[Federal Register Volume 61, Number 87 (Friday, May 3, 1996)]
[Rules and Regulations]
[Pages 19805-19807]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10891]
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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
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Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Rules and
Regulations
[[Page 19805]]
FEDERAL RESERVE SYSTEM
12 CFR Part 250
[Docket No. R-0902]
Transactions With Affiliates
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is adopting a definition of capital stock and
surplus for purposes of section 23A of the Federal Reserve Act that
conforms to the definition of unimpaired capital and unimpaired surplus
used by the Board in calculating the limits in Regulation O for insider
lending and by the Office of the Comptroller of the Currency (OCC) in
calculating the limit on loans by a national bank to a single borrower.
The final rule will reduce the burden for member banks and other
insured depository institutions monitoring lending to their affiliates.
EFFECTIVE DATE: July 1, 1996.
FOR FURTHER INFORMATION CONTACT: Pamela G. Nardolilli, Senior Attorney
(202/452-3289) Legal Division, or Barbara Bouchard, Supervisory
Financial Analyst (202/452-3072), Division of Banking Supervision and
Regulation, Board of Governors of the Federal Reserve System. For users
of the Telecommunications Device for the Deaf (TDD) only, please
contact Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION: Section 23A of the Federal Reserve Act, 12
U.S.C. 371c, regulates lending and asset purchase transactions between
insured depository institutions and their affiliates. In general,
section 23A prohibits an insured depository institution from engaging
in covered transactions (which include extensions of credit and
purchases of assets) with any single affiliate in excess of 10 percent
of the institution's capital stock and surplus. A 20 percent aggregate
limit is imposed on the total amount of covered transactions by a bank
with all affiliates. Under section 23A, all extensions of credit
between an insured depository institution and its affiliate must meet
certain collateral requirements. Section 23A also prohibits an insured
depository institution from purchasing any low-quality assets from an
affiliate and requires that all transactions with an affiliate must be
conducted on terms that are consistent with safe and sound banking
practices. Although section 23A, by its terms, applies only to member
banks, the Federal Deposit Insurance Act applies section 23A to all
nonmember insured banks (12 U.S.C. 1828 (j)), and the Home Owners' Loan
Act applies section 23A to savings associations (12 U.S.C. 1468).
Section 23A does not include an explicit definition of ``capital
stock and surplus.'' A 1964 Board interpretation refers to the
definition of capital as ``the amount of unimpaired common stock plus
the amount of preferred stock outstanding and unimpaired'' but
explicitly excludes debt-like instruments from the definition of
capital and surplus. 12 CFR 250.161. In the interpretation, the Board
recognized that certain notes and debentures could be considered as
capital or capital stock for purposes of membership in the Federal
Reserve System, but concluded that for purposes of certain Federal
Reserve Act limitations and requirements, such instruments could not be
regarded as part of either capital or capital stock. A subsequent Board
interpretation issued in 1971 states that capital stock and surplus, as
used in provisions of the Federal Reserve Act, includes undivided
profits, which are defined to include reserves for loan losses and
valuation reserves for securities. 12 CFR 250.162. As a practical
matter, this definition of capital and surplus has been implemented as
total equity capital and the allowance for loan and lease losses (ALLL)
as set forth in the bank's Report of Condition and Income (Call
Report).
Revisions to the Definition of Capital Stock and Surplus
In February 1995, the OCC amended its regulation governing the
amount a national bank may lend to a single counterparty, and revised
the definition of unimpaired capital and unimpaired surplus upon which
this lending limit was based. 60 FR 8526 (February 15, 1995) (to be
codified at 12 CFR 32.2(b)). In June 1995, the Board amended its
Regulation O, 60 FR 31053 (June 13, 1995) (to be codified at 12 CFR
215.2), to revise the definition of capital used to limit loans to
insiders, to a definition that is consistent with that used for
purposes of the OCC's single borrower lending limits. The Board took
this action to eliminate discrepancies in the definitions of capital
used for different lending limit purposes and to reduce regulatory
burden for banks monitoring lending to their insiders. Under the
revised OCC regulation, unimpaired capital and unimpaired surplus is
defined as Tier 1 and Tier 2 capital, as calculated under the risk-
based capital guidelines, plus the balance of the allowance for loan
and lease losses (ALLL) excluded from Tier 2 capital.1
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\1\ Under the banking agencies' risk-based capital guidelines,
Tier 1 capital includes common equity, some noncumulative perpetual
preferred stock and related surplus, and minority interest in equity
accounts of consolidated subsidiaries. Tier 2 capital includes the
ALLL up to 1.25 percent of the bank's weighted risk assets,
perpetual preferred stock and related surplus, hybrid capital
instruments, and certain types of subordinated debt.
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On December 4, 1995, the Board proposed adopting a definition of
``capital stock and surplus'' for purposes of section 23A that is the
same as the capital definitions used for Regulation O and the national
bank lending limits. (60 FR 62050 (1995)). Unlike the current capital
definition for section 23A, the revised definition will permit banks to
include in capital the bank's subordinated debt that qualifies for
inclusion in Tier 2 capital. On the other hand, unlike equity capital,
Tier 1 capital does not include securities revaluation reserves, in
particular, gains and losses on available-for-sale securities, which
under Statement of Financial Accounting Standards Number 115 (FAS 115)
are considered a component of equity capital. Tier 1 capital also
excludes certain intangible assets, most notably goodwill. Based on
June 1995 Call Report data, the revised definition will decrease the
limits for transactions with affiliates for a majority of banks.
Overall, it is estimated that the revised definition of capital and
surplus will result in a change for most banks of 5 percent or less
from their current limit, although a few community and
[[Page 19806]]
mid-sized banks may experience substantial changes principally due to
large gains or losses on available-for-sale securities.
Notwithstanding the decrease for many banks in the amount of
capital that will be used to calculate their section 23A limit under
the revised definition, the Board believes that, over all, revising the
definition will be beneficial for all insured depository institutions
for two reasons. First, the revised definition will provide consistency
in the capital definition used for section 23A, Regulation O, and the
national bank lending limits. Second, the revised definition will
result in a more stable limit over time than the current definition
because the revised definition excludes revaluation gains and losses on
available-for-sale securities, a component of equity capital that tends
to be volatile.
Public Comment
The Board received seventeen comments regarding its proposed
definition of capital stock and surplus. The Board received eight
comments from Reserve Banks, six comments from commercial banking
organizations and three comments from trade associations. All the
commenters supported the Board's efforts to reduce regulatory burden
and provide greater uniformity in defining capital for regulatory
purposes. Seven commenters also noted that the proposed definition will
provide greater stability over time because the proposed definition
excludes the gains and losses on available-for-sale securities.
Several commenters questioned whether an institution will be in
violation of section 23A if, as a result of the change in the
definition of capital stock and surplus, the institution's amount of
outstanding covered transactions exceeded the quantitative limits of
section 23A. In general, the Board believes that a change in
circumstances, such as a change in the capital definition, should not
adversely affect existing transactions that were entered into in good
faith by an insured depository institution and its affiliate. In the
past, when an institution exceeded its quantitative limit because of a
change in circumstances, the Board has allowed the insured depository
institution to retain the nonconforming transaction, but has not
allowed the institution to engage in additional covered transactions
until the institution was in compliance with section 23A. Accordingly,
based on this precedent, the Board has determined that any institution
whose outstanding covered transactions with its affiliates exceed its
quantitative limits as a result of this rule will be allowed to retain
those transactions. However, these institutions are not allowed to
engage in any additional covered transactions with any affiliate,
including any renewal transactions, until the institution's outstanding
amount of covered transactions is in compliance with the institution's
new quantitative limit.
The Board also amends 12 CFR 250.161 and 12 CFR 250.162 to delete
the reference to section 23A to reflect the change.
Determination of Effective Date
Because the final rule adjusts a requirement on insured depository
institutions, the final rule will become effective July 1, 1996, the
first day of the calendar quarter after the date of the final rule's
publication. See 12 U.S.C. 4802(b).
Final Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (the ``Act'')
requires an agency to publish a final regulatory flexibility analysis
with any final rulemaking. The Act requires that the regulatory
flexibility analysis of a final rule provide a description of the
reasons why the action by the agency is being considered and a
statement of the objectives of, and legal basis for, the rule and a
summary of the issues raised by the public comments received, the
agency assessment thereof, and any change made in response thereto.
This information is contained in the supplementary information above.
No significant alternatives to the final rule were considered by the
agency.
Another requirement for the regulatory flexibility analysis is a
description of, and where feasible, an estimate of the number of small
entities to which the proposed rule will apply. The final rule will
apply to all insured depository institutions, regardless of size. The
Board has determined that its final rule will impose no additional
reporting or recordkeeping requirements, and that there are no relevant
federal rules that duplicate, overlap, or conflict with the proposed
rule. In addition, the final rule is not expected to have a significant
economic impact on small institutions. Instead, the final rule is
expected to relieve the regulatory burden on the majority of insured
depository institutions.
Paperwork Reduction Act
In accordance with section 3506 of the Paperwork Reduction Act of
1995 (44 U.S.C. 3501 et seq.; 5 CFR 1320 Appendix A.1.), the Board
reviewed the final rule under authority delegated to the Board by the
Office of Management and Budget. No collections of information pursuant
to the Paperwork Reduction Act are contained in the final rule.
List of Subjects in 12 CFR Part 250
Credit, Federal Reserve System.
For the reasons set forth in the preamble, the Board amends 12 CFR
part 250 as set forth below:
PART 250--MISCELLANEOUS INTERPRETATIONS
1. The authority citation for part 250 will continue to read as
follows:
Authority: 12 U.S.C. 248(i) and 371c(e).
Sec. 250.161 [Amended]
2. In Sec. 250.161 paragraph (d) is amended by removing the words
``loans to affiliates (12 U.S.C. 371c),'' in the first sentence.
Sec. 250.162 [Amended]
3. In Sec. 250.162, paragraph (a) is amended by removing the words
``Loans to affiliates (12 U.S.C. 371c), purchases'' in the first
sentence and adding ``Purchases'' in their place.
4. A new Sec. 250.242 is added to read as follows:
Sec. 250.242 Section 23A of the Federal Reserve Act--definition of
capital stock and surplus.
(a) An insured depository institution's capital stock and surplus
for purposes of section 23A of the Federal Reserve Act (12 U.S.C. 371c)
is:
(1) Tier 1 and Tier 2 capital included in an institution's risk-
based capital under the capital guidelines of the appropriate Federal
banking agency, based on the institution's most recent consolidated
Report of Condition and Income filed under 12 U.S.C. 1817(a)(3); and
(2) The balance of an institution's allowance for loan and lease
losses not included in its Tier 2 capital for purposes of the
calculation of risk-based capital by the appropriate Federal banking
agency, based on the institution's most recent consolidated Report of
Condition and Income filed under 12 U.S.C. 1817(a)(3).
(b) For purposes of this section, the terms appropriate Federal
banking agency and insured depository institution are defined as those
terms are defined in section 3 of the Federal Deposit Insurance Act, 12
U.S.C. 1813.
[[Page 19807]]
By order of the Board of Governors of the Federal Reserve
System, April 26, 1996.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 96-10891 Filed 5-2-96; 8:45 am]
BILLING CODE 6210-01-P
