[Federal Register Volume 73, Number 205 (Wednesday, October 22, 2008)]
[Rules and Regulations]
[Pages 62851-62853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-25117]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
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Federal Register / Vol. 73, No. 205 / Wednesday, October 22, 2008 /
Rules and Regulations
[[Page 62851]]
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-1336]
Capital Adequacy Guidelines: Treatment of Perpetual Preferred
Stock Issued to the United States Treasury Under the Emergency Economic
Stabilization Act of 2008
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Interim final rule with request for public comment.
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SUMMARY: In order to support and facilitate the timely implementation
and acceptance of the capital purchase program announced by the U.S.
Department of Treasury (Treasury) and promote the stability of banking
organizations and the financial system, the Board has adopted this
interim final rule (interim final rule or rule). The rule specifically
permits bank holding companies that issue new senior perpetual
preferred stock to the Treasury under the capital purchase program
announced by the Secretary of the Treasury on October 14, 2008, to
include such capital instruments in Tier 1 capital for purposes of the
Board's risk-based and leverage capital rules and guidelines for bank
holding companies.
DATES: The interim final rule will become effective on October 17,
2008. Comments must be received by November 21, 2008.
ADDRESSES: You may submit comments, identified by Docket No. R-1336, by
any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include docket
number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Street, NW) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Norah M. Barger, Deputy Director,
(202) 452-2402, or John Connolly, Senior Project Manager, (202) 452-
3621, Division of Banking Supervision and Regulation; or Kieran J.
Fallon, Assistant General Counsel, (202) 452-5270, Mark E. Van Der
Weide, Assistant General Counsel, (202) 452-2263, or Benjamin W.
McDonough, Senior Attorney, (202) 452-2036, Legal Division; Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Ave., NW., Washington, DC 20551. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
SUPPLEMENTARY INFORMATION: On October 3, 2008, President Bush signed
the Emergency Economic Stabilization Act of 2008 (Act) \1\ into law.
The Act expressly provides that it is intended, among other things,
``to immediately provide authority and facilities that the Secretary of
the Treasury can use to restore liquidity and stability to the
financial system of the United States.'' \2\ Pursuant to the
authorities granted by the Act, and in order to restore liquidity and
stability to the financial system, on October 14, 2008, the Secretary
of the Treasury announced a program within the Troubled Asset Relief
Program (TARP) established by section 102 of the Act to provide capital
to eligible banks, bank holding companies and savings associations
(collectively, banking organizations), as well as certain other
financial institutions. Treasury has announced that eligible banking
organizations will be able to submit applications to participate in the
capital purchase program (the Capital Purchase Program) until November
14, 2008.
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\1\ Division A of Public Law No. 110-342, 122 Stat. 3765 (2008).
\2\ See Act, Sec. 2.
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Under the Capital Purchase Program, the Treasury will provide
capital to an eligible banking organization by purchasing newly issued
senior perpetual preferred stock (Senior Perpetual Preferred Stock) of
the banking organization. The Senior Perpetual Preferred Stock issued
under the Capital Purchase Program will be perpetual preferred stock in
the issuing banking organization and will be senior to the issuer's
common stock and pari passu with the issuer's existing preferred shares
(other than preferred shares which by their terms rank junior to any
existing preferred shares). All Senior Perpetual Preferred Stock issued
by bank holding companies will provide for cumulative dividends. The
aggregate amount of Senior Perpetual Preferred Stock that may be issued
by a banking organization to Treasury must be (i) not less than one
percent of the organization's risk-weighted assets, and (ii) not more
than the lesser of (A) $25 billion and (B) three percent of its risk-
weighted assets. Treasury expects the issuance and purchase of the
Senior Perpetual Preferred Stock to be completed no later than December
31, 2008.
To be eligible for the Capital Purchase Program, the Senior
Perpetual Preferred Stock must include several features, which are
designed to make it attractive to a wide array of generally sound
banking organizations and encourage such banking organizations to
replace the Senior Perpetual Preferred Stock with private capital once
the financial markets return to more normal conditions.
In particular, the Senior Perpetual Preferred Stock will have an
initial dividend rate of five percent per annum, which will increase to
nine percent per annum five years after issuance. In addition, the
stock will be callable by the banking organization at par after three
years from issuance and may be called at an earlier date if the stock
will be redeemed with cash proceeds from
[[Page 62852]]
the banking organization's issuance of common stock or perpetual
preferred stock that (i) qualifies as Tier 1 capital of the
organization and (ii) the proceeds of which are no less than 25 percent
of the aggregate issue price of the Senior Perpetual Preferred Stock.
In all cases, the redemption of the Senior Perpetual Preferred Stock
will be subject to the approval of the banking organization's
appropriate Federal banking agency. In addition, following the
redemption of all the Senior Perpetual Preferred Stock, a banking
organization shall have the right to repurchase any other equity
security of the organization (such as warrants or equity securities
acquired through the exercise of such warrants) held by Treasury.
The Board recognizes that some of the features of the Senior
Perpetual Preferred Stock would otherwise render the preferred stock
ineligible for Tier 1 capital treatment or limit its inclusion in Tier
1 capital under the Board's capital guidelines for bank holding
companies. Bank holding companies generally may not include in Tier 1
capital perpetual preferred stock (whether cumulative or noncumulative)
that has a dividend step-up rate. Furthermore, the amount of cumulative
perpetual preferred stock that a bank holding company may include in
its Tier 1 capital currently is subject to a 25 percent limit.\3\
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\3\ See 12 CFR part 225, Appendix A, sections II.A.1.a.ii.,
II.A. a.iv.(1), II.A.1.b.i. and II.A.1.c.ii.(2).
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The Board has adopted this interim final rule to provide that the
Senior Perpetual Preferred Stock may be included without limit in the
Tier 1 capital of bank holding companies.\4\ The Senior Perpetual
Preferred Stock will be issued to Treasury as part of a nationwide
program, established by Treasury under the Act, to provide capital to
eligible banking organizations that already are in generally sound
financial condition in order to increase the capital available to
banking organizations and thereby promote stability in the financial
markets and the banking industry as a whole. These actions are being
taken under special powers granted by Congress to the Secretary of the
Treasury to achieve these important public policy objectives. A bank
holding company also may redeem the Senior Perpetual Preferred Stock
only with the approval of the Board. The dividend step-up rate for the
Senior Perpetual Preferred Stock is included in the instrument to help
achieve a fundamental public policy objective in the United States--the
replacement of the equity capital provided by the U.S. government with
private capital in a prompt fashion, consistent with the safety and
soundness of the banking organization. Each of these factors is
important to the determinations made by the Board with respect to the
appropriate capital treatment of the Senior Perpetual Preferred Stock.
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\4\ This interim final rule addresses only regulatory capital.
Details about the Capital Purchase Program, including eligibility
requirements and the general terms and conditions of the Senior
Perpetual Preferred Stock and warrants associated with such stock,
are available on the Treasury's Web site at http://www.treas.gov.
Banking organizations interested in participating in the Capital
Program should contact Treasury and their appropriate Federal
banking agency. The Board is issuing this rule for bank holding
companies only at this time. The Board continues to work with
Treasury, the other Federal banking agencies, and other parties on
other capital and related matters associated with the Capital
Purchase Program.
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For these reasons and in order to support and facilitate the timely
implementation and acceptance of the Capital Purchase Program and
promote the stability of banking organizations and the financial
system, the Board has adopted this interim final rule to permit bank
holding companies that issue new Senior Perpetual Preferred Stock to
the Treasury under the TARP to include such stock without limit as Tier
1 capital for purposes of the Board's risk-based and leverage capital
rules and guidelines for bank holding companies.\5\
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\5\ See 12 CFR part 225, Appendix A and Appendix D.
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The Board expects bank holding companies that issue Senior
Perpetual Preferred Stock, like all other bank holding companies, to
hold capital commensurate with the level and nature of the risks to
which they are exposed. In addition, the Board expects bank holding
companies that issue Senior Perpetual Preferred Stock to appropriately
incorporate the dividend features of the Senior Perpetual Preferred
Stock into the organization's liquidity and capital funding plans.
The Board notes that as a matter of prudential policy and practice
it generally has not allowed capital instruments with a dividend rate
step-up to be included in Tier 1 or Tier 2 capital. The Board has long
expressed concern that a rate step-up undermines the permanence of a
capital instrument and poses safety and soundness concerns.\6\ In light
of these concerns, the Board previously has declined to allow, as would
otherwise have been permitted by the 1998 Sydney Agreement of The Basel
Committee on Banking Supervision, capital instruments with a moderate
dividend step-up (up to 100 bps) to be included in Tier 1 capital up to
a limit of 15 percent of Tier 1 capital. The Board also notes that
capital instruments with step-up provisions issued by banking
organizations in other countries that are members of the Basel
Committee have become callable over the last several months. These
securities have been widely redeemed, even though the stepped-up rate
has been economical for the issuer. Such redemptions could lead to the
undesirable outcome of the issuer either refinancing the capital
instrument at a higher rate, placing further stress on an institution
that may already be in strained condition, or simply not replacing the
instrument, further depleting its capital resources.
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\6\ For example, in a 1992 policy statement on subordinated
debt, the Board noted: ``Although payments on debt whose rates
increase over time on the surface may not appear to be directly
linked to the financial condition of the issuing organization, such
debt (sometimes referred to as expanding or exploding rate debt) has
a strong potential to be credit sensitive in substance.
Organizations whose financial condition has strengthened are more
likely to be able to refinance the debt at a rate lower than that
mandated by the preset increase, whereas institutions whose
condition has deteriorated are less likely to be able to do so.
Moreover, just when these latter institutions would be in the most
need of conserving capital, they would be under strong pressure to
redeem the debt as an alternative to paying higher rates and, thus,
would accelerate depletion of their own resources.'' See 12 CFR
250.166(b)(4) at n. 4.
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However, as discussed above, issuance of the Senior Perpetual
Preferred Shares is consistent with a strong public policy objective,
which is to increase the capital available to banking organizations
generally in the current environment and thereby promote stability in
the financial markets and the banking industry as a whole. In addition,
the Board notes that other terms and public policy considerations
related to the Senior Perpetual Preferred Stock mitigate supervisory
concerns over the rate step-up feature. Issuers of this instrument
generally will not be allowed to repurchase other stock or increase
common dividends for three years after issuance without the consent of
the Treasury. These restrictions promote in an important way not only
the overall safety and soundness of the issuer, but also the retention
of the highest form of capital, common equity. Moreover, as discussed
above, the Senior Perpetual Preferred Stock includes features designed
to incentivize issuers to redeem the stock and replace it with Tier 1
qualifying perpetual equity as soon as practicable, a feature that also
fosters a higher quality of capital. These features, which are unique
to the Senior Perpetual Preferred Stock, countervail in many respects
the Board's concerns with regard to a step-up feature.
[[Page 62853]]
In light of the instrument- and circumstances-specific nature of
the Board's determination, the Board strongly cautions bank holding
companies against construing the inclusion of the Senior Perpetual
Preferred Stock in Tier 1 capital as in any way detracting from the
Board's longstanding stance regarding the unacceptability of a rate
step-up in other regulatory capital instruments.
The Board requests comment on all aspects of this rule.
Regulatory Analysis
Administrative Procedure Act
Pursuant to sections 553(b) and (d) of the Administrative Procedure
Act (5 U.S.C. 553(b) and (d)), the Board finds that there is good cause
for issuing this interim final rule and making the rule effective on
October 17, 2008, and that it is impracticable, unnecessary, or
contrary to the public interest to issue a notice of proposed
rulemaking and provide an opportunity to comment before the effective
date. The Board has adopted the rule in light of, and to help address,
the continuing unusual and exigent circumstances in the financial
markets. The rule will allow bank holding companies to immediately
count the Senior Perpetual Preferred Stock as Tier 1 capital for
purposes of their risk-based and leverage capital ratios and will help
promote stability in the banking system and financial markets. The
Board believes it is important to provide bank holding companies
immediately with guidance concerning the capital treatment of the
Senior Perpetual Preferred Stock so that bank holding companies may
make appropriate judgments concerning their participation in the
Capital Purchase Program. The Board is soliciting comment on all
aspects of the rule and will make such changes that it considers
appropriate or necessary after review of any comments received.
Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
generally requires that an agency prepare and make available for public
comment an initial regulatory flexibility analysis in connection with a
notice of proposed rulemaking.\7\ Under regulations issued by the Small
Business Administration,\8\ a small entity includes a bank holding
company with assets of $175 million or less (a small bank holding
company). As of June 30, 2008, there were 2,636 small bank holding
companies.
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\7\ See 5 U.S.C. 603(a).
\8\ See 13 CFR 121.201.
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The exact number of small bank holding companies that would be
impacted by this rule will depend on the number of such entities that
participate in the Capital Purchase Program.
As a general matter, the Board's risk-based and leverage capital
rules and guidelines for bank holding companies apply only to a bank
holding company that has consolidated assets of $500 million or more.
Accordingly, this interim final rule will not affect any small bank
holding company and, for this reason, the Board hereby certifies that
the rule will not have a significant impact on a substantial number of
small bank holding companies.
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3506), the Board has reviewed the interim final rule
to assess any information collections. There are no collections of
information as defined by the Paperwork Reduction Act in the interim
final rule.
Solicitation of Comments on Use of Plain Language
Section 722 of the GLBA required the Federal banking agencies to
use plain language in all proposed and final rules published after
January 1, 2000. The Board invites comment on how to make the interim
final rule easier to understand. For example:
Have we organized the material to suit your needs? If not,
how could the rule be more clearly stated?
Are the requirements in the rule clearly stated? If not,
how could the rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would make the regulation easier to
understand?
Would more, but shorter, sections be better? If so, which
sections should be changed?
What else could we do to make the regulation easier to
understand?
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
0
For the reasons stated in the preamble, the Board of Governors of the
Federal Reserve System amends part 225 of chapter II of title 12 of the
Code of Federal Regulations as follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
1. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and
3909; 15 U.S.C. 6801 and 6805.
0
2. In appendix A to part 225:
0
a. Revise section II.A.1.a.ii.; and
0
b. Revise footnote 8 in section II.A.1.c.ii.(2) to read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
II. * * *
A. * * *
1. * * *
a. * * *
ii. Qualifying noncumulative perpetual preferred stock,
including related surplus, and senior perpetual preferred stock
issued to the United States Department of the Treasury (Treasury)
under the Troubled Asset Relief Program (TARP) established by the
Emergency Economic Stabilization Act of 2008, Division A of Public
Law No. 110-342 (which for purposes of this appendix shall be
considered qualifying noncumulative perpetual preferred stock),
including related surplus;
* * *
c. * * *
ii. * * *
(2) * * *
\8\ Notwithstanding this provision, senior perpetual preferred
stock issued to the Treasury under the TARP established by the
Emergency Economic Stabilization Act of 2008, Division A of Public
Law No. 110-342, may be included in tier 1 capital. In addition,
traditional convertible perpetual preferred stock, which the holder
must or can convert at a fixed number of common shares at a preset
price, generally qualifies for inclusion in tier 1 capital provided
all other requirements are met.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, October 16, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8-25117 Filed 10-17-08; 11:15 am]
BILLING CODE 6210-02-P