A number of banks have recently been examining the possibility of raising capital through the sale of a minority interest in a subsidiary set up to hold bank owned real estate such as bank headquarters and branches.

Part 325 of the FDIC Rules and Regulations indicates that Tier 1 Capital includes minority interests in equity capital accounts of those subsidiaries that have been consolidated for the purpose of computing regulatory capital, (except that minority interests which fail to provide meaningful capital support are excluded from the definition).   Stock held by minority shareholders in a bank controlled subsidiary whose assets are consolidated with those of the bank are not generally recognized as equity capital under GAAP, but the bank regulatory agencies have in the past counted it as regulatory capital.

We have been informed by the FDIC that the current regulatory view of such transactions is not favorable.   Their position is that subsidiaries typically are not normally formed for the sole intent of raising capital, and that minority interests usually arise when a bank acquires a pre-existing subsidiary.   From a corporate perspective, the FDIC is currently taking the position it will not be allowing banks to transfer assets to a subsidiary for the sole intent of raising temporary capital, particularly if the investors have a preferred claim or return on such assets.   Accordingly, institutions looking to raise capital are unlikely to find any relief by selling interests in the bank’s existing owned real estate.