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Financial Institution Letter
Capital Standards

SUBJECT: Interim Rule Lowering Capital Requirement on Small Business Loans Sold With Recourse

The FDIC Board of Directors has approved an interim rule to reduce the minimum capital levels FDIC-supervised institutions must maintain for certain small business loans and leases that are sold with recourse. This action implements Section 208 of the Riegle Community Development and Regulatory Improvement Act of 1994 (the Riegle Act), and was effective on August 31, 1995. The other federal banking and thrift regulators are issuing similar rules that will apply to the institutions they supervise. A copy of the interim rule is attached.

Regulatory reporting instructions for an FDIC-supervised bank generally require an institution that transfers assets with recourse to continue to report these assets on its balance sheet when filing its quarterly Reports of Condition and Income (Call Reports). Thus, these amounts normally are included in the denominator when calculating the institution's risk-based and leverage capital ratios. This regulatory reporting and capital treatment differs from how transfers of assets with recourse are reported under generally accepted accounting principles (GAAP), which permit many such transactions to be reported as sales, thereby allowing the assets to be removed from the balance sheet.

In general, hanks currently must maintain risk-based capital against the full amount of assets transferred with recourse. Under the FDIC's interim rule, however, qualifying institutions that sell small business obligations with recourse are required to maintain risk-based capital only against the amount of recourse retained, if two conditions are met. First, the transaction must be treated as a sale under GAAP. Second, the transferring institution must establish a non-capital reserve sufficient to meet its reasonably estimated liability under the recourse arrangements.

A qualifying institution is defined as one that is well capitalized or, with the approval of the FDIC, adequately capitalized, as these terms are set forth in the FDIC's prompt corrective action rules. Under the interim rule, the amount of recourse retained by a qualifying institution on transactions receiving this preferential capital treatment cannot exceed 15 percent of the bank's total risk-based capital.

For Call Report purposes, transactions completed on or after August 31, 1995, which meet the above criteria should be reported as sales under GAAP. Also the Riegle Act directed the federal banking agencies to issue final regulations implementing Section 208 no later than March 22, 1995. The FDIC, therefore, will not object if a bank which it supervises and is a qualifying institution under the interim rule chooses to apply the rule's provisions to small business obligations that were transferred with recourse between March 22, 1995, and August 31, 1995, effective date

Consistent with Section 208 of the Riegle Act, the preferential capital treatment set forth in this interim rule will not affect the application of prompt corrective action sanctions.

Although this rule became effective when it was published in the Federal Register on August 31, 1995, comments will be accepted for 60 days. The comment period expires on October 30, 1995.

For further information, contact Stephen G. Pfeifer, an Examination Specialist in the Division of Supervision's Accounting Section (202-898-8904).

Nicholas J. Ketcha Jr.
Acting Director


FDIC-Supervised Banks (Commercial and Savings)

Last Updated: September 19, 1995