This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

10212

Vol. 66, No. 31

Wednesday, February 14, 2001

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket No. 01–03]

RIN 1557–AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R–1097]

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 325

RIN 3064–AC47

Capital; Leverage and Risk-Based

Capital Guidelines; Capital Adequacy

Guidelines; Capital Maintenance:

Nonfinancial Equity Investments

AGENCIES: Office of the Comptroller of

the Currency (OCC); Board of Governors

of the Federal Reserve System (Board);

and Federal Deposit Insurance

Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

SUMMARY: The OCC, Board, and FDIC

(collectively, the agencies) are

requesting comment on a proposed rule

that would establish special minimum

regulatory capital requirements for

equity investments in nonfinancial

companies. The proposed capital

treatment would apply symmetrically to

equity investments of banks and bank

holding companies. As described in

detail below, the proposal would apply

a series of marginal capital charges on

covered equity investments that

increase with the level of a banking

organization’s overall exposure to equity

investments relative to the

organization’s Tier 1 capital. The

proposal replaces the capital proposal

issued for public comment by the Board

in March 2000 (Docket No. R–1067).

DATES: Comments must be received by

April 16, 2001.

ADDRESSES:

OCC: Comments should be addressed

to Docket No. 01–03, Communications

Division, Third Floor, Office of the

Comptroller of the Currency, 250 E

Street, SW., Washington, DC 20219. In

addition, comments may be sent by

facsimile transmission to fax number

(202) 874–5274 or by electronic mail to

regs.comments@occ.treas.gov.

Comments will be available for

inspection and photocopying at the

same location.

Board: Comments directed to the

Board should refer to Docket No. R–

1097 and may be mailed to Ms. Jennifer

J. Johnson, Secretary, Board of

Governors of the Federal Reserve

System, 20th Street and Constitution

Avenue, NW., Washington, DC 20551 or

mailed electronically to

regs.comments@federalreserve.gov.

Comments addressed to Ms. Johnson

also may be delivered to Room B–2222

of the Eccles Building between 8:45 a.m.

and 5:15 p.m., weekdays, or the security

control room in the Eccles Building

courtyard on 20th Street, NW (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.

FDIC: Written comments should be

addressed to Robert E. Feldman,

Executive Secretary, Attention:

Comments/OES, Federal Deposit

Insurance Corporation, 550 17th Street,

NW, Washington, DC 20429. Comments

may be hand delivered to the guard

station at the rear of the 550 17th Street

Building (located on F Street) on

business days between 7 a.m. and 5 p.m.

Send facsimile transmissions to fax

number (202) 898–3838. Comments may

be submitted electronically to

comments@fdic.gov. Comments may be

inspected and photocopied in the FDIC

Public Information Center, Room 100,

801 17th Street, NW., Washington, DC

20429, between 9 a.m. and 4:30 p.m. on

business days.

FOR FURTHER INFORMATION CONTACT:

OCC: Tommy Snow, Director, Capital

Policy (202/874–5070); Karen Solomon,

Director (202/874–5090), or Ron

Shimabukuro, Senior Attorney (202/

874–5090), Legislative and Regulatory

Activities Division, Office of the

Comptroller of the Currency, 250 E

Street, SW., Washington, DC 20219.

Board: Scott G. Alvarez, Associate

General Counsel (202/452–3583), Kieran

J. Fallon, Senior Counsel (202/452–

5270), or Camille M. Caesar, Counsel

(202/452–3513), Legal Division; Jean

Nellie Liang, Chief, Capital Markets

(202/452–2918), Division of Research &

Statistics; Michael G. Martinson,

Associate Director (202/452–3640) or

James A. Embersit, Assistant Director

(202/452–5249), Capital Markets,

Division of Banking Supervision and

Regulation; Board of Governors of the

Federal Reserve System, 20th Street and

Constitution Avenue, NW, Washington,

D.C. 20551.

FDIC: Mark S. Schmidt, Associate

Director, (202/898–6918), Stephen G.

Pfeifer, Examination Specialist,

Accounting Section (202/898–8904),

Curtis Vaughn, Examination Specialist

(202/898–6759), Division of

Supervision; Michael B. Phillips,

Counsel, (202/898–3581); Thelma W.

Diaz, Counsel (202/898–3765), Legal

Division, Federal Deposit Insurance

Corporation, 550 17th Street, NW.,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

A. Background

1. Description of Original Capital

Proposal

In March, 2000, the Board in

connection with publishing an interim

rule implementing provisions of the

Gramm-Leach-Bliley Act (GLB Act) that

allow financial holding companies to

engage in merchant banking activities,

invited public comment on a proposal

to establish capital requirements

governing investments by bank holding

companies in nonfinancial companies.

(See 65 FR 16480). The capital proposal

would assess, at the holding company

level, a 50 percent capital charge on the

carrying value of each investment.

The capital proposal applied to

investments, including equity and debt

instruments under some circumstances,

made by a bank holding company under

any of its equity investment authorities,

including its merchant banking

authority, investment authority under

Regulation K, authority to make

investments through small business

investment companies, authority to hold

indirectly investments under section 24

of the Federal Deposit Insurance Act,

and authority to make investments in

Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules 10213

less than 5 percent of the shares of any

company under sections 4(c)(6) and

4(c)(7) of the Bank Holding Company

Act (BHC Act). This capital proposal did

not apply, however, to shares that a

bank holding company acquires in a

company engaged only in financial

activities, acquires in connection with

its securities underwriting, dealing or

market making activities and held in

trading accounts, or acquires through an

insurance underwriting company.

2. Brief Summary of Comments

The Board and the Secretary of the

Treasury together received more than

130 comments on the capital proposal.

Commenters included members of

Congress, other federal agencies, state

banking departments, banking

organizations, securities firms, trade

associations for the banking and

securities industries, law firms and

individuals. Many commenters

acknowledged that equity investment

activities involve greater risks than

traditional banking activities. For

example, a trade association for the

banking industry fully supported the

proposed capital charge as appropriate

to protect banking organizations and the

financial system from the risks

associated with merchant banking

investment activities.

Most commenters, however, opposed

the capital proposal or one or more

aspects of the proposal. Some

commenters contended that the

proposal, by applying a uniform 50-

percent charge to all equity investments,

failed adequately to take into account

risk variances between different types of

equity investments (e.g., private equity

investments vs. investments in publicly

traded stocks) or between different

investment portfolios. A number of

commenters argued that the proposal

would frustrate Congress’ desire to

permit a ‘‘two-way street’’ between

securities firms and banking

organizations or would place bank

holding companies, and particularly

those with large equity investment

portfolios, at a disadvantage in

competing with nonbanking

organizations and foreign banking

organizations in the market for making

equity investments. Some commenters

also contended that the Board lacked

the authority to establish special capital

requirements for merchant banking and

similar equity investments.

Many commenters acknowledged that

the internal capital models developed

by banking organizations and securities

firms frequently require equity

investment activities to be supported by

significant amounts of capital. Some

commenters argued that banking

organizations should be permitted to

use their internal capital models to

determine the appropriate amount of

regulatory capital needed to support

their investment activities. Others

argued that, because banking

organizations use internal models for a

variety of purposes, it is not appropriate

for the agencies to rely on selected data

from those models as a principal basis

for establishing a minimum regulatory

capital requirement for equity

investments. Commenters also argued

that the banking agencies should not use

data derived from internal models to

support establishing a high regulatory

capital requirement for equity

investments without also using the data

from these models to reduce the amount

of regulatory capital needed to support

more traditional banking assets, such as

consumer and commercial loans.

Many commenters suggested specific

amendments or alternatives to the

proposed capital charge. For example,

some commenters suggested that the

Board rely solely on the examination

and supervisory process, as well as

market discipline, to ensure that a bank

holding company maintains adequate

capital to support its equity investment

activities. Other commenters argued that

the proposal should be replaced with a

rule that prohibits bank holding

companies from including any

unrealized gains on equity investments

in their regulatory capital. Some

commenters argued that the proposal

should be amended to impose a lower

capital charge on equity investments

such as, for instance, by assigning

equity investments a 200 percent riskweight or by applying a capital charge

higher than the current minimums only

to equity investments that exceed some

threshold amount of the banking

organization’s Tier 1 capital (e.g., 30

percent).

Some commenters argued that a

higher capital charge should be limited

only to merchant banking investments

made by financial holding companies

under the new merchant banking

authority in the GLB Act, and should

not be applied to past or future

investments made by banking

organizations under other statutory

authorities. Other commenters

requested that specific investment

authorities be excluded from the

proposal. For example, a number of

commenters argued that the proposal

should not apply to investments made

by small business investment company

(SBIC) subsidiaries of a banking

organization because SBICs are an

important source of capital for small

businesses, are subject to oversight by

the Small Business Administration, and

have not historically caused significant

losses at banking organizations. Many

state banking institutions also argued

that the proposal should not apply to

the equity investments made by state

banks under the special grandfather

provisions of section 24(f)(2) of the

Federal Deposit Insurance Act (FDI Act).

Others asserted that the capital charge

should not be applied to investments

approved on a case-by-case basis by the

FDIC under section 24 of the FDI Act,

to investments made under section

4(c)(6) or 4(c)(7) of the BHC Act, or to

debt instruments.

A number of commenters asserted

that a capital charge higher than the

current minimums should not be

applied to equity investments actually

made prior to issuance of the capital

proposal. Commenters argued that the

business decisions concerning these

investments were made based on the

capital rules then in effect, and that

applying a new, higher capital charge to

these pre-existing investments would be

unfair.

B. Revised Capital Adequacy Proposal

The Board has carefully reviewed the

comments regarding its initial capital

proposal. In addition, the Board has

consulted with the Treasury Department

and has worked with the other Federal

banking agencies to improve the

proposal and to develop capital

standards that would apply uniformly to

equity investments held by bank

holding companies and those held by

depository institutions.

The new proposal attempts to balance

the concerns of commenters with the

belief of the Federal banking agencies

that banking organizations must

maintain sufficient capital to offset the

risk of an activity that generally

involves risks that are higher than the

risks associated with many traditional

banking activities. In striking this

balance, the new proposal focuses on

establishing a regulatory capital

requirement that the Federal banking

agencies believe represents the

minimum capital levels consistent with

the safe and sound conduct of equity

investment activities. The agencies fully

expect that individual banking

organizations in most cases will allocate

higher economic capital levels, as

appropriate, commensurate with the

risk in the individual investment

portfolios of the company.

The banking agencies have been

guided by several principles in

considering the appropriate levels of

capital that should be required as a

regulatory minimum to support equity

investment activities. First, equity

investment activities in nonfinancial

10214 Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules

companies generally involve greater

risks than traditional bank and financial

activities. Analysis of the annual returns

for a diversified portfolio of publiclytraded small cap stocks over the past

seventy-five years indicates that capital

levels well in excess of the current

regulatory minimum capital levels for

banking organizations may be needed to

support equity investment activities

with the level of financial soundness

expected of organizations that control

insured depository institutions. Over

the past twenty-five years, a study of

venture capital investment firms

indicates that, while some of these firms

did very well, nearly 20 percent of these

firms failed and a substantial number of

others achieved only modest returns.

Two national rating agencies have

indicated that the private equity

business is largely funded with equity

capital and that equity portfolios,

including mature and well diversified

equity portfolios, require substantially

more capital than loans.

Firms and institutional investors that

engage to a significant degree in equity

investment activities typically support

their equity investment activities with

high levels of capital—often dollar for

dollar—due to the greater risk and

illiquidity of these types of investments

and the higher leverage that often is

employed by portfolio companies. In

fact, the vast majority of commenters

did not disagree that equity investment

activities are riskier than traditional

banking activities or that it is prudent to

fund these types of investment activities

with higher levels of capital.

For these reasons, the agencies believe

that capital in excess of the current

regulatory minimum capital levels for

more traditional banking activities

should be required to allow a banking

organization to conduct equity

investment activities in a safe and

sound manner.

A second and related principle that

guided the agencies in considering this

new proposal is that the financial risks

to an organization engaged in equity

investment activities increase as the

level of their investments accounts for a

larger portion of the organization’s

capital, earnings and activities. Banking

organizations have for some time

engaged in equity investment activities

using various authorities, including

primarily SBICs and authority to make

limited passive investments under

sections 4(c)(6) and (7) of the BHC Act.

When the current capital treatment,

which requires a minimum of 4% Tier

1 capital (6% in the case of depository

institutions that must meet the

regulatory well-capitalized definition)

was developed, these equity investment

activities by bank holding companies

and banks were small in relation to the

more traditional lending and other

activities of these organizations.

The level of these investment

activities has grown significantly in

recent years, however. For example,

investments made through SBICs owned

by banking organizations have alone

more than doubled in the past 5 years.

In addition, the merchant banking

authority granted to financial holding

companies by the GLB Act provides

significant new authority to make equity

investments without many of the

restrictions that apply to other

authorities currently used by banking

organizations to make these

investments. The agencies believe that it

is appropriate to revisit the regulatory

capital requirements applicable to

equity investment activities in light of

the dramatic growth in banking

organizations’ equity investment

activities through existing authorities

and the grant of this new and expanded

merchant banking authority.

A third principle guiding the

agencies’ efforts is that the risk of loss

associated with a particular equity

investment is likely to be the same

regardless of the legal authority used to

make the investment or whether the

investment is held in the bank holding

company or in the bank. In fact, the

agencies’ supervisory experience is that

banking organizations are increasingly

making investment decisions and

managing equity investment risks across

legal entities as a single business line

within the organization. These

organizations use different legal

authorities available to different legal

entities within the organization to

conduct a unified equity investment

business.

In light of these principles, the

agencies propose to amend their

respective capital regulations and

guidelines to establish special minimum

regulatory capital requirements for

equity investments in nonfinancial

companies as described herein. This

capital treatment would apply

symmetrically to equity investment

activities of bank holding companies

and banks. Importantly, this new

proposal applies a series of marginal

capital charges that increase with the

level of a banking organization’s overall

exposure to equity investment activities

relative to the institution’s Tier 1

capital.

The Board, the OCC, and the FDIC

each propose to amend their respective

capital regulations and guidelines

applicable to banks to incorporate the

capital treatment described below. In

addition, the Board proposes to amend

its capital guidelines and regulations

that apply on a consolidated basis to

bank holding companies as described

below.

The agencies invite comment on all

aspects of the proposal.

1. Scope of Coverage

The proposed capital treatment

discussed below would apply only to

equity investments in nonfinancial

companies. Specifically, the proposed

capital treatment would apply to equity

investments made in nonfinancial

companies:

• By financial holding companies

under the merchant banking authority of

section 4(k)(4)(H) of the BHC Act;

• By bank holding companies

(including financial holding companies)

in less than 5 percent of the shares of

a nonfinancial company under the

authority of section 4(c)(6) or 4(c)(7) of

the BHC Act;

• By bank holding companies

(including financial holding companies)

or banks in nonfinancial companies

through SBICs;

• By bank holding companies

(including financial holding companies)

or banks under Regulation K; and

• By banking organizations under

section 24 of the Federal Deposit

Insurance Act.

Many commenters, including a

number of members of Congress, argued

that investments in SBICs should not be

subject to higher capital requirements.

These commenters contended that

SBICs serve the important public

purpose of encouraging the

development and funding of small

businesses and that SBICs owned by

banking organizations have generally

been profitable to date.

Congress has, through the Small

Business Investment Act, expressed its

desire to facilitate the funding of small

businesses through SBICs and has by

statute imposed limits on the formation,

operation, funding and investments of

SBICs. Congress has also imposed

special limitations on the amount of

capital that a banking organization may

invest in an SBIC. In light of this

congressional intent and these statutory

limits, the revised proposal would not

apply any special capital charge to

investments in nonfinancial companies

held by SBICs owned by banks or bank

holding companies so long as these

investments remain within traditional

limits.

The agencies note, however, that

SBICs have grown significantly in the

past few years, in part because of the

appreciation of the value of SBIC

investments on their books. Reflecting

both the specific congressional

Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules 10215

1Under the proposal, the Board of Directors of the

FDIC, acting directly, may, in exceptional cases and

after a review of the proposed activity, permit a

lower capital deduction for investments approved

by the Board of Directors under section 24 of the

FDI Act so long as the bank’s investments under

section 24 and SBIC investments represent, in the

aggregate, less than 15 percent of the Tier 1 capital

of the bank. The FDIC and the other banking

agencies reserve the authority to impose higher

capital charges where appropriate.

preference for SBICs and the

appreciation in the value of SBIC

investments, the proposal would apply

special capital charges to equity

investments made through SBICs only

when the carrying value of those

investments exceeds certain high

thresholds relative to Tier 1 capital. The

agencies note that nearly all SBICs

owned by banking organizations

currently are below the thresholds

proposed.

Commenters requested clarification

regarding whether the capital charge

would apply to certain other types of

equity investments, including in

particular investments in companies

that engage solely in banking and

financial activities that the investing

company could conduct directly.

Banking organizations have special

expertise in managing the risks

associated with financial activities. As a

result, neither the original proposal

made by the Board nor the new proposal

by the banking agencies would apply to

equity investments made in companies

that engage in banking or financial

activities that are permissible for the

investing bank holding company or

bank, as relevant, to conduct directly.

The proposal also would not apply to an

equity investment made under

Regulation K in any company that is

engaged solely in activities that have

been determined to be financial in

nature or incidental to financial

services.

A number of commenters, requested

that the agencies clarify whether the

capital proposal would apply to equity

securities held in a trading account. The

new proposal does not apply to

securities that are held in a trading

account in accordance with applicable

accounting principles and as part of an

underwriting, market making or dealing

activity. Several commenters also

requested clarification regarding

whether the proposal would apply to

investments that the primary supervisor

of the bank or bank holding company

has determined to be designed primarily

to promote the public welfare and are

held in community development

corporations. The proposal would not

apply to these investments.

Many commenters argued that the

proposed capital treatment should not

be applied to investments in

nonfinancial companies held by state

banks in accordance with section 24 of

the FDI Act. Commenters argued that

state banks, especially state banks

located in New England, have been

authorized to make limited amounts of

equity investments for more than 50

years and that these investments have

provided diversification to their

earnings when loans have been

unprofitable.

Section 24 of the FDI Act allows state

banks to retain equity investments in

nonfinancial companies made pursuant

to state law under certain

circumstances. In particular, section

24(f) permits certain state banks to

retain shares of publicly traded

companies and registered investment

companies if the investment was

permitted under a state law enacted as

of a certain date, the state bank engaged

in the investment activity as of a certain

date and the total amount of equity

investments made by the bank does not

exceed the capital of the bank.

Commenters argued that Congress

specifically considered the risks to state

banks from these investments when

deciding to grandfather these equity

investment activities.

In addition to this grandfathered

investment authority, a state bank may

hold equity in other nonfinancial

companies if the FDIC determines that

the investment does not pose a

significant risk to the deposit insurance

fund. The FDIC is empowered to

establish and has established higher

capital requirements and other

limitations on equity investments of

state banks held under this authority,

such as investments in companies

engaged in real estate investment and

development activities. The FDIC has to

date in most cases required state banks

that make these investments to limit the

amount of the investment and to deduct

these investments from the bank’s

capital, effectively imposing a 100

percent capital charge on these

investments.

For these reasons, the agencies

propose to exclude from the special

capital charge any investment in a

nonfinancial company held by a state

bank in accordance with the grandfather

provisions of section 24(f) of the FDI

Act. The proposal would apply to other

equity investments in nonfinancial

companies held by state banks in

accordance with other provision of

section 24.1

A few commenters argued that the

capital proposal should not be applied

to any equity investment made by a

bank or bank holding company prior to

March 13, 2000. These investments

were made at a time when the agencies

had not proposed a higher regulatory

capital charge, are modest in amount at

most banking organizations, and will be

liquidated over time. As explained

below, the new capital proposal

establishes a marginal capital structure

that is different and, on average, lower

than the original proposal. The new

proposal also provides that no special

capital charge would be imposed on

investments made through an SBIC

within certain thresholds. SBICs hold a

very large portion of the investments

made prior to March 13, 2000, by

banking organizations. In light of these

changes, the agencies request comment

on whether it is necessary or

appropriate to grandfather the

individual investments made prior to

March 13, 2000. The agencies also

request comment on the alternative of

allowing banking organizations to phase

in over a period of time (such as 3 years)

the proposed capital standards with

regard to investments made prior to

March 13, 2000.

Commenters also argued that capital

charges should not apply to debt that is

extended to companies in which an

organization has made an equity

investment. The original proposal

would have applied the proposed

capital charge to any debt instrument

with equity features (such as conversion

rights, warrants or call options). In

addition, the proposal would have

applied a higher capital charge to any

other type of debt extended to a

company if the debt instrument is held

by a banking organization that also

owns at least 15 percent of the equity of

the company. The original proposal

included exceptions for short-term,

secured credit provided for working

capital purposes, any extension of credit

that meets the collateral requirements of

section 23A of the Federal Reserve Act,

any extension of credit that is

guaranteed by the U.S. Government, and

any extension of credit at least 50

percent of which is sold or participated

out to unaffiliated parties.

Commenters noted that the legal

doctrine of equitable subordination

affects the ability of investors to make

loans to portfolio companies that serve

as the functional equivalent of equity.

Under this doctrine, courts in

bankruptcy proceedings have, under

certain circumstances, subordinated the

claims of creditors that are also

investors in a company to the claims of

other creditors, effectively treating the

debt held by the investor as if the debt

were equity.

After considering the comments on

this matter, the agencies have revised

the approach to debt instruments with

10216 Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules

equity features. The new proposal

applies the proposed capital treatment

to equity features of debt (such as

warrants and options to purchase

equities in nonfinancial companies) and

to debt instruments convertible into

equity investments in nonfinancial

companies where the equity feature or

instrument is held under one of the

authorities listed above. The primary

supervisor will monitor the use of debt

held under any authority as a method

for providing the equivalent of equity

funding to portfolio companies, and

may, on a case-by-case basis in the

supervisory process, require banking

organizations to maintain higher capital

against debt where circumstances

indicate that the debt serves as the

functional equivalent of equity.

The original capital proposal made by

the Board did not apply to equity

investments made under section

4(k)(4)(I) of the BHC Act by an

insurance underwriting affiliate of a

financial holding company, and the

revised proposal continues that

approach. These investments generally

are already subject to higher capital

charges under state insurance laws. The

Board requests comment regarding

whether special capital requirements or

other supervisory restrictions should be

applied to assure that financial holding

companies do not use insurance

underwriting companies to arbitrage any

differences in the capital requirements

on equity investment activities that

apply to insurance companies and other

financial holding company affiliates. To

the extent appropriate, the Board will

address these matters in a separate

proposal regarding the appropriate

method for accounting for insurance

companies under the Board’s

consolidated capital adequacy

guidelines applicable to financial

holding companies.

The agencies believe that the

authorities discussed above cover the

principal authorities available to

banking organizations to make equity

investments in companies that engage in

nonfinancial activities. The agencies

request comment on whether there are

other investment activities that should

be covered by this capital proposal.

As noted above, the new proposal

would apply the special capital charge

to investments in nonfinancial

companies made in accordance with the

portfolio investment provisions of

Regulation K. This includes investments

made through so-called Edge Act and

Agreement corporations. This special

capital treatment would not apply, for

example, to the ownership of equity

securities held by an Edge Act or

Agreement corporation to hedge equity

derivative transactions for foreign

customers. The agencies request

comment on whether it is appropriate to

apply the capital charge to investments

made through Edge Act corporations

and Agreement corporations in

nonfinancial companies overseas.

2. Capital Charges

As noted above, the agencies propose

to amend their respective capital

guidelines and rules to apply a different

charge to equity investments in

nonfinancial companies than is

currently applied to traditional banking

investments and activities. This

proposal would apply symmetrically to

banks and bank holding companies.

This proposal would not have a

significant effect on the capital levels of

any major banking organization based

on current investment levels.

The proposal involves a progression

of capital charges that increases with the

size of the aggregate equity investment

portfolio of the banking organization

relative to its Tier 1 capital. This

approach takes account of the greater

impact that losses in a larger portfolio

of equity investments relative to capital

may have on the financial condition of

a banking organization.

As explained in the attached

proposed amendment to the capital

rules, the proposed capital charge

would be applied by making a

deduction from the organization’s Tier 1

capital. This deduction would be based

on the adjusted carrying value of equity

investments in nonfinancial companies.

The adjusted carrying value is the value

at which the relevant investment is

recorded on the balance sheet, reduced

by net unrealized gains that are

included in carrying value but that have

not been included in Tier 1 capital and

associated deferred tax liabilities.

For the reasons explained above, no

additional capital charge would be

applied to SBIC investments made by a

bank or bank holding company, so long

as the adjusted carrying value of the

investments does not exceed 15 percent

of the Tier 1 capital of the depository

institution that holds the investment or,

in the case of an SBIC held directly by

the bank holding company, 15 percent

of the pro rata Tier 1 capital of all

depository institutions controlled by the

bank holding company. These

investments would be included,

however, in determining the aggregate

size of the organization’s investment

portfolio for purposes of applying the

marginal capital charges discussed

below.

For all investments other than SBIC

investments, an 8 percent Tier 1 capital

charge would be applied so long as the

adjusted carrying value of all such

investments (plus all SBIC investments

and other covered investments)

represent less than 15 percent of Tier 1

capital. This difference in treatment for

investments made outside of an SBIC

recognizes the special limits that have

been imposed on the operations of

SBICs and preferences that Congress has

granted to SBICs.

In the case of a portfolio of covered

investments that, in the aggregate

(including SBIC investments and other

covered investments), exceeds 15

percent of the organization’s Tier 1

capital, a 12 percent Tier 1 capital

charge would apply to the portion of the

portfolio above the 15 percent

threshold. The 12 percent marginal

charge would apply to the adjusted

carrying value of equity investments up

to 25 percent of Tier 1 capital. In the

case of a portfolio of covered

investments that, in the aggregate,

exceeds 25 percent of the organization’s

Tier 1 capital, a 25 percent marginal

Tier 1 capital charge would apply to the

portion of the portfolio above the 25

percent threshold. The following table,

which is included in the proposed

regulation, reflects these capital charges.

TABLE 1.—DEDUCTION FOR

NONFINANCIAL EQUITY INVESTMENTS

Aggregate adjusted

carrying value of all

nonfinancial equity investments held by the

bank or bank holding

company (as a percentage of the Tier 1

capital of the bank or

bank holding company) 2

Deduction from Tier 1

Capital (as a percentage of the adjusted

carrying value of the

investment)

Less than 15 percent 8 percent

15 percent to 24.99

percent.

12 percent

25 percent and above 25 percent

2For purposes of calculating the percentage

of equity investments relative to Tier 1 capital,

Tier 1 capital is defined as the sum of core

capital elements net of goodwill and net of all

identifiable intangible assets other than mortgage servicing assets, nonmortgage servicing

assets and purchased credit card relationships, but prior to the deduction for deferred

tax assets and nonfinancial equity

investments.

The agencies propose to apply

heightened supervision to the equity

investment activities of banking

organizations as appropriate, including

in the event that the adjusted carrying

value of all nonfinancial equity

investments represents more than 50

percent of the organization’s Tier 1

capital. The agencies may in any case

impose a higher minimum capital

charge on an organization as appropriate

in light of the risk management systems;

Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules 10217

risk, nature, size and composition of the

organization’s investments; market

conditions; and other relevant

information and circumstances.

In the event that the agencies

determine not to apply this special

capital charge to equity investments

made by a banking organization prior to

March 13, 2000, the agencies propose to

include the adjusted carrying value of

an organization’s investment portfolio

made in grandfathered investments for

purposes of determining the appropriate

marginal capital charge on investments

that are not grandfathered.

Commenters questioned how the

original capital proposal would apply to

investments held through equity

investment funds, in particular, through

investment partnerships where the

holding company may control the fund,

usually through its role as general

partner, but is not the sole participant

in the fund. As noted in the original

proposal, the capital charge in such

instances would apply only to the

holding company’s proportionate share

of the fund’s investments. Such

treatment would apply even if the

partnership is consolidated in the

holding company’s financial reporting

statements. Similarly, the new proposal

provides that minority interest resulting

from any such consolidation would not

be included in the Tier 1 capital of the

holding company. Such minority

interest is not available to support the

overall financial business of the holding

company.

Similar treatment is proposed for

minority interest with respect to

investments in nonfinancial companies

under the authorities covered by the

proposal. Generally, it would not be

expected that any nonfinancial

company whose shares are acquired

pursuant to these authorities would be

consolidated, either because the

investment is temporary as in the case

of merchant banking investments, or

limited to a minority interest. However,

if consolidation does occur, any

resulting minority interest must be

excluded from Tier 1 capital because the

minority interest is not available to

support the general financial business of

the banking organization.

The agencies invite comment on all

aspects of the proposal, including in

particular on the proposed marginal

capital charges and the methods for

calculating and applying the deduction

to capital. The agencies recognize that

the proposed capital deduction may

have an effect on the calculation of the

leverage ratio for the banking

organization. Accordingly, the agencies

also request comment on whether this

effect is likely to be significant, whether

an adjustment should be permitted to

account for this effect, and, if so, what

type of adjustment is appropriate.

3. Alternatives Suggested by

Commenters

Commenters offered a variety of

alternatives to the original capital

proposal. Among these suggestions were

to rely on internal capital models, to

rely on the supervisory process for

determining appropriate capital charges

on a case-by-case basis, to require

banking organizations to adopt the

regulatory equivalent of available-forsale accounting, and to adopt a reduced

capital charge.

Many commenters suggested that the

agencies rely fully on internal capital

models developed by each banking

organization to measure the capital

needs of the organization across all of its

activities. A number of commenters

argued that the original capital proposal

was flawed because it adopted a higher

capital charge on equity investments in

a manner similar to the internal capital

models used by many banking

organizations without at the same time

allowing banking organizations to adopt

features of these models that allocate

less capital than the regulatory

minimum capital requirements against

other, less risky, activities.

The agencies believe that internal

capital models that take account of the

different risks and capital needs of each

of the activities of a particular banking

organization ultimately represent an

effective method for determining the

capital adequacy of an organization. The

agencies have encouraged the

development of comprehensive internal

capital models, and many banking

organizations have begun to develop

their own internal capital models. As

yet, however, these models are largely

untested and unable to capture the risks

of many activities conducted by banking

organizations. Moreover, the stage of

development and sophistication of

models varies greatly across

organizations. In addition, as noted by

many commenters, assessing the

adequacy of capital by reference to risk

models is most effective when applied

across the entire organizational risk

structure, rather than piece meal for

selected assets or portfolios. As a result,

the agencies do not believe that it is

appropriate at this time to rely on

internal modeling of equity portfolios as

a replacement for regulatory minimum

capital requirements. The agencies

believe, however, that robust internal

modeling can be an effective method for

addressing capital adequacy.

Accordingly, the agencies will review a

banking organization’s internal models

in assessing the adequacy of the

organization’s capital levels in relation

to its equity investment activities and

expect to revisit the need for regulatory

minimum capital requirements for

equity investment activities as internal

models become more sophisticated and

reliable.

Another alternative suggested by

many commenters was that the agencies

assess the appropriate regulatory capital

levels for equity investment activities on

a case-by-case basis through the

supervisory process. These commenters

argued that it was inappropriate for the

agencies to adopt a single regulatory

minimum capital requirement that

would apply in the same way to all

banking organizations engaged in equity

investment activities, regardless of the

differences in portfolio risks at different

organizations. These commenters

believed that the capital needs of

individual organizations could be best

assessed through the individual

examination of each organization, with

the agencies assessing higher capital

requirements on a case-by-case basis to

address particular risks at individual

organizations.

The agencies agree that examination

and supervision are important methods

for assuring that individual

organizations are conducting equity

investment activities in a safe and

sound manner and have adequate

capital to support those activities. The

agencies expect to pay particular

attention to the investment activities of

banking organizations and to heighten

that supervision as the level of

concentration in these activities

increases at an organization. The

supervisory process will consider,

among other things, the institution’s

internal allocation of capital to equity

investment activities as an important

element in assessing capital adequacy.

However, the agencies believe that

supervisory experience and analysis of

equity investment activities over a long

period of time indicate that it is prudent

to establish minimum capital

requirements for equity investment

activities in addition to effective

supervision and examination.

Establishing minimum capital

requirements by rule also reduces the

potential that capital requirements at an

organization will be arbitrarily set

during the examination process. A

uniform regulatory minimum capital

rule also indicates to organizations that

are entering this business line for the

first time the agencies’ expectations for

additional capital to support these

activities.

Some commenters suggested that the

agencies require that banking

10218 Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules

organizations adopt the regulatory

equivalent of available-for-sale (AFS)

accounting. Commenters argued that

this approach improves the capital

strength of an organization by

eliminating from Tier 1 capital, at least

for regulatory reporting purposes, any

reliance on unrealized gains on equity

investments. This arguably reduces the

volatility in capital that results from

changes in the value of equity

investments, which often occur

unpredictably and quickly during the

life of the investment, by preventing

banking organizations from taking

unrealized gains into income, and thus

capital, for regulatory purposes.

AFS accounting has been adopted by

many organizations and represents a

prudent and appropriate approach to

accounting for equity investments in

many situations. Nonetheless, the

agencies have determined not to require

the regulatory equivalent of this

accounting treatment for regulatory

capital calculations for several reasons.

First, this approach does not address the

risk associated with the initial cost of

the investment. Instead, it effectively

applies a 100 percent capital charge on

unrealized gains while maintaining the

normal capital charge on the initial

investment cost. For investments that

are very profitable, this charge may be

too high, while for investments that are

not performing well, this capital charge

is likely to be too low.

In addition, an AFS approach creates

differences in capital treatment for

companies that acquired the same

equity investment, with the same risk,

on different dates. Under the AFS

approach, an investor that has acquired

an investment in the initial offering of

stock of the portfolio company would be

effectively required to hold more capital

against the investment than a second

investor that acquires the same amount

of shares of the same company for a

higher price at a later date.

Moreover, a capital charge based on

the AFS approach is easily manipulated

through the sale and repurchase of

equity of the same company. This

manipulation would be difficult to

monitor and prevent.

While the agencies have not proposed

adopting the regulatory equivalent of

the AFS accounting approach, the

agencies recognize that a regulatory

minimum capital charge must take

account of situations in which an

investor determines to adopt this

approach for GAAP reporting purposes.

Accordingly, the capital charge

proposed by the agencies is based on the

‘‘adjusted carrying value’’ of the

relevant investment and the proposal

would require deduction of the adjusted

carrying value from risk-weighted assets

for purposes of calculating the riskbased capital ratio. This treatment

retains the flexibility of an investor to

adopt AFS accounting or other

accounting treatments permitted under

GAAP.

C. Regulatory Flexibility Act Analysis

OCC: This proposal would amend the

OCC’s risk-based capital guidelines and

leverage capital rules for national banks.

The amendments made by the proposal

would establish the regulatory capital

requirements applicable to a national

bank’s equity investment in a

nonfinancial company made through a

SBIC pursuant to section 302(b) of the

Small Business Investment Act of 1958

or under the portfolio investment

provisions of the Board’s Regulation K.

The OCC hereby certifies, pursuant to

section 5(b) of the Regulatory Flexibility

Act (5 U.S.C. 603(a)), that the proposed

amendments will not, if promulgated in

final rule form, have a significant

economic impact on a substantial

number of small entities.

For the purposes of the Regulatory

Flexibility Act, small entities are

defined to include any national bank

that has $100 million in assets or less.

See 5 U.S.C. 601(3) and (6), 15 U.S.C.

632(a), and 13 CFR 121.201. With

respect to national banks, this proposal

would only apply to equity investments

in a nonfinancial company either made

through a SBIC pursuant to section

302(b) of the Small Business Investment

Act of 1958 or under the portfolio

investment provisions of Regulation K.

The OCC does not believe that it is

likely that a substantial number of small

national banks engage in these kinds of

equity investment activities. Moreover,

even with respect to any small national

banks that might engage in the types of

equity investments covered by this

proposal, the OCC does not believe that

the proposal rule will require these

banks to raise significant amounts of

new capital. For these reasons, the OCC

does not believe that this proposal, if

promulgated in final rule form, will

have a significant economic impact on

a substantial number of small national

banks.

Nevertheless, the OCC specifically

seeks comment on any burden that this

proposal would impose on small

national banks.

Board: In accordance with section 3(a)

of the Regulatory Flexibility Act (5

U.S.C. 603(a)), the Board must publish

an initial regulatory flexibility analysis

with this rulemaking. The rule proposes

and requests comment on amendments

to the Board’s consolidated risk-based

and leverage capital adequacy

guidelines for bank holding companies

(Part 225, Appendix A and Appendix D)

and state member banks (Part 208,

Appendix A and Appendix D).

These amendments would establish

the regulatory capital requirements

applicable to the merchant banking

investments of financial holding

companies and similar investment

activities of bank holding companies

and state member banks. The Board

hereby certifies, pursuant to 5 U.S.C.

605(b), that the proposed capital

amendments will not, if promulgated

through a final rule, have a significant

economic impact on a substantial

number of small entities because small

entities that the Board regulates,

specifically, financial or bank holding

companies or state member banks that

have less than $150 million in

consolidated assets, generally do not

engage in these investment activities to

any significant degree. In addition,

because the Board’s risk-based and

leverage capital guidelines do not

generally apply to bank holding

companies, including financial holding

companies, that have less than $150

million in consolidated assets, the

proposed rule will have no impact upon

such organizations.

For the reasons discussed above, the

Board believes that the proposed

amendments to its capital guidelines are

necessary and appropriate to ensure that

bank holding companies and state

member banks maintain capital

commensurate with the levels of risk

associated with their equity investment

activities and that these activities do not

pose an undue risk to the safety and

soundness of insured depository

institutions. This notice of proposed

rulemaking contains a detailed

discussion of the Board’s reasons for

issuing the proposed rule and of the

alternatives to the rule that the Board

has considered.

The Board specifically seeks comment

on the likely burden that the proposed

rule will impose on bank holding

companies and state member banks.

FDIC: The rule proposes and requests

comment on amendments to the FDIC’s

risk-based and leverage capital

standards for state nonmember banks

(Part 325). These amendments would

establish the regulatory capital

requirements applicable to certain

nonfinancial equity investments of state

nonmember banks. The FDIC hereby

certifies, pursuant to section 605(b) of

the Regulatory Flexibility Act, 5 U.S.C.

605(b), that the proposed capital

amendments will not, if promulgated

through a final rule, have a significant

economic impact on a substantial

number of small entities because small

Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules 10219

entities that the FDIC regulates,

specifically, state nonmember banks

that have less than $100 million in

consolidated assets, generally do not

engage in nonfinancial equity

investment activities covered by this

proposed rule to any significant degree.

D. Paperwork Reduction Act

OCC: In accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3506; 5 CFR 1320 App. A.1), the

OCC has reviewed the proposal under

the authority delegated to the OCC by

the Office of Management and Budget.

No collections of information pursuant

to the Paperwork Reduction Act are

contained in the proposal.

Board: In accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3506; 5 CFR 1320 App. A.1), the

Board has reviewed the proposed rule

under the 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 proposed rule.

FDIC: The FDIC has determined that

this proposal 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.).

E. Executive Order 12866

Determination

OCC: The Comptroller of the Currency

has determined that this proposed rule,

if adopted as a final rule, would not

constitute a ‘‘significant regulatory

action’’ for the purposes of Executive

Order 12866.

F. Unfunded Mandates Act of 1995

OCC: Section 202 of the Unfunded

Mandates Reform Act of 1995, 2 U.S.C.

1532 (Unfunded Mandates Act),

requires that an agency prepare a

budgetary impact statement before

promulgating any rule likely to result in

a Federal mandate that may result in the

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

the agency to identify and consider a

reasonable number of regulatory

alternatives before promulgating the

rule. The OCC has determined that this

proposed regulation will not result in

expenditures by State, local, and tribal

governments, in the aggregate, or by the

private sector, of $100 million or more

in any one year. Accordingly, the OCC

has not prepared a budgetary impact

statement or specifically addressed the

regulatory alternatives considered.

G. Solicitation of Comments on Use of

‘‘Plain Language’’

Section 722 of the GLB Act requires

the agencies to use ‘‘plain language’’ in

all proposed and final rules published

after January 1, 2000. The agencies

invite comments about how to make the

proposed rule easier to understand,

including answers to the following

questions:

(1) Have the agencies organized the

material in an effective manner? If not,

how could the material be better

organized?

(2) Are the terms of the rule clearly

stated? If not, how could the terms be

more clearly stated?

(3) Does the rule contain technical

language or jargon this is unclear? If so,

which language requires clarification?

(4) Would a different format (with

respect to the grouping and order of

sections and use of headings) make the

rule easier to understand?

(5) Would increasing the number of

sections (and making each section

shorter) clarify the rule? If so, which

portions of the rule should be changed

in this respect?

(6) What additional changes would

make the rule easier to understand?

The agencies also solicit comment

about whether including factual

examples in the rule in order to

illustrate its terms is appropriate. Are

there alternatives that the agencies

should consider to illustrate the terms

in the rule?

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 225

Administrative practice and

procedure, Banks, banking, Federal

Reserve System, Holding companies,

Reporting and recordkeeping

requirements, Securities.

12 CFR Part 325

Administrative practice and

procedure, Banks, banking, Capital

adequacy, Reporting and recordkeeping

requirements, State non-member banks.

Department of the Treasury

Office of the Comptroller of the

Currency

12 CFR Chapter I

Authority and Issuance

For the reasons set out in the

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 Appendix A to part 3:

A. In section 1, paragraphs (c)(17)

through (c)(31) are redesignated as

paragraphs (c)(20) through (c)(34);

paragraphs (c)(12) through (c)(16) are

redesignated as paragraphs (c)(14)

through (c)(18); and paragraphs (c)(1)

through (c)(11) are redesignated as

paragraphs (c)(2) through (c)(12);

B. In section 1, new paragraphs (c)(1),

(c)(13) and (c)(19) are added;

C. In section 2, paragraph (a)(3) is

revised;

D. In section 2, new paragraph

(c)(1)(iv) is added;

E. In section 2, paragraph (c)(4) is

redesignated as paragraph (c)(5); and

F. In section 2, new paragraph (c)(4)

is added to read as follows:

Appendix A to Part 3—Risk-Based

Capital Guidelines

Section 1. Purpose, Applicability of

Guidelines, and Definitions

* * * * *

(c) * * *

(1) Adjusted carrying value means, for

purposes of section 2(c)(4) of this appendix

A, the aggregate value that investments are

carried on the balance sheet of the bank

reduced by any unrealized gains on the

investments that are reflected in such

carrying value but excluded from the bank’s

Tier 1 capital. For example, for investments

held as available-for-sale (AFS), the adjusted

carrying value of the investments would be

the aggregate carrying value of the

investments (as reflected on the consolidated

balance sheet of the bank) less any unrealized

gains on those investments that are included

in other comprehensive income and that are

not reflected in Tier 1 capital, and less any

associated deferred tax liabilities. Unrealized

losses on AFS equity investments must be

deducted from Tier 1 capital in accordance

with section 1(c)(8) of this appendix A. The

treatment of small business investment

companies that are consolidated for

accounting purposes is discussed in section

2(c)(4)(iv) of this appendix A. For

investments in a nonfinancial company that

is consolidated for accounting purposes, the

10220 Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules

bank’s adjusted carrying value of the

investment is determined under the equity

method of accounting (net of any intangibles

associated with the investment that are

deducted from the bank’s Tier 1 capital in

accordance with section 2(c)(2) of this

appendix A). Even though the assets of the

nonfinancial company are consolidated for

accounting purposes, these assets (as well as

the credit equivalent amounts of the

company’s off-balance sheet items) are

excluded from the bank’s risk-weighted

assets.

* * * * *

(13) Equity investment means, for purposes

of section 1(c)(19) and section 2(c)(4) of this

appendix A, any equity instrument including

warrants and call options that give the holder

the right to purchase an equity instrument,

any equity feature of a debt instrument (such

as a warrant or call option), and any debt

instrument that is convertible into equity. An

investment in subordinated debt or other

types of debt instruments may be treated as

an equity investment if the OCC determines

that the instrument is the functional

equivalent of equity.

* * * * *

(19) Nonfinancial equity investment means

any equity investment in a nonfinancial

company made by the bank through a small

business investment company (SBIC) under

section 302(b) of the Small Business

Investment Act of 1958 (15 U.S.C. 682(b)) or

under the portfolio investment provisions of

Regulation K (12 CFR 211.5(b)(1)(iii)). An

equity investment in a SBIC made under

section 302(b) of the Small Business

Investment Act of 1958 that is not

consolidated with the bank is treated as a

nonfinancial equity investment in the

manner provided in section 2(c)(4)(iv)(C) of

this appendix A. A nonfinancial company is

an entity that engages in any activity that has

not been determined to be permissible for the

bank to conduct directly or to be financial in

nature or incidental to financial activities

under section 4(k) of the Bank Holding

Company Act (12 U.S.C. 1843(k)).

* * * * *

Section 2. Components of Capital

* * * * *

(a) * * *

(3) Minority interests in the equity

accounts of consolidated subsidiaries, except

that minority interests in a small business

investment company or investment fund that

holds nonfinancial equity investments and

minority interests in a subsidiary that is

engaged in nonfinancial activities and is held

under one of the legal authorities listed in

section 1(c)(19) of this appendix A are not

included in Tier 1 capital or total capital.

* * * * *

(c) * * *

(1) * * *

(iv) Nonfinancial equity investments as

provided by section 2(c)(4) of this appendix

A.

* * * * *

(4) Nonfinancial equity investments. (i)

General. A bank must deduct from its Tier 1

capital the appropriate percentage, as

determined in accordance with Table 1, of

the adjusted carrying value of all

nonfinancial equity investments made by the

bank or by its direct or indirect subsidiaries.

(ii) Nonfinancial equity investments in the

trading account. Section 2(c)(4) of this

appendix A does not apply to, and no

deduction is required for, any nonfinancial

equity investment that is held in the trading

account in accordance with applicable

accounting principles and as part of an

underwriting, market making or dealing

activity.

(iii) Amount of deduction from Tier 1

capital. (A) The bank must deduct from its

Tier 1 capital the appropriate percentage, as

determined in accordance with Table 1, of

the adjusted carrying value of all

nonfinancial equity investments held by the

bank and its subsidiaries.

TABLE 1.—DEDUCTION FOR

NONFINANCIAL EQUITY INVESTMENTS

Aggregate adjusted

carrying value of all

nonfinancial equity investments held directly or indirectly by

the bank (As a percentage of the Tier 1

capital of the bank) 1

Deduction from Tier 1

Capital (As a percentage of the adjusted

carrying value of the

investment)

Less than 15 percent 8.0 percent.

15 percent but less

than 25 percent.

12.0 percent.

25 percent or greater 25.0 percent.

1For purposes of calculating the adjusted

carrying value of nonfinancial equity investments as a percentage of Tier 1 capital, Tier 1

capital is defined as the sum of the Tier 1 capital elements net of goodwill and net of all

identifiable intangible assets other than mortgage servicing assets, nonmortgage servicing

assets and purchased credit card relationships, but prior to the deduction for deferred

tax assets and nonfinancial equity

investments.

(B) Deductions for nonfinancial equity

investments must be applied on a marginal

basis to the portions of the adjusted carrying

value of nonfinancial equity investments that

fall within the specified ranges of the bank’s

Tier 1 capital. For example, if the adjusted

carrying value of all nonfinancial equity

investments held by a bank equals 20 percent

of the Tier 1 capital of the bank, then the

amount of the deduction would be 8 percent

of the adjusted carrying value of all

investments up to 15 percent of the bank’s

Tier 1 capital, and 12 percent of the adjusted

carrying value of all investments in excess of

15 percent of the bank’s Tier 1 capital.

(C) The total adjusted carrying value of any

nonfinancial equity investment that is subject

to deduction under section 2(c)(4) of this

appendix A is excluded from the bank’s

weighted risk assets for purposes of

computing the denominator of the bank’s

risk-based capital ratio. For example, if 8

percent of the adjusted carrying value of a

nonfinancial equity investment is deducted

from Tier 1 capital, the entire adjusted

carrying value of the investment will be

excluded from risk-weighted assets in

calculating the denominator of the risk-based

capital ratio.

(D) Banks engaged in equity investment

activities, including those banks with a high

concentration in nonfinancial equity

investments (e.g., in excess of 50 percent of

Tier 1 capital) will be monitored and may be

subject to heightened supervision, as

appropriate, by the OCC to ensure that such

banks maintain capital levels that are

appropriate in light of their equity

investment activities, and the OCC may

impose a higher capital charge in any case

where the circumstances, such as the level of

risk of the particular investment or portfolio

of investments, the risk management systems

of the bank, or other information, indicate

that a higher minimum capital requirement is

appropriate.

(iv) Small business investment company

investments. (A) Notwithstanding section

2(c)(4)(iii) of this appendix A, no deduction

is required for nonfinancial equity

investments that are made by a bank or its

subsidiary through a SBIC that is

consolidated with the bank, or in a SBIC that

is not consolidated with the bank, to the

extent that such investments, in the

aggregate, do not exceed 15 percent of the

Tier 1 capital of the bank. Except as provided

in paragraph (c)(4)(iv)(B) of this section, any

nonfinancial equity investment that is held

through or in a SBIC and not deducted from

Tier 1 capital will be assigned to the 100

percent risk-weight category and included in

the bank’s consolidated risk-weighted assets.

(B) If a bank has an investment in a SBIC

that is consolidated for accounting purposes

but the SBIC is not wholly owned by the

bank, the adjusted carrying value of the

bank’s nonfinancial equity investments held

through the SBIC is equal to the bank’s

proportionate share of the SBIC’s adjusted

carrying value of its nonfinancial equity

investments. The remainder of the SBIC’s

adjusted carrying value (i.e., the minority

interest holders’ proportionate share) is

excluded from the risk-weighted assets of the

bank.

(C) If a bank has an investment in a SBIC

that is not consolidated for accounting

purposes and has current information that

identifies the percentage of the SBIC’s assets

that are nonfinancial equity investments, the

bank may reduce the adjusted carrying value

of its investment in the SBIC proportionately

to reflect the percentage of the adjusted

carrying value of the SBIC’s assets that are

not nonfinancial equity investments. The

amount by which the adjusted carrying value

of the bank’s investment in the SBIC is

reduced under this provision will be risk

weighted at 100 percent and included in the

bank’s risk-weighted assets.

(D) To the extent the adjusted carrying

value of all nonfinancial equity investments

that the bank holds through a consolidated

SBIC or in a nonconsolidated SBIC exceeds,

in the aggregate, 15 percent of the Tier 1

capital of the bank, the appropriate

percentage of such amounts, as set forth in

Table 1, must be deducted from the bank’s

Tier 1 capital. In addition, the aggregate

adjusted carrying value of all nonfinancial

equity investments held through a

consolidated SBIC and in a nonconsolidated

SBIC (including any investments for which

no deduction is required) must be included

Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules 10221

24An equity investment made under section

302(b) of the Small Business Investment Act of 1958

in a SBIC that is not consolidated with the bank is

treated as a nonfinancial equity investment.

25See 12 CFR 211.5(b)(1)(iii); and 15 U.S.C.

682(b).

26For example, if 8 percent of the adjusted

carrying value of a nonfinancial equity investment

is deducted from Tier 1 capital, the entire adjusted

carrying value of the investment will be excluded

form risk-weighted assets in calculating the

denominator for the risk-based capital ratio.

in determining for purposes of Table 1 the

total amount of nonfinancial equity

investments held by the bank in relation to

its Tier 1 capital.

(v) Transition period. [Comment

requested].

Dated: January 26, 2001.

John D. Hawke, Jr.,

Comptroller of the Currency.

Federal Reserve System

Authority and Issuance

For the reasons set forth in the

preamble, the Board of Governors of the

Federal Reserve System proposes to

amend parts 208 and 225 of chapter II

of title 12 of the Code of Federal

Regulations 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, 92a, 93a,

248(a), 248(c), 321–338a, 371d, 461, 481–486,

601, 611, 1814, 1816, 1818, 1820(d), 1823(j),

1828(o), 1831o, 1831p–1, 1831r–1, 1831w,

1835a, 1882, 2901–2907, 3105, 3310, 3331–

3351, and 3906–3909; 15 U.S.C. 78b, 781(b),

781(g), 781(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, the

following amendments are made:

a. In section II.A., one sentence is

added at the end of paragraph 1.c.,

Minority interest in equity accounts of

consolidated subsidiaries;

b. In section II.B., a new paragraph (v)

is added at the end of the introductory

text and a new paragraph 5 is added at

the end of section II.B; and

c. In sections III. and IV., footnotes 24

through 57 are redesignated as footnotes

29 through 62, respectively.

Appendix A to Part 208—Capital

Adequacy Guidelines for State Member

Banks: Risk-Based Measure

* * * * *

II. * * *

A. ***

1. * * *

c. * * * Minority interests in small

business investment companies and

investment funds that hold nonfinancial

equity investments (as defined in section

II.B.5.b. of this appendix) and minority

interests in subsidiaries that are engaged in

nonfinancial activities and held under one of

the legal authorities listed in section II.B.5.b

are not included in the bank’s Tier 1 or total

capital base.

B. ***

(v) Nonfinancial equity investmentsportions are deducted from the sum of core

capital elements in accordance with section

II.B.5 of this appendix.

* * * * *

5. Nonfinancial equity investments—a.

General. A bank must deduct from its Tier 1

capital the appropriate percentage (as

determined below) of the adjusted carrying

value of all nonfinancial equity investments

made by the parent bank or by its direct or

indirect subsidiaries.

b. Scope of nonfinancial equity

investments. i. A nonfinancial equity

investment means any equity investment

made by the bank in a nonfinancial company

through a small business investment

company (SBIC) under section 302(b) of the

Small Business Investment Act of 1958 24 or

under the portfolio investment provisions of

the Board’s Regulation K (12 CFR

211.5(b)(1)(iii)).25 A nonfinancial company is

an entity that engages in any activity that has

not been determined to be permissible for the

bank to conduct directly, or to be financial

in nature or incidental to financial activities

under section 4(k) of the Bank Holding

Company Act (12 U.S.C. 1843(k)).

ii. This section II.B.5. does not apply to,

and no deduction is required for, any

nonfinancial equity investment that is held

in the trading account in accordance with

applicable accounting principles and as part

of an underwriting, market making or dealing

activity.

c. Amount of deduction from core capital.

i. The bank must deduct from its Tier 1

capital the appropriate percentage, as set

forth in Table 1, of the adjusted carrying

value of all nonfinancial equity investments

held by the bank and its subsidiaries. The

amount of the deduction increases as the

aggregate amount of nonfinancial equity

investments held by the bank and its

subsidiaries increases as a percentage of the

bank’s Tier 1 capital.

TABLE 1.—DEDUCTION FOR

NONFINANCIAL EQUITY INVESTMENTS

Aggregate adjusted

carrying value of all

nonfinancial equity investments held directly or indirectly by

the bank (as a percentage of the Tier 1

capital of the bank) 1

Deduction from Tier 1

Capital (as a percentage of the adjusted

carrying value of the

investment)

Less than 15 percent 8 percent.

15 percent to 24.99

percent.

12 percent.

TABLE 1.—DEDUCTION FOR NONFINANCIAL EQUITY INVESTMENTS—

Continued

Aggregate adjusted

carrying value of all

nonfinancial equity investments held directly or indirectly by

the bank (as a percentage of the Tier 1

capital of the bank) 1

Deduction from Tier 1

Capital (as a percentage of the adjusted

carrying value of the

investment)

25 percent and above 25 percent.

1For purposes of calculating the adjusted

carrying value of nonfinancial equity investments as a percentage of Tier 1 capital, Tier 1

capital is defined as the sum of core capital

elements net of goodwill and net of all identifiable intangible assets other than mortgage

servicing assets, nonmortgage servicing assets and purchased credit card relationships,

but prior to the deduction for deferred tax assets and nonfinancial equity investments.

ii. These deductions are applied on a

marginal basis to the portions of the adjusted

carrying value of nonfinancial equity

investments that fall within the specified

ranges of the parent bank’s Tier 1 capital. For

example, if the adjusted carrying value of all

nonfinancial equity investments held by a

bank equals 20 percent of the Tier 1 capital

of the bank, then the amount of the

deduction would be 8 percent of the adjusted

carrying value of all investments up to 15

percent of the bank’s Tier 1 capital, and 12

percent of the adjusted carrying value of all

investments in excess of 15 percent of the

bank’s Tier 1 capital.

iii. The total adjusted carrying value of any

nonfinancial equity investment that is subject

to deduction under this paragraph is

excluded from the bank’s risk-weighted

assets for purposes of computing the

denominator of the bank’s risk-based capital

ratio.26

iv. As noted in section I, this Appendix

establishes minimum risk-based capital ratios

and banks are at all times expected to

maintain capital commensurate with the

level and nature of the risks to which they

are exposed. The risk to a bank from

nonfinancial equity investments increases

with its concentration in such investments

and strong capital levels above the minimum

requirements are particularly important

when a bank has a high degree of

concentration in nonfinancial equity

investments (e.g., in excess of 50 percent of

Tier 1 capital). The Federal Reserve intends

to monitor banks and apply heightened

supervision to equity investment activities as

appropriate, including where the bank has a

high degree of concentration in nonfinancial

equity investments, to ensure that banks

maintain capital levels that are appropriate in

light of their equity investment activities.

The Federal Reserve also reserves authority

to impose a higher capital charge in any case

where the circumstances, such as the level of

10222 Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules

27 If a bank has an investment in a SBIC that is

consolidated for accounting purposes but that is not

wholly owned by the bank, the adjusted carrying

value of the bank’s nonfinancial equity investments

through the SBIC is equal to the bank’s

proportionate share of the SBIC’s adjusted carrying

value of its nonfinancial equity investments. The

remainder of the SBIC’s adjusted carrying value

(i.e., the minority interest holders’ proportionate

share) is excluded from the risk-weighted assets of

the bank. If a bank has an investment in a SBIC that

is not consolidated for accounting purposes and has

current information that identifies the percentage of

the SBIC’s assets that are nonfinancial equity

investments, the bank may reduce the adjusted

carrying value of its investment in the SBIC

proportioantely to reflect the percentage of the

adjusted carrying value of the SBIC’s assets that are

not nonfinancial equity investments. The amount

by which the adjusted carrying value of the bank’s

investment in the SBIC is reduced under this

provision will be risk weighted at 100 percent and

included in the bank’s risk-weighted assets.

28Unrealized gains on AFS investments may be

included in supplementary capital to the extent

permitted under section II.A.2.e of this appendix.

In addition, the unrealized losses on AFS equity

investments are deducted from Tier 1 capital in

accordance with section II.A.1.a of this appendix.

2Tier 1 capital for state member banks includes

common equity, minority interest in the equity

accounts of consolidated subsidiaries, and

qualifying noncumulative perpetual preferred stock.

In addition, as a general matter, Tier 1 capital

excludes goodwill; amounts of mortgage servicing

assets, nonmortgage servicing assets, and purchased

credit card relationships that, in the aggregate,

exceed 100 percent of Tier 1 capital; nonmortgage

servicing assets and purchased credit card

relationships that, in the aggregate, exceed 25

percent of Tier 1 capital; other identifiable

intangible assets; deferred tax assets that are

dependent upon future taxable income, net of their

valuation allowance, in excess of certain

limitations; and a percentage of the bank’s

nonfinancial equity investments. The Federal

Reserve may exclude certain other investments in

subsidiaries or associated companies as

appropriate.

risk of the particular investment or portfolio

of investments, the risk management systems

of the bank, or other information, indicate

that a higher minimum capital requirement is

appropriate.

d. SBIC investments. i. No deduction is

required for nonfinancial equity investments

that are made by a bank through an SBIC that

is consolidated with the bank or in an SBIC

that is not consolidated with the bank to the

extent that such investments, in the

aggregate, do not exceed 15 percent of the

bank’s Tier 1 capital. Any nonfinancial

equity investment that is held through or in

an SBIC and not deducted from Tier 1 capital

will be assigned a 100 percent risk-weight

and included in the bank’s consolidated riskweighted assets.27

ii. To the extent the adjusted carrying value

of all nonfinancial equity investments that a

bank holds through a consolidated SBIC or in

a non-consolidated SBIC exceeds, in the

aggregate, 15 percent of the bank’s Tier 1

capital, the appropriate percentage of such

amounts (as set forth in Table 1) must be

deducted from the bank’s Tier 1 capital. In

addition, the aggregate adjusted carrying

value of all nonfinancial equity investments

held through a consolidated SBIC and in a

non-consolidated SBIC (including any

investments for which no deduction is

required) must be included in determining

for purposes of Table 1 the total amount of

nonfinancial equity investments held by the

bank in relation to its Tier 1 capital.

e. Transition provisions. [Comment

requested.]

f. Adjusted carrying value. i. For purposes

of this section II.B.5., the ‘‘adjusted carrying

value’’ of investments is the aggregate value

at which the investments are carried on the

balance sheet of the bank reduced by any

unrealized gains on those investments that

are reflected in such carrying value but

excluded from the bank’s Tier 1 capital. For

example, for investments held as availablefor-sale (AFS), the adjusted carrying value of

the investments would be the aggregate

carrying value of the investments (as

reflected on the consolidated balance sheet of

the bank) less: any unrealized gains on those

investments that are included in other

comprehensive income and not reflected in

Tier 1 capital; and associated deferred tax

liabilities.28

ii. As discussed above with respect to

consolidated SBICs, some equity investments

may be in companies that are consolidated

for accounting purposes. For investments in

a nonfinancial company that is consolidated

for accounting purposes under generally

accepted accounting principles, the bank’s

adjusted carrying value of the investment is

determined under the equity method of

accounting (net of any intangibles associated

with the investment that are deducted from

the bank’s core capital in accordance with

section II.B.1 of this appendix). Even though

the assets of the nonfinancial company are

consolidated for accounting purposes, these

assets (as well as the credit equivalent

amounts of the company’s off-balance sheet

items) should be excluded from the bank’s

risk-weighted assets for regulatory capital

purposes.

g. Equity investments. For purposes of this

section II.B.5., an equity investment means

any equity instrument (including warrants

and call options that give the holder the right

to purchase an equity instrument), any equity

feature of a debt instrument (such as a

warrant or call option), and any debt

instrument that is convertible into equity

where the instrument or feature is held under

one of the legal authorities listed in section

II.B.5.b. of this appendix. An investment in

subordinated debt or other types of debt

instruments may be treated as an equity

investment if, in the judgment of the Federal

Reserve, the instrument is the functional

equivalent of equity.

* * * * *

3. In Appendix B to part 208, in section

II.b., footnote 2 is revised and the fourth

sentence of section II.b. is revised to read as

follows:

Appendix B to Part 208—Capital

Adequacy Guidelines for State Member

Banks: Tier 1 Leverage Measure

* * * * *

II. * * *

b. * * *2 As a general matter, average total

consolidated assets are defined as the

quarterly average total assets (defined net of

the allowance for loan and lease losses)

reported on the bank’s Reports of Condition

and Income (Call Reports), less goodwill;

amounts of mortgage servicing assets,

nonmortgage servicing assets, and purchased

credit card relationships that, in the

aggregate, are in excess of 100 percent of Tier

1 capital; amounts of nonmortgage servicing

assets and purchased credit card

relationships that, in the aggregate, are in

excess of 25 percent of Tier 1 capital; all

other identifiable intangible assets; any

investments in subsidiaries or associated

companies that the Federal Reserve

determines should be deducted Tier 1

capital; deferred tax assets that are dependent

upon future taxable income, net of their

valuation allowance, in excess of the

limitations set forth in section II.B.4 of

Appendix A of this part; and the total

adjusted carrying value of nonfinancial

equity investments that are subject to a

deduction from capital.

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), 1843(k),

1844(b), 1972(l), 3106, 3108, 3310, 3331–

3351, 3907, and 3909.

2. In Appendix A to part 225, the

following revisions are made:

a. In section II.A., one sentence is

added at the end of paragraph 1.c.,

Minority interest in equity accounts of

consolidated subsidiaries;

b. In section II.B., a new paragraph (v)

is added at the end of the introductory

text and a new paragraph 5 is added at

the end of section II.B; and

c. In sections III. and IV., footnotes 24

through 57 are redesignated as footnotes

29 through 62, respectively.

Appendix A to Part 225—Capital

Adequacy Guidelines for Bank Holding

Companies: Risk-Based Measure

* * * * *

II. * * *

A. ***

1. * * *

c. * * * Minority interests in small

business investment companies and

investment funds that hold nonfinancial

equity investments (as defined in section

II.B.5.b. of this appendix) and minority

interests in subsidiaries that are engaged in

nonfinancial activities and held under one of

the legal authorities listed in section II.B.5.b

are not included in a banking organization’s

Tier 1 or total capital base.

* * * * *

B. ***

(v) Nonfinancial equity investments—

portions are deducted from the sum of core

capital elements in accordance with section

II.B.5 of this appendix.

* * * * *

Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules 10223

24An equity investment made under section

302(b) of the Small Business Investment Act of 1958

in a SBIC that is not consolidated with the parent

banking organizations is treated as a nonfinancial

equity investment.

25See 12 U.S.C. 1843(c)(6), (c)(7) and (k)(4)(H); 15

U.S.C. 682(b); 12 CFR 211.5(b)(1)(iii); and 12 U.S.C.

1831a(f). In a case in which the Board of the FDIC,

acting directly in exceptional cases and after a

review of the proposed activity, has permitted a

lesser capital deduction for an investment approved

by the Board of Directors under section 24 of the

Federal Deposit Insurance Act, such deduction

shall also apply to the consolidated bank holding

company capital calculation so long as the bank’s

investments under section 24 and SBIC investments

represent, in the aggregate, less than 15 percent of

the Tier 1 capital of the bank.

26For example, if 8 percent of the adjusted

carrying value of a nonfinancial equity investment

is deducted from Tier 1 capital, the entire adjusted

carrying value of the investment will be excluded

from risk-weighted assets in calculating the

denominator for the risk-based capital ratio.

27 If a bank holding company has an investment

in a SBIC that is consolidated for accounting

purposes but that is not wholly owned by the bank

holding company, the adjusted carrying value of the

bank holding company’s nonfinancial equity

investments through the SBIC is equal to the

holding company’s proportionate share of the

SBIC’s adjusted carrying value of its nonfinancial

equity investments. The remainder of the SBIC’s

adjusted carrying value (i.e. the minority interest

holders’ proportionate share) is excluded from the

risk-weighted assets of the bank holding company.

If a bank holding company has an investment in a

SBIC that is not consolidated for accounting

purposes and has current information that identifies

the percentage of the SBIC’s assets that are

nonfinancial equity investments, the bank holding

company may reduce the adjusted carrying value of

its investment in the SBIC proportionately to reflect

the percentage of the adjusted carrying value of the

SBIC’s assets that are not nonfinancial equity

investments. The amount by which the adjusted

carrying value of the company’s investment in the

SBIC is reduced under this provision will be risk

weighted at 100 percent and included in the bank

holding company’s risk-weighted assets.

5. Nonfinancial equity investments—a.

General. A bank holding company must

deduct from its Tier 1 capital the appropriate

percentage (as determined below) of the

adjusted carrying value of all nonfinancial

equity investments made by the parent bank

holding company or by its direct or indirect

subsidiaries.

b. Scope of nonfinancial equity

investments. i. A nonfinancial equity

investment means any equity investment

made by the bank holding company:

pursuant to the merchant banking authority

of section 4(k)(4)(H) of the BHC Act and

subpart J of the Board’s Regulation Y (12 CFR

part 225); under section 4(c)(6) or 4(c)(7) of

BHC Act in a nonfinancial company or in a

company that makes investments in

nonfinancial companies; in a nonfinancial

company through a small business

investment company (SBIC) under section

302(b) of the Small Business Investment Act

of 1958; 24 in a nonfinancial company under

the portfolio investment provisions of the

Board’s Regulation K (12 CFR

211.5(b)(1)(iii)); or in a nonfinancial

company under section 24 of the Federal

Deposit Insurance Act (other than section

24(f)).25 A nonfinancial company is an entity

that engages in any activity that has not been

determined to be financial in nature or

incidental to financial activities under

section 4(k) of the Bank Holding Company

Act (12 U.S.C. 1843(k)).

ii. This section II.B.5. does not apply to,

and no deduction is required for, any

nonfinancial equity investment that is held

in the trading account in accordance with

applicable accounting principles and as part

of an underwriting, market making or dealing

activity.

c. Amount of deduction from core capital.

i. The bank holding company must deduct

from its Tier 1 capital the appropriate

percentage, as set forth in Table 1, of the

adjusted carrying value of all nonfinancial

equity investments held by the bank holding

company and its subsidiaries. The amount of

the deduction increases as the aggregate

amount of nonfinancial equity investments

held by the bank holding company and its

subsidiaries increases as a percentage of the

bank holding company’s Tier 1 capital.

TABLE 1.—DEDUCTION FOR

NONFINANCIAL EQUITY INVESTMENTS

Aggregate adjusted

carrying value of all

nonfinancial equity investments held directly or indirectly by

the bank holding company (as a percentage of the Tier 1 capital of the parent

banking organization)1

Deduction from Tier 1

Capital (as a percentage of the adjusted

carrying value of the

investment)

Less than 15 percent 8 percent.

15 percent to 24.99

percent.

12 percent.

25 percent and above 25 percent.

1For purposes of calculating the adjusted

carrying value of nonfinancial equity investments as a percentage of Tier 1 capital, Tier 1

capital is defined as the sum of core capital

elements net of goodwill and net of all identifiable intangible assets other than mortgage

servicing assets, nonmortgage servicing assets and purchased credit card relationships,

but prior to the deduction for deferred tax assets and nonfinancial equity investments.

ii. These deductions are applied on a

marginal basis to the portions of the adjusted

carrying value of nonfinancial equity

investments that fall within the specified

ranges of the parent holding company’s Tier

1 capital. For example, if the adjusted

carrying value of all nonfinancial equity

investments held by a bank holding company

equals 20 percent of the Tier 1 capital of the

bank holding company, then the amount of

the deduction would be 8 percent of the

adjusted carrying value of all investments up

to 15 percent of the company’s Tier 1 capital,

and 12 percent of the adjusted carrying value

of all investments in excess of 15 percent of

the company’s Tier 1 capital.

iii. The total adjusted carrying value of any

nonfinancial equity investment that is subject

to deduction under this paragraph is

excluded from the bank holding company’s

risk-weighted assets for purposes of

computing the denominator of the company’s

risk-based capital ratio.26

iv. As noted in section I, this appendix

establishes minimum risk-based capital ratios

and banking organizations are at all times

expected to maintain capital commensurate

with the level and nature of the risks to

which they are exposed. The risk to a

banking organization from nonfinancial

equity investments increases with its

concentration in such investments and strong

capital levels above the minimum

requirements are particularly important

when a banking organization has a high

degree of concentration in nonfinancial

equity investments (e.g., in excess of 50

percent of Tier 1 capital). The Federal

Reserve intends to monitor banking

organizations and apply heightened

supervision to equity investment activities as

appropriate, including where the banking

organization has a high degree of

concentration in nonfinancial equity

investments, to ensure that organizations

maintain capital levels that are appropriate in

light of their equity investment activities.

The Federal Reserve also reserves authority

to impose a higher capital charge in any case

where the circumstances, such as the level of

risk of the particular investment or portfolio

of investments, the risk management systems

of the banking organization, or other

information, indicate that a higher minimum

capital requirement is appropriate.

d. SBIC investments. i. No deduction is

required for nonfinancial equity investments

that are made by a bank holding company or

a subsidiary through an SBIC that is

consolidated with the bank holding company

or in a SBIC that is not consolidated with the

bank holding company to the extent that

such investments, in the aggregate, do not

exceed 15 percent of the aggregate Tier 1

capital of the subsidiary banks of the bank

holding company. Any nonfinancial equity

investment that is held through or in an SBIC

and not deducted from Tier 1 capital will be

assigned a 100 percent risk-weight and

included in the parent holding company’s

consolidated risk-weighted assets.27

ii. To the extent the adjusted carrying value

of all nonfinancial equity investments that a

bank holding company holds through a

consolidated SBIC or in a non-consolidated

SBIC exceeds, in the aggregate, 15 percent of

the aggregate Tier 1 capital of the company’s

subsidiary banks, the appropriate percentage

of such amounts (as set forth in Table 1) must

be deducted from the bank holding

company’s Tier 1 capital. In addition, the

aggregate adjusted carrying value of all

nonfinancial equity investments held

through a consolidated SBIC and in a nonconsolidated SBIC (including any

investments for which no deduction is

required) must be included in determining

for purposes of Table 1 the total amount of

nonfinancial equity investments held by the

bank holding company in relation to its Tier

1 capital.

e. Transition provisions. [Comment

requested.]

10224 Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules

28Unrealized gains on AFS investments may be

included in supplementary capital to the extent

permitted under section II.A.2.e of this Appendix.

In addition, the unrealized losses on AFS equity

investments are deducted from Tier 1 capital in

accordance with section II.A.1.a of this Appendix.

3Tier 1 capital for banking organizations includes

common equity, minority interest in the equity

accounts of consolidated subsidiaries, qualifying

noncumulative perpetual preferred stock, and

qualifying cumulative perpetual preferred stock.

(Cumulative perpetual preferred stock is limited to

25 percent of Tier 1 capital.) In addition, as a

general matter, Tier 1 capital excludes goodwill;

amounts of mortgage servicing assets, nonmortgage

servicing assets, and purchased credit card

relationships that, in the aggregate, exceed 100

percent of Tier 1 capital; nonmortgage servicing

assets and purchased credit card relationships that,

in the aggregate, exceed 25 percent of Tier 1 capital;

all other identifiable intangible assets; deferred tax

assets that are dependent upon future taxable

income, net of their valuation allowance, in excess

of certain limitations; and a percentage of the

organization’s nonfinancial equity investments. The

Federal Reserve may exclude certain other

investments in subsidiaries or associated companies

as appropriate.

f. Adjusted carrying value. i. For purposes

of this section II.B.5., the ‘‘adjusted carrying

value’’ of investments is the aggregate value

at which the investments are carried on the

balance sheet of the consolidated bank

holding company reduced by any unrealized

gains on those investments that are reflected

in such carrying value but excluded from the

bank holding company’s Tier 1 capital. For

example, for investments held as availablefor-sale (AFS), the adjusted carrying value of

the investments would be the aggregate

carrying value of the investments (as

reflected on the consolidated balance sheet of

the bank holding company) less: any

unrealized gains on those investments that

are included in other comprehensive income

and not reflected in Tier 1 capital; and

associated deferred tax liabilities.28

ii. As discussed above with respect to

consolidated SBICs, some equity investments

may be in companies that are consolidated

for accounting purposes. For investments in

a nonfinancial company that is consolidated

for accounting purposes under generally

accepted accounting principles, the parent

banking organization’s adjusted carrying

value of the investment is determined under

the equity method of accounting (net of any

intangibles associated with the investment

that are deducted from the consolidated bank

holding company’s core capital in

accordance with section II.B.1 of this

Appendix). Even though the assets of the

nonfinancial company are consolidated for

accounting purposes, these assets (as well as

the credit equivalent amounts of the

company’s off-balance sheet items) should be

excluded from the banking organization’s

risk-weighted assets for regulatory capital

purposes.

g. Equity investments. For purposes of this

section II.B.5, an equity investment means

any equity instrument (including warrants

and call options that give the holder the right

to purchase an equity instrument), any equity

feature of a debt instrument (such as a

warrant or call option), and any debt

instrument that is convertible into equity

where the instrument or feature is held under

one of the legal authorities listed in section

II.B.5.b. above. An investment in

subordinated debt or other types of debt

instruments may be treated as an equity

investment if, in the judgment of the

appropriate federal banking agency, the

instrument is the functional equivalent of

equity.

* * * * *

3. In Appendix D to part 225, in

section II.b., footnote 3 is revised and

the fourth sentence of section II.b. is

revised to read as follows.

Appendix D to Part 225—Capital

Adequacy Guidelines for Bank Holding

Companies; Tier 1 Leverage Measure

* * * * *

II. * * *

b. * * *3 As a general matter, average total

consolidated assets are defined as the

quarterly average total assets (defined net of

the allowance for loan and lease losses)

reported on the organization’s Consolidated

Financial Statements (FR Y–9C Report), less

goodwill; amounts of mortgage servicing

assets, nonmortgage servicing assets, and

purchased credit card relationships that, in

the aggregate, are in excess of 100 percent of

Tier 1 capital; amounts of nonmortgage

servicing assets and purchased credit card

relationships that, in the aggregate, are in

excess of 25 percent of Tier 1 capital; all

other identifiable intangible assets; deferred

tax assets that are dependent upon future

taxable income, net of their valuation

allowance, in excess of the limitations set

forth in section II.B.4 of appendix A of this

part; the total adjusted carrying value of

nonfinancial equity investments that are

subject to a deduction from capital; and other

investments in subsidiaries or associated

companies that the Federal Reserve

determines should be deducted from Tier 1

capital.

By order of the Board of Governors of the

Federal Reserve System, February 1, 2001.

Jennifer J. Johnson,

Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

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, as amended by

Pub. L. 103–325, 108 Stat. 2160, 2233 (12

U.S.C. 1828 note); Pub. L. 102–242, 105 Stat.

2236, 2386, as amended by Pub. L. 102–550,

106 Stat. 3672, 4089 (12 U.S.C. 1828 note).

2. In § 325.2, paragraphs (t) and (v) are

revised to read as follows:

§ 325.2 Definitions.

(t) Tier 1 capital or core capital means

the sum of common stockholders’

equity, noncumulative perpetual

preferred stock (including any related

surplus), and minority interests in

consolidated subsidiaries, minus all

intangible assets (other than mortgage

servicing assets, and purchased credit

card relationships eligible for inclusion

in core capital pursuant to § 325.5(f)),

minus deferred tax assets in excess of

the limit set forth in § 325.5(g), minus:

(1) Identified losses (to the extent that

Tier 1 capital would have been reduced

if the appropriate accounting entries to

reflect the identified losses had been

recorded on the insured depository

institution’s books);

(2) Investments in financial

subsidiaries subject to 12 CFR part 362,

subpart E; and

(3) A percentage of the bank’s

nonfinancial equity investments as set

forth in section I.B of appendix A to this

part.

* * * * *

(v) Total assets means the average of

total assets required to be included in a

banking institution’s ‘‘Reports of

Condition and Income’’ (Call Report) or,

for a savings association, the

consolidated total assets required to be

included in the ‘‘Thrift Financial

Report,’’ as these reports may from time

to time be revised, as of the most recent

report date (and after making any

necessary subsidiary adjustments for

state nonmember banks as described in

§§ 325.5(c) and 325.5(d) of this part),

minus:

(1) Intangible assets (other than

mortgage servicing assets, nonmortgage

servicing assets, and purchased credit

card relationships eligible for inclusion

in core capital pursuant to § 325.5(f));

(2) Deferred tax assets in excess of the

limit set forth in § 325.5(g);

(3) Assets classified loss and any

other assets that are deducted in

determining Tier 1 capital; and

(4) The total adjusted carrying value

of nonfinancial equity investments

subject to a deduction from Tier 1

capital under section I.B. of appendix A

to this part.

3. In appendix A to part 325, the

following amendments are made:

a. A new paragraph is added at the

end of section I.A.1.

b. In section I.B., a new paragraph (6)

is added at the end.

c. In section II of Appendix A to part

325, footnotes 11 through 42 are

Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules 10225

11An equity investment made under section

302(b) of the Small Business Investment Act of 1958

in a SBIC that is not consolidated with the bank is

treated as a nonfinancial equity investment.

12See 12 CFR 211.5(b)(1)(iii); and 15 U.S.C.

682(b).

13The Board of Directors of the FDIC, acting

directly, may, in exceptional cases and after a

review of the proposed activity, permit a lower

capital deduction for investments approved by the

Board of Directors under section 24 of the FDI Act

so long as the bank’s investments under section 24

and SBIC investments represent, in the aggregate,

less than 15 percent of the Tier 1 capital of the

bank. The FDIC and the other banking agencies

reserve the authority to impose higher capital

charges where appropriate.

14For example, if 8 percent of the adjusted

carrying value of a nonfinancial equity investment

is deducted from the numerator for Tier 1 capital,

the entire adjusted carrying value of the investment

will be excluded from both risk-weighted assets and

total assets in calculating the respective

denominators for the risk-based capital and leverage

ratios.

15 If a bank has an investment in a SBIC that is

consolidated for accounting purposes but that is not

wholly owned by the bank, the adjusted carrying

value of the bank’s nonfinancial equity investments

through the SBIC is equal to the bank’s

proportionate share of the SBIC’s adjusted carrying

value of its nonfinancial equity investments. The

remainder of the SBIC’s adjusted carrying value

(i.e., the minority interest holders’ proportionate

share) is excluded from the risk-weighted assets of

the bank. If a bank has an investment in a SBIC that

is not consolidated for accounting purposes and has

current information that identifies the percentage of

the SBIC’s assets that are nonfinancial equity

investments, the bank may reduce the adjusted

carrying value of its investment in the SBIC

proportionately to reflect the percentage of the

adjusted carrying value of the SBIC’s assets that are

not nonfinancial equity investments. The amount

by which the adjusted carrying value of the bank’s

investment in the SBIC is reduced under this

provision will be risk weighted at 100 percent and

included in the bank’s risk-weighted assets.

redesignated as footnotes 17 through 48,

respectively.

Appendix A to Part 325—Statement of

Policy on Risk-Based Capital

* * * * *

I. * * *

A. * * *

1. * * *

Minority interests in small business

investment companies and investment funds

that hold nonfinancial equity investments (as

defined in section I.B(6)(ii) of this appendix)

and minority interests in subsidiaries that are

engaged in nonfinancial activities and held

under one of the legal authorities listed in

section I.B(6)(ii)are not included in a bank’s

Tier 1 or total capital base.

* * * * *

B. * * *

(6) Nonfinancial equity investments. (i)

General. A bank must deduct from its Tier 1

capital the appropriate percentage (as

determined below) of the adjusted carrying

value of all nonfinancial equity investments.

(ii) Scope of nonfinancial equity

investments. (A) A nonfinancial equity

investment means any equity investment

made by the bank: in a nonfinancial company

through a small business investment

company (SBIC) under section 302(b) of the

Small Business Investment Act of 1958;11

and in a nonfinancial company under the

portfolio investment provisions of Regulation

K issued by the Board of Governors of the

Federal Reserve System (12 CFR

211.5(b)(1)(iii)).12 It also includes any bank

investment made in a nonfinancial company

under section 24 of the Federal Deposit

Insurance Act (12 U.S.C. 1831a(f)), other than

an investment held in accordance with

section 24(f) of that Act.13 A nonfinancial

company is an entity that engages in any

activity that has not been determined to be

permissible for the bank to conduct directly,

or to be financial in nature or incidental to

financial activities under section 4(k) of the

Bank Holding Company Act.

(B) This section I.B.(6) does not apply to,

and no deduction is required for, any

nonfinancial equity investment that is held

in the trading account in accordance with

applicable accounting principles and as part

of an underwriting, market making or dealing

activity.

(iii) Amount of deduction from core

capital. (A) The bank must deduct from its

Tier 1 capital the appropriate percentage, as

set forth in the table following this

paragraph, of the adjusted carrying value of

all nonfinancial equity investments held by

the bank and its subsidiaries. The amount of

the deduction increases as the aggregate

amount of nonfinancial equity investments

held by the bank and its subsidiaries

increases as a percentage of the bank’s Tier

1 capital.

DEDUCTION FOR NONFINANCIAL EQUITY

INVESTMENTS

Aggregate adjusted

carrying value of all

nonfinancial equity investments held directly or indirectly by

the bank (as a percentage of the Tier 1

capital of the bank 1

Deduction from Tier 1

Capital (as a percentage of the adjusted

carrying value of the

investment)

Less than 15 percent 8 percent.

15 percent to 24.99

percent.

12 percent.

25 percent and above 25 percent.

1 In determining the adjusted carrying value

of nonfinancial equity investments as a percentage of Tier 1 capital, the capital amount

used in calculating this percentage is the

amount of Tier 1 capital that exists before the

deduction of any disallowed mortgage servicing assets, any disallowed purchased credit

card relationships, any disallowed nonmortgage servicing assets, any disallowed deferred

tax assets, and before the deduction of any

nonfinancial equity investments.

(B) These deductions are applied on a

marginal basis to the portions of the adjusted

carrying value of nonfinancial equity

investments that fall within the specified

ranges of the parent bank’s Tier 1 capital. For

example, if the adjusted carrying value of all

nonfinancial equity investments held by a

bank equals 20 percent of the Tier 1 capital

of the bank, then the amount of the

deduction would be 8 percent of the adjusted

carrying value of all investments up to 15

percent of the bank’s Tier 1 capital, and 12

percent of the adjusted carrying value of all

investments in excess of 15 percent of the

bank’s Tier 1 capital.

(C) The total adjusted carrying value of any

nonfinancial equity investment that is subject

to deduction under this paragraph is

excluded from the bank’s risk-weighted

assets for purposes of computing the

denominator of the bank’s risk-based capital

ratio and from total assets for purposes of

calculating the denominator of the leverage

ratio.14

(D) This appendix establishes minimum

risk-based capital ratios and banks are at all

times expected to maintain capital

commensurate with the level and nature of

the risks to which they are exposed. The risk

to a bank from nonfinancial equity

investments increases with its concentration

in such investments and strong capital levels

above the minimum requirements are

particularly important when a bank has a

high degree of concentration in nonfinancial

equity investments (e.g., in excess of 50

percent of Tier 1 capital). The FDIC intends

to monitor banks and apply heightened

supervision to equity investment activities as

appropriate, including where the bank has a

high degree of concentration in nonfinancial

equity investments, to ensure that banks

maintain capital levels that are appropriate in

light of their equity investment activities.

The FDIC also reserves authority to impose

a higher capital charge in any case where the

circumstances, such as the level of risk of the

particular investment or portfolio of

investments, the risk management systems of

the bank, or other information, indicate that

a higher minimum capital requirement is

appropriate.

(iv) SBIC investments. (A) No deduction is

required for nonfinancial equity investments

that are made by a bank through an SBIC that

is consolidated with the bank or in an SBIC

that is not consolidated with the bank to the

extent that such investments, in the

aggregate, do not exceed 15 percent of the

bank’s Tier 1 capital. Any nonfinancial

equity investment that is held through an

SBIC or in an SBIC and not deducted from

Tier 1 capital will be assigned a 100 percent

risk-weight and included in the bank’s

consolidated risk-weighted assets.15

(B) To the extent the adjusted carrying

value of all nonfinancial equity investments

held through a consolidated SBIC or held in

a non-consolidated SBIC exceed, in the

aggregate, 15 percent of the bank’s Tier 1

capital, the appropriate percentage of such

amounts (as set forth in the table in section

I.B.(6)(iii)(A)) must be deducted from the

common stockholders’ equity in determining

the bank’s Tier 1 capital. In addition, the

aggregate adjusted carrying value of all

nonfinancial equity investments held by a

bank through a consolidated SBIC and in a

non-consolidated SBIC (including any

investments for which no deduction is

required) must be included in determining

for purposes of the table in section

I.B.(6)(iii)(A) the total amount of nonfinancial

equity investments held by the bank in

relation to its Tier 1 capital.

(v) Transition provisions. [Comment

requested.]

10226 Federal Register / Vol. 66, No. 31 / Wednesday, February 14, 2001 / Proposed Rules

16Unrealized gains on available-for-sale equity

investments may be included in Tier 2 capital to the

extent permitted under section I.A.2.(f) of this

Appendix. In addition, the net unrealized loss on

available-for-sale equity investments are deducted

from Tier 1 capital in accordance with section I.A.1.

of this Appendix.

(vi) Adjusted carrying value. (A) For

purposes of this section I.B.(6), the ‘‘adjusted

carrying value’’ of investments is the

aggregate value at which the investments are

carried on the balance sheet of the bank

reduced by any unrealized gains on those

investments that are reflected in such

carrying value but excluded from the bank’s

Tier 1 capital. For example, for nonfinancial

equity investments held as available-for-sale,

the adjusted carrying value of the

investments would be the aggregate carrying

value of those investments (as reflected on

the balance sheet of the bank) less: any

unrealized gains on those investments that

are included in other comprehensive income

and not reflected in Tier 1 capital; and

associated deferred tax liabilities.16

(B) As discussed above with respect to

consolidated SBICs, some equity investments

may be in companies that are consolidated

for accounting purposes. For investments in

a nonfinancial company that is consolidated

for accounting purposes under generally

accepted accounting principles, the bank’s

adjusted carrying value of the investment is

determined under the equity method of

accounting (net of any intangibles associated

with the investment that are deducted from

the bank’s core capital in accordance with

section I.A.1 of this Appendix). Even though

the assets of the nonfinancial company are

consolidated for accounting purposes, these

assets (as well as the credit equivalent assets

of the company’s off-balance sheet items)

should be excluded from the bank’s riskweighted assets for regulatory capital

purposes.

(vii) Equity investments. For purposes of

this section I.B.(6), an equity investment

means any equity instrument (including

warrants and call options that give the holder

the right to purchase an equity instrument),

any equity feature of a debt instrument (such

as a warrant or call option), and any debt

instrument that is convertible into equity

where the instrument or feature is held under

one of the legal authorities listed in section

I.B.(6)(ii) of this appendix. An investment in

subordinated debt or other types of debt

instruments may be treated as an equity

investment if, in the judgment of the FDIC,

the instrument is the functional equivalent of

equity.

By order of the Board of Directors, Federal

Deposit Insurance Corporation.

Dated at Washington, D.C., this 19th day of

January, 2001.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 01–3131 Filed 2–13–01; 8:45 am]

BILLING CODE 4810–33–P, 6210–01–P, 6714–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 2000–CE–25–AD]

RIN 2120–AA64

Airworthiness Directives; Raytheon

Aircraft Company Beech Models F33A,

A36, B36TC, 58/58A, C90A, B200, and

1900D Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes to

adopt a new airworthiness directive

(AD) that would apply to certain

Raytheon Aircraft Company (Raytheon)

Beech Model F33A, A36, B36TC, 58/

58A, C90A, B200, and 1900D airplanes

equipped with a KA–33 cooling blower.

The proposed AD would require you to

incorporate certain electrical parts to

protect cooling blowers. Several reports

of circuit breakers failing to protect

cooling blowers on the affected

airplanes have prompted the proposed

action. The actions specified by the

proposed AD are intended to provide

protection to the blower motor circuit,

thus reducing the possibility of

emission of smoke or a burning odor

into the cockpit or passenger

compartment as a result of a failed or

seized blower motor.

DATES: The Federal Aviation

Administration (FAA) must receive any

comments on this proposed rule by

April 6, 2001.

ADDRESSES: Send three copies of

comments to the Federal Aviation

Administration (FAA), Central Region,

Office of the Regional Counsel,

Attention: Rules Docket No. 2000–CE–

25–AD, 901 Locust, Room 506, Kansas

City, Missouri 64106. You may look at

comments at this location between 8

a.m. and 4 p.m., Monday through

Friday, except holidays.

You may get the service information

referenced in the proposed AD from the

Raytheon Aircraft Company, P.O. Box

85, Wichita, Kansas 67201–0085;

telephone: (800) 429–5372 or (316) 676–

3140. You may look at this information

at the Rules Docket at the address above.

FOR FURTHER INFORMATION CONTACT:

Todd Dixon, Aerospace Engineer, FAA,

Wichita Aircraft Certification Office,

1801 Airport Road, Mid-Continent

Airport, Wichita, Kansas 67209;

telephone: (316) 946–4152; facsimile:

(316) 946–4407.

SUPPLEMENTARY INFORMATION:

Comments Invited

How do I comment on this proposed

AD? We invite your comments on the

proposed rule. You may send whatever

written data, views, or arguments you

choose. You need to include the rule’s

docket number and send your

comments in triplicate to the address

named under the caption ADDRESSES.

We will consider all comments received

by the closing date specified above,

before acting on the proposed rule. We

may change the proposals contained in

this notice because of the comments

received.

Are there any specific portions of the

proposed AD I should pay attention to?

The FAA specifically invites comments

on the overall regulatory, economic,

environmental, and energy aspects of

the proposed rule that might call for a

need to change the proposed rule. You

may examine all comments we receive.

We will file a report in the Rules Docket

that summarizes each FAA contact with

the public that concerns the substantive

parts of this proposal.

The FAA is reexamining the writing

style we currently use in regulatory

documents, in response to the

Presidential memorandum of June 1,

1998. That memorandum requires

federal agencies to communicate more

clearly with the public. We are

interested in your comments on the ease

of understanding this document, and

any other suggestions you might have to

improve the clarity of FAA

communications that affect you. You

can get more information about the

Presidential memorandum and the plain

language initiative at http://

www.faa.gov/language/.

How can I be sure FAA receives my

comment? If you want us to

acknowledge the receipt of your

comments, you must include a selfaddressed, stamped postcard. On the

postcard, write ‘‘Comments to Docket

No. 2000–CE–25–AD.’’ We will date

stamp and mail the postcard back to

you.

Discussion

What events have caused this

proposed AD? The FAA has received

several reports of blower motors failing,

seizing, smoking, and producing a

burning odor that enters the cabin and

passenger compartment. These events

are the result of the blower motor

having circuit protection of more than 1

ampere. This amount of circuit

protection does not prevent the blower

motor from smoking and creating a

burning odor should it fail or seize.

What are the consequences if the

condition is not corrected? This