[Federal Register Volume 63, Number 107 (Thursday, June 4, 1998)]
[Rules and Regulations]
[Pages 30369-30370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14808]



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Rules and Regulations
                                                Federal Register
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Federal Register / Vol. 63, No. 107 / Thursday, June 4, 1998 / Rules 
and Regulations

[[Page 30369]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-0948]


Leverage Capital Standards: Tier 1 Leverage Ratio

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is amending its Tier 1 leverage capital standard for bank holding 
companies. The effect of this final rule is to simplify the Board's 
leverage capital standard for bank holding companies and to incorporate 
the market risk capital rule into the leverage standard.

EFFECTIVE DATE: June 30, 1998.

FOR FURTHER INFORMATION CONTACT: Norah Barger, Assistant Director (202/
452-2402), Barbara Bouchard, Manager (202/452-3072), T. Kirk Odegard, 
Financial Analyst (202/530-6225), Division of Banking Supervision and 
Regulation. For the hearing impaired only, Telecommunication Device for 
the Deaf (TDD), Diane Jenkins (202/452-3544), Board of Governors of the 
Federal Reserve System, 20th and C Streets, N.W., Washington, D.C. 
20551.

SUPPLEMENTARY INFORMATION:

Background

    On October 27, 1997, the Board issued a proposal to amend its risk-
based and Tier 1 leverage capital standards for bank holding companies 
(62 FR 55692). This proposal stemmed in large part from an interagency 
effort to streamline capital standards pursuant to section 303 of the 
Riegle Community Development and Regulatory Improvement Act of 1994 
(CDRI Act).<SUP>1</SUP> That Act required the Agencies to review their 
own regulations and written policies and to streamline those 
regulations where possible, and also required the Agencies to work 
jointly to make uniform all regulations and guidelines implementing 
common statutory or supervisory policies. To fulfill the section 303 
mandate, the Agencies reviewed their capital standards for banks and 
thrifts to identify areas where they had substantively different 
capital treatments or where streamlining was appropriate. As a result 
of these reviews, the Agencies proposed conforming amendments to their 
risk-based and leverage capital standards for banks and thrifts (62 FR 
55686) concurrently with the Board's proposal for bank holding 
companies on October 27, 1997.
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    \1\ The Board has worked with the Office of the Comptroller of 
the Currency, the Federal Deposit Insurance Corporation, and the 
Office of Thrift Supervision (collectively, the Agencies) to fulfill 
the CDRI Act section 303 mandate.
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    While not technically mandated under section 303 of the CDRI Act, 
the Board decided to amend the risk-based and leverage capital 
standards for bank holding companies to make them more uniform with 
those for banks and thrifts. The concurrently issued interagency and 
Board proposals were identical with respect to risk-based capital 
standards,<SUP>2</SUP> but differed with respect to Tier 1 leverage 
capital standards. Specifically, the Board's proposal for bank holding 
companies incorporated the Board's market risk capital rule, which 
became effective this year. The Agencies are currently working to 
complete a final rule based on the proposal for banks and thrifts. The 
Board intends to implement amendments to the risk-based capital 
standards for bank holding companies concurrently with the 
implementation of the interagency CDRI Act rulemaking for banks and 
thrifts. Because the Board's proposal to amend the leverage capital 
standard for bank holding companies differed from the interagency 
proposal for banks and thrifts, however, the Board has decided that it 
is not necessary to wait for the completion of the interagency 
rulemaking to finalize its rulemaking on the bank holding company 
leverage capital standard.
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    \2\ Both proposals would make uniform the risk-based capital 
treatment of construction loans on presold residential properties, 
loans secured by junior liens on 1- to 4-family residential 
properties, and investments in mutual funds.
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The Board's Proposal

    The Board's proposal established a minimum Tier 1 leverage ratio 
(Tier 1 capital to total assets) of 3.0 percent for all bank holding 
companies that are rated a composite ``1'' under the BOPEC <SUP>3</SUP> 
rating system or that have implemented the risk-based capital market 
risk measure set forth in the Board's capital adequacy guidelines (12 
CFR 225, Appendix E). All other bank holding companies must maintain a 
minimum Tier 1 leverage ratio of 4.0 percent. Higher capital ratios 
could be required for bank holding companies that had significant 
financial and/or operational weaknesses, had a high risk profile, or 
were undergoing or anticipating rapid growth. Prior to implementation 
of this final rule, bank holding companies that were not ``1'' rated 
under the BOPEC system were required to maintain a minimum leverage 
ratio of 3.0 percent, plus an additional 100 to 200 basis points. This 
proposal differed from the interagency proposal for banks in that the 
interagency proposal did not lower the minimum leverage capital 
standard for banks that had adopted the market risk capital rule.
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    \3\ The 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.
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Comments Received

    The Board received three public comments on the Tier 1 leverage 
component of the bank holding company proposal (two from bank holding 
companies and one from an industry trade group), all of which supported 
the proposal.<SUP>4</SUP> Two of these commenters supported immediate 
adoption of the proposal to reduce regulatory burden on bank holding 
companies engaged in significant trading activities. Moreover, these 
commenters encouraged the Board to discontinue entirely the use of the 
leverage ratio as an indicator of safety and soundness for such 
institutions. They argued that the leverage ratio was an inadequate 
measure of relative risk, and was unnecessary in light of strict 
international risk-based capital standards. Moreover, these commenters

[[Page 30370]]

argued that the existence of the leverage capital requirement placed 
domestic institutions at a competitive disadvantage relative to broker-
dealers and foreign banking organizations that were not subject to 
minimum leverage requirements. In the absence of elimination of the 
leverage ratio, however, these commenters supported the proposed 
reduction of the minimum required leverage ratio for bank holding 
companies that have adopted the market risk capital rule. These 
commenters also requested that the Agencies: (a) apply the leverage 
ratio reduction to banks that have adopted the market risk capital 
rule; and (b) exclude the leverage ratio requirement entirely from the 
prompt corrective action guidelines for banks.
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    \4\ In addition, a bank holding company commenting on the 
proposal for banks and thrifts expressed support for the Tier 1 
leverage component of the bank holding company proposal.
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Final Rule

    The Board has determined to adopt a final rule that is consistent 
with the original proposal with respect to the bank holding company 
leverage capital standard. The final rule provides that the minimum 
Tier 1 leverage ratio for the most highly-rated bank holding companies, 
as well as those that have implemented the market risk capital rule, is 
3.0 percent. The minimum leverage ratio for all other bank holding 
companies is 4.0 percent. The final rule also incorporates certain 
changes in wording to adjust for these new provisions. These stylistic 
changes are not intended to alter in any substantial way the other 
provisions of the leverage capital standard for bank holding companies. 
The Board acknowledges commenter concerns about the usefulness of the 
leverage ratio as a supervisory tool for those institutions that have 
adopted the market risk capital measure. Although further modifications 
to the leverage ratio are beyond the scope of this final rule, the 
Board may consider whether the leverage requirements should be further 
modified in the future.

Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Board has determined that this final rule would not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The 
effect of the final rule will be to reduce regulatory burden on bank 
holding companies by simplifying the Tier 1 leverage standard. The most 
highly-rated bank holding companies, as well as those that have adopted 
the market risk capital rule, will be required to meet a lower leverage 
capital standard under this rule. Accordingly, a regulatory flexibility 
analysis is not required.

Paperwork Reduction Act

    The Board has determined that the final 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.).

Deferred Effective Date

    The Board has determined that the delayed effective date 
requirements of the Administrative Procedure Act (5 U.S.C. 553) do not 
apply with respect to this final rule. A delayed effective date is not 
required with respect to agency action that relieves a restriction (5 
U.S.C. 553(d)(1)). Because this final rule would relieve a restriction 
on certain bank holding companies and would not impose any new 
restrictions on bank holding companies, the Board concludes that the 
requirements of section 553 do not apply to this final rule.

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 amended as set forth 
below.

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 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. The Board has established a minimum ratio of Tier 1 capital 
to total assets of 3.0 percent for strong bank holding companies 
(rated composite ``1'' under the BOPEC rating system of bank holding 
companies), and for bank holding companies that have implemented the 
Board's risk-based capital measure for market risk as set forth in 
appendices A and E of this part. For all other bank holding 
companies, the minimum ratio of Tier 1 capital to total assets is 
4.0 percent. Banking organizations with supervisory, financial, 
operational, or managerial weaknesses, as well as organizations that 
are anticipating or experiencing significant growth, are expected to 
maintain capital ratios well above the minimum levels. Moreover, 
higher capital ratios may be required for any bank holding company 
if warranted by its particular circumstances or risk profile. In all 
cases, bank holding companies should hold capital commensurate with 
the level and nature of the 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, May 29, 1998.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 98-14808 Filed 6-3-98; 8:45 am]
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