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
Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules 55687

1The Agencies also identified inconsistencies in

their treatment of transactions supported by

qualifying collateral, which are addressed in a

pending joint notice of proposed rulemaking, 61 FR

42565 (August 16, 1996).

2Other criteria include that the loan may not be

90 days or more past due or carried in nonaccrual

status. The OTS rule also specifies that the

documented LTV ratio may not exceed 80 percent

of the securing real estate, unless the loan amount

over the 80 percent LTV threshold is insured by

qualifying private mortgage insurance.

between 9 a.m. and 5 p.m. weekdays,

except as provided in 12 CFR 261.8 of

the Federal Reserve’s Rules Regarding

Availability of Information.

FDIC: Written comments should be

sent 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. 97–36. 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), 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; or Karen Osterloh,

Assistant Chief Counsel, (202/906–

6639), Regulations and Legislation

Division, Office of the Chief Counsel.

SUPPLEMENTARY INFORMATION: Section

303(a)(2) of the Riegle Community

Development and Regulatory

Improvement Act of 1994 (12 U.S.C.

4803(a)) (Riegle Act) provides that the

Agencies shall, consistent with the

principles of safety and soundness,

statutory law and policy, and the public

interest, work jointly to make uniform

all regulations and guidelines

implementing common statutory or

supervisory policies. Section 303(a)(1)

of the Riegle Act requires the Agencies

to review their own regulations and

written policies and to streamline those

regulations and policies where possible.

To fulfill the section 303 mandate, the

Agencies have been reviewing, on an

interagency basis and internally, their

capital standards to identify areas where

they have substantively different capital

treatments or where streamlining is

appropriate. As a result of these

reviews, the Agencies have identified

inconsistencies in the risk-based capital

treatment of certain types of

transactions, in particular, construction

loans on presold residential properties,

loans secured by junior liens on 1-to 4-

family residential properties, and

investments in mutual funds.1 The

Agencies also believe that the minimum

leverage capital standards could be

streamlined and made uniform among

the Agencies.

The Agencies are proposing various

amendments to their risk-based capital

and leverage standards to eliminate

these differences and to streamline their

rules.

Proposed Amendments

Construction Loans on Presold

Residential Property

The Agencies all assign a qualifying

loan to a builder to finance the

construction of a presold 1-to 4-family

residential property to the 50 percent

risk weight category, provided the

borrower has a substantial equity

interest in the project, the property has

been presold under a binding contract,

the purchaser has a firm commitment

for a permanent qualifying mortgage

loan, and the purchaser has made a

substantial earnest money deposit.

Under the OCC and OTS rules, the

construction loan may not receive a 50

percent risk weight unless, prior to the

extension of credit to the builder, the

property was sold to an individual who

will occupy the residence upon

completion of construction. Under the

capital rules of the Board and the FDIC,

however, such loans to builders for

residential construction are eligible for

a 50 percent risk weight once the

property is sold, even if the sale occurs

after the construction loan has been

made.

The Agencies are proposing to

eliminate this difference by permitting

qualifying residential construction loans

to become eligible for the 50 percent

risk weight category at the time the

property is sold, even if that sale occurs

after the institution has made the loan

to the builder. In this regard, the OCC

and OTS are proposing revised

regulatory language that would permit

this treatment because construction

loans for residences sold to individual

purchasers are equally safe regardless of

whether sold before or after the loan is

made to the builder. The Board is

proposing a revision to its regulatory

language to conform its discussion of

qualifying construction loans to builders

to the language of the FDIC.

Junior Liens on 1- to 4-Family

Residential Properties

The Agencies are not uniform in their

risk-based capital treatment of real

estate loans secured by junior liens on

1-to 4-family residential properties

when the lending institution also holds

the first lien and no other party holds

an intervening lien. In such cases, the

Board views both loans as a single

extension of credit secured by a first

lien held by the lending institution and,

accordingly, assigns the combined loan

amount to either the 50 percent or 100

percent risk weight category depending

upon whether certain other criteria are

met.

One criterion to qualify for a 50

percent risk weight is that the loan must

be made in accordance with prudent

underwriting standards, including an

appropriate ratio of the current loan

balance to the value of the property (the

loan-to-value or LTV ratio).2 When

considering whether a loan is consistent

with prudent underwriting standards,

the Board evaluates the LTV ratio based

on the combined loan amount. If the

combined loan amount satisfies prudent

underwriting standards, both the first

and second lien are assigned to the 50

percent risk weight category. The FDIC
55688 Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules

3The UFIRS is used by supervisors to summarize

their evaluations of the strength and soundness of

financial institutions in a comprehensive and

uniform manner.

4The OTS’s core capital ratio is the OTS

equivalent to the other agencies’ Tier 1 leverage

ratio. OTS is proposing to add definitions of Tier

1 capital and Tier 2 capital to clarify that these are

equivalent to core and supplementary capital,

respectively.

also combines the first and second liens

to determine the appropriateness of the

LTV ratio, but it applies the risk weights

differently than the Board. If the

combined loan amount satisfies prudent

underwriting standards, the FDIC risk

weights the first lien at 50 percent and

the second lien at 100 percent;

otherwise, both liens are risk weighted

at 100 percent. The OCC treats all first

and junior liens separately, even if the

lending institution holds both liens and

no party holds an intervening lien.

Qualifying first liens are risk weighted

at 50 percent, and non-qualifying first

liens and all junior liens are risk

weighted at 100 percent. The OTS

definition of qualifying mortgage in its

capital rule parallels that of the OCC,

but in response to specific inquiries, the

OTS has interpreted this provision to

treat first and second mortgage loans to

a single individual with no intervening

liens as a single extension of credit.

The Agencies have decided to

propose adopting the OCC’s capital

treatment of junior liens as the uniform

interagency approach because it is

simple to implement and monitor, and

it treats all junior liens consistently.

Under this approach, all junior liens

would be assigned to the 100 percent

risk weight category. The Board and the

FDIC are proposing conforming

revisions to their risk-based capital

standards. The OTS would revisit its

policy interpretation of its current rule,

which parallels the OCC’s text.

Mutual Funds

The Board and FDIC generally assign

all of an institution’s investment in a

mutual fund to the risk weight category

appropriate to the highest risk weighted

asset that a particular mutual fund is

permitted to invest in pursuant to its

prospectus. As a general rule, the OCC

applies the same treatment, but permits,

on a case-by-case basis, an institution’s

investment to be allocated on a pro-rata

basis among risk weight categories

based on the percentages of a portfolio

authorized to be invested in assets in a

particular risk weight category as set

forth in the fund’s prospectus. The OTS

generally assigns all of an institution’s

investment in a mutual fund to the risk

weight category applicable to the

highest risk weighted asset that the fund

actually holds at a particular time. The

OTS, however, on a case-by-case basis,

permits pro-rata allocation among risk

weight categories based on the fund’s

actual holdings. All of the Agencies’

rules provide that the minimum risk

weight for investments in mutual funds

is 20 percent.

The Agencies are proposing to

achieve uniformity in the capital

treatment of an institution’s investments

in mutual funds by generally assigning

the institution’s total investment to the

risk category appropriate to the highest

risk weighted asset the fund is

permitted to hold in accordance with its

stated investment limits set forth in the

prospectus. The Agencies, however, are

proposing to allow an institution, at its

option, to assign the investment on a

pro-rata basis to different risk weight

categories according to the investment

limits in the fund’s prospectus, but in

no case will indirect holdings through

shares in a mutual fund be assigned to

a risk weight less than 20 percent. For

example, an institution’s investment in

a mutual fund that is authorized, in

accordance with its prospectus, to

invest up to 40 percent of its portfolio

in corporate bonds and the remainder in

U.S. government bonds, normally would

be placed in the 100 percent risk-weight

category. However, the institution could

choose to place only 40 percent of its

investment in the 100 percent risk

weight category and the remainder in

the 20 percent risk weight category. The

proposed rules note that if a mutual

fund is permitted to contain an

insignificant quantity of highly liquid

securities of superior quality that do not

qualify for a preferential risk weight,

such securities generally will be

disregarded in determining the risk

weight for the overall fund. The

Agencies also emphasize that any

activities which are speculative in

nature or otherwise inconsistent with

the preferential risk weighting assigned

to the fund’s assets could result in the

mutual fund investment being assigned

to the 100 percent risk category.

Tier 1 Leverage Ratio

The Agencies’ Tier 1 leverage ratio

(that is, the ratio of Tier 1 capital to total

assets) is an indicator of an institution’s

capital adequacy and places a constraint

on the degree to which an institution

can leverage its equity capital base. The

Board, FDIC, and OCC require the most

highly-rated institutions—that is, those

with, among other things, a composite 1

rating under the Uniform Financial

Institutions Rating System (UFIRS) 3—to

meet a minimum leverage ratio of 3.0

percent. The minimum leverage ratio for

other institutions is 3.0 percent ‘‘plus an

additional cushion of at least 100 to 200

basis points.’’

All four Agencies’ prompt corrective

action (PCA) rules require institutions to

satisfy a 4.0 percent leverage ratio (3.0

percent for institutions with a

composite 1 rating under the UFIRS) to

be considered ‘‘adequately capitalized.’’

The OTS capital rule includes a 3.0

percent core (Tier 1) capital

requirement,4 but the 4.0 percent

standard to be adequately capitalized

under the Agencies’ PCA rules has been

the controlling thrift leverage standard.

The Agencies are proposing revisions

to their leverage capital standards so

that the most highly-rated institutions

would be subject to a minimum 3.0

percent leverage ratio and all other

institutions would be subject to a

minimum 4.0 percent leverage ratio (the

same standard used to be adequately

capitalized under their PCA rules). This

proposed change would simplify and

streamline the Agencies’ leverage rules.

In addition, it would make the OTS

Tier 1 leverage standard consistent with

the current standard to be ‘‘adequately

capitalized’’ under all four agencies’

PCA rules and with the other agencies’

Tier 1 leverage standards. The OTS is

also proposing to be consistent with the

other three agencies by explicitly

clarifying that the prescribed leverage

standard is a minimum standard for

financially strong institutions, that

higher capital may be required if

warranted, and that institutions should

maintain capital levels consistent with

their risk exposure.

The Agencies request comment on all

aspects of this proposal. Comment is

specifically requested on the proposed

treatment of first and second mortgages,

which places qualifying first mortgages

on 1- to 4-family residential properties

in the 50 percent risk-weight category

and all second mortgages in the 100

percent risk-weight category. Please

comment on whether the combined

loan-to-value ratio of a first and second

mortgage to the same borrower, or some

other criteria, provides a sound basis for

modifying the proposed capital

treatment of such first and second

mortgages. Comment is also specifically

requested on the 20 percent minimum

risk weight applied to banks’

investments in mutual funds. In

particular, commenters are encouraged

to discuss whether 20 percent is too low

or too high as a lower bound in light of

mutual funds’ various credit,

operational, and legal risks, and where

these risks lie.
Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules 55689

Regulatory Flexibility Act Analysis

OCC Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the OCC

certifies that this proposed rule would

not have a significant economic impact

on a substantial number of small entities

in accord 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

reduce regulatory burden by unifying

the Agencies’ risk-based capital

treatment for presold construction

loans, junior liens, and investments in

mutual funds, and simplifying the Tier

1 leverage standards. The economic

impact of this proposed rule on banks,

regardless of size, is expected to be

minimal.

Federal Reserve Board Regulatory

Flexibility Act Analysis

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the Board

does not believe this proposal would

have a significant impact on a

substantial number of small business

entities in accord 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 effect of the proposal

would be to reduce regulatory burden

on depository institutions by unifying

the Agencies’ risk-based capital

treatment for presold construction

loans, junior liens, and investments in

mutual funds, and simplifying the Tier

1 leverage standards. The economic

impact of the proposed rule on

institutions, regardless of size, is

expected to be minimal.

FDIC Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the

Regulatory Flexibility Act (Pub. L. 96–

354, 5 U.S.C. 601 et seq.), it is certified

that the proposal would not have a

significant impact on a substantial

number of small entities. The effect of

the proposal would be to simplify

depository institutions’ capital

calculations.

OTS Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the OTS

certifies that this proposed rule will not

have a significant economic impact on

a substantial number of small entities.

The effect of the proposal would be to

reduce regulatory burden on depository

institutions by simplifying the treatment

of junior liens, permitting institutions to

risk weight holdings in a mutual fund

on a pro rata basis, and making OTS’

Tier 1 leverage ratio consistent with its

current standard to be adequately

capitalized under PCA. In addition, the

proposal will eliminate various

inconsistencies in the risk-based capital

treatments applied by the Agencies.

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 this 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 is limited to changing the

risk weighting of presold residential

construction loans, second liens, and

mutual fund investments under the

Agencies’ risk-based capital rules. It also

establishes a uniform, simplified

leverage requirement for all institutions.

In addition, with respect to the OCC,

this proposal clarifies and makes

uniform existing regulatory

requirements for national banks. The

OCC and OTS have therefore

determined that the proposed rule 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

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 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, 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 § 3.6, paragraph (c) is revised to

read as follows:

§ 3.6 Minimum capital ratios.

* * * * *

(c) Additional leverage ratio

requirement. An institution operating at

or near the level in paragraph (b) of this

section is expected to have welldiversified risks, including no undue

interest rate risk exposure; excellent

control systems; good earnings, high

asset quality; high liquidity; and well

managed on- and off-balance sheet

activities; and in general be considered

a strong banking organization, rated

composite 1 under the Uniform

Financial Institutions Rating System

(CAMELS) rating system of banks. For

all but the most highly-rated banks

meeting the conditions set forth in this

paragraph, the minimum Tier 1 leverage

ratio is to be 4 percent. In all cases,

banking institutions should hold capital

commensurate with the level and nature

of all risks.

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

the second undesignated paragraph and

paragraph (a)(3)(iv) are revised to read

as follows:
55690 Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules

21An investment in shares of a mutual fund

whose portfolio consists solely of various securities

or money market instruments that, if held

separately, would be assigned to different risk

categories, generally is assigned to the risk category

appropriate to the highest risk-weighted asset that

the fund is permitted to hold in accordance with

the stated investment objectives set forth in the

prospectus. The bank may, at its option, assign the

investment on a pro rata basis to different risk

categories according to the investment limits in the

fund’s prospectus, but in no case will indirect

holdings through shares in any mutual fund be

assigned to a risk weight less than 20 percent. If,

in order to maintain a necessary degree of shortterm liquidity, a fund is permitted to hold an

insignificant amount of its assets in short-term,

highly liquid securities of superior credit quality

that do not qualify for a preferential risk weight,

such securities generally will be disregarded in

determining the risk category into which the bank’s

holding in the overall fund should be assigned. The

prudent use of hedging instruments by a mutual

fund to reduce the risk of its assets will not increase

the risk weighting of the mutual fund investment.

For example, the use of hedging instruments by a

mutual fund to reduce the interest rate risk of its

government bond portfolio will not increase the risk

weight of that fund above the 20 percent category.

Nonetheless, if the fund engages in any activities

that appear speculative in nature or has any other

characteristics that are inconsistent with the

preferential risk weighting assigned to the fund’s

assets, holdings in the fund will be assigned to the

100 percent risk category.

35 * * * Such loans to builders will be

considered prudently underwritten only if the bank

has obtained sufficient documentation that the

buyer of the home intends to purchase the home

(i.e., has a legally binding written sales contract)

and has the ability to obtain a mortgage loan

sufficient to purchase the home (i.e., has a firm

written commitment for permanent financing of the

home upon completion).

APPENDIX A TO PART 3—RISK

BASED CAPITAL GUIDELINES

* * * * *

Section 3. Risk Categories/Weights for OnBalance Sheet Assets and Off-Balance Sheet

Items

* * * * *

Some of the assets on a bank’s balance

sheet may represent an indirect holding of a

pool of assets, e.g., mutual funds, that

encompass more than one risk weight within

the pool. In those situations, the bank may

assign the asset to the risk category

applicable to the highest risk-weighted asset

that pool is permitted to hold pursuant to its

stated investment objectives in the fund’s

prospectus. Alternatively, the bank may

assign the asset on a pro rata basis to

different risk categories according to the

investment limits in the fund’s prospectus. In

either case, the minimum risk weight that the

bank may assign to such a pool is 20 percent.

If, in order to maintain a necessary degree of

liquidity, the fund is permitted to hold an

insignificant amount of its investments in

short-term, highly-liquid securities of

superior credit quality (that do not qualify for

a preferential risk weight), such securities

generally will not be taken into account in

determining the risk category into which the

bank’s holding in the overall pool should be

assigned. The prudent use of hedging

instruments by a mutual fund to reduce the

risk of its assets will not increase the risk

weighting of that fund above the 20 percent

category. More detail on the treatment of

mortgage-backed securities is provided in

section 3(a)(3)(vi) of this appendix A.

(a) * * *

(3) * * *

(iv) Loans to residential real estate builders

for one-to-four family residential property

construction, if the bank obtains sufficient

documentation demonstrating that the buyer

of the home intends to purchase the home

(i.e., a legally binding written sales contract)

and has the ability to obtain a mortgage loan

sufficient to purchase the home (i.e., a firm

written commitment for permanent financing

of the home upon completion), subject to the

following additional criteria:

* * * * *

Dated: September 29, 1997.

Eugene A. Ludwig,

Comptroller of the Currency.

Federal Reserve System

12 CFR CHAPTER II

For the reasons set forth in the joint

preamble, part 208 of chapter II of title

12 of the Code of Federal Regulations is

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

continues 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, r–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, section

III. A., footnote 21 is revised to read as

follows:

APPENDIX A TO PART 208—CAPITAL

ADEQUACY GUIDELINES FOR STATE

MEMBER BANKS: RISK-BASED

MEASURE

* * * * *

III. * * *

A. * * * 21

* * * * *

3. In appendix A to part 208, section

III.C.3. is amended by removing and

reserving footnote 34 and by adding a

new sentence to the end of the first

paragraph of footnote 35 to read as

follows:

* * * * *

III. * * *

C. * * *

3. * * * 35

* * * * *

4. In appendix B to part 208, section

II.a. is revised to read as follows:

APPENDIX B TO PART 208—CAPITAL

ADEQUACY GUIDELINES FOR STATE

MEMBER BANKS: TIER 1 LEVERAGE

MEASURE

* * * * *

II. * * *

a. For a strong banking organization (rated

composite 1 under the UFIRS rating system

of banks) the minimum ratio of Tier 1 capital

to total assets is 3.0 percent. Such

institutions must not be anticipating or

experiencing significant growth, and are

expected to have well-diversified risk

(including no undue interest rate risk

exposure), excellent asset quality, high

liquidity, good earnings, and in general to be

considered a strong banking organization. For

all other institutions, the minimum ratio is

4.0 percent. Higher capital ratios could be

required if warranted by the particular

circumstances or risk profiles of individual

banks. In all cases, banking institutions

should hold capital commensurate with the

level and nature of all risks, including the

volume and severity of problem loans, to

which they are exposed.

* * * * *

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. Paragraph (b)(2) in § 325.3 is

revised to read as follows:

§ 325.3 Minimum leverage capital

requirement.

* * * * *

(b) * * *

(2) For all but the most highly-rated

institutions meeting the conditions set

forth in paragraph (b)(1) of this section,

the minimum leverage capital

requirement for a bank (or for an

insured depository institution making

an application to the FDIC) shall consist

of a ratio of Tier 1 capital to total assets

of not less than 4 percent.

* * * * *

3. In appendix A to part 325, section

II.B., paragraph 1 is revised to read as

follows:
Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules 55691

APPENDIX A TO PART 325—

STATEMENT OF POLICY ON RISKBASED CAPITAL

* * * * *

II. * * *

B. * * *

1. Indirect Holdings of Assets. Some

of the assets on a bank’s balance sheet

may represent an indirect holding of a

pool of assets; for example, mutual

funds. An investment in shares of a

mutual fund whose portfolio consists

solely of various securities or money

market instruments that, if held

separately, would be assigned to

different risk categories, generally is

assigned to the risk category appropriate

to the highest risk-weighted asset that

the fund is permitted to hold in

accordance with the stated investment

objectives set forth in its prospectus.

The bank may, at its option, assign the

investment on a pro rata basis to

different risk categories according to the

investment limits in the fund’s

prospectus, but in no case will indirect

holdings through shares in any mutual

fund be assigned to a risk weight less

than 20 percent. If, in order to maintain

a necessary degree of short-term

liquidity, a fund is permitted to hold an

insignificant amount of its assets in

short-term, highly liquid securities of

superior credit quality that do not

qualify for a preferential risk weight,

such securities generally will be

disregarded in determining the risk

category into which the bank’s holding

in the overall fund should be assigned.

The prudent use of hedging instruments

by a mutual fund to reduce the risk of

its assets will not increase the risk

weighting of the mutual fund

investment. For example, the use of

hedging instruments by a mutual fund

to reduce the interest rate risk of its

government bond portfolio will not

increase the risk weight of that fund

above the 20 percent category.

Nonetheless, if the fund engages in any

activities that appear speculative in

nature or has any other characteristics

that are inconsistent with the

preferential risk weighting assigned to

the fund’s assets, holdings in the fund

will be assigned to the 100 percent risk

category.

* * * * *

4. In appendix A to part 325, section

II.C. is amended by removing and

reserving footnote 26.

By order of the Board of Directors.

Dated at Washington, D.C. this 4th day of

February 1997.

Federal Deposit Insurance Corporation.

Jerry L. Langley,

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. In § 567.1, paragraph (jj)(1)(ii) is

revised, and new paragraphs (mm) and

(nn) are added to read as follows:

§ 567.1 Definitions.

* * * * *

(jj) Qualifying residential construction

loan. (1) * * *

(ii) The residence being constructed

must be a 1–4 family residence sold to

a home purchaser;

* * * * *

(mm) Tier 1 capital. The term Tier 1

capital means core capital as computed

in accordance with § 567.5(a) of this

part.

(nn) Tier 2 capital. The term Tier 2

capital means supplementary capital as

computed in accordance with § 567.5(b)

of this part.

3. Section 567.2(a)(2)(ii) is revised to

read as follows:

§ 567.2 Minimum regulatory capital

requirement.

(a) * * *

(2) Leverage ratio requirement. * * *

(ii) A savings association must satisfy

this requirement with core capital as

defined in § 567.5(a) of this part.

* * * * *

4. Section 567.6(a)(1)(vi) is revised to

read as follows:

§ 567.6 Risk-based capital credit riskweight categories.

(a) * * *

(1) * * *

(vi) Indirect ownership interests in

pools of assets. An asset representing an

indirect holding of a pool of assets, e.g.,

mutual funds, generally is assigned to

the risk-weight category under this

section based upon the risk weight that

would be assigned to the assets in the

portfolio of the pool. An investment in

shares of a mutual fund whose portfolio

consists solely of various securities or

money market instruments that, if held

separately, would be assigned to

different risk-weight categories,

generally is assigned to the risk-weight

category appropriate to the highest riskweighted asset that the fund is

permitted to hold in accordance with

the investment objectives set forth in its

prospectus. The savings association

may, at its option, assign the investment

on a pro-rata basis to different riskweight categories according to the

investment limits in the fund’s

prospectus. In no case will an indirect

holding through shares in a mutual fund

be assigned to the zero percent riskweight category. If, in order to maintain

a necessary degree of short-term

liquidity, a fund is permitted to hold an

insignificant amount of its assets in

short-term, highly liquid securities of

superior credit quality that do not

qualify for a preferential risk weight,

such securities generally will be

disregarded in determining the riskweight category into which the savings

association’s holding in the overall fund

should be assigned. The prudent use of

hedging instruments by a mutual fund

to reduce the risk of its assets will not

increase the risk weighting of the

mutual fund investment. For example,

the use of hedging instruments by a

mutual fund to reduce the interest rate

risk of its government bond portfolio

will not increase the risk weight of that

fund above the 20 percent category.

Nonetheless, if the fund engages in any

activities that appear speculative in

nature or has any other characteristics

that are inconsistent with the

preferential risk-weighting assigned to

the fund’s assets, holdings in the fund

will be assigned to the 100 percent riskweight category.

* * * * *

5. Section 567.8 is revised to read as

follows:

§ 567.8 Leverage ratio.

(a) The minimum leverage capital

requirement for a savings association

assigned a composite rating of 1, as

defined in § 516.3(c) of this chapter,

shall consist of a ratio of core capital to

adjusted total assets of 3 percent. These

generally are strong associations that are

not anticipating or experiencing

significant growth and have welldiversified risks, including no undue

interest rate risk exposure, excellent

asset quality, high liquidity, and good

earnings.

(b) For all savings associations not

meeting the conditions set forth in

paragraph (a) of this section, the

minimum leverage capital requirement

shall consist of a ratio of core capital to

adjusted total assets of 4 percent. Higher

capital ratios may be required if

warranted by the particular

circumstances or risk profiles of an
55692 Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules

1The BOPEC rating system is used by supervisors

to summarize their evaluations of the strength and

soundness of bank holding companies in a

comprehensive and uniform manner.

individual savings association. In all

cases, savings associations should hold

capital commensurate with the level

and nature of all risks, including the

volume and severity of problems loans,

to which they are exposed.

Dated: April 17, 1997.

The Office of Thrift Supervision.

Nicolas P. Retsinas,

Director.

[FR Doc. 97–28270 Filed 10–24–97; 8:45 am]

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

6720–01–P

FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R–0948]

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

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Notice of proposed rulemaking.

SUMMARY: The Board of Governors of the

Federal Reserve System is proposing to

amend its risk-based capital guidelines

for bank holding companies by revising

the treatment for junior liens on 1- to 4-

family residential properties and mutual

funds and the language for construction

loans on presold residential properties,

and to simplify the leverage capital

guidelines for bank holding companies.

The proposal, which was developed on

an interagency basis, would implement

part of section 303 of the Riegle

Community Development and

Regulatory Improvement Act of 1994,

which requires the Federal banking

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 bank holding

company risk-based capital treatment

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 would be consistent

with the risk-based capital treatment of

the other Federal banking and thrift

regulatory agencies, and the bank

holding company Tier 1 leverage

standards would be simplified and

revised to take into account the market

risk capital rule.

DATES: Comments must be received on

or before December 26, 1997.

ADDRESSES: Comments should refer to

Docket No. R–0948 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.

FOR FURTHER INFORMATION CONTACT:

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).

SUPPLEMENTARY INFORMATION: The

Federal Reserve, along with the other

bank and thrift regulatory agencies (that

is, the Office of the Comptroller of the

Currency (OCC), the Federal Deposit

Insurance Corporation (FDIC), and the

Office of Thrift Supervision (OTS)

(collectively, the Agencies)), issued a

joint notice of proposed rulemaking,

published elsewhere in today’s Federal

Register, under Docket No. R–0947. In

that joint notice, the Agencies have

proposed several amendments to their

risk-based capital standards that would

eliminate inconsistencies among the

capital rules for banks and thrifts. In

particular, the Agencies have proposed

amendments to the risk-based capital

treatment of construction loans on

presold residential properties, loans

secured by junior liens on 1- to 4-family

residential property, and investments in

mutual funds. The agencies also have

proposed a streamlining revision to

their leverage capital rules. The Federal

Reserve, in this notice, is proposing

conforming amendments to its riskbased capital guidelines for bank

holding companies, as well as a

streamlining revision to its leverage

capital guidelines for such

organizations, that takes into account

the market risk capital rule (12 CFR part

225, appendix E).

Proposed Amendments to the RiskBased Capital Guidelines

With regard to construction loans on

presold residential properties, the Board

is not proposing any substantive change

to its rule, but is proposing a revision to

the regulatory language to provide

guidance on the characteristics of loans

to builders that will be considered

prudently underwritten. This change

would conform the discussion of

qualifying construction loans to builders

to the existing language of the FDIC. For

junior liens on 1-to 4-family properties,

the Board is proposing to treat all first

and second liens separately, even if the

lending institution holds both liens and

no party holds an intervening lien.

Under the proposed treatment,

qualifying first liens would be risk

weighted at 50 percent, and nonqualifying first liens and all junior liens

would be risk weighted at 100 percent.

The Federal Reserve is proposing to

retain its general treatment for

investments in mutual funds, that is,

generally assigning an institution’s

investment in a mutual fund to the

highest risk-weight category applicable

to any asset the fund is authorized to

hold in accordance with its prospectus.

The Federal Reserve is also proposing to

allow an institution, at its option, to

allocate its investment in a mutual fund

among the risk-weight categories based

on the maximum percentage of the

mutual fund’s portfolio that may consist

of higher risk-weighted assets under its

prospectus. These proposed revisions

are consistent with the Federal

Reserve’s proposed amendments for

state member banks that are set forth in

the earlier referenced interagency notice

of proposed rulemaking.

Proposed Amendment to the Tier 1

Leverage Guidelines

The Federal Reserve’s capital

adequacy guidelines for bank holding

companies set forth the following

minimum levels of Tier 1 capital to total

assets (leverage ratio): a 3 percent

minimum for organizations rated a

composite 1 under the BOPEC1 rating

system for bank holding companies and

a minimum of 3 percent plus 100 to 200

basis points for all other organizations.

The Federal Reserve is proposing to

amend its guidelines to set forth a

minimum 3 percent leverage ratio for

bank holding companies that are BOPEC

1-rated or have implemented the riskbased capital market risk measure set

forth in the Board’s capital adequacy

guidelines (12 CFR part 225, appendix

E). All other bank holding companies

would be subject to a 4 percent

minimum Tier 1 leverage ratio. Higher