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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10584 “I
October 14, 1992
PROMPT CORRECTIVE ACTION
FOR UNDERCAPITALIZED INSTITUTIONS
Amendments to Regulation H
and Rules of Practice for Hearings
Effective December 19, 1992
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 Governors of the Federal Reserve
System:
The Federal Reserve Board has issued a final rule to carry out the “Prompt Corrective Action”
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (Section 131). The
rule applies to State member banks and goes into effect on December 19, 1992.
The Board adopted this rule following the receipt of public comment and in consultation with the
other Federal banking agencies. The rules adopted by each agency are substantially the same.
Section 131 created a legal framework for a system of supervisory actions based primarily on the
capital levels of individual institutions. The purpose of the provision is to resolve the problems of insured
institutions at the least possible long-term loss to the deposit insurance fund.
The regulation adopted by the Board:
— Defines capital measures and the capital thresholds for each of the five categories established
in the law.
— Establishes a uniform schedule for filing of capital restoration plans by undercapitalized insti
tutions and agency review of those plans.
— Clarifies aspects of the capital guarantees made as part of an acceptable capital plan by com
panies that control an undercapitalized institution.
— Establishes procedures for providing institutions with advance notice of a proposed supervisory
directive and an opportunity to contest the directive.
— Establishes procedures for reclassifying an institution to a lower capital category based on su
pervisory factors other than capital.
— Establishes procedures by which officers and directors who are dismissed as a result of an agency
order may obtain review of the dismissal and possible reinstatement.
(OVER)
Enclosed, for State member banks, bank holding companies, and those who maintain sets of
the Board’s regulations, is an excerpt from the Federal Register of September 29, containing the
official notice of this action by the Federal regulatory agencies, together with the text of the amend
ments to the Board’s Regulation H, “Membership of State Banking Institutions in the Federal Re
serve System,” and to its Rules of Practice for Hearings, effective December 19, 1992; the imple
menting regulations of the other agencies, also published in that issue of the Federal Register, have
not been reprinted by us. Additional, single copies of the enclosure 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).
Questions on this matter may be directed to Beverly J. Hirtle, Manager of our Banking Studies
Department (Tel. No. 212-720-7544).
E. G e r a l d C o r r ig a n ,
President.
Tuesday
September 29, 1992
Part IV
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Parts 6 and 19
Office of Thrift Supervision
12 CFR Part 565
Prompt Corrective Action; Rules of Practice for
Hearings; Final Rules
Federal Reserve System
12 CFR Parts 208 and 263
Federal Deposit Insurance
Corporation
12 CFR Parts 308 and 325
[Enc. Cir. No. 10584]
44866 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 6 and 19
[Docket No. 92-19]
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 263
[Docket No. R-0763; Regulation H]
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Parts 308 and 325
RIN 3064-AB16
DEPARTMENT OF TH E TREASURY
categories. It also restricts or prohibits
certain activities and requires the
submission of a capital restoration plan
when an insured institution becomes
undercapitalized. The revisions adopted
by the agencies are necessary to
establish the capital levels at which
institutions will be deemed to come
within the five capital categories. The
revisions also establish procedures for
issuing and contesting prompt corrective
action directives including directives
requiring the dismissal of directors and
senior executive officers.
The agencies sought public comment
on this proposal in July 1992. The final
rule reflects a number of changes to the
original proposal to address concerns
raised by the commenters.
EFFECTIVE DATE: December 19,1992.
FOR FURTHER INFORMATION CONTACT:
Federal Reserve Board: Frederick M.
Struble, Associate Director (202/4523794), Norah Barger, Supervisory
12 CFR Part 565
Financial Analyst (202/452-2402),
[Resolution No. 92-403]
Division of Banking Supervision and
Regulation; Scott G. Alvarez, Associate
RIN 1550-A A 57
General Counsel (202/452-3583),
Gregory A. Baer, Senior Attorney (202/
Prompt Corrective Action; Rules of
452-3236), Legal Division; Myron L.
Practice for Hearings
Kwast, Assistant Director, Division of
Research and Statistics, Board of
AGENCIES: Board of Governors of the
Governors of the Federal Reserve
Federal Reserve System; Office of the
System. For the hearing impaired only,
Comptroller of the Currency, Treasury;
Federal Deposit Insurance Corporation; Telecommunication Device for the Deaf
(TDD), Dorothea Thompson (202/452and Office of Thrift Supervision,
3544), Board of Governors of the Federal
Treasury.
Reserve System, 20th and C Streets,
ACTION: Final rules.
NW„ Washington, DC 20551.
SUMMARY: The Board of Governors of
OTS: John Connolly, Program
the Federal Reserve System (Board of
Manager, (202) 906-6465, Policy;
Governors), the Office of the
Lorraine E. Waller, Counsel (Banking
Comptroller of the Currency (OCC), the and Finance), (202) 906-6457, Deborah
Federal Deposit Insurance Corporation
Dakin, Assistant Chief Counsel, (202)
(FDIC), and the Office of Thrift
906-6445, Regulations and Legislation
Supervision (OTS) (collectively “the
Division, Office of Thrift Supervision,
agencies”) have adopted final rules
1700 G Street, NW., Washington, DC
revising their.regulations to implement
20552.
for the institutions that they supervise
FDIC: Daniel M. Gautsch,
the system of prompt corrective action
established by section 38 of the Federal Examination Specialist (202-898-6912),
Stephen G. Pfeifer, Examination
Deposit Insurance Act (FDI Act) as
Specialist (202-898-8904), Division of
added by section 131 of the Federal
Supervision; Valerie Jean Best, Counsel
Deposit Insurance Corporation
(202-898-3812), Claude A. Rollin,
Improvement Act of 1991 (FDICIA).
Counsel (202-898-3985), Legal Division,
Section 38 requires each Federal
Federal Deposit Insurance Corporation,
banking agency to implement prompt
corrective action for the institutions that 550 17th Street, NW., Washington, DC
20429.
it regulates. The agencies have also
revised their rules of practice for
OCC: Kevin J. Bailey, Executive
hearings to establish procedures for the Assistant, Senior Deputy Comptroller
issuance of directives and other actions for Bank Supervision Operations, (202)
required under prompt corrective action. 874-5030; Daniel Berkland, National
Section 38 requires or permits the
Bank Examiner, Special Supervision,
agencies to take certain supervisory
(202) 874-4450; or Beth Kirby, Senior
actions when an insured depository
Attorney, Corporate Organization and
institution falls within one of five
Resolutions Division, (202) 874-5300,
specifically enumerated capital
Office of Comptroller of the Currency.
Office of Thrift Supervision
SUPPLEMENTARY INFORMATION:
I. Background
In early July, the Board of Governors
of the Federal Reserve System (Federal
Reserve Board) (57 FR 29226, July 1,
1992), the Federal Deposit Insurance
Corporation (FDIC) (57 FR 29662, July 6,
1992), the Office of the Comptroller of
the Currency (OCC) (57 FR 29808, July 7,
1992), and the Office of Thrift
Supervision (OTS) (57 FR 29826, July 7,
1992) proposed regulations to implement
the provisions of section 131 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) (Pub.
L 102-242), which is entitled "Prompt
Corrective Action”. Section 131 of
FDICIA created a new statutory
framework that applies to every insured
depository institution a system of
supervisory actions indexed to the
capital level of the individual institution.
The stated purpose of this statutory
provision is to resolve the problems of
insured depository institutions at the
least possible long-term loss to the
deposit insurance fund. The new
framework is contained in section 38 of
the FDI Act (12 U.S.C. 1831o) (“section
38”). This framework 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
way the agencies’ existing authority
under other statutes or regulations to
initiate supervisory actions to address
capital deficiencies, unsafe or unsound
conduct, practices, or conditions, or
violations of law.
Section 38 requires the Federal
banking agencies, within 9 months of the
enactment of FDICIA, to promulgate
final regulations necessary to carry out
the purposes of that section. Under the
statute, these regulations must become
effective within one year after the date
of enactment of FDICIA, or no later than
December 19,1992.
D. Summary of Final Rules
The agencies have received 92
comments from interested persons, and
have reviewed the original proposal in
light of those comments. As an initial
matter, the commenters strongly
supported the agencies’ efforts to adopt
uniform rules implementing the
provisions of section 38. The agencies
believe that a uniform approach to
capital definitions and capital
categories, as well as a uniform
framework of procedures, will simplify
the tasks facing bank and thrift
management of monitoring and
maintaining the capital levels of insured
depository institutions, and will remove
any competitive distortions that might
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
arise if different standards were applied
to competing institutions. Accordingly,
the agencies have adopted substantially
the same rules.
The final rules that have been
adopted by the agencies are
substantially as originally proposed by
the agencies, with modifications to
address concerns and issues raised by
the commenters. In particular, the final
rules define the relevant capital
measures for the categories of wellcapitalized, adequately capitalized,
undercapitalized, and significantly
undercapitalized, to be the ratio of total
capital to risk-weighted assets, the ratio
of Tier 1 capital to risk-weighted assets,
and the ratio of Tier 1 capital to total
average assets (the leverage ratio).1*The
ratio of tangible equity to total assets
has been adopted as the sole relevant
capital measure for defining the
critically undercapitalized category.
The capital thresholds that have been
adopted for each of the five capital
categories are the thresholds that were
originally proposed by the agencies.
Under the final rules, an institution will
be deemed to be:
• Well-capitalized if the institution
has a total risk-based capital ratio of
10.0 percent or greater, a Tier 1 riskbased capital ratio of 6.0 percent or
greater, and a leverage ratio of 5.0
percent or greater, and the institution is
not subject to an order, written
agreement, capital directive, or prompt
corrective action directive to meet and
maintain a specific capital level for any
capital measure;
• Adequately capitalized if the
institution has a total risk-based capital
ratio of 8.0 percent or greater, a Tier 1
risk-based capital ratio of 4.0 percent or
greater, and a leverage ratio of 4.0
percent or greater (or a leverage ratio of
3.0 percent or greater if the institution is
rated composite 1 in its most recent
report of examination, subject to
appropriate Federal banking agency
guidelines), and the institution does not
meet the definition of a well-capitalized
institution;
• Undercapitalized if the institution
has a total risk-based capital ratio that
is less than 8.0 percent, a Tier 1 riskbased capital ratio that is less than 4.0
percent, or a leverage ratio that is less
than 4.0 percent (or a leverage ratio that
is less than 3.0 percent if the institution
is rated composite 1 in its most recent
1 For savings associations, aD references to T ierl
capital should be read as core capital, as defined in
part 567 of the OTS's regulations, which is the thrift
capital measure comparable to Tier 1 capital. 12
CFR part 567. In addition, all references to total
average assets should be read as adjusted total
assets, as defined in part 567 of the OTS’s
regulations.
report of examination, subject to
appropriate Federal banking agency
guidelines);
• Significantly undercapitalized if the
institution has a total risk-based capital
ratio that is less than 6.0 percent, a Tier
1 risk-based capital ratio that is less
than 3.0 percent, or a leverage ratio that
is less than 3.0 percent.
• Critically undercapitalized if the
institution has a ratio of tangible equity
to total assets that is equal to or less
than 2.0 percent.
To the extent possible, the final rules
define capital terms in the same way as
they are defined under existing capital
adequacy standards. The final rules also
generally rely on the most recent
Consolidated Report of Condition and
Income (Call Report) 2 and examination
report for determining the capital
category of an institution, and provide
that the appropriate banking agency will
provide written notice to an institution
in the event that the agency determines
the capital category of the institution on
the basis of other information. The final
rules also establish a procedure for an
institution to notify the appropriate
agency in the event that a material event
occurs that would result in the
reclassification of the institution to a
lower capital category. This procedure
has been modified in several respects to
address concerns raised by commenters.
The final rules do not adopt a
requirement that an institution calculate
its capital position on a daily basis.
The final rules establish a uniform
schedule for filing and reviewing capital
restoration plans. In addition, the rules
adopt several provisions clarifying
certain aspects of the capital guarantee
required to be made as part of an
acceptable capital plan by companies
that control an undercapitalized
institution, including the limit on the
liability of such companies.
The agencies have adopted uniform
procedures for the issuance of directives
by the appropriate agency under section
38. Under these procedures, an
institution will generally be provided
advance notice when the appropriate
agency proposes that the institution take
one or more of the actions committed to
agency discretion under section 38.
These procedures provide an
opportunity for the institution to respond
to the proposed agency action, or, where
circumstances warrant immediate
agency action, an opportunity for
administrative review of the agency’s
action.
* Savings associations report their capital levels
on Thrift Financial Reports.
/
Rules and Regulations 44867
A separate procedure has been
adopted in the case of proposals by the
appropriate Federal banking agency to
subject an institution to more stringent
treatment based on supervisory factors
other than capital. The proposed
procedures were modified at the request
of commenters to provide an informal
hearing whether the treatment is based
on a determination that the institution is
in unsafe or unsound condition or based
on an institution's failure to correct
deficient ratings received in an
examination. The final rules also
implement the statutory requirement
that officers and directors dismissed as
a result of an agency order issued under
section 38 be afforded agency review of
the dismissal, including an opportunity
for an informal hearing.
The final rules and the public
comments are discussed in more detail
below.
III. Summary of Statutory Framework
In the request for comment, the
agencies provided a brief summary of
the statutory framework established by
section 38. That summary is reprinted
here in order to give context to the
agencies’ final rules. The summary is not
intended to be a complete description of
the requirements of section 38, and
insured institutions and other persons
affected by section 38 should consult the
provisions of section 38.
Section 38 provides a framework of
supervisory actions based on the capital
level of an insured depository
institution. Section 38 establishes five
capital categories: well capitalized,
adequately capitalized,
undercapitalized, significantly
undercapitalized, and critically
undercapitalized. The statute deems an
insured depository institution to be:
"W ell cap italized ” if the institution
significantly ex cee d s the required minimum
level for each relevant capital measure;
“A deq u ately capitalized” if the institution
m eets the required minimum level for each
relevant capital measure;
"Undercapitalized” if the institution fails to
m eet the required minimum level for an y
relevant capital measure;
"Significantly undercapitalized” if the
institution is significantly b elo w the required
minimum level for an y relevant capita!
m easure; or,
“Critically undercapitalized” if the
institution h as a ratio o f tangible equity to
total a ssets o f 2 percent or less, or otherw ise
fails to m eet the critical capital level
estab lish ed pursuant to section 38 (c)(3)(A).
Section 38 requires the Federal
banking agencies to specify, by
regulation, the levels at which an
institution would be within each of
these five categories. The applicability
44868 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
of supervisory actions provided in
section 38 to an individual institution
depends on the institution’s
classification within one of these five
categories.3
A. Provisions Applicable to All
Institutions
Section 38 prohibits an insured
depository institution from declaring
any dividends, making any other capital
distribution, or paying a management
fee to a controlling person if, following
the distribution or payment, the
institution would be within any of the
three undercapitalized categories.4 The
statute provides a limited exception to
this prohibition for stock redemptions
that do not result in any decrease in an
institution’s capital and would improve
the institution’s financial condition,
provided that the redemption has been
approved by the institution’s
appropriate Federal banking agency
after consultation with the FDIC.
B. Provisions**Applicable to
Undercapitalized Institutions
I n s titu tio n s th a t are c la s s i f ie d a s
u n d e r c a p ita liz e d a re s u b je c t to
a d d itio n a l m a n d a to r y s u p e r v is o r y
a c tio n s . T h e s e in clu d e:
• 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 institution and
implement that plan;
• A restriction on growth of the
institution’s total assets; and
• A lim itation on the institution's ability to
make any acquisition, open any n ew branch
offices, or engage in any n ew line o f b u siness
w ithout the prior approval of-the appropriate
Federal banking agency for the institution or
the FDIC.
Section 38 also provides that the
appropriate Federal banking agency for
3 A savings association operating in accordance
with a capital plan approved by the OTS before
December 19,1991, is subject to certain exceptions
from provisions of section 38 (12 U.S.C. 1831o(o)(2)).
However, neither section 38 nor this regulation in
any way limits the authority of the OTS under any
other provision of law to take supervisory actions to
address unsafe cy unsound practices, deficient
capital levels, violations of law or regulation, unsafe
or unsound conditions or other practices.
* The OTS intends that the permissibility of
capital distributions will be determined by the
prompt corrective action regulations. A savings
association permitted to make a capital distribution
under the prompt corrective action regulations may
do so if the amount and type of distribution would
be permitted under section 563.134 of the OTS’s
regulations. The OTS will review its capital
distributions regulations and consider making
amendments that may be necessary based on
section 38 of the FDI Act.
an undercapitalized institution may take
any of a number of discretionary
supervisory actions if the agency
determines that any of these actions is
necessary to resolve the problems of the
institution at the least possible long
term cost to the deposit insurance fund.
These discretionary supervisory actions
include requiring the institution to raise
additional capital, restricting
transactions with affiliates, restricting
interest rates paid by the institution on
deposits, requiring replacement of senior
executive officers and directors,
restricting the activities of the institution
and its affiliates, requiring divestiture of
the institution or the sale of the
institution to a willing purchaser, and
any other supervisory action that the
agency believes would better carry out
the purpose of section 38. Because these
discretionary actions are also applicable
to significantly undercapitalized
institutions (as well as to critically
undercapitalized institutions), these
actions are described more fully in the
next section.
C. Provisions Applicable to
Significan tly Undercapitalized
Institutions
Section 38 provides that significantly
undercapitalized institutions are subject
to the four mandatory provisions listed
above that are applicable to
undercapitalized institutions. Section 38
also restricts the ability of a
significantly undercapitalized institution
to pay bonuses or raises to senior
executive officers of the institution. A
significantly undercapitalized institution
may pay bonuses and raises to senior
executive officers of the institution with
the prior written approval of the
appropriate Federal banking agency,
unless the institution has failed to
submit an acceptable capital restoration
plan. For so long as an institution has
failed to submit an acceptable capital
restoration plan, the institution is
prohibited from paying any bonus or
raise to any senior executive officer.
In addition to these mandatory
requirements, section 38 specifies that
the appropriate Federal banking agency
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 ould be adequately
capitalized after the sale;
• Restricting transactions b etw een the
institution and its affiliates, including
transactions w ith its insured depository
institution affiliates;
• Restricting the interest rates paid on
deposits collected by the institution to the
prevailing rates in the region where the
institution is located;
• Restricting the institution’s a sset growth
or requiring the institution to reduce its total
assets;
• Requiring the institution or any
subsidiary of the institution to terminate,
reduce or alter any activity that the agency
determ ines p oses ex c e ssiv e risk to the
institution;
• Requiring the institution to hold a new
election of its board of directors;
• Requiring the institution to d ism iss any
director or senior execu tive officer w ho had
held office at the institution for more than 180
d ays im m ediately before the institution
b ecam e undercapitalized if the agency deem s
such dism issal to be appropriate, and to
em ploy n ew officers w ho m ay be subject to
agency approval;
• Prohibiting the institution from accepting
d ep osits from correspondent depository
institutions;
• Prohibiting any bank holding com pany
that controls the institution from making any
dividend paym ent w ithout prior approval of
the Federal R eserve Board;
• Requiring the institution to accept an
offer to be acquired by another institution or
com pany, or requiring any com pany that
controls the institution to d ivest the
institution;
• Requiring the institution to d ivest or
liquidate any subsidiary that is in danger of
becom ing in solven t and p o ses a significant
risk to the institution, or that is likely to
cau se significant dissipation o f the
institution’s a ssets or earnings;
• Requiring any com pany that controls the
institution to d ivest or liquidate any affiliate
o f the institution (other than another insured
depository institution) if the appropriate
Federal banking agency for the holding
com pany determ ines that the affiliate is in
danger of becom ing in solven t and p o ses a
significant risk to the institution, or is likely
to cau se significant dissipation of the
institution’s a sse ts or earnings; and
• Requiring the institution to take any
other action that the agency determ ines
w ould better carry out the purposes o f
section 38.
While the statute generally provides
the agency with discretion to determine
whether these actions are appropriate in
connection with a particular institution,
the statute establishes certain
presumptions and requirements with
respect to the agency’s consideration of
these actions. Section 38 requires that
the appropriate agency take at least one
of the above discretionary supervisory
actions in connection with an 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
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44869
level, (2) restrict transactions with
affiliates of the institution, including
transactions with depository institution
affiliates, and (3) restrict the interest
rates the institution pays on deposits.
The agency must impose each of these
three actions unless the agency
determines that the action would not
further the purpose of section 38.
As discussed above, each of the
discretionary actions listed above may
also be taken, by issuance of a prompt
corrective action directive, in
connection with undercapitalized
institutions if a finding is made by the
agency that the action is necessary to
carry out the purposes of section 38. In
addition, these discretionary actions
may be taken in connection with any
undercapitalized institution that fails to
submit or implement in any material
respect a capital restoration plan, as if
the institution were a significantly
undercapitalized institution. As noted
above, the provision restricting the
payment of bonuses and raises to senior
executive officers applies to any
undercapitalized institution that has
failed to submit a capital restoration
plan that is acceptable to the
appropriate agency.
In addition to the discretionary
actions discussed above, section 38 also
provides that, where the appropriate
agency finds it necessary to carry out
the purposes of section 38, the agency
may require, by issuance of a prompt
corrective action directive, a
significantly undercapitalized institution
to comply with one or more of the
restrictions established by the FDIC on
the activities of critically
undercapitalized institutions. The same
actions may be taken in the case of an
undercapitalized institution that has
failed to submit or implement, in any
material respect, an acceptable capital
restoration plan.
D. Provisions Applicable to Critically
Undercapitalized Institutions
Section 38 requires that an insured
depository institution that is critically
undercapitalized be placed in
conservatorship (with the concurrence
of the FDIC) or receivership within 90
days, unless the appropriate Federal
banking agency for the institution and
the FDIC concur that other action would
better achieve the purposes of section
38. A determination by the agency to
defer placing a critically
undercapitalized institution in
receivership or conservatorship must be
reviewed every 90 days and must
document the reasons the agency
believes other action would better
achieve the purposes of section 38.
The statute requires that the
institution be placed in receivership if
the institution continues to be critically
undercapitalized on average during the
fourth quarter after the institution
initially became 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 have an upward trend in
earnings, and (4} have reduced its ratio
of nonperforming loans to total loans. In
addition, the head of the appropriate
Federal banking agency for the
institution and the Chairperson of the
FDIC must both certify that the
institution is viable and not expected to
fail.
Critically undercapitalized institutions
are also prohibited, beginning 60 days
after becoming critically
undercapitalized, from making any
payment of principal or interest on
subordinated debt issued by the
institution without the prior approval of
the FDIC. Section 38 does not prevent
unpaid interest from accruing on
subordinated debt under the terms of
the debt instrument.
Section 38(i) of the FDI Act also
provides that the FDIC, by regulation or
order, must restrict the activities of
critically undercapitalized institutions.
At a minimum, the FDIC must prohibit a
critically undercapitalized institution
from doing any of the following without
the prior written approval of the FDIC:
• Entering into any m aterial transaction
other than in the usual course of business.
Such activities include any investm ent,
expansion, acquisition, sa le of a sse ts or other
sim ilar action w here the institution would
have to notify its appropriate Federal
banking agency;
• Extending credit for any highly leveraged
transaction (HLT);
• A m ending the institution's charter or
b y la w s u n less required to do so in order to
carry out any other requirement o f any law ,
regulation or order;
• Making any m aterial change in its
accounting methods;
• Engaging in any “covered transactions"
w ithin the m eaning of section 23A(b) o f the
Federal R eserve A ct (12 U.S.C. 371c), which
concerns affiliate transactions;
• Paying ex cessiv e com pensation or
bonuses; and
• Paying interest on n ew or renew ed
liabilities at a rate w hich w ould increase the
institution’s w eighted average cost of funds
to a level significantly exceedin g the
prevailing rates in the institution's norma)
market areas.
Pursuant to section 38(j) of the FDI
Act, none of these restrictions apply (1)
to institutions in conservatorship for
which the FDIC or RTC has been
appointed the conservator or (2) to any
bridge bank that is wholly owned by the
FDIC or the RTC. Pursuant to section
38(o)(2) of the FDI Act, none of these
restrictions shall apply, before July 1,
1994, to any insured savings association
if:
(a) The savings association had
submitted a plan meeting the
requirements of section 5(t)(A)(ii) of the
Home Owners’ Loan Act (12 U.S.C
1464(t)(A)(ii));
(b) The Director of OTS had accepted
the plan; and
(c) The savings association remains in
compliance with the plan or is operating
under a written agreement with the
appropriate Federal banking agency.
IV. Discussion of Final Rules and Public
Comments
The agencies received a total of 92
comment letters from interested persons
regarding the proposed rules
implementing section 38. Sixty of the
commenters were from banks, thrifts
and bank and thrift holding companies,
while nineteen were from industry trade
associations and organizations. Eight
were from Federal Reserve Banks. In
addition, there were five from law firms
and other organizations and individuals.
The comments provided a number of
suggestions for clarifying or modifying
the proposed rule. These are discussed
below.
Many of the commenters supported
the underlying purpose of prompt
corrective action. However, several
expressed concern that section 38
unduly restricts regulatory flexibility
and discretion. Several commenters
urged, as a g e n e r a l m a tter, th a t the
agencies retain as much flexibility as
possible m implementing the rules
governing prompt corrective action and
in administering the requirements of
section 38. These commenters argued
that capital alone is an inexact measure
of the financial strength of an institution,
and is only one of a number of measures
that must be considered in determining
the financial strength of an insured
institution. Commenters argued that a
narrow focus on capital levels to the
exclusion of other indications of
Financial strength could result in
unnecessary and counterproductive
actions being taken against Financially
sound institutions. To avoid this result,
many commenters argued that the
agencies should adopt flexible rules that
permit the agencies as much discretion
as possible in determining when to take
action under section 38 and what
actions are appropriate.
44870 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
The agencies have attempted to
address this concern to the extent
possible under the statute. Section 38
establishes a framework that is triggered
by the capital levels of insured
institutions, and subjects an insured
institution that has capital below the
regulatory minimum levels to several
mandatory provisions that apply
without any agency action. Section 38
also authorizes the agencies, in their
discretion, to impose a number of
additional requirements and
proscriptions on an institution that is
undercapitalized, significantly
undercapitalized, or critically
undercapitalized. The statute permits
the agencies to tailor these discretionary
supervisory actions to the specific
problems faced by individual
institutions, and the final rules retain
this flexibility.
In addition, commenters generally
were concerned that the agencies
provide adequate procedural protections
to insured institutions and individuals
prior to taking any discretionary actions
under section 38. The agencies have
established procedures in the rule to
give affected institutions and persons
notice of, and a right to participate in
the process for determining,
discretionary actions taken by the
agency under section 38. These
procedures include the general right to
advance notice of any action
contemplated by the agency, and the
right to provide the agency with any
information that an affected institution
or person believes should be considered
by the agency in exercising its discretion
under the statute. These procedures
provide a mechanism for an institution
to identify facts and circumstances that
the agency should consider in
determining appropriate action for that
institution, and are intended to
supplement informal discussions that
ordinarily occur between an institution
that has less than adequate capital and
the institution’s appropriate Federal
banking agency.
A. Capital Measures
For purposes of defining each of the
capital categories (except for the
critically undercapitalized category),
section 38(c) requires the agencies to
prescribe capital standards that include
a leverage limit and a risk-based capital
requirement. The agencies may establish
additional capital measures for these
categories if additional capital measures
would serve the purposes of section 38.
In addition, section 38 permits the
agencies to rescind the leverage limit or
the risk-based capital measure if the
Federal banking agencies concur that
either measure is no longer an
appropriate means for carrying out the
purposes of section 38.
The agencies proposed to adopt the
leverage limit and the total risk-based
capital measure in defining the capital
categories other than the critically
undercapitalized category. In addition,
the agencies proposed to adopt the Tier
1 risk-based capital ratio as a capital
measure in defining these capital
categories.
Most commenters supported or did
not object to the proposal to adopt these
three capital measures. Commenters
expressed a strong preference for using
capital measures and definitions that
are currently in place in order to reduce
the burden and costs associated with
calculating the capital category of an
institution.
Several commenters suggested that
the agencies eliminate one or more of
the proposed capital measures. In
particular, a small number of
commenters argued that the agencies
should not adopt a leverage ratio as a
capital measure. Several other
commenters argued that the agencies
should not establish a separate
threshold for Tier 1 capital to riskweighted assets. A few commenters
argued that the agencies should rely
solely on the ratio of Tier 1 capital to
risk-weighted assets and should
eliminate use of the ratio of total capital
to risk-weighted assets and the leverage
ratio. Finally, one commenter suggested
that the agencies rely only on the
leverage ratio for smaller institutions
that are not internationally active,
dropping the risk-based capital tests for
these institutions.
The agencies have determined to
adopt the three capital measures
originally proposed for defining whether
an institution is well-capitalized,
adequately capitalized,
undercapitalized, or significantly
undercapitalized. Section 38 requires the
agencies to employ a risk-based capital
requirement and the leverage ratio as
capital measures for each capital
category unless the agencies all agree
that these capital measures are no
longer an appropriate means for
carrying out the purposes of section 38.
The agencies continue to believe that
the ratio of total capital to risk-weighted
assets represents an appropriate capital
measure. In addition, the ratio of Tier 1
capital to total assets, which is a
component of the total risk-weighted
capital ratio, represents an important
measure of the highest quality capital
available to the institution to absorb
losses. Both the total risk-weighted
capital ratio and the Tier 1 riskweighted capital ratios are recognized in
the Basle Accord and are elements of
the minimum capital adequacy
standards currently employed by the
Federal banking agencies.
The agencies have considered the
suggestion of commenters that the
leverage ratio be eliminated as an
appropriate capital measure. The
agencies do not believe that elimination
of the leverage ratio is appropriate at
this time. One of the rationales for
retaining a leverage ratio after the riskbased capital measure was introduced
was that the risk-based capital measure
is focused on credit-related risk, and
does not explicitly factor in other risks,
particularly interest rate risk.
However, the agencies noted in the
request for comment that revisions to
the risk-based capital standards
mandated by FDICIA may warrant
review of the capital measures and
thresholds specified under section 38 at
a later date. Section 305 of FDICIA,
which amends section 18 of the FDI Act,
requires the agencies to revise their riskbased capital standards by no later than
June 1993 to take into account interest
rate risk, concentration of credit risk,
and the risks of nontraditional activities
and multi-family mortgages. The
agencies intend to lower or eliminate the
leverage capital component from the
definitions of "well capitalized,"
“adequately capitalized,” and
“undercapitalized" after the risk-based
capital standards have been revised by
each Federal banking agency to take
into account interest rate risk as
required by section 305 of FDICIA and
after experience has been gained with
such standards. The agencies
acknowledge the requirements of
section 38(c) of the FDI Act and would
comply with those requirements, to the
extent they apply, before taking any
such action.5 Several commenters
supported reconsideration of the need
for the leverage ratio after completion of
the review required by section 305.
B. Definition of Capital Terms
The agencies had proposed to adopt
the same definitions of capital terms for
purposes of the prompt corrective action
* Section 38(c) of the FDI Act requires that the
capital standards prescribed under that section by
each appropriate Federal banking agency shall
include a leverage limit and a risk-based capital
requirement, as well as any other additional
relevant capital measures needed to carry out the
purpose of section .38 and implemented by
regulation. However, an appropriate Federal
banking agency may, by regulation, rescind any
relevant capital measure required by section 38,
upon determining (with the concurrence of the other
Federal banking agencies) that the measure is no
longer an appropriate means for carrying out the
purpose of section 38.
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44871
provisions of section 38 as are currently
used under the capital adequacy
guidelines or regulations adopted by the
agencies. The commenters strongly
favored this approach because it would
reduce the burden and complexity that
could result from the use of new or
modified capital definitions, and would
minimize the possibility that an
institution may be uncertain regarding
its capital levels for purposes of section
38. Accordingly, the final rules adopt the
definitions of the various capital
elements and terms currently used in the
agencies' existing capital adequacy
guidelines and regulations.
The agencies requested comment
regarding the appropriate period for
calculation of capital levels. Under
current reporting requirements, as
specified in the instructions to the Call
Report, the level of capital of an
institution is generally calculated as the
ratio of the institution’s quarter-end
capital to the quarterly average of its
total assets (in the case of the leverage
ratio) or its quarter-end risk-weighted
assets (in the case of the risk-based
capital ratios).6 The agencies sought
comment on whether capital
calculations should be based on the
same period calculations for purposes of
section 38. The agencies also requested
comment on the feasibility of requiring
institutions to make a daily calculation
of various capital measures.
Commenters generally supported
applying the same periods for capital
calculations under section 38 as are
currently used under the agencies'
capital adequacy standards. The
commenters also strongly objected to
any requirement that capital
calculations be required on a daily basis
for purposes of implementing section 38.
The commenters argued that daily
calculations would substantially
increase the reporting burden and costs
for many institutions. In addition,
commenters contended that daily
calculations present a distorted picture
of the capital position of an institution
by focusing on individual daily events
(such as a temporary increase in
deposits in connection with a lock-box
operation) and do not take account of
related actions that occur within a
reasonably short period or remedial
actions that are readily'available to the
institution (such as a scheduled
withdrawal of deposits from a lock-box
account). The commenters argued that
the calculation periods currently
adopted by the agencies in their capital
• Savings associations report their capital
amounts on their Thrift Financial Reports based on
end of the quarter total assets and total riskweighted assets.
adequacy standards provide a more
accurate and reliable estimation of the
capital levels of institutions.
Based on these comments, the final
rules use the same calculation periods
for purposes of section 38 as are
currently employed under the agencies’
capital adequacy standards. The
agencies have determined not to require
the daily calculation of capital for
purposes of section 38 at this time.
C. Specific Capital Levels for Five
Capital Categories
The agencies proposed specific capital
levels defining each capital category.
Under the standards set forth in section
38, an institution is deemed to be
adequately capitalized if it meets the
required minimum level for each
relevant capital measure. Thus, the
agencies proposed to set the capital
levels for the adequately capitalized
category generally at the same levels 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 risk-based capital
ratio, and 4 percent for the Tier 1
leverage ratio (3 percent for composite
1-rated banks and savings associations,
subject to appropriate Federal banking
agency guidelines). An institution would
have to meet all these minimums in
order to be deemed adequately
capitalized.
The statute provides specific guidance
as to the capital level for defining a
critically undercapitalized institution.
Section 38 requires that a critically
undercapitalized institution be defined
by reference to the institution’s ratio of
tangible equity to total assets. The
statute requires the agencies to establish
the threshold ratio for defining a
critically undercapitalized institution at
no lower than 2 percent.
Taking the capital levels for the
adequately capitalized and critically
undercapitalized categories as
benchmarks, the agencies proposed 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 Tier 1 leverage
ratio (under 3 percent for composite 1rated banks and savings associations,
subject to appropriate Federal banking
agency guidelines). An institution would
be considered undercapitalized if it
were below the specified capital level
for any of the three capital measures.
Further, the capital levels for
significantly undercapitalized
institutions were defined as any level
under 6 percent for the total riskrbased
capital ratio, under 3 percent for the Tier
1 risk-based capital ratio, or under 3
percent for the Tier 1 leverage ratio. An
institution would be considered
significantly undercapitalized if it were
below the specified capital level for any
of the three capital measures. Under the
proposed definitions, an institution that
is significantly undercapitalized also
would be deemed to be
undercapitalized. Similarly, an
institution that is critically
undercapitalized also would be deemed
to be significantly undercapitalized and
undercapitalized. The overlap between
these categories is contemplated by the
statute and has the effect of applying to
significantly undercapitalized
institutions and to critically •
undercapitalized institutions any
provisions of section 38 that are
applicable to undercapitalized
institutions.
The agencies proposed establishing
the minimum total risk-based capital
level for the well capitalized category at
10 percent and setting the minimum
leverage capital level for this category at
5 percent. To emphasize the importance
the agencies place on Tier 1 capital, the
agencies proposed that the minimum
level for the Tier 1 risk-based capital
ratio be set at 0 percent for the well
capitalized category.
Many commenters indicated
agreement with the capital thresholds
proposed by the agencies. Several
commenters were concerned that the
levels be applied equally to institutions
of all sizes. Other commenters argued
that the capital levels set for the wellcapitalized category were established at
too high a level. These commenters
noted that the standard for well
capitalized institutions would require an
institution to hold 25 percent more total
risk-based capital, 50 percent more Tier
1 capital, and 60 percent more leverage
capital than an adequately capitalized
institution.
Commenters stated that they were
particularly concerned about the wellcapitalized levels because several of the
newly proposed rules required by
FDICLA impose new constraints on
institutions that are not within the wellcapitalized category. Commenters
believe that these provisions will have
the practical effect of establishing the
well-capitalized category as the
minimum acceptable capital category for
most Institutions. Several commenters
argued that high capital thresholds for
the well-capitalized category would
have significant implications in the near
term for the availability of credit in the
44872 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
United States, as depository institutions
attempt to meet the higher capital levels
of the well-capitalized category through
slower asset growth or shrinkage of
assets. These commenters also argued
that establishing high capital thresholds
for this category would significantly
impair the ability of domestic depository
institutions to compete against foreign
institutions that are not subject to this
capital-based regulatory and
supervisory framework. In order to
address these potential effects, these
commenters argued that the capital
thresholds should be lowered, or
phased-in over a period of time.
On the other hand, a few commenters
argued that the capital levels proposed
by the agencies were too low. In
particular, these commenters contended
that a higher threshold for the definition
of the critically undercapitalized
category was necessary in order to
minimize potential losses to the federal
deposit insurance funds. One
commenter argued that, at the
thresholds in the proposal, the number
of institutions that would qualify for the
well-capitalized category was too high
and included a large number of
institutions that had received
unsatisfactory examination ratings.
These commenters argued that higher
thresholds for each of the capital
categories would permit the agencies to
initiate supervisory actions under
section 38 against a greater number of
institutions, thereby permitting action
while an institution is still sufficiently
healthy to reverse its deterioration.
After considering the comments, the
agencies have determined at this time to
adopt the capital thresholds as
proposed. In the agencies' view the
proposed thresholds strike a reasonable
balance between the statutory
requirements on the one hand, and the
need to promote safe and sound banking
conditions in a manner that gives due
consideration to the international
capital standards to which the United
States and the other G-10 countries
have agreed on the other hand. The
agencies believe that such consideration
is appropriate in view of the competitive
pressures faced by U.S. banks operating
in international markets with foreign
banks adhering to these standards. In
this regard, as with the capital adequacy
standards currently adopted by the
agencies, the thresholds adopted in the
final rules under section 38 will apply to
each insured depository institution,
regardless of the size of the institution.
Comparable thresholds are applied to
insured branches of foreign banks.
In establishing these thresholds, the
agencies recognize that capital ratios
alone are not fully indicative of the
capital strength of an institution. The
agencies are aware, for example, that
some poorly-rated depository
institutions have capital ratios above
the specified minimurns for the wellcapitalized and adequately capitalized
categories. One reason that some
poorly-rated institutions qualify as well
capitalized for prompt corrective action
purposes is that capital is a lagging
indicator of problems of insured
depository institutions. In part for this
reason, examiners traditionally have
reached judgments on an institution’s
capital needs by also taking into
account a range of factors such as
interest rate risk and concentration risk.
As noted above, the agencies have
under way initiatives mandated by
FDICIA to review their risk-based
capital standards to ensure that they
take adequate account of such risks, and
also have been engaged in a project
under the Federal Financial Institutions
Examination Council (FFIEC) to refine
and improve procedures for assessing
the reserving policies and practices of
individual institutions. After those
projects have been completed and
improvements implemented and
assessed, the agencies intend to revisit
the question of how the specifications
for the well-capitalized category may
need to be modified or adjusted.
Severs! commenters argued that an
institution that nominally has capital
above the threshold for well-capitalized
institutions should not be excluded from
that category because the institution is
subject to an agency order or directive
to raise additional capital. These
commenters argued that use of capital
directives or agency orders to raise
additional capital as a means of defining
the well-capitalized category is not
contemplated by section 38, and is not
consistent with the statute’s instruction
that capital categories be defined by
reference to the actual capital level of
an institution.
To qualify as a well-capitalized
institution under section 38, the capital
levels of an institution must significantly
exceed the required minimum level for
each relevant capital category. The
agencies believe that an institution that
is subject to an agency order or directive
to raise capital or to maintain capital at
a higher capital level does not meet the
statutory definition of a well-capitalized
institution. Instead, institutions that
have been ordered to raise capital or
maintain a higher level of capital are
subject to an agency determination that,
given the particular circumstances and
financial condition of the institution, the
capital level of the institution is
inadequate or minimally adequate.
Accordingly, the agencies have adopted
the definition of the well-capitalized
category as proposed, and have retained
the provision disqualifying from the
well-capitalized category any institution
that is subject to an agency order or
directive to meet and maintain a specific
capital category. The agencies have
modified the language of this section to
clarify that the provision applies only to
written agreements, orders, capital
directives, and prompt corrective action
directives that are issued under certain
provisions of the FDI Act, the
International Lending Supervision Act
the Home Owners’ Loan Act or
regulations implementing these laws.
D. Critically Undercapitalized
Institutions
The statute requires that the critically
undercapitalized category be based on
the ratio of tangible equity to total
assets of the institution. Section 38
requires that the minimum ratio for this
category be established at a level of
tangible equity that is no less than 2
percent of the institution's total assets,
and that is no higher than the ratio equal
to 65 percent of the required minimum
level of capital under the leverage limit
The agencies may, by regulation, specify
additional capital measures (such as a
risk-based capital ratio) in defining the
critically undercapitalized category. Any
such measures may not, without the
concurrence of the FDIC, be set at a
level lower than the level specified by
the FDIC for insured state-chartered
banks that are not members of the
Federal Reserve System.
The agencies proposed to define the
level for the critically undercapitalized
category as a ratio of tangible equity to
total assets of 2 percent or less. The
agencies did not propose to establish
any additional capital measures for the
critically undercapitalized category. The
commenters that addressed these
matters favored the capital level
proposed by the agencies for this capital
category and generally agreed that no
additional capital measure was
necessary to define this category.
Accordingly, the final rules adopt the
original proposal to define an institution
as critically undercapitalized if the
institution has a ratio of tangible equity
to total assets of 2.0 percent or less.
Section 38 provides that the critically
undercapitalized category must be
defined by reference to the ratio of
tangible equity to total assets of an
institution. However, section 38 does not
define the term "tangible equity."
Moreover, the term is not currently
defined by the Federal banking agencies
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
in connection with their capital
adequacy standards or by the
accounting profession. To implement
this provision, the agencies had
proposed to define the ratio of tangible
equity to total assets in the same
manner as the leverage ratio currently
established by the agencies by
regulation or guideline, which is the
ratio of Tier 1 capital to total average
assets.
A significant number of commenters
argued that the agencies should modify
the proposed definition of tangible
equity to permit the inclusion of all
forms of equity capital, in particular
cumulative perpetual preferred stock.
These commenters noted that the OCC
recognizes the level of cumulative
perpetual preferred stock in determining
whether a national bank is insolvent for
purposes of the National Bank Act.
In adopting the final rules, the
agencies have determined to define
tangible equity to include the core
capital elements recognized in the
calculation of Tier 1 capital. In addition,
the final rule includes cumulative
perpetual preferred stock issued by the
institution and related surplus. The
agencies recognize that cumulative
perpetual preferred stock provides a
cushion against losses suffered by the
institution and provides protection to
the deposit insurance funds. The
agencies have determined not to include
other instruments, however. The
agencies are concerned that the
inclusion of other types of instruments,
in particular instruments that are
hybrids of equity and debt, will distort
the capital raising efforts of depository
institutions and result in the
development and issuance of
instruments that, while providing some
protection against loss, place a
significant burden on the earnings of the
institution over the life of the instrument
and on the ability of the institution to
raise additional capital.
Several commenters also argued that
the agencies should not require the
deduction of all intangible assets in
determining whether an institution is
critically undercapitalized. These
commenters argued that many assets
that are considered intangible in fact
have significant value and serve as a
ready and marketable source of liquidity
to troubled institutions.
In determining whether equity is
“tangible” for purposes of the final rule
under section 38, the agencies have
determined to require the deduction of
all intangible assets with one
exception.7 The agencies have sought
7 For savings associations, pursuant to section 5(t)
of the Home Owners’ Loan Act (12 U.S.C. 1404(t)),
public comment on a proposal to amend
their capital adequacy standards
regarding inclusion of certain purchased
mortgage servicing rights in the
calculation of Tier 1 capital. This
proposal is in response to section 475 of
FDICIA, which requires the Federal
banking agencies to determine whether
a portion of certain purchased mortgage
servicing rights should be included in
the definition of “tangible capital."
To comply with this statutory
provision, the agencies must determine
whether certain purchased mortgage
servicing rights have sufficient value to
warrant a determination that these
assets should not be treated as
intangible assets for purposes of the
calculation of tangible capital. The
agencies believe that, to the extent that
purchased mortgage servicing rights are
determined under this statutory
provision to be properly included in
“tangible capital," these assets should
be given identical treatment in the
calculation of tangible equity under
section 38.8
E. Notice of Capital Category
Under section 38, an institution
becomes subject to certain mandatory
provisions on the basis of the capital
category of the institution. These
mandatory provisions apply
immediately without agency action. As
noted above, an undercapitalized
institution is immediately subject to a
restriction on the payment of dividends
and management fees, a limitation on
asset growth and expansion, and an
obligation to file an acceptable capital
restoration plan. In addition to these
requirements, an institution that is
significantly undercapitalized or
critically undercapitalized is subject to a
limitation on the payment of bonuses or
raises to senior executive officers. A
number of other mandatory restrictions
are imposed on critically
undercapitalized institutions. Moreover,
once an institution is deemed to be
undercapitalized, significantly
undercapitalized or critically
undercapitalized, section 38 grants the
appropriate Federal banking agency for
enacted as part of the Financial Institutions Reform.
Recovery and Enforcement Act of 1989, certain
qualifying supervisory goodwill will also be
included in "tangible equity."
8 Several commenters argued that the definition
of tangible equity should include investments in
certain types of subsidiaries, which savings
associations are required to deduct tor purposes of
their general capital calculations. The OTS has
determined that investments in these subsidiaries
will be included in the definition of tangible equity
only to the extent permitted in the definition of Tier
1 capital under the Home Owners’ Loan Act’s
transitional rule, which expires July 1,1994,12
U.S.C. 1464(t)(5)(D).
/ Rules and Regulations 44873
the institution discretion to take a
number of supervisory actions to
address the problems of the institution.
The final rules include provisions for
an institution and its appropriate
Federal banking agency to determine the
capital category of the institution, and,
thereby to determine when the
provisions of section 38 are applicable.
Commenters supported the agencies'
proposal to base capital calculations
principally on the Call Report filed by
each institution and on an institution’s
examination.
A c c o r d in g ly , th e fin a l r u le s r eta in
p r o v is io n s th a t d e e m a n in s titu tio n to b e
a w a r e o f its c a p ita l c a te g o r y a s o f th e
d a te th a t th e C a ll R e p o r t is r eq u ire d to
b e file d . S im ila r ly , th e in s titu tio n is
d e e m e d to b e n o tifie d o f its c a p ita l
c a te g o r y a s o f th e d a te th a t th e
e x a m in a t io n r ep o rt is p r o v id e d to th e
in stitu tio n .
T h e fin a l r u le s a ls o r e ta in th e
p r o v is io n p e r m ittin g th e a g e n c ie s to
d e te r m in e th e c a p ita l c a te g o r y o f a n
in s titu tio n b a s e d o n o th e r in fo r m a tio n
a v a ila b le to th e a g e n c y , in c lu d in g
in fo r m a tio n o b t a in e d in th e a p p lic a tio n s
p r o c e s s , th ro u g h o th e r r e p o r ts file d b y
th e in s titu tio n u n d e r th e b a n k in g l a w s or
th e s e c u r it ie s la w s , or in p u b lic
a n n o u n c e m e n t s b y th e in stitu tio n . T h e
fin a l r u le s p r o v id e th at, in th e e v e n t th a t
th e a g e n c y d e te r m in e s th e c a p ita l
c a te g o r y o f th e in s titu tio n o n th e b a s is
o f o th e r in fo r m a tio n , th e a g e n c y m u st
n o t if y th e in s titu tio n in w r itin g o f its
d e te r m in a tio n .
The agencies also requested comment
on whether to require capital
calculations to be made daily or
monthly for purposes of applying the
provisions of section 38. A significant
number of commenters opposed any
requirement that institutions make daily
calculations of capital. A number of
commenters also argued that daily
calculations of capital would present a
distorted view of the capital position of
an institution because daily calculations
emphasize the timing of events and do
not permit consideration of offsetting
events that are reasonably expected to
occur at a later date. These commenters
also argued that requiring institutions to
calculate capital levels on a daily basis
would be impractical, particularly for
institutions with extensive branch
networks or with foreign offices, and
would impose significant added costs
and burdens on insured institutions. As
explained above, the agencies have not
adopted provisions requiring institutions
to make daily calculations or file daily
reports of capital levels for purposes of
section 38.
44874 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
Several commenters argued that
similar burden would result from the
agencies’ proposal to establish a
procedure that requires an institution to
notify the appropriate agency within 5
days of any change in the institution’s
capital position that would cause the
institution to be within a different
capital category. The agencies had
proposed this notification procedure as
a means of supplementing the use of
Call Reports and periodic examinations
for determining the capital category of
insured institutions.
The agencies have made several
revisions to the proposed notification
procedures to address commenters’
concerns. The final rules have been
modified to require an institution to
notify the appropriate agency only of
material events that affect the capital
position of the institution. The notice
period has also been extended to 15
days from the 5 days originally
proposed. The determination of whether
the capital category of the institution
has changed may be made by reference
to the most recent Call Report or
examination report.
The rule retains the original proposal
that the capital category of the
institution will not change until the
appropriate agency has reviewed the
data provided by the institution along
with any explanation offered by the
institution. Following review of this
information, the agency will determine
whether an adjustment to the capital
category of the institution is appropriate.
Finally, in response to several
comments, the riile has been modified to
eliminate the requirement that the
institution notify the agency of events
that improve the capital level of the
institution. Because an institution’s
capital category is based on the
information filed in the most recent Call
Report or report of examination,
however, an institution that has
improved its capital position prior to the
time that a new .Call Report has been
filed or examination report completed
would continue to be considered within
the capital category reflected in the
most recent Call Report or examination
report unless the institution voluntarily
sought a determination by the agency
that the institution is in a different
capital category.
The agencies believe that the revised
notification procedures address the
concerns raised by these commenters
while at the same time still providing
adequate notice to the appropriate
Federal banking agency when an
institution's capital category has
changed between filing of Call Reports
or examinations. The agencies believe
that failure to recognize material events
that occur during this period could result
in delay in application of the
supervisory requirements of section 38,
including the mandatory provisions of
the statute.
F. Procedures Governing Agency Action
1. In General
The final rules establish procedures
governing four types of agency action
that may be taken under section 38.® In
three cases, the final rules generally
require the appropriate agency to
provide notice to an insured institution
or company of proposed agency action
and an opportunity for the institution or
company to submit to the agency
information that is relevant to the
agency’s decision before the agency
takes final action. In particular, the final
rules establish these procedures for: (1)
Issuing a directive under section 38 that
imposes requirements or restrictions
committed to agency discretion on an
undercapitalized institution or a
company that controls an
undercapitalized institution; (2)
determining that an institution should be
subject to more stringent treatment
because the institution is in unsafe or
unsound condition; and (3) determining
that an institution should be subject to
more stringent treatment because the
agency deems the institution to be
engaged in an unsafe or unsound
practice based on the institution's
failure to correct certain deficient
ratings received in an examination. The
final rules also establish a special
procedure, as required by section 38,
permitting senior executive officers and
directors who have been dismissed from
an institution as a result of an agency
directive an opportunity to petition for
reinstatement.
In establishing these procedures, the
agencies have attempted to comply with
the statutory mandate that the agencies
take prompt action to resolve the
problems of troubled institutions while
also providing affected institutions,
companies, and persons the opportunity
to be heard at a meaningful time and in
a meaningful manner.
2. Procedures for Issuing Prompt
Corrective Action Directives
Section 38 imposes certain mandatory
restrictions on institutions that are
undercapitalized, significantly
• The agencies will not be required to grant
administrative review if an institution, company, or
person consents to the action to be taken by the
agency either as initially proposed by the agencies
or as modified by mutual agreement. Actions taken
with such consent have the same legal affect and
are enforceable to the same extent and by the same
means as actions taken upon exhaustion of these
procedures.
undercapitalized, or critically
undercapitalized. The statute also
provides the agencies with discretion to
impose a number of supervisory
requirements or restrictions on an
insured institution that is
undercapitalized, significantly
undercapitalized or critically
undercapitalized, as well as on any
company that controls such an
institution. These discretionary
supervisory actions are described
above. The system enacted in section 38
is based on Congress’s belief that
prompt action must be taken to resolve
problems at insured depository
institutions at an early enough stage to
minimize costs to the federal deposit
insurance funds, and ultimately the
taxpayer.
The agencies do not believe that the
purpose and mandate of section 38 are
compromised by, as a general matter,
providing institutions notice of proposed
agency action under section 38 and an
opportunity to submit relevant
information to the agency for its
consideration. Under the final rules, the
appropriate agency will provide written
notice to an institution or company prior
to issuing a directive as a general
matter. The notice must describe the
action contemplated by the agency. The
institution or company is then provided
at least 14 calendar days to submit
written arguments and evidence in
response to the proposed agency action.
Failure to file a timely response
constitutes consent to the issuance of
the directive and a waiver of the
opportunity to appeal. The agency will
consider the submission in determining
whether to issue the directive.
The agencies reserve the right to issue
directives that are effective immediately
when the circumstances of a particular
case indicate that immediate action is
necessary to serve the purpose of
prompt corrective action. In these cases,
the final rules provide the institution an
opportunity to seek modification or
rescission of the directive on an
expedited basis. An institution or
company that appeals an immediately
effective directive is required to file a
written appeal within 14 days of
receiving the notice, and the agency
must consider the appeal within 60 days
of receiving it.
The agencies believe that these
procedures afford an adequate and fair
opportunity for affected persons to
present the agency with argument and
information relevant to the agency’s
action. The procedures adhere to the
mandate of section 38 that the agencies
take prompt corrective action to resolve
the problems of insured depository
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44875
institutions at the least possible long
term loss to the deposit insurance fund
while providing institutions with an
opportunity for agency review.
Commenters raised various objections
to the procedures proposed by the
agencies for issuing directives under
section 38. Some commenters stated that
an oral hearing is required by principles
of due process and fundamental fairness
before an agency can issue a prompt
corrective action directive. Certain other
commenters expressed concern about
the agencies’ proposal to allow issuance
of a directive without prior notice to the
institution in limited cases; other
commenters recommended that such an
immediately effective directive be
issued only after a determination by the
agency head that exigent circumstances
require immediate action.
The final rules do not adopt the
suggestion of several commenters that
the agencies provide for an oral hearing
in connection with the issuance of a
prompt corrective action directive. The
agencies believe that the procedures for
prior notice and an opportunity for
submission of written argument and
information are sufficient in light of the
purpose and mandate of section 38. As
explained above, the language and
legislative history of section 38 indicate
that Congress intended agency action
under section 38 to be taken as promptly
as possible. 12 U.S.C. 1831o(a)(2); see
also S. Rep. No. 102-167,102d Cong., 1st
Sess. (1991) (‘The prompt corrective
action system will require regulators to
act at the first sign of trouble.’’).
In addition, Congress clearly
indicated those occasions when it
believed that an oral he'aring is
appropriate in connection with actions
taken under section 38. Congress gave
no indication in either the statutory
language or legislative history that it
intended to require an oral hearing in
connection with supervisory actions
committed to agency discretion under
section 38.
Finally, the agencies believe that the
provision for written submissions prior
to issuance of a directive affords
adversely affected parties an
opportunity to be heard "at a meaningful
time and in a meaningful manner.”
Mathews v. Eldridge, 424 U.S. 319, 333
(1976); see FDIC v. Mallen, 486 U.S. 230
(1988) (upholding post-deprivation
hearing in case of suspension or removal
of a bank officer charged with a felony);
Federal Deposit Ins. Corp. v. Bank of
Coushatta, 930 F.2d 1122 (5th Cir. 1991),
cert, denied, 112 S. Ct. 170 (1992)
(affirming hearing procedures for FDIC
capital directive).
In special cases where immediate
action is necessary and prior notice has
not been given, the institution is given
prompt post-directive administrative
review. The courts have found similar
post-deprivation procedures to be
adequate when necessary to protect the
public interest. See Mallen, 486 U.S. at
243; Soranno’s Gasco, Inc. v. Morgan,
874 F.2d 1310,1317-18 (9th Cir. 1989)
(power to suspend permit immediately is
necessitated by state’s interest in
enforcing pollution control laws).
Several commenters argued that the
14-day deadline for submission of a
response to a proposed directive was
too short, favoring deadlines from 30 to
90 days. The final rule provides at least
14 days for submission of a response,
but permits the agency to extend that
period in individual cases as
appropriate.
3. Dismissal of Directors or Senior
Executive Officers
Section 38 provides that a director or
senior executive officer who is
dismissed by an institution in
compliance with an agency directive
may obtain review of the dismissal by
filing, within ten days, a petition for
reinstatement with the agency that
ordered the dismissal. 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 member(s)
or designated employee(s) of the agency.
Under the statute, the hearing shall
occur within 30 days of the filing of the
petition unless the petitioner requests a
later date. Under the final rules, within
20 days of the closing of the hearing
record, the presiding officer must make
a recommendation to the agency
regarding the petition for reinstatement,
and the agency shall issue a decision
within 60 days of the date of the closing
of the hearing record.
The statute envisions a post-dismissal
hearing procedure, as it refers to the
appeal as a “petition for reinstatement”
and sets a short time for agency decision
following the hearing. Accordingly, the
proposed regulation required that an
institution ordered to dismiss a senior
executive officer or director take that
action immediately upon receiving a
final directive requiring that action.
The agencies also proposed that any
officer or director who is dismissed in
compliance with an agency directive
under section 38 be provided an
opportunity to petition the agency for
reinstatement within the statutorily
prescribed period, and be afforded an
opportunity for an informal agency
hearing. The petitioner was provided the
right to appear at the hearing, with
counsel, and to submit written materials
and present oral argument.
The proposed regulation also
incorporated the statutory burden of
proof imposed upon an officer or
director seeking reinstatement. When
the dismissal order is based upon an
institution’8 capital category or its
failure to submit or implement a capital
restoration plan, the petitioner must
prove that his or her continued
employment would materially
strengthen the institution’s ability to
become adequately capitalized. When
the dismissal order is based upon a
reclassification of an institution on
grounds of unsafe or unsound condition
or practice, the petitioner must prove
that his or her continued employment
would materially strengthen the
institution’s ability to correct the
condition or practice. The agencies
proposed to restrict the ability of an
officer or director seeking reinstatement
to challenge the capital category to
which the institution has been assigned.
Commenters generally recognized that
most of the procedures for review of a
dismissal are set out in the statute and
that the agency proposal adopted these
statutory standards. Several
commenters urged the agencies to
amend the proposal to allow dismissed
officers and directors to present, as a
matter of right, oral testimony or
witnesses at the agency hearing. The
proposal permitted the presentation of
oral testimony or witnesses only with
the permission of the presiding officer.
The commenters argued that the
petitioner must meet a heavy burden of
proof in order to be reinstated, and
should be permitted to meet that burden
through the presentation of oral
testimony.
The agencies have decided to retain
the provision providing that petitioners
may present oral testimony and
witnesses with the permission of the
presiding officer without providing an
absolute right to presentation of oral
testimony. Under the proposed
procedures, petitioners have the right to
submit affidavits or other written
statements from any person in making
their case. In addition, petitioners may
request permission of the presiding
officer to present oral testimony or
witnesses. Any decision by a presiding
officer not to permit oral testimony is
subject to review when the agency
determines the action that is appropriate
on the basis of the record compiled at
the hearing.
Commenters also expressed concern
that neither the statute nor the proposed
rule requires an agency to identify any
connection between the conduct of the
officer or director and the financial
deficiencies experienced by the insured
44876 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
institution before dismissing or
upholding the dismissal of the officer or
director. Commenters urged that the
agencies consider whether the conduct
of an officer or director contributed to
the troubled condition of the institution
in deciding whether to dismiss the
officer or director and in considering a
petition for reinstatement.
The agencies note that the burden of
proof necessary for reinstatement is
established by statute for all petitions
for reinstatement. The agencies do not
have discretion to establish an
alternative burden of proof for cases in
which an officer or director believes that
he or she has not contributed to the
financial weakness of the institution.
However, the agencies note that the
statute does not limit the types of
arguments or evidence that may be
presented by a petitioner in meeting the
statutory burden of proof. In this regard,
the agencies believe that evidence
concerning the past performance of the
director or officer at the institution may
be relevant to determining whether a
director or officer would materially
strengthen an institution’s ability to
address its problems. Accordingly, the
final rules adopt the procedures for
review of petitions for reinstatement as
proposed by the agencies.
Finally, one commenter argued that a
dismissed officer or director should be
allowed to challenge the bank’s capital
category, since the bank's capital
category is the basis for the dismissal.
The agencies have decided not to adopt
this restriction in the final rule.
4. More Stringent Treatment Based on
Non-Capital Supervisory Criteria
In establishing a system of prompt
corrective action based primarily on the
capital level of each institution,
Congress recognized that factors other
than capital should in certain
circumstances be used to assess the
financial condition of an institution. In
providing for more stringent treatment
based on non-capital indications of
financial condition, Congress appears to
have had the same concern that
underlies prompt corrective action
generally: preventing loss to the deposit
insurance funds. See S. Rep No. 102-167,
32-38 (giving regulators “flexibility to
discipline institutions based on criteria
other than capital * * * will help reduce
deposit insurance losses * * *.”). If
actions taken based on criteria other
than capital are to be effective, they
must be taken promptly.
Section 38 provides that the
appropriate Federal banking agency
may, under certain circumstances,
reclassify a well capitalized insured
depository institution as adequately
capitalized. Section 38 also permits the
appropriate agency to require an
adequately capitalized or
undercapitalized institution to comply
with the supervisory provisions as if the
institution were in the next lower
category (but not treat a significantly
undercapitalized institution as critically
undercapitalized) based on supervisory
information other than the capital levels
of the institution. (While the agencies
recognize that these provisions are not
strictly a reclassification of the
institution in all cases, reclassification
to the adequately capitalized category
and treatment of an institution as if it
were in the next lower capital category
are referred to collectively in this
document and in the final rules as a
“reclassification.”)
The statute provides that ah
institution may be reclassified if the
appropriate Federal banking agency
determines (after notice and opportunity
for hearing) that [the institution] is in an
unsafe or unsound condition or,
pursuant to section 8(b) (8), deems the
institution to be engaging in an unsafe or
unsound practice. 12 U.S.C. 1831o(g).
Section 8(b)(8) of the FDI Act was
amended by FDICIA to provide that an
institution may be deemed to be
engaged in an unsafe or unsound
practice if (1) the institution has
received a less-than-satisfactory rating
in its most recent examination report for
assets, management, earnings or
liquidity l0, and (2) the institution has
not corrected the deficiency. 12 U.S.C.
1818(b)(8).
Relying on the statutory language, the
proposed rule provided different
procedures for review of
reclassifications based on unsafe or
unsound condition and those based on
unsafe or unsound practice. In the case
of unsafe or unsound condition, the
proposed regulation provided for notice
to the institution and an opportunity for
an informal hearing prior to the
reclassification; in the case of unsafe or
unsound practice, the proposed
regulation provided for notice to the
institution, a 14-day period in which the
institution could make a written
submission objecting to the
reclassification, and agency review of
that submission prior to any
reclassification.
Several commenters argued that the
agencies should provide a formal
administrative hearing in connection
with reclassifications that are based on
a finding that the institution is in unsafe
or unsound condition. Commenters
10 For savings associations, the equivalent
categories are the management, assets, risk, and
operations components of the MACRO rating.
argued that the provision in section 38
requiring that this type of
reclassification occur only “after notice
and opportunity for hearing” indicates a
Congressional intent that a full
administrative hearing be given in these
cases. Commenters also contended that
principles of fundamental fairness
require a full hearing in these cases.
The agencies do not believe that the
statute or the principles of fairness
require that a formal administrative
hearing be afforded in the case of
reclassifications based on a finding of
unsafe and unsound condition. The
courts have determined that the
statutory language—“after notice and
opportunity for hearing”—does not
require a formal hearing. See, e.g.,
United States v. Florida East Coast Ry.,
410 U.S. 224, 240 (1973) (use of the word
“hearing” in statute “does not
necessarily embrace either the right to
present evidence orally and to crossexamine opposing witnesses, or the right
to present oral argument to the agency’s
decisionmaker"). Where, as here, the
statute does not contain the phrase
"hearing on the record" and the
legislative history does not indicate a
Congressional intent to provide for a
formal hearing, the agency may meet the
statutory requirements by providing an
informal hearing. See, e.g., Independent
U.S. Tanker Owner Comm. v. Lewis, 690
F.2d 908, 922 n.63 (D.C. Cir. 1982).
The final rules adopt the agencies’
proposal to provide institutions with an
opportunity for an informal hearing in
connection with a-reclassification based
on the institution’s condition. Under the
procedures adopted by the agencies, an
institution will be provided prior written
notice of any intention by the agencies
to reclassify the institution, along with
an explanation of the reasons for the
proposed reclassification. The
institution is provided an opportunity to
present written testimony and argument
and an opportunity for an informal
hearing prior to the reclassification. The
informal hearing is available as a matter
of right. At the informal hearing, the
institution may present written and oral
argument, written evidence and
testimony, and, where appropriate, oral
testimony.
The agencies believe that these
procedures, which include an
opportunity for an informal hearing,
provide institutions with an adequate
opportunity to be heard prior to agency
action. These procedures also ensure
that agency action in connection with an
institution whose nominal capital levels
do not provide an accurate indication of
the condition of the institution, will be
prompt, as mandated by section 38.
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44877
Several commenters objected to the
agency proposal to establish a different
procedure—without an opportunity for a
hearing—for the reclassification of an
institution that has received an
unsatisfactory examination rating and
failed to correct the deficiency. These
commenters favored providing at least
an informal hearing in the case of both
types of reclassification. Commenters
argued that the consequences of
reclassification were identical, whether
based on an examination rating or on a
finding that the institution is in unsafe or
unsound condition, and, therefore, a
hearing should be provided in both
cases.
Commenters also argued that the
apparent difference in the wording of
the statute in authorizing the two
methods for reclassification of insured
institutions did not indicate a
Congressional intent to deprive
institutions of a hearing in connection
with a reclassification based on an
examination rating. Rather, commenters
argued that insured institutions should
be afforded an opportunity for a hearing
prior to reclassification based on an
unsatisfactory examination rating
because examinations are inherently
subjective and the consequences to the
institution of reclassification,
particularly for an institution that is
^nominally adequately capitalized, could
be significant. Accordingly, commenters
contended that principles of
fundamental fairness required that an
opportunity for a hearing be provided
prior to a reclassification based on an
examination rating.
Following consideration of the
comments, the agencies have modified
the final rules to provide an opportunity
for an informal hearing in the case of
both types of reclassifications. The
agencies believe that providing an
opportunity for an informal hearing prior
to reclassification based on an
unsatisfactory examination rating will
provide the institution with an adequate
and meaningful opportunity to provide
the agency with information and
argument relevant to the agency's
decision without substantially delaying
the ability of the agencies to take
prompt action as required by section 38.
The agencies do not believe that a
formal hearing is required in connection
with reclassifications based on an
unsatisfactory examination rating. The
statute does not require a formal hearing
on the record in the case of these types
of reclassifications. Instead, the statute
grants the agencies significant discretion
n reclassifying an institution that has
received an unsatisfactory examination
3
(
rating and failed to correct the
deficiency.
In addition, the agencies believe that
the availability of an informal hearing
meets any requirement of fundamental
fairness or due process when viewed in
context. The examination rating that
serves as the trigger for a
reclassification is the result of a process
that involves substantial participation
by the affected institution. This
participation includes an opportunity to
provide all relevant information to the
examiner, and to meet with the
examiner with regard to issues that
arise during the examination. Moreover,
following the examination, each of the
agencies provides an informal appeals
process whereby an institution can seek
review of an examiner’s decision at a
higher level of the agency. Thus, an
institution that has been reclassified
based on its examination ratings will
have already been afforded substantial
opportunity to present evidence and
argument prior to any reclassification
procedure.
The agencies also note that
reclassification of an institution based
on an examination rating is not an
automatic result of receiving an
unsatisfactory rating. Instead, each
agency retains discretion to initiate the
procedures for reclassification and will
do so based on the facts of each case.
Finally, no restrictions or
requirements become effective
automatically as a result of
reclassification. As commenters noted,
section 38 does not make institutions
that have been reclassified immediately
subject to the mandatory provisions of
section 38. Instead, section 38 authorizes
the appropriate agency, in its discretion,
to impose requirements or proscriptions
contained in section 38.
Several commenters expressed
concern that any use of the
reclassification procedures would result
in public disclosure of an institution’s
examination rating. Consequently, these
commenters contended that the agencies
should never reclassify an institution on
the basis of ratings received in an
examination report. Several other
commenters argued that examination
ratings are subjective in nature and
should not serve as the basis of
reclassification of an institution under
section 38.
The agencies expect to use the
reclassification provisions of section 38
when appropriate. The agencies believe
that steps can be taken to prevent public
disclosure of examination ratings, and
that use of the reclassification
provisions of section 38 is important to
ensuring prompt corrective action. The
agencies also believe that examination
ratings are a proper basis for
reclassification under section 38. As
noted above, depository institutions
participate in the examination process
and are afforded an informal appeal of
an examiner’s judgment. Furthermore,
reclassification based on a less-thansatisfactory rating is not automatic, and
is left to the agency’s discretion, with
corresponding procedural protections.
A small number of commenters
favored other changes to the
reclassification procedures. In
particular, one commenter urged that the
period for filing a response to a
proposed reclassification be lengthened
from 14-days to 45 or 60 days. In light of
the agencies’ decision to provide an
opportunity for an informal hearing in
connection with reclassifications based
on an examination rating, the agencies
have determined not to lengthen the
time within which an institution may
provide its initial written response to a
proposed reclassification.
Another commenter suggested
delaying the effective date of any
reclassification to allow the institution
to adjust to new restrictions on its
activities. The agencies believe that,
because reclassification does not result
in the automatic application of any
mandatory provision under section 38, it
is not necessary to delay the effective
date of any reclassification.
Finally, one commenter requested that
the agencies provide by regulation that
the presiding officer at a hearing not be
an individual that has served as an
examiner of the institution. The agencies
expect to select presiding officers that
may render a qualified recommendation
to the agency regarding whether
reclassification is appropriate, and do
not believe that it is necessary or
appropriate to specify in the regulation
the qualifications of the presiding
officer.
5. Enforcement of Directives
Section 8 of the FDI Act, as amended
by FDICLA, includes prompt corrective
action directives issued pursuant to
section 38 among the orders that may be
enforced in the courts pursuant to
section 8(i)(l), and also makes any
depository institution, company, or
institution-affiliated party that violates
such a directive subject to civil money
penalties pursuant to section 8(i)(2)(A).
12 U.S.C. 1818(i). The final rules adopt
the proposed clarification that the
failure of a depository institution to
implement, in any material respect, a
capital restoration plan, or the failure of
a company having control of a
depository institution to fulfill a
44878 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
guarantee that the company has given in
connection with a capital plan accepted
by the appropriate Federal banking
agency, will subject responsible parties
to civil money penalties. Commenters
did not object to this proposal.
G. Capital Restoration Plans
1. Information Required
Section 38 requires an institution that
is undercapitalized, significantly
undercapitalized, 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:
/ Rules and Regulations
by the agency of a new or revised
capital plan, the statute treats the
institution in the same manner as a
significantly undercapitalized
institution. Institutions that fail to
submit any capital restoration plan
within the required period also are
subject to the provisions applicable to
significantly undercapitalized
institutions. Included in these provisions
is the statutory prohibition on payment
by the institution of any bonus or raise
to any senior executive officer.
Several commenters argued that the
rule should be revised to permit an
undercapitalized institution that had
submitted its original capital restoration
plan in good faith an opportunity to
formulate and submit a revised capital
plan before becoming subject to the
provisions applicable to significantly
(1) The steps the institution will take to
undercapitalized institutions.
become adequately capitalized;
Commenters expressed concern that
(2) The levels of capital the institution
rejection of the capital plan by the
expects to attain in each year that the plan is
in effect;
institution’s appropriate agency, and
(3) How the institution will comply with the
corresponding treatment of the
restrictions and requirem ents im posed on the
institution as significantly
institution under section 38;
undercapitalized, pre-supposes an
(4) The types and levels of activities in
unwillingness on the part of the
which the institution will engage; and
institution to devise and implement an
(5) Any other information required by the
acceptable capital plan. Commenters
appropriate Federal banking agency.
argued that a capital restoration plan
Section 38 provides that the
may be found by an agency to be
appropriate Federal banking agency
unacceptable for reasons that are
may not accept a capital restoration
unrelated to the willingness or ability of
plan unless the plan:
the institution to devise an a c c e p t^e
(1) Contains the information required by
capital plan. For example, commenteiS
statute;
were concerned that a capital plan may
(2) Is based on realistic assum ptions and is
be rejected because an institution was
likely to succeed in restoring the institution’s
unaware that the appropriate agency
capital; and
expected the institution to take certain
(3) W ould not appreciably increase the risk
steps in addition to the steps proposed
{including credit risk, interest-rate risk, and
other types of risk) to which the institution is
by the institution, or because
exposed.
developments may have occurred during
the period that the plan is under review
The agencies did not propose to
by the agency that were not reasonably
require by regulation any additional
foreseeable by the institution at the time
information in a capital restoration plan
the plan was submitted.
submitted under section 38, and the
As an initial matter, the agencies
commenters generally agreed that the
believe that it is important that an
agencies should not impose additional
undercapitalized institution discuss the
reporting requirements by regulation.
development of its capital restoration
The commenters argued that the
plan with the appropriate banking
agencies could require additional
agency during the period that the plan is
information in cases in which
being developed. The agencies have
circumstances warranted.
adopted the maximum time periods
2. Schedule for Submission and Review
permitted by section 38 for the formal
of Capital Plans
submission and review of a capital
restoration plan in order to permit an
The agencies proposed adopting the
opportunity for informal discussions
schedule for submission and review of
11 As discussed above, an institution is deemed to between institutions and the appropriate
capital restoration plans that is
been notified of its capital category on the
generally established in the statute. This have
agency. The adoption of a schedule for
date that it is required to file its Call Report, the
schedule provided an institution with 45 date that the institution receives its final report of
formal action does not, and is not
days to submit a capital restoration plan examination or inspection, or the date that the
intended to, preclude informal
after the institution has received notice appropriate federal banking agency notifies the
discussions between the institution and
institution
of
the
institution's
capital
category
or been deemed to have notice that the
the appropriate agency regarding the
(based on an adjustment to capital reported by the
institution is undercapitalized,
elements of the plan prior to the time
institution or on other information obtained by the
significantly undercapitalized or
agency).
that the plan is formally submitted.
critically undercapitalized.11 The
proposal permitted the appropriate
Federal banking agency to change this
period in individual cases, provided that
the agency notified the institution that a
different schedule had been adopted.
The proposed schedule also required
the appropriate Federal banking agency
to review each capital restoration plan
within 60 days of submission of the plan
unless the agency extends the time for
review. The agencies would be required
to provide written notice to the
institution regarding whether the agency
had approved or rejected the capital
plan. The agency would also provide a
copy of each acceptable capital
restoration plan, or amendments thereto,
to the FDIC within 45 days of accepting
the plan.
The commenters addressing this
proposal generally supported adopting
the schedule provided in section 38,
without revision. Two commenters
argued that the agencies should be
required to review capital restoration
plans in less than 60 days.
The final rules adopt the schedule for
filing and review of capital restoration
plans as proposed. The agencies have
determined not to shorten the review
period for capital plans as a general
matter because the longer period will
permit the agencies to discuss revisions
to the plan with the institution before
the agency is required to take final
action on the plan. The agencies expect,
however, not to delay action on capital
plans, and to act on these plans well
within the regulatory schedule.
3. Failure to Submit or Implement an
Acceptable Capital Plan
Section 38 provides that an
undercapitalized institution that fails to
submit or implement, in any material
respect, an acceptable capital plan shall
be subject to the same restrictions
applicable to an institution that is
significantly undercapitalized. In the
event that the appropriate Federal
banking agency has disapproved an
institution’s capital restoration plan, the
proposal would require the institution to
submit a new capital restoration plan
within a time specified by the
appropriate Federal banking agency.
During the period following notice of
such disapproval and prior to approval
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44879
F urther, ais n o te d a b o v e , th e a g e n c ie s
e x p e c t d is c u s s io n s to c o n tin u e d u rin g
th e p e r io d th a t th e a g e n c y r e v i e w s th e
p la n . T h e s e d is c u s s io n s s h o u ld
e lim in a te th e c h a n c e s th a t a c a p ita l
r e s to r a tio n p la n w ill b e r e je c te d b y the
a g e n c y fo r a r e a s o n th a t is n o t
a n tic ip a te d b y th e in stitu tio n .
In c a s e s in w h ic h a n u n d e r c a p ita liz e d
in s titu tio n n o n e t h e le s s h a s f a ile d to
su b m it a c a p ita l r e s to r a tio n p la n or a
p la n s u b m itte d b y a n in s titu tio n is
r e je c te d b y th e a p p r o p r ia te a g e n c y , the
s ta tu te p r o v id e s th a t th e in s titu tio n is
s u b je c t to th e p r o v is io n s a p p lic a b le to
s ig n if ic a n tly u n d e r c a p ita liz e d
in s titu tio n s . T h is tr e a tm e n t h a s tw o
c o n s e q u e n c e s u n d er s e c tio n 3 8 .12 First,
th e in s titu tio n is s u b je c t to r e s tr ic tio n s
o n its a b ility to p a y b o n u s e s or sa la r y
in c r e a s e s to th e in s t itu t io n ’s se n io r
e x e c u t iv e o ffic e r s . In th is regard , s e c tio n
38 s p e c if ic a lly p r o h ib its a n y in stitu tio n
th a t h a s f a ile d to su b m it a c a p ita l
r e s to r a tio n p la n th a t is a c c e p t a b le to its
a p p r o p r ia te a g e n c y from p a y in g a n y
b o n u s o r r a is e to its s e n io r e x e c u t iv e
o ffic e r s . T h e p u r p o se o f th is r e s tr ic tio n
a p p e a r s to b e to p r e v e n t s e n io r o ffic e r s
o f a n u n d e r c a p ita liz e d in s titu tio n from
r e c e iv in g a n y in c r e a s e in p a y if th e
o ffic e r s h a v e n o t d e v is e d a n d s u b m itte d
a c a p ita l r e s to r a tio n p la n th a t th e
a g e n c y a g r e e s w ill a d d r e s s th e p r o b le m s
f a c e d b y th e in stitu tio n .
S e c o n d , th e a p p r o p r ia te F e d e r a l
b a n k in g a g e n c y for th e in s titu tio n is
p e r m itte d to ta k e, a n d m u st c o n s id e r
ta k in g , a n u m b er o f a d d itio n a l
d is c r e tio n a r y a c tio n s in c o n n e c t io n w ith
th e in stitu tio n . In d e te r m in in g w h e th e r
to e x e r c is e its d is c r e tio n to ta k e
a d d itio n a l su p e r v iso r y a c tio n s , th e
a g e n c ie s b e lie v e th a t th e y m a y c o n s id e r
th e t y p e s o f fa c to r s n o te d b y th e
c o m m e n te r s, in c lu d in g e v e n t s th a t h a v e
o c c u r r e d a fte r s u b m is s io n o f th e o r ig in a l
p la n , th e e ffo r ts o f m a n a g e m e n t to
d e v i s e a r e a lis t ic a n d a c c e p t a b le p lan ,
a n d o th e r fa c to r s.
In lig h t o f th e sta tu to r y la n g u a g e a n d
th e a b ility o f th e a g e n c ie s to c o n s id e r
th e fa c to r s id e n tifie d b y c o m m e n te r s on
a c a s e - b y - c a s e b a s is in d e te r m in in g
a p p ro p ria te a c tio n th a t th e a g e n c y
s h o u ld ta k e, th e a g e n c ie s b e lie v e th a t it
is a p p ro p ria te to r e ta in in th e fin a l ru les
th e p r o v is io n in d ic a tin g th a t an
u n d e r c a p ita liz e d in s titu tio n is s u b je c t to
th e p r o v is io n s a p p lic a b le to sig n ific a n tly
u n d e r c a p ita liz e d in s titu tio n s in th e
e v e n t th e in stitu tio n h a s s u b m itte d a
c a p ita l r e s to r a tio n p la n th a t is r e je c te d
b y th e a p p ro p ria te a g e n c y . S im ila r ly , an
12
As explained above, a significantly
undercapitalized institution is subject to the same
mandatory and discretionary provisions that apply
to undercapitalized institutions.
u n d e r c a p ita liz e d in s titu tio n th a t f a ils to
im p le m e n t, in a n y m a te r ia l r e s p e c t, its
c a p it a l r e s to r a tio n p la n w o u ld
im m e d ia t e ly b e s u b je c t to t h e s e s a m e
p r o v is io n s u p o n th e in s t itu t io n ’s fa ilu r e
to im p le m e n t th e p la n .
4. G u a r a n te e o f P e r fo r m a n c e o f C a p ita l
R e s to r a tio n P la n
S e c t io n 38 p r o v id e s th a t th e
a p p r o p r ia te a g e n c y m a y n o t a c c e p t a
c a p ita l r e s to r a tio n p la n s u b m itte d b y a n
u n d e r c a p ita liz e d in s titu tio n u n le s s e a c h
c o m p a n y th a t c o n tr o ls th e in s titu tio n
h a s g u a r a n te e d th a t th e in s titu tio n w ill
c o m p ly w it h th e p la n u n til th e in s titu tio n
h a s b e e n a d e q u a te ly c a p it a liz e d o n
a v e r a g e d u rin g e a c h o f fo u r c o n s e c u t iv e
c a le n d a r q u a rte rs, a n d e a c h su c h
c o m p a n y h a s p r o v id e d a p p r o p r ia te
a s s u r a n c e s o f p e r fo r m a n c e . T h is
g u a r a n te e b y a n y c o n tr o llin g c o m p a n y is
in d e p e n d e n t o f a n y lia b ilit y o f a f filia t e s
o f th e d e p o s it o r y in s titu tio n p u r su a n t to
th e c r o s s - g u a r a n te e p r o v is io n o f th e FD I
A c t (12 U .S .C . 1 8 1 5 (e)).
T h e a g e n c ie s p r o p o s e d to im p le m e n t
th e p e r fo r m a n c e g u a r a n te e p r o v is io n b y
p r o v id in g th a t th e a g e n c ie s w ill n o t
a p p r o v e a c a p it a l r e s to r a tio n p la n
r e q u ir e d to b e s u b m itte d b y a n
u n d e r c a p ita liz e d , s ig n if ic a n tly
u n d e r c a p ita liz e d , or c r itic a lly
u n d e r c a p ita liz e d in s titu tio n u n d e r
s e c t io n 38, u n le s s e a c h c o m p a n y th a t
c o n tr o ls th e in s t itu t io n s u b m its a w r itte n
g u a r a n te e o f th e p la n .13 T h e
p e r fo r m a n c e g u a r a n te e w o u ld in c lu d e a
c o m m itm e n t to ta k e a c t io n s r e q u ir e d b y
th e c a p ita l p la n , in c lu d in g , for e x a m p le ,
a ss u r in g th a t c o m p e te n t m a n a g e m e n t
w ill b e s e le c t e d , r e s tr ic tin g tr a n s a c t io n s
b e t w e e n th e in s titu tio n a n d th e
c o n tr o llin g c o m p a n y , a n d d is c o n tin u in g
c e r ta in r is k y a c t iv it ie s w ith in th e
in s titu tio n or a n a ffilia te . T h is g u a r a n te e
w o u ld a ls o in c lu d e a s s u r a n c e s th a t th e
in s titu tio n w o u ld fu lfill a n y
c o m m itm e n ts to r a is e c a p ita l m a d e in
th e p la n . E a c h c o m p a n y th a t p r o v id e s
th e f in a n c ia l g u a r a n te e w o u ld b e jo in tly
a n d s e v e r a lly lia b le for fu lfillm e n t o f th e
g u a r a n te e , up to th e s ta tu to r y lim it o f
lia b ility . F a ilu r e o f a n y c o m p a n y th a t
c o n tr o ls a n u n d e r c a p ita liz e d in s titu tio n
to p r o v id e th e r e q u ir e d g u a r a n te e c a u s e s
th e in s titu tio n to b e c o m e su b je c t to th e
p r o v is io n s o f s e c t io n 38 a p p lic a b le to
s ig n if ic a n tly u n d e r c a p ita liz e d
in s titu tio n s .
S e c t io n 38 a ls o r e q u ir e s e a c h
c o m p a n y th a t c o n tr o ls a n
u n d e r c a p ita liz e d in s titu tio n to p r o v id e
a d e q u a te a s s u r a n c e s th a t th e in s titu tio n
w ill p erfo rm u n d e r its c a p ita l p la n .
P r o v id in g a d e q u a te a s s u r a n c e s w ill
13 A capital restoration plan doe9 not supersede
an existing net worth maintenance agreement.
in c lu d e c o m m ittin g to ta k e w h a t e v e r
s t e p s a re n e c e s s a r y to e n s u r e th a t th e
c a p it a l r e s to r a tio n p la n is fu lly
im p le m e n te d .
T h e a g e n c ie s r e q u e s te d c o m m e n t
r e g a r d in g w h e t h e r it w a s a p p r o p r ia te to
s p e c if y b y r e g u la tio n th e t y p e s o f
p e r fo r m a n c e a s s u r a n c e s th a t w o u ld b e
r eq u ired . In a d d itio n , th e a g e n c ie s
p r o p o s e d a n u m b e r o f c la r if ic a tio n s to
th e c a p ita l g u a r a n te e in th e o rig in a l
p r o p o sa l.
M o s t o f th e c o m m e n t e r s th a t
a d d r e s s e d th e g u a r a n te e p r o v is io n s
s u g g e s t e d th a t th e a g e n c ie s d e te r m in e
o n a c a s e - b y - c a s e b a s is , a n d n o t s p e c ify
b y r e g u la tio n , th e form o f g u a r a n te e th a t
w o u ld b e a c c e p t a b le a n d w h e t h e r
a d e q u a te a s s u r a n c e s o f p e r fo r m a n c e
h a d b e e n g iv e n b y c o m p a n ie s th a t
c o n tr o l a n u n d e r c a p ita liz e d in stitu tio n .
A t th is tim e, th e a g e n c ie s a g r e e w ith th e
c o m m e n te r s th a t th e a d e q u a c y o f a
c a p ita l g u a r a n te e a n d o f th e a s s u r a n c e s
o f p e r fo r m a n c e sh o u ld b e d e te r m in e d o n
a c a s e - b y - c a s e b a s i s in c o n n e c t io n w ith
a n a g e n c y ’s r e v ie w o f c a p it a l r e s to r a tio n
p la n s , a n d n o t b y r e g u la tio n . T h is w ill
p r o v id e th e a g e n c ie s a n d c o m p a n ie s
th a t c o n tr o l u n d e r c a p ita liz e d
in s t itu t io n s w it h f le x ib ilit y to d e v is e
g u a r a n te e s th a t a re a p p r o p r ia te for
in d iv id u a l c a s e s , a n d p erm it th e
a g e n c ie s a n d th e in d u s tr y to g a in
e x p e r ie n c e w it h th e ty p e s o f a s s u r a n c e s
th a t a r e a d e q u a te . A s th e a g e n c ie s a n d
th e in d u s tr y g a in e x p e r ie n c e in th is a rea ,
th e a g e n c ie s w ill r e c o n s id e r w h e th e r it
is a p p r o p r ia te to e s t a b lis h r e g u la lo r y
r e q u ir e m e n ts in th is a r e a .
T h e c o m m e n t e r s g e n e r a lly d id n o t
o b je c t to th e a g e n c i e s ’ in te r p r e ta tio n
th a t e a c h c o m p a n y th a t p r o v id e s a
p e r fo r m a n c e g u a r a n te e u n d e r s e c t io n 38
w o u ld b e jo in tly a n d s e v e r a lly lia b le for
fu lfillm e n t o f th e g u a r a n te e . H o w e v e r ,
s e v e r a l c o m m e n te r s r e q u e s te d
c la r if ic a tio n r e g a r d in g w h e t h e r
c o m p a n ie s th a t a re in te r m e d ia te s h e ll
h o ld in g c o m p a n ie s w o u ld b e p e r m itte d
to fu lfill th e ir g u a r a n te e r e q u ir e m e n t b y
p r o v id in g a c e r t if ic a tio n th a t th e p a r e n t
o f th e in te r m e d ia te c o m p a n ie s w o u ld
g u a r a n te e p e r fo r m a n c e . S im ila r ly , t h e s e
c o m m e n te r s so u g h t a g e n c y g u id a n c e
re g a r d in g w h e t h e r in te r m e d ia te s h e ll
h o ld in g c o m p a n ie s w o u ld b e p e r m itte d
to r e ly o n th e fin a n c ia l r e s o u r c e s o f th e
p a r e n t c o m p a n y or o f a th ird p a r ty a s
a d e q u a te a s s u r a n c e o f p e r fo r m a n c e o n
th e g u a r a n te e .
T h e a g e n c ie s b e lie v e th a t a g u a r a n te e
th a t is - b a c k e d b y th e c o n tr a c tu a l p le d g e
o f reso u rces o f a parent com p any m ay,
p a r tic u la r ly in s it u a tio n s in v o lv in g th e
o w n e r s h ip o f a n in su r e d in stitu tio n b y a
c o m p a n y th r o u g h a w h o lly o w n e d
d o m e s t ic s h e ll h o ld in g c o m p a n y , s a t is f y
44880 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
the requirements of section 38. In other
situations, a third party guarantee made
by a party with adequate financial
resources may be satisfactory for
purposes of section 38. The agencies will
consider the type of guarantee that
would be appropriate in multi-tier
holding companies on a case-by-case
basis. The agencies will also consider on
a case-by-case basis the type of
guarantee that is necessary in the case
of a parent holding company that is a
shell company or has limited resources.
Section 38 limits the aggregate
liability under the capital performance
guarantee of all companies that control
a given insured depository institution to
the lesser of:
(1) An am ount equal to 5 percent of the
institution's total assets at the time the
institution becam e undercapitalized: or
(2) The amount necessary (or that would be
necessary) to bring the institution into
compliance with all capital standards
applicable with respect to such institution as
of the time the institution fails to comply with
its capital restoration plan.
In incorporating this provision into the
regulation, the agencies proposed to
adopt the same definition of total assets
for purposes of computing the first
component of the limit on liability as
would be used in determining the capital
category of the institution. As discussed
above, the commenters unanimously
favored using the same definition of
capital terms to the extent possible in
implementing section 38, and argued
against the use of definitions that would
require daily calculation of riskweighted assets or capital. The final
rules rely on existing definitions and
capital calculation procedures in
implementing the capital guarantee
provisions.
The agencies also proposed to clarify
that the second component of the limit
on liability refers to the amount
necessary to restore the capital of the
institution to the applicable minimum
capital levels as those levels were
defined at the time that the institution
initially failed to comply with its capital
plan. The amount of a capital guarantee
would not change if the minimum capital
adequacy standards changed after the
time the institution initially failed to
comply with its capital restoration
plan. 14 The commenters that addressed
this issue favored this approach, and the
agencies have adopted the proposal in
the final rules.
14 Any modification of the minimum capital
requirement for savings associations, required by
FIRREA's transition schedules, is not a change of
the minimum capital adequacy requirements for
purposes of section 38 and this part.
The final rules also include the
agencies’ proposal for implementing Ihe
statutory provision that limits the
duration of a guarantee of a capital plan.
Under the proposal, the appropriate
Federal banking agency would provide
notice to the company that the
guarantee has expired once the
depository institution has remained
adequately capitalized for four
consecutive calendar quarters. This
approach permits the agency and the
institution to verify that the limit of
liability under the guarantee has
expired.
The final rules adopt provisions that
make clear that expiration of a
guarantee or fulfillment of a guarantee
given by a company in connection with
one capital restoration plan does not
relieve the company from the obligation
to guarantee another capital restoration
plan that may be required at a future
date for the same institution if it again
becomes undercapitalized. Similarly, the
fact that a company has, at one time,
fulfilled a guarantee by providing
resources to an institution up to the
statutory limit would not reduce the
amount of any guarantee of a future
capital plan for the same institution.
Moreover, the provision or fulfillment by
a company of a guarantee for one
institution does not affect the obligation
of that company to guarantee a capital
plan in connection with any other
insured depository institution.
Commenters generally did not disagree
with these provisions.
One commenter asked that a company
that has performed on a guarantee of a
capital plan be granted a two-year grace
period before being required to
guarantee another plan by the same
institution. The agencies do not believe
that the statute contemplates such an
exception.
5. Priority in Bankruptcy
In the original proposal for comment,
the agencies noted that the FDIC will
have a priority claim in any bankruptcy
proceedings of a holding company that
has guaranteed an institution’s
compliance with a capital restoration
plan. The FDIC’s claim against a holding
company's estate would have priority
over the claims of unsecured creditors
and is provided for in section 507(a)(8)
of Title 11 of the United States Code, as
amended by the Crime Control Act of
1990, Public Law 101-647,104 Stat. 4789.
Sections 365(o) and 523(a)(12) of Title 11
of the United States Code, as amended
by the Crime Control Act of 1990, also
provide special protections for the FDIC.
The agencies did not receive any
comment on this matter.
6. Submission of Plans by Reclassified
Institutions
Section 38(g) provides that an
institution that has been reclassified to a
different capital category as a result of
an agency determination that the
institution is in an unsafe or unsound
condition or is engaged in an unsafe or
unsound practice must describe the
steps the institution will take to address
these deficiencies. The final rules reflect
this statutory requirement.
Section 38(g) also provides that an
institution is not required to submit a
capital restoration plan if the institution
nominally has adequate capital but has,
because of its condition or practices,
been made subject to provisions
applicable to an undercapitalized
institution. The agencies requested
comment on whether it was appropriate
to require by regulation that all
adequately capitalized institutions that
are subject to provisions as if the
institution were undercapitalized file a
plan describing the steps that would be
required to address its deficiencies. The
commenters strongly urged that this
provision not be adopted in the
regulation and that the agencies reserve
authority to require plans on a case-bycase basis. The agencies agree that
these plans may not always be
appropriate and have determined to
consider the need for these plans on a
case-by-case basis as provided in
section 38.
7. Revised Capital Restoration Plans
The agencies requested comment
regarding whether the final rules should
require in all cases that an insured
depository institution that is operating
under a capital restoration plan that has
been approved by the appropriate
Federal banking agency must submit an
additional or a revised capital
restoration plan if the institution’s
capital classification changes.
Commenters generally believed that an
inflexible rule would result in requiring
an institution to file capital plans more
frequently than necessary to address the
institution’s problems. On the other
hand, commenters agreed that the
agencies had discretion under section 38
to require a capital plan in individual
cases as appropriate.
The final rules do not adopt a
regulatory requirement that an
institution file a new or revised capital
restoration plan in the event that the
institution’s capital category changes.
Instead, the agencies have adopted a
provision in the final rules retaining
discretion to determine on a case-by
case basis that an institution must
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 41881
submit a new or revised capital plan.
Under the final rules, in the event that
the agency determines that a new or
revised plan must be submitted, the
agency will provide notice to the
institution.
H. Monitoring Undercapitalized
Institutions.
Section 38 requires the agencies to
monitor closely institutions that are
undercapitalized, significantly
undercapitalized, or critically
undercapitalized. The agencies must
also monitor compliance by these
institutions with their capital restoration
plans and with restrictions and
requirements imposed under section 38.
This monitoring will be carried out
through review of the reports filed by
the institution, examinations of the
institution on an appropriate time
schedule, and informal discussions with
the institution regarding the steps that it
is taking to improve its condition,
develop and implement an acceptable
capital restoration plan, and comply
with applicable requirements.
As part of this monitoring program,
the appropriate Federal agency will
discuss with the institution any
revisions that may need to be made by
an institution to its capital plan. The
appropriate agency also will discuss
elimination of restrictions that are no
longer needed as an institution
successfully implements its capital plan
and improves its financial condition.
Once an institution has fulfilled its
capital restoration plan and returned to
at least the adequately capitalized
category, directives issued pursuant to
section 38 will be removed.
I. Other Matters
1. Definition of “Management Fee”
Section 38 of the FDI Act prohibits
any institution from paying management
fees to a controlling person if, following
the payment of those fees, the institution
would be undercapitalized. The
agencies had proposed to define a
management fee to be any payment for
management services or advice, other
than payments to individuals in their
capacity as employees of the institution.
Commenter9 expressed concern that
this definition could be interpreted to
preclude payments for non-management
services obtained from an affiliate, such
as data processing services. In order to
address this concern, one commenter,
representing a group of insured
institutions, suggested defining a
management fee to be any payment
made for the provision of management
services or advice in connection with
"supervisory, executive, managerial, or
policymaking functions.” The agencies
believe that this formulation covers the
types of fees identified by the statute
without affecting fees paid for non
management services, which are not
prohibited by the mandatory provisions
of section 38.
The final rules generally adopt the
language suggested by the commenter
and define management fees to include
any payment of money or provision of
any other thing of value to a company or
individual for the provision of
management services or advice to the
bank, or related overhead expenses,
including payments related to
supervisory, executive, managerial, or
policymaking functions, other than
compensation to an individual in the
individual’s capacity as an officer or
employee of the bank. The definition
does not include payments to a
controlling person for such things as
electronic data processing, trust
activities, mortgage servicing, audit and
accounting services, property
management, or other similar service
fees.
The agencies point out that while fees
paid for nonmanagement services
provided by an affiliate are not
prohibited by the mandatory provisions
of section 38, the agencies have
discretion under several provisions of
section 38 to restrict any fees paid to an
affiliate by an undercapitalized
institution or any transaction between
the undercapitalized institution and an
affiliate. The agencies also stress that
all management fees and servicing fees
paid by an insured institution to an
affiliate are subject to the restrictions
and requirements of sections 23A and
23B of the Federal Reserve Act (12
U.S.C. 371c, 371c-l), regardless of the
institution’s capital category under
section 38. Sections 23A and 23B require
that services that are provided to an
insured institution be provided on terms
that ar$ at least as favorable to the
insured institution as would be
available from a third party.
2. Definition of "Control” and
"Controlling Person”
The agencies requested comment
regarding the definition of "control,"
particularly whether an exception
should be provided for persons that
have acquired control of an institution in
a fiduciary capacity or in satisfaction of
a debt previously contracted (DPC). The
word "control” is used in two provisions
of the regulation: first, in the definition
of controlling person, noted below, and
second, in the requirement that for any
capital restoration plan to be
acceptable, the plan must be guaranteed
by each company having control of the
institution.
Section 38 does not define the term
"control." Section 3 of the FDI Act,
however, adopts the definition of
“control” contained in section 2 of the
Bank Holding Company Act (BHC Act)
(12 U.S.C. 1841(a)(2)). Under the BHC
Act, a company controls an institution if
the company owns or controls 25
percent or more of the voting securities
of that institution, controls the board of
directors of the'institution; or exercises
a controlling influence over the
management or policies of the
institution.
The BHC Act also provides exclusions
for certain types of share ownership
from the applicability of the control
provisions. Section 2(a)(5)(A) of the BHC
Act (12 U.S.C. 1841(a)(5)(A)) states that
a bank or company is not deemed to be
a bank holding company by virtue of its
ownership or control of shares in a
fiduciary capacity, provided that the
bank or company does not retain sole
right to vote the shares. Additionally,
section 2(a)(5)(D) of the BHC Act (12
U.S.C. 1841(a)(5)(D)) permits a company
to hold shares of a depository institution
acquired DPC without being deemed to
be a bank holding company, provided
that the company disposes of the shares
within two years (with the possibility of
three one-year extensions).
The proposed rules noted that the FDI
Act also contains a DPC exception.
Section 5 of the Act (12 U.S.C. 1815),
addresses the liability of commonly
controlled depository institutions for
“cross-guarantee” claims. Section 5(e)(7)
of the FDI Act (12 U.S.C. 1815(e) (7 ))
contains an exception for the acquisition
by an insured depository institution of
shares of another depository institution
in satisfaction of a debt previously
contracted. That exception is
conditioned on the requirement that all
transactions between the controlling
institution or any affiliate of the
controlling institution and the subsidiary
institution comply with the restrictions
contained in sections 23A and 23B of the
Federal Reserve Act.
The agencies requested comment on
whether it would be appropriate under
section 38 to provide, by regulation, an
exception from the definition of
“control” for shares held in a fiduciary
capacity or for shares acquired DPC.
The agencies also requested comment
on whether, assuming there were an
exception for shares acquired DPC, the
exception should be subject to the
conditions established in the FDI Act
regarding compliance with sections 23A
and 23B.
44882 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
The agencies received 18 comment
letters on this matter. All 18 comment
letters supported the adoption of a
definition of ‘‘control" similar to that
found presently in the BHC Act.
Seventeen comment letters also
supported the adoption of fiduciary
ownership and DPC exceptions from the
definition of ‘‘control". Commenters
strongly supported adopting these
exceptions and argued that without
these exceptions companies would be
unlikely to hold stock from an insured
institution in a fiduciary capacity or
accept such stock as collateral for a loan
because of the potential liability under
section 38. Seven comment letters
supported the inclusion of conditions
similar to those contained in section 5(e)
(7) of the FDI Act in the DPC exception,
with one comment letter opposed.
The agencies have included in the
final rules implementing section 38 a
definition of the term “control" identical
to that provided in section 2 of the BHC
Act and an exception from that
definition for shares held in a fiduciary
capacity and for shares acquired DPC.
Similar to section 2(a) (5) (A) of the BHC
Act. the fiduciary exception is premised
on the condition that the bank or
company holding the shares not retain
the sole right to vote the shares. The
DPC exception in the final rule parallels
section 2(a) (5) (D) of the BHC Act in
that the shares held DPC must be
disposed of within two years, with the
possibility of three one-year extensions.
The agencies did not consider it
necessary to include conditions similar
to those contained in the DPC exception
to section 5 of the FDI Act (12 U.S.C.
1815(e) (7)) in the final rule.
Qualification for an exemption from
the definition of control, however, does
not exempt the depository institution
whose shares are held by another
company or depository institution from
the provisions of section 38. Whether or
not it is “controlled” by another entity, a
depository institution whose stock is
held DPC or in a fiduciary capacity will
still be subject to all relevant provisions
of section 38 in accordance with its
capital category. For example, an
undercapitalized institution whose stock
is held DPC may not pay dividends.
The final rules add a definition of the
term "controlling person." The term
“controlling person” is defined as any
person having control of an insured
depository institution and any company
controlled by that person. Thus, the
prohibition on payment of management
fees covers payment to any company,
including a consulting firm, owned by
the principal shareholder of an
institution, and any servicing company
owned by a bank holding company.
3. Restrictions on Advertising
The proposed rule limited an insured
depository institution’s use of its capital
category for any purpose, except when
permitted by the appropriate Federal
banking agency or otherwise required
by law. This provision was intended to
restrict the ability of insured depository
institutions to advertise their capital
category.
The agencies received eleven
comments in support of this limitation
on use of the capital category. Twelve
commenters objected and urged that
financial institutions be allowed to
advertise their capital category.
Some commenters expressed concern
about the practicality of such a
prohibition given that disclosure of the
category may be required for purposes
of risk-based deposit insurance
premiums, brokered deposits, and
interbank liabilities. Disclosure may
also be necessary in securities filings.
The agencies recognize that disclosure
may be appropriate under some
circumstances. The prompt corrective
action framework in section 38 was
designed, however, to be a supervisory
tool, not a marketing vehicle. The
agencies have long held that capital
levels are a lagging indicator of
problems in financial institutions. An
advertisement that cites a financial
institution’s capital category under
section 38 could be misleading to the
general public. Depositors, investors and
other affected persons could improperly
v i e w th e c a p ita l c a te g o r y d e s ig n a t io n a s
the regulator’s definitive assessment of
the insured depository institution’s true
financial condition.
Taking account of the concerns
expressed by the commenters, the final
rule has narrowed the disclosure
restriction to prohibit the advertising of
the capital category assigned to an
institution pursuant to section 38. The
final rule does not restrict advertising of
the institution’s capital levels or
financial condition. The institution may
not, however, describe itself in an
advertisement or in promotional
material as falling within the well
capitalized category, as that category is
defined by the Federal banking agencies
pursuant to section 38. Nor may the
institution advertise that its appropriate
Federal banking agency has determined
it to be well capitalized.
4. Applicability of Capital Categories to
Bank Holding Companies and Savings
and Loan Holding Companies
Section 38 applies capital-based
prompt corrective action to insured
depository institutions but not to holding
companies that control such institutions.
The commenters strongly urged the
Federal Reserve Board and the OTS not
to impose the framework of section 38 to
bank holding companies and to savings
and loan holding companies. Several
commenters argued that the enactment
of section 38 provided the agencies with
an opportunity to eliminate the capital
adequacy standards that are currently
applicable to bank holding companies
and savings and loan holding
companies.
The Board and the OTS have
determined not to apply section 38 to
bank holding companies and savings
and loan holding companies. The
statute, by its terms, applies only to
insured depository institutions, and
Congress has provided no indication
that it intended the framework to be
extended. The agencies also have
authority under a number of other
statutory provisions to supervise the
activities and financial condition of
holding companies.
The agencies note, however, that,
while the complete supervisory
framework of section 38 does not govern
holding companies, various provisions
of section 38 apply to companies that
control insured depository institutions.
These provisions, including the
provisions regarding guarantee of a
capital restoration plan, appear to apply
to holding companies regardless of the
capital level of those holding companies.
The Federal Reserve Board intends to
consult with the Federal banking agency
for each in s u r e d d e p o s it o r y in s titu tio n
subsidiary of a bank holding company to
monitor supervisory actions required
under section 38, and, in the supervision
of the holding company, to take
appropriate action at the holding
company level based on an assessment
of these developments. In supervising
savings and loan holding companies, the
OTS will concentrate on ensuring that
subsidiary savings associations are well
managed and well capitalized and that
transactions and relationships between
savings associations and their holding
companies satisfy fiduciary
requirements and do not negatively
affect the safety and soundness of the
subsidiary associations. OTS will
supervise holding companies in a
manner consistent with the
effectiveness of supervisory actions
required under section 38 imposed upon
subsidiary associations.
5. Restrictions on Activities of Critically
Undercapitalized Institutions
Section 38(i) of the FDI Act provides
that the FDIC must, by regulation or
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44883
the banking industry. The FDIC intends
order, restrict the activities of critically
to interpret this phrase to mean any
undercapitalized institutions. The
activities that must be restricted are
activity currently engaged in by the
described above. FDICIA does not
specific institution. Therefore, any new
provide specific guidance on how to
activity not currently exercised by the
interpret and implement each of the
specific institution, though permissible
restrictive provisions of section 38(i).
and approved by the appropriate
Consequently, the FDIC considered a
regulator(s), would require the FDIC’s
number of options.
prior written approval. For example, a
The prohibition on entering into "any critically undercapitalized institution
material transaction other than in the
that wishes to engage for the first time
usual course of business” can be
in commercial real estate lending and to
interpreted in a general fashion relying
establish a new commercial real estate
on outstanding case law in the area of
loan department would be required to
securities disclosures. The concept of
obtain the FDIC’s prior written approval
materiality also could be defined from
under this section.
an accounting perspective by
The FDIC recognizes that the types of
establishing specific limits for
activities considered “usual” for a
determining materiality. For example,
particular institution are contingent on
the FDIC could, by regulation, require
its size, location, management expertise,
that any prospective transaction other
business strategy, etc. Consequently,
than one that is in the usual course of
what may be “usual” for a large urban
business that results or could result in a institution may not be “usual” for a
5 percent change in an institution’s
smaller rural institution and vice versa.
tangible equity capital account or net
The FDIC believes that this definition of
income account would automatically be new activity is consistent with the
considered a material transaction
statutory intent that troubled
requiring the FDIC’s prior approval.
institutions should focus their attention
Other transactions could be defined as
on their existing problems and existing
material on a case by case basis. The
lines of business.
FDIC solicited comment on how to
The FDIC proposed to define the term
define the terms “material” and "usual
“highly
leveraged transaction” by
course of business” as well as what
utilizing
the interagency definition
specific guidance, if any, should be
published in the Federal Reqister (57 FR
provided by the FDIC to the banking
5040, February 11,1992). Due to the
industry.
The FDIC received two comments on uncertainty over whether the HLT
definition will remain in effect, the FDIC
the materiality issue. One respondent
has
decided to adopt in the final rule an
suggested the definition be based on
abbreviated definition for HLTs that will
market capitalization as opposed to a
percentage based on equity capital. The apply to critically undercapitalized
institutions. The FDIC also intends to
range suggested was between 5 and 10
percent. The other respondent suggested rely on existing generally accepted
accounting principles when interpreting
that the denominator for defining a
the restriction on making any “material
material transaction be based on 10
change in accounting methods.”
p e r c e n t o f to ta l a s s e t s .
Section 39(c) of the FDI Act requires
After consideration of the above
the Federal banking agencies to
comments, the FDIC has decided to
define a material transaction on a case- prescribe standards for determining
when compensation paid to employees,
by-case basis. The FDIC believes mat
directors and principal shareholders of
defining a material transaction using a
insured depository institutions is
fixed percentage of capital or assets
excessive. An advunce notice of
could be arbitrary and exclude those
proposed rulemaking was recently
transactions that initially may be de
published in the Federal Register (52 FR
minimus in amount or not easily
subjected to a quantifiable measure but 31330, July 15,1992). The FDIC intends
to interpret the restrictive provision in
“material” in substance such as a
section 38(i)(2)(F) involving the payment
proposal to engage in a new serviceof excessive compensation or bonuses in
oriented activity. A fixed measurement
a manner that is consistent with the
also could be inconsistent with the
FDIC’s actions in fulfilling the
statutory requirement that a material
requirements of section 39(c) of the FDI
transaction includes those activities
Act. In the interim, the FDIC intends to
where the institution would have to
enforce section 38(i) by requiring prior
notify its appropriate Federal banking
written approval of any change in the
agency.
institution’s compensation of any of its
The FDIC did not receive any
executive officers (as defined in Federal
comments on how to apply the phrase
“usual course of business” or what
Regulation O (12 CFR part 215),
specific guidance, if any, to provide to
directors and principal shareholders and
will consider existing compensation
levels on a case-by-case basis.
The provision that restricts "paying
interest on new or renewed liabilities at
a rate that would increase the
institution’s weighted average cost of
funds to a level significantly exceeding
the prevailing rates of interest on
insured deposits in the institution’s
normal market areas” contains terms
that are similar to those mandated by
section 301 of FDICIA and the revisions
of § 337.0 of the FDIC’s regulations (12
CFR 337.0) as recently implemented by
the FDIC. Specifically, the FDIC intends
to interpret the phrase "significantly
exceeding the prevailing rates” the same
as defined in § 337.0. The prevailing
effective yields of interest are the
effective yields on insured deposits of
comparable maturities offered by other
insured depository institutions in the
market area in which deposits are being
solicited. A market area is any readily
defined geographic area in which the
rates offered by any one insured
depository institution soliciting deposits
in the area may affect the rates offered
by other institutions soliciting deposits
in the same area.
0. Application of Prompt Corrective
Action to Insured Branches
Section 38(a)(2) of the FDI Act, as
added by section 131 of FDICIA,
provides that each appropriate Federal
banking agency and the FDIC (acting in
the FDIC’s capacity as the insurer of
depository institutions) shall take
prompt corrective action to resolve the
problems of insured depository
institutions.
Section 3(c)(2) of the FDI Act defines
the term “insured depository institution”
as any bank or savings association the
deposits of which are insured by the
FDIC pursuant to the FDI Act. 12 U.S.C.
1813(c)(2). The term “bank” is defined,
in section 3(a)(1) of the FDI Act, to
include, inter alia, any "insured
branch.” 12 U.S.C. 1813(a)(1). Section
3(s)(3) defines the term “insured branch”
to mean any branch (as defined in
section 1(b)(3) of the International
Banking Act of 1978) of a foreign bank
any deposits in which are insured
pursuant to the FDI Act. 12 U^S.C.
1813(s)(3).
The plain language of these statutory
provisions requires the application of
the prompt corrective action provisions
to insured branches of foreign banks,
including insured federal branches.
Insured branches, however, are not
required to maintain minimum capital
levels under the FDIC's capital
maintenance regulations, 12 CFR part
325. In fact, they are expressly excluded
44884
Fedejal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
from the definition of “insured
depository institution" which is used in
the FDIC's capital maintenance
regulations. 12 CFR 325.2(f). Insured
branches, however, are required to
maintain a pledge of assets, pursuant to
12 CFR 346.19, and a certain volume of
eligible assets, pursuant to 12 CFR
346.20.
Insured federal branches, likewise,
are not required to maintain minimum
capital levels under the OCC’s capital
maintenance regulations, 12 CFR part 3.
See 50 FR 10215, March 14,1985. In
addition to the asset pledge and asset
maintenance requirements to which all
insured branches are subject, all federal
branches are required by section 4 of the
International Banking Act of 1978 (12
U.S.C. 3102(g)(2)) to establish capital
equivalency deposits which generally
must equal at least 5 percent of the
branch’s third party liabilities. Federal
branches also may be required by the
OCC to maintain a certain quantity of
specified assets in the states in which
they operate.
In an effort to promote competitive
equality between insured federal and
state branches of foreign banks, the
OCC and the FDIC proposed a uniform
definition of capital categories for all
insured branches of foreign banks based
upon the FDIC’s asset pledge and asset
maintenance requirements which apply
to all insured branches.
The OCC and the FDIC recognize that
the eligible assets and, more
particularly, the pledge of assets are not
perfect substitutes for capital.
Nonetheless, the FDIC has long taken
the position that the asset maintenance
requirement is analogous to a domestic
bank’s required capital. Therefore, the
OCC and the FDIC have decided to
utilize FDIC’s regulations governing the
pledge of assets and the level of eligible
assets to determine an insured branch's
capital category.
For prompt corrective action
purposes, an insured federal branch will
be deemed:
“Well capitalized” if it:
1. Maintains the pledge of assets
required under 12 CFR 346.19; and
2. Maintains the eligible assets
prescribed under 12 CFR 346.20 at 108
percent or more of the preceding
quarter’s average book value of the
insured branch’s third-party liabilities;
and
3. Has not received written
notification from (1) the OCC to increase
its capital equivalency deposit pursuant
to 12 CFR 28.6(a), or to comply with the
asset maintenance requirements
pursuant to 12 CFR 28.9 or (2) the FDIC
to pledge additional assets pursuant to
12 CFR 346.19 or to maintain a higher
ratio of eligible assets pursuant to 12
CFR 346.20.
“Adequately capitalized" if it:
1. Maintains the pledge of assets
required under 12 CFR 346.19;
2. Maintains the eligible assets
prescribed under 12 CFR 346.20 at 106
percent or more of the preceding
quarter’s average book value of the
insured branch’s third-party liabilities;
and
3. Does not meet the definition of a
“well capitalized" insured branch.
“Undercapitalized” if it:
1. Fails to maintain the pledge of
assets required under 12 CFR 346.19; or
2. Fails to maintain the eligible assets
prescribed under 12 CFR 348.20 at 106
percent or more of the preceding
quarter’s average book value of the
insured branch’s third-party liabilities.
“Significantly undercapitalized" if it
fajls to maintain the eligible assets
prescribed under 12 CFR 346.20 at 104
percent or more of the preceding
quarter’s average book value of the
insured branch's third-party liabilities.
"Critically undercapitalized" if it fails
to maintain the eligible assets
prescribed under 12 CFR 346.20 at 102
percent or more of the preceding
quarter's average book value of the
insured branch’s third-party liabilities.
Section 38 of the FDI Act enumerates
the corrective measures that the
appropriate Federal banking agency
may or must take against, and what
restrictions apply to, institutions in each
of the five capital categories. Some of
the prescribed measures and applicable
restrictions may not be practical or
appropriate in dealing with insured
branches of foreign banks.
Therefore, it is the intent of the OCC
and the FDIC to apply to insured
branches as many of the prompt
corrective measures and restrictions as
practical and appropriate, given the
unique characteristics of insured
branches.
Several respondents expressed the
view that the prompt corrective action
provisions in section 38 of the FDI Act
should apply to insured branches of
foreign banks and that the capital levels
should be comparable with those for
domestic banks. The FDIC and OCC, as
the primary federal regulators of insured
branches, concur with this approach. As
a result, the prompt corrective action
rules of the FDIC and OCC intend to
accomplish this objective by using the
asset pledge and asset maintenance
tests noted above for purposes of
determining an insured branch’s capital
category.
Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act, it is hereby
certified that these final rules will not
have a significant impact on a
substantial number of small entities.
The final rules impose the minimum
burdens necessary to implement the
prompt corrective action provisions of
section 131 of FDICLA for all insured
depository institutions, regardless of
size. The regulation requires each
insured depository institution to monitor
its capital levels and to report to the
appropriate Federal banking agency any
material event that would cause the
institution to be classified within a
lower capital category. In addition, the
final rules require an institution that
becomes undercapitalized, significantly
undercapitalized, or critically
undercapitalized to submit a capital
restoration plan.
The filing of the capital plan is a
requirement imposed by statute and
occurs only when an institution initially
becomes undercapitalized, significantly
undercapitalized, or critically
undercapitalized. In establishing a
mechanism for gathering sufficient
information to determine the
appropriate capital category for each
insured depository institution, the
Federal banking agencies have
attempted to reduce the burden imposed
on such institutions by relying primarily
on the Call Report that must already be
filed and on reports of examination that
would otherwise take place. No
additional regular reporting requirement
has been imposed.
Executive Order 12291;
The OCC and OTS have determined
that these final rules are not major
regulations as defined in Executive
Order 12291. These final rules
implements section 131 of FDICIA,
which established a new statutory
framework for resolving the problems of
insured depository institutions at the
least long-term cost to the FDIC.
List of Subjects
12 CFR Part 6
Banks, Banking, Capital adequacy,
National banks.
12 CFR Part 19
Administrative practice and
procedure, Crime, Dismissals,
Investigations, National banks,
Penalties, Reclassification, Securities.
12 CFR Part 208
Accounting, Agriculture, Banks,
banking, Confidential business
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44885
information, Currency, Federal Reserve
System, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 263
Administrative practice and
procedure, Federal Reserve System.
12 CFR Part 308
Administrative practice and
procedure, claims, equal access to
justice, lawyers, penalties.
12 CFR Part 325
Bank deposit insurance, Banks,
Banking, Capital adequacy, Reporting
and recordkeeping requirements, State
nonmember banks, Savings
associations.
Subpart B— Prompt Corrective Action
Sec.
208.30 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
208.31 Definitions.
208.32 N otice of capital category.
208.33 Capital m easures and capital
category definitions.
208.34 Capital restoration plans.
208.35 M andatory and discretionary
supervisory actions under section 38.
Subpart B— Prompt Corrective Action
§ 208.30 Authority, purpose, scope, other
supervisory authority, and disclosure of
capital categories.
(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
12 CFR Part 565
Federal Deposit Insurance Act (FDI Act)
as added by section 131 of the Federal
Administrative practice and
Deposit Insurance Corporation
procedure, Capital, Savings
Improvement Act of 1991 (Pub. L. 102associations.
242,105 Stat. 2236 (1991)) (12 U.S.C.
FEDERAL RESERVE SYSTEM
1831o.).
(b) Purpose. Section 38 of the FDI Act
12 CFR Parts 208 and 263
establishes a framework of supervisory
For the reasons outlined above, the
actions for insured depository
Board of Governors amends 12 CFR
institutions that are not adequately
parts 208 and 263 as set forth below:
capitalized. The principal purpose of
this subpart is to define, for state
PART 208— MEMBERSHIP OF STA TE
member banks, the capital measures
BANKING INSTITUTIONS IN THE
and capital levels that are used for
FEDERAL RESERVE SYSTEM
determining the supervisory actions
authorized under section 38 of the FDI
1. The authority citation for 12 CFR
Act. This subpart also establishes
part 208 is revised to read as follows:
procedures for submission and review of
Authority: Secs. 9 , 11(a), 11(c), 19, 21. 25
capital restoration plans and for
and 25(a) o f the Federal Reserve Act, as
issuance and review of directives and
am ended (12 U.S.C. 321-338, 248(a), 248(c),
orders pursuant to section 38.
461, 481-486, 601, and 611, respectively): secs.
(c) Scope. This subpart implements
4 , 13(j) and 38 o f the Federal D eposit
the
provisions of section 38 of the FDI
Insurance Act, a s am ended (12 U.S.C. 1814,
Act as they apply to state member
1823(j), and 1831o, respectively): sec. 7(a) of
banks. Certain of these provisions also
the International Banking Act o f 1978 (12
apply to officers, directors and
U.S.C. 3105); secs. 907-910 o f the
employees of state member banks.
International Lending Supervision Act of 1983
Other provisions apply to any company
(12 U.S.C. 3906-3909); secs. 2 , 12(b), 12(g),
that controls a state member bank and
12(i), 15B(c) (5), 1 7 ,17A, and 23 of the
to the affiliates of a state member bank.
Securities Exchange A ct of 1934 (15 U.S.C.
(d) Other supervisory authority.
78b, 781(b), 1781(g), 781(i), 78o-4(c) (5). 78q,
Neither section 38 nor this subpart in
7 8 q -l, and 78w, respectively): sec. 5155 o f the
any way limits the authority of the
R evised Statutes (12 U.S.C. 36) as am ended
by the M cFadden A ct of 1927; and secs. 1101- Board under any other provision of law
to take supervisory actions to address
1122 o f the Financial Institutions Reform,
unsafe or unsound practices, deficient
Recovery, and Enforcem ent Act of 1989 (12
capital levels, violations of law, unsafe
U.S.C. 3310 and 3331-3351).
or unsound conditions, or other
practices. Action under section 38 of the
Subpart A— -General Provisions
FDI Act and this subpart may be taken
2. The undesignated centerheading
independently of, in conjunction with, or
preceding § 208.1 is removed, § § 208.1
in addition to any other enforcement
through 208.19 are designated as subpart action available to the Board, including
A to part 208, and the subpart A heading issuance of cease and desist orders,
is added to read a9 set forth above.
capital directives, approval or denial of
3. Subpart B, comprising S§ 208.30
applications or notices, assessment of
through 208.35, i9 added to part 208 to
civil money penalties, or any other
read as follows:
actions authorized by law.
(e)
Disclosure of capital categories.
The assignment of a bank under this
subpart within a particular capital
category is for purposes of implementing
and applying the provisions of section
38. Unless permitted by the Board or
otherwise required by law, no bank may
state in any advertisement or
promotional material its capital category
under this subpart or that the Board or
any other Federal banking agency has
assigned the bank to a particular capital
category.
§ 208.31 Definitions.
Fgr purposes of this subpart, except as
modified in this section or unless the
context otherwise requires, the terms
used have the same meanings as set
forth in section 38 and section 3 of the
FDI Act.
(a) (1) Control has 4he same meaning
assigned to it in section 2 of the Bank
Holding Company Act (12 U.S.C. 1841),
and the term “controlled" shall be
construed consistently with the term
“control.”
(2 )
Exclusion for fiduciary ownership.
No insured depository institution or
company controls another insured
depository institution or company by
virtue of its ownership or control of
shares in a fiduciary capacity. Shares
shall not be deemed to have been
acquired in a fiduciary capacity if the
acquiring insured depository institution
or company has sole discretionary
authority to exercise voting rights with
respect thereto.
(3)
Exclusion for debts previously
contracted. No insured depository
in s titu tio n or company controls another
in su r e d depository institution or
company by virtue of its ownership or
c o n tr o l o f s h a r e s acquired in securing or
c o lle c t in g a debt previously contracted
in g o o d fa ith , until two years after the
d a te o f a c q u is itio n . The two-year period
m a y b e extended at the discretion of the
a p p r o p r ia te Federal banking agency for
up to th ree one-year periods.
(b ) Controlling person means any
p e r so n having control of an insured
d e p o s ito r y institution and any company
c o n tr o lle d b y that person.
(c) Leverage ratio means the ratio of
Tier 1 capital to average total
consolidated assets, as calculated in
accordance with the Board’s Capital
Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
(appendix B to part 208).
(d ) Management fee means any
payment of money or provision of any
other thing of value to a company or
individual for the provision of
management services or advice to the
bank or related overhead expenses,
44886 Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992
including payments related to
supervisory, executive, managerial, or
policymaking functions, other than
compensation to an individual in the
individual’s capacity as an officer or
employee of the bank.
(e) Risk-weighted assets means total
weighted risk assets, as calculated in
accordance with the Board’s Capital
Adequacy Guidelines for State Member
Banks: Risk-Based Measure (appendix A
to part 208).
(f) Tangible equity means the amount
of core capital elements in the Board's
Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
(appendix A to part 208), plus the
amount of outstanding cumulative
perpetual preferred stock (including
related surplus), minus all intangible
assets except purchased mortgage
servicing rights to the extent that the
Board determines pursuant to section
475 of the Federal Deposit Insurance
Corporation Improvement Act of 1991
(12 U.S.C. 1828 note) that purchased
mortgage servicing rights may be
included in calculating the bank’s Tier 1
capital.
(g) Tier 1 capital means the amount of
Tier 1 capital as defined in the Board’s
Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
(appendix A to part 208).
(h) Tier 1 risk-based capital ratio
means the ratio of Tier 1 capital to
weighted risk assets, as calculated in
accordance With the Board’s Capital
Adequacy Guidelines for State Member
Banks: Risk-Based Measure (appendix A
to part 208).
(i) Total assets means quarterly
average total assets as reported in a
bank’s Report of Condition and Income
(Call Report), minus intangible assets as
provided in the definition of tangible
equity.
(j) Total risk-based capital ratio
means the ratio of qualifying total
capital to weighted risk assets, as
calculated in accordance with the
Board’s Capital Adequacy Guidelines
for State Member Banks: Risk-Based
Measure (appendix A to part 208).
§ 208.32 Notice of capital category.
(a) Effective date of determination of
capital category. A state member bank
shall be deemed to be within a given
capital category for purposes of section
38 of the FDI Act and this subpart as of
the date the bank is notified of, or is
deemed to have notice of, its capital
category, pursuant to paragraph (b) of
this section.
(b) Notice of capital category. A state
member bank shall be deemed to have
been notified of its capital levels and its
/ Rules and Regulations
(i) Has a total risk-based capital ratio
of 8.0 percent or greater; and
(ii) Has a Tier 1 risk-based capital
ratio of 4.0 percent or greater; and
(iii) Has—
(A) A leverage ratio of 4.0 percent or
greater, or
(B) A leverage ratio of 3.0 percerft or
greater if the bank is rated composite 1
under the CAMEL rating system in the
most recent examination 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) Has a leverage ratio that is less
than 3.0 percent, if the bank is rated
composite 1 under the CAMEL rating
system in the most recent examination
of the bank and is not experiencing or
anticipating significant growth.
(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.
§ 208.33 Capital measures and capital
(5) “Critically undercapitalized” if the
category definitions.
bank has a ratio of tangible equity to
(a) Capital measures. For purposes of total assets that is equal to or less than
section 38 and this subpart, the relevant 2.0 percent.
capital measures shall be:
(c)
Reclassification based on
(1) The total risk-based capital ratio;
supervisory criteria other than capital.
(2) The Tier 1 risk-based capital ratio; The Board may reclassify a well
and
capitalized state member bank as
(3) The leverage ratio.
adequately capitalized and may require
(b) Capital categories. For purposes of an adequately capitalized or an
section 38 and this subpart, a state
undercapitalized state member bank to
member bank shall be deemed to be:
comply with certain mandatory or
(1) ‘‘Well capitalized" if the bank:
discretionary supervisory actions as if
(1) Has a total risk-based capital ratio the bank were in the next lower capital
of 10.0 percent or greater; and
category (except that the Board may not
(ii) Has a Tier 1 risk-based capital
reclassify a significantly
ratio of 6.0 percent or greater; and
undercapitalized bank as critically
(iii) Has a leverage ratio of 5.0 percent undercapitalized) (each of these actions
or greater; and
are hereinafter referred to generally as
"reclassifications”) in the following
(iv) Is not subject to any written
agreement, order, capital directive, or
circumstances: *
(1) Unsafe or unsound condition. The
prompt corrective action directive
issued by the Board pursuant to section Board has determined, after notice and
opportunity for hearing pursuant to
8 of the FDI Act, the International
§ 263.203 of this chapter, that the bank is
Lending Supervision Act of 1983 (12
in unsafe or unsound condition; or
U.S.C. 3907), or section 38 of the FDI
Act, or any regulation thereunder, to
(2) Unsafe or unsound practice. The
Board has determined, after notice and
meet and maintain a specific capital
level for any capital measure.
opportunity for hearing pursuant to
§ 263.203 of this chapter, that, in the
(2) “Adequately capitalized" if the
most recent examination of the banx,
bank:
capital category as of the most recent
date:
(1) A Report of Condition and Income
(Call Report) is required to be filed with
the Board:
(2) A final report of examination is
delivered to the bank; or
(3) Written notice is provided by the
Board to the bank of its capital category
for purposes of section 38 of the FDI Act
and this subpart or that the bank’s
capital category has changed as
provided in paragraph (c) of this section
or § 208.33(c).
(c)
Adjustments to reported capital
levels and capital category.—(1) Notice
of adjustment by bank. A state member
bank shall provide the Board with
written notice that an adjustment to the
bank’s capital category may have
occurred no later than 15 calendar days
following the date that any material
event has occurred that would cause the
bank to be placed in a lower capital
category from the category assigned to
the bank for purposes of section 38 and
this subpart on the basis of the bank’s
most recent Call Report or report of 1
examination. "
(2)
Determination by the Board to
change capital category. After receiving
notice pursuant to paragraph (c)(1) of
this section, the Board shall determina
whether to change the capital category
of the bank and shall notify the bank of
the Board’s determination.
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44887
bank received and has not corrected,
a less-than-satisfactory rating for any of
Othe
the categories of asset quality,
has been approved. The Board may
extend the time within which notice
regarding approval of a plan shall be
management, earnings, or liquidity.
provided.
(d) Disapproval of capital plan. If a
§ 208.34 Capital restoration plans.
capital restoration plan is not approved
(a) Schedule for filing plan—(1) In
by the Board, the bank shall submit a
general. A state member bank shall file revised capital restoration plan within
a written capital restoration plan with
the time specified by the Board. Upon
the appropriate Reserve Bank within 45 receiving notice that its capital
days of the date that the bank receives
restoration plan has not been approved,
notice or is deemed to have notice that
any undercapitalized state member
the bank is undercapitalized,
bank (as defined in § 208.33(b)(3)) shall
significantly undercapitalized, or
be subject to all of the provisions of
critically undercapitalized, unless the
section 38 and this subpart applicable to
Board notifies the bank in writing that
significantly undercapitalized
the plan is to be filed within a different
institutions. These provisions shall be
period. An adequately capitalized bank applicable until such time as a new or
that has been required pursuant to
revised capital restoration plan
§ 208.33(c) to comply with supervisory
submitted by the bank has been
actions as if the bank were
approved by the Board.
undercapitalized is not required to
(e) Failure to submit capital
submit a capital restoration plan solely
restoration plan. A state member bank
by virtue of the reclassification.
that is undercapitalized (as defined in
(2) Additional capital restoration
§ 208.33(b)(3)) and that fails to submit a
plans. Notwithstanding paragraph (a)(1) written capital restoration plan within
of this section; a bank that has already
the period provided in this section shall,
submitted and is operating under a
upon the expiration of that period, be
capital restoration plan approved under subject to all of the provisions of section
section 38 and this subpart is not
38 and this subpart applicable to
required to submit an additional capital significantly undercapitalized
restoration plan based on a revised
institutions.
calculation of its capital measures or a
(f) Failure to implement capital
reclassification of the institution under
restoration plan. Any undercapitalized
§ 208.33(c) unless the Board notifies the state member bank that fails in any
bank that it must submit a new or
material respect to implement a capital
revised capital plan. A bank that is
restoration plan shall be subject to all of
notified that it must submit a new or
the provisions of section 38 and this
revised capital restoration plan shall file subpart applicable to significantly
the plan in writing with the appropriate undercapitalized institutions.
Reserve Bank within 45 days of
(g) Amendment of capital plan. A
receiving such notice, unless the Board
bank that has filed an approved capital
notifies the bank in writing that the plan restoration plan may, after prior written
is to be filed within a different period.
notice to and approval by the Board,
(b) Contents of plan. All financial data amend the plan to reflect a change in
submitted in connection with a capital
circumstance. Until such time as a
restoration plan shall be prepared in
proposed amendment has been
accordance with the instructions
approved, the bank shall implement the
provided on the Call Report, unless the
capital restoration plan as approved
Board instructs otherwise. The capital
prior to the proposed amendment.
restoration plan shall include all of the
(h) Notice to FDIC. Within 45 days of
information required to be filed under
the effective date of Board approval of a
section 38(e)(2) of the FDI Act. A bank
capital restoration plan, or any
that is required to submit a capital
amendment to a capital restoration plan,
restoration plan as the result of a
the Board shall provide a copy of the
reclassification of the bank pursuant to plan or amendment to the Federal
§ 208.33(c) shall include a description of Deposit Insurance Corporation.
the steps the bank will take to correct
(i) Performance guarantee by
the unsafe or unsound condition or
companies that control a bank—(1)
practice. No plan shall be accepted
Limitation on Liability—(i) Amount
limitation. The aggregate liability under
unless it includes any performance
guarantee described in section
the guarantee provided under section 38
38(e)(2)(C) of that Act by each company and this subpart for all companies that
that controls the bank.
control a specific state member bank
(c)
Review of capital restoration
that is required to submit a capital
plans. Within 60 days after receiving a
restoration plan under this subpart shall
capital restoration plan under this
be limited to the lesser of:
subpart, the Board shall provide written
(A) An amount equal to 5.0 percent of
notice to the bank of whether the plan
the bank’s total assets at the time the
bank was notified or deemed to have
notice that the bank was
undercapitalized; or
(B) The amount necessary to restore
the relevant capital measures of the
bank to the levels required for the bank
to be classified as adequately
capitalized, as those capital measures
dnd levels are defined at the time that
the bank initially fails to comply with a
capital restoration plan under this
subpart.
(ii) Limit on duration. The guarantee
and limit of liability under section 38
and this subpart shall expire after the
Board notifies the bank that it has
remained adequately capitalized for
each of four consecutive calendar
quarters. The expiration or fulfillment
by a company of a guarantee of a capital
restoration plan shall not limit the
liability of the company under any
guarantee required or provided in
connection with any capital restoration
plan filed by the same bank after
expiration of the first guarantee.
(iii) Collection on guarantee. Each
company that controls a given bank
shall be jointly and severally liable for
the guarantee for such bank as required
under section 38 and this subpart, and
the Board may require and collect
payment of the full amount of that
guarantee from any or all of the
companies issuing the guarantee.
(2) Failure to provide guarantee. In the
event that a bank that is controlled by
any company submits a capital
restoration plan that does not contain
the guarantee required under section
38(e) (2) of the FDI Act, the bank shall,
upon submission of the plan, be subject
to the provisions of section 38 and this
subpart that are applicable to banks that
have not submitted an acceptable
capital restoration plan.
(3) Failure to perform guarantee.
Failure by any company that controls a
bank to perform fully its guarantee of
any capital plan shall constitute a
material failure to implement the plan
for purposes of section 38(f) of the FDI
Act. Upon such failure, the bank shall be
subject to the provisions of section 38
and this subpart that are applicable to
banks that have failed in a material
respect to implement a capital
restoration plan.
§ 208.35 Mandatory and discretionary
supervisory actions under section 38.
(a) Mandatory supervisory actions—
(1) Provisions applicable to all banks.
All state member banks are subject to
the restrictions contained in section
38(d) of the FDI Act on payment of
capital distributions and management
fees.
44888
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
Subpart H— Issuance and Review of Orders
(2) Provisions applicable to
bank that is deemed to bey
Pursuant to Prompt Corrective Action
undercapitalized, significantly
undercapitalized, significantly
Provisions of the Federal Deposit
undercapitalized, and critically
undercapitalized, or critically
Insurance Act
undercapitalized banks. Immediately
undercapitalized, or has been
upon receiving notice or being deemed
reclassified as undercapitalized, or
Sec.
to have notice, as provided in section
significantly undercapitalized; an officer § 263.201 Scope.
§ 208.32 or section § 208.34 of this
§ 263.202 D irectives to take prompt
or director of such bank; or a company
corrective action.
subpart, that the bank is
that controls such bank, the Board shall
§ 263.203 Procedures for reclassifying a
undercapitalized, significantly
follow the procedures for issuing
state m em ber bank b ased on criteria
undercapitalized, or critically
directives under § § 263.202 and 263.204
other than capital.
undercapitalized, the bank shall become of this chapter, unless otherwise
§ 263.204 Order to d ism iss a director or
subject to the provisions of section 38 of provided in section 38 or this subpart.
senior execu tive officer.
the FDI Act:
§ 263.205 Enforcem ent o f directives.
(i) Restricting payment of capital
Subparts C and D— [Reserved]
distributions and management fees
Subpart H— Issuance and Review of
(section 38(d));
Subpart E— Interpretations
Orders Pursuant to Prompt Corrective
(ii) Requiring that the Board monitor
Action Provisions of the Federal
the condition of the bank (section 38(e)
4. Subparts C and D are added to part Deposit Insurance Act
208 and reserved, the undesignated
CD);
(iii) Requiring submission of a capital centerhead preceding section 208.116 is § 263.201 Scope.
restoration plan within the schedule
removed, §§ 208.116, 208.117, 208.122,
(a) The rules and procedures set forth
established in this subpart (section
and 208.124 through 208.128 are
in this subpart apply to state member
38(e)(2));
designated as subpart E of part 208, and banks, companies that control state
(iv) Restricting the growth of the
the subpart E heading is added to read
member banks or are affiliated with
bank’s assets (section 38(e)(3)); and
as set forth above.
such banks, and senior executive
(v) Requiring prior approval of certain
officers
and directors of state member
expansion proposals (section 3(e)(4)).
PART 263— RULES OF PRACTICE FOR
banks that are subject to the provisions
(3) Additional provisions applicable
HEARINGS
of section 38 of the Federal Deposit
to significantly undercapitalized, and
Insurance Act (section 38) and subpart B
1. The authority citation for 12 CFR
critically undercapitalized banks. In
of part 208 of this chapter.
Part 263 is revised to read as follows:
addition to the provisions of section 38
of the FDI Act described in paragraph
§ 263.202 Directives to take prompt
Authority: 5 U.S.C. 504; 12 U.S.C. 248, 324,
(a)(2) of this section, immediately upon
regulatory action.
504, 5 0 5 ,1817{j), 1818,1828(c), 1831o, 1847(b),
receiving notice or being deemed to
1847(d), 1884(b), 1972(2) (F), 3105, 3107, 3108,
(a) Notice of intent to issue
have notice, as provided in § 208.32 or
3907, 3909; 15 U.S.C. 21, 78o-4, 78o-5, and 78udirective.—(1) In general. The Board
§ 208.34 of this subpart, that the bank is 2.
shall provide an undercapitalized,
significantly undercapitalized, or
significantly undercapitalized, or
2. Section 263.50(b) is amended by
critically undercapitalized, or that the
critically undercapitalized state member
removing the word “arid” at the end of
bank is subject to the provisions
paragraph (b)(9), removing the period at bank or, where appropriate, any
applicable to institutions that are
the end of paragraph (b)(10) and adding company that controls the bank, prior
significantly undercapitalized because
written notice of the Board’s intention to
in its place a semicolon, and by adding
the bank failed to submit or implement
issue a directive requiring such bank or
paragraphs
(b)(ll)
through
(b)(14)
to
in any material respect an acceptable
company to take actions or to follow
read as follows:
capital restoration plan, the bank shall
proscriptions described in section 38
become subject to the provisions of
§ 263.50 Purpose and scope.
that are within the Board's discretion to
section 38 of the FDI Act that restrict
require or impose under section 38 of the
compensation paid to senior executive
FDI Act, including sections 38(e)(5),
officers of the institution (section
(b) * * *
(f)(2), (f)(3), or (f)(5). The bank shall have
38(f)(4)).
(11) Issuance of a prompt corrective
time to respond to a proposed
(4) Additional provisions applicable
action directive to a member bank under such
directive as provided by the Board
to critically undercapitalized banks. In section 38 of the FDI Act (12 U.S.C.
under paragraph (c) of this section.
addition to the provisions of section 38
1831o);
(2) Immediate issuance of final
of the FDI Act described in paragraphs
(12) Reclassification of 8 member
directive.
If the Board finds it necessary
(a) (2) and (3) of this section,
bank on grounds of unsafe or unsound
in order to carry out the purposes of
immediately upon receiving notice or
condition under section 38(g)(1) of the
section 38 of the FDI Act, the Board
being deemed to have notice, as
FDI Act (12 U.S.C. 18310(g)(1));
may, without providing the notice
provided in § 208.32 of this subpart, that
(13)
Reclassification
of
a
member
prescribed in paragraph (a)(1) of this
the bank is critically undercapitalized,
bank on grounds of unsafe and unsound section, issue a directive requiring a
the bank shall become subject to the
practice under section 38(g)(1) of the FDI state member bank or any company that
provisions of section 38 of the FDI Act:
Act (12 U.S.C. 18310(g)(1)); and
controls a state member bank
(i) Restricting the activities of the
(14) Issuance of an order requiring a
bank (section 38(h)(1)); and
immediately to take actions or to follow
member bank to dismiss a director or
(ii) Restricting payments on
proscriptions described in section 38
senior executive officer under section 38 that are within the Board’s discretion to
subordinated debt of the bank (section
(e)(5) and 38(f)(2) (F)(ii) of the FDI Act
38(h)(2)).
require or impose under section 38 of the
(b) Discretionary supervisory actions. (12 U.S.C. 1831o(e)(5) and 1831o(f)(2)
FDI Act, including section 38(e)(5), (f)(2),
(F)(ii)).
In taking any action under section 38
(f)(3), or (f)(5). A bank or company that
that is within the Board's discretion to
3. A new subpart H is added to part
is subject to such an immediately
take in connection with: A state member 263 to read as follows:
effective directive may submit a written
*
*
*
*
*
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44889
appeal of the directive to the Board.
Such an appeal must be received by the
Board within 14 calendar days of the
issuance of the directive, unless the
Board permits a longer period. The
Board shall consider any such appeal, if
filed in a timely matter, within 60 days
of receiving the appeal. During such
period of review, the directive shall
remain in effect unless the Board, in its
sole discretion, stays the effectiveness
of the directive.
(b) Contents of notice. A notice of
intention to issue a directive shall
include:
(1) A statement of the bank's capital
measures and capital levels;
(2) A description of the restrictions,
prohibitions, or affirmative actions that
the Board proposes to impose or require;
(3) The proposed date when such
restrictions or prohibitions would be
effective or the proposed date for
completion of such affirmative actions;
and
(4) The date by which the bank or
company subject to the directive may
file with the Board a written response to
the notice.
(c) Response to notice—(1) Time for
response. A bank or company may file 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 of 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;
fii) 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) Board consideration of response.
After 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.
(e) Failure to file 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.
(f)
Request for modification or
rescission of 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.
(3) Response to notice of proposed
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
§ 263.203 Procedures for reclassifying a
Board to a notice of proposed
state member bank based on criteria other
reclassification shall constitute a waiver
than capital.
of the opportunity to respond and shall
(a) Reclassification based on unsafe
constitute consent to the
or unsound condition or practice—(1)
reclassification.
Issuance of notice of proposed
(5) Request for hearing and
reclassification—(i) Grounds for
presentation
of oral testimony or
reclassification. (A) Pursuant to
witnesses. The response may include a
§ 208.33(c) of Regulation H (12 CFR
request for an informal hearing before
208.33(c)), the Board may reclassify a
the Board or its designee under this
well capitalized bank as adequately
section. If the bank desires to present
capitalized or subject an adequately
oral testimony or witnesses at the
capitalized or undercapitalized
hearing, the bank shall include a request
institution to the supervisory actions
to do so with the request for an informal
applicable to the next lower capital
hearing.
A request to present oral
category if:
testimony or witnesses shall specify the*
(1) The Board determines that the
bank is in unsafe or unsound condition; names of the witnesses and the general
nature of their expected testimony.
or
Failure to request a hearing shall
[2] The Board deems the bank to be
constitute a waiver of any right to a
engaged in an unsafe or unsound
hearing, and failure to request the
practice and not to have corrected the
opportunity to present oral testimony or
deficiency.
witnesses shall constitute a waiver of
(B) Any action pursuant to this
any right to present oral testimony or
paragraph (a)(l)(i) shall hereinafter be
witnesses.
referred to as "reclassification.”
(6) Order for informal hearing. Upon
(ii) Prior notice to institution. Prior to
receipt of a timely written request that
taking action pursuant to § 208.33(c) of
includes a request for a hearing, the
this chapter, the Board shall issue and
serve on the bank a written notice of the Board shall issue an order directing an
Board’s intention to reclassify the bank. informal hearing to commence no later
than 30 days after receipt of the request,
(2) Contents of notice. A notice of
unless the bank requests a later date.
intention to reclassify a bank based on
The hearing shall be held in
unsafe or unsound condition shall
Washington, DC or at such other place
include:
as may be designated by the Board,
(i) A statement of the bank’s capital
before a presiding officer(s) designated
measures and capital levels and the
by the Board to conduct the hearing.
category to which the bank would be
(7) Hearing procedures, (i) The bank
reclassified;
(ii) The reasons for reclassification of shall have the right to introduce relevant
the bank;
written materials and to present oral
(iii) The date by which the bank
argument at the hearing. The bank may
subject to the notice of reclassification
introduce oral testimony and present
may file with the Board a written appeal witnesses only if expressly authorized
of the proposed reclassification and a
by the Board or the presiding officer(s).
request for a hearing, which shall be at
Neither the provisions of the
least 14 calendar days from the date of
Administrative Procedure Act (5 U.S.C.
service of the notice unless the Board
554-557) governing adjudications
determines that a shorter period is
required by statute to be determined on
appropriate in light of the financial
the record nor the Uniform Rules of
Practice and Procedure in subpart A of
condition of the bank or other relevant
circumstances.
this part apply to an informal hearing
44890
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations
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 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.
(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) Recommendation of 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. 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
was requested, the Board will decide
whether to reclassify the bank and
notify the bank of the Board’s decision.
(b) Request for rescission of
mclassification. 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 the reclassification be modified,
rescinded, or removed. Unless otherwise
o r d e r e d by th e B o a r d , th e b a n k s h a ll
remain subject to the reclassification
and to any directives issued in
connection with that reclassification
while such request is pending before the
Board.
§ 263.204 Order to dismiss a director or
senior executive officer.
(a) Service of notice. When the Board
issues and serves a directive on a state
member bank pursuant to § 263.202
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 shall 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—(1) Request
for reinstatement. 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 shall 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.
(2) Contents of request; informal
hearing. The request for reinstatement
shall include reasons why the
Respondent should be reinstated, and
may include a request for 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 shall 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.
(3) Effective date. Unless otherwise
ordered by the Board, the dismissal
shall remain in effect while a request for
reinstatement is pending.
(c) Order for informal 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.G. 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 ahd
present witnesses only if expressly
authorized by the Board or the presiding
officers). Neither the provisions of the
Administrative Procedure Act governing
adjudications required by statute to be
determined on the record nor the
Uniform 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 officerfs) 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 for 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
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 Act.
(f) Recommendation of presiding
officers. W'ithin 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.
(g) Time for 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
was 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.
§ 263.205 Enforcement of directives.
(a) Judicial remedies. 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) (1) of the FDI
Act.
(b) Administrative remedies—(1)
Failure to comply with directive.
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
Federal Register / Vol. 57, No. 189 / Tuesday, September 29, 1992 / Rules and Regulations 44891
participates in such violation or
noncompliance.
(21 Failure to implement capitai
restoration plan. 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) Other enforcement action. In
addition to the actions described in
paragraphs (a) and (b) of this section,
the Board may seek enforcement of the
provisions of section 38 or subpart B of
Regulation H (12 CFR part 208, subpart
B) through any other judicial or
administrative proceeding authorized by
law.
By order o f the Board o f G overnors o f the
Federal R eserve System .
Dated: Septem ber 18,1992.
William W. Wiles,
Secretary of the Board.
@FedFRASER