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 and the Small Business Jobs Act of 2010, 35959-35963 [2011-14983]

Download as PDF Federal Register / Vol. 76, No. 119 / Tuesday, June 21, 2011 / Rules and Regulations To view the interim rule, go to: https://www.regulations.gov/ #!documentDetail;D=AMS-FV-10-01150001. This action also affirms information contained in the interim rule concerning Executive Orders 12866 and 12988, the Paperwork Reduction Act (44 U.S.C. Chapter 35), and the E-Gov Act (44 U.S.C. 101). After consideration of all relevant material presented, it is found that finalizing the interim rule, without change, as published in the Federal Register (76 FR 11937, March 4, 2011) will tend to effectuate the declared policy of the Act. List of Subjects in 7 CFR Part 932 Olives, Marketing agreements, Reporting and recordkeeping requirements. PART 932—[AMENDED] Accordingly, the interim rule that amended 7 CFR part 932 and that was published at 76 FR 11937 on March 4, 2011, is adopted as a final rule, without change. ■ Dated: June 15, 2011. Ellen King, Acting Administrator, Agricultural Marketing Service. [FR Doc. 2011–15446 Filed 6–20–11; 8:45 am] BILLING CODE 3410–02–P 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 and the Small Business Jobs Act of 2010 Board of Governors of the Federal Reserve System (Board). ACTION: Final rule. AGENCY: The Board is adopting a final rule that allows 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 subordinated debt securities issued to the U.S. Department of the Treasury (Treasury) under the capital purchase program (CPP), in tier 1 capital for purposes of the Board’s risk-based and leverage capital wwoods2 on DSK1DXX6B1PROD with RULES_PART 1 SUMMARY: VerDate Mar<15>2010 13:46 Jun 20, 2011 Jkt 223001 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 (small bank holding companies) and that are S-Corp BHCs or Mutual BHCs to exclude the CPP Subordinated Securities from treatment as debt for purposes of the debt-toequity standard under the Small Bank Holding Company Policy Statement (Policy Statement). The Board is also adopting, and requesting comment on, an interim final rule that allows small bank holding companies that are SCorps or Mutual BHCs to exclude from treatment as debt for purposes of the debt-to-equity standard under the Policy Statement subordinated debt securities issued to the Treasury through the Small Business Lending Fund established under the Small Business Jobs Act of 2010. DATES: The final rule will become effective on June 21, 2011. Comments on allowing S-Corp BHCs and Mutual BHCs that issue SBLF Subordinated Securities to the Treasury to exclude the securities from the definition of debt under the Policy Statement are due by July 30, 2011. FOR FURTHER INFORMATION CONTACT: Anna Lee Hewko, (202) 530–6260, Assistant Director, Capital and Regulatory Policy, or Brendan G. Burke, (202) Senior Supervisory Financial Analyst, Division of Banking Supervision and Regulation; April C. Snyder, Counsel, (202) 452–3099, or Benjamin W. McDonough, Counsel, (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: Background On June 1, 2009, the Board issued an interim final rule (CPP interim rule) (74 FR 26077) to allow 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 subordinated debt securities issued to the Treasury under the capital purchase program (CPP Subordinated Securities) established by Treasury under the Economic PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 35959 Stabilization Act of 2008 (EESA) 1 in tier 1 capital for purposes of the Board’s risk-based and leverage capital guidelines for bank holding companies (Capital Guidelines),2 provided that the Subordinated Securities would count toward the limit on the amount of other restricted core capital elements includable in tier 1 capital. The CPP interim rule also permitted bank holding companies that are subject to the Board’s Small Bank Holding Company Policy Statement (Policy Statement) 3 and that are S-Corps or Mutual BHCs, to exclude the CPP Subordinated Securities from treatment as debt for purposes of the debt-toequity standard under the Policy Statement. The Board is now adopting the CPP interim final rule as a final rule in substantially the same form, as discussed below. In addition, for the reasons explained below, the Board is adopting as an interim final rule a provision that would allow bank holding companies that are subject to the Board’s Policy Statement and that are S-Corp BHCs or Mutual BHCs to exclude subordinated debt securities issued to the Treasury through the Small Business Lending Fund established under the Small Business Jobs Act of 2010 (SBLF Subordinated Securities) from debt for purposes of the debt-to-equity standard under the Policy Statement. Capital Guidelines Under the Troubled Asset Relief Program (TARP) established in the Emergency Economic Stabilization Act of 2008 (EESA), Division A of Pub. L. No. 110–343, 122 Stat. 3765 (2008), Treasury provided capital to eligible banks, bank holding companies and savings associations (collectively, banking organizations), as well as certain other financial institutions (CPP).4 S-Corp BHCs generally could not participate in the CPP through the issuance of Senior Perpetual Preferred Stock because, under the Internal Revenue Code, S-Corp BHCs may not issue more than one class of equity security. Bank holding companies organized in mutual form also cannot issue Senior Perpetual Preferred Stock 1 Public Law 110–343, 122 Stat. 3765 (2008). CFR part 225, Appendices A and D. 3 12 CFR part 225, Appendix C. 4 Through the CPP, Treasury invested in newly issued senior perpetual preferred stock of banking organizations (Senior Perpetual Preferred Stock) that are not S-Corps or organized in mutual form. On June 1, 2009, the Board published a final rule on the capital treatment of the Senior Perpetual Preferred Stock. See 74 FR 26081 (June 1, 2009). 2 12 E:\FR\FM\21JNR1.SGM 21JNR1 35960 Federal Register / Vol. 76, No. 119 / Tuesday, June 21, 2011 / Rules and Regulations wwoods2 on DSK1DXX6B1PROD with RULES_PART 1 because of their mutual ownership structure. Under the CPP, Treasury purchased the CPP Subordinated Securities, which rank senior to common stock but are subordinated to the claims of depositors and other creditors unless such other claims are explicitly made pari passu or subordinated to the Subordinated Securities.5 These terms were designed to facilitate S-Corp and Mutual BHC participation in the CPP in a manner that is as economically comparable as possible, consistent with the legal structure of S-Corp and Mutual BHCs, the Board’s capital adequacy guidelines, and the Internal Revenue Code, to institutions that issued Senior Perpetual Preferred Stock to the Treasury under the CPP.6 As with other securities issued to Treasury under the CPP, and as described in further detail in the interim final rule, the CPP Subordinated Securities included certain features designed to make them attractive to a wide array of generally sound S-Corp and mutual 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 CPP Subordinated Securities bear an interest rate that increases substantially five years after issuance. Under the Board’s current Capital Guidelines, the CPP Subordinated Securities generally 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).8 Moreover, the CPP Subordinated Securities could not be redeemed without the approval of the Federal Reserve, to ensure redemptions are consistent with safety and soundness.9 Additionally, the CPP Subordinated Securities were issued to Treasury as part of a nationwide program to increase capital available to eligible banking organizations that are in generally sound financial condition in order to promote stability in the financial markets and the banking industry as a whole. For these reasons and in order to support the participation of S-Corp 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 adopted the CPP interim rule to permit S-Corp BHCs that issued CPP Subordinated Securities to the Treasury to include the full amount of such securities in tier 1 capital for purposes of the Board’s Capital Guidelines, subject to certain limitations.10 The Board received two comments on the CPP interim rule. Both comments generally were in favor of the Board’s action. One commenter suggested that the Board extend the capital treatment provided by the CPP interim rule to instruments with similar terms issued to private entities. Another commenter expressed support for the CPP interim rule generally and asked that the Board clarify in the final rule that the capital treatment of the CPP interim rule would apply to all CPP Subordinated Securities issued, whether before or after the publication of the CPP interim rule. As discussed in the CPP interim rule, the Board, as a matter of prudential policy and practice, generally has not allowed subordinated debt to be included in tier 1 capital, given the 5 This final rule 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. 6 The interest payments on the CPP Subordinated Securities are 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. 7 See 12 CFR part 225, Appendix A, sections II.A.2. and II.A.2.d. 8 For example, like such junior subordinated notes, the CPP Subordinated Securities were deeply subordinated and junior to the claims of depositors and other creditors of the issuing bank holding company. Furthermore, interest payable on the CPP Subordinated Securities could be deferred by the issuing S-Corp BHC for up to 20 quarters without creating an event of default and the CPP Subordinated Securities were issued with a maturity of 30 years, which is the same minimum term required for such junior subordinated notes. See 12 CFR part 225, Appendix A, section II.A.1.c.iv. 9 See 12 CFR part 225, Appendix A, section II.A.1.c.ii.(2). 10 As explained in the interim final rule, an SCorp BHC issuing CPP Subordinated Securities must take into account the amount of CPP Subordinated Securities in determining the amount of other restricted core capital elements the company could include in its tier 1 capital. Thus, for example, if the amount of Subordinated Securities issued by an S-Corp BHC equaled or exceeded 25 percent of the company’s tier 1 capital elements, the company could 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. See 74 FR 26077, 26079 (June 1, 2009). VerDate Mar<15>2010 13:46 Jun 20, 2011 Jkt 223001 PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 contractual obligations they place on the issuing banking organization and consequent limited ability to absorb losses. The Board remains concerned that instruments with debt or debt-like features have limited ability to absorb losses. However, as discussed above and in the CPP interim rule, issuance of the CPP Subordinated Securities to Treasury in connection with TARP was consistent with a strong public policy objective, which was to increase the capital available to banking organizations generally in a stressed economic environment and thereby promote stability in the financial markets and the banking industry as a whole, as well as facilitate the ability of banking organizations to meet the needs of creditworthy households, businesses, and other customers. In addition, as discussed above and in the CPP interim rule, the terms and public policy considerations related to the CPP Subordinated Securities mitigated supervisory concerns. These facts and circumstanced, viewed in light of the unique, temporary, and extraordinary nature of the CPP, countervailed in many respects the Board’s concerns with regard to the subordinated debt nature of the securities. For these reasons and others related to subsequent legislation, as described below, the Board has not extended the capital treatment provided under the CPP interim rule to subordinated debt other than the CPP Subordinated Securities. Since the issuance of the CPP interim rule, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA).11 Under section 171 of the DFA, the Board must establish minimum risk-based and capital leverage requirements for bank holding companies that are no less than the generally applicable minimum riskbased and leverage capital requirements for insured depository institutions. Under current generally applicable capital requirements for insured depository institutions, subordinated debt cannot be included in the tier 1 capital of insured depository institutions and therefore as a general matter, could not be included in the tier 1 capital of bank holding companies. However, the DFA exempted from the requirements of section 171 debt instruments issued by banks and bank holding companies pursuant to EESA to the Treasury prior to October 4, 2010. Therefore, section of the DFA generally does not affect the treatment in the CPP interim rule of CPP Subordinated Debt Securities, although other subordinated 11 Public E:\FR\FM\21JNR1.SGM Law 111–203, 124 Stat. 1376 (2010). 21JNR1 Federal Register / Vol. 76, No. 119 / Tuesday, June 21, 2011 / Rules and Regulations debt securities are subject to section 171 of the DFA. For the reasons above, the Board has adopted the CPP interim rule as a final rule, clarifying that the provisions apply to all CPP Subordinated Securities issued to Treasury prior to October 4, 2010, in accordance with the DFA. The Board expects S-Corp BHCs that issue CPP 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 CPP Subordinated Securities to appropriately incorporate the obligations associated with the CPP Subordinated Securities into the organization’s liquidity and capital funding plans. Small Bank Holding Company Policy Statement wwoods2 on DSK1DXX6B1PROD with RULES_PART 1 CPP Subordinated Securities In the CPP interim rule, in order to maintain competitive equality between large and small bank holding companies, the Board also amended the 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 debt-toequity standard under Policy Statement.12 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 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.13 The practical effect of excluding the CPP Subordinated Securities from debt for purposes of the Policy Statement is to allow issuance of CPP 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 12 12 13 12 CFR part 225, Appendix C. CFR part 225, Appendix C, section 2, n. 3. VerDate Mar<15>2010 13:46 Jun 20, 2011 Jkt 223001 bank holding companies. In turn, this allows small bank holding companies that issue CPP Subordinated Securities to downstream Treasury’s investment in the form of the CPP 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. Because the CPP 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 adopted the CPP interim rule to allow small bank holding companies that are S-Corp BHCs to exclude the CPP 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 with respect to the Board’s treatment of the CPP Subordinated Securities under its Capital Adequacy Guidelines also apply equally to the Board’s decision to modify the Policy Statement in this manner. Section 171 of the DFA, by its terms, does not apply to any small bank holding company that is subject to the Policy Statement as in effect on May 19, 2010. The CPP Subordinated Securities may be excluded from the definition of debt under the Policy Statement as in effect on May 19, 2010. Therefore, SCorp BHCs and Mutual BHCs subject to the Policy Statement as in effect on May 19, 2010, are not subject to the requirements of section 171 and may under the final rule continue to exclude the CPP Subordinated Securities from debt. SBLF Subordinated Securities Under the Small Business Jobs Act of 2010 (SBJA),14 a $30 billion Small Business Lending Fund (SBLF) was established to facilitate lending to small business by banking organizations with less than $10 billion in consolidated assets. The increased lending would be enabled through capital investments by Treasury in these banking organizations. The resulting rise in availability of credit to small businesses is intended to counteract the effects of the financial crisis on lending to small businesses 14 Public PO 00000 Law 111–240, 124 Stat. 2504 (2010). Frm 00005 Fmt 4700 Sfmt 4700 35961 and encourage increased hiring by small businesses. Treasury has established term sheets for the issuance of subordinated securities by S-Corp BHCs and Mutual BHCs that are eligible for the SBLF program, with terms and structure similar to the CPP Subordinated Securities. The SBLF Subordinated Securities, like the CPP Subordinated Securities, are deeply subordinated, cannot be redeemed by a bank holding company issuer without the permission of the Federal Reserve, and cannot provide for accelerated interest except in liquidation or bankruptcy.15 Furthermore, the SBLF Subordinated Securities, like the CPP Subordinated Securities, are issued to Treasury as part of a nationwide program to provide capital to eligible banking organizations that are in generally sound financial condition in order to increase the capital available for lending to small businesses, thereby mitigating the ongoing effects of the financial crisis on small businesses and promoting financial stability. Based on these facts and circumstances, the Board has concluded that the SBLF Subordinated Securities are in terms and substance substantially equivalent to the CPP Subordinated Securities and may be excluded from debt under the Policy Statement as in effect on May 19, 2010, on the same basis and for the same reasons as described above. The Board therefore has approved an interim final rule for public comment that allows S-Corp and mutual bank holding companies that issue SBLF Subordinated Securities to the Treasury to exclude the securities from the definition of debt under the Policy Statement. The Board requests comment on allowing S-Corp BHCs and Mutual BHCs to exclude the SBLF Subordinated Securities from debt under the Policy Statement. Administrative Procedure Act As discussed above and in the interim final rule, the Board found good cause for issuing the CPP interim rule and 15 The SBLF Subordinated Securities, like the CPP Securities, bear an interest step-up feature. This feature is designed in accordance with the SBJA. The SBLF Subordinated Securities, unlike the CPP Subordinated Securities that had a maturity of 30 years, have a stated maturity of 10 years. However, as with the CPP Subordinated Securities, for public policy reasons, the step-up feature is designed to encourage the issuer to replace the government investment with private capital at a point in time prior to the stated maturity. The term sheets for SBLF Subordinated Securities are available on Treasury’s Web site at https:// www.treasury.gov/resource-center/sb-programs/ Pages/Overview-for-S-Corporation-Banks-andMutual-Institutions.aspx. E:\FR\FM\21JNR1.SGM 21JNR1 35962 Federal Register / Vol. 76, No. 119 / Tuesday, June 21, 2011 / Rules and Regulations wwoods2 on DSK1DXX6B1PROD with RULES_PART 1 making it effective on June 1, 2009, without opportunity to comment before the effective date. The Board has considered comments that were submitted after the publication of the final rule and for the reasons described above, adopted the final rule for CPP Subordinated Securities substantially in the form of the interim final rule. Pursuant to sections 553(b) and (d) of the Administrative Procedure Act (5 U.S.C. §§ 553(b) and (d)), the Board also finds that there is good cause for issuing this interim final rule with respect to the SBLF Securities and making the rule effective on June 21, 2011, and that it is impracticable, unnecessary, or contrary to the public interest to issue a notice of proposed rulemaking. The Board is requesting public comment on the interim final rule. As explained, the SBLF Subordinated Securities are substantially equivalent to the CPP Subordinated Securities in terms and substance. Furthermore, the Board has adopted the interim final rule in light of the important policy considerations of the SBLF program and to help address the continued effects of the financial crisis and recession on small businesses. The rule will allow SCorp BHCs that are subject to the Policy Statement to exclude the SBLF Subordinated Securities from debt for purposes of the debt-to-equity ratio standard of the Policy Statement. This will help counteract the effects of the recent financial crisis on lending to small businesses and promote stability in the banking system as well as economic growth through increased availability of credit to small businesses. The Board believes it is important to provide S-Corp BHCs that are subject to the Policy Statement immediately with guidance concerning the capital treatment of the SBLF Subordinated Securities so that they may make appropriate judgments concerning the extent of their participation in the SBLF program and to provide S-Corp BHCs with immediate certainty concerning the treatment of SBLF Subordinated Securities under the Policy Statement. 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.16 Under regulations issued by the Small Business Administration,17 a small entity includes a bank holding company with assets of $175 million or 16 See 5 U.S.C. 603(a). 17 See 13 CFR 121.201. VerDate Mar<15>2010 13:46 Jun 20, 2011 Jkt 223001 less (a small bank holding company). As of December 31, 2010, there were approximately 4,493 small bank holding companies. The purpose of the final rule for CPP Subordinated Securities, like the interim final rule, is to facilitate participation in the CPP for S-Corp and Mutual BHCs, increase capital available to banking organizations, and promote stability in the financial markets and banking industry. Similarly, the purpose of the interim final rule for SBLF Subordinated Securities is to facilitate participation by S-Corp BHCs and Mutual BHCs in the SBLF program, thereby making more capital available for small business lending and alleviate the effects of the financial crisis and economic downturn on lending to small businesses. 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 final rule, like the CPP interim rule, would not affect small bank holding companies. Furthermore, the final rule has no new effect on small bank holding companies that were applicants to the CPP and excluded CPP Subordinated Securities from the definition of debt under the Policy Statement pursuant to the CPP interim rule, which reduced burden and benefited small bank holding companies, as explained in the CPP interim rule. Therefore, the Board believes adoption of the final rule for CPP Subordinated Securities will not result in a significant economic impact on small bank holding companies. The changes to the Policy Statement under the interim final rule for SBLF Subordinated Securities will also reduce burden and benefit small bank holding companies. By allowing them to exclude the SBLF Subordinated Securities from treatment as debt for purposes of the debt-to-equity standard under the Policy Statement, issuance of the subordinated securities to Treasury would have a neutral effect on the ability of the issuing small bank holding company to issue dividends or make acquisitions with regard to its debt-to-equity ratio. Furthermore, the interim final rule does not appear to duplicate, overlap, or conflict with any other Federal rules. Therefore, the Board believes that the interim final rule will not result in a significant economic impact on a substantial number of small entities. Nonetheless, the Board seeks comment on whether the interim final rule would impose undue burdens on, or have unintended consequences for, small banking organizations, and whether there are ways such potential burdens or consequences could be minimized in a PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 manner consistent with the purpose of the interim final rule. Paperwork Reduction Act In accordance with the requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3506), the Board has reviewed the final rule and interim final rule to assess any information collections. There are no collections of information as defined by the Paperwork Reduction Act in the final rule or interim final rule. Solicitation of Comments on Use of Plain Language Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The Board invites comment on how to make the interim final rule easier to understand. For example: • Have we organized the material to suit your needs? If not, how could the rule be more clearly stated? • Are the requirements in the rule clearly stated? If not, how could the rule be more clearly stated? • Do the regulations contain technical language or jargon that is not clear? If so, which language requires clarification? • Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes would make the regulation easier to understand? • Would more, but shorter, sections be better? If so, which sections should be changed? • What else could we do to make the regulation easier to understand? List of Subjects in 12 CFR Part 225 Administrative practice and procedure, Banks, Banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. Authority and Issuance Accordingly, the interim rule amending 12 CFR part 225 which was published at 74 FR 26077 on June 1, 2009, is adopted as a final rule with the following changes: PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 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, E:\FR\FM\21JNR1.SGM 21JNR1 Federal Register / Vol. 76, No. 119 / Tuesday, June 21, 2011 / Rules and Regulations 3907, 3909, and 5371; 15 U.S.C. 1681s, 1681w, 6801 and 6805. FEDERAL DEPOSIT INSURANCE CORPORATION 2. Appendix A to part 225 is amended by revising section II.A.1.a.iv., paragraph (5), to read as follows: 12 CFR Parts 309 and 310 Appendix A to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure Disclosure of Information; Privacy Act Regulations; Notice and Amendments ■ * * * * * II. * * * A. * * * 1. * * * a. * * * iv. * * * (5) Subordinated debentures issued prior to October 4, 2010, 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). * * * * * 3. In appendix C to part 225, revise paragraph 3 in footnote 3 to section 2 to read as follows: ■ Appendix C to Part 225—Small Bank Holding Company Policy Statement * * * * * 2. Ongoing Requirements 3* * * 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 (i) the Troubled Asset Relief Program established by the Emergency Economic Stabilization Act of 2008, Division A of Public Law 110–343, 122 Stat. 3765 (2008), and (ii) the Small Business Lending Fund established by the Small Business Jobs Act of 2010, Title IV of Public Law 111–240, 124 Stat. 2504 (2010). wwoods2 on DSK1DXX6B1PROD with RULES_PART 1 * * * * * By order of the Board of Governors of the Federal Reserve System, June 13, 2011. Jennifer J. Johnson, Secretary of the Board. [FR Doc. 2011–14983 Filed 6–20–11; 8:45 am] BILLING CODE 6210–01–P VerDate Mar<15>2010 13:46 Jun 20, 2011 Jkt 223001 RIN 3064–AD83 Federal Deposit Insurance Corporation (FDIC). ACTION: Interim rule with request for comments. AGENCY: The Dodd-Frank Wall Street Reform and Consumer Protection Act (Act), abolished the Office of Thrift Supervision (OTS) and redistributed, as of July 21, 2011, the statutorily prescribed transfer date (Transfer Date), the functions and regulations of the OTS relating to savings and loan holding companies, Federal savings associations, and State savings associations to the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC), and the FDIC, respectively. The Board of Directors has determined that, effective on the Transfer Date, the OTS Freedom of Information Act (FOIA) and Privacy Act (PA) regulations will not be enforced by the FDIC and that, instead, all FOIA and PA issues will be addressed under the FDIC’s regulations involving disclosure of information and the PA, as amended. In taking this action the FDIC’s goal is to avoid potential confusion and uncertainty that may arise regarding information concerning State savings associations after the Transfer Date. DATES: The effective date of the Interim Rule is July 21, 2011. Written comments must be received by the FDIC no later than August 22, 2011. ADDRESSES: You may submit comments by any of the following methods: Agency Web Site: https:// www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency Web Site. E-mail: Comments@FDIC.gov. Include RIN 3064–AD83 in the subject line of the message. Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. Hand Delivery/Courier: Guard station at the rear of the 550 17th Street Building (located on F Street) on business days between 7 a.m. and 5 p.m. (EST). Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. Public Inspection: All comments received will be posted without change SUMMARY: PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 35963 to https://www.fdic.gov/regulations/laws/ federal including any personal information provided. Paper copies of public comments may be ordered from the Public Information Center by telephone at 1–(877) 275–3342 or 1–(703) 562–2200. FOR FURTHER INFORMATION CONTACT: A. Ann Johnson, Counsel, Legal Division, (202) 898–3573 or aajohnson@fdic.gov; Rodney D. Ray, Counsel, Legal Division, (202) 898–3556 or rray@fdic.gov; or Martin P. Thompson, Senior Review Examiner, Division of Risk Management Supervision, (202) 898–6767 or marthompson@fdic.gov. SUPPLEMENTARY INFORMATION: I. Background The Act, signed into law on July 21, 2010, provides for a substantial reorganization of the regulation of savings associations and their holding companies. Beginning July 21, 2011, the Transfer Date established in DoddFrank, functions formerly performed by the OTS will be divided among the FRB, OCC, and FDIC. Section 316(b) of the Act provides that all orders, resolutions, determinations, and regulations issued, made, prescribed, or allowed to become effective by the OTS that were in effect on the day before the Transfer Date continue in effect and are enforceable by the appropriate successor Federal banking agency until modified, terminated, set aside, or superseded in accordance with applicable law by such successor agency, by any court of competent jurisdiction, or by operation of law. Section 323(b) also provides for the transfer on the Transfer Date of OTS property, including books, accounts, records, reports, files, memoranda, paper, reports of examination, work papers, and correspondence relating to such reports, to the respective agencies, that were used by the OTS on the day before the Transfer Date to support OTS functions. Section 316(c) of the Act further provides for the identification of OTS regulations relating to the supervision of State savings associations to be transferred to the FDIC. The FDIC does not intend to continue or enforce existing OTS regulations regarding the Freedom of Information Act or Privacy Act. II. The Interim Rule The OTS regulations governing Freedom of Information Act and Privacy Act issues are contained in 12 CFR parts 503 and 505. Because the OTS, unlike the FDIC, is a component part of the Department of the Treasury (Treasury), the OTS rules supplement Treasury’s E:\FR\FM\21JNR1.SGM 21JNR1

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FEDERAL RESERVE SYSTEM

[Federal Register Volume 76, Number 119 (Tuesday, June 21, 2011)]
[Rules and Regulations]
[Pages 35959-35963]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14983]


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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 
and the Small Business Jobs Act of 2010

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

ACTION: Final rule.

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SUMMARY: The Board is adopting a final rule that allows 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 subordinated debt securities issued to the U.S. 
Department of the Treasury (Treasury) under the capital purchase 
program (CPP), 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 (small bank holding 
companies) and that are S-Corp BHCs or Mutual BHCs to exclude the CPP 
Subordinated Securities from treatment as debt for purposes of the 
debt-to-equity standard under the Small Bank Holding Company Policy 
Statement (Policy Statement). The Board is also adopting, and 
requesting comment on, an interim final rule that allows small bank 
holding companies that are S-Corps or Mutual BHCs to exclude from 
treatment as debt for purposes of the debt-to-equity standard under the 
Policy Statement subordinated debt securities issued to the Treasury 
through the Small Business Lending Fund established under the Small 
Business Jobs Act of 2010.

DATES: The final rule will become effective on June 21, 2011. Comments 
on allowing S-Corp BHCs and Mutual BHCs that issue SBLF Subordinated 
Securities to the Treasury to exclude the securities from the 
definition of debt under the Policy Statement are due by July 30, 2011.

FOR FURTHER INFORMATION CONTACT: Anna Lee Hewko, (202) 530-6260, 
Assistant Director, Capital and Regulatory Policy, or Brendan G. Burke, 
(202) Senior Supervisory Financial Analyst, Division of Banking 
Supervision and Regulation; April C. Snyder, Counsel, (202) 452-3099, 
or Benjamin W. McDonough, Counsel, (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: 

Background

    On June 1, 2009, the Board issued an interim final rule (CPP 
interim rule) (74 FR 26077) to allow 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 subordinated debt securities issued to the Treasury under the 
capital purchase program (CPP Subordinated Securities) established by 
Treasury under the Economic Stabilization Act of 2008 (EESA) \1\ in 
tier 1 capital for purposes of the Board's risk-based and leverage 
capital guidelines for bank holding companies (Capital Guidelines),\2\ 
provided that the Subordinated Securities would count toward the limit 
on the amount of other restricted core capital elements includable in 
tier 1 capital. The CPP interim rule also permitted bank holding 
companies that are subject to the Board's Small Bank Holding Company 
Policy Statement (Policy Statement) \3\ and that are S-Corps or Mutual 
BHCs, to exclude the CPP Subordinated Securities from treatment as debt 
for purposes of the debt-to-equity standard under the Policy Statement.
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    \1\ Public Law 110-343, 122 Stat. 3765 (2008).
    \2\ 12 CFR part 225, Appendices A and D.
    \3\ 12 CFR part 225, Appendix C.
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    The Board is now adopting the CPP interim final rule as a final 
rule in substantially the same form, as discussed below. In addition, 
for the reasons explained below, the Board is adopting as an interim 
final rule a provision that would allow bank holding companies that are 
subject to the Board's Policy Statement and that are S-Corp BHCs or 
Mutual BHCs to exclude subordinated debt securities issued to the 
Treasury through the Small Business Lending Fund established under the 
Small Business Jobs Act of 2010 (SBLF Subordinated Securities) from 
debt for purposes of the debt-to-equity standard under the Policy 
Statement.

Capital Guidelines

    Under the Troubled Asset Relief Program (TARP) established in the 
Emergency Economic Stabilization Act of 2008 (EESA), Division A of Pub. 
L. No. 110-343, 122 Stat. 3765 (2008), Treasury provided capital to 
eligible banks, bank holding companies and savings associations 
(collectively, banking organizations), as well as certain other 
financial institutions (CPP).\4\ S-Corp BHCs generally could not 
participate in the CPP through the issuance of Senior Perpetual 
Preferred Stock because, under the Internal Revenue Code, S-Corp BHCs 
may not issue more than one class of equity security. Bank holding 
companies organized in mutual form also cannot issue Senior Perpetual 
Preferred Stock

[[Page 35960]]

because of their mutual ownership structure.
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    \4\ Through the CPP, Treasury invested in newly issued senior 
perpetual preferred stock of banking organizations (Senior Perpetual 
Preferred Stock) that are not S-Corps or organized in mutual form. 
On June 1, 2009, the Board published a final rule on the capital 
treatment of the Senior Perpetual Preferred Stock. See 74 FR 26081 
(June 1, 2009).
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    Under the CPP, Treasury purchased the CPP Subordinated Securities, 
which rank senior to common stock but are subordinated to the claims of 
depositors and other creditors unless such other claims are explicitly 
made pari passu or subordinated to the Subordinated Securities.\5\ 
These terms were designed to facilitate S-Corp and Mutual BHC 
participation in the CPP in a manner that is as economically comparable 
as possible, consistent with the legal structure of S-Corp and Mutual 
BHCs, the Board's capital adequacy guidelines, and the Internal Revenue 
Code, to institutions that issued Senior Perpetual Preferred Stock to 
the Treasury under the CPP.\6\
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    \5\ This final rule 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.
    \6\ The interest payments on the CPP Subordinated Securities are 
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.
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    As with other securities issued to Treasury under the CPP, and as 
described in further detail in the interim final rule, the CPP 
Subordinated Securities included certain features designed to make them 
attractive to a wide array of generally sound S-Corp and mutual 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 CPP Subordinated Securities 
bear an interest rate that increases substantially five years after 
issuance.
    Under the Board's current Capital Guidelines, the CPP Subordinated 
Securities generally 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).\8\ 
Moreover, the CPP Subordinated Securities could not be redeemed without 
the approval of the Federal Reserve, to ensure redemptions are 
consistent with safety and soundness.\9\ Additionally, the CPP 
Subordinated Securities were issued to Treasury as part of a nationwide 
program to increase capital available to eligible banking organizations 
that are in generally sound financial condition in order to promote 
stability in the financial markets and the banking industry as a whole.
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    \7\ See 12 CFR part 225, Appendix A, sections II.A.2. and 
II.A.2.d.
    \8\ For example, like such junior subordinated notes, the CPP 
Subordinated Securities were deeply subordinated and junior to the 
claims of depositors and other creditors of the issuing bank holding 
company. Furthermore, interest payable on the CPP Subordinated 
Securities could be deferred by the issuing S-Corp BHC for up to 20 
quarters without creating an event of default and the CPP 
Subordinated Securities were issued with a maturity of 30 years, 
which is the same minimum term required for such junior subordinated 
notes. See 12 CFR part 225, Appendix A, section II.A.1.c.iv.
    \9\ See 12 CFR part 225, Appendix A, section II.A.1.c.ii.(2).
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    For these reasons and in order to support the participation of S-
Corp 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 adopted the CPP interim rule to permit S-Corp BHCs that issued 
CPP Subordinated Securities to the Treasury to include the full amount 
of such securities in tier 1 capital for purposes of the Board's 
Capital Guidelines, subject to certain limitations.\10\
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    \10\ As explained in the interim final rule, an S-Corp BHC 
issuing CPP Subordinated Securities must take into account the 
amount of CPP Subordinated Securities in determining the amount of 
other restricted core capital elements the company could include in 
its tier 1 capital. Thus, for example, if the amount of Subordinated 
Securities issued by an S-Corp BHC equaled or exceeded 25 percent of 
the company's tier 1 capital elements, the company could 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. See 74 FR 26077, 26079 (June 1, 2009).
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    The Board received two comments on the CPP interim rule. Both 
comments generally were in favor of the Board's action. One commenter 
suggested that the Board extend the capital treatment provided by the 
CPP interim rule to instruments with similar terms issued to private 
entities. Another commenter expressed support for the CPP interim rule 
generally and asked that the Board clarify in the final rule that the 
capital treatment of the CPP interim rule would apply to all CPP 
Subordinated Securities issued, whether before or after the publication 
of the CPP interim rule.
    As discussed in the CPP interim rule, the Board, as a matter of 
prudential policy and practice, generally has not allowed subordinated 
debt to be included in tier 1 capital, given the contractual 
obligations they place on the issuing banking organization and 
consequent limited ability to absorb losses. The Board remains 
concerned that instruments with debt or debt-like features have limited 
ability to absorb losses. However, as discussed above and in the CPP 
interim rule, issuance of the CPP Subordinated Securities to Treasury 
in connection with TARP was consistent with a strong public policy 
objective, which was to increase the capital available to banking 
organizations generally in a stressed economic environment and thereby 
promote stability in the financial markets and the banking industry as 
a whole, as well as facilitate the ability of banking organizations to 
meet the needs of creditworthy households, businesses, and other 
customers. In addition, as discussed above and in the CPP interim rule, 
the terms and public policy considerations related to the CPP 
Subordinated Securities mitigated supervisory concerns. These facts and 
circumstanced, viewed in light of the unique, temporary, and 
extraordinary nature of the CPP, countervailed in many respects the 
Board's concerns with regard to the subordinated debt nature of the 
securities. For these reasons and others related to subsequent 
legislation, as described below, the Board has not extended the capital 
treatment provided under the CPP interim rule to subordinated debt 
other than the CPP Subordinated Securities.
    Since the issuance of the CPP interim rule, Congress passed the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(DFA).\11\ Under section 171 of the DFA, the Board must establish 
minimum risk-based and capital leverage requirements for bank holding 
companies that are no less than the generally applicable minimum risk-
based and leverage capital requirements for insured depository 
institutions. Under current generally applicable capital requirements 
for insured depository institutions, subordinated debt cannot be 
included in the tier 1 capital of insured depository institutions and 
therefore as a general matter, could not be included in the tier 1 
capital of bank holding companies. However, the DFA exempted from the 
requirements of section 171 debt instruments issued by banks and bank 
holding companies pursuant to EESA to the Treasury prior to October 4, 
2010. Therefore, section of the DFA generally does not affect the 
treatment in the CPP interim rule of CPP Subordinated Debt Securities, 
although other subordinated

[[Page 35961]]

debt securities are subject to section 171 of the DFA.
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    \11\ Public Law 111-203, 124 Stat. 1376 (2010).
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    For the reasons above, the Board has adopted the CPP interim rule 
as a final rule, clarifying that the provisions apply to all CPP 
Subordinated Securities issued to Treasury prior to October 4, 2010, in 
accordance with the DFA.
    The Board expects S-Corp BHCs that issue CPP 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 CPP Subordinated Securities to appropriately incorporate the 
obligations associated with the CPP Subordinated Securities into the 
organization's liquidity and capital funding plans.

Small Bank Holding Company Policy Statement

CPP Subordinated Securities

    In the CPP interim rule, in order to maintain competitive equality 
between large and small bank holding companies, the Board also amended 
the 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 debt-to-equity 
standard under Policy Statement.\12\ 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.
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    \12\ 12 CFR part 225, Appendix C.
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    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 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.\13\ The practical effect of excluding the CPP 
Subordinated Securities from debt for purposes of the Policy Statement 
is to allow issuance of CPP 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 
CPP Subordinated Securities to downstream Treasury's investment in the 
form of the CPP 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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    \13\ 12 CFR part 225, Appendix C, section 2, n. 3.
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    Because the CPP 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 adopted 
the CPP interim rule to allow small bank holding companies that are S-
Corp BHCs to exclude the CPP 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 with respect to the Board's treatment of the CPP Subordinated 
Securities under its Capital Adequacy Guidelines also apply equally to 
the Board's decision to modify the Policy Statement in this manner.
    Section 171 of the DFA, by its terms, does not apply to any small 
bank holding company that is subject to the Policy Statement as in 
effect on May 19, 2010. The CPP Subordinated Securities may be excluded 
from the definition of debt under the Policy Statement as in effect on 
May 19, 2010. Therefore, S-Corp BHCs and Mutual BHCs subject to the 
Policy Statement as in effect on May 19, 2010, are not subject to the 
requirements of section 171 and may under the final rule continue to 
exclude the CPP Subordinated Securities from debt.

SBLF Subordinated Securities

    Under the Small Business Jobs Act of 2010 (SBJA),\14\ a $30 billion 
Small Business Lending Fund (SBLF) was established to facilitate 
lending to small business by banking organizations with less than $10 
billion in consolidated assets. The increased lending would be enabled 
through capital investments by Treasury in these banking organizations. 
The resulting rise in availability of credit to small businesses is 
intended to counteract the effects of the financial crisis on lending 
to small businesses and encourage increased hiring by small businesses.
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    \14\ Public Law 111-240, 124 Stat. 2504 (2010).
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    Treasury has established term sheets for the issuance of 
subordinated securities by S-Corp BHCs and Mutual BHCs that are 
eligible for the SBLF program, with terms and structure similar to the 
CPP Subordinated Securities. The SBLF Subordinated Securities, like the 
CPP Subordinated Securities, are deeply subordinated, cannot be 
redeemed by a bank holding company issuer without the permission of the 
Federal Reserve, and cannot provide for accelerated interest except in 
liquidation or bankruptcy.\15\ Furthermore, the SBLF Subordinated 
Securities, like the CPP Subordinated Securities, are issued to 
Treasury as part of a nationwide program to provide capital to eligible 
banking organizations that are in generally sound financial condition 
in order to increase the capital available for lending to small 
businesses, thereby mitigating the ongoing effects of the financial 
crisis on small businesses and promoting financial stability.
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    \15\ The SBLF Subordinated Securities, like the CPP Securities, 
bear an interest step-up feature. This feature is designed in 
accordance with the SBJA. The SBLF Subordinated Securities, unlike 
the CPP Subordinated Securities that had a maturity of 30 years, 
have a stated maturity of 10 years. However, as with the CPP 
Subordinated Securities, for public policy reasons, the step-up 
feature is designed to encourage the issuer to replace the 
government investment with private capital at a point in time prior 
to the stated maturity. The term sheets for SBLF Subordinated 
Securities are available on Treasury's Web site at https://www.treasury.gov/resource-center/sb-programs/Pages/Overview-for-S-Corporation-Banks-and-Mutual-Institutions.aspx.
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    Based on these facts and circumstances, the Board has concluded 
that the SBLF Subordinated Securities are in terms and substance 
substantially equivalent to the CPP Subordinated Securities and may be 
excluded from debt under the Policy Statement as in effect on May 19, 
2010, on the same basis and for the same reasons as described above. 
The Board therefore has approved an interim final rule for public 
comment that allows S-Corp and mutual bank holding companies that issue 
SBLF Subordinated Securities to the Treasury to exclude the securities 
from the definition of debt under the Policy Statement.
    The Board requests comment on allowing S-Corp BHCs and Mutual BHCs 
to exclude the SBLF Subordinated Securities from debt under the Policy 
Statement.

Administrative Procedure Act

    As discussed above and in the interim final rule, the Board found 
good cause for issuing the CPP interim rule and

[[Page 35962]]

making it effective on June 1, 2009, without opportunity to comment 
before the effective date. The Board has considered comments that were 
submitted after the publication of the final rule and for the reasons 
described above, adopted the final rule for CPP Subordinated Securities 
substantially in the form of the interim final rule.
    Pursuant to sections 553(b) and (d) of the Administrative Procedure 
Act (5 U.S.C. Sec. Sec.  553(b) and (d)), the Board also finds that 
there is good cause for issuing this interim final rule with respect to 
the SBLF Securities and making the rule effective on June 21, 2011, and 
that it is impracticable, unnecessary, or contrary to the public 
interest to issue a notice of proposed rulemaking. The Board is 
requesting public comment on the interim final rule.
    As explained, the SBLF Subordinated Securities are substantially 
equivalent to the CPP Subordinated Securities in terms and substance. 
Furthermore, the Board has adopted the interim final rule in light of 
the important policy considerations of the SBLF program and to help 
address the continued effects of the financial crisis and recession on 
small businesses. The rule will allow S-Corp BHCs that are subject to 
the Policy Statement to exclude the SBLF Subordinated Securities from 
debt for purposes of the debt-to-equity ratio standard of the Policy 
Statement. This will help counteract the effects of the recent 
financial crisis on lending to small businesses and promote stability 
in the banking system as well as economic growth through increased 
availability of credit to small businesses.
    The Board believes it is important to provide S-Corp BHCs that are 
subject to the Policy Statement immediately with guidance concerning 
the capital treatment of the SBLF Subordinated Securities so that they 
may make appropriate judgments concerning the extent of their 
participation in the SBLF program and to provide S-Corp BHCs with 
immediate certainty concerning the treatment of SBLF Subordinated 
Securities under the Policy Statement.

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.\16\ Under regulations issued by the 
Small Business Administration,\17\ a small entity includes a bank 
holding company with assets of $175 million or less (a small bank 
holding company). As of December 31, 2010, there were approximately 
4,493 small bank holding companies.
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    \16\ See 5 U.S.C. 603(a).
    \17\ See 13 CFR 121.201.
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    The purpose of the final rule for CPP Subordinated Securities, like 
the interim final rule, is to facilitate participation in the CPP for 
S-Corp and Mutual BHCs, increase capital available to banking 
organizations, and promote stability in the financial markets and 
banking industry. Similarly, the purpose of the interim final rule for 
SBLF Subordinated Securities is to facilitate participation by S-Corp 
BHCs and Mutual BHCs in the SBLF program, thereby making more capital 
available for small business lending and alleviate the effects of the 
financial crisis and economic downturn on lending to small businesses.
    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 final rule, like the CPP interim rule, would not affect 
small bank holding companies. Furthermore, the final rule has no new 
effect on small bank holding companies that were applicants to the CPP 
and excluded CPP Subordinated Securities from the definition of debt 
under the Policy Statement pursuant to the CPP interim rule, which 
reduced burden and benefited small bank holding companies, as explained 
in the CPP interim rule. Therefore, the Board believes adoption of the 
final rule for CPP Subordinated Securities will not result in a 
significant economic impact on small bank holding companies.
    The changes to the Policy Statement under the interim final rule 
for SBLF Subordinated Securities will also reduce burden and benefit 
small bank holding companies. By allowing them to exclude the SBLF 
Subordinated Securities from treatment as debt for purposes of the 
debt-to-equity standard under the Policy Statement, issuance of the 
subordinated securities to Treasury would have a neutral effect on the 
ability of the issuing small bank holding company to issue dividends or 
make acquisitions with regard to its debt-to-equity ratio. Furthermore, 
the interim final rule does not appear to duplicate, overlap, or 
conflict with any other Federal rules. Therefore, the Board believes 
that the interim final rule will not result in a significant economic 
impact on a substantial number of small entities. Nonetheless, the 
Board seeks comment on whether the interim final rule would impose 
undue burdens on, or have unintended consequences for, small banking 
organizations, and whether there are ways such potential burdens or 
consequences could be minimized in a manner consistent with the purpose 
of the interim final rule.

Paperwork Reduction Act

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

Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 
requires the Federal banking agencies to use plain language in all 
proposed and final rules published after January 1, 2000. The Board 
invites comment on how to make the interim final rule easier to 
understand. For example:
     Have we organized the material to suit your needs? If not, 
how could the rule be more clearly stated?
     Are the requirements in the rule clearly stated? If not, 
how could the rule be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would make the regulation easier to 
understand?
     Would more, but shorter, sections be better? If so, which 
sections should be changed?
     What else could we do to make the regulation easier to 
understand?

List of Subjects in 12 CFR Part 225

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

Authority and Issuance

    Accordingly, the interim rule amending 12 CFR part 225 which was 
published at 74 FR 26077 on June 1, 2009, is adopted as a final rule 
with the following changes:

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,

[[Page 35963]]

3907, 3909, and 5371; 15 U.S.C. 1681s, 1681w, 6801 and 6805.


0
2. Appendix A to part 225 is amended by revising section II.A.1.a.iv., 
paragraph (5), 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 prior to October 4, 2010, 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).
* * * * *


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

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

* * * * *

2. Ongoing Requirements

    \3\ * * *
    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 (i) the Troubled Asset Relief Program established 
by the Emergency Economic Stabilization Act of 2008, Division A of 
Public Law 110-343, 122 Stat. 3765 (2008), and (ii) the Small 
Business Lending Fund established by the Small Business Jobs Act of 
2010, Title IV of Public Law 111-240, 124 Stat. 2504 (2010).
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, June 13, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-14983 Filed 6-20-11; 8:45 am]
BILLING CODE 6210-01-P

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