[Federal Register Volume 60, Number 21 (Wednesday, February 1, 1995)]
[Proposed Rules]
[Pages 6042-6045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2415]



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FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-0870]


Capital; Capital Adequacy Guidelines

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is proposing to amend its capital adequacy guidelines for state member 
banks and bank holding companies (banking organizations) with regard to 
the regulatory capital treatment of certain transfers of assets with 
recourse. This amendment is being proposed to implement section 208 of 
the Riegle Community Development and Regulatory Improvement Act of 1994 
(Riegle Act). The proposed rule would have the effect of lowering the 
capital requirement for small business loans and leases on personal 
property that have been transferred with recourse by qualifying banking 
organizations.

DATES: Comments must be received on or before February 27, 1995.

ADDRESSES: Comments, which should refer to Docket No. R-0870, may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's 
rules regarding availability of information.

FOR FURTHER INFORMATION CONTACT: Rhoger H. Pugh, Assistant Director 
(202/728-5883); Norah Barger, Manager (202/452-2402); Thomas R. Boemio, 
Supervisory Financial Analyst (202/452-2982); or David A. Elkes, 
Financial Analyst (202/452-5218), Division of Banking Supervision and 
Regulation. Telecommunication Device for the Deaf (TDD), Dorothea 
Thompson (202/452-3544), Board of Governors of the Federal Reserve 
System, 20th and C Streets NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

Background

    The Board's current regulatory capital guidelines are intended to 
ensure that banking organizations that transfer assets and retain the 
credit risk inherent in those assets maintain adequate capital to 
support that risk. For banks, this is generally accomplished by 
requiring that assets transferred with recourse continue to be reported 
on the balance sheet in their regulatory reports. Thus, these assets 
are included in the calculation of banks' risk-based and leverage 
capital ratios. For bank holding companies, transfers of assets with 
recourse are reported in accordance with generally accepted accounting 
principles (GAAP). GAAP treats most such transactions as sales, 
allowing the assets to be removed from the balance sheet.1 For 
purposes of calculating bank holding companies' risk-based capital 
ratios, however, assets sold with recourse that have been removed from 
the balance sheet in accordance with GAAP are included in risk-weighted 
assets. Accordingly, banking organizations are generally required to 
maintain capital against the full amount of assets transferred with 
recourse.

    \1\The GAAP treatment focuses on the transfer of benefits rather 
than the retention of risk and, thus, allows a transfer of 
receivables with recourse to be accounted for as a sale if the 
transferor (1) surrenders control of the future economic benefits of 
the assets, (2) is able to reasonably estimate its obligations under 
the recourse provision, and (3) is not obligated to repurchase the 
assets except pursuant to the recourse provision. In addition, the 
transferor must establish a separate liability account equal to the 
estimated probable losses under the recourse provision (GAAP 
recourse liability account).
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    Section 208 of the Riegle Act, which Congress enacted last year, 
directs the federal banking agencies to revise the current regulatory 
capital treatment applied to depository institutions engaging in 
recourse transactions that involve small business obligations. 
Specifically, the Riegle Act states that a qualifying insured 
depository institution that sells small business loans and leases on 
personal property with recourse need include only the amount of 
retained recourse in its asset base when calculating its capital 
ratios, provided two conditions are met. First, the transaction must be 
treated as a sale under GAAP and, second, the depository institution 
must establish a non-capital reserve sufficient to meet the 
institution's reasonably estimated liability under the recourse 
arrangement. The aggregate amount of recourse retained in accordance 
with the provisions of the Act may not exceed 15 percent of an 
institution's total risk-based capital or a greater amount established 
by the appropriate federal banking agency. The Act also states that the 
preferential capital treatment set forth in section 208 is not to be 
applied for purposes of determining an institution's status under the 
prompt corrective action statute (section 38(b) of the Federal Deposit 
Insurance Act).
    The Riegle Act defines a small business as a business that meets 
the criteria for a small business concern established by the Small 
Business Administration under section 3(a) of the Small Business 
Act.2 The Riegle Act also defines a qualifying institution as one 
that is well capitalized or, with the approval of the appropriate 
federal banking agency, adequately capitalized, as these terms are set 
forth in the prompt corrective action statute. For purposes of 
determining whether an institution is qualifying, its capital ratios 
must be calculated without regard to the preferential capital treatment 
the Act sets forth for small business obligations.

    \2\See 15 U.S.C. 631 et seq. The Small Business Administration 
has enacted regulations setting forth the criteria for a small 
business concern at 13 CFR 121.101-121.2106. For most industry 
categories, the regulation defines a small business concern as one 
with 500 or fewer employees. For some industry categories, a small 
business concern is defined in terms of a greater or lesser number 
of employees or in terms of a specified threshold of annual 
receipts.
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Proposal

    To implement the requirements of section 208 of the Riegle Act, the 
Board is proposing to amend its risk-based and leverage capital 
requirements for state member banks. While section 208 of the Act 
specifically applies only to insured depository institutions, and not 
to bank holding companies, the Board is also proposing to amend its 
risk-based capital guidelines for bank holding companies to reflect the 
requirements [[Page 6043]] that section sets forth for banks.3 
This would maintain consistency between banks and bank holding 
companies with regard to the risk-based capital treatment of transfers 
of small business loans and leases of personal property with recourse. 
In general, the Board's proposal could significantly reduce the amount 
of capital that some banking organizations are required to hold against 
recourse transactions involving small business obligations.

    \3\The Board is not proposing to amend the leverage capital 
guidelines for bank holding companies since all transfers with 
recourse that are treated as sales under GAAP are already removed 
from a transferring bank holding company's balance sheet and, thus, 
are not included in the calculation of its leverage ratio.
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    Under the Board's proposal, for the general purpose of calculating 
risk-based and leverage capital ratios, qualifying institutions that 
transfer small business obligations with recourse would be required to 
maintain capital only against the amount of recourse retained, provided 
two conditions are met. First, the transaction must be treated as a 
sale under GAAP and, second, the transferring institutions must 
establish a non-capital reserve sufficient to meet the reasonably 
estimated liability under their recourse arrangements.
    The Board's proposal would extend the preferential capital 
treatment for transfers of small business obligations with recourse 
only to qualifying institutions. A state member bank would be 
considered qualifying if, pursuant to the Board's prompt corrective 
action regulation (12 CFR 208.30), it is well capitalized or, by order 
of the Board, adequately capitalized.4 Although bank holding 
companies are not subject to the prompt corrective action regulation, 
they would be considered qualifying under the Board's proposal if they 
meet the criteria for well capitalized or, by order of the Board, for 
adequately capitalized as those criteria are set forth for banks in 
that regulation. A qualifying institution must be determined to be well 
capitalized or adequately capitalized without taking into consideration 
the preferential capital treatment the proposal provides for transfers 
of small business obligations with recourse.

    \4\ Under 12 CFR 208.30, a state member bank is deemed to be 
well capitalized if it: (1) Has a total risk-based capital ratio of 
10.0 percent or greater; (2) has a Tier 1 risk-based capital ratio 
of 6.0 percent or greater; (3) has a leverage ratio of 5.0 percent 
or greater; and (4) is not subject to any written agreement, order, 
capital directive or prompt corrective action directive issued by 
the Board pursuant to section 8 of the FDI Act, the International 
Lending Supervision Act of 1983, or section 38 of the FDI Act or any 
regulation thereunder, to meet and maintain a specific capital level 
for any capital measure.
    A state member bank is deemed to be adequately capitalized if 
it: (1) Has a total risk-based capital ratio of 8.0 or greater; (2) 
has a Tier 1 risk-based capital ratio of 4.0 percent or greater; (3) 
has a leverage ratio of 4.0 percent or greater or a leverage ratio 
of 3.0 percent or greater if the bank is rated composite 1 under the 
CAMEL rating system in its most recent examination and is not 
experiencing or anticipating significant growth; and (4) does not 
meet the definition of a well capitalized bank.
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    The Board is also proposing that the total outstanding amount of 
recourse retained by qualifying banking organizations on transfers of 
small business obligations receiving the preferential capital treatment 
cannot exceed 15 percent of the institution's total risk-based capital. 
By order, the Board may approve a higher limit. If a banking 
organization is no longer qualifying, i.e., becomes less than well 
capitalized, or has met the established limit, it could not apply the 
preferential capital treatment to any new transfers of small business 
loans and leases of personal property with recourse. Such types of 
transfers completed while the institution was qualifying or before it 
met the established limit, however, would continue to receive the 
preferential capital treatment.
    In accordance with section 208 of the Riegle Act, the Board is 
proposing, that for purposes of determining a state member bank's 
capital category under the Board's prompt corrective action regulation, 
its risk-based and leverage capital ratios shall be calculated without 
taking into consideration the preferential capital treatment the 
proposal provides for transfers of small business obligations with 
recourse.
    The Board expects that this preferential capital treatment also 
would not be applied for purposes of determining limitations on an 
institution's ability to borrow from the discount window, which is tied 
to its prompt corrective action status. In addition, the Board will 
consider whether the preferential capital treatment should be 
disregarded for purposes of determining an institution's ability to 
accept interbank liabilities. The relevant regulation sets limits on 
institutions that are not adequately capitalized, a term the regulation 
states is similar to, but not identical to, the definition of that term 
under the prompt corrective action regulation. A decision on whether 
the preferential capital treatment would be taken into account for 
purposes of determining an institution's ability to accept brokered 
deposits and the amount of its risk-based insurance premiums is to be 
made by the FDIC. The regulations governing these matters employ the 
prompt corrective action categories.
    The Board is seeking comments on all aspects of this proposal.

Regulatory Flexibility Act

    The purpose of this proposal is to reduce the regulatory capital 
requirement on transfers with recourse of small business loans and 
leases of personal property. Therefore, pursuant to section 605(b) of 
the Regulatory Flexibility Act, the Board hereby certifies that this 
rule, as proposed, would not have a significant economic impact on a 
substantial number of small business entities (in this case, small 
banking organizations). Accordingly, a regulatory flexibility analysis 
is not required. The risk-based capital guidelines generally do not 
apply to bank holding companies with consolidated assets of less than 
$150 million; thus, the proposed rule would not affect such companies.

Paperwork Reduction Act and Regulatory Burden

    The Board has determined that this proposed rule will not increase 
the regulatory paperwork burden of banking organizations pursuant to 
the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.). 
Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) provides that 
the federal banking agencies must consider the administrative burdens 
and benefits of any new regulations that impose additional requirements 
on insured depository institutions.

List of Subjects

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.

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR parts 208 and 225 as set forth below:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 continues to read as 
follows:

    [[Page 6044]] Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-
1, 3105, 3310, 3331-3351 and 3906-3909; 15 U.S.C. 78b, 78l(b), 
78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C. 5318.

    2. In Part 208, Appendix A, section III.B. is amended by adding a 
new paragraph 5. to read as follows:

Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure

* * * * *
    III.* * *
    B.* * *
    5. Small Business Loans and Leases on Personal Property 
Transferred with Recourse. a. Notwithstanding other provisions of 
this Appendix A, a qualifying bank that has transferred small 
business loans and leases on personal property with recourse need 
include in weighted-risk assets only the amount of retained recourse 
in lieu of the outstanding amount of the loans and leases 
transferred with recourse, provided two conditions are met. First, 
the transaction must be treated as a sale under GAAP and, second, 
the bank must establish a non-capital reserve sufficient to meet the 
bank's reasonably estimated liability under the recourse 
arrangement. Only loans and leases to businesses that meet the 
criteria for a small business concern established by the Small 
Business Administration under section 3(a) of the Small Business Act 
are eligible for this capital treatment.
    b. For purposes of this Appendix A, qualifying banks are those 
that are well capitalized or, by order of the Board, adequately 
capitalized. The definitions of well capitalized and adequately 
capitalized are found in the Board's prompt corrective action 
regulation (12 CFR 208.30). For purposes of determining whether a 
bank is qualifying, its capital ratios must be calculated without 
regard to the capital treatment for transfers of small business 
obligations with recourse specified in section III.B.5.a. of this 
Appendix A. The total outstanding amount of recourse retained by 
qualifying banking organizations on transfers of small business 
obligations receiving the preferential capital treatment cannot 
exceed 15 percent of the institution's total risk-based capital. By 
order, the Board may approve a higher limit.
    c. For purposes of determining whether a bank is adequately 
capitalized, undercapitalized, significantly undercapitalized, or 
critically undercapitalized under prompt corrective action (12 CFR 
208.30), the risk-based capital ratio of the bank shall be 
determined without regard to the capital treatment of transfers of 
small business obligations with recourse specified in section 
III.B.5.a. of this Appendix A.
* * * * *
    3. In Part 208, Appendix B, section II is amended by revising 
paragraph c. and adding new paragraphs d., e., and f.

Appendix B to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Tier 1 Leverage Measure

* * * * *
    II. * * *
    c. Notwithstanding other provisions of this Appendix B, a 
qualifying bank that has transferred small business loans and leases 
on personal property with recourse may adjust its average total 
consolidated assets, for purposes of calculating its tier 1 leverage 
ratio, to include only the amount of retained recourse in lieu of 
the outstanding amount of the loans and leases transferred with 
recourse, provided two conditions are met. First, the transaction 
must be treated as a sale under GAAP and, second, the bank must 
establish a non-capital reserve sufficient to meet the bank's 
reasonably estimated liability under the recourse arrangement. Only 
loans and leases to businesses that meet the criteria for a small 
business concern established by the Small Business Administration 
under section 3(a) of the Small Business Act are eligible for this 
capital treatment.
    d. For purposes of this Appendix B, qualifying banks are those that 
are well capitalized or, by order of the Board, adequately capitalized. 
The definitions of well capitalized and adequately capitalized are 
found in the Board's prompt corrective action regulation (12 CFR 
208.30). For purposes of determining whether a bank is qualifying, its 
capital ratios must be calculated without regard to the capital 
treatment for transfers of small business obligations with recourse 
specified in section II.c. of this Appendix B. The total outstanding 
amount of recourse retained by qualifying banks on transfers of small 
business obligations receiving the preferential capital treatment 
cannot exceed 15 percent of the institution's total risk-based capital. 
By order, the Board may approve a higher limit.
    e. For purposes of determining whether a bank is adequately 
capitalized, undercapitalized, significantly undercapitalized, or 
critically undercapitalized under prompt corrective action (12 CFR 
208.30), the leverage capital ratio of the bank shall be determined 
without regard to the capital treatment of transfers of small business 
obligations with recourse specified in section II.c. of this Appendix 
B.
    f. Whenever appropriate, including when a bank is undertaking 
expansion, seeking to engage in new activities, or otherwise facing 
unusual or abnormal risks, the Board will continue to consider the 
level of an individual bank's tangible tier 1 leverage ratio (after 
deducting all intangibles) in making an overall assessment of capital 
adequacy. This is consistent with the Federal Reserve's risk-based 
capital guidelines and long-standing Board policy and practice with 
regard to leverage guidelines. Banks experiencing growth, whether 
internally or by acquisition, are expected to maintain strong capital 
positions substantially above minimum supervisory levels, without 
significant reliance on intangible assets.

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, 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and 
3909.

    2. In part 225, Appendix A, section III.B. is amended by adding a 
new paragraph 5. to read as follows:

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Risked-Based Measure

* * * * *
    III. * * *
    B. * * *
    5. Small Business Loans and Leases on Personal Property 
Transferred with Recourse. a. Notwithstanding other provisions of 
this Appendix A, a qualifying banking organization that has 
transferred small business loans and leases on personal property 
with recourse need include in weighted-risk assets only the amount 
of retained recourse in lieu of the outstanding amount of the loans 
and leases transferred with recourse, provided two conditions are 
met. First, the transaction must be treated as a sale under GAAP 
and, second, the banking organization must establish a non-capital 
reserve sufficient to meet the organization's reasonably estimated 
liability under the recourse arrangement. Only loans and leases to 
businesses that meet the criteria for a small business concern 
established by the Small Business Administration under section 3(a) 
of the Small Business Act are eligible for this capital treatment.
    b. For purposes of this Appendix A, qualifying banking 
organizations are those that meet the criteria for well capitalized 
or, by order of the Board, adequately capitalized. The criteria for 
well capitalized and adequately capitalized are found in the Board's 
prompt corrective action regulation for state member banks (12 CFR 
208.30). For purposes of determining whether an organization is 
qualifying, its capital ratios must be calculated without regard to 
the capital treatment for transfers of small business obligations 
with recourse specified in section III.B.5.a. of this Appendix A. 
The total outstanding amount of recourse retained by qualifying 
banking organizations on transfers of small business obligations 
receiving the preferential capital treatment cannot exceed 15 
percent of the institution's total risk-based capital. By order, the 
Board may approve a higher limit.
* * * * * [[Page 6045]] 
    By order of the Board of Governors of the Federal Reserve 
System, January 26, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-2415 Filed 1-31-95; 8:45 am]
BILLING CODE 6210-01-P