[Federal Register Volume 73, Number 205 (Wednesday, October 22, 2008)]
[Rules and Regulations]
[Pages 62851-62853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-25117]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
 
 The Code of Federal Regulations is sold by the Superintendent of Documents. 
 Prices of new books are listed in the first FEDERAL REGISTER issue of each 
 week.
 
 ========================================================================
 

  Federal Register / Vol. 73, No. 205 / Wednesday, October 22, 2008 / 
Rules and Regulations  

[[Page 62851]]



FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-1336]


Capital Adequacy Guidelines: Treatment of Perpetual Preferred 
Stock Issued to the United States Treasury Under the Emergency Economic 
Stabilization Act of 2008

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Interim final rule with request for public comment.

-----------------------------------------------------------------------

SUMMARY: In order to support and facilitate the timely implementation 
and acceptance of the capital purchase program announced by the U.S. 
Department of Treasury (Treasury) and promote the stability of banking 
organizations and the financial system, the Board has adopted this 
interim final rule (interim final rule or rule). The rule specifically 
permits bank holding companies that issue new senior perpetual 
preferred stock to the Treasury under the capital purchase program 
announced by the Secretary of the Treasury on October 14, 2008, to 
include such capital instruments in Tier 1 capital for purposes of the 
Board's risk-based and leverage capital rules and guidelines for bank 
holding companies.

DATES: The interim final rule will become effective on October 17, 
2008. Comments must be received by November 21, 2008.

ADDRESSES: You may submit comments, identified by Docket No. R-1336, by 
any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include docket 
number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Street, NW) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Norah M. Barger, Deputy Director, 
(202) 452-2402, or John Connolly, Senior Project Manager, (202) 452-
3621, Division of Banking Supervision and Regulation; or Kieran J. 
Fallon, Assistant General Counsel, (202) 452-5270, Mark E. Van Der 
Weide, Assistant General Counsel, (202) 452-2263, or Benjamin W. 
McDonough, Senior Attorney, (202) 452-2036, Legal Division; Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Ave., NW., Washington, DC 20551. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), (202) 263-4869.

SUPPLEMENTARY INFORMATION: On October 3, 2008, President Bush signed 
the Emergency Economic Stabilization Act of 2008 (Act) \1\ into law. 
The Act expressly provides that it is intended, among other things, 
``to immediately provide authority and facilities that the Secretary of 
the Treasury can use to restore liquidity and stability to the 
financial system of the United States.'' \2\ Pursuant to the 
authorities granted by the Act, and in order to restore liquidity and 
stability to the financial system, on October 14, 2008, the Secretary 
of the Treasury announced a program within the Troubled Asset Relief 
Program (TARP) established by section 102 of the Act to provide capital 
to eligible banks, bank holding companies and savings associations 
(collectively, banking organizations), as well as certain other 
financial institutions. Treasury has announced that eligible banking 
organizations will be able to submit applications to participate in the 
capital purchase program (the Capital Purchase Program) until November 
14, 2008.
---------------------------------------------------------------------------

    \1\ Division A of Public Law No. 110-342, 122 Stat. 3765 (2008).
    \2\ See Act, Sec.  2.
---------------------------------------------------------------------------

    Under the Capital Purchase Program, the Treasury will provide 
capital to an eligible banking organization by purchasing newly issued 
senior perpetual preferred stock (Senior Perpetual Preferred Stock) of 
the banking organization. The Senior Perpetual Preferred Stock issued 
under the Capital Purchase Program will be perpetual preferred stock in 
the issuing banking organization and will be senior to the issuer's 
common stock and pari passu with the issuer's existing preferred shares 
(other than preferred shares which by their terms rank junior to any 
existing preferred shares). All Senior Perpetual Preferred Stock issued 
by bank holding companies will provide for cumulative dividends. The 
aggregate amount of Senior Perpetual Preferred Stock that may be issued 
by a banking organization to Treasury must be (i) not less than one 
percent of the organization's risk-weighted assets, and (ii) not more 
than the lesser of (A) $25 billion and (B) three percent of its risk-
weighted assets. Treasury expects the issuance and purchase of the 
Senior Perpetual Preferred Stock to be completed no later than December 
31, 2008.
    To be eligible for the Capital Purchase Program, the Senior 
Perpetual Preferred Stock must include several features, which are 
designed to make it attractive to a wide array of generally sound 
banking organizations and encourage such banking organizations to 
replace the Senior Perpetual Preferred Stock with private capital once 
the financial markets return to more normal conditions.
    In particular, the Senior Perpetual Preferred Stock will have an 
initial dividend rate of five percent per annum, which will increase to 
nine percent per annum five years after issuance. In addition, the 
stock will be callable by the banking organization at par after three 
years from issuance and may be called at an earlier date if the stock 
will be redeemed with cash proceeds from

[[Page 62852]]

the banking organization's issuance of common stock or perpetual 
preferred stock that (i) qualifies as Tier 1 capital of the 
organization and (ii) the proceeds of which are no less than 25 percent 
of the aggregate issue price of the Senior Perpetual Preferred Stock. 
In all cases, the redemption of the Senior Perpetual Preferred Stock 
will be subject to the approval of the banking organization's 
appropriate Federal banking agency. In addition, following the 
redemption of all the Senior Perpetual Preferred Stock, a banking 
organization shall have the right to repurchase any other equity 
security of the organization (such as warrants or equity securities 
acquired through the exercise of such warrants) held by Treasury.
    The Board recognizes that some of the features of the Senior 
Perpetual Preferred Stock would otherwise render the preferred stock 
ineligible for Tier 1 capital treatment or limit its inclusion in Tier 
1 capital under the Board's capital guidelines for bank holding 
companies. Bank holding companies generally may not include in Tier 1 
capital perpetual preferred stock (whether cumulative or noncumulative) 
that has a dividend step-up rate. Furthermore, the amount of cumulative 
perpetual preferred stock that a bank holding company may include in 
its Tier 1 capital currently is subject to a 25 percent limit.\3\
---------------------------------------------------------------------------

    \3\ See 12 CFR part 225, Appendix A, sections II.A.1.a.ii., 
II.A. a.iv.(1), II.A.1.b.i. and II.A.1.c.ii.(2).
---------------------------------------------------------------------------

    The Board has adopted this interim final rule to provide that the 
Senior Perpetual Preferred Stock may be included without limit in the 
Tier 1 capital of bank holding companies.\4\ The Senior Perpetual 
Preferred Stock will be issued to Treasury as part of a nationwide 
program, established by Treasury under the Act, to provide capital to 
eligible banking organizations that already are in generally sound 
financial condition in order to increase the capital available to 
banking organizations and thereby promote stability in the financial 
markets and the banking industry as a whole. These actions are being 
taken under special powers granted by Congress to the Secretary of the 
Treasury to achieve these important public policy objectives. A bank 
holding company also may redeem the Senior Perpetual Preferred Stock 
only with the approval of the Board. The dividend step-up rate for the 
Senior Perpetual Preferred Stock is included in the instrument to help 
achieve a fundamental public policy objective in the United States--the 
replacement of the equity capital provided by the U.S. government with 
private capital in a prompt fashion, consistent with the safety and 
soundness of the banking organization. Each of these factors is 
important to the determinations made by the Board with respect to the 
appropriate capital treatment of the Senior Perpetual Preferred Stock.
---------------------------------------------------------------------------

    \4\ This interim final rule addresses only regulatory capital. 
Details about the Capital Purchase Program, including eligibility 
requirements and the general terms and conditions of the Senior 
Perpetual Preferred Stock and warrants associated with such stock, 
are available on the Treasury's Web site at http://www.treas.gov. 
Banking organizations interested in participating in the Capital 
Program should contact Treasury and their appropriate Federal 
banking agency. The Board is issuing this rule for bank holding 
companies only at this time. The Board continues to work with 
Treasury, the other Federal banking agencies, and other parties on 
other capital and related matters associated with the Capital 
Purchase Program.
---------------------------------------------------------------------------

    For these reasons and in order to support and facilitate the timely 
implementation and acceptance of the Capital Purchase Program and 
promote the stability of banking organizations and the financial 
system, the Board has adopted this interim final rule to permit bank 
holding companies that issue new Senior Perpetual Preferred Stock to 
the Treasury under the TARP to include such stock without limit as Tier 
1 capital for purposes of the Board's risk-based and leverage capital 
rules and guidelines for bank holding companies.\5\
---------------------------------------------------------------------------

    \5\ See 12 CFR part 225, Appendix A and Appendix D.
---------------------------------------------------------------------------

    The Board expects bank holding companies that issue Senior 
Perpetual Preferred Stock, like all other bank holding companies, to 
hold capital commensurate with the level and nature of the risks to 
which they are exposed. In addition, the Board expects bank holding 
companies that issue Senior Perpetual Preferred Stock to appropriately 
incorporate the dividend features of the Senior Perpetual Preferred 
Stock into the organization's liquidity and capital funding plans.
    The Board notes that as a matter of prudential policy and practice 
it generally has not allowed capital instruments with a dividend rate 
step-up to be included in Tier 1 or Tier 2 capital. The Board has long 
expressed concern that a rate step-up undermines the permanence of a 
capital instrument and poses safety and soundness concerns.\6\ In light 
of these concerns, the Board previously has declined to allow, as would 
otherwise have been permitted by the 1998 Sydney Agreement of The Basel 
Committee on Banking Supervision, capital instruments with a moderate 
dividend step-up (up to 100 bps) to be included in Tier 1 capital up to 
a limit of 15 percent of Tier 1 capital. The Board also notes that 
capital instruments with step-up provisions issued by banking 
organizations in other countries that are members of the Basel 
Committee have become callable over the last several months. These 
securities have been widely redeemed, even though the stepped-up rate 
has been economical for the issuer. Such redemptions could lead to the 
undesirable outcome of the issuer either refinancing the capital 
instrument at a higher rate, placing further stress on an institution 
that may already be in strained condition, or simply not replacing the 
instrument, further depleting its capital resources.
---------------------------------------------------------------------------

    \6\ For example, in a 1992 policy statement on subordinated 
debt, the Board noted: ``Although payments on debt whose rates 
increase over time on the surface may not appear to be directly 
linked to the financial condition of the issuing organization, such 
debt (sometimes referred to as expanding or exploding rate debt) has 
a strong potential to be credit sensitive in substance. 
Organizations whose financial condition has strengthened are more 
likely to be able to refinance the debt at a rate lower than that 
mandated by the preset increase, whereas institutions whose 
condition has deteriorated are less likely to be able to do so. 
Moreover, just when these latter institutions would be in the most 
need of conserving capital, they would be under strong pressure to 
redeem the debt as an alternative to paying higher rates and, thus, 
would accelerate depletion of their own resources.'' See 12 CFR 
250.166(b)(4) at n. 4.
---------------------------------------------------------------------------

    However, as discussed above, issuance of the Senior Perpetual 
Preferred Shares is consistent with a strong public policy objective, 
which is to increase the capital available to banking organizations 
generally in the current environment and thereby promote stability in 
the financial markets and the banking industry as a whole. In addition, 
the Board notes that other terms and public policy considerations 
related to the Senior Perpetual Preferred Stock mitigate supervisory 
concerns over the rate step-up feature. Issuers of this instrument 
generally will not be allowed to repurchase other stock or increase 
common dividends for three years after issuance without the consent of 
the Treasury. These restrictions promote in an important way not only 
the overall safety and soundness of the issuer, but also the retention 
of the highest form of capital, common equity. Moreover, as discussed 
above, the Senior Perpetual Preferred Stock includes features designed 
to incentivize issuers to redeem the stock and replace it with Tier 1 
qualifying perpetual equity as soon as practicable, a feature that also 
fosters a higher quality of capital. These features, which are unique 
to the Senior Perpetual Preferred Stock, countervail in many respects 
the Board's concerns with regard to a step-up feature.

[[Page 62853]]

    In light of the instrument- and circumstances-specific nature of 
the Board's determination, the Board strongly cautions bank holding 
companies against construing the inclusion of the Senior Perpetual 
Preferred Stock in Tier 1 capital as in any way detracting from the 
Board's longstanding stance regarding the unacceptability of a rate 
step-up in other regulatory capital instruments.
    The Board requests comment on all aspects of this rule.

Regulatory Analysis

Administrative Procedure Act

    Pursuant to sections 553(b) and (d) of the Administrative Procedure 
Act (5 U.S.C. 553(b) and (d)), the Board finds that there is good cause 
for issuing this interim final rule and making the rule effective on 
October 17, 2008, and that it is impracticable, unnecessary, or 
contrary to the public interest to issue a notice of proposed 
rulemaking and provide an opportunity to comment before the effective 
date. The Board has adopted the rule in light of, and to help address, 
the continuing unusual and exigent circumstances in the financial 
markets. The rule will allow bank holding companies to immediately 
count the Senior Perpetual Preferred Stock as Tier 1 capital for 
purposes of their risk-based and leverage capital ratios and will help 
promote stability in the banking system and financial markets. The 
Board believes it is important to provide bank holding companies 
immediately with guidance concerning the capital treatment of the 
Senior Perpetual Preferred Stock so that bank holding companies may 
make appropriate judgments concerning their participation in the 
Capital Purchase Program. The Board is soliciting comment on all 
aspects of the rule and will make such changes that it considers 
appropriate or necessary after review of any comments received.

Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
generally requires that an agency prepare and make available for public 
comment an initial regulatory flexibility analysis in connection with a 
notice of proposed rulemaking.\7\ Under regulations issued by the Small 
Business Administration,\8\ a small entity includes a bank holding 
company with assets of $175 million or less (a small bank holding 
company). As of June 30, 2008, there were 2,636 small bank holding 
companies.
---------------------------------------------------------------------------

    \7\ See 5 U.S.C. 603(a).
    \8\ See 13 CFR 121.201.
---------------------------------------------------------------------------

    The exact number of small bank holding companies that would be 
impacted by this rule will depend on the number of such entities that 
participate in the Capital Purchase Program.
    As a general matter, the Board's risk-based and leverage capital 
rules and guidelines for bank holding companies apply only to a bank 
holding company that has consolidated assets of $500 million or more. 
Accordingly, this interim final rule will not affect any small bank 
holding company and, for this reason, the Board hereby certifies that 
the rule will not have a significant impact on a substantial number of 
small bank holding companies.

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3506), the Board has reviewed the interim final rule 
to assess any information collections. There are no collections of 
information as defined by the Paperwork Reduction Act in the interim 
final rule.

Solicitation of Comments on Use of Plain Language

    Section 722 of the GLBA required the Federal banking agencies to 
use plain language in all proposed and final rules published after 
January 1, 2000. The Board invites comment on how to make the interim 
final rule easier to understand. For example:
     Have we organized the material to suit your needs? If not, 
how could the rule be more clearly stated?
     Are the requirements in the rule clearly stated? If not, 
how could the rule be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would make the regulation easier to 
understand?
     Would more, but shorter, sections be better? If so, which 
sections should be changed?
     What else could we do to make the regulation easier to 
understand?

List of Subjects in 12 CFR Part 225

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

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

0
For the reasons stated in the preamble, the Board of Governors of the 
Federal Reserve System amends part 225 of chapter II of title 12 of the 
Code of Federal Regulations as follows:

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

0
1. The authority citation for part 225 continues to read as follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 
3909; 15 U.S.C. 6801 and 6805.

0
2. In appendix A to part 225:
0
a. Revise section II.A.1.a.ii.; and
0
b. Revise footnote 8 in section II.A.1.c.ii.(2) to read as follows:

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

    II. * * *
    A. * * *
    1. * * *
    a. * * *
    ii. Qualifying noncumulative perpetual preferred stock, 
including related surplus, and senior perpetual preferred stock 
issued to the United States Department of the Treasury (Treasury) 
under the Troubled Asset Relief Program (TARP) established by the 
Emergency Economic Stabilization Act of 2008, Division A of Public 
Law No. 110-342 (which for purposes of this appendix shall be 
considered qualifying noncumulative perpetual preferred stock), 
including related surplus;
    * * *
    c. * * *
    ii. * * *
    (2) * * *
    \8\ Notwithstanding this provision, senior perpetual preferred 
stock issued to the Treasury under the TARP established by the 
Emergency Economic Stabilization Act of 2008, Division A of Public 
Law No. 110-342, may be included in tier 1 capital. In addition, 
traditional convertible perpetual preferred stock, which the holder 
must or can convert at a fixed number of common shares at a preset 
price, generally qualifies for inclusion in tier 1 capital provided 
all other requirements are met.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, October 16, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8-25117 Filed 10-17-08; 11:15 am]
BILLING CODE 6210-02-P