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FDIC Federal Register Citations

[Federal Register: January 25, 2002 (Volume 67, Number 17)]
[Rules and Regulations]
[Page 3783-3807]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25ja02-17]

[[Page 3783]]

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Part II

Department of the Treasury
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Office of the Comptroller of the Currency


12 CFR Part 3


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Federal Reserve System
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12 CFR Parts 208 and 225


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Federal Deposit Insurance Corporation
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12 CFR Part 325


Capital; Leverage and Risk-Based Capital Guidelines; Capital Adequacy
Guidelines; Capital Maintenance: Nonfinancial Equity Investments; Final
Rule

[[Page 3784]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 02-01]
RIN 1557-AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1097]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC47


Capital; Leverage and Risk-Based Capital Guidelines; Capital
Adequacy Guidelines; Capital Maintenance: Nonfinancial Equity
Investments

AGENCIES: Office of the Comptroller of the Currency (OCC), DOT; Board
of Governors of the Federal Reserve System (Board); and Federal Deposit
Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The OCC, Board and FDIC (collectively, the agencies) are
amending their capital guidelines to establish special minimum capital
requirements for equity investments in nonfinancial companies. The new
capital requirements, which will apply symmetrically to equity
investments of banks and bank holding companies, impose a series of
marginal capital charges on covered equity investments that increase
with the level of a banking organization's overall exposure to equity
investments relative to the organization's Tier 1 capital. The final
rule is substantially similar to the proposal that the agencies
published for comment in February 2001.

EFFECTIVE DATE: April 1, 2002.

FOR FURTHER INFORMATION CONTACT: OCC: Tommy Snow, Director, Capital
Policy (202/874-5070); Karen Solomon, Director (202/874-5090), or Ron
Shimabukuro, Counsel (202/874-5090), Legislative and Regulatory
Activities Division, Office of the Comptroller of the Currency, 250 E
Street, SW, Washington, DC 20219.
Board: Michael G. Martinson, Associate Director (202/452-3640),
James A. Embersit, Assistant Director (202/452-5249), or Mary Frances
Monroe, Senior Supervisory Financial Analyst (202/452-5231), Division
of Banking Supervision and Regulation; Scott G. Alvarez, Associate
General Counsel (202/452-3583), or Kieran J. Fallon, Senior Counsel
(202/452-5270), Legal Division; Jean Nellie Liang, Assistant Director
(202/452-2918), Division of Research & Statistics; Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue, NW,
Washington, D.C. 20551. For users of Telecommunications Device for the
Deaf (``TDD'') only, contact 202/263-4869.
FDIC: Mark S. Schmidt, Associate Director, (202/898-6918), Stephen
G. Pfeifer, Examination Specialist, Accounting Section (202/898-8904),
Curtis Vaughn, Examination Specialist (202/898-6759), Division of
Supervision; Michael B. Phillips, Counsel, (202/898-3581), Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street, NW,
Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

A. Background

In March 2000, the Board invited public comment on a proposal to
amend its consolidated capital adequacy guidelines for bank holding
companies to establish special capital requirements for investments
made, directly or indirectly, by bank holding companies in nonfinancial
companies.\1\ The Board's proposal, which was developed in consultation
with the Secretary of the Treasury, applied to nonfinancial investments
made directly or indirectly by a bank holding company under a variety
of authorities, including investments made by financial holding
companies under the merchant banking authority granted by the Gramm-
Leach-Bliley Act (GLB Act) and investments made directly or indirectly
by a bank holding company through a small business investment company
(SBIC). The Board's initial capital proposal would have assessed, at
the holding company level, a 50 percent capital charge on the carrying
value of each covered investment.
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\1\ See 65 FR 16480, March 28, 2000.
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In February 2001, the Board, OCC and FDIC jointly issued for
comment a revised capital proposal (revised proposal).\2\ The revised
proposal attempted to balance the concerns raised by commenters on the
Board's initial proposal with the belief of the agencies that banking
organizations must maintain sufficient capital to offset the risks
associated with equity investment activities. In developing the revised
proposal, the agencies were guided by several important principles,
including that:
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\2\ See 66 FR 10212, Feb. 14, 2001.
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Equity investment activities in nonfinancial companies
generally involve greater risks than traditional bank and financial
activities;
The risk of loss associated with a particular equity
investment is likely to be the same regardless of the legal authority
used to make the investment or whether the investment is held by a bank
holding company or a bank; and
The financial risks to an organization engaged in equity
investment activities increase as the level of the organization's
investments accounts for a larger portion of its capital, earnings and
activities.
In light of these principles, the revised proposal provided for a
progression of Tier 1 marginal capital charges that increases with the
size of the aggregate equity investment portfolio of the banking
organization relative to its Tier 1 capital. The proposed Tier 1 charge
ranged from 8 percent for investments that aggregated up to 15 percent
of the banking organization's Tier 1 capital, to 25 percent for
investments representing 25 percent or more of the banking
organization's Tier 1 capital.
The agencies proposed to apply these higher capital charges
symmetrically to nonfinancial equity investments held by banks and bank
holding companies. In particular, the agencies proposed to apply these
charges to investments held directly or indirectly under the merchant
banking authority of section 4(k)(4)(H) of the BHC Act; held directly
or indirectly by bank holding companies in less than 5 percent of the
shares of a nonfinancial company under section 4(c)(6) or 4(c)(7) of
the BHC Act; made by bank holding companies or banks in nonfinancial
companies through SBICs; held directly or indirectly by bank holding
companies or banks in nonfinancial companies under the portfolio
investment provisions of Regulation K; and held by banks in
nonfinancial companies under section 24 of the Federal Deposit
Insurance Act (FDI Act).
The agencies proposed that the higher capital charges would not
apply to SBIC investments of a bank or bank holding company to the
extent such investments, in the aggregate, did not exceed 15 percent of
the banking organization's Tier 1 capital. All SBIC investments,
including any amount exempted from the higher proposed charges, would
be included in the calculation of a banking organization's aggregate
equity investment portfolio for purposes of determining the marginal
capital charge applicable to non-SBIC

[[Page 3785]]

investments and SBIC investments that, in the aggregate, exceed 15
percent of Tier 1 capital. The agencies also proposed to exempt from
coverage investments made by state banks under the special grandfather
rights established by section 24(f) of the FDI Act.
The agencies requested comment on all aspects of the revised
proposal and on a number of specific topics identified in the proposal.
For example, the agencies requested comment on whether it would be
necessary or appropriate to grandfather individual equity investments
that were made before banking organizations received notice that the
capital requirements for such investments might change.

B. Overview of Comments

The agencies collectively received approximately 60 comments on the
revised proposal, including many comments that were submitted to more
than one of the agencies. Commenters included trade associations for
the banking, securities and insurance industries, state banking
departments and individual banks and bank holding companies. Some
commenters supported the lower marginal capital charge structure and
level of deductions adopted by the revised proposal. For example, some
commenters stated that the marginal approach embodied in the revised
proposal was appropriate, logical, and consistent with the agencies'
responsibilities to ensure the safety and soundness of banking
organizations. One large banking organization with a significant amount
of equity investments also stated that the revised proposal would not
have a significantly negative impact on its ability to make equity
investments. Many commenters also supported the agencies' willingness
to take steps to meaningfully address some of the issues raised by
commenters concerning the initial proposal.
A number of commenters, however, stated their belief that no
special capital charge was necessary for equity investments. Some of
these commenters argued that banking organizations are adept at
managing the risks of these investment activities and that additional
regulatory capital is not necessary to adequately support these
activities. Some commenters also expressed concern that the higher
capital charges imposed by the revised proposal would place banking
organizations at a competitive disadvantage to independent securities
firms and foreign banks in the market for making equity investments. In
addition, several commenters asserted that the higher proposed charges
would discourage independent securities firms that make equity
investments as part of their business from affiliating with a bank.
Commenters argued that these effects would frustrate Congress' desire,
as expressed in the GLB Act, to permit a ``two-way street'' between
securities firms and banking organizations.
Some commenters also asserted that the agencies should delay
adoption of a final rule and address the issue of the appropriate
capital treatment for equity investments in connection with the broader
revisions to the capital rules currently being considered by the Basel
Committee on Banking Supervision (Basel Committee). A number of
commenters also reiterated their position that banking organizations
should be permitted to use their internal capital models to determine
the amount of regulatory capital necessary to support the particular
investment portfolio of the organization, subject to supervisory review
of these models during the examination process. A few commenters
suggested that a smaller, uniform capital charge or risk-weight (e.g. a
10 percent Tier 1 capital deduction or a 250 percent risk-weight) would
be adequate to offset the risk of all equity investments held by
banking organizations, regardless of the size of the organization's
overall equity investment portfolio.
A number of commenters also contended that, if a higher capital
charge was imposed, the capital charge should apply only to investments
made by financial holding companies under the GLB Act's merchant
banking authority, and not to any investment made by a banking
organization under one or more of the legal authorities that were in
effect prior to the GLB Act. Commenters asserted that banking
organizations have a history of profitably making investments under
these pre-existing authorities and that there is no evidence to support
an increase in the regulatory capital charge for such investments. A
few commenters also contended that the proposed higher capital charges
should not apply to equity investments made by a company engaged in a
nonfinancial activity so long as the company was ``predominantly''
engaged in financial activities.
Commenters strongly supported several specific aspects of the
revised proposal. For example, many commenters supported the decision
by the agencies to exempt from the new capital charge SBIC investments
that, in the aggregate, represented less than 15 percent of the banking
organization's Tier 1 capital.\3\ Many of these commenters, however,
also argued that any SBIC investments that were exempted from the
higher proposed charges also should be excluded for purposes of
determining the aggregate size of the banking organization's equity
portfolio and, thus, the appropriate marginal charge to be applied to
non-exempt investments. Commenters also supported the agencies'
proposal to exclude from coverage investments made by insurance company
subsidiaries of financial holding companies under section 4(k)(4)(I) of
the BHC Act; investments made by state banks under the grandfather
rights established by section 24(f) of the FDI Act (12 U.S.C.
1831a(f)); and investments in debt instruments that do not serve as the
functional equivalent of equity.
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\3\ One large banking organization, however, opposed providing
an exemption for SBIC investments on the grounds that these
investments entail the same risks as other types of nonfinancial
equity investments.
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In addition, in response to the agencies' request for comments on
the subject, many commenters asserted that any higher capital charges
established for nonfinancial equity investments should not apply to
investments made before March 13, 2000. These commenters noted that
such investments were made before the industry was aware that a higher
capital charge might be established for equity investments and argued
that applying the higher charges to these pre-existing investments
would be inequitable and could cause some investments to become
unprofitable. Many of these commenters also argued that any
grandfathered investments should not be included in the banking
organization's aggregate equity portfolio for purposes of determining
the marginal charge applicable to non-exempt investments made on or
after March 13, 2000.
Commenters also argued that the higher proposed capital charges
should not be applied in determining a banking organization's Tier 1
leverage ratio, because the leverage ratio generally does not account
for the relative risks of a banking organization's assets. Finally,
some commenters requested that the agencies clarify whether or how the
proposed higher charges would apply to particular types of equity
investments, including equity investments held in the trading account
or for hedging purposes; investments that are acquired in satisfaction
of a debt previously contracted (DPC); and investments made by a
financial holding company under section 4(k)(1)(B) of the BHC Act in a

[[Page 3786]]

company that is engaged in activities that the Board has determined are
``complementary'' to a financial activity.

C. Explanation of the Final Rule

The agencies have carefully reviewed the revised proposal in light
of all of the comments received. Following this review, the agencies
have adopted a final rule that is substantially similar to the revised
proposal that was issued for comment. As described further below, the
agencies also have made several changes to the rule to address matters
raised by commenters and to further clarify the scope and application
of the rule. These changes include a grandfather provision designed to
apply the rule's capital charges only to investments made on or after
March 13, 2000.
As an initial matter, the agencies believe it is important and
appropriate to adopt a final rule at this time that establishes a
regulatory minimum capital requirement for equity investments made by
banking organizations in nonfinancial companies that is higher than the
regulatory minimum capital charge that applies more broadly to banking
assets. Data demonstrate that equity investments in nonfinancial
companies generally involve greater risks than traditional banking and
financial activities. An analysis of the annual returns for the period
1946 through 1998 for publicly traded small capitalization stocks in
the United States indicates that a banking organization would have to
hold capital well in excess of the current regulatory minimum capital
levels to maintain the margin of safety required to retain the lowest
investment grade rating on a bond issued to finance a portfolio of
small capitalization stocks. Furthermore, as discussed in the revised
proposal, data from a study of venture capital investment firms over
the past 25 years, information and analysis from two national rating
agencies, and a survey of the internal capital allocation policies of
several banking organizations and securities firms engaged in equity
investment activities all indicate that equity investments require
higher capital support than traditional banking activities. The
performance of the U.S. equity markets over the past few quarters
further evidences the volatility and risk of equity investments.
The level and significance of equity investment activities at
banking organizations also has increased substantially in the years
since adoption of the original capital rules that govern banks and bank
holding companies generally. For example, the size of SBICs owned by
banking organizations more than doubled in the period from 1995 to
1999, and aggregate equity investments held by banking organizations
during that period more than quadrupled. In addition, as of June 30,
2001, financial holding companies held more than $8.5 billion in
investments under the new GLB Act authority to make merchant banking
investments--authority that only became effective on March 13, 2000.
Although the growth of these activities recently has slowed, equity
investment activities have become, and are likely to continue to be, a
significant business line for many banking organizations.
In light of the increased significance of the equity investment
activities of banking organizations and the risks associated with these
investments, the agencies believe it is important to revise their
capital rules to reflect more accurately the risks equity investments
may pose to the safety and soundness of banking organizations. For
these same reasons, the agencies do not believe it would be prudent or
appropriate to delay adoption of a final rule, as some commenters
suggested. The agencies are aware of, and are participating actively
in, the ongoing comprehensive review and revision of the Basel Capital
Accord, which is expected to include provisions addressing equity
investment activities. The agencies believe this rule is consistent
with the efforts of the Basel Committee to develop a minimum regulatory
capital requirement for equities that is more risk-sensitive than the
current 100-percent risk-weighting. The agencies note, moreover, that
any revised Accord is not expected to become effective until 2005 at
the earliest. The agencies view this final rule as an interim step or
``bridge'' to the revised Accord. The agencies fully expect to revisit
the capital charge applicable to equity investments once the Basle
Capital Accord is revised, and will at that time decide whether and
what, if any, revisions to the agencies' capital guidelines should be
adopted in light of the final revised Accord.
The agencies also continue to believe that internal capital models
that take account of the different risks and capital needs of the
credit and equity activities of a particular banking organization
ultimately represent an effective method for determining the capital
adequacy of an organization. The agencies do not believe that it would
be appropriate at this time, however, to rely on internal capital
models, as a replacement for regulatory minimum capital requirements,
to address the higher risks associated with the equity investment
activities of banking organizations. The stage of development and
sophistication of internal models for assessing equity risk exposures
varies widely across institutions. While modeling techniques for equity
investments are being developed and refined at major U.S. banking
organizations, few institutions have adequately robust modeling
capabilities for equity investments at the present time.
The agencies note that the Basel Committee is actively considering
the circumstances under which it would be appropriate for a banking
organization to calculate its capital requirements under an internal
models-based approach. As part of this effort, the agencies are working
as part of the Basel Committee to develop the criteria under which a
banking organization could use internal measurement systems or internal
models to estimate the organization's risk exposure to equity
investments for risk-based capital purposes.\4\ The agencies will
continue to work with banking organizations that seek to develop robust
and effective internal models and with other domestic and international
regulatory agencies to develop a regulatory framework that permits
banking organizations to use models that meet appropriate quantitative
and qualitative standards in assessing the organization's capital
adequacy.
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\4\ See Basel Committee on Banking Supervision, Working Paper on
Risk Sensitive Approaches for Equity Exposures in the Banking Book
for IRB Banks (August 2001) (``Equity Risk Working Paper'').
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The Board notes that, once the final rule becomes effective on
April 1, 2002, the aggregate investment review thresholds that
currently apply to the merchant banking investments of financial
holding companies will expire automatically.\5\ These thresholds
currently require a financial holding company to obtain the Board's
approval prior to making additional merchant banking investments if the
aggregate carrying value of the holding company's existing merchant
banking investments exceeds the lesser of 30 percent of Tier 1 capital,
or 20 percent of Tier 1 capital after excluding investments in private
equity funds. As the Board previously noted, these review thresholds
were adopted as an interim measure pending adoption of a final rule
addressing the appropriate regulatory capital treatment of merchant
banking investments.
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\5\ See 12 CFR 225.174(c); 12 CFR 1500.5(c).
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1. Equity Investments Covered by Final Rule

The final rule, like the revised proposal, applies symmetrically to
equity investments made by bank

[[Page 3787]]

holding companies and banks. Bank holding companies and banks generally
make equity investments in reliance on, and the capital charge applies
only to investments held under, the following authorities--
The merchant banking authority of section 4(k)(4)(H) of
the BHC Act (12 U.S.C. 1843(k)(4)(H)) and subpart J of the Board's
Regulation Y (12 CFR 225.170 et seq.);
The authority to acquire up to 5 percent of the voting
shares of any company under section 4(c)(6) or 4(c)(7) of the BHC Act
(12 U.S.C. 1843(c)(6) and (c)(7));
The authority to invest in SBICs under section 302(b) of
the Small Business Investment Act of 1958 (15 U.S.C. 682(b));
The portfolio investment provisions of Regulation K (12
CFR 211.8(c)(3)), including the authority to make portfolio investments
through Edge and Agreement corporations; \6\ and
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\6\ Recently, the Board comprehensively revised Regulation K,
which, among other things, governs the foreign activities of U.S.
banking organizations. See 66 FR 54346, Oct. 26, 2001. As part of
that action, the portfolio investment provisions previously located
at 12 CFR 211.5(b)(1)(iii) were amended and moved to 12 CFR
211.8(c)(3).
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The authority to make investments under section 24 of the
FDI Act (other than under section 24(f)) (12 U.S.C. 1831a).
For purposes of the rule, an equity investment includes the
purchase, acquisition or retention of any equity instrument (including
common stock, preferred stock, partnership interests, interests in
limited liability companies, trust certificates and warrants and call
options that give the holder the right to purchase an equity
instrument), any equity feature of a debt instrument (such as a warrant
or call option), and any debt instrument that is convertible into
equity. The rule generally does not apply to investments in
nonconvertible senior or subordinated debt. The agencies, however, may
impose the rule's higher charges on any instrument if the agency, based
on a case-by-case review of the investment in the supervisory process,
determines that the instrument serves as the functional equivalent of
equity or exposes the banking organization to essentially the same
risks as an equity instrument. The agencies believe this reservation of
supervisory authority is appropriate to ensure that the higher capital
charges apply to instruments that function as equity, and ensure that
banking organizations do not evade the requirements of the rule through
financial engineering.
The capital charge applies only to investments held directly or
indirectly in nonfinancial companies under one or more of the
authorities listed above. For purposes of the final capital rule, a
nonfinancial company is defined to mean an entity that engages in any
activity that has not been determined to be financial in nature or
incidental to financial activities under section 4(k) of the BHC Act.
For investments held directly or indirectly by a bank, the term
``nonfinancial company'' also does not include a company that engages
only in activities that are permissible for the parent bank to conduct
directly. The rule does not apply to investments made in companies that
engage solely in banking and financial activities. Banking
organizations have special expertise in managing the risks associated
with banking and financial activities.
A few commenters asserted that the proposed higher capital charges
should apply only to merchant banking investments made by financial
holding companies under section 4(k)(4)(H) of the BHC Act, or should
not apply to investments made under one or more of the other investment
authorities listed above. The risk of loss associated with a particular
equity investment is likely to be the same regardless of the legal
authority used by a banking organization to make the investment, or
whether the investment is held by a bank holding company or a bank.
Supervisory experience, particularly over the past few quarters, has
confirmed that significant valuation declines may occur with respect to
equity investments held under a variety of legal authorities. It is for
these reasons that banking organizations are increasingly making
investment decisions and managing equity investment risks across legal
entities as a single business line within the organization. It is for
these same reasons that the final rule, like the revised proposal,
applies symmetrically to nonfinancial equity investments held by banks
and bank holding companies and applies to equity investments made under
each of the principal legal authorities currently available to banking
organizations for making such investments.
As noted above, the final rule applies to investments made by bank
holding companies or banks in or through SBICs under section 302(b) of
the Small Business Investment Act. In light of Congress' express desire
to facilitate the funding of small businesses through SBICs, the
statutory limits on the amount of capital a banking organization may
invest in SBICs, and the existing regulatory framework governing the
formation and operations of SBICs, the agencies proposed to exempt from
the higher capital charges SBIC investments of banking organizations
that, in the aggregate, did not exceed 15 percent of the Tier 1 capital
of the banking organization.
Commenters strongly supported this treatment. Accordingly, the
final rule continues to provide an exception for SBIC investments. As
described further below (see Part C.4 below), the rule does not place
any additional regulatory capital charge on SBIC investments held
directly or indirectly by a bank to the extent the aggregate adjusted
carrying value of all such investments does not exceed 15 percent of
the Tier 1 capital of the bank. For bank holding companies, no
additional regulatory capital charge is imposed on SBIC investments
held directly or indirectly by the holding company to the extent the
aggregate adjusted carrying value of all such investments does not
exceed 15 percent of the aggregate of the holding company's pro rata
interests in the Tier 1 capital of its subsidiary banks.
The rule also applies to investments held by state banks in a
nonfinancial company under section 24 of the FDI Act. Section 24
permits a state bank to acquire equity in a nonfinancial company if the
FDIC determines that the investment does not pose a significant risk to
the deposit insurance fund. The FDIC is empowered to establish and has
established higher capital requirements and other limitations on equity
investments of state banks held under this authority, such as
investments in companies engaged in real estate investment and
development activities. The FDIC has to date in most cases required
state banks that make these investments to limit the amount of the
investment and to deduct these investments from the bank's capital,
effectively imposing a 100 percent capital charge on these investments.
Because of the FDIC's practice in establishing higher capital charges,
the final rule will not have the effect of imposing additional capital
requirements on investments held under section 24 of the FDI Act.\7\
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\7\ The final rule permits the Board of Directors of the FDIC,
acting directly in exceptional cases and after a review of the
proposed activity, to allow a lower capital deduction for
investments approved by the Board of Directors under section 24 of
the FDI Act so long as the bank's investments under section 24 and
SBIC investments represent, in the aggregate, less than 15 percent
of the Tier 1 capital of the bank. The FDIC may also impose a higher
capital charge on any investment made under section 24 where
appropriate.
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The agencies proposed to exclude from coverage equity investments
made

[[Page 3788]]

by state banks under the grandfather rights established by section
24(f) of the FDI Act and commenters strongly supported this exception.
Section 24(f) permits a state bank to make investments only in shares
of publicly traded companies and registered investment companies, and
only if the investment was permitted under a state law enacted as of a
certain date and the state bank engaged in the investment activity as
of a certain date. The FDI Act also provides that the total amount of
investments made by a state bank under section 24(f) may not exceed the
capital of the bank, and expressly authorizes the FDIC to require the
divestiture of any investment made under the section if the FDIC
determines the investment will have an adverse effect on the safety and
soundness of the bank. In light of the limited scope of these
investments and the statutory restrictions applicable to them, the
agencies have adopted an exemption for these investments in the final
rule.
Some commenters asserted that the proposed higher charges should
not apply to any investment made in a company that is predominantly
engaged in banking or financial activities. These investments, by
definition, involve some mixing of banking and commerce, and present
special risks to the investing banking organization. In addition, the
agencies believe that the adoption of a ``predominantly financial''
standard would create significant administrative and verification
burdens for banking organizations and their supervisors, and could
create opportunities for banking organizations to evade the higher
capital charges established by the rule. In this regard, the agencies
believe it would be difficult for banking organizations to establish
and document adequately, and for the appropriate supervisor to monitor
effectively, the mix of a company's financial and nonfinancial
activities. On the other hand, the approach adopted by the final rule
provides a clear standard for banking organizations and their
supervisors to use in identifying investments covered by the rule
while, at the same time, excluding from coverage investments in
companies engaged solely in banking or financial activities that the
banking organization could hold under their traditional authorities to
engage in such activities.
In response to questions raised by commenters, the agencies wish to
clarify that the rule does not apply to investments made in a community
development corporation to promote the public welfare under 12 U.S.C.
24(Eleventh). In addition, the rule does not apply to equity securities
that are acquired in satisfaction of a debt previously contracted (DPC)
and that are held and divested in accordance with applicable law, or to
unexercised warrants acquired by a bank as additional consideration for
making a loan where the warrants are not held under one of the legal
authorities covered by the rule.
The final rule also does not apply to equity investments made under
section 4(k)(4)(I) of the BHC Act by an insurance underwriting
affiliate of a financial holding company. Investments made by insurance
underwriting affiliates of a financial holding company generally are
already subject to higher capital charges under state insurance laws.
The Board expects to monitor financial holding companies with insurance
underwriting affiliates to ensure that they do not arbitrage any
differences in the capital requirements applicable to equity
investments made by insurance companies and other financial holding
company affiliates. The Board also currently is considering the
appropriate method for accounting for insurance companies and their
investments under the Board's consolidated capital adequacy guidelines
and will address any issues that arise in this area in a separate
proposal.
The agencies proposed to exempt from the higher capital charges any
equity instrument that was held in the trading account of the relevant
banking organization in accordance with generally accepted accounting
principles (GAAP) and as part of an underwriting, market making or
dealing activity.
Several commenters asserted that the higher capital charges should
not apply to any equity instrument that is held for hedging purposes,
or to any equity instrument that is held in the trading account in
accordance with GAAP. Some commenters also asked the agencies to
clarify the scope of the proposed exemption for equity instruments held
in the trading account.
The final rule does not apply the higher capital charges to equity
securities acquired and held by a bank or bank holding company as a
bona fide hedge of an equity derivative transaction lawfully entered
into by the bank or bank holding company. Moreover, banking
organizations have separate authority to underwrite, deal in, and make
a market in equity securities through a securities broker or dealer
that is subject to special capital and accounting requirements, and
securities lawfully acquired under these statutory provisions are not
covered by the rule.\8\
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\8\ See 12 U.S.C. 24a, 335 and 1831w (financial subsidiaries of
national, state member and state nonmember banks, respectively); 12
U.S.C. 1843(k)(4)(E) (financial holding companies); and 12 U.S.C.
1843(c)(8) and J.P. Morgan & Co., Inc., 75 Federal Reserve Bulletin
192 (1989), aff'd sub nom. Securities Industry Ass'n v. Board of
Governors of the Federal Reserve System, 900 F.2d 360 (D.C. Cir.
1990) (bank holding companies).
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Because the trading account provision of the revised proposal was
included for the purpose of exempting these types of holdings from the
capital proposal, the agencies do not believe that, with the
clarifications discussed above, a general exemption for investments
held in the trading account is necessary. Moreover, a more general
exception for equities held in the trading account, as advocated by
some commenters, could allow banking organizations to evade the
requirements of the rule by placing nonfinancial equity investments in
their trading account. Accordingly, the final rule does not include a
general exemption for investments that are held in the trading account.
A few commenters questioned whether the proposed charges would
apply to investments made by financial holding companies in a company
engaged in ``complementary'' activities. Section 4(k)(1)(B) of the BHC
Act (12 U.S.C. 1843(k)(1)(B)) permits a financial holding company to
acquire a company engaged in a nonfinancial activity if the Board finds
that the activity is complementary to a financial activity and does not
pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. A financial holding
company must obtain the Board's prior approval to acquire a company
under this authority.\9\ The Board will review and consider the
appropriate capital treatment of investments made by a financial
holding company under section 4(k)(1)(B) in connection with its review
of any notice filed by a financial holding company to acquire a company
engaged in a complementary activity, or in connection with its
determination that a particular activity is ``complementary'' to a
financial activity.\10\ Accordingly, the final rule does not apply to
investments made by a financial holding company under the
``complementary'' investment authority of section 4(k)(1)(B) of the BHC
Act.
---------------------------------------------------------------------------

\9\ See 12 CFR 225.89.
\10\ See 65 FR 80384, Dec. 21, 2000 (requesting comment on a
proposal to determine that certain data processing and data
transmission activities are complementary to a financial activity
and on the appropriate capital treatment for such investments).
---------------------------------------------------------------------------

The agencies believe that the legal authorities covered by the rule
represent

[[Page 3789]]

the principal legal authorities available to banking organizations for
making equity investments in nonfinancial companies. The agencies
intend to monitor developments relating to nonfinancial equity
investments of banking organizations and may expand the types of
investments covered by the rule if necessary to ensure that banking
organizations maintain adequate capital to support their equity
investment activities.

2. Transition Rule for Investments Made Before March 13, 2000

As noted above, the agencies specifically requested comment on
whether the higher proposed capital charges should apply to individual
investments made by a bank or bank holding company prior to March 13,
2000. The agencies proposed that, if investments made prior to March
13, 2000, were grandfathered, the amount of such investments be
included in determining the aggregate size of the banking
organization's equity investment portfolio and, thus, the appropriate
marginal capital charge that would apply to investments that were not
grandfathered.
Commenters strongly supported grandfathering investments that were
made prior to March 13, 2000. Commenters noted that these investments
were made before the agencies publicly indicated that a higher
regulatory capital charge might be imposed, and argued that applying
the new charges retroactively to these investments would be unfair and
could render certain existing investments unprofitable. Commenters also
favored a permanent grandfather for individual investments made prior
to March 13, 2000, rather than a phase-in period that would apply the
new capital requirements to such investments over a period of years.
After reviewing the comments received, the agencies have determined
to exempt from the new capital charges any individual investment that
was made by a bank or bank holding company before March 13, 2000, or
that was made after such date pursuant to a binding written commitment
entered into by the banking organization prior to March 13, 2000.\11\
These investments are modest in amount at most banking organizations
and will be liquidated over time. As discussed further below (see Part
C.4), the adjusted carrying value of any grandfathered investment must
be included in determining the total amount of nonfinancial equity
investments held by the banking organization in relation to its Tier 1
capital and, thus, the marginal capital charge that applies to the
organization's covered equity investments.\12\
---------------------------------------------------------------------------

\11\ A few commenters asserted that grandfather rights should be
granted to all investments made prior to the effective date of the
final rule. The agencies do not believe granting broader grandfather
rights for equity investments would be appropriate in light of the
risks these investments pose to banking organizations. Also, the
Board in its initial capital proposal specifically gave notice that
it expected banking organizations to maintain capital in sufficient
amounts to allow the organizations to transition to higher
regulatory capital levels for equity investments if required. Thus,
the agencies expect that banking organizations will not face
significant burdens in complying with the final rule which, as noted
above, imposes capital charges that are lower than those initially
proposed.
\12\ In addition, all grandfathered investments that are not
subject to a deduction under the rule will be risk-weighted at 100
percent and included in the banking organization's risk-weighted
assets for purposes of calculating the organization's risk-based
capital ratios.
---------------------------------------------------------------------------

The final rule grants these grandfather rights only to investments
that were made prior to March 13, 2000, or that were made on or after
March 13, 2000 pursuant to a binding written commitment entered into
prior to March 13, 2000.\13\ For example, if a bank holding company
acquired 100 shares of a nonfinancial company under section 4(c)(6) of
the BHC Act prior to March 13, 2000, the adjusted carrying value of
that investment would be exempt from the rule's higher capital charges.
However, if the bank holding company purchased additional shares of the
company after March 13, 2000, or made a capital contribution to the
company after March 13, 2000, the adjusted carrying value of the
additional investment would be subject to the marginal capital charges
of the rule (assuming that the additional investment was not made
pursuant to a binding written commitment entered into before March 13,
2000). Shares or other interests received by a banking organization
through a stock split or stock dividend on an investment made prior to
March 13, 2000, are not considered a new investment if the banking
organization does not provide any consideration for the shares or
interests received and the transaction does not materially increase the
organization's proportional interest in the company. On the other hand,
shares or interests acquired on or after March 13, 2000, through the
exercise of options or warrants acquired before March 13, 2000, will be
considered a new investment if the banking organization provides any
consideration for the shares or interests received.
---------------------------------------------------------------------------

\13\ For purposes of the rule a binding written commitment means
a legally binding written agreement that requires the banking
organization to acquire shares or other equity of the company, or
make a capital contribution to the company, under terms and
conditions set forth in the agreement. Options, warrants, and other
agreements that give a banking organization the right to acquire
equity or make an investment, but do not require the banking
organization to take such actions, are not considered a binding
written commitment for purposes of the rule.
---------------------------------------------------------------------------

An investment qualifies for grandfather rights only if the banking
organization has continuously held the investment since March 13, 2000.
Thus, in the example discussed above, if the bank holding company sold
and repurchased 40 shares of the nonfinancial company after March 13,
2000, those 40 shares would no longer qualify for grandfather rights
under the rule. The grandfather status of an investment is not affected
if the banking organization determines to hold that investment under a
different legal authority than the authority originally used to acquire
the investment. A financial holding company could, for example, decide
to hold certain investments made through an SBIC or under section
4(c)(6) of the BHC Act prior to March 13, 2000, under the GLB Act's
expanded merchant banking authority, and such decision would not affect
the grandfathered treatment of the investment under the rule.

3. Marginal Capital Charge Structure

The agencies are adopting a final marginal capital charge structure
that is substantially as outlined in the revised proposal. This
structure applies a higher capital charge to equity investments as the
aggregate amount of the organization's nonfinancial equity investments
increases in relation to its capital. This approach reflects the fact
that the financial risks to a banking organization from equity
investment activities increases as the level of these activities
account for a larger portion of the organization's capital, earnings,
and activities. The charges, which are reflected in the following
table, are applied by making a deduction from the banking
organization's Tier 1 capital.

[[Page 3790]]


Table 1.--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held Deduction from Tier 1 Capital
directly or indirectly by the banking (as a percentage of the
organization (as a percentage of the Tier adjusted carrying value of
1 capital of the banking organization) the investment)
------------------------------------------------------------------------
Less than 15 percent..................... 8 percent.
15 percent to 24.99 percent.............. 12 percent.
25 percent and above..................... 25 percent.
------------------------------------------------------------------------

Each tier of charges applies, on a marginal basis, to the adjusted
carrying value of the banking organization's nonfinancial equity
investments that fall within the specified range of the organization's
Tier 1 capital.\14\ The total adjusted carrying value of a nonfinancial
equity investment that is subject to a deduction under the rule is
excluded from the banking organization's risk-weighted assets for
purposes of computing the denominator of the organization's risk-based
capital ratio.
---------------------------------------------------------------------------

\14\ For purposes of determining the amount of a banking
organization's nonfinancial equity investments as a percentage of
its Tier 1 capital, Tier 1 capital is calculated before any
deduction for disallowed mortgage servicing assets, disallowed
nonmortgage servicing assets, disallowed purchased credit card
relationships, disallowed credit enhancing interest-only strips
(both purchased and retained), disallowed deferred tax assets, and
nonfinancial equity investments.
The agencies recently adopted amendments to their capital
guidelines to better address the regulatory capital treatment of
recourse obligations, residual interests (including credit enhancing
interest-only strips) and direct credit substitutes. See 66 FR 59614
(Nov. 29, 2001) (``Securitization Rule''). The amendments to the
agencies' capital guidelines adopted by this final rule reflect the
changes made to the capital guidelines by the Securitization Rule.
---------------------------------------------------------------------------

The amount of the deduction is based on the adjusted carrying value
of the banking organization's nonfinancial equity investments. The
``adjusted carrying value'' of an investment is the value at which the
investment is recorded on the balance sheet of the banking
organization, reduced by (i) net unrealized gains that are included in
carrying value but that have not been included in Tier 1 capital and
(ii) associated deferred tax liabilities. For example, for investments
held as available-for-sale (AFS), the adjusted carrying value of the
investments would be the aggregate carrying value of the investment as
reflected on the banking organization's balance sheet, less the sum of
(i) unrealized gains on those investments included in the
organization's other comprehensive income and not reflected in Tier 1
capital and (ii) any associated deferred tax liabilities.
Comments were mixed on using the adjusted carrying value of an
investment for purposes of determining the amount of the required
deduction. While some commenters favored this approach, others argued
that it unfairly penalized well performing investments that are marked-
up with the unrealized gains flowing into Tier 1 capital.
The agencies continue to believe that the adjusted carrying value
of an investment provides an appropriate benchmark for applying the
deduction because it reflects the full amount of an organization's
capital exposure to equity investments. Adjusted carrying value
reflects both the amount actually invested by the banking organization
and any additional unrealized gains (or losses) on the investment that
are reflected in the organization's Tier 1 capital. All of the adjusted
carrying value of an investment is potentially subject to loss in the
event of devaluation of the investment. Applying the charge to the
adjusted carrying value of an investment also takes into account that
some banking organizations use AFS accounting for GAAP reporting
purposes, which is a prudent and appropriate accounting method in many
situations and one that results in an effective 100 percent capital
charge on unrealized gains.\15\
---------------------------------------------------------------------------

\15\ The rule does not affect the treatment of unrealized gains
and losses on AFS securities for purposes of calculating
supplementary (Tier 2) capital. Under the agencies' risk-based
capital rules, up to 45 percent of an organization's pretax net
unrealized gains on AFS equity securities may be included in Tier 2
capital.
---------------------------------------------------------------------------

4. SBIC Investments

The final rule applies to equity investments made by bank holding
companies and banks in nonfinancial companies through one or more SBICs
that are consolidated with the banking organization, and to equity
investments in one or more SBICs that are not consolidated with the
banking organization. For the reasons discussed above, the final rule
provides an accommodation for SBIC investments made by a bank holding
company or bank provided such investments remain within traditional
investment ranges. In particular, no additional capital charge is
applied to SBIC investments held directly or indirectly by a bank to
the extent the aggregate adjusted carrying value of all such
investments does not exceed 15 percent of the Tier 1 capital of the
bank. In the case of a bank holding company, no additional capital
charge is applied to SBIC investments held directly or indirectly by
the bank holding company to the extent the aggregate adjusted carrying
value of all such investments does not exceed 15 percent of the
aggregate of the holding company's pro rata interests in the Tier 1
capital of its subsidiary banks.\16\ SBIC investments that are not
subject to a deduction under the rule will be risk-weighted at 100
percent and included in the banking organization's risk-weighted assets
for purposes of calculating the organization's risk-based capital
ratios.
---------------------------------------------------------------------------

\16\ The amount a bank holding company may invest in the stock
of an SBIC under section 4(c)(5) of the BHC Act and section 302(b)
of the Small Business Investment Act is based on the bank holding
company's proportionate interest in the capital and surplus of its
subsidiary banks. See 12 CFR 225.111. The Board believes a similar
methodology is appropriate for determining the level of SBIC
investments held directly or indirectly by a bank holding company
that qualify for an exemption from the rule's higher capital
charges.
---------------------------------------------------------------------------

The final rule continues to provide that a banking organization, in
calculating the aggregate adjusted carrying value of its nonfinancial
equity investments for purposes of determining the appropriate marginal
charge to be applied to an equity investment subject to the rule, must
include all nonfinancial equity investments held by the organization in
or through an SBIC as well as all grandfathered investments that are
exempt from the rule's higher capital charges. A number of commenters
opposed this treatment and argued that this treatment would effectively
subject exempt SBIC investments and grandfathered investments to the
rule's higher capital charges.
One of the principles that has guided the agencies during this
rulemaking process is that the risks to a banking organization from
equity investment activities increase as equity investments constitute
a larger component of the

[[Page 3791]]

organization's capital and operations. Although the agencies, for the
reasons discussed above, have determined to provide an exemption for
SBIC investments and investments made prior to March 13, 2000, the
agencies believe it is appropriate to consider the risks associated
with an organization's total equity investment portfolio in determining
the marginal charge that would apply to SBIC investments that exceed
traditional levels and to investments made on or after March 13, 2000.
This approach balances Congress' desire to promote the funding of small
businesses through SBICs and the desire of banking organizations to
preserve the existing capital treatment of investments made prior to
March 13, 2000, with the agencies' strong belief, based on available
data, that regulatory capital levels higher than the current
requirements are necessary to support the greater risks associated with
equity investments and ensure the safety and soundness of banking
organizations. The agencies also note that this approach does not
impose a higher capital charge on exempted SBIC investments or
grandfathered investments. These investments would continue to be
subject to the same capital requirements that apply to such investments
today. However, these investments could cause a higher marginal capital
charge to be imposed on each additional dollar of non-exempt and non-
grandfathered investments made by the banking organization to reflect
the organization's higher concentration and exposure to equity
investment activities.
If a banking organization has an investment in a SBIC that is
consolidated with the banking organization for accounting purposes, but
that is not wholly owned by the banking organization, the adjusted
carrying value of the organization's nonfinancial equity investments
held through the SBIC is equal to the organization's proportionate
share of the adjusted carrying value of the SBIC's equity investments
in nonfinancial companies. The remainder of the adjusted carrying value
of the SBIC's investments, which represents the minority interest
holders' proportionate share, is excluded from the banking
organization's risk-weighted assets.\17\
---------------------------------------------------------------------------

\17\ If a banking organization has an investment in a SBIC that
is not consolidated with the banking organization for accounting
purposes, that organization may (but is not required to) reduce the
adjusted carrying value of its investment in the SBIC
proportionately to reflect the percentage of the SBIC's investments
that are in companies engaged only in banking or financial
activities. A banking organization may adjust its interest in a non-
consolidated SBIC in this manner only if the organization has
current information that identifies the percentage of the SBIC's
investments that are in companies engaged in a nonfinancial
activity. This information must be available to examiners upon
request.
---------------------------------------------------------------------------

Similar treatment applies to investments that a bank holding
company holds through equity investment funds that are controlled by
the holding company (such as, by acting as general partner of the fund)
but that are not wholly owned by the holding company. In these
circumstances, the capital charge applies only to the holding company's
proportionate share of the fund's investments even if the fund is
consolidated in the holding company's financial reporting statements.
In addition, if a less-than-wholly-owned SBIC or investment fund is
consolidated into the banking organization's financial statements for
accounting and reporting purposes, any minority interest resulting from
the consolidation may not be included in the Tier 1 capital of the
banking organization. The agencies believe this treatment is
appropriate because the minority interest is not available to support
the overall financial business of the banking organization and,
therefore, should not be included in the banking organization's
capital.
The agencies do not expect that any nonfinancial company acquired
by a banking organization under one of the legal authorities covered by
the rule would be consolidated into the banking organization's
financial statements, either because the investment is temporary or
limited to a non-controlling stake. However, if consolidation does
occur, any resulting minority interest also must be excluded from Tier
1 capital because the minority interest is not available to support the
general financial business of the banking organization.

5. Examples of Application of Rule's Marginal Charges

The following two examples illustrate how the rule's marginal
charges apply.

Example 1: A financial holding company has $1 million in Tier 1
capital and has nonfinancial equity investments with an aggregate
adjusted carrying value of $270,000. All of the financial holding
company's nonfinancial equity investments are held under the GLB
Act's merchant banking authority and all were made after March 13,
2000. The total amount of the financial holding company's required
Tier 1 capital deduction would be $28,998, determined as follows:
(i) 8 percent of the first $149,999 ($11,999); (ii) 12 percent of
the amount between $150,000 and $249,999 ($11,999); and (iii) 25
percent of the amount from $250,000 to $270,000 ($5,000).\18\ The
average Tier 1 charge on the financial holding company's portfolio
would be 10.74 percent.
---------------------------------------------------------------------------

\18\ For purposes of these examples, all figures have been
rounded to the nearest dollar.
---------------------------------------------------------------------------

Example 2: A bank has $1 million in Tier 1 capital and has
nonfinancial equity investments with an aggregate adjusted carrying
value of $375,000. Of this amount, $100,000 represents the adjusted
carrying value of investments made prior to March 13, 2000, and an
additional $175,000 represents the adjusted carrying value of
investments made through the bank's wholly owned SBIC. The $100,000
in investments made prior to March 13, 2000, and $150,000 of the
bank's SBIC investments would not be subject to the rule's marginal
capital charges. These amounts are considered for purposes of
determining the marginal charge that applies to the bank's covered
investments (including the $25,000 of non-exempt SBIC investments).
In this case, the total amount of the bank's Tier 1 capital
deduction would be $31,250. This figure is 25 percent of $125,000,
which is the amount of the bank's total nonfinancial equity
portfolio subject to the rule's marginal capital charges. The
average Tier 1 capital charge on the bank's entire nonfinancial
equity portfolio would be 8.33 percent.

The $31,250 charge in Example 2 reflects the provisions of the rule
that impose no additional capital charge on investments made prior to
March 13, 2000, and on SBIC investments to the extent such investments
do not exceed 15 percent of Tier 1 capital. While these grandfathered
and SBIC investments are not subject to a Tier 1 capital deduction
under the final rule, these investments would be given a 100 percent
risk-weight and would remain subject to the normal Tier 1 and total
capital charges applicable to the organization's risk-weighted assets
under the agencies's risk-based capital guidelines.

6. Leverage Ratio

The revised proposal required banking organizations to apply the
proposed capital deduction in calculating the organization's Tier 1
capital. Consequently, the proposal would affect both the
organization's risk-based capital ratio and its ratio of Tier 1 capital
to average total assets (Tier 1 leverage ratio). The agencies requested
comment on whether the final rule should be adjusted to eliminate
application of the deduction for purposes of calculating the Tier 1
leverage ratio and, if so, how this might be done. A small number of
commenters addressed this issue, and generally opposed incorporating
the higher capital charges for equity investments into the calculation
of an organization's Tier 1 leverage ratio. Commenters asserted that
the leverage ratio was

[[Page 3792]]

intended to provide an absolute measure of the bank's capital to asset
ratio without adjusting the bank's assets according to the relative
risk associated with different classes of assets.
After carefully reviewing the comments on this issue, the agencies
have decided to adopt the approach proposed, which applies the
deduction to Tier 1 for both risk-based and leverage capital
purposes.\19\ In reaching this conclusion, the agencies have carefully
considered a number of factors and alternatives. The agencies have long
used a uniform definition of Tier 1 capital for both risk-based and
leverage capital purposes based, in part, on the view that the nature
and composition of ``core'' capital does not differ depending on
whether it is being compared to risk-weighted or average total assets.
In addition, although the leverage ratio generally is intended to
provide an absolute measure of a banking organization's ratio of core
capital to average total assets, the agencies also previously have
determined that certain types of assets that involve special risks
should be deducted from, and not considered part of, Tier 1 capital for
both risk-based and leverage capital purposes.\20\ As discussed above,
equity investments involve significantly greater risks than those
associated with traditional banking and financial activities and,
accordingly, the agencies believe it is appropriate to require that
these investments be deducted from core capital for leverage capital
purposes in the manner provided in the rule.
---------------------------------------------------------------------------

\19\ A few commenters also asserted that the agencies should, as
a general matter, eliminate the Tier 1 leverage ratio for banking
organizations. This suggestion is beyond the scope of this targeted
rulemaking, and the agencies believe that the leverage ratio
continues to be a useful tool in ensuring that banking organizations
operate with adequate capital to support their activities.
\20\ For example, the agencies' risk-based and leverage capital
guidelines may require banking organizations to deduct all or a
portion of the following assets from Tier 1 capital: goodwill;
mortgage servicing assets, nonmortgage servicing assets, purchased
credit card relationships, and credit-enhancing interest-only
strips; other identifiable intangible assets; and deferred tax
assets.
---------------------------------------------------------------------------

The agencies note, moreover, that the most direct method of
implementing the commenters' proposal would be to require banks to
apply the rule's deductions only for risk-based capital purposes. Such
an approach would result in many banking organizations having two
separate Tier 1 capital amounts--one for risk-based purposes and one
for leverage purposes. This dichotomy could create significant
confusion in, and burden for, the industry, particularly because a
number of regulatory and reporting requirements are based on an
organization's ``Tier 1 capital'' and two such numbers might exist. The
agencies also have considered potential alternative approaches that
would implement the commenters' suggestion while, at the same time,
retaining an uniform definition of Tier 1. These alternative
approaches, however, also would significantly increase the complexity
and burden of the rule.
The agencies also have reviewed information obtained through the
supervisory and examination process for a sample of banking
organizations with a significant amount of equity investments. This
review indicates that applying the rule's Tier 1 deductions for
leverage capital purposes likely will have a de minimis impact on the
leverage ratio of banking organizations at this time. For these
reasons, the final rule requires banking organizations to make the
rule's Tier 1 deductions for both risk-based and leverage capital
purposes.
The final rule provides that the total adjusted carrying value of a
banking organization's nonfinancial equity investments that is subject
to a deduction from Tier 1 capital will be excluded from the
organization's average total consolidated assets for purposes of
computing the denominator of the organization's Tier 1 leverage ratio.
Any amount of equity investments that is not subject to a deduction
under the rule (e.g. grandfathered investments and SBIC investments
that, in the aggregate, do not exceed 15 percent of Tier 1 capital)
must be included in the organization's average total consolidated
assets.

7. Risk Management and the Supervisory Process

Although strong capital adequacy is critically important to ensure
that equity investment activities do not pose an undue risk to a
banking organization, capital strength must be supplemented by strong
internal controls and management practices to ensure that equity
investment activities are conducted in a safe and sound manner.
Accordingly, all banking organizations are expected to develop,
maintain and employ sound risk management policies, procedures and
systems that are reasonably designed to manage the risks associated
with the organization's equity investment activities. These policies,
procedures and systems should include established limits on the types
and amounts of equity investments that may be made by the banking
organization; parameters governing portfolio diversification; sound
policies governing the valuation and accounting of investments;
periodic reviews of the performance of individual investments and the
aggregate portfolio; and strong internal controls, including investment
review and authorization procedures and recordkeeping requirements. The
level and complexity of an organization's risk management policies,
procedures and systems should be commensurate to the size, nature and
complexity of the organization's equity investment activities and
consistent with any guidance published by the agencies.\21\
---------------------------------------------------------------------------

\21\ See, e.g. Federal Reserve SR Letter No. 00-9 (SPE),
Supervisory Guidance on Equity Investment and Merchant Banking
Activities (June 22, 2000).
---------------------------------------------------------------------------

The agencies note, moreover, that the capital requirements
established by this final rule are viewed as the minimum capital levels
required for a banking organization to adequately support its equity
investment activities. The agencies' risk-based capital guidelines
require banking organizations at all times to maintain capital that is
commensurate with the level and nature of the risks to which they are
exposed and the agencies fully expect that individual banking
organizations will allocate higher economic capital levels, as
appropriate, to support their equity investment activities in amounts
commensurate with the risk in the individual investment portfolios of
the organization.
Furthermore, the agencies may impose a higher capital charge on the
nonfinancial equity investments of a banking organization if the facts
and circumstances indicate that a higher capital level is appropriate
in light of the risks associated with the organization's investment
activities. The agencies believe that strong capital levels above the
minimum requirements are particularly important when a banking
organization has a high degree of concentration in nonfinancial equity
investments. As proposed, the agencies will apply heightened
supervision to the equity investment activities of banking
organizations with significant concentrations in equity investments. In
addition, capital levels above the minimums established by this rule
may be appropriate in light of the nature, concentration or performance
of a particular organization's equity investments, or the sufficiency
of the organization's policies, procedures, and systems used to monitor
and control the risks associated with the organization's equity
investments.

[[Page 3793]]

8. Regulatory Requirements Based on Tier 1 Capital

A number of regulatory restrictions and reporting requirements are
based on, or refer to, a bank's Tier 1 capital. For example, Tier 1
capital is one component used in determining the dollar amount of
covered transactions that a bank may have with any one affiliate and
all affiliates in the aggregate under section 23A of the Federal
Reserve Act, and the amount of extensions of credit that a national
bank may have outstanding to a single borrower under the National Bank
Act.\22\
---------------------------------------------------------------------------

\22\ See 12 CFR 250.242; 12 CFR 32.2(b).
---------------------------------------------------------------------------

The final rule requires banking organizations, in calculating their
Tier 1 capital, to deduct the appropriate percentage of their
nonfinancial equity investments from the sum of their core capital
elements. The organization's Tier 1 capital is the amount remaining
after the deduction for nonfinancial equity investments, and after any
other deductions and adjustments required by the agencies' capital
guidelines. Accordingly, banking organizations must use their Tier 1
capital, calculated in the manner required by the agencies' capital
guidelines as amended by this final rule, in determining their
compliance with any regulatory restriction or reporting requirement
that is based on Tier 1 capital.

D. Regulatory Flexibility Act Analysis

OCC: The OCC hereby certifies, pursuant to section 605(b) of the
Regulatory Flexibility Act, 5 U.S.C. 605(b), that the regulatory
capital requirements will not have a significant economic impact on a
substantial number of small entities. As described in detail elsewhere
in the supplementary information, the final rule amends the OCC's risk-
based capital guidelines to apply a series of marginal capital charges
that increase as the size of a national bank's portfolio of certain
nonfinancial equity investments increases in relation to its Tier 1
capital. For the following reasons, the OCC concludes that the new
capital requirements are unlikely to have a significant economic impact
on a substantial number of small banks.
First, the final rule applies to only two categories of national
bank investments: investments made pursuant to the Board's Regulation K
and investments made in or through, SBICs. The majority of national
bank nonfinancial equity investments are in the form of investments
made in, or through, SBICs. The OCC believes that SBIC investment
activities are conducted primarily by large banks rather than by small
banks within the Small Business Administration's definition of ``small
entity'' (asset size of $100 million or less).
Moreover, several key features of the rule mitigate any effect that
the increased capital requirements may have on small banks that do
engage in nonfinancial equity investments covered by the rule. For
example, in order to reduce regulatory burden on banking organizations
and in response to comments on the revised proposal, nonfinancial
equity investments made before March 13, 2000, are ``grandfathered.''
Commenters noted that because such investments were made before the
industry was aware of the possibility of higher capital requirements,
applying higher capital requirements to such investments could
negatively impact the economics of the transactions. Moreover, the
final rule does not apply the higher capital requirements to
investments by national banks in community development corporations
pursuant to 12 U.S.C. 24(Eleventh), to equity securities acquired in
satisfaction of a debt previously contracted, or to certain unexercised
warrants.
Finally, the new capital requirements apply only to levels of
investment that equal or exceed 15 percent of the bank's Tier 1
capital. Most national banks will not be required to hold additional
capital for the SBIC investments that they currently hold either
because the investments are grandfathered or because the bank's level
of investment is below 15 percent. As a result, the new capital charge
should not deter prudent new investment in small companies, since most
national banks could undertake new investments without tripping the 15
percent threshhold.
Board: In accordance with section 4(a) of the Regulatory
Flexibility Act (5 U.S.C. 604(a)), the Board must publish a final
regulatory flexibility analysis with this rulemaking. The rule amends
the Board's consolidated risk-based and leverage capital adequacy
guidelines for state member banks and bank holding companies to
establish special minimum regulatory capital requirements for equity
investments in nonfinancial companies. See 12 CFR Part 208, Appendix A
and Appendix B (state member banks); 12 CFR Part 225, Appendix A and
Appendix D (bank holding companies). As discussed more fully above,
available data indicate that equity investments generally involve
greater risks than the traditional banking and financial activities of
banking organizations. Data also indicate that the level and
significance of equity investment activities at banking organizations
has increased significantly in recent years. The final rule modifies
the Board's capital adequacy guidelines to better reflect the riskiness
of equity investments and the potential risks such investments pose to
the safety and soundness of insured depository institutions.
The Board specifically requested comment on the likely burden that
the revised proposal would impose on bank holding companies and state
member banks. One bank holding company that owns or controls a
substantial quantity of equity investments stated that the revised
proposal would not have a significantly adverse impact on its ability
to make equity investments. Some commenters, on the other hand, argued
that the higher capital charges imposed by the rule would place banking
organizations at a competitive disadvantage to independent securities
firms and foreign banks in the market for making equity investments, or
would discourage securities firms from affiliating with banks. In
addition, some commenters also asserted that the agencies should adopt
one or more alternative approaches suggested by the commenters. These
alternatives included establishing a uniform capital charge or risk-
weight for all equity investments, relying on a banking organization's
internal capital models to determine the appropriate amount of capital
to support a banking organization's equity investment portfolio, and
delaying adoption of a final rule pending completion of the ongoing
revisions to the Basle Capital Accord.
For the reasons discussed in detail above, the Board believes that
the capital charges imposed by the final rule are necessary and
appropriate to ensure that state member banks and bank holding
companies maintain capital commensurate with the risk associated with
their equity investment activities and that these activities do not
pose an undue risk to the safety and soundness of insured depository
institutions. The Board also has reviewed the alternatives suggested by
commenters and, for the reasons discussed above, believes it would not
be prudent or appropriate at this time to adopt these approaches as an
alternative to the marginal regulatory capital charge structure
implemented by the final rule.
The Board notes, moreover, that the final rule includes several
features that likely will reduce the potential effect of the rule on
bank holding companies (including their bank and nonbank subsidiaries)
and state member banks,

[[Page 3794]]

including in particular small banking organizations and other small
entities. As described fully above, the rule exempts from the higher
capital charges SBIC investments held by banks and bank holding
companies that remain within traditional limits, investments made by
banking organizations prior to March 13, 2000, and investments made by
state banks under the special grandfather rights granted by section
24(f) of the FDI Act. For covered investments, the rule applies a
series of marginal capital charges that increase as the size of the
banking organization's equity investment portfolio increases in
relation to its Tier 1 capital. The highest marginal Tier 1 charge (25
percent) is well below the uniform charge initially proposed (50
percent).
In addition, once the final rule becomes effective on April 1,
2002, the aggregate investment review thresholds currently applicable
to the merchant banking investments of financial holding companies will
expire automatically. See 12 CFR 225.174(c); 12 CFR 1500.5(c). Thus,
adoption of the final rule will relieve financial holding companies of
all sizes from any burden associated with seeking formal Board approval
to expand their merchant banking activities.
The Board's supervisory experience also indicates that a
significant number of small banks and bank holding companies do not
engage in the type of equity investment activities covered by the
rule.\23\ In addition, the Board's risk-based and leverage capital
guidelines generally do not apply to bank holding companies that have
less than $150 million in consolidated total assets and, accordingly,
the amendments made by the final rule generally would not apply to such
small bank holding companies. The Board also has reviewed information
concerning a sample banking organizations that are actively engaged in
equity investment activities and, based on this review, believes the
final rule is not likely to have a significantly adverse impact on
banking organizations or their ability to engage in equity investment
activities.
---------------------------------------------------------------------------

\23\ For purposes of the Regulatory Flexibility Act, small
entities are defined to include state member banks and bank holding
companies that have $100 million or less in assets. See 13 CFR
121.201.
---------------------------------------------------------------------------

FDIC: The final rule amends the FDIC's risk-based and leverage
capital standards for state nonmember banks (12 CFR part 325). These
amendments establish the regulatory capital requirements applicable to
certain nonfinancial equity investments of state nonmember banks. The
FDIC hereby certifies, pursuant to section 605(b) of the Regulatory
Flexibility Act, 5 U.S.C. 605(b), that the regulatory capital
requirements will not have a significant economic impact on a
substantial number of small entities because of the exclusion in this
final rule for grandfathered equity investments by state banks under
section 24(f) of the FDI Act and the grandfather provision that was
added to this final rule for nonfinancial equity investments made
before March 13, 2000.
Since March 13, 2000, the FDIC has received approximately 37
applications and notices under section 24 of the FDI Act for equity
investment activities in nonfinancial companies. It is anticipated that
most of these equity investment activities would be covered under this
rule. However, the capital charges required in this final rule for
nonfinancial equity investments would be less than the capital charges
imposed by the FDIC for the great majority of the nonfinancial equity
investment activities approved by the FDIC under section 24 since March
13, 2000. Also, these section 24 notices and applications have involved
investments that generally were significantly below 15 percent of the
respective banks' Tier 1 capital.
In order to reduce regulatory burden on banking organizations and
in response to comments on the revised proposal, the final rule
provides for a ``grandfather'' provision for nonfinancial equity
investments made before March 13, 2000. These commenters noted such
investments were made before the industry was aware that a higher
capital charge might be established for nonfinancial equity
investments.
In addition, the FDIC notes that the final rule includes several
features that likely will reduce the potential effect of the rule on
banking organizations and, especially, small banking organizations and
other small entities. The final rule exempts from the higher capital
charges SBIC investments held by banking organizations that remain
within traditional limits, and equity investments made by state
nonmember banks under the grandfather rights granted by Congress in
section 24(f) of the FDI Act. For covered investments, the rule applies
a series of marginal capital charges that increase as the size of the
banking organization's equity investment portfolio increases in
relation to its Tier 1 capital. The highest marginal Tier 1 charge (25
percent) under the final rule is well below the uniform capital charge
initially proposed by the Board for bank holding companies (50 percent
of Tier 1 capital).
In response to questions raised by commenters, the agencies have
clarified in this preamble to the final rule that the rule does not
apply to investments made in a community development corporation to
promote welfare under 12 U.S.C. 24 (Eleventh). In addition, the rule
does not apply to equity securities that are acquired in satisfaction
of a DPC and that are held and divested in accordance with applicable
law, or to unexercised warrants acquired by a bank as additional
consideration for making a loan where the warrants are not held under
one of the legal authorities covered by this final rule.

E. Paperwork Reduction Act

OCC: The OCC has determined that this final rule does not involve a
collection of information pursuant to the provisions of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501, et seq.).
Board: In accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3505; 5 CFR 1320 App. A.1), the Board has reviewed this final
rule under the authority delegated to the Board by the Office of
Management and Budget. No collections of information as defined in the
Paperwork Reduction Act are contained in the final rule.
FDIC: The FDIC has determined that this final rule does not involve
a collection of information pursuant to the provisions of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501, et seq.).

F. Executive Order 12866 Determination

OCC: The OCC has determined that this final rule does not
constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866. The final rule amends the OCC's risk-based
capital guidelines with respect to the regulatory capital treatment
applicable to certain nonfinancial equity investments by national
banks. While the general effect of this final rule is to raise the
capital requirements for certain nonfinancial equity investments held
by banking organizations, for the following reasons, the OCC does not
believe that this final rule will have a significant economic impact on
national banks.
This final rule applies a series of marginal capital charges that
increase as the size of the banking organization's equity investment
portfolio increases in relation to its Tier 1 capital. Specifically
with respect to national banks, the final rule only applies to two
categories of national bank investments: investments made pursuant to
the Board's Regulation K and investments made in or through SBICs. The
majority of

[[Page 3795]]

national bank nonfinancial equity investments are in the form of
investments made in, or through SBICs. However, under the final rule
SBIC investments held by a national bank in amounts that remain within
traditional limits (15 percent of Tier 1 capital) are exempted from the
higher capital requirements. The final rule also clarifies that the
higher capital requirements do not apply to national bank investments
in community development corporations pursuant to 12 U.S.C. 24
(Eleventh), to equity securities acquired in satisfaction of a debt
previously contracted, or to certain unexercised warrants.
In addition, in order to reduce regulatory burden on banking
organizations and in response to comments on the revised proposal,
nonfinancial equity investments made before March 13, 2000, are
``grandfathered.'' Commenters noted that because such investments were
made before the industry was aware of the possibility of higher capital
requirements, applying higher capital requirements to such investments
could negatively impact the economics of the transactions.

G. Unfunded Mandates Act of 1995

OCC: Section 202 of the Unfunded Mandates Reform Act of 1995, 2
U.S.C. 1532 (Unfunded Mandates Act), requires that an agency prepare a
budgetary impact statement before promulgating any rule likely to
result in a Federal mandate that may result in the expenditure by
State, local, and tribal governments, in the aggregate, or by the
private sector, of $100 million or more in any one year. If a budgetary
impact statement is required, section 205 of the Unfunded Mandates Act
also requires the agency to identify and consider a reasonable number
of regulatory alternatives before promulgating the rule. The OCC has
determined that this rule will not result in expenditures by State,
local, and tribal governments, in the aggregate, or by the private
sector, of $100 million or more in any one year. Accordingly, the OCC
has not prepared a budgetary impact statement or specifically addressed
the regulatory alternatives considered. While the general effect of
this final rule is to raise the capital requirements for nonfinancial
equity investments held by banking organizations, for the following
reasons, the OCC does not believe that this final rule will result in
expenditures of $100 million or more in any one year.
This final rules applies a series of marginal capital charges that
increase as the size of the banking organization's equity investment
portfolio increases in relation to its Tier 1 capital. Specifically
with respect to national banks, the final rule only applies to two
categories of national bank investments: investments made pursuant to
the Board's Regulation K and investments made in or through SBICs. The
majority of national bank nonfinancial equity investments are in the
form of investments made in, or through SBICs. However, under the final
rule SBIC investments held by a national bank in amounts that remain
within traditional limits (15 percent of Tier 1 capital) are exempted
from the higher capital requirements. The final rule also clarifies
that the higher capital requirements do not apply to national bank
investments in community development corporations pursuant to 12 U.S.C.
24 (Eleventh), to equity securities acquired in satisfaction of a debt
previously contracted, or to certain unexercised warrants.
In addition, in order to reduce regulatory burden on banking
organizations and in response to comments on the revised proposal,
nonfinancial equity investments made before March 13, 2000, are
``grandfathered.'' Commenters noted that because such investments were
made before the industry was aware of the possibility of higher capital
requirements, applying higher capital requirements to such investments
could negatively impact the economics of the transactions.

H. Use of ``Plain Language''

Section 722 of the GLB Act requires the agencies to use ``plain
language'' in all proposed and final rules published after January 1,
2000. The agencies invited comment on whether the proposed rule was
drafted in plain language and clearly presented. No commenters
specifically addressed this issue. The agencies have used a variety of
``plain language'' techniques to ensure that the final rule is
presented in a clear fashion, including using numerous topical headings
in the rule, easy-to-read tables to set forth the marginal capital
charge structure adopted by the rule, and textual examples to
illustrate application of the rule. The agencies believe the final rule
is written plainly and clearly.

List of Subjects

12 CFR Part 3

Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.

12 CFR Part 208

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

12 CFR Part 225

Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and record keeping
requirements, Securities.

12 CFR Part 325

Administrative practice and procedure, Banks, banking, Capital
adequacy, Reporting and record keeping requirements, State non-member
banks.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For the reasons set out in the joint preamble, the Office of the
Comptroller of the Currency amends part 3 of chapter I of title 12 of
the Code of Federal Regulations as follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

1. The authority citation for part 3 continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, and 3909.

2. The first sentence in paragraph (a) of section 3.2 is amended to
read as follows:

Sec. 3.2 Definitions.

* * * * *
(a) Adjusted total assets means the average total assets figure
required to be computed for and stated in a bank's most recent
quarterly Consolidated Report of Condition and Income (Call Report)
minus end-of-quarter intangible assets, deferred tax assets, and
credit-enhancing interest-only strips, that are deducted from Tier 1
capital, and minus nonfinancial equity investments for which a Tier 1
capital deduction is required pursuant to section 2(c)(5) of appendix A
of this part 3. * * *
* * * * *

3. In appendix A to part 3:
A. In section 1, paragraphs (c)(17) through (c)(31) are
redesignated as paragraphs (c)(20) through (c)(34); paragraphs (c)(12)
through (c)(16) are redesignated as paragraphs (c)(14)

[[Page 3796]]

through (c)(18); and paragraphs (c)(1) through (c)(11) are redesignated
as paragraphs (c)(2) through (c)(12).
B. In section 1, new paragraphs (c)(1), (c)(13) and (c)(19) are
added.
C. In section 2, paragraph (a)(3) is amended;
D. In section 2, new paragraph (c)(1)(v) is added;
E. In section 2, paragraph (c)(5) is redesignated as paragraph
(c)(6);
F. In sections 3 and 4, Tables A through D are redesignated as
Tables B through E, respectively;
G. All references to ``Table A'' are revised to read ``Table B'';
H. All references to ``Table B'' are revised to read ``Table C'';
I. All references to ``Table C'' are revised to read ``Table D'';
J. All references to ``Table D'' are revised to read ``Table E'';
and
K. In section 2, new paragraph (c)(5), including new Table A, is
added. The additions and revisions read as follows:

Appendix A to Part 3--Risk-Based Capital Guidelines

Section 1. Purpose, Applicability of Guidelines, and Definitions.

* * * * *
(c) * * *
(1) Adjusted carrying value means, for purposes of section
2(c)(5) of this appendix A, the aggregate value that investments are
carried on the balance sheet of the bank reduced by any unrealized
gains on the investments that are reflected in such carrying value
but excluded from the bank's Tier 1 capital and reduced by any
associated deferred tax liabilities. For example, for investments
held as available-for-sale (AFS), the adjusted carrying value of the
investments would be the aggregate carrying value of the investments
(as reflected on the consolidated balance sheet of the bank) less
any unrealized gains on those investments that are included in other
comprehensive income and that are not reflected in Tier 1 capital,
and less any associated deferred tax liabilities. Unrealized losses
on AFS nonfinancial equity investments must be deducted from Tier 1
capital in accordance with section 1(c)(8) of this appendix A. The
treatment of small business investment companies that are
consolidated for accounting purposes under generally accepted
accounting principles is discussed in section 2(c)(5)(ii) of this
appendix A. For investments in a nonfinancial company that is
consolidated for accounting purposes, the bank's adjusted carrying
value of the investment is determined under the equity method of
accounting (net of any intangibles associated with the investment
that are deducted from the bank's Tier 1 capital in accordance with
section 2(c)(2) of this appendix A). Even though the assets of the
nonfinancial company are consolidated for accounting purposes, these
assets (as well as the credit equivalent amounts of the company's
off-balance sheet items) are excluded from the bank's risk-weighted
assets.
* * * * *
(13) Equity investment means, for purposes of section 1(c)(19)
and section 2(c)(5) of this appendix A, any equity instrument
including warrants and call options that give the holder the right
to purchase an equity instrument, any equity feature of a debt
instrument (such as a warrant or call option), and any debt
instrument that is convertible into equity. An investment in any
other instrument, including subordinated debt or other types of debt
instruments, may be treated as an equity investment if the OCC
determines that the instrument is the functional equivalent of
equity or exposes the bank to essentially the same risks as an
equity instrument.
* * * * *
(19) Nonfinancial equity investment means any equity investment
held by a bank in a nonfinancial company through a small business
investment company (SBIC) under section 302(b) of the Small Business
Investment Act of 1958 (15 U.S.C. 682(b)) or under the portfolio
investment provisions of Regulation K (12 CFR 211.8(c)(3)). An
equity investment made under section 302(b) of the Small Business
Investment Act of 1958 in a SBIC that is not consolidated with the
bank is treated as a nonfinancial equity investment in the manner
provided in section 2(c)(5)(ii)(C) of this appendix A. A
nonfinancial company is an entity that engages in any activity that
has not been determined to be permissible for a bank to conduct
directly or to be financial in nature or incidental to financial
activities under section 4(k) of the Bank Holding Company Act (12
U.S.C. 1843(k)).
* * * * *

Section 2. Components of Capital

* * * * *
(a) * * *
(3) Minority interests in the equity accounts of consolidated
subsidiaries, except that minority interests in a small business
investment company or investment fund that holds nonfinancial equity
investments, and minority interests in a subsidiary that is engaged
in nonfinancial activities and is held under one of the legal
authorities listed in section 1(c)(19) of this appendix A, are not
included in Tier 1 capital or total capital.
* * * * *
(c) * * *
(1) * * *
(v) Nonfinancial equity investments as provided by section
2(c)(5) of this appendix A.
* * * * *
(5) Nonfinancial equity investments--(i) General. (A) A bank
must deduct from its Tier 1 capital the appropriate percentage, as
determined in accordance with Table A, of the adjusted carrying
value of all nonfinancial equity investments held by the bank and
its subsidiaries.

Table A.--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held Deduction from Tier 1 Capital
directly or indirectly by banks (as a (as a percentage of the
percentage of the Tier 1 capital of the adjusted carrying value of
bank)\1\ the investment)
------------------------------------------------------------------------
Less than 15 percent..................... 8.0 percent.
Greater than or equal to 15 percent but 12.0 percent.
less than 25 percent.
Greater than or equal to 25 percent...... 25.0 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of the Tier 1 capital elements
net of goodwill and net of all identifiable intangible assets other
than mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships, but prior to the deduction for
disallowed mortgage servicing assets, disallowed nonmortgage servicing
assets, disallowed purchased credit card relationships, disallowed
credit-enhancing interest only strips (both purchased and retained),
disallowed deferred tax assets, and nonfinancial equity investments.

(B) Deductions for nonfinancial equity investments must be
applied on a marginal basis to the portions of the adjusted carrying
value of nonfinancial equity investments that fall within the
specified ranges of the bank's Tier 1 capital. For example, if the
adjusted carrying value of all nonfinancial equity investments held
by a bank equals 20 percent of the Tier 1 capital of the bank, then
the amount of the deduction would be 8 percent of the adjusted
carrying value of all investments up to 15 percent of the bank's
Tier 1 capital, and 12 percent of the adjusted carrying value of all
investments equal to, or in excess of, 15 percent of the bank's Tier
1 capital.
(C) The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under section 2(c)(5) of
this appendix A is excluded from the bank's weighted risk assets for
purposes of computing the denominator of the bank's risk-based
capital ratio. For example, if 8 percent of the adjusted carrying
value of a

[[Page 3797]]

nonfinancial equity investment is deducted from Tier 1 capital, the
entire adjusted carrying value of the investment will be excluded
from risk-weighted assets in calculating the denominator of the
risk-based capital ratio.
(D) Banks engaged in equity investment activities, including
those banks with a high concentration in nonfinancial equity
investments (e.g., in excess of 50 percent of Tier 1 capital), will
be monitored and may be subject to heightened supervision, as
appropriate, by the OCC to ensure that such banks maintain capital
levels that are appropriate in light of their equity investment
activities, and the OCC may impose a higher capital charge in any
case where the circumstances, such as the level of risk of the
particular investment or portfolio of investments, the risk
management systems of the bank, or other information, indicate that
a higher minimum capital requirement is appropriate.
(ii) Small business investment company investments. (A)
Notwithstanding section 2(c)(5)(i) of this appendix A, no deduction
is required for nonfinancial equity investments that are made by a
bank or its subsidiary through a SBIC that is consolidated with the
bank, or in a SBIC that is not consolidated with the bank, to the
extent that such investments, in the aggregate, do not exceed 15
percent of the Tier 1 capital of the bank. Except as provided in
paragraph (c)(5)(ii)(B) of this section, any nonfinancial equity
investment that is held through or in a SBIC and not deducted from
Tier 1 capital will be assigned to the 100 percent risk-weight
category and included in the bank's consolidated risk-weighted
assets.
(B) If a bank has an investment in a SBIC that is consolidated
for accounting purposes but the SBIC is not wholly owned by the
bank, the adjusted carrying value of the bank's nonfinancial equity
investments held through the SBIC is equal to the bank's
proportionate share of the SBIC's adjusted carrying value of its
equity investments in nonfinancial companies. The remainder of the
SBIC's adjusted carrying value (i.e., the minority interest holders'
proportionate share) is excluded from the risk-weighted assets of
the bank.
(C) If a bank has an investment in a SBIC that is not
consolidated for accounting purposes and has current information
that identifies the percentage of the SBIC's assets that are equity
investments in nonfinancial companies, the bank may reduce the
adjusted carrying value of its investment in the SBIC
proportionately to reflect the percentage of the adjusted carrying
value of the SBIC's assets that are not equity investments in
nonfinancial companies. The amount by which the adjusted carrying
value of the bank's investment in the SBIC is reduced under this
paragraph will be risk weighted at 100 percent and included in the
bank's risk-weighted assets.
(D) To the extent the adjusted carrying value of all
nonfinancial equity investments that the bank holds through a
consolidated SBIC or in a nonconsolidated SBIC equals or exceeds, in
the aggregate, 15 percent of the Tier 1 capital of the bank, the
appropriate percentage of such amounts, as set forth in Table A,
must be deducted from the bank's Tier 1 capital. In addition, the
aggregate adjusted carrying value of all nonfinancial equity
investments held through a consolidated SBIC and in a
nonconsolidated SBIC (including any nonfinancial equity investments
for which no deduction is required) must be included in determining,
for purposes of Table A the total amount of nonfinancial equity
investments held by the bank in relation to its Tier 1 capital.
(iii) Nonfinancial equity investments excluded. (A)
Notwithstanding section 2(c)(5)(i) and (ii) of this appendix A, no
deduction from Tier 1 capital is required for the following:
(1) Nonfinancial equity investments (or portion of such
investments) made by the bank prior to March 13, 2000, and
continuously held by the bank since March 13, 2000.
(2) Nonfinancial equity investments made on or after March 13,
2000, pursuant to a legally binding written commitment that was
entered into by the bank prior to March 13, 2000, and that required
the bank to make the investment, if the bank has continuously held
the investment since the date the investment was acquired.
(3) Nonfinancial equity investments received by the bank through
a stock split or stock dividend on a nonfinancial equity investment
made prior to March 13, 2000, provided that the bank provides no
consideration for the shares or interests received, and the
transaction does not materially increase the bank's proportional
interest in the nonfinancial company.
(4) Nonfinancial equity investments received by the bank through
the exercise on or after March 13, 2000, of an option, warrant, or
other agreement that provides the bank with the right, but not the
obligation, to acquire equity or make an investment in a
nonfinancial company, if the option, warrant, or other agreement was
acquired by the bank prior to March 13, 2000, and the bank provides
no consideration for the nonfinancial equity investments.
(B) Any excluded nonfinancial equity investments described in
section 2(c)(5)(iii)(A) of this appendix A must be included in
determining the total amount of nonfinancial equity investments held
by the bank in relation to its Tier 1 capital for purposes of Table
A. In addition, any excluded nonfinancial equity investments will be
risk weighted at 100 percent and included in the bank's risk-
weighted assets.
* * * * *

Dated: January 4, 2002.
John D. Hawke, Jr.,
Comptroller of the Currency.

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

For the reasons set forth in the joint preamble, the Board of
Governors of the Federal Reserve System amends parts 208 and 225 of
chapter II of title 12 of the Code of Federal Regulations as follows:

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

1. The authority citation for part 208 continues to read as
follows:

Authority: 12 U.S.C. 24, 24a, 36, 92a, 93a, 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),
1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1835a,
1842(l), 1882, 2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15
U.S.C. 78b, 781(b), 781(g), 781(i), 78o-4(c)(5), 78q, 78q-1, and
78w; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

2. In Appendix A to part 208, the following amendments are made:
a. In section II.A--
i. The undesignated paragraph following paragraph 1.(iii) is
revised;
ii. One sentence is added at the end of paragraph 1.c.; and
iii. The first undesignated paragraph following paragraph 2.(v) is
revised.
b. In section II.B--
i. A new paragraph (v) is added following paragraph (iv) Deferred
tax assets;
ii. Paragraph 1.e.ii is revised;
iii. Paragraph 4.b is revised; and
iv. A new paragraph 5 is added at the end of section II.B.
c. In sections III. and IV., footnotes 21 through 48 are
redesignated as footnotes 27 through 54, respectively.
d. Attachment II is revised.

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

* * * * *
II. * * *
A. * * *
1. * * *
Tier 1 capital is generally defined as the sum of core capital
elements \5\ less any amounts of goodwill, other intangible assets,
interest-only strips receivables and nonfinancial equity investments
that are required to be deducted in accordance with section II.B. of
this appendix A.
---------------------------------------------------------------------------

\5\ [Reserved]
---------------------------------------------------------------------------

* * * * *
c. * * * Minority interests in small business investment
companies, investment funds that hold nonfinancial equity
investments (as defined in section II.B.5.b. of this appendix A),
and subsidiaries engaged in nonfinancial activities are not included
in the bank's Tier 1 or total capital base if the bank's interest in
the company or fund is held under one of the legal authorities
listed in section II.B.5.b.
* * * * *
2. * * *
The maximum amount of tier 2 capital that may be included in a
bank's qualifying total capital is limited to 100 percent of tier 1

[[Page 3798]]

capital (net of goodwill, other intangible assets, interest-only
strips receivables and nonfinancial equity investments that are
required to be deducted in accordance with section II.B. of this
appendix A).
* * * * *
B. * * *
(v) Nonfinancial equity investments-portions are deducted from
the sum of core capital elements in accordance with section II.B.5
of this appendix.
* * * * *
1. * * *
e. * * *
ii. For purposes of calculating these limitations on mortgage
servicing assets, nonmortgage servicing assets, purchased credit
card relationships, and credit-enhancing I/Os, tier 1 capital is
defined as the sum of core capital elements, net of goodwill, and
net of all identifiable intangible assets other than mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships, but prior to the deduction of any disallowed
mortgage servicing assets, any disallowed nonmortgage servicing
assets, any disallowed purchased credit card relationships, any
disallowed credit-enhancing I/Os (both purchased and retained), any
disallowed deferred tax assets, and any nonfinancial equity
investments.
* * * * *
4. * * *
b. The reported amount of deferred-tax assets, net of any
valuation allowance for deferred-tax assets, in excess of the lesser
of these two amounts is to be deducted from a bank's core capital
elements in determining tier 1 capital. For purposes of calculating
the 10 percent limitation, tier 1 capital is defined as the sum of
core capital elements, net of goodwill and net of all identifiable
intangible assets other than mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships, but prior
to the deduction of any disallowed mortgage servicing assets, any
disallowed nonmortgage servicing assets, any disallowed purchased
credit card relationships, any disallowed credit-enhancing I/Os, any
disallowed deferred-tax assets, and any nonfinancial equity
investments. There generally is no limit in tier 1 capital on the
amount of deferred-tax assets that can be realized from taxes paid
in prior carry-back years or from future reversals of existing
taxable temporary differences.
* * * * *
5. Nonfinancial equity investments--a. General. A bank must
deduct from its core capital elements the sum of the appropriate
percentages (as determined below) of the adjusted carrying value of
all nonfinancial equity investments held by the bank or by its
direct or indirect subsidiaries. For purposes of this section
II.B.5, investments held by a bank include all investments held
directly or indirectly by the bank or any of its subsidiaries.
b. Scope of nonfinancial equity investments. A nonfinancial
equity investment means any equity investment held by the bank in a
nonfinancial company: through a small business investment company
(SBIC) under section 302(b) of the Small Business Investment Act of
1958 (15 U.S.C. 682(b)); \21\ or under the portfolio investment
provisions of the Board's Regulation K (12 CFR 211.8(c)(3)). A
nonfinancial company is an entity that engages in any activity that
has not been determined to be permissible for the bank to conduct
directly, or to be financial in nature or incidental to financial
activities under section 4(k) of the Bank Holding Company Act (12
U.S.C. 1843(k)).
---------------------------------------------------------------------------

\21\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in an SBIC that is not consolidated
with the bank is treated as a nonfinancial equity investment.
---------------------------------------------------------------------------

c. Amount of deduction from core capital. i. The bank must
deduct from its core capital elements the sum of the appropriate
percentages, as set forth in Table 1, of the adjusted carrying value
of all nonfinancial equity investments held by the bank. The amount
of the percentage deduction increases as the aggregate amount of
nonfinancial equity investments held by the bank increases as a
percentage of the bank's Tier 1 capital.

Table 1.--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held Deduction from Core Capital
directly or indirectly by the bank (as a Elements (as a percentage of
percentage of the Tier 1 capital of the the adjusted carrying value
bank) \1\ of the investment)
------------------------------------------------------------------------
Less than 15 percent..................... 8 percent.
15 percent to 24.99 percent.............. 12 percent.
25 percent and above..................... 25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of core capital elements net of
goodwill and net of all identifiable intangible assets other than
mortgage servicing assets, nonmortgage servicing assets and purchased
credit card relationships, but prior to the deduction for any
disallowed mortgage servicing assets, any disallowed nonmortgage
servicing assets, any disallowed purchased credit card relationships,
any disallowed credit enhancing I/Os (both purchased and retained),
any disallowed deferred tax assets, and any nonfinancial equity
investments.

ii. These deductions are applied on a marginal basis to the
portions of the adjusted carrying value of nonfinancial equity
investments that fall within the specified ranges of the parent
bank's Tier 1 capital. For example, if the adjusted carrying value
of all nonfinancial equity investments held by a bank equals 20
percent of the Tier 1 capital of the bank, then the amount of the
deduction would be 8 percent of the adjusted carrying value of all
investments up to 15 percent of the bank's Tier 1 capital, and 12
percent of the adjusted carrying value of all investments in excess
of 15 percent of the bank's Tier 1 capital.
iii. The total adjusted carrying value of any nonfinancial
equity investment that is subject to deduction under this paragraph
is excluded from the bank's risk-weighted assets for purposes of
computing the denominator of the bank's risk-based capital
ratio.\22\
---------------------------------------------------------------------------

\22\ For example, if 8 percent of the adjusted carrying value of
a nonfinancial equity investment is deducted from Tier 1 capital,
the entire adjusted carrying value of the investment will be
excluded from risk-weighted assets in calculating the denominator
for the risk-based capital ratio.
---------------------------------------------------------------------------

iv. As noted in section I, this appendix establishes minimum
risk-based capital ratios and banks are at all times expected to
maintain capital commensurate with the level and nature of the risks
to which they are exposed. The risk to a bank from nonfinancial
equity investments increases with its concentration in such
investments and strong capital levels above the minimum requirements
are particularly important when a bank has a high degree of
concentration in nonfinancial equity investments (e.g., in excess of
50 percent of Tier 1 capital). The Federal Reserve intends to
monitor banks and apply heightened supervision to equity investment
activities as appropriate, including where the bank has a high
degree of concentration in nonfinancial equity investments, to
ensure that each bank maintains capital levels that are appropriate
in light of its equity investment activities. The Federal Reserve
also reserves authority to impose a higher capital charge in any
case where the circumstances, such as the level of risk of the
particular investment or portfolio of investments, the risk
management systems of the bank, or other information, indicate that
a higher minimum capital requirement is appropriate.
d. SBIC investments. i. No deduction is required for
nonfinancial equity investments that are held by a bank through one
or more SBICs that are consolidated with the bank or in one or more
SBICs that are not consolidated with the bank to the extent that

[[Page 3799]]

all such investments, in the aggregate, do not exceed 15 percent of
the bank's Tier 1 capital. Any nonfinancial equity investment that
is held through or in an SBIC and that is not required to be
deducted from Tier 1 capital under this section II.B.5.d. will be
assigned a 100 percent risk-weight and included in the bank's
consolidated risk-weighted assets.\23\
---------------------------------------------------------------------------

\23\ If a bank has an investment in an SBIC that is consolidated
for accounting purposes but that is not wholly owned by the bank,
the adjusted carrying value of the bank's nonfinancial equity
investments through the SBIC is equal to the bank's proportionate
share of the adjusted carrying value of the SBIC's equity
investments in nonfinancial companies. The remainder of the SBIC's
adjusted carrying value (i.e., the minority interest holders'
proportionate share) is excluded from the risk-weighted assets of
the bank. If a bank has an investment in an SBIC that is not
consolidated for accounting purposes and has current information
that identifies the percentage of the SBIC's assets that are equity
investments in nonfinancial companies, the bank may reduce the
adjusted carrying value of its investment in the SBIC
proportionately to reflect the percentage of the adjusted carrying
value of the SBIC's assets that are not equity investments in
nonfinancial companies. If a bank reduces the adjusted carrying
value of its investment in a non-consolidated SBIC to reflect
financial investments of the SBIC, the amount of the adjustment will
be risk weighted at 100 percent and included in the bank's risk-
weighted assets.
---------------------------------------------------------------------------

ii. To the extent the adjusted carrying value of all
nonfinancial equity investments that a bank holds through one or
more SBICs that are consolidated with the bank or in one or more
SBICs that are not consolidated with the bank exceeds, in the
aggregate, 15 percent of the bank's Tier 1 capital, the appropriate
percentage of such amounts (as set forth in Table 1) must be
deducted from the bank's core capital elements. In addition, the
aggregate adjusted carrying value of all nonfinancial equity
investments held through a consolidated SBIC and in a non-
consolidated SBIC (including any investments for which no deduction
is required) must be included in determining, for purposes of Table
1, the total amount of nonfinancial equity investments held by the
bank in relation to its Tier 1 capital.
e. Transition provisions. No deduction under this section II.B.5
is required to be made with respect to the adjusted carrying value
of any nonfinancial equity investment (or portion of such an
investment) that was made by the bank prior to March 13, 2000, or
that was made by the bank after such date pursuant to a binding
written commitment \24\ entered into prior to March 13, 2000,
provided that in either case the bank has continuously held the
investment since the relevant investment date.\25\ For purposes of
this section II.B.5.e., a nonfinancial equity investment made prior
to March 13, 2000, includes any shares or other interests received
by the bank through a stock split or stock dividend on an investment
made prior to March 13, 2000, provided the bank provides no
consideration for the shares or interests received and the
transaction does not materially increase the bank's proportional
interest in the company. The exercise on or after March 13, 2000, of
options or warrants acquired prior to March 13, 2000, is not
considered to be an investment made prior to March 13, 2000, if the
bank provides any consideration for the shares or interests received
upon exercise of the options or warrants. Any nonfinancial equity
investment (or portion thereof) that is not required to be deducted
from Tier 1 capital under this section II.B.5.e. must be included in
determining the total amount of nonfinancial equity investments held
by the bank in relation to its Tier 1 capital for purposes of Table
1. In addition, any nonfinancial equity investment (or portion
thereof) that is not required to be deducted from Tier 1 capital
under this section II.B.5.e. will be assigned a 100-percent risk
weight and included in the bank's consolidated risk-weighted assets.
---------------------------------------------------------------------------

\24\ A ``binding written commitment'' means a legally binding
written agreement that requires the bank to acquire shares or other
equity of the company, or make a capital contribution to the
company, under terms and conditions set forth in the agreement.
Options, warrants, and other agreements that give a bank the right
to acquire equity or make an investment, but do not require the bank
to take such actions, are not considered a binding written
commitment for purposes of this section II.B.5.
\25\ For example, if a bank made an equity investment in 100
shares of a nonfinancial company prior to March 13, 2000, the
adjusted carrying value of that investment would not be subject to a
deduction under this section II.B.5. However, if the bank made any
additional equity investment in the company after March 13, 2000,
such as by purchasing additional shares of the company (including
through the exercise of options or warrants acquired before or after
March 13, 2000) or by making a capital contribution to the company
and such investment was not made pursuant to a binding written
commitment entered into before March 13, 2000, the adjusted carrying
value of the additional investment would be subject to a deduction
under this section II.B.5. In addition, if the bank sold and
repurchased, after March 13, 2000, 40 shares of the company, the
adjusted carrying value of those 40 shares would be subject to a
deduction under this section II.B.5.
---------------------------------------------------------------------------

f. Adjusted carrying value. i. For purposes of this section
II.B.5., the ``adjusted carrying value'' of investments is the
aggregate value at which the investments are carried on the balance
sheet of the bank reduced by any unrealized gains on those
investments that are reflected in such carrying value but excluded
from the bank's Tier 1 capital and associated deferred tax
liabilities. For example, for investments held as available-for-sale
(AFS), the adjusted carrying value of the investments would be the
aggregate carrying value of the investments (as reflected on the
consolidated balance sheet of the bank) less any unrealized gains on
those investments that are included in other comprehensive income
and not reflected in Tier 1 capital, and associated deferred tax
liabilities.\26\
---------------------------------------------------------------------------

\26\ Unrealized gains on AFS equity investments may be included
in supplementary capital to the extent permitted under section
II.A.2.e. of this appendix A. In addition, the unrealized losses on
AFS equity investments are deducted from Tier 1 capital in
accordance with section II.A.1.a. of this appendix A.
---------------------------------------------------------------------------

ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that
is consolidated for accounting purposes under generally accepted
accounting principles, the bank's adjusted carrying value of the
investment is determined under the equity method of accounting (net
of any intangibles associated with the investment that are deducted
from the bank's core capital in accordance with section II.B.1. of
this appendix A). Even though the assets of the nonfinancial company
are consolidated for accounting purposes, these assets (as well as
the credit equivalent amounts of the company's off-balance sheet
items) should be excluded from the bank's risk-weighted assets for
regulatory capital purposes.
g. Equity investments. For purposes of this section II.B.5., an
equity investment means any equity instrument (including common
stock, preferred stock, partnership interests, interests in limited
liability companies, trust certificates and warrants and call
options that give the holder the right to purchase an equity
instrument), any equity feature of a debt instrument (such as a
warrant or call option), and any debt instrument that is convertible
into equity where the instrument or feature is held under one of the
legal authorities listed in section II.B.5.b. of this appendix A. An
investment in any other instrument (including subordinated debt) may
be treated as an equity investment if, in the judgment of the
Federal Reserve, the instrument is the functional equivalent of
equity or exposes the state member bank to essentially the same
risks as an equity instrument.
* * * * *

Attachment II--Summary of Definition of Qualifying Capital for State
Member Banks \*\
[Using the Year-End 1992 Standard]
------------------------------------------------------------------------
Components Minimum requirements
------------------------------------------------------------------------
CORE CAPITAL (Tier 1).................. Must equal or exceed 4% of
weighted-risk assets.
Common stockholders' equity............ No limit.
Qualifying noncumulative perpetual No limit; banks should avoid
preferred stock. undue reliance on preferred
stock in tier 1.

[[Page 3800]]

Minority interest in equity accounts of Banks should avoid using
consolidated. minority interests to
subsidiaries introduce
elements not otherwise
qualifying for tier 1 capital.
Less: Goodwill, other intangible
assets, credit-enhancing interest-only
strips and nonfinancial equity
investments required to be deducted
from capital \1\
SUPPLEMENTARY CAPITAL (Tier 2)......... Total of tier 2 is limited to
100% of tier 1.\2\
Allowance for loan and lease losses Limited to 1.25% of weighted-
risk assets.\2\
Perpetual preferred stock.......... No limit within tier 2.
Hybrid capital instruments and No limit within tier 2.
equity contract notes.
Subordinated debt and intermediate- Subordinated debt and
term preferred stock (original intermediate-term preferred
weighted average maturity of 5 stock are limited to 50% of
years or more). tier 1,2 amortized for capital
purposes as they approach
maturity.
Revaluation reserves (equity and Not included; banks encouraged
building). to disclose; may be evaluated
on a case-by-case basis for
international comparisons; and
taken into account in making
an overall assessment of
capital.
DEDUCTIONS (from sum of tier 1 and tier
2)
Investments in unconsolidated As a general rule, one-half of
subsidiaries. the aggregate investments will
be deducted from tier 1
capital and one-half from tier
2 capital.\3\
Reciprocal holdings of banking
organizations' capital securities
Other deductions (such as other On a case-by-case basis or as a
subsidiaries or joint ventures) as matter of policy.
determined by supervisory
authority after a formal
rulemaking.
TOTAL CAPITAL (tier 1 + tier Must equal or exceed 8% of
2--deductions). weighted-risk assets.
------------------------------------------------------------------------
\1\ Requirements for the deduction of other intangible assets, residual
interests and nonfinancial equity investments are set forth in section
II.B. of this appendix.
\2\ Amounts in excess of limitations are permitted but do not qualify as
capital.
\3\ A proportionately greater amount may be deducted from tier 1
capital, if the risks associated with the subsidiary so warrant.
* See discussion in section II of the guidelines for a complete
description of the requirements for, and the limitations on, the
components of qualifying capital.

* * * * *

3. In Appendix B to part 208, in section II.b., footnotes 2 and 3
are revised and the fourth sentence of section II.b. is revised to read
as follows:

Appendix B to Part 208--Capital Adequacy Guidelines for State
Member Banks: Tier 1 Leverage Measure

* * * * *
II. * * *
b. * * * \2\ As a general matter, average total consolidated
assets are defined as the quarterly average total assets (defined
net of the allowance for loan and lease losses) reported on the
bank's Reports of Condition and Income (Call Reports), less
goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, are in excess of 100 percent of Tier 1 capital;
amounts of nonmortgage servicing assets and purchased credit card
relationships that, in the aggregate, are in excess of 25 percent of
Tier 1 capital; amounts of credit-enhancing interest-only strips
that are in excess of 25 percent of Tier 1 capital; all other
identifiable intangible assets; any investments in subsidiaries or
associated companies that the Federal Reserve determines should be
deducted Tier 1 capital; deferred tax assets that are dependent upon
future taxable income, net of their valuation allowance, in excess
of the limitations set forth in section II.B.4 of appendix A of this
part; and the amount of the total adjusted carrying value of
nonfinancial equity investments that is subject to a deduction from
Tier 1 capital.\3\
---------------------------------------------------------------------------

\2\ Tier 1 capital for state member banks includes common
equity, minority interest in the equity accounts of consolidated
subsidiaries, and qualifying noncumulative perpetual preferred
stock. In addition, as a general matter, Tier 1 capital excludes
goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, exceed 100 percent of Tier 1 capital; nonmortgage
servicing assets and purchased credit card relationships that, in
the aggregate, exceed 25 percent of Tier 1 capital; amounts of
credit enhancing interest-only strips in excess of 25 percent of
Tier 1 capital; other identifiable intangible assets; deferred tax
assets that are dependent upon future taxable income, net of their
valuation allowance, in excess of certain limitations; and a
percentage of the bank's nonfinancial equity investments. The
Federal Reserve may exclude certain other investments in
subsidiaries or associated companies as appropriate.
\3\ Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B in appendix A of this part.
---------------------------------------------------------------------------

* * * * *

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

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

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

2. In Appendix A to part 225, the following amendments are made:
a. In section II.A--
i. The undesignated paragraph following paragraph 1.(iv) is
revised;
ii. One sentence is added at the end of paragraph 1.c; and
iii. The first undesignated paragraph following paragraph 2.(v) is
revised.
b. In section II.B--
i. A new paragraph (v) is added following paragraph (iv) Deferred
tax assets;
ii. Paragraph 1.e.ii is revised;
iii. Paragraph 4.b is revised; and
iv. A new paragraph 5 is added at the end of section II.B.
c. In sections III. and IV., footnotes 24 through 51 are
redesignated as footnotes 31 through 58, respectively.
d. Attachment II is revised.

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

* * * * *
II. * * *
A. * * *
1. * * *
Tier 1 capital is generally defined as the sum of core capital
elements \6\ less any amounts of goodwill, other intangible assets,
interest-only strips receivables and nonfinancial equity investments
that are required to be deducted in accordance with section II.B. of
this appendix A.
---------------------------------------------------------------------------

\6\ [Reserved]
---------------------------------------------------------------------------

* * * * *
c. * * * Minority interests in small business investment
companies, investment

[[Page 3801]]

funds that hold nonfinancial equity investments (as defined in
section II.B.5.b. of this appendix A), and subsidiaries engaged in
nonfinancial activities are not included in the banking
organization's Tier 1 or total capital base if the banking
organization's interest in the company or fund is held under one of
the legal authorities listed in section II.B.5.b.
* * * * *
2. * * *
The maximum amount of tier 2 capital that may be included in an
institution's qualifying total capital is limited to 100 percent of
tier 1 capital (net of goodwill, other intangible assets, interest-
only strips receivables and nonfinancial equity investments that are
required to be deducted in accordance with section II.B. of this
appendix A).
* * * * *
B. * * *
(v) Nonfinancial equity investments--portions are deducted from
the sum of core capital elements in accordance with section II.B.5
of this appendix A.
* * * * *
1. * * *
e. * * *
ii. For purposes of calculating these limitations on mortgage
servicing assets, nonmortgage servicing assets, purchased credit
card relationships, and credit-enhancing I/Os, tier 1 capital is
defined as the sum of core capital elements, net of goodwill, and
net of all identifiable intangible assets other than mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships, but prior to the deduction of any disallowed
mortgage servicing assets, any disallowed nonmortgage servicing
assets, any disallowed purchased credit card relationships, any
disallowed credit-enhancing I/Os (both purchased and retained), any
disallowed deferred tax assets, and any nonfinancial equity
investments.
* * * * *
4. * * *
b. The reported amount of deferred-tax assets, net of any
valuation allowance for deferred-tax assets, in excess of the lesser
of these two amounts is to be deducted from a banking organization's
core capital elements in determining tier 1 capital. For purposes of
calculating the 10 percent limitation, tier 1 capital is defined as
the sum of core capital elements, net of goodwill and net of all
identifiable intangible assets other than mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card
relationships, but prior to the deduction of any disallowed mortgage
servicing assets, any disallowed nonmortgage servicing assets, any
disallowed purchased credit card relationships, any disallowed
credit-enhancing I/Os, any disallowed deferred-tax assets, and any
nonfinancial equity investments. There generally is no limit in tier
1 capital on the amount of deferred-tax assets that can be realized
from taxes paid in prior carry-back years or from future reversals
of existing taxable temporary differences.
* * * * *
5. Nonfinancial equity investments--a. General. A bank holding
company must deduct from its core capital elements the sum of the
appropriate percentages (as determined below) of the adjusted
carrying value of all nonfinancial equity investments held by the
parent bank holding company or by its direct or indirect
subsidiaries. For purposes of this section II.B.5, investments held
by a bank holding company include all investments held directly or
indirectly by the bank holding company or any of its subsidiaries.
b. Scope of nonfinancial equity investments. A nonfinancial
equity investment means any equity investment held by the bank
holding company: under the merchant banking authority of section
4(k)(4)(H) of the BHC Act and subpart J of the Board's Regulation Y
(12 CFR 225.175 et seq.); under section 4(c)(6) or 4(c)(7) of BHC
Act in a nonfinancial company or in a company that makes investments
in nonfinancial companies; in a nonfinancial company through a small
business investment company (SBIC) under section 302(b) of the Small
Business Investment Act of 1958; \24\ in a nonfinancial company
under the portfolio investment provisions of the Board's Regulation
K (12 CFR 211.8(c)(3)); or in a nonfinancial company under section
24 of the Federal Deposit Insurance Act (other than section
24(f)).\25\ A nonfinancial company is an entity that engages in any
activity that has not been determined to be financial in nature or
incidental to financial activities under section 4(k) of the Bank
Holding Company Act (12 U.S.C. 1843(k)).
---------------------------------------------------------------------------

\24\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in an SBIC that is not consolidated
with the parent banking organization is treated as a nonfinancial
equity investment.
\25\ See 12 U.S.C. 1843(c)(6), (c)(7) and (k)(4)(H); 15 U.S.C.
682(b); 12 CFR 211.5(b)(1)(iii); and 12 U.S.C. 1831a. In a case in
which the Board of Directors of the FDIC, acting directly in
exceptional cases and after a review of the proposed activity, has
permitted a lesser capital deduction for an investment approved by
the Board of Directors under section 24 of the Federal Deposit
Insurance Act, such deduction shall also apply to the consolidated
bank holding company capital calculation so long as the bank's
investments under section 24 and SBIC investments represent, in the
aggregate, less than 15 percent of the Tier 1 capital of the bank.
---------------------------------------------------------------------------

c. Amount of deduction from core capital. i. The bank holding
company must deduct from its core capital elements the sum of the
appropriate percentages, as set forth in Table 1, of the adjusted
carrying value of all nonfinancial equity investments held by the
bank holding company. The amount of the percentage deduction
increases as the aggregate amount of nonfinancial equity investments
held by the bank holding company increases as a percentage of the
bank holding company's Tier 1 capital.

Table 1.--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value
of all nonfinancial equity
investments held directly or Deduction from Core Capital
indirectly by the bank holding Elements (as a percentage of the
company (as a percentage of the adjusted carrying value of the
Tier 1 capital of the parent investment)
banking organization)\1\
------------------------------------------------------------------------
Less than 15 percent............... 8 percent.
15 percent to 24.99 percent........ 12 percent.
25 percent and above............... 25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of core capital elements net of
goodwill and net of all identifiable intangible assets other than
mortgage servicing assets, nonmortgage servicing assets and purchased
credit card relationships, but prior to the deduction for any
disallowed mortgage servicing assets, any disallowed nonmortgage
servicing assets, any disallowed purchased credit card relationships,
any disallowed credit enhancing I/Os (both purchased and retained),
any disallowed deferred tax assets, and any nonfinancial equity
investments.

ii. These deductions are applied on a marginal basis to the
portions of the adjusted carrying value of nonfinancial equity
investments that fall within the specified ranges of the parent
holding company's Tier 1 capital. For example, if the adjusted
carrying value of all nonfinancial equity investments held by a bank
holding company equals 20 percent of the Tier 1 capital of the bank
holding company, then the amount of the deduction would be 8 percent
of the adjusted carrying value of all investments up to 15 percent
of the company's Tier 1 capital, and 12 percent of the adjusted
carrying value of all investments in excess of 15 percent of the
company's Tier 1 capital.
iii. The total adjusted carrying value of any nonfinancial
equity investment that is subject to deduction under this paragraph
is excluded from the bank holding company's risk-weighted assets for
purposes of

[[Page 3802]]

computing the denominator of the company's risk-based capital
ratio.\26\
---------------------------------------------------------------------------

\26\ For example, if 8 percent of the adjusted carrying value of
a nonfinancial equity investment is deducted from Tier 1 capital,
the entire adjusted carrying value of the investment will be
excluded from risk-weighted assets in calculating the denominator
for the risk-based capital ratio.
---------------------------------------------------------------------------

iv. As noted in section I, this appendix establishes minimum
risk-based capital ratios and banking organizations are at all times
expected to maintain capital commensurate with the level and nature
of the risks to which they are exposed. The risk to a banking
organization from nonfinancial equity investments increases with its
concentration in such investments and strong capital levels above
the minimum requirements are particularly important when a banking
organization has a high degree of concentration in nonfinancial
equity investments (e.g., in excess of 50 percent of Tier 1
capital). The Federal Reserve intends to monitor banking
organizations and apply heightened supervision to equity investment
activities as appropriate, including where the banking organization
has a high degree of concentration in nonfinancial equity
investments, to ensure that each organization maintains capital
levels that are appropriate in light of its equity investment
activities. The Federal Reserve also reserves authority to impose a
higher capital charge in any case where the circumstances, such as
the level of risk of the particular investment or portfolio of
investments, the risk management systems of the banking
organization, or other information, indicate that a higher minimum
capital requirement is appropriate.
d. SBIC investments. i. No deduction is required for
nonfinancial equity investments that are held by a bank holding
company through one or more SBICs that are consolidated with the
bank holding company or in one or more SBICs that are not
consolidated with the bank holding company to the extent that all
such investments, in the aggregate, do not exceed 15 percent of the
aggregate of the bank holding company's pro rata interests in the
Tier 1 capital of its subsidiary banks. Any nonfinancial equity
investment that is held through or in an SBIC and not required to be
deducted from Tier 1 capital under this section II.B.5.d. will be
assigned a 100 percent risk-weight and included in the parent
holding company's consolidated risk-weighted assets.\27\
---------------------------------------------------------------------------

\27\ If a bank holding company has an investment in an SBIC that
is consolidated for accounting purposes but that is not wholly owned
by the bank holding company, the adjusted carrying value of the bank
holding company's nonfinancial equity investments through the SBIC
is equal to the holding company's proportionate share of the
adjusted carrying value of the SBIC's equity investments in
nonfinancial companies. The remainder of the SBIC's adjusted
carrying value (i.e. the minority interest holders' proportionate
share) is excluded from the risk-weighted assets of the bank holding
company. If a bank holding company has an investment in a SBIC that
is not consolidated for accounting purposes and has current
information that identifies the percentage of the SBIC's assets that
are equity investments in nonfinancial companies, the bank holding
company may reduce the adjusted carrying value of its investment in
the SBIC proportionately to reflect the percentage of the adjusted
carrying value of the SBIC's assets that are not equity investments
in nonfinancial companies. If a bank holding company reduces the
adjusted carrying value of its investment in a non-consolidated SBIC
to reflect financial investments of the SBIC, the amount of the
adjustment will be risk weighted at 100 percent and included in the
bank's risk-weighted assets.
---------------------------------------------------------------------------

ii. To the extent the adjusted carrying value of all
nonfinancial equity investments that a bank holding company holds
through one or more SBICs that are consolidated with the bank
holding company or in one or more SBICs that are not consolidated
with the bank holding company exceeds, in the aggregate, 15 percent
of the aggregate Tier 1 capital of the company's subsidiary banks,
the appropriate percentage of such amounts (as set forth in Table 1)
must be deducted from the bank holding company's core capital
elements. In addition, the aggregate adjusted carrying value of all
nonfinancial equity investments held through a consolidated SBIC and
in a non-consolidated SBIC (including any investments for which no
deduction is required) must be included in determining, for purposes
of Table 1, the total amount of nonfinancial equity investments held
by the bank holding company in relation to its Tier 1 capital.
e. Transition provisions. No deduction under this section II.B.5
is required to be made with respect to the adjusted carrying value
of any nonfinancial equity investment (or portion of such an
investment) that was made by the bank holding company prior to March
13, 2000, or that was made after such date pursuant to a binding
written commitment \28\ entered into by the bank holding company
prior to March 13, 2000, provided that in either case the bank
holding company has continuously held the investment since the
relevant investment date.\29\ For purposes of this section
II.B.5.e., a nonfinancial equity investment made prior to March 13,
2000, includes any shares or other interests received by the bank
holding company through a stock split or stock dividend on an
investment made prior to March 13, 2000, provided the bank holding
company provides no consideration for the shares or interests
received and the transaction does not materially increase the bank''
holding company's proportional interest in the company. The exercise
on or after March 13, 2000, of options or warrants acquired prior to
March 13, 2000, is not considered to be an investment made prior to
March 13, 2000, if the bank holding company provides any
consideration for the shares or interests received upon exercise of
the options or warrants. Any nonfinancial equity investment (or
portion thereof) that is not required to be deducted from Tier 1
capital under this section II.B.5.e. must be included in determining
the total amount of nonfinancial equity investments held by the bank
holding company in relation to its Tier 1 capital for purposes of
Table 1. In addition, any nonfinancial equity investment (or portion
thereof) that is not required to be deducted from Tier 1 capital
under this section II.B.5.e. will be assigned a 100-percent risk
weight and included in the bank holding company's consolidated risk-
weighted assets.
---------------------------------------------------------------------------

\28\ A ``binding written commitment'' means a legally binding
written agreement that requires the banking organization to acquire
shares or other equity of the company, or make a capital
contribution to the company, under terms and conditions set forth in
the agreement. Options, warrants, and other agreements that give a
banking organization the right to acquire equity or make an
investment, but do not require the banking organization to take such
actions, are not considered a binding written commitment for
purposes of this section II.B.5.
\29\ For example, if a bank holding company made an equity
investment in 100 shares of a nonfinancial company prior to March
13, 2000, that investment would not be subject to a deduction under
this section II.B.5. However, if the bank holding company made any
additional equity investment in the company after March 13, 2000,
such as by purchasing additional shares of the company (including
through the exercise of options or warrants acquired before or after
March 13, 2000) or by making a capital contribution to the company,
and such investment was not made pursuant to a binding written
commitment entered into before March 13, 2000, the adjusted carrying
value of the additional investment would be subject to a deduction
under this section II.B.5. In addition, if the bank holding company
sold and repurchased shares of the company after March 13, 2000, the
adjusted carrying value of the re-acquired shares would be subject
to a deduction under this section II.B.5.
---------------------------------------------------------------------------

f. Adjusted carrying value. i. For purposes of this section
II.B.5., the ``adjusted carrying value'' of investments is the
aggregate value at which the investments are carried on the balance
sheet of the consolidated bank holding company reduced by any
unrealized gains on those investments that are reflected in such
carrying value but excluded from the bank holding company's Tier 1
capital and associated deferred tax liabilities. For example, for
investments held as available-for-sale (AFS), the adjusted carrying
value of the investments would be the aggregate carrying value of
the investments (as reflected on the consolidated balance sheet of
the bank holding company) less any unrealized gains on those
investments that are included in other comprehensive income and not
reflected in Tier 1 capital, and associated deferred tax
liabilities.\30\
---------------------------------------------------------------------------

\30\ Unrealized gains on AFS investments may be included in
supplementary capital to the extent permitted under section II.A.2.e
of this appendix A. In addition, the unrealized losses on AFS equity
investments are deducted from Tier 1 capital in accordance with
section II.A.1.a of this appendix A.
---------------------------------------------------------------------------

ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that
is consolidated for accounting purposes under generally accepted
accounting principles, the parent banking organization's adjusted
carrying value of the investment is determined under the equity
method of accounting (net of any intangibles associated with the
investment that are deducted from the consolidated bank holding
company's core capital in accordance with section II.B.1 of this
Appendix). Even though the assets of the nonfinancial company are
consolidated for accounting purposes, these assets (as well as the
credit equivalent amounts of the company's off-balance sheet items)
should be excluded from the banking organization's

[[Page 3803]]

risk-weighted assets for regulatory capital purposes.
g. Equity investments. For purposes of this section II.B.5, an
equity investment means any equity instrument (including common
stock, preferred stock, partnership interests, interests in limited
liability companies, trust certificates and warrants and call
options that give the holder the right to purchase an equity
instrument), any equity feature of a debt instrument (such as a
warrant or call option), and any debt instrument that is convertible
into equity where the instrument or feature is held under one of the
legal authorities listed in section II.B.5.b. of this appendix. An
investment in any other instrument (including subordinated debt) may
be treated as an equity investment if, in the judgment of the
Federal Reserve, the instrument is the functional equivalent of
equity or exposes the state member bank to essentially the same
risks as an equity instrument.
* * * * *

Attachment II--Summary of Definition of Qualifying Capital for Bank
Holding Companies*
[Using the Year-End 1992 Standard]
------------------------------------------------------------------------
Components Minimum requirements
------------------------------------------------------------------------
CORE CAPITAL (Tier 1).................. Must equal or exceed 4% of
weighted-risk assets.
Common stockholders' equity........ No limit.
Qualifying noncumulative perpetual No limit; bank holding
preferred stock. companies should avoid undue
reliance on preferred stock in
tier 1.
Qualifying cumulative perpetual Limited to 25% of the sum of
preferred stock. common stock, qualifying
perpetual stock, and minority
interests.
Minority interest in equity Organizations should avoid
accounts of consolidated using minority interests to
subsidiaries. introduce elements not
otherwise qualifying for tier
1 capital.
Less: Goodwill, other intangible
assets, credit-enhancing interest-only
strips and nonfinancial equity
investments required to be deducted
from capital \1\
SUPPLEMENTARY CAPITAL (Tier 2)......... Total of tier 2 is limited to
100% of tier 1. \2\
Allowance for loan and lease losses Limited to 1.25% of weighted-
risk assets. \2\
Perpetual preferred stock.......... No limit within tier 2.
Hybrid capital instruments and No limit within tier 2.
equity contract notes.
Subordinated debt and intermediate- Subordinated debt and
term preferred stock (original intermediate-term preferred
weighted average maturity of 5 stock are limited to 50% of
years or more). tier 1 \2\; amortized for
capital purposes as they
approach maturity.
Revaluation reserves (equity and Not included; organizations
building). encouraged to disclose; may be
evaluated on a case-by-case
basis for international
comparisons; and taken into
account in making an overall
assessment of capital.
DEDUCTIONS (from sum of tier 1 and tier
2)
Investments in unconsolidated As a general rule, one-half of
subsidiaries. the aggregate investments will
be deducted from tier 1
capital and one-half from tier
2 capital. \3\
Reciprocal holdings of banking
organizations' capital securities
Other deductions (such as other On a case-by-case basis or as a
subsidiaries or joint ventures) as matter of policy after a
determined by supervisory formal rulemaking.
authority.
TOTAL CAPITAL (tier 1 + tier 2- Must equal or exceed 8% of
deductions). weighted-risk assets.
------------------------------------------------------------------------
\1\ Requirements for the deduction of other intangible assets and
residual interests are set forth in section II.B.1. of this appendix.
\2\ Amounts in excess of limitations are permitted but do not qualify as
capital.
\3\ A proportionately greater amount may be deducted from tier 1
capital, if the risks associated with the subsidiary so warrant.
* See discussion in section II of the guidelines for a complete
description of the requirements for, and the limitations on, the
components of qualifying capital.

* * * * *

3. In Appendix D to part 225, in section II.b., footnotes 3 and 4
are revised and the fourth sentence of section II.b. is revised to read
as follows.

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

* * * * *
II. * * *
b. * * * \3\ As a general matter, average total consolidated
assets are defined as the quarterly average total assets (defined
net of the allowance for loan and lease losses) reported on the
organization's Consolidated Financial Statements (FR Y-9C Report),
less goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, are in excess of 100 percent of Tier 1 capital;
amounts of nonmortgage servicing assets and purchased credit card
relationships that, in the aggregate, are in excess of 25 percent of
Tier 1 capital; amounts of credit-enhancing interest-only strips
that are in excess of 25 percent of Tier 1 capital; all other
identifiable intangible assets; any investments in subsidiaries or
associated companies that the Federal Reserve determines should be
deducted from Tier 1 capital; deferred tax assets that are dependent
upon future taxable income, net of their valuation allowance, in
excess of the limitation set forth in section II.B.4 of appendix A
of this part; and the amount of the total adjusted carrying value of
nonfinancial equity investments that is subject to a deduction from
Tier 1 capital. \4\
---------------------------------------------------------------------------

\3\ Tier 1 capital for banking organizations includes common
equity, minority interest in the equity accounts of consolidated
subsidiaries, qualifying noncumulative perpetual preferred stock,
and qualifying cumulative perpetual preferred stock. (Cumulative
perpetual preferred stock is limited to 25 percent of Tier 1
capital.) In addition, as a general matter, Tier 1 capital excludes
goodwill; amounts of mortgage servicing assets, nonmortgage
servicing assets, and purchased credit card relationships that, in
the aggregate, exceed 100 percent of Tier 1 capital; amounts of
nonmortgage servicing assets and purchased credit card relationships
that, in the aggregate, exceed 25 percent of Tier 1 capital; amounts
of credit-enhancing interest-only strips that are in excess of 25
percent of Tier 1 capital; all other identifiable intangible assets;
deferred tax assets that are dependent upon future taxable income,
net of their valuation allowance, in excess of certain limitations;
and a percentage of the organization's nonfinancial equity
investments. The Federal Reserve may exclude certain other
investments in subsidiaries or associated companies as appropriate.
\4\ Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B. of appendix A of this part.
---------------------------------------------------------------------------

* * * * *

By order of the Board of Governors of the Federal Reserve
System.

[[Page 3804]]

Dated: January 7, 2002.

Jennifer J. Johnson,
Secretary of the Board.

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

For the reasons set forth in the joint preamble, the Board of
Directors of the Federal Deposit Insurance Corporation amends part 325
of chapter III of title 12 of the Code of Federal Regulations as
follows:

PART 325--CAPITAL MAINTENANCE

1. The authority citation for part 325 continues to read as
follows:

Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended
by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).

2. In Sec. 325.2, paragraphs (v) and (x) are revised to read as
follows:

Sec. 325.2 Definitions.

* * * * *
(v) Tier 1 capital or core capital means the sum of common
stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus), and minority interests in consolidated
subsidiaries, minus all intangible assets (other than mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships eligible for inclusion in core capital pursuant to
Sec. 325.5(f)), minus credit-enhancing interest-only strips that are
not eligible for inclusion in core capital pursuant to Sec. 325.5(f),
minus deferred tax assets in excess of the limit set forth in
Sec. 325.5(g), minus identified losses (to the extent that Tier 1
capital would have been reduced if the appropriate accounting entries
to reflect the identified losses had been recorded on the insured
depository institution's books), minus investments in financial
subsidiaries subject to 12 CFR part 362, subpart E, and minus the
amount of the total adjusted carrying value of nonfinancial equity
investments that is subject to a deduction from Tier 1 capital as set
forth in section II.B.(6) of appendix A to this part.
* * * * *
(x) Total assets means the average of total assets required to be
included in a banking institution's ``Reports of Condition and Income''
(Call Report) or, for savings associations, the consolidated total
assets required to be included in the ``Thrift Financial Report,'' as
these reports may from time to time be revised, as of the most recent
report date (and after making any necessary subsidiary adjustments for
state nonmember banks as described in Secs. 325.5(c) and 325.5(d) of
this part), minus intangible assets (other than mortgage servicing
assets, nonmortgage servicing assets, and purchased credit card
relationships eligible for inclusion in core capital pursuant to
Sec. 325.5(f)), minus credit-enhancing interest-only strips that are
not eligible for inclusion in core capital pursuant to Sec. 325.5(f),
minus deferred tax assets in excess of the limit set forth in
Sec. 325.5(g), minus assets classified loss and any other assets that
are deducted in determining Tier 1 capital, and minus the amount of the
total adjusted carrying value of nonfinancial equity investments that
is subject to a deduction from Tier 1 capital as set forth in section
II.B.(6) of appendix A to this part. For banking institutions, the
average of total assets is found in the Call Report schedule of
quarterly averages. For savings associations, the consolidated total
assets figure is found in Schedule CSC of the Thrift Financial Report.
* * * * *

3. Paragraphs (f)(3), (f)(4), and (g)(2)(i) of Sec. 325.5 are
revised to read as follows:

Sec. 325.5 Miscellaneous.

* * * * *
(f) * * *
(3) Tier 1 capital limitations. (i) The maximum allowable amount of
mortgage servicing assets, purchased credit card relationships, and
nonmortgage servicing assets in the aggregate will be limited to the
lesser of:
(A) 100 percent of the amount of Tier 1 capital that exists before
the deduction of any disallowed mortgage servicing assets, any
disallowed purchased credit card relationships, any disallowed
nonmortgage servicing assets, any disallowed credit-enhancing interest-
only strips, any disallowed deferred tax assets, and any nonfinancial
equity investments; or
(B) The sum of the amounts of mortgage servicing assets, purchased
credit card relationships, and nonmortgage servicing assets, determined
in accordance with paragraph (f)(2) of this section.
(ii) The maximum allowable amount of credit-enhancing interest-only
strips, whether purchased or retained, will be limited to the lesser
of:
(A) 25 percent of the amount of Tier 1 capital that exists before
the deduction of any disallowed mortgage servicing assets, any
disallowed purchased credit card relationships, any disallowed
nonmortgage servicing assets, any disallowed credit-enhancing interest-
only strips, any disallowed deferred tax assets, and any nonfinancial
equity investments; or
(B) The sum of the face amounts of all credit-enhancing interest-
only strips.
(4) Tier 1 capital sublimit. In addition to the aggregate
limitation on mortgage servicing assets, purchased credit card
relationships, and nonmortgage servicing assets set forth in paragraph
(f)(3) of this section, a sublimit will apply to purchased credit card
relationships and nonmortgage servicing assets. The maximum allowable
amount of the aggregate of purchased credit card relationships and
nonmortgage servicing assets will be limited to the lesser of:
(i) 25 percent of the amount of Tier 1 capital that exists before
the deduction of any disallowed mortgage servicing assets, any
disallowed purchased credit card relationships, any disallowed
nonmortgage servicing assets, any disallowed credit-enhancing interest-
only strips, any disallowed deferred tax assets, and any nonfinancial
equity investments; or
(ii) The sum of the amounts of purchased credit card relationships
and nonmortgage servicing assets determined in accordance with
paragraph (f)(2) of this section.
(g) * * *
(2) Tier 1 capital limitations. (i) The maximum allowable amount of
deferred tax assets that are dependent upon future taxable income, net
of any valuation allowance for deferred tax assets, will be limited to
the lesser of:
(A) The amount of deferred tax assets that are dependent upon
future taxable income that is expected to be realized within one year
of the calendar quarter-end date, based on projected future taxable
income for that year; or
(B) 10 percent of the amount of Tier 1 capital that exists before
the deduction of any disallowed mortgage servicing assets, any
disallowed nonmortgage servicing assets, any disallowed purchased
credit card relationships, any disallowed credit-enhancing interest-
only strips, any disallowed deferred tax assets, and any nonfinancial
equity investments.
* * * * *

4. In appendix A to part 325:
A. Revise section I.A.1 (Core capital elements (Tier 1));.
B. Amend section II.B. by adding a new paragraph (6);

[[Page 3805]]

C. Amend section II. by redesignating footnotes 16 through 40 as
footnotes 23 through 47, respectively; and
D. Revise Table I.

Appendix A to Part 325--Statement of Policy on Risk-Based Capital

* * * * *
I. * * *
A. * * *
1. Core capital elements (Tier 1) consists of:
i. Common stockholders' equity capital (includes common stock
and related surplus, undivided profits, disclosed capital reserves
that represent a segregation of undivided profits, and foreign
currency translation adjustments, less net unrealized holding losses
on available-for-sale equity securities with readily determinable
fair values);
ii. Noncumulative perpetual preferred stock,\2\ including any
related surplus; and
---------------------------------------------------------------------------

\2\ Preferred stock issues where the dividend is reset
periodically based, in whole or in part, upon the bank's current
credit standing, including but not limited to, auction rate, money
market or remarketable preferred stock, are assigned to Tier 2
capital, regardless of whether the dividends are cumulative or
noncumulative.
---------------------------------------------------------------------------

iii. Minority interests in the equity capital accounts of
consolidated subsidiaries.
At least 50 percent of the qualifying total capital base should
consist of Tier 1 capital. Core (Tier 1) capital is defined as the
sum of core capital elements minus all intangible assets (other than
mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships eligible for inclusion in core
capital pursuant to Sec. 325.5(f)),\3\ minus credit-enhancing
interest-only strips that are not eligible for inclusion in core
capital pursuant to Sec. 325.5(f)), minus any disallowed deferred
tax assets, and minus any amount of nonfinancial equity investments
required to be deducted pursuant to section II.B.(6) of this
Appendix.
---------------------------------------------------------------------------

\3\ An exception is allowed for intangible assets that are
explicitly approved by the FDIC as part of the bank's regulatory
capital on a specific case basis. These intangibles will be included
in capital for risk-based capital purposes under the terms and
conditions that are specifically approved by the FDIC.
---------------------------------------------------------------------------

Although nonvoting common stock, noncumulative perpetual
preferred stock, and minority interests in the equity capital
accounts of consolidated subsidiaries are normally included in Tier
1 capital, voting common stockholders' equity generally will be
expected to be the dominant form of Tier 1 capital. Thus, banks
should avoid undue reliance on nonvoting equity, preferred stock and
minority interests.
Although minority interests in consolidated subsidiaries are
generally included in regulatory capital, exceptions to this general
rule will be made if the minority interests fail to provide
meaningful capital support to the consolidated bank. Such a
situation could arise if the minority interests are entitled to a
preferred claim on essentially low risk assets of the subsidiary.
Similarly, although credit-enhancing interest-only strips and
intangible assets in the form of mortgage servicing assets,
nonmortgage servicing assets and purchased credit card relationships
are generally recognized for risk-based capital purposes, the
deduction of part or all of the credit-enhancing interest-only
strips, mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships may be required if the carrying
amounts of these assets are excessive in relation to their market
value or the level of the bank's capital accounts. Credit-enhancing
interest-only strips, mortgage servicing assets, nonmortgage
servicing assets, purchased credit card relationships and deferred
tax assets that do not meet the conditions, limitations and
restrictions described in Sec. 325.5(f) and (g) of this part will
not be recognized for risk-based capital purposes.
Minority interests in small business investment companies,
investment funds that hold nonfinancial equity investments (as
defined in section II.B.(6)(ii) of this appendix A), and
subsidiaries that are engaged in nonfinancial activities are not
included in a bank's Tier 1 or total capital base if the bank's
interest in the company or fund is held under one of the legal
authorities listed in section II.B.(6)(ii) of this appendix A.
* * * * *
II.B. * * *
(6) Nonfinancial equity investments. (i) General. A bank must
deduct from its Tier 1 capital the sum of the appropriate percentage
(as determined below) of the adjusted carrying value of all
nonfinancial equity investments held by the bank or by its direct or
indirect subsidiaries. For purposes of this section II.B.(6),
investments held by a bank include all investments held directly or
indirectly by the bank or any of its subsidiaries.
(ii) Scope of nonfinancial equity investments. A nonfinancial
equity investment means any equity investment held by the bank in a
nonfinancial company: through a small business investment company
(SBIC) under section 302(b) of the Small Business Investment Act of
1958 (15 U.S.C. 682(b));\16\ under the portfolio investment
provisions of Regulation K issued by the Board of Governors of the
Federal Reserve System (12 CFR 211.8(c)(3)); or under section 24 of
the Federal Deposit Insurance Act (12 U.S.C. 1831a), other than an
investment held in accordance with section 24(f) of that Act.\17\ A
nonfinancial company is an entity that engages in any activity that
has not been determined to be permissible for the bank to conduct
directly, or to be financial in nature or incidental to financial
activities under section 4(k) of the Bank Holding Company Act (12
U.S.C. 1843(k)).
---------------------------------------------------------------------------

\16\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in a SBIC that is not consolidated
with the bank is treated as a nonfinancial equity investment.
\17\ The Board of Directors of the FDIC, acting directly, may,
in exceptional cases and after a review of the proposed activity,
permit a lower capital deduction for investments approved by the
Board of Directors under section 24 of the FDI Act so long as the
bank's investments under section 24 and SBIC investments represent,
in the aggregate, less than 15 percent of the Tier 1 capital of the
bank. The FDIC reserves the authority to impose higher capital
charges on any investment where appropriate.
---------------------------------------------------------------------------

(iii) Amount of deduction from core capital. (A) The bank must
deduct from its Tier 1 capital the sum of the appropriate
percentages, as set forth in the table following this paragraph, of
the adjusted carrying value of all nonfinancial equity investments
held by the bank. The amount of the percentage deduction increases
as the aggregate amount of nonfinancial equity investments held by
the bank increases as a percentage of the bank's Tier 1 capital.

Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value
of all nonfinancial equity
investments held directly or Deduction from Tier 1 Capital (as a
indirectly by the bank (as a percentage of the adjusted carrying
percentage of the Tier 1 capital of value of the investment)
the bank) \1\
------------------------------------------------------------------------
Less than 15 percent............... 8 percent.
15 percent to 24.99 percent........ 12 percent.
25 percent and above............... 25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of core capital elements net of
goodwill and net of all identifiable intangible assets other than
mortgage servicing assets, nonmortgage servicing assets and purchased
credit card relationships, but prior to the deduction for any
disallowed mortgage servicing assets, any disallowed nonmortgage
servicing assets, any disallowed purchased credit card relationships,
any disallowed credit-enhancing interest-only strips (both purchased
and retained), any disallowed deferred tax assets, and any
nonfinancial equity investments.

[[Page 3806]]

(B) These deductions are applied on a marginal basis to the
portions of the adjusted carrying value of nonfinancial equity
investments that fall within the specified ranges of the parent
bank's Tier 1 capital. For example, if the adjusted carrying value
of all nonfinancial equity investments held by a bank equals 20
percent of the Tier 1 capital of the bank, then the amount of the
deduction would be 8 percent of the adjusted carrying value of all
investments up to 15 percent of the bank's Tier 1 capital, and 12
percent of the adjusted carrying value of all investments in excess
of 15 percent of the bank's Tier 1 capital.
(C) The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under this paragraph is
excluded from the bank's risk-weighted assets for purposes of
computing the denominator of the bank's risk-based capital ratio and
from total assets for purposes of calculating the denominator of the
leverage ratio.\18\
---------------------------------------------------------------------------

\18\ For example, if 8 percent of the adjusted carrying value of
a nonfinancial equity investment is deducted from Tier 1 capital,
the entire adjusted carrying value of the investment will be
excluded from both risk-weighted assets and total assets in
calculating the respective denominators for the risk-based capital
and leverage ratios.
---------------------------------------------------------------------------

(D) This Appendix establishes minimum risk-based capital ratios
and banks are at all times expected to maintain capital commensurate
with the level and nature of the risks to which they are exposed.
The risk to a bank from nonfinancial equity investments increases
with its concentration in such investments and strong capital levels
above the minimum requirements are particularly important when a
bank has a high degree of concentration in nonfinancial equity
investments (e.g., in excess of 50 percent of Tier 1 capital). The
FDIC intends to monitor banks and apply heightened supervision to
equity investment activities as appropriate, including where the
bank has a high degree of concentration in nonfinancial equity
investments, to ensure that each bank maintains capital levels that
are appropriate in light of its equity investment activities. The
FDIC also reserves authority to impose a higher capital charge in
any case where the circumstances, such as the level of risk of the
particular investment or portfolio of investments, the risk
management systems of the bank, or other information, indicate that
a higher minimum capital requirement is appropriate.
(iv) SBIC investments. (A) No deduction is required for
nonfinancial equity investments that are held by a bank through one
or more SBICs that are consolidated with the bank or in one or more
SBICs that are not consolidated with the bank to the extent that all
such investments, in the aggregate, do not exceed 15 percent of the
bank's Tier 1 capital. Any nonfinancial equity investment that is
held through an SBIC or in an SBIC and that is not required to be
deducted from Tier 1 capital under this section II.B.(6)(iv) will be
assigned a 100 percent risk-weight and included in the bank's
consolidated risk-weighted assets.\19\
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\19\ If a bank has an investment in a SBIC that is consolidated
for accounting purposes but that is not wholly owned by the bank,
the adjusted carrying value of the bank's nonfinancial equity
investments through the SBIC is equal to the bank's proportionate
share of the adjusted carrying value of the SBIC's investments in
nonfinancial companies. The remainder of the SBIC's adjusted
carrying value (i.e., the minority interest holders' proportionate
share) is excluded from the risk-weighted assets of the bank. If a
bank has an investment in a SBIC that is not consolidated for
accounting purposes and has current information that identifies the
percentage of the SBIC's assets that are equity investments in
nonfinancial companies, the bank may reduce the adjusted carrying
value of its investment in the SBIC proportionately to reflect the
percentage of the adjusted carrying value of the SBIC's assets that
are not equity investments in nonfinancial companies. If a bank
reduces the adjusted carrying value of its investment in a non-
consolidated SBIC to reflect financial investments of the SBIC, the
amount of the adjustment will be risk weighted at 100 percent and
included in the bank's risk-weighted assets.
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(B) To the extent the adjusted carrying value of all
nonfinancial equity investments that a bank holds through one or
more SBICs that are consolidated with the bank or in one or more
SBICs that are not consolidated with the bank exceeds, in the
aggregate, 15 percent of the bank's Tier 1 capital, the appropriate
percentage of such amounts (as set forth in the table in section
II.B.(6)(iii)(A)) must be deducted from the bank's common
stockholders' equity in determining the bank's Tier 1 capital. In
addition, the aggregate adjusted carrying value of all nonfinancial
equity investments held by a bank through a consolidated SBIC and in
a non-consolidated SBIC (including any investments for which no
deduction is required) must be included in determining, for purposes
of the table in section II.B.(6)(iii)(A), the total amount of
nonfinancial equity investments held by the bank in relation to its
Tier 1 capital.
(v) Transition provisions. No deduction under this section
II.B.(6) is required to be made with respect to the adjusted
carrying value of any nonfinancial equity investment (or portion of
such an investment) that was made by the bank prior to March 13,
2000, or that was made by the bank after such date pursuant to a
binding written commitment \20\ entered into prior to March 13,
2000, provided that in either case the bank has continuously held
the investment since the relevant investment date.\21\ For purposes
of this section II.B.(6)(v) a nonfinancial equity investment made
prior to March 13, 2000, includes any shares or other interests
received by the bank through a stock split or stock dividend on an
investment made prior to March 13, 2000, provided the bank provides
no consideration for the shares or interests received and the
transaction does not materially increase the bank's proportional
interest in the company. The exercise on or after March 13, 2000, of
options or warrants acquired prior to March 13, 2000, is not
considered to be an investment made prior to March 13, 2000, if the
bank provides any consideration for the shares or interests received
upon exercise of the options or warrants. Any nonfinancial equity
investment (or portion thereof) that is not required to be deducted
from Tier 1 capital under this section II.B.(6)(v) must be included
in determining the total amount of nonfinancial equity investments
held by the bank in relation to its Tier 1 capital for purposes of
the table in section II.B.(6)(iii)(A). In addition, any nonfinancial
equity investment (or portion thereof) that is not required to be
deducted from Tier 1 capital under this section II.B.(6)(v) will be
assigned a 100-percent risk weight and included in the bank's
consolidated risk-weighted assets.
---------------------------------------------------------------------------

\20\ A ``binding written commitment'' means a legally binding
written agreement that requires the bank to acquire shares or other
equity of the company, or make a capital contribution to the
company, under terms and conditions set forth in the agreement.
Options, warrants, and other agreements that give a bank the right
to acquire equity or make an investment, but do not require the bank
to take such actions, are not considered a binding written
commitment for purposes of this section II.B.(6)(v).
\21\ For example, if a bank made an equity investment in 100
shares of a nonfinancial company prior to March 13, 2000, the
adjusted carrying value of that investment would not be subject to a
deduction under this section II.B.(6). However, if the bank made any
additional equity investment in the company after March 13, 2000,
such as by purchasing additional shares of the company (including
through the exercise of options or warrants acquired before or after
March 13, 2000) or by making a capital contribution to the company
and such investment was not made pursuant to a binding written
commitment entered into before March 13, 2000, the adjusted carrying
value of the additional investment would be subject to a deduction
under this section II.B.(6). In addition, if the bank sold and
repurchased, after March 13, 2000, 40 shares of the company, the
adjusted carrying value of those 40 shares would be subject to a
deduction under this section II.B.(6).
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(vi) Adjusted carrying value. (A) For purposes of this section
II.B.(6), the ``adjusted carrying value'' of investments is the
aggregate value at which the investments are carried on the balance
sheet of the bank reduced by any unrealized gains on those
investments that are reflected in such carrying value but excluded
from the bank's Tier 1 capital and associated deferred tax
liabilities. For example, for equity investments held as available-
for-sale (AFS), the adjusted carrying value of the investments would
be the aggregate carrying value of those investments (as reflected
on the consolidated balance sheet of the bank) less any unrealized
gains on those investments that are included in other comprehensive
income and not reflected in Tier 1 capital, and associated deferred
tax liabilities.\22\
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\22\ Unrealized gains on available-for-sale equity investments
may be included in Tier 2 capital to the extent permitted under
section I.A.(2)(f) of this appendix A. In addition, the net
unrealized losses on available-for-sale equity investments are
deducted from Tier 1 capital in accordance with section I.A.(1) of
this appendix A.
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(B) As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that
is consolidated for accounting purposes under generally accepted
accounting principles, the bank's adjusted carrying value of the
investment is determined under the equity method of accounting (net
of any intangibles associated with the investment that are deducted
from

[[Page 3807]]

the bank's core capital in accordance with section I.A.(1) of this
appendix A). Even though the assets of the nonfinancial company are
consolidated for accounting purposes, these assets (as well as the
credit equivalent amounts of the company's off-balance sheet items)
should be excluded from the bank's risk-weighted assets for
regulatory capital purposes.
(vii) Equity investments. For purposes of this section II.B.(6),
an equity investment means any equity instrument (including common
stock, preferred stock, partnership interests, interests in limited
liability companies, trust certificates and warrants and call
options that give the holder the right to purchase an equity
instrument), any equity feature of a debt instrument (such as a
warrant or call option), and any debt instrument that is convertible
into equity where the instrument or feature is held under one of the
legal authorities listed in section II.B.(6)(ii) of this appendix A.
An investment in any other instrument (including subordinated debt)
may be treated as an equity investment if, in the judgment of the
FDIC, the instrument is the functional equivalent of equity or
exposes the bank to essentially the same risks as an equity
instrument.
* * * * *

Table I.--Definition of Qualifying Capital
------------------------------------------------------------------------
Components Minimum requirements
------------------------------------------------------------------------
(1) CORE CAPITAL (Tier 1).............. Must equal or exceed 4% of
weighted-risk assets.
(a) Common stockholders' equity.... No limit.\1\
(b) Noncumulative perpetual No limit.\1\
preferred stock and any related
surplus.
(c) Minority interest in equity No limit.\1\
accounts of consolidated.
(d) Less: All intangible assets (\2\).
other than certain mortgage
servicing assets, nonmortgage
servicing assets and purchased
credit card relationships.
(e) Less: Certain credit-enhancing (\3\).
interest-only strips and
nonfinancial equity investments
required to be deducted from
capital.
(f) Less: Certain deferred tax (\4\).
assets.
(2) SUPPLEMENTARY CAPITAL (Tier 2)..... Total of tier 2 is limited to
100% of tier 1.\5\
(a) Allowance for loan and lease Limited to 1.25% of weighted-
losses. risk assets.\5\
(b) Unrealized gains on certain Limited to 45% of pretax net
equity securities.\6\. unrealized gains.\6\
(c) Cumulative perpetual and long- No limit within tier 2; long-
term preferred stock (original term preferred is amortized
maturity of 20 years or more) and for capital purposes as it
any related surplus. approaches maturity.
(d) Auction rate and similar No limit within Tier 2.
preferred stock (both cumulative
and non-cumulative).
(e) Hybrid capital instruments No limit within Tier 2.
(including mandatory convertible
debt securities).
(f) Term subordinated debt and Term subordinated debt and
intermediate-term preferred stock intermediate-term preferred
(original weighted average stock are limited to 50% of
maturity of five years or more). Tier 1 \5\ and amortized for
capital purposes as they
approach maturity.
(3) DEDUCTIONS (from sum of tier 1 and
tier 2)
(a) Investments in banking and
finance subsidiaries that are not
consolidated for regulatory
capital purposes
(b) Intentional, reciprocal cross-
holdings of capital securities
issued by banks
(c) Other deductions (such as On a case-by-case basis or as a
investment in other subsidiaries matter of policy after formal
or joint ventures) as determined consideration of relevant
by supervisory authority. issues.
(4) TOTAL CAPITAL...................... Must equal or exceed 8% of
weighted-risk assets.
------------------------------------------------------------------------
\1\ No express limits are placed on the amounts of nonvoting common,
noncumulative perpetual preferred stock, and minority interests that
may be recognized as part of Tier 1 capital. However, voting common
stockholders' equity capital generally will be expected to be the
dominant form of Tier 1 capital and banks should avoid undue reliance
on other Tier 1 capital elements.
\2\ The amounts of mortgage servicing assets, nonmortgage servicing
assets and purchased credit card relationships that can be recognized
for purposes of calculating Tier 1 capital are subject to the
limitations set forth in Sec. 325.5(f). All deductions are for
capital purposes only; deductions would not affect accounting
treatment.
\3\ The amounts of credit-enhancing interest-only strips that can be
recognized for purposes of calculating Tier 1 capital are subject to
the limitations set forth in Sec. 325.5(f). The amounts of
nonfinancial equity investments that must be deducted for purposes of
calculating Tier 1 capital are set forth in section II.B.(6) of
appendix A to part 325.
\4\ Deferred tax assets are subject to the capital limitations set forth
in Sec. 325.5(g).
\5\ Amounts in excess of limitations are permitted but do not qualify as
capital.
\6\ Unrealized gains on equity securities are subject to the capital
limitations set forth in paragraph I.A(2)(f) of appendix A to part
325.

* * * * *

Dated at Washington, DC, this 10th day of December, 2001.

By order of the Board of Directors, Federal Deposit Insurance
Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 02-794 Filed 1-24-02; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P


Last Updated 01/25/2002 regs@fdic.gov