[Federal Register Volume 61, Number 213 (Friday, November 1, 1996)]
[Rules and Regulations]
[Pages 56404-56407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27691]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-0936]


Bank Holding Companies and Change in Bank Control (Regulation Y)

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interim rule with request for comments.

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SUMMARY: Section 2208 of the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996 amended the Bank Holding Company Act to eliminate 
the requirement that bank holding companies seek Board approval before 
engaging de novo in permissible nonbanking activities listed in 
Regulation Y if the holding company is well-capitalized and meets 
certain other criteria specified in the statute. Section 2208 also 
established an expedited procedure for well-capitalized bank holding 
companies that meet these criteria to obtain Board approval to acquire 
smaller companies that engage in any permissible nonbanking activities 
listed in Regulation Y as well as to engage in nonbanking activities 
that the Board has approved only by order. These changes are effective 
immediately.
    Section 2208 provides that a bank holding company shall be 
considered ``well-capitalized'' if it meets the capital levels required 
by the Board. For purposes of determining the capital levels at which a 
bank holding company shall be considered ``well-capitalized'' under 
section 2208 and Regulation Y, the Board has adopted, as an interim 
rule, risk-based capital thresholds that are the same as the levels set 
for determining that a state member bank is well capitalized under the 
provisions established under section 38 of the Federal Deposit 
Insurance Act, and a modified leverage ratio. Because section 2208 
became effective upon enactment on September 30, 1996, this definition 
is adopted effective immediately on an interim basis. The Board invites 
public comment on the definition of ``well-capitalized,'' including how 
this provision in section 2208 applies to foreign banking 
organizations. The Board will adjust the definition as appropriate in 
light of public comment.

DATES: Interim rule effective October 23, 1996; comments must be 
received by December 2, 1996.

ADDRESSES: Comments should refer to Docket No. R-0936, and may be 
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551. Comments may also be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, and to 
the guard station in the Eccles Building courtyard on 20th Street, NW. 
(between Constitution Avenue and C Street) at any time. Comments 
received will be available for inspection in room MP-500 of the Martin 
Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided 
in section 261.8(a) of the Board's Rules Regarding Availability of 
Information.

FOR FURTHER INFORMATION CONTACT: Scott G. Alvarez, Associate General 
Counsel (202/452-3583), Deborah M. Awai, Senior Attorney (202/452-
3594), Legal Division; Rhoger Pugh, Assistant

[[Page 56405]]

Director (202/728-5883), Norah M. Barger, Manager (202/452-2402), 
Division of Banking Supervision and Regulation, Board of Governors of 
the Federal Reserve System. 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 
Street and Constitution Avenue, NW., Washington, DC.

SUPPLEMENTARY INFORMATION: Section 2208 of the Economic Growth and 
Regulatory Paperwork Reduction Act of 1996 (Pub. L. 104-208, 110 Stat. 
3009) amended section 4 of the Bank Holding Company Act to provide that 
a well-capitalized bank holding company that meets certain criteria is 
no longer required to obtain prior Board approval to engage de novo in 
a nonbanking activity listed in Regulation Y. A bank holding company 
that meets the qualifications in section 2208 is required only to 
notify the Board within 10 business days after the activity has been 
started.1
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    \1\ The other criteria established by section 2208 require that 
1) the lead insured depository institution controlled by the bank 
holding company and insured depository institutions that control at 
least 80 percent of the aggregate total risk-weighted assets of 
insured depository institutions controlled by the holding company be 
well-capitalized; 2) no insured depository institution controlled by 
the holding company be undercapitalized; 3) the bank holding 
company, its lead insured depository institution and insured 
depository institutions representing at least 90 percent of the 
aggregate total risk-weighted assets of insured depository 
institutions controlled by the bank holding company have received at 
least a composite 2 examination rating and a ``satisfactory'' rating 
for management at the most recent examination; 4) no insured 
depository institution controlled by the bank holding company have 
received a composite examination rating of 4 or 5 at the latest 
examination; and 5) no supervisory or enforcement action be pending 
against the bank holding company or any of its insured depository 
institutions.
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    Section 2208 also established an expedited procedure for well-
capitalized bank holding companies that meet the criteria in section 
2208 to obtain Board approval to acquire companies (other than an 
insured depository institution) that engage in any permissible 
nonbanking activities as well as to engage de novo in nonbanking 
activities that the Board has approved only by order.2 Under the 
statutory change, a qualifying bank holding company must provide the 
Board with at least 12 business days advance notice of a proposed 
acquisition or of a proposal to engage in an activity approved only by 
order, and the Board may notify the bank holding company during that 
period that a full application is required.3
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    \2\ In addition to meeting the criteria described in footnote 1, 
an acquisition qualifies under the statute if the acquired assets or 
company represent less than 10 percent of the total risk-weighted 
assets of the acquiring bank holding company and the consideration 
paid for the assets or company does not exceed 15 percent of the 
consolidated Tier 1 capital of the acquiring bank holding company.
    \3\ By the terms of the statutory change, this expedited 
procedure is not available for acquisitions of savings associations 
or other insured depository institutions. Proposals that involve the 
acquisition of a savings association or other insured depository 
institution, or that do not otherwise meet the criteria established 
in section 2208 must receive prior System approval under the 
procedures currently set forth in Regulation Y.
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    To qualify for this exemption and procedure, a bank holding company 
must be well-capitalized. Section 2208 provides that a bank holding 
company is ``well-capitalized'' for purposes of that section if the 
holding company meets the required capital levels for well-capitalized 
bank holding companies established by the Board. The Board's capital 
adequacy guidelines do not currently define a capital level at which a 
bank holding company would be considered to be ``well-capitalized'' for 
any purpose.
    For purposes of section 2208 and the provisions of Regulation Y, 
the Board considers a bank holding company to be ``well-capitalized'' 
if:
    1. The bank holding company, on a consolidated basis, maintains a 
total risk-based capital ratio of 10.0 percent or greater;
    2. The bank holding company, on a consolidated basis, maintains a 
Tier 1 risk-based capital ratio of 6.0 percent or greater.
    3. The bank holding company, on a consolidated basis, maintains 
either:
    A. A Tier 1 leverage ratio of 4.0 percent or greater, or
    B. If the bank holding company has a composite 1 rating under the 
BOPEC (or comparable) rating system or has implemented the risk-based 
capital measure for market risk, a Tier 1 leverage ratio of 3.0 percent 
or greater; and
    4. The bank holding company is not subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive issued by the Board to meet and maintain a specific capital 
level for any capital measure.
    The risk-based ratios are the risk-based capital levels at which a 
state member bank is deemed to be well-capitalized for purposes of the 
provisions of the Federal Deposit Insurance Act that govern prompt 
corrective action. The Board believes it is desirable for bank holding 
companies also to maintain a minimum base of capital to total assets, 
but recognizes that the leverage ratio can be an inexact measure of 
capital adequacy for many bank holding companies, particularly for 
holding companies that engage in significant nonbanking activities. The 
leverage ratio can be particularly misleading for very large 
organizations that have significant trading portfolios and are 
extensively engaged in fee-generating off-balance sheet activity.
    Accordingly, the Board requires a leverage ratio that is somewhat 
different than the ratio required for a ``well-capitalized'' 
bank.4 Specifically, in order to be deemed well-capitalized for 
purposes of Regulation Y and the modifications to the application 
process, a bank holding company must maintain a minimum Tier 1 leverage 
ratio of 3 percent so long as the organization has a composite 1 BOPEC 
rating or has implemented the risk-based capital market risk measure 
set forth in the Board's capital adequacy guidelines.5 All other 
bank holding companies would be subject to a 4 percent minimum Tier 1 
leverage ratio. In calculating the various capital levels, a bank 
holding company should apply the definition of capital, assets, 
weighted risk assets, Tier 1 capital, leverage, and other capital terms 
as defined currently in the capital adequacy guidelines applicable to 
bank holding companies.6
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    \4\ To be classified as ``well-capitalized,'' a state member 
bank must have a Tier 1 leverage ratio of at least 5 percent, in 
addition to the two risk-based capital ratios described above.
    \5\ The Board's current guidelines for determining that a 
banking organization is ``adequately capitalized'' set the minimum 
level of Tier 1 capital to total assets at 3 percent for 
organizations with a composite 1 BOPEC rating that also meet certain 
other conditions, and at 3 percent plus an additional cushion of 100 
to 200 basis points for all other organizations.
    \6\ Capital Adequacy Guidelines for Bank Holding Companies: 
Risk-based Measure (12 CFR Part 225, Appendix A); and Capital 
Adequacy Guidelines for Bank Holding Companies: Tier 1 Leverage 
Measure (12 CFR Part 225, Appendix D).
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    The changes enacted by section 2208 will reduce regulatory burden 
on well-capitalized bank holding companies that meet the criteria of 
that section by eliminating the current statutory requirement for prior 
approval of proposals to engage de novo in nonbanking activities that 
the Board has approved by regulation, and by establishing a streamlined 
prior notice requirement for these companies to obtain approval to make 
small acquisitions of companies engaged in permissible nonbanking 
activities and to engage de novo in activities permitted by order. 
Because the provisions of section 2208 became effective on the date of 
enactment, which was September 30, 1996, and because the change to 
Regulation Y would establish a definition that is needed to identify

[[Page 56406]]

bank holding companies that qualify for the regulatory relief contained 
in section 2208, the Board believes that there is good cause for 
adopting its definition of a ``well-capitalized'' bank holding company 
on an interim basis effective immediately.
    The Board invites public comment on the definition of ``well-
capitalized,'' including how this provision in section 2208 applies to 
foreign banking organizations. The Board will adjust the definition as 
appropriate in light of public comment.

Regulatory Flexibility Act Analysis

    Pursuant to the Regulatory Flexibility Act, the Board is required 
to conduct an analysis of the effect, on small institutions, of the 
proposed revision to Regulation Y. As of December 31, 1995, the number 
of bank holding companies totalled 5,274.7 The following chart 
provides a distribution, based on asset size, for those companies.
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    \7\ Financial top-tier domestic bank holding companies. Excludes 
middle-tier bank holding companies, and foreign bank holding 
companies that are not required to file a Y-9 report with the 
Federal Reserve System.

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                                                              Percent of
                                                 Number of       bank   
                                                    bank       holding  
        Asset size category (M=Million)           holding      company  
                                                 companies      assets  
                                                              (percent) 
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Less than $150M...............................        3,954      \1\ 5.5
Greater than $150M............................        1,320        94.5 
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\1\ Bank holding companies with consolidated assets of less than $150   
  million are not required to file financial regulatory reports on a    
  consolidated basis. Assets for this group are estimated based on      
  reports filed by the parent companies and subsidiaries.               

    The Board does not believe that the interim rule would have a 
significant adverse economic impact on a substantial number of small 
entities. The rule would reduce regulatory burdens imposed by the 
Board's procedures on well-capitalized bank holding companies by 
eliminating or streamlining the notice requirements under section 4 of 
the Bank Holding Company Act. Elimination or streamlining of these 
procedures for well-capitalized bank holding companies is expected to 
have a particular benefit to small bank holding companies that qualify 
for this exemption by reducing the paperwork burden and processing time 
associated with regulatory filings, and the costs associated with 
complying with regulation. This will improve the ability of all bank 
holding companies, including small organizations, to conduct business 
on a more cost-efficient basis. The Board invites public comment on 
this subject.

Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Ch. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the interim rule 
under the authority delegated to the Board by the Office of Management 
and Budget. Comments on the collections of information should be sent 
to the Office of Management and Budget, Paperwork Reduction Project 
(7100-00171, 7100-0121, 7100-0134, 7100-0131, 7100-0119, as applicable; 
see below), Washington, DC 20503, with copies of such comments to be 
sent to Mary M. McLaughlin, Federal Reserve Board Clearance Officer, 
Division of Research and Statistics, Mail Stop 97, Board of Governors 
of the Federal Reserve System, Washington, DC 20551.
    This interim rule will eliminate one information collection 
requirement and substantially reduce another for any bank holding 
company that meets the proposed definition of a well-capitalized bank 
holding company and the other statutory requirements. The affected 
information requirements are found in 12 CFR 225.23 and 12 CFR 225.24. 
This information is required to evidence compliance with the 
requirements of the Bank Holding Company Act. The respondents are for-
profit financial institutions and other corporations, including small 
businesses, and individuals. The Federal Reserve may not conduct or 
sponsor, and an organization is not required to respond to, these 
information collections unless it displays a currently valid OMB 
control number. The OMB control numbers are indicated below.
    The Board believes the interim rule will result in a reduction in 
burden by defining when a bank holding company is ``well-capitalized'' 
and, consequently, qualifies for the new statutory exemption from or 
streamlined notice procedures for obtaining prior approval for 
nonbanking proposals under section 4 of the Bank Holding Company Act.
    Bank holding companies that qualify for the exemption from the 
prior approval requirement to engage de novo in permissible nonbanking 
activities and for the streamlined procedure for obtaining approval for 
proposals to acquire small nonbanking companies should benefit from a 
significant reduction in burden for respondents that file the 
Application for Prior Approval To Engage Directly or Indirectly in 
Certain Nonbanking Activities (FR Y-4; OMB No. 7100-0121). 
Approximately 360 respondents file the FR Y-4 annually to meet 
application requirements, and 114 respondents file to meet notification 
requirements. The current burden per response is 59.0 hours and 1.5 
hours, respectively, for a total estimated annual burden of 21,529 
hours. Under the proposed rule it is estimated that between 30 and 50 
percent of these respondents would meet the criteria to qualify either 
for elimination or for the filing of a streamlined application, 
representing between 109 and 181 applications and between 34 and 57 
notifications. The average number of hours per response for the 
required post-consummation notice is 0.5 hours and for the required 
streamlined notice is 1.5 hours. Therefore the total amount of annual 
burden is estimated to be between 11,121.5 and 15,261.5 hours. Based on 
an hourly cost of $50, the annual cost to the public under the proposed 
revision is estimated to be between $556,075 and $763,075, which 
represents an estimated cost reduction of between $313,375 and $520,375 
from the current estimated annual cost to the public of $1,076,450 
under the current rule.
    All information contained in these collections of information are 
available to the public unless the respondent can substantiate that 
disclosure of certain information would result in substantial 
competitive harm or an unwarranted invasion of personal privacy or 
would otherwise qualify for an exemption under the Freedom of 
Information Act.
    Comments are invited on: a. whether the proposed collections of 
information are necessary for the proper performance of the Federal 
Reserve's functions, including whether the information has practical 
utility; b. the accuracy of the Federal Reserve's estimate of the 
burden of the proposed information collections, including the cost of 
compliance; c. ways to enhance the quality, utility, and clarity of the 
information to be collected; and d. ways to minimize the burden of 
information collection on respondents, including through the use of 
automated collection techniques or other forms of information 
technology.

List of Subjects in 12 CFR Part 225

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

    For the reasons set out in the preamble, the Board amends 12 CFR 
Part 225 as follows:

[[Page 56407]]

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 Sec. 225.2, paragraph (q) is added to read as follows:


Sec. 225.2  Definitions.

* * * * *
    (q) Well-capitalized--(1) Bank holding company. In the case of a 
bank holding company, well-capitalized means that:
    (i) On a consolidated basis, the bank holding company maintains a 
total risk-based capital ratio of 10.0 percent or greater, as defined 
in Appendix A of this part;
    (ii) On a consolidated basis, the bank holding company maintains a 
Tier 1 risk-based capital ratio of 6.0 percent or greater, as defined 
in Appendix A of this part;
    (iii) On a consolidated basis, the bank holding company maintains 
either:
    (A) A Tier 1 leverage ratio of 4.0 percent or greater; or
    (B) If the bank holding company has a composite 1 rating under the 
BOPEC (or comparable) rating system or has implemented the risk-based 
capital measure for market risk, a Tier 1 leverage ratio of 3.0 percent 
or greater; and
    (iv) The bank holding company is not subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive issued by the Board to meet and maintain a specific capital 
level for any capital measure.
    (2) Insured depository institution. In the case of an insured 
depository institution, well-capitalized means that the institution 
maintains at least the capital levels required to be well-capitalized 
under the capital adequacy regulations or guidelines applicable to the 
institution that have been adopted by the appropriate federal banking 
agency for the institution under section 38 of the Federal Deposit 
Insurance Act.

    By order of the Board of Governors of the Federal Reserve 
System, October 23, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-27691 Filed 10-31-96; 8:45 am]
BILLING CODE 6210-01-P