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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No.
10333 1
January 16, 1990
CAPITAL ADEQUACY
Proposed Transition Capital Guidelines
and Guidelines for New Leverage Constraint
Comments Requested by March 9
To All State Member Banks and Bank Holding Companies
in the Second Federal Reserve District, and Others Concerned:
Our Circular No. 10320, dated December 1, 1989, contained an announcement by the Board
of Governors of the Federal Reserve System of its intention to seek public comment on proposed
transition capital standards for State member banks and bank holding companies through the end
of 1990; the Board’s statement also set forth preliminary views on the appropriate leverage standard
in conjunction with the risk-based capital framework after year-end 1990.
The Board is now formally seeking public comment on these matters. In that connection, the
Board has issued the following statement:
The Federal Reserve Board has requested public comment on proposed transition capital standards
for state member banks and bank holding companies through the end of 1990. The proposed guidelines
also set forth the Board’s preliminary views on the appropriate leverage standard to be applied to banking
organizations in conjunction with the risk-based capital framework after year-end 1990.
Comments should be received by the Board on this matter no later than March 9, 1990.
On November 22, 1989, the Board announced its proposed transition capital standards, and indi
cated that it would seek public comment on the standards by year-end.
Printed on the following pages is an excerpt from the Federal Register of January 5, 1990, con
taining the Board’s official notice. Comments thereon should be submitted by March 9 and may be
sent to the Board, as indicated in the notice, or to our Bank Analysis Department.
E.
G e r a l d C o r r ig a n ,
President.
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulation H, Regulation Y; Docket No. R -
0683]
Capital; Capital Adequacy Guidelines
December 29,1989.
Board of Governors of the
Federal Reserve System.
ACTION: Notice of proposed guidelines.
agency:
When the Board of
Governors of the Federal Reserve
System (“Board”) issued final risk-based
capital guidelines on January 19,1989, it
indicated that the existing 5.5 percent
and 6 percent primary and total capital
to total assets (leverage) ratios would
stay in effect at least until the end of
1990, when the interim minimum riskbased capital ratios take effect. The
Board also indicated that it would
consider proposing a revised leverage
constraint that, if adopted, would
replace the existing leverage guidelines.
It was contemplated that the definition
of capital for the new leverage
guidelines would be consistent with the
risk-based capital definition.
The Board is now proposing for public
comment transition capital guidelines to
be applied through the end of 1990, as
well as guidelines for a new leverage
constraint. The Board believes that
these steps, taken together, should assist
state-chartered member banks and bank
holding companies (collectively
“banking organizations”) in formulating
their capital planning process and in
strengthening their capital base.
Under the proposal, a banking
organization may choose up to the end
of 1990 to conform to either the existing
minimum capital adequacy ratios (5.5
percent primary capital and 8 percent
total capital to total assets) or to the 7.25
percent year-end 1990 risk-based capital
standard. In addition, the Board is
proposing to establish and apply during
this period a minimum ratio of 3 percent
Tier 1 capital to total assets (leverage
ratio). For leverage purposes, Tier 1
would be defined consistent with the
year-end 1992 risk-based capital
guidelines.
The Board is also proposing to drop
the existing 5.5 percent primary and 6.0
percent total capital to total assets
leverage ratios after year-end 1990. The
3 percent Tier 1 leverage ratio would
then constitute the minimum capital to
total assets standard for banking
organizations.
Under the Board’s proposal, these
standards would be minimum
requirements. Any institution operating
at or neai these levels would be
sum m ary:
expected to have well-diversified risk,
including no undue interest rate risk
exposure, excellent asset quality, high
liquidity, good earnings and, in general,
would have to be considered a strong
banking organization, rated composite 1
under the appropriate bank or bank
holding company rating system. Any
institution experiencing or anticipating
significant growth would be expected to
maintain capital well above the
minimum levels as has been the case in
the past. For example, most such
banking organizations have generally
operated at capital levels ranging from
100 to 200 basis points above the stated
minimums. Higher capital ratios could
be required if warranted by the
particular circumstances or risk profiles
of individual banking organizations. In
all cases, banking institutions should
hold capital commensurate with the
level and nature of all of the risks,
including the volume and severity of
problem loans, to which they are
exposed.
Whenever appropriate, in particular
when an organization is undertaking
expansion, seeking to engage in new
activities or otherwise facing unusual or
abnormal risks, the Board will continue
to consider, on a case-by-case basis, the
level of an organization's tangible Tier 1
leverage ratio (after deducting all
intangibles) in making an overall
assessment of capital. This is consistent
with the Federal Reserve’s risk-based
capital guidelines and long-standing
Board policy and practice under the
current leverage guidelines.
Organizations experiencing growth,
whether internally or by acquisition, are
expected to maintain strong capital
positions substantially above minimum
supervisory levels, without significant
reliance on intangible assets.
d a t e : Comments should be submitted
on or before March 9,1990.
a d d r e s s : Comments, which should refer
to Docket No. R-0883, may be mailed to
the Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551, to the attention of Mr.
William W. Wiles, Secretary; or
delivered to room B-2223, Eccles
Building, between 8:45 a.m. and 5:15 p.m.
Comments may be inspected in room B 1122 between 9:00 a.m. and 5:00 p.m.,
except as provided in § 261.8 of the
Board’s Rules Regarding Availability of
Information, 12 CFR 201.8.
FOR FURTHER INFORMATION CONTACT:
Richard Spillenkothen, Deputy
Associate Director (202/452-2594), Roger
Cole, Assistant Director (202/452-2618),
Rhoger H. Pugh, Manager (202/7285883), or Norah Barger, Senior Financial
2
Analyst (202/452-2402), Division of
Banking Supervision and Regulation,
Board of Governors; Michael J.
O’Rourke, Senior Attorney (202/4523288) or Mark J. Tenhundfeld, Attorney
(202/452-3012), Legal Division, Board of
Governors; or Donald E. Schmid,
Manager (212/720-6611) or Manuel J.
Schnaidman, Senior Financial Analyst
(212/720-6710), Federal Reserve Bank of
New York. For the hearing impaired
Telecommunication Device for the
Deaf (TDD), Eamestine Hill or Dorothea
Thompson (202/452-3544).
only,
SUPPLEMENTARY INFORMATION:
I. Background
The Federal Reserve’s risk-based
capital guidelines adopted January 27,
1989 (54 FR 4186) set forth an interim
target risk-based ratio effective year-end
1990 and a final risk-based standard
effective year-end 1992. In issuing its
risk-based capital guidelines, the Board
indicated that the existing 5.5 and 6.0
percent primary and total capital to total
assets (leverage) ratios would stay in
effect, at least until the end of 1990. A
principal reason for this was to retain a
capital constraint until the interim
minimum risk-based capital ratios take
effect.
The Board also indicated that even
after minimum risk-based capital ratios
become effective, retention of an overall
leverage constraint might be deemed
appropriate because the risk-based
capital framework does not incorporate
a comprehensive measure of interest
rate risk. A minimum ratio of capital to
total assets would help to address this
potential problem by imposing an
overall limitation on the extent to which
a banking organization could leverage
its equity capital base.
In addition to interest rate risk, capital
ratios may also not take full or explicit
account of certain other risk factors that
can affect a banking organization's risk
profile. These factors include funding
and market risks; investment or loan
portfolio concentrations; asset quality;
and the adequacy of internal policies,
systems, and controls. These factors,
which must be taken into account in
determining the overall risk profile and
capital adequacy of a banking
organization, also suggest the need to
generally encourage banking
organizations to qperate well above
minimum supervisory ratios.
In issuing its risk-based capital
guidelines, the Board indicated that
retention of the existing leverage ratios
would provide an element of stability
during the risk-based capital transition
period. The Board further stated that if
retention of an overall leverage
standard were deemed appropriate in
the long-run, the Federal Reserve would
consider replacing the existing primary
and total capital to total assets leverage
ratios with a standard that incorporates
a definition of capital that is consistent
with the definitions contained in the
risk-based capital framework. At the
time, the Board indicated that a leverage
standard based upon a revised
definition of capital, and used in
conjunction with a strong risk-based
capital requirement, could be set at a
level different from the existing leverage
standard it would replace.
The Board is now proposing for public
comment transition capital guidelines to
be applied through the end of 1990, as
well as guidelines for a new leverage
constraint which the Board believes
should replace the existing leverage
guidelines at the end of 1990. Taken
together, these steps should assist
banking organizations in their capital
planning process and, where necessary,
their efforts to raise additional capital
and strengthen their capital base.
II. Proposed Transition and Leverage
Standards
A. Transition Standards
The Board is proposing that during the
first phase of the risk-based capital
transition period, which ends at yearend 1990, a banking organization may
conform to either the existing minimum
capital adequacy ratios of 5.5 percent
primary capital and 0 percent total
capital to total assets, or to the 7.25
percent year-end 1990 minimum riskbased capital standard. It should be
emphasized that banking organizations
are not required to meet the interim riskbased standard prior to its year-end
1990 effective date. Rather,
organizations have the option of
complying with the risk-based standard
during 1990 in lieu of meeting the
existing primary and total capital
adequacy guidelines. Regardless of
which of these options a banking
organization chooses, during this period
banking organizations would also have
to meet the new proposed leverage
standard set forth below.
B. New Leverage Standard
The Board is also proposing to
establish and apply during 1990 and
thereafter a minimum Tier 1 capital to
total assets (leverage) ratio of 3 percent.
For this purpose, the definition of Tier 1
capital for year-end 1992, as set forth in
the risk-based capital guidelines, will be
used.1 Total assets would be defined for
1 At the end of 1992, Tier 1 capital for state
member banks includes common equity, minority
this purpose as total consolidated assets
(defined net of the allowance for loan
and lease losses), less goodwill and any
other intangible assets or investments in
subsidiaries that the primary regulator
determines should be deducted from
Tier 1 capital on a case-by-case basis.
Finally, the Board is also proposing
that at the end of 1990 the existing
leverage ratios, that is, the 5.5 percent
and 6.0 percent primary and total capital
to total assets leverage ratios, would be
dropped. The 3 percent Tier 1 capital to
total assets ratio would then constitute
the leverage standard for banking
organizations, and would be used
thereafter in conjunction with the riskbased ratio in determining the overall
capital adequacy of banking
organizations.
The proposed Tier 1 leverage ratio
differs in a number of respects from the
current primary and total capital ratios
as defined under the Federal Reserve’s
existing leverage guidelines. For
example, primary capital includes the
allowance for loan and lease losses
(without limitation), and total capital
includes limiterd amounts of
subordinated d ebt Neither of these
elements, both of which are deemed to
be Tier 2 components under the riskbased capital framework, is included in
the definition of capital for the newly
proposed Tier 1 leverage ratio.
Moreover, the current primary and total
capital leverage standards do not
contain an absolute minimum for the
level of permanent shareholders' equity
in relation to assets— a minimum that is
established by the proposed Tier 1
leverage standard. Thus, the proposed
Tier 1 leverage ratio reflects the amount
of core equity that is available to
support unanticipated losses— a key
prudential measure for determining the
health of individual banking
organizations. In ad d ition to th ese
benefits, adoption of Tier 1 for the
interests in equity accounts of consolidated
subsidiaries, and qualifying noncumulative
perpetual preferred stock, less goodwill. It excludes
any other intangible assets and investments in
subsidiaries that the Federal Reserve determines
should be deducted from capital for supervisory
purposes on a case-by-case basis. For bank holding
companies. Tier 1 capital at the end of 1992 includes
common equity, minority interests in equity
accounts of consolidated subsidiaries, and
qualifying cumulative and noncumulative perpetual
preferred stock. (Perpetual preferred stock is limited
to 25 percent of Tier 1 capital.) In addition. Tier 1
excludes goodwill as well as any other intangibles
and investments in subsidiaries that the primary
regulator determines should be deducted from
capital on a case-by-case basis. (This summary of
Tier 1 capital definitions is purely illustrative in
nature. Comprehensive Tier 1 capital definitions are
set forth in Appendix A to part 206 of the Board’s
Regulation H for state member banks and in
Appendix A to part 225 of the Board’s Regulation Y
for bank holding companies.)
3
purpose of comparing capital to total
assets will have the advantage of
bringing the definition of capital for
leverage purposes into line with the
definition of capital for risk-based
capital purposes.
The Board emphasizes that in all
cases, the standards set forth above are
supervisory minimums. An institution
operating at or near these levels is
expected to have well-diversified risk,
including no undue interest rate risk
exposure; excellent asset quality; high
liquidity; good earnings; and in general
be considered a strong banking
organization, rated composite 1 under
the CAMEL rating system for banks or
the BOPEC rating system for bank
holding companies. Institutions with
high or inordinate levels of risk are
expected to operate well above
minimum capital standards. As has been
the case in the past, institutions
experiencing or anticipating significant
growth are also expected to maintain
capital well above the minimum levels.
For example, most such banking
organizations generally have operated
at capital levels ranging from 100 to 200
basis points above the stated minimums.
Higher capital ratios could be required if
warranted by the particular
circumstances or risk profiles of
individual banking organizations. In all
cases, banking institutions should hold
capital commensurate with the level and
nature of all of the risks, including the
volume and severity of problem loans, to
which they are exposed.
Whenever appropriate, in particular
when an organization is undertaking
expansion, seeking to engage in new
activities or otherwise facing unusual or
abnormal risks, the Board will continue
to cojisider, on a case-by-case basis, the
level of an organization’s tangible Tier 1
leverage ratio (after deducting all
intangibles) in making an overall
assessment of capital. This is consistent
with the Federal Reserve’s risk-based
capital guidelines and long-standing
Board policy and practice under the
current leverage guidelines.
Organizations experiencing growth,
whether internally or by acquisition, are
expected to maintain strong capital
positions substantially above minimum
supervisory levels, without significant
reliance on intangible assets.
III. Regulatory Flexibility Act Analysis
The Federal Reserve Board does not
believe that adoption of this proposal
would have a significant economic
impact on a substantial number of small
business entities (in this case, small
banking organizations), in accord with
the spirit and purposes of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.J. In
addition, consistent with current policy,
these guidelines generally will not apply
to bank holding companies with
consolidated assets of less than $150
million. Moreover, rather than requiring
all banking organizations to raise
additional capital, the guidelines are
directed at institutions whose capital
positions are less than fully adequate in
relation to their risk and leverage
profiles.
List of Subjects
12 CFR Part 208
Banks, Banking, Capital adequacy.
Federal Reserve System, Reporting and
recordkeeping requirements. State
member banks.
12 CFR Part 225
Banks, Banking, Capital adequacy,
Federal Reserve System, Holding
companies, Reporting and recordkeeping
requirements. State member banks.
For the reasons set forth in this notice,
and pursuant to the Board’s authority
under section 5(b) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1844(b)),
and section 910 of the International
Lending Supervision Act of 1983 (12
U.S.C. 3909), the Board proposes to
amend 12 CFR parts 208 and 225 as
follows:
PART 208— MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
1. The authority citation for part 208
continues to read as follows:
Authority: Sections 9 , 11(a), 11(c), 19, 21, 25,
and 25(a) of the Federal Reserve Act, as
amended (12 U.S.C. 321-338, 248(a), 248(c),
461, 481-486,601, and 611, respectively):
sections 4 and 13(j) of the Federal Deposit
Insurance Act, as amended (12 U.S.C. 1814
and 1923(j), respectively); section 7(a) of the
International Lending Supervision Act of 1978
(12 U.S.C. 3105); sections 907-910 of the
International Banking Act of 1983 (12 U.S.C.
3906-3909); sections 2 , 12(b), 12(g), 12(i),
15B(c){5), 1 7 ,17A, and 23 of the Securities
Exchange Act of 1934 (15 U .S.C 78b, 787(b),
787(g), 787(i), 787—4(c)(5), 78q, 78q-l, and 78w,
respectively): and section 5155 of the Revised
Statutes (12 U.S.C. 36) as amended by the
McFadden Act of 1927.
2. Section 2C8.13 is revised to read as
follows:
§ 208.13
Capital adequacy.
The standards and guidelines by
which the capital adequacy of state
member banks will be evaluated by the
Board are set forth in Appendix A to
part 208 for risk-based capital purposes,
and, with respect to the ratios relating
capital to total assets, in Appendix B to
part 208 and in Appendix B to the
Board’s Regulation Y, 12 CFR part 225.
Appendix A—(Amended]
Overview” of
3. Footnote 1 to
Appendix A to part 208 is revised to
read as follows:
1 Supervisory ratios that relate capital to
total assets for state member banks are
outlined in Appendix B of this part and in
Appendix B to part 225 of the Federal
Reserve’s Regulation Y, 12 CFR part 225.
4. The last sentence of the first
paragraph to 'TV.
" is removed; a
new paragraph is added immediately
following the first paragraph; the
existing second paragraph now becomes
the third paragraph and remains
unchanged. The new second paragraph
read s as follows:
this measure is to place a constraint on the
maximum degree to which a state member
bank can leverage its equity capital base.
The guidelines apply to all state member
banks on a consolidated basis and are to be
used in the examination and supervisory
process as well as in the analysis of
applications acted upon by the Federal
Reserve. The Board will review the guidelines
from time to time and will consider the need
for possible adjustments in light of any
significant changes in the economy, financial
markets, and banking practices.
Minimum Supervisory II. The Tier 1 Leverage Ratio
Ratios and Standards
Institutions with high or inordinate levels
of risk are expected to operate well above
minimum capital standards. Banks
experiencing or anticipating significant
growth are also expected to maintain capital
well above the minimum levels. For example,
most such institutions generally have
operated at capital levels ranging from 100 to
200 basis points above the stated minimums.
Higher capital ratios could be required if
warranted by the particular circumstances or
risk profiles of individual banks. In all cases,
banks should hold capital commensurate
with the level and nature of all of the risks,
including the volume and severity of problem
loans, to which they are exposed.
5. A second paragraph is added to
"IV. B. Transition Arrangements” of
Appendix A to part 208 to read as
follows:
Through year-end 1990 banks have the
option of complying with the minimum
percent year-end 1990 risk-based capital
standard in lieu of the minimum 5.5 percent
primary and 6 percent total capital to total
assets capital ratios set forth in Appendix B
to part 225 of the Federal Reserve's
Regulation Y. In addition, as more fully set
forth in Appendix B to this part, banks are
expected to maintain a minimum ratio of 3
percent Tier 1 capital to total assets during
this transition period.
725
6. Appendix B is added after
"Attachment VI.—Summary” to part 208
to read as set forth below.
Appendix B to Part 286—Capital
Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
L Overview
The Board of Governors of the Federal
Reserve System has adopted a minimum ratio
of Tier 1 capital to total assets to assist in the
assessment of the capital adequacy of state
member banks.1
21 The principal objective of
1 Supervisory risk-based capital ratio* that relate
capital to weighted risk assets for state member
banks are outlined in Appendix A to this part.
4
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, including no undue interest rate risk
exposure; excellent asset quality; high
liquidity; good earnings; and in general be
considered a strong banking organization,
rated composite 1 under the CAMEL rating
system of banks. Institutions not meeting
these characteristics, as well as institutions
with supervisory, financial, or operations
weaknesses, are expected to operate well
above minimum capital standards.
Institutions experiencing or anticipating
significant growth also are expected to
maintain capital well above the minimum
levels. For example, most such banks
generally have operated at capital levels
ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios
could be required if warranted by the
particular circumstances or risk profiles of
individual banks. In all cases, banking
institutions should hold capital
commensurate with the level and nature of
all of the risks, including the volume and
severity of problem loans, to which they are
exposed.
A bank's Tier 1 leverage ratio is calculated
by dividing its Tier 1 capital (the numerator
of the ratio) by its average total consolidated
assets (the denominator of the ratio). The
ratio will also be calculated using period-end
assets whenever necessary an a case-by-case
basis. For the purpose of this leverage ratio,
the definition of Tier 1 capital for year-end
1992 as set forth in the risk-based capital
guidelines contained in Appendix A of this
Part will be used.* Average total
consolidated assets are defined as the
quarterly average total assets (defined net of
the allowance for loan and lease losses)
reported on the bank's Reports of Condition
and Income (“Call Report”), less goodwill
and any other intangible assets and
investments in subsidiaries that the Federal
Reserve determines should be deducted from
Tier 1 capital on a case-by-case basis.*
* At the end of 1992, Tier 1 capital for state
member banks inchides common equity, minority
interests in equity accounts of consolidated
subsidiaries, and qualifying noncumulative
perpetual preferred stock, less goodwill. In general,
no other deductions from capital are madb
automatically. However, the Federal Reserve may,
on a case-by-case basis, exclude certain other
intangible* and investments in subsidiaries as
appropriate.
* Deductions from Tier 1 capital and other
adjustments are discussed more fully in section ILB.
of Appendix A to this p art
Whenever appropriate, in particular when
a bank is undertaking expansion, seeking to
engage in new activities or otherwise facing
unusual or abnormal risks, the Board will
continue to consider, on a case-by-case basis,
the level of an Individual bank’s tangible Tier
1 leverage ratio (after deducting all
intangibles) in making an overall assessment
of capital. This is consistent with the Federal
Reserve's risk-based capital guidelines and
long-standing Board policy and practice with
regard to leverage guidelines. Banks
experiencing growth, whether internally or by
acquisition, are expected to maintain strong
capital positions substantially above
minimum supervisory levels, without
significant reliance on intangible assets.
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
1. The authority citation for part 225
continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818,
1843(c)(8), 1844(b), 3106, 3108, 3907, 3909.
Appendix A— [Amended]
Overview”
2. Footnote 1 to
of
Appendix A to part 225 is revised to
read as follows:
* Supervisory ratios that relate capital to
total assets for bank holding companies are
outlined in Appendices B and D of this part
3. The last sentence of the First
paragraph to
” is removed: a
new paragraph is added immediately
following the first paragraph: the
existing second paragraph now becomes
the third paragraph and remains
unchanged. The new second paragraph
reads as follows:
"IV. Minimum Supervisory
Ratios and Standards
Institutions with high or inordinate levels
of risk are expected to operate well above
minimum capital standards. Banking
organizations experiencing or anticipating
significant growth are also expected to
maintain capital well above the minimum
levels. For example, most such organizations
generally have operated at capital levels
ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios
could be required if warranted by the
particular circumstances or risk profiles of
individual banking organizations. In all cases,
organizations should hold capital
commensurate with the level and nature of
all of the risks, including the volume and
severity of problem loans, to which they are
exposed.
4. A second paragraph is added to
“IV. B. Transition Arrangements” of
Appendix A to part 225 to read as
follows:
Through year-end 1990 banking
organizations have the option of complying
with the minimum 7.25 percent year-end 1990
risk-based capital standard in lieu of the
minimum 5.5 percent primary and 6 percent
total capital to total assets ratios set forth in
Appendix B of this Part. In addition, as more
fully set forth in Appendix D to this Part
banking organizations are expected to
maintain a minimum ratio of 3 percent Tier 1
capital to total assets during this transition
period.
Appendix B— [Amended]
5. Three new sentences are added to
the end of the first paragraph of
Appendix B to part 225 to read as
follow s:
* * * In this regard, the Board has
determined that during the transition period
through year-end 1990 for implementation of
the risk-based capital guidelines contained in
Appendix A to this part and in Appendix A
to part 208, a banking organization may
choose to fulfill the requirements of the
guidelines relating capital to total assets
contained in this Appendix in one of two
manners. Until year-end 1990, a banking
organization may choose to conform to either
the 5.5 percent and 6 percent minimum
primary and total capital standards set forth
in this Appendix or the 7.25 percent year-end
1990 minimum risk-based 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.
6. Appendix D is added after
Appendix C to part 225 to read as set
forth below.
Appendix D to Part 225—Capital
Adequacy Guidelines for Bank Holding
Companies: Tier 1 Leverage Measure
/.
Overview
The Board of Governors of the Federal
Reserve System has adopted a minimum ratio
of Tier 1 capital to total assets to assist in the
assessment of the capital adequacy of bank
holding companies (“banking
organizations”).1 The principal objective of
this measure is to place a constraint on the
maximum degree to which a banking
organization can leverage its equity capital
base.
The guidelines apply on a consolidated
basis to bank holding companies with
consolidated assets of $150 million or more.
For bank holding companies with less than
$150 million in consolidated assets, the
guidelines will be applied on a bank-only
basis unless: (a) The parent bank holding
company is engaged in nonbank activity
involving significant leverage; * or (b) the
1 Supervisory risk-based capital ratios that relate
capital to weighted risk assets for bank holding
companies are outlined in Appendix A to this Part
* A parent company that is engaged in significant
off-balance sheet activities would generally be
deemed to be engaged in activities that involve
significant leverage.
5
parent company has a significant amount of
outstanding debt that is held by the general
public.
The Tier 1 leverage guidelines cue to be
used in the inspection and supervisory
process as well as in the analysis of
applications acted upon by the Federal
Reserve. The Board will review the guidelines
from time to time and will consider the need
for possible adjustments in light of any
significant changes in the economy, financial
markets, and banking practices.
II. The Tier 1 Leverage Ratio
The Board has established a minimum level
of Tier 1 capital to total assets of 3 percent A
banking organization operating at or near
these levels is expected to have welldiversified risk, including no undue interest
rate risk exposure; excellent asset quality;
high liquidity; good earnings; and in general
be considered a strong banking organization,
rated composite 1 under the BOPEC rating
system for bank holding companies.
Organizations not meeting these
characteristics, as well as institutions with
supervisory, financial, or operations
weaknesses, are expected to operate well
above minimum capital standards.
Organizations experiencing or anticipating
significant growth also are expected to
maintain capital well above the minimum
levels. For example, most such organizations
generally have operated at capital levels
ranging from 100 to 200 basis points above
the stated minimums. Higher capital ratios
could be required if warranted by the
particular circumstances or risk profiles of
individual banking organizations. In all cases,
banking organizations should hold capital
commensurate with the level and nature of
all of the risks, including the volume and
severity of problem loans, to which they are
exposed.
A banking organization’s Tier 1 leverage
ratio is calculated by dividing its Tier 1
capital (the numerator of the ratio) by its
average total consolidated assets (the
denominator of the ratio). The ratio will also
be calculated on the basis of period-end
assets whenever necessary on a case-by-case
basis. For the purpose of this leverage ratio,
the definition of Tier 1 capital for year-end
1992 as set forth in the risk-based capital
guidelines contained in Appendix A to this
part will be used.* Average total
consolidated assets are defined as the
quarterly average total assets (defined net of
the allowance for loan and lease losses)
reported on the banking organization’s
Consolidated Financial Statements (“FR Y 9C Report”), less goodwill and any other
intangible assets or investments in
* At the end of 1982. Tier 1 capital for bank
holding companies includes common equity,
minority interests in equity accounts of
consolidated subsidiaries, and qualifying
cumulative and noncumulative perpetual preferred
stock. (Perpetual preferred stock is limited to 25
percent of Tier 1 capital.) In addition. Tier 1
excludes goodwill. In general no other deductions
from capital are made automatically. However, the
Federal Reserve may, on a case-by-case basis,
exclude certain other intangibles and investments in
subsidiaries as appropriate.
subsidiaries that the Federal Reserve
determines should be deducted from Tier 1
capital on a case-by-case basis.4
Whenever appropriate, in particular when
an organization is undertaking expansion,
seeking to engage in new activities or
otherwise facing unusual or abnormal risks,
4 Deductions from Tier 1 capital and other
adjustments are discussed more fully in section 113.
of Appendix A to this part.
the Board will continue to consider, on a
case-by-case basis, the level of an individual
organization's tangible Tier 1 leverage ratio
(after deducting all intangibles) in making an
overall assessment of capital. This is
consistent with the Federal Reserve’s riskbased capital guidelines and long-standing
Board policy and practice with regard to
leverage guidelines. Organizations
experiencing growth, whether internally or by
acquisition, are expected to maintain strong
capital positions substantially above
minimum supervisory levels, without
significant reliance on intangible assets.
Board of Governors of the Federal Reserve
System, December 29,1989.
William W. Wiles,
Secretary of the Board.
[FR Doc. 90-210 Filed 1-4-90; 8:45 am)
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cooe eato-01-7
PRIN TED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 5 5 , NO. 4 , pp. 5 8 2-586.
@FedFRASER