[Federal Register Volume 62, Number 207 (Monday, October 27, 1997)]
[Proposed Rules]
[Pages 55692-55694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28271]
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FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0948]
Risk-Based Capital Standards: Construction Loans on Presold
Residential Properties; Junior Liens on 1- to 4-Family Residential
Properties; and Mutual Funds and Leverage Capital Standards: Tier 1
Leverage Ratio
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Board of Governors of the Federal Reserve System is
proposing to amend its risk-based capital guidelines for bank holding
companies by revising the treatment for junior liens on 1- to 4-family
residential properties and mutual funds and the language for
construction loans on presold residential properties, and to simplify
the leverage capital guidelines for bank holding companies. The
proposal, which was developed on an interagency basis, would implement
part of section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994, which requires the Federal banking agencies to
work jointly to make uniform their regulations and guidelines
implementing common statutory or supervisory policies. The effect of
the proposal would be that the bank holding company risk-based capital
treatment for construction loans on presold residential properties,
real estate loans secured by junior liens on 1- to 4-family residential
properties, and investments in mutual funds would be consistent with
the risk-based capital treatment of the other Federal banking and
thrift regulatory agencies, and the bank holding company Tier 1
leverage standards would be simplified and revised to take into account
the market risk capital rule.
DATES: Comments must be received on or before December 26, 1997.
ADDRESSES: Comments should refer to Docket No. R-0948 and may be mailed
to William W. Wiles, Secretary, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, N.W., Washington
D.C., 20551. Comments may also be delivered to Room B-2222 of the
Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or the guard
station in the Eccles Building courtyard on 20th Street, N.W. (between
Constitution Avenue and C Street) at any time. Comments may be
inspected in Room MP-500 of the Martin Building between 9 a.m. and 5
p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's Rules
Regarding Availability of Information.
FOR FURTHER INFORMATION CONTACT: Roger Cole, Associate Director (202/
452-2618); Norah Barger, Assistant Director (202/452-2402); or Barbara
Bouchard, Senior Supervisory Financial Analyst (202/452-3072), Division
of Banking Supervision and Regulation. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), Diane Jenkins (202/452-
3544).
SUPPLEMENTARY INFORMATION: The Federal Reserve, along with the other
bank and thrift regulatory agencies (that is, the Office of the
Comptroller of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), and the Office of Thrift Supervision (OTS)
(collectively, the Agencies)), issued a joint notice of proposed
rulemaking, published elsewhere in today's Federal Register, under
Docket No. R-0947. In that joint notice, the Agencies have proposed
several amendments to their risk-based capital standards that would
eliminate inconsistencies among the capital rules for banks and
thrifts. In particular, the Agencies have proposed amendments to the
risk-based capital treatment of construction loans on presold
residential properties, loans secured by junior liens on 1- to 4-family
residential property, and investments in mutual funds. The agencies
also have proposed a streamlining revision to their leverage capital
rules. The Federal Reserve, in this notice, is proposing conforming
amendments to its risk-based capital guidelines for bank holding
companies, as well as a streamlining revision to its leverage capital
guidelines for such organizations, that takes into account the market
risk capital rule (12 CFR part 225, appendix E).
Proposed Amendments to the Risk-Based Capital Guidelines
With regard to construction loans on presold residential
properties, the Board is not proposing any substantive change to its
rule, but is proposing a revision to the regulatory language to provide
guidance on the characteristics of loans to builders that will be
considered prudently underwritten. This change would conform the
discussion of qualifying construction loans to builders to the existing
language of the FDIC. For junior liens on 1-to 4-family properties, the
Board is proposing to treat all first and second liens separately, even
if the lending institution holds both liens and no party holds an
intervening lien. Under the proposed treatment, qualifying first liens
would be risk weighted at 50 percent, and non-qualifying first liens
and all junior liens would be risk weighted at 100 percent. The Federal
Reserve is proposing to retain its general treatment for investments in
mutual funds, that is, generally assigning an institution's investment
in a mutual fund to the highest risk-weight category applicable to any
asset the fund is authorized to hold in accordance with its prospectus.
The Federal Reserve is also proposing to allow an institution, at its
option, to allocate its investment in a mutual fund among the risk-
weight categories based on the maximum percentage of the mutual fund's
portfolio that may consist of higher risk-weighted assets under its
prospectus. These proposed revisions are consistent with the Federal
Reserve's proposed amendments for state member banks that are set forth
in the earlier referenced interagency notice of proposed rulemaking.
Proposed Amendment to the Tier 1 Leverage Guidelines
The Federal Reserve's capital adequacy guidelines for bank holding
companies set forth the following minimum levels of Tier 1 capital to
total assets (leverage ratio): a 3 percent minimum for organizations
rated a composite 1 under the BOPEC 1 rating system for bank
holding companies and a minimum of 3 percent plus 100 to 200 basis
points for all other organizations. The Federal Reserve is proposing to
amend its guidelines to set forth a minimum 3 percent leverage ratio
for bank holding companies that are BOPEC 1-rated or have implemented
the risk-based capital market risk measure set forth in the Board's
capital adequacy guidelines (12 CFR part 225, appendix E). All other
bank holding companies would be subject to a 4 percent minimum Tier 1
leverage ratio. Higher
[[Page 55693]]
capital ratios could be required if warranted by the particular
circumstances or risk profiles of individual banking organizations.
Institutions with supervisory, financial, or operational weaknesses
would continue to be expected to operate well above minimum capital
levels. Organizations experiencing or anticipating significant growth
also would be expected to maintain capital ratios, including tangible
capital positions, well above the minimum.
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\1\ The BOPEC rating system is used by supervisors to summarize
their evaluations of the strength and soundness of bank holding
companies in a comprehensive and uniform manner.
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The Federal Reserve notes that this proposed amendment would lower
the minimum Tier 1 leverage ratio for institutions that have
implemented the market risk capital rule. While the Federal Reserve
believes it is desirable for bank holding companies to maintain a
minimum base of capital to total assets, it also recognizes that the
leverage ratio can be an inexact measure of capital adequacy for many
bank holding companies, particularly for very large organizations that
have significant trading portfolios and are extensively engaged in fee-
generating off-balance-sheet activity. Accordingly, in light of the
revisions to the risk-based capital measure to capture market risk as
well as credit risk, the Federal Reserve believes it is appropriate to
lower the minimum Tier 1 leverage ratio to 3 percent for bank holding
companies that have implemented the market risk rule.
The Federal Reserve requests comment on all aspects of this
proposal. With regard to the proposed treatment for first and second
liens, the Board notes that it continues to believe its current
approach of merging first and second liens more appropriately reflects
the risk of those transactions. This is because, in terms of an
institution's collateral position, funds advanced on both the first and
second note are effectively secured by a first lien and timely payment
in accordance with the terms of both loans depends on the same
borrower's financial ability to pay. Furthermore, the Board believes
that merging these liens is consistent with general industry practice.
Thus, the Board requests, in particular, comment on the proposed
treatment for first and second liens.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Board does not believe the proposed rule would have a significant
impact on a substantial number of small business entities in accord
with the spirit and purposes of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.). Accordingly, a regulatory flexibility analysis is
not required. In addition, because the risk-based capital guidelines
generally do not apply to bank holding companies with consolidated
assets of less than $150 million, the proposed rule would not affect
such companies. The effect of the proposed rule would be to reduce
regulatory burden on bank holding companies by unifying the Agencies'
risk-based capital treatment for presold construction loans, junior
liens, and investments in mutual funds, and simplifying the Tier 1
leverage standards.
Paperwork Reduction Act
The Board has determined that the proposed rule does not involve a
collection of information pursuant to the provisions of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
For the reasons set forth in the preamble, part 225 of chapter II
of title 12 of the Code of Federal Regulations is proposed to be
amended as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 is revised to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. In appendix A to part 225, section III.A., footnote 24 is
revised to read as follows:
APPENDIX A TO PART 225--CAPITAL ADEQUACY GUIDELINES FOR BANK
HOLDING COMPANIES: RISK-BASED MEASURE
* * * * *
III. * * *
A. * * * 24
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\24\ An investment in shares of a mutual fund whose portfolio
consists solely of various securities or money market instruments
that, if held separately, would be assigned to different risk
categories, generally is assigned to the risk category appropriate
to the highest risk-weighted asset that the fund is permitted to
hold in accordance with the stated investment objectives as set
forth in the prospectus. The organization may, at its option, assign
the investment on a pro rata basis to different risk categories
according to the investment limits in the fund's prospectus, but in
no case will indirect holdings through shares in any mutual fund be
assigned to a risk weight less than 20 percent. 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 securities
generally will be disregarded in determining the risk category into
which the organization's holding in the overall fund should be
assigned. The prudent use of hedging instruments by a mutual fund to
reduce the risk of its assets will not increase the risk weighting
of the mutual fund investment. For example, the use of hedging
instruments by a mutual fund to reduce the interest rate risk of its
government bond portfolio will not increase the risk weight of that
fund above the 20 percent category. Nonetheless, if the fund engages
in any activities that appear speculative in nature or has any other
characteristics that are inconsistent with the preferential risk
weighting assigned to the fund's assets, holdings in the fund will
be assigned to the 100 percent risk category.
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* * * * *
3. In appendix A to part 225, section III.C.3. is amended by
removing and reserving footnote 37 and by adding a new sentence to the
end of the footnote 38 to read as follows:
* * * * *
III. * * *
C. * * *
3. * * * 38 * * *
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\38\ * * * Such loans to builders will be considered prudently
underwritten only if the bank holding company has obtained
sufficient documentation that the buyer of the home intends to
purchase the home (i.e., has a legally binding written sales
contract) and has the ability to obtain a mortgage loan sufficient
to purchase the home (i.e., has a firm written commitment for
permanent financing of the home upon completion).
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* * * * *
4. In appendix D to part 225, section II.a. is revised to read as
follows:
APPENDIX D TO PART 225--CAPITAL ADEQUACY GUIDELINES FOR BANK
HOLDING COMPANIES: TIER 1 LEVERAGE MEASURE
* * * * *
II. * * *
a. For a strong banking organization (rated composite 1 under
the BOPEC rating system of bank holding companies or has implemented
the Board's risk-based capital measure for market risk as set forth
in appendices A and E of this part) the minimum ratio of Tier 1
capital to total assets is 3.0 percent. Such organizations must not
be anticipating or experiencing significant growth, are expected to
have well diversified risk (including no undue interest rate risk
exposure), excellent asset quality, high liquidity, good earnings,
and in general be considered a strong banking organization. In
addition, organizations are expected to maintain capital ratios,
including tangible capital positions, well above minimum levels. For
all other bank holding companies, the minimum ratio is 4.0 percent.
Higher capital ratios could be required if warranted by the
particular circumstances or risk profiles of individual banking
organizations. In all cases, bank holding companies should hold
capital commensurate with the level and nature of all risks,
including the volume and severity of problem loans, to which they
are exposed.
* * * * *
[[Page 55694]]
By order of the Board of Governors of the Federal Reserve
System, October 21, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-28271 Filed 10-24-97; 8:45 am]
BILLING CODE 6210-01-P
