[Federal Register Volume 59, Number 14 (Friday, January 21, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1455]


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[Federal Register: January 21, 1994]


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FEDERAL DEPOSIT INSURANCE CORPORATION

 

Differences in Capital and Accounting Standards Among the Federal 
Banking and Thrift Agencies; Report to Congressional Committees

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Report to the Committee on Banking, Finance and Urban Affairs 
of the U.S. House of Representatives and to the Committee on Banking, 
Housing, and Urban Affairs of the United States Senate Regarding 
Differences in Capital and Accounting Standards Among the Federal 
Banking and Thrift Agencies.

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SUMMARY: This report has been prepared by the FDIC pursuant to Section 
37(c) of the Federal Deposit Insurance Act, as added by Section 121 of 
the Federal Deposit Insurance Corporation Improvement Act of 1991 
(FDICIA). Section 37(c) requires each Federal banking agency to report 
annually to the Committee on Banking, Finance and Urban Affairs of the 
House of Representatives and to the Committee on Banking, Housing, and 
Urban Affairs of the Senate any differences between any accounting or 
capital standard used by such agency and any accounting or capital 
standard used by any other such agency. The report must also contain an 
explanation of the reasons for any discrepancy in such accounting and 
capital standards and must be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Robert F. Storch, Chief, Accounting 
Section, Division of Supervision, Federal Deposit Insurance 
Corporation, 550 17th Street, NW., Washington, DC 20429, telephone 
(202) 898-8906.
SUPPLEMENTARY INFORMATION: The text of the report follows:

Report to the Committee on Banking, Finance and Urban Affairs of the 
U.S. House of Representatives and to the Committee on Banking, Housing, 
and Urban Affairs of the United States Senate, Regarding Differences in 
Capital and Accounting Standards Among the Federal Banking and Thrift 
Agencies

Introduction

    This report has been prepared by the Federal Deposit Insurance 
Corporation (FDIC) pursuant to Section 37(c) of the Federal Deposit 
Insurance Act, as added by Section 121 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA), which reads as follows:

    (1) ANNUAL REPORTS REQUIRED.--Each appropriate Federal banking 
agency shall annually submit a report to the Committee on Banking, 
Finance and Urban Affairs of the House of Representatives and the 
Committee on Banking, Housing, and Urban Affairs of the Senate 
containing a description of any difference between any accounting or 
capital standard used by such agency and any accounting or capital 
standard used by any other agency.
    (2) EXPLANATION OF REASONS FOR DISCREPANCY.--Each report * * * 
shall contain an explanation of the reasons for any discrepancy 
between any accounting or capital standard used by such agency and 
any accounting or capital standard used by any other agency.
    (3) PUBLICATION.--Each report * * * shall be published in the 
Federal Register.

This introduction is followed by a discussion of the capital and 
underlying accounting and reporting standards employed by the FDIC as 
well as the two other federal banking agencies, the Board of Governors 
of the Federal Reserve System (FRB) and the Office of the Comptroller 
of the Currency (OCC), and the federal thrift supervisor, the Office of 
Thrift Supervision (OTS). Appendix One lists the differences in the 
capital standards among the FDIC, FRB, OCC and OTS as well as the 
reasons for these discrepancies. Appendix Two contains the differences 
in accounting and reporting standards among the banking and thrift 
agencies.

Capital Standards

    The three banking agencies have implemented a common regulatory 
framework that sets forth two minimum capital standards--a minimum 
leverage capital requirement and a minimum risk-based capital 
requirement. In addition to common minimum standards, the definitions 
of capital used by the banking agencies have generally been consistent 
with the exception of certain differences in the treatment of 
intangible assets. However, during late 1992 and 1993, the banking 
agencies amended their capital definitions to incorporate a uniform 
approach to the regulatory capital treatment of identifiable intangible 
assets. While the OTS participated in the development of this uniform 
approach, that agency has not yet adopted comparable amendments to its 
capital standards.
    The leverage and risk-based capital requirements only represent 
minimum standards and the FDIC generally expects the banks that it 
supervises to maintain capital levels well above these minimums, 
particularly banks that are expanding or experiencing unusual or high 
levels of risk.
    Several sections of FDICIA require the banking agencies and the OTS 
to more specifically incorporate capital standards into the supervision 
and regulation of insured depository institutions. During 1993, the 
FDIC has continued to work with the other agencies toward the 
completion of the capital-related rules mandated by FDICIA, including 
the requirement under Section 305 that the risk-based capital standards 
take account of interest rate risk as well as concentration of credit 
risk and the risks of nontraditional activities. In June 1993, the FDIC 
approved revisions to its ``transitional'' risk-related insurance 
assessment system, thereby creating the ``final'' system required by 
Section 302. Both the ``transitional'' and ``final'' risk-related 
insurance systems use capital categories to differentiate among 
institutions.
    In December 1992, the Federal Financial Institutions Examination 
Council (FFIEC) concluded that, for regulatory reporting purposes, 
banks and thrifts should report applicable income taxes in accordance 
with Financial Accounting Standards Board Statement No. 109, 
``Accounting for Income Taxes'' (FASB 109). The FFIEC also recommended 
to the banking agencies and to the OTS that they amend their capital 
standards to limit the amount of deferred tax assets recorded under 
FASB 109 that can be used to meet leverage and risk-based capital 
requirements. More specifically, the FFIEC recommended that deferred 
tax assets whose realization is dependent on an institution's future 
taxable income should be limited for regulatory capital purposes to the 
amount that can be realized within one year or ten percent of Tier 1 
capital, whichever is less. The FDIC and FRB issued proposed amendments 
to their leverage and risk-based capital standards that would 
incorporate the recommended limitation on deferred tax assets during 
the first half of 1993. The OCC's proposed amendment is expected to be 
published shortly. Adoption of final rules by the banking agencies is 
anticipated during 1994. The OTS has already imposed this deferred tax 
asset limitation on thrift institutions.
    Another recently issued accounting standard, Financial Accounting 
Standards Board Statement No. 115, ``Accounting for Certain Investments 
in Debt and Equity Securities'' (FASB 115), which generally takes 
effect in 1994 (unless an institution elects to adopt this standard in 
1993), has created the need for the agencies to revise their 
definitions of capital for leverage and risk-based capital purposes. 
Under FASB 115, debt and equity securities which are deemed to be 
``available-for-sale'' must be carried at fair value (generally, market 
value) for balance sheet purposes. Net unrealized holding gains and 
losses on available-for-sale securities are reported as a separate 
component of stockholders' equity. The FFIEC announced in August 1993 
that insured banks and thrifts must adopt FASB 115 for regulatory 
reporting purposes and indicated that the banking agencies and the OTS 
would be requesting comment on whether the new FASB 115 stockholders' 
equity component for net unrealized holding gains and losses on 
available-for-sale securities should be included in Tier 1 capital for 
leverage and risk-based capital purposes. The Board of Directors of the 
FDIC approved the publication of this proposal for a 30-day public 
comment period in December 1993. Similar proposals by the other 
agencies are also nearing publication.

Leverage Capital Requirement

    The banking agencies have since 1985 employed a capital requirement 
that establishes a minimum ratio of capital as a percent of total 
assets (leverage ratio). The FDIC substantially revised its minimum 
leverage capital requirement for state nonmember banks in February 
1991. This revised leverage requirement relies on a single narrow 
definition of capital that is based solely on Tier 1 (or core) capital. 
In most instances, a bank's Tier 1 capital is equal to the amount of 
its common equity capital minus certain intangible assets such as 
goodwill. Under the leverage capital rule, the most highly-rated banks 
in terms of safe and sound operation (i.e., those rated a composite 
``1'' under the CAMEL system used by the three federal banking 
agencies) that are not anticipating or experiencing significant growth 
are required to meet a minimum Tier 1 leverage capital ratio of at 
least 3 percent. All other state nonmember banks are required to meet a 
minimum Tier 1 leverage capital ratio of at least 100 to 200 basis 
points above the 3 percent level--that is, an absolute minimum leverage 
ratio of at least 4 percent. Similar leverage capital requirements have 
been adopted by the OCC for national banks and by the FRB for state 
member banks and bank holding companies.
    As initially required by the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA), the OTS that year 
adopted a 1.5 percent tangible and a 3 percent core capital to total 
assets leverage standard. However, also consistent with FIRREA, the OTS 
is continuing its efforts to revise this 3 percent core leverage 
capital requirement for savings associations so that its minimum 
leverage capital standard will be at least as stringent as the leverage 
capital requirement that the OCC currently applies to national banks. 
In addition, although goodwill is generally deducted in calculating a 
savings association's tangible and core capital levels, the OTS allows 
limited amounts of grandfathered ``qualifying supervisory goodwill'' to 
be included in the calculation of core capital during a five-year 
phase-out period that expires on January 1, 1995.

Risk-Based Capital Requirement

    In 1989, the banking agencies adopted a risk-based capital 
framework based upon the July 1988 Capital Accord developed by the 
Basle Supervisors' Committee and endorsed by the central bank governors 
of the G-10 countries. A transition period ended on December 31, 1992. 
Under the risk-based capital framework, banks are currently expected to 
meet a minimum ratio of total qualifying capital to risk-weighted 
assets of 8 percent, of which at least one-half (or four percentage 
points) must be comprised of Tier 1 capital.
    In addition to identical ratios, the risk-based framework 
implemented by the banking agencies generally includes a common 
definition of capital and a uniform system of risk weights and 
categories. Nevertheless, some technical differences in language and 
interpretation exist among the agencies' risk-based capital guidelines. 
As required by FIRREA, the OTS also adopted in 1989 a risk-based 
capital standard for savings associations that generally parallels the 
risk-based standards of the banking agencies but which is different in 
some respects.
    The banking agencies are continuing their efforts to revise their 
risk-based capital standards to ensure that this framework adequately 
considers an institution's interest rate risk. This action is required 
by Section 305 of FDICIA. The three banking agencies requested comment 
in August 1992 on a proposed approach for incorporating interest rate 
risk into the risk-based capital standards. In response to the 
recommendations made by commenters and after further banking agency 
staff deliberations, the three banking agencies published on September 
14, 1993, a substantially modified proposal on interest rate risk. The 
proposal would ensure that banks measure and monitor their interest 
rate risk and maintain adequate capital for that risk. During 1993, the 
OTS adopted a final rule which adds an interest rate risk component to 
its risk-based capital rule and requires thrift institutions with a 
greater than normal interest rate exposure to take a deduction from the 
total capital available to meet their risk-based capital requirement. 
The method the OTS has adopted for measuring the interest rate risk 
exposures of thrift institutions differs from that proposed by the 
banking agencies.
    Section 305 of FDICIA also mandates that the agencies' risk-based 
capital standards address concentration of credit risk and the risks of 
nontraditional activities. The banking agencies' August 1992 proposal 
also solicited comment in these two areas. During 1993, the agencies 
have developed proposed risk-based capital amendments for 
concentrations and nontraditional activities. The agencies' joint 
notice of proposed rulemaking covering these two areas should be 
published in 1994.
    In December 1993, the FFIEC recommended to the banking agencies and 
the OTS that they issue for public comment certain proposed changes to 
their risk-based capital standards pertaining to the treatment of 
recourse arrangements and direct credit substitutes. These proposed 
changes would bring the risk-based capital requirements of the banking 
agencies and the OTS into greater conformity. Among other features of 
the proposal, equivalent risk-based capital treatment would be required 
for recourse arrangements and certain direct credit substitutes that 
present equivalent risk of loss.
    Finally, the staffs of the agencies have been discussing during 
1993 a proposal to amend the risk-based capital standards to provide 
for the recognition of the reduced credit risk associated with 
bilateral netting arrangements covering outstanding interest rate and 
foreign exchange rate contracts. Such netting arrangements would have 
to be enforceable in all relevant jurisdictions as evidenced by well-
founded and reasoned legal opinions. The agencies anticipate issuing 
proposals on this matter early in 1994.
    The differences in the capital standards among the banking agencies 
and between the banking agencies and the OTS are set forth in Appendix 
One. In addition to the leverage capital ratio difference mentioned 
above, the major differences between the capital standards of the 
banking agencies on the one hand and the OTS on the other include the 
capital treatment for subsidiaries, intangible assets, and assets sold 
with recourse. The staffs of the banking agencies and the OTS meet 
regularly to achieve uniformity in targeted areas of their respective 
capital standards and to address differences and inconsistencies among 
these standards.

Accounting and Reporting Standards

    Over the years, the banking agencies, under the auspices of the 
FFIEC, have developed uniform Reports of Condition and Income (Call 
Reports) for all commercial banks and FDIC-supervised savings banks. 
The reporting standards followed by the banking agencies are 
substantially consistent with generally accepted accounting principles 
(GAAP) as they are applied by commercial banks. The uniform Call Report 
serves as the basis for calculating risk-based capital and leverage 
ratios and is also used extensively for other regulatory purposes. 
Thus, material differences in accounting and reporting standards do not 
exist among commercial banks and FDIC-supervised savings banks.
    OTS requires each thrift institution to file the Thrift Financial 
Report (TFR), which is consistent with GAAP as it is applied by 
thrifts. However, the TFR differs in material respects from the bank 
Call Report. Certain of these differences arise from differences in 
GAAP as applied by banks and thrifts and the few areas in which the 
banking agencies have adopted regulatory reporting standards at 
variance with GAAP, as it is applied by banks. However, there are also 
significant differences in the required information and its form of 
presentation on the two reports so that the required reports are 
significantly different.
    Nevertheless, more uniform reporting by all institutions is a long-
term goal of the FDIC. The federal banking agencies and OTS continue to 
study ways to reduce differences in accounting and reporting standards 
between the banking agencies and OTS and between GAAP for banks and 
thrifts. In the latter regard, after the enactment of FIRREA, the FDIC 
requested the Financial Accounting Standards Board (FASB) and the 
American Institute of Certified Public Accountants (AICPA) to consider 
eliminating the differences in GAAP as applied by thrifts and by banks. 
Both of these organizations have since undertaken projects that move in 
this direction. For example, since the FDIC's last report on capital 
and accounting differences, the FASB has issued a Statement of 
Financial Accounting Standards on loan impairment that applies equally 
to banks and thrifts. An interagency staff working group has identified 
a series of implementation issues raised by this new accounting 
standard and is preparing its recommendations on how the banking 
agencies and the OTS should proceed on these issues in a uniform 
manner.
    At the same time, the agencies continue working toward the goal of 
eliminating differences in reporting by banks and thrifts. The banking 
agencies and OTS have cooperated on several projects relating to 
accounting and reporting since the FDIC's last report on capital and 
accounting differences, including interagency guidance on restoring 
certain nonaccrual loans to accrual status and on the reporting of in-
substance foreclosures. This guidance was issued on June 10, 1993, as 
part of a package of six initiatives to implement President Clinton's 
March 10, 1993, program to improve the availability of credit to 
businesses and individuals.
    Under the auspices of the FFIEC's Task Force on Supervision, an 
interagency working group including staff members from the banking 
agencies and the OTS recently completed an interagency policy statement 
on the allowance for loan and lease losses which should promote 
consistency in supervisory policies among the agencies and the 
institutions they supervise. The policy statement provides 
comprehensive guidance on the maintenance of an adequate allowance and 
an effective loan review system. The guidance explains that the 
allowance is designed to absorb estimated credit losses associated with 
the loan and lease portfolio, including binding commitments to lend, 
and discusses the analysis of the portfolio and factors to consider in 
estimating credit losses.
    In addition, the banking agencies continue to look for ways in 
which the differences between the Call Report standards and GAAP can be 
eliminated, consistent with the agencies' supervisory responsibilities. 
As one of the June 10, 1993, credit availability initiatives, the 
banking agencies issued guidance to banks that generally conforms bank 
regulatory reporting (Call Report) requirements for sales of other real 
estate owned (OREO) with GAAP, as set forth in FASB Statement No. 66, 
``Accounting for Sales of Real Estate.'' Thrift institutions were 
already following GAAP in this area.

Appendix One

Summary of Differences in Capital Standards Among Federal Banking 
and Thrift Supervisory Agencies

    The three federal banking agencies have substantially similar 
leverage and risk-based capital standards. Nevertheless, the banking 
agencies view the leverage and risk-based capital requirements as 
minimum standards and most banking organizations are expected to 
operate with capital levels well above the minimums, particularly those 
institutions that are expanding or experiencing unusual or high levels 
of risk. Most of the differences described below represent 
inconsistencies between the capital standards used by the banking 
agencies and those employed by the OTS.

Leverage Capital Requirement

    In 1985, the three federal banking agencies established a minimum 
5.5 percent primary capital and 6 percent total capital leverage 
(capital-to-total assets) standard. In February 1991, the FDIC 
substantially revised its leverage capital rule which is contained in 
Part 325 of its regulations. The revised rule replaced the primary and 
total capital definitions with a single, narrower definition for 
leverage capital that is based solely on Tier 1 (or core) capital. It 
also established a minimum Tier 1 leverage capital requirement of at 
least 3 percent for the most highly-rated banks (i.e., those with a 
composite CAMEL rating of 1) that are not anticipating or experiencing 
any significant growth and that meet certain other conditions. All 
other state nonmember banks must maintain a minimum leverage capital 
ratio that is at least 100 to 200 basis points above this minimum 
(i.e., an absolute minimum leverage ratio of not less than 4 percent). 
These revised minimum leverage requirements are similar to the revised 
minimum leverage standards that were adopted by the OCC and the FRB in 
the second half of 1990.
    The OTS has a three percent core capital and a 1.5 percent tangible 
capital leverage requirement for savings associations. Goodwill is 
generally deducted in calculating a savings association's tangible and 
core capital levels. However, limited amounts of ``qualifying 
supervisory goodwill'' acquired on or before April 12, 1989, can be 
included in the calculation of core capital during a five-year phase-
out period. During 1993, the amount of qualifying supervisory goodwill 
included in the calculation of core capital cannot exceed 0.75 
percentage point (i.e., one quarter of the minimum 3 percent leverage 
ratio requirement). This allowable level phases down to zero, effective 
January 1, 1995.
    Consistent with the requirements of FIRREA, the OTS has proposed 
revisions to its leverage standard for savings associations so that its 
minimum leverage standard will be at least as stringent as the revised 
leverage standard that the OCC applies to national banks.

Risk-Based Capital Requirement

    In 1989, the three federal banking agencies adopted risk-based 
capital standards consistent with the July 1988 Basle Accord. A 
transition period ended on December 31, 1992. The risk-based capital 
standards currently require a minimum total risk-based capital (Tier 1 
plus Tier 2) ratio for all banking organizations equal to 8 percent. 
Risk-adjusted assets are calculated by assigning risk weights of 0, 20, 
50 and 100 percent to broad categories of assets and off-balance sheet 
items based upon their relative credit risks. As is the case with 
leverage ratios, the banking agencies view the risk-based requirement 
as a minimum ratio. Under the auspices of the Basle Supervisors' 
Committee, and domestically among themselves, U.S. bank regulatory 
authorities have been attempting to develop ways of quantifying the 
risks associated with changes in interest rates, equity investments, 
traded debt securities, and foreign exchange activities to supplement 
the basic risk-based capital framework. Furthermore, Section 305 of 
FDICIA mandates that the risk-based capital standards of the banking 
agencies and of OTS take account of interest rate risk. The three 
banking agencies requested comment in September 1993 on a proposed rule 
that would incorporate interest rate risk into their risk-based capital 
standards.
    OTS has adopted a risk-based capital standard which, in many 
respects, is similar to the framework adopted by the banking agencies. 
The OTS standard also requires a minimum risk-based capital ratio equal 
to 8 percent of risk-adjusted assets. During 1993, the OTS adopted a 
final rule which adds an interest rate risk component to its risk-based 
capital rule. Under this rule, thrift institutions with a greater than 
normal interest rate exposure must take a deduction from the total 
capital available to meet their risk-based capital requirement. That 
deduction is equal to one half of the difference between the 
institution's actual measured exposure and the normal level of 
exposure. In addition, the OTS amended its capital regulation in 1993 
to conform its risk weight for repossessed assets and assets more than 
90 days past due to the risk weight used by the banking agencies for 
these items.
Subsidiaries
    The federal banking agencies consolidate all significant majority-
owned subsidiaries of the parent organization. The purpose of this 
practice is to assure that capital requirements are related to all of 
the risks to which the bank is exposed. For subsidiaries which are not 
consolidated on a line-for-line basis, their balance sheets may be 
consolidated on a pro-rata basis, bank investments in such subsidiaries 
may be deducted entirely from capital, or the investments may be risk-
weighted at 100 percent, depending upon the circumstances. For example, 
the FDIC deducts investments in, and unsecured advances to, securities 
subsidiaries of state nonmember banks established pursuant to Section 
337.4 of the FDIC regulations. These options, with respect to the 
consolidation or ``separate capitalization'' of subsidiaries for the 
purpose of determining the capital adequacy of the parent organization, 
provide the banking agencies with the flexibility necessary to ensure 
that adequate capital is being provided commensurate with the actual 
risks involved. Such flexibility is essential to ensure a realistic 
assessment of an institution's capital adequacy.
    Under OTS capital guidelines, a distinction, mandated by FIRREA, is 
drawn between subsidiaries engaged in those activities that are 
permissible for national banks and subsidiaries engaged in 
``impermissible'' activities for national banks. Subsidiaries of thrift 
institutions that engage only in permissible activities are 
consolidated on a line-for-line basis, if majority-owned, and on a pro 
rata basis, if ownership is between 5 percent and 50 percent. As a 
general rule, investments in, including loans to, subsidiaries that 
engage in impermissible activities are deducted in determining the 
capital adequacy of the parent. However, for subsidiaries which were 
engaged in impermissible activities prior to April 12, 1989, 
investments in, including loans to, such subsidiaries that were 
outstanding as of that date are grandfathered and will be phased out of 
capital over a five-year transition period that expires on July 1, 
1994. During this transition period, investments in subsidiaries 
engaged in impermissible activities which have not been phased out of 
capital are to be consolidated on a pro rata basis.
    The phase-out provisions of FIRREA were amended in October 1992 by 
the Housing and Community Development Act of 1992 with respect to 
impermissible subsidiaries that are subject to this requirement solely 
by reasons of their real estate investments and activities. Under this 
legislation, the OTS is authorized to grant extensions of the 
transition period for the capital deduction on a case-by-case basis if 
certain conditions are met. If an extension is granted, the transition 
period will expire on July 1, 1996, instead of July 1, 1994.
Intangible Assets
    The banking agencies do not allow goodwill to be included in 
capital for commercial banks and FDIC-supervised savings banks.
    Pursuant to FIRREA, the OTS allows ``qualifying supervisory 
goodwill'' acquired on or before April 12, 1989, to be included as part 
of core capital through year-end 1994. Supervisory goodwill is goodwill 
acquired in an acquisition where the fair value of the assets was less 
than the fair value of the liabilities at the acquisition date or 
goodwill acquired in the acquisition of a problem institution. However, 
in accordance with FIRREA and Section 18(n) of the Federal Deposit 
Insurance Act, goodwill acquired after April 12, 1989, cannot be 
included in calculating regulatory capital under the OTS capital rules. 
This explicit prohibition against recognizing goodwill also applies to 
the three federal banking agencies and the capital rules they have 
adopted for banking organizations.
    Starting in late 1991, the banking agencies and the OTS began 
working to eliminate their then existing differences in the regulatory 
capital treatments of identifiable intangible assets. After agreeing 
upon a uniform capital approach to these assets, each of the agencies 
issued proposed amendments to its capital standards during the second 
quarter of 1992. During late 1992 and 1993, the banking agencies 
adopted final rules permitting purchased credit card relationships and 
purchased mortgage servicing rights to count toward capital 
requirements, subject to certain limits. Both forms of intangible 
assets are in the aggregate limited to 50 percent of core capital. In 
addition, purchased credit card relationships alone are restricted to 
no more than 25 percent of an institution's core capital. Any purchased 
mortgage servicing rights and purchased credit card relationships that 
exceed these limits, as well as all other intangible assets such as 
goodwill and core deposit intangibles, are deducted from capital and 
assets in calculating an institution's core capital.
    The banking agencies' final rules also address the valuation of 
identifiable intangible assets that count toward capital requirements 
in a manner that is consistent with Section 475 of FDICIA. Section 475 
provides that the value of purchased mortgage servicing rights included 
in an institution's capital may not exceed 90 percent of their fair 
market value and that this value be determined at least quarterly. 
Furthermore, the final rules also state that, for purposes of 
calculating regulatory capital (but not for financial statement 
purposes), the value of purchased mortgage servicing rights and 
purchased credit card relationships would be limited to the lesser of 
90 percent of fair market value or 100 percent of remaining unamortized 
book value. The book value of these intangible assets must be 
determined at least quarterly using a discounted approach which looks 
to the discounted amount of the estimated future net cash flows from 
the asset.
    The OTS has developed but has not yet issued its final rule on the 
regulatory capital treatment of identifiable intangible assets which is 
comparable to the rules already in effect for banks. Until its final 
rule takes effect, the existing OTS treatment of identifiable 
intangible assets continues to apply to savings associations. Under 
these rules, the OTS limits the amount of purchased mortgage servicing 
rights that may be included in capital to the lower of 90 percent of 
fair market value, 90 percent of the original purchase price, or 100 
percent of the remaining unamortized book value. In addition, purchased 
mortgage servicing rights equal to no more than 50 percent of a savings 
association's core capital may be included in calculating core and 
tangible capital. However, purchased mortgage servicing rights 
purchased, or under contract to be purchased, on or before February 9, 
1990, are exempt from this concentration limit. The amount of any 
identifiable intangible assets (other than purchased mortgage servicing 
rights) that meet a qualifying three-part test can only be included in 
core capital for leverage and risk-based capital purposes up to a limit 
of 25 percent of core capital.
Assets Sold with Recourse
    As a general rule, the banking agencies require full leverage and 
risk-based capital charges on assets sold with recourse, even when the 
recourse is limited. This includes transactions where the recourse 
arises because the seller, as servicer, must absorb credit losses on 
the assets being serviced. The exceptions to this rule (for leverage 
capital purposes only) pertain to certain pools of one-to-four family 
residential mortgages and to certain farm mortgage loans (see Appendix 
2, ``Sales of Assets With Recourse'' for further details).
    For risk-based capital purposes, the OTS limits the capital 
required on assets sold with limited recourse to the lesser of the 
amount of the recourse or the actual amount of capital that would 
otherwise be required against that asset, i.e., the normal capital 
charge. This is known as the ``low-level recourse'' rule.
    Some securitized asset arrangements involve the issuance of senior 
and subordinated classes of securities. When a bank originates such a 
transaction and retains a subordinated piece, the banking agencies 
require that capital be maintained against the entire amount of the 
asset pool. When a bank acquires a subordinated security in a pool of 
assets that it did not originate, the banking agencies assign the 
investment in the subordinated piece to the 100 percent risk weight 
category.
    The OTS requires that capital be maintained against the entire 
amount of the asset pool in both of the situations described in the 
preceding paragraph. Additionally, the OTS applies a capital charge to 
the full amount of assets being serviced when the servicer is required 
to absorb credit losses on the assets being serviced, regardless of 
whether the servicer was the seller of the assets or purchased the 
servicing from another party.
    In December 1993, the FFIEC recommended to the banking agencies and 
the OTS that they issue for public comment certain proposed changes to 
their risk-based capital standards pertaining to the treatment of 
recourse arrangements and direct credit substitutes. As recommended by 
the FFIEC, the banking agencies and the OTS would amend their risk-
based capital standards to define ``recourse'' and certain related 
terms and would expand the existing definition of ``direct credit 
substitute.'' The banking agencies would adopt the ``low-level 
recourse'' rule, would require banking organizations that purchase loan 
servicing rights to hold capital against the outstanding amount of the 
loans being serviced, and would require banking organizations that 
purchase subordinated interests which absorb the first dollars of 
losses from the underlying assets to hold capital against the 
subordinated interest plus all more senior interests. In addition, the 
banking agencies and the OTS would amend their risk-based capital 
standards to require the provider of a financial standby letter of 
credit or other guarantee-like arrangement that absorbs the first 
dollars of losses on third-party assets to hold capital against the 
outstanding amount of assets enhanced. The banking agencies and the OTS 
expect to jointly publish these proposed risk-based capital changes in 
early 1994.
Limitation on Subordinated Debt and Limited Life Preferred Stock
    The federal banking agencies limit subordinated debt and 
intermediate-term preferred stock that may be treated as part of Tier 2 
capital to an amount not to exceed 50 percent of Tier 1 capital. In 
addition, all maturing capital instruments must be discounted by 20 
percent each year of the five years before maturity. The banking 
agencies adopted this approach in order to emphasize equity versus debt 
in the assessment of capital adequacy.
    The OTS has no limitation on the ratio of maturing capital 
instruments as part of Tier 2. Also, for all maturing instruments 
issued on or after November 7, 1989 (those issued before are 
grandfathered with respect to the discounting requirement), thrifts 
have the option of using either (a) the discounting approach used by 
the banking regulators, or (b) an approach which allows for the full 
inclusion of all such instruments provided that the amount maturing in 
any one year does not exceed 20 percent of the thrift's total capital.
Presold Residential Construction Loans
    As required by Section 618(a) of the Resolution Trust Corporation 
Refinancing, Restructuring, and Improvement Act of 1991 (RTCRRIA), the 
banking agencies and the OTS have amended their risk-based capital 
guidelines to lower from 100 percent to 50 percent the risk weight for 
loans to builders to finance the construction of one-to-four family 
residential properties that have been presold and meet certain other 
criteria. However, the criteria adopted by the FDIC and the FRB differ 
in one respect from those of the OTS and OCC. Under the OTS and OCC 
rules, the property must be presold before the construction loan is 
made in order for the loan to qualify for the 50 percent risk weight. 
In contrast, the FDIC and FRB permit loans to builders for residential 
construction to qualify for the 50 percent risk weight once the 
property is presold, even if that event occurs after the construction 
loan has been made.
Qualifying Multifamily Mortgage Loans
    The banking agencies have generally placed multifamily (five units 
or more) residential mortgage loans in the 100 percent risk-weight 
category along with most other commercial loans since the risks in both 
assets are similar.
    The OTS allows certain multifamily residential mortgage loans 
(e.g., those secured by buildings with 5-36 units, a maximum 80 percent 
loan to value ratio, and 80 percent occupancy rate) to qualify for the 
50 percent risk-weight category.
    However, Section 618(b) of RTCRRIA requires the banking agencies 
and the OTS to amend their risk-based capital guidelines to lower the 
risk weight of multifamily housing loans that meet certain criteria, 
and securities collateralized by such loans, from 100 percent to 50 
percent. In December 1993, the FDIC and FRB adopted amendments to their 
risk-based capital standards to implement the Section 618(b) 
requirement. The OCC and OTS are in the process of finalizing their 
risk-based capital amendments for multifamily housing loans.
Equity Investments
    To the extent that commercial banks and FDIC-supervised savings 
banks are allowed to invest in equity securities under applicable 
federal or state law, such investments are assigned to the 100 percent 
risk-weight category, for risk-based capital purposes, by all three of 
the federal banking agencies.
    The OTS risk-based capital standards require that thrift 
institutions deduct certain equity investments from capital over a 
five-year phase-in period, which ends on July 1, 1994.
Nonresidential Construction and Land Loans
    The banking agencies assign loans for real estate development and 
construction purposes to the 100 percent risk weight category.
    OTS generally assigns these loans to the same 100 percent risk 
category. However, if the amount of the loan exceeds 80 percent of the 
fair value of the property, the excess portion is deducted from capital 
in accordance with the same five-year phase-in arrangement as described 
above for ``Equity Investments.''
Mortgage-Backed Securities (MBS)
    The federal banking agencies, in general, place privately-issued 
MBS in either the 50 percent or 100 percent risk-weight category, 
depending upon the appropriate risk category of the underlying assets. 
However, privately-issued MBS, collateralized by government agency or 
government-sponsored agency securities, are generally assigned to the 
20 percent risk weight category.
    The OTS assigns privately-issued high-quality mortgage-related 
securities (also known as ``SMMEA'' securities) to the 20 percent risk 
weight category. These are, generally, privately-issued MBS with AA or 
better investment ratings.
    At the same time, the banking agencies and the OTS automatically 
assign to the 100 percent risk weight category certain mortgagebacked 
securities, including interest-only strips, residuals, and similar 
instruments that can absorb more than their pro rata share of loss. The 
FDIC, in conjunction with the other banking agencies and the OTS, 
continues to discuss the development of more specific guidance as to 
the types of ``high risk'' mortgagebacked securities that meet this 
definition.
Treatment of Junior Liens on One to Four Family Properties
    In some cases, a bank may make two loans on a single residential 
property, one loan secured by a first lien, the other by a second lien. 
The FDIC and FRB view these two transactions as a single loan for 
purposes of determining whether the loan secured by the first lien has 
been prudently underwritten. The loan secured by the first lien could 
be assigned to the 100 percent risk weight category, if, in the 
aggregate, the two loans exceed a prudent loan-to-value ratio. In such 
a situation, the loan secured by the first lien would not qualify for 
the 50 percent risk weight (but, in all cases, the FDIC would assign 
the loan secured by the second lien to the 100 percent risk weight 
category regardless of the aggregate loan-to-value ratio). This 
approach for first liens is intended to avoid possible circumvention of 
the capital requirement and capture the risks associated with the 
combined transactions.
    The OCC and OTS generally assign the loan secured by the first lien 
to the 50 percent risk weight category and the loan secured by the 
second lien to the 100 percent risk weight category.
Mutual Funds
    Rather than looking to a mutual fund's actual holdings, the banking 
agencies assign all of a bank's holdings in a mutual fund to the risk 
category appropriate to the highest risk asset that a particular mutual 
fund is permitted to hold under its operating rules. Thus, the banking 
agencies take into account the maximum degree of risk to which a bank 
may be exposed when investing in a mutual fund because the composition 
and risk characteristics of its future holdings cannot be known in 
advance.
    OTS applies a capital charge appropriate to the riskiest asset that 
a mutual fund is actually holding at a particular time. In addition, 
OTS guidelines also permit investments in mutual funds to be allocated 
on a pro-rata basis in a manner consistent with the actual composition 
of the mutual fund.
FSLIC/FDIC-Covered Assets
    The federal banking agencies generally place FSLIC/FDIC-covered 
assets (assets subject to guarantee arrangements by the FSLIC or FDIC) 
in the 20 percent risk-weight category. However, the banking agencies 
have permitted limited exceptions on a case-by-case basis in several 
large bank assistance transactions.
    The OTS places these assets in the zero percent risk-weight 
category.
Pledged Deposits and Nonwithdrawable Accounts
    Instruments such as pledged deposits, nonwithdrawable accounts, 
income capital certificates (ICCs), and mutual capital certificates 
(MCCs) do not exist in the banking industry and are not included in the 
capital guidelines of the banking agencies.
    The capital guidelines of OTS permit thrift institutions to include 
pledged deposits and nonwithdrawable accounts that meet OTS criteria as 
well as ICCs and MCCs as capital.
Agricultural Loan Loss Amortization
    In the computation of regulatory capital, those banks accepted into 
the agricultural loan loss amortization program pursuant to Title VIII 
of the Competitive Equality Banking Act of 1987 may defer and amortize 
losses incurred on agricultural loans between January 1, 1984, and 
December 31, 1991. The unamortized portion of any losses is included as 
an element of Tier 2 capital under the FDIC's risk-based capital 
framework. The program also applies to losses incurred between January 
1, 1983, and December 31, 1991, as a result of reappraisals and sales 
of agricultural other real estate owned and agricultural personal 
property. Thrifts are not eligible to participate in the agricultural 
loan loss amortization program established by this statute.

Appendix Two

Summary of Differences in Reporting Standards Among Federal Banking 
and Thrift Supervisory Agencies

    Under the auspices of the Federal Financial Institutions 
Examination Council, the three federal banking agencies have developed 
uniform reporting standards which must be followed by insured 
commercial banks and FDIC-supervised savings banks in the preparation 
of the Reports of Condition and Income (Call Report). The income 
statement, balance sheet, and supporting schedules presented in the 
Call Report are used by the federal bank supervisory agencies for off-
site monitoring of the capital adequacy of banks and for other 
regulatory, supervisory, surveillance, analytical, insurance 
assessment, and general statistical purposes. The reporting standards 
set forth for the Call Report are based almost entirely on generally 
accepted accounting principles for banks, and, as a matter of policy, 
deviate only in those instances where statutory requirements or 
overriding supervisory concerns have warranted a departure from GAAP. 
In those areas where the Call Report instructions depart from GAAP, the 
GAAP requirements appear to be inconsistent with the objectives and 
standards for regulatory reporting that are set forth in section 121 of 
FDICIA. Accordingly, the Call Report standards in these areas are no 
less stringent than, i.e., are more conservative than, GAAP. Thus, 
insofar as the federal banking agencies are concerned, uniform 
accounting standards for regulatory and supervisory purposes have been 
established.
    The OTS has developed and maintains its own separate reporting 
scheme for the thrift institutions under its supervision. The reporting 
form used by savings institutions, known as the Thrift Financial 
Report, is based on GAAP as applied by thrifts, which differs in some 
respects from GAAP for banks.

Specific Valuation Allowances for, and Charge-offs of, Troubled Real 
Estate Loans not in Foreclosure

    The banking agencies generally consider real estate loans which 
lack acceptable cash flow or other ready sources of repayment, other 
than the collateral, as ``collateral dependent.'' When a real estate 
loan is considered to be collateral dependent and the fair value of the 
collateral has declined below the book value of the loan, charge-off or 
the establishment of a specific valuation allowance is made to reduce 
the value of the loan to the fair value of the collateral. Fair value 
is generally determined by a current appraisal. The banking agencies 
believe that this approach accurately reflects the amount of recovery a 
financial institution is likely to receive if it is forced to foreclose 
on the underlying collateral. This banking agency approach is basically 
consistent with GAAP as it has been applied by banks.
    Effective September 30, 1993, OTS revised its policy for the 
valuation of troubled, collateral-dependent loans. When it is probable, 
based on current information and events, that a thrift will be unable 
to collect all amounts due (both principal and interest) on a troubled, 
collateral-dependent loan, OTS requires a specific valuation allowance 
against (or a partial charge-off of) the loan for the amount by which 
the recorded investment in the loan (generally, its book value) exceeds 
its ``value,'' as defined. The ``value'' is either the present value of 
the expected future cash flows on the loan discounted at the loan's 
effective interest rate, the loan's observable market price, or the 
fair value of the collateral. Previously, OTS generally required 
specific valuation allowances for troubled real estate loans based on 
the estimated net realizable value of the collateral, an amount that 
normally exceeds fair value. The revised OTS policy narrows this 
difference between banks and thrifts and is somewhat similar to the 
requirements of FASB Statement No. 114 on loan impairment, which was 
issued in May 1993. However, FASB Statement No. 114, which will apply 
to financial statements prepared in accordance with GAAP by both banks 
and thrifts, is not required to be adopted until 1995.

Futures and Forward Contracts

    The banking agencies, as a general rule, do not permit the deferral 
of losses on futures and forward contracts whether or not they are used 
for hedging purposes. All changes in market value of futures and 
forward contracts are reported in current period income. The banking 
agencies adopted this reporting standard as a supervisory policy prior 
to the issuance of FASB Statement No. 80, which permits hedge or 
deferral accounting under certain circumstances. Hedge accounting in 
accordance with FASB Statement No. 80 is permitted by the banking 
agencies only for futures and forward contracts used in mortgage 
banking operations.
    OTS practice is to follow FASB Statement No. 80 for futures 
contracts. In accordance with this statement, when hedging criteria are 
satisfied, the accounting for the futures contract is related to the 
accounting for the hedged item. Changes in the market value of the 
futures contract are recognized in income when the effects of related 
changes in the price or interest rate of the hedged item are 
recognized. Such reporting can result in deferred losses which would be 
reflected as assets on the thrift's balance sheet in accordance with 
GAAP.

Excess Servicing Fees

    As a general rule, the banking agencies do not follow GAAP for 
excess servicing fees, but require a more conservative treatment. 
Excess servicing arises when loans are sold with servicing retained and 
the stated servicing fee rate is greater than a normal servicing fee 
rate. With the exception of sales of pools of first lien one-to-four 
family residential mortgages for which the banking agencies' approach 
is consistent with FASB Statement No. 65, excess servicing fee income 
in banks must be reported as realized over the life of the transferred 
asset.
    In contrast, OTS allows the present value of the future excess 
servicing fee to be treated as an adjustment to the sales price for 
purposes of recognizing gain or loss on the sale. This approach is 
consistent with FASB Statement No. 65.

In-Substance Defeasance of Debt

    The banking agencies do not permit banks to report the 
institution's defeasance of their liabilities in accordance with FASB 
Statement No. 76. Defeasance involves a debtor irrevocably placing 
risk-free monetary assets in a trust established solely for satisfying 
the debt. In order to qualify for this treatment, the possibility that 
the debtor will be required to make further payments on the debt, 
beyond the funds placed in the trust, must be remote. With defeasance, 
the debt is netted against the assets placed in the trust, a gain or 
loss results in the current period, and both the assets placed in the 
trust and the liability are removed from the balance sheet. However, 
for Call Report purposes, banks must continue to report defeased debt 
as a liability and the securities contributed to the trust must 
continue to be reported as assets. No netting is permitted, nor is any 
recognition of gains or losses on the transaction allowed. The banking 
agencies have not adopted FASB Statement No. 76 because of uncertainty 
regarding the irrevocability of trusts established for defeasance 
purposes. Furthermore, defeasance would not relieve the bank of its 
contractual obligation to pay depositors or other creditors. OTS 
practice is to follow FASB Statement No. 76.

Sales of Assets with Recourse

    In accordance with FASB Statement No. 77, a transfer of receivables 
with recourse is recognized as a sale if:
    (1) The transferor surrenders control of the future economic 
benefits;
    (2) The transferor's obligation under the recourse provisions can 
be reasonably estimated; and
    (3) The transferee cannot require repurchase of the receivables 
except pursuant to the recourse provisions.
    The practice of the banking agencies is generally to allow banks to 
report transfers of receivables as sales only when the transferring 
institution: (1) Retains no risk of loss from the assets transferred 
and (2) has no obligation for the payment of principal or interest on 
the assets transferred. As a result, virtually no transfers of assets 
with recourse can be reported as sales. However, this rule does not 
apply to the transfer of one-to-four family residential mortgage loans 
and agricultural mortgage loans under any one of the government 
programs (GNMA, FNMA, FHLMC, and Farmer Mac). Transfers of mortgages 
under these programs are treated as sales for Call Report purposes, 
provided the transfers would be reported as sales under GAAP. 
Furthermore, private transfers of one-to-four family residential 
mortgages are also reported as sales if the transferring institution 
retains only an insignificant risk of loss on the assets transferred. 
However, under the risk-based capital framework, the seller's 
obligation under any recourse provision resulting from transfers of 
mortgage loans under the government programs or in private transfers 
that qualify as sales is viewed as an off-balance sheet exposure that 
will be assigned a 100 percent credit conversion factor. Thus, for 
risk-based capital purposes, capital is generally required to be held 
for any recourse obligation associated with such transactions.
    OTS policy is to follow FASB Statement No. 77. However, in the 
calculation of risk-based capital under OTS guidelines, off-balance 
sheet recourse obligations are converted at 100 percent. This 
effectively negates the sale treatment recognized on a GAAP basis for 
risk-based capital purposes, but not for leverage capital purposes.

Push Down Accounting

    Push down accounting is the establishment of a new accounting basis 
for a depository institution in its separate financial statements as a 
result of a substantive change in control. Under push down accounting, 
when a depository institution is acquired, yet retains its separate 
corporate existence, the assets and liabilities of the acquired 
institution are restated to their fair values as of the acquisition 
date. These values, including any goodwill, are reflected in the 
separate financial statements of the acquired institution as well as in 
any consolidated financial statements of the institution's parent.
    The three banking agencies require push down accounting when there 
is at least a 95 percent change in ownership. This approach is 
generally consistent with accounting interpretations issued by the 
staff of the Securities and Exchange Commission.
    The OTS requires push down accounting when there is at least a 90 
percent change in ownership.

Negative Goodwill

    Under Accounting Principles Board Opinion No. 16, ``Business 
Combinations,'' negative goodwill arises when the fair value of the net 
assets acquired in a purchase business combination exceeds the cost of 
the acquisition and a portion of this excess remains after the values 
otherwise assignable to the acquired noncurrent assets have been 
reduced to a zero value.
    The three banking agencies require negative goodwill to be reported 
as a liability on the balance sheet and do not permit it to be netted 
against goodwill that is included as an asset. This ensures that all 
goodwill assets are deducted in regulatory capital calculations 
consistent with the internationally agreed-upon Basle Capital Accord.
    The OTS permits negative goodwill to offset goodwill assets on the 
balance sheet.

Offsetting of Assets and Liabilities

    FASB Interpretation No. 39, ``Offsetting of Amounts Related to 
Certain Contracts'' (FIN 39), becomes effective in 1994. FIN 39 
interprets the longstanding accounting principle that ``the offsetting 
of assets and liabilities in the balance sheet is improper except where 
a right of setoff exists.'' Under FIN 39, four conditions must be met 
in order to demonstrate that a right of setoff exists. A debtor with 
``a valid right of setoff may offset the related asset and liability 
and report the net amount.'' Although an interpretive issue concerning 
one of the four conditions remains to be clarified, the banking 
agencies plan to allow banks to adopt FIN 39 for Call Report purposes 
solely as it relates to on-balance sheet amounts for conditional and 
exchange contracts (e.g., forwards, interest rate swaps, and options). 
However, consistent with the existing Call Report instructions, netting 
of other assets and liabilities will continue to not be permitted 
unless specifically required by the instructions.
    OTS practice is to follow GAAP as it relates to offsetting in the 
balance sheet.

    Dated at Washington, DC, this 14th day of January, 1994.

Federal Deposit Insurance Corporation
Robert E. Feldman,
Acting Executive Secretary .
[FR Doc. 94-1455 Filed 1-19-94; 4:15 pm]
BILLING CODE 6174-01-P