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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 10773 February 10, 1995 ”1 RISK-BASED CAPITAL GUIDELINES Proposed Amendments to the Risk-Based Capital Guidelines Comments Invited by February 27 To A ll State Member Banks and Bank Holding Companies in the Second Federal Reserve District, and Others Concerned: Following is the text of a statement issued by the Board of Governors of the Federal Reserve System: The Federal Reserve Board has requested public comment on a proposal to amend its capital adequacy guidelines for state member banks and bank holding companies (banking organizations) with regard to the regulatory capital treatment of certain transfers of assets with recourse. Comment is requested by February 27, 1995. This amendment is being proposed to implement section 208 of the Riegle Community Development and Regulatory Improvement Act of 1994 (Riegle Act). The proposed rule would have the effect of lowering the capital requirement for small business loans and leases on personal property that have been transferred with recourse by qualified banking organizations. Printed on the following pages is the text of the proposal, as published in the Federal Register. Comments on the proposal should be sent to the Board of Governors, as specified in the notice, by February 27. W il l ia m J. M cD onough, President. 6042 Federal Register / Vol. 60, No. 21 / Wednesday, February 1, 1995 / Proposed Rules MP-500 of the Martin Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board’s rules regarding availability of information. FEDERAL RESERVE SYSTEM 12 CFR Parts 208 and 225 [R egulations H and Y; Docket No. R -0 87 0 ) Capital; Capital Adequacy Guidelines Board of Governors of the Federal Reserve System. ACTION: Notice of proposed rulemaking. AGENCY: The Board of Governors of the Federal Reserve System (Board) is proposing to amend its capital adequacy guidelines for state member banks and bank holding companies (banking organizations) with regard to the regulatory capital treatment of certain transfers of assets with recourse. This amendment is being proposed to implement section 208 of the Riegle Community Development and Regulatory Improvement Act of 1994 (Riegle Act). The proposed rule would have the effect of lowering the capital requirement for small business loans and leases on personal property that have been transferred with recourse by qualifying banking organizations. DATES: Comments must be received on or before February 27,1995. ADDRESSES: Comments, which should refer to Docket No. R^-0870, may be mailed to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551. Comments also may be delivered to Room B-2222 of the Eccles building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard station in the Eccles Building courtyard on 20th Street, N.W. (between Constitution Avenue and C Street) at any time. Comments may be inspected in Room SUMMARY: Specifically, the Riegle Act states that a qualifying insured depository institution that sells small business loans and leases on personal property with recourse need include only the FOR FURTHER INFORMATION CONTACT: amount of retained recourse in its asset Rhoger H. Pugh, Assistant Director (202/ base when calculating its capital ratios, 728-5883): Norah Barger, Manager (202/ provided two conditions are m et First, 452-2402); Thomas R. Boemio, the transaction must be treated as a sale Supervisory Financial Analyst (202/ under GAAP and, second, the 452-2982); or David A. Elkes, Financial depository institution must establish a Analyst (202/452-5218), Division of non-capital reserve sufficient to meet Banking Supervision and Regulation. the institution’s reasonably estimated Telecommunication Device for the Deaf liability under the recourse (TDD), Dorothea Thompson (202/452arrangement. The aggregate amount of 3544), Board of Governors of the Federal recourse retained in accordance with Reserve System, 20th and C Streets the provisions of the Act may not NW., Washington, DC20551. exceed 15 percent of an institution’s total risk-based capital or a greater SUPPLEMENTARY INFORMATION: amount established by the appropriate Background federal banking agency. The Act also The Board’s current regulatory capital states that the preferential capital guidelines are intended to ensure that treatment set forth in section 208 is not to he applied for purposes of banking organizations that transfer assets and retain the credit risk inherent determining an institution’s status under the prompt corrective action in those assets maintain adequate capital to support that risk. For banks, statute (section 38(b) of the Federal this is generally accomplished by Deposit Insurance Act). requiring that assets transferred with The Riegle Act defines a small recourse continue to be reported on the business as a business that meets the balance sheet in their regulatory reports. criteria for a small business concern Thus, these assets are included in the established by the Small Business calculation of banks’ risk-based and Administration under section 3(a) of the leverage capital ratios. For bank holding Small Business Act.2 The Riegle Act companies, transfers of assets with also defines a qualifying institution as recourse are reported in accordance one that is well capitalized or, with the with generally accepted accounting approval of the appropriate federal principles (GAAP). GAAP treats most banking agency, adequately capitalized, such transactions as sales, allowing the as these terms are set forth in the assets to be removed from the balance prompt corrective action statute. For sheet.1For purposes of calculating bank purposes of determining whether an holding companies’ risk-based capital institution is qualifying, its capital ratios, however, assets sold with ratios must be calculated without regard recourse that have been removed from to the preferential capital treatment the the balance sheet in accordance with Act sets forth for small business GAAP are included in ride-weighted obligations. assets. Accordingly, banking organizations are generally required to P ro p o s a l maintain capital against the full amount To implement the requirements of of assets transferred with recourse. section 208 of the Riegle Act, the Board Section 208 of the Riegle Act, which is proposing to amend its risk-based and Congress enacted last year, directs the leverage capital requirements for state federal banking agencies to revise the member banks. While section 208 of the current regulatory capital treatment Act specifically applies only to insured applied to depository institutions depository institutions, and not to bank engaging in recourse transactions that holding companies, the Board is also involve small business obligations. proposing to amend its risk-based 'TheGAAP treatment focuses on the transfer of capital guidelines for bank holding benefits rather than the retentiooof risk and, thus, companies to reflect the requirements allows a transfer of receivables with recourse to be accounted for as a sale if the transferor (l) surrenders control of the future economic benefits of the assets, (2) is able to reasonably estimate its obligations under the recourse provision, and |3) is not obligated to repurchase the assets except pursuant to the recourse provision, in addition, the transferor must establish a separate liability account equal to the estimated probable losses under the recourse provision (GAAP recourse liability account). 2 See 15 U.S.C. 631 et seq. The Small Business Administration has enacted regulations setting forth the criteria for a small business concern at 13 CFR 121.101— 121.2106. For most industry categories, the regulation defines a small business concern as one with 500 or fewer employees. For some industry categories, a small business concern is defined in terms of a greater or lesser number of employees or in terms of a specified threshold of annua! receipts. Federal Register / Vol. 60, No. 21 / Wednesday, February 1, 1995 / Proposed Rules that section sets forth for banks.3 This would maintain consistency between banks and bank holding companies with regard to the risk-based capital treatment of transfers of small business loans and leases of personal property with recourse. In general, the Board’s proposal could significantly reduce the amount of capital that some banking organizations are required to hold against recourse transactions involving small business obligations. Under the Board’s proposal, for the general purpose of calculating riskbased and leverage capital ratios, qualifying institutions that transfer small business obligations with recourse would be required to maintain capital only against the amount of recourse retained, provided two conditions are met. First, the transaction must be treated as a sale under GAAP and, second, the transferring institutions must establish a non-capital reserve sufficient to meet the reasonably estimated liability under their recourse arrangements. The Board’s proposal would extend the preferential capital treatment for transfers of small business obligations with recourse only to qualifying institutions. A state member bank would be considered qualifying if, pursuant to the Board’s prompt corrective action regulation (12 CFR 208.30), it is well capitalized or, by order of the Board, adequately capitalized.4 Although bank holding companies are not subject to the prompt corrective action regulation, they would be considered qualifying under the Board’s proposal if they meet the criteria for well capitalized or, by order ’ The Board is not proposing to amend the leverage capital guidelines for bank holding companies since all transfers with recourse that are treated as sales under GAAP are already removed from a transferring bank holding company’s balance sheet and. thus, are not included in the calculation of its leverage ratio. 4 Under 12 CFR 208.30, a state member bank is deemed to be well capitalized if it: (1) Has a total risk-based capital ratio of 10.0 percent or greater; (2) has a Tier 1 risk-based capital ratio of 6.0 percent or greater; (3) has a leverage ratio of 5.0 percent or greater; and (4) is not subject to any written agreement, order, capital directive or prompt corrective action directive issued by the Board pursuant to section 8 of the FDr Act, the International Lending Supervision Act of 1983, or section 38 of the FDI Act or any regulation * thereunder, to meet and maintain a specific capital level for any capital measure. A state member bank is deemed to be adequately capitalized if it: (1) Has a total risk-based capital ratio of 8.0 or greater: (2) has a Tier 1 risk-based Capital ratio of 4.0 percent or greater: (3) has a leverage ratio of 4.0 percent or greater or a leverage ratio of 3.0 percent or greater if the bank is rated composite 1 under the CAMEL rating system in its most recent examination and is not experiencing or anticipating significant growth: and (4) docs not meet the definition of a well capitalized bank. of the Board, for adequately capitalized as those criteria are set forth for banks in that regulation. A qualifying institution must be determined to be well capitalized or adequately capitalized without taking into consideration the preferential capital treatment the proposal provides for transfers of small business obligations with recourse. The Board is also proposing that the total outstanding amount of recourse retained by qualifying banking organizations on transfers of small business obligations receiving the preferential capital treatment cannot exceed 15 percent of the institution’s total risk-based capital. By order, the Board may approve a higher limit. If a banking organization is no longer qualifying, i.e., becomes less than well capitalized, or has met the established limit, it could not apply the preferential capital treatment to any new transfers of small business loans and leases of personal property with recourse. Such types of transfers completed while the institution was qualifying or before it met the established limit, however, would continue to receive the preferential capital treatment. In accordance with section 208 of the Riegle Act, the Board is proposing, that for purposes of determining a state member bank’s capital category under the Board’s prompt corrective action regulation, its risk-based and leverage capital ratios shall be calculated without taking into consideration the preferential capital treatment the proposal provides for transfers of small business obligations with recourse. The Board expects that this preferential capital treatment also would not be applied for purposes of determining limitations on an institution’s ability to borrow from the discount window, which is tied to its prompt corrective action status. In addition, the Board will consider whether the preferential capital treatment should be disregarded for purposes of determining an institution’s ability to accept interbank liabilities. The relevant regulation sets limits on institutions that are not adequately capitalized, a term the regulation states is similar to, but not identical to, the definition of that term under the prompt corrective action regulation. A decision on whether the preferential capital treatment would be taken into account for purposes of determining an institution’s ability to accept brokered deposits and the amount of its riskbased insufance premiums is to be made by the FDIC. The regulations governing these matters employ the prompt corrective action categories. 6043 The Board is seeking comments oi • 1 1 aspects of this proposal. Regulatory Flexibility Act The purpose of this proposal is to reduce the regulatory capital requirement on transfers with recourse of small business loans and leases of personal property. Therefore, pursuant to section 605(b) of the Regulatory Flexibility Act, the Board hereby certifies that this rule, as proposed, would not have a significant economic impact on a substantial number of small business entities (in this case, small banking organizations). Accordingly, a regulatory flexibility analysis is not required. The risk-based capital guidelines generally do not apply to bank holding companies with consolidated assets of less than $150 million; thus, the proposed rule would not affect such companies. Paperwork Reduction Act and Regulatory Burden The Board has determined that this proposed rule will not increase the regulatory paperwork burden of banking organizations pursuant to the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.). Section 302 of the Riegle Community Development and Regulatory Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) provides that the federal banking agencies must consider the administrative burdens and benefits of any new regulations that impose additional requirements on insured depository institutions. List of Subjects 12 CFR Pari 208 Accounting, Agriculture, Banks, banking, Confidential business information, Crime, Currency, Federal Reserve System, Mortgages, Reporting and recordkeeping requirements, Securities. 12 CFR Part 225 Administrative practice and procedure, Banks, banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. For the reasons set forth in the preamble, the Board proposes to amend 12 CFR parts 208 and 225 as set forth below: PART 208— MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 1. The authority citation for part 208 continues to read as follows: 6044 Federal Register / Vo1. 60, No. 21 / Wednesday, February 1, 1995 / Proposed Rules Authority: 12 U.S.C. 3 , 2 8 a , 2 8 c , 6 4() 4() 321-338a. 37ld, 461, 481-486,601, 611, 1814, 1 2 ( ) 1 2 ( ) 1831o, 1831p-1, 3105, 83j, 8 8 o , 3310, 3331-3351 and 3906-3909; 15 U.S.C. 78b, 7 1 b . 7 1 g , 7 l i , 7 o ^ c ( ) 7 q 8 ( ) 8 ( ) 8() 8 - ( ) 5 , 8 , 78q-l and 78w; 31 U.S.C. 5318. 2. In Part 208, Appendix A, section III.B. is amended by adding a new paragraph 5. to read as follows: Appendix A to Part 208—Capital Adequacy Guidelines for State Member Banks: RiskBased Measure * * * * * 111. * * * B.* * * 5 . S m a ll B u sin ess L oan s a n d L eases on P erso n a l P ro p e rty T ra n sferred w ith R ecou rse. a Notwithstanding other provisions oft i . hs Appendix A, a qualifying bank t a has ht trans e r d small business loans and l a e fre ess on personal property with recourse need include i weighted-risk a s t only t e n ses h amount ofretained recourse i l e ofthe n iu outstanding amount ofthe loans and l a e ess transferred with recou s , provided two re conditions a e met F r t the t a s c i n r is, rnato must be t e t d as a s l under GAAP and, rae ae second, the bank must e t b i h a non-capital sals reserve s f i i n t meet the bank’ ufcet o s reasonably estimated l a i i y under t e iblt h recourse arrangement. Only loans and l a e ess t businesses t a meet the c i e i f ra small o ht rtra o business concern established by the Small Business administration under s c i n 3 a e t o () of the Small Business Act a e e i i l f rt i r lgbe o hs c p t lt e m n . a i a r at e t b For purposes oft i Appendix A, . hs qualifying banks a e those t a a e well r ht r cp a italized o ,by order ofthe Board, r adequately c p t l z d The d f n t o sof aiaie. eiiin well c p tal z d and adequately c p t l z d ai ie aiaie a e found i the Board’ prompt c r e t v r n s orcie action regulation ( 2 CFR 2 8 3 ) For 1 0.0. purposes of determining whether a hank i s q a i y n , isc p t l r t o must be u l f i g t aia ais calculated w ith o u t re g a rd t the c p t l o aia treatment f rt a s e s ofsmall business o rnfr obligations with recourse spec f e i s c i n iid n eto 1 1 B 5 a oft i Appendix A. The t t l 1.. .. h s oa outstanding amount ofrecourse retained by qualifying banking organizations on t a s e s rnfr of small business o l g t o s receiving t e biain h p e e e t a c p t l treatment cannot exceed rfrnil aia 15 percent ofthe i s i u i ns t t l r s - a e n t t t o ’ oa i k b s d c p t l By o d r t e Board may approve a aia. re, h higher l m t ii. c For purposes of determiningwhether a . bank i adequately c p t l z d s aiaie, undercapitalized, s g i i a t y infcnl undercapitalized, or c i i a l rtcly undercapitalized under prompt c r e t v orcie action (12 CFR 2 8 3 ) the r sk-based c p t l 0.0, i aia r t o of the bank s a lbe determined w ith o u t ai hl re g a rd t the c p t l treatment oft a s e s o o aia rnfr f small business obli a i n with recourse gtos specified i section I I B 5 a oft i n I.... h s Appendix A. ★ * * i t I t 3 In Part 208, Appendix B, section I . I i amended by revising paragraph c and s . adding new paragraphs d., e., and f. Appendix B to Part 208—Capital Adequacy Guidelines for State Member Banks: Tier 1 Leverage Measure * * * * * practice with regard to leverage guidelines. Banks experiencing growth, whether internally or by acquisition, are expected to maintain strong capital I. * * * I positions substantially above minimum c . Notwithstanding other provisions oft isupervisory levels, without significant hs Appendix B aqualifyingbank t a has , ht reliance on intangible assets. t a s e r d small business loans and l a e rnfre ess on personal property with recourse may a just isaverage t t l consolidated a s t , d t oa ses f r purposes ofc l ulating ist e 1 leverage o ac t ir r t o t include only the amount ofretained ai, o recourse i l e ofthe outstandingamount of n iu the loans and l a e t a s e r d with ess rnfre reco r e provided two conditions are met. us, F r t the trans c i n must be t e t d asa s l is, ato rae ae under GAAP and, second, the bank must e t b i ha non-capital reserve s f i i n t sals ufcet o meet thebank’ reasonably estimated l a i i y s iblt under the recourse arrangement. Only loans and l a e t businesses t a meet the c i e i ess o ht rtra f ra small business concern established by o the Small Business Administration under section 3 a ofthe Small Business Act a e () r e i i l f r t i c p t l treat e t lgbe o hs aia mn. a. For purposes of this Appendix B, qualifying banks are those that are well capitalized or, by order of the Board, adequately capitalized. The definitions of well capitalized and adequately capitalized are found in the Board’s prompt corrective action regulation (12 CFR 208.30). For purposes of determining whether a bank is qualifying, its capital ratios must be calculated without regard to the capital treatment for transfers of small business obligations with recourse specified in section II.c. of this Appendix B. The total outstanding amount of recourse retained by qualifying banks on transfers of small business obligations receiving the preferential capital treatment cannot exceed 15 percent of the institution’s total risk-based capital. By order, the Board may approve a higher limit. e. For purposes of determining whether a bank is adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized under prompt corrective action (12 CFR 208.30), the leverage capitalratio of the bank shall be determined without regard to the capital treatment of transfers of small business obligations with recourse specified in section II.c. of this Appendix B. f. Whenever appropriate, including when a bank is undertaking expansion, seeking to engage in new activities, or otherwise facing unusual or abnormal risks, the Board will continue to consider the level of an individual bank’s tangible tier 1 leverage ratio (after deducting all intangibles) in making an overall assessment of capital adequacy. This is consistent with the Federal Reserve’s risk-based capital guidelines and long-standing Board policy and PART 225— BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 1. The authority citation for part 225 continues to read as follows: Authority: 12 U.S.C. 1817(jHl3). 1818, 1831i, 1831p-l, 1 4 ( ) 8 , 1844(b), 1 7 ( ) 83c() 921, 3106, 3108, 3310, 3331-3351, 3907, and 3909. 2. In part 225, Appendix A, section III.B. is amended by adding a new paragraph 5. to read as follows: Appendix A to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Risked-Based Measure * * * * * III. * * * a * * * 5 . S m a ll B u sin e ss L o a n s a n d L e a s e s on P erso n a l P ro p e rty T ra n sferred w ith R ecou rse. a Notwithstanding other provisions oft i . hs Appendix A, a qualifying banking organization t a has tran f r e small ht serd business loans and l a e on personal ess property with recourse need Include i n weighted-risk a s t only the amount of ses retained recourse i l e ofthe outstanding n iu amount ofthe loans and l a e trans e r d ess fre with recou s , provided two conditions a e re r met F r t the tran a is, s ction must be t e t das rae asale under GAAP and, second, the banking organization must e t b i ha non-capital sals reserve s f i i n t meet the organization’ ufcet o s reasonably estimated l a i i yunder the iblt recourse arrangement. Only loans and l a e ess t businesses t a meet the c i e i f ra small o ht rtra o business concern established by the Small Business Administration under section 3 a () of the Small Business Act are e i i l f rt i lgbe o hs c p t l treatment aia b . For purposes oft i Appendix A, hs qualifying banking organizations are those t a meet the c i e i f rwell capitalized o , ht rtra o r by order ofthe Board, adequately c p t l z d aiaie. The c i e i f rwell capitalized and rtra o adequately c p t l z d a e found i the aiaie r n Board’ prompt c r e t v action regulation s orcie f r s a emember banks (12 CFR 2 8 3 ) For o tt 0.0. purposes ofdetermining whether an organization i q a i y n , isc p t l r t o s u l f i g t a ia ais must be calculated w ith o u t re g a rd t the o c p t l treatment f rt a s e s ofsmall aia o rnfr business o l g t o s with recourse spe i i d biain cfe i section I I B 5 a oft i Appendix A. The n I.. .. h s t t loutstanding amount ofrecourse retained oa by qualifying banking organizations on t a s e s ofsmall business obligations rnfr receiving the p e e e t a c p t l treatment rfrnil aia cannot exceed 15 percent ofthe i s i u i ns nttto’ t t l risk-based c p t l By order, the Board oa aia. may approve a higher l m t ii. * * * * * Bv order of t e Board of Governors of t e h h Federal Reserve System, January 26,1995. William W. Wiles, S e c r e ta r y o f th e B oard.
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