[Federal Register Volume 66, Number 228 (Tuesday, November 27, 2001)]
[Proposed Rules]
[Pages 59176-59178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29331]


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FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1117]


Risk-Based Capital Guidelines; Supplementary Capital Elements 
(Tier 2 Capital); Deferred Tax Assets

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule with request for comment.

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[[Page 59177]]

SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is proposing to amend its risk-based capital guidelines to clarify that 
deferred tax assets in excess of the allowable amount (disallowed 
deferred tax assets) are included in the items that are deducted from 
tier 1 capital for the purpose of determining the maximum allowable 
amount of tier 2 capital that a banking organization may include in 
qualifying total capital and the maximum allowable amount of term 
subordinated debt and intermediate-term preferred stock that may be 
treated as supplementary capital. The proposed rule would reduce the 
maximum allowable amount of tier 2 capital for institutions that have 
disallowed deferred tax assets, as well as the amount of term 
subordinated debt and intermediate-term preferred stock that those 
institutions could include in supplementary capital. This clarification 
will make the Federal Reserve's capital guidelines consistent with 
those of the Office of the Comptroller of the Currency (OCC), the 
Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift 
Supervision (OTS).

DATES: Comments must be received by December 27, 2001.

ADDRESSES: Comments should refer to Docket No. R-1117 and should be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551, or mailed electronically to 
[email protected]. Comments addressed to Ms. Johnson may 
also be delivered to the Board's mail facility in the West Courtyard 
between 8:45 a.m. and 5:15 p.m., located on 21st Street between 
Constitution Avenue and C Street, NW. Members of the public may inspect 
comments in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. on weekdays pursuant to Sec. 261.12, except as provided in 
Sec. 261.14, of the Board's Rules Regarding Availability of 
Information, 12 CFR 261.12 and 261.14.

FOR FURTHER INFORMATION CONTACT: Barbara Bouchard, Associate Director 
(202/452-3072), or David Adkins, Supervisory Financial Analyst (202/
452-5259), Division of Banking Supervision and Regulation. For users of 
Telecommunications Device for the Deaf (``TDD'') only, contact 202/263-
4869.

SUPPLEMENTARY INFORMATION: Under the Board's risk-based capital 
guidelines, banking organizations must deduct disallowed deferred tax 
assets from tier 1 capital, along with goodwill and certain other 
intangible assets.\1\ As a general rule, the maximum amount of tier 2 
capital that may be included in an organization's qualifying total 
capital is limited to 100 percent of tier 1 capital. In addition, the 
aggregate amount of term subordinated debt (excluding mandatory 
convertible debt) and intermediate-term preferred stock that may be 
treated as supplementary capital is limited to 50 percent of tier 1 
capital. However, for purposes of these two limitations, the Board's 
current guidelines define tier 1 capital as net of goodwill and certain 
other intangible assets but not of disallowed deferred tax assets. This 
treatment is inconsistent with that of the OCC, the FDIC, and the OTS 
(the other federal banking agencies), whose capital guidelines 
specifically require disallowed deferred tax assets to be deducted from 
tier 1 capital in determining these limitations. The Board is proposing 
to amend its risk-based capital guidelines so that, in addition to 
goodwill and certain other intangible assets, disallowed deferred tax 
assets will also be netted out of tier 1 capital for the purpose of 
determining these two limitations. These changes are being proposed in 
order to make the Federal Reserve's risk-based capital guidelines 
consistent with current market practice, and, in keeping with the 
mandate of section 303(a)(1) of the Riegle Community Development and 
Regulatory Improvement Act of 1994, to make the Federal Reserve's risk-
based capital rules consistent with those of the other Federal banking 
agencies.
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    \1\ The amount of deferred tax assets that may be included in a 
banking organization's capital may not exceed the lesser of (i) the 
amount of deferred tax assets that the banking organization is 
expected to realize within one year, or (ii) 10 percent of tier 1 
capital. Amounts in excess of this threshold represent disallowed 
deferred tax assets and must be deducted from a banking 
organization's core capital elements in determining tier 1 capital.
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Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Board has determined that this rule would not have a significant impact 
on a substantial number of small entities in accord with the spirit and 
purposes of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). An 
analysis of recent Call Report data indicates that less than four 
percent of banks with assets of $100 million or less carry disallowed 
deferred tax assets on their balance sheets. In addition, many of these 
banks may already be making the proper deduction of these disallowed 
deferred tax assets from tier 1 capital. Accordingly, a regulatory 
flexibility analysis is not required.

Paperwork Reduction Act

    The Board has determined that this proposed rule does not involve a 
collection of information pursuant to the provisions of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

Solicitation of Comments Regarding the Use of ``Plain Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the 
Board to use ``plain language'' in all proposed and final rules 
published after January 1, 2000. The Board invites comments about how 
to make the rule easier to understand, including answers to the 
following questions:
    (1) Is the material organized in an effective manner? If not, how 
could the material be better organized?
    (2) Are the terms of the proposed rule clearly stated? If not, how 
could the terms be more clearly stated?
    (3) Does the proposed rule contain technical language or jargon 
that is unclear? If not, which language requires clarification?
    (4) Would a different format (with respect to the grouping and 
order of sections and use of headings) make the proposed rule easier to 
understand? If so, what changes to the format would make the proposed 
rule easier to understand?
    (5) Would increasing the number of sections (and making each 
section shorter) clarify the proposed rule? If so, which portions of 
the proposed rule should be changed in this respect?
    (6) What additional changes would make the proposed rule easier to 
understand?

List of Subjects

12 CFR Part 208

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

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.
    For the reasons set forth in the preamble, part 208 and part 225 of 
chapter II of title 12 of the Code of Federal Regulations are proposed 
to be amended as set forth below:

[[Page 59178]]

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. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j), 
1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1835a, 1882, 2901-2907, 
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, 6801, and 6805; 31 U.S.C. 
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

    2. In appendix A to part 208, section II.A.2. is amended by 
revising the first undesignated paragraph following paragraph (v), and 
section II.A.2.d. is amended by revising paragraph (i) to read as 
follows:

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

    II. * * *
    A. * * *
    2. * * *
    (v) * * *

    The maximum amount of Tier 2 capital that may be included in a 
bank's qualifying total capital is limited to 100 percent of Tier 1 
capital (net of goodwill, other intangible assets required to be 
deducted in accordance with section II.B.1.b. of this appendix, and 
deferred tax assets required to be deducted in accordance with 
section II.B.4. of this appendix).

* * * * *

    (d) Subordinated debt and intermediate term preferred stock. (i) 
The aggregate amount of term subordinated debt (excluding mandatory 
convertible debt) and intermediate-term preferred stock that may be 
treated as supplementary capital is limited to 50 percent of Tier 1 
capital (net of goodwill, other intangible assets required to be 
deducted in accordance with section II.B.1.b. of this appendix, and 
deferred tax assets required to be deducted in accordance with 
section II.B.4. of this appendix).

* * * * *

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, 1828(o), 1831i, 1831p-1, 
1843( c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, 
and 3909; 15 U.S.C. 6801 and 6805.

    2. In appendix A to part 225, section II.A.2. is amended by 
revising the first undesignated paragraph following paragraph (v), and 
section II.A.2.d. is amended by revising paragraph (i) to read as 
follows:

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

    II. * * *
    A. * * *
    2. * * *
    (v) * * *

    The maximum amount of Tier 2 capital that may be included in an 
organization's qualifying total capital is limited to 100 percent of 
Tier 1 capital (net of goodwill, other intangible assets required to 
be deducted in accordance with section II.B.1.b. of this appendix, 
and deferred tax assets required to be deducted in accordance with 
section II.B.4. of this appendix).

* * * * *

    (d) Subordinated debt and intermediate term preferred stock. (i) 
The aggregate amount of term subordinated debt (excluding mandatory 
convertible debt) and intermediate-term preferred stock that may be 
treated as supplementary capital is limited to 50 percent of tier 1 
capital (net of goodwill, other intangible assets required to be 
deducted in accordance with section II.B.1.b. of this appendix, and 
deferred tax assets required to be deducted in accordance with 
section II.B.4. of this appendix).

* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, November 19, 2001.
Jennifer J. Johnson,
 Secretary of the Board.
[FR Doc. 01-29331 Filed 11-26-01; 8:45 am]
BILLING CODE 6210-01-P