[Federal Register Volume 64, Number 95 (Tuesday, May 18, 1999)]
[Notices]
[Pages 26962-26966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12421]


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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.

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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 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.

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

A. Introduction

    The Federal Deposit Insurance Corporation (FDIC) has prepared this 
report pursuant to section 37(c) of the Federal Deposit Insurance Act. 
Section 37(c) requires the agency to 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. This report covers differences existing 
during 1998 and developments affecting these differences.
    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 
some 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 insured 
commercial banks and FDIC-supervised savings banks. The OTS requires 
each savings association to file the Thrift Financial Report (TFR). The 
reporting standards

[[Page 26963]]

for recognition and measurement in both the Call Report and the TFR are 
consistent with generally accepted accounting principles (GAAP). Thus, 
there are no significant differences in reporting standards among the 
agencies. However, two minor differences remain between the standards 
of the banking agencies and those of the OTS.
    Section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (12 U.S.C. 4803) requires the banking agencies 
and the OTS to conduct a systematic review of their regulations and 
written policies in order to improve efficiency, reduce unnecessary 
costs, and eliminate inconsistencies. It also directs the four agencies 
to work jointly to make uniform all regulations and guidelines 
implementing common statutory or supervisory policies. The results of 
these efforts must be ``consistent with the principles of safety and 
soundness, statutory law and policy, and the public interest.'' The 
four agencies' ongoing efforts to eliminate existing differences among 
their regulatory capital standards as part of the Section 303 review 
are discussed in the following section.

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 rating of ``1'' under 
the Uniform Financial Institutions Rating System (UFIRS)) 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 savings associations. However, the 
OTS' Prompt Corrective Action rule requires a savings association to 
have a 4 percent leverage capital ratio (or a 3 percent leverage 
capital ratio if it is rated a composite ``1'' under the UFIRS) in 
order for the association to be considered ``adequately capitalized.'' 
Consequently, the 4 percent leverage capital ratio is, in effect, the 
controlling leverage capital standard for savings associations other 
than those rated a composite ``1.''
    As a result of the agencies' section 303 review of their regulatory 
capital standards, the agencies issued a proposal for public comment on 
October 27, 1997, which, among other provisions, would establish a 
uniform leverage requirement. As proposed, institutions rated a 
composite 1 under the Uniform Financial Institutions Rating System 
would be subject to a minimum 3 percent leverage ratio and all other 
institutions would be subject to a minimum 4 percent leverage ratio. 
This change would simplify and streamline the agencies' leverage rules 
and make them uniform. On December 18, 1998, the FDIC Board of 
Directors approved a final rule adopting the uniform leverage 
requirement as proposed. After all four of the agencies approved this 
final rule, it was published on March 2, 1999 (64 Federal Register 
10194), and took effect on April 1, 1999.
B.2. Interest Rate Risk
    Section 305 of the FDIC Improvement Act of 1991 mandates that the 
agencies' risk-based capital standards take adequate account of 
interest rate risk. In August 1995, each of the banking agencies 
amended its capital standards to specifically include an assessment of 
a bank's interest rate risk, as measured by its exposure to declines in 
the economic value of its capital due to changes in interest rates, in 
the evaluation of bank capital adequacy. In June 1996, the banking 
agencies issued a Joint Agency Policy Statement on Interest Rate Risk 
that provides guidance on sound practices for managing interest rate 
risk. This policy statement does not establish a standardized measure 
of interest rate risk nor does it create an explicit capital charge for 
interest rate risk. Instead, the policy statement identifies the 
standards that the banking agencies will use to evaluate the adequacy 
and effectiveness of a bank's interest rate risk management.
    In 1993, the OTS adopted a final rule that adds an interest rate 
risk component to its risk-based capital standards. Under this rule, 
savings associations 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 partially implemented this 
rule by formalizing the review of interest rate risk; however, no 
deductions from capital are being made. Thus, the regulatory capital 
approach to interest rate risk adopted by the OTS differs from that of 
the banking agencies.
B.3. Subsidiaries
    The banking agencies generally consolidate all significant 
majority-owned subsidiaries of the parent bank for regulatory capital 
purposes. 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 that 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 for handling 
subsidiaries for purposes of determining the capital adequacy of the 
parent bank provide the banking agencies with the flexibility necessary 
to ensure that institutions maintain capital levels that are 
commensurate with the actual risks involved.
    Under the OTS' capital guidelines, a statutorily mandated 
distinction is drawn between subsidiaries engaged in activities that 
are permissible for national banks and subsidiaries engaged in 
``impermissible'' activities for national banks. For regulatory capital 
purposes, subsidiaries of savings associations 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. For subsidiaries that engage in impermissible 
activities, investments in, and loans to, such subsidiaries are 
deducted from assets and capital when determining the capital adequacy 
of the parent.
B.4. Servicing Assets and Intangible Assets
    On August 10, 1998, the four agencies jointly published a final 
rule (63 FR 42667) revising the treatment of servicing assets for 
regulatory capital purposes. As amended, the agencies' rules permit 
servicing assets and purchased credit card relationships to count 
toward capital requirements, subject to certain limits. The final rule 
increased the aggregate regulatory capital limit on these two 
categories of assets from 50 percent to 100 percent of Tier 1 capital. 
In addition, for the first time, servicing assets on financial assets 
other than mortgages were recognized (rather than deducted) for 
regulatory capital purposes. However, these nonmortgage servicing 
assets are

[[Page 26964]]

combined with purchased credit card relationships and this combined 
amount is limited to no more than 25 percent of an institution's Tier 1 
capital. Before applying these Tier 1 capital limits, mortgage 
servicing assets, nonmortgage servicing assets, and purchased credit 
card relationships are each first limited to the lesser of 90 percent 
of their fair value or 100 percent of their book value (net of any 
valuation allowances). Any servicing assets and purchased credit card 
relationships that exceed the relevant 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 Tier 1 
capital.
    The OTS' capital rules governing servicing assets and intangible 
assets contain two differences from the banking agencies' rules that, 
with the passage of time, have become relatively insignificant. Under 
its rules, the OTS has grandfathered, i.e., does not deduct from 
regulatory capital, core deposit intangibles acquired before February 
1994 up to 25 percent of Tier 1 capital and all purchased mortgage 
servicing rights acquired before February 1990.
B.5. Capital Requirements for Recourse Arrangements
    B.5.a. Senior-Subordinated Structures--Some asset securitization 
structures involve the creation of senior and subordinated classes of 
securities or other financial instruments. When a bank originates such 
a transaction and retains a subordinated interest, the banking agencies 
generally require that the bank maintain risk-based capital against its 
subordinated interest plus all more senior interests unless the low-
level recourse rule applies.\1\ 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 interest to 
the 100 percent risk weight category.
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    \1\ When assets are sold with limited recourse, the banking and 
thrift agencies' risk-based capital standards limit the amount of 
capital that must be maintained against this exposure to the lesser 
of the amount of the recourse retained (e.g., through the retention 
of a subordinated interest) or the amount of risk-based capital that 
would otherwise be required to be held against the assets that were 
sold, i.e., the full effective risk-based capital charge. This is 
known as the ``low-level recourse'' rule.
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    In general, unless the low-level recourse rule applies, the OTS 
requires a thrift that holds the subordinated interest in a senior-
subordinated structure to maintain capital against the subordinated 
interest plus all more senior interests regardless of whether the 
subordinated interest has been retained or has been purchased.
    On November 5, 1997, the banking and thrift agencies issued a 
proposal that, among other provisions, generally would treat both 
retained and purchased subordinated interests similarly for risk-based 
capital purposes, i.e., banks and thrifts would be required to hold 
capital against the subordinated interest plus all more senior 
interests unless the low-level recourse rule applies. The proposal also 
includes a multi-level approach to capital requirements for asset 
securitizations. The multi-level approach would vary the risk-based 
capital requirements for positions in securitizations, including 
subordinated interests, according to their relative risk exposure. The 
comment period for the proposal ended on February 3, 1998. The agencies 
have evaluated the comments received and, based on guidance received 
from the FFIEC, are working jointly to develop a revised proposal.
    B.5.b. Recourse Servicing--The right to service loans and other 
financial 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 an institution to maintain 
risk-based capital against the full amount of assets sold by the 
institution if the institution, as servicer, must absorb credit losses 
on those assets. 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 if the thrift is required to absorb credit 
losses on the assets being serviced.
    The agencies' November 1997 risk-based capital proposal would 
require banking organizations that purchase loan servicing rights which 
provide loss protection to the owners of the serviced loans to begin to 
hold capital against those loans, thereby making the risk-based capital 
treatment of these servicing rights uniform for banks and savings 
associations. As mentioned above, after evaluating the comments 
received on the proposal and receiving guidance from the FFIEC, the 
agencies are developing a revised recourse proposal.
B.6. Collateralized Transactions
    The FRB and the OCC assign a zero percent risk weight to claims 
collateralized by cash on deposit in the institution or by securities 
issued or guaranteed by the U.S. Government or the central governments 
of countries that are members of the Organization of Economic 
Cooperation and Development (OECD), provided a positive margin of 
collateral protection is maintained daily.
    The FDIC and the OTS assign a 20 percent risk weight to claims 
collateralized by cash on deposit in the institution or by securities 
issued or guaranteed by the U.S. Government or OECD central 
governments.
    As part of the Section 303 review of their capital standards, the 
banking and thrift agencies issued a joint proposal in August 1996 that 
would permit collateralized claims that meet criteria that are uniform 
among all four agencies to be eligible for a zero percent risk weight. 
In general, this proposal would allow institutions supervised by the 
FDIC and the OTS to hold less capital for transactions collateralized 
by cash or U.S. or OECD government securities. The proposal would 
eliminate the differences among the agencies regarding the capital 
treatment of collateralized transactions. The agencies are continuing 
to work together to complete a uniform final rule for collateralized 
transactions.
B.7. Presold Residential Construction Loans
    The four agencies assign a 50 percent risk weight to qualifying 
loans that a builder has obtained to finance the construction of one-
to-four family residential properties. These properties must be 
presold, and the lending relationship must meet certain other criteria. 
The OTS and the 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. Until the property is 
presold, the construction loan normally would be assigned to the 100 
percent risk weight category.
    As a result of their Section 303 review, the agencies' previously 
mentioned October 27, 1997, regulatory capital proposal includes a 
provision under which the OTS and the OCC would adopt the treatment of 
presold residential construction loans followed by the FDIC and the 
FRB. This would make the agencies' rules in this area uniform. On 
December 18, 1998, the FDIC Board of Directors approved a final rule 
that, as proposed, retains the existing FDIC-FRB treatment of presold 
residential construction loans. After all four of the agencies approved 
this final

[[Page 26965]]

rule, it was published on March 2, 1999, and took effect on April 1, 
1999.
B.8. Junior Liens on One-to-Four Family Residential Properties
    In some cases, a bank may make two loans on a single residential 
property, one secured by a first lien, the other by a junior lien. When 
there are no intervening liens, the FRB and the OTS view both loans as 
a single extension of credit secured by a first lien and assign the 
combined loan amount a 50 percent risk weight if the combined loans 
satisfy prudent underwriting standards, including a prudent loan-to-
value ratio, and are performing adequately. If these conditions are not 
met, e.g., if the combined loan amount exceeds a prudent loan-to-value 
ratio, the combined loans are assigned to the 100 percent risk weight 
category. The FDIC also combines the first and junior liens to 
determine the appropriateness of the loan-to-value ratio, but it 
applies the risk weights differently than the FRB and the OTS. If the 
combined loans satisfy prudent underwriting standards and are 
performing adequately, the FDIC risk weights the first lien at 50 
percent and the junior lien at 100 percent; otherwise, both liens are 
risk-weighted at 100 percent. This combining of first and junior liens 
is intended to avoid possible circumvention of the capital requirement 
and to capture the risks associated with the combined loans.
    The OCC treats all first and junior liens separately. It assigns 
the loan secured by the first lien, if it has been prudently 
underwritten, to the 50 percent risk weight category; otherwise, it 
assigns the loan to the 100 percent risk weight category. In all cases, 
the OCC assigns the loan secured by the junior lien to the 100 percent 
risk weight category.
    As a result of the Section 303 review of their capital standards, 
the agencies proposed on October 27, 1997, to extend the OCC's 
treatment of junior liens on one-to-four family residential properties 
to all four agencies and thereby eliminate this difference among the 
agencies. However, after considering the comments received on the 
proposal, the agencies concluded that it would be more appropriate to 
adopt the treatment of junior liens followed by the FRB and the OTS. On 
December 18, 1998, the FDIC Board of Directors approved a final rule 
that takes this FRB-OTS approach. After all four of the agencies 
approved this final rule, it was published on March 2, 1999, and took 
effect on April 1, 1999.
B.9. Mutual Funds
    The banking agencies assign the entire amount 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 the 
fund's future holdings cannot be known in advance. In no case, however, 
may a risk-weight of less than 20 percent be assigned to an investment 
in a mutual fund.
    The OTS applies a capital charge appropriate to the riskiest asset 
that a mutual fund is actually holding at a particular time, but not 
less than 20 percent. 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. However, the OTS and the OCC apply the 
pro rata allocation differently. While the OTS applies the allocation 
based on the actual holdings of the mutual fund, the OCC applies it 
based on the highest amount of holdings the fund is permitted to hold 
as set forth in its prospectus.
    As part of the agencies' Section 303 review of their regulatory 
capital standards, one provision of their October 27, 1997, proposal 
would apply the banking agencies' treatment of mutual funds to all 
institutions. However, the proposal also would permit institutions, at 
their option, to adopt the OCC's pro rata allocation alternative for 
risk weighting investments in mutual funds. This proposal would make 
the agencies' risk-based capital rules in this area uniform, thereby 
eliminating this capital difference. On December 18, 1998, the FDIC 
Board of Directors approved a final rule that adopts the mutual fund 
treatment that had been proposed. After all four of the agencies 
approved this final rule, it was published on March 2, 1999, and took 
effect on April 1, 1999.
B.10. Noncumulative Perpetual Preferred Stock
    Under the banking and thrift agencies' capital standards, 
noncumulative perpetual preferred stock is a component of Tier 1 
capital. The FDIC's capital standards define noncumulative perpetual 
preferred stock as perpetual preferred stock where the issuer has the 
option to waive the payment of dividends and where the dividends so 
waived do not accumulate to future periods and do not represent a 
contingent claim on the issuer. Under the FRB's capital standards, 
perpetual preferred stock is noncumulative if the issuer has the 
ability and legal right to defer or eliminate preferred dividends. For 
these two agencies, for a perpetual preferred stock issue to be 
considered noncumulative, the issue may not permit the accruing or 
payment of unpaid dividends in any form, including the form of 
dividends payable in common stock. Thus, if the issuer of perpetual 
preferred stock is required to pay dividends in a form other than cash 
when cash dividends are not or cannot be paid, the issuer does not have 
the option to waive or eliminate dividends and the stock would not 
qualify as noncumulative. The OCC's capital standards do not explicitly 
define noncumulative perpetual preferred stock, but the OCC normally 
has not considered perpetual preferred stock issues with this type of 
dividend requirement to be noncumulative.
    The OTS defines as noncumulative those issues of perpetual 
preferred stock where the unpaid dividends are not carried over to 
subsequent dividend periods. This definition does not address the 
issuer's ability to waive dividends. As a result, the OTS has permitted 
perpetual preferred stock issues that require the payment of dividends 
in the form of stock in the issuer when cash dividends are not paid to 
qualify as noncumulative.
B.11. Limitation on Subordinated Debt and Limited-Life Preferred Stock
    Consistent with the Basle Accord, the internationally agreed-upon 
risk-based capital framework which the banking agencies' risk-based 
capital standards implement, 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 in each of the last 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 capital. Furthermore, for all maturing 
instruments issued after November 7, 1989, 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. As for 
maturing capital

[[Page 26966]]

instruments issued on or before November 7, 1989, the OTS has 
grandfathered them with respect to the discounting requirement.
B.12. 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. In general, these 
are privately-issued mortgage-backed securities that are rated in one 
of the two highest rating categories, e.g., AA or better, by at least 
one nationally recognized statistical rating organization.
B.13. 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 OTS deducts the excess portion from 
assets and total capital.
B.14. ``Covered Assets''
    The banking agencies generally place assets subject to guarantee 
arrangements by the FDIC or the former 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
    The OTS' capital standards permit savings associations to include 
pledged deposits and nonwithdrawable accounts that meet OTS' criteria, 
Income Capital Certificates, and Mutual Capital Certificates in 
regulatory capital.
    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 banking 
agencies' capital standards.
B.16. Agricultural Loan Loss Amortization
    In the computation of regulatory capital, those banks that were 
accepted into the agricultural loan loss amortization program pursuant 
to Title VIII of the Competitive Equality Banking Act of 1987 were 
permitted to defer and amortize certain losses related to agricultural 
lending that were incurred on or before December 31, 1991. These losses 
had to be amortized over seven years. The unamortized portion of these 
losses was 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.
    Because the banking agencies' agricultural loan loss amortization 
program ended on December 31, 1998, this difference has now been 
eliminated.

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

C.1. 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 in a purchase (but not in a 
pooling of interests), 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.2. 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 zero.
    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 Basle Accord.
    The OTS permits negative goodwill to offset goodwill assets on the 
balance sheet.

    Dated at Washington, DC, this 12th day of May, 1999.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 99-12421 Filed 5-17-99; 8:45 am]
BILLING CODE 6714-01-P