[Federal Register Volume 63, Number 169 (Tuesday, September 1, 1998)]
[Rules and Regulations]
[Pages 46518-46524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23379]
[[Page 46517]]
_______________________________________________________________________
Part III
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 3
Federal Reserve System
12 CFR Parts 208 and 225
Federal Deposit Insurance Corporation
12 CFR Part 325
Department of the Treasury
Office of Thrift Supervision
_______________________________________________________________________
12 CFR Part 567
Risk-Based Capital Standards: Unrealized Holding Gains on Certain
Equity Securities; Final Rule
Federal Register / Vol. 63, No. 169 / Tuesday, September 1, 1998 /
Rules and Regulations
[[Page 46518]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 98-12]
RIN 1557-AB14
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-0982]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AC11
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[Docket No. 98-75]
RIN 1550-AB11
Risk-Based Capital Standards: Unrealized Holding Gains on Certain
Equity Securities
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; and Office of Thrift Supervision, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), the Federal Deposit
Insurance Corporation (FDIC), and the Office of Thrift Supervision
(OTS) (collectively, the Agencies) are amending their respective risk-
based capital standards for banks, bank holding companies, and thrifts
(institutions) with regard to the regulatory capital treatment of
unrealized holding gains on certain equity securities. These gains are
reported as a component of equity capital under U.S. generally accepted
accounting principles (GAAP), but have not been included in regulatory
capital under the Agencies' capital standards. This final rule permits
institutions to include in supplementary (Tier 2) capital up to 45
percent of the pretax net unrealized holding gains on certain
available-for-sale (AFS) equity securities. The final rule is intended
to make the regulatory capital treatment of these unrealized gains
consistent with the international standards of the Basle Accord.
DATES: This final rule is effective October 1, 1998. The Agencies will
not object if an institution wishes to apply the provisions of this
final rule beginning on September 1, 1998.
FOR FURTHER INFORMATION CONTACT: OCC: Roger Tufts, Senior Economic
Advisor (202/874-5070), Amrit Sekhon, Examiner (202/874-5070), Capital
Policy Division; or Ronald Shimabukuro, Senior Attorney (202/874-5090),
Legislative and Regulatory Activities Division, Office of the
Comptroller of the Currency, 250 E Street, SW, Washington, DC 20219.
Board: Norah Barger, Assistant Director (202/452-2402), Barbara
Bouchard, Manager (202/452-3072), John F. Connolly, Supervisory
Financial Analyst (202/452-3621), Division of Banking Supervision and
Regulation; or Mark E. Van Der Weide, Staff Attorney (202/452-2263),
Legal Division. For the hearing impaired only, Telecommunication Device
for the Deaf (TDD), Diane Jenkins (202/452-3544), Board of Governors of
the Federal Reserve System, 20th and C Streets, NW, Washington, DC
20551.
FDIC: For supervisory issues, Stephen G. Pfeifer, Examination
Specialist (202/898-8904) or Carol L. Liquori, Examination Specialist
(202/898-7289), Accounting Section, Division of Supervision; for legal
issues, Jamey Basham, Counsel, Legal Division (202/898-7265), Federal
Deposit Insurance Corporation, 550 17th Street, NW, Washington, DC
20429.
OTS: Michael D. Solomon, Senior Program Manager for Capital Policy
(202/906-5654), Supervision Policy; or Vern McKinley, Senior Attorney
(202/906-6241), Regulations and Legislation Division, Office of the
Chief Counsel, Office of Thrift Supervision, 1700 G Street, NW,
Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
Background
The Agencies' risk-based capital standards implementing the
International Convergence of Capital Measurement and Capital Standards
(the Basle Accord) 1 include definitions for core (Tier 1)
capital and supplementary (Tier 2) capital.2 Under the
Agencies' capital standards, Tier 1 capital generally includes common
stockholders' equity, noncumulative perpetual preferred stock, and
minority interests in the equity accounts of consolidated
subsidiaries.3 The common stockholders' equity component is
defined to include common stock; related surplus; and retained earnings
(including capital reserves and adjustments for the cumulative effect
of foreign currency translation); less net unrealized holding losses on
AFS equity securities with readily determinable fair values. Net
unrealized holding gains on such equity securities and net unrealized
holding gains and losses on AFS debt securities are not included in the
Agencies' regulatory capital definition of common stockholders'
equity.4 Tier 2 capital includes, subject to certain
limitations and conditions, the allowance for loan and lease losses;
cumulative perpetual preferred stock and related surplus; and certain
other maturing or redeemable capital instruments.
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\1\ The Basle Accord is a risk-based capital framework developed
by the Basle Committee on Banking Regulations and Supervisory
Practices and endorsed by the central bank governors of the Group of
Ten (G-10) countries in July 1988. The Basle Committee is comprised
of the central banks and supervisory authorities from the G-10
countries (Belgium, Canada, France, Germany, Italy, Japan, the
Netherlands, Sweden, Switzerland, the United Kingdom, and the United
States) and Luxembourg.
\2\ Each Agency's risk-based capital standards contain more
detailed descriptions of core and supplementary capital. See 12 CFR
Part 3, Appendix A, for national banks; 12 CFR Part 208, Appendix A,
for state member banks; 12 CFR Part 225, Appendix A, for bank
holding
\3\ Bank holding companies may also include limited amounts of
cumulative perpetual preferred stock in Tier 1 capital.
\4\ For regulatory reporting purposes, institutions record net
unrealized gains and losses on AFS securities (debt and equity) in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 115, ``Accounting for Certain Investments in Debt and Equity
Securities.'' AFS securities are all debt securities not held for
trading that an institution does not have the positive intent and
ability to hold to maturity and equity securities with readily
determinable fair values not held for trading. AFS securities must
be reported at fair value with unrealized holding gains or losses
(i.e., the amount by which fair value exceeds or falls below cost)
reported, net of tax, directly in a separate component of common
stockholders' equity.
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The Basle Accord also permits institutions to include up to 45
percent of the pretax net unrealized gains on equity securities in
supplementary capital. As explained in the Basle Accord, the 55 percent
discount is applied to the unrealized gains to reflect the potential
volatility of this form of unrealized capital, as well as the tax
liability charges that generally would be incurred if the unrealized
gain were realized or otherwise taxed currently. When the Agencies
implemented the Basle Accord by issuing their respective risk-based
capital standards in 1989, they decided not to include unrealized gains
on AFS equity securities in Tier 2 capital.
[[Page 46519]]
Proposed Rule
The Agencies believe that it is appropriate to continue the
existing regulatory capital treatment of net unrealized holding gains
and losses on AFS debt securities and net unrealized holding losses on
AFS equity securities. However, for institutions that have net
unrealized holding gains on AFS equity securities, the Agencies decided
to consider whether to include at least a portion of the unrealized
gains on such securities in regulatory capital. Accordingly, on October
27, 1997, the Agencies published a joint proposal to amend their
respective risk-based capital standards for institutions (62 FR 55682).
Specifically, the Agencies proposed, consistent with the Basle
Accord, to permit institutions that legally hold equity securities to
include up to 45 percent of the pretax net unrealized holding gains
(that is, the excess amount, if any, of fair value over historical
cost) on AFS equity securities in Tier 2 capital. The proposed rule
required that equity securities be valued in accordance with GAAP and
have readily determinable fair values,5 and institutions
should be able to substantiate those values. In the event that an
Agency determines that an institution's AFS equity securities are not
prudently valued in accordance with GAAP, the institution may be
precluded from including all or a portion of the 45 percent of pretax
net unrealized holding gains on those securities in Tier 2 capital.
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\5\ The Agencies intend to rely on the guidance set forth in
SFAS 115 for purposes of determining whether equity securities have
fair values that are ``readily determinable.'' Under SFAS 115, the
fair value of an equity security is readily determinable if sales
prices or bid-and-ask quotations are currently available on a
securities exchange registered with the Securities and Exchange
Commission or in the over-the-counter market, provided that those
prices or quotations for the over-the-counter market are publicly
reported by the National Association of Securities Dealers Automated
Quotations System or by the National Quotations Bureau. Restricted
stock does not meet this definition. The fair value of an equity
security traded only in a foreign market is readily determinable if
that foreign market is of a breadth and scope comparable to one of
the U.S. markets referred to previously. The fair value of an
investment in a mutual fund is readily determinable if the fair
value per share (unit) is determined and published and is the basis
for current transactions.
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Comments Received
The Agencies received eleven comments on the proposal, six from
financial institutions and five from banking trade associations. Seven
commenters expressed support for the proposal; the remaining four
respondents were opposed.
Respondents supporting the proposal included three institutions and
four trade associations. These commenters generally believe that
convergence with the Basle Accord will result in greater uniformity
with foreign capital standards, and will mitigate a source of
competitive inequality arising from continuing differences in
supervisory capital requirements across countries. Three commenters
representing trade associations further emphasized that the proposed
rule would treat net unrealized holding gains on AFS equity securities
more consistently with the current treatment of net unrealized holding
losses since the latter are already deducted from Tier 1 capital.
Another commenter observed that including net unrealized holding gains
in Tier 2 capital is more comparable to the GAAP treatment of such
gains as a component of equity capital.
Opponents of the proposal, three financial institutions and one
banking trade association, expressed varying concerns. The financial
institution representatives generally stated that the proposed rule
would place an additional burden on small community banks. The
remaining opponent of the proposed rule expressed opposition to the
fair value treatment of debt and equity securities for regulatory
capital calculations (an opinion expressed by two other trade
associations, despite their support for the proposal). This commenter
noted that market fluctuations could have a significant impact on
capital levels if the unrealized equity gains are included and the
proposed discount may be insufficient to absorb the potential
volatility in the value of these assets. This commenter also disagreed
with the timing of the proposal, indicating that the currently strong
market could create equity holding gains that may not be sustained if
the economy weakens. In such an event, the commenter was concerned that
institutions unduly relying on unrealized holding gains in their
portfolios may find their capital levels falling below regulatory
minimums due to an adverse change in market conditions.
Several commenters made suggestions for improvements or requests
for clarification. Two supporters of the proposal recommended that the
Agencies further amend the risk-based capital guidelines to eliminate
the Tier 1 capital deduction for net unrealized losses on AFS equity
securities in favor of a deduction from Tier 2 capital, thereby
providing parallel treatment of both unrealized gains and losses on AFS
equity securities. Others, claiming that AFS debt securities are as
liquid and marketable as AFS equity holdings, recommended that the
Agencies work with the Basle Committee to allow unrealized holding
gains on debt securities to be treated as supplementary capital.
Two commenters, each with a different overall opinion of the
proposed rule, questioned the proposed 55 percent discount applied to
the amount permitted to be recognized for regulatory capital purposes.
One stated that the discount was excessive and suggested the Agencies
consider eliminating or reducing the discount. While generally in favor
of the proposal, this commenter noted that a comparable discount was
not required by GAAP and pointed out that unrealized losses were not
similarly discounted. The other commenter believed unrealized equity
gains should either be fully recognized in capital or be entirely
disallowed. Since the commenter expected a discount to be included in
the final rule, the commenter voiced overall opposition to the
proposal.
The Agencies were also asked to clarify that the proposal applies
to equity securities held in subsidiaries of financial institutions.
Finally, two commenters supported a reexamination of the whole risk-
based capital framework, contending that the framework is too complex
for small, traditional institutions and the current risk weight
categories are too broad.
Response to Comments
After carefully considering the comments received, the Agencies are
adopting the final rule substantially as proposed. The Agencies agree
that adopting this rule will result in more consistency with the
capital standards applied to financial institutions in other countries
that have adopted the treatment permitted in the Basle Accord. Although
limited to a supplementary capital item, recognizing unrealized gains
on AFS equity securities in Tier 2 capital is more consistent with the
treatment of unrealized losses on such equity securities and is also
more comparable to the GAAP treatment of such gains as a component of
equity capital.
Under the final rule an institution is permitted, but not required,
to recognize up to 45 percent of pretax net unrealized holding gains on
AFS equity securities in Tier 2 capital. The information the
institution must assemble in support of such treatment is the same as
that already used by the institution when it prepares its
[[Page 46520]]
regulatory reports 6 in accordance with GAAP and there are
no new capital restrictions or limitations imposed. Consequently, the
Agencies find no reason to believe that this final rule places an
additional burden on institutions of any size, including small
community banks.
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\6\ These reports are the Consolidated Reports of Condition and
Income for banks supervised by the OCC, the Board, or the FDIC; the
Thrift Financial Report for thrift institutions supervised by the
OTS; and the FR Y-9C Report for bank holding companies supervised by
the Board.
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Unrealized gains and losses on many financial assets, including AFS
debt securities and most loans, are ignored for purposes of calculating
capital under the Agencies' leverage and risk-based capital standards.
However, the Agencies do not agree with the argument raised in some of
the comment letters that, for regulatory capital purposes, historical
cost (rather than fair value) should be used for equity securities. To
the contrary, the Agencies believe that the fair value of equity
securities is relevant when evaluating regulatory capital.
At the time the risk-based capital guidelines were promulgated in
1989, GAAP and the regulatory reporting rules generally required equity
investments to be valued at the lower of cost or market (LOCOM) with
any net unrealized losses on these investments deducted from equity
capital.7 Consistent with this LOCOM accounting approach,
the Agencies did not include net unrealized gains on equity securities
in Tier 2 capital. However, in 1993, SFAS 115 was adopted. This
accounting standard, which applies fair value accounting to many equity
securities and requires institutions to reflect changes in the fair
value of their AFS equity securities as a component of equity capital,
was also adopted by the Agencies for regulatory reporting purposes.
Although SFAS 115 further requires AFS debt securities to be carried at
fair value, the unrealized holding gains and losses on these securities
generally are more temporary in nature because the fair values of these
debt instruments, over time, tend to approach their respective face
values. Thus, any unrealized gains and losses on these debt instruments
generally diminish as the instruments draw closer to their maturity
dates. As a result, the Agencies continue to believe that unrealized
gains and losses on AFS debt instruments are appropriately excluded
from regulatory capital. However, the Agencies now believe it is
appropriate, subject to prudential supervisory limitations, to include
in Tier 2 capital at least a portion of an institution's net unrealized
holding gains on AFS equity securities. Consistent with current
supervisory policy, to the extent that unrealized gains and losses on
AFS debt securities and other assets are not formally recognized for
regulatory capital purposes, the Agencies will continue to consider the
impact of any appreciation or depreciation on these assets when
evaluating an institution's capital adequacy.
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\7\ This LOCOM accounting approach for equity securities was
required by SFAS No. 12, ``Accounting for Certain Marketable
Securities.''
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This final rule does not revise the treatment of net unrealized
losses on AFS equity securities. The Agencies believe any measure of
potential loss must be reflected in Tier 1 capital so as to provide an
adequate cushion against risk. Therefore, in accordance with the
Agencies' existing capital standards, these net unrealized losses will
continue to be deducted in determining Tier 1 capital.
The Agencies agree with the concerns of the commenter that market
fluctuations could have a significant impact on capital levels if net
unrealized holding gains on equity securities are included in Tier 2
capital. Thus, as a prudent supervisory constraint, and consistent with
the Basle Accord, it appears appropriate to limit the amount of net
appreciation on AFS equity securities that may be included in Tier 2
capital to no more than 45 percent of the pretax net unrealized holding
gains on these securities. Although not required by GAAP, this discount
will help minimize supervisory concerns about market volatility, forced
sale risk, and possible tax charges.
Furthermore, to prevent undue reliance on such gains to meet
minimum capital requirements, unrealized gains on AFS equity securities
are not included in the calculation of Tier 1 capital under the
Agencies' leverage and risk-based capital ratios. Although up to 45
percent of these net unrealized holding gains may be included in
calculating total risk-based capital, the allowable portion of these
gains is only included in Tier 2 capital, which, in turn, is limited
under the Agencies' risk-based capital standards to no more than 100
percent of Tier 1 capital.
The proposed rulemaking did not address how unrealized gains on
equity securities that are held by an institution's subsidiaries should
be treated in those cases where the institution's investment in the
subsidiary itself is required to be deducted from regulatory capital.
If an institution's investment in a subsidiary is deducted for
regulatory capital purposes, any unrealized gains on equity securities
held by the subsidiary will not be included in the institution's Tier 2
capital. On September 12, 1997, the FDIC published a request for
comments regarding proposed changes to the rules regarding the
activities of insured state banks and insured state savings
associations (62 FR 47969). If this rule is adopted as proposed by the
FDIC, a state institution's investment in a subsidiary which, in turn,
invests in listed equity securities or shares of investment companies
of a type not permitted for a national bank or federal savings
association, as authorized by the proposed rule in the case of well-
capitalized institutions, would be deducted from Tier 1 capital for
regulatory capital purposes.
Finally, the Agencies have considered the commenters' concern that
the current risk-based capital rules are too complex for small
traditional institutions and that the current risk weight categories
are too broad. Although the Agencies are sympathetic to this concern
and will continue to seek ways to reduce burden on banks wherever
appropriate, a broad-based reexamination of the risk-based capital
framework is outside the scope of this rulemaking.
Final Rule
After careful consideration of all the comments received, the
Agencies have decided to adopt the final rule with only minor technical
modifications. Under the final rule, institutions that legally hold
equity securities are permitted to include up to 45 percent of the
pretax net unrealized holding gains on AFS equity securities in Tier 2
capital. Revisions from the original proposal have been limited to
minor changes in the regulatory text to ensure consistency among the
rules issued by each Agency.
Institutions need to be aware that, although including a portion of
unrealized gains on AFS equity securities in Tier 2 capital may
increase their total risk-based capital ratio, it may reduce their Tier
1 risk-based capital ratio.8 Such decreases could occur
because an institution's total risk-weighted assets (the denominator
for both the Tier 1 and total risk-based capital ratios) would increase
by the amount of pretax net unrealized holding gains on AFS equity
securities included in Tier 2 capital. However, none of these gains
would be included in Tier 1
[[Page 46521]]
capital, thereby potentially decreasing an institution's Tier 1 risk-
based capital ratio. For this reason, institutions should weigh the
effects on both their total risk-based capital ratio and Tier 1 risk-
based capital ratio when determining the amount of unrealized gains on
AFS equity securities, if any, to include in Tier 2 capital.
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\8\ The leverage ratio will not be affected because the
unrealized gains on AFS equity securities are not included in the
numerator (Tier 1 capital) nor the denominator (total assets as
defined in the agencies' capital standards) when computing the
leverage ratio.
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Early Compliance
Subject to certain exceptions, 12 U.S.C. 4802(b) provides that new
regulations and amendments to regulations prescribed by a Federal
banking agency which impose additional reporting, disclosures, or other
new requirements on an insured depository institution shall take effect
on the first day of a calendar quarter which begins on or after the
date on which the regulations are published in final form. However,
section 4802(b) also permits persons who are subject to such
regulations to comply with the regulation before its effective date.
Accordingly, the Agencies will not object if an institution wishes to
apply the provisions of this final rule beginning with the date it is
published in the Federal Register.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Agencies have determined that this final rule will not have a
significant economic impact on a substantial number of small entities
in accordance with the spirit and purposes of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.). The final rule will permit, but
not obligate, institutions to include up to 45 percent of the pretax
net unrealized holding gains on AFS equity securities in Tier 2
capital. The information which an institution must assemble in support
of such treatment is the same as that already created when it prepares
its regulatory reports in accordance with GAAP. For those institutions
choosing to utilize the final rule, the effect would be to increase
immediately the amount of Tier 2 capital held by institutions,
including small institutions, by the amount of their qualifying pretax
net unrealized holding gains on such securities subject to the existing
limit on Tier 2 capital. Thereafter, the amount of Tier 2 capital will
increase or decrease as the fair value of the institution's holdings of
AFS equity securities changes. The Agencies have concluded that the
increase and changes in Tier 2 capital will not have a significant
impact on the amount of total capital held by institutions, regardless
of size.
Paperwork Reduction Act
The Agencies have determined that the final rule does not involve a
collection of information pursuant to the provisions of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) (Title II, Pub. L. 1004-121) provides generally for agencies
to report rules to Congress for review. The reporting requirement is
triggered when a federal agency issues a final rule. Accordingly, the
Agencies will file the appropriate reports with Congress as required by
SBREFA.
The Office of Management and Budget has determined that this final
rule does not constitute a ``major rule'' as defined by SBREFA.
OCC and OTS Executive Order 12866 Determination
The OCC and the OTS have determined that the final rule does not
constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866.
OCC and OTS Unfunded Mandates Reform Act of 1995 Determinations
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. As discussed in the preamble,
this rule will permit institutions to include up to 45 percent of
pretax net unrealized holding gains on AFS equity securities in Tier 2
capital under the Agencies' risk-based capital rules. The final rule
will reduce regulatory burden by increasing the amount of supplementary
capital held by certain institutions. The OCC and the OTS have
therefore determined that the overall effect of the rule on national
banks and thrifts will not result in aggregate expenditures by State,
local, or tribal governments or by the private sector of $100 million
or more. Accordingly, the OCC and the OTS have not prepared a budgetary
impact statement or specifically addressed the regulatory alternatives
considered.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
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.
12 CFR Part 325
Administrative practice and procedure, Banks, banking, Capital
adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.
12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Savings
associations.
Authority and Issuance
Office of the Comptroller of the Currency
12 CFR Chapter I
For the reasons set out in the joint preamble, part 3 of chapter I
of title 12 of the Code of Federal Regulations is amended as follows:
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, and 3909.
2. In appendix A to part 3, section 2. is amended by adding a new
paragraph (b)(5) including footnote 5 to read as follows:
Appendix A to Part 3--Risk-Based Capital Guidelines
* * * * *
Section 2. Components of Capital.
* * * * *
(b) * * *
(5) Up to 45 percent of the pretax net unrealized holding gains
(that is, the excess, if any, of the fair value over historical
cost) on available-for-sale equity securities with
[[Page 46522]]
readily determinable fair values.5 Unrealized gains
(losses) on other types of assets, such as bank premises and
available-for-sale debt securities, are not included in Tier 2
capital, but the OCC may take these unrealized gains (losses) into
account as additional factors when assessing a bank's overall
capital adequacy.
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\5\ The OCC reserves the authority to exclude all or a portion
of unrealized gains from Tier 2 capital if the OCC determines that
the equity securities are not prudently valued.
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* * * * *
Dated: August 12, 1998.
Julie L. Williams,
Acting Comptroller of the Currency.
Federal Reserve System
12 CFR Chapter II
For the reasons set forth in the joint preamble, parts 208 and 225
of chapter II of title 12 of the Code of Federal Regulations are
amended as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 is revised to read as
follows:
Authority: 12 U.S.C. 24, 36, 92(a), 93(a), 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),
1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1835a, 1882, 2901-
2907, 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, 4106, and 4128.
2. In appendix A to part 208, the introductory paragraphs in
section II.A.2. are revised and footnote 8 is removed and reserved to
read as follows:
Appendix A to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
* * * * *
II. * * *
A. * * *
2. Supplementary capital elements (Tier 2 capital). The Tier 2
component of a bank's qualifying total capital may consist of the
following items that are defined as supplementary capital elements:
(i) Allowance for loan and lease losses (subject to limitations
discussed below);
(ii) Perpetual preferred stock and related surplus (subject to
conditions discussed below);
(iii) Hybrid capital instruments (as defined below) and
mandatory convertible debt securities;
(iv) Term subordinated debt and intermediate-term preferred
stock, including related surplus (subject to limitations discussed
below);
(v) Unrealized holding gains on equity securities (subject to
limitations discussed in section II.A.2.e. of this appendix).
The maximum amount of Tier 2 capital that may be included in a
bank's qualifying total capital is limited to 100 percent of Tier 1
capital (net of goodwill and other intangible assets required to be
deducted in accordance with section II.B.1.b. of this appendix).
The elements of supplementary capital are discussed in greater
detail below.
* * * * *
3. In appendix A to part 208, section II.A.2., paragraphs d. and e.
are revised to read as follows:
* * * * *
II. * * *
A. * * *
2. * * *
d. Subordinated debt and intermediate term preferred stock. (i)
The aggregate amount of term subordinated debt (excluding mandatory
convertible debt) and intermediate-term preferred stock that may be
treated as supplementary capital is limited to 50 percent of Tier 1
capital (net of goodwill and other intangible assets required to be
deducted in accordance with section II.B.1.b. of this appendix).
Amounts in excess of these limits may be issued and, while not
included in the ratio calculation, will be taken into account in the
overall assessment of a bank's funding and financial condition.
(ii) Subordinated debt and intermediate-term preferred stock
must have an original weighted average maturity of at least five
years to qualify as supplementary capital. (If the holder has the
option to require the issuer to redeem, repay, or repurchase the
instrument prior to the original stated maturity, maturity would be
defined, for risk-based capital purposes, as the earliest possible
date on which the holder can put the instrument back to the issuing
bank.) 12 In the case of subordinated debt, the
instrument must be unsecured and must clearly state on its face that
it is not a deposit and is not insured by a Federal agency. To
qualify as capital in banks, debt must be subordinated to general
creditors and claims of depositors. Consistent with current
regulatory requirements, if a state member bank wishes to redeem
subordinated debt before the stated maturity, it must receive prior
approval of the Federal Reserve.
---------------------------------------------------------------------------
\12\ As a limited-life capital instrument approaches maturity it
begins to take on characteristics of a short-term obligation. For
this reason, the outstanding amount of term subordinated debt and
limited-life preferred stock eligible for inclusion in Tier 2 is
reduced, or discounted, as these instruments approach maturity: one-
fifth of the original amount (less redemptions) is excluded each
year during the instrument's last five years before maturity. When
the remaining maturity is less than one year, the instrument is
excluded from Tier 2 capital.
---------------------------------------------------------------------------
e. Unrealized gains on equity securities and unrealized gains
(losses) on other assets. Up to 45 percent of pretax net unrealized
holding gains (that is, the excess, if any, of the fair value over
historical cost) on available-for-sale equity securities with
readily determinable fair values may be included in supplementary
capital. However, the Federal Reserve may exclude all or a portion
of these unrealized gains from Tier 2 capital if the Federal Reserve
determines that the equity securities are not prudently valued.
Unrealized gains (losses) on other types of assets, such as bank
premises and available-for-sale debt securities, are not included in
supplementary capital, but the Federal Reserve may take these
unrealized gains (losses) into account as additional factors when
assessing a bank's overall capital adequacy.
* * * * *
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 is revised 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.
2. In appendix A to part 225, the introductory paragraphs of
section II.A.2. are revised and footnote 8 is removed and reserved to
read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
* * * * *
II. * * *
A. * * *
2. Supplementary capital elements (Tier 2 capital). The Tier 2
component of an institution's qualifying total capital may consist
of the following items that are defined as supplementary capital
elements:
(i) Allowance for loan and lease losses (subject to limitations
discussed below);
(ii) Perpetual preferred stock and related surplus (subject to
conditions discussed below);
(iii) Hybrid capital instruments (as defined below), perpetual
debt and mandatory convertible debt securities;
(iv) Term subordinated debt and intermediate-term preferred
stock, including related surplus (subject to limitations discussed
below);
(v) Unrealized holding gains on equity securities (subject to
limitations discussed in section II.A.2.e. of this appendix).
The maximum amount of Tier 2 capital that may be included in an
organization's qualifying total capital is limited to 100 percent of
Tier 1 capital (net of goodwill and other intangible assets required
to be deducted in accordance with section II.B.1.b. of this
appendix).
The elements of supplementary capital are discussed in greater
detail below.
* * * * *
3. In appendix A to part 225, section II.A.2., paragraphs d and e
are revised to read as follows:
* * * * *
II. * * *
A. * * *
2. * * *
d. Subordinated debt and intermediate-term preferred stock. (i)
The aggregate
[[Page 46523]]
amount of term subordinated debt (excluding mandatory convertible
debt) and intermediate-term preferred stock that may be treated as
supplementary capital is limited to 50 percent of Tier 1 capital
(net of goodwill and other intangible assets required to be deducted
in accordance with section II.B.1.b. of this appendix). Amounts in
excess of these limits may be issued and, while not included in the
ratio calculation, will be taken into account in the overall
assessment of an organization's funding and financial condition.
(ii) Subordinated debt and intermediate-term preferred stock
must have an original weighted average maturity of at least five
years to qualify as supplementary capital.12 (If the
holder has the option to require the issuer to redeem, repay, or
repurchase the instrument prior to the stated maturity, maturity
would be defined, for risk-based capital purposes, as the earliest
possible date on which the holder can put the instrument back to the
issuing banking organization.) 13 In the case of
subordinated debt, the instrument must be unsecured and must clearly
state on its face that it is not a deposit and is not insured by a
Federal agency. Bank holding company debt must be subordinated in
the right of payment to all senior indebtedness of the company.
---------------------------------------------------------------------------
\12\ Unsecured term debt issued by bank holding companies prior
to March 12, 1988, and qualifying as secondary capital at the time
of issuance continues to qualify as an element of supplementary
capital under the risk-based framework, subject to the 50 percent of
Tier 1 capital limitation. Bank holding company term debt issued on
or after March 12, 1988, must be subordinated in order to qualify as
capital.
\13\ As a limited-life capital instrument approaches maturity it
begins to take on characteristics of a short-term obligation. For
this reason, the outstanding amount of term subordinated debt and
limited-life preferred stock eligible for inclusion in Tier 2 is
reduced, or discounted, as these instruments approach maturity: one-
fifth of the original amount (less redemptions) is excluded each
year during the instrument's last five years before maturity. When
the remaining maturity is less than one year, the instrument is
excluded from Tier 2 capital.
---------------------------------------------------------------------------
e. Unrealized gains on equity securities and unrealized gains
(losses) on other assets. Up to 45 percent of pretax net unrealized
holding gains (that is, the excess, if any, of the fair value over
historical cost) on available-for-sale equity securities with
readily determinable fair values may be included in supplementary
capital. However, the Federal Reserve may exclude all or a portion
of these unrealized gains from Tier 2 capital if the Federal Reserve
determines that the equity securities are not prudently valued.
Unrealized gains (losses) on other types of assets, such as bank
premises and available-for-sale debt securities, are not included in
supplementary capital, but the Federal Reserve may take these
unrealized gains (losses) into account as additional factors when
assessing an institution's overall capital adequacy.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, August 25, 1998.
Jennifer J. Johnson,
Secretary of the Board.
Federal Deposit Insurance Corporation
12 CFR Chapter III
For the reasons set forth in the joint preamble, part 325 of
chapter III of title 12 of the Code of Federal Regulations is amended
as follows:
PART 325--CAPITAL MAINTENANCE
1. The authority citation for part 325 continues to read as
follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended
by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).
2. In appendix A to part 325, the introductory paragraphs of
section I.A.2. are revised to read as follows:
Appendix A to Part 325--Statement of Policy on Risk-Based Capital
* * * * *
I. * * *
A. * * *
2. Supplementary capital elements (Tier 2) consist of:
i. Allowance for loan and lease losses, up to a maximum of 1.25
percent of risk-weighted assets;
ii. Cumulative perpetual preferred stock, long-term preferred
stock (original maturity of at least 20 years), and any related
surplus;
iii. Perpetual preferred stock (and any related surplus) where
the dividend is reset periodically based, in whole or part, on the
bank's current credit standing, regardless of whether the dividends
are cumulative or noncumulative;
iv. Hybrid capital instruments, including mandatory convertible
debt securities;
v. Term subordinated debt and intermediate-term preferred stock
(original average maturity of five years or more) and any related
surplus; and
vi. Net unrealized holding gains on equity securities (subject
to the limitations discussed in paragraph I.A.2.(f) of this
section).
The maximum amount of Tier 2 capital that may be recognized for
risk-based capital purposes is limited to 100 percent of Tier 1
capital (after any deductions for disallowed intangibles and
disallowed deferred tax assets). In addition, the combined amount of
term subordinated debt and intermediate-term preferred stock that
may be treated as part of Tier 2 capital for risk-based capital
purposes is limited to 50 percent of Tier 1 capital. Amounts in
excess of these limits may be issued but are not included in the
calculation of the risk-based capital ratio.
* * * * *
3. In appendix A to part 325, the last undesignated paragraph of
section I.A.2., entitled ``Discount of limited-life supplementary
capital instruments,'' is designated as paragraph (e) and a new
paragraph (f) is added to section I.A.2. to read as follows:
* * * * *
I. * * *
A. * * *
2. * * *
(f) Unrealized gains on equity securities and unrealized gains
(losses) on other assets. Up to 45 percent of pretax net unrealized
holding gains (that is, the excess, if any, of the fair value over
historical cost) on available-for-sale equity securities with
readily determinable fair values may be included in supplementary
capital. However, the FDIC may exclude all or a portion of these
unrealized gains from Tier 2 capital if the FDIC determines that the
equity securities are not prudently valued. Unrealized gains
(losses) on other types of assets, such as bank premises and
available-for-sale debt securities, are not included in
supplementary capital, but the FDIC may take these unrealized gains
(losses) into account as additional factors when assessing a bank's
overall capital adequacy.
* * * * *
4. In appendix A to part 325, Table I is revised to read as
follows:
Table I.-- Definition of Qualifying Capital
------------------------------------------------------------------------
Minimum requirements and
Components limitations
------------------------------------------------------------------------
(1) Core Capital (Tier 1).............. Must equal or exceed 4% of risk-
weighted assets.
(2) Common stockholders' equity capital No limit.1
(3) Noncumulative perpetual preferred No limit.\1\
stock and any related surplus.
(4) Minority interests in equity No limit.\1\
capital accounts of consolidated
subsidiaries.
(5) Less: All intangible assets other (\2\)
than mortgage servicing rights and
purchased credit card relationships.
(6) Less: Certain deferred tax assets.. (\3\)
[[Page 46524]]
(7) Supplementary Capital (Tier 2)..... Total of Tier 2 is limited to
100% of Tier 1.4
(8) Allowance for loan and lease losses Limited to 1.25% of risk-
weighted assets.4
(9) Unrealized gains on certain equity Limited to 45% of pretax net
securities 5. unrealized gains.\5\
(10) Cumulative perpetual and long-term No limit within Tier 2; long-
preferred stock (original maturity of term preferred is amortized
20 years or more) and any related for capital purposes as it
surplus. approaches maturity.
(11) Auction rate and similar preferred No limit within Tier 2.
stock (both cumulative and non-
cumulative).
(12) Hybrid capital instruments No limit within Tier 2.
(including mandatory convertible debt
securities).
(13) Term subordinated debt and Term subordinated debt and
intermediate-term preferred stock intermediate term preferred
(original weighted average maturity of stock are limited to 50% of
five years or more). Tier 1\4\ and amortized for
capital purposes as they
approach maturity.
(14) Deductions (from the sum of Tier 1
plus Tier 2).
(15) Investments in banking and finance
subsidiaries that are not consolidated
for regulatory capital purposes.
(16) Intentional, reciprocal cross-
holdings of capital securities issued
by banks.
(17) Other deductions (such as On a case-by-case basis or as a
investments in other subsidiaries or matter of policy after formal
in joint ventures) as determined by consideration of relevant
supervisory authority. issues.
(18) Total Capital (Tier 1 + Tier 2-- Must equal or exceed 8% of risk-
Deductions). weighted assets.
------------------------------------------------------------------------
\1\ No express limits are placed on the amounts of nonvoting common,
noncumulative perpetual preferred stock, and minority interests that
may be recognized as part of Tier 1 capital. However, voting common
stockholders' equity capital generally will be expected to be the
dominant form of Tier 1 capital and banks should avoid undue reliance
on other Tier 1 capital elements.
\2\ The amounts of mortgage servicing rights and purchased credit card
relationships that can be recognized for purposes of calculating Tier
1 capital are subject to the limitations set forth in Sec. 325.5(f).
All deductions are for capital purposes only; deductions would not
affect accounting treatment.
\3\ Deferred tax assets are subject to the capital limitations set forth
in Sec. 325.5(g).
\4\ Amounts in excess of limitations are permitted but do not qualify as
capital.
\5\ Unrealized gains on equity securities are subject to the capital
limitations set forth in paragraph I.A.2.(f) of Appendix A to part
325.
By order of the Board of Directors.
Dated at Washington, DC, this 25th day of August, 1998.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Office of Thrift Supervision
12 CFR Chapter V
For the reasons set forth in the joint preamble, part 567 of
chapter V of title 12 of the Code of Federal Regulations is amended as
set forth below:
PART 567--CAPITAL
1. The authority citation for part 567 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).
2. Section 567.5 is amended by adding a new paragraph (b)(5) to
read as follows:
Sec. 567.5 Components of capital.
* * * * *
(b) * * *
(5) Unrealized gains on equity securities. Up to 45 percent of
unrealized gains on available-for-sale equity securities with readily
determinable fair values may be included in supplementary capital.
Unrealized gains are unrealized holding gains, net of unrealized
holding losses, before income taxes, calculated as the amount, if any,
by which fair value exceeds historical cost. The OTS may disallow such
inclusion in the calculation of supplementary capital if the Office
determines that the equity securities are not prudently valued.
* * * * *
Dated: August 6, 1998.
By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-23379 Filed 8-31-98; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P, 6714-01-P; 6720-01-P
