[Federal Register Volume 60, Number 169 (Thursday, August 31, 1995)]
[Rules and Regulations]
[Pages 45612-45616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21607]
[[Page 45611]]
_______________________________________________________________________
Part VI
Federal Reserve System
_______________________________________________________________________
12 CFR Parts 208 and 225
Capital; Capital Adequacy Guidelines; Final Rule
Federal Register / Vol. 60, No. 169 / Thursday, August 31, 1995 /
Rules and Regulations
[[Page 45612]]
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: Final rule.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
is amending its risk-based and leverage capital adequacy guidelines for
state member banks and bank holding companies (collectively, banking
organizations) to implement section 208 of the Riegle Community
Development and Regulatory Improvement Act of 1994 (Riegle Act).
Section 208 states that a qualifying insured depository institution
that transfers small business loans and leases on personal property
with recourse shall include only the amount of retained recourse in its
risk-weighted assets when calculating its capital ratios, provided that
certain conditions are met. This rule will have the effect of lowering
the capital requirements for small business loans and leases on
personal property that have been transferred with recourse by
qualifying banking organizations.
EFFECTIVE DATE: September 1, 1995.
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, Senior
Financial Analyst (202/452-5218), Division of Banking Supervision and
Regulation. 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 and C Streets, N.W., Washington, D.C.
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 transfers small business loans and leases
on personal property (small business obligations) with recourse need
include only the amount of retained recourse in its risk-weighted
assets when calculating its capital ratios, rather than the full amount
of the transferred small business loans with recourse generally
required, 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 in an amount 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 of the Federal Deposit
Insurance Act).
The Riegle Act 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 that section 208
sets forth for small business obligations. The Riegle Act also defines
a small business as one 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
\2\ See 15 U.S.C. 631 et seq. The Small Business Administration
has implemented 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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To meet the statutory requirements of section 208 of the Riegle
Act, the Board issued a proposed rule amending its risk-based and
leverage capital guidelines for state member banks (60 FR 6042,
February 1, 1995). Although section 208 pertains only to insured
depository institutions, the Board also proposed amending its risk-
based capital guidelines for bank holding companies in order to
maintain consistency among banking organizations in the calculation of
regulatory capital ratios.3
\3\ The Board did not propose amending its 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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The proposal noted that in view of the requirement that the
preferential capital treatment set forth in section 208 be disregarded
for prompt corrective action purposes, the Board expected that it also
would disregard the preferential capital treatment for purposes of
determining limitations on an institution's ability to borrow from the
discount window and that it would consider disregarding this treatment
for purposes of determining a correspondent's capital level under the
limitations of the Board's Regulation F (limitations on interbank
liabilities). The regulations governing these matters are based in part
on regulations implementing the prompt corrective action statute. The
comment period on the Board's proposal ended on February 27, 1995.
Comments Received
In response to its proposal, the Board received letters from four
public commenters consisting of three banking organizations and one
banking trade association. All four organizations
[[Page 45613]]
supported the Board's proposal to lower the capital requirements for
both state member banks and bank holding companies on recourse
transactions associated with transfers of small business loans and
leases. Three respondents favored extending the preferential capital
treatment to other types of assets. Two commenters argued that not
applying the preferential capital treatment for purposes of determining
an institution's prompt corrective action category, its ability to
borrow from the discount window, or limitations on interbank
liabilities would diminish the benefits of the proposed capital
treatment.
Three respondents noted that under the proposal, capital would be
required to be maintained for the entire amount of recourse retained
while further requiring that a liability reserve be established for
expected future losses associated with the recourse arrangements. These
commenters stated that this requirement would result in a partial
duplication of capital charges and, accordingly, argued that the
retained recourse liability should be reduced by the amount of the
reserve before calculating capital requirements.
Final Rule
After consideration of the comments received and further
deliberation on the issues involved, the Board is implementing section
208 of the Riegle Act by adopting a final rule amending the risk-based
and leverage capital guidelines for state member banks. In general, the
final rule reduces the amount of capital that banking organizations are
required to hold against small business obligations transferred with
recourse. The final rule provides that qualifying institutions that
transfer small business obligations with recourse are required, for
risk-based capital purposes, to maintain capital only against the
amount of recourse retained and, for leverage ratio purposes, are not
required to maintain any capital at all against such obligations
transferred with recourse, provided two conditions are met. First, the
transaction must be treated as a sale under GAAP and, second, the
transferring institutions must establish, pursuant to GAAP, a non-
capital reserve sufficient to meet the reasonably estimated liability
under their recourse arrangements.
As proposed, to maintain consistency in regulatory capital
calculations among the banking organizations, the Board is also issuing
a parallel final amendment to its risk-based capital guidelines for
bank holding companies. The Board notes that the final rule, consistent
with section 208 and its proposal, applies only to transfers of
obligations of small businesses that meet the criteria for a small
business as established by the Small Business Administration. The Board
also notes that the capital treatment specified in section 208 and in
this final rule for transfers of small business obligations with
recourse takes precedence over the capital requirements recently
implemented for transactions involving low levels of recourse.
In setting forth this final rule, the Board has considered the
arguments made by commenters for reducing the amount of retained
recourse against which capital would be assessed by the amount of the
recourse liability reserve that is established pursuant to GAAP.
Section 208, however, requires qualifying institutions selling small
business obligations with recourse to establish and maintain a reserve
equal to the amount of its reasonable estimated liability under the
recourse arrangement and maintain capital against the amount of
retained recourse. The Board notes that the reserve required under GAAP
for the reasonable estimated liability on assets transferred with
recourse is established to cover expected losses while regulatory
capital is maintained to absorb unexpected losses beyond those that
were estimated and expected. Thus, the Board believes that it is
appropriate to assess risk-based capital against the full amount of
recourse, as well as require the establishment of a liability reserve
pursuant to GAAP.
However, the final rule does not, as proposed, amend the leverage
capital guidelines for state member banks to require that the off-
balance sheet amount of retained recourse on small business loans sold
with recourse be included in the calculation of the leverage ratio. The
Board has concluded that the leverage ratio should continue to be based
primarily on the amount of average total on-balance-sheet assets as
reported in the Call Report.
The Board's final rule extends the preferential capital treatment
for transfers of small business obligations with recourse only to
qualifying institutions. A state member bank will 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 will
be considered qualifying under the Board's final rule 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 order to
qualify, an institution must be determined to be well capitalized or
adequately capitalized without taking into account the preferential
capital treatment the rule provides for any previous 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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Under the final rule, the total outstanding amount of recourse
retained by a qualifying banking organization on transfers of small
business obligations receiving the preferential capital treatment
cannot exceed 15 percent of the institution's total risk-based
capital.5 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 exceeds the established limit, it will not be able
to apply the preferential capital treatment to any transfers of small
business obligations with recourse that occur while the institution is
not qualified or above the capital limit. However, those transfers of
small business obligations with recourse that were completed while the
banking organization was qualified and before it exceeded the
established limit of 15 percent of total risk-based capital will
continue to receive the preferential capital treatment even when the
institution is no longer qualified or the amount of retained recourse
on such transfers subsequently exceeds the capital limitation.
\5\ Thus, a transfer of small business obligations with recourse
that results in a qualifying banking organization retaining recourse
in an amount greater than 15 percent of its total risk-based capital
would not be eligible for the preferential capital treatment, even
though the organization's amount of retained recourse before the
transfer was less than 15 percent of capital.
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Section 208(f) provides that the capital of an insured depository
institution shall be computed without regard to section 208 when
determining
[[Page 45614]]
whether an institution is adequately capitalized, undercapitalized,
significantly undercapitalized, or critically undercapitalized for
purposes of prompt corrective action under the Board's prompt
corrective action regulation (12 CFR 208.33(b)).
The caption to section 208(f) of the Riegle Act, ``Prompt
Corrective Action Not Affected,'' and the legislative history indicate
section 208 was not intended to affect the operation of the prompt
corrective action system. See S. Rep. No. 103-169, 103d Cong., 1st
Sess. 38, 69 (1993). However, the statute does not include ``well
capitalized'' in the list of capital categories not affected. The
prompt corrective action system deals primarily with imposing
corrective sanctions on institutions that are less than adequately
capitalized. Therefore, allowing a bank that is adequately capitalized
without regard to section 208 to use the section's capital provisions
for purposes of determining whether the bank is well capitalized
generally would not affect the application of the prompt corrective
action sanctions to the bank.6 Other statutes and regulations
treat a bank more favorably if it is well capitalized as defined under
the prompt corrective action statute, but these provisions are not part
of the prompt corrective action system of sanctions. Permitting an
institution to be treated as well capitalized for purposes of these
other provisions also will not affect the imposition of prompt
corrective action sanctions.
\6\ It is very unlikely but theoretically possible for a banking
organization that is undercapitalized without using the preferential
capital treatment in section 208 to become well capitalized if the
provisions of section 208 are applied. Since, in the Board's view,
section 208 was not intended to affect prompt corrective action
sanctions, allowing an undercapitalized institution (without taking
into account section 208) to be treated as well capitalized (taking
into consideration section 208) would be an inappropriate
application of the preferential capital treatment permitted under
section 208. Thus, undercapitalized banking organizations will not
be able to use the capital provisions of section 208 for purposes of
improving their prompt corrective action capital category.
There is one provision of the prompt corrective action system that
could be affected by treating an institution as well capitalized rather
than adequately capitalized. In this regard, if the institution's
condition is unsafe and unsound or it is engaging in an unsafe or
unsound practice, section 208.33(c) of the Board's prompt corrective
action regulation (12 CFR 208.33(c)) authorizes the Board to reclassify
a well capitalized institution as adequately capitalized and require an
adequately capitalized institution to comply with certain prompt
corrective action provisions as if that institution were
undercapitalized. Because the text and legislative history of section
208 of the Riegle Act clearly indicate that Congress did not intend to
affect prompt corrective action sanctions, the Board believes that the
provisions of section 208 do not affect the capital calculation for
purposes of reclassifying a bank from one capital category to a lower
capital category, regardless of the bank's capital level.
Thus, an institution may use the capital treatment described in
section 208 of the Riegle Act when determining whether it is well
capitalized for purposes of prompt corrective action as well as for
other regulations that reference the well capitalized capital
category.7 An institution may not use the capital treatment
described in section 208 when determining whether it is adequately
capitalized, undercapitalized, significantly undercapitalized, or
critically undercapitalized for purposes of prompt corrective action or
other regulations that directly or indirectly reference the prompt
corrective action capital categories.8 Furthermore, the capital
ratios of an institution are to be determined without regard to the
preferential capital treatment described in section 208 of the Riegle
Act for purposes of being reclassified from one capital category to a
lower category as described in the Board's prompt corrective action
regulation (12 CFR 208.33(c)).
\7\ A institution that is subject to a written agreement or
capital directive as discussed in the Board's prompt corrective
action regulation would not be considered well capitalized. Also,
undercapitalized banking organizations will not be able to use the
capital provisions of section 208 for purposes of improving their
prompt corrective action capital category. (See footnote 6.)
\8\ Under the provisions of section 208, the capital calculation
used to determine whether an institution is well capitalized differs
from the calculation used to determine whether an institution is
adequately capitalized. As a result, it is possible that an
institution could be well capitalized using one calculation (i.e.,
one that considers the preferential capital treatment) and
adequately capitalized using the other (i.e., one that is calculated
without regard to the preferential capital treatment). In this
situation, the institution would be considered well capitalized.
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Section 208(g) of the Riegle Act required that final regulations
implementing the provisions of section 208 be promulgated not later
than 180 days after the date of the statute's enactment, i.e., by March
22, 1995. In order to meet the spirit of the statute, the preferential
capital treatment may be applied by qualifying banking organizations
for those transfers of small business obligations with recourse that
occurred on or after March 22, 1995, provided certain conditions are
met.
The Board also notes that Section 208(a) of the Riegle Act provides
that the accounting principles applicable to the transfer of small
business obligations with recourse contained in reports or statements
required to be filed with the federal banking agencies by a qualified
insured depository institution shall be consistent with GAAP.9 The
Board, in consultation with the other agencies and under the auspices
of the Federal Financial Institutions Examinations Council, intends to
ensure that appropriate revisions are made to the Consolidated Reports
of Condition and Income (Call Reports) and the Call Report instructions
to implement the accounting provisions of section 208.
\9\ Transfers of small business obligations with recourse that
are consummated at a time when the transferring banking organization
does not qualify for the preferential capital treatment or that
result in the organization exceeding the 15 percent capital
limitation will continue to be reported in accordance with the
instructions of the Consolidated Reports of Condition and Income
(Call Reports) for sales of assets with recourse. The Call Report
instructions generally require banks transferring assets with
recourse to continue to report the assets on their balance sheets.
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Regulatory Flexibility Act
This rule reduces the capital requirements 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 will 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 rule will not
affect such companies.
Paperwork Reduction Act and Regulatory Burden
The Board has determined that this 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) requires that
new regulations take effect on the first day of the calendar quarter
following publication of the rule, unless the agency determines, for
good cause, that the regulation should become effective on a day other
than the first day of the next quarter. October 1, 1995 would be
[[Page 45615]]
the first day of the calendar quarter following publication of the rule
that would also satisfy the requirements of the Administrative
Procedures Act (5 U.S.C. 553(d)). The Board has decided that the final
rule should be effective immediately since the rule relieves a
regulatory burden on banking organizations that transfer small business
obligations with recourse by significantly reducing the capital
requirements on such obligations. This immediate effective date will
permit banks to treat transfers of small business obligations as sales
and to reduce the capital requirement for any such sales. Also, there
is a statutory requirement for the banking agencies to promulgate final
regulations implementing the provisions of section 208 by March 22,
1995. For these same reasons, in accordance with 5 U.S.C. 553(d) (1)
and (3), the Board finds there is good cause not to follow the 30-day
notice requirements of 5 U.S.C. 553(d) and to make the final rule
effective immediately.
List of Subjects
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Flood insurance,
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 amends 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:
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-l, 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; 42 U.S.C.
4012a, 4104a, 4104b.
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 (small business
obligations) with recourse shall include in weighted-risk assets
only the amount of retained recourse, provided two conditions are
met. First, the transaction must be treated as a sale under GAAP
and, second, the bank must establish pursuant to GAAP 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, a bank is qualifying if it
meets the criteria set forth in the Board's prompt corrective action
regulation (12 CFR 208.30) for well capitalized or, by order of the
Board, adequately capitalized. For purposes of determining whether a
bank meets the criteria, its capital ratios must be calculated
without regard to the preferential 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 a qualifying bank on transfers of small
business obligations receiving the preferential capital treatment
cannot exceed 15 percent of the bank's total risk-based capital. By
order, the Board may approve a higher limit.
c. If a bank ceases to be qualifying or exceeds the 15 percent
capital limitation, the preferential capital treatment will continue
to apply to any transfers of small business obligations with
recourse that were consummated during the time that the bank was
qualifying and did not exceed the capital limit.
d. The risk-based capital ratios of the bank shall be calculated
without regard to the preferential capital treatment for transfers
of small business obligations with recourse specified in section
III.B.5.a. of this appendix A for purposes of:
(i) Determining whether a bank is adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized under prompt corrective action (12 CFR 208.33(b));
and
(ii) Reclassifying a well capitalized bank to adequately
capitalized and requiring an adequately capitalized bank to comply
with certain mandatory or discretionary supervisory actions as if
the bank were in the next lower prompt corrective action capital
category (12 CFR 208.33(c)).
* * * * *
3. In part 208, appendix B, section II. is amended by redesignating
paragraph c. as paragraph g. and adding new paragraphs c., d., e., and
f to read as follows:
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 (small business obligations) with recourse
shall, for purposes of calculating its tier 1 leverage ratio,
exclude from its average total consolidated assets the outstanding
principal amount of the small business loans and leases transferred
with recourse, provided two conditions are met. First, the
transaction must be treated as a sale under generally accepted
accounting principles (GAAP) and, second, the bank must establish
pursuant to GAAP 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, a bank is qualifying if it
meets the criteria set forth in the Board's prompt corrective action
regulation (12 CFR 208.30) for well capitalized or, by order of the
Board, adequately capitalized. For purposes of determining whether a
bank meets these criteria, its capital ratios must be calculated
without regard to the preferential 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 a qualifying bank on transfers of small business
obligations receiving the preferential capital treatment cannot
exceed 15 percent of the bank's total risk-based capital. By order,
the Board may approve a higher limit.
e. If a bank ceases to be qualifying or exceeds the 15 percent
capital limitation, the preferential capital treatment will continue
to apply to any transfers of small business obligations with
recourse that were consummated during the time that the bank was
qualifying and did not exceed the capital limit.
f. The leverage capital ratio of the bank shall be calculated
without regard to the preferential capital treatment for transfers
of small business obligations with recourse specified in section II
of this appendix B for purposes of:
(i) Determining whether a bank is adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized under prompt corrective action (12 CFR 208.33(b));
and
(ii) Reclassifying a well capitalized bank to adequately
capitalized and requiring an adequately capitalized bank to comply
with certain mandatory or discretionary supervisory actions as if
the bank were in the next lower prompt corrective action capital
category (12 CFR 208.33(c)).
* * * * *
[[Page 45616]]
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, 1828o, 1831i, 1831p-l,
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: 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 banking organization that has
transferred small business loans and leases on personal property
(small business obligations) with recourse shall include in
weighted-risk assets only the amount of retained recourse, provided
two conditions are met. First, the transaction must be treated as a
sale under GAAP and, second, the banking organization must establish
pursuant to GAAP 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, a banking organization is
qualifying if it meets the criteria for well capitalized or, by
order of the Board, adequately capitalized, as those criteria are
set forth in the Board's prompt corrective action regulation for
state member banks (12 CFR 208.30). For purposes of determining
whether an organization meets these criteria, 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 a qualifying banking organization on
transfers of small business obligations receiving the preferential
capital treatment cannot exceed 15 percent of the organization's
total risk-based capital. By order, the Board may approve a higher
limit.
c. If a bank holding company ceases to be qualifying or exceeds
the 15 percent capital limitation, the preferential capital
treatment will continue to apply to any transfers of small business
obligations with recourse that were consummated during the time that
the organization was qualifying and did not exceed the capital
limit.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, August 25, 1995.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 95-21607 Filed 8-30-95; 8:45 am]
BILLING CODE 6210-01-P
