[Federal Register Volume 60, Number 28 (Friday, February 10, 1995)]
[Rules and Regulations]
[Pages 7903-7908]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3364]



=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 95-02]
RIN 1557-AB14


Capital Adequacy: Deferred Tax Assets

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

ACTION: Final rule.

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

SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
amending its capital adequacy rules with respect to deferred tax 
assets. This final rule limits the amount of certain deferred tax 
assets that a bank may include in Tier 1 capital for risk-based capital 
and leverage capital purposes.
    The OCC, in consultation with the Board of Governors of the Federal 
Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), 
and the Office of the Thrift Supervision (OTS) (banking agencies), 
developed this final rule in response to the Financial Accounting 
Standards Board's (FASB) issuance of Statement of Financial Accounting 
Standards No. 109, ``Accounting for Income Taxes'' (FAS 109), in 
February 1992. The banking agencies adopted the provisions of FAS 109 
for reporting in quarterly Consolidated Reports of Condition and Income 
(Call Reports) beginning January 1, 1993. This reporting change 
increased the amount of net deferred tax assets that a bank may record 
on its balance sheet. This final rule will ensure that national banks 
do not place excessive reliance on deferred tax assets to satisfy the 
minimum capital adequacy requirements.

EFFECTIVE DATE: April 1, 1995.

FOR FURTHER INFORMATION CONTACT: Thomas G. Rees, Professional 
Accounting Fellow, Office of the Chief National Bank Examiner, (202) 
874-5180; Eugene W. Green, Deputy Chief Accountant, Office of the Chief 
National Bank Examiner, (202) 874-5180; Roger Tufts, Senior Economic 
Advisor, Office of the Chief National Bank Examiner, (202) 874-5070; 
Ronald Shimabukuro, Senior Attorney, Legislative and Regulatory 
Activities Division, (202) 874-5090, Office of the Comptroller of the 
Currency, Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Background

    In February 1992, the FASB issued FAS 109. FAS 109 provides 
guidance on how to account for income taxes, including deferred tax 
assets, and was effective for fiscal years beginning on or after 
December 15, 1992. FAS 109 generally allows a bank to report certain 
deferred tax assets it could not previously recognize, which has the 
effect of increasing bank capital levels. Consequently, the OCC and the 
other banking agencies were concerned about the impact of the change on 
the financial institutions they regulate, especially regarding their 
reported capital levels.
    FAS 109--Deferred tax assets are assets that reflect, for financial 
reporting purposes, the benefits of certain aspects of tax laws and 
rules. Under FAS 109, a bank reports deferred tax assets that arise 
from: (1) Tax carryforwards, and (2) deductible temporary differences. 
Tax carryforwards are deductions or credits that a bank cannot use for 
current tax purposes, but may carry forward to reduce taxable income or 
income taxes payable in a future period [[Page 7904]] or periods. For 
example, when a bank's tax deductions exceed its tax revenues, the 
result is a net operating loss. Such losses may be used to recover 
taxes paid in prior years (the carryback period) or may be carried 
forward to reduce a bank's taxable income in a future period. The 
situation is similar for some tax credits that a bank cannot use in the 
current tax period. The bank will realize the benefit of deferred tax 
assets arising from tax carryforwards if it generates sufficient 
taxable income in the permissible carryforward period.
    Temporary differences arise when a bank records financial events or 
transactions in one period on the bank's books and recognizes them in 
another period, or periods, on its tax return. There are two types of 
temporary differences--deductible and taxable. Deductible temporary 
differences reduce a bank's future taxable income. When a bank records 
an addition to its allowance for loan and lease losses, it records that 
amount as an expense on its books. However, the bank may be unable to 
take the tax deductions for such losses until it charges off the loans 
and realizes the losses. The chargeoffs typically occur in subsequent 
periods. Thus, a bank creates a deferred tax asset when it adds an 
amount to the allowance on the books, but charges it off in a future 
period.
    Taxable temporary differences produce additional taxable income in 
future periods. For example, a bank may depreciate its bank building 
using an accelerated depreciation method on its tax return but may use 
a straight-line method when recording depreciation on its books. As a 
result, the bank's tax depreciation will be less than its book 
depreciation in certain future periods. This taxable temporary 
difference will cause the bank to have higher taxable income in those 
future periods.
    A bank may only realize deferred tax assets arising from deductible 
temporary differences by: (1) Recovering taxes paid in prior years, (2) 
offsetting taxable temporary differences, or (3) earning sufficient 
future taxable income. Consequently, if deferred tax assets arise from 
deductible temporary differences and exceed the amount of recoverable 
taxes paid in prior years plus offsetting taxable temporary 
differences, the bank will only realize such deferred tax assets if it 
generates sufficient taxable income in the carryforward period. 
Hereafter, these deferred tax assets, and deferred tax assets arising 
from tax carryforwards, will be called ``deferred tax assets that are 
dependent upon future taxable income.''
    FAS 109 allows a bank to record deferred tax assets that are 
dependent upon future taxable income. However, the bank must establish 
a reserve to adjust the recorded deferred tax asset to the amount that 
it is more likely than not (i.e., likelihood of more than 50 percent) 
to realize. A bank assesses the probability of realization based on its 
prospects of earning taxable income in the future. The statutory 
carryforward period of 15 years provides a limit on the amount of the 
assessment.

Supervisory Concerns Regarding Deferred Tax Assets

    Before adoption of FAS 109, regulatory policy generally limited the 
recognition of net deferred tax assets to the bank's potential tax 
carryback amount. In other words, a bank could only record an asset to 
the extent it potentially could file for a tax refund if all book and 
tax timing differences reversed at the report date.
    Because FAS 109 allows a bank to record a greater amount of 
deferred tax assets than under previous policy, the OCC and the other 
banking agencies were concerned about the effect of the accounting 
standard on bank capital adequacy. Specifically, the OCC was concerned 
that FAS 109 would allow banks to include excessive amounts of deferred 
tax assets that are dependent upon future taxable income as part of 
regulatory capital.
    Whether a bank can realize such assets depends on whether it 
generates enough taxable income during the carryforward period. As new 
products evolve and market conditions change, a bank's current 
financial condition and outlook for future income can change rapidly. 
Such changes make predicting future taxable income more difficult. For 
many banks, including sound and well-managed banks, the judgment about 
the likelihood that the bank will realize deferred tax assets that are 
dependent upon future taxable income is highly subjective. Inaccurate 
estimates could cause a bank to overstate its deferred tax assets and 
its capital position. Therefore, allowing banks to recognize 
significant amounts of assets based on subjective estimates could pose 
a risk to the deposit insurance funds.
    Additionally, the OCC is concerned about the effect of these 
changes on a bank that is experiencing financial difficulty. Such banks 
often have net operating loss carryforwards. As a result, these 
troubled institutions potentially could record deferred tax assets 
under FAS 109, even though their realistic prospects for generating 
sufficient future taxable income are uncertain. As a troubled bank's 
condition deteriorates, it is less likely to realize the financial 
benefit of deferred tax assets that are dependent upon future taxable 
income. In such instances, FAS 109 generally requires the bank to 
reduce its recorded net deferred tax asset by increasing the asset's 
valuation allowance. The result is a charge to earnings that will 
reduce the bank's regulatory capital at precisely the time it needs 
capital the most.
    To address these concerns, on August 3, 1992, under the auspices of 
the Federal Financial Institutions Examination Council (FFIEC), the 
OCC, along with the other banking agencies requested public comment (57 
FR 34135) on alternative approaches for the regulatory capital and 
reporting treatment of deferred tax assets. Based on the comments 
received, the FFIEC agreed to adopt FAS 109 for regulatory reporting 
effective January 1, 1993.
    After discussing the comments and suggestions received, the OCC and 
the other banking agencies remained concerned about the impact of 
deferred tax assets that are dependent upon future taxable income on 
regulatory capital. The OCC believes that many financially sound banks 
will have net deferred tax assets arising from deductible temporary 
differences that exceed their taxable temporary differences and the 
bank's carryback potential. Since many of these deferred tax assets 
will be realized, the OCC agreed that banks should recognize some 
amount of these assets in regulatory capital. The OCC and the other 
banking agencies concluded they could adequately address their 
supervisory concerns by placing a limit on the amount of such assets 
that a bank could include in regulatory capital. This approach 
maintained consistency between generally accepted accounting principles 
(GAAP) and regulatory reporting.
    Proposed Rule--In December 1993, the OCC issued a proposed rule to 
amend its capital adequacy rules with respect to deferred tax assets 
(58 FR 68065, December 23, 1993). The FRB (58 FR 8007, February 11, 
1993), and the FDIC ( 58 FR 26701, May 5, 1993) published similar 
proposed rules.
    The OCC proposed to limit the amount of deferred tax assets that 
are dependent upon future taxable income that a bank may include in 
regulatory capital to the lesser of:
    (1) The amount of deferred tax assets expected to be realized 
within one year of the quarter-end report date, based on a bank's 
projection of future taxable income (exclusive of tax carryforwards and 
reversals of existing temporary differences) for that year, including 
the effect of tax-planning strategies [[Page 7905]] expected to be 
implemented during that year, or
    (2) 10 percent of Tier 1 capital net of goodwill and other 
disallowed intangible assets.
    Banks have been calculating and reporting the amount of ``Deferred 
tax assets disallowed for regulatory capital purposes'' in the Call 
Reports since March 31, 1993.
    Comments Received on the Proposed Rule--The comment period for the 
OCC's proposed rule closed on January 24, 1994. The OCC received a 
total of 17 comments on the proposed rule. The commenters consisted of 
13 banks, three trade groups, and one public accounting firm.
    All but one commenter expressed opposition to some portion or all 
of the proposed rule. Eleven of the commenters indicated that a limit 
on the amount of deferred tax assets included in regulatory capital was 
unnecessary. However, six commenters agreed that some form of limit on 
deferred tax assets was appropriate.
    The primary concern of the commenters is that the adoption of a 
deferred tax limit could increase regulatory burden because regulatory 
capital policy would be more restrictive than GAAP. Several commenters 
indicated that no limit on deferred tax assets is necessary because FAS 
109 only permits the reporting of deferred tax assets that have a 
better than 50% probability of being realized. Other commenters 
indicated that the proposed one year limit was too restrictive because 
there is a 15-year carryforward period in which a bank could realize 
the deferred tax assets.
    After carefully considering the comments, the OCC believes that a 
limit on deferred tax assets is necessary. Estimates of future taxable 
income are very subjective. If a bank does not realize these estimates, 
the bank insurance fund is exposed to losses because bank capital would 
be overstated. Moreover, unlike certain types of intangible assets that 
a bank can include in regulatory capital at a higher allowable 
percentage, a bank cannot sell deferred tax assets.
    The GAAP standard allows a bank to record deferred tax assets that 
they may not realize for up to 15 years. The OCC believes that allowing 
deferred tax assets to constitute a significant portion of a bank's 
capital is inappropriate, since deferred tax assets may have only a 
slightly better than 50% possibility of realization. Furthermore, other 
than the likelihood of realization, there is no specific limit under 
GAAP on the amount of deferred tax assets that a bank can record. 
Without a limit on deferred tax assets, a bank could include 
significant amounts of deferred tax assets in capital.
    In addition, the OCC believes that GAAP should guide rather than 
establish regulatory capital policy. When formulating GAAP, the 
accounting policy makers do not consider the safety and soundness 
objectives of the capital standards applicable to banks. Therefore, 
differences between the GAAP and regulatory capital definitions are 
justified.

Final Rule

    The OCC believes that since banks can only realize deferred tax 
assets that are dependent upon future taxable income when they achieve 
positive taxable earnings, a limit based on estimated future earnings 
is rational. In general, a bank's projections up to 12 months into the 
future are reliable. However, the OCC believes the reliability of such 
projections decreases significantly for periods further in the future. 
Therefore, having a one year cutoff reduces the risk of a bank 
misstating its deferred tax assets because its estimate of future 
income is inaccurate. Furthermore, the one year cutoff increases the 
likelihood of a bank achieving the earnings required to realize the 
recorded deferred tax asset.
    The OCC believes that this final rule will ensure that such 
deferred tax assets do not make up an unduly large portion of a bank's 
regulatory capital base. The upper limit of 10 percent of Tier 1 
capital provides a ``backstop'' that addresses this concern. This 
requirement also reduces the risk that an overly optimistic estimate of 
future taxable income will cause the bank to significantly misstate the 
deferred tax asset.
    The OCC believes that the combination of the one year future income 
approach and the 10% of Tier 1 capital approach will provide an 
effective and efficient limit on deferred tax assets. Consequently, 
under the final rule, the amount of deferred tax assets that are 
dependent upon future taxable income that a bank may include in its 
regulatory capital is limited to the lesser of:
    (1) The amount of deferred tax assets the institution expects to 
realize within one year of the quarter-end report date, based on its 
projection of future taxable income (exclusive of tax carryforwards and 
reversal of existing temporary differences for that year), or
    (2) 10 percent of Tier 1 capital, net of goodwill and all 
identifiable intangible assets other than purchased mortgage servicing 
rights and purchased credit card relationships, and before any 
disallowed deferred tax assets are deducted.
    Banks should note that under this final rule there is no limit on 
deferred tax assets that a bank can realize from taxes paid in prior 
carryback years and from reversals of existing taxable temporary 
differences. In addition, to determine the limit on deferred tax 
assets, a bank should assume that all temporary differences fully 
reverse as of the report date. Also, estimates of future taxable income 
should include the effect of tax planning strategies the bank is 
planning to implement within one year of the quarter-end report date to 
realize net operating loss or tax credit carryforwards that will 
otherwise expire during the year. With respect to the Call Reports, 
banks will continue to report deferred tax assets according to GAAP.
    The OCC believes that the limit on deferred tax assets will pose 
little or no additional burden on banks. Banks already follow FAS 109 
for Call Report purposes and already are making projections of taxable 
income. Additionally, the OCC has revised the 10 percent Tier 1 capital 
calculation to be more straightforward and less burdensome. Under the 
proposed rule, the 10 percent of Tier 1 capital calculation is based on 
Tier 1 capital net of goodwill and other disallowed intangible assets. 
As proposed, the 10 percent of Tier 1 capital calculation would have 
required banks to first determine the amount of disallowed intangible 
assets. After consideration of this matter, the OCC believes that this 
additional computation is not necessary. Consequently, the final rule 
requires that the 10 percent of Tier 1 capital calculation be based on 
Tier 1 capital net of goodwill and all identifiable intangible assets 
other than purchased mortgage servicing rights and purchased credit 
card relationships, and before any disallowed deferred tax assets are 
deducted. While this calculation may result in a slightly higher Tier 1 
capital base, the OCC believes that this calculation is simpler and 
imposes less burden on banks.
    In response to the comments received, the OCC has decided to 
incorporate the following additional provisions to reduce the 
regulatory burden of this final rule.
    Method of Estimating Future Income--In Banking Bulletin 93-15, 
Supplement 1 (BB 93-15), the OCC specified a method of estimating 
future taxable income. BB 93-15 provided a specific method for treating 
originating and reversing tax timing differences in the calculation of 
one year's future taxable income. Several commenters 
[[Page 7906]] stated that other less restrictive methods of estimating 
future taxable income, which are acceptable under GAAP, should also be 
allowed.
    After considering these comments, the OCC concluded that banks may 
calculate one year's future taxable income based on either the specific 
method in BB 93-15 or another reasonable method that is consistent with 
GAAP. Since banks routinely make their own projections of future 
taxable income and have this information readily available, this 
modification reduces regulatory burden.
    Gross-up of Intangibles--FAS 109 requires a bank to record higher 
amounts of intangible assets acquired in nontaxable purchase business 
combinations than they would record under previous GAAP for the same 
transaction. The OCC capital adequacy rules require banks to deduct 
certain intangible assets from regulatory capital. Consequently, under 
FAS 109, a bank acquiring such assets would reflect a lower amount of 
regulatory capital after deducting these disallowed intangibles than it 
would have under previous accounting standards even though there is no 
additional risk to capital.
    Several commenters indicated that the OCC should not require banks 
to deduct the additional amounts of identifiable intangible assets 
required by FAS 109. The OCC agrees with these commenters. Since the 
higher intangible amounts occur simply because of an accounting rule 
change, the higher amounts do not present additional risk to capital. 
Therefore, because the increased value of the intangible assets pose no 
additional risk to capital adequacy, this final rule permits a bank to 
net the deferred tax liability associated with a disallowed intangible 
asset against that intangible asset in the calculation of its limit on 
deferred tax assets.
    Under this approach, a bank would only deduct the net amount of the 
disallowed intangible from Tier 1 capital. Netting is not allowed 
against purchased mortgage servicing rights and purchased credit card 
receivables since a bank deducts these assets for capital adequacy 
purposes only if they exceed specified limits on intangible assets. 
Consequently, this final rule results in the same treatment for 
intangibles resulting from purchase business combinations as under 
previous GAAP. However, to ensure this benefit is not double counted, a 
deferred tax liability netted in this manner could not also be netted 
against deferred tax assets when determining the amount of deferred tax 
assets that are dependent upon future taxable income.
    Leveraged Leases--Similar to the ``gross up of intangibles'' issue, 
the OCC agrees with one commenter who recommended that the final rule 
include a specific provision relating to the accounting treatment for 
leveraged leases. The commenter noted the valuation of a leveraged 
lease acquired in a purchase business combination gives recognition to 
the estimated future tax effect of the remaining cash flows of the 
lease. Therefore, any future tax liabilities related to acquired 
leveraged leases are included in the valuation of the leveraged leases 
and are not shown on the balance sheet as deferred taxes payable. This 
artificially increases the amount of deferred tax assets for 
institutions that acquire a leveraged lease portfolio. The commenter 
suggested that banks treat the future taxes payable included in the 
valuation of a leverage lease portfolio as a reversing taxable 
temporary difference available to support the recognition of deferred 
tax assets.
    Although this situation will not affect many banks, the OCC agrees 
with this commenter. Accordingly, when applying the limit on deferred 
tax assets, a bank may use the deferred tax liabilities embedded in the 
carrying value of a leveraged lease to reduce the amount of deferred 
tax assets subject to the limit.
    Tax Jurisdictions--In a response to the proposed rule, a commenter 
suggested that a bank calculate one overall limit on deferred tax 
assets to cover all tax jurisdictions in which the bank operates. This 
provision would reduce burden on large banks that operate in numerous 
jurisdictions because they would not need to separately calculate a 
limit on deferred tax assets for each jurisdiction. FAS 109 already 
requires a jurisdiction-by-jurisdiction approach. The OCC agrees with 
the commenter that the separate tax jurisdiction requirement in the 
overall limit on deferred tax assets is unnecessary. Therefore, to 
reduce regulatory burden, a bank may calculate one overall limit on 
deferred tax assets that covers all tax jurisdictions in which the bank 
operates.
    Timing--A bank may use the future taxable income projections for 
its closest fiscal year (adjusted for any significant changes that have 
occurred or are expected to occur) when applying the limit on deferred 
tax assets at a report date other than year-end. Therefore, a bank will 
not have to prepare a new projection each quarter. Several commenters 
requested this treatment because it reduces the frequency that a bank 
is required to revise their estimate of future taxable income.
    Except for these provisions, banks should follow FAS 109 in 
determining regulatory capital. Net deferred tax assets included in 
bank Call Reports under FAS 109, that exceed the limit on deferred tax 
assets, should be deducted from Tier 1 capital. Banks should also 
deduct the amount of disallowed deferred tax assets from both total 
assets and from risk-weighted assets in determining their leverage 
capital and risk-based capital ratios. Deferred tax assets included in 
risk-based capital continue to have a risk weight of 100%.

Other Considerations

    Separate Entity Method--Consistent with the policy of applying GAAP 
individually to banks of a holding company, each subsidiary bank must 
determine its limit on deferred tax assets separately from the holding 
company. Under this ``separate entity method,'' a subsidiary of a 
holding company is treated as a separate taxpayer, and its tax 
provision is calculated on this basis.
    In some cases, a bank's holding company may not have the financial 
capability to reimburse the bank for tax benefits derived from the 
bank's carryback of net operating losses or tax credits. In these 
cases, the amount of carryback potential the bank may consider in 
calculating the limit on deferred tax assets is limited to the amount 
which it could reasonably expect to have refunded by its parent.
    Several commenters suggested that the OCC eliminate the separate 
entity approach because GAAP does not require it and because the 
approach ignores Federal tax law and binding intercompany tax 
settlement agreements. The OCC considered these comments. However, the 
banking agencies generally require banks to file regulatory reports 
using a separate entity approach, and consistency between the reports 
would be reduced if the OCC permitted a bank to use other methods for 
calculating deferred tax assets. Therefore, the OCC decided that banks 
must continue to report and calculate the limit on deferred tax assets 
under the separate entity method.
    Tax Effects of Financial Accounting Standard 115 (FAS 115)--The 
OCC, along with the other banking agencies, adopted Statement of 
Financial Accounting Standards No. 115, ``Accounting for Certain 
Investments in Debt and Equity Securities'' (FAS 115), for regulatory 
reporting purposes effective January 1, 1994. FAS 115 requires net 
unrealized holding gains and losses on available-for-sale securities to 
be recorded net of taxes. Consequently, when a bank recognizes 
[[Page 7907]] the FAS 115 unrealized holding gains and losses on 
available-for-sale securities in financial reports, it also must 
include any deferred tax effects of these unrealized gains and losses 
in its determination of the deferred tax asset.
    For example, if a bank has an unrealized gain in the available-for-
sale portfolio, it must record a deferred tax liability for the taxes 
that would be due if they sold the assets and realized the gain. On the 
other hand, if a bank has an unrealized loss in the available-for-sale 
portfolio, the bank should include the tax benefits from realizing that 
loss when it records its deferred tax asset.
    The OCC and the other banking agencies recently agreed that banks 
should exclude the net unrealized holding gains and losses on 
available-for-sale debt securities from regulatory capital 
calculations. Therefore, it would be consistent to exclude the deferred 
tax assets and liabilities relating to the FAS 115 gains and losses on 
available-for-sale debt securities in the calculation of the allowable 
amount of deferred tax assets for regulatory capital.
    It has been argued that failure to eliminate these FAS 115 deferred 
tax effects would cause a bank to overstate or understate the amount of 
deferred tax assets disallowed for regulatory capital purposes. For 
example, a bank with a net unrealized loss in its available-for-sale 
account would report a related deferred tax asset in its Call Report. 
If the bank does not remove the deferred tax asset relating to the net 
unrealized loss, and has net deferred tax assets that exceed the 
allowable amount stipulated in this final rule, the bank will overstate 
the amount of deferred tax assets that it must deduct from regulatory 
capital. Conversely, if the bank has a net unrealized gain on 
available-for-sale securities, and does not remove its deferred tax 
effect, the calculation of the limit on deferred tax assets will 
understate the amount of deferred tax assets the bank must deduct from 
regulatory capital.
    The OCC believes that identifying and removing the deferred tax 
components that specifically relate to FAS 115 may be very complicated, 
and in some situations may place significant burden on banks. 
Therefore, the OCC has decided to allow, but not require, banks to 
eliminate the FAS 115 deferred tax items before calculating the limit 
on deferred tax assets. Consequently, a bank that does not want to deal 
with the complexity of the adjustment can reduce its implementation 
burden. On the other hand, a bank that wants to achieve greater 
precision may make such adjustments. Whether or not a bank chooses to 
adjust for the FAS 115 deferred tax effects, it must apply that 
approach consistently in future calculations of the limit on deferred 
tax assets.

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. When considered with 
the change in the reporting of deferred tax assets in the Call Report, 
this final rule permits banks to include more deferred tax assets in 
regulatory capital than under previous policy. However, this change 
will not significantly impact banks of any size.

Executive Order 12866

    The OCC has determined that this final rule is not a significant 
regulatory action under Executive Order 12866.

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, part 3 of title 12, 
chapter I, of the Code of Federal Regulations is amended as set forth 
below.

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

    1. The authority citation for part 3 continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note, 
3907, and 3909.

    2. Paragraph (a) of Sec. 3.2 is revised to read as follows:


Sec. 3.2  Definitions.

* * * * *
    (a) Adjusted total assets means the average total assets figure 
required to be computed for and stated in a bank's most recent 
quarterly Consolidated Report of Condition and Income (Call Report) 
minus end-of-quarter intangible assets and deferred tax assets that are 
deducted from Tier 1 capital. The OCC reserves the right to require a 
bank to compute and maintain its capital ratios on the basis of actual, 
rather than average, total assets when necessary to carry out the 
purposes of this part.
* * * * *
    3. In appendix A to part 3, section 1, paragraphs (c)(9) through 
(c)(29) are redesignated as paragraphs (c)(10) through (c)(30) and a 
new paragraph (c)(9) is added to read as follows:

Appendix A to Part 3--Risk-Based Capital Guidelines

Section 1. Purpose, Applicability of Guidelines, and Definitions.

* * * * *
    (c) * * *
    (9) Deferred tax assets means the tax consequences attributable 
to tax carryforwards and deductible temporary differences. Tax 
carryforwards are deductions or credits that cannot be used for tax 
purposes during the current period, but can be carried forward to 
reduce taxable income or taxes payable in a future period or 
periods. Temporary differences are financial events or transactions 
that are recognized in one period for financial statement purposes, 
but are recognized in another period or periods for income tax 
purposes. Deductible temporary differences are temporary differences 
that result in a reduction of taxable income in a future period or 
periods.
* * * * *
    4. In appendix A to part 3, section 2, paragraph (c)(1) is 
revised, a new paragraph heading is added to paragraph (c)(2), 
paragraph (c)(3) is redesignated as paragraph (c)(4) and a heading 
is added to newly designated paragraph (c)(4) and the introductory 
text is revised, and a new paragraph (c)(3) is added, to read as 
follows:
* * * * *

Section 2. Components of Capital.

* * * * *
    (c) * * *
    (1) Deductions from Tier 1 capital. The following items are 
deducted from Tier 1 capital before the Tier 2 portion of the 
calculation is made:
    (i) All goodwill subject to the transition rules contained in 
section 4(a)(1)(ii) of this appendix A;
    (ii) Other intangible assets, except as provided in section 
2(c)(2) of this appendix A; and
    (iii) Deferred tax assets, except as provided in section 2(c)(3) 
of this appendix A, that are dependent upon future taxable income, 
which exceed thelesser of either:
    (A) The amount of deferred tax assets that the bank could 
reasonably expect to realize within one year of the quarter-end call 
report, based on its estimate of future taxable income for that 
year; or
    (B) 10% of Tier 1 capital, net of goodwill and all intangible 
assets other than purchased mortgage servicing rights and purchased 
credit card relationships, and before any disallowed deferred tax 
assets are deducted.
    (2) Qualifying intangible assets. * * *
    (3) Deferred tax assets--(i) Net unrealized gains and losses on 
available-for-sale securities. Before calculating the amount of 
deferred tax assets subject to the limit in section 2(c)(1)(iii) of 
this appendix A, a bank may eliminate the deferred tax effects of 
any net unrealized holding gains and losses on available-for-sale 
debt securities. Banks report these net unrealized holding gains and 
losses in their Call Reports as a separate component of equity 
capital, but exclude them from the definition of common 
stockholders' equity for regulatory capital [[Page 7908]] purposes. 
A bank that adopts a policy to deduct these amounts must apply that 
approach consistently in all future calculations of the amount of 
disallowed deferred tax assets under section 2(c)(1)(iii) of this 
appendix A.
    (ii) Consolidated groups. The amount of deferred tax assets that 
a bank can realize from taxes paid in prior carryback years and from 
reversals of existing taxable temporary differences generally would 
not be deducted from capital. However, for a bank that is a member 
of a consolidated group (for tax purposes), the amount of carryback 
potential a bank may consider in calculating the limit on deferred 
tax assets under section 2(c)(1)(iii) of this appendix A, may not 
exceed the amount that the bank could reasonably expect to have 
refunded by its parent holding company.
    (iii) Nontaxable Purchase Business Combination. In calculating 
the amount of net deferred tax assets under section 2(c)(1)(iii) of 
this appendix A, a deferred tax liability that is specifically 
associated with an intangible asset (other than purchased mortgage 
servicing rights and purchased credit card relationships) due to a 
nontaxable purchase business combination may be netted against that 
intangible asset. Only the net amount of the intangible asset must 
be deducted from Tier 1 capital. Deferred tax liabilities netted in 
this manner cannot also be netted against deferred tax assets when 
determining the amount of net deferred tax assets that are dependent 
upon future taxable income.
    (iv) Estimated future taxable income. Estimated future taxable 
income does not include net operating loss carryforwards to be used 
during that year or the amount of existing temporary differences 
expected to reverse within the year. A bank may use future taxable 
income projections for their closest fiscal year, provided it 
adjusts the projections for any significant changes that occur or 
that it expects to occur. Such projections must include the 
estimated effect of tax planning strategies that the bank expects to 
implement to realize net operating losses or tax credit 
carryforwards that will otherwise expire during the year.
    (4) Deductions from total capital. The following items are 
deducted from total capital:
* * * * *
    Dated: February 3, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 95-3364 Filed 2-9-95; 8:45 am]
BILLING CODE 4810-33-P