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FEDERAL RESERVE BANK
OF NEW YORK

1
Ju n e 29, 1994

To All Depository Institutions in the Second Federal Reserve
District, and Others Maintaining Sets o f Board Regulations:
E n c l o s e d a r e t h e f o l l o w i n g d o c u m e n t s i s s u e d b y th e B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e
S y s te m :
1) R e g u l a t i o n A , " E x te n s io n s o f C r e d i t b y F e d e r a l R e s e r v e B a n k s ," a s a m e n d e d
e ffe c tiv e J a n u a ry 3 0 , 1 9 9 4 ; a n d

2 ) C a p i t a l A d e q u a c y G u i d e lin e s , p a m p h l e t d a te d M a y 1 9 9 4 :
—" C a p ita l A d e q u a c y G u i d e l i n e s f o r S ta te M e m b e r B a n k s : R i s k - B a s e d M e a s u r e ," a s
a m e n d e d e f f e c tiv e D e c e m b e r 3 1 , 1 9 9 3 ( R e g u l a t i o n H , A p p e n d i x A ) ;
—" C a p i t a l A d e q u a c y G u id e lin e s f o r S ta te M e m b e r B a n k s : T i e r 1 L e v e r a g e
M e a s u r e ," a s a m e n d e d e f f e c tiv e M a r c h 9 , 1 9 9 3 ( R e g u l a t i o n H , A p p e n d i x B );
—" C a p ita l A d e q u a c y G u i d e l i n e s f o r B a n k H o l d i n g C o m p a n ie s : R i s k - B a s e d
M e a s u r e ," a s a m e n d e d e f f e c tiv e D e c e m b e r 3 1 , 1 9 9 3 ( R e g u l a t i o n Y , A p p e n d i x 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 f o r B a n k H o l d i n g C o m p a n i e s a n d S ta te M e m b e r
B a n k s : L e v e r a g e M e a s u r e ," a s a m e n d e d e f f e c tiv e S e p t e m b e r 7 , 1 9 9 0
(R e g u la tio n Y , A p p e n d ix B ); a n d
—" C a p ita l A d e q u a c y G u i d e l i n e s f o r B a n k H o l d i n g C o m p a n ie s : T i e r 1 L e v e r a g e
M e a s u r e ," a s a m e n d e d e f f e c tiv e M a r c h 9 , 1 9 9 3 ( R e g u l a t i o n Y , A p p e n d i x D ) .

Circulars Division

f it M W
B o a rd o f G o v e rn o rs o f th e F e d e ra l R e s e rv e S y s te m

( tt/ o n / y

Li >?'•

A n y inquiry relating to this regu lation sh ou ld b e add ressed to the Federal R eserve B an k o f
the Federal R eserve D istrict in w h ich the inquiry arises.
M ay 1994

Contents

Page
Section 201.1—Authority, scope and
purpose................................................. 1
(a) Authority and scope..........................
(b) Purpose...............................................
Section 201.2—Definitions..................... 1
Section 201.3—Availability and terms . . . .
(a) Adjustment credit..............................
(b) Seasonal credit...................................
(c) Extended credit.................................
(d) Emergency credit for others..............
Section 201.4—Limitations on
availability and assessments................ 3
(a) Advances to or discounts for
undercapitalized insured
depository institutions........................
(b) Advances to or discounts for
critically undercapitalized insured
depository institutions........................
(c) Assessments........................................
(d) Information........................................
Section 201.5—Advances and discounts . .
Section 201.6—General requirements..... 4

1
1
3
3
3
3
3

4
4
4
4

Page
(a) Credit for capital purposes................ 4
(b) Compliance with law and
regulation ....................
4
(c) Information...................................... 5
(d) Indirect credit forothers.................... 5
Section 201.7—Branches and agencies . . . . 5
Section 201.8—Federal Intermediate
Credit Banks........................................... 5
Section 201.9—No obligation to make
advances or discounts............................. 5
Section 201.51—Short-term adjustment
credit for depository institutions.............. 5
Section 201.52—Extended credit for
depository institutions............................. 5
(a) Seasonal credit.................................. 5
(b) Other extendedcredit ........................ 5

FEDERAL RESERVE ACT
Sections 10B, 13, 19.................................. 7

Regulation A
Extensions o f Credit by Federal Reserve Banks
12 CFR 201; as amended effective January 30, 1994

SECTION 201.1—Authority, Scope and
Purpose

the FDI Act (12 USC 1831o(b)(l)(E)) and the
implementing regulations.

(a) Authority and scope. This part* is issued
under the authority of sections 10A, 10B, 13,
13A, and 19 of the FRA (12 USC 347a, 347b,
343 et seq., 347c, 348 et seq., 374, 374a, and
461), other provisions of the FRA, and section
7(b) of the International Banking Act of 1978
(12 USC 347d) and relates to extensions of
credit by Federal Reserve Banks to depository
institutions and others.

(c)(1) Depository institution means an institu
tion that maintains reservable transaction
accounts or nonpersonal time deposits and
is—
(i) an insured bank as defined in section
3 of the FDI Act (12 USC 1813(h)) or a
bank which is eligible to make applica
tion to become an insured bank under
section 5 of such act (12 USC 1815);
(ii) a mutual savings bank as defined in
section 3 of the FDI Act (12 USC
1813(0) or a bank which is eligible to
make application to become an insured
bank under section 5 of such act (12
USC 1815);
(iii) A savings bank as defined in section
3 of the FDI Act (12 USC 1813(g)) or a
bank which is eligible to make applica
tion to become an insured bank under
section 5 of such act (12 USC 1815);
(iv) An insured credit union as defined in
section 101 of the Federal Credit Union
Act (12 USC 1752(7)) or a credit union
which is eligible to make application to
become an insured credit union pursuant
to section 201 of such Act (12 USC
1781);
(v) A member as defined in section 2 of
the Federal Home Loan Bank Act (12
USC 1422(4)); or
(vi) A savings association as defined in
section 3 of the FDI Act (12 USC
1813(b)) which is an insured depository
institution as defined in section 3 of the
act (12 USC 1813(c)(2)) or is eligible to
apply to become an insured depository
institution under section 5 of the act (12
USC 1815(a)).
(2) The term depository institution does not
include a financial institution that is not re
quired to maintain reserves under Regula
tion D (12 CFR 204) because it is organ
ized solely to do business with other
financial institutions, is owned primarily by
the financial institutions with which it does

(b) Purpose. This part establishes rules under
which Federal Reserve Banks may extend
credit to depository institutions and others.
Extending credit to depository institutions to
accommodate commerce, industry, and agri
culture is a principal function of Federal Re
serve Banks. While open market operations
are the primary means of affecting the overall
supply of reserves, the lending function of the
Federal Reserve Banks is an effective method
of supplying reserves to meet the particular
credit needs of individual depository institu
tions. The lending functions of the Federal
Reserve System are conducted with due re
gard to the basic objectives of monetary pol
icy and the maintenance of a sound and or
derly financial system.

S E C T IO N 2 0 1 .2 — D e fin itio n s

For purposes of this part, the following defini
tions shall apply:
(a) Appropriate federal banking agency has
the same meaning as in section 3 of the FDI
Act (12 USC 1813(q)).
(b) Critically undercapitalized insured deposi
tory institution means any insured depository
institution as defined in section 3 of the FDI
Act (12 USC 1813(c)(2)) that is deemed to be
critically undercapitalized under section 38 of
* The words “this part,” as used herein, mean Regula
tion A (Code of Federal Regulations, title 12, chapter II,
part 201).

f t t

/ o '? / ?

Regulation A

b u sin ess, and d o e s not d o b u sin ess w ith the

van ces ou tstan d in g at the en d o f the period s

general pu blic.

sp ecified in paragraphs (d )(1 ) and (2 ) o f

(d ) L iquidation loss m eans the lo ss that any
d e p o s it in su ran ce fun d in the F D IC

w o u ld

h a v e incurred i f the F D IC had liq uidated the

this se c tio n i f th ose in creased a d van ces had
b een unsecured; or
(2 ) the interest receiv ed on the am oun t by
w h ich the ad van ces under se c tio n 1 0 B (l)(a )

institution—
(1 ) in the c a se o f an un dercapitalized in

e x c e e d the am oun t o f ad van ces outstand in g,

sured d ep o sito ry institution, as o f the en d o f

i f any, at the en d o f the p eriod s sp ecified in

the later o f —

paragraphs (d )(1 ) and (2 ) o f th is section .

■q

(i) 6 0 da y s—

(g ) Transaction account an d nonpersonal time

(A ) in any 120-day period;

d ep o sit h ave the m ean in gs sp ecified in R e g u

(B ) during w h ich the in stitu tion w as

lation D (1 2 C F R 2 0 4 ).

an undercapitalized insured d ep ository
institution; and
(C ) d u rin g

w h ic h

ad van ces

or d is

cou n ts w ere outstand in g to the d e p o si
tory institution from any Federal R e
serv e Bank; or

(h ) U n dercapitalized insured depository insti
tution m ean s any insured dep ository institution
as d efin ed in sectio n 3 o f the F D I A c t (1 2
U S C 1 8 1 3 (c )(2 )) that—
(1 ) is not a critically u n dercapitalized in

(ii) the 60-calen d ar-d ay period fo llo w in g

sured d ep ository institution; and

the receipt by a Federal R eserv e B ank o f

(2 ) ( i) is d e e m e d

a w ritten certification from the chairm an
o f the B oard o f G overnors or the head o f

1 8 3 1 o ( b ) ( l) ( C ) )

the appropriate fed eral b an k in g a g en cy

regu lations; or

that the institution is viab le.
(2 ) in the c a se o f a critically undercapital

to b e u n d e rc a p ita liz e d

under sectio n 38 o f the F D I A c t (1 2 U S C
and th e im p le m e n tin g

(ii) has receiv ed from its appropriate fe d

ized insured d ep ository institution , as o f the

e r a l b a n k in g a g e n c y
a c o m p o s ite
C A M E L rating o f 5 under the U n iform

end o f the 5-d ay period b eg in n in g on the

F in an cial In stitutions R ating S y stem (or

date the institution b ecam e a critica lly u n

an e q u iv a len t rating b y its appropriate

dercap italized insured d ep ository institution.

federal ban king a g en cy under a com para

(e ) Increased loss m eans the am oun t o f lo ss

b le rating system ) as o f the m o st recen t

to any d ep o sit insurance fund in the F D IC
that e x c e e d s the liq uidation lo ss due to—
(1 ) an a d van ce under sectio n 1 0 B (l)(a ) o f
the F R A that is outstand in g to an under
ca p ita lized or critically un dercapitalized in
su red d e p o sito r y in stitu tio n

w ith o u t p a y

m ent havin g b een d em and ed as o f the end
o f the period s sp ecified in paragraphs (d )(1 )
and (2 ) o f this section ; or

exam in ation o f su ch institution .
(i) Viable, w ith respect to a d ep ository in stitu
tion, m eans that the B oard o f G overn ors or
the appropriate federal ban king ag en cy has d e
term ined, g iv in g du e regard to the e co n o m ic
co n d ition s and circu m stan ces in the m arket in
w h ich the institution operates, that the institu
tion is not critically u n dercapitalized, is not
e x p ected to b e c o m e critically u n dercapitalized,

(2 ) an a d van ce under sectio n 1 0 B (l)(a ) o f

and is not e x p ected to be p laced in con serv a

the Federal R eserve A ct that is m ade after

torship or receiversh ip . A lth ou gh there are a

the end o f su ch periods.

num ber o f criteria that m ay b e u sed to deter
m ine via b ility , the B oard o f G overn ors b e

(f) E xcess loss m ean s the lesse r o f the in

lie v e s that ordinarily an u n dercapitalized in

crea sed lo ss or that portion o f the increased

sured d ep o sito ry in stitu tion is v ia b le i f the

lo ss equal to the lesser o f—

appropriate fed eral b an k in g a g e n c y has a c

(1 ) the lo ss the B oard o f G overnors or any

cep ted a capital restoration plan for the d e p o s

Federal R eserv e B ank w o u ld have incurred

itory in stitu tion under

o n the am oun t by w h ich ad van ces under

and the d ep o sito r y in stitu tion is c o m p ly in g

se c tio n 1 0 B (l)(a ) e x c e e d the am oun t o f ad-

w ith that plan.

12 U S C

1 8 3 1 o (e )(2 )

44/0*7/9

Regulation A
S E C T IO N 2 0 1 .3 — A v ailab ility a n d
T erm s

e x ten d e d cred it arran gem en ts w h ere sim ilar
a ssista n c e is not reaso n a b ly

(a) A djustm ent credit. Federal R eserv e B ank s
ex ten d adjustm ent credit on a short-term b asis
to dep o sito ry in stitu tion s to a ssist in m eetin g
tem porary requirem ents for fu n d s or to c u sh
io n m ore persistent sh ortfalls o f fun ds p en d in g
an orderly adjustm ent o f a borrow in g in stitu
tio n ’s a ssets and liab ilities. S u ch credit g en er
a lly is a v a ila b le o n ly for appropriate pu rp oses
and a fter r ea so n a b le a ltern ative so u r c e s o f
fun ds h a v e b een fu lly u sed , in clu d in g credit
from sp ecia l industry lenders su ch as Federal
H o m e L oan B an k s, the N ation al Credit U n ion
A d m in istr a tio n ’s C entral L iq u id ity

F a c ility ,

and corp orate central credit u n ion s. A d ju st
m ent credit is u su ally granted at the b asic d is
cou n t rate, but under certain circu m stan ces a
sp ecia l rate or rates a b ove the b asic d iscou n t
rate m ay be app lied.
(b ) S eason al credit.

§ 201. 4

F ederal R e serv e B an k s

ex ten d sea so n a l credit for p eriod s lon ger than
th o se perm itted under adjustm ent credit to as
sist sm a ller dep o sitory in stitu tion s in m eetin g
regular n eed s fo r funds arising from e x p ected
patterns o f m o v em en t in their d ep o sits and
lo a n s. A sp ecia l rate or rates at or a b o v e the
b a sic d isco u n t rate m ay b e app lied to season al
credit.

a v a ila b le from

other sou rces, in clu d in g sp ecia l industry len d
ers. S u ch credit m ay b e p rovid ed w h ere there
are excep tio n a l circu m stan ces or p ractices af
fectin g a particular d ep ository institution in
clu d in g su stain ed d ep o sit drains, im paired ac
cess

m oney

m a rk et

fu n d s ,

su d d en

deterioration in loan -rep aym en t perform ance.
E xten d ed credit m ay a lso b e provid ed to ac
co m m o d a te the n e e d s o f d ep o sitory in stitu
tion s, in clu d in g th o se w ith longer-term asset
p o rtfo lio s, that m ay be exp erien cin g difficu l
ties adjusting to ch an gin g m on ey m arket c o n
d itio n s ov er a lon g er period , particularly at
tim es o f d ep osit d isin term ed iation . A sp ecial
rate or rates a b ove the b a sic d isco u n t rate m ay
be ap p lied to exten d ed credit.
(d )

Em ergency credit f o r others. In unusual

and e x ig e n t circu m stan ces, a Federal R eserve
B ank m ay, after con su ltation w ith the B oard
o f G overn ors, ad van ce credit to in d ivid u als,
partnerships, and corp oration s that are not d e
p ository in stitu tion s if, in the ju d g m en t o f the
Federal R eserv e B ank , credit is not availab le
from other sou rces and failu re to obtain su ch
cred it w o u ld a d v ersely a ffec t the e c o n o m y .
T h e rate a p p lica b le to su ch cred it w ill be
a b o v e the h igh est rate in e ffe c t for ad van ces
to dep ository in stitu tion s. W h ere the collateral

(1 ) S ea so n a l credit is o n ly availab le if —
(i) the d ep o sito ry in stitu tio n ’s se a so n a l

u sed to secure su ch credit c o n sists o f assets
other than o b ligation s o f, or fu lly guaranteed

n eed s e x c e e d a threshold that the in stitu

as to p rincip al and in terest b y , the U n ited

tio n

S ta tes or an a g e n c y th ereo f, an affirm ative

e x p e c te d

m e e t fro m

o th e r

so u rces o f liq u id ity (th is threshold is c a l

vo te o f five or m ore m em b ers o f the B oard o f

cu lated as certain p ercen tages, estab lish ed

G overn ors is required b efo re credit m ay b e

b y the B oard o f G overnors, o f the institu

exten d ed .

tio n ’s a v erage total d ep o sits in the pre
ced in g calend ar year);
(ii) the F ederal R eserv e B ank is satisfied
that the in stitu tion ’s q u a lify in g n eed for
fu n d s is sea son al and w ill persist for at
least four w eek s; and

S E C T IO N 201.4— L im ita tio n s on
A v ailab ility a n d A sse ssm e n ts
(a) A dvances to o r discounts f o r undercapital

( iii) sim ila r a ssista n c e is n ot a v a ila b le

ized insured depository institutions. A Federal

from sp ecia l industry lenders.

R eserv e B ank m ay m ake or h ave outstand in g

(2 ) T h e B oard m ay estab lish sp ecial term s

ad van ces to or d isco u n ts for a d ep ository in

for sea so n a l credit w h en d ep ository institu

stitution that it k n o w s to b e an undercapital

tio n s are ex p erien cin g unusual season al d e

ized insured dep ository in stitu tion , o n ly —

m and s for credit in a period o f liq u id ity

(1 ) if, in any 120-d ay period , ad van ces or

strain.

d iscou n ts from any Federal R eserv e B ank

(c ) E xten ded credit. Federal R e serv e B an k s

to that dep ository in stitu tion are not ou t

ex ten d credit to dep ository in stitu tion s under

stan ding

for

m ore

than

d ays

during
3

§ 201.4

Regulation A
Information. B e fo r e e x te n d in g cred it a

w h ich the institution is an u n dercapitalized

(d )

insured d ep o sito ry institution; or

Federal R eserv e B ank sh ou ld ascertain i f an

(2 ) during the 6 0 calendar d ays after the

institution is an u n dercapitalized insured d e

receipt o f a w ritten certification from the

p ository in stitu tion or a critically undercapital

chairm an o f the Board o f G overn ors or the

ized insured d ep ository institution.

h ea d o f the app rop riate fed era l b a n k in g
a g en cy that the borrow ing dep ository in sti

(3 ) after c o n su lta tio n w ith the B oard o f

S E C T IO N 2 0 1 .5 — A d v a n c e s an d
D isc o u n ts

G o v ern o rs.1

(a) F ederal R eserve B ank s m ay len d to d e p o s

tution is v iab le; or

itory institution s either through ad van ces se

Advances to or discounts for critically un
dercapitalized insured depository institutions.

cured by accep tab le collateral or through the

(b )

A F ederal R eserv e B ank m ay m ake or have

d iscou n t o f certain typ es o f paper. Credit e x

ou tstan d in g ad van ces to or d iscou n ts for a d e

tended b y the F ederal R eserv e B ank s gen er

p o sito ry institution that it k n o w s to be a criti

a lly takes the form o f an advan ce.

c a lly un dercapitalized insured dep ository in sti
(b ) F ed eral R e se r v e B a n k s m ay

tution o n ly —
(1 ) during the 5-d ay period b eg in n in g on
the date the institution b eca m e a critically
u n dercapitalized insured d ep ository institu
tion; or

m ak e a d

van ces to any d ep ository institution i f secured
to th e sa tisfa c tio n

o f th e F ed eral R e se r v e

Bank. S atisfactory collateral gen erally in clu d es
U n ited States govern m en t and fed eral-agen cy
secu rities, and, i f o f accep tab le q u ality, m ort

(2 ) after c o n su lta tio n w ith the B oard o f

g a g e notes co v erin g on e- to fou r-fam ily resi

G o v ern o rs.12

d en ces, state and lo ca l govern m en t secu rities,

(c )

Assessments. T h e Board o f G overnors w ill

a s s e s s the F ed eral R e se rv e

B an k s for any

am oun t that it p ays to the F D IC du e to any
e x c e s s lo ss. E ach Federal R eserv e B ank shall
b e a ssesse d that portion o f the am oun t that the
B oard o f G overnors pays to the F D IC that is
attributable to an exten sion o f credit by that
Federal R eserv e Bank, up to 1 percent o f its

and b u sin ess, con su m er, and other cu stom er
notes.
(c ) If a Federal R eserv e B ank c o n c lu d e s that
a dep ository institution w ill b e better a c co m
m odated by the d iscou n t o f paper than by an
ad van ce, it m ay d iscou n t any paper en d orsed
by the d ep ository institution that m eets the re
qu irem en ts sp ecified in the F R A .

capital as reported at the b eg in n in g o f the ca l
endar year in w h ich the assessm en t is m ade.
T h e B oard o f G overnors w ill a ssess all o f the
Federal R eserv e B ank s for the rem ainder o f

S E C T IO N 2 0 1 .6 — G e n e ra l R e q u ire m e n ts

the am oun t it pa y s to the F D IC in the ratio

(a)

that the capital o f ea ch Federal R eserve B ank

serve credit is not a su bstitute for capital.

Credit for capital purposes. F ederal R e

bears to the total capital o f all Federal R e
serve B an k s at the b egin n in g o f the calendar
year in w h ich the a ssessm en t is m ade, pro
v id ed , h o w ev e r, that if any a ssessm e n t e x
c ee d s 5 0 percent o f the total capital and sur
plu s o f all F ederal R eserve B ank s, w h eth er to
d istrib u te the e x c e s s ov er su ch 5 0 p ercen t
sh all be m ade at the d iscretion o f the Board
o f G overnors.

(b)

Compliance with law and regulation. A ll

credit exten d ed under this part sh all co m p ly
w ith ap p licab le requirem ents o f law and o f
this part. E ach Federal R eserv e B ank—
(1 ) sh all k eep itse lf inform ed o f the general
character and am oun t o f the loan s and in
vestm en ts o f d ep ository in stitu tion s w ith a
v ie w to ascertaining w h eth er undue u se is
b ein g m ade o f d ep ository-in stitu tion credit

1In unusual circumstances, when prior consultation with
the Board is not possible, a Federal Reserve Bank should
consult with the Board as soon as possible after extending
credit that requires consultation under this paragraph.
2 See footnote 1 in section 201.4(a)(3).
4

for the sp ecu la tiv e carrying o f or trading in
secu rities, real estate, or c o m m o d itie s, or
for any other p u rp ose in co n sisten t w ith the
m aintenance o f sou nd credit con d ition s; and

A+

Regulation A
(2 ) sh all co n sid er su ch inform ation in d e
term ining w h eth er to ex ten d credit.
(c)

Information. A F ederal R eserv e B ank shall

§ 201.52

S E C T IO N 2 0 1 .5 1 — S h o rt-T e rm
A d ju stm e n t C re d it fo r D e p o sito ry
In stitu tio n s

require any inform ation it b e lie v e s appropriate

T h e rates for short-term adju stm ent credit pro

or d esirab le to ensure that paper tendered as

vid ed to dep ository in stitu tion s under sectio n

collateral for a d van ces or for d iscou n t is ac

2 0 1 .3 (a ) o f R egu lation A are:

cep tab le and that the credit p rovided is used

Federal Reserve Bank

in a m anner co n sisten t w ith this part.

Rate

Effective

Boston

3.0

institution sh all act as the m ed iu m or agen t o f

New York

3.0

July 2, 1992

a n o th er d e p o s ito r y

Philadelphia

3.0

July 2, 1992

Federal R eserv e credit e x ce p t w ith the p erm is

Cleveland

3.0

July 6, 1992

sio n o f the Federal R eserv e B ank ex ten d in g

Richmond

3.0

July 2, 1992

(d )

Indirect credit for others. N o dep ository
in stitu tio n

in r e c e iv in g

credit.

July 2, 1992

Atlanta

3.0

July 2, 1992

Chicago

3.0

July 2, 1992

St. Louis

3.0

July 7, 1992

Minneapolis

3.0

July 2, 1992

Kansas City

3.0

July 2, 1992

S E C T IO N 2 0 1 .7 — B ra n c h e s an d
A g en cies

Dallas

3.0

July 2, 1992

(a) E xcep t as m ay be o th erw ise p rovided, this

San Francisco

3.0

July 2, 1992

part sh a ll b e

a p p lic a b le

U n ite d

S ta te s

branches and a g en cies o f foreign banks su b
je c t to reserve requirem ents under R egu lation
D (1 2 C F R 2 0 4 ) in the sam e m anner and to
the sa m e ex ten t as d ep ository institution s.

S E C T IO N 2 0 1 .5 2 — E x te n d e d C re d it fo r
D e p o sito ry In stitu tio n s
(a )

Seasonal credit. T h e rate for se a so n a l

c r e d it e x te n d e d

S E C T IO N 2 0 1 .8 — F e d e ra l In te rm e d ia te
C re d it B an k s

d e p o s ito r y

in s titu tio n s

under sectio n 2 0 1 .3 (b )(1 ) is a flex ib le rate that
takes into accou n t rates on m arket sou rces o f
funds, but in no c a se w ill the rate charged be

(a) A Federal R eserve B ank m ay discou n t for
any Federal Interm ediate Credit B ank agricu l

less than the rate for short-term adjustm ent
credit as set out in se c tio n 2 0 1 .5 1 .

tural paper or n otes payab le to and bearing
the en d o rsem en t o f the Federal Interm ediate
C red it B a n k that c o v e r lo a n s or a d v a n ce s

Federal Reserve Bank

m ade under su b sectio n s (a) and (b) o f sectio n

Boston

3.0

July 2, 1992

2 .3 o f the Farm Credit A ct o f 1971 (1 2 U S C

New York

3.0

July 2, 1992

2 0 7 4 ) and that are secured by paper e lig ib le

Philadelphia

3.0

July 2, 1992

for d isco u n t b y F ederal R eserve B ank s. A n y

Cleveland

3.0

July 6, 1992

paper so d isco u n ted sh all h ave a period re

Richmond

3.0

July 2, 1992

m ain in g to m aturity at the tim e o f d iscou n t o f

Atlanta

3.0

July 2, 1992

not m ore than nin e m onths.

Chicago

3.0

July 2, 1992

St. Louis

3.0

July 7, 1992

Minneapolis

3.0

July 2, 1992

Kansas City

3.0

July 2, 1992

Dallas

3.0

July 2, 1992

San Francisco

3.0

July 2, 1992

S E C T IO N 2 0 1 .9 — N o O b lig a tio n to
M a k e A d v a n c e s o r D isc o u n ts

Rate

Effective

(a) A Federal R eserve B ank sh all h ave no o b

Other extended credit. T h e rates for other

lig a tio n to m ake, increase, ren ew , or exten d

(b)

any a d v a n ce or d iscou n t to any d ep o sitory

exten d ed credit provid ed to d ep ository in stitu

institution.

tion s under su sta in ed liq u id ity pressu res or

M W /?

§ 201.52

Regulation A

w h ere there are ex cep tion al circu m stan ces or

T h e se rates app ly for the first 3 0 d ays o f bor

p r a c tic e s in v o lv in g

row in g. For credit outstand in g for m ore than

a p a rticu lar in stitu tio n

under sectio n 2 0 1 .3 (b X 2 ) are:

3 0 d ays, a flex ib le rate w ill b e ch arged that
takes in to accou n t rates on m arket sou rces o f

Federal Reserve Bank

Rate

Effective

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0

July
July
July
July
July
July
July
July
July
July
July
July

2,
2,
2,
6,
2,
2,
2,
7,
2,
2,
2,
2,

1992
1992
1992
1992
1992
1992
1992
1992
1992
1992
1992
1992

fu n d s, but in n o c a se w ill the rate charged be
le s s than the rate for short-term adjustm ent
credit, as set out in sectio n 2 0 1 .5 1 , p lu s on eh a lf p ercen tage point. W here exten d ed credit
p rovid ed to a particular d ep ository institution
is anticip ated to b e outstand in g for an u n usu
a lly p rolon ged period and in relatively large
a m o u n ts, th e
shortened.

3 0 -d a y

tim e p e r io d

m ay

A+/o<7/9

Federal Reserve Act

S E C T IO N 10B *— A d v a n c e s to
In d iv id u a l M e m b e r B a n k s

b eg in n in g on the date su ch certification is
received .
(B ) T h e 6 0 -d a y period m ay be exten d ed

(a ) A n y F ed eral R eserv e B ank , under rules

for ad d ition al 6 0 -d a y p eriod s upon re

and regu lation s prescribed by the B oard o f

ceip t by the Federal R eserv e bank o f ad

G o v ern o rs o f th e F ed eral R e se rv e S y s te m ,

d ition al w ritten certification s under sub-

m ay m ake ad v an ces to any m em b er bank on

paragraph (A ) w ith resp ect to ea ch su ch

its tim e or dem an d notes h avin g m aturities o f

additional period.

not m ore than four m onths and w h ich are se

(C ) T h e au th ority o f the h ead o f any

cured to the satisfaction o f su ch Federal R e

ag en cy to issu e a written certification o f

serv e B ank . N o tw ith sta n d in g the fo r eg o in g ,

v iab ility under this paragraph m ay not be

any Federal R eserv e B ank , under rules and
regu lation s prescribed b y the B oard o f G over
nors o f the F ed eral R e se r v e

S y s te m , m ay

m ake ad v a n ces to any m em b er bank on its
tim e

n o te s

h a v in g

su c h

m a tu r itie s

as the

B oard m ay prescribe and w h ich are secured
by

m o r tg a g e

lo a n s c o v e r in g

a o n e -to -fo u r

fa m ily resid en ce. Su ch ad van ces sh all bear in
terest at a rate equal to the lo w e st d iscou n t

d elegated to any other person.
(D ) N o tw ith sta n d in g
u n d e r c a p ita liz e d

paragraph (1 ), an

d e p o s ito r y

in stitu tio n

w h ich d o e s not h ave a certificate o f v ia
bility in e ffe c t under this paragraph m ay
have ad van ces outstand in g for m ore than
6 0 d a y s in any

1 2 0 -d a y p eriod i f the

Board e le cts to treat—

rate in e ffe c t at su ch Federal R eserve B ank on

(i) su ch institution as critically under

the date o f su ch note.

cap italized under paragraph (3); and
(ii) any su ch ad van ce as an advan ce

[12 u se 347b(a). As added by act of Feb. 27,
Stat. 56); and amended by acts of Feb. 3, 1933
794); March 9, 1933 (48 Stat. 7); Aug. 23, 1935
705); Oct. 18, 1974 (88 Stat. 1368); March 31,
Stat. 140); and Dec. 19, 1991 (105 Stat. 2279).]

1932 (47
(47 Stat.
(49 Stat.
1980 (94

d e sc r ib ed

in su b p aragrap h

( A ) ( i)

paragraph (3 ).
(3 )

(A ) N otw ith stan d in g any other p rovision

o f this section , i f —
(i) in the c a se o f any critically under

(b ) Lim itations on advances.

cap italized d ep ository institution—

(1 ) E x cep t as provid ed in paragraph (2 ), no
ad v a n ces to any u n dercapitalized d ep ository
in stitu tio n b y any F ed eral R e se r v e bank
under this se c tio n m ay be outstand in g for
m ore than 6 0 days in any 120-d ay period.
(2 ) (A ) If—
b an king a g en cy certifies in ad van ce in
w ritin g to the F ed eral R eserv e bank
that any d ep ository institution is v ia
ble; or
(ii) the B oard con d u cts an exam in ation
o f any dep ository institution and the
o f th e B oard c e r tifie s

w ritin g to the F ed eral R eserv e bank
that the institution is viab le,
the lim itation con tain ed in paragraph (1 )
sh all not app ly during the 60 -d a y period
* Previously section 10(b), this section was redesignated
by act of Dec. 19, 1991 (105 Stat. 2279).

su ch institution is outstand in g w ith
out p aym en t h avin g b een dem and ed
as o f the en d o f the 5 -d ay period
b eg in n in g on the date the institution
b e c o m es a critically un dercapitalized

(i) the head o f the appropriate F ederal

C h a irm a n

(I) any ad van ce under this se c tio n to

institution; or
(II) any n e w

a d v a n ce is m ad e to

su ch institution under this se c tio n af
ter the en d o f su ch period; and
(ii) after the en d o f that 5 -d ay period,
any d ep o sit insu ran ce fund in the F ed
eral D e p o sit Insurance C orporation in
curs a lo ss e x c e e d in g the lo ss that the
C orporation w o u ld have incurred i f it
had liq uidated that institution as o f the
en d o f that period ,
the B oard sh all, su bject to the lim itation s
in subparagraph (B ), b e liab le to the F ed
eral D e p o s it In su ran ce C orp oration for

M /OW ?

§i 10B

Federal Reserve Act

the e x c e s s lo s s , w ith ou t regard to the

m o st

term s o f the advan ce or any collateral

institution .

recen t

e x a m in a t io n

su ch

A d ep ository institution is “ via b le ”

p led g ed to secure the ad van ce.

(E )

(B ) T h e liab ility o f the B oard under sub-

i f the B oard or the appropriate Federal

paragraph (A ) sh all not e x c e e d the lesser

ban k in g a g e n c y d eterm in es, g iv in g d u e

o f the fo llo w in g :

regard to the e c o n o m ic c o n d itio n s and

(i) T h e am oun t o f the lo s s the B oard

circu m stan ces in the m arket in w h ich the

o r an y F ed eral R eserv e bank w o u ld

institution op erates, that the institution—

h a v e incurred on the in creases in the

(i) is not critically undercapitalized;

am oun t o f a d van ces m ade after the 5 -

( ii) is not e x p e cte d to b e c o m e criti

d ay period referred to in subparagraph

ca lly u n dercapitalized; and

(A ) i f th o se in creased a d v a n ce s had

( iii) is not e x p e cte d to be p la ced in

b een un secu red.

conservatorsh ip or receiversh ip .

( ii) T h e in terest r ec eiv e d on the in
crea ses

in th e am ou n t o f a d v a n c e s

[12 use 347b(b). As added by act of Dec. 19, 1991 (105
Stat. 2279).]

m ad e after the 5-d ay period referred to
in subparagraph (A ).
(C ) T h e B oard sh all pay the Federal D e
p o sit Insurance Corporation the am ount

SECTION 13— Powers of Federal
Reserve Banks

o f any liab ility o f the B oard under sub-

paragraph (A ).

(D ) T h e B oard sh all report to the C o n
g ress o n any e x c e s s lo ss liab ility it incurs
under subparagraph (A ), as lim ite d by
su b p a ra g ra p h

(B )(i),

an d

th e

reasons

3. D iscoun ts f o r Individuals, Partnerships,
a n d C orporations

therefore, not later than 6 m on th s after

In u n u su al and e x ig e n t c ir c u m sta n c e s, the

incurring the liab ility.
(4 ) A Federal R eserv e bank sh all h ave no

B oard o f G overn ors o f the F ederal R eserve
S y stem , by the affirm ative vo te o f not less

o b lig a tio n to m ake, increase, ren ew , or e x

than five m em b ers, m ay authorize any F ederal

tend any ad van ce or d iscou n t under this A ct

R eserv e B ank , during su ch p eriod s as the said

to any dep o sito ry institution.

B oard m ay determ ine, at rates esta b lish ed in

“ a p p ro p r ia te F e d e r a l

accordan ce w ith the p ro v isio n s o f sectio n 14,

banking agen cy ” has the sam e m ean in g

su b d iv isio n (d ), o f this A ct, to d iscou n t for

(5 ) (A ) T h e

term

as in sectio n 3 o f the F ederal D e p o sit In

any in d iv id u a l, partn ersh ip , or corp o ra tio n ,

surance A ct.

n o tes, drafts, and b ills o f ex ch a n g e w h en su ch

(B ) T h e term

“ c ritic a lly u n d erca p ita l

n o tes, drafts, and b ills o f e x ch a n g e are in

ized" has the sam e m eaning as in sectio n

d orsed or o th erw ise secured to the satisfaction

3 8 o f the Federal D ep o sit Insurance A ct.

o f the Federal R eserve Bank: Provided, That

“ d e p o sito ry in stitu tio n ”

b efore d iscou n tin g any su ch n ote, draft, or b ill

has the sa m e m eaning as in sectio n 3 o f

o f ex ch a n g e for an in d ivid u al or a partnership

(C ) T h e term

the Federal D e p o sit Insurance A ct.

or corporation the F ederal R eserv e B ank shall

(D ) T h e term “ undercapitalized d e p o si

obtain e v id en ce that su ch in d ivid u al, partner

tory institution ” m eans any dep ository in

sh ip , or corporation is un able to secure ad e

stitution w h ich —

quate credit a ccom m od ation s from other bank

(i) is u n d ercap italized , as d efin ed in

in g

se c tio n 3 8 o f the Federal D e p o sit In

in d ivid u als, partnerships, or corp orations sh all

(ii) has a c o m p o site C A M E L rating o f
5 under the U n iform F in an cial Institu
tio n s R ating S y stem (or an eq u ivalen t
u n d er a

co m p a ra b le rating s y s te m ) as o f the
8

A ll

su ch

d is c o u n ts

fo r

be su bject to su ch lim itation s, restriction s, and

surance A ct; or

ratin g b y a n y su ch a g e n c y

i n s t it u t io n s .

regu lation s as the B oard o f G overn ors o f the
F ederal R eserv e S y stem m ay prescribe.
[12 use 343. As added by act of July 21, 1932 (47 Stat.
715) and amended by acts of Aug. 23, 1935 (49 Stat. 714)
and Dec. 19, 1991 (105 Stat. 2386).]

M /or/?

Federal Reserve Act

w ith resp ect to a m em b er bank i f su ch branch
or ag en cy is m aintaining reserves w ith su ch

13. A dvances to Individuals, Partnerships,
an d C orporations on O bligations o f U nited
States

R eserve B ank pursuant to se c tio n 7 o f the In
ternational B an k in g A c t o f 1978. In ex ercisin g
any su ch p ow ers w ith resp ect to any su ch
branch or a g en cy , e a ch Fed eral R eserv e B ank

S u b ject to su ch lim itation s, restriction s and

sh all g iv e d u e regard to accou n t b alan ces b e

regu lation s as the B oard o f G overn ors o f the

in g m aintained by su ch branch or a g en cy w ith

m ay p rescribe, any

su ch R eserve B ank and the proportion o f the

Federal R eserv e B ank m ay m ake ad van ces to

assets o f su ch branch or a g en cy b ein g h eld as

Federal R eserv e S y stem

any in d ivid u al, partnership or corporation on

reserves under se c tio n 7 o f the International

the p rom issory notes o f su ch in d ivid u al, part

B an k in g A ct o f 1978.

nership or corporation secu red by d irect o b li
g a tio n s o f the U n ited States or by any o b lig a

[12 USC 347d. As added by act of Sept. 17, 1978 (92 Stat.
621).]

tion w h ich is a d irect ob lig a tio n o f, or fu lly
guaranteed as to principal and interest b y, any
a g en cy o f the U n ited States. S u ch ad van ces
sh all be m ade for period s not e x ce ed in g 9 0

SECTION 19— Bank Reserves

d a y s and sh all bear interest at rates fix ed from
tim e to tim e b y the F ederal R eserve B ank ,

(b ) R eserve requirem ents

su bject to the rev iew and determ ination o f the

B oard o f G overn ors o f the F ederal R eserv e
S y stem .

use

[12
347c. As added by act of March 9, 1933 (48 Stat.
7) and amended by act of Sept 21, 1968 (82 Stat. 856).]14

(7 )

D iscount a n d borrowing. A n y d ep ository

in stitu tion in w h ic h transaction acco u n ts or
n on personal tim e d ep o sits are h eld sh all be
en titled to the sam e d isco u n t and b orrow ing

14. R eceipt o f D eposits from , D iscount
P a p er E ndorsed by, a n d A dvances to
Foreign Banks

p r iv ile g es as m em b er banks. In the a d m in is

S u b ject to su ch restrictions, lim itation s, and
regu lation s as m ay b e im p o sed by the Board

take into con sid eration the sp ec ia l n eed s o f
sa v in g s and other d ep ository in stitu tion s for

tration o f d iscou n t and b orrow in g p riv ileg es,
the B oard and the F ederal R e serv e banks sh all

o f G overn ors o f the Federal R eserve S y stem ,

a c c e s s to d isc o u n t and b o rro w in g fa c ilitie s

e a ch F ederal R eserv e B ank m ay rec eiv e d e

c o n sisten t w ith their lon g-term a sset p ortfolios

p o sits from , d isco u n t paper en d orsed by, and

and th e s e n s itiv ity

m ake a d v a n ces to any branch or ag en cy o f a

trends in the national m o n ey m arkets.

foreign bank in the sam e m anner and to the

[12 USC 461(bX7). As amended by acts of Sept 21, 1966
(80 Stat. 823) and March 31, 1980 (94 Stat. 133).]

sa m e ex ten t that it m ay ex er cise su ch p ow ers

o f su c h

in stitu tio n s to

B o a rd o f G o v e rn o rs o f th e F e d e ra l R e s e rv e S y s te m

Capital Adequacy Guidelines
12 C FR 2 0 8 ,

appendix A ; as am ended e ffe c tiv e D ecem b er 31 , 1993

12 C F R 2 0 8 ,

appendix B ; as am ended e ffe c tiv e M arch 9, 1993

12 C F R 2 2 5 ,

appendix A ; as am ended e ffe c tiv e D ecem b er 3 1 , 1993

12 C FR 2 2 5 ,

appendix B ; as am ended e ffe c tiv e Sep tem b er 7, 1990

12 C FR 2 2 5 ,

app en dix D ; as am ended e ffe c tiv e M arch 9, 1993

A n y inquiry relating to th ese g u id elin es sh ou ld be add ressed to the Federal R eserv e B ank o f
the Federal R eserve D istrict in w h ich the inquiry arises.
M ay 1994

Hi /dY/f

Contents

Page
Capital A dequacy G uidelines for State
M em ber Banks: R isk-B ased M easure

H olding C om panies and State

(Regulation H, A ppendix A ) ........................

M em ber Banks: Leverage M easure
(Regulation Y , A ppendix B ) .....................

Capital A dequacy G uidelines for State

Capital A dequacy G uidelines for Bank

M em ber Banks: Tier 1 Leverage
M easure (R egulation H, Appendix B )

Page
Capital A dequancy G uidelines for Bank

H olding Com panies: Tier 1 Leverage
M easure (R egulation Y , A ppendix D )

Capital A dequacy G uidelines for Bank

H olding Com panies: R isk -B ased
M easure (R egulation Y , A ppendix A )

/0 7 /?

Capital Adequacy Guidelines for State Member Banks:
Risk-Based Measure
Regulation H (12 CFR 208), Appendix A; as amended effective December 31, 1993

I. O v erv iew

period to facilitate ad op tion and im p lem en ta

T h e B oard o f G overnors o f the Federal R e
serve S y stem has adopted a risk-based capital
m easure to a ssist in the assessm en t o f the cap
ital ad eq u a cy o f state m em b er b a n k s.1 T h e
principal o b jectiv es o f this m easure are to (i)
m ak e reg u la to ry cap ital req u irem en ts m ore
se n sitiv e to d ifferen ces in risk profiles am on g
banks; (ii) factor off-b a la n ce-sh eet exp osu res
into the a ssessm en t o f capital adequacy; (iii)
m in im ize d isin cen tiv es to h old in g liq uid, lo w risk assets; and (iv ) a c h iev e greater c o n sis
ten cy in the ev alu ation o f the capital adequ acy

tion o f the m easure at the end o f 1992. T h ese
in terim

stan d ard s and tra n sitio n a l arran ge

m en ts are set forth in sectio n IV .
T h e risk-based g u id elin es app ly to all state
m em b er banks on a co n so lid a ted b asis. T h ey
are to b e u sed in the exam in ation and su p ervi
sory p ro cess as w e ll as in the a n a lysis o f ap
p lica tio n s acted upon b y the Federal R eserve.
T hu s, in con sid erin g an app lication filed by a
state m em b er bank, the Federal R eserve w ill
take into accou n t the b an k ’s risk -b ased capital
ratio, the reason ab len ess o f its capital plan s,
and the d egree o f progress it has dem onstrated

o f m ajor banks throughout the w orld .12
T h e risk -b a sed cap ital g u id e lin e s in clu d e
both a d efin ition o f capital and a fram ew ork

tow ard m e etin g the in terim

and final risk-

b ased capital standards.

a s

T h e risk-based capital ratio fo c u se s princi

sig n in g a ssets and off-b a la n ce-sh eet item s to

pally on broad categ o ries o f credit risk, al

broad risk c a te g o r ie s. A

b a n k ’s risk -b a sed

th ou gh the fram ew ork for a ssig n in g a ssets and

capital ratio is calcu lated by d iv id in g its q u ali

o ff-b a la n ce-sh eet item s to risk ca tegories d oes

fy in g capital (the num erator o f the ratio) by

incorporate elem en ts o f transfer risk, as w e ll

fo r c a lc u la tin g

w e ig h te d -risk

a ssets b y

its w e ig h te d -risk a ssets (th e d e n o m in a to r ).3

as lim ited in stan ces o f interest-rate and m arket

T h e defin ition o f “ q u alifyin g cap ital” is ou t

risk. T h e risk-based ratio d o e s not, h ow ever,

lin ed b e lo w in section II, and the procedures

in corp orate oth er fa c to r s that can

for ca lcu la tin g w eig h ted -risk assets are d is

b an k ’s financial con d ition . T h e se factors in

cu ssed in sectio n III. A ttachm ent I illustrates a
sam p le calcu la tion o f w eigh ted -risk assets and

clu d e overall interest-rate exp osu re; liq u id ity,

the risk-based capital ratio.

le v e l o f earnings; in v estm en t or loan -p ortfolio

T h e risk -b ased capital g u id elin es a lso estab
lish a sch ed u le for ach iev in g a m in im u m su
p ervisory standard for the ratio o f q u alifyin g
capital to w eig h ted -risk assets and p rovid e for
tran sition al arran gem ents during a p h a se-in

fu n d in g

a ffec t a

and m arket risk s; th e q u a lity

and

concen trations; the qu ality o f loan s and in v est
m ents; the e ffe c tiv e n e ss o f loan and in v est
m ent p o lic ie s; and m a n a g em en t’s ab ility to
m on itor and con trol fin an cial and operatin g
risks.
In add ition to evalu atin g capital ratios, an

1 S u p e r v i s o r y r a t i o s t h a t r e l a t e c a p it a l t o t o t a l a s s e t s f o r
s ta t e m e m b e r b a n k s a r e o u t li n e d in a p p e n d i x B o f R e g u l a
t io n

( p a g e 2 9 ) a n d in a p p e n d i x

B to p a rt 2 2 5

o f th e

F e d e r a l R e s e r v e ’s R e g u l a ti o n Y , 1 2 C F R 2 2 5 ( p a g e 5 9 ) .
2 T h e ris k - b a s e d c a p ita l m e a s u r e is b a s e d u p o n a fra m e
w o rk d e v e lo p e d jo in tly b y s u p e rv is o ry a u th o r itie s f ro m th e
c o u n t r i e s r e p r e s e n t e d o n th e B a s l e C o m m i t t e e o n B a n k i n g
R e g u la tio n s a n d S u p e rv is o ry P r a c tic e s (B a s le S u p e r v is o r s ’
C o m m itte e )

and

e n d o rse d

B a n k G o v e rn o rs. T h e

th e

G ro u p

o f Ten

C e n tra l

f r a m e w o r k i s d e s c r i b e d in a p a p e r

p r e p a r e d b y th e B S C e n title d “ I n te r n a tio n a l C o n v e r g e n c e o f
C a p i t a l M e a s u r e m e n t , ” J u ly
3 B anks

w ill in itia lly

1988.

b e e x p e c te d

overall assessm en t o f capital ad eq u acy m ust
take accou n t o f th ese other factors, in clu d in g,
in particular, the le v e l and severity o f p roblem
and cla ssifie d assets. For this reason, the final
su p ervisory ju d gm en t on a b an k ’s capital ad e
qu acy m ay differ sign ifica n tly from c o n c lu
sio n s that m igh t b e draw n so le ly from the
le v e l o f its risk -b ased capital ratio.
T h e risk-based capital g u id elin es estab lish

to u tiliz e p e rio d -e n d

a m o u n t s in c a l c u l a t i n g t h e i r r i s k - b a s e d c a p it a l r a t i o s . W h e n

minimum ratios o f capital to w eigh ted -risk a s

n e c e s s a ry a n d a p p ro p r ia te , r a tio s b a s e d o n a v e ra g e b a la n c e s

sets. In ligh t o f the con sid eration s ju st d is

m a y a l s o b e c a l c u l a t e d o n a c a s e - b y - c a s e b a s is . M o r e o v e r ,

cu ssed , ban ks gen erally are e x p ected to op er

t o t h e e x t e n t b a n k s h a v e d a ta o n a v e r a g e b a l a n c e s t h a t c a n
b e u s e d to c a lc u la te ris k -b a s e d r a tio s , th e F e d e ra l R e s e rv e

ate w e ll ab ove the m in im u m risk -b ased ratios.

w i l l t a k e s u c h d a t a i n to a c c o u n t .

In particular, banks con tem p latin g sign ifican t

Regulation H, Appendix A

expansion proposals are expected to maintain
strong capital levels substantially above the
minimum ratios and should not allow signifi
cant diminution of financial strength below
these strong levels to fund their expansion
plans. Institutions with high or inordinate
levels of risk are also expected to operate well
above minimum capital standards. In all cases,
institutions should hold capital commensurate
with the level and nature of the risks to which
they are exposed. Banks that do not meet the
minimum risk-based standard, or that are oth
erwise considered to be inadequately capital
ized, are expected to develop and implement
plans acceptable to the Federal Reserve for
achieving adequate levels of capital within a
reasonable period of time.
The Board will monitor the implementation
and effect of these guidelines in relation to
domestic and international developments in
the banking industry. When necessary and ap
propriate, the Board will consider the need to
modify the guidelines in light of any signifi
cant changes in the economy, financial mar
kets, banking practices, or other relevant
factors.

II. D e f i n i t io n o f Q u a lif y in g C a p ita l fo r
t h e R i s k - B a s e d C a p ita l R a t io

A bank’s qualifying total capital consists of
two types of capital components: “core capital
elements” (comprising tier 1 capital) and
“supplementary capital elements” (comprising
tier 2 capital). These capital elements and the
various limits, restrictions, and deductions to
which they are subject, are discussed below
and are set forth in attachment II.
To qualify as an element of tier 1 or tier 2
capital, a capital instrument may not contain
or be covered by any covenants, terms, or re
strictions that are inconsistent with safe and
sound banking practices.
Redemptions of permanent equity or other
capital instruments before stated maturity
could have a significant impact on a bank’s
overall capital structure. Consequently, a bank
considering such a step should consult with
the Federal Reserve before redeeming any eq
uity or debt capital instrument (prior to matur
ity) if such redemption could have a material
2

Capital Adequacy Guidelines

effect on the level or composition of the insti
tution’s capital base.II.4

A. The Components of Qualifying Capital

1. Core capital elements (tier 1 capital). The
tier 1 component of a bank’s qualifying capi
tal must represent at least 50 percent of quali
fying total capital and may consist of the fol
lowing items that are defined as core capital
elements:
i. common stockholders’ equity
ii. qualifying noncumulative perpetual pre
ferred stock (including related surplus)
iii. minority interest in the equity accounts of
consolidated subsidiaries
Tier 1 capital is generally defined as the sum
of core capital elements5* less goodwill and
other intangible assets required to be deducted
in accordance with section II.B.l.b. of this
appendix.
a. Common stockholders’ equity. Common
stockholders’ equity includes common
stock; related surplus; and retained earnings,
including capital reserves and adjustments
for the cumulative effect of foreign cur
rency translation, net of any treasury stock.
b. Perpetual preferred stock. Perpetual pre
ferred stock is defined as preferred stock
that does not have a maturity date, that can
not be redeemed at the option of the holder
of the instrument, and that has no other
provisions that will require future redemp
tion of the issue. Consistent with these pro
visions, any perpetual preferred stock with
a feature permitting redemption at the op
tion of the issuer may qualify as capital
only if the redemption is subject to prior
approval of the Federal Reserve. In general,
preferred stock will qualify for inclusion in
capital only if it can absorb losses while the
issuer operates as a going concern (a funda
mental characteristic of equity capital) and
only if the issuer has the ability and legal
4Consultation would not ordinarily be necessary if an
instrument were redeemed with the proceeds of, or replaced
by, a like amount of a similar or higher-quality capital in
strument and the organization’s capital position is consid
ered fully adequate by the Federal Reserve.
5During the transition period and subject to certain limi
tations set forth in section IV below, tier 1 capital may also
include items defined as supplementary capital elements.

/? / / o f / ?
Capital Adequacy Guidelines
right to defer or elim in ate preferred
dividends.
The only form o f perpetual preferred
stock that state member banks may consider
as an element o f tier 1 capital is noncumulative perpetual preferred. While the guide
lines allow for the inclusion of noncumulative perpetual preferred stock in tier 1, it is
desirable from a supervisory standpoint that
voting common stockholders’ equity remain
the dominant form o f tier 1 capital. Thus,
state member banks should avoid overre
liance on preferred stock or nonvoting eq
uity elements within tier 1.
Perpetual preferred stock in which the
dividend is reset periodically based, in
whole or in part, upon the bank’s current
credit standing (that is, auction rate perpet
ual preferred stock, including so-called
Dutch auction, m oney market, and
remarketable preferred) will not qualify for
inclusion in tier 1 capital.6- 7 Such instru
ments, however, qualify for inclusion in tier
2 capital.
c. Minority interest in equity accounts of
consolidated subsidiaries. This element is
included in tier 1 because, as a general rule,
it represents equity that is freely available
to absorb losses in operating subsidiaries.
While not subject to an explicit sublimit
within tier 1, banks are expected to avoid
using minority interest in the equity ac
counts o f consolidated subsidiaries as an
avenue for introducing into their capital
structures elements that might not otherwise
qualify as tier 1 capital or that would, in
effect, result in an excessive reliance on
preferred stock within tier 1.
2. Supplementary capital elements (tier 2 cap
ital). The tier 2 component o f a bank’s quali
fying total capital may consist o f the follow
ing items that are defined as supplementary
capital elements:
i. allowance for loan and lease losses (sub
ject to limitations discussed below)
6Reserved.
7 Adjustable-rate noncumulative perpetual preferred stock
(that is, perpetual preferred stock in which the dividend rate
is not affected by the issuer’s credit standing or financial
condition but is adjusted periodically according to a
formula based solely on general market interest rates) may
be included in tier 1.

Regulation H, Appendix A
ii. perpetual preferred stock and related sur
plus (subject to conditions discussed
below)
iii. hybrid capital instruments (as defined be
low ) and mandatory convertible debt
securities
iv. term subordinated debt and intermediateterm preferred stock, including related sur
plus (subject to lim itations discussed
below)
The maximum amount o f tier 2 capital that
may be included in a bank’s qualifying total
capital is limited to 100 percent o f tier 1 capi
tal (net o f goodwill and other intangible assets
required to be deducted in accordance with
section II.B.l.b. o f this appendix).
The elements of supplementary capital are
discussed in greater detail below.8
a. Allowance for loan and lease losses. Al
lowances for loan and lease losses are
reserves that have been established through
a charge against earnings to absorb future
losses on loans or lease financing receiv
ables. Allowances for loan and lease losses
exclude “allocated transfer risk reserves,”9
and reserves created against identified
losses.
During the transition period, the riskbased capital guidelines provide for reduc
ing the amount o f this allowance that may
be included in an institution’s total capital.
Initially, it is unlimited. However, by yearend 1990, the amount o f the allowance for
loan and lease losses that will qualify as
capital will be limited to 1.5 percent o f an
institution’s weighted risk assets. By the
end of the transition period, the amount of
8The Basle capital framework also provides for the in
clusion of “undisclosed reserves” in tier 2. As defined in
the framework, undisclosed reserves represent accumulated
after-tax retained earnings that are not disclosed on the bal
ance sheet of a bank. Apart from the fact that these
reserves are not disclosed publicly, they are essentially of
the same quality and character as retained earnings, and, to
be included in capital, such reserves must be accepted by
the bank’s home supervisor. Although such undisclosed
reserves are common in some countries, under generally
accepted accounting principles (GAAP) and long-standing
supervisory practice, these types of reserves are not recog
nized for state member banks.
9Allocated transfer risk reserves are reserves that have
been established in accordance with section 905(a) of the
International Lending Supervision Act of 1983, 12 USC
3904(a), against certain assets whose value U.S. supervi
sory authorities have found to be significantly impaired by
protracted transfer risk problems.
3

H
Regulation H, Appendix A
the allowance qualifying for inclusion in
tier 2 capital may not exceed 1.25 percent
of weighted risk assets.101
b. Perpetual preferred stock. Perpetual pre
ferred stock, as noted above, is defined as
preferred stock that has no maturity date,
that cannot be redeemed at the option of
the holder, and that has no other provisions
that will require future redemption o f the
issue. Such instruments are eligible for in
clusion in tier 2 capital without limit."
c. H ybrid
capital instruments and
mandatory convertible debt securities. Hy
brid capital instruments include instruments
that are essentially permanent in nature and
that have certain characteristics o f both eq
uity and debt. Such instruments may be in
cluded in tier 2 without limit. The general
criteria hybrid capital instruments must
meet in order to qualify for inclusion in tier
2 capital are listed below:
1. The instrument must be unsecured; fully
paid up; and subordinated to general
creditors and must also be subordinated
to claims of depositors.
2. The instrument must not be redeemable at
the option o f the holder prior to maturity,
except with the prior approval o f the Fed
eral Reserve. (Consistent with the Board’s
criteria for perpetual debt and mandatory
convertible securities, this requirement im
plies that holders of such instruments may
not accelerate the payment o f principal
except in the event of bankruptcy, insol
vency, or reorganization.)
3. The instrument must be available to par
ticipate in losses while the issuer is oper
10The amount of the allowance for loan and lease losses
that may be included in tier 2 capital is based on a percent
age of gross weighted-risk assets. A bank may deduct
reserves for loan and lease losses in excess of the amount
permitted to be included in tier 2 capital, as well as allo
cated transfer risk reserves, from the sum of gross weightedrisk assets and use the resulting net sum of weighted-risk
assets in computing the denominator of the risk-based capi
tal ratio.
11 Long-term preferred stock with an original maturity of
20 years or more (including related surplus) will also qual
ify in this category as an element of tier 2. If the holder of
such an instrument has a right to require the issuer to re
deem, repay, or repurchase the instrument prior to the orig
inal stated maturity, maturity would be defined, for riskbased capital purposes, as the earliest possible date on
which the holder can put the instrument back to the issuing
bank.
4

/Oft 9

Capital Adequacy Guidelines
ating as a going concern. (Term
subordinated debt would not meet this re
quirement.) To satisfy this requirement,
the instrument must convert to common
or perpetual preferred stock in the event
that the accumulated losses exceed the
sum o f the retained earnings and capital
surplus accounts o f the issuer.
4. The instrument must provide the option
for the issuer to defer interest payments if
(a) the issuer does not report a profit in
the preceding annual period (defined as
combined profits for the most recent four
quarters) and (b) the issuer eliminates
cash dividends on common and preferred
stock.
Mandatory convertible debt securities in
the form of equity contract notes that meet
the criteria set forth in 12 CFR 225, appendix
B (page 59) also qualify as unlimited ele
ments o f tier 2 capital. In accordance with
that appendix, equity commitment notes is
sued prior to May 15, 1985, also qualify for
inclusion in tier 2.
d. Subordinated debt and intermediate-term
preferred stock. The aggregate amount of
term
subordinated
debt (ex clu d in g
mandatory convertible debt) and intermedi
ate-term preferred stock that may be treated
as supplementary capital is limited to 50
percent o f tier 1 capital (net of goodwill
and other intangible assets required to be
deducted in accordance w ith section
II.B.l.b. of this appendix). Amounts in ex
cess o f these limits may be issued and,
while not included in the ratio calculation,
will be taken into account in the overall as
sessment o f a bank’s funding and financial
condition.
Subordinated debt and intermediate-term
preferred stock must have an original
weighted average maturity o f at least five
years to qualify as supplementary capital.
(If the holder has the option to require the
issuer to redeem, repay, or repurchase the
instrument prior to the original stated ma
turity, maturity would be defined, for riskbased capital purposes, as the earliest possi
ble date on which the holder can put the
instrument back to the issuing bank.)
In the case o f subordinated debt, the in-

/H ' / 0 7 /?
Capital Adequacy Guidelines
strument must be unsecured and must
clearly state on its face that it is not a de
posit and is not insured by a federal
agency. To qualify as capital in banks, debt
must be subordinated to general creditors
and claims o f depositors. Consistent with
current regulatory requirements, if a state
member bank wishes to redeem subordi
nated debt before the stated maturity, it
must receive prior approval o f the Federal
Reserve.
e. Discount of supplementary capital instru
ments. As a limited-life capital instrument
approaches maturity it begins to take on
characteristics o f a short-term obligation.
For this reason, the outstanding amount o f
term subordinated debt and any long- or in
termediate-life, or term, preferred stock eli
gible for inclusion in tier 2 is reduced, or
discounted, as these instruments approach
maturity: one-fifth o f the original amount,
less any redemptions, is excluded each year
during the instrument’s last five years
before maturity.12
f. Revaluation reserves. Such reserves re
flect the formal balance sheet restatement or
revaluation for capital purposes of asset car
rying values to reflect current market val
ues. In the United States, banks, for the
most part, follow GAAP when preparing
their financial statements, and GAAP gener
ally does not permit the use of marketvalue
accounting. For this and other reasons, the
federal banking agencies generally have not
included unrealized asset values in capital
ratio calculations, although they have long
taken such values into account as a separate
factor in assessing the overall financial
strength of a bank.

Regulation H, Appendix A
book values for assets held by state member
banks will generally not be recognized in
supplementary capital or in the calculation
o f the risk-based capital ratio. However, all
banks are encouraged to disclose their
equivalent o f premises (building) and equity
revaluation reserves. Such values will be
taken into account as additional considera
tions in assessing overall capital strength
and financial condition.

B. Deductions from Capital and Other
Adjustments
Certain assets are deducted from a bank’s cap
ital for the purpose o f calculating the riskbased capital ratio.13*These assets include—
i. a. Goodwill— deducted from the sum of
core capital elements
b. Certain identifiable intangible assets,
that is, intangible assets other than
goodw ill— deducted from the sum of
core capital elements in accordance with
section II.B.l.b. o f this appendix.
ii. investments in banking and finance subsid
iaries that are not consolidated for ac
counting or supervisory purposes and, on
a case-by-case basis, investments in other
designated subsidiaries or associated com
panies at the discretion o f the Federal
Reserve— deducted from total capital com
ponents
iii. reciprocal holdings o f capital instruments
of banking organizations— deducted from
total capital components

1. Goodwill and other intangible assets
a. Goodwill. Goodwill is an intangible asset
that represents the excess o f the purchase
price over the fair market value o f identifi
Consistent with long-standing supervisory
able assets acquired less liabilities assumed
practice, the excess o f market values over
in acquisitions accounted for under the
purchase method o f accounting. State mem
12
For example, outstanding amounts of these instruments
ber banks generally have not been allowed
that count as supplementary capital include 100 percent of
the outstanding amounts with remaining maturities of more
to include goodwill in regulatory capital
than five years; 80 percent of outstanding amounts with
under current supervisory policies. Consis
remaining maturities of four to five years; 60 percent of
tent with this policy, all goodwill in state
outstanding amounts with remaining maturities of three to
four years; 40 percent of outstanding amounts with remain
member banks will be deducted from tier 1
ing maturities of two to three years; 20 percent of outstand
capital.
ing amounts with remaining maturities of one to two years;
and 0 percent of outstanding amounts with remaining matu
rities of less than one year. Such instruments with a re
maining maturity of less than one year are excluded from
tier 2 capital.

13Any assets deducted from capital in computing the nu
merator of the ratio are not included in weighted-risk assets
in computing the denominator of the ratio.
5

Regulation H, Appendix A

fH /W/9

Capital Adequacy Guidelines

b. Other intangible assets. The only types
o f identifiable intangible assets thay may be
included in, that is, not deducted from, a
bank’s capital are readily marketable pur
chased mortgage-servicing rights and pur
chased credit-card relationships, provided
that, in the aggregate, the total amount of
these assets included in capital does not ex
ceed 50 percent o f tier 1 capital. Purchased
credit-card relationships are subject to a
separate sublimit o f 25 percent o f tier 1
capital.14

expected future net cash flows. This deter
mination shall include adjustments for any
significant changes in original valuation as
sumptions, including changes in prepayment
estimates or account attrition rates.

For purposes o f calculating these limita
tions on purchased m ortgage-servicing
rights and purchased credit-card relation
ships, tier 1 capital is defined as the sum of
core capital elements, net o f goodwill and
all identifiable intangible assets other than
purchased mortgage-servicing rights and
purchased credit-card relationships, regard
less o f the date acquired. This method of
calculation could result in purchased mort
gage-servicing rights and purchased creditcard relationships being included in capital
in an amount greater than 50 percent— or in
purchased credit-card relationships being in
cluded in an amount greater than 25 per
cent— of the amount of tier 1 capital used
to calculate an institution’s capital ratios. In
such instances, the Federal Reserve may de
termine that a bank is operating in an un
safe and unsound manner because o f over
reliance on intangible assets in tier 1
capital.

The amount o f purchased mortgage-ser
vicing rights and purchased credit-card rela
tionships that a bank may include in capital
shall be the lesser of 90 percent o f their
fair market value, as determined in accor
dance with this section, or 100 percent o f
their book value, as adjusted for capital
purposes in accordance with the instructions
in the commercial bank Consolidated Re
ports of Condition and Income (call report).
If both the application o f the limits on pur
chased mortgage-servicing rights and pur
chased credit-card relationships and the ad
justment o f the balance-sheet amount for
these intangibles would result in an amount
being deducted from capital, the bank
would deduct only the greater o f the two
amounts from its core capital elements in
determining tier 1 capital.

Banks must review the book value of all
intangible assets at least quarterly and make
adjustments to these values as necessary.
The fair market value of purchased mort
gage-servicing rights and purchased creditcard relationships also must be determined
at least quarterly. The fair market value
generally shall be determined by applying
an appropriate market discount rate to the

Examiners will review both the book
value and the fair market value assigned to
these assets, together with supporting docu
mentation, during the examination process.
In addition, the Federal Reserve may re
quire, on a case-by-case basis, an indepen
dent valuation o f a bank’s intangible assets.

The treatment of identifiable intangible
assets set forth in this section generally will
be used in the calculation o f a bank’s capi
tal ratios for supervisory and applications
purposes. However, in making an overall
assessment o f a bank’s capital adequacy for
applications purposes, the Board may, if it
deems appropriate, take into account the
quality and composition o f a bank’s capital,
together with the quality and value o f its
tangible and intangible assets.
2. Investments in certain subsidiaries. The ag

14
Amounts of purchased mortgage-servicing rights andgregate amount o f investments in banking or
purchased credit-card relationships in excess of these limi
finance subsidiaries15* whose financial state
tations, as well as all other identifiable intangible assets,
ments are not consolidated for accounting or
including core deposit intangibles and favorable leaseholds,
are to be deducted from a bank’s core capital elements in
15 For this purpose, a banking and finance subsidiary gen
determinng tier 1 capital. However, indentifiable intangible
erally is defined as any company engaged in banking or
assets (other than purchased mortgage-servicing rights and
finance in which the parent institution holds directly or in
purchased credit-card relationships) acquired on or before
directly more than 50 percent of the outstanding voting
February 19, 1992, generally will not be deducted from
stock, or which is otherwise controlled or capable of being
capital for supervisory purposes, although they will con
controlled by the parent institution.
tinue to be deducted for applications purposes.

/ o '/ / ?
Capital Adequacy Guidelines
bank regulatory reporting purposes will be de
ducted from a bank’s total capital compo
nents.16 Generally, investments for this pur
pose are defined as equity and debt capital
investments and any other instruments that are
deem ed to be capital in the particular
subsidiary.
Advances (that is, loans, extensions of
credit, guarantees, commitments, or any other
forms of credit exposure) to the subsidiary
that are not deemed to be capital will gener
ally not be deducted from a bank’s capital.
Rather, such advances generally will be in
cluded in the bank’s consolidated assets and
be assigned to the 100 percent risk category,
unless such obligations are backed by recog
nized collateral or guarantees, in which case
they will be assigned to the risk category ap
propriate to such collateral or guarantees.
These advances may, however, also be de
ducted from the bank’s capital if, in the judg
ment o f the Federal Reserve, the risks stem
ming from such advances are comparable to
the risks associated with capital investments
or if the advances involve other risk factors
that warrant such an adjustment to capital for
supervisory purposes. These other factors
could include, for example, the absence o f
collateral support.
Inasmuch as the assets o f unconsolidated

banking and finance subsidiaries are not fully
reflected in a bank’s consolidated total assets,
such assets may be viewed as the equivalent
o f off-balance-sheet exposures since the opera
tions o f an unconsolidated subsidiary could
expose the bank to considerable risk. For this
reason, it is generally appropriate to view the
capital resources invested in these unconsoli
dated entities as primarily supporting the risks
inherent in these off-balance-sheet assets, and
not generally available to support risks or ab
sorb losses elsewhere in the bank.
The Federal Reserve may, on a case-by
case basis, also deduct from a bank’s capital,
investments in certain other subsidiaries in or
der to determine if the consolidated bank
meets minimum supervisory capital require-

Regulation H, Appendix A
ments without reliance on the resources in
vested in such subsidiaries.
The Federal Reserve will not automatically
deduct investments in other unconsolidated
subsidiaries or investments in joint ventures
and associated companies.17 Nonetheless, the
resources invested in these entities, like in
vestments in unconsolidated banking and fi
nance subsidiaries, support assets not consoli
dated with the rest o f the bank’s activities
and, therefore, may not be generally available
to support additional leverage or absorb losses
elsewhere in the bank. Moreover, experience
has shown that banks stand behind the losses
of affiliated institutions, such as joint ventures
and associated companies, in order to protect
the reputation o f the organization as a whole.
In some cases, this has led to losses that
have exceed ed the investm ents in such
organizations.
For this reason, the Federal Reserve will
monitor the level and nature of such invest
ments for individual banks and on a case-by
case basis may, for risk-based capital pur
poses, deduct such investments from total cap
ital components, apply an appropriate riskweighted capital charge against the bank’s
proportionate share o f the assets o f its associ
ated companies, require a line-by-line consoli
dation o f the entity (in the event that the
bank’s control over the entity makes it the
functional equivalent o f a subsidiary), or oth
erwise require the bank to operate with a riskbased capital ratio above the minimum.
In considering the appropriateness o f such
adjustments or actions, the Federal Reserve
will generally take into account whether—
1. the bank has significant influence over the
financial or managerial policies or opera
tions of the subsidiary, joint venture, or as
sociated company;
2. the bank is the largest investor in the affili
ated company; or
3. other circumstances prevail that appear to
closely tie the activities o f the affiliated
company to the bank.

16
An exception to this deduction would be made in the 17 The definition of such entities is contained in the in
case of shares acquired in the regular course of securing or
structions to the commercial bank call report. Under regula
collecting a debt previously contracted in good faith. The
tory reporting procedures, associated companies and joint
requirements for consolidation are spelled out in the in
ventures generally are defined as companies in which the
structions to the call report.
bank owns 20 to 50 percent of the voting stock.
7

Regulation H, Appendix A

/o7/Q

Capital Adequacy Guidelines

3. Reciprocal holdings of banking organiza the “credit-equivalent amount” o f off-balancetions’ capital instruments. Reciprocal holdings sheet items is determined, in most cases by
of banking organizations’ capital instruments
(that is, instruments that qualify as tier 1 or
tier 2 capital)18 w ill be deducted from a
bank’s total capital components for the pur
pose of determining the numerator of the riskbased capital ratio.
Reciprocal holdings are cross-holdings re
sulting from formal or informal arrangements
in which two or more banking organizations
swap, exchange, or otherwise agree to hold
each other’s capital instruments. Generally,
deductions will be limited to intentional cross
holdings. At present, the Board does not in
tend to require banks to deduct nonreciprocal
holdings o f such capital instruments.19' 20

III. Procedures for Computing WeightedRisk Assets and Off-Balance-Sheet Items
A. Procedures
Assets and credit-equivalent amounts o f offbalance-sheet items of state member banks are
assigned to one of several broad risk catego
ries, according to the obligor, or, if relevant,
the guarantor or the nature o f the collateral.
The aggregate dollar value of the amount in
each category is then multiplied by the risk
weight associated with that category. The re
sulting weighted values from each o f the risk
categories are added together, and this sum is
the bank’s total weighted-risk assets that com
prise the denominator of the risk-based capital
ratio. A ttachm ent I provides a sam ple
calculation.
Risk weights for all off-balance-sheet items
are determined by a two-step process. First,
18See 12 CFR 225, appendix A (page 31) for instruments
that qualify as tier 1 and tier 2 capital for bank holding
companies.
19Deductions of holdings of capital securities also would
not be made in the case of interstate “stake out” invest
ments that comply with the Board’s policy statement on
nonvoting equity investments, 12 CFR 225.143 (Federal
Reserve Regulatory Service 4—172.1). In addition, holdings
of capital instruments issued by other banking organizations
but taken in satisfaction of debts previously contracted
would be exempt from any deduction from capital.
20The Board intends to monitor nonreciprocal holdings
of other banking organizations’ capital instruments and to
provide information on such holdings to the Basle Supervi
sors’ Committee as called for under the Basle capital
framework.
8

multiplying the off-balance-sheet item by a
credit conversion factor. Second, the creditequivalent amount is treated like any balancesheet asset and generally is assigned to the
appropriate risk category according to the ob
ligor, or, if relevant, the guarantor or the na
ture of the collateral.
In general, if a particular item qualifies for
placement in more than one risk category, it is
assigned to the category that has the lowest
risk weight. A holding of a U.S. municipal
revenue bond that is fully guaranteed by a
U.S. bank, for example, would be assigned the
20 percent risk weight appropriate to claims
guaranteed by U.S. banks, rather than the 50
percent risk weight appropriate to U.S. munic
ipal revenue bonds.21*
The terms “claims” and “securities” used
in the context o f the discussion o f risk
weights, unless otherwise specified, refer to
loans or debt obligations of the entity on
whom the claim is held. Assets in the form of
stock or equity holdings in commercial or fi
nancial firms are assigned to the 100 percent
21
An investment in shares of a fund whose portfolio con
sists solely of various securities or money market instru
ments that, if held separately, would be assigned to differ
ent risk categories, is generally assigned to the risk
category appropriate to the highest risk-weighted security or
instrument that the fund is permitted to hold in accordance
with its stated investment objectives. However, in no case
will indirect holdings through shares in such funds be as
signed to the zero percent risk category. For example, if a
fund is permitted to hold U.S. Treasuries and commercial
paper, shares in that fund would generally be assigned the
100 percent risk weight appropriate to commercial paper,
regardless of the actual composition of the fund’s invest
ments at any particular time. Shares in a fund that may
invest only in U.S. Treasury securities would generally be
assigned to the 20 percent risk category. If, in order to
maintain a necessary degree of short-term liquidity, a fund
is permitted to hold an insignificant amount of its assets in
short-term, highly liquid securities of superior credit quality
that do not qualify for a preferential risk weight, such se
curities will generally not be taken into account in deter
mining the risk category into which the bank’s holding in
the overall fund should be assigned. Regardless of the com
position of the fund’s securities, if the fund engages in any
activities that appear speculative in nature (for example, use
of futures, forwards, or option contracts for purposes other
than to reduce interest-rate risk) or has any other character
istics that are inconsistent with the preferential risk weight
ing assigned to the fund’s investments, holdings in the fund
will be assigned to the 100 percent risk category. During
the examination process, the treatment of shares in such
funds that are assigned to a lower risk weight will be sub
ject to examiner review to ensure that they have been as
signed an appropriate risk weight.

/< w
Capital Adequacy Guidelines
risk category, unless some other treatment is
explicitly permitted.

B. Collateral, Guarantees, and Other
Considerations
1. Collateral. The only forms o f collateral
that are formally recognized by the risk-based
capital framework are cash on deposit in the
bank; securities issued or guaranteed by the
central governm ents o f the OECD-based
group of countries,22 U.S. government agen
cies, or U.S. government-sponsored agencies;
and securities issued by multilateral lending
institutions or regional development banks.
Claims fully secured by such collateral gener
ally are assigned to the 20 percent risk-weight
category. Collateralized transactions meeting
all the conditions described in section III.C.l.
may be assigned a zero percent risk weight.
With regard to collateralized claims that
may be assigned to the 20 percent risk-weight
category, the extent to which qualifying secur
ities are recognized as collateral is determined
by their current market value. If such a claim
is only partially secured, that is, the market
value o f the pledged securities is less than the
face amount o f a balance-sheet asset or an
off-balance-sheet item, the portion that is cov
ered by the market value o f the qualifying
collateral is assigned to the 20 percent risk
category, and the portion o f the claim that is
not covered by collateral in the form o f cash
or a qualifying security is assigned to the risk
category appropriate to the obligor or, if rele
vant, the guarantor. For example, to the extent
that a claim on a private-sector obligor is col
lateralized by the current market value o f U.S.
government securities, it would be placed in
the 20 percent risk category, and the balance
would be assigned to the 100 percent risk
category.

Regulation H, Appendix A
agencies, state and local governments of the
OECD-based group o f countries, multilateral
lending institutions and regional development
banks, U.S. depository institutions, and for
eign banks are also recognized. If a claim is
partially guaranteed, that is, coverage of the
guarantee is less than the face amount o f a
balance-sheet asset or an off-balance-sheet
item, the portion that is not fully covered by
the guarantee is assigned to the risk category
appropriate to the obligor or, if relevant, to
any collateral. The face amount o f a claim
covered by two types o f guarantees that have
different risk weights, such as a U.S. govern
ment guarantee and a state guarantee, is to be
apportioned between the two risk categories
appropriate to the guarantors.
The existence of other forms o f collateral or
guarantees that the risk-based capital frame
work does not formally recognize may be
taken into consideration in evaluating the risks
inherent in a bank’s loan portfolio— which, in
turn, would affect the overall supervisory as
sessment o f the bank’s capital adequacy.
3. M ortgage-backed securities. M ortgagebacked securities, including pass-throughs and
collateralized mortgage obligations (but not
stripped mortgage-backed securities), that are
issued or guaranteed by a U.S. government
agency or U.S. government-sponsored agency
are assigned to the risk-weight category ap
propriate to the issuer or guarantor. Generally,
a privately issued mortgage-backed security
meeting certain criteria set forth in the accom
panying footnote23* is treated as essentially an

23 A privately issued mortgage-backed security may be
treated as an indirect holding of the underlying assets pro
vided that (1) the underlying assets are held by an indepen
dent trustee and the trustee has a first priority, perfected
security interest in the underlying assets on behalf of the
holders of the security; (2) either the holder of the security
has
an undivided pro rata ownership interest in the underly
2. Guarantees. Guarantees of the OECD and
ing mortgage assets or the trust or single-purpose entity (or
non-OECD central governments, U.S. govern
conduit) that issues the security has no liabilities unrelated
ment agencies, U.S. government-sponsored
to the issued securities; (3) the security is structured such
that the cash flow from the underlying assets in all cases
22
The OECD-based group of countries comprises all fullfully meets the cash flow requirements of the security with
out undue reliance on any reinvestment income; and (4)
members of the Organization for Economic Cooperation
there is no material reinvestment risk associated with any
and Development (OECD), as well as countries that have
funds awaiting distribution to the holders of the security. In
concluded special lending arrangements with the Interna
addition, if the underlying assets of a mortgagebacked se
tional Monetary Fund (IMF) associated with the Fund’s
curity are composed of more than one type of asset, for
General Arrangements to Borrow. The OECD includes the
example, U.S. government-sponsored agency securities and
following countries: Australia, Austria, Belgium, Canada,
Denmark, the Federal Republic of Germany, Finland,
privately issued pass-through securities that qualify for the
France, Greece, Iceland, Ireland, Italy, Japan, Luxembourg,
50 percent risk category, the entire mortgage-backed secur
ity is generally assigned to the category appropriate to the
Netherlands, New Zealand, Norway, Portugal, Spain, Swe
highest risk-weighted asset underlying the issue. Thus, in
den, Switzerland, Turkey, the United Kingdom, and the
United States. Saudi Arabia has concluded special lending
this example, the security would receive the 50 percent risk
arrangements with the IMF associated with the Fund’s Gen
weight appropriate to the privately issued pass-through
eral Arrangements to Borrow.
securities.
9

iff w / 9
Regulation H, Appendix A
indirect holding of the underlying assets, and
assigned to the same risk category as the un
derlying assets, but in no case to the zero per
cent risk category. Privately issued mortgagebacked securities whose structures do not
qualify them to be regarded as indirect hold
ings of the underlying assets are assigned to
the 100 percent risk category. During the ex
amination process, privately issued mortgagebacked securities that are assigned to a lower
risk-weight category will be subject to exam
iner review to ensure that they meet the ap
propriate criteria.
While the risk category to which mortgagebacked securities are assigned will generally
be based upon the issuer or guarantor or, in
the case o f privately issued mortgage-backed
securities, the assets underlying the security,
any class o f a mortgage-backed security that
can absorb more than its pro rata share o f loss
without the whole issue being in default (for
example, a so-called subordinated class or
residual interest), is assigned to the 100 per
cent risk category. Furthermore, all stripped
mortgage-backed securities, including interestonly strips (IOs), principal-only strips (POs),
and similar instruments are also assigned to
the 100 percent risk-weight category, regard
less o f the issuer or guarantor.
4. Maturity. Maturity is generally not a factor
in assigning items to risk categories with the
exception o f claims on non-OECD banks,
commitments, and interest-rate and foreignexchange-rate contracts. Except for commit
ments, short-term is defined as one year or
less remaining maturity and long-term is de
fined as over one year remaining maturity. In
the case o f commitments, short-term is de
fined as on year or less original maturity and
long-term is defined as over one year original
maturity.24

Capital Adequacy Guidelines
brief explanation o f the components o f each
category follows.
1. Category 1: zero percent. This category in
cludes cash (domestic and foreign) owned and
held in all offices o f the bank or in transit and
gold bullion held in the bank’s own vaults or
in another bank’s vaults on an allocated basis,
to the extent it is offset by gold bullion liabil
ities.*1025 The category also includes all direct
claims (including securities, loans, and leases)
on, and the portions o f claims that are directly
and unconditionally guaranteed by, the central
governments26 o f the OECD countries and
U.S. government agencies,27 as well as all di
rect local currency claims on, and the portions
o f local currency claims that are directly and
unconditionally guaranteed by, the central
governments o f non-OECD countries, to the
extent that the bank has liabilities booked in
that currency. A claim is not considered to be
unconditionally guaranteed by a central gov
ernment if the validity o f the guarantee is de
pendent upon some affirmative action by the
holder or a third party. Generally, securities
guaranteed by the U.S. government or its
agencies that are actively traded in financial
markets, such as GNMA securities, are con
sidered to be unconditionally guaranteed.

25 All other holdings of bullion are assigned to the 100
percent risk category.
26A central government is defined to include departments
and ministries, including the central bank, of the central
government. The U.S. central bank includes the 12 Federal
Reserve Banks, and the stock held in these banks as a
condition of membership is assigned to the zero percent
risk category. The definition of central government does not
include state, provincial, or local governments; or commer
cial enterprises owned by the central government. In addi
tion, it does not include local government entities or com
mercial enterprises whose obligations are guaranteed by the
central government, although any claims on such entities
guaranteed by central governments are placed in the same
general risk category as other claims guaranteed by central
governments. OECD central governments are defined as
central governments of the OECD-based group of countries;
non-OECD central governments are defined as central gov
ernments of countries that do not belong to the OECDC. Risk Weights
based group of countries.
27A U.S. government agency is defined as an instrumen
Attachment III contains a listing o f the risk
tality of the U.S. government whose obligations are fully
categories, a summary of the types o f assets
and explicitly guaranteed as to the timely payment of prin
assigned to each category and the weight as
cipal and interest by the full faith and credit of the U.S.
government. Such agencies include the Government Na
sociated with each category, that is, 0 percent,
tional Mortgage Association (GNMA), the Veterans Admin
20 percent, 50 percent, and 100 percent. A
istration (VA), the Federal Housing Administration (FHA),
the Export-Import Bank (Exim Bank), the Overseas Private
24 Through year-end 1992, remaining, rather than origi Investment Corporation (OPIC), the Commodity Credit
Corporation (CCC), and the Small Business Administration
nal, maturity may be used for determining the maturity of
(SBA).
commitments.
10

/H
Capital Adequacy Guidelines
This category also includes claims collater
alized by cash on deposit in the bank or by
securities issued or guaranteed by OECD cen
tral governments or U.S. government agencies
for which a positive margin of collateral is
maintained on a daily basis, fully taking into
account any change in the bank’s exposure to
the obligor or counterparty under a claim in
relation to the market value of the collateral
held in support o f that claim.
2. Category 2: 20 percent. This category in
cludes cash items in the process o f collection,
both foreign and domestic; short-term claims
(including demand deposits) on, and the por
tions o f short-term claims that are guaran
teed28 by, U.S. depository institutions29 and
foreign banks;30 and long-term claims on, and
the portions of long-term claims that are guar
anteed by, U.S. depository institutions and
OECD banks.31
This category also includes the portions of
claims that are conditionally guaranteed by
OECD central governments and U.S. govem28 Claims guaranteed by U.S. depository institutions and
foreign banks include risk participations in both banker’s
acceptances and standby letters of credit, as well as partici
pations in commitments, that are conveyed to other U.S.
depository institutions or foreign banks.
29 U.S. depository institutions are defined to include
branches (foreign and domestic) of federally insured banks
and depository institutions chartered and headquartered in
the 50 states of the United States, the District of Columbia,
Puerto Rico, and U.S. territories and possessions. The defi
nition encompasses banks, mutual or stock savings banks,
savings or building and loan associations, cooperative
banks, credit unions, and international banking facilities of
domestic banks. U.S.-chartered depository institutions
owned by foreigners are also included in the definition.
However, branches and agencies of foreign banks located
in the U.S., as well as all bank holding companies, are
excluded.
30Foreign banks are distinguished as either OECD banks
or non-OECD banks. OECD banks include banks and their
branches (foreign and domestic) organized under the laws
of countries (other than the U.S.) that belong to the OECDbased group of countries. Non-OECD banks include banks
and their branches (foreign and domestic) organized under
the laws of countries that do not belong to the OECDbased group of countries. For this purpose, a bank is de
fined as an institution that engages in the business of bank
ing; is recognized as a bank by the bank supervisory or
monetary authorities of the country of its organization or
principal banking operations; receives deposits to a substan
tial extent in the regular course of business; and has the
power to accept demand deposits.
31 Long-term claims on, or guaranteed by, non-OECD
banks and all claims on bank holding companies are as
signed to the 100 percent risk category, as are holdings of
bank-issued securities that qualify as capital of the issuing
banks.

/ 0 ‘7 /?
Regulation H, Appendix A

ment agencies, as well as the portions o f local
currency claims that are conditionally guaran
teed by non-OECD central governments, to
the extent that the bank has liabilities booked
in that currency. In addition, this category also
includes claims on, and the portions of claims
that are guaranteed by, U .S . g overn
ment-sponsored32 agencies and claims on, and
the portions o f claims guaranteed by, the In
ternational Bank for Reconstruction and D e
velopment (World Bank), the International Fi
nance Corporation, the Inter-Am erican
Development Bank, the Asian Development
Bank, the African Development Bank, the Eu
ropean Investment Bank, the European Bank
for Reconstruction and Development, the Nor
dic Investment Bank, and other multilateral
lending institutions or regional development
banks in which the U.S. government is a
shareholder or contributing member. General
obligation claims on, or portions o f claims
guaranteed by the full faith and credit of,
states or other political subdivisions o f the
U nited States or other countries o f the
OECD-based group are also assigned to this
category.33
This category also includes the portions of
claims (including repurchase transactions) col
lateralized by cash on deposit in the bank or
by securities issued or guaranteed by OECD
central governments or U.S. government agen
cies that do not qualify for the zero percent
risk-weight category; collateralized by securi
ties issued or guaranteed by U.S. govern
ment-sponsored agencies; or collateralized by
securities issued by multilateral lending insti
tutions or regional developm ent banks in
which the U.S. government is a shareholder or
contributing member.
32For this purpose, U.S. government-sponsored agencies
are defined as agencies originally established or chartered
by the federal government to serve public purposes speci
fied by the U.S. Congress but whose obligations are not
explicitly guaranteed by the full faith and credit of the U.S.
government. These agencies include the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal Na
tional Mortgage Association (FNMA), the Farm Credit Sys
tem, the Federal Home Loan Bank System, and the Student
Loan Marketing Association (SLMA). Claims on U.S. gov
ernment-sponsored agencies include capital stock in a Fed
eral Home Loan Bank that is held as a condition of mem
bership in that Bank.
33Claims on, or guaranteed by, states or other political
subdivisions of countries that do not belong to the OECDbased group of countries are placed in the 100 percent risk
category.

Regulation H, Appendix A

fhi /07/9

Capital Adequacy Guidelines

3. Category 3: 50 percent. This category in
cludes loans fully secured by first liens34 on
one- to four-family residential properties, ei
ther owner-occupied or rented, or on multi
family residential properties,35 that meet cer
tain criteria.36 Loans included in this category
must have been made in accordance with pru
dent underwriting standards;37 be performing
in accordance with their original terms; and
not be 90 days or more past due or carried in

nonaccrual status. The following additional
criteria must also be applied to a loan secured
by a multifamily residential property that is
included in this category: all principal and in
terest payments on the loan must have been
made on time for at least the year preceding
placement in this category, or in the case
where the existing property owner is refinanc
ing a loan on that property, all principal and
interest payments on the loan being refinanced
must have been made on time for at least the
34 If a bank holds the first and junior lien(s) on a residen year preceding placement in this category;
tial property and no other party holds an intervening lien,
amortization o f the principal and interest must
the transaction is treated as a single loan secured by a first
occur over a period o f not more that 30 years
lien for the purpose of determining the loan-to-value ratio.
}s Loans that qualify as loans secured by one- to fourand the minimum original maturity for repay
family residential properties or multifamily residential
ment o f principal must not be less than 7
properties are listed in the instructions to the commercial
bank call report. In addition, for risk-based capital pur
years; and the annual net operating income
poses, loans secured by one- to four-family residential
(before debt service) generated by the prop
properties include loans to builders with substantial project
erty during its most recent fiscal year must
equity for the construction of one- to four-family residences
that have been presold under firm contracts to purchasers
not be less than 120 percent o f the loan’s cur
who have obtained firm commitments for permanent quali
rent annual debt service (115 percent if the
fying mortgage loans and have made substantial earnestloan is based on a floating interest rate) or, in
money deposits.
The instructions to the call report also discuss the treat
the case o f a cooperative or other not-forment of loans, including multifamily housing loans, that are
profit housing project, the property must gen
sold subject to a pro rata loss-sharing arrangement. Such an
erate sufficient cash flow to provide compara
arrangement should be treated by the selling bank as sold
(and excluded from balance-sheet assets) to the extent that
ble protection to the institution. Also included
the sales agreement provides for the purchaser of the loan
in this category are privately issued mortgageto share in any loss incurred on the loan on a pro rata basis
backed securities provided that (1) the struc
with the selling bank. In such a transaction, from the stand
point of the selling bank, the portion of the loan that is
ture o f the security meets the criteria de
treated as sold is not subject to the risk-based capital stan
scribed in section 111(B)(3) above; (2) if the
dards. In connection with sales of multifamily housing
loans in which the purchaser of a loan shares in any loss
security is backed by a pool o f conventional
incurred on the loan with the selling institution on other
mortgages, on one- to four-family residential
than a pro rata basis, these other loss-sharing arrangements
or multifamily residential properties, each un
are taken into account for purposes of determining the ex
tent to which such loans are treated by the selling bank as
derlying mortgage meets the criteria described
sold (and excluded from balance-sheet assets) under the
above in this section for eligibility for the 50
risk-based capital framework in the same manner as pre
percent risk category at the time the pool is
scribed for reporting purposes in the instructions to the call
report.
originated; (3) if the security is backed by pri
36Residential property loans that do not meet all the
vately issued mortgage-backed securities, each
specified criteria or that are made for the purpose of specu
underlying security qualifies for the 50 percent
lative property development are placed in the 100 percent
risk category.
risk category; and (4) if the security is backed
37 Prudent underwriting standards include a conservative
by a pool o f multifamily residential mort
ratio of the current loan balance to the value of the prop
gages, principal and interest payments on the
erty. In the case of a loan secured by multifamily residen
tial property, the loan-to-value ratio is not conservative if it
security are not 30 days or more past due.
exceeds 80 percent (75 percent if the loan is based on a
Privately issued mortgage-backed securities
floating interest rate). Prudent underwriting standards also
dictate that a loan-to-value ratio used in the case of
that do not meet these criteria or that do not
originating a loan to acquire a property would not be
qualify for a lower risk weight are generally
deemed conservative unless the value is based on the lower
assigned to the 100 percent risk category.
of the acquisition cost of the property or appraised (or if
appropriate, evaluated) value. Otherwise, the loan-to-value
ratio generally would be based upon the value of the prop
erty as determined by the most current appraisal or, if ap
propriate, the most current evaluation. All appraisals must
be made in a manner consistent with the federal banking
agencies’ real estate appraisal regulations and guidelines
and with the bank’s own appraisal guidelines.

Also assigned to this category are revenue
(nongeneral obligation) bonds or similar obli
gations, including loans and leases, that are
obligations of states or other political subdivi
sions o f the U.S. (for example, municipal rev-

7H
Capital Adequacy Guidelines
enue bonds) or other countries o f the OECDbased group, but for which the government
entity is committed to repay the debt with
revenues from the specific projects financed,
rather than from general tax funds.
Credit-equivalent amounts o f interest-rate
and foreign-exchange-rate contracts involving
standard risk obligors (that is, obligors whose
loans or debt securities would be assigned to
the 100 percent risk category) are included in
the 50 percent category, unless they are
backed by collateral or guarantees that allow
them to be placed in a lower risk category.

4. Category 4: 100 percent. All assets not in
cluded in the categories above are assigned to
this category, which comprises standard risk
assets. The bulk of the assets typically found
in a loan portfolio would be assigned to the
100 percent category.
This category includes long-term claims on,
or guaranteed by, non-OECD banks, and all
claims on non-OECD central governments that
entail some degree o f transfer risk.38 This cat
egory also includes all claims on foreign and
domestic private-sector obligors not included
in the categories above (including loans to
nondepository financial institutions and bank
holding companies); claims on commercial
firms owned by the public sector; customer
liabilities to the bank on acceptances outstand
ing involving standard risk claims;39 invest
ments in fixed assets, premises, and other real
estate owned; common and preferred stock of
corporations, including stock acquired for
debts previously contracted; commercial and
consumer loans (except those assigned to
lower risk categories due to recognized guar
antees or collateral and loans for residential
property that qualify for a lower risk weight);
mortgage-backed securities that do not meet
38Such assets include all nonlocal currency claims on, or
guaranteed by, non-OECD central governments and those
portions of local currency claims on, or guaranteed by,
non-OECD central governments that exceed the local cur
rency liabilities held by the bank.
39Customer liabilities on acceptances outstanding involv
ing nonstandard risk claims, such as claims on U.S. deposi
tory institutions, are assigned to the risk category appropri
ate to the identity of the obligor or, if relevant, the nature
of the collateral or guarantees backing the claims. Portions
of acceptances conveyed as risk participations to U.S. de
pository institutions or foreign banks are assigned to the 20
percent risk category appropriate to short-term claims guar
anteed by U.S. depository institutions and foreign banks.

7 0 * 7 /9

Regulation H, Appendix A
criteria for assignment to a lower risk weight
(including any classes of mortgage-backed se
curities that can absorb more than their pro
rata share o f loss without the whole issue be
ing in default); and all stripped mortgagebacked and similar securities.
Also included in this category are industrial
development bonds and similar obligations is
sued under the auspices of states or political
subdivisions o f the OECD-based group of
countries for the benefit o f a private party or
enterprise where that party or enterprise, not
the government entity, is obligated to pay the
principal and interest, and all obligations o f
states or political subdivisions o f countries
that do not belong to the OECD-based group.
The following assets also are assigned a
risk weight o f 100 percent if they have not
been deducted from capital: investments in
unconsolidated companies, joint ventures, or
associated companies; instruments that qualify
as capital issued by other banking organiza
tions; and any intangibles, including those that
may have been grandfathered into capital.

D. Off-Balance-Sheet Items
The face amount o f an off-balance-sheet item
is incorporated into the risk-based capital ratio
by multiplying it by a credit conversion fac
tor. The resultant credit-equivalent amount is
assigned to the appropriate risk category ac
cording to the obligor, or, if relevant, the
guarantor or the nature o f the collateral.40 At
tachment IV sets forth the conversion factors
for various types o f off-balance-sheet items.
1. Items with a 100 percent conversion factor.
A 100 percent conversion factor applies to di
rect credit substitutes, which include guaran
tees, or equivalent instruments, backing finan
cial claims, such as outstanding securities,
loans, and other financial liabilities, or that
back off-balance-sheet items that require capi
tal under the risk-based capital framework.
Direct credit substitutes include, for example,
40
The sufficiency of collateral and guarantees for offbalance-sheet items is determined by the market value of
the collateral or the amount of the guarantee in relation to
the face amount of the item, except for interest- and for
eign-exchange-rate contracts, for which this determination
is made in relation to the credit equivalent amount. Collat
eral and guarantees are subject to the same provisions
noted under section III(B).
13

Regulation H, Appendix A
financial standby letters o f credit, or other
equivalent irrevocable undertakings or surety
arrangements, that guarantee repayment o f fi
nancial obligations such as commercial paper,
tax-exempt securities, commercial or individ
ual loans or debt obligations, or standby or
commercial letters o f credit. Direct credit sub
stitutes also include the acquisition o f risk
participations in banker’s acceptances and
standby letters of credit, since both o f these
transactions, in effect, constitute a guarantee
by the acquiring bank that the underlying ac
count party (obligor) will repay its obligation
to the originating, or issuing, institution.41
(Standby letters o f credit that are perform
ance-related are discussed below and have a
credit conversion factor o f 50 percent.)
The full amount o f a direct credit substitute
is converted at 100 percent and the resulting
credit-equivalent amount is assigned to the
risk category appropriate to the obligor or, if
relevant, the guarantor or the nature of the
collateral. In the case of a direct credit substi
tute in which a risk participation42 has been
conveyed, the full amount is still converted at
100 percent. However, the credit-equivalent
amount that has been conveyed is assigned to
whichever risk category is lower: the risk cat
egory appropriate to the obligor, after giving
effect to any relevant guarantees or collateral,
or the risk category appropriate to the institu
tion acquiring the participation. Any remain
der is assigned to the risk category appropriate
to the obligor, guarantor, or collateral. For ex
ample, the portion o f a direct credit substitute
conveyed as a risk participation to a U.S. do
mestic depository institution or foreign bank is
assigned to the risk category appropriate to
claims guaranteed by those institutions, that is,
the 20 percent risk category.43 This approach
recognizes that such conveyances replace the
originating bank’s exposure to the obligor
41 Credit-equivalent amounts of acquisitions of risk par
ticipations are assigned to the risk category appropriate to
the account-party obligor, or, if relevant, the nature of the
collateral or guarantees.
42That is, a participation in which the originating bank
remains liable to the beneficiary for the full amount of the
direct credit substitute if the party that has acquired the
participation fails to pay when the instrument is drawn.
43 Risk participations with a remaining maturity of over
one year that are conveyed to non-OECD banks are to be
assigned to the 100 percent risk category, unless a lower
risk category is appropriate to the obligor, guarantor, or
collateral.
14

J0W9

Capital Adequacy Guidelines
with an exposure to the institutions acquiring
the risk participations.44
In the case o f direct credit substitutes that
take the form o f a syndication as defined in
the instructions to the commercial bank call
report, that is, where each bank is obligated
only for its pro rata share o f the risk and there
is no recourse to the originating bank, each
bank will only include its pro rata share o f the
direct credit substitute in its risk-based capital
calculation.
Financial standby letters o f credit are distin
guished from loan commitments (discussed
below) in that standbys are irrevocable obliga
tions o f the bank to pay a third-party benefici
ary when a customer (account party) fails to
repay an outstanding loan or debt instrument
(direct credit substitute). Performance standby
letters of credit (performance bonds) are irrev
ocable obligations o f the bank to pay a thirdparty beneficiary when a customer (account
party) fails to perform some other contractual
nonfinancial obligation.
The distin gu ish in g characteristic o f a
standby letter o f credit for risk-based capital
purposes is the combination o f irrevocability
with the fact that funding is triggered by some
failure to repay or perform an obligation.
Thus, any commitment (by whatever name)
that involves an irrevocable obligation to
make a payment to the customer or to a third
party in the event the customer fails to repay
an outstanding debt obligation or fails to per
form a contractual obligation is treated, for
risk-based capital purposes, as respectively, a
financial guarantee standby letter o f credit or a
performance standby.
A loan commitment, on the other hand, in
volves an obligation (with or without a mate
rial adverse change or similar clause) o f the
bank to fund its customer in the normal
course o f business should the customer seek
to draw down the commitment.
Sale and repurchase agreements and asset
sales with recourse (to the extent not included
on the balance sheet) and forward agreements
also are converted at 100 percent. The riskbased capital definition o f the sale o f assets
44
A risk participation in banker’s acceptances conveyed
to other institutions is also assigned to the risk category
appropriate to the institution acquiring the participation or,
if relevant, the guarantor or nature of the collateral.

/O V /f
Capital Adequacy Guidelines
with recourse, including the sale o f one- to
four-family residential mortgages, is the same
as the definition contained in the instructions
to the commercial bank call report. Accord
ingly, the entire amount o f any assets trans
ferred with recourse that are not already in
cluded on the balance sheet, including pools
o f one- to four-family residential mortgages,
are to be converted at 100 percent and as
signed to the risk weight appropriate to the
obligor, or if relevant, the nature o f any col
lateral or guarantees. The only exception in
volves transfers of pools of residential mort
gages that have been made with insignificant
recourse for which a liability or specific non
capital reserve has been established and is
maintained for the maximum amount of possi
ble loss under the recourse provision. Socalled loan strips (that is, short-term advances
sold under long-term commitments without di
rect recourse) are defined in the instructions to
the commercial bank call report and for riskbased capital purposes as assets sold with
recourse.
Forward agreements are legally binding
contractual obligations to purchase assets with
certain drawdown at a specified future date.
Such obligations include forward purchases,
forward forward deposits placed,45 and partly
paid shares and securities; they do not include
commitments to make residential mortgage
loans or forward foreign-exchange contracts.
Securities lent by a bank are treated in one
o f two ways, depending upon whether the
lender is at risk o f loss. If a bank, as agent
for a customer, lends the customer’s securities
and does not indemnify the customer against
loss, then the transaction is excluded from the
risk-based capital calculation. If, alternatively,
a bank lends its own securities or, acting as
agent for a customer, lends the customer’s se
curities and indemnifies the customer against
loss, the transaction is converted at 100 per
cent and assigned to the risk-weight category
appropriate to the obligor, to any collateral
delivered to the lending bank, or, if applica
ble, to the independent custodian acting on the
lender’s behalf. Where a bank is acting as
agent for a customer in a transaction involving
the lending or sale of securities that is collat-

Regulation H, Appendix A
eralized by cash delivered to the bank, the
transaction is deemed to be collateralized by
cash on deposit in the bank for purposes of
determining the appropriate risk-weight cate
gory, provided that any indemnification is lim
ited to no more than the difference between
the market value o f the securities and the cash
collateral received and any reinvestment risk
associated with that cash collateral is borne by
the customer.
2. Items with a 50 percent conversion factor.
Transaction-related contingencies are con
verted at 50 percent. Such contingencies in
clude bid bonds, performance bonds, warran
ties, standby letters o f credit related to
particular transactions, and perform ance
standby letters o f credit, as well as acquisi
tions of risk participations in performance
standby letters of credit. Performance standby
letters o f credit represent obligations backing
the performance o f nonfinancial or commer
cial contracts or undertakings. To the extent
permitted by law or regulation, performance
standby letters of credit include arrangements
backing, among other things, subcontractors’
and suppliers’ performance, labor and materi
als contracts, and construction bids.
The unused portion o f commitments with
an original maturity exceeding one year,46 in
cluding underwriting commitments, and com
mercial and consumer credit commitments
also are converted at 50 percent. Original ma
turity is defined as the length of time between
the date the commitment is issued and the
earliest date on which (1) the bank can, at its
option, unconditionally (without cause) cancel
the commitment47 and (2) the bank is sched
uled to (and as a normal practice actually
does) review the facility to determine whether
or not it should be extended. Such reviews
must continue to be conducted at least annu
ally for such a facility to qualify as a short
term commitment.

46Through year-end 1992, remaining maturity may be
used for determining the maturity of off-balance-sheet loan
commitments; thereafter, original maturity must be used.
47 In the case of consumer home equity or mortgage lines
of credit secured by liens on one- to four-family residential
properties, the bank is deemed able to unconditionally can
cel the commitment for the purpose of this criterion if, at
its option, it can prohibit additional extensions of credit,
45
Forward forward deposits accepted are treated as reduce the credit line, and terminate the commitment to the
interest-rate contracts.
full extent permitted by relevant federal law.

f i t 10119
Regulation H, Appendix A
Commitments are defined as any legally
binding arrangements that obligate a bank to
extend credit in the form of loans or leases; to
purchase loans, securities, or other assets; or
to participate in loans and leases. They also
include overdraft facilities, revolving credit,
home equity and mortgage lines o f credit, and
similar transactions. Normally, commitments
involve a written contract or agreement and a
commitment fee, or some other form o f con
sideration. Commitments are included in
weighted-risk assets regardless o f whether
they contain “ material adverse ch an ge”
clauses or other provisions that are intended to
relieve the issuer o f its funding obligation
under certain conditions. In the case o f com
mitments structured as syndications, where the
bank is obligated solely for its pro rata share,
only the bank’s proportional share o f the syn
dicated commitment is taken into account in
calculating the risk-based capital ratio.
Facilities that are unconditionally cancel
lable (without cause) at any time by the bank
are not deemed to be commitments, provided
the bank makes a separate credit decision
before each drawing under the facility. Com
mitments with an original maturity o f one
year or less are deemed to involve low risk
and, therefore, are not assessed a capital
charge. Such short-term commitments are de
fined to include the unused portion o f lines of
credit on retail credit cards and related plans
(as defined in the instructions to the commer
cial bank call report) if the bank has the un
conditional right to cancel the line o f credit at
any time, in accordance with applicable law.
Once a commitment has been converted at
50 percent, any portion that has been con
veyed to U.S. depository institutions or OECD
banks as participations in which the originat
ing bank retains the full obligation to the bor
rower if the participating bank fails to pay
when the instrument is drawn, is assigned to
the 20 percent risk category. This treatment is
analogous to that accorded to conveyances o f
risk participations in standby letters o f credit.
The acquisition of a participation in a com
mitment by a bank is converted at 50 percent
and assigned to the risk category appropriate
to the account-party obligor or, if relevant, the
nature o f the collateral or guarantees.
Revolving underwriting facilities (RUFs),
16

Capital Adequacy Guidelines
note issuance facilities (NIFs), and other simi
lar arrangements also are converted at 50 per
cent regardless o f maturity. These are facili
ties under which a borrower can issue on a
revolving basis short-term paper in its own
name, but for which the underwriting banks
have a legally binding commitment either to
purchase any notes the borrower is unable to
sell by the rollover date or to advance funds
to the borrower.
3. Items with a 20 percent conversion factor.
Short-term, self-liquidating trade-related con
tingencies which arise from the movement of
goods are converted at 20 percent. Such con
tingencies generally include commercial letters
o f credit and other documentary letters o f
credit co lla tera lized by the underlying
shipments.
4. Items with a zero percent conversion fac
tor. These include unused portions o f commit
ments with an original maturity o f one year or
less,48* or which are unconditionally cancel
lable at any time, provided a separate credit
decision is made before each drawing under
the facility. Unused portions o f lines o f credit
on retail credit cards and related plans are
deemed to be short-term commitments if the
bank has the unconditional right to cancel the
line of credit at any time, in accordance with
applicable law.

E. Interest-Rate and Foreign-Exchange-Rate
Contracts
1. Scope. Credit equivalent amounts are com
puted for each o f the following off-balancesheet interest-rate and foreign-exchange-rate
instruments:
I. Interest-Rate Contracts
A. Single-currency interest-rate swaps
B. Basis swaps
C. Forward-rate agreements
D. Interest-rate
op tion s
purchased
(including caps, collars, and floors
purchased)
E. Any other instrument that gives rise to
similar credit risks (including when48Through year-end 1992, remaining maturity may be
used for determining term to maturity for off-balance-sheet
loan commitments; thereafter, original maturity must be
used.

At /07/9

Regulation H, Appendix A

Capital Adequacy Guidelines

issued securities and forward forward
deposits accepted)
II. Exchange-Rate Contracts
A. Cross-currency interest-rate swaps
B. Forward foreign-exchange contracts
C. Currency options purchased
D. Any other instrument that gives rise to
similar credit risks
Exchange-rate contracts with an original ma
turity of 14 calendar days or less and instru
ments traded on exchanges that require daily
payment o f variation margin are excluded
from the risk-based ratio calculation. Overthe-counter options purchased, however, are
included and treated in the same way as the
other interest-rate and exchange-rate contracts.
2. Calculation o f credit-equivalent amounts.
Credit-equivalent amounts are calculated for
each individual contract o f the types listed
above. To calculate the credit-equivalent
amount o f its off-balance-sheet interest-rate
and exchange-rate instruments, a bank sums
these amounts:
1. the mark-to-market value49 positive values
only) o f each contract (that is, the current
exposure) and
2. an estimate of the potential future credit
exposure over the remaining life of each
contract.
The potential future credit exposure on a
contract, including contracts with negative
mark-to-market values, is estimated by multi
plying the notional principal amount by one
of the following credit conversion factors, as
appropriate:

Remaining maturity
One year or less
Over one year

Interestrate
contracts
-0 0.5%

Exchangerate
contracts
1.0%
5.0%

interest rates, higher conversion factors have
been established for foreign-exchange con
tracts than for interest-rate contracts.
No potential future credit exposure is calcu
lated for single-currency interest-rate swaps in
which payments are made based upon two
floating rate indices, so-called floating/floating
or basis swaps; the credit exposure on these
contracts is evaluated solely on the basis of
their mark-to-market values.
3. Risk weights. Once the credit-equivalent
amount for interest-rate and exchange-rate in
struments has been determined, that amount is
assigned to the risk-weight category appropri
ate to the counterparty, or, if relevant, the na
ture o f any collateral or guarantees.50 How
ever, the maximum w eight that w ill be
applied to the credit-equivalent amount o f
such instruments is 50 percent.
4. Avoidance o f double-counting. In certain
cases, credit exposures arising from the inter
est-rate and exchange instruments covered by
these guidelines may already be reflected, in
part, on the balance sheet. To avoid double
counting such exposures in the assessment of
capital adequacy and, perhaps, assigning inap
propriate risk weights, counterparty credit ex
posures arising from the types of instruments
covered by these guidelines may need to be
excluded from balance-sheet assets in calculat
ing banks’ risk-based capital ratios.
5. Netting. Netting of swaps and similar con
tracts is recognized for purposes o f calculating
the risk-based capital ratio only when accom
plished through netting by novation.51 While
the Federal Reserve encourages any reasona
ble arrangements designed to reduce the risks
inherent in these transactions, other types of
netting arrangements are not recognized for

50 For interest- and exchange-rate contracts, sufficiency of
collateral or guarantees is determined by the market value
of the collateral or the amount of the guarantee in relation
to the credit-equivalent amount. Collateral and guarantees
are subject to the same provisions noted under section
III(B).
51 Netting by novation, for this purpose, is a written bilat
eral contract between two counterparties under which any
obligation to each other to deliver a given currency on a
49
Mark-to-market values are measured in dollars, regardgiven date is automatically amalgamated with all other obli
less of the currency or currencies specified in the contract,
gations for the same currency and value date, legally sub
and should reflect changes in both interest rates and
stituting one single net amount for the previous gross
counterparty credit quality.
obligations.

Regulation H, Appendix A
purposes o f calculating the risk-based ratio at
this time.

IV. Minimum Supervisory Ratios and
Standards
The interim and final supervisory standards set
forth below specify minimum supervisory ra
tios based primarily on broad credit-risk con
siderations. As noted above, the risk-based ra
tio does not take explicit account o f the
quality o f individual asset portfolios or the
range o f other types of risks to which banks
may be exposed, such as interest-rate, liquid
ity, market, or operational risks. For this rea
son, banks are generally expected to operate
with capital positions above the minimum
ratios.
Institutions with high or inordinate levels of
risk are expected to operate well above mini
mum capital standards. Banks experiencing or
anticipating significant growth are also ex
pected to maintain capital, including tangible
capital positions, well above the minimum
levels. For example, most such institutions
generally have operated at capital levels rang
ing from 100 to 200 basis points above the
stated m inim u m s. H igh er capital ratios cou ld

be required if warranted by the particular cir
cumstances or risk profiles o f individual
banks. In all cases, banks should hold capital
commensurate with the level and nature o f all
of the risks, including the volume and severity
of problem loans, to which they are exposed.
Upon adoption of the risk-based framework,
any bank that does not meet the interim or
final supervisory ratios, or whose capital is
otherwise considered inadequate, is expected
to develop and implement a plan acceptable to
the Federal Reserve for achieving an adequate
level of capital consistent with the provisions
of these guidelines or with the special circum
stances affecting the individual institution. In
addition, such banks should avoid any actions,
including increased risk-taking or unwarranted
expansion, that would lower or further erode
their capital positions.

A. Minimum Risk-Based Ratio After
Transition Period
As reflected in attachment VI, by year-end
1992, all state member banks should meet a
18

frfJOf/9
Capital Adequacy Guidelines
minimum ratio o f qualifying total capital to
weighted-risk assets of 8 percent, o f which at
least 4.0 percentage points should be in the
form o f tier 1 capital. For purposes o f section
IV.A., tier 1 capital is defined as the sum of
core capital elements less goodwill and other
intangible assets required to be deducted in
accordance with section II.B.l.b. o f this ap
pendix. The maximum amount o f supplemen
tary capital elements that qualifies as tier 2
capital is limited to 100 percent o f tier 1 capi
tal. The maximum amount o f supplementary
capital elements that qualifies as tier 2 capital
is limited to 100 percent o f tier 1 capital. In
addition, the combined maximum amount o f
subordinated debt and intermediate-term pre
ferred stock that qualifies as tier 2 capital is
limited to 50 percent o f tier 1 capital. The
maximum amount o f the allowance for loan
and lease losses that qualifies as tier 2 capital
is limited to 1.25 percent o f gross weightedrisk assets. Allowances for loan and lease
losses in excess o f this limit may, o f course,
be maintained, but would not be included in a
bank’s total capital. The Federal Reserve will
continue to require banks to maintain reserves
at levels fully sufficient to cover losses inher
ent in their loan portfolios.
Qualifying total capital is calculated by ad
ding tier 1 capital and tier 2 capital (limited to
100 percent of tier 1 capital) and then deduct
ing from this sum certain investments in
banking or finance subsidiaries that are not
consolidated for accounting or supervisory
purposes, reciprocal holdings o f banking or
ganization capital securities, or other items at
the direction of the Federal Reserve. These
deductions are discussed above in section
11(B).

B. Transition Arrangements
The transition period for implementing the
risk-based capital standard ends on December
31, 1992.52 Initially, the risk-based capital
52 The Basle capital framework does not establish an ini
tial minimum standard for the risk-based capital ratio
before the end of 1990. However, for the purpose of calcu
lating a risk-based capital ratio prior to year-end 1990, no
sublimit is placed on the amount of the allowance for loan
and lease losses includable in tier 2. In addition, this frame
work permits, under temporary transition arrangements, a
certain percentage of a bank’s tier 1 capital to be made up
Continued

H \

Capital Adequacy Guidelines
guidelines do not establish a minimum level
o f capital. However, by year-end 1990, banks
are expected to meet a minimum interim tar
get ratio for qualifying total capital to weightedrisk assets o f 7.25 percent, at least one-half
of which should be in the form of tier 1 capi
tal. For purposes o f meeting the 1990 interim
target, the amount o f loan-loss reserves that*1
Continued
of supplementary capital elements. In particular, supple
mentary elements may constitute 25 percent of a bank’s tier
1 capital (before the deduction of goodwill) up to the end
of 1990; from year-end 1990 up to the end of 1992, this
allowable percentage of supplementary elements in tier 1
declines to 10 percent of tier 1 (before the deduction of
goodwill). Beginning on December 31, 1992, supplemen
tary elements may not be included in tier 1. The amount of
subordinated debt and intermediate-term preferred stock
temporarily included in tier 1 under these arrangements will
not be subject to the sublimit on the amount of such instru
ments includable in tier 2 capital. Goodwill must be de
ducted from the sum of a bank’s permanent core capital
elements (that is, common equity, noncumulative perpetual
preferred stock, and minority interest in the equity of un
consolidated subsidiaries) plus supplementary items that
may temporarily qualify as tier 1 elements for the purpose
of calculating tier 1 (net of goodwill), tier 2, and total
capital.

/ f f / oV/?
Regulation H, Appendix A
may be included in capital is limited to 1.5
percent o f weighted-risk assets and up to 10
percent of a bank’s tier 1 capital may consist
o f supplementary capital elements. Thus, the
7.25 percent interim target ratio implies a
minimum ratio o f tier 1 capital to weightedrisk assets of 3.6 percent (one-half o f 7.25)
and a minimum ratio of core capital elements
to weighted-risk assets ratio of 3.25 percent
(nine-tenths o f the tier 1 capital ratio).
Through year-end 1990, banks have the op
tion o f complying with the minimum 7.25
percent year-end 1990 risk-based capital stan
dard, in lieu o f the minimum 5.5 percent pri
mary and 6 percent total capital to total assets
capital ratios set forth in appendix B to part
225 of the Federal Reserve’s Regulation Y
(page 59). In addition, as more fully set forth
in appendix B to Regulation H (page 29),
banks are expected to maintain a minimum ra
tio o f tier 1 capital to total assets during this
transition period.

Hi
W I9
Capital Adequacy Guidelines

Regulation H, Appendix A

Attachment I— Sample Calculation of Risk-Based Capital Ratio
for State Member Banks
Example of a bank with $6,000 in total capital and the following assets and off-balance-sheet
item s.
Balance-sheet assets
Cash
U.S. Treasuries
Balances at domestic banks
Loans secured by first liens on 1- to 4-family
residential properties
Loans to private corporations
Total Balance-Sheet Assets
Off-balance-sheet items
Standby letters o f credit (SLCs) backing generalobligation debt issues o f U.S. municipalities
(GOs)
Long-term legally binding commitments to private
corporations
Total Off-Balance-Sheet Items

5,000
20,000
5,000
5,000
65,000

$ 100,000

10,000
20,000

$ 30,000

This bank’s total capital to total assets (leverage) ratio would be:
($ 6 ,000 /$ 100,000 ) = 6 .00 %.

To compute the bank’s weighted-risk assets—
1. Compute the credit-equivalent amount o f each off-balance-sheet (OBS) item.
OBS item
SLCs backing municipal GOs
Long-term commitments to private corporations

Face value
$ 10,000
$ 20,000

X
X

Conversion
factor

Creditequivalent amount

1.00
0.50

$ 10,000
$ 10,000

Attachment I continued, next page

/H~Regulation
/of/?
H, Appendix A

Capital Adequacy Guidelines
Attachm ent / continued

2. Multiply each balance-sheet asset and the credit-equivalent amount of each OBS item by
the appropriate risk weight.
OBS item

Conversion
factor

Face value

Creditequivalent amount

0% category

Cash
U.S. Treasuries

$ 5,000
20,000
$25,000

20% category

Balances at domestic banks
Credit-equivalent amounts of SLCs backing GOs
of U.S. municipalities

$ 5,000
10,000
$15,000

0.20

$ 3,000

$ 5,000

0.50

$ 2,500

1.00

$75,000

50% category

Loans secured by first liens on 1- to 4-family
residential properties
100% category

Loans to private corporations
Credit-equivalent amounts of long-term commitments to private corporations

$65,000
10,000
$75,000

Total Risk-Weighted Assets

$80,500

This bank’s ratio of total capital to weighted-risk assets (risk-based capital ratio) would be:
($6,000/$80,500) = 7.45%

Regulation H, Appendix A

#t
M /9
Capital Adequacy Guidelines

Attachment II— Summary Definition of Qualifying Capital for State Member Banks*
Using the Year-End 1992 Standards

Components

CORE CAPITAL (tier 1)
Common stockholders’ equity
Qualifying noncumulative perpetual preferred stock
Minority interest in equity accounts of
consolidated subsidiaries

Minimum requirements after
transition period

Must equal or exceed 4% of weighted-risk assets
No limit
No limit; banks should avoid undue reliance on
preferred stock in tier 1
Banks should avoid using minority interests to
introduce elements not otherwise qualifying for tier
1 capital

Less: Goodwill and other intangible assets required
to be deducted from capital1
SUPPLEMENTARY CAPITAL (tier 2)
Allowance for loan and lease losses
Perpetual preferred stock
Hybrid capital instruments and equity-contract
notes
Subordinated debt and intermediate-term
preferred stock (original weighted average
maturity of 5 years or more)
Revaluation reserves (equity and building)

DEDUCTIONS (from sum of tier 1 and tier 2)
Investments in unconsolidated subsidiaries
Reciprocal holdings of banking organizations’
capital securities
Other deductions (such as other subsidiaries or
joint ventures) as determined by supervisory
authority
TOTAL CAPITAL
(tier 1 + tier 2 - Deductions)

Total of tier 2 is limited to 100% of tier l 2
Limited to 1.25% of weighted-risk assets2
No limit within tier 2
No limit within tier 2
Subordinated debt and intermediate-term preferred
stock are limited to 50% of tier l;3 amortized for
capital purposes as they approach maturity
Not included; banks encouraged to disclose; may
be evaluated on a case-by-case basis for interna
tional comparisons; and taken into account in mak
ing an overall assessment of capital

On a case-by-case basis or as a matter of policy
after formal rulemaking
Must equal or exceed 8% of weighted-risk assets

2Amounts in excess of limitations are permitted but do
*See discussion in section II of the guidelines for a com
not qualify as capital.
plete description of the requirements for, and the limitations
3Amounts in excess of limitations are permitted but do
on, the components of qualifying capital.
1
Requirements for the deduction of other intangible asnot qualify as capital.
sets are set forth in section II.B.l.b. of this appendix.

Capital Adequacy Guidelines

Attachment III— Summary of Risk
Weights and Risk Categories for State
Member Banks
C ategory 1: Zero P ercent

1. Cash (domestic and foreign) held in the
bank or in transit
2. Balances due from Federal Reserve Banks
(including Federal Reserve Bank stock) and
central banks in other OECD countries
3. Direct claim s on, and the portions o f
claims that are unconditionally guaranteed by,
the U.S. Treasury and U.S. government agen
cies' and the central governments o f other
OECD countries, and local currency claims
on, and the portions of local currency claims
that are unconditionally guaranteed by, the
central governments o f non-OECD countries
(including the central banks o f non-OECD
countries), to the extent that the bank has lia
bilities booked in that currency
4. Gold bullion held in the bank’s vaults or in
another’s vaults on an allocated basis, to the
extent offset by gold bullion liabilities
5. Claims collateralized by cash on deposit in
the bank or by securities issued or guaranteed
by OECD central governments or U.S. gov
ernment agencies for which a positive margin
o f collateral is maintained on a daily basis,
fully taking into account any change in the
bank’s exposure to the obligor or counterparty
under a claim in relation to the market value
o f the collateral held in support of that claim

C ategory 2: 20 P ercent

1. Cash items in the process of collection
2. All claims (long- or short-term) on, and the
portions of claims (long- or short-term) that
are guaranteed by, U.S. depository institutions
and OECD banks
3. Short-term claims (remaining maturity of
one year or less) on, and the portions o f

/o ff?

Regulation H, Appendix A

short-term claims that are guaranteed by, nonOECD banks
4. The portions o f claims that are condition
ally guaranteed by the central governments of
OECD countries and U.S. government agen
cies, and the portions o f local currency claims
that are conditionally guaranteed by the cen
tral governments of non-OECD countries, to
the extent that the bank has liabilities booked
in that currency
5. Claims on, and the portions o f claims that
are guaranteed by, U.S. government-sponsored
agencies12
6. General obligation claims on, and the por
tions o f claims that are guaranteed by the full
faith and credit of, local governments and po
litical subdivisions o f the U.S. and other
OECD local governments
7. Claims on, and the portions of claims that
are guaranteed by, official multilateral lending
institutions or regional development banks
8. The portions of claims that are collateral
ized3 by cash on deposit in the bank or by
securities issued or guaranteed by the U.S.
Treasury, the central governments o f other
OECD countries, and U.S. government agen
cies that do not qualify for the zero percent
risk-weight category, or that are collateralized
by securities issued or guaranteed by U.S.
government-sponsored agencies
9. The portions o f claims that are collateral
ized3 by securities issued by official multilat
eral lending institutions or regional develop
ment banks
10. Certain privately issued securities repre
senting indirect ownership of mortgage-backed
U .S. government agency or U .S. govern
ment-sponsored agency securities
11. Investments in shares o f a fund whose
portfolio is permitted to hold only securities

2For the purpose of calculating the risk-based capital ra
tio, a U.S. government-sponsored agency is defined as an
1 For the purpose of calculating the risk-based capital ra agency originally established or chartered to serve public
purposes specified by the U.S. Congress but whose obliga
tio, a U.S. government agency is defined as an instrumen
tions are not explicitly guaranteed by the full faith and
tality of the U.S. government whose obligations are fully
credit of the U.S. government.
and explicitly guaranteed as to the timely payment of prin
3The extent of collateralization is determined by current
cipal and interest by the full faith and credit of the U.S.
market value.
government.

Regulation H, Appendix A
that would qualify for the zero or 20 percent
risk categories

Capital Adequacy Guidelines
2. Claims on, or guaranteed by, non-OECD
foreign banks with a remaining maturity ex
ceeding one year

Category 3: 50 Percent
1. Loans fully secured by first liens on oneto four-family residential properties or on
multifamily residential properties that have
been made in accordance with prudent under
writing standards, that are performing in ac
cordance with their original terms, that are not
past due or in nonaccrual status, and that meet
other qualifying criteria, and certain privately
issued mortgage-backed securities representing
indirect ownership o f such loans. (Loans made
for speculative purposes are excluded.)
2. Revenue bonds or similar claims that are
obligations o f U.S. state or local governments,
or other OECD local governments, but for
which the government entity is committed to
repay the debt only out of revenues from the
facilities financed
3. Credit-equivalent amounts o f interest rateand foreign exchange rate-related contracts,
except for those assigned to a lower risk
category

Category 4: 100 Percent
1. All other claims on private obligors

3. Claims on, or guaranteed by, non-OECD
central governments that are not included in
item 3 o f category 1 or item 4 o f category 2;
all claim s on non-OECD state or local
governments
4. Obligations issued by U.S. state or local
governments, or other OECD local govern
ments (including industrial-development au
thorities and similar entities), repayable solely
by a private party or enterprise
5. Premises, plant, and equipment; other fixed
assets; and other real estate owned
6. Investments in any unconsolidated subsidi
aries, joint ventures, or associated compa
nies— if not deducted from capital
7. Instruments issued by other banking orga
nizations that qualify as capital— if not de
ducted from capital
8. Claims on commercial firms owned by a
government
9. All other assets, including any intangible
assets that are not deducted from capital

4 / /o¥/9

Capital Adequacy Guidelines

Regulation H, Appendix A

Attachment IV— Credit-Conversion
Factors for Off-Balance-Sheet Items for
State Member Banks

contingencies, including commercial letters of
credit

100 Percent Conversion Factor
Zero Percent Conversion Factor
1. Direct credit substitutes (These
general guarantees o f indebtedness
guarantee-type instruments, including
letters o f credit backing the financial
tions o f other parties.)

include
and all
standby
obliga

2. Risk participations in banker’s acceptances
and direct credit substitutes, such as standby
letters o f credit
3. Sale and repurchase agreements and assets
sold with recourse that are not included on the
balance sheet
4. Forward agreements to purchase assets, in
cluding financing fa c ilitie s, on w hich
drawdown is certain

5. Securities lent for which the bank is at risk
50 Percent Conversion Factor
1. Transaction-related contingencies (These
include bid bonds, performance bonds, war
ranties, and standby letters o f credit backing
the nonfinancial performance o f other parties.)
2. Unused portions o f commitments with an
original maturity1 exceeding one year, includ
ing underwriting commitments and commer
cial credit lines
3. Revolving underwriting facilities (RUFs),
note-issuance facilities (NIFs), and similar
arrangements

20 Percent Conversion Factor
1. Short-term, self-liquidating, trade-related
' Remaining maturity may be used until year-end 1992.

Credit Conversion for Interest-Rate and
Foreign-Exchange Contracts
The total replacement cost o f contracts (ob
tained by summing the positive mark-to-mar
ket values of contracts) is added to a measure
of future potential increases in credit expo
sure. This future potential exposure measure is
calculated by multiplying the total notional
value o f contracts by one o f the following
credit-conversion factors, as appropriate:
Remaining
maturity

One year or less
Over one year

Interest-rate
contracts

Exchange-rate
contracts

1. 0%

0.5%

5.0%

No potential exposure is calculated for sin
gle-currency interest-rate swaps in which pay
ments are made based upon two floating rate
indices, that is, so-called floating/floating or
basis swaps. The credit exposure on these
contracts is evaluated solely on the basis of
their mark-to-market value. Exchange-rate
contracts with an original maturity of 14 days
or less are excluded. Instruments traded on
exchanges that require daily payments o f vari
ation margin are also excluded. The only form
o f netting recognized is netting by novation.

Regulation H, Appendix A

Capital Adequacy Guidelines

Attachment V— Calculation of Credit-Equivalent Amounts

Interest Rate- and Foreign Exchange Rate-Related Transactions for State Member Banks

Potential Exposure_________+

Type o f contract
(remaining maturity)

Notional
principal
(dollars)

Potentialexposure
conversion
X fa cto r

Potential
exposure
= (dollars)

Current Exposure
Replace
ment
cost'

CreditEquivalent
Amount
= (dollars)

Current
exposure
(dollars)2

(1) 120-day forward
foreign exchange

5,000,000

.01

50,000

(2) 120-day forward
foreign exchange

6,000,000

.01

60,000

(3) 3-year single-currency
fixed/floating
10,000,000
interest-rate swap

.005

50,000

(4) 3-year single-currency
fixed/floating
10,000,000
interest-rate swap

.005

50,000

-250,000

-0-

50,000

(5) 7-year cross-currency
floating/floating
20,000,000
interest-rate swap

.05

1,000,000

-1,300,000

-0-

1,000,000

TOTAL

100,000 100,000
-120,000

-0-

60,000

200,000 200,000

250,000

$51,000,000

$1,510,000

1These numbers are purely for illustration.
2The larger of zero or a positive mark-to-market value.

150,000

id 'll)

Capital Adequacy Guidelines

Regulation H, Appendix A

A ttachm ent VI

SUMMARY OF:
Transitional Arrangements
f o r State M ember Banks
Initial

1. Minimum standard of
total capital to
weighted-risk assets None
2. Definition of tier 1
capital
Common equity,
qualifying
noncumulative perpetual
preferred stock, minority
interests, plus
supplementary elements1
less goodwill
3. Minimum standard of
tier 1 capital to
weighted-risk assets None
4. Minimum standard of
stockholders’ equity
to weighted-risk
assets
None
5. Limitations on
supplementary capital
elements
a. Allowance for loan
and lease losses
No limit within tier 2
b. Qualifying
perpetual preferred
stock
No limit within tier 2
c. Hybrid capital
instruments and
equity contract
No limit within tier 2
notes
d. Subordinated debt
and intermediateterm preferred
stock
Combined maximum of
50% of tier 1
e. Total qualifying
tier 2 capital
May not exceed tier 1
capital
6. Definition of total
Tier 1 plus tier 2 less:
capital
• reciprocal holdings of
banking organizations’
capital instruments
• investments in
unconsolidated
subsidiaries
1Supplementary elements may be included in tier 1 up
to 25% of the sum of tier 1 plus goodwill.
2Supplementary elements may be included in tier 1 up
to 10% of the sum of tier 1 plus goodwill.

Final Arrangement
Year-end 1990

Year-end 1992

7.25%

8.0%

Common equity,
qualifying
noncumulative perpetual
preferred stock, minority
interests, plus
supplementary elements2
less goodwill

Common equity,
qualifying
noncumulative perpetual
preferred stock, and
minority interest less
goodwill and other
intangible assets
required to be deducted
from capital3

3.625%

4.0%

3.25%

4.0%

1.5% of weighted-risk
assets

1.25% of weighted-risk
assets

No limit within tier 2

Combined maximum of
50% of tier 1

May not exceed tier 1
capital

Tier 1 plus tier 2 less: Tier 1 plus tier 2 less:
• reciprocal holdings of • reciprocal holdings of
banking organizations’ banking organizations’
capital instruments
capital instruments
• investments in
• investments in
unconsolidated
unconsolidated
subsidiaries
subsidiaries
3 Requirements for the deduction of other intangible
assets are set forth in section II.B.l.b of this appendix.

fk 16711

Capital Adequacy Guidelines for State Member Banks:
Tier 1 Leverage Measure
Regulation H (12 CFR 208), Appendix B; as amended effective March 9, 1993

I. Overview
The Board of Governors of the Federal Re
serve System has adopted a minimum ratio of
tier 1 capital to total assets to assist in the
assessment o f the capital adequacy of state
member banks.1 The principal objective o f this
measure is to place a constraint on the maxi
mum degree to which a state member bank
can leverage its equity capital base. It is in
tended to be used as a supplement to the riskbased capital measure.
The guidelines apply to all state member
banks on a consolidated basis and are to be
used in the examination and supervisory pro
cess as well as in the analysis o f applications
acted upon by the Federal Reserve. The Board
will review the guidelines from time to time
and will consider the need for possible adjust
ments in light o f any significant changes in
the economy, financial markets, and banking
practices.

II. The Tier 1 Leverage Ratio
The Board has established a minimum level of
tier 1 capital to total assets o f 3 percent. An
institution operating at or near these levels is
expected to have well-diversified risk, includ
ing no undue interest-rate risk exposure; ex
cellent asset quality; high liquidity; and good
earnings; and in general be considered a
strong banking organization, rated composite 1
under the CAMEL rating system o f banks. In
stitutions not meeting these characteristics, as
well as institutions with supervisory, financial,
or operational weaknesses, are expected to op
erate well above minimum capital standards.
Institutions experiencing or anticipating signif
icant growth also are expected to maintain
capital ratios, including tangible capital posi
tions, well above the minimum levels. For ex
ample, most such banks generally have oper
ated at capital levels ranging from 100 to 200
basis points above the stated minimums.
Higher capital ratios could be required if war

ranted by the particular circumstances or risk
profiles of individual banks. Thus, for all but
the most highly rated banks meeting the con
ditions set forth above, the minimum tier 1
leverage ratio is to be 3 percent plus an addi
tional cushion o f at least 100 to 200 basis
points. In all cases, banking institutions should
hold capital commensurate with the level and
nature o f all risks, including the volume and
severity of problem loans, to which they are
exposed.
A bank’s tier 1 leverage ratio is calculated
by dividing its tier 1 capital (the numerator of
the ratio) by its average total consolidated as
sets (the denominator o f the ratio). The ratio
will also be calculated using period-end assets
whenever necessary, on a case-by-case basis.
For the purpose of this leverage ratio, the def
inition o f tier 1 capital for year-end 1992 as
set forth in the risk-based capital guidelines
contained in appendix A of this part will be
used.2 As a general matter, average total con
solidated assets are defined as the quarterly
average total assets (defined net of the allow
ance for loan and lease losses) reported on the
bank’s Reports o f Condition and Income (call
report), less goodwill; amounts of purchased
m ortgage-servicing rights and purchased
credit-card relationships that, in the aggregate,
are in excess o f 50 percent of tier 1 capital;
amounts o f purchased credit-card relationships
in excess o f 25 percent o f tier 1 capital; all
other intangible assets; and any investments in
subsidiaries or associated companies that the
Federal Reserve determines should be de
ducted from tier 1 capital.3

2At the end of 1992, tier 1 capital for state member
banks includes common equity, minority interest in equity
accounts of consolidated subsidiaries, and qualifying
noncumulative perpetual preferred stock. In addition, as a
general matter, tier 1 capital excludes goodwill; amounts of
purchased mortgage-servicing rights and purchased creditcard relationships that, in the aggregate, exceed 50 percent
of tier 1 capital; amounts of purchased credit-card relation
ships that exceed 25 percent of tier 1 capital; and all other
intangible assets. The Federal Reserve may exclude certain
investments in subsidiaries or associated companies as
appropriate.
3Deductions from tier 1 capital and other adjustments are
1 Supervisory risk-based capital ratios that relate capital
discussed more fully in section II.B. of appendix A to Reg
to weighted-risk assets for state member banks are outlined
in appendix A to Regulation H (page 1).
ulation H (page 1).
29

/-? / W

Regulation H, Appendix B
Whenever appropriate, including when a
bank is undertaking expansion, seeking to en
gage in new activities or otherwise facing un
usual or abnormal risks, the Board will con
tinue to consider the level o f an individual
bank’s tangible tier 1 leverage ratio (after de
ducting all intangibles) in making an overall
assessment o f capital adequacy. This is con
sistent with the Federal Reserve’s risk-based

Capital Adequacy Guidelines
capital guidelines and long-standing Board
policy and practice with regard to leverage
g u id elin es. Banks exp erien cin g grow th,
whether internally or by acquisition, are ex
pected to maintain strong capital positions
substantially above minimum supervisory
levels, without significant reliance on intangi
ble assets.

io ll9

Capital Adequacy Guidelines for Bank Holding Companies:
Risk-Based Measure
Regulation Y (12 CFR 225), Appendix A; as amended effective December 31, 1993

I. Overview
The Board o f Governors o f the Federal Re
serve System has adopted a risk-based capital
measure to assist in the assessment o f the cap
ital adequacy o f bank holding companies
( “ banking organizations” ) .1 The principal
objectives of this measure are to (i) make reg
ulatory capital requirements more sensitive to
differences in risk profiles among banking or
ganizations; (ii) factor off-balance-sheet expo
sures into the assessment o f capital adequacy;
(iii) minimize disincentives to holding liquid,
low-risk assets; and (iv) achieve greater con
sistency in the evaluation of the capital ade
quacy o f major banking organizations
throughout the world.12
The risk-based capital guidelines include
both a definition o f capital and a framework
for calculating weighted-risk assets by as
signing assets and off-balance-sheet items to
broad risk categories. An institution’s riskbased capital ratio is calculated by dividing its
qualifying capital (the numerator of the ratio)
by its weighted-risk assets (the denominator).3
The definition o f “qualifying capital” is out
lined below in section II, and the procedures
for calculating weighted-risk assets are dis
cussed in section III. Attachment I illustrates a
sample calculation o f weighted-risk assets and
the risk-based capital ratio.
The risk-based capital guidelines also estab
lish a schedule for achieving a minimum su
pervisory standard for the ratio o f qualifying
1Supervisory ratios that relate capital to total assets for
bank holding companies are outlined in appendixes B and
D of Regulation Y (pages 59 and 67).
2The risk-based capital measure is based upon a frame
work developed jointly by supervisory authorities from the
countries represented on the Basle Committee on Banking
Regulations and Supervisory Practices (Basle Supervisors’
Committee) and endorsed by the Group of Ten Central
Bank Governors. The framework is described in a paper
prepared by the BSC entitled “International Convergence of
Capital Measurement,” July 1988.
3Banking organizations will initially be expected to uti
lize period-end amounts in calculating their risk-based capi
tal ratios. When necessary and appropriate, ratios based on
average balances may also be calculated on a case-by-case
basis. Moreover, to the extent banking organizations have
data on average balances that can be used to calculate riskbased ratios, the Federal Reserve will take such data into
account.

capital to weighted-risk assets and provide for
transitional arrangements during a phase-in
period to facilitate adoption and implementa
tion o f the measure at the end o f 1992. These
interim standards and transitional arrange
ments are set forth in section IV.
The risk-based guidelines apply on a con
solidated basis to bank holding companies
with consolidated assets o f $150 million or
more. For bank holding companies with less
than $150 million in consolidated assets, the
guidelines will be applied on a bank-only ba
sis unless (a) the parent bank holding com
pany is engaged in nonbank activity involving
significant leverage;4 or (b) the parent com
pany has a significant amount o f outstanding
debt that is held by the general public.
The risk-based guidelines are to be used in
the inspection and supervisory process as well
as in the analysis o f applications acted upon
by the Federal Reserve. Thus, in considering
an application filed by a bank holding com
pany, the Federal Reserve will take into ac
count the organization’s risk-based capital ra
tio, the reasonableness o f its capital plans, and
the degree of progress it has demonstrated to
ward meeting the interim and final risk-based
capital standards.
The risk-based capital ratio focuses princi
pally on broad categories o f credit risk, al
though the framework for assigning assets and
off-balance-sheet items to risk categories does
incorporate elements o f transfer risk, as well
as limited instances o f interest-rate and market
risk. The risk-based ratio does not, however,
incorporate other factors that can affect an or
ganization’s financial condition. These factors
include overall interest-rate exposure; liquid
ity, funding, and market risks; the quality and
level o f earnings; investment or loan portfolio
concentrations; the quality o f loans and invest
ments; the effectiveness o f loan and invest
ment policies; and management’s ability to
monitor and control financial and operating
risks.
4
A parent company that is engaged in significant offbalance-sheet activities would generally be deemed to be
engaged in activities that involve significant leverage.

/ 0‘Y/)9

Regulation Y, Appendix A
In addition to evaluating capital ratios, an
overall assessment of capital adequacy must
take account o f these other factors, including,
in particular, the level and severity o f problem
and classified assets. For this reason, the final
supervisory judgment on an organization’s
capital adequacy may differ significantly from
conclusions that might be drawn solely from
the level of the organization’s risk-based capi
tal ratio.
The risk-based capital guidelines establish
m in im u m ratios of capital to weighted-risk as
sets. In light of the considerations just dis
cussed, banking organizations generally are
expected to operate well above the minimum
risk-based ratios. In particular, banking orga
nizations contemplating significant expansion
proposals are expected to maintain strong cap
ital levels substantially above the minimum
ratios and should not allow significant diminu
tion of financial strength below these strong
levels to fund their expansion plans. Institu
tions with high or inordinate levels o f risk are
also expected to operate above minimum capi
tal standards. In all cases, institutions should
hold capital commensurate with the level and
nature of the risks to which they are exposed.
Banking organizations that do not meet the
minimum risk-based standard, or that are oth
erwise considered to be inadequately capital
ized, are expected to develop and implement
plans acceptable to the Federal Reserve for
achieving adequate levels o f capital within a
reasonable period o f time.
The Board will monitor the implementation
and effect of these guidelines in relation to
domestic and international developments in
the banking industry. When necessary and ap
propriate, the Board will consider the need to
modify the guidelines in light of any signifi
cant changes in the economy, financial mar
kets, banking practices, or other relevant
factors.I.

II. Definition of Qualifying Capital for
the Risk-Based Capital Ratio
An institution’s qualifying total capital con
sists o f two types o f capital components:
“ core capital elem ents” (comprising tier 1
capital) and “supplementary capital elements”
(comprising tier 2 capital). These capital ele
ments and the various limits, restrictions, and

Capital Adequacy Guidelines
deductions to which they are subject, are dis
cussed below and are set forth in attachment
II.
To qualify as an element o f tier 1 or tier 2
capital, a capital instrument may not contain
or be covered by any covenants, terms, or re
strictions that are inconsistent with safe and
sound banking practices.
Redemptions o f permanent equity or other
capital instruments before stated maturity
could have a significant impact on an organi
zation’s overall capital structure. C onse
quently, an organization considering such a
step should consult with the Federal Reserve
before redeeming any equity or debt capital
instrument (prior to maturity) if such redemp
tion could have a material effect on the level
or composition o f the organization’s capital
base.5
A. The C o m p o n en ts o f Q u a lify in g C a p ita l

1. C o re c a p ita l e lem en ts ( tie r 1 c a p ita l). The
tier 1 component o f an institution’s qualifying
capital must represent at least 50 percent of
qualifying total capital and may consist of the
following items that are defined as core capi
tal elements:
i. common stockholders’ equity
ii. qualifying noncumulative perpetual pre
ferred stock (including related surplus)
iii. minority interest in the equity accounts of
consolidated subsidiaries, subject to cer
tain limitations described below
iv. minority interest in the equity accounts o f
consolidated subsidiaries
Tier 1 capital is generally defined as the
sum of the core capital elements6 less good
will and other intangible assets required to be
deducted in accordance with section II.B.l.b.
of this appendix.
a. C o m m on sto c k h o ld e r s ’ eq u ity. Common
stockholders’ equity includes: comm on
5Consultation would not ordinarily be necessary if an
instrument were redeemed with the proceeds of, or replaced
by, a like amount of a similar or higher-quality capital in
strument and the organization’s capital position is consid
ered fully adequate by the Federal Reserve. In the case of
limited-life tier 2 instruments, consultation would generally
be obviated if the new security is of equal or greater matur
ity than the one it replaces.
6 During the transition period and subject to certain limi
tations set forth in section IV below, tier 1 capital may also
include items defined as supplementary capital elements.

ttt

Capital Adequacy Guidelines
stock; related surplus; and retained earnings,
including capital reserves and adjustments
for the cumulative effect o f foreign cur
rency translation, net o f any treasury stock,
b. Perpetual preferred stock. Perpetual pre
ferred stock is defined as preferred stock
that does not have a maturity date, that can
not be redeemed at the option o f the holder
o f the instrument, and that has no other
provisions that will require future redemp
tion o f the issue. Consistent with these pro
visions, any perpetual preferred stock with
a feature permitting redemption at the op
tion o f the issuer may qualify as capital
only if the redemption is subject to prior
approval of the Federal Reserve. In general,
preferred stock will qualify for inclusion in
capital only if it can absorb losses while the
issuer operates as a going concern (a funda
mental characteristic o f equity capital) and
only if the issuer has the ability and legal
right to defer or elim in ate preferred
dividends.
Perpetual preferred stock in which the
dividend is reset periodically based, in
whole or in part, upon the banking organi
zation’s current credit standing (that is, auc
tion rate perpetual preferred stock, including
so-called Dutch auction, money market, and
remarketable preferred) will not qualify for
inclusion in tier 1 capital.7 Such instru
ments, however, qualify for inclusion in tier
2 capital.
For bank holding companies, both cumu
lative and noncumulative perpetual pre
ferred stock qualify for inclusion in tier 1.
However, the aggregate amount o f cumula
tive perpetual preferred stock that may be
included in a holding company’s tier 1 is
limited to one-third of the sum of core cap
ital elements, excluding the perpetual pre
ferred stock (that is, items i, ii, and iv
above). Stated differently, the aggregate
amount may not exceed 25 percent o f the
sum o f all core capital elements, including
cumulative perpetual preferred stock (that

Regulation Y, Appendix A
is, items i, ii, iii and iv above). Any cumu
lative perpetual preferred stock outstanding
in excess o f this limit may be included in
tier 2 capital without any sublimits within
that tier (see discussion below).
While the guidelines allow for the inclu
sion of noncumulative perpetual preferred
stock and limited amounts o f cumulative
perpetual preferred stock in tier 1, it is de
sirable from a supervisory standpoint that
voting common equity remain the dominant
form o f tier 1 capital. Thus, bank holding
companies should avoid overreliance on
preferred stock or nonvoting equity ele
ments within tier 1.
c. Minority interest in equity accounts of
consolidated subsidiaries. This element is
included in tier 1 because, as a general rule,
it represents equity that is freely available
to absorb losses in operating subsidiaries.
While not subject to an explicit sublimit
within tier 1, banking organizations are ex
pected to avoid using minority interest in
the equity accounts of consolidated subsidi
aries as an avenue for introducing into their
capital structures elements that might not
otherwise qualify as tier 1 capital or that
would, in effect, result in an excessive reli
ance on preferred stock within tier 1.
2. Supplementary capital elements (tier 2 cap
ital). The tier 2 component o f an institution’s
qualifying total capital may consist o f the fol
lowing items that are defined as supplemen
tary capital elements:
i. Allowance for loan and lease losses (sub
ject to limitations discussed below)
ii. Perpetual preferred stock and related sur
plus (subject to conditions discussed
below)
iii. Hybrid capital instruments (as defined be
low), perpetual debt, and mandatory con
vertible debt securities
iv. Term subordinated debt and intermediateterm preferred stock, including related sur
plus (subject to lim itations discussed
below)

7
Adjustable-rate perpetual preferred stock (that is, per
petual preferred stock in which the dividend rate is not
The maximum amount of tier 2 capital that
affected by the issuer’s credit standing or financial condi
tion but is adjusted periodically according to a formula
may be included in an organization’s qualify
based solely on general market interest rates) may be in
ing total capital is limited to 100 percent of
cluded in tier 1 up to the limits specified for perpetual
preferred stock.
tier 1 capital (net o f goodwill and other intan-

V .'

/H m /f

Regulation Y, Appendix A
gible assets required to be deducted in accor
dance with section II.B.l.b. o f this appendix).
The elements of supplementary capital are
discussed in greater detail below.8
a. Allowance for loan and lease losses. A l
lowances for loan and lease losses are
reserves that have been established through
a charge against earnings to absorb future
losses on loans or lease-financing receiv
ables. Allowances for loan and lease losses
exclude “allocated transfer risk reserves,”9
and reserves created against identified
losses.
During the transition period, the riskbased capital guidelines provide for reduc
ing the amount of this allowance that may
be included in an institution’s total capital.
Initially, it is unlimited. However, by yearend 1990, the amount o f the allowance for
loan and lease losses that will qualify as
capital will be limited to 1.5 percent o f an
institution’s weighted-risk assets. By the
end o f the transition period, the amount of
the allowance qualifying for inclusion in
tier 2 capital may not exceed 1.25 percent
of weighted-risk assets.10*1
b. Perpetual preferred stock. Perpetual pre
8 The Basle capital framework also provides for the in
clusion of “undisclosed reserves” in tier 2. As defined in
the framework, undisclosed reserves represent accumulated
after-tax retained earnings that are not disclosed on the bal
ance sheet of a banking organization. Apart from the fact
that these reserves are not disclosed publicly, they are es
sentially of the same quality and character as retained earn
ings, and, to be included in capital, such reserves must be
accepted by the banking organization’s home supervisor.
Although such undisclosed reserves are common in some
countries, under generally accepted accounting principles
(GAAP) and long-standing supervisory practice, these types
of reserves are not recognized for banking organizations in
the United States. Foreign banking organizations seeking to
make acquisitions or conduct business in the United States
would generally be expected to disclose publicly at least
the degree of reliance on such reserves in meeting supervi
sory capital requirements.
’ Allocated transfer risk reserves are reserves that have
been established in accordance with section 905(a) of the
International Lending Supervision Act of 1983, 12 USC
3904(a), against certain assets whose value U.S. supervi
sory authorities have found to be significantly impaired by
protracted transfer risk problems.
10 The amount of the allowance for loan and lease losses
that may be included in tier 2 capital is based on a percent
age of gross weighted-risk assets. A banking organization
may deduct reserves for loan and lease losses in excess of
the amount permitted to be included in tier 2 capital, as
well as allocated transfer risk reserves, from the sum of
gross weighted-risk assets and use the resulting net sum of
weighted-risk assets in computing the denominator of the
risk-based capital ratio.
34

Capital Adequacy Guidelines
ferred stock, as noted above, is defined as
preferred stock that has no maturity date,
that cannot be redeemed at the option of
the holder, and that has no other provisions
that will require future redemption o f the
issue. Such instruments are eligible for in
clusion in tier 2 capital without limit."
c. Hybrid capital instruments, perpetual

debt, and mandatory convertible debt secur
ities. Hybrid capital instruments include in
struments that are essentially permanent in
nature and that have certain characteristics
o f both equity and debt. Such instruments
may be included in tier 2 without limit. The
general criteria hybrid capital instruments
must meet in order to qualify for inclusion
in tier 2 capital are listed below:
1. The instrument must be unsecured; fully
paid up; and subordinated to general
creditors. If issued by a bank, it must
also be subordinated to claim s o f
depositors.
2. The instrument must not be redeemable
at the option o f the holder prior to ma
turity, except with the prior approval of
the Federal Reserve. (Consistent with the
Board’s criteria for perpetual debt and
mandatory convertible securities, this re
quirement implies that holders o f such
instruments may not accelerate the pay
ment o f principal except in the event
of
bankruptcy,
in so lv e n c y ,
or
reorganization.)
3. The instrument must be available to par
ticipate in losses while the issuer is op
erating as a goin g concern. (Term
subordinated debt would not meet this
requirement.) To satisfy this requirement,
the instrument must convert to common
or perpetual preferred stock in the event
that the accumulated losses exceed the
sum of the retained earnings and capital
surplus accounts o f the issuer.
4. The instrument must provide the option
11 Long-term preferred stock with an original maturity of
20 years or more (including related surplus) will also qual
ify in this category as an element of tier 2. If the holder of
such an instrument has a right to require the issuer to re
deem, repay, or repurchase the instrument prior to the orig
inal stated maturity, maturity would be defined, for riskbased capital purposes, as the earliest possible date on
which the holder can put the instrument back to the issuing
banking oiganization.

to m

Capital Adequacy Guidelines

for the issuer to defer interest payments
if (a) the issuer does not report a profit
in the preceding annual period (defined
as combined profits for the most recent
four quarters) and (b) the issuer elimi
nates cash dividends on common and
preferred stock.
Perpetual debt and mandatory convertible
debt securities that meet the criteria set
forth in 12 CFR 225, appendix B (page 59),
also qualify as unlimited elements of tier 2
capital for bank holding companies,
d. Subordinated debt and intermediate-term
preferred stock. The aggregate amount of
term subordinated debt (excluding
mandatory convertible debt) and intermedi
ate-term preferred stock that may be treated
as supplementary capital is limited to 50
percent of tier 1 capital (net of goodwill
and other intangible assets required to be
deducted in accordance with section
II.B.l.b. of this appendix). Amounts in ex
cess of these limits may be issued and,
while not included in the ratio calculation,
will be taken into account in the overall as
sessment of an organization’s funding and
financial condition.
Subordinated debt and intermediate-term
preferred stock must have an original
weighted average maturity of at least five
years to qualify as supplementary capital.12
(If the holder has the option to require the
issuer to redeem, repay, or repurchase the
instrument prior to the original stated ma
turity, maturity would be defined, for riskbased capital purposes, as the earliest possi
ble date on which the holder can put the
instrument back to the issuing banking
organization.)
In the case of subordinated debt, the in
strument must be unsecured and must
clearly state on its face that it is not a de
posit and is not insured by a federal
agency. Bank holding company debt must

Regulation Y, Appendix A

be subordinated in right of payment to all
senior indebtedness of the company.
e. Discount of supplementary capital instru
ments. As a limited-life capital instrument
approaches maturity it begins to take on
characteristics of a short-term obligation.
For this reason, the outstanding amount of
term subordinated debt and any long- or in
termediate-life, or term, preferred stock eli
gible for inclusion in tier 2 is reduced, or
discounted, as these instruments approach
maturity: one-fifth of the original amount,
less any redemptions, is excluded each year
during the instrument’s last five years
before maturity.13
f. Revaluation reserves. Such reserves re
flect the formal balance-sheet restatement or
revaluation for capital purposes of asset car
rying values to reflect current market val
ues. In the United States, banking organiza
tions, for the most part, follow GAAP when
preparing their financial statements, and
GAAP generally does not permit the use of
market-value accounting. For this and other
reasons, the federal banking agencies gener
ally have not included unrealized asset val
ues in capital-ratio calculations, although
they have long taken such values into ac
count as a separate factor in assessing the
overall financial strength of a banking
organization.
Consistent with long-standing supervisory
practice, the excess of market values over
book values for assets held by bank holding
companies will generally not be recognized
in supplementary capital or in the calcula
tion of the risk-based capital ratio. How
ever, all banking organizations are en
couraged to disclose their equivalent of
premises (building) and equity revaluation
reserves. Such values will be taken into ac
count as additional considerations in assess-

13 For example, outstanding amounts of these instruments
that count as supplementary capital include 100 percent of
the outstanding amounts with remaining maturities of more
than five years; 80 percent of outstanding amounts with
remaining maturities of four to five years; 60 percent of
12
Unsecured term debt issued by bank holding compaoutstanding amounts with remaining maturities of three to
nies prior to March 12, 1988, and qualifying as secondary
four years; 40 percent of outstanding amounts with remain
capital at the time o f issuance would continue to qualify as
ing maturities of two to three years; 20 percent of outstand
an element of supplementary capital under the risk-based
ing amounts with remaining maturities of one to two years;
framework, subject to the 50 percent of tier 1 capital limi
and 0 percent of outstanding amounts with remaining matu
rities of less than one year. Such instruments with a re
tation. Bank holding company term debt issued on or after
maining maturity of less than one year are excluded from
March 12, 1988, must be subordinated in order to qualify
as capital.
tier 2 capital.

rtt tof/9

Capital Adequacy Guidelines

Regulation Y, Appendix A

ing overall capital strength and financial
condition.

B. Deductions from Capital and Other
Adjustments
Certain assets are deducted from an organiza
tion’s capital for the purpose of calculating
the risk-based capital ratio.14 These assets
include—
i. a. Goodwill—deducted from the sum of
core capital elements
b. Certain identifiable intangible assets,
that is, intangible assets other than
goodwill—deducted from the sum of
core capital elements in accordance with
section II.B.l.b. of this appendix.
ii. investments in banking and finance subsid
iaries that are not consolidated for ac
counting or supervisory purposes, and
investments in other designated subsidiar
ies or associated companies at the discre
tion of the Federal Reserve—deducted
from total capital components (as de
scribed in greater detail below)
iii. reciprocal holdings of capital instruments
of banking organizations—deducted from
total capital components
1. Goodwill and other intangible assets.
a. Goodwill. Goodwill is an intangible asset
that represents the excess of the purchase
price over the fair market value of identifi
able assets acquired less liabilities assumed
in acquisitions accounted for under the
purchase method of accounting. Any good
will carried on the balance sheet of a bank
holding company after December 31, 1992,
will be deducted from the sum of core capi
tal elements in determining tier 1 capital for
ratio-calculation purposes. Any goodwill in
existence before March 12, 1988, is
grandfathered during the transition period
and is not deducted from core capital ele
ments until after December 31, 1992. How
ever, bank holding company goodwill ac
quired as a result of a merger or acquisition
that was consummated on or after March
12, 1988, is deducted immediately.

b. Other intangible assets. The only types
of identifiable intangible assets that may be
included in, that is, not deducted from, an
organization’s capital are readily marketable
purchased mortgage-servicing rights and
purchased credit-card relationships, pro
vided that, in the aggregate, the total
amount of these assets included in capital
does not exceed 50 percent of tier 1 capital.
Purchased credit-card relationships are sub
ject to a separate sublimit of 25 percent of
tier 1 capital.15
For purposes of calculating these limita
tions on purchased mortgage-servicing
rights and purchased credit-card relation
ships, tier 1 capital is defined as the sum of
core capital elements, net of goodwill and
all identifiable intangible assets other than
purchased mortgage-servicing rights and
purchased credit-card relationships, regard
less of the date acquired. This method of
calculation could result in purchased mort
gage-servicing rights and purchased creditcard relationships being included in capital
in an amount greater than 50 percent—or in
purchased credit-card relationships being in
cluded in an amount greater than 25 per
cent—of the amount of tier 1 capital used
to calculate an institution’s capital ratios. In
such instances, the Federal Reserve may de
termine that an organization is operating in
an unsafe and unsound manner because of
overreliance on intangible assets in tier 1
capital.
Bank holding companies must review the
book value of all intangible assets at least
quarterly and make adjustments to these
values as necessary. The fair market value
of purchased mortgage-servicing rights and
purchased credit-card relationships also
must be determined at least quarterly. The
fair market value generally shall be deter
mined by applying an appropriate market

15
Amounts of purchased mortgage-servicing rights and
purchased credit-card relationships in excess of these limi
tations, as well as all other identifiable intangible assets,
including core deposit intangibles and favorable leaseholds,
are to be deducted from an organization’s core capital ele
ments in determining tier 1 capital. However, identifiable
intangible assets (other than purchased mortgage-servicing
rights and purchased credit-card relationships) acquired on
14 Any assets deducted from capital in computing the nu or before February 19, 1992, generally will not be deducted
from capital for supervisory purposes, although they will
merator of the ratio are not included in weighted-risk assets
continue to be deducted for applications purposes.
in computing the denominator of the ratio.

( 9

Capital Adequacy Guidelines

discount rate to the expected future net cash
flows. This determination shall include ad
justments for any significant changes in
original valuation assumptions, including
changes in prepayment estimates or account
attrition rates.
Examiners will review both the book
value and the fair market value assigned to
these assets, together with supporting docu
mentation, during the inspection process. In
addition, the Federal Reserve may require,
on a case-by-case basis, an independent val
uation of an organization’s intangible assets.
The amount of purchased mortgage-ser
vicing rights and purchased credit-card rela
tionships that a bank holding company may
include in capital shall be the lesser of 90
percent of their fair market value, as deter
mined in accordance with this section, or
100 percent of their book value, as adjusted
for capital purposes in accordance with the
instructions to the Consolidated Financial
Statements for Bank Holding Companies
(FR Y-9C Report). If both the application
of the limits on purchased mortgage-servic
ing rights and purchased credit-card rela
tionships and the adjustment of the balancesheet amount for these intangibles would
result in an amount being deducted from
capital, the bank holding company would
deduct only the greater of the two amounts
from its core capital elements in determin
ing tier 1 capital.
The treatment of identifiable intangible
assets set forth in this section generally will
be used in the calculation of a bank holding
company’s capital ratios for supervisory and
applications purposes. However, in making
an overall assessment of an organization’s
capital adequacy for applications purposes,
the Board may, if it deems appropriate, take
into account the quality and composition of
an organization’s capital, together with the
quality and value of its tangible and intan
gible assets.
2. Investments in certain subsidiaries.
a. Unconsolidated banking or finance sub
sidiaries. The aggregate amount of invest
ments in banking or finance subsidiaries16
16 For this purpose, a banking and finance subsidiary gen
erally is defined as any company engaged in banking or
finance in which the parent institution holds directly or in
directly more than 50 percent of the outstanding voting
stock, or which is otherwise controlled or capable o f being
controlled by the parent institution.

Regulation Y, Appendix A

whose financial statements are not consoli
dated for accounting or regulatory-reporting
purposes, regardless of whether the invest
ment is made by the parent bank holding
company or its direct or indirect subsidiar
ies, will be deducted from the consolidated
parent banking organization’s total capital
components.17 Generally, investments for
this purpose are defined as equity and debt
capital investments and any other instru
ments that are deemed to be capital in the
particular subsidiary.
Advances (that is, loans, extensions of
credit, guarantees, commitments, or any
other forms of credit exposure) to the sub
sidiary that are not deemed to be capital
will generally not be deducted from an or
ganization’s capital. Rather, such advances
generally will be included in the parent
banking organization’s consolidated assets
and be assigned to the 100 percent risk cat
egory, unless such obligations are backed
by recognized collateral or guarantees, in
which case they will be assigned to the risk
category appropriate to such collateral or
guarantees. These advances may, however,
also be deducted from the consolidated par
ent banking organization’s capital if, in the
judgment of the Federal'Reserve, the risks
stemming from such advances are compara
ble to the risks associated with capital in
vestments or if the advances involve other
risk factors that warrant such an adjustment
to capital for supervisory purposes. These
other factors could include, for example, the
absence of collateral support.
Inasmuch as the assets of unconsolidated
banking and finance subsidiaries are not
fully reflected in a banking organization’s
consolidated total assets, such assets may
be viewed as the equivalent of off-balancesheet exposures since the operations of an
unconsolidated subsidiary could expose the
parent organization and its affiliates to con
siderable risk. For this reason, it is gener
ally appropriate to view the capital re
sources invested in these unconsolidated
17
An exception to this deduction would be made in the
case of shares acquired in the regular course of securing or
collecting a debt previously contracted in good faith. The
requirements for consolidation are spelled out in the in
structions to the FR Y-9C Report.

37
M

/O ft?

Regulation Y, Appendix A

entities as primarily supporting the risks in
herent in these off-balance-sheet assets, and
not generally available to support risks or
absorb losses elsewhere in the organization,
b. Other subsidiaries and investments. The
deduction of investments, regardless of
whether they are made by the parent bank
holding company or by its direct or indirect
subsidiaries, from a consolidated banking
organization’s capital will also be applied in
the case of any subsidiaries, that, while
consolidated for accounting purposes, are
not consolidated for certain specified super
visory or regulatory purposes, such as to fa
cilitate functional regulation. For this pur
pose, aggregate capital investments (that is,
the sum of any equity or debt instruments
that are deemed to be capital) in these sub
sidiaries will be deducted from the consoli
dated parent banking organization’s total
capital components.18
Advances (that is, loans, extensions of
credit, guarantees, commitments, or any
other forms of credit exposure) to such sub
sidiaries that are not deemed to be capital
will generally not be deducted from capital.
Rather, such advances will normally be in
cluded in the parent banking organization’s
consolidated assets and assigned to the 100
percent risk category, unless such obliga
tions are backed by recognized collateral or
guarantees, in which case they will be as
signed to the risk category appropriate to
such collateral or guarantees. These ad
vances may, however, be deducted from the
consolidated parent banking organization’s
capital if, in the judgment of the Federal
Reserve, the risks stemming from such ad
vances are comparable to the risks associ
ated with capital investments or if such ad
vances involve other risk factors that
18 Investments in unconsolidated subsidiaries will be de
ducted from both tier 1 and tier 2 capital. As a general
rule, one-half (50 percent) of the aggregate amount of capi
tal investments will be deducted from the bank holding
company’s tier 1 capital and one-half (50 percent) from its
tier 2 capital. However, the Federal Reserve may, on a
case-bycase basis, deduct a proportionately greater amount
from tier 1 if the risks associated with the subsidiary so
warrant. If the amount deductible from tier 2 capital ex
ceeds actual tier 2 capital, the excess would be deducted
from tier 1 capital. Bank holding companies’ risk-based
capital ratios, net of these deductions, must exceed the min
imum standards set forth in section IV.

Capital Adequacy Guidelines

warrant such an adjustment to capital for
supervisory purposes. These other factors
could include, for example, the absence of
collateral support.19
In general, when investments in a consol
idated subsidiary are deducted from a con
solidated parent banking organization’s cap
ital, the subsidiary’s assets will also be
excluded from the consolidated assets of the
parent banking organization in order to as
sess the latter’s capital adequacy.20
The Federal Reserve may also deduct
from a banking organization’s capital, on a
case-by-case basis, investments in certain
other subsidiaries in order to determine if
the consolidated banking organization meets
minimum supervisory capital requirements
without reliance on the resources invested
in such subsidiaries.
The Federal Reserve will not automati
cally deduct investments in other unconsoli
dated subsidiaries or investments in joint
ventures and associated companies.21 None
theless, the resources invested in these enti
ties, like investments in unconsolidated
banking and finance subsidiaries, support
assets not consolidated with the rest of the
banking organization’s activities and, there
fore, may not be generally available to sup
port additional leverage or absorb losses
elsewhere in the banking organization.
Moreover, experience has shown that bank
ing organizations stand behind the losses of
affiliated institutions, such as joint ventures
and associated companies, in order to pro
tect the reputation of the organization as a
whole. In some cases, this has led to losses
19 In assessing the overall capital adequacy of a banking
organization, the Federal Reserve may also consider the or
ganization’s fully consolidated capital position.
20 If the subsidiary’s assets are consolidated with the par
ent banking organization for financial-reporting purposes,
this adjustment will involve excluding the subsidiary’s as
sets on a line-by-line basis from the consolidated parent
organization’s assets. The parent banking organization’s
capital ratio will then be calculated on a consolidated basis
with the exception that the assets of the excluded subsidi
ary will not be consolidated with the remainder of the par
ent banking organization.
21 The definition of such entities is contained in the in
structions to the Consolidated Financial Statements for
Bank Holding Companies. Under regulatory-reporting pro
cedures, associated companies and joint ventures generally
are defined as companies in which the banking organization
owns 20 to 50 percent of the voting stock.

s t t

i d ^ i q

Capital Adequacy Guidelines

that have exceeded the investments in such
organizations.
For this reason, the Federal Reserve will
monitor the level and nature of such invest
ments for individual banking organizations
and may, on a case-by-case basis, deduct
such investments from total capital compo
nents, apply an appropriate risk-weighted
capital charge against the organization’s
proportionate share of the assets of its asso
ciated companies, require a line-by-line
consolidation of the entity (in the event that
the parent’s control over the entity makes it
the functional equivalent of a subsidiary),
or otherwise require the organization to op
erate with a risk-based capital ratio above
the minimum.
In considering the appropriateness of
such adjustments or actions, the Federal Re
serve will generally take into account
whether—
1. the parent banking organization has sig
nificant influence over the financial or
managerial policies or operations of the
subsidiary, joint venture, or associated
company;
2. the banking organization is the largest
investor in the affiliated company; or
3. other circumstances prevail that appear
to closely tie the activities of the affiliat
ed company to the parent banking
organization.
3. Reciprocal holdings o f banking organiza
tions’ capital instruments. Reciprocal holdings
of banking organizations’ capital instruments
(that is, instruments that qualify as tier 1 or
tier 2 capital) will be deducted from an organ
ization’s total capital components for the pur
pose of determining the numerator of the riskbased capital ratio.
Reciprocal holdings are cross-holdings re
sulting from formal or informal arrangements
in which two or more banking organizations
swap, exchange, or otherwise agree to hold
each other’s capital instruments. Generally,
deductions will be limited to intentional cross
holdings. At present, the Board does not in
tend to require banking organizations to de

Regulation Y, Appendix A

duct nonreciprocal holdings of such capital
instruments. 22> 23

III. P ro c e d u re s fo r C o m p u tin g W eig h ted R isk A sse ts a n d O ff-B a la n c e -S h e e t Item s

A. Procedures
Assets and credit-equivalent amounts of offbalance-sheet items of bank holding compa
nies are assigned to one of several broad risk
categories, according to the obligor, or, if rel
evant, the guarantor or the nature of the col
lateral. The aggregate dollar value of the
amount in each category is then multiplied by
the risk weight associated with that category.
The resulting weighted values from each of
the risk categories are added together, and this
sum is the banking organization’s total
weighted-risk assets that comprise the denomi
nator of the risk-based capital ratio. Attach
ment I provides a sample calculation.
Risk weights for all off-balance-sheet items
are determined by a two-step process. First,
the “credit equivalent amount” of off-balancesheet items is determined, in most cases, by
multiplying the off-balance-sheet item by a
credit conversion factor. Second, the creditequivalent amount is treated like any balancesheet asset and generally is assigned to the
appropriate risk category according to the ob
ligor, or, if relevant, the guarantor or the na
ture of the collateral.
In general, if a particular item qualifies for
placement in more than one risk category, it is
assigned to the category that has the lowest
risk weight. A holding of a U.S. municipal
revenue bond that is fully guaranteed by a
U.S. bank, for example, would be assigned the
20 percent risk weight appropriate to claims
guaranteed by U.S. banks, rather than the 502*
22 Deductions of holdings of capital securities also would
not be made in the case of interstate “stake out” invest
ments that comply with the Board’s policy statement on
nonvoting equity investments, 12 CFR 225.143 (Federal
Reserve Regulatory Service 4—172.1). In addition, holdings
o f capital instruments issued by other banking organizations
but taken in satisfaction of debts previously contracted
would be exempt from any deduction from capital.
13 The Board intends to monitor nonreciprocal holdings
of other banking organizations’ capital instruments and to
provide information on such holdings to the Basle Supervi
sors’ Committee as called for under the Basle capital
framework.

39
m

Regulation Y, Appendix A

percent risk weight appropriate to U.S. munic
ipal revenue bonds.24
The terms “claims” and “securities” used
in the context of the discussion of risk
weights, unless otherwise specified, refer to
loans or debt obligations of the entity on
whom the claim is held. Assets in the form of
stock or equity holdings in commercial or fi
nancial firms are assigned to the 100 percent
risk category, unless some other treatment is
explicitly permitted.
B. Collateral, Guarantees, and Other
Considerations
1. Collateral. The only forms of collateral
that are formally recognized by the risk-based
capital framework are cash on deposit in a
subsidiary lending institution; securities issued
or guaranteed by the central governments of
the OECD-based group of countries,25* U.S.
24 An investment in shares of a fund whose portfolio con
sists solely of various securities or money market instru
ments that, if held separately, would be assigned to differ
ent risk categories, is generally assigned to the risk
category appropriate to the highest risk-weighted security or
instrument that the fund is permitted to hold in accordance
with its stated investment objectives. However, in no case
will indirect holdings through shares in such funds be as
signed to the zero percent risk category. For example, if a
fund is permitted to hold U.S. Treasuries and commercial
paper, shares in that fund would generally be assigned the
100 percent risk weight appropriate to commercial paper,
regardless of the actual composition of the fund’s invest
ments at any particular time. Shares in a fund that may
invest only in U.S. Treasury securities would generally be
assigned to the 20 percent risk category. If, in order to
maintain a necessary degree of short-term liquidity, a fund
is permitted to hold an insignificant amount of its assets in
short-term, highly liquid securities of superior credit quality
that do not qualify for a preferential risk weight, such se
curities will generally not be taken into account in deter
mining the risk category into which the banking organiza
tion’s holding in the overall fund should be assigned.
Regardless of the composition of the fund’s securities, if
the fund engages in any activities that appear speculative in
nature (for example, use of futures, forwards, or option
contracts for purposes other than to reduce interest-rate
risk) or has any other characteristics that are inconsistent
with the preferential risk weighting assigned to the fund’s
investments, holdings in the fund will be assigned to the
100 percent risk category. During the examination process,
the treatment of shares in such funds that are assigned to a
lower risk weight will be subject to examiner review to
ensure that they have been assigned an appropriate risk
weight.
25 The OECD-based group of countries comprises all full
members o f the Organization for Economic Cooperation
and Development (OECD), as well as countries that have
concluded special lending arrangements with the Interna
tional Monetary Fund (IMF) associated with the Fund’s
General Arrangements to Borrow. The OECD includes the
Continued

Capital Adequacy Guidelines

government agencies, or U.S. govern
ment-sponsored agencies; and securities is
sued by multilateral lending institutions or re
gional development banks. Claims fully
secured by such collateral generally are as
signed to the 20 percent risk category. Collat
eralized transactions meeting all the conditions
described in section III.C.l. may be assigned
a zero percent risk weight.
With regard to collateralized claims that
may be assigned to the 20 percent risk-weight
category, the extent to which qualifying secur
ities are recognized as collateral is determined
by their current market value. If such a claim
is only partially secured, that is, the market
value of the pledged securities is less than the
face amount of a balance-sheet asset or an
off-balance-sheet item, the portion that is cov
ered by the market value of the qualifying
collateral is assigned to the 20 percent risk
category, and the portion of the claim that is
not covered by collateral in the form of cash
or a qualifying security is assigned to the risk
category appropriate to the obligor or, if rele
vant, the guarantor. For example, to the extent
that a claim on a private-sector obligor is col
lateralized by the current market value of U.S.
government securities, it would be placed in
the 20 percent risk category and the balance
would be assigned to the 100 percent risk
category.
2. Guarantees. Guarantees of the OECD and
non-OECD central governments, U.S. govern
ment agencies, U.S. government-sponsored
agencies, state and local governments of the
OECD-based group of countries, multilateral
lending institutions and regional development
banks, U.S. depository institutions, and for
eign banks are also recognized. If a claim is
partially guaranteed, that is, coverage of the
guarantee is less than the face amount of a
balance-sheet asset or an off-balance-sheet
item, the portion that is not fully covered by
the guarantee is assigned to the risk category
Continued
following countries: Australia, Austria, Belgium, Canada,
Denmark, the Federal Republic o f Germany, Finland,
France, Greece, Iceland, Ireland, Italy, Japan, Luxembourg,
Netherlands, New Zealand, Norway, Portugal, Spain, Swe
den, Switzerland, Turkey, the United Kingdom, and the
United States. Saudi Arabia has concluded special lending
arrangements with the IMF associated with the Fund’s Gen
eral Arrangements to Borrow.

Regulation Y, Appendix A

Capital Adequacy Guidelines

appropriate to the obligor or, if relevant, to
any collateral. The face amount of a claim
covered by two types of guarantees that have
different risk weights, such as a U.S. govern
ment guarantee and a state guarantee, is to be
apportioned between the two risk categories
appropriate to the guarantors.
The existence of other forms of collateral or
guarantees that the risk-based capital frame
work does not formally recognize may be
taken into consideration in evaluating the risks
inherent in an organization’s loan portfo
lio—which, in turn, would affect the overall
supervisory assessment of the organization’s
capital adequacy.
3. Mortgage-backed securities. Mortgagebacked securities, including pass-throughs and
collateralized mortgage obligations (but not
stripped mortgage-backed securities), that are
issued or guaranteed by a U.S. government
agency or U.S. government-sponsored agency
are assigned to the risk-weight category ap
propriate to the issuer or guarantor. Generally,
a privately issued mortgage-backed security
meeting certain criteria set forth in the accom
panying footnote26 is treated as essentially an
indirect holding of the underlying assets, and
is assigned to the same risk category as the
underlying assets, but in no case to the zero
percent risk category. Privately issued mort
gage-backed securities whose structures do not
qualify them to be regarded as indirect hold26
A privately issued mortgage-backed security may
treated as an indirect holding of the underlying assets pro
vided that (1) the underlying assets are held by an indepen
dent trustee and the trustee has a first priority, perfected
security interest in the underlying assets on behalf of the
holders of the security; (2) either the holder of the security
has an undivided pro rata ownership interest in the underly
ing mortgage assets or the trust or single-purpose entity (or
conduit) that issues the security has no liabilities unrelated
to the issued securities; (3) the security is structured such
that the cash flow from the underlying assets in all cases
fully meets the cash-flow requirements of the security with
out undue reliance on any reinvestment income; and (4)
there is no material reinvestment risk associated with any
funds awaiting distribution to the holders of the security. In
addition, if the underlying assets of a mortgage-backed se
curity are composed of more than one type of asset, for
example, U.S. government-sponsored agency securities and
privately issued pass-through securities that qualify for the
50 percent risk weight category, the entire mortgage-backed
security is generally assigned to the category appropriate to
the highest risk-weighted asset underlying the issue, but in
no case to the zero percent risk category. Thus, in this
example, the security would receive the 50 percent risk
weight appropriate to the privately issued pass-through
securities.

ings of the underlying assets are assigned to
the 100 percent risk category. During the in
spection process, privately issued mortgagebacked securities that are assigned to a lower
risk-weight category will be subject to exam
iner review to ensure that they meet the ap
propriate criteria.
While the risk category to which mortgagebacked securities are assigned will generally
be based upon the issuer or guarantor or, in
the case of privately issued mortgage-backed
securities, the assets underlying the security,
any class of a mortgage-backed security that
can absorb more than its pro rata share of loss
without the whole issue being in default (for
example, a so-called subordinated class or
residual interest), is assigned to the 100 per
cent risk category. Furthermore, all stripped
mortgage-backed securities, including interestonly strips (IOs), principal-only strips (POs),
and similar instruments, are also assigned to
the 100 percent risk-weight category, regard
less of the issuer or guarantor.
4. Maturity. Maturity is generally not a factor
in assigning items to risk categories with the
exception of claims on non-OECD banks,
commitments, and interest-rate and foreign-ex
change-rate contracts. Except for commit
ments, short-term is defined as one year or
less remaining maturity and long-term is de
fined as over one year remaining maturity. In
the case of commitments, short-term is de
fined as one year or less original maturity and
belong-term is defined as over one year original
maturity.27*

C. Risk Weights
Attachment III contains a listing of the risk
categories, a summary of the types of assets
assigned to each category and the risk weight
associated with each category, that is, 0 per
cent, 20 percent, 50 percent, and 100 percent.
A brief explanation of the components of each
category follows.
1. Category 1: zero percent. This category in
cludes cash (domestic and foreign) owned and
held in all offices of subsidiary depository institu27 Through year-end 1992, remaining, rather than origi
nal, maturity may be used for determining the maturity of
commitments.

f t

Regulation Y, Appendix A

tions or in transit and gold bullion held in either a
subsidiary depository institution’s own vaults or
in another’s vaults on an allocated basis, to the
extent it is offset by gold bullion liabilities.28 The
category also includes all direct claims (includ
ing securities, loans, and leases) on, and the
portions of claims that are directly and uncondi
tionally guaranteed by, the central governments29
of the OECD countries and U.S. government
agencies,30 as well as all direct local currency
claims on, and the portions of local currency
claims that are directly and unconditionally
guaranteed by, the central governments of nonOECD countries, to the extent that subsidiary
depository institutions have liabilities booked in
that currency. A claim is not considered to be
unconditionally guaranteed by a central govern
ment if the validity of the guarantee is depen
dent upon some affirmative action by the holder
or a third party. Generally, securities guaranteed
by the U.S. government or its agencies that are
actively traded in financial markets, such as
GNMA securities, are considered to be uncondi
tionally guaranteed.
This category also includes claims collater
alized by cash on deposit in the subsidiary
lending institution or by securities issued or
guaranteed by OECD central governments or
U.S. government agencies for which a positive
margin of collateral is maintained on a daily
28 All other holdings of bullion are assigned to the 100 percent
risk category.
29 A central government is defined to include departments
and ministries, including the central bank, of the central gov
ernment. The U.S. central bank includes the 12 Federal Re
serve Banks, and stock held in these banks as a condition of
membership is assigned to the zero percent risk category. The
definition of central government does not include state, provin
cial, or local governments; or commercial enterprises owned
by the central government. In addition, it does not include
local government entities or commercial enterprises whose ob
ligations are guaranteed by the central government, although
any claims on such entities guaranteed by central governments
are placed in the same general risk category as other claims
guaranteed by central governments. OECD central govern
ments are defined as central governments of the OECD-based
group of countries; non-OECD central governments are defined
as central governments of countries that do not belong to the
OECD-based group of countries.
30 A U.S. government agency is defined as an instrumental
ity of the U.S. government whose obligations are fully and
explicitly guaranteed as to the timely payment of principal and
interest by the full faith and credit of the U.S. government.
Such agencies include the Government National Mortgage As
sociation (GNMA), the Veterans Administration (VA), the Fed
eral Housing Administration (FHA), the Export-Import Bank
(Exim Bank), the Overseas Private Investment Corporation
(OPIC), the Commodity Credit Corporation (CCC), and the
Small Business Administration (SBA).

Capital Adequacy Guidelines

basis, fully taking into account any change in
the banking organization’s exposure to the ob
ligor or counterparty under a claim in relation
to the market value of the collateral held in
support of that claim.
2. Category 2: 20 percent. This category in
cludes cash items in the process of collec
tion, both foreign and domestic; short-term
claims (including demand deposits) on, and
the portions of short-term claims that are
guaranteed by,31 U.S. depository institu
tions32 and foreign banks;33 and long-term
claims on, and the portions of long-term
claims that are guaranteed by, U.S. deposi
tory institutions and OECD banks.34
This category also includes the portions of
claims that are conditionally guaranteed by
OECD central governments and U.S. govern
ment agencies, as well as the portions of local
currency claims that are conditionally guaran
teed by non-OECD central governments, to
the extent that subsidiary depository institu
tions have liabilities booked in that currency.
31 Claims guaranteed by U.S. depository institutions
and foreign banks include risk participations in both
banker’s acceptances and standby letters o f credit, as
well as participations in commitments, that are con
veyed to U.S. depository institutions or foreign banks.
32 U.S. depository institutions are defined to include
branches (foreign and domestic) of federally insured
banks and depository institutions chartered and head
quartered in the 50 states of the United States, the Dis
trict of Columbia, Puerto Rico, and U.S. territories and
possessions. The definition encompasses banks, mutual
or stock savings banks, savings or building and loan
associations, cooperative banks, credit unions, and in
ternational banking facilities of domestic banks. U.S.chartered depository institutions owned by foreigners
are also included in the definition. However, branches
and agencies of foreign banks located in the U.S., as
well as all bank holding companies, are excluded.
33 Foreign banks are distinguished as either OECD
banks or non-OECD banks. OECD banks include banks
and their branches (foreign and domestic) organized
under the laws of countries (other than the U.S.) that
belong to the OECD-based group of countries. NonOECD banks include banks and their branches (foreign
and domestic) organized under the laws of countries
that do not belong to the OECD-based group of coun
tries. For this purpose, a bank is defined as an institu
tion that engages in the business of banking; is recog
nized as a bank by the bank supervisory or monetary
authorities of the country of its organization or princi
pal banking operations; receives deposits to a substan
tial extent in the regular course of business; and has
the power to accept demand deposits.
34 Long-term claims on, or guaranteed by, non-OECD
banks and all claims on bank holding companies are
assigned to the 100 percent risk category, as are hold
ings of bank-issued securities that qualify as capital of
the issuing banks.

/olt 9

Regulation Y, Appendix A

Capital Adequacy Guidelines

In addition, this category also includes claims
on, and the portions of claims that are guaran
teed by, U.S. government-sponsored agen
cies35 and claims on, and the portions of
claims guaranteed by, the International Bank
for Reconstruction and Development (World
Bank), the International Finance Corporation,
the Inter-American Development Bank, the
Asian Development Bank, the African Devel
opment Bank, the European Investment Bank,
the European Bank for Reconstruction and
Development, the Nordic Investment Bank,
and other multilateral lending institutions or
regional development banks in which the U.S.
government is a shareholder or contributing
member. General obligation claims on, or por
tions of claims guaranteed by the full faith
and credit of, states or other political subdivi
sions of the United States or other countries
of the OECD-based group are also assigned to
this category.36
This category also includes the portions of
claims (including repurchase transactions) col
lateralized by cash on deposit in the subsidi
ary lending institution or by securities issued
or guaranteed by OECD central governments
or U.S. government agencies that do not qual
ify for the zero percent risk-weight category;
collateralized by securities issued or guaran
teed by U.S. government-sponsored agencies;
or collateralized by securities issued by multi
lateral lending institutions or regional develop
ment banks in which the U.S. government is a
shareholder or contributing member.
3. Category 3: 50 percent. This category in
cludes loans fully secured by first liens37 on
35 For this purpose, U.S. government-sponsored agencies
are defined as agencies originally established or chartered
by the federal government to serve public purposes speci
fied by the U.S. Congress but whose obligations are not
explicitly guaranteed by the full faith and credit of the U.S.
government. These agencies include the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal Na
tional Mortgage Association (FNMA), the Farm Credit Sys
tem, the Federal Home Loan Bank System, and the Student
Loan Marketing Association (SLMA). Claims on U.S. gov
ernment-sponsored agencies include capital stock in a Fed
eral Home Loan Bank that is held as a condition of mem
bership in that Bank.
36 Claims on, or guaranteed by, states or other political
subdivisions o f countries that do not belong to the OECDbased group o f countries are placed in the 100 percent risk
category.
37 If a banking organization holds the first and junior
lien(s) on a residential property and no other party holds an
Continued

one- to four-family residential properties, ei
ther owner-occupied or rented, or on multi
family residential properties,38 that meet cer
tain criteria.39 Loans included in this category
must have been made in accordance with pru
dent underwriting standards;40 be performing
in accordance with their original terms; and
not be 90 days or more past due or carried in
nonaccrual status. The following additional
criteria must also be applied to a loan secured
by a multifamily residential property that is
included in this category: all principal and in
terest payments on the loan must have been
made on time for at least the year preceding
placement in this category, or in the case
where the existing property owner is refinanc
ing a loan on that property, all principal and
interest payments on the loan being refinanced
must have been made on time for at least the
year preceding placement in this category;
amortization of the principal and interest may
occur over a period of not more than 30 years
and the minimum original maturity for repay
ment of principal must not be less than 7
Continued
intervening lien, the transaction is treated as a single loan
secured by a first lien for the purpose of determining the
loan-to-value ratio.
“ Loans that qualify as loans secured by one- to fourfamily residential properties or multifamily residential
properties are listed in the instructions to the FR Y-9C
Report. In addition, for risk-based capital purposes, loans
secured by one- to four-family residential properties include
loans to builders with substantial project equity for the con
struction of one- to four-family residences that have been
presold under firm contracts to purchasers who have ob
tained firm commitments for permanent qualifying mort
gage loans and have made substantial earnest money
deposits.
39 Residential property loans that do not meet all the
specified criteria or that are made for the purpose of specu
lative property development are placed in the 100 percent
risk category.
40 Prudent underwriting standards include a conservative
ratio of the current loan balance to the value of the prop
erty. In the case of a loan secured by multifamily residen
tial property, the loan-to-value ratio is not conservative if it
exceeds 80 percent (75 percent if the loan is based on a
floating interest rate). Prudent underwriting standards also
dictate that a loan-to-value ratio used in the case of
originating a loan to acquire a property would not be
deemed conservative unless the value is based on the lower
of the acquisition cost of the property or appraised (or if
appropriate, evaluated) value. Otherwise, the loan-to-value
ratio generally would be based upon the value of the prop
erty as determined by the most current appraisal, or if ap
propriate, the most current evaluation. All appraisals must
be made in a manner consistent with the federal banking
agencies’ real estate appraisal regulations and guidelines
and with the banking organization’s own appraisal
guidelines.

Regulation Y, Appendix A

years; and the annual net operating income
(before debt service) generated by the prop
erty during its most recent fiscal year must
not be less than 120 percent of the loan’s cur
rent annual debt service (115 percent if the
loan is based on a floating interest rate) or, in
the case of a cooperative or other not-forprofit housing project, the property must gen
erate sufficient cash flow to provide compara
ble protection to the institution. Also included
in this category are privately issued mortgagebacked securities provided that (1) the struc
ture of the security meets the criteria de
scribed in section 111(B)(3) above; (2) if the
security is backed by a pool of conventional
mortgages, on one- to four-family residential
or multifamily residential properties, each un
derlying mortgage meets the criteria described
above in this section for eligibility for the 50
percent risk category at the time the pool is
originated; (3) if the security is backed by pri
vately issued mortgage-backed securities, each
underlying security qualifies for the 50 percent
risk category; and (4) if the security is backed
by a pool of multifamily residential mort
gages, principal and interest payments on the
security are not 30 days or more past due.
Privately issued mortgage-backed securities
that do not meet these criteria or that do not
qualify for a lower risk weight are generally
assigned to the 100 percent risk category.
Also assigned to this category are revenue
(nongeneral obligation) bonds or similar ob
ligations, including loans and leases, that are
obligations of states or other political subdi
visions of the United States (for example,
municipal revenue bonds) or other countries
of the OECD-based group, but for which the
government entity is committed to repay the
debt with revenues from the specific projects
financed, rather than from general tax funds.
Credit-equivalent amounts of interest-rate
and foreign-exchange-rate contracts involving
standard risk obligors (that is, obligors whose
loans or debt securities would be assigned to
the 100 percent risk category) are included in
the 50 percent category, unless they are
backed by collateral or guarantees that allow
them to be placed in a lower risk category.
4. Category 4: 100 percent. All assets not in
cluded in the categories above are assigned to
this category, which comprises standard risk

Capital Adequacy Guidelines

assets. The bulk of the assets typically found
in a loan portfolio would be assigned to the
100 percent category.
This category includes long-term claims on,
and the portions of long-term claims that are
guaranteed by, non-OECD banks, and all
claims on non-OECD central governments that
entail some degree of transfer risk.41 This cat
egory also includes all claims on foreign and
domestic private-sector obligors not included
in the categories above (including loans to
nondepository financial institutions and bank
holding companies); claims on commercial
firms owned by the public sector; customer
liabilities to the bank on acceptances outstand
ing involving standard risk claims;42 invest
ments in fixed assets, premises, and other real
estate owned; common and preferred stock of
corporations, including stock acquired for
debts previously contracted; commercial and
consumer loans (except those assigned to
lower risk categories due to recognized guar
antees or collateral and loans for residential
property that qualify for a lower risk weight);
mortgage-backed securities that do not meet
criteria for assignment to a lower risk weight
(including any classes of mortgage-backed se
curities that can absorb more than their pro
rata share of loss without the whole issue be
ing in default); and all stripped mortgagebacked and similar securities.
Also included in this category are indus
trial-development bonds and similar obliga
tions issued under the auspices of states or
political subdivisions of the OECD-based
group of countries for the benefit of a private
party or enterprise where that party or enter
prise, not the government entity, is obligated
to pay the principal and interest, and all obli
gations of states or political subdivisions of
41 Such assets include all nonlocal-currency claims on,
and the portions of claims that are guaranteed by, nonOECD central governments and those portions of local-cur
rency claims on, or guaranteed by, non-OECD central gov
ernments that exceed the local-currency liabilities held by
subsidiary depository institutions.
42 Customer liabilities on acceptances outstanding involv
ing nonstandard risk claims, such as claims on U.S. deposi
tory institutions, are assigned to the risk category appropri
ate to the identity of the obligor or, if relevant, the nature
of the collateral or guarantees backing the claims. Portions
of acceptances conveyed as risk participations to U.S. de
pository institutions or foreign banks are assigned to the 20
percent risk category appropriate to short-term claims guar
anteed by U.S. depository institutions and foreign banks.

lo t/?

Capital Adequacy Guidelines

countries that do not belong to the OECDbased group.
The following assets also are assigned a
risk weight of 100 percent if they have not
been deducted from capital: investments in
unconsolidated companies, joint ventures, or
associated companies; instruments that qualify
as capital issued by other banking organiza
tions; and any intangibles, including those that
may have been grandfathered into capital.
D. Off-Balance-Sheet Items
The face amount of an off-balance-sheet item
is incorporated into the risk-based capital ratio
by multiplying it by a credit-conversion fac
tor. The resultant credit-equivalent amount is
assigned to the appropriate risk category ac
cording to the obligor, or, if relevant, the
guarantor or the nature of the collateral.43 At
tachment IV sets forth the conversion factors
for various types of off-balance-sheet items.
1. Items with a 100 percent conversion factor.
A 100 percent conversion factor applies to di
rect credit substitutes, which include guaran
tees, or equivalent instruments, backing finan
cial claims, such as outstanding securities,
loans, and other financial liabilities, or that
back off-balance-sheet items that require capi
tal under the risk-based capital framework.
Direct credit substitutes include, for example,
financial standby letters of credit, or other
equivalent irrevocable undertakings or surety
arrangements, that guarantee repayment of fi
nancial obligations such as commercial paper,
tax-exempt securities, commercial or individ
ual loans or debt obligations, or standby or
commercial letters of credit. Direct credit sub
stitutes also include the acquisition of risk
participations in banker’s acceptances and
standby letters of credit, since both of these
transactions, in effect, constitute a guarantee
by the acquiring banking organization that the
underlying account party (obligor) will repay
its obligation to the originating, or issuing, in-

Regulation Y, Appendix A

stitution.44 (Standby letters of credit that are
performance-related are discussed below and
have a credit-conversion factor of 50 percent.)
The full amount of a direct credit substitute
is converted at 100 percent and the resulting
credit-equivalent amount is assigned to the
risk category appropriate to the obligor or, if
relevant, the guarantor or the nature of the
collateral. In the case of a direct credit substi
tute in which a risk participation45 has been
conveyed, the full amount is still converted at
100 percent. However, the credit-equivalent
amount that has been conveyed is assigned to
whichever risk category is lower: the risk cat
egory appropriate to the obligor, after giving
effect to any relevant guarantees or collateral,
or the risk category appropriate to the institu
tion acquiring the participation. Any remain
der is assigned to the risk category appropriate
to the obligor, guarantor, or collateral. For ex
ample, the portion of a direct credit substitute
conveyed as a risk participation to a U.S. do
mestic depository institution or foreign bank is
assigned to the risk category appropriate to
claims guaranteed by those institutions, that is,
the 20 percent risk category.46 This approach
recognizes that such conveyances replace the
originating banking organization’s exposure to
the obligor with an exposure to the institu
tions acquiring the risk participations.47

In the case of direct credit substitutes that
take the form of a syndication, that is, where
each banking organization is obligated only
for its pro rata share of the risk and there is
no recourse to the originating banking organi
zation, each banking organization will only in
clude its pro rata share of the direct credit
substitute in its risk-based capital calculation.

44 Credit-equivalent amounts of acquisitions of risk par
ticipations are assigned to the risk category appropriate to
the account-party obligor, or, if relevant, the nature of the
collateral or guarantees.
45 That is, a participation in which the originating bank
ing organization remains liable to the beneficiary for the
full amount of the direct credit substitute if the party that
has acquired the participation fails to pay when the instru
ment is drawn.
‘“ Risk participations with a remaining maturity of over
43
The sufficiency of collateral and guarantees for off- one year that are conveyed to non-OECD banks are to be
balance-sheet items is determined by the market value of
assigned to the 100 percent risk category, unless a lower
the collateral or the amount o f the guarantee in relation to
risk category is appropriate to the obligor, guarantor, or
collateral.
the face amount of the item, except for interest- and for
eign-exchange-rate contracts, for which this determination
47 A risk participation in banker’s acceptances conveyed
to other institutions is also assigned to the risk category
is made in relation to the credit-equivalent amount. Collat
appropriate to the institution acquiring the participation or,
eral and guarantees are subject to the same provisions
noted under section III(B).
if relevant, the guarantor or nature of the collateral.

Regulation Y, Appendix A

Financial standby letters of credit are distin
guished from loan commitments (discussed
below) in that standbys are irrevocable obliga
tions of the banking organization to pay a
third-party beneficiary when a customer (ac
count party) fails to repay an outstanding loan
or debt instrument (direct credit substitute).
Performance standby letters of credit (per
formance bonds) are irrevocable obligations of
the banking organization to pay a third-party
beneficiary when a customer (account party)
fails to perform some other contractual nonfinancial obligation.
The distinguishing characteristic of a
standby letter of credit for risk-based capital
purposes is the combination of irrevocability
with the fact that funding is triggered by some
failure to repay or perform an obligation.
Thus, any commitment (by whatever name)
that involves an irrevocable obligation to
make a payment to the customer or to a third
party in the event the customer fails to repay
an outstanding debt obligation or fails to per
form a contractual obligation is treated, for
risk-based capital purposes, as respectively, a
financial guarantee standby letter of credit or a
performance standby.
A loan commitment, on the other hand, in
volves an obligation (with or without a mate
rial adverse change or similar clause) of the
banking organization to fund its customer in
the normal course of business should the
customer seek to draw down the commitment.
Sale and repurchase agreements and asset
sales with recourse (to the extent not included
on the balance sheet) and forward agreements
also are converted at 100 percent.48 So-called
48 In regulatory reports and under GAAP, bank holding
companies are permitted to treat some asset sales with re
course as “true” sales. For risk-based capital purposes,
however, such assets sold with recourse and reported as
“true” sales by bank holding companies are converted at
100 percent and assigned to the risk category appropriate to
the underlying obligor or, if relevant, the guarantor or na
ture of the collateral, provided that the transactions meet
the definition of assets sold with recourse, (including assets
sold subject to pro rata and other loss-sharing arrange
ments), that is contained in the instructions to the commer
cial bank Consolidated Reports of Condition and Income
(call report). This treatment applies to any assets, including
the sale o f one- to four-family and multifamily residential
mortgages, sold with recourse. Accordingly, the entire
amount of any assets transferred with recourse that are not
already included on the balance sheet, including pools of
one- to four-family residential mortgages, are to be con
verted at 100 percent and assigned to the risk weight apContinued

Capital Adequacy Guidelines

“loan strips” (that is, short-term advances
sold under long-term commitments without di
rect recourse) are treated for risk-based capital
purposes as assets sold with recourse and, ac
cordingly, are also converted at 100 percent.
Forward agreements are legally binding
contractual obligations to purchase assets with
certain drawdown at a specified future date.
Such obligations include forward purchases,
forward forward deposits placed,49 and partly
paid shares and securities; they do not include
commitments to make residential mortgage
loans or forward foreign-exchange contracts.
Securities lent by a banking organization
are treated in one of two ways, depending
upon whether the lender is at risk of loss. If a
banking organization, as agent for a customer,
lends the customer’s securities and does not
indemnify the customer against loss, then the
transaction is excluded from the risk-based
capital calculation. If, alternatively, a banking
organization lends its own securities or, acting
as agent for a customer, lends the customer’s
securities and indemnifies the customer
against loss, the transaction is converted at
100 percent and assigned to the risk-weight
category appropriate to the obligor, to any
collateral delivered to the lending banking or
ganization, or, if applicable, to the indepen
dent custodian acting on the lender’s behalf.
Where a banking organization is acting as
agent for a customer in a transaction involving
the lending or sale of securities that is collat
eralized by cash delivered to the banking or
ganization, the transaction is deemed to be
collateralized by cash on deposit in a subsidi
ary lending institution for purposes of deter
mining the appropriate risk-weight category,
provided that any indemnification is limited to
no more than the difference between the mar
ket value of the securities and the cash collat
eral received and any reinvestment risk associ
ated with that cash collateral is borne by the
customer.
Continued
propriate to the obligor or, if relevant, the nature of any
collateral or guarantees. The only exception involves trans
fers of pools of residential mortgages that have been made
with insignificant recourse for which a liability or specific
noncapital reserve has been established and is maintained
for the maximum amount of possible loss under the re
course provision.
49
Forward forward deposits accepted are treated as inter
est-rate contracts.

(o m q

Capital Adequacy Guidelines

2. Items with a 50 percent conversion factor.
Transaction-related contingencies are con
verted at 50 percent. Such contingencies in
clude bid bonds, performance bonds, warran
ties, standby letters of credit related to
particular transactions, and performance
standby letters of credit, as well as acquisi
tions of risk participations in performance
standby letters of credit. Performance standby
letters of credit represent obligations backing
the performance of nonfinancial or commer
cial contracts or undertakings. To the extent
permitted by law or regulation, performance
standby letters of credit include arrangements
backing, among other things, subcontractors’
and suppliers’ performance, labor and materi
als contracts, and construction bids.
The unused portion of commitments with
an original maturity exceeding one year,50 in
cluding underwriting commitments, and com
mercial and consumer credit commitments
also are converted at 50 percent. Original ma
turity is defined as the length of time between
the date the commitment is issued and the
earliest date on which (1) the banking organi
zation can, at its option, unconditionally
(without cause) cancel the commitment51* and
(2) the banking organization is scheduled to
(and as a normal practice actually does) re
view the facility to determine whether or not
it should be extended. Such reviews must con
tinue to be conducted at least annually for
such a facility to qualify as a short-term
commitment.
Commitments are defined as any legally
binding arrangements that obligate a banking
organization to extend credit in the form of
loans or leases; to purchase loans, securities,
or other assets; or to participate in loans and
leases. They also include overdraft facilities,
revolving credit, home equity and mortgage
lines of credit, and similar transactions. Nor
mally, commitments involve a written contract
or agreement and a commitment fee, or some
50 Through year-end 1992, remaining maturity may be
used for determining the maturity of off-balance-sheet loan
commitments; thereafter, original maturity must be used.
51 In the case of consumer home equity or mortgage lines
of credit secured by liens on one- to four-family residential
properties, the bank is deemed able to unconditionally can
cel the commitment for the purpose of this criterion if, at
its option, it can prohibit additional extensions of credit,
reduce the credit line, and terminate the commitment to the
full extent permitted by relevant federal law.

Regulation Y, Appendix A

other form of consideration. Commitments are
included in weighted-risk assets regardless of
whether they contain “ material adverse
change” clauses or other provisions that are
intended to relieve the issuer of its funding
obligation under certain conditions. In the
case of commitments structured as syndica
tions, where the banking organization is obli
gated solely for its pro rata share, only the
banking organization’s proportional share of
the syndicated commitment is taken into ac
count in calculating the risk-based capital
ratio.
Facilities that are unconditionally cancel
lable (without cause) at any time by the bank
ing organization are not deemed to be com
mitments, provided the banking organization
makes a separate credit decision before each
drawing under the facility. Commitments with
an original maturity of one year or less are
deemed to involve low risk and, therefore, are
not assessed a capital charge. Such short-term
commitments are defined to include the un
used portion of lines of credit on retail credit
cards and related plans (as defined in the in
structions to the FR Y-9C Report) if the bank
ing organization has the unconditional right to
cancel the line of credit at any time, in accor
dance with applicable law.

Once a commitment has been converted at
50 percent, any portion that has been con
veyed to U.S. depository institutions or OECD
banks as participations in which the originat
ing banking organization retains the full obli
gation to the borrower if the participating
bank fails to pay when the instrument is
drawn, is assigned to the 20 percent risk cate
gory. This treatment is analogous to that ac
corded to conveyances of risk participations in
standby letters of credit. The acquisition of a
participation in a commitment by a banking
organization is converted at 50 percent and as
signed to the risk category appropriate to the
account-party obligor or, if relevant, the na
ture of the collateral or guarantees.
Revolving underwriting facilities (RUFs),
note-issuance facilities (NIFs), and other simi
lar arrangements also are converted at 50 per
cent regardless of maturity. These are facili
ties under which a borrower can issue on a
revolving basis short-term paper in its own
name, but for which the underwriting organi-

^ mi

Capital Adequacy Guidelines

Regulation Y, Appendix A

zations have a legally binding commitment ei
ther to purchase any notes the borrower is un
able to sell by the rollover date or to advance
funds to the borrower.
3. Items with a 20 percent conversion factor.
Short-term, self-liquidating, trade-related con
tingencies which arise from the movement of
goods are converted at 20 percent. Such con
tingencies generally include commercial letters
of credit and other documentary letters of
credit collateralized by the underlying
shipments.
4. Items with a zero percent conversion fac
tor. These include unused portions of commit
ments with an original maturity of one year or
less,52 or which are unconditionally cancel
lable at any time, provided a separate credit
decision is made before each drawing under
the facility. Unused portions of lines of credit
on retail credit cards and related plans are
deemed to be short-term commitments if the
banking organization has the unconditional
right to cancel the line of credit at any time,
in accordance with applicable law.
E. Interest-Rate and Foreign-Exchange-Rate
Contracts
1. Scope. Credit-equivalent amounts are com
puted for each of the following off-balancesheet interest-rate and foreign-exchange-rate
instruments:
I. Interest-rate contracts
A. Single-currency interest-rate swaps
B. Basis swaps
C. Forward-rate agreements
D. Interest-rate
options
purchased
(including caps, collars, and floors
purchased)
E. Any other instrument that gives rise to
similar credit risks (including whenissued securities and forward forward
deposits accepted)
II. Exchange-rate contracts
A. Cross-currency interest rate swaps
B. Forward foreign-exchange contracts
C. Currency options purchased

D. Any other instrument that gives rise to
similar credit risks
Exchange-rate contracts with an original ma
turity of 14 calendar days or less and instru
ments traded on exchanges that require daily
payment of variation margin are excluded
from the risk-based ratio calculation. Overthe-counter options purchased, however, are
included and treated in the same way as the
other interest-rate and exchange-rate contracts.
2. Calculation o f credit-equivalent amounts.
Credit-equivalent amounts are calculated for
each individual contract of the types listed
above. To calculate the credit-equivalent
amount of its off-balance-sheet interest-rate
and exchange-rate instruments, a banking or
ganization sums these amounts:
1. the mark-to-market value53 (positive values
only) of each contract (that is, the current
exposure); and
2. an estimate of the potential future credit
exposure over the remaining life of each
contract.
The potential future credit exposure on a
contract, including contracts with negative
mark-to-market values, is estimated by multi
plying the notional principal amount by one
of the following credit conversion factors, as
appropriate:
Remaining maturity

One year or less
Over one year

Interest-rate
contracts

Exchange-rate
contracts

-00.5%

1.0%
5.0%

Examples of the calculation of creditequivalent amounts for these instruments are
contained in attachment V.
Because exchange-rate contracts involve an
exchange of principal upon maturity, and ex
change rates are generally more volatile than
interest rates, higher conversion factors have
been established for foreign-exchange con
tracts than for interest-rate contracts.
No potential future credit exposure is calcu
lated for single-currency interest-rate swaps in
which payments are made based upon two

(

52
Through year-end 1992, remaining maturity may be 53 Mark-to-market values are measured in dollars, regard
less of the currency or currencies specified in the contract,
used for determining term to maturity for off-balance-sheet
and should reflect changes in both interest rates and
loan commitments; thereafter, original maturity must be
counterparty credit quality.
used.
48

(

lo w

Capital Adequacy Guidelines

floating rate indices, so-called floating/floating
or basis swaps; the credit exposure on these
contracts is evaluated solely on the basis of
their mark-to-market values.
3. Risk weights. Once the credit-equivalent
amount for interest-rate and exchange-rate in
struments has been determined, that amount is
assigned to the risk-weight category appropri
ate to the counterparty, or, if relevant, the na
ture of any collateral or guarantees.54 How
ever, the maximum weight that will be
applied to the credit-equivalent amount of
such instruments is 50 percent.
4. Avoidance o f double-counting. In certain
cases, credit exposures arising from the inter
est-rate and exchange instruments covered by
these guidelines may already be reflected, in
part, on the balance sheet. To avoid double
counting such exposures in the assessment of
capital adequacy and, perhaps, assigning inap
propriate risk weights, counterparty credit ex
posures arising from the types of instruments
covered by these guidelines may need to be
excluded from balance-sheet assets in calculat
ing banking organizations’ risk-based capital
ratios.
5. Netting. Netting of swaps and similar con
tracts is recognized for purposes of calculating
the risk-based capital ratio only when accom
plished through netting by novation.55 While
the Federal Reserve encourages any reasona
ble arrangements designed to reduce the risks
inherent in these transactions, other types of
netting arrangements are not recognized for
purposes of calculating the risk-based ratio at
this time.
IV . M in im u m S u p e rv iso ry R a tio s a n d
S tan d ard s

The interim and final supervisory standards set
54 For interest- and exchange-rate contracts, sufficiency of
collateral or guarantees is determined by the market value
of the collateral or the amount of the guarantee in relation
to the credit-equivalent amount. Collateral and guarantees
are subject to the same provisions noted under section

III(B).
55 Netting by novation, for this purpose, is a written bilat
eral contract between two counterparties under which any
obligation to each other to deliver a given currency on a
given date is automatically amalgamated with all other obli
gations for the same currency and value date, legally sub
stituting one single net amount for the previous gross
obligations.

Regulation Y, Appendix A

forth below specify minimum supervisory ra
tios based primarily on broad credit-risk con
siderations. As noted above, the risk-based ra
tio does not take explicit account of the
quality of individual asset portfolios or the
range of other types of risks to which banking
organizations may be exposed, such as inter
est-rate, liquidity, market, or operational risks.
For this reason, banking organizations are
generally expected to operate with capital po
sitions well above the minimum ratios. Institu
tions with high or inordinate levels of risk are
expected to operate well above minimum cap
ital standards. Banking organizations exper
iencing or anticipating significant growth are
also expected to maintain capital, including
tangible capital positions, well above the min
imum levels. For example, most such organi
zations generally have operated at capital
levels ranging from 100 to 200 basis points
above the stated minimums. Higher capital ra
tios could be required if warranted by the par
ticular circumstances or risk profiles of indi
vidual banking organizations. In all cases,
organizations should hold capital commensu
rate with the level and nature of all of the
risks, including the volume and severity of
problem loans, to which they are exposed.
Upon adoption of the risk-based framework,
any organization that does not meet the in
terim or final supervisory ratios, or whose
capital is otherwise considered inadequate, is
expected to develop and implement a plan ac
ceptable to the Federal Reserve for achieving
an adequate level of capital consistent with
the provisions of these guidelines or with the
special circumstances affecting the individual
organization. In addition, such organizations
should avoid any actions, including increased
risk-taking or unwarranted expansion, that
would lower or further erode their capital
positions.
A. Minimum Risk-Based Ratio After
Transition Period
As reflected in attachment VI, by year-end
1992, all bank holding companies56 should
56
As noted in section I above, bank holding companies
with less than $150 million in consolidated assets would
generally be exempt from the calculation and analysis of
risk-based ratios on a consolidated holding company basis,
subject to certain terms and conditions.

IWiq

Regulation Y, Appendix A

meet a minimum ratio of qualifying total capi
tal to weighted-risk assets of 8 percent, of
which at least 4.0 percentage points should be
in the form of tier 1 capital. For purposes of
section IV.A., tier 1 capital is defined as the
sum of core capital elements less goodwill
and other intangible assets required to be de
ducted in accordance with section II.B.l.b. of
this appendix. The maximum amount of sup
plementary capital elements that qualifies as
tier 2 capital is limited to 100 percent of tier
1 capital. In addition, the combined maximum
amount of subordinated debt and intermediateterm preferred stock that qualifies as tier 2
capital is limited to 50 percent of tier 1 capi
tal. The maximum amount of the allowance
for loan and lease losses that qualifies as tier
2 capital is limited to 1.25 percent of gross
weighted-risk assets. Allowances for loan and
lease losses in excess of this limit may, of
course, be maintained, but would not be in
cluded in an organization’s total capital. The
Federal Reserve will continue to require bank
holding companies to maintain reserves at
levels fully sufficient to cover losses inherent
in their loan portfolios.
Qualifying total capital is calculated by ad
ding tier 1 capital and tier 2 capital (limited to
100 percent of tier 1 capital) and then deduct
ing from this sum certain investments in
banking or finance subsidiaries that are not
consolidated for accounting or supervisory
purposes, reciprocal holdings of banking orga
nizations’ capital securities, or other items at
the direction of the Federal Reserve. The con
ditions under which these deductions are to be
made and the procedures for making the de
ductions are discussed above in section 11(B).

Capital Adequacy Guidelines

guidelines do not establish a minimum level
of capital. However, by year-end 1990, bank
ing organizations are expected to meet a mini
mum interim target ratio for qualifying total
capital to weighted-risk assets of 7.25 percent,
at least one-half of which should be in the
form of tier 1 capital. For purposes of meeting
the 1990 interim target, the amount of loanloss reserves that may be included in capital
is limited to 1.5 percent of weighted-risk as
sets and up to 10 percent of an organization’s
tier 1 capital may consist of supplementary
capital elements. Thus, the 7.25 percent in
terim target ratio implies a minimum ratio of
tier 1 capital to weighted-risk assets of 3.6
percent (one-half of 7.25) and a minimum ra
tio of core capital elements to weighted-risk
assets ratio of 3.25 percent (nine-tenths of the
tier 1 capital ratio).
Through year-end 1990, banking organiza
tions have the option of complying with the
minimum 7.25 percent year-end 1990
riskbased capital standard, in lieu of the mini
mum 5.5 percent primary and 6 percent total
capital to total assets ratios set forth in appen
dix B of Regulation Y (page 59). In addition,
as more fully set forth in appendix D to Reg
ulation Y (page 67), banking organizations are
expected to maintain a minimum ratio or tier
1 capital to total assets during this transition
period.

Continued
organization’s tier 1 capital (before the deduction of good
will) up to the end of 1990; from year-end 1990 up to the
end of 1992, this allowable percentage of supplementary
elements in tier 1 declines to 10 percent of tier 1 (before
the deduction of goodwill). Beginning on December 31,
1992, supplementary elements may not be included in tier
1. The amount of subordinated debt and intermediate-term
preferred stock temporarily included in tier 1 under these
B. Transition Arrangements
arrangements will not be subject to the sublimit on the
amount of such instruments includable in tier 2 capital.
The transition period for implementing the While the transitional arrangements allow an organization
risk-based capital standard ends on December to include supplementary elements in tier 1 on a temporary
basis, the amount of perpetual preferred stock that may be
31, 1992.57*1 Initially, the risk-based capital included in a bank holding company’s tier 1— both during
and after the transition period—is, as described in section
57 The Basle capital framework does not establish an ini 11(A), based solely upon a specified percentage of the or
ganization’s permanent core capital elements (that is, com
tial minimum standard for the risk-based capital ratio
mon equity, perpetual preferred stock, and minority interest
before the end of 1990. However, for the purpose of calcu
in the equity of consolidated subsidiaries), not upon total
lating a risk-based capital ratio prior to year-end 1990, no
tier 1 elements that temporarily include tier 2 items. Once
sublimit is placed on the amount of the allowance for loan
the amount of supplementary items that may temporarily
and lease losses includable in tier 2. In addition, this frame
qualify as tier 1 elements is determined, goodwill must be
work permits, under temporary transition arrangements, a
deducted from the sum of this amount and the amount of
certain percentage of an organization’s tier 1 capital to be
the organization’s permanent core capital elements for the
made up of supplementary capital elements. In particular,
purpose of calculating tier 1 (net of goodwill), tier 2, and
supplementary elements may constitute 25 percent of an
total capital.
Continued
50

/ K / W 9

Regulation Y, Appendix A

Capital Adequacy Guidelines

A tta c h m e n t I— S a m p le C a lc u la tio n o f R isk -B a se d C a p ita l R a tio fo r B a n k H o ld in g
C o m p a n ie s

Example of a banking organization with $6,000 in total capital and the following assets and offbalance-sheet items:
Balance-sheet assets

Cash
U.S. Treasuries
Balances at domestic banks
Loans secured by first liens on 1- to 4-family
residential properties
Loans to private corporations

$ 5,000
20,000
5,000

Total Balance-Sheet Assets

$100,000

5,000
65,000

Off-balance-sheet items

Standby letters of credit (SLCs) backing generalobligation debt issues of U.S. municipalities (GOs)
Long-term legally binding commitments to private
corporations
Total Off-Balance-Sheet Items

$ 10,000
20,000
$ 30,000

This bank holding company’s total capital to total assets (leverage ratio) would be:
($6,000/$ 100,000) = 6.00%.

To compute the bank holding company’s weighted-risk assets:
1.

Compute the credit-equivalent amount of each off-balance-sheet (OBS) item.

OBS item

SLCs backing municipal GOs
Long-term commitments to private
corporations

Conversion
factor

Face value

Creditequivalent amount

$ 1 0 ,0 0 0

1.00

$10,0 0 0

$ 2 0 ,0 0 0

0.50

$10,0 0 0

Attachment I continued, next page

Regulation Y, Appendix A

Capital Adequacy Guidelines

Attachment / continued
2. Multiply each balance-sheet asset and the credit-equivalent amount of each OBS item by
the appropriate risk weight.
OBS item

Conversion
fa cto r

Face value

Creditequivalent amount

0% category

Cash
U.S. Treasuries

$ 5,000
20,000
$25,000

10,000
$15,000

0.20

$ 3,000

$ 5,000

0.50

$ 2,500

1.00

$75,000
$80,500

20% category

Balances at domestic banks
Credit-equivalent amounts of SLCs backing
GOs of U.S. municipalities

$ 5,000

50% category

Loans secured by first liens on 1- to 4-family
residential properties
100% category

Loans to private corporations
Credit-equivalent amounts of long-term
commitments to private corporations
Total Risk-Weighted Assets

$65,000
10,000
$75,000

This bank holding company’s ratio of total capital to weighted-risk assets (risk-based capital
ratio) would be:

($6,000/$80,500) = 7.45%

/?h o t t y

Capital Adequacy Guidelines

Regulation Y, Appendix A

A tta c h m e n t II— S u m m a ry D efin itio n o f Q u a lify in g C a p ita l fo r B a n k H o ld in g
C o m p an ies*

Using the Year-End 1992 Standards
Components

Minimum requirements after transition period

CORE CAPITAL (tier 1)
Common stockholders’ equity
Qualifying noncumulative perpetual preferred
stock
Qualifying cumulative perpetual preferred stock

Must equal or exceed 4% of weighted-risk assets
No limit
No limit

Minority interest in equity accounts of consoli
dated subsidiaries

Limited to 25% of the sum of common stock, quali
fying perpetual preferred stock, and minority interests
Organizations should avoid using minority interests to
introduce elements not otherwise qualifying for tier 1
capital

Less: Goodwill and other intangible assets
required to be deducted from capital1
SUPPLEMENTARY CAPITAL (tier 2)
Allowance for loan and lease losses
Perpetual preferred stock
Hybrid capital instruments, perpetual debt, and
mandatory convertible securities
Subordinated debt and intermediate-term pre
ferred stock (original weighted average maturity
of 5 years or more)
Revaluation reserves (equity and building)

DEDUCTIONS (from sum of tier 1 and tier 2)
Investments in unconsolidated subsidiaries

Total of tier 2 is limited to 100% of tier l2
Limited to 1.25% of weighted-risk assets2
No limit within tier 2
No limit within tier 2
Subordinated debt and intermediate-term preferred
stock are limited to 50% of tier l;3 amortized for
capital purposes as they approach maturity
Not included; organizations encouraged to disclose;
may be evaluated on a case-by-case basis for interna
tional comparisons; and taken into account in making
an overall assessment of capital
As a general rule, one-half of the aggregate invest
ments will be deducted from tier 1 capital and onehalf from tier 2 capital4

Reciprocal holdings of banking organizations’
capital securities
Other deductions (such as other subsidiaries or
joint ventures) as determined by supervisory
authority

On a case-by-case basis or as a matter of policy after
formal rulemaking

TOTAL CAPITAL
(tier 1 + tier 2 - Deductions)

Must equal or exceed 8% of weighted-risk assets

* See discussion in section II of the guidelines for a
complete description of the requirements for, and the limitations on, the components of qualifying capital.
1Requirements for the deduction of other intangible ass e s are set forth in section II.B.l.b. of this appendix.
2 Amounts in excess of limitations are permitted but do
not qualify as capital.

3 Amounts in excess of limitations are permitted but do
not qualify as capital.
4 A proportionately greater amount may be deducted
from tier 1 capital if the risks associated with the subsidi
ary so warrant.

53
M

- w

Regulation Y, Appendix A

Capital Adequacy Guidelines

Attachment III— Summary of Risk
Weights and Risk Categories for Bank
Holding Companies

3. Short-term claims (remaining maturity of
one year or less) on, and the portions of
short-term claims that are guaranteed by, nonOECD banks

Category 1: Zero Percent

4. The portions of claims that are condition
ally guaranteed by the central governments of
OECD countries and U.S. government agen
cies, and the portions of local currency claims
that are conditionally guaranteed by the cen
tral governments of non-OECD countries, to
the extent that subsidiary depository institu
tions have liabilities booked in that currency

1. Cash (domestic and foreign) held in sub
sidiary depository institutions or in transit
2. Balances due from Federal Reserve Banks
(including Federal Reserve Bank stock) and
central banks in other OECD countries
3. Direct claims on, and the portions of
claims that are unconditionally guaranteed by,
the U.S. Treasury and U.S. government agen
cies' and the central governments of other
OECD countries, and local currency claims
on, and the portions of local currency claims
that are unconditionally guaranteed by, the
central governments of non-OECD countries
(including the central banks of non-OECD
countries), to the extent that subsidiary depos
itory institutions have liabilities booked in that
currency
4. Gold bullion held in the vaults of a subsid
iary depository institution or in another’s
vaults on an allocated basis, to the extent off
set by gold bullion liabilities
5. Claims collateralized by cash on deposit in
the subsidiary lending institution or by securi
ties issued or guaranteed by OECD central
governments or U.S. government agencies for
which a positive margin of collateral is main
tained on a daily basis, fully taking into ac
count any change in the bank’s exposure to
the obligor or counterparty under a claim in
relation to the market value of the collateral
held in support of that claim
Category 2: 20 Percent
1. Cash items in the process of collection
2. All claims (long- or short-term) on, and the
portions of claims (long- or short-term) that
are guaranteed by, U.S. depository institutions
and OECD banks

5. Claims on, and the portions of claims that
are guaranteed by, U.S. government-sponsored
agencies1
2
6. General obligation claims on, and the por
tions of claims that are guaranteed by the full
faith and credit of, local governments and po
litical subdivisions of the U.S. and other
OECD local governments
7. Claims on, and the portions of claims that
are guaranteed by, official multilateral lending
institutions or regional development banks
8. The portions of claims that are collateral
ized3 by cash on deposit in the subsidiary
lending institution or by securities issued or
guaranteed by the U.S. Treasury, the central
governments of other OECD countries, and
U.S. government agencies that do not qualify
for the zero percent risk-weight category, or
that are collateralized by securities issued or
guaranteed by U.S. government-sponsored
agencies.
9. The portions of claims that are collateral
ized3 by securities issued by official multilat
eral lending institutions or regional develop
ment banks
10. Certain privately issued securities repre
senting indirect ownership of mortgage-backed
U.S. government agency or U.S. govern
ment-sponsored agency securities

2 For the purpose of calculating the risk-based capital ra
tio, a U.S. government-sponsored agency is defined as an
1 For the purpose of calculating the risk-based capital ra agency originally established or chartered to serve public
purposes specified by the U.S. Congress but whose obliga
tio, a U.S. government agency is defined as an instrumen
tions are not explicitly guaranteed by the full faith and
tality of the U.S. government whose obligations are fully
credit of the U.S. government.
and explicitly guaranteed as to the timely payment of prin
3 The extent of collateralization is determined by current
cipal and interest by the full faith and credit of the U.S.
market value.
government.

Capital Adequacy Guidelines

11. Investments in shares of a fund whose
portfolio is permitted to hold only securities
that would qualify for the zero or 20 percent
risk categories
Category 3: 50 Percent
1. Loans fully secured by first liens on oneto four-family residential properties that have
been made in accordance with prudent under
writing standards, that are performing in ac
cordance with their original terms, and are not
past due or in nonaccrual status, and certain
privately issued mortgage-backed securities
representing indirect ownership of such loans
(Loans made for speculative purposes are
excluded.)
2. Revenue bonds or similar claims that are
obligations of U.S. state or local governments,
or other OECD local governments, but for
which the government entity is committed to
repay the debt only out of revenues from the
facilities financed
3. Credit-equivalent amounts of interest
rate-and foreign exchange rate-related con
tracts, except for those assigned to a lower
risk category
Category 4: 100 Percent
1. All other claims on private obligors

Regulation Y, Appendix A

2. Claims on, or guaranteed by, non-OECD
foreign banks with a remaining maturity ex
ceeding one year
3. Claims on, or guaranteed by, non-OECD
central governments that are not included in
item 3 of category 1 or item 4 of category 2;
all claims on non-OECD state or local
governments
4. Obligations issued by U.S. state or local
governments, or other OECD local govern
ments (including industrial-development au
thorities and similar entities), repayable solely
by a private party or enterprise
5. Premises, plant, and equipment; other fixed
assets; and other real estate owned
6. Investments in any unconsolidated subsidi
aries, joint ventures, or associated compa
nies—if not deducted from capital
7. Instruments issued by other banking orga
nizations that qualify as capital—if not de
ducted from capital
8. Claims on commercial firms owned by a
government
9. All other assets, including any intangible
assets that are not deducted from capital

f¥ r lo tfiq

Regulation Y, Appendix A

Attachment IV— Credit-Conversion
Factors for Off-Balance-Sheet Items for
Bank Holding Companies

Capital Adequacy Guidelines

contingences, including commercial letters of
credit
Zero Percent Conversion Factor

100 Percent Conversion Factor
1. Direct credit substitutes (These include
general guarantees of indebtedness and all
guarantee-type instruments, including standby
letters of credit backing the financial obliga
tions of other parties.)
2. Risk participations in banker’s acceptances
and direct credit substitutes, such as standby
letters of credit
3. Sale and repurchase agreements and assets
sold with recourse that are not included on the
balance sheet
4. Forward agreements to purchase assets, in
cluding financing facilities, on which
drawdown is certain
5. Securities lent for which the banking or
ganization is at risk
50 Percent Conversion Factor
1. Transaction-related contingencies (These
include bid bonds, performance bonds, war
ranties, and standby letters of credit backing
the nonfinancial performance of other parties.)
2. Unused portions of commitments with an
original maturity1 exceeding one year, includ
ing underwriting commitments and commer
cial credit lines
3. Revolving underwriting facilities (RUFs),
note issuance facilities (NIFs), and similar
arrangements

1. Unused portions of commitments with an
original maturity1 of one year or less, or
which are unconditionally cancellable at any
time, provided a separate credit decision is
made before each drawing
Credit Conversion for Interest-Rate and
Foreign-Exchange Contracts
The total replacement cost of contracts (ob
tained by summing the positive mark-to-mar
ket values of contracts) is added to a measure
of future potential increases in credit expo
sure. This future potential exposure measure is
calculated by multiplying the total notional
value of contracts by one of the following
credit conversion factors, as appropriate:
Remaining maturity

One year or less
Over one year

Interest-rate
contracts

Exchange-rate
contracts

0
0.5%

1.0%
5.0%

No potential exposure is calculated for single
currency interest-rate swaps in which pay
ments are made based upon two floating rate
indices, that is, so-called floating/floating or
basis swaps. The credit exposure on these
contracts is evaluated solely on the basis of
their mark-to-market value. Exchange-rate
contracts with an original maturity of 14 days
or less are excluded. Instruments traded on
exchanges that require daily payment of varia
tion margin are also excluded. The only form
of netting recognized is netting by novation.

20 Percent Conversion Factor
1. Short-term, self-liquidating, trade-related
1 Remaining maturity may be used until year-end 1992.

M 10 V / ?

Capital Adequacy Guidelines

Regulation Y, Appendix A

Attachment V— Calculation of Credit-Equivalent Amounts

Interest Rate- and Foreign Exchange Rate-Related Transactions for Bank Holding Companies

Potential Exposure

Type o f contract
(remaining maturity)

Potential
Notional
exposure
Potential
principal
conversion
exposure
(dollars) X factor
= (dollars)

(1) 120-day forward foreign
exchange

5,000,000

.01

50,000

(2) 120-day forward foreign
exchange

6,000,000

.01

60,000

(3) 3-year single-currency fixed/
floating interest-rate swap

10,000,000

.005

50,000

(4) 3-year single-currency fixed/
floating interest-rate swap

10,000,000

.005

50,000

(5) 7-year cross-currency floating/
floating interest-rate swap
20,000,000
TOTAL
$51,000,000

.05

Current Exposure

Replace
ment
cost1

CreditEquivalent
Amount
= (dollars)

Current
exposure
(dollars)2

100,000 100,000
-120,000

150,000

-0-

60,000

200,000 200,000

250,000

-250,000

-0-

1,000,000 -1,300,000

-0-

50,000
1,000,000
$1,510,000

' These numbers are purely for illustration.
2 The larger of zero or a positive mark-to-market value.

H /oft 9

Regulation Y, Appendix A

Capital Adequacy Guidelines

Attachment VI

SUMMARY OF:
Transitional A rrangem ents
fo r Bank Holding Companies
Initial

1. Minimum standard of
total capital to
weighted-risk assets
None
2. Definition of tier 1
Common equity,
capital
qualifying cumulative
perpetual preferred
stock,1 and minority
interests, plus
supplementary
elements,2 less goodwill3
3. Minimum standards
of tier 1 capita] to
weighted-risk assets
None
4. Minimum standard of
stockholders’ equity
to weighted-risk
None
assets
5. Limitations on sup
plementary capital
elements
a. Allowance for loan
No limit within tier 2
and lease losses
b. Perpetual pre
No limit within tier 2
ferred stock
c. Hybrid capital in
struments, perpet
ual debt, and man
datory convertibles No limit within tier 2
d. Subordinated debt
and intermediateterm preferred
Combined maximum of
stock
50% of tier 1
e. Total qualifying
May not exceed tier 1
tier 2 capital
capital
6. Definition of total
Tier 1 plus tier 2 less:
capital
• reciprocal holdings of
banking organizations’
capital instruments
• investments in
unconsolidated
subsidiaries5
1Cumulative perpetual preferred stock is limited within
tier 1 to 25% of the sum o f common stockholders’ equity,
qualifying perpetual preferred stock, and minority interest.
2 Supplementary elements may be included in tier 1 up to
25% of the sum of tier 1 plus goodwill.
3 Requirements for the deduction of other intangible as
sets are set forth in section II.B.l.b of this appendix.

Final Arrangem ent

Year-end 1990

Year-end 1992

7.25%

8.0%

Common equity,
qualifying cumulative
and noncumulative
perpetual preferred
stock,1 and minority
interests, plus
supplementary
elements,4 less goodwill3

Common equity,
qualifying
noncumulative and
cumulative perpetual
preferred stock,1 and
minority interest less
goodwill and other
intangible assets
required to be deducted
from capital3

3.625%

4.0%

3.25%

4.0%

1.5% of weighted-risk
assets

1.25% of weighted-risk
assets

No limit within tier 2

Combined maximum of
50% of tier 1

May not exceed tier 1
capital

Tier 1 plus tier 2 less:
• reciprocal holdings of
banking organizations’
capital instruments
• investments in
unconsolidated
subsidiaries5

4 Supplementary elements may be included in tier 1 up to
10% of the sum of tier 1 plus goodwill.
5 As a general rule, one-half (50%) of the aggregate
amount of investments will be deducted from tier 1 capital
and one-half (50%) from tier 2 capital. A proportionally
greater amount may be deducted from tier 1 capital if the
risks associated with the subsidiary so warrant.

M l&U?

Capital A d eq u acy G u id elin es for B ank H o ld in g C om p an ies
and State M em ber Banks: L everage M easure
Regulation Y (12 CFR 225), Appendix B; as amended effective September 7, 1990

The Board of Governors of the Federal Re
serve System has adopted minimum capital ra
tios and guidelines to provide a framework for
assessing the adequacy of the capital of bank
holding companies and state member banks
(collectively “banking organizations” ). The
guidelines generally apply to all state member
banks and bank holding companies regardless
of size and are to be used in the examination
and supervisory process as well as in the anal
ysis of applications acted upon by the Federal
Reserve. The Board of Governors will review
the guidelines from time to time for possible
adjustments commensurate with changes in
the economy, financial markets, and banking
practices. In this regard, the Board has deter
mined that during the transition period
through year-end 1990 for implementation of
the risk-based capital guidelines contained in
appendix A to part 225 (page 31) and in ap
pendix A to part 208 (page 1), a banking or
ganization may choose to fulfill the require
ments of the guidelines relating capital to total
assets contained in this appendix in one of
two manners. Until year-end 1990, a banking
organization may choose to conform to either
the 5.5 percent and 6 percent minimum pri
mary and total capital standards set forth in
this appendix, or the 7.25 percent year-end
1990 minimum risk-based capital standard set
forth in appendix A to this part and appendix
A to part 208. Those organizations that
choose to conform during this period to the
7.25 percent year-end 1990 risk-based capital
standard will be deemed to be in compliance
with the capital adequacy guidelines set forth
in this appendix.
Two principal measurements of capital are
used—the primary capital ratio and the total
capital ratio. The definitions of primary and
total capital for banks and bank holding com
panies and formulas for calculating the capital
ratios are set forth below in the definitional
sections of these guidelines.

C a p ita l G u id e lin e s

The Board has established a minimum level

of primary capital to total assets of 5.5 per
cent and a minimum level of total capital to
total assets of 6.0 percent. Generally, banking
organizations are expected to operate above
the minimum primary and total capital levels.
Those organizations whose operations involve
or are exposed to high or inordinate degrees
of risk will be expected to hold additional
capital to compensate for these risks.
In addition, the Board has established the
following three zones for total capital for
banking organizations of all sizes:
Total Capital Ratio

Zone 1
Zone 2
Zone 3

Above 7.0%
6.0% to 7.0%
Below 6.0%

The capital guidelines assume adequate li
quidity and a moderate amount of risk in the
loan and investment portfolios and in off-bal
ance-sheet activities. The Board is concerned
that some banking organizations may attempt
to comply with the guidelines in ways that
reduce their liquidity or increase risk. Banking
organizations should avoid the practice of at
tempting to meet the guidelines by decreasing
the level of liquid assets in relation to total
assets. In assessing compliance with the
guidelines, the Federal Reserve will take into
account liquidity and the overall degree of
risk associated with an organization’s opera
tions, including the volume of assets exposed
to risk.
The Federal Reserve will also take into ac
count the sale of loans or other assets with
recourse and the volume and nature of all offbalance-sheet risk. Particularly close attention
will be directed to risks associated with
standby letters of credit and participation in
joint-venture activities. The Federal Reserve
will review the relationship of all on- and offbalance-sheet risks to capital and will require;
those institutions with high or inordinate
levels of risk to hold additional primary capi
tal. In addition, the Federal Reserve will con
tinue to review the need for more explicit pro
cedures for factoring on- and off-balance-sheet
risks into the assessment of capital adequacy.

Regulation Y, Appendix B

The capital guidelines apply to both banks
and bank holding companies on a consolidated
basis.1 Some banking organizations are en
gaged in significant nonbanking activities that
typically require capital ratios higher than
those of commercial banks alone. 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 activities.
Consequently, in evaluating the consolidated
capital positions of banking organizations, the
Board is placing greater weight on the build
ing-block approach for assessing capital re
quirements. This approach generally provides
that nonbank subsidiaries of a banking organi
zation should maintain levels of capital con
sistent with the levels that have been estab
lished by industry norms or standards, by
federal or state regulatory agencies for similar
firms that are not affiliated with banking orga
nizations, or that may be established by the
Board after taking into account risk factors of
a particular industry. The assessment of an or
ganization’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 subsidi
aries as well as those of the parent company.
S u p e rv iso ry A ctio n

The nature and intensity of supervisory action
will be determined by an organization’s com
pliance with the required minimum primary
capital ratio as well as by the zone in which
the company’s total capital ratio falls. Banks
and bank holding companies with primary
capital ratios below the 5.5 percent minimum
will be considered undercapitalized unless
they can demonstrate clear extenuating cir
cumstances. Such banking organizations will
1 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 outstand
ing significant debt held by the general public. Debt held
by the general public is defined to mean debt held by par
ties other than financial institutions, officers, directors, and
controlling shareholders of the banking organization or their
related interests.

Capital Adequacy Guidelines

be required to submit an acceptable plan for
achieving compliance with the capital guide
lines and will be subject to denial of applica
tions and appropriate supervisory enforcement
actions.
The zone into which an organization’s total
capital ratio falls will normally trigger the fol
lowing supervisory responses, subject to quali
tative analysis:
• For institutions operating in zone 1, the
Federal Reserve will consider that capital is
generally adequate if the primary capital
ratio is acceptable to the Federal Reserve
and is above the 5.5 percent minimum.
• For institutions operating in zone 2, the
Federal Reserve will pay particular atten
tion to financial factors, such as asset qual
ity, liquidity, off-balance-sheet risk, and
interest-rate risk, as they relate to the ade
quacy of capital. If these areas are deficient
and the Federal Reserve concludes capital
is not fully adequate, the Federal Reserve
will intensify its monitoring and take ap
propriate supervisory action.
• For institutions operating in zone 3, the
Federal Reserve will—
—consider that the institution is
undercapitalized, absent clear extenuating
circumstances;
—require the institution to submit a
comprehensive capital plan, acceptable to
the Federal Reserve, that includes a
program for achieving compliance with
the required minimum ratios within a
reasonable time period; and
—institute appropriate supervisory and/or
administrative enforcement action, which
may include the issuance of a capital
directive or denial of applications, unless
a capital plan acceptable to the Federal
Reserve has been adopted by the
institution.

T re a tm e n t o f In ta n g ib le A sse ts fo r
P u rp o se o f A sse ssin g C a p ita l A d e q u a c y

In considering the treatment of intangible as
sets for the purpose of assessing capital ade
quacy, the Federal Reserve recognizes that the
determination of the future benefits and useful
lives of certain intangible assets may involve

Capital Adequacy Guidelines

a degree of uncertainty that is not normally
associated with other banking assets. Supervi
sory concern over intangible assets derives
from this uncertainty and from the possibility
that, in the event an organization experiences
financial difficulties, such assets may not pro
vide the degree of support generally associ
ated with other assets. For this reason, the
Federal Reserve will carefully review the level
and specific character of intangible assets in
evaluating the capital adequacy of state mem
ber banks and bank holding companies.
The Federal Reserve recognizes that intan
gible assets may differ with respect to predict
ability of any income stream directly associ
ated with a particular asset, the existence of a
market for the asset, the ability to sell the as
set, or the reliability of any estimate of the
asset’s useful life. Certain intangible assets
have predictable income streams and objec
tively verifiable values and may contribute to
an organization’s profitability and overall fi
nancial strength. The value of other in
tangibles, such as goodwill, may involve a
number of assumptions and may be more sub
ject to changes in general economic circum
stances or to changes in an individual institu
tion’s future prospects. Consequently, the
value of such intangible assets may be diffi
cult to ascertain. Consistent with prudent
banking practices and the principle of the di
versification of risks, banking organizations
should avoid excessive balance-sheet concen
tration in any category or related categories of
intangible assets.

B a n k H o ld in g C o m p a n ies

While the Federal Reserve will consider the
amount and nature of all intangible assets,
those holding companies with aggregate intan
gible assets in excess of 25 percent of tangi
ble primary capital (i.e., stated primary capital
less all intangible assets) or those institutions
with lesser, although still significant, amounts
of goodwill will be subject to close scrutiny.
For the purpose of assessing capital adequacy,
the Federal Reserve may, on a case-by-case
basis, make adjustments to an organization’s
capital ratios based upon the amount of intan
gible assets in excess of the 25 percent thresh

Regulation Y, Appendix B

old level or upon the specific character of the
organization’s intangible assets in relation to
its overall financial condition. Such adjust
ments may require some organizations to raise
additional capital.
The Board expects banking organizations
(including state member banks) contemplating
expansion proposals to ensure that pro forma
capital ratios exceed the minimum capital
levels without significant reliance on in
tangibles, particularly goodwill. Consequently,
in reviewing acquisition proposals, the Board
will take into consideration both the stated
primary capital ratio (that is, the ratio without
any adjustment for intangible assets) and the
primary capital ratio after deducting in
tangibles. In acting on applications, the Board
will take into account the nature and amount
of intangible assets and will, as appropriate,
adjust capital ratios to include certain intangi
ble assets on a case-by-case basis.

S ta te M e m b e r B an ks

State member banks with intangible assets in
excess of 25 percent of tangible primary capi
tal will be subject to close scrutiny. In addi
tion, for the purpose of calculating capital ra
tios of state member banks, the Federal
Reserve will deduct goodwill from primary
capital and total capital. The Federal Reserve
may, on a case-by-case basis, make further
adjustments to a bank’s capital ratios based on
the amount of intangible assets (aside from
goodwill) in excess of the 25 percent thresh
old level or on the specific character of the
bank’s intangible assets in relation to its over
all financial condition. Such adjustments may
require some banks to raise additional capital.
In addition, state member banks and bank
holding companies are expected to review pe
riodically the value at which intangible assets
are carried on their balance sheets to deter
mine whether there has been any impairment
of value or whether changing circumstances
warrant a shortening of amortization periods.
Institutions should make appropriate reduc
tions in carrying values and amortization peri
ods in light of this review, and examiners will
evaluate the treatment of intangible assets dur
ing on-site examinations.

/oy/y

Regulation Y, Appendix B
D e fin itio n o f C ap ita l to B e U se d in
D e te rm in in g C ap ita l A d e q u a c y

Primary Capital Components
The components of primary capital are—
• common stock,
• perpetual preferred stock (preferred stock
that does not have a stated maturity date
and that may not be redeemed at the option
of the holder),
• surplus (excluding surplus relating to limit
ed-life preferred stock),
• undivided profits,
• contingency and other capital reserves,
• mandatory convertible instruments,2
• allowance for possible loan and lease
losses (exclusive of allocated transfer risk
reserves),
• minority interest in equity accounts of con
solidated subsidiaries, and
• perpetual debt instruments (for bank hold
ing companies but not for state member
banks).
Limits on Certain Forms o f Primary Capital
Bank holding companies. The maximum com
posite amount of mandatory convertible secur
ities, perpetual debt, and perpetual preferred
stock that may be counted as primary capital
for bank holding companies is limited to 33.3
percent of all primary capital, including these
instruments. Perpetual preferred stock issued
prior to November 20, 1985, (or determined
by the Federal Reserve to be in the process of
being issued prior to that date) shall continue
to be included as primary capital.
The maximum composite amount of
mandatory convertible securities and perpetual
debt that may be counted as primary capital
for bank holding companies is limited to 20
percent of all primary capital, including these
instruments. The maximum amount of equity
commitment notes (a form of mandatory con
vertible securities) that may be counted as pri
mary capital for a bank holding company is
limited to 10 percent of all primary capital,
including mandatory convertible securities.
2 See the definitional section below that lists the criteria
for mandatory convertible instruments to qualify as primary
capital.

Capital Adequacy Guidelines

Amounts outstanding in excess of these limi
tations may be counted as secondary capital
provided they meet the requirements of secon
dary capital instruments.
State member banks. The composite limita
tions on the amount of mandatory convertible
securities and perpetual preferred stock (per
petual debt is not primary capital for state
member banks) that may serve as primary
capital for bank holding companies shall not
be applied formally to state member banks,
although the Board shall determine appropri
ate limits for these forms of primary capital
on a case-by-case basis.
The maximum amount of mandatory con
vertible securities that may be counted as pri
mary capital for state member banks is limited
to 162/3 percent of all primary capital, includ
ing mandatory convertible securities. Equity
commitment notes, one form of mandatory
convertible securities, shall not be included as
primary capital for state member banks except
that notes issued by state member banks prior
to May 15, 1985, will continue to be included
in primary capital. Amounts of mandatory
convertible securities in excess of these limita
tions may be counted as secondary capital if
they meet the requirements of secondary capi
tal instruments.
Secondary Capital Components
The components of secondary capital are—
• limited-life preferred stock (including relat
ed surplus) and
• bank subordinated notes and debentures
and unsecured long-term debt of the parent
company and its nonbank subsidiaries.
Restrictions Relating to Capital Components
To qualify as primary or secondary capital, a
capital instrument should not contain or be
covered by any covenants, terms, or restric
tions that are inconsistent with safe and sound
banking practices. Examples of such terms are
those regarded as unduly interfering with the
ability of the bank or holding company to
conduct normal banking operations or those
resulting in significantly higher dividends or
interest payments in the event of a deteriora
tion in the financial condition of the issuer.

4f W

Regulation Y, Appendix B

Capital Adequacy Guidelines

The secondary components must meet the
following conditions to qualify as capital:
• The instrument must have an original
weighted-average maturity of at least seven
years.
• The instrument must be unsecured.
• The instrument must clearly state on its
face that it is not a deposit and is not in
sured by a federal agency.
• Bank debt instruments must be subordinat
ed to claims of depositors.
• For banks only, the aggregate amount of
limited-life preferred stock and subordinate
debt qualifying as capital may not exceed
50 percent of the amount of the bank’s pri
mary capital.
As secondary capital components approach
maturity, the banking organization must plan
to redeem or replace the instruments while
maintaining an adequate overall capital posi
tion. Thus, the remaining maturity of secon
dary capital components will be an important
consideration in assessing the adequacy of to
tal capital.

C ap ital R atio s

The primary and total capital ratios for bank
holding companies are computed as follows:

Primary capital ratio:
Primary capital components
Total assets + Allowance for loan and lease
losses (exclusive of allocated transfer risk
reserves)
Total capital ratio:

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 ratio:

Primary capital components-Goodwill
Average total assets + Allownce for loan and
lease losses (exclusive of allocated transfer risk
reserves)- Goodwill

Total capital ratio:

Primary capital components + Secondary capital
components—Goodwill
Average total assets + Allownce for loan and
lease losses (exclusive of allocated transfer risk
reserves)—Goodwill
Generally, period-end amounts will be used
to calculate bank holding company ratios.
However, the Federal Reserve will discourage
temporary balance-sheet adjustments or any
other “window dressing” practices designed
to achieve transitory compliance with the
guidelines. Banking organizations are expected
to maintain adequate capital positions at all
times. Thus, the Federal Reserve will, on a
case-by-case basis, use average total assets in
the calculation of bank holding company capi
tal ratios whenever this approach provides a
more meaningful indication of an individual
holding company’s capital position.
For the calculation of bank capital ratios,
“average total assets” will generally be de
fined as the quarterly average total assets fig
ure reported on the bank’s Report of Condi
tion. If warranted, however, the Federal
Reserve may calculate bank capital ratios
based upon total assets as of period-end. All
other components of the bank’s capital ratios
will be based upon period-end balances.

C rite ria fo r D e te rm in in g P rim a ry C a p ita l
S tatu s o f M a n d a to ry C o n v e rtib le
S e c u ritie s

Mandatory convertible securities are subordi
nated debt instruments that are eventually
transformed into common or perpetual pre
ferred stock within a specified period of time,
not to exceed 12 years. To be counted as pri
mary capital, mandatory convertible securities
must meet the criteria set forth below. These
criteria cover the two basic types of
mandatory convertible securities: equity con
tract notes (securities that obligate the holder
to take common or perpetual preferred stock
of the issuer in lieu of cash for repayment of
principal) and equity commitment notes (se
curities that are redeemable only with the pro
ceeds from the sale of common or perpetual

f r f i o v i q

Regulation Y, Appendix B

Capital Adequacy Guidelines

preferred stock). Both equity commitment
notes and equity contract notes qualify as pri
mary capital for bank holding companies, but
only equity contract notes qualify as primary
capital for banks.

rule, if the dedication is not made within the
prescribed period, then the securities issued
may not at a later date be dedicated to the
retirement or redemption of the mandatory
convertible securities.4

Criteria Applicable to Both Types of
Mandatory Convertible Securities

Additional Criteria Applicable to Equity
Contract Notes

a. The securities must mature in 12 years or
less.

a. The note must contain a contractual provi
sion (or must be issued with a mandatory
stock purchase contract) that requires the
holder of the instrument to take the common
or perpetual stock of the issuer in lieu of cash
in satisfaction of the claim for principal repay
ment. The obligation of the holder to take the
common or perpetual preferred stock of the
issuer may be waived if, and to the extent
that, prior to the maturity date of the obliga
tion, the issuer sells new common or perpetual
preferred stock and dedicates the proceeds to
the retirement or redemption of the notes. The
dedication generally must be made during the
quarter in which the new common or pre
ferred stock is issued.

b. 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 company. Any excep
tion to this rule must be approved by the Fed
eral Reserve. The securities may not be re
deemed with the proceeds of another issue of
mandatory convertible securities. Nor may the
issuer repurchase or acquire its own
mandatory convertible securities for resale or
reissuance.
c. Holders of the securities may not accelerate
the payment of principal except in the event
of bankruptcy, insolvency, or reorganization.
d. The securities must be subordinate in right
of payment to all senior indebtedness of the
issuer. 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.
e. An issuer that intends to dedicate the pro
ceeds of an issue of common or perpetual pre
ferred stock to satisfy the funding require
ments of an issue of mandatory convertible
securities (i.e. the requirement to retire or re
deem 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 common
or preferred stock is issued.3 As a general

b. A stock purchase contract may be sepa
rated from a security only if (1) the holder of
the contract provides sufficient collateral5 to
the issuer, or to an independent trustee for the
benefit of the issuer, to ensure performance
under the contract and (2) the stock purchase
contract requires the purchase of common or
perpetual preferred stock.

4 The dedication procedure is necessary to ensure that the
primary capital of the issuer is not overstated. For each
dollar of common or perpetual preferred proceeds dedicated
to the retirement or redemption of the notes, there is a
corresponding reduction in the amount of outstanding
mandatory securities that may qualify as primary capital.
De minimis amounts (in relation to primary capital) of
common or perpetual preferred stock issued under arrange
ments in which the amount of stock issued is not predict
able, such as dividend reinvestment plans and employee
stock option plans (but excluding public stock offerings and
stock issued in connection with acquisitions), should be
3 Common or perpetual preferred stock issued under divi dedicated by no later than the company’s fiscal year-end.
5 Collateral is defined as (1) cash or certificates of de
dend reinvestment plans or issued to finance acquisitions,
posit; (2) U.S. government securities that will mature prior
including acquisitions of business entities, may be dedi
to or simultaneous with the maturity of the equity contract
cated to the retirement or redemption of the mandatory
and that have a par or maturity value at least equal to the
convertible securities. Documentation certified by an au
amount of the holder’s obligation under the stock purchase
thorized agent of the issuer showing the amount of com
contract; (3) standby letters of credit issued by an insured
mon stock or perpetual preferred stock issued, the dates of
U.S. bank that is not an affiliate of the issuer; or (4) other
issue, and amounts of such issues dedicated to the retire
collateral as may be designated from time to time by the
ment or redemption of mandatory convertible securities will
Federal Reserve.
satisfy the dedication requirement.

(H /otfiQ

Capital Adequacy Guidelines

Additional Criteria Applicable to Equity
Commitment Notes
a. The indenture or note agreement must con
tain the following two provisions:
1. The proceeds of the sale of common or
perpetual preferred stock will be the sole
source of repayment for the notes, and the
issuer must dedicate the proceeds for the
purpose of repaying the notes. (Documenta
tion certified by an authorized agent of the
issuer showing the amount of common or
perpetual preferred stock issued, the dates
of issue, and amounts of such issues dedi
cated to the retirement or redemption of
mandatory convertible securities will sat
isfy the dedication requirement.)
2. By the time that one-third of the life of
the securities has run, the issuer must have
raised and dedicated an amount equal to
one-third of the original principal of the se
curities. By the time that two-thirds of the
life of the securities has run, the issuer
must have raised and dedicated an amount
equal to two-thirds of the original principal
of the securities. At least 60 days prior to
the maturity of the securities, the issuer
must have raised and dedicated an amount
equal to the entire original principal of the
securities. Proceeds dedicated to redemption
or retirement of the notes must come only
from the sale of common or perpetual pre
ferred stock.6
b. If the issuer fails to meet any of these peri
odic funding requirements, the Federal Re
serve immediately will cease to treat the un
funded securities as primary capital and will
take appropriate supervisory action. In addi
tion, failure to meet the funding requirements
will be viewed as a breach of a regulatory
commitment and will be taken into consid eration by the Board in acting on statutory
applications.
c. 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 repay
6 The funded portions of the securities will be deducted
from primary capital to avoid double counting.

Regulation Y, Appendix B

ment of the principal amount of the security
at its final maturity.

Criteria for Determining the Primary Capital
Status o f Perpetual Debt Instruments of
Bank Holding Companies
a. The instrument must be unsecured and, if
issued by a bank, must be subordinated to the
claims of depositors.
b. The instrument may not provide the note
holder with the right to demand repayment of
principal except in the event of bankruptcy,
insolvency, or reorganization. The instrument
must provide that nonpayment of interest shall
not trigger repayment of the principal of the
perpetual debt note or any other obligation of
the issuer, nor shall it constitute prima facie
evidence of insolvency or bankruptcy.
c. The issuer shall not voluntarily redeem the
debt issue without prior approval of the Fed
eral Reserve, except when the debt is con
verted to, exchanged for, or simultaneously re
placed in like amount by an issue of common
or perpetual preferred stock of the issuer or
the issuer’s parent company.
d. If issued by a bank holding company, a
bank subsidiary, or a subsidiary with substan
tial operations, the instrument must contain a
provision that allows the issuer to defer inter
est payments on the perpetual debt in the
event of, and at the same time as the elimina
tion of dividends on all outstanding common
or preferred stock of the isssuer (or in the
case of a guarantee by a parent company at
the same time as the elimination of the divi
dends of the parent company’s common and
preferred stock). In the case of a nonoperating
subsidiary (a funding subsidiary or one
formed to issue securities), the deferral of in
terest payments must be triggered by elimina
tion of dividends by the parent company.
e. If issued by a bank holding company or a
subsidiary with substantial operations, the in
strument must convert automatically to com
mon or perpetual preferred stock of the issuer
when the issuer’s retained earnings and sur
plus accounts become negative. If an operat
ing subsidiary’s perpetual debt is guaranteed
by its parent, the debt may convert to the

ioi

Regulation Y, Appendix B

shares of the issuer or guarantor and such
conversion may be triggered when the issuer’s
or parent’s retained earnings and surplus ac
counts become negative. If issued by a nonop
erating subsidiary of a bank holding company

Capital Adequacy Guidelines

or bank, the instrument must convert automat
ically to common or preferrred stock of the
issuer’s parent when the retained earnings and
surplus accounts of the issuer’s parent become
negative.

C apital A d eq u acy G u id elin es for B ank H old in g C om panies:
Tier 1 L everage M easure
Regulation Y (12 CFR 225), Appendix D; as amended effective March 9, 1993

I. O v erv ie w
The Board of Governors o f the Federal Re
serve System has adopted a minimum ratio o f
tier 1 capital to total assets to assist in the
assessment of the capital adequacy of bank
holding com pan ies ( “ banking organiza
tions” ).1 The principal objectives o f this mea
sure is to place a constraint on the maximum
degree to which a banking organization can
leverage its equity capital base. It is intended
to be used as a supplement to the risk-based
capital measure.
The guidelines apply on a consolidated ba
sis to bank holding companies with consoli
dated assets of $150 million or more. For
bank holding companies with less than $150
million in consolidated assets, the guidelines
will be applied on a bank-only basis unless
(a) the parent bank holding company is en
gaged in nonbank activity involving signifi
cant leverage. 12 or (b) the parent company has
a significant amount of outstanding debt that
is held by the general public.
The tier 1 leverage guidelines are to be
used in the inspection and supervisory process
as well as in the analysis o f applications acted
upon by the Federal Reserve. The Board will
review the guidelines from time to time and
will consider the need for possible adjust
ments in light o f any significant changes in
the economy, financial markets, and banking
practices.
II. T h e T ie r 1 L e v e ra g e R a tio
The Board has established a minimum level of
tier 1 capital to total assets o f 3 percent. A
banking organization operating at or near
these levels is expected to have well-diversi
fied risk, including no undue interest-rate risk
exposure; excellent asset quality; high liquid
ity; and good earnings; and in general be con
sidered a strong banking organization, rated
1Supervisory ratios that relate capital to total assets for
state member banks are outlined in appendix B of Regula
tion Y (page 59).
2A parent company that is engaged in signific off bal
ance sheet activities would generally be deemed to be en
gaged in activities that involve significant leverage

composite 1 under the BOPEC rating system
for bank holding companies. Organizations not
meeting these characteristics, as well as insti
tutions with supervisory, financial, or opera
tional weaknesses, are expected to operate
well above minimum capital standards. Orga
nizations experiencing or anticipating signifi
cant growth also are expected to maintain cap
ital ratios, including tangible capital positions,
well above the minimum levels. For example,
most such organizations generally have oper
ated at capital levels ranging from 100 to 200
basis points above the stated minimums.
Higher capital ratios could be required if war
ranted by the particular circumstances or risk
profiles of individual banking organizations.
Thus, for all but the most highly rated organi
zations meeting the conditions set forth above,
the minimum tier 1 leveraged ratio is to be 3
percent plus an additional cushion of at least
100 to 200 basis points. In all cases, banking
organizations should hold capital commensu
rate with the level and nature o f all risks, in
cluding the volume and severity o f problem
loans, to which they are exposed.
A banking organization’s tier 1 leverage ra
tio is calculated by dividing its tier 1 capital
(the numerator o f the ratio) by its average to
tal consolidated assets (the denominator o f the
ratio). The ratio will also be calculated on the
basis o f period-end assets, whenever necessary
on a case-by-case basis. For the purpose of
this leverage ratio, the definition o f tier 1 cap
ital for year-end 1992 as set forth in the riskbased capital guidelines contained in appendix
A to Regulation Y (page 31) will be used.3 As
a general matter, average total consolidated

3 At the end of 1992, tier 1 capital for bank holding
companies includes common equity, minority interest in eq
uity accounts of consolidated subsidiaries, qualifying
noncumulative perpetual preferred stock, and qualifying cu
mulative perpetual preferred stock. (Cumulative perpetual
preferred stock is limited to 25 percent of tier 1 capital.) In
addition, as a general matter, tier 1 capital excludes good
will; amounts of purchased mortgage-servicing rights and
purchased credit-card relationships that, in the aggregate,
exceed 50 percent of tier 1 capital; amounts of purchased
credit-card relationships that exceed 25 percent of tier 1
capital; and all other intangible assets. The Federal Reserve
may exclude certain investments in subsidiaries or associ
ated companies as appropriate.

Regulation Y, Appendix D

Capital Adequacy Guidelines

Whenever appropriate, including when an
organization is undertaking expansion, seeking
to engage in new activities or otherwise facing
unusual or abnormal risks, the Board will con
tinue to consider the level of an individual
organization’s tangible tier 1 leverage ratio
(after deducting all intangibles) in making an
overall assessment o f capital adequacy. This is
consistent with the Federal Reserve’s riskbased capital guidelines and long-standing
Board policy and practice with regard to lev
erage guidelines. Organizations experiencing
growth, whether internally or by acquisition,
are expected to maintain strong capital posi
tions substantially above minimum supervi
sory levels, without significant reliance on in
4 Deductions from tier 1 capital and other adjustments are tangible assets.

assets are defined as the quarterly average to
tal assets (defined net of the allowance for
loan and lease losses) reported on the banking
organization’s Consolidated Financial State
ments (FR Y-9C Report), less goodw ill;
amounts o f purchased m ortgage-servicing
rights and purchased credit-card relationships
that, in the aggregate, are in excess o f 50 per
cent o f tier 1 capital; amounts o f purchased
credit-card relationships in excess of 25 per
cent of tier 1 capital; all other intangible as
sets; and any investments in subsidiaries or
associated companies that the Federal Reserve
determines should be deducted from tier 1
capital.4

»*

discussed more fully in section II.B. of appendix A to Reg
ulation Y (page 31).

Full text of Federal Reserve Bank of New York Circulars : [Letter Regarding Regulation A and Appendices to Regulations H and Y]

FRASER