E9-6096. Capital Adequacy Guidelines: Trust Preferred Securities and the Definition of Capital; Delay of Implementation Date

AGENCY:

Board of Governors of the Federal Reserve System (Board).

ACTION:

Final rule.

SUMMARY:

This final rule delays the March 31, 2009, implementation date for certain amendments to the Board's capital adequacy guidelines for bank holding companies on trust preferred securities and the definition of capital published by the Board in the Federal Register on March 10, 2005. Due to the continuing stressed conditions in the financial markets and in order to promote stability in the financial markets and the banking industry as a whole, the Board has decided to delay until March 31, 2011, the implementation date of new requirements that: limit the aggregate amount of cumulative perpetual preferred stock, trust preferred securities, and minority interests in the equity accounts of most consolidated subsidiaries (collectively, restricted core capital elements) included in the tier 1 capital of all bank holding companies; require bank holding companies to deduct goodwill, less any associated deferred tax liability, from the sum of core capital elements in calculating the amount of restricted core capital elements that may be included in tier 1 capital; and impose further limits on the amount of restricted core capital elements that internationally active bank holding companies may include in tier 1 capital.

DATES:

This amendment is effective March 23, 2009.

FOR FURTHER INFORMATION CONTACT:

Norah M. Barger, Deputy Director, [phone], or John Connolly, Senior Project Manager, [phone], Division of Banking Supervision and Regulation; or April C. Snyder, Counsel, [phone], Benjamin W. McDonough, Senior Attorney, [phone], or Kathleen M. O'Day, Deputy General Counsel, [phone], Legal Division; Board of Governors of the Federal Reserve System, 20th Street and Constitution Ave., NW., Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), [phone].

SUPPLEMENTARY INFORMATION:

I. Background

On March 10, 2005, the Board published in the Federal Register (70 FR 11827) a final rule (final rule) amending its risk-based capital standards for bank holding companies (BHCs) (1) to allow the continued inclusion of outstanding and prospective issuances of trust preferred securities in the tier 1 capital of BHCs, subject to stricter requirements,^[1] and (2) to revise the requirements generally applied to the aggregate amount of restricted core capital elements (including trust preferred securities) included in the tier 1 capital of BHCs.^[2] These new limits on trust preferred securities and other restricted core capital elements (new limits) were scheduled to become effective on March 31, 2009. As noted in the preamble to the final rule, the Board adopted the final rule to address supervisory concerns, competitive equity considerations, and changes in generally accepted accounting principles and to strengthen the definition of regulatory capital for BHCs.^[3]

Under limits on restricted core capital elements that are currently in effect, a BHC generally may include in tier 1 capital cumulative perpetual preferred stock and trust preferred securities up to 25 percent of the sum of core capital elements (including cumulative perpetual preferred stock and trust preferred securities).^[4] The new limits would limit restricted core capital elements includable in the tier 1 capital of a BHC to 25 percent of the sum of core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. In addition, internationally active BHCs would be subject to a further limitation.^[5] In particular, the amount of restricted core capital elements (other than qualifying mandatory convertible preferred securities) that an internationally active BHC could include in tier 1 capital could not exceed 15 percent of the sum of core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability.^[6]

II. Postponement of the Implementation Date

On May 19, 2004, the Board issued a notice of proposed rulemaking (proposed rule) under which the new limits would have come into force on March 31, 2007.^[7] Several commenters to the proposed rule asked the Board to extend the transition period for compliance with the new limits.^[8] These commenters noted that an extended transition period would allow affected BHCs substantially more flexibility in managing their compliance with the new limits through a combination of redeeming outstanding trust preferred securities with expired no-call periods and generating capital internally through the retention of earnings.^[9] For these reasons, and consistent with comments received, in the final rule the Board established an implementation date for the new limits of March 31, 2009, to allow BHCs to transition to the new limits.

In light of conditions in the capital markets, the Board has considered whether an additional extension of the implementation date of the new limits is appropriate. The economic conditions for the past 18 months, and currently, have created a situation in which requiring adherence to the new limits by the March 31, 2009, implementation date creates a substantial burden for many BHCs in a way that was not anticipated when the final rule was adopted in 2005. In the prevailing market conditions, it is especially important for BHCs to expend efforts to increase their overall capital levels, although it is challenging to do so now through retention of earnings, the most typical means. Therefore, to promote stability in the financial markets and the banking industry as a whole, the Board has decided to further delay the implementation date of the new limits until March 31, 2011. The Board believes that this extended transition period would allow affected BHCs sufficient flexibility to satisfy the Board's risk-based and leverage capital guidelines during the current stressed market conditions.^[10]

The Board notes that the new limits apply only to regulatory capital calculations and do not affect the ability of restricted core capital instruments to absorb losses. However, as a general matter and in light of the Board's continuing interest in assuring the appropriate regulatory capital treatment of trust preferred securities (and other restricted core capital elements), institutions that intend to issue new restricted core capital instruments should consult with appropriate Reserve Bank and Board staff prior to issuance.

Administrative Procedure Act

Pursuant to sections 553(b) and (d) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b) and (d)), the Board finds that there is good cause for delaying the implementation date of the final rule, and that it is impracticable, unnecessary, or contrary to the public interest to issue a notice of proposed rulemaking and provide an opportunity to comment before the implementation date. The Board has adopted the rule in light of, and to help address, the potential adverse effects of imposing new regulatory capital restrictions, the continuing stressed market conditions, and BHCs' efforts to increase their overall capital levels. Because the implementation date of the final rule (March 31, 2009) is imminent, it is impracticable to seek further public comment before issuing this amendment to the final rule delaying the implementation date of the new limits. In addition, the delay will further the Board's efforts, as well as the efforts of the other Federal banking agencies and Treasury, to respond to the current financial situation.

Regulatory Flexibility Act

Under section 604 of the Regulatory Flexibility Act (RFA) (5 U.S.C. 604), a final regulatory flexibility analysis is required only for notice-and-comment rulemakings conducted under section 553 of the APA. Since the Board finds that there is “good cause” under the APA for not proceeding with notice-and-comment rulemaking for this amendment to the implementation date for the final rule, the RFA does not require that a final regulatory flexibility analysis be provided for this amendment.

The Board provided regulatory flexibility analysis in the preamble to the final rule published on March 10, 2005 (70 FR 11827-11838). In that regulatory flexibility analysis, the Board considered the likely impact of the final rule on small entities and determined that the final rule will not have a significant impact on a substantial number of small entities.

Paperwork Reduction Act

In accordance with the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3506), the Board has reviewed this rule to assess any information collections. There are no collections of information as defined by the Paperwork Reduction Act in this rule.

Solicitation of Comments on Use of Plain Language

Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The Board invited comment on how to make the final rule easier to understand.^[11] No commenter indicated that the proposed rule should be revised to make it easier to understand. In the preamble to the final rule the Board indicated that it believes the final rule is written plainly and clearly.^[12]

List of Subjects in 12 CFR Part 225

• Administrative Practice and Procedure
• Banks
• Banking
• Federal Reserve System
• Holding companies
• Reporting and recordkeeping requirements
• Securities

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

For the reasons stated in the preamble, the Board of Governors of the Federal Reserve System amends part 225 of chapter II of title 12 of the Code of Federal Regulations as follows:

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, 1828(o), 1831i, 1831p-1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 3909; 15 U.S.C. 6801 and 6805.

Appendix A to Part 225 [Amended]

2. In Appendix A to part 225, paragraphs II.A.1.b.ii. and II.A.2.d.iv. are amended by removing “2009” and adding “2011” in its place wherever it appears.

By order of the Board of Governors of the Federal Reserve System, March 16, 2009.

Jennifer J. Johnson,

Secretary of the Board.

Footnotes

1.  70 FR 11827 (March 10, 2005).

2.  See 12 CFR part 225, Appendix A, sections II.A.1.b.i and II.A.2.d.iv.

3.  70 FR 11827 (March 10, 2005).

4.  In addition, on October 22, 2008, the Board issued an interim final rule that allows BHCs to include new senior perpetual preferred securities issued to the U.S. Department of the Treasury (Treasury) under the capital purchase program announced by the Secretary of the Treasury on October 14, 2008, in tier 1 capital without limit. 73 FR 62851 (October 22, 2008).

5.  An internationally active BHC is defined as a BHC that (1) as of its most recent year-end FR Y-9C reports total consolidated assets equal to $250 billion or more or (2) on a consolidated basis, reports total on-balance-sheet foreign exposure of $10 billion or more on its filings of the most recent year-end FFIEC 009 Country Exposure Report. See 12 CFR part 225, appendix A, section II.A.1.b.i.(2) at n. 6.

6.  See 70 FR 11830.

7.  See 69 FR 28851 (May 19, 2004).

8.  70 FR 11832.

9.  Id.

10.  With respect to the Board's first quarter 2009 regulatory reports, the Board will provide supplemental instructions to BHCs on how to report overages in their restricted core capital elements.

11.  69 FR 28856 (May 19, 2004).

12.  70 FR 11834 (March 10, 2005).