2.1 Captial

Front 1

What is the purpose of Capital?

Back 1

Absorbs losses

Promotes public confidence

Restricts excessive asset growth

Protection for depositors & DIF

Front 2

Components of Tier 1 Capital

Back 2

• Stockholder's equity (common stock + related surplus + undivided profits + disclosed capital reserves + foreign currenct adj - unrealized losses on AFS equity secs)
• Noncumulative perpetual preferred stock (if dividend is reset based on bank's credit standing, exculded from this definition)
• Minority interests in consolidated subsidaries

Front 3

Deductions from Tier 1 Capital

Back 3

• Intangible assets other than servicing assets and purchased credit card relationships (servicing assets & PCCRs limited to 100% of Tier 1; seperate sublimit: nonmortgage svcg assets & PCCRs 25% of Tier 1)
• Noneligible credit-enhancing interest only strips (generally limited to 25% of Tier 1)
• Deferred tax assets in excess of limit (generally lesser of (i) amt bank expects to realize w/in one year from quarter end, or (ii) 10% of Tier 1)
• Identified losses (items classified loss, estimated losses in contignent liabilities, provisions necessary for adequate ALLL, etc.)
• Investments in financial subsidiaries subject to Part 362 (sub thru which conducts activities not permissible for subsidiary of a nat'l bank)
• Nonfinancial equity investments

Front 4

Components of Tier 2 Capital

Back 4

• ALLL, up to 1.25% gross risk-weighted assets
• Cumulative perpertual preferred stock, long-term preferred stock (orig. mat. at least 20yrs) (cannot be redeemed at option of holder, dividends accumulate until paid out. discounting begins when remaining mat. falls below 5yrs)
• Hybrid capital instruments, incl mandatory convertible debt (characteristics of both equity and debt)
• Term subordinated debt and intermmediate-term preferred stock (orig. avg. mat. 5-20yrs, not redeemable at option of holder, except w/ prior approval) amt includible limited to 50% of Tier 1
• Net unrealized holding gains on equity secs, up to 45% pretax (cannot exceed 45% of pretax net unrealized holding gain on AFS equity secs)

Front 5

When is Tier 3 Capital used?

Back 5

Where market risk risk-based capital rules apply.

Trading activity equals 10% or more of TA or $1 billion or more

Front 6

Total Capital equals...

Back 6

Tier 1 + Tier 2

minus

Unconsolidated banking & finance subs. and reciprocal holdings of capital instruments of other banks

Front 7

Intangible assets

Back 7

• Mortgage servicing assets
• Nonmortgage servicing assets
• Purchased Credit Card relationships
• Other (e.g. core deposit intangibles, favorable leasehold rights)
• Goodwill
• Other than goodwill (primarily result from business combinations accounted for under the acquisition method )

Front 8

Credit-enhancing interest-only strips

Back 8

an on-balance sheet asset, represents contractual right to receive some/all interest due on transferred assets; and exposes the bank to credit risk directly/indirectly associated with the transferred assets that exceeds a pro rata share of the bank's claim on the assets, whether through subordination provisions or other credit enhancement techniques.

Generally limited to 25% of Tier 1

Front 9

Minimum Leverage Capital Requirement

Back 9

3% Tier 1 to TA - banks composite 1, not anticipating/experiencing sig. growth, well-diversified risks incl. IRR, excellent AQ, high liq., good earnings

4% Tier 1 to TA - all other banks

Front 10

Well Capitalized

Back 10

5%, 6%, 10% (T1, T1RBC, TotRBC)

+

no written agreement, order, capital directive, or PCA directive to maintain specific capital level

Front 11

Adequately Capitalized

Back 11

4%, 4%, 8% (T1, T1RBC, TotRBC)

+

does not meet the definition of a well capitalized bank.
*or Leverage ratio of 3% if bank is composite 1 and is not experiencing/anticipating sig. growth

Front 12

Undercapitalized

Back 12

Less than 4%, 4%, 8% (T1, T1RBC, TotRBC)

* or less than 3% T1 Leverage if the bank is rated composite 1 and is not experiencing/anticipating sig. growth

Front 13

Significantly Undercapitalized

Back 13

Less than 3%, 3%, 6% (T1, T1RBC, TotRBC)

Front 14

Critically Undercapitalized

Back 14

Tangible equity capital equal to or less than 2%

Front 15

Tangible Equity Capital

Back 15

Tier 1 + cumulative perpetual preferred stock (and surplus)

less

intangible assets except eligible MSAs

Front 16

When do you cite a violation of Part 325?

Back 16

A violation is considered for leverage capital standards (T1 Leverage ratio less than 4% or 3%) (Part 325)

A contravention is cited for failure to meet RBC guidelines. (RBC ratios, less than 4% and 8%) (Appendix A of Part 325)

Front 17

Unsafe and unsound practice (per Part 325)

Back 17

Less than minimum leverage capital requirement (T1 Leverage ratio less than 4% or 3%) and not in compliance or hasn't submitted capital plan

pursuant to Sec 8(b) or (c)

Front 18

Unsafe and unsound condition (per Part 325)

Back 18

T1 Leverage ratio less than 2%

pursuant to Sec 8(a)

Front 19

What must a bank do if less than adequately capitalized?

Back 19

Submit written Capital Plan within 45 days of becoming undercapitalized

Front 20

What should be in capital plan?

Back 20

• Steps bank will take to become adequately capitalized
• Levels of capital to be attained during ea year in which plan will be in effect
• How bank will comply w/ restrictions/requirements in effect
• Types and levels of activities in which bank will engage
• Performance guaranty by controlling company that bank will comply, be adequately capitalized on avg over 4 consecutive qtrs

Front 21

Limitations on required performance guarantee liability by controlling company of undercapitalized bank

Back 21

5% of bank's TA or amount needed to make bank adequately capitalized

Company is liable until bank is adequately capitalized 4 consecutive qtrs

Front 22

General restriction on capital distributions and management fees per Sec 38(d)

Back 22

No bank shall make a capital distribution or pay management fee to a person controlling bank if upon doing so, bank will become undercapitalized

Front 23

Provisions applicable to Undercapitalized, Significantly Undercapitalized, and Critically Undercapitalized banks (Sec 38 (e))

Back 23

• Restrict pmt of capital distributions & mgmt fees
• Require monitoring by FDIC
• Require capital plan
• Restrict asset growth
• Require prior approval for certain expansion proposals

Front 24

Add'l provisions applicable to Significantly Undercapitalized and Critically Undercapitalized banks that fail to submit/implement capital plan (Sec 38 (f))

Back 24

• Require recapitalization
• Restricting affiliate transactions (remove exemptions)
• Restrict interest rates paid
• Restrict asset growth or require reduction
• Restrict activities
• Improve management
• Prohibit deposits from correspondents
• Require prior approval for capital dist by BHC
• Require divestiture
• Restrict senior executive's compensation

Front 25

Add'l provisions applicable to Critically Undercapitalized banks (Sec 38 (h))

Back 25

• Prohibit pmts on subordinated debt
• Conservatorship, receivership, or other action

Prohibiting bank (w/out prior approval) from:

• Entering into any material transaction other than usual business
• Making a HLT loan
• Amending charter/bylaws except as necessary to carry out requirements
• Materially change accounting methods
• Engage in a covered transaction
• Pay excessive compensation
• Paying interest on new/renewed liabilities at a rate that would increase weighted average cost of funds to level significantly exceeding prevailing local market rates on deposits

Front 26

What does FDIC do upon a bank becoming Critically Undercapitalized?

Back 26

Within 90 days -

• appoint a receiver, OR
• take such other action to better achieve purpose, after documenting why

Front 27

How are intangibles valued?

Back 27

MSAs, PCCRs, and non-MSAs:

Lesser of 90% FV or 100% of remaining unamortized book value

Front 28

What is a capital directive and who issues one?

Back 28

Final order for banks failing to maintain leverage capital at or above minimums. Enforceable in same manner as a C&D/Consent Order

Only for SNM banks

By FDIC BoD or designee

Front 29

Capital requirement compliance determined using Call Report, with what two exceptions?

Back 29

1. Investment in securities subsidiaries shall not be counted toward capital. If consolidated, must adjust to reflect equity method. Deduct investment from capital

2. Call Report requires domestic bank subsidiaries should be accounted for by equity method. To calculate Tier 1, should consolidate on line by line basis

Front 30

Evaluation factors for Capital component

Back 30

• Level & quality of capital, overall financial condition
• Mgmt's ability to address needs for capital
• Nature, trend, volume of problem assets, adequacy of ALLL
• Balance sheet composition, amt of intangibles, concentrations, nontraditional activities
• Off-bal sheet items risk
• Earnings, reasonableness of dividends
• Growth
• Access to capital mkts & other sources, HC support

Front 31

Method for adjusting capital for loss & other items

Back 31

• Deduct Loss for items other than loans (if reserves exist for ORE, take reserves into acct)
• Deduct Loss for loans & leases from ALLL
• If inadequate ALLL, estimate required provision needed after charging off loans classified Loss
• Adjustment from Tier 1 to Tier 2 for inadequate ALLL only if amt is significant (judgement call)

Front 32

Category II Contingent Liabilities

Back 32

• Litigation
• Trust activities
• Consigned items & other nonledger control accts (e.g. safe deposit, safekeeping, custodial accts, collection dept liabilities)