[Federal Register Volume 68, Number 24 (Wednesday, February 5, 2003)]
[Notices]
[Pages 5976-5979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2780]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 03-03]

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[No. 2003-03]


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

AGENCIES: Office of the Comptroller of the Currency (OCC), Treasury; 
Board of Governors of the Federal Reserve System (Board); Federal 
Deposit Insurance Corporation (FDIC); and Office of Thrift Supervision 
(OTS), Treasury.

ACTION: Report to the Committee on Financial Services of the United 
States 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: The OCC, Board, FDIC, and OTS (the agencies) have prepared 
this report pursuant to section 37(c) of the Federal Deposit Insurance 
Act (12 U.S.C. 1831n(c)). Section 37(c) requires the Agencies to 
jointly submit an annual report to the Committee on Financial Services 
of the House of Representatives and to the Committee on Banking, 
Housing, and Urban Affairs of the Senate describing differences between 
the accounting and capital standards used by the agencies. The report 
must be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:
    OCC: Nancy Hunt, Risk Expert (202-874-4923), Office of the 
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
    Board: John Connolly, Supervisory Financial Analyst (202-452-3621), 
Division of Banking Supervision and Regulation, Board of Governors of 
the Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551.
    FDIC: Robert F. Storch, Chief, Accounting and Securities Disclosure 
Section (202-898-8906), Division of Supervision and Consumer 
Protection, Federal Deposit Insurance Corporation, 550 17th Street, 
NW., Washington, DC 20429.
    OTS: Michael D. Solomon, Senior Program Manager for Capital Policy 
(202-906-5654), Supervision Policy, Office of Thrift Supervision, 1700 
G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION: The text of the report follows:

Report to the Committee on Financial Services of the United States 
House of Representatives and to the Committee on Banking, Housing, and 
Urban Affairs of the United States Senate Regarding Differences in 
Accounting and Capital Standards Among the Federal Banking Agencies

Introduction

    The Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (FRB), the Federal Deposit 
Insurance Corporation (FDIC), and the Office of Thrift Supervision 
(OTS) (the Federal banking agencies or the agencies) must jointly 
submit an annual report to the Committee on Financial Services of the 
U.S. House of Representatives and the Committee on Banking, Housing, 
and Urban Affairs of the U.S. Senate describing differences between the 
accounting and capital standards used by and among the agencies. The 
report must be published in the Federal Register. This report covers 
differences existing as of December 31, 2002.
    This is the first joint annual report on differences in accounting 
and capital standards to be submitted pursuant to Section 37(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1831n(c)), as amended. Prior 
to this report, each agency reported separately.
    Section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (12 U.S.C. 4803) in part directs the 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.''
    Since the agencies filed their first reports under this reporting 
requirement in 1991, the agencies have acted in concert on numerous 
occasions to modify their accounting and capital standards and to 
harmonize the four sets of standards so as to eliminate as many 
differences as possible. In particular, the agencies have revised their 
capital standards to address changes in credit and certain other risk 
exposures within the banking system, thereby rendering the amount of 
capital institutions are required to hold generally more commensurate 
with the credit risk and certain other risks to which they are exposed. 
Some of the few remaining capital differences are statutorily mandated. 
Some were significant historically but now no longer affect in a 
measurable way, either individually or in the aggregate, institutions 
supervised by the Federal banking agencies.
    As a result, the Federal banking agencies now have substantially 
similar leverage and risk-based capital standards. These standards 
employ a common regulatory framework that establishes minimum capital 
adequacy ratios for all banking organizations (banks, bank holding 
companies and savings associations). In 1989, all four agencies adopted 
risk-based capital frameworks that were based upon the international 
capital accord (the Basel Accord) developed by the Basel Committee on 
Banking Regulations and Supervisory Practices (Basel

[[Page 5977]]

Supervisors' Committee) and endorsed by the central bank governors of 
the G-10 countries. The agencies view the risk-based capital and 
leverage 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 OCC, the FRB, and the FDIC, 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 OTS-supervised savings association to file the Thrift Financial 
Report (TFR). The reporting standards for recognition and measurement 
in the Call Report and the TFR are consistent with generally accepted 
accounting principles (GAAP). Thus, there are no significant 
differences in regulatory accounting standards for regulatory reports 
filed with the Federal banking agencies. Only one minor difference 
remains between the accounting standards of the OTS and those of the 
other Federal banking agencies, and that difference relates to push-
down accounting, as more fully explained below.

Differences in Capital Standards Among the Federal Banking Agencies

Subordinate Organizations Other Than Financial Subsidiaries
    Banks supervised by the OCC, the FRB, and the FDIC generally 
consolidate all significant majority-owned subsidiaries, including 
banking and finance subsidiaries, of the parent banking organization 
for regulatory capital purposes. This practice assures that capital 
requirements are related to the risks to which the banking organization 
is exposed. When banking and finance subsidiaries are not consolidated 
for financial reporting purposes under GAAP, the aggregate amount of 
investments in such subsidiaries is deducted from a bank's total 
capital.
    For other subsidiaries that are not consolidated on a line-for-line 
basis for financial reporting purposes, joint ventures, and associated 
companies, the parent banking organization's investment in each such 
entity may be treated in any of three ways for risk-based capital 
purposes, depending upon the circumstances: the entity's balance sheet 
may be consolidated on a pro-rata basis, the banking organization's 
investment in the entity may be deducted entirely from capital, or the 
banking organization's investment in the entity may be assigned to the 
100 percent risk-weight category. These options for handling 
unconsolidated subsidiaries, joint ventures, and associated companies 
for purposes of determining the capital adequacy of the parent banking 
organization provide the agencies with the flexibility necessary to 
ensure that institutions maintain capital levels that are commensurate 
with the actual risks involved.
    Under the OTS' capital regulations, a statutorily mandated 
distinction is drawn between subsidiaries (majority-owned) engaged in 
activities that are permissible for national banks and subsidiaries 
engaged in ``impermissible'' activities for national banks. Where 
subsidiaries engage in activities that are impermissible for national 
banks, the OTS requires the deduction of the parent's investment in 
these subsidiaries from the parent's assets and capital. If a 
subsidiary's activities are permissible for a national bank, that 
subsidiary's assets are generally consolidated with those of the parent 
on a line-for-line basis. If a subordinate organization, other than a 
subsidiary, engages in impermissible activities, the OTS will generally 
deduct investments in and loans to such organization. If a subordinate 
organization, other than a subsidiary, engages solely in permissible 
activities, the OTS may, depending upon the nature and risk of the 
activity, either assign investments in and loans to such organizations 
to the 100 percent risk-weight category or require full deduction of 
the investments and loans.
Financial Subsidiaries
    The Gramm-Leach-Bliley Act (GLBA) amends the National Banking Act 
to permit national banks to conduct certain expanded financial 
activities through financial subsidiaries. Section 121(a) of the GLBA 
(12 U.S.C. 24a) imposes a number of conditions and requirements upon 
national banks that have financial subsidiaries, including specifying 
the treatment that applies for regulatory capital purposes. The statute 
requires that a national bank deduct from assets and tangible equity 
the aggregate amount of its equity investments in financial 
subsidiaries. The statute further requires that the financial 
subsidiary's assets and liabilities not be consolidated with those of 
the parent national bank for applicable capital purposes.
    GLBA also amends the Federal Deposit Insurance Act to provide that 
an insured State bank is, among other limitations, subject to the 
capital deduction and deconsolidation requirements that apply to a 
national bank if the State bank holds an interest in a subsidiary that 
engages as principal in activities that would only be permissible for a 
national bank to conduct through a financial subsidiary. Under section 
121(d) of GLBA (12 U.S.C. 1831w), a State bank that holds an interest 
in any financial subsidiary--whether conducting activities as a 
principal or agent--must comply with all of the same conditions that 
apply to a national bank, including the capital deduction and 
deconsolidation requirement. The OCC, the FDIC, and the FRB adopted 
final rules implementing their respective provisions of section 121 of 
GLBA for national banks in March 2000, for state nonmember banks in 
January 2001, and for state member banks in August 2001. GLBA did not 
provide new authority to OTS-regulated institutions to own, hold or 
operate financial subsidiaries, as defined.
Nonfinancial Equity Investments
    Under final rules jointly published by the OCC, the FRB, and the 
FDIC, on January 25, 2002 (67 FR 3783), subject to certain exceptions, 
covered equity investments in nonfinancial companies are subject to a 
Tier 1 capital charge (for both risk-based and leverage capital 
purposes) that increases in steps as the banking organization's level 
of concentration in equity investments increases. The GLBA authorizes 
financial holding companies, which are bank holding companies granted 
expanded investment and activity authority by the GLBA, to acquire or 
control shares, assets, or ownership interests of any nonfinancial 
company as part of a bona fide underwriting, or merchant or investment 
banking activity. Banks and bank holding companies supervised by the 
OCC, the FDIC, or the FRB also have authority, which predated GLBA, to 
make limited equity investments in nonfinancial companies under various 
other legal authorities.
    OTS-regulated holding companies grandfathered by GLBA have no 
statutory limits on their investments. Nongrandfathered holding 
companies may make equity investments in nonfinancial companies of the 
type authorized for financial holding companies (e.g., bona fide 
underwriting or merchant or investment banking activity). The OTS does 
not prescribe specific capital regulations for OTS-regulated holding 
companies.

[[Page 5978]]

Collateralized Transactions
    The FRB and the OCC assign a zero percent risk weight to certain 
claims collateralized by cash on deposit in the institution or by 
securities issued or guaranteed by the U.S. government, U.S. government 
agencies, or the central governments of other countries that are 
members of the Organization of Economic Cooperation and Development 
(OECD). To qualify for the zero percent risk weight, the OCC and the 
FRB rules require the collateral to be marked-to-market daily and a 
positive margin of collateral protection to be maintained daily. The 
FRB requires qualifying claims to be fully collateralized, while the 
OCC rule permits partial collateralization.
    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, U.S. government agencies, 
or other OECD central governments.
    In a final interagency rule assigning a 20 percent risk weight to 
certain claims on qualifying securities firms, which was published in 
the Federal Register on April 9, 2002, (67 FR 16971), the FDIC and the 
OTS conformed their rules to assign a zero percent risk weight to 
certain collateralized claims on qualifying securities firms that are 
marked to market daily and have a positive margin of collateral. The 
rule became effective July 1, 2002. The actions taken by the FDIC and 
the OTS in adopting the April 9, 2002, rule for claims on qualifying 
securities firms eliminates a portion of the capital difference 
regarding collateralized transactions between these agencies and the 
OCC and the FRB.
Noncumulative Perpetual Preferred Stock
    Under the Federal banking agencies' capital standards, 
noncumulative perpetual preferred stock is a component of Tier 1 
capital. The capital standards of the OCC, the FRB, and the FDIC 
require noncumulative perpetual preferred stock to give the issuer the 
option to waive the payment of dividends and to provide that waived 
dividends neither accumulate to future periods nor represent a 
contingent claim on the issuer.
    The practical effect of these requirements is that if a bank 
supervised by the OCC, the FRB, or the FDIC issues perpetual preferred 
stock and is required to pay dividends in a form other than cash--e.g., 
stock--when cash dividends are not or cannot be paid, the bank does not 
have the option to waive or eliminate dividends and the stock would not 
qualify as noncumulative. If an OTS-supervised savings association 
issues perpetual preferred stock that requires the payment of dividends 
in the form of stock when cash dividends are not paid, the stock may, 
subject to supervisory approval, qualify as noncumulative.
Equity Securities of Government-Sponsored Enterprises
    The FRB, the FDIC, and the OTS apply a 100 percent risk weight to 
equity securities of government-sponsored enterprises (GSEs), other 
than the 20 percent risk weighting of Federal Home Loan Bank stock held 
by banking organizations as a condition of membership. The OCC applies 
a 20 percent risk weight to all GSE equity securities. This difference 
arises because the OCC's risk-based capital standards specify that 
``securities'' of GSEs, which includes both debt and equity securities, 
qualify for the 20 percent risk weight. In contrast, the risk-based 
capital standards of the FRB, the FDIC, and the OTS apply a 20 percent 
risk weight only to debt claims on these companies.
Limitation on Subordinated Debt and Limited-Life Preferred Stock
    The OCC, the FRB, and the FDIC limit the amount of subordinated 
debt and intermediate-term preferred stock that may be treated as part 
of Tier 2 capital to 50 percent of Tier 1 capital. The OTS does not 
prescribe such a limit. In addition, for banking organizations 
supervised by the OCC, the FRB, and the FDIC, these maturing 
instruments must be discounted by 20 percent in each of the last five 
years before maturity. The OTS provides thrifts the option of using 
either the discounting approach used by the other Federal banking 
agencies, or an approach which, during the last seven years of the 
maturing instrument's life, 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.
Pledged Deposits, Nonwithdrawable Accounts, and Certain Certificates
    The OTS capital regulations permit mutual savings associations to 
include in Tier 1 capital pledged deposits and nonwithdrawable accounts 
to the extent that such accounts or deposits have no fixed maturity 
date, cannot be withdrawn at the option of the accountholder, and do 
not earn interest that carries over to subsequent periods. The OTS also 
permits the inclusion of net worth certificates, mutual capital 
certificates, and income capital certificates complying with applicable 
OTS regulations in savings associations' Tier 2 capital. The OCC, the 
FRB, and the FDIC do not expressly address these instruments in their 
regulatory capital standards, and they generally are not recognized as 
Tier 1 or Tier 2 capital components.
Servicing Assets and Intangible Assets
    The Federal banking agencies' capital rules permit servicing assets 
and purchased credit card relationships to be included in assets (i.e., 
not be deducted), subject to certain limits. The aggregate regulatory 
capital limit on these two categories of assets is 100 percent of Tier 
1 capital. However, within this overall limit, nonmortgage servicing 
assets are 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 valued at the lesser of 90 
percent of their fair value or 100 percent of their book value (net of 
any valuation allowances).
    A recent statutory change permits the agencies to eliminate this 10 
percent fair value discount from their capital standards if the 
agencies determine that such assets can be valued at 100 percent of 
their book value consistent with safety and soundness. The agencies are 
considering how best to make such a determination. 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.
    Although the Federal banking agencies' regulatory capital treatment 
of servicing assets and intangible assets is fundamentally the same, 
the OTS' capital rules contain one difference that, with the passage of 
time, continues to lose significance. 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.
Covered Assets
    The OCC, the FRB, and the FDIC 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

[[Page 5979]]

these ``covered assets'' in the zero percent risk-weight category.
Tangible Capital Requirement
    Savings associations supervised by the OTS, by statute, must 
satisfy a 1.5 percent minimum tangible capital requirement. However, 
subsequent statutory and regulatory changes have imposed higher capital 
standards on savings associations, rendering it unlikely, if not 
impossible, for the 1.5 percent tangible capital requirement to 
function as a meaningful regulatory trigger. This statutory tangible 
capital requirement does not apply to institutions supervised by the 
OCC, the FRB, or the FDIC.
Interest Rate Risk
    The OCC, the FRB, and the FDIC specifically include in their 
evaluation of capital adequacy an assessment of a banking 
organization'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 addition, these three agencies have provided 
guidance on sound practices for managing interest rate risk and on the 
standards that they use to evaluate the adequacy and effectiveness of a 
banking organization's interest rate risk management.
    Historically, the OTS employed an explicit interest rate risk 
component in its capital rule, as distinct from the other banking 
agencies. In 2002 the OTS eliminated this explicit requirement from its 
standards in light of other supervisory tools that are currently 
available to measure and control interest rate risk. The OTS, like the 
other banking agencies, has provided written guidance on sound 
practices for managing interest rate risk, and directs examiners to 
take into account interest rate risk when assessing capital adequacy. 
The OTS' final rule brought its regulatory capital treatment of 
interest rate risk into line with the approach followed by the other 
Federal banking agencies, thereby formally eliminating a capital 
difference between the OTS and the other agencies.

Differences in Accounting Standards Among the Federal Banking and 
Thrift Agencies

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 purchased by another organization 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 OCC, the FRB, and the FDIC require the use of push-down 
accounting for regulatory reporting purposes when there is a 95 percent 
or greater change in ownership. This approach is generally consistent 
with accounting interpretations issued by the staff of the Securities 
and Exchange Commission. The OTS requires the use of push-down 
accounting when there is a 90 percent or greater change in ownership.

    Dated: January 29, 2003.
John D. Hawke, Jr.,
Comptroller of the Currency.

    Dated: January 28, 2003.

By order of the Board of Governors of the Federal Reserve System.
Jennifer J. Johnson,
Secretary of the Board.

    Dated in Washington, DC this 29th day of January, 2003.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

    Dated: January 24, 2003.

By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 03-2780 Filed 2-4-03; 8:45 am]
BILLING CODE 4810-33, 6210-01, 6714-01 and 6720-01-P