CAPITAL STANDARDS
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[Federal Register: February 14, 2001 (Volume 66, Number 31)]
[Proposed Rules]
[Page 10212-10226]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14fe01-9]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 10212]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 01-03]
RIN 1557-AB14
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1097]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AC47
Capital; Leverage and Risk-Based Capital Guidelines; Capital
Adequacy Guidelines; Capital Maintenance: Nonfinancial Equity
Investments
AGENCIES: Office of the Comptroller of the Currency (OCC); Board of
Governors of the Federal Reserve System (Board); and Federal Deposit
Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
T INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AC47
Capital; Leverage and Risk-Based Capital Guidelines; Capital
Adequacy Guidelines; Capital Maintenance: Nonfinancial Equity
Investments
AGENCIES: Office of the Comptroller of the Currency (OCC); Board of
Governors of the Federal Reserve System (Board); and Federal Deposit
Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are
requesting comment on a proposed rule that would establish special
minimum regulatory capital requirements for equity investments in
nonfinancial companies. The proposed capital treatment would apply
symmetrically to equity investments of banks and bank holding
companies. As described in detail below, the proposal would apply a
series of marginal capital charges on covered equity investments that
increase with the level of a banking organization's overall exposure to
equity investments relative to the organization's Tier 1 capital. The
proposal replaces the capital proposal issued for public comment by the
Board in March 2000 (Docket No. R-1067).
DATES: Comments must be received by April 16, 2001.
ADDRESSES:
OCC: Comments should be addressed to Docket No. 01-03,
Communications Division, Third Floor, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219. In addition,
comments may be sent by facsimile transmission to fax number (202) 874-
5274 or by electronic mail to regs.comments@occ.treas.gov. Comments
will be available for inspection and photocopying at the same location.
Board: Comments directed to the Board should refer to Docket No. R-
1097 and may be mailed to Ms. Jennifer J
r of the
Currency, 250 E Street, SW., Washington, DC 20219. In addition,
comments may be sent by facsimile transmission to fax number (202) 874-
5274 or by electronic mail to regs.comments@occ.treas.gov. Comments
will be available for inspection and photocopying at the same location.
Board: Comments directed to the Board should refer to Docket No. R-
1097 and may be mailed to Ms. Jennifer J. Johnson, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551 or mailed electronically to
regs.comments@federalreserve.gov. Comments addressed to Ms. Johnson
also may be delivered to Room B-2222 of the Eccles Building between
8:45 a.m. and 5:15 p.m., weekdays, or the security control room in the
Eccles Building courtyard on 20th Street, NW (between Constitution
Avenue and C Street) at any time. Comments may be inspected in Room MP-
500 of the Martin Building between 9 a.m. and 5 p.m. weekdays, except
as provided in 12 CFR 261.8 of the Board's Rules Regarding Availability
of Information.
FDIC: Written comments should be addressed to Robert E. Feldman,
Executive Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, NW, Washington, DC 20429. Comments may be
hand delivered to the guard station at the rear of the 550 17th Street
Building (located on F Street) on business days between 7 a.m. and 5
p.m. Send facsimile transmissions to fax number (202) 898-3838.
Comments may be submitted electronically to comments@fdic.gov. Comments
may be inspected and photocopied in the FDIC Public Information Center,
Room 100, 801 17th Street, NW., Washington, DC 20429, between 9 a.m.
and 4:30 p.m. on business days
e 550 17th Street
Building (located on F Street) on business days between 7 a.m. and 5
p.m. Send facsimile transmissions to fax number (202) 898-3838.
Comments may be submitted electronically to comments@fdic.gov. Comments
may be inspected and photocopied in the FDIC Public Information Center,
Room 100, 801 17th Street, NW., Washington, DC 20429, between 9 a.m.
and 4:30 p.m. on business days.
FOR FURTHER INFORMATION CONTACT:
OCC: Tommy Snow, Director, Capital Policy (202/874-5070); Karen
Solomon, Director (202/874-5090), or Ron 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: Scott G. Alvarez, Associate General Counsel (202/452-3583),
Kieran J. Fallon, Senior Counsel (202/452-5270), or Camille M. Caesar,
Counsel (202/452-3513), Legal Division; Jean Nellie Liang, Chief,
Capital Markets (202/452-2918), Division of Research & Statistics;
Michael G. Martinson, Associate Director (202/452-3640) or James A.
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Embersit, Assistant Director (202/452-5249), Capital Markets, Division
of Banking Supervision and Regulation; Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW,
Washington, D.C. 20551.
FDIC: Mark S. Schmidt, Associate Director, (202/898-6918), Stephen
G. Pfeifer, Examination Specialist, Accounting Section (202/898-8904),
Curtis Vaughn, Examination Specialist (202/898-6759), Division of
Supervision; Michael B. Phillips, Counsel, (202/898-3581); Thelma W.
Diaz, Counsel (202/898-3765), Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street, NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
A. Background
1
98-6918), Stephen
G. Pfeifer, Examination Specialist, Accounting Section (202/898-8904),
Curtis Vaughn, Examination Specialist (202/898-6759), Division of
Supervision; Michael B. Phillips, Counsel, (202/898-3581); Thelma W.
Diaz, Counsel (202/898-3765), Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street, NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
A. Background
1. Description of Original Capital Proposal
In March, 2000, the Board in connection with publishing an interim
rule implementing provisions of the Gramm-Leach-Bliley Act (GLB Act)
that allow financial holding companies to engage in merchant banking
activities, invited public comment on a proposal to establish capital
requirements governing investments by bank holding companies in
nonfinancial companies. (See 65 FR 16480). The capital proposal would
assess, at the holding company level, a 50 percent capital charge on
the carrying value of each investment.
The capital proposal applied to investments, including equity and
debt instruments under some circumstances, made by a bank holding
company under any of its equity investment authorities, including its
merchant banking authority, investment authority under Regulation K,
authority to make investments through small business investment
companies, authority to hold indirectly investments under section 24 of
the Federal Deposit Insurance Act, and authority to make investments in
[[Page 10213]]
less than 5 percent of the shares of any company under sections 4(c)(6)
and 4(c)(7) of the Bank Holding Company Act (BHC Act). This capital
proposal did not apply, however, to shares that a bank holding company
acquires in a company engaged only in financial activities, acquires in
connection with its securities underwriting, dealing or market making
activities and held in trading accounts, or acquires through an
insurance underwriting company.
2
ections 4(c)(6)
and 4(c)(7) of the Bank Holding Company Act (BHC Act). This capital
proposal did not apply, however, to shares that a bank holding company
acquires in a company engaged only in financial activities, acquires in
connection with its securities underwriting, dealing or market making
activities and held in trading accounts, or acquires through an
insurance underwriting company.
2. Brief Summary of Comments
The Board and the Secretary of the Treasury together received more
than 130 comments on the capital proposal. Commenters included members
of Congress, other federal agencies, state banking departments, banking
organizations, securities firms, trade associations for the banking and
securities industries, law firms and individuals. Many commenters
acknowledged that equity investment activities involve greater risks
than traditional banking activities. For example, a trade association
for the banking industry fully supported the proposed capital charge as
appropriate to protect banking organizations and the financial system
from the risks associated with merchant banking investment activities.
Most commenters, however, opposed the capital proposal or one or
more aspects of the proposal. Some commenters contended that the
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proposal, by applying a uniform 50-percent charge to all equity
investments, failed adequately to take into account risk variances
between different types of equity investments (e.g., private equity
investments vs. investments in publicly traded stocks) or between
different investment portfolios
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proposal, by applying a uniform 50-percent charge to all equity
investments, failed adequately to take into account risk variances
between different types of equity investments (e.g., private equity
investments vs. investments in publicly traded stocks) or between
different investment portfolios. A number of commenters argued that the
proposal would frustrate Congress' desire to permit a ``two-way
street'' between securities firms and banking organizations or would
place bank holding companies, and particularly those with large equity
investment portfolios, at a disadvantage in competing with nonbanking
organizations and foreign banking organizations in the market for
making equity investments. Some commenters also contended that the
Board lacked the authority to establish special capital requirements
for merchant banking and similar equity investments.
Many commenters acknowledged that the internal capital models
developed by banking organizations and securities firms frequently
require equity investment activities to be supported by significant
amounts of capital. Some commenters argued that banking organizations
should be permitted to use their internal capital models to determine
the appropriate amount of regulatory capital needed to support their
investment activities. Others argued that, because banking
organizations use internal models for a variety of purposes, it is not
appropriate for the agencies to rely on selected data from those models
as a principal basis for establishing a minimum regulatory capital
requirement for equity investments
l models to determine
the appropriate amount of regulatory capital needed to support their
investment activities. Others argued that, because banking
organizations use internal models for a variety of purposes, it is not
appropriate for the agencies to rely on selected data from those models
as a principal basis for establishing a minimum regulatory capital
requirement for equity investments. Commenters also argued that the
banking agencies should not use data derived from internal models to
support establishing a high regulatory capital requirement for equity
investments without also using the data from these models to reduce the
amount of regulatory capital needed to support more traditional banking
assets, such as consumer and commercial loans.
Many commenters suggested specific amendments or alternatives to
the proposed capital charge. For example, some commenters suggested
that the Board rely solely on the examination and supervisory process,
as well as market discipline, to ensure that a bank holding company
maintains adequate capital to support its equity investment activities.
Other commenters argued that the proposal should be replaced with a
rule that prohibits bank holding companies from including any
unrealized gains on equity investments in their regulatory capital.
Some commenters argued that the proposal should be amended to impose a
lower capital charge on equity investments such as, for instance, by
assigning equity investments a 200 percent risk-weight or by applying a
capital charge higher than the current minimums only to equity
investments that exceed some threshold amount of the banking
organization's Tier 1 capital (e.g., 30 percent).
Some commenters argued that a higher capital charge should be
limited only to merchant banking investments made by financial holding
companies under the new merchant banking authority in the GLB Act, and
should not be applied to past or future investments made by banking
organizations under other statutory authorities
amount of the banking
organization's Tier 1 capital (e.g., 30 percent).
Some commenters argued that a higher capital charge should be
limited only to merchant banking investments made by financial holding
companies under the new merchant banking authority in the GLB Act, and
should not be applied to past or future investments made by banking
organizations under other statutory authorities. Other commenters
requested that specific investment authorities be excluded from the
proposal. For example, a number of commenters argued that the proposal
should not apply to investments made by small business investment
company (SBIC) subsidiaries of a banking organization because SBICs are
an important source of capital for small businesses, are subject to
oversight by the Small Business Administration, and have not
historically caused significant losses at banking organizations. Many
state banking institutions also argued that the proposal should not
apply to the equity investments made by state banks under the special
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grandfather provisions of section 24(f)(2) of the Federal Deposit
Insurance Act (FDI Act). Others asserted that the capital charge should
not be applied to investments approved on a case-by-case basis by the
FDIC under section 24 of the FDI Act, to investments made under section
4(c)(6) or 4(c)(7) of the BHC Act, or to debt instruments.
A number of commenters asserted that a capital charge higher than
the current minimums should not be applied to equity investments
actually made prior to issuance of the capital proposal. Commenters
argued that the business decisions concerning these investments were
made based on the capital rules then in effect, and that applying a
new, higher capital charge to these pre-existing investments would be
unfair.
B
s asserted that a capital charge higher than
the current minimums should not be applied to equity investments
actually made prior to issuance of the capital proposal. Commenters
argued that the business decisions concerning these investments were
made based on the capital rules then in effect, and that applying a
new, higher capital charge to these pre-existing investments would be
unfair.
B. Revised Capital Adequacy Proposal
The Board has carefully reviewed the comments regarding its initial
capital proposal. In addition, the Board has consulted with the
Treasury Department and has worked with the other Federal banking
agencies to improve the proposal and to develop capital standards that
would apply uniformly to equity investments held by bank holding
companies and those held by depository institutions.
The new proposal attempts to balance the concerns of commenters
with the belief of the Federal banking agencies that banking
organizations must maintain sufficient capital to offset the risk of an
activity that generally involves risks that are higher than the risks
associated with many traditional banking activities. In striking this
balance, the new proposal focuses on establishing a regulatory capital
requirement that the Federal banking agencies believe represents the
minimum capital levels consistent with the safe and sound conduct of
equity investment activities. The agencies fully expect that individual
banking organizations in most cases will allocate higher economic
capital levels, as appropriate, commensurate with the risk in the
individual investment portfolios of the company.
The banking agencies have been guided by several principles in
considering the appropriate levels of capital that should be required
as a regulatory minimum to support equity investment activities. First,
equity investment activities in nonfinancial
[[Page 10214]]
companies generally involve greater risks than traditional bank and
financial activities
investment portfolios of the company.
The banking agencies have been guided by several principles in
considering the appropriate levels of capital that should be required
as a regulatory minimum to support equity investment activities. First,
equity investment activities in nonfinancial
[[Page 10214]]
companies generally involve greater risks than traditional bank and
financial activities. Analysis of the annual returns for a diversified
portfolio of publicly-traded small cap stocks over the past seventy-
five years indicates that capital levels well in excess of the current
regulatory minimum capital levels for banking organizations may be
needed to support equity investment activities with the level of
financial soundness expected of organizations that control insured
depository institutions. Over the past twenty-five years, a study of
venture capital investment firms indicates that, while some of these
firms did very well, nearly 20 percent of these firms failed and a
substantial number of others achieved only modest returns. Two national
rating agencies have indicated that the private equity business is
largely funded with equity capital and that equity portfolios,
including mature and well diversified equity portfolios, require
substantially more capital than loans.
Firms and institutional investors that engage to a significant
degree in equity investment activities typically support their equity
t returns. Two national
rating agencies have indicated that the private equity business is
largely funded with equity capital and that equity portfolios,
including mature and well diversified equity portfolios, require
substantially more capital than loans.
Firms and institutional investors that engage to a significant
degree in equity investment activities typically support their equity
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investment activities with high levels of capital--often dollar for
dollar--due to the greater risk and illiquidity of these types of
investments and the higher leverage that often is employed by portfolio
companies. In fact, the vast majority of commenters did not disagree
that equity investment activities are riskier than traditional banking
activities or that it is prudent to fund these types of investment
activities with higher levels of capital.
For these reasons, the agencies believe that capital in excess of
the current regulatory minimum capital levels for more traditional
banking activities should be required to allow a banking organization
to conduct equity investment activities in a safe and sound manner.
A second and related principle that guided the agencies in
considering this new proposal is that the financial risks to an
organization engaged in equity investment activities increase as the
level of their investments accounts for a larger portion of the
organization's capital, earnings and activities. Banking organizations
have for some time engaged in equity investment activities using
various authorities, including primarily SBICs and authority to make
limited passive investments under sections 4(c)(6) and (7) of the BHC
Act
ged in equity investment activities increase as the
level of their investments accounts for a larger portion of the
organization's capital, earnings and activities. Banking organizations
have for some time engaged in equity investment activities using
various authorities, including primarily SBICs and authority to make
limited passive investments under sections 4(c)(6) and (7) of the BHC
Act. When the current capital treatment, which requires a minimum of 4%
Tier 1 capital (6% in the case of depository institutions that must
meet the regulatory well-capitalized definition) was developed, these
equity investment activities by bank holding companies and banks were
small in relation to the more traditional lending and other activities
of these organizations.
The level of these investment activities has grown significantly in
recent years, however. For example, investments made through SBICs
owned by banking organizations have alone more than doubled in the past
5 years. In addition, the merchant banking authority granted to
financial holding companies by the GLB Act provides significant new
authority to make equity investments without many of the restrictions
that apply to other authorities currently used by banking organizations
to make these investments. The agencies believe that it is appropriate
to revisit the regulatory capital requirements applicable to equity
investment activities in light of the dramatic growth in banking
organizations' equity investment activities through existing
authorities and the grant of this new and expanded merchant banking
authority.
A third principle guiding the agencies' efforts is that the risk of
loss associated with a particular equity investment is likely to be the
same regardless of the legal authority used to make the investment or
whether the investment is held in the bank holding company or in the
bank
activities through existing
authorities and the grant of this new and expanded merchant banking
authority.
A third principle guiding the agencies' efforts is that the risk of
loss associated with a particular equity investment is likely to be the
same regardless of the legal authority used to make the investment or
whether the investment is held in the bank holding company or in the
bank. In fact, the agencies' supervisory experience is that banking
organizations are increasingly making investment decisions and managing
equity investment risks across legal entities as a single business line
within the organization. These organizations use different legal
authorities available to different legal entities within the
organization to conduct a unified equity investment business.
In light of these principles, the agencies propose to amend their
respective capital regulations and guidelines to establish special
minimum regulatory capital requirements for equity investments in
nonfinancial companies as described herein. This capital treatment
would apply symmetrically to equity investment activities of bank
holding companies and banks. Importantly, this new proposal applies a
series of marginal capital charges that increase with the level of a
banking organization's overall exposure to equity investment activities
relative to the institution's Tier 1 capital.
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The Board, the OCC, and the FDIC each propose to amend their
respective capital regulations and guidelines applicable to banks to
incorporate the capital treatment described below. In addition, the
Board proposes to amend its capital guidelines and regulations that
apply on a consolidated basis to bank holding companies as described
below.
The agencies invite comment on all aspects of the proposal.
1
he OCC, and the FDIC each propose to amend their
respective capital regulations and guidelines applicable to banks to
incorporate the capital treatment described below. In addition, the
Board proposes to amend its capital guidelines and regulations that
apply on a consolidated basis to bank holding companies as described
below.
The agencies invite comment on all aspects of the proposal.
1. Scope of Coverage
The proposed capital treatment discussed below would apply only to
equity investments in nonfinancial companies. Specifically, the
proposed capital treatment would apply to equity investments made in
nonfinancial companies:
By financial holding companies under the merchant banking
authority of section 4(k)(4)(H) of the BHC Act;
By bank holding companies (including financial holding
companies) in less than 5 percent of the shares of a nonfinancial
company under the authority of section 4(c)(6) or 4(c)(7) of the BHC
Act;
By bank holding companies (including financial holding
companies) or banks in nonfinancial companies through SBICs;
By bank holding companies (including financial holding
companies) or banks under Regulation K; and
By banking organizations under section 24 of the Federal
Deposit Insurance Act.
Many commenters, including a number of members of Congress, argued
that investments in SBICs should not be subject to higher capital
requirements. These commenters contended that SBICs serve the important
public purpose of encouraging the development and funding of small
businesses and that SBICs owned by banking organizations have generally
been profitable to date.
Congress has, through the Small Business Investment Act, expressed
its desire to facilitate the funding of small businesses through SBICs
and has by statute imposed limits on the formation, operation, funding
and investments of SBICs. Congress has also imposed special limitations
on the amount of capital that a banking organization may invest in an
SBIC
generally
been profitable to date.
Congress has, through the Small Business Investment Act, expressed
its desire to facilitate the funding of small businesses through SBICs
and has by statute imposed limits on the formation, operation, funding
and investments of SBICs. Congress has also imposed special limitations
on the amount of capital that a banking organization may invest in an
SBIC. In light of this congressional intent and these statutory limits,
the revised proposal would not apply any special capital charge to
investments in nonfinancial companies held by SBICs owned by banks or
bank holding companies so long as these investments remain within
traditional limits.
The agencies note, however, that SBICs have grown significantly in
the past few years, in part because of the appreciation of the value of
SBIC investments on their books. Reflecting both the specific
congressional
[[Page 10215]]
preference for SBICs and the appreciation in the value of SBIC
investments, the proposal would apply special capital charges to equity
investments made through SBICs only when the carrying value of those
investments exceeds certain high thresholds relative to Tier 1 capital.
The agencies note that nearly all SBICs owned by banking organizations
currently are below the thresholds proposed.
Commenters requested clarification regarding whether the capital
charge would apply to certain other types of equity investments,
ity
investments made through SBICs only when the carrying value of those
investments exceeds certain high thresholds relative to Tier 1 capital.
The agencies note that nearly all SBICs owned by banking organizations
currently are below the thresholds proposed.
Commenters requested clarification regarding whether the capital
charge would apply to certain other types of equity investments,
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including in particular investments in companies that engage solely in
banking and financial activities that the investing company could
conduct directly. Banking organizations have special expertise in
managing the risks associated with financial activities. As a result,
neither the original proposal made by the Board nor the new proposal by
the banking agencies would apply to equity investments made in
companies that engage in banking or financial activities that are
permissible for the investing bank holding company or bank, as
relevant, to conduct directly. The proposal also would not apply to an
equity investment made under Regulation K in any company that is
engaged solely in activities that have been determined to be financial
in nature or incidental to financial services.
A number of commenters, requested that the agencies clarify whether
the capital proposal would apply to equity securities held in a trading
account. The new proposal does not apply to securities that are held in
a trading account in accordance with applicable accounting principles
and as part of an underwriting, market making or dealing activity.
Several commenters also requested clarification regarding whether the
proposal would apply to investments that the primary supervisor of the
bank or bank holding company has determined to be designed primarily to
promote the public welfare and are held in community development
corporations. The proposal would not apply to these investments
f an underwriting, market making or dealing activity.
Several commenters also requested clarification regarding whether the
proposal would apply to investments that the primary supervisor of the
bank or bank holding company has determined to be designed primarily to
promote the public welfare and are held in community development
corporations. The proposal would not apply to these investments.
Many commenters argued that the proposed capital treatment should
not be applied to investments in nonfinancial companies held by state
banks in accordance with section 24 of the FDI Act. Commenters argued
that state banks, especially state banks located in New England, have
been authorized to make limited amounts of equity investments for more
than 50 years and that these investments have provided diversification
to their earnings when loans have been unprofitable.
Section 24 of the FDI Act allows state banks to retain equity
investments in nonfinancial companies made pursuant to state law under
certain circumstances. In particular, section 24(f) permits certain
state banks to retain shares of publicly traded companies and
registered investment companies if the investment was permitted under a
state law enacted as of a certain date, the state bank engaged in the
investment activity as of a certain date and the total amount of equity
investments made by the bank does not exceed the capital of the bank.
Commenters argued that Congress specifically considered the risks to
state banks from these investments when deciding to grandfather these
equity investment activities.
In addition to this grandfathered investment authority, a state
bank may hold equity in other nonfinancial companies if the FDIC
determines that the investment does not pose a significant risk to the
deposit insurance fund
Commenters argued that Congress specifically considered the risks to
state banks from these investments when deciding to grandfather these
equity investment activities.
In addition to this grandfathered investment authority, a state
bank may hold equity in other nonfinancial companies if the FDIC
determines that the investment does not pose a significant risk to the
deposit insurance fund. The FDIC is empowered to establish and has
established higher capital requirements and other limitations on equity
investments of state banks held under this authority, such as
investments in companies engaged in real estate investment and
development activities. The FDIC has to date in most cases required
state banks that make these investments to limit the amount of the
investment and to deduct these investments from the bank's capital,
effectively imposing a 100 percent capital charge on these investments.
For these reasons, the agencies propose to exclude from the special
capital charge any investment in a nonfinancial company held by a state
bank in accordance with the grandfather provisions of section 24(f) of
the FDI Act. The proposal would apply to other equity investments in
nonfinancial companies held by state banks in accordance with other
provision of section 24.\1\
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\1\ Under the proposal, the Board of Directors of the FDIC,
acting directly, may, in exceptional cases and after a review of the
proposed activity, permit a lower capital deduction for investments
approved by the Board of Directors under section 24 of the FDI Act
so long as the bank's investments under section 24 and SBIC
investments represent, in the aggregate, less than 15 percent of the
Tier 1 capital of the bank. The FDIC and the other banking agencies
reserve the authority to impose higher capital charges where
appropriate
ctivity, permit a lower capital deduction for investments
approved by the Board of Directors under section 24 of the FDI Act
so long as the bank's investments under section 24 and SBIC
investments represent, in the aggregate, less than 15 percent of the
Tier 1 capital of the bank. The FDIC and the other banking agencies
reserve the authority to impose higher capital charges where
appropriate.
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A few commenters argued that the capital proposal should not be
applied to any equity investment made by a bank or bank holding company
prior to March 13, 2000. These investments were made at a time when the
agencies had not proposed a higher regulatory capital charge, are
modest in amount at most banking organizations, and will be liquidated
over time. As explained below, the new capital proposal establishes a
marginal capital structure that is different and, on average, lower
than the original proposal. The new proposal also provides that no
special capital charge would be imposed on investments made through an
SBIC within certain thresholds. SBICs hold a very large portion of the
investments made prior to March 13, 2000, by banking organizations. In
light of these changes, the agencies request comment on whether it is
necessary or appropriate to grandfather the individual investments made
prior to March 13, 2000. The agencies also request comment on the
alternative of allowing banking organizations to phase in over a period
of time (such as 3 years) the proposed capital standards with regard to
investments made prior to March 13, 2000.
Commenters also argued that capital charges should not apply to
debt that is extended to companies in which an organization has made an
equity investment. The original proposal would have applied the
proposed capital charge to any debt instrument with equity features
(such as conversion rights, warrants or call options)
al standards with regard to
investments made prior to March 13, 2000.
Commenters also argued that capital charges should not apply to
debt that is extended to companies in which an organization has made an
equity investment. The original proposal would have applied the
proposed capital charge to any debt instrument with equity features
(such as conversion rights, warrants or call options). In addition, the
proposal would have applied a higher capital charge to any other type
of debt extended to a company if the debt instrument is held by a
banking organization that also owns at least 15 percent of the equity
of the company. The original proposal included exceptions for short-
term, secured credit provided for working capital purposes, any
extension of credit that meets the collateral requirements of section
23A of the Federal Reserve Act, any extension of credit that is
guaranteed by the U.S. Government, and any extension of credit at least
50 percent of which is sold or participated out to unaffiliated
parties.
Commenters noted that the legal doctrine of equitable subordination
affects the ability of investors to make loans to portfolio companies
that serve as the functional equivalent of equity. Under this doctrine,
courts in bankruptcy proceedings have, under certain circumstances,
subordinated the claims of creditors that are also investors in a
company to the claims of other creditors, effectively treating the debt
held by the investor as if the debt were equity.
After considering the comments on this matter, the agencies have
revised the approach to debt instruments with
[[Page 10216]]
doctrine,
courts in bankruptcy proceedings have, under certain circumstances,
subordinated the claims of creditors that are also investors in a
company to the claims of other creditors, effectively treating the debt
held by the investor as if the debt were equity.
After considering the comments on this matter, the agencies have
revised the approach to debt instruments with
[[Page 10216]]
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equity features. The new proposal applies the proposed capital
treatment to equity features of debt (such as warrants and options to
purchase equities in nonfinancial companies) and to debt instruments
convertible into equity investments in nonfinancial companies where the
equity feature or instrument is held under one of the authorities
listed above. The primary supervisor will monitor the use of debt held
under any authority as a method for providing the equivalent of equity
funding to portfolio companies, and may, on a case-by-case basis in the
supervisory process, require banking organizations to maintain higher
capital against debt where circumstances indicate that the debt serves
as the functional equivalent of equity.
The original capital proposal made by the Board did not apply to
equity investments made under section 4(k)(4)(I) of the BHC Act by an
insurance underwriting affiliate of a financial holding company, and
the revised proposal continues that approach. These investments
generally are already subject to higher capital charges under state
insurance laws. The Board requests comment regarding whether special
capital requirements or other supervisory restrictions should be
applied to assure that financial holding companies do not use insurance
underwriting companies to arbitrage any differences in the capital
requirements on equity investment activities that apply to insurance
companies and other financial holding company affiliates
urance laws. The Board requests comment regarding whether special
capital requirements or other supervisory restrictions should be
applied to assure that financial holding companies do not use insurance
underwriting companies to arbitrage any differences in the capital
requirements on equity investment activities that apply to insurance
companies and other financial holding company affiliates. To the extent
appropriate, the Board will address these matters in a separate
proposal regarding the appropriate method for accounting for insurance
companies under the Board's consolidated capital adequacy guidelines
applicable to financial holding companies.
The agencies believe that the authorities discussed above cover the
principal authorities available to banking organizations to make equity
investments in companies that engage in nonfinancial activities. The
agencies request comment on whether there are other investment
activities that should be covered by this capital proposal.
As noted above, the new proposal would apply the special capital
charge to investments in nonfinancial companies made in accordance with
the portfolio investment provisions of Regulation K. This includes
investments made through so-called Edge Act and Agreement corporations.
This special capital treatment would not apply, for example, to the
ownership of equity securities held by an Edge Act or Agreement
corporation to hedge equity derivative transactions for foreign
customers. The agencies request comment on whether it is appropriate to
apply the capital charge to investments made through Edge Act
corporations and Agreement corporations in nonfinancial companies
overseas.
2. Capital Charges
As noted above, the agencies propose to amend their respective
capital guidelines and rules to apply a different charge to equity
investments in nonfinancial companies than is currently applied to
traditional banking investments and activities
capital charge to investments made through Edge Act
corporations and Agreement corporations in nonfinancial companies
overseas.
2. Capital Charges
As noted above, the agencies propose to amend their respective
capital guidelines and rules to apply a different charge to equity
investments in nonfinancial companies than is currently applied to
traditional banking investments and activities. This proposal would
apply symmetrically to banks and bank holding companies. This proposal
would not have a significant effect on the capital levels of any major
banking organization based on current investment levels.
The proposal involves a progression of capital charges that
increases with the size of the aggregate equity investment portfolio of
the banking organization relative to its Tier 1 capital. This approach
takes account of the greater impact that losses in a larger portfolio
of equity investments relative to capital may have on the financial
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condition of a banking organization.
As explained in the attached proposed amendment to the capital
rules, the proposed capital charge would be applied by making a
deduction from the organization's Tier 1 capital. This deduction would
be based on the adjusted carrying value of equity investments in
nonfinancial companies. The adjusted carrying value is the value at
which the relevant investment is recorded on the balance sheet, reduced
by net unrealized gains that are included in carrying value but that
have not been included in Tier 1 capital and associated deferred tax
liabilities
's Tier 1 capital. This deduction would
be based on the adjusted carrying value of equity investments in
nonfinancial companies. The adjusted carrying value is the value at
which the relevant investment is recorded on the balance sheet, reduced
by net unrealized gains that are included in carrying value but that
have not been included in Tier 1 capital and associated deferred tax
liabilities.
For the reasons explained above, no additional capital charge would
be applied to SBIC investments made by a bank or bank holding company,
so long as the adjusted carrying value of the investments does not
exceed 15 percent of the Tier 1 capital of the depository institution
that holds the investment or, in the case of an SBIC held directly by
the bank holding company, 15 percent of the pro rata Tier 1 capital of
all depository institutions controlled by the bank holding company.
These investments would be included, however, in determining the
aggregate size of the organization's investment portfolio for purposes
of applying the marginal capital charges discussed below.
For all investments other than SBIC investments, an 8 percent Tier
1 capital charge would be applied so long as the adjusted carrying
value of all such investments (plus all SBIC investments and other
covered investments) represent less than 15 percent of Tier 1 capital.
This difference in treatment for investments made outside of an SBIC
recognizes the special limits that have been imposed on the operations
of SBICs and preferences that Congress has granted to SBICs.
In the case of a portfolio of covered investments that, in the
aggregate (including SBIC investments and other covered investments),
exceeds 15 percent of the organization's Tier 1 capital, a 12 percent
Tier 1 capital charge would apply to the portion of the portfolio above
the 15 percent threshold. The 12 percent marginal charge would apply to
the adjusted carrying value of equity investments up to 25 percent of
Tier 1 capital
investments that, in the
aggregate (including SBIC investments and other covered investments),
exceeds 15 percent of the organization's Tier 1 capital, a 12 percent
Tier 1 capital charge would apply to the portion of the portfolio above
the 15 percent threshold. The 12 percent marginal charge would apply to
the adjusted carrying value of equity investments up to 25 percent of
Tier 1 capital. In the case of a portfolio of covered investments that,
in the aggregate, exceeds 25 percent of the organization's Tier 1
capital, a 25 percent marginal Tier 1 capital charge would apply to the
portion of the portfolio above the 25 percent threshold. The following
table, which is included in the proposed regulation, reflects these
capital charges.
Table 1.--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held by Deduction from Tier 1
the bank or bank holding company (as a Capital (as a percentage of
percentage of the Tier 1 capital of the the adjusted carrying value
bank or bank holding company) \2\ of the investment)
------------------------------------------------------------------------
Less than 15 percent...................... 8 percent
15 percent to 24.99 percent............... 12 percent
25 percent and above...................... 25 percent
------------------------------------------------------------------------
\2\ For purposes of calculating the percentage of equity investments
relative to Tier 1 capital, Tier 1 capital is defined as the sum of
core capital elements net of goodwill and net of all identifiable
intangible assets other than mortgage servicing assets, nonmortgage
servicing assets and purchased credit card relationships, but prior to
--------------------------------------------------
\2\ For purposes of calculating the percentage of equity investments
relative to Tier 1 capital, Tier 1 capital is defined as the sum of
core capital elements net of goodwill and net of all identifiable
intangible assets other than mortgage servicing assets, nonmortgage
servicing assets and purchased credit card relationships, but prior to
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the deduction for deferred tax assets and nonfinancial equity
investments.
The agencies propose to apply heightened supervision to the equity
investment activities of banking organizations as appropriate,
including in the event that the adjusted carrying value of all
nonfinancial equity investments represents more than 50 percent of the
organization's Tier 1 capital. The agencies may in any case impose a
higher minimum capital charge on an organization as appropriate in
light of the risk management systems;
[[Page 10217]]
risk, nature, size and composition of the organization's investments;
market conditions; and other relevant information and circumstances.
In the event that the agencies determine not to apply this special
capital charge to equity investments made by a banking organization
prior to March 13, 2000, the agencies propose to include the adjusted
carrying value of an organization's investment portfolio made in
grandfathered investments for purposes of determining the appropriate
marginal capital charge on investments that are not grandfathered.
Commenters questioned how the original capital proposal would apply
to investments held through equity investment funds, in particular,
through investment partnerships where the holding company may control
the fund, usually through its role as general partner, but is not the
sole participant in the fund
ing the appropriate
marginal capital charge on investments that are not grandfathered.
Commenters questioned how the original capital proposal would apply
to investments held through equity investment funds, in particular,
through investment partnerships where the holding company may control
the fund, usually through its role as general partner, but is not the
sole participant in the fund. As noted in the original proposal, the
capital charge in such instances would apply only to the holding
company's proportionate share of the fund's investments. Such treatment
would apply even if the partnership is consolidated in the holding
company's financial reporting statements. Similarly, the new proposal
provides that minority interest resulting from any such consolidation
would not be included in the Tier 1 capital of the holding company.
Such minority interest is not available to support the overall
financial business of the holding company.
Similar treatment is proposed for minority interest with respect to
investments in nonfinancial companies under the authorities covered by
the proposal. Generally, it would not be expected that any nonfinancial
company whose shares are acquired pursuant to these authorities would
be consolidated, either because the investment is temporary as in the
case of merchant banking investments, or limited to a minority
interest. However, if consolidation does occur, any resulting minority
interest must be excluded from Tier 1 capital because the minority
interest is not available to support the general financial business of
the banking organization.
The agencies invite comment on all aspects of the proposal,
including in particular on the proposed marginal capital charges and
the methods for calculating and applying the deduction to capital. The
agencies recognize that the proposed capital deduction may have an
effect on the calculation of the leverage ratio for the banking
organization
inancial business of
the banking organization.
The agencies invite comment on all aspects of the proposal,
including in particular on the proposed marginal capital charges and
the methods for calculating and applying the deduction to capital. The
agencies recognize that the proposed capital deduction may have an
effect on the calculation of the leverage ratio for the banking
organization. Accordingly, the agencies also request comment on whether
this effect is likely to be significant, whether an adjustment should
be permitted to account for this effect, and, if so, what type of
adjustment is appropriate.
3. Alternatives Suggested by Commenters
Commenters offered a variety of alternatives to the original
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capital proposal. Among these suggestions were to rely on internal
capital models, to rely on the supervisory process for determining
appropriate capital charges on a case-by-case basis, to require banking
organizations to adopt the regulatory equivalent of available-for-sale
accounting, and to adopt a reduced capital charge.
Many commenters suggested that the agencies rely fully on internal
capital models developed by each banking organization to measure the
capital needs of the organization across all of its activities. A
number of commenters argued that the original capital proposal was
flawed because it adopted a higher capital charge on equity investments
in a manner similar to the internal capital models used by many banking
organizations without at the same time allowing banking organizations
to adopt features of these models that allocate less capital than the
regulatory minimum capital requirements against other, less risky,
activities
he original capital proposal was
flawed because it adopted a higher capital charge on equity investments
in a manner similar to the internal capital models used by many banking
organizations without at the same time allowing banking organizations
to adopt features of these models that allocate less capital than the
regulatory minimum capital requirements against other, less risky,
activities.
The agencies believe that internal capital models that take account
of the different risks and capital needs of each of the activities of a
particular banking organization ultimately represent an effective
method for determining the capital adequacy of an organization. The
agencies have encouraged the development of comprehensive internal
capital models, and many banking organizations have begun to develop
their own internal capital models. As yet, however, these models are
largely untested and unable to capture the risks of many activities
conducted by banking organizations. Moreover, the stage of development
and sophistication of models varies greatly across organizations. In
addition, as noted by many commenters, assessing the adequacy of
capital by reference to risk models is most effective when applied
across the entire organizational risk structure, rather than piece meal
for selected assets or portfolios. As a result, the agencies do not
believe that it is appropriate at this time to rely on internal
modeling of equity portfolios as a replacement for regulatory minimum
capital requirements. The agencies believe, however, that robust
internal modeling can be an effective method for addressing capital
adequacy. Accordingly, the agencies will review a banking
organization's internal models in assessing the adequacy of the
organization's capital levels in relation to its equity investment
activities and expect to revisit the need for regulatory minimum
capital requirements for equity investment activities as internal
models become more sophisticated and reliable
ethod for addressing capital
adequacy. Accordingly, the agencies will review a banking
organization's internal models in assessing the adequacy of the
organization's capital levels in relation to its equity investment
activities and expect to revisit the need for regulatory minimum
capital requirements for equity investment activities as internal
models become more sophisticated and reliable.
Another alternative suggested by many commenters was that the
agencies assess the appropriate regulatory capital levels for equity
investment activities on a case-by-case basis through the supervisory
process. These commenters argued that it was inappropriate for the
agencies to adopt a single regulatory minimum capital requirement that
would apply in the same way to all banking organizations engaged in
equity investment activities, regardless of the differences in
portfolio risks at different organizations. These commenters believed
that the capital needs of individual organizations could be best
assessed through the individual examination of each organization, with
the agencies assessing higher capital requirements on a case-by-case
basis to address particular risks at individual organizations.
The agencies agree that examination and supervision are important
methods for assuring that individual organizations are conducting
equity investment activities in a safe and sound manner and have
adequate capital to support those activities. The agencies expect to
pay particular attention to the investment activities of banking
organizations and to heighten that supervision as the level of
The agencies agree that examination and supervision are important
methods for assuring that individual organizations are conducting
equity investment activities in a safe and sound manner and have
adequate capital to support those activities. The agencies expect to
pay particular attention to the investment activities of banking
organizations and to heighten that supervision as the level of
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concentration in these activities increases at an organization. The
supervisory process will consider, among other things, the
institution's internal allocation of capital to equity investment
activities as an important element in assessing capital adequacy.
However, the agencies believe that supervisory experience and
analysis of equity investment activities over a long period of time
indicate that it is prudent to establish minimum capital requirements
for equity investment activities in addition to effective supervision
and examination. Establishing minimum capital requirements by rule also
reduces the potential that capital requirements at an organization will
be arbitrarily set during the examination process. A uniform regulatory
minimum capital rule also indicates to organizations that are entering
this business line for the first time the agencies' expectations for
additional capital to support these activities.
Some commenters suggested that the agencies require that banking
[[Page 10218]]
organizations adopt the regulatory equivalent of available-for-sale
(AFS) accounting. Commenters argued that this approach improves the
capital strength of an organization by eliminating from Tier 1 capital,
at least for regulatory reporting purposes, any reliance on unrealized
gains on equity investments
ties.
Some commenters suggested that the agencies require that banking
[[Page 10218]]
organizations adopt the regulatory equivalent of available-for-sale
(AFS) accounting. Commenters argued that this approach improves the
capital strength of an organization by eliminating from Tier 1 capital,
at least for regulatory reporting purposes, any reliance on unrealized
gains on equity investments. This arguably reduces the volatility in
capital that results from changes in the value of equity investments,
which often occur unpredictably and quickly during the life of the
investment, by preventing banking organizations from taking unrealized
gains into income, and thus capital, for regulatory purposes.
AFS accounting has been adopted by many organizations and
represents a prudent and appropriate approach to accounting for equity
investments in many situations. Nonetheless, the agencies have
determined not to require the regulatory equivalent of this accounting
treatment for regulatory capital calculations for several reasons.
First, this approach does not address the risk associated with the
initial cost of the investment. Instead, it effectively applies a 100
percent capital charge on unrealized gains while maintaining the normal
capital charge on the initial investment cost. For investments that are
very profitable, this charge may be too high, while for investments
that are not performing well, this capital charge is likely to be too
low.
In addition, an AFS approach creates differences in capital
treatment for companies that acquired the same equity investment, with
the same risk, on different dates. Under the AFS approach, an investor
that has acquired an investment in the initial offering of stock of the
portfolio company would be effectively required to hold more capital
against the investment than a second investor that acquires the same
amount of shares of the same company for a higher price at a later
date
acquired the same equity investment, with
the same risk, on different dates. Under the AFS approach, an investor
that has acquired an investment in the initial offering of stock of the
portfolio company would be effectively required to hold more capital
against the investment than a second investor that acquires the same
amount of shares of the same company for a higher price at a later
date.
Moreover, a capital charge based on the AFS approach is easily
manipulated through the sale and repurchase of equity of the same
company. This manipulation would be difficult to monitor and prevent.
While the agencies have not proposed adopting the regulatory
equivalent of the AFS accounting approach, the agencies recognize that
a regulatory minimum capital charge must take account of situations in
which an investor determines to adopt this approach for GAAP reporting
purposes. Accordingly, the capital charge proposed by the agencies is
based on the ``adjusted carrying value'' of the relevant investment and
the proposal would require deduction of the adjusted carrying value
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from risk-weighted assets for purposes of calculating the risk-based
capital ratio. This treatment retains the flexibility of an investor to
adopt AFS accounting or other accounting treatments permitted under
GAAP.
C. Regulatory Flexibility Act Analysis
OCC: This proposal would amend the OCC's risk-based capital
guidelines and leverage capital rules for national banks. The
amendments made by the proposal would establish the regulatory capital
requirements applicable to a national bank's equity investment in a
nonfinancial company made through a SBIC pursuant to section 302(b) of
the Small Business Investment Act of 1958 or under the portfolio
investment provisions of the Board's Regulation K.
The OCC hereby certifies, pursuant to section 5(b) of the
Regulatory Flexibility Act (5 U.S.C
sal would establish the regulatory capital
requirements applicable to a national bank's equity investment in a
nonfinancial company made through a SBIC pursuant to section 302(b) of
the Small Business Investment Act of 1958 or under the portfolio
investment provisions of the Board's Regulation K.
The OCC hereby certifies, pursuant to section 5(b) of the
Regulatory Flexibility Act (5 U.S.C. 603(a)), that the proposed
amendments will not, if promulgated in final rule form, have a
significant economic impact on a substantial number of small entities.
For the purposes of the Regulatory Flexibility Act, small entities
are defined to include any national bank that has $100 million in
assets or less. See 5 U.S.C. 601(3) and (6), 15 U.S.C. 632(a), and 13
CFR 121.201. With respect to national banks, this proposal would only
apply to equity investments in a nonfinancial company either made
through a SBIC pursuant to section 302(b) of the Small Business
Investment Act of 1958 or under the portfolio investment provisions of
Regulation K. The OCC does not believe that it is likely that a
substantial number of small national banks engage in these kinds of
equity investment activities. Moreover, even with respect to any small
national banks that might engage in the types of equity investments
covered by this proposal, the OCC does not believe that the proposal
rule will require these banks to raise significant amounts of new
capital. For these reasons, the OCC does not believe that this
proposal, if promulgated in final rule form, will have a significant
economic impact on a substantial number of small national banks.
Nevertheless, the OCC specifically seeks comment on any burden that
this proposal would impose on small national banks.
Board: In accordance with section 3(a) of the Regulatory
Flexibility Act (5 U.S.C. 603(a)), the Board must publish an initial
regulatory flexibility analysis with this rulemaking
will have a significant
economic impact on a substantial number of small national banks.
Nevertheless, the OCC specifically seeks comment on any burden that
this proposal would impose on small national banks.
Board: In accordance with section 3(a) of the Regulatory
Flexibility Act (5 U.S.C. 603(a)), the Board must publish an initial
regulatory flexibility analysis with this rulemaking. The rule proposes
and requests comment on amendments to the Board's consolidated risk-
based and leverage capital adequacy guidelines for bank holding
companies (Part 225, Appendix A and Appendix D) and state member banks
(Part 208, Appendix A and Appendix D).
These amendments would establish the regulatory capital
requirements applicable to the merchant banking investments of
financial holding companies and similar investment activities of bank
holding companies and state member banks. The Board hereby certifies,
pursuant to 5 U.S.C. 605(b), that the proposed capital amendments will
not, if promulgated through a final rule, have a significant economic
impact on a substantial number of small entities because small entities
that the Board regulates, specifically, financial or bank holding
companies or state member banks that have less than $150 million in
consolidated assets, generally do not engage in these investment
activities to any significant degree. In addition, because the Board's
risk-based and leverage capital guidelines do not generally apply to
bank holding companies, including financial holding companies, that
have less than $150 million in consolidated assets, the proposed rule
te member banks that have less than $150 million in
consolidated assets, generally do not engage in these investment
activities to any significant degree. In addition, because the Board's
risk-based and leverage capital guidelines do not generally apply to
bank holding companies, including financial holding companies, that
have less than $150 million in consolidated assets, the proposed rule
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will have no impact upon such organizations.
For the reasons discussed above, the Board believes that the
proposed amendments to its capital guidelines are necessary and
appropriate to ensure that bank holding companies and state member
banks maintain capital commensurate with the levels of risk associated
with their equity investment activities and that these activities do
not pose an undue risk to the safety and soundness of insured
depository institutions. This notice of proposed rulemaking contains a
detailed discussion of the Board's reasons for issuing the proposed
rule and of the alternatives to the rule that the Board has considered.
The Board specifically seeks comment on the likely burden that the
proposed rule will impose on bank holding companies and state member
banks.
FDIC: The rule proposes and requests comment on amendments to the
FDIC's risk-based and leverage capital standards for state nonmember
banks (Part 325). These amendments would establish the regulatory
capital requirements applicable to certain nonfinancial equity
investments of state nonmember banks. The FDIC hereby certifies,
pursuant to section 605(b) of the Regulatory Flexibility Act, 5 U.S.C
C: The rule proposes and requests comment on amendments to the
FDIC's risk-based and leverage capital standards for state nonmember
banks (Part 325). These amendments would establish the regulatory
capital requirements applicable to certain nonfinancial equity
investments of state nonmember banks. The FDIC hereby certifies,
pursuant to section 605(b) of the Regulatory Flexibility Act, 5 U.S.C.
605(b), that the proposed capital amendments will not, if promulgated
through a final rule, have a significant economic impact on a
substantial number of small entities because small
[[Page 10219]]
entities that the FDIC regulates, specifically, state nonmember banks
that have less than $100 million in consolidated assets, generally do
not engage in nonfinancial equity investment activities covered by this
proposed rule to any significant degree.
D. Paperwork Reduction Act
OCC: In accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3506; 5 CFR 1320 App. A.1), the OCC has reviewed the proposal
under the authority delegated to the OCC by the Office of Management
and Budget. No collections of information pursuant to the Paperwork
Reduction Act are contained in the proposal.
Board: In accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3506; 5 CFR 1320 App. A.1), the Board has reviewed the proposed
rule under the 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 proposed rule.
FDIC: The FDIC has determined that this proposal 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.).
E. Executive Order 12866 Determination
OCC: The Comptroller of the Currency has determined that this
proposed rule, if adopted as a final rule, would not constitute a
``significant regulatory action'' for the purposes of Executive Order
12866.
F
roposal 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.).
E. Executive Order 12866 Determination
OCC: The Comptroller of the Currency has determined that this
proposed rule, if adopted as a final rule, would not constitute a
``significant regulatory action'' for the purposes of Executive Order
12866.
F. Unfunded Mandates Act of 1995
OCC: Section 202 of the Unfunded Mandates Reform Act of 1995, 2
U.S.C. 1532 (Unfunded Mandates Act), requires that an agency prepare a
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budgetary impact statement before promulgating any rule likely to
result in a Federal mandate that may result in the 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 the agency to identify and consider a reasonable number
of regulatory alternatives before promulgating the rule. The OCC has
determined that this proposed regulation will not result in
expenditures by State, local, and tribal governments, in the aggregate,
or by the private sector, of $100 million or more in any one year.
Accordingly, the OCC has not prepared a budgetary impact statement or
specifically addressed the regulatory alternatives considered.
G. Solicitation of Comments on Use of ``Plain Language''
Section 722 of the GLB Act requires the agencies to use ``plain
language'' in all proposed and final rules published after January 1,
2000. The agencies invite comments about how to make the proposed rule
easier to understand, including answers to the following questions:
(1) Have the agencies organized the material in an effective
manner? If not, how could the material be better organized?
ection 722 of the GLB Act requires the agencies to use ``plain
language'' in all proposed and final rules published after January 1,
2000. The agencies invite comments about how to make the proposed rule
easier to understand, including answers to the following questions:
(1) Have the agencies organized the material in an effective
manner? If not, how could the material be better organized?
(2) Are the terms of the rule clearly stated? If not, how could the
terms be more clearly stated?
(3) Does the rule contain technical language or jargon this is
unclear? If so, which language requires clarification?
(4) Would a different format (with respect to the grouping and
order of sections and use of headings) make the rule easier to
understand?
(5) Would increasing the number of sections (and making each
section shorter) clarify the rule? If so, which portions of the rule
should be changed in this respect?
(6) What additional changes would make the rule easier to
understand?
The agencies also solicit comment about whether including factual
examples in the rule in order to illustrate its terms is appropriate.
Are there alternatives that the agencies should consider to illustrate
the terms in the rule?
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.
ng 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.
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12 CFR Part 325
Administrative practice and procedure, Banks, banking, Capital
adequacy, Reporting and recordkeeping requirements, State non-member
banks.
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set out in the preamble, part 3 of chapter I of
title 12 of the Code of Federal Regulations is proposed to be 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:
A. In section 1, paragraphs (c)(17) through (c)(31) are
redesignated as paragraphs (c)(20) through (c)(34); paragraphs (c)(12)
through (c)(16) are redesignated as paragraphs (c)(14) through (c)(18);
and paragraphs (c)(1) through (c)(11) are redesignated as paragraphs
(c)(2) through (c)(12);
B. In section 1, new paragraphs (c)(1), (c)(13) and (c)(19) are
added;
C. In section 2, paragraph (a)(3) is revised;
D. In section 2, new paragraph (c)(1)(iv) is added;
E. In section 2, paragraph (c)(4) is redesignated as paragraph
(c)(5); and
F. In section 2, new paragraph (c)(4) is added to read as follows:
Appendix A to Part 3--Risk-Based Capital Guidelines
Section 1. Purpose, Applicability of Guidelines, and Definitions
* * * * *
(19) are
added;
C. In section 2, paragraph (a)(3) is revised;
D. In section 2, new paragraph (c)(1)(iv) is added;
E. In section 2, paragraph (c)(4) is redesignated as paragraph
(c)(5); and
F. In section 2, new paragraph (c)(4) is added to read as follows:
Appendix A to Part 3--Risk-Based Capital Guidelines
Section 1. Purpose, Applicability of Guidelines, and Definitions
* * * * *
(c) * * *
(1) Adjusted carrying value means, for purposes of section
2(c)(4) of this appendix A, the aggregate value that investments are
carried on the balance sheet of the bank reduced by any unrealized
gains on the investments that are reflected in such carrying value
but excluded from the bank's Tier 1 capital. For example, for
investments held as available-for-sale (AFS), the adjusted carrying
value of the investments would be the aggregate carrying value of
the investments (as reflected on the consolidated balance sheet of
the bank) less any unrealized gains on those investments that are
included in other comprehensive income and that are not reflected in
Tier 1 capital, and less any associated deferred tax liabilities.
Unrealized losses on AFS equity investments must be deducted from
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Tier 1 capital in accordance with section 1(c)(8) of this appendix
A. The treatment of small business investment companies that are
consolidated for accounting purposes is discussed in section
2(c)(4)(iv) of this appendix A. For investments in a nonfinancial
company that is consolidated for accounting purposes, the
[[Page 10220]]
bank's adjusted carrying value of the investment is determined under
the equity method of accounting (net of any intangibles associated
with the investment that are deducted from the bank's Tier 1 capital
in accordance with section 2(c)(2) of this appendix A)
c)(4)(iv) of this appendix A. For investments in a nonfinancial
company that is consolidated for accounting purposes, the
[[Page 10220]]
bank's adjusted carrying value of the investment is determined under
the equity method of accounting (net of any intangibles associated
with the investment that are deducted from the bank's Tier 1 capital
in accordance with section 2(c)(2) of this appendix A). Even though
the assets of the nonfinancial company are consolidated for
accounting purposes, these assets (as well as the credit equivalent
amounts of the company's off-balance sheet items) are excluded from
the bank's risk-weighted assets.
* * * * *
(13) Equity investment means, for purposes of section 1(c)(19)
and section 2(c)(4) of this appendix A, any equity instrument
including warrants and call options that give the holder the right
to purchase an equity instrument, any equity feature of a debt
instrument (such as a warrant or call option), and any debt
instrument that is convertible into equity. An investment in
subordinated debt or other types of debt instruments may be treated
as an equity investment if the OCC determines that the instrument is
the functional equivalent of equity.
* * * * *
(19) Nonfinancial equity investment means any equity investment
in a nonfinancial company made by the bank through a small business
investment company (SBIC) under section 302(b) of the Small Business
Investment Act of 1958 (15 U.S.C. 682(b)) or under the portfolio
investment provisions of Regulation K (12 CFR 211.5(b)(1)(iii)). An
equity investment in a SBIC made under section 302(b) of the Small
Business Investment Act of 1958 that is not consolidated with the
bank is treated as a nonfinancial equity investment in the manner
provided in section 2(c)(4)(iv)(C) of this appendix A
Business
Investment Act of 1958 (15 U.S.C. 682(b)) or under the portfolio
investment provisions of Regulation K (12 CFR 211.5(b)(1)(iii)). An
equity investment in a SBIC made under section 302(b) of the Small
Business Investment Act of 1958 that is not consolidated with the
bank is treated as a nonfinancial equity investment in the manner
provided in section 2(c)(4)(iv)(C) of this appendix A. A
nonfinancial company is an entity that engages in any activity that
has not been determined to be permissible for the bank to conduct
directly or to be financial in nature or incidental to financial
activities under section 4(k) of the Bank Holding Company Act (12
U.S.C. 1843(k)).
* * * * *
Section 2. Components of Capital
* * * * *
(a) * * *
(3) Minority interests in the equity accounts of consolidated
subsidiaries, except that minority interests in a small business
investment company or investment fund that holds nonfinancial equity
investments and minority interests in a subsidiary that is engaged
in nonfinancial activities and is held under one of the legal
authorities listed in section 1(c)(19) of this appendix A are not
included in Tier 1 capital or total capital.
* * * * *
(c) * * *
(1) * * *
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(iv) Nonfinancial equity investments as provided by section
2(c)(4) of this appendix A.
* * * * *
nd is held under one of the legal
authorities listed in section 1(c)(19) of this appendix A are not
included in Tier 1 capital or total capital.
* * * * *
(c) * * *
(1) * * *
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(iv) Nonfinancial equity investments as provided by section
2(c)(4) of this appendix A.
* * * * *
(4) Nonfinancial equity investments. (i) General. A bank must
deduct from its Tier 1 capital the appropriate percentage, as
determined in accordance with Table 1, of the adjusted carrying
value of all nonfinancial equity investments made by the bank or by
its direct or indirect subsidiaries.
(ii) Nonfinancial equity investments in the trading account.
Section 2(c)(4) of this appendix A does not apply to, and no
deduction is required for, any nonfinancial equity investment that
is held in the trading account in accordance with applicable
accounting principles and as part of an underwriting, market making
or dealing activity.
(iii) Amount of deduction from Tier 1 capital. (A) The bank must
deduct from its Tier 1 capital the appropriate percentage, as
determined in accordance with Table 1, of the adjusted carrying
value of all nonfinancial equity investments held by the bank and
its subsidiaries.
Table 1.--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held Deduction from Tier 1
directly or indirectly by the bank (As a Capital (As a percentage of
percentage of the Tier 1 capital of the the adjusted carrying value
bank) \1\ of the investment)
------------------------------------------------------------------------
Less than 15 percent...................... 8.0 percent.
15 percent but less than 25 percent....... 12.0 percent.
25 percent or greater..................... 25.0 percent
percentage of
percentage of the Tier 1 capital of the the adjusted carrying value
bank) \1\ of the investment)
------------------------------------------------------------------------
Less than 15 percent...................... 8.0 percent.
15 percent but less than 25 percent....... 12.0 percent.
25 percent or greater..................... 25.0 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of the Tier 1 capital elements
net of goodwill and net of all identifiable intangible assets other
than mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships, but prior to the deduction for
deferred tax assets and nonfinancial equity investments.
(B) Deductions for nonfinancial equity investments must be
applied on a marginal basis to the portions of the adjusted carrying
value of nonfinancial equity investments that fall within the
specified ranges of the bank's Tier 1 capital. For example, if the
adjusted carrying value of all nonfinancial equity investments held
by a bank equals 20 percent of the Tier 1 capital of the bank, then
the amount of the deduction would be 8 percent of the adjusted
carrying value of all investments up to 15 percent of the bank's
Tier 1 capital, and 12 percent of the adjusted carrying value of all
investments in excess of 15 percent of the bank's Tier 1 capital.
(C) The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under section 2(c)(4) of
this appendix A is excluded from the bank's weighted risk assets for
purposes of computing the denominator of the bank's risk-based
capital ratio
12 percent of the adjusted carrying value of all
investments in excess of 15 percent of the bank's Tier 1 capital.
(C) The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under section 2(c)(4) of
this appendix A is excluded from the bank's weighted risk assets for
purposes of computing the denominator of the bank's risk-based
capital ratio. For example, if 8 percent of the adjusted carrying
value of a nonfinancial equity investment is deducted from Tier 1
capital, the entire adjusted carrying value of the investment will
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be excluded from risk-weighted assets in calculating the denominator
of the risk-based capital ratio.
(D) Banks engaged in equity investment activities, including
those banks with a high concentration in nonfinancial equity
investments (e.g., in excess of 50 percent of Tier 1 capital) will
be monitored and may be subject to heightened supervision, as
appropriate, by the OCC to ensure that such banks maintain capital
levels that are appropriate in light of their equity investment
activities, and the OCC may impose a higher capital charge in any
case where the circumstances, such as the level of risk of the
particular investment or portfolio of investments, the risk
management systems of the bank, or other information, indicate that
a higher minimum capital requirement is appropriate.
nks maintain capital
levels that are appropriate in light of their equity investment
activities, and the OCC may impose a higher capital charge in any
case where the circumstances, such as the level of risk of the
particular investment or portfolio of investments, the risk
management systems of the bank, or other information, indicate that
a higher minimum capital requirement is appropriate.
(iv) Small business investment company investments. (A)
Notwithstanding section 2(c)(4)(iii) of this appendix A, no
deduction is required for nonfinancial equity investments that are
made by a bank or its subsidiary through a SBIC that is consolidated
with the bank, or in a SBIC that is not consolidated with the bank,
to the extent that such investments, in the aggregate, do not exceed
15 percent of the Tier 1 capital of the bank. Except as provided in
paragraph (c)(4)(iv)(B) of this section, any nonfinancial equity
investment that is held through or in a SBIC and not deducted from
Tier 1 capital will be assigned to the 100 percent risk-weight
category and included in the bank's consolidated risk-weighted
assets.
(B) If a bank has an investment in a SBIC that is consolidated
for accounting purposes but the SBIC is not wholly owned by the
bank, the adjusted carrying value of the bank's nonfinancial equity
investments held through the SBIC is equal to the bank's
proportionate share of the SBIC's adjusted carrying value of its
nonfinancial equity investments. The remainder of the SBIC's
adjusted carrying value (i.e., the minority interest holders'
proportionate share) is excluded from the risk-weighted assets of
the bank
y the
bank, the adjusted carrying value of the bank's nonfinancial equity
investments held through the SBIC is equal to the bank's
proportionate share of the SBIC's adjusted carrying value of its
nonfinancial equity investments. The remainder of the SBIC's
adjusted carrying value (i.e., the minority interest holders'
proportionate share) is excluded from the risk-weighted assets of
the bank.
(C) If a bank has an investment in a SBIC that is not
consolidated for accounting purposes and has current information
that identifies the percentage of the SBIC's assets that are
nonfinancial equity investments, the bank may reduce the adjusted
carrying value of its investment in the SBIC proportionately to
reflect the percentage of the adjusted carrying value of the SBIC's
assets that are not nonfinancial equity investments. The amount by
which the adjusted carrying value of the bank's investment in the
SBIC is reduced under this provision will be risk weighted at 100
percent and included in the bank's risk-weighted assets.
(D) To the extent the adjusted carrying value of all
nonfinancial equity investments that the bank holds through a
consolidated SBIC or in a nonconsolidated SBIC exceeds, in the
aggregate, 15 percent of the Tier 1 capital of the bank, the
appropriate percentage of such amounts, as set forth in Table 1,
must be deducted from the bank's Tier 1 capital. In addition, the
aggregate adjusted carrying value of all nonfinancial equity
investments held through a consolidated SBIC and in a
nonconsolidated SBIC (including any investments for which no
deduction is required) must be included
[[Page 10221]]
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in determining for purposes of Table 1 the total amount of
nonfinancial equity investments held by the bank in relation to its
Tier 1 capital.
nsolidated SBIC and in a
nonconsolidated SBIC (including any investments for which no
deduction is required) must be included
[[Page 10221]]
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in determining for purposes of Table 1 the total amount of
nonfinancial equity investments held by the bank in relation to its
Tier 1 capital.
(v) Transition period. [Comment requested].
Dated: January 26, 2001.
John D. Hawke, Jr.,
Comptroller of the Currency.
Federal Reserve System
Authority and Issuance
For the reasons set forth in the preamble, the Board of Governors
of the Federal Reserve System proposes to amend parts 208 and 225 of
chapter II of title 12 of the Code of Federal Regulations as follows:
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. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d), 1823(j),
1828(o), 1831o, 1831p-1, 1831r-1, 1831w, 1835a, 1882, 2901-2907,
3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 781(b), 781(g),
781(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 following amendments are made:
a. In section II.A., one sentence is added at the end of paragraph
1.c., Minority interest in equity accounts of consolidated
subsidiaries;
b. In section II.B., a new paragraph (v) is added at the end of the
introductory text and a new paragraph 5 is added at the end of section
II.B; and
c. In sections III. and IV., footnotes 24 through 57 are
redesignated as footnotes 29 through 62, respectively.
Appendix A to Part 208--Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
* * * * *
II. * * *
A. * * *
1. * * *
c
, a new paragraph (v) is added at the end of the
introductory text and a new paragraph 5 is added at the end of section
II.B; and
c. In sections III. and IV., footnotes 24 through 57 are
redesignated as footnotes 29 through 62, respectively.
Appendix A to Part 208--Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
* * * * *
II. * * *
A. * * *
1. * * *
c. * * * Minority interests in small business investment
companies and investment funds that hold nonfinancial equity
investments (as defined in section II.B.5.b. of this appendix) and
minority interests in subsidiaries that are engaged in nonfinancial
activities and held under one of the legal authorities listed in
section II.B.5.b are not included in the bank's Tier 1 or total
capital base.
B. * * *
(v) Nonfinancial equity investments-portions are deducted from
the sum of core capital elements in accordance with section II.B.5
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of this appendix.
* * * * *
5. Nonfinancial equity investments--a. General. A bank must
deduct from its Tier 1 capital the appropriate percentage (as
determined below) of the adjusted carrying value of all nonfinancial
equity investments made by the parent bank or by its direct or
indirect subsidiaries.
b. Scope of nonfinancial equity investments. i. A nonfinancial
equity investment means any equity investment made by the bank in a
nonfinancial company through a small business investment company
(SBIC) under section 302(b) of the Small Business Investment Act of
1958 \24\ or under the portfolio investment provisions of the
Board's Regulation K (12 CFR 211.5(b)(1)(iii)).\25\ A nonfinancial
company is an entity that engages in any activity that has not been
determined to be permissible for the bank to conduct directly, or to
be financial in nature or incidental to financial activities under
section 4(k) of the Bank Holding Company Act (12 U.S.C
Act of
1958 \24\ or under the portfolio investment provisions of the
Board's Regulation K (12 CFR 211.5(b)(1)(iii)).\25\ A nonfinancial
company is an entity that engages in any activity that has not been
determined to be permissible for the bank to conduct directly, or to
be financial in nature or incidental to financial activities under
section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k)).
---------------------------------------------------------------------------
\24\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in a SBIC that is not consolidated
with the bank is treated as a nonfinancial equity investment.
\25\ See 12 CFR 211.5(b)(1)(iii); and 15 U.S.C. 682(b).
---------------------------------------------------------------------------
ii. This section II.B.5. does not apply to, and no deduction is
required for, any nonfinancial equity investment that is held in the
trading account in accordance with applicable accounting principles
and as part of an underwriting, market making or dealing activity.
c. Amount of deduction from core capital. i. The bank must
deduct from its Tier 1 capital the appropriate percentage, as set
forth in Table 1, of the adjusted carrying value of all nonfinancial
equity investments held by the bank and its subsidiaries. The amount
of the deduction increases as the aggregate amount of nonfinancial
equity investments held by the bank and its subsidiaries increases
as a percentage of the bank's Tier 1 capital
e bank must
deduct from its Tier 1 capital the appropriate percentage, as set
forth in Table 1, of the adjusted carrying value of all nonfinancial
equity investments held by the bank and its subsidiaries. The amount
of the deduction increases as the aggregate amount of nonfinancial
equity investments held by the bank and its subsidiaries increases
as a percentage of the bank's Tier 1 capital.
Table 1.--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held Deduction from Tier 1
directly or indirectly by the bank (as a Capital (as a percentage of
percentage of the Tier 1 capital of the the adjusted carrying value
bank) \1\ of the investment)
------------------------------------------------------------------------
Less than 15 percent...................... 8 percent.
15 percent to 24.99 percent............... 12 percent.
25 percent and above...................... 25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of core capital elements net of
goodwill and net of all identifiable intangible assets other than
mortgage servicing assets, nonmortgage servicing assets and purchased
credit card relationships, but prior to the deduction for deferred tax
assets and nonfinancial equity investments.
f
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of core capital elements net of
goodwill and net of all identifiable intangible assets other than
mortgage servicing assets, nonmortgage servicing assets and purchased
credit card relationships, but prior to the deduction for deferred tax
assets and nonfinancial equity investments.
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ii. These deductions are applied on a marginal basis to the
portions of the adjusted carrying value of nonfinancial equity
investments that fall within the specified ranges of the parent
bank's Tier 1 capital. For example, if the adjusted carrying value
of all nonfinancial equity investments held by a bank equals 20
percent of the Tier 1 capital of the bank, then the amount of the
deduction would be 8 percent of the adjusted carrying value of all
investments up to 15 percent of the bank's Tier 1 capital, and 12
percent of the adjusted carrying value of all investments in excess
of 15 percent of the bank's Tier 1 capital.
iii. The total adjusted carrying value of any nonfinancial
equity investment that is subject to deduction under this paragraph
is excluded from the bank's risk-weighted assets for purposes of
computing the denominator of the bank's risk-based capital
ratio.\26\
---------------------------------------------------------------------------
\26\ For example, if 8 percent of the adjusted carrying value of
a nonfinancial equity investment is deducted from Tier 1 capital,
the entire adjusted carrying value of the investment will be
excluded form risk-weighted assets in calculating the denominator
for the risk-based capital ratio.
---------------------------------------------------------------------------
iv
-----------------
\26\ For example, if 8 percent of the adjusted carrying value of
a nonfinancial equity investment is deducted from Tier 1 capital,
the entire adjusted carrying value of the investment will be
excluded form risk-weighted assets in calculating the denominator
for the risk-based capital ratio.
---------------------------------------------------------------------------
iv. As noted in section I, this Appendix establishes minimum
risk-based capital ratios and banks are at all times expected to
maintain capital commensurate with the level and nature of the risks
to which they are exposed. The risk to a bank from nonfinancial
equity investments increases with its concentration in such
investments and strong capital levels above the minimum requirements
are particularly important when a bank has a high degree of
concentration in nonfinancial equity investments (e.g., in excess of
50 percent of Tier 1 capital). The Federal Reserve intends to
monitor banks and apply heightened supervision to equity investment
activities as appropriate, including where the bank has a high
degree of concentration in nonfinancial equity investments, to
ensure that banks maintain capital levels that are appropriate in
light of their equity investment activities. The Federal Reserve
also reserves authority to impose a higher capital charge in any
case where the circumstances, such as the level of
[[Page 10222]]
risk of the particular investment or portfolio of investments, the
risk management systems of the bank, or other information, indicate
that a higher minimum capital requirement is appropriate.
d. SBIC investments. i. No deduction is required for
nonfinancial equity investments that are made by a bank through an
SBIC that is consolidated with the bank or in an SBIC that is not
consolidated with the bank to the extent that such investments, in
the aggregate, do not exceed 15 percent of the bank's Tier 1
capital
, indicate
that a higher minimum capital requirement is appropriate.
d. SBIC investments. i. No deduction is required for
nonfinancial equity investments that are made by a bank through an
SBIC that is consolidated with the bank or in an SBIC that is not
consolidated with the bank to the extent that such investments, in
the aggregate, do not exceed 15 percent of the bank's Tier 1
capital. Any nonfinancial equity investment that is held through or
in an SBIC and not deducted from Tier 1 capital will be assigned a
100 percent risk-weight and included in the bank's consolidated
risk-weighted assets.\27\
---------------------------------------------------------------------------
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\27\ If a bank has an investment in a SBIC that is consolidated
for accounting purposes but that is not wholly owned by the bank,
the adjusted carrying value of the bank's nonfinancial equity
investments through the SBIC is equal to the bank's proportionate
share of the SBIC's adjusted carrying value of its nonfinancial
equity investments. The remainder of the SBIC's adjusted carrying
value (i.e., the minority interest holders' proportionate share) is
excluded from the risk-weighted assets of the bank. If a bank has an
investment in a SBIC that is not consolidated for accounting
purposes and has current information that identifies the percentage
of the SBIC's assets that are nonfinancial equity investments, the
bank may reduce the adjusted carrying value of its investment in the
SBIC proportioantely to reflect the percentage of the adjusted
carrying value of the SBIC's assets that are not nonfinancial equity
investments. The amount by which the adjusted carrying value of the
bank's investment in the SBIC is reduced under this provision will
be risk weighted at 100 percent and included in the bank's risk-
weighted assets
djusted carrying value of its investment in the
SBIC proportioantely to reflect the percentage of the adjusted
carrying value of the SBIC's assets that are not nonfinancial equity
investments. The amount by which the adjusted carrying value of the
bank's investment in the SBIC is reduced under this provision will
be risk weighted at 100 percent and included in the bank's risk-
weighted assets.
---------------------------------------------------------------------------
ii. To the extent the adjusted carrying value of all
nonfinancial equity investments that a bank holds through a
consolidated SBIC or in a non-consolidated SBIC exceeds, in the
aggregate, 15 percent of the bank's Tier 1 capital, the appropriate
percentage of such amounts (as set forth in Table 1) must be
deducted from the bank's Tier 1 capital. In addition, the aggregate
adjusted carrying value of all nonfinancial equity investments held
through a consolidated SBIC and in a non-consolidated SBIC
(including any investments for which no deduction is required) must
be included in determining for purposes of Table 1 the total amount
of nonfinancial equity investments held by the bank in relation to
its Tier 1 capital.
e. Transition provisions. [Comment requested.]
f. Adjusted carrying value. i. For purposes of this section
II.B.5., the ``adjusted carrying value'' of investments is the
aggregate value at which the investments are carried on the balance
sheet of the bank reduced by any unrealized gains on those
investments that are reflected in such carrying value but excluded
from the bank's Tier 1 capital
Transition provisions. [Comment requested.]
f. Adjusted carrying value. i. For purposes of this section
II.B.5., the ``adjusted carrying value'' of investments is the
aggregate value at which the investments are carried on the balance
sheet of the bank reduced by any unrealized gains on those
investments that are reflected in such carrying value but excluded
from the bank's Tier 1 capital. For example, for investments held as
available-for-sale (AFS), the adjusted carrying value of the
investments would be the aggregate carrying value of the investments
(as reflected on the consolidated balance sheet of the bank) less:
any unrealized gains on those investments that are included in other
comprehensive income and not reflected in Tier 1 capital; and
associated deferred tax liabilities.\28\
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\28\ Unrealized gains on AFS investments may be included in
supplementary capital to the extent permitted under section II.A.2.e
of this appendix. In addition, the unrealized losses on AFS equity
investments are deducted from Tier 1 capital in accordance with
section II.A.1.a of this appendix.
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ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that
osses on AFS equity
investments are deducted from Tier 1 capital in accordance with
section II.A.1.a of this appendix.
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ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that
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is consolidated for accounting purposes under generally accepted
accounting principles, the bank's adjusted carrying value of the
investment is determined under the equity method of accounting (net
of any intangibles associated with the investment that are deducted
from the bank's core capital in accordance with section II.B.1 of
this appendix). Even though the assets of the nonfinancial company
are consolidated for accounting purposes, these assets (as well as
the credit equivalent amounts of the company's off-balance sheet
items) should be excluded from the bank's risk-weighted assets for
regulatory capital purposes.
g. Equity investments. For purposes of this section II.B.5., an
equity investment means any equity instrument (including warrants
and call options that give the holder the right to purchase an
equity instrument), any equity feature of a debt instrument (such as
a warrant or call option), and any debt instrument that is
convertible into equity where the instrument or feature is held
under one of the legal authorities listed in section II.B.5.b. of
this appendix. An investment in subordinated debt or other types of
debt instruments may be treated as an equity investment if, in the
judgment of the Federal Reserve, the instrument is the functional
equivalent of equity.
* * * * *
3. In Appendix B to part 208, in section II.b., footnote 2 is
revised and the fourth sentence of section II.b
legal authorities listed in section II.B.5.b. of
this appendix. An investment in subordinated debt or other types of
debt instruments may be treated as an equity investment if, in the
judgment of the Federal Reserve, the instrument is the functional
equivalent of equity.
* * * * *
3. In Appendix B to part 208, in section II.b., footnote 2 is
revised and the fourth sentence of section II.b. is revised to read
as follows:
Appendix B to Part 208--Capital Adequacy Guidelines for State
Member Banks: Tier 1 Leverage Measure
* * * * *
II. * * *
b. * * *\2\ As a general matter, average total consolidated
assets are defined as the quarterly average total assets (defined
net of the allowance for loan and lease losses) reported on the
bank's Reports of Condition and Income (Call Reports), less
goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, are in excess of 100 percent of Tier 1 capital;
amounts of nonmortgage servicing assets and purchased credit card
relationships that, in the aggregate, are in excess of 25 percent of
Tier 1 capital; all other identifiable intangible assets; any
investments in subsidiaries or associated companies that the Federal
Reserve determines should be deducted Tier 1 capital; deferred tax
assets that are dependent upon future taxable income, net of their
valuation allowance, in excess of the limitations set forth in
section II.B.4 of Appendix A of this part; and the total adjusted
carrying value of nonfinancial equity investments that are subject
to a deduction from capital.
---------------------------------------------------------------------------
\2\ Tier 1 capital for state member banks includes common
equity, minority interest in the equity accounts of consolidated
subsidiaries, and qualifying noncumulative perpetual preferred
stock
art; and the total adjusted
carrying value of nonfinancial equity investments that are subject
to a deduction from capital.
---------------------------------------------------------------------------
\2\ Tier 1 capital for state member banks includes common
equity, minority interest in the equity accounts of consolidated
subsidiaries, and qualifying noncumulative perpetual preferred
stock. In addition, as a general matter, Tier 1 capital excludes
goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, exceed 100 percent of Tier 1 capital; nonmortgage
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servicing assets and purchased credit card relationships that, in
the aggregate, exceed 25 percent of Tier 1 capital; other
identifiable intangible assets; deferred tax assets that are
dependent upon future taxable income, net of their valuation
allowance, in excess of certain limitations; and a percentage of the
bank's nonfinancial equity investments. The Federal Reserve may
exclude certain other investments in subsidiaries or associated
companies as appropriate.
---------------------------------------------------------------------------
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1843(k), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351,
3907, and 3909.
2. In Appendix A to part 225, the following revisions are made:
a. In section II.A., one sentence is added at the end of paragraph
1.c., Minority interest in equity accounts of consolidated
subsidiaries;
b. In section II.B., a new paragraph (v) is added at the end of the
introductory text and a new paragraph 5 is added at the end of section
II.B; and
c. In sections III
nd 3909.
2. In Appendix A to part 225, the following revisions are made:
a. In section II.A., one sentence is added at the end of paragraph
1.c., Minority interest in equity accounts of consolidated
subsidiaries;
b. In section II.B., a new paragraph (v) is added at the end of the
introductory text and a new paragraph 5 is added at the end of section
II.B; and
c. In sections III. and IV., footnotes 24 through 57 are
redesignated as footnotes 29 through 62, respectively.
Appendix A to Part 225--Capital Adequacy Guidelines for Bank
Holding Companies: Risk-Based Measure
* * * * *
II. * * *
A. * * *
1. * * *
c. * * * Minority interests in small business investment
companies and investment funds that hold nonfinancial equity
investments (as defined in section II.B.5.b. of this appendix) and
minority interests in subsidiaries that are engaged in nonfinancial
activities and held under one of the legal authorities listed in
section II.B.5.b are not included in a banking organization's Tier 1
or total capital base.
* * * * *
B. * * *
(v) Nonfinancial equity investments--portions are deducted from
the sum of core capital elements in accordance with section II.B.5
of this appendix.
* * * * *
[[Page 10223]]
5. Nonfinancial equity investments--a. General. A bank holding
company must deduct from its Tier 1 capital the appropriate
percentage (as determined below) of the adjusted carrying value of
all nonfinancial equity investments made by the parent bank holding
ions are deducted from
the sum of core capital elements in accordance with section II.B.5
of this appendix.
* * * * *
[[Page 10223]]
5. Nonfinancial equity investments--a. General. A bank holding
company must deduct from its Tier 1 capital the appropriate
percentage (as determined below) of the adjusted carrying value of
all nonfinancial equity investments made by the parent bank holding
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company or by its direct or indirect subsidiaries.
b. Scope of nonfinancial equity investments. i. A nonfinancial
equity investment means any equity investment made by the bank
holding company: pursuant to the merchant banking authority of
section 4(k)(4)(H) of the BHC Act and subpart J of the Board's
Regulation Y (12 CFR part 225); under section 4(c)(6) or 4(c)(7) of
BHC Act in a nonfinancial company or in a company that makes
investments in nonfinancial companies; in a nonfinancial company
through a small business investment company (SBIC) under section
302(b) of the Small Business Investment Act of 1958; \24\ in a
nonfinancial company under the portfolio investment provisions of
the Board's Regulation K (12 CFR 211.5(b)(1)(iii)); or in a
nonfinancial company under section 24 of the Federal Deposit
Insurance Act (other than section 24(f)).\25\ A nonfinancial company
is an entity that engages in any activity that has not been
determined to be financial in nature or incidental to financial
activities under section 4(k) of the Bank Holding Company Act (12
U.S.C. 1843(k)).
---------------------------------------------------------------------------
\24\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in a SBIC that is not consolidated
with the parent banking organizations is treated as a nonfinancial
equity investment.
\25\ See 12 U.S.C. 1843(c)(6), (c)(7) and (k)(4)(H); 15 U.S.C.
682(b); 12 CFR 211.5(b)(1)(iii); and 12 U.S.C. 1831a(f)
---------------------------------------------------
\24\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in a SBIC that is not consolidated
with the parent banking organizations is treated as a nonfinancial
equity investment.
\25\ See 12 U.S.C. 1843(c)(6), (c)(7) and (k)(4)(H); 15 U.S.C.
682(b); 12 CFR 211.5(b)(1)(iii); and 12 U.S.C. 1831a(f). In a case
in which the Board of the FDIC, acting directly in exceptional cases
and after a review of the proposed activity, has permitted a lesser
capital deduction for an investment approved by the Board of
Directors under section 24 of the Federal Deposit Insurance Act,
such deduction shall also apply to the consolidated bank holding
company capital calculation so long as the bank's investments under
section 24 and SBIC investments represent, in the aggregate, less
than 15 percent of the Tier 1 capital of the bank.
---------------------------------------------------------------------------
ii. This section II.B.5. does not apply to, and no deduction is
required for, any nonfinancial equity investment that is held in the
trading account in accordance with applicable accounting principles
and as part of an underwriting, market making or dealing activity.
c. Amount of deduction from core capital. i. The bank holding
company must deduct from its Tier 1 capital the appropriate
percentage, as set forth in Table 1, of the adjusted carrying value
of all nonfinancial equity investments held by the bank holding
company and its subsidiaries. The amount of the deduction increases
as the aggregate amount of nonfinancial equity investments held by
the bank holding company and its subsidiaries increases as a
percentage of the bank holding company's Tier 1 capital
ppropriate
percentage, as set forth in Table 1, of the adjusted carrying value
of all nonfinancial equity investments held by the bank holding
company and its subsidiaries. The amount of the deduction increases
as the aggregate amount of nonfinancial equity investments held by
the bank holding company and its subsidiaries increases as a
percentage of the bank holding company's Tier 1 capital.
Table 1.--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held Deduction from Tier 1
directly or indirectly by the bank holding Capital (as a percentage of
company (as a percentage of the Tier 1 the adjusted carrying value
capital of the parent banking of the investment)
organization)\1\
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------------------------------------------------------------------------
Less than 15 percent...................... 8 percent.
15 percent to 24.99 percent............... 12 percent.
25 percent and above...................... 25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of core capital elements net of
goodwill and net of all identifiable intangible assets other than
mortgage servicing assets, nonmortgage servicing assets and purchased
credit card relationships, but prior to the deduction for deferred tax
assets and nonfinancial equity investments.
ii. These deductions are applied on a marginal basis to the
portions of the adjusted carrying value of nonfinancial equity
investments that fall within the specified ranges of the parent
holding company's Tier 1 capital
ing assets, nonmortgage servicing assets and purchased
credit card relationships, but prior to the deduction for deferred tax
assets and nonfinancial equity investments.
ii. These deductions are applied on a marginal basis to the
portions of the adjusted carrying value of nonfinancial equity
investments that fall within the specified ranges of the parent
holding company's Tier 1 capital. For example, if the adjusted
carrying value of all nonfinancial equity investments held by a bank
holding company equals 20 percent of the Tier 1 capital of the bank
holding company, then the amount of the deduction would be 8 percent
of the adjusted carrying value of all investments up to 15 percent
of the company's Tier 1 capital, and 12 percent of the adjusted
carrying value of all investments in excess of 15 percent of the
company's Tier 1 capital.
iii. The total adjusted carrying value of any nonfinancial
equity investment that is subject to deduction under this paragraph
is excluded from the bank holding company's risk-weighted assets for
purposes of computing the denominator of the company's risk-based
capital ratio.\26\
---------------------------------------------------------------------------
\26\ For example, if 8 percent of the adjusted carrying value of
a nonfinancial equity investment is deducted from Tier 1 capital,
the entire adjusted carrying value of the investment will be
excluded from risk-weighted assets in calculating the denominator
for the risk-based capital ratio.
---------------------------------------------------------------------------
iv. As noted in section I, this appendix establishes minimum
risk-based capital ratios and banking organizations are at all times
expected to maintain capital commensurate with the level and nature
of the risks to which they are exposed
eighted assets in calculating the denominator
for the risk-based capital ratio.
---------------------------------------------------------------------------
iv. As noted in section I, this appendix establishes minimum
risk-based capital ratios and banking organizations are at all times
expected to maintain capital commensurate with the level and nature
of the risks to which they are exposed. The risk to a banking
organization from nonfinancial equity investments increases with its
concentration in such investments and strong capital levels above
the minimum requirements are particularly important when a banking
organization has a high degree of concentration in nonfinancial
equity investments (e.g., in excess of 50 percent of Tier 1
capital). The Federal Reserve intends to monitor banking
organizations and apply heightened supervision to equity investment
activities as appropriate, including where the banking organization
has a high degree of concentration in nonfinancial equity
investments, to ensure that organizations maintain capital levels
that are appropriate in light of their equity investment activities.
The Federal Reserve also reserves authority to impose a higher
capital charge in any case where the circumstances, such as the
level of risk of the particular investment or portfolio of
investments, the risk management systems of the banking
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organization, or other information, indicate that a higher minimum
capital requirement is appropriate.
d. SBIC investments. i
e where the circumstances, such as the
level of risk of the particular investment or portfolio of
investments, the risk management systems of the banking
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organization, or other information, indicate that a higher minimum
capital requirement is appropriate.
d. SBIC investments. i. No deduction is required for
nonfinancial equity investments that are made by a bank holding
company or a subsidiary through an SBIC that is consolidated with
the bank holding company or in a SBIC that is not consolidated with
the bank holding company to the extent that such investments, in the
aggregate, do not exceed 15 percent of the aggregate Tier 1 capital
of the subsidiary banks of the bank holding company. Any
nonfinancial equity investment that is held through or in an SBIC
and not deducted from Tier 1 capital will be assigned a 100 percent
risk-weight and included in the parent holding company's
consolidated risk-weighted assets.\27\
---------------------------------------------------------------------------
\27\ If a bank holding company has an investment in a SBIC that
is consolidated for accounting purposes but that is not wholly owned
by the bank holding company, the adjusted carrying value of the bank
holding company's nonfinancial equity investments through the SBIC
is equal to the holding company's proportionate share of the SBIC's
adjusted carrying value of its nonfinancial equity investments. The
remainder of the SBIC's adjusted carrying value (i.e. the minority
interest holders' proportionate share) is excluded from the risk-
weighted assets of the bank holding company
lue of the bank
holding company's nonfinancial equity investments through the SBIC
is equal to the holding company's proportionate share of the SBIC's
adjusted carrying value of its nonfinancial equity investments. The
remainder of the SBIC's adjusted carrying value (i.e. the minority
interest holders' proportionate share) is excluded from the risk-
weighted assets of the bank holding company. If a bank holding
company has an investment in a SBIC that is not consolidated for
accounting purposes and has current information that identifies the
percentage of the SBIC's assets that are nonfinancial equity
investments, the bank holding company may reduce the adjusted
carrying value of its investment in the SBIC proportionately to
reflect the percentage of the adjusted carrying value of the SBIC's
assets that are not nonfinancial equity investments. The amount by
which the adjusted carrying value of the company's investment in the
SBIC is reduced under this provision will be risk weighted at 100
percent and included in the bank holding company's risk-weighted
assets.
---------------------------------------------------------------------------
ii. To the extent the adjusted carrying value of all
nonfinancial equity investments that a bank holding company holds
through a consolidated SBIC or in a non-consolidated SBIC exceeds,
in the aggregate, 15 percent of the aggregate Tier 1 capital of the
company's subsidiary banks, the appropriate percentage of such
amounts (as set forth in Table 1) must be deducted from the bank
holding company's Tier 1 capital. In addition, the aggregate
adjusted carrying value of all nonfinancial equity investments held
through a consolidated SBIC and in a non-consolidated SBIC
(including any investments for which no deduction is required) must
be included in determining for purposes of Table 1 the total amount
of nonfinancial equity investments held by the bank holding company
in relation to its Tier 1 capital.
e. Transition provisions
adjusted carrying value of all nonfinancial equity investments held
through a consolidated SBIC and in a non-consolidated SBIC
(including any investments for which no deduction is required) must
be included in determining for purposes of Table 1 the total amount
of nonfinancial equity investments held by the bank holding company
in relation to its Tier 1 capital.
e. Transition provisions. [Comment requested.]
[[Page 10224]]
f. Adjusted carrying value. i. For purposes of this section
II.B.5., the ``adjusted carrying value'' of investments is the
aggregate value at which the investments are carried on the balance
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sheet of the consolidated bank holding company reduced by any
unrealized gains on those investments that are reflected in such
carrying value but excluded from the bank holding company's Tier 1
capital. For example, for investments held as available-for-sale
(AFS), the adjusted carrying value of the investments would be the
aggregate carrying value of the investments (as reflected on the
consolidated balance sheet of the bank holding company) less: any
unrealized gains on those investments that are included in other
comprehensive income and not reflected in Tier 1 capital; and
associated deferred tax liabilities.\28\
---------------------------------------------------------------------------
\28\ Unrealized gains on AFS investments may be included in
supplementary capital to the extent permitted under section II.A.2.e
of this Appendix. In addition, the unrealized losses on AFS equity
investments are deducted from Tier 1 capital in accordance with
section II.A.1.a of this Appendix.
---------------------------------------------------------------------------
ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes
of this Appendix. In addition, the unrealized losses on AFS equity
investments are deducted from Tier 1 capital in accordance with
section II.A.1.a of this Appendix.
---------------------------------------------------------------------------
ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that
is consolidated for accounting purposes under generally accepted
accounting principles, the parent banking organization's adjusted
carrying value of the investment is determined under the equity
method of accounting (net of any intangibles associated with the
investment that are deducted from the consolidated bank holding
company's core capital in accordance with section II.B.1 of this
Appendix). Even though the assets of the nonfinancial company are
consolidated for accounting purposes, these assets (as well as the
credit equivalent amounts of the company's off-balance sheet items)
should be excluded from the banking organization's risk-weighted
assets for regulatory capital purposes.
g. Equity investments. For purposes of this section II.B.5, an
equity investment means any equity instrument (including warrants
and call options that give the holder the right to purchase an
equity instrument), any equity feature of a debt instrument (such as
a warrant or call option), and any debt instrument that is
convertible into equity where the instrument or feature is held
under one of the legal authorities listed in section II.B.5.b.
above. An investment in subordinated debt or other types of debt
instruments may be treated as an equity investment if, in the
judgment of the appropriate federal banking agency, the instrument
is the functional equivalent of equity.
* * * * *
3. In Appendix D to part 225, in section II.b., footnote 3 is
revised and the fourth sentence of section II.b. is revised to read as
follows
.5.b.
above. An investment in subordinated debt or other types of debt
instruments may be treated as an equity investment if, in the
judgment of the appropriate federal banking agency, the instrument
is the functional equivalent of equity.
* * * * *
3. In Appendix D to part 225, in section II.b., footnote 3 is
revised and the fourth sentence of section II.b. is revised to read as
follows.
Appendix D to Part 225--Capital Adequacy Guidelines for Bank
Holding Companies; Tier 1 Leverage Measure
* * * * *
II. * * *
b. * * *\3\ As a general matter, average total consolidated
assets are defined as the quarterly average total assets (defined
net of the allowance for loan and lease losses) reported on the
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organization's Consolidated Financial Statements (FR Y-9C Report),
less goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, are in excess of 100 percent of Tier 1 capital;
amounts of nonmortgage servicing assets and purchased credit card
relationships that, in the aggregate, are in excess of 25 percent of
Tier 1 capital; all other identifiable intangible assets; deferred
tax assets that are dependent upon future taxable income, net of
their valuation allowance, in excess of the limitations set forth in
section II.B.4 of appendix A of this part; the total adjusted
carrying value of nonfinancial equity investments that are subject
to a deduction from capital; and other investments in subsidiaries
or associated companies that the Federal Reserve determines should
be deducted from Tier 1 capital
future taxable income, net of
their valuation allowance, in excess of the limitations set forth in
section II.B.4 of appendix A of this part; the total adjusted
carrying value of nonfinancial equity investments that are subject
to a deduction from capital; and other investments in subsidiaries
or associated companies that the Federal Reserve determines should
be deducted from Tier 1 capital.
---------------------------------------------------------------------------
\3\ Tier 1 capital for banking organizations includes common
equity, minority interest in the equity accounts of consolidated
subsidiaries, qualifying noncumulative perpetual preferred stock,
and qualifying cumulative perpetual preferred stock. (Cumulative
perpetual preferred stock is limited to 25 percent of Tier 1
capital.) In addition, as a general matter, Tier 1 capital excludes
goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, exceed 100 percent of Tier 1 capital; nonmortgage
servicing assets and purchased credit card relationships that, in
the aggregate, exceed 25 percent of Tier 1 capital; all other
identifiable intangible assets; deferred tax assets that are
dependent upon future taxable income, net of their valuation
allowance, in excess of certain limitations; and a percentage of the
organization's nonfinancial equity investments. The Federal Reserve
may exclude certain other investments in subsidiaries or associated
companies as appropriate.
By order of the Board of Governors of the Federal Reserve
System, February 1, 2001.
Jennifer J. Johnson,
Secretary of the Board.
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the joint preamble, part 325 of
chapter III of title 12 of the Code of Federal Regulations is proposed
to be amended as follows:
PART 325-CAPITAL MAINTENANCE
1
of the Board of Governors of the Federal Reserve
System, February 1, 2001.
Jennifer J. Johnson,
Secretary of the Board.
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the joint preamble, part 325 of
chapter III of title 12 of the Code of Federal Regulations is proposed
to be 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.
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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 Sec. 325.2, paragraphs (t) and (v) are revised to read as
follows:
Sec. 325.2 Definitions.
(t) Tier 1 capital or core capital means the sum of common
stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus), and minority interests in consolidated
subsidiaries, minus all intangible assets (other than mortgage
servicing assets, and purchased credit card relationships eligible for
inclusion in core capital pursuant to Sec. 325.5(f)), minus deferred
tax assets in excess of the limit set forth in Sec. 325.5(g), minus:
(1) Identified losses (to the extent that Tier 1 capital would have
been reduced if the appropriate accounting entries to reflect the
identified losses had been recorded on the insured depository
institution's books);
(2) Investments in financial subsidiaries subject to 12 CFR part
362, subpart E; and
minus deferred
tax assets in excess of the limit set forth in Sec. 325.5(g), minus:
(1) Identified losses (to the extent that Tier 1 capital would have
been reduced if the appropriate accounting entries to reflect the
identified losses had been recorded on the insured depository
institution's books);
(2) Investments in financial subsidiaries subject to 12 CFR part
362, subpart E; and
(3) A percentage of the bank's nonfinancial equity investments as
set forth in section I.B of appendix A to this part.
* * * * *
(v) Total assets means the average of total assets required to be
included in a banking institution's ``Reports of Condition and Income''
(Call Report) or, for a savings association, the consolidated total
assets required to be included in the ``Thrift Financial Report,'' as
these reports may from time to time be revised, as of the most recent
report date (and after making any necessary subsidiary adjustments for
state nonmember banks as described in Secs. 325.5(c) and 325.5(d) of
this part), minus:
(1) Intangible assets (other than mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card relationships
eligible for inclusion in core capital pursuant to Sec. 325.5(f));
(2) Deferred tax assets in excess of the limit set forth in
Sec. 325.5(g);
(3) Assets classified loss and any other assets that are deducted
in determining Tier 1 capital; and
t), minus:
(1) Intangible assets (other than mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card relationships
eligible for inclusion in core capital pursuant to Sec. 325.5(f));
(2) Deferred tax assets in excess of the limit set forth in
Sec. 325.5(g);
(3) Assets classified loss and any other assets that are deducted
in determining Tier 1 capital; and
(4) The total adjusted carrying value of nonfinancial equity
investments subject to a deduction from Tier 1 capital under section
I.B. of appendix A to this part.
3. In appendix A to part 325, the following amendments are made:
a. A new paragraph is added at the end of section I.A.1.
b. In section I.B., a new paragraph (6) is added at the end.
c. In section II of Appendix A to part 325, footnotes 11 through 42
are
[[Page 10225]]
redesignated as footnotes 17 through 48, respectively.
Appendix A to Part 325--Statement of Policy on Risk-Based Capital
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* * * * *
I. * * *
A. * * *
1. * * *
Minority interests in small business investment companies and
investment funds that hold nonfinancial equity investments (as
defined in section I.B(6)(ii) of this appendix) and minority
interests in subsidiaries that are engaged in nonfinancial
activities and held under one of the legal authorities listed in
section I.B(6)(ii)are not included in a bank's Tier 1 or total
capital base.
* * * * *
B. * * *
sts in small business investment companies and
investment funds that hold nonfinancial equity investments (as
defined in section I.B(6)(ii) of this appendix) and minority
interests in subsidiaries that are engaged in nonfinancial
activities and held under one of the legal authorities listed in
section I.B(6)(ii)are not included in a bank's Tier 1 or total
capital base.
* * * * *
B. * * *
(6) Nonfinancial equity investments. (i) General. A bank must
deduct from its Tier 1 capital the appropriate percentage (as
determined below) of the adjusted carrying value of all nonfinancial
equity investments.
(ii) Scope of nonfinancial equity investments. (A) A
nonfinancial equity investment means any equity investment made by
the bank: in a nonfinancial company through a small business
investment company (SBIC) under section 302(b) of the Small Business
Investment Act of 1958;\11\ and in a nonfinancial company under the
portfolio investment provisions of Regulation K issued by the Board
of Governors of the Federal Reserve System (12 CFR
211.5(b)(1)(iii)).\12\ It also includes any bank investment made in
a nonfinancial company under section 24 of the Federal Deposit
Insurance Act (12 U.S.C. 1831a(f)), other than an investment held in
accordance with section 24(f) of that Act.\13\ A nonfinancial
company is an entity that engages in any activity that has not been
determined to be permissible for the bank to conduct directly, or to
be financial in nature or incidental to financial activities under
section 4(k) of the Bank Holding Company Act.
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\11\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in a SBIC that is not consolidated
with the bank is treated as a nonfinancial equity investment.
\12\ See 12 CFR 211.5(b)(1)(iii); and 15 U.S.C. 682(b)
l activities under
section 4(k) of the Bank Holding Company Act.
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\11\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in a SBIC that is not consolidated
with the bank is treated as a nonfinancial equity investment.
\12\ See 12 CFR 211.5(b)(1)(iii); and 15 U.S.C. 682(b).
\13\ The Board of Directors of the FDIC, acting directly, may,
in exceptional cases and after a review of the proposed activity,
permit a lower capital deduction for investments approved by the
Board of Directors under section 24 of the FDI Act so long as the
bank's investments under section 24 and SBIC investments represent,
in the aggregate, less than 15 percent of the Tier 1 capital of the
bank. The FDIC and the other banking agencies reserve the authority
to impose higher capital charges where appropriate.
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(B) This section I.B.(6) does not apply to, and no deduction is
required for, any nonfinancial equity investment that is held in the
trading account in accordance with applicable accounting principles
and as part of an underwriting, market making or dealing activity.
(iii) Amount of deduction from core capital. (A) The bank must
deduct from its Tier 1 capital the appropriate percentage, as set
forth in the table following this paragraph, of the adjusted
carrying value of all nonfinancial equity investments held by the
bank and its subsidiaries. The amount of the deduction increases as
and as part of an underwriting, market making or dealing activity.
(iii) Amount of deduction from core capital. (A) The bank must
deduct from its Tier 1 capital the appropriate percentage, as set
forth in the table following this paragraph, of the adjusted
carrying value of all nonfinancial equity investments held by the
bank and its subsidiaries. The amount of the deduction increases as
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the aggregate amount of nonfinancial equity investments held by the
bank and its subsidiaries increases as a percentage of the bank's
Tier 1 capital.
Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held Deduction from Tier 1
directly or indirectly by the bank (as a Capital (as a percentage of
percentage of the Tier 1 capital of the the adjusted carrying value
bank \1\ of the investment)
------------------------------------------------------------------------
Less than 15 percent...................... 8 percent.
15 percent to 24.99 percent............... 12 percent.
25 percent and above...................... 25 percent.
------------------------------------------------------------------------
\1\ In determining the adjusted carrying value of nonfinancial equity
investments as a percentage of Tier 1 capital, the capital amount used
in calculating this percentage is the amount of Tier 1 capital that
exists before the deduction of any disallowed mortgage servicing
assets, any disallowed purchased credit card relationships, any
disallowed nonmortgage servicing assets, any disallowed deferred tax
assets, and before the deduction of any nonfinancial equity
investments
centage of Tier 1 capital, the capital amount used
in calculating this percentage is the amount of Tier 1 capital that
exists before the deduction of any disallowed mortgage servicing
assets, any disallowed purchased credit card relationships, any
disallowed nonmortgage servicing assets, any disallowed deferred tax
assets, and before the deduction of any nonfinancial equity
investments.
(B) These deductions are applied on a marginal basis to the
portions of the adjusted carrying value of nonfinancial equity
investments that fall within the specified ranges of the parent
bank's Tier 1 capital. For example, if the adjusted carrying value
of all nonfinancial equity investments held by a bank equals 20
percent of the Tier 1 capital of the bank, then the amount of the
deduction would be 8 percent of the adjusted carrying value of all
investments up to 15 percent of the bank's Tier 1 capital, and 12
percent of the adjusted carrying value of all investments in excess
of 15 percent of the bank's Tier 1 capital.
(C) The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under this paragraph is
excluded from the bank's risk-weighted assets for purposes of
computing the denominator of the bank's risk-based capital ratio and
from total assets for purposes of calculating the denominator of the
leverage ratio.\14\
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\14\ For example, if 8 percent of the adjusted carrying value of
a nonfinancial equity investment is deducted from the numerator for
Tier 1 capital, the entire adjusted carrying value of the investment
will be excluded from both risk-weighted assets and total assets in
calculating the respective denominators for the risk-based capital
and leverage ratios
----------------------------------
\14\ For example, if 8 percent of the adjusted carrying value of
a nonfinancial equity investment is deducted from the numerator for
Tier 1 capital, the entire adjusted carrying value of the investment
will be excluded from both risk-weighted assets and total assets in
calculating the respective denominators for the risk-based capital
and leverage ratios.
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(D) This appendix establishes minimum risk-based capital ratios
and banks are at all times expected to maintain capital commensurate
with the level and nature of the risks to which they are exposed.
The risk to a bank from nonfinancial equity investments increases
with its concentration in such investments and strong capital levels
above the minimum requirements are particularly important when a
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bank has a high degree of concentration in nonfinancial equity
investments (e.g., in excess of 50 percent of Tier 1 capital). The
FDIC intends to monitor banks and apply heightened supervision to
equity investment activities as appropriate, including where the
bank has a high degree of concentration in nonfinancial equity
investments, to ensure that banks maintain capital levels that are
appropriate in light of their equity investment activities. The FDIC
also reserves authority to impose a higher capital charge in any
case where the circumstances, such as the level of risk of the
particular investment or portfolio of investments, the risk
management systems of the bank, or other information, indicate that
a higher minimum capital requirement is appropriate.
levels that are
appropriate in light of their equity investment activities. The FDIC
also reserves authority to impose a higher capital charge in any
case where the circumstances, such as the level of risk of the
particular investment or portfolio of investments, the risk
management systems of the bank, or other information, indicate that
a higher minimum capital requirement is appropriate.
(iv) SBIC investments. (A) No deduction is required for
nonfinancial equity investments that are made by a bank through an
SBIC that is consolidated with the bank or in an SBIC that is not
consolidated with the bank to the extent that such investments, in
the aggregate, do not exceed 15 percent of the bank's Tier 1
capital. Any nonfinancial equity investment that is held through an
SBIC or in an SBIC and not deducted from Tier 1 capital will be
assigned a 100 percent risk-weight and included in the bank's
consolidated risk-weighted assets.\15\
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\15\ If a bank has an investment in a SBIC that is consolidated
for accounting purposes but that is not wholly owned by the bank,
the adjusted carrying value of the bank's nonfinancial equity
investments through the SBIC is equal to the bank's proportionate
share of the SBIC's adjusted carrying value of its nonfinancial
equity investments. The remainder of the SBIC's adjusted carrying
value (i.e., the minority interest holders' proportionate share) is
excluded from the risk-weighted assets of the bank. If a bank has an
investment in a SBIC that is not consolidated for accounting
purposes and has current information that identifies the percentage
of the SBIC's assets that are nonfinancial equity investments, the
bank may reduce the adjusted carrying value of its investment in the
SBIC proportionately to reflect the percentage of the adjusted
carrying value of the SBIC's assets that are not nonfinancial equity
investments
a SBIC that is not consolidated for accounting
purposes and has current information that identifies the percentage
of the SBIC's assets that are nonfinancial equity investments, the
bank may reduce the adjusted carrying value of its investment in the
SBIC proportionately to reflect the percentage of the adjusted
carrying value of the SBIC's assets that are not nonfinancial equity
investments. The amount by which the adjusted carrying value of the
bank's investment in the SBIC is reduced under this provision will
be risk weighted at 100 percent and included in the bank's risk-
weighted assets.
---------------------------------------------------------------------------
(B) To the extent the adjusted carrying value of all
nonfinancial equity investments held through a consolidated SBIC or
held in a non-consolidated SBIC exceed, in the aggregate, 15 percent
of the bank's Tier 1 capital, the appropriate percentage of such
amounts (as set forth in the table in section I.B.(6)(iii)(A)) must
be deducted from the common stockholders' equity in determining the
bank's Tier 1 capital. In addition, the aggregate adjusted carrying
value of all nonfinancial equity investments held by a bank through
a consolidated SBIC and in a non-consolidated SBIC (including any
investments for which no deduction is required) must be included in
determining for purposes of the table in section I.B.(6)(iii)(A) the
total amount of nonfinancial equity investments held by the bank in
relation to its Tier 1 capital.
egate adjusted carrying
value of all nonfinancial equity investments held by a bank through
a consolidated SBIC and in a non-consolidated SBIC (including any
investments for which no deduction is required) must be included in
determining for purposes of the table in section I.B.(6)(iii)(A) the
total amount of nonfinancial equity investments held by the bank in
relation to its Tier 1 capital.
(v) Transition provisions. [Comment requested.]
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[[Page 10226]]
(vi) Adjusted carrying value. (A) For purposes of this section
I.B.(6), the ``adjusted carrying value'' of investments is the
aggregate value at which the investments are carried on the balance
sheet of the bank reduced by any unrealized gains on those
investments that are reflected in such carrying value but excluded
from the bank's Tier 1 capital. For example, for nonfinancial equity
investments held as available-for-sale, the adjusted carrying value
of the investments would be the aggregate carrying value of those
investments (as reflected on the balance sheet of the bank) less:
any unrealized gains on those investments that are included in other
comprehensive income and not reflected in Tier 1 capital; and
associated deferred tax liabilities.\16\
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\16\ Unrealized gains on available-for-sale equity investments
may be included in Tier 2 capital to the extent permitted under
section I.A.2.(f) of this Appendix. In addition, the net unrealized
loss on available-for-sale equity investments are deducted from Tier
1 capital in accordance with section I.A.1. of this Appendix.
---------------------------------------------------------------------------
(B) As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes
dix. In addition, the net unrealized
loss on available-for-sale equity investments are deducted from Tier
1 capital in accordance with section I.A.1. of this Appendix.
---------------------------------------------------------------------------
(B) As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that
is consolidated for accounting purposes under generally accepted
accounting principles, the bank's adjusted carrying value of the
investment is determined under the equity method of accounting (net
of any intangibles associated with the investment that are deducted
from the bank's core capital in accordance with section I.A.1 of
this Appendix). Even though the assets of the nonfinancial company
are consolidated for accounting purposes, these assets (as well as
the credit equivalent assets of the company's off-balance sheet
items) should be excluded from the bank's risk-weighted assets for
regulatory capital purposes.
(vii) Equity investments. For purposes of this section I.B.(6),
an equity investment means any equity instrument (including warrants
and call options that give the holder the right to purchase an
equity instrument), any equity feature of a debt instrument (such as
a warrant or call option), and any debt instrument that is
convertible into equity where the instrument or feature is held
under one of the legal authorities listed in section I.B.(6)(ii) of
this appendix. An investment in subordinated debt or other types of
debt instruments may be treated as an equity investment if, in the
judgment of the FDIC, the instrument is the functional equivalent of
equity.
By order of the Board of Directors, Federal Deposit Insurance
Corporation.
Dated at Washington, D.C., this 19th day of January, 2001.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 01-3131 Filed 2-13-01; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P
ts may be treated as an equity investment if, in the
judgment of the FDIC, the instrument is the functional equivalent of
equity.
By order of the Board of Directors, Federal Deposit Insurance
Corporation.
Dated at Washington, D.C., this 19th day of January, 2001.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 01-3131 Filed 2-13-01; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.