OCC 2001-13
OCC Bulletin
Subject: Risk-Based Capital -- Nonfinancial Equity
Investments
Description: Proposed Rule
Date: March 5, 2001

TO:	Chief Executive Officers of National Banks,
Department and Division Heads, Examining Personnel and
Other Interested Parties

PURPOSE

This bulletin transmits a proposed rule on the
regulatory capital treatment of nonfinancial equity
investments that was published in the Federal Register
on February 14, 2001.  Comments on the proposed rule
are due April 16, 2001.

SUMMARY

The Office of the Comptroller of the Currency (OCC),
Board of Governors of the Federal Reserve System
(Board), and Federal Deposit Insurance Corporation
(collectively, the agencies) are requesting comment on
a proposed rule that would establish new minimum
regulatory capital requirements for equity investments
in nonfinancial companies.  The proposed capital
treatment would apply symmetrically to equity
investments of banks and bank holding companies.
The proposal would apply a series of marginal capital
charges on covered equity investments that increase
with the level of a banking organization's overall
exposure to equity investments relative to the
organization's Tier 1 capital.

The proposed capital treatment was motivated by the
agencies' belief that equity investment activities
generally involve risks that are higher than the risks
associated with many traditional banking activities.
The proposal replaces a capital proposal issued for
public comment by the Board in March 2000. (See 65 FR
16480.) 

Scope

National bank investments that would be covered by the
proposal are equity investments in nonfinancial
companies made pursuant to: (1) the authority to
invest through or in small business investment
companies (SBIC) (Small business investment companies
are defined under section 302(b) of the Small Business
Investment Act of 1958.) or (2) the authority to make
portfolio investments under Regulation K. (See 12 CFR
211.5(b)(1)(iii).) The proposal also would apply to
equity features of debt (such as warrants and options
to purchase equities in nonfinancial companies) and to
debt instruments convertible into equity investments
in nonfinancial companies.

The proposal would not apply to equity investments
made in companies that engage solely in banking or
financial activities that are permissible for the
investing bank to conduct directly.  Nor would the
proposal apply to securities that are held in a
trading account in accordance with applicable
accounting principles and as part of an underwriting,
market making or dealing activity.

The proposed capital treatment would not be applied
to SBIC investments, so long as the aggregate adjusted
carrying value (defined below) of the investments does
not exceed 15 percent of the Tier 1 capital of the
banking organization that holds the investment.  These
investments would be included, however, in determining
the aggregate size of a banking organization's
nonfinancial equity investment portfolio for purposes
of applying the marginal capital charges included in
the proposal.  The proposal notes that nearly all SBIC
investments by banking organizations are currently
below the 15 percent threshold.

As noted above, the proposed capital charge would
apply to investments in nonfinancial companies made
in accordance with the portfolio investment provisions
of Regulation K.  This would include investments made
through so-called Edge Act and Agreement corporations.
The proposal would not apply to the ownership of
equity securities held by an Edge Act or Agreement
corporation to hedge equity derivative transactions.

Proposed Capital Treatment

The proposed capital charge would be applied by making
a deduction from a banking organization's Tier 1
capital.  This deduction would be based on the adjusted
carrying value of equity investments in nonfinancial
companies.  The adjusted carrying value is defined as
the value at which the relevant investment is recorded
on the balance sheet, reduced by net unrealized gains
included in carrying value but not included in Tier 1
capital and by associated deferred tax liabilities.

The proposal involves a progression of capital charges
that increases with the size of the aggregate equity
investment portfolio relative to Tier 1 capital.
A banking organization would be required to deduct
from its Tier 1 capital the appropriate percentage,
as determined in the following table.

Aggregate adjusted carrying Required deduction from Tier   
value of all nonfinancial   1 capital (as a % of the 
equity investments (as a %  adjusted carrying value of 
of Tier 1 capital)          the investment)

Less than 15%               8%

15% but less than 25%       12%

25% or greater              25%

The agencies also propose to apply heightened
supervision to the equity investment activities
of banking organizations as appropriate, including
circumstances in which the adjusted carrying value
of all nonfinancial equity investments represents
more than 50 percent of the organization's Tier 1
capital.  The proposal would permit the agencies in
any case to impose a higher minimum capital charge
as appropriate in light of the risk management systems;
risk, nature, size, and composition of a banking
organization's investments; market conditions; and
other relevant information and circumstances.

In some cases, a banking organization might have
investments through equity investment funds or
investment partnerships where it controls the fund
but is not the sole participant in the fund.  In such
instances, the proposed capital charge would apply
only to the banking organization's proportionate share
of the fund's investments.  Such treatment would apply
even if the partnership were consolidated in the
banking organization's financial reporting statements.
Similarly, the proposal provides that minority interest
resulting from any such consolidation would not be
included in Tier 1 capital, since such minority
interest is not available to support the banking
organization's overall financial business.

The OCC does not believe that the proposal would have
a significant effect on the capital levels of national
banks based on current investment levels.

Comments on the Proposal

The OCC encourages all interested parties to review
and comment on the attached proposal.  Please forward
all comments to Communication Division, 250 E Street
SW, Washington, DC 20219, Attention: Docket No. 01-03.


FOR FURTHER INFORMATION CONTACT:

Tommy Snow, director, Capital Policy Division,
at (202) 874-5070 or Ron Shimabukuro, senior attorney,
Legislative and Regulatory Activities Division, at
(202) 874-5090.



________________________
Jonathan L. Fiechter
Senior Deputy Comptroller
International and Economic Affairs

Attachment--66 FR 10212