Full text of Federal Reserve Bank of New York Circulars : 10552. Proposals to Implement Prompt Corrective Action for Undercapitalized State Member Banks

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FEDERAL RESERVE BANK
OF NEW YORK

[

C ir c u la r N o .

10552 "1

J u ly 1 3 , 1 9 9 2

Proposals To Implement Prompt Corrective Action
For Undercapitalized State Member Banks
Comments Invited by August 14

To All State Member Banks, and Bank Holding
Companies, in the Second Federal Reserve District:

Following is the text of a statement issued by the Board of G overnors of the Federal Reserve System:
The Federal Reserve Board has requested public comment on proposals to implement prompt corrective action for
undercapitalized State member banks in accordance with Section 131 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), which amended Section 38 of the Federal Deposit Insurance Act.
Comments should be received by August 14, 1992.
These proposals to revise the Board’s Regulation H (Membership of State Banking Institutions in the Federal Reserve
System) would:
• Adopt definitions of the capital measures and capital thresholds for each of the five capital categories established in
the statute;
• Establish a schedule for filing and review of capital restoration plans required to be filed by undercapitalized institutions;
• Clarify certain aspects of the capital guarantee required to be made by any company that controls an undercapitalized
institution as part of an acceptable plan;
• Establish a procedure for providing institutions with notice of, and an opportunity to respond to, a proposed agency
directive to apply supervisory requirements committed by the statute to agency discretion;
• Establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than
capital; and
• Establish procedures by which senior executive officers and directors who are ordered dismissed by the Board may
petition for reinstatement.
The Board has developed this proposal in consultation with the Office of the Comptroller of the Currency, the Office
of Thrift Supervision, and the Federal Deposit Insurance Corporation.
Printed on the following pages are tables that sum m arize the general statutory definitions of capital categories
for prom pt corrective action. In addition, enclosed, for State m em ber banks and bank holding com panies in this
D istrict, is the text of the B oard’s proposals as published in the Federal Register of July 1; additional, single copies
can be obtained at this Bank (33 Liberty Street) from the Issues Division on the first floor, or by calling our Circulars
Division (Tel. No. 212-720-5215 or 5216).
Com ments on the proposals should be subm itted by A ugust 14, 1992, and may be sent to the Board, as
indicated in the notice, or to this Bank, to Manuel J. Schnaidm an, Manager, Bank Analysis D epartm ent
(Tel. No. 212-720-6710).




E.

G

erald

C

o r r ig a n

,

President.

TABLE 1
GENERAL STATUTORY DEFINITIONS OF CAPITAL CATEGORIES
FOR PROMPT CORRECTIVE ACTION

CAPITAL CATEGORY

STATUTORY DEFINITION

WELL CAPITALIZED

Capital ratios significantly exceed minimums for each specified
capital standard

ADEQUATELY CAPITALIZED

Capital ratios meet m
inim s for each specified capital
um
standard

UNDERCAPITALIZED

Capital ratios fail to meet m
inim s for any specified capital
um
standard

SIGNIFICANTLY UNDERCAPITALIZED

Capital ratios are significantly below minimums of any specified
capital standard

CRITICALLY UNDERCAPITALIZED

A ratio of tangible equity to total assets of 2 percent or less




O

o

a

\

I0S5Z
TABLE 2

MANDATORY SUPERVISORY ACTIONS APPLICABLE TO INSTITUTIONS
IN THE VARIOUS CAPITAL CATEGORIES

Well Capitalized and Adequately Capitalized
May not make any capital distribution or pay a
management fee to a controlling person that would
leave the institution undercapitalized.

Undercapitalized
Subject to provision applicable to well capitalized
and adequately capitalized.
Subject to increased monitoring.
Must submit an acceptable capital restoration plan
within 45 days and implement that plan.
Growth of total assets must be restricted.
Prior approval from the appropriate agency is
required prior to acquisitions, branching, and new
lines of business.

Critically Undercapitalized
Must be placed in receivership within 90 days unless the
appropriate agency and the FDIC concur that other action
would better achieve the purposes of prompt corrective
action.
Must be placed in receivership if it continues to be
critically undercapitalized, unless specific statutory
requirements are m et
After 60 days, must be prohibited from paying principal or
interest on subordinated debt without prior approval of
the FDIC
Activities must be restricted. At a minimum, may not do
the following without the prior written approval of the
FDIC:
Enter into any material transaction other than
in the usual course of business.
Extend credit for any HLT.

Significantly Undercapitalized
Subject to all provisions applicable to
undercapitalized institutions.
Bonuses and raises to senior executive officers
must be restricted.
Subject to at least one of the discretionary
actions presented on Table 3.




Make any material change in accounting methods.
Engage in any "covered transactions" as defined in
section 23A of the Federal Reserve Act, which
concerns affiliate transactions.
Pay excessive compensation or bonuses.
Pay interest on new or renewed liabilities at a rate
that would cause the weighted average cost of
funds to significantly exceed the prevailing
rate in the institution’s market area.

.J0S
% _

105^

*•?

’^

TABLE 3

DISCRETIONARY SUPERVISORY ACTIONS APPLICABLE TO INSTITUTIONS
IN THE VARIOUS CAPITAL CATEGORIES

Well Capitalized and Adequately Capitalized
None.

Undercapitalized
Subject to any discretionary actions applicable to
significantly undercapitalized institutions if
the appropriate agency determines that those
actions are necessary to carry out the purposes of
prompt corrective action.

Significantly Undercapitalized
Actions the institution is presumed subject to unless the
appropriate agency determines that such action would not
further the purpose of prompt corrective action:
Must raise additional capital or arrange to be
merged with another institution.
Transactions with affiliates must be restricted by
requiring compliance with section 23A of the
Federal Reserve Act as if exemptions of that section
did not apply.
Interest rates paid on deposits must be restricted
to prevailing rates in the region.




Significantly Undercapitalized (C o o t)

Other discretionary actions:
Severe restriction on asset growth or reduction of
total assets may be required.
Institution or its subsidiaries may be required to
terminate, reduce, or alter any activity determines
to pose excessive risk.
May be required to hold a new election of its
board of directors.
Dismissal of any director or senior executive
officer and their replacement by new officers
subject to agency approval may be required.
May be prohibited from accepting deposits from
correspondent depository institutions.
Controlling BHC may be prohibited from paying
dividends without prior Federal Reserve approva
May be required to divest or liquidate any
subsidiary in danger of becoming insolvent and
posing a significant risk to the institution.
Any controlling company may be required to
divest or liquidate any nondepository institution
affiliate in danger of becoming insolvent and
posing a significant risk to the institution.
May be required to take any other action that tl
appropriate agency determines would better car
out the purposes of prompt corrective action.
Critically Undercapitalized
Additional restrictions (other than those
mandated) may be placed on activities.

i n u i i u

i

PROPOSED SPECIFICATIONS OF CAPITAL ZONES
FOR PROMPT CORRECTIVE ACTION
(in percent)

<>
3
Ct
Cl

to

Total RiskBased Ratio

Tier 1 RiskBased Ratio

Tier 1 Leverage
Ratio

Well
Capitalized

10 or above &

6 or above &

5 or above &

Not subject to a capital directive to m
eet
a specific level for any capital measure

Adequately
Capitalized

8 or above &

4 or above &

4 or above1&

Does not m the definition of well
eet
capitalized

Under
Capitalized

Under 8

or

Under 4

or

Under 42

Significantly Under
Capitalized

Under 6

or

Under 3

or

Under 3

Critically

Capital Directive/Other

2 or under3

1 3 percent or above for composite 1-rated banks and savings associations that are not experiencing or anticipating
significant growth.
2 U nder 3 percent for composite 1-rated banks and savings associations that are not experiencing or anticipating
significant growth.
3 Section 131 o f FDICLA specifies that an insured depository institution shall be deem ed to become critically
undercapitalized when its ratio of tangible equity to total asset is 2 percent or less. It is proposed that the Tier 1 leverage
ratio be used for this capital measure.




®

10552**

W ednesday
J u ly 1, 1992
Vol. 57, No. 127
Pp. 29226-29244

P roposals Regarding
P rom pt C orrective A ction fo r
U ndercapitalized In stitu tio n s
Docket No. R-0763
Comments Invited by August 14, 1992

[Enc. Cir. No. 10552]




10552

**
* «:
■

FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 263
[Docket No. R-0763; Regulation H]

Membership of State Banking
Institutions in the Federal Reserve
System; Rules of Practice for
Hearings; Prompt Corrective Action
AGENCY: Board o f Governors o f the
Federal Reserve System.
a c t io n : Notice o f proposed rulemaking.

SUMMARY: The Board is proposing to
revise Regulation H to implement for
state m ember banks the system o f
prompt corrective action established by
section 38 o f the Federal Deposit
Insurance A ct (FDI A ct) as added by
section 131 o f the Federal Deposit
Insurance Corporation Improvement Act
o f 1991 (FDICLA). Section 38 requires
each federal banking agency to
implement prompt corrective action for
the institutions that it regulates. The
Board is also proposing to revise its
rules o f practice for hearings to establish
procedures for the issuance o f directives
and other actions required under prompt
corrective action.
Section 38 requires or permits the
Board to take certain supervisory
actions w hen a state member bank falls
within one o f five specifically
enumerated capital categories. It also
restricts or prohibits certain activities
and requires the submission o f a capital
restoration plan w hen an insured
institution becom es undercapitalized.
The proposed amendments to the
B oard’s regulations are necessary to
establish the capital levels at which
state m ember banks w ill be deemed to
come within the five capital categories.
The proposed amendments also
establish procedures for issuing and
contesting prompt corrective action
directives including directives requiring
the dism issal o f directors and senior
executive officers.
The Board is seeking comment on all
aspects o f its proposal.

entrance on 20th Street betw een
Constitution A venu e and C Street, N W .
Comments m ay be inspected in room
B-1122 betw een 9 a.m. and 5 p.m.,
except as provided in $ 261.8 o f the
Board's Rules Regarding Availability o f
Information, 12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT:
Frederick M . Struble, A ssociate Director
(202/452-3794), N orah Barger,
Supervisory Financial A nalyst (202/4522402), Division o f Banking Supervision
and Regulation; Scott G. A lvarez,
A ssociate General Counsel (202/4523583), G regory A . Baer, Senior Attorney
(202/452-3236), Legal Division; M yron L.
Kwast, Assistant Director, Division o f
Research and Statistics, Board of
Governors o f the Federal Reserve
System. For the hearing impaired only.
Telecommunication Device for the D e a f
(T D D ), Dorothea Thompson (202/4523544), Board o f Governors o f the Federal
Reserve System, 20th and C Streets,
N W ., W ashington, D C 20551.

SUPPLEMENTARY INFORMATION:
L Background

Section 131 o f FDICLA, Public L a w
102-242, created a n e w statutory
fram ework that applies to every insured
depository institution a system of
supervisory actions indexed to the
capital level o f the individual, institution.
The stated purpose o f this statutory
provision is to resolve the problems o f
insured depository institutions at the
least possible long-term loss to the
deposit insurance fund. The n ew
fram ew ork is contained in section 38 o f
the FDI A c t This fram ework and the
authority it confers on the federal
banking agencies are meant to
supplement the existing supervisory
authority vested in the agencies, and do
not limit in any w a y their existing
authority under other statutes or
regulations to initiate supervisory
actions to address capital deficiencies,
unsafe or unsound conduct, practices, or
conditions, or violations o f law .
Section 38 requires the federal
banking agencies, within 9 months o f the
DATES: W ritten comments must be
enactment o f FDICLA, to promulgate
received on or before August 14,1992.
final regulations necessary to carry out
the purposes o f that section. U nder the
ADDRESSES: Comments, which should
statute, these regulations must become
refer to Docket N o. R-0763, may be
effective within one year after the date
m ailed to M r. W illiam W iles, Secretary,
o f enactment o f FDICLA, or no later than
Board o f Governors o f the Federal
Decem ber 19,1992.
Reserve System, 20th Street and
It is the goal o f the Board of
Constitution A venue N W ., W ashington,
Governors o f the Federal Reserve
D C 20551. Comments addressed to Mr.
System ("Fed eral Reserve B oard”), the
W ile s m ay also be delivered to the
Federal Deposit Insurance Corporation
B oard’s mail room betw een 8:45 a.m.
and 5:15 p.m., and to the security control ( “F D IC "), the Office o f the Comptroller
o f the Currency (" O C C "), and the Office
room outside o f those hours. Both the
mail room and the security control room o f Thrift Supervision (" O T S " ) to
promulgate uniform regulations to the
are accessible from the courtyard




2

extent feasible in implementing the
prompt corrective action fram ew ork o f
section 38. The agencies believe that a
uniform approach to capital definitions
and capital categories w o u ld simplify
the tasks facing bank and thrift
management o f monitoring and
maintaining the capital levels o f insured
depository institutions, and w ould
rem ove any competitive distortions that
might arise if different standards w ere
applied to competing institutions.
In order to implement the provisions
o f section 38, the agencies have
proposed regulations that have uniform
provisions. The agencies propose to
define in the same manner the capital
measures and capital thresholds for
each o f the five capital categories
established in the statute. The agencies
also propose to establish a uniform
schedule for filing and review o f capital
restoration plans. In addition, the
agencies propose to adopt identical
provisions clarifying certain aspects o f
the capital guarantee required to be
m ade by companies that control an
undercapitalized institution as part o f an
acceptable capital plan, including the
limit on the liability o f such companies.
The agencies' proposal establishes a
procedure under which institutions are
provided advance notice o f a proposed
agency action under section 38 and
provided an opportunity to respond to
the proposed action. A separate
procedure is proposed that governs
decisions b y the appropriate federal
banking agency to change the capital
category to which the institution is
assigned after review o f supervisory
factors other than capital. Finally, the
proposal implements the statutory
requirement that officers and directors
w h o are subject to dism issal as a result
o f an agency order issued under section
38 be afforded agency review o f the
dismissal.
M an y o f the provisions o f section 38
apply without the need for agency
action, or impose requirements or
limitations on an agency in the exercise
o f its discretion. These provisions have
not been repeated in the proposed
regulation. The proposal implements
only those portions o f section 38 that the
agencies believe require regulatory
specification or clarification.

Where procedures have not been
established in this proposal, such as
procedures for review of a stock
redemption or an expansion proposal by
an undercapitalized institution, each
agency will implement a procedure
governing agency review. Such
procedures will be established by
regulation or through instructions to its
appropriate field offices or examiners
and to the institutions involved. In

1 ‘
several instances, procedures governing
agency review have already been
established in other agency regulations.
The agencies request comment on all
aspects o f this proposal, including the
specific num bered questions presented
below . In addition, the agencies request
comment on whether other provisions o f
section 38 require clarification or should
be implemented by regulation. The
agencies stress that comments may
address any aspect o f the proposal and
need not be confined to the numbered
questions set out below . Commenters
are invited to submit comments to any
or all o f the federal banking agencies.

10552
capital distribution, or paying a
management fee to a controlling person
if, following the distribution or payment,
the institution w ould be within any o f
the three undercapitalized categories.
The statute provides a limited exception
to this prohibition for stock redemptions
that do not result in any decrease in an
institution’s capital and w ould improve
the institution’s financial condition
provided the redemption has been
approved by the institution’s
appropriate federal banking agency
after consultation with the FDIC.

B. Provisions A ppliable to
U ndercapitalized Institutions

II. Summary o f Statutory Fram ework
The follow ing is a brief summary o f
the supervisory fram ework established
by section 38. This summary has been
prepared in order to give context to the
agency proposal and request for
comment. The summary is not intended
to be complete description o f the
requirements o f section 38, and
commenters may find it useful to consult
the provisions o f section 38, contained
at 12 U.S.C. 1831o, in preparing their
comments.
Section 38 provides a fram ework of
supervisory actions based on the capital
level o f an insured depository
institution. Section 38 establishes five
capital categories: w ell capitalized,
adequately capitalized,
undercapitalized, significantly
undercapitalized, and critically
undercapitalized. The statute deems an
insured depository institution to be:

Well capitalized if the institution
significantly exceeds the required minimum
level for each relevant capital measure:
Adequately capitalized if the institution
fails to meet the required minimum level for
any relevant capital measure;
Undercapitalized if the institution fails to
meet the required minimum level for any
relevant capital measure;
Significantly undercapitalized if the
institution is significantly below the required
minimum level for any relevant capital
measure; or,
Critically undercapitalized if the institution
has a ratio of tangible equity to total assets ot
2 percent or less, or otherwise fails to meet
the critical capital level established pursuant
to section 38(c)(3)(A).
The applicability of supervisory
actions provided in section 38 to an
individual institution depends on the
institution’s classification within one
these five categories.

A. Provisions A pplicable to A ll
Institutions
Section 38 prohibits ar6 insured
depository institution from declaring
any individuals, making any other




of

Institutions that are classified as
undercapitalized are subject to a
number of additional mandatory
supervisory actions. These include.
• Increased monitoring by the
appropriate federal banking agency for
the institution and periodic review o f the
institution’s efforts to restore its capital;
• A requirement that the institution
submit, generally within 45 days, a
capital restoration plan acceptable to
the appropriate federal banking agency
for the insitution and implement that
plan;
• A restriction on growth o f the
institution's total assets; and
• A limitation on the institution's
ability to make any acquisition, open
any n ew branch offices, or engage in
any n ew line of business without the
prior approval o f the appropriate federal
banking agency for the institution.
Section 38 also provides that the
appropriate federal banking agency for
an undercapitalized institution may take
any a number o f discretionary
supervisory actions if the agency
determines that any o f these actions is
necessary to resolve the problem s o f the
institution at the least possible long­
term cost to the deposit insurance fund.
These discretionary supervisory actions
include requiring the institution to raise
additional capital, restricting
transactions with affiliates, restricting
interest rates paid by the institution on
deposits, requiring replacement o f senior
executive officers and directors,
restricting the activities o f the institution
and its affiliates, requiring divestiture o f
the institution or the sale of the
institution to a willing purchaser, and
any other supervisory action that the
agency deems appropriate. Because
these discretionary actions are also
applicable to significantly
undercapitalized institutions (as w ell as
to critically undercapitalized
institutions), these actions are described
more fully in the next section.

3

C. P rovisions A pplicable to
Significantly U ndercapitalized
Institutions
Section 38 provides that significantly
undercapitalized institutions are subject
to the four mandatory provisions listed
above that are applicable to
undercapitalized institutions. Sections
38 also provides that a significantly
undercapitalized institution must restrict
the payment o f bonuses and raises to
senior executive officers o f the
institution.
In addition to these m andatory
requirements, section 38 specifies that
the appropriate federal banking agency
for the institution shall impose one or
more restrictions on an institution that is
significantly undercapitalized. These
discretionary actions include:
• Requiring the institution to sell
enough additional capital, including
voting shares, so that the institution
w o u ld be adequately capitalized after
the sale;
• Restricting transactions betw een
the institution and its affiliates,
including transactions with its insured
depository institution affiliates;
• Restricting the interest rates paid on
deposits collected by the institution to
the prevailing rates in the region w here
the institution is located;
• Restricting the institution's asset
growth or requiring the institution to
reduce its total assets;
• Requiring the institution or any
subsidiary o f the institution to
terminate, reduce or alter any activity
that the agency determines poses
excessive risk to the institution;
• Requiring the institution to hold a
n ew election o f its board o f directors;
• Requiring the institution to dismiss
any director or senior executive officer
w h o had held office at the institution for
more than 180 days immediately before
the institution becam e undercapitalized
if the agency deems such dismissal to be
appropriate, and to employ n ew officers
w ho may be subject to agency approval;
• Prohibiting the institution from
accepting deposits from correspondent
depository institutions;
• Prohibiting any bank holding
company that controls the institution
from making any dividend payment
without prior approval o f the Federal
Reserve Board;
• Requiring the institution to accept
an offer to be acquired by another
institution or company, or requiring any
company that controls the institution to
divest the institution;
• Requiring the institution to divest or
liquidate any subsidiary that is in
danger o f becoming insolvent and poses
a significant risk to the institution, or

10552

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that is likely to cause significant
dissipation o f the institution’s assets or
earnings;
• Requiring any company that
controls the institution to divest or
liquidate any affiliate o f the institution
(other than another insured depository
institution) if the appropriate federal
banking agency for the holding company
determines that the affiliate is in danger
o f becoming insolvent and poses a
significant risk to the institution, or is
likely to cause significant dissipation of
the institution’s assets or earnings; and
• Requiring the institution to take any
other action that the agency determines
w ould better carry out the purposes o f
section 38.
W h ile the statute generally provides
the agency with discretion to determine
whether these actions are appropriate in
connection with a particular institution,
the statute establishes certain
presumptions and requirements with
respect to the agency’s consideration o f
these actions. Section 38 requires that
the agency take at least one o f the
above discretionary supervisory actions
in connection with every institution that
is significantly undercapitalized or
critically undercapitalized. The statute
also establishes a presumption that the
agency require each significantly
undercapitalized or critically
undercapitalized institution to (1) be
acquired by another institution or
company or sell sufficient shares to
restore the institution’s capital to at
least the minimum acceptable capital
level, (2) restrict transactions with
affiliates o f the institution, including
transactions with depository institution
affiliates, and (3) restrict interest rates
paid by the institution on deposits. The
agency must impose each o f these three
actions unless the agency determines
that the action w ould not further the
purpose o f section 38.
A s discussed above, each o f the
discretionary actions listed above may
also be taken in connection with
undercapitalized institutions if a finding
is m ade by the agency that the action is
necessary to carry out the purposes o f
section 38. In addition, these
discretionary actions m ay be taken in
connection with any undercapitalized
institution that fails to submit or
materially implement a capital
restoration plan, as if the institution
w ere a significantly undercapitalized
institution.
In addition to the discretionary
actions discussed above, section 38 also
provides that the appropriate federal
banking agency m ay require a
significantly undercapitalized institution
or an undercapitalized institution that




has failed to submit or implement an
acceptable capital restoration plan to
comply with one or more o f the
restrictions established by the FDIC on
the activities o f critically
undercapitalized institutions.

O. P rovisions A p plicable to C ritically
U ndercapitalized Institutions
Section 38 requires that an insured
depository institution thdt is critically
undercapitalized be placed in
conservatorship or receivership within
90 days, unless the appropriate federal
banking agency for the institution and
the FDIC concur that other action w ould
better achieve the purposes o f section
38. A determination by the agency to
defer placing a critically
undercapitalized institution in
receivership or conservatorship must be
review ed every 90 days and must
document the reasons the agency
believes other action w ould better
achieve the purposes o f section 38.
The statute requires that the
institution b e placed in receivership if
the institution continues to be critically
undercapitalized on average during the
fourth quarter after the institution
initially becam e critically
undercapitalized, unless certain specific
statutory requirements are met. To be
eligible for the exception, the institution
must (1) have positive net worth, (2) be
in substantial compliance with an
approved capital restoration plan, (3) be
profitable or nave an up w ard trend in
earnings, and (4) have reduced its ratio
o f nonperforming loans to total loans. In
addition, the head o f the appropriate
federal banking agency for the
institution and the Chairperson o f the
FDIC must both certify that the
institution is viable and not expected to
faiL
Critically undercapitalized institutions
are also prohibited, beginning 60 days
after becoming critically
undercapitalized, from making any
payment o f principal or interest on
subordinated debt issued by the
institution without the prior approval o f
the F D IC Section 38 does not prevent
unpaid interest from accruing on
subordinated debt under the terms of
the debt instrument.
^
Section 38(i) o f the FDI A ct also
provides that the FDIC, by regulation or
order, must restrict the activities o f
critically undercapitalized institutions.
At a minimum, the FDIC must prohibit a
critically undercapitalized institution
from doing any o f the following without
the prior written approval o f the FDIC:
• Entering into any material
transaction other than in the usual
course o f business. Such activities
include any investment, expansion.

4

acquisition, sale o f assets or other
similar action w here the institution
w o uld have to notify its appropriate
federal banking agency;
• Extending credit for any highly
leveraged transaction;
• Am ending the institution’s charter
or b y la w s unless required to do so in
order to carry out any other requirement
o f any law , regulation or order.
• M aking any material change in Us
accounting methods;
• Engaging in any “covered
transactions’’ within the meaning of
§ 23 A (b) o f the Federal Reserve A ct (12
U.S.C. 371c). which concerns affiliate
transactions;
• Paying excessive compensation or
bonuses; and
• Paying interest on n ew or renew ed
liabilities at a rate which w o u ld increase
the institution's weighted average cost
o f funds to a level significantly
exceeding the prevailing rates in the
institution’s normal market areas.
Pursuant to section 38(j) o f the FDI
Act. none o f these restrictions apply to
institutions in conservatorship or to any
bridge bank that is w holly ow n ed by the
FD IC or the RTC.
Pursuant to section 38(o)(2) o f the FDI
A c t none o f these restrictions shall
apply, before July 1,1994, to any insured
savings association if:
(a ) The savings association had
submitted a plan meeting the
requirements o f section 5 (t)(A )(ii) o f the
H om e O w n e rs ’ Loan A c t
(b ) The Director o f O T S had accepted
the plan; and
(c) The savings association remains in
compliance with the plan or is operating
under a written agreement with the
appropriate federal banking agency.
IIL Proposal and Request for Comment

A. C apital M easures
For purposes o f defining each o f the
capital categories (except for the
critically undercapitalized category),
section 38(c) requires the agencies to
prescribe capital standards that include
a leverage limit and a risk-based capital
requirem ent The agencies m ay establish
additional capital m easures for these
categories if additional capital measures
w ould serve the purposes o f section 38.
In addition, section 38 permits the
agencies to rescind the leverage limit or
the risk-based capital m easure if the
federal banking agencies concur that
either measure is no longer an
appropriate means for carrying out the
purposes o f section 38.
The agencies are proposing to adopt
the leverage limit and the total riskbased capital measure in defining the
capital categories other than the

10552
critically undercapitalized category. In
addition, the agencies propose to adopt
the Tier 1 risk-based capital ratio as a
capital measure in defining these capital
categories. These measures are
generally used by the federal banking
agencies in determining the adequacy of
capital o f insured depository
institutions.
Com m ent 1: The agencies request
comment on whether adoption o f these
three capital measures is appropriate to
carry out the purpose o f section 38.
The agencies note that the capital
requirements applicable to insured
depository institutions may be affected
by section 305 o f FDIC IA, which amends
section 18 o f the Federal Deposit
Insurance A ct ( ‘‘FDI A c t") to require the
agencies to revise their risk-based
capital standards to take into account
interest rate risk, concentration o f credit
risk, and the risks o f nontraditional
activities. The statutory deadline for
implementation o f these revisions is in
June 1993.
A s the revisions required under
section 18 o f the FDI A ct are
implemented, it might prove necessary
o f appropriate to review the capital
measures and thresholds specified for
the various capital categories. In
particular, the agencies note that one o f
the rationales for retaining a leverage
ratio after the risk-based capital
measure w a s introduced w a s that the
risk-based capital measure is focused on
credit-related risk, and does not
explicitly factor in other risks,
particularly interest rate risk. The
agencies w ill address in an appropriate
and expeditious manner the need for
low ering or eliminating the leverage
capital component from the definitions
o f w ell capitalized, adequately
capitalized, undercapitalized, and
significantly undercapitalized after the
risk-based capital standards have been
revised by each Federal banking agency
to take account o f interest rate risk as
required by section 305 o f FDIC IA.

B. Definition o f C apital Terms
The agencies propose to adopt the
same definitions o f capital terms for
purposes o f the prompt corrective action
provisions o f section 38 as are currently
used under the capital adequacy
guidelines or regulations adopted by the
agencies. The definition o f the riskbased and leverage capital ratios for
purposes o f the prompt corrective action
subpart w o u ld refer to the definitions of
Tier 1 capital, total c ap ital total riskweighted assets, adjusted total assets,
and total assets as those terms are
defined in the agencies' current capital
adequacy guidelines and regulations.




This proposal attempts to reduce
complexity that could result from the
use o f n ew or m odified capital
definitions, and to minimize confusion
and the possibility that an institution
m ay be uncertain regarding its capital
levels for purposes o f section 38.
Comment 2: The agencies request
public comment regarding whether this
approach is appropriate or whether the
agencies should modify the existing
capital definitions for purposes of
applying section 38. If adjustments o f
modifications to the capital definitions
currently used are deem ed to be
appropriate, the agencies request
comment on w hat type o f adjustments
or modifications should be made.
Comment 3: The agencies also request
comment regarding die appropriate
period for calculation o f capital levels.
U nder current practice and
requirements, die level o f capital o f an
institution is calculated on the basis o f
the amount o f capital held b y the
institution on a given day as a ratio o f
the most recent quarterly average o f
total assets or quarter-end risk-weighted
assets for the institution. A daily
calculation o f both capital and assets
m ay facilitate prompt action under
section 38. H ow ever, the agencies note
that insured depository institutions are
not currently required to make daily
calculations o f capital, and such a
requirement w ould increase the
reporting burden on many institutions.
In addition, a daily calculation may
distort capital calculations b y focusing
on individual daily events (such as a
decline in the market value o f certain
investments on a given d ay) rather than
on related actions taken during a given
period or remedial actions that are
readily available to the institution (such
as a decline in market value in one
investment follow ed by a gain realized
on the sale o f another investment).
Com m ent 4: The agencies request
comment on whether, for purposes of
applying the prompt corrective action
requirements o f section 38, the use of
quarterly average total assets or
quarter-end risk-weighted assets in
calculating capital levels is appropriate,
or whether the capital calculations for
an institution should be based on an
actual daily measure or quarter-end
measure o f the institution’s capital and
assets.
Com m ent 5: The agencies also request
comment on whether a daily calculation
o f total assets andrisk-w eighted assets
is feasible, and whether a requirement
that an institution make daily
calculations w ould impose significant
added burden on insured depository
institutions.
5

C. S pecific C apital L evels fo r Five
C apital C ategories
Section 38 requires the agencies to
establish specific capital thresholds for
each capital category and sets general
standards, as described above, for each
o f these categories. U nder these
standards, an institution is adequately
capitalized if it meets the required
minimum level for each relevant capital
measure. Thus, capital levels set for the
adequately capitalized category
generally w o u ld be the same as the
minimum ratios established under the
existing minimum capital adequacy
rules and guidelines adopted by the
agencies. These minimums are 8 percent
for the total risk-based capital ratio, 4
percent for the Tier 1 risked-based
capital ratio, and 4 percent for the T ier 1
leverage ratio (3 percent for composite
1-rated banks and savings associations,
subject to appropriate federal banking
agency guidelines). A n institution w o u ld
have to meet all these minimums in
order to be deem ed adequately
capitalized.
The statute also provides specific
guidance as to the capital level for
defining a critically undercapitalized
institution. Section 38 requires that a
critically undercapitalized institution be
defined b y reference to the institution’s
ratio o f tangible equity to total assets.
The statute requires the agencies to
establish the threshold ratio for defining
a critically undercapitalized institution
at no lo w e r than 2 percent. A s discussed
below , the agencies are proposing that a
critically under capitalized institution be
defined as any institution that has a Tier
1 leverage ratio o f 2 percent or less.
Taking the capital levels for the
adequately capitalized and critically
undercapitalized categories as
benchmarks, the agencies are proposing
that the capital levels for the
undercapitalized category be defined as
any level under 8 percent for the total
risk-based capital ratio, under 4 percent
for the Tier 1 risk-based capital ratio, or
under 4 percent for the T ier 1 leverage
ratio (under 3 percent for composite 1rated banks and savings associations,
subject to appropriate federal banking
agency guidelines). A n institution w ould
be considered undercapitalized if it
w ere b e lo w the specified capital level
for any o f the three capital measures.
Further, the capital levels for
significantly undercapitalized
institutions w o u ld be defined as any
level under 6 percent for the total riskb ased capital ratio, under 3 percent for
the Tier 1 risk-based capital ratio, or
under 3 percent for the Tier 1 leverage
ratio. A n institution w o u ld be
considered significantly

10552'
undercapitalized if it w ere be lo w the
specified capital level for any o f the
three capital measures. U n der the
proposed definitions, an institution that
is significantly undercapitalized also
w o u ld be deemed to be
undercapitalized. Similarly, an
institution that is critically
undercapitalized also w o u ld be deemed
to be significantly undercapitalized and
undercapitalized. The overlap betw een
these categories is contemplated by the
statute and has the effect o f applying to
significantly undercapitalized
institutions and to critically
undercapitalized institutions any
provisions o f section 38 that are
applicable to undercapitalized
institutions.
The agencies are proposing to
establish the minimum total risk-based
capital level for the w ell capitalized
category at 10 percent and to set the
minimum leverage capital level for this
category at 5 percent. T o emphasize the
importance the agencies place on Tier 1
capital, it is proposed that for the w ell
capitalized category the minimum level
for the Tier 1 risk-based capital ratio be
set at 6 percent. The specifications of
the minimum ratios for the w ell
capitalized category are proposed at
levels that are 25 percent to 50 percent
higher than the minimum for the
adequately capitalized category to
promote safe and sound banking
conditions, giving due consideration to
the international capital standards to
w hich the United States and other G-10
countries have agreed, and to the
competitive pressures faced by U.S.
banks operating in international markets
with foreign banks adhering to these
standards.
Capital ratios alone, o f course, are not
fully indicative o f the capital strength of
an institution. In particular, in proposing
these minimum capital levels, the
agencies are a w are that some poorlyrated depository institutions have
capital ratios ab o v e the specified
minimums for the w ell capitalized and
adequately capitalized categories. One
reason that some poorly-rated
institutions qualify as w e ll capitalized
for prompt corrective action purposes i9
that capital is a lagging indicator of
problem s o f insured depository
institutions.

capital directive from the appropriate
capital needs by also taking into
federal banking agency does not have
account a range o f factors such as
capital that significantly exceeds the
interest rate risk and concentration risk.
required minimum level for the relevant T h e agencies have initiatives under w a y
capital measures.
m andated by F D IC IA to review their
The agencies also intend to assess
risk-based capital standards to ensure
carefully all aspects o f a troubled
that they take more adequate account o f
institution’s condition, and to exercise
such risks, and also have been engaged
their reclassification authority under
in a project under the Federal Financial
section 38(g) o f F D IC IA . Section 38(g)
Institutions Examination Council
gives the agencies discretion to
( “FFIEC’’) to refine and improve
downgrade, w here appropriate, a “w e ll
procedures for assessing the reserving
capitalized'* institution b y one category
policies and practices o f individual
and require an “adequately capitalized" institutions. A fte r those projects have
or “undercapitalized" institution to
been completed and improvements
comply with supervisory actions as if it
implemented and assessed, the agencies
w ere in the next low e r category if that
intend to revisit the question o f h o w the
institution has received a less-thanspecifications for the w e ll capitalized
satisfactory exam ination rating for asset category m ay need to be modified or
quality, management, earnings, or
adjusted.
liquidity without correcting the
Com m ent 7: The agencies request
deficiency. A n y institution w o uld be
comment on all aspects of the capital
subject to dow ngrading on the basis o f
levels proposed in the draft regulation
the components o f the institution's
Com m ent 8: In particular, the agencies
examination rating, including an
seek comment on whether the specific
institution that has been deemed not to
levels set for each capital category are
be within the w e ll capitalized category
appropriate, as w ell as whether it is
because the institution is subject to a
appropriate to require that w e llwritten capital order or directive.
capitalized institutions not be subject to
W h ile the prompt corrective action
a capital order or directive.
fram ework constitutes an additional
D. C ritically U ndercapitalized
supervisory tool, the federal banking
Institutions
agencies continue to have available all
The statute requires that the critically
supervisory tools traditionally used to
supervise institutions. The agencies also undercapitalized category b e b ased on
the ratio o f tangible equity to total
fully intend to use these tools as
assets o f the institution. Section 38
appropriate in supervising institutions.
requires that the minimum ratio for this
These include appropriate enforcement
category be established at a level o f
actions and supervisory follow-up
tangible equity that is no less than 2
measures b ased upon the institution’s
percent o f the institution’s total assets,
overall condition and the existence o f
and that is no higher than the ratio equal
any financial, operational, or other
supervisory weaknesses, irrespective o f to 65 percent o f die required minimum
level o f capital under the leverage limit.
the organization's capital category for
purposes o f the prompt corrective action The agencies may, be regulation, specify
additional capital m easures (such as a
provisions o f section 38.
risk-based capital ratio) in defining the
Accordingly, the assignment o f an
critically undercapitalized category. A n y
institution to a particular capital
category— including the w ell capitalized such m easures m ay not, without the
concurrence o f the FDIC, b e set at a
category— does not prevent the
appropriate federal banking agency from level low e r than the level specified by
taking other supervisory action that the the FD IC for insured state-chartered
banks that are not members o f the
agency deems to be appropriate.
Federal Reserve System.
M oreover, in light o f the intended
The agencies are proposing to define
limited purpose o f a capital category
designation, the agencies are proposing critically undercapitalized institutions
as institutions that have a ratio o f T ier 1
to limit a given insured depository
capital to total assets o f 2 percent or
institution’s use o f its capital category,
less. The agencies-do not at this time
except w hen permitted by the
propose to establish any additional
appropriate federal banking agency or
capital measures for the critically
otherwise required by statute or
undercapitalized category.
regulation. This is intended to limit the
Under this proposal, the agencies
ability o f insured depository institutions
would define tangible equity to be Tier 1
to advertise their category.

Some institutions are subject to a
written order or directive that
establishes a higher capital level for the
institution. The agencies are proposing
that for an institution to be well
Comment 6: The agencies invite
capitalized, it must not be subject to any comment on this limitation on
written capital order or directive. This
advertising.
proposal reflects the view that an
Traditionally, examiners have
institution that is subject to a written
reached judgments on an institution's




6

capital as defined under the agencies'
existing capital adequacy guidelines or
regulations. The use of the Tier 1 capital
definition has been proposed for several
reasons. The definition of Tier 1 capital

10552'*’
requires a deduction from equity capital
for most intangible assets, including
goodwill. The use o f Tier 1 capital also
focuses primarily on common equity
rather than other forms o f equity and.
therefore, represents the most secure
form o f equity available to absorb losses
that m ay be incurred by an insured
depository institution.
In addition, because Tier 1 capital is
an element o f the existing capital
adequacy guidelines and is included in
the definition o f the other capital
m easures proposed under section 38, use
o f the Tier 1 capital definition w ould
promote consistency and simplicity and.
therefore, minimize the potential for
confusion in the capital computations
required to be m ade by insured
depository institutions. It w ould also
reduce the potential for distortion in the
capital raising efforts o f insured
depository institutions and for
anomalies in the classification o f
institutions under section 38 that might
result from use o f a substantially
different definition o f capital for the
critically undercapitalized category than
is used for the other capital categories.
Comment 9: The agencies request
public comment on this definition.
Comment 10: The agencies also
request comment on whether the
definition o f tangible equity should
reflect additional adjustments to deduct
intangible assets. The agencies note that
section 475 o f F D IC IA requires the
federal banking agencies to determine
whether a portion o f certain purchased
mortgage servicing rights should be
included in the calculation oi tangible
capital. The agencies also recently
sought public comment on a proposal to
permit insured depository institutions to
include a portion o f certain purchased
credit-card relationships in the
calculation o f tangible capital for
purposes o f meeting applicable
minimum capital adequacy standards.
Comment 11: The agencies request
comment on whether purchased
mortgage servicing rights and purchased
credit-card relationships should be
excluded from the definition o f tangible
equity for purposes o f section 38.
Similarly, investments in certain types
o f subsidiaries, which savings
associations are required to deduct for
purposes o f their general capital
calculations, represent realizable assets
which buffer the exposure o f the deposit
insurance funds.

Comment 12: The agencies request
comment on whether these investments
should be deducted in computing the
relevant capital ratio for purposes of
determining whether an institution is
critically undercapitalized.




Comment 13: In addition, the agencies
request comment on whether tangible
equity should be defined to take into
account broader forms o f equity beyond
those included in the definition o f Tier 1
capital.
Comment 14: In particular, the
agencies request comment on whether
cumulative perpetual preferred stock
should be included in determining
whether an institution is critically
undercapitalized.
Comment 15: Because the agencies are
not proposing to include this form of
equity in determining whether an
institution is critically undercapitalized,
the agencies also request comment on
whether a transition period should be
permitted for institutions that are
permitted to rely on cumulative
perpetual preferred stock under
currently outstanding agency orders.
Comment 16: The agencies also
request comment on whether a higher
threshold should be established than the
proposed 2 percent leverage lim it By
statute, this ratio may not exceed 65
percent o f the minimum leverage ratio
established by the agencies.
Comment 17: Finally, the agencies
request comment on whether it is
appropriate to establish additional
capital measures for the critically
undercapitalized category. A s noted
above, section 38 permits the agencies to
establish additional capital measures in
defining the critically undercapitalized
category. The agencies are proposing the
use the total risk-based capital measure
and the Tier 1 risk-based capital
measure for all other categories, but are
not proposing to use these capital
m easures in defining critically
undercapitalized institutions.
E. Calculation o f C apital L evels an d
N otice o f C apital L evels
U n der the proposal, an institution
w o u ld be expected to monitor its capital
levels continually and to notify the
appropriate federal banking agency
promptly if the institution’s capital
levels fall into a low er capital category.
In addition, capital levels w ould be
periodically determined on the basis o f
information filed by each insured
depository institution in its quarterly
Consolidated Report o f Condition and
Income (“Call Report"), or on the basis
o f information obtained in an
examination or inspection o f the
institution. Capital levels may also be
determined by the appropriate federal
banking agency for an institution on the
basis o f other information obtained by
the agency from any source. This
information may include data provided
b y the institution to the agency on a
voluntary basis, information obtained in

7

connection with an application,
calculations b ased on a report that the
institution must file other than a C all
R ep o rt or adjustments that are
appropriate bused on publicly
announced events that m ay affect the
institution’s capital.
U n der the proposal, an institution
w o u ld be deem ed to be aw a re o f
information that it files in a C all Report
as o f the date that the C all Report is
required to be filed. Similarly, the
institution w o u ld be deem ed to be
notified o f capital levels calculated in
the examination or inspection process
as o f the date that the exam ination
report or inspection report is provided to
the institution. In the event that the
agency determines the capital levels of
the institution on the basis o f other
information, the agencies are proposing
to notify the institution in writing o f the
calculation and the information used as
a basis for the capital calculation.
The agencies are concem ed that,
w hile the proposed arrangement for
calculating the capital levels o f an
institution on the basis o f C all Reports
and reports o f examination and
inspection m ay b e reliable and in most
instances timely, this procedure m ay not
alw a y s lead to a prompt calculation o f
capital levels for a given institution. For
example, an institution m ay becom e
a w are o f information that affects its
capital calculation betw een the time
that C all Reports are required to b e filed
and w hen an examination is not in
process or another report m ay not be
required. This could result in delay in
application o f the supervisory
requirements o f section 38, including the
provisions that are m andated by the
statute.
In order to address changes in capital
promptly, the agencies propose to
require insured depository institutions to
notify the appropriate federal banking
agency within 5 days o f any event that
w o u ld cause the institution to be
assigned to a different capital category
than the category assigned on the basis
o f the most recent C all Report or report
o f examination or inspection. The
institution w o u ld be deem ed to be
a w are o f a necessary adjustment w hen
its senior management determines that
the adjustment is appropriate, even if
the adjustment is nohrequired to be
reported in an official report o f
otherwise disclosed for some period o f
time. U n der the proposal, the agency
w o u ld review the information provided
by the institution, along with any
explanation provided by the institution,
to determine whether the institution
should be assigned to a different capital
category for purposes o f the provisions
o f section 38. This procedure w o uld

*«

10552-

i -

apply to both upward and downward
adjustments to capital that occur
between the filing of Call Reports or
examinations.
Comment 18: The agencies invite
public comment on all aspects of this
approach to the capital calculations.
Comment 19: In particular, the
agencies request comment on the use of
Call Reports and examination reports as
the primary bases for capital
calculations.

receiving prior written notice o f the
proposed reclassification from the
agency and having an opportunity to
respond to the proposed reclassification.
In the case o f a proposed
reclassification based on a
determination that the institution is in
unsafe or unsound condition, the
agencies also propose, pursuant to
section 38, to accord the institution an
opportunity for an informal oral hearing
prior to the reclassification.
Because section 38 expressly provides
Com m ent 20: In addition, the agencies
request comment on the procedures that for notice and opportunity for hearing in
connection with a reclassification on the
have been proposed for self-monitoring
ground o f unsafe and unsound condition
and agency notification of changes in
capital levels, including comment on the but does not with respect to the
reclassification b ased on examination
burden associated with this procedure
ratings, the agencies are not proposing
and comment on whether any other
to provide an opportunity for an oral
procedure to permit the timely
hearing prior to reclassification based
monitoring o f an institution’s capital
on an institution's examination rating. In
levels is appropriate.
the case o f a reclassification proposed
F. R eclassification B psed on
on the basis o f an examination rating o f
Supervisory Criteria O ther Than
the institution, the agencies are
C apital Standards
proposing to p ro vid e the institution an
opportunity to present written
Section 38 provides that the
arguments and information prior to the
appropriate federal banking agency
agency's reclassification o f the
may, under certain circumstances,
institution.
reclassify a w ell capitalized insured
U nder the proposal, the appropriate
depository institution as adequately
federal banking agency w ould provide
capitalized and require an adequately
an institution with written notice o f the
capitalized or undercapitalized
agency's intention to reclassify the
institution to comply with supervisory
institution. The institution w o uld be
actions as if it w ere in the next low e r
provided at least 14 days to respond to
category (but not treat a significantly
the proposed reclassification unless the
undercapitalized institution as critically
agency determines that the condition of
undercapitalized) based on supervisory
the institution w arrants a shorter time
information other than the capital levels
period for response. In its response, the
o f the institution. (Reclassification to the
institution should set forth any reasons
adequately capitalized category and
w h y the proposed reclassification w ould
treatment o f an institution as if it w ere
not be appropriate, and provide the
in the next low e r capital category are
agency with any information that the
referred to collectively herein as a
institution believes supports its position
“reclassification.”) The statute permits
on the reclassification. The agency
the agency to reclassify an institution
w ould consider the response in deciding
w here the agency has determined, after
whether to proceed with the
notice and opportunity for hearing, that
reclassification.
the institution is in unsafe or unsound
Comments 21: The agencies invite
condition. Section 38 also provides that
comment on all aspects o f these
an institution may be reclassified if the
procedures for reclassifying institutions
agency deems the institution to be
based on supervisory criteria other than
engaged in an unsafe or unsound
capital.
practice under section 8(b)(8) o f the FDI
G. Timing o f M andatory Provisions
Act. 12 U.S.C. 1818(b)(8). Section 8(b)(8)
o f the FDI A ct w a s am ended by FDICIA
U nder section 38, an institution
to provide that an institution may be
becomes subject to certain mandatory
deem ed to be engaged in an unsafe or
provisions on the basis o f the capital
unsound practice if the institution has
levels of the institution. These
received a less-than-satisfactory rating
mandatory provisions apply
in its most recent examination report in
immediately without agency action. A s
any o f the categories for assets,
noted above, an undercapitalized
management, earnings, or liquidity, and
institution is immediately subject to a
the institution has not corrected the
restriction on the payment o f dividends
deficiency.
and management fees, a limitation on

Under the proposed rule, an
institution would be reclassified on any
of these supervisory grounds only after




asset growth, and an obligation to file
an acceptable capital restoration plan.
In addition to these requirements, an

8

institution that is significantly
undercapitalized or critically
undercapitalized is subject to a
limitation on the payment o f bonuses or
raises to senior executive officers.
U n der the proposal, once an
institution is deem ed to have notice of
its capital levels and category or is given
actual notice b y the agency o f the
institution’s capital category, the
institution is deem ed immediately to be
subject to the m andatory provisions that
apply to institutions within the
corresponding capital category without
any further action by the appropriate
federal banking agency for the
institution. A s explained above, the
agencies propose to deem an institution
to have notice o f its capital category
w hen ever a C all Report is due to be
filed by the institution, or an
examination report or report of
inspection has been provided to the
institution. The agencies w ill provide
actual notice to the institution o f its
capital categorization if the category is
based on an adjustment to capital
betw een the filing o f C all Reports or
examinations; if the agency determines
the capital levels o f the institution based
on information other than information
contained in the C all Reports or an
examination report; or if the agency
determines to reclassify the institution
based on supervisory criteria other than
capital.

H. Procedures fo r Issuing Prompt
C orrective A ction D irectives
Section 38 also provides the agencies
with discretion to impose other
requirements or restrictions on an
insured institution that is
undercapitalized, significantly
undercapitalized or critically
undercapitalized, as w ell as on any
company that controls such an
institution. These discretionary
supervisory actions are described
above.
Because these provisions rely on an
agency determination that certain action
is appropriate, the agencies are
proposing a procedure under w hich a
federal banking agency w o u ld issue a
written directive w henever the agency
has determined that a discretionary
supervisory actioi\.is appropriate. The
agencies propose to provide written
notice to an institution prior to issuing
any directive to take an action
committed by section 38 to the agency’s
discretion. The notice w o uld describe
the action contemplated by the agency
and w o u ld provide the institution or
company with 14 calendar days to
respond to the proposed agency action,
unless the agency determines that a

1 05
shorter response period is appropriate in
light o f the condition o f the institution.
U nder the proposal, the institution or
company w ould be permitted to submit
written arguments regarding whether
the directive is an appropriate exercise
o f the agency’s discretion, along with
any information or evidence supporting
the respondent's position, Failure to file
a timely response w ould constitute
consent to the issuance o f the directive
and a w aiver o f the opportunity to
appeal. The agency w ould consider the
institution’s response prior to issuing a
final directive to take action under
section 38.
The agencies are also proposing to
permit the appropriate federal banking
agency to issue a final directive without
notice or opportunity to respond where
immediate supervisory action is
appropriate. In cases w here immediate
action is necessary, the agencies
propose to provide the institution with
an opportunity to appeal the action to
the agency and request modification or
rescission o f the agency action following
issuance o f the directive. A n institution
that seeks to appeal an immediately
effective directive w o u ld be required to
file a written appeal with the agency
within 14 calendar days o f the effective
date o f the directive. The agency would
be required to consider and take action
regarding a timely appeal within 60 days
o f receiving the appeal.
The agencies believe that these
procedures w ill afford an adequate and
fair opportunity to obtain agency review
o f the agency’s action. See, e.q., FDIC v.
Mallen, 486 U.S. 230 (1988) (upholding
post-deprivation hearing in case of
suspension or rem oval o f a bank officer
charged with a felony); Federal D eposit
Ins. Corp. v. Bank o f Coushatta, 930 F.2d
1122 (5th Cir. 1991), cert, denied. 112 S.
Ct. 170 (1992) (affirming procedures for
issuance o f capital directives).
In proposing these procedures, the
agencies have attempted to adhere to
the mandate o f section 38 that the
agencies take prompt corrective action
to resolve the problems o f insured
depository institutions at the least
possible long-term loss to the deposit
insurance fund w hile providing
institutions with an opportunity for
agency review o f disputed factual
claims. These procedures generally
permit an institution advance notice of a
proposed directive and an opportunity
to present written information and
argument to the agency prior to final
agency action regarding the directive.
The agencies w ould not be required to
follow these procedures, and the
respective time periods w ould not apply,
if an institution consented to the action




to b e taken b y the agency either as
initially proposed by the agencies or as
modified by mutual agreem ent Actions
taken with such consent w o u ld have the
same legal affect and be enforceable to
the sam e extent and by the same means
as actions taken upon exhaustion o f
these procedures.
The agencies are not proposing an
oral hearing in connection with the
issuance o f a prompt corrective action
directive for several reasons. First, the
terms and legislative history o f section
38 indicate that Congress intended
agency action under section 38 to be
taken as promptly as possible. 12 U.S.C.
1831o(a)(2); see also S. Rep. N o. 102-167,
102d Cong., 1st Sess. 32-38 (1991) ( “The
prompt corrective action system w ill
require regulators to act at the first sign
o f trouble.”). Second, Congress clearly
indicated several occasions w hen it
believed that a hearing w a s appropriate
in connection with actions taken under
section 38, such as orders requiring
dismissal o f a director or senior
executive officer. Congress gave no
indication in either the statutory
language or legislative history that it
intended to provide for an agency
hearing in connection with supervisory
actions committed to agency discretion
under section 38. Third, a requirement
that an agency hold a hearing in each
case involving action committed to
agency discretion under section 38
w ould cause the prompt corrective
action provisions o f section 38 largely to
duplicate the existing cease-and-desist
authority grant to the agencies under
section 8(b) o f the FDI Act.
Comment 22: The agencies request
comment on all aspects o f the proposal
to issue prompt corrective action
directives w here the agency determines
to apply the provisions o f section 38
committed to the discretion o f the
agency.
Comment 23: In particular, the
agencies request comment on the
sufficiency o f the proposal to provide
notice and opportunity for written
response in connection with these
directives.
Comment 24: The agencies also
request comment on w ay s that these
procedures can be improved to give an
institution or company that is subject to
a prompt corrective action directive a
fair opportunity to contest such a
directive, w hile at the same time
adhering to the statutory mandate to
take prompt action to resolve the
problems o f inadequately capitalized
institutions.

I. Enforcement o f D irectives
Section 8 o f the FDI Act, as am ended
by FDICLA, includes prompt corrective

9

52

action directives issued pursuant to
section 38 among the orders that m ay be
enforced in the courts pursuant to
section 8 (i)(l), and also m akes any
depository institution, company, or
institution-affiliated party that violates
such a directive subject to civil money
penalties pursuant to section 8 (i)(2 )(A ).
12 U.S.C. 1818(i). The proposed
regulation m akes clear that failure o f a
depository institution to implement a
capital restoration plan or the failure o f
a company having control o f a
depository institution to fulfill a
guarantee that the com pany has given in
connection with a capital plan accepted
by the appropriate federal banking
agency w ill subject responsible parties
to civil money penalties.

D ism issa l o f D irectors or Senior
E xecutive O fficers

/.

Section 38 provides that a director or
senior executive officer dismissed by an
insured depository institution in
compliance with an agency directive
under section 38 may obtain review of
the dismissal by filing with the
appropriate federal banking agency a
petition of reinstatement. The statute
also provides that the petitioner shall
have the opportunity to submit written
materials in support of the petition and
to appear at a hearing before memberfs)
or designated employee(s) of the agency.
The hearing shall occur within 30 days
of the filing of the petition unless the
petitioner requests a later date. The
agency decision shall issue within 60
days of the date of the closing of the
hearing record.
The statute appears to envision on a
post-dismissal hearing procedure, as it
refers to the appeal as a "petition for
reinstatement’’ and sets a short time for
agency decision. Accordingly, the
proposed regulation contemplates that
an institution ordered to dismiss a
senior executive officer or director w ill
take that action immediately upon
receiving a final directive requiring that
action. The agencies are proposing that
any officer or director that is dismissed
in compliance with an agency directive
under section 38 be provided an
opportunity to petition the appropriate
federal banking agency for
reinstatement within the statutorilyprescribed period-

The proposed regulation permits the
affected officer or director an
opportunity for an informal agency
hearing. The agency will designate a
presiding officerfs) to conduct the
hearing. The petitioner will have the
right to appear at the hearing, with
counsel, and to submit written materials
and present oral argument. The
petitioner may present oral testimony or *

1 ® 5 5 2 > ’

witnesses only with the consent o f the
presiding o fficers).

restoration plans submitted under
section 38.

The proposed regulation incorporates
the statutory burdens o f proof imposed
upon an officer or director seeking
reinstatement W h e n the dism issal order
is b ased upon an institution’s capital
category or its failure to submit or
implement a capital restoration plan, the
petitioner must prove that his or her
continued employment w o u ld materially
strengthen the institution’s ability to
becom e adequately capitalized. W h en
the dism issal order is based upon a
reclassification o f an institution on
grounds o f unsafe or unsound condition
or practice, the petitioner must prove
that his or her continued employment
w o uld materially strengthen the
institutions’ ability to correct the
condition or practice. The agencies
propose to restrict the ability o f an
officer or director seeking reinstatement
to challenge the capital category to
which the institution has been assigned.

2. Schedule for Submission and R eview
o f Capital Plans

Comment 25: The agencies seek
comment on these procedures.
K. C apital R estoration Plans
1. Information Required
Section 38 requires an institution that
is under-capitalized, significantly under
capitalized, or critically
undercapitalized to submit a plan to the
appropriate federal banking agency to
restore the institution’s capital at least
to the minimum capital levels required
for adequately capitalized institutions.
The statute requires that this capital
restoration plan be submitted in writing
and specify:
(1) The steps the institution w ill take
to becom e adequately capitalized;
(2) The levels o f capital the institution
expects to attain in each year that the
plan is in effect;
(3) H o w the institution w ill comply
with the restrictions and requirements
im posed on the institution under section
38;
(4) The types and levels o f activities
in w hich the institution w ill engage; and

The statute requires the agencies to
establish by regulation deadlines for the
submission and review o f capital
restoration plans. The agencies propose
to adopt the schedule generally
established in the statute. U nder this
schedule, an institution w o uld generally
be required to submit a capital
restoration plan within 45 days o f
receiving notice or having been deemed
to have notice that the institution is
undercapitalized, significantly
undercapitalized or critically
undercapitalized. A s discussed above,
an institution is deemed to have been
notified o f its capital category on the
date that it is required to file its C all
Report, the date that the institution
receives its final report o f examination
or inspection, or the date that the
appropriate federal banking agency
notifies the institution o f the institution’s
capital category (b ased on an
adjustment to capital reported by the
institution or on other information
obtained by the agency). U nder the
proposal, the appropriate federal
banking agency m ay change this period
in individual cases, in which case the
agency w o u ld notify the institution that
a different schedule has been adopted.
The proposed schedule w o u ld require
the appropriate federal banking agency
to review each capital restoration plan
within 60 days o f submission o f the plan
unless the agency extends the time for
review. The agencies propose to provide
written notice to the institution
regarding whether the agency has
approved or rejected the capital plan.
The agency w o u ld also provide a copy
o f each acceptable capital restoration
plan, or amendments thereto, to the
FDIC within 45 days o f accepting the
plan.
Comment 27: The agencies request
comment on the proposed time
schedules for submission and review o f
a capital restoration plan.

(5) A n y other information required by
the appropriate federal banking agency.

3. Failure to Submit or Implement an
A cceptable Capital Plan

The agencies do not propose at this
time to require by regulation any
additional information in a capital
restoration plan submitted under section
38. The agencies may, in individual
cases, require an institution to provide
additional information based on
particular circumstances.

In the event that the appropriate
federal banking agency has disapproved
an institution’s capital restoration plan,
the proposal w o u ld require the
institution to submit a n ew capital
restoration plan within a time specified
by the appropriate federal banking
agency. During the period following
notice o f such disapproval and prior to
approval b y the agency o f a n ew or
revised capital plan, the institution
w o u ld be subject to all o f the provisions

Com m ent 26: The agencies request
comment on whether and what
additional information should be
required b y regulation for all capital




10

in section 38 that apply to
undercapitalized institutions that have
failed to submit and implement, in any
material respect, an acceptable capital
restoration plan.
The proposed regulation incorporates
the provision o f section 38 that makes
any insured depository institution that is
undercapitalized and fails to submit or
implement a capital restoration plan
within the required time subject to the
provisions applicable to significantly
undercapitalized institutions. U n der the
proposal, these provisions apply
immediately upon expiration o f the time
for submission o f a capital restoration
plan. Accordingly, under the proposal,
an undercapitalized institution that fails
to submit a capital restoration plan
within the required time w ould, upon the
expiration o f that period, becom e
subject to the mandatory and
discretionary provisions o f section 38
outlined abo ve that are applicable to
significantly undercapitalized
institutions, including limitations on the
compensation paid to senior executive
officers. A n undercapitalized institution
that fails to implement, in any material
respect, its capital restoration plan
w o u ld immediately be subject to these
same provisions upon the institution’s
failure to implement the plan.

Com m ent 26\ The agencies invite
comment on each o f these aspects o f the
proposed rule.
4. Content o f C apital Restoration Plans
Section 38 provides that the
appropriate federal banking agency may
not accept a capital restoration plan
unless the plan:
(1) Contains the information required
by statute;
(2) Is b ased on realistic assumptions
and is likely to succeed in restoring the
institution’s capital; and
(3) W o u ld not appreciably increase
the risk (including credit risk, interestrate risk, and other types o f risk) to
which the institution is exposed.
The statute also provides that the
appropriate federal banking agency m ay
not approve a capital restoration plan
unless each company that controls the
institution guarantees the institution’s
compliance with the plan until the
institution has been adequately
capitalized for each o f four consecutive
calendar quarters, and provides
appropriate assurances o f performance.
This guarantee b y any controlling
company is independent o f any liability
o f affiliates o f the depository institution
pursuant to the cross-guarantee
provision o f the FDI Act.

10552i
U
adopt the same definition of total assets
liability, and, if so, w hen that
for purposes of computing the first
calculation should be made.
The agencies propose to implement
Comment 36: In addition, the agencies
component of the limit on liability as
the performance guarantee provision,
would be used in determining the capital request comment on whether any
contained in section 38(e)(2)(E), by
additional regulatory clarifications o f
category of the institution.
requiring each company to submit a
the holding com pany guarantee are
Comment 32: Accordingly, as
written guarantee o f any capital plan
necessary.
discussed above in connection with the
submitted by an undercapitalized,
definition of capital categories, the
6. Priority in Bankruptcy
significantly undercapitalized, or
agencies request comment on whether
critically undercapitalized institution
It should be noted that the FDIC w ill
the definition of total assets should be
controlled by the company. This
have a priority claim in any bankruptcy
based on a period average of total
guarantee w ould include assurance that
assets (as proposed above) or should be proceedings o f a holding company that
the institution w ould fulfill any
has guaranteed an institution’s
based on a daily report of the
commitments to raise capital m ade in
compliance with a capital restoration
institution’s total assets.
the plan- Each company that provides
plan. The F D IC ’s claim against a holding
The agencies also propose that the
the guarantee w o u ld be jointly and
com pany’s estate w o u ld have priority
second component of the limit on
severally liable for fulfillment o f the
over the claims o f unsecured creditors
liability refers to the amount necessary
guarantee. Liability could extend to the
to restore the capital of the institution to and is provided for in section 507(a)(8)
amount necessary (up to the statutory
the applicable minimum capital levels as o f title 11 o f the United States Code, as
limit o f liability) to restore the
am ended b y the Crime Control A ct o f
those levels were defined at the time
institution to applicable capital
1990, Public L a w 101-647,104 Stat. 4789.
that the institution initially failed to
standards. Failure o f any company that
Sections 365(o) and 523(a)(12) o f title 11
comply with its capital plan. The
controls an undercapitalized institution
amount of a capital guarantee would not o f the United States Code, as am ended
to provide the required guarantee causes
change if the minimum capital adequacy by the Crime Control A ct o f 1990, also
the institution to becom e subject to the
provide special protections for the FDIC.
requirements change after the time the
provisions o f section 38 applicable to
institution initially failed to comply with 7. Submission of Plans by Reclassified
significantly undercapitalized
Institutions
its capital restoration plan.
institutions.
Comment 33: The agencies request
Section 38(g) provides that an
Comment 29: The agencies request
comment on this clarification of the
institution that has been reclassified to a
comment on whether the rule should
statutory provision.
different capital category as a result o f
provide greater detail regarding the
The proposed rule also implements
an agency determination that the
content and form of the guarantee.
the statutory provision that limits the
institution is in an unsafe or unsound
Comment 30: In addition, the agencies
duration of a guarantee of a capital plan. condition or is engaged in an unsafe or
request comment on what assurances
Under the proposal, the appropriate
unsound practice must describe the
the agencies should find to be
federal banking agency would provide
steps the institution w ill take to address
"appropriate assurances of
notice to the company that the
these deficiencies. Section 38(g) also
perform ance" o f the capital plan and
guarantee has expired once the
provides that an institution that
guarantee. Section 38 appears to permit
depository institution has remained
nominally has adequate capital but has
the agencies to determine the
adequately capitalized for four
been reclassified to the under­
appropriateness o f assurances in
consecutive calendar quarters. The
capitalized category because o f its
connection with the agency’s review of
proposal makes clear that expiration of
condition or practices is not required to
the capital restoration plan.
a guarantee or fulfillment of a guarantee submit a capital restoration plan. The
Comment 31: The agencies seek
given by a company in connection with
portions of the proposed regulation
comment on whether there are
one capital restoration plan does not
regarding capital restoration plans
particular assurances that the agencies
relieve the company from the obligation reflect these provisions.
should require by regulation in all cases. to guarantee another capital restoration
Comment 37: W h ile section 38 does
For example, should the agencies
plan that may be required at a future
not require an institution that nominally
require a guarantor to demonstrate that
date for the same institution if it again
has adequate capital but has been
it has sufficient financial resources to
becomes undercapitalized. Similarly, the reclassified to the undercapitalized
honor the guarantee?
fact that a company has, at one time,
category to file a capital restoration
The statute limits the aggregate
fulfilled a guarantee by providing
plan, the agencies request comment
liability under the capital performance
resources to an institution up to the
regarding whether it is appropriate for
guarantee of all companies that control statutory limit would not reduce the
the agencies to exercise their general
a given insured depository institution to amount of any guarantee of a future
supervisory authority to require such an
the lesser of:
capital plan for the same institution.
institution to submit a description o f the
(1) A n amount equal to 5 percent of
Moreover, the provision or fulfillment by steps the institution w ill take to address
the institution’s total assets at the time
a company of a guarantee for one
the deficiencies in the institution’s
the institution becam e undercapitalized; institution does not affect the obligation
condition.
or
of that company to guarantee a capital
8. Revised Capital Restoration Plans
plan in connection with any other
(2) The amount necessary (or that
insured depository institution.
would be necessary) to bring the
Under the proposal, and insured
institution into compliance with all
Comment 34: The agencies request
depository institution that is operating
capital standards applicable with
comment on these provisions of the
under a capital restoration plan that has
respect to such institution as of the time proposal.
been approved by the appropriate
the institution fails to comply with its
federal banking agency would not
Comment 35: The agencies also
capital restoration plan.
generally be required to submit an
request comment on whether the
additional or a revised capital
In incorporating this provision into the agencies should establish by regulation
restoration plan if the institution’s
a time for computing the limit on
regulation, the agencies propose to
5. Capital Plan Performance Guarantee




11

10552
capital classification changes, unless the
agency notifies the institution that a
n ew or revised capital restoration plan
is required. U nder this proposal, for
example, an undercapitalized institution
that is implementing an approved
capital restoration plan w ould not be
required to submit a second or revised
capital restoration plan if the institution
experienced further declines in its
capital levels unless the appropriate
federal banking agency determined that
a n ew plan w a s appropriate in light o f
the particular circumstances.

Comment 38: The agencies request
comment on this approach and on
whether the agencies should, by
regulation, require each insured
depository institution to file a n ew or
revised capital restoration plan in the
event that the institution’s capital
category has changed.
L O ther M atters

1. Definition of “Management Fee”
Section 38 o f the FDI A ct prohibits
any institution from paying management
fees to a controlling person if, following
the payment o f those fees, the institution
w o u ld be undercapitalized. The statute
does not provide a definition o f
management fees. The agencies have
proposed to define management fees to
include any payment o f money or
provision o f any other thing o f value to a
com pany or individual for the provision
o f management services or advice other
than compensation paid to an individual
in the individual’s capacity as an officer
or employee o f the institution. This
definition covers all companies,
including consulting firms, companies
ow ned by the principal shareholder of
an institution, and servicing
corporations ow ned by bank holding
companies. U n der the proposal,
compensation for duties performed by
an officer or employee o f the institution
w ould not be deemed to be a
management fee for purposes o f section
38.

Comment 39: The agencies request
comment on the proposal’s provisions
regarding management fees and
compensation in light o f the purpose o f
section 38 o f limiting losses to the
deposit insurance funds that might result
from the payment o f dividends or the
payment o f management fees by an
undercapitalized institution or an
institution that w o u ld be
undercapitalized after the payment.

2. Definition of “Control”
Certain provisions o f section 38 apply
to companies that "control” an insured
depository institution. Section 38 o f the




F D I A ct does not define the term
"control” . H o w ever, section 3 o f the FDI
A ct adopts the definition o f "control”
contained in section 2 o f the Bank
H olding Com pany A ct ( “B H C A c t”) (12
U.S.C. 1841(a)(2)). U nder the B H C Act, a
company controls an institution if (1) the
company o w n s or controls 25 percent or
more o f any class o f voting securities o f
that institution; (2) the company controls
in any m anner the election o f a majority
o f the board o f directors o f the
institution; or (3) the agency determines,
after notice and opportunity for hearing,
that the company exercises a controlling
influence over the management or
policies o f the institution.

Other provisions of the BHC Act
exclude certain types of share
ownership from the provisions of the
BHC Act, including shares acquired by a
company in satisfaction of a debt
previously contracted ("DPC’J or shares
held by a company in a fiduciary
capacity.
Com m ent 40; The agencies request
comment on whether it w o u ld be
appropriate under section 38 to provide,
by regulation, an exception from the
definition o f “control” for shares
acquired D P C or shares held in a
fiduciary capacity.
Comment 41; In particular, the
agencies request comment on whether
the agencies should by regulation adopt
the D P C and fiduciary ownership
exceptions contained in section 2(a)(5)
o f the Bank H olding Com pany Act.
Section 2(a)(5) o f the B H C A ct (12 U.S.C.
1841(a)(5)) permits a company to hold
shares o f a depository institution
acquired D P C without becoming subject
to the restrictions o f that A ct provided
that the company disposes o f the shares
within two years (with the possibility of
three one-year extensions). Section
2(a)(5) also permits a company to hold
shares of a depository institution in a
fiduciary capacity without becoming
subject to the restrictions o f the B H C
A ct provided that the company does not
retain sole right to vote the shares.
Comment 42: Finally, in the event that
an exception for shares acquired D P C is
included in the regulations implementing
section 38, the agencies request
comment on whether the exception
should include conditions similar to
those contained in the D P C exception to
section 5 o f the FDI A ct (12 U.S.C.
1815(e)), which imposes cross-guarantee
requirements on affiliated institutions.
Section 5 o f the F D I A ct contains an
exception for the acquisition by an
insured depository institution o f shares
o f another depository institution in
satisfaction o f a debt previously
contracted. That exception is
conditioned on the requirement that all
12

transactions betw een the controlling
institution or any affiliate o f the
controlling institution and the subsidiary
institution comply with the restrictions
contained in sections 23A and 23B o f the
Federal Reserve Act.
3. A pplicability o f Capital Categories to
Bank H olding Com panies and Savings
and Loan H olding Com panies
Section 38 applies capital-based
prompt corrective action to insured
depository institutions but not to holding
companies that control such institutions.
H ow ever, various provisions o f section
38 apply to companies that control
insured depository institutions. These
provisions appear to apply to holding
companies regardless o f the capital level
o f those holding companies.
The Federal Reserve B oard and the
O T S do not propose to adopt a parallel
fram ework o f capital categories for
holding companies. Instead, the Federal
Reserve intends to consult with the
federal banking agency for each insured
depository institution subsidiary o f the
holding company to monitor supervisory
actions required under section 38, and,
in the supervision o f the holding
company, to take appropriate action at
the holding com pany level b ased on an
assessment o f these developments. In
supervising savings and loan holding
companies, the O T S w ill also take
appropriate action at the holding
com pany level b a se d on an assessm ent
o f the actions taken under section 38
regarding its savings association
subsidiaries.
Com m ent 43: The agencies request
comment on whether it is appropriate
for the agencies to exercise their
supervisory authority under other
provisions o f la w to establish a
fram ework o f supervisory actions for
bank holding companies and savings
and loan holding companies sim ilar to
those established in section 38 for
insured depository institutions.
4. Restrictions on Activities o f Critically
Undercapitalized Institutions
Section 38(i) o f the FDI A ct provides
that the FDIC must, by regulation or
order, restrict the activities o f critically
undercapitalized institutions. The
activities that must be restricted are
described a bo verln order to facilitate
state member banks providing
comments on the FD IC ’s proposal to
implement the restrictions on section
38(i), the following discussion o f the
FDIC proposal has been provided.
The FD IC proposes to rely on existing
industry or regulatory guidance, to the
extent possible, w hen evaluating and
applying each o f the restrictive
provisions of section 38(i) and to

1 0 5 5 2 1
-'
continue to coordinate closely with the
primary Federal and/or State banking
regulators. The interagency procedures
implemented w ill be similar to those
already in place at both the Federal
agency and state banking department
levels. For example, prior to imposing
any order restricting or prohibiting an
institution from engaging in any o f the
activities that can be restricted, the
F D IC w ould consult with the
appropriate federal banking agency and
State banking agency, as appropriate.
FDIC1A does not provide specific
guidance on h o w to interpret and
implement each o f the above restrictive
provisions. Consequently, the FDIC is
considering a number o f options.
The prohibition on entering into "any
material transaction other than in the
usual course o f business” can be
interpreted in a general fashion relying
on outstanding case la w in the area o f
securities disclosures. The concept o f
materiality also could be defined from
an accounting perspective b y
establishing specific limits for
determining materiality. For example,
the FDIC could, by regulation, require
that any prospective transaction other
than one that is m the usual course of
business that results or could result in a
5 percent change in an institution's
tangible equity capital account o r net
income account w o uld automatically b e
considered a material transaction
requiring the FD IC ’s prior approval.
Other transactions could be defined as
material on a case by case basis.
Comment 4 :The FDIC solicits
4
comment on h o w to define the terms
‘‘material” and "usual course of
business” as w ell as w hat specific
guidance, if any, should be provided by
the FDIC to the banking industry.
The FDIC proposes to define the term
"highly leveraged transaction” by
utilizing the currently outstanding
interagency definition published in the
Federal Register (57 FR 5040, February
11,1992). The FD IC proposes to rely on
existing generally accepted accounting
principles w hen interpreting the
restriction on making any “material
change in accounting method.”
Section 39(c) o f the FDI A ct requires
the federal banking agencies to
prescribe standards for determining
w hen compensation paid to employees,
directors and principal shareholders o f
insured depository institutions is
excessive. A n advance notice o f
proposed rulemaking is expected to b e
published in the Federal Register in the
near future. The FDIC intends to
interpret the restrictive provision of
section 38(i) involving the payment o f
excessive compensation or bonuses in a




m anner that is consistent with the
F D IC ’s actions in fulfilling the
requirements o f section 39(c) o f the FDI
Act.
The provision that restricts “paying
interest on n ew or renew ed liabilities at
a rate that w o u ld increase the
institution’s weighted average cost o f
funds to a level significantly exceeding
the prevailing rates o f interest on
insured deposits in the institution's
normal market areas” contains terms
that relate to the changes mandated by
section 301 o f F D IC IA and the revisions
o f § 337.6 o f the F D IC ’s regulations as
recently implemented by the FDIC. The
FDIC proposes to interpret the phrase
“significantly exceeding the prevailing
rates” the same as defined in § 337.6.
The prevailing effective yields of
interest are the effective yields on
insured deposits o f com parable
maturities offered by other insured
depository institutions in the market
area in which deposits are being
solicited. A rate o f interest on a deposit
with an odd maturity w ill be considered
excessive if it is more than 75 basis
points higher than the yield calculated
by interpolating between the yields
offered by other depository institutions
on deposits o f the next longer and
shorter maturities offered in the market.
A market area is any readily defined
geographic area in which the rates
offered b y any one insured depository
institution operating in the area may
affect the raters offered b y other
institution operating in the same area.

The FDIC invites comments on all
aspects of these proposed
interpretations.
Regulatory Flexibility Act
The Regulatory Flexibility A ct (5
U.S.C. 601 et seq.) requires an initial
regulatory flexibility analysis with any
notice o f proposed rulemaking. A
description of the reasons w h y the
action by the Board is being considered
and a statement o f the objectives of, and
legal basis for, the proposed rule are
contained in the supplementary
information above. There are no
relevant federal rules that duplicate,
overlap, or conflict with the proposed
rule.
The proposed rule implements the
prompt corrective action provisions o f
section 131 o f F D IC IA for all state
mem ber banks, regardless o f size. The
regulation requires each bank to monitor
its capital levels and to report to the
Board any event that w o u ld change the
bank’s capital category. The proposed
rule requires that a bank that becomes
undercapitalized, significantly
undercapitalized, or critically

13

undercapitalized submit a capital
restoration plan.
The proposal is not expected to have
a significant economic impact on a
substantial number o f small entities
within the meaning o f the Regulatory
Flexibility Act. The filing o f the capital
plan is a requirement im posed by statute
and occurs only w hen an institution
initially becom es undercapitalized,
significantly undercapitalized, or
critically undercapitalized. In
establishing a mechanism for gathering
sufficient information to determine the
appropriate capital category for each
state m ember bank, the Board has
attempted to reduce the burden imposed
on such banks by relying primarily on
the call report that must already be filed
and on reports o f examination that
w o uld otherwise take place. N o
additional regular reporting requirement
has been proposed. Rather, each state
m ember bank is required to monitor its
capital levels— an effort that analysts at
an institution should already be
undertaking— and report to the Board
only w hen an event occurs that w ould
change the capital category in which the
banks w a s previously placed.
Paperw ork Reduction
The proposal w o u ld require certain
state m em ber banks to file capital
restoration plans and w o u ld require all
banks to monitor their capital levels and
report any event that w o u ld result in a
change in capital category under prompt
corrective action. A s described above,
the filing o f a capital plan occurs only
under limited circumstances and is
required by statute. The requirement
that a state mem ber bank notify the
Board o f an event that w o u ld change its
capital category is intended to
supplement existing call report data and
reports o f examination, and should be
triggered infrequently. The institution
should not be required to engage in
significant additional recordkeeping to
comply with this requirement.
List o f Subjects

12 CFR Part 208
Accounting, Agriculture, Banks,
Banking, Confidential business
information, Currency, Federal Reserve
System, Reporting and recordkeeping
requirements, Securities.

12 CFR Part 263
Adm inistrative practice and
procedure, Federal Reserve System.
For the reasons outlined above, the
Board o f Governors proposes to amend
12 CFR parts 208 and 263 as set forth
below :

\
w

10552

PART 208— MEMBERSHIP OF S TA TE
BANKING INSTITUTIONS IN TH E
FEDERAL RESERVE SYSTEM

and capita) levels that are used for
determining the supervisory actions
authorized under section 38 o f the FDI
A c t This subpart also establishes
1. The authority citation for 12 CFR
procedures for submission and review o f
part 208 is revised to read as follows:
capita] restoration plans and for
Authority: Secs. 9 ,11(a), 11(c), 19, 21, 25
issuance and review o f orders pursuant
and 25(a) of the Federal Reserve Act, as
to that section.
amended (12 U.S.C. 321-338, 248(a), 248(c),
(c ) A pplicability. This subpart
461, 481-486, 601, and 611, respectively); secs. implements the provisions o f section 38
4 ,13(j) and 38 of the Federal Deposit
o f the FDI A ct as they apply to state
Insurance Act, as amended (12 U.S.C. 1814,
member banks. Certain o f these
1823(j), and 1831o, respectively): sec. 7(a) of
provisions also apply to officers,
the International Banking Act of 1978 (12
directors and employees o f state
U.S.C. 3105): secs. 907-910 of the
International Lending Supervision Act of 1983 member banks. Other provisions apply
(12 U.S.C. 3906-3909): secs. 2, 12(b), 12(g),
to any company that controls a state
12(i), 15B(c)(5), 17,17A, and 23 of the
mem ber bank and to the affiliates o f a
Securities Exchange Act of 1934 (15 U.S.C.
state member bank.
78b, 781(b), 1781(g), 781(i), 78o-4(c)(5), 78q,
(d) O ther S u pervisory Authority.
78q-l, and 78w, respectively); sec. 5155 of the
Neither section 38 nor this subpart in
Revised Statutes (12 U.S.C. 36) as amended
by the McFadded Act of 1927; and secs. 1101- any w a y limits the authority o f the
Board under any other provision o f la w
1122 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (12
to take supervisory actions to address
U.S.C. 3310 and 3331-3351).
unsafe o r unsound practices, deficient
capital levels, violations o f la w o r
2. The undesignated centerheading
regulation, unsafe or unsound
preceding $ 208.1 is removed, § § 208.1
through 208.19 are designated as subpart conditions, o r other practices. Action
A to part 208, and the subpart A heading under section 38 o f the FD I A ct and this
subpart m ay b e taken independently of,
is added to read as follows:
in conjunction with, or in addition to
any other enforcement action available
Subpart A — General Provisions
to the Board, including issuance a t cease
3. Subpart B, comprising § § 208.30
and desist orders, capital directives,
through 208.35, is added to part 208 to
approval or denial o f applications o r
read as follows:
notices, assessment o f civil money
penalties, or any other actions
Sub part B— Prompt Regulatory Action
authorized b y law .
Sec.
(e) L im ited Scope o f C apital
208.30 Authority, purpose, applicability and
Categories. The assignment o f a bank
other supervisory authority.
under this subpart within a particular
208.31 Definitions.
capital category is for purposes o f
208.32 Financial data calculations and
notice of capital category.
implementing and applying the
208.33 Capital measures and capital
provisions o f section 38 and, unless
category definitions.
permitted b y the Board o r otherwise
208.34 Capital restoration plans.
required b y la w or regulation, m ay not
208.35 Mandatory and discretionary
be used by, for, or on beh a lf o f a state
supervisory actions and section 38.
m em ber bank for any other purpose.

Subpart B— Prompt Regulatory Action
§ 208.30 Authority, purpose, applicability
and other supervisory authority.

(a) Authority. This subpart is issued
by the Board of Governors of the
Federal Reserve System (Board)
pursuant to section 38 (section 38) of the
Federal Deposit Insurance Act (FDI
Act), as added by section 131 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (Pub. L. 102242,105 Stat. 2236 (1991)) (12 U.S.C.
1831o).

(b) Purpose. Section 38 of the FDI Act
establishes a framework of supervisory
actions for insured depository
institutions that are not adequately
capitalized. The principal purpose of
this subpart is to define, for state
member banks, the capital measures




in dividu al in the in dividu al’s cap acity as
an officer or em p loyee o f the bank.
(c) R isk-w eigh ted a sse ts m ean s total
w eig h ted risk a sse ts, a s calcu lated in
a cco rd a n ce w ith the Board’s C apital
A d eq u a cy G u id elin es for State M em ber
Banks: R isk-B ased M easure (appendix A
to part 208).
(d) Tangible e q u ity m ean s the am ount
o f Tier 1 cap ital a s calcu lated in
a ccord an ce w ith the Board’s C apital
A d eq u a cy G u id elin es for State M em ber
Banks: R isk-B ased M easure (appendix A
to part 208).
(e) Tier 1 ca p ita l m ean s the am ount o f
T ier 1 cap ital a s d efined in the Board’s
C apital A d eq u a cy G uidelines for State
M em ber Banks: R isk-B ased M easure
(app en dix A to part 208).
(f)

Tier 1 risk -b a sed c a p ita l ratio

m ea n s the ratio o f Tier 1 cap ital to
w eig h ted risk a sse ts, a s calcu lated in
a ccord an ce w ith the Board’s C apital
A d eq u a cy G u id elines for S tate M em ber
Banks: R isk-B ased M easure (appendix A
to part 208).
(g) T otal a sse ts m ean s average total
co n so lid a ted a sse ts a s calcu lated in
acco rd a n ce w ith the Board’s C apital
A d eq u a cy G u id elin es for S tate M em ber
Banks: Tier 1 L everage M easure
(app en dix B to part 208).
(h )

T otal risk -b a sed c a p ita l ratio

m ean s the ratio o f qualifying total
cap ital to risk-w eighted a sse ts, as
ca lcu la ted in a ccord an ce w ith the
Board’s C apital A d eq u acy G uidelines
for S ta te M em ber Banks: R isk-B ased
M easu re (app en dix A to part 208).
§ 200.32 Financial data calculations and
node* of capital category.

(a) E ffective d a te o f determ ination o f
c a p ita l category. A state m em ber bank

sh a ll b e d eem ed to be w ithin a given
cap ital category for purposes o f section
38 o f the FDI A ct and this subpart a s o f
the d ate the bank is n otified of, or is
d eem ed to h a v e n otice of, its capital
§ 208.31 Definition*.
category, pursuant to paragraph (b) o f
F o r purposes o f this subpart, except a s this section.
m odified in this section or unless the
(b) N otice o f ca p ita l category. A state
context otherwise requires, the terms
m em ber bank sh all b e deem ed to h ave
used in this subpart have the sam e
n otice o f its cap ital le v e ls and its capital
meanings as set forth in sections 38 and
category a s o f the m ost recent of:
3 o f the FDI Act.
(1) The d ate o f Report o f C ondition
(a ) L everage ra tio means the ratio o f
and Incom e (“C all Report”) is required
Tier 1 capital to average total
to be filed w ith the Board;
consolidated assets, as calculated in
(2) The d ate a final report of
accordance with the Board’s Capital
exam in ation or report o f in sp ection is
A de qu acy Guidelines for State M em ber
d elivered to the bank;
Banks: Tier 1 Leverage M easure
(3) The d ate that the Board p rovides
(appendix B to part 208).
w ritten n otice to the bank that the
bank's cap ital category h as changed as
(b ) M anagem ent f e e m eans any
p rovid ed in paragraph (C) o f this
payment o f money o r provision o f any
section;
other thing o f value to a company or
(4) The d ate that the Board p rovides
individual for the provision o f
w ritten n o tice to the bank o f its capital
management services o r advice to the
le v e ls an d its cap ital category for
bank, other than compensation to an
14

f

purposes o f section 38 o f the FDI Act
and this subpart; or
(5)
The date any written notice is
served in the bank that the ban k’s
capital category has been changed
pursuant to $ 208.33(c).
(c)
Adjustments o f reported capital
levels and category— (1) N otice o f
adjustm ent to be p ro v id e d b y bank. A
state m em ber bank shall provide the
B oard with written notice that an
adjustment to the bank’s capital
category may have occurred no later
than 5 calendar days following the
earlier o f the date that the bank:
(1) Reports, or has determined to
report, any event that w o u ld cause the
bank to b e placed in a different capital
category from the category assigned to
the bank for purposes o f section 38 and
this subpart on the basis o f the bank’s
most recent Call Report or report of
examination o r inspection; or
(ii)
Determines that any event has
occurred that w ould cause the bank to
be placed in a different capital category
from the category assigned to the bank
for purposes o f section 38 and this
subpart on the basis o f the bank’s most
recent C all Report or report o f
exam ination or inspection.
(2) D eterm ination to change ca p ita l
category. A fter receiving notice
pursuant to paragraph (c)(1) o f this
section, the Board shall determine
whether the capital category o f the bank
should be changed and shall notify the
bank o f the B oard’s determination.

§ 208.33 Capital measures and capital
category definitions.

(ii) Has a Tier 1 risk-based capital
ratio of 4.0 percent or greater;
(iii) Has—
(A) A leverage ratio of 4.0 percent or
greater, or
(B) A leverage ration of 3.0 percent or
greater if the bank is rated composite 1
under the CAMEL rating system in the
most recent examination or inspection
of the bank and is not experiencing or
anticipating significant growth; and
(iv) Does not meet the definition of a
“well capitalized” bank.
(3) “undercapitalized” if the bank—
(i) Has a total risk-based capital ratio
that is less than 8.0 percent; or
(ii) Has a Tier 1 risk-based capital
ratio that is less than 4.0 percent; or
(iii) (A) Except as provided in clause
(B), has a leverage ratio that is less than
4.0 percent; or
(B) If the bank is rated composite 1
under the CAMEL rating system in the
most recent examination or inspection
of the bank, has a leverage ratio that is
less than 3.0 percent.
(4) “Significantly undercapitalized” if
the bank has—
(i) A total risk-based capital ratio that
is less than 6.0 percent; or
(ii) A Tier 1 risk-based capital ratio
that is less than 3.0 percent; or
(iii) A leverage ratio that is less than
3.0 percent.
(5) "Critically undercapitalized” if the
bank has a ratio of tangible equity to
total assets that is equal to or less than
2.0 percent.
(c)
Classification b a se d on
su pervisory criteria other than capital.

The Board may reclassify a well
capitalized state member bank as
adequately capitalized and may require
an adequately capitalized or an
undercapitalized state member bank to
comply with supervisory actions as if it
were in the next lower capital category
(except that the Board may not
reclassify a significantly
undercapitalized bank as critically
undercapitalized) in the following
circumstances:
(1) Unsafe or unsound conditions. The
Board has determined, after notice and
(1) H as a total risk-based capital ratio
opportunity for hearing pursuant to
o f 10.0 percent or greater;
§ 263.202(a) of this chapter, that the
(ii) H as a Tier 1 risk-based capital
bank is in unsafe or unsound condition;
ratio o f 6.0 percent or grea ter;
or
(iii) H as a leverage ratio o f 5.0 percent
(2) Unsafe or unsound practice. The
or greater; and
Board has determined, after notice and
(iv ) Is not subject to any order o f final
opportunity for response pursuant to
capital directive by the Board to meet
| 263.202(b) of this chapter, that the
and maintain a specific capital level for
bank has received, and not corrected, a
any capital measure.
less-than-satisfactory rating for any of
(2) “A dequately capitalized” if the
the categories of asset quality,
bank:
management, earnings, or liquidity in
(i)
H as a total risk-based capital ratiothe most recent examination or
o f 8.0 percent or greater;
inspection of the bank.

(a ) C apital m easures. For purposes o f
section 38 and this subpart, the relevant
capital m easures shall be:
(1) The total risk-based capital ratio;
(2) The H e r 1 risk-based capital ratio;
and
(3) The leverage ratio.
(b ) C apital categories. For purposes of
the provisions o f section 38 and this
su b p art a state member bank shall be
deem ed to be:
(1) “W e ll capitalized” if the bank:




15

§ 208.34

Capital restoration plans.

Schedule o f filing plan — (1) In
general. A state mem ber bank must file
(a)

a written capital restoration plan with
the appropriate Reserve Bank within 45
days o f the date that the bank receives
notice or is deem ed to have notice that
the bank is undercapitalized,
significantly undercapitalized, or
critically undercapitalized, unless the
Board notifies the bank in writing that
the plan must be filed within a different
period. A bank that has been
reclassified as undercapitalized
pursuant to § 208.33(c) is not required to
submit a capital restoration plan solely
by virtue o f the reclassification.
(2)
A d d ition al ca p ita l restoration
plans. Notwithstanding paragraph (a)(1)
o f this section, a bank that has already
submitted and is operating under a
capital restoration plan approved under
section 38 and this subpart is not
required to submit an additional capital
restoration plan based on a revised
calculation of its capital measures
unless the Board notifies the bank that it
must submit a n ew or revised capital
plan. A bank that is notified that it must
submit a n e w or revised capital
restoration plan shall file the plan in
writing with the appropriate Reserve
bank within 45 days of receiving such
notice, unless the Board notifies the
bank in writing that the plan is to be
filed within a different period.
(b ) Contents o f plan. A ll financial data
submitted in connection with a capital
restoration plan shall be prepared in
accordance with the instructions
provided on the C all Report, unless the
Board instructs otherwise. The capital
restoration plan shall include all o f the
information required to be filed under
section 38(e)(2) o f the FDI Act, including
any performance guarantee required to
be executed under section 38(e)(2)(C) o f
that A ct by each com pany that controls
the bank. A bank that is required to
submit a capital restoration plan as the
result o f a reclassification o f the bank
pursuant to § 208.33(c) shall include a
description o f the steps the bank w ill
take to correct the unsafe or unsound
condition or practice.
(c) R eview o f ca p ita l restoration
plans. W ithin 60 days after receiving a
capital restoration-plan under this
subpart, the Board w ill provide written
notice to the bank o f whether the plan
has been approved. The Board m ay
extend the time within which notice
regarding approval o f a plan shall be
provided.
(d) D isapproval o f cap ita l plan. If a
capital restoration plan is not approved
by the Board, the bank must submit a
revised capital restoration plan within
the time specified by the Board. Upon

16552“
receiving notice that its capital
restoration plan has not been approved,
any undercapitalized state member
bank (as defined in § 208.33(b)(3)) shall
be subject to all of the provisions of
section 38 and this subpart applicable to
significantly undercapitalized
institutions. These provisions shall be
applicable until such time as a new or
revised capital restoration plan
submitted by the bank has been
approved by the Board.
(e) Failure to subm it a capital
restoration plan. A state member bank
that is undercapitalized (as defined in
§ 208.33(b)(3)) and that fails to submit a
written capital restoration plan within
the period provided in this section shall,
upon the expiration of that period, be
subject to all of the provisions of section
38 and this subpart applicable to
significantly undercapitalized
institutions.
(f) Failure to im plem ent a capital
restoration plan. Any undercapitalized
state member bank that fails in any
material respect to implement a capital
restoration plan shall be subject to all of
the provisions of section 38 and this
subpart applicable to significantly
undercapitalized institutions.
(g) A m endm ent o f capital plan. A
bank that has filed an approved capital
restoration plan may, after prior written
notice to and approval by the Board,
amend the plan to reflect a change in
circumstance. Until such time as a
proposed amendment has been
approved, the bank shall implement the
capital restoration plan as approved
prior to the proposed amendment.
(h) N otice to FDIC. With 45 days of
the effective date of Board approval of a
capital restoration plan, or any
amendment to a capital restoration plan,
the Board will provide a copy of such
plan or amendment to the Federal
Deposit Insurance Corporation.
(i) Performance guarantee b y
com panies that control a bank.— (1)
Lim itation on liability. —(i) Am ount
lim itation. The aggregate liability under

and levels are defined at the time that
the bank initially fails to comply w ith a
capital restoration plan under this
subpart.
(ii) L im it on duration. The guarantee
and limit o f liability under section 38
and this subpart shall expire after the
Board notifies the bank that it has
remained adequately capitalized for
each o f four consecutive calendar
quarters. The expiration or fulfillment
b y a com pany o f a guarantee o f a capital
restoration plan shall not limit the
liability o f the com pany under any
guarantee required or provided in
connection with any capital restoration
plan filed by the sam e ban k after
expiration o f the first guarantee.
(iii) Collection on guarantee. Each
company that controls a given bank
shall be jointly and severally liable few*
the guarantee for such bank as required
under section 38 an d this subpart, and
the B oard may require and collect
payment o f the full amount o f that
guarantee from any o r all o f the
companies issuing the guarantee.
(2) Failure to p ro v id e guarantee. In the
event that a ban k that is controlled by
any com pany submits a capital
restoration plan that does not contain
the guarantee required under section
38(e)(2) o f the F D I A ct, the bank shall,
upon subm ission o f the plan, b e subject
to the provisions o f section 38 and this
subpart that are applicable to ban k s that
have not submitted an approved capital
restoration plan.
(3) Failure to perform guarantee .
Failure b y any company that controls a
bank to perform fully its guarantee o f
any capital p lan shall constitute a
material failure to implement the plan
for purposes o f section 38(f) o f the FDI
A c t Upon such failure, the bank shall be
subject to the provisions o f section 38
and this subpart that are applicable to
banks that have failed in a material
respect to implement a capital
restoration plan.

§ 208.36 Mandatory and eBacrodonary
supervisory actions under section 38.

the guarantee provided under section 38
(a) M andatory su pervisory actions .—
and this subpart for all companies that
(1) Provisions applicable to a ll banks.
control a specific state member bank
A ll state m ember banks are subject to
that is required to submit a capital
the restrictions contained in section
restoration plan under this subpart shall 38(d) o f the FDI Act. on payment o f
be limited to the lesser of:
capital distributions and management
(A) An amount equal to 5.0 percent of fees.
the bank’s total assets at the time the
(2)
P rovisions applicable to
bank was notified or deemed to have
undercapitalized, significantly
notice that the bank was
undercapitalized, a n d critica lly
undercapitalized; or
u n dercapitalized banks. Immediately
(B) The amount necessary to restore
upon receiving notice or being deemed
the relevant capital measures of the
to have notice, as provided in § 208.32 or
bank to the levels required for the bank § 208.34 o f this subpart, that the bank is
to be classified as adequately
undercapitalized, significantly
capitalized, as those capital measures
undercapitalized, or critically




16

undercapitalized, the bank shall becom e
subject to the provisions o f section 38 of
the FDI A ct—
(i) Restricting payment o f capital
distributions and management fees
(section 38(d));
(ii) Requiring that the B oard monitor
the condition o f the bank (section
38(e)(1));
(iii) Requiring subm ission o f a capital
restoration plan within the schedule
established in this subpart (section
38(e)(2));
(iv) Restricting the grow th o f the
ban k ’s assets (section 38(e)(3)); and
(v ) Requiring prior approval o f certain
expansion proposals (section 38(e)(4)).
(3) A d d itio n a l pro visio n s applicable

to significantly undercapitalized, an d
critica lly u n dercapitalized banks. In
addition to the provisions o f section 38
o f the FDI A ct described in paragraph
(a)(2 ) o f this section, immediately upon
receiving notice or being deem ed to
have notice, as provided in | 208.32 or
9 208.34 o f this subpart, that the bank is
significantly undercapitalized, or
critically undercapitalized, the bank
shall becom e subject to the provisions o f
section 38 o f the FDI A c t that restrict
compensation paid to senior executive
officers o f the institution (section
38(f)(4)).
(4) A d d itio n a l p rovision s a p p licable
to c ritica lly u n dercapitalized banks. In
addition to the provisions o f section 38
o f the FDI A c t described in paragraphs
(a ) (2) and (3) o f this section,
immediately upon receiving notice o f
being deem ed to have notice, as
provided in S 20832 or 9 20834 o f this
subpart, that the bank is critically
undercapitalized, the bank shall becom e
subject to the provisions o f section 38 o f
the FD I A ct—
(i) Restricting the activities o f the
ban k (section 38(h)(1)); and
(ii) Restricting payments on
subordinated debt o f the b ank (section
38(h)(2)).
(b )
D iscretionary su p erviso ry actions.
In taking any action under section 38
that is within the B oard’s discretion to
take in connection with a state m em ber
bank that is deemed to be
undercapitalized, significantly
undercapitalized or critically
undercapitalized, an officer or director
o f such bank, or a com pany that controls
such bank, the Board w ill fo llo w the
procedures for issuing directives under
§ § 263.201 and 263.203 o f this chapter,
unless otherwise provided in section 38
or this subpart.
4.
Subparts C and D are added to part
208 and reserved, the undesignated
centerhead preceding § 208.116 is
removed,
208.116, 208.117, 208.122,
and 208.124 through 208.128 are

99

y § A

designated a s subpart E o f part 208, and
the 8ubpart E heading is added to read
as follow s:

Subpart E— Interpretations
PART 263— RULES OF PRACTICE FOR
HEARINGS
1. The authority citation for 12 CFR
part 263 is revised to read as follows:

such banks, and senior executive
officers and directors o f state member
banks that are subject to the provisions
o f section 38 o f the Federal Deposit
Insurance A ct (section 38) and subpart B
o f part 208 o f this chapter.

§ 263.201 Directives to take prompt
regulatory action.
(a) N otice o f intent to issue a
directive. — (1) In General. The Board

Authority: 5 U.S.C. 504; 12 U.S.C. 248, 324,
504, 505,1817(j), 1818,1828(c), 1831o, 1847(b),
1847(d), 1884(b), 1072(2)(F), 3105, 3107, 3108,
3907, 3909,15 U.S.C, 21. 78o-4, 78o-5, and
78u-2.

w ill provide an undercapitalized,
significantly undercapitalized, or
critically undercapitalized state member
bank or, w here appropriate, any
company that controls the bank, prior
written notice o f the B oard’s intention to
2. Section 2634>0(b} is am ended by
issue a directive requiring such bank or
rem oving the w o rd M
and” at the end of
paragraph (b )(9 ), removing the period at company to take actions or to follow
proscriptions described in section 38
the end o f paragraph (b)(10) and adding
that are within the B oard’s discretion to
in its place a semicolon, and by adding
require or impose under section 38(e)(5),
paragraphs ( b ) ( l l ) through (b)(14) to
(f)(2), (f)(3), or (f)(5) o f the FDI Act.
read as follows:
(2)
Im m ediate issuance o f fin a l
S 26350 Purpose and scops.
directive. If the propose Board finds it
necessary in order to carry out the
purposes of section 38 o f the FDI Act,
(b ) * * *
the Board may, without providing the
(11) Issuance o f a prompt corrective
action directive to a member bank under notice prescribed in paragraph (a)(1 ) of
this section, issue a directive requiring a
section 38 o f the FDI A ct (12 U.S.C.
state member bank or any company that
18310):
controls a state member bank
(12) Reclassification o f a member
immediately to take actions or to fo llo w
bank on grounds o f unsafe or unsound
proscriptions described in section 38
condition under section 38(g)(1) o f t{ie
that are within the B oard’s direction to
FDI A ct (12 U.S.C. 1831o(g)(l));
require or impose under section 38(e)(5),
(13) Reclassification of a member
bank on grounds of unsafe and unsound (f)(2), (f)(3), or (f)(5) o f the FDI Act. A
practice under section 38(g)(1) of the FDI bank or company that is subject to such
an immediately effective directive m ay
Act (12 U.S.C. 1831o(g)© !]]; and
submit a written appeal o f the directive
(14) Issuance o f an order requiring a
o f the Board. Such an appeal must be
member bank to dismiss a director or
received by the Board within 14
senior executive officer under section
calendar days o f the issuance o f the
38(e)(5) and 38(f)(2)(F)(ii) o f the FDI A ct
directive. The Board shall consider any
(12 U.S.C. 1831o (e)(5 ) and
such appeal, if filed in a timely matter,
1831o(fM2KF)(ii)).
within 60 days o f receiving the appeal.
3. A n ew subpart H is added to part
During such period o f review, the
263 to read as follows:
directive shall remain in effect unless
Subpart H— Issuance and Review of Orders the Board, in its sole discretion, stays
Pursuant to Prompt Regulatory Action
the effectiveness o f the directive.
Sec.
(b ) Contents o f notice .— A notice of
$ 263.200 Scope.
intention to issue a directive shall
S 263.201 Directives to take prompt
include:
regulatory action
(1) A statement o f the ban k’s capital
§ 263.202 Procedures for reclassifying a state
measures and capital levels;
member bank based on criteria other
(2) A description o f the restrictions,
than capital.
prohibitions or affirmative actions that
§ 263.203 O lder to dismiss a director or
the Board proposes to impose or require;
senior executive officer.
(3) The proposed date w hen such
S 263.204 Enforcement of directives.
restrictions or prohibitions w o u ld be
SUBPART H— INSURANCE AND
effective or the proposed date for
REVIEW O F ORDERS PURSUANT T O
completion o f such affirmative actions;
PROMPT REG ULATOR Y ACTION
and
(4) The date by which the bank or
§263.200 Scope.
company subject to the directive may
(a )
The rules and procedures set forthfile with the Board a written response to
in this subpart apply to state member
the notice.
banks, companies that control state
(c) R esponse to notice. — (1) Time fo r
m em ber banks or are affiliated with
Response. A bank or company may file




17

mf

a written response to a notice of intent
to issue a directive within the time
period set by the Board. The date shall
be at least 14 calendar days from the
date of the notice unless the Board
determines that a shorter period is
appropriate in light of the financial
condition of the bank or other relevant
circumstances.
(2) Content o f Response. The response
should include:

(i) An explanation why the action
proposed by the Board is not an
appropriate exercise of discretion under
section 38;
(ii) Any recommended modification of
the proposed directive; and
(iii) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the bank or
company regarding the proposed
directive.
(d) Failure to file agency response.
Failure by a bank or company to file
with the Board, within the specified time
period, a written response to a proposed
directive shall constitute a waiver of the
opportunity to respond and shall
constitute consent to the issuance of the
directive.
(e) Board consideration o f response.
A fter considering the response, the
Board may:
(1) Issue the directive as proposed or
in modified form;

(2) Determine not to issue the
directive and so notify the bank or
company; or
(3) Seek additional information or
clarification of the response from the
bank or company, or any other relevant
source.
(f) R equest fo r m odification or
rescission o f directive. Any bank or
company that is subject to a directive
under this subpart may, upon a change
in circumstances, request in writing that
the Board reconsider the terms of the
directive, and may propose that the
directive be rescinded or modified.
Unless otherwise ordered by the Board,
the directive shall continue in place
while such request is pending before the
Board.
§ 263.202 Procedures for reclassifying a
state member bank based on criteria other
than capital.

(a)
C lassification o f a sta te m em ber
bank, b a se d on unsafe or unsound
condition — (l)Issuance o f notice o f
p ro p o sed reclassification. If the Board
determines to reclassify a well
capitalized state member bank as
adequately capitalized or to require an
adequately capitalized or
undercapitalized state member bank to
comply with supervisory actions as if it

x
\j o j

M

constitute a waiver of any right to a
hearing, and failure to request the
opportunity to present oral testimony or
witnesses shall constitute a waiver of
any right to present oral testimony or
witnesses.
(6) O rder for inform al hearing. Upon
receipt of a timely written request
including a request for a hearing, the
Board shall issue an order directing an
informal hearing to commence no later
than 30 days after receipt of the request,
unless the bank requests a later date.
The hearing shall be held in
Washington, DC or at such other place
as may be designated by the Board,
before a presiding officer(s) designated
by the Board to conduct the hearing.
(7) Hearing procedures, (i) The bank
shall have the right to introduce relevant
written materials and to present oral
argument at the hearing. The bank may
introduce oral testimony and present
witnesses only if expressly authorized
by the Board or the presiding officer(s).
Neither the provisions of the
Administrative Procedure Act governing
adjudications required by statute to be
determined on the record nor the
Uniform Rules of Practice and Procedure
in subpart A of this part apply to an
informal hearing under this section
unless the Board orders that such
procedures shall apply.
(ii) The informal hearing shall be
recorded, and a transcript shall be
furnished to the bank upon and payment
of the cost thereof. Witnesses need not
be sworn, unless specifically requested
by a party or the presiding officer(s).
The presiding officer(s) may ask
questions of any witness.
(iii) The presiding officer(s) may order
that the hearing be continued for a
reasonable period (normally five
business days) following completion of
oral testimony or argument to allow
additional written submissions to the
hearing record.
(8) Recom m endation o f presiding
officers. Within 20 calendar days
following the date the hearing and the
record on the proceeding are closed, the
presiding officer(s) shall make a
recommendation to the Board on the
reclassification.
(9) Time for decision. No later than 60
presentation o f oral testim on y or
calendar days after the date the record
w itnesses. The response may include a
is closed or the date of the response in a
request for an informal hearing before
case where no hearing was requested,
the Board or its designee under this
the Board will decide whether to
section. If the bank desires to present
reclassify the bank and notify the bank
oral testimony or witnesses at the
hearing, the bank must include a request of the Board’s decision.
(b)
Procedures fo r reclassifying a
to do so with the request for an informal
sta te m em ber bank b a sed on unsafe and
hearing. A request to present oral
testimony or witnesses shall specify the unsound practice. —(1) Issuance o f
names of the witnesses and the general notice o f p ro p o sed reclassification. If
the Board determines to reclassify a
nature of their expected testimony.
Failure to request a hearing shall
well capitalized state member bank as

were in the next lower capital category
pursuant to section 38(g) of the FDI Act
and § 208.33(c)(1) of Regulation H (12
CFR 208.33(c)(1)) because the Board
deems the bank to be in unsafe or
unsound condition (each of the foregoing
referred to hereinafter as a
“reclassification”), the Board will issue
3hd serve on the bank a written notice
of the Board’s intention to reclassify the
bank.
(2) Contents o f notice. A notice of
intention to reclassify a bank based on
unsafe or unsound condition will
include:
(i) A statement of the bank’s capital
measures and capital levels and the
category to which the bank would be
reclassified;
(ii) The reasons for reclassification of
the bank;
(iii) The date by which the bank
subject to the notice of reclassification
may file with the Board a written appeal
of the proposed reclassification and a
request for a hearing, which shall be at
least 14 calendar days from the date of
service of the notice unless the Board
determines that a shorter period is
appropriate in light of the financial
condition of the bank or other relevant
circumstances.
(3) R esponse to notice o f p roposed
reclassification. A bank may file a
written response to a notice of proposed
reclassification within the time period
set by the Board. The response should
include:
(i) An explanation of why the bank is
not in unsafe or unsound condition or
otherwise should not be reclassified;
(ii) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the bank or
company regarding the reclassification.
(4) Failure to file response. Failure by
a bank to file, within the specified time
period, a written response with the
Board to a notice of proposed
reclassification shall constitute a waiver
of the opportunity to respond and shall
constitute consent to the
reclassification.
(5) R equest fo r hearing and




18

adequately capitalized or to require
an adequately capitalized or
undercapitalized state member
bank to comply with supervisory actions
as if it were in the next lower capital
category pursuant to section 38(g) of the
FDI Act and § 208.33(c)(2) of Regulation
H (12 CFR 208.33(c)(2)) because the
Board deems the bank to be engaging in
an unsafe or unsound practice (each of
the foregoing referred to hereinafter as a
"reclassification”), the Board will issue
and serve on the bank a written notice
of the Board’s intention to reclassify the
bank.
(2) Contents o f notice. A notice of
intention to reclassify a bank will
include:
(i) A statement of the bank’s capital
measures and capital levels and the
category to which the bank would be
reclassified;
(ii) The reasons for reclassification of
the bank;
(iii) The date by which the bank
subject to the notice of reclassification
may file with the Board a written appeal
of the proposed reclassification, which
shall be at least 14 calendar days from
the date of service of the notice unless
the Board determines that a shorter
period is appropriate in light of the
financial condition of the bank or other
relevant circumstances.
(3) R esponse to n otice o f p ro p o sed
reclassification b a se d on unsafe and
unsound practice. A bank may file a

written response to a notice of proposed
reclassification issued under this
subsection within the time period set by
the Board. The response should include:
(i) An explanation of the steps taken
by the bank to address the deficiency
described in the notice of proposed
reclassification or of the reasons that
the reclassification is not otherwise
appropriate;
(ii) Any other relevant information,
mitigating circumstances,
documentation, or other evidence in
support of the position of the bank or
company regarding the reclassification.
(4) Faiure to file response. Failure by
a bank to file, within the specified time
period, a written response with the
Board to a notice of proposed
reclassification under this subsection
shall constitute a waiver of the
opportunity to respond and shall
constitute consent to the
reclassification.
(5) B oard consideration o f response.
After considering the response, the
Board may:
(i)
Issue a written order to the bank
reclassifying the bank to a different
capital category as provided in section
38(g) of the FDI Act;

(ii) Determine not to reclassify the
bank and so notify the bank; or
(iii) Seek additional information or
clarification of the response from the
bank or company, or any other relevant
source.
(c)
R equest fo r rescission o f
reclassification. Any bank that has been
reclassified under this section, may,
upon a change in circumstances, request
in writing that the Board reconsider the
reclassification, and may propose that
the reclassification be rescinded and
that any directives issued in connection
with that reclassification be modified,
rescinded, or removed. Unless otherwise
ordered by the Board, the bank shall
remain subject to the reclassification
and to any directives issued in
connection with that reclassification
while such request is pending before the
Board.
§ 263.203 Order to dismiss a director or
senior executive officer.

(a) Service o f notice. When the Board
issues and serves a directive on a state
member bank pursuant to § 263.201
requiring the bank to dismiss from office
any director or senior executive officer
under section 38(f)(2)(F)(ii) of the FDI
Act, the Board will also serve a copy of
the directive, or the relevant portions of
the directive where appropriate, upon
the person to be dismissed.
(b) Response to directive. A director
or senior executive officer who has been
served with a directive under paragraph
(a) of this section (“Respondent”) may
file a written request for reinstatement.
The request for reinstatement must be
filed within 10 calendar days of the
receipt of the directive by the
Respondent, unless further time is
allowed by the Board at the request of
the Respondent. The request for
reinstatement should include reasons
why the Respondent should be
reinstated, and may request an informal
hearing before the Board or its designee
under this section. If the Respondent
desires to present oral testimony or
witnesses at the hearing, the
Respondent must include a request to do
so with the request for an informal
hearing. The request to present oral
testimony or witnesses shall specify the
names of the witnesses and the general
nature of their expected testimony.
Failure to request a hearing shall
constitute a waiver of any right to a
hearing and failure to request the
opportunity to present oral testimony or
witnesses shall constitute a waiver of
any right or opportunity to present oral




testimony or witnesses. Unless
otherwise ordered by the Board, the
dismissal shall remain in effect while a
request for reinstatement made under
this section is pending.
(c) O rder fo r inform al hearing. Upon
receipt of a timely written request from
a Respondent for an informal hearing on
the portion of a directive requiring a
bank to dismiss from office any director
or senior executive officer, the Board
shall issue an order directing an
informal hearing to commence no later
than 30 days after receipt of the request,
unless the Respondent requests a later
date. The hearing shall be held in
Washington, D.C., or at such other place
as may be designated by the Board,
before a presiding officer(s) designated
by the Board to conduct the hearing.
(d) Hearing procedures. (1) A
Respondent may appear at the hearing
personally or through counsel. A
Respondent shall have the right to
introduce relevant written materials and
to present oral argument A Respondent
may introduce oral testimony and
present witnesses only if expressly
authorized by the Board or the presiding
officer(s). Neither the provisions of the
Administrative Procedure Act governing
adjudications required by statute to be
determined on the record nor the
Uniform Rules of Practice and Procedure
in subpart A of this part apply to an
informal hearing under this section
unless the Board orders that such
procedures shall apply.
(2) The informal hearing shall be
recorded, and a transcript shall be
furnished to the Respondent upon
request and payment of the cost thereof.
Witnesses need not be sworn, unless
specifically requested by a party or the
presiding officer(s). The presiding
officer(s) may ask questions of any
witness.
(3) The presiding officers) may order
that the hearing be continued for a
reasonable period (normally five
business days) following completion of
oral testimony or argument to allow
additional written submissions to the
hearing record.
(e) Standard fo r review . A
Respondent shall bear the burden of
demonstrating that his or her continued
employment by or service with the bank
would materially strengthen the bank’s
ability—
(1) To become adequately capitalized,
to the extent that the directive was
issued as a result of the bank’s capital
level or failure to submit or implement a
capital restoration plan; and
(2) To correct the unsafe or unsound

19

condition or unsafe or unsound practice,
to the extent that the directive was
issued as a result of classification of the
bank based on supervisory criteria other
than capital, pursuant to section 38(g) of
the FDI A ct
(f) Lim itation on scope o f review . The
level of capital or the capital category
assigned to the state member bank with
which a Respondent is associated shall
not be subject to review in any
proceeding under this section.
(g) Recom m endation o f presiding
officers. Within 20 calendar days
following the date the hearing and the
record on the proceeding are closed, the
presiding officer(s) shall make a
recommendation to the Board
concerning the Respondent’s request for
reinstatement with the bank.
(h) Time fo r decision. Not later than
60 calendar days after the date the
record is closed or the date of the
response in a case where no hearing has
been requested, the Board shall grant or
deny the request for reinstatement and
notify the Respondent of the Board’s
decision. If the Board denies the request
for reinstatement, the Board shall set
forth in the notification the reasons for
the Board’s action.

§ 263.204 Enforcement of directives.
(a) Judicial rem edies. Whenever a
state member bank or company that
controls a state member bank fails to
comply with a directive issued under
section 38, the Board may seek
enforcement of the directive in the
appropriate United States district court
pursuant to section 8(i)(l) of the FDI Act.
(b) A d m in istra tive rem edies. Pursuant
to section 8{i)(2)(A) of the FDI Act, the
Board may assess a civil money penalty
against any state member bank or
company that controls a state member
bank that violates or otherwise fails to
comply with any final directive issued
under section 38 and against any
institution-affiliated party who
participates in such violation or
noncompliance. The failure of a bank to
implement a capital restoration plan
required under section 38, subpart B of
Regulation H (12 CFR part 208, subpart
B), or this subpart, or the failure of a
company having control of a bank to
fulfill a guarantee of a capital
restoration plan made pursuant to
section 38(e)(2) of the FDI Act shall
subject the bank or company to the
assessment of civil money penalties
pursuant to section 8(i)(2)(A) of the FDI
Act.
(c) O ther enforcem ent action. In

I .* F* *** A . .1

I
addition to the actions described in
paragraphs (a) anc|r(b) of this section,
the Board may sd&k enforcement of the
provisions of section 38 or subpart B of
Regulation H (12 CFR part 208, subpart




B) through any other judicial or
Dated: June 25,1992.
administrative proceeding authorized by Jennifer J. Johnson,
law.
Associate Secretary of the Board.
By order of the Board of Governors of the [FR Doc. 92-15307 Filed 0-26-92; 3:33 pm]
Federal Reserve System.
BILLING COOE 6 2 1 0 -0 1 -M

20