[Federal Register Volume 70, Number 57 (Friday, March 25, 2005)]
[Notices]
[Pages 15379-15382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-5931]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 05-05]

FEDERAL RESERVE SYSTEM

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[No. 2005-12]


Joint Report: Differences in Accounting and Capital Standards 
Among the Federal Banking 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 accounting and capital standards among the federal 
banking 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 United States House of Representatives and to the Committee on 
Banking, Housing, and Urban Affairs of the United States Senate 
describing differences between the capital and accounting 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 F. Connolly, Senior 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 Accountant (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 the agencies. The report must 
be published in the Federal Register.
    This report, which covers differences existing as of December 31, 
2004, is the third 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 the agencies' first joint annual report, Section 37(c) required a 
separate report from each agency.
    Since the agencies filed their first reports on accounting and 
capital differences in 1990, the agencies have acted in concert to 
harmonize their accounting and capital standards and eliminate as many 
differences as possible. Section 303 of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (12 U.S.C. 4803) 
also 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.'' During the past decade, the agencies have revised 
their capital standards to address changes in credit and certain other 
risk exposures within the banking system and to align the amount of 
capital institutions are

[[Page 15380]]

required to hold more closely with the credit risks and certain other 
risks to which they are exposed. These revisions have been made in a 
uniform manner whenever possible and practicable to minimize 
interagency differences.
    While the differences in capital standards have diminished over 
time, a few differences remain. Some of the remaining capital 
differences are statutorily mandated. Others 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. In addition to the specific differences noted 
below, the agencies may have differences in how they apply certain 
aspects of their rules. These differences usually arise as a result of 
case-specific inquiries that have only been presented to one agency. 
Agency staffs seek to minimize these occurrences by coordinating 
responses to the fullest extent reasonably practicable.
    The federal banking agencies have substantially similar capital 
adequacy standards. These standards employ a common regulatory 
framework that establishes minimum leverage and risk-based capital 
ratios for all banking organizations (banks, bank holding companies, 
and savings associations). 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 OCC, the FRB, and the FDIC, under the auspices of the Federal 
Financial Institutions Examination Council, have developed uniform 
Reports of Condition and Income (Call Reports) for all insured 
commercial banks and state-chartered 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 Reports 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

Financial Subsidiaries
    The Gramm-Leach-Bliley Act (GLBA) establishes the framework for 
financial subsidiaries of banks.\1\ GLBA amends the National Bank 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.
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    \1\ A national bank that has a financial subsidiary must satisfy 
a number of statutory requirements in addition to the capital 
deduction and deconsolidation requirements described in the text. 
The bank (and each of its depository institution affiliates) must be 
well capitalized and well managed. Asset size restrictions apply to 
the aggregate amount of assets of all of the bank's financial 
subsidiaries. Certain debt rating requirements apply, depending on 
the size of the national bank. The national bank is required to 
maintain policies and procedures to protect the bank from financial 
and operational risks presented by the financial subsidiary. It is 
also required to have policies and procedures to preserve the 
corporate separateness of the financial subsidiary and the bank's 
limited liability. Finally, transactions between the bank and its 
financial subsidiary generally must comply with the Federal Reserve 
Act's (FRA) restrictions on affiliate transactions and the financial 
subsidiary is considered an affiliate of the bank for purposes of 
the anti-tying provisions of the Bank Holding Company Act. See 12 
U.S.C. 5136A.
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    State member banks may have financial subsidiaries subject to all 
of the same restrictions that apply to national banks.\2\ State 
nonmember banks may also have financial subsidiaries, but they are 
subject only to a subset of the statutory requirements that apply to 
national banks and state member banks.\3\ Finally, national banks, 
state member banks, and state nonmember banks may not establish or 
acquire a financial subsidiary or commence a new activity in a 
financial subsidiary if the bank, or any of its insured depository 
institution affiliates, has received a less than satisfactory rating as 
of its most recent examination under the Community Reinvestment Act.\4\
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    \2\ See 12 U.S.C. 335 (state member banks subject to the ``same 
conditions and limitations'' that apply to national banks that hold 
financial subsidiaries).
    \3\ The applicable statutory requirements for state nonmember 
banks are as follows. The bank (and each of its insured depository 
institution affiliates) must be well capitalized. The bank must 
comply with the capital deduction and deconsolidation requirements. 
It must also satisfy the requirements for policies and procedures to 
protect the bank from financial and operational risks and to 
preserve corporate separateness and limited liability for the bank. 
Further, transactions between the bank and a subsidiary that would 
be classified as a financial subsidiary generally are subject to the 
affiliate transactions restrictions of the FRA. See 12 U.S.C. 1831w.
    \4\ See 12 U.S.C. 1841(l)(2).
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    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-
supervised savings associations to own, hold, or operate financial 
subsidiaries, as defined.
Subordinate Organizations Other Than Financial Subsidiaries
    Banks supervised by the OCC, the FRB, and the FDIC generally 
consolidate all significant majority-owned subsidiaries other than 
financial subsidiaries for regulatory capital purposes. This practice 
assures that capital requirements are related to the aggregate credit 
(and, where applicable, market) risks to which the banking organization 
is exposed. For subsidiaries other than financial 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 subordinate organization is, for 
risk-based capital purposes, deducted from capital or assigned to the 
100 percent risk-weight category, depending upon the circumstances. The 
FRB's and the FDIC's rules also permit the banking organization to 
consolidate the investment on a pro rata basis in appropriate 
circumstances. 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's capital regulations, a statutorily mandated 
distinction is drawn between subsidiaries, which generally are 
majority-owned, that are engaged in activities that are permissible for 
national banks and those that are engaged in activities 
``impermissible'' for national banks. Where subsidiaries engage in 
activities

[[Page 15381]]

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 that organization.\5\ If such a subordinate organization 
engages solely in permissible activities, the OTS may, depending upon 
the nature and risk of the activity, either assign investments in and 
loans to that organization to the 100 percent risk-weight category or 
require full deduction of the investments and loans.
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    \5\ See 12 CFR 559.2 for the OTS's definition of subordinate 
organization.
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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, U.S. Government agencies, 
or the central governments of other countries that are members of the 
Organization for Economic Cooperation and Development (OECD). 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 zero percent risk weight to claims on 
qualifying securities firms that are 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. The FDIC and the OTS accord a 20 percent risk weight to 
such claims on other parties.
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.
    As a result of these requirements, 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.
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 restriction. The OTS does, however, limit the amount 
of Tier 2 capital to 100 percent of Tier 1 capital, as do the other 
agencies.
    In addition, for banking organizations supervised by the OCC, the 
FRB, and the FDIC, at the beginning of each of the last five years of 
the life of a subordinated debt or limited-life preferred stock 
instrument, the amount that is eligible for inclusion in Tier 2 capital 
is reduced by 20 percent of the original amount of that instrument (net 
of redemptions). 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 instrument's 
life, allows for the full inclusion of all such instruments, provided 
that the aggregate amount of such instruments 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. In the 
aggregate, however, these deposits, accounts, and certificates are only 
a negligible amount of the Tier 1 capital of OTS-supervised savings 
associations. 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.
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 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. Other 
subsequent statutory and regulatory changes, however, imposed higher 
capital standards 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.

Differences in Accounting Standards Among the Federal Banking 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 acquired in a purchase, 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

[[Page 15382]]

accounting for regulatory reporting purposes 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 the use of push-down 
accounting when there is at least a 90 percent change in ownership.

    Dated: March 15, 2005.
Julie L. Williams,
Acting Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, March 17, 2005.
Jennifer J. Johnson,
Secretary of the Board.
    Dated in Washington, DC, this 14th day of March, 2005.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
 Executive Secretary.
    Dated: March 14, 2005.

    By the Office of Thrift Supervision.
James Gilleran,
Director.
[FR Doc. 05-5931 Filed 3-24-05; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P