[Federal Register Volume 61, Number 213 (Friday, November 1, 1996)]
[Rules and Regulations]
[Pages 56404-56407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27691]
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FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0936]
Bank Holding Companies and Change in Bank Control (Regulation Y)
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Interim rule with request for comments.
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SUMMARY: Section 2208 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 amended the Bank Holding Company Act to eliminate
the requirement that bank holding companies seek Board approval before
engaging de novo in permissible nonbanking activities listed in
Regulation Y if the holding company is well-capitalized and meets
certain other criteria specified in the statute. Section 2208 also
established an expedited procedure for well-capitalized bank holding
companies that meet these criteria to obtain Board approval to acquire
smaller companies that engage in any permissible nonbanking activities
listed in Regulation Y as well as to engage in nonbanking activities
that the Board has approved only by order. These changes are effective
immediately.
Section 2208 provides that a bank holding company shall be
considered ``well-capitalized'' if it meets the capital levels required
by the Board. For purposes of determining the capital levels at which a
bank holding company shall be considered ``well-capitalized'' under
section 2208 and Regulation Y, the Board has adopted, as an interim
rule, risk-based capital thresholds that are the same as the levels set
for determining that a state member bank is well capitalized under the
provisions established under section 38 of the Federal Deposit
Insurance Act, and a modified leverage ratio. Because section 2208
became effective upon enactment on September 30, 1996, this definition
is adopted effective immediately on an interim basis. The Board invites
public comment on the definition of ``well-capitalized,'' including how
this provision in section 2208 applies to foreign banking
organizations. The Board will adjust the definition as appropriate in
light of public comment.
DATES: Interim rule effective October 23, 1996; comments must be
received by December 2, 1996.
ADDRESSES: Comments should refer to Docket No. R-0936, and may be
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 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, and to
the guard station in the Eccles Building courtyard on 20th Street, NW.
(between Constitution Avenue and C Street) at any time. Comments
received will be available for inspection in room MP-500 of the Martin
Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided
in section 261.8(a) of the Board's Rules Regarding Availability of
Information.
FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General
Counsel (202/452-3583), Deborah M. Awai, Senior Attorney (202/452-
3594), Legal Division; Rhoger Pugh, Assistant
[[Page 56405]]
Director (202/728-5883), Norah M. Barger, Manager (202/452-2402),
Division of Banking Supervision and Regulation, Board of Governors of
the Federal Reserve System. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544), Board of Governors of the Federal Reserve System, 20th
Street and Constitution Avenue, NW., Washington, DC.
SUPPLEMENTARY INFORMATION: Section 2208 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (Pub. L. 104-208, 110 Stat.
3009) amended section 4 of the Bank Holding Company Act to provide that
a well-capitalized bank holding company that meets certain criteria is
no longer required to obtain prior Board approval to engage de novo in
a nonbanking activity listed in Regulation Y. A bank holding company
that meets the qualifications in section 2208 is required only to
notify the Board within 10 business days after the activity has been
started.1
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\1\ The other criteria established by section 2208 require that
1) the lead insured depository institution controlled by the bank
holding company and insured depository institutions that control at
least 80 percent of the aggregate total risk-weighted assets of
insured depository institutions controlled by the holding company be
well-capitalized; 2) no insured depository institution controlled by
the holding company be undercapitalized; 3) the bank holding
company, its lead insured depository institution and insured
depository institutions representing at least 90 percent of the
aggregate total risk-weighted assets of insured depository
institutions controlled by the bank holding company have received at
least a composite 2 examination rating and a ``satisfactory'' rating
for management at the most recent examination; 4) no insured
depository institution controlled by the bank holding company have
received a composite examination rating of 4 or 5 at the latest
examination; and 5) no supervisory or enforcement action be pending
against the bank holding company or any of its insured depository
institutions.
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Section 2208 also established an expedited procedure for well-
capitalized bank holding companies that meet the criteria in section
2208 to obtain Board approval to acquire companies (other than an
insured depository institution) that engage in any permissible
nonbanking activities as well as to engage de novo in nonbanking
activities that the Board has approved only by order.2 Under the
statutory change, a qualifying bank holding company must provide the
Board with at least 12 business days advance notice of a proposed
acquisition or of a proposal to engage in an activity approved only by
order, and the Board may notify the bank holding company during that
period that a full application is required.3
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\2\ In addition to meeting the criteria described in footnote 1,
an acquisition qualifies under the statute if the acquired assets or
company represent less than 10 percent of the total risk-weighted
assets of the acquiring bank holding company and the consideration
paid for the assets or company does not exceed 15 percent of the
consolidated Tier 1 capital of the acquiring bank holding company.
\3\ By the terms of the statutory change, this expedited
procedure is not available for acquisitions of savings associations
or other insured depository institutions. Proposals that involve the
acquisition of a savings association or other insured depository
institution, or that do not otherwise meet the criteria established
in section 2208 must receive prior System approval under the
procedures currently set forth in Regulation Y.
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To qualify for this exemption and procedure, a bank holding company
must be well-capitalized. Section 2208 provides that a bank holding
company is ``well-capitalized'' for purposes of that section if the
holding company meets the required capital levels for well-capitalized
bank holding companies established by the Board. The Board's capital
adequacy guidelines do not currently define a capital level at which a
bank holding company would be considered to be ``well-capitalized'' for
any purpose.
For purposes of section 2208 and the provisions of Regulation Y,
the Board considers a bank holding company to be ``well-capitalized''
if:
1. The bank holding company, on a consolidated basis, maintains a
total risk-based capital ratio of 10.0 percent or greater;
2. The bank holding company, on a consolidated basis, maintains a
Tier 1 risk-based capital ratio of 6.0 percent or greater.
3. The bank holding company, on a consolidated basis, maintains
either:
A. A Tier 1 leverage ratio of 4.0 percent or greater, or
B. If the bank holding company has a composite 1 rating under the
BOPEC (or comparable) rating system or has implemented the risk-based
capital measure for market risk, a Tier 1 leverage ratio of 3.0 percent
or greater; and
4. The bank holding company is not subject to any written
agreement, order, capital directive, or prompt corrective action
directive issued by the Board to meet and maintain a specific capital
level for any capital measure.
The risk-based ratios are the risk-based capital levels at which a
state member bank is deemed to be well-capitalized for purposes of the
provisions of the Federal Deposit Insurance Act that govern prompt
corrective action. The Board believes it is desirable for bank holding
companies also to maintain a minimum base of capital to total assets,
but recognizes that the leverage ratio can be an inexact measure of
capital adequacy for many bank holding companies, particularly for
holding companies that engage in significant nonbanking activities. The
leverage ratio can be particularly misleading for very large
organizations that have significant trading portfolios and are
extensively engaged in fee-generating off-balance sheet activity.
Accordingly, the Board requires a leverage ratio that is somewhat
different than the ratio required for a ``well-capitalized''
bank.4 Specifically, in order to be deemed well-capitalized for
purposes of Regulation Y and the modifications to the application
process, a bank holding company must maintain a minimum Tier 1 leverage
ratio of 3 percent so long as the organization has a composite 1 BOPEC
rating or has implemented the risk-based capital market risk measure
set forth in the Board's capital adequacy guidelines.5 All other
bank holding companies would be subject to a 4 percent minimum Tier 1
leverage ratio. In calculating the various capital levels, a bank
holding company should apply the definition of capital, assets,
weighted risk assets, Tier 1 capital, leverage, and other capital terms
as defined currently in the capital adequacy guidelines applicable to
bank holding companies.6
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\4\ To be classified as ``well-capitalized,'' a state member
bank must have a Tier 1 leverage ratio of at least 5 percent, in
addition to the two risk-based capital ratios described above.
\5\ The Board's current guidelines for determining that a
banking organization is ``adequately capitalized'' set the minimum
level of Tier 1 capital to total assets at 3 percent for
organizations with a composite 1 BOPEC rating that also meet certain
other conditions, and at 3 percent plus an additional cushion of 100
to 200 basis points for all other organizations.
\6\ Capital Adequacy Guidelines for Bank Holding Companies:
Risk-based Measure (12 CFR Part 225, Appendix A); and Capital
Adequacy Guidelines for Bank Holding Companies: Tier 1 Leverage
Measure (12 CFR Part 225, Appendix D).
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The changes enacted by section 2208 will reduce regulatory burden
on well-capitalized bank holding companies that meet the criteria of
that section by eliminating the current statutory requirement for prior
approval of proposals to engage de novo in nonbanking activities that
the Board has approved by regulation, and by establishing a streamlined
prior notice requirement for these companies to obtain approval to make
small acquisitions of companies engaged in permissible nonbanking
activities and to engage de novo in activities permitted by order.
Because the provisions of section 2208 became effective on the date of
enactment, which was September 30, 1996, and because the change to
Regulation Y would establish a definition that is needed to identify
[[Page 56406]]
bank holding companies that qualify for the regulatory relief contained
in section 2208, the Board believes that there is good cause for
adopting its definition of a ``well-capitalized'' bank holding company
on an interim basis effective immediately.
The Board invites public comment on the definition of ``well-
capitalized,'' including how this provision in section 2208 applies to
foreign banking organizations. The Board will adjust the definition as
appropriate in light of public comment.
Regulatory Flexibility Act Analysis
Pursuant to the Regulatory Flexibility Act, the Board is required
to conduct an analysis of the effect, on small institutions, of the
proposed revision to Regulation Y. As of December 31, 1995, the number
of bank holding companies totalled 5,274.7 The following chart
provides a distribution, based on asset size, for those companies.
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\7\ Financial top-tier domestic bank holding companies. Excludes
middle-tier bank holding companies, and foreign bank holding
companies that are not required to file a Y-9 report with the
Federal Reserve System.
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Percent of
Number of bank
bank holding
Asset size category (M=Million) holding company
companies assets
(percent)
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Less than $150M............................... 3,954 \1\ 5.5
Greater than $150M............................ 1,320 94.5
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\1\ Bank holding companies with consolidated assets of less than $150
million are not required to file financial regulatory reports on a
consolidated basis. Assets for this group are estimated based on
reports filed by the parent companies and subsidiaries.
The Board does not believe that the interim rule would have a
significant adverse economic impact on a substantial number of small
entities. The rule would reduce regulatory burdens imposed by the
Board's procedures on well-capitalized bank holding companies by
eliminating or streamlining the notice requirements under section 4 of
the Bank Holding Company Act. Elimination or streamlining of these
procedures for well-capitalized bank holding companies is expected to
have a particular benefit to small bank holding companies that qualify
for this exemption by reducing the paperwork burden and processing time
associated with regulatory filings, and the costs associated with
complying with regulation. This will improve the ability of all bank
holding companies, including small organizations, to conduct business
on a more cost-efficient basis. The Board invites public comment on
this subject.
Paperwork Reduction Act Analysis
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
Ch. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the interim rule
under the authority delegated to the Board by the Office of Management
and Budget. Comments on the collections of information should be sent
to the Office of Management and Budget, Paperwork Reduction Project
(7100-00171, 7100-0121, 7100-0134, 7100-0131, 7100-0119, as applicable;
see below), Washington, DC 20503, with copies of such comments to be
sent to Mary M. McLaughlin, Federal Reserve Board Clearance Officer,
Division of Research and Statistics, Mail Stop 97, Board of Governors
of the Federal Reserve System, Washington, DC 20551.
This interim rule will eliminate one information collection
requirement and substantially reduce another for any bank holding
company that meets the proposed definition of a well-capitalized bank
holding company and the other statutory requirements. The affected
information requirements are found in 12 CFR 225.23 and 12 CFR 225.24.
This information is required to evidence compliance with the
requirements of the Bank Holding Company Act. The respondents are for-
profit financial institutions and other corporations, including small
businesses, and individuals. The Federal Reserve may not conduct or
sponsor, and an organization is not required to respond to, these
information collections unless it displays a currently valid OMB
control number. The OMB control numbers are indicated below.
The Board believes the interim rule will result in a reduction in
burden by defining when a bank holding company is ``well-capitalized''
and, consequently, qualifies for the new statutory exemption from or
streamlined notice procedures for obtaining prior approval for
nonbanking proposals under section 4 of the Bank Holding Company Act.
Bank holding companies that qualify for the exemption from the
prior approval requirement to engage de novo in permissible nonbanking
activities and for the streamlined procedure for obtaining approval for
proposals to acquire small nonbanking companies should benefit from a
significant reduction in burden for respondents that file the
Application for Prior Approval To Engage Directly or Indirectly in
Certain Nonbanking Activities (FR Y-4; OMB No. 7100-0121).
Approximately 360 respondents file the FR Y-4 annually to meet
application requirements, and 114 respondents file to meet notification
requirements. The current burden per response is 59.0 hours and 1.5
hours, respectively, for a total estimated annual burden of 21,529
hours. Under the proposed rule it is estimated that between 30 and 50
percent of these respondents would meet the criteria to qualify either
for elimination or for the filing of a streamlined application,
representing between 109 and 181 applications and between 34 and 57
notifications. The average number of hours per response for the
required post-consummation notice is 0.5 hours and for the required
streamlined notice is 1.5 hours. Therefore the total amount of annual
burden is estimated to be between 11,121.5 and 15,261.5 hours. Based on
an hourly cost of $50, the annual cost to the public under the proposed
revision is estimated to be between $556,075 and $763,075, which
represents an estimated cost reduction of between $313,375 and $520,375
from the current estimated annual cost to the public of $1,076,450
under the current rule.
All information contained in these collections of information are
available to the public unless the respondent can substantiate that
disclosure of certain information would result in substantial
competitive harm or an unwarranted invasion of personal privacy or
would otherwise qualify for an exemption under the Freedom of
Information Act.
Comments are invited on: a. whether the proposed collections of
information are necessary for the proper performance of the Federal
Reserve's functions, including whether the information has practical
utility; b. the accuracy of the Federal Reserve's estimate of the
burden of the proposed information collections, including the cost of
compliance; c. ways to enhance the quality, utility, and clarity of the
information to be collected; and d. ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology.
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 out in the preamble, the Board amends 12 CFR
Part 225 as follows:
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PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for Part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. In Sec. 225.2, paragraph (q) is added to read as follows:
Sec. 225.2 Definitions.
* * * * *
(q) Well-capitalized--(1) Bank holding company. In the case of a
bank holding company, well-capitalized means that:
(i) On a consolidated basis, the bank holding company maintains a
total risk-based capital ratio of 10.0 percent or greater, as defined
in Appendix A of this part;
(ii) On a consolidated basis, the bank holding company maintains a
Tier 1 risk-based capital ratio of 6.0 percent or greater, as defined
in Appendix A of this part;
(iii) On a consolidated basis, the bank holding company maintains
either:
(A) A Tier 1 leverage ratio of 4.0 percent or greater; or
(B) If the bank holding company has a composite 1 rating under the
BOPEC (or comparable) rating system or has implemented the risk-based
capital measure for market risk, a Tier 1 leverage ratio of 3.0 percent
or greater; and
(iv) The bank holding company is not subject to any written
agreement, order, capital directive, or prompt corrective action
directive issued by the Board to meet and maintain a specific capital
level for any capital measure.
(2) Insured depository institution. In the case of an insured
depository institution, well-capitalized means that the institution
maintains at least the capital levels required to be well-capitalized
under the capital adequacy regulations or guidelines applicable to the
institution that have been adopted by the appropriate federal banking
agency for the institution under section 38 of the Federal Deposit
Insurance Act.
By order of the Board of Governors of the Federal Reserve
System, October 23, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-27691 Filed 10-31-96; 8:45 am]
BILLING CODE 6210-01-P
