[Federal Register Volume 75, Number 152 (Monday, August 9, 2010)]
[Notices]
[Pages 47900-47903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-19499]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2010-0005]

FEDERAL RESERVE SYSTEM

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket OTS-2010-0006]


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 (FRB); Federal Deposit 
Insurance Corporation (FDIC); and Office of Thrift Supervision (OTS), 
Treasury.

ACTION: Report to the Congressional Committees.

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SUMMARY: The OCC, the FRB, the FDIC, and the OTS (the agencies) have 
prepared this report pursuant to section 37(c) of the Federal Deposit 
Insurance Act. 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: Paul Podgorski, Risk Expert, Capital Policy (202-874-4755), 
Office of the Comptroller of the Currency, 250 E Street, SW., 
Washington, DC 20219.
    FRB: John F. Connolly, Manager, Risk Policy and Guidance (202-452-
3621) or Kevin H. Wilson, Senior Financial Analyst (202-452-2362), 
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: Christine A. Smith, Project Manager (202-906-5740), 
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.
    The agencies are submitting this joint report, which covers 
differences existing as of December 31, 2009, pursuant to

[[Page 47901]]

Section 37(c) of the Federal Deposit Insurance Act (12 U.S.C. 
1831n(c)), as amended. The capital differences described in this report 
are the same as those presented in recent years. 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 directed 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.'' In recent years, 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 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 in capital standards 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. Furthermore, 
while the agencies work together to adopt and apply generally uniform 
capital standards, there are wording differences in various provisions 
of the agencies' standards that largely date back to each agency's 
separate initial adoption of these standards before 1990.
    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.
    Furthermore, in December 2007, the federal banking agencies issued 
a new common risk-based capital adequacy framework, ``Risk-Based 
Capital Standards: Advanced Capital Adequacy Framework--Basel II.'' \1\ 
The final rule requires some qualifying banking organizations, and 
permits other qualifying banking organizations, to use an advanced 
internal ratings-based approach to calculate regulatory credit risk 
capital requirements and advanced measurement approaches to calculate 
regulatory operational risk capital requirements. It describes the 
qualifying criteria for banking organizations required or seeking to 
operate under the new framework and the applicable risk-based capital 
requirements for banking organizations that operate under the 
framework. Because the agencies adopted a joint final rulemaking 
establishing a common framework, there are no differences among the 
agencies' Basel II rules.
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    \1\ 72 FR 69288, December 7, 2007.
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    The risk-based capital differences described below have arisen 
under the agencies' Basel I-based risk-based capital standards.
    The OCC, the FRB, and the FDIC, under the auspices of the Federal 
Financial Institutions Examination Council (FFIEC), have developed 
uniform Consolidated 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 U.S. 
generally accepted accounting principles (GAAP). Thus, there are no 
significant differences in regulatory accounting standards for 
regulatory reports filed with the federal banking agencies. In 2009, 
the OTS eliminated the only minor difference remaining between the 
accounting standards of the OTS and those of the other federal banking 
agencies, and that difference related to push-down accounting, as more 
fully explained below.
    With regard to the capital difference pertaining to covered assets 
discussed below, the OTS will clarify in the TFR instructions that its 
capital rule that allows a zero percent risk-weight for covered assets 
applies only to those assets initially covered by the Federal Savings 
and Loan Insurance Corporation (FSLIC), regardless of any successor 
agency.

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.\2\ 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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    \2\ 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 the 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.\3\ 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

[[Page 47902]]

member banks.\4\ 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.\5\
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    \3\ See 12 U.S.C. Section 335 (state member banks subject to the 
``same conditions and limitations'' that apply to national banks 
that hold financial subsidiaries).
    \4\ 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. 
Section 1831w.
    \5\ See 12 U.S.C. Section 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. 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.
    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 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 for regulatory capital purposes. 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 for regulatory 
capital purposes.\6\ 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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    \6\ See 12 CFR Section 559.2 for the OTS's definition of 
subsidiary and 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.

Tangible Capital Requirement

    Savings associations supervised by the OTS, by statute, must 
satisfy a 1.5 percent minimum tangible capital

[[Page 47903]]

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.

Market Risk Rule

    In 1996, the OCC, the FRB, and the FDIC adopted rules requiring 
banks and bank holding companies with significant exposure to market 
risk to measure and maintain capital to support that risk. The OTS did 
not adopt a market risk rule because no OTS-supervised savings 
association engaged in the threshold level of trading activity 
addressed by the other agencies' rules. As the nature of many savings 
associations' activities has changed since 1996, market risk has become 
an increasingly more significant risk factor to consider in the capital 
management process. Accordingly, the OTS joined the other agencies in 
proposing a revised market risk rule in 2006.\7\ The Basel Committee on 
Banking Supervision published its ``Revisions to the Basel II Market 
Risk Framework'' in July 2009, which the agencies are currently working 
to implement in the U.S.
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    \7\ 71 FR 55958 (September 25, 2006). This NPR was not 
finalized.
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Pledged Deposits, Nonwithdrawable Accounts, and Certain Certificates

    The OTS's 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, if any, of the Tier 1 or Tier 2 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 FSLIC in the 20 
percent risk-weight category. The OTS has placed certain ``covered 
assets'' in the zero percent risk-weight category.\8\ In the aggregate, 
the amount of assets originally covered by the FSLIC that are reported 
by OTS-supervised savings associations is negligible. In the second 
quarter of 2010, the OTS will revise the instructions to the TFR 
regulatory capital schedule to specify that only that portion of assets 
that were fully covered against capital loss and/or by yield 
maintenance agreements initially by the FSLIC, regardless of any later 
successor agency such as the FDIC, may receive a zero percent risk 
weight. The federal banking agencies issued a Joint Statement, 
Clarification of the Risk Weight for Claims on or Guaranteed by the 
FDIC, on February 26, 2010, that clarifies the risk weights for claims 
on or guaranteed by the FDIC for purposes of banking organizations' 
risk-based capital requirements. Recent loss-sharing agreements entered 
into by the FDIC with acquirers of assets from failed institutions are 
considered conditional guarantees for risk-based capital purposes due 
to contractual conditions that acquirers must meet. The guaranteed 
portion of assets subject to an FDIC loss-sharing agreement may be 
assigned a 20 percent risk weight. Any covered assets reported by a 
savings association other than those meeting 12 CFR Section 
567.6(a)(1)(i)(F) may similarly receive a 20 percent risk weight.
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    \8\ See 12 CFR 567.6(a)(1)(i)(F).
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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 the institution becoming substantially wholly owned. 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 
accounting for regulatory reporting purposes when an institution's 
voting stock becomes at least 95 percent owned by an investor or a 
group of investors acting collaboratively. The OTS had required the use 
of push-down accounting when an institution's voting stock became at 
least 90 percent owned by an investor or investor group. In 2009, the 
OTS adopted the same push-down threshold as the OCC, the FRB, and the 
FDIC, eliminating this accounting difference. This approach is 
generally consistent with accounting interpretations issued by the 
staff of the Securities and Exchange Commission.

    Dated: July 12, 2010.
John C. Dugan,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, July 30, 2010.
Jennifer J. Johnson,
Secretary of the Board.
    Dated at Washington, DC, this 22nd day of June 2010.

    Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
    Dated: June 2, 2010.

    By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. 2010-19499 Filed 8-6-10; 8:45 am]
BILLING CODE 6720-01-P 6219-01-P 6714-01-P 6720-01-P