Federal Reserve Board finalizes technical rule that will streamline reporting requirements for member banks related to their subscriptions to Federal Reserve Bank capital stock

FEDERAL RESERVE SYSTEM 12 CFR Part 209

Regulation I; Docket No. R-1745

RIN 7100-AG13

Federal Reserve Bank Capital Stock

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board of Governors (Board) is publishing a final rule that amends Regulation I to automate non-merger-related adjustments to member banks' subscriptions to Federal Reserve Bank (Reserve Bank) capital stock. The final rule also makes certain technical amendments to Regulation I and conforming revisions to the FR 2056 reporting form.

EFFECTIVE DATE: [INSERT DATE 30 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].

FOR FURTHER INFORMATION CONTACT: Evan Winerman, Senior Counsel (202- 872-7578), Legal Division; or Kimberly Zaikov, Manager (202-452-2256), Reserve Bank Operations and Payments Systems Division. You may also contact us by email via https://www.federalreserve.gov/apps/ContactUs/feedback.aspx, choose Staff Group: Regulations.

SUPPLEMENTARY INFORMATION:

I. Background

Regulation I governs the issuance and cancellation of capital stock by the Reserve Banks. Under section 5 of the Federal Reserve Act and Regulation I, a member bank (other

than a mutual savings bank) must subscribe to capital stock of the Reserve Bank of its district

in an amount equal to 6 percent of the member bank's capital and surplus.1 Similarly, under

section 9 of the Federal Reserve Act and Regulation I, a member bank that is a mutual savings

bank must subscribe to capital stock of the Reserve Bank of its district in an amount equal to

six-tenths of 1 percent of its total deposit liabilities.2 The member bank must pay for one-half

of this subscription on the date that the Reserve Bank approves its application for capital

stock, while the remaining half of the subscription shall be subject to call by the Board.3

Under section 7 of the Federal Reserve Act and Regulation I, smaller member banks

(currently those with $11.229 billion or less in total consolidated assets) receive a 6 percent

annual dividend on their Reserve Bank stock.4 Other member banks receive a dividend at the

lesser of (i) the annual rate equal to the high yield of the 10-year Treasury note auctioned at the

last auction held prior to the payment of such dividend and (ii) an annual rate of 6 percent.5

A. Non-merger-related adjustments to Reserve Bank stock subscriptions

Regulation I requires that a member bank apply to adjust its stock subscription

1. 12 U.S.C 287 and 12 CFR 209.4(a).
2. 12 U.S.C. 333 and 12 CFR 209.4(b). The Federal Reserve Act and Regulation I allow a mutual savings bank to maintain a temporary "deposit" with a Reserve Bank in lieu of obtaining capital stock if the mutual savings bank is not permitted to purchase Reserve Bank stock under state law. However, if the relevant state law is not amended at the first session of the legislature after the bank is admitted to authorize the purchase of Reserve Bank stock, or if the bank fails to purchase the stock within six months of such amendment, the Reserve Bank will terminate the membership of the mutual savings bank. 12 U.S.C. 333; 12 CFR 209.2(a) and 208.3(a)(1).
3. 12 U.S.C. 287 and 12 CFR 209.4(c)(2).
4. 12 U.S.C. 289 and 12 CFR 209.4(e). Regulation I generally defines total consolidated assets by reference to the total assets reported on a member bank's most recent December 31 Call Report. 12 CFR 209.1(d)(3).
5. Id.

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"promptly after filing" its December 31 report of condition (Call Report).6 Additionally, a

member bank must apply to adjust its stock subscription promptly after filing any other

quarterly Call Report showing that the member bank has experienced an increase or decrease

to its capital and surplus (or its total deposit liabilities for a mutual savings bank) requiring a

change in excess of the lesser of 15 percent or 100 shares of Reserve Bank capital stock.7

Member banks use the FR 2056 reporting form to apply for adjustments to their stock

subscriptions.8

B. Merger-related adjustments to Reserve Bank stock subscriptions

Regulation I provides that, when two member banks merge or consolidate, the

appropriate Reserve Banks shall cancel shares of the nonsurviving bank and credit shares to

the surviving bank.9 In order to effectuate this requirement, the Reserve Banks direct

surviving member banks to apply to adjust their stock subscriptions before they merge or

consolidate with other member banks. Similarly, the Reserve Banks direct nonsurviving

member banks to apply to cancel their stock subscriptions before they merge or consolidate

with other member banks.10

Regulation I does not expressly require that a surviving member bank apply to adjust

its stock subscription before it merges or consolidates with a nonmember bank. In practice,

1. 12 CFR 209.4(a) and (b).
2. Id.
3. See Federal Reserve, Reporting Forms at https://www.federalreserve.gov/reportforms/forms/FR_205620200115_f.pdf.
4. 12 CFR 209.3(d)(1) and (2). If the surviving or nonsurviving bank is a mutual savings bank that is not permitted to purchase Reserve Bank stock under state law, Regulation I instead directs the Reserve Bank to transfer or increase the member bank's deposit obligation. Id.
5. Nonsurviving member banks use the FR 2086a reporting form to apply to cancel their stock subscriptions. https://www.federalreserve.gov/reportforms/forms/FR_2086a20200115_f.pdf.

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however, the Reserve Banks request that surviving member banks apply to adjust their stock subscriptions before they merge or consolidate with nonmember banks.11 This practice allows the Reserve Banks to make timely changes to the stock subscriptions of surviving member banks that merge or consolidate with nonmember banks.

When a surviving member bank applies to adjust its stock subscription, it must state whether its total consolidated assets exceed $11.229 billion.12 This requirement ensures that a Reserve Bank receives timely and accurate notice of whether a merger has caused a surviving member bank's total consolidated assets to exceed $11.229 billion, which (as noted above) determines the dividend rate to which the member bank is entitled.

II. Description of the Final Rule

On April 13, 2021, the Board published a proposal to automate non-merger-related adjustments to member banks' subscriptions to Reserve Bank capital stock.13 The Board also proposed to clarify that a surviving member bank must apply to adjust its stock subscription before merging or consolidating with another bank. Finally, the Board proposed two technical amendments to Regulation I.

The Board received no responsive comments on the proposal. The Board is finalizing the proposed amendments with certain technical clarifications.

A. Automation of non-merger-related stock adjustments

As noted above, Regulation I currently requires that a member bank apply to adjust its stock subscription at least annually and sometimes quarterly. A member bank determines its

1. The surviving bank applies to adjust its stock subscription based on its anticipated post- merger capital and surplus or, in the case of a member bank that is a mutual savings bank, its anticipated post-merger total deposit liabilities.
2. 12 CFR 209.1(d)(3) and 209.3(d)(3).
3. 86 FR 19152 (April 13, 2021).

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required stock subscription based on its capital and surplus (or total deposit liabilities for a mutual savings bank) as reported in the member bank's most recent Call Report.

The Reserve Banks have developed software that automatically pulls the information needed to calculate member banks' required stock subscriptions from Call Reports. The Board is therefore amending section 209.4 to automate the stock adjustment process. Specifically, the Reserve Banks will adjust a member bank's stock subscription each time the member bank files a Call Report.14 This automated process will eliminate the need for member banks to file applications to adjust their stock subscriptions (except in the context of mergers, as described infra).

The Board is also clarifying that, when a Reserve Bank issues stock to a member bank, the Reserve Bank will obtain payment for that stock by debit to an account on the Reserve Bank's books or by other form of settlement to which the Reserve Bank agrees.

B. Merger-related stock adjustments

As noted above, before two member banks merge or consolidate, the Reserve Banks direct the surviving member bank to apply to adjust its stock subscription and the nonsurviving member bank to apply to cancel its stock subscription. Similarly, before a member bank merges or consolidates with a nonmember bank, the Reserve Banks request that the surviving member bank apply to adjust its stock subscription.

The Board is amending section 209.3 to codify the Reserve Banks' current practice of requesting pre-merger stock adjustment applications. The amendments will expressly require a surviving member bank to apply to adjust its stock subscription before merging or

14 Similarly, the Board is automating the process for adjusting the deposit obligation of a mutual savings bank that has a deposit with the appropriate Reserve Bank in lieu of Reserve Bank capital stock.

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