[Federal Register Volume 74, Number 103 (Monday, June 1, 2009)]
[Rules and Regulations]
[Pages 26081-26084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-12628]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-1336]


Capital Adequacy Guidelines: Treatment of Perpetual Preferred 
Stock Issued to the United States Treasury Under the Emergency Economic 
Stabilization Act of 2008

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

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SUMMARY: The Board is adopting a final rule to allow bank holding 
companies that have issued senior perpetual preferred stock to the U.S. 
Department of the Treasury under the capital purchase and other 
programs established by the Secretary of the Treasury under the 
Emergency

[[Page 26082]]

Economic Stabilization Act of 2008, to include such capital instruments 
in tier 1 capital for purposes of the Board's risk-based and leverage 
capital guidelines for bank holding companies.

DATES: The final rule will become effective on July 1, 2009.

FOR FURTHER INFORMATION CONTACT: Norah M. Barger, Deputy Director, 
(202) 452-2402, or John F. Connolly, Manager, (202) 452-3621, Division 
of Banking Supervision and Regulation; or Kieran J. Fallon, Assistant 
General Counsel, (202) 452-5270, 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 17, 2008, the Board issued an 
interim final rule (interim rule) to allow bank holding companies that 
issue senior perpetual preferred stock to the U.S. Department of 
Treasury (Treasury) under the Troubled Asset Relief Program (TARP) 
established by section 101 of the Emergency Economic Stabilization Act 
of 2008 (Senior Perpetual Preferred Stock), to include such capital 
instruments in tier 1 capital for purposes of the Board's risk-based 
and leverage capital guidelines for bank holding companies.\1\ The 
Board is now adopting the interim rule as a final rule without 
substantive changes.\2\
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    \1\ 73 FR 62851 (October 22, 2008). A correction to a citation 
in the interim rule was published on October 27, 2008. 73 FR 63624 
(October 27, 2008).
    \2\ This final rule addresses only the regulatory capital 
treatment of the Senior Perpetual Preferred Stock. Details about the 
Capital Purchase Program and other programs established by the 
Treasury under the EESA, including eligibility requirements and the 
general terms and conditions of the senior perpetual preferred stock 
issued to Treasury and warrants associated with such stock, are 
available at http://www.financialstability.gov/.
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    The Emergency Economic Stabilization Act of 2008 (EESA), Division A 
of Public Law 110-343, 122 Stat. 3765 (2008), was 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.'' \3\ Pursuant to the 
authorities granted by the EESA, and in order to restore liquidity and 
stability to the financial system, on October 14, 2008, Treasury 
announced the establishment of the Capital Purchase Program (CPP) under 
the TARP.\4\ Through the CPP, Treasury has provided capital to eligible 
banks, bank holding companies, savings and loan holding companies, and 
savings associations (collectively, banking organizations) by 
purchasing Senior Perpetual Preferred Stock of the banking 
organizations.\5\ As of April 20, 2009, the Treasury had invested 
approximately $198 billion in U.S. banking organizations through the 
CPP.
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    \3\ See 12 U.S.C. 5201(1).
    \4\ On November 17, 2008, the Treasury announced a term sheet 
under the CPP for privately-held financial institutions. On April 7, 
2009, the Treasury announced term sheets for public and non-public 
holding companies with a top-tier parent that is organized in mutual 
form. These term sheets have substantially the same terms as the 
term sheet that was announced on October 14, 2008, for publicly-held 
financial institutions. For purposes of the interim rule and the 
final rule, the preferred stock issued to Treasury pursuant to these 
term sheets is considered to be senior perpetual preferred stock 
issued to Treasury under the TARP.
    \5\ In a separate rule document published elsewhere in today's 
issue of the Federal Register, the Board is publishing an interim 
final rule to allow bank holding companies that are ``S-
corporations'' to include in tier 1 capital subordinated notes 
issued to the Treasury under the CPP for purposes of the Board's 
risk-based and leverage capital guidelines for bank holding 
companies. (June 1, 2009).
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    The Senior Perpetual Preferred Stock issued under the CPP is 
perpetual preferred stock in the issuing banking organization, is 
senior to the issuer's common stock, and is pari passu with the 
issuer's existing preferred shares as to liquidation preference and 
dividends (other than preferred shares which by their terms rank junior 
to the issuer's most senior class of existing preferred shares). All 
Senior Perpetual Preferred Stock issued by bank holding companies 
provide for cumulative dividends. The aggregate amount of Senior 
Perpetual Preferred Stock that may be issued by a banking organization 
to Treasury under the CPP 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 the organization's risk-
weighted assets.\6\
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    \6\ Treasury has announced that it is considering re-opening the 
Capital Purchase Program for institutions with total assets under 
$500 million and raising--from 3 percent to 5 percent of risk-
weighted assets--the amount of capital instruments for which 
qualifying institutions can apply.
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    As noted in the preamble to the interim rule, the Senior Perpetual 
Preferred Stock issued under the CPP includes several features that 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 with private capital in an 
expeditious, but prudent, manner.
    In particular, the Senior Perpetual Preferred Stock issued under 
the CPP has an initial dividend rate of five percent per annum, which 
will increase to nine percent per annum five years after issuance. In 
addition, following the redemption of all the Senior Perpetual 
Preferred Stock issued under the CPP, a banking organization will 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.
    In the preamble to the interim rule, the Board recognized that some 
of the features of the Senior Perpetual Preferred Stock issued under 
the CPP if included in preferred stock issued to private investors 
would 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 rate step-up. 
Furthermore, the amount of eligible cumulative perpetual preferred 
stock that a bank holding company may include in its tier 1 capital 
generally is subject to a 25 percent limit.\7\
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    \7\ 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.b.ii.(2). Until March 31, 
2011, internationally-active banking organizations generally are 
expected, but not required, to limit the amount of qualifying 
cumulative perpetual preferred stock (including related surplus) and 
qualifying trust preferred securities included in tier 1 capital to 
15 percent of the sum of core capital elements. 12 CFR part 225, 
Appendix A, section II.A.1.b.ii.(3).
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    The interim rule permits bank holding companies to include all 
Senior Perpetual Preferred Stock issued to Treasury under the TARP in 
tier 1 capital without limit. The Board sought comment on all aspects 
of the interim rule, including this treatment. The Board has carefully 
reviewed and analyzed the issues raised by commenters and has decided 
to adopt the interim rule as a final rule without substantive changes. 
The Board received seven comments on the interim rule from individuals 
and trade groups. Commenters largely supported the interim rule.\8\ 
Commenters acknowledged the Board's concerns with certain features of 
the Senior Perpetual Preferred Stock, including its dividend rate step-
up. However, commenters noted that other factors mitigate these 
concerns. Commenters noted, for example, that issuers will not be 
allowed to repurchase other stock or increase common dividends for 
three years after the issuance of the Senior

[[Page 26083]]

Perpetual Preferred Stock. In addition, commenters argued that the 
dividend rate step-up of the Senior Perpetual Preferred Stock would 
help achieve the fundamental public policy objective of replacing the 
U.S. Government's equity investment with private capital in a prompt, 
safe, and sound manner.
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    \8\ One commenter recommended that the Board take steps to make 
its capital adequacy guidelines easier to understand. This comment 
is addressed below.
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    The Board concurs that the specific features of the Senior 
Perpetual Preferred Stock and the unique circumstances and purposes of 
the Capital Purchase Program and TARP largely mitigate the Board's 
concerns about the dividend rate step-up. The Senior Perpetual 
Preferred Stock is issued to Treasury as part of a nationwide, 
temporary, and emergency program, established by Treasury under the 
EESA, to provide capital to eligible banking organizations and thereby 
promote stability in the financial markets and the banking industry as 
a whole and help restore economic growth.
    Since publication of the interim rule, the Treasury has established 
two additional programs under the EESA pursuant to which Treasury may 
purchase Senior Perpetual Preferred Stock from bank holding companies--
the Targeted Investment Program (TIP) and Capital Assistance Program 
(CAP). In addition, the Treasury has established the Asset Guarantee 
Program (AGP), under which Treasury may receive Senior Perpetual 
Preferred Stock from a bank holding company as a premium for 
guaranteeing assets of the company.\9 \
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    \9\ Details about the TIP, CAP, and AGP are available at http://www.financialstability.gov.
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    The interim final rule adopted by the Board, by its terms, applies 
to all Senior Perpetual Preferred Stock issued to Treasury under the 
TARP, including any Senior Perpetual Preferred Stock issued under the 
TIP, CAP, or AGP. The Board recognizes that the Senior Perpetual 
Preferred Stock issued by bank holding companies to Treasury under the 
TIP and AGP (TIP/AGP Preferred) and under the CAP (CAP Preferred) has 
certain features that differ from the Senior Perpetual Preferred Stock 
issued under the CPP. For example, both the TIP/AGP Preferred and CAP 
Preferred have a higher initial interest rate, but no interest rate 
step-up feature. In addition, the CAP Preferred is convertible to 
common stock of the issuing banking organization at the organization's 
option (subject to the approval of the appropriate Federal banking 
agency), and must convert to common stock of the issuer after seven 
years.\10\ Although the higher initial interest rate makes the TIP/AGP 
Preferred and CAP Preferred somewhat less desirable from a capital 
perspective because of its added cost to the issuing bank holding 
company, the Board believes that this feature is mitigated by the lack 
of an interest rate step-up (in the case of both instruments) and the 
convertibility of the CAP Preferred.
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    \10\ After conversion, the Convertible Preferred, as qualifying 
common stockholders' equity, would be includable without limit in 
the tier 1 capital of a bank holding company as a core capital 
element for purposes of the Board's risk-based and leverage capital 
guidelines for bank holding companies. See 12 CFR part 225, Appendix 
A, section II.A.1.a.i.
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    In addition, the CPP, TIP, CAP, and AGP each seek to advance the 
same key government objectives underlying the EESA--fostering financial 
market stability, and supporting the availability of credit to 
consumers during the current stressed market conditions. As noted 
above, the EESA was adopted 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.'' 
\11\ Treasury's authority to make investments, and to provide 
commitments to make investments, under the TARP, including through the 
CPP and other programs, ends on December 31, 2009, subject to a 
potential extension to October 3, 2010.\12\ The emergency nature and 
statutorily-limited duration of the TARP helps to ensure that the 
Senior Perpetual Preferred Stock issued by banking organizations will 
serve its intended purpose as a provisional vehicle for buttressing the 
capital bases of banking organizations and stabilizing the financial 
system during a period of severe economic stress, while preserving the 
preeminent importance of private capital to the stability of banking 
organizations in the longer-term.
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    \11\ See supra, n. 3.
    \12\ See 12 U.S.C. 5230. Treasury's authority under the TARP may 
be extended until October 3, 2010, only upon a written certification 
to the Congress by the Secretary of the Treasury. This certification 
must ``include a justification of why the extension is necessary to 
assist American families and stabilize financial markets, as well as 
the expected cost to the taxpayers for such an extension.'' Id.
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    The Board also notes that, since the adoption of the interim rule, 
the EESA has been amended to permit a banking organization to redeem 
the Senior Perpetual Preferred Stock without regard to the source of 
the funds used to redeem the stock and without regard to any waiting 
period.\13\ The Board notes, however, that the amendment requires that 
Treasury consult with the appropriate Federal banking agency before a 
banking organization may make such a redemption.\14\ In addition, the 
terms of the Senior Perpetual Preferred Stock issued under the CPP, 
TIP, CAP, and AGP provide that redemption is subject to the approval of 
the Federal Reserve, which provision remains effective.\15\ In light of 
this provision, the Board recently noted in Federal Reserve SR letter 
09-4 \16\ that any bank holding company that intends to redeem Senior 
Perpetual Preferred Stock issued to Treasury under the CPP, TIP, CAP, 
or AGP should first consult with Federal Reserve supervisory staff. 
After reviewing a request by a bank holding company to redeem Senior 
Perpetual Preferred Stock, the Board may take such actions as are 
necessary or appropriate to restrict the bank holding company from 
redeeming such securities if the redemption would be inconsistent with 
the safety and soundness of the bank holding company.\17\
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    \13\ See section 7001 of the American Recovery and Reinvestment 
Act of 2009 (ARRA), Public Law 111-5, 123 Stat. 115 (2009). 
Previously, during the first three years that the Senior Perpetual 
Preferred Stock was outstanding, a banking organization was required 
to redeem the stock with cash proceeds from 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. See 73 FR 62852 
(October 22, 2008).
    \14\ See section 7001 of the ARRA.
    \15\ See 12 CFR part 225, Appendix A, section II.A.1.c.ii.(2).
    \16\ SR 09-4, ``Applying Supervisory Guidance and Regulations on 
the Payment of Dividends, Stock Redemptions, and Stock Repurchases 
at Bank Holding Companies,'' March 27, 2009.
    \17\ See 12 CFR 225.4(b)(1); 12 CFR part 225, Appendix A, 
sections II.(iii) and II.A.1.c.ii.(2).
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    For these reasons and in order to continue to support the strong 
public policy objectives of the CPP, TIP, CAP, and AGP and promote the 
stability of banking organizations and the financial system, the Board 
has adopted the interim rule in final form. The final rule--like the 
interim rule--permits bank holding companies that have issued 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 guidelines for bank holding 
companies.\18\ The Board's decision to include Senior Perpetual 
Preferred Stock as an unrestricted core capital element in bank holding 
companies' tier 1 capital is based on each of the factors discussed 
above--including the emergency and temporary nature of the legislation 
authorizing the acquisition of such stock by the Treasury--as well as

[[Page 26084]]

those presented in the interim rule, and is further supported by the 
commenters and the points they raised.
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    \18\ See 12 CFR part 225, Appendices A and D.
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    As noted in the preamble to the interim rule, the Board expects 
bank holding companies that issue Senior Perpetual Preferred Stock 
under the CPP, TIP, CAP, and AGP 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 stock into the organization's 
liquidity and capital funding plans. Bank holding companies should not 
construe the Board's decision to allow the inclusion of the Senior 
Perpetual Preferred Stock as an unrestricted core capital element in 
bank holding companies' tier 1 capital as in any way (1) detracting 
from the Board's longstanding stance regarding the unacceptability of a 
rate step-up in other tier 1 capital instruments or (2) reflecting a 
decision by the Board to allow cumulative perpetual preferred stock to 
be includable in bank holding companies' tier 1 capital in excess of 
the limits established for restricted core capital elements under the 
Board's capital guidelines for bank holding companies.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires an agency that is 
issuing a final rule to prepare and make available a regulatory 
flexibility analysis that describes the impact of the final rule on 
small entities.\19\ The RFA provides that an agency is not required to 
prepare and publish a regulatory flexibility analysis if the agency 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities.\20\ Under regulations 
issued by the Small Business Administration,\21\ a small entity 
includes a bank holding company with assets of $175 million or less (a 
small bank holding company). As of December 31, 2008, there were 
approximately 2,586 small bank holding companies.
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    \19\ 5 U.S.C. 603(a).
    \20\ 5 U.S.C. 605(b).
    \21\ See 13 CFR 121.201.
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    As a general matter, the Board's risk-based and leverage capital 
guidelines for bank holding companies apply only to a bank holding 
company that has consolidated assets of $500 million or more. 
Accordingly, this final rule will not affect small bank holding 
companies 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 final rule to 
assess any information collections. There are no collections of 
information as defined by the Paperwork Reduction Act in the final 
rule.

Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 
requires the Federal banking agencies to use plain language in all 
proposed and final rules published after January 1, 2000. The Board 
invited comment on how to make the interim rule easier to understand. 
The Board received one comment generally criticizing the Board's 
capital adequacy guidelines as difficult to understand.
    The Board acknowledges that the regulation of a banking 
organization's capital is a complex area. The Board's capital 
guidelines necessarily must reflect this complexity. Nevertheless, the 
Board has endeavored to present this final rule, like all of its 
capital rules, in a manner that, in light of the nature and complexity 
of the subject matter, is as brief, comprehensible, and straightforward 
as possible.

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, 3906, 
3907, and 3909; 15 U.S.C. 1681s, 1681w, 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 (EESA), Division A of 
Public Law 110-343 (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 EESA, may 
be included in tier 1 capital. In addition, traditional convertible 
perpetual preferred stock, which the holder must or can convert into 
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, May 21, 2009.
Robert deV. Frierson,
Deputy Secretary of the Board.
 [FR Doc. E9-12628 Filed 5-29-09; 8:45 am]
BILLING CODE 6210-02-P