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6000 - Bank Holding Company Act


IV. Minimum Supervisory Ratios and Standards

The interim and final supervisory standards set forth below specify minimum supervisory ratios based primarily on broad credit risk considerations. As noted above, the riskbased ratio does not take explicit account of the quality of individual asset portfolios or the range of other types of risks to which banking organizations may be exposed, such as interest rate, liquidity, market or operational risks. For this reason, banking organizations are generally expected to operate with capital positions well above the minimum ratios.

Institutions with high or inordinate levels of risk are expected to operate well above minimum capital standards. Banking organizations experiencing or anticipating significant growth are also expected to maintain capital, including tangible capital positions, well above the minimum levels. For example, most such organizations generally have operated at capital levels ranging from 100 to 200 basis points above the stated minimums. Higher capital ratios could be required if warranted by the particular circumstances or risk profiles of individual banking organizations. In all cases, organizations should hold capital commensurate with the level and nature of all of the risks, including the volume and severity of problem loans, to which they are exposed.

Upon adoption of the risk-based framework, any organization that does not meet the interim or final supervisory ratios, or whose capital is otherwise considered inadequate, is expected to develop and implement a plan acceptable to the Federal Reserve for achieving an adequate level of capital consistent with the provisions of these guidelines or with the special circumstances affecting the individual organization. In addition, such organizations should avoid any actions, including increased risk-taking or unwarranted expansion, that would lower or further erode their capital positions.

A.  Minimum Risk-Based Ratio After Transition Period

As reflected in attachment VI, by year-end 1992, all bank holding companies should meet a minimum ratio of qualifying total capital to weighted risk assets of 8 percent, of which at least 4.0 percentage points should be in the form of Tier 1 capital. For purposes of section IV.A., Tier 1 capital is defined as the sum of core capital elements less goodwill and other intangible assets required to be deducted in accordance with section II.B.1.b. of this appendix. The maximum amount of supplementary capital elements that qualifies as Tier 2 capital is limited to 100 percent of Tier 1 capital. In addition, the combined maximum amount of subordinated debt and intermediate-term preferred stock that qualifies as Tier 2 capital is limited to 50 percent of Tier 1 capital. Allowances for loan and lease losses in excess of this limit may, of course, be maintained, but would not be included in an organization's total capital. The Federal Reserve will continue to require bank holding companies to maintain reserves at levels fully sufficient to cover losses inherent in their loan portfolios.

Qualifying total capital is calculated by adding Tier 1 capital and Tier 2 capital (limited to 100 percent of Tier 1 capital) and then deducting from this sum certain investments in banking or finance subsidiaries that are not consolidated for accounting or supervisory purposes, reciprocal holdings of banking organizations' capital securities, or other items at the direction of the Federal Reserve. The conditions under which these deductions are to be made and the procedures for making the deductions are discussed above in section II(B).

B.  Transition Arrangements

The transition period for implementing the risk-based capital standard ends on December 31, 1992.64 Initially, the risk-based capital guidelines do not establish aminimum level of capital. However, by year-end 1990, banking organizations are expected to meet a minimum interim target ratio for qualifying total capital to weighted risk assets of 7.25 percent, at least one-half of which should be in the form of Tier 1 capital. For purposes of meeting the 1990 interim target, the amount of loan loss reserves that may be included in capital is limited to 1.5 percent of weighted risk assets and up to 10 percent of an organization's Tier 1 capital may consist of supplementary capital elements. Thus, the 7.25 percent interim target ratio implies a minimum ratio of Tier 1 capital to weighted risk assets of 3.6 percent (one-half of 7.25) and a minimum ratio of core capital elements to weighted risk assets ratio of 3.25 percent (nine-tenths of the Tier 1 capital ratio).

Through year-end 1990, banking organizations have the option of complying with the minimum 7.25 percent year-end 1990 risk-based capital standard, in lieu of the minimum 5.5 percent primary and 6 percent total capital to total assets ratios set forth in appendix B of this part. In addition, as more fully set forth in appendix D to this part, banking organizations are expected to maintain a minimum ratio of Tier 1 capital to total assets during this transition period.

C. Optional Transition Provisions Related to the Implementation of Consolidation Requirements under FAS 167

This section IV.C. provides optional transition provisions for a banking organization that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpreta- tion No. 46(R) (FAS 167), to consolidate certain variable interest entities (VIEs) as defined under United States generally accepted accounting principles (GAAP). These transition provisions apply through the end of the fourth quarter following the date of a banking organization's implementation of FAS 167 (implementation date).

1.  Exclusion Period

a.  Exclusion of risk-weighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a banking organization may exclude from risk-weighted assets:

i.  Subject to the limitations in section IV.C.3, assets held by a VIE, provided that the following conditions are met:

(1)  The VIE existed prior to the implementation date.

(2)  The banking organization did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date.

(3)  The banking organization must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167, and

(4)  The banking organization excludes all assets held by VIEs described in paragraphs C.1.a.i (1) through (3) of this section IV.C.1.a.i; and

ii.  Subject to the limitations in section IV.C.3, assets held by a VIE that is a consolidated ABCP program, provided that the following conditions are met:

(1)  The banking organization is the sponsor of the ABCP program,

(2)  Prior to the implementation date, the banking organization consolidated the VIE onto its balance sheet under GAAP and excluded the VIE's assets from the banking organization's risk-weighted assets, and

(3)  The banking organization chooses to exclude all assets held by ABCP program VIEs described in paragraphs (1) and (2) of this section IV.C.1.a.ii.

(b)  Risk-weighted assets during exclusion period. During the exclusion period, including for the two calendar quarter-end regulatory report dates during the exclusion period, a banking organization adopting the optional provisions in section IV.C.1.a must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in section IV.C.1.a. on the implementation date and include this calculated amount in risk-weighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans.c.  Inclusion of allowance for loan and lease losses in tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a banking organization that excludes VIE assets from risk-weighted assets pursuant to section IV.C.1.a may include in tier 2 capital the full amount of the allowance for loan and lease losses (ALLL) calculated as of the implementation date that is attributable to the assets it excludes pursuant to section IV.C.1.a (inclusion amount). The amount of ALLL includable in tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in section II.A.2.a of this Appendix.

2.  Phase-in period.

a.  Exclusion amount. For purposes of this section IV.C., exclusion amount is defined as the amount of risk-weighted assets excluded in section IV.C.1.a as of the implementation date.

b.  Risk-weighted assets for the third and fourth quarters. A banking organization that excludes assets of consolidated VIEs from risk-weighted assets pursuant to section IV.C.1.a. may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates within those quarters, exclude from risk-weighted assets 50 percent of the exclusion amount, provided that the banking organization may not include in risk-weighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to section IV.C.1.b.

c.  Inclusion of ALLL in tier 2 capital for the third and fourth quarters. A banking organization that excludes assets of consolidated VIEs from risk-weighted assets pursuant to section IV.C.2.b. may, for the phase-in period, include in tier 2 capital 50 percent of the inclusion amount it included in tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in tier 2 capital in section II.A.2.a. of this Appendix.

3.  Implicit recourse limitation. Notwithstanding any other provision in this section IV.C., assets held by a VIE to which the banking organization has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets.

ATTACHMENT I.—SAMPLE CALCULATION OF RISK-BASED CAPITAL RATIO FOR BANK Holding Companies
Example of a banking organization with $6,000 in total capital and the following assets and off-balance sheet items:
Balance Sheet Assets:
Cash $ 5,000
U.S. Treasuries 20,000
Balances at domestic banks 5,000
Loans secured by first liens on 1--4 family residential properties 5,000
Loans to private corporations 65,000
Total Balance Sheet Assets $100,000
Off-Balance Sheet Items:
Standby letters of credit ("SLCs") backing general obligation debt issues of U.S. municipalities ("GOs") $10,000
Long-term legally binding commitments to private corporations 20,000
Total Off/Balance Sheet Items $30,000
This bank holding company's total capital to total assets (leverage) ratio would be: ($6,000/$100,000) = 6.00%.
To compute the bank holding company's weighted risk assets:
1. Compute the credit equivalent amount of each off-balance sheet ("OBS") item.

OBS item Face value Conversion factor Credit equivalent amount
SLCS backing municipal GOs $10,000 × 1.00 = $10,000
Long-term commitments to private corporations $20,000 × 0.50 = $10,000
2. Multiply each balance sheet asset and the credit equivalent amount of each OBS item by the appropriate risk weight.
0% Category:
Cash 5,000
U.S. Treasuries 20,000
25,000 x 0 = 0
20% Category:
Balances at domestic banks 5,000
Credit equivalent amounts of SLCs backing GOs of U.S. municipalities 10,000
15,000 x .20 = $3,000
50% Category:
Loans secured by first liens on 1--4 family residential properties 5,000 x .50 = $2,500
100% Category:
Loans to private corporations 65,000
Credit equivalent amounts of long-term committments to private corporations 10,000
$75,000 × 1.00 = 75,000
Total Risk-weighted Assets 80,500
This bank holding company's ratio of total capital to weighted risk assets (risk-based capital ratio) would be: ($6,000/$80,500) = 7.45%

[Codified to 12 C.F.R. Part 225, Appendix A]

[Appendix A added at 54 Fed. Reg. 4209, January 27, 1989, effective March 15, 1989; amended at 55 Fed. Reg. 32832, August 10, 1990, effective September 10, 1990; 57 Fed. Reg. 2012, January 17, 1992; 57 Fed. Reg. 43890, September 23, 1992; 57 Fed. Reg. 60720, December 22, 1992; 57 Fed. Reg. 62180, December 30, 1992; 58 Fed. Reg. 7980, February 11, 1993, effective March 15, 1993; 58 Fed. Reg. 28492, May 14, 1993, effective April 26, 1993; 58 Fed. Reg. 68739, December 29, 1993, effective December 31, 1993; 59 Fed. Reg. 62992, December 7, 1994, effective December 31, 1994; 59 Fed. Reg. 63241, December 8, 1994, effective December 31, 1994; 59 Fed. Reg. 65926, December 22, 1994, effective January 1, 1995; 60 Fed. Reg. 8181, February 13, 1995, effective March 22, 1995; 60 Fed. Reg. 39230, August 1, 1995; 60 Fed. Reg. 45616, August 31, 1995, effective September 1, 1995; 60 Fed. Reg. 46179, September 5, 1995, effective October 1, 1995; 60 Fed. Reg. 66045, December 20, 1995, effective April 1, 1996; 61 Fed. Reg. 47372, September 16, 1996, effective January 1, 1997; 63 Fed. Reg. 42676, August 10, 1998, effective October 1, 1998; 63 Fed. Reg. 46522, September 1, 1998, effective October 1, 1998; 63 Fed. Reg. 58621, November 2, 1998; 66 Fed. Reg. 59643, November 29, 2001, effective January 1, 2002; 67 Fed. Reg. 3800, January 25, 2002, effective April 1, 2002; 67 Fed. Reg. 16978, April 9, 2002, effective July 1, 2002; 67 Fed. Reg. 34991, May 17, 2002, effective July 1, 2002; 68 Fed. Reg. 56535, October 1, 2003, effective October 1, 2003; 69 Fed. Reg. 22385, April 26, 2004; 69 Fed. Reg. 44919, July 28, 2004, however, any banking organization may elect to adopt, as of July 28, 2004, the capital treatment described in this final rule for assets in ABCP programs that are consolidated onto the balance sheets of sponsoring banking organizations as a result of FIN 46--R. All liquidity facilities that provide support to ABCP will be treated as "eligible ABCP liquidity facilities," regardless of their compliance with the definition of "eligible ABCP liquidity facilities" in the final rule, until September 30, 2005. On that date and thereafter, liquidity facilities that do not meet the final rule's definition of "eligible ABCP liquidity facility" will be treated as recourse obligations or direct credit substitutes; 70 Fed. Reg. 11834, March 10, 2005, effective April 11, 2005; 70 Fed. Reg. 20704, April 21, 2005; 71 Fed. Reg. 9902, February 28, 2006, effective March 30, 2006; 73 Fed. Reg. 55708, September 26, 2008, effective September 19, 2008; 73 Fed. Reg. 62583, October 22, 2008, effective October 17, 2008; 73 Fed. Reg. 63624, October 27, 2008; 73 Fed. Reg. 79606, December 30, 2008, effective January 29, 2009, applicability date for banking organizations may elect to apply this final rule for purposes of the regulatory reporting period ending on December 31, 2008; 74 Fed. Reg. 12078, March 23, 2009; 74 Fed. Reg. 26081, June 1, 2009; 74 Fed. Reg. 26084, June 1, 2009, effective July 1, 2009; 74 Fed. Reg. 31166, June 30, 2009; 74 Fed. Reg. 60142, November 20, 2009, effective December 31, 2009; 75 Fed. Reg. 4648, January 28, 2010, effective March 29, 2010]

64As noted in section I, bank holding companies with less than $500 million in consolidated assets would generally be exempt from the calculation and analysis of risk-based ratios on a consolidated holding company basis, subject to certain terms and conditions. Go back to Text


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