[Federal Register Volume 59, Number 137 (Tuesday, July 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17435]


[[Page Unknown]]

[Federal Register: July 19, 1994]


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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. 94-12]

 

Report to the Congress Regarding the Differences in Capital and 
Accounting Standards Among the Federal Banking and Thrift Agencies

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Report to the Committee on Banking, Housing, and Urban Affairs 
of the United States Senate and to the Committee on Banking, Finance 
and Urban Affairs of the United States House of Representatives 
regarding differences in capital and accounting standards among the 
federal banking and thrift agencies.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) has 
prepared this 1993 report as required by the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA). FDICIA requires the OCC 
to provide a report to Congress on any differences in capital standards 
among the federal financial regulatory agencies. This notice is 
intended to satisfy the FDICIA requirement that the report be published 
in the Federal Register.

FOR FURTHER INFORMATION CONTACT:Roger Tufts, Senior Economic Advisor, 
Office of the Chief National Bank Examiner, (202) 874-5070, or Ronald 
Shimabukuro, Senior Attorney, Banking Operations and Assets Division, 
(202) 874-4460, Office of the Comptroller of the Currency, 250 E Street 
SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION: Section 121 of FDICIA, Pub. L. 102-242, 105 
Stat. 2236 (December 19, 1991), requires each federal banking agency to 
report annually to the Committee on Banking, Housing, and Urban Affairs 
of the Senate and the Committee on Banking, Finance and Urban Affairs 
of the House of Representatives on any differences between the capital 
standards used by the OCC and the capital standards used by the other 
financial institutions supervisory agencies. The text of that report is 
provided as follows:

Differences in Capital and Accounting Standards Among the Federal 
Banking and Thrift Agencies,\1\ Report to the Committee on Banking, 
Housing, and Urban Affairs of the United States Senate and to the 
Committee on Banking, Finance and Urban Affairs of the United States 
House of Representatives, 1993

    This annual report details the differences in the capital 
requirements of the OCC, the Federal Reserve Board (FRB), the Federal 
Deposit Insurance Corporation (FDIC) and the Office of Thrift 
Supervision (OTS).\2\ This report is divided into three sections. The 
first section briefly discusses recent efforts of the agencies to 
promote more consistent capital standards; the second section discusses 
the differences in the capital standards; and the third section 
discusses the differences in accounting standards.
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    \1\This report is made pursuant to section 121 of the Federal 
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) which 
superseded section 1215 of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989 (FIRREA).
    \2\The OCC is the primary supervisor of national banks. Bank 
holding companies and state-chartered banks that are members of the 
Federal Reserve System are supervised by the FRB. State-chartered 
nonmember banks are supervised by the FDIC. The OTS supervises 
savings and loan associations.
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A. Recent Efforts of the Agencies

    Representatives of each of the agencies meet regularly to discuss 
capital and related accounting issues as part of an ongoing effort to 
promote consistent interpretation and application of capital 
requirements and to develop uniform capital standards. The agencies are 
committed to achieve full uniformity in their capital and accounting 
standards. During this past year, the banking agencies have been 
extremely busy in these efforts. The agencies have issued several final 
and proposed rules relating to:
     Identifiable intangible assets.
     Multifamily housing loans.
     Interest rate risk.
     Risks from concentrations of credit and nontraditional 
activities.
     Collateralized transactions.
     Bilateral netting contracts.
     Deferred tax assets (FAS 109).
     Unrealized gains and losses on securities available for 
sale (FAS 115).
    In addition, the agencies issued changes to regulatory reporting 
requirements for sales of other real estate owned (OREO) as part of the 
initiative to implement the President's March 10, 1993, program to 
improve the availability of credit to businesses and individuals. The 
reporting change for OREO generally made the regulatory reporting 
requirements consistent with generally accepted accounting principles.

B. Differences in Capital Standards Among the Federal Financial 
Institution Regulatory Agencies

    In 1989 the banking agencies and OTS adopted the risk-based capital 
guidelines. The risk-based capital guidelines impose capital 
requirements based on the credit risk profiles of the assets held by an 
institution and provide a means to measure off-balance sheet risks. The 
risk-based capital guidelines implement the Accord on International 
Convergence of Capital Measurement and Capital Standards of July 1988, 
as adopted by the Committee on Banking Regulation and Supervisory 
Practice (Basle Accord). Under the risk-based capital guidelines bank 
and thrift institutions are required to maintain total capital\3\ of at 
least 8 percent of risk-weighted assets. The risk-based capital 
requirements are the minimum capital requirements.
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    \3\Total capital consists of Tier 1 capital plus Tier 2 capital 
less required deductions. Tier 1 capital is defined to include 
common stockholders' equity, noncumulative perpetual preferred stock 
and related surplus, and minority interests in consolidated 
subsidiaries. Tier 2 capital is generally defined to include the 
allowance for loan and lease losses, up to 1.25% of risk weighted 
assets, cumulative perpetual preferred stock and other qualifying 
subordinated debt and hybrid capital instruments.
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    Most institutions are expected to, and generally do, maintain 
capital well above this minimum level.
    In addition to the risk-based capital guidelines, the federal 
banking agencies impose leverage capital requirements based on the 
ratio of Tier 1 capital to total assets. The leverage capital 
requirements work in conjunction with the risk-based capital guidelines 
and impose minimum capital requirements regardless of the risk weights 
assigned to the assets held by the institution.
    Although the agencies have adopted common leverage capital 
requirements and risk-based capital guidelines, there remain some 
technical differences in language and interpretation of the capital 
standards among the agencies. These minor differences are detailed 
below.
1. Leverage Capital Requirements
    Under the leverage capital requirements, highly-rated banks 
(composite CAMEL rating of 1) must maintain a minimum leverage capital 
ratio of 3 percent of Tier 1 capital to total assets. All other banks 
must maintain an additional 100 to 200 basis points of Tier 1 capital 
to total assets.
    In addition to the leverage ratio requirements, thrift institutions 
also must maintain a tangible equity ratio of 1.5 percent of total 
assets. This additional tangible equity requirement is required by the 
Financial Institution Reform, Recovery and Enforcement Act (FIRREA). 
The OTS is currently amending its leverage ratio requirement to make it 
more consistent with the leverage ratio requirements of the other 
banking agencies. The only notable difference will be the definition of 
core capital. While the definition of core capital will generally be 
consistent with the definition of Tier 1 capital, certain adjustments, 
such as supervisory goodwill,\4\ will result in some differences.
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    \4\With respect to supervisory goodwill, it should be noted that 
supervisory goodwill for thrifts will be phased out by the end of 
1994.
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2. Equity Investments
    In general, commercial banks are not permitted to invest in equity 
securities, not are they generally permitted to engage in real estate 
investment or development activities. To the extent that a bank is 
permitted to hold equity securities (as with securities obtained in 
connection with debts previously contracted), the risk-based capital 
guidelines of the banking agencies require these investments to be 
risk-weighted at 100 percent. However, on a case-by-case basis, the 
banking agencies may require deduction of equity investments from the 
capital of the parent bank or impose other requirements in order to 
assess an appropriate capital charge above the minimum capital 
requirements. The capital treatment of equity investments is also 
discussed in the section on operating subsidiaries.
    The OTS risk-based capital requirements require thrift institutions 
to deduct equity investment from capital over a phased-in period ending 
July 1, 1994. This phased-in period may be extended to July 1, 1996, by 
the OTS on a case-by-case basis. In the interim, the portion of these 
equity investments not deducted will be risk-weighted at 100 percent.
3. Assets subject to Guarantee Arrangements by the Federal Savings and 
Loan Insurance Corporation (FLSIC)/Federal Deposit Insurance 
Corporation
    The risk-based capital guidelines of the banking agencies assign 
assets subject to FLSIC or FDIC guarantees to the 20 percent risk-
weight category, the same category to which claims on depository 
institutions and government-sponsored agencies are assigned. The OTS 
assigns these assets to the zero percent risk weight category.
4. Limitation on Subordinated Debt and Limited-Life Preferred Stock
    Consistent with the Basle Accord, the banking agencies limit the 
amount of subordinated debt and limited-life preferred stock that may 
be included in Tier 2 capital to 50 percent of Tier 1 capital. This 
limitation is in addition to the overall limitation on Tier 2 capital 
which restricts the amount of Tier 2 capital that may be included in 
total capital to 100 percent of Tier 1 capital. In addition, the risk-
based capital guidelines of the banking agencies require that 
subordinated debt and limited-life preferred stock by discounted 20 
percent in each of the five years prior to maturity.
    While subordinated debt and limited-life preferred stock do provide 
some measure of protection to the FDIC insurance fund, neither are a 
permanent source of funds. Moreover, subordinated debt cannot absorb 
losses while the bank continues to operate as a going concern. This 
limitation permits the inclusion of some subordinated debt and limited-
life preferred stock in capital, while assuring that permanent 
stockholders' equity capital remains the predominant element in bank 
regulatory capital.
    The OTS risk-based capital guidelines do not contain any sublimit 
on the total amount of limited-life instruments that may be included 
within Tier 2 capital. In addition, the OTS allows thrift institutions 
the option of either (1) discounting maturing capital instruments 
(issued on or after November 7, 1989) by 20 percent a year over the 
last five years of their term, or (2) including the full amount of such 
instruments, provided that the amount maturing in any of the next seven 
years does not exceed 20 percent of the total capital of the thrift 
institution.
5. Subsidiaries
    The banking agencies generally require that all significant 
majority-owned subsidiaries be consolidated with the parent 
organization for both regulatory reporting and capital purposes. This 
requirement is consistent with the Basle Accord and is designed to 
ensure that all risk exposures of the banking organization are taken 
into account.
    While significant majority-owned subsidiaries are generally 
consolidated, in some instances the OCC does not require a bank to 
consolidate certain subsidiaries. In these instances the bank's 
investment in the subsidiary constitutes a capital investment in the 
subsidiary. The OCC risk-based capital guidelines specifically provide 
that capital investment in an unconsolidated banking or financial 
subsidiary must be deducted from the total capital of the bank. In 
addition, the OCC risk-based capital guidelines permit the OCC to 
require the deduction of investment in other subsidiaries and 
associated companies on a case-by-case basis.
    Similarly, the FRB risk-based capital guidelines generally require 
the deduction of investments in unconsolidated banking and finance 
subsidiaries. With respect to the investment in other types of 
unconsolidated subsidiaries (other than banking and finance 
subsidiaries) or joint ventures and associated companies, the FRB does 
retain flexibility in the capital treatment. The FRB may require the 
investments in such subsidiaries (1) to be deducted, (2) to be 
appropriately risk-weighted against the proportionate share of the 
assets of the entity, (3) to be consolidated line-by-line with the 
entity, or (4) otherwise to require the parent organization to maintain 
capital above the minimum standard sufficient to compensate for any 
risks associated with the investment.
    In addition, the FRB risk-based capital guidelines also explicitly 
permit the deduction of investments in certain subsidiaries that, while 
consolidated for accounting purposes, are not consolidated for certain 
specified supervisory or regulatory purposes. For example, the FRB 
deducts investments in, and unsecured advances to, Section 20 
securities subsidiaries from the capital of the parent bank holding 
company. The FDIC accords similar treatment to securities subsidiaries 
of state-chartered nonmember banks. Moreover, under the FDIC rules, 
investments in, and extensions of credit to, certain mortgage banking 
subsidiaries are also deducted in computing the capita of the parent 
bank. Neither the OCC nor the FRB has a similar requirement with regard 
to mortgage banking subsidiaries.
    The deduction of investments in subsidiaries from the capital of 
the parent bank 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 bank. In deducting investments in, and 
advances to, certain subsidiaries from the capital of the parent bank, 
the banking agencies expect the parent bank to satisfy or exceed 
minimum regulatory capital requirements without reliance on the capital 
invested in the subsidiary. In assessing the overall capital adequacy 
of the parent bank, the banking agencies may also consider the parent 
bank's fully consolidated capital position.
    Under OTS risk-based capital guidelines, a distinction is made 
between subsidiaries engaged in activities permissible for national 
banks and subsidiaries engaged in activities ``impermissible'' for 
national banks. This distinction is mandated by the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989. 
Subsidiaries of thrift institutions that engage only in activities 
permissible for national banks 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, including 
loans, in subsidiaries that engage in impermissible activities are 
deducted in determining the capital adequacy of the parent thrift 
institution. The remaining assets (the percent of assets corresponding 
to the nondeducted portion of the investment in the subsidiary) are 
consolidated with the parent thrift. However, investments, including 
loans, outstanding as of April 12, 1989, to subsidiaries that were 
engaged in impermissible activities prior to that date are 
grandfathered and will be phased-out of capital over a transition 
period that expires on July 1, 1994. The transition period may be 
extended to July 1, 1996, by the OTS on a case-by-case basis. During 
this transition period, investments in subsidiaries engaged in 
impermissible activities that have not been phased out of capital are 
to be consolidated on a pro rata basis.
6. Qualifying Multifamily Mortgage Loans
    Pursuant to Section 618(b) of the Resolution Trust Corporation 
Refinancing, Restructuring, and Improvement Act of 1991 (RTCRRIA), the 
banking agencies and OTS have amended their risk-based capital 
guidelines to lower the risk weight of certain multifamily housing 
loans, and securities backed by such loans, from 100 percent to 50 
percent. Specifically, loans secured by multifamily residential 
properties may qualify for a 50 percent risk weight subject to the 
following conditions:
    (1) The loan must be secured by a first mortgage on a multifamily 
residential property consisting of five or more dwelling units;
    (2) The original amortization of principal and interest must not 
exceed 30 years;
    (3) The original minimum maturity for repayment of principal must 
not be less than seven years;
    (4) All principal and interest payments must have been made on a 
timely basis in accordance with the terms of the loan for at least one 
year immediately preceding the risk weighting of the loan in the 50 
percent risk weight category;
    (5) The loan cannot be otherwise 90 days or more past due, or 
carried in nonaccrual status;
    (6) The loan must be in accordance with applicable lending limit 
requirements and prudent underwriting standards; and
    (7) If the rate of interest does not change over the term of the 
loan, then the current loan amount must not exceed 80 percent of the 
current value of the property, and in the most recent fiscal year, the 
ratio of annual net operating income generated by the property to 
annual debt service on the loan must not be less than 120 percent; or
    (8) If the rate of interest changes over the term of the loan, then 
the current loan amount must not exceed 75 percent of the current value 
of the property, and in the most recent fiscal year, the ratio of 
annual net operating income generated by the property to annual debt 
service on the loan must not be less than 115 percent.
7. Goodwill
    As required by FIRREA, the federal banking agencies do not allow 
banks or FDIC-supervised savings banks to include goodwill as capital 
for either risk-based capital guidelines or the leverage capital 
requirements. Bank holding companies included goodwill acquired prior 
to March 12, 1988, in Tier 1 for the purposes of the risk-based capital 
guidelines (although not for leverage capital requirements) until the 
end of 1992. After 1992, all goodwill must be deducted from bank 
holding company capital.
    As permitted by FIRREA, OTS allows ``qualifying supervisory 
goodwill'' to be included as part of core capital through year-end 
1994. After this date, thrift institutions must satisfy their minimum 
core capital requirement without reliance on goodwill.
8. Nonresidential Construction and Land Loans
    Under the risk-based capital guidelines of the banking agencies, 
loans for real estate development and construction are assigned to the 
100 percent risk-weight category. Reserves or charge-offs are required 
for such loans when weaknesses or losses develop. The banking agencies 
have no requirement for an automatic charge-off when the amount of a 
loan exceeds the fair value of the property pledged as collateral for 
the loan.
    OTS generally also assigns these loans to the 100 percent risk 
weight category. However, if the amount of the loan exceeds 80 percent 
of the fair value of the property, that excess portion must be deducted 
from capital in accordance with a phase-in rule which ends on July 1, 
1994.
9. Mortgage-Backed Securities (MBS)
    The risk-based capital guidelines of the banking agencies generally 
assign a risk weight to privately-issued MBSs according to the 
underlying assets, but in no case would it be assigned to the zero 
percent risk-weight category. Privately-issued MBSs where the direct 
underlying assets are mortgages, are generally assigned a risk weight 
of 50 percent or 100 percent. Privately-issued MBSs that have 
government agency or government-sponsored agency securities as their 
direct underlying assets are generally assigned to the 20 percent risk-
weight category.
    The OTS assigns privately-issued high quality mortgage-related 
securities to the 20 percent risk-weight category. However, these are 
privately-issued MBSs with AA or better investment ratings from private 
rating companies.
    With respect to other MBSs, the federal banking agencies assign to 
the 100 percent risk weight category certain MBSs, including interest-
only strips, residuals, and similar instruments that can absorb more 
than their pro rata share of loss. The OCC, in conjunction with the 
other banking agencies and the OTS, on January 10, 1992, issued more 
specific guidance as to the types of ``high types'' MBSs that require a 
100 percent risk weight.
10. Assets Sold With Recourse
    In general, recourse is any risk of loss retained by an institution 
when it sells an asset. Recourse arrangements allow the purchaser of an 
aset to seek recovery against the originating institution that sold the 
asset under the conditions in the agreement. Recovery may take various 
forms, but usually permits the buyer to ``put,'' or resell, the asset 
back to the selling institution or to obtain reimbursement from the 
selling institution for the amount of the loss. A typical condition for 
recourse would be if the asset ceases to perform satisfactorily. 
Therefore, recourse provisions generally expose the originating 
institution to loss associated with the asset.
    Generally, under the risk-based capital guidelines of the banking 
agencies, sales of assets involving any recourse must be reported as 
financings, so that the assets are retained on the balance sheet of the 
selling bank. This has the effect of requiring a full leverage and 
risk-based capital charge whenever assets are sold with recourse, 
including limited recourse.
    The OCC has recently revised its risk-based capital guidelines to 
clarify the definition of recourse and to permit a limited exception 
for transactions involving the sale of certain mortgage loan pools 
where the selling bank has retained only minimal recourse and generally 
has provided for all potential losses.
    The FRB generally applies a capital charge to any recourse 
arrangement that is the equivalent of an off-balance sheet guarantee, 
regardless of the nature of the transaction that gives rise to the 
recourse obligation. As with the OCC, the FRB provides an exception for 
pools of one-to four-family residential mortgages and for certain farm 
mortgage loans. These recourse transactions are reported by the bank as 
sales, removing them from leverage capital requirements. These 
transactions, which are the equivalent of off-balance sheet guarantees, 
involve the type of credit risk that is addressed by the risk-based 
capital guidelines. However, some questions have been raised because of 
the treatment afforded these transactions for the purposes of the 
leverage capital requirements. The FRB has clarified its risk-based 
capital guidelines to ensure that recourse sales involving residential 
mortgages are to be taken into account for determining compliance with 
risk-based capital requirements. The FDIC has also clarified their 
risk-based capital guidelines on this issue in 1993.
    In general, OTS also requires a full capital charge against assets 
sold with recourse. However, for certain limited recourse arrangements, 
OTS limits the capital charge to the lesser of the amount of recourse 
or the actual amount of capital that would otherwise be required 
against that asset, that is, the normal full capital charge.
    At present the banking agencies do not provide for any special 
treatment of securitized assets. Some securitized asset arrangements 
may involve the issuance of senior and subordinated classes of 
securities against pools of assets. When a bank originates such a 
transaction by placing loans that it owns in a trust and retains any 
portion of the subordinated securities, the banking agencies require 
that capital be maintained against the entire amount of the asset pool. 
Regardless of whether a bank acquires a subordinated or senior security 
in a pool of assets that it did not originate, the banking agencies 
assign both the investment in the subordinated piece or the senior 
piece to the 100 percent risk-weight category. The banking agencies 
review these instruments to determine if additional reserves, asset 
write-downs, or capital are necessary to protect the bank.
    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.
    In 1990, under the auspices of the FFIEC, the banking agencies and 
the OTS issued for public comment a fact finding paper pertaining to 
the full range of issues relating to recourse arrangements. These 
issues include the definition of ``recourse'' and the appropriate 
reporting and capital treatments to be applied to recourse 
arrangements, as well as so-called recourse servicing arrangements and 
limited recourse. The objective of this effort was to develop in a 
comprehensive and consistent fashion an appropriate and uniform 
approach to recourse arrangements for capital adequacy, reporting, and 
other regulatory purposes. The comments received were very extensive 
and generally illustrated the complexity of the subject. In view of the 
significance and complexity of this project, the FFIEC in December 1990 
decided to narrow the scope of the initial phase of the recourse 
project to credit-related recourse arrangements that involve limited 
recourse or that support a third party's assets.
    A recourse working group, composed of representatives from all four 
agencies, presented a report and recommendations to the FFIEC in August 
1992 and were directed to carry out a study of the impact of their 
recommendations on depository institutions, financial markets, and 
other affected parties. The interagency working group completed a study 
in early 1993. As a result of that study, the interagency working group 
has revised several of its recommendations to reflect market practice 
especially for securitized assets. A joint interagency notice of 
proposed rulemaking and advance notice of proposed rulemaking was 
published in the Federal Register on May 25, 1994 (59 Fed. Reg. 27116).
11. Agricultural Loan Loss Amortization
    In determining regulatory capital, those banks accepted into the 
agricultural loan loss amortization program pursuant to Title VIII of 
the Competitive Equality Banking Act of 1987 are permitted to defer and 
amortize losses incurred on agricultural loans between January 1, 1984, 
and December 31, 1991. The program also applies to losses incurred 
between January 1, 1983, and December 31, 1991, as a result of 
reappraisals and sales of agricultural and other real estate owned and 
agricultural personal property. These losses must be fully amortized 
over a period not to exceed seven years and, in any case, must be fully 
amortized by year-end 1998. Thrift institutions are not eligible to 
participate in the agricultural loan loss amortization program 
established by this statute.
12. Treatment of Junior Liens on One- to Four-Family Properties
    In some cases, a banking organization may make two loans secured by 
a single piece of residential property--one loan secured by a first 
lien, the other by a second lien. The OCC and OTS generally assign 
first liens on one- to four-family properties to the 50 percent risk-
weight category. All second liens on residential property are assigned 
to the 100 percent risk-weight category, regardless of whether the 
institution also holds the first lien. The assignment of first lien 
mortgages to the 50 percent risk-weight category is based upon the 
requirement that banks will adhere to prudent underwriting standards 
with respect to the maximum loan-to-value ratio, the borrower's paying 
capacity and the long-term expectations for the real estate market in 
which the bank is lending.
    The FDIC similarly assigns all second liens to the 100 percent 
risk-weight category. However, in determining the risk-weight of the 
first lien, the FDIC considers the first and second liens together to 
assess whether the first lien satisfies prudent underwriting standards. 
When evaluated together, if the first and second liens are within the 
prudent loan-to-value ratio and satisfy all other underwriting 
standards, then the first lien will be assigned to the 50 percent risk-
weight category; otherwise, it will be assigned to the 100 percent risk 
category.
    The FRB and OTS consider the first and second liens as a single 
loan, provided there are no intervening liens. Therefore, the total 
amount of these transactions may be assigned to the 100 percent risk-
weight category, if, in the aggregate, the two loans exceeds a prudent 
loan-to-value ratio and, therefore, do not qualify for the 50 percent 
risk-weight category. This approach is intended to avoid possible 
circumvention of the capital requirements and capture the risks 
associated with the combined transactions. However, if the total amount 
of the transaction does satisfy a prudent loan-to-value ratio and other 
underwriting standards, then both the first and second liens may be 
assigned to the 50 percent risk-weight category.
    Although there are some technical differences in the methodology, 
all the agencies have the same ability to adjust the capital 
requirements of an individual bank to account for imprudent loans 
secured by first liens on one- to four-family properties.
13. Pledged Deposits and Nonwithdrawable Accounts
    The OTS capital guidelines permit thrift institutions to include in 
capital certain pledged deposits and nonwithdrawal accounts that 
satisfy specified OTS criteria. Income capital certificates and mutual 
capital certificates held by OTS may also be included in capital by 
thrift institutions. These instruments are not relevant to commercial 
banks, and, therefore, they are not addressed in the risk-based capital 
guidelines of the banking agencies.
 14. Mutual Funds
    The three banking agencies assign all of the holdings of a bank 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. The purposes of this is to take into account the 
maximum degree of risk to which a bank may be exposed when investing in 
a mutual fund in view of the fact that the future composition and risk 
characteristics of the fund cannot be known in advance.
    The OTS applies a capital charge based on the riskiest asset that 
is actually held by the mutual fund at a particular time. In addition 
the OTS guidelines also permit, on a case-by-case basis, investments in 
mutual funds to be allocated on a pro rata basis dependent on the 
actual composition of the fund.
15. Interest Rate Risk
    The risk-based capital guidelines were designed primarily as a 
broad measure of the relative credit risk of the assets. However, the 
banking agencies and OTS are continuing their efforts to refine the 
risk-based capital guidelines to take into account other noncredit 
risks, including interest rate risk. The agencies are required to 
consider interest rate risk, as well as the risk of concentrations of 
credit and the risks of nontraditional activities, under Section 305 of 
FDICIA.
    The OTS has adopted an interest rate risk component to its risk-
based capital guidelines, which became effective on January 1, 1994. 
Under this new rule, thrift institutions with an above normal level of 
interest rate risk will be subject to a capital charge commensurate to 
their risk exposure.
    The banking agencies also are developing an interest rate risk 
component. On September 14, 1993, the banking agencies published a 
joint notice of proposed rulemaking in the Federal Register and are 
currently in the process of drafting a final rule.
16. Concentrations of Credit and Nontraditional Activities
    As required by Section 305 of FDICIA, the banking agencies and the 
OTS published a joint proposal in the Federal Register on February 22, 
1994. The proposed rule would amend the capital standards of the 
banking agencies and the OTS by explicitly identifying concentration of 
credit risk and certain risks arising from nontraditional activities as 
important factors in assessing an institution's overall capital 
adequacy. The banking agencies and the OTS are currently reviewing the 
comment letters received and are drafting a final rule.
17. Collateralized Transactions
    In December 1992, the FRB amended its risk-based capital guidelines 
to lower the risk-weight on loans collateralized by cash or government 
securities from 20 percent to zero percent. In August 1993, the OCC 
issued a proposed rule that would similarly lower the risk-weight on 
loans collateralized by cash or government securities from 20 percent 
of zero percent for national banks. The OCC is currently drafting a 
final rule. The FDIC and OTS are also considering this issue.
18. Deferred Tax Assets
    On December 23, 1993, the OCC published in the Federal Register a 
proposed rule on deferred tax assets. This proposal was developed 
jointly by the banking agencies and the OTS in response to Financial 
Accounting Standard (FAS) Number 109 which was adopted for regulatory 
reporting purposes beginning January 1, 1993. The proposed rule would 
amend the capital standards to limit the amount of certain deferred tax 
assets that may be included in an institution's Tier 1 capital. The 
other banking agencies and the OTS have issued or are considering 
similar proposals. The OCC will be working with the other banking 
agencies and the OTS in drafting a final rule.
19. Unrealized Gains and Losses on Securities Available for Sale
    On April 18, 1994, the OCC published in the Federal Register a 
proposed rule on unrealized gains and losses on securities available 
for sale. This proposal was developed jointly by the banking agencies 
and OTS in response to FAS 115, which was adopted for regulatory 
reporting purposes beginning December 15, 1993. The proposed rule would 
amend the definition of ``common stockholders' equity'' in the capital 
guidelines to include both unrealized gains and losses on securities 
available for sale. The other banking agencies and the OTS have issued 
or are planning to issue similar proposals. The OCC will be working 
with the other banking agencies and the OTS in drafting a final rule.
20. Bilateral Netting Contracts
    The banking agencies and the OTS have been meeting to discuss an 
amendment to the risk-based capital guideline to provide for the 
recognition of bilateral netting contracts for the purpose of 
determining the capital requirement for off-balance sheet rate 
contracts. In May of 1994, the OCC and the FRB have issued a joint 
proposed rule that generally would permit an institution to net 
positive and negative mark-to-market values of interest rate and 
foreign exchange rate contracts with a single counterparty if those 
rate contracts are subject to qualifying bilateral netting contracts. 
The OTS and the FDIC are considering the issuance of similar proposed 
rules.

C. Interagency Differences in Accounting Principles

    The OCC, as well as the other banking agencies, requires banks to 
follow generally accepted accounting principles (GAAP), except when the 
agency determines that a specific accounting standard under GAAP does 
not meet the accounting objectives included in Section 121 of FDICIA. 
In such cases, the use of accounting principles more stringent than 
GAAP may be required. For the most part, the regulatory accounting 
standards for all commercial banks, whether regulated by the OCC, the 
FRB, or the FDIC, are prescribed in the Instructions to the Report of 
Condition and Income (Call Report).
    The Call Report instructions are established by the FFIEC and are 
generally consistent with GAAP. Differences in interpretations between 
the OCC and the other banking agencies may occur. However, such 
differences are usually infrequent and involve immaterial or emerging 
issues, which the FFIEC has not yet reviewed on a joint agency basis.
    Under Section 121 of FDICIA, the federal banking agencies must 
require financial institutions to use accounting principles ``no less 
stringent than GAAP.'' The banking agencies believe that GAAP generally 
satisfies the accounting objectives included in FDICIA Section 121. 
However, as previously noted, in certain circumstances, accounting 
principals more stringent than GAAP are required to satisfy accounting 
objectives included in FDICIA.
    The OTS requires each thrift institution to file the Thrift 
Financial Report. That report is filed on a basis consistent with GAAP, 
as it is applied by thrift institutions, which differs in a few 
respects from GAAP as it is applied by banks.
    These differences in accounting principles between the banks and 
thrift institutions may cause differences in financial statement 
presentation and in amounts of regulatory capital required to be 
maintained by depository institutions.
    The following summarizes the significant differences in accounting 
standards between the Thrift Financial Report and the Call Report. 
These differences generally arise because of either: (1) differences 
between regulatory reporting standards and GAAP applicable to banks, or 
(2) differences in GAAP applicable to banks and GAAP applicable to 
thrift institutions.
1. Futures and Forward Contracts
    Differences in this area result because the banking regulators 
generally require future and forward contracts to be marked to market, 
whereas thrift institutions may defer gains and losses resulting from 
hedging activities. The banking agencies do not follow GAAP, but 
require banks to report changes in the market value of futures and 
forward contracts, even when used as hedges, in current income. 
However, futures contracts used to hedge mortgage banking operations 
are reported in accordance with GAAP. This issue will be reexamined as 
part of an ongoing project on accounting for derivatives.
    The OTS requires thrift institutions to follow GAAP to account for 
futures contracts. Accordingly, when specified hedging criteria are 
satisfied, the accounting for the futures contract is matched with the 
accounting for the hedged item. Changes in the market value of the 
futures contract are recognized in income when the income effects of 
the hedged item are recognized. This reporting can result in the 
deferral of both gains and losses. Although there is no specific GAAP 
for forward contracts, the OTS applies these same principles to forward 
contracts.
2. Push-Down Accounting
    When a depository institution is acquired by a holding company in a 
purchase transaction, the holding company is required to revalue all of 
the assets and liabilities of the depository institution at fair value 
at the time of acquisition. When push-down accounting is applied, the 
same fair value adjustments recorded by the parent holding company are 
also recorded at the depository institution level.
    All of the agencies require the use of push-down accounting when 
there has been a substantial change in the ownership of the 
institution. However, differing standards have been applied to 
determine when this substantial change has occurred.
    The three banking agencies require push-down accounting when there 
is at least a 95 percent change in ownership of the institution. This 
approach is consistent with interpretations of the Securities and 
Exchange Commission.
    The OTS requires push-down accounting when there is at least a 90 
percent change of ownership.
3. Excess Service Fees
    Thrift institutions consider excess servicing fees in the 
determination of the gain or loss on a loan sale, whereas banks 
generally recognize the excess fee over the life of the loan.
    The banking agencies require banks to follow GAAP for residential 
first mortgage loans. This requires that when loans are sold with 
servicing retained and the stated servicing fee is sufficiently higher 
than a normal servicing fee, the sales price is adjusted to determine 
the gain or loss from the sale. This allows additional gain recognition 
at the time of sale and recognizes a normal servicing fee in each 
subsequent year. This gain cannot exceed the gain assuming the loans 
were sold with servicing released.
    For all other loans, the banking agencies require that excess 
servicing fees retained on loans sold be recognized over the 
contractual life of the transferred assets.
    The OTS follows GAAP in valuing all excessive service fees. 
Therefore, the accounting stated above for sales of mortgage loans with 
excess servicing at banking institutions would apply to all loan sales 
with excess servicing at thrift institutions.
4. In-Substance Defeasance of Debt
    The banking agencies do not permit banks to defease their 
liabilities in accordance with FASB Statement Number 76, whereas thrift 
institutions may eliminate defeased liabilities from the balance sheet.
    The banking agencies report in-substance defeased debt as a 
liability and the securities contributed to a trust as assets with no 
recognition of any gain or loss on the transaction.
    The OTS accounts for debt that has been in-substance defeased in 
accordance with GAAP.
    Therefore, 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.
5. Sales of Assets with Recourse
    The banking agencies generally do not allow banks to report sales 
of receivables if any risk of loss is retained. Thrift institutions 
report sales when the risk of loss can be estimated in accordance with 
FASB Statement Number 77.
    The banking agencies generally 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, assets transferred with recourse are reported 
as financings, not sales.
    However, this rule does not apply to the transfer of mortgage loans 
under certain government programs (GNMA, FNMA, etc.). Transfers of 
mortgages under one of these programs are automatically treated as 
sales. Furthermore, private transfers of pools of mortgages are also 
reported as sales if the transferring institution does not retain more 
than an insignificant risk of loss on the assets transferred.
    The OTS follows GAAP to account for a transfer of all receivables 
with recourse. A transfer of receivables with recourse is recognized as 
a sale if: (1) the seller 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 FFIEC has a study under way involving the topic of transfers 
with recourse. As part of this study, the staff of the OCC is reviewing 
the reporting requirements for sales of assets with recourse. The 
purpose of this study is to determine whether a reduction or 
elimination of the differences between regulatory reporting 
requirements and GAAP may be achieved in this area.
6. Negative Goodwill
    The three banking agencies require that negative goodwill5 be 
reported as a liability, and not netted against the goodwill asset.
---------------------------------------------------------------------------

    \5\Negative goodwill typically is created when a bank purchases 
assets for less than the determined fair value of the assets.
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    The OTS permits negative goodwill to offset the goodwill assets 
resulting from other acquisitions.
7. Offsetting of Amounts Related to Certain Contracts
    FASB Interpretation Number 39 (FIN 39) became effective in 1994. 
FIN 39 allows the offsetting of certain assets and liabilities on the 
balance sheet (e.g., loans, deposits, etc.), as well as the netting of 
assets and liabilities arising from off-balance sheet derivative 
instruments, when four conditions are met. These conditions relate to 
whether a valid right of offset exists. The three banking agencies are 
planning to adopt FIN 39 sometime in 1994 solely for on-balance sheet 
amounts arising from conditional and exchange contracts (e.g., interest 
rate swaps, options, etc.). The Call Report's existing guidance, which 
generally prohibits netting of assets and liabilities, will continue to 
be followed in all other cases.
    The OTS policy on netting of assets and liabilities is consistent 
with GAAP and FIN 39.
8. Specific Valuation Allowance for and Charge-Offs of Troubled Loans
    The banking agencies generally consider real estate loans that lack 
acceptable cash flows or other repayment sources to be ``collateral 
dependent.'' When the fair value of the collateral of such a loan has 
declined below book value, the loan is reduced to fair value. This 
approach is consistent with GAAP applicable to banks.
    Prior to September 30, 1993, the OTS required specific valuation 
allowances for troubled loans based on the net realizable value of the 
collateral. Effective September 30, 1993, the OTS issued a revised 
policy that requires a specific valuation allowance against, or partial 
charge-off, of 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, 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.

    Dated: July 11, 1994.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 94-17435 Filed 7-18-94; 8:45 am]
BILLING CODE 4810-33-M