[Federal Register Volume 61, Number 87 (Friday, May 3, 1996)]
[Rules and Regulations]
[Pages 19805-19807]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10891]



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Rules and Regulations
                                                Federal Register
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to and codified in the Code of Federal Regulations, which is published 
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Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Rules and 
Regulations

[[Page 19805]]



FEDERAL RESERVE SYSTEM

12 CFR Part 250

[Docket No. R-0902]


Transactions With Affiliates

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is adopting a definition of capital stock and 
surplus for purposes of section 23A of the Federal Reserve Act that 
conforms to the definition of unimpaired capital and unimpaired surplus 
used by the Board in calculating the limits in Regulation O for insider 
lending and by the Office of the Comptroller of the Currency (OCC) in 
calculating the limit on loans by a national bank to a single borrower. 
The final rule will reduce the burden for member banks and other 
insured depository institutions monitoring lending to their affiliates.

EFFECTIVE DATE: July 1, 1996.

FOR FURTHER INFORMATION CONTACT: Pamela G. Nardolilli, Senior Attorney 
(202/452-3289) Legal Division, or Barbara Bouchard, Supervisory 
Financial Analyst (202/452-3072), Division of Banking Supervision and 
Regulation, Board of Governors of the Federal Reserve System. For users 
of the Telecommunications Device for the Deaf (TDD) only, please 
contact Dorothea Thompson (202/452-3544).

SUPPLEMENTARY INFORMATION: Section 23A of the Federal Reserve Act, 12 
U.S.C. 371c, regulates lending and asset purchase transactions between 
insured depository institutions and their affiliates. In general, 
section 23A prohibits an insured depository institution from engaging 
in covered transactions (which include extensions of credit and 
purchases of assets) with any single affiliate in excess of 10 percent 
of the institution's capital stock and surplus. A 20 percent aggregate 
limit is imposed on the total amount of covered transactions by a bank 
with all affiliates. Under section 23A, all extensions of credit 
between an insured depository institution and its affiliate must meet 
certain collateral requirements. Section 23A also prohibits an insured 
depository institution from purchasing any low-quality assets from an 
affiliate and requires that all transactions with an affiliate must be 
conducted on terms that are consistent with safe and sound banking 
practices. Although section 23A, by its terms, applies only to member 
banks, the Federal Deposit Insurance Act applies section 23A to all 
nonmember insured banks (12 U.S.C. 1828 (j)), and the Home Owners' Loan 
Act applies section 23A to savings associations (12 U.S.C. 1468).
    Section 23A does not include an explicit definition of ``capital 
stock and surplus.'' A 1964 Board interpretation refers to the 
definition of capital as ``the amount of unimpaired common stock plus 
the amount of preferred stock outstanding and unimpaired'' but 
explicitly excludes debt-like instruments from the definition of 
capital and surplus. 12 CFR 250.161. In the interpretation, the Board 
recognized that certain notes and debentures could be considered as 
capital or capital stock for purposes of membership in the Federal 
Reserve System, but concluded that for purposes of certain Federal 
Reserve Act limitations and requirements, such instruments could not be 
regarded as part of either capital or capital stock. A subsequent Board 
interpretation issued in 1971 states that capital stock and surplus, as 
used in provisions of the Federal Reserve Act, includes undivided 
profits, which are defined to include reserves for loan losses and 
valuation reserves for securities. 12 CFR 250.162. As a practical 
matter, this definition of capital and surplus has been implemented as 
total equity capital and the allowance for loan and lease losses (ALLL) 
as set forth in the bank's Report of Condition and Income (Call 
Report).

Revisions to the Definition of Capital Stock and Surplus

    In February 1995, the OCC amended its regulation governing the 
amount a national bank may lend to a single counterparty, and revised 
the definition of unimpaired capital and unimpaired surplus upon which 
this lending limit was based. 60 FR 8526 (February 15, 1995) (to be 
codified at 12 CFR 32.2(b)). In June 1995, the Board amended its 
Regulation O, 60 FR 31053 (June 13, 1995) (to be codified at 12 CFR 
215.2), to revise the definition of capital used to limit loans to 
insiders, to a definition that is consistent with that used for 
purposes of the OCC's single borrower lending limits. The Board took 
this action to eliminate discrepancies in the definitions of capital 
used for different lending limit purposes and to reduce regulatory 
burden for banks monitoring lending to their insiders. Under the 
revised OCC regulation, unimpaired capital and unimpaired surplus is 
defined as Tier 1 and Tier 2 capital, as calculated under the risk-
based capital guidelines, plus the balance of the allowance for loan 
and lease losses (ALLL) excluded from Tier 2 capital.<SUP>1
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    \1\  Under the banking agencies' risk-based capital guidelines, 
Tier 1 capital includes common equity, some noncumulative perpetual 
preferred stock and related surplus, and minority interest in equity 
accounts of consolidated subsidiaries. Tier 2 capital includes the 
ALLL up to 1.25 percent of the bank's weighted risk assets, 
perpetual preferred stock and related surplus, hybrid capital 
instruments, and certain types of subordinated debt.
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    On December 4, 1995, the Board proposed adopting a definition of 
``capital stock and surplus'' for purposes of section 23A that is the 
same as the capital definitions used for Regulation O and the national 
bank lending limits. (60 FR 62050 (1995)). Unlike the current capital 
definition for section 23A, the revised definition will permit banks to 
include in capital the bank's subordinated debt that qualifies for 
inclusion in Tier 2 capital. On the other hand, unlike equity capital, 
Tier 1 capital does not include securities revaluation reserves, in 
particular, gains and losses on available-for-sale securities, which 
under Statement of Financial Accounting Standards Number 115 (FAS 115) 
are considered a component of equity capital. Tier 1 capital also 
excludes certain intangible assets, most notably goodwill. Based on 
June 1995 Call Report data, the revised definition will decrease the 
limits for transactions with affiliates for a majority of banks. 
Overall, it is estimated that the revised definition of capital and 
surplus will result in a change for most banks of 5 percent or less 
from their current limit, although a few community and

[[Page 19806]]

mid-sized banks may experience substantial changes principally due to 
large gains or losses on available-for-sale securities.
    Notwithstanding the decrease for many banks in the amount of 
capital that will be used to calculate their section 23A limit under 
the revised definition, the Board believes that, over all, revising the 
definition will be beneficial for all insured depository institutions 
for two reasons. First, the revised definition will provide consistency 
in the capital definition used for section 23A, Regulation O, and the 
national bank lending limits. Second, the revised definition will 
result in a more stable limit over time than the current definition 
because the revised definition excludes revaluation gains and losses on 
available-for-sale securities, a component of equity capital that tends 
to be volatile.

Public Comment

    The Board received seventeen comments regarding its proposed 
definition of capital stock and surplus. The Board received eight 
comments from Reserve Banks, six comments from commercial banking 
organizations and three comments from trade associations. All the 
commenters supported the Board's efforts to reduce regulatory burden 
and provide greater uniformity in defining capital for regulatory 
purposes. Seven commenters also noted that the proposed definition will 
provide greater stability over time because the proposed definition 
excludes the gains and losses on available-for-sale securities.
    Several commenters questioned whether an institution will be in 
violation of section 23A if, as a result of the change in the 
definition of capital stock and surplus, the institution's amount of 
outstanding covered transactions exceeded the quantitative limits of 
section 23A. In general, the Board believes that a change in 
circumstances, such as a change in the capital definition, should not 
adversely affect existing transactions that were entered into in good 
faith by an insured depository institution and its affiliate. In the 
past, when an institution exceeded its quantitative limit because of a 
change in circumstances, the Board has allowed the insured depository 
institution to retain the nonconforming transaction, but has not 
allowed the institution to engage in additional covered transactions 
until the institution was in compliance with section 23A. Accordingly, 
based on this precedent, the Board has determined that any institution 
whose outstanding covered transactions with its affiliates exceed its 
quantitative limits as a result of this rule will be allowed to retain 
those transactions. However, these institutions are not allowed to 
engage in any additional covered transactions with any affiliate, 
including any renewal transactions, until the institution's outstanding 
amount of covered transactions is in compliance with the institution's 
new quantitative limit.
    The Board also amends 12 CFR 250.161 and 12 CFR 250.162 to delete 
the reference to section 23A to reflect the change.

Determination of Effective Date

    Because the final rule adjusts a requirement on insured depository 
institutions, the final rule will become effective July 1, 1996, the 
first day of the calendar quarter after the date of the final rule's 
publication. See 12 U.S.C. 4802(b).

Final Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (the ``Act'') 
requires an agency to publish a final regulatory flexibility analysis 
with any final rulemaking. The Act requires that the regulatory 
flexibility analysis of a final rule provide a description of the 
reasons why the action by the agency is being considered and a 
statement of the objectives of, and legal basis for, the rule and a 
summary of the issues raised by the public comments received, the 
agency assessment thereof, and any change made in response thereto. 
This information is contained in the supplementary information above. 
No significant alternatives to the final rule were considered by the 
agency.
    Another requirement for the regulatory flexibility analysis is a 
description of, and where feasible, an estimate of the number of small 
entities to which the proposed rule will apply. The final rule will 
apply to all insured depository institutions, regardless of size. The 
Board has determined that its final rule will impose no additional 
reporting or recordkeeping requirements, and that there are no relevant 
federal rules that duplicate, overlap, or conflict with the proposed 
rule. In addition, the final rule is not expected to have a significant 
economic impact on small institutions. Instead, the final rule is 
expected to relieve the regulatory burden on the majority of insured 
depository institutions.

Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501 et seq.; 5 CFR 1320 Appendix A.1.), the Board 
reviewed the final rule under authority delegated to the Board by the 
Office of Management and Budget. No collections of information pursuant 
to the Paperwork Reduction Act are contained in the final rule.

List of Subjects in 12 CFR Part 250

    Credit, Federal Reserve System.

    For the reasons set forth in the preamble, the Board amends 12 CFR 
part 250 as set forth below:

PART 250--MISCELLANEOUS INTERPRETATIONS

    1. The authority citation for part 250 will continue to read as 
follows:

    Authority: 12 U.S.C. 248(i) and 371c(e).


Sec. 250.161  [Amended]

    2. In Sec. 250.161 paragraph (d) is amended by removing the words 
``loans to affiliates (12 U.S.C. 371c),'' in the first sentence.


Sec. 250.162   [Amended]

    3. In Sec. 250.162, paragraph (a) is amended by removing the words 
``Loans to affiliates (12 U.S.C. 371c), purchases'' in the first 
sentence and adding ``Purchases'' in their place.
    4. A new Sec. 250.242 is added to read as follows:


Sec. 250.242   Section 23A of the Federal Reserve Act--definition of 
capital stock and surplus.

    (a) An insured depository institution's capital stock and surplus 
for purposes of section 23A of the Federal Reserve Act (12 U.S.C. 371c) 
is:
    (1) Tier 1 and Tier 2 capital included in an institution's risk-
based capital under the capital guidelines of the appropriate Federal 
banking agency, based on the institution's most recent consolidated 
Report of Condition and Income filed under 12 U.S.C. 1817(a)(3); and
    (2) The balance of an institution's allowance for loan and lease 
losses not included in its Tier 2 capital for purposes of the 
calculation of risk-based capital by the appropriate Federal banking 
agency, based on the institution's most recent consolidated Report of 
Condition and Income filed under 12 U.S.C. 1817(a)(3).
    (b) For purposes of this section, the terms appropriate Federal 
banking agency and insured depository institution are defined as those 
terms are defined in section 3 of the Federal Deposit Insurance Act, 12 
U.S.C. 1813.


[[Page 19807]]


    By order of the Board of Governors of the Federal Reserve 
System, April 26, 1996.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 96-10891 Filed 5-2-96; 8:45 am]
BILLING CODE 6210-01-P