[Federal Register Volume 59, Number 44 (Monday, March 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5049]


[[Page Unknown]]

[Federal Register: March 7, 1994]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[No. 94-17]

 

Capital and Accounting Standards; Annual Report to Congressional 
Committees

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice.

-----------------------------------------------------------------------

SUMMARY: Pursuant to the reporting requirements of section 121 of the 
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), 
we have submitted our annual report to the Chairman and ranking 
minority member of the Committee on Banking, Housing, and Urban Affairs 
of the Senate and the Chairman and ranking minority member of the 
Committee on Banking, Finance and Urban Affairs of the House of 
Representatives identifying the differences between the capital and 
accounting standards used by the Office of Thrift Supervision (OTS) and 
the capital and accounting standards used by the other Federal banking 
agencies (Banking Agencies).
    Our report contains two attachments. Attachment I, ``Summary of 
Differences in Capital Standards,'' identifies and explains the reasons 
for differences in the capital standards applied by OTS from those 
capital standards applied by the Banking Agencies. Attachment II, 
``Summary of Differences in Accounting Practices,'' identifies and 
explains the reasons for the major differences between OTS and the 
Banking Agencies in supervisory reporting practices that affect their 
respective capital standards.
    Despite some differences, the capital and accounting rules of OTS 
generally parallel those of the Banking Agencies (collectively, the 
``Agencies''). Many of the differences are a result of either statutory 
requirements (e.g., goodwill) or historical differences between the 
banking and thrift industries (e.g., investment authorities, mutual 
form of organization). Moreover, the Agencies continue to work together 
to minimize the differences.
    The capital standards of OTS comply with the statutory requirement 
of the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989 (FIRREA), which provides that OTS standards be no less stringent 
than the standards applied to national banks.

FOR FURTHER INFORMATION CONTACT: Robert Pomeranz, Senior Accountant, 
Accounting Policy, (202) 906-5650; John F. Connolly, Program Manager 
for Capital Policy, (202) 906-6465; Policy, Office of Thrift 
Supervision, 1700 G Street, NW., Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

Attachment I

Summary of Differences in Capital Standards

    FDICIA requires a report to Congress on the differences in the bank 
and savings association capital standards. Below is a summary of the 
differences.
A. Major Differences

1. Interest Rate Risk Component

    Interest Rate Risk Component: OTS adopted an interest rate risk 
component to its risk-based capital rule, which is effective January 1, 
1994. Under the new rule, institutions with an above normal level of 
interest rate risk will be subject to a capital charge commensurate 
with their risk exposure. The Banking Agencies intend to adopt an 
interest rate risk component in 1994. The interest rate risk component 
adopted by OTS will differ from that which is expected to be adopted by 
the Banking Agencies in important respects, namely, the methodology 
used to measure interest rate exposure and the data used to measure 
exposure.
    Reason for OTS Difference: Because interest rate risk is a 
significant risk to savings associations, OTS believes that it is 
important to use a relatively sophisticated model to measure the 
interest rate risk exposure of individual institutions. OTS believes 
that it is particularly important to use a model that is capable of 
measuring the option component in mortgages and the effect of financial 
derivatives on an institution's overall interest rate risk exposure. As 
a consequence, OTS uses an option-based pricing model to measure 
exposure and collects detailed financial data on a reporting form that 
was designed to provide the financial data that OTS needs to measure 
exposure.

2. Core Capital

    Core Capital Requirement: The leverage ratio requirements of the 
Office of the Comptroller (``OCC''), the Federal Deposit Insurance 
Corporation (``FDIC''), and the Board of Governors of the Federal 
Reserve System (``FRB'') are tied to Tier 1 capital. These requirements 
set the minimum leverage ratio rule requirement at 3 percent plus at 
least 100 to 200 basis points (depending on the CAMEL ratings). The OTS 
has proposed to adopt a leverage ratio rule conforming with the 
leverage ratios of the other bank regulatory agencies.
    During 1992, the Agencies adopted uniform prompt corrective action 
regulations, as mandated by section 131 of FDICIA. These regulations 
require the establishment of specific capital categories based on risk-
based capital ratio and leverage ratio measures. The Prompt Corrective 
Action (``PCA'') rules of the Agencies, including the OTS, require 
compliance with a 4 percent leverage ratio for associations to be in 
the ``adequately capitalized'' category.
    Goodwill: FIRREA requires ``qualifying supervisory goodwill'' to be 
included in core capital under the OTS capital rule through December 
31, 1994. The Banking Agencies, in general, do not allow goodwill to be 
included in calculating core capital.
    Reason for OTS Differences: FIRREA requires that the OTS capital 
rule include a limited amount of qualifying supervisory goodwill in 
core capital until December 31, 1994 (HOLA 5(t)(3)(A)).

3. Subsidiaries

    Subsidiary (general): OTS defines a subsidiary as a 5 percent or 
greater ownership interest in an entity. The OTS requires consolidation 
of any subsidiary with the insured institution if the subsidiary is 
considered to be controlled by the insured institution under generally 
accepted accounting principles (``GAAP'') (except for those engaged in 
activities impermissible for national banks, as described below). If an 
association owns a 5 percent or greater interest, but does not have 
control under GAAP, OTS requires pro-rata consolidation, as discussed 
below. For the Banking Agencies, subsidiaries are generally 
consolidated if the parent institution holds more than 50 percent of 
the outstanding voting stock, or if the subsidiary is otherwise 
controlled or capable of being controlled by the parent institution 
(see exception for depository institutions).
    Reason for OTS difference: Savings associations, particularly 
state-chartered institutions, have in the past been allowed to invest 
in a more expansive list of subsidiaries and equity investments than 
national banks. OTS has adopted its more stringent policy of requiring 
pro-rata consolidation of ownership interests of 5 percent or greater, 
but not constituting GAAP control, because it better reflects the risk 
that may be posed by such subsidiaries.
    Subsidiaries (``impermissible''): FIRREA and the OTS capital rule 
require the deduction from capital of investments in and loans to 
subsidiaries that engage in activities not permissible for a national 
bank. FIRREA originally provided for a five year phase-out of such 
investments and loans that were made prior to April 13, 1989. In 1992, 
the Director of OTS was given discretionary authority to extend the 
phase-out period until mid-1996 for investments in certain real estate 
subsidiaries provided the conditions contained in the statute are 
satisfied. During the phase-out period, the percentage of assets 
corresponding with the non-deducted portion of the assets is 
consolidated. The Banking Agencies may require deduction on a case-by-
case basis.
    The FRB deducts investments in, and unsecured advances to, Section 
20 securities subsidiaries from a member bank's capital. The FDIC 
similarly deducts investments in, and unsecured advances to, securities 
subsidiaries and mortgage banking subsidiaries.
    Reason for OTS difference: Although savings associations may own 
subsidiaries that engage in activities that are prohibited for national 
banks, the Home Owners' Loan Act (``HOLA'') requires the deduction of 
investments and loans to such subsidiaries, in accordance with a 
statutorily prescribed phase-out period. (HOLA 5(t)(5)).
    The deduction of investments in subsidiaries from the parent's 
capital is designed to ensure that the capital supporting the 
subsidiary is not also used as the basis of further leveraging and 
risk-taking by the parent association. In deducting investments in and 
advances to certain subsidiaries from the parent association's capital, 
the OTS expects the parent savings association to meet or exceed 
minimum regulatory capital standards without reliance on the capital 
invested in the particular subsidiary, consistent with FIRREA's 
mandate.
    The deduction of investments in and extensions of credit to 
impermissible subsidiaries is consistent with, but more broadly 
applicable than, the FRB's and FDIC's treatment of securities 
subsidiaries and the FDIC's treatment of mortgage banking subsidiaries.
    Consolidation of the remaining assets of the impermissible 
subsidiaries is required to ensure that sufficient capital is held by 
savings associations during the phase-out period.
    Subsidiaries (``permissible--minority ownership''): The OTS rule 
requires the pro-rata consolidation of subsidiaries where the 
association does not have control, as defined under GAAP, but owns a 
five percent or greater ownership interest in the subsidiary. The bank 
regulators generally require capital to be held only against the 
investments in such subsidiaries but may, on a case-by-case basis, 
deduct them from capital or consolidate them either fully or on a pro-
rata basis.
    Reason for OTS Difference: OTS believes that its treatment is 
appropriate and that sufficient capital should be held against the 
risks of such investments. OTS believes associations are better 
protected from the economic risk presented by their subsidiaries by 
requiring capital to be held against the amount of the subsidiaries' 
assets rather than only assessing an 8 percent capital charge against 
an institution's investment in such nonconsolidated subsidiaries.
    Subsidiaries (lower-tier depository institutions): Under OTS rules, 
a depository institution subsidiary is automatically consolidated with 
its parent association if the subsidiary was acquired prior to May 1, 
1989. The parent association's investment in such subsidiaries is 
automatically excluded from the parent association's capital if the 
depository institution subsidiary was acquired on or after May 1, 1989 
(except if it engages only in activities permissible for a national 
bank, in which case it is consolidated). OTS requires consolidation of 
lower-tier depository institutions, if consolidation results in a 
higher capital requirement than the exclusion requirement. For purposes 
of the risk-based capital regulations, the Banking Agencies generally 
consolidate majority-owned banking and finance subsidiaries.
    Reason for OTS Difference: OTS's policy addresses its concerns 
about (i) ``double-leveraging'' of the parent association's capital and 
(ii) incentives to minimally capitalize lower-tier depository 
institutions. It also ensures that OTS capital standards are at least 
as stringent as those imposed on banks. (HOLA 5(t)(5)(A),(C),(E)).
    4. Equity Investments: OTS requires associations to deduct equity 
investments from their capital over a five year transition period. Bank 
regulators allow only a limited range of equity investments and place 
those investments in the 100 percent risk-weight category, rather than 
requiring deduction.
    In March 1993, OTS issued a final rule that provides parallel 
treatment of equity investments for thrifts and national banks. Equity 
investments of thrifts (primarily stock of the Federal Home Loan 
Mortgage Corporation (``FHLMC''), stock of the Federal National 
Mortgage Association (``FNMA''), and certain loans with equity 
characteristics) that are permissible for national banks would be 
placed in the 100 percent risk weight category.
    Reason for OTS Difference: OTS will continue to require the 
deduction from capital of equity investments that are impermissible for 
national banks. This approach is designed to insulate the institution 
and the insurance fund from the risk of these investments. This policy 
is intended to result in such investments being either divested or 
``pushed down'' into subsidiaries, where savings associations can limit 
their liability and attempt to attract partial market funding for the 
subsidiaries. The OTS will address the safety and soundness of equity 
investments of thrifts that are permissible for national banks through 
the same capital and supervisory approach used by the Banking Agencies.
    5. 20 Percent Risk-Weight for High Quality MBS: OTS includes agency 
securities (i.e., issued by FNMA or FHLMC) in the 20 percent risk-
weight category. OTS also places high-quality, private-issue, mortgage-
related securities (i.e., eligible securities under the Secondary 
Mortgage Market Enhancement Act (``SMMEA'')) in the 20 percent risk-
weight category. These private-issue mortgage-backed securities 
represent interests in residential or mixed use real estate and are 
rated in one of the two highest investment grade rating categories by a 
nationally recognized rating agency. Generally, the Banking Agencies 
place private-issue MBS in the 50 percent or 100 percent risk-weight 
category.
    Reason for OTS Difference: Policy decision to take the high credit 
quality of these securities into account in risk-weighting these 
securities.
    6. Qualifying Multi-family Mortgage Loans: OTS allows certain low-
risk multi-family mortgage loans (i.e., buildings with 5-36 units, 
maximum 80 percent loan-to-value ratios and minimum 80 percent 
occupancy rates) to qualify for the 50 percent risk-weight category. 
The Banking Agencies currently place all multi-family mortgage loans in 
the 100 percent risk-weight category.
    OTS and the Banking Agencies are in the process of issuing final 
rules to implement section 618(b) of the Resolution Trust Corporation 
Refinancing, Restructuring, and Improvement Act of 1991 (``RTC Act''), 
by reducing the risk weight of multi-family mortgage loans meeting the 
specified statutory and regulatory criteria to the 50 percent risk 
weight.
    The RTC Act requires OTS and the Banking Agencies to place multi-
family mortgage loans in the 50 percent risk weight category if they 
meet the following criteria: (1) The loan is secured by a first lien, 
(2) the ratio of the principal obligation to the appraised value of the 
property, that is, the loan-to-value ratio, does not exceed 80 percent 
(75 percent if the loan is based on a floating interest rate), (3) the 
annual net operating income generated by the property (before debt 
service) is not less than 120 percent of the annual debt service on the 
loan (115 percent if the loan is based on a floating interest rate), 
(4) the amortization of principal and interest occurs over a period of 
not more than 30 years and the minimum maturity for repayment of 
principal is not less than seven years, (5) all principal and interest 
payments have been made on time for a period of not less than one year, 
and (6) meets other prudential underwriting criteria imposed by the 
Banking Agencies.
    Reason for OTS Difference: Policy decision to assess a lower 
capital charge on such loans and securities in accordance with the 
requirement of Section 618(b). OTS is working with the Banking Agencies 
to implement the statutory mandate on a uniform interagency basis.
    7. Intangible Assets: The final rule on the capital treatment of 
intangible assets adopted by the OTS generally is consistent with the 
rules adopted by the Banking Agencies. The final OTS rule, however, 
contains a grandfathering provision and a transition provision for 
purchased mortgage servicing rights included in capital prior to 
adoption of the revised final rule.
    The OTS rule also contains a grandfather provision allowing 
continued inclusion of core deposit premiums included in associations' 
capital on the effective date of the final rule. These core deposit 
premiums were previously includable in capital pursuant to temporary 
OTS guidance if an association's management determined that they passed 
a three-part test and the amount included did not exceed 25 percent of 
core capital. The new rule requires the deduction of nongrandfathered 
core deposit premiums from capital.
    Reason for OTS Difference: Policy decision to permit purchased 
mortgage servicing rights and core deposit premiums to be included in 
capital if they were previously included pursuant to OTS rule or 
policy.

8. Recourse Arrangements

    Assets Sold with Recourse (Non-Mortgage): If a savings association 
sells non-mortgage assets with recourse (where the transaction is 
treated as a sale under GAAP), OTS (i) considers it a sale, and (ii) 
requires capital to be held against the total amount of the loans sold 
with recourse through the use of the 100 percent off-balance sheet 
conversion factor. If a bank sells a non-mortgage asset with recourse 
(even when the transaction is treated as a sale under GAAP), it is not 
considered a sale by the Banking Agencies.
    Reason for OTS Difference: OTS follows GAAP in determining whether 
a transaction is a sale. The OTS policy is designed to ensure that 
sufficient capital is available to absorb the risk associated with the 
recourse obligation.
    Assets Sold with Recourse (Mortgages--Private Transactions): If 
savings associations sell mortgage assets with recourse to private 
entities and the transaction is treated as a sale under GAAP, OTS 
follows the same policy as it follows regarding sales of non-mortgage 
assets. Under this policy, OTS (i) considers the transaction a sale and 
(ii) requires capital to be held under the risk-based capital 
computations through the use of the 100 percent off-balance sheet 
conversion factor.
    Banks that sell pools of residential mortgages to private entities 
with recourse generally are required to hold the full amount of capital 
against the mortgages sold regardless of the amount of recourse 
retained and the treatment of the transaction for regulatory reporting 
purposes.
    The rules of the FRB and OCC, however, provide that no capital is 
required against pools of 1- to 4- family mortgages sold to private 
entities with ``insignificant recourse'' (i.e., less than expected 
losses) for which a specific non-capital reserve or liability account 
is established and maintained for the maximum amount of possible loss 
under the recourse provision.)
    If ``significant'' recourse is retained, the transaction is not 
reported as a sale and the assets remain on the balance sheet. Capital 
is required to be held against the on-balance sheet amount of the 
assets. The FDIC follows this approach for all sales with recourse; the 
FDIC has not adopted an ``insignificant recourse'' policy.
    Reason for OTS Difference: Policy decision to ensure appropriate 
capital against risk of these assets. OTS, in general, follows GAAP in 
determining whether a transaction is a sale. Regardless of ``sale'' 
treatment, OTS requires capital if savings associations are liable for 
losses.
    Assets Sold with Recourse (Limited Recourse): For risk-based 
capital purposes only, the OTS limits the capital required on mortgage 
and non-mortgage assets sold with recourse (that are treated as sales 
under GAAP) to the lesser of (i) the maximum contractual liability 
under the recourse arrangement or (ii) the ``normal'' capital charge on 
the off-balance sheet assets.
    Reason for OTS Difference: Policy decision to ensure appropriate 
capital against risk of these assets, which is limited to an 
association's maximum contractual liability under such arrangements.
    Recourse servicing: Where savings associations are responsible for 
credit losses on loans they service, OTS requires capital against the 
amount of the underlying loans consistent with the recourse policy set 
forth above. Although savings associations do not ``own'' the 
underlying assets, they have a contingent liability and are subject to 
losses on those loans. OTS requires associations to hold capital 
against the underlying loans posing economic risk for the associations. 
The Banking Agencies do not assess capital on the underlying loans but 
only on the amount of the servicing rights.
    Reason for OTS difference: Policy decision to assess capital on 
underlying loans to buffer associations from risk of loss on such 
loans.
    9. Purchased Subordinated Securities: Savings associations are 
required to hold capital against the amount of subordinated securities 
and all more senior securities regardless of whether the subordinated 
securities were originated by the institution or purchased from other 
parties. Banks are only required to hold capital against the amount of 
more senior securities if the institution originated and sold the 
underlying loans. The Banking Agencies do not require banks to hold 
capital against securities senior to acquired subordinated securities 
if a bank did not originate and sell the underlying loans.
    Reason for OTS difference: Policy decision to ensure appropriate 
capital against risk of these assets. Whether institutions create 
subordinated securities or purchase subordinated securities, the risks 
are similar.
    10. Consequences of Failure to Meet Capital Standards: The PCA 
provisions of FDICIA impose a stringent regulatory regimen on thrifts 
and banks failing their capital requirements. The PCA provisions of 
section 131 of FDICIA establish five regulatory categories, with the 
distinctions primarily based on institutions' capital ratios. Section 
131 imposes various sanctions and restrictions on institutions in the 
lower three PCA categories, while other regulations (brokered deposits 
and the risk-based premium rules of the FDIC) provide preferential 
treatment to the well-capitalized institutions. The Agencies issued a 
joint preamble and parallel rules implementing PCA.
    Savings associations are also subject to additional restrictions 
and requirements under the HOLA, as enacted in FIRREA. The OTS will 
continue to apply these provisions to savings associations, but is 
coordinating their implementation with the PCA provisions to the extent 
possible. The HOLA provisions do not apply to banks.
    Reason for OTS Difference: The Agencies have adopted uniform rules 
implementing the PCA provisions of FDICIA. The HOLA, however, continues 
to impose additional restrictions on savings associations (HOLA 
5(t)(6)).
B. Minor Differences
    1. 1.5 Percent Tangible Capital Requirement: OTS has an explicit 
1.5 percent tangible capital requirement; the bank regulators do not.
    Reason for OTS Difference: FIRREA requires OTS to establish a 
tangible capital requirement of at least 1.5 percent of assets (HOLA 
5(t)(2)(B)). 2.
    2. Collateralized Mortgage Obligations (``CMO'') Tranches: In its 
final interest rate risk rule, OTS eliminated the placement of stripped 
securities and certain collateralized mortgage obligations in the 100 
percent risk weight category because of interest rate risk sensitivity. 
The interest rate risk component will address this risk directly. OTS 
is keeping residual securities in the 100 percent risk-weight in light 
of the risks associated with residual securities.
    The Banking Agencies vary in their approach: OCC has stated that 
any CMO tranche absorbing more than its pro-rata share of principal 
loss risk is risk-weighted at 100 percent (others generally at 20 
percent); FRB has stated that any CMO tranche absorbing more than its 
pro-rata share of loss is risk weighted at 100 percent (others 
generally at 20 percent); FDIC undertakes a case-by-case review.
    Reason for OTS Difference: Policy decision to address the interest 
rate risk of these securities by imposing capital charge in accordance 
with interest rate risk rule. The risks involved with residual 
securities warrant their continued placement in the 100 percent risk 
weight.
    3. Pledged Deposits/Nonwithdrawable Accounts: OTS includes these 
instruments as core capital for mutual associations if they meet the 
same requirements as non-cumulative perpetual preferred stock. If they 
do not meet the requirements for inclusion in core capital, OTS 
includes them as supplementary capital provided they meet the standards 
for preferred stock or subordinated debt. The Banking Agencies do not 
address this issue since these instruments do not exist in the banking 
industry.
    Reason for OTS Difference: Policy decision to treat items that 
offer equivalent protection to the insurance fund and the institution 
in the same way.
    4. Qualifying Single Family Mortgage Loans: In order to be placed 
in the 50 percent risk-weight category, OTS requires that mortgages 
have no more than an 80 percent loan-to-value (``LTV'') ratio (unless 
they have private mortgage insurance (``PMI'') bringing the LTV ratio 
down to 80 percent). The Banking Agencies require ``prudent, 
conservative'' underwriting without specific LTV ratio requirements.
    Reason for OTS Difference: Policy decision to make explicit what 
OTS believes is generally ``prudent and conservative''; the Banking 
Agencies have indicated to OTS that they may use the 80 percent LTV 
ratio in examiner guidance.
    5. Loans to Individual Purchasers for the Construction of Their 
Homes: OTS and OCC place these assets in the 50 percent risk-weight 
category. The FRB and FDIC may treat them as construction loans (100 
percent) or as mortgage loans (50 percent) depending on their 
characteristics.
    Reason for OTS difference: Policy decision to include such loans in 
standard treatment of 1-4 family mortgage loans, as does the OCC.
    6. Holding of First and Second Liens on Home Mortgages by the Same 
Institution: The FDIC, FRB, and OTS generally treat first and second 
liens held by the same institution as single loans if there are no 
intervening liens. The OCC generally places second liens in the 100 
percent risk-weight category.
    Reason for OTS Difference: Policy decision generally to treat 
combined loans same as single loans. Second mortgages (depending on 
their characteristics) should be placed in the 50 percent risk weight 
if both loans are held by the same institution, there are no 
intervening liens, and they meet the criteria for qualifying mortgage 
loans.
    7. Rules on Maturing Capital Instruments (``MCI''): OTS and the 
Banking Agencies use different rules to determine how much of MCI 
counts toward capital. OTS (i) grandfathers issuances of MCI issued on 
or before November 7, 1989 (which was the date of the rule change) and 
(ii) allows two options for issuances of MCI after November 7, 1989 (a) 
the bank rule (five year amortization) or (b) a limit of 20 percent of 
total capital maturing in any one year for instruments within seven 
years of maturity. Bank regulators use a five year amortization rule.
    Reason for OTS Difference: Policy decision to minimize unnecessary 
disincentives for issuance of subordinated debt and to avoid unduly 
penalizing pre-FIRREA issuances of MCI.
    8. Limitation on Subordinated Debt: The Banking Agencies limit 
subordinated debt to 50 percent of core capital. OTS has no limit on 
the amount of subordinated debt that can count as supplementary 
capital.
    Reason for OTS Difference: Policy decision to encourage issuance of 
supplementary capital.
    9. Non-residential Construction and Land Loans: OTS requires the 
amount of these loans above an 80 percent LTV ratio to be deducted from 
total capital (with a five year phase-in). The Banking Agencies place 
the whole loan amount in the 100 percent risk-weight category.
    Reason for OTS Difference: Policy decision to ensure appropriate 
capital against risk of these assets. OTS experience indicates that 
high LTV ratio land loans and nonresidential construction loans present 
particularly high levels of risk.
    10. FSLIC/FDIC-covered Assets: OTS places these assets in the zero 
percent risk-weight category. The Banking Agencies generally place 
these assets in the 20 percent risk-weight category.
    Reason for OTS Difference: Policy decision to ensure appropriate 
capital against risk of these assets. OTS notes that these government 
guaranteed obligations are supported by a ``backup'' call on the United 
States Treasury.
    11. Mutual Funds: In general, OTS establishes the risk weighting 
for mutual funds on the asset with the highest capital requirement 
actually held by the mutual fund. The Banking Agencies base their 
capital charge on the highest risk-weighted asset that is a permissible 
investment by the mutual fund. OTS allows, on a case-by-case basis, 
``pro-rata'' risk-weighting of investments in mutual funds, based on 
the assets of the mutual fund (i.e., if 90 percent of a mutual fund's 
assets are 20 percent risk-weight assets and 10 percent are 100 percent 
risk-weight assets, we may allow 90 percent of the investment in 20 
percent risk-weight category and 10 percent in the 100 percent risk-
weight category). The Banking Agencies do not allow banks to pro-rate 
mutual fund investments between risk-weight categories.
    Reason for OTS Difference: Policy decision to ensure appropriate 
capital against risk of these assets. OTS believes that allowing 
institutions to pro-rate their investments and focus on actual assets 
ensures that savings associations hold capital in an amount essentially 
equivalent to that required if they directly held the assets in which 
the mutual fund invested.
    12. Capital Requirement on Holding Companies: FRB applies the risk-
based capital requirements to bank holding companies; OTS does not 
apply them to thrift holding companies.
    Reason for OTS Difference: OTS policy decision to not impose 
capital requirements on corporate entities that do not pose a risk to 
the deposit insurance fund.
    13. Agricultural Loan Losses: The Banking Agencies, due to a 
statutory requirement, allow such losses to be deferred (and, 
effectively, allow these losses to be ``included'' in supplementary 
capital). OTS does not allow such losses to be deferred or included in 
assets or capital.
    Reason for OTS Difference: OTS has no statutory requirement to 
allow such deferred losses in assets or capital.
    14. Income Capital Certificates (``ICCs'') and Mutual Capital 
Certificates (``MCCs''): OTS allows inclusion in supplementary capital. 
Because these items do not exist in the banking industry, the Banking 
Agencies do not address them.
    Reason for OTS Difference: ICCs/MCCs are counted as supplementary 
capital due to their being functionally equivalent to net worth 
certificates (which are required, by statute, to be included in 
capital).
    15. Restrictions on Hybrid Capital Instruments: The Banking 
Agencies' capital rules contain certain restrictions on hybrid capital 
instruments (priority of debt, etc.). OTS does not have these 
restrictions in its capital rule (rather, they are elsewhere in OTS 
regulations or policy statements).
    Reason for OTS Difference: Policy decision to retain flexibility to 
adapt to innovations in capital instruments. (There is no difference in 
practice.)

Attachment II

Summary of Differences in Accounting Practices

    Differences by each agency in accounting or supervisory reporting 
practices may cause differences in the amount of regulatory capital 
maintained by depository institutions. These differences are the result 
of an evolutionary process that primarily reflects historical agency 
philosophy and industry trends. A summary of these differences is 
presented below.

1. Futures and Forward Contracts

    OTS practice is to follow generally accepted accounting principles 
(``GAAP''). In accordance with SFAS 80, when hedging criteria are 
satisfied, the accounting for the futures contract is to be 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 gains and losses in 
accordance with GAAP.
    The Banking Agencies do not follow GAAP, but require that banks 
report changes in the market value of futures contracts even when used 
as hedges in the current period's income statement. However, futures 
contracts used to hedge mortgage banking operations are reported in 
accordance with GAAP.

2. Excess Servicing Fees

    OTS practice is to follow GAAP in valuing excess servicing fees. 
When loans are sold with servicing retained and the stated servicing 
fee rate differs materially from a normal servicing fee rate, the sales 
price should be adjusted in determining the gain or loss from the sale 
of the loans. This provides for the recognition of a normal fee in each 
subsequent year that servicing continues on the loans. The gain 
recorded at the date of sale cannot be larger than the gain assuming 
the loans were sold servicing released. The subsequent valuation of the 
excess servicing is adjusted based upon anticipated prepayment rates 
and interest rates.
    The Banking Agencies follow GAAP for residential mortgage loan 
pools. For all other loans (including individual residential mortgage 
loans), the Banking Agencies do not follow GAAP. In those cases, they 
require that excess servicing fees retained on loans sold be reported 
as realized over the contractual life of the transferred asset.

3. In-Substance Defeasance of Debt

    OTS practice is to follow GAAP. In accordance with SFAS 76, when a 
debtor irrevocably places risk-free monetary assets in a trust solely 
for satisfying the debt and the possibility that the debtor will be 
required to make further payments is remote, the debt is considered 
extinguished. The transfer can result in a gain or loss in the current 
period.
    The Banking Agencies do not follow GAAP. The Banking Agencies 
continue to report the defeased debt as a liability and the securities 
contributed to the trust as assets with no recognition of any gain or 
loss on the transaction.

4. Sales of Assets with Recourse

    OTS practice is to follow GAAP. A transfer of receivables with 
recourse is recognized as a sale if (i) the transferor surrenders 
control of the future economic benefits, (ii) the transferor's 
obligation under the recourse provisions can be reasonably estimated, 
and (iii) the transferee cannot require repurchase of the receivables 
except pursuant to the recourse provisions.
    However, in the calculation of OTS risk-based capital, certain off-
balance sheet conversions are performed that result in capital being 
required for the risk retained. See further discussion of capital 
differences with respect to this item in Attachment I, Capital 
Differences.
    The practice of the Banking Agencies is generally to report 
transfers of receivables with recourse as sales only when the 
transferring institution (i) retains no risk of loss from the assets 
transferred and (ii) has no obligation for the payment of principal or 
interest on the assets transferred. As a result, assets transferred 
with recourse are reported as financings, not sales.
    However, this general rule does not apply to the transfer of 
mortgage loans under one of the government programs: Government 
National Mortgage Association, FNMA, and FHLMC. Transfers of mortgages 
under one of these programs are automatically treated as sales. 
Furthermore, private transfers of mortgages are also reported as sales 
under the rules of the FRB and OCC if the transferring institution does 
not retain a significant risk of loss on the assets transferred.

5. Negative Goodwill

    OTS permits negative goodwill to offset goodwill reported as an 
asset.
    The Banking Agencies require that negative goodwill be reported as 
a liability, not netted against goodwill assets.

6. Push-Down Accounting

    OTS requires push-down accounting when there is at least a 90 
percent change in ownership.
    The Banking Agencies require push-down accounting when there is at 
least a 95 percent change in ownership.

7. Offsetting of Amounts Related to Certain Contracts

    OTS practice is to follow GAAP. It is a general accounting 
principle that the offsetting of assets and liabilities in the balance 
sheet is improper except where a right of setoff exists. FASB 
Interpretation No. 39, ``Offsetting of Amounts Related to Certain 
Contracts'' (FIN 39), effective in 1994, defines right of setoff and 
specifies that four conditions must be met to net assets and 
liabilities, as well as off-balance sheet instruments.
    The three Banking Agencies are planning to adopt FIN 39 solely for 
on-balance sheet items arising from off-balance sheet derivatives. The 
Call Report's existing guidance generally prohibits netting of assets 
and liabilities.

8. Specific Valuation Allowance for and Charge-offs of Troubled Loans

    Prior to September 30, 1993, OTS required specific valuation 
allowances or charge-offs for troubled loans based on the net 
realizable value of the collateral. Effective September 30, 1993, OTS 
issued a revised policy that requires charge-offs or specific valuation 
allowances against a loan when its book value exceeds its ``value,'' as 
defined. The ``value'' is either the present value of the expected 
future cash flows discounted at the loan's effective interest rate, the 
observable market price of the loan, or the fair value of the 
collateral. This revised policy, which is similar to the requirements 
of FASB Statement No. 114, narrows the differences between banks and 
thrifts.
    The Banking Agencies generally consider real estate loans, where 
repayment is expected to come solely from the collateral that secures 
the loan, to be ``collateral dependent.'' For such a loan, any portion 
of the loan balance that is not adequately secured by the value of the 
collateral, and that can be clearly identified as uncollectible, should 
be charged off. This approach is consistent with GAAP applicable to 
banks.

    Dated: February 23, 1994.

    By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-5049 Filed 3-4-94; 8:45 am]
BILLING CODE 6720-01-P