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To: Chief Executive Officers of National Banks, Department and Division Heads, and all Examining Personnel

Description: Final Rule

On September 1, 1998, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (agencies) published the attached joint final rule. The final rule amends the agencies' risk-based capital regulations to permit banks to include up to 45 percent of pretax net unrealized holding gains on available-for-sale equity securities in Tier 2 capital. The previous risk-based capital guidelines did not permit any portion of unrealized gains on equity securities to be included as bank capital. The final rule applies only to equity securities held as available-for-sale under Statement of Financial Accounting Standard 115, "Accounting for Certain Investments in Debt and Equity Securities." The equity securities must be prudently valued in accordance with generally accepted accounting principles (GAAP) and have readily determinable values. Net unrealized gains on these securities will continue to be excluded from common stockholders' equity in the calculation of Tier 1 capital.

Under the final rule, the agencies' treatment of unrealized gains on available-for-sale equity securities for regulatory capital purposes is consistent with the international standards of the Basle Accord. The rule takes effect on October 1, 1998; however, the agencies will not object if an institution wishes to apply the provisions of this final ruling beginning September 1, 1998, the date it was published in the Federal Register.

For further information, contact Credit & Market Risk (202) 649-6670.

Emory Wayne Rushton
Senior Deputy Comptroller for Bank Supervision Policy

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