Understanding Capital Requirements for Non-FDIC Insured Banks in Puerto Rico

In the dynamic landscape of banking regulations, Puerto Rico stands out as a jurisdiction that offers unique opportunities for international financial entities. However, navigating capital requirements—especially for institutions operating without Federal Deposit Insurance Corporation (FDIC) insurance—can be complex. This article explores the evolution of these rules, drawing from federal guidelines and recent Puerto Rican reforms. Whether you’re considering establishing an International Banking Entity (IBE) or International Financial Entity (IFE), understanding these mandates is crucial for compliance and success.

We’ll break down the historical context from federal regulations, current U.S. standards, and the specific requirements for non-FDIC insured entities in Puerto Rico as of 2024/2025. Note that while federal rules apply broadly to U.S.-supervised banks, Puerto Rico’s local laws govern specialized offshore-like entities that bypass FDIC mandates.

Historical Federal Capital Rules: Insights from OCC Regulations

Prior to major reforms in the early 2010s, capital requirements for federal savings associations (FSAs)—including those in U.S. territories like Puerto Rico—were outlined in regulations such as 12 CFR Part 167, administered by the Office of the Comptroller of the Currency (OCC). These rules emphasized a multi-tiered approach to ensure financial stability:

• Core Capital (Tier 1): This foundational layer included common stock, retained earnings, and noncumulative perpetual preferred stock. Deductions were made for intangible assets and certain subsidiary investments.
• Supplementary Capital (Tier 2): Limited to 100% of core capital, it encompassed allowances for loan and lease losses (up to 1.25% of risk-weighted assets), unrealized gains on equity securities (up to 45%), and maturing instruments with phased reductions in the final years.
• Total Capital: The sum of core and supplementary capital, with a minimum of 8% of risk-weighted assets.
• Tangible Capital: At least 1.5% of adjusted total assets.
• Leverage Ratio: 3–4% core capital to adjusted assets, depending on the institution’s rating.

Risk-weighted assets were categorized into buckets (0%, 20%, 50%, 100%) based on asset types, such as U.S. government securities (0%) or commercial loans (100%). Off-balance-sheet items were converted to equivalents and weighted accordingly.

These rules assumed FDIC insurance, as FSAs are required to maintain it under federal law (12 U.S.C. §1464). However, they provide a baseline for understanding how capital adequacy was historically measured.

Modern Federal Standards: Basel III and OCC Integration

The Dodd-Frank Act of 2010 led to the dissolution of the Office of Thrift Supervision (OTS) and the integration of FSA rules into OCC’s broader framework under 12 CFR Part 3. This shift implemented Basel III standards, which are more stringent and apply uniformly to national banks and FSAs:

• Common Equity Tier 1 (CET1): 4.5% of risk-weighted assets.
• Tier 1 Capital: 6% of risk-weighted assets.
• Total Capital: 8% of risk-weighted assets.
• Capital Conservation Buffer: An additional 2.5% CET1, bringing the effective CET1 minimum to 7%.
• Leverage Ratio: 4% Tier 1 capital to average total assets.
• Supplementary Leverage Ratio: 3% for larger institutions (assets over $250 billion), with ongoing proposals for adjustments as of 2025.

Risk weights remain similar but include refinements for mortgages, derivatives, and high-volatility exposures. The tangible capital requirement has been phased out in favor of these ratios.

Importantly, all OCC-supervised FSAs must be FDIC-insured. For non-FDIC entities, federal rules don’t directly apply—Puerto Rico’s local regulations take precedence for specialized institutions.

Capital Requirements for Non-FDIC Insured Entities in Puerto Rico

Puerto Rico’s appeal for international banking lies in its Acts 52 (for IBEs) and 273 (for IFEs), which allow entities to operate without FDIC insurance. These are not traditional deposit-taking banks; they focus on offshore activities and cannot accept deposits from Puerto Rican residents. Oversight falls under the Office of the Commissioner of Financial Institutions (OCIF).

Recent reforms, effective in 2024 and continuing into 2025, have significantly raised the bar for new licenses to enhance stability and attract high-quality institutions:

• Paid-In Capital: For de novo (newly established) IFEs and IBEs, the minimum initial paid-in capital is now $10,000,000, fully paid at licensing. This is a sharp increase from previous levels ($250,000 for IFEs and $550,000 for IBEs). Existing entities have transition periods to meet stepped-up requirements, such as maintaining unimpaired capital of at least $500,000 by 2025.
• Certificate of Deposit (CD): A mandatory unencumbered CD has increased to $1,000,000, held in Puerto Rico.
• Other Assets: Entities must hold at least $5 million in admissible assets (e.g., cash, investment-grade securities). The paid-in capital must never fall below 10% of deposits unless fully collateralized.

Unlike federal rules, there’s no risk-based capital ratio; the focus is on absolute minimums and liquidity. These entities benefit from tax incentives under Act 60, including low corporate taxes on international income, making Puerto Rico a hub for global finance.

These changes aim to bolster the sector’s resilience amid global economic shifts.

Why These Changes Matter for Investors

The hike to $10 million in paid-in capital reflects Puerto Rico’s push for more robust financial players, reducing risks while maintaining its competitive edge. For entrepreneurs eyeing a non-FDIC license, this means higher upfront costs but potential rewards in tax efficiency and operational flexibility. Always consult OCIF or legal experts for the latest guidance, as regulations can evolve—draft proposals for 2025 emphasize enhanced reporting and source-of-wealth verification.

In conclusion, while federal capital rules provide a rigorous framework for FDIC-insured banks, Puerto Rico’s non-FDIC options offer a tailored alternative with the new $10 million threshold. This positions the island as a strategic gateway for international banking in 2025 and beyond. If you’re planning to apply, start by reviewing OCIF’s guidelines to ensure compliance.