[Federal Register Volume 60, Number 232 (Monday, December 4, 1995)]
[Proposed Rules]
[Pages 62050-62051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29425]



 ========================================================================
 Proposed Rules
                                                 Federal Register
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 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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 

  Federal Register / Vol. 60, No. 232 / Monday, December 4, 1995 / 
Proposed Rules  

[[Page 62050]]


FEDERAL RESERVE SYSTEM

12 CFR Part 250

[Docket No. R-0902]


Transactions With Affiliates

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board is proposing to conform the definition of capital 
stock and surplus for purposes of section 23A of the Federal Reserve 
Act to the definition of unimpaired capital and unimpaired surplus used 
in Regulation O and to the definition of capital and surplus used by 
Office of the Comptroller of the Currency (OCC) in calculating the 
limit on loans by a national bank to a single borrower. The proposed 
rule seeks to reduce the burden for member banks and other insured 
depository institutions monitoring lending to their affiliates.

DATES: Comments must be submitted on or before January 8, 1996.

ADDRESSES: Comments should refer to Docket No. R-0902, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments also may be delivered to the Board's 
mail room in the Eccles Building between 8:45 am and 5:15 pm 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 am and 5 pm weekdays, except as provided in 12 CFR 261.8 of the 
Board's rules regarding availability of information.

FOR FURTHER INFORMATION CONTACT: Pamela G. Nardolilli, Senior Attorney 
(202/452-3289) Legal Division, or Barbara Bouchard, Supervisory 
Financial Analyst (202/452-3072), Division of Banking Supervision and 
Regulation, Board of Governors of the Federal Reserve System. For users 
of the Telecommunications Device for the Deaf (TDD) only, please 
contact Dorothea Thompson (202/452-3544).

SUPPLEMENTARY INFORMATION: Section 23A of the Federal Reserve Act, 12 
U.S.C. 371c, regulates certain transactions between insured depository 
institutions and their affiliates, including transactions between 
affiliated depository institutions. Section 23A is designed to protect 
insured depository institutions from abuses that may result from 
lending and asset purchase transactions with their affiliates. In 
general, section 23A prohibits an insured depository institution from 
engaging in covered transactions (which include extensions of credit 
and purchases of assets) with any single affiliate in excess of 10 
percent of the institution's capital stock and surplus. A 20 percent 
aggregate limit is imposed on the total amount of covered transactions 
by an insured depository institution with all affiliates. Under section 
23A, all extensions of credit between an insured depository institution 
and its affiliate must meet certain collateral requirements. Section 
23A also prohibits an insured depository institution from purchasing 
any low-quality assets from an affiliate, and requires that all 
transactions with an affiliate must be conducted on terms that are 
consistent with safe and sound banking practices. Although section 23A, 
by its terms, applies only to member banks, the Federal Deposit 
Insurance Act applies section 23A to all nonmember insured banks (12 
U.S.C. 1828 (j)) and the Home Owners' Loan Act applies section 23A to 
savings associations (12 U.S.C. 1468).
    Section 23A does not include an explicit definition of ``capital 
stock and surplus.'' A 1964 Board interpretation refers to the 
definition of capital as ``the amount of unimpaired common stock plus 
the amount of preferred stock outstanding and unimpaired'' but 
explicitly excluded debt-like instruments from the definition of 
capital and surplus. 12 CFR 250.161. In the interpretation, the Board 
recognized that certain notes and debentures could be considered as 
capital or capital stock for purposes of membership in the Federal 
Reserve System, but concluded that for purposes of certain Federal 
Reserve Act limitations and requirements, such instruments could not be 
regarded as part of either capital or capital stock. A subsequent Board 
interpretation issued in 1971 states that capital stock and surplus, as 
used in provisions of the Federal Reserve Act, includes reserves for 
loan losses and valuation reserves for securities. 12 CFR 250.162. As a 
practical matter, this definition of capital and surplus has been 
implemented as total equity capital and the allowance for loan and 
lease losses (ALLL) as set forth in the bank's Report of Condition and 
Income (Call Report).

Revisions to the Definition of Capital and Surplus

    In February 1995, the OCC amended its regulation, 60 FR 8526 
(February 15, 1995) (to be codified at 12 CFR 32.2(b)), setting forth 
lending limits on the amount a national bank may lend to a single 
counterparty and revised the definition of capital and surplus upon 
which lending limits are based. In June 1995, the Board amended its 
Regulation O, 60 FR 31053 (June 13, 1995) (to be codified at 12 CFR 
215.2), to revise the definition of unimpaired capital and unimpaired 
surplus used to limit loans to insiders, to a definition that is 
consistent with that used for purposes of the OCC's single borrower 
lending limits to eliminate discrepancies in the definitions of capital 
used for different lending limit purposes and to reduce regulatory 
burden for banks monitoring lending to their insiders. Under the 
revised OCC regulation, capital and surplus is defined as Tier 1 and 
Tier 2 capital as calculated under the risk-based capital guidelines 
plus the balance of the allowance for loan and lease losses (ALLL) 
excluded from Tier 2 capital.1

    \1\ Under the banking agencies' risk-based capital guidelines, 
Tier 1 capital includes common stock, some noncumulative perpetual 
preferred stock and related surplus, and minority interest in equity 
accounts of consolidated subsidiaries. Tier 2 capital includes the 
ALLL up to 1.25 percent of the bank's weighted risk assets, 
perpetual preferred stock and related surplus, hybrid capital 
instruments, and certain subordinated debt.
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    The Board is recommending the adoption of a definition of ``capital 
stock and surplus'' for purposes of section 23A that is the same as the 
general capital definitions that are used for Regulation O and the 
national bank lending limits. Based on June 1995 Call Report data, the 
revised definition would decrease the limits for 

[[Page 62051]]
transactions with affiliates for a majority of banks. Unlike the 
current capital stock and surplus definition for section 23A, the 
revised definition would permit banks to include in the calculation of 
capital stock and surplus, subordinated debt that qualifies for 
inclusion in Tier 2 capital. On the other hand, unlike equity capital, 
Tier 1 capital does not include securities revaluation reserves, in 
particular gains and losses on available-for sale securities, which 
under Statement of Financial Accounting Standards Number 115 (FAS 115) 
are considered a component of equity capital. Overall, it is estimated 
that the revised definition of capital stock and surplus would result 
in a change for most banks of 5 percent or less from their current 
limit, although a few community and mid-sized banks would experience 
substantial changes as a result of their having large gains or losses 
on available-for-sale securities.
    Notwithstanding the decrease for many banks in the amount of 
capital stock and surplus that would be used to calculate their section 
23A limit under the revised definition, the Board believes that, over 
all, revising the definition would be beneficial for all insured 
depository institutions for two reasons. First, it would provide 
consistency in the capital definition used for Regulation O and the 
national bank lending limits. Second, the revised definition would 
result in a more stable limit over time than the current definition 
because it excludes revaluation gains and losses on available-for-sale 
securities, a component of equity capital that tends to be volatile.
    The Board also proposes to amend 12 CFR 250.161 and 12 CFR 250.162 
to delete the reference to section 23A to reflect the proposed change.

Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an 
agency to publish an initial regulatory flexibility analysis with any 
notice of proposed rulemaking. Two of the requirements of an initial 
regulatory flexibility analysis (5 U.S.C. 603(b))--a description of the 
reasons why the action by the agency is being considered and a 
statement of the objectives of, and legal basis for, the proposed 
rule--are contained in the supplementary information above.
    Another requirement for the initial regulatory flexibility analysis 
is a description of, and where feasible, an estimate of the number of 
small entities to which the proposed rule will apply. The proposed rule 
would apply to all insured depository institutions, regardless of size. 
The Board has determined that its proposed rule would impose no 
additional reporting or recordkeeping requirements, and that there are 
no relevant federal rules that duplicate, overlap, or conflict with the 
proposed rule. In addition, the proposed rule is not expected to have a 
significant economic impact on small institutions. Instead, the 
proposed rule is expected to relieve the regulatory burden on a 
majority of insured depository institutions.

Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501 et seq.; 5 CFR 1320 Appendix A.1.), the Board 
reviewed the proposed rule under 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.

List of Subjects in 12 CFR Part 250

    Credit, Federal Reserve System.

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 250 as set forth below:

PART 250--MISCELLANEOUS INTERPRETATIONS

    1. The authority citation for part 250 would continue to read as 
follows:

    Authority: 12 U.S.C. 248(i) and 371c(e).


Sec. 250.161  [Amended]

    2. In Sec. 250.161 paragraph (d) is amended by removing the words 
``loans to affiliates (12 U.S.C. 371c),'' in the first sentence.


Sec. 250.162  [Amended]

    3. In Sec. 250.162, paragraph (a) is amended by removing the words 
``Loans to affiliates (12 U.S.C. 371c), purchases'' in the first 
sentence and adding ``Purchases'' in their place.
    4. A new Sec. 250.242 is added to read as follows:


Sec. 250.242  Section 23A of the Federal Reserve Act--definition of 
capital and surplus.

    (a) An insured depository institution's capital stock and surplus 
for purposes of section 23A of the Federal Reserve Act (12 U.S.C. 371c) 
is defined as:
    (1) An institution's Tier 1 and Tier 2 capital included in the 
institution's risk-based capital under the capital guidelines of the 
appropriate Federal banking agency, based on the institution's most 
recent consolidated report of condition filed under 12 U.S.C. 
1817(a)(3); and
    (2) The balance of an institution's allowance for loan and lease 
losses not included in the institution's Tier 2 capital for purposes of 
the calculation of risk-based capital by the appropriate Federal 
banking agency, based on the institution's most recent consolidated 
report of condition filed under 12 U.S.C. 1817(a)(3).
    (b) Definitions. For purposes of this section, the terms 
appropriate Federal banking agency and insured depository institution 
are defined as those terms are defined in section 3 of the Federal 
Deposit Insurance Act, 12 U.S.C. 1813.

    By order of the Board of Governors of the Federal Reserve 
System, November 28, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-29425 Filed 12-1-95; 8:45 am]
BILLING CODE 6210-01-P