[Federal Register Volume 60, Number 169 (Thursday, August 31, 1995)]
[Rules and Regulations]
[Pages 45612-45616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21607]




[[Page 45611]]

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Part VI





Federal Reserve System





_______________________________________________________________________



12 CFR Parts 208 and 225



Capital; Capital Adequacy Guidelines; Final Rule

  Federal Register / Vol. 60, No. 169 / Thursday, August 31, 1995 / 
Rules and Regulations   

[[Page 45612]]


FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

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


Capital; Capital Adequacy Guidelines

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is amending its risk-based and leverage capital adequacy guidelines for 
state member banks and bank holding companies (collectively, banking 
organizations) to implement section 208 of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (Riegle Act). 
Section 208 states that a qualifying insured depository institution 
that transfers small business loans and leases on personal property 
with recourse shall include only the amount of retained recourse in its 
risk-weighted assets when calculating its capital ratios, provided that 
certain conditions are met. This rule will have the effect of lowering 
the capital requirements for small business loans and leases on 
personal property that have been transferred with recourse by 
qualifying banking organizations.

EFFECTIVE DATE: September 1, 1995.

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

SUPPLEMENTARY INFORMATION:

Background

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

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

    \2\ See 15 U.S.C. 631 et seq. The Small Business Administration 
has implemented regulations setting forth the criteria for a small 
business concern at 13 CFR 121.101-121.2106. For most industry 
categories, the regulation defines a small business concern as one 
with 500 or fewer employees. For some industry categories, a small 
business concern is defined in terms of a greater or lesser number 
of employees or in terms of a specified threshold of annual 
receipts.
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    To meet the statutory requirements of section 208 of the Riegle 
Act, the Board issued a proposed rule amending its risk-based and 
leverage capital guidelines for state member banks (60 FR 6042, 
February 1, 1995). Although section 208 pertains only to insured 
depository institutions, the Board also proposed amending its risk-
based capital guidelines for bank holding companies in order to 
maintain consistency among banking organizations in the calculation of 
regulatory capital ratios.3

    \3\ The Board did not propose amending its leverage capital 
guidelines for bank holding companies since all transfers with 
recourse that are treated as sales under GAAP are already removed 
from a transferring bank holding company's balance sheet and, thus, 
are not included in the calculation of its leverage ratio.
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    The proposal noted that in view of the requirement that the 
preferential capital treatment set forth in section 208 be disregarded 
for prompt corrective action purposes, the Board expected that it also 
would disregard the preferential capital treatment for purposes of 
determining limitations on an institution's ability to borrow from the 
discount window and that it would consider disregarding this treatment 
for purposes of determining a correspondent's capital level under the 
limitations of the Board's Regulation F (limitations on interbank 
liabilities). The regulations governing these matters are based in part 
on regulations implementing the prompt corrective action statute. The 
comment period on the Board's proposal ended on February 27, 1995.

Comments Received

    In response to its proposal, the Board received letters from four 
public commenters consisting of three banking organizations and one 
banking trade association. All four organizations 

[[Page 45613]]
supported the Board's proposal to lower the capital requirements for 
both state member banks and bank holding companies on recourse 
transactions associated with transfers of small business loans and 
leases. Three respondents favored extending the preferential capital 
treatment to other types of assets. Two commenters argued that not 
applying the preferential capital treatment for purposes of determining 
an institution's prompt corrective action category, its ability to 
borrow from the discount window, or limitations on interbank 
liabilities would diminish the benefits of the proposed capital 
treatment.
    Three respondents noted that under the proposal, capital would be 
required to be maintained for the entire amount of recourse retained 
while further requiring that a liability reserve be established for 
expected future losses associated with the recourse arrangements. These 
commenters stated that this requirement would result in a partial 
duplication of capital charges and, accordingly, argued that the 
retained recourse liability should be reduced by the amount of the 
reserve before calculating capital requirements.

Final Rule

    After consideration of the comments received and further 
deliberation on the issues involved, the Board is implementing section 
208 of the Riegle Act by adopting a final rule amending the risk-based 
and leverage capital guidelines for state member banks. In general, the 
final rule reduces the amount of capital that banking organizations are 
required to hold against small business obligations transferred with 
recourse. The final rule provides that qualifying institutions that 
transfer small business obligations with recourse are required, for 
risk-based capital purposes, to maintain capital only against the 
amount of recourse retained and, for leverage ratio purposes, are not 
required to maintain any capital at all against such obligations 
transferred with recourse, provided two conditions are met. First, the 
transaction must be treated as a sale under GAAP and, second, the 
transferring institutions must establish, pursuant to GAAP, a non-
capital reserve sufficient to meet the reasonably estimated liability 
under their recourse arrangements.
    As proposed, to maintain consistency in regulatory capital 
calculations among the banking organizations, the Board is also issuing 
a parallel final amendment to its risk-based capital guidelines for 
bank holding companies. The Board notes that the final rule, consistent 
with section 208 and its proposal, applies only to transfers of 
obligations of small businesses that meet the criteria for a small 
business as established by the Small Business Administration. The Board 
also notes that the capital treatment specified in section 208 and in 
this final rule for transfers of small business obligations with 
recourse takes precedence over the capital requirements recently 
implemented for transactions involving low levels of recourse.
    In setting forth this final rule, the Board has considered the 
arguments made by commenters for reducing the amount of retained 
recourse against which capital would be assessed by the amount of the 
recourse liability reserve that is established pursuant to GAAP. 
Section 208, however, requires qualifying institutions selling small 
business obligations with recourse to establish and maintain a reserve 
equal to the amount of its reasonable estimated liability under the 
recourse arrangement and maintain capital against the amount of 
retained recourse. The Board notes that the reserve required under GAAP 
for the reasonable estimated liability on assets transferred with 
recourse is established to cover expected losses while regulatory 
capital is maintained to absorb unexpected losses beyond those that 
were estimated and expected. Thus, the Board believes that it is 
appropriate to assess risk-based capital against the full amount of 
recourse, as well as require the establishment of a liability reserve 
pursuant to GAAP.
    However, the final rule does not, as proposed, amend the leverage 
capital guidelines for state member banks to require that the off-
balance sheet amount of retained recourse on small business loans sold 
with recourse be included in the calculation of the leverage ratio. The 
Board has concluded that the leverage ratio should continue to be based 
primarily on the amount of average total on-balance-sheet assets as 
reported in the Call Report.
    The Board's final rule extends the preferential capital treatment 
for transfers of small business obligations with recourse only to 
qualifying institutions. A state member bank will be considered 
qualifying if, pursuant to the Board's prompt corrective action 
regulation (12 CFR 208.30), it is well capitalized or, by order of the 
Board, adequately capitalized.4 Although bank holding companies 
are not subject to the prompt corrective action regulation, they will 
be considered qualifying under the Board's final rule if they meet the 
criteria for well capitalized or, by order of the Board, for adequately 
capitalized as those criteria are set forth for banks. In order to 
qualify, an institution must be determined to be well capitalized or 
adequately capitalized without taking into account the preferential 
capital treatment the rule provides for any previous transfers of small 
business obligations with recourse.

    \4\ Under 12 CFR 208.30, a state member bank is deemed to be 
well capitalized if it: 1) has a total risk-based capital ratio of 
10.0 percent or greater; 2) has a Tier 1 risk-based capital ratio of 
6.0 percent or greater; 3) has a leverage ratio of 5.0 percent or 
greater; and 4) is not subject to any written agreement, order, 
capital directive, or prompt corrective action directive issued by 
the Board pursuant to section 8 of the FDI Act, the International 
Lending Supervision Act of 1983, or section 38 of the FDI Act or any 
regulation thereunder, to meet and maintain a specific capital level 
for any capital measure.
    A state member bank is deemed to be adequately capitalized if 
it: 1) has a total risk-based capital ratio of 8.0 or greater; 2) 
has a Tier 1 risk-based capital ratio of 4.0 percent or greater; 3) 
has a leverage ratio of 4.0 percent or greater or a leverage ratio 
of 3.0 percent or greater if the bank is rated composite 1 under the 
CAMEL rating system in its most recent examination and is not 
experiencing or anticipating significant growth; and 4) does not 
meet the definition of a well capitalized bank.
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    Under the final rule, the total outstanding amount of recourse 
retained by a qualifying banking organization on transfers of small 
business obligations receiving the preferential capital treatment 
cannot exceed 15 percent of the institution's total risk-based 
capital.5 By order, the Board may approve a higher limit. If a 
banking organization is no longer qualifying (i.e., becomes less than 
well capitalized) or exceeds the established limit, it will not be able 
to apply the preferential capital treatment to any transfers of small 
business obligations with recourse that occur while the institution is 
not qualified or above the capital limit. However, those transfers of 
small business obligations with recourse that were completed while the 
banking organization was qualified and before it exceeded the 
established limit of 15 percent of total risk-based capital will 
continue to receive the preferential capital treatment even when the 
institution is no longer qualified or the amount of retained recourse 
on such transfers subsequently exceeds the capital limitation.

    \5\ Thus, a transfer of small business obligations with recourse 
that results in a qualifying banking organization retaining recourse 
in an amount greater than 15 percent of its total risk-based capital 
would not be eligible for the preferential capital treatment, even 
though the organization's amount of retained recourse before the 
transfer was less than 15 percent of capital.
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    Section 208(f) provides that the capital of an insured depository 
institution shall be computed without regard to section 208 when 
determining 

[[Page 45614]]
whether an institution is adequately capitalized, undercapitalized, 
significantly undercapitalized, or critically undercapitalized for 
purposes of prompt corrective action under the Board's prompt 
corrective action regulation (12 CFR 208.33(b)).
    The caption to section 208(f) of the Riegle Act, ``Prompt 
Corrective Action Not Affected,'' and the legislative history indicate 
section 208 was not intended to affect the operation of the prompt 
corrective action system. See S. Rep. No. 103-169, 103d Cong., 1st 
Sess. 38, 69 (1993). However, the statute does not include ``well 
capitalized'' in the list of capital categories not affected. The 
prompt corrective action system deals primarily with imposing 
corrective sanctions on institutions that are less than adequately 
capitalized. Therefore, allowing a bank that is adequately capitalized 
without regard to section 208 to use the section's capital provisions 
for purposes of determining whether the bank is well capitalized 
generally would not affect the application of the prompt corrective 
action sanctions to the bank.6 Other statutes and regulations 
treat a bank more favorably if it is well capitalized as defined under 
the prompt corrective action statute, but these provisions are not part 
of the prompt corrective action system of sanctions. Permitting an 
institution to be treated as well capitalized for purposes of these 
other provisions also will not affect the imposition of prompt 
corrective action sanctions.

    \6\ It is very unlikely but theoretically possible for a banking 
organization that is undercapitalized without using the preferential 
capital treatment in section 208 to become well capitalized if the 
provisions of section 208 are applied. Since, in the Board's view, 
section 208 was not intended to affect prompt corrective action 
sanctions, allowing an undercapitalized institution (without taking 
into account section 208) to be treated as well capitalized (taking 
into consideration section 208) would be an inappropriate 
application of the preferential capital treatment permitted under 
section 208. Thus, undercapitalized banking organizations will not 
be able to use the capital provisions of section 208 for purposes of 
improving their prompt corrective action capital category.
    There is one provision of the prompt corrective action system that 
could be affected by treating an institution as well capitalized rather 
than adequately capitalized. In this regard, if the institution's 
condition is unsafe and unsound or it is engaging in an unsafe or 
unsound practice, section 208.33(c) of the Board's prompt corrective 
action regulation (12 CFR 208.33(c)) authorizes the Board to reclassify 
a well capitalized institution as adequately capitalized and require an 
adequately capitalized institution to comply with certain prompt 
corrective action provisions as if that institution were 
undercapitalized. Because the text and legislative history of section 
208 of the Riegle Act clearly indicate that Congress did not intend to 
affect prompt corrective action sanctions, the Board believes that the 
provisions of section 208 do not affect the capital calculation for 
purposes of reclassifying a bank from one capital category to a lower 
capital category, regardless of the bank's capital level.
    Thus, an institution may use the capital treatment described in 
section 208 of the Riegle Act when determining whether it is well 
capitalized for purposes of prompt corrective action as well as for 
other regulations that reference the well capitalized capital 
category.7 An institution may not use the capital treatment 
described in section 208 when determining whether it is adequately 
capitalized, undercapitalized, significantly undercapitalized, or 
critically undercapitalized for purposes of prompt corrective action or 
other regulations that directly or indirectly reference the prompt 
corrective action capital categories.8 Furthermore, the capital 
ratios of an institution are to be determined without regard to the 
preferential capital treatment described in section 208 of the Riegle 
Act for purposes of being reclassified from one capital category to a 
lower category as described in the Board's prompt corrective action 
regulation (12 CFR 208.33(c)).

    \7\ A institution that is subject to a written agreement or 
capital directive as discussed in the Board's prompt corrective 
action regulation would not be considered well capitalized. Also, 
undercapitalized banking organizations will not be able to use the 
capital provisions of section 208 for purposes of improving their 
prompt corrective action capital category. (See footnote 6.)
    \8\ Under the provisions of section 208, the capital calculation 
used to determine whether an institution is well capitalized differs 
from the calculation used to determine whether an institution is 
adequately capitalized. As a result, it is possible that an 
institution could be well capitalized using one calculation (i.e., 
one that considers the preferential capital treatment) and 
adequately capitalized using the other (i.e., one that is calculated 
without regard to the preferential capital treatment). In this 
situation, the institution would be considered well capitalized.
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    Section 208(g) of the Riegle Act required that final regulations 
implementing the provisions of section 208 be promulgated not later 
than 180 days after the date of the statute's enactment, i.e., by March 
22, 1995. In order to meet the spirit of the statute, the preferential 
capital treatment may be applied by qualifying banking organizations 
for those transfers of small business obligations with recourse that 
occurred on or after March 22, 1995, provided certain conditions are 
met.
    The Board also notes that Section 208(a) of the Riegle Act provides 
that the accounting principles applicable to the transfer of small 
business obligations with recourse contained in reports or statements 
required to be filed with the federal banking agencies by a qualified 
insured depository institution shall be consistent with GAAP.9 The 
Board, in consultation with the other agencies and under the auspices 
of the Federal Financial Institutions Examinations Council, intends to 
ensure that appropriate revisions are made to the Consolidated Reports 
of Condition and Income (Call Reports) and the Call Report instructions 
to implement the accounting provisions of section 208.

    \9\ Transfers of small business obligations with recourse that 
are consummated at a time when the transferring banking organization 
does not qualify for the preferential capital treatment or that 
result in the organization exceeding the 15 percent capital 
limitation will continue to be reported in accordance with the 
instructions of the Consolidated Reports of Condition and Income 
(Call Reports) for sales of assets with recourse. The Call Report 
instructions generally require banks transferring assets with 
recourse to continue to report the assets on their balance sheets.
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Regulatory Flexibility Act

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

Paperwork Reduction Act and Regulatory Burden

    The Board has determined that this rule will not increase the 
regulatory paperwork burden of banking organizations pursuant to the 
provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).
    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) requires that 
new regulations take effect on the first day of the calendar quarter 
following publication of the rule, unless the agency determines, for 
good cause, that the regulation should become effective on a day other 
than the first day of the next quarter. October 1, 1995 would be 

[[Page 45615]]
the first day of the calendar quarter following publication of the rule 
that would also satisfy the requirements of the Administrative 
Procedures Act (5 U.S.C. 553(d)). The Board has decided that the final 
rule should be effective immediately since the rule relieves a 
regulatory burden on banking organizations that transfer small business 
obligations with recourse by significantly reducing the capital 
requirements on such obligations. This immediate effective date will 
permit banks to treat transfers of small business obligations as sales 
and to reduce the capital requirement for any such sales. Also, there 
is a statutory requirement for the banking agencies to promulgate final 
regulations implementing the provisions of section 208 by March 22, 
1995. For these same reasons, in accordance with 5 U.S.C. 553(d) (1) 
and (3), the Board finds there is good cause not to follow the 30-day 
notice requirements of 5 U.S.C. 553(d) and to make the final rule 
effective immediately.

List of Subjects

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Flood insurance, 
Mortgages, Reporting and recordkeeping requirements, Securities.

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

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

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

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

    Authority: 12 U.S.C. 36, 248(a), 248(c), 321-338a, 371d, 461, 
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-l, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 
78l(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C. 5318; 42 U.S.C. 
4012a, 4104a, 4104b.

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

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

* * * * *
    III. * * *
    B. * * *
    5. Small Business Loans and Leases on Personal Property 
Transferred with Recourse. a. Notwithstanding other provisions of 
this appendix A, a qualifying bank that has transferred small 
business loans and leases on personal property (small business 
obligations) with recourse shall include in weighted-risk assets 
only the amount of retained recourse, provided two conditions are 
met. First, the transaction must be treated as a sale under GAAP 
and, second, the bank must establish pursuant to GAAP a non-capital 
reserve sufficient to meet the bank's reasonably estimated liability 
under the recourse arrangement. Only loans and leases to businesses 
that meet the criteria for a small business concern established by 
the Small Business Administration under section 3(a) of the Small 
Business Act are eligible for this capital treatment.
    b. For purposes of this appendix A, a bank is qualifying if it 
meets the criteria set forth in the Board's prompt corrective action 
regulation (12 CFR 208.30) for well capitalized or, by order of the 
Board, adequately capitalized. For purposes of determining whether a 
bank meets the criteria, its capital ratios must be calculated 
without regard to the preferential capital treatment for transfers 
of small business obligations with recourse specified in section 
III.B.5.a. of this appendix A. The total outstanding amount of 
recourse retained by a qualifying bank on transfers of small 
business obligations receiving the preferential capital treatment 
cannot exceed 15 percent of the bank's total risk-based capital. By 
order, the Board may approve a higher limit.
    c. If a bank ceases to be qualifying or exceeds the 15 percent 
capital limitation, the preferential capital treatment will continue 
to apply to any transfers of small business obligations with 
recourse that were consummated during the time that the bank was 
qualifying and did not exceed the capital limit.
    d. The risk-based capital ratios of the bank shall be calculated 
without regard to the preferential capital treatment for transfers 
of small business obligations with recourse specified in section 
III.B.5.a. of this appendix A for purposes of:
    (i) Determining whether a bank is adequately capitalized, 
undercapitalized, significantly undercapitalized, or critically 
undercapitalized under prompt corrective action (12 CFR 208.33(b)); 
and
    (ii) Reclassifying a well capitalized bank to adequately 
capitalized and requiring an adequately capitalized bank to comply 
with certain mandatory or discretionary supervisory actions as if 
the bank were in the next lower prompt corrective action capital 
category (12 CFR 208.33(c)).
* * * * *
    3. In part 208, appendix B, section II. is amended by redesignating 
paragraph c. as paragraph g. and adding new paragraphs c., d., e., and 
f to read as follows:

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

* * * * *
    II. * * *
    c. Notwithstanding other provisions of this appendix B, a 
qualifying bank that has transferred small business loans and leases 
on personal property (small business obligations) with recourse 
shall, for purposes of calculating its tier 1 leverage ratio, 
exclude from its average total consolidated assets the outstanding 
principal amount of the small business loans and leases transferred 
with recourse, provided two conditions are met. First, the 
transaction must be treated as a sale under generally accepted 
accounting principles (GAAP) and, second, the bank must establish 
pursuant to GAAP a non-capital reserve sufficient to meet the bank's 
reasonably estimated liability under the recourse arrangement. Only 
loans and leases to businesses that meet the criteria for a small 
business concern established by the Small Business Administration 
under section 3(a) of the Small Business Act are eligible for this 
capital treatment.
    d. For purposes of this appendix B, a bank is qualifying if it 
meets the criteria set forth in the Board's prompt corrective action 
regulation (12 CFR 208.30) for well capitalized or, by order of the 
Board, adequately capitalized. For purposes of determining whether a 
bank meets these criteria, its capital ratios must be calculated 
without regard to the preferential capital treatment for transfers 
of small business obligations with recourse specified in section 
II.c. of this appendix B. The total outstanding amount of recourse 
retained by a qualifying bank on transfers of small business 
obligations receiving the preferential capital treatment cannot 
exceed 15 percent of the bank's total risk-based capital. By order, 
the Board may approve a higher limit.
    e. If a bank ceases to be qualifying or exceeds the 15 percent 
capital limitation, the preferential capital treatment will continue 
to apply to any transfers of small business obligations with 
recourse that were consummated during the time that the bank was 
qualifying and did not exceed the capital limit.
    f. The leverage capital ratio of the bank shall be calculated 
without regard to the preferential capital treatment for transfers 
of small business obligations with recourse specified in section II 
of this appendix B for purposes of:
    (i) Determining whether a bank is adequately capitalized, 
undercapitalized, significantly undercapitalized, or critically 
undercapitalized under prompt corrective action (12 CFR 208.33(b)); 
and
    (ii) Reclassifying a well capitalized bank to adequately 
capitalized and requiring an adequately capitalized bank to comply 
with certain mandatory or discretionary supervisory actions as if 
the bank were in the next lower prompt corrective action capital 
category (12 CFR 208.33(c)).
* * * * *

[[Page 45616]]


PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for part 225 continues to read as 
follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828o, 1831i, 1831p-l, 
1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and 
3909.

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

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

* * * * *
    III. * * *
    B. * * *
    5. Small Business Loans and Leases on Personal Property 
Transferred with Recourse. a. Notwithstanding other provisions of 
this appendix A, a qualifying banking organization that has 
transferred small business loans and leases on personal property 
(small business obligations) with recourse shall include in 
weighted-risk assets only the amount of retained recourse, provided 
two conditions are met. First, the transaction must be treated as a 
sale under GAAP and, second, the banking organization must establish 
pursuant to GAAP a non-capital reserve sufficient to meet the 
organization's reasonably estimated liability under the recourse 
arrangement. Only loans and leases to businesses that meet the 
criteria for a small business concern established by the Small 
Business Administration under section 3(a) of the Small Business Act 
are eligible for this capital treatment.
    b. For purposes of this appendix A, a banking organization is 
qualifying if it meets the criteria for well capitalized or, by 
order of the Board, adequately capitalized, as those criteria are 
set forth in the Board's prompt corrective action regulation for 
state member banks (12 CFR 208.30). For purposes of determining 
whether an organization meets these criteria, its capital ratios 
must be calculated without regard to the capital treatment for 
transfers of small business obligations with recourse specified in 
section III.B.5.a. of this appendix A. The total outstanding amount 
of recourse retained by a qualifying banking organization on 
transfers of small business obligations receiving the preferential 
capital treatment cannot exceed 15 percent of the organization's 
total risk-based capital. By order, the Board may approve a higher 
limit.
    c. If a bank holding company ceases to be qualifying or exceeds 
the 15 percent capital limitation, the preferential capital 
treatment will continue to apply to any transfers of small business 
obligations with recourse that were consummated during the time that 
the organization was qualifying and did not exceed the capital 
limit.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, August 25, 1995.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 95-21607 Filed 8-30-95; 8:45 am]
BILLING CODE 6210-01-P