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
Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules 55693

24An 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 as set forth in the

prospectus. The organization 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

organization’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.

38 * * * Such loans to builders will be

considered prudently underwritten only if the bank

holding company 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).

capital ratios could be required if

warranted by the particular

circumstances or risk profiles of

individual banking organizations.

Institutions with supervisory, financial,

or operational weaknesses would

continue to be expected to operate well

above minimum capital levels.

Organizations experiencing or

anticipating significant growth also

would be expected to maintain capital

ratios, including tangible capital

positions, well above the minimum.

The Federal Reserve notes that this

proposed amendment would lower the

minimum Tier 1 leverage ratio for

institutions that have implemented the

market risk capital rule. While the

Federal Reserve believes it is desirable

for bank holding companies to maintain

a minimum base of capital to total

assets, it also recognizes that the

leverage ratio can be an inexact measure

of capital adequacy for many bank

holding companies, particularly for very

large organizations that have significant

trading portfolios and are extensively

engaged in fee-generating off-balancesheet activity. Accordingly, in light of

the revisions to the risk-based capital

measure to capture market risk as well

as credit risk, the Federal Reserve

believes it is appropriate to lower the

minimum Tier 1 leverage ratio to 3

percent for bank holding companies that

have implemented the market risk rule.

The Federal Reserve requests

comment on all aspects of this proposal.

With regard to the proposed treatment

for first and second liens, the Board

notes that it continues to believe its

current approach of merging first and

second liens more appropriately reflects

the risk of those transactions. This is

because, in terms of an institution’s

collateral position, funds advanced on

both the first and second note are

effectively secured by a first lien and

timely payment in accordance with the

terms of both loans depends on the

same borrower’s financial ability to pay.

Furthermore, the Board believes that

merging these liens is consistent with

general industry practice. Thus, the

Board requests, in particular, comment

on the proposed treatment for first and

second liens.

Regulatory Flexibility Act Analysis

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the Board

does not believe the proposed rule

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. In addition, because the riskbased capital guidelines generally do

not apply to bank holding companies

with consolidated assets of less than

$150 million, the proposed rule would

not affect such companies. The effect of

the proposed rule would be to reduce

regulatory burden on bank holding

companies 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.

Paperwork Reduction Act

The Board has 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.).

List of Subjects in 12 CFR Part 225

Administrative practice and

procedure, Banks, banking, Federal

Reserve System, Holding companies,

Reporting and recordkeeping

requirements, Securities.

For the reasons set forth in the

preamble, part 225 of chapter II of title

12 of the Code of Federal Regulations is

proposed to be amended as follows:

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, section

III.A., footnote 24 is revised to read as

follows:

APPENDIX A TO PART 225—CAPITAL

ADEQUACY GUIDELINES FOR BANK

HOLDING COMPANIES: RISK-BASED

MEASURE

* * * * *

III. * * *

A. * * * 24

* * * * *

3. In appendix A to part 225, section

III.C.3. is amended by removing and

reserving footnote 37 and by adding a

new sentence to the end of the footnote

38 to read as follows:

* * * * *

III. * * *

C. * * *

3. * * * 38 * * *

* * * * *

4. In appendix D to part 225, section

II.a. is revised to read as follows:

APPENDIX D TO PART 225—CAPITAL

ADEQUACY GUIDELINES FOR BANK

HOLDING COMPANIES: TIER 1

LEVERAGE MEASURE

* * * * *

II. * * *

a. For a strong banking organization (rated

composite 1 under the BOPEC rating system

of bank holding companies or has

implemented the Board’s risk-based capital

measure for market risk as set forth in

appendices A and E of this part) the

minimum ratio of Tier 1 capital to total assets

is 3.0 percent. Such organizations must not

be anticipating or experiencing significant

growth, are expected to have well diversified

risk (including no undue interest rate risk

exposure), excellent asset quality, high

liquidity, good earnings, and in general be

considered a strong banking organization. In

addition, organizations are expected to

maintain capital ratios, including tangible

capital positions, well above minimum

levels. For all other bank holding companies,

the minimum ratio is 4.0 percent. Higher

capital ratios could be required if warranted

by the particular circumstances or risk

profiles of individual banking organizations.

In all cases, bank holding companies 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.

* * * * *
55694 Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Proposed Rules

By order of the Board of Governors of the

Federal Reserve System, October 21, 1997.

William W. Wiles,

Secretary of the Board.

[FR Doc. 97–28271 Filed 10–24–97; 8:45 am]

BILLING CODE 6210–01–P