WASHINGTON -- The Federal Reserve Board adopted a rule Monday that will spur the seizure of about 50 critically undercapitalized banks with $21 billion in assets beginning Dec. 19.
The "prompt corrective action" measure, mandated by Congress in the 1991 banking law, will curtail the growth and deposit-taking activities of 200 other capital-deficient banks with $62 billion in total assets.
"We need to increase our intolerance of undercapitalized institutions," Fed Vice Chairman David Mullins said in support of the 210-page regulation.
The Fed is the first of the four federal bank regulators to adopt a rule requiring regulators to impose progressively stricter sanctions against a bank or thrift as its capital declines.
Congress enacted the requirement after citing evidence that regulatory forbearance, which was supposed to buy time for troubled institutions to work out their problems, actually caused larger losses.
The Federal Deposit Insurance Corp. is expected to adopt an identical rule today, during a meeting in which it also plans to raise deposit insurance premiums.
The Office of the Comptroller of the Currency and Office of Thrift Supervision are expected to adopt the capitalization rule by Friday.
OTS spokeswoman Janice Smith said Monday that the agency has not yet ascertained how many thrifts would be affected immediately.
5 Capitalization Categories
Congress instructed the regulators to set objective criteria for measuring the health of banks and specific sanctions for below-standard institutions.
Regulators have outlined five categories, based on capital levels and subjective criteria like the quality of management:
* Critically undercapitalized: With limited exceptions, about 50 banks with tangible equity ratios of 2% or less must be seized by regulators within 90 days.
* Significantly undercapitalized: Another 50 banks with total capital ratios of less than 6% and a leverage ratio less than 3% will not be able to pay officers bonuses or raises.
At their discretion, regulators may impose many other sanctions on these banks, such as restricting interest rates on deposits or requiring dismissal of top officers.
* Undercapitalized: About 150 banks with less than 8% total capital and less than a 4% leverage ratio must submit capital restoration plans within 45 days. Asset growth and expansion will be restricted.
* Adequately capitalized: Banks with at least 8% risk-based capital and 4% leverage capital will face no regulatory penalties. Based on midyear statistics, some 550 banks with $1.2 trillion in assets are adequately capitalized.
* Well Capitalized: About 11,100 banks with 1.72 trillion in assets have ratios of total capital to risk-based assets of 10% or more, at least a 5% leverage ratio, and no interest rate risk problems.
Potential Downgradings
Fred Struble, an associate director in the Fed's bank supervision division, said 2,500 institutions might be downgraded to lower categories for various reasons, including interest rate exposure or loan concentrations. These banks have $600 billion to $700 billion in assets.
Bank capital levels will be determined each quarter in call reports.
However, if a bank's capital drops significantly in the interim, it must notify its primary regulator within 15 days.
