Capital Adequacy Guidelines; Small Bank Holding Company Policy Statement: Treatment of Subordinated Securities Issued to the United States Treasury Under the Emergency Economic Stabilization Act of 2008, 26077-26081 [E9-12626]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 74, Number 103 (Monday, June 1, 2009)]
[Rules and Regulations]
[Pages 26077-26081]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-12626]



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Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Rules 
and Regulations

[[Page 26077]]



FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-1356]


Capital Adequacy Guidelines; Small Bank Holding Company Policy 
Statement: Treatment of Subordinated Securities Issued to the United 
States Treasury Under the Emergency Economic Stabilization Act of 2008

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

ACTION: Interim final rule with request for public comment.

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SUMMARY: The Board has adopted, and is seeking public comment on an 
interim final rule (interim final rule or rule) to support in a timely 
manner, the full implementation and acceptance of the capital purchase 
program of the U.S. Department of Treasury (Treasury) and promote the 
stability of banking organizations and the financial system. This rule 
permits bank holding companies that have made a valid election to be 
taxed under Subchapter S of Chapter 1 of the U.S. Internal Revenue Code 
(S-Corp BHCs) and bank holding companies organized in mutual form 
(Mutual BHCs) to include the full amount of any new subordinated debt 
securities issued to the Treasury under the capital purchase program 
announced by the Secretary of the Treasury on October 14, 2008 
(Subordinated Securities) in tier 1 capital for purposes of the Board's 
risk-based and leverage capital guidelines for bank holding companies, 
provided that the Subordinated Securities will count toward the limit 
on the amount of other restricted core capital elements includable in 
tier 1 capital; and allows bank holding companies that are subject to 
the Board's Small Bank Holding Company Policy Statement and that are S-
Corps or Mutual BHCs to exclude the Subordinated Securities from 
treatment as debt for purposes of the debt-to-equity standard under the 
Small Bank Holding Company Policy Statement.

DATES: The interim final rule will become effective on June 1, 2009. 
Comments must be received by July 1, 2009.

ADDRESSES: You may submit comments, identified by Docket No. R-1356, by 
any of the following methods:
     Agency Web Site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include docket 
number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.

All public comments are available from the Board's Web site at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
unless modified for technical reasons. Accordingly, your comments will 
not be edited to remove any identifying or contact information. Public 
comments may also be viewed electronically or in paper form in Room MP-
500 of the Board's Martin Building (20th and C Street, NW.) between 9 
a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Norah M. Barger, Deputy Director, 
(202) 452-2402, John F. Connolly, Manager, (202) 452-3621, or Michael 
J. Sexton, Manager, (202) 452-3009, Division of Banking Supervision and 
Regulation; or Kieran J. Fallon, Assistant General Counsel, (202) 452-
5270, April C. Snyder, Counsel, (202) 452-3099, 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:

Capital Guidelines

    On October 3, 2008, President Bush signed into law the Emergency 
Economic Stabilization Act of 2008 (EESA), Division A of Public Law No. 
110-343, 122 Stat. 3765 (2008). Pursuant to the authorities granted by 
the EESA, and in order to restore liquidity and stability to the 
financial system, on October 14, 2008, the Secretary of the Treasury 
announced a program within the Troubled Asset Relief Program (TARP) 
established by section 101 of the EESA to provide capital to eligible 
banks, bank holding companies and savings associations (collectively, 
banking organizations), as well as certain other financial institutions 
(the Capital Purchase Program or CPP).
    As of April 20, 2009, Treasury had invested approximately $198 
billion under the CPP in newly issued senior perpetual preferred stock 
of banking organizations (Senior Perpetual Preferred Stock) that are 
not S-Corps or organized in mutual form. In order to support the CPP 
and promote the stability of banking organizations and the financial 
system through Treasury's investments in Senior Perpetual Preferred 
Stock, the Board published an interim final rule on October 22, 2008 
(October interim final rule) permitting bank holding companies that 
issued Senior Perpetual Preferred Stock to the Treasury under the CPP 
to include all of the Senior Perpetual Preferred Stock in their tier 1 
capital without limit. The Board today published a final rule on the 
capital treatment of the Senior Perpetual Preferred Stock substantially 
identical to the October interim final rule.\1\
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    \1\ Published elsewhere in today's issue.
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    Since the time that Treasury announced the terms of the Senior 
Perpetual Preferred Stock, Treasury has worked towards developing terms 
under which banking organizations organized as S-Corps or in mutual 
form could participate in the Capital Purchase Program. This is 
consistent with the goal of the CPP, which is to promote financial 
stability by offering capital support to all viable banking 
organizations regardless of their form of organization.
    S-Corp BHCs generally may not participate in the CPP through the 
issuance of Senior Perpetual Preferred

[[Page 26078]]

Stock because, under the Internal Revenue Code, S-Corps may not issue 
more than one class of equity security. Bank holding companies 
organized in mutual form also cannot issue Senior Perpetual Preferred 
Stock because of their mutual ownership structure.
    On January 14, 2009, Treasury announced the terms under which it 
will purchase newly-issued subordinated debt securities from S-Corps 
under the Capital Purchase Program. These terms are designed to 
facilitate S-Corp participation in the CPP in a manner that is as 
economically comparable as possible, consistent with the legal 
structure of S-Corp BHCs, the Board's capital adequacy guidelines, and 
the Internal Revenue Code, to institutions that have issued Senior 
Perpetual Preferred Stock. In particular, Treasury will purchase from 
S-Corps that are eligible to participate in the CPP subordinated debt 
securities that rank senior to common stock but that are subordinated 
to the claims of depositors and other creditors (Subordinated 
Securities), unless such other claims are explicitly made pari passu or 
subordinated to the Subordinated Securities.\2\
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    \2\ On April 7, 2009, the Treasury announced a term sheet for 
top-tier Mutual BHCs under which these banking organizations issue 
subordinated debt to Treasury under the CPP on substantially the 
same terms as S-Corp BHCs. This interim final rule also accords the 
same capital treatment to Subordinated Securities issued by Mutual 
BHCs as those issued by S-Corp BHCs, and accordingly, any reference 
to a S-Corp BHC in the notice shall also be deemed to include a 
Mutual BHC unless the context otherwise requires.
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    As with other CPP participants, the aggregate amount of 
Subordinated Securities that may be issued by an S-Corp to Treasury 
must be (i) not less than one percent of the S-Corp's risk-weighted 
assets, and (ii) not more than the lesser of (A) $25 billion and (B) 
three percent of its risk-weighted assets.\3\ In connection with its 
purchase of the Subordinated Securities, the Treasury also will receive 
warrants to purchase, upon net settlement, a number of additional 
Subordinated Securities in an amount equal to 5 percent of the amount 
of Subordinated Securities purchased on the date of investment.
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    \3\ 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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    Similar to the Senior Perpetual Preferred Stock, Subordinated 
Securities issued pursuant to the CPP must include certain features 
designed to make them attractive to a wide array of generally sound S-
Corp banking organizations and to encourage such companies to replace 
such securities with private capital once the financial markets return 
to more normal conditions. In particular, the Subordinated Securities 
will bear an initial interest rate of 7.7 percent per annum, which will 
increase to 13.8 percent per annum five years after issuance.\4\ An S-
Corp issuer may redeem the Subordinated Securities at 100 percent of 
their issuance price, plus accrued and unpaid interest. In all cases, 
Treasury must consult with the appropriate Federal banking agency 
before a banking organization may redeem the Subordinated 
Securities.\5\ In addition, following the redemption of all outstanding 
Subordinated Securities, an S-Corp issuer shall have the right to 
repurchase any warrants for additional Subordinated Securities held by 
Treasury.
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    \4\ The interest payments on the Subordinated Securities will be 
tax deductible for shareholders of the issuing S-Corp and therefore 
this interest rate is economically comparable (assuming a 35 percent 
marginal tax rate) to the dividend payments on the Senior Preferred 
Stock, which are not tax deductible.
    \5\ See section 7001 of the American Recovery and Reinvestment 
Act of 2009, Public Law No. 111-5, 123 Stat. 115.
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    Under the Board's current risk-based and leverage capital adequacy 
guidelines for bank holding companies (Capital Guidelines),\6\ the 
Subordinated Securities would be ineligible for tier 1 capital 
treatment because they are subordinated debt, but would be eligible for 
inclusion in tier 2 capital.\7\ However, the Subordinated Securities 
were purposefully structured to have features that are very close to 
those of the subordinated notes underlying trust preferred securities 
that qualify for tier 1 capital as a restricted core capital element 
for bank holding companies (qualifying trust preferred securities). 
Like such junior subordinated notes, the Subordinated Securities would 
be deeply subordinated and junior to the claims of depositors and other 
creditors of the issuing bank holding company. Furthermore, as required 
of the junior subordinated notes underlying qualifying trust preferred 
securities, interest payable on the Subordinated Securities may be 
deferred by the issuing S-Corp BHC for up to 20 quarters without 
creating an event of default. Principal and accrued interest on such 
securities would only become due and payable if interest is deferred 
more than 20 quarters or if the issuing S-Corp BHC enters bankruptcy, 
is liquidated, or if one or more of its major bank subsidiaries is put 
into receivership. Additionally, under the terms of the Capital 
Purchase Program, the Subordinated Securities have a maturity of 30 
years, which is the same minimum term required for such junior 
subordinated notes.\8\
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    \6\ 12 CFR part 225, Appendices A and D.
    \7\ See 12 CFR part 225, Appendix A, sections II.A.2. and 
II.A.2.d.
    \8\ 12 CFR part 225, Appendix A, section II.A.1.c.iv.
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    In addition, like the Senior Perpetual Preferred Stock, the 
Subordinated Securities will be issued to Treasury as part of a 
nationwide program, established by Treasury under the EESA, to provide 
capital to eligible banking organizations that are in generally sound 
financial condition in order to increase the capital available to 
banking organizations and thereby promote stability in the financial 
markets and the banking industry as a whole.\9\ Treasury will purchase 
these Subordinated Securities under special powers granted by Congress 
to the Secretary of the Treasury in the EESA to achieve these important 
public policy objectives. In addition, the terms of the Subordinated 
Securities issued under the CPP provide that redemption is subject to 
the approval of the Federal Reserve.\10\ In light of this provision, 
the Board recently specified in Federal Reserve SR letter 09-4 \11\ 
that any bank holding company that intends to redeem Subordinated 
Securities issued to Treasury under the CPP should first consult with 
Federal Reserve supervisory staff. After reviewing a request by a bank 
holding company to redeem Subordinated Securities, 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.\12\ Each of these factors, and the features of the 
Subordinated Securities that are comparable to those of qualifying 
trust preferred securities, is important to the determinations made by 
the Board with respect to the appropriate regulatory capital treatment 
of the Subordinated Securities.
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    \9\ This interim final rule addresses only the regulatory 
capital treatment of Subordinated Securities. Details about the CPP, 
including eligibility requirements and the general terms and 
conditions of the Subordinated Securities and warrants associated 
with such securities, are available at https://www.financialstability.gov.
    \10\ See 12 CFR part 225, Appendix A, section II.A.1.c.ii.(2).
    \11\ 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.
    \12\ See 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 support the participation of S-
Corp

[[Page 26079]]

BHCs in the Capital Purchase Program, promote the stability of banking 
organizations and the financial system, and help banking organizations 
meet the credit needs of creditworthy customers, the Board has adopted 
this interim final rule to permit S-Corp BHCs that issue new 
Subordinated Securities to the Treasury under the TARP to include the 
full amount of such securities in tier 1 capital for purposes of the 
Board's Capital Guidelines.\13\
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    \13\ See 12 CFR part 225, Appendices A and D.
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    The Board is allowing the full amount of the Subordinated 
Securities to count in tier 1 capital to provide similar regulatory 
capital treatment to the instruments issued by S-Corp BHCs and other 
bank holding companies under the Capital Purchase Program and in light 
of the special and unique public policy objectives of the CPP. However, 
the interim final rule requires an S-Corp BHC to take into account the 
amount of Subordinated Securities in determining the amount of other 
restricted core capital elements the company may include in its tier 1 
capital.\14\ Thus, for example, if the amount of Subordinated 
Securities issued by an S-Corp BHC equals or exceeds 25 percent of the 
company's tier 1 capital elements, the company may not include any 
other currently outstanding or future restricted core capital elements 
in tier 1 capital, and any such restricted core capital elements in the 
company's tier 1 capital elements could only be included in tier 2 
capital. This approach is designed to give the Subordinated Securities 
tier 1 treatment that is equivalent to that provided Senior Perpetual 
Preferred Stock, while preventing a S-Corp BHC's tier 1 capital from 
becoming dominated by instruments that are, or have features similar 
to, restricted core capital elements. The following examples provide an 
explanation of how this computation will operate; each example assumes 
that the bank holding company's limit on inclusion of restricted core 
capital elements in tier 1 capital is $25 million.
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    \14\ 12 CFR part 225, Appendix A, section II.A.1.b.
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     Example 1. The bank holding company has no existing 
restricted core capital elements and issues $30 million of Subordinated 
Securities to the Treasury. The bank holding company may include the 
full $30 million in tier 1 capital, but may not include any additional 
restricted core capital elements that it issues in tier 1 capital 
unless its limit expands.
     Example 2. The bank holding company has $10 million of 
previously issued trust preferred securities included in tier 1 capital 
and issues $30 million of Subordinated Securities. The $30 million of 
Subordinated Securities is includable in tier 1 capital, and the $10 
million of trust preferred securities is includable in tier 2 capital. 
The bank holding company may not include the trust preferred securities 
in tier 1 capital, because the $30 million of Subordinated Securities 
exceeds the bank holding company's $25 million limit on inclusion of 
restricted core capital elements in tier 1 capital.
     Example 3. The bank holding company has no restricted core 
capital elements and issues $20 million of Subordinated Securities to 
Treasury. The $20 million of Subordinated Securities is includable in 
tier 1 capital, and the bank holding company may issue an additional $5 
million of other restricted core capital elements (e.g., trust 
preferred securities or cumulative perpetual preferred securities) and 
include them in its tier 1 capital.

The Board expects S-Corp BHCs that issue Subordinated Securities, 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 banking organizations that issue Subordinated 
Securities to appropriately incorporate the obligations of the 
Subordinated Securities into the organization's liquidity and capital 
funding plans.
    The Board notes that, as a matter of prudential policy and 
practice, it generally has not allowed subordinated debt to be included 
in tier 1 capital. Furthermore, the Board has restricted the amount of 
qualifying trust preferred securities that may be included in core 
capital, along with other restricted core capital elements, to an 
aggregate total that may not exceed 25 percent of the sum of all core 
capital elements, including restricted core capital elements (which 
will be computed net of goodwill less any associated deferred tax 
liability as of March 31, 2011).\15\ The Board has long expressed 
concern about banking organizations including debt instruments of any 
kind in tier 1 capital given the contractual obligations they place on 
the issuing banking organization and consequent limited ability to 
absorb losses. The Board also expressed concerns with the inclusion in 
tier 1 capital of instruments that provide for a step-up in dividend or 
coupon rates.\16\ In light of these concerns, the Board previously has 
declined to allow subordinated debt to be included in tier 1 capital 
and has restricted the amount of qualifying trust preferred securities 
that may be included in tier 1 capital. The Board remains concerned 
that instruments with debt or debt-like features have limited ability 
to absorb losses.
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    \15\ See 74 FR 12076 (March 23, 2009).
    \16\ For example, in a 1992 policy statement on subordinated 
debt, the Board noted: ``Although payments on debt whose rates 
increase over time on the surface may not appear to be directly 
linked to the financial condition of the issuing organization, such 
debt (sometimes referred to as expanding or exploding rate debt) has 
a strong potential to be credit sensitive in substance. 
Organizations whose financial condition has strengthened are more 
likely to be able to refinance the debt at a rate lower than that 
mandated by the preset increase, whereas institutions whose 
condition has deteriorated are less likely to be able to do so. 
Moreover, just when these latter institutions would be in the most 
need of conserving capital, they would be under strong pressure to 
redeem the debt as an alternative to paying higher rates and, thus, 
would accelerate depletion of their resources.'' See 12 CFR Sec.  
250.166(b)(4) at n. 4. Furthermore, the Board has not permitted bank 
holding companies to include capital instruments in tier 1 capital 
if they include dividend rate step-ups.
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    However, as discussed above, issuance of the Subordinated 
Securities is consistent with a strong public policy objective, which 
is to increase the capital available to banking organizations generally 
in the current environment and thereby promote stability in the 
financial markets and the banking industry as a whole and facilitate 
the ability of banking organizations to meet the needs of creditworthy 
households, businesses, and other customers. In addition, the Board 
notes that other terms and public policy considerations related to the 
Subordinated Securities mitigate supervisory concerns. As with 
qualifying trust preferred securities, the Subordinated Securities 
allow the issuing bank holding company to defer interest payments for 
five years. Furthermore, under the terms of the CPP, issuers of this 
instrument generally will not be allowed to repurchase equity 
securities or trust preferred securities for ten years after the 
issuance of the Subordinated Securities or increase common dividends 
for three years after issuance without the consent of the Treasury. 
These restrictions promote in an important way the overall safety and 
soundness of the issuer. Moreover, as previously discussed, Treasury 
must consult with the Board before an S-Corp BHC may redeem the 
Subordinated Securities. These features, viewed in light of the unique, 
temporary, and extraordinary nature of the CPP, countervail in many 
respects the Board's concerns with regard to the subordinated debt 
nature of the securities. As previously noted, the Board also would 
retain general

[[Page 26080]]

supervisory authority with respect to any S-Corp BHC.
    In light of the instrument- and circumstances-specific nature of 
the Board's determination, the Board strongly cautions bank holding 
companies against construing the inclusion of the Subordinated 
Securities in tier 1 capital as in any way detracting from the Board's 
longstanding stance regarding the unacceptability of including other 
forms of subordinated debt in tier 1 capital.

Small Bank Holding Company Policy Statement

    In order to maintain competitive equality between large and small 
bank holding companies, the Board also is amending its Small Bank 
Holding Policy Statement (Policy Statement) to allow bank holding 
companies that are subject to the Policy Statement and that are S-Corp 
BHCs to exclude the Subordinated Securities from debt for purposes of 
the Policy Statement.\17\ Generally, bank holding companies with less 
than $500 million in consolidated assets (small bank holding companies) 
are not subject to the Capital Guidelines and instead are subject to 
the Policy Statement. The Policy Statement limits the ability of a 
small bank holding company to pay dividends if its debt-to-equity ratio 
exceeds certain limits. However, the Policy Statement currently 
provides that small bank holding companies may exclude from debt an 
amount of subordinated debt associated with qualifying trust preferred 
securities up to 25 percent of the bank holding company's equity (as 
defined in the Policy Statement), less goodwill on the parent company's 
balance sheet, in determining compliance with the requirements of 
certain provisions of the Policy Statement.\18\ The practical effect of 
excluding the Subordinated Securities from debt for purposes of the 
Policy Statement is to allow issuance of Subordinated Securities by 
small bank holding companies without exceeding the debt-to-equity ratio 
standard that would disallow the payment of dividends by such small 
bank holding companies. In turn, this allows small bank holding 
companies that issue Subordinated Securities to downstream Treasury's 
investment in the form of the Subordinated Securities as additional 
common stock to subsidiary depository institutions (that counts as tier 
1 capital of the depository institutions) and to pay dividends to the 
small bank holding company's shareholders to the extent appropriate and 
permitted by the Federal Reserve.
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    \17\ 12 CFR part 225, Appendix C.
    \18\ 12 CFR part 225, Appendix C, section 2, n. 3.
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    Because, as previously discussed, the Subordinated Securities and 
the junior subordinated notes underlying qualifying trust preferred 
securities have very similar features, and to facilitate the 
participation of small bank holding companies in the Capital Purchase 
Program, the Board has adopted this interim final rule to allow small 
bank holding companies that are S-Corp BHCs to exclude the Subordinated 
Securities from the definition of debt for purposes of the debt-to-
equity ratio standard under the Policy Statement. The factors and 
considerations discussed above apply equally to the Board's decision to 
modify the Policy Statement in this manner.
    The Board solicits comments on all aspects of the rule.

Administrative Procedure Act

    Pursuant to sections 553(b) and (d) of the Administrative Procedure 
Act (5 U.S.C. 553(b) and (d)), the Board finds that there is good cause 
for issuing this interim final rule and making the rule effective on 
June 1, 2009, and that it is impracticable, unnecessary, or contrary to 
the public interest to issue a notice of proposed rulemaking and 
provide an opportunity to comment before the effective date. The Board 
has adopted the rule in light of, and to help address, the continuing 
unusual and exigent circumstances in the financial markets. The rule 
will allow S-Corp BHCs to immediately include the full amount of 
Subordinated Securities they issue to Treasury under the CPP in tier 1 
capital. This will help promote stability in the banking system and 
financial markets. The rule also will allow small bank holding 
companies that are S-Corp BHCs to exclude the Subordinated Securities 
from the definition of debt for purposes of the debt-to-equity ratio 
standard of the Policy Statement.
    The Board believes it is important to provide S-Corp BHCs 
immediately with guidance concerning the capital treatment of the 
Subordinated Securities so that they may make appropriate judgments 
concerning the extent of their participation in the CPP and to provide 
S-Corp BHCs with immediate certainty concerning the regulatory capital 
treatment of the Subordinated Securities for capital planning purposes. 
(Treasury recently completed the documentation for issuances of the 
Subordinated Securities by S-Corp BHCs.) The Board is soliciting 
comment on all aspects of the rule and will make such changes that it 
considers appropriate or necessary after review of any comments 
received.

Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
generally requires that an agency prepare and make available for public 
comment an initial regulatory flexibility analysis in connection with a 
notice of proposed rulemaking.\19\ Under regulations issued by the 
Small Business Administration,\20\ 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\ See 5 U.S.C. 603(a).
    \20\ See 13 CFR 121.201.
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    As a general matter, the Capital Guidelines apply only to a bank 
holding company that has consolidated assets of $500 million or more. 
Therefore, the changes to the Capital Guidelines will not affect small 
bank holding companies. In addition, the rule would reduce burden and 
benefit small bank holding companies by allowing them to exclude the 
Subordinated Securities from treatment as debt for purposes of the 
debt-to-equity standard under the Policy Statement. This treatment is 
similar to the current treatment of junior subordinated notes 
underlying trust preferred securities under the Policy Statement. 
Furthermore, the Board estimates that the changes to the Policy 
Statement will affect less than one percent of small bank holding 
companies. Accordingly, the Board certifies that this interim final 
rule does not have a significant impact on a substantial number of 
small bank holding companies.

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3506), the Board has reviewed the interim final rule 
to assess any information collections. There are no collections of 
information as defined by the Paperwork Reduction Act in the interim 
final rule.

Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law No. 106-102, 
requires the Federal banking agencies to use plain language in all 
proposed and final rules published after January 1, 2000. The Board 
invites comment on how to make the interim final rule easier to 
understand. For example:
     Have we organized the material to suit your needs? If not, 
how could the rule be more clearly stated?

[[Page 26081]]

     Are the requirements in the rule clearly stated? If not, 
how could the rule be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would make the regulation easier to 
understand?
     Would more, but shorter, sections be better? If so, which 
sections should be changed?
     What else could we do to make the regulation easier to 
understand?

List of Subjects in 12 CFR Part 225

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

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

0
For the reasons stated in the preamble, the Board of Governors of the 
Federal Reserve System amends part 225 of chapter II of title 12 of the 
Code of Federal Regulations as follows:

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

0
1. The authority citation for part 225 continues to read as follows:

    Authority:  12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-
1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906, 
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.


0
2. Appendix A to part 225 is amended as set forth below:
0
a. In section II.A.1.a.iv., remove ``and'' from the end of paragraph 
(3), remove the period from the end of paragraph (4), add a semicolon 
and ``and'' to the end of subparagraph (4), and add a new paragraph (5) 
to read as follows; and
0
b. In section II.A.1.b.i., amend paragraph (1) by adding the following 
sentence to the end of paragraph (1) to read as follows:

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

    II. * * *
    A. * * *
    1. * * *
    a. * * *
    iv. * * *
    (5) Subordinated debentures issued to the Treasury under the 
TARP (TARP Subordinated Securities) established by the EESA by a 
bank holding company that has made a valid election to be taxed 
under Subchapter S of Chapter 1 of the U.S. Internal Revenue Code 
(S-Corp BHC) or by a bank holding company organized in mutual form 
(Mutual BHC).
    b. * * *
    i. * * *
    (1) * * * Notwithstanding the foregoing, the full amount of TARP 
Subordinated Securities issued by an S-Corp BHC or Mutual BHC may be 
included in its tier 1 capital, provided that the banking 
organization must include the TARP Subordinated Securities in 
restricted core capital elements for the purposes of determining the 
aggregate amount of other restricted core capital elements that may 
be included in tier 1 capital in accordance with this section.
* * * * *


0
3. In appendix C to part 225, revise footnote 3 in section 2 to read as 
follows:

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

* * * * *
    2. * * *
    \3\ The term debt, as used in the ratio of debt to equity, means 
any borrowed funds (exclusive of short-term borrowings that arise 
out of current transactions, the proceeds of which are used for 
current transactions), and any securities issued by, or obligations 
of, the holding company that are the functional equivalent of 
borrowed funds.
    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 also may 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.
    In addition, notwithstanding any other provision of this policy 
statement and for purposes of compliance with paragraphs 2.C., 3.A., 
4.A.i., and 4.B.i. of this policy statement, both a bank holding 
company that is organized in mutual form and a bank holding company 
that has made a valid election to be taxed under Subchapter S of 
Chapter 1 of the U.S. Internal Revenue Code may exclude from debt 
subordinated debentures issued to the United States Department of 
the Treasury under the Troubled Asset Relief Program established by 
the Emergency Economic Stabilization Act of 2008, Division A of Pub. 
L. No. 110-343, 122 Stat. 3765 (2008).
    The term equity, as used in the ratio of debt to equity, means 
the total stockholders' equity of the bank holding company as 
defined in accordance with generally accepted accounting principles. 
In determining the total amount of stockholders' equity, the bank 
holding company should account for its investments in the common 
stock of subsidiaries by the equity method of accounting.
    Ordinarily the Board does not view redeemable preferred stock as 
a substitute for common stock in a small bank holding company. 
Nevertheless, to a limited degree and under certain circumstances, 
the Board will consider redeemable preferred stock as equity in the 
capital accounts of the holding company if the following conditions 
are met: (1) The preferred stock is redeemable only at the option of 
the issuer; and (2) the debt to equity ratio of the holding company 
would be at or remain below .30:1 following the redemption or 
retirement of any preferred stock. Preferred stock that is 
convertible into common stock of the holding company may be treated 
as equity.
* * * * *

    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. E9-12626 Filed 5-29-09; 8:45 am]
BILLING CODE 6210-02-P