FINAL RULE--AMENDMENT TO REGULATION Y.

The Board of Governors of the Federal Reserve System (Board) is amending 12 C.F.R. Part 225, its Regulation Y (Risk-Based Capital Standards; Construction Loans on Presold Residential Properties; Junior Liens on 1- to 4-Family Residential Properties; and Investments in Mutual Funds). The intended effect of this final rule is to keep the Board's bank holding company risk-based capital standards for construction loans on presold residential properties, real estate loans secured by junior liens on 1- to 4-family residential properties, and investments in mutual funds consistent with the risk-based capital standards for banks and thrifts.

Effective April 1, 1999, 12 C.F.R. Part 225 is amended as follows:

Part 225- Bank Holding Companies and Change in Bank Control (Regluation Y)

1. The authority citation for Part 225 continues to read as follows:

Authority: 12U. S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 3909.

2. In Appendix A to Part 225, section III.A., footnote 24 is revised to read as follows:

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure

III. ***

A. ***(24)

3. In Appendix A to Part 225, section III.C.3. footnote 37 is revised to read as follows:

III. ***

C. ***

3. ***(37)

4. In Appendix A to Part 225, section III.C.3. is amended by adding a new sentence to the end of footnote 38 to read as follows:

III. ***

C. ***

3. ***(38)

(24.) An investment in shares of a fund whose portfolio consists primarily of various securities or money market instruments that, if held separately, would be assigned to different risk categories, generally is assigned to the risk category appropriate to the highest risk-weighted asset that the fund is permitted to hold in accordance with the stated investment objectives set forth in the prospectus. An organization may, at its option, assign a fund investment on a pro rata basis to different risk categories according to the investment limits in the fund's prospectus. In no case will an investment in shares in any fund be assigned to a total risk weight of less than 20 percent. If an organization chooses to assign a fund investment on a pro rata basis, and the sum of the investment limits of assets in the fund's prospectus exceeds 100 percent, the organization must assign risk weights in descending order. If, in order to maintain a necessary degree of short-term liquidity, a fund is permitted to hold an insignificant amount of its assets in short-term, highly liquid securities of superior credit quality that do not qualify for a preferential risk weight, such securities generally will be disregarded when determining the risk category into which the organization's holding in the overall fund should be assigned. The prudent use of hedging instruments by a fund to reduce the risk of its assets will not increase the risk weighting of the fund investment. For example, the use of hedging instruments by a fund to reduce the interest rate risk of its government bond portfolio will not increase the risk weight of that fund above the 20 percent category. Nonetheless, if a fund engages in any activities that appear speculative in nature or has any other characteristics that are inconsistent with the preferential risk weighting assigned to the fund's assets, holdings in the fund will be assigned to the 100 percent risk category.

(37.) If a banking organization holds the first and junior lien(s) on a residential property and no other party holds an intervening lien, the transaction is treated as a single loan secured by a first lien for the purposes of determining the loan-to-value ratio and assigning a risk weight.

(38.) *** Such loans to builders will be considered prudently underwritten only if the bank holding company has obtained sufficient documentation that the buyer of the home intends to purchase the home (i.e., has a legally binding written sales contract) and has the ability to obtain a mortgage loan sufficient to purchase the home (i.e., has a firm written commitment for permanent financing of the home upon completion).