[Federal Register Volume 74, Number 103 (Monday, June 1, 2009)]
[Rules and Regulations]
[Pages 26081-26084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-12628]
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FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-1336]
Capital Adequacy Guidelines: Treatment of Perpetual Preferred
Stock Issued to the United States Treasury Under the Emergency Economic
Stabilization Act of 2008
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Final rule.
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SUMMARY: The Board is adopting a final rule to allow bank holding
companies that have issued senior perpetual preferred stock to the U.S.
Department of the Treasury under the capital purchase and other
programs established by the Secretary of the Treasury under the
Emergency
[[Page 26082]]
Economic Stabilization Act of 2008, to include such capital instruments
in tier 1 capital for purposes of the Board's risk-based and leverage
capital guidelines for bank holding companies.
DATES: The final rule will become effective on July 1, 2009.
FOR FURTHER INFORMATION CONTACT: Norah M. Barger, Deputy Director,
(202) 452-2402, or John F. Connolly, Manager, (202) 452-3621, Division
of Banking Supervision and Regulation; or Kieran J. Fallon, Assistant
General Counsel, (202) 452-5270, or Benjamin W. McDonough, Senior
Attorney, (202) 452-2036, Legal Division; Board of Governors of the
Federal Reserve System, 20th Street and Constitution Ave., NW.,
Washington, DC 20551. For the hearing impaired only, Telecommunication
Device for the Deaf (TDD), (202) 263-4869.
SUPPLEMENTARY INFORMATION: On October 17, 2008, the Board issued an
interim final rule (interim rule) to allow bank holding companies that
issue senior perpetual preferred stock to the U.S. Department of
Treasury (Treasury) under the Troubled Asset Relief Program (TARP)
established by section 101 of the Emergency Economic Stabilization Act
of 2008 (Senior Perpetual Preferred Stock), to include such capital
instruments in tier 1 capital for purposes of the Board's risk-based
and leverage capital guidelines for bank holding companies.\1\ The
Board is now adopting the interim rule as a final rule without
substantive changes.\2\
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\1\ 73 FR 62851 (October 22, 2008). A correction to a citation
in the interim rule was published on October 27, 2008. 73 FR 63624
(October 27, 2008).
\2\ This final rule addresses only the regulatory capital
treatment of the Senior Perpetual Preferred Stock. Details about the
Capital Purchase Program and other programs established by the
Treasury under the EESA, including eligibility requirements and the
general terms and conditions of the senior perpetual preferred stock
issued to Treasury and warrants associated with such stock, are
available at http://www.financialstability.gov/.
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The Emergency Economic Stabilization Act of 2008 (EESA), Division A
of Public Law 110-343, 122 Stat. 3765 (2008), was intended, among other
things, ``to immediately provide authority and facilities that the
Secretary of the Treasury can use to restore liquidity and stability to
the financial system of the United States.'' \3\ Pursuant to the
authorities granted by the EESA, and in order to restore liquidity and
stability to the financial system, on October 14, 2008, Treasury
announced the establishment of the Capital Purchase Program (CPP) under
the TARP.\4\ Through the CPP, Treasury has provided capital to eligible
banks, bank holding companies, savings and loan holding companies, and
savings associations (collectively, banking organizations) by
purchasing Senior Perpetual Preferred Stock of the banking
organizations.\5\ As of April 20, 2009, the Treasury had invested
approximately $198 billion in U.S. banking organizations through the
CPP.
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\3\ See 12 U.S.C. 5201(1).
\4\ On November 17, 2008, the Treasury announced a term sheet
under the CPP for privately-held financial institutions. On April 7,
2009, the Treasury announced term sheets for public and non-public
holding companies with a top-tier parent that is organized in mutual
form. These term sheets have substantially the same terms as the
term sheet that was announced on October 14, 2008, for publicly-held
financial institutions. For purposes of the interim rule and the
final rule, the preferred stock issued to Treasury pursuant to these
term sheets is considered to be senior perpetual preferred stock
issued to Treasury under the TARP.
\5\ In a separate rule document published elsewhere in today's
issue of the Federal Register, the Board is publishing an interim
final rule to allow bank holding companies that are ``S-
corporations'' to include in tier 1 capital subordinated notes
issued to the Treasury under the CPP for purposes of the Board's
risk-based and leverage capital guidelines for bank holding
companies. (June 1, 2009).
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The Senior Perpetual Preferred Stock issued under the CPP is
perpetual preferred stock in the issuing banking organization, is
senior to the issuer's common stock, and is pari passu with the
issuer's existing preferred shares as to liquidation preference and
dividends (other than preferred shares which by their terms rank junior
to the issuer's most senior class of existing preferred shares). All
Senior Perpetual Preferred Stock issued by bank holding companies
provide for cumulative dividends. The aggregate amount of Senior
Perpetual Preferred Stock that may be issued by a banking organization
to Treasury under the CPP must be (i) not less than one percent of the
organization's risk-weighted assets, and (ii) not more than the lesser
of (A) $25 billion and (B) three percent of the organization's risk-
weighted assets.\6\
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\6\ Treasury has announced that it is considering re-opening the
Capital Purchase Program for institutions with total assets under
$500 million and raising--from 3 percent to 5 percent of risk-
weighted assets--the amount of capital instruments for which
qualifying institutions can apply.
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As noted in the preamble to the interim rule, the Senior Perpetual
Preferred Stock issued under the CPP includes several features that are
designed to make it attractive to a wide array of generally sound
banking organizations and encourage such banking organizations to
replace the Senior Perpetual Preferred with private capital in an
expeditious, but prudent, manner.
In particular, the Senior Perpetual Preferred Stock issued under
the CPP has an initial dividend rate of five percent per annum, which
will increase to nine percent per annum five years after issuance. In
addition, following the redemption of all the Senior Perpetual
Preferred Stock issued under the CPP, a banking organization will have
the right to repurchase any other equity security of the organization
(such as warrants or equity securities acquired through the exercise of
such warrants) held by Treasury.
In the preamble to the interim rule, the Board recognized that some
of the features of the Senior Perpetual Preferred Stock issued under
the CPP if included in preferred stock issued to private investors
would render the preferred stock ineligible for tier 1 capital
treatment or limit its inclusion in tier 1 capital under the Board's
capital guidelines for bank holding companies. Bank holding companies
generally may not include in tier 1 capital perpetual preferred stock
(whether cumulative or noncumulative) that has a dividend rate step-up.
Furthermore, the amount of eligible cumulative perpetual preferred
stock that a bank holding company may include in its tier 1 capital
generally is subject to a 25 percent limit.\7\
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\7\ See 12 CFR part 225, Appendix A, sections II.A.1.a.ii.,
II.A. a.iv.(1), II.A.1.b.i., and II.A.1.b.ii.(2). Until March 31,
2011, internationally-active banking organizations generally are
expected, but not required, to limit the amount of qualifying
cumulative perpetual preferred stock (including related surplus) and
qualifying trust preferred securities included in tier 1 capital to
15 percent of the sum of core capital elements. 12 CFR part 225,
Appendix A, section II.A.1.b.ii.(3).
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The interim rule permits bank holding companies to include all
Senior Perpetual Preferred Stock issued to Treasury under the TARP in
tier 1 capital without limit. The Board sought comment on all aspects
of the interim rule, including this treatment. The Board has carefully
reviewed and analyzed the issues raised by commenters and has decided
to adopt the interim rule as a final rule without substantive changes.
The Board received seven comments on the interim rule from individuals
and trade groups. Commenters largely supported the interim rule.\8\
Commenters acknowledged the Board's concerns with certain features of
the Senior Perpetual Preferred Stock, including its dividend rate step-
up. However, commenters noted that other factors mitigate these
concerns. Commenters noted, for example, that issuers will not be
allowed to repurchase other stock or increase common dividends for
three years after the issuance of the Senior
[[Page 26083]]
Perpetual Preferred Stock. In addition, commenters argued that the
dividend rate step-up of the Senior Perpetual Preferred Stock would
help achieve the fundamental public policy objective of replacing the
U.S. Government's equity investment with private capital in a prompt,
safe, and sound manner.
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\8\ One commenter recommended that the Board take steps to make
its capital adequacy guidelines easier to understand. This comment
is addressed below.
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The Board concurs that the specific features of the Senior
Perpetual Preferred Stock and the unique circumstances and purposes of
the Capital Purchase Program and TARP largely mitigate the Board's
concerns about the dividend rate step-up. The Senior Perpetual
Preferred Stock is issued to Treasury as part of a nationwide,
temporary, and emergency program, established by Treasury under the
EESA, to provide capital to eligible banking organizations and thereby
promote stability in the financial markets and the banking industry as
a whole and help restore economic growth.
Since publication of the interim rule, the Treasury has established
two additional programs under the EESA pursuant to which Treasury may
purchase Senior Perpetual Preferred Stock from bank holding companies--
the Targeted Investment Program (TIP) and Capital Assistance Program
(CAP). In addition, the Treasury has established the Asset Guarantee
Program (AGP), under which Treasury may receive Senior Perpetual
Preferred Stock from a bank holding company as a premium for
guaranteeing assets of the company.\9 \
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\9\ Details about the TIP, CAP, and AGP are available at http://www.financialstability.gov.
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The interim final rule adopted by the Board, by its terms, applies
to all Senior Perpetual Preferred Stock issued to Treasury under the
TARP, including any Senior Perpetual Preferred Stock issued under the
TIP, CAP, or AGP. The Board recognizes that the Senior Perpetual
Preferred Stock issued by bank holding companies to Treasury under the
TIP and AGP (TIP/AGP Preferred) and under the CAP (CAP Preferred) has
certain features that differ from the Senior Perpetual Preferred Stock
issued under the CPP. For example, both the TIP/AGP Preferred and CAP
Preferred have a higher initial interest rate, but no interest rate
step-up feature. In addition, the CAP Preferred is convertible to
common stock of the issuing banking organization at the organization's
option (subject to the approval of the appropriate Federal banking
agency), and must convert to common stock of the issuer after seven
years.\10\ Although the higher initial interest rate makes the TIP/AGP
Preferred and CAP Preferred somewhat less desirable from a capital
perspective because of its added cost to the issuing bank holding
company, the Board believes that this feature is mitigated by the lack
of an interest rate step-up (in the case of both instruments) and the
convertibility of the CAP Preferred.
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\10\ After conversion, the Convertible Preferred, as qualifying
common stockholders' equity, would be includable without limit in
the tier 1 capital of a bank holding company as a core capital
element for purposes of the Board's risk-based and leverage capital
guidelines for bank holding companies. See 12 CFR part 225, Appendix
A, section II.A.1.a.i.
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In addition, the CPP, TIP, CAP, and AGP each seek to advance the
same key government objectives underlying the EESA--fostering financial
market stability, and supporting the availability of credit to
consumers during the current stressed market conditions. As noted
above, the EESA was adopted to ``immediately provide authority and
facilities that the Secretary of the Treasury can use to restore
liquidity and stability to the financial system of the United States.''
\11\ Treasury's authority to make investments, and to provide
commitments to make investments, under the TARP, including through the
CPP and other programs, ends on December 31, 2009, subject to a
potential extension to October 3, 2010.\12\ The emergency nature and
statutorily-limited duration of the TARP helps to ensure that the
Senior Perpetual Preferred Stock issued by banking organizations will
serve its intended purpose as a provisional vehicle for buttressing the
capital bases of banking organizations and stabilizing the financial
system during a period of severe economic stress, while preserving the
preeminent importance of private capital to the stability of banking
organizations in the longer-term.
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\11\ See supra, n. 3.
\12\ See 12 U.S.C. 5230. Treasury's authority under the TARP may
be extended until October 3, 2010, only upon a written certification
to the Congress by the Secretary of the Treasury. This certification
must ``include a justification of why the extension is necessary to
assist American families and stabilize financial markets, as well as
the expected cost to the taxpayers for such an extension.'' Id.
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The Board also notes that, since the adoption of the interim rule,
the EESA has been amended to permit a banking organization to redeem
the Senior Perpetual Preferred Stock without regard to the source of
the funds used to redeem the stock and without regard to any waiting
period.\13\ The Board notes, however, that the amendment requires that
Treasury consult with the appropriate Federal banking agency before a
banking organization may make such a redemption.\14\ In addition, the
terms of the Senior Perpetual Preferred Stock issued under the CPP,
TIP, CAP, and AGP provide that redemption is subject to the approval of
the Federal Reserve, which provision remains effective.\15\ In light of
this provision, the Board recently noted in Federal Reserve SR letter
09-4 \16\ that any bank holding company that intends to redeem Senior
Perpetual Preferred Stock issued to Treasury under the CPP, TIP, CAP,
or AGP should first consult with Federal Reserve supervisory staff.
After reviewing a request by a bank holding company to redeem Senior
Perpetual Preferred Stock, the Board may take such actions as are
necessary or appropriate to restrict the bank holding company from
redeeming such securities if the redemption would be inconsistent with
the safety and soundness of the bank holding company.\17\
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\13\ See section 7001 of the American Recovery and Reinvestment
Act of 2009 (ARRA), Public Law 111-5, 123 Stat. 115 (2009).
Previously, during the first three years that the Senior Perpetual
Preferred Stock was outstanding, a banking organization was required
to redeem the stock with cash proceeds from the banking
organization's issuance of common stock or perpetual preferred stock
that (i) qualifies as tier 1 capital of the organization and (ii)
the proceeds of which are no less than 25 percent of the aggregate
issue price of the Senior Perpetual Preferred Stock. See 73 FR 62852
(October 22, 2008).
\14\ See section 7001 of the ARRA.
\15\ See 12 CFR part 225, Appendix A, section II.A.1.c.ii.(2).
\16\ SR 09-4, ``Applying Supervisory Guidance and Regulations on
the Payment of Dividends, Stock Redemptions, and Stock Repurchases
at Bank Holding Companies,'' March 27, 2009.
\17\ See 12 CFR 225.4(b)(1); 12 CFR part 225, Appendix A,
sections II.(iii) and II.A.1.c.ii.(2).
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For these reasons and in order to continue to support the strong
public policy objectives of the CPP, TIP, CAP, and AGP and promote the
stability of banking organizations and the financial system, the Board
has adopted the interim rule in final form. The final rule--like the
interim rule--permits bank holding companies that have issued Senior
Perpetual Preferred Stock to the Treasury under the TARP to include
such stock without limit as tier 1 capital for purposes of the Board's
risk-based and leverage capital guidelines for bank holding
companies.\18\ The Board's decision to include Senior Perpetual
Preferred Stock as an unrestricted core capital element in bank holding
companies' tier 1 capital is based on each of the factors discussed
above--including the emergency and temporary nature of the legislation
authorizing the acquisition of such stock by the Treasury--as well as
[[Page 26084]]
those presented in the interim rule, and is further supported by the
commenters and the points they raised.
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\18\ See 12 CFR part 225, Appendices A and D.
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As noted in the preamble to the interim rule, the Board expects
bank holding companies that issue Senior Perpetual Preferred Stock
under the CPP, TIP, CAP, and AGP like all other bank holding companies,
to hold capital commensurate with the level and nature of the risks to
which they are exposed. In addition, the Board expects bank holding
companies that issue Senior Perpetual Preferred Stock to appropriately
incorporate the dividend features of the stock into the organization's
liquidity and capital funding plans. Bank holding companies should not
construe the Board's decision to allow the inclusion of the Senior
Perpetual Preferred Stock as an unrestricted core capital element in
bank holding companies' tier 1 capital as in any way (1) detracting
from the Board's longstanding stance regarding the unacceptability of a
rate step-up in other tier 1 capital instruments or (2) reflecting a
decision by the Board to allow cumulative perpetual preferred stock to
be includable in bank holding companies' tier 1 capital in excess of
the limits established for restricted core capital elements under the
Board's capital guidelines for bank holding companies.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires an agency that is
issuing a final rule to prepare and make available a regulatory
flexibility analysis that describes the impact of the final rule on
small entities.\19\ The RFA provides that an agency is not required to
prepare and publish a regulatory flexibility analysis if the agency
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities.\20\ Under regulations
issued by the Small Business Administration,\21\ a small entity
includes a bank holding company with assets of $175 million or less (a
small bank holding company). As of December 31, 2008, there were
approximately 2,586 small bank holding companies.
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\19\ 5 U.S.C. 603(a).
\20\ 5 U.S.C. 605(b).
\21\ See 13 CFR 121.201.
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As a general matter, the Board's risk-based and leverage capital
guidelines for bank holding companies apply only to a bank holding
company that has consolidated assets of $500 million or more.
Accordingly, this final rule will not affect small bank holding
companies and, for this reason, the Board hereby certifies that the
rule will not have a significant impact on a substantial number of
small bank holding companies.
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3506), the Board has reviewed the final rule to
assess any information collections. There are no collections of
information as defined by the Paperwork Reduction Act in the final
rule.
Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102,
requires the Federal banking agencies to use plain language in all
proposed and final rules published after January 1, 2000. The Board
invited comment on how to make the interim rule easier to understand.
The Board received one comment generally criticizing the Board's
capital adequacy guidelines as difficult to understand.
The Board acknowledges that the regulation of a banking
organization's capital is a complex area. The Board's capital
guidelines necessarily must reflect this complexity. Nevertheless, the
Board has endeavored to present this final rule, like all of its
capital rules, in a manner that, in light of the nature and complexity
of the subject matter, is as brief, comprehensible, and straightforward
as possible.
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
0
For the reasons stated in the preamble, the Board of Governors of the
Federal Reserve System amends part 225 of chapter II of title 12 of the
Code of Federal Regulations as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
1. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
2. In appendix A to part 225:
0
a. Revise section II.A.1.a.ii.; and
0
b. Revise footnote 8 in section II.A.1.c.ii.(2) to read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
II. * * *
A. * * *
1. * * *
a. * * *
ii. Qualifying noncumulative perpetual preferred stock,
including related surplus, and senior perpetual preferred stock
issued to the United States Department of the Treasury (Treasury)
under the Troubled Asset Relief Program (TARP), established by the
Emergency Economic Stabilization Act of 2008 (EESA), Division A of
Public Law 110-343 (which for purposes of this appendix shall be
considered qualifying noncumulative perpetual preferred stock),
including related surplus;
* * * * *
c. * * *
ii. * * *
(2) * * *
\8\ Notwithstanding this provision, senior perpetual preferred stock
issued to the Treasury under the TARP, established by the EESA, may
be included in tier 1 capital. In addition, traditional convertible
perpetual preferred stock, which the holder must or can convert into
a fixed number of common shares at a preset price, generally
qualifies for inclusion in tier 1 capital provided all other
requirements are met.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, May 21, 2009.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. E9-12628 Filed 5-29-09; 8:45 am]
BILLING CODE 6210-02-P