[Federal Register Volume 59, Number 74 (Monday, April 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9271]
[[Page Unknown]]
[Federal Register: April 18, 1994]
VOL. 59, NO. 74
Monday, April 18, 1994
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 94-05]
RIN 1557-AB14
Capital Adequacy; Net Unrealized Holding Gains and Losses on
Available-for-Sale Securities
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
proposing to amend its capital adequacy rules to revise the definition
of common stockholders' equity to include unrealized holding gains and
losses on available-for-sale securities, net of applicable tax effects.
Inclusion of such unrealized gains and losses as a separate component
of stockholders' equity is consistent with Statement of Financial
Accounting Standards No. 115, ``Accounting for Certain Investments in
Debt and Equity Securities,'' and would keep the OCC's definition of
common stockholders' equity consistent with generally accepted
accounting principles (GAAP). As Tier 1 capital under the OCC's capital
adequacy rules is defined to include common stockholders' equity, this
proposal, if adopted, would require these net unrealized holding gains
and losses to be considered in determining the amount of an
institution's Tier 1 capital.
DATES: Comments should be submitted on or before May 18, 1994.
ADDRESSES: Comments on the OCC's proposal may be submitted to Docket
No. 94-05, Communications Division, Ninth floor, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
Comments will be available for inspection and photocopying at that
address.
FOR FURTHER INFORMATION CONTACT: Zane D. Blackburn, Chief Accountant,
(202) 874-5180; Roger Tufts, Senior Economic Advisor, Office of the
Chief National Bank Examiner, (202) 874-5070; Ronald Shimabukuro,
Senior Attorney, Bank Operations and Assets Division, (202) 874-4460,
Office of the Comptroller of the Currency.
SUPPLEMENTARY INFORMATION:
Background
Under the current OCC minimum capital requirements (leverage ratio)
and the risk-based capital guidelines set forth at 12 CFR part 3, a
major component of Tier 1 capital is common stockholders' equity.
Common stockholders' equity is defined to include (1) common stock, (2)
common stock surplus, (3) undivided profits, (4) capital reserves, (5)
adjustments for the cumulative effect of foreign currency translation,
and (6) net unrealized losses on non-current marketable equity
securities. The net unrealized losses are those recorded under
Statement of Financial Accounting Standards No. 12, ``Accounting for
Certain Marketable Securities'' (SFAS 12).
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, ``Accounting for
Certain Investments in Debt and Equity Securities,'' (SFAS 115). This
statement supersedes SFAS 12 and establishes a new component of common
stockholders' equity consisting of net unrealized holding gains and
losses on available-for-sale securities. Under SFAS 115, available-for-
sale securities are those securities which a bank does not have the
positive intent and ability to hold to maturity, but does not intend to
trade actively as part of its trading account.
In August 1993, the OCC, the Federal Reserve Board, The Federal
Deposit Insurance Corporation, and the Office of Thrift Supervision,
announced the adoption of SFAS 115 for regulatory reporting purposes.
The OCC now proposes to adopt SFAS 115 for regulatory capital purposes
as well.
SFAS 115
SFAS 115 applies for all debt securities and certain equity
securities that have readily determinable fair values. The statement
establishes new accounting and reporting requirements for such
securities effective for fiscal years beginning after December 15,
1993, but banks have the option of adopting the statement as of the end
of an earlier fiscal year. For most banks, that would be as of December
31, 1993.
SFAS 115 requires banks to divide their securities holdings among
three categories: securities held-to-maturity, trading securities, and
available-for-sale securities. Each category of security is accounted
for differently.
Held-to-Maturity
The held-to-maturity category replaces the existing held for
investment category. Presently, securities held for investment are
recorded at amortized cost. Under SFAS 115, securities in the held-to-
maturity category will be recorded at amortized cost. However, only
those securities that a bank has both the positive intent and ability
to hold to maturity may be included in this account.
This change will restrict a bank's ability to carry securities at
amortized cost. For example, if a bank has the intent to hold a
security for only an indefinite period, the security cannot be
classified as held-to-maturity. Consequently, if a security would be
sold in response to (1) changes in market interest rates and related
changes in the security's prepayment risk, (2) liquidity needs, (3)
changes in the availability of and yield on alternative investments,
(4) changes in funding sources and terms, or (5) changes in foreign
currency risk, then it must be assigned to either the available-for-
sale or trading categories.
Nonetheless, changes in circumstances may occur that cause a bank
to change its intent to hold a security to maturity. SFAS 115 notes
that a sale or transfer of a security from the held-to-maturity account
in response to events that are isolated, nonrecurring, and unusual and
that could not have been anticipated, would not necessarily call into
question the bank's intent to hold other securities to maturity.
Trading Securities
The accounting for trading securities has not changed. Trading
securities are those debt and equity securities that a bank buys and
holds principally for the purpose of selling in the near term. Trading
securities will continue to be recorded at fair value with unrealized
changes in fair value reported directly in the income statement as part
of the bank's earnings.
Available-for-Sale
All securities that are not classified as either held-to-maturity
or trading will be considered available-for-sale securities. The
available-for-sale category replaces the existing held-for-sale
category. However, it is likely to include some securities previously
considered held for investment. The accounting treatment also has
changed. Under existing accounting requirements, held-for-sale
securities are carried at the lower of cost or fair value, with the
offsetting entry reported directly in the income statement. Under SFAS
115, available-for-sale securities will be recorded at fair value and
any unrealized appreciation or depreciation will be excluded from
earnings and reported, net of applicable tax effects, as a separate
component of common stockholders' equity.
Impact of SFAS 115 on Regulatory Capital
This proposed rule would amend the OCC's capital adequacy rules by
revising the definition of common stockholders' equity. Specifically,
the proposed rule would remove the adjustment for net unrealized losses
on non-current marketable equity securities and replace it with the net
unrealized holding gains and losses on available-for-sale securities
under SFAS 115. Since common stockholders' equity is a component of
Tier 1 capital, the proposed rule would affect the calculation of an
institution's Tier 1 capital under the OCC's capital adequacy rules.
This amendment is intended to adopt SFAS 115 for regulatory capital
purposes and to ensure greater consistency with GAAP.
As discussed earlier, SFAS 115 restricts the circumstances in which
securities may be reported at amortized cost. Thus, a greater
proportion of a national bank's securities will be carried at fair
value. While this proposed rule to adopt SFAS 115 for regulatory
capital purposes will not affect reported earnings, it could result in
an increase in the volatility of regulatory capital. Under the current
interest rate environment, the precise impact of this proposed rule is
difficult to predict. Until recently, interest rates were declining.
Consequently, the fair value for most banks' securities portfolios
generally exceeded their book value. Therefore, the impact of this
proposal likely would have resulted in an increase in the regulatory
capital of national banks. However, with the recent upturn in interest
rates, it is not possible to generalize the impact of this proposed
rule on regulatory capital. Over time, as the interest rate environment
changes, the proposed rule could result in periods of lower regulatory
capital for some national banks and possibly subject a bank to
regulatory action under the OCC's prompt corrective action rules. See
12 CFR part 6. Nonetheless, while the amount of regulatory capital may
vary with changes in interest rates, banks can exercise some control
over the volatility through effective interest rate risk management
techniques.
Issues for Comment
The OCC invites comments on all aspects of this proposal regarding
the regulatory capital treatment of net unrealized holding gains and
losses on available-for-sale securities. However, the OCC specifically
seeks comment on (1) the costs and benefits of adopting SFAS 115 for
regulatory capital purposes, and (2) the extent to which banks will
adjust their behavior to manage the potential volatility in regulatory
capital if the OCC adopts the proposed rule.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, it is
hereby certified that this regulation will not have a significant
economic impact on a substantial number of small entities. Accordingly,
a regulatory flexibility analysis is not required.
This rule may increase the volatility of small banks' regulatory
capital. However, it should not lead to a significant increase in the
number of small banks that do not meet regulatory capital standards
because most small banks operate with capital levels well above
regulatory capital standards. Even if there were a significant decline
in the market value of banks' available-for-sale securities, most banks
would still meet regulatory standards.
Executive Order 12866
It has been determined that this document is not a significant
regulatory action under Executive Order 12866. This proposed rule
affects the method of calculating regulatory capital. This proposed
rule is intended to amend the capital adequacy rules to make the
definition of common stockholders' equity for regulatory capital
consistent with GAAP. This proposed rule should not have a material
impact upon national banks.
List of Subjects in 12 CFR Part 3
Administrative practice and procedure, National banks, Reporting
and recordkeeping requirements.
Authority and Issuance
For the reasons set out in the preamble, title 12, chapter I, part
3 of the Code of Federal Regulations is proposed to be amended as set
forth below.
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 is revised to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 3907, and 3909.
2. In appendix A, section 1, paragraph (c)(7) is revised to read as
follows:
Appendix A to Part 3--Risk-Based Capital Guidelines
Section 1. Purpose, Applicability of Guidelines, and Definitions.
* * * * *
(c) * * *
(7) Common stockholders' equity means common stock, common stock
surplus, undivided profits, capital reserves, adjustments for the
cumulative effect of foreign currency translation and net of
unrealized holding gains or losses on available-for-sale securities.
* * * * *
Editorial Note: This document was received by the Office of the
Federal Register on April 13, 1994.
Dated: October 25, 1993.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 94-9271 Filed 4-15-94; 8:45 am]
BILLING CODE 4810-33-P