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GAO reviewed the Federal Reserve System's (Reserve) new rule on treatment of perpetual preferred stock issued to the United States Treasury under the Emergency Economic Stabilization Act of 2008. 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 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) Reserve complied with the applicable requirements in promulgating the rule.





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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-09-167R, November 7, 2008 B-317401 November 7, 2008 The Honorable Christopher J. Dodd Chairman The Honorable Richard C. Shelby Ranking Minority Member Committee on Banking, Housing, and Urban AffairsUnited States Senate The Honorable Barney Frank Chairman The Honorable Spencer Bachus Ranking Minority Member Committee on Financial Services House of Representatives Subject: 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 Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on a major rule promulgated by the Federal Reserve System (Federal Reserve), entitled –Capital Adequacy Guidelines: Treatment of Perpetual Preferred Stock Issued to the United States Treasury Under the Emergency Economic Stabilization Act of 2008— (Regulation Y; Docket No. R-1336). We received the rule on October 27, 2008. It was published in the Federal Register as an –interim final rule with request for public comment— on October 22, 2008. 73 Fed. Reg. 62,851. The interim 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. The interim final rule became effective on October 17, 2008. Federal Reserve found good cause for the rule to become effective retroactively, notwithstanding the requirement of the Congressional Review Act that major rules not become effective until 60 days after publication or receipt by Congress. 5 U.S.C. sect. 808(2). Enclosed is our assessment of the Federal Reserve's compliance with the procedural steps required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the rule. Our review indicates that the Federal Reserve complied with the applicable requirements. If you have any questions about this report or wish to contact GAO officials responsible for the evaluation work relating to the subject matter of the rule, please contact Michael R. Volpe, Assistant General Counsel, at (202) 512-8236. signed Robert J. Cramer Associate General Counsel Enclosure cc: Laricke D. Blanchard Assistant to the Board Board of Governors of theFederal Reserve System ENCLOSURE REPORT UNDER 5 U.S.C. sect. 801(a)(2)(A) ON A MAJOR RULE 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 STABLIZATION ACT OF 2008" (REGULATION Y; DOCKET NO. R-1336) (i) Cost-benefit analysis The Federal Reserve did not prepare a cost-benefit analysis. However, the interim final rule does explain that the Federal Reserve finds strong public policy considerations to allow Senior Perpetual Preferred Stock issued to Treasury under the Troubled Asset Relief Program (TARP) to be included as Tier 1 capital for the purposes of the Federal Reserve's risk-based and leverage capital rules and guidelines, as an exception to its longstanding stance regarding the unacceptability of a rate step-up in other regulatory capital instruments. (ii) Agency actions relevant to the Regulatory Flexibility Act, 5 U.S.C. sections 603-605, 607, and 609 The Federal Reserve certifies that this interim final rule will not affect a significant impact on a substantial number of small bank holding companies. (iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. sections 1532-1535 The Unfunded Mandate Reform Act does not apply to independent regulatory agencies, such as the Federal Reserve. (iv) Other relevant information or requirements under acts and executive orders Administrative Procedure Act, 5 U.S.C. sections 551 et seq. The Federal Reserve found that there is good cause for issuing the interim final rule and making the rule effective retroactively to October 17, 2008, and that it would be impracticable, unnecessary, or contrary to the public interest to issue a notice of proposed rulemaking and provide an opportunity to comment before the effective date. The Federal Reserve solicits comments on all aspects of the rule and will make changes it considers appropriate or necessary after review of any comments received. Paperwork Reduction Act, 44 U.S.C. sections 3501-3520 The interim final rule contains no collection of information requirements under the Paperwork Reduction Act. Statutory authorization for the rule This final rule is issued under the authority of the Emergency Economic Stabilization Act of 2008, Division A of Pub. L. 110-342, 122 Stat. 3765 (2008). Executive Order No. 12,866 The Executive Order does not apply to independent regulatory agencies, such as the Federal Reserve. Executive Order No. 13,132 (Federalism) The Executive Order does not apply to independent regulatory agencies, such as the Federal Reserve.



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