[Federal Register Volume 62, Number 207 (Monday, October 27, 1997)]
[Proposed Rules]
[Pages 55686-55692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28270]


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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.

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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 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 <a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="5f0d1a180c711c1012121a110b0c1f101c1c710b0d1a1e0c7118100971">[email protected]</a>
    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

[[Page 55687]]

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: 
<a href="/cdn-cgi/l/email-protection#a3c0cccecec6cdd7d0e3c5c7cac08dc4ccd5"><span class="__cf_email__" data-cfemail="23404c4e4e464d57506345474a400d444c55">[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. 97-36. 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: <a href="/cdn-cgi/l/email-protection#a4d4d1c6c8cdc78acdcac2cbe4cbd0d78ad0d6c1c5d78ac3cbd2"><span class="__cf_email__" data-cfemail="e5959087898c86cb8c8b838aa58a9196cb9197808496cb828a93">[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), 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.<SUP>1</SUP> The Agencies 
also believe that the minimum leverage capital standards could be 
streamlined and made uniform among the Agencies.
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    \1\ The 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).
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    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).<SUP>2</SUP> 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

[[Page 55688]]

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.
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    \2\ Other 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.
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    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) <SUP>3</SUP>--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.''
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    \3\ The UFIRS is used by supervisors to summarize their 
evaluations of the strength and soundness of financial institutions 
in a comprehensive and uniform manner.
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    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,<SUP>4</SUP> but the 4.0 
percent standard to be adequately capitalized under the Agencies' PCA 
rules has been the controlling thrift leverage standard.
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    \4\ The 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.
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    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.

[[Page 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 Sec. 3.6, paragraph (c) is revised to read as follows:


Sec. 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 well-diversified 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:

[[Page 55690]]

APPENDIX A TO PART 3--RISK BASED CAPITAL GUIDELINES

* * * * *

Section 3. Risk Categories/Weights for On-Balance 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. * * * <SUP>21</SUP>
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    \21\ 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 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 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.
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* * * * *
    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. * * * <SUP>35</SUP>
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    \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).
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* * * * *
    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 Sec. 325.3 is revised to read as follows:


Sec. 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:

[[Page 55691]]

APPENDIX A TO PART 325--STATEMENT OF POLICY ON RISK-BASED 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 Sec. 567.1, paragraph (jj)(1)(ii) is revised, and new 
paragraphs (mm) and (nn) are added to read as follows:


Sec. 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 Sec. 567.5(a) of this part.
    (nn) Tier 2 capital. The term Tier 2 capital means supplementary 
capital as computed in accordance with Sec. 567.5(b) of this part.
    3. Section 567.2(a)(2)(ii) is revised to read as follows:


Sec. 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 Sec. 567.5(a) of this part.
* * * * *
    4. Section 567.6(a)(1)(vi) is revised to read as follows:


Sec. 567.6  Risk-based capital credit risk-weight 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 risk-weighted 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 risk-weight 
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 risk-weight 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 risk-weight 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 
risk-weight category.
* * * * *
    5. Section 567.8 is revised to read as follows:


Sec. 567.8  Leverage ratio.

    (a) The minimum leverage capital requirement for a savings 
association assigned a composite rating of 1, as defined in 
Sec. 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 well-diversified 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

[[Page 55692]]

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


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