[Federal Register Volume 74, Number 19 (Friday, January 30, 2009)]
[Rules and Regulations]
[Pages 5595-5609]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-2083]



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  Federal Register / Vol. 74, No. 19 / Friday, January 30, 2009 / Rules 
and Regulations  

[[Page 5595]]



FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1229

RIN 2590-AA21


Capital Classifications and Critical Capital Levels for the 
Federal Home Loan Banks

AGENCY: Federal Housing Finance Agency.

ACTION: Interim final rule; request for comments.

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SUMMARY: The Federal Housing Regulatory Reform Act, Division A of the 
Housing and Economic Recovery Act of 2008 (HERA), requires the Director 
of Federal Housing Finance Agency (FHFA) to establish criteria based on 
the amount and type of capital held by a Federal Home Loan Bank (Bank) 
for each of the following capital classifications: adequately 
capitalized, undercapitalized, significantly undercapitalized and 
critically undercapitalized. In addition, HERA provides that the 
critical capital level for each Bank shall be the amount of capital 
that the Director by regulation shall require. HERA also sets forth 
prompt corrective action (PCA) authority that the Director has for the 
Banks. To implement these new provisions, the FHFA is adopting this 
interim final rule to define critical capital for the Banks, establish 
the criteria for each of the capital classifications identified in HERA 
and delineate its PCA authority over the Banks.

DATES: Effective Date: January 30, 2009.
    Comment Date: Comments on the interim final rule must be received 
on or before April 30, 2009. For additional information, see 
SUPPLEMENTARY INFORMATION.

ADDRESSES: You may submit your comments on the proposed regulation, 
identified by regulatory information number (RIN) 2590-AA21 by any of 
the following methods:
     U.S. Mail, United Parcel Post, Federal Express, or Other 
Mail Service: The mailing address for comments is: Alfred M. Pollard, 
General Counsel and Christopher Curtis, Senior Deputy General Counsel, 
Attention: Comments/RIN 2590-AA21, Federal Housing Finance Agency, 
Fourth Floor, 1700 G Street, NW., Washington, DC 20552.
     Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel and Christopher T. Curtis, Senior 
Deputy General Counsel, Attention: Comments/RIN 2590-AA21, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552. The package should be logged at the Guard Desk, First Floor, 
on business days between 9 a.m. and 5 p.m.
     E-mail: Comments to Alfred M. Pollard, General Counsel and 
Christopher T. Curtis, Senior Deputy General Counsel, may be sent by e-
mail at [email protected]. Please include ``RIN 2590-AA21'' in the 
subject line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

FOR FURTHER INFORMATION CONTACT: Julie Paller, Senior Financial 
Analyst, (202) 408-2842, and Anthony Cornyn, Senior Associate Director, 
(202) 408-2522, Division of Federal Home Loan Bank Regulation; or 
Thomas E. Joseph, Senior Attorney-Advisor, (202) 408-2512, Office of 
General Counsel, Federal Housing Finance Agency, 1625 Eye Street, NW., 
Washington, DC 20006. The telephone number for the Telecommunications 
Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Comments

    The FHFA invites comments on all aspects of the interim final rule, 
and will amend the rule as appropriate after taking all comments into 
consideration. FHFA requests that comments submitted in hard copy also 
be accompanied by the electronic version in Microsoft[supreg] Word or 
in portable document format (PDF) on CD-ROM. Copies of all comments 
will be posted on the internet Web site at https://www.fhfa.gov. In 
addition, copies of all comments received will be available for 
examination by the public on business days between the hours of 10 a.m. 
and 3 p.m., at the Federal Housing Finance Agency, Fourth Floor, 1700 G 
Street, NW., Washington, DC 20552. To make an appointment to inspect 
comments, please call the Office of General Counsel at (202) 414-3751.

II. Background

A. Federal Housing Finance Agency and Recent Legislation

    Effective July 30, 2008, HERA, Public Law No. 110-289, 122 Stat. 
2654 (2008), transferred the supervisory and oversight responsibilities 
of the Office of Federal Housing Enterprise Oversight (OFHEO) over the 
Federal National Mortgage Association (Fannie Mae), and the Federal 
Home Loan Mortgage Corporation (Freddie Mac) (collectively, the 
Enterprises) and the oversight responsibilities of the Federal Housing 
Finance Board (FHFB or Finance Board) over the Banks and the Office of 
Finance (which acts as the Banks' fiscal agent) to a new independent 
executive branch agency, the FHFA. The FHFA is responsible for ensuring 
that the Enterprises and the Banks operate in a safe and sound manner, 
including that they maintain adequate capital and internal controls, 
that their activities foster liquid, efficient, competitive and 
resilient national housing finance markets, and that they carry out 
their public policy missions through authorized activities. See id. at 
Sec.  1102, 122 Stat. 2663-64. The Enterprises and the Banks continue 
to operate under regulations promulgated by OFHEO and the FHFB until 
the FHFA issues its own regulations. See id. at Sec. Sec.  1302, 1313, 
122 Stat. 2795, 2798.
    Section 1141 of HERA states that the Director shall adopt 
regulations specifying the critical capital level for each Bank. See 
id. at Sec.  1141, 122 Stat. 2730 (adopting 12 U.S.C. 4613(b)). In 
establishing this requirement, HERA provides that the Director shall 
take due consideration of the critical capital levels established for 
the Enterprises, with such modifications as the Director determines to 
be appropriate to reflect the difference in operations between the 
Banks and the Enterprises. HERA further requires the Director to issue 
regulations establishing the critical capital levels for the Banks no 
later than the expiration of the 180 day period from the date that HERA 
was enacted.

[[Page 5596]]

    In addition, section 1142 of HERA requires that the Director, no 
later than 180 days from its enactment, establish for the Banks the 
following four capital classifications and criteria for each 
classification: adequately capitalized, undercapitalized, significantly 
undercapitalized, and critically undercapitalized. See id. at Sec.  
1142, 122 Stat. 2730-32. HERA specifies that the criteria should be 
based on the amount and types of capital held by a Bank and the risk-
based, minimum and critical capital levels for the Banks, taking due 
consideration of the capital classifications established for the 
Enterprises, with such modifications as the Director determines to be 
appropriate to reflect the difference in operations between the Banks 
and the Enterprises. HERA also provides the FHFA prompt corrective 
action authority over the Banks and amends the Federal Housing 
Enterprises Safety and Soundness Act of 1992 (Safety and Soundness Act) 
so that specific mandatory or discretionary supervisory actions and 
restrictions under that statute would apply to any Bank determined to 
be undercapitalized, significantly undercapitalized or critically 
undercapitalized. See id. at Sec. Sec.  1143-1145, 122 Stat. 2732-34. 
The general purpose for the PCA framework is to supplement the FHFA's 
other regulatory and supervisory authority and provide for timely and, 
in some situations, mandatory intervention by the regulator.

B. The Bank System Generally

    The twelve Banks are instrumentalities of the United States 
organized under the Federal Home Loan Bank Act (Bank Act).\1\ See 12 
U.S.C. 1423, 1432(a). The Banks are cooperatives; only members of a 
Bank may purchase the capital stock of a Bank, and only members or 
certain eligible housing associates (such as state housing finance 
agencies) may obtain access to secured loans, known as advances or 
other products provided by a Bank. See 12 U.S.C. 1426(a)(4), 1430(a), 
1430b. Each Bank is managed by its own board of directors and serves 
the public interest by enhancing the availability of residential 
mortgage and community lending credit through its member institutions. 
See 12 U.S.C. 1427. Any eligible institution (generally a federally-
insured depository institution or state-regulated insurance company) 
may become a member of a Bank if it satisfies certain criteria and 
purchases a specified amount of the Bank's capital stock. See 12 U.S.C. 
1424; 12 CFR part 925. The Bank Act also requires each Bank to 
establish an affordable housing program (AHP) and contribute a 
specified portion of its previous year's net income to support that 
program. See 12 U.S.C. 1430(j). The purpose of the program is to enable 
Bank members to finance homeownership for low- or moderate-income 
households and the purchase, construction or rehabilitation of rental 
projects that benefit very low-income households.
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    \1\ Each Bank is generally referred to by the name of the city 
in which it is located. The twelve Banks are located in: Boston, New 
York, Pittsburgh, Atlanta, Cincinnati, Indianapolis, Chicago, Des 
Moines, Dallas, Topeka, San Francisco, and Seattle.
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    As government-sponsored enterprises (GSEs), the Banks are granted 
certain privileges under federal law. In light of those privileges and 
their status as GSEs, the Banks typically can borrow funds at a modest 
spread over the rates on U.S. Treasury securities of comparable 
maturity. The Banks pass along a portion of their GSE funding advantage 
to their members--and ultimately to consumers--by providing advances 
and other financial services at rates that would not otherwise be 
available to their members. Some of the Banks also have acquired member 
asset (AMA) programs whereby they acquire fixed-rate, single-family 
mortgage loans from participating member institutions.
    Consolidated obligations, consisting of bonds and discount notes, 
are the principal funding source for the Banks. The Office of Finance 
issues all consolidated obligations on behalf of the twelve Banks.\2\ 
Although each Bank is primarily liable for the portion of consolidated 
obligations corresponding to the proceeds received by that Bank, each 
Bank is also jointly and severally liable with the other eleven Banks 
for the payment of principal of, and interest on, all consolidated 
obligations. See 12 CFR 966.9.
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    \2\ Since June 2000, the Banks have been issuing consolidated 
obligations under section 11(a) of the Bank Act (12 U.S.C. 1431(a)) 
and 12 CFR 966.2(b). Section 11(a) allows the Banks to issue debt 
subject to such rules, regulations and conditions imposed by their 
regulator while 12 CFR 966.2(b) allows the Banks only to issue 
consolidated obligations jointly and which are the joint and several 
obligation of all Banks. Prior to June 2000, the Finance Board 
issued consolidated obligations on which the Banks were jointly and 
severally liable on behalf of the Banks under section 11(c) of the 
Bank Act (12 U.S.C. 1431(c)). HERA amended section 11(c) of the Bank 
Act to remove the authority of the Banks' regulator to issue debt on 
behalf of the Banks. See Sec.  1204(3)(B), Pub. L. No. 110-289, 122 
Stat. 2785-86 (amending 12 U.S.C. 1431(c)).
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C. Capital Requirements for the Banks

    The Bank Act defines the types of capital that the Banks must 
hold--specifically permanent and total capital--and establishes the 
Banks' minimum leverage and risk-based capital requirements. The Bank 
Act defines ``permanent capital'' as the amounts paid for Class B stock 
by members plus the Bank's retained earnings as determined in 
accordance with generally accepted accounting principles (GAAP), and 
defines ``total capital'' as permanent capital plus the amounts paid by 
members for Class A stock, any general allowances for losses held by a 
Bank under GAAP (but not any allowances or reserves held against 
specific assets or specific classes of assets) and any other amounts 
from sources available to absorb losses that are determined by 
regulation to be appropriate to include in total capital.\3\ See 12 
U.S.C. 1426(a)(5). However, because the Banks have no general 
allowances for losses and no additional sources have been determined to 
be appropriate to include in total capital, a Bank's total capital 
currently consists of its permanent capital plus the amounts, if any, 
paid by its members for Class A stock.\4\
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    \3\ Class B stock is defined by the Bank Act as stock that is 
redeemable (subject to certain exceptions) five years after a member 
files notice of its intent to have the stock redeemed, while Class A 
stock is defined as stock redeemable (subject to the same 
exceptions) six months after a member files such a notice. See, 12 
U.S.C. 1426(a)(5). See also 12 CFR 931.1. The Chicago Bank is the 
only Bank that has not converted to the Class A/Class B capital 
structure required under the Gramm-Leach Bliley Act (GLB Act) 
amendments to the Bank Act and thus, does not issue either Class A 
or Class B stock. Instead, the Chicago Bank still issues stock as 
defined in the Bank Act prior to its amendment by the GLB Act.
    \4\ Only two Banks, Topeka and Seattle, have issued both Class A 
and Class B stock. Nine Banks, Boston, New York, Pittsburgh, 
Atlanta, Cincinnati, Indianapolis, Des Moines, Dallas, and San 
Francisco, issue only Class B stock, while, as already noted, the 
Chicago Bank has yet to issue either Class A or Class B stock.
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    The Bank Act provides that each Bank must hold total capital equal 
to at least 5 percent of its total assets, provided that in determining 
compliance with this ratio, a Bank's total capital shall be calculated 
by multiplying its permanent capital by 1.5 and adding to this product 
any other component of total capital. See 12 U.S.C. 1426(a)(2). See 
also 12 CFR 932.2(b). The Bank Act also requires that when total 
capital is calculated without application of the multiplier of 1.5, a 
Bank's total capital must equal at least 4 percent of its total 
assets.\5\ See 12 U.S.C. 1426(a)(2)(B). See

[[Page 5597]]

also, 12 CFR 932.2(a). Each Bank also must fulfill a risk-based capital 
requirement under which it must hold sufficient permanent capital to 
meet its market, credit and operations risk, as measured under current 
regulations.\6\ See 12 U.S.C. 1426(a)(3) and 12 CFR 932.3.
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    \5\ HERA defines these two leverage ratios as the ``minimum 
capital level'' for a Bank. See Sec.  1111, Pub. L. No. 110-289, 122 
Stat. 2666-67. As already noted, the Act states that the capital 
classifications for the Banks should be based on among other things 
``the minimum capital * * * levels for the [B]anks.'' HERA also 
provides the Director with authority to require an increase in a 
Bank's minimum capital level by order, if the increase is to be 
temporary, and to promulgate regulations to require a permanent, 
higher minimum capital level for the Banks. Id.
    \6\ HERA amended the risk-based capital provision to provide the 
Director more flexibility to adopt new risk-based capital standards 
if desired. See Sec.  1110, Pub. L. No. 110-289, 122 Stat. 2675-76 
(amending 12 U.S.C. 1426(a)(3)). The current risk-based capital 
rules are contained at 12 CFR 932.4, 932.5, & 932.6.
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    The above requirements apply to the eleven Banks that have 
converted to the GLB Act capital structure, but do not apply to the 
Chicago Bank. The Chicago Bank is currently subject to capital 
requirements set forth in a 2007 Cease & Desist Order, as amended 
(Order), and remains the only Bank subject to capital requirements 
under Sec.  966.3(a) of the rules.\7\ See 12 CFR 966.3(a). Under the 
Order, the Chicago Bank must maintain a leverage ratio of the sum of 
the paid-in value of its capital stock, plus retained earnings, plus 
the face value of includable, outstanding subordinated debt instruments 
to total assets of at least 4.5 percent, and an aggregate amount of at 
least $3,600,000 in outstanding capital stock and includable 
subordinate debt. The includable amount of subordinated debt used to 
determine compliance with these requirements is 100 percent of the face 
value of the outstanding debt for the five years beginning on June 13, 
2006, the date the debt was issued; thereafter, the included amount of 
outstanding debt shall be reduced by 20 percentage points annually.\8\ 
The capital requirements under the Order, rather than those of Sec.  
966.3(a), currently are binding on the Chicago Bank.
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    \7\ Once a Bank converts to the GLB Act capital structure and 
first complies with the capital requirements under Part 932 of the 
rules, it is no longer subject to Sec.  966.3(a). See, 12 CFR 
931.9(b).
    \8\ In effect, 80 percent of the face value of outstanding 
subordinated debt will be used to calculate compliance beginning 
June 13, 2012, 60 percent beginning June 13, 2013, etc. The 
subordinate debt comes due June 13, 2016. The face value of the 
subordinated debt issued by Chicago Bank was $1 billion, all of 
which remains outstanding.
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    In addition, the Bank Act imposes certain restrictions on Banks 
should they fail to meet any applicable capital requirement. These 
restrictions are separate and distinct from any restrictions or 
requirements imposed by the PCA provisions that apply to the Banks 
under HERA. Under the Bank Act, the Banks are prohibited from redeeming 
or repurchasing any stock if after doing so the Bank would fail to meet 
any minimum capital requirement. See 12 U.S.C. 1426(f). The Bank Act 
also prohibits a Bank from making any distribution of retained earnings 
if following such distribution the Bank would fail to meet any capital 
requirement. See 12 U.S.C. 1426(h)(3).
    Finally, the Bank Act and regulatory provisions restrict Bank 
activity if the value of a Bank's stock is impaired by losses, whether 
or not the Bank meets its regulatory capital requirements. 
Specifically, the Bank Act prohibits a Bank from redeeming or 
repurchasing stock without the written permission of the Director if 
the Bank is experiencing, or is likely to experience, losses that will 
result in charges against capital. See 12 U.S.C. 1426(f). Current 
regulations define the phrase ``charges against capital'' to mean 
losses that would cause a Bank's total equity to fall below the par 
value of outstanding Bank stock on an other than temporary basis. See 
12 CFR 930.1. Current regulations also prohibit a Bank from declaring 
or paying a dividend if the par value of the Bank's stock is impaired 
or is projected to become impaired after payment of the dividend. See 
12 CFR 917.9(b).

D. Considerations of Differences Between the Banks and the Enterprises

    Section 1201 of HERA requires the Director, when promulgating 
regulations relating to the Banks, to consider the following 
differences between the Banks and the Enterprises: cooperative 
ownership structure; mission of providing liquidity to members; 
affordable housing and community development mission; capital 
structure; and joint and several liability. See Sec.  1201 Public Law 
110-289, 122 Stat. 2782-83 (amending 12 U.S.C. 4513). The Director also 
may consider any other differences that are deemed appropriate. In 
preparing this interim final rule, the FHFA considered the differences 
between the Banks and the Enterprises as they relate to the above 
factors. The FHFA requests comments from the public about whether 
differences related to these factors should result in a revision to the 
interim final rule.

III. The Interim Final Rule

    The interim final rule adds new subpart A of part 1229 to 12 CFR 
chapter XII, subchapter B. The new provision clarifies and provides 
details on how the FHFA intends to implement sections 1363 through 
1369D of the Safety and Soundness Act, as these provisions have been 
amended and made applicable to the Banks by HERA. Where appropriate, 
the rule also incorporates and makes clear that restrictions on capital 
distributions established under the Bank Act and its implementing 
regulations apply to Banks that do not meet their capital requirements 
or have suffered from charges against their capital, in addition to any 
of the PCA restrictions applicable under the Safety and Soundness Act. 
See e.g., 12 U.S.C. 1426(f) and (h)(3); 12 CFR 917.9(b). The provisions 
adopted under new subpart A of part 1229 apply only to the Banks. The 
capital classification and PCA provisions applicable to the Enterprises 
are contained at 12 CFR part 1777.

Analysis of the Interim Final Rule

    Section 1229.1. Section 1229.1 sets forth definitions that will be 
applicable to subpart A of part 1229. Many of the terms are specific to 
the Banks. Most of these Bank-specific terms are defined with reference 
to the Bank Act or adopt definitions that are set forth in the Bank Act 
or that were previously adopted by the Finance Board in part 900 of its 
rules. 12 CFR part 900. Such terms include ``class A stock,'' ``class B 
stock,'' ``consolidated obligations,'' ``permanent capital'' and 
``total capital.'' As discussed below, the definition of ``total 
capital,'' however, has been expanded from the definition in the Bank 
Act to ensure that it applies to all Banks and not just those that have 
converted to the GLB Act capital structure. See n.10, infra.
    The definition for the term ``consolidated obligations'' in Sec.  
1229.1 has been altered slightly from the definition previously set 
forth in part 900 of the Finance Board's rules to reflect the fact the 
HERA amendment to section 11 of the Bank Act to remove authority from 
the Banks' regulator to issue debt on behalf of the Banks and to 
authorize the Banks, themselves, through their agent, the Office of 
Finance, to issue debt that would be the joint and several liability of 
all the Banks. See Sec.  1204, Public Law 110-289, 122 Stat. 2785-86 
(amending 12 U.S.C. 1431(b) and (c)). Nevertheless, the new definition 
recognizes that some of the outstanding consolidated obligations may 
have been issued by the Finance Board on behalf of the Banks, and it is 
meant to encompass all outstanding obligations issued under section 11 
(either before or after its amendment by HERA) on which the Banks are 
jointly and severally liable, whether such obligations were issued by 
the Finance Board or jointly by the Banks.
    The section also provides a definition of ``capital distribution'' 
that applies only to the Banks. The Safety and Soundness Act defines 
``capital

[[Page 5598]]

distribution'' but only in terms of payments made by, or with respect 
to shares of, an Enterprise, so that the statutory definition would not 
apply to the Banks. See 12 U.S.C. 4502(2). Nevertheless, the definition 
of ``capital distribution'' adopted in Sec.  1229.1 covers the same 
types of transactions covered by the statutory provision to the extent 
that such transactions are undertaken by the Banks. The definition also 
makes clear that the payment of dividends in the form of stock is 
considered a capital distribution for the Banks even though this type 
of transaction is specifically excluded from the statutory definition 
of ``capital distribution'' for the Enterprises. In this respect, the 
Bank Act and regulations applicable to the Banks prohibit a Bank from 
declaring or paying a dividend in any form if it does not comply with 
any of its capital requirements or would not do so after paying the 
dividend. See 12 U.S.C. 1426(h)(3); 12 CFR 931.4(b). To assure that 
these restrictions are captured in the PCA provisions, capital 
distributions for a Bank are defined to include dividends paid in the 
form of stock.
    Section 1229.1 defines the ``minimum capital requirement'' with 
reference to section 6(a)(2) of the Bank Act (12 U.S.C. 1426(a)(2)), 
which establishes the minimum leverage and total capital requirement 
for Banks that have converted to the stock structure required by the 
GLB Act, as such requirements may be modified by the Director. This is 
consistent with HERA which specifically defines these two requirements 
as the ``minimum capital level'' for the Banks and allows the Director 
to raise these requirements either permanently or temporarily. See n.5, 
supra. In addition, the definition adopted in Sec.  1229.1 states that 
the minimum capital requirement shall include ``any similar requirement 
[to those under section 6(a)(2) of the Bank Act] established for a Bank 
by regulation, order, written agreement or other action.'' This wording 
captures the fact that the Chicago Bank has not yet converted to the 
GLB Act capital structure and is therefore not subject to the leverage 
requirements in section 6(a)(2) of the Bank Act, although it is subject 
to leverage requirements under the Cease and Desist Order and 
applicable regulations. See 12 CFR 966.3(a).\9\ The FHFA does not 
believe that HERA intended to exclude the Chicago Bank from PCA 
coverage just because it has not converted to the GLB Act capital 
structure, and thus has adopted a definition of ``minimum capital 
requirement'' that encompasses the leverage requirements applicable to 
Chicago.\10\ The wording also recognizes that the Director could 
subject any Bank to higher minimum leverage requirements through an 
enforcement action and will assure that such requirements will be 
considered a minimum capital requirement for PCA purposes.
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    \9\ This aspect of the regulation only applies to the Chicago 
Bank and does not apply to any of the other Banks, all of which have 
converted to the GLB Act capital structure and made the transition 
to complying with the GLB Act's capital requirements. See 12 CFR 
931.9(b)(1).
    \10\ Similarly, the definition of total capital in Sec.  1229.1 
states that for a Bank that has not issued either Class A or Class B 
stock, total capital ``will be the measure of capital used to 
determine compliance with its minimum capital requirement.'' This 
wording applies only to the Chicago Bank and recognizes that the 
Chicago Bank's regulatory total capital (used to meet its applicable 
leverage requirements) is defined by the current Order and by 
Finance Board resolution. See Fin. Brd. Res. No. 2006-06 (Apr. 18, 
2006).
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    Section 1229.1 defines the phrase ``tangible equity'' to mean ``for 
a Bank, the paid-in value of its outstanding capital stock plus its 
retained earnings calculated in accordance with generally accepted 
accounting principles in the United States (GAAP) less the amount of 
any assets that would be intangible assets under GAAP.'' HERA adds 
references to ``tangible equity'' in certain PCA provisions but does 
not otherwise define the term.\11\ See Sec.  1143, Pub. L. No. 110-289, 
122 Stat. 2732 (amending 12 U.S.C. 4615). The definition adopted is 
based on that used by banking regulators, adjusted to reflect the 
capital structure of the Banks. Other regulators generally include as 
``tangible equity'' retained earnings, all forms of non-redeemable 
stock such as common stock and perpetual preferred stock less amounts 
of non-tangible assets. See e.g., 12 CFR 565.3(f) (Office of Thrift 
Supervision (OTS) definition). Tangible equity generally does not 
include debt instruments such as subordinated debt.
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    \11\ The term ``tangible equity'' is used in a PCA provision 
added by HERA restricting asset growth for undercapitalized 
regulated entities. The term ``regulated entity'' is defined in HERA 
to mean any Enterprise or any Bank. See Sec.  1002(a), Public Law 
No. 110-289, 122 Stat.2659 (adopting 12 U.S.C. 4502(20)). Section 
1229.6(a)(4) of this interim final rule implements the provision 
restricting asset growth for undercapitalized Banks.
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    The Banks, however, are only allowed to issue stock as defined in 
the Bank Act. The Bank Act specifically defines all Bank stock as 
redeemable, although the Bank Act also prohibits redemption of the 
stock if it is needed to maintain a Bank's compliance with its risk-
based and minimum capital requirements. See 12 U.S.C. 1426. Given this 
statutorily-imposed capital structure, it does not seem reasonable to 
exclude redeemable stock from the definition of ``tangible equity'' for 
the Banks. Therefore, the definition of ``tangible equity'' in Sec.  
1229.1 includes the paid-in value of stock and retained earnings less 
intangible assets. As with the definition adopted by other regulators, 
this definition does not include subordinated debt instruments in 
``tangible equity.''
    Finally, as required by Sec.  1141(a) of HERA, the FHFA establishes 
and defines the critical capital level for the Banks in this section. 
See Sec.  1141(a), Public Law No. 110-289, 122, Stat. 2730 (adopting 12 
U.S.C. 4613(b)). The critical capital level for a Bank is established 
as 2 percent of its total assets. This threshold is addressed below as 
part of the discussion of the criteria for classifying a Bank as 
``critically undercapitalized.''
    Section 1229.2. Section 1229.2 of the interim final rule generally 
implements the requirements of section 1364(d) of the Safety and 
Soundness Act, as that provision was amended and re-designated by Sec.  
1142 of HERA. As set forth in the statute, the interim final rule 
requires the Director to determine the capital classification of each 
Bank no less often than once every quarter. The rule makes clear, 
however, that the Director may make such a determination more often 
than once a quarter and that the Director can make a determination at 
any time for one or more Banks without making a determination for all 
Banks. The rule also requires that the quarterly determination be made 
in accordance with the procedural requirements set forth in Sec.  
1229.12 of the rule, a provision which implements Sec.  1368 of the 
Safety and Soundness Act. 12 U.S.C. 4618. The rule also requires a Bank 
to provide written notification to the FHFA within ten calendar days of 
any event that causes its permanent or total capital to fall below the 
level necessary to maintain the capital classification provided in the 
most recent notice from, or determination by, the Director. For 
purposes of this requirement, a notice would include one provided to 
the Bank under Sec.  1229.12(a) of this interim final rule. This 
requirement is similar to those currently imposed on the Enterprises, 
and the FHFA finds no reasons that the Banks should be treated 
differently in this respect. See 12 CFR 1777.21(b).
    Section 1229.3. Section 1229.3 sets forth the criteria for 
classifying the Banks as adequately capitalized, undercapitalized, 
significantly undercapitalized and critically undercapitalized, as 
required by Sec.  1142 of HERA. Sec.  1142 Public Law No. 110-289, 122 
Stat. 2730-31 (amending 12

[[Page 5599]]

U.S.C. 4614). As required by HERA, these categories are defined in 
terms of the risk-based and minimum capital requirements established 
for the Banks under the Bank Act and other applicable law, after taking 
due consideration of the classifications established for the 
Enterprises. Id. The rule also makes clear that the criteria are only 
applicable to the extent that the Director has not exercised authority 
to reclassify the Bank based on factors other than the capital levels 
of the Bank, such as that provided in Sec.  1142 of HERA and 
implemented in Sec.  1229.4 of this rule. See Sec.  1142 Public Law No. 
110-289, 122 Stat. 2730-31 (adopting 12 U.S.C. 4614(c)).
    Under the rule, a Bank will be adequately capitalized only if it 
holds sufficient capital to meet both its risk-based and minimum 
capital requirements.\12\ This is consistent with the provision in HERA 
that the Banks' capital classifications be based on the amount and 
types of capital held by the Banks and the risk-based and minimum 
capital requirements for the Banks. It is also consistent with the 
general approach under existing Bank Act provisions that a Bank must 
remain in compliance with all its capital requirements, and that a Bank 
itself becomes subject to restrictions, similar to those under the PCA 
provisions of HERA, when it is not in compliance with any one of its 
capital requirements. See 12 U.S.C. 1426(c)(1)(D), (f)(1) and (h)(3).
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    \12\ The Chicago Bank is not yet subject to the risk-based 
capital provisions under section 6(a)(3) of the Bank Act. Further, 
there are no (and have not been) statutory or regulatory risk-based 
capital requirements applicable to a Bank that has not converted to 
the GLB Act capital structure. Thus, until the Chicago Bank 
completes its transition to the GLB Act capital structure, it will 
not have to meet the risk-based requirement for purposes of the 
capital classification--unless further regulatory or supervisory 
action result in the adoption of a risk-based capital requirement 
for it.
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    The rule states that a Bank will be undercapitalized if it fails to 
meet any one of its minimum or risk-based capital requirements. This 
approach is slightly different from that established for the 
Enterprises under the Safety and Soundness Act, which provides that an 
Enterprise is undercapitalized only if it does not meet its total 
capital requirement. See 12 U.S.C. 4614(a)(2). As previously noted, the 
Bank Act already imposes restrictions on a Bank's activity when a Bank 
fails to comply with either the risk-based or minimum capital 
requirement that are similar to those imposed on undercapitalized Banks 
under these PCA provisions. Thus, it would appear reasonable to define 
an undercapitalized Bank by references to both risk-based and minimum 
capital requirements and conform the approach in this regulation to 
that generally mandated by the Bank Act.
    The rule establishes the threshold at which the Bank would become 
significantly undercapitalized at 75 percent of the capital levels 
needed for the Bank to meet either its risk-based or minimum capital 
requirements. This threshold is reasonable given that the Banks have 
the obligation to adjust the amount of capital stock members are 
required to buy when they face a capital shortfall; a case where a Bank 
was facing a greater-than-25 percent shortfall in capital would suggest 
the Bank was having problems raising capital or was beginning to show 
serious structural or financial difficulties. The greater number of 
supervisory options available under the PCA provision with regard to 
significantly undercapitalized Banks would appear valuable in this 
case. At the same time, the threshold is still high enough that in most 
circumstances the Bank would have capital sufficient to operate safely, 
especially in light of the additional restrictions and safeguards that 
may be imposed under the PCA provisions, while action is taken to try 
to correct its capital problems. This threshold is also similar to how 
other banking regulators define the significantly undercapitalized 
category in their regulations. See, e.g., 12 CFR 565.4(b)(4) (OTS 
regulation).
    Finally, a Bank would be critically undercapitalized whenever its 
total capital is 2 percent or less of its total assets. The threshold 
equals one-half of the 4 percent minimum total capital requirement 
established for the Banks under Sec.  6(a)(2)(B) of the Bank Act. This 
approach is broadly similar to that defining critical capital for the 
Enterprises under the Safety and Soundness Act, although the approach 
adopted in this rule recognizes that the Banks do not issue or 
guarantee mortgage-backed securities or hold significant off-balance-
sheet items; no charges are added for these items. See 12 U.S.C. 
4613(a) and 4614(a)(4); 12 CFR 1777.20(a)(4).\13\ The FHFA also 
believes the two percent of total asset threshold is appropriate for 
the Banks. If a Bank's total capital reached this low level, it would 
indicate that the Bank was having serious problems raising additional 
capital from members either because a significant portion of the 
membership were no longer interested in, or were not in a financial 
condition to be capable of, doing business with the Bank or were no 
longer willing or able to buy capital stock to support that business. 
Such a situation, no matter what the cause, would suggest either that 
the Bank's cooperative business model was not working or that members 
were not capable of capitalizing a Bank and justify the intervention by 
the FHFA under the PCA provisions applicable to a critically 
undercapitalized regulated entity or other similar situations. The 
threshold adopted in this rule is similar to the critically 
undercapitalized category in the banking regulations. See, e.g., 12 CFR 
565.4(b)(5) (OTS regulation).
---------------------------------------------------------------------------

    \13\ Under both the Safety and Soundness Act and applicable 
regulations, an Enterprise would be critically undercapitalized if 
its core capital were less than the critical capital level. The term 
``core capital,'' however, is not defined or used in the Bank Act or 
any regulation applicable to the Banks. An Enterprise's core capital 
is similar to total capital for a Bank in that each is used to meet 
a leverage type requirement. On the other hand, the Bank Act 
specifically requires that the Bank's permanent capital be used to 
meet its risk-based capital requirements while an Enterprise's total 
capital is used to meet its risk-based capital requirements. Thus, 
whenever comparisons need to be made between the types of capital 
held by the Banks and the core capital and total capital of the 
Enterprises or provisions in HERA implemented by this interim final 
rule refer to core capital and total capital of a regulated entity, 
these terms generally have been interpreted as or compared to, 
respectively, a Bank's total capital and permanent capital.
---------------------------------------------------------------------------

    Section 1229.4. Section 1229.4 implements the authority provided in 
Sec.  1142(a)(4) of HERA, allowing the Director discretionary authority 
to reclassify a Bank's capital classification for reasons other than 
the amount of capital held by a Bank, such as those related to the 
condition of the Bank or the quality of the assets or collateral held 
by a Bank. See Sec.  1142 Public Law No. 110-289, 122 Stat. 2730-31 
(adopting 12 U.S.C. 4614(c)).
    This section of the interim final rule closely adheres to the text 
of the statutory provision. The grounds for reclassifying a Bank are 
set forth in Sec.  1229.4(b) of the interim final rule. Under this 
provision the Director can reclassify the Bank upon a written 
determination that the Bank is engaging in conduct that could result in 
a rapid depletion of its capital, or that the value of collateral 
pledged to the Bank or the value of property subject to mortgages owned 
by the Bank has decreased significantly. The Director can also 
reclassify a Bank if the Director determines the Bank is in an unsafe 
and unsound condition. Before making this determination, however, the 
rule states that the Director will provide the Bank with notice and an 
opportunity for an informal hearing before the Director during which 
the Bank can present information or testimony about its

[[Page 5600]]

condition. The process contemplated is based on and similar to that 
used by other banking regulators before reclassifying regulated banks 
on similar grounds. See 12 CFR 308.202(a), 325.103(d) (Federal Deposit 
Insurance Corporation regulations); 12 CFR 565.8 (OTS regulations). 
Finally, the Director can reclassify a Bank if the Director has found, 
in accordance with Sec.  1371(b) of the Safety and Soundness Act, that 
the Bank is engaging in an unsafe and unsound practice because the 
Bank's asset quality, management, earnings or liquidity were found to 
be less than satisfactory during the most recent examination and any 
deficiency has not been corrected.
    As required by statute, Sec.  1229.4(c) of the interim final rules 
provides that the capital reclassification of a Bank is subject to the 
notice and procedural requirements under Sec.  1368 of the Safety and 
Soundness Act, as that provision is implemented by Sec.  1229.12 of 
this rule. Section 1229.4(d) makes clear that any condition, action or 
inaction by a Bank that results in a reclassification of a Bank under 
this section can be the basis for a subsequent reclassification action, 
as long as the Bank has not rectified the original problem or 
condition. Finally, Sec.  1229.4(e) states that nothing in Sec.  1229.4 
will prevent the Director from exercising any other authority available 
under the Bank Act, the Safety and Soundness Act or any other 
regulation to reclassify a Bank or take any other action against a 
Bank.
    Section 1229.5. Section 1229.5 of the interim final rule implements 
the provision added by Sec.  1142(a)(5) of HERA addressing capital 
distributions by adequately capitalized regulated entities. See id. 
(adopting 12 U.S.C. 4614(e)). The provision prohibits an adequately 
capitalized Bank from making a capital distribution if, after doing so, 
the Bank would be undercapitalized. The provision also makes clear that 
an adequately capitalized Bank cannot make any capital distribution if 
it would violate any restriction in section 6 of the Bank Act or any 
other applicable regulation.
    Section 1142(a)(5) of HERA allows the Director to grant an 
exception to the new restriction on capital distributions and permit a 
regulated entity to redeem, repurchase or retire stock if such 
transaction is in connection with the issuance of additional shares or 
obligations in an equivalent amount to those shares retired, will 
reduce the regulated entity's financial obligations or otherwise 
improve its financial conditions. Section 1229.5(b) of the interim 
final rule implements this exception as applied to the Banks, but makes 
clear that any transaction permitted under this exception must be 
consistent with and not violate any restriction in the Bank Act or 
other regulation that prohibits redemption or repurchase of Bank stock.
    Section 1229.6 and Section 1229.7. Sections 1229.6 and 1229.7 of 
the interim final rule implement Sec.  1365 of the Safety and Soundness 
Act as amended by HERA, which sets forth the mandatory and 
discretionary actions applicable to a Bank classified as 
undercapitalized. See 12 U.S.C. 4615, as amended by Sec.  1143, Public 
Law No. 110-289, 122 Stat. 2732-33. Section 1229.6(a) sets forth the 
mandatory actions that a Bank must take and the restrictions that are 
applied to a Bank once it is deemed to be undercapitalized. These 
provisions closely follow the wording in the statute. The regulation 
requires an undercapitalized Bank to submit a capital restoration plan 
that meets with the approval of the Director within the timeframe 
required under Sec.  1229.11 of this regulation, and carry out all 
commitments made in that plan. The regulation also restricts an 
undercapitalized Bank's quarterly asset growth and its ability to 
engage in any new business activity or acquire any entity. The rule 
clarifies that for purposes of the restriction on asset growth, the 
calculation of a Bank's average total assets for a quarter will be 
based on the daily total assets held by the Bank in the quarter.\14\ As 
required under the statute, Sec.  1229.6(a) also prohibits an 
undercapitalized Bank from making any capital distribution that would 
cause it to become significantly or critically undercapitalized, but 
the regulation also makes clear that the undercapitalized Bank cannot 
make any capital distribution that would violate any additional 
restrictions in the Bank Act or other regulations related to the 
payment of dividends or the repurchase or redemption of stock.
---------------------------------------------------------------------------

    \14\ Each month, each Bank reports its daily average total 
assets held during that month. These reported figures are then used 
to calculate a quarterly average.
---------------------------------------------------------------------------

    Section 1229.6(b) implements the changes made by Sec.  1143 of HERA 
which require the Director to reclassify an undercapitalized Bank as 
significantly undercapitalized if the Bank fails to submit a capital 
restoration plan which the Director can approve within the time limits 
established under the interim final rule or fails to implement any 
approved capital restoration plan in any material respect. Finally, 
Sec.  1229.6(c) implements the statutory requirements that the Director 
monitor the undercapitalized Bank's condition and its compliance with 
the requirements and obligations imposed on it under the PCA 
provisions.
    Section 1229.7 implements the provision in Sec.  1143 of HERA which 
allows the Director the discretion to take any action with respect to 
an undercapitalized Bank which the Director may take pursuant to Sec.  
1366 of the Safety and Soundness Act against a significantly 
undercapitalized Bank, ``if the Director determines that such actions 
are necessary to carry out the purpose of this subtitle [C].'' Sec.  
1143(6), Public Law No. 110-289, 122 Stat. 2733 (amending 12 U.S.C. 
4615(c)). The wording of Sec.  1229.7 reflects the FHFA's belief that 
the purposes of the PCA provisions contained in subtitle C of HERA are 
to assure the safe and sound operations of a Bank, for both its own 
benefit and the benefit of its members and the financial system, and 
its compliance with its risk-based and minimum capital requirements 
within a reasonable period of time.\15\ This provision of the rule also 
makes clear that, as required by Sec.  1368 of the Safety and Soundness 
Act, the Director will provide notice to an undercapitalized Bank about 
any potential discretionary action under Sec.  1299.7 and allow the 
Bank the opportunity, as set forth in Sec.  1229.12(c) of this interim 
final rule, to provide information relevant to the proposed action 
before the Director makes a final determination.
---------------------------------------------------------------------------

    \15\ Similarly, Sec.  1143 of HERA allows the Director to exempt 
an undercapitalized Bank from the prohibition on its engaging in new 
business activities or acquiring other entities if among other 
conditions, the Director determines the ``proposed action will 
further purposes of this subtitle [C]'' and provides that the 
Director shall monitor the restrictions and requirement imposed on 
an undercapitalized Bank to determine whether they are achieving 
``the purposes of this section [1143].'' These statutory provisions 
are implemented by Sec.  1229.6(a)(5)(ii) and Sec.  1229.6(c) of the 
interim final rule respectively. The wording employed for these two 
regulatory provisions reflects the FHFA's view that the purposes of 
the PCA provisions are to help to assure that a Bank will operate in 
a safe and sound fashion, for both its own benefit and the benefit 
of its members and the financial system, and return within a 
reasonable period of time to compliance with its risk-based and 
minimum capital requirements.
---------------------------------------------------------------------------

    Section 1229.8 and Section 1229.9. Sections 1229.8 and 1229.9 
implement Sec.  1366 of the Safety and Soundness Act as amended by 
HERA, which sets forth the mandatory and discretionary actions 
applicable to a Bank classified as significantly undercapitalized. See 
12 U.S.C. 4616, as amended by Sec.  1144, Public Law No. 110-289, 122 
Stat. 2733-34. Section 1229.8 sets forth the mandatory actions and 
restrictions on activities that will apply to a Bank found to be 
significantly

[[Page 5601]]

undercapitalized, while Sec.  1229.9 sets forth discretionary actions 
that the Director may take with regard to any significantly 
undercapitalized Bank.
    Sections 1229.8(a) and (b) of the interim final rule require a 
significantly undercapitalized Bank to submit a capital restoration 
plan consistent with the requirements of Sec.  1229.11 of this rule, 
receive the Director's approval for this plan, and fulfill all terms, 
conditions, and obligations contained in the approved plan. Sections 
1229.8(c) and (d) implement restrictions on the capital distributions 
that a significantly undercapitalized Bank may make. Specifically, 
Sec.  1229.8(c) prohibits a significantly undercapitalized Bank from 
making any capital distribution if the distribution would result in the 
Bank becoming critically undercapitalized or would otherwise violate 
restrictions on the declaration or payment of a dividend or the 
repurchase or redemption of stock set forth in section 6 of the Bank 
Act or any other applicable regulation. To the extent that a capital 
distribution is not already prohibited by Sec.  1229.8(c), Sec.  
1229.8(d) provides that the Bank can make the distribution only with 
the prior approval of the Director. The Director may provide such 
approval only upon a determination that the capital distribution will 
enhance the ability of the Bank to meet its capital requirements 
promptly, contribute to the long-term financial safety and soundness of 
the Bank or otherwise be in the public interest.
    Finally, Sec.  1229.8(e) and Sec.  1229.8(f) of the interim final 
rule establish limits on the bonuses and compensation that a 
significantly undercapitalized Bank may pay to any executive officer. 
Section1229.8(e) prohibits a significantly undercapitalized Bank from 
paying any bonus to an executive officer without the prior written 
approval of the Director. For purposes of this provision, a bonus 
includes any amounts paid or accruing to the executive officer under 
any profit sharing arrangement established by the Bank. Section 
1229.8(f) prohibits a significantly undercapitalized Bank from paying 
an executive officer at a rate of compensation that is higher than the 
average rate paid to that officer during the twelve month period 
immediately prior to the month the Bank became significantly 
undercapitalized, without first receiving the prior written approval 
from the Director. As set forth in HERA, the rule states that the 
average rate of compensation does not include bonuses or profit sharing 
paid or accruing to the officer during the twelve month period.\16\ A 
definition for ``executive officer'' is provided in Sec.  1229.1 of the 
interim final rule.
---------------------------------------------------------------------------

    \16\ While the HERA provision also excludes stock options from 
the calculation of average compensation, the Banks do not provide 
stock options to their executive officers; nor can the Banks provide 
such options to officers as the Bank Act only allows member 
institutions to purchase Bank stock and prevents individuals from 
buying Bank stock. Thus, the interim final rule does not need to 
exclude stock options from the calculation of compensation for 
executive officers of a Bank.
---------------------------------------------------------------------------

    Section 1229.9 of the interim final rules sets forth the 
discretionary actions the Director may take with regard to a 
significantly undercapitalized Bank. Section 1229.9(a) provides that 
the Director shall carry out this section by taking any one or more of 
the listed action with regard to a significantly undercapitalized Bank. 
These actions can include requiring the Bank to reduce, or limit the 
growth of any obligation, class of obligation, asset or class of assets 
held by the Bank. The Director also can require a Bank to acquire new 
capital in such form and amount determined by the Director, which can 
include requiring the Bank to increase its retained earnings by 
specific amounts. The Director can also require a significantly 
undercapitalized Bank to modify, limit or terminate any activity that 
the Director determines creates excessive risk to the Bank.
    Section 1229.9(a) also allows the Director to take actions to 
improve the management and corporate governance of a significantly 
undercapitalized Bank. Under this provision the Director may take any 
or all of the following actions: ordering the Bank to hold new 
elections for its board of directors under such procedures established 
by the Director at the time of the order, ordering the Bank to dismiss 
particular directors or executive officers, and/or ordering the Bank to 
hire qualified executive officers. As set forth in Sec.  1144 of HERA, 
Sec.  1229.9(a)(7) provides that the removal of a director or executive 
officer under this provision is separate and distinct from a removal 
action under Sec.  1377 of the Safety and Soundness Act (12 U.S.C. 
4636a) and shall not be subject to any procedural requirements adopted 
to implement Sec.  1377. As with other discretionary actions taken 
under Sec.  1229.9, however, removal of a director or executive officer 
under Sec.  1229.9(a)(7) would be subject to the notice and procedural 
requirements applicable to supervisory actions set forth in Sec.  
1229.12. This section also makes clear that the Director may require 
the significantly undercapitalized Bank to get the Director's approval 
before hiring any new executive officer, whenever the Director has 
ordered the Bank to hire qualified executive officers.
    Finally, section 1229.9(a) provides that the Director, in his or 
her discretion, may reclassify a significantly undercapitalized Bank as 
critically undercapitalized if a Bank fails to submit a capital 
restoration plan within the time frame required by regulation, to 
receive the Director's approval of such plan or to carry out any 
obligation under an approved plan. The provision makes clear that the 
Director may assert the stated grounds as a basis for reclassification 
to the critically undercapitalized category even if the same grounds 
previously formed the basis for reclassification of the Bank from 
undercapitalized to significantly undercapitalized, if the Bank has not 
acted to rectify the original problem.
    Section 1229.9(b) provides that the Director may take actions not 
specifically listed elsewhere in Sec.  1229.9, if the Director 
determines that such action will better help ensure the safe and sound 
operation of a significantly undercapitalized Bank and the Bank's 
prompt compliance with its minimum and risk-based capital requirements. 
This provision implements the part of Sec.  1144 of HERA which allows 
the Director to require a significantly undercapitalized Bank ``to take 
any other action that the Director determines will better carry out the 
purpose of this section [1144].'' Id. (adopting 12 U.S.C. 4616(b)(7)). 
The wording adopted in Sec.  1229.9(b) reflects the FHFA's belief, as 
noted above, that the purposes of the PCA provisions are to help ensure 
the safe and sound operations of the Banks and a Bank's prompt 
compliance with its required capital levels, and thus, Sec.  1229.9(b) 
uses references to such goals to implement the quoted language of HERA.
    Section 1229.10. Section 1229.10 of the interim final rule 
implements various provisions of Sec.  1145 of HERA which relate to 
critically undercapitalized Banks. See Sec.  1145(a), Public Law No. 
110-289, 122 Stat. 2734-36 (amending 12 U.S.C. 4617). Under Sec.  
1229.10(a) of this rule, the Director is authorized to appoint the FHFA 
as conservator or receiver as soon as final action is taken to classify 
or reclassify a Bank as critically undercapitalized.
    Section 1229.10(b)(1) of this rule requires the Director to make a 
determination at least once every 30 calendar days, beginning on the 
date a final determination is first made that a Bank is critically 
undercapitalized, as to whether the Bank's assets during the previous 
60 calendar day period were less than the Bank's obligations, or the

[[Page 5602]]

Bank is not currently, or had not been during the previous 60 calendar 
day period, paying its debts as such debts became due. For purposes of 
this determination, the rule clarifies that a Bank's obligations 
include only that portion of outstanding consolidated obligations for 
which the Bank is primary obligor or for which the Bank has been 
ordered to make payments of principal or interest by the Director or 
for which the Bank is actually making such payments on behalf of 
another Bank. Similarly, a Bank's debts do not include any unpaid 
amounts that are subject of a bona fide dispute.
    If the Director determines that a critically undercapitalized 
Bank's obligations are greater than its assets or the Bank has not been 
paying its debts, Sec.  1229.10(b)(2) requires the Director immediately 
to appoint the FHFA as receiver for the Bank. The appointment of the 
FHFA as receiver under Sec.  1229.10(b)(2) terminates any 
conservatorship established for the Bank and ends the requirement for 
future determinations by the Director under Sec.  1229.10(b)(1) for the 
pendency of the receivership.
    Section 1229.10(c) of the interim final rule provides that a Bank 
may seek judicial review of an action under Sec.  1229.10(a) or Sec.  
1229.10(b)(2) to appoint the FHFA as conservator or receiver, as 
allowed under HERA. See Sec.  1145(a), Public Law No. 110-289, 122 
Stat. 2736 (adopting 12 U.S.C. 4617(a)(5)). Finally, Sec.  1229.10(d) 
of the interim final rule makes clear that until the FHFA is appointed 
conservator or receiver of a critically undercapitalized Bank, the Bank 
is subject to all mandatory restrictions and obligations applicable to 
significantly undercapitalized Banks under the PCA provisions, any 
restrictions or obligations previously placed on the Bank by the 
Director under the PCA authority, or any restrictions or obligations 
imposed on the Bank by an approved capital restoration plan.
    Section 1229.11. Section 1229.11 of the interim final rule 
implements Sec.  1369C of the Safety and Soundness Act, as that 
provision is made applicable to the Banks by HERA, which sets forth the 
requirements for capital restoration plans that are required by various 
provisions of this interim final rule. See 12 U.S.C. 4622 (as amended 
by Sec.  1145(b)(2), Public Law No. 110-289, 122 Stat. 2767). Section 
1229.11(a) describes the minimum information that must be contained in 
each capital restoration plan. This information includes a description 
of any changes to members' stock purchase requirements that a Bank 
intends to make to raise capital. As already noted, the Bank Act 
specifically requires each Bank's board of directors to monitor the 
Bank's capital levels and adjust its member's stock purchase 
requirements to assure a Bank maintains compliance with all capital 
requirements. Given that a change in members' stock purchase 
requirements will be a major method for a Bank to raise capital, it is 
reasonable for the Bank to explain how it will adjust these 
requirements as part of its capital restoration plan.
    Section 1229.11(b) of the interim final rule establishes that a 
Bank must submit a capital restoration plan within ten calendar days 
after the Bank learns that it is required to submit such a plan, but 
allows the Director to extend the deadline in writing if needed. The 
FHFA will consider that a Bank knows that it must submit a capital 
restoration plan if the Bank receives final notification that its 
capital classification is undercapitalized, significantly 
undercapitalized or critically undercapitalized, given that submission 
of a plan is mandatory in these situations, or if the Director 
otherwise informs the Bank that it must submit such a plan. While the 
Safety and Soundness Act provides that the Director may establish a 
deadline for submission of a capital restoration plan of no more than 
45 days, it also allows the Director to establish a shorter deadline. 
The ten day period established in Sec.  1229.11(b) appears reasonable 
given the need for a Bank to act promptly to restore its capital levels 
and the possibility that the Director can extend the deadline if 
needed. Ten calendar days for submission of a plan is also consistent 
with the deadline established for the Enterprises under current 
regulations, and the FHFA sees no reason why the Banks and the 
Enterprises should be treated differently with regard to this 
requirement. See 12 CFR 1777.23(a).
    Section 1229.11(c) and (d) sets forth the requirements and 
deadlines for the Director's review of a capital restoration plan 
submitted by a Bank and for the Bank's submission of a new plan should 
the Director not approve the original submission. These provisions 
closely follow the requirements set forth in the Safety and Soundness 
Act. See 12 U.S.C. 4622(c) and (d). Section 1229.11(e) provides that 
the Director may approve amendments to a previously approved capital 
restoration plan if, after consideration of changes in market 
conditions or other relevant factors, the Director determines that the 
amendments are consistent with the Bank's achieving an adequately 
capitalized classification in a reasonable period of time and operating 
in a safe and sound manner.
    Section 1229.11(f) of the interim final rule makes clear that a 
Bank is obligated to implement and fulfill all provisions of an 
approved capital restoration plan, and remains obligated under the 
provisions of an approved capital restoration plan until such provision 
is terminated as may be specifically stated in the plan or is otherwise 
amended or terminated in writing by the Director. Finally, Sec.  
1229.11(g) implements provisions added to the Safety and Soundness Act 
by Sec.  1145 of HERA which provide that the Director may appoint the 
FHFA as conservator or receiver of a Bank if the Bank fails to submit 
an acceptable capital restoration plan within the time frame 
established under the regulations or materially fails to implement any 
provision or fulfill any obligation arising under an approved capital 
restoration plan. See Sec.  1145(a), Public Law No. 110-289, 122 Stat. 
2735 (adopting 12 U.S.C. 4617(a)(3)(J)(iii) and (iv)).
    Section 1229.12. Section 1229.12 of the interim final rule 
implements the provisions of Sec.  1368 of the Safety and Soundness Act 
as these provisions are made applicable to the Banks by HERA. See 12 
U.S.C. 4618 (as amended by Sec.  1145(b)(1), Public Law No. 110-289, 
122 Stat. 2767). Section 1368 of the Safety and Soundness Act requires 
the Director to provide a Bank notice before finalizing any decision to 
classify or reclassify a Bank within a particular capital 
classification under Sec.  1364 of the Safety and Soundness Act or 
before taking any discretionary action pursuant to the PCA authority 
set forth in Sec. Sec.  1365 or 1366 of the Safety and Soundness Act 
and allow the Bank an opportunity to submit information that would be 
relevant to the final decision. The cited statutory provisions with 
regard to capital classification or reclassification and discretionary 
PCA authority are implemented by Sec. Sec.  1229.2, 1229.4, 1229.7 and 
1229.9 of this interim final rule.
    Section 1229.12 adheres to the time frames and requirements set 
forth in the statute. It provides that a notice to classify or 
reclassify a Bank within a particular capital classification may be 
combined with the notice to require a Bank to take a particular action 
or adhere to a particular restriction under the Director's 
discretionary PCA authority. Additionally, the Director may combine a 
notice that the Bank has been classified in one capital classification 
category based on the amount of capital held or other factors with a 
simultaneous determination to reclassify the Bank to the next lower

[[Page 5603]]

category. The rule allows a Bank thirty calendar days from the date the 
Bank is provided initial notice of the proposed action to provide 
information to the Director that may be relevant to such action. It 
also provides that the Director may make a final determination with 
regard to the proposed action at the end of the comment period or after 
receipt of the information provided by the Bank, whichever is earlier. 
The provision requires the Director to provide written notice to the 
Bank of final decisions and the reasons for making such decisions. 
Consistent with section 1369D of the Safety and Soundness Act (12 
U.S.C. 4623), the regulation also provides that any Bank that is not 
classified as critically undercapitalized may seek judicial review of a 
final action taken under Sec. Sec.  1229.2, 1229.4, 1229.7 and 1229.9 
of this interim final rule, in accordance with the procedures and 
requirements set forth in that statutory provision. The rule also 
provides that any final decision that a Bank take action, refrain from 
action or comply with any other requirement that was the subject of a 
notice issued under this section shall constitute an final order under 
the Safety and Soundness Act and can be enforced by the Director by 
application to the relevant United States district court or be the 
subject of an administrative enforcement action.

Issue for Further Consideration and Comment

    The interim final rule adopts criteria defining the four capital 
classification categories specifically identified in, and made 
applicable to the Banks by, HERA. FHFA requests comments on all aspects 
of the interim final rule, including these criteria. In addition, the 
FHFA is requesting comments on whether adopting a fifth capital 
classification category of ``well-capitalized'' would be a useful and 
appropriate way to encourage Banks to hold more than the minimum 
amounts of capital. Adopting a well-capitalized category would be 
similar to the approach used by banking regulators. See, e.g., 12 CFR 
103(b) (capital categories for FDIC PCA rule). The criteria for a well-
capitalized category could be specified as a percentage of a Bank's 
minimum leverage and risk-based capital requirements, such as 110 
percent of these requirements, and/or incorporate specific retained 
earnings or market value of equity/par value of capital stock (MVE/
PVCS) targets.
    The FHFA believes that introducing a retained earnings target or an 
MVE/PVCS target into such a regulation, or as a separate capital 
regulation, may be especially helpful in encouraging the Banks to 
maintain levels of retained earnings that would help prevent impairment 
of the par value of their stock. Impairment of the par value of a 
Bank's stock could have consequences for the members' willingness to 
continue to buy capital and do business with the Bank and for the 
Bank's ability to raise funds. Thus, defining criteria that would 
provide incentives to protect the par value of the stock would be an 
important consideration for the FHFA if it were to adopt a well-
capitalized category or a separate retained earnings regulation.\17\
---------------------------------------------------------------------------

    \17\ If the economic value of a Bank's equity base, defined as 
the market value of equity (MVE), falls below the par value of the 
Bank's capital stock (PVCS), then any redemptions or repurchases at 
par value will dilute the economic value of the remaining shares, 
causing a Bank's ratio of MVE/PVCS to decline further. Moreover, 
should the MVE per share of a Bank's stock fall significantly below 
its par value, members may decide not to purchase additional shares 
in the Bank. In the extreme, members may exit the System.
---------------------------------------------------------------------------

    The FHFA recognizes that the market incentive for an individual 
Bank to achieve and maintain a well-capitalized classification may be 
mitigated by the fact that the Banks generally fund themselves through 
issuance of consolidated obligations. Because this debt is the joint 
and several obligation of the Banks collectively and is not marketed in 
the name of an individual Bank, a well-capitalized Bank may not fully 
capture the funding advantage that could be associated with achieving 
this classification. Nevertheless, having a well-capitalized rating may 
provide advantages to the Bank in its dealings with counterparties and 
perhaps in other transactions in which the Bank engages in its own 
name.
    Additional incentives for a Bank to become well-capitalized could 
be created by restricting certain activities of Banks that have not 
achieved a well-capitalized rating. Such restrictions could include 
limiting new business activities, preventing the Bank from repurchasing 
a member's excess stock prior to the end of the statutory redemption 
period, or placing some restrictions on the payment of dividends. While 
neither the PCA provisions in the Safety and Soundness Act as amended 
by HERA, nor the Bank Act contains these types of restrictions on Banks 
that otherwise meet their capital requirements,\18\ the FHFA could 
adopt such restrictions pursuant to its general supervisory authority, 
especially its authority to oversee the prudential operations of the 
Banks, ensure that the Banks operate in a safe and sound manner and 
ensure that the manner in which the Banks operate is in the public 
interest. See Sec.  1102, Public Law No. 110-289, 122 Stat. 2663-64 
(amending 12 U.S.C. 4513). Similarly, the FHFA considers this authority 
to provide a basis for adopting a well-capitalized classification as 
part of the capital classification/PCA rules even though such category 
is not specifically identified in the Safety and Soundness Act as 
amended by HERA.
---------------------------------------------------------------------------

    \18\ The exception is a Bank that has experienced a charge 
against capital so that the par value of its stock is impaired. In 
this situation, the Bank Act and existing regulations would prohibit 
the Bank from redeeming or repurchasing any stock without the 
permission of the Director or from declaring or paying a dividend, 
even if the Bank is otherwise adequately capitalized. See 12 U.S.C. 
1426(f); 12 CFR 917.9(b).
---------------------------------------------------------------------------

    While the FHFA has not adopted a well-capitalized category as part 
of this interim final rule, it is specifically seeking comments on all 
aspects of introducing such a category into the regulation. It is 
especially interested in comments on:
    1. Would a well-capitalized classification category provide 
incentives to the Banks to hold more than the minimum amounts of 
capital and increase retained earnings as a percentage of capital?
    2. What criteria may be appropriate to define such a category?
    3. Would a MVE/PVCS or a retained earnings target be appropriate in 
defining a well-capitalized category, and if so, what should the 
targets be?
    4. What restrictions on adequately capitalized Banks may be 
appropriate to create an incentive to Banks to achieve and maintain a 
well-capitalized rating?
    5. Alternatively, should the FHFA adopt a MVE/PVCS and/or retained 
earnings requirement as a separate risk-based capital rule that would 
be applied to the Banks in addition to the current risk-based capital 
requirement in 12 CFR 932.3, and incorporate this new requirement into 
the criteria for defining either the adequately capitalized category or 
a new well-capitalized category? Should MVE/PVCS or retained-earnings 
targets be adopted other than as part of the risk-based capital 
structure?
    6. Are there any changes to the current risk-based capital 
requirements that should be considered in light of the PCA provisions 
that are being added by this interim final rule? Should MVE/PVCS or 
retained-earnings targets be adopted other than as part of the risk-
based Capital structure?
    In addition to seeking comments on the above questions, the FHFA is 
also interested in comments on all other aspects of the interim final 
rule as adopted.

[[Page 5604]]

IV. Notice and Public Participation

    The FHFA finds for good cause that the notice and comment procedure 
required by the Administrative Procedure Act is impracticable or 
contrary to the public interest in this instance. See 5 U.S.C. 
553(b)(3)(B). The rule is necessary to provide the details on how the 
FHFA will implement the capital classification and PCA provisions made 
applicable to the Banks by HERA. These authorities are critical to 
assuring the safe and sound operations of the Bank System and prompt 
intervention to address troubled Banks, should such a situation arise. 
The PCA authority is especially important during the current period of 
market stress when conditions are volatile and the financial conditions 
of a Bank could be subject to sudden change. Thus, the FHFA believes 
immediate adoption of this rule would be in the public interest, but 
nevertheless believes public comments on this rule would be valuable. 
The FHFA will consider all comments received on or before April 30, 
2009 in promulgating a final rule.

V. Effective Date

    For the reasons stated in part IV above, the FHFA for good cause 
finds that the interim final rule should become effective on January 
30, 2009. See 5 U.S.C. 553(d).

VI. Paperwork Reduction Act

    The rule does not contain any collections of information pursuant 
to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). 
Therefore, the FHFA has not submitted any information to the Office of 
Management and Budget for review.

VII. Regulatory Flexibility Act

    The FHFA is adopting this regulation in the form of an interim 
final rule and not as a proposed rule. Therefore, the provisions of the 
Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) do not apply. 
See 5 U.S.C. 601(2) and 603(a).

List of Subjects in 12 CFR Part 1229

    Capital, Federal home loan banks, Government-sponsored enterprises, 
Reporting and recordkeeping requirements.

0
For the reasons stated in the preamble, the Federal Housing Finance 
Agency is amending 12 CFR chapter XII, subchapter B, by adding new Part 
1229 to read as follows:

PART 1229--CAPITAL CLASSIFICATIONS AND PROMPT CORRECTIVE ACTION

Subpart A--Federal Home Loan Banks
Sec.
1229.1 Definitions.
1229.2 Determination of a Bank's capital classification.
1229.3 Criteria for a Bank's capital classification.
1229.4 Reclassification by the Director.
1229.5 Capital distributions for adequately capitalized Banks.
1229.6 Mandatory actions applicable to undercapitalized Banks.
1229.7 Discretionary actions applicable to undercapitalized Banks.
1229.8 Mandatory actions applicable to significantly 
undercapitalized Banks.
1229.9 Discretionary actions applicable to significantly 
undercapitalized Banks.
1229.10 Actions applicable to critically undercapitalized Banks.
1229.11 Capital restoration plans.
1229.12 Procedures related to capital classification and other 
actions.

    Authority: 12 U.S.C. 1426, 4513, 4526, 4613, 4614, 4615, 4616, 
4617, 4618, 4622, 4623.

Subpart A--Federal Home Loan Banks


Sec.  1229.1  Definitions.

    For purposes of this subpart:
    Bank written in title case, means a Federal Home Loan Bank 
established under section 12 of the Bank Act (12 U.S.C. 1432).
    Bank Act means the Federal Home Loan Bank Act, as amended (12 
U.S.C. 1421 through 1449).
    Capital distribution means any payment by the Bank, whether in cash 
or stock, of a dividend, any return of capital or retained earnings by 
the Bank to its shareholders, any transaction in which the Bank redeems 
or repurchases capital stock, or any transaction in which the Bank 
redeems, repurchases or retires any other instrument which is included 
in the calculation of its total capital.
    Class A stock means capital stock issued by a Bank, including 
subclasses, that has the characteristics specified in section 
6(a)(4)(A)(i) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(i)) and related 
regulations.
    Class B stock means capital stock issued by a Bank, including 
subclasses, that has the characteristics specified in section 
6(a)(4)(A)(ii) of the Bank Act (12 U.S.C. 1426(a)(4)(A)(ii)) and 
related regulations.
    Consolidated obligations means any bond, debenture or note on which 
the Banks are jointly and severally liable and which was issued under 
section 11 of the Bank Act (12 U.S.C. 1431) and any implementing 
regulations, whether or not such instrument was originally issued 
jointly by the Banks or by the Federal Housing Finance Board on behalf 
of the Banks.
    Critical capital level for a Bank means an amount equal to 2 
percent of the Bank's total assets.
    Director means the Director of the Federal Housing Finance Agency 
or his or her designee.
    Executive officer means for a Bank any of the following persons, 
provided that the Director may from time to time add or remove persons, 
positions, or functions to or from the list (individually for one or 
more Banks or jointly for all the Banks) by communication to the 
affected Banks:
    (1) Executive officers about whom the Banks must publicly disclose 
detailed compensation information under Regulation S-K, 17 CFR part 
229, issued by the Securities and Exchange Commission;
    (2) Any other executive who occupies one of the following positions 
or is in charge of one of the following subject areas:
    (i) Overall Bank operations, such as the Chief Operating Officer or 
an equivalent employee;
    (ii) Chief Financial Officer or an equivalent employee;
    (iii) Chief Administrative Officer or an equivalent employee;
    (iv) Chief Risk Officer or an equivalent employee;
    (v) Asset and Liability Management officer, or an equivalent 
employee;
    (vi) Chief Accounting Officer or an equivalent employee;
    (vii) General Counsel or an equivalent employee;
    (viii) Strategic Planning officer or an equivalent employee;
    (ix) Internal Audit officer or an equivalent employee; or
    (x) Chief Information Officer or an equivalent employee; or
    (3) Any other individual, without regard to title:
    (i) Who is in charge of a principal business unit, division or 
function; or
    (ii) Who reports directly to the Bank's chairman of the board of 
directors, vice chairman of the board of directors, president or chief 
operating officer.
    FHFA means the Federal Housing Finance Agency.
    Minimum capital requirement means the leverage and total capital 
requirements established for a Bank under section 6(a)(2) of the Bank 
Act (12 U.S.C. 1426(a)(2)) and related regulations, as such 
requirements may be revised by the Director, or any similar requirement 
established for a Bank by regulation, order, written agreement or other 
action.

[[Page 5605]]

    New business activity means any activity undertaken by a Bank that 
requires approval from the FHFA under part 980 of this title.
    Permanent capital means the retained earnings of a Bank, determined 
in accordance with generally accepted accounting principles in the 
United States (GAAP), plus the amount paid-in for the Bank's Class B 
stock.
    Risk-based capital requirement means any capital requirement 
established for a Bank under section 6(a)(3) of the Bank Act (12 U.S.C. 
1426(a)(3)) and related regulations that ensures a Bank will hold 
sufficient permanent capital and reserves to support the risks that 
arise from its operations.
    Safety and Soundness Act means the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) as 
amended.
    Tangible equity means, for a Bank, the paid-in value of its 
outstanding capital stock plus its retained earnings calculated in 
accordance with generally accepted accounting principles in the United 
States (GAAP) less the amount of any assets that would be intangible 
assets under GAAP.
    Total capital means the sum of the Bank's permanent capital, the 
amount paid-in for its Class A stock, the amount of any general 
allowances for losses, and the amount of any other instruments 
indentified in a Bank's capital plan that the Director has determined 
to be available to absorb losses incurred by such Bank. For a Bank that 
has issued neither Class A nor Class B stock, the Bank's total capital 
shall be the measure of capital used to determine compliance with its 
minimum capital requirement.


Sec.  1229.2  Determination of a Bank's capital classification.

    (a) Quarterly determination. The Director shall determine the 
capital classification for each Bank no less often than once a quarter 
based on the capital classifications in Sec.  1229.3 of this subpart. 
The Director may make a determination with regard to a capital 
classification for a Bank more often than the minimum required under 
this paragraph or make a determination for one or more Banks without 
making a determination for all the Banks.
    (b) Notification to a Bank. Before finalizing any action to 
classify a Bank under this section, the Director shall provide a Bank 
written notice describing the proposed action and an opportunity to 
submit information that the Bank considers relevant to the proposed 
action in accordance with Sec.  1229.12 of this subpart.
    (c) Notification to the FHFA. A Bank shall provide written 
notification within ten calendar days of any event or development that 
has caused or is likely to cause its permanent or total capital to fall 
below the level necessary to maintain its capital classification at the 
level assigned in the most recent capital classification or 
reclassification determination by the Director or that is contained in 
the most recent notice of a proposed capital classification or 
reclassification provided under Sec.  1229.12(a) of this subpart.


Sec.  1229.3  Criteria for a Bank's capital classification.

    (a) Adequately capitalized. Except where the Director has exercised 
authority to reclassify a Bank, a Bank shall be considered adequately 
capitalized if, at the time of the determination under Sec.  1229.2(a) 
of this subpart, the Bank has sufficient permanent and total capital, 
as applicable, to meet or exceed its risk-based and minimum capital 
requirements.
    (b) Undercapitalized. Except where the Director has exercised 
authority to reclassify a Bank, a Bank shall be considered 
undercapitalized if, at the time of the determination under Sec.  
1229.2(a) of this subpart, the Bank does not have sufficient permanent 
or total capital, as applicable, to meet any one or more of its risk-
based or minimum capital requirements but such deficiency is not of a 
magnitude to classify the Bank as significantly undercapitalized or 
critically undercapitalized.
    (c) Significantly undercapitalized. Except where the Director has 
exercised authority to reclassify a Bank, a Bank shall be considered 
significantly undercapitalized if, at the time of the determination 
under Sec.  1229.2(a) of this subpart, the amount of permanent or total 
capital held by the Bank is less than 75 percent of what is required to 
meet any one of its risk-based or minimum capital requirements but the 
magnitude of the Bank's deficiency in total capital is not sufficient 
to classify it as critically undercapitalized.
    (d) Critically undercapitalized. Except where the Director has 
exercised authority to reclassify a Bank, a Bank shall be considered 
critically undercapitalized if, at the time of the determination under 
Sec.  1229.2(a) of this subpart, the total capital held by the Bank is 
less than or equal to the critical capital level for a Bank as defined 
under Sec.  1229.1 of this subpart.


Sec.  1229.4  Reclassification by the Director.

    (a) Discretionary reclassification. Where the Director determines 
that any of the grounds described in paragraph (b) of this section 
exist, the Director may reclassify a Bank as:
    (1) Undercapitalized, if it is otherwise classified as adequately 
capitalized;
    (2) Significantly undercapitalized, if it is otherwise classified 
as undercapitalized; or
    (3) Critically undercapitalized if it is otherwise classified as 
significantly undercapitalized.
    (b) Grounds for discretionary reclassification. Notwithstanding any 
other provision of this subpart, the Director may at any time 
reclassify a Bank under this section if:
    (1) The Director determines in writing that:
    (i) The Bank is engaging in conduct that could result in the rapid 
depletion of permanent or total capital;
    (ii) The value of collateral pledged to the Bank has decreased 
significantly; or
    (iii) The value of property subject to mortgages owned by the Bank 
has decreased significantly.
    (2) The Director determines, after notice to the Bank and 
opportunity for an informal hearing before the Director, that a Bank is 
in an unsafe and unsound condition; or
    (3) The Director finds, under Sec.  1371(b) of Safety and Soundness 
Act (12 U.S.C. 4631(b)), that the Bank is engaging in an unsafe and 
unsound practice because the Bank's asset quality, management, earnings 
or liquidity were found to be less than satisfactory during the most 
recent examination, and any deficiency has not been corrected.
    (c) Procedures. Before finalizing any action to reclassify a Bank 
under this section, the Director shall provide a Bank written notice 
describing the proposed action and an opportunity to submit information 
that the Bank considers relevant to the Director's proposed action in 
accordance with Sec.  1229.12 of this subpart.
    (d) Duration. Any condition, action or inaction by a Bank that is 
the basis for a decision to reclassify a Bank under this section or 
under any other authority provided the Director may be considered by 
the Director and form the basis of further, subsequent actions to 
reclassify the Bank until such time as the Bank remedies such condition 
or takes necessary action to correct such situation to the satisfaction 
of the Director.
    (e) Reservation of authority. Nothing in this section shall prevent 
the Director from exercising any other authority under the Safety and 
Soundness Act, the Bank Act or any regulation to reclassify a Bank for 
reasons not set forth in paragraph (b) of this section or to take any 
other action against a Bank.

[[Page 5606]]

Sec.  1229.5  Capital distributions for adequately capitalized Banks.

    (a) Restriction. An adequately capitalized Bank may not make a 
capital distribution if after doing so the Bank's capital would be 
insufficient to maintain a classification of adequately capitalized. A 
Bank may not make a capital distribution if such distribution would 
violate any restriction on the redemption or repurchase of capital 
stock or the payment of a dividend set forth in section 6 of the Bank 
Act (12 U.S.C. 1426) and any other applicable regulation.
    (b) Exception. Notwithstanding the restriction in paragraph (a) of 
this section, the Director may permit a Bank to repurchase or redeem 
its shares of stock if the transaction is made in connection with the 
issuance of additional Bank shares or obligations in at least an 
equivalent amount to the shares that are redeemed or repurchased and 
will reduce the Bank's financial obligations or otherwise improve its 
financial condition. Any transaction under this paragraph also must 
conform with any restriction on the redemption or repurchase of Bank 
stock set forth in section 6 of the Bank Act (12 U.S.C. 1426) and in 
any other applicable regulation.


Sec.  1229.6  Mandatory actions applicable to undercapitalized Banks.

    (a) Mandatory Actions by the Bank. A Bank that is classified as 
undercapitalized shall:
    (1) Submit to the Director for approval a capital restoration plan 
that complies with the the requirements and procedures established by 
Sec.  1229.11 of this part and receive approval from the Director for 
such plan;
    (2) Fulfill all terms, conditions and obligations contained in the 
capital restoration plan as approved by the Director;
    (3) Not make any capital distribution that would result in the Bank 
being reclassified as significantly undercapitalized or critically 
undercapitalized, nor make a capital distribution if such distribution 
would violate any restriction on the redemption or repurchase of 
capital stock or the declaration or payment of a dividend set forth in 
section 6 of the Bank Act (12 U.S.C. 1426) or in any other applicable 
regulation;
    (4) Not permit its average total assets in any calendar quarter to 
exceed its average total assets during the preceding calendar quarter, 
where such average is calculated based on the total amount of assets 
held by the Bank for each day in a quarter, unless:
    (i) The Director has approved the Bank's capital restoration plan; 
and
    (ii) The Director determines that:
    (A) The increase in total assets is consistent with the approved 
capital restoration plan; and
    (B) The ratio of tangible equity to the Bank's total assets is 
increasing at a rate sufficient to enable the Bank to become adequately 
capitalized within a reasonable time and consistent with any schedule 
established in the capital restoration plan; and
    (5) Not acquire, directly or indirectly, any interest in any entity 
nor engage in any new business activity unless:
    (i) The Director has approved the Bank's capital restoration plan, 
the Bank is implementing the capital restoration plan and the Director 
determines that proposed acquisition or activity will further 
achievement of the goals set forth in that plan; or
    (ii) The Director determines that the proposed acquisition or 
activity will be consistent with the safe and sound operation of the 
Bank and will further the Bank's compliance with its risk-based and 
minimum capital requirements in a reasonable period of time.
    (b) Mandatory reclassification by the Director. The Director shall 
reclassify an undercapitalized Bank as significantly undercapitalized 
if:
    (1) The Bank does not submit a capital restoration plan that is 
substantially in compliance with Sec.  1229.11 of this subpart and 
within the time frame required.
    (2) The Director does not approve the capital restoration plan 
submitted by the Bank; or
    (3) The Director determines that the Bank has failed in any 
material respect to comply with its approved capital restoration plan 
or fulfill any schedule for action established by that plan.
    (c) Monitoring. The Director shall monitor the condition of any 
undercapitalized Bank and monitor the Bank's compliance with the 
capital restoration plan and any restrictions imposed under this 
section or Sec.  1229.7 of this subpart. As part of this process, the 
Director shall review the capital restoration plan and any restrictions 
or requirements imposed on the undercapitalized Bank to determine 
whether such plan, restrictions or requirements are consistent with the 
safe and sound operation of the Bank and will further the Bank's 
compliance with its risk-based and minimum capital requirements in a 
reasonable period of time.


Sec.  1229.7  Discretionary actions applicable to undercapitalized 
Banks.

    (a) Discretionary safeguards. The Director may take any action with 
regard to an undercapitalized Bank that may be taken with regard to a 
significantly undercapitalized Bank under section 1366 of the Safety 
and Soundness Act (12 U.S.C. 4616) or Sec.  1229.7 or Sec.  1229.8 of 
this subpart if the Director determines that such action is necessary 
to assure the safe and sound operation of the Bank and the Bank's 
compliance with its risk-based and minimum capital requirements in a 
reasonable period of time.
    (b) Procedures. Before finalizing any action under this section, 
the Director shall provide a Bank written notice describing the 
proposed action or actions and an opportunity to submit information 
that the Bank considers relevant to the Director's decision to take 
such action in accordance with Sec.  1229.12 of this subpart.


Sec.  1229.8  Mandatory actions applicable to significantly 
undercapitalized Banks.

    A Bank that is classified as significantly undercapitalized:
    (a) Shall submit to the Director for approval a capital restoration 
plan that complies with the requirements and procedures established by 
Sec.  1229.11 of this part and receive approval from the Director for 
such plan;
    (b) Fulfill all terms, conditions and obligations contained in the 
capital restoration plan once the plan is approved by the Director;
    (c) Shall not make any capital distribution that would result in 
the Bank being reclassified as critically undercapitalized or that 
would violate any restriction on the redemption or repurchase of 
capital stock or the payment of a dividend set forth in section 6 of 
the Bank Act (12 U.S.C. 1426) or any applicable regulation;
    (d) Shall not make any capital distribution not otherwise 
prohibited under paragraph (c) of this section absent the prior written 
approval of the Director, provided that the Director may approve such 
distribution only if the Director determines that:
    (1) The capital distribution will enhance the ability of the Bank 
to meet its risk-based and minimum capital requirements promptly;
    (2) The capital distribution will contribute to the long-term 
financial safety and soundness of the Bank; or
    (3) The capital distribution is otherwise in the public interest;
    (e) Shall not without prior written approval of the Director pay a 
bonus to any executive officer, provided that for purposes of this 
paragraph a bonus shall

[[Page 5607]]

include any amount paid or accruing to an executive officer under a 
profit sharing arrangement; and
    (f) Shall not without the prior written approval of the Director 
compensate an executive officer at a rate exceeding the average rate of 
compensation of that officer during the 12 months preceding the 
calendar month in which the Bank became significantly undercapitalized, 
provided however, that for purposes of calculating the executive 
officer's average rate of compensation, such compensation shall not 
include any bonus or profit sharing paid or accruing to the officer 
during the 12 month period.


Sec.  1229.9  Discretionary actions applicable to significantly 
undercapitalized Banks.

    (a) Actions by the Director. The Director shall carry out this 
section by taking, at any time, one or more of the following actions 
with respect to a significantly undercapitalized Bank:
    (1) Limit the increase in any obligations or class of obligations 
of the Bank, including any off-balance sheet obligations. Such 
limitation may be stated in an absolute dollar amount, as a percentage 
of current obligations or in any other form chosen by the Director;
    (2) Reduce the amount of any obligations or class of obligations 
held by the Bank, including any off-balance sheet obligations. Such 
reduction may be stated in an absolute dollar amount, as a percentage 
of current obligations or in any other form chosen by the Director;
    (3) Limit the increase in, or prohibit the growth of any asset or 
class of assets held by the Bank. Such limitation may be stated in an 
absolute dollar amount, as a percentage of current assets or in any 
other form chosen by the Director;
    (4) Reduce the amount of any asset or class of asset held by the 
Bank. Such reduction may be stated in an absolute dollar amount, as a 
percentage of current obligations or in any other form chosen by the 
Director;
    (5) Acquire new capital in the form and amount determined by the 
Director, which specifically may include requiring a Bank to increase 
its level of retained earnings;
    (6) Modify, limit or terminate any activity of the Bank that the 
Director determines creates excessive risk;
    (7) Take steps to improve the management at the Bank by:
    (i) Ordering a new election for the Bank's board of directors in 
accordance with procedures established by the Director;
    (ii) Dismissing particular directors or executive officers, in 
accordance with section 1366(b)(5)(B) of the Safety and Soundness Act 
(12 U.S.C. 4616(b)(5)(B)), who held office for more than 180 days 
immediately prior to the date on which the Bank became 
undercapitalized, provided further that such dismissals shall not be 
considered removal pursuant to an enforcement action under section 1377 
of the Safety and Soundness Act (12 U.S.C. 4636a) and shall not be 
subject to the requirements necessary to remove an officer or director 
under that section; or
    (iii) Ordering the Bank to hire qualified executive officers, the 
hiring of whom, prior to employment by the Bank and at of the option of 
the Director, may be subject to review and approval by the Director; or
    (8)(i) Reclassify a significantly undercapitalized Bank as 
critically undercapitalized if:
    (A) The Bank does not submit a capital restoration plan that is 
substantially in compliance with Sec.  1229.11 of this part and within 
the time frame required;
    (B) The Director does not approve the capital restoration plan 
submitted by the Bank; or
    (C) The Director determines that the Bank has failed to make 
reasonable, good faith efforts to comply with its approved capital 
restoration plan and fulfill any schedule established by that plan.
    (ii) Subject to paragraph (c) of this section, the Director may 
reclassify a significantly undercapitalized Bank under paragraph 
(a)(8)(i) of this section at any time the grounds for such action 
exist, notwithstanding the fact that such grounds had formed the basis 
on which the Director reclassified a Bank from undercapitalized to 
significantly undercapitalized.
    (b) Additional safeguards. The Director may require a significantly 
undercapitalized Bank to take any other action not specifically listed 
in this section if the Director determines such action will help ensure 
the safe and sound operation of the Bank and the Bank's compliance with 
its risk-based and minimum capital requirements in a reasonable period 
of time more than any action specifically authorized under paragraph 
(a) of this section.
    (c) Procedures. Before finalizing any action under this section, 
the Director shall provide a Bank written notice describing the 
proposed action or actions and an opportunity to submit information 
that the Bank considers relevant to the Director's decision to take 
such action in accordance with Sec.  1229.12 of this subpart.


Sec.  1229.10  Actions applicable to critically undercapitalized Banks.

    (a) Appointment of conservator or receiver. Notwithstanding any 
other provision of federal or state law, the Director may appoint the 
FHFA as conservator or receiver of any Bank at any time after the 
Director determines that the Bank is, or the Director otherwise 
exercises authority to reclassify the Bank as, critically 
undercapitalized.
    (b) Periodic determination--(1) Determination. Not later than 30 
calendar days after the Director first determines that a Bank is, or 
the Director otherwise exercises authority to reclassify the Bank as, 
critically undercapitalized, and a least once during each succeeding 
30-day calendar period, the Director make a determination in writing as 
to whether:
    (i) The assets of the Bank are, and during the preceding 60 
calendar days have been, less than its obligations to its creditors and 
others, provided that the Director shall consider as an obligation only 
that amount of outstanding consolidated obligations for which the Bank 
is primary obligor or for which the Bank has been ordered to make 
payments of principal or interest on behalf of another Bank, or is 
actually making payments of principal or interest on behalf of another 
Bank; or
    (ii) The Bank is not, and during the previous 60 calendar days has 
not been paying its debts on a regular basis as such debts become due, 
provided that this provision does not apply to any unpaid debts that 
are the subject of a bona fide dispute.
    (2) Mandatory receivership. If the Director determines that the 
conditions described in either paragraph (b)(1)(i) or (b)(1)(ii) of 
this section applies to a Bank, the Director shall appoint the FHFA as 
receiver for the Bank. The appointment of the FHFA as receiver under 
this paragraph shall immediately terminate any conservatorship 
established for the Bank.
    (3) Determination not required. A determination under paragraph 
(b)(1) of this section shall not be required during any period in which 
the FHFA serves as receiver for a Bank.
    (c) Judicial review. If the Director appoints the FHFA as 
conservator or receiver of a Bank under paragraph (a) or (b)(2) of this 
section, the Bank may within 30 days of such appointment bring an 
action in the United States district court for the judicial district in 
which the Bank was established pursuant to section 3 of the Bank Act 
(12 U.S.C. 1423) or in the United States District Court for the 
District of Columbia, for an order requiring the

[[Page 5608]]

FHFA to remove itself as conservator or receiver.
    (d) Other applicable actions. Until such time the FHFA is appointed 
as conservator or receiver for a critically undercapitalized Bank, a 
critically undercapitalized Bank shall be subject to all mandatory 
restrictions or obligations applicable to significantly 
undercapitalized Bank under Sec.  1229.8 of this subpart and will 
remain subject to any on-going restrictions that the Director may have 
placed on the Bank under Sec.  1229.7 or Sec.  1229.9 of this subpart, 
or any restrictions or obligations that are applicable to the Bank 
under the terms of an approved capital restoration plan.


Sec.  1229.11  Capital restoration plans.

    (a) Contents. Each capital restoration plan submitted by a Bank 
shall set forth a plan to restore its permanent and total capital to 
levels sufficient to fulfill its risk-based and minimum capital 
requirements within a reasonable period of time. Such plan must be 
feasible given general market conditions and the conditions of the Bank 
and, at a minimum, shall:
    (1) Describe the actions the Bank will take, including any changes 
that the Bank will make to member stock purchase requirements, to 
assure that it will become adequately capitalized within the meaning of 
Sec.  1229.3(a) of this subpart;
    (2) Specify the level of permanent and total capital the Bank will 
achieve and maintain;
    (3) Specify the types and levels of activities in which the Bank 
will engage during the term of the plan, including any new business 
activities that it intends to begin during such term;
    (4) Describe any other actions the Bank intends to take to comply 
with any other requirements imposed on it under this subpart A of part 
1229;
    (5) Provide a schedule which sets forth dates for meeting specific 
goals and benchmarks and taking other actions described in the proposed 
capital restoration plan, including setting forth a schedule for it to 
restore its permanent and total capital to levels necessary for meeting 
its risk-based and minimum capital requirements; and
    (6) Address such other items that the Director shall provide in 
writing in advance of such submission.
    (b) Deadline for submission. A Bank must submit a proposed capital 
restoration plan no later than 10 calendar days after it receives 
written notification that such a plan is required either because the 
notice specifically states that the Director has required the 
submission of a plan or the notice indicates that the Bank's capital 
classification or reclassification is to a category for which a capital 
restoration plan is a mandatory action required of the Bank. The 
Director may extend this deadline if the Director determines that such 
extension is necessary. Any such extension shall be in writing and 
provide a specific date by which the Bank must submit its proposed 
capital restoration plan.
    (c) Review of the plan by the Director. The Director shall have 30 
calendar days from the date the Bank submits a proposed capital 
restoration plan to approve or disapprove the plan. The Director may 
extend the period for consideration of a capital restoration plan for a 
single 30 calendar day period by providing the Bank with written 
notification that the decision deadline has been extended. The Director 
shall provide the Bank with written notification of the decision to 
approve or not approve a proposed capital restoration plan. If the 
Director does not approve the capital restoration plan, the written 
notification of such decision shall provide the reasons for the 
disapproval.
    (d) Resubmission. If the Director does not approve the Bank's 
proposed capital restoration plan, the Bank shall submit a new capital 
restoration plan acceptable to the Director within 30 calendar days of 
the date that the Bank was notified of the disapproval. The Director 
may extend the period for the Bank's submission of a new acceptable 
capital restoration plan upon a determination that such extension is in 
the public interest. The Director shall provide the Bank written notice 
of the extension and include in such notice the date by which the Bank 
must submit an acceptable plan.
    (e) Amendments. The Director, in his or her sole discretion, may 
approve amendments to an approved capital restoration plan if, after 
consideration of changes in conditions of the Bank, changes in market 
conditions and other relevant factors, the Director determines that 
such amendments are consistent with the restoration of the Bank's 
capital to levels necessary to meet its risk-based and minimum capital 
requirements in a reasonable period of time and with the safe and sound 
operations of the Bank.
    (f) Effectiveness of provisions. A Bank is obligated to implement 
and fulfill all provisions of an approved capital restoration plan. 
Unless expressly addressed by the terms of the capital restoration 
plan, a Bank remains bound by each and every obligation and requirement 
set forth in the approved capital restoration plan until such 
requirement or obligation is amended under paragraph (e) of this 
section or terminated in writing by the Director.
    (g) Appointment of conservator or receiver. Notwithstanding any 
other provision of federal or state law, the Director may appoint the 
FHFA as conservator or receiver of any Bank that is classified as 
undercapitalized or significantly undercapitalized if the Bank fails to 
submit a capital restoration plan acceptable to the Director within the 
time frames established by this section or if the Bank materially fails 
to implement any capital restoration plan that has been approved by the 
Director. A Bank may within 30 days of such appointment bring an action 
in the United States district court for the judicial district in which 
the Bank is established pursuant to section 3 of the Bank Act (12 
U.S.C. 1423) or in the United States District Court for the District of 
Columbia, for an order requiring the FHFA to remove itself as 
conservator or receiver.


Sec.  1229.12  Procedures related to capital classification and other 
actions.

    (a) Classification or reclassification of a Bank. Before finalizing 
any decision to classify a Bank under Sec.  1229.2(a) of this subpart 
or reclassify the Bank under Sec.  1229.4(a) of this subpart, the 
Director shall provide the Bank with written notification of the 
proposed action that states the reasons for the proposed action and 
describes the information on which the proposed action is based. The 
notice required under this paragraph may be combined with the notice of 
a proposed supervisory action required under paragraph (b) of this 
section. The Director also may combine a notice informing the Bank of 
its capital classification and simultaneously informing the Bank that 
the Director intends to reclassify a Bank to a lower capital 
classification category.
    (b) Notice of a supervisory action. Before finalizing any action or 
actions authorized under Sec.  1229.7 or Sec.  1229.9 of this subpart, 
the Director shall provide the Bank with written notification of the 
proposed action that states the reasons for the proposed action and 
describes the information on which the proposed action is based. The 
notice required under this paragraph may be combined with the notice of 
a proposed action to classify or reclassify the Bank required under 
paragraph (a) of this section.
    (c) Bank response. During the 30 calendar day period beginning on 
the date that the Bank is provided notice under paragraph (a) or (b) of 
this section of a proposed action or actions, a Bank may submit to the 
Director any information that the Bank considers relevant or 
appropriate for the Director

[[Page 5609]]

to consider in determining whether to finalize the proposed action. The 
Director may, in his or her sole discretion, convene an informal 
hearing with representatives of the Bank to receive or discuss any such 
information. The Director, in his or her sole discretion, also may 
extend the period in which the Bank may respond to a notice for an 
additional 30 calendar days for good cause, or shorten such comment 
period if the Director determines the condition of the Bank requires 
faster action or a shorter comment period or if the Bank consents to a 
shorter comment period. The Director shall inform the Bank in writing, 
which may be provided as part of the notice required under paragraphs 
(a) or (b) of this section, of any decision to extend or shorten the 
comment period. The failure of a Bank to provide information during the 
allotted comment period will waive any right of the Bank to comment on 
the proposed action.
    (d) Final action. At the earlier of the completion of the comment 
period established under paragraph (c) or the receipt of information 
provided by the Bank during such period, the Director shall determine 
whether to take the proposed action or actions that were the subject of 
the notice under paragraphs (a) or (b) of this section, after taking 
into consideration any information provided by the Bank. Such notice 
shall respond to any information submitted by the Bank. Any final order 
that the Bank take action, refrain from action or comply with any other 
requirement that was the subject of a notice under paragraph (b) of 
this section shall take effect upon the Bank's receipt of the notice 
required under this paragraph, unless a different effective date is set 
forth in this notice, and shall remain in effect and binding on the 
Bank until terminated in writing by the Director or until any terms and 
conditions for termination, as set forth in the notice, have been met.
    (e) Final actions under this section. Any final decision that the 
Bank take action, refrain from action or comply with any other 
requirement that was the subject of a notice under paragraph (b) of 
this section shall constitute an order under the Safety and Soundness 
Act. The Director in his or her discretion may apply to the United 
States District Court for the District of Columbia or to the United 
States district court for the judicial district in which the Bank in 
question is established pursuant to section 3 of the Bank Act (12 
U.S.C. 1423) for the enforcement of such order, as allowed under Sec.  
1375 of the Safety and Soundness Act (12 U.S.C. 4635) . In addition, a 
Bank or any executive officer or director of a Bank can be subject to 
enforcement action, including the imposition of civil monetary 
penalties, under Sec.  1371, Sec.  1372 or Sec.  1376 of the Safety and 
Soundness Act (12 U.S.C. 4631, 4632, or 4636) for failure to comply 
with such an order.
    (f) Judicial review. A Bank that is not classified as critically 
undercapitalized may obtain judicial review of any final capital 
classification decision or of any final decision to take supervisory 
action made by the Director under Sec.  1229.2, Sec.  1229.4, Sec.  
1229.7 or Sec.  1229.9 in accordance with the requirements and 
procedures set forth in Sec.  1369D of the Safety and Soundness Act (12 
U.S.C. 4623).

    Dated: January 26, 2009.
James B. Lockhart III,
Director, Federal Housing Finance Agency.
[FR Doc. E9-2083 Filed 1-29-09; 8:45 am]
BILLING CODE 8070-01-P