Federal Reserve System: Capital Adequacy Guidelines; Treatment of Perpetual Preferred Stock Issued to the United States Treasury Under the Emergency Economic Stabilization Act of 2008

GAO-09-1034R, Sep 21, 2009

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GAO reviewed the Board of Governors of the Federal Reserve System's (Board) new rule on the treatment of perpetual preferred stock issued to the United States Treasury. GAO found that (1) the final rule permits bank holding companies that issue new senior perpetual preferred stock to the Treasury under the capital purchase program announced by the Secretary of the Treasury on October 14, 2008, to include such capital instruments in tier 1 capital for purposes of the Federal Reserve's risk-based and leverage capital rules and guidelines for bank holding companies; and (2) that the Board complied with applicable requirements in promulgating the rule.

Federal Reserve System: Capital Adequacy Guidelines; Treatment of Perpetual Preferred Stock Issued to the United States Treasury Under the Emergency Economic Stabilization Act of 2008, GAO-09-1034R, September 21, 2009

B-318675

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; Treatment ofPerpetual Preferred Stock Issued to the United States Treasury Under theEmergency 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; Treatment of Perpetual Preferred StockIssued to the United States Treasury Under the Emergency Economic StabilizationAct of 2008 (Docket No. R-1336). Wereceived the rule on September4, 2009.It was published in the FederalRegister as a final rule on June 1, 2009.74 Fed. Reg. 26,081.

The final rule permits bank holding companies that issuenew senior perpetual preferred stock to the Treasury under the capital purchaseprogram announced by the Secretary of the Treasury on October 14, 2008, toinclude such capital instruments in tier 1 capital for purposes of the FederalReserves risk-based and leverage capital rules and guidelines for bank holdingcompanies. The final rule adopts asfinal the interim final rule that became effective on October 17, 2008.

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 the applicablerequirements.

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; TREATMENT OF
PERPETUAL PREFERRED STOCK ISSUED TO THE
UNITED STATES TREASURY UNDER THE
EMERGENCY ECONOMIC STABILIZATION ACT OF 2008"
(DOCKET NO. R-1336)

(i) Cost-benefit analysis

The Federal Reserve did not prepare a cost-benefitanalysis. However, the final rule doesexplain that the Federal Reserve finds strong public policy considerations toallow Senior Perpetual Preferred Stock issued to Treasury under the TroubledAsset Relief Program (TARP) to be included as tier 1 capital for the purposesof the Federal Reserves risk-based and leverage capital rules and guidelines,as an exception to its longstanding stance regarding the unacceptability of arate step-up in other regulatory capital instruments.

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

The Board certifies that this final rule will not affect asignificant 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 Mandate Reform Act does not apply toindependent regulatory agencies, such as the Federal Reserve.

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

Administrative Procedure Act, 5 U.S.C. sections551 etseq.

On October 22, 2008, the Board published an interim finalrule with request for public comment in the Federal Register. 73 Fed.Reg. 62,851. The Board received sevencomments on the interim rule, and reviewed and analyzed those comments. On June 1, 2009, the Board decided to adoptthe interim rule as a final rule without substantive changes. 74 Fed. Reg. 26,081.

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

The final rule contains nocollection of information requirements under the Paperwork Reduction Act.

Statutory authorization for the rule

Thisfinal rule is issued under the authority of the Emergency EconomicStabilization Act of 2008, Division A of Pub. L. 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.

Executive Order No. 13,132 (Federalism)

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