Federal Reserve System: 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

GAO-09-1033R, Sep 21, 2009

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GAO reviewed the Federal Reserve System's (FRS) new rule on capital adequacy guidelines, small bank holding company policy statement and treatment of subordinates securities issued to the United States Treasury under the Emergency Economic Stabilization Act of 2008. GAO found that (1) the final rule permits 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 new subordinated debt securities issued to the Treasury under the capital purchase program 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 (2) FRS complied with applicable requirements in promulgating the rule.

Federal Reserve System: 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, GAO-09-1033R, September 21, 2009

B-318674

September 21, 2009

The Honorable ChristopherJ. Dodd
Chairman
The Honorable Richard C. Shelby
Ranking Minority Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable BarneyFrank
Chairman
The Honorable Spencer Bachus
Ranking Minority Member
Committee on Financial Services
House of Representatives

Subject: Federal Reserve System: Capital Adequacy Guidelines; Small Bank HoldingCompany Policy Statement: Treatment of Subordinated Securities Issued to theUnited States Treasury Under the Emergency Economic Stabilization Act of 2008

Pursuant to section801(a)(2)(A) of title 5, United States Code, this is our report on a major rulepromulgated by the Board of Governors of the Federal Reserve System (Board),entitled Capital Adequacy Guidelines; Small Bank Holding Company PolicyStatement: Treatment of Subordinated Securities Issued to the United StatesTreasury Under the Emergency Economic Stabilization Act of 2008 (Docket No. R-1356). We received the rule on September4, 2009. It was published in the Federal Register as an interim final rulewith request for public comment on June 1, 2009. 74 Fed. Reg. 26,077.

The interim final rule with request for public commentpermits bank holding companies that have made a valid election to be taxedunder 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 includethe full amount of any new subordinated debt securities issued to the Treasuryunder the capital purchase program in tier 1 capital for purposes of theBoards risk-based and leverage capital guidelines for bank holding companies,provided that the Subordinated Securities will count toward the limit on theamount of other restricted core capital elements includable in tier 1capital. The interim final rule withrequest for public comment also allows bank holding companies that are subjectto the Boards Small Bank Holding Company Policy Statement that are S-Corps orMutual BHCs to exclude the Subordinated Securities from treatment as debt forpurposes of the debt-to-equity standard under the Small Bank Holding CompanyPolicy Statement.

TheCongressional Review Act requires major rules to have a 60-day delay in their effectivedate following their publication in the Federal Register or receipt byCongress, whichever is later. 5 U.S.C. sect.801(a)(3)(A). However, notwithstandingthe 60-day delay requirement, any rule that an agency for good cause finds thatnotice and public procedures are impractical, unnecessary, or contrary to thepublic interest is to take effect when the promulgating agency sodetermines. 5 U.S.C. sect.808(2). The Board found good cause, by determiningthat it would be impracticable, unnecessary, or contrary to the public interestto issue a notice of proposed rulemaking and provide an opportunity for commentbefore the effective date. Therefore,the requirement to have a 60-day delay does not apply to this rule.

Enclosed is our assessment of the Boards compliance withthe procedural steps required by section 801(a)(1)(B)(i) through (iv) of title5 with respect to the rule. Our reviewof the procedural steps taken indicates that the Board complied with theapplicable requirements.

If you have any questions about this report or wish tocontact GAO officials responsible for the evaluation work relating to thesubject matter of the rule, please contact Shirley A. Jones, Assistant GeneralCounsel, at (202) 512-8156.

signed

Robert J. Cramer
Managing Associate General Counsel

Enclosure

cc: Linda Robertson
Assistant to the Board of Governors
Federal Reserve System


ENCLOSURE

REPORT UNDER 5 U.S.C. sect.801(a)(2)(A) ON A MAJORRULE
ISSUED BY THE
FEDERAL RESERVE SYSTEM
ENTITLED
"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"
(DOCKET NO. R-1356)

(i) Cost-benefit analysis

The Board did not prepare a cost-benefit analysis inconjunction with the interim final rule.

(ii) Agency actions relevant to the RegulatoryFlexibility Act, 5 U.S.C. sections603-605, 607, and 609

The Board certified that the interim final rule will nothave a significant impact on a substantial number of small bank holdingcompanies.

(iii) Agency actions relevant to sections 202-205 ofthe Unfunded Mandates Reform Act of 1995, 2 U.S.C. sections1532-1535

The Unfunded Mandates Reform Act does not apply toindependent regulatory agencies, such as the Federal Reserve System.

(iv) Other relevant information or requirements underacts and executive orders

Administrative Procedure Act (APA), 5 U.S.C. sections551 etseq.

The Board issued this rule as an interim final rule withrequest for public comment, with an effective date of June 1, 2009. The APA generally requires that rules bepublished not less than 30 days before their effective date. 5 U.S.C. sect. 553(d). The Board concluded, however, that goodcause exists to publish the interim final rule less than 30 days before theeffective date. Id.

The Board similarly concluded that there was good causeto exempt this interim final rule with request for public comment from thenotice and comment requirements under the APA, 5 U.S.C. sect. 552(b)(B). Despite the publication and effective date ofJune 1, 2009, comments could be submitted through July 1, 2009.

Paperwork Reduction Act, 44 U.S.C. sections3501-3520

This final rule imposes no new information andrecordkeeping requirements; therefore, the Office of Management and Budget(OMB) clearance under the Paperwork Reduction Act is not required.

Statutory authorization for the rule

The interim final rule with request for public comment isauthorized by section 101 of the Emergency Economic Stabilization Act of 2008,Division A of Public Law No. 110-343, 122 Stat. 3765 (2008).

Executive Order No. 12,866 (Regulatory Planning andReview)

The Executive Order does not apply to independentregulatory agencies, such as the Federal Reserve System.

Executive Order No. 13,132 (Federalism)

The Executive Order does not apply to independentregulatory agencies, such as the Federal Reserve System.