Capital Adequacy Guidelines for Bank Holding Companies; Small Bank Holding Company Policy Statement; Definition of a Qualifying Small Bank Holding Company, 9897-9903 [06-1837]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 71, Number 39 (Tuesday, February 28, 2006)]
[Rules and Regulations]
[Pages 9897-9903]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1837]


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FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. 1235]


Capital Adequacy Guidelines for Bank Holding Companies; Small 
Bank Holding Company Policy Statement; Definition of a Qualifying Small 
Bank Holding Company

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is amending the asset size threshold and other criteria for determining 
whether a bank holding company (BHC) qualifies for the Board's Small 
Bank Holding Company Policy Statement (Regulation Y, Appendix C) 
(Policy Statement) and an exemption from the Board's consolidated risk-
based and leverage capital adequacy guidelines for BHCs (Regulation Y, 
Appendices A and D) (Capital Guidelines). The Board is adopting this 
final rule to address the effects of inflation, industry consolidation, 
and normal asset growth of BHCs since the Board introduced the Policy 
Statement in 1980. The final rule increases the asset size threshold 
from $150 million to $500 million in consolidated assets for 
determining whether a BHC may qualify for the Policy Statement and an 
exemption from the Capital Guidelines; modifies the qualitative 
criteria used in determining whether a BHC that is under the asset size 
threshold

[[Page 9898]]

nevertheless would not qualify for the Policy Statement or the 
exemption from the Capital Guidelines; and clarifies the treatment 
under the Policy Statement of subordinated debt associated with trust 
preferred securities.

DATES: This final rule is effective March 30, 2006.

FOR FURTHER INFORMATION CONTACT: Barbara Bouchard, Deputy Associate 
Director (202/452-3072 or barbara.bouchard@frb.gov), Mary Frances 
Monroe, Manager (202/452-5231 or mary.f.monroe@frb.gov), William 
Tiernay, Supervisory Financial Analyst (202/872-7579 or 
william.h.tiernay@frb.gov), Supervisory and Risk Policy; Robert Maahs, 
Manager, Regulatory Reports (202/872-4935 or robert.maahs@frb.gov); or 
Robert Brooks, Supervisory Financial Analyst (202/452-3103 or 
robert.brooks@frb.gov), Applications, Division of Banking Supervision 
and Regulation; or Mark Van Der Weide, Senior Counsel (202/452-2263 or 
mark.vanderweide@frb.gov), Legal Division. For the hearing impaired 
only, Telecommunication Device for the Deaf (TDD), contact 202/263-
4869.

SUPPLEMENTARY INFORMATION: 

I. Background

    The Board issued the Policy Statement in 1980 to facilitate the 
transfer of ownership of small community-based banks in a manner that 
is consistent with bank safety and soundness. The Board generally has 
discouraged the use of debt by BHCs to finance the acquisition of banks 
or other companies because high levels of debt at a BHC can impair the 
ability of the BHC to serve as a source of strength to its subsidiary 
banks. The Board has recognized, however, that the transfer of 
ownership of small banks often requires the use of acquisition debt. 
Accordingly, the Board adopted the Policy Statement to permit the 
formation and expansion of small BHCs with debt levels that are higher 
than what would be permitted for larger BHCs. The Policy Statement 
contains several conditions and restrictions that are designed to 
ensure that small BHCs that operate with the higher levels of debt 
permitted by the Policy Statement do not present an undue risk to the 
safety and soundness of their subsidiary banks.
    Currently, the Policy Statement applies to BHCs with pro forma 
consolidated assets of less than $150 million that (i) are not engaged 
in any nonbanking activities involving significant leverage; (ii) are 
not engaged in any significant off-balance sheet activities; and (iii) 
do not have a significant amount of outstanding debt that is held by 
the general public (``qualifying small BHCs''). Under the Policy 
Statement, qualifying small BHCs may use debt to finance up to 75 
percent of the purchase price of an acquisition (that is, they may have 
a debt-to-equity ratio of up to 3:1), but are subject to a number of 
ongoing requirements. The principal ongoing requirements are that a 
qualifying small BHC (i) reduce its parent company debt in such a 
manner that all debt is retired within 25 years of being incurred; (ii) 
reduce its debt-to-equity ratio to .30:1 or less within 12 years of the 
debt being incurred; (iii) ensure that each of its subsidiary insured 
depository institutions is well capitalized; and (iv) refrain from 
paying dividends until such time as it reduces its debt-to-equity ratio 
to 1.0:1 or less. The Policy Statement also specifically provides that 
a qualifying small BHC may not use the expedited applications 
procedures or obtain a waiver of the stock redemption filing 
requirements applicable to BHCs under the Board's Regulation Y (12 CFR 
225.4(b), 225.14, and 225.23) unless the BHC has a pro forma debt-to-
equity ratio of 1.0:1 or less.
    The Board adopted the risk-based capital guidelines in 1989 to 
assist in the assessment of the capital adequacy of BHCs. The risk-
based capital guidelines establish for BHCs minimum ratios of tier 1 
capital and total capital to risk-weighted assets. One of the Board's 
principal objectives in adopting the risk-based capital guidelines was 
to make regulatory capital requirements more sensitive to differences 
in risk profiles among banking organizations. Supplemental to the risk-
based capital guidelines, the Board in 1991 adopted the tier 1 leverage 
measure, a minimum ratio of tier 1 capital to total average assets, to 
further assist in the assessment of the capital adequacy of BHCs with 
the principal objective of placing a constraint on the maximum degree 
to which a banking organization can leverage its equity capital base. 
Because qualifying small BHCs may, consistent with the Policy 
Statement, operate at a level of leverage that generally is 
inconsistent with the Capital Guidelines, the Capital Guidelines 
provide an exemption for qualifying small BHCs.
    On September 8, 2005, the Board requested comment on a proposed 
rule that would raise, to $500 million, the asset size threshold for 
determining whether a small BHC would be subject to the Policy 
Statement and exempt from the Capital Guidelines (70 FR 53320, 
September 8, 2005). The Board also proposed several modifications to 
the criteria under which a BHC that is under the asset size threshold 
would be ineligible for application of the Policy Statement and would 
be subject to the Capital Guidelines. The proposed rule also clarified 
that subordinated debt associated with issuances of trust preferred 
securities generally would be considered debt for most purposes under 
the Policy Statement, but provided a transition period for certain 
currently outstanding subordinated debt associated with these 
securities.

II. Summary of Comments and Final Rule

    The Board received twenty-nine comments on the proposed rule. 
Commenters included financial institutions, industry associations, and 
individuals. All commenters generally supported the proposed increase 
in the asset threshold for determining whether a BHC would qualify for 
the Policy Statement and an exemption from the Capital Guidelines; 
however, some commenters urged the Board to increase the asset 
threshold to $1 billion. Some commenters also recommended that the 
Board create an indexing mechanism under which the threshold would be 
raised automatically over time to reflect some measure of the rate of 
inflation. Some commenters also raised questions about or recommended 
changes to the proposed qualification criteria under which small BHCs 
would fail to qualify for the application of the Policy Statement and 
would be subject to the Capital Guidelines. Finally, a number of 
commenters recommended changes to the proposed criteria for exempting 
subordinated debt associated with trust preferred securities during the 
transition period and extending the transition period. The comments 
received on the proposed rule are discussed in greater detail below.

New Asset Threshold of $500 Million

    As noted above, commenters generally supported the Board's proposal 
to raise the asset threshold under the Policy Statement from $150 
million to $500 million. Six commenters, however, expressed the view 
that the proposed increase in the asset threshold from $150 million to 
$500 million would be inadequate and asserted that the threshold should 
be increased to $1 billion. In support of their view, these commenters 
generally argued that, until a BHC reaches the $1 billion asset level, 
it does not have the necessary access to the equity markets that would 
enable it to finance an acquisition with a lower proportion of debt-to-
equity.

[[Page 9899]]

    After carefully considering the comments received in light of the 
Board's supervisory experience and the purposes of the Policy Statement 
and Capital Guidelines, the Board has determined to raise the asset 
threshold to $500 million in consolidated assets as proposed. The Board 
is concerned that a further expansion at this time of the definition of 
qualifying small BHCs beyond $500 million could adversely impact bank 
safety and soundness and impair the Board's ability to monitor the 
financial condition of BHCs. The existence of the Policy Statement and 
the exemption from the Capital Guidelines for qualifying small BHCs are 
major departures from the Board's general policy of limiting BHC 
leverage and reflect a careful balance of the special difficulties 
small banks may face in the transfer of ownership with the prudential 
and supervisory concerns of the Board. Consolidated capital standards 
are a key aspect of the Board's supervisory program and play an 
important role in helping ensure that a BHC--whether large or small--is 
able to serve as a source of strength for its subsidiary depository 
institutions. For this reason, the Board believes that exemptions from 
these standards (and related reporting obligations) should be narrowly 
tailored and granted only when clearly warranted. This is particularly 
true for small BHCs because the Board's risk-focused supervision 
program for smaller BHCs (whether or not qualifying small BHCs for the 
purposes of the Policy Statement) relies heavily on off-site monitoring 
rather than on-site examiner reviews.
    Moreover, raising the asset threshold to $500 million as set forth 
in this final rule will allow approximately 85 percent of all BHCs to 
qualify for the Policy Statement, a substantial increase from the 55 
percent that were eligible to qualify under the $150 million threshold.
    Finally, since the Policy Statement was originally adopted, the 
legal framework governing the ownership and branching of banking 
organizations has changed dramatically, increasing market liquidity. 
The Board's supervisory experience indicates that many banks with 
assets in excess of $500 million are attractive for acquisition by 
organizations that have the means to make acquisitions without the use 
of excessive debt.
    The Board expects to review at least once every five years the 
asset threshold in the final rule to determine whether this threshold 
should be further adjusted. In considering whether to modify the asset 
threshold, the Board will consider several factors which may include, 
among other things, the rate of growth of aggregate bank assets, the 
overall financial condition of the banking industry, and structural 
changes in the role of banking organizations in the overall economy. 
The Board believes that this periodic review will allow the Board to 
consider the full range of factors that may be relevant to identifying 
the level below which a BHC should be subject to the Policy Statement 
and exempt from the Capital Guidelines. In this regard, the Board 
believes that measures of price inflation are not necessarily 
appropriate determinants of what constitutes a small BHC for capital 
and prudential purposes.

Other Criteria for Identifying a Qualifying Small BHC

    The Board also proposed to modify the qualitative criteria for 
determining whether a BHC that otherwise meets the asset threshold 
nevertheless should not qualify for application of the Policy Statement 
and exemption from the Capital Guidelines to reflect changes to the 
banking industry over the last two decades, including the nature of the 
operations of many smaller BHCs. As proposed, BHCs with less than $500 
million in consolidated assets would not qualify for the Policy 
Statement and would be subject to the Capital Guidelines if the BHC (i) 
is engaged in significant nonbanking activities either directly or 
through a nonbank subsidiary, (ii) conducts significant off-balance 
sheet activities, including securitizations or managing or 
administering assets for third parties, either directly or through a 
nonbank subsidiary, or (iii) has a material amount of debt or equity 
securities (other than trust preferred securities) outstanding that are 
registered with the Securities and Exchange Commission (SEC).
    A few commenters indicated that more clarity would be helpful in 
quantifying ``significant'' nonbanking activities, ``significant'' off-
balance sheet activities, or ``material'' amounts of debt and equity 
securities. For example, one commenter suggested the use of more 
absolute quantitative thresholds or limits, such as total nonbank 
assets, off-balance sheet items, or debt or equity securities as a 
percentage of Tier 1 capital. Commenters also suggested that the term 
``nonbanking activities'' be more specifically defined and exclude 
nonbanking activities that have been found to be ``closely related to 
banking'' under the Board's Regulation Y (See 12 CFR 225.28).
    Some commenters also requested that the Federal Reserve allow a 
small BHC to operate under the Policy Statement if the BHC conducts 
significant nonbanking activities but the activities are found, based 
on supervisory review, to not pose material additional operational 
risks.\1\ Two commenters noted that SEC registration can be triggered 
by increases in an institution's shareholder base through inheritance 
or other inter-generational transfers and, on this basis, argued that 
the criterion related to SEC-registered debt or equity should be 
deleted.
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    \1\ Two commenters urged that any final rule clearly provide 
that a small BHC is not prohibited from operating under the Policy 
Statement if it conducts trust activities through trust departments 
of its subsidiary bank or through a nonbank subsidiary of that bank. 
The term ``nonbank subsidiary'' as used in the Policy Statement 
refers to a subsidiary of a BHC other than a bank or a subsidiary of 
a bank.
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    After carefully considering the issues raised by commenters, the 
Board has adopted the changes, as proposed. The Board believes that the 
changes best reflect the Board's prudential and supervisory interests 
in ensuring that BHCs remain well capitalized, subject to appropriate 
financial reporting requirements to facilitate the supervisory process, 
and able to serve as a source of strength to their subsidiary banks. 
The Board also believes these changes are necessary or appropriate to 
reflect changes in the banking industry over the last two decades, 
including the nature of the operations of many small BHCs. The 
enactment of the Gramm-Leach-Bliley Act in 1999 expanded significantly 
the range of nonbanking activities in which BHCs may engage, both 
directly and through nonbank subsidiaries of the holding company. Such 
activities may result in a higher level of operational, legal or 
reputational risk to the banking organization than balance sheet 
measures would indicate and, in some cases, may contribute 
significantly to an organization's overall financial performance.\2\
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    \2\ The examples provided in the proposed rule--securitizations 
and managing or administering assets for third parties--simply 
highlight two off-balance sheet activities that may involve 
substantial risk. These examples are not intended to be exclusive 
and other activities may well present similar concerns.
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    The revision of the criterion to exclude from the Policy Statement 
any BHC that has outstanding a material amount of SEC-registered debt 
or equity securities reflects the fact that SEC registrants typically 
exhibit a degree of complexity of operations and access to multiple 
funding sources that warrants excluding them from the Policy Statement 
and subjecting them to the Capital Guidelines. Moreover, the 
application of consolidated reporting requirements to these BHCs should 
not

[[Page 9900]]

impose significant additional burden, as they are required to have 
consolidated financial statements for SEC reporting purposes. What 
constitutes a ``significant'' amount of nonbanking activities or a 
``material'' amount of SEC-registered debt or equity for a particular 
BHC depends on the size, activities and condition of the relevant BHC. 
In the Board's view, differing levels of risk in varying business lines 
and practices among institutions precludes the use of fixed measurable 
parameters of significance or materiality across all institutions. For 
this reason, the rule provides the Federal Reserve with supervisory 
flexibility in determining, on a case-by-case basis, the significance 
or materiality of activities or securities outstanding such that the 
BHC should be excluded from the Policy Statement and subject to the 
Capital Guidelines. The Board notes that the current Policy Statement 
also uses a ``significant'' standard and that application of this 
standard through the supervisory process has not created substantial 
difficulty over the years. As a general matter, the Board believes that 
relatively few small BHCs are likely to be excluded from the Policy 
Statement and become subject to the Capital Guidelines due to 
qualitative criteria included in the final rule.
    The Board has amended the Policy Statement and the Capital 
Guidelines to make explicit the Federal Reserve's existing authority to 
require on a case-by-case basis that a qualifying small BHC meet 
consolidated capital requirements when such action is warranted for 
supervisory reasons, as well as the ability of a qualifying small BHC 
to voluntarily elect to comply with the Capital Guidelines.

Treatment of Subordinated Debt Associated With Trust Preferred 
Securities

    Currently, for purposes of the Policy Statement, subordinated debt 
on the parent company's balance sheet that is issued in connection with 
trust preferred securities is not treated as debt; however, the cash-
flow impact of such subordinated debt is included in the Board's review 
of the financial condition of a BHC.\3\ The proposed rule provided that 
subordinated debt associated with trust preferred securities would be 
considered debt for most purposes under the Policy Statement. In 
particular, such subordinated debt would be included as debt in 
determining whether (i) a qualifying small BHC's acquisition debt is 75 
percent or less of the purchase price; or (ii) a qualifying small BHC's 
debt-to-equity ratio is greater than 1.0:1 (the ratio above which a 
qualifying small BHC is subject to dividend restrictions and is not 
permitted to use the expedited applications processing procedures or 
obtain a waiver of stock redemption filing requirements under 
Regulation Y).\4\ However, subordinated debt associated with trust 
preferred securities would not be included as debt in determining 
compliance with the 12-year debt reduction and 25-year debt retirement 
requirements of the Policy Statement.
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    \3\ Trust preferred securities are undated cumulative preferred 
securities issued out of a special purpose entity, usually in the 
form of a trust, in which a BHC owns all of the common securities. 
The special purpose entity's sole asset is a deeply subordinated 
note issued by the BHC that typically has a fixed maturity of 30 
years.
    \4\ The Board also would consider subordinated debt associated 
with the issuance of trust preferred securities as covered by any 
supervisory debt commitments with the Federal Reserve.
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    In order to provide for more equitable treatment between qualifying 
small BHCs and larger BHCs that are subject to the Capital 
Guidelines,\5\ the proposed rule provided that, for purposes of 
determining compliance with Policy Statement requirements, a qualifying 
small BHC could exclude from debt an amount of subordinated debt 
associated with trust preferred securities equaling up to 25 percent of 
the small BHC's stockholders' equity (as defined in the Policy 
Statement) less parent company goodwill.\6\ In addition, in order to 
give qualifying small BHCs sufficient time to conform their debt 
structures, the Board proposed to provide for a five-year transition 
period during which all subordinated debt associated with trust 
preferred securities issued on or prior to the publication date of the 
proposed rule (September 8, 2005) would not be considered debt under 
the Policy Statement. However, the proposed rule also provided that 
this temporary non-debt status would terminate if the qualifying small 
BHC issued additional subordinated debt associated with a new issuance 
of trust preferred securities after the date of the proposed rule.
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    \5\ A BHC that is subject to the Capital Guidelines generally 
may count an amount of qualifying trust preferred securities as tier 
1 capital up to 25 percent of the sum of the BHC's core capital 
elements. 12 CFR part 225, appendix A, Sec.  II.A.1.b.
    \6\ For example, assume the parent company only financial 
statements of a qualifying small BHC include subordinated debt 
associated with trust preferred securities of $200, other debt of 
$75, stockholders' equity of $300, and goodwill of $100. The 
numerator of the debt to equity ratio of the company for purposes of 
the Policy Statement would equal $225 or ($75 + ($200 - (($300 - 
$100) x .25))). The denominator of the debt to equity ratio would be 
$300.
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    Overall, commenters did not object to the proposed treatment of 
subordinated debt under the Policy Statement. However, several 
commenters recommended changes to the transition period and related 
conditions for existing subordinated debt associated with trust 
preferred securities. For example, one commenter recommended that 
existing subordinated debt of this type should be permanently 
grandfathered, while another recommended extending the transition 
period to ten years so that small BHCs would have more time to conform 
their debt structures. Several others recommended that the transition 
period be amended to include debt outstanding on the date of issuance 
of the final rule (or even up to 90 days after its issuance) so that 
companies would have time to restructure or complete issuances pending 
on the date of the proposed rule without being penalized under the rule 
change. Commenters also recommended that small BHCs be allowed to 
refinance existing trust preferred securities during the transition 
period to lower their interest costs without losing the exempted status 
of any associated subordinated debt.
    Several hundred BHCs with assets under $500 million have issued 
trust preferred securities to date. The Board believes that permanently 
grandfathering existing subordinated debt associated with trust 
preferred securities would provide these small BHCs with an unfair 
competitive advantage and would not be prudent for supervisory 
purposes. The Board continues to believe that five years is sufficient 
time for small BHCs to conform their existing debt structures. Such a 
transition period generally would be consistent with the five-year 
transition period afforded to larger BHCs to meet the Board's risk-
based capital guidelines with respect to trust preferred securities.\7\ 
However, in order to provide for equitable treatment of trust preferred 
issuances pending on the date of the proposed rule, the Board has 
decided to provide for a five-year transition period during which 
subordinated debt associated with trust preferred securities issued on 
or prior to December 31, 2005, would not be considered debt under the 
Policy Statement. Small BHCs may also refinance existing issuances of 
trust preferred securities without losing the exempt status of the 
related subordinated debt under the Policy Statement during the 
transition period

[[Page 9901]]

as long as the amount of the subordinated debt does not increase.
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    \7\ See 12 CFR part 225, appendix A, Sec.  II.A.1.b.ii.
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Small BHC Regulatory Reporting

    To assist the Federal Reserve in monitoring the financial health 
and operations of BHCs, the Board requires all BHCs to file certain 
regulatory reports with the Federal Reserve. One of the most important 
of the Federal Reserve reporting requirements is the Financial 
Statements for Bank Holding Companies (FR Y-9 series of reports; OMB 
No. 7100-0128). Currently, BHCs that have consolidated assets of less 
than $150 million (and that also meet qualitative criteria similar to 
those in the Policy Statement) generally submit limited summary parent-
only financial data semiannually on the FR Y-9SP. Currently, BHCs with 
consolidated assets of $150 million or more must submit parent only 
financial data on the FR Y-9LP and consolidated financial data on the 
FR Y-9C quarterly.
    The Federal Reserve has issued a notice whereby it has proposed to 
revise the reporting requirements for the FR Y-9 series of reports for 
2006 (2006 proposal).\8\ If these reporting revisions are adopted, they 
would increase the FR Y-9SP reporting threshold from $150 million to 
$500 million in consolidated assets and conform the FR Y-9SP reporting 
exception criteria to the proposed qualitative exception criteria under 
the Policy Statement and the Capital Guidelines. Under the 2006 
proposal, BHCs that meet the criteria for filing the FR Y-9SP would be 
exempt from filing the FR Y-9LP and FR Y-9C. Conversely, BHCs subject 
to the Capital Guidelines, including small BHCs that do not qualify 
under the revised Policy Statement and qualifying small BHCs that 
voluntarily elect to comply with the Capital Guidelines, would file the 
FR Y-9LP and the FR Y-9C on a quarterly basis.
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    \8\ 70 FR 66423, November 2, 2005. Comments on this proposal 
were due by January 3, 2006.
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Conforming Amendments

    A number of documentation, filing, and other provisions in 
Regulation Y are triggered by the consolidated asset threshold 
established by the Board's Small Bank Holding Company Policy Statement. 
These provisions include, for example, the notice procedures for one-
bank holding company formations in 12 CFR 225.17(a)(6). The Board has 
made technical and conforming amendments to these provisions to provide 
that qualifying small BHCs may take advantage of the streamlined 
informational and notice requirements embodied in these rules. These 
technical and conforming amendments are a logical outgrowth of the 
revisions to the Policy Statement and the Capital Guidelines issued for 
public comment and, moreover, will provide relief to most bank holding 
companies with consolidated total assets of between $150 million and 
$500 million.

Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the Board has determined the rule would not have a 
significant impact on a substantial number of small entities, as 
defined in the Regulatory Flexibility Act. In this regard, the rule 
would reduce regulatory burden by exempting most BHCs with total 
consolidated assets of between $150 million and $500 million from the 
application of the Board's Capital Guidelines. Although the rule will 
treat subordinated debt associated with trust preferred securities as 
debt for most purposes under the Policy Statement, the final rule 
provides a substantial five-year transition period for subordinated 
debt associated with trust preferred securities issued on or prior to 
December 31, 2005.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1.), the Board has reviewed this rulemaking 
under the authority delegated to the Board by the Office of Management 
and Budget. The Board has determined that the rule does not involve a 
collection of information pursuant to the provisions of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the Federal 
banking agencies to use ``plain language'' in all proposed and final 
rules published after January 1, 2000. Accordingly, the Board has 
sought to present the rule in a simple and straightforward manner.

List of Subjects in 12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

0
For the reasons set forth in the preamble, part 225 of chapter II of 
title 12 of the Code of Federal Regulations is amended as set forth 
below:

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 Sec.  225.2, footnote 2 is revised to read as follows:


Sec.  225.2  Definitions.

* * * * *
    \2\ For purposes of this subpart and subparts B and C of this part, 
a bank holding company with consolidated assets of less than $500 
million that is subject to the Small Bank Holding Company Policy 
Statement in Appendix C of this part will be deemed to be ``well-
capitalized'' if the bank holding company meets the requirements for 
expedited/waived processing in Appendix C.
* * * * *

0
3. Section 225.4(b)(2)(iii) is revised as follows:


Sec.  225.4  Corporate practices.

* * * * *
    (b) * * *
    (2) * * *
    (iii) (A) If the bank holding company has consolidated assets of 
$500 million or more, consolidated pro forma risk-based capital and 
leverage ratio calculations for the bank holding company as of the most 
recent quarter, and, if the redemption is to be debt funded, a parent-
only pro forma balance sheet as of the most recent quarter; or
    (B) If the bank holding company has consolidated assets of less 
than $500 million, a pro forma parent-only balance sheet as of the most 
recent quarter, and, if the redemption is to be debt funded, one-year 
income statement and cash flow projections.
* * * * *

0
4. Section 225.14(a)(1)(v) is revised as follows:


Sec.  225.14  Expedited action for certain bank acquisitions by well-
run bank holding companies.

    (a) * * *
    (1) * * *
    (v)(A) If the bank holding company has consolidated assets of $500 
million or more, an abbreviated consolidated pro forma balance sheet as 
of the most recent quarter showing credit and debit adjustments that 
reflect the proposed transaction, consolidated pro forma risk-based 
capital ratios for the acquiring bank holding company as of the most 
recent quarter, and a

[[Page 9902]]

description of the purchase price and the terms and sources of funding 
for the transaction;
    (B) If the bank holding company has consolidated assets of less 
than $500 million, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, and a description of the purchase price, the 
terms and sources of funding for the transaction, and the sources and 
schedule for retiring any debt incurred in the transaction;
* * * * *

0
5. In Sec.  225.17, footnote 5 is revised to read as follows:


Sec.  225.17  Notice procedure for one-bank holding company formations.

* * * * *
    \5\ For a banking organization with consolidated assets, on a pro 
forma basis, of less than $500 million (other than a banking 
organization that will control a de novo bank), this requirement is 
satisfied if the proposal complies with the Board's Small Bank Holding 
Company Policy Statement (Appendix C of this part).
* * * * *

0
6. Section 225.23(a)(1)(iii)(A) and (B) are revised as follows:


Sec.  225.23  Expedited action for certain nonbanking proposals by 
well-run bank holding companies.

    (a) * * *
    (1) * * *
    (iii) * * *
    (A) If the bank holding company has consolidated assets of $500 
million or more, an abbreviated consolidated pro forma balance sheet 
for the acquiring bank holding company as of the most recent quarter 
showing credit and debit adjustments that reflect the proposed 
transaction, consolidated pro forma risk-based capital ratios for the 
acquiring bank holding company as of the most recent quarter, a 
description of the purchase price and the terms and sources of funding 
for the transaction, and the total revenue and net income of the 
company to be acquired;
    (B) If the bank holding company has consolidated assets of less 
than $500 million, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, a description of the purchase price and the terms 
and sources of funding for the transaction and the sources and schedule 
for retiring any debt incurred in the transaction, and the total 
assets, off-balance sheet items, revenue and net income of the company 
to be acquired;
* * * * *

0
7. Appendix A to part 225 is amended as follows:
0
a. In section I, the fifth undesignated paragraph is revised.
0
b. In section I, footnote 4 is removed and reserved.
0
c. In section IV.A, footnote 64 is revised.

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Risk-Based Measure

I. Overview

* * * * *
    The risk-based guidelines apply on a consolidated basis to any 
bank holding company with consolidated assets of $500 million or 
more. The risk-based guidelines also apply on a consolidated basis 
to any bank holding company with consolidated assets of less than 
$500 million if the holding company (i) is engaged in significant 
nonbanking activities either directly or through a nonbank 
subsidiary; (ii) conducts significant off-balance sheet activities 
(including securitization and asset management or administration) 
either directly or through a nonbank subsidiary; or (iii) has a 
material amount of debt or equity securities outstanding (other than 
trust preferred securities) that are registered with the Securities 
and Exchange Commission (SEC). The Federal Reserve may apply the 
risk-based guidelines at its discretion to any bank holding company, 
regardless of asset size, if such action is warranted for 
supervisory purposes.\4\
* * * * *
    \4\ [Reserved].
* * * * *

IV. Minimum Supervisory Ratios and Standards

* * * * *

A. Minimum Risk-Based Ratio After Transition Period

* * * * *
    \64\ As noted in section I, bank holding companies with less 
than $500 million in consolidated assets would generally be exempt 
from the calculation and analysis of risk-based ratios on a 
consolidated holding company basis, subject to certain terms and 
conditions.
* * * * *

0
8. Appendix C to part 225 is amended as follows:
0
a. In section 1, the first undesignated paragraph is revised.
0
b. In section 1, footnote 1 is removed and reserved.
0
c. In section 2.A., a new paragraph is added after the first paragraph 
in footnote 3.

Appendix C to Part 225--Small Bank Holding Company Policy Statement

* * * * *
    1. * * *
    This policy statement applies only to bank holding companies 
with pro forma consolidated assets of less than $500 million that 
(i) are not engaged in significant nonbanking activities either 
directly or through a nonbank subsidiary; (ii) do not conduct 
significant off-balance sheet activities (including securitization 
and asset management or administration) either directly or through a 
nonbank subsidiary; and (iii) do not have a material amount of debt 
or equity securities outstanding (other than trust preferred 
securities) that are registered with the Securities and Exchange 
Commission. The Board may in its discretion exclude any bank holding 
company, regardless of asset size, from the policy statement if such 
action is warranted for supervisory purposes.\1\
* * * * *
    \1\ [Reserved].
* * * * *
    2. * * *
    A. * * *
    \3\ * * *
    Subordinated debt associated with trust preferred securities 
generally would be treated as debt for purposes of paragraphs 2.C., 
3.A., 4.A.i, and 4.B.i. of this policy statement. A bank holding 
company, however, may exclude from debt an amount of subordinated 
debt associated with trust preferred securities up to 25 percent of 
the holding company's equity (as defined below) less goodwill on the 
parent company's balance sheet in determining compliance with the 
requirements of such paragraphs of the policy statement. In 
addition, a bank holding company subject to this Policy Statement 
that has not issued subordinated debt associated with a new issuance 
of trust preferred securities after December 31, 2005 may exclude 
from debt any subordinated debt associated with trust preferred 
securities until December 31, 2010. Bank holding companies subject 
to this Policy Statement may also exclude from debt until December 
31, 2010, any subordinated debt associated with refinanced issuances 
of trust preferred securities originally issued on or prior to 
December 31, 2005, provided that the refinancing does not increase 
the bank holding company's outstanding amount of subordinated debt. 
Subordinated debt associated with trust preferred securities will 
not be included as debt in determining compliance with any other 
requirements of this policy statement.
* * * * *

0
9. Appendix D to part 225 is amended as follows:
0
a. In section I., paragraph b. is revised.
0
b. In section I.b., footnote 2 is removed and reserved.

Appendix D to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Tier 1 Leverage Measure

I. Overview

* * * * *
    b. The tier 1 leverage guidelines apply on a consolidated basis 
to any bank holding company with consolidated assets of $500 million 
or more. The tier 1 leverage guidelines also apply on a consolidated 
basis to any bank holding company with

[[Page 9903]]

consolidated assets of less than $500 million if the holding company 
(i) is engaged in significant nonbanking activities either directly 
or through a nonbank subsidiary; (ii) conducts significant off-
balance sheet activities (including securitization and asset 
management or administration) either directly or through a nonbank 
subsidiary; or (iii) has a material amount of debt or equity 
securities outstanding (other than trust preferred securities) that 
are registered with the Securities and Exchange Commission. The 
Federal Reserve may apply the tier 1 leverage guidelines at its 
discretion to any bank holding company, regardless of asset size, if 
such action is warranted for supervisory purposes.\2\
* * * * *
    \2\ [Reserved].
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, February 22, 2006.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 06-1837 Filed 2-27-06; 8:45 am]
BILLING CODE 6210-02-P