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To: Chief Executive Officers of National Banks, Department and Division Heads, Examining Personnel and Other Interested Parties

Description: Final Rule


This bulletin transmits the final rule on the regulatory capital treatment of nonfinancial equity investments that was published in the Federal Register on January 25, 2002.


The final rule is substantially similar to the proposal that the OCC published in February 2001 (66 FR 10212, February 14, 2001). Similar to the earlier proposal, this final rule requires a series of marginal capital charges on equity investments that increase with the level of those investments relative to the bank's Tier 1 capital. One modification to the proposal was the inclusion of a grandfathering provision. Individual investments are exempt from the revised capital requirements if the investment was made prior to March 13, 2000.


National bank investments covered by the rule are limited to equity investments in nonfinancial companies made pursuant to: (1) the authority to invest through or in small business investment companies (SBIC)1 or (2) the authority to make portfolio investments under Regulation K. 2 For purposes of this rule, equity investments include instruments with equity features, such as warrants and options to purchase equities, as well as debt instruments that are convertible into equity investments.

The rule does not apply to equity investments made in companies that engage solely in banking or financial activities that are permissible for the investing bank to conduct directly. The marginal capital charges also do not apply to SBIC investments, to the extent that the aggregate adjusted carrying value of the investments does not exceed 15 percent of the Tier 1 capital of the bank that holds the investment. However, these investments will be included in determining the aggregate size of a bank's nonfinancial equity investment portfolio for the purpose of applying the marginal capital charges to other equity investments.

As noted above, the capital charge will apply to investments in nonfinancial companies made in accordance with the portfolio investment provisions of Regulation K. This will include investments made through so-called Edge Act and Agreement corporations. The rule exempts the ownership of equity securities held to hedge equity derivative transactions.

Capital Requirements

The rule contains capital charges that increase with the size of the aggregate equity investment portfolio relative to Tier 1 capital. A banking organization will be required to deduct from its Tier 1 capital the appropriate percentage, as determined in the following table.

Table 1
Tier 1 Capital Charges on Equity Investments

Aggregate adjusted carrying value of all nonfinancial equity investments
(as a percentage of Tier 1 capital)
Required deduction from Tier 1 capital
(as a percentage of the adjusted carrying value of the investment)
Less than 15%8%
15% but less than 25%12%
25% or greater25%

The Tier 1 deduction is based on the adjusted carrying value of the equity investments. The adjusted carrying value is defined as the value at which the relevant investment is recorded on the balance sheet, reduced by net unrealized gains included in the carrying value but not included in Tier 1 capital and by any associated deferred tax liabilities.

The OCC will also apply heightened supervision to the equity investment activities of banks as appropriate, including circumstances in which the adjusted carrying value of all nonfinancial equity investments represents more than 50 percent of the organization's Tier 1 capital. In addition, the OCC may impose a higher minimum capital charge as appropriate in light of the risk management systems; risk, nature, size, and composition of a banking organization's investments; market conditions; and other relevant information and circumstances.

The rule addresses the case where a bank has investments through equity investment funds or investment partnerships, where it controls (but is not the sole participant in) the fund. In such instances, the capital charge will apply only to the bank's proportionate share of the fund's investments. This treatment will apply even if the partnership is consolidated in the bank's financial reporting statements. Similarly, the rule provides that minority interests resulting from any such consolidation would not be included in Tier 1 capital, because such minority interests are not available to support the bank's overall business.

For Further Information

For further information about this bulletin, contact the Office of the Chief National Bank Examiner (202) 649-6370.

Jonathan L. Fiechter
Senior Deputy Comptroller International and Economic Affairs

1 Small business investment companies are defined under section 302(b) of the Small Business Investment Act of 1958.

2 See 12 CFR 211.8(c)(3).

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