[Federal Register Volume 62, Number 207 (Monday, October 27, 1997)]
[Proposed Rules]
[Pages 55682-55686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28269]



[[Page 55681]]

  

  

  

  

  

_______________________________________________________________________

Part III

Department of the Treasury
Office of the Comptroller of the Currency



12 CFR Part 3

Federal Reserve System



12 CFR Parts 208 and 225

Federal Deposit Insurance Corporation



12 CFR Part 325

Department of the Treasury
Office of Thrift Supervision



12 CFR Part 567



_______________________________________________________________________



Risk Based Capital Standards: Unrealized Holding Gains on Certain 
Equity Securities; and 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); 
Proposed Rules

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

[[Page 55682]]


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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.

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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 <a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="6d3f282a3e432e2220202823393e2d222e2e43393f282c3e432a223b43">[email protected]</a>
    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: 
<a href="/cdn-cgi/l/email-protection#583b3735353d362c2b183e3c313b763f372e"><span class="__cf_email__" data-cfemail="bad9d5d7d7dfd4cec9fadcded3d994ddd5cc">[email protected]</span></a>). 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: <a href="/cdn-cgi/l/email-protection#b7c7c2d5dbded499ded9d1d8f7d8c3c499c3c5d2d6c499d0d8c1"><span class="__cf_email__" data-cfemail="2a5a5f484643490443444c456a455e59045e584f4b59044d455c">[email protected]</span></a>. 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) <SUP>1</SUP> include definitions 
for core (Tier 1) capital and supplementary (Tier 2) 
capital.<SUP>2</SUP> 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.<SUP>3</SUP> The common 
stockholders' equity component is defined to include common stock; 
related surplus; and retained earnings

[[Page 55683]]

(including capital reserves and adjustments for the cumulative effect 
of foreign currency translation); less net unrealized holding losses on 
available-for-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.<SUP>4</SUP>
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    \1\ The 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.
    \2\ Refer to each Agency's risk-based capital standards for more 
detailed descriptions of core and supplementary capital.
    \3\ Bank holding companies may also include in Tier 1 capital 
limited amounts of cumulative perpetual preferred stock.
    \4\ For regulatory capital purposes, institutions record net 
unrealized gains or losses on available-for-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). Available-for-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.
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    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) 
<SUP>5</SUP> on available-for-sale equity securities. The equity 
securities must be valued in accordance with GAAP and have readily 
determinable fair values <SUP>6</SUP> 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.
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    \5\ The 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.
    \6\ The 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.
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    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

[[Page 55684]]

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.<SUP>5</SUP> 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.
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    \5\ The 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.
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* * * * *

    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 intermediate-term 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.) 
<SUP>12</SUP>
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    \12\ As 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.
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    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

[[Page 55685]]

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 intermediate-term preferred stock must 
have an original weighted average maturity of at least five years to 
qualify as supplementary capital.<SUP>12</SUP> (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.) <SUP>13</SUP>
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    \12\ Unsecured 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.
    \13\ As 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.
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    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 risk-weighted 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 intermediate-term preferred stock 
(original average maturity of five years or more) and any related 
surplus; and

[[Page 55686]]

--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 risk-based 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-for-sale 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:


Sec. 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


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