District Circular Letters

March 8, 2002

BANKING SUPERVISION AND REGULATION:
FINAL RULES
ON REGULATORY CAPITAL TREATMENT
OF NONFINANCIAL EQUITY INVESTMENTS

To State Member Banks, Bank
Holding Companies, U.S. Branches
and Agencies of Foreign Banks,
and Others Concerned,
in the Twelfth Federal Reserve District

Final Capital Rules for Nonfinancial Equity Investments (SR 02-4 and Docket R-1097)

The Federal Reserve Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency has adopted final rules governing the regulatory capital treatment of equity investments in nonfinancial companies held by banks, bank holding companies and financial holding companies. The agencies' final rules are substantially similar to the revised proposed rules jointly issued for public comment last year. SR 02-4 is enclosed with this letter. The final rules will become effective on April 1, 2002.

The new capital requirements apply to equity investments made by banks and their holding companies in nonfinancial companies under the legal authorities specified in the final rules. Among others, these include the merchant banking authority granted by the Gramm-Leach-Bliley Act and the authority to invest in small business investment companies (SBICs) granted by the Small Business Investment Act.

Covered equity investments will be subject to a series of marginal Tier 1 capital charges, with the size of the charge increasing as the organization's level of concentration in equity investments increases. The highest marginal charge specified in the final rules requires a 25 percent deduction from Tier 1 capital for covered investments that aggregate more than 25 percent of an organization's Tier 1 capital. Equity investments through SBICs will be exempt from the new charges to the extent such investments, in the aggregate, do not exceed 15 percent of the banking organization's Tier 1 capital.

The new charges would not apply to individual investments made by banking organizations prior to March 13, 2000. Grandfathered investments made by state banks under section 24(f) of the Federal Deposit Insurance Act also are exempted from coverage.

The agencies have reiterated their intent to apply heightened supervision to banking organizations as their level of concentration in equity investments increases.

Additional Information

All circulars and documents are available on the Internet through the Federal Reserve Bank of San Francisco's Internet site, at http://www.frbsf.org/banking/letters/. Paper copies of the Board's notice (R-1097) are available from our Corporate Services Department. To request copies to be sent by mail, please call (415) 974-2060.

For additional information about the final rule, please contact our Banking Supervision and Regulation Department at (415) 974-2936.

FEDERAL RESERVE BANK OF SAN FRANCISCO

Attachments: SR 02-4; Docket R-1097 (PDF - 288KB)