PART 1229—CAPITAL CLASSIFICATIONS AND PROMPT CORRECTIVE ACTION Authority: 12 U.S.C. 1426, 4513, 4526, 4613, 4614, 4615, 4616, 4617, 4618, 4622, 4623. Source: 74 FR 5604, Jan. 30, 2009, unless otherwise noted. Subpart A—Federal Home Loan Banks § 1229.1 Definitions. For purposes of this subpart: Capital distribution Class A stock Class B stock Critical capital level Executive officer (1) Executive officers about whom the Banks must publicly disclose detailed compensation information under Regulation S-K, 17 CFR part 229, issued by the Securities and Exchange Commission; (2) Any other executive who occupies one of the following positions or is in charge of one of the following subject areas: (i) Overall Bank operations, such as the Chief Operating Officer or an equivalent employee; (ii) Chief Financial Officer or an equivalent employee; (iii) Chief Administrative Officer or an equivalent employee; (iv) Chief Risk Officer or an equivalent employee; (v) Asset and Liability Management officer, or an equivalent employee; (vi) Chief Accounting Officer or an equivalent employee; (vii) General Counsel or an equivalent employee; (viii) Strategic Planning officer or an equivalent employee; (ix) Internal Audit officer or an equivalent employee; or (x) Chief Information Officer or an equivalent employee; or (3) Any other individual, without regard to title: (i) Who is in charge of a principal business unit, division or function; or (ii) Who reports directly to the Bank's chairman of the board of directors, vice chairman of the board of directors, president or chief operating officer. Minimum capital requirement New business activity Permanent capital Risk-based capital requirement Tangible equity Total capital [74 FR 5604, Jan. 30, 2009, as amended at 78 FR 2323, Jan. 11, 2013; 81 FR 76295, Nov. 2, 2016] § 1229.2 Determination of a Bank's capital classification. (a) Quarterly determination. (b) Notification to a Bank. (c) Notification to the FHFA. § 1229.3 Criteria for a Bank's capital classification. (a) Adequately capitalized. (b) Undercapitalized. (c) Significantly undercapitalized. (d) Critically undercapitalized. § 1229.4 Reclassification by the Director. (a) Discretionary reclassification. (1) Undercapitalized, if it is otherwise classified as adequately capitalized; (2) Significantly undercapitalized, if it is otherwise classified as undercapitalized; or (3) Critically undercapitalized if it is otherwise classified as significantly undercapitalized. (b) Grounds for discretionary reclassification. (1) The Director determines in writing that: (i) The Bank is engaging in conduct that could result in the rapid depletion of permanent or total capital; (ii) The value of collateral pledged to the Bank has decreased significantly; or (iii) The value of property subject to mortgages owned by the Bank has decreased significantly. (2) The Director determines, after notice to the Bank and opportunity for an informal hearing before the Director, that a Bank is in an unsafe and unsound condition; or (3) The Director finds, under § 1371(b) of Safety and Soundness Act (12 U.S.C. 4631(b)), that the Bank is engaging in an unsafe and unsound practice because the Bank's asset quality, management, earnings or liquidity were found to be less than satisfactory during the most recent examination, and any deficiency has not been corrected. (c) Procedures. (d) Duration. (e) Reservation of authority. § 1229.5 Capital distributions for adequately capitalized Banks. (a) Restriction. (b) Exception. § 1229.6 Mandatory actions applicable to undercapitalized Banks. (a) Mandatory Actions by the Bank. (1) Submit to the Director for approval a capital restoration plan that complies with the requirements and procedures established by § 1229.11 of this part and receive approval from the Director for such plan; (2) Fulfill all terms, conditions and obligations contained in the capital restoration plan as approved by the Director; (3) Not make any capital distribution unless: (i) The distribution meets the requirements of § 1229.5(b) and paragraphs (a)(3)(ii) and (iii) of this section and the Director has provided permission for such distribution as set forth in § 1229.5(b); (ii) The capital distribution will not result in the Bank being reclassified as significantly undercapitalized or critically undercapitalized; and (iii) The capital distribution does not violate any restriction on the redemption or repurchase of capital stock or the declaration or payment of a dividend set forth in section 6 of the Bank Act (12 U.S.C. 1426) or in any other applicable regulation; (4) Not permit its average total assets in any calendar quarter to exceed its average total assets during the preceding calendar quarter, where such average is calculated based on the total amount of assets held by the Bank for each day in a quarter, unless: (i) The Director has approved the Bank's capital restoration plan; and (ii) The Director determines that: (A) The increase in total assets is consistent with the approved capital restoration plan; and (B) The ratio of tangible equity to the Bank's total assets is increasing at a rate sufficient to enable the Bank to become adequately capitalized within a reasonable time and consistent with any schedule established in the capital restoration plan; and (5) Not acquire, directly or indirectly, an equity interest in any operating entity (other than as necessary to enforce a security interest granted to the Bank) nor engage in any new business activity unless: (i) The Director has approved the Bank's capital restoration plan, the Bank is implementing the capital restoration plan and the Director determines that proposed acquisition or activity will further achievement of the goals set forth in that plan; or (ii) The Director determines that the proposed acquisition or activity will be consistent with the safe and sound operation of the Bank and will further the Bank's compliance with its risk-based and minimum capital requirements in a reasonable period of time. (b) Mandatory reclassification by the Director. (1) The Bank does not submit a capital restoration plan that is substantially in compliance with § 1229.11 of this subpart and within the time frame required. (2) The Director does not approve the capital restoration plan submitted by the Bank; or (3) The Director determines that the Bank has failed in any material respect to comply with its approved capital restoration plan or fulfill any schedule for action established by that plan. (c) Monitoring. [74 FR 5604, Jan. 30, 2009, as amended at 74 FR 38513, Aug. 4, 2009; 81 FR 76295, Nov. 2, 2016] § 1229.7 Discretionary actions applicable to undercapitalized Banks. (a) Discretionary safeguards. (b) Procedures. [74 FR 5604, Jan. 30, 2009, as amended at 81 FR 76295, Nov. 2, 2016] § 1229.8 Mandatory actions applicable to significantly undercapitalized Banks. A Bank that is classified as significantly undercapitalized: (a) Shall submit to the Director for approval a capital restoration plan that complies with the requirements and procedures established by § 1229.11 of this part and receive approval from the Director for such plan; (b) Fulfill all terms, conditions and obligations contained in the capital restoration plan once the plan is approved by the Director; (c) Shall not make any capital distribution that would result in the Bank being reclassified as critically undercapitalized or that would violate any restriction on the redemption or repurchase of capital stock or the payment of a dividend set forth in section 6 of the Bank Act (12 U.S.C. 1426) or any applicable regulation; (d) Shall not make any capital distribution not otherwise prohibited under paragraph (c) of this section absent the prior written approval of the Director, provided that the Director may approve such distribution only if the Director determines that: (1) The capital distribution will enhance the ability of the Bank to meet its risk-based and minimum capital requirements promptly; (2) The capital distribution will contribute to the long-term financial safety and soundness of the Bank; or (3) The capital distribution is otherwise in the public interest; (e) Shall not without prior written approval of the Director pay a bonus to any executive officer, provided that for purposes of this paragraph a bonus shall include any amount paid or accruing to an executive officer under a profit sharing arrangement; (f) Shall not without the prior written approval of the Director compensate an executive officer at a rate exceeding the average rate of compensation of that officer during the 12 months preceding the calendar month in which the Bank became significantly undercapitalized, provided however, that for purposes of calculating the executive officer's average rate of compensation, such compensation shall not include any bonus or profit sharing paid or accruing to the officer during the 12 month period; (g) Comply with § 1229.6(a)(4) and (a)(5) of this subpart; and (h) Comply with any on-going restrictions or obligations that were imposed on the Bank by the Director under § 1229.7 of this subpart. [74 FR 5604, Jan. 30, 2009, as amended at 74 FR 38513, Aug. 4, 2009] § 1229.9 Discretionary actions applicable to significantly undercapitalized Banks. (a) Actions by the Director. (1) Limit the increase in any obligations or class of obligations of the Bank, including any off-balance sheet obligations. Such limitation may be stated in an absolute dollar amount, as a percentage of current obligations or in any other form chosen by the Director; (2) Reduce the amount of any obligations or class of obligations held by the Bank, including any off-balance sheet obligations. Such reduction may be stated in an absolute dollar amount, as a percentage of current obligations or in any other form chosen by the Director; (3) Limit the increase in, or prohibit the growth of any asset or class of assets held by the Bank. Such limitation may be stated in an absolute dollar amount, as a percentage of current assets or in any other form chosen by the Director; (4) Reduce the amount of any asset or class of asset held by the Bank. Such reduction may be stated in an absolute dollar amount, as a percentage of current obligations or in any other form chosen by the Director; (5) Acquire new capital in the form and amount determined by the Director, which specifically may include requiring a Bank to increase its level of retained earnings; (6) Modify, limit or terminate any activity of the Bank that the Director determines creates excessive risk; (7) Take steps to improve the management at the Bank by: (i) Ordering a new election for the Bank's board of directors in accordance with procedures established by the Director; (ii) Dismissing particular directors or executive officers, in accordance with section 1366(b)(5)(B) of the Safety and Soundness Act (12 U.S.C. 4616(b)(5)(B)), who held office for more than 180 days immediately prior to the date on which the Bank became undercapitalized, provided further that such dismissals shall not be considered removal pursuant to an enforcement action under section 1377 of the Safety and Soundness Act (12 U.S.C. 4636a) and shall not be subject to the requirements necessary to remove an officer or director under that section; or (iii) Ordering the Bank to hire qualified executive officers, the hiring of whom, prior to employment by the Bank and at of the option of the Director, may be subject to review and approval by the Director; or (8)(i) Reclassify a significantly undercapitalized Bank as critically undercapitalized if: (A) The Bank does not submit a capital restoration plan that is substantially in compliance with § 1229.11 of this part and within the time frame required; (B) The Director does not approve the capital restoration plan submitted by the Bank; or (C) The Director determines that the Bank has failed to make reasonable, good faith efforts to comply with its approved capital restoration plan and fulfill any schedule established by that plan. (ii) Subject to paragraph (c) of this section, the Director may reclassify a significantly undercapitalized Bank under paragraph (a)(8)(i) of this section at any time the grounds for such action exist, notwithstanding the fact that such grounds had formed the basis on which the Director reclassified a Bank from undercapitalized to significantly undercapitalized. (b) Additional safeguards. (c) Procedures. § 1229.10 Actions applicable to critically undercapitalized Banks. (a) Appointment of conservator or receiver. (b) Periodic determination Determination. (i) The assets of the Bank are, and during the preceding 60 calendar days have been, less than its obligations to its creditors and others, provided that the Director shall consider as an obligation only that amount of outstanding consolidated obligations for which the Bank is primary obligor or for which the Bank has been ordered to make payments of principal or interest on behalf of another Bank, or is actually making payments of principal or interest on behalf of another Bank; or (ii) The Bank is not, and during the previous 60 calendar days has not been paying its debts on a regular basis as such debts become due, provided that this provision does not apply to any unpaid debts that are the subject of a bona fide (2) Mandatory receivership. (3) Determination not required. (c) Judicial review. (d) Other applicable actions. [74 FR 5604, Jan. 30, 2009, as amended at 74 FR 38513, Aug. 4, 2009] § 1229.11 Capital restoration plans. (a) Contents. (1) Describe the actions the Bank will take, including any changes that the Bank will make to member stock purchase requirements, to assure that it will become adequately capitalized within the meaning of § 1229.3(a) of this subpart and, if appropriate, to resolve any structural or long term causes for the capital deficiency; (2) Specify the level of permanent and total capital the Bank will achieve and maintain and provide quarterly projections indicating how each component of total and permanent capital and the major components of income, assets and liabilities are expected to change over the term of the plan; (3) Specify the types and levels of activities in which the Bank will engage during the term of the plan, including any new business activities that it intends to begin during such term; (4) Describe any other actions the Bank intends to take to comply with any other requirements imposed on it under this subpart A of part 1229; (5) Provide a schedule which sets forth dates for meeting specific goals and benchmarks and taking other actions described in the proposed capital restoration plan, including setting forth a schedule for it to restore its permanent and total capital to levels necessary for meeting its risk-based and minimum capital requirements; and (6) Address such other items that the Director shall provide in writing in advance of such submission. (b) Deadline for submission. (c) Review of the plan by the Director. (d) Resubmission. (e) Amendments. (f) Effectiveness of provisions. (g) Appointment of conservator or receiver. [74 FR 5604, Jan. 30, 2009, as amended at 74 FR 38513, Aug. 4, 2009] § 1229.12 Procedures related to capital classification and other actions. (a) Classification or reclassification of a Bank. (b) Notice of a supervisory action. (c) Bank response. (d) Final action. (e) Final actions under this section. (f) Judicial review. Subpart B—Enterprises Authority: 12 U.S.C. 4513b, 4526, 4613, 4614, 4615, 4616, 4617. Source: 76 FR 35733, June 20, 2011, unless otherwise noted. § 1229.13 Definitions. For purposes of this subpart: Capital distribution (1) Any dividend or other distribution in cash or in kind made with respect to any shares of, or other ownership interest in, an Enterprise, except a dividend consisting only of shares of the Enterprise; (2) Any payment made by an Enterprise to repurchase, redeem, retire, or otherwise acquire any of its shares or other ownership interests, including any extension of credit made to finance an acquisition by the Enterprise of such shares or other ownership interests, except to the extent the Enterprise makes a payment to repurchase its shares for the purpose of fulfilling an obligation of the Enterprise under an employee stock ownership plan that is qualified under the Internal Revenue Code of 1986 (26 U.S.C. 401 et seq. (3) Any payment of any claim, whether or not reduced to judgment, liquidated or unliquidated, fixed, contingent, matured or unmatured, disputed or undisputed, legal, equitable, secured or unsecured, arising from rescission of a purchase or sale of an equity security of an Enterprise or for damages arising from the purchase, sale, or retention of such a security.