This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

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new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

26077 

Vol. 74, No. 103 

Monday, June 1, 2009 

1Published elsewhere in today’s issue. 

FEDERAL RESERVE SYSTEM 

12 CFR Part 225 

[Regulation Y; Docket No. R–1356] 

Capital Adequacy Guidelines; Small 

Bank Holding Company Policy 

Statement: Treatment of Subordinated 

Securities Issued to the United States 

Treasury Under the Emergency 

Economic Stabilization Act of 2008 

AGENCY: Board of Governors of the 

Federal Reserve System (Board). 

ACTION: Interim final rule with request 

for public comment. 

SUMMARY: The Board has adopted, and 

is seeking public comment on an 

interim final rule (interim final rule or 

rule) to support in a timely manner, the 

full implementation and acceptance of 

the capital purchase program of the U.S. 

Department of Treasury (Treasury) and 

promote the stability of banking 

organizations and the financial system. 

This rule permits bank holding 

companies that have made a valid 

election to be taxed under Subchapter S 

of Chapter 1 of the U.S. Internal 

Revenue Code (S–Corp BHCs) and bank 

holding companies organized in mutual 

form (Mutual BHCs) to include the full 

amount of any new subordinated debt 

securities issued to the Treasury under 

the capital purchase program 

announced by the Secretary of the 

Treasury on October 14, 2008 

(Subordinated Securities) in tier 1 

capital for purposes of the Board’s riskbased and leverage capital guidelines for 

bank holding companies, provided that 

the Subordinated Securities will count 

toward the limit on the amount of other 

restricted core capital elements 

includable in tier 1 capital; and allows 

bank holding companies that are subject 

to the Board’s Small Bank Holding 

Company Policy Statement and that are 

S–Corps or Mutual BHCs to exclude the 

Subordinated Securities from treatment 

as debt for purposes of the debt-toequity standard under the Small Bank 

Holding Company Policy Statement. 

DATES: The interim final rule will 

become effective on June 1, 2009. 

Comments must be received by July 1, 

2009. 

ADDRESSES: You may submit comments, 

identified by Docket No. R–1356, by any 

of the following methods: 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include docket number in the subject 

line of the message. 

• FAX: (202) 452–3819 or (202) 452– 

3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available from 

the Board’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

unless modified for technical reasons. 

Accordingly, your comments will not be 

edited to remove any identifying or 

contact information. Public comments 

may also be viewed electronically or in 

paper form in Room MP–500 of the 

Board’s Martin Building (20th and C 

Street, NW.) between 9 a.m. and 5 p.m. 

on weekdays. 

FOR FURTHER INFORMATION CONTACT: 

Norah M. Barger, Deputy Director, (202) 

452–2402, John F. Connolly, Manager, 

(202) 452–3621, or Michael J. Sexton, 

Manager, (202) 452–3009, Division of 

Banking Supervision and Regulation; or 

Kieran J. Fallon, Assistant General 

Counsel, (202) 452–5270, April C. 

Snyder, Counsel, (202) 452–3099, or 

Benjamin W. McDonough, Senior 

Attorney, (202) 452–2036, Legal 

Division; Board of Governors of the 

Federal Reserve System, 20th Street and 

Constitution Ave., NW., Washington, 

DC 20551. For the hearing impaired 

only, Telecommunication Device for the 

Deaf (TDD), (202) 263–4869. 

SUPPLEMENTARY INFORMATION: 

Capital Guidelines 

On October 3, 2008, President Bush 

signed into law the Emergency 

Economic Stabilization Act of 2008 

(EESA), Division A of Public Law No. 

110–343, 122 Stat. 3765 (2008). 

Pursuant to the authorities granted by 

the EESA, and in order to restore 

liquidity and stability to the financial 

system, on October 14, 2008, the 

Secretary of the Treasury announced a 

program within the Troubled Asset 

Relief Program (TARP) established by 

section 101 of the EESA to provide 

capital to eligible banks, bank holding 

companies and savings associations 

(collectively, banking organizations), as 

well as certain other financial 

institutions (the Capital Purchase 

Program or CPP). 

As of April 20, 2009, Treasury had 

invested approximately $198 billion 

under the CPP in newly issued senior 

perpetual preferred stock of banking 

organizations (Senior Perpetual 

Preferred Stock) that are not S–Corps or 

organized in mutual form. In order to 

support the CPP and promote the 

stability of banking organizations and 

the financial system through Treasury’s 

investments in Senior Perpetual 

Preferred Stock, the Board published an 

interim final rule on October 22, 2008 

(October interim final rule) permitting 

bank holding companies that issued 

Senior Perpetual Preferred Stock to the 

Treasury under the CPP to include all of 

the Senior Perpetual Preferred Stock in 

their tier 1 capital without limit. The 

Board today published a final rule on 

the capital treatment of the Senior 

Perpetual Preferred Stock substantially 

identical to the October interim final 

rule.1

Since the time that Treasury 

announced the terms of the Senior 

Perpetual Preferred Stock, Treasury has 

worked towards developing terms under 

which banking organizations organized 

as S–Corps or in mutual form could 

participate in the Capital Purchase 

Program. This is consistent with the 

goal of the CPP, which is to promote 

financial stability by offering capital 

support to all viable banking 

organizations regardless of their form of 

organization. 

S–Corp BHCs generally may not 

participate in the CPP through the 

issuance of Senior Perpetual Preferred 

26078 Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Rules and Regulations 

2On April 7, 2009, the Treasury announced a 

term sheet for top-tier Mutual BHCs under which 

these banking organizations issue subordinated debt 

to Treasury under the CPP on substantially the 

same terms as S–Corp BHCs. This interim final rule 

also accords the same capital treatment to 

Subordinated Securities issued by Mutual BHCs as 

those issued by S–Corp BHCs, and accordingly, any 

reference to a S–Corp BHC in the notice shall also 

be deemed to include a Mutual BHC unless the 

context otherwise requires. 

3Treasury has announced that it is considering 

re-opening the Capital Purchase Program for 

institutions with total assets under $500 million 

and raising—from 3 percent to 5 percent of riskweighted assets—the amount of capital instruments 

for which qualifying institutions can apply. 

4The interest payments on the Subordinated 

Securities will be tax deductible for shareholders of 

the issuing S–Corp and therefore this interest rate 

is economically comparable (assuming a 35 percent 

marginal tax rate) to the dividend payments on the 

Senior Preferred Stock, which are not tax 

deductible. 

5See section 7001 of the American Recovery and 

Reinvestment Act of 2009, Public Law No. 111–5, 

123 Stat. 115. 

6 12 CFR part 225, Appendices A and D. 

7See 12 CFR part 225, Appendix A, sections 

II.A.2. and II.A.2.d. 

8 12 CFR part 225, Appendix A, section 

II.A.1.c.iv. 9This interim final rule addresses only the 

regulatory capital treatment of Subordinated 

Securities. Details about the CPP, including 

eligibility requirements and the general terms and 

conditions of the Subordinated Securities and 

warrants associated with such securities, are 

available at http://www.financialstability.gov. 10See 12 CFR part 225, Appendix A, section 

II.A.1.c.ii.(2). 11SR 09–4, ‘‘Applying Supervisory Guidance and 

Regulations on the Payment of Dividends, Stock 

Redemptions, and Stock Repurchases at Bank 

Holding Companies,’’ March 27, 2009. 

12See 12 CFR part 225, Appendix A, sections 

II.(iii) and II.A.1.c.ii.(2). 

Stock because, under the Internal 

Revenue Code, S–Corps may not issue 

more than one class of equity security. 

Bank holding companies organized in 

mutual form also cannot issue Senior 

Perpetual Preferred Stock because of 

their mutual ownership structure. 

On January 14, 2009, Treasury 

announced the terms under which it 

will purchase newly-issued 

subordinated debt securities from S– 

Corps under the Capital Purchase 

Program. These terms are designed to 

facilitate S–Corp participation in the 

CPP in a manner that is as economically 

comparable as possible, consistent with 

the legal structure of S–Corp BHCs, the 

Board’s capital adequacy guidelines, 

and the Internal Revenue Code, to 

institutions that have issued Senior 

Perpetual Preferred Stock. In particular, 

Treasury will purchase from S–Corps 

that are eligible to participate in the CPP 

subordinated debt securities that rank 

senior to common stock but that are 

subordinated to the claims of depositors 

and other creditors (Subordinated 

Securities), unless such other claims are 

explicitly made pari passu or 

subordinated to the Subordinated 

Securities.2

As with other CPP participants, the 

aggregate amount of Subordinated 

Securities that may be issued by an S– 

Corp to Treasury must be (i) not less 

than one percent of the S–Corp’s riskweighted assets, and (ii) not more than 

the lesser of (A) $25 billion and (B) 

three percent of its risk-weighted 

assets.3 In connection with its purchase 

of the Subordinated Securities, the 

Treasury also will receive warrants to 

purchase, upon net settlement, a 

number of additional Subordinated 

Securities in an amount equal to 5 

percent of the amount of Subordinated 

Securities purchased on the date of 

investment. 

Similar to the Senior Perpetual 

Preferred Stock, Subordinated Securities 

issued pursuant to the CPP must 

include certain features designed to 

make them attractive to a wide array of 

generally sound S–Corp banking 

organizations and to encourage such 

companies to replace such securities 

with private capital once the financial 

markets return to more normal 

conditions. In particular, the 

Subordinated Securities will bear an 

initial interest rate of 7.7 percent per 

annum, which will increase to 13.8 

percent per annum five years after 

issuance.4 An S–Corp issuer may 

redeem the Subordinated Securities at 

100 percent of their issuance price, plus 

accrued and unpaid interest. In all 

cases, Treasury must consult with the 

appropriate Federal banking agency 

before a banking organization may 

redeem the Subordinated Securities.5 In 

addition, following the redemption of 

all outstanding Subordinated Securities, 

an S–Corp issuer shall have the right to 

repurchase any warrants for additional 

Subordinated Securities held by 

Treasury. 

Under the Board’s current risk-based 

and leverage capital adequacy 

guidelines for bank holding companies 

(Capital Guidelines),6 the Subordinated 

Securities would be ineligible for tier 1 

capital treatment because they are 

subordinated debt, but would be eligible 

for inclusion in tier 2 capital.7 However, 

the Subordinated Securities were 

purposefully structured to have features 

that are very close to those of the 

subordinated notes underlying trust 

preferred securities that qualify for tier 

1 capital as a restricted core capital 

element for bank holding companies 

(qualifying trust preferred securities). 

Like such junior subordinated notes, the 

Subordinated Securities would be 

deeply subordinated and junior to the 

claims of depositors and other creditors 

of the issuing bank holding company. 

Furthermore, as required of the junior 

subordinated notes underlying 

qualifying trust preferred securities, 

interest payable on the Subordinated 

Securities may be deferred by the 

issuing S–Corp BHC for up to 20 

quarters without creating an event of 

default. Principal and accrued interest 

on such securities would only become 

due and payable if interest is deferred 

more than 20 quarters or if the issuing 

S–Corp BHC enters bankruptcy, is 

liquidated, or if one or more of its major 

bank subsidiaries is put into 

receivership. Additionally, under the 

terms of the Capital Purchase Program, 

the Subordinated Securities have a 

maturity of 30 years, which is the same 

minimum term required for such junior 

subordinated notes.8

In addition, like the Senior Perpetual 

Preferred Stock, the Subordinated 

Securities will be issued to Treasury as 

part of a nationwide program, 

established by Treasury under the 

EESA, to provide capital to eligible 

banking organizations that are in 

generally sound financial condition in 

order to increase the capital available to 

banking organizations and thereby 

promote stability in the financial 

markets and the banking industry as a 

whole.9 Treasury will purchase these 

Subordinated Securities under special 

powers granted by Congress to the 

Secretary of the Treasury in the EESA to 

achieve these important public policy 

objectives. In addition, the terms of the 

Subordinated Securities issued under 

the CPP provide that redemption is 

subject to the approval of the Federal 

Reserve.10 In light of this provision, the 

Board recently specified in Federal 

Reserve SR letter 09–4 11 that any bank 

holding company that intends to redeem 

Subordinated Securities issued to 

Treasury under the CPP should first 

consult with Federal Reserve 

supervisory staff. After reviewing a 

request by a bank holding company to 

redeem Subordinated Securities, the 

Board may take such actions as are 

necessary or appropriate to restrict the 

bank holding company from redeeming 

such securities if the redemption would 

be inconsistent with the safety and 

soundness of the bank holding 

company.12 Each of these factors, and 

the features of the Subordinated 

Securities that are comparable to those 

of qualifying trust preferred securities, 

is important to the determinations made 

by the Board with respect to the 

appropriate regulatory capital treatment 

of the Subordinated Securities. 

For these reasons and in order to 

support the participation of S–Corp 

Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Rules and Regulations 26079 

13See 12 CFR part 225, Appendices A and D. 

14 12 CFR part 225, Appendix A, section II.A.1.b. 

15See 74 FR 12076 (March 23, 2009). 

16For example, in a 1992 policy statement on 

subordinated debt, the Board noted: ‘‘Although 

payments on debt whose rates increase over time 

on the surface may not appear to be directly linked 

to the financial condition of the issuing 

organization, such debt (sometimes referred to as 

expanding or exploding rate debt) has a strong 

potential to be credit sensitive in substance. 

Organizations whose financial condition has 

strengthened are more likely to be able to refinance 

the debt at a rate lower than that mandated by the 

preset increase, whereas institutions whose 

condition has deteriorated are less likely to be able 

to do so. Moreover, just when these latter 

institutions would be in the most need of 

conserving capital, they would be under strong 

pressure to redeem the debt as an alternative to 

paying higher rates and, thus, would accelerate 

depletion of their resources.’’ See 12 CFR 

§ 250.166(b)(4) at n. 4. Furthermore, the Board has 

not permitted bank holding companies to include 

capital instruments in tier 1 capital if they include 

dividend rate step-ups. 

BHCs in the Capital Purchase Program, 

promote the stability of banking 

organizations and the financial system, 

and help banking organizations meet the 

credit needs of creditworthy customers, 

the Board has adopted this interim final 

rule to permit S–Corp BHCs that issue 

new Subordinated Securities to the 

Treasury under the TARP to include the 

full amount of such securities in tier 1 

capital for purposes of the Board’s 

Capital Guidelines.13

The Board is allowing the full amount 

of the Subordinated Securities to count 

in tier 1 capital to provide similar 

regulatory capital treatment to the 

instruments issued by S–Corp BHCs and 

other bank holding companies under the 

Capital Purchase Program and in light of 

the special and unique public policy 

objectives of the CPP. However, the 

interim final rule requires an S–Corp 

BHC to take into account the amount of 

Subordinated Securities in determining 

the amount of other restricted core 

capital elements the company may 

include in its tier 1 capital.14 Thus, for 

example, if the amount of Subordinated 

Securities issued by an S–Corp BHC 

equals or exceeds 25 percent of the 

company’s tier 1 capital elements, the 

company may not include any other 

currently outstanding or future 

restricted core capital elements in tier 1 

capital, and any such restricted core 

capital elements in the company’s tier 1 

capital elements could only be included 

in tier 2 capital. This approach is 

designed to give the Subordinated 

Securities tier 1 treatment that is 

equivalent to that provided Senior 

Perpetual Preferred Stock, while 

preventing a S–Corp BHC’s tier 1 capital 

from becoming dominated by 

instruments that are, or have features 

similar to, restricted core capital 

elements. The following examples 

provide an explanation of how this 

computation will operate; each example 

assumes that the bank holding 

company’s limit on inclusion of 

restricted core capital elements in tier 1 

capital is $25 million. 

• Example 1. The bank holding 

company has no existing restricted core 

capital elements and issues $30 million 

of Subordinated Securities to the 

Treasury. The bank holding company 

may include the full $30 million in tier 

1 capital, but may not include any 

additional restricted core capital 

elements that it issues in tier 1 capital 

unless its limit expands. 

• Example 2. The bank holding 

company has $10 million of previously 

issued trust preferred securities 

included in tier 1 capital and issues $30 

million of Subordinated Securities. The 

$30 million of Subordinated Securities 

is includable in tier 1 capital, and the 

$10 million of trust preferred securities 

is includable in tier 2 capital. The bank 

holding company may not include the 

trust preferred securities in tier 1 

capital, because the $30 million of 

Subordinated Securities exceeds the 

bank holding company’s $25 million 

limit on inclusion of restricted core 

capital elements in tier 1 capital. 

• Example 3. The bank holding 

company has no restricted core capital 

elements and issues $20 million of 

Subordinated Securities to Treasury. 

The $20 million of Subordinated 

Securities is includable in tier 1 capital, 

and the bank holding company may 

issue an additional $5 million of other 

restricted core capital elements (e.g., 

trust preferred securities or cumulative 

perpetual preferred securities) and 

include them in its tier 1 capital. 

The Board expects S–Corp BHCs that 

issue Subordinated Securities, like all 

other bank holding companies, to hold 

capital commensurate with the level 

and nature of the risks to which they are 

exposed. In addition, the Board expects 

banking organizations that issue 

Subordinated Securities to 

appropriately incorporate the 

obligations of the Subordinated 

Securities into the organization’s 

liquidity and capital funding plans. 

The Board notes that, as a matter of 

prudential policy and practice, it 

generally has not allowed subordinated 

debt to be included in tier 1 capital. 

Furthermore, the Board has restricted 

the amount of qualifying trust preferred 

securities that may be included in core 

capital, along with other restricted core 

capital elements, to an aggregate total 

that may not exceed 25 percent of the 

sum of all core capital elements, 

including restricted core capital 

elements (which will be computed net 

of goodwill less any associated deferred 

tax liability as of March 31, 2011).15 The 

Board has long expressed concern about 

banking organizations including debt 

instruments of any kind in tier 1 capital 

given the contractual obligations they 

place on the issuing banking 

organization and consequent limited 

ability to absorb losses. The Board also 

expressed concerns with the inclusion 

in tier 1 capital of instruments that 

provide for a step-up in dividend or 

coupon rates.16 In light of these 

concerns, the Board previously has 

declined to allow subordinated debt to 

be included in tier 1 capital and has 

restricted the amount of qualifying trust 

preferred securities that may be 

included in tier 1 capital. The Board 

remains concerned that instruments 

with debt or debt-like features have 

limited ability to absorb losses. 

However, as discussed above, 

issuance of the Subordinated Securities 

is consistent with a strong public policy 

objective, which is to increase the 

capital available to banking 

organizations generally in the current 

environment and thereby promote 

stability in the financial markets and the 

banking industry as a whole and 

facilitate the ability of banking 

organizations to meet the needs of 

creditworthy households, businesses, 

and other customers. In addition, the 

Board notes that other terms and public 

policy considerations related to the 

Subordinated Securities mitigate 

supervisory concerns. As with 

qualifying trust preferred securities, the 

Subordinated Securities allow the 

issuing bank holding company to defer 

interest payments for five years. 

Furthermore, under the terms of the 

CPP, issuers of this instrument generally 

will not be allowed to repurchase equity 

securities or trust preferred securities 

for ten years after the issuance of the 

Subordinated Securities or increase 

common dividends for three years after 

issuance without the consent of the 

Treasury. These restrictions promote in 

an important way the overall safety and 

soundness of the issuer. Moreover, as 

previously discussed, Treasury must 

consult with the Board before an S–Corp 

BHC may redeem the Subordinated 

Securities. These features, viewed in 

light of the unique, temporary, and 

extraordinary nature of the CPP, 

countervail in many respects the 

Board’s concerns with regard to the 

subordinated debt nature of the 

securities. As previously noted, the 

Board also would retain general 

26080 Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Rules and Regulations 

17 12 CFR part 225, Appendix C. 

18 12 CFR part 225, Appendix C, section 2, n. 3. 

19See 5 U.S.C. 603(a). 

20See 13 CFR 121.201. 

supervisory authority with respect to 

any S–Corp BHC. 

In light of the instrument- and 

circumstances-specific nature of the 

Board’s determination, the Board 

strongly cautions bank holding 

companies against construing the 

inclusion of the Subordinated Securities 

in tier 1 capital as in any way detracting 

from the Board’s longstanding stance 

regarding the unacceptability of 

including other forms of subordinated 

debt in tier 1 capital. 

Small Bank Holding Company Policy 

Statement 

In order to maintain competitive 

equality between large and small bank 

holding companies, the Board also is 

amending its Small Bank Holding Policy 

Statement (Policy Statement) to allow 

bank holding companies that are subject 

to the Policy Statement and that are S– 

Corp BHCs to exclude the Subordinated 

Securities from debt for purposes of the 

Policy Statement.17 Generally, bank 

holding companies with less than $500 

million in consolidated assets (small 

bank holding companies) are not subject 

to the Capital Guidelines and instead 

are subject to the Policy Statement. The 

Policy Statement limits the ability of a 

small bank holding company to pay 

dividends if its debt-to-equity ratio 

exceeds certain limits. However, the 

Policy Statement currently provides that 

small bank holding companies may 

exclude from debt an amount of 

subordinated debt associated with 

qualifying trust preferred securities up 

to 25 percent of the bank holding 

company’s equity (as defined in the 

Policy Statement), less goodwill on the 

parent company’s balance sheet, in 

determining compliance with the 

requirements of certain provisions of the 

Policy Statement.18 The practical effect 

of excluding the Subordinated 

Securities from debt for purposes of the 

Policy Statement is to allow issuance of 

Subordinated Securities by small bank 

holding companies without exceeding 

the debt-to-equity ratio standard that 

would disallow the payment of 

dividends by such small bank holding 

companies. In turn, this allows small 

bank holding companies that issue 

Subordinated Securities to downstream 

Treasury’s investment in the form of the 

Subordinated Securities as additional 

common stock to subsidiary depository 

institutions (that counts as tier 1 capital 

of the depository institutions) and to 

pay dividends to the small bank holding 

company’s shareholders to the extent 

appropriate and permitted by the 

Federal Reserve. 

Because, as previously discussed, the 

Subordinated Securities and the junior 

subordinated notes underlying 

qualifying trust preferred securities have 

very similar features, and to facilitate 

the participation of small bank holding 

companies in the Capital Purchase 

Program, the Board has adopted this 

interim final rule to allow small bank 

holding companies that are S–Corp 

BHCs to exclude the Subordinated 

Securities from the definition of debt for 

purposes of the debt-to-equity ratio 

standard under the Policy Statement. 

The factors and considerations 

discussed above apply equally to the 

Board’s decision to modify the Policy 

Statement in this manner. 

The Board solicits comments on all 

aspects of the rule. 

Administrative Procedure Act 

Pursuant to sections 553(b) and (d) of 

the Administrative Procedure Act (5 

U.S.C. 553(b) and (d)), the Board finds 

that there is good cause for issuing this 

interim final rule and making the rule 

effective on June 1, 2009, and that it is 

impracticable, unnecessary, or contrary 

to the public interest to issue a notice 

of proposed rulemaking and provide an 

opportunity to comment before the 

effective date. The Board has adopted 

the rule in light of, and to help address, 

the continuing unusual and exigent 

circumstances in the financial markets. 

The rule will allow S–Corp BHCs to 

immediately include the full amount of 

Subordinated Securities they issue to 

Treasury under the CPP in tier 1 capital. 

This will help promote stability in the 

banking system and financial markets. 

The rule also will allow small bank 

holding companies that are S–Corp 

BHCs to exclude the Subordinated 

Securities from the definition of debt for 

purposes of the debt-to-equity ratio 

standard of the Policy Statement. 

The Board believes it is important to 

provide S–Corp BHCs immediately with 

guidance concerning the capital 

treatment of the Subordinated Securities 

so that they may make appropriate 

judgments concerning the extent of their 

participation in the CPP and to provide 

S–Corp BHCs with immediate certainty 

concerning the regulatory capital 

treatment of the Subordinated Securities 

for capital planning purposes. (Treasury 

recently completed the documentation 

for issuances of the Subordinated 

Securities by S–Corp BHCs.) The Board 

is soliciting comment on all aspects of 

the rule and will make such changes 

that it considers appropriate or 

necessary after review of any comments 

received. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act, 5 

U.S.C. 601 et seq. (RFA), generally 

requires that an agency prepare and 

make available for public comment an 

initial regulatory flexibility analysis in 

connection with a notice of proposed 

rulemaking.19 Under regulations issued 

by the Small Business Administration,20

a small entity includes a bank holding 

company with assets of $175 million or 

less (a small bank holding company). As 

of December 31, 2008, there were 

approximately 2,586 small bank holding 

companies. 

As a general matter, the Capital 

Guidelines apply only to a bank holding 

company that has consolidated assets of 

$500 million or more. Therefore, the 

changes to the Capital Guidelines will 

not affect small bank holding 

companies. In addition, the rule would 

reduce burden and benefit small bank 

holding companies by allowing them to 

exclude the Subordinated Securities 

from treatment as debt for purposes of 

the debt-to-equity standard under the 

Policy Statement. This treatment is 

similar to the current treatment of junior 

subordinated notes underlying trust 

preferred securities under the Policy 

Statement. Furthermore, the Board 

estimates that the changes to the Policy 

Statement will affect less than one 

percent of small bank holding 

companies. Accordingly, the Board 

certifies that this interim final rule does 

not have a significant impact on a 

substantial number of small bank 

holding companies. 

Paperwork Reduction Act 

In accordance with the requirements 

of the Paperwork Reduction Act of 1995 

(44 U.S.C. 3506), the Board has 

reviewed the interim final rule to assess 

any information collections. There are 

no collections of information as defined 

by the Paperwork Reduction Act in the 

interim final rule. 

Solicitation of Comments on Use of 

Plain Language 

Section 722 of the Gramm-LeachBliley Act, Public Law No. 106–102, 

requires the Federal banking agencies to 

use plain language in all proposed and 

final rules published after January 1, 

2000. The Board invites comment on 

how to make the interim final rule 

easier to understand. For example: 

• Have we organized the material to 

suit your needs? If not, how could the 

rule be more clearly stated? 

Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Rules and Regulations 26081 

• Are the requirements in the rule 

clearly stated? If not, how could the rule 

be more clearly stated? 

• Do the regulations contain technical 

language or jargon that is not clear? If 

so, which language requires 

clarification? 

• Would a different format (grouping 

and order of sections, use of headings, 

paragraphing) make the regulation 

easier to understand? If so, what 

changes would make the regulation 

easier to understand? 

• Would more, but shorter, sections 

be better? If so, which sections should 

be changed? 

• What else could we do to make the 

regulation easier to understand? 

List of Subjects in 12 CFR Part 225 

Administrative practice and 

procedure, Banks, Banking, Federal 

Reserve System, Holding companies, 

Reporting and recordkeeping 

requirements, Securities. 

Board of Governors of the Federal 

Reserve System 

12 CFR Chapter II 

Authority and Issuance 

■ For the reasons stated in the preamble, 

the Board of Governors of the Federal 

Reserve System amends part 225 of 

chapter II of title 12 of the Code of 

Federal Regulations as follows: 

PART 225—BANK HOLDING 

COMPANIES AND CHANGE IN BANK 

CONTROL (REGULATION Y) 

■ 1. The authority citation for part 225 

continues 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, 3906, 

3907, and 3909; 15 U.S.C. 1681s, 1681w, 

6801 and 6805. 

■ 2. Appendix A to part 225 is amended 

as set forth below: 

■ a. In section II.A.1.a.iv., remove ‘‘and’’ 

from the end of paragraph (3), remove 

the period from the end of paragraph 

(4), add a semicolon and ‘‘and’’ to the 

end of subparagraph (4), and add a new 

paragraph (5) to read as follows; and 

■ b. In section II.A.1.b.i., amend 

paragraph (1) by adding the following 

sentence to the end of paragraph (1) to 

read as follows: 

Appendix A to Part 225—Capital 

Adequacy Guidelines for Bank Holding 

Companies: Risk-Based Measure 

II. * * * 

A. * * * 

1. * * * 

a. * * * 

iv. * * * 

(5) Subordinated debentures issued to the 

Treasury under the TARP (TARP 

Subordinated Securities) established by the 

EESA by a bank holding company that has 

made a valid election to be taxed under 

Subchapter S of Chapter 1 of the U.S. Internal 

Revenue Code (S–Corp BHC) or by a bank 

holding company organized in mutual form 

(Mutual BHC). 

b. * * * 

i. * * * 

(1) * * * Notwithstanding the foregoing, 

the full amount of TARP Subordinated 

Securities issued by an S–Corp BHC or 

Mutual BHC may be included in its tier 1 

capital, provided that the banking 

organization must include the TARP 

Subordinated Securities in restricted core 

capital elements for the purposes of 

determining the aggregate amount of other 

restricted core capital elements that may be 

included in tier 1 capital in accordance with 

this section. 

* * * * * 

■ 3. In appendix C to part 225, revise 

footnote 3 in section 2 to read as 

follows: 

Appendix C to Part 225—Small Bank 

Holding Company Policy Statement 

* * * * * 

2. * * * 

3 The term debt, as used in the ratio of debt 

to equity, means any borrowed funds 

(exclusive of short-term borrowings that arise 

out of current transactions, the proceeds of 

which are used for current transactions), and 

any securities issued by, or obligations of, the 

holding company that are the functional 

equivalent of borrowed funds. 

Subordinated debt associated with trust 

preferred securities generally would be 

treated as debt for purposes of paragraphs 

2.C., 3.A., 4.A.i., and 4.B.i. of this policy 

statement. A bank holding company, 

however, may exclude from debt an amount 

of subordinated debt associated with trust 

preferred securities up to 25 percent of the 

holding company’s equity (as defined below) 

less goodwill on the parent company’s 

balance sheet in determining compliance 

with the requirements of such paragraphs of 

the policy statement. In addition, a bank 

holding company subject to this policy 

statement that has not issued subordinated 

debt associated with a new issuance of trust 

preferred securities after December 31, 2005, 

may exclude from debt any subordinated 

debt associated with trust preferred securities 

until December 31, 2010. Bank holding 

companies subject to this policy statement 

also may exclude from debt until December 

31, 2010, any subordinated debt associated 

with refinanced issuances of trust preferred 

securities originally issued on or prior to 

December 31, 2005, provided that the 

refinancing does not increase the bank 

holding company’s outstanding amount of 

subordinated debt. Subordinated debt 

associated with trust preferred securities will 

not be included as debt in determining 

compliance with any other requirements of 

this policy statement. 

In addition, notwithstanding any other 

provision of this policy statement and for 

purposes of compliance with paragraphs 2.C., 

3.A., 4.A.i., and 4.B.i. of this policy 

statement, both a bank holding company that 

is organized in mutual form and a bank 

holding company that has made a valid 

election to be taxed under Subchapter S of 

Chapter 1 of the U.S. Internal Revenue Code 

may exclude from debt subordinated 

debentures issued to the United States 

Department of the Treasury under the 

Troubled Asset Relief Program established by 

the Emergency Economic Stabilization Act of 

2008, Division A of Pub. L. No. 110–343, 122 

Stat. 3765 (2008). 

The term equity, as used in the ratio of debt 

to equity, means the total stockholders’ 

equity of the bank holding company as 

defined in accordance with generally 

accepted accounting principles. In 

determining the total amount of stockholders’ 

equity, the bank holding company should 

account for its investments in the common 

stock of subsidiaries by the equity method of 

accounting. 

Ordinarily the Board does not view 

redeemable preferred stock as a substitute for 

common stock in a small bank holding 

company. Nevertheless, to a limited degree 

and under certain circumstances, the Board 

will consider redeemable preferred stock as 

equity in the capital accounts of the holding 

company if the following conditions are met: 

(1) The preferred stock is redeemable only at 

the option of the issuer; and (2) the debt to 

equity ratio of the holding company would 

be at or remain below .30:1 following the 

redemption or retirement of any preferred 

stock. Preferred stock that is convertible into 

common stock of the holding company may 

be treated as equity. 

* * * * * 

By order of the Board of Governors of the 

Federal Reserve System, May 21, 2009. 

Robert deV. Frierson, 

Deputy Secretary of the Board. 

[FR Doc. E9–12626 Filed 5–29–09; 8:45 am] 

BILLING CODE 6210–02–P 

FEDERAL RESERVE SYSTEM 

12 CFR Part 225 

[Regulation Y; Docket No. R–1336] 

Capital Adequacy Guidelines: 

Treatment of Perpetual Preferred Stock 

Issued to the United States Treasury 

Under the Emergency Economic 

Stabilization Act of 2008 

AGENCY: Board of Governors of the 

Federal Reserve System (Board). 

ACTION: Final rule. 

SUMMARY: The Board is adopting a final 

rule to allow bank holding companies 

that have issued senior perpetual 

preferred stock to the U.S. Department 

of the Treasury under the capital 

purchase and other programs 

established by the Secretary of the 

Treasury under the Emergency