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FEDERAL RESERVE BAWK
OF M E W Y O R K
[
Circular No. 9846 ~j
April 29, 1985
REV ISIO N OF CA PITAL ADEQUACY GUIDELINES
Effective May 15, 1985
To A ll State M ember 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 announced revisions to itsguidelines regarding capital adequacy for state member
banks and bank holding companies.
The revised guidelines raise the minimum capital levels for multinational and regional banking organizations. By
doing so, they eliminate the disparity in the minimum capital requirements between these larger institutions and smaller
community state member banks and bank holding companies by setting a uniform minimum ratio ofp r im a r y capital to
totalassets of5.5 percent and a minimum ratioof to ta l capital tototalassets of6.0 percent. In general, banking organiza
tions are expected to operate above the minimum primary and total capital levels.
This action parallels the recent actions of the Office of the Comptroller of the Currency (OCC) and the Federal
Deposit Insurance Corporation (FDIC), resulting in uniform minimum capital levels being established for all federally
supervised banking organizations.
Based on itsexperience, the Board has continued to include the substantive capital requirements for state member
banks and bank holding companies inguidelinesratherthan intheform ofaregulation. In addition, theBoard has retained
the use oftotal capital zones or target ranges that help to define various levels of capitalization. The use of such zones or
target ranges provides the management of banking organizations with broad standards for future capital planning and
encourages banking organizations to maintain total capital levels in excess of the minimum. These zones are generally
defined as:
Zone 1 — Institutions with totalcapitalequal toatleast7 percentoftotalassets aregenerally considered adequately
capitalized, provided their primary capital ratios are considered adequate.
Zone 2 — Institutions operating with total capital equal to 6 to 7 percent of their total assets may be considered
capitalized at a minimally acceptable level, subject to consideration of other financial factors.
Zone 3 — Banking organizations with total capital equal to less than 6 percent of their total assets are generally
considered undercapitalized, in the absence of clear extenuating circumstances.
The Board has also included in the revised guidelines a more detailed definitional section dealing with mandatory
convertiblesecurities. Finally, theBoard has adopted aregulationestablishingprocedures by which theBoard may require
a banking organization to maintain the minimum capital levels, as defined in the revised guidelines, or higher levels for
institutions on a case-by-base basis.
(OVER)
The Board has made three changes initsexisting capital guidelines forsta te m e m b e r b a n k s in order todefine capital
more consistently with the capital regulations of the OCC and FDIC. Specifically, the Board has amended the capital
guidelines for state member banks but not for bank holding companies:
— to require the automatic deduction of goodwill from primary and total capital;
— to eliminate equity commitment notes from primary capital; and
— to define the capital ratios in terms of average assets rather than period-end figures.
The guidelines statethattheFederal Reserve willreview liquidityand therelationshipofallon- and off-balance sheet
risks tocapital, and will require those institutions with high or inordinate levels ofrisktohold additional primary capital.
The guidelines suggest that banking organizations avoid the practice of attempting to meet capital requirements by
decreasing the level of liquid assets in relation to total assets. The guidelines also indicate that the Federal Reserve will
continue toreview the need formore explicitprocedures forfactoring on- and off-balance sheet risks intothe assessment
of capital adequacy.
Enclosed — for State member banks and bank holding companies in this District — is a copy of the Board’s
official notice in this matter. The text of the revised guidelines appears on pages 26-38 of the notice; the procedural
regulation to permit the Board to enforce compliance with the guidelines appears on pages 39-45; and explanatory
material appears on pages 1-25. In addition, enclosed is a copy of an amendment to the Board’s Rules Regarding
Delegation of Authority, which delegates authority to the Director of the Board’s Division of Banking Supervision
and Regulation to issue compliance notices and directives in this matter.
Questions on this matter may be directed to Donald E. Schmid, Manager of our Bank Analysis Department (Tel.
No. 212-791-6611). Additional copies of the enclosures may be obtained from our Circulars Division (Tel. No.
212-791-5216).
E . G e r a l d C o r r ig a n ,
P r e s id e n t.
FEDERAL
RESERVE
SYSTEM
12 C o F c H , F a r t 2 0 8
MEMBERSHIP OF STATE BANKING INSTITUTIONS
IN T H E F E D E R A L R E S E R V E S Y S T E M
BANK
12 C o F o R o P a r t 2 2 5
HOLDING COMPANIES AND CHANGE
BANK CONTROL
IN
12 C o F o R o P a r t 2 6 3
R U L E S OF P R O C E D U R E
[Docket
No0
Capital
Maintenance
AGENCY:
Board
of
Governors
ACTIONs
Final
Rulemaking0
of
the
R-0526 3
Federal
Reserve
Systemc
SUMMARY?
T h e B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e se rv e ' S y s t e m
("the B o a r d " ) has a d o p t e d r e v i s e d c a p i t a l a d e q u a c y g u i d e l i n e s
and a procedural regulation
to p e r m i t
the Board
to e n f o r c e
c o m p l i a n c e w i t h the r e v i s e d g u i d e l i n e s 0
The amended guidelines
and the procedural e n f o r c e m e n t r e g u l a t i o n i m p l e m e n t se c t i o n 908
of the i n t e r n a t i o n a l L e n d i n g S u p e r v i s i o n A c t of 1983 (Public L a w
9 8 = 1 8 1 , T i t l e IX, 97 S t a t . 1 1 5 3 , c o d i f i e d a t 12 U o S . C . § 3 9 0 7 ) ,
w h i c h d i r e c t s the f e d e r a l bank s u p e r v i s o r y a g e n c i e s ,
i oe 0 , t h e
Board,
the Federal D e p o s i t I n s u r a n c e C o r p o r a t i o n
("the F D I C " )
and the C o m p t r o l l e r of the C u r r e n c y
("the C o m p t r o l l e r " ) ,
to
establish
minimum
and
appropriate
levels
of
capital
for
federally
supervised
banking
institutions.
Pursuant
to
its
s u p e r v i s o r y a u t h o r i t y , t h e B o a r d is p r o m u l g a t i n g r e v i s e d c a p i t a l
g u i d e l i n e s for b a n k h o l d i n g c o m p a n i e s a n d s t a t e = c h a r t e r e d b a n k s
t h a t a r e m e m b e r s o f t h e F e d e r a l R e s e r v e System,,
C a p i t a l a d e q u a c y is o n e o f t h e c r i t i c a l
factors
the
B o a r d is r e q u i r e d t o a n a l y z e in t a k i n g a c t i o n o n v a r i o u s t y p e s
of a p p l i c a t i o n s , such as m e r g e r s and a c q u i s i t i o n s by b a n k s and
bank
holding companies,
and
in t h e c o n d u c t
of
the B o a r d ' s
various
supervisory
activities
related
to
the
safety
and
s o u n d n e s s of i n d i v i d u a l b a n k s and b ank h o l d i n g c o m p a n i e s and to
t h e s t a b i l i t y o f t h e b a n k i n g system,,
in a m e n d i n g
i ts c a p i t a l
guidelines,
the Board
has
a d o p t e d , w i t h s o m e c h a n g e s , t h e p r o p o s a l p u b l i s h e d for c o m m e n t
o n J u l y 30, 1 9 8 4 (49 F e d „ R e g „ 3 0 3 1 7 ) „
The revised guidelines?
(a) d e f i n e c a p i t a l a n d t h e m a j o r c o m p o n e n t s o f c a p i t a l ,
(b)
e s t a b l i s h m i n i m u m capital ratios, and
(e) p r o v i d e f o r c a p i t a l
z o n e s o r t a r g e t r a n g e s for s t a t e m e m b e r b a n k s a n d b a n k h o l d i n g
[Enc. Cir. No. 9846]
- 2 companies,
In
addition,
the
final
enforcement
regulation
e s t a b l i s h e s p r o c e d u r e s under w h i c h the B o a r d m a y r e q u i r e b a n k i n g
o r g a n i z a t i o n s to a c h i e v e and m a i n t a i n the m i n i m u m c a p i t a l l e v e l s
contained
in t h e g u i d e l i n e s „
The
regulation
also provides
procedures
f or
the Board
to
set
capital
requirements
for
individual
banking
organizations
at l e v e l s
higher
than
the
u n i f o r m m i n i m u m l e v e l s in t h e g u i d e l i n e s 0
EFFECTIVE
DATE ;
May
15,
1985,
FOR
FURTHER
INFORMATION
CONTACT;
Richard Spillenkothen,
Assistant
Director,
Division
of
Banking
Supervision
and
Regulation
(202/452=2594),
A n t h o n y G. C o r n y n ,
Assistant
Director,
Division
of
Banking
Supervision
and
Regulation
(202/452=3354),
or
J a m e s E, Scott,
Senior
Attorney,
Legal
Division (202/452=3513)0
SUPPLEMENTARY
INFORMATION;
1o
BACKGROUND
The
Need
for
Capital
Adequacy
Standards,
The Board,
b y r e a s o n of its r e s p o n s i b i l i t i e s
as
a
b a n k i n g r e g u l a t o r , h a s h i s t o r i c a l l y h a d a c r i t i c a l i n t e r e s t in
t h e m a i n t e n a n c e o f a d e q u a t e c a p i t a l in i n d i v i d u a l s t a t e m e m b e r
b a n k s a n d b a n k h o l d i n g c o m p a n i e s a n d in t h e b a n k i n g s y s t e m in
general,
in t h e B o a r d ' s v i e w , c a p i t a l p r o v i d e s a b u f f e r
for
i n d i v i d u a l b a n k i n g o r g a n i z a t i o n s in t i m e s o f p o o r p e r f o r m a n c e ,
helps
to m a i n t a i n
public
confidence
in p a r t i c u l a r
banking
o r g a n i z a t i o n s a n d in t h e b a n k i n g s y s t e m , p r o m o t e s t h e s a f e t y o f
d e p o s i t o r s 8 funds, and s u p p o r t s the r e a s o n a b l e g r o w t h of b a n k i n g
organizationso
A n e v a l u a t i o n o f c a p i t a l a d e q u a c y is o n e o f t h e
m a j o r p u r p o s e s o f a b a n k or b a n k h o l d i n g c o m p a n y e x a m i n a t i o n .
C a p i t a l is o n e c o m p o n e n t o f t h e U n i f o r m F i n a n c i a l I n s t i t u t i o n s
R a t i n g S y s t e m used by the f e d e r a l bank s u p e r v i s o r y a g e n c i e s .
D e s p i t e the r e c o g n i t i o n by the B o a r d and o t h e r f e d e r a l
b a n k i n g r e g u l a t o r s of the i m p o r t a n c e of c a p i t a l , the p e r i o d f r o m
1 9 6 0 t h r o u g h 1 9 8 0 w a s m a r k e d b y a g r a d u a l d e c l i n e in t h e r a t i o
of
equity
capital
to
total
assets
in
the
United
States
com m e r c i a l banking system.
C o n c e r n a b o u t the d e c l i n e
in t h e
r a t i o of c a p i t a l to bank a s s e t s b e f o r e 1981, p a r t i c u l a r l y at the
n a t i o n ' s l a r g e s t b a n k i n g o r g a n i z a t i o n s , p r o m p t e d the B o a r d and
the C o m p t r o l l e r
in D e c e m b e r
1981 to a d o p t
capital
adequacy
g u i d e l i n e s for n a t i o n a l a n d s t a t e m e m b e r b a n k s a n d b a n k h o l d i n g
companies.
These guidelines established minimum capital levels
and c a p i t a l
"zones"
which defined,
for w e l l - m a n a g e d
banking
institutions
without
significant
financial
weaknesses,
those
institutions
that were considered a d e q u a t e l y capitalized and
t h o s e p r e s u m e d to be u n d e r c a p i t a l i z e d , a b s e n t c l e a r e x t e n u a t i n g
circumstances,
3
The guidelines have continued to provide state member
banks and bank holding companies with targets or objectives to
be reached over timeD The Board has noted that many banks and
bank holding companies* including the nation’s largest banking
organizations* have improved their capital positions to comply
with the guidelines0 nevertheless* several recent developments*
including deregulation of interest rates on bank liabilities*
weakening of loan portfolios of some banking institutions
occasioned by economic shocks in certain industries or
geographic areas* and increased competition in the financial
services areas* have combined to place additional pressures on
the profitability of banking institutions and to accentuate
potential demands on the capital of those institutions0 The
Board has continued to stress the importance of capital to
banking organizations and the importance of the capital
guidelines in setting standards of capital adequacy.,
In June
1983* the Board amended its guidelines to set explicit minimum
capital levels for multinational organizations0 In December
1983* the Board republished the guidelines as Appendix A of its
Regulation Y (12 CoFoR, § 225) (49 Federal Register 794) 0
Reasons for Revision of the Guidelines0
In November 1983* Congress enacted the International
Lending Supervision Act of 1983 (12 UoSoCo 3901 et se q 0)
(°’ILSA00)* which directed that the federal banking agencies
00o o o shall cause banking institutions to achieve and maintain
adequate capital by establishing minimum levels of capital for
such banking institutions and by such other methods as the
appropriate Federal banking agency deems appropriate0"
(Section 908* 12 UoSoCo § 3907)0 Pursuant to this authority* as
well as the authority of the Bank Holding Company Act* 12 UoSoCo
1844(b)* the Federal Reserve Act* 12 UoSoCo 248* 324* 329* and
the Financial Institutions Supervisory Act of 1966* 12 UoSoCo
1818* the Board is amending its capital adequacy guidelines to
Increase the required minimum primary and total capital levels
for the larger regional and multinational bank holding companies
and state member banks and to eliminate the disparate minimum
capital levels for large and small banking organizations„
The amended guidelines* when considered in conjunction
with the capital maintenance regulations of the Comptroller and
the FDIC* will establish uniform minimum capital levels for all
federally supervised banking organizations*
including bank
holding companies* regardless of size* type of charter* primary
supervisor or membership in the Federal Reserve System0 In
addition* the guidelines have been amended to define the
components of capital for state member banks more consistently
with the definitions contained In the capital maintenance
regulations of the Comptroller and FBICo
The Board is also
4
adopting procedural regulations
that p r o vide
a mechanism
e n f o r c e the s u b s t a n t i v e r e q u i r e m e n t s of the g u i d e l i n e s .
to
The
Board
will
continue
to
require
bank
holding
c o m p a n i e s to m e e t the s a m e m i n i m u m c a p i t a l r a t i o s as s t a t e
member banks.
T h e B o a r d has found p u r s u a n t to s e c t i o n 9 1 0 ( a ) ( 2 )
of ILSA
(12 UoSoCo § 3909(a)(2)) that appl i c a t i o n of m i n i m u m
c a p i t a l l e v e l s a n d c a p i t a l z o n e s t o b a n k h o l d i n g c o m p a n i e s is
n e c e s s a r y to p r e v e n t e v a s i o n s of the p u r p o s e s of ILSA.
It
s e r v e s no p u r p o s e to i n c r e a s e the c a p i t a l l e v e l s of a b a n k w h i l e
a l l o w i n g its p a r e n t h o l d i n g c o m p a n y to o p e r a t e w i t h low e r l e v e l s
of capitalo
The financial condition of a bank holding c o m p a n y
continues
to be a p r i m a r y fact o r
influencing
the
financial
c o n d i t i o n o f i ts s u b s i d i a r y b a n k s 0
T h e B o a r d ' s r e v i s i o n of the
capital
adequacy
guidelines
for
bank
holding
companies
is
designed
to i n c r e a s e the r e q u i r e d m i n i m u m p r i m a r y and
total
c a p i t a l l e v e l s for t h e l a r g e r r e g i o n a l a n d m u l t i n a t i o n a l b a n k
h o l d i n g c o m p a n i e s , and to e s t a b l i s h u n i f o r m c a p i t a l r e q u i r e m e n t s
f or a l l b a n k h o l d i n g c o m p a n i e s r e g a r d l e s s o f s i z e .
2»
COMMENTS
RECEIVED
T h e B o a r d ’s p r o p o s a l
to a m e n d
its c a p i t a l
adequacy
g u i d e l i n e s w a s a n n o u n c e d o n J u l y 26, 1 9 8 4 ,
and p u b l i s h e d
for
c o m m e n t , w i t h t h e c o m m e n t p e r i o d e n d i n g S e p t e m b e r 24, 1 9 8 4 .
The
FB1C
and
Comptroller
published
similar
capital
maintenance
r e g u l a t i o n s at a p p r o x i m a t e l y the same
time,
and the c o m m e n t
period
on
the
Comptroller's
proposed
regulations
expired
N o v e m b e r 5, 1 9 8 4 .
In v i e w o f t h e s i m i l a r i t y o f
the
issues
r a i s e d b y t h e s e p a r a l l e l p r o c e e d i n g s and the fact t hat s e v e r a l
c o m m e n t e r s filed c o m m e n t s with all the f e deral b a n k i n g age n c i e s ,
the B o a r d c o n s i d e r e d c o m m e n t s r e c e i v e d a f t e r its c o m m e n t p e r i o d
b u t before November 5, 1 9 8 4 „
T h e Board received 8 9 comments
f r o m t h e p u b l i c , i n c l u d i n g 12 f r o m m u l t i n a t i o n a l b a n k s , 27 f r o m
regional
banks,
29
from smaller
community
banks
(under
$1
billion
in t o t a l
assets),
7 from
banking
associations
or
organizations,
2
from
foreign
banks,
3
from
state
bank
s u p e r v i s o r s , 2 from n o n b a n k f i n a n c i a l s e r v i c e o r g a n i z a t i o n s and
7 from other o r g a n i z a t i o n s and ind i v i d u a l s .
in a d d i t i o n ,
the
B o a r d r e c e i v e d c o m m e n t s f r o m 10 of its F e d e r a l R e s e r v e B a n k s .
T h e B o a r d r e q u e s t e d c o m m e n t s on four s p e c i f i c issues.
O n t h e i s s u e o f w h e t h e r t o p r o m u l g a t e g u i d e l i n e s or a r e g u l a t i o n
d e a l i n g with m a i n t e n a n c e of a d e q u a t e capital,
92 p e r c e n t of
t h o s e c o m m e n t i n g r e c o m m e n d e d t h a t the B o a r d c o n t i n u e to e m p l o y
guidelines.
O n c o n t i n u e d u s e o f c a p i t a l " z o n e s " in a d d i t i o n t o
a m i n i m u m c a p i t a l l e v e l , 77 p e r c e n t o f t h o s e c o m m e n t i n g e n d o r s e d
the zone concept.
On the t r e a t m e n t of i n t a n g i b l e assets,
98
p e r c e n t o f t h o s e c o m m e n t i n g f a v o r e d i n c l u d i n g a l l i n t a n g i b l e s in
th e d e f i n i t i o n of p r i m a r y c a p i t a l for b a n k h o l d i n g c o m p a n i e s a n d
5
78 p e r c e n t e n d o r s e d the s a m e p r i n c i p l e for s t a t e m e m b e r b a n k s 0
F i n a l l y * on the t r e a t m e n t of e q u i t y c o m m i t m e n t n o t e s * 91 p e r c e n t
o f t h o s e c o m m e n t i n g f a v o r e d i n c l u d i n g s u c h c o m m i t m e n t n o t e s as
primary
capital
f or
bank
holding
companies
and
78 p e r c e n t
f a v o r e d the i n c l u s i o n of such n o t e s as p r i m a r y c a p i t a l
for
commercial b a n k s »
The comments covered a range of other
issues.,
The
B o a r d h a s r e v i e w e d the c o m m e n t s and r e c o m m e n d a t i o n s r e c e i v e d and
h as i n c o r p o r a t e d s e v e r a l o f the s u g g e s t i o n s and r e c o m m e n d a t i o n s
in t h e r e v i s e d g u i d e l i n e s 0
3 °
RESOLUTION
M inimum Capital
of
maj or
issues
Ratios0
T h e B o a r d has r e v i s e d its c a p i t a l a d e q u a c y g u i d e l i n e s *
in a c c o r d a n c e w i t h i t s J u l y 1 9 8 4 p r o p o s a l * t o r e q u i r e a m i n i m u m
r a t i o o f p r i m 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 5 C5 p e r c e n t a n d a
m i n i m u m r a t i o 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 o0 p e r c e n t
for a l l s t a t e m e m b e r b a n k s a n d b a n k h o l d i n g compa n ie s, .
This
requirement
represents
an
increase
in
the
minimum
pr i m a r y
c a p i t a l r a t i o f r o m 5 . 0 t o 5 o 5 p e r c e n t f o r r e g i o n a l (in e x c e s s o f
$1
billion
in
total
assets)
and
multinational
banking
i n s t i t u t i o n s and a d e c r e a s e f r o m 6 .0 to 5„5 p e r c e n t
in t h e
minimum
primary
capital
ratio
for
community
banking
organizations
( l e s s t h a n $ 1 b i l l i o n in t o t a l a s s e t s ) „
It a l s o
r e p r e s e n t s a n i n c r e a s e in t h e m i n i m u m t o t a l c a p i t a l r a t i o o f
larger
banking
institutions
f r o m 5 05 t o 6 „ 0
percent,,
The
m i n i m u m t o t a l c a p i t a l r a t i o for c o m m u n i t y b a n k i n g i n s t i t u t i o n s
remains unchanged0
Th e f o l l o w i n g t a b l e s u m m a r i z e s the c h a n g e s
f r o m the m i n i m u m c a p i t a l r e q u i r e m e n t s
in t h e B o a r d ' s c u r r e n t
capital adequacy guidelines.
Amended
Current
Guidelines
Guidelines
(percent)
(percent)
Minimum Primary Capitals
M u l t i n a t i o n a l and R e g i o n a l
C o m m u n i t y ( u n d e r $1
b i l l i o n in t o t a l a s s e t s )
5.0
5 o5
6 .0
5 o5
Minimum Total Capitals
M u l t i n a t i o n a l and Regio n a l
Community
5 o5
SoO
6 o0
6 o0
The Board did not receive any s i g n i f i c a n t l y adverse
c o m m e n t s o n i ts p r o p o s a l t o r e d u c e t h e m i n i m u m p r i m a r y c a p i t a l
l e v e l s of smaller c o m m u n i t y b a n k i n g I n s t i t u t i o n s „
In v i e w o f
the i m p o r t a n c e the B o a r d p l a c e s on m a i n t a i n i n g a s t r o n g c a p i t a l
6
p o s i t i o n , t h e B o a r d w a s r e l u c t a n t t o a c c e p t a r e d u c t i o n in t h e
m i n i m u m p r i m a r y capital level of smaller banking o r ganizations.’
However,
the Board has made
this change
for the o v e r r i d i n g
r e a s o n s o f a c h i e v i n g u n i f o r m i t y in t h e c a p i t a l r e q u i r e m e n t s for
large and small banking organizations, m a i n t a i n i n g c o n s i s t e n c y
w i t h the r e q u i r e m e n t s of
the C o m p t r o l l e r and the
FDIC, and
a d h e r i n g t o t h e o b j e c t i v e s o f C o n g r e s s in e n a c t i n g
XLSA. Total
capital
requirements
for
these
community
institutions
will
r e m a i n u n c h a n g e d , and the B o a r d w i l l c o n t i n u e to e m p h a s i z e t hat
all ba n k i n g
institutions
are expec t e d
to o p e r a t e
a b o v e the
minimum capital
ratios.
The Board
will also
continue
to
s c r u t i n i z e , p a r t i c u l a r l y in t h e c o u r s e o f p r o p o s a l s t o e x p a n d ,
a n y d e c l i n e in t h e c a p i t a l r a t i o s o f b a n k i n g o r g a n i z a t i o n s .
The
Board did
receive
strong
objections
from
some
larger
banking
institutions
to the p r o p o s a l
to r a i s e
their
m i n i m u m p r i m a r y and t o t a l c a p i t a l r a t i o s .
In t h e i r c o m m e n t s ,
these
r e g i o n a l and m u l t i n a t i o n a l
institutions questioned not
o n l y the pr o p o s e d m i n i m u m c a p ital levels,
but also,
in s o m e
cases,
the v e r y c o n c e p t o f c a p i t a l r a t i o s as a m e a s u r e o f a
b a n k ' s s t a b i l i t y and c o n d i t i o n .
S o m e c o m m e n t e r s a r g u e d t h a t t h e e m p h a s i s o n c a p i t a l is
m i s p l a c e d and that bank regulators
s h o u l d be c o n c e r n e d w i t h
o t h e r f a c t o r s s u c h as l i q u i d i t y , i n t e r e s t r a t e e x p o s u r e , a nd the
q u a l i t y of the loan p o r t f o l i o .
T h e y n o t e d that use of m i n i m u m
c a p i t a l l e v e l s is n o t a s u i t a b l e t o o l f o r m a n a g e m e n t o f r i s k
exposure
and c o ntended
that capital
does
not prevent
bank
failures.
These commenters also argued
that higher
capital
r e q u i r e m e n t s w o u l d i n c r e a s e r i s k b y p r e s s u r i n g i n s t i t u t i o n s to
s h i f t a s s e t s t o w a r d h i g h e r y i e l d i n g , b u t r i s k i e r , l o a n s in o r d e r
to m a i n t a i n e a r n i n g s per s h are.
They
further
asserted
that
higher
capital
levels
would
put
large
domestic
banking
i n s t i t u t i o n s at a c o m p e t i t i v e d i s a d v a n t a g e a g a i n s t t h r i f t s and
foreign banking institutions.
Finally,
some commenters argued
t h a t a n i n c r e a s e in m i n i m u m c a p i t a l l e v e l s f o r l a r g e r b a n k i n g
organizations
is i n a p p r o p r i a t e ,
because
a 5 percent minimum
primary
capital
level
was
set
for
multinational
banking
institutions
in
1983
and
no
subsequent
increase
in
risk
j u s t i f i e s the i n c rease.
The Board has long held that adequ a t e capital
is a
critical
factor
in
helping
a banking
institution
weather
f i n a n c i a l a d v e r s i t y a n d in p r o m o t i n g t h e s a f e t y a n d s o u n d n e s s o f
the b a n k i n g sy s t e m .
O t h e r t h i n g s b e i n g e q u a l , the s t r o n g e r an
o r g a n i z a t i o n ' s c a p i t a l p o s i t i o n , t h e m o r e l i k e l y it w i l l b e a b l e
to w i t h s t a n d a p e r i o d of f i n a n c i a l s t r e s s w i t h o u t e x p e r i e n c i n g a
loss
of
public
confidence.
Supervisory
experience
has
demonstrated
that a strong
capital
position
is a c r i t i c a l
e l e m e n t of bank s o u n d n e s s and serv e s both to p r o t e c t d e p o s i t o r s
and to p r o m o t e the s a f e t y of the b a n k i n g s y s t e m .
Moreover,
in
7
enacting
XLSA,
Congress
has established
the
requirement
of
m i n i m u m capital levels by law and has gener a l l y mandated both
g r e a t e r u n i f o r m i t y in c a p i t a l r e q u i r e m e n t s a n d a n i n c r e a s e in
c a p i t a l l e v e l s , p a r t i c u l a r l y in v i e w o f i t s c o n c e r n a b o u t l a r g e r
banking
institutions
in
the
international
arena0
Finally,
h i g h e r c a p i t a l r a t i o g u i d e l i n e s ne e d n o t m e a n a n y l e s s e n i n g of
c o n c e r n or s c r u t i n y b y the B o a r d w i t h r e s p e c t to o t h e r risk
factorso
The amended guidelines
state explicitly that
such
f a c t o r s as l i q u i d i t y ,
the d e g r e e of r isk a s s o c i a t e d w i t h a
banking
institution's
assets,
and o f f - b a l a n c e
sheet exposure
w i l l b e t a k e n i n t o a c c o u n t in a s s e s s i n g c a p i t a l a d e q u a c y a n d
t h a t the B o a r d w i l l take o t h e r r e l e v a n t f a c t o r s into a c c o u n t on
a e a s e ~ b y - = c a s e b a s i s in a p p l y i n g t h e c a p i t a l g u i d e l i n e s 0
B a s e d o n t h e m o s t r e c e n t a v a i l a b l e d a t a , o n l y 17 s t a t e
m e m b e r b a n k s and 61 bank h o l d i n g c o m p a n i e s w i t h a s s e t s o v e r $ 1 5 0
million
have
primary
capital
ratios
(without
deducting
i n t a n g i b l e assets) b e l o w the 5*5 p e r c e n t m i n i m u m p r i m a r y c a p i t a l
guidelineo
Thus, fewer than 2 p e r c e n t of all state m e mber banks
and 8 p e r c e n t of all h o l d i n g c o m p a n i e s with a s s e t s over $150
m i l l i o n h a d p r i m a r y c a p i t a l r a t i o s b e l o w t h e m i n i m u m b enchmark,,
W i t h r e s p e c t t o t o t a l c a p i t a l , 25 s t a t e m e m b e r b a n k s a n d 8 0 b a n k
holding companies have total capital ratios
(without deducting
intangibles)
b e l o w t h e 6 o0 p e r c e n t m i n i m u m g u i d e l i n e 0
These
n u m b e r s p e r t a i n i n g to t o t a l c a p i t a l i n c l u d e s o m e o f t h e s a m e
banking organizations whose primary capital ratios
also fall
b e l o w t h e 5<,5 p e r c e n t m i n i m u m p r i m a r y c a p i t a l guideline,,
The
f i g u r e s for the n u m b e r of s t a t e m e m b e r b a n k s t h a t fall b e l o w the
g u i d e l i n e s d o n o t tak e a c c o u n t of the B o a r d ' s d e c i s i o n to d e d u c t
g o o d w i l l f r o m the c a p i t a l of s t a t e m e m b e r b a n k s 0
The
Continued
Use
of
Total
Capital
Zones„
T h e B o a r d h a s d e c i d e d , in a c c o r d a n c e w i t h i t s J u l y 1 9 8 4
p r o p o s a l , t o c o n t i n u e u s i n g " z o n e s " in a s s e s s i n g t h e a d e q u a c y o f
t o t a l capital,,
Ba n k i n g o r g a n i z a t i o n s with a r a tio of total
c a p i t a l to total a s s e t s less than 6 „0 p e r c e n t w i l l be c o n s i d e r e d
undercapitalized,
if t h e r e a r e n o e x t e n u a t i n g c i r c u m s t a n c e s „
I n s t i t u t i o n s w ith a total c a p i t a l to tot a l a s s e t s r a t i o of 6 „ 0
to 7 o 0
p e r c e n t m a y be c o n s i d e r e d
to be c a p i t a l i z e d
at an
a c c e p t a b l e l e v e l if t h e F e d e r a l R e s e r v e ' s c l o s e
s c r u t i n y of
o t h e r r e l e v a n t f i n a n c i a l a n d m a n a g e r i a l f a c t o r s s h o w s t h e m t o be
fully satisfactoryo
Finally,
institutions with a total capital
to t o t a l a s s e t s r a t i o e x c e e d i n g 7 * 0
p e r c e n t w i l l g e n e r a l l y be
considered
adequately
capitalized,
unless
there
are
significantly
adverse
financial
or
managerial
factors*
R e g a r d l e s s of the level of total capital, a b a n k i n g o r g a n i z a t i o n
w i t h a p r i m a r y c a p i t a l r a t i o b e l o w 5„5 p e r c e n t w i l l g e n e r a l l y be
considered undercapitalized*
T he revised g u i d e l i n e s m a i n t a i n the same total c a p i t a l
z o n e s f o r s m a l l e r c o m m u n i t y b a n k i n g o r g a n i z a t i o n s w h i l e raisingthe r e q u i r e m e n t s 0„5 p e r c e n t
in e a c h z o n e
for r e g i o n a l
and
multinational banking organizations0
T h i s i n c r e a s e in t h e t o t a l
capital
zones
for
regional
and
multinational
banking
o r g a n i z a t i o n s w a s a d o p t e d to e n c o u r a g e s u c h o r g a n i z a t i o n s
to
strengthen
their
total
capital
positions
and
to
achieve
u n i f o r m i t y in t h e z o n e r e q u i r e m e n t s f o r a l l s t a t e m e m b e r b a n k s
and bank holding companies r e g a rdless of s i z e D
T h e c o m m e n t s on the B o a r d ' s p r o p o s a l to c o n t i n u e u s i n g
total capital zones were overwhelmingly favorable „
Zones were
p e r c e i v e d as b e i n g m o r e f l e x i b l e than a s i n g l e m i n i m u m c a p i t a l
l e v e l and as p r o v i d i n g m a n a g e m e n t w i t h b r o a d
standards
for
f u t u r e c a p i t a l planning,,
The B o a r d w i l l c o n t i n u e u s i n g z o n e s to
p r o v i d e g u i d a n c e to t h e m a n a g e m e n t o f b a n k i n g o r g a n i z a t i o n s , a n d
to e n c o u r a g e such o r g a n i z a t i o n s to m a i n t a i n t o t a l c a p i t a l l e v e l s
in e x c e s s
of
the
minimum,,
Total
capital
zones
may
also
encourage
institutions
to
substitute
subordinated
debt
for
short-term
borrowings,
which
may
induce
greater
market
discipline„
The
Continued
Use
of
G u i d e l i n e s ,,
T he B o a r d w i l l c o n t i n u e its use of g u i d e l i n e s r a t h e r
t h a n r e g u l a t i o n s to e m b o d y i t s s u b s t a n t i v e c a p i t a l r e q u i r e m e n t s ,
i n cluding m i n i m u m capital ratios, ca p i t a l zones, d e f i n i t i o n s of
p r i m a r y and s e c o n d a r y c a p i t a l and
treat m e n t of such c a p ital
components
as
intangible
assets
and
mandatory
convertible
instruments0
T h e B o a r d ' s d e c i s i o n to use c a p i t a l g u i d e l i n e s ins t e a d
o f a r e g u l a t i o n is b a s e d o n i t s e x p e r i e n c e w i t h t h e e x i s t i n g
guidelines,,
This s u p e r v i s o r y e x p e rience has d e m o n strated
the
b e n e f i t in w o r k i n g w i t h b a n k i n g i n s t i t u t i o n s o n c a p i t a l a d e q u a c y
m a t t e r s r a t h e r t h a n in d e a l i n g w i t h t h e m o n a m o r e r i g i d b a s i s
under a r e g u l a t i o n G
G u i d e l i n e s g i v e the B o a r d f l e x i b i l i t y to
a d j u s t c a p i t a l r e q u i r e m e n t s a n d d e f i n i t i o n s t o c h a n g e s in t h e
economy,
in
financial
markets,
and
in
banking
practices0
F l e x i b l e g u i d e l i n e s a l s o p e r m i t the F e d e r a l R e s e r v e
to take
account
of
the
individual
characteristics
of
a
banking
i n s t i t u ti o n, ,
F a i l u r e to m e e t the m i n i m u m c a p i t a l l e v e l s s h o u l d
n o t a u t o m a t i c a l l y b e c o n s t r u e d as a v i o l a t i o n o f a r e g u l a t i o n
a n d t h e r e f o r e a v i o l a t i o n o f l a w, p a r t i c u l a r l y if t h e F e d e r a l
R e s e r v e w o u l d h a v e t o c o n s i d e r c a p i t a l a d e q u a c y in t h e c o n t e x t
o f a b r o a d r a n g e o f f a c t o r s in a c t i n g u p o n a p p l i c a t i o n s „
favored
The
comments
received
by
c o n t i n u e d use of g u i d e l i n e s
the
Board
instead of
overwhelmingly
r e gu l a t i o n s , ,
9
Treatment
of
Intangible
Assets,
(a) S t a t e m e m b e r b a n k s 0
The Board did not adopt a
p r o v i s i o n in i t s J u l y 1 9 8 4 p r o p o s a l t o r e q u i r e t h e d e d u c t i o n o f
a l l i n t a n g i b l e a s s e t s in c a l c u l a t i n g p r i m a r y
( b ut n o t t o t a l )
capital ratioso
The Board has d e c i d e d in s t e a d to d e d u c t o n l y
goodwill, in c o m p u t i n g p r i m a r y and t o t a l c a p i t a l r a t i o s of sta t e
m e m b e r banks*,
O t h e r i n t a n g i b l e s , such as m o r t g a g e s e r v i c i n g
r i g h t s a n d f a v o r a b l e l e a s e s , w i l l g e n e r a l l y b e i n c l u d e d in t h e
c o m p u t a t i o n of p r i m a r y cap i t a l , a l t h o u g h the g u i d e l i n e s p r o v i d e
t h e B o a r d w i t h a u t h o r i t y a n d f l e x i b i l i t y to m a k e a d j u s t m e n t s to
c a p i t a l r a tios on a e a s e - b y - c a s e basis,
b a s e d on the level,
quality,
or n a t u r e of
intangible assets
in r e l a t i o n
to the
bank's overall financial c o ndition0
His t o r i c a l l y , the Board has r equired state member banks
to c h a r g e off g o o d w i l l i m m e d i a t e l y
( e x c e p t in t h o s e i n s t a n c e s
w h e r e it w a s a c q u i r e d in t h e r e s c u e o f a f a i l i n g b a n k , in w h i c h
case
a 15 y e a r
write-off
has been
required) 0
Aside
from
g o o d w i l l in t h e c a s e o f b a n k s , h o w e v e r , t h e B o a r d h a s m a d e n o
automatic
deduction
of
intangible
assets
in
computing
the
p r i m a r y or
total capital
ratios
of b a n k s or
bank
holding
c o m p a n i e s , p r e f e r r i n g i n s t e a d to t a k e the c h a r a c t e r and l e v e l of
s u c h a s s e t s i n t o a c c o u n t in a s s e s s i n g t h e c a p i t a l a d e q u a c y o f a
p a r t i c u l a r i ns t it u ti o n, ,
T h e B o a r d ' s J u l y 1984 p r o p o s a l to d e d u c t all i n t a n g i b l e
assets
f r o m the p r i m a r y c a p i t a l of s t a t e m e m b e r
banks
was
d e s i g n e d to c o n f o r m the B o a r d ' s d e f i n i t i o n of p r i m a r y c a p i t a l to
the p r o p o s a l s of the F D I C and the C o m p t r o l l e r „
In t a k i n g t h i s
step, h o w e v e r , the B o a r d q u e s t i o n e d the d e s i r a b i l i t y of s u c h an
approacho
The o v e r w h e l m i n g m a j o r i t y of those c o m m e n t i n g o p p o s e d
a n y d e d u c t i o n of i n t a n g i b l e a s s e t s f r o m the p r i m a r y c a p i t a l of
b a n k s or b a n k h o l d i n g c o m p a n i e s , n o t i n g t h a t i n t a n g i b l e a s s e t s
have
economic
value
and
that
generally
accepted
accounting
p r i n c i p l e s p e r m i t i n t a n g i b l e a s s e t s t o b e r e c o r d e d in f i n a n c i a l
s t a t em e n t s * ,
C o m m e n t e r s a l s o c i t e d the fact that the d e d u c t i o n
of all i n t a n g i b l e assets from p r i m a r y c a p i t a l would
fail to
a c c o r d a n y v a l u e w h a t s o e v e r to i n t a n g i b l e a s s e t s and w o u l d n o t
d i s t i n g u i s h b e t w e e n d i f f e r e n t t y p e s o f i n t a n g i b l e assets*,
Some
commen t e r s suggested that concern over intangible assets could
be m i t i g a t e d by r e q u i r i n g a p p r o p r i a t e a m o r t i z a t i o n p e riods*
In
general,
most
public
commenters
viewed
the
deduction
of
intangible
assets
from primary
capital
as
inhibiting
sound
a c q u i s i t i o n s or b u s i n e s s t r a n s a c t i o n s i n v o l v i n g t h e b o o k i n g o f
i n t a n g i b l e assets*,
in
light of
the public c o m m e n t s
received
and
its
r e s e r v a t i o n s a b o u t the d e d u c t i o n of all i n t a n g i b l e a s s e t s ,
the
B o a r d h a s m o d i f i e d i ts p r o p o s a l w i t h r e s p e c t t o t h e t r e a t m e n t o f
i n t a n g i b l e s in banks*,
Instead of d e d ucting all intangibles from
10
bank p r i m a r y capital, the Board will d e d u c t o nly goodwill from
pr i m a r y and total eapitalo
(The F e d e r a l
Reserve may permit
*
g o o d w i l l a c q u i r e d b y a b a n k in c o n n e c t i o n w i t h a s u p e r v i s o r y
m e r g e r w i t h a f a i l i n g i n s t i t u t i o n to be i n c l u d e d for c a p i t a l
p u r p o s e s if it is a p p r o p r i a t e l y a m o r t i z e d »)
S i n c e the B o a r d g e n e r a l l y has r e q u i r e d
state member
banks
to
charge
off
goodwill
immediately,
this
approach
represents little change from existing p o l i c y Q
The accounting
t r e a t m e n t , h o w e v e r , w i l l d i f f e r f r o m t h e e x i s t i n g p r a c t i c e in
t h a t a f t e r the e f f e c t i v e d a t e o f the r e v i s e d g u i d e l i n e s , s t a t e
m e m b e r b a n k s w i l l be a l l o w e d
to b o o k a n d a m o r t i z e g o o d w i l l
r a t h e r t h a n c h a r g e it o f f , in o r d e r t o c o n f o r m t o t h e p r a c t i c e
of the FD I C and
the C o m p t r o l l e r 0
As a
general principle,
i n t a n g i b l e a s s e t s in s t a t e m e m b e r b a n k s a r e t o b e w r i t t e n o f f
o v e r t h e i r e s t i m a t e d u s e f u l l i v e s , n o t t o e x c e e d 15 y e a r s 0
B o t h the F D I C and the C o m p t r o l l e r ha v e a m e n d e d their
o r i g i n a l p r o p o s a l s to i n c l u d e at l e a s t o n e k i n d of i n t a n g i b l e ,
m o r t g a g e - s e r v i c i n g rights,
in p r i m a r y e a p i t a l o
Apparently both
a g e n c i e s h a v e c o n c l u d e d that, a m o n g o t h e r things, the v a l u e of
t h e i n c o m e f l o w f r o m m o r t g a g e s e r v i c i n g is s u f f i c i e n t l y c e r t a i n
and s t a b l e to w a r r a n t t r e a t i n g m o r t g a g e s e r v i c i n g as t a n g i b l e
assetSo
In
the
B o a r d 0s v i e w ,
other
intangibles
(such
as
favorable
leases)
have
characteristics
more
akin
to
m o r t g a g e - s e r v i c i n g r i g h t s than to g o o d w i l l and s h o u l d t h u s be
given
similar
consideration
in
assessing
an
institution's
capital positiono
The Board has
included
in t h e g u i d e l i n e s
for
state
member
banks a threshold
for
i n t a n g i b l e s of
25 p e r c e n t o f
tangible primary capital, above which any intangible assets will
be
subject
to close
supervisory
scrutiny.,
In a d d i t i o n
to
deducting
goodwill
for
the
purpose
of
assessing
capital
a d e q u a c y , the F e d e r a l R e s e r v e may, on a c a s e - b y - c a s e basis, m a k e
f u r t h e r a d j u s t m e n t s to a b a n k ' s c a p i t a l r a t i o s b a s e d on the
amount of intangible assets
( a s i d e f r o m g o o d w i l l ) o v e r t h e 25
p e r c e n t t h r e s h o l d or on the s p e c i f i c c h a r a c t e r of the b a n k ' s
intangible
assets
in
relation
to
its
overall
financial
conditiono
The
Board
has
previously
used
the
25
percent
threshold
on
a
case-by-case
basis0
The
impact
of
this
r e q u i r e m e n t a p p e a r s to be m i n i m a l o
A l t h o u g h 48 state member
b a n k s r e p o r t e d i n t a n g i b l e a s s e t s a s o f S e p t e m b e r 30, 1 9 8 4 , o n l y
f o u r s u c h b a n k s (all c o m m u n i t y i n s t i t u t i o n s u n d e r $1 b i l l i o n in
t o t a l a s s e t s ) h a d i n t a n g i b l e a s s e t s o v e r 25 p e r c e n t o f t a n g i b l e
primary eapitalo
(b)
Bank Holding C o m p a n i e s ,
With
respect
to bank
h o l d i n g c o m p a n i e s , the B o a r d h a s s u b s t a n t i a l l y a d o p t e d its J u l y
proposalo
The Board
will
continue
to t ake
the
level
and
c h a r a c t e r o f i n t a n g i b l e a s s e t s i n t o a c c o u n t in a s s e s s i n g c a p i t a l
11
a d e q u a c y , b u t w i l l a v o i d a n y a u t o m a t i c d e d u c t i o n o f g o o d w i l l or
o t h e r i n t a n g i b l e a s s e t s f r o m p r i m a r y or t o t a l c a p i t a l o
Prudent
b a n k i n g p r a c t i c e s and the p r i n c i p l e of the d i v e r s i f i c a t i o n of
risk suggest that banking organisations should avoid excessive
balance
sheet
concentration
in
any
category
or
related
categories'- o f i n t a n g i b l e a s s e t s 0
C o n s i s t e n t with this concern,
the gui d e l i n e s state that while the Board will consider
the
amount
and nature
of all
intangible
assets,
those
holding
c o m p a n i e s w i t h a g g r e g a t e i n t a n g i b l e a s s e t s o v e r 25 p e r c e n t o f
t a n g i b l e p r i m a r y c a p i t a l or t h o s e i n s t i t u t i o n s w i t h l e s s e r b ut
significant
amounts of
goodwill
will
be
subject
to c l o s e
scrutinyD
In a d d i t i o n ,
the g u i d e l i n e s s t a t e th a t the F e d e r a l
R e s e r v e may, on a e a s e - b y - c a s e basis, m a k e a d j u s t m e n t s
to an
o r g a n i z a t i o n ’s c a p i t a l r a t i o s b a s e d o n t h e a m o u n t o f i n t a n g i b l e
a s s e t s in e x c e s s o f t h e 25 p e r c e n t t h r e s h o l d o r o n t h e s p e c i f i c
c h a r a c t e r o f t h e o r g a n i z a t i o n ’s i n t a n g i b l e a s s e t s in r e l a t i o n t o
i t s o v e r a l l f i n a n c i a l c on dition,,
Four hundred and e i g h t y - t w o bank ho l d i n g c o m p a n i e s with
consolidated
assets
in
excess
of
$150
million
reported
i n t a n g i b l e a s s e t s on their m o s t r e c e n t r e p o r t s to the B o a r d „
Of
this total, however, 354 c o m p a n i e s had i n t angible assets less
than
15
percent
of
tangible
primary
capitalo
Seventy-six
holding companies with assets over $150 million
(20 r e g i o n a l
institutions
and
56 c o m m u n i t y
institutions)
had
intangible
a s s e t s in e x c e s s o f 25 p e r c e n t o f t a n g i b l e p r i m a r y c a p i t a l o
The guidelines provide that banking o r g a n i z a t i o n s are
e x p e c t e d to r e v i e w p e r i o d i c a l l y the v a l u e at w h i c h i n t a n g i b l e
assets
are
carried
on
their
balance
sheets
and
the
r e a s o n a b l e n e s s of the a m o r t i z a t i o n p e r i o d s of such a s s e t s to
d e t e r m i n e if t h e r e h a s b e e n i m p a i r m e n t o f v a l u e o r if c h a n g i n g
circumstances
warrant
shortening
the
amortization
periods0
Banking
organizations
are
instructed
to
make
appropriate
r e d u c t i o n s in c a r r y i n g v a l u e s a n d a m o r t i z a t i o n p e r i o d s in l i g h t
of this review,
and e x a m i n e r s w i l l e v a l u a t e the t r e a t m e n t of
intangible assets during inspections and e x a m i n a t i o n s 0
Although
the
amended
capital
guidelines
for
bank
holding companies generally do not require a specific deduction
of i n t a n g i b l e a s s e t s for s u p e r v i s o r y p u r p o s e s ,
the g u i d e l i n e s
state
that
banking
organizations
contemplating
expansion
proposals
(including state member banks contemplating mergers)
s h o u l d g e n e r a l l y e n s u r e t h a t p r o f o r m a c a p i t a l r a t i o s e x c e e d the
minimum
capital
guidelines
without
significant
reliance
on
intangibles,
particularly goodwillo
The Board,
in r e v i e w i n g
proposals
to
undertake
acquisitions,
will
take
into
c o n s i d e r a t i o n b o t h the s t a t e d p r i m a r y c a p i t a l r a t i o and the
p r i m a r y c a p i t a l r a t i o a f t e r d e d u c t i n g i n t a n g i bl e s, ,
In a c t i n g o n
applications,
the Board will evalu a t e
intangible assets
and
will, as a p p r o p r i a t e , a d j u s t c a p i t a l r a t i o s to i n c l u d e c e r t a i n
intangible assets on a c ase-by-case basis „
12
The
Treatment
of
Equity
Commitment
Notes„
T h e B o a r d h a s a d o p t e d t h e g u i d e l i n e s p r o p o s e d in J u l y
t h a t t r e a t e q u i t y c o m m i t m e n t n o t e s a s p r i m a r y c a p i t a l for b a n k
h o l d i n g c o m p a n i e s b u t n o t for s t a t e m e m b e r b a n k s .
T h e B o a r d 9s
c u r r e n t g u i d e l i n e s t r e a t e q u i t y c o m m i t m e n t n o t e s as a form of
p r i m a r y c a p i t a l f or b o t h b a n k h o l d i n g c o m p a n i e s a n d s t a t e m e m b e r
bankSo
In p r o p o s i n g t o c h a n g e t h e t r e a t m e n t f o r s t a t e m e m b e r
banks,
t h e B o a r d c i t e d a n i n t e r e s t in m a i n t a i n i n g u n i f o r m i t y
among
federally
regulated
banks
in
light
of
the
proposed
exclusion
of equity commitment
notes
by
the FD I C
and
the
Comptroller
in c o m p u t i n g t h e p r i m a r y c a p i t a l l e v e l s o f s t a t e
n o n m e m b e r b a n k s and n a t i o n a l b a n k s 0
Equity
commitment
notes,
a
type
of
mandatory
convertible
security,
are s u b o r d i n a t e d d e b t
instruments
that
m u s t be c o n v e r t e d
i n t o c o m m o n or p e r p e t u a l
preferred
stock
w i t h i n a s p e c i f i e d p e r i o d o f t i m e n o t t o e x c e e d 12 y e a r s 0
E q u i t y c o m m i t m e n t n o t e s a l l o w for c a s h r e d e m p t i o n w i t h p r o c e e d s
f r o m t h e s a l e of n e w l y i s s u e d c o m m o n or p e r p e t u a l p r e f e r r e d
stocko
Such notes are di s t i n g u i s h e d from e q u i t y contract notes,
which obligate
the h o l d e r
to t a k e the c o m m o n
or
perpetual
p r e f e r r e d s t o c k o f t h e i s s u e r in l i e u o f c a s h for r e p a y m e n t o f
the n o t e s o
U n d e r the a m e n d e d g u i d e l i n e s , e q u i t y c o n t r a c t n o t e s
continue
to be t r e a t e d as p r i m a r y c a p i t a l
for b a n k h o l d i n g
c o m p a n i e s and state m e m b e r b a n k s „
T h e m a j o r i t y of t h o s e c o m m e n t i n g on this a s p e c t of the
p r o p o s a l t h o u g h t that e q u i t y c o m m i t m e n t n o t e s s h o u l d c o n t i n u e to
be c o u n t e d as p r i m a r y c a p i t a l for b a n k s as w e l l as for b a n k
holding com p a n i e s „
They thought that equity commitment notes
a r e an i m p o r t a n t v e h i c l e for i n c r e a s i n g e q u i t y c a p i t a l a n d t h a t
such n o t e s p r o v i d e g r e a t e r f l e x i b i l i t y to b a n k i n g o r g a n i z a t i o n s
in m e e t i n g c a p i t a l r e q u i r e m e n t s „
Some commenters asserted there
is n o r e a s o n
the B o a r d
should
take d i f f e r e n t
positions
on
c o m m i t m e n t n o t e s for b a n k h o l d i n g c o m p a n i e s a n d for s t a t e m e m b e r
banks„
S e v e r a l c o m m e n t e r s , h o w e v e r , o p p o s e d the t r e a t m e n t of
c o m m i t m e n t n o t e s as p r i m a r y c a p i t a l b e c a u s e t h e i n s t r u m e n t s ,
in
t h e i r vie w , r e p r e s e n t o n l y a p r o m i s e to i s s u e e q u i t y D
Moreover,
t h e h o l d e r o f t h e n o t e s is n o t o b l i g a t e d t o a c c e p t s t o c k
in
p l a c e o f t h e n o t e s a s is t h e c a s e w i t h e q u i t y c o n t r a c t n o t e s 0
S o m e c o m m e n t e r s e x p r e s s e d c o n c e r n t h a t if a b a n k i n g o r g a n i z a t i o n
encountered
financial
trouble
before
it
could
honor
its
c o m m i t m e n t to issue e quity, the b a n k i n g o r g a n i z a t i o n w o u l d h a v e
to c o p e with less e q u i t y than w o u l d o t h e r w i s e be the c a s e Q
While equity comm i t m e n t notes serve a useful purpose by
e n c o u r a g i n g b a n k h o l d i n g c o m p a n i e s to m a k e a c o m m i t m e n t to is s u e
c o m m o n o r p e r p e t u a l p r e f e r r e d s t o c k , t h e r e is v a l i d c o n c e r n t h a t
- 13
some institutions may not honor their commitment to issue
equityo
The Board believes, however, that commitment notes can
be structured to provide substantial guarantees of conversion*
To that end, the Board has written a pre-maturity funding
requirement into its guidelines0 Under this requirement, a bank
holding company issuing such notes must issue new common or
perpetual preferred stock sufficient to redeem or replace
one-third of the amount of the typical 12-year commitment notes
by the end of the fourth year, another third by the end of the
eighth year, and the final third at least 60 d a y s before the
notes mature*
T h u s , most of the debt will have been funded
before maturity*
In a d d i t i o n , t h e B o a r d h a s s p e c i f i c a l l y d e t a i l e d o t h e r
criteria
f or
equity
commitment
notes,
including
specific
the
sanctions
and
supervisory actions
for
failure
to m e e t
pre-maturity funding requirements,
a subordination requirement
f or a n y g u a r a n t e e o f c o m m i t m e n t n o t e s p r o v i d e d b y a s t a t e m e m b e r
b a n k or b a n k h o l d i n g c o m p a n y , and a l i m i t a t i o n on the a m o u n t of
s u c h n o t e s f or c a p i t a l p u r p o s e s t o 10 p e r c e n t o f p r i m a r y c a p i t a l
excluding mandatory convertible securities*
The Board has also spelled out
in m o r e d e t a i l
the
g e n e r a l c r i t e r i a f or m a n d a t o r y c o n v e r t i b l e s e c u r i t i e s , i n c l u d i n g
a m a x i m u m 1 2 - y e a r term,
l i m i t a t i o n s on a m o u n t s a l l o w a b l e
for
p r i m a r y c a p i t a l p u r p o s e s , r e s t r i c t i o n s on r e d e m p t i o n , a g e n e r a l
prohibition
a g a i n s t a c c e l e r a t i o n of pay m e n t ,
a subordination
requirement,
and d e d i c a t i o n of stock p r o c e e d s
upon
issuance*
These
requirements
for
mandatory
convertible
securities
in
g e n e r a l and the s p e c i f i c l i m i t s i m p o s e d on e q u i t y c o m m i t m e n t
n o t e s w i l l p r o v i d e a d e q u a t e s a f e g u a r d s to p e r m i t r e l i a n c e on
such
commitment
notes
as p r i m a r y
capital
for
bank
holding
companies *
The Board believes, however, that federally supervised
b a nks should be treated
u n i f o r m l y w i t h r e s p e c t to d e b t and
e q u i t y instruments they issue*
A bank s hould not be e n c o u r a g e d
t o a l t e r i t s s t a t u s as a n a t i o n a l b a n k , s t a t e b a n k , or m e m b e r o f
the F e d e r a l R e s e r v e S y s t e m or to " f o r u m s h o p " b y s t r u c t u r i n g
m e r g e r s or o t h e r t r a n s a c t i o n s t o p e r m i t t h e t r e a t m e n t o f d e b t or
e q u i t y i n s t r u m e n t s as p r i m a r y c a p i t a l *
T h e B o a r d b e l i e v e s the
need
for u n i f o r m i t y in t h e t r e a t m e n t o f b a n k s
is s u f f i c i e n t
reason
to e x c l u d e e q u i t y c o m m i t m e n t n o t e s
from
the p r i m a r y
capital of state member
banks*
The Board will continue
to
i n c l u d e e q u i t y c o m m i t m e n t n o t e s as p r i m a r y c a p i t a l
for b a n k
holding companies*
The Board has "grandfathered" any equity commitment
notes issued by state member banks prior to May 15, 1985, and it
will continue to include such notes in a bank°s primary capital*
14
Issues
Relating
to
Secondary
Capitalo
E q u i t y c o m m i t m e n t n o t e s t h a t d o n o t q u a l i f y for p r i m a r y
c a p i t a l f or s t a t e m e m b e r b a n k s w i l l q u a l i f y in m a n y c a s e s as
secondary capitalo
Sec o n d a r y capital c o n s i s t s of long-term,
unsecured
debt
( w hi c h ,
in
the
case
of
banks,
must
be
s u b o r d i n a t e d to d e p o s i t s ) and 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 0
In
proposing
to a m e n d
the g u i d e l i n e s
in J u l y
1984,
the B o a r d
s u g g e s t e d n o c h a n g e s in t h e t r e a t m e n t o f s e c o n d a r y c a p i t a l o
In
particular,
under
current
guidelines
secondary
capital
i n s t r u m e n t s a re r e q u i r e d to h a v e an o r i g i n a l w e i g h t e d a v e r a g e
maturity
of
at le a s t
seven y e a r s Q
In a d d i t i o n ,
as
these
instruments approach maturity,
the o u t s t a n d i n g b a l a n c e of the
i n s t r u m e n t s i n c l u d e d in s e c o n d a r y c a p i t a l
is d i s c o u n t e d 0
The
e x i s t i n g g u i d e l i n e s a l s o l i m i t the a m o u n t of s e c o n d a r y c a p i t a l
o f a s t a t e m e m b e r b a n k t o 50 p e r c e n t o f t h e b a n k ° s p r i m a r y
capitalo
S e v e r a l p u b l i c c o m m e n t s a d d r e s s e d these c o n d i t i o n s of
s e c o n d a r y c a p i t a l , and s o m e c o m m e n t e r s s u g g e s t e d e l i m i n a t i o n of
o n e or m o r e of the t h r e e c o n d i t i o n s »
(a)
Original Weigh t e d M a t u r i t y of Seven Y e a r s s
The
Board has decided
to r e t a i n
the r e q u i r e m e n t
that
secondary
c a p i t a l c o m p o n e n t s h a v e an o r i g i n a l w e i g h t e d - a v e r a g e m a t u r i t y of
at
least
seven
years*
(The
method
for
determining
the
w e i g h t e d - a v e r a g e m a t u r i t y o f a q u a l i f y i n g i n s t r u m e n t is d e f i n e d
in 2 = 4 1 9 o f t h e F e d e r a l R e s e r v e R e g u l a t o r y S e r v i c e , 1 9 7 6 F e d e r a l
Reserve
Bulletin
6 0 3,
41
Federal
Register
26201
( J u n e 25,
1 9 7 6 ) o)
T h i s r e q u i r e m e n t is c o n s i s t e n t w i t h t h e n o t i o n t h a t
s e c o n d a r y c a p i t a l i n s t r u m e n t s s h ould p r o v i d e a stable s o u r c e of
funds with a reasonably long maturity*
Als o , e x e m p t i o n f r o m the
d e f i n i t i o n of a d e p o s i t und e r the B o a r d ' s R e g u l a t i o n s D and Q
(12
CoFoRo
§§ 2 0 4
and
217,
respectively),
requires
that
s u b o r d i n a t e d d e b t h a v e w e i g h t e d - a v e r a g e m a t u r i t y of at l e a s t
seven years*
R e t e n t i o n o f t h i s r e q u i r e m e n t is c o n s i s t e n t w i t h
the p o s i t i o n s of the F D I C and the C o m p t r o l l e r *
(b)
Discounting Requirements*
The B o a r d has d e c i d e d
t o e l i m i n a t e t h e r e q u i r e m e n t in i t s g u i d e l i n e s
for e x p l i c i t
d i s c o u n t i n g of s e c o n d a r y c a p i t a l i n s t r u m e n t s as t hey a p p r o a c h
maturity*
The Bo a r d had d i s c o u n t e d the o u t s t a n d i n g b a l a n c e of
s u b o r d i n a t e d d e b t and l i m i t e d - l i f e p r e f e r r e d sto c k i n s t r u m e n t s
20 p e r c e n t e a c h year d u r i n g the i n s t r u m e n t s '
last five years
before maturity*
W h i l e this p r o c e s s has a c e r t a i n a n a l y t i c a l
a p p e a l - - t h a t is, as s e c o n d a r y c o m p o n e n t s a p p r o a c h m a t u r i t y t h e y
b e c o m e in s o m e r e s p e c t s l e s s l i k e c a p i t a 1 - - it a l s o c o m p l i c a t e s
the c a l c u l a t i o n of s e c o n d a r y and total capital*
Moreover,
the
information
necessary
to
make
this
calculation
is
often
difficult
to o b t a i n on
a regular
basis
from bank
holding
c o m p a n i e s , and the i m p o s i t i o n of a ne w r e p o r t i n g r e q u i r e m e n t
could
involve
a considerable
burden
not
justified
by
the
resulting benefits*
The C o m p t r o l l e r and the FD I C have al s o
15
e l e c t e d n o t to i n c o r p o r a t e this d i s c o u n t i n g r e q u i r e m e n t
into
t h e i r regulations,,
W h i l e the B o a r d w i l l e l i m i n a t e the e x p l i c i t
discounting requirement,
t h e a m e n d e d g u i d e l i n e s m a k e it c l e a r
t h a t the B o a r d w i l l c o n t i n u e ,
on a ease~by-=case basis,
and
p a r t i c u l a r l y in c a s e s o f p r o p o s e d e x p a n s i o n ,
to e v a l u a t e the
r e m a i n i n g m a t u r i t y o f s e c o n d a r y c a p i t a l c o m p o n e n t s in a s s e s s i n g
the a d e q u a c y of a banking o r g a n i z a t i o n ' s total c a p i t a l 0
(c)
Limiting
Secondary
Capital
to
50
Percent
P r i m a r y C a p i t a l ,, T h e B o a r d ' s c u r r e n t g u i d e l i n e s l i m i t a g g r e g a t e
s e c o n d a r y c a p i t a l in a n
individual
state member
bank
to 50
p e r c e n t of
t h e b a n k ' s p r i m a r y capital,,
The
Board
has
not
i m p o s e d a s i m i l a r l i m i t a t i o n on the a m o u n t of s e c o n d a r y c a p i t a l
components
that m a y be i n c l u d e d
in a b a n k h o l d i n g c o m p a n y ' s
total capitalo
Banking organizations
should be e n c o u r a g e d
to r a i s e
a d d i t i o n a l c a p ital funds through the issuance of
instruments
s u b o r d i n a t e d t o d e po s it o r s , ,
Jud i c i o u s use of subordinated debt
can
improve
a banking
organization's
overall
funding
by
i n c r e a s i n g the m a t u r i t y of its liabilities,,
Greater reliance on
s u b o r d i n a t e d d e b t as a f u n d i n g v e h i c l e can a l s o e n h a n c e the r o l e
of c a p i t a l m a r k e t s
in d i s c i p l i n i n g t h e a c t i v i t i e s o f b a n k i n g
organizations,
because
subordinated
debtholders
have
an
i n c e n t i v e to m o n i t o r
the r i s k s of the b a n k i n g o r g a n i z a t i o n s
whose obligations
they hold and
to c h a r g e
appropriate
risk
p r e m i u m s for t h e f u n d s t h e y p r o v i d e „
N e v e r t h e l e s s , the F D I C and C o m p t r o l l e r l i m i t the use of
such subordinated debt
(and 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 )
for
s e c o n d a r y c a p i t a l p u r p o s e s t o 5 0 p e r c e n t o f p r i m a r y c a p i t a l in
the c a s e of n a t i o n a l b a n k s and s t a t e n o n m e m b e r b a n k s „
T h i s 50
p e r c e n t l i m i t a t i o n o n s e c o n d a r y c a p i t a l a r i s e s in p a r t f r o m a
concern
to
limit
total
capital,
which
is
the
base
for
d e t e r m i n i n g a n a t i o n a l b a n k 0s l e g a l l e n d i n g l i m i t , a n d in p a r t
f r o m a c o n c e r n that high tot a l c a p i t a l r a t i o s b a s e d on l a r g e
amounts
of s e c o n d a r y c a p i t a l c o u l d be m i s l e a d i n g 0
For
any
banking
organization
with
a minimally acceptable
level
of
p r i m a r y c a p i t a l , the 5 0 p e r c e n t l i m i t on s e c o n d a r y c a p i t a l w i l l
not become operative until a bank's total capital ratio exceeds
8 o 2 5
percent,
well
into
capital
zone
1D
The
5 0
percent
requirement,
therefore,
has
very
limited
impact
on
a
d e t e r m i n a t i o n of a bank's capital a d e q u a c y «
A s o f S e p t e m b e r 30,
1984, fewer
t h a n 15
banks had
s e c o n d a r y c a p i t a l o f 50 p e r c e n t or m o r e of p r i m a r y c a p i t a l o
The
a v e r a g e r a t i o of s e c o n d a r y c a p i t a l to p r i m a r y c a p i t a l for t h o s e
b a n k s i s s u i n g s e c o n d a r y c a p i t a l i n s t r u m e n t s was less than 10
percento
Given
the
limited
impact
of
the
50°percent-of-primary-capital
rule, the n e e d
to t r e a t b a n k s
u n i f o r m l y w h e n e v e r p o s s i b l e , and the c o n c e r n s e x p r e s s e d b y the
of
16
F D I C a n d t h e C o m p t r o l l e r , the B o a r d h a s d e c i d e d to c o n t i n u e its
p r e s e n t p r a c t i c e of l i m i t i n g the s e c o n d a r y c a p i t a l of s t a t e
m e m b e r b a n k s t o 50 p e r c e n t o f t h e p r i m a r y c a p i t a l o f s u c h
banks o
The B o a r d wi l l not impose such a l i m i t on bank h o l d i n g
companieso
State m e m b e r ban k s are free to issue s u b o r d i n a t e d
d e b t or 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 o v e r t h e 50 p e r c e n t li mit,
b u t t h e B o a r d w i l l n o t i n c l u d e s u c h i n s t r u m e n t s in t h e i r c a p i t a l 0
4 0
MISCELLANEOUS
issues
and
conside ratio ns
A n u mber of a d d i t i o n a l
issues were
raised by those
c o m m e n t i n g on the B o a r d ' s p r o p o s a l „
The Board has c o n s i d e r e d
t h e s e c o m m e n t s a n d i n c l u d e d c e r t a i n c h a n g e s in t h e g u i d e l i n e s D
Use
of
Average
Assets0
In
applying
its c a p i t a l
guidelines,
the Board
has
c o m p u t e d p r i m a r y and t o t a l c a p i t a l r a t i o s of b a n k s and b a n k
h o l d i n g c o m p a n i e s on the b a s i s of f i n a n c i a l d a t a a v a i l a b l e at
the c l o s e of a p a r t i c u l a r q u a r t e r l y r e p o r t i n g p e r i o d 0
The FDIC
and the C o m p t r o l l e r
are p l a n n i n g to use a v e r a g e t o t a l a s s e t
figures
in
the
denominators
of
their
capital
ratios
and
period-end capital figures
in t h e n u m e r a t o r s o f t h e r a t i o s .
T h i s a p p r o a c h is p r o m p t e d b y c o n c e r n s t h a t t h e u s e o f p e r i o d - e n d
asset
figures may result
in
inadvertent violations
of
the
c a p i t a l r e q u i r e m e n t s if a s s e t s s h o u l d i n c r e a s e a t t h e e n d o f a
p e r i o d in t h e n o r m a l c o u r s e o f b u s i n e s s ,
in a d d i t i o n , t h e r e is
also a concern
that the use of p e r i o d - e n d
data
encourages
"reverse
window dressing,"
a practice
whereby
institutions
r e d u c e h o l d i n g s of l i q u i d a s s e t s to b o o s t c a p i t a l r a t i o s on the
l a s t d a y o f e a c h quarter,,
W h i l e the B o a r d b e l i e v e s these c o n c e r n s m a y be d e a l t
w i t h on a c a s e - b y - c a s e basis, the l e g i t i m a c y o f the c o n c e r n s and
t h e i n t e r e s t in u n i f o r m i t y h a v e p r o m p t e d t h e B o a r d t o a m e n d i t s
practice,.
The B o a r d w i l l use a v e r a g e t o t a l a s s e t f i g u r e s
in
c o m p u t i n g c a p i t a l r a t i o s o f s t a t e m e m b e r banks,,
T h e B o a r d is
concerned,
however,
that some bank holding companies may not
r o u t i n e l y ke e p data that p e r m i t ea s y c o m p i l a t i o n of q u a r t e r l y
a v e r a g e a s s e t f i g u r e s a n d t h a t s u c h a c h a n g e in c o m p u t i n g t h e
capital
rat i o s of bank h o l d i n g c o m p a n i e s at
this
time may
constitute
an a d d i t i o n a l
reporting b u r d e n c
Accordingly,
the
B o a r d w i l l c o n t i n u e t o u s e p e r i o d - e n d t o t a l a s s e t f i g u r e s for
bank h o l d i n g c o m p a n i e s w h i l e stu d y i n g w h e t h e r the use of average
total
asset
figures
would
impose
any
substantial
new
r e c o r d k e e p i n g or r e p o r t i n g b u r d e n s „
- 17
Off-Balance
Sheet
R i s k .,
The amended guidelines require that state member banks
or b a n k h o l d i n g c o m p a n i e s w i t h h i g h or i n o r d i n a t e o f f - b a l a n c e
s h e e t e x p o s u r e h o l d a d d i t i o n a l p r i m a r y c a p i t a l t o c o m p e n s a t e for
this
risk*
The guidelines
contain no ex p l i c i t
quantitative
m e t h o d f or t a k i n g o f f - b a l a n c e s h e e t r i s k i n t o c o n s i d e r a t i o n in
c o m p u t i n g p r i m a r y and total c a pital r a t i o s 0
Several commenters
argued
that
capital
guidelines
or
regulations
have
the
unintended
and
undesirable
effect
of
encouraging
banking
i n s t i t u t i o n s t o e n g a g e in a c t i v i t i e s a n d t o e m p l o y a c c o u n t i n g
t e c h n i q u e s t h a t a r e d e s i g n e d to t a k e or to k e e p a s s e t s o f f the
balance
sheeto
This
practice,
known
as
"off-balance
sheet
b a n k i n g / " r e s u l t s in h i g h e r r e p o r t e d c a p i t a l r a t i o s b u t d o e s n o t
r e d u c e the risk to b a n k i n g o r g a n i z a t i o n s 0
To provide more guidance
in t h e a r e a o f o f f - b a l a n c e
s h e e t r i s k t h e B o a r d h a s i n c l u d e d in t h e a m e n d e d g u i d e l i n e s t h e
following
language
in p l a c e
of
the
general
reference
to
o f f - b a l a n c e s h e e t b a n k i n g in t h e c u r r e n t g u i d e l i n e s 0
The Federal
Reserve
will
also
take
into
a c c o u n t the s a l e o f l o a n s or o t h e r a s s e t s
w i t h r e c o u r s e and the v o l u m e and n a t u r e of
all o f f - b a l a n c e
sheet
risk,,
Particularly
c l o s e a t t e n t i o n w i l l be d i r e c t e d
to r i s k s
associated with
standby letters of credit
and
participation
in
joint
venture
a c t i vi t ie s .,
The Federal Reserve will review
the r e l a t i o n s h i p of all o n- and o f f - b a l a n c e
sheet
risks
to c a p i t a l
and
will
require
t h o s e i n s t i t u t i o n s w i t h h i g h or i n o r d i n a t e
l e v e l s of risk to hold a d d i t i o n a l p r i m a r y
capitalo
In a d d i t i o n ,
the F e d e r a l R e s e r v e
w i l l c o n t i n u e to r e v i e w the n e e d
for m o r e
explicit procedures
for
f a c t o r i n g o n- and
o f f - b a l a n c e s h e e t r i s k s into the a s s e s s m e n t
o f c a p i t a l adequacy.,
T h e B o a r d i n t e n d s to e n c o u r a g e b a n k i n g i n s t i t u t i o n s to
b e t t e r m o n i t o r and c o n t r o l r i s k s on a v o l u n t a r y b a s i s and thus
to a v o i d the n e c e s s i t y of m o r e f o r m a l l i m i t s or c o n t r o l s on
off-balance
sheet
activity,,
Moreover,
examiners
will
be
instructed
to r e v i e w c a r e f u l l y the n a t u r e and d e g r e e of all
o f f - b a l a n c e s h e e t r i s k s a n d t a k e t h e s e r i s k s i n t o a c c o u n t in
assigning
capital
ratings
under
the
Uniform
Financial
I n s t i t u t i o n s R a t i n g System,,
18
Risk-Based
Capital
Ratios0
A
n u m b e r of c o m m e n t e r s , p a r t i c u l a r l y some large bank
holding companies,
i n d i c a t e d t h a t a r a t i o of c a p i t a l to risk
a s s e t s w o u l d be of m u c h g r e a t e r a n a l y t i c a l v a l u e to r e g u l a t o r s
t h a n a c a p i t a l to tot a l a s s e t s ratio, a nd w o u l d be c o n s i s t e n t
w i t h r e g u l a t o r y t r e n d s in o t h e r count r ie s, ,
These commenters
argued that a risk-based capital ratio would exclude federal
funds, s h o r t - t e r m U°S„ T r e a s u r y s e c u r i t i e s and other "riskless"
a s s e t s f r o m the a s s e t b a s e of the r a t i o and, t h e r e f o r e ,
avoid
potentially
adverse
effects
on
liqui d it y, ,
These
commenters
generally
acknowledged,
however,
that
the
techniques
and
d e f i n i t i o n s n e e d e d to d e v e l o p a r i s k - b a s e d c a p i t a l r a t i o w o u l d
ha v e to be p r e d i c a t e d upon c o n s i d e r a b l e
research
and should
p r o b a b l y include some m e a s u r e m e n t of o f f - b a l a n c e sheet r i s k D
The B o a r d has not a d o p t e d c a p i t a l g u i d e l i n e s b a sed on a
r a t i o of c a p i t a l to risk a s s e t s at t h i s t i m e 0
The amended
g u i d e l i n e s i n d i c a t e t h a t the B o a r d w i l l take the o v e r a l l d e g r e e
of
risk
associated
with
an
o r g a n i z a t i o n ’s
assets
into
consideration
in
assessing
compliance
with
the
capital
guidelines,,
T he c a p i t a l g u i d e l i n e s a p p l y to sound, w e l l - m a n a g e d
b a n k i n g o r g a n i z a t i o n s o p e r a t i n g w i t h m o d e r a t e r i s k in t h e i r l o a n
and i n v estment p o r t f o l i o s 0
Organizations operating with more
r i s k a r e e x p e c t e d to h o l d a d d i t i o n a l c a p i t a l to c o m p e n s a t e for
t h e s e risks,,
The B o a r d r e c o g n i z e s that risk m u s t be taken into
consideration
in a s s e s s i n g c a p i t a l a d e q u a c y 0
At this
time,
h o w e v e r , it is m o r e a p p r o p r i a t e t o d o s o o n a c a s e - b y - c a s e b a s i s
t h a n w i t h q u a n t i t a t i v e standards,,
Uniformity
of
Institutions„
Capital
Requirements
for
Banks
and
Thrift
Several
comments
emphasized
the
competitive
disadvantage
of banks
vis-a-vis
thrift
institutions
because
t h r i f t s m a y o p e r a t e at lower c a p i t a l l e vels.
The Federal Home
Loan Bank Board has recen t l y adopted rules requiring feder a l l y
insured thrift institutions undertaking significant growth
to
increase their net worth positions „
T he B o a r d has s t a t e d its
s u p p o r t of this p r o p o s a l and h as u r g e d that the F e d e r a l H o m e
Loan
Bank
Board
recognize
the need
to m o v e
toward
higher
c a p i t a l - t o - a s s e t s r a t i o s f o r t h r i f t s a s p r o m p t l y a s possible,,
While
there
is a s i g n i f i c a n t d i s p a r i t y b e t w e e n
the c a p i t a l
l e v e l s at w h i c h t h r i f t s and b a n k s are r e q u i r e d to o p e r a t e , the
a p p r o p r i a t e w a y t o d e a l w i t h t h i s i s s u e is t o s u p p o r t h i g h e r
r a t i o s for t h e t h r i f t industry,,
T o t hat end, the e s t a b l i s h m e n t
b y t h e b a n k i n g r e g u l a t o r s of u n i f o r m m i n i m u m c a p i t a l l e v e l s for
all federally supervised banking o r g a n i z a t i o n s has provided a
c l e a r s t a t e m e n t o f w h a t t h e y v i e w as an a p p r o p r i a t e t a r g e t for
all d e p o s i t o r y i n s t i t u t i o n s „
19
Applicability
of
the
Guidelines
t o B a n k e r s 8 B a n k s ,,
Several c o m m e n t e r s requested c l a r i f i c a t i o n on whether
t h e c a p i t a l g u i d e l i n e s a p p l y t o '“b a n k e r s 0 b a n k s 0"
A n u m b e r of
c o m m e n t e r s i n d i c a t e d that the b a n k e r s 0 b a n k s s h o u l d be e x e m p t
f r o m t h e g u i d e l i n e s b e c a u s e t h e y g e n e r a l l y e n g a g e in " l o w r i s k "
activitieso
H o w e v e r { b a n k e r s 0 banks are not prohibited
from
taking risks? consequently,
the B o a r d h as t a k e n n o a c t i o n to
e x c l u d e b a n k e r s 6 b a n k s f r o m t h e u n i f o r m c a p i t a l s t a n d a r d s in i t s
guidelines.
Treatment
of
Foreign
Banks
under
the
Guidelines0
A
number
of
commenters
raised
the
issue
of
the
application
of
the
capital
guidelines
to
foreign-domiciled
banking organizations with banking operations
in t h e U n i t e d
Stateso
W h i l e s o m e c o m m e n t e r s s u g g e s t e d it w o u l d b e p r e f e r a b l e
for s u c h f o r e i g n b a n k s to be s u b j e c t to the B o a r d ' s c a p i t a l
guidelines,
it w a s
also
requested
that
foreign
banks
be
specifically excluded from coverage,
at l e a s t u n t i l the B o a r d
has c o m p l e t e d its d i s c u s s i o n s w i t h f o r e i g n bank s u p e r v i s o r s on
c a p i t a l and i n t e r n a t i o n a l l e n d i n g i s s u e s as r e q u i r e d by I L S A 0
T h e B o a r d is d i s c u s s i n g w i t h f o r e i g n b a n k s u p e r v i s o r s
appropriate
capital
standards
for
banks
operating
internationally,
Pending c o m p letion of those discussions,
the
B o a r d h as d e c i d e d to r e v i e w the f i n a n c i a l c o n d i t i o n ,
including
t h e c a p i t a l a d e q u a c y , o f f o r e i g n b a n k s w i t h o p e r a t i o n s in t h e
U n i t e d S t a t e s on a c a s e - b y - c a s e b a s i s .
The Board will continue
to s c r u t i n i z e the c a p i t a l of such f o r e i g n b a n k i n g o r g a n i z a t i o n s
with special care when those
institutions propose
to e x p a n d
operations
or
make
additional
acquisitions
in
the
United
States.
T h e c a p i t a l g u i d e l i n e s a p p l y to a n y s t a t e m e m b e r b a n k
or b a n k h o l d i n g c o m p a n y (other t h a n a q u a l i f y i n g f o r e i g n b a n k i n g
organization
as
defined
by
Regulation
K ) , regardless
of
o wn er s hi p ,,
Technical
Changes
Secur ities 0
to
Criteria
for
Mandatory
Convertible
The Board has made certain techn i c a l changes
in t h e
existing
guidelines
with
respect
to
mandatory
convertible
securitieso
T h e m o d i f i c a t i o n s for the m o s t p a r t a r e d e s i g n e d to
u p d a t e the g u i d e l i n e s to r e f l e c t e x i s t i n g p o l i c y and to c o r r e c t
d e f i c i e n c i e s in t h e e x i s t i n g criteria,,
T h e m o d i f i c a t i o n s are as
follows?
20
a 0
b 0
Co
do
-
The g u i d e l i n e s have been am e n d e d
to a l l o w
specifically
for
the t r e a t m e n t of
"hybrid
m a n d a t o r y c o n v e r t i b l e s 00 a s p r i m a r y c a p i t a l „
These instruments combine features of equity
commitment
notes
with
those
of
equity
contract
notes.
For
purposes
of
the
guidelines, such instruments would be treated
as e q u i t y c o n t r a c t notes,,
The g u i d e l i n e s h a v e b e e n a m e n d e d to i n d i c a t e
that a b a n k or b a n k h o l d i n g c o m p a n y i s s u i n g
equity
generally
must
decide
during
the
quarter
in w h i c h t h e s e c u r i t i e s a r e i s s u e d
w h e t h e r or n o t the p r o c e e d s a r e to be u s e d to
s a t i s f y the r e q u i r e m e n t to i s s u e s t o c k under
an
equity
commitment
or
equity
contract
note,
This
dedication
requirement
is
d e s i g n e d to r e d u c e the p o s s i b i l i t y t h a t the
p r i m a r y c a p i t a l r a t i o of an i n s t i t u t i o n m i g h t
be
overstated 0
An
institution's
primary
c a p i t a l w o u l d be o v e r s t a t e d
if t h e
issuer
counts
both
the
mandatory
convertible
s e c u r i t i e s and the sto c k
i s s u e d to r e p l a c e
t h o s e s e c u r i t i e s as p r i m a r y c a p i t a l a t t h e
same t i m e 0
W h e n e v e r s t o c k is i s s u e d a n d is
dedicated
to
satisfy
a
note
funding
requirement,
the
amount
of
outstanding
mandatory
convertible
debt
that counts
as
p r i m a r y c a p i t a l is r e d u c e d b y t h e a m o u n t o f
stock issued,
In g e n e r a l , a n y d e d i c a t i o n o f
the
proceeds
of
a
common
or
perpetual
p r e f e r r e d stock i s s u a n c e to s a t i s f y a f u n d i n g
r e q u i r e m e n t m u s t b e m a d e in t h e q u a r t e r
in
which
the stock
is i s s u e d „
As a general
rule,
if t h e d e d i c a t i o n is n o t m a d e w i t h i n
the p r e s c r i b e d p e r i o d , t h e n the s t o c k i s s u e d
cannot
later
be d e d i c a t e d
to s a t i s f y any
funding requirement,
T he g u i d e l i n e s h a v e b e e n a m e n d e d to i n d i c a t e
t h a t d o c u m e n t a t i o n c e r t i f i e d b y an a u t h o r i z e d
agent of the issuer s h o w i n g the a m o u n t of
stock
issued,
the d a t e s of issue,
and
the
amounts
of
such
issues
dedicated
to
the
retirement
or
redemption
of
mandatory
convertible
securities
will
satisfy
the
dedication r e q u i r e m e n t
The g uidelines have been amended
to s t a t e
that f a i l u r e to m e e t the f u n d i n g r e q u i r e m e n t s
of an e q u i t y c o m m i t m e n t n o t e w i l l be v i e w e d
as a b r e a c h of a r e g u l a t o r y c o m m i t m e n t , w i l l
r e s u l t in a p p r o p r i a t e s u p e r v i s o r y a c t i o n , a n d
will be taken into c o n s i d e r a t i o n by the Board
21
in
e.
Perpetual
acting
on
statutory
applications0
This
provision
is d e s i g n e d
to e n s u r e
that
the
issuer will honor
its c o m m i t m e n t
to issue
equity 0
T h e g u i d e l i n e s have been a m e n d e d to i n dicate
that
common
or
perpetual
preferred
stock
i s s u e d u n d e r d i v i d e n d r e i n v e s t m e n t p l a n s , or
issued
to
finance
acquisitions,
including
acquisitions
of business
entities,
m a y be
dedicated
to
satisfy
any
mandatory
convertible note funding requirements.
Debt.
S e v e r a l i n s t i t u t i o n s h a v e u r g e d the B o a r d to c o n s i d e r
t r e a t i n g " p e r p e t u a l deb t " as a f o r m of p r i m a r y c a p i t a l .
The
B o a r d ' s J u l y p r o p o s a l did n o t m a k e a n y r e f e r e n c e to p e r p e t u a l
debt.
Although
it a p p e a r s
t h a t n o c o m m e r c i a l b a n k or b a n k
h o l d i n g c o m p a n y in t h e U n i t e d S t a t e s h a s e v e r i s s u e d p e r p e t u a l
debt,
i n t e r e s t in p e r p e t u a l d e b t h a s i n c r e a s e d r e c e n t l y a s a
r e s u l t of a r u l i n g by the Bank of E n g l a n d that w o u l d p e r m i t
U n i t e d K i n g d o m i n s t i t u t i o n s to c o u n t p e r p e t u a l s u b o r d i n a t e d e b t
as p r i m a r y c a p i t a l under c e r t a i n c o n d i t i o n s .
The Board has
d e c i d e d t h a t p e r p e t u a l d e b t w i l l n ot be a f f o r d e d the s t a t u s of
p r i m a r y c a p i t a l at this time.
The Board, however, will continue
to s t u d y t h e i s s u e to d e t e r m i n e w h e t h e r to s e e k p u b l i c c o m m e n t .
5,
THE PROCEDURAL REGULATION
The Board has adopted, with only minor wording or
technical changes, the procedural regulation it proposed in July
1984, to require compliance with the capital guidelines and, in
particular, with the minimum capital ratios.
The basic
procedures parallel those of the FDIC and the Comptroller.
The B o a r d has a d d e d a d e f i n i t i o n a l p r o v i s i o n to the
procedural regulation
to c l a r i f y that the c a p i t a l
directive
p r o c e d u r e s a n d t h o s e p r o c e d u r e s for s e t t i n g c a p i t a l l e v e l s for
i n d i v i d u a l i n s t i t u t i o n s a r e i n t e n d e d to a p p l y to the i n d i v i d u a l
n o n b a n k s u b s i d i a r i e s of b a n k h o l d i n g c o m p a n i e s as w e l l as to the
h o l d i n g c o m p a n i e s on a c o n s o l i d a t e d basis.
W h i l e the am e n d e d
g u i d e l i n e s h a v e n o t a p p l i e d s u b s t a n t i v e c a p i t a l r e q u i r e m e n t s to
the n o n b a n k s u b s i d i a r i e s of b ank h o l d i n g c o m p a n i e s , the a m e n d e d
g u i d e l i n e s e m p h a s i z e t h a t " t h e B o a r d is p l a c i n g g r e a t e r w e i g h t
on
the
building=block
approach
for
assessing
capital
r e q u i r e m e n t s " and t hat the " n o n b a n k s u b s i d i a r i e s of a b a n k i n g
o r g a n i z a t i o n should maintain levels of c a p ital con s i s t e n t with
levels
that
have
been
established
by
industry
norms
or
s t a n d a r d s , b y F e d e r a l or S t a t e r e g u l a t o r y a g e n c i e s . . o or t h a t
22
may be established by the Board after taking into account risk
factors of a particular industry 008 The procedural regulation ,
will permit the Board to enforce its capital requirements for
nonbank subsidiaries of bank holding companies on an
industry-wide basis or in individual cases0 The Report of the
Senate Committee on Banking, Housing, and Urban Affairs
accompanying ILSA, So Rep0 98-122, 98th Congress, 1st Session,
17 (1983) , demonstrates that ILSA provides authority for
extending capital requirements to nonbank affiliates of banks,
stating?
c”0 0 ° any of the provisions of the bill may be
applied by the appropriate federal banking -agency to any
affiliate of any insured bank, including any bank holding
company individually or on a consolidated basis or its non-bank
subsidiaries „ » Q00
initial Implementation0
The procedural regulation requires that any state
member bank or bank holding company not meeting the uniform
minimum capital standards in the guidelines at the time they
become effective, must submit to the Reserve Bank within 90 days
a plan indicating how the banking organization intends to
increase its capital to the required level within a reasonable
period of timeD Certain administrative and judicial enforcement
procedures are outlined in the regulation for failure to submit
a capital planQ
Some commenters expressed concern over the time that
banking organizations will be given to meet the guidelines0 In
accordance with its concern for flexibility, the Board has
avoided establishing a fixed rule defining a reasonable time for
compliance in all easesQ
The Board will assess each
organization's plan on a ease-by-ease basis0 Nevertheless, the
Board believes that, in general, banking organizations should
comply with the minimum ratios within 12 to 18 months of the
effective date of the revised guidelines0
Establishing Capital Requirements Above the uniform Minimum0
The Board may also require particular banks or bank,
holding companies to maintain more than the minimum level of
capital if the financial condition, management, or future
prospects of the institution make a higher capital level
necessary and appropriate,. The amended guidelines indicate the
Board will pay particular attention to risk factors, including
off-balance sheet risk, and to liquidity0 The Board will
discourage the practice of meeting capital guidelines by
reducing the level of liquid assets relative to total assets of
the institution0 The process of determining the adequacy of an
23
i n s t i t u t i o n ^ capital will begin with a qualitative evaluation
o f the c r i t i c a l v a r i a b l e s t h a t d i r e c t l y b e a r on its o v e r a l l
f i n a n c i a l c on d it io n .,
T h e s e varia b l e s include the quality, type
and d i v e r s i f i c a t i o n of assets? c u r r e n t and h i s t o r i c a l earnings?
liquidity?
appropriate
policies
for
loan
charge-offs?
risks
arising
from
interest
rate
mismatches?
the
quality
of
Management?
and o t h e r a c t i v i t i e s t h a t m a y e x p o s e the b a n k to
risks,
including off-balance sheet r i s k s Q
institutions with
s i g n i f i c a n t w e a k n e s s e s in o n e o r m o r e o f t h e s e a r e a s w i l l b e
e x p e c t e d t o m a i n t a i n h i g h e r c a p i t a l l e v e l s t h a n t h e minir a um s s e t
forth
in
the
g u id e li n e s . ,
institutions
currently
or
prospectively
under
any
formal
administrative
action,
final
order,
or
c o n d i t i o n or
agreement
that
sets
forth
a more
stringent
capital
requirement
shall
continue
to m e e t
the
requirement thereinQ
In a d d i t i o n t o p r o c e d u r e s n o w u s e d b y t h e B o a r d
to
require a higher capital level
( e 0g 0 w r i t t e n
agreements
or
m e m o r a n d a b e t w e e n the B o a r d and the f i n a n c i a l i n s t i t u t i o n , c e a s e
and d e s i s t o r ders, and c o n d i t i o n s a t t a c h e d to o r d e r s iss u e d on
a p p l i c a t i o n s or n o t i c e s ) , the a m e n d e d r e g u l a t i o n p r o v i d e s for a
s p e c i f i c n otice and co m m e n t and d i r e c t i v e p r o c e d u r e 0
The Board
m a y c o n s i d e r f a i l u r e to m e e t the m i n i m u m c a p i t a l r e q u i r e m e n t or
a higher
capital
requirement
set by the
Board
as b e a r i n g
a d v e r s e l y u p o n a p p l i c a t i o n s or n o t i c e s
t h a t a b a n k or b a n k
holding company may f i l e 0
Directives„
S e c t i o n 9 0 8 o f I L S A (12 U o S . C o § 3 9 0 7 ) a u t h o r i z e s t h e
a p p r o p r i a t e b a n k i n g a g e n c y to iss u e a d i r e c t i v e to a b a n k i n g
i n s t i t u t i o n that fai l s to m e e t the m i n i m u m c a p i t a l r e q u i r e m e n t o
A d i r e c t i v e m a y r e q u i r e a p l a n for a c h i e v i n g s u c h r e q u i r e m e n t . ,
A
directive,
including
a
capital
adequacy
plan
submitted
t h e r e u n d e r , is a f i n a l o r d e r e n f o r c e a b l e in t h e s a m e m a n n e r a s a
f i n a l c e a s e a n d d e s i s t o r d e r i s s u e d u n d e r 12 U o S o C o § 1 8 1 8 ( b ) 0
T h e i s s u a n c e o f a d i r e c t i v e is d i s c r e t i o n a r y ,
and a d i r e c t i v e
m a y b e i s s u e d in l i e u of, in c o n j u n c t i o n w i t h , o r in a d d i t i o n t o
existing enforcement t o o l s „
The Board has adopted notice and
c o m m e n t p r o c e d u r e s for i s s u a n c e o f a dire c ti ve . ,
6 o
ADOPTION
BANK HOLDING
OF A SINGLE
COMPANIES
SET
OF
GUIDELINES
FOR
MEMBER
BANKS
AND
The Board has amended
its J u l y p r o p o s a l
to r e q u i r e
s e p a r a t e g u i d e l i n e s f or s t a t e m e m b e r b a n k s t o b e p r i n t e d a s a n
a p p e n d i x t o t h e B o a r d “s R e g u l a t i o n H, 12 C o F o R o P a r t 2 0 8 a n d for
b a n k h o l d i n g c o m p a n i e s to be p r i n t e d as an a p p e n d i x to the
B o a r d ' s R e g u l a t i o n Y, 12 C o F o R o P a r t 2 2 5 0
B e c a u s e t h e y a re so
24
s i m i l a r , the Board
will
continue
to
include
them
in o n e
d o c u m e n t , p u b l i s h e d a s A p p e n d i x A t o R e g u l a t i o n Y , 12 C „ F o R s
Part 2 2 5 o
T h i s w i l l a v o i d d u p l i c a t i o n in t h e C o d e o f F e d e r a l
leguationSo
T h e B o a r d w i l l a d d a s e c t i o n t o R e g u l a t i o n h , 12
CoFoRo
208„13,
noting
that
state
member
bank
capital
r e q u i r e m e n t s a r e in R e g u l a t i o n Yo
To summarize,
the amended ca p i t a l a d e q u a c y g u i d e l i n e s
distinguish
between
state
member
banks
and
bank
holding
c o m p a n i e s in f o u r s p e c i f i c a r e a s , a s f o l l o w s ?
a 0
bo
Co
do
IntangibleSo
The
guidelines
require
the
a u t o m a t i c d e d u c t i o n of g o o d w i l l from p r i m a r y
a n d t o t a l c a p i t a l for s t a t e m e m b e r b a n k s b u t
n o t for b a n k h o l d i n g c o m p a n i e s „
Equity
commitment
notes0
The
amended
g u i d e l i n e s tr e a t e q u i t y c o m m i t m e n t n o t e s as
primary capital
for b a n k h o l d i n g c o m p a n i e s
b u t n o t for s t a t e m e m b e r b a n k s .
S e c o n d a r y capital,,
The
amended
guidelines
limit
secondary
capital,
including
subo r d i n a t e d debt and 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 , to 50 p e r c e n t o f p r i m a r y c a p i t a l for
s t a t e m e m b e r b a n k s b u t n o t for b a n k h o l d i n g
companies„
Average A s s e t s „
For st a t e m e m b e r b a n k s the
B o a r d w i l l use a v e r a g e t o t a l a s s e t s o f the
q u a r t e r l y r e p o r t i n g p e r i o d in t h e d e n o m i n a t o r
of p r i m a r y and
total capital
ratiosQ
The
B o a r d w i l l c o n t i n u e to use p e r i o d - e n d a s s e t
f i g u r e s in t h e d e n o m i n a t o r o f c a p i t a l r a t i o s
for b ank h o l d i n g c o m p a n i e s 0
R e g u l a t o r y F l e x i b i l i t y A n a l y s i s -- P a p e r w o r k R e d u c t i o n
Act o
The Board
certified
that adoption of
these
amended
guidelines
is n o t e x p e c t e d
to have a s i g n i f i c a n t
economic
i m p a c t on a s u b s t a n t i a l n u m b e r of s m a l l e n t i t i e s 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 F l e x i b i l i t y A c t
(5 U . S o C »
601 et
s e q ,)o
The am e n d e d g u i d e l i n e s m a y have a s u b s t a n t i a l impact on
a comparatively
small number
of r e g i o n a l
or m u l t i n a t i o n a l
b a n k i n g o r g a n i z a t i o n s , but that impact w i l l be m i n i m i z e d by the
e x t e n d e d p h a s e - i n p e r i o d and the s u b s t a n t i a l a d v a n c e n o t i c e of
a d o p t i o n of these g u i d e l i n e s »
Moreover,
the p o tential impact
on certain organ i z a t i o n s
is o u t w e i g h e d b y t h e b e n e f i t s o f
uniform capital standards,
i m proved s a f e t y and s o u n d n e s s of
large banking organizations,
and i n c r e a s e d s t a b i l i t y of the
banking s ystem0
of
T h e B o a r d is
situationso
These
r e q u i r e d to c o n s i d e r
include applications
c a p i t a l in a n u m b e r
for a c q u i s i t i o n s b y
25
bank holding companies,
application
for m e r g e r s w i t h
state
member
banks,
applications
for
membership
in
the
Federal
Reserve System,
and s u p e r v i s o r y a c t i o n s when n e c e s s a r y 0
in
addition,
12 U o S aC„ 3 9 0 7 ( a ) ( 1 )
r e q u i r e s t h e B o a r d t o ““c a u s e
b a n k i n g i n s t i t u t i o n s to a c h i e v e and m a i n t a i n a d e q u a t e c a p i t a l
by e s t a b l i s h i n g m i n i m u m l e vels of c a p i t a l
for s u c h b a n k i n g
i n s t i t u t i o n s and by using such o ther m e t h o d s as the a p p r o p r i a t e
f e d e r a l b a n k i n g a g e n c y d e e m s a p p r o p r i a t e „"
In c a r r y i n g o u t i t s s u p e r v i s o r y r e s p o n s i b i l i t i e s a n d
in a p p r o v i n g i n d i v i d u a l m e r g e r s a n d a c q u i s i t i o n s , t h e B o a r d h a s
a l w a y s c o n s i d e r e d c a p i t a l adequacy,,
In D e c e m b e r
1981,
the
B o a r d i s s u e d c a p i t a l a d e q u a c y g u i d e l i n e s to i n f o r m b a nks, b a n k
h o l d i n g c o m p a n i e s , and the p u b l i c of its p o l i c i e s on c a p i t a l
and
capital
adequacy,,
The
Board
is
now
amending
those
g u i d e l i n e s to e s t a b l i s h m o r e u n i f o r m s t a n d a r d s for l a r g e a n d
small banking
i n s t i t u t i o n s a n d for g r e a t e r
uniformity among
f e d e r a l b a n k i n g agencies,,
Historically,
the Board has required higher c a p i t a l
r a t i o s for s m a l l b a n k s a n d b a n k h o l d i n g c o m p a n i e s t h a n for
larger ones.
T o the e x t e n t
that this r e g u l a t i o n e q u a l i z e s
requirements,
it w i l l l e s s e n t h e b u r d e n o n s m a l l b a n k s a n d
small bank holding c o m p a n i e s 0
In a c c o r d a n c e
with
Section
3507
of
the p a p e r w o r k
R e d u c t i o n A c t o f 1 9 8 0 a n d 5 C 0F oRo
I320d3,
the p r o p o s e d
information
collection
requirement
in
the
regulation
was
a p p r o v e d b y the B o a r d under a u t h o r i t y d e l e g a t e d b y the O f f i c e
o f M a n a g e m e n t a n d Budget,,
List
of
Subjects
in
12
C,F,R,
Part
Banks,
banking,
Federal
requirements, Securities0
List
of
Subjects
in
12 C,FoR,
208
Reserve
Part
of
Subjects
in
12
CoFoR„
Administrative
Part
practice
Reporting
225
Banks,
banking,
Federal
Reserve
companies, Reporting requirements„
List
System,
System,
Holding
263
and
procedure,
Federal
Reserve
System,,
Pursuant
to
International Lending
the
Board°s
authority
S u p e r v i s i o n A c t of 1983,
under
the
12 U o S » C » 3 9 0 7
26
a n d 3 9 0 9 ? s e c t i o n 5(b) o f t h e B a n k H o l d i n g C o m p a n y A c t o f 1 9 5 6 ,
12 U o S o C o 1 8 4 4 ( b ) ? the F i n a n c i a l I n s t i t u t i o n s S u p e r v i s o r y A c t
of 1966,
12 U o S o C o
1818?
and s e c t i o n s 9 and 11(a)
o f the
F e d e r a l R e s e r v e Act , 12 U o S o C o
248, 3 2 4 and 329,
the B oard
h e r e b y a m e n d s 1 2 C o F o R o p a r t s 2 0 8, 2 2 5 a n d 2 6 3 a s s e t f o r t h
below?
Part
l o
the
208
—
M E M B E R S H I P OF STATE BANKING
FEDERAL RESERVE SYSTEM
12 C o F o R o
Part, and
IN T H E
P a r t 2 0 8 is a m e n d e d b y r e v i s i n g t h e a u t h o r i t y for
b y a d d i n g a n e w s e c t i o n 2 0 8 o13 t o r e a d a s f o l l o w s ?
Authority?
SECTION
INSTITUTIONS
-
2 0 8 o l 3
12 U o S o C o 248, 3 2 1 = 3 3 8 , 4 8 6 ,
3907, 3909, u n less o t h e r w i s e
Capital
1814,
notede
Adequacy
The standards and g u i d e l i n e s by which
the c a p i t a l
a d e q u a c y of s t a t e m e m b e r b a n k s w i l l be e v a l u a t e d by the B o a r d
are set forth
in A p p e n d i x A t o t h e B o a r d ' s R e g u l a t i o n Y,
1 2
C o F o R o
Part 2 2 5 o
Part
225
- BANK
HOLDING
COMPANIES
AND
CHANGE
IN BA N K
CONTROL
2 o
12 C o F o R o P a r t 2 2 5 is a m e n d e d , u n d e r a u t h o r i t y c i t e d
in t h i s p a r t i n c l u d i n g 12 U o S o C o 1 8 4 4 ( b ) , 1 8 1 7 ( j ) ( l 3 ) ,
1818(b),
a n d P u b „ L 9 8 = 1 8 1 , T i t l e I X (12 U o S o C o 3 9 0 7
a n d 3 9 0 9 ) , b y r e v i s i n g A p p e n d i x A to r e a d as f o l l o w s ?
APPENDIX
A
==
C a p i t a l A d e q u a c y G u i d e l i n e s for
C o m p a n i e s and State M e m b e r
Bank Holding
Banks
The B o a r d o f G o v e r n o r s of the F e d e r a l R e s e r v e S y s t e m
h a s a d o p t e d m i n i m u m c a p i t a l r a t i o s and g u i d e l i n e s to p r o v i d e a
f r a m e w o r k for a s s e s s i n g t h e a d e q u a c y o f t h e c a p i t a l o f b a n k
holding c o mpanies and state member banks (collectively "banking
organizations") „
The g u i d e l i n e s g e n e r a l l y a p p l y to all s t a t e
m e m b e r b a n k s and b a n k h o l d i n g c o m p a n i e s r e g a r d l e s s of s i z e and
a r e t o b e u s e d in t h e e x a m i n a t i o n a n d s u p e r v i s o r y p r o c e s s a s
w e l l a s in t h e a n a l y s i s o f a p p l i c a t i o n s a c t e d u p o n b y t h e
Federal
Reserve0
The Board of Governors
will
review
the
guidelines
from
time
to
time
for
possible
adjustments
c o m m e n s u r a t e w i t h c h a n g e s in t h e e c o n o m y ,
financial markets,
a n d b a n k i n g practices.,
27
T w o principal measur e m e n t s of c a p ital are used--the
primary capital
ratio
and
the
total
capital
ratio0
The
d e f i n i t i o n s o f p r i m a r y a nd t o t a l c a p i t a l for b a n k s an d b a n k
h o l d i n g c o m p a n i e s and f o r m u l a s
for c a l c u l a t i n g
the capital
r a t i o s a r e s e t f o r t h b e l o w in t h e d e f i n i t i o n a l s e c t i o n s o f
t h e s e guicfelines<>
Capital
Guidelines
T h e B o a r d has e s t a b l i s h e d a m i n i m u m level of p r i m 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 5 05 p e r c e n t a n d a m i n i m u m l e v e l o f
total capital
t o t o t a l a s s e t s o f 6 o0 percent,,
Generally,
b a n k i n g o r g a n i z a t i o n s are e x p e c t e d to o p e r a t e a b o v e the m i n i m u m
p r i m a r y and total c a p ital l e v e l s 0
Those organizations whose
o p e r a t i o n s i n v o l v e or a r e e x p o s e d t o h i g h o r i n o r d i n a t e d e g r e e s
of
risk will
be
expected
to h o l d
additional
capital
to
c o m p e n s a t e for t h e s e r i s k s »
In
three zones
sizes s
addition,
f or t o t a l
the Board has e s t a b l i s h e d the f o llowing
c a p i t a l for b a n k i n g o r g a n i z a t i o n s o f a l l
Total
Zone
1
Zone
2
Zone
3
Capital
Above
6 o0 %
7 o0 %
to
Below
Ratio
7 o0%
6 o0%
The capital guidelines assume adequate liquidity and a
m o d e r a t e a m o u n t o f r i s k in t h e l o a n a n d i n v e s t m e n t p o r t f o l i o s
a n d in o f f - b a l a n c e s h e e t a c t i v i t i e s 0
T h e B o a r d is c o n c e r n e d
that s o m e b a n k i n g o r g a n i z a t i o n s m a y a t t e m p t to c o m p l y w i t h the
guidelines
in w a y s t h a t r e d u c e
their
l i q u i d i t y or
increase
risko
Banking
organizations
should
avoid
the p r a c t i c e
of
a t t e m p t i n g to m e e t the g u i d e l i n e s by d e c r e a s i n g the l e v e l of
liquid
assets
in r e l a t i o n
to total
assets.
in a s s e s s i n g
c o m p l i a n c e w i t h the g u i d e l i n e s , the F e d e r a l R e s e r v e w i l l take
into
account
liquidity
and
the
overall
degree
of
risk
a s s o c i a t e d w i t h an o r g a n i z a t i o n ' s o p e r a t i o n s ,
including
the
v o l u m e of a s s e t s e x p o s e d to risko
T h e F e d e r a l R e s e r v e w i l l a l s o take i n t o a c c o u n t the
s a l e of l o a n s or o t h e r a s s e t s w i t h r e c o u r s e and the v o l u m e and
nature
of all o f f - b a l a n c e
sheet
risk0
Particularly close
a t t e n t i o n w i l l be d i r e c t e d to r i s k s a s s o c i a t e d w i t h s t a n d b y
letters
of
credit
and
participation
in
joint
venture
activitieso
The F e deral Reserve will r e v i e w the r e l a t i o n s h i p
of a l l o n - and o f f - b a l a n c e s h e e t r i s k s to c a p i t a l and w i l l
r e q u i r e t h o s e i n s t i t u t i o n s w i t h h i g h or i n o r d i n a t e l e v e l s of
28
risk to hold additional primary capifcalo
in addition, the
Federal Reserve will continue to review the need for more
explicit procedures for factoring on- and off-balance sheet
risks into the assessment of capital adequacy0
Tlhe capital guidelines apply to both banks and bank
holding companies on a consolidated basisQi/
Some banking
organizations are engaged in significant nonbanking activities
that typically require capital ratios higher than those of
commercial banks aloneQ The Board believes that, as a matter
of both safety and soundness and competitive equity, the degree
of leverage common in banking should not automatically extend
to nonbanking activities0 Consequently, in evaluating the
consolidated capital positions of banking organizations, the
Board is placing greater weight on the building-block approach
for assessing capital requirements0 This approach generally
provides that nonbank subsidiaries of a banking organization
should maintain levels of capital consistent with the levels
that have been established by industry norms or standards, by
Federal or State regulatory agencies for similar firms that are
not affiliated with banking organizations, or that may be
established by the Board after taking into account risk factors
of a particular industry,, The assessment of an organization's
consolidated capital adequacy must take into account the amount
and nature of all nonbank activities, and an institution's
consolidated capital position should at least equal the sum of
the capital requirements of the organization's bank and nonbank
subsidiaries as well as those of the parent companyQ
Supervisory Action
The nature and intensity of supervisory action will be
determined by an organization's compliance with the required
minimum primary capital ratio as well as by the zone in which
the company's total capital ratio falls0 Banks and bank
holding companies with primary capital ratios below the 5„5
i/ The guidelines will apply to bank holding companies with
less than $150 million in consolidated assets on a bank-only
basis unless (1) the holding company or any nonbank subsidiary
is engaged directly or indirectly in any nonbank activity
involving significant leverage or (2) the holding company or
any nonbank subsidiary has outstanding significant debt held by
the general public,, Debt held by the general public is defined
to mean debt held by parties other than financial institutions,
officers, directors, and principal shareholders of the banking
organization or their related interests.
- 29
p e r c e n t m i n i m u m will be c o n s i d e r e d u n d e r c a p i t a l i z e d u n l e s s they
can d emonstrate clear extenuating c i r c u m s t a n c e s .
Such banking
o r g a n i z a t i o n s w i l l be r e q u i r e d to s u b m i t an a c c e p t a b l e p l a n for
a c h i e v i n g c o m p l i a n c e w i t h the c a p i t a l g u i d e l i n e s and w i l l be
s u b j e c t to d e n i a l of a p p l i c a t i o n s and a p p r o p r i a t e s u p e r v i s o r y
enforcement actions.
The
zone
in w h i c h a n o r g a n i z a t i o n ' s
total
capital
r a t i o falls w i l l n o r m a l l y trigger the
following
supervisory
r e s p o n s e s , s u b j e c t to q u a l i t a t i v e a n a l y s i s ?
For
institutions
R e s e r v e will?
operating
in
Zone
1,
the
Federal
-- consider that capital is generally adequate if the
primary capital ratio is acceptable to the Federal
Reserve and is above the 5 o 5 percent minimum,,
For
institutions
R e s e r v e will?
--
operating
in
Zone
2,
the
Federal
p a y p a r t i c u l a r a t t e n t i o n to f i n a n c i a l f a c t o r s , s u c h
as
asset
quality,
liquidity,
off-balance
sheet
risk, and i n t e r e s t r a t e risk, as t h e y r e l a t e to the
a d e quacy of c a p i t a l D
If t h e s e a r e a s a r e d e f i c i e n t
a n d t h e F e d e r a l R e s e r v e c o n c l u d e s c a p i t a l is n o t
f u l l y a d e q u a t e , the F e d e r a l R e s e r v e w i l l i n t e n s i f y
its m o n i t o r i n g
and
take
appropriate
supervisory
action.
For
institutions
R e s e r v e will?
operating
in
Zone
3,
the
Federal
--
c o n s i d e r t h a t t h e i n s t i t u t i o n is u n d e r c a p i t a l i z e d ,
absent clear extenuating circumstances?
--
r e q u i r e the i n s t i t u t i o n to s u b m i t a c o m p r e h e n s i v e
c a p i t a l plan,
a c c e p t a b l e to the F e d e r a l R e s e r v e ,
t h a t i n c l u d e s a p r o g r a m for a c h i e v i n g c o m p l i a n c e
with
the
required
minimum
ratios
within
a
reas o n a b l e time period? and
--
institute
appropriate
supervisory
and/or
administrative
enforcement
action,
which
may
include
the
issuance of a c a pital d i r e c t i v e
or
denial
of
applications,
unless
a capital
plan
a c c e p t a b l e to the F e d e r a l R e s e r v e h as b e e n a d o p t e d
by the institution.
30
T r e a t m e n t o f I n t a n g i b l e A s s e t s for the P u r p o s e o f A s s e s s i n g t h e
C a p i t a l A d e q u a c y of Bank H o l d i n g C o m p a n i e s and State Member
Banks
In c o n s i d e r i n g t h e t r e a t m e n t o f i n t a n g i b l e a s s e t s f o r
the p u r p o s e of a s s e s s i n g c a p i t a l adequ a c y , the F e d e r a l R e s e r v e
recognizes' t h a t the d e t e r m i n a t i o n of the f u t u r e b e n e f i t s and
useful lives of certain intangible assets may involve a degree
o f u n c e r t a i n t y t h a t is n o t n o r m a l l y a s s o c i a t e d
with
other
banking a s s e t s 0
Supervisory concern over
intangible assets
d e r i v e s f r o m t h i s u n c e r t a i n t y a n d f r o m t h e p o s s i b i l i t y t h a t , in
the e v e n t an o r g a n i z a t i o n e x p e r i e n c e s f i n a n c i a l d i f f i c u l t i e s ,
s u c h a s s e t s m a y n o t p r o v i d e the d e g r e e of s u p p o r t g e n e r a l l y
associated with other a s s e t s 0
For this reason,
the F e d e r a l
R e s e r v e will c a r e f u l l y r e v i e w the level and s p e c i f i c c h a r a c t e r
of intangible assets
in e v a l u a t i n g
the c a p i t a l a d e q u a c y o f
s t a t e m e m b e r b a n k s and b a n k h o l d i n g c o m p a n i e s „
The F e d eral Reserve recognizes that intangible assets
m a y d i f f e r w i t h r e s p e c t to p r e d i c t a b i l i t y of a n y i n c o m e s t r e a m
d i r e c t l y a s s o c i a t e d with a p a r t i c u l a r asset, the e x i s t e n c e of a
m a r k e t for the asset, the a b i l i t y to s e l l the asset, or the
r e l i a b i l i t y of any
estimate
of
the
asset's
useful
lifec
C e r t a i n intangible assets have p r e d i c t a b l e income streams and
objectively
verifiable
values
and
may
contribute
to
an
o r g a n i z a t i o n ' s p r o f i t a b i l i t y and o v e r a l l
financial
strength,.
T h e v a l u e o f o t h e r i n t a n g i b l e s , s u c h as g o o d w i l l , m a y i n v o l v e a
n u m b e r o f a s s u m p t i o n s a n d m a y b e m o r e s u b j e c t t o c h a n g e s in
g e n e r a l e c o n o m i c c i r c u m s t a n c e s o r t o c h a n g e s in a n i n d i v i d u a l
institution's
f u t u r e p r os pe c ts ,,
Consequently,
the v a l u e of
such
intangible
assets
may
be
difficult
to
ascer t ai n, ,
C o n s i s t e n t with pr u d e n t ba n k i n g p r a c t i c e s and the p r i n c i p l e of
the d i v e r s i f i c a t i o n of
risks,
banking
organizations
should
a v o i d e x c e s s i v e b a l a n c e s h e e t c o n c e n t r a t i o n in a n y c a t e g o r y o r
r e l a t e d c a t e g o r i e s o f i n t a n g i b l e assets,,
Bank Holding c o m p a n i e s .
While
the F e d eral Reserve
w i l l c o n s i d e r the a m o u n t and n a t u r e of all i n t a n g i b l e assets,
those holding companies with aggregate
intangible assets
in
e x c e s s o f 25 p e r c e n t o f t a n g i b l e p r i m a r y c a p i t a l
( i se*, s t a t e d
primary
capital
less
all
intangible
assets)
or
those
i n s t i tutions with lesser, although still significant, amounts
of g o o d w i l l w i l l be s u b j e c t to c l o s e s c r u t i n y *
For the p u r p o s e
of a s s e s s i n g c a p i t a l adequacy,
the F e d e r a l R e s e r v e may, on a
case-by-case
basis,
make
adjustments
to an
organization's
c a p i t a l r a t i o s b a s e d u p o n t h e a m o u n t o f i n t a n g i b l e a s s e t s in
e x c e s s o f t h e 25 p e r c e n t t h r e s h o l d l e v e l o r u p o n t h e s p e c i f i c
c h a r a c t e r o f t h e o r g a n i z a t i o n ' s i n t a n g i b l e a s s e t s in r e l a t i o n
to
its o v e r a l l
financial condition*
Such
adjustments may
r e q u i r e some o r g a n i z a t i o n s to r a i s e a d d i t i o n a l c a p i t a l *
31
The Board
expects
banking
organizations
(including
s t a t e m e m b e r banks) c o n t e m p l a t i n g e x p a n s i o n p r o p o s a l s to e n s u r e
that pro forma capital ratios exceed the m i n i m u m c a pital levels
without
significant
reliance
on
Intangibles,
particularly
goodwill„
Consequently,
in r e v i e w i n g
acquisition proposals,
the Board will take into c o n s i d e r a t i o n both the stated p r i mary
c a p i t a l r a t i o ( t h a t is, t h e r a t i o w i t h o u t a n y a d j u s t m e n t for
intangible
assets)
and
the
primary
capital
ratio
after
deducting intangibles0
In a c t i n g o n a p p l i c a t i o n s ,
the B o a r d
wil l take into a c c ount the n a t u r e and a m o u n t of intan g i b l e
assets and will,
as a p p r o p r i a t e ,
adjust capital
ratios
to
inc l u d e c e r t a i n i n t a n g i b l e a s sets on a c a s e - b y - c a s e b a s i s Q
State
Member
Banks „
State
member
banks
with
i n t a n g i b l e a s s e t s in e x c e s s o f 25 p e r c e n t o f t a n g i b l e p r i m a r y
c a p i t a l w i l l be s u b j e c t to c l o s e s c r u t i n y c
In a d d i t i o n ,
for
the p u r p o s e of c a l c u l a t i n g c a p i t a l r a t i o s of
state member
banks,
the F e d e r a l R e s e r v e wi l l d e d u c t g o o d w i l l fr o m p r i m a r y
c a p i t a l and total capitalo
The F e d e r a l R e s e r v e may, on a c a s e
b y - c a s e basis, m a k e f u r t h e r a d j u s t m e n t s to a b a n k ' s c a p i t a l
r a t i o s based on the a m o u n t of i n t a n g i b l e a s s e t s
(aside from
g o o d w i l l ) in e x c e s s o f t h e 25 p e r c e n t t h r e s h o l d l e v e l o r o n t h e
s p e c i f i c c h a r a c t e r o f t h e b a n k ' s i n t a n g i b l e a s s e t s in r e l a t i o n
to
its o v e r a l l
financial
condition0
Such
adjustments
may
r e q u i r e s o m e b a n k s to r a i s e a d d i t i o n a l c a p i t a l o
In
addition,
state
member
banks
and
bank
holding
companies are expected
to r e v i e w p e r i o d i c a l l y
the va l u e
at
w h i c h i n t a n g i b l e a s s e t s a r e c a r r i e d o n t h e i r b a l a n c e s h e e t s to
d e t e r m i n e w h e t h e r t h e r e h a s b e e n a n y i m p a i r m e n t o f v a l u e or
whether
changing
circumstances
warrant
a
shortening
of
amortization
periods0
institutions
should
make
appropriate
r e d u c t i o n s in c a r r y i n g v a l u e s a n d a m o r t i z a t i o n p e r i o d s in l i g h t
of this review, and e x a m i n e r s will e v a l u a t e the t r e a t m e n t of
intangible assets during on-site examinations „
Definition
of Capital
to be U s e d
in D e t e r m i n i n g
A d e q u a c y of Bank H o l d i n g C o m p a n i e s and S t a t e M e m b e r
Primary
capital
The
Capital
Banks
components
components
of
primary
capital
ares
--
common
stock,
--
perpetual
preferred
stock
(preferred
stock
that
does not have a stated m a t u r i t y dat e and that may
n o t be r e d e e m e d at the o p t i o n of the h o l d e r ) ,
~
surplus (excluding
preferred s tock),
surplus
relating
to
limited-life
32 --
undivided
—
contingency
—
mandatory
--
allowance
for
possible
loan
and
lease
losses
(exclusive of allocated transfer risk reserves) ,
—
minority
interest
in
equity
consolidated subsidiaries0
Secondary
capital
The
profits,
and
other
capital
reserves,
instruments.2/ 0
convertible
accounts
of
components
components
of
secondary
limited-life
surplus) and
--
bank
subordinated
notes
and
debentures
and
u n s e c u r e d l o n g - t e r m d e b t of the p a r e n t c o m p a n y
its n o n b a n k subs i d i a r i e s »
relating
to
capital
stock
ares
—
Restrictions
preferred
capital
(including
related
and
components
T o q u a l i f y a s p r i m a r y or s e c o n d a r y c a p i t a l , a c a p i t a l
i n s t r u m e n t s h o u l d no t c o n t a i n or be c o v e r e d by a n y c o v e n a n t s ,
terms,
or r e s t r i c t i o n s t hat are
inco n s i s t e n t with safe and
sound banking p r a c t i c e s 0
E x a m p l e s of such
terms are those
r e g a r d e d a s u n d u l y i n t e r f e r i n g w i t h t h e a b i l i t y o f t h e b a n k or
h o l d i n g c o m p a n y to c o n d u c t n o r m a l b a n k i n g o p e r a t i o n s or t h o s e
resulting
in
significantly
higher
dividends
or
interest
payments
in t h e e v e n t o f a d e t e r i o r a t i o n
in t h e f i n a n c i a l
c o n d i t i o n of the issuer „
The
secondary
components
c o n d i t i o n s t o q u a l i f y as c a p i t a l ;
2/
See
criteria
primary
--
The
instrument
weighted-average
--
The
the
f or
instrument
meet
the
following
must
have
an
original
m a t u r i t y of at l e ast seven y e a r s 0
must
be
definitional
section
mandatory convertible
capitalo
must
unsecured.
below
that
instruments
lists
the
to q u a l i f y
as
33 -
-- The instrument must clearly state on its face that
it is not a deposit and is not insured by a federal
agency„
-- Bank debt instruments
claims of depositors,.
-- For
banks
only,
the
must
be
subordinated
aggregate
amount
to
of
l imited-life preferred stock and s u b o r dinate debt
q u a l i f y i n g a s c a p i t a l m a y n o t e x c e e d 50 p e r c e n t o f
the amount of the bank°s p r i m a r y c a p i t a l 0
As secondary capital components approach maturity, the
banking organization must plan to redeem or replace the
instruments while maintaining an adequate overall capital
position,,
Thus, the remaining maturity of secondary capital
components will be an important consideration in assessing the
adequacy of total capital.
Capital ratios
The primary and total capital ratios for bank holding
companies are computed as followss
Primary capital ratios
Primary capital components _____ _
Total assets + Allowance for loan and lease losses
(exclusive of allocated transfer risk reserves)
Total capital ratios
Primary capital components + Secondary capital components
Total assets + Allowance for loan and lease losses
(exclusive of allocated transfer risk reserves)
The primary and total capital ratios for state member
banks are computed as follows?
Primary capital ratios
Primary capital components - Goodwill
Average total assets + Allowance for loan and lease losses
(exclusive of allocated transfer risk reserves) -Goodwill
34
Total
capital
ratios
Primary
Average total
(exclusive of
capital components
Secondary capital
components - Goodwill
a s s e t s + A l l o w a n c e for l o a n and l e a s e l o s s e s
allocated transfer risk reserves) - Goodwill
Generally,
period-end
amounts
will
be
used
to
c a l c u l a t e bank holding company r a t i o s 0
However,
the F e d e r a l
R e s e r v e w i l l d i s c o u r a g e t e m p o r a r y b a l a n c e s h e e t a d j u s t m e n t s or
any other
"window dressing"
practices
designed
to a c h i e v e
transitory
compliance
with
the
guidelines.
Banking
organizations
are
expected
to
maintain
adequate
capital
p o s i t i o n s at all t i m e s 0
Thus, the F e d e r a l R e s e r v e will, on a
c a s e - b y - c a s e b a s i s , u s e a v e r a g e t o t a l a s s e t s in t h e c a l c u l a t i o n
of bank holding c o m pany capital ratios whenever this approach
p r o v i d e s a m o r e m e a n i n g f u l i n d i c a t i o n o f an i n d i v i d u a l h o l d i n g
company's capital position0
For the c a l c u l a t i o n of bank c a p i t a l ratios,
"average
total
assets"
will
generally
be d e f i n e d
as
the q u a r t e r l y
a v e r a g e total a s s e t s figure r e p o r t e d on the b a n k ' s R e p o r t of
ConditionG
If w a r r a n t e d ,
however,
the F e d e r a l R e s e r v e
may
c a l c u l a t e b a n k c a p i t a l r a t i o s b a s e d u p o n t o t a l a s s e t s as of
period-end.
All other c o m p o n e n t s of the b a n k ' s c a p i t a l r a t i o s
w i l l be b a s e d upon p e r i o d - e n d b a l a n c e s 0
Criteria
f or
Determining
the
Primary
Capital
Status
of
M a n d a t o r y C o n v e r t i b l e S e c u r i t i e s of Bank H o l d i n g C o m p a n i e s
State Member Banks
_
_
-
and
M a n d a t o r y convertible securities are subordinated debt
instruments
that are e v e n t u a l l y t r a n s f o r m e d
into c o m m o n or
p e r p e t u a l p r e f e r r e d sto c k w i t h i n a s p e c i f i e d p e r i o d of time,
n o t t o e x c e e d 12 y e a r s „
T o be c o u n t e d as p r i m a r y c a p i t a l ,
m a n d a t o r y c o n v e r t i b l e s e c u r i t i e s m u s t m e e t the c r i t e r i a
set
forth belowo
These criteria cover
the
two basic types of
mandatory convertible securities?
"equity contract notes"
s e c u r i t i e s t h a t o b l i g a t e t h e h o l d e r t o t a k e c o m m o n or p e r p e t u a l
p r e f e r r e d s t o c k o f t h e i s s u e r in l i e u o f c a s h f o r r e p a y m e n t o f
p r i n c i p a l , and " e q u i t y c o m m i t m e n t n o t e s " ~~ s e c u r i t i e s that are
r e d e e m a b l e o n l y w i t h t h e p r o c e e d s f r o m t h e s a l e o f c o m m o n or
perpetual preferred s t o c k c
B o t h e q u i t y c o m m i t m e n t n o t e s and
e q u i t y c o n t r a c t n o t e s q u a l i f y as p r i m a r y c a p i t a l
for b a n k
h o l d i n g c o m p a n i e s , b u t o n l y e q u i t y c o n t r a c t n o t e s q u a l i f y as
p r i m a r y c a p i t a l for b a n k s a2 J
3/
E q u i t y 'commitment notes that were issued by state member
b a n k s p r i o r t o M a y 15, 1 9 8 5 w i l l c o n t i n u e t o b e i n c l u d e d in
primary capitalo
35
Criteria applicable
securities
to both
securities
types of mandatory
must
mature
in
12
convertible
a c
The
years
or
less0
bo
The maximum amount of mandatory convertible
securities that may be counted as primary capital
is limited to 20 percent of primary capital,
exclusive
of
mandatory
convertible
securities.£/ (Amounts outstanding in excess of
the 20 percent limitation may be counted as
secondary capital provided they meet the
requirements of secondary capital instruments.)
Co
The issuer may redeem securities prior to maturity
only with the proceeds from the sale of common or
perpetual preferred stock of the bank or bank
holding company0 Any exception to this rule must
be approved by the Federal Reserve9
The
securities may not be redeemed with the proceeds
of another issue of mandatory convertible
securitieso
Nor may the issuer repurchase or
acquire its own mandatory convertible securities
for resale or r@issuance0
d«
Holders of the securities may not accelerate the
payment of principal except in the event of
bankruptcy, insolvency, or reorganization0
eQ
The securities must be subordinate in right of
payment to all senior indebtedness of the issuer0
In the event that the proceeds of the securities
are reloaned to an affiliate, the loan must be
subordinated to the same degree as the original
issue o
fc
An issuer that intends to dedicate the proceeds of
an issue of common or perpetual preferred stock to
satisfy the funding requirements of an issue of
mandatory convertible securities
(i0e o the
requirement to retire or redeem the notes with the
proceeds from the issuance of common or perpetual
preferred stock) generally must make such a
dedication during the quarter in which the new
The maximum amount of equity commitment notes that may be
counted as primary capital is limited to 10 percent of primary
capital exclusive of mandatory convertible securitieso
36
c o m m o n or
preferred
stock
is
i s s u e d „.§/
As
a
g e n e r a l r u l e , if t h e d e d i c a t i o n is n o t m a d e w i t h i n
the p r e s c r i b e d period, then the secur i t i e s issued
m ay not at a later date be ded i c a t e d
to the
retirement
or
redemption
©f
the
mandatory
c o n v e r t i b l e s e c u r i t i e s ®J§/
Additional
a®
criteria
applicable
to
equity
contract
notes
The note must contain a contractual provision
(or
m u s t be i s s u e d w i t h a m a n d a t o r y stock p u r c h a s e
contract)
that
requires
the
holder
of
the
i n s t r u m e n t to t ake the c o m m o n or p e r p e t u a l s t o c k
o f t h e i s s u e r in l i e u o f c a s h in s a t i s f a c t i o n o f
the c l a i m for p r i n c i p a l r e p a y m e n t ®
The obligation
of the h o l d e r
to take the c o m m o n or p e r p e t u a l
p r e f e r r e d s t o c k o f t h e i s s u e r m a y b e w a i v e d if,
and to the e x t e n t that, p r i o r to the m a t u r i t y d a t e
of the o b l i g a t i o n , t h e i s s u e r s e l l s n e w c o m m o n or
perpetual
preferred
stock
and
dedicates
the
p r o c e e d s to the r e t i r e m e n t or r e d e m p t i o n o f the
notes®
The
dedication
g e n e r a l l y m u s t be m a d e
d u r i n g the q u a r t e r
in w h i c h
t h e n e w c o m m o n or
p r e f e r r e d s t o c k is i s s u e d ®
5/
C o m m o n or p e r p e t u a l p r e f e r r e d s t o c k i s s u e d u n d e r d i v i d e n d
r e i n v e s t m e n t p l a n s or i s s u e d t o f i n a n c e a c q u i s i t i o n s , i n c l u d i n g
a c q u i s i t i o n s of b u s i n e s s entities, m a y be d e d i c a t e d
to the
retirement
or
redemption
of
the
mandatory
convertible
securities®
D o c u m e n t a t i o n c e r t i f i e d b y an a u t h o r i z e d a g e n t of
the i s s u e r s h o w i n g the a m o u n t o f c o m m o n s t o c k or p e r p e t u a l
p r e f e r r e d sto c k issued, the d a t e s of issue, and a m o u n t s of such
i s s u e s d e d i c a t e d to t h e r e t i r e m e n t or r e d e m p t i o n o f m a n d a t o r y
c o n v e r t i b l e s e c u r i t i e s w i l l s a t i s f y the d e d i c a t i o n r e q u i r e m e n t ®
j§/
T h e d e d i c a t i o n p r o c e d u r e is n e c e s s a r y t o e n s u r e t h a t t h e
p r i m a r y c a p i t a l of the issu e r
is n o t o v e r s t a t e d ®
For each
d o l l a r o f c o m m o n or p e r p e t u a l p r e f e r r e d p r o c e e d s d e d i c a t e d t o
the
retirement
or
redemption
of
the
notes,
there
is
a
c o r r e s p o n d i n g r e d u c t i o n in t h e a m o u n t o f o u t s t a n d i n g m a n d a t o r y
s e c u r i t i e s t h a t m a y q u a l i f y as p r i m a r y c a p i t a l ®
D@ minimis
a m o u n t s (in r e l a t i o n t o p r i m a r y c a p i t a l ) o f c o m m o n o r p e r p e t u a l
p r e f e r r e d s t o c k i s s u e d u n d e r a r r a n g e m e n t s in w h i c h t h e a m o u n t
of
stock
issued
is
not
predictable,
such
as
dividend
reinvestment
plans
and
employee
stock
option
plans
(but
e x c l u d i n g p u b l i c s t o c k o f f e r i n g s a n d s t o c k i s s u e d in c o n n e c t i o n
w i t h a c q u i s i t i o n s ) , s h o u l d be d e d i c a t e d b y n o later t han the
c o m p a n y ' s f iscal year end®
37
b 0
A stock p u r c h a s e c o n t r a c t m a y be s e p a r a t e d
from a
security only
if
(1)
the h o l d e r
of
the c o n t r a c t
provides sufficient collateral?/
to the
issuer,
or
to an i n d e p e n d e n t
trustee
for
the b e n e f i t of
the
i s s u e r , to a s s u r e p e r f o r m a n c e u n d e r the c o n t r a c t and
(2) t h e s t o c k p u r c h a s e c o n t r a c t r e q u i r e s t h e p u r c h a s e
of c o m m o n or p e r p e t u a l p r e f e r r e d stock*
Additional
a 0
criteria
applicable
to
equity
commitment
The
i n d e n t u r e or n o t e
agreement
following two provisions?
must
notes
contain
the
lo
T h e p r o c e e d s o f the s ale of c o m m o n or p e r p e t u a l
preferred
stock
will
be
the
sole
source
of
repayment
f or
the
notes,
and
the
issuer
must
d e d i c a t e t h e p r o c e e d s for t h e p u r p o s e of r e p a y i n g
the
notes*
(Documentation
certified
by
an
a u t h o r i z e d a g e n t of the i s s u e r s h o w i n g the a m o u n t
of c o m m o n or p e r p e t u a l p r e f e r r e d sto c k issued, the
dates
of
issue,
and
amounts
of
such
issues
dedicated
to
the
retirement
or
redemption
of
m a n d a t o r y c o n v e r t i b l e s e c u r i t i e s wi l l s a t i s f y the
dedication requirement*)
2*
By the time that o n e - t h i r d of the life of the
s e c u r i t i e s h as run, the i s s u e r m u s t h a v e r a i s e d and
dedicated
an a m o u n t
equal
to o n e - t h i r d
of
the
o r i g i n a l p r i n c i p a l of the s e c u r i t i e s *
By the time
that t w o - t h i r d s of the life of the s e c u r i t i e s has
run, the i s suer m u s t h a v e r a i s e d and d e d i c a t e d an
amount
equal
to
two-thirds
of
the
original
p r i n c i p a l of the s e c u r i t i e s *
A t l e a s t 60 d a y s
p r i o r to the m a t u r i t y of the s e c u r i t i e s , the i s suer
m u s t h a v e r a i s e d and d e d i c a t e d an a m o u n t e q u a l to
the e n t i r e o r i g i n a l p r i n c i p a l of the s e c u r i t i e s *
P r o c e e d s d e d i c a t e d to r e d e m p t i o n or r e t i r e m e n t of
2/
Collateral
is d e f i n e d as?
1) c a s h o r c e r t i f i c a t e s o f
d e p o s i t ? 2) U * S * g o v e r n m e n t s e c u r i t i e s t h a t w i l l m a t u r e p r i o r
to or s i m u l t a n e o u s w i t h the m a t u r i t y of the e q u i t y c o n t r a c t and
t h a t h a v e a p a r or m a t u r i t y v a l u e a t l e a s t e q u a l t o t h e a m o u n t
of the h o l d e r " s o b l i g a t i o n under the s t o c k p u r c h a s e c o n t r a c t ?
3) s t a n d b y l e t t e r s o f c r e d i t i s s u e d b y a n i n s u r e d U * S * b a n k
t h a t is n o t a n a f f i l i a t e o f t h e i s s u e r ? o r 4) o t h e r c o l l a t e r a l
as m a y be d e s i g n a t e d f r o m time to time by the F e d e r a l R e s e r v e *
38
the notes must come only from the sale of common
or perpetual preferred stock„§/
b0
If the issuer fails to meet any of these periodic
funding
requirements, the Federal
Reserve
immediately will cease to treat the unfunded
securities as primary capital and will take
appropriate supervisory action0
in addition,
failure to meet the funding requirements will be
viewed as a breach of a regulatory commitment and
will be taken into consideration by the Board in
acting on statutory applications0
Co
If a security is issued by a subsidiary of a bank
or bank holding company, any guarantee of the
principal by that subsidiary’s parent bank or bank
holding company must be subordinate to the same
degree as the security issued by the subsidiary
and limited to repayment of the principal amount
of the security at its final maturityQ
d0
The maximum amount of equity commitment notes that
may be counted as primary capital for a bank
holding company is limited to 10 percent of
primary capital exclusive of mandatory convertible
securitieso
Amounts outstanding in excess of the
10 percent limitation may be counted as secondary
capital provided they meet the requirements of
secondary capital instruments.,
®/
The funded portions of the securities will be deducted
from primary capital to avoid double counting.
Part
263— RULES
OF
PRACTICE
FOR
HEARINGS
3. 12. C o F o R o P a r t 2 6 3 is a m e n d e d b y a d d i n g a n e w S u b p a r t D ,
i n c l u d i n g a s e c t i o n o f t h e a u t h o r i t y u n d e r w h i c h t h e S u b p a r t is
i s sued, to read as f ollows?
Part
263— Rules
of
Practice
for
Hearings
* * * * *
SUBPART
D
- PROCEDURES
DIRECTIVES
SECTION
(a)
(b)
2 6 3
o 3 5
-
FOR
ISSUANCE
AND
TO MAINTAIN ADEQUATE
Authority,
A u t h o r i ty
Purpose and
Purpose
and
ENFORCEMENT
CAPITAL
Scope
scope
SECTION
2 6 3
o3 6
-
Definitions
SECTION
2 6 3
o 3 7
-
Establishment
SECTION
2 6 3
o 3 8
-
P r o c e d u r e s for R e q u i r i n g
Adequate Capital
(a)
Submission
(b)
Issuance
(1)
( 2 )
( 3 )
(4)
( 5 )
( 6 )
( 7 )
SECTION
(a)
(b)
(c)
OF
of
of
of
capital
Minimum
Capital
Levels
Maintenance
improvement
plan
directive
N o t i c e of i n t e n t to i s s u e d i r e c t i v e
C o n t e n t s of n o t i c e
R e s p o n s e to n o t i c e
F a i l u r e to file r e s p o n s e
Boa r d c o n s i d e r a t i o n of resp o n s e
C o n t e n t s of d i r e c t i v e
R e q u e s t for r e c o n s i d e r a t i o n of d i r e c t i v e
- Enforcement of Directive
Judicial and administrative remedies
Other enforcement actions
Consideration in application proceedings
2 6 3 o 3 9
of
40
SECTION 263 o40 ■= Establishment of increased Capital Level
for Individual Bank or Bank Holding
Company
(a)
Establishment of capital levels for Individual
institution
(b)
Procedure to establish higher capital requirement
(1)
(2)
(3)
(4)
Notice
Response
Board decision
Enforcement of higher capital level
SUBPART D - PROCEDURES FOR ISSUANCE AND
DIRECTIVES TO MAINTAIN ADEQUATE CAPITAL
ENFORCEMENT
OF
SECTION 263o35 - AuthorIty, Purpose, and Scope
(a) Authority„ This subpart is Issued under authority of
the International Lending Supervision Act of 1983 ("ILSA"),
12 UoSoCo 3907, 3909? section 5(b) of the Bank Holding Company
Act ("BBC Act"), 12 UoSoCo 1844(b)? the Financial Institutions
Supervisory Act of 1966 ("FIS Act"), 12 UoSoCo 1818(b)- (n)• and
sections 9 and 11(1) of the Federal Reserve Act, 12 UoSoCo 248,
324, 329o
(b)
Purpose and scope„ This subpart establishes
procedures under which the Board may issue a directive or take
other action to require a state member bank or a bank holding
company to achieve and maintain adequate capital0 The
Information collection requirement contained in this regulation
has been approved by the Office of Managment and Budget under
the provisions of 44 UoSoCo Chapter 35 and has been assigned
OMB NOo 7100o
SECTION 263 036 - Definitions
(a)
"Bank holding company" means any company that
controls a bank as defined in section 2 of the BHC Act,
12 UoSoCo 1841, and In the Board's Regulation Y (12 CoF»R.
225o2(b)) or any direct or indirect subsidiary thereof other
than a bank subsidiary as defined in section 2(c) of the BHC
Act, 12 UoSoCo 1841(c), and in the Board°s Regulation Y
(12 CoFoRo 225 o2 (a)) 0
(b)
"Capital Adequacy Guidelines" means those
guidelines for bank holding companies and state member banks
contained In Appendix A to the Board's Regulation Y (12 CoFoRo
Part 225)0
41 (c)
"Directive" means a final order
i s s u e d b y the
■Board p u r s u a n t t o X L S A (12 U o S o C o 3 9 0 7 ( b ) ( 2 ) ) r e q u i r i n g a s t a t e
m e m b e r b a n k or b a n k h o l d i n g c o m p a n y to i n c r e a s e c a p i t a l to or
m a i n t a i n c a p i t a l a t t h e m i n i m u m l e v e l s e t f o r t h in t h e B o a r d ' s
C a p i t a l A d e q u a c y G u i d e l i n e s or as o t h e r w i s e e s t a b l i s h e d under
p r o c e d u r e s d e s c r i b e d in s e c t i o n 2 6 3 o4 0 o f t h i s s u b p a r t o
bank
that
SECTION
(d)
is
"State
a member
2 6 3 o37
member
of the
bank"
means any state-chartered
F e d e r a l R e s e r v e System,,
- Establishment
of
Minimum
Capital
Levels
T h e B o a r d h a s e s t a b l i s h e d m i n i m u m c a p i t a l l e v e l s for
s t a t e m e m b e r b a n k s a n d b a n k h o l d i n g c o m p a n i e s in i t s C a p i t a l
Adequacy Guidelines0
The Board may set higher c a pital levels
as n e c e s s a r y and a p p r o p r i a t e for a p a r t i c u l a r s t a t e m e m b e r b a n k
or b a n k h o l d i n g c o m p a n y b a s e d u p o n Its f i n a n c i a l c o n d i t i o n ,
m a n a g e r i a l r e s o u r c e s , p r o s p e c t s , or s i m i l a r f actors, p u r s u a n t
t o t h e p r o c e d u r e s s e t f o r t h in s e c t i o n 2 6 3 o4 0 o f t h i s s u b p a r t o
SECTION
2 6 3 03 8
- P r o c e d u r e s for R e q u i r i n g
Adequate Capital
Maintenance
of
(a)
Submission of capital
improvement
plan0
Any
s t a t e m e m b e r b a n k o r b a n k h o l d i n g c o m p a n y t h a t m a y n o t b e in
c o m p l i a n c e w i t h the B o a r d ' s C a p i t a l A d e q u a c y G u i d e l i n e s o n the
d a t e t h a t t h i s r e g u l a t i o n b e c o m e s e f f e c t i v e s h a l l , w i t h i n 90
day s , s u b m i t to its a p p r o p r i a t e F e d e r a l R e s e r v e B a n k for r e v i e w
a p l a n d e s c r i b i n g the m e a n s and the time s c h e d u l e by w h i c h the
b a n k or b a n k h o l d i n g c o m p a n y s h a l l a c h i e v e the r e q u i r e d m i n i m u m
level of capitalo
(b)
issuance
of
directive0
(1)
N o t i c e o f i n t e n t t o i s s u e d i r e c t i v e .,
If a
s t a t e m e m b e r b a n k o r b a n k h o l d i n g c o m p a n y is o p e r a t i n g w i t h
less than the m i n i m u m l evel of c a p i t a l
established
in t h e
Board's
Capital
Adequacy
Guidelines,
or
as
otherwise
e s t a b l i s h e d u n d e r t h e p r o c e d u r e s d e s c r i b e d in s e c t i o n 2 6 3 o4 0 o f
this subpart,
the Bo a r d m a y issue and s e r v e upon such state
m e m b e r b a n k or bank h o l d i n g c o m p a n y w r i t t e n n o t i c e of
the
B o a r d ' s i n t e n t to Issue a d i r e c t i v e to r e q u i r e the b a n k or bank
holding
company
to a c h i e v e
and
maintain
adequate
capital
within a specified time p e r i o d 0
issue
(2)
a directive
to
achieved
be
or
Conte n t s of n o t i c e 0
T h e n o t i c e o f i n t e n t to
shall includes
(i)
the required m i n i m u m level of capital
m a i n t a i n e d by the i n s t i t u t i o n ?
42
(ii)
its c u r r e n t l e v e l o f c a p i t a l ?
(iii)
the
proposed
increase
in
capital
n e e d e d to m e e t the m i n i m u m r e q u i r e m e n t s ?
(iv)
the p r o p o s e d
date
or
schedule
for
meeting these minimum requirements?
(v)
when
deemed
appropriate,
specific
d e t a i l s o f a p r o p o s e d p l a n for m e e t i n g t h e m i n i m u m c a p i t a l
requirements? and
(vi)
the d a t e for a w r i t t e n r e s p o n s e b y th e
b a n k or b a n k h o l d i n g c o m p a n y to the p r o p o s e d d i r e c t i v e , w h i c h
s h a l l be at l e a s t 14 d a y s f r o m the d a t e o f i s s u a n c e of the
notice
unless
the
Board
determines
a
shorter
period
is
n e c e s s a r y b e c a u s e of the f i n a n c i a l c o n d i t i o n of the b a n k or
bank holding c o m p a n y 0
(3)
Response to notice0 The bank
holding company may file a written response to the notice
within the time period set by the Board „ The response may
includei
(i)
not
be
the
explanation
why
a
directive
bank
should
issued?
(ii)
of
an
or
any
proposed
modification
of
the
terms
directive?
(iii)
any relevant information, mitigating
c i r c u m s t a n c e s , d o c u m e n t a t i o n o r o t h e r e v i d e n c e in s u p p o r t o f
the i n s t i t u t i o n ' s p o s i t i o n r e g a r d i n g the p r o p o s e d d i r e c t i v e ? and
(iv)
t h e i n s t i t u t i o n ’s p l a n for a t t a i n i n g
t h e r e q u i r e d l e v e l o f capitalo
(4)
F a i l u r e t o f i l e r e s p o n s e ,,
Failure
b a n k or b a n k h o l d i n g c o m p a n y to file a w r i t t e n r e s p o n s e to the
n o t i c e o f i n t e n t to i s s u e a d i r e c t i v e w i t h i n t h e s p e c i f i e d t i m e
p e r i o d s h a l l c o n s t i t u t e a w a i v e r of the o p p o r t u n i t y to r e s p o n d
a n d s h a l l c o n s t i t u t e c o n s e n t t o t h e i s s u a n c e o f s u c h d i re c t i v e, ,
(5)
Board
c o n s i d e r i n g the response
the B o a r d mays
consideration
of
response.
After
of the b a n k or b a n k h o l d i n g c o m p a n y ,
(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? or
(iii)
seek additional
information or
clarification of the response by the bank or bank holding
company 0
(6) Contents of directive0 Any directive issued
by the Board may order the bank or bank holding company tos
(i)
a c h i e v e or m a i n t a i n t h e m i n i m u m c a p i t a l
requirement
established
pursuant
to
the
Board's
Capital
A d e q u a c y G u i d e l i n e s o r t h e p r o c e d u r e s in s e c t i o n 2 6 3 o4 0 o f t h i s
s u b p a r t by a c e r t a i n date?
by
t
43
(ii)
a d h e r e to a p r e v i o u s l y s u b m i t t e d p l a n
or s u b m i t for a p p r o v a l a n d a d h e r e to a p l a n for a c h i e v i n g the
m i n i m u m ca p i t a l r e q u i r e m e n t by a c e r tain date?
(iii)
take other
s p e c i f i c a c t i o n as the
B o a r d d i r e c t s to a c h i e v e the m i n i m u m c a p i t a l lev e l s ,
including
r e q u i r i n g a r e d u c t i o n o f a s s e t s or a s s e t g r o w t h or r e s t r i c t i o n
o n th e p a y m e n t o f d i v i d e n d s ? or
(iv)
a c o m b i n a t i o n of the above a c t i o n s .
(7)
Request
for r e c o n s i d e r a t i o n o f
A n y s t a t e m e m b e r b a n k "or “b a n k h olding- c o m p a n y , u p o n a c h a n g e in
c i r c u m s t a n c e s , m a y r e q u e s t the B o a r d to r e c o n s i d e r the t e r m s of
a d i r e c t i v e a n d m a y p r o p o s e c h a n g e s in t h e p l a n u n d e r w h i c h it
is o p e r a t i n g t o m e e t t h e r e q u i r e d m i n i m u m c a p i t a l l e v e l 0
The
d i r e c t i v e a n d p l a n c o n t i n u e in e f f e c t w h i l e s u c h r e q u e s t is
p e n d i n g b e f o r e the Boards
SECTION
2 6 3 o39 - E n f o r c e m e n t o f D i r e c t i v e s
(a)
Judicial
and
administrative
remedies,
(1)
Whenever
a b a n k or b a n k h o l d i n g
company
f a i l s to f o l l o w a d i r e c t i v e i s s u e d u n d e r t h i s s u b p a r t , or to
s u b m i t or a d h e r e t o a c a p i t a l a d e q u a c y p l a n a s r e q u i r e d b y s u c h
directive,
the B o a r d m a y s eek e n f o r c e m e n t of the d i r e c t i v e ,
i n c l u d i n g t h e c a p i t a l a d e q u a c y p l a n , in t h e a p p r o p r i a t e u n i t e d
S t a t e s d i s t r i c t c o u r t , p u r s u a n t t o s e c t i o n 9 0 8 (b) (2) (B) (i i ) o f
I L S A (12 UoSoCo 3 9 0 7 (b) (2) (B) (i i ) a n d t o s e c t i o n 8 (i ) o f t h e
F e d e r a l D e p o s i t i n s u r a n c e A c t (12 U o S s C e 1 8 1 8 ( i ) ) ,
in t h e s a m e
m a n n e r a n d t o t h e s a m e e x t e n t a s if t h e d i r e c t i v e w e r e a f i n a l
cease and desist o r d e r c
(2)
The Board,
p u r s u a n t to s e c t i o n 910(d)
of
I L S A (12 U o S o C o 3 9 0 9 ( d ) ) , m a y a l s o a s s e s s c i v i l m o n e y p e n a l t i e s
for v i o l a t i o n o f the d i r e c t i v e a g a i n s t a n y b a n k or bank h o l d i n g
c o m p a n y and any officer, director, employee,
a g e n t , or o t h e r
p e r s o n p a r t i c i p a t i n g in t h e c o n d u c t o f t h e a f f a i r s o f t h e b a n k
or b a n k h o l d i n g c o m p a n y ,
in t h e s a m e m a n n e r a n d t o t h e s a m e
e x t e n t a s if t h e d i r e c t i v e w e r e a f i n a l c e a s e a n d d e s i s t o r d e r 0
(b)
Other enforcement a c t i o n s .
A d i r e c t i v e m a y be
issued separately,
in c o n j u n c t i o n w i t h , o r in a d d i t i o n t o a n y
o t h e r e n f o r c e m e n t a c t i o n s a v a i l a b l e to the B o ard,
including
i s s u a n c e of c e a s e and d e s i s t o r d e r s , the a p p r o v a l or d e n i a l of
a p p l i c a t i o n s or n o t i c e s , or a n y o t h e r a c t i o n s a u t h o r i z e d by l a w Q
(c)
consideration
in a p p l i c a t i o n
p r o c e e d i n g s .,
in
a c t i n g u p o n a n y a p p l i c a t i o n or n o t i c e s u b m i t t e d to the B o a r d
p u r s u a n t to a n y s t a t u t e a d m i n i s t e r e d b y t he Boar d , the B o a r d
may consider
the p r o g r e s s of a state m e m b e r
bank or bank
d i r e c t i v e ^,
44
h o l d i n g c o m p a n y o r a n y s u b s i d i a r y t h e r e o f in a d h e r i n g t o a n y
directive
or
capital
adequacy plan
required
by
the B o a r d
p u r s u a n t to this s u b p a r t , or b y a n y o t h e r a p p r o p r i a t e b a n k i n g
s u p e r v i s o r y a g e n c y p u r s u a n t to ILSA°
The Board shall consider
w h e t h e r a p p r o v a l or a n o t i c e o f i n t e n t n o t t o d i s a p p r o v e w o u l d
d i v e r t @ar.nings, d i m i n i s h c a p i t a l , o r o t h e r w i s e i m p e d e t h e b a n k
or bank h o l d i n g c o m p a n y
in a c h i e v i n g
its
required
minimum
c a p i t a l l e v e l or c o m p l y i n g w i t h its c a p i t a l a d e q u a c y p l a n 0
SECTION
2 6 3 o40
- E s t a b l i s h m e n t of I n c r e a s e d C a p i t a l L e v e l
I n d i v i d u a l B a n k or B a n k H o l d i n g C o m p a n y
for
(a)
E s t a b l i s h m e n t of c a p i t a l l e v e l s for i n d i v i d u a l
institutions 0
The Board may establish a capital level higher
t h a n t h a t s p e c i f i e d in t h e B o a r d ’s C a p i t a l A d e q u a c y G u i d e l i n e s
f o r a n i n d i v i d u a l b a n k o r b a n k h o l d i n g c o m p a n y p u r s u a n t to;
(i)
a
written
agreement
or
memorandum
of
understanding between
t h e B o a r d or
the a p p r o p r i a t e
Federal
R e s e r v e B a n k a n d the b a n k or b a n k h o l d i n g c o m p a n y ;
(ii)
a t e m p o r a r y or f i n a l c e a s e a n d d e s i s t o r d e r
issued
pursuant
to s e c t i o n
8(b)
or
(c)
of
the
FIS
Act
(12 U o S o C o § 1 8 1 8 ( b ) o r ( c ) );
(iii)
a c o n d i t i o n for a p p r o v a l of an a p p l i c a t i o n
or i s s u a n c e o f a n o t i c e o f i n t e n t n o t t o d i s a p p r o v e a p r o p o s a l ;
(iv)
or o t h e r s i m i l a r m e a n s ; or
(v)
t h e p r o c e d u r e s s e t f o r t h in s u b s e c t i o n
(b)
o f t h i s section,,
(b)
P r o c e d u r e to e s t a b l i s h h i g h e r c a p i t a l r e q u i r e m e n t ,
(1)
Notice o
When
the
Board
determines
that
c a p i t a l l e v e l s a b o v e t h o s e in t h e B o a r d ' s C a p i t a l A d e q u a c y
G u i d e l i n e s m a y be n e c e s s a r y and a p p r o p r i a t e for a p a r t i c u l a r
b a n k or b a n k h o l d i n g c o m p a n y under the c i r c u m s t a n c e s , the B o a r d
s h a l l g i v e the b a n k or b a n k h o l d i n g c o m p a n y n o t i c e of th e
p r o p o s e d h i gher c a p i t a l r e q u i r e m e n t and s hall p e r m i t the bank
or b a n k h o l d i n g c o m p a n y a n o p p o r t u n i t y to c o m m e n t u p o n t h e
p r o p o s e d c a p i t a l l e v e l , w h e t h e r it s h o u l d b e r e q u i r e d a n d ,
if
so, u n d e r w h a t t i m e schedule.,
The n o t i c e s h a l l c o n t a i n the
B o a r d ' s r e a s o n s for p r o p o s i n g a h i g h e r l e v e l o f capital.,
(2)
Response,
The
bank
or
bank
holding
company
s h a l l be a l l o w e d at l e a s t 14 d a y s to r e s p o n d , u n l e s s the B o a r d
d e t e r m i n e s t h a t a s h o r t e r p e r i o d is n e c e s s a r y b e c a u s e o f t h e
financial
condition
of
the bank
or b a n k
holding
company.,
F a i l u r e by the bank of b a n k h o l d i n g c o m p a n y to file a w r i t t e n
r e s p o n s e to the n o t i c e w i t h i n the time s et b y the B o a r d s h a l l
c o n s t i t u t e a w a i v e r of the o p p o r t u n i t y to r e s p o n d and s h a l l
c o n s t i t u t e c o n s e n t to i s s u a n c e of a d i r e c t i v e c o n t a i n i n g the
r e q u i r e d m i n i m u m c a p i t a l level.,
45
(3)
Board
d e c i s i o n ,,
After
considering
the
respo n s e of the institution,
the B o a r d m a y i s s u e a w r i t t e n
directive
to the b ank or b a n k h o l d i n g
company
setting
an
a p p r o p r i a t e ca p i t a l level and the date on which this capital
l e v e l w i l l b e c o m e effe ct i v e, ,
T h e B o a r d m a y r e q u i r e t h e b a n k or
b a n k h o l d i n g c o m p a n y to s u b m i t and a d h e r e
to a plan
for
a c h i e v i n g s u c h h i g h e r c a p i t a l l e v e l as t h e B o a r d m a y s e t 0
(4)
Enforcement of higher capital l e v e l G
The
B o a r d m a y e n f o r c e the c a p i t a l l e v e l e s t a b l i s h e d p u r s u a n t to the
p r o c e d u r e s d e s c r i b e d in t h i s s e c t i o n a n d a n y p l a n s u b m i t t e d t o
a c h i e v e t h a t c a p i t a l l e v e l t h r o u g h t h e p r o c e d u r e s s e t f o r t h in
s e c t i o n 2 6 3 03 9 o f t h i s s u b p a r t o
April
17,
Board of
1985c
Governors
of
the
Federal
Reserve
System,
(signed) William w. Wiles
W i l l i a m Wo W i l e s
S e c r e t a r y of the Board
FEDERAL
12
RESERVE
CoFJ.
[Docket
RULES
REGARDING
Notice
AGENCYs
Board
of
ACTION:
Final
rule.
SUMMARY:
265,
to
The
its
the
under
Enforcement
263.38
Practice
or
and
and
for
bank
that
EFFECTIVE
Reserve
DATE:
the
Federal
is
Reserve
amending
of
the
the
Board's
of
to
issue
companies
such
have
banking
D
of
notices
CoF.Ro
.to
Issuance
that
state
to
the
and
Rules
member
levels
organizations
and
Capital,
Board's
insufficent
delegate
Counsels
Adequate
the
Part
Supervision
for
Maintain
Subpart
12
General
Procedures
to
System.
Authority,
of
May
15,
of
file
of
banks
capital
capital
1985.
CONTACT:
Division,
Washington,
INFORMATION:
Delegation
Division
[Enc. Cir. No. 9846]
the
Plan
concurrence
INFORMATION
Legal
SUPPLEMENTARY
of
Capital
plans.
System,
Regarding
AUTHORITY
the
Hearings,
FURTHER
Attorney,
of
OF
Banking
263.40
direct
DELEGATION
of
Directives
holding
improvement
FOR
of
R-0526 ]
Delegation
the
265
Division
with
authority
§§
of
No.
Governors
Regarding
Director
Regulation,
of
Part
Submit
Governors
Board
Rules
to
SYSTEM
of
of
Board
D.C.
(1)
of
The
E.
Scott,
Governors
20551,
Authority
Banking
James
(202)
Board
to
Supervision
of
is
the
Federal
452-3513.
amending
delegate
and
Senior
to
the
Regulation,
its
Rules
Director
with
the
2
concurrence
of
the
preliminary
actions
holding
companies
capital
as
as
set
the
the
Board's
12
C.F.R.
state
banking
levels
set
levels
has
failed
as
t he
of
of
the
action
before
delegation
compliance
an
of
i ts
capital
increase
The
to
notice
in
uniform
levels
is
to
banking
issued
may
by
banking
to
of
organizations
the
2 2 5)
also
to
or
of
a
Director
the
plan
is
a
may
final
action
finds
the
organizations
capital
that
at
the
require
submit
take
Board
banking
and
at
said
organization.
the
The
levels
that
organizations
whether
necessary
particular
guidelines
C.F.R.
directed
screen
a
consideration
capital.
minimum
those
is
to
adequacy
capital
the
decides
authority
identify
it
which
Board
in
the
and
capital
12
in
Capital,
indicating
y,
or
to
of
Issuance
notice
capital
particular
which
increase
with
preliminarily
the
to
263.40
maintain
Regulation
the
to
capital.
to
appropriate
need
a
of
guidelines
Adequate
company
Board's
Board's
organization
require
higher
the
issue
holding
condition
preliminary
to
in
to
levels
pursuant
and
Maintain
bank
organization.
authority
for
take
and
adequate
capital
263.38
to
banks
banking
Procedures
bank
be
increase
respond
or
member
revised
the
to
authority
maintain
sections
263.40,
may
notice
banking
to
bank
to
has
in
and
and
individual
adopted
forth
A
an
the
state
Board's
Directives
263.38
financial
The
for
organization
(Appendix
such
of
member
the
forth
recently
Enforcement
require
Director
set
Counsel,
increase
by
Board
particular,
procedures
to
to
defined
by
General
-
and
should
appropriate
for
to
maintain
because
of
3
the
substantial
systematically
only
a
number
and
the
banking
repeatedly
preliminary
guidelines
of
reviewed,
procedure,
Board
has
organizations
and
because
because
articulated
that
the
the
in
must
notice
its
be
is
capital
standards
to
be
applied .
comment,
553(b)
The
and
deferral
are
because
the
(2)
it
relates
List
of
in
to
of
Subject
12
the
date
connection
with
15,
1979
this
in P a r t
delegations
opportunity
procedures
with
procedures.
procedures
January
notice,
set
(44
this
For
forth
FR
of
5
to
U.S.Co
proceeding
the
in
same
the
3957),
reasons,
Board's
will
not
be
proceeding.
265
(Government
agencies),
Federal
System.
Reserve
C.F.Ro
in
Headings
Pursuant
Federal
that
effective
agency
connection
Authority
Reserve
of
rulemaking
statement
followed
finds
unnecessary
expanded
policy
Board
265.2
to
Act
by
the
(12
provisions
U.S.Co
adding
of
Section
248 ( k)) , the
paragraph
( c ) (33)
1 1 (k)
Board
to
of
hereby
read
as
the
amends
follows-
4
PA RT 265 -- Rules Regarding Deleg at ion of A u th o r i ty
C
§ 265.2
Specific
Federal
Reserve
functions
de legated
*
*
(33)
263*40 of
Board's
with
that
Under
to
Rules
of
file
k
to
k
Pr ovi sions
member
with
its
By
order
Adequa te
Pr actice
insufficient capital
to
the
Ma intain
state
and
*
the con currence
a
k
the B o a r d ’s Pr ocedures
Dir ectives
employees
Banks.
•k k
( C)
to Board
of
for
the
bank
and
of
for
Issuance
Capital,
Hea ri ngs
general
or
Subpart
(12
C.F.Ro
D
company
Bank
a
of
of
the
263),
ho lding
said
and
and En fo rc m en t
to issue
bank
Reserve
263*38
counsel,
that directs
regional
sections
and
a notice
has
banking or ga ni z at i o n
capital
improvement
plan *
Reserve System,
of
the
April 17,
Board
of
Gove rn ors
of
the
Federal
1985
(sig n ed )
W i l l i a m W. W i l e s
W i ll ia m W. Wiles
Secretary of the Board
(
c
@FedFRASER