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6000 - Bank Holding Company Act
IV. Minimum Supervisory Ratios and Standards
The interim and final supervisory standards set forth below specify
minimum supervisory ratios based primarily on broad credit
risk considerations. As noted above, the riskbased ratio does not
take explicit account of the quality of individual asset portfolios or
the range of other types of risks to which banking organizations may be
exposed, such as interest rate, liquidity, market or operational risks.
For this reason, banking organizations are generally expected to
operate with capital positions well above the minimum ratios.
Institutions with high or inordinate levels of risk are expected to
operate well above minimum capital standards. Banking organizations
experiencing or anticipating significant growth are also expected to
maintain capital, including tangible capital positions, well above the
minimum levels. For example, most such organizations generally have
operated at capital levels ranging from 100 to 200 basis points above
the stated minimums. Higher
{{10-31-07 p.6120.16-B}}capital ratios could be required if
warranted by the particular circumstances or risk profiles of
individual banking organizations. In all cases, organizations should
hold capital commensurate with the level and nature of all of the
risks, including the volume and severity of problem loans, to which
they are exposed.
Upon adoption of the risk-based framework, any organization that
does not meet the interim or final supervisory ratios, or whose capital
is otherwise considered inadequate, is expected to develop and
implement a plan acceptable to the Federal Reserve for achieving an
adequate level of capital consistent with the provisions of these
guidelines or with the special circumstances affecting the individual
organization. In addition, such organizations should avoid any actions,
including increased risk-taking or unwarranted expansion, that would
lower or further erode their capital positions.
A. Minimum Risk-Based Ratio After Transition Period
As reflected in attachment VI, by year-end 1992, all bank holding
companies should meet a minimum ratio of qualifying total capital to
weighted risk assets of 8 percent, of which at least 4.0 percentage
points should be in the form of Tier 1 capital. For purposes of section
IV.A., Tier 1 capital is defined as the sum of core capital elements
less goodwill and other intangible assets required to be deducted in
accordance with section II.B.1.b. of this appendix. The maximum amount
of supplementary capital elements that qualifies as Tier 2 capital is
limited to 100 percent of Tier 1 capital. In addition, the combined
maximum amount of subordinated debt and intermediate-term preferred
stock that qualifies as Tier 2 capital is limited to 50 percent of Tier
1 capital. Allowances for loan and lease losses in excess of this limit
may, of course, be maintained, but would not be included in an
organization's total capital. The Federal Reserve will continue to
require bank holding companies to maintain reserves at levels fully
sufficient to cover losses inherent in their loan portfolios.
Qualifying total capital is calculated by adding Tier 1 capital and
Tier 2 capital (limited to 100 percent of Tier 1 capital) and then
deducting from this sum certain investments in banking or finance
subsidiaries that are not consolidated for accounting or supervisory
purposes, reciprocal holdings of banking organizations' capital
securities, or other items at the direction of the Federal Reserve. The
conditions under which these deductions are to be made and the
procedures for making the deductions are discussed above in section
II(B).
B. Transition Arrangements
The transition period for implementing the risk-based capital
standard ends on December 31,
1992. 64
Initially, the risk-based capital guidelines do not establish aminimum
level of capital. However, by year-end 1990, banking organizations are
expected to meet a minimum interim target ratio for qualifying total
capital to weighted risk assets of 7.25 percent, at least one-half of
which should be in the form of Tier 1 capital. For purposes of meeting
the 1990 interim target, the amount of loan loss reserves that may be
included in capital is limited to 1.5 percent of weighted risk assets
and up to 10 percent of an organization's Tier 1 capital may consist of
supplementary capital elements. Thus, the 7.25 percent interim target
ratio implies a minimum ratio of Tier 1 capital to weighted risk assets
of 3.6 percent (one-half of 7.25) and a minimum ratio of core capital
elements to weighted risk assets ratio of 3.25 percent (nine-tenths of
the Tier 1 capital ratio).
Through year-end 1990, banking organizations have the option of
complying with the minimum 7.25 percent year-end 1990 risk-based
capital standard, in lieu of the minimum 5.5 percent primary and 6
percent total capital to total assets ratios set forth in appendix B of
this part. In addition, as more fully set forth in appendix D to this
part, banking organizations are expected to maintain a minimum ratio of
Tier 1 capital to total assets during this transition
period.
{{12-31-08 p.6120.17}}
Attachment I.—Sample Calculation of Risk-Based
Capital Ratio for Bank Holding Companies
| Example of a banking organization with $6,000 in total capital
and the following assets and off-balance sheet items: |
Balance
Sheet Assets:
| Cash
| $ 5,000 |
|---|
| U.S.
Treasuries |
20,000 |
| Balances at domestic banks
|
5,000 |
| Loans secured by first liens on 1--4 family
residential properties |
5,000 |
| Loans to private
corporations |
65,000 |
|
|
Total Balance Sheet
Assets |
$100,000
|
|
| Off-Balance Sheet Items: |
| Standby
letters of credit ("SLCs") backing general obligation debt
issues of U.S. municipalities ("GOs")
|
$10,000 |
| Long-term legally binding commitments to private
corporations |
20,000 |
|
|
Total Off/Balance
Sheet Items |
$30,000 |
| This bank holding company's total
capital to total assets (leverage) ratio would be:
($6,000/$100,000) = 6.00%. |
| To compute the bank holding
company's weighted risk assets: |
| 1. Compute the credit
equivalent amount of each off-balance sheet ("OBS")
item.
| |
| OBS item
| Face value |
|
Conversion
factor |
Credit equivalent amount |
|---|
| SLCS backing
municipal GOs
| $10,000 |
× |
1.00 = |
$10,000
|
|---|
| Long-term commitments to private corporations
| $20,000 |
× |
0.50 = |
$10,000 |
|---|
| 2. Multiply each
balance sheet asset and the credit equivalent amount of each OBS item
by the appropriate risk weight. |
| 0% Category: |
| Cash
|
5,000 |
|
| U.S. Treasuries
|
20,000 |
|
|
25,000 |
× |
0 = |
0
|
| 20% Category: |
| Balances at domestic banks
|
5,000 |
|
|
|
| Credit equivalent amounts of SLCs
backing GOs of U.S. municipalities
|
10,000 |
|
|
|
|
15,000 |
×
|
.20 = |
$3,000 |
| 50% Category: |
| Loans secured by
first liens on 1--4 family residential properties
|
5,000 |
× |
.50 = |
$2,500 |
| 100% Category:
|
| Loans to private corporations
|
65,000 |
|
| Credit equivalent amounts of long-term
committments to private corporations
|
10,000 |
|
|
$75,000 |
× |
1.00 =
|
75,000 |
|
|
Total Risk-weighted Assets
|
|
|
|
80,500 |
| This bank holding company's ratio of
total capital to weighted risk assets (risk-based capital ratio)
would be: ($6,000/$80,500) = 7.45%
|
{{12-31-08 p.6120.18}}
[Codified to 12 C.F.R. Part 225, Appendix A]
[Appendix A added at 54 Fed. Reg. 4209, January 27, 1989, effective
March 15, 1989; amended at 55 Fed. Reg. 32832, August 10, 1990,
effective September 10, 1990; 57 Fed. Reg. 2012, January 17, 1992; 57
Fed. Reg. 43890, September 23, 1992; 57 Fed. Reg. 60720, December 22,
1992; 57 Fed. Reg. 62180, December 30, 1992; 58 Fed. Reg. 7980,
February 11, 1993, effective March 15, 1993; 58 Fed. Reg. 28492, May
14, 1993, effective April 26, 1993; 58 Fed. Reg. 68739, December 29,
1993, effective December 31, 1993; 59 Fed. Reg. 62992, December 7,
1994, effective December 31, 1994; 59 Fed. Reg. 63241, December 8,
1994, effective December 31, 1994; 59 Fed. Reg. 65926, December 22,
1994, effective January 1, 1995; 60 Fed. Reg. 8181, February 13, 1995,
effective March 22, 1995; 60 Fed. Reg. 39230, August 1, 1995; 60 Fed.
Reg. 45616, August 31, 1995, effective September 1, 1995; 60 Fed. Reg.
46179, September 5, 1995, effective October 1, 1995; 60 Fed. Reg.
66045, December 20, 1995, effective April 1, 1996; 61 Fed. Reg. 47372,
September 16, 1996, effective January 1, 1997; 63 Fed. Reg. 42676,
August 10, 1998, effective October 1, 1998; 63 Fed. Reg. 46522,
September 1, 1998, effective October 1, 1998; 63 Fed. Reg. 58621,
November 2, 1998; 66 Fed. Reg. 59643, November 29, 2001, effective
January 1, 2002; 67 Fed. Reg. 3800, January 25, 2002, effective April
1, 2002; 67 Fed. Reg. 16978, April 9, 2002, effective July 1, 2002; 67
Fed. Reg. 34991, May 17, 2002, effective July 1, 2002; 68 Fed. Reg.
56535, October 1, 2003, effective October 1, 2003; 69 Fed. Reg. 22385,
April 26, 2004; 69 Fed. Reg. 44919, July 28, 2004, however, any banking
organization may elect to adopt, as of July 28, 2004, the capital
treatment described in this final rule for assets in ABCP programs that
are consolidated onto the balance sheets of sponsoring banking
organizations as a result of FIN 46--R. All liquidity facilities that
provide support to ABCP will be treated as "eligible ABCP liquidity
facilities," regardless of their compliance with the definition of
"eligible ABCP liquidity facilities" in the final rule, until
September 30, 2005. On that date and thereafter, liquidity facilities
that do not meet the final rule's definition of "eligible ABCP
liquidity facility" will be treated as recourse obligations or
direct credit substitutes; 70 Fed. Reg. 11834, March 10, 2005,
effective April 11, 2005; 70 Fed. Reg. 20704, April 21, 2005; 71 Fed.
Reg. 9902, February 28, 2006, effective March 30, 2006; 73 Fed. Reg.
55708, September 26, 2008, effective September 19, 2008; 73 Fed. Reg.
62583, October 22, 2008, effective October 17, 2008; 73 Fed. Reg.
63624, October 27, 2008; 73 Fed. Reg. 79606, December 30, 2008,
effective January 29, 2009, applicability date for banking
organizations may elect to apply this final rule for purposes of the
regulatory reporting period ending on December 31,
2008]
64 As noted in section I, bank holding companies with less
than $500 million in consolidated assets would generally be exempt from
the calculation and analysis of risk-based ratios on a consolidated
holding company basis, subject to certain terms and
conditions. Go Back to Text
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