[Federal Register Volume 60, Number 125 (Thursday, June 29, 1995)]
[Notices]
[Pages 33803-33808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15930]



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

FEDERAL DEPOSIT INSURANCE CORPORATION


Differences in Capital and Accounting Standards Among the Federal 
Banking and Thrift Agencies; Report to Congressional Committees

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Report to the Committee on Banking and Financial Services of 
the U.S. House of Representatives and to the Committee on Banking, 
Housing, and Urban Affairs of the United States Senate Regarding 
Differences in Capital and Accounting Standards Among the Federal 
Banking and Thrift Agencies as of December 31, 1994.

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

SUMMARY: This report has been prepared by the FDIC pursuant to Section 
37(c) of the Federal Deposit Insurance Act (12 U.S.C. 1831n(c)). 
Section 37(c) requires each federal banking agency to report annually 
to the Committee on Banking and Financial Services of the House of 
Representatives and to the Committee on Banking, Housing, and Urban 
Affairs of the Senate any differences between any accounting or capital 
standard used by such agency and any accounting or capital standard 
used by any other such agency. The report must also contain an 
explanation of the reasons for any discrepancy in such accounting and 
capital standards and must be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Robert F. Storch, Chief, Accounting 
Section, Division of Supervision, Federal Deposit Insurance 
Corporation, 550 17th Street, NW., Washington, D.C. 20429, telephone 
(202) 898-8906.


[[Page 33804]]

SUPPLEMENTARY INFORMATION: The text of the report follows:

Report to the Committee on Banking and Financial Services of the U.S. 
House of Representatives and to the Committee on Banking, Housing, and 
Urban Affairs of the United States Senate Regarding Differences in 
Capital and Accounting Standards Among the Federal Banking and Thrift 
Agencies as of December 31, 1994

A. Introduction

    This report has been prepared by the Federal Deposit Insurance 
Corporation (FDIC) pursuant to Section 37(c) of the Federal Deposit 
Insurance Act, which requires the agency to annually submit a report to 
specified Congressional Committees describing any differences in 
regulatory capital and accounting standards among the federal banking 
and thrift agencies, including an explanation of the reasons for these 
differences. Section 37(c) also requires the FDIC to publish this 
report in the Federal Register.
    The FDIC, the Board of Governors of the Federal Reserve System 
(FRB), and the Office of the Comptroller of the Currency (OCC) 
(hereafter, the banking agencies) have substantially similar leverage 
and risk-based capital standards. While the Office of Thrift 
Supervision (OTS) employs a regulatory capital framework that also 
includes leverage and risk-based capital requirements, it differs in 
several respects from that of the banking agencies. Nevertheless, the 
agencies view the leverage and risk-based capital requirements as 
minimum standards and most institutions are expected to operate with 
capital levels well above the minimums, particularly those institutions 
that are expanding or experiencing unusual or high levels of risk.
    The banking agencies, under the auspices of the Federal Financial 
Institutions Examination Council (FFIEC), have developed uniform 
Reports of Condition and Income (Call Reports) for all commercial banks 
and FDIC-supervised savings banks. The reporting standards followed by 
the banking agencies are substantially consistent with generally 
accepted accounting principles (GAAP) as they are applied by banks. In 
the limited number of cases where the bank Call Report standards are 
different from GAAP, the regulatory reporting requirements are intended 
to be more conservative then GAAP. The OTS requires each thrift 
institution to file the Thrift Financial Report (TFR), which is 
consistent with GAAP as it is applied by thrifts. However, the 
reporting standards applicable to the TFR differ in some respects from 
the reporting standards applicable to the bank Call Report.
B. Differences in Capital Standards Among the Federal Banking and 
Thrift Agencies

B.1. Minimum Leverage Capital
    The banking agencies have established leverage capital standards 
based upon the definition of Tier 1 (or core) capital contained in 
their risk-based capital standards. These standards require the most 
highly-rated banks (i.e., those with a composite CAMEL rating of ``1'') 
to maintain a minimum leverage capital ratio of at least 3 percent if 
they are not anticipating or experiencing any significant growth and 
meet certain other conditions. All other banks must maintain a minimum 
leverage capital ratio that is at least 100 to 200 basis points above 
this minimum (i.e., an absolute minimum leverage ratio of not less than 
4 percent).
    The OTS has a 3 percent core capital and a 1.5 percent tangible 
capital leverage requirement for thrift institutions. Consistent with 
the requirements of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA), the OTS has proposed revisions to its 
leverage standard for thrift institutions so that its minimum leverage 
standard will be at least as stringent as the revised leverage standard 
that the OCC applies to national banks.
B.2. Interest Rate Risk
    Section 305 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (FDICIA) mandates that the agencies' risk-based 
capital standards take adequate account of interest rate risk. The 
banking agencies requested comment in August 1992 and September 1993 on 
proposals to incorporate interest rate risk into their risk-based 
capital standards. The agencies expect to issue another interest rate 
risk proposal for public comment during 1995. The delay in completing a 
final rule has been the result of difficulties in designing a 
meaningful measurement system for interest rate risk and efforts to 
seek international agreement on capital standards for this risk.
    In 1993, the OTS adopted a final rule which adds an interest rate 
risk component to its risk-based capital standards. Under this rule, 
thrift institutions with a greater than normal interest rate exposure 
must take a deduction from the total capital available to meet their 
risk-based capital requirement. The deduction is equal to one half of 
the difference between the institution's actual measured exposure and 
the normal level of exposure. The OTS has deferred the September 30, 
1994, effective date of its interest rate risk rule while the banking 
agencies continue their work on an interest rate risk rule for banks. 
The approach ultimately adopted by the banking agencies could differ 
from that of the OTS.
B.3. Subsidiaries
    The banking agencies consolidate all significant majority-owned 
subsidiaries of the parent organization. The purpose of this practice 
is to assure that capital requirements are related to all of the risks 
to which the bank is exposed. For subsidiaries which are not 
consolidated on a line-for-line basis, their balance sheets may be 
consolidated on a pro-rata basis, bank investments in such subsidiaries 
may be deducted entirely from capital, or the investments may be risk-
weighted at 100 percent, depending upon the circumstances. These 
options, with respect to the consolidation or ``separate 
capitalization'' of subsidiaries for the purpose of determining the 
capital adequacy of the parent organization, provide the banking 
agencies with the flexibility necessary to ensure that adequate capital 
is being provided commensurate with the actual risks involved.
    Under OTS capital guidelines, a distinction, mandated by FIRREA, is 
drawn between subsidiaries engaged in activities that are permissible 
for national banks and subsidiaries engaged in ``impermissible'' 
activities for national banks. Subsidiaries of thrift institutions that 
engage only in permissible activities 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 in, 
and loans to, subsidiaries that engage in impermissible activities are 
deducted in determining the capital adequacy of the parent. However, 
for subsidiaries which were engaged in impermissible activities prior 
to April 12, 1989, investments in, and loans to, such subsidiaries that 
were outstanding as of that date were grandfathered and were phased out 
of capital over a five-year transition period that expired on July 1, 
1994. During this transition period, investments in subsidiaries 
engaged in impermissible activities which had not been phased out of 
capital were consolidated on a pro rata basis. The phase-out provisions 
were amended by the Housing and Community 

[[Page 33805]]
Development Act of 1992 with respect to impermissible subsidiaries that 
are subject to this requirement solely by reason of their real estate 
investments and activities. The OTS may extend the transition period 
until July 1, 1996, on a case-by-case basis if certain conditions are 
met.
B.4. Intangible Assets
    The banking agencies' rules permit purchased credit card 
relationships and purchased mortgage servicing rights to count toward 
capital requirements, subject to certain limits. Both forms of 
intangible assets are in the aggregate limited to 50 percent of core 
capital. In addition, purchased credit card relationships alone are 
restricted to no more than 25 percent of an institution's core capital. 
Any purchased mortgage servicing rights and purchased credit card 
relationships that exceed these limits, as well as all other intangible 
assets such as goodwill and core deposit intangibles, are deducted from 
capital and assets in calculating an institution's core capital.
    In February 1994, the OTS issued a final rule making its capital 
treatment of intangible assets generally consistent with the banking 
agencies' rules. However, the OTS rule grandfathers preexisting core 
deposit intangibles up to 25 percent of core capital and all purchased 
mortgage servicing rights acquired before February 1990.
B.5. Capital Requirements for Recourse Arrangements
    B.5.a. Leverage Capital Requirements--The banking agencies require 
full leverage capital charges on most assets sold with recourse, even 
when the recourse is limited. This includes transactions where the 
recourse arises because the seller, as servicer, must absorb credit 
losses on the assets being serviced. The exceptions to this rule 
pertain to certain pools of first lien one-to-four family residential 
mortgages and to certain agricultural mortgage loans.
    Banks must maintain leverage capital against most assets sold with 
recourse because the banking agencies' regulatory reporting rules 
generally do not permit assets sold with recourse to be removed from a 
bank's balance sheet (see ``Sales of Assets With Recourse'' in Section 
C.1. below for further details). As a result, such assets continue to 
be included in the asset base which is used to calculate a bank's 
leverage capital ratio.
    Because the regulatory reporting rules for thrifts enable them to 
remove assets sold with recourse from their balance sheets when such 
transactions qualify for sales under GAAP, the OTS capital rules do not 
require thrifts to hold leverage capital against such assets.
    B.5.b. Low Level Recourse Transactions--The banking agencies and 
the OTS generally require a full risk-based capital charge against 
assets sold with recourse. However, in the case of assets sold with 
limited recourse, the OTS limits the capital charge to the lesser of 
the amount of the recourse or the actual amount of capital that would 
otherwise be required against that asset, i.e., the full effective 
risk-based capital charge. This is known as the ``low level recourse'' 
rule.
    The banking agencies proposed in May 1994 to adopt the low level 
recourse rule that OTS already has in place. Such action was mandated 
four months later by Section 350 of the Riegle Community Development 
and Regulatory Improvement Act of 1994 (RCDRIA). The FDIC adopted the 
low level recourse rule on March 21, 1995, and the other banking 
agencies have taken similar action.
    B.5.c. Senior-Subordinated Structures--Some securitized asset 
arrangements involve the creation of senior and subordinated classes of 
securities. When a bank originates such a transaction and retains the 
subordinated interest, the banking agencies require that capital be 
maintained against the entire amount of the asset pool. However, when a 
bank acquires a subordinated interest in a pool of assets that it did 
not own, the banking agencies assign the investment in the subordinated 
security to the 100 percent risk weight category.
    In general, the OTS requires a thrift that holds the subordinated 
interest in a senior-subordinated structure to maintain capital against 
the entire amount of the underlying asset pool regardless of whether 
the subordinated interest has been retained or has been purchased.
    In May 1994, the banking agencies proposed to require banking 
organizations that purchase subordinated interests which absorb the 
first dollars of losses from the underlying assets to hold capital 
against the subordinated interest plus all more senior interests.
    B.5.d. Recourse Servicing--The right to service loans and other 
assets may be retained when the assets are sold. This right also may be 
acquired from another entity. Regardless of whether servicing rights 
are retained or acquired, recourse is present whenever the servicer 
must absorb credit losses on the assets being serviced. The banking 
agencies and the OTS require risk-based capital to be maintained 
against the full amount of assets upon which a selling institution, as 
servicer, must absorb credit losses. Additionally, the OTS applies a 
capital charge to the full amount of assets being serviced by a thrift 
that has purchased the servicing from another party and is required to 
absorb credit losses on the assets being serviced.
    The banking agencies' May 1994 proposal also would require banking 
organizations that purchase certain loan servicing rights which provide 
loss protection to the owners of the loans serviced to hold capital 
against those loans.
B.6. Collateralized Transactions
    The FRB and the OCC have lowered from 20 percent to zero percent 
the risk weight accorded collateralized claims for which a positive 
margin of protection is maintained on a daily basis by cash on deposit 
in the institution or by securities issued or guaranteed by the U.S. 
Government agencies or the central governments of countries that are 
members of the Organization of Economic Cooperation and Development 
(OECD).
    The FDIC and the OTS still assign a 20 percent risk weight to 
claims collateralized by cash on deposit in the institution or by 
securities issued or guaranteed by U.S. Government agencies or OECD 
central governments. The FDIC staff is preparing a proposal that will 
lower the risk weight for collateralized transactions.
B.7. Limitation on Subordinated Debt and Limited Life Preferred Stock
    Consistent with the Basle Accord, the banking agencies limit the 
amount of subordinated debt and intermediate-term preferred stock that 
may be treated as part of Tier 2 capital to an amount not to exceed 50 
percent of Tier 1 capital. In addition, all maturing capital 
instruments must be discounted by 20 percent each year of the five 
years before maturity. The banking agencies adopted this approach in 
order to emphasize equity versus debt in the assessment of capital 
adequacy.
    The OTS has no limitation on the ratio of maturing capital 
instruments as part of Tier 2. Also, for all maturing instruments 
issued on or after November 7, 1989 (those issued before are 
grandfathered with respect to the discounting requirement), thrifts 
have the option of using either (a) the discounting approach used by 
the banking regulators, or (b) an approach which allows for the full 
inclusion of all such instruments provided that the amount maturing in 
any one year does not exceed 20 percent of the thrift's total capital. 

[[Page 33806]]

B.8. Presold Residential Construction Loans
    The four agencies assign a 50 percent risk weight to loans to 
builders to finance the construction of one-to-four family residential 
properties that have been presold and meet certain other criteria. 
However, the OTS and OCC rules indicate that the property must be 
presold before the construction loan is made in order for the loan to 
qualify for the 50 percent risk weight. The FDIC and FRB permit loans 
to builders for residential construction to qualify for the 50 percent 
risk weight once the property is presold, even if that event occurs 
after the construction loan has been made.
B.9. Nonresidential Construction and Land Loans
    The banking agencies assign loans for nonresidential real estate 
development and construction purposes to the 100 percent risk weight 
category. The OTS generally assigns these loans to the same 100 percent 
risk category. However, if the amount of the loan exceeds 80 percent of 
the fair value of the property, the excess portion is deducted from 
capital.
B.10. Privately-Issued Mortgage-Backed Securities
    The banking agencies, in general, place privately-issued mortgage-
backed securities in either the 50 percent or 100 percent risk-weight 
category, depending upon the appropriate risk category of the 
underlying assets. However, privately-issued mortgage-backed 
securities, if collateralized by government agency or government-
sponsored agency securities, 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. These are, 
generally, privately-issued mortgage-backed securities with AA or 
better investment ratings.
B.11. Other Mortgage-Backed Securities
    The banking agencies and the OTS automatically assign to the 100 
percent risk weight category certain mortgage-backed securities, 
including interest-only strips, principal-only strips, and residuals. 
However, once the OTS' interest rate risk amendments to its risk-based 
capital standards take effect, stripped mortgage-backed securities will 
be reassigned to the 20 percent or 50 percent risk weight category, 
depending upon these securities' characteristics. Residuals will remain 
in the 100 percent risk weight category.
B.12. Junior Liens on One-to-Four Family Residential Properties
    In some cases, a bank may make two loans on a single residential 
property, one loan secured by a first lien, the other by a second lien. 
In this situation, if the total amount of the two loans exceeds a 
prudent loan-to-value ratio, the FDIC and the FRB would not consider 
the loan secured by the first lien to be eligible to receive a 50 
percent risk weight. Instead, this loan would be assigned to the 100 
percent risk weight category. In all cases, the FDIC would assign the 
loan secured by the second lien to the 100 percent risk weight category 
regardless of the aggregate loan-to-value ratio. This approach for 
first liens is intended to avoid possible circumvention of the capital 
requirement and to capture the risks associated with the combined 
transactions.
    The OCC and OTS generally assign the loan secured by the first lien 
to the 50 percent risk weight category and the loan secured by the 
second lien to the 100 percent risk weight category.
B.13. Mutual Funds
    Rather than looking to a mutual fund's actual holdings, the banking 
agencies assign all of a bank's holdings 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. Thus, the banking 
agencies take into account the maximum degree of risk to which a bank 
may be exposed when investing in a mutual fund because the composition 
and risk characteristics of its future holdings cannot be known in 
advance.
    The OTS applies a capital charge appropriate to the riskiest asset 
that a mutual fund is actually holding at a particular time. In 
addition, both the OTS and the OCC guidelines also permit, on a case-
by-case basis, investments in mutual funds to be allocated on a pro 
rata basis in a manner consistent with the actual composition of the 
mutual fund.
B.14. ``Covered Assets''
    The banking agencies generally place assets subject to guarantee 
arrangements by the FDIC or the Federal Savings and Loan Insurance 
Corporation in the 20 percent risk weight category. The OTS places 
these ``covered assets'' in the zero percent risk-weight category.
B.15. Pledged Deposits and Nonwithdrawable Accounts
    Instruments such as pledged deposits, nonwithdrawable accounts, 
Income Capital Certificates, and Mutual Capital Certificates do not 
exist in the banking industry and are not addressed in the capital 
guidelines of the three banking agencies.
    The capital guidelines of OTS permit thrift institutions to include 
pledged deposits and nonwithdrawable accounts that meet OTS criteria, 
Income Capital Certificates, and Mutual Capital Certificates in 
capital.
B.16. Agricultural Loan Loss Amortization
    In the computation of regulatory capital, those banks accepted into 
the agricultural loan loss amortization program pursuant to Title VIII 
of the Competitive Equality Banking Act of 1987 may defer and amortize 
certain losses related to agricultural lending that were incurred on or 
before December 31, 1991. These losses must be amortized over seven 
years. The unamortized portion of these losses is included as an 
element of Tier 2 capital under the banking agencies' risk-based 
capital standards.
    Thrifts were not eligible to participate in the agricultural loan 
loss amortization program established by this statute.

C. Differences in Reporting Standards Among the Federal Banking and 
Thrift Agencies

C.1. Sales of Assets with Recourse
    In accordance with FASB Statement No. 77, a transfer of receivables 
with recourse is recognized as a sale if: (1) The transferor 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 practice of the banking agencies is generally to 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, virtually no transfers of assets 
with recourse can be reported as sales. However, this rule does not 
apply to the transfer of first lien one-to-four family residential 
mortgage loans and agricultural mortgage loans under any one of the 
government programs (Government National Mortgage Association, Federal 
National Mortgage Association, Federal Home Loan Mortgage Corporation, 
and Federal Agricultural Mortgage Corporation). Transfers of mortgages 
under these programs are treated as sales for Call 

[[Page 33807]]
Report purposes, provided the transfers would be reported as sales 
under GAAP. Furthermore, private transfers of first lien one-to-four 
family residential mortgages are also reported as sales if the 
transferring institution retains only an insignificant risk of loss on 
the assets transferred. However, under the risk-based capital 
framework, the seller's obligation under any recourse provision 
resulting from transfers of mortgage loans under the government 
programs or in private transfers that qualify as sales is viewed as an 
off-balance sheet exposure that will be assigned a 100 percent credit 
conversion factor. Thus, for risk-based capital purposes, capital is 
generally required to be held for any recourse obligation associated 
with such transactions.
    The OTS accounting policy is to follow FASB Statement No. 77. 
However, in the calculation of risk-based capital under OTS guidelines, 
off-balance sheet recourse obligations are converted at 100 percent. 
This effectively negates the sale treatment recognized on a GAAP basis 
for risk-based capital purposes, but not for leverage capital purposes.
    On May 25, 1994, the agencies issued for public comment a proposal 
addressing certain aspects of the regulatory capital and reporting 
treatment of assets sold with recourse. If finalized, the proposal 
could reduce the differences between the bank regulatory reporting 
requirements and GAAP in this area (which OTS follows) by allowing a 
larger portion of asset transfers with recourse to be treated as sales 
for Call Report purposes. In addition, the staffs of the four agencies 
are working to implement Section 208 of the RCDRIA which mandates that 
the regulatory reporting requirements applicable to transfers of small 
business obligations with recourse by qualified insured depository 
institutions to be consistent with GAAP.
C.2. Futures and Forward Contracts
    The banking agencies, as a general rule, do not permit the deferral 
of losses on futures and forward contracts whether or not they are used 
for hedging purposes. All changes in market value of futures and 
forward contracts are reported in current period income. The banking 
agencies adopted this reporting standard prior to the issuance of FASB 
Statement No. 80, which permits hedge or deferral accounting under 
certain circumstances. Hedge accounting in accordance with FASB 
Statement No. 80 is permitted by the banking agencies only for futures 
and forward contracts used in mortgage banking operations.
    The OTS practice is to follow generally accepted accounting 
principles for futures and forward contracts. In accordance with FASB 
Statement No. 80, when hedging criteria are satisfied, the accounting 
for a contract is related to the accounting for the hedged item. 
Changes in the market value of the contract are recognized in income 
when the effects of related changes in the price or interest rate of 
the hedged item are recognized. Such reporting can result in deferred 
losses which would be reflected as assets on the balance sheet.
    The FASB is working to develop a comprehensive hedge accounting 
framework for all free-standing derivative instruments, including 
futures and forward contracts and certain on-balance sheet instruments, 
that can be applied consistently by all enterprises. The banking 
agencies and the OTS are monitoring the progress of this project.
C.3. Excess Servicing Fees
    As a general rule, the banking agencies do not follow GAAP for 
excess servicing fees, but require a more conservative treatment. 
Excess servicing arises when loans are sold with servicing retained and 
the stated servicing fee rate is greater than a normal servicing fee 
rate. With the exception of sales of pools of first lien one-to-four 
family residential mortgages for which the banking agencies' approach 
is consistent with FASB Statement No. 65, excess servicing fee income 
in banks must be reported as realized over the life of the transferred 
asset.
    In contrast, the OTS allows the present value of the future excess 
servicing fee to be treated as an adjustment to the sales price for 
purposes of recognizing gain or loss on the sale. This approach is 
consistent with FASB Statement No. 65.
C.4. Specific Valuation Allowances for, and Charge-offs of, Troubled 
Real Estate Loans not in Foreclosure
    A troubled real estate loan is considered ``collateral dependent'' 
when the repayment of the debt will be provided solely by the 
underlying real estate and there are no other available and reliable 
sources of repayment.
    For a troubled collateral dependent real estate loan, the banking 
agencies generally treat any portion of the loan balance that exceeds 
the amount that is adequately secured by the value of the collateral, 
and that can clearly be identified as uncollectible, as a loss that 
should be charged off. The banking agencies believe that this approach 
accurately reflects the amount of recovery a financial institution is 
likely to receive if it is forced to foreclose on the underlying 
collateral. This banking agency approach is basically consistent with 
GAAP as it has been applied by banks.
    The most recent OTS policy has been to require a specific valuation 
allowance against (or a partial charge-off of) a loan for the amount by 
which the recorded investment in the loan (generally, its book value) 
exceeds its ``value,'' as defined, when it is probable, based on 
current information and events, that a thrift will be unable to collect 
all amounts due (both principal and interest) on the loan. The 
``value'' is either the present value of the expected future cash flows 
on the loan discounted at the loan's effective interest rate, the 
loan's observable market price, or the fair value of the collateral. 
Previously, the OTS generally required specific valuation allowances 
for troubled real estate loans based on the estimated net realizable 
value of the collateral, an amount that normally exceeds fair value. By 
revising its policy in 1993, OTS narrowed the accounting difference 
between banks and thrifts. The revised OTS policy is somewhat similar 
to the requirements of FASB Statement No. 114 on loan impairment, which 
was issued in May 1993.
    As all banks and thrifts adopt FASB Statement No. 114 during 1995, 
this accounting difference will be eliminated. When Statement No. 114 
is applied for regulatory reporting purposes, impairment of a 
collateral dependent loan must be measured using the fair value of the 
collateral.
C.5. Offsetting of Assets and Liabilities
    FASB Interpretation No. 39, ``Offsetting of Amounts Related to 
Certain Contracts,'' became effective in 1994. Interpretation No. 39 
interprets the longstanding accounting principle that ``the offsetting 
of assets and liabilities in the balance sheet is improper except where 
a right of setoff exists.'' Under Interpretation No. 39, four 
conditions must be met in order to demonstrate that a right of setoff 
exists. A debtor with ``a valid right of setoff may offset the related 
asset and liability and report the net amount.'' The banking agencies 
allow banks to apply Interpretation No. 39 for Call Report purposes 
solely as it relates to on-balance sheet amounts associated with off-
balance sheet conditional and exchange contracts (e.g., forwards, 
interest rate swaps, and options). Under the Call Report instructions, 
netting of other assets and liabilities is not 

[[Page 33808]]
permitted unless specifically required by the instructions.
    The OTS practice is to follow GAAP as it relates to offsetting in 
the balance sheet.
C.6. Push Down Accounting
    Push down accounting is the establishment of a new accounting basis 
for a depository institution in its separate financial statements as a 
result of a substantive change in control. Under push down accounting, 
when a depository institution is acquired, yet retains its separate 
corporate existence, the assets and liabilities of the acquired 
institution are restated to their fair values as of the acquisition 
date. These values, including any goodwill, are reflected in the 
separate financial statements of the acquired institution as well as in 
any consolidated financial statements of the institution's parent.
    The banking agencies require push down accounting when there is at 
least a 95 percent change in ownership. This approach is generally 
consistent with accounting interpretations issued by the staff of the 
Securities and Exchange Commission.
    The OTS requires push down accounting when there is at least a 90 
percent change in ownership.
C.7. Negative Goodwill
    Under Accounting Principles Board Opinion No. 16, ``Business 
Combinations,'' negative goodwill arises when the fair value of the net 
assets acquired in a purchase business combination exceeds the cost of 
the acquisition and a portion of this excess remains after the values 
otherwise assignable to the acquired noncurrent assets have been 
reduced to a zero value.
    The banking agencies require negative goodwill to be reported as a 
liability on the balance sheet and do not permit it to be netted 
against goodwill that is included as an asset. This ensures that all 
goodwill assets are deducted in regulatory capital calculations 
consistent with the internationally agreed-upon Basle Accord.
    The OTS permits negative goodwill to offset goodwill assets on the 
balance sheet.
C.8. In-Substance Defeasance of Debt
    The banking agencies do not permit banks to report the defeasance 
of their liabilities in accordance with FASB Statement No. 76. 
Defeasance involves a debtor irrevocably placing risk-free monetary 
assets in a trust established solely for satisfying the debt. In order 
to qualify for this treatment, the possibility that the debtor will be 
required to make further payments on the debt, beyond the funds placed 
in the trust, must be remote. With defeasance, the debt is netted 
against the assets placed in the trust, a gain or loss results in the 
current period, and both the assets placed in the trust and the 
liability are removed from the balance sheet. However, for Call Report 
purposes, banks must continue to report defeased debt as a liability 
and the securities contributed to the trust must continue to be 
reported as assets. No netting is permitted, nor is any recognition of 
gains or losses on the transaction allowed. The banking agencies have 
not adopted FASB Statement No. 76 because of uncertainty regarding the 
irrevocability of trusts established for defeasance purposes. 
Furthermore, defeasance would not relieve the bank of its contractual 
obligation to pay depositors or other creditors.
    The OTS practice is to follow FASB Statement No. 76.

    Dated at Washington, D.C., this 22nd day of June, 1995.

    Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 95-15930 Filed 6-28-95; 8:45 am]
BILLING CODE 6714-01-P