[Federal Register Volume 60, Number 21 (Wednesday, February 1, 1995)]
[Proposed Rules]
[Pages 6042-6045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2415]
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FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-0870]
Capital; Capital Adequacy Guidelines
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 (Board)
is proposing to amend its capital adequacy guidelines for state member
banks and bank holding companies (banking organizations) with regard to
the regulatory capital treatment of certain transfers of assets with
recourse. This amendment is being proposed to implement section 208 of
the Riegle Community Development and Regulatory Improvement Act of 1994
(Riegle Act). The proposed rule would have the effect of lowering the
capital requirement for small business loans and leases on personal
property that have been transferred with recourse by qualifying banking
organizations.
DATES: Comments must be received on or before February 27, 1995.
ADDRESSES: Comments, which should refer to Docket No. R-0870, may be
mailed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551. Comments also may be delivered to Room B-2222 of
the Eccles building between 8:45 a.m. and 5:15 p.m. weekdays, or to 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 9:00 a.m. and
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's
rules regarding availability of information.
FOR FURTHER INFORMATION CONTACT: Rhoger H. Pugh, Assistant Director
(202/728-5883); Norah Barger, Manager (202/452-2402); Thomas R. Boemio,
Supervisory Financial Analyst (202/452-2982); or David A. Elkes,
Financial Analyst (202/452-5218), Division of Banking Supervision and
Regulation. Telecommunication Device for the Deaf (TDD), Dorothea
Thompson (202/452-3544), Board of Governors of the Federal Reserve
System, 20th and C Streets NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
Background
The Board's current regulatory capital guidelines are intended to
ensure that banking organizations that transfer assets and retain the
credit risk inherent in those assets maintain adequate capital to
support that risk. For banks, this is generally accomplished by
requiring that assets transferred with recourse continue to be reported
on the balance sheet in their regulatory reports. Thus, these assets
are included in the calculation of banks' risk-based and leverage
capital ratios. For bank holding companies, transfers of assets with
recourse are reported in accordance with generally accepted accounting
principles (GAAP). GAAP treats most such transactions as sales,
allowing the assets to be removed from the balance sheet.1 For
purposes of calculating bank holding companies' risk-based capital
ratios, however, assets sold with recourse that have been removed from
the balance sheet in accordance with GAAP are included in risk-weighted
assets. Accordingly, banking organizations are generally required to
maintain capital against the full amount of assets transferred with
recourse.
\1\The GAAP treatment focuses on the transfer of benefits rather
than the retention of risk and, thus, allows a transfer of
receivables with recourse to be accounted for as a sale if the
transferor (1) surrenders control of the future economic benefits of
the assets, (2) is able to reasonably estimate its obligations under
the recourse provision, and (3) is not obligated to repurchase the
assets except pursuant to the recourse provision. In addition, the
transferor must establish a separate liability account equal to the
estimated probable losses under the recourse provision (GAAP
recourse liability account).
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Section 208 of the Riegle Act, which Congress enacted last year,
directs the federal banking agencies to revise the current regulatory
capital treatment applied to depository institutions engaging in
recourse transactions that involve small business obligations.
Specifically, the Riegle Act states that a qualifying insured
depository institution that sells small business loans and leases on
personal property with recourse need include only the amount of
retained recourse in its asset base when calculating its capital
ratios, provided two conditions are met. First, the transaction must be
treated as a sale under GAAP and, second, the depository institution
must establish a non-capital reserve sufficient to meet the
institution's reasonably estimated liability under the recourse
arrangement. The aggregate amount of recourse retained in accordance
with the provisions of the Act may not exceed 15 percent of an
institution's total risk-based capital or a greater amount established
by the appropriate federal banking agency. The Act also states that the
preferential capital treatment set forth in section 208 is not to be
applied for purposes of determining an institution's status under the
prompt corrective action statute (section 38(b) of the Federal Deposit
Insurance Act).
The Riegle Act defines a small business as a business that meets
the criteria for a small business concern established by the Small
Business Administration under section 3(a) of the Small Business
Act.2 The Riegle Act also defines a qualifying institution as one
that is well capitalized or, with the approval of the appropriate
federal banking agency, adequately capitalized, as these terms are set
forth in the prompt corrective action statute. For purposes of
determining whether an institution is qualifying, its capital ratios
must be calculated without regard to the preferential capital treatment
the Act sets forth for small business obligations.
\2\See 15 U.S.C. 631 et seq. The Small Business Administration
has enacted regulations setting forth the criteria for a small
business concern at 13 CFR 121.101-121.2106. For most industry
categories, the regulation defines a small business concern as one
with 500 or fewer employees. For some industry categories, a small
business concern is defined in terms of a greater or lesser number
of employees or in terms of a specified threshold of annual
receipts.
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Proposal
To implement the requirements of section 208 of the Riegle Act, the
Board is proposing to amend its risk-based and leverage capital
requirements for state member banks. While section 208 of the Act
specifically applies only to insured depository institutions, and not
to bank holding companies, the Board is also proposing to amend its
risk-based capital guidelines for bank holding companies to reflect the
requirements [[Page 6043]] that section sets forth for banks.3
This would maintain consistency between banks and bank holding
companies with regard to the risk-based capital treatment of transfers
of small business loans and leases of personal property with recourse.
In general, the Board's proposal could significantly reduce the amount
of capital that some banking organizations are required to hold against
recourse transactions involving small business obligations.
\3\The Board is not proposing to amend the leverage capital
guidelines for bank holding companies since all transfers with
recourse that are treated as sales under GAAP are already removed
from a transferring bank holding company's balance sheet and, thus,
are not included in the calculation of its leverage ratio.
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Under the Board's proposal, for the general purpose of calculating
risk-based and leverage capital ratios, qualifying institutions that
transfer small business obligations with recourse would be required to
maintain capital only against the amount of recourse retained, provided
two conditions are met. First, the transaction must be treated as a
sale under GAAP and, second, the transferring institutions must
establish a non-capital reserve sufficient to meet the reasonably
estimated liability under their recourse arrangements.
The Board's proposal would extend the preferential capital
treatment for transfers of small business obligations with recourse
only to qualifying institutions. A state member bank would be
considered qualifying if, pursuant to the Board's prompt corrective
action regulation (12 CFR 208.30), it is well capitalized or, by order
of the Board, adequately capitalized.4 Although bank holding
companies are not subject to the prompt corrective action regulation,
they would be considered qualifying under the Board's proposal if they
meet the criteria for well capitalized or, by order of the Board, for
adequately capitalized as those criteria are set forth for banks in
that regulation. A qualifying institution must be determined to be well
capitalized or adequately capitalized without taking into consideration
the preferential capital treatment the proposal provides for transfers
of small business obligations with recourse.
\4\ Under 12 CFR 208.30, a state member bank is deemed to be
well capitalized if it: (1) Has a total risk-based capital ratio of
10.0 percent or greater; (2) has a Tier 1 risk-based capital ratio
of 6.0 percent or greater; (3) has a leverage ratio of 5.0 percent
or greater; and (4) is not subject to any written agreement, order,
capital directive or prompt corrective action directive issued by
the Board pursuant to section 8 of the FDI Act, the International
Lending Supervision Act of 1983, or section 38 of the FDI Act or any
regulation thereunder, to meet and maintain a specific capital level
for any capital measure.
A state member bank is deemed to be adequately capitalized if
it: (1) Has a total risk-based capital ratio of 8.0 or greater; (2)
has a Tier 1 risk-based capital ratio of 4.0 percent or greater; (3)
has a leverage ratio of 4.0 percent or greater or a leverage ratio
of 3.0 percent or greater if the bank is rated composite 1 under the
CAMEL rating system in its most recent examination and is not
experiencing or anticipating significant growth; and (4) does not
meet the definition of a well capitalized bank.
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The Board is also proposing that the total outstanding amount of
recourse retained by qualifying banking organizations on transfers of
small business obligations receiving the preferential capital treatment
cannot exceed 15 percent of the institution's total risk-based capital.
By order, the Board may approve a higher limit. If a banking
organization is no longer qualifying, i.e., becomes less than well
capitalized, or has met the established limit, it could not apply the
preferential capital treatment to any new transfers of small business
loans and leases of personal property with recourse. Such types of
transfers completed while the institution was qualifying or before it
met the established limit, however, would continue to receive the
preferential capital treatment.
In accordance with section 208 of the Riegle Act, the Board is
proposing, that for purposes of determining a state member bank's
capital category under the Board's prompt corrective action regulation,
its risk-based and leverage capital ratios shall be calculated without
taking into consideration the preferential capital treatment the
proposal provides for transfers of small business obligations with
recourse.
The Board expects that this preferential capital treatment also
would not be applied for purposes of determining limitations on an
institution's ability to borrow from the discount window, which is tied
to its prompt corrective action status. In addition, the Board will
consider whether the preferential capital treatment should be
disregarded for purposes of determining an institution's ability to
accept interbank liabilities. The relevant regulation sets limits on
institutions that are not adequately capitalized, a term the regulation
states is similar to, but not identical to, the definition of that term
under the prompt corrective action regulation. A decision on whether
the preferential capital treatment would be taken into account for
purposes of determining an institution's ability to accept brokered
deposits and the amount of its risk-based insurance premiums is to be
made by the FDIC. The regulations governing these matters employ the
prompt corrective action categories.
The Board is seeking comments on all aspects of this proposal.
Regulatory Flexibility Act
The purpose of this proposal is to reduce the regulatory capital
requirement on transfers with recourse of small business loans and
leases of personal property. Therefore, pursuant to section 605(b) of
the Regulatory Flexibility Act, the Board hereby certifies that this
rule, as proposed, would not have a significant economic impact on a
substantial number of small business entities (in this case, small
banking organizations). Accordingly, a regulatory flexibility analysis
is not required. The risk-based capital guidelines generally do not
apply to bank holding companies with consolidated assets of less than
$150 million; thus, the proposed rule would not affect such companies.
Paperwork Reduction Act and Regulatory Burden
The Board has determined that this proposed rule will not increase
the regulatory paperwork burden of banking organizations pursuant to
the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) provides that
the federal banking agencies must consider the administrative burdens
and benefits of any new regulations that impose additional requirements
on insured depository institutions.
List of Subjects
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.
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, the Board proposes to
amend 12 CFR parts 208 and 225 as set forth below:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 continues to read as
follows:
[[Page 6044]] Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-
1, 3105, 3310, 3331-3351 and 3906-3909; 15 U.S.C. 78b, 78l(b),
78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C. 5318.
2. In Part 208, Appendix A, section III.B. is amended by adding a
new paragraph 5. to read as follows:
Appendix A to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
* * * * *
III.* * *
B.* * *
5. Small Business Loans and Leases on Personal Property
Transferred with Recourse. a. Notwithstanding other provisions of
this Appendix A, a qualifying bank that has transferred small
business loans and leases on personal property with recourse need
include in weighted-risk assets only the amount of retained recourse
in lieu of the outstanding amount of the loans and leases
transferred with recourse, provided two conditions are met. First,
the transaction must be treated as a sale under GAAP and, second,
the bank must establish a non-capital reserve sufficient to meet the
bank's reasonably estimated liability under the recourse
arrangement. Only loans and leases to businesses that meet the
criteria for a small business concern established by the Small
Business Administration under section 3(a) of the Small Business Act
are eligible for this capital treatment.
b. For purposes of this Appendix A, qualifying banks are those
that are well capitalized or, by order of the Board, adequately
capitalized. The definitions of well capitalized and adequately
capitalized are found in the Board's prompt corrective action
regulation (12 CFR 208.30). For purposes of determining whether a
bank is qualifying, its capital ratios must be calculated without
regard to the capital treatment for transfers of small business
obligations with recourse specified in section III.B.5.a. of this
Appendix A. The total outstanding amount of recourse retained by
qualifying banking organizations on transfers of small business
obligations receiving the preferential capital treatment cannot
exceed 15 percent of the institution's total risk-based capital. By
order, the Board may approve a higher limit.
c. For purposes of determining whether a bank is adequately
capitalized, undercapitalized, significantly undercapitalized, or
critically undercapitalized under prompt corrective action (12 CFR
208.30), the risk-based capital ratio of the bank shall be
determined without regard to the capital treatment of transfers of
small business obligations with recourse specified in section
III.B.5.a. of this Appendix A.
* * * * *
3. In Part 208, Appendix B, section II is amended by revising
paragraph c. and adding new paragraphs d., e., and f.
Appendix B to Part 208--Capital Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
* * * * *
II. * * *
c. Notwithstanding other provisions of this Appendix B, a
qualifying bank that has transferred small business loans and leases
on personal property with recourse may adjust its average total
consolidated assets, for purposes of calculating its tier 1 leverage
ratio, to include only the amount of retained recourse in lieu of
the outstanding amount of the loans and leases transferred with
recourse, provided two conditions are met. First, the transaction
must be treated as a sale under GAAP and, second, the bank must
establish a non-capital reserve sufficient to meet the bank's
reasonably estimated liability under the recourse arrangement. Only
loans and leases to businesses that meet the criteria for a small
business concern established by the Small Business Administration
under section 3(a) of the Small Business Act are eligible for this
capital treatment.
d. For purposes of this Appendix B, qualifying banks are those that
are well capitalized or, by order of the Board, adequately capitalized.
The definitions of well capitalized and adequately capitalized are
found in the Board's prompt corrective action regulation (12 CFR
208.30). For purposes of determining whether a bank is qualifying, its
capital ratios must be calculated without regard to the capital
treatment for transfers of small business obligations with recourse
specified in section II.c. of this Appendix B. The total outstanding
amount of recourse retained by qualifying banks on transfers of small
business obligations receiving the preferential capital treatment
cannot exceed 15 percent of the institution's total risk-based capital.
By order, the Board may approve a higher limit.
e. For purposes of determining whether a bank is adequately
capitalized, undercapitalized, significantly undercapitalized, or
critically undercapitalized under prompt corrective action (12 CFR
208.30), the leverage capital ratio of the bank shall be determined
without regard to the capital treatment of transfers of small business
obligations with recourse specified in section II.c. of this Appendix
B.
f. Whenever appropriate, including when a bank is undertaking
expansion, seeking to engage in new activities, or otherwise facing
unusual or abnormal risks, the Board will continue to consider the
level of an individual bank's tangible tier 1 leverage ratio (after
deducting all intangibles) in making an overall assessment of capital
adequacy. This is consistent with the Federal Reserve's risk-based
capital guidelines and long-standing Board policy and practice with
regard to leverage guidelines. Banks experiencing growth, whether
internally or by acquisition, are expected to maintain strong capital
positions substantially above minimum supervisory levels, without
significant reliance on intangible assets.
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 part 225, Appendix A, section III.B. is amended by adding a
new paragraph 5. to read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risked-Based Measure
* * * * *
III. * * *
B. * * *
5. Small Business Loans and Leases on Personal Property
Transferred with Recourse. a. Notwithstanding other provisions of
this Appendix A, a qualifying banking organization that has
transferred small business loans and leases on personal property
with recourse need include in weighted-risk assets only the amount
of retained recourse in lieu of the outstanding amount of the loans
and leases transferred with recourse, provided two conditions are
met. First, the transaction must be treated as a sale under GAAP
and, second, the banking organization must establish a non-capital
reserve sufficient to meet the organization's reasonably estimated
liability under the recourse arrangement. Only loans and leases to
businesses that meet the criteria for a small business concern
established by the Small Business Administration under section 3(a)
of the Small Business Act are eligible for this capital treatment.
b. For purposes of this Appendix A, qualifying banking
organizations are those that meet the criteria for well capitalized
or, by order of the Board, adequately capitalized. The criteria for
well capitalized and adequately capitalized are found in the Board's
prompt corrective action regulation for state member banks (12 CFR
208.30). For purposes of determining whether an organization is
qualifying, its capital ratios must be calculated without regard to
the capital treatment for transfers of small business obligations
with recourse specified in section III.B.5.a. of this Appendix A.
The total outstanding amount of recourse retained by qualifying
banking organizations on transfers of small business obligations
receiving the preferential capital treatment cannot exceed 15
percent of the institution's total risk-based capital. By order, the
Board may approve a higher limit.
* * * * * [[Page 6045]]
By order of the Board of Governors of the Federal Reserve
System, January 26, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-2415 Filed 1-31-95; 8:45 am]
BILLING CODE 6210-01-P
