converted at 50 percent and
assigned to the risk category appropriate to
the account-party obligor or, if relevant, the
nature of the collateral or guarantees.
Revolving underwriting facilities (RUFs),
note issuance facilities (NIFs), and other simi­
lar arrangements also are converted at 50 per­
cent regardless of maturity. These are facilities
under which a borrower can issue on a re­
volving basis short-term paper in its own
name, but for which the underwriting banks
have a legally binding commitment either to
purchase any notes the borrower is unable to
sell by the rollover date or to advance funds
to the borrower.
3. Items with a 20 percent conversion factor.
Short-term, self-liquidating trade-related con­
tingencies which arise from the movement of
goods are converted at 20 percent. Such con­
tingencies generally include commercial letters
of credit and other documentary letters of
credit collateralized by the underlying
shipments.
4. Items with a zero percent conversion factor.
These include unused portions of commit­
ments with an original maturity of one year or
less,48 or which are unconditionally cancel­
48 Through year-end 1992, remaining maturity may be
used for determining term to maturity for off-balance-sheet
loan commitments; thereafter, original maturity must be
used.

lable at any time, provided a separate credit
decision is made before each drawing under
the facility. Unused portions of lines of credit
on retail credit cards and related plans are
deemed to be short-term commitments if the
bank has the unconditional right to cancel the
line of credit at any time, in accordance with
applicable law.
E. Derivative Contracts (Interest-Rate,
Exchange-Rate, Commodity- (Including
Precious Metals) and Equity-Linked
Contracts)
1. Scope. Credit-equivalent amounts are com­
puted for each of the following off-balancesheet derivative contracts:
a. Interest-rate contracts. These include
single-currency interest-rate swaps, basis
swaps, forward rate agreements, interest-rate
options purchased (including caps, collars,
and floors purchased), and any other instru­
ment linked to interest rates that gives rise
to similar credit risks (including whenissued securities and forward forward de­
posits accepted).
b. Exchange-rate contracts. These include
cross-currency interest-rate swaps, forward
foreign-exchange contracts, currency op­
tions purchased, and any other instrument
linked to exchange rates that gives rise to
similar credit risks.
c. Equity derivative contracts. These in­
clude equity-linked swaps, equity-linked op­
tions purchased, forward equity-linked con­
tracts, and any other instrument linked to
equities that gives rise to similar credit
risks.
d. Commodity (including precious metal)
derivative contracts. These include
commodity-linked swaps, commodity-linked
options purchased, forward commoditylinked contracts, and any other instrument
linked to commodities that gives rise to
similar credit risks.
e. Exceptions. Exchange-rate contracts with
an original maturity of 14 or fewer calendar
days and derivative contracts traded on ex­
changes that require daily receipt and pay­
ment of cash-variation margin may be ex­
cluded from the risk-based ratio calculation.
Gold contracts are accorded the same treat­

Capital Adequacy (SMBs: Risk-Based Measure)

Regulation H, Appendix A

ment as exchange-rate contracts except that
gold contracts with an original maturity of
14 or fewer calendar days are included in
the risk-based ratio calculation. Over-thecounter options purchased are included and
treated in the same way as other derivative
contracts.

the mark-to-market value is positive, then
the current exposure is equal to that markto-market value. If the mark-to-market
value is zero or negative, then the current
exposure is zero. Mark-to-market values are
measured in dollars, regardless of the cur­
rency or currencies specified in the contract,
and should reflect changes in underlying
rates, prices, and indices, as well as
counterparty credit quality.

2. Calculation o f credit-equivalent amounts.
a. The credit-equivalent amount of a de­
rivative contract that is not subject to a
qualifying bilateral netting contract in ac­
cordance with section III.E.3. of this appen­
dix A is equal to the sum of (i) the current
exposure (sometimes referred to as the re­
placement cost) of the contract; and (ii) an
estimate of the potential future credit expo­
sure of the contract.
b. The current exposure is determined by
the mark-to-market value of the contract. If

c. The potential future credit exposure of a
contract, including a contract with a nega­
tive mark-to-market value, is estimated by
multiplying the notional principal amount of
the contract by a credit-conversion factor.
Banks should use, subject to examiner re­
view, the effective rather than the apparent
or stated notional amount in this calcula­
tion. The conversion factors are:

Conversion Factors
(in percent)

Remaining maturity

Interestrate

One year or less
Over one to five years
Over five years

0.0
0.5
. 1.5

Exchangerate and
gold
1.0
5.0
7.5

d. For a contract that is structured such that
on specified dates any outstanding expo­
sure is settled and the terms are reset so
that the market value of the contract is
zero, the remaining maturity is equal to the
time until the next reset date. For an
interest-rate contract with a remaining ma­
turity of more than one year that meets
these criteria, the minimum conversion fac­
tor is 0.5 percent.
e. For a contract with multiple exchanges
of principal, the conversion factor is multi­
plied by the number of remaining payments
in the contract. A derivative contract not
included in the definitions of interest-rate,
exchange-rate, equity, or commodity con­
tracts as set forth in section DI.E.l. of this
appendix A, is subject to the same conver­
sion factors as a commodity, excluding pre­
cious metals.
f. No potential future exposure is calculated

Equity
6.0
8.0
10.0

Commodity,
excluding
precious
metals

Precious
metals,
except
gold

10.0
12.0

7.0
7.0

15.0

8.0

for a single-currency interest-rate swap in
which payments are made based upon two
floating-rate indices (a so-called floating/
floating or basis swap); the credit exposure
on such a contract is evaluated solely on
the basis of the mark-to-market value,
g. The Board notes that the conversion fac­
tors set forth above, which are based on
observed volatilities of the particular types
of instruments, are subject to review and
modification in light of changing volatilities
or market conditions.
3. Netting.
a. For purposes of this appendix A, netting
refers to the offsetting of positive and nega­
tive mark-to-market values when determin­
ing a current exposure to be used in the
calculation of a credit-equivalent amount.
Any legally enforceable form of bilateral
netting (that is, netting with a single
counterparty) of derivative contracts is rec­
19

Regulation H, Appendix A
ognized for purposes of calculating the
credit-equivalent amount provided that—
i-

the netting is accomplished under a writ­
ten netting contract that creates a single
legal obligation, covering all included
individual contracts, with the effect that
the bank would have a claim to receive,
or obligation to pay, only the net
amount of the sum of the positive and
negative mark-to-market values on in­
cluded individual contracts in the event
that a counterparty, or a counterparty to
whom the contract has been validly as­
signed, fails to perform due to any of
the following events: default, insolven­
cy, liquidation, or similar circumstances;
ii. the bank obtains a written and reasoned
legal opinion(s) representing that in the
event of a legal challenge— including
one resulting from default, insolvency,
liquidation, or similar circumstances—
the relevant court and administrative au­
thorities would find the bank’s exposure
to be the net amount under—
1. the law of the jurisdiction in which
the counterparty is chartered or the
equivalent location in the case of
noncorporate entities, and if a branch
of the counterparty is involved, then
also under the law of the jurisdiction
in which the branch is located;
2. the law that governs the individual
contracts covered by the netting con­
tract; and
3. the law that governs the netting
contract;
iii. the bank establishes and maintains pro­
cedures to ensure that the legal charac­
teristics of netting contracts are kept un­
der review in the light of possible
changes in relevant law; and
iv. the bank maintains in its files documen­
tation adequate to support the netting of
derivative contracts, including a copy of
the bilateral netting contract and neces­
sary legal opinions.
b. A contract containing a walkaway clause
is not eligible for netting for purposes of
calculating the credit-equivalent amount.49

49 A walkaway clause is a provision in a netting contract

Capital Adequacy (SMBs: Risk-Based Measure)
c. A bank netting individual contracts for
the purpose of calculating credit-equivalent
amounts of derivative contracts, represents
that it has met the requirements of this ap­
pendix A and all the appropriate documents
are in the bank’s files and available for
inspection by the Federal Reserve. The Fed­
eral Reserve may determine that a bank’s
files are inadequate or that a netting con­
tract, or any of its underlying individual
contracts, may not be legally enforceable
under any one of the bodies of law de­
scribed in section III.E.3.a.ii. of this appen­
dix A. If such a determination is made, the
netting contract may be disqualified from
recognition for risk-based capital purposes
or underlying individual contracts may be
treated as though they are not subject to the
netting contract.
d. The credit-equivalent amount of con­
tracts that are subject to a qualifying bilat­
eral netting contract is calculated by adding
(i) the current exposure of the netting con­
tract (net current exposure) and (ii) the sum
of the estimates of potential future credit
exposures on all individual contracts subject
to the netting contract (gross potential fu­
ture exposure) adjusted to reflect the effects
of the netting contract.50
e. The net current exposure is the sum of
all positive and negative mark-to-market
values of the individual contracts included
in the netting contract. If the net sum of the
mark-to-market values is positive, then the
net current exposure is equal to that sum. If
the net sum of the mark-to-market values is
zero or negative, then the net exposure is
zero. The Federal Reserve may determine
that a netting contract qualifies for riskbased capital netting treatment even though
certain individual contracts included under
the netting contract may not qualify. In
such instances, the nonqualifying contracts
that permits a nondefaulting counterparty to make lower
payments than it would make otherwise under the contract,
or no payment at all, to a defaulter or to the estate of a
defaulter, even if the defaulter or the estate of the defaulter
is a net creditor under the contract.
50 For purposes of calculating potential future credit ex­
posure to a netting counterparty for foreign-exchange con­
tracts and other similar contracts in which notional princi­
pal is equivalent to cash flows, total notional principal is
defined as the net receipts falling due on each value date in
each currency.

Capital Adequacy (SMBs: Risk-Based Measure)
should be treated as individual contracts
that are not subject to the netting contract.
f. Gross potential future exposure, or Agross
is calculated by summing the estimates of
potential future exposure (determined in ac­
cordance with section III.E.2 of this appen­
dix A) for each individual contract subject
to the qualifying bilateral netting contract.
g. The effects of the bilateral netting con­
tract on the gross potential future exposure
are recognized through the application of a
formula that results in an adjusted add-on
amount (Anet). The formula, which employs
the ratio of net current exposure to gross
current exposure (NGR) is expressed as:
Anet = (0.4 x Agross) +
0.6(NGR x Agross)
h. The NGR may be calculated in accor­
dance with either the counterparty-bycounterparty approach or the aggregate
approach.
i. Under the counterparty-by-counterparty
approach, the NGR is the ratio of the net
current exposure for a netting contract to
the gross current exposure of the netting
contract. The gross current exposure is
the sum of the current exposures of all
individual contracts subject to the netting
contract calculated in accordance with
section III.E.2. of this appendix A. Net
negative mark-to-market values for indi­
vidual netting contracts with the same
counterparty may not be used to offset
net positive mark-to-market values for
other netting contracts with that
counterparty.
ii. Under the aggregate approach, the
NGR is the ratio of the sum of all of the
net current exposures for qualifying bilat­
eral netting contracts to the sum of all of
the gross current exposures for those net­
ting contracts (each gross current expo­
sure is calculated in the same manner as
in section III.E.3.h.i. of this appendix A).
Net negative mark-to-market values for
individual counterparties may not be used
to offset net positive mark-to-market val­
ues for other counterparties.
iii. A bank must consistently use either
the counterparty-by-counterparty ap­

Regulation H, Appendix A
proach or the aggregate approach to cal­
culate the NGR. Regardless of the ap­
proach used, the NGR should be applied
individually to each qualifying bilateral
netting contract to determine the adjusted
add-on for that netting contract,
i. In the event a netting contract covers
contracts that are normally excluded from
the risk-based ratio calculation—for ex­
ample, exchange-rate contracts with an
original maturity of 14 or fewer calendar
days or instruments traded on exchanges
that require daily payment and receipt of
cash variation margin— a bank may elect to
either include or exclude all mark-to-market
values of such contracts when determining
net current exposure, provided the method
chosen is applied consistently.
4. Risk weights. Once the credit-equivalent
amount for a derivative contract, or a group of
derivative contracts subject to a qualifying bi­
lateral netting contract, has been determined,
that amount is assigned to the risk category
appropriate to the counterparty, or, if relevant,
the guarantor or the nature of any collateral.51
However, the maximum risk weight applicable
to the credit-equivalent amount of such con­
tracts is 50 percent.
5. Avoidance o f double-counting.
a. In certain cases, credit exposures arising
from the derivative contracts covered by
section III.E. of this appendix A may al­
ready be reflected, in part, on the balance
sheet. To avoid double-counting such expo­
sures in the assessment of capital adequacy
and, perhaps, assigning inappropriate risk
weights, counterparty credit exposures aris­
ing from the derivative instruments covered
by these guidelines may need to be ex­
cluded from balance-sheet assets in calcu­
lating a bank’s risk-based capital ratios.
b. Examples of the calculation of creditequivalent amounts for contracts covered
under this section III.E. are contained in
attachment V of this appendix A.
51 For derivative contracts, sufficiency of collateral or
guarantees is generally determined by the market value of
the collateral or the amount of the guarantee in relation to
the credit-equivalent amount. Collateral and guarantees are
subject to the same provisions noted under section III.B. of
this appendix A.
21

Regulation H, Appendix A

IV. Minimum Supervisory Ratios and
Standards
The interim and final supervisory standards
set forth below specify minimum supervisory
ratios based primarily on broad credit-risk
considerations. As noted above, the risk-based
ratio does not take explicit account of the
quality of individual asset portfolios or the
range of other types of risks to which banks
may be exposed, such as interest-rate, liquid­
ity, market, or operational risks. For this rea­
son, banks are generally expected to operate
with capital positions above the minimum
ratios.
Institutions with high or inordinate levels of
risk are expected to operate well above mini­
mum capital standards. Banks experiencing or
anticipating significant growth are also ex­
pected to maintain capital, including tangible
capital positions, well above the minimum
levels. For example, most such institutions
generally have operated at capital levels rang­
ing from 100 to 200 basis points above the
stated minimums. Higher capital ratios could
be required if warranted by the particular cir­
cumstances or risk profiles of individual
banks. In all cases, banks should hold capital
commensurate with the level and nature of all
of the risks, including the volume and severity
of problem loans, to which they are exposed.
Upon adoption of the risk-based framework,
any bank that does not meet the interim or
final supervisory ratios, or whose capital is
otherwise considered inadequate, is expected
to develop and implement a plan acceptable to
the Federal Reserve for achieving an adequate
level of capital consistent with the provisions
of these guidelines or with the special circum­
stances affecting the individual institution. In
addition, such banks should avoid any actions,
including increased risk-taking or unwarranted
expansion, that would lower or further erode
their capital positions.
A. Minimum Risk-Based Ratio After
Transition Period
As reflected in attachment VI, by year-end
1992, all state member banks should meet a
minimum ratio of qualifying total capital to
weighted-risk assets of 8 percent, of which at
least 4.0 percentage points should be in the
22

Capital Adequacy (SMBs: Risk-Based Measure)
form of tier 1 capital. For purposes of section
IV.A., tier 1 capital is defined as the sum of
core capital elements less goodwill and other
intangible assets required to be deducted in
accordance with section H.B.l.b. of this ap­
pendix. The maximum amount of supplemen­
tary capital elements that qualifies as tier 2
capital is limited to 100 percent of tier 1
capital. The maximum amount of supplemen­
tary capital elements that qualifies as tier 2
capital is limited to 100 percent of tier 1
capital. In addition, the combined maximum
amount of subordinated debt and intermediateterm preferred stock that qualifies as tier 2
capital is limited to 50 percent of tier 1 capi­
tal. The maximum amount of the allowance
for loan and lease losses that qualifies as tier
2 capital is limited to 1.25 percent of gross
weighted-risk assets. Allowances for loan and
lease losses in excess of this limit may, of
course, be maintained, but would not be in­
cluded in a bank’s total capital. The Federal
Reserve will continue to require banks to
maintain reserves at levels fully sufficient to
cover losses inherent in their loan portfolios.
Qualifying total capital is calculated by
adding tier 1 capital and tier 2 capital (limited
to 100 percent of tier 1 capital) and then
deducting from this sum certain investments
in banking or finance subsidiaries that are not
consolidated for accounting or supervisory
purposes, reciprocal holdings of banking orga­
nization capital securities, or other items at
the direction of the Federal Reserve. These
de-ductions are discussed above in section
11(B).
B. Transition Arrangements
The transition period for implementing the
risk-based capital standard ends on December
31, 1992.52 Initially, the risk-based capital
52 The Basle capital framework does not establish an
initial minimum standard for the risk-based capital ratio
before the end of 1990. However, for the purpose of calcu­
lating a risk-based capital ratio prior to year-end 1990, no
sublimit is placed on the amount of the allowance for loan
and lease losses includable in tier 2. In addition, this frame­
work permits, under temporary transition arrangements, a
certain percentage of a bank’s tier 1 capital to be made up
of supplementary capital elements. In particular, supplemen­
tary elements may constitute 25 percent of a bank’s tier 1
capital (before the deduction of goodwill) up to the end of
1990; from year-end 1990 up to the end of 1992, this
Continued

Capital Adequacy (SMBs: Risk-Based Measure)
guidelines do not establish a minimum level
of capital. However, by year-end 1990, banks
are expected to meet a minimum interim tar­
get ratio for qualifying total capital to
weighted risk assets of 7.25 percent, at least
one-half of which should be in the form of
tier 1 capital. For purposes of meeting the
1990 interim target, the amount of loan-loss
reserves that may be included in capital is
Continued
allowable percentage of supplementary elements in tier 1
declines to 10 percent o f tier 1 (before the deduction of
goodwill). Beginning on December 31, 1992, supplemen­
tary elements may not be included in tier 1. The amount of
subordinated debt and intermediate-term preferred stock
temporarily included in tier 1 under these arrangements will
not be subject to the sublimit on the amount of such
instruments includable in tier 2 capital. Goodwill must be
deducted from the sum of a bank’s permanent core capital
elements (that is, common equity, noncumulative perpetual
preferred stock, and minority interest in the equity of un­
consolidated subsidiaries) plus supplementary items that
may temporarily qualify as tier 1 elements for the purpose
of calculating tier 1 (net of goodwill), tier 2, and total
capital.

Regulation H, Appendix A
limited to 1.5 percent of weighted-risk assets
and up to 10 percent of a bank’s tier 1 capital
may consist of supplementary capital ele­
ments. Thus, the 7.25 percent interim target
ratio implies a minimum ratio of tier 1 capital
to weighted-risk assets of 3.6 percent (onehalf of 7.25) and a minimum ratio of core
capital elements to weighted-risk assets ratio
of 3.25 percent (nine-tenths of the tier 1 capi­
tal ratio).
Through year-end 1990, banks have the op­
tion of complying with the minimum 7.25
percent year-end 1990 risk-based capital stan­
dard, in lieu of the minimum 5.5 percent pri­
mary and 6 percent total capital to total assets
capital ratios set forth in appendix B to part
225 of the Federal Reserve’s Regulation Y. In
addition, as more fully set forth in appendix B
to this part, banks are expected to maintain a
minimum ratio of tier 1 capital to total assets
during this transition period.

Regulation H, Appendix A

Capital Adequacy (SMBs: Risk-Based Measure)

Attachment I— Sample Calculation of Risk-Based Capital Ratio
for State Member Banks
Example o f a bank with $6,000 in total capital and the following assets and off-balance-sheet
items.
Balance-sheet assets
Cash
U.S. Treasuries
Balances at domestic banks
Loans secured by first liens on 1- to 4-family
residential properties
Loans to private corporations
Total Balance-Sheet Assets

$ 5,000
20,000
5,000
5,000
65,000
$100,000

Off-balance-sheet items
Standby letters of credit (SLCs) backing generalobligation debt issues of U.S. municipalities
(GOs)
$ 10,000
Long-term legally binding commitments to private
corporations
20,000
Total Off-Balance-Sheet Items
$ 30,000
This bank’s total capital to total assets (leverage) ratio would be:
($ 6 ,000/$ 100,000 ) = 6 .00 %.

To compute the bank’s weighted-risk assets—
1. Compute the credit-equivalent amount of each off-balance-sheet (OBS) item.
OBS item
SLCs backing municipal GOs
Long-term commitments to private corporations

Conversion
factor

Face value
$10,000
$20,000

x
x

Creditequivalent amount

1.00
0.50

$10,000
$10,000

2. Multiply each balance-sheet asset and the credit-equivalent amount of each OBS item by the appropri­
ate risk weight.
OBS item

Conversion
factor

Face value

Creditequivalent amount

0% category
Cash
U.S. Treasuries
20% category
Balances at domestic banks
Credit-equivalent amounts of SLCs backing GOs
of U.S. municipalities

24

$ 5,000
20,000
$25,000

x

0

x

0.20

0

$ 5,000
10,000
$15,000

$ 3,000

Capital Adequacy (SMBs: Risk-Based Measure)

OBS item

Regulation H, Appendix A

Conversion
factor

Face value

Creditequivalent amount

50% category
Loans secured by first liens on 1- to 4-family
residential properties

$ 5,000

x

0.50

=

$ 2,500

x

1.00

=

$75,000
$80,500

100% category
Loans to private corporations
Credit-equivalent amounts of long-term
commitments to private corporations

$65,000
10,000
$75,000

Total Risk-Weighted Assets

This bank’s ratio of total capital to weighted-risk assets (risk-based capital ratio) would be:
($6,000/$80,500) = 7.45%

25
i

Regulation H, Appendix A

Capital Adequacy (SMBs: Risk-Based Measure)

Attachment II— Summary Definition of Qualifying Capital for State Member Banks*
Using the Year-End 1992 Standards
Components

Minimum requirements after transition period

CORE CAPITAL (tier 1)

Must equal or exceed 4% of weighted-risk assets

Common stockholders’ equity
Qualifying noncumulative perpetual preferred stock

No limit
No limit; banks should avoid undue reliance on
preferred stock in tier 1
Banks should avoid using minority interests to
introduce elements not otherwise qualifying for
tier 1 capital

Minority interest in equity accounts of
consolidated subsidiaries
Less: Goodwill and other intangible assets required
to be deducted from capital1
SUPPLEMENTARY CAPITAL (tier 2)
Allowance for loan and lease losses
Perpetual preferred stock
Hybrid capital instruments and equity-contract
notes
Subordinated debt and intermediate-term
preferred stock (original weighted average
maturity of 5 years or more)
Revaluation reserves (equity and building)

DEDUCTIONS (from sum of tier 1 and tier 2)
Investments in unconsolidated subsidiaries
Reciprocal holdings of banking organizations’
capital securities
Other deductions (such as other subsidiaries or
joint ventures) as determined by supervisory
authority
TOTAL CAPITAL
(tier 1 + tier 2 - Deductions)

Total of tier 2 is limited to 100% of tier l 2
Limited to 1.25% of weighted-risk assets2
No limit within tier 2
No limit within tier 2
Subordinated debt and intermediate-term preferred
stock are limited to 50% of tier l;3 amortized for
capital purposes as they approach maturity
Not included; banks encouraged to disclose; may be
evaluated on a case-by-case basis for international
comparisons; and taken into account in making an
overall assessment of capital
On a case-by-case basis or as a matter of policy
after formal rulemaking

Must equal or exceed 8% of weighted-risk assets

1 Requirements for the deduction of other intangible assets are set forth in section II.B.l.b. of this appendix.
2 Amounts in excess of limitations are permitted but do not qualify as capital.
3 Amounts in excess of limitations are permitted but do not qualify as capital.
* See discussion in section II of the guidelines for a complete description o f the requirements for, and the limitations on,
the components of qualifying capital.

Capital Adequacy (SMBs: Risk-Based Measure)

Attachment III— Summary of Risk
Weights and Risk Categories for State
Member Banks
Category 1: Zero Percent
1. Cash (domestic and foreign) held in the
bank or in transit
2. Balances due from Federal Reserve Banks
(including Federal Reserve Bank stock) and
central banks in other OECD countries
3. Direct claims on, and the portions of
claims that are unconditionally guaranteed by,
the U.S. Treasury and U.S. government agen­
cies' and the central governments of other
OECD countries, and local currency claims
on, and the portions of local currency claims
that are unconditionally guaranteed by, the
central governments of non-OECD countries
(including the central banks of non-OECD
countries), to the extent that the bank has
liabilities booked in that currency
4. Gold bullion held in the bank’s vaults or in
another’s vaults on an allocated basis, to the
extent offset by gold bullion liabilities
5. Claims collateralized by cash on deposit in
the bank or by securities issued or guaranteed
by OECD central governments or U.S. gov­
ernment agencies for which a positive margin
of collateral is maintained on a daily basis,
fully taking into account any change in the
bank’s exposure to the obligor or counterparty
under a claim in relation to the market value
of the collateral held in support of that claim

Category 2: 20 Percent
1. Cash items in the process of collection
2. All claims (long- or short-term) on, and the
portions of claims (long- or short-term) that
are guaranteed by, U.S. depository institutions
and OECD banks
3. Short-term claims (remaining maturity of
one year or less) on, and the portions of short­

Regulation H, Appendix A
term claims that are guaranteed by, nonOECD banks
4. The portions of claims that are condition­
ally guaranteed by the central governments of
OECD countries and U.S. government agen­
cies, and the portions of local currency claims
that are conditionally guaranteed by the cen­
tral governments of non-OECD countries, to
the extent that the bank has liabilities booked
in that currency
5. Claims on, and the portions of claims that
are guaranteed by, U.S. government-sponsored
agencies2
6. General obligation claims on, and the por­
tions of claims that are guaranteed by the full
faith and credit of, local governments and po­
litical subdivisions of the U.S. and other
OECD local governments
7. Claims on, and the portions of claims that
are guaranteed by, official multilateral lending
institutions or regional development banks
8. The portions of
claim s that
are
collateralized3 by cash on deposit in the bank
or by securities issued or guaranteed by the
U.S. Treasury, the central governments of
other OECD countries, and U.S. government
agencies that do not qualify for the zero per­
cent risk-w eight category, or that are
collateralized by securities issued or guaran­
teed by U.S. government-sponsored agencies
9. The portions
of
claim s that
are
collateralized3 by securities issued by official
multilateral lending institutions or regional de­
velopment banks
10. Certain privately issued securities repre­
senting indirect ownership of mortgage-backed
U.S. government agency or U.S. governmentsponsored agency securities
11. Investments in shares of a fund whose
portfolio is permitted to hold only securities

2 For the purpose of calculating the risk-based capital
ratio, a U.S. government-sponsored agency is defined as an
1 For the purpose o f calculating the risk-based capital agency originally established or chartered to serve public
ratio, a U.S. government agency is defined as an instrumen­
purposes specified by the U.S. Congress but whose obliga­
tality of the U.S. government whose obligations are fully
tions are not explicitly guaranteed by the full faith and
and explicitly guaranteed as to the timely payment of prin­
credit of the U.S. government.
cipal and interest by the full faith and credit of the U.S.
3 The extent of collateralization is determined by current
government.
market value.

Regulation H, Appendix A
that would qualify for the zero or 20 percent
risk categories
Category 3: 50 Percent
1. Loans fully secured by first liens on oneto four-family residential properties or on
multifamily residential properties that have
been made in accordance with prudent under­
writing standards, that are performing in ac­
cordance with their original terms, that are not
past due or in nonaccrual status, and that meet
other qualifying criteria, and certain privately
issued mortgage-backed securities representing
indirect ownership of such loans. (Loans made
for speculative purposes are excluded.)
2. Revenue bonds or similar claims that are
obligations of U.S. state or local governments,
or other OECD local governments, but for
which the government entity is committed to
repay the debt only out of revenues from the
facilities financed
3. Credit-equivalent amounts of interest rateand foreign exchange rate-related contracts,
except for those assigned to a lower risk
category
Category 4: 100 Percent
1. All other claims on private obligors

Capital Adequacy (SMBs: Risk-Based Measure)
2. Claims on, or guaranteed by, non-OECD
foreign banks with a remaining maturity ex­
ceeding one year
3. Claims on, or guaranteed by, non-OECD
central governments that are not included in
item 3 of category 1 or item 4 of category 2;
all claim s on non-OECD state or local
governments
4. Obligations issued by U.S. state or local
governments, or other OECD local govern­
ments (including industrial-development au­
thorities and similar entities), repayable solely
by a private party or enterprise
5. Premises, plant, and equipment; other fixed
assets; and other real estate owned
6. Investments in any unconsolidated subsid­
iaries, joint ventures, or associated compa­
nies—if not deducted from capital
7. Instruments issued by other banking orga­
nizations that qualify as capital— if not de­
ducted from capital
8. Claims on commercial firms owned by a
government
9. All other assets, including any intangible
assets that are not deducted from capital

Capital Adequacy (SMBs: Risk-Based Measure)

Attachment IV— Credit-Conversion
Factors for Off-Balance-Sheet Items for
State Member Banks

Regulation H, Appendix A
note-issuance facilities (NIFs), and similar
arrangements
20 Percent Conversion Factor

100 Percent Conversion Factor
1. Direct credit substitutes (These include
general guarantees of indebtedness and all
guarantee-type instruments, including standby
letters of credit backing the financial obliga­
tions of other parties.)

Short-term, self-liquidating, trade-related con­
tingencies, including commercial letters of
credit
Zero Percent Conversion Factor

2. Risk participations in banker’s acceptances
and direct credit substitutes, such as standby
letters of credit

Unused portions of commitments with an
original maturity of one year or less, or which
are unconditionally cancellable at any time,
provided a separate credit decision is made
before each drawing

3. Sale and repurchase agreements and assets
sold with recourse that are not included on the
balance sheet

Credit Conversion fo r Derivative Contracts

4. Forward agreements to purchase assets, in­
cluding financing facilities, on w hich
draw-down is certain
5. Securities lent for which the bank is at risk
50 Percent Conversion Factor
1. Transaction-related contingencies (These
include bid bonds, performance bonds, war­
ranties, and standby letters of credit backing
the nonfinancial performance of other parties.)
2. Unused portions of commitments with an
original maturity exceeding one year, includ­
ing underwriting commitments and commer­
cial credit lines
3. Revolving underwriting facilities (RUFs),

1. The credit-equivalent amount of a deriva­
tive contract is the sum of the current credit
exposure of the contract and an estimate of
potential future increases in credit exposure.
The current exposure is the positive mark-tomarket value of the contract (or zero if the
mark-to-market value is zero or negative). For
derivative contracts that are subject to a quali­
fying bilateral netting contract, the current ex­
posure is, generally, the net sum of the posi­
tive and negative mark-to-market values of the
contracts included in the netting contract (or
zero if the net sum of the mark-to-market
values is zero or negative). The potential fu­
ture exposure is calculated by multiplying the
effective notional amount of a contract by one
of the following credit-conversion factors, as
appropriate:

Conversion Factors
(in percent)

Remaining Maturity
One year or less
Over one to five years
Over five years

Interestrate
0.0
0.5
1.5

Exchangerate and
gold
1.0
5.0
7.5

Equity

Commodity,
excluding
precious
metals

Precious
metals,
except
gold

6.0
8.0
10.0

10.0
12.0
15.0

7.0
7.0
8.0

29

Regulation H, Appendix A
For contracts subject to a qualifying bilateral
netting contract, the potential future exposure
is, generally, the sum of the individual poten­
tial future exposures for each contract in­
cluded under the netting contract adjusted by
the application of the following formula:
Anet = (0-4 x Agross) + 0.6(NGR x Agross)
NGR is the ratio of net current exposure to
gross current exposure.
2. No potential future exposure is calculated

Capital Adequacy (SMBs: Risk-Based Measure)
for single-currency interest-rate swaps in
which payments are made based upon two
floating indices, that is, so-called floating/
floating or basis swaps. The credit exposure
on these contracts is evaluated solely on the
basis of their mark-to-market value. Exchangerate contracts with an original maturity of 14
days or fewer are excluded. Instruments traded
on exchanges that require daily receipt and
payment of cash variation margin are also
excluded.

Capital Adequacy (SMBs: Risk-Based Measure)

Regulation H, Appendix A

Attachment V— Calculating Credit-Equivalent Amounts for Derivative Contracts
Notional
principal
amount

Type o f contract

Potential
Conversion exposure
factor
(dollars)

(1) 120-day forward
foreign exchange
5,000.000
(2) 4-year forward
foreign exchange
6,000,000
(3) 3-year
single-currency
fixed and floating
interest-rate swap
10,000,000
(4) 6-month oil swap
10,000,000
(5) 7-year cross-currency
floating and floating
interest-rate swap
20,000,000
TOTAL

Mark-tomarket

Current
exposure
(dollars)
100,000

Creditequivalent
amount

.01

50,000

100,000

150,000

.05

300,000

-120,000

.005
.10

50,000
1,000,000

200,000
-250,000

200,000
-0 -

250,000
1,000,000

.075

1,500,000
2,900,000

-1,500,000
+

-0 300,000

1,500,000
$3,200,000

300,000

-0 -

a. If contracts (1) through (5) above are subject to a qualifying bilateral netting contract, then
the following applies:
Contract

Net current
exposure

Potential future exposure

(1)
(2)
(3)
(4)
(5)
TOTAL

Credit-equivalent
amount

50,000
300,000
50,000
1,000,000
1,500,000
2,900,000

+

0

=

2,900,000

NOTE: The total o f the mark-to-market values from the first table is -1,370,000. Since this is a negative amount, the net
current exposure is zero.

b.
To recognize the effects of bilateral net­
d.
If the net current exposure was a posi­
ting on potential future exposure the following tive number, for example $200,000, the creditformula applies:
equivalent amount would be calculated as
follows:
Ane, = (.4 x A ;s) + .6(NGR x Agross)
NGR = .67 = ($200,000/$300,000)
c.
In the above example where the net cur­
rent exposure is zero, the credit-equivalent
Anet = (0.4 x $2,900,000)+
amount would be calculated as follows:
0.6(.67 x $2,900,000)
NGR = 0 = (0/300,000)
Anet = $2,325,800
Anet = (0.4 x $2,900,000) +
0.6(0 x $2,900,000)
Anet = $1,160,000

The credit-equivalent am ount would be
$2,325,800 + $200,000 = $2,525,800.

The credit-equivalent amount is
$1,160,000 + 0 = $1,160,000.

31

Regulation H, Appendix A

Capital Adequacy (SMBs: Risk-Based Measure)

Attachment VI
SUMMARY OF:
Transitional Arrangements
for State Member Banks

Year-end 1992

7.25%

8.0%

Common equity,
qualifying
noncumulative perpetual
preferred stock,
minority interests, plus
supplementary
elements2 less goodwill

Common equity,
qualifying
noncumulative perpetual
preferred stock, and
minority interest less
goodwill and other
intangible assets
required to be deducted
from capital3

3.625%

4.0%

3.25%

4.0%

1.5% of weighted-risk
assets

1.25% of weighted-risk
assets

No limit within tier 2

No limit within tier 2

No limit within tier 2

No limit within tier 2

No limit within tier 2

No limit within tier 2

Combined maximum of
50% of tier 1

Combined maximum of Combined maximum of
50% of tier 1
50% of tier 1

May not exceed tier 1
capital

May not exceed tier 1
capital

1. Minimum standard of
total capital to
weighted-risk assets
None
2. Definition of tier 1
capital
Common equity,
qualifying noncumulative
perpetual preferred stock,
minority interests, plus
supplementary elements1
less goodwill

3. Minimum standard of
tier 1 capital to
weighted-risk assets
None
4. Minimum standard of
stockholders’ equity
to weighted-risk
assets
None
5. Limitations on
supplementary capital
elements
a. Allowance for loan
No limit within tier 2
and lease losses
b. Qualifying
perpetual preferred
stock
c. Hybrid capital
instruments and
equity contract
notes
d. Subordinated debt
and
intermediate-term
preferred stock
e. Total qualifying
tier 2 capital
6. Definition of total
capital

Final Arrangement
Year-end 1990

Initial

May not exceed tier 1
capital

Tier 1 plus tier 2 less:
Tier 1 plus tier 2 less:
Tier 1 plus tier 2 less:
• reciprocal holdings of
• reciprocal holdings of • reciprocal holdings of
banking organizations’
banking organizations’ banking organizations’
capital instruments
capital instruments
capital instruments
• investments in
• investments in
• investments in
unconsolidated
unconsolidated subsidiaries
unconsolidated
subsidiaries
subsidiaries

1 Supplementary elements may be included in tier 1 up to 25% o f the sum o f tier 1 plus goodwill.
2 Supplementary elements may be included in tier 1 up to 10% of the sum o f tier 1 plus goodwill.
3 Requirements for the deduction of other intangible assets are set forth in section II.B.l.b of this appendix.

Capital Adequacy Guidelines for Bank Holding Companies:
Risk-Based Measure
12 CFR 225, appendix A; as amended effective October 1, 1995

I. Overview

The risk-based capital guidelines include
both a definition of capital and a framework
for calculating weighted-risk assets by assign­
ing assets and off-balance-sheet items to broad
risk categories. An institution’s risk-based
capital ratio is calculated by dividing its quali­
fying capital (the numerator of the ratio) by

its weighted-risk assets (the denominator).3
The definition of “qualifying capital” is out­
lined below in section II, and the procedures
for calculating weighted-risk assets are dis­
cussed in section III. Attachment I illustrates a
sample calculation of weighted-risk assets and
the risk-based capital ratio.
The risk-based capital guidelines also estab­
lish a schedule for achieving a minimum su­
pervisory standard for the ratio of qualifying
capital to weighted-risk assets and provide for
transitional arrangements during a phase-in
period to facilitate adoption and implementa­
tion of the measure at the end of 1992. These
interim standards and transitional arrange­
ments are set forth in section IV.
The risk-based guidelines apply on a con­
solidated basis to bank holding companies
with consolidated assets of $150 million or
more. For bank holding companies with less
than $150 million in consolidated assets, the
guidelines will be applied on a bank-only ba­
sis unless (a) the parent bank holding com­
pany is engaged in nonbank activity involving
significant leverage;4 or (b) the parent com­
pany has a significant amount of outstanding
debt that is held by the general public.
The risk-based guidelines are to be used in
the inspection and supervisory process as well
as in the analysis of applications acted upon
by the Federal Reserve. Thus, in considering
an application filed by a bank holding com­
pany, the Federal Reserve will take into ac­
count the organization’s risk-based capital ra­
tio, the reasonableness of its capital plans, and
the degree of progress it has demonstrated
toward meeting the interim and final riskbased capital standards.
The risk-based capital ratio focuses princi­

1 Supervisory ratios that relate capital to total assets for
bank holding companies are outlined in appendixes B and
D o f this part.
2 The risk-based capital measure is based upon a frame­
work developed jointly by supervisory authorities from the
countries represented on the Basle Committee on Banking
Regulations and Supervisory Practices (Basle Supervisors’
Committee) and endorsed by the Group of Ten Central
Bank Governors. The framework is described in a paper
prepared by the BSC entitled “International Convergence of
Capital Measurement,” July 1988.

3 Banking organizations will initially be expected to utilize period-end amounts in calculating their risk-based capi­
tal ratios. When necessary and appropriate, ratios based on
average balances may also be calculated on a case-by-case
basis. Moreover, to the extent banking organizations have
data on average balances that can be used to calculate
risk-based ratios, the Federal Reserve will take such data
into account.
4 A parent company that is engaged in significant offbalance-sheet activities would generally be deemed to be
engaged in activities that involve significant leverage.

The Board of Governors of the Federal Re­
serve System has adopted a risk-based capital
measure to assist in the assessment of the
capital adequacy of bank holding companies
(“banking organizations” ).1 The principal ob­
jectives of this measure are to (i) make regu­
latory capital requirements more sensitive to
differences in risk profiles among banking or­
ganizations; (ii) factor off-balance-sheet expo­
sures into the assessment of capital adequacy;
(iii) minimize disincentives to holding liquid,
low-risk assets; and (iv) achieve greater con­
sistency in the evaluation of the capital ad­
equacy of m ajor banking organizations
throughout the world.2
In addition, when certain organizations that
engage in trading activities calculate their
risk-based capital ratio under this appendix A,
they must also refer to appendix E of this
part, which incorporates capital charges for
certain market risks into the risk-based capital
ratio. When calculating their risk-based capital
ratio under this appendix A, such organiza­
tions are required to refer to appendix E of
this part for supplemental rules to determine
qualifying and excess capital, calculate riskw eighted assets, calculate m arket-riskequivalent assets, and calculate risk-based
capital ratios adjusted for market risk.

33

Regulation Y, Appendix A
pally on broad categories of credit risk, al­
though the framework for assigning assets and
off-balance-sheet items to risk categories does
incorporate elements of transfer risk, as well
as limited instances of interest-rate and market
risk. The risk-based ratio does not, however,
incorporate other factors that can affect an
organization’s financial condition. These fac­
tors include overall interest-rate exposure; li­
quidity, funding, and market risks; the quality
and level of earnings; investment or loan port­
folio concentrations; the quality of loans and
investments; the effectiveness of loan and in­
vestment policies; and management’s ability to
monitor and control financial and operating
risks.
In addition to evaluating capital ratios, an
overall assessment of capital adequacy must
take account of these other factors, including,
in particular, the level and severity of problem
and classified assets. For this reason, the final
supervisory judgment on an organization’s
capital adequacy may differ significantly from
conclusions that might be drawn solely from
the level of the organization’s risk-based capi­
tal ratio.
The risk-based capital guidelines establish
minimum ratios of capital to weighted-risk as­
sets. In light of the considerations just dis­
cussed, banking organizations generally are
expected to operate well above the minimum
risk-based ratios. In particular, banking organi­
zations contemplating significant expansion
proposals are expected to maintain strong
capital levels substantially above the minimum
ratios and should not allow significant diminu­
tion of financial strength below these strong
levels to fund their expansion plans. Institu­
tions with high or inordinate levels of risk are
also expected to operate above minimum capi­
tal standards. In all cases, institutions should
hold capital commensurate with the level and
nature of the risks to which they are exposed.
Banking organizations that do not meet the
minimum risk-based standard, or that are oth­
erwise considered to be inadequately capital­
ized, are expected to develop and implement
plans acceptable to the Federal Reserve for
achieving adequate levels of capital within a
reasonable period of time.
The Board will monitor the implementation
and effect of these guidelines in relation to
34

Capital Adequacy (BHCs: Risk-Based Measure)
domestic and international developments in
the banking industry. When necessary and ap­
propriate, the Board will consider the need to
modify the guidelines in light of any signifi­
cant changes in the economy, financial mar­
kets, banking practices, or other relevant
factors.

II. Definition of Qualifying Capital for
the Risk-Based Capital Ratio
An institution’s qualifying total capital con­
sists of two types of capital components:
“core capital elements” (comprising tier 1
capital) and “ supplementary capital elements”
(comprising tier 2 capital). These capital ele­
ments and the various limits, restrictions, and
deductions to which they are subject, are dis­
cussed below and are set forth in attachment

n.
To qualify as an element of tier 1 or tier 2
capital, a capital instrument may not contain
or be covered by any covenants, terms, or
restrictions that are inconsistent with safe and
sound banking practices.
Redemptions of permanent equity or other
capital instruments before stated maturity
could have a significant impact on an organi­
zation’s overall capital structure. Conse­
quently, an organization considering such a
step should consult with the Federal Reserve
before redeeming any equity or debt capital
instrument (prior to maturity) if such redemp­
tion could have a material effect on the level
or composition of the organization’s capital
base.5

A. The Components o f Qualifying Capital
1. Core capital elements (tier 1 capital). The
tier 1 component of an institution’s qualifying
capital must represent at least 50 percent of
qualifying total capital and may consist of the
following items that are defined as core capi­
tal elements:
5 Consultation would not ordinarily be necessary if an
instrument were redeemed with the proceeds of, or replaced
by, a like amount of a similar or higher-quality capital
instrument and the organization’s capital position is consid­
ered fully adequate by the Federal Reserve. In the case of
limited-life tier 2 instruments, consultation would generally
be obviated if the new security is of equal or greater
maturity than the one it replaces.

Capital Adequacy (BHCs: Risk-Based Measure)
i. common stockholders’ equity
ii. qualifying noncumulative perpetual pre­
ferred stock (including related surplus)
iii. qualifying cumulative perpetual preferred
stock (including related surplus), subject
to certain limitations described below
iv. minority interest in the equity accounts of
consolidated subsidiaries
Tier 1 capital is generally defined as the
sum of the core capital elements6 less good­
will and other intangible assets required to be
deducted in accordance with section II.B.l.b.
of this appendix.
a. Common stockholders’ equity. For pur­
poses of calculating the risk-based capital
ratio, common stockholders’ equity is lim­
ited to common stock; related surplus; and
retained earnings, including capital reserves
and adjustments for the cumulative effect of
foreign-currency translation, net of any trea­
sury stock; less net unrealized holding
losses on available-for-sale equity securities
with readily determinable fair values. For
this purpose, net unrealized holding gains
on such equity securities and net unrealized
holding gains (losses) on available-for-sale
debt securities are not included in common
stockholders’ equity.
b. Perpetual preferred stock. Perpetual pre­
ferred stock is defined as preferred stock
that does not have a maturity date, that
cannot be redeemed at the option of the
holder of the instrument, and that has no
other provisions that will require future re­
demption of the issue. Consistent with these
provisions, any perpetual preferred stock
with a feature permitting redemption at the
option of the issuer may qualify as capital
only if the redemption is subject to prior
approval of the Federal Reserve. In general,
preferred stock will qualify for inclusion in
capital only if it can absorb losses while the
issuer operates as a going concern (a funda­
mental characteristic of equity capital) and
only if the issuer has the ability and legal
right to defer or elim inate preferred
dividends.
Perpetual preferred stock in which the

Regulation Y, Appendix A
dividend is reset periodically based, in
whole or in part, upon the banking organi­
zation’s current credit standing (that is, auc­
tion rate perpetual preferred stock, including
so-called Dutch auction, money market, and
remarketable preferred) will not qualify for
inclusion in tier 1 capital.7 Such instru­
ments, however, qualify for inclusion in tier
2 capital.
For bank holding companies, both cumu­
lative and noncumulative perpetual pre­
ferred stock qualify for inclusion in tier 1.
However, the aggregate amount of cumula­
tive perpetual preferred stock that may be
included in a holding company’s tier 1 is
limited to one-third of the sum of core
capital elements, excluding the perpetual
preferred stock (that is, items i, ii, and iv
above). Stated differently, the aggregate
amount may not exceed 25 percent of the
sum of all core capital elements, including
cumulative perpetual preferred stock (that
is, items i, ii, iii and iv above). Any cumu­
lative perpetual preferred stock outstanding
in excess of this limit may be included in
tier 2 capital without any sublimits within
that tier (see discussion below).
While the guidelines allow for the inclu­
sion of noncumulative perpetual preferred
stock and limited amounts of cumulative
perpetual preferred stock in tier 1, it is de­
sirable from a supervisory standpoint that
voting common equity remain the dominant
form of tier 1 capital. Thus, bank holding
companies should avoid overreliance on
preferred stock or nonvoting equity ele­
ments within tier 1.
c. Minority interest in equity accounts o f
consolidated subsidiaries. This element is
included in tier 1 because, as a general rule,
it represents equity that is freely available
to absorb losses in operating subsidiaries.
While not subject to an explicit sublimit
within tier 1, banking organizations are ex­
pected to avoid using minority interest in
the equity accounts of consolidated subsid­

7 Adjustable-rate perpetual preferred stock (that is, perpetual preferred stock in which the dividend rate is not
affected by the issuer’s credit standing or financial condi­
tion but is adjusted periodically according to a formula
6
During the transition period and subject to certain iimi- based solely on general market interest rates) may be in­
cluded in tier 1 up to the limits specified for perpetual
tations set forth in section IV below, tier 1 capital may also
include items defined as supplementary capital elements.
preferred stock.

35

Regulation Y, Appendix A
iaries as an avenue for introducing into
their capital structures elements that might
not otherwise qualify as tier 1 capital or
that would, in effect, result in an excessive
reliance on preferred stock within tier 1.
2. Supplementary capital elements (tier 2
capital). The tier 2 component of an institu­
tion’s qualifying total capital may consist of
the following items that are defined as supple­
mentary capital elements:
i. Allowance for loan and lease losses (sub­
ject to limitations discussed below)
ii. Perpetual preferred stock and related sur­
plus (subject to conditions discussed
below)
iii. Hybrid capital instruments (as defined be­
low), perpetual debt, and mandatory con­
vertible debt securities
iv. Term subordinated debt and intermediateterm preferred stock, including related sur­
plus (subject to lim itations discussed
below)
The maximum amount of tier 2 capital that
may be included in an organization’s qualify­
ing total capital is limited to 100 percent of
tier 1 capital (net of goodwill and other intan­
gible assets required to be deducted in accor­
dance with section II.B.l.b. of this appendix).
The elements of supplementary capital are
discussed in greater detail below.8
a. Allowance fo r loan and lease losses. Al­
lowances for loan and lease losses are re­
serves that have been established through a
charge against earnings to absorb future
losses on loans or lease-financing receiv-

Capital Adequacy (BHCs: Risk-Based Measure)
ables. Allowances for loan and lease losses
exclude “ allocated transfer risk reserves,”9
and reserves created against identified
losses.
During the transition period, the riskbased capital guidelines provide for reduc­
ing the amount of this allowance that may
be included in an institution’s total capital.
Initially, it is unlimited. However, by yearend 1990, the amount of the allowance for
loan and lease losses that will qualify as
capital will be limited to 1.5 percent of an
institution’s weighted-risk assets. By the
end of the transition period, the amount of
the allowance qualifying for inclusion in
tier 2 capital may not exceed 1.25 percent
of weighted-risk assets.10
b. Perpetual preferred stock. Perpetual pre­
ferred stock, as noted above, is defined as
preferred stock that has no maturity date,
that cannot be redeemed at the option of
the holder, and that has no other provisions
that will require future redemption of the
issue. Such instruments are eligible for in­
clusion in tier 2 capital without limit.1
1
c. Hybrid capital instruments, perpetual
debt, and mandatory convertible debt secu­
rities. Hybrid capital instruments include in­
struments that are essentially permanent in
nature and that have certain characteristics
of both equity and debt. Such instruments
may be included in tier 2 without limit. The
general criteria hybrid capital instruments

9 Allocated transfer risk reserves are reserves that have
been established in accordance with section 905(a) of the
International Lending Supervision Act of 1983, 12 USC
3904(a), against certain assets whose value U.S. supervisory
authorities have found to be significantly impaired by pro­
tracted transfer risk problems.
8 The Basle capital framework also provides for the in10 The amount of the allowance for loan and lease losses
elusion of “ undisclosed reserves” in tier 2. As defined in
that may be included in tier 2 capital is based on a percent­
age of gross weighted-risk assets. A banking organization
the framework, undisclosed reserves represent accumulated
may deduct reserves for loan and lease losses in excess of
after-tax retained earnings that are not disclosed on the
balance sheet of a banking organization. Apart from the
the amount permitted to be included in tier 2 capital, as
fact that these reserves are not disclosed publicly, they are
well as allocated transfer risk reserves, from the sum of
essentially of the same quality and character as retained
gross weighted-risk assets and use the resulting net sum of
earnings, and, to be included in capital, such reserves must
weighted-risk assets in computing the denominator of the
be accepted by the banking organization’s home supervisor.
risk-based capital ratio.
Although such undisclosed reserves are common in some
11 Long-term preferred stock with an original maturity of
countries, under generally accepted accounting principles
20 years or more (including related surplus) will also
(GAAP) and long-standing supervisory practice, these types
qualify in this category as an element of tier 2. If the
of reserves are not recognized for banking organizations in
holder of such an instrument has a right to require the
issuer to redeem, repay, or repurchase the instrument prior
the United States. Foreign banking organizations seeking to
make acquisitions or conduct business in the United States
to the original stated maturity, maturity would be defined,
would generally be expected to disclose publicly at least
for risk-based capital purposes, as the earliest possible date
the degree of reliance on such reserves in meeting supervi­
on which the holder can put the instrument back to the
sory capital requirements.
issuing banking organization.

36

Capital Adequacy (BHCs: Risk-Based Measure)
must meet in order to qualify for inclusion
in tier 2 capital are listed below:
1. The instrument must be unsecured; fully
paid up; and subordinated to general
creditors. If issued by a bank, it must
also be subordinated to claim s of
depositors.
2. The instrument must not be redeemable
at the option of the holder prior to matu­
rity, except with the prior approval of
the Federal Reserve. (Consistent with the
Board’s criteria for perpetual debt and
mandatory convertible securities, this re­
quirement implies that holders of such
instruments may not accelerate the pay­
ment of principal except in the event of
bankruptcy,
insolvency,
or
reorganization.)
3. The instrument must be available to par­
ticipate in losses while the issuer is oper­
ating as a going concern. (Term subordi­
nated debt would not meet this
requirement.) To satisfy this requirement,
the instrument must convert to common
or perpetual preferred stock in the event
that the accumulated losses exceed the
sum of the retained earnings and capital
surplus accounts of the issuer.
4. The instrument must provide the option
for the issuer to defer interest payments
if (a) the issuer does not report a profit
in the preceding annual period (defined
as combined profits for the most recent
four quarters) and (b) the issuer elimi­
nates cash dividends on common and
preferred stock.
Perpetual debt and mandatory convertible
debt securities that meet the criteria set
forth in 12 CFR 225, appendix B, also
qualify as unlimited elements of tier 2 capi­
tal for bank holding companies,
d. Subordinated debt and intermediate-term
preferred stock. The aggregate amount of
term subordinated debt (excluding manda­
tory convertible debt) and intermediate-term
preferred stock that may be treated as
supplementary capital is limited to 50 per­
cent of tier 1 capital (net of goodwill and
other intangible assets required to be de­
ducted in accordance with section n.B .l.b.
of this appendix). Amounts in excess of

Regulation Y, Appendix A
these limits may be issued and, while not
included in the ratio calculation, will be
taken into account in the overall assessment
of an organization’s funding and financial
condition.
Subordinated debt and intermediate-term
preferred stock must have an original
weighted average maturity of at least five
years to qualify as supplementary capital.12
(If the holder has the option to require the
issuer to redeem, repay, or repurchase the
instrument prior to the original stated matu­
rity, maturity would be defined, for riskbased capital purposes, as the earliest pos­
sible date on which the holder can put the
instrument back to the issuing banking
organization.)
In the case of subordinated debt, the in­
strument must be unsecured and must
clearly state on its face that it is not a
deposit and is not insured by a federal
agency. Bank holding company debt must
be subordinated in right of payment to all
senior indebtedness of the company,
e. Discount o f supplementary capital instru­
ments. As a limited-life capital instrument
approaches maturity it begins to take on
characteristics of a short-term obligation.
For this reason, the outstanding amount of
term subordinated debt and any long- or
intermediate-life, or term, preferred stock
eligible for inclusion in tier 2 is reduced, or
discounted, as these instruments approach
maturity: one-fifth of the original amount,
less any redemptions, is excluded each year
during the instrument’s last five years be­
fore maturity.13
12 Unsecured term debt issued by bank holding compa­
nies prior to March 12, 1988, and qualifying as secondary
capital at the time of issuance would continue to qualify as
an element of supplementary capital under the risk-based
framework, subject to the 50 percent of tier 1 capital limi­
tation. Bank holding company term debt issued on or after
March 12, 1988, must be subordinated in order to qualify
as capital.
13 For example, outstanding amounts of these instruments
that count as supplementary capital include 100 percent of
the outstanding amounts with remaining maturities of more
than five years; 80 percent of outstanding amounts with
remaining maturities of four to five years; 60 percent of
outstanding amounts with remaining maturities of three to
four years; 40 percent of outstanding amounts with remain­
ing maturities of two to three years; 20 percent of outstand­
ing amounts with remaining maturities of one to two years;
and 0 percent of outstanding amounts with remaining
Continued

37

Regulation Y, Appendix A
f. Revaluation reserves.
1. Such reserves reflect the formal
balance-sheet restatement or revaluation
for capital purposes of asset carrying val­
ues to reflect current market values. The
Federal Reserve generally has not in­
cluded unrealized asset appreciation in
capital-ratio calculations, although it has
long taken such values into account as a
separate factor in assessing the overall
financial strength of a banking
organization.
2. Consistent with long-standing supervi­
sory practice, the excess of market values
over book values for assets held by bank
holding companies will generally not be
recognized in supplementary capital or in
the calculation of the risk-based capital
ratio. However, all bank holding compa­
nies are encouraged to disclose their
equivalent of premises (building) and se­
curity revaluation reserves. The Federal
Reserve will consider any appreciation,
as well as depreciation, in specific asset
values as additional considerations in as­
sessing overall capital strength and finan­
cial condition.
B. Deductions from Capital and Other
Adjustments
Certain assets are deducted from an organiza­
tion’s capital for the purpose of calculating the
risk-based capital ratio .14 These assets
include—
i. a. Goodwill—deducted from the sum of
core capital elements
b. Certain identifiable intangible assets,
that is, intangible assets other than
goodwill— deducted from the sum of
core capital elements in accordance
with section n.B .l.b. of this appendix,
ii. investments in banking and finance sub­
sidiaries that are not consolidated for ac­
counting or supervisory purposes, and in­
vestments in other designated subsidiaries

Capital Adequacy (BHCs: Risk-Based Measure)
or associated companies at the discretion
of the Federal Reserve— deducted from to­
tal capital components (as described in
greater detail below)
iii. reciprocal holdings of capital instruments
of banking organizations—deducted from
total capital components
iv. Deferred tax assets—portions are deducted
from the sum of core capital elements in
accordance with section II.B.4. of this ap­
pendix A.
1.

Goodwill and other intangible assets.
a. Goodwill. Goodwill is an intangible asset
that represents the excess of the purchase
price over the fair market value of identifi­
able assets acquired less liabilities assumed
in acquisitions accounted for under the pur­
chase method of accounting. Any goodwill
carried on the balance sheet of a bank hold­
ing company after December 31, 1992, will
be deducted from the sum of core capital
elements in determining tier 1 capital for
ratio-calculation purposes. Any goodwill in
existence before M arch 12, 1988, is
grandfathered during the transition period
and is not deducted from core capital ele­
ments until after December 31, 1992. How­
ever, bank holding company goodwill ac­
quired as a result of a merger or acquisition
that was consummated on or after March
12, 1988, is deducted immediately.
b. i. Other intangible assets. The only types
of identifiable intangible assets that may be
included in, that is, not deducted from, an
organization’s capital are readily marketable
mortgage-servicing rights and purchased
credit-card relationships, provided that, in
the aggregate, the total amount of these as­
sets included in capital does not exceed 50
percent of tier 1 capital. Purchased creditcard relationships are subject to a separate
sublimit of 25 percent of tier 1 capital.15

15 Amounts of mortgage-servicing rights and purchased
credit-card relationships in excess of these limitations, as
well as all other identifiable intangible assets, including
core deposit intangibles and favorable leaseholds, are to be
deducted from an organization’s core capital elements in
Continued
determining tier 1 capital. However, identifiable intangible
maturities of less than one year. Such instruments with a
assets (other than mortgage-servicing rights and purchased
remaining maturity of less than one year are excluded from
credit-card relationships) acquired on or before February
tier 2 capital.
14 Any assets deducted from capital in computing the 19, 1992, generally will not be deducted from capital for
supervisory purposes, although they will continue to be
numerator of the ratio are not included in weighted-risk
assets in computing the denominator of the ratio.
deducted for applications purposes.

38

Capital Adequacy (BHCs: Risk-Based Measure)
ii. For purposes of calculating these limi­
tations on mortgage-servicing rights and
purchased credit-card relationships, tier 1
capital is defined as the sum of core capital
elements, net of goodwill and all identifi­
able intangible assets other than mortgageservicing rights and purchased credit-card
relationships, regardless of the date ac­
quired. This method of calculation could re­
sult in mortgage-servicing rights and pur­
chased credit-card relationships being
included in capital in an amount greater
than 50 percent— or in purchased creditcard relationships being included in an
amount greater than 25 percent— of the
amount of tier 1 capital used to calculate an
institution’s capital ratios. In such instances,
the Federal Reserve may determine that an
organization is operating in an unsafe and
unsound manner because of overreliance on
intangible assets in tier 1 capital.
iii. Bank holding companies must review
the book value of all intangible assets at
least quarterly and make adjustments to
these values as necessary. The fair market
value of mortgage-servicing rights and pur­
chased credit-card relationships also must
be determined at least quarterly. The fair
market value generally shall be determined
by applying an appropriate market discount
rate to the expected future net cash flows.
This determination shall include adjust­
ments for any significant changes in origi­
nal valuation assum ptions, including
changes in prepayment estimates or account
attrition rates.
iv. Examiners will review both the book
value and the fair market value assigned to
these assets, together with supporting docu­
mentation, during the inspection process. In
addition, the Federal Reserve may require,
on a case-by-case basis, an independent val­
uation of an organization’s intangible assets.
v. The amount of mortgage-servicing
rights and purchased credit-card relation­
ships that a bank holding company may
include in capital shall be the lesser of 90
percent of their fair market value, as deter­
mined in accordance with this section, or
100 percent of their book value, as adjusted
for capital purposes in accordance with the
instructions to the Consolidated Financial

Regulation Y, Appendix A
Statements for Bank Holding Companies
(FR Y-9C Report). If both the application of
the limits on mortgage-servicing rights and
purchased credit-card relationships and the
adjustment of the balance-sheet amount for
these intangibles would result in an amount
being deducted from capital, the bank hold­
ing company would deduct only the greater
of the two amounts from its core capital
elements in determining tier 1 capital.
vi. The treatment of identifiable intan­
gible assets set forth in this section gener­
ally will be used in the calculation of a
bank holding company’s capital ratios for
supervisory and applications purposes.
However, in making an overall assessment
of an organization’s capital adequacy for
applications purposes, the Board may, if it
deems appropriate, take into account the
quality and composition of an organization’s
capital, together with the quality and value
of its tangible and intangible assets.
vii. Consistent with long-standing Board
policy, banking organizations experiencing
substantial growth, whether internally or by
acquisition, are expected to maintain strong
capital positions substantially above mini­
mum supervisory levels, without significant
reliance on intangible assets.
2. Investments in certain subsidiaries.
a. Unconsolidated banking or finance sub­
sidiaries. The aggregate amount of invest­
ments in banking or finance subsidiaries16
whose financial statements are not consoli­
dated for accounting or regulatory-reporting
purposes, regardless of whether the invest­
ment is made by the parent bank holding
company or its direct or indirect subsidiar­
ies, will be deducted from the consolidated
parent banking organization’s total capital
components.17 Generally, investments for
this purpose are defined as equity and debt
16 For this purpose, a banking and finance subsidiary
generally is defined as any company engaged in banking or
finance in which the parent institution holds directly or
indirectly more than 50 percent of the outstanding voting
stock, or which is otherwise controlled or capable of being
controlled by the parent institution.
17 An exception to this deduction would be made in the
case of shares acquired in the regular course of securing or
collecting a debt previously contracted in good faith. The
requirements for consolidation are spelled out in the in­
structions to the FR Y-9C Report.

39

Regulation Y, Appendix A
capital investments and any other instru­
ments that are deemed to be capital in the
particular subsidiary.
Advances (that is, loans, extensions of
credit, guarantees, commitments, or any
other forms of credit exposure) to the sub­
sidiary that are not deemed to be capital
will generally not be deducted from an or­
ganization’s capital. Rather, such advances
generally will be included in the parent
banking organization’s consolidated assets
and be assigned to the 100 percent risk
category, unless such obligations are backed
by recognized collateral or guarantees, in
which case they will be assigned to the risk
category appropriate to such collateral or
guarantees. These advances may, however,
also be deducted from the consolidated par­
ent banking organization’s capital if, in the
judgment of the Federal Reserve, the risks
stemming from such advances are compa­
rable to the risks associated with capital
investments or if the advances involve other
risk factors that warrant such an adjustment
to capital for supervisory purposes. These
other factors could include, for example, the
absence of collateral support.
Inasmuch as the assets of unconsolidated
banking and finance subsidiaries are not
fully reflected in a banking organization’s
consolidated total assets, such assets may
be viewed as the equivalent of off-balancesheet exposures since the operations of an
unconsolidated subsidiary could expose the
parent organization and its affiliates to con­
siderable risk. For this reason, it is gener­
ally appropriate to view the capital re­
sources invested in these unconsolidated
entities as primarily supporting the risks in­
herent in these off-balance-sheet assets, and
not generally available to support risks or
absorb losses elsewhere in the organization,
b. Other subsidiaries and investments. The
deduction of investments, regardless of
whether they are made by the parent bank
holding company or by its direct or indirect
subsidiaries, from a consolidated banking
organization’s capital will also be applied in
the case of any subsidiaries, that, while
consolidated for accounting purposes, are
not consolidated for certain specified super­
visory or regulatory purposes, such as to

Capital Adequacy (BHCs: Risk-Based Measure)
facilitate functional regulation. For this pur­
pose, aggregate capital investments (that is,
the sum of any equity or debt instruments
that are deemed to be capital) in these sub­
sidiaries will be deducted from the consoli­
dated parent banking organization’s total
capital components.18
Advances (that is, loans, extensions of
credit, guarantees, commitments, or any
other forms of credit exposure) to such sub­
sidiaries that are not deemed to be capital
will generally not be deducted from capital.
Rather, such advances will normally be in­
cluded in the parent banking organization’s
consolidated assets and assigned to the 100
percent risk category, unless such obliga­
tions are backed by recognized collateral or
guarantees, in which case they will be as­
signed to the risk category appropriate to
such collateral or guarantees. These ad­
vances may, however, be deducted from the
consolidated parent banking organization’s
capital if, in the judgment of the Federal
Reserve, the risks stemming from such ad­
vances are comparable to the risks associ­
ated with capital investments or if such ad­
vances involve other risk factors that
warrant such an adjustment to capital for
supervisory purposes. These other factors
could include, for example, the absence of
collateral support.19
In general, when investments in a con­
solidated subsidiary are deducted from a
consolidated parent banking organization’s
capital, the subsidiary’s assets will also be
excluded from the consolidated assets of the
parent banking organization in order to as­
sess the latter’s capital adequacy.20
18 Investments in unconsolidated subsidiaries will be de­
ducted from both tier 1 and tier 2 capital. As a general rule,
one-half (50 percent) of the aggregate amount of capital
investments will be deducted from the bank holding compa­
ny’s tier 1 capital and one-half (50 percent) from its tier 2
capital. However, the Federal Reserve may, on a case-bycase basis, deduct a proportionately greater amount from
tier 1 if the risks associated with the subsidiary so warrant.
If the amount deductible from tier 2 capital exceeds actual
tier 2 capital, the excess would be deducted from tier 1
capital. Bank holding companies’ risk-based capital ratios,
net of these deductions, must exceed the minimum stan­
dards set forth in section IV.
19 In assessing the overall capital adequacy of a banking
organization, the Federal Reserve may also consider the
organization’s fully consolidated capital position.
20 If the subsidiary’s assets are consolidated with the
Continued

Capital Adequacy (BHCs: Risk-Based Measure)
The Federal Reserve may also deduct
from a banking organization’s capital, on a
case-by-case basis, investments in certain
other subsidiaries in order to determine if
the consolidated banking organization meets
minimum supervisory capital requirements
without reliance on the resources invested
in such subsidiaries.
The Federal Reserve will not automati­
cally deduct investments in other unconsoli­
dated subsidiaries or investments in joint
ventures and associated companies.21 None­
theless, the resources invested in these enti­
ties, like investments in unconsolidated
banking and finance subsidiaries, support
assets not consolidated with the rest of the
banking organization’s activities and, there­
fore, may not be generally available to sup­
port additional leverage or absorb losses
elsewhere in the banking organization.
Moreover, experience has shown that bank­
ing organizations stand behind the losses of
affiliated institutions, such as joint ventures
and associated companies, in order to pro­
tect the reputation of the organization as a
whole. In some cases, this has led to losses
that have exceeded the investments in such
organizations.
For this reason, the Federal Reserve will
monitor the level and nature of such invest­
ments for individual banking organizations
and may, on a case-by-case basis, deduct
such investments from total capital compo­
nents, apply an appropriate risk-weighted
capital charge against the organization’s
proportionate share of the assets of its asso­
ciated companies, require a line-by-line
consolidation of the entity (in the event that
the parent’s control over the entity makes it
the functional equivalent of a subsidiary),
Continued
parent banking organization for financial-reporting pur­
poses, this adjustment will involve excluding the subsid­
iary’s assets on a line-by-line basis from the consolidated
parent organization’s assets. The parent banking organiza­
tion's capital ratio will then be calculated on a consolidated
basis with the exception that the assets o f the excluded
subsidiary will not be consolidated with the remainder of
the parent banking organization.
21 The definition o f such entities is contained in the
instructions to the Consolidated Financial Statements for
Bank Holding Companies. Under regulatory-reporting pro­
cedures, associated companies and joint ventures generally
are defined as companies in which the banking organization
owns 20 to 50 percent of the voting stock.

Regulation Y, Appendix A
or otherwise require the organization to op­
erate with a risk-based capital ratio above
the minimum.
In considering the appropriateness of
such adjustments or actions, the Federal Re­
serve will generally take into account
whether—
1. the parent banking organization has sig­
nificant influence over the financial or
managerial policies or operations of the
subsidiary, joint venture, or associated
company;
2. the banking organization is the largest
investor in the affiliated company; or
3. other circumstances prevail that appear
to closely tie the activities of the affili­
ated company to the parent banking
organization.
3. Reciprocal holdings o f banking organiza­
tions’ capital instruments. Reciprocal holdings
of banking organizations’ capital instruments
(that is, instruments that qualify as tier 1 or
tier 2 capital) will be deducted from an orga­
nization’s total capital components for the pur­
pose of determining the numerator of the riskbased capital ratio.
Reciprocal holdings are cross-holdings re­
sulting from formal or informal arrangements
in which two or more banking organizations
swap, exchange, or otherwise agree to hold
each other’s capital instruments. Generally, de­
ductions will be limited to intentional cross­
holdings. At present, the Board does not in­
tend to require banking organizations to
deduct nonreciprocal holdings of such capital
instruments.22
4. D eferred-tax assets. The am ount of
deferred-tax assets that are dependent upon
future taxable income, net of the valuation
allowance for deferred-tax assets, that may be
included in, that is, not deducted from, a
22
Deductions of holdings of capital securities also would
not be made in the case of interstate “ stake out” invest­
ments that comply with the Board’s policy statement on
non voting equity investments, 12 CFR 225.143. In addition,
holdings of capital instruments issued by other banking
organizations but taken in satisfaction of debts previously
contracted would be exempt from any deduction from capi­
tal. The Board intends to monitor nonreciprocal holdings of
other banking organizations’ capital instruments and to pro­
vide information on such holdings to the Basle Supervisors’
Committee as called for under the Basle capital framework.
41

Regulation Y, Appendix A
banking organization’s capital may not exceed
the lesser of (i) the amount of these deferredtax assets that the banking organization is ex­
pected to realize within one year of the calen­
dar quarter-end date, based on its projections
of future taxable income for that year,23 or (ii)
10 percent of tier 1 capital. The reported
amount of deferred-tax assets, net of any valu­
ation allowance for deferred-tax assets, in ex­
cess of the lesser of these two amounts is to
be deducted from a banking organization’s
core capital elements in determining tier 1
capital. For purposes of calculating the 10 per­
cent limitation, tier 1 capital is defined as the
sum of core capital elements, net of goodwill
and all identifiable intangible assets other than
m ortgage-servicing rights and purchased
credit-card relationships, before any disal­
lowed deferred-tax assets are deducted. There
generally is no limit in tier 1 capital on the
amount of deferred-tax assets that can be real­
ized from taxes paid in prior carry-back years
or from future reversals of existing taxable
temporary differences.

III. Procedures for Computing
Weighted-Risk Assets and
Off-Balance-Sheet Items

Capital Adequacy (BHCs: Risk-Based Measure)
the risk categories are added together, and this
sum is the banking organization’s total
weighted-risk assets that comprise the denomi­
nator of the risk-based capital ratio. Attach­
ment I provides a sample calculation.
Risk weights for all off-balance-sheet items
are determined by a two-step process. First,
the “ credit equivalent amount” of off-balancesheet items is determined, in most cases, by
multiplying the off-balance-sheet item by a
credit-conversion factor. Second, the creditequivalent amount is treated like any balancesheet asset and generally is assigned to the
appropriate risk category according to the ob­
ligor, or, if relevant, the guarantor or the na­
ture of the collateral.
In general, if a particular item qualifies for
placement in more than one risk category, it is
assigned to the category that has the lowest
risk weight. A holding of a U.S. municipal
revenue bond that is fully guaranteed by a
U.S. bank, for example, would be assigned the
20 percent risk weight appropriate to claims
guaranteed by U.S. banks, rather than the 50
percent risk weight appropriate to U.S. mu­
nicipal revenue bonds.24

24 An investment in shares of a fund whose portfolio
consists solely of various securities or money market instru­
ments that, if held separately, would be assigned to differ­
A. Procedures
ent risk categories, is generally assigned to the risk cat­
egory appropriate to the highest risk-weighted security or
Assets and credit-equivalent amounts of off- instrument that the fund is permitted to hold in accordance
balance-sheet items of bank holding compa­ with its stated investment objectives. However, in no case
will indirect holdings through shares in such funds be as­
nies are assigned to one of several broad risk signed to the zero percent risk category. For example, if a
categories, according to the obligor, or, if rel­ fund is permitted to hold U.S. Treasuries and commercial
evant, the guarantor or the nature of the col­ paper, shares in that fund would generally be assigned the
100 percent risk weight appropriate to commercial paper,
lateral. The aggregate dollar value of the
regardless of the actual composition of the fund’s invest­
amount in each category is then multiplied by ments at any particular time. Shares in a fund that may
the risk weight associated with that category. invest only in U.S. Treasury securities would generally be
assigned to the 20 percent risk category. If, in order to
The resulting weighted values from each of maintain a necessary degree of short-term liquidity, a fund
is permitted to hold an insignificant amount of its assets in
23 To determine the amount of expected deferred-tax as- short-term, highly liquid securities of superior credit quality
that do not qualify for a preferential risk weight, such
sets realizable in the next 12 months, an institution should
securities will generally not be taken into account in deter­
assume that all existing temporary differences fully reverse
mining the risk category into which the banking organiza­
as of the report date. Projected future taxable income
tion’s holding in the overall fund should be assigned. Re­
should not include net operating loss carry-forwards to be
gardless of the composition of the fund’s securities, if the
used during that year or the amount of existing temporary
fund engages in any activities that appear speculative in
differences a bank holding company expects to reverse
nature (for example, use of futures, forwards, or option
within the year. Such projections should include the esti­
contracts for purposes other than to reduce interest-rate
mated effect of tax-planning strategies that the organization
risk) or has any other characteristics that are inconsistent
expects to implement to realize net operating losses or
with the preferential risk weighting assigned to the fund’s
tax-credit carry-forwards that would otherwise expire dur­
investments, holdings in the fund will be assigned to the
ing the year. Institutions do not have to prepare a new
100 percent risk category. During the examination process,
12-month projection each quarter. Rather, on interim report
the treatment of shares in such funds that are assigned to a
dates, institutions may use the future-taxable-income projec­
lower risk weight will be subject to examiner review to
tions for their current fiscal year, adjusted for any signifi­
Continued
cant changes that have occurred or are expected to occur.
42

Capital Adequacy (BHCs: Risk-Based Measure)
The terms “claims” and “securities” used
in the context of the discussion of risk
weights, unless otherwise specified, refer to
loans or debt obligations of the entity on
whom the claim is held. Assets in the form of
stock or equity holdings in commercial or fi­
nancial firms are assigned to the 100 percent
risk category, unless some other treatment is
explicitly permitted.
B. Collateral, Guarantees, and Other
Considerations
1. Collateral. The only forms of collateral
that are formally recognized by the risk-based
capital framework are cash on deposit in a
subsidiary lending institution; securities issued
or guaranteed by the central governments of
the OECD-based group of countries,25 U.S.
government agencies, or U.S. governmentsponsored agencies; and securities issued by
multilateral lending institutions or regional de­
velopment banks. Claims fully secured by
such collateral generally are assigned to the
20 percent risk category. Collateralized trans­
actions meeting all the conditions described in
section III.C.l. may be assigned a zero per­
cent risk weight.
With regard to collateralized claims that
may be assigned to the 20 percent risk-weight
category, the extent to which qualifying secu­
rities are recognized as collateral is deter­
mined by their current market value. If such a
claim is only partially secured, that is, the
market value of the pledged securities is less
than the face amount of a balance-sheet asset
or an off-balance-sheet item, the portion that
is covered by the market value of the qualify­
ing collateral is assigned to the 20 percent
Continued
ensure that they have been assigned an appropriate risk
weight.
25 The OECD-based group of countries comprises all full
members of the Organization for Economic Cooperation
and Development (OECD), as well as countries that have
concluded special lending arrangements with the Interna­
tional Monetary Fund (IMF) associated with the Fund’s
General Arrangements to Borrow. The OECD includes the
following countries: Australia, Austria, Belgium, Canada,
Denmark, the Federal Republic o f Germany, Finland,
France, Greece, Iceland, Ireland, Italy, Japan, Luxembourg,
Netherlands, New Zealand, Norway, Portugal, Spain, Swe­
den, Switzerland, Turkey, the United Kingdom, and the
United States. Saudi Arabia has concluded special lending
arrangements with the IMF associated with the Fund’s Gen­
eral Arrangements to Borrow.

Regulation Y, Appendix A
risk category, and the portion of the claim that
is not covered by collateral in the form of
cash or a qualifying security is assigned to the
risk category appropriate to the obligor or, if
relevant, the guarantor. For example, to the
extent that a claim on a private-sector obligor
is collateralized by the current market value of
U.S. government securities, it would be placed
in the 20 percent risk category and the bal­
ance would be assigned to the 100 percent
risk category.
2. Guarantees. Guarantees of the OECD and
non-OECD central governments, U.S. govern­
ment agencies, U.S. government-sponsored
agencies, state and local governments of the
OECD-based group of countries, multilateral
lending institutions and regional development
banks, U.S. depository institutions, and for­
eign banks are also recognized. If a claim is
partially guaranteed, that is, coverage of the
guarantee is less than the face amount of a
balance-sheet asset or an off-balance-sheet
item, the portion that is not fully covered by
the guarantee is assigned to the risk category
appropriate to the obligor or, if relevant, to
any collateral. The face amount of a claim
covered by two types of guarantees that have
different risk weights, such as a U.S. govern­
ment guarantee and a state guarantee, is to be
apportioned between the two risk categories
appropriate to the guarantors.
The existence of other forms of collateral or
guarantees that the risk-based capital frame­
work does not formally recognize may be
taken into consideration in evaluating the risks
inherent in an organization’s loan portfolio—
which, in turn, would affect the overall super­
visory assessment of the organization’s capital
adequacy.
3. M ortgage-backed securities. M ortgagebacked securities, including pass-throughs and
collateralized mortgage obligations (but not
stripped mortgage-backed securities), that are
issued or guaranteed by a U.S. government
agency or U.S. governm ent-sponsored
agency are assigned to the risk-weight cat­
egory appropriate to the issuer or guarantor.
Generally, a privately issued mortgage-backed
security meeting certain criteria set forth in
43

Regulation Y, Appendix A
the accompanying footnote26 is treated as es­
sentially an indirect holding of the underlying
assets, and is assigned to the same risk cat­
egory as the underlying assets, but in no case
to the zero percent risk category. Privately
issued mortgage-backed securities whose
structures do not qualify them to be regarded
as indirect holdings of the underlying assets
are assigned to the 100 percent risk category.
During the inspection process, privately issued
mortgage-backed securities that are assigned
to a lower risk-weight category will be subject
to examiner review to ensure that they meet
the appropriate criteria.
While the risk category to which mortgagebacked securities are assigned will generally
be based upon the issuer or guarantor or, in
the case of privately issued mortgage-backed
securities, the assets underlying the security,
any class of a mortgage-backed security that
can absorb more than its pro rata share of loss
without the whole issue being in default (for
example, a so-called subordinated class or re­
sidual interest), is assigned to the 100 percent
risk category. Furtherm ore, all stripped
mortgage-backed securities, including interestonly strips (IOs), principal-only strips (POs),
and similar instruments, are also assigned to
the 100 percent risk-weight category, regard­
less of the issuer or guarantor.
4. Maturity. Maturity is generally not a factor
26 A privately issued mortgage-backed security may be
treated as an indirect holding of the underlying assets pro­
vided that (1) the underlying assets are held by an indepen­
dent trustee and the trustee has a first priority, perfected
security interest in the underlying assets on behalf o f the
holders of the security; (2) either the holder o f the security
has an undivided pro rata ownership interest in the underly­
ing mortgage assets or the trust or single-purpose entity (or
conduit) that issues the security has no liabilities unrelated
to the issued securities; (3) the security is structured such
that the cash flow from the underlying assets in all cases
fully meets the cash-flow requirements of the security with­
out undue reliance on any reinvestment income; and (4)
there is no material reinvestment risk associated with any
funds awaiting distribution to the holders of the security. In
addition, if the underlying assets of a mortgage-backed
security are composed o f more than one type o f asset, for
example, U.S. government-sponsored agency securities
and privately issued pass-through securities that qualify for
the 50 percent risk weight category, the entire mortgagebacked security is generally assigned to the category appro­
priate to the highest risk-weighted asset underlying the is­
sue, but in no case to the zero percent risk category. Thus,
in this example, the security would receive the 50 percent
risk weight appropriate to the privately issued pass-through
securities.

Capital Adequacy (BHCs: Risk-Based Measure)
in assigning items to risk categories with the
exception of claims on non-OECD banks,
commitments, and interest-rate and foreignexchange-rate contracts. Except for commit­
ments, short-term is defined as one year or
less remaining maturity and long-term is de­
fined as over one year remaining maturity. In
the case of commitments, short-term is de­
fined as one year or less original maturity and
long-term is defined as over one year original
maturity.27
5. Small-business loans and leases on per­
sonal property transferred with recourse.
a. Notwithstanding other provisions of this
appendix A, a qualifying banking organiza­
tion that has transferred small-business
loans and leases on personal property
(small-business obligations) with recourse
shall include in weighted-risk assets only
the amount of retained recourse, provided
two conditions are met. First, the transac­
tion must be treated as a sale under GAAP
and, second, the banking organization must
establish pursuant to GAAP a noncapital
reserve sufficient to meet the organization’s
reasonably estimated liability under the re­
course arrangement. Only loans and leases
to businesses that meet the criteria for a
small-business concern established by the
Small Business Administration under sec­
tion 3(a) of the Small Business Act are
eligible for this capital treatment.
b. For purposes of this appendix A, a bank­
ing organization is qualifying if it meets the
criteria for well capitalized or, by order of
the Board, adequately capitalized, as those
criteria are set forth in the Board’s promptcorrective-action regulation for state mem­
ber banks (12 CFR 208.30). For purposes
of determining whether an organization
meets these criteria, its capital ratios must
be calculated without regard to the capital
treatment for transfers of small-business ob­
ligations with recourse specified in section
III.B.5.a. of this appendix A. The total out­
standing amount of recourse retained by a
qualifying banking organization on transfers
of small-business obligations receiving the
27 Through year-end 1992, remaining, rather than origi­
nal, maturity may be used for determining the maturity of
commitments.

Capital Adequacy (BHCs: Risk-Based Measure)
preferential capital treatment cannot exceed
15 percent of the organization’s total riskbased capital. By order, the Board may ap­
prove a higher limit.
c. If a bank holding company ceases to be
qualifying or exceeds the 15 percent capital
limitation, the preferential capital treatment
will continue to apply to any transfers of
small-business obligations with recourse
that were consummated during the time that
the organization was qualifying and did not
exceed the capital limit.
C. Risk Weights
Attachment III contains a listing of the risk
categories, a summary of the types of assets
assigned to each category and the risk weight
associated with each category, that is, 0 per­
cent, 20 percent, 50 percent, and 100 percent.
A brief explanation of the components of each
category follows.
1. Category 1: zero percent. This category in­
cludes cash (domestic and foreign) owned and
held in all offices of subsidiary depository
institutions or in transit and gold bullion held
in either a subsidiary depository institution’s
own vaults or in another’s vaults on an allo­
cated basis, to the extent it is offset by gold
bullion liabilities.28 The category also includes
all direct claims (including securities, loans,
and leases) on, and the portions of claims that
are directly and unconditionally guaranteed by,
the central governments29 of the OECD coun­
tries and U.S. government agencies,30 as well
28 All other holdings o f bullion are assigned to the 100
percent risk category.
29 A central government is defined to include depart­
ments and ministries, including the central bank, of the
central government. The U.S. central bank includes the 12
Federal Reserve Banks, and stock held in these banks as a
condition of membership is assigned to the zero percent
risk category. The definition o f central government does not
include state, provincial, or local governments; or commer­
cial enterprises owned by the central government. In addi­
tion, it does not include local government entities or com­
mercial enterprises whose obligations are guaranteed by the
central government, although any claims on such entities
guaranteed by central governments are placed in the same
general risk category as other claims guaranteed by central
governments. OECD central governments are defined as
central governments of the OECD-based group o f countries;
non-OECD central governments are defined as central gov­
ernments of countries that do not belong to the OECDbased group of countries.
30 A U.S. government agency is defined as an instrumen­
tality of the U.S. government whose obligations are fully

Regulation Y, Appendix A
as all direct local currency claims on, and the
portions of local currency claims that are di­
rectly and unconditionally guaranteed by, the
central governments of non-OECD countries,
to the extent that subsidiary depository institu­
tions have liabilities booked in that currency.
A claim is not considered to be uncondition­
ally guaranteed by a central government if the
validity of the guarantee is dependent upon
some affirmative action by the holder or a
third party. Generally, securities guaranteed by
the U.S. government or its agencies that are
actively traded in financial markets, such as
GNMA securities, are considered to be uncon­
ditionally guaranteed.
This category also includes claims
collateralized by cash on deposit in the sub­
sidiary lending institution or by securities is­
sued or guaranteed by OECD central govern­
ments or U.S. government agencies for which
a positive margin of collateral is maintained
on a daily basis, fully taking into account any
change in the banking organization’s exposure
to the obligor or counterparty under a claim in
relation to the market value of the collateral
held in support of that claim.
2. Category 2: 20 percent. This category in­
cludes cash items in the process of collection,
both foreign and domestic; short-term claims
(including demand deposits) on, and the por­
tions of short-term claims that are guaranteed
by,31 U.S. depository institutions32 and foreign
and explicitly guaranteed as to the timely payment of prin­
cipal and interest by the full faith and credit of the U.S.
government. Such agencies include the Government Na­
tional Mortgage Association (GNMA), the Veterans Admin­
istration (VA), the Federal Housing Administration (FHA),
the Export-Import Bank (Exim Bank), the Overseas Private
Investment Corporation (OPIC), the Commodity Credit
Corporation (CCC), and the Small Business Administration
(SBA).
31 Claims guaranteed by U.S. depository institutions ant}
foreign banks include risk participations in both banker’s
acceptances and standby letters of credit, as well as partici­
pations in commitments, that are conveyed to U.S. deposi­
tory institutions or foreign banks.
32 U.S. depository institutions are defined to include
branches (foreign and domestic) of federally insured banks
and depository institutions chartered and headquartered in
the 50 states of the United States, the District of Columbia,
Puerto Rico, and U.S. territories and possessions. The defi­
nition encompasses banks, mutual or stock savings banks,
savings or building and loan associations, cooperative
banks, credit unions, and international banking facilities of
domestic banks. U.S.-chartered depository institutions
owned by foreigners are also included in the definition.
Continued

45

Regulation Y, Appendix A
banks;33 and long-term claims on, and the
portions of long-term claims that are guaran­
teed by, U.S. depository institutions and
OECD banks.34
This category also includes the portions of
claims that are conditionally guaranteed by
OECD central governments and U.S. govern­
ment agencies, as well as the portions of local
currency claims that are conditionally guaran­
teed by non-OECD central governments, to
the extent that subsidiary depository institu­
tions have liabilities booked in that currency.
In addition, this category also includes claims
on, and the portions of claims that are guaran­
teed by, U.S. government-sponsored agen­
cies35 and claims on, and the portions of
claims guaranteed by, the International Bank
for Reconstruction and Development (World
Bank), the International Finance Corporation,
the Inter-American Development Bank, the
Asian Development Bank, the African Devel­
opment Bank, the European Investment Bank,
the European Bank for Reconstruction and
Development, the Nordic Investment Bank,
and other multilateral lending institutions or
Continued
However, branches and agencies of foreign banks located in
the U.S., as well as all bank holding companies, are
excluded.
33 Foreign banks are distinguished as either OECD banks
or non-OECD banks. OECD banks include banks and their
branches (foreign and domestic) organized under the laws
o f countries (other than the U.S.) that belong to the OECDbased group of countries. Non-OECD banks include banks
and their branches (foreign and domestic) organized under
the laws of countries that do not belong to the OECDbased group of countries. For this purpose, a bank is de­
fined as an institution that engages in the business of bank­
ing; is recognized as a bank by the bank supervisory or
monetary authorities o f the country o f its organization or
principal banking operations; receives deposits to a substan­
tial extent in the regular course of business; and has the
power to accept demand deposits.
34 Long-term claims on, or guaranteed by, non-OECD
banks and all claims on bank holding companies are as­
signed to the 100 percent risk category, as are holdings of
bank-issued securities that qualify as capital of the issuing
banks.
35 For this purpose, U.S. government-sponsored agencies
are defined as agencies originally established or chartered
by the federal government to serve public purposes speci­
fied by the U.S. Congress but whose obligations are not
explicitly guaranteed by the full faith and credit o f the U.S.
government. These agencies include the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal Na­
tional Mortgage Association (FNMA), the Farm Credit Sys­
tem, the Federal Home Loan Bank System, and the Student
Loan Marketing Association (SLMA). Claims on U.S.
government-sponsored agencies include capital stock in a
Federal Home Loan Bank that is held as a condition of
membership in that Bank.

46

Capital Adequacy (BHCs: Risk-Based Measure)
regional development banks in which the U.S.
government is a shareholder or contributing
member. General obligation claims on, or por­
tions of claims guaranteed by the full faith
and credit of, states or other political subdivi­
sions of the United States or other countries
of the OECD-based group are also assigned to
this category.36
This category also includes the portions of
claims (including repurchase transactions)
collateralized by cash on deposit in the sub­
sidiary lending institution or by securities is­
sued or guaranteed by OECD central govern­
ments or U.S. government agencies that do
not qualify for the zero percent risk-weight
category; collateralized by securities issued or
guaranteed by U.S. government-sponsored
agencies; or collateralized by securities issued
by multilateral lending institutions or regional
development banks in which the U.S. govern­
ment is a shareholder or contributing member.
3. Category 3: 50 percent. This category in­
cludes loans fully secured by first liens37 on
one- to four-family residential properties, ei­
ther owner-occupied or rented, or on multi­
family residential properties,38 that meet cer­
tain criteria.39 Loans included in this category
must have been made in accordance with pru­
dent underwriting standards;40 be performing
36 Claims on, or guaranteed by, states or other political
subdivisions of countries that do not belong to the OECDbased group of countries are placed in the 100 percent risk
category.
37 If a banking organization holds the first and junior
lien(s) on a residential property and no other party holds an
intervening lien, the transaction is treated as a single loan
secured by a first lien for the purpose of determining the
loan-to-value ratio.
38 Loans that qualify as loans secured by one- to fourfamily residential properties or multifamily residential prop­
erties are listed in the instructions to the FR Y-9C Report.
In addition, for risk-based capital purposes, loans secured
by one- to four-family residential properties include loans
to builders with substantial project equity for the construc­
tion of one- to four-family residences that have been
presold under firm contracts to purchasers who have ob­
tained firm commitments for permanent qualifying mort­
gage loans and have made substantial earnest money
deposits.
39 Residential property loans that do not meet all the
specified criteria or that are made for the purpose of specu­
lative property development are placed in the 100 percent
risk category.
40 Prudent underwriting standards include a conservative
ratio o f the current loan balance to the value of the prop­
erty. In the case of a loan secured by multifamily residen­
tial property, the loan-to-value ratio is not conservative if it
Continued

Capital Adequacy (BHCs: Risk-Based Measure)
in accordance with their original terms; and
not be 90 days or more past due or carried in
nonaccrual status. The following additional
criteria must also be applied to a loan secured
by a multifamily residential property that is
included in this category: all principal and
interest payments on the loan must have been
made on time for at least the year preceding
placement in this category, or in the case
where the existing property owner is refinanc­
ing a loan on that property, all principal and
interest payments on the loan being refinanced
must have been made on time for at least the
year preceding placement in this category;
amortization of the principal and interest may
occur over a period of not more than 30 years
and the minimum original maturity for repay­
ment of principal must not be less than 7
years; and the annual net operating income
(before debt service) generated by the prop­
erty during its most recent fiscal year must
not be less than 120 percent of the loan’s
current annual debt service (115 percent if the
loan is based on a floating interest rate) or, in
the case of a cooperative or other not-forprofit housing project, the property must gen­
erate sufficient cash flow to provide compa­
rable protection to the institution. Also
included in this category are privately issued
mortgage-backed securities provided that (1)
the structure of the security meets the criteria
described in section 111(B)(3) above; (2) if the
security is backed by a pool of conventional
mortgages, on one- to four-family residential
or multifamily residential properties, each un­
derlying mortgage meets the criteria described
above in this section for eligibility for the 50
percent risk category at the time the pool is
originated; (3) if the security is backed by
privately issued mortgage-backed securities,
each underlying security qualifies for the 50
Continued
exceeds 80 percent (75 percent if the loan is based on a
floating interest rate). Prudent underwriting standards also
dictate that a loan-to-value ratio used in the case of origi­
nating a loan to acquire a property would not be deemed
conservative unless the value is based on the lower o f the
acquisition cost of the property or appraised (or if appropri­
ate, evaluated) value. Otherwise, the loan-to-value ratio
generally would be based upon the value of the property as
determined by the most current appraisal, or if appropriate,
the most current evaluation. All appraisals must be made in
a manner consistent with the federal banking agencies’ real
estate appraisal regulations and guidelines and with the
banking organization’s own appraisal guidelines.

Regulation Y, Appendix A
percent risk category; and (4) if the security is
backed by a pool of multifamily residential
mortgages, principal and interest payments on
the security are not 30 days or more past due.
Privately issued mortgage-backed securities
that do not meet these criteria or that do not
qualify for a lower risk weight are generally
assigned to the 100 percent risk category.
Also assigned to this category are revenue
(nongeneral obligation) bonds or similar obli­
gations, including loans and leases, that are
obligations of states or other political subdivi­
sions of the United States (for example, mu­
nicipal revenue bonds) or other countries of
the OECD-based group, but for which the
government entity is committed to repay the
debt with revenues from the specific projects
financed, rather than from general tax funds.
Credit-equivalent amounts of derivative
contracts involving standard risk obligors (that
is, obligors whose loans or debt securities
would be assigned to the 100 percent risk
category) are included in the 50 percent cat­
egory, unless they are backed by collateral or
guarantees that allow them to be placed in a
lower risk category.
4. Category 4: 100 percent. All assets not
included in the categories above are assigned
to this category, which comprises standard risk
assets. The bulk of the assets typically found
in a loan portfolio would be assigned to the
100 percent category.
This category includes long-term claims on,
and the portions of long-term claims that are
guaranteed by, non-OECD banks, and all
claims on non-OECD central governments that
entail some degree of transfer risk.41 This cat­
egory also includes all claims on foreign and
domestic private-sector obligors not included
in the categories above (including loans to
nondepository financial institutions and bank
holding companies); claims on commercial
firms owned by the public sector; customer
liabilities to the bank on acceptances outstand­
41 Such assets include all nonlocal-currency claims on,
and the portions of claims that are guaranteed by, nonOECD central governments and those portions of localcurrency claims on, or guaranteed by, non-OECD central
governments that exceed the local-currency liabilities held
by subsidiary depository institutions.
47

Regulation Y, Appendix A
ing involving standard risk claims;42 invest­
ments in fixed assets, premises, and other real
estate owned; common and preferred stock of
corporations, including stock acquired for
debts previously contracted; commercial and
consumer loans (except those assigned to
lower risk categories due to recognized guar­
antees or collateral and loans for residential
property that qualify for a lower risk weight);
mortgage-backed securities that do not meet
criteria for assignment to a lower risk weight
(including any classes of mortgage-backed se­
curities that can absorb more than their pro
rata share of loss without the whole issue
being in default); and all stripped mortgagebacked and similar securities.
Also included in this category are
industrial-development bonds and similar obli­
gations issued under the auspices of states or
political subdivisions of the OECD-based
group of countries for the benefit of a private
party or enterprise where that party or enter­
prise, not the government entity, is obligated
to pay the principal and interest, and all obli­
gations of states or political subdivisions of
countries that do not belong to the OECDbased group.
The following assets also are assigned a
risk weight of 100 percent if they have not
been deducted from capital: investments in
unconsolidated companies, joint ventures, or
associated companies; instruments that qualify
as capital issued by other banking organiza­
tions; and any intangibles, including those that
may have been grandfathered into capital.

D. Off-Balance-Sheet Items
The face amount of an off-balance-sheet item
is incorporated into the risk-based capital ratio
by multiplying it by a credit-conversion factor.
The resultant credit-equivalent amount is as­
signed to the appropriate risk category accord­
ing to the obligor, or, if relevant, the guaran-

Capital Adequacy (BHCs: Risk-Based Measure)
tor or the nature of the collateral.43
Attachment IV sets forth the conversion fac­
tors for various types of off-balance-sheet
items.
1. Items with a 100 percent conversion factor.
a. A 100 percent conversion factor applies
to direct credit substitutes, which include
guarantees, or equivalent instruments, back­
ing financial claims, such as outstanding se­
curities, loans, and other financial liabilities,
or that back off-balance-sheet items that re­
quire capital under the risk-based capital
framework. Direct credit substitutes include,
for example, financial standby letters of
credit, or other equivalent irrevocable un­
dertakings or surety arrangements, that
guarantee repayment of financial obligations
such as commercial paper, tax-exempt secu­
rities, commercial or individual loans or
debt obligations, or standby or commercial
letters of credit. Direct credit substitutes
also include the acquisition of risk partici­
pations in banker’s acceptances and standby
letters of credit, since both of these transac­
tions, in effect, constitute a guarantee by
the acquiring banking organization that the
underlying account party (obligor) will re­
pay its obligation to the originating, or issu­
ing, institution.44 (Standby letters of credit
that are performance related are discussed
below and have a credit-conversion factor
of 50 percent.)
b. The full amount of a direct credit substi­
tute is converted at 100 percent and the
resulting credit-equivalent amount is as­
signed to the risk category appropriate to
the obligor or, if relevant, the guarantor or
the nature of the collateral. In the case of a
direct credit substitute in which a risk par­
ticipation45 has been conveyed, the full

43 The sufficiency of collateral and guarantees for offbalance-sheet items is determined by the market value of
the collateral or the amount of the guarantee in relation to
the face amount of the item, except for interest- and
foreign-exchange-rate contracts, for which this determina­
42 Customer liabilities on acceptances outstanding involv- tion is made in relation to the credit-equivalent amount.
ing nonstandard risk claims, such as claims on U.S. deposi­
Collateral and guarantees are subject to the same provisions
tory institutions, are assigned to the risk category appropri­
noted under section III(B).
ate to the identity of the obligor or, if relevant, the nature
44 Credit-equivalent amounts of acquisitions of risk par­
of the collateral or guarantees backing the claims. Portions
ticipations are assigned to the risk category appropriate to
of acceptances conveyed as risk participations to U.S. de­
the account party obligor, or, if relevant, the nature of the
pository institutions or foreign banks are assigned to the 20
collateral or guarantees.
percent risk category appropriate to short- term claims guar­
45 That is, a participation in which the originating bankanteed by U.S. depository institutions and foreign banks.
Continued
48

Capital Adequacy (BHCs: Risk-Based Measure)
amount is still converted at 100 percent.
However, the credit-equivalent amount that
has been conveyed is assigned to whichever
risk category is lower: the risk category ap­
propriate to the obligor, after giving effect
to any relevant guarantees or collateral, or
the risk category appropriate to the institu­
tion acquiring the participation. Any re­
mainder is assigned to the risk category ap­
propriate to the obligor, guarantor, or
collateral. For example, the portion of a
direct credit substitute conveyed as a risk
participation to a U.S. domestic depository
institution or foreign bank is assigned to the
risk category appropriate to claims guaran­
teed by those institutions, that is, the 20
percent risk category.46 This approach rec­
ognizes that such conveyances replace the
originating banking organization’s exposure
to the obligor with an exposure to the insti­
tutions acquiring the risk participations.47
c. In the case of direct credit substitutes
that take the form of a syndication, that is,
where each banking organization is obli­
gated only for its pro rata share of the risk
and there is no recourse to the originating
banking organization, each banking organi­
zation will only include its pro rata share of
the direct credit substitute in its risk-based
capital calculation.
d. Financial standby letters of credit are
distinguished from loan commitments (dis­
cussed below) in that standbys are irrevo­
cable obligations of the banking organiza­
tion to pay a third-party beneficiary when a
customer (account party) fails to repay an
outstanding loan or debt instrument (direct
credit substitute). Performance standby let­
ters of credit (performance bonds) are irre­
vocable obligations of the banking organiza­
tion to pay a third-party beneficiary when a
Continued
ing organization remains liable to the beneficiary for the
full amount of the direct credit substitute if the party that
has acquired the participation fails to pay when the instru­
ment is drawn.
46 Risk participations with a remaining maturity of over
one year that are conveyed to non-OECD banks are to be
assigned to the 100 percent risk category, unless a lower
risk category is appropriate to the obligor, guarantor, or
collateral.
47 A risk participation in banker’s acceptances conveyed
to other institutions is also assigned to the risk category
appropriate to the institution acquiring the participation or,
if relevant, the guarantor or nature of the collateral.

Regulation Y, Appendix A
customer (account party) fails to perform
some other contractual nonfinancial
obligation.
e. The distinguishing characteristic of a
standby letter of credit for risk-based capital
purposes is the combination of irrevocabil­
ity with the fact that funding is triggered by
some failure to repay or perform an obliga­
tion. Thus, any commitment (by whatever
name) that involves an irrevocable obliga­
tion to make a payment to the customer or
to a third party in the event the customer
fails to repay an outstanding debt obligation
or fails to perform a contractual obligation
is treated, for risk-based capital purposes, as
respectively, a financial guarantee standby
letter of credit or a performance standby.
f. A loan commitment, on the other hand,
involves an obligation (with or without a
material adverse change or similar clause)
of the banking organization to fund its cus­
tomer in the normal course of business
should the customer seek to draw down the
commitment.
g. Sale and repurchase agreements and as­
set sales with recourse (to the extent not
included on the balance sheet) and forward
agreements also are converted at 100 per­
cent.48 So-called “ loan strips” (that is,
48
In regulatory reports and under GAAP, bank holding
companies are permitted to treat some asset sales with
recourse as “ true” sales. For risk-based capital purposes,
however, such assets sold with recourse and reported as
“ true” sales by bank holding companies are converted at
100 percent and assigned to the risk category appropriate to
the underlying obligor or, if relevant, the guarantor or na­
ture of the collateral, provided that the transactions meet
the definition of assets sold with recourse (including assets
sold subject to pro rata and other loss-sharing arrange­
ments), that is contained in the instructions to the commer­
cial bank Consolidated Reports of Condition and Income
(call report). This treatment applies to any assets, including
the sale of one- to four-family and multifamily residential
mortgages, sold with recourse. Accordingly, the entire
amount of any assets transferred with recourse that are not
already included on the balance sheet, including pools of
one- to four-family residential mortgages, are to be con­
verted at 100 percent and assigned to the risk category
appropriate to the obligor or, if relevant, the nature of any
collateral or guarantees. The terms of a transfer of assets
with recourse may contractually limit the amount of the
institution’s liability to an amount less than the effective
risk-based capital requirement for the assets being trans­
ferred with recourse. If such a transaction is recognized as
a sale under GAAP, the amount of total capital required is
equal to the maximum amount of loss possible under the
recourse provision, less any amount held in an associated
non-capital liability account established pursuant to GAAP
Continued

49

Regulation Y, Appendix A
short-term advances sold under long-term
commitments without direct recourse) are
treated for risk-based capital purposes as
assets sold with recourse and, accordingly,
are also converted at 100 percent.
h. Forward agreements are legally binding
contractual obligations to purchase assets
with certain drawdown at a specified future
date. Such obligations include forward pur­
chases, forward forward deposits placed,49
and partly paid shares and securities; they
do not include commitments to make resi­
dential mortgage loans or forward foreignexchange contracts.
i. Securities lent by a banking organization
are treated in one of two ways, depending
upon whether the lender is at risk of loss. If
a banking organization, as agent for a cus­
tomer, lends the customer’s securities and
does not indemnify the customer against
loss, then the transaction is excluded from
the risk-based capital calculation. If, alter­
natively, a banking organization lends its
own securities or, acting as agent for a cus­
tomer, lends the customer’s securities and
indemnifies the customer against loss, the
transaction is converted at 100 percent and
assigned to the risk-weight category appro­
priate to the obligor, to any collateral deliv­
ered to the lending banking organization, or,
if applicable, to the independent custodian
acting on the lender’s behalf. Where a
banking organization is acting as agent for
a customer in a transaction involving the
lending or sale of securities that is
collateralized by cash delivered to the bank­
ing organization, the transaction is deemed
to be collateralized by cash on deposit in a
subsidiary lending institution for purposes
of determining the appropriate risk-weight
category, provided that any indemnification
is limited to no more than the difference
between the market value of the securities
and the cash collateral received and any
reinvestment risk associated with that cash
collateral is borne by the customer.
2. Items with a 50 percent conversion factor.
Continued
to cover estimated probable losses under the recourse
provision.
49 Forward forward deposits accepted are treated as
interest-rate contracts.

Capital Adequacy (BHCs: Risk-Based Measure)
Transaction-related contingencies are con­
verted at 50 percent. Such contingencies in­
clude bid bonds, performance bonds, warran­
ties, standby letters of credit related to
particular transactions, and perform ance
standby letters of credit, as well as acquisi­
tions of risk participations in performance
standby letters of credit. Performance standby
letters of credit represent obligations backing
the performance of nonfinancial or commer­
cial contracts or undertakings. To the extent
permitted by law or regulation, performance
standby letters of credit include arrangements
backing, among other things, subcontractors’
and suppliers’ performance, labor and materi­
als contracts, and construction bids.
The unused portion of commitments with
an original maturity exceeding one year,50 in­
cluding underwriting commitments, and com­
mercial and consumer credit commitments
also are converted at 50 percent. Original ma­
turity is defined as the length of time between
the date the commitment is issued and the
earliest date on which (1) the banking organi­
zation can, at its option, unconditionally
(without cause) cancel the commitment51 and
(2) the banking organization is scheduled to
(and as a normal practice actually does) re­
view the facility to determine whether or not
it should be extended. Such reviews must con­
tinue to be conducted at least annually for
such a facility to qualify as a short-term
commitment.
Commitments are defined as any legally
binding arrangements that obligate a banking
organization to extend credit in the form of
loans or leases; to purchase loans, securities,
or other assets; or to participate in loans and
leases. They also include overdraft facilities,
revolving credit, home equity and mortgage
lines of credit, and similar transactions. Nor­
mally, commitments involve a written contract
or agreement and a commitment fee, or some
50 Through year-end 1992, remaining maturity may be
used for determining the maturity of off-balance-sheet loan
commitments; thereafter, original maturity must be used.
51 In the case of consumer home-equity or mortgage
lines of credit secured by liens on one- to four-family
residential properties, the bank is deemed able to uncondi­
tionally cancel the commitment for the purpose of this
criterion if, at its option, it can prohibit additional exten­
sions of credit, reduce the credit line, and terminate the
commitment to the full extent permitted by relevant federal
law.

Capital Adequacy (BHCs: Risk-Based Measure)
other form of consideration. Commitments are
included in weighted-risk assets regardless of
w hether they contain “ m aterial adverse
change” clauses or other provisions that are
intended to relieve the issuer of its funding
obligation under certain conditions. In the
case of commitments structured as syndica­
tions, where the banking organization is obli­
gated solely for its pro rata share, only the
banking organization’s proportional share of
the syndicated commitment is taken into ac­
count in calculating the risk-based capital
ratio.
Facilities that are unconditionally cancel­
lable (without cause) at any time by the bank­
ing organization are not deemed to be com­
mitments, provided the banking organization
makes a separate credit decision before each
drawing under the facility. Commitments with
an original maturity of one year or less are
deemed to involve low risk and, therefore, are
not assessed a capital charge. Such short-term
commitments are defined to include the un­
used portion of lines of credit on retail credit
cards and related plans (as defined in the in­
structions to the FR Y-9C Report) if the bank­
ing organization has the unconditional right to
cancel the line of credit at any time, in accor­
dance with applicable law.
Once a commitment has been converted at
50 percent, any portion that has been con­
veyed to U.S. depository institutions or OECD
banks as participations in which the originat­
ing banking organization retains the full obli­
gation to the borrower if the participating
bank fails to pay when the instrument is
drawn, is assigned to the 20 percent risk cat­
egory. This treatment is analogous to that ac­
corded to conveyances of risk participations in
standby letters of credit. The acquisition of a
participation in a commitment by a banking
organization is converted at 50 percent and
assigned to the risk category appropriate to
the account-party obligor or, if relevant, the
nature of the collateral or guarantees.
Revolving underwriting facilities (RUFs),
note-issuance facilities (NIFs), and other simi­
lar arrangements also are converted at 50 per­
cent regardless of maturity. These are facilities
under which a borrower can issue on a re­
volving basis short-term paper in its own
name, but for which the underwriting organi­

Regulation Y, Appendix A
zations have a legally binding commitment ei­
ther to purchase any notes the borrower is
unable to sell by the rollover date or to ad­
vance funds to the borrower.
3. Items with a 20 percent conversion factor.
Short-term, self-liquidating, trade-related con­
tingencies which arise from the movement of
goods are converted at 20 percent. Such con­
tingencies generally include commercial letters
of credit and other documentary letters of
credit collateralized by the underlying
shipments.
4. Items with a zero percent conversion factor.
These include unused portions of commit­
ments with an original maturity of one year or
less,52 or which are unconditionally cancel­
lable at any time, provided a separate credit
decision is made before each drawing under
the facility. Unused portions of lines of credit
on retail credit cards and related plans are
deemed to be short-term commitments if the
banking organization has the unconditional
right to cancel the line of credit at any time,
in accordance with applicable law.

E. Derivative Contracts (Interest-Rate,
Exchange-Rate, Commodity- (Including
Precious Metals) and Equity-Linked
Contracts)
1. Scope. Credit-equivalent amounts are com­
puted for each of the following off-balancesheet derivative contracts:
a. Interest-rate contracts. These include
single-currency interest-rate swaps, basis
swaps, forward rate agreements, interest-rate
options purchased (including caps, collars,
and floors purchased), and any other instru­
ment linked to interest rates that gives rise
to similar credit risks (including whenissued securities and forward forward de­
posits accepted).
b. Exchange-rate contracts. These include
cross-currency interest-rate swaps, forward
foreign-exchange contracts, currency op­
tions purchased, and any other instrument
52 Through year-end 1992, remaining maturity may be
used for determining term to maturity for off-balance-sheet
loan commitments; thereafter, original maturity must be
used.

51

Regulation Y, Appendix A

Capital Adequacy (BHCs: Risk-Based Measure)

linked to exchange rates that gives rise to
similar credit risks.
c. Equity derivative contracts. These in­
clude equity-linked swaps, equity-linked op­
tions purchased, forward equity-linked con­
tracts, and any other instrument linked to
equities that gives rise to similar credit
risks.
d. Commodity (including precious metal)
derivative contracts. These include
commodity-linked swaps, commodity-linked
options purchased, forward commoditylinked contracts, and any other instrument
linked to commodities that gives rise to
similar credit risks.
e. Exceptions. Exchange-rate contracts with
an original maturity of 14 or fewer calendar
days and derivative contracts traded on ex­
changes that require daily receipt and pay­
ment of cash variation margin may be ex­
cluded from the risk-based ratio calculation.
Gold contracts are accorded the same treat­
ment as exchange-rate contracts except that
gold contracts with an original maturity of
14 or fewer calendar days are included in
the risk-based ratio calculation. Over-thecounter options purchased are included and
treated in the same way as other derivative
contracts.
2. Calculation o f credit-equivalent amounts.

a. The credit-equivalent amount of a de­
rivative contract that is not subject to a
qualifying bilateral netting contract in ac­
cordance with section III.E.3. of this appen­
dix A is equal to the sum of (i) the current
exposure (sometimes referred to as the re­
placement cost) of the contract; and (ii) an
estimate of the potential future credit expo­
sure of the contract.
b. The current exposure is determined by
the mark-to-market value of the contract. If
the mark-to-market value is positive, then
the current exposure is that mark-to-market
value. If the mark-to-market value is zero
or negative, then the current exposure is
zero. Mark-to-market values are measured
in dollars, regardless of the currency or cur­
rencies specified in the contract, and should
reflect changes in underlying rates, prices,
and indices, as well as counterparty credit
quality.
c. The potential future credit exposure of a
contract, including a contract with a nega­
tive mark-to-market value, is estimated by
multiplying the notional principal amount of
the contract by a credit-conversion factor.
Banking organizations should use, subject
to examiner review, the effective rather than
the apparent or stated notional amount in
this calculation. The conversion factors are:

Conversion Factors
(in percent)

Remaining maturity
One year or less
Over one to five years
Over five years

Interest-rate
0.0
0.5
1.5

Exchange-rate
and gold

Equity

1.0
5.0
7.5

6.0
8.0
10.0

d. For a contract that is structured such that
on specified dates any outstanding exposure
is settled and the terms are reset so that the
market value of the contract is zero, the
remaining maturity is equal to the time until
the next reset date. For an interest-rate con­
tract with a remaining maturity of more
than one year that meets these criteria, the
minimum conversion factor is 0.5 percent.
e. For a contract with multiple exchanges
of principal, the conversion factor is multi­
52

Commodity,
excluding
precious
metals
10.0
12.0
15.0

Precious
metals,
except
gold
7.0
7.0
8.0

plied by the number of remaining payments
in the contract. A derivative contract not
included in the definitions of interest-rate,
exchange-rate, equity, or commodity con­
tracts as set forth in section III.E. 1. of this
appendix A is subject to the same conver­
sion factors as a commodity, excluding pre­
cious metals.
f. No potential future exposure is calculated
for a single-currency interest-rate swap in
which payments are made based upon two

Capital Adequacy (BHCs: Risk-Based Measure)
floating-rate indices (a so-called floating/
floating or basis swap); the credit exposure
on such a contract is evaluated solely on
the basis of the mark-to-market value,
g. The Board notes that the conversion fac­
tors set forth above, which are based on
observed volatilities of the particular types
of instruments, are subject to review and
modification in light of changing volatilities
or market conditions.
3. Netting.
a. For purposes of this appendix A, netting
refers to the offsetting of positive and nega­
tive mark-to-market values when determin­
ing a current exposure to be used in the
calculation of a credit-equivalent amount.
Any legally enforceable form of bilateral
netting (that is, netting with a single
counterparty) of derivative contracts is rec­
ognized for purposes of calculating the
credit-equivalent amount provided that—
i. the netting is accomplished under a
written netting contract that creates a
single legal obligation, covering all in­
cluded individual contracts, with the ef­
fect that the organization would have a
claim to receive, or obligation to pay,
only the net amount of the sum of the
positive and negative mark-to-market
values on included individual contracts
in the event that a counterparty, or a
counterparty to whom the contract has
been validly assigned, fails to perform
due to any of the following events: de­
fault, bankruptcy, liquidation, or similar
circumstances;
ii. the banking organization obtains a writ­
ten and reasoned legal opinion(s) repre­
senting that in the event of a legal chal­
lenge— including one resulting from
default, bankruptcy, liquidation, or simi­
lar circumstances— the relevant court
and administrative authorities would
find the banking organization’s expo­
sure to be the net amount under—
1. the law of the jurisdiction in which
the counterparty is chartered or the
equivalent location in the case of
noncorporate entities, and if a
branch of the counterparty is in­
volved, then also under the law of

Regulation Y, Appendix A
the jurisdiction in which the branch
is located;
2. the law that governs the individual
contracts covered by the netting
contract; and
3. the law that governs the netting
contract;
iii. the banking organization establishes and
maintains procedures to ensure that the
legal characteristics of netting contracts
are kept under review in the light of
possible changes in relevant law; and
iv. the banking organization maintains in
its files documentation adequate to sup­
port the netting of derivative contracts,
including a copy of the bilateral netting
contract and necessary legal opinions.
b. A contract containing a walkaway clause
is not eligible for netting for purposes of
calculating the credit-equivalent amount.53
c. A banking organization netting individual
contracts for the purpose of calculating
credit-equivalent amounts of derivative con­
tracts represents that it has met the require­
ments of this appendix A and all the appro­
priate documents are in the organization’s
files and available for inspection by the
Federal Reserve. The Federal Reserve may
determine that a banking organization’s files
are inadequate or that a netting contract, or
any of its underlying individual contracts,
may not be legally enforceable under any
one of the bodies of law described in sec­
tion III.E.3.a.ii. of this appendix A. If such
a determination is made, the netting con­
tract may be disqualified from recognition
for risk-based capital purposes or underly­
ing individual contracts may be treated as
though they are not subject to the netting
contract.
d. The credit-equivalent amount of con­
tracts that are subject to a qualifying bilat­
eral netting contract is calculated by adding
(i) the current exposure of the netting con­
tract (net current exposure) and (ii) the sum
of the estimates of potential future credit
53 A walkaway clause is a provision in a netting contract
that permits a nondefaulting counterparty to make lower
payments than it would make otherwise under the contract,
or no payment at all, to a defaulter or to the estate of a
defaulter, even if the defaulter or the estate of the defaulter
is a net creditor under the contract.
53

Regulation Y, Appendix A
exposures on all individual contracts subject
to the netting contract (gross potential fu­
ture exposure) adjusted to reflect the effects
of the netting contract.54
e. The net current exposure is the sum of
all positive and negative mark-to-market
values of the individual contracts included
in the netting contract. If the net sum of the
mark-to-market values is positive, then the
net current exposure is equal to that sum. If
the net sum of the mark-to-market values is
zero or negative, then the current exposure
is zero. The Federal Reserve may determine
that a netting contract qualifies for riskbased capital netting treatment even though
certain individual contracts included under
the netting contract may not qualify. In
such instances, the nonqualifying contracts
should be treated as individual contracts
that are not subject to the netting contract.
f. Gross potential future exposure, or Agross
is calculated by summing the estimates of
potential future exposure (determined in ac­
cordance with section III.E.2 of this appen­
dix A) for each individual contract subject
to the qualifying bilateral netting contract.
g. The effects of the bilateral netting con­
tract on the gross potential future exposure
are recognized through the application of a
formula that results in an adjusted add-on
amount (Anct). The formula, which employs
the ratio of net current exposure to gross
current exposure (NGR), is expressed as:
Anet = (0.4 x Agross) + 0.6 (NGR x Agross)
h. The NGR may be calculated in accor­
dance with either the counterparty-bycounterparty approach or the aggegate
approach.
i. Under the counterparty-by-counterparty
approach, the NGR is the ratio of the net
current exposure for a netting contract to
the gross current exposure of the netting
contract. The gross current exposure is
the sum of the current exposures of all
individual contracts subject to the netting
54
For purposes o f calculating potential future credit
posure to a netting counterparty for foreign-exchange con­
tracts and other similar contracts in which notional princi­
pal is equivalent to cash flows, total notional principal is
defined as the net receipts falling due on each value date in
each currency.

54

Capital Adequacy (BHCs: Risk-Based Measure)
contract calculated in accordance with
section III.E.2. of this appendix A. Net
negative mark-to-market values for indi­
vidual netting contracts with the same
counterparty may not be used to offset
net positive mark-to-market values for
other netting contracts with the same
counterparty.
ii. Under the aggregate approach, the
NGR is the ratio of the sum of all of the
net current exposures for qualifying bilat­
eral netting contracts to the sum of all of
the gross current exposures for those net­
ting contracts (each gross current expo­
sure is calculated in the same manner as
in section III.E.3.h.i. of this appendix A).
Net negative mark-to-market values for
individual counterparties may not be used
to offset net positive current exposures
for other counterparties.
iii. A banking organization must use con­
sistently either the counterparty-bycounterparty approach or the aggregate
approach to calculate the NGR. Regard­
less of the approach used, the NGR
should be applied individually to each
qualifying bilateral netting contract to de­
termine the adjusted add-on for that net­
ting contract.
i. In the event a netting contract covers
contracts that are normally excluded from
the risk-based ratio calculation— for ex­
ample, exchange-rate contracts with an
original maturity of 14 or fewer calendar
days or instruments traded on exchanges
that require daily payment and receipt of
cash variation margin—an institution may
elect to either include or exclude all markto-market values of such contracts when de­
termining net current exposure, provided the
method chosen is applied consistently.
4. Risk weights. Once the credit-equivalent
amount for a derivative contract, or a group of
derivative contracts subject to a qualifying bi­
lateral netting contract, has been determined,
that amount is assigned to the risk category
appropriate to the counterparty, or, if relevant,
exthe guarantor or the nature of any collateral.55
55 For derivative contracts, sufficiency of collateral or
guarantees is generally determined by the market value of
Continued

Capital Adequacy (BHCs: Risk-Based Measure)
However, the maximum risk weight applicable
to the credit-equivalent amount of such con­
tracts is 50 percent.
5. Avoidance o f double-counting.
a. In certain cases, credit exposures arising
from the derivative contracts covered by
section III.E. of this appendix A may al­
ready be reflected, in part, on the balance
sheet. To avoid double-counting such expo­
sures in the assessment of capital adequacy
and, perhaps, assigning inappropriate risk
weights, counterparty credit exposures aris­
ing from the derivative instruments covered
by these guidelines may need to be ex­
cluded from balance-sheet assets in calcu­
lating a banking organization’s risk-based
capital ratios.
b. Examples of the calculation of creditequivalent amounts for contracts covered
under this section III.E. are contained in
attachment V of this appendix A.

IV. Minimum Supervisory Ratios and
Standards

Regulation Y, Appendix A
tios could be required if warranted by the
particular circumstances or risk profiles of in­
dividual banking organizations. In all cases,
organizations should hold capital commensu­
rate with the level and nature of all of the
risks, including the volume and severity of
problem loans, to which they are exposed.
Upon adoption of the risk-based framework,
any organization that does not meet the in­
terim or final supervisory ratios, or whose
capital is otherwise considered inadequate, is
expected to develop and implement a plan
acceptable to the Federal Reserve for achiev­
ing an adequate level of capital consistent
with the provisions of these guidelines or with
the special circumstances affecting the indi­
vidual organization. In addition, such organi­
zations should avoid any actions, including
increased risk-taking or unwarranted expan­
sion, that would lower or further erode their
capital positions.
A. Minimum Risk-Based Ratio After
Transition Period

The interim and final supervisory standards
set forth below specify minimum supervisory
ratios based primarily on broad credit-risk
considerations. As noted above, the risk-based
ratio does not take explicit account of the
quality of individual asset portfolios or the
range of other types of risks to which banking
organizations may be exposed, such as
interest-rate, liquidity, market, or operational
risks. For this reason, banking organizations
are generally expected to operate with capital
positions well above the minimum ratios. In­
stitutions with high or inordinate levels of risk
are expected to operate well above minimum
capital standards. Banking organizations expe­
riencing or anticipating significant growth are
also expected to maintain capital, including
tangible capital positions, well above the
minimum levels. For example, most such or­
ganizations generally have operated at capital
levels ranging from 100 to 200 basis points
above the stated minimums. Higher capital ra-

As reflected in attachment VI, by year-end
1992, all bank holding companies55 should
meet a minimum ratio of qualifying total capi­
tal to weighted-risk assets of 8 percent, of
which at least 4.0 percentage points should be
in the form of tier 1 capital. For purposes of
section IV.A., tier 1 capital is defined as the
sum of core capital elements less goodwill
and other intangible assets required to be de­
ducted in accordance with section II.B.l.b. of
this appendix. The maximum amount of
supplementary capital elements that qualifies
as tier 2 capital is limited to 100 percent of
tier 1 capital. In addition, the combined maxi­
mum am ount of subordinated debt and
intermediate-term preferred stock that qualifies
as tier 2 capital is limited to 50 percent of tier
1 capital. The maximum amount of the allow­
ance for loan and lease losses that qualifies as
tier 2 capital is limited to 1.25 percent of
gross weighted-risk assets. Allowances for
loan and lease losses in excess of this limit
may, of course, be maintained, but would not

Continued
the collateral or the amount o f the guarantee in relation to
the credit-equivalent amount. Collateral and guarantees are
subject to the same provisions noted under section III.B. of
this appendix A.

56 As noted in section I above, bank holding companies
with less than $150 million in consolidated assets would
generally be exempt from the calculation and analysis of
risk-based ratios on a consolidated holding company basis,
subject to certain terms and conditions.

55

Regulation Y, Appendix A

Capital Adequacy (BHCs: Risk-Based Measure)

be included in an organization’s total capital.
The Federal Reserve will continue to require
bank holding companies to maintain reserves
at levels fully sufficient to cover losses inher­
ent in their loan portfolios.
Qualifying total capital is calculated by
adding tier 1 capital and tier 2 capital (limited
to 100 percent of tier 1 capital) and then
deducting from this sum certain investments
in banking or finance subsidiaries that are not
consolidated for accounting or supervisory
purposes, reciprocal holdings of banking orga­
nizations’ capital securities, or other items at
the direction of the Federal Reserve. The con­
ditions under which these deductions are to be
made and the procedures for making the de­
ductions are discussed above in section 11(B).

of capital. However, by year-end 1990, bank­
ing organizations are expected to meet a mini­
mum interim target ratio for qualifying total
capital to weighted-risk assets of 7.25 percent,
at least one-half of which should be in the
form of tier 1 capital. For purposes of meeting
the 1990 interim target, the amount of loanloss reserves that may be included in capital
is limited to 1.5 percent of weighted-risk as­
sets and up to 10 percent of an organization’s
tier 1 capital may consist of supplementary
capital elements. Thus, the 7.25 percent in­
terim target ratio implies a minimum ratio of
tier 1 capital to weighted-risk assets of 3.6
percent (one-half of 7.25) and a minimum ra­
tio of core capital elements to weighted-risk
assets ratio of 3.25 percent (nine-tenths of the
tier 1 capital ratio).

B. Transition Arrangements

Through year-end 1990, banking organiza­
tions have the option of complying with the
minimum 7.25 percent year-end 1990 riskbased capital standard, in lieu of the minimum
5.5 percent primary and 6 percent total capital
to total assets ratios set forth in appendix B of
this part. In addition, as more fully set forth
in appendix D to this part, banking organiza­
tions are expected to maintain a minimum ra­
tio or tier 1 capital to total assets during this
transition period.

The transition period for implementing the
risk-based capital standard ends on December
31, 1992.57 Initially, the risk-based capital
guidelines do not establish a minimum level
57 The Basle capital framework does not establish an
initial minimum standard for the risk-based capital ratio
before the end o f 1990. However, for the purpose of calcu­
lating a risk-based capital ratio prior to year-end 1990, no
sublimit is placed on the amount of the allowance for loan
and lease losses includable in tier 2. In addition, this frame­
work permits, under temporary transition arrangements, a
certain percentage of an organization’s tier 1 capital to be
made up of supplementary capital elements. In particular,
supplementary elements may constitute 25 percent o f an
organization’s tier 1 capital (before the deduction of good­
will) up to the end o f 1990; from year-end 1990 up to the
end of 1992, this allowable percentage o f supplementary
elements in tier 1 declines to 10 percent o f tier 1 (before
the deduction of goodwill). Beginning on December 31,
1992, supplementary elements may not be included in tier
1. The amount of subordinated debt and intermediate-term
preferred stock temporarily included in tier 1 under these
arrangements will not be subject to the sublimit on the
amount of such instruments includable in tier 2 capital.
While the transitional arrangements allow an organization
to include supplementary elements in tier 1 on a temporary

basis, the amount of perpetual preferred stock that may be
included in a bank holding company’s tier 1— both during
and after the transition period— is, as described in section
11(A), based solely upon a specified percentage of the orga­
nization’s permanent core capital elements (that is, common
equity, perpetual preferred stock, and minority interest in
the equity of consolidated subsidiaries), not upon total tier
1 elements that temporarily include tier 2 items. Once the
amount o f supplementary items that may temporarily
qualify as tier 1 elements is determined, goodwill must be
deducted from the sum of this amount and the amount of
the organization’s permanent core capital elements for the
purpose of calculating tier 1 (net of goodwill), tier 2, and
total capital.

Regulation Y, Appendix A

Capital Adequacy (BHCs: Risk-Based Measure)

Attachment I— Sample Calculation of Risk-Based Capital Ratio for Bank Holding
Companies
Example of a banking organization with $6,000 in total capital and the following assets and
off-balance-sheet items:
Balance-sheet assets
Cash

$ 5,000
20,000
5,000

U.S. Treasuries
Balances at domestic banks
Loans secured by first liens on 1- to 4-family
residential properties
Loans to private corporations
Total Balance-Sheet Assets

5,000
65,000
$100,000

Off-balance-sheet items
Standby letters of credit (SLCs) backing generalobligation debt issues of U.S. municipalities (GOs)
Long-term legally binding commitments to private
corporations
Total Off-Balance-Sheet Items

$ 10,000
20,000
$ 30,000

This bank holding com pany’s total capital to total assets (leverage ratio) w ould be:
($6,000/$ 100,000) = 6.00%.
To compute the bank holding com pany’s w eighted-risk assets:
1. Compute the credit-equivalent am ount of each off-balance-sheet (OBS) item.
OBS item
SLCs backing municipal GOs
Long-term commitments to private
corporations

Creditequivalent amount

Conversion factor

Face value
$10,000

x

1.00

=

$10,000

$20,000

x

0.50

=

$10,000

Table continued

Regulation Y, Appendix A

Capital Adequacy (BHCs: Risk-Based Measure)

2. M ultiply each balance-sheet asset and the credit-equivalent am ount of each OBS item by
the appropriate risk weight.
OBS item
0% category
Cash
U.S. Treasuries

20% category
Balances at domestic banks
Credit-equivalent amounts of SLCs backing
GOs of U.S. municipalities
50% category
Loans secured by first liens on 1- to 4-family
residential properties

Conversion
factor

Face value
$ 5,000
20,000
$25,000

Creditequivalent amount

0

x

0

10,000
$15,000

x

0.20

$ 3,000

$ 5,000

x

0.50

$ 2,500

x

1.00

$75,000
$80,500

$ 5,000

100% category
Loans to private corporations
Credit-equivalent amounts of long-term
commitments to private corporations

$65,000
10,000
$75,000

Total Risk-Weighted Assets

This bank holding company’s ratio of total capital to weighted-risk assets (risk-based capital
ratio) would be:
($6,000/$80,500) = 7.45%

58

Regulation Y, Appendix A

Capital Adequacy (BHCs: Risk-Based Measure)

Attachment II— Summary Definition of Qualifying Capital for Bank Holding
Companies*
Using the Year-End 1992 Standards
Components

Minimum requirements after transition period

CORE CAPITAL (tier 1)
Common stockholders’ equity
Qualifying noncumulative perpetual preferred stock
Qualifying cumulative perpetual preferred stock

Must equal or exceed 4% of weighted-risk assets

Minority interest in equity accounts of
consolidated subsidiaries
Less: Goodwill and other intangible assets
required to be deducted from capital1
SUPPLEMENTARY CAPITAL (tier 2)
Allowance for loan and lease losses
Perpetual preferred stock
Hybrid capital instruments, perpetual debt, and man­
datory convertible securities

No limit
No limit
Limited to 25% of the sum of common stock,
qualifying perpetual preferred stock, and minority
interests
Organizations should avoid using minority interests
to introduce elements not otherwise qualifying for
tier 1 capital

Total of tier 2 is limited to 100% of tier l 2
Limited to 1.25% of weighted-risk assets2
No limit within tier 2
No limit within tier 2

Subordinated debt and intermediate-term preferred
Subordinated debt and intermediate-term preferred
stock (original weighted average maturity of 5 years stock are limited to 50% of tier l;3 amortized for
capital putposes as they approach maturity
or more)
Not included; organizations encouraged to disclose;
Revaluation reserves (equity and building)
may be evaluated on a case-by-case basis for
international comparisons; and taken into account
in making an overall assessment of capital
DEDUCTIONS (from sum of tier 1 and tier 2)
Investments in unconsolidated subsidiaries

As a general rule, one-half of the aggregate
investments will be deducted from tier 1 capital and
one-half from tier 2 capital4

Reciprocal holdings of banking organizations’ capital
securities
Other deductions (such as other subsidiaries or joint On a case-by-case basis or as a matter of policy
after formal rulemaking
ventures) as determined by supervisory authority
Must equal or exceed 8% of weighted-risk assets
TOTAL CAPITAL
(tier 1 + tier 2 - Deductions)
1 Requirements for the deduction o f other intangible assets are set forth in section II.B.l.b. of this appendix.
2 Amounts in excess o f limitations are permitted but do not qualify as capital.
3 Amounts in excess o f limitations are permitted but do not qualify as capital.
4 A proportionately greater amount may be deducted from tier 1 capital if the risks associated with the subsidiary so
warrant.

* See discussion in section II o f the guidelines for a
complete description o f the requirements for, and the limi­
tations on, the components of qualifying capital.

Regulation Y, Appendix A

Attachment III— Summary of Risk
Weights and Risk Categories for Bank
Holding Companies
Category 1: Zero Percent
1. Cash (domestic and foreign) held in sub­
sidiary depository institutions or in transit
2. Balances due from Federal Reserve Banks
(including Federal Reserve Bank stock) and
central banks in other OECD countries
3. Direct claims on, and the portions of
claims that are unconditionally guaranteed by,
the U.S. Treasury and U.S. government agen­
cies1 and the central governments of other
OECD countries, and local currency claims
on, and the portions of local currency claims
that are unconditionally guaranteed by, the
central governments of non-OECD countries
(including the central banks of non-OECD
countries), to the extent that subsidiary de­
pository institutions have liabilities booked in
that currency
4. Gold bullion held in the vaults of a subsid­
iary depository institution or in another’s
vaults on an allocated basis, to the extent off­
set by gold bullion liabilities
5. Claims collateralized by cash on deposit in
the subsidiary lending institution or by securi­
ties issued or guaranteed by OECD central
governments or U.S. government agencies for
which a positive margin of collateral is main­
tained on a daily basis, fully taking into ac­
count any change in the bank’s exposure to
the obligor or counterparty under a claim in
relation to the market value of the collateral
held in support of that claim
Category 2: 20 Percent
1. Cash items in the process of collection
2. All claims (long- or short-term) on, and the
portions of claims (long- or short-term) that
are guaranteed by, U.S. depository institutions
and OECD banks

Capital Adequacy (BHCs: Risk-Based Measure)
3. Short-term claims (remaining maturity of
one year or less) on, and the portions of short­
term claims that are guaranteed by, nonOECD banks
4. The portions of claims that are condition­
ally guaranteed by the central governments of
OECD countries and U.S. government agen­
cies, and the portions of local currency claims
that are conditionally guaranteed by the cen­
tral governments of non-OECD countries, to
the extent that subsidiary depository institu­
tions have liabilities booked in that currency
5. Claims on, and the portions of claims that
are guaranteed by, U.S. government-sponsored
agencies2
6. General obligation claims on, and the por­
tions of claims that are guaranteed by the full
faith and credit of, local governments and po­
litical subdivisions of the U.S. and other
OECD local governments
7. Claims on, and the portions of claims that
are guaranteed by, official multilateral lending
institutions or regional development banks
8. The portions of
claim s that
are
collateralized3 by cash on deposit in the sub­
sidiary lending institution or by securities is­
sued or guaranteed by the U.S. Treasury, the
central governments of other OECD countries,
and U.S. government agencies that do not
qualify for the zero percent risk-weight cat­
egory, or that are collateralized by securities
issued or guaranteed by U.S. governmentsponsored agencies.
9. The portions of
claim s that
are
collateralized3 by securities issued by official
multilateral lending institutions or regional
development banks
10. Certain privately issued securities repre­
senting indirect ownership of mortgage-backed
U.S. government agency or U.S. governmentsponsored agency securities

2 For the purpose of calculating the risk-based capital
ratio, a U.S. government-sponsored agency is defined as an
1 For the purpose o f calculating the risk-based capital agency originally established or chartered to serve public
ratio, a U.S. government agency is defined as an instrumen­
purposes specified by the U.S. Congress but whose obliga­
tality of the U.S. government whose obligations are fully
tions are not explicitly guaranteed by the full faith and
and explicitly guaranteed as to the timely payment of prin­
credit of the U.S. government.
cipal and interest by the full faith and credit of the U.S.
3 The extent of collateralization is determined by current
government.
market value.

60

Capital Adequacy (BHCs: Risk-Based Measure)
11. Investments in shares of a fund whose
portfolio is permitted to hold only securities
that would qualify for the zero or 20 percent
risk categories
Category 3: 50 Percent
1. Loans fully secured by first liens on oneto four-family residential properties that have
been made in accordance with prudent under­
writing standards, that are performing in ac­
cordance with their original terms, and are not
past due or in nonaccrual status, and certain
privately issued mortgage-backed securities
representing indirect ownership of such loans
(Loans made for speculative purposes are
excluded.)
2. Revenue bonds or similar claims that are
obligations of U.S. state or local governments,
or other OECD local governments, but for
which the government entity is committed to
repay the debt only out of revenues from the
facilities financed
3. Credit-equivalent amounts of interest rateand foreign exchange rate-related contracts,
except for those assigned to a lower risk
category
Category 4: 100 Percent
1. All other claims on private obligors

Regulation Y, Appendix A
2. Claims on, or guaranteed by, non-OECD
foreign banks with a remaining maturity ex­
ceeding one year
3. Claims on, or guaranteed by, non-OECD
central governments that are not included in
item 3 of category 1 or item 4 of category 2;
all claim s on non-OECD state or local
governments
4. Obligations issued by U.S. state or local
governments, or other OECD local govern­
ments (including industrial-development au­
thorities and similar entities), repayable solely
by a private party or enterprise
5. Premises, plant, and equipment; other fixed
assets; and other real estate owned
6. Investments in any unconsolidated subsid­
iaries, joint ventures, or associated compa­
nies—if not deducted from capital
7. Instruments issued by other banking orga­
nizations that qualify as capital—if not de­
ducted from capital
8. Claims on commercial firms owned by a
government
9. All other assets, including any intangible
assets that are not deducted from capital

Regulation Y, Appendix A

Capital Adequacy (BHCs: Risk-Based Measure)
note issuance facilities (NIFs), and similar
arrangements

Attachment IV— Credit-Conversion
Factors for Off-Balance-Sheet Items for
Bank Holding Companies

20 Percent Conversion Factor
100 Percent Conversion Factor

Short-term , self-liquidating, trade-related
contingences, including commercial letters of
credit

1. Direct credit substitutes (These include
general guarantees of indebtedness and all
guarantee-type instruments, including standby
letters of credit backing the financial obliga­
tions of other parties.)

Zero Percent Conversion Factor
Unused portions of commitments with an
original maturity of one year or less, or which
are unconditionally cancellable at any time,
provided a separate credit decision is made
before each drawing

2. Risk participations in banker’s acceptances
and direct credit substitutes, such as standby
letters of credit
3. Sale and repurchase agreements and assets
sold with recourse that are not included on the
balance sheet
4. Forward agreements to purchase assets, in­
cluding financing facilities, on which
drawdown is certain
5. Securities lent for which the banking orga­
nization is at risk
50 Percent Conversion Factor
1. Transaction-related contingencies (These
include bid bonds, performance bonds, war­
ranties, and standby letters of credit backing
the nonfinancial performance of other parties.)
2. Unused portions of commitments with an
original maturity exceeding one year, includ­
ing underwriting commitments and commer­
cial credit lines
3. Revolving underwriting facilities (RUFs),

Credit Conversion fo r Derivative Contracts
1. The credit-equivalent amount of a deriva­
tive contract is the sum of the current credit
exposure of the contract and an estimate of
potential future increases in credit exposure.
The current exposure is the positive mark-tomarket value of the contract (or zero if the
mark-to-market value is zero or negative). For
derivative contracts that are subject to a quali­
fying bilateral netting contract the current ex­
posure is, generally, the net sum of the posi­
tive and negative mark-to-market values of the
contracts included in the netting contract (or
zero if the net sum of the mark-to-market
values is zero or negative). The potential fu­
ture exposure is calculated by multiplying the
effective notional amount of a contract by one
of the following credit conversion factors, as
appropriate:

Conversion Factors
(in percent)

Remaining maturity
One year or less
Over one to five years
Over five years

62

Interest-rate
0.0
0.5
1.5

Exchange-rate
and gold
1.0
5.0
7.5

Equity
6.0
8.0
10.0

Commodity,
excluding
precious
metals

Precious
metals,
except
gold

10.0

7.0
7.0
8.0

12.0
15.0

Capital Adequacy (BHCs: Risk-Based Measure)
For contracts subject to a qualifying bilat­
eral netting contract, the potential future expo­
sure is, generally, the sum of the individual
potential future exposures for each contract
included under the netting contract adjusted
by the application of the following formula:
Anet = (0.4

X

Agross) + 0.6 (NGR x Agross)

NGR is the ratio of net current exposure to
gross current exposure.

Regulation Y, Appendix A
for single-currency interest-rate swaps in
which payments are made based upon two
floating indices, that is, so-called floating/
floating or basis swaps. The credit exposure
on these contracts is evaluated solely on the
basis of their m ark-to-m arket value.
Exchange-rate contracts with an original matu­
rity of 14 or fewer days are excluded. Instru­
ments traded on exchanges that require daily
receipt and payment of cash variation margin
are also excluded.

2. No potential future exposure is calculated

63

Regulation Y, Appendix A

Capital Adequacy (BHCs: Risk-Based Measure)

Attachment V— Calculating Credit-Equivalent Amounts for Derivative Contracts
Notional
principal
amount

Type o f contract
(1) 120-day forward foreign
exchange
(2) 4-year forward foreign
exchange
(3) 3-year single-currency
fixed and floating
interest-rate swap
(4) 6-month oil swap
(5) 7-year cross-currency
floating and floating
interest-rate swap
TOTAL

Potential
Conversion exposure
factor
(dollars)

Mark-tomarket

5,000,000

.01

50,000

6,000,000

.05

60,000

10,000,000

.005

50,000

10,000,000
20,000,000

.005
.075

50,000
1,000,000

-250,000
-1,500,000

2,900,000

+

Current
exposure
(dollars)

Creditequivalent
amount
150,000

100,000 100,000
-120,000

300,000

-0 -

200,000 200,000

250,000

1,000,000
1,500,000

-0 -0 -

300,000

$3,200,000

a. If contracts (1) through (5) above are subject to a qualifying bilateral netting contract, then
the following applies:

Contract

Potential future exposure
50,000
300,000
50,000
1,000,000
1,000,000
2,900,000

(1)
(2)
(3)
(4)
(5)
TOTAL

Creditequivalent
amount

Net current
exposure

+

0

=

2,900,000

NOTE: The total o f the mark-to-market values from the first table is -1,370,000. Since this is a negative amount, the
net current exposure is zero.

b. To recognize the effects of bilateral net­
ting on potential future exposure the following
formula applies:
Anet = (0.4

X

Agross) + 0.6 (NGR x Agross)

c. In the above example, where the net cur­
rent exposure is zero, the credit-equivalent
amount would be calculated as follows:
NGR = 0 = (0/300,000)
A net = (0.4 x $2,900,000) + .6 (0 x
$2,900,000)
A.-. = $1,160,000

64

The credit-equivalent amount is $1,160,000 +
0 = $1,160,000.
d. If the net current exposure was a positive
number, for example $200,000, the credit
equivalent would be calculated as follows:
NGR = .67 = ($200,000/$300,000)
Anet = (0.4 x $2,900,000) + 0.6(.67 x
$2,900,000)
Anet = $2,325,800
The credit-equivalent am ount would be
$2,325,800 + $200,000 = $2,525,800.

Capital Adequacy (BHCs: Risk-Based Measure)

Regulation Y, Appendix A

Attachment VI
SUMMARY OF:
Transitional Arrangements
for Bank Holding Companies
Initial
1. Minimum standard of
total capital to
weighted-risk assets
2. Definition of tier 1
capital

Final Arrangement

Year-end 1990

Year-end 1992

None

7.25%

8.0%

Common equity,
qualifying cumulative
perpetual preferred
stock,1 and minority
interests, plus
supplementary
elements,2 less goodwill3

Common equity,
qualifying cumulative
and noncumulative
perpetual preferred
stock,1 and minority
interests, plus
supplementary
elements,4 less goodwill3

Common equity,
qualifying
noncumulative and
cumulative perpetual
preferred stock,1 and
minority interest less
goodwill and other
intangible assets
required to be deducted
from capital3

3.625%

4.0%

3.25%

4.0%

1.5% of weighted-risk
assets

1.25% of weighted-risk
assets

No limit within tier 2

No limit within tier 2

No limit within tier 2

No limit within tier 2

No limit within tier 2

No limit within tier 2

Combined maximum of
50% of tier 1

Combined maximum of
50% of tier 1

Combined maximum of
50% of tier 1

May not exceed tier 1
capital

May not exceed tier 1
capital

May not exceed tier 1
capital

Tier 1 plus tier 2 less:
• reciprocal holdings of
banking organizations’
capital instruments
• investments in
unconsolidated
subsidiaries5

Tier 1 plus tier 2 less:
• reciprocal holdings of
banking organizations’
capital instruments
• investments in
unconsolidated
subsidiaries5

Tier 1 plus tier 2 less:
• reciprocal holdings of
banking organizations’
capital instruments
• investments in
unconsolidated
subsidiaries 5

3. Minimum standards of
tier 1 capital to
weighted-risk assets
None
4. Minimum standard of
stockholders’ equity to
weighted-risk assets
None
5. Limitations on supple­
mentary capital
elements
a. Allowance for loan
and lease losses
No limit within tier 2
b. Perpetual pre­
ferred stock
c. Hybrid capital in­
struments, perpet­
ual debt, and man­
datory convertibles
d. Subordinated debt
and intermediateterm preferred
stock
e. Total qualifying
tier 2 capital
6. Definition of total
capital

1 Cumulative perpetual preferred stock is limited within
tier 1 to 25% o f the sum of common stockholders’ equity,
qualifying perpetual preferred stock, and minority interest.
2 Supplementary elements may be included in tier 1 up to
25% of the sum of tier 1 plus goodwill.
3 Requirements for the deduction o f other intangible as­
sets are set forth in section II.B .l.b o f this appendix.
4 Supplementary elements may be included in tier 1 up to

10% o f the sum of tier 1 plus goodwill.
5 As a general rule, one-half (50%) of the aggregate
amount of investments will be deducted from tier 1 capital
and one-half (50%) from tier 2 capital. A proportionally
greater amount may be deducted from tier 1 capital if the
risks associated with the subsidiary so warrant.

Capital Adequacy Guidelines for Bank Holding Companies
and State Member Banks:
Leverage Measure
12 CFR 225, appendix B; as amended effective September 1, 1995

The Board of Governors of the Federal Re­
serve System has adopted minimum capital
ratios and guidelines to provide a framework
for assessing the adequacy of the capital of
bank holding companies and state member
banks (collectively “banking organizations” ).
The guidelines generally apply to all state
member banks and bank holding companies
regardless of size and are to be used in the
examination and supervisory process as well
as in the analysis of applications acted upon
by the Federal Reserve. The Board of Gover­
nors will review the guidelines from time to
time for possible adjustments commensurate
with changes in the economy, financial mar­
kets, and banking practices. In this regard, the
Board has determined that during the transi­
tion period through year-end 1990 for imple­
mentation of the risk-based capital guidelines
contained in appendix A to this part and in
appendix A to part 208 a banking organization
may choose to fulfill the requirements of the
guidelines relating capital to total assets con­
tained in this appendix in one of two manners.
Until year-end 1990, a banking organization
may choose to conform to either the 5.5 per­
cent and 6 percent minimum primary and total
capital standards set forth in this appendix, or
the 7.25 percent year-end 1990 minimum riskbased capital standard set forth in appendix A
to this part and appendix A to part 208. Those
organizations that choose to conform during
this period to the 7.25 percent year-end 1990
risk-based capital standard will be deemed to
be in compliance with the capital adequacy
guidelines set forth in this appendix.
Two principal measurements of capital are
used—the primary capital ratio and the total
capital ratio. The definitions of primary and
total capital for banks and bank holding com­
panies and formulas for calculating the capital
ratios are set forth below in the definitional
sections of these guidelines.

Capital Guidelines
The Board has established a minimum level of

primary capital to total assets of 5.5 percent
and a minimum level of total capital to total
assets of 6.0 percent. Generally, banking orga­
nizations are expected to operate above the
minimum primary and total capital levels.
Those organizations whose operations involve
or are exposed to high or inordinate degrees
of risk will be expected to hold additional
capital to compensate for these risks.
In addition, the Board has established the
following three zones for total capital for
banking organizations of all sizes:
Zone 1
Zone 2
Zone 3

Total Capital Ratio
Above 7.0%
6.0% to 7.0%
Below 6.0%

The capital guidelines assume adequate li­
quidity and a moderate amount of risk in the
loan and investment portfolios and in offbalance-sheet activities. The Board is con­
cerned that some banking organizations may
attempt to comply with the guidelines in ways
that reduce their liquidity or increase risk.
Banking organizations should avoid the prac­
tice of attempting to meet the guidelines by
decreasing the level of liquid assets in relation
to total assets. In assessing compliance with
the guidelines, the Federal Reserve will take
into account liquidity and the overall degree
of risk associated with an organization’s op­
erations, including the volume of assets ex­
posed to risk.
The Federal Reserve will also take into ac­
count the sale of loans or other assets with
recourse and the volume and nature of all
off-balance-sheet risk. Particularly close atten­
tion will be directed to risks associated with
standby letters of credit and participation in
joint-venture activities. The Federal Reserve
will review the relationship of all on- and
off-balance-sheet risks to capital and will re­
quire those institutions with high or inordinate
levels of risk to hold additional primary capi­
tal. In addition, the Federal Reserve will con­
tinue to review the need for more explicit
procedures for factoring on- and off-balance67

Regulation Y, Appendix B

Capital Adequacy (BHCs and SMBs: Leverage Measure)

sheet risks into the assessment of capital
adequacy.
The capital guidelines apply to both banks
and bank holding companies on a consolidated
basis.1 Some banking organizations are en­
gaged in significant nonbanking activities that
typically require capital ratios higher than
those of commercial banks alone. The Board
believes that, as a matter of both safety and
soundness and competitive equity, the degree
of leverage common in banking should not
automatically extend to nonbanking activities.
Consequently, in evaluating the consolidated
capital positions of banking organizations, the
Board is placing greater w eight on the
building-block approach for assessing capital
requirements. This approach generally pro­
vides that nonbank subsidiaries of a banking
organization should maintain levels of capital
consistent with the levels that have been es­
tablished by industry norms or standards, by
federal or state regulatory agencies for similar
firms that are not affiliated with banking orga­
nizations, or that may be established by the
Board after taking into account risk factors of
a particular industry. The assessment of an
organization’s consolidated capital adequacy
must take into account the amount and nature
of all nonbank activities, and an institution’s
consolidated capital position should at least
equal the sum of the capital requirements of
the organization’s bank and nonbank subsid­
iaries as well as those of the parent company.

Supervisory Action
The nature and intensity of supervisory action
will be determined by an organization’s com­
pliance with the required minimum primary
capital ratio as well as by the zone in which
the company’s total capital ratio falls. Banks
and bank holding companies with primary
capital ratios below the 5.5 percent minimum
1 The guidelines will apply to bank holding companies
with less than $150 million in consolidated assets on a
bank-only basis unless (1) the holding company or any
nonbank subsidiary is engaged directly or indirectly in any
nonbank activity involving significant leverage or (2) the
holding company or any nonbank subsidiary has outstand­
ing significant debt held by the general public. Debt held
by the general public is defined to mean debt held by
parties other than financial institutions, officers, directors,
and controlling shareholders o f the banking organization or
their related interests.
68

will be considered undercapitalized unless
they can demonstrate clear extenuating cir­
cumstances. Such banking organizations will
be required to submit an acceptable plan for
achieving compliance with the capital guide­
lines and will be subject to denial of applica­
tions and appropriate supervisory enforcement
actions.
The zone into which an organization’s total
capital ratio falls will normally trigger the fol­
lowing supervisory responses, subject to quali­
tative analysis:
•

For institutions operating in zone 1, the
Federal Reserve will consider that capital
is generally adequate if the primary capital
ratio is acceptable to the Federal Reserve
and is above the 5.5 percent minimum.
• For institutions operating in zone 2, the
Federal Reserve will pay particular atten­
tion to financial factors, such as asset qual­
ity, liquidity, off-balance-sheet risk, and
interest-rate risk, as they relate to the ad­
equacy of capital. If these areas are defi­
cient and the Federal Reserve concludes
capital is not fully adequate, the Federal
Reserve will intensify its monitoring and
take appropriate supervisory action.
• For institutions operating in zone 3, the
Federal Reserve will—
—consider that the institution is undercapi­
talized, absent clear extenuating
circumstances;
—require the institution to submit a com­
prehensive capital plan, acceptable to the
Federal Reserve, that includes a program
for achieving compliance with the re­
quired minimum ratios within a reason­
able time period; and
—institute appropriate supervisory and/or
administrative enforcement action, which
may include the issuance of a capital
directive or denial of applications, unless
a capital plan acceptable to the Federal
Reserve has been adopted by the
institution.

Treatment of Intangible Assets for
Purpose of Assessing Capital Adequacy
In considering the treatment of intangible as­
sets for the purpose of assessing capital ad­
equacy, the Federal Reserve recognizes that

Capital Adequacy (BHCs and SMBs: Leverage Measure)
the determination of the future benefits and
useful lives of certain intangible assets may
involve a degree of uncertainty that is not
normally associated with other banking assets.
Supervisory concern over intangible assets de­
rives from this uncertainty and from the possi­
bility that, in the event an organization experi­
ences financial difficulties, such assets may
not provide the degree of support generally
associated with other assets. For this reason,
the Federal Reserve will carefully review the
level and specific character of intangible as­
sets in evaluating the capital adequacy of state
member banks and bank holding companies.
The Federal Reserve recognizes that intan­
gible assets may differ with respect to predict­
ability of any income stream directly associ­
ated with a particular asset, the existence of a
market for the asset, the ability to sell the
asset, or the reliability of any estimate of the
asset’s useful life. Certain intangible assets
have predictable income streams and objec­
tively verifiable values and may contribute to
an organization’s profitability and overall fi­
nancial strength. The value of other intan­
gibles, such as goodwill, may involve a num­
ber of assumptions and may be more subject
to changes in general economic circumstances
or to changes in an individual institution’s fu­
ture prospects. Consequently, the value of
such intangible assets may be difficult to as­
certain. Consistent with prudent banking prac­
tices and the principle of the diversification of
risks, banking organizations should avoid ex­
cessive balance-sheet concentration in any cat­
egory or related categories of intangible
assets.
Bank Holding Companies
While the Federal Reserve will consider the
amount and nature of all intangible assets,
those holding companies with aggregate intan­
gible assets in excess of 25 percent of tan­
gible primary capital (i.e., stated primary capi­
tal less all intangible assets) or those
institutions with lesser, although still signifi­
cant, amounts of goodwill will be subject to
close scrutiny. For the purpose of assessing
capital adequacy, the Federal Reserve may, on
a case-by-case basis, make adjustments to an
organization’s capital ratios based upon the

Regulation Y, Appendix B

amount of intangible assets in excess of the
25 percent threshold level or upon the specific
character of the organization’s intangible as­
sets in relation to its overall financial condi­
tion. Such adjustments may require some or­
ganizations to raise additional capital.
The Board expects banking organizations
(including state member banks) contemplating
expansion proposals to ensure that pro forma
capital ratios exceed the minimum capital lev­
els without significant reliance on intangibles,
particularly goodwill. Consequently, in review­
ing acquisition proposals, the Board will take
into consideration both the stated primary
capital ratio (that is, the ratio without any
adjustment for intangible assets) and the pri­
mary capital ratio after deducting intangibles.
In acting on applications, the Board will take
into account the nature and amount of intan­
gible assets and will, as appropriate, adjust
capital ratios to include certain intangible as­
sets on a case-by-case basis.
State Member Banks
State member banks with intangible assets in
excess of 25 percent of tangible primary capi­
tal will be subject to close scrutiny. In addi­
tion, for the purpose of calculating capital ra­
tios of state member banks, the Federal
Reserve will deduct goodwill from primary
capital and total capital. The Federal Reserve
may, on a case-by-case basis, make further
adjustments to a bank’s capital ratios based on
the amount of intangible assets (aside from
goodwill) in excess of the 25 percent thresh­
old level or on the specific character of the
bank’s intangible assets in relation to its over­
all financial condition. Such adjustments may
require some banks to raise additional capital.
In addition, state member banks and bank
holding companies are expected to review pe­
riodically the value at which intangible assets
are carried on their balance sheets to deter­
mine whether there has been any impairment
of value or whether changing circumstances
warrant a shortening of amortization periods.
Institutions should make appropriate reduc­
tions in carrying values and amortization peri­
ods in light of this review, and examiners will
evaluate the treatment of intangible assets dur­
ing on-site examinations.
69

Regulation Y, Appendix B

Capital Adequacy (BHCs and SMBs: Leverage Measure)

Definition of Capital to Be Used in
Determining Capital Adequacy
Primary Capital Components
The components of primary capital are—
•
•

common stock,
perpetual preferred stock (preferred stock
that does not have a stated maturity date
and that may not be redeemed at the op­
tion of the holder),
• surplus (excluding surplus relating to
limited-life preferred stock),
• undivided profits,
• contingency and other capital reserves,
• mandatory convertible instruments,2
• allowance for possible loan and lease
losses (exclusive o f allocated transfer risk
reserves),
• minority interest in equity accounts of con­
solidated subsidiaries, and
• perpetual debt instruments (for bank hold­
ing companies but not for state member
banks).
Limits on Certain Forms o f Primary Capital
Bank holding companies. The maximum com­
posite amount of mandatory convertible secur­
ities, perpetual debt, and perpetual preferred
stock that may be counted as primary capital
for bank holding companies is limited to 33.3
percent of all primary capital, including these
instruments. Perpetual preferred stock issued
prior to November 20, 1985, (or determined
by the Federal Reserve to be in the process of
being issued prior to that date) shall continue
to be included as primary capital.
The maximum composite amount of manda­
tory convertible securities and perpetual debt
that may be counted as primary capital for
bank holding companies is limited to 20 per­
cent of all primary capital, including these
instruments. The maximum amount of equity
commitment notes (a form of mandatory con­
vertible securities) that may be counted as pri­
mary capital for a bank holding company is
limited to 10 percent of all primary capital,
including mandatory convertible securities.
2 See the definitional section below that lists the criteria
for mandatory convertible instruments to qualify as primary
capital.

70

Amounts outstanding in excess of these limi­
tations may be counted as secondary capital
provided they meet the requirements of sec­
ondary capital instruments.
State member banks. The composite limita­
tions on the amount of mandatory convertible
securities and perpetual preferred stock (per­
petual debt is not primary capital for state
member banks) that may serve as primary
capital for bank holding companies shall not
be applied formally to state member banks,
although the Board shall determine appropri­
ate limits for these forms of primary capital
on a case-by-case basis.
The maximum amount of mandatory con­
vertible securities that may be counted as pri­
mary capital for state member banks is limited
to 1 6 2/ 3 percent of all primary capital, includ­
ing mandatory convertible securities. Equity
commitment notes, one form of mandatory
convertible securities, shall not be included as
primary capital for state member banks except
that notes issued by state member banks prior
to May 15, 1985, will continue to be included
in primary capital. Amounts of mandatory
convertible securities in excess of these limita­
tions may be counted as secondary capital if
they meet the requirements of secondary capi­
tal instruments.
Secondary Capital Components
The components of secondary capital are—
•
•

limited-life preferred stock (including re­
lated surplus) and
bank subordinated notes and debentures
and unsecured long-term debt of the parent
company and its nonbank subsidiaries.

Restrictions Relating to Capital Components
To qualify as primary or secondary capital, a
capital instrument should not contain or be
covered by any covenants, terms, or restric­
tions that are inconsistent with safe and sound
banking practices. Examples of such terms are
those regarded as unduly interfering with the
ability of the bank or holding company to
conduct normal banking operations or those
resulting in significantly higher dividends or
interest payments in the event of a deteriora­
tion in the financial condition of the issuer.

Capital Adequacy (BHCs and SMBs: Leverage Measure)
The secondary components must meet the
following conditions to qualify as capital:
•

•
•

•
•

The instrument must have an original
weighted-average maturity of at least seven
years.
The instrument must be unsecured.
The instrument must clearly state on its
face that it is not a deposit and is not
insured by a federal agency.
Bank debt instruments must be subordi­
nated to claims of depositors.
For banks only, the aggregate amount of
limited-life preferred stock and subordinate
debt qualifying as capital may not exceed
50 percent of the amount of the bank’s
primary capital.

As secondary capital components approach
maturity, the banking organization must plan
to redeem or replace the instruments while
maintaining an adequate overall capital posi­
tion. Thus, the remaining maturity of second­
ary capital components will be an important
consideration in assessing the adequacy of to­
tal capital.

Capital Ratios
The primary and total capital ratios for bank
holding companies are computed as follows:
Primary capital ratio:
Primary capital components
Total assets + Allowance for loan and lease losses
(exclusive of allocated transfer risk reserves)

Total capital ratio:
Primary capital components + Secondary capital
components
Total assets + Allowance for loan and lease losses
(exclusive of allocated transfer risk reserves)

The primary and total capital ratios for state
member banks are computed as follows:
Primary capital ratio:
Primary capital components-Goodwill
Average total assets + Allowance for loan and
lease losses (exclusive of allocated transfer risk
reserves)-Goodwill

Regulation Y, Appendix B

Total capital ratio:
Primary capital components + Secondary capital
components-Goodwill
Average total assets + Allowance for loan and
lease losses (exclusive of allocated transfer risk
reserves)-Goodwill

Generally, period-end amounts will be used
to calculate bank holding company ratios.
However, the Federal Reserve will discourage
temporary balance-sheet adjustments or any
other “window dressing” practices designed
to achieve transitory compliance with the
guidelines. Banking organizations are expected
to maintain adequate capital positions at all
times. Thus, the Federal Reserve will, on a
case-by-case basis, use average total assets in
the calculation of bank holding company capi­
tal ratios whenever this approach provides a
more meaningful indication of an individual
holding company’s capital position.
For the calculation of bank capital ratios,
“average total assets” will generally be de­
fined as the quarterly average total assets fig­
ure reported on the bank’s Report of Condi­
tion. If warranted, however, the Federal
Reserve may calculate bank capital ratios
based upon total assets as of period-end. All
other components of the bank’s capital ratios
will be based upon period-end balances.

Criteria for Determining Primary Capital
Status of Mandatory Convertible
Securities
Mandatory convertible securities are subordi­
nated debt instruments that are eventually
transformed into common or perpetual pre­
ferred stock within a specified period of time,
not to exceed 12 years. To be counted as
primary capital, mandatory convertible securi­
ties must meet the criteria set forth below.
These criteria cover the two basic types of
mandatory convertible securities: equity con­
tract notes (securities that obligate the holder
to take common or perpetual preferred stock
of the issuer in lieu of cash for repayment of
principal) and equity commitment notes (secu­
rities that are redeemable only with the pro­
ceeds from the sale of common or perpetual
preferred stock). Both equity commitment
notes and equity contract notes qualify as pri­
mary capital for bank holding companies, but
71

Regulation Y, Appendix B

Capital Adequacy (BHCs and SMBs: Leverage Measure)

only equity contract notes qualify as primary
capital for banks.
Criteria Applicable to Both Types o f
Mandatory Convertible Securities
a. The securities must mature in 12 years or
less.
b. The issuer may redeem securities prior to
maturity only with the proceeds from the sale
of common or perpetual preferred stock of the
bank or bank holding company. Any exception
to this rule must be approved by the Federal
Reserve. The securities may not be redeemed
with the proceeds of another issue of manda­
tory convertible securities. Nor may the issuer
repurchase or acquire its own mandatory con­
vertible securities for resale or reissuance.
c. Holders of the securities may not accelerate
the payment of principal except in the event
of bankruptcy, insolvency, or reorganization.
d. The securities must be subordinate in right
of payment to all senior indebtedness of the
issuer. In the event that the proceeds of the
securities are reloaned to an affiliate, the loan
must be subordinated to the same degree as
the original issue.
e. An issuer that intends to dedicate the pro­
ceeds of an issue of common or perpetual
preferred stock to satisfy the funding require­
ments of an issue of mandatory convertible
securities (i.e. the requirement to retire or re­
deem the notes with the proceeds from the
issuance of common or perpetual preferred
stock) generally must make such a dedication
during the quarter in which the new common
or preferred stock is issued.3 As a general
rule, if the dedication is not made within the
prescribed period, then the securities issued
may not at a later date be dedicated to the
retirement or redemption of the mandatory
convertible securities.4
3 Common or perpetual preferred stock issued under divi­
dend reinvestment plans or issued to finance acquisitions,
including acquisitions of business entities, may be dedi­
cated to the retirement or redemption of the mandatory
convertible securities. Documentation certified by an autho­
rized agent of the issuer showing the amount o f common
stock or perpetual preferred stock issued, the dates of issue,
and amounts o f such issues dedicated to the retirement or
redemption of mandatory convertible securities will satisfy
the dedication requirement.
4 The dedication procedure is necessary to ensure that the
72

Additional Criteria Applicable to Equity
Contract Notes
a. The note must contain a contractual provi­
sion (or must be issued with a mandatory
stock purchase contract) that requires the
holder of the instrument to take the common
or perpetual stock of the issuer in lieu of cash
in satisfaction of the claim for principal repay­
ment. The obligation of the holder to take the
common or perpetual preferred stock of the
issuer may be waived if, and to the extent
that, prior to the maturity date of the obliga­
tion, the issuer sells new common or perpetual
preferred stock and dedicates the proceeds to
the retirement or redemption of the notes. The
dedication generally must be made during the
quarter in which the new common or pre­
ferred stock is issued.
b. A stock purchase contract may be sepa­
rated from a security only if (1) the holder of
the contract provides sufficient collateral5 to
the issuer, or to an independent trustee for the
benefit of the issuer, to ensure performance
under the contract and (2) the stock purchase
contract requires the purchase of common or
perpetual preferred stock.
Additional Criteria Applicable to Equity
Commitment Notes
a. The indenture or note agreement must con­
tain the following two provisions:
1. The proceeds of the sale of common or
perpetual preferred stock will be the sole
source of repayment for the notes, and the
primary capital of the issuer is not overstated. For each
dollar of common or perpetual preferred proceeds dedicated
to the retirement or redemption of the notes, there is a
corresponding reduction in the amount of outstanding man­
datory securities that may qualify as primary capital. De
minimis amounts (in relation to primary capital) of com­
mon or perpetual preferred stock issued under arrangements
in which the amount of stock issued is not predictable, such
as dividend reinvestment plans and employee stock option
plans (but excluding public stock offerings and stock issued
in connection with acquisitions), should be dedicated by no
later than the company’s fiscal year-end.
5 Collateral is defined as (1) cash or certificates of de­
posit; (2) U.S. government securities that will mature prior
to or simultaneous with the maturity of the equity contract
and that have a par or maturity value at least equal to the
amount o f the holder’s obligation under the stock purchase
contract; (3) standby letters of credit issued by an insured
U.S. bank that is not an affiliate of the issuer; or (4) other
collateral as may be designated from time to time by the
Federal Reserve.

Capital Adequacy (BHCs and SMBs: Leverage Measure)
issuer must dedicate the proceeds for the
purpose of repaying the notes. (Documenta­
tion certified by an authorized agent of the
issuer showing the amount of common or
perpetual preferred stock issued, the dates
of issue, and amounts of such issues dedi­
cated to the retirement or redemption of
mandatory convertible securities will satisfy
the dedication requirement.)
2. By the time that one-third of the life of
the securities has run, the issuer must have
raised and dedicated an amount equal to
one-third of the original principal of the
securities. By the time that two-thirds of the
life of the securities has run, the issuer
must have raised and dedicated an amount
equal to two-thirds of the original principal
of the securities. At least 60 days prior to
the maturity of the securities, the issuer
must have raised and dedicated an amount
equal to the entire original principal of the
securities. Proceeds dedicated to redemption
or retirement of the notes must come only
from the sale of common or perpetual pre­
ferred stock.6
b. If the issuer fails to meet any of these
periodic funding requirements, the Federal Re­
serve immediately will cease to treat the un­
funded securities as primary capital and will
take appropriate supervisory action. In addi­
tion, failure to meet the funding requirements
will be viewed as a breach of a regulatory
commitment and will be taken into consider­
ation by the Board in acting on statutory ap­
plications.
c. If a security is issued by a subsidiary of a
bank or bank holding company, any guarantee
of the principal by that subsidiary’s parent
bank or bank holding company must be subor­
dinate to the same degree as the security is­
sued by the subsidiary and limited to repay­
ment of the principal amount of the security
at its final maturity.
Criteria fo r Determining the Primary Capital
Status o f Perpetual Debt Instruments o f Bank
Holding Companies
a. The instrument must be unsecured and, if
6 The funded portions of the securities will be deducted
from primary capital to avoid double-counting.

Regulation Y, Appendix B

issued by a bank, must be subordinated to the
claims of depositors.
b. The instrum ent may not provide the
noteholder with the right to demand repay­
ment of principal except in the event of bank­
ruptcy, insolvency, or reorganization. The in­
strument must provide that nonpayment of
interest shall not trigger repayment of the
principal of the perpetual debt note or any
other obligation of the issuer, nor shall it con­
stitute prima facie evidence of insolvency or
bankruptcy.
c. The issuer shall not voluntarily redeem the
debt issue without prior approval of the Fed­
eral Reserve, except when the debt is con­
verted to, exchanged for, or simultaneously
replaced in like amount by an issue of com­
mon or perpetual preferred stock of the issuer
or the issuer’s parent company.
d. If issued by a bank holding company, a
bank subsidiary, or a subsidiary with substan­
tial operations, the instrument must contain a
provision that allows the issuer to defer inter­
est payments on the perpetual debt in the
event of, and at the same time as the elimina­
tion of dividends on all outstanding common
or preferred stock of the isssuer (or in the
case of a guarantee by a parent company at
the same time as the elimination of the divi­
dends of the parent company’s common and
preferred stock). In the case of a nonoperating
subsidiary (a funding subsidiary or one
formed to issue securities), the deferral of in­
terest payments must be triggered by elimina­
tion of dividends by the parent company.
e. If issued by a bank holding company or a
subsidiary with substantial operations, the in­
strument must convert automatically to com­
mon or perpetual preferred stock of the issuer
when the issuer’s retained earnings and sur­
plus accounts become negative. If an operat­
ing subsidiary’s perpetual debt is guaranteed
by its parent, the debt may convert to the
shares of the issuer or guarantor and such
conversion may be triggered when the issuer’s
or parent’s retained earnings and surplus ac­
counts become negative. If issued by a
nonoperating subsidiary of a bank holding
company or bank, the instrument must convert
73

Regulation Y, Appendix B

Capital Adequacy (BHCs and SMBs: Leverage Measure)

automatically to common or preferred stock
of the issuer’s parent when the retained earn-

ings and surplus accounts of the issuer’s parent become negative.

Capital Adequacy Guidelines for State Member Banks:
Tier 1 Leverage Measure
12 C FR 208, appendix B ; as amended effective A ugust 1, 1995

I. Overview
a. The Board of Governors of the Federal Re­
serve System has adopted a minimum ratio of
tier 1 capital to total assets to assist in the
assessment of the capital adequacy of state
member banks.1 The principal objective of
this measure is to place a constraint on the
maximum degree to which a state member
bank can leverage its equity capital base. It is
intended to be used as a supplement to the
risk-based capital measure.
b.
The guidelines apply to all state member
banks on a consolidated basis and are to be
used in the examination and supervisory pro­
cess as well as in the analysis of applications
acted upon by the Federal Reserve. The Board
will review the guidelines from time to time
and will consider the need for possible adjust­
ments in light of any significant changes in
the economy, financial markets, and banking
practices.

II. The Tier 1 Leverage Ratio
a. The Board has established a minimum level
of tier 1 capital to total assets of 3 percent.
An institution operating at or near these levels
is expected to have well-diversified risk, in­
cluding no undue interest-rate risk exposure;
excellent asset quality; high liquidity; and
good earnings; and in general be considered a
strong banking organization, rated composite 1
under the CAMEL rating system of banks.
Institutions not meeting these characteristics,
as well as institutions with supervisory, finan­
cial, or operational weaknesses, are expected
to operate well above minimum capital stan­
dards. Institutions experiencing or anticipating
significant growth also are expected to main­
tain capital ratios, including tangible capital
positions, well above the minimum levels. For
example, most such banks generally have op­
erated at capital levels ranging from 100 to
200 basis points above the stated minimums.

Higher capital ratios could be required if war­
ranted by the particular circumstances or risk
profiles of individual banks. Thus, for all but
the most highly rated banks meeting the con­
ditions set forth above, the minimum tier 1
leverage ratio is to be 3 percent plus an addi­
tional cushion of at least 100 to 200 basis
points. In all cases, banking institutions should
hold capital commensurate with the level and
nature of all risks, including the volume and
severity of problem loans, to which they are
exposed.
b.
A bank’s tier 1 leverage ratio is calcu­
lated by dividing its tier 1 capital (the nu­
merator of the ratio) by its average total con­
solidated assets (the denominator of the ratio).
The ratio will also be calculated using periodend assets whenever necessary, on a case-bycase basis. For the purpose of this leverage
ratio, the definition of tier 1 capital for yearend 1992 as set forth in the risk-based capital
guidelines contained in appendix A of this part
will be used.2 As a general matter, average
total consolidated assets are defined as the
quarterly average total assets (defined net of
the allowance for loan and lease losses) re­
ported on the bank’s Reports of Condition and
Income (call report), less goodwill; amounts
of mortgage-servicing rights and purchased
credit-card relationships that, in the aggregate,
are in excess of 50 percent of tier 1 capital;
amounts of purchased credit-card relationships
in excess of 25 percent of tier 1 capital; all
other intangible assets; any investments in
subsidiaries or associated companies that the
Federal Reserve determines should be de­

2 At the end of 1992, tier 1 capital for state member
banks includes common equity, minority interest in the
equity accounts of consolidated subsidiaries, and qualifying
noncumulative perpetual preferred stock. In addition, as a
general matter, tier 1 capital excludes goodwill; amounts of
mortgage-servicing rights and purchased credit-card rela­
tionships that, in the aggregate, exceed 50 percent of tier 1
capital; amounts of purchased credit-card relationships that
exceed 25 percent of tier 1 capital; all other intangible
assets; and deferred-tax assets that are dependent upon fu­
ture taxable income, net of their valuation allowance, in
1 Supervisory risk-based capital ratios that relate capital excess of certain limitations. The Federal Reserve may ex­
clude certain investments in subsidiaries or associated com­
to weighted-risk assets for state member banks are outlined
in appendix A to this part.
panies as appropriate.
75

Regulation H, Appendix B

Capital Adequacy (SMBs: Tier 1 Leverage Measure)

ducted from tier 1 capital; and deferred-tax
assets that are dependent upon future taxable
income, net of their valuation allowance, in
excess of the limitation set forth in section
II.B.4. of this appendix A.3
c. Notwithstanding other provisions of this
appendix B, a qualifying bank that has trans­
ferred small-business loans and leases on per­
sonal property (small-business obligations)
with recourse shall, for purposes of calculat­
ing its tier 1 leverage ratio, exclude from its
average total consolidated assets the outstand­
ing principal amount of the small-business
loans and leases transferred with recourse,
provided two conditions are met. First, the
transaction must be treated as a sale under
generally accepted accounting principles
(GAAP) and, second, the bank must establish
pursuant to GAAP a noncapital reserve suffi­
cient to meet the bank’s reasonably estimated
liability under the recourse arrangement. Only
loans and leases to businesses that meet the
criteria for a small-business concern estab­
lished by the Small Business Administration
under section 3(a) of the Small Business Act
are eligible for this capital treatment.
d. For purposes of this appendix B, a bank
is qualifying if it meets the criteria set forth in
the Board’s prompt-corrective-action regula­
tion (12 CFR 208.30) for well capitalized or,
by order of the Board, adequately capitalized.
For purposes of determining whether a bank
meets these criteria, its capital ratios must be
calculated without regard to the preferential
capital treatm ent for transfers of smallbusiness obligations with recourse specified in
section II.c. of this appendix B. The total out­
standing amount of recourse retained by a
qualifying bank on transfers of small-business
obligations receiving the preferential capital
treatment cannot exceed 15 percent of the
bank’s total risk-based capital. By order, the
Board may approve a higher limit.
3 Deductions from tier 1 capital and other adjustments
are discussed more fully in section II.B. of appendix A to
this part.

e. If a bank ceases to be qualifying or ex­
ceeds the 15 percent capital limitation, the
preferential capital treatment will continue to
apply to any transfers of small-business obli­
gations with recourse that were consummated
during the time that the bank was qualifying
and did not exceed the capital limit.
f. The leverage capital ratio of the bank
shall be calculated without regard to the pref­
erential capital treatment for transfers of
small-business obligations with recourse speci­
fied in section II of this appendix B for pur­
poses of—
i.

determ ining whether a bank is ad­
equately capitalized, undercapitalized,
significantly undercapitalized, or criti­
cally undercapitalized under prompt cor­
rective action (12 CFR 208.33(b)); and
ii. reclassifying a well-capitalized bank to
adequately capitalized and requiring an
adequately capitalized bank to comply
with certain mandatory or discretionary
supervisory actions as if the bank were
in the next lower prompt-correctiveaction capital category (12 CFR
208.33(c)).
g. Whenever appropriate, including when a
bank is undertaking expansion, seeking to en­
gage in new activities, or otherwise facing
unusual or abnormal risks, the Board will con­
tinue to consider the level of an individual
bank’s tangible tier 1 leverage ratio (after de­
ducting all intangibles) in making an overall
assessment of capital adequacy. This is consis­
tent with the Federal Reserve’s risk-based
capital guidelines and long-standing Board
policy and practice with regard to leverage
guidelines. Banks experiencing growth,
whether internally or by acquisition, are ex­
pected to maintain strong capital positions
substantially above minimum supervisory lev­
els, without significant reliance on intangible
assets.

Capital Adequacy Guidelines for Bank Holding Companies:
Tier 1 Leverage Measure
12 C FR 225, appendix D ; as amended effective A ugust 1, 1995

I. Overview
a. The Board of Governors of the Federal Re­
serve System has adopted a minimum ratio of
tier 1 capital to total assets to assist in the
assessment of the capital adequacy of bank
holding com panies ( “ banking organiza­
tions” ).1 The principal objective of this mea­
sure is to place a constraint on the maximum
degree to which a banking organization can
leverage its equity capital base. It is intended
to be used as a supplement to the risk-based
capital measure.
b. The guidelines apply on a consolidated
basis to bank holding companies with consoli­
dated assets of $150 million or more. For
bank holding companies with less than $150
million in consolidated assets, the guidelines
will be applied on a bank-only basis unless (i)
the parent bank holding company is engaged
in nonbank activity involving significant lever­
age;2 or (ii) the parent company has a signifi­
cant amount of outstanding debt that is held
by the general public.
c. The tier 1 leverage guidelines are to be
used in the inspection and supervisory process
as well as in the analysis of applications acted
upon by the Federal Reserve. The Board will
review the guidelines from time to time and
will consider the need for possible adjust­
ments in light of any significant changes in
the economy, financial markets, and banking
practices.

E The Tier 1 Leverage Ratio
L
a. The Board has established a minimum level
of tier 1 capital to total assets of 3 percent. A
banking organization operating at or near
these levels is expected to have welldiversified risk, including no undue interestrate risk exposure; excellent asset quality;
high liquidity; and good earnings; and in gen1 Supervisory ratios that related capital to total assets for
bank holding companies are outlined in appendix B of this
part.
2 A parent company that is engaged in significant offbalance-sheet activities would generally be deemed to be
engaged in activities that involve significant leverage.

eral be considered a strong banking organiza­
tion, rated composite 1 under the BOPEC rat­
ing system for bank holding companies.
Organizations not meeting these characteris­
tics, as well as institutions with supervisory,
financial, or operational weaknesses, are ex­
pected to operate well above minimum capital
standards. Organizations experiencing or an­
ticipating significant growth also are expected
to maintain capital ratios, including tangible
capital positions, well above the minimum
levels. For example, most such organizations
generally have operated at capital levels rang­
ing from 100 to 200 basis points above the
stated minimums. Higher capital ratios could
be required if warranted by the particular cir­
cumstances or risk profiles of individual bank­
ing organizations. Thus, for all but the most
highly rated organizations meeting the condi­
tions set forth above, the minimum tier 1 le­
verage ratio is to be 3 percent plus an addi­
tional cushion
of at least 100 to 200 basis
points. In all cases, banking organizations
should hold capital commensurate with the
level and nature of all risks, including the
volume and severity of problem loans, to
which they are exposed.
b.
A banking organization’s tier 1 leverage
ratio is calculated by dividing its tier 1 capital
(the numerator of the ratio) by its average
total consolidated assets (the denominator of
the ratio). The ratio will also be calculated
using period-end assets whenever necessary,
on a case-by-case basis. For the purpose of
this leverage ratio, the definition of tier 1
capital for year-end 1992 as set forth in the
risk-based capital guidelines contained in ap­
pendix A of this part will be used.3 As a
3 At the end of 1992, tier 1 capital for banking organizations includes common equity, minority interest in the eq­
uity accounts of consolidated subsidiaries, qualifying non­
cum ulative perpetual preferred stock, and qualifying
cumulative perpetual preferred stock. (Cumulative perpetual
preferred stock is limited to 25 percent of tier 1 capital.) In
addition, as a general matter, tier 1 capital excludes good­
will; amounts of mortgage-servicing rights and purchased
credit-card relationships that, in the aggregate, exceed 50
percent of tier 1 capital; amounts of purchased credit-card
relationships that exceed 25 percent of tier 1 capital; all
Continued
77

Regulation Y, Appendix D

Capital Adequacy (BHCs: Tier 1 Leverage Measure)

general matter, average total consolidated as­
sets are defined as the quarterly average total
assets (defined net of the allowance for loan
and lease losses) reported on the organiza­
tion’s Consolidated Financial Statements (FR
Y-9C Report), less goodwill; amounts of
m ortgage-servicing rights and purchased
credit-card relationships that, in the aggregate,
are in excess of 50 percent of tier 1 capital;
amounts of purchased credit-card relationships
in excess of 25 percent of tier 1 capital; all
other intangible assets; any investments in
subsidiaries or associated companies that the
Federal Reserve determines should be de­
ducted from tier 1 capital; and deferred-tax
assets that are dependent upon future taxable
income, net of their valuation allowance, in
Continued
other intangible assets; and deferred-tax assets that are de­
pendent upon future taxable income, net of their valuation
allowance, in excess o f certain limitations. The Federal
Reserve may exclude certain investments in subsidiaries or
associated companies as appropriate.

excess of the limitation set forth in section
II.B.4 of this appendix A.4
c.
Whenever appropriate, including when
an organization is undertaking expansion,
seeking to engage in new activities, or other­
wise facing unusual or abnormal risks, the
Board will continue to consider the level of
an individual organization’s tangible tier 1 le­
verage ratio (after deducting all intangibles) in
making an overall assessment of capital ad­
equacy. This is consistent with the Federal
Reserve’s risk-based capital guidelines and
long-standing Board policy and practice with
regard to leverage guidelines. Organizations
experiencing growth, whether internally or by
acquisition, are expected to maintain strong
capital positions substantially above minimum
supervisory levels, without significant reliance
on intangible assets.
4 Deductions from tier 1 capital and other adjustments
are discussed more fully in section II.B. in appendix A of
this part.

Capital Adequacy Guidelines for State Member Banks:
Market-Risk Measure
12 CFR 208, appendix E; effective January 1, 1997

Section
1 Purpose, applicability, scope, and
effective date
2 Definitions
3 Adjustments to the risk-based capital
ratio calculations
4 Internal models
5 Specific risk
Table 1—Multiplication factor based on
results of backtesting
Table 2— Specific-risk weighting factors for
covered debt positions

SECTION 1— Purpose, Applicability,
Scope, and Effective Date
(a) Purpose. The purpose of this appendix is
to ensure that banks with significant exposure
to market risk maintain adequate capital to
support that exposure.1 This appendix supple­
ments and adjusts the risk-based capital ratio
calculations under appendix A of this part
with respect to those banks.
(b) Applicability.
(1) This appendix applies to any insured
state member bank whose trading activity2
(on a w orldw ide consolidated basis)
equals—
(i) 10 percent or more of total assets;3 or
(ii) $1 billion or more.
(2) The Federal Reserve may additionally
apply this appendix to any insured state
member bank if the Federal Reserve deems
it necessary or appropriate for safe and
sound banking practices.
(3) The Federal Reserve may exclude an
1 This appendix is based on a framework developed
jointly by supervisory authorities from the countries repre­
sented on the Basle Committee on Banking Supervision and
endorsed by the Group of Ten Central Bank Governors.
The framework is described in a Basle Committee paper
entitled “ Amendment to the Capital Accord to Incorporate
Market Risk,” January 1996.
2 “ Trading activity” means the gross sum of trading as­
sets and liabilities as reported in the bank’s most recent
quarterly Consolidated Report of Condition and Income
(call report).
3 “Total assets” means quarter-end total assets as re­
ported in the bank’s most recent call report.

insured state member bank otherwise meet­
ing the criteria of paragraph (b)(1) of this
section from coverage under this appendix
if it determines the bank meets such criteria
as a consequence of accounting, opera­
tional, or similar considerations, and the
Federal Reserve deems it consistent with
safe and sound banking practices.
(c) Scope. The capital requirements of this
appendix support market risk associated with
a bank’s covered positions.
(d) Effective date. This appendix is effective
as of January 1, 1997. Compliance is not
mandatory until January 1, 1998. Subject to
supervisory approval, a bank may opt to com­
ply with this appendix as early as January 1,
1997.4

SECTION 2— Definitions
For purposes of this appendix, the following
definitions apply:
(a) Covered positions means all positions in a
bank’s trading account, and all foreign-ex­
change5 and commodity positions, whether or
not in the trading account.6 Positions include
on-balance-sheet assets and liabilities and offbalance-sheet items. Securities subject to re­
purchase and lending agreements are included
as if they are still owned by the lender.
(b) Market risk means the risk of loss result­
ing from movements in market prices. Market
risk consists of general market risk and spe­
cific risk components.
(1) General market risk means changes in
the market value of covered positions re­
sulting from broad market movements, such
as changes in the general level of interest
4 A bank that voluntarily complies with the final rule
prior to January 1, 1998, must comply with all of its
provisions.
5 Subject to supervisory review, a bank may exclude
structural positions in foreign currencies from its covered
positions.
6 The term trading account is defined in the instructions
to the call report.
79

Regulation H, Appendix E
rates, equity prices, foreign-exchange rates,
or commodity prices.
(2) Specific risk means changes in the mar­
ket value of specific positions due to factors
other than broad market movements and in­
cludes such risk as the credit risk of an
instrument’s issuer.
(c) Tier 1 and tier 2 capital are defined in
appendix A of this part.
(d) Tier 3 capital is subordinated debt that is
unsecured; is fully paid up; has an original
maturity of at least two years; is not redeem­
able before maturity without prior approval by
the Federal Reserve; includes a lock-in clause
precluding payment of either interest or prin­
cipal (even at maturity) if the payment would
cause the issuing bank’s risk-based capital ra­
tio to fall or remain below the minimum re­
quired under appendix A of this part; and does
not contain and is not covered by any cov­
enants, terms, or restrictions that are inconsis­
tent with safe and sound banking practices.
(e) Value-at-risk (VAR) means the estimate of
the maximum amount that the value of cov­
ered positions could decline during a fixed
holding period within a stated confidence
level, measured in accordance with section 4
of this appendix.

SECTION 3— Adjustments to the
Risk-Based Capital Ratio Calculations
(a) Risk-based capital ratio denominator. A
bank subject to this appendix shall calculate
its risk-based capital ratio denominator as
follows:
(1) Adjusted risk-weighted assets. Calculate
adjusted risk-weighted assets, which equals
risk-weighted assets (as determined in ac­
cordance with appendix A of this part), ex­
cluding the risk-weighted amounts of all
covered positions (except foreign-exchange
positions outside the trading account and
over-the-counter derivative positions).7
(2) Measure fo r market risk. Calculate the
measure for market risk, which equals the

Capital Adequacy (SMBs: Market-Risk Measure)
sum of the VAR-based capital charge, the
specific risk add-on (if any), and the capital
charge for de minimis exposures (if any).
(i) VAR-based capital charge. The VARbased capital charge equals the higher

of—
(A) the previous day’s VAR measure;
or
(B) the average of the daily VAR mea­
sures for each of the preceding 60
business days multiplied by three, ex­
cept as provided in section 4(e) of this
appendix;
(ii) Specific risk add-on. The specific
risk add-on is calculated in accordance
with section 5 of this appendix; and
(iii) Capital charge fo r de minimis expo­
sure. The capital charge for de minimis
exposure is calculated in accordance with
section 4(a) of this appendix.
(3) Market-risk-equivalent assets. Calculate
market-risk-equivalent assets by multiplying
the measure for market risk (as calculated
in paragraph (a)(2) of this section) by 12.5.
(4) Denominator calculation. Add marketrisk-equivalent assets (as calculated in para­
graph (a)(3) of this section) to adjusted
risk-weighted assets (as calculated in para­
graph (a)(1) of this section). The resulting
sum is the bank’s risk-based capital ratio
denominator.
(b) Risk-based capital ratio numerator. A
bank subject to this appendix shall calculate
its risk-based capital ratio numerator by allo­
cating capital as follows:
(1) Credit-risk allocation. Allocate tier 1
and tier 2 capital equal to 8.0 percent of
adjusted risk-weighted assets (as calculated
in paragraph (a)(1) of this section).8
(2) Market-risk allocation. Allocate tier 1,
tier 2, and tier 3 capital equal to the mea­
sure for market risk as calculated in para­
graph (a)(2) of this section. The sum of tier
2 and tier 3 capital allocated for market risk
must not exceed 250 percent of tier 1 capi­
tal allocated for market risk. (This require­
ment means that tier 1 capital allocated in

7
Foreign-exchange positions outside the trading account
and all over-the-counter derivative positions, whether or not
in the trading account, must be included in adjusted risk8 A bank may not allocate tier 3 capital to support credit
weighted assets as determined in appendix A of this part.
risk (as calculated under appendix A of this part).
80

Capital Adequacy (SMBs: Market-Risk Measure)
this paragraph (b)(2) must equal at least
28.6 percent of the measure for market
risk.)
(3) Restrictions.
(i) The sum of tier 2 capital (both allo­
cated and excess) and tier 3 capital (allo­
cated in paragraph (b)(2) of this section)
may not exceed 100 percent of tier 1
capital (both allocated and excess).9
(ii) Term subordinated debt (and
intermediate-term preferred stock and re­
lated surplus) included in tier 2 capital
(both allocated and excess) may not ex­
ceed 50 percent of tier 1 capital (both
allocated and excess).
(4) Numerator calculation. Add tier 1 capi­
tal (both allocated and excess), tier 2 capital
(both allocated and excess), and tier 3 capi­
tal (allocated under paragraph (b)(2) of this
section). The resulting sum is the bank’s
risk-based capital ratio numerator.

Regulation H, Appendix E
(1) The bank must have a risk-control unit
that reports directly to senior management
and is independent from business-trading
units.
(2) The bank’s internal risk-measurement
model must be integrated into the daily
management process.
(3) The bank’s policies and procedures
must identify, and the bank must conduct,
appropriate stress tests and backtests.1 The
1
bank’s policies and procedures must iden­
tify the procedures to follow in response to
the results of such tests.
(4) The bank must conduct independent re­
views of its risk measurement and riskmanagement systems at least annually.
(c) Market-risk factors. The bank’s internal
model must use risk factors sufficient to mea­
sure the market risk inherent in all covered
positions. The risk factors must address inter­
est-rate risk ,12 equity-price risk, foreignexchange-rate risk, and commodity-price risk.

SECTION A Internal Models
—
(a) General. For risk-based capital purposes, a
bank subject to this appendix must use its
internal model to measure its daily VAR, in
accordance with the requirements of this sec­
tion.10 The Federal Reserve may permit a
bank to use alternative techniques to measure
the market risk of de minimis exposures so
long as the techniques adequately measure as­
sociated market risk.
(b) Qualitative requirements. A bank subject
to this appendix must have a risk-management
system that meets the following minimum
qualitative requirements:
9 Excess tier 1 capital means tier 1 capital that has not
been allocated in paragraphs (b)(1) and (b)(2) o f this section. Excess tier 2 capital means tier 2 capital that has not
been allocated in paragraph (b)(1) and (b)(2) of this sec­
tion, subject to the restrictions in paragraph (b)(3) of this
section.
10 A bank’s internal model may use any generally ac­
cepted m easurem ent techniques, such as variancecovariance models, historical simulations, or Monte Carlo
simulations. However, the level o f sophistication and accu­
racy of a bank’s internal model must be commensurate with
the nature and size of its covered positions. A bank that
modifies its existing modeling procedures to comply with
the requirements of this appendix for risk-based capital
purposes should, nonetheless, continue to use the internal
model it considers most appropriate in evaluating risks for
other purposes.

(d) Quantitative requirements. For regulatory
capital purposes, VAR measures must meet
the following quantitative requirements:
(1) The VAR measures must be calculated
on a daily basis using a 99 percent, one­
tailed confidence level with a price shock
equivalent to a ten-business-day movement
in rates and prices. In order to calculate
VAR measures based on a ten-day price
shock, the bank may either calculate tenday figures directly or convert VAR figures
based on holding periods other than ten
days to the equivalent of a ten-day holding
period (for instance, by multiplying a oneday VAR measure by the square root of
ten).
(2) The VAR measures must be based on
an historical observation period (or effective
observation period for a bank using a
1 Stress tests provide information about the impact of
1
adverse market events on a bank’s covered positions.
Backtests provide information about the accuracy of an
internal model by comparing a bank’s daily VAR measures
to its corresponding daily trading profits and losses.
12 For material exposures in the major currencies and
markets, modeling techniques must capture spread risk and
must incorporate enough segments of the yield curve— at
least six—to capture differences in volatility and less-thanperfect correlation of rates along the yield curve.
81

Regulation H, Appendix E

Capital Adequacy (SMBs: Market-Risk Measure)

weighting scheme or other similar method)
of at least one year. The bank must update
data sets at least once every three months
or more frequently as market conditions
warrant.
(3) The VAR measures must include the
risks arising from the nonlinear price char­
acteristics of options positions and the sen­
sitivity of the market value of the positions
to changes in the volatility of the underly­
ing rates or prices. A bank with a large or
complex options portfolio must measure the
volatility of options positions by different
maturities.
(4) The VAR measures may incorporate
empirical correlations within and across risk
categories, provided that the bank’s process
for measuring correlations is sound. In the
event that the VAR measures do not incor­
porate empirical correlations across risk cat­
egories, then the bank must add the sepa­
rate VAR measures for the four major risk
categories to determine its aggregate VAR
measure.
(e) Backtesting.
(1) Beginning one year after a bank starts
to comply with this appendix, a bank must
conduct backtesting by comparing each of
its most recent 250 business days’ actual
net trading profit or loss13 with the corre­
sponding daily VAR measures generated for
internal risk-measurement purposes and
calibrated to a one-day holding period and a
99 percent, one-tailed confidence level.
(2) Once each quarter, the bank must iden­
tify the number of exceptions, that is, the
number of business days for which the
magnitude of the actual daily net trading
loss, if any, exceeds the corresponding daily
VAR measure.
(3) A bank must use the multiplication fac­
tor indicated in table 1 of this appendix in
determining its capital charge for market
risk under section 3(a)(2)(i)(B) of this ap­
pendix until it obtains the next quarter’s
backtesting results, unless the Federal Re­
13 Actual net trading profits and losses typically include
such things as realized and unrealized gains and losses on
portfolio positions as well as fee income and commissions
associated with trading activities.
82

serve determines that a different adjustment
or other action is appropriate.

SECTION 5— Specific Risk
(a) Specific-risk add-on. For purposes of sec­
tion 3(a)(2)(ii) of this appendix, a bank’s
specific-risk add-on equals the standard
specific-risk capital charge calculated under
paragraph (c) of this section. If, however, a
bank can demonstrate to the Federal Reserve
that its internal model measures the specific
risk of covered debt and/or equity positions
and that those measures are included in the
VAR-based capital charge in section 3(a)(2)(i)
of this appendix, then the bank may reduce or
eliminate its specific-risk add-on under this
section. The determination as to whether a
model incorporates specific risk must be made
separately for covered debt and equity
positions.
(1) If a model includes the specific risk of
covered debt positions but not covered eq­
uity positions (or vice versa), then the bank
can reduce its specific-risk charge for the
included positions under paragraph (b) of
this section. The specific-risk charge for the
positions not included equals the standard
specific-risk capital charge under paragraph
(c) of this section.
(2) If a model addresses the specific risk of
both covered debt and equity positions, then
the bank can reduce its specific-risk charge
for both covered debt and equity positions
under paragraph (b) of this section. In this
case, the comparison described in paragraph
(b) of this section must be based on the
total VAR-based figure for the specific risk
of debt and equity positions, taking into
account any correlations that are built into
the model.
(b) VAR-based specific-risk capital charge. In
all cases where a bank measures specific risk
in its internal model, the total capital charge
for specific risk (i.e., the VAR-based specificrisk capital charge plus the specific-risk add­
on) must equal at least 50 percent of the stan­
dard specific-risk capital charge (this amount
is the minimum specific-risk charge).
(1) If the portion of a bank’s VAR measure
that is attributable to specific risk (multi­

Capital Adequacy (SMBs: Market-Risk Measure)
plied by the bank’s multiplication factor if
required in section 3(a)(2) of this appendix)
is greater than or equal to the minimum
specific-risk charge, then the bank has no
specific-risk add-on and its capital charge
for specific risk is the portion included in
the VAR measure.
(2) If the portion of a bank’s VAR measure
that is attributable to specific risk (multi­
plied by the bank’s multiplication factor if
required in section 3(a)(2) of this appendix)
is less than the minimum specific-risk
charge, then the bank’s specific-risk add-on
is the difference between the minimum
specific-risk charge and the specific-risk
portion of the VAR measure (multiplied by
the bank’s multiplication factor if required
in section 3(a)(2) of this appendix).
(c) Standard specific-risk capital charge. The
standard specific-risk capital charge equals the
sum of the components for covered debt and
equity positions as follows:
(1) Covered debt positions.
(i)For purposes of this section 5, “cov­
ered debt positions” means fixed-rate or
floating-rate debt instruments located in
the trading account and instruments lo­
cated in the trading account with values
that react primarily to changes in interest
rates, including certain nonconvertible
preferred stock, convertible bonds, and
instruments subject to repurchase and
lending agreements. Also included are de­
rivatives (including written and purchased
options) for which the underlying instru­
ment is a covered debt instrument that is
subject to a non-zero specific-risk capital
charge.
(A) For covered debt positions that are
derivatives, a bank must risk-weight
(as described in paragraph (c)(l)(iii) of
this section) the market value of the
effective notional amount of the under­
lying debt instrument or index portfo­
lio. Swaps must be included as the no­
tional position in the underlying debt
instrument or index portfolio, with a
receiving side treated as a long posi­
tion and a paying side treated as a
short position.
(B) For covered debt positions that are

Regulation H, Appendix E
options, whether long or short, a bank
must risk-weight (as described in para­
graph (c)(l)(iii) of this section) the
market value of the effective notional
amount of the underlying debt instru­
ment or index multiplied by the op­
tion’s delta.
(ii) A bank may net long and short cov­
ered debt positions (including derivatives)
in identical debt issues or indices.
(iii) A bank must multiply the absolute
value of the current market value of each
net long or short covered debt position
by the appropriate specific-risk weighting
factor indicated in table 2 of this appen­
dix. The specific risk capital charge com­
ponent for covered debt positions is the
sum of the weighted values.
(A) The government category includes
all debt instruments of central govern­
ments of OECD-based countries14 in­
cluding bonds, Treasury bills, and
other short-term instruments, as well as
local currency instruments of nonOECD central governments to the ex­
tent the bank has liabilities booked in
that currency.
(B) The qualifying category includes
debt instruments of U.S. governmentsponsored agencies, general-obligation
debt instruments issued by states and
other political subdivisions of OECDbased countries, multilateral develop­
ment banks, and debt instruments is­
sued by U.S. depository institutions or
OECD-banks that do not qualify as
capital of the issuing institution.15 This
category also includes other debt in­
struments, including corporate debt and
revenue instruments issued by states
and other political subdivisions of
OECD countries, that are—
( /) rated investment-grade by at
least two nationally recognized
credit-rating services;
(2) rated investment-grade by one
14 Organization for Economic Cooperation and Develop­
ment (OECD)-based countries is defined in appendix A of
this part.
15 U.S. government-sponsored agencies, multilateral de­
velopment banks, and OECD banks are defined in appendix
A of this part.

83

Regulation H, Appendix E
nationally recognized credit rating
agency and not rated less than
investm ent-grade by any other
credit-rating agency; or
(3) unrated, but deemed to be of
comparable investment quality by
the reporting bank and the issuer has
instruments listed on a recognized
stock exchange, subject to review by
the Federal Reserve.
(C) The other category includes debt
instruments that are not included in the
government or qualifying categories.
(2) Covered equity positions.
(i) For purposes of this section 5, “cov­
ered equity positions” means equity in­
struments located in the trading account
and instruments located in the trading ac­
count with values that react primarily to
changes in equity prices, including voting
or nonvoting common stock, certain con­
vertible bonds, and commitments to buy
or sell equity instruments. Also included
are derivatives (including written and
purchased options) for which the underly­
ing is a covered equity position.
(A) For covered equity positions that
are derivatives, a bank must riskweight (as described in paragraph
(c)(2)(iii) of this section) the market
value of the effective notional amount
of the underlying equity instrument or
equity portfolio. Swaps must be in­
cluded as the notional position in the
underlying equity instrument or index
portfolio, with a receiving side treated
as a long position and a paying side
treated as a short position.
(B) For covered equity positions that
are options, whether long or short, a
bank must risk-weight (as described in
paragraph (c)(2)(iii) of this section) the
market value of the effective notional
amount of the underlying equity instru­
ment or index multiplied by the op­
tion’s delta.
(ii) A bank may net long and short cov­
ered equity positions (including deriva­
tives) in identical equity issues or equity
indices in the same market.16
16 A bank may also net positions in depository receipts

Capital Adequacy (SMBs: Market-Risk Measure)
(iii) (A) A bank must multiply the abso­
lute value of the current market value
of each net long or short covered eq­
uity position by a risk-weighting factor
of 8.0 percent, or by 4.0 percent if the
equity is held in a portfolio that is
both liquid and well diversified.17 For
covered equity positions that are index
contracts comprising a well-diversified
portfolio of equity instruments, the net
long or short position is multiplied by
a risk-weighting factor of 2.0 percent.
(B) For covered equity positions from
the following futures-related arbitrage
strategies, a bank may apply a 2.0 per­
cent risk-weighting factor to one side
(long or short) of each position with
the opposite side exempt from charge,
subject to review by the Federal
Reserve:
(1) long and short positions in ex­
actly the same index at different
dates or in different market centers;
or
(2) long and short positions in index
contracts at the same date in differ­
ent but similar indices.
(C) For futures contracts on broadly
based indices that are matched by off­
setting positions in a basket of stocks
comprising the index, a bank may ap­
ply a 2.0 percent risk-weighting factor
to the futures and stock basket posi­
tions (long and short), provided that
such trades are deliberately entered
into and separately controlled, and that
the basket of stocks comprises at least
90 percent of the capitalization of the
index.
(iv) The specific-risk capital-charge
against an opposite position in the underlying equity or
identical equity in different markets, provided that the bank
includes the costs of conversion.
17 A portfolio is liquid and well diversified if (1) it is
characterized by a limited sensitivity to price changes of
any single equity issue or closely related group of equity
issues held in the portfolio; (2) the volatility of the portfo­
lio’s value is not dominated by the volatility of any indi­
vidual equity issue or by equity issues from any single
industry or economic sector; (3) it contains a large number
of individual equity positions, with no single position rep­
resenting a substantial portion of the portfolio’s total market
value; and (4) it consists mainly of issues traded on orga­
nized exchanges or in well-established over-the-counter
markets.

Regulation H, Appendix E

Capital Adequacy (SMBs: Market-Risk Measure)
component for covered equity positions
is the sum of the weighted values.

Table 2— Specific-Risk Weighting
Factors for Covered Debt Positions

Table 1— Multiplication Factor Based on
Results of Backtesting

Category

Number o f exceptions

Government
Qualifying

4 or fewer
5
6
7
8
9
10 or more

Multiplication factor
3.00
3.40
3.50
3.65
3.75
3.85
4.00

Other

Remaining
maturity
(contractual)
N/A
6 months or
less
over 6 months
to 24 months
over 24 months
N/A

Weighting
factor
(in percent)
0.00

0.25
1.00

1.60
8.00

85

Capital Adequacy Guidelines for Bank Holding Companies:
Market-Risk Measure
12 CFR 225, appendix E ; effective January 1, 1997

Section
1 Purpose, applicability, scope, and
effective date
2 Definitions
3 Adjustments to the risk-based capital
ratio calculations
4 Internal models
5 Specific risk
Table 1—Multiplication factor based on
results of backtesting
Table 2—Specific-risk weighting factors for
covered debt positions

SECTION 1— Purpose, Applicability,
Scope, and Effective Date
(a) Purpose. The purpose of this appendix is
to ensure that bank holding companies (orga­
nizations) with significant exposure to market
risk maintain adequate capital to support that
exposure.' This appendix supplements and ad­
justs the risk-based capital ratio calculations
under appendix A of this part with respect to
those organizations.
(b) Applicability.
(1) This appendix applies to any bank hold­
ing company whose trading activity2 (on a
worldwide consolidated basis) equals—
(i) 10 percent or more of total assets;3 or
(ii) $1 billion or more.
(2) The Federal Reserve may additionally
apply this appendix to any bank holding
company if the Federal Reserve deems it
necessary or appropriate for safe and sound
banking practices.
(3) The Federal Reserve may exclude a
bank holding company otherwise meeting
1 This appendix is based on a framework developed
jointly by supervisory authorities from the countries repre­
sented on the Basle Committee on Banking Supervision and
endorsed by the Group of Ten Central Bank Governors.
The framework is described in a Basle Committee paper
entitled “ Amendment to the Capital Accord to Incorporate
Market Risk,” January 1996.
2 Trading activity means the gross sum o f trading assets
and liabilities as reported in the bank holding company’s
most recent quarterly Y-9C Report.
3 Total assets means quarter-end total assets as reported
in the bank holding company’s most recent Y-9C Report.

the criteria of paragraph (b)(1) of this sec­
tion from coverage under this appendix if it
determines the organization meets such cri­
teria as a consequence of accounting, opera­
tional, or similar considerations, and the
Federal Reserve deems it consistent with
safe and sound banking practices.
(c) Scope. The capital requirements of this
appendix support market risk associated with
an organization’s covered positions.
(d) Effective date. This appendix is effective
as of January 1, 1997. Compliance is not
mandatory until January 1, 1998. Subject to
supervisory approval, a bank holding company
may opt to comply with this appendix as early
as January 1, 1997.4

SECTION 2— Definitions
For purposes of this appendix, the following
definitions apply:
(a) Covered positions means all positions in
an organization’s trading account, and all
foreign-exchange5 and commodity positions,
whether or not in the trading account.6 Posi­
tions include on-balance-sheet assets and li­
abilities and off-balance-sheet items. Securities
subject to repurchase and lending agreements
are included as if still owned by the lender.
(b) Market risk means the risk of loss result­
ing from movements in market prices. Market
risk consists of general market risk and spe­
cific risk components.
(1) General market risk means changes in
the market value of covered positions re­
sulting from broad market movements, such
as changes in the general level of interest
4 A bank holding company that voluntarily complies with
the final rule prior to January 1, 1998, must comply with
all of its provisions.
5 Subject to supervisory review, a bank may exclude
structural positions in foreign currencies from its covered
positions.
6 The term trading account is defined in the instructions
to the call report.
87

Regulation Y, Appendix E
rates, equity prices, foreign-exchange rates,
or commodity prices.
(2) Specific risk means changes in the mar­
ket value of specific positions due to factors
other than broad market movements and in­
cludes such risk as the credit risk of an
instrument’s issuer.
(c) Tier 1 and tier 2 capital are defined in
appendix A of this part.
(d) Tier 3 capital is subordinated debt that is
unsecured; is fully paid up; has an original
maturity of at least two years; is not redeem­
able before maturity without prior approval by
the Federal Reserve; includes a lock-in clause
precluding payment of either interest or prin­
cipal (even at maturity) if the payment would
cause the issuing organization’s risk-based
capital ratio to fall or remain below the mini­
mum required under appendix A of this part;
and does not contain and is not covered by
any covenants, terms, or restrictions that are
inconsistent with safe and sound banking
practices.
(e) Value-at-risk (VAR) means the estimate of
the maximum amount that the value of cov­
ered positions could decline due to market
price or rate movements during a fixed hold­
ing period within a stated confidence level,
measured in accordance with section 4 of this
appendix.

SECTION 3— Adjustments to the
Risk-Based Capital Ratio Calculations
(a) Risk-based capital ratio denominator. An
organization subject to this appendix shall cal­
culate its risk-based capital ratio denominator
as follows:
(1) Adjusted risk-weighted assets. Calculate
adjusted risk-weighted assets, which equals
risk-weighted assets (as determined in ac­
cordance with appendix A of this part) ex­
cluding the risk-weighted amounts of all
covered positions (except foreign-exchange
positions outside the trading account and
over-the-counter derivative positions).7

Capital Adequacy (BHCs: Market-Risk Measure)
(2) Measure fo r market risk. Calculate the
measure for market risk, which equals the
sum of the VAR-based capital charge, the
specific risk add-on (if any), and the capital
charge for de minimis exposures (if any).
(i) VAR-based capital charge. The VARbased capital charge equals the higher
of—
(A) the previous day’s VAR measure;
or
(B) the average of the daily VAR mea­
sures for each of the preceding 60
business days multiplied by three, ex­
cept as provided in section 4(e) of this
appendix;
(ii) Specific risk add-on. The specific
risk add-on is calculated in accordance
with section 5 of this appendix; and
(iii) Capital charge fo r de minimis expo­
sure. The capital charge for de minimis
exposure is calculated in accordance with
section 4(a) of this appendix.
(3) Market-risk-equivalent assets. Calculate
market-risk-equivalent assets by multiplying
the measure for market risk (as calculated
in paragraph (a)(2) of this section) by 12.5.
(4) Denominator calculation. Add marketrisk-equivalent assets (as calculated in para­
graph (a)(3) of this section) to adjusted
risk-weighted assets (as calculated in para­
graph (a)(1) of this section). The resulting
sum is the organization’s risk-based capital
ratio denominator.
(b) Risk-based capital ratio numerator. An or­
ganization subject to this appendix shall calcu­
late its risk-based capital ratio numerator by
allocating capital as follows:
(1) Credit risk allocation. Allocate tier 1
and tier 2 capital equal to 8.0 percent of
adjusted risk-weighted assets (as calculated
in paragraph (a)(1) of this section).8
(2) Market-risk allocation. Allocate tier 1,
tier 2, and tier 3 capital equal to the mea­
sure for market risk as calculated in para­
graph (a)(2) of this section. The sum of tier
2 and tier 3 capital allocated for market risk
must not exceed 250 percent of tier 1 capi­
tal allocated for market risk. (This require­
ment means that tier 1 capital allocated in

7
Foreign-exchange positions outside the trading account
and all over-the-counter derivative positions, whether or not
in the trading account, must be included in adjusted risk8 An institution may not allocate tier 3 capital to support
weighted assets as determined in appendix A o f this part.
credit risk (as calculated under appendix A of this part).

Capital Adequacy (BHCs: Market-Risk Measure)
this paragraph (b)(2) must equal at least
28.6 percent of the measure for market
risk.)
(3) Restrictions.
(i) The sum of tier 2 capital (both allo­
cated and excess) and tier 3 capital (allo­
cated in paragraph (b)(2) of this section)
may not exceed 100 percent of tier 1
capital (both allocated and excess).9
(ii) Term subordinated debt (and
intermediate-term preferred stock and re­
lated surplus) included in tier 2 capital
(both allocated and excess) may not ex­
ceed 50 percent of tier 1 capital (both
allocated and excess).
(4) Numerator calculation. Add tier 1 capi­
tal (both allocated and excess), tier 2 capital
(both allocated and excess), and tier 3 capi­
tal (allocated under paragraph (b)(2) of this
section). The resulting sum is the organiza­
tion’s risk-based capital ratio numerator.

SECTION 4— Internal Models
(a) General. For risk-based capital purposes, a
bank holding company subject to this appen­
dix must use its internal model to measure its
daily VAR, in accordance with the require­
ments of this section.10 The Federal Reserve
may permit an organization to use alternative
techniques to measure the market risk of de
minimis exposures so long as the techniques
adequately measure associated market risk.
(b) Qualitative requirements. A bank holding
company subject to this appendix must have a
risk-management system that meets the fol­
lowing minimum qualitative requirements:
’ Excess tier 1 capital means tier 1 capital that has not
been allocated in paragraphs (b)(1) and (b)(2) of this sec­
tion. Excess tier 2 capital means tier 2 capital that has not
been allocated in paragraph (b)(1) and (b)(2) o f this sec­
tion, subject to the restrictions in paragraph (b)(3) of this
section.
10 An organization’s internal model may use any gener­
ally accepted measurement techniques, such as variancecovariance models, historical simulations, or Monte Carlo
simulations. However, the level o f sophistication and accu­
racy of an organization’s internal model must be commen­
surate with the nature and size o f its covered positions. An
organization that modifies its existing modeling procedures
to comply with the requirements of this appendix for riskbased capital purposes should, nonetheless, continue to use
the internal model it considers most appropriate in evaluat­
ing risks for other purposes.

Regulation Y, Appendix E
(1) The organization must have a riskcontrol unit that reports directly to senior
m anagem ent and is independent from
business-trading units.
(2) The organization’s internal riskmeasurement model must be integrated into
the daily management process.
(3) The organization’s policies and proce­
dures must identify, and the organization
must conduct, appropriate stress tests and
backtests.1 The organization’s policies and
1
procedures must identify the procedures to
follow in response to the results of such
tests.
(4) The organization must conduct indepen­
dent reviews of its risk-measurement and
risk-management systems at least annually.
(c) Market-risk factors. The organization’s in­
ternal model must use risk factors sufficient to
measure the market risk inherent in all cov­
ered positions. The risk factors must address
interest-rate risk,12 equity-price risk, foreignexchange-rate risk, and commodity-price risk.
(d) Quantitative requirements. For regulatory
capital purposes, VAR measures must meet
the following quantitative requirements:
(1) The VAR measures must be calculated
on a daily basis using a 99 percent, one­
tailed confidence level with a price shock
equivalent to a ten-business-day movement
in rates and prices. In order to calculate
VAR measures based on a ten-day price
shock, the organization may either calculate
ten-day figures directly or convert VAR fig­
ures based on holding periods other than
ten days to the equivalent of a ten-day
holding period (for instance, by multiplying
a one-day VAR measure by the square root
of ten).
(2) The VAR measures must be based on
an historical observation period (or effective
observation period for an organization using
11 Stress tests provide information about the impact of
adverse market events on a bank’s covered positions.
Backtests provide information about the accuracy of an
internal model by comparing an organization’s daily VAR
measures to its corresponding daily trading profits and
losses.
12 For material exposures in the major currencies and
markets, modeling techniques must capture spread risk and
must incorporate enough segments of the yield curve— at
least six— to capture differences in volatility and less than
perfect correlation of rates along the yield curve.

89

Regulation Y, Appendix E

Capital Adequacy (BHCs: Market-Risk Measure)

a weighting scheme or other sim ilar
method) of at least one year. The organiza­
tion must update data sets at least once
every three months or more frequently as
market conditions warrant.
(3) The VAR measures must include the
risks arising from the nonlinear price char­
acteristics of options positions and the sen­
sitivity of the market value of the positions
to changes in the volatility of the underly­
ing rates or pries. An organization with a
large or complex options portfolio must
measure the volatility of options positions
by different maturities.
(4) The VAR measures may incorporate
empirical correlations within and across risk
categories, provided that the organization’s
process for measuring correlations is sound.
In the event that the VAR measures do not
incorporate empirical correlations across
risk categories, then the organization must
add the separate VAR measures for the four
major risk categories to determine its aggre­
gate VAR measure.
(e) Backtesting.
(1) Beginning one year after a bank hold­
ing company starts to comply with this ap­
pendix, it must conduct backtesting by
comparing each of its most recent 250 busi­
ness days’ actual net trading profit or loss13
with the corresponding daily VAR measures
generated for internal risk-measurement pur­
poses and calibrated to a one-day holding
period and a 99th percentile, one-tailed con­
fidence level.
(2) Once each quarter, the organization
must identify the number of exceptions, that
is, the number of business days for which
the magnitude of the actual daily net trad­
ing loss, if any, exceeds the corresponding
daily VAR measure.
(3) A bank holding company must use the
multiplication factor indicated in table 1 of
this appendix in determining its capital
charge for m arket risk under section
3(a)(2)(i)(B) of this appendix until it ob­
tains the next quarter’s backtesting results,
13 Actual net trading profits and losses typically include
such things as realized and unrealized gains and losses on
portfolio positions as well as fee income and commissions
associated with trading activities.
90

unless the Federal Reserve determines that
a different adjustment or other action is
appropriate.

SECTION 5— Specific Risk
(a) Specific-risk add-on. For purposes of sec­
tion 3(a)(2)(ii) of this appendix, a bank hold­
ing company’s specific-risk add-on equals the
standard specific-risk capital charge calculated
under paragraph (c) of this section. If, how­
ever, an organization can demonstrate to the
Federal Reserve that its internal model mea­
sures the specific risk of covered debt and/or
equity positions and that those measures are
included in the VAR-based capital charge in
section 3(a)(2)(i) of this appendix, then it may
reduce or eliminate its specific-risk add-on un­
der this section. The determination as to
whether a model incorporates specific risk
must be made separately for covered debt and
equity positions.
(1) If a model includes the specific risk of
covered debt positions but not covered eq­
uity positions (or vice versa), then the orga­
nization can reduce its specific-risk charge
for the included positions under paragraph
(b) of this section. The specific-risk charge
for the positions not included equals the
standard specific-risk capital charge under
paragraph (c) of this section.
(2) If a model addresses the specific risk of
both covered debt and equity positions, then
the organization can reduce its specific-risk
charge for both covered debt and equity
positions under paragraph (b) of this sec­
tion. In this case, the comparison described
in paragraph (b) of this section must be
based on the total VAR-based figure for the
specific risk of debt and equity positions,
taking account of any correlations that are
built into the model.
(b) VAR-based specific-risk capital charge. In
all cases where a bank holding company mea­
sures specific risk in its internal model, the
total capital charge for specific risk (i.e., the
VAR-based specific-risk capital charge plus
the specific-risk add-on) must equal at least
50 percent of the standard specific-risk capital
charge (this amount is the minimum specificrisk charge).

Capital Adequacy (BHCs: Market-Risk Measure)
(1) If the portion of an organization’s VAR
measure that is attributable to specific risk
(multiplied by the organization’s multiplica­
tion factor if required in section 3(a)(2) of
this appendix) is greaterthan or equal to
the minimum specific-risk charge, then the
organization has no specific-risk add-on and
its capital charge for specific risk is the
portion included in the VAR measure.
(2) If the portion of an organization’s VAR
measure that is attributable to specific risk
(multiplied by the organization’s multiplica­
tion factor if required in section 3(a)(2) of
this appendix) is less than theminimum
specific-risk charge, then the organization’s
specific-risk add-on is the difference be­
tween the minimum specific-risk charge and
the specific-risk portion of the VAR mea­
sure (multiplied by the multiplication factor
if required in section 3(a)(2) of this
appendix).
(c) Standard specific-risk capital charge. The
standard specific-risk capital charge equals the
sum of the components for covered debt and
equity positions as follows:
(1) Covered debt positions.
(i) For purposes of this section 5, cov­
ered debt positions means fixed-rate or
floating-rate debt instruments located in
the trading account or instruments located
in the trading account with values that
react primarily to changes in interest
rates, including certain nonconvertible
preferred stock, convertible bonds, and
instruments subject to repurchase and
lending agreements. Also included are de­
rivatives (including written and purchased
options) for which the underlying instru­
ment is a covered debt instrument that is
subject to a non-zero specific risk capital
charge.
(A) For covered debt positions that are
derivatives, an organization must riskweight (as described in paragraph
(c)(l)(iii) of this section) the market
value of the effective notional amount
of the underlying debt instrument or
index portfolio. Swaps must be in­
cluded as the notional position in the
underlying debt instrument or index
portfolio, with a receiving side treated

Regulation Y, Appendix E
as a long position and a paying side
treated as a short position.
(B) For covered debt positions that are
options, whether long or short, an or­
ganization must risk-weight (as de­
scribed in paragraph (c)(l)(iii) of this
section) the market value of the effec­
tive notional amount of the underlying
debt instrument or index multiplied by
the option’s delta.
(ii) An organization may net long and
short covered debt positions (including
derivatives) in identical debt issues or in­
dices.
(iii) An organization must multiply the
absolute value of the current market
value of each net long or short covered
debt position by the appropriate specificrisk weighting factor indicated in table 2
of this appendix. The specific-risk capi­
tal charge component for covered debt
positions is the sum of the weighted
values.
(A) The government category includes
all debt instruments of central govern­
ments of OECD-based countries14 in­
cluding bonds, Treasury bills, and
other short-term instruments, as well as
local currency instruments of nonOECD central governments to the ex­
tent the organization has liabilities
booked in that currency.
(B) The qualifying category includes
debt instruments of U.S. governmentsponsored agencies, general obligation
debt instruments issued by states and
other political subdivisions of OECDbased countries, multilateral develop­
ment banks, and debt instruments is­
sued by U.S. depository institutions or
OECD banks that do not qualify as
capital of the issuing institution.15 This
category also includes other debt in­
struments, including corporate debt and
revenue instruments issued by states
14 Organization for Economic Cooperation and Develop­
ment (OECD)-based countries is defined in appendix A of
this part.
15 U.S. government-sponsored agencies, multilateral de­
velopment banks, and OECD banks are defined in appendix
A o f this part.

91

Regulation Y, Appendix E
and other political subdivisions of
OECD countries, that are—
(1) rated investment-grade by at
least two nationally recognized
credit rating services;
(2) rated investment grade by one
nationally recognized credit rating
agency and not rated less than in­
vestment grade by any other credit
rating agency; or
(5) unrated, but deemed to be of
comparable investment quality by
the reporting organization and the is­
suer has instruments listed on a rec­
ognized stock exchange, subject to
review by the Federal Reserve.
(C) The other category includes debt
instruments that are not included in the
government or qualifying categories.
(2) Covered equity positions.
(i) For purposes of this section 5, cov­
ered equity positions means equity instru­
ments located in the trading account and
instruments located in the trading account
with values that react prim arily to
changes in equity prices, including voting
or nonvoting common stock, certain con­
vertible bonds, and commitments to buy
or sell equity instruments. Also included
are derivatives (including written or pur­
chased options) for which the underlying
is a covered equity position.
(A) For covered equity positions that
are derivatives, an organization must
risk-weight (as described in paragraph
(c)(2)(iii) of this section) the market
value of the effective notional amount
of the underlying equity instrument or
equity portfolio. Swaps must be in­
cluded as the notional position in the
underlying equity instrument or index
portfolio, with a receiving side treated
as a long position and a paying side
treated as a short position.
(B) For covered equity positions that
are options, whether long or short, an
organization must risk-weight (as de­
scribed in paragraph (c)(2)(iii) of this
section) the market value of the effec­
tive notional amount of the underlying
equity instrument or index multiplied
by the option’s delta.

Capital Adequacy (BHCs: Market-Risk Measure)
(ii) An organization may net long and
short covered equity positions (including
derivatives) in identical equity issues or
equity indices in the same market.16
(iii) (A) An organization must multiply
the absolute value of the current mar­
ket value of each net long or short
covered equity position by a riskweighting factor of 8.0 percent, or by
4.0 percent if the equity is held in a
portfolio that is both liquid and well
diversified.17 For covered equity posi­
tions that are index contracts compris­
ing a well-diversified portfolio of eq­
uity instruments, the net long or short
position is to be multiplied by a riskweighting factor of 2.0 percent.
(B) For covered equity positions from
the following futures-related arbitrage
strategies, an organization may apply a
2.0 percent risk-weighting factor to one
side (long or short) of each equity po­
sition with the opposite side exempt
from charge, subject to review by the
Federal Reserve:
(7) long and short positions in ex­
actly the same index at different
dates or in different market centers;
or
(2) long and short positions in index
contracts at the same date in differ­
ent but similar indices.
(C) For futures contracts on broadly
based indices that are matched by off­
setting positions in a basket of stocks
comprising the index, an organization
may apply a 2.0 percent risk-weighting
factor to the futures and stock basket
positions (long and short), provided
16 An organization may also net positions in depository
receipts against an opposite position in the underlying eq­
uity or identical equity in different markets, provided that
the organization includes the costs of conversion.
17 A portfolio is liquid and well-diversified if (1) it is
characterized by a limited sensitivity to price changes of
any single equity issue or closely related group of equity
issues held in the portfolio; (2) the volatility of the portfo­
lio’s value is not dominated by the volatility of any indi­
vidual equity issue or by equity issues from any single
industry or economic sector; (3) it contains a large number
of individual equity positions, with no single position rep­
resenting a substantial portion of the portfolio’s total market
value; and (4) it consists mainly of issues traded on orga­
nized exchanges or in well-established over-the-counter
markets.

Regulation Y, Appendix E

Capital Adequacy (BHCs: Market-Risk Measure)
that such trades are deliberately en­
tered into and separately controlled,
and that the basket of stocks comprises
at least 90 percent of the capitalization
of the index.
(iv) The specific-risk capital charge com­
ponent for covered equity positions is the
sum of the weighted values.

Table 2— Specific-Risk Weighting
Factors for Covered Debt Positions

Category
Government
Qualifying

Table 1— Multiplication Factor Based on
Results of Backtesting
Other
Number o f exceptions
4 or fewer
5
6
7
8
9
10 or more

Remaining
maturity
(contractual)

Weighting
factor
(in percent)

N/A
6 months or
less
over 6 months
to 24 months
over 24 months
N/A

0.00
0.25
1.00
1.60
8.00

Multiplication factor
3.00
3.40
3.50
3.65
3.75
3.85
4.00

93