[Federal Register Volume 62, Number 61 (Monday, March 31, 1997)]
[Proposed Rules]
[Pages 15297-15300]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7587]



[[Page 15297]]

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FEDERAL RESERVE SYSTEM

12 CFR Part 209

[Regulation I; Docket No. R-0966]


Issue and Cancellation of Federal Reserve Bank Capital Stock

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 is 
proposing to amend its Regulation I regarding the issue and 
cancellation of Federal Reserve Bank Capital Stock in order to reduce 
regulatory burden and simplify and update requirements. This proposal 
to modernize Regulation I is in accordance with the Board's policy of 
regular review of its regulations and the Board's review of its 
regulations pursuant to section 303 of the Riegle Community Development 
and Regulatory Improvement Act of 1994.

DATES: Comments must be received by May 30, 1997.

ADDRESSES: Comments, which should refer to Docket No. R-0966, may be 
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments addressed to Mr. Wiles may also be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and 
to the security control room outside of those hours. Both the mail room 
and the security control room are accessible from the courtyard 
entrance on 20th Street between Constitution Avenue and C Street N.W. 
Comments may be inspected in Room MP-500 between 9:00 a.m. and 5:00 
p.m. weekdays, except as provided in Sec. 261.8 of the Board's Rules 
Regarding the Availability of Information, 12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT: Rick Heyke, Staff Attorney (202/452-
3688), Legal Division, Board of Governors; Elizabeth Tacik, Accountant 
(202/452-2303), Division of Reserve Bank Operations and Payment 
Systems, Board of Governors; or Anthony Scafide, Manager (215/574-
6546), Wholesale Payments Division, Federal Reserve Bank of 
Philadelphia. For the hearing impaired only, Telecommunications Device 
for the Deaf (TDD), Dorothea Thompson (202/452-3544).

SUPPLEMENTARY INFORMATION:

Background

    As part of its policy of regular review of its regulations, and 
consistent with section 303 of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (Riegle Act), the Board of Governors 
of the Federal Reserve System (Board) is proposing to amend its 
Regulation I regarding issue and cancellation of Federal Reserve Bank 
capital stock (12 CFR part 209). Section 303 of the Riegle Act requires 
each federal banking agency to review and streamline its regulations 
and written policies to improve efficiency, reduce unnecessary costs, 
and remove inconsistencies and outmoded and duplicative requirements. 
The proposed amendments are designed to reduce regulatory burden and 
simplify and update the Regulation.
    The principal amendments being proposed are described below. In 
general, the amendments simplify, modernize, and condense the 
Regulation, and reflect the replacement of share certificates by a 
book-entry system. The amendments also codify Board and staff 
interpretations. Finally, the amendments delete the many references to 
specific forms. Many of these references are incorrect because the 
forms no longer exist or no longer have the same identification 
numbers.

Banks Desiring To Become Member Banks

    Proposed Sec. 209.2 combines and condenses existing Secs. 209.1 and 
209.2 regarding national and state bank applications. Existing 
Sec. 209.1 also specifies the amount of Reserve Bank stock for which 
national banks should apply, but the proposal combines all references 
to amount in proposed Sec. 209.4 and deletes repetitive explanations. 
Proposed Sec. 209.2 also includes a subsection (c) that will specify 
the Reserve Bank of which a bank may become a member and that is the 
subject of a separate request for comment. See 62 FR 11117.

Cessation of Membership

    Proposed Sec. 209.3 combines and simplifies existing Secs. 209.5(b) 
(merger of a member bank into a state nonmember bank), 209.6 
(conversion of a national bank into a state nonmember bank), 209.7 
(insolvency), 209.8 (voluntary liquidation), 209.9(b) (national bank in 
the hands of a conservator to be liquidated), 209.10 (closed state 
member banks not in liquidation), 209.11 (voluntary withdrawal from 
membership by state bank), and 209.12 (involuntary termination of state 
bank membership).
    The Regulation previously distinguished between insolvency and 
voluntary liquidation (where the bank or receiver was required to file 
for cancellation of Reserve Bank stock within three months), other 
cessation of business by state member banks (where failure by the bank 
to file for cancellation within 60 days commenced a process whereby the 
Board might order termination of membership), and other cases such as 
voluntary withdrawal, merger into a nonmember bank, or conversion of a 
national bank into a nonmember state bank (where the regulation imposed 
no specific timing requirement for filing an application for 
cancellation of Reserve Bank stock). Proposed 209.3(a) provides instead 
that all such banks (or receivers) shall file promptly for cancellation 
of Reserve Bank stock, failing which the Board may order the membership 
of the bank terminated under 209.3(b).
    Section 6(2) of the Act (12 U.S.C. 288) provides that the 
Comptroller of the Currency may appoint a receiver for a national bank 
that has discontinued banking operations for 60 days but has not gone 
into liquidation, if the Comptroller deems it advisable. The existing 
regulation includes in Sec. 209.9(a) a provision for the appropriate 
Reserve Bank to notify the Office of the Comptroller of the Currency in 
the event a national bank has ceased business for 60 days but has not 
gone into liquidation, together with a statement of reasons why a 
receiver should be appointed. The proposal omits this provision. The 
appropriate procedures for communication among the Board, the Reserve 
Bank, and the Comptroller's office in such a case would depend on the 
facts and circumstances of the particular case.

Amounts and Payments

    Proposed Sec. 209.4(a) combines in one section the requirement for 
amount of total subscription for Reserve Bank stock (other than for a 
mutual savings bank) on becoming a member or on a change in capital 
stock and surplus. The Federal Reserve Act (the Act) requires member 
banks (other than mutual savings banks) to subscribe for Reserve Bank 
capital stock in an amount equal to 6 percent of their capital stock 
and surplus. Member banks are required to pay in half this amount and 
half is subject to call by the Reserve Bank.
    Proposed Sec. 209.4(b) defines member bank capital stock and 
surplus as capital stock and paid-in surplus. Retained earnings 
continue to be generally excluded from this definition, thereby 
minimizing member banks' adjustments in their Reserve Bank stock 
holdings. The Federal Reserve System experienced approximately 1500 
adjustments in Reserve Bank capital stock as a result of changes in 
member bank capital stock and surplus in 1992.

[[Page 15298]]

The Board estimates that this number would increase substantially if it 
were necessary to adjust for changes in retained earnings of member 
banks. Although retained earnings are generally excluded from the 
definition, the regulation incorporates previous guidance requiring a 
deficit in retained earnings to be subtracted from capital stock and 
surplus unless the deficit is relatively small and the appropriate 
Reserve Bank is satisfied that it will be extinguished by accumulation 
of earnings or formal reduction of surplus, in which case the 
adjustment of Reserve Bank stock may be deferred until the end of the 
quarter in which the deficit arises.
    Section 5 of the Act provides that Federal Reserve Bank stock shall 
be adjusted from time to time as member banks increase or decrease 
capital stock and surplus. The Act does not specify whether this 
adjustment must be done immediately or can be done periodically after a 
number of changes in a member bank's capital stock and surplus have 
occurred or when such changes become in the aggregate significant. 
There is a burden associated with adjusting banks' Reserve Stock 
positions to reflect small changes in the banks' capital accounts. The 
Board seeks comment on how frequently, or after how much cumulative 
dollar or percentage change, member banks should be required to adjust 
their Reserve Bank capital stock holdings.
    Proposed Sec. 209.4(c) is a condensed version of existing 
Sec. 209.4 specifying that mutual savings banks are required to 
subscribe for Reserve Bank stock in an amount equal to 0.6 percent of 
total deposits rather than 6 percent of capital and surplus. Mutual 
savings banks not permitted to hold Reserve Bank stock are required to 
maintain a deposit at the Reserve Bank in the same amount pending a 
change in state law to permit purchase of the stock.
    Proposed Secs. 209.4 (d) and (e) specify that transactions in 
Reserve Bank capital stock between member banks and the Reserve Bank 
take place at the subscription price plus accrued dividends at the rate 
of one-half of one percent per month (provided that the total price 
paid on redemption of Reserve Bank stock does not exceed the book value 
of such stock). Under section 5 of the Act (12 U.S.C. 287), banks 
applying for Reserve Bank capital stock are required to pay the 
subscription price plus accrued dividends for such stock. Under 
sections 5, 6, and 9(10) of the Act (12 U.S.C. 287, 288 and 328), 
Reserve Banks redeeming their capital stock from member banks which are 
in voluntary liquidation or which have been declared insolvent and for 
which a receiver has been appointed, or from state member banks on 
voluntary withdrawal from or involuntary termination of membership, are 
required to pay a price equal to the cash subscription price originally 
paid plus accrued dividends, but may not pay a price exceeding the book 
value of the Reserve Bank stock. The Act is silent on whether accrued 
dividends are payable by Reserve Banks in other cases such as merger 
into nonmember banks. In cases where the Act requires accrued 
dividends, it specifies that they shall accrue at one-half percent per 
completed month but is silent on whether dividends should be prorated 
to accrue within a month.
    In practice, Reserve Banks have included accrued dividends in both 
purchases and redemptions, including intra-month accrued dividends, and 
the proposal applies the concept of accrued dividends to all 
transactions in Reserve Bank capital stock.1 The proposal also 
continues the Board's practice of accruing dividends within a month.
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    \1\ Under sections 6 and 9(10) of the Act, the Board is under no 
obligation to pay unearned accrued dividends on redemption of 
Reserve Bank capital stock from insolvent member banks for which a 
receiver has been appointed or from state member banks on voluntary 
withdrawal from or involuntary termination of membership. See, e.g., 
Board Interpretation of April 17, 1925, X-4322, and related note, 
published in Federal Reserve Regulatory Service at 3-500.
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    The Board seeks comment on the appropriate method of computing 
accrued dividends. Generally the Reserve Banks have accrued intra-month 
dividends on the basis of the actual number of days elapsed within a 
month divided by the number of actual days in the month. This method 
results in different daily accruals depending on the number of days in 
the month for which intra-month accrued dividends are calculated. The 
Board requests comment on whether adopting another method, such as use 
of a standard 30-day month, would simplify the computation.
    Proposed Sec. 209.4(e)(2) specifies that in the case of any 
cancellation of Reserve Bank stock under Regulation I, the Reserve Bank 
may first apply the proceeds to any liability of the member bank to the 
Reserve Bank, and pay over the remainder to the bank or receiver as 
appropriate. This replaces a similar requirement in existing 
Sec. 209.5(b), and clarifies that the principle may apply to partial as 
well as total cancellations.

The Share Register

    Proposed Sec. 209.5 revises the share register provision of the 
Regulation to reflect the modern book-entry and electronic records 
systems the Reserve Banks have implemented. This change permits 
eliminating the numerous and confusing provisions of the existing 
Regulation that deal with the circumstances under which share 
certificates may be retained or must be submitted for reissue. For 
example, existing Sec. 209.13(a) requires a member bank to surrender 
its certificate in the event of a change in name for the Reserve Bank 
to issue a new certificate in the new name. Existing Sec. 209.5(a) 
includes a lengthy footnote explaining the difference between transfer 
of Reserve Bank stock certificates by purchase and by operation of law, 
because a new certificate is not required in the case of transfer by 
operation of law. Under the proposal, the Reserve Bank in each case 
need merely change the name of the stockholder in its records.

Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601-612) 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 action by the agency is being considered and a statement of 
the objectives of, and legal basis for, the proposed rule--are 
contained in ``Background'' above. The proposed rules do not overlap 
with other federal rules.
    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 proposal will 
apply to all member banks regardless of size.
    The amendments are burden-reducing. Therefore, the Board believes 
that the amendments will not have a significant adverse economic impact 
on a substantial number of small entities.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act notice of 1995 (44 
U.S.C. Ch. 3506; 5 CFR Part 1320, Appendix A.1), the Board has reviewed 
the rule under the authority delegated to the Board by the Office of 
Management and Budget. No collections of information pursuant to the 
Paperwork Reduction Act are contained in the proposed rule.

List of Subjects in 12 CFR Part 209

    Banks and banking, Federal Reserve System, Reporting and 
recordkeeping requirements, Securities.

[[Page 15299]]

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
revise part 209 of chapter II of title 12 to read as follows:

PART 209--ISSUE AND CANCELLATION OF FEDERAL RESERVE BANK CAPITAL 
STOCK (REGULATION I)

Sec.
209.1  Authority, purpose, and scope.
209.2  Banks desiring to become member banks.
209.3  Cessation of membership.
209.4  Amounts and payments.
209.5  The share register.

    Authority: 12 U.S.C. 248, 321-338, 466, 486.

Sec. 209.1  Authority, purpose, and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 248, 321-
338, 466, and 486.
    (b) Purpose. The purpose of this part is to implement the 
provisions of the Federal Reserve Act relating to the issuance and 
cancellation of Federal Reserve Bank stock upon becoming or ceasing to 
be a member bank, or upon changes in the capital and surplus of a 
member bank, of the Federal Reserve System.
    (c) Scope. This part applies to member banks of the Federal Reserve 
System, to national banks in process of organization, and to state 
banks applying for membership. National banks and locally-incorporated 
banks located in United States dependencies and possessions are 
eligible (with the consent of the Board) but not required to apply for 
membership under section 19(h) of the Federal Reserve Act, 12 U.S.C. 
466.1
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    \1\ If such a bank desires to become a member bank under the 
provisions of section 19(h) of the Federal Reserve Act, it should 
communicate with the Federal Reserve Bank with which it desires to 
do business.
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Sec. 209.2  Banks desiring to become member banks.

    (a) Application for stock or deposit. Each national bank in process 
of organization, 2 each nonmember state bank converting into a 
national bank, and each nonmember state bank applying for membership in 
the Federal Reserve System under Regulation H, 12 CFR part 208, shall 
file with the Federal Reserve Bank in whose district it is located an 
application for stock (or deposit in the case of mutual savings banks 
not authorized to purchase Reserve Bank stock 3) in the Reserve 
Bank. The bank shall pay for the stock (or deposit) in accordance with 
Sec. 209.4.
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    \2\ A new national bank organized by the Federal Deposit 
Insurance Corporation under section 11(n) of the Federal Deposit 
Insurance Act (12 U.S.C. 1821(n)) should not apply until in the 
process of issuing stock pursuant to section 11(n)(15) of that act. 
Reserve Bank approval of such an application shall not be effective 
until the issuance of a certificate by the Comptroller of the 
Currency pursuant to section 11(n)(16)of that act.
    \3\ A mutual savings bank not authorized to purchase Federal 
Reserve Bank stock may apply for membership evidenced initially by a 
deposit. [See Sec. 208.4(c) of Regulation H, 12 CFR 208.4(c), and 
Secs. 208.3(a)(2) and 208.3(b) of Regulation H as proposed to be 
amended and published elsewhere in today's Federal Register.] The 
membership of the savings bank shall be terminated if the laws under 
which it is organized are not amended to authorize such purchase at 
the first session of the legislature after its admission, or if it 
fails to purchase such stock within six months after such an 
amendment.
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    (b) Issuance of stock; acceptance of deposit. Upon authorization to 
commence business by the Comptroller of the Currency in the case of a 
national bank in organization or upon approval of conversion by the 
Comptroller of the Currency in the case of a state nonmember bank 
converting to a national bank, and when all applicable requirements 
have been complied with in the case of a state bank approved for 
membership, the Reserve Bank shall issue the appropriate number of 
shares by crediting the bank with the appropriate number of shares on 
its books. In the case of a mutual savings bank not authorized to 
purchase Reserve Bank shares, the Reserve Bank shall accept the deposit 
in place of issuing shares. The bank's membership shall become 
effective on the date of such issuance or acceptance.
    (c) Location of bank. Placeholder for location of bank.


Sec. 209.3  Cessation of membership.

    (a) Application for cancellation. Any bank that desires to withdraw 
from membership in a Federal Reserve Bank, voluntarily liquidates or 
ceases business, is merged or consolidated into a nonmember bank, or is 
involuntarily liquidated by a receiver or conservator or otherwise, 
shall promptly file with its Reserve Bank an application for 
cancellation of all its Reserve Bank stock (or withdrawal of its 
deposit, as the case may be) and payment therefor in accordance with 
Sec. 209.4.
    (b) Involuntary termination of membership. If an application is not 
filed promptly after a cessation of business by a state member bank, a 
vote to place a member bank in voluntary liquidation, or the 
appointment of a receiver for (or a determination to liquidate the bank 
by a conservator of) a member bank, the Board may, after notice and an 
opportunity for hearing where required under Section 9(9) of the 
Federal Reserve Act (12 U.S.C. 327), order the membership of the bank 
terminated and all of its Reserve Bank stock canceled.
    (c) Effective date of cancellation. Cancellation in whole of a 
bank's Reserve Bank capital stock shall be effective, in the case of:
    (1) Voluntary withdrawal from membership by a state bank, as of the 
date of such withdrawal;
    (2) Merger into, consolidation with, or (for a national bank) 
conversion into, a State nonmember bank, as of the effective date of 
the merger, consolidation, or conversion; and
    (3) Involuntary termination of membership, as of the date the Board 
issues the order of termination.
    (d) Merger of member banks. Upon a merger or consolidation of 
member banks, the surviving bank shall instruct the relevant Reserve 
Bank to cancel all the shares previously held by any nonsurviving bank. 
To the extent appropriate, proceeds payable under Sec. 209.4 may be 
applied to purchase additional shares in the name of the surviving 
bank.
    (e) Voluntary withdrawal. Any bank withdrawing voluntarily from 
membership shall give 6 months written notice, and shall not cause the 
withdrawal of more than 25 percent of any Reserve Bank's capital stock 
in any calendar year, without waivers of these requirements from the 
Board of Governors.


Sec. 209.4  Amounts and payments.

    (a) Amount of subscription. The total subscription of a member bank 
(other than a mutual savings bank) shall equal six percent of its 
capital and surplus. Whenever any member bank (other than a mutual 
savings bank) experiences an increase or decrease in capital and 
surplus, it shall file with the appropriate Reserve Bank an application 
for issue or cancellation of Reserve Bank capital stock in order to 
adjust its Reserve Bank capital stock subscription to equal six percent 
of the member bank's capital and surplus.
    (b) Capital Stock and Surplus defined. Capital stock and surplus of 
a member bank at the end of a quarter means the paid-up capital stock 
and surplus of the bank, less any deficit in its retained earnings 
account, all as shown on the bank's call report as of the end of the 
quarter. A Reserve Bank may permit a member bank to disregard a 
relatively small deficit in its retained earnings account until the end 
of the quarter in which the deficit arises if the Reserve Bank is 
satisfied that the deficit will be extinguished by accumulation of 
earnings or by a formal reduction of surplus.

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    (c) Mutual savings banks. The total subscription of a member bank 
that is a mutual savings bank shall equal six-tenths of 1 percent of 
its total deposit liabilities as shown on its most recent report of 
condition. Whenever any member bank that is a mutual savings bank 
experiences an increase or decrease in total deposit liabilities as 
shown on its most recent report of condition, it shall file with the 
appropriate Reserve Bank an application for issue or cancellation of 
Reserve Bank capital stock in order to adjust its Reserve Bank capital 
stock subscription to equal six-tenths of one percent of its total 
deposit liabilities. A mutual savings bank that is applying for or has 
a deposit with the appropriate Reserve Bank in lieu of Reserve Bank 
capital stock shall file for acceptance or adjustment of its deposit in 
a like manner.
    (d) Payment for subscriptions. Upon approval by the Reserve Bank of 
an application for capital stock (or for a deposit in lieu thereof), 
the applying bank shall pay the Reserve Bank one-half of the 
subscription amount plus accrued dividends at the rate of one half of 
one percent per month. Upon payment (and in the case of a national 
banks in organization or state nonmember bank converting into a 
national bank, upon authorization or approval by the Comptroller of the 
Currency), the Reserve Bank shall issue the appropriate number of 
shares by crediting the bank with the appropriate number of shares on 
its books. In the case of a mutual savings bank not authorized to 
purchase Reserve Bank stock, the Reserve Bank will accept the deposit 
or addition to the deposit in place of issuing shares. The remaining 
half of the subscription or additional subscription (including 
subscriptions for deposits or additions to deposits) shall be subject 
to call by the Board.
    (e) Payment for cancellations. (1) Upon approval of an application 
for cancellation of Reserve Bank capital stock, the Reserve Bank shall 
reduce the bank's shareholding on the Reserve Bank's books by the 
number of shares required to be canceled and shall pay therefor a sum 
equal to the cash subscription paid on the canceled stock plus accrued 
dividends at the rate of one half of one percent per month, such sum 
not to exceed the book value of the stock. 4
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    \4\  Under sections 6 and 9(10) of the Act, the Board is under 
no obligation to pay unearned accrued dividends on redemption of 
Reserve Bank capital stock from insolvent member banks for which a 
receiver has been appointed or from state member banks on voluntary 
withdrawal from or involuntary termination of membership.
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    (2) In the case of any cancellation of Reserve Bank stock under 
this Part, the Reserve Bank may first apply such sum to any liability 
of the bank to the Reserve Bank and pay over the remainder to the bank 
(or receiver or conservator, as appropriate).


Sec. 209.5  The share register.

    (a) Electronic or written record. A member bank's holding of 
Reserve Bank capital stock shall be represented by one (or at the 
option of the Reserve Bank, more than one) notation on the Reserve 
Bank's books. Such books may be electronic or in writing. Upon any 
issue or cancellation of Reserve Bank capital stock, the Reserve Bank 
shall record the member bank's new share position in its books (or 
eliminate the bank's share position from its books, as the case may 
be).
    (b) Certification. A Reserve Bank may certify on request as to the 
number of shares held by a member bank and purchased before March 28, 
1942, or as to the purchase and cancellation dates and prices of shares 
cancelled, as the case may be.

    By order of the Board of Governors of the Federal Reserve 
System, March 20, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-7587 Filed 3-28-97; 8:45 am]
BILLING CODE 6210-01-P