Full text of Federal Reserve Bank of New York Circulars : 9709. Proposed Revision of Capital Adequacy Guidelines

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 9709
July 30, 1984

Proposed Revision of Capital Adequacy Guidelines
To All Member Banks and Bank Holding Companies
in the Second Federal Reserve District:

The following statement was issued by the Board of Governors of the Federal Reserve System:
The Federal Reserve Board has asked for comment on a proposed revision of its guidelines regarding capital ade­
quacy for State member banks and bank holding companies, as well as on a proposed supporting regulation establishing
procedures for requiring compliance with capital requirements.
The Board asked for comment during the 60-day period ending September 24, 1984.
The Board’s proposed guidelines would increase minimum required primary and total capital for all but smaller State
member banks and bank holding companies and would parallel proposed minimum bank capital adequacy requirements
being considered by the other Federal bank regulators.
In addition, the Board proposed to continue using — at higher levels of capitalization for larger banks and bank
holding companies — its “zone” concept of appropriate capital for those institutions under its supervision, with the
objective of encouraging State member banks and bank holding companies of all sizes to meet higher than minimum
standards of total capital adequacy.
I.

Proposed Policy Statement on Capital Adequacy
The Board proposed:
All State member banks and all bank holding companies should have minimum primary capital equal to 5.5 percent
of total assets and total capital equal to 6 percent of total adjusted assets.

For both regional and multinational State member banks and for bank holding companies this would be an increase in
minimum capital requirements of one-half of one percent in minimum primary and total capital requirements. For commu­
nity banks and bank holding companies (with assets of under $1 billion), there would be a decrease of one-half of one
percent in the minimum primary capital requirements by comparison to current requirements. The minimum total capital
requirement for these institutions would not be changed.
The Board proposed the reduction in minimum primary capital requirements for smaller banking institutions under its
supervision in order to achieve uniformity with capital adequacy requirements being considered by the Federal Deposit
Insurance Corporation and the Comptroller of the Currency for institutions they supervise.
At the same time the Board proposed continued supervisory use of its “zone” standards of appropriate total capitali­
zation for all State member banks and all bank holding companies, regardless of size, as follows:
Zone 1 — Institutions with capital equal to at least 7 percent of total assets would be considered adequately capital­
ized.
Zone 2 — Institutions operating with total capital equal to 6 to 7 percent of their total assets would be considered
marginally capitalized, subject to consideration of other financial factors.
Zone 3 — Banking organizations with total capital equal to less than 6 percent of their total assets may be considered
undercapitalized, in the absence of clear extenuating circumstances.




The Board also considered a number of definitional changes affecting its capital adequacy guidelines for State mem­
ber banks:
— Intangible assets1 would not be counted among the components of primary capital, or of assets, in determining
the capital adequacy of State member banks. Equity commitment notes12 would not be included in determining the
primary capital of banks. Reserves for loan and lease losses would be added to total assets in computing all
capital ratios.
(Primary capital o f banks would thus include: common stock; perpetual preferred stock; capital surplus;
undivided profits; contingency and other capital reserves; instruments mandating conversion into common
or perpetual preferred stock; reserves for loan and lease losses and the bank’s minority interest in the equity
accounts of consolidated subsidiaries.)
— Intangible assets would continue to be counted as part of the total capital of banks.
('Total capital o f banks would thus include the intangible assets deducted from primary capital, the other
components of primary capital and limited-life preferred stock and qualifying subordinated notes and deben­
tures.)3
These definitions and minimum requirements for bank capitalization are consistent with those being considered by
the other Federal bank regulators.
— In assessing the primary and total capital of bank holding companies the Board proposed:
Intangible assets would not be required to be netted out of primary capital. Instead, the amount and character
of intangible assets would be taken into account in determining a company’s compliance with the guidelines.
Equity commitment notes would be included in primary capital. Also — the only new element — the asset
base for calculating the primary and total capital ratios of bank holding companies would include the
companies’ reserves set aside for possible loan and lease losses, conforming to the calculation of primary
and total capital of State member banks.
Thus, except for the treatment of intangible assets and equity commitment notes, primary components
would be the same for both State member banks and for bank holding companies.
The Board’s guidelines for capital adequacy of bank holding companies are designed to retain the flexibility in the
Board’s current guidelines by the inclusion of equity commitment notes and moderate amounts of intangible assets as a
part of a bank holding company’s primary capital.
The Board requested that commenters focus specifically on the differences between these proposed guidelines and
those being proposed by the other Federal bank regulators. These issues include:
1.

Issuing substantive capital requirements in a regulation or in the form of guidelines.

2.

Relying upon the concept of capital zones as embodied in the Board’s guidelines or only on a requirement of a
“minimum capital” level.

3.

Deducting intangible assets in deriving primary capital ratios.

4.

Whether to include equity commitment notes as a component of primary capital.

The Board’s proposed capital guidelines for banks and for bank holding companies, currently in one document,
would be separated into separate guidelines.
The Board is proposing to increase the minimum required primary capital for regional and multinational banks in
light of the Board’s concern with fostering improvements in the capital ratios of large banking organizations and the
concern the Congress has indicated in the directions for improving capital ratios embodied in the International Lending
Supervision Act of 1983 (ILSA).
1. As defined in the quarterly report of condition (Call Report) banks file with their Federal supervisors — roughly, any amount over and above intrinsic value.
2. A type of mandatory convertible security.
3. Certain restrictions and maturity requirements — set forth in the attached capital adequacy policy statements — apply to and limit the use of these secondary
components of capital.




2

The Board’s further objectives in revising its guidelines are to achieve uniformity in capital requirements for State
member banks and bank holding companies regardless of size, and uniformity among all federally insured banks.
The Board’s proposed embodiment of its capital adequacy rules in a guideline, rather than a regulation, is designed to
preserve the Board’s flexibility in determining both appropriate capital levels of particular banks and bank holding
companies and in defining the components of capital.
The Board regards determination of capital adequacy as a major objective of its supervision of banks and bank hold­
ing companies. It views maintenance of adequate capital levels as a key to protecting depositors and to ensuring the
stability of the banking system.
II.

The Proposed Procedural Regulation in connection with the Board’s capital adequacy guidelines

The supporting procedural regulation proposes a number of supervisory actions such as submission of a plan for
achieving capital adequacy and possible administrative enforcement actions, including possible denial of applications,
that may be taken in the event a banking organization falls below required minimum ratios. The proposed rules place
emphasis upon giving the Board flexibility to deal with situations of undercapitalization in the practical light of the circum­
stances of particular banks or bank holding companies, while insisting upon current and continued progress toward ade­
quate capitalization.
The regulation refers to the Board’s capital adequacy guidelines as setting the substantive capitalization standards.
The rules establish the procedures under which the Board, as provided for in ILSA, may issue a directive to a bank or
bank holding company to increase its capital to a minimum or higher level, by written agreement, cease and desist order or
otherwise.
The main elements of the proposed procedures include:
— All State member banks, and bank holding companies, that do not meet the Board’s capital adequacy standards
on the day of final promulgation of the regulation would be required to file a plan with the Board, within 90 days,
to meet minimum capital requirements.
— Banks or holding companies that subsequently fail to meet the guideline requirements may be subject to a proce­
dure after notice and opportunity to comment that could lead to the issuance, by the Board, of a directive man­
dating and setting a time limit for compliance, as well as specifying a schedule for achieving the required capitali­
zation or the way in which it is to be achieved.
Enclosed — for State member banks and bank holding companies in this District — is the text of the capital
adequacy guidelines and the Board’s procedural regulations. It will be published in the Federal Register, in addition,
single copies will be furnished upon request directed to our Circulars Division (Tel. No. 212-791-5216). Comments
on the proposal should be submitted by September 24, 1984 and may be sent to our Bank Analysis Department.




A nthony

M.

So lo m o n ,

President.

3

BOARD

OF G O V E R N O R S

OF THE

12 CoFoR
(Docket

F E D E RA L

RE S E R V E

SY S T E M

Re s e r v e

Sy st em

Part 263

NOo

R-0526)

CAPITAL MAINTENANCE

AGENCY:

Board of G o v e rn or s

ACTION:

Prop os ed

SUMMARY:
Board

Capital

in ta k i n g

as m e r g er s
co nduct

of the Federal

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capital

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banks

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under c o n s i d e r a t i o n
and the

in order to e s t a b l i s h

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Board

supervised

Adequacy
pr op os es

for

are m e m b e r s
its

by the Federal

Comptroller

of the

uniform minimum
banksD

Guidelines
to issue

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for bank

holding

a r e g u la ti on

under which the Board may
requirements

to

ho lding

with the

("FDIC")

to

in the

in a m a n n e r c o n s i s t e n t

for f e d e r a l l y

procedures

activities

ana

to amend

ad e q u a c y

the

is r e q u i r e d

companies*

proposal

The Board

the

pr op os es

ance with the m i n i m u m capital
Guide Ii nes

This

factors

of a p p l i c a t i o n s s such

banks

and state c h a r t e r e d

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requirements

supervisory

system»

Sy s t e m

ho ld in g

and a p p r o p r i a t e

("Comptroller")

c o m p an ie So

by bank

of individual

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of capital

pr op os es

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p r o v is io ns
D e p o si t

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on va ri ou s types

va ri ou s

for re qu ir ed

holding

Capital

action

and the banking

Gu i d e l i n e s

is one of the critical

of the Federal

of the Board's

companies

also

a d e q ua cy

and a c q u i s i t i o n s

the sa fety and

bank

Ru le m a k i n g

of Go v e r n o r s

a n al yz e

of the Federal

require

contained

in the

compli-

-

DATE:

C o m m e n t s must

ADDRESS:
should

All

Go v e r n o r s
Avenue,

Federal

Se c r e t a r y ,
Avenue,

p . m 0 weekdays,.
Building

Attorney,
Ma n a g e r ,

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for

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Adequacy

responsibilities

fu n c t i o n s

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in the

public

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in ba n k i n g

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ba n k i n g

as a

system,

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in the
capital

institutions,
unforeseen

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partially
and

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of capital

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has acted to p r om ot e the m a i n t e n a n c e

im po rt an t

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Eo Scott,

and

as part of its

a 0m 0 and

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and Special

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to the

20th and

in Room 1122,

James

Se ct io n,

Analysis

in general 0

several

institutions

of 8:45

Supervision

The Board,

re g u l a t o r ,

including

the hours

(202/452-2594),

INFORMATION:

ba nk in g

p e r f or ms

or d e l i v e r c o m m e n t s

p.m„

of

Constitution

( 202/45 2- 35 1 3 ), or Ri chard

Pl a n n i n g

Banking

SUPPLEMENTARY

20th and

Building,

5:15

No„ R-0526,

of the Board

Cedes

CUNTACT:

and R e g u l a t i o n

Chief,

Di v i s i o n

D cC. 20551,

INFORMATION

Legal

Supervision

Secretary

System,

Room 2200,

1984„

refer to Docket

Co mm en ts may be in s p e c t e d

b e tw ee n

FU RT HE R

should

R e se rv e

N . W 0 , Washington,

Constitution

losses,

which

by S e p t e m b e r 24,

to W i l l i a m W. Wiles,

of the

Of fi ce of the

FOR

be re ce iv ed

co mm en ts ,

be ma i l e d

2 -

protecting

supporting
the Board

reasonable

considers

a d e q u a c y to be one of the m a j o r

a

objectives

3

of a bank e x a m i n a t i o n

or bank

is one of the c o m p o n e n t s
Financial
bank

I n s t it ut io n

supervisory

capital

levels

the Board

that

Ra ti ng

agenciesQ

plays

h o ld in g c o m p a n y

a key

form the basis

Sy s t e m used by each

role in the pr o g r a m s
ag e n c i e s

co nc er n
bank

assets

decline

Un i f o r m
federal

of a d e q u a t e

and

po l i c i e s

of

depositors

in the

prior to 1 9 8 1 s p a r t i c u l a r l y

of capital

and a

ratio of capital

to

in the n a t i o n ’s la rgest

ba n k i n g o r g a n i z a t i o n s 9 pr o m p t e d

the Board and the C o m p t r o l l e r

December

Adequacy

1981 s to adopt Capital

and state

member

Guidelines

were d e s i g n e d

levels

for

institutions
capitalized
pr e s u m e d

that

are a d e q u a t e l y

to

be

and bank

the

1983

multinational

to

Comptroller

c a p i t a l i z e d s t h os e

acceptable

fa sh io n
ab sent

pr ovide

national

with ta r g e t s

The Board

has noted that many

pr ov id e

sp ec if ic

organizations.
(49

defining

that

are

re vi se d

are

extenuating

or o b j e c t i v e s

position

ratio

In De c e m b e r

Federal

in

banks

the n a t i o n ’s la rg es t

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capital

and state me m b e r

co mp a n i e s

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and thos e that
clear

in

for national

companies0

im pr ov ed t h ei r capital

firmed the G u i d e l i n e s




and

c o m p a n i e s s including

comply with these
June

Board

The G u i d e l i n e s

o r g a n i z a t i o n s 9 have

in

holding

undercapitalizeds

ho lding

Guidelines

to set a range of s u b s t a n t i v e

in a m i n i m a l l y

holding

bank

by

be reached over t i m e 0
bank

and

use

circumstanceso
banks

banks

and

system0

of the i m p o r t a n c e

about the gradual

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of the

in p r o t e c t i n g

en s u r i n g the s t a b i l i t y of the b a n k in g
recognition

of the

In s h o r t 9 m a i n t e n a n c e

and other ba nk in g

This

inspection.

to
and

ba nking

in order to

the Gu i d e l i n e s

guidelines

1 9 8 3 s the Board

for
reaf°

R e g i s t e r 794 & incorporating

the G u i d e l i n e s

as A p p e n d i x

A of R e g u l a t i o n

Y s 12 C 0F . R 0 § 2 2 5 ) G

P u r p o s e of the P r o p o s e d R u l e m a k i n g 0
C o n g re ss
1 983

en a c t e d the

( 1 2 ILSoCo

federal

levels

§ 3901

b a n k in g

to a c h i e v e

I n te rn at io na l
et s e q »)

ag e n c i e s

and m a i n t a i n

of capital

other me t h o d s

(“ U S A " ) ,

" 0 . . shall

for such b a n k i n g

(Section

908*

this

and that

contained

Act*

the Federal

Supervisory
Capital

Re s e r v e

adequacy

provisions

and the F D I C 0
established
regulated

Act

Thus*

for all

banks*

and by such

banking

a g en cy deems
Pursuant

the

Financial

is p r o p o s i n g

uniform

under c o n s i d e r a t i o n
m i n i m u m capital

bank ho l d i n g

companies

Institutions
its

in capital

by the Comptr ol l

levels

and all

of size or p r i m a r y

to

Company

to amend

to c o n f o r m with ch an ge s

currently

regardless

institutions

in the Bank H o l d i n g
and

that the

by e s t a b l i s h i n g m i n i m u m

12 U 0S 0C 0 § 3 9 0 7 ) 0

Act of 1 966 9 the Board

Adequacy Guidelines

banking

1983*

Act of

w h ic h d i r e c t e d

institutions

Federal

appropriateo"

Supervision

c a us e

a d e q u a t e capital

as the a p p r o p r i a t e

authority

Le n d i n g

In N o v e m b e r

will

be

federally

federal

supervisory

agency .
The

Board

pr o p o s e s

respect to state m e m b e r banks
to in c r e a s e the
levels
uniform

regardless
regulations

requirements




its

The Board

Guidelines
reasons:

p r i m a r y and total

and m u l t i n a t i o n a l

requirements

of size„

revise

for two addi ti on al

required m i n i m u m

for regional
capital

to

for

banks
all

is also

which p r o v i d e a m e c h a n i s m

and

state

proposing
to en f o r c e

with
(1)

capital

(2) to e s t a b l i s h
member

banks

proc ed ur al
the s u b s t a n t i v e

of the Guidelines,,

The Board will

also c o n t i n u e to

re quire

bank

holding

5

companies

to meet m i n i m u m capital

a fi nding

pu r s u a n t to s e c t io n

§ 3 9 0 9 (a )( 2) )
requirements
e v a s io ns

that
to bank

h o l d in g

companies

no pu r p o s e to i n c r e a s e

parent

ho ld in g

the

co mp an y

financial

Board

has

condition

repeatedly

to be a

s t at ed that

Y0

Capital

Guidelines

for

bank

levels

for the larger

ho lding

c o m p a n i e s s and to e s t a b l i s h

for all

bank

definitions
the

total

to total
total

capital

to asset

may be c o n s i d e r e d

influencing

or b a n k s 0

has

of the
are

and total
bank

requirements

of s i z e 0
The

Board

requirements

Guidelines

that

and

parallel

by the FDIC and C o m p t r o l l e r
capital

capital

c o n t i n u e to view

in terms of t h r e e
to total

in sofar

to a d j u s t e d

ratio of total

The Board will

capital

be a

companies

Guide!ines0

and a m i n i m u m

ratios

The

so re qu ir ed

re v i s i o n s

u n i f o r m capital

ratio of p r i m ar y

of 6 pe rc en to

of its

bank

and m u l t i n a t i o n a l

Adequacy

being c o n s i d e r e d

i n s t i t u t i o n s with total




Adequacy

of 5 05 p e r c en t

assets

bank

ho ld in g

re ga r d l e s s

Capital

r e q u ir e a m i n i m u m

assets

fa c t o r

the s u b s t a n t i v e capital

in am ended

regulations

as they

regional

ho lding c o m p a n i e s

to em body

of a

re qu ir ed m i n i m u m p r i m a r y

A m e n d e d Capital

capital

at the e x p e n s e

banks,, and

pr o p o s e d

capital

proposes

the

a ho ld in g c o m p a n y mu s t

The Bo ard°s

to incr ea se the

U 0SoC0

(12

condition

of its s u b s i d i a r y

in its R e g u l a t i o n

de s i g n e d

has made

is n e c e s s a r y to pr event

pr im ar y

source of s t r e n g t h to its s u b s i d i a r y

Adequacy

ILSA
of

bank capital

The financial

continues

The Board

ILSAo The Board b e l i e v e s that it

of

company„

of

application

serves

holding

9 1 0 ( a) (2 )

uniform

of the p u r p os es

ratios0

assets

to be u n d e r c a p i t a l i z e d , ab se nt

"zoneSo"
of less

Those
than 6 o0

clear e x t e n u a t i n g

6

circumstanceso
total

Those

assets

ratio

be c a p i t a l i z e d

of

6 „0

to

in a m i n i m a l l y

evaluation

of other

tions with

a total

pr e s u m e d

institutions

financial
capital

adequately

pr im ar y capital

7 o0

a

total

pe r c e n t

capital

f a s h i o n 9 su b j e c t to

factors,.

Finally,, t h os e

capitalized,,

assets

In all

total

to

are c o n s i d e r e d

acceptable

to total

to a d j u s t e d

with

institu­

ratio of ab ov e

ca ses, the

to

7„0 are

ratio of

assets must

be at least

5 e5

Guidelines

for

Member

b e t w ee n the

Bo ard's

percent«
Ch an ge s
Banks,

The principal

guidelines
are

found

Existing
differences

and the p r o p o s e d

guidelines

in the d e f i n i t i o n s

guideline
(1)

from

ratios,,

the p r o p o s e d d e f i n i t i o n

e q ui ty c o m m i t m e n t

notes;

the sum of total

as well

in the p r o p o s e d

o f p r im ar y

(2)

capital

intangible

assets

p r i m ar y

capital

components

n u m e r a t o r of the p r im ar y

capital

ratio;

ratio

(total

of the

pri ma ry

allowance

for po s s i b l e

intangible
ratio
and

capital

assets;

(total

lease

and

assets)

capital

as in the

definitions
does

not

in d e r i v i n g

are:

in c l u d e

are e x c l u d e d

from

the

(3) the d e n o m i n a t o r
assets)

losses

in cl ud es

the

but e x c l u d e s

(4) the d e n o m i n a t o r of the total

in cl ud es

the a l l o w a n c e

proposed

in the d e f i n i t i o n s

are to c o n f o r m the

under c o n s i d e r a t i o n
questions
especially




lease

banks

for p o s s i b l e

capital
loan

1 osses Q
The changes

total

loan and

cu r r e n t

for state m e m b e r

of ca pi ta ls

The c h a n ge s

State

Board's

by the C o m p t r o l l e r

w h e t h e r t h es e c h an ge s
the e x c l u s i o n

are

of e q ui ty

of pr i m a r y

and

definitions

with th os e

and the FDIC„

The Board

improvements
commitment

in the d e f i n i t i o n s s

notes

and all

7
i n t a n g i b l e as set s 9 r e g a r d l e s s
of primary c a p i t a l 0
flexibility

of c h a r a c t e r s

The Board's

in d e t e r m i n i n g

cu rr en t

ratioso

H o w e v e r 9 the Board

may be d e s i r a b l e
capital
those

in this

definitions

The ch an ge s
minimum

ad e q u a t e

multinational

be l i e v e s

area and

capital

ratio

ratio for regional

banks

for total

are each

in c r e a s e d

The Board
requ ir ed
banks

capital

pr im ar y capital

is a p p r o p r i a t e given

improvements

in

the

organizations

and

for

capital

im pr ov in g

Board

has also

total

capital

percentage




(3)

each

of m u l t i n a t i o n a l

(1)

banks

and

is

is

and

regional

pointo

in the m i n i m u m

and m u l t i n a t i o n a l

of

large

fostering
ba nking

c o nc er n e m b o d i e d
with this

zone m e a s u r i n g
and

banks

1 and Zone 2

c o n c e r n with

Consistent

(2)

(Zone 3)

(4) the Zone

for regional

ratios

the

the m i n i m u m total

a percentage

Co ng re s s i o n a l

in c r e a s e d

for regional

for m u l t i n a t i o n a l

the Board's

ratios0

are:

regional

in

v i e w 9 the

the a d e q u a c y
banks

ILSA

of

by o n e - h a l f

a

pointo

The
re p r e s e n t s

FDICo

that the in c r e a s e

capital

the

and

ratios

ratio

same as

ratio for c o m m u n i t y

and

by o n e - h a l f

be li ev es

are the

guidelines

and m u l t i n a t i o n a l

from 5 05 to 6 o0 percents

guidelines

of d e f i n i t i o n s

from 5 o0 to 5 05 percent;

from 6 o0 to 5 05 percent;

in c r e a s e d

banks that

in the s u b s t a n t i v e

is i n c r e a s e d

p r i m a r y capital

uniformity

by the C o m p t r o l l e r and

the m i n i m u m a d e q u a t e pr imary capital
decreased

that

of intan-

it i s s t h e r e f o r e s p r o p o s i n g

pr imary capital

banks

p r ov id e

and the type

in c a l c u l a t i n g

for state m e m b e r

being c o n s i d e r e d

guidelines

both the level

gible assets that may be in cl ud ed

from the d e f i n i t i o n

minimum

a decrease

p r i m ar y

capital

ratio

in the m i n i m u m capital

of

5 05

requirement

percent
for

-

sm al le r

community

billion)0

state

The Board

8 -

member

banks

is p r o p o s i n g this

of e s t a b l i s h i n g

a si ng le

uniform

large and small

b a n k in g

insitutions

in te re st

in e s t a b l i s h i n g

the FDIC and C o m p t r o l l e r
ted bankSc

The Board

e m p h a s i z e that

capital

remain

unchanged

Ho l d i n g

Guidelines
companies
be l i e v e s
all

for
are

that

purpose,
c e rt ai n

from

state

contained

ho lding

one

lease

losses,,

1,

2 and

3

Guidelines

banks

Capital

and

document,.

serves
that

ho l d i n g
the

ratios

for bank

is p r o p o s i n g ,

Board

used

im po r t a n t

it is d e s i r a b l e

guidelines

Board

and

Bank

Adequacy

bank

While

an

for

for

policy

to retain

ho ld in g

in a d d i t i o n

separate guidelines

to

for

companies,,
from e x i s t i n g

ratios

is that the asset

capital

regula­

the m i n i m u m

Zones

Bo ard"s

for state m e m b e r banks,

lation of the capital

total

ratio with

federally

F i n a ll y,

of the d e f i n i t i o n s

the

overriding

organizations»

the

also be l i e v e s

The only c h a n g e

companies

an

for

are e x p e c t e d to o p e r a t e

Existing

banks

in t e r e s t

that, the new G u i d e l i n e s

member

in

regula te d

Accordingly,

as

that d e f i n e

ba n k i n g

fe at ur es of the c u r r e n t

the g u i d e l i n e s

ratios

Guidelines

in the G u i d e l i n e s
base

in c l u d e s

As noted above,

ma de for the c a l c u l a t i o n




level

$1„0

requirement

for all

level „

Currently,

both

the Board

companies,,

bank

asset

conformity

federally

capital

Change

Companies,

well

of the C u r r e n c y

for small

Proposed

as

organizations

to total

in the

a u n i f o r m m i n i m u m capital

above the m i n i m u m pr i m a r y
total

decrease

under

p r i m ar y capital

n o t e s / howe ve r,

ba nking

(assets

this

of t h e s e

for bank

for c a l c u l a t i n g

the a l l o w a n c e

ho ld in g

the p r i m a r y

for p o s s i b l e

is a c o n f o r m i n g

ratios

in the c a l c u ­

loan

and
and

c h a n g e being

for state m e m b e r

banks,

9

and the Board be l i e v e s
reserves
asset

sh ou ld

t h a t 9 for p u r p o s e s

also be in c l u d e d

base of bank

in the g u i d e l i n e

made for state m e m b e r banks;
capital

ratio

i.e.s

for

is i n c r e a s e d

minimum

ad e q u a t e

pr im ar y

holding

companies

is d e c r e a s e d

bank

m i n i m u m total

ho lding c o m p a n i e s

(4) the Zone

parallel

The

Bank H o ld in g
the

banks

and bank

the t r e a t m e n t

member

reasons
above

from 5.5 to

are each

Guidelines

of i n t a n g i b l e

ratios

and m a n d a t o r y

assets

and

differences

These d i f f e r e n c e s

de ri ve the n u m e r a t o r of the p r im ar y capital




by o n e - h a l f a

the t r e a t m e n t

from the sum of the c o m p o n e n t s

loan and lease

regional

capital

Banks

afforded

relate to

convertible

ratios

of state

the e x i s t e n c e

Specificallys intangible

p o s s ib le

and

in t h es e

would be made to re flect

from the sum of total

and

for total

of State Me m b e r s

regarding

assets

de d u c t e d

bank

for state m e m b e r banks.

In c o m p u t i n g the p r i m ar y capital

assets.

the

6.0 p e r c e n t s and

increased

for the c h an ge s

bank

(2)

community

There are two s i g n i f i c a n t

b a n k s 9 adjustments

be d e d u c t e d

for

ratio for m u l t i n a t i o n a l

ho lding c o m p a n i e s .

of any i n t a n g i b l e

regional

from 6.0 to 5.5 percent;

in T r e a t m e n t

Companies.

p r o p os ed

securities.

ratio

is i n c r e a s e d

thos e d i s c u s s e d
Differences

in

capital

capital

and

those

adequate

from 5.0 to 5.5 pe rc en t;

ho lding c o m p a n i e s

point.

in the

parallel

(1) the m i n i m u m

l s Zone 2, and Zone 3 g u i d e l i n e s

for t h es e bank
percentage

ratios

multinational

ho ld in g c o m p a n i e s

(3) the

for these c a l c u l a t i o n s

h o l d in g c o m p a n i e s .

The d i f f e r e n c e s

pr imary

of c o n s i s t e n c y s th es e

assets

would

of p r i m a r y capital
ratio

and would

and the a l l o w a n c e

losses to de r i v e the d e n o m i n a t o r

to

be

for
of the

- 10
ratio*,

The Board

gibles

b e l i ev es

that the s p e c i f i c d e d u c t i o n

from p r im ar y capital

deriving

pr im ar y

capital

and total

ratios

c o m p a n i e s may be u n d e s i r a b l e
of t h es e

institutions

c u r r e n t l y takes the
assets
banks

into c o n s i d e r a t i o n
and bank

ex clude
of

holding

intangibles

state m e m b e r

holding

banks*,

pr op os es

The pr o p o s e d
re quire

ratios

to de rive the

not to e x cl ud e

of bank

companies

holding

character

However,

of i n t a n g i b l e

with additional

proposes

guidelines

for bank

to be d e d u c t e d

ratio,,

in c o m p u t i n g

from

or from

The Board
p r i m a r y capital

in order to pr o v i d e

flexibility®

bank

The Board does,

ho lding

however,

intend to c o n t i n u e to take the level

and s p e c i f i c

intangible

in e v a l u a t i n g the overall

financial

assets

condition
With

notes

(a

pr o p o s e s

into- c o n s i d e r a t i o n
and capital

respect to

the

to allow such

instruments
for bank

d i s a l l o w th es e

instruments

member

The pr op os ed

banks®

of p r i m ar y capital

interagency




uniformity

of a bank

treatment

type of m a n d a t o r y c o n v e r t i b l e

a form of pr imary capital

form

adequacy

character

ho ld in g

of e q ui ty

security),

to co n t i n u e
holding

for banks

is d e s i g n e d

in the d e f i n i t i o n

co m p a n y ®

the Board

to be c o un te d

companies

of th es e

of

commitment

as

but to

as a form of p r i m a r y capital
exclusion

to

ratios

of p r i m a r y capital

pr i m a r y capital

companies

of indi vi du al

p r im ar y capital

intangibles

intangibles

The Board

the Board

capital

components

holding

the f l e x i b i l i t y

acquisitions®

c a l c u l a t i n g the

c o m p a n i e s do not

assets

it re duces

sp e c i f i c

companies*,

when

and bank

in a s s e s s i n g the capital

e i t h e r the sum of the total
total

be c a u s e

and

for the p u r p o s e of

of both banks

in s t r u c t u r i n g

level

as se ts

of i n t a n ­

in state

instruments

as a

to a c h i ev e

of p r im ar y capital

for

n
banks,,

In d e c i d i n g to c o n t i n u e to treat

as primary capital
that

such i n s t r u m e n t s

perpetual
vehicle

preferred

encourage

stock

convertible

re gu l a t i o n
co mpany

requires

that does

be co me s

requ ir ed

Adequacy

must

are outlined

companies
if

the

prospe ct s

of

necessary

and

particular
pr a c t i c e




an a t t r a c t i v e

The Board

has

exclusive

li mi te d

of the

of m a n d a t o r y

when the

its capital

administrative
in the

also

require

Reserve

appropriate,,

capital

begin

make

a

l i q u id it y

in the event

hi gh er
the

and

guidelines
assets

the ad e q u a c y
with

enforcement
of the

of

or bank

level

managements

Moreover9

relative to total

of d e t e r m i n i n g

Bank

to the m i n i m u m

p a r t i c u l a r banks

co n d i t i o n s

institution

to

(set

p 1a n „

financial

the

ho ld in g

regulation

and judicial

regulation

pr op os ed

standards

to m a i n t a i n more than the m i n i m u m

of m e e t i n g

will

The

submit to the a p p r o p r i a t e

a capital

a t t e nt io n

assets

R e g u l a t i o n .,

G u i d el in es )

for i n c r e a s i n g

The Board may

capital

and

r e p r es en t

any state m e m b e r bank or bank

Ce rtain

fa il ur e to submit

holding

notes

common

h o w e v e r 9 to 10 p e r c en t

Procedural

that

a plan

level „

p r o c ed ur es

of

not meet the m i n i m u m capital

effectives

within 90 days

capital

i s s u an ce

pr im ar y capital

Proposed

in the Capital

process

the

notes

securities0

The

liquid

c o m p a n i e s 9 the Board

over time and

in st r u m e n t s *

holding c o m p a n y ' s

forth

holding

for ra ising l o n g - t e r m capitalo

the use of such
bank

for bank

e q u i t y commi tment

or

future

capital

Board

will

of

will

discourage

by r e d u ci ng

the

level

of the institution,,
an

level

institution's

a qualitative evaluation

of the

pay
the
of
The

12

critical

va ri ab le s that d i r e c t l y

condition,,

These

diversification
li quidity;
ar i s i n g

variables

of assets;

appropriate

from in te re st

significant

po l i c i e s

expected
forth

in the

prospectively

sheet

formal

shall

risks

sets

c o n t i n u e to meet

with

areas will

be

the m i n i m u m

are

to

set

c u r r e n t l y or

a c t i o n s final

forth
the

a mo r e

stringent

requirement

con­

therein,,
In ad di ti on

to the tr ad i t i o n a l

Board to set a hi g h e r capital
memoranda

be tw ee n the Board

cease and de sist
on a p p l i c a t i o n s
for a s p e c i f i c

level

and

the

right to c o n s i d e r

capital

re qu i r e m e n t

h i g h e r capital

institutions

re qu i r e m e n t

applications

attached

by

to or ders

regulation

procedure,,

failure

established

The Board

to meet

the

or

issued

p r o v id es
also

minimum

the G u i d e l i n e s s or such

set by the B o a r d s as b e a r i n g

or no tices

by the

financial

p r o p os ed

notice and c o mm en t

used

agreements

the

or n o t i c e s ) s the

procedures

( e 0g„ w r i t t e n

o r d e r s 9 and c o n d i t i o n s

reserves

that a bank or bank

ho ld in g

adversely
c o mp an y

fi1e „
Di recti ves ,

authorizes




that

administrative

capital

may

of t h es e

Institutions

or a g r e e m e n t that

upon

ea rn in gs ;

Institutions

levels than

o r d e r s or co n d i t i o n

ta in ed

financial

the q u a l i t y of m a n a g e m e n t ;

risks,,

hi gh er capital

under any

requirement

hist or ic al

for loan c h a r g e - o f f s ;

in one or more

regulation,,

overall

a c t i v i t i e s that may ex p o s e the bank

off ba la nc e

to m a i n ta in

and

rate m i s m a t c h e s ;

weaknesses

its

in cl ud e the q u a l i t y s type and

cu rr en t

and the e x i s t e n c e of other
r i s k s s including

bear on

Section

the a p p r o p r i a t e

908 of

b a n k in g

USA

(12 U. So C.

a g e n c y to issue

§ 3907)

a directive

13
to a b a n k in g
capital

institution

requirement
a

that

fails

to m a i n t a i n

A d i r e c t i v e may

plan

and adhere

to

directive,

i n c l ud in g

a

thereunder,

is a final

orde r e n f o r c e a b l e

United

States d i s t r i c t

extent

as a final

1818(b) o

for

re qu ir e

achieving

capital

court

cease and de sist

d i r e c t i v e may

be issued

in lieu of,

ad d i t i o n

ex i s t i n g

enforcement

ag encieSo

The

Board has

or de r

A

submitted

the a p p r o p r i a t e

issued

under

12 U 0S . C 0 §

is d i s c r e t i o n a r y ,

in c o n j u n c t i o n
tools

proposed

the is s u a n c e of a d i r e c t i v e

requirement„
plan

in

to submit

in the same m a n n e r and to the same

The issuance of a d i r e c t i v e

to

a bank

such

ad e q u a c y

the m i n i m u m

i n c l ud in g

with,

available

pr o c e d u r e s

and a
or in

to

the

leading

to

no tice and o p p o r t u n i t y

to

c ommen t .
Differences
major difference
considered

Among

Pr o p o s e d Ag en cy

Regulations.

between the B o a r d ’s proposal

by the FDIC and the C o m p t r o l l e r

and those

requirements

of g u i d e l i n e s

The Bo ar d' s

with

in a regulation,,

its Capital

Adequacy

Guidelines

has d e m o n s t r a t e d

the need

for f l e x i b i l i t y

capital
that
all

ratios

and even

rigidly d e f i n i n g
cases

ef fo rt s

in w o r k i n g with
thei r capital

ad eq ua cy

in the context

consider

in acting

banks

in ap p l y i n g

"capitalo“
ce rtain

of law could

and bank

po s i t i o n s

of

in a set
experience

du ri ng the past 2=1/2 year s

fa il ur e to meet

as a per se v i o l a t i o n

strengthen




in de f i n i n g

being

is the d e c i s i o n

the Board to embody the s u b s t a n t i v e capital
rather than

The

and

of a br oa de r

upon applications,.

The Board
capital

be li ev es

levels

in

ha mp er the Board's

holding

companies

in e v a l u a t i n g

range

minimum

capital

of factors

In a d d i t i o n ,

to

it must

the Board

14
r e c o gn iz es the d i f f i c u l t y of imposing
components

of capital „

The use of f l e x i b l e

permit the Board to adjust
mo re

rapidly

a st at ic d e f i n i t i o n

to ch anges

capital

requirements

practices.,

The FDIC

has c h o s e n

containing

its s u b s t a n t i v e capital
requ es ts

requirements

in the G u i d e l i n e s

markets

and

to issue a r e g u l a t i o n

requirements.

ho we ve rs specifically

will

and d e f i n i t i o n s

in the e c o n o m y s in financ ia l

in ba n k i n g

p r o p os ed

guidelines

on the

The B o a r d 9

co m m e n t on w h e t h e r the capital
sh ou ld

be i n c o r p o r a t e d

has also

led the Board's

in a regulation.,
The c o n c er n
proposal

to di f f e r

ag en ci es

in e s c h e w i n g

ment

process..

q u i c kl y

for f l e x i b i l i t y

from thos e being c o n s i d e r e d
any general

The Board

a particular

The Board

A third difference

bank

capital

so le ly by means
co n c e p t
mo re

Board's

capitalized

be tw ee n

banks

in terms

with

capitalized

c o m p a n y must

re spond to
take

in each case

the p r o p o s a l s
of

the

of br o a d e r zones
capital

a general

adequate

based

of the Board
need

for the s p e c t r u m of banks

ta r g e t

institutions

in a m a r g i n a l l y

how

case*

recognition

of a si n g l e m i n i m u m

p r o v id es

st r o n g l y

of that

requirements

ho lding c o m p a n i e s

ho lding

the e n f o r c e ­

right to d e c i d e

to set time limits

upon the u n iq ue c i r c u m s t a n c e s

treat total

re se rv ed the

in

and how qu i c k l y the Board must

p r o p os es

and the FDIC is the

time d e a d l i n e s

bank or bank

the no tice of a d i r e c t i v e
action.,

has

by the other

and

ra th er than

level*

The zone

range that de fi ne s

as well

fa sh io n

to

as t h os e that

are

and thos e that may

be u n d e r c a p i t a l i z e d *
The
procedure




to

Board's
establish

regulation
hi gh er

pr ov id es
than

an

minimal

administrative
capital

for

15
individual

banks

the tr ad i t i o n a l
capital

levels

the Board's

and bank
cease

ho ld in g companies,,

and desist

procedures

this
has

s h ou ld

pr op os ed

be given

90 days

banks

and bank

h o l d in g

from the e f f e c t i v e date of

the Board

of the Board

n o t a bl y

and

has de c i d e d to

notes,
The

regulations

are d e s c r i b e d

ad op ti on

nu mb er of institutions,,

of

these

loss), more than

had pr i m a r y capital
capital

most

ratios

ratios than
and total

proposed m i n i m u m capital
that there




regulations

requirement

reflect

in excess

is

not

on a large

smaller
capital

adjustments

of all

of 5.5 pe r c e n t ,

and

institutions)

regional

primary
In

banks

permitted

had

ratios that would

and bank

the

banks

guidelines.

were p r e v i o u s l y

ratio g u i d e l i n e s .

for assets

state m e m b e r

by the B o a r d' s

(which

a relatively

These d i f f e r e n c e s ,

and bank eq ui ty

p r o p os ed

96 percent

are a few large banks

be faced with

for

in mo r e detail .

of the larger m u l t i n a t i o n a l

ho ld in g c o m p a n i e s

lower capital
capital

ratios

guidelines

on the D e c e m b e r 31 s 1 983 Call

requirement established

additi on ,
and bank

Based

assets

capital

(which do not n e c e s s a r i l y

classified

FDIC

from the bank guide-­

of the FDIC.

above

e x p e c t e d to impose an additional

Re ports

issue

that d i f f e r s l i g h t l y

in the t r e a t m e n t of i n t a n g i b l e

commitment

The

60 days.

ho ld in g c o m p a n i e s

lines

hi gher

p r o c e d u r e of •

r e g u l a t i o n to pr e p a r e a plan to i n c r e a s e c a p i t a l «

bank

use

re gu la ti on .

Fi na ll y,

will

to e s t a b l i s h

rather than the no ti ce and d i r e c t i v e

The Board also be l i e v e s that
companies

The FDIC would

pr im ar y
ex ce ed the

It is r e c o g n i z e d
ho ld in g

large d o l l a r

companies

shortfall

that

in their

16
capital

a c c o un ts .

to make

every

p o s s ib le ,

ef fort

of

the Board will

unless

(1)

significant
nonbank

subsidiary

co mp an y

or

(2)

has

compliance
and the

the

re ason-

in c o n s o l i d a t e d

or any no n b a n k

the h o ld in g
debt

as

from the G u i d e l i n e s

in any n o n b an k

outstanding

r a pi dl y

achieve c o m p l i a n c e 0

under $150 m i l l i o n

or i n d i r e c t l y

leverage,

to

institutions

as

circumstances

c o n t i n u e to ex em pt
with

all

to a c h i e v e

institutions

the h o ld in g

is e n g a g e d d i r e c t l y

ex p e c t

compliance

submitted

individual

thes e

h o l d in g c o m p a n i e s

assets,

achieve

plans

c o n s i d e r the

able c a p a c i t y

bank

to

in a n a l y z i n g

Board will

Finally,

While the Board will

subsidiary

activity

co m p a n y

or

involving
any

held by the general

p u b 11 c o
The Board
in this

proposed

member

banks

maintain
ag ai ns t

regulation

and

hi gh er

st r e s s e s

bank

levels

unforeseen

Issues
commenters
proposed

the C o m p t r o l l e r .

a regulation

will

provide

to

protection
greater

able to ta k e a d v a n t a g e

The

arise.
Board

on the d i f f e r e n c e s
being c o n s i d e r e d

issues,

state

encouraged

as p r o v i d e a

as they

Commentc

are

all

set forth

as d i s c u s s e d

requests

that

be t w e e n thes e

by the FDIC and

above,

include:

requirements

wi thin

or in t h e . f o r m of G u i d e l i n e s ;

in the Bo ar d' s




and that

Issuing the s u b s t a n t i v e capital

2.

ca p i t a l "

as well

gr owth

and th os e

Th es e

This

in terms of being

focus

requirements

companies

of capital..

for S p e c i f i c

Guidelines

1.

ho ld in g

for sound

specifically

capital

are m i n i m u m s

adversities

m e a s u r e of f l e x i b i l i t y
of o p p o r t u n i t i e s

that

level;

Re ly in g

upon the co n c e p t of capital

Guidelines

or only

zones

upon a r e q u i r e m e n t

as e m b o d i e d

of a " m i n i m u m

17
3o
capital

Deducting

ratios;
4o

pr im ar y

Includ in g

significant
en ti ti es

eq u i t y c o m m i t m e n t

of these

economic

proposals

impact on

601

et s e q 0) 0

wr i t t e n

considered

policy*,

its G u i d e l i n e s
ba nk in g

among the
ad e q u a c y

and bank

December

its Capital

and capital

out

the capital

ho ld in g companies*,

capital

a substa nt ia l

In c a r r y i n g

ho lding c o m p a n i e s 0 In

of

The Board c e r t i f i e s

its

Flexibility

h o l d in g c o m p a n i e s

federal

b a nk in g

Board

a

Guidelines*, to in fo rm banks,
concerning

The Board now p r o p o s e s

to amend

for large and

and to at te mp t to e s t a b l i s h
a g e n ci es

the

promulgated

to e s t a b l i s h more u n i f o r m s t a n d a r d s
institutions

(5

and bank

and the p u bl ic o.f its b e l i ef s

adequacy0

Act

responsibilities

a d e q u a c y of banks

Adequacy

to have a

n u mb er of small

1981*, the Board

in the

uniformity

i m p o s i t i o n of capital

requicements0
H i s t o r i c a l l y s the Board

in s m a l le r banks

ex tent that this
lessen the burden
This

m e m b e r banks

and bank

regulation
on small

proposal

with any ex i s t i n g




pr imary

as a c o m p o n e n t

is not e x p e c t e d

w i t h i n the m e a n i n g of the R e g u l a t o r y

has always

ratios

notes

Flexibility Analysis A c t .

for s u p e r v i s i n g m e m b e r banks

small

in d e r i v i n g

capital „

that the a d o p t i o n

bank

assets

and

Regulatory

UoSoCo

intangible

and bank

banks

required

those

and bank

and

requirements

overlap

regulations

ho lding c o m p a n i e s .

To the
it will

ho l d i n g c o m p a n i e s 0

not d u p l i c a t e ,

laws

hi g h e r capital

ho ld in g c o m p a n i e s .

equalizes

does

federal

has

or c o n f l i c t

governing

state

1 8

-

List of

Su b j e c t s

banking;

Federal

Re se rv e

A d e q ua cy ;

State Me m b e r

in

-

12

System;

C <,F 0 R <,

Holding

3909;

Lending
section

12 UoSoCo
of 1966

(FIS Act),

the Federal
he reby

Act of

of the Bank

§ 1844(b);

Federal
Adequacy

12 UoS. Co

Co m p a n y Act

§§ 39G7,

(BHC Act),
Act

12 U ®S „ C ® 1818;

and s e c t i o n s

9 and

of

(12 U . S 0C. §§ 248,

System,

Adequacy

Guidelines

a new Su bp ar t

ho lding

the

Board

for state

A to the Bo ar d' s

Institutions

12 C . F 0R 0 Part 208;

for bank

11(a)

3 2 4 9 329),

in a new A p p e n d i x

of State Ba nk in g

for A p p e n d i x A of the Bo ar d' s
and to adopt

(ILSA),

Interna­

Supervisory

H, M e m b e r s h i p

Guidelines

Under the

Institutions

to be re p r i n t e d

R e s e rv e

1983

Ho ld in g

pr o p o s e s to adopt Capital

Regulation

Capital

the Financial

R e se rv e Act

m e m b e r banks,

Banks,

Banks®

Supervision
5(b)

263®

Co m p a n i e s ;

P u r s u a n t to the B o a r d 8s A u t h o r i t y
tional

Part

in the

to adopt Capital

c o m p a n i e s to be s u b s t i t u t e d

Regulation

Y s 12 CoFoR®

Part

D to its Rules of Pr a c t i c e

225;

for He ar in gs ,

12 C eF o R e Part 2 6 3 9 as follows;
Part 208 -- M e m b e r s h i p of State Ba nk in g
Federal R e s e rv e System

1®




in the

A u t h o r i t y for 12 Co F0Ro Part 208 is pr o p o s e d
to be re vised as follows:
A u t h or it y:

2o

Institutions

12 U 0SoC® 248, 321-338, 486,
3907, 3909, unless o t h e r w i s e

12 C®F®R® Part 208 is proposed to be am e n d e d
adding an A p p e n d i x A to read as follows:

by

1814,
noted®

-1 9

=

APPENDIX A—Capital Adequacy Guidelines
Definition of Capital to be used in Determining
Capital Adequacy of State Member Banks
Primary Capital Components
T h e c o m p o n e n t s o f p r im a r y c a p i t a l a res
— co m m o n sto c k
— p e r p e t u a l p r e fe r r e d s t o c k
~

su r p lu s

— u n d iv id e d p r o f it s
=-

c o n t in g e n c y a n d o t h e r c a p i t a l r e s e r v e s

—

m a n d a to r y c o n v e r t ib le in s tr u m e n ts ( c a p it a l in s tr u m e n ts
w it h c o v e n a n t s m a n d a tin g c o n v e r s io n in to c o m m o n or
p e r p e tu a l p r e fe r r e d s to c k )

— a l lo w a n c e fo r p o s s ib le lo a n a n d l e a s e lo s s e s
—

m in o r ity i n t e r e s t in e q u it y a c c o u n t s o f c o n s o lid a t e d
s u b s id ia r ie s

F o r t h e p u r p o s e o f c a lc u la t in g a b an k 's p r im a r y c a p ita l* in ta n g ib le a s s e t s
(a s d e f in e d in t h e in s t r u c t io n s t o t h e b a n k C a ll R e p o r t) a r e d e d u c t e d fr o m t h e su m o f
t h e c o m p o n e n t s o f p r im a r y c a p i t a l s e t f o r t h a b o v e .

Secondary Capital Components
It

is

r e c o g n iz e d

th a t

o th e r

f in a n c ia l

in s tr u m e n ts

can,

w it h

c e r t a in

r e s t r i c t i o n s , b e c o n s id e r e d p a r t o f c a p it a l b e c a u s e t h e y p o s s e s s s o m e , th o u g h n o t a ll,
o f t h e f e a t u r e s o f c a p i t a l . T h e s e in s tr u m e n ts a r e :




=~ L i m i t e d - l i f e p r e f e r r e d s t o c k
=~ Q u a lif y in g s u b o r d in a te d n o t e s and d e b e n t u r e s

-

20

-

F o r t h e p u r p o s e o f d e t e r m in in g a g g r e g a t e s e c o n d a r y a n d t o t a l c a p i t a l , t h e
a m o u n t o f in t a n g ib le

a s s e ts d e d u c te d

fr o m

p r im a r y c a p i t a l is a d d e d

back to

th e

c o m p o n e n ts o f se c o n d a r y c a p ita l s e t fo r th a b o v e .

Restrictions Relating to Secondary Components
The

seco n d a ry

c o m p o n e n ts

w ill

be

c o n s id e r e d

as

c a p ita l

und er

th e

c o n d it io n s l i s t e d b elo w ?
~

T h e s e c u r i t y is s u e m u s t h a v e an o r ig in a l w e ig h t e d a v e r a g e m a tu r ity o f
a t le a s t se v en y e a r s.

~

The a g g r e g a te a m o u n t o f seco n d a r y c a p ita l m ay n o t e x c e e d 50 p e r c e n t
o f t h e a m o u n t o f t h e b a n k ’s p r im a r y c a p i t a l .

—

A s s u b o r d in a te d d e b t o r l i m i t e d - l i f e p r e fe r r e d s t o c k a p p r o a c h e s
m a t u r it y , r e d e m p t io n or r e p a y m e n t , t h e o u ts ta n d in g b a la n c e o f a l l s u c h
in s t r u m e n t s —in c lu d in g t h o s e w it h s e r ia l n o t e p a y m e n t s , sin k in g fu n d
p r o v is io n s , or
an
a m o r t iz a t io n
s c h e d u le —w ill b e
a m o r t iz e d
in
a c c o r d a n c e w it h t h e f o llo w in g s c h e d u le :

Y e a r s t o M a tu r ity
G r e a t e r th a n o r e q u a l t o 5

P e r c e n t o f Issu e
C o n s id e r e d C a p it a l
100

L e s s th a n 5 b u t g r e a t e r th a n
or e q u a l to 4

80

L e s s t h a n 4 b u t g r e a t e r th a n
or eq u a l to 3

60

L e s s th a n 3 b u t g r e a t e r th a n
or e q u a l to 2

40

L e s s th a n 2 b u t g r e a t e r th a n
or e q u a l t o 1

20

L e ss th a n 1

0

(N o a d j u s t m e n t s in t h e b o o k a m o u n t o f t h e is s u e is r e q u ir e d o r e x p e c t e d
s c h e d u le .




A d ju s tm e n t w ill b e m a d e b y a m e m o r a n d u m a c c o u n t .)

b y t h is

-

21

-

Minimum Capital Guidelines for State Member Banks
The

B o a rd o f G o v e r n o r s o f t h e

F ed eral R eserve

S y stem

has

a d o p te d

m in im u m c a p i t a l r a t i o s a n d g u id e lin e s t o p r o v id e a fr a m e w o r k fo r a s s e s s in g t h e c a p i t a l
o f w e ll- m a n a g e d s t a t e m e m b e r b a n k s w ith n o s ig n if ic a n t f in a n c ia l w e a k n e s s e s ! / « T h e
g u id e lin e s a p p ly t o a ll s t a t e m e m b e r b a n k s r e g a r d le s s o f s i z e a n d a r e t o b e u s e d in t h e
e x a m in a t io n a n d s u p e r v is o r y p r o c e s s a s w e ll a s in t h e a n a ly s is o f a p p lic a t io n s a c t e d
u p on b y t h e Boardo

T h e B o a rd w ill r e v ie w t h e g u id e lin e s fr o m

t im e t o t i m e fo r

p o s s ib le u p w a rd a d j u s t m e n t s c o m m e n s u r a te w ith c h a n g e s in t h e e c o n o m y , f in a n c ia l
m a r k e t s a n d b a n k in g p r a c t i c e s .
O b j e c t iv e s o f t h e m in im u m c a p it a l g u id e lin e s a r e to :
~

I n tr o d u c e u n if o r m it y , o b j e c t i v it y an d c o n s is t e n c y in to
t h e s u p e r v is o r y a p p r o a c h fo r a s s e s s in g c a p i t a l a d e q u a c y ;

—

P r o v id e d ir e c t io n fo r c a p it a l an d s t r a t e g i c p la n n in g an d
fo r t h e a p p r a is a l o f t h is p la n n in g b y t h e B oa rd ; and

—

P e r m it t h e e lim in a t io n o f d is p a r it ie s in c a p i t a l r a t io s
b e t w e e n b a n k in g o r g a n iz a t io n s o f d i f f e r e n t s i z e s .

T w o p r in c ip a l r a t io m e a s u r e m e n ts o f c a p i t a l a r e u s e d : (1) p r im a r y c a p it a l
t o a d ju s te d t o t a l a s s e t s ( i . e . , t o t a l a s s e t s p lu s t h e a llo w a n c e fo r p o s s ib le lo a n a n d l e a s e
l o s s e s l e s s in t a n g ib le a s s e t s ) a n d , (2) t o t a l c a p it a l t o t o t a l a s s e t s p lu s t h e a llo w a n c e fo r
p o s s ib le lo a n a n d l e a s e l o s s e s .

F o r t h e p u r p o se o f c a lc u la t in g t h e s e r a t io s , p r im a r y

c a p i t a l is d e f in e d a s t h e su m o f c o m m o n s t o c k , p e r p e tu a l p r e fe r r e d s t o c k , c a p it a l
su r p lu s ,

u n d iv id e d

m a n d a to r y

p r o f it s ,

c o n v e r tib le

reserv es

fo r

in s t r u m e n ts

c o n t in g e n c ie s

( e x c lu d in g

an d

e q u it y

o th e r

c a p ita l

c o m m it m e n t

reserves,

n o te s),

th e

a l lo w a n c e f o r p o s s ib le lo a n a n d le a s e lo s s e s , and a n y m in o r ity i n t e r e s t in t h e e q u it y
a c c o u n ts

of

c o n s o lid a t e d

s u b s id ia r ie s ,

m in u s

in ta n g ib le

a ssets.

T o ta l

c a p it a l

is

c a lc u l a t e d b y a d d in g t o p r im a r y c a p i t a l (a s d e f in e d a b o v e ) l i m i t e d - l i f e p r e fe r r e d s t o c k ,

1/

B a n k s w it h s ig n if ic a n t w e a k n e s s e s or t h o s e u n d er s p e c ia l s u p e r v is io n m a y b e
s u b j e c t t o h ig h e r c a p i t a l r e q u ir e m e n ts th a n t h e g u id e lin e m in im u m s .




-

22

-

q u a lif y in g s u b o r d in a te d n o t e s a n d d e b e n t u r e s a n d t h e
d e d u c t e d fr o m

a m o u n t o f in t a n g ib le

a ssets

p r im a r y c a p i t a l fo r t h e p u r p o se o f d e t e r m in in g t h e p r im a r y c a p i t a l

r a tio e
A m in im u m l e v e l o f p r im a r y c a p i t a l t o a d ju s te d t o t a l a s s e t s is e s t a b lis h e d
a t 5 .5 p e r c e n t fo r a ll s t a t e m e m b e r b a n k s .

G e n e r a lly , t h e s e b a n k s a r e e x p e c t e d t o

o p e r a t e a b o v e t h e m in im u m p r im a r y c a p i t a l r a t i o 0

A ls o , t h o s e s t a t e m e m b e r b a n k s

t h a t h a v e a h ig h e r th a n a v e r a g e or e x c e s s i v e a m o u n t o f t h e ir a s s e t s e x p o s e d t o r isk or
a h ig h e r th a n a v e r a g e or e x c e s s i v e a m o u n t o f o f f - b a l a n c e s h e e t r is k , w ill b e e x p e c t e d
t o h o ld a d d it io n a l p r im a r y c a p i t a l t o c o m p e n s a t e fo r t h is r is k .

M o r e o v e r , t h e B o a rd

w ill p a y p a r t ic u la r a t t e n t i o n t o liq u id it y a n d w o u ld d is c o u r a g e t h e p r a c t i c e o f m e e t in g
t h e g u id e lin e s b y d e c r e a s in g t h e l e v e l o f liq u id a s s e t s r e l a t i v e t o t o t a l a s s e t s .
w it h

p r im a r y

c o n s id e r e d

to

c ir c u m s ta n c e s .

c a p ita l

r a t io s

b e lo w

b e u n d e r c a p it a liz e d

th e

5 .5

percen t

u n le s s t h e y

can

m in im u m

d e m o n str a te

B anks

w ill g e n e r a lly
c le a r

be

e x t e n u a t in g

S u ch b a n k s , a s d e s c r ib e d in g r e a t e r d e t a il b e lo w , w ill b e r e q u ir e d t o

s u b m it a n a c c e p t a b l e

c a p i t a l p la n

an d w ill b e s u b j e c t t o

a p p r o p r ia te

s u p e r v is o r y

e n fo r c e m e n t a c tio n .
T h e B o a rd h a s a ls o e s t a b lis h e d a m in im u m t o t a l c a p i t a l r a t io o f 6 .0 p e r c e n t
f o r a ll s t a t e m e m b e r b a n k s a n d h a s r a is e d t h e Z o n e 1 t o t a l c a p i t a l r a t io g u id e lin e fo r
r e g io n a l a n d m u lt in a t io n a l b a n k s t o 7 .0 p e r c e n t .

T h e s e r a t io s e s t a b lis h t h r e e b r o a d

z o n e s f o r t o t a l c a p i t a l t h a t a p p ly t o s t a t e m e m b e r b a n k s o f a ll s iz e s s
Z one 1

A b o v e 7.0%

Z one 2

6.0% t o 7.0%

Z o n e 3 (M in im u m T o t a l C a p it a l R a t io )

B e lo w 6.0%

G e n e r a lly ,

th e

n a tu r e

an d

in t e n s it y

of

s u p e r v is o r y

a c t io n

w ill

be

d e t e r m in e d b y a b a n k ’s c o m p lia n c e w ith t h e r e q u ir e d m in im u m p r im a r y c a p i t a l r a t io a s




-

23

-

w e l l a s b y t h e z o n e in w h ic h a b a n k 's t o t a l c a p i t a l r a tio f a ll s .

W h ile an in s t it u t io n 's

p o s it io n in t h e q u a n t it a t iv e c a p i t a l z o n e s w ill n o r m a lly t r ig g e r t h e b e lo w s p e c if ie d
s u p e r v is o r y r e s p o n s e s , q u a l i t a t iv e a n a ly s is w ill c o n t in u e t o b e u s e d in d e t e r m in in g
m in im u m l e v e l s o f c a p i t a l f o r s t a t e m e m b e r b a n k s .

F o r b a n k s o p e r a tin g in Z o n e 1, t h e B o a rd w ills
— p r e s u m e t h a t c a p i t a l is a d e q u a te i f t h e p r im a r y c a p i t a l r a t io is
a c c e p t a b l e t o t h e B oard and is a b o v e t h e 5 .5 p e r c e n t m in im u m

F o r b a n k s o p e r a t in g in Z o n e 2 , t h e B oard w ills
~

p a y p a r t ic u la r a t t e n t io n t o o t h e r f in a n c ia l f a c t o r s s u c h a s a s s e t
q u a lit y , liq u id it y , an d i n t e r e s t r a t e risk a s t h e y r e la t e t o t h e
a d e q u a c y o f c a p i t a l a n d , i f t h e y a r e n o t s a t i s f a c t o r y a n d t h e B o a rd
c o n c lu d e s c a p i t a l is n o t a d e q u a t e , in t e n s if y it s a n a ly s is a n d a c t i o n .

B a n k s o p e r a t in g in Z o n e 3:
—

m a y b e c o n s id e r e d
c ir c u m s t a n c e s

u n d e r c a p it a liz e d ,

ab sen t

c le a r

e x t e n u a t in g

~

w o u ld b e r e q u ir e d t o s u b m it a c o m p r e h e n s iv e c a p i t a l p la n t h a t is
a c c e p t a b l e t o t h e B o a rd an d t h a t in c lu d e s a p r o g r a m fo r a c h ie v in g
c o m p lia n c e w it h t h e r e q u ir e d m in im u m r a t io s w ith in a r e a s o n a b le
t i m e p e r io d
.

~

w o u ld b e s u b j e c t t o a p p r o p r ia te s u p e r v is o r y a n d /o r a d m in is t r a t iv e
e n f o r c e m e n t a c t i o n , or t h e is s u a n c e o f a c a p i t a l d i r e c t i v e , b y t h e
B o a rd

— w o u ld g e n e r a lly b e s u b j e c t t o d e n ia l o f a p p lic a t io n s b y t h e B oard
u n le s s a r e a s o n a b le c a p it a l p la n t h a t is a c c e p t a b l e t o t h e B oard h a s
b e e n a d o p te d .

In a d d it io n t o c o m p lia n c e w it h t h e m in im u m p r im a r y an d m in im u m t o t a l
c a p i t a l r a t i o s , t h e a s s e s s m e n t o f c a p it a l a d e q u a c y w ill c o n t in u e t o b e m a d e on a
c a se-b y -c a se

b a s is

c o n s id e r in g

v a r io u s

in s t it u t io n 's o v e r a ll f in a n c ia l c o n d it io n .

q u a lit a t iv e

fa cto r s

th a t

a ffe c t

an

T h u s, t h e B oard r e t a in s t h e f l e x i b i l i t y

t o m a k e a p p r o p r ia te a d j u s t m e n t s in t h e a p p lic a t io n o f t h e g u id e lin e s t o in d iv id u a l
in s t i t u t i o n s .




- 24 The

B o a rd w ill is s u e r e g u la t io n s fo r e n f o r c in g t h e

m in im u m

c a p it a l

r e q u ir e m e n t s s e t f o r t h a b o v e a n d fo r im p le m e n t in g t h e a u t h o r it y t o is s u e c a p i t a l
d i r e c t i v e s a s p r o v id e d in t h e I n te r n a tio n a l L e n d in g S u p e r v is io n A c t o f




19S3o

-

25

-

PART 225 - BANK HOLDING COMPANIES AND CHANGE
IN BANK CONTROL
3o

Authority for 12 CoFoRo Part 225 is proposed to be revised as follows?
Authority? 12 U.S.C. 1844(b), 3106, 3108, 1817(j)(13), 1818(b), 3907, 3909; and
Pub. Lo 98=181, Title IX.

4.

12 C.F.R. Part 225 is proposed to be amended by revising Appendix A to read
as follows?

APPENDIX A—Capital Adequacy Guidelines for Bank Holding Companies
I n tr o d u c tio n
In a d o p t in g t h e c a p i t a l a d e q u a c y g u id e lin e s p r o g r a m

in D e c e m b e r o f

1 9 8 1 , t h e B o a r d e x p r e s s e d c o n c e r n a b o u t t h e s e c u la r d e c lin e in t h e c a p i t a l r a t io s o f
t h e n a tio n 's l a r g e s t b a n k in g o r g a n iz a t io n s and s t a t e d t h a t i t s s u p e r v is o r y p o l ic i e s
w o u ld b e m o d if ie d t o a c h i e v e a s tr e n g t h e n in g o v e r t i m e o f t h e c a p i t a l p o s itio n s o f
th e

m u lt in a t io n a l

group.

S in c e

th e

im p le m e n t a t io n

of

th e

c a p ita l

g u id e lin e s

p r o g r a m a n d t h e e s t a b lis h m e n t o f t h e 5 .0 p e r c e n t p r im a r y c a p i t a l r a t io g u id e lin e
f o r t h e m u lt in a t io n a l b a n k in g o r g a n iz a t io n s , c o n s id e r a b le p r o g r e s s h a s b e e n m a d e in
im p r o v in g t h e c a p i t a l r a t io s o f t h e n a tio n 's l a r g e s t b a n k h o ld in g c o m p a n ie s .

In

p a r t ic u la r , a s o f M arch 3 1 , 1 9 8 4 , a ll o f t h e m u lt in a tio n a l h o ld in g c o m p a n ie s h ad
p r im a r y c a p i t a l r a t i o s t h a t e x c e e d e d 5 .0 p e r c e n t , an d m o s t o f t h e s e o r g a n iz a t io n s
h a v e a c h i e v e d p r im a r y c a p i t a l r a t io s t h a t a r e s ig n if ic a n t ly a b o v e t h is l e v e l .
T h e B o a rd h a s s t a t e d on a n u m b er o f o c c a s io n s t h a t c a p i t a l a d e q u a c y is
a n e x t r e m e l y im p o r t a n t f in a n c ia l f a c t o r and i t b e l ie v e s t h a t , a s p a r t o f i t s o n g o in g
e f f o r t t o im p r o v e t h e c a p i t a l p o s itio n s o f b a n k in g o r g a n iz a t io n s , a d d it io n a l s t e p s
a r e a p p r o p r ia te a t t h is t im e t o e n c o u r a g e fu r th e r s tr e n g t h e n in g o f c a p it a l r a t io s .
M oreover,

C on gress

ad d ressed

th e

is s u e

of

c a p it a l

adequacy

I n t e r n a t io n a l L e n d in g S u p e r v is io n A c t o f 1 9 8 3 ("ILSA").

in

e n a c t in g

th e

T h is l e g i s la t io n r e q u ir e s

t h e F e d e r a l b a n k in g a g e n c ie s t o e s t a b lis h a p p r o p r ia te m in im u m l e v e l s o f c a p i t a l fo r
b a n k in g o r g a n iz a t io n s , t o c a u s e b a n k in g o r g a n iz a t io n s t o a c h i e v e and m a in ta in t h e




=

m in im u m

26

=

c a p i t a l r e q u ir e m e n ts an d g r a n t s t h e

a g e n c ie s t h e

c a p i t a l d i r e c t i v e s t o a s s i s t in e n f o r c in g t h e m in im u m s .

a u t h o r it y

to

is s u e

In a d d it io n , IL SA p r o v id e s

t h a t " T h e C h a ir m a n o f t h e B o a rd o f G o v e r n o r s an d t h e S e c r e t a r y o f t h e T r e a s u r y
s h a ll e n c o u r a g e g o v e r n m e n t s , c e n t r a l b a n k s , an d r e g u la t o r y a u t h o r it ie s o f o t h e r
m a jo r

b a n k in g

c o u n t r ie s

to

w ork

to w a r d

m a in ta in in g

and,

w h ere

a p p r o p r ia te ,

s t r e n g t h e n in g t h e c a p i t a l b a s e s o f b a n k in g i n s t it u t io n s in v o lv e d in in t e r n a t io n a l
le n d in g ."

C a p it a l G u id e lin e s P r o g r a m
In lig h t o f t h e s e d e v e lo p m e n t s an d w ith in t h e c o n t e x t o f i t s c o n tin u in g
e ffo r ts

to

bank

h o ld in g

c o m p a n ie s , t h e B o a r d h a s m a d e t h e f o llo w in g c h a n g e s t o t h e m in im u m

c a p ita l

r a tio s

h o ld in g

an d

fo ste r

Im p rovem en t

g u id e lin e s

th a t

a p p ly

in

th e

to

c a p ita l

r a t io s

m u lt in a tio n a l

an d

of

la r g e

r e g io n a l

bank

c o m p a n ie s ;
T h e m in im u m r a t io o f p r im a r y c a p i t a l t o t o t a l a s s e t s h a s b e e n
in c r e a s e d fr o m 5 .0 t o 5 .5 p e r c e n t . \J
T h e m in im u m r a t io o f t o t a l c a p i t a l t o t o t a l a s s e t s ( i . e . , t h e Z o n e
3 m in im u m t o t a l c a p i t a l r a t io ) h a s b e e n in c r e a s e d fr o m 5 .5 t o 6 .0
p e r c e n t.
T h e Z o n e 1 t o t a l c a p i t a l r a t io g u id e lin e f o r m u lt in a tio n a l and
r e g io n a l b a n k h o ld in g c o m p a n ie s is b e in g r a is e d fr o m 6 .5 t o 7 .0
p e r c e n t , a n d t h e Z o n e 2 t o t a l c a p i t a l g u id e lin e r a n g e w ill n o w b e
b e t w e e n 6 .0 an d 7 .0 p e r c e n t .

1/




P r im a r y c a p i t a l fo r b an k h o ld in g c o m p a n ie s c o n s is t s o f c o m m o n s t o c k ,
p e r p e t u a l p r e fe r r e d s t o c k , c a p i t a l su r p lu s, u n d iv id e d p r o f it s , r e s e r v e s fo r
c o n t i n g e n c i e s an d o t h e r c a p i t a l r e s e r v e s , m a n d a to r y c o n v e r t ib le in s tr u m e n ts
in c lu d in g e q u it y c o m m it m e n t n o t e s , t h e a llo w a n c e fo r p o s s ib le lo a n an d l e a s e
l o s s e s , an d a n y m in o r ity i n t e r e s t in t h e e q u it y a c c o u n t s o f c o n s o lid a t e d
s u b s id ia r ie s . T o t a l c a p i t a l fo r h o ld in g c o m p a n ie s c o n s is t s o f t h e p r im a r y
c o m p o n e n t s p lu s l i m i t e d - l i f e p r e fe r r e d s t o c k and u n s e c u r e d lo n g - t e r m d e b t o f
t h e h o ld in g c o m p a n y or i t s n o n b a n k s u b s id ia r ie s . T o q u a lif y , s u c h d e b t m u s t
h a v e an o r ig in a l w e ig h t e d a v e r a g e m a tu r ity o f s e v e n y e a r s or m o r e .
For
c a p i t a l a d e q u a c y p u r p o s e s , u n s e c u r e d lo n g - t e r m d e b t o f t h e h o ld in g c o m p a n y
o r i t s n o n b a n k s u b s id ia r ie s is a ls o s u b j e c t t o t h e a m o r t iz a t io n a d j u s tm e n t s
t h a t a r e m a d e a s t h e d e b t a p p r o a c h e s m a t u r it y . T o ta l a s s e t s fo r t h e p u r p o s e s
o f c a lc u l a t in g t h e p r im a r y an d t o t a l c a p i t a l g u id e lin e r a t io s is t o t a l ’a s s e t s
p lu s t h e a llo w a n c e fo r p o s s ib le lo a n an d l e a s e l o s s e s . '

~

W ith

r e sp e c t to

27

-

c o m m u n it y b an k h o ld in g c o m p a n ie s , t h e

e s t a b l i s h e d a n e w m in im u m r a t io o f p r im a r y c a p i t a l t o t o t a l a s s e t s o f

B oard h a s

5.5 p e r c e n t..

T h is m in im u m is i d e n t i c a l t o t h e n e w p r im a r y c a p i t a l r e q u ir e m e n t t h a t h a s b e e n
e s t a b l i s h e d fo r m u lt in a t io n a l an d r e g io n a l b a n k h o ld in g c o m p a n ie s .

T h e m in im u m

t o t a l c a p i t a l r a t io and g u id e lin e s t h a t a p p ly t o c o m m u n it y b a n k h o ld in g c o m p a n ie s
have not been changed.
In t a k in g t h e s e s t e p s , t h e B o a rd h a s e n c o u r a g e d t h e s tr e n g t h e n in g o f t h e
c a p i t a l r a t io s o f la r g e b a n k h o ld in g c o m p a n ie s and h a s e lim in a t e d
d is p a r it ie s

in

th e

s u p e r v is o r y

r e q u ir e m e n ts fo r

t h e e x is t in g

h o ld in g c o m p a n ie s o f d i f f e r e n t

s i z e s 2J
In lig h t o f t h e p r o g r e s s t h a t h a s b e e n m a d e in im p r o v in g c a p i t a l r a t io s
s in c e t h e a d o p tio n o f t h e g u id e lin e s p r o g r a m , m o s t o f t h e l a r g e s t b a n k h o ld in g
c o m p a n ie s h a v e p r im a r y c a p i t a l r a t io s t h a t e x c e e d t h e n e w
g u id e lin e .

5.5 p e r c e n t m in im u m

T h o se h o ld in g c o m p a n ie s b e lo w t h e m in im u m g u id e lin e w ill b e g iv e n a

r e a s o n a b le a m o u n t o f t i m e t o im p le m e n t p la n s fo r a c h ie v in g c o m p lia n c e .
T h e c a p i t a l g u id e lin e s p r o g r a m e s t a b lis h e s m in im u m l e v e l s o f p r im a r y
c a p i t a l a n d , g e n e r a lly , b a n k in g o r g a n iz a t io n s a r e e x p e c t e d t o o p e r a t e a b o v e t h e
m in im u m s .

T h e g u id e lin e s p r o g r a m a s s u m e s m o d e r a t e a m o u n ts o f o n - and o f f -

b a la n c e s h e e t r is k an d in t a n g ib le a s s e t s .

B a n k in g o r g a n iz a t io n s t h a t h a v e a h ig h e r

th a n n o r m a l o r e x c e s s i v e p e r c e n t a g e o f t h e ir a s s e t s e x p o s e d t o r is k , a h ig h e r th a n
n o r m a l or e x c e s s i v e a m o u n t o f o f f - b a l a n c e s h e e t r is k , or a h ig h e r th a n n o r m a l or
e x c e s s i v e a m o u n t o f in t a n g ib le a s s e t s , w ill b e e x p e c t e d t o h o ld a d d it io n a l p r im a r y

2/

In s e p a r a t e b u t r e la t e d a c t i o n s w ith r e s p e c t t o c o m m e r c ia l b a n k s, t h e F e d e r a l
R e s e r v e , t h e F e d e r a l D e p o s it In su r a n c e C o r p o r a tio n an d t h e O f f i c e o f t h e
C o m p t r o lle r o f t h e C u r r e n c y h a v e e s t a b lis h e d m in im u m p r im a r y and t o t a l
c a p i t a l r a t io s o f 5.5 p e r c e n t a n d 6 .0 p e r c e n t , r e s p e c t iv e l y , fo r b a n k s o f a ll
s i z e s . T h e s e a c t i o n s in c r e a s e t h e m in im u m s u p e r v is o r y c a p i t a l r e q u ir e m e n ts
fo r la r g e b a n k s a n d g e n e r a lly p e r m it c o m m u n it y b a n k s t o o p e r a t e a t t h e s a m e
c a p i t a l l e v e l s a s r e g io n a l a n d m u lt in a tio n a l b a n k s.




28-

-

c a p i t a l t o c o m p e n s a t e f o r t h e s e c h a r a c t e r i s t i c s . In a d d itio n t o t h e q u a lity o f lo a n s ,
i n v e s t m e n t s a n d o t h e r a s s e t s , t h e n a tu r e an d a m o u n t o f o f f - b a l a n c e s h e e t r is k and
in t a n g ib le

a ssets

w ill

be

ta k en

in to

c o n s id e r a t io n

in

d e t e r m in in g

c o m p a n y ’s c o m p lia n c e w ith t h e c a p i t a l g u id e lin e s p r o g r a m .
w ill p a y p a r t ic u la r a t t e n t i o n t o

a

h o ld in g

M o r e o v e r , t h e B oard

liq u id ity and w o u ld d is c o u r a g e t h e p r a c t i c e

of

m e e t in g t h e g u id e lin e s b y d e c r e a s in g t h e r e la t iv e l e v e l o f liq u id a s s e t s t o t o t a l
a ssets.
T h e i n c r e a s e in t h e c a p i t a l g u id e lin e s fo r m u lt in a tio n a l an d r e g io n a l
b a n k h o ld in g c o m p a n ie s sh o u ld b e v ie w e d in t h e c o n t e x t o f t h e B o a r d ’s c o n tin u in g
e ffo r ts

to

str e n g th e n

c a p ita l

r a t io s ,

th e

o n g o in g

d is c u s s io n s

w ith

f o r e ig n

s u p e r v is o r y o f f i c i a l s a s r e q u ir e d b y IL SA a n d t h e o n - an d o f f - b a l a n c e s h e e t r isk
f a c t o r s d is c u s s e d a b o v e .

In lig h t o f t h e s e o n g o in g e f f o r t s an d c o n s id e r a t io n s , t h e

B o a rd w i l l c o n t in u e t o r e v ie w t h e c a p i t a l p o s it io n s a n d r isk c h a r a c t e r is t ic s o f t h e
la r g e b a n k h o ld in g c o m p a n ie s a n d m a y c o n s id e r a d d it io n a l s t e p s , in c lu d in g f u r th e r
i n c r e a s e s in t h e c a p i t a l g u id e lin e s , t o s u s ta in t h e p r o g r e s s t h a t h a s b e e n m a d e in
s t r e n g t h e n in g t h e c a p i t a l r a t io s o f t h e s e i n s t it u t io n s .

A s p a r t o f t h is p r o c e s s , t h e

B o a rd w i l l c o n t in u e t o r e v ie w t h e n e e d fo r in c r e a s e s in c a p i t a l g u id e lin e r a t io s t o
c o m p e n s a t e fo r e x c e s s i v e a m o u n t s o f o f f - b a l a n c e s h e e t r isk or in t a n g ib le a s s e t s .
T h e c a p i t a l g u id e lin e s g e n e r a lly a p p ly t o b a n k h o ld in g c o m p a n ie s o n a
c o n s o lid a t e d b a s is .
m illio n

T h e g u id e lin e s w i l l n o t a p p ly t o h o ld in g c o m p a n ie s u n d er $ 1 5 0

in c o n s o lid a t e d

s u b s id ia r y

is

engaged

a ssets
d i r e c t ly

u n le s s
or

(1) t h e h o ld in g

in d ir e c t ly

in

any

com pany
nonbank

or

any

a c tiv ity

nonbank
in v o lv in g

s i g n i f i c a n t l e v e r a g e or (2) t h e h o ld in g c o m p a n y o r a n y n o n b a n k su b s id ia r y h a s
o u t s t a n d in g s ig n if ic a n t d e b t h e ld b y t h e g e n e r a l p u b lic .
Som e

h o ld in g

c o m p a n ie s

are

engaged

in

s ig n if ic a n t

n o n b a n k in g

a c t i v i t i e s t h a t t y p i c a l l y r e q u ir e c a p i t a l r a t io s h ig h e r th a n t h o s e o f c o m m e r c i a l
b a n k in g o r g a n iz a t io n s .

T h e B o a rd b e l i e v e s t h a t , a s a m a t t e r o f b o th s a f e t y a n d

s o u n d n e s s an d c o m p e t i t i v e




e q u it y , t h e

degree o f

le v e r a g e

com m on

in b a n k in g

29-

-

sh o u ld

not

a u to m a tic a lly

e x te n d

to

n o n b a n k in g

a c tiv itie s .

C o n s e q u e n t ly ,

in

e v a lu a t i n g t h e c o n s o lid a t e d c a p i t a l p o s it io n s o f b a n k h o ld in g c o m p a n ie s , t h e B oard
is p la c in g g r e a t e r w e ig h t o n t h e
r e q u ir e m e n t s .

b u ild in g b lo c k

approach

fo r

a s s e s s in g

c a p ita l

T h is a p p r o a c h g e n e r a lly p r o v id e s t h a t n o n b a n k s u b s id ia r ie s o f a

b a n k in g o r g a n iz a t io n sh o u ld m a in ta in l e v e l s o f c a p i t a l c o n s is t e n t w it h t h e l e v e l s
t h a t h a v e b e e n e s t a b lis h e d b y in d u s tr y n o r m s, F e d e r a l or S t a t e r e g u la t o r y a g e n c ie s
f o r s im ila r f ir m s t h a t a r e n o t a f f i l i a t e d w it h b a n k in g o r g a n iz a t io n s o r t h a t m a y b e
e s t a b lis h e d b y t h e B o a rd t a k in g in to a c c o u n t r isk f a c t o r s o f a p a r t ic u la r in d u s tr y .
T h e a s s e s s m e n t o f a h o ld in g c o m p a n y 's c o n s o lid a t e d c a p i t a l a d e q u a c y m u s t t a k e
in t o

account

th e

am ount

an d

n a tu r e

o f a ll n o n b a n k a c t i v i t i e s , and a h o ld in g

c o m p a n y 's c o n s o lid a t e d c a p i t a l p o s it io n sh o u ld g e n e r a lly r e f l e c t t h e su m

o f th e

c a p i t a l r e q u ir e m e n t s o f t h e o r g a n iz a t io n 's b a n k a n d n o n b a n k s u b s id ia r ie s a s w e l l a s
t h o s e o f t h e p a r e n t h o ld in g c o m p a n y .

T h e B o a rd in te n d s t o b e g u id e d b y t h e s e

p r in c ip le s in d e t e r m in in g c o m p lia n c e w ith t h e c a p i t a l g u id e lin e s p r o g r a m .
B an k h o ld in g c o m p a n ie s a f f e c t e d b y t h e g u id e lin e s a r e c a t e g o r iz e d a s
e it h e r

m u lt in a t io n a l

c o m p a n ie s

(a s

d e s ig n a t e d

by

t h e ir

a g e n c y ) ; r e g io n a l c o m p a n ie s (a ll o t h e r in s t it u t io n s w ith

r e s p e c tiv e
a ssets

s u p e r v is o r y

in e x c e s s o f

b illio n ); o r c o m m u n it y h o ld in g c o m p a n ie s ( le s s th a n $1 b illio n in t o t a l a s s e t s ) .

$1
The

m in im u m r a t i o s an d g u id e lin e s s e t f o r t h b e lo w a p p ly t o b a n k h o ld in g c o m p a n ie s o f
a ll s iz e c a te g o r ie s .

M in im u m G u id e lin e R a t io s
T h e B o a rd h a s e s t a b lis h e d a m in im u m r a tio o f p r im a r y c a p i t a l t o t o t a l
a ssets o f

5.5 p e r c e n t fo r a l l b a n k h o ld in g c o m p a n ie s .

p r im a r y c a p i t a l r a t io s b e lo w t h e
to

be

u n d e r c a p it a liz e d

c ir c u m s ta n c e s .




H o ld in g c o m p a n ie s w ith

5.5 p e r c e n t m in im u m w ill g e n e r a lly b e c o n s id e r e d

u n le s s

th e y

can

d e m o n str a te

c le a r

e x t e n u a t in g

S u ch c o m p a n ie s , a s d e s c r ib e d in g r e a t e r d e t a il b e lo w , w ill b e

-

30

-

r e q u ir e d t o s u b m it a n a c c e p t a b l e c a p i t a l p la n a n d w ill b e s u b j e c t t o a p p r o p r ia te
s u p e r v is o r y e n f o r c e m e n t a c tio n .,
A m in im u m r a t io o f t o t a l c a p i t a l t o t o t a l a s s e t s o f 6 .0 p e r c e n t h a s b e e n
e s t a b l i s h e d fo r a ll b a n k h o ld in g c o m p a n ie s .

In a d d itio n * t h e Z o n e 1 t o t a l c a p i t a l

r a t io g u id e lin e fo r m u lt in a t io n a l a n d r e g io n a l h o ld in g c o m p a n ie s is b e in g r a is e d t o
7 .0 p e r c e n t* w h ic h is t h e Z o n e 1 r a tio fo r c o m m u n it y o r g a n iz a t io n s .

The to ta l

c a p i t a l r a t io g u id e lin e s e s t a b lis h t h r e e b r o a d z o n e s f o r t o t a l c a p i t a l t h a t a p p ly t o
h o ld in g c o m p a n ie s o f a ll s iz e s ?

Z one I

A b o v e 7.0%

Z one 2

6.0% t o 7.0%

Z o n e 3 (M in im u m T o t a l C a p it a l R a t io )

B e lo w 6.0%

G e n e r a lly ,

th e

n a tu r e

and

in t e n s i t y

of

s u p e r v is o r y

a c t io n

w ill

be

d e t e r m in e d b y a h o ld in g c o m p a n y ’s c o m p lia n c e w ith t h e r e q u ir e d m in im u m p r im a r y
c a p i t a l r a t io a s w e ll a s b y t h e z o n e in w h ic h a h o ld in g c o m p a n y ’s t o t a l c a p i t a l r a t io
f a lls .

W h ile a c o m p a n y ’s p o s itio n in t h e q u a n t it a t iv e c a p i t a l z o n e s w ill n o r m a lly

t r i g g e r t h e b e lo w s p e c if ie d s u p e r v is o r y r e s p o n s e s , q u a lit a t iv e a n a ly s is w ill c o n t in u e
t o b e u s e d in d e t e r m in in g m in im u m l e v e l s o f c a p i t a l f o r b a n k in g i n s t it u t io n s .




F o r h o ld in g c o m p a n ie s o p e r a tin g in Z o n e 1, t h e B o a rd w ills
—

p r e s u m e t h a t c a p i t a l is a d e q u a t e i f t h e p r im a r y c a p i t a l r a t io is
a c c e p t a b l e and is a b o v e t h e 5.5 p e r c e n t m in im u m

F o r c o m p a n ie s o p e r a tin g in Z o n e 2 , t h e B oard w ills
—

p a y p a r t ic u la r a t t e n t io n t o o t h e r f in a n c ia l f a c t o r s s u c h a s a s s e t
q u a lit y , liq u id it y , an d i n t e r e s t r a t e r isk a s t h e y r e la t e t o t h e
a d e q u a c y o f c a p i t a l a n d , i f t h e y a r e n o t s a t i s f a c t o r y and t h e F e d e r a l
R e s e r v e c o n c lu d e s c a p i t a l is n o t a d e q u a t e , i n t e n s if y i t s a n a ly s is an d
a c tio n

-

31

-

B a n k h o ld in g c o m p a n ie s o p e r a tin g in Z o n e 3:
—

m a y b e c o n s id e r e d
c ir c u m s t a n c e s

u n d e r c a p it a liz e d ,

a b sen t

c le a r

e x t e n u a t in g

—

w o u ld b e r e q u ir e d t o s u b m it a c o m p r e h e n s iv e c a p i t a l p la n t h a t is
a c c e p t a b l e t o t h e B oard an d t h a t in c lu d e s a p r o g r a m fo r a c h ie v in g
c o m p lia n c e w it h t h e m in im u m r e q u ir e d r a t io s w ith in a r e a s o n a b le
t i m e p e r io d

—

w o u ld b e s u b j e c t t o a p p r o p r ia te s u p e r v is o r y a n d /o r a d m in is t r a t iv e
e n f o r c e m e n t a c t i o n , o r t h e is s u a n c e o f a c a p i t a l d i r e c t iv e

—

w o u ld g e n e r a lly b e s u b j e c t t o d e n ia l o f a p p lic a t io n s u n le s s a
r e a s o n a b le c a p i t a l p la n t h a t is a c c e p t a b l e t o t h e B oard h a s b e e n
a d o p te d .

W h ile t h e c r i t i c a l f i r s t t e s t o f a h o ld in g c o m p a n y 's c a p i t a l a d e q u a c y is
its

c o m p lia n c e

c o n t in u e

to

w it h

ta k e

th e

in to

m in im u m

account

th e

s u p e r v is o r y
v a r io u s

g u id e lin e

q u a lit a t iv e

i n s t it u t io n 's o v e r a ll l e v e l o f r is k an d f in a n c ia l c o n d i t i o n

r a t io s , t h e
fa cto r s

th a t

B o a rd
a ffe c t

w ill
an

T h e B oard r e t a in s t h e

f l e x i b i l i t y t o m a k e a p p r o p r ia te a d j u s tm e n t s in t h e a p p lic a t io n o f t h e g u id e lin e s t o
in d iv id u a l i n s t i t u t i o n s .
The

B o a r d w ill is s u e r e g u la t io n s fo r e n f o r c in g t h e

r e q u ir e m e n t s s e t f o r t h a b o v e a n d fo r e x e r c is in g t h e a u t h o r it y

m in im u m
to

is s u e c a p it a l

d i r e c t i v e s a s p r o v id e d in t h e I n t e r n a tio n a l L e n d in g S u p e r v isio n A c t o f 1 9 8 3 ,




c a p ita l

32

Part 263— Rules of Practice for Hearings

5o

12

CoFoRo

Part

the authority for

263

is proposed

the Part,

to be amended

by

revising

and by adding a new Subpart D to

read as follows?
Part 263— Rules of Practice for Hearings

*

SUBPART D - PROCEDURES




FOR

DIRECTIVES

*

*

*

*

ISSUANCE

TO REQUIRE

AND

E N F O RCEMENT

COMPLIANCE

WITH

THE

OF
B O A R D 5S

CAPITAL GUIDELINES

SECTION 263.35 - Authority, Purpose and Scope
(a)

Authority

(b)

Purpose and scope

SECTION 263.36 - Definitions
SECTION 2 6 3 037 - Establishment of Minimum Capital Levels
SECTION 2 6 3 038 - Procedures

for

Requiring

Maintenance

Adequate Capital
(a)

Submission of capital improvement plan

(b)

Issuance of directive
(1)

Notice of intent to issue directive

(2)

Contents of notice

(3)

Response to notice

of

33

(4)

Failure to file response

(5)

Board consideration of response

(6)

Contents of directive

(7)

Request for reconsideration of directive

SECTION 263.39 - Enforcement of Directive
(a)

Judicial and administrative remedies

(b)

Other enforcement actions

(c)

Consideration in application proceedings

SECTION 263.39 - Establishment
for

of

Individual

Increased
Bank

or

Capital

Bank

Level

Holding

Company
(a)

Establishment

of

capital

levels

for

individual

institution
(b)

Authorityi

Procedure to establish higher capital requirement
(1)

Notice

(2)

Response

(3)

Board decision

(4)

Enforcement of higher capital level

12 U.S.C.

3909, 15 U.SoC.




248,

324,

329,

19.

*

*

*

*

☆

1818,

1828,

1844,

3907,

-

SUBPART

D

-

DIRECTIVES

PROCEDURES

TO

REQUIRE

FOR

34

ISSUANCE

COMPLIANCE

AND

WITH

ENFORCEMENT

THE

B O A R D 8S

OF

CAPITAL

GUIDELINES

SECTION 2 6 3 o 3 5 - Authority, Purpose, and Scope

(a)
the

International

12 U„SoC.
Act

Authority,

3907,

This subpart is issued under authority of

Lending

3909?

Supervision

section 5(b)

("BHC A c t 13), 12 UcSoCo

Supervisory Act of 1966

Act

of

1983

(raI L S A B ),

of the Bank Holding Company

1844(b)?

the Financial

("FIS Act"),

12 UoS.C„

Institutions

1818(b )-(n )? and

sections 9 and 1 1 ( i ) of the Federal Reserve Act,

12 U.S.C.

248,

324, 329.
(b)

Purpose

and

scope.

This

subpart

establishes

procedures under which thre Board may issue a directive or take
other action to require a state member

bank

or a bank holding

company to achieve and m a intain adequate c a p i t a l .

SECTION 263 o36 - Definitions

(a)
controls




'’Bank
a

bank

holding
as

company"

defined

in

means

section

any
2

of

company
the

BHC

that
Act,

35

12 U 0S o C e 1841,

and

in

the

Board's

Regul a t i o n

Y

(12 C.F*R.

225.2(b))*
(b)

"Capital

Adequacy

Guidelines'1

means

those

guidelines contained in Appendix A to the Board's R e g u l a t i o n H
(12 CoFoRc

Part 208)

in the case of state member banks

Appendix A to the Board's Regulation Y

(12 C.F.R.

Part

and

in

225)

in

the case of bank holding c o m p a n i e s .
(c)

"Directive"

Board pursuant to ILSA

means

a

final

(12 U.S*C.

member bank or bank holding

order

3907(b)(2))

company

issued

by

the

requiring a state

to increase capital

to or

maintain capital at the minimum level set forth in the Board's
Capital Adequacy Guidelines

or

as

otherwise

established

under

procedures described in section 2 6 3 o40 of this subparte
(d)

"State

member

bank"

means

any

state

chartered

bank that is a member of the Federal Reserve System*

SECTION 263*37 - Establishment of Minimum Capital Levels

The Board has established
state member

banks and bank

Adequacy Guidelines*

holding

minimum

capital

companies

The Board may set higher

as necessary and appropriate for a particular
or. bank

holding

managerial

company

resources,

in

based

upon

prospects,

or

its

its

for

Capital

capital

levels

state member bank

financial

similar

levels

condition,

factors,

pursuant

to the procedures set forth in section 263*40 of this subpart.




36

SECTION

2 6 3 o38

-

Procedures

for

Requiring

M aintenance

of

Adequate Capital

(a)

Submission

state member

bank

of

capital

improvement

or bank holding company

plan.

that may not be

compliance with the Board's Capital Adequacy Guidelines
date

that

this

regulation

becomes

Any

effective

shall/

in

on the

within

90

dayS/ submit to its appropriate Federal Reserve Bank for review
a plan describing the means and the time schedule by which

the

bank or bank holding company shall achieve the required m i n i m u m
level of capitalo
(b )

Issuance of d i r e c t i v e „

state member
less

than

Board's

(1)

Notice

of intent

bank

or bank

holding

the

minimum

Capital

level

Adequacy

of

to issue d i r e c t i v e ,,
company

capital

Guidelines„

is

operating

established
or

as

in

If

a

with
the

otherwise

established under the procedures described in section 263 „40 of
this

subpart/

member

bank

the Board may

or

bank

holding

issue

and

company

serve

written

upon

such

notice

of

state
the

Board's intent to issue a directive to require the bank or bank
holding

company

to

achieve

and

maintain

adequate

capital

within a specified time periodo
(2)

Contents of notice.,

issue a directive shall include:




The notice of intent to

37

(i)

the

required m i n imum

level

of

capital

to be achieved or maintained by the institution;
(ii)

its current level of capital;

(iii)

the

proposed

increase

in

capital

needed to meet the minimu m requirements;
(iv)

the

proposed

date

or

schedule

for

meeting these minimum requirements;
(v)
details

of

when

a proposed

requirements;

plan

bank or bank holding

notice

least

unless

necessary

for

appropriate,

meeting

the

specific

m i n imum

capital

and
(vi)

shall be at

deemed

company

14 days

the

because

the date for a written response by the

Board
of

the

to the proposed directive,

from

the date

determines
financial

a

of

issuance

shorter

condition

of

of

period
the

which
the
is

bank

or

bank holding company.
(3)
holding
within

company
the

Response

may

file

time period

a

set

written
by

the

to

response
Board.

notice.
to

The

the

The

bank

notice

response

may

include:
(i)

an explanation why

a directive

should

(ii)

any proposed mod i f i c a t i o n of the terms

not issue;

of the directive;




or

bank

-

(iii)
circumstances*

38

any

documentation

relevant
or

information*

other

evidence

in

mitiga t i n g
support

of

the institution's position regarding the proposed directive;
(iv)

the

institution's

plan

for

and

attaining

the required level of capital.
(4)

Failure

to file

response.

Failure

by

the

bank or bank holding company to file a written response to the
notice of intent to issue a directive within the specified time
period shall constitute a waiver of the opportunity

to respond

and shall constitute consent to the issuance of such directive.
(5)
considering

the

Board

consideration

response of the bank

of

response.

After

or bank holding company*

the Board may;
(i)

issue

the

directive

as

originally

proposed or in modified form;
(ii) determine not

to issue a directive and

so notify the bank or bank holding company;
(iii)
clarification

of

the

seek

response

additional
by

the

bank

or
information
or

bank

or

holding

company.
(6)

Contents of d i r e c t i v e .

Any directive issued

by the- Board may order the bank or bank holding company to;
(i)
requirement
Adequacy

Guidelines

certain date;




established
or

achieve or maintain the m i n i m
pursuant
the

to

procedures

the
in

Board's
this

Capital

subpart

by

a

39

(ii)

submit

for

approval

and

adhere

to

a

plan for achieving the m i n imum capital requirement by a certain
date;
(iii)

take

other

specific

Board directs to achieve the minimum capital

action

levels,

as

the

including

requiring a reduction of assets or asset growth or restriction
on the payment of dividends; or
(iv)

a combination of the above a c t i o n s c

(7)

Request

for

reconsideration

Any state member bank or bank holding company,

upon a change

circumstances, may request the Board to reconsider

directive

to meet

and plan

the required minimum capital

continue

in effect

while

such

in

the terms of

a directive and may propose changes in the plan under which
is operating

of

it

level.

The

request

is

pending before the Board.

SECTION 263.39 - Enforcement of Directive.

(a)

Judicial and administrative r e m e d i e s 0
(1)

fails

Whenever

a

to follow a directive

bank

or

bank

issued under

holding

this

company

subpart,

or

to

submit or adhere to a capital adequacy plan submitted pursuant
to

such

directive,

directive,




the

including

Board

the

may

capital

seek

enforcement

adequacy

plan,

of
in

the
the

directive.

40

appropriate United States
8(i ) (2 )

of

the

1818 (i) (2))*

Federal

district
Deposit

in the same manner

court*

pursuant

Insurance

to

section

(12 UoScC.

Act

and to the same extent

as

if

the directive were a final cease and desist order„
(2)
penalties
bank

for violation of

holding

agent*

or

The

company

other

and

person

the

Board

directive

any

also

against

officer*

participating

may

any bank

director*

in

the

assess

mon

or

employee*

conduct

affairs of the bank or bank holding company,

civil

of

the

in the same manner

and to the same extent as if the directive were a final

cease

and desist order,
"(b)
issued
other

Other

separately*

enforcement

in conjunction with*

enforcement

actions

A

actions,

available

issuance of cease and desist orders,

or

to

directive

may

in addition

the

Board*

be

to any

including

the approval or denial

of

applications or notices, or any other actions authorized by law,
(c)
acting

upon any application

pursuant
may

to any statute

consider

holding

pursuant




the

company

directive

agency

Consideration

or

capital

to

of

a

adequacy

ILSAo

application

submitted
by

state

subsidiary

to this subpart,

pursuant

notice

administered

progress

or any

or

in

the

member

thereof

plan

The

Board

shall

to

the

Board

Board*

the

Board

bank

or

in adhering

required

or by any other

proceedings.

by

the

appropriate
consider

bank
to any
Board
banking

whether

In

41

approval or a notice of
earnings*

diminish

intent not to disapprove would

capital*

or

otherwise

bank holding company in achieving

impede

the

divert

bank

or

its required m i n i m u m capital

level or complying with its capital adequacy plan„

SECTION 2 6 3 o40 - Establishment

of Increased Capital

Level

for

Individual Bank or Bank Holding Company

(a)

Establishment

institutions.

of

capital

The Board may establish

levels

for

a capital

individual

level

higher

than that specified in the B o a r d ss Capital Adequacy Guidelines
for an individual'bank or bank holding company pursuant to;
(i)
understanding

a

written

between

the

agreement

Board

or

the

or

memor a n d u m

appropriate

of

Federal

Reserve Bank and the bank or bank holding company;
(ii)
issued

pursuant

(12 U.S.C.

to

a temporary or final cease and desist order
section

8(b)

or

(c)

of

the

FIS

Act

§ 1818(b) or (c));
(iii)

a condition for approval of an application

or issuance of a notice of intent not to disapprove a proposal;
(iv)
(v)
of this s e c t i o n 0




or other similar means; or
the procedures

set

forth

in subsection

(b)

h

4 2

-

(b)

Procedure to establish higher capital r e q u i r e m e n t ,
(1)

capital

levels

Guidelines

-

Notice.

above

When

those

in

may be necessary

the

the

and

Board

determines

Board's

Capital

appropriate

for

that

Adequacy

a particular

bank or bank holding company under the c i r c u m s t a n c e s , the Board
shall

give

the

bank

proposed higher
or

bank

holding

under

what

bank

capital

levels

time

holding

requirement

company

proposed capital
so,

or

an

company

schedule.

of

and shall permit

opportunity

whether

notice

to

comment

the

the bank

upon

the

it should be required and,
The

notice

shall

contain

if

the

Board's reasons for proposing a higher level of capital.
(2)

Response,

The bank

or bank

shall be allowed at least 14 days to respond,
determines

that a shorter

period

holding

company

unless the Board

is necessary

because

of

the

financial condition of the bank or bank holding company.
(3)

Board

decision.

response of the institution,
decision

to

the

bank

appropriate capital

or

the Board

bank

level and

level will become effective.

After

holding
the

date

considering

shall

issue

company

as

on which

the

a written
to

this

the
capital

The Board may require the bank or

bank holding company to submit a plan for achieving

such higher

capital level as the Board may set.
(4)

Enforcement

of

higher

capital

level.

The

Board may enforce the capital level established pursuant to the
procedures




describe

in this

section and any plan

s u b mitted to

43

achieve that capital level through the procedures

set forth

section 263.38 of this subpart.
By

order

of

the

Board

of

Governors,

effective

July 24, 1 9 8 4 0




(signed)

W i l l i a m W. W i l e s

William W. Wiles
Secretary of the Board

in