Act providing that stringent regulatory actions may be taken against depository institutions according to their level of capital adequacy: (1) well capitalized; (2) adequately capitalized; (3) undercapitalized; (4) significantly undercapitalized; and (5) critically undercapitalized.
If an institution is classified as well capitalized or adequately capitalized, no special regulatory steps must be taken, but those institutions that fall into the three remaining categories are subject to progressively more demanding restrictions. If an institution is declared to be undercapitalized, the following applies: (1) the institution must adopt an acceptable capital restoration plan; (2) limits are placed on the institution's growth; (3) capital distributions cannot be made; and (4) acquisitions and establishment of new branches cannot be made without prior approval of its capital plan.
If an institution is declared to be significantly undercapitalized, the institution must: (1) sell shares; (2) restrict interest paid on deposits; (3) restrict the growth of assets; (4) prohibit the receiving of deposits from correspondent banks; and (5) terminate particular executive officers and/or directors.
If an institution is declared to be critically undercapitalized, it cannot: (1) pay interest on subordinated debt; (2) repay principal on subordinated debt; (3) participate in highly leveraged transactions without prior FDIC approval; (4) make material changes in accounting methods; (5) pay excessive compensation or bonuses; (6) change its charters or by-laws; and (7) engage in transactions that require prior notice to the primary regulator to include expansion, acquisition, or the sale of assets.
