[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