8
Department of the Treasury Office of Thrift Supervision October 28,1997 Number: 184 With the attached joint notice of proposed rule- making, the Office of Thrift Supervision (OTS), in concert with the OCC, FDIC and Fed, has taken an important step toward making minimum capital re- quirements the same for thrifts and banks. The agencies would modify their rules to give the same capital treatment to three areas of the risk- based capital standards: l Construction loans on presold residential prop- erties; l Real estate loans secured by junior liens on l- to 4-family residential properties; and l Investments in mutual funds. In addition, the proposal contains uniform and simplified Tier 1 capital standards. Key provisions are: Construction loans on Dresold residential Drooertv; Adopt the current practice of the FDIC and the Fed for qualifying residential construction loans. The agencies would assign a 50 percent risk weight to these loans once the property is sold and other criteria are satisfied, even if the sale oc- curs after the construction loan was made. OTS and the OCC currently permit an institution to use a 50 percent risk weight only if the property is sold before the construction loan is made. Junior liens on one- to four-family residential grooerties; Adopt the OCC’s current approach that places qualifying first mortgages on one- to four- family residential properties in the 50 percent risk- weight category and nonqualifying first mortgages and all junior loans on such properties in the 100- percent risk weight category. The current OTS rule parallels the OCC’s rule. but in certain circum- stances OTS has interpreted such loans as a single extension of credit. hlutual funds: Require an institution to assign its total investment in a mutual fund to the highest risk weight of any asset that the fund is authorized to hold. in accordance with its prospectus. An in- stitution. however. could opt to assign the in- vestment on a pro-rata basis to different risk- weight categories according to the investment lim- its for different categories in the fund’s prospectus. Current OTS rules are similar? but are based on the actual holdings of the fund, rather than limits in the prospectus. The agencies also propose to require all in- stitutions, other than those with a CAMELS rating of 1, to have a Tier 1 capital ratio of at least 4 per- cent. Institutions with a CAMELS 1 composite rat- ing would continue to be subject to a lower 3 percent Tier 1 leverage ratio requirement. This change would align the agencies’ Tier 1 capital rules with their Prompt Corrective Action rules. The proposal is one of a series of steps the agen- cies are taking to implement a provision of the Riegle Community Development and Regulatory Improvement Act of 1994 requiring the federal banking agencies to work toward uniform regu- lations and policies. The joint notice of proposed rulemaking was pub- lished in the October 27, 1997, edition of the Fed- eral Register, Vol. 62, No. 207, pp. 55686-55692. Written comments must be received on or before December 26? 1997, and should be addressed to: Manager, Dissemination Branch, Records Man- agement and Information Policy Division, Office of Thrift Supervision, 1700 G Street, N.W., Washing- ton, DC 20552. Comments may be faxed to 202/ 906-7755, or e-mailed to: pub- [email protected]. For further information contact: John F. Connolly 202/906-6465 Karen Osterloh 202/906-6639 Nicolas P. Retsinas Director Office of Thrift Supervision Attachment

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Page 1: Office of Thrift Supervision - Office of the Comptroller ... · the Federal Reseme’s Rules Regarding Availability of Information. FDIC: Written comments should be sent to Robert

Depar tment of the Treasury

Office of Thrift Supervision

October 28,1997 Number: 184

With the attached joint notice of proposed rule-making, the Office of Thrift Supervision (OTS), inconcert with the OCC, FDIC and Fed, has taken animportant step toward making minimum capital re-quirements the same for thrifts and banks. Theagencies would modify their rules to give thesame capital treatment to three areas of the risk-based capital standards:

l Construction loans on presold residential prop-erties;

l Real estate loans secured by junior liens on l-to 4-family residential properties; and

l Investments in mutual funds.

In addition, the proposal contains uniform andsimplified Tier 1 capital standards. Key provisionsare:

Construction loans on Dresold residential Drooertv;Adopt the current practice of the FDIC and theFed for qualifying residential construction loans.The agencies would assign a 50 percent riskweight to these loans once the property is soldand other criteria are satisfied, even if the sale oc-curs after the construction loan was made. OTSand the OCC currently permit an institution to usea 50 percent risk weight only if the property issold before the construction loan is made.

Junior liens on one- to four-family residentialgrooerties; Adopt the OCC’s current approach thatplaces qualifying first mortgages on one- to four-family residential properties in the 50 percent risk-weight category and nonqualifying first mortgagesand all junior loans on such properties in the 100-percent risk weight category. The current OTS ruleparallels the OCC’s rule. but in certain circum-stances OTS has interpreted such loans as a singleextension of credit.

hlutual funds: Require an institution to assign itstotal investment in a mutual fund to the highestrisk weight of any asset that the fund is authorizedto hold. in accordance with its prospectus. An in-stitution. however. could opt to assign the in-vestment on a pro-rata basis to different risk-

weight categories according to the investment lim-its for different categories in the fund’s prospectus.Current OTS rules are similar? but are based on theactual holdings of the fund, rather than limits inthe prospectus.

The agencies also propose to require all in-stitutions, other than those with a CAMELS ratingof 1, to have a Tier 1 capital ratio of at least 4 per-cent. Institutions with a CAMELS 1 composite rat-ing would continue to be subject to a lower 3percent Tier 1 leverage ratio requirement. Thischange would align the agencies’ Tier 1 capitalrules with their Prompt Corrective Action rules.

The proposal is one of a series of steps the agen-cies are taking to implement a provision of theRiegle Community Development and RegulatoryImprovement Act of 1994 requiring the federalbanking agencies to work toward uniform regu-lations and policies.

The joint notice of proposed rulemaking was pub-lished in the October 27, 1997, edition of the Fed-eral Register, Vol. 62, No. 207, pp. 55686-55692.Written comments must be received on or beforeDecember 26? 1997, and should be addressed to:Manager, Dissemination Branch, Records Man-agement and Information Policy Division, Office ofThrift Supervision, 1700 G Street, N.W., Washing-ton, DC 20552. Comments may be faxed to 202/906-7755, or e-mailed to: [email protected].

For further information contact:John F. Connolly 202/906-6465Karen Osterloh 202/906-6639

Nicolas P. RetsinasDirectorOffice of Thrift Supervision

Attachment

emily.abramsky
Text Box
This rescission does not change the applicability of the conveyed document. To determine the applicability of the conveyed document, refer to the original issuer of the document.
emily.abramsky
Cover
Page 2: Office of Thrift Supervision - Office of the Comptroller ... · the Federal Reseme’s Rules Regarding Availability of Information. FDIC: Written comments should be sent to Robert

DEPARTMENT OF THE TREASURY

Office of the Comptroller of theCurrency

12 CFR Pait 3

[Docket No. 07-l@]RIN lssI-AB14

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Re9ulatlon Ii; Docket No. R-08411

FEDERAL DEPOSIT INSURANCECOR PORAllON

12 CFR Part 325

RIN 38844B88

DEPARTMENT OF THE TREASURY

Office of Thrift Supewvislon

12 CFR Part 567

[Docket No. 97361

RIN 1559-AA98

Risk-Based Cap&l Standards:Construction Loans on PreaoldResidential Properties; Junior Liens on1. lo 4-Family Residentlal Properties:and Mutual Funds and LeverageCapital Standards: Tier 1 LeverageRatio

AwrwE8: Office of the Comptroller ofthe Currency, Treasury: Board of

..FederaZ Register Attachment to Transmittal 18455666 Federal Register I Vol. 62. No. 207 1 Monday, October 27, 1997 / Proposed Rules

Governors of the Federal ReserveSystem: Federal Deposit InsuranceCorporation: and Office of ThriftSupervision, Treasury.ACTION: Joint notice of proposedrulemaking.

SUMMARY: The Office of the Comptrollerof the Currency (OCC). the Board ofGovernors of the Federal ReserveSystem (Board), the Federal DepositInsurance Corporation (FDICI. and theOffice of Thrift Supervision (OTSI(collectively, the Agencies) areproposing to amend their respectiverisk-based capital standards andleverage capital standards for banks andthrifts. The proposal would represent asignificant step in implementing section303 of the Riegle CommunityDevelopment and RegulatoryImprovement Act of 1994, with regardto the Agencies’ capital adequacystandards. (Section 303 requires theAgencies to work jointly to makeuniform their regulations and guidelinesimplementing common statutory orsupervisory policies.) The effect of theproposal would be that the Agencieswould have uniform risk-based capitaltreatments for construction loans onpresold residential properties, realestate loans secured by junior liens onI- to 4-family residential properties, andinvestments in mutual funds, as well eSuniform and simplified minimum Tier 1capital leverage standards.DATES: Comments must be received onor before December 26.1997.ADDRE9SEB: Comments should bedirected to:

OCC: Comments may be submitted toDocket No. 97-19. CommunicationsDivision. Third Floor, Office of theComptroller of the Cmnq, 250 EStreet, S.W.. Washington, D.C. 20219.Comments will ba available forinspection and photocopying at thataddress. In addition, comments may besent by facsimile transmission to FAXnumber (202) 874-5274. or by electronicmail toREGS.COMMENT [email protected].

Board: Comments directed to theBoard should refer to Docket No. R-0947 and may be mailed to William W.Wiles, Secretary, Board of Governors ofthe Federal Reserve System, 20th Streetand Constitution Avenue, N.W..Washington D.C.. 20551. Commentsmay also be delivered to Room B-2222of the Eccles Building between 8:45 a.m.and 5:lS p.m. weekdays, or the guardstation in the Eccles Building courtyardon 20th Street, N.W. (betweenConstitution Avenue and C Street) atany time. Commexits may be inspectedin Room IvfP-500 of the Martin Building

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Federal Register f Vol. 62, NO . 207 / Monday, October 27, 1997 I Proposed Rules 5568’7 ’ ’

between 9 a.m. and 5 p.m. weekdays,except as provided in’12 CFR 261.8 ofthe Federal Reseme’s Rules RegardingAvailability of Information.

FDIC: Written comments should besent to Robert E. Feldman, ExecutiveSecretary, Attention: Comments/OES,Federal Deposit Insurance Corporation,550 17th Street N.W., Washington, D.C.20429. Comments may be handdelivered to the guard station at the rearof the 17th Street building (located onF Street) on business days between 7:00a.m. and 5:00 p.m. (FAX number (202)898-3838; Internet address:[email protected]). Comments may beinspected and photocopied in the FDICPublic Information Center, Room 100,.801 17th Street, N.W., Washington, D.C.20429, between 9:00 a.m. and 4:30 p.m.on business days.

OTS: Send comments to Manager,Dissemination Branch, RecordsManagement and Information Policy,Office of Thrift Suuervision. 1700 GStreet, N.W., Washington, D.C. 20552,Attention Docket No. 97-36. Thesesubmissions may be hand-delivered to1700 G Street, N.W., from 9:00 a.m. to5:00 p.m. on business days; they may besent by facsimile transmission to FAXnumber (202) 9067755; or they may besent by e-mail:[email protected]. Thosecommenting by e-mail should includetheir name and telephone number.Comments will be available forinspection at 1700 G Street, N.W., from9:00 a.m. until 4:00 p.m. on businessdays.

FOR FURTHER INFORMATION CONTACT:

OCC: Roger Tufts, Senior EconomicAdvisor (202/874-5070), Tom Rollo,National Bank Examiner (202/874-5070) Capital Policy Division; orRonald Shimabukuro, Senior Attorney(202/874-5090), Legislative andReplate% Activities Division.

oard: oger Cole, Associate Director(202/452-2618), Norah Barger, AssistantDirector (202/452-2402). BarbaraBouchard, Senior Supervisory FinancialAnalyst (202/452-3072), Division ofBanking Supervision and Regulation,For the hearing impaired only,Telecommunication Device for the Deaf(TDD), Diane Jenkins (202145%3544).

FDIC: For supervisory issues, StephenG. Pfeifer, Examination Specialist,Accounting Section, Division of ’Supervision (202/898-8904); for legalissues, Jamey Basham, Counsel, LegalDivision (202/898-7285).

OTS: John F. Connolly, SeniorProgram Manager for Capital Policy,(2021 906-6465) Michael D. Solomon,Senior Policy Advisor (20219065654),Supervision Policy; or Karen Osterloh,

Assistant Chief Counsel, (202/906-6639). Regulations and LegislationDivision, Office of the Chief Counsel.SUPPLEMENTARY INFORMATION: Section303(a)(2) of the Riegle CommunityDevelopment and RegulatoryImprovement Act of 1994 (12 U.S.C.4803(a)) (Riegle Act) provides that theAgencies shall, consistent with theprinciples of safety and soundness,statutory law and policy, and the publicinterest, work jointly to make uniformall regulations and guidelinesimplementing common statutory orsupervisory policies. Section 303(a)(l)of the Riegle Act requires the Agenciesto review their own regulations andwritten policies and to streamline thoseregulations and policies where possible.To fulfill the section 303 mandate, theAgencies have been reviewing, on aninteragency basis and internally, theircapital standards to identify areas wherethey have substantively different capitaltreatments or where streamlining isappropriate. As a result of thesereviews, the Agencies have identifiedinconsistencies in the risk-based capitaltreatment of certain types oftransactions, in particular, constructionloans on presold residential properties,loans secured by junior liens on l-to 4-family residential properties, andinvestments in mutual funds. * TheAgencies also believe that the minimumleverage capital standards could bestreamlined and made uniform amongthe Agencies.

The Agencies are proposing variousamendments to their risk-based capitaland leverage standards to elimmatethese differences and to streamline theirrules.

Proposed AmendmentsConstruction Loans on PresoldResiden tiol Property

The Agencies’all assign a qualifyingloan to a builder to finance theconstruction of a presold l-to 4-familyresidential property to the 50 percentrisk weight category, provided theborrower has a substantial equityinterest in the project, the property hasbeen presold under a binding contract,the purchaser has a firm commitmentfor a permanent qualifying mortgageloan, and the purchaser has made asubstantial earnest money deposit.Under the OCC and OTS rules, theconstruction loan may not receive a 50percent risk weight unless, prior to theextension of credit to the builder, the

1 The Agencies also identified inconsistencies intheir treatment of transactions supported byqualifying collateral. which am addressed in apending joint notice of proposed r&making. 61 FR42565 (August 16.1996).

property was sold to an individual whowill occupy the residence uponcompletion of construction. Under thecapital rules of the Board and the FDIC,however, such loans to builders forresidential construction are eligible fora SO percent risk weight once theproperty is sold, even if the sale occursafter the construction loan has beenmade.

The Agencies are proposing toeliminate this difference bv oermittinequalifying residential cons&&ion lo&sto become eligible for the 50 percentrisk weight category at the time theproperty is sold, even if that sale occursafter the institution has made the loanto the builder. In this regard, the OCCand OTS are proposing revisedregulatory language that would permitthis treatment because constructionloans for residences sold to individualpurchasers are equally safe regardless ofwhether sold before or after the loan ismade to the builder. The Board isproposing a revision to its regulatorylanguage to conform its discussion ofqualifying construction loans to buildersto the language of the FDIC.

Junior Liens on I- to &FamilyResidential Properties

The Agencies are not uniform in theirrisk-based capital treatment of realestate loans secured by junior liens onl-to 4-family residential propertieswhen the lending institution also holdsthe first lien and no other party holdsan intervening lien. In such cases, theBoard views both loans as a singleextension of credit secured by a firstlien held by the lending institution and,accordingly, assigns the combined loanamount to either the 50 percent or 100percent risk weight category dependingupon whether certain other criteria aremet.

One criterion to qualify for a 50percent risk weight is that the loan mustbe made in accordance with prudentunderwriting standards, including anappropriate ratio of the current loanbalance to the va!ue of the property (theloan-to-value or LTV ratio).2 Whenconsidering whether a loan is consistentwith prudent underwriting standards,the Board evaluates the LTV ratio basedon the combined loan amount. If thecombined loan amount satisfies prudentunderwriting standards, both the firstand second lien are assigned to the 50percent risk weight category. The FDIC

lOther criteria include that the loan may not be60 days or more past due or carried in nonaccrualstatus. The OTS rule also specifies that thedocumented LTV ratio may not exceed 60 oarcentof the securing real estate.vunless the loan amountover the 80 percent LTV threshold is insured byqualifying private mortgage insurance.

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. .A

55666 Federal Register I Vol. 62, No. 207 I Monday, October 27, 1997 f Proposed Rules

also combines the first and second liensto determine the appropriateness of theLTV ratio, but it applies the risk weightsdifferently than the Board. If thecombined loan amount satisfies prudentunderwriting standards, the FDIC riskweights the first lien at 50 percent andthe Second lien at 100 percent:otherwise. both liens are risk weightedat 100 percent. The CCC treats all%rstand junior liens separately, even if thelending institution holds both liens andno party holds an intervening lien.Qualifying first liens are risk weightedat 50 percent, and non-qualifying firstliens and all junior liens are riskweighted at 100 percent. The OTSdefinition of qualifying mortgage in itscapital rule parallels that of the CCC.but in response to specific inquiries, theOTS has interpreted this provision totreat first and second mortgage loans toa single individual with no interveningliens-as a single extension of credit.

The Anencies have decided topropose idopting the CCC’s capitaltreatment of junior liens as the uniforminteragency approach because it issimple to implement and monitor, andit treats all junior liens consistently.Under this approach, all junior lienswould be assigned to the 100 percentrisk weight category. The Board and theFDIC are proposing conformingrevisions to their risk-based capitalstandards. The OTS would revisit itspolicy interpretation of its current rule,which parallels the OCC’s text.

Mutual FundsThe Board and FDIC generally assign

all of an institution’s investment in amutual fund to the risk weight category

appropriate to the highest risk weightedasset that a particular mutual fund ispermitted to invest in pursuant to itsprospectus. As a general rule, the OCCapplies the same treatment, but permits,on a case-by-case basis, an institution’sinvestment to be allocated on a pro-ratabasis among risk weight categoriesbased on the percentages of a po_rtfolioauthorized to be invested in assets in aparticular risk weight category as setforth in the fund’s prospectus. The OTSgenerally assigns all of an institution’sinvestment in a mutual fund to the riskweight category applicable to thehighest risk weighted asset that the fundactually holds at a particular time. TheOTS, however, on a case-by-case basis,permits pro-rata allocation among riskweight categories based on the fund’sactual holdings. All of the Agencies’rules provide that the minimum riskweight for investments in mutual fundsis 20 percent.

The Agencies are proposing toachieve uniformity in the capital

treatment of an institution’s investmentsin mutual funds by generally assigningthe institution’s total investment to therisk category appropriate to the highestrisk weighted asset the fund ispermitted to hold in accordance with itsstated investment limits set forth in theprospectus. The Agencies, however. areproposing to allow an institution, at itsoption, to assign the investment on apro-rata basis to different risk weightcategories according to the investmentlimits in the fund’s prospectus, but inno case will indirect holdings throughshares in a mutual fund be assigned toa risk weight less than 20 percent. Forexample, an institution’s investment ina mutual fund that is authorized, inaccordance with its prospectus, toinvest up to 40 percent of its portfolioin corporate bonds and the remainder inU.S. government bonds, normally wouldbe placed in the 100 percent risk-weightcategory. However, the institution couldchoose to place only 40 percent of itsinvestment in the 100 percent riskweight category and the remainder inthe 20 percent risk weight category. Theproposed rules note that if a mutualfund is permitted to contain aninsignificant quantity of highly liquidsecurities of superior quality that do notqualify for a preferential risk weight,such securities generally will bedisregarded in determining the riskweight for the overall fund. TheAgencies also emphasize that anyactivities which are speculative innature or otherwise inconsistent withthe preferential risk weighting assignedto the fund’s assets could result in themutual fund investment being assignedto the 100 percent risk category.

Tier 1 Leverage RatioThe Agencies’ Tier 1 leverage ratio

(that is. the ratio of Tier 1 capital to totalassets) is an indicator of an institution’scapital adequacy and places a constrainton the degree to which an institutioncan leverage its equity capital base. TheBoard, FDIC, and OCC require the mosthighly-rated institutions-that is, thosewith, among other things, a composite 1rating under the Uniform FinancialInstitutions Rating System (UFIRS) 3-tomeet a minimum leverage ratio of 3.0percent. The minimum leverage ratio forother institutions is 3.0 percent “plus anadditional cushion of at least 100 to 200basis points.”

All four Agencies’ prompt correctiveaction (PCA) rules require institutions tosatisfy a 4.0 percent leverage ratio (3.0

‘The UFIRS is used by supervisors to summarizetheir evaluations of the strength and soundness offinancial institutions in a comprehensive anduniform manner.

percent for institutions with acomposite 1 rating under the UFIRS) tobe considered “adequately capitalized.”The OTS capital rule includes a 3.0percent core (Tier 1) capitalrequirement,* but the 4.0 percentstandard to be adequately capitalizedunder the Agencies’ PCA rules has beenthe controlling thrift leverage standard.

The Agencies are proposing revisionsto their leverage capital standards sothat the most highly-rated institutionswould be subject to a minimum 3.0percent leverage ratio and all otherinstitutions would be subject to aminimum 4.0 percent leverage ratio (thesame standard used to be adequatelycapitalized under their PCA rules). Thisproposed change would simplify andstreamline the Agencies’ leverage rules.

In addition, it would make the OTSTier 1 leverage standard consistent withthe current standard to be “adequatelycapitalized” under all four agencies’PCA rules and with the other agencies’Tier 1 leverage standards. The OTS isalso proposing to be consistent with theother three agencies by explicitlyclarifying that the prescribed leverage.standard is a minimum standard forfinancially strong institutions, thathigher capital may be required ifwarranted, and that institutions shouldmaintain capital levels consistent withtheir risk exposure.

The Agencies request comment on allaspects of this proposal. Comment isspecifically requested on the proposedtreatment of first and second mortgages,which places qualifying first mortgageson l- to 4-family residential propertiesin the 50 percent risk-weight categoryand all second mortgages in the 100percent risk-weight category. Pleasecomment on whether the combinedloan-to-value ratio of a first and secondmortgage to the same borrower, or someother criteria, provides a sound basis formodifying the proposed capitaltreatment of such first and secondmortgages. Comment is also specificallyrequested on the 20 percent minimumrisk weight applied to banks’investments in mutual funds. Inparticular, commenters are encouragedto discuss whether 20 percent is too lowor too high as a lower bound in light ofmutual funds’ various credit,operational, and legal risks, and wherethese risks lie.

‘The OTS’s core capital ratio is the OTSequivalent to the other agencies’ Tier 1 leverageratio. OTS is proposing to add definitions of TierI capital and-Tier 2 ca$taI to clarify that these areequivalent to cora and supplementary capital.respectively.

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Federal Register / Vol. 62, No. 207 I Monday, October 27, 1997 / Proposed Rules 55669 .

Regulatory Flexibility Act Analysis

OCC Regulatory Flexibility Act AnalysisPursuant to section SOS(b) of the

Regulatory Flexibility Act, the OCCcertifies that this proposed rule wouldnot have a significant economic impacton a substantial number of small entitiesin accord with the spirit and purposesof the Regulatory Flexibility Act (5USC. 601 et seq.). Accordingly, aregulatory flexibility analysis is notrequired. The proposed rule wouldreduce regulatory burden by unifyingthe Agencies’ risk-based capitaltreatment for presold constructionloans, junior liens, and investments inmutual funds, and simplifying the Tier1 leverage standards. The economicimpact of this proposed rule on banks,regardless of size. is expected to beminimal.

Fedeml Reserve Board RegulatoryFlexibility Act Analysis

Pursuant to section 605(b) of theRegulatory Flexibility Act, the Boarddoes not believe this proposal wouldhave a significant impact on asubstantial number of small businessentities in accord with the spirit andpurposes of the Regulatory FlexibilityAct (5 U.S.C. 601 et seq.). Accordingly,a regulatory flexibility analysis is notrequired. The effect of the proposalwould be to reduce regulatory burdenon depository Institutions by unifyingthe Agencies’ risk-based capitaltreatment for presold constructionloans, junior liens, and investments inmutual funds, and simplifying the Tier1 leverage standards. The economicimpact of the proposed rule oninstitutions, regardless of size, isexpected to be minimal.

FDIC Regulatory Flexibility Act AnalysisPursuant to section 605(b) of the

Regulatory Flexibility Act (Pub. L. 96354.5 U.S.C. 601 et seq.), it is certifiedthat the proposal would not have asignificant impact on a substantialnumber of small entities. The effect ofthe proposal would be to simplifydepository institutions’ capitalcalculations.

OTS Regulatory Flexibility Act AnalysisPursuant to section 605(b) of the

Regulatory Flexibility Act, the OTScertifies that this proposed rule will nofhave a significant economic impact ona substantial number of small entities.The effect of the proposal would be toreduce regulatory burden on depositoryinstitutions by simplifying the treatmentof junior liens. permitting institutions t0risk weight holdings in a mutual fundon a pro rata basis, and making OTS’

Tier 1 leverage ratio consistent with itscurrent standard to be adequatelycapitalized under PCA. In addition, theproposal will eliminate variousinconsistencies in the risk-based capitaltreatments applied by the Agencies.

Paperwork Reduction ActThe Agencies have determined that

the proposed rule does not involve acollection of information pursuant tothe provisions of the PaperworkReduction Act of 1995 (44 U.S.C. 3501et seq.).OCC and OTS Executive Order 12866Determination

The OCC and the OTS havedetermined that this proposed rule doesnot constitute a “significant regulatoryaction” for the purposes of ExecutiveOrder 12666.

OCC and OTS Unfunded MandatesReform Act of 1995 Determinatious

Section 202 of the UnfundedMandates Reform Act of 1995, Pub. L.1044 (Unfunded Mandates Act)requires that an agency prepare abudgetary impact statement beforepromulgating a rule that includes aFideral mandate that may result inexpenditure by State, local, and tribalgovernments, in the aggregate, or by theprivate sector, of $100 million or morein any one year. If a budgetary impactstatement is required, section 205 of theUnfunded Mandates Act also requiresan agency to identify and consider areasonablenumber of regulatoryalternatives before promulgating a rule.As discussed in the preamble, thisproposed rule is limited to changing therisk weighting of presold residentialconstruction loans, second liens, andmutual fund investments under theAgencies’ risk-based capital rules. It alsoestablishes a uniform, simplified Ileverage requirement for all institutions.In addition, with respect to the OCC.this proposal clarifies and makesuniform existing regulatoryrequirements for national banks. TheOCC and OTS have thereforedetermined that the proposed rule willnot result in expenditures by State,local, or tribal governments or by theprivate sector of $100 million or more.Accordingly, the OCC and OTS have notprepared a budgetary impact statementor specifically addressed the regulatoryalternatives considered.

List of Subjects

12CFRPart3Administrative practice and

procedure, Capital, National banks,Reporting and recordkeepingrequirements, Risk.

12 CFR Part 208

Accounting, Agriculture, Banks,banking, Confidential businessinformation, Crime, Currency, FederalReserve System, Mortgages, Reportingand recordkeeping requirements,Securities.

12 CFR Part 325

Bank deposit insurance, Banks,banking, Capital adequacy, Reportingand recordkeeping requirements,Savings associations, State non-memberbanks.

12 CFR Part 567

Capital, Reporting and recordkeepingrequirements, Savings associations.

Authority and Issuance

Office of the Comptroller of theClllTellcg12 CFR CHAPTER I

For the reasons set out in the jointpreamble, part 3 of chapter I of title 12of the Code of Federal Regulations isproposed to be amended as follows:

PART “INIMUM CAPllAL RATIOS;ISSUANCE OF DIRECTIVES

1. The authority citation for part 3continues to read as follows:

Authority: 12 U.S.C. 93a. 161.1616.1626(n). 1628 note. 1631n note, 1635.3907.and 3909.

2. In 5 3.6, paragraph (c) is revised tomad as follows:

3 3.6 Mlnlmum capital ratIoa.t l l . .

(cl Additional levemge mtiorequirement. An institution operating ator near the level in paragraph (b) of thissection is expected to have well-diversified risks, including no undueinterest rate risk exposure: excellentcontrol systems: good earnings, highasset quality; high liquidity; and wellmanaged on- and off-balance sheetactivities: and in general be considereda strong banking organization, ratedcomposite 1 under the UniformFinancial Institutions Rating System(CAMELS) rating system of banks. Forall but the most highly-rated banksmeeting the conditions set forth in thisparagraph, the minimum Tier 1 leverageratio is to be 4 percent. In all cases,banking institutions should hold capitalcommensurate with the level and natureof all risks.

3. In appendix A to part 3, section 3..the second undesignated paragraph andparagraph (a)(3)(iv) are revised to readas follows:

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I . -. .

05 5 6 9 0 Federal Register I Vol. 62. No. 207 / Monday, October 27, 1997 1 Proposed Rules

APPENDIX A TO PART 3-RISKBASED CAPITAL GUIDELINESl l l . .

Section 3. Risk CotegoriesIWeights for On-Balance Sheet Assets and Off-Balance SheetItemsl l t l l

Some of the assets on a bank’s balancesheet may represent an indirect holding of apool of assets, e.g., mutual funds. thatencompass more than one risk weight withinthe pool. In those situations, the bank mayassign the asset to the risk categoryapplicable to the highest risk-weighted assetthat pool is permitted to hold pursuant to itsstated investment objectives in the fund’sprospectus. Alternatively, the bank mayassign the asset on a pm rata basis todifferent risk categories according to theinvestment limits in the fund’s prospectus. Ineither case, the minimum risk weight that thebank may assign to such a pool is 20 percent.If, in order to maintain a necessary degree ofliquidity, the fund is permitted to hold aninsignificant amount of its investments inshort-term, highly-liquid securities ofsuperior credit quality (that do not qualify fora preferential risk weight), such securitiesgenerally will not be taken into account indetermining the risk category into which thebank’s holding in the overall pool should heassigned. The prudent use of hedginginstruments by a mutual fund to reduce therisk of its assets will not increase the riskweighting of that fund above the 20 percentcategory. More detail on the treatment ofmortgage-backed securities is provided insection 3(a)(3)(vi) of this appendix A.

(iv) Loans to residential real estate buildersfor one-to-four family residential propertyconstruction, if the bank obtains sufficientdocumentation demonstrating that the buyerof the home intends to purchase the home(i.e., a legally binding written sales contract)and has the ability to obtain a mortgage loansufficient to purchase the home (i.e., a firmwritten commitment for permanent financingof the home upon completion), subject to thefollowing additional criteria:l l l l l

Dated: September 29.1997.Eugene A. Ludwig,Comptroller of the Currency.

Federal Reserrre System12 CFR CHAPTER II

For the reasons set forth in the jointpreamble, part 208 of chapter II of title12 of the Code of Federal Regulations isproposed to be amended as follows:

PART 203-MEMBERSHIP OFSTATEBANKING INSTITUTIONS IN THEFEDERALRESERVESYSTEM(REGULATION H)

1. The authority citation for part 208continues to read as follows:

Authority: 12 U.S.C. 24. 36. 92(a), 93(a),248(a), 248(c), 321-338a. 37ld, 461.481-486,

601,611,1814,1816,1818,1820(d)(9),1823(j), 1828(o). 1831,18310,1831p-1, r-l.1835(a). 1882,2901-2907,3105,3310,3331-3351, and 3906-3909: 15 U.S.C. 78b, 78I(b),781(g), 781(i), 78o4(c)(S), 78q. 78q-1, and78~; 31 U.S.C. 5318; 42 U.S.C. 4012a. 4104a,4104b, 4106, and 4128.

2. In appendix A to part 208, sectionZZZ. A., footnote 21 is revised to read asfollows:

APPENDIX A TO PART POS-CAPITALADEQUACY GUIDELINES FOR STATEMEMBER BANKS: RISK-BASEDMEASUREl c l l *

3. In appendix A to part 208, sectionZLLC.3. is amended by removing andreserving footnote 34 and by adding anew sentence to the end of the firstparagraph of footnote 35 to read asfollows:l l l l l

4. In appendix B to part 208, sectionII.a. is revised to read as follows:

~IAII investment in shares of a mutual fundwhose portfolio consists solely of various securitiesor money market instruments that, if heldseparately, would bs assigned to diflerent riskcategories, generally is assigned to the risk categoryappmpriate to the highest risk-weighted ssset thatthe fund is permitted to hold in accordance withthe stated investment objectives set forth in theprospectus. The bank may. at its option, assign theinvestment on a pm rata basis to different riskcategories according to the investment limits in thefund’s pmspe-ctus. but in no case will indirectholdings through shares in any mutual fund beassigned to a risk weight less than 20 percent. If.in order to maintain a necessary degree of short-term liquidity, a fund is permitted to hold aninsignificant amount of its assets in short-term,highly liquid securities of superior czedit qualitythat do not qualify for a preferential risk weight.such securities generally till bs disregarded indetermining the risk category into which the bank’sholding in the overall fund should be assigned. Theprudent use of hedging instruments by a mutualfund to reduce the risk of its assets will not increasethe risk weighting of the mutual fund investment.For example, the use of hedging instruments by amutual fund to reduce the interest rate risk of itsgovernment bond portfolio will not increase the riskweight of that fund above the ?O percent category.Nonetheless, if the fund engages in any activitiesthat appear speculative in nature or has any othercharacteristics that are inconsistent with thepreferential risk weighting assigned to the fund’sassets, holdings in the fund will be assigned to the100 percent risk category.

3’ l l l Such loans to builders will beconsidered prudently underwritten only if the bankhas obtained sufficient documentation that thebuyer of the home intends to purchase the home(i.e.. has a legally binding written sales contract1and has the ability to obtain a mortgage loansufficient to purchase the home (i.e.. has a firmwritten commitment for permanent financing of thehome upon completion).

APPENDIX B TO PART PWAPlTALADEGUACY GUIDELINES FOR STATEMEMBER BANKS: TlER 1 LEVERAGEMEASUREl l l l l

II’..a.‘For a strong banking organization (rated

composite 1 under the UFIRS rating systemof banks) the minimum ratio of Tier 1 capitalto total assets is 3.0 percent. Suchinstitutions must not be anticipating orexperiencing significant growth, and areexpected to have welldiversified risk(including no undue interest rate riskexposure), excellent asset quality, highliquidity, good earnings, and in general to beconsidered a strong banking organization. Forall other institutions, the miniium ratio is4.0 percent. Higher capital ratios could berequired if warranted by the particularcircumstances or risk profiles of individualbanks. In all cases, banking institutionsshould hold capital commensurate with thelevel and nature of all risks, including thevolume and severity of problem loans, towhich they are exposed.l . t . t

By order of the Board of Governors of theFederal Reserve System, October 21.1997.wiIIiam w. wiles,Secretary of the Bawd.

Federal Deposit Insurance Corporation

12 CFR CHAPTER 111For the reasons set forth in the joint

preamble, part 325 of chapter III of title12 of the Code of Federal Regulations isproposed to be amended as follows:

PART 325-CAPITAL MAINTENANCE

1. The authority citation for part 325continues to read as follows:

Authority: 12 U.S.C. 1815(a), 1815(b).1818, 1818(a), 1818(b), 1818(c), 1818(t),1819(Tenth), 1828(c), 1828(d), 1828(i),1828(n), 1828(o). 18310,1835,3907, 3909,4808; Pub. L. 102-233.105 Stat. 1761,1789.1790 (12 U.S.C. 1831n note): Pub. L. 102-242,105 Stat. 2236.2355.2386 (12 U.S.C1828 note).

2. Paragraph (b)(Z) in 0 325.3 isrevised to read as follows:

Q 325.3 Mlnlmum leverage capltalrequirementl l t l l

gi io; ail but the most highly-ratedinstitutions meeting the conditions setforth in paragraph (b)(l) of this section,the minimum leverage capitalrequirement for a bank (or for aninsured depository institution makingan application to the FDIC) shall consistof a ratio of Tier 1 capital to total assetsof not less than 4 percent.l t l l l

3. In appendix A to part 325, sectionII.B., paragraph 1 is revised to read asfollows:

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Federal Register I Vol. 62, No. 207 I Monday, October 27, 1997 I Proposed Rules 55691

APPENDIX A TO PART 32&STATEMENT OF POLICY ON RISK-BASED CAPiTALl l l l l

II. l l lB. l l

I. Indirect Holdings of Assets. Someof the assets on a bank’s balance sheetmay represent an indirect holding of apool of assets: for example, mutualfunds. An investment in shares of amutual fund whose portfolio consistssolely of various securities or moneymarket instruments that, if heldseparately, would be assigned todifferent risk categories, generally isassigned to the risk category appropriateto the highest risk-weighted asset thatthe fund is permitted to hold inaccordance with the stated investmentobjectives set forth in its prospectus.The bank may, at its option, assign theinvestment on a pro rata basis todifferent risk categories according to theinvestment limits in the fund’sprospectus, but in no case will indirectholdings through shares in any mutualfund be assigned to a risk weight lessthan 20 percent. If, in order to maintaina necessary degree of short-termliquidity, a fund is permitted to hold aninsignificant amount of its assets inshort-term, highly liquid securities ofsuperior credit quality that do notqualify for a preferential risk weight,such securities generally will bedisregarded in determining the riskcategory into which the bank’s holdingin the overall fimd should be assigned.The prudent use of hedging instrumentsby a mutual fund to reduce the risk ofits assets will not increase the riskweighting of the mutual fundinvestment. For example, the use ofhedging instruments by a mutual fundto reduce the interest rate risk. of itsgovernment bond portfolio will notincrease the risk weight of that fundabove the 20 percent category.Nonetheless, if the fund engages in anyactivities that appear speculative innature or has any other characteristicsthat are inconsistent with thepreferential risk weighting assigned tothe fund’s assets, holdings in the fundwill be assigned to the 100 percent riskcategory.l l t l l

4. In appendix A to part 325, sectionII.C. is amended by removing andreserving footnote 26.

By order of the Board of Directors.Dated at Washington, D.C. this 4th day of

February 1997.

Federal Deposit Insurance Corporation.

Jerry L. L=&Y.Executive Secretary

Office of Thrift Supervision

12 CFR CHAPTER VFor the reasons set forth in the joint

preamble, part 567 of chapter V of title12 of the Code of Federal Regulations isproposed to be amended as set forthbelow:

PART 567-CAPITAL

1. The authority citation for part 567continues to read as follows:

Authority: 12 U.S.C. 1462.1462a. 1463,1464.1467a. 1626 (note).

2. In 5 567.1, paragraph (jj)(l)(ii) isrevised, and new paragraphs (mm) and(nn) are added to read as follows:

5 567.1 DefinItIonal l t l l

(jj) Qualifvinn residential construction10&i (i) l 7i l -

(iii The residence beinn constructedm&i be a 1-1 farnil; resivdence sold toa home purchaser;* l l l *

(mm) Tier I capital. The term Tier Icapital means core capital as computedin accordance with 5 567.5(a) of thisPart.

(nn) Tier z capital. The term Tier 2capital means supplementary capital ascomputed in accordance with 5 567.5(b)of this part.

3. Section 567.2(a)(2)(ii) is revised toread as follows:

5 567.2 Minimum regulatory capitalrequlrefnent

(a) l l l(2) Leverage mtio requirement. l l l

(ii) A savings association must satisfyti& requirement with core capital asdefined in Q 567.5(a) of this part.l l c * l

4. Section 567.6(a)(l)(vi) is revised toread as follows:

5 567.6 Risk-based capital credit rlsk-weight categories.

(a) l * l(1) l l l(vi) Indirect ownership interests in

pools of assets. An asset representing anindirect holding of a pool of assets, e.g.,mutual funds, generally is assigned tothe risk-weight category under thissection based upon the risk weight thatwould be assigned to the assets in theportfolio of the pool. An investment inshares of a mutual fimd whose portfolioconsists solely of various securities ormoney market instruments that, if heldseparately, would be assigned todifferent risk-weight categories,

generally is assigned to the risk-weightcategory appropriate to the highest risk-weighted asset that the fund ispermitted to hold in accordance withthe investment objectives set forth in itsprospectus. The savings associationmay, at its option, assign the investmenton a pro-rata basis to different risk-weight categories according to theinvestment limits in the fund’sprospectus. In no case will an indirectholding through shares in a mutual fundbe assigned to the zero percent risk-weight category. If. in order to maintaina necessary degree of short-termliquidity, a fund is permitted to hold aninsignificant amount of its assets inshort-term, highly liquid securities ofsuperior credit quality that do notqualify for a preferential risk weight,such securities generally will bedisregarded in determining the risk-wei&t category into whit& the savingsassociation’s holding in the overall fundshould be assigned. The prudent use ofhedging instruments by a mutual fundto reduce the risk of its assets will notincrease the risk weighting of themutual fund investment. For example,the use of hedging instruments by amutual fund to reduce the interest raterisk of its government bond portfoliowill not increase the risk weight of thatfund above the 20 percent category.Nonetheless, if the fund engages in anyactivities that appear speculative innature or has any other characteristicsthat are inconsistent with thepreferential risk-weighting assigned tothe fund’s assets, holdings in the fundwill be assigned to the 100 percent risk-weight category.l * ” l l

5. Section 567.6 is revised to read asfollows:

5 567.8 LeWerago ratio.(a) The minimum leverage capital

requirement for a savings associationassigned a composite rating of I, asdefined in 5 516.3(c) of this .&chapter,shall consist of a ratio of core capital toadjusted total assets of 3 percent. Thesegenerally are strong associations that arenot anticipating or experiencingsignificant growth and have well-diversified risks, including no undueinterest rate risk exposure, excellentasset quality, high liquidity, and goodearnings.

Ib) For all savings associations notm&&g the condisons set forth inparagraph (a) of this section, theminimum leverage capital requirementshall consist of a ratio of core capital toadjusted total assets of 4 percent. Highercapital ratios may be required ifwarranted by the paticularcircumstances or risk profiles of an

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.

55692 Federal Register / Vol. 62, No. 207 I Monday, October 27, 1997 1 Proposed Rules

individual savings association. In allcases, savings associations should holdcapital commensurate with the leveland nature of all risks, including thevolume and severity of problems loans,to which they are exposed.

Dated: April 17.1997.The Office of Thrift Supervision.

Nicohs P. Retsinns.Director.[FR Dot. 97-28270 Filed 10-24-97; 8:45 am]BlLlJNO CODE 4mo43-P. 621041-P, 6114-0~P.W2041-P