[Federal Register Volume 60, Number 157 (Tuesday, August 15, 1995)]
[Rules and Regulations]
[Pages 42025-42029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19854]



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 Rules and Regulations
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  Federal Register / Vol. 60, No. 157 / Tuesday, August 15, 1995 / 
Rules and Regulations  


[[Page 42025]]


DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. 95-151]
RIN 1550-AA71


Regulatory Capital: Common Stockholders' Equity

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS), consistent with the 
other Federal banking agencies (collectively, the Agencies), is 
amending its capital rule to conform its definition of ``common 
stockholders' equity'' with the terminology used in referring to 
available-for-sale equity securities in Statement of Financial 
Accounting Standard No. 115, ``Accounting for Certain Investments in 
Debt and Equity Securities'' (SFAS No. 115). Specifically, this rule 
substitutes the term ``available-for-sale equity securities with 
readily determinable fair values'' used in SFAS No. 115 for the current 
reference to ``marketable equity securities'' in the OTS definition of 
``common stockholders' equity.''
    The OTS has decided not to adopt other provisions of its June 1994 
proposal that would include net unrealized gains and losses on all 
available-for-sale debt and equity securities in regulatory capital.
    The OTS and the other Agencies had initially issued proposed rules 
to change institutions' regulatory capital computations to be 
consistent with generally accepted accounting principles (GAAP), as 
amended by SFAS No. 115. Although the Agencies' regulatory capital 
rules will not conform with SFAS No. 115, institutions will continue to 
be required to comply with SFAS No. 115 for regulatory reporting 
purposes, as required by statute.
    The Agencies decided not to change their regulatory capital 
standards to conform with SFAS No. 115 after extensive interagency 
discussion and consideration of comments received, most of which 
opposed the Agencies' proposals. Those comments included concerns about 
capital volatility if institutions were required to compute regulatory 
capital in accordance with SFAS No. 115, which would also have a prompt 
corrective action effect.
    As a result of not amending the Agencies' capital rules to 
incorporate SFAS No. 115, available-for-sale debt securities will 
continue to be valued at amortized cost in computing regulatory 
capital. (This differs from their valuation at fair value under SFAS 
No. 115.) Available-for-sale equity securities will continue to be 
valued at the lower of fair value or amortized cost in computing 
regulatory capital, as they have been under the Agencies' capital 
rules.

EFFECTIVE DATE: October 1, 1995.

FOR FURTHER INFORMATION CONTACT: John F. Connolly, Senior Program 
Manager for Capital Policy, Supervision, (202) 906-6465, or Ellen J. 
Sazzman, Counsel, Regulations and Legislation Division, Chief Counsel's 
Office, (202) 906-7133, Office of Thrift Supervision, 1700 G Street, 
NW., Washington, D.C. 20552.

SUPPLEMENTARY INFORMATION:

I. Background of SFAS No. 115

    Under the current OTS minimum regulatory capital requirements set 
forth at 12 CFR Part 567, common stockholders' equity is the primary 
component of core capital for most savings associations. It includes 
items that are generally the same as the items that comprised GAAP 
equity when the capital rule was adopted. Common stockholders' equity 
currently includes: (1) Common stock, (2) common stock surplus, (3) 
retained earnings, (4) adjustments for the cumulative effect of foreign 
currency translation, and (5) adjustments for net unrealized losses on 
non-current marketable equity securities. The net unrealized losses 
were those recorded under SFAS No. 12, ``Accounting for Certain 
Marketable Securities.''
    In May 1993, the Financial Accounting Standards Board (FASB) 
amended GAAP by adopting SFAS No. 115, which superseded SFAS No. 12. 
SFAS No. 115 divides securities held by depository institutions into 
three categories: (1) Securities held to maturity; (2) trading account 
securities; and (3) securities available for sale.
    Under SFAS No. 115, held-to-maturity securities generally are debt 
securities that an institution has the positive intent and ability to 
hold to maturity, as evidenced by standards established by SFAS No. 
115. Held-to-maturity securities are to be recorded at amortized cost.
    Under SFAS No. 115, trading securities are defined as those 
securities that an institution buys and holds principally for the 
purpose of selling in the near term. As under earlier accounting 
standards, these securities are to be reported at fair value (i.e., 
generally at market value), with net unrealized changes in their value 
reported directly in the income statement as part of an institution's 
earnings.
    Securities meeting the definition of the available-for-sale 
category (i.e., all debt and equity securities not held for trading 
that an institution does not have the requisite intent and ability to 
hold to maturity) are to be reported at fair value. This category 
generally encompasses: (1) nontrading debt securities (e.g., bonds, 
debentures, collateralized mortgage obligations) that an institution 
cannot show it will hold to maturity, and (2) nontrading equity 
securities (e.g., Fannie Mae or Freddie Mac stock). Changes in the fair 
value of available-for-sale securities are to be reported, net of tax 
effects, directly in a separate component of common stockholders' 
equity. Consequently, any unrealized appreciation or depreciation in 
the value of securities in the available-for-sale category has no 
impact on the reported earnings of an institution but does affect its 
GAAP equity capital position.
    In August 1993, the Federal Financial Institutions Examination 
Council (FFIEC) announced the adoption of SFAS No. 115 for regulatory 
reporting purposes, effective January 1, 1994. The OTS made a similar 
decision for regulatory reporting by savings associations in an August 
16, 1993 

[[Page 42026]]
policy statement.1 Accordingly, all savings associations now 
follow SFAS No. 115 for regulatory reporting purposes. Associations 
reflect unrealized gains and losses on all available-for-sale 
securities (debt as well as equity), rather than just the net 
unrealized losses on marketable equity securities, as a separate 
capital component for regulatory reporting purposes.

    \1\ See letter of August 16, 1993, from Acting Director Fiechter 
to the Chief Executive Officers of Savings Associations.
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II. OTS Proposed Rule and Interim Policy

    The issuance of SFAS No. 115 raised the question of how net 
unrealized gains and losses on available-for-sale securities should be 
treated for purposes of calculating the amount of an association's 
regulatory capital under part 567. In its August 16, 1993 policy 
statement, the OTS permitted savings associations to adopt SFAS No. 115 
for both financial reporting and capital purposes as early as June 30, 
1993. This early adoption option was expressly permitted by SFAS No. 
115, which did not become mandatory until the fiscal year beginning 
after December 15, 1993.
    On June 22, 1994, the OTS published its proposal to amend the OTS 
capital rule to include the SFAS No. 115 capital component in core 
capital, replacing the superseded SFAS No. 12 component.2 The 
other Agencies, the Office of the Comptroller of the Currency (OCC), 
the Federal Reserve Board (FRB), and the Federal Deposit Insurance 
Corporation (FDIC), published similar proposals to adopt SFAS No. 115 
for regulatory capital purposes.3 The stated rationale for these 
proposals was to conform the Agencies' capital regulations to GAAP and 
to include unrealized gains and losses on available-for-sale debt and 
equity securities in regulatory capital.

    \2\ 59 FR 32143 (June 22, 1994).
    \3\ See 59 FR 18328 (April 18, 1994) (OCC); 58 FR 68563 
(December 28, 1993) (FRB); 58 FR 68781 (December 29, 1993) (FDIC).
    In its June 22, 1994 notice of proposed rulemaking, the OTS 
requested comment on all aspects of the proposed rule, and specifically 
solicited comment on whether unrealized gains and losses under SFAS No. 
115 should be included in core capital for purposes of the leverage 
ratio requirement, for purposes of the risk-based capital requirements 
and for purposes of Prompt Corrective Action (PCA).4 The OTS also 
specifically solicited comment on what changes, if any, in asset 
liability management or risk management would likely result from the 
inclusion of SFAS No. 115 unrealized gains and losses in capital and 
whether such changes would increase or decrease risk to the Savings 
Association Insurance Fund (SAIF).5

    \4\ See 59 FR at 32144. The OTS's risk-based capital 
requirements are located at 12 CFR Part 567 and its PCA requirements 
are located at 12 CFR Part 565.
    \5\ See 59 FR at 32144.
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    The proposal's comment period closed on July 22, 1994. After 
consideration of the comments received and in anticipation of its final 
rule, the OTS issued a November 28, 1994 interim policy statement, 
which provided that the SFAS No. 115 capital component could no longer 
be included in regulatory capital.6

    \6\ See letter dated November 28, 1994, from Acting Director 
Fiechter to the Chief Executive Officers of Savings Associations, 
which revised the August 16, 1993 interim policy statement 
(permitting associations to adopt SFAS No. 115 for financial 
reporting and capital purposes). The November 28 policy statement 
gave associations the option either to follow the revised policy for 
submission of their December 1994 Thrift Financial Reports (TFRs), 
or to defer implementation as late as submission of their June 1995 
TFRs. The OTS provided this optional transition period to give 
associations sufficient time to plan for the effects of the revised 
policy on their regulatory capital and to take any appropriate 
business actions.
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III. Comment Summary

    In response to its notice of proposed rulemaking, the OTS received 
10 comments: five from savings associations, one from a commercial 
bank, one from a state-chartered savings bank, two from financial 
institution trade associations, and one from an investment banking 
firm. Eight of the commenters generally opposed the OTS proposal, while 
two commenters strongly supported the proposal. The OTS has also 
considered the comments received by the other federal banking agencies 
in working with the other agencies to develop a consistent interagency 
position on SFAS No. 115.

A. Comments Opposing a SFAS No. 115 Component

    Commenters opposing the proposal raised a number of common 
concerns. Their primary concern was a belief that the proposal would 
distort the true picture of savings associations' core capital. These 
commenters reasoned that the SFAS No. 115 capital component has less 
bearing on their institutions' financial strength than the 
institutions' more permanent base of common stock, paid-in surplus and 
retained earnings. Under SFAS 115, changes in interest rates could 
dramatically affect institutions' capital positions without affecting 
their amount of common stock and retained earnings and without them 
suffering any losses through their income statements. Commenters 
asserted that another distortion arises because SFAS No. 115 requires 
that the change in fair value of securities subject to SFAS No. 115 be 
included in GAAP capital, but does not require that any offsetting 
changes in the value of associations' deposit bases and hedging 
instruments be included in GAAP capital.
    A second related concern of commenters objecting to the proposal 
was that adopting the proposal would result in excessive volatility in 
associations' regulatory capital levels and present an inaccurate 
picture of associations' long-range viability. Commenters observed that 
associations' capital levels would change with temporary movements in 
interest rates, which in turn cause temporary changes in a security's 
market value. Commenters argued that associations may have sufficient 
capital and liquidity to give them the discretion to determine not to 
sell those securities when the market is unfavorable. These commenters 
submitted that because associations would not be forced to sell their 
available-for-sale securities in a market trough, they should not be 
required to include those unrealized losses on securities in their 
regulatory capital calculations. Such inclusion could result in 
volatile temporary fluctuations in the associations' regulatory capital 
levels, which in turn could trigger more permanent regulatory 
limitations and subject associations to increased deposit insurance 
premiums or PCA sanctions. These commenters argued that in the worst 
case, some associations with the ability to survive a temporary market 
trough might be forced into receivership because of unrealized losses 
in their SFAS No. 115 capital component.
    A number of commenters stressed that associations might take steps 
to avoid unrealized losses that could harm their long-term financial 
viability. Some commenters said that associations would purchase 
shorter duration securities to avoid the greater volatility in the 
value of longer term securities. This action would lower the yield on 
associations' securities and reduce the net income that they could add 
to their retained earnings. Some commenters added that associations 
would have the incentive to make up for this lower yield by increasing 
the credit risk in their portfolios. This strategy would increase 
associations' yield in a potentially dangerous way not captured by SFAS 
No. 115 without necessarily affecting their reported capital levels.
    Some commenters also contended that because SFAS No. 115 only 
applies to securities, associations would avoid 

[[Page 42027]]
SFAS No. 115's mark-to-market requirements by purchasing or retaining 
whole loans instead of similar loans that had been securitized and 
guaranteed by government sponsored enterprises or the private market. 
This approach could harm associations because many loans have greater 
credit risk than guaranteed, high-quality mortgage-related securities.
    Other commenters submitted that the OTS interest-rate risk model 
and capital component already capture and address associations' 
interest rate risk exposure. They argued that adoption of SFAS No. 115 
for capital purposes was unnecessary, could conflict with the interest-
rate risk model and component, and could result in a double hit to 
capital for interest rate swings.
    Commenters opposing the proposal also argued that its adoption 
would lead to associations' focusing too much attention on the short-
term effects of investment decisions instead of long-term economic 
viability. Commenters also raised the possibility that adoption of the 
proposal would make an association reluctant to sell securities from 
its held-to-maturity portfolio for fear of having its entire held-to-
maturity portfolio reclassified as available-for-sale, thereby limiting 
an association's flexibility to manage its investments properly.
    Several commenters were critical of the market value accounting 
approach imposed by SFAS 115 because it includes in capital unrealized 
gains and losses that might never be realized by an association and so 
could present a misleading picture of an association's current 
financial condition. Commenters also submitted that SFAS 115 is 
inconsistent in its approach because it requires institutions to 
account for certain assets at fair market value while liabilities are 
valued at cost.

B. Comments Supporting a SFAS No. 115 Component

    The two commenters supporting the OTS proposed rule believed that 
the OTS's adoption of SFAS No. 115 for regulatory capital purposes was 
consistent with GAAP and the Agencies' requirements that institutions 
comply with SFAS No. 115 for regulatory reporting purposes. These 
commenters reasoned that the proposal would minimize the reporting and 
systems burden that would otherwise result if the SFAS No. 115 capital 
component is treated differently in regulatory capital calculations 
than in GAAP and regulatory reports. Second, these commenters stated 
that the OTS's adoption of SFAS No. 115 for regulatory capital purposes 
would be consistent with Congressional intent as manifested in section 
121 of the Federal Deposit Insurance Corporation Improvement Act of 
1991 (FDICIA),7 which provides that Federal banking agency 
regulatory accounting policy applicable to reports or statements filed 
with those agencies be no less stringent than GAAP. One commenter 
contended that including the SFAS No. 115 equity component in 
regulatory capital would protect associations and the deposit insurance 
fund by causing associations to control their interest-rate risk 
exposure. This commenter believed that SFAS No. 115 gives associations 
the appropriate incentive to hold shorter duration securities and to 
limit their interest-rate risk exposure to avoid drops in their capital 
levels.

    \7\ Pub. L. 102-242 (1991).
    Finally, one commenter contended that not adopting SFAS No. 115 for 
regulatory capital purposes would arguably allow institutions 
temporarily to hide their losses and to defer appropriate supervisory 
action. This would be inconsistent with prudent asset liability 
management and ultimately with protecting the SAIF from losses not 
otherwise included in regulatory capital. Furthermore, failure to 
include unrealized losses in regulatory capital would give 
associations, particularly undercapitalized ones, an incentive to 
speculate on interest rates by holding unhedged long-term securities.

C. Comments Suggesting Alternative Ways of Incorporating a SFAS No. 115 
Component

    The majority of commenters opposing the proposal supported 
excluding the SFAS No. 115 equity component from regulatory capital 
altogether. Several commenters, however, suggested alternative methods 
of incorporating SFAS 115 into the OTS's regulatory capital regulation. 
One commenter recommended that, if SFAS No. 115 was going to affect 
regulatory capital, that it only be included in supplementary capital 
or in risk-based capital computations. Commenters also argued that, 
even if the SFAS No. 115 equity component was included in regulatory 
capital, it should be excluded from computations and determinations 
relating to PCA, insurance premiums, lending limits, and other 
differential regulations based on capital levels. Other commenters 
recommended that the OTS propose a method for balancing the mark-to-
market adjustment for available-for-sale securities with offsetting 
adjustments to associations' deposits, other liabilities, and hedging 
instruments. Finally, several commenters recommended that OTS institute 
a three-quarter lag similar to that used with the interest-rate risk 
component to reduce the effects of temporary market fluctuations and to 
give associations time to take action ameliorating the effects of their 
unrealized losses.

IV. The Final Rule

    After considering all the comments received, the OTS, in 
consultation with the other Agencies, has decided not to adopt its 
proposal to include the SFAS No. 115 equity component in computing 
regulatory capital. Savings associations, however, must follow SFAS No. 
115 for regulatory reporting purposes, as required by statute. This 
decision leaves in effect the OTS's current requirement that nontrading 
debt securities be valued at amortized cost and nontrading marketable 
equity securities be valued at the lower of fair value or amortized 
cost for computing regulatory capital.\8\ This decision is consistent 
with the recommendation of the Task Force on Supervision of the FFIEC 
and the policies of the other Agencies.\9\

    \8\ See current 12 CFR 567.1(d) and the OTS's November 28, 1994 
interim policy statement, which provided that the SFAS No. 115 
capital component could no longer be included in regulatory capital.
    \9\ See 59 FR 60552 (November 25, 1994) (OCC), 59 FR 63241 
(December 8, 1994) (FRB), and 59 FR 66662 (December 28, 1994) 
(FDIC).
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    Based on the comment letters received, the OTS determined that 
adoption of the proposal could potentially have an inappropriate impact 
on associations' regulatory capital and result in an inaccurate picture 
of their capital positions. For example, fluctuations in interest rates 
could cause temporary changes in regulatory capital levels, which in 
turn could trigger more permanent regulatory intervention and 
inappropriately affect industry profitability. In addition, including 
the SFAS No. 115 adjustment in capital could potentially distort an 
association's capital position by giving the same weight to an 
association's SFAS 115 component as is given to its common stock, paid-
in surplus, and retained earnings. Also, changes in the value of 
institutions' assets from interest rate changes would not be properly 
balanced by offsetting changes in the value of institutions' 
liabilities and hedge positions.
    The OTS is also concerned that adoption of the proposal would 
encourage management to place excessive weight on the accounting 
implications of their decisions, rather than on their long-term 
economic impacts. Associations could potentially take actions or make 
investment 

[[Page 42028]]
decisions to avoid the effects of SFAS No. 115 that could give 
associations more flexibility in the short run but might not enhance 
the associations' long-term viability.
    The OTS considered the comments received regarding FDICIA's 
requirement that regulatory accounting policy be no less stringent than 
GAAP. Section 121 of FDICIA \10\ requires that policies applicable to 
reports and statements filed with the Federal banking agencies 
generally conform to GAAP. The section, however, does not require the 
calculation of an institution's regulatory capital or the components of 
regulatory capital to conform to GAAP, and the legislative history of 
the section indicates that was not necessarily the intent of 
Congress.\11\ Furthermore, calculation of associations' risk-based 
capital requirements under the OTS capital rule is based on principles 
that are so fundamentally different from GAAP that comparing the 
stringency of the OTS rule with GAAP is not meaningful. Accordingly, we 
do not believe that Congress intended the OTS to make such a 
comparison.

    \10\ 12 U.S.C. 1831n(a).
    \11\ See generally H.R. Rep. No. 102-330, 102d Cong., 2d Sess. 
119 (1991).
---------------------------------------------------------------------------

    By adopting SFAS No. 115 for regulatory reporting purposes, the OTS 
is complying with the requirements of section 121 and is utilizing a 
uniform approach with the other Agencies. Adoption of such a uniform 
approach also complies with FDICIA's requirement that each Federal 
banking agency ``maintain uniform accounting standards to be used for 
determining compliance with statutory or regulatory requirements of 
depository institutions.'' \12\ Adoption of this uniform interagency 
policy also is consistent with the general goal of regulatory 
uniformity set forth in Section 303 of the Riegle Community Development 
and Regulatory Improvement Act of 1994 (CDRIA).\13\

    \12\ 12 U.S.C. 1831n(b).
    \13\ Pub. L. 103-325, 108 Stat. 2160.
---------------------------------------------------------------------------

    The OTS did consider alternatives suggested by several commenters 
including counting the net unrealized holding gains and losses on 
available-for-sale securities in risk-based or supplementary capital 
calculations, or including net unrealized holding gains and losses on 
available-for-sale securities in regulatory capital but excluding the 
adjustment from capital calculations tied to other regulations. 
However, the OTS believes such approaches would be too complex and 
burdensome and potentially could require a savings association to 
maintain yet another set of capital calculations. Furthermore, because 
SFAS No. 115 significantly increased the number of securities subject 
to market valuation, including the unrealized gains and losses in risk-
based capital may contribute to volatility in regulatory capital 
levels.
    The OTS has decided, therefore, to retain its current requirements 
that available-for-sale debt securities be valued at amortized cost and 
that marketable equity securities be valued at the lower of amortized 
cost or fair value. This is consistent with the current capital 
treatment of these securities by the other Federal banking agencies.
    To conform the capital rule's definition of ``common stockholders' 
equity'' to the terminology and standards used in SFAS No. 115, 
however, this rule substitutes the phrase ``net unrealized losses on 
available-for-sale equity securities with readily determinable fair 
values'' instead of ``net unrealized losses on non-current marketable 
equity securities.'' \14\ The latter phrase was based on terminology 
included in the SFAS No. 12 accounting standard, which was superseded 
by SFAS No. 115. The new terminology of the revised regulation 
encompasses the identical types of securities as the pre-existing 
regulation.

    \14\ See current version of 12 CFR 567.1(d).
    Finally, the OTS will continue to consider unrealized gains and 
losses on securities, regardless of their classification under SFAS No. 
115 or this rule, as a factor in various supervisory determinations. 
For example, an association's unrealized gain or loss on securities 
would be an appropriate factor for an examiner to consider in 
evaluating the adequacy of the association's level of regulatory 
capital or in making discretionary supervisory determinations, such as 
the reasonableness of associations' capital distributions.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, it is 
hereby certified that this final rule will not have a significant 
economic impact on a substantial number of small entities. Accordingly, 
a regulatory flexibility analysis is not required. This final rule is 
not expected to increase the capital requirements of a substantial 
number of small entities. This final rule is not expected to have a 
disparate effect on the capital levels of small entities as opposed to 
larger entities; rather the effect on capital will be minimal 
regardless of savings association size.

Executive Order 12866

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

Unfunded Mandates Reform Act of 1995

    The OTS has determined that this final rule will not result in the 
expenditure by State, local, and tribal governments, in the aggregate, 
or by the private sector, of $100,000,000 or more in any one year, and 
therefore is not a significant regulatory action under Section 202 of 
the Unfunded Mandates Reform Act of 1995, Pub. L. 104-4, 109 Stat. 64 
(signed into law on March 22, 1995).

Paperwork Reduction Act

    The OTS has determined that this final rule will not increase the 
regulatory paperwork burden of savings associations pursuant to the 
provisions of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. 

List of Subjects in 12 CFR Part 567

    Capital, Reporting and recordkeeping requirements, Savings 
associations.

Authority and Issuance

    For the reasons set forth in the preamble, the Office of Thrift 
Supervision hereby amends part 567, chapter V, title 12, Code of 
Federal Regulations, as set forth below:

Subchapter D--Regulations Applicable to All Savings Associations

PART 567--[AMENDED]

    1. The authority for part 567 continues to read as follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 
(note).

    2. Section 567.1 is amended by revising paragraph (d) to read as 
follows:


Sec. 567.1  Definitions.

* * * * *
    (d) Common stockholders' equity. The term common stockholders' 
equity means common stock, common stock surplus, retained earnings, and 
adjustments for the cumulative effect of foreign currency translation, 
less net unrealized losses on available-for-sale equity securities with 
readily determinable fair values.
* * * * *
    Dated: August 3, 1995.


[[Page 42029]]

    By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 95-19854 Filed 8-14-95; 8:45 am]
BILLING CODE 6720-01-P