[Federal Register Volume 62, Number 12 (Friday, January 17, 1997)]
[Notices]
[Pages 2711-2717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1182]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision
[No. 97-3]


Capital and Accounting Standards

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice.

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SUMMARY: Pursuant to the reporting requirements of section 121 of the 
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), 
we have submitted our report to the Chairman and ranking minority 
member of the Committee on Banking, Housing and Urban Affairs of the 
Senate and the Chairman and ranking minority member of the Committee on 
Banking and Financial Services of the House of Representatives 
identifying the differences between the capital and accounting 
standards used by the office of Thrift Supervision (OTS) and the 
capital and accounting standards used by the Office of the Comptroller 
of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) 
and the Board of Governors of, the Federal Reserve System 
(FRB)(collectively, the banking agencies).

[[Page 2712]]

    Our report contains two attachments. Attachment I, ``Summary of 
Differences in Capital Standards,'' identifies and explains the reasons 
for differences in the OTS capital standards and those of the other 
banking agencies. Attachment II, ``Summary of Differences in Accounting 
Practices,'' identifies and explains the reasons for the major 
differences between OTS and the other banking agencies in supervisory 
reporting practices that affect their respective capital standards.
    Despite some differences, the capital and accounting rules of OTS 
generally parallel those of the banking agencies (collectively, the 
``agencies''). Many of the differences result from either statutory 
requirements (e.g., deduction of investment in subsidiaries engaged in 
activities impermissible for national banks) or historical differences 
between the banking and thrift industries (e.g., investment 
authorities, mutual form of organization).
    Moreover, the agencies continue to work together to minimize their 
current differences and to ensure that the new rules and policies they 
adopt are consistent and result in a uniform national banking policy. 
The agencies frequently issue joint regulatory and policy documents in 
working toward the general goal of interagency consistency set forth in 
section 303 of the Reigle Community Development and Regulatory 
Improvement Act of 1994 (CDRIA).
    Today's report reflects differences as of September 30, 1996. It 
indicates how these differences will be resolved, in accordance with 
the agencies' Joint Report: Streamlining of Regulatory Requirements 
(Sept. 23, 1996) (Joint Report).
    Furthermore, the OTS requires that savings associations follow 
generally accepted accounting principles (GAAP) for regulatory reports. 
This complies with the requirement of section 121(a) of FDICIA that the 
accounting principles applicable to reports or statements filed with 
OTS be consistent with GAAP.
    The OTS capital standards comply with the requirements of the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA), including the general requirement that the capital standards 
applicable to savings associations be no less stringent than those 
applicable to national banks.

EFFECTIVE DATE: January 17, 1997.

FOR FURTHER INFORMATION CONTACT: John Connolly, Senior Program Manager 
for Capital Policy, (202) 906-6465, Supervision Policy; or Timothy J. 
Stier, Chief Accountant, (202) 906-5699, Accounting Policy, 
Supervision, Office of Thrift Supervision, 1700 G Street, NW, 
Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Attachment I--Summary of Differences in Capital Standards

    FDICIA requires a report to Congress on the differences in the 
capital standards for banks and savings associations. Below is a 
summary of the differences.

A. Major Differences

1. Interest-Rate Risk Component
    Interest-Rate Risk Component: The OTS has adopted a final rule 
incorporating an interest-rate risk component into its risk-based 
capital requirements. Under the rule, institutions with an above-normal 
level of interest-rate risk will be subject to a capital charge 
commensurate with their risk exposure. Institutions have been 
submitting their interest-risk data and receiving a report on their 
interest-risk exposure under the OTS model from OTS staff since March 
1991. This interest-rate risk analysis is considered so valuable by 
savings associations that a considerable number of associations not 
required to file reports do so voluntarily. Furthermore, the OTS 
supervisory staff considers institutions' interest-rate risk exposure 
in assessing institutions' capital adequacy and asset/liability 
management. OTS has not yet implemented the requirement for 
associations to deduct an interest-rate risk component in calculating 
their risk-based capital.
    The banking agencies also are implementing policies under which 
they consider banks' interest-rate risk exposure in the examination 
process. On August 2, 1995, the banking agencies published a joint 
final rule in the Federal Register on interest-rate risk. See 60 FR 
39490 (August 2, 1995). The final rule amends their capital adequacy 
guidelines to clarify the authority of the banking agencies to include 
in their evaluation of bank capital adequacy an assessment of banks' 
exposure to declines in capital due to interest rate movements. 
Concurrent with the publication of the final rule, the banking agencies 
issued a joint policy statement for comment that describes the process 
that the banking agencies will use to measure and assess the exposure 
of a bank's economic value to changes in interest rates. See 60 FR 
39495 (August 2, 1995).
    The OTS interest-rate risk approach differs from that of the 
banking agencies in important respects. The major differences are the 
methodology and data used to measure interest rate exposure.
    Reason for OTS Difference: Because interest-rate risk is a 
significant risk to savings associations, OTS believes that it is 
important to use a relatively sophisticated model to measure the 
interest-rate risk exposure of individual institutions. OTS believes 
that it is particularly important to use a model that is capable of 
measuring the option component in mortgages and the effect of financial 
derivatives on an institution's overall interest-rate-risk exposure. As 
a consequence, OTS uses an option-based pricing model to measure 
exposure and collects detailed financial data on a reporting form that 
was designed to provide the financial data that OTS needs to measure 
exposure.
2. Leverage Ratio Standard
    The agencies use uniform leverage ratio standards for purposes of 
the capital ratio thresholds used in defining the prompt corrective 
action (PCA) categories under section 38 of the Federal Deposit 
Insurance Act (FDIA). Institutions, other than CAMEL-1 rated 
institutions, must satisfy a leverage ratio standard requiring 
institutions to have Tier 1 (core) capital equal to four percent of 
assets to be adequately capitalized for purposes of the prompt 
corrective action system. The leverage ratio standard for CAMEL-1 rated 
institutions only requires them to have Tier 1 (core) capital equal to 
three percent of assets, although most CAMEL-1 rated institutions 
exceed this requirement by a wide margin. The leverage ratio 
requirements in the banking agencies' capital regulations mirror those 
in their PCA regulations.
    Although the OTS capital rule continues to contain a three percent 
leverage ratio requirement, the four percent leverage ratio requirement 
to be ``adequately capitalized'' for PCA purposes is, in effect, the 
controlling standard for thrifts.
    Reason for OTS Difference: Initial adoption of a three percent 
leverage ratio requirement in the OTS capital rule in 1989 prior to 
adoption of the banking agencies' current standard. As indicated in the 
September 23 Joint Report, the agencies will be issuing a proposed rule 
to make all of their leverage ratio regulations uniform.
3. Subsidiaries
    Subsidiary (general): OTS defines a subsidiary as a five percent or 
greater ownership interest in an entity. The OTS requires full 
consolidation of any subsidiary with its parent association if the 
subsidiary is consolidated for

[[Page 2713]]

reporting purposes consistent with generally accepted accounting 
principles (GAAP) (except for subsidiaries engaged as principal in 
activities impermissible for national banks, as described below). If an 
association owns a five percent or greater interest, but does not have 
control under GAAP, OTS requires pro-rata consolidation, as discussed 
below.
    The banking agencies generally follow the GAAP approach for the 
definition and consolidation of subsidiaries, but do not require 
consolidation of subsidiaries not exceeding certain ``de minimis'' 
thresholds. Subject to these exceptions, subsidiaries generally are 
fully consolidated if the parent institution holds more than 50 percent 
of the outstanding voting stock, or if the subsidiary is otherwise 
controlled or capable of being controlled by the parent institution 
(see exception for depository institutions).
    The OTS, however, instead of applying, ``pro rata'' consolidation, 
has decided to use its discretion under its capital rule to follow GAAP 
and the banking agencies' approach in consolidating community 
development subsidiaries and low-income housing tax credit limited 
partnerships.
    Reason for OTS Difference: Policy decision in 1989 based, in part, 
on the wide array of subsidiaries that state-chartered associations had 
previously been permitted to hold. In 1994, however, the OTS decided to 
follow the consolidation approach of GAAP and the other Federal banking 
agencies in consolidating community development subsidiaries. This 
beneficial capital treatment avoids the requirement for associations to 
deduct their investments in community development subsidiaries engaged 
in activities that are permissible for subsidiaries of national banks, 
but impermissible for national banks themselves. In June 1996, the OTS 
proposed to define ``subsidiary'' for capital purposes generally in the 
same manner as the banking agencies.
    Subsidiaries (impermissible): FIRREA and the OTS capital rule 
require the deduction from core capital of savings associations' 
investments in and loans to subsidiaries that engage in activities not 
permissible for national banks. Generally, any new investment after 
April 13, 1989, in such nonincludable subsidiaries has had to be 
deducted immediately. Furthermore, because all transition schedules for 
grandfathered investments in nonincludable subsidiaries expired as of 
June 30, 1996, all investments in nonincludable subsidiaries must be 
deducted in computing core capital.
    As of July 1, 1996, savings associations must deduct all 
investments in, and extensions of credit to, nonincludable real estate 
subsidiaries, consistent with the deduction requirement applicable to 
other types of nonincludable subsidiaries since July 1, 1994.
    The banking agencies may require the deduction of investments in 
certain subsidiaries, generally on a case-by-case basis. For example, 
the FRB deducts investments in, and unsecured advances to, Section 20 
securities subsidiaries from a member bank's capital. The FDIC 
similarly deducts investments in, and unsecured advances to, securities 
subsidiaries and mortgage banking subsidiaries. The FDIC also exercises 
similar authority over the subsidiaries of state nonmember banks 
engaged in activities not permissible for national banks.
    Reason for OTS Difference: The Home Owners' Loan Act, as amended by 
FIRREA, requires associations to deduct investments in and loans to 
subsidiaries engaged as principal in activities impermissible for 
national banks. Generally, savings associations are required to deduct 
the total amount of their investments in, and advances to, such 
nonincludable subsidiaries.
    The deduction of investments in subsidiaries from parent 
associations' capital is designed to insulate associations' capital 
from activities potentially riskier than those in which associations 
are permitted to engage. The statutory standard for whether an activity 
is risky is whether a national bank may engage in that activity, plus 
certain other expressly permissible activities.
    Subsidiaries (Permissible--Minority Ownership): The OTS capital 
rule, as discussed above, requires the pro-rata consolidation of 
subsidiaries where the association does not have control, as defined 
under GAAP, but owns a five percent or greater ownership interest in 
the subsidiary. The banking agencies generally require capital to be 
held only against the investments in such subsidiaries but may, on a 
case-by-case basis, deduct them from capital or consolidate them either 
fully or on a pro-rata basis.
    Reason for OTS Difference: Policy decision in 1989 to ensure ample 
capital against the diverse assets then held by thrift subsidiaries, 
particularly subsidiaries of certain state-chartered associations. The 
proposed changes to the OTS's definition of subsidiary for capital 
purposes will remove this difference.
    Subsidiaries (Lower-tier Depository Institutions): Under OTS rules, 
a depository institution subsidiary is automatically consolidated with 
its parent association if the subsidiary was acquired prior to May 1, 
1989. The parent association's investment in such subsidiaries is 
automatically excluded from the parent association's capital if the 
depository institution subsidiary was acquired on or after May 1, 1989, 
unless it engages only in activities permissible for a national bank. 
On a case-by-case basis, the OTS requires consolidation of lower-tier 
depository institutions, if consolidation results in a higher capital 
requirement than the exclusion requirement. For purposes of risk-based 
capital, the banking agencies generally consolidate majority-owned 
subsidiaries.
    Reason for OTS Difference: The Home Owners' Loan Act, as amended by 
FIRREA, requires associations to deduct investments in and loans to 
subsidiaries, including depository institutions acquired after May 1, 
1989, engaged as principal in activities impermissible for national 
banks. OTS's policy addresses the need for both the parent and 
subsidiary institutions to have adequate capital on a consolidated and 
unconsolidated basis. It also ensures that OTS capital standards are at 
least as stringent as those imposed on banks. (HOLA sections 
5(t)(5)(A), (C), (E)) .
    4. Equity Investments: Savings associations must deduct the amount 
of their equity investments, as defined in the OTS capital rule, in 
computing total capital used to satisfy their risk-based capital 
requirements. The banking agencies allow only a limited range of equity 
investments and place those investments in the 100 percent risk-weight 
category, rather than requiring deduction.
    In March 1993, OTS issued a final rule that provides parallel 
treatment of equity investments for thrifts and national banks. Equity 
investments of thrifts that are permissible for national banks 
(primarily stock of Freddie Mac, stock of Fannie Mae and certain loans 
with equity characteristics) are placed in the 100 percent risk-weight 
category.
    Reason for OTS Difference: OTS will continue to require the 
deduction from capital of equity investments that are impermissible for 
national banks. This approach is designed to insulate the institution 
and the insurance fund from the risk of these investments. This policy 
is intended to result in such investments being either divested or 
``pushed down'' into subsidiaries, where savings associations can limit 
their liability and attempt to attract partial market funding for the 
subsidiaries. The OTS will address the safety and

[[Page 2714]]

soundness of equity investments of thrifts that are permissible for 
national banks through the same capital and supervisory approach used 
by the banking agencies.
    5. 20 Percent Risk-Weight for High Quality Mortgage-backed 
Securities: OTS includes agency securities (i.e., issued by Freddie Mac 
or Fannie Mae) in the 20 percent risk-weight category. OTS also places 
high-quality, private-issue, mortgage-related securities (i.e., 
eligible securities under the Secondary Mortgage Market Enhancement Act 
(SMMEA)) in the 20 percent risk-weight category. These private-issue 
mortgage-backed securities represent interests in residential or mixed-
use real estate and are rated in one of the two highest investment-
grade rating categories by a nationally recognized statistical rating 
organization. Generally, the banking agencies place private-issue, 
mortgage-backed securities in the 50 percent or 100 percent risk-weight 
category.
    Reason for OTS Difference: Policy decision to take the high credit 
quality of these securities into account in risk-weighting these 
securities.
    6. Qualifying Multifamily Mortgage Loans: OTS and the banking 
agencies have uniform rules placing multifamily loans satisfying the 
criteria of section 618(b) of the Resolution Trust Corporation 
Refinancing, Restructuring, and Improvement Act of 1991 (RTC Act), in 
the 50 percent risk-weight category.
    The OTS, however, extended grandfathered treatment to multifamily 
mortgage loans that were in the 50 percent risk-weight category under a 
prior OTS rule in March 1994, when OTS adopted its rule implementing 
section 618(b) of the RTC Act. Those low-risk, grandfathered 
multifamily loans must continue to satisfy the criteria of the prior 
OTS rule. Those criteria are that the loans are secured by multifamily 
residential buildings with 5-36 units, have maximum 80 percent loan-to-
value ratios and maintain occupancy rates of at least 80 percent.
    Reason for OTS Difference: The rules of the OTS and the banking 
agencies are generally consistent. The OTS, however, decided to extend 
grandfathered treatment to low-risk multifamily loans previously 
qualifying for the 50 percent risk-weight category under the prior OTS 
multifamily rule.
    7. Intangible Assets and Mortgage Servicing Rights: The final rule 
on the capital treatment of intangible assets adopted by the OTS 
generally is consistent with the rules adopted by the banking agencies. 
The OTS rule, however, contains a grandfathering provision and a 
transition provision for purchased mortgage servicing rights included 
in capital prior to adoption of the revised final rule.
    The OTS rule also contains a grandfathering provision allowing 
continued inclusion of core deposit premiums included in associations' 
capital on the effective date of the final rule. These core deposit 
premiums were previously included in capital pursuant to temporary OTS 
guidance if an association's management determined that they passed a 
three-part test and the amount included did not exceed 25 percent of 
core capital. The new rule requires the deduction of nongrandfathered 
core deposit premiums from capital.
    In August 1995, the OTS also issued a joint rule with the other 
banking agencies adopting uniform interim capital treatment of 
originated mortgage servicing rights. The Financial Accounting 
Standards Board required originated mortgage servicing rights to be 
capitalized in accordance with prescribed valuation criteria by 
adopting Statement of Financial Accounting Standard No. 122, 
``Accounting for Mortgage Servicing Rights'', in May 1995. The joint 
interim rule generally applies the same treatment to originated 
mortgage servicing rights that the agencies previously applied to 
purchased mortgage servicing rights. This capital treatment includes a 
50 percent of Tier 1 capital limit and valuation at the lower of 90 
percent of fair market value or 100 percent of amortized book value.
    Reason for OTS Difference: The treatment of intangible assets and 
mortgage servicing rights under the capital rules of OTS and the 
banking agencies are generally uniform. The OTS, however, decided to 
allow associations to continue to include purchased mortgage servicing 
rights and core deposit premiums in capital computations if the 
specific assets had previously been included in associations' capital 
under prior OTS rule or policy.
8. Recourse Arrangements
    Assets Sold with Recourse (Nonmortgage): If a savings association 
makes a GAAP sale of nonmortgage assets with recourse, the OTS (i) 
treats the transaction as a sale for purpose of reporting and leverage 
ratio computation and (ii) requires capital to be held against the 
total amount of the loans sold with recourse in calculating the 
association's risk-based capital requirement. Despite being a GAAP 
sale, the banking agencies treat the transaction as a financing. This 
means that the original assets are considered still on the books, along 
with the proceeds received, in computing the leverage and risk-based 
assets.
    Reason for OTS Difference: OTS follows GAAP in determining whether 
a transaction is a sale for reporting purposes and in computing 
associations' leverage ratio capital requirements. The OTS policy also 
ensures that the economic risk to associations from sales with recourse 
is captured in determining associations' risk-based capital 
requirements.
    Assets Sold with Recourse (Mortgages--Private Transactions): If a 
savings association sells mortgage assets with recourse to private 
entities and the transaction is treated as a sale under GAAP, OTS 
follows the same policy as it follows regarding sales of nonmortgage 
assets. Under this policy, OTS (i) treats the transaction as a sale and 
(ii) requires capital to be held against the total amount of loans sold 
with recourse in calculating the association's risk-based capital 
requirement.
    A bank that sells pools of residential mortgages to private 
entities with recourse generally is required to hold the full amount of 
capital against the mortgages sold, as well as the proceeds received, 
regardless of the amount of recourse retained and the treatment of the 
transactions for regulatory reporting purposes.
    The rules of the FRB and OCC, however, provide that no capital is 
required against pools of 1- to 4-family mortgages sold to private 
entities with ``insignificant recourse'' (i.e., less than expected 
losses) for which a specific noncapital reserve or liability account is 
established and maintained for the maximum amount of possible loss 
under the recourse provision.
    If ``significant'' recourse is retained, the transaction is not 
reported as a sale and the assets remain on the balance sheet. Capital 
is required to be held against the on-balance sheet amount of the 
assets. The FDIC follows this approach for all sales with recourse; the 
FDIC has not adopted an ``insignificant recourse'' policy.
    Reason for OTS Difference: OTS follows GAAP in determining whether 
a transaction is a sale for reporting purposes and in computing 
associations' leverage ratio capital requirement. The OTS policy also 
ensures that the economic risk to associations from sales with recourse 
will be captured in determining their risk-based capital requirements. 
The banking agencies' application of their limited recourse provisions 
for computing banks' risk-based capital requirements has affected the

[[Page 2715]]

significance of the ``insignificant recourse'' provisions of the FRB 
and OCC.
    Assets Sold with Recourse (Limited Recourse): In accordance with 
section 350 of the Riegle Community Development and Regulatory 
Improvement Act of 1994, the banking agencies adopted a low-level 
recourse rule. The OTS adopted its low-level recourse provision in 
1989. The remaining difference regarding such sales with recourse is 
that the OTS follows GAAP in according sales treatment to those 
transactions for reporting and leverage computation purposes. The 
banking agencies generally do not accord sales treatment to sales with 
low-level recourse and continue to treat the transaction as a financing 
in computing banks' leverage ratio requirements, subject to the 
``insignificant recourse'' provisions of the FRB and OCC.
    Reason for OTS Difference: The agencies, low-level recourse 
provisions, in accordance with section 350 of the Riegle Act, limit an 
institution's capital requirement to its maximum contractual liability 
under its recourse obligation. The difference between OTS and the 
banking agencies for reporting and leverage ratio purposes is caused by 
the OTS decision to follow GAAP in determining whether to accord sales 
treatment.
    Recourse Servicing: Where savings associations are responsible for 
credit losses on loans they service, OTS requires capital against the 
amount of the underlying loans consistent with the recourse policy set 
forth above. Although savings associations do not own the underlying 
assets, they have a contingent liability and are subject to losses on 
those loans. OTS requires associations to hold capital against the 
underlying loans posing economic risk for the associations. The banking 
agencies do not assess capital on the underlying loans but only on the 
value of the servicing rights.
    Reason for OTS difference: Policy decision to assess capital on 
underlying loans to buffer associations from the risk of loss on such 
loans.
    9. Purchased Subordinated Securities: The OTS risk-based capital 
standard requires associations to hold capital against the amount of 
their subordinated securities and any more senior securities. It does 
not matter whether the subordinated securities were acquired from 
others or result from the securitization of loans they originated. 
Associations' risk-based capital requirements are limited, however, by 
the low-level recourse provision.
    Banks are only required to hold capital against the amount of more 
senior securities if the institution originated and sold the underlying 
loans. The banking agencies do not require banks to hold capital 
against securities senior to acquired subordinated securities if a bank 
acquired the securities in the market from third parties.
    Reason for OTS Difference: Policy decision to ensure appropriate 
capital against risk of these assets. Whether institutions create 
subordinated securities or purchase subordinated securities, the risks 
are similar.
    10. Consequences of Failure to Meet Capital Standards: The PCA 
provisions of FDICIA impose a stringent regulatory regimen on thrifts 
and banks failing their capital requirements. The PCA provisions of 
section 131 of FDICIA establish five regulatory categories, with the 
distinctions primarily based on institutions' capital ratios. Section 
131 imposes various sanctions and restrictions on institutions in the 
lower three PCA categories, while other regulations (brokered deposits 
and the risk-based premium rules of the FDIC) provide preferential 
treatment to the well-capitalized institutions. The agencies issued a 
joint preamble and parallel rules implementing PCA.
    Savings associations are also subject to additional restrictions 
and requirements under the HOLA, as enacted in FIRREA. The OTS will 
continue to apply these provisions to savings associations, but is 
coordinating their implementation with the PCA provisions to the extent 
possible. The HOLA provisions do not apply to banks.
    Reason for OTS Difference: The agencies have adopted uniform rules 
implementing the PCA provisions of FDICIA. The HOLA, however, continues 
to impose additional restrictions on savings associations (HOLA section 
5(t) (6)).
11. Collateralized Transactions
    Since December 1994, the agencies have had three different rules 
for the capital treatment of transactions that are supported by 
qualifying collateral. The FDIC's and OTS's risk-based capital 
standards provide that the portion of a transaction collateralized by 
cash on deposit in the lending institution or by the market value of 
central government securities of countries that are members of the 
Organization for Economic Cooperation and Development (OECD securities) 
may be assigned to the 20 percent risk-weight category. The FRB's 
general rule is like the FDIC's and OTS's rule, but with a limited 
exception. The exception is that transactions fully collateralized with 
cash or OECD securities marked-to-market daily with positive collateral 
margin maintained. The OCC's rule permits the portion of a transaction 
that is collateralized with a positive margin by cash or OECD 
securities, which must be marked-to-market daily, to receive a zero 
percent risk-weighting.
    Reason for OTS Difference: The OTS and FDIC regulations on 
collateralized transactions have not been changed since 1989. The FRB 
and OCC revised their regulations in different ways in 1992 and 1994, 
respectively. As indicated in the September 23 Joint Report, consistent 
with section 303 of the Riegle Act, in August, 1996, the agencies 
jointly proposed a uniform approach to the capital treatment of 
collateralized transactions. Under the proposed approach, designated 
portions of claims are included in the zero percent risk-weight 
category if the institution marks the designated portion to market 
daily and requires the obligor to adjust the amount of underlying 
collateral to maintain a positive daily margin on the designated 
portion of the claim.

B. Minor Differences

    1. 1.5 Percent Tangible Capital Requirement: OTS has an explicit 
1.5 percent tangible capital requirement; the bank regulators do not.
    Reason for OTS Difference: FIRREA required OTS to establish a 
tangible capital requirement of at least 1.5 percen of assets. (HOLA 
5(t)(2)(B)).
    2. Collateralized Mortgage Obligations (CMO) Tranches: In its final 
interest-rate risk rule, OTS eliminated the placement of stripped 
securities and certain collateralized mortgage obligations in the 100 
percent risk-weight category because of their interest-rate risk 
sensitivity. The OTS interest-rate risk model evaluates the interest-
rate risk stemming from these assets. The OTS examination and 
supervisory staffs consider associations, interest-rate risk exposure, 
along with aspects of associations, capital position, in determining 
the associations, capital adequacy under the CAMEL system. Residual 
securities remain in the 100 percent risk-weight category because of 
their degree of credit risk and other risks.
    The banking agencies vary in their approach: OCC has stated that 
any CMO tranche absorbing more than its pro-rata share of the risk of 
losing principal is risk-weighted at 100 percent (others generally at 
20 percent); FRB has stated that any CMO tranche absorbing more than 
its pro-rata share of loss is risk-weighted at 100 percent (others

[[Page 2716]]

generally at 20 percent); FDIC undertakes a case-by-case review.
    Reason for OTS Difference: Policy decision to address the interest-
rate risk of CMOs through the OTS interest-rate risk rule, model and 
supervisory oversight. Policy determination that dealing with these 
securities in this way made continued risk-weighting for credit risk in 
the 100 percent risk-weight category unwarranted. The degree of credit 
risk and other risks to which residual securities expose associations 
warrant their continued risk-weighting in the 100 percent risk-weight 
category.
    3. Pledged Deposits/Nonwithdrawable Accounts: OTS includes these 
instruments as core capital for mutual associations if they meet the 
same requirements as non-cumulative perpetual preferred stock. If they 
do not meet the requirements for inclusion in core capital, OTS 
includes them as supplementary capital provided they meet the standards 
for preferred stock or subordinated debt. The banking agencies do not 
address this issue because these instruments represent the capital of 
mutual associations legally restricted from issuing equity securities 
(i.e., their depositor members are their owners). Banks generally are 
not organized in mutual form.
    Reason for OTS Difference: Policy decision to treat these 
instruments the same as the equity instruments of corporate thrifts 
because they provide the same protection as equity to the mutual 
associations and the deposit insurance fund.
    4. Qualifying Single Family Mortgage Loans: In order to be placed 
in the 50 percent risk-weight category, OTS requires that mortgages 
have no more than an 80 percent loan-to-value (LTV) ratio (unless they 
have private mortgage insurance (PMI) bringing the LTV ratio down to 80 
percent). The banking agencies require ``prudent, conservative'' 
underwriting without specific LTV ratio requirements.
    Reason for OTS Difference: Policy decision to make explicit what 
OTS believes is generally ``prudent and conservative''; the banking 
agencies generally include a similar LTV standard in their examiner 
guidance.
    5. Loans to Individual Purchasers for the Construction of Their 
Homes: OTS and OCC place these assets in the 50 percent risk-weight 
category. The FRB and FDIC may treat them as construction loans (100 
percent) or as mortgage loans (50 percent) depending on their 
characteristics.
    Reason for OTS Difference: Policy decision to include such loans in 
standard treatment of 1-4 family mortgage loans, as does the OCC. As 
indicated in the September 23 Joint Report, the agencies expect to 
issue a proposal to make their regulations uniform in this area.
    6. Holding of First and Second Liens on Home Mortgages by the Same 
Institution: The FRB and OTS generally treat first and second liens 
held by the same institution as single loans if there are no 
intervening liens. The OCC generally places second liens in the 100 
percent risk-weight category. The FDIC combines first and second liens 
in evaluating whether the first lien is prudently underwritten, but 
places all second liens in the 100 percent risk-weight category.
    Reason for OTS Difference: Policy decision generally to treat two 
extensions of credit to the same individual and secured by the same 1-4 
family residence the same as a single extension of credit. The combined 
credit should be placed in the appropriate risk-weight depending on 
whether the combined credit meets the other criteria for a qualifying 
mortgage loan. As indicated in the September 23 Joint Report, the 
agencies expect to issue a proposal to make their regulations uniform 
in this area.
    7. Rules on Maturing Capital Instruments (MCI): OTS and the banking 
agencies use different rules to determine how much of MCI counts toward 
capital. OTS (i) grandfathers issuances of MCI issued on or before 
November 7, 1989 (which was the date of the rule change) and (ii) 
allows two options for issuances of MCI after November 7, 1989 (a) the 
bank rule (five year amortization) or (b) a limit of 20 percent of 
total capital maturing in any one year for instruments within seven 
years of maturity.
    The banking agencies require use of the straight five-year 
approach.
    Reason for OTS Difference: Policy decision to minimize unnecessary 
disincentives for issuance of subordinated debt and to avoid unduly 
penalizing pre-FIRREA issuances of MCI.
    8. Limitation on Subordinated Debt: The banking agencies limit 
subordinated debt to 50 percent of core capital. OTS has no limit on 
the amount of subordinated debt that can count as supplementary 
capital.
    Reason for OTS Difference: Policy decision to encourage issuance of 
supplementary capital.
    9. Nonresidential Construction and Land Loans: OTS requires the 
amount of these loans above an 80 percent LTV ratio to be deducted from 
total capital (with a five year phase-in). The banking agencies place 
the whole loan amount in the 100 percent risk-weight category.
    Reason for OTS Difference: Policy decision to ensure appropriate 
capital against risk of these assets. OTS experience indicates that 
high-LTV ratio land loans and nonresidential construction loans present 
particularly high levels of risk.
    10. FSLIC/FDIC-covered Assets: OTS places these assets in the zero 
percent risk-weight category. The banking agencies generally place 
these assets in the 20 percent risk-weight category.
    Reason for OTS Difference: Policy decision to recognize OTS Capital 
and Accounting Standards that these assets have never resulted in 
losses and that these government guaranteed obligations are supported 
by a ``backup'' call on the United States Treasury.
    11. Mutual Funds: In general, OTS establishes the risk weighting 
for mutual funds on the asset with the highest capital requirement 
actually held by the mutual fund. The banking agencies base their 
capital charge on the highest risk-weighted asset that is a permissible 
investment by the mutual fund. The 20 percent risk-weight category is 
the lowest risk-weight category in which associations may place mutual 
fund investments.
    OTS allows, on a case-by-case basis, ``pro-rata'' risk-weighting of 
investments in mutual funds, based on the assets of the mutual fund 
(i.e., if 90 percent of a mutual fund's assets are 20 percent risk-
weight assets and 10 percent are 100 percent risk-weight assets, we may 
allow 90 percent of the investment in 20 percent risk-weight category 
and 10 percent in the 100 percent risk-weight category). The OCC 
permits national banks to pro-rate mutual fund investments between 
risk-weight categories based on the maximum amount of different types 
of assets that mutual funds may hold in accordance with their 
prospectuses. The FDIC and FRB do not allow banks to pro-rate mutual 
fund investments between risk-weight categories.
    Reason for OTS Difference: Policy decision to ensure appropriate 
capital against the risk of these assets. OTS believes that allowing 
institutions to pro-rate their investments and focus on ``actual'' 
assets ensures that savings associations hold capital in an amount 
essentially equivalent to that required if they directly held the 
assets in which the mutual fund invested. However, as indicated in the 
September 23 Joint Report, the agencies expect to issue a proposal in 
the near future to make their regulations uniform in this area.
    12. Capital Requirement on Holding Companies: FRB applies the risk-
based

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capital requirements to bank holding companies; OTS does not apply them 
to thrift holding companies.
    Reason for OTS Difference: OTS policy decision to not impose 
capital requirements on corporate entities because they do not pose a 
risk to the deposit insurance fund.
    13. Agricultural Loan Losses: The banking agencies, due to a 
statutory requirement, allow such losses to be deferred (and, 
effectively, allow these losses to be ``included'' in supplementary 
capital). OTS does not allow such losses to be deferred or included in 
assets or capital.
    Reason for OTS Difference: OTS has no statutory requirement to 
allow such deferred losses in assets or capital.
    14. Income Capital Certificates (ICCS) and Mutual Capital 
Certificates (MCCs): OTS allows inclusion in supplementary capital. 
Because these items do not exist in the banking industry, the banking 
agencies do not address them.
    Reason for OTS Difference: ICCs/MCCs are counted as supplementary 
capital due to their being functionally equivalent to net worth 
certificates (which are required, by statute, to be included in 
capital).

Attachment II--Summary of Differences in Accounting Practices

    Differences by each agency in accounting or supervisory reporting 
practices may cause differences in amounts of regulatory capital 
maintained by depository institutions. These differences are the result 
of an evolutionary process that primarily reflects historical agency 
philosophy and industry trends.
    The OTS follows generally accepted accounting principles for 
regulatory reporting purposes. The other banking agencies require banks 
to follow certain prescribed regulatory accounting principles (RAP) 
instead of GAAP for reporting purposes. The banking agencies, however, 
are contemplating moving toward GAAP reporting in 1997, which will 
eliminate most remaining differences between the reporting of OTS and 
the other banking agencies.
    A summary of these differences is presented below.

1. Futures and Forward Contracts

    OTS practice is to follow generally accepted accounting principles. 
In accordance with SFAS 80, when hedging criteria are satisfied, the 
accounting for the futures contract shall be related to the accounting 
for the hedged item. Changes in the market value of the futures 
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 gains and losses in accordance with 
GAAP.
    The banking agencies do not follow GAAP, but report changes in the 
market value of futures contracts even when used as hedges in the 
current period's income statement. However, futures contracts used to 
hedge mortgage banking operations are reported in accordance with GAAP.

2. Excess Service Fees

    OTS practice is to follow GAAP in valuing excess service fees. When 
loans are sold with servicing retained and the stated servicing fee 
rate differs materially from a normal servicing fee rate, the sales 
price should be adjusted in determining the gain or loss from the sale 
of the loans. This provides for the recognition of a normal fee in each 
subsequent year that servicing continues on the loans. The gain 
recorded at the date of sale cannot be larger than the gain assuming 
the loans were sold servicing released. The subsequent valuation of the 
excess servicing is adjusted based upon anticipated prepayment rates 
and interest rates.
    The banking agencies follow GAAP for residential mortgage loan 
pools. For all other types of loans, the banking agencies do not follow 
GAAP. In those cases they require that excess servicing fees retained 
on loans sold be reported as realized over the contractual life of the 
transferred asset.

3. In-Substance Defeasance of Debt

    OTS practice is to follow GAAP. In accordance with SFAS 76, when a 
debtor irrevocably places risk-free monetary assets in a trust solely 
to satisfy the debt and the possibility that the debtor will be 
required to make further payments is remote, the debt is considered 
extinguished. The transfer can result in a gain or loss in the current 
period.
    The banking agencies do not follow GAAP. The banking agencies 
continue to report the defeased debt as a liability and the securities 
contributed to the trust as assets with no recognition of any gain or 
loss on the transaction.

4. Sales of Assets with Recourse

    OTS practice is to follow GAAP. A transfer of receivables with 
recourse is recognized as a sale under GAAP if (i) the transferor 
surrenders control of the future economic benefits, (ii) the 
transferor's obligation under the recourse provisions can be reasonably 
estimated, and (iii) the transferee cannot require repurchase of the 
receivables except pursuant to the recourse provisions.
    However, in the calculation of OTS risk-based capital, certain off-
balance sheet conversions are performed that result in capital being 
required for the risk retained. See further discussion of capital 
differences with respect to this item in Attachment I, Capital 
Differences.
    The practice of the banking agencies is generally to report 
transfers of receivables with recourse as sales only when the 
transferring institution (i) retains no risk of loss from the assets 
transferred and (ii) has no obligation for the payment of principal or 
interest on the assets transferred. As a result, assets transferred 
with recourse are reported as financings, not as sales.
    However, this general rule does not apply to the transfer of 
mortgage loans under one of the government programs of the Government 
National Mortgage Association, Freddie Mac or Fannie Mae. Transfers of 
mortgages under one of these programs are automatically treated as 
sales. Furthermore, the OCC and FRB provide for the treatment of 
private transfers of mortgages as sales if the transferring institution 
does not retain a significant risk of loss on the assets transferred.

5. Negative Goodwill

    OTS practice is to follow GAAP for reporting purposes. OTS permits 
negative goodwill to offset goodwill reported as an asset. The banking 
agencies require that negative goodwill be reported as a liability, and 
not be netted against goodwill assets.

6. Push-Down Accounting

    OTS practice is to follow GAAP. OTS requires push-down accounting 
when there is at least a 90 percent change in ownership. Push-down 
accounting generally applies the fair value concepts of purchase 
accounting in the context of a holding company's acquisition of a 
company to be held as a separate subsidiary or combined with an 
existing subsidiary.
    The banking agencies require push-down accounting when there is at 
least a 95 percent change in ownership.

    Dated: January 6, 1997.

    By the Office of Thrift Supervision.
Nicolas P. Retsinas,
Director.
[FR Doc. 97-1182 Filed 1-16-97; 8:45 am]
BILLING CODE 6720-01-P