55682 Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules

1The Basle Accord is a risk-based framework

developed by the Basle Committee on Banking

Regulations and Supervisory Practices and

endorsed by the central bank governors of the

Group of Ten (G–10) countries in July 1988. The

Committee is comprised of the central banks and

supervisory authorities from the G–10 countries

(Belgium, Canada, France, Germany, Italy,

Netherlands, Sweden, Switzerland, the United

Kingdom, and the United States) and Luxembourg.

2Refer to each Agency’s risk-based capital

standards for more detailed descriptions of core and

supplementary capital.

3Bank holding companies may also include in

Tier 1 capital limited amounts of cumulative

perpetual preferred stock.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket No. 97–18]

RIN 1557–AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R–0982]

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 325

RIN 3064–AC11

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[Docket No. 97–109]

RIN 1550–AB11

Risk-Based Capital Standards;

Unrealized Holding Gains on Certain

Equity Securities

AGENCIES: Office of the Comptroller of

the Currency, Treasury; Board of

Governors of the Federal Reserve

System; Federal Deposit Insurance

Corporation; and Office of Thrift

Supervision, Treasury.

ACTION: Joint notice of proposed

rulemaking.

SUMMARY: The Office of the Comptroller

of the Currency (OCC), the Board of

Governors of the Federal Reserve

System (Board), the Federal Deposit

Insurance Corporation (FDIC), and the

Office of Thrift Supervision (OTS)

(collectively, the Agencies) are

proposing to amend their respective

risk-based capital standards for banks,

bank holding companies and thrifts

(institutions) with regard to the

treatment of unrealized holding gains on

certain equity securities. These gains are

reported as a component of equity

capital under U.S. generally accepted

accounting principles (GAAP), but

currently are not included in regulatory

capital under the Agencies’ capital

standards. The proposal, if adopted as a

final rule, would establish uniform

interagency rules permitting institutions

to include in supplementary (Tier 2)

capital up to 45 percent of unrealized

gains on certain available-for-sale equity

securities. The Agencies’ proposal is

consistent with the prudential standards

of the Basle Accord.

DATES: Comments must be received on

or before December 26, 1997.

ADDRESSES: Comments should be

directed to:

OCC: Comments may be submitted to

Docket No. 97–18, Communications

Division, Third Floor, Office of the

Comptroller of the Currency, 250 E

Street, S.W., Washington, D.C., 20219.

Comments will be available for

inspection and photocopying at that

address. In addition, comments may be

sent by facsimile transmission to FAX

number (202) 874–5274, or by electronic

mail to

REGS.COMMENTS@OCC.TREAS.GOV.

Board: Comments directed to the

Board should refer to Docket No.R–0982

and may be mailed to William W. Wiles,

Secretary, Board of Governors of the

Federal Reserve System, 20th Street and

Constitution Avenue, N.W., Washington

D.C., 20551. Comments may also be

delivered to Room B–2222 of the Eccles

Building between 8:45 a.m. and 5:15

p.m. weekdays, or the guard station in

the Eccles Building courtyard on 20th

Street, N.W. (between Constitution

Avenue and C Street) at any time.

Comments may be inspected in Room

MP–500 of the Martin Building between

9 a.m. and 5 p.m. weekdays, except as

provided in 12 CFR 261.8 of the Board’s

Rules Regarding Availability of

Information.

FDIC: Send written comments to

Robert E. Feldman, Executive Secretary,

Attention: Comments/OES, Federal

Deposit Insurance Corporation, 550 17th

Street, N.W., Washington, D.C. 20429.

Comments may be hand-delivered to the

guard station at the rear of the 17th

Street Building (located on F Street), on

business days between 7:00 a.m. and

5:00 p.m. (FAX number (202)898–3838;

Internet address: comments@fdic.gov).

Comments may be inspected and

photocopied in the FDIC Public

Information Center, Room 100, 801 17th

Street, N.W., Washington, D.C. 20429,

between 9:00 a.m. and 4:30 p.m. on

business days.

OTS: Send comments to Manager,

Dissemination Branch, Records

Management and Information Policy,

Office of Thrift Supervision, 1700 G

Street, N.W., Washington, D.C. 20552,

Attention Docket No. 97–109. These

submissions may be hand-delivered to

1700 G Street, N.W., from 9:00 a.m. to

5:00 p.m. on business days; they may be

sent by facsimile transmission to FAX

number (202) 906–7755, or they may be

sent by e-mail:

public.info@ots.treas.gov. Those

commenting by e-mail should include

their name and telephone number.

Comments will be available for

inspection at 1700 G Street, N.W., from

9:00 a.m. until 4:00 p.m. on business

days.

FOR FURTHER INFORMATION CONTACT:

OCC: Roger Tufts, Senior Economic

Advisor (202/874–5070), Tom Rollo,

National Bank Examiner (202/874–

5070), Capital Policy Division; or

Ronald Shimabukuro, Senior Attorney

(202/874–5090), Legislative and

Regulatory Activities Division.

Board: Roger Cole, Associate Director

(202/452–2618); Norah Barger, Assistant

Director (202/452–2402); or Barbara

Bouchard, Senior Supervisory Financial

Analyst (202/452–3072), Division of

Banking Supervision and Regulation.

For the hearing impaired only,

Telecommunication Device for the Deaf

(TDD), Diane Jenkins (202/452–3544).

FDIC: For supervisory issues, Stephen

G. Pfeifer, Examination Specialist,

Accounting Section, Division of

Supervision (202/898–8904); for legal

issues, Jamey Basham, Counsel, Legal

Division (202/898–7265).

OTS: John F. Connolly, Senior

Program Manager for Capital Policy

(202/906–6465); Michael D. Solomon,

Senior Policy Advisor (202/906–5654),

Supervision Policy; Karen Osterloh,

Assistant Chief Counsel (202/906–6639),

or Vern McKinley, Senior Attorney

(202/906–6241), Regulations and

Legislation Division, Office of the Chief

Counsel.

SUPPLEMENTARY INFORMATION: The

Agencies’ risk-based capital standards

implementing the International

Convergence of Capital Measurement

and Capital Standards (the Basle

Accord) 1 include definitions for core

(Tier 1) capital and supplementary (Tier

2) capital.2 Under the Agencies’ capital

standards, Tier 1 capital generally

includes common stockholders’ equity,

noncumulative perpetual preferred

stock, and minority interests in the

equity accounts of consolidated

subsidiaries.3 The common

stockholders’ equity component is

defined to include common stock;

related surplus; and retained earnings
Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules 55683

4For regulatory capital purposes, institutions

record net unrealized gains or losses on availablefor-sale securities (debt and equity) in accordance

with Statement of Financial Accounting Standards

No. 115, ‘‘Accounting for Certain Investments in

Debt and Equity Securities’’ (SFAS 115). Availablefor-sale securities are all debt securities not held for

trading that an institution does not have the

positive intent and ability to hold until maturity

and equity securities with readily determinable fair

values not held for trading. Available-for-sale

securities must be reported at fair value with

unrealized gains or losses (i.e., the amount by

which fair value exceeds or falls below amortized

cost) reported, net of tax, directly in a separate

component of common stockholders’ equity.

5The Consolidated Report of Condition and

Income for banks supervised by the OCC, the Board,

or the FDIC; the Thrift Financial Report for thrift

institutions supervised by the OTS; and the Y–9C

Report for bank holding companies supervised by

the Board.

6The Agencies intend to rely on the guidance set

forth in SFAS 115 for purposes of determining

whether equity securities have fair values that are

‘‘readily determinable.’’ Under SFAS 115, the fair

value of an equity security is readily determinable

if sales prices or bid-and-ask quotations are

currently available on a securities exchange

registered with the Securities and Exchange

Commission or in the over-the-counter market,

provided that those prices or quotations for the

over-the-counter market are publicly reported by

the National Association of Securities Dealers

Automated Quotations system or by the National

Quotations Bureau. Restricted stock does not meet

this definition. The fair value of an equity security

traded only in a foreign market is readily

determinable if that foreign market is of a breadth

and scope comparable to one of the U.S. markets

referred to above. The fair value of an investment

in a mutual fund is readily determinable if the fair

value per share (unit) is determined and published

and is the basis for current transactions.

(including capital reserves and

adjustments for the cumulative effect of

foreign currency translation); less net

unrealized holding losses on availablefor-sale equity securities with readily

determinable fair values. Net unrealized

holding gains on such equity securities

and net unrealized holding gains and

losses on available-for-sale debt

securities are not included in the

Agencies’ regulatory capital definition

of common stockholders’ equity.4

Tier 2 capital includes, subject to

certain limitations and conditions, the

allowance for loan and lease losses;

cumulative perpetual preferred stock

and related surplus; and certain other

maturing or redeemable capital

instruments. The Basle Accord also

permits in Tier 2 capital up to 45

percent of the gross (i.e., pre-tax)

unrealized gains on equity securities.

The 55 percent discount is applied to

the unrealized gains to reflect potential

volatility of this form of unrealized

capital, as well as tax liability charges

that would be incurred if the unrealized

gain were realized or otherwise taxed

currently. When the Agencies

implemented the Basle Accord by

issuing their respective risk-based

capital standards in 1989, they decided

not to include such unrealized gains in

Tier 2 capital.

The Agencies believe that it is

appropriate to continue the existing

regulatory capital treatment of

unrealized gains and losses on

available-for-sale debt securities and

unrealized losses on available-for-sale

equity securities. However, for

institutions that have net unrealized

holding gains on available-for-sale

equity securities, the Agencies are

considering whether it would be more

reasonable, as well as more consistent

with the Basle Accord, to include at

least a portion of the unrealized gains

on such securities in regulatory capital.

Therefore, the Agencies have decided to

issue, and request comment on, a

proposed revision to the Agencies’

rules.

Specifically, the Agencies are

proposing to permit institutions that

legally hold equity securities to include

in Tier 2 capital up to 45 percent of the

pretax net unrealized holding gains (that

is, the excess amount, if any, of the fair

value over historical cost as reported in

the institution’s most recent quarterly

regulatory report) 5 on available-for-sale

equity securities. The equity securities

must be valued in accordance with

GAAP and have readily determinable

fair values 6 and institutions should be

able to substantiate those values. In the

event that an Agency determines that an

institution’s available-for-sale equity

securities are not prudently valued, the

institution may be precluded from

including all or a portion of the eligible

pretax net unrealized gains on those

securities in Tier 2 capital. The

proposed 55 percent discount is not

required by GAAP, but is consistent

with the Basle Accord.

The Agencies clarify that net

unrealized gains (losses) on other types

of assets, such as bank premises and

available-for-sale debt securities, are not

included in supplementary capital, but

may be taken into account when

assessing an institution’s overall capital

adequacy.

The Agencies request comment on all

aspects of this proposal.

Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the Agencies

have determined that this proposed rule

would not have a significant economic

impact on a substantial number of small

entities in accordance with the spirit

and purposes of the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.).

Accordingly, a regulatory flexibility

analysis is not required. The proposed

rule would permit institutions to

include up to 45 percent of the pretax

net unrealized holding gains on

available-for-sale equity securities in

Tier 2 capital. The effect of the proposed

rule would be to increase immediately

the amount of Tier 2 capital held by

institutions, including small

institutions, in proportion to the amount

of their qualifying pretax net unrealized

holding gains on such securities.

Thereafter, the amount of Tier 2 capital

will increase or decrease as the value of

the equity securities changes. The

Agencies have concluded that this

proposal will not have a significant

impact on the amount of total capital

held by institutions, regardless of size.

Paperwork Reduction Act

The Agencies have determined that

the proposed 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.).

OCC and OTS Executive Order 12866

Determination

The OCC and the OTS have

determined that the proposed rule does

not constitute a ‘‘significant regulatory

action’’ for the purposes of Executive

Order 12866.

OCC and OTS Unfunded Mandates

Reform Act of 1995 Determinations

Section 202 of the Unfunded

Mandates Reform Act of 1995, Pub. L.

104–4 (Unfunded Mandates Act)

requires that an agency prepare a

budgetary impact statement before

promulgating a rule that includes a

Federal mandate that may result in

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

an agency to identify and consider a

reasonable number of regulatory

alternatives before promulgating a rule.

As discussed in the preamble, this

proposed rule would permit institutions

to include up to 45 percent of holding

gains on available-for-sale equity

securities in Tier 2 capital under the

Agencies’ risk-based capital rules. The

proposed rule would reduce regulatory

burden by increasing the amount of

supplementary capital held by certain

institutions. The OCC and OTS have

therefore determined that the effect of

the proposed rule on the thrift and

banking institutions as a whole will not

result in expenditures by State, local, or

tribal governments or by the private

sector of $100 million or more.

Accordingly, the OCC and OTS have not
55684 Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules

5The OCC reserves the authority to exclude all or

a portion of unrealized gains from Tier 2 capital if

the OCC determines that the equity securities are

not prudently valued.

12As a limited-life capital instrument approaches

maturity it begins to take on characteristics of a

short-term obligation. For this reason, the

outstanding amount of term subordinated debt and

limited life preferred stock eligible for inclusion in

Tier 2 is reduced, or discounted, as these

instruments approach maturity: one-fifth of the

original amount (less redemptions) is excluded each

year during the instrument’s last five years before

maturity. When the remaining maturity is less than

one year, the instrument is excluded from Tier 2

capital.

prepared a budgetary impact statement

or specifically addressed the regulatory

alternatives considered.

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 recordkeeping

requirements, Securities.

12 CFR Part 325

Bank deposit insurance, Banks,

banking, Capital adequacy, Reporting

and recordkeeping requirements,

Savings associations, State non-member

banks.

12 CFR Part 567

Capital, Reporting and recordkeeping

requirements, Savings associations.

Authority and Issuance

Office of the Comptroller of the

Currency

12 CFR CHAPTER I

For the reasons set out in the joint

preamble, appendix A to part 3 of

chapter I of title 12 of the Code of

Federal Regulations is proposed to be

amended 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. In appendix A to part 3, section 2.

is amended by adding a new paragraph

(b)(5) including footnote 5 to read as

follows:

Appendix A to Part 3—Risk-Based

Capital Guidelines

* * * * *

Section 2. Components of Capital.

* * * * *

(b) * * *

(5) Up to 45 percent of the pretax net

unrealized holding gains (the excess, if

any, of the fair value over historical

cost) on available-for-sale equity

securities with readily determinable fair

values.5 Unrealized gains (losses) on

other types of assets, such as bank

premises or available-for-sale debt

securities, are not included in

supplementary capital, but the OCC may

take these unrealized gains (losses) into

account as additional factors when

assessing overall capital adequacy.

* * * * *

Dated: October 6, 1997.

Eugene A. Ludwig,

Comptroller of the Currency.

Federal Reserve System

12 CFR CHAPTER II

For the reasons set forth in the joint

preamble, parts 208 and 225 of chapter

II of title 12 of the Code of Federal

Regulations are proposed to be amended

as follows:

PART 208—MEMBERSHIP OF STATE

BANKING INSTITUTIONS IN THE

FEDERAL RESERVE SYSTEM

(REGULATION H)

1. The authority citation for part 208

is revised to read as follows:

Authority: 12 U.S.C. 24, 36, 92(a), 93(a),

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, 1835(a), 1882, 2901–2907, 3105,

3310, 3331–3351, and 3906–3909; 15 U.S.C.

78b, 78l(b), 78l(g), 78l(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

introductory paragraphs in section

II.A.2. are revised and footnote 8 is

removed and reserved to read as

follows:

Appendix A to Part 208—Capital

Adequacy Guidelines for State Member

Banks: Risk-Based Measure

* * * * *

II. * * *

A. * * *

2. Supplementary capital elements (Tier 2

capital). The Tier 2 component of a bank’s

qualifying total capital may consist of the

following items that are defined as

supplementary capital elements:

(i) Allowance for loan and lease losses

(subject to limitations discussed below).

(ii) Perpetual preferred stock and

related surplus (subject to conditions

discussed below).

(iii) Hybrid capital instruments (as

defined below) and mandatory

convertible debt securities.

(iv) Term subordinated debt and

intermediate-term preferred stock,

including related surplus (subject to

limitations discussed below).

(v) Unrealized gains on equity

securities (subject to limitations

discussed in paragraph II.B.2.e. of this

section).

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 capital (net of goodwill

and other intangible assets required to

be deducted in accordance with section

II.B.1.b. of this appendix).

The elements of supplementary

capital are discussed in greater detail

below.

* * * * *

3. In appendix A to part 208, section

II.A.2., paragraphs (d) and (e) are

revised to read as follows:

* * * * *

II. * * *

A. * * *

2. * * *

(d) Subordinated debt and intermediate

term preferred stock. i. The aggregate amount

of term subordinated debt (excluding

mandatory convertible debt) and

intermediate-term preferred stock that may

be treated as supplementary capital is limited

to 50 percent of Tier 1 capital (net of

goodwill and other intangible assets required

to be deducted in accordance with section

II.B.1.b. of this appendix). Amounts in excess

of these limits may be issued and, while not

included in the ratio calculation, will be

taken into account in the overall assessment

of an organization’s funding and financial

condition.

ii. Subordinated debt and intermediateterm preferred stock must have an original

weighted average maturity of at least five

years to qualify as supplemental capital. (If

the holder has the option to require the issuer

to redeem, repay, or repurchase the

instrument prior to the stated maturity,

maturity would be defined, for risk-based

capital purposes, as the earliest possible date

on which the holder can put the instrument

back to the issuing bank.) 12

iii. In the case of subordinated debt, the

instrument must be unsecured and must

clearly state on its face that it is not a deposit

and is not insured by a Federal agency. To

qualify as capital in banks, debt must be

subordinated to general creditors and claims

of depositors. Consistent with current

regulatory requirements, if a state member

bank wishes to redeem subordinated debt
Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules 55685

12Unsecured term debt issued by bank holding

companies prior to March 12, 1988, and qualifying

as secondary capital at the time of issuance

continues to qualify as an element of

supplementary capital under the risk-based

framework, subject to the 50 percent of Tier 1

capital limitation. Bank holding company term debt

issued on or after March 12, 1988, must be

subordinated in order to qualify as capital.

13As a limited-life capital instrument approaches

maturity it begins to take on characteristics of a

short-term obligation. For this reason, the

outstanding amount of term subordinated debt and

limited life preferred stock eligible for inclusion in

Tier 2 is reduced, or discounted, as these

instruments approach maturity: one-fifth of the

original amount (less redemptions) is excluded each

year during the instrument’s last five years before

maturity. When the remaining maturity is less than

one year, the instrument is excluded from Tier 2

capital.

before the stated maturity, it must receive

prior approval of the Federal Reserve.

(e) Unrealized gains on equity securities

and unrealized gains (losses) on other assets.

i. Up to 45 percent of pretax net unrealized

holding gains (that is, the excess, if any, of

the fair value over amortized cost) on

available-for-sale equity securities with

readily determinable fair values may be

included in supplementary capital. However,

the Federal Reserve may exclude all or a

portion of these unrealized gains from Tier 2

capital if the Federal Reserve determines that

the equity securities are not prudently

valued. Unrealized gains (losses) on other

types of assets, such as bank premises and

available-for-sale debt securities, are not

included in supplementary capital, but the

Federal Reserve may take these unrealized

gains (losses) into account as additional

factors when assessing a bank’s overall

capital adequacy.

* * * * *

PART 225—BANK HOLDING

COMPANIES AND CHANGE IN BANK

CONTROL (REGULATION Y)

1. The authority citation for part 225

is revised to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818,

1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b),

1972(1), 3106, 3108, 3310, 3331–3351, 3907,

and 3909.

2. In appendix A to part 225, the

introductory paragraphs of section

II.A.2. are revised and footnote 8 is

removed and reserved to read as

follows:

Appendix A to Part 225—Capital

Adequacy Guidelines for Bank Holding

Companies: Risk-Based Measure

* * * * *

II. * * *

A. * * *

2. Supplementary capital elements (Tier 2

capital). The Tier 2 component of an

institution’s qualifying total capital may

consist of the following items that are

defined as supplementary capital elements:

(i) Allowance for loan and lease losses

(subject to limitations discussed below).

(ii) Perpetual preferred stock and related

surplus (subject to conditions discussed

below).

(iii) Hybrid capital instruments (as defined

below), perpetual debt and mandatory

convertible debt securities.

(iv) Term subordinated debt and

intermediate-term preferred stock, including

related surplus (subject to limitations

discussed below).

(v) Unrealized gains on equity securities

(subject to limitations discussed in paragraph

II.B.2.(e) of this section).

The maximum amount of Tier 2 capital

that may be included in an organization’s

qualifying total capital is limited to 100

percent of Tier 1 capital (net of goodwill and

other intangible assets required to be

deducted in accordance with section II.B.1.b.

of this appendix).

The elements of supplementary capital are

discussed in greater detail below.

* * * * *

3. In appendix A to part 225, section

II.A.2., paragraphs (d) and (e) are

revised to read as follows:

* * * * *

II. * * *

A. * * *

2. * * *

(d) Subordinated debt and

intermediate term preferred stock. i. The

aggregate amount of term subordinated

debt (excluding mandatory convertible

stock) and intermediate-term preferred

stock that may be treated as

supplementary capital is limited to 50

percent of Tier 1 capital (net of goodwill

and other intangible assets required to

be deducted in accordance with section

II.B.1.b. of this appendix). Amounts in

excess of these limits may be issued

and, while not included in the ratio

calculation, will be taken into account

in the overall assessment of an

organization’s funding and financial

condition.

ii. Subordinated debt and intermediateterm preferred stock must have an original

weighted average maturity of at least five

years to qualify as supplementary capital.12

(If the holder has the option to require the

issuer to redeem, repay, or repurchase the

instrument prior to the stated maturity,

maturity would be defined, for risk-based

capital purposes, as the earliest possible date

on which the holder can put the instrument

back to the issuing banking organization.) 13

iii. In the case of subordinated debt, the

instrument must be unsecured and must

clearly state on its face that it is not a deposit

and is not insured by a Federal agency. Bank

holding company debt must be subordinated

in the right of payment to all senior

indebtedness of the company.

(e) Unrealized gains on equity

securities and unrealized gains (losses)

on other assets. i. Up to 45 percent of

net unrealized holding gains (that is, the

excess, if any, of the fair value over

amortized cost) on available-for-sale

equity securities with readily

determinable fair values may be

included in supplementary capital.

However, the Federal Reserve may

exclude all or a portion of these

unrealized gains from Tier 2 capital if

the Federal Reserve determines that the

equity securities are not prudently

valued. Unrealized gains (losses) on

other types of assets, such as bank

premises and available-for-sale debt

securities, are not included in

supplementary capital, but the Federal

Reserve may take these unrealized gains

(losses) into account as additional

factors when assessing an institution’s

capital adequacy.

* * * * *

By order of the Board of Governors of the

Federal Reserve System, October 21, 1997.

William W. Wiles,

Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR CHAPTER III

For the reasons set forth in the joint

preamble, part 325 of chapter III of title

12 of the Code of Federal Regulations is

proposed to be amended 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, 2386 (12 U.S.C.

1828 note).

2. In appendix A to part 325, the

introductory paragraphs of section I.A.2.

are revised to read as follows:

Appendix A to Part 325—Statement of

Policy on Risk-Based Capital

* * * * *

I. * * *

A. * * *

2. Supplementary capital elements

(Tier 2) consist of:

—Allowance for loan and lease losses, up to

a maximum of 1.25 percent of riskweighted assets;

—Cumulative perpetual preferred stock,

long-term preferred stock (original maturity

of at least 20 years) and any related

surplus;

—Perpetual preferred stock (and any related

surplus) where the dividend is reset

periodically based, in whole or part, on the

bank’s current credit standing, regardless

of whether the dividends are cumulative or

noncumulative;

—Hybrid capital instruments, including

mandatory convertible debt securities;

—Term subordinated debt and intermediateterm preferred stock (original average

maturity of five years or more) and any

related surplus; and
55686 Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules

—Net unrealized gains on equity securities

(subject to limitations discussed in

paragraph I.A.2.(f) of this section).

The maximum amount of Tier 2 capital

that may be recognized for risk-based capital

purposes is limited to 100 percent of Tier 1

capital (after any deductions for disallowed

intangibles). In addition, the combined

amount of term subordinated debt and

intermediate-term preferred stock that may

be treated as part of Tier 2 capital for riskbased capital purposes is limited to 50

percent of Tier 1 capital. Amounts in excess

of these limits may be issued but are not

included in the calculation of the risk-based

capital ratio.

* * * * *

3. In appendix A to part 325, the last

undesignated paragraph of section

I.A.2., entitled ‘‘Discount of limited-life

supplementary capital instruments’’ is

designated as paragraph (e).

4. In appendix A to part 325, a new

paragraph (f) is added to section I.A.2.

to read as follows:

* * * * *

II. * * *

A. * * *

2. * * *

(f) Unrealized gains on equity securities

and unrealized gains (losses) on other assets.

Up to 45 percent of pretax net unrealized

gains (that is, the excess, if any, of the fair

value over amortized cost) on available-forsale equity securities with readily

determinable fair values may be included in

supplementary capital. However, the FDIC

may, on a case-by-case basis, exercise its

discretion to exclude all or a portion of these

unrealized gains from Tier 2 capital if the

FDIC determines that the equity securities are

not prudently valued. Unrealized gains

(losses) on other types of assets, such as bank

premises and available-for-sale debt

securities, are not included in supplementary

capital, but the FDIC may take these

unrealized gains (losses) into account as

additional factors when assessing a bank’s

overall capital adequacy.

* * * * *

By order of the Board of Directors.

Dated at Washington, DC, this 16th day of

September 1997.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Office of Thrift Supervision

12 CFR CHAPTER V

For the reasons set forth in the joint

preamble, part 567 of chapter V of title

12 of the Code of Federal Regulations is

proposed to be amended as set forth

below:

PART 567—CAPITAL

1. The authority citation for part 567

continues to read as follows:

Authority: 12 U.S.C. 1462, 1462a, 1463,

1464, 1467a, 1828 (note).

2. Section 567.5 is amended by

adding a new paragraph (b)(5) to read as

follows:

§ 567.5 Components of capital.

* * * * *

(b) * * *

(5) Unrealized gains on equity

securities. Up to 45 percent of net,

unrealized gains before income taxes,

calculated as the amount, if any, by

which fair value exceeds amortized cost

on available-for-sale equity securities

with readily determinable fair values,

may be included in supplementary

capital. The OTS may disallow such

inclusion in the calculation of

supplementary capital if the Office

determines that the equity securities are

not prudently valued.

* * * * *

Dated: September 30, 1997.

By the Office of Thrift Supervision.

Nicolas P. Retsinas,

Director.

[FR Doc. 97–28269 Filed 10–24–97; 8:45 am]

BILLING CODE 4810–33–P, 6210–01–P, 6714–01–P,

6720–01–P

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket No. 97–19]

RIN 1557–AB14

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Regulation H; Docket No. R–0947]

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 325

RIN 3064–AB96

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[Docket No. 97–36]

RIN 1550–AA98

Risk-Based Capital Standards:

Construction Loans on Presold

Residential Properties; Junior Liens on

1- to 4-Family Residential Properties;

and Mutual Funds and Leverage

Capital Standards: Tier 1 Leverage

Ratio

AGENCIES: Office of the Comptroller of

the Currency, Treasury; Board of

Governors of the Federal Reserve

System; Federal Deposit Insurance

Corporation; and Office of Thrift

Supervision, Treasury.

ACTION: Joint notice of proposed

rulemaking.

SUMMARY: The Office of the Comptroller

of the Currency (OCC), the Board of

Governors of the Federal Reserve

System (Board), the Federal Deposit

Insurance Corporation (FDIC), and the

Office of Thrift Supervision (OTS)

(collectively, the Agencies) are

proposing to amend their respective

risk-based capital standards and

leverage capital standards for banks and

thrifts. The proposal would represent a

significant step in implementing section

303 of the Riegle Community

Development and Regulatory

Improvement Act of 1994, with regard

to the Agencies’ capital adequacy

standards. (Section 303 requires the

Agencies to work jointly to make

uniform their regulations and guidelines

implementing common statutory or

supervisory policies.) The effect of the

proposal would be that the Agencies

would have uniform risk-based capital

treatments for construction loans on

presold residential properties, real

estate loans secured by junior liens on

1- to 4-family residential properties, and

investments in mutual funds, as well as

uniform and simplified minimum Tier 1

capital leverage standards.

DATES: Comments must be received on

or before December 26, 1997.

ADDRESSES: Comments should be

directed to:

OCC: Comments may be submitted to

Docket No. 97–19, Communications

Division, Third Floor, Office of the

Comptroller of the Currency, 250 E

Street, S.W., Washington, D.C., 20219.

Comments will be available for

inspection and photocopying at that

address. In addition, comments may be

sent by facsimile transmission to FAX

number (202) 874–5274, or by electronic

mail to

REGS.COMMENTS@OCC.TREAS.GOV.

Board: Comments directed to the

Board should refer to Docket No. R–

0947 and may be mailed to William W.

Wiles, Secretary, Board of Governors of

the Federal Reserve System, 20th Street

and Constitution Avenue, N.W.,

Washington D.C., 20551. Comments

may also be delivered to Room B–2222

of the Eccles Building between 8:45 a.m.

and 5:15 p.m. weekdays, or the guard

station in the Eccles Building courtyard

on 20th Street, N.W. (between

Constitution Avenue and C Street) at

any time. Comments may be inspected

in Room MP–500 of the Martin Building