[Federal Register Volume 70, Number 46 (Thursday, March 10, 2005)]
[Rules and Regulations]
[Pages 11827-11838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-4690]



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  Federal Register / Vol. 70, No. 46 / Thursday, March 10, 2005 / Rules 
and Regulations  

[[Page 11827]]



FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1193]


Risk-Based Capital Standards: Trust Preferred Securities and the 
Definition of Capital

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 capital standards for bank holding companies 
to allow the continued inclusion of outstanding and prospective 
issuances of trust preferred securities in the tier 1 capital of bank 
holding companies, subject to stricter quantitative limits and 
qualitative standards. The Board also is revising the quantitative 
limits applied to the aggregate amount of cumulative perpetual 
preferred stock, trust preferred securities, and minority interests in 
the equity accounts of most consolidated subsidiaries (collectively, 
restricted core capital elements) included in the tier 1 capital of 
bank holding companies. The new quantitative limits become effective 
after a five-year transition period. In addition, the Board is revising 
the qualitative standards for capital instruments included in 
regulatory capital consistent with longstanding Board policies. The 
Board is adopting this final rule to address supervisory concerns, 
competitive equity considerations, and changes in generally accepted 
accounting principles and to strengthen the definition of regulatory 
capital for bank holding companies.

EFFECTIVE DATE: This final rule is effective on April 11, 2005. The 
Board will not object if a banking organization wishes to apply the 
provisions of this final rule beginning on the date it is published in 
the Federal Register.

FOR FURTHER INFORMATION CONTACT: Norah Barger, Associate Director (202/
452-2402 or [email protected]), Mary Frances Monroe, Manager (202/
452-5231 or [email protected]), John F. Connolly, Senior 
Supervisory Financial Analyst (202/452-3621 or 
[email protected]), Division of Banking Supervision and 
Regulation, or Mark E. Van Der Weide, Senior Counsel (202/452-2263 or 
[email protected]), Legal Division. For users of 
Telecommunications Device for the Deaf (``TDD'') only, contact 202/263-
4869.

SUPPLEMENTARY INFORMATION:

Background

Trust Preferred Securities and Other Tier 1 Capital Components

    The Board's risk-based capital guidelines for bank holding 
companies (BHCs), which are based on the 1988 Basel Accord, as well as 
the leverage capital guidelines for BHCs, allow BHCs to include in 
their tier 1 capital the following items that are defined as core (or 
tier 1) capital elements: common stockholders' equity; qualifying 
noncumulative perpetual preferred stock (including related surplus); 
qualifying cumulative perpetual preferred stock (including related 
surplus); and minority interest in the equity accounts of consolidated 
subsidiaries. Since 1989, qualifying cumulative perpetual preferred 
securities have been limited to 25 percent of a BHC's core capital 
elements. Tier 1 capital generally is defined as the sum of core 
capital elements less deductions for all, or a portion of, goodwill, 
other intangible assets, credit-enhancing interest-only strips 
receivable, deferred tax assets, non-financial equity investments, and 
certain other items required to be deducted in computing tier 1 
capital.
    The Board's capital guidelines allow minority interest in the 
equity accounts of consolidated subsidiaries of a BHC to be included in 
the BHC's tier 1 capital because such minority interest represents 
capital support from third-party investors for a subsidiary controlled 
by a BHC and consolidated on its balance sheet. Nonetheless, minority 
interest does not constitute equity on the BHC's consolidated balance 
sheet because minority interest typically is available to absorb losses 
only within the subsidiary that issues it and is not generally 
available to absorb losses in the broader consolidated banking 
organization. Under the Board's existing capital rule, minority 
interest is not subject to a specific numeric sub-limit within tier 1 
capital, although the includable amount of minority interest is 
restricted by the rule's directive that voting common stock generally 
should be the dominant form of tier 1 capital. Minority interest in the 
form of cumulative preferred stock, however, generally has been subject 
to the same 25 percent sub-limit as qualifying cumulative preferred 
stock issued directly by a BHC.
    In 1996, the Board explicitly approved the inclusion in BHCs' tier 
1 capital of minority interest in the form of trust preferred 
securities for most of the same reasons that the Board proposed in its 
May 2004 proposed rule to allow the continued inclusion of trust 
preferred securities in BHCs' tier 1 capital. In particular, two key 
features of trust preferred securities--their long lives approaching 
economic perpetuity and their dividend deferral rights (allowing 
deferral for 20 consecutive quarters) approaching economically 
indefinite deferral--are features that provide substantial capital 
support.
    Trust preferred securities are undated cumulative preferred 
securities issued out of a special purpose entity (SPE), usually in the 
form of a trust, in which a BHC owns all of the common securities. The 
SPE's sole asset is a deeply subordinated note issued by the BHC. The 
subordinated note, which is senior only to a BHC's common and preferred 
stock, has terms that generally mirror those of the trust preferred 
securities, except that the junior subordinated note has a fixed 
maturity of at least 30 years. The terms of the trust preferred 
securities allow dividends to be deferred for at least a twenty-
consecutive-quarter period without creating an event of default or 
acceleration. After the deferral of dividends for this twenty-quarter 
period, if the BHC fails to pay the cumulative dividend amount owed to 
investors, an event of default and acceleration occurs, giving 
investors the right to take hold of the subordinated note issued by the 
BHC. At the same time, the BHC's obligation to pay principal and 
interest on the underlying junior subordinated note accelerates and the 
note becomes immediately due and

[[Page 11828]]

payable. A key advantage of trust preferred securities to BHCs is that 
for tax purposes the dividends paid on trust preferred securities, 
unlike those paid on directly issued preferred stock, are a tax 
deductible interest expense. The Internal Revenue Service ignores the 
trust and focuses on the interest payments on the underlying 
subordinated note. Because trust preferred securities are cumulative, 
they have been limited since their inclusion in tier 1 capital in 1996, 
together with a BHC's directly issued cumulative perpetual preferred 
stock, to no more than 25 percent of a BHC's core capital elements.
    In 2000, the first pooled issuance of trust preferred securities 
came to market. Pooled issuances generally constitute the issuance of 
trust preferred securities by a number of BHCs to a pooling entity that 
issues to the market asset-backed securities representing interests in 
the BHCs' pooled trust preferred securities. Such pooling arrangements, 
which have become increasingly popular and typically involve thirty or 
more separate BHC issuers, have made the issuance of trust preferred 
securities possible for even very small BHCs, most of which had not 
previously enjoyed capital market access for raising tier 1 capital.

Asset-Driven Preferred Securities

    In addition to issuing trust preferred securities, banking 
organizations have also issued asset-driven securities, particularly 
real estate investment trust (REIT) preferred securities. REIT 
preferred securities generally are issued by SPE subsidiaries of a bank 
that qualify as REITs for tax purposes. In most cases the REIT issues 
noncumulative perpetual preferred securities to the market and uses the 
proceeds to buy mortgage-related assets from its sole common 
shareholder, its parent bank. By qualifying as a REIT under the tax 
code, the SPE's income is not subject to tax at the entity level, but 
is taxable only as income to the REIT's investors upon distribution. 
Two key qualifying criteria for REITs are that REITs must hold 
predominantly real estate assets and must pay out annually a 
substantial portion of their income to investors. To avoid the 
situation where preferred stock investors in a REIT subsidiary of a 
failing bank are effectively over-collateralized by high quality 
mortgage assets of the parent bank, the Federal banking agencies have 
required REIT preferred securities to have an exchange provision to 
qualify for inclusion in tier 1 capital. The exchange provision 
provides that upon the occurrence of certain events, such as the parent 
bank becoming undercapitalized or being placed into receivership, the 
noncumulative REIT preferred securities will be exchanged either 
automatically or upon the directive of the parent bank's primary 
Federal supervisor for directly issued noncumulative perpetual 
preferred securities of the parent bank. In the absence of the exchange 
provision, the REIT preferred securities would provide little support 
to a deteriorating or failing parent bank or to the FDIC, despite 
possibly comprising a substantial amount of the parent bank's tier 1 
capital (in the form of minority interest).
    While some banking organizations have issued a limited amount of 
REIT preferred and other asset-driven securities, most BHCs prefer to 
issue trust preferred securities because they are relatively simple and 
standard instruments, do not tie up liquid assets, are easier and more 
cost-efficient to issue and manage, and are more transparent and better 
understood by the market. Also, BHCs generally prefer to issue trust 
preferred securities at the holding company level rather than REIT 
preferred securities at the bank level because it gives them greater 
flexibility in using the proceeds of such issuances.

Revised GAAP Accounting for Trust Preferred Securities

    Prior to the Board's issuance of its proposed rule last May, the 
Financial Accounting Standards Board (FASB) revised the accounting 
treatment of trust preferred securities through the issuance in January 
2003 of FASB Interpretation No. 46, Consolidation of Variable Interest 
Entities (FIN 46). Since then the accounting industry and BHCs have 
dealt with the application of FIN 46 to the consolidation by BHC 
sponsors of trusts issuing trust preferred securities. In late December 
2003, when FASB issued a revised version of FIN 46 (FIN 46R), the 
accounting authorities generally concluded that such trusts must be 
deconsolidated from their BHC sponsors' financial statements under 
GAAP. The result is that, for GAAP accounting purposes, trust preferred 
securities generally continue to be accounted for as equity at the 
level of the trust that issues them, but the instruments may no longer 
be treated as minority interest in the equity accounts of a 
consolidated subsidiary on a BHC's consolidated balance sheet. Instead, 
under FIN 46 and FIN 46R, a BHC must reflect on its consolidated 
balance sheet the deeply subordinated note the BHC issued to the 
deconsolidated SPE.
    A change in the GAAP accounting for a capital instrument does not 
necessarily change the regulatory capital treatment of that instrument. 
Although GAAP informs the definition of regulatory capital, the Board 
is not bound to use GAAP accounting concepts in its definition of tier 
1 or tier 2 capital because regulatory capital requirements are 
regulatory constructs designed to ensure the safety and soundness of 
banking organizations, not accounting designations established to 
ensure the transparency of financial statements. In this regard, the 
definition of tier 1 capital since the Board adopted its risk-based 
capital rule in 1989 has differed from GAAP equity in a number of ways. 
The Board has determined that these differences are consistent with its 
responsibility for ensuring the soundness of the capital bases of 
banking organizations under its supervision. These differences are not 
differences between regulatory reporting and GAAP accounting 
requirements, but rather are differences only between the definition of 
equity for purposes of GAAP and the definition of tier 1 capital for 
purposes of the Board's regulatory capital requirements for banking 
organizations.
    Nevertheless, consistent with longstanding Board direction, BHCs 
are required to follow GAAP for regulatory reporting purposes. Thus, 
BHCs should, for both accounting and regulatory reporting purposes, 
determine the appropriate application of GAAP (including FIN 46 and FIN 
46R) to their trusts issuing trust preferred securities. Accordingly, 
there should be no substantive difference in the treatment of trust 
preferred securities issued by such trusts, or the underlying junior 
subordinated debt, for purposes of regulatory reporting and GAAP 
accounting.

Proposed Rule

    In May 2004, the Board issued a proposed rule, Risk-Based Capital 
Standards: Trust Preferred Securities and the Definition of Capital (69 
FR 28851, May 19, 2004). Under the proposal, BHCs would be allowed 
explicitly to include outstanding and prospective issuances of trust 
preferred securities in their tier 1 capital.
    The Board, however, also proposed subjecting these instruments and 
other restricted core capital elements to tighter quantitative limits 
within tier 1 and more stringent qualitative standards. The proposed 
rule defined other restricted core capital elements to include 
qualifying cumulative perpetual preferred stock (including related 
surplus) and minority interest other than in the form of common equity 
or noncumulative perpetual preferred stock directly issued by a U.S.

[[Page 11829]]

depository institution or foreign bank subsidiary of a BHC.
    The Board generally proposed limiting restricted core capital 
elements to 25 percent of the sum of core capital elements, net of 
goodwill, for BHCs. However, consistent with the 1998 Sydney Agreement 
of the Basel Committee on Banking Supervision (Sydney Agreement), the 
proposal also stated that internationally active BHCs generally would 
be expected to limit restricted core capital elements to 15 percent of 
the sum of core capital elements, net of goodwill. The proposed rule 
defined internationally active BHCs to include BHCs that have 
significant activity in non-U.S. markets or are candidates for use of 
the Advanced Internal Ratings-Based (AIRB) approach under the revised 
Basel Accord, International Convergence of Capital Measurement and 
Capital Standards (June 2004) (the Mid-year Text). The proposal 
provided an approximately three-year transition period, through March 
31, 2007, before BHCs would be required to comply with the proposed 
revised quantitative limits and qualitative standards.
    The Board also proposed to incorporate explicitly in the rule the 
Board's long-standing policy that the junior subordinated debt 
underlying trust preferred securities generally must meet the criteria 
for qualifying tier 2 subordinated debt set forth in the Board's 1992 
subordinated debt policy statement, 12 CFR 250.166. As a result, trust 
preferred securities qualifying for tier 1 capital would be required to 
have underlying junior subordinated debt that complies with the Board's 
long-standing acceleration and subordination requirements for tier 2 
subordinated debt. Under the proposal, noncompliant junior subordinated 
debt issued before May 31, 2004 would be grandfathered as long as the 
terms of the junior subordinated debt met certain criteria.

Comments Received and Final Rule

    In response to the proposed rule, the Board received thirty-eight 
comments. All commenters but one supported the Board's proposal to 
continue to include outstanding and prospective issuances of trust 
preferred securities in BHCs' tier 1 capital. Many commenters, however, 
had some reservations with other aspects of the proposal. These aspects 
included the deduction of goodwill for purposes of determining 
compliance with the generally applicable 25 percent tier 1 sub-limit on 
restricted core capital elements; the 15 percent restricted core 
capital elements supervisory threshold for internationally active BHCs; 
the length of the transition period; the technical requirements for the 
junior subordinated debt underlying trust preferred securities; the 
grandfathering period for noncompliant issuances of underlying junior 
subordinated debt; other qualitative requirements for trust preferred 
securities eligible for inclusion in tier 1 capital; the treatment of 
restricted core capital elements for purposes of the small BHC policy 
statement; and the explicit inclusion in the proposed rule of the 
Board's longstanding policy to restrict the amount of non-voting equity 
elements included in tier 1 capital. The comments received, as well as 
the Board's discussion and resolution of the issues raised, are 
discussed further below.

Continued Inclusion of Trust Preferred Securities in BHCs' Tier 1 
Capital

    Almost all of the comment letters agreed that the continued 
inclusion of trust preferred securities in the tier 1 capital of BHCs 
was appropriate from financial, economic, and public policy 
perspectives. The commenters encouraged the Board to adopt its proposal 
to continue to include trust preferred securities in BHCs' tier 1 
capital.
    Only the comment letter from the Federal Deposit Insurance 
Corporation opposed the proposal, based primarily on its view that 
instruments that are accounted for as a liability under GAAP should not 
be included in tier 1 capital, a view the Board had previously 
considered before issuance of its proposal. The comment letter also 
argued that trust preferred securities should be excluded from tier 1 
capital because they are not perpetual, have cumulative dividend 
structures, do not allow for the perpetual deferral of dividends, are 
treated as debt by rating agencies, put stress on subsidiary banks to 
pay dividends to BHCs to service trust preferred dividends, and give a 
capital raising preference to banks with BHCs.
    After reconsideration of the issues raised by the FDIC and other 
commenters, the Board has decided to adopt this final rule allowing the 
continued limited inclusion of outstanding and prospective issuances of 
trust preferred securities in BHCs' tier 1 capital. The Board does not 
believe that the change in GAAP accounting for trust preferred 
securities has changed the prudential characteristics that led the 
Board in 1996 to include trust preferred securities in the tier 1 
capital of BHCs. In arriving at this decision, the Board also 
considered its generally positive supervisory experience with trust 
preferred securities, domestic and international competitive equity 
issues, and supervisory concerns with alternative tax-efficient 
instruments.
    A key consideration of the Board has been the ability of trust 
preferred securities to provide financial support to a consolidated BHC 
because of their deep subordination and the ability of the BHC to defer 
dividends for up to 20 consecutive quarters. The Board recognizes that 
trust preferred securities, like other forms of minority interest that 
have been included in banks' and BHCs' tier 1 capital since 1989, are 
not included in GAAP equity and cannot forestall a BHC's insolvency. 
Nevertheless, trust preferred securities are available to absorb losses 
more broadly than most other minority interest in the consolidated 
banking organization because the issuing trust's sole asset is a deeply 
subordinated note of its parent BHC. Thus, if a BHC defers payments on 
its junior subordinated notes underlying the trust preferred 
securities, the BHC can use the cash flow anywhere within the 
consolidated organization. Dividend deferrals on equity issued by the 
typical operating subsidiary, on the other hand, absorb losses and 
preserve cash flow only within the subsidiary; the cash that is freed 
up generally is not available for use elsewhere in the consolidated 
organization.
    As noted, the Board also considered its generally positive 
supervisory experience with trust preferred securities, particularly 
for BHCs that limit their reliance on such securities. The instrument 
has performed much as expected in banking organizations that have 
encountered financial difficulties; in a substantial number of 
instances, BHCs in deteriorating financial condition have deferred 
dividends on trust preferred securities to preserve cash flow. In 
addition, trust preferred securities have proven to be a useful source 
of capital funding for BHCs, which often downstream the proceeds in the 
form of common stock to subsidiary banks, thereby strengthening the 
banks' capital bases. For example, in the months following the events 
of September 11, 2001, a period when the issuance of most other capital 
instruments was extremely difficult, BHCs were able to execute large 
issuances of trust preferred securities to retail investors, 
demonstrating the financial flexibility this instrument offers.
    Trust preferred securities have reduced the cost of tier 1 capital 
for a wide range of BHCs. Approximately 800 BHCs have outstanding over 
$85 billion of trust preferred securities, the popularity of which 
stems in large part

[[Page 11830]]

from their tax-efficiency. Eliminating the ability to include trust 
preferred securities in tier 1 capital would eliminate BHCs' ability to 
benefit from this tax-advantaged source of funds, which would put them 
at a competitive disadvantage to both U.S. and non-U.S. competitors. 
With respect to the latter, the Board is aware that foreign competitors 
have issued as much as $125 billion of similar tax-efficient tier 1 
capital instruments.
    Furthermore, in reviewing existing alternative tax-efficient tier 1 
capital instruments available to BHCs, the Board concluded that in 
several ways trust preferred securities are a superior instrument to 
such alternative capital instruments, such as REIT preferred securities 
and other asset-driven securities, which continue to be included in 
minority interest under FIN 46 and FIN 46R. In this regard, trust 
preferred securities are available to absorb losses throughout the BHC 
and do not affect the BHC's liquidity position. In addition, trust 
preferred securities are relatively simple, standardized, and well-
understood instruments that are widely issued by both corporate and 
banking organizations. Moreover, issuances of trust preferred 
securities tend to be broadly distributed and transparent and, thus, 
easy for the market to track.
    Under this final rule, trust preferred securities will be 
includable in the tier 1 capital of BHCs, but subject to tightened 
quantitative limits for trust preferred securities and a broader range 
of tier 1 capital components defined as restricted core capital 
elements. Specifically, restricted core capital elements are defined to 
include qualifying cumulative perpetual preferred stock (and related 
surplus), minority interest related to qualifying cumulative perpetual 
preferred stock directly issued by a consolidated U.S. depository 
institution or foreign bank subsidiary (Class B minority interest), 
minority interest related to qualifying common or qualifying perpetual 
preferred stock issued by a consolidated subsidiary that is neither a 
U.S. depository institution nor a foreign bank (Class C minority 
interest), and qualifying trust preferred securities.
    Restricted core capital elements includable in the tier 1 capital 
of a BHC are limited to 25 percent of the sum of core capital elements 
(including restricted core capital elements), net of goodwill less any 
associated deferred tax liability, as discussed further below. In 
addition, as amplified below, internationally active BHCs would be 
subject to a further limitation. In particular, the amount of 
restricted core capital elements (other than qualifying mandatory 
convertible preferred securities discussed below) that an 
internationally active BHC may include in tier 1 capital must not 
exceed 15 percent of the sum of core capital elements (including 
restricted core capital elements), net of goodwill less any associated 
deferred tax liability.

Deduction of Goodwill in Computing Tier 1 Limits on Restricted Core 
Capital Elements

    Fifteen comment letters opposed the deduction of goodwill from core 
capital elements in calculating the applicable tier 1 capital sub-limit 
for restricted core capital elements. Commenters noted that goodwill 
represents the going concern value paid by banking organizations in 
acquisitions and mergers and that GAAP, since 2001, has treated 
goodwill as a non-amortizing asset that is reduced annually, if 
appropriate, to reflect impairment. A result of the 2001 accounting 
change is that over the coming years BHCs making acquisitions will 
accrue higher amounts of goodwill as a percentage of assets than they 
have in the past. Some of these commenters argued that this would make 
the proposal's ``net of goodwill'' approach grow increasingly 
burdensome for BHCs making acquisitions and would potentially reduce 
merger and acquisition activity in the banking sector.
    Other commenters indicated that while they concurred with the 
Board's reasons for the goodwill deduction--limiting the extent to 
which BHCs can leverage their tangible equity capital--they believed 
this goal could be achieved through increased supervisory scrutiny, 
particularly at community and smaller regional banking organizations, 
which are subject to less market discipline than larger organizations 
that routinely access the capital markets. Some commenters also stated 
that the proposed rule would have a disproportionately binding impact 
on BHCs that acquire and operate fee-based businesses, including trust 
and custody businesses, because such BHCs typically have higher market-
to-book values and levels of goodwill than other BHCs. A few commenters 
argued that the interplay of the proposed 15 percent of tier 1 capital 
supervisory threshold for internationally active BHCs, coupled with the 
requirement to deduct goodwill in computing compliance with the 
threshold, would significantly constrain the ability of many large U.S. 
banking organizations to raise tier 1 capital effectively and 
competitively.
    In addition, a number of commenters suggested that if the Board 
nonetheless decides to finalize the proposed goodwill deduction, it 
should do so on a basis that nets any associated deferred tax liability 
from the amount of goodwill deducted. The basis for this suggestion is 
that if the value of goodwill is totally eliminated, the deferred tax 
liability associated with the goodwill also would be eliminated. In 
effect, the maximum loss that a BHC would suffer from elimination of 
the value of its goodwill would be the amount represented by its 
goodwill net of any associated deferred tax liability. Netting the 
associated deferred tax liability from the goodwill deducted would be 
consistent with the methodology some rating agencies use in determining 
tangible equity ratios.
    The Board believes that the tier 1 capital sub-limits for 
restricted core capital elements should be keyed more closely than at 
present to BHCs' tangible equity--that is, core capital elements less 
goodwill--and has decided to require the deduction of goodwill as 
proposed. Goodwill generally provides value for a banking organization 
on a going concern basis, but this value declines as the organization 
deteriorates and has little if any value in the event of insolvency or 
bankruptcy. The deduction approach is in line with the current practice 
of most G-10 countries, as well as with the Mid-year Text. Although 
goodwill is also deducted from the sum of a BHC's core capital elements 
in computing its tier 1 capital, the Board does not believe that 
deducting it from the sum of core capital elements for purposes of 
computing the tier 1 sub-limit for restricted core capital elements 
constitutes a double deduction of goodwill. The Board, however, agrees 
it would be appropriate to modify the goodwill deduction by netting 
from the amount of goodwill deducted any associated deferred tax 
liability. Accordingly, the final rule limits restricted core capital 
elements to a percentage of the sum of core capital elements, net of 
goodwill less any associated deferred tax liability.

15 Percent Standard for Internationally Active BHCs

    The proposed rule stated that the Board would generally expect 
internationally active banking organizations to limit the aggregate 
amount of restricted core capital elements included in tier 1 capital 
to 15 percent of the sum of all core capital elements (including 
restricted core capital elements), net of goodwill. The proposal 
defined an internationally active banking organization as one that has 
significant activity in non-U.S.

[[Page 11831]]

markets or that is considered a candidate for the AIRB approach under 
the Mid-year Text. The proposed rule specifically requested comment on 
the definition of an internationally active banking organization.
    The Board had several reasons for proposing a lower quantitative 
standard on the inclusion of restricted core capital elements in the 
tier 1 capital of internationally active banking organizations. First, 
because these BHCs are the largest and most complex U.S. banking 
organizations, it is important for the protection of the financial 
system to ensure the strength of their capital bases. In this regard, 
the 15 percent standard is generally consistent with the current 
expectations of investors and the rating agencies.
    In addition, the G-10 banking supervisors participating in the 
Basel Committee on Banking Supervision agreed in the Sydney Agreement 
to limit the percentage of a banking organization's tier 1 capital that 
is composed of innovative securities, which, as defined, would include 
trust preferred securities, to no more than 15 percent of its tier 1 
capital. Although the Board has informally encouraged internationally 
active BHCs to comply with this standard since 1998, the Board's 
proposal would have formalized its commitment to this standard.
    Eight commenters argued that the 15 percent standard was too 
restrictive, although most agreed that 25 percent would be appropriate. 
A number of commenters argued that there is no need for the lower 
percentage standard for internationally active BHCs because market 
discipline already restrains their issuance of restricted core capital 
elements. Also, these commenters stated that the transparent U.S. 
accounting and disclosure standards remove any material obstacles to 
investors' ability to analyze the capital components and capital 
strength of large U.S. banking organizations. Other commenters argued 
that only BHCs that the Board requires to use the AIRB approach for 
calculating regulatory capital requirements should be subject to the 15 
percent standard and that BHCs that opt-in to the AIRB approach should 
not be subject to the 15 percent standard because such BHCs may have no 
international activities and the lower limit could deter them from 
adopting the advanced risk management approaches necessary to qualify 
for use of the AIRB approach. Some commenters believed, on the 
contrary, that if the 15 percent standard were applied to AIRB BHCs, it 
should be applied to both mandatory and opt-in AIRB BHCs to ensure a 
level playing field. Several commenters stated that if the 15 percent 
standard were extended to all AIRB BHCs, institutions should be allowed 
to permanently grandfather all existing restricted core capital 
elements.
    In light of the comments received, and after further reflection on 
the issues concerned, the Board has decided to apply the 15 percent 
limitation only to internationally active BHCs. For this purpose, an 
internationally active BHC is a BHC that (1) as of its most recent 
year-end FR Y-9C reports has total consolidated assets equal to $250 
billion or more or (2) on a consolidated basis, reports total on-
balance sheet foreign exposure of $10 billion or more on its filings of 
the most recent year-end FFIEC 009 Country Exposure Report. This 
definition closely proxies the definition proposed for mandatory 
advanced AIRB banking organizations in the Advance Notice of Proposed 
Rulemaking to implement the Mid-year Text, which was issued on August 
4, 2003. Thus, the 15 percent limit would not apply to banking 
organizations that opt-in to the AIRB. In arriving at this definition 
of internationally active, the Board took into account the possible 
effects of the proposed application of the 15 percent limitation on the 
capital-raising efforts of moderate-sized BHCs that may opt in to the 
AIRB approach in the future. The Board also has decided to turn the 15 
percent general supervisory expectation into a regulatory limitation to 
ensure the soundness of the capital base of the largest U.S. banking 
organizations and to formalize the application of the Sydney Agreement 
to such banking organizations by regulation. The Board will generally 
expect and strongly encourage opt-in AIRB BHCs to plan for, and come 
into compliance with, the 15 percent limit on restricted core capital 
elements as they approach the criteria for internationally active BHCs. 
The Board intends to set forth the 15 percent tier 1 sub-limit for 
internationally active BHCs, as well as this expectation and 
encouragement for opt-in AIRB BHCs, in its forthcoming notice of 
proposed rulemaking for U.S. implementation of the Basel Mid-year Text.
    Although BHCs that are not internationally active BHCs are not 
required to comply with the 15 percent tier 1 capital sub-limit, these 
BHCs are encouraged to ensure the soundness of their capital bases. The 
Board notes that the quality of their capital components will continue 
to be part of the Federal Reserve's supervisory assessment of capital 
adequacy.
    The Board has also decided to exempt qualifying mandatory 
convertible preferred securities from the 15 percent tier 1 capital 
sub-limit applicable to internationally active BHCs. Accordingly, under 
the final rule, the aggregate amount of restricted core capital 
elements (excluding mandatory convertible preferred securities) that an 
internationally active BHC may include in tier 1 capital must not 
exceed the 15 percent limit applicable to such BHCs, whereas the 
aggregate amount of restricted core capital elements (including 
mandatory convertible preferred securities) that an internationally 
active BHC may include in tier 1 capital must not exceed the 25 percent 
limit applicable to all BHCs.
    Qualifying mandatory convertible preferred securities generally 
consist of the joint issuance by a BHC to investors of trust preferred 
securities and a forward purchase contract, which the investors fully 
collateralize with the securities, that obligates the investors to 
purchase a fixed amount of the BHC's common stock, generally in three 
years. Typically, prior to exercise of the purchase contract in three 
years, the trust preferred securities are remarketed by the initial 
investors to new investors and the cash proceeds are used to satisfy 
the initial investors' obligation to buy the BHC's common stock. The 
common stock replaces the initial trust preferred securities as a 
component of the BHC's tier 1 capital, and the remarketed trust 
preferred securities are excluded from the BHC's regulatory capital.\1\
---------------------------------------------------------------------------

    \1\ The reasons for this exclusion include the fact that the 
terms of the remarketed securities frequently are changed to shorten 
the maturity of the securities and include more debt-like features 
in the securities, thereby no longer meeting the characteristics for 
capital instruments includable in regulatory capital.
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    Allowing internationally active BHCs to include these instruments 
in tier 1 capital above the 15 percent sub-limit (but subject to the 25 
percent sub-limit) is prudential and consistent with safety and 
soundness. These securities provide a source of capital that is 
generally superior to other restricted core capital elements because 
they are effectively replaced by common stock, the highest form of tier 
1 capital, within a few years of issuance. The high quality of these 
instruments is indicated by the rating agencies' assignment of greater 
equity strength to mandatory convertible trust preferred securities 
than to cumulative or noncumulative perpetual preferred stock, even 
though mandatory convertible preferred securities, unlike perpetual 
preferred securities, are not included in GAAP equity until the common 
stock is issued. Nonetheless, organizations wishing to issue such 
instruments are cautioned to have their structure reviewed by the 
Federal Reserve prior to issuance to ensure that

[[Page 11832]]

they do not contain features that detract from its high capital 
quality.

Transition Period

    Sixteen institutions advocated a transition period of at least five 
years, instead of the proposed three-year period. A primary reason 
stated by the commenters was that a significant volume of banking 
organizations' trust preferred securities were issued after March 2002 
with ``no-call'' periods of at least five years (meaning the no-call 
periods expire at various dates after March 2007). BHCs issuing such 
instruments in the first quarter of 2004, for example, could call the 
securities in the first quarter of 2009. These commenters contended 
that a five-year transition period would allow affected BHCs 
substantially more flexibility in managing their compliance with the 
new standards through a combination of redeeming outstanding trust 
preferred securities with expired no-call periods and generating 
capital internally through the retention of earnings. Commenters also 
contended that a five-year transition period would coincide more 
closely with implementation of Basel II.
    The Board has decided, consistent with the comments received, to 
extend the transition period from the end of the first quarter of 2007 
to the end of the first quarter of 2009 to give BHCs more time to 
conform their capital structures to the revised quantitative limits. 
The result of this extension is that the revised quantitative limits 
will become applicable to BHCs' restricted core capital elements for 
reports and capital computations beginning on March 31, 2009, the 
reporting date for the first quarter of 2009.

Non-Voting Instruments Includable in Tier 1 Capital

    Five commenters objected to the Board's reiteration in the proposal 
of its long-standing standard in the current capital guidelines that 
voting common stock should be the dominant form of a BHC's tier 1 
capital. These commenters further objected to the proposed 
incorporation into the capital guidelines of the Board's longstanding 
written policy that excess amounts of non-voting tier 1 elements 
generally will be reallocated to BHCs' tier 2 capital. Concerns were 
expressed that this treatment could result in the exclusion from tier 1 
capital of noncumulative perpetual preferred stock and non-voting 
common stock, even though these elements are included in GAAP equity 
and can fully absorb losses of the issuing BHC.
    Several commenters indicated that investments in noncumulative 
perpetual preferred stock and non-voting common stock are often made by 
government-sponsored enterprises and large BHCs seeking to make 
community development investments in small banking organizations. These 
commenters noted that the non-voting feature is necessary to achieve 
the dual public goals of ensuring that such small community-focused 
banking organizations have adequate capital to enable them to continue 
making community development loans, while maintaining their control 
structures. Preservation of control is also needed for qualification 
under various legislative and regulatory programs designed for 
community development. In addition, commenters noted that, because of 
other legal and business factors, the investing government-sponsored 
enterprises and large BHCs want to avoid acquiring control of these 
small, community-focused BHCs.
    The reasoning behind the Board's current and proposed standards on 
the inclusion of non-voting elements in tier 1 capital, which have been 
in place since 1989 and continue to be appropriate, is that individuals 
having voting control over a BHC's chosen business strategies should 
have a substantial financial stake at risk from the success or failure 
of the BHC's activities. Supervisory experience over the years has 
shown that the absence of such an equity stake by those controlling a 
BHC's strategies and activities can give such owners an incentive for 
the BHC to pursue high-risk business strategies. Such behavior creates 
a moral hazard problem for the deposit insurance fund and the public 
because, while the banking organization may become profitable if the 
strategy succeeds, the deposit insurance fund and the public are left 
to deal with a failed banking organization if the strategy fails.
    The Board has decided, as proposed, to retain in the final rule the 
standard that voting common stock should be the dominant form of a 
BHC's tier 1 capital. The final rule continues to caution that 
excessive non-voting elements generally will be reallocated to tier 2 
capital. This language provides a limited degree of flexibility, 
principally for smaller community banking organizations, depending on 
the facts and circumstances of a particular situation. The Federal 
Reserve has exercised this flexibility in the past, for example, to aid 
compliance with the Board's voting common stock standard by small 
privately-held community banking organizations reaching $150 million in 
assets and becoming subject to the Board's risk-based capital 
requirements for the first time. Because of significant concerns about 
the possible effects on the safe and sound operation of a BHC if 
controlling parties do not have economic stakes in the BHC 
proportionate to their voting control, the Federal Reserve will, as a 
general matter, heighten its supervisory scrutiny of the corporate 
governance and financial strategies of BHCs when the predominance of 
voting common equity in tier 1 capital begins to erode.

Disallowed Terms for Instruments Included in Tier 1 Capital

    Two institutions requested that BHCs be allowed to include moderate 
dividend step-ups in their tier 1 trust preferred securities. 
Currently, step-up features are not allowed in any tier 1 capital 
instrument or in tier 2 subordinated debt. These commenters stressed 
that allowing step-up features in capital instruments would allow BHCs 
to reduce their cost of capital and level the playing field with 
foreign bank competitors, almost all of which include step-up features 
in their tier 1 capital instruments (subject to the 15 percent limit on 
innovative instruments). As the commenters noted, limited step-ups are 
permitted for these instruments under the Sydney Agreement.
    After considering these comments, the Board has decided to continue 
prohibiting step-up provisions in tier 1 capital instruments and tier 2 
subordinated debt. Because such features provide the issuer with the 
incentive to redeem an instrument, step-ups change the economic nature 
of instruments from longer-term to shorter-term. The resulting short-
term tenor of such capital instruments is inconsistent with the Board's 
view that regulatory capital should provide long-term, stable support 
to a BHC. This view is consistent with the market expectation that BHCs 
will almost always redeem such instruments on the step-up date to 
preserve market access for future capital raising initiatives. 
Basically, investors view a step-up provision as an informal commitment 
by a BHC issuer to call such securities at the time of the step up. 
Failure to honor this informal commitment to redeem could impair an 
institution's ability to continue issuing securities to the market.
    Two BHCs asked the Board to eliminate its longstanding requirement 
for the presence of a call option in qualifying trust preferred 
securities included in tier 1 capital. This requirement was based on 
the market standard prevailing at the time trust preferred securities 
were approved for

[[Page 11833]]

inclusion in tier 1 capital. The market for trust preferred securities 
at that time was strictly retail but since has expanded to include 
institutional investors. Unlike retail investors, who tend to focus on 
yield, non-retail investors charge for call options because they give 
the issuer flexibility to call the instrument should interest rates 
decline or the institution's condition improve, allowing refinancing at 
a cheaper rate. Investors have no control over this option, which the 
BHC issuer is most likely to exercise just as the securities become 
more valuable in the hands of the investor.
    The Board continues to believe that the flexibility call options 
provide to BHCs is beneficial from both a financial and supervisory 
perspective. This potential benefit to BHCs is reflected in the 
substantial rate reductions that BHCs with trust preferred securities 
issued in 1996 or 1997 have been able to achieve in the recent period 
of declining interest rates by redeeming their trust preferred 
securities and replacing them with new issuances at lower rates. 
Nonetheless, the Board does not require call provisions in perpetual 
preferred stock included in tier 1 capital, where they would be even 
more useful from the same financial and supervisory perspectives due to 
the perpetual nature of these instruments. For these reasons, as well 
as to accommodate the expansion of the investor base to include the 
institutional market, the Board will no longer require that qualifying 
trust preferred securities include call provisions.

Technical Requirements for the Underlying Junior Subordinated Debt and 
the Grandfathering Period for Noncompliant Issuances

    A substantial number of commenters asked the Board to extend the 
effective date for conformance with the technical requirements for 
junior subordinated debt underlying trust preferred securities from May 
31, 2004, as proposed, to the effective date of the final rule. The 
Board, in response to these comments, has decided to extend the 
grandfathering date for junior subordinated debt with nonconforming 
provisions, but satisfying certain grandfathering criteria, to April 
15, 2005. The Board has determined that this extension of the 
grandfathering date is appropriate given the number of technical legal 
issues that were raised by commenters.
    The Board's proposed rule, in general, would have clarified that 
the terms of junior subordinated debt must comply with the criteria 
applicable to tier 2 subordinated debt under the proposed rule as well 
as the Board's 1992 subordinated debt policy statement, 12 CFR 250.166, 
as supplemented by SR 92-37 (Oct. 15, 1992). However, acceleration of 
the junior subordinated debt after the nonpayment of interest for a 
period of 20 consecutive quarters would be permitted.
    A substantial number of banking organizations and other commenters 
have provided detailed comment on the need for various additional 
provisions in the indentures governing junior subordinated debt and the 
trust agreements governing trust preferred securities. In particular, 
commenters requested clarification of the technical requirements 
related to the deferability, acceleration, and subordination terms of 
junior subordinated debt and trust preferred securities in light of the 
existing subordinated debt policy statement.
    One issue upon which commenters sought Board clarification was the 
maximum permissible length of the deferral notice period provided in 
the terms of junior subordinated debt. The indentures for junior 
subordinated debt have prescribed various periods within which a BHC 
must provide notice to the trustee of its intention to defer interest 
on junior subordinated debt, which in turn enables the trustee to defer 
the payment of dividends on trust preferred securities. Because the 
requirement for a long notice period could impede a BHC from deferring 
dividends when it needs to do so, or when the Federal Reserve directs 
it to do so, the proposed rule would have restricted the notice period 
for deferral to no more than five business days from the payment date. 
In response to commenters' concern that this was too short a period and 
would interfere with widespread market practice, the final rule permits 
a deferral notice period of up to 15 business days before the payment 
date. This would allow, for example, a five-business-day notice to the 
trustee prior to the record date and a ten-business-day period between 
the record date and the payment date.
    The proposed rule sought to ensure that the junior subordinated 
debt is subordinated to senior debt and other subordinated debt issued 
by the BHC. Commenters sought clarification in the final rule that 
junior subordinated debt does not have to be subordinated to, and can 
be pari passu with, trade accounts payable and other accrued 
liabilities arising in the ordinary course of business. This 
interpretation is consistent with the Board's subordinated debt policy 
statement; accordingly, junior subordinated debt may be pari passu with 
obligations to trade creditors. In addition, junior subordinated debt 
underlying one issuance of trust preferred securities may be pari passu 
with junior subordinated debt underlying another issue of trust 
preferred securities, just as an issue of perpetual preferred stock may 
be pari passu with another issuance of perpetual preferred stock. In 
addition, the terms of junior subordinated debt may provide that it may 
be senior to, or pari passu with, deeply subordinated capital 
instruments that the Federal Reserve may in the future authorize for 
inclusion in tier 1 capital.
    Some commenters sought clarification about whether junior 
subordinated debt needs to be subordinated to senior obligations (and 
senior only to common and preferred stock) with regard not only to 
priority of payment in a BHC's bankruptcy, but also to priority of 
interest payments while a BHC is a going concern. If a BHC has a non-
deferrable debt that is subordinated in right of payment to its junior 
subordinated debt, the BHC could not defer payment on its deferrable 
junior subordinated debt without causing an event of default on its 
non-deferrable subordinated debt, thereby undermining the ability of 
the junior subordinated debt to absorb losses on an ongoing basis. 
Accordingly, junior subordinated debt must not be senior in 
liquidation, or in the priority of payment of periodic interest, to 
non-deferrable debt.
    Some commenters sought clarification of the permissibility of 
indenture provisions that prohibit interest deferral on junior 
subordinated debt if a default event has occurred. Such provisions are 
permissible only if the event of default is one that is authorized to 
trigger the acceleration of principal and interest under the final 
rule. Thus, an indenture provision that prohibits deferral upon a 
default that arises from failure to follow the proper deferral process 
or upon any other event of default that the final rule does not allow 
to trigger acceleration is unacceptable.
    Commenters concurred with the proposal to allow the acceleration of 
principal and interest on junior subordinated debt in the event of the 
voluntary or involuntary bankruptcy of a BHC, but sought clarification 
of the acceptability in junior subordinated debt indentures of other 
acceleration events. Consistent with the 1992 interpretation of the 
subordinated debt policy statement set forth in SR 92-37, junior 
subordinated debt also may accelerate in the event that a major bank 
subsidiary of the BHC goes into receivership. Junior subordinated debt 
also may accelerate if the trust issuing the trust preferred securities 
goes into

[[Page 11834]]

bankruptcy or is dissolved, unless the junior subordinated notes have 
been redeemed or distributed to the trust preferred securities 
investors or the obligation is assumed by a successor to the BHC.
    The Board notes that it generally is also permissible for perpetual 
preferred stock to provide voting rights to investors upon the non-
payment of dividends, or for junior subordinated debt and trust 
preferred securities to provide voting rights to investors upon the 
deferral of interest and dividends, respectively. However, these 
clauses conferring voting rights may contain only customary provisions, 
such as the ability to elect one or two directors to the board of the 
BHC issuer, and may not be so adverse as to create a substantial 
disincentive for the banking organization to defer interest and 
dividends when necessary or prudent.

Small BHC Policy Statement

    In the preamble of the proposed rule, the Board solicited comment 
on certain clarifications that it may make either by rulemaking or 
through supervisory guidance to the treatment of qualifying trust 
preferred securities issued by small BHCs (that is, BHCs with 
consolidated assets of less than $150 million) under the Small Bank 
Holding Company Policy Statement. The policy generally exempts small 
BHCs from the Board's risk-based capital and leverage capital 
guidelines. Instead, small BHCs generally apply the risk-based capital 
and leverage capital guidelines on a bank-only basis and must only meet 
a debt-to-equity ratio at the parent BHC level.
    One approach discussed in the proposal was generally to treat the 
subordinated debt associated with trust preferred securities issued by 
small BHCs as debt for most purposes under the Small BHC Policy 
Statement (other than the 12-year debt reduction and 25-year debt 
retirement standards), except that an amount of subordinated debt up to 
25 percent of a small BHC's GAAP total stockholders' equity, net of 
goodwill, would be considered as neither debt nor equity. This approach 
would result in a treatment for trust preferred securities issued by 
BHCs subject to the Small BHC Policy Statement that would be more in 
line with the treatment of these securities that the Board is 
finalizing for larger BHCs subject to the Federal Reserve's risk-based 
capital guidelines.
    Commenters made two recommendations. The first was that the Board 
should analyze more thoroughly the potential effect of the proposed 
revisions on small BHCs. The second comment was that the Board should 
provide for a transition period of at least five years at a minimum. 
The Board intends to issue supervisory guidance on this matter in the 
near future.

Regulatory Flexibility Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Board has determined that this final rule does not have a significant 
impact on a substantial number of small entities in accordance with the 
spirit and purposes of the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.). The Board has determined that this final rule does not have a 
significant impact on a substantial number of small banking 
organizations because the vast majority of small banking organizations 
are not subject to the final rule, are already in compliance with the 
final rule, or will readily come into compliance with the final rule 
within the five-year transition period.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR part 1320 Appendix A.1.), the Board has reviewed this final 
rule under the authority delegated to the Board by the Office of 
Management and Budget. The Board has determined that this final rule 
does not contain a collection of information pursuant to the Paperwork 
Reduction Act.

Plain Language

    Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the use 
of ``plain language'' in all proposed and final rules published after 
January 1, 2000. The Board invited comments on whether the proposed 
rule was written in ``plain language'' and how to make the proposed 
rule easier to understand. No commenter indicated that the proposed 
rule should be revised to make it easier to understand. The final rule 
is substantially similar to the proposed rule, and the Board believes 
the final rule is written plainly and clearly.

List of Subjects

12 CFR Part 208

    Accounting, Agriculture, Banks, Banking, Confidential business 
information, Crime, Currency, Mortgages, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 225

    Administrative practice and procedure, Banks, Banking, Holding 
companies, Reporting and recordkeeping requirements, Securities.

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

0
1. The authority citation of 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, 1831w, 1831x, 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; 31 U.S.C. 
5318, 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

Appendix A to Part 208--[Amended]

0
2. In Appendix A to part 208, remove Attachments II and III.

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

0
3. 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(l), 3106, 3108, 3310, 3331-3351, 3907, and 
3909; 15 U.S.C. 6801 and 6805.

0
4. Amend Appendix A to part 225 as follows:
0
a. In section II:
0
i. Designate the three undesignated paragraphs as paragraphs (i), (ii), 
and (iii) and revise newly redesignated paragraphs (i), (ii) and (iii).
0
ii. Remove footnote 8 [Reserved]; redesignate footnotes 9, 10, and 11 
as footnotes 13, 14, and 15 respectively; and redesignate footnotes 14 
through 61 as footnotes 17 through 64 respectively.
0
b. In section II.A., revise the heading.
0
c. Revise section II.A.1.
0
d. In section II.A.2.,
0
i. Revise the heading.
0
ii. Revise paragraph b and newly redesignated footnote 15.
0
iii. Revise paragraph d. and add new footnote 16.
0
e. In section II.B.2., add a sentence at the end of newly redesignated 
footnote 19.
0
f. In section III.C.2., revise newly redesignated footnotes 40 and 41.
0
g. Remove Attachments II and III.

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

* * * * *

II. Definition of Qualifying Capital for the Risk-Based Capital Ratio

    (i) A banking organization's qualifying total capital consists 
of two types of capital components: ``core capital elements'' (tier 
1 capital elements) and ``supplementary capital

[[Page 11835]]

elements'' (tier 2 capital elements). These capital elements and the 
various limits, restrictions, and deductions to which they are 
subject, are discussed below. To qualify as an element of tier 1 or 
tier 2 capital, an instrument must be fully paid up and effectively 
unsecured. Accordingly, if a banking organization has purchased, or 
has directly or indirectly funded the purchase of, its own capital 
instrument, that instrument generally is disqualified from inclusion 
in regulatory capital. A qualifying tier 1 or tier 2 capital 
instrument must be subordinated to all senior indebtedness of the 
organization. If issued by a bank, it also must be subordinated to 
claims of depositors. In addition, the instrument must not contain 
or be covered by any covenants, terms, or restrictions that are 
inconsistent with safe and sound banking practices.
    (ii) On a case-by-case basis, the Federal Reserve may determine 
whether, and to what extent, any instrument that does not fit wholly 
within the terms of a capital element set forth below, or that does 
not have the characteristics or the ability to absorb losses 
commensurate with the capital treatment specified below, will 
qualify as an element of tier 1 or tier 2 capital. In making such a 
determination, the Federal Reserve will consider the similarity of 
the instrument to instruments explicitly addressed in the 
guidelines; the ability of the instrument to absorb losses, 
particularly while the organization operates as a going concern; the 
maturity and redemption features of the instrument; and other 
relevant terms and factors.
    (iii) The redemption of capital instruments before stated 
maturity could have a significant impact on an organization's 
overall capital structure. Consequently, an organization should 
consult with the Federal Reserve before redeeming any equity or 
other capital instrument included in tier 1 or tier 2 capital prior 
to stated maturity if such redemption could have a material effect 
on the level or composition of the organization's capital base. Such 
consultation generally would not be necessary when the instrument is 
to be redeemed with the proceeds of, or replaced by, a like amount 
of a capital instrument that is of equal or higher quality with 
regard to terms and maturity and the Federal Reserve considers the 
organization's capital position to be fully sufficient.

A. The Definition and Components of Qualifying Capital

    1. Tier 1 capital. Tier 1 capital generally is defined as the 
sum of core capital elements less any amounts of goodwill, other 
intangible assets, interest-only strips receivables, deferred tax 
assets, nonfinancial equity investments, and other items that are 
required to be deducted in accordance with section II.B. of this 
appendix. Tier 1 capital must represent at least 50 percent of 
qualifying total capital.
    a. Core capital elements (tier 1 capital elements). The elements 
qualifying for inclusion in the tier 1 component of a banking 
organization's qualifying total capital are:
    i. Qualifying common stockholders' equity;
    ii. Qualifying noncumulative perpetual preferred stock 
(including related surplus);
    iii. Minority interest related to qualifying common or 
noncumulative perpetual preferred stock directly issued by a 
consolidated U.S. depository institution or foreign bank subsidiary 
(Class A minority interest); and
    iv. Restricted core capital elements. The aggregate of these 
items is limited within tier 1 capital as set forth in section 
II.A.1.b. of this appendix. These elements are defined to include:
    (1) Qualifying cumulative perpetual preferred stock (including 
related surplus);
    (2) Minority interest related to qualifying cumulative perpetual 
preferred stock directly issued by a consolidated U.S. depository 
institution or foreign bank subsidiary (Class B minority interest);
    (3) Minority interest related to qualifying common stockholders' 
equity or perpetual preferred stock issued by a consolidated 
subsidiary that is neither a U.S. depository institution nor a 
foreign bank (Class C minority interest); and
    (4) Qualifying trust preferred securities.
    b. Limits on restricted core capital elements--i. Limits. (1) 
The aggregate amount of restricted core capital elements that may be 
included in the tier 1 capital of a banking organization must not 
exceed 25 percent of the sum of all core capital elements, including 
restricted core capital elements, net of goodwill less any 
associated deferred tax liability. Stated differently, the aggregate 
amount of restricted core capital elements is limited to one-third 
of the sum of core capital elements, excluding restricted core 
capital elements, net of goodwill less any associated deferred tax 
liability.
    (2) In addition, the aggregate amount of restricted core capital 
elements (other than qualifying mandatory convertible preferred 
securities \5\) that may be included in the tier 1 capital of an 
internationally active banking organization \6\ must not exceed 15 
percent of the sum of all core capital elements, including 
restricted core capital elements, net of goodwill less any 
associated deferred tax liability.
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    * * * * *
    \5\ Qualifying mandatory convertible preferred securities 
generally consist of the joint issuance by a bank holding company to 
investors of trust preferred securities and a forward purchase 
contract, which the investors fully collateralize with the 
securities, that obligates the investors to purchase a fixed amount 
of the bank holding company's common stock, generally in three 
years. A bank holding company wishing to issue mandatorily 
convertible preferred securities and include them in tier 1 capital 
must consult with the Federal Reserve prior to issuance to ensure 
that the securities' terms are consistent with tier 1 capital 
treatment.
    \6\ For this purpose, an internationally active banking 
organization is a banking organization that (1) as of its most 
recent year-end FR Y-9C reports total consolidated assets equal to 
$250 billion or more or (2) on a consolidated basis, reports total 
on-balance-sheet foreign exposure of $10 billion or more on its 
filings of the most recent year-end FFIEC 009 Country Exposure 
Report.
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    (3) Amounts of restricted core capital elements in excess of 
this limit generally may be included in tier 2 capital. The excess 
amounts of restricted core capital elements that are in the form of 
Class C minority interest and qualifying trust preferred securities 
are subject to further limitation within tier 2 capital in 
accordance with section II.A.2.d.iv. of this appendix. A banking 
organization may attribute excess amounts of restricted core capital 
elements first to any qualifying cumulative perpetual preferred 
stock or to Class B minority interest, and second to qualifying 
trust preferred securities or to Class C minority interest, which 
are subject to a tier 2 sublimit.
    ii. Transition.
    (1) The quantitative limits for restricted core capital elements 
set forth in sections II.A.1.b.i. and II.A.2.d.iv. of this appendix 
become effective on March 31, 2009. Prior to that time, a banking 
organization with restricted core capital elements in amounts that 
cause it to exceed these limits must consult with the Federal 
Reserve on a plan for ensuring that the banking organization is not 
unduly relying on these elements in its capital base and, where 
appropriate, for reducing such reliance to ensure that the 
organization complies with these limits as of March 31, 2009.
    (2) Until March 31, 2009, the aggregate amount of qualifying 
cumulative perpetual preferred stock (including related surplus) and 
qualifying trust preferred securities that a banking organization 
may include in tier 1 capital is limited to 25 percent of the sum of 
the following core capital elements: qualifying common stockholders' 
equity, Qualifying noncumulative and cumulative perpetual preferred 
stock (including related surplus), qualifying minority interest in 
the equity accounts of consolidated subsidiaries, and qualifying 
trust preferred securities. Amounts of qualifying cumulative 
perpetual preferred stock (including related surplus) and qualifying 
trust preferred securities in excess of this limit may be included 
in tier 2 capital.
    (3) Until March 31, 2009, internationally active banking 
organizations generally are expected to limit the amount of 
qualifying cumulative perpetual preferred stock (including related 
surplus) and qualifying trust preferred securities included in tier 
1 capital to 15 percent of the sum of core capital elements set 
forth in section II.A.1.b.ii.2. of this appendix.
    c. Definitions and requirements for core capital elements--i. 
Qualifying common stockholders' equity.
    (1) Definition. Qualifying common stockholders' equity is 
limited to common stock; related surplus; and retained earnings, 
including capital reserves and adjustments for the cumulative effect 
of foreign currency translation, net of any treasury stock, less net 
unrealized holding losses on available-for-sale equity securities 
with readily determinable fair values. For this purpose, net 
unrealized holding gains on such equity securities and net 
unrealized holding gains (losses) on available-for-sale debt 
securities are not included in qualifying common stockholders' 
equity.
    (2) Restrictions on terms and features. A capital instrument 
that has a stated maturity date or that has a preference with regard 
to liquidation or the payment of dividends is not deemed to be a 
component of qualifying common stockholders' equity, regardless of

[[Page 11836]]

whether or not it is called common equity. Terms or features that 
grant other preferences also may call into question whether the 
capital instrument would be deemed to be qualifying common 
stockholders' equity. Features that require, or provide significant 
incentives for, the issuer to redeem the instrument for cash or cash 
equivalents will render the instrument ineligible as a component of 
qualifying common stockholders' equity.
    (3) Reliance on voting common stockholders' equity. Although 
section II.A.1. of this appendix allows for the inclusion of 
elements other than common stockholders' equity within tier 1 
capital, voting common stockholders' equity, which is the most 
desirable capital element from a supervisory standpoint, generally 
should be the dominant element within tier 1 capital. Thus, banking 
organizations should avoid over-reliance on preferred stock and 
nonvoting elements within tier 1 capital. Such nonvoting elements 
can include portions of common stockholders' equity where, for 
example, a banking organization has a class of nonvoting common 
equity, or a class of voting common equity that has substantially 
fewer voting rights per share than another class of voting common 
equity. Where a banking organization relies excessively on nonvoting 
elements within tier 1 capital, the Federal Reserve generally will 
require the banking organization to allocate a portion of the 
nonvoting elements to tier 2 capital.
    ii. Qualifying perpetual preferred stock.
    (1) Qualifying requirements. Perpetual preferred stock 
qualifying for inclusion in tier 1 capital has no maturity date and 
cannot be redeemed at the option of the holder. Perpetual preferred 
stock will qualify for inclusion in tier 1 capital only if it can 
absorb losses while the issuer operates as a going concern.
    (2) Restrictions on terms and features. Perpetual preferred 
stock included in tier 1 capital may not have any provisions 
restricting the banking organization's ability or legal right to 
defer or waive dividends, other than provisions requiring prior or 
concurrent deferral or waiver of payments on more junior 
instruments, which the Federal Reserve generally expects in such 
instruments consistent with the notion that the most junior capital 
elements should absorb losses first. Dividend deferrals or waivers 
for preferred stock, which the Federal Reserve expects will occur 
either voluntarily or at its direction when an organization is in a 
weakened condition, must not be subject to arrangements that would 
diminish the ability of the deferral to shore up the banking 
organization's resources. Any perpetual preferred stock with a 
feature permitting redemption at the option of the issuer may 
qualify as tier 1 capital only if the redemption is subject to prior 
approval of the Federal Reserve. Features that require, or create 
significant incentives for the issuer to redeem the instrument for 
cash or cash equivalents will render the instrument ineligible for 
inclusion in tier 1 capital. For example, perpetual preferred stock 
that has a credit-sensitive dividend feature--that is, a dividend 
rate that is reset periodically based, in whole or in part, on the 
banking organization's current credit standing--generally does not 
qualify for inclusion in tier 1 capital.\7\ Similarly, perpetual 
preferred stock that has a dividend rate step-up or a market value 
conversion feature--that is, a feature whereby the holder must or 
can convert the preferred stock into common stock at the market 
price prevailing at the time of conversion--generally does not 
qualify for inclusion in tier 1 capital.\8\ Perpetual preferred 
stock that does not qualify for inclusion in tier 1 capital 
generally will qualify for inclusion in tier 2 capital.
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    \7\ Traditional floating-rate or adjustable-rate perpetual 
preferred stock (that is, perpetual preferred stock in which the 
dividend rate is not affected by the issuer's credit standing or 
financial condition but is adjusted periodically in relation to an 
independent index based solely on general market interest rates), 
however, generally qualifies for inclusion in tier 1 capital 
provided all other requirements are met.
    \8\ Traditional convertible perpetual preferred stock, which the 
holder must or can convert into a fixed number of common shares at a 
preset price, generally qualifies for inclusion in tier 1 capital 
provided all other requirements are met.
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    (3) Noncumulative and cumulative features. Perpetual preferred 
stock that is noncumulative generally may not permit the 
accumulation or payment of unpaid dividends in any form, including 
in the form of common stock. Perpetual preferred stock that provides 
for the accumulation or future payment of unpaid dividends is deemed 
to be cumulative, regardless of whether or not it is called 
noncumulative.
    iii. Qualifying minority interest. Minority interest in the 
common and preferred stockholders' equity accounts of a consolidated 
subsidiary (minority interest) represents stockholders' equity 
associated with common or preferred equity instruments issued by a 
banking organization's consolidated subsidiary that are held by 
investors other than the banking organization. Minority interest is 
included in tier 1 capital because, as a general rule, it represents 
equity that is freely available to absorb losses in the issuing 
subsidiary. Nonetheless, minority interest typically is not 
available to absorb losses in the banking organization as a whole, a 
feature that is a particular concern when the minority interest is 
issued by a subsidiary that is neither a U.S. depository institution 
nor a foreign bank. For this reason, this appendix distinguishes 
among three types of qualifying minority interest. Class A minority 
interest is minority interest related to qualifying common and 
noncumulative perpetual preferred equity instruments issued directly 
(that is, not through a subsidiary) by a consolidated U.S. 
depository institution \9\ or foreign bank \10\ subsidiary of a 
banking organization. Class A minority interest is not subject to a 
formal limitation within tier 1 capital. Class B minority interest 
is minority interest related to qualifying cumulative perpetual 
preferred equity instruments issued directly by a consolidated U.S. 
depository institution or foreign bank subsidiary of a banking 
organization. Class B minority interest is a restricted core capital 
element subject to the limitations set forth in section II.A.1.b.i. 
of this appendix, but is not subject to a tier 2 sub-limit. Class C 
minority interest is minority interest related to qualifying common 
or perpetual preferred stock issued by a banking organization's 
consolidated subsidiary that is neither a U.S. depository 
institution nor a foreign bank. Class C minority interest is 
eligible for inclusion in tier 1 capital as a restricted core 
capital element and is subject to the limitations set forth in 
sections II.A.1.b.i. and II.A.2.d.iv. of this appendix. Minority 
interest in small business investment companies, investment funds 
that hold nonfinancial equity investments (as defined in section 
II.B.5.b. of this appendix), and subsidiaries engaged in 
nonfinancial activities are not included in the banking 
organization's tier 1 or total capital if the banking organization's 
interest in the company or fund is held under one of the legal 
authorities listed in section II.B.5.b. of this appendix. In 
addition, minority interest in consolidated asset-backed commercial 
paper programs (ABCP) (as defined in section III.B.6. of this 
appendix) that are sponsored by a banking organization are not 
included in the organization's tier 1 or total capital if the 
organization excludes the consolidated assets of such programs from 
risk-weighted assets pursuant to section III.B.6. of this appendix.
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    \9\ U.S. depository institutions are defined to include branches 
(foreign and domestic) of federally insured banks and depository 
institutions chartered and headquartered in the 50 states of the 
United States, the District of Columbia, Puerto Rico, and U.S. 
territories and possessions. The definition encompasses banks, 
mutual or stock savings banks, savings or building and loan 
associations, cooperative banks, credit unions, and international 
banking facilities of domestic banks.
    \10\ For this purpose, a foreign bank is defined as an 
institution that engages in the business of banking; is recognized 
as a bank by the bank supervisory or monetary authorities of the 
country of its organization or principal banking operations; 
receives deposits to a substantial extent in the regular course of 
business; and has the power to accept demand deposits.
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    iv. Qualifying trust preferred securities.
    (1) A banking organization that wishes to issue trust preferred 
securities and include them in tier 1 capital must first consult 
with the Federal Reserve. Trust preferred securities are defined as 
undated preferred securities issued by a trust or similar entity 
sponsored (but generally not consolidated) by a banking organization 
that is the sole common equity holder of the trust. Qualifying trust 
preferred securities must allow for dividends to be deferred for at 
least twenty consecutive quarters without an event of default, 
unless an event of default leading to acceleration permitted under 
section II.A.1.c.iv.(2) has occurred. The required notification 
period for such deferral must be reasonably short, no more than 15 
business days prior to the payment date. Qualifying trust preferred 
securities are otherwise subject to the same restrictions on terms 
and features as qualifying perpetual preferred stock under section 
II.A.1.c.ii.(2) of this appendix.
    (2) The sole asset of the trust must be a junior subordinated 
note issued by the sponsoring banking organization that has a 
minimum maturity of thirty years, is subordinated with regard to 
both liquidation

[[Page 11837]]

and priority of periodic payments to all senior and subordinated 
debt of the sponsoring banking organization (other than other junior 
subordinated notes underlying trust preferred securities). Otherwise 
the terms of a junior subordinated note must mirror those of the 
preferred securities issued by the trust.\11\ The note must comply 
with section II.A.2.d. of this appendix and the Federal Reserve's 
subordinated debt policy statement set forth in 12 CFR 250.166 \12\ 
except that the note may provide for an event of default and the 
acceleration of principal and accrued interest upon (a) nonpayment 
of interest for 20 or more consecutive quarters or (b) termination 
of the trust without redemption of the trust preferred securities, 
distribution of the notes to investors, or assumption of the 
obligation by a successor to the banking organization.
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    \11\ Under generally accepted accounting principles, the trust 
issuing the preferred securities generally is not consolidated on 
the banking organization's balance sheet; rather the underlying 
subordinated note is recorded as a liability on the organization's 
balance sheet. Only the amount of the trust preferred securities 
issued, which generally is equal to the amount of the underlying 
subordinated note less the amount of the sponsoring banking 
organization's common equity investment in the trust (which is 
recorded as an asset on the banking organization's consolidated 
balance sheet), may be included in tier 1 capital. Because this 
calculation method effectively deducts the banking organization's 
common stock investment in the trust in computing the numerator of 
the capital ratio, the common equity investment in the trust should 
be excluded from the calculation of risk-weighted assets in 
accordance with footnote 17 of this appendix. Where a banking 
organization has issued trust preferred securities as part of a 
pooled issuance, the organization generally must not buy back a 
security issued from the pool. Where a banking organization does 
hold such a security (for example, as a result of an acquisition of 
another banking organization), the amount of the trust preferred 
securities includable in regulatory capital must, consistent with 
section II.(i) of this appendix, be reduced by the notional amount 
of the banking organization's investment in the security issued by 
the pooling entity.
    \12\ Trust preferred securities issued before April 15, 2005, 
generally would be includable in tier 1 capital despite 
noncompliance with sections II.A.1.c.iv. or II.A.2.d. of this 
appendix or 12 CFR 250.166 provided the non-complying terms of the 
instrument (i) have been commonly used by banking organizations, 
(ii) do not provide an unreasonably high degree of protection to the 
holder in circumstances other than bankruptcy of the banking 
organization, and (iii) do not effectively allow a holder in due 
course of the note to stand ahead of senior or subordinated debt 
holders in the event of bankruptcy of the banking organization.
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    (3) In the last five years before the maturity of the note, the 
outstanding amount of the associated trust preferred securities is 
excluded from tier 1 capital and included in tier 2 capital, where 
the trust preferred securities are subject to the amortization 
provisions and quantitative restrictions set forth in sections 
II.A.2.d.iii. and iv. of this appendix as if the trust preferred 
securities were limited-life preferred stock.
    2. Supplementary capital elements (tier 2 capital elements) * * 
*
    b. Perpetual preferred stock. Perpetual preferred stock (and 
related surplus) that meets the requirements set forth in section 
II.A.1.c.ii.(1) of this appendix is eligible for inclusion in tier 2 
capital without limit.\15\
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    * * * * *
    \15\ Long-term preferred stock with an original maturity of 20 
years or more (including related surplus) will also qualify in this 
category as an element of tier 2 capital. If the holder of such an 
instrument has the right to require the issuer to redeem, repay, or 
repurchase the instrument prior to the original stated maturity, 
maturity would be defined for risk-based capital purposes as the 
earliest possible date on which the holder can put the instrument 
back to the issuing banking organization. In the last five years 
before the maturity of the stock, it must be treated as limited-life 
preferred stock, subject to the amortization provisions and 
quantitative restrictions set forth in sections II.A.2.d.iii. and 
iv. of this appendix.
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* * * * *
    d. Subordinated debt and intermediate-term preferred stock--i. 
Five-year minimum maturity. Subordinated debt and intermediate-term 
preferred stock must have an original weighted average maturity of 
at least five years to qualify as tier 2 capital. If the holder has 
the option to require the issuer to redeem, repay, or repurchase the 
instrument prior to the original stated maturity, maturity would be 
defined, for risk-based capital purposes, as the earliest possible 
date on which the holder can put the instrument back to the issuing 
banking organization.
    ii. Other restrictions on subordinated debt. Subordinated debt 
included in tier 2 capital must comply with the Federal Reserve's 
subordinated debt policy statement set forth in 12 CFR 250.166.\16\ 
Accordingly, such subordinated debt must meet the following 
requirements:
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    \16\ The subordinated debt policy statement set forth in 12 CFR 
250.166 notes that certain terms found in subordinated debt may 
provide protection to investors without adversely affecting the 
overall benefits of the instrument to the issuing banking 
organization and, thus, would be acceptable for subordinated debt 
included in capital. For example, a provision that prohibits a bank 
holding company from merging, consolidating, or selling 
substantially all of its assets unless the new entity redeems or 
assumes the subordinated debt or that designates the failure to pay 
principal and interest on a timely basis as an event of default 
would be acceptable, so long as the occurrence of such events does 
not allow the debt holders to accelerate the payment of principal or 
interest on the debt.
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    (1) The subordinated debt must be unsecured.
    (2) The subordinated debt must clearly state on its face that it 
is not a deposit and is not insured by a Federal agency.
    (3) The subordinated debt must not have credit-sensitive 
features or other provisions that are inconsistent with safe and 
sound banking practice.
    (4) Subordinated debt issued by a subsidiary U.S. depository 
institution or foreign bank of a bank holding company must be 
subordinated in right of payment to the claims of all the 
institution's general creditors and depositors, and generally must 
not contain provisions permitting debt holders to accelerate payment 
of principal or interest upon the occurrence of any event other than 
receivership of the institution. Subordinated debt issued by a bank 
holding company or its subsidiaries that are neither U.S. depository 
institutions nor foreign banks must be subordinated to all senior 
indebtedness of the issuer; that is, the debt must be subordinated 
at a minimum to all borrowed money, similar obligations arising from 
off-balance sheet guarantees and direct credit substitutes, and 
obligations associated with derivative products such as interest 
rate and foreign exchange contracts, commodity contracts, and 
similar arrangements. Subordinated debt issued by a bank holding 
company or any of its subsidiaries that is not a U.S. depository 
institution or foreign bank must not contain provisions permitting 
debt holders to accelerate the payment of principal or interest upon 
the occurrence of any event other than the bankruptcy of the bank 
holding company or the receivership of a major subsidiary depository 
institution. Thus, a provision permitting acceleration in the event 
that any other affiliate of the bank holding company issuer enters 
into bankruptcy or receivership makes the instrument ineligible for 
inclusion in tier 2 capital.
    iii. Discounting in last five years. As a limited-life capital 
instrument approaches maturity, it begins to take on characteristics 
of a short-term obligation. For this reason, the outstanding amount 
of term subordinated debt and limited-life preferred stock eligible 
for inclusion in tier 2 capital is reduced, or discounted, as these 
instruments approach maturity: one-fifth of the outstanding amount 
is excluded each year during the instrument's last five years before 
maturity. When remaining maturity is less than one year, the 
instrument is excluded from tier 2 capital.
    iv. Limits. The aggregate amount of term subordinated debt 
(excluding mandatory convertible debt) and limited-life preferred 
stock as well as, beginning March 31, 2009, qualifying trust 
preferred securities and Class C minority interest in excess of the 
limits set forth in section II.A.1.b.i. of this appendix that may be 
included in tier 2 capital is limited to 50 percent of tier 1 
capital (net of goodwill and other intangible assets required to be 
deducted in accordance with section II.B.1.b. of this appendix). 
Amounts of these instruments in excess of this limit, although not 
included in tier 2 capital, will be taken into account by the 
Federal Reserve in its overall assessment of a banking 
organization's funding and financial condition.
    B. * * *
    2. * * *
    a. * * * The aggregate amount of investments in banking or 
finance subsidiaries\19\
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    * * * * *
    \19\ * * * For purposes of this section, the definition of 
banking and finance subsidiary does not include a trust or other 
special purpose entity used to issue trust preferred securities.
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* * * * *
    III. * * *
    C. * * *
    2. * * *

[[Page 11838]]

    a. * * * U.S. depository institutions \40\ and foreign banks 
\41\;* * *
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    * * * * *
    \40\ See footnote 9 of this appendix for the definition of a 
U.S. depository institution. For this purpose, the definition also 
includes U.S.-chartered depository institutions owned by foreigners. 
However, branches and agencies of foreign banks located in the U.S., 
as well as all bank holding companies, are excluded.
    \41\ See footnote 10 of this appendix for the definition of a 
foreign bank. Foreign banks are distinguished as either OECD banks 
or non-OECD banks. OECD banks include banks and their branches 
(foreign and domestic) organized under the laws of countries (other 
than the United States) that belong to the OECD-based group of 
countries. Non-OECD banks include banks and their branches (foreign 
and domestic) organized under the laws of countries that do not 
belong to the OECD-based group of countries.
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* * * * *

0
5. Amend Appendix D to part 225, as follows:
0
a. In section I.b., amend the first sentence by changing the phrase 
``to consolidated basis'' to ``on a consolidated basis'' and the second 
sentence by changing the word ``that'' to ``than.''
0
b. In section II.b., remove footnote 3 and redesignate footnote 4 as 
footnote 3.
0
c. In section II.c., revise the second sentence.

Appendix to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Tier 1 Leverage Measure

* * * * *
    II. * * *
    c. * * * This is consistent with the Federal Reserve's risk-
based capital guidelines and long-standing Federal Reserve policy 
and practice with regard to leverage guidelines. * * *
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, March 4, 2005.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 05-4690 Filed 3-9-05; 8:45 am]
BILLING CODE 6210-01-P