[Federal Register Volume 79, Number 184 (Tuesday, September 23, 2014)]
[Notices]
[Pages 56856-56861]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-22593]



[[Page 56856]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

FEDERAL RESERVE SYSTEM

FEDERAL DEPOSIT INSURANCE CORPORATION


Joint Report: Differences in Accounting and Capital Standards 
Among the Federal Banking Agencies as of December 31, 2013; Report to 
Congressional Committees

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

ACTION: Report to the Congressional Committees.

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SUMMARY: The OCC, the Board, and the FDIC (collectively, 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 
U.S. House of Representatives and to 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.

FOR FURTHER INFORMATION CONTACT: OCC: Benjamin Pegg, Risk Specialist, 
Capital Policy, (202) 649-7146, Office of the Comptroller of the 
Currency, 400 7th Street SW., Washington, DC 20219.
    Board: Sviatlana Phelan, Senior Financial Analyst, Capital and 
Regulatory Policy, (202) 912-4306, Division of Banking Supervision and 
Regulation, Board of Governors of the Federal Reserve System, 20th 
Street and Constitution Avenue NW., Washington, DC 20551.
    FDIC: David W. Riley, Senior Analyst (Capital Markets), (202) 898-
3728, Division of Risk Management Supervision, Federal Deposit 
Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION: The text of the report follows:

Report to the Committee on Financial Services of the U.S. House of 
Representatives and to the Committee on Banking, Housing, and Urban 
Affairs of the U.S. 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 (Board), and the Federal 
Deposit Insurance Corporation (FDIC) (collectively, 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 any 
differences between the accounting and capital standards used by the 
agencies.\1\ The report must be published in the Federal Register.
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    \1\ Prior to 2011, the Office of Thrift Supervision (OTS) joined 
the agencies in submitting this annual report to Congress. Title III 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law. 111-203, 124 Stat. 1376 (2010) (Dodd-Frank Act), 
transferred the powers, authorities, rights, and duties of the OTS 
to other federal banking agencies on July 21, 2011 (the transfer 
date), and the OTS was abolished 90 days later. Under Title III, the 
OCC assumed all functions of the OTS and the Director of the OTS 
relating to federal savings associations, and thus the OCC has 
responsibility for the ongoing supervision, examination, and 
regulation of federal savings associations as of the transfer date. 
Title III transferred all supervision, examination, and certain 
regulatory functions of the OTS relating to state savings 
associations to the FDIC and all functions relating to the 
supervision of any savings and loan holding company and non-
depository institution subsidiaries of such holding companies to the 
Board. Accordingly, this report is being submitted by the OCC, 
Board, and FDIC.
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    The agencies are submitting this joint report, which covers 
differences between their uses of accounting or capital standards 
existing as of December 31, 2013, pursuant to section 37(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1831n(c)), as amended. This 
report covers 2012 and 2013 and describes capital differences similar 
to those presented in previous reports.\2\
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    \2\ See, e.g., 77 FR 75259 (December 19, 2012).
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    Since the agencies filed their first reports on accounting and 
capital differences in 1990, they 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.'' \3\ In recent years, the agencies have revised their 
capital standards to harmonize their regulatory capital requirements in 
a comprehensive manner 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 to minimize interagency 
differences. Although the differences in capital standards have 
diminished over time significantly, a few differences remain, some of 
which are statutorily mandated.
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    \3\ 12 U.S.C. 4803(a).
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    Several of the differences described in this report will be 
resolved beginning in 2014, when revised capital rules take effect for 
institutions subject to the advanced approaches risk-based capital 
rules, and in 2015, when revised capital rules take effect for all 
other institutions subject to those rules. In 2012, the agencies 
published three notices of proposed rulemaking seeking public comment 
on the implementation of the Basel III capital standards,\4\ a 
standardized approach for risk weighting assets and off-balance sheet 
exposures, as well as revisions to the agencies' advanced approaches 
rules.\5\ The agencies adopted these proposals with some revisions and 
published the revised capital rules in the Federal Register in 2013 
(revised capital rules).\6\
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    \4\ See BCBS, ``Basel III: A Global Regulatory Framework for 
More Resilient Banks and Banking Systems'' (December 2010), 
available at www.bis.org/publ/bcbs189.htm.
    \5\ See 77 FR 52792 (August 30, 2012).
    \6\ The Board adopted the revised capital rules as final on July 
2, 2013 (78 FR 62018 (October 11, 2013)); the OCC adopted the 
revised capital rules as final on July 9, 2013 (78 FR 62018 (October 
11, 2013)); and the FDIC adopted the revised capital rules on an 
interim basis on July 9, 2013 (78 FR 55340 (September 10, 2013)).
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    In 2012, the agencies also revised their market risk capital rules 
in a uniform manner to better capture positions subject to market risk, 
reduce pro-cyclicality in market risk capital requirements, enhance 
sensitivity to market risks, and increase transparency through enhanced 
disclosures.\7\ In the revised capital rules, the agencies also 
expanded the scope of the market risk capital rules to include savings 
associations and incorporated the market risk rules into the revised 
regulatory capital framework.\8\
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    \7\ See 77 FR 53060 (August 30, 2012).
    \8\ See 78 FR 62018 (October 11, 2013) (OCC and FRB) and 78 FR 
55340 (September 10, 2013) (FDIC).
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    In addition to the specific differences in capital standards noted 
below, the

[[Page 56857]]

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 been presented to only 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 prior to 1990.
    In general, however, the agencies have substantially similar 
capital adequacy standards.\9\ These standards are based on a common 
regulatory framework that establishes minimum leverage and risk-based 
capital ratios for depository institutions (banks and savings 
associations).\10\ The agencies view the leverage and risk-based 
capital requirements as minimum standards, and most institutions 
generally 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.
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    \9\ The agencies' general risk-based capital rules are at 12 CFR 
part 3 (national banks) and 12 CFR part 167.6 (federal savings 
associations); 12 CFR parts 208 and 225, appendix A (state member 
banks and bank holding companies, respectively); 12 CFR part 325, 
appendix A (state nonmember banks); and 12 CFR part 390, subpart Z 
(state savings associations).
    \10\ 12 U.S.C. 1813(c).
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    The agencies note that, with respect to the advanced approaches 
rules,\11\ there are virtually no differences across the agencies' 
rules because the agencies adopted a joint rule establishing a common 
advanced approaches framework in December 2007,\12\ with subsequent 
joint revisions.\13\ Therefore, most of the risk-based capital 
differences described below pertain to the agencies' Basel I-based 
risk-based capital standards.\14\
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    \11\ Prior to issuance of the revised capital rules, the 
agencies' advanced approaches rules were at 12 CFR part 3, appendix 
C (national banks) and 12 CFR part 167, appendix C (federal savings 
associations); 12 CFR part 208, appendix F, and 12 CFR part 225, 
appendix G (state member banks and bank holding companies, 
respectively); 12 CFR part 325, appendix D (state nonmember banks); 
and 12 CFR part 390, subpart Z, appendix A (state savings 
associations).
    \12\ See 72 FR 69288 (December 7, 2007).
    \13\ See 76 FR 37620 (June 28, 2011). See also revised capital 
rules. Some minor differences remain in the application of the 
advanced approaches rule to savings associations, as statutorily 
mandated.
    \14\ As mentioned, the revised capital rules eliminate a 
majority of the non-statutory differences described in this report.
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    With respect to reporting standards, under the auspices of the 
Federal Financial Institutions Examination Council (FFIEC), the 
agencies have developed the uniform Consolidated Reports of Condition 
and Income (Call Report) for all insured commercial banks and certain 
state-chartered savings banks, as well as savings associations.\15\
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    \15\ Prior to 2012, the OTS required all OTS-supervised savings 
associations to file the Thrift Financial Report (TFR). However, in 
2011, the agencies adopted revisions to the reporting requirements 
for savings associations, including a requirement to transition from 
the quarterly TFR to the quarterly Call Report, effective 2012.
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Differences in Capital Standards Among the Federal Banking Agencies

Financial Subsidiaries

    The Gramm-Leach-Bliley Act (GLBA), also known as the Financial 
Services Modernization Act of 1999, established the framework for 
financial subsidiaries of banks.\16\ GLBA amended the Revised Statutes 
to permit national banks to conduct certain expanded financial 
activities through financial subsidiaries. Section 5136A of the Revised 
Statutes (12 U.S.C. 24a) imposes a number of conditions and 
requirements upon national banks that have financial subsidiaries, 
including the regulatory capital treatment applicable to equity 
investments in such subsidiaries. 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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    \16\ 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 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 (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. 24a.
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    State member banks may have financial subsidiaries subject to the 
same restrictions that apply to national banks.\17\ 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.\18\
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    \17\ See 12 U.S.C. 335 (state member banks are subject to the 
``same conditions and limitations'' that apply to national banks 
that hold financial subsidiaries).
    \18\ The applicable statutory requirements for state nonmember 
banks are as follows: The bank (and each of its insured depository 
institution affiliates) must (1) be well capitalized, (2) comply 
with the capital deduction and deconsolidation requirements, and (3) 
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. In addition, the 
statute requires that any transaction between the bank and a 
subsidiary that would be classified as a financial subsidiary 
generally shall be subject to the affiliate transactions 
restrictions of the FRA. See 12 U.S.C. 1831w.
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    The agencies adopted final rules implementing their respective 
provisions arising from section 121 of the GLBA for national banks in 
March 2000, for state nonmember banks in January 2001, and for state 
member banks in August 2001.\19\ The GLBA did not provide new authority 
to savings associations to own, hold, or operate financial 
subsidiaries, as defined, and thus the capital rules for savings 
associations do not contain parallel provisions.
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    \19\ See 65 FR 12914 (March 10, 2000) (national banks); 66 FR 
1018 (January 5, 2001) (state nonmember banks); 66 FR 42929 (August 
16, 2001) (state member banks).
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Non-financial Subsidiaries and Subordinate Organizations of Savings 
Associations

    Banks supervised by the agencies 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-by-line 
basis for financial reporting purposes, joint ventures, and associated 
companies, the parent 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 Board's and the FDIC's rules also 
permit banks to consolidate the investment on a pro rata basis under 
appropriate circumstances.
    The capital regulations for savings associations are different in 
some respects because of statutory requirements. 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 that are not

[[Page 56858]]

permissible for national banks.\20\ When subsidiaries engage in 
activities that are not permissible for national banks,\21\ the parent 
savings association must deduct the parent's investment in and 
extensions of credit to these subsidiaries from the capital of the 
parent organization. If a subsidiary's activities are permissible for a 
national bank, that subsidiary's assets are generally consolidated with 
those of the parent organization on a line-by-line basis in accordance 
with generally accepted accounting principles. If a subordinate 
organization, other than a subsidiary, engages in activities not 
permissible for national banks, investments in and loans to that 
organization generally are deducted from the savings association's 
capital.\22\ If a subordinate organization engages solely in 
permissible activities, depending on the nature and risk of the 
activity, investments in and loans to that organization may be assigned 
either to the 100 percent risk-weight category or deducted from 
capital. The requirements for non-financial subsidiaries remain 
unchanged under the revised capital rules.
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    \20\ See 12 U.S.C. 1464(t)(5).
    \21\ Subsidiaries engaged in activities not permissible for 
national banks are considered non-includable subsidiaries.
    \22\ The definitions of subsidiary and subordinate organization 
are provided in 12 CFR 159.2 (federal savings associations) and 12 
CFR 390.251 (state savings associations).
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Leverage Ratio Denominator

    Banks supervised by the agencies use average total consolidated 
assets to calculate the denominator of the leverage ratio. In contrast, 
savings associations use quarter-end total consolidated assets. Under 
the rules governing the reservation of authority for savings 
associations, the OCC and the FDIC reserve the right to require federal 
and state savings associations, respectively, to compute capital ratios 
on the basis of average, rather than period-end, assets.
    This capital difference has been eliminated under the revised 
capital rules, which require all banks and savings associations to 
calculate the denominator of the leverage ratio using average total 
consolidated assets.

Collateralized Transactions

    The general risk-based capital rules of the Board assign a zero 
percent risk weight to claims collateralized by cash on deposit in the 
institution or by securities issued or guaranteed by U.S. Government 
agencies or the central governments of countries that are members of 
the Organization for Economic Cooperation and Development (OECD), 
provided there is daily mark-to-market of collateral and maintenance of 
a positive margin of collateral. The OCC's rules with respect to 
national banks incorporate similar conditions for such collateralized 
claims eligible for a zero percent risk weight. However, while the 
Board's general risk-based capital rules require such claims to be 
fully collateralized, the OCC's rules governing national banks permit 
partial collateralization.
    Under the FDIC rules for state nonmember banks and the rules for 
state and federal savings associations, portions of claims 
collateralized by cash or by securities issued or guaranteed by OECD 
central governments or U.S. Government agencies receive a 20 percent 
risk weight. However, these institutions may assign a zero percent risk 
weight to claims on certain 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 revised capital rules eliminate this capital difference and 
provide a common rule text to address capital requirements for 
collateralized transactions, as well as exposures to sovereign and 
public sector entities.

Noncumulative Perpetual Preferred Stock

    Under the agencies' capital standards, noncumulative perpetual 
preferred stock is a component of tier 1 capital. The capital standards 
of the Board, the FDIC with respect to state nonmember banks, and the 
OCC with respect to national banks, require noncumulative perpetual 
preferred stock to give the issuer the option to waive the payment of 
dividends and provide that waived dividends neither accumulate to 
future periods nor represent a contingent claim on the issuer.
    As a result of these requirements, under the risk-based capital 
rules of the Board, the FDIC with respect to state nonmember banks, and 
the OCC with respect to national banks, if a bank issues perpetual 
preferred stock and is required to pay dividends in a form other than 
cash (e.g., dividends in the form of stock, when cash dividends are not 
or cannot be paid, and when the bank does not have the option to waive 
or eliminate dividends), the perpetual preferred stock would not 
qualify as noncumulative and, therefore, would not be included in tier 
1 capital. Under the capital requirements applicable to savings 
associations, a savings association may request supervisory approval to 
treat perpetual preferred stock as noncumulative if it requires the 
payment of dividends in the form of stock when cash dividends are not 
paid.
    This capital difference has been eliminated under the revised 
capital rules which set forth revised eligibility criteria for 
regulatory capital instruments. Perpetual preferred stock that requires 
payment-in-kind (of dividends in the form of stock when cash dividends 
are not paid) will not be includable in tier 1 capital under the 
revised capital rules, subject to certain statutory exceptions.

Equity Securities of Government-sponsored Enterprises

    The risk-based capital rules of the Board and the FDIC and the 
capital regulations governing savings associations apply a 100 percent 
risk weight to equity securities of government-sponsored enterprises 
(GSEs).\23\ In contrast, the OCC's capital rules for national banks 
apply a 20 percent risk weight to all GSE equity securities.
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    \23\ However, Federal Home Loan Bank stock held by banking 
organizations as a condition of membership receives a 20 percent 
risk weight.
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    This capital difference has been eliminated under the revised 
capital rules, which assign a 20 percent risk weight to an equity 
exposure to a Federal Home Loan Bank or the Federal Agricultural 
Mortgage Corporation. In addition, the revised capital rules assign a 
100 percent risk weight to preferred stock issued by a GSE. Other GSE 
equity exposures receive a risk weight of no less than 100 percent or 
are subject to deduction.

Conversion Factors for Off-balance Sheet Derivative Contracts

    Under the agencies' general risk-based capital rules, the credit 
equivalent amount of a derivative contract that is not subject to a 
qualifying bilateral netting contract is equal to the sum of the 
derivative contract's current credit exposure and potential future 
credit exposure. The potential future exposure is estimated by 
multiplying the notional principal amount of the contract by a credit 
conversion factor that is based on the type and remaining maturity of a 
derivative contract. The regulations of the Board, the FDIC with 
respect to state nonmember banks, and the OCC with respect to national 
banks provide a chart illustrating the applicable credit conversion 
factors, as follows:

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                                                                                     Precious
                                   Interest rate   Exchange rate      Equity          metals,          Other
       Remaining maturity            (percent)       and gold        (percent)      except gold     commodities
                                                     (percent)                       (percent)       (percent)
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One year or less................             0.0             1.0             6.0             7.0            10.0
More than one year to five years             0.5             5.0             8.0             7.0            12.0
More than five years............             1.5             7.5            10.0             8.0            15.0
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    In contrast, the regulations governing savings associations provide 
a table of conversion factors that is less granular as to the types of 
contracts to which it applies, as well as their remaining maturity, as 
follows:

------------------------------------------------------------------------
                                                               Foreign
                                                  Interest     exchange
              Remaining maturity                    rate         rate
                                                 contracts    contracts
                                                 (percent)    (percent)
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One year or less..............................          0.0          1.0
Over one year.................................          0.5          5.0
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    This capital difference has been eliminated under the revised 
capital rules which require all banks and savings associations to use 
an identical table of credit conversion factors to determine the 
potential future exposure of a derivative contract.

Limitation on Subordinated Debt and Limited-Life Preferred Stock

    The general risk-based capital rules of the Board, the FDIC with 
respect to state nonmember banks, and the OCC with respect to national 
banks limit the amount of subordinated debt and intermediate-term 
preferred stock that may be recognized as tier 2 capital to 50 percent 
of tier 1 capital. Such a restriction is not imposed on savings 
associations; however, the agencies limit the amount of tier 2 capital 
to 100 percent of tier 1 capital for all banks and savings 
associations.
    In addition, under the general risk-based capital rules of the 
Board, the FDIC with respect to state nonmember banks, and the OCC with 
respect to national banks, 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 eligible for inclusion in tier 2 capital 
is reduced by 20 percent of the original amount of that instrument (net 
of redemptions). The regulations governing savings associations provide 
the option of using either the discounting approach described above or 
an approach that, 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 savings association's total capital.
    This capital difference has been eliminated under the revised 
capital rules, which do not include the capital limits described above 
with respect to subordinated debt and limited-life preferred stock. 
Furthermore, the revised capital rules do not provide savings 
associations with alternative methodologies for the gradual de-
recognition of subordinated debt and limited-life preferred stock from 
regulatory capital. Under the revised capital rules, all banks and 
savings associations must reduce the amount of an instrument eligible 
for inclusion in tier 2 capital by 20 percent each year, at the 
beginning of each of the last five years of the life of the instrument.

Tangible Capital Requirement

    Under section 5(t)(2)(B) of the Home Owners' Loan Act (HOLA), 
savings associations are required by statute to maintain tangible 
capital in an amount not less than 1.5 percent of total assets.\24\ 
This particular statutory requirement does not apply to banks. However, 
under the Prompt Corrective Action (PCA) framework, all insured 
depository institutions are considered critically undercapitalized if 
their tangible equity falls below 2 percent.\25\ Therefore, the 1.5 
percent minimum tangible capital requirement for savings associations 
is generally not a binding capital requirement given the more stringent 
PCA critically undercapitalized threshold.
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    \24\ See 12 U.S.C. 1464(t)(1)(A)(ii) and (t)(2)(B).
    \25\ See 12 U.S.C. 1831o(c)(3); see also 12 CFR 6.4, 12 CFR 
165.4 (OCC); 12 CFR 208.45 (Board); 12 CFR 325.105, 12 CFR 390.455 
(FDIC).
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    This capital difference has been addressed under the revised 
capital rules, which are effective for all savings associations 
beginning in 2015. The revised capital rules define tangible capital 
for purposes of meeting the requirements of HOLA as the amount of tier 
1 capital plus the amount of outstanding perpetual preferred stock 
(including related surplus) not included in tier 1 capital, which 
mirrors the definition of ``tangible equity.''

Market Risk Rule

    In 1996, the Board, the FDIC with respect to state nonmember banks, 
and the OCC with respect to national banks, adopted rules requiring 
banks with significant exposure to market risk to measure and maintain 
capital to support that risk.\26\ Since then, the agencies revised 
their market risk rules in a uniform manner.\27\ However, the market 
risk framework did not apply to savings associations, as they generally 
did not engage in the threshold level of trading activity when the 
market risk rule was adopted.
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    \26\ See 61 FR 47358 (September 6, 1996).
    \27\ On August 30, 2012, the agencies published a revised market 
risk final rule that: (1) Enhances the market risk rule's 
sensitivity to risks that are not adequately captured under the 
prior market risk rule, (2) increases transparency through enhanced 
disclosures, and (3) does not rely on credit ratings, consistent 
with section 939A of the Dodd-Frank Act. See 77 FR 53060 (August 30, 
2012). On the same day, the agencies proposed a rule that would 
subject federal and state savings associations to the market risk 
rule. See 77 FR 52978 (August 30, 2012). This proposed rule was 
finalized as part of the revised capital rules. See also 78 FR 62018 
(October 11, 2013) (Board and the OCC); and 78 FR 55340 (September 
10, 2013) (FDIC). Additional technical revisions to the market risk 
rule were made by the Board after the revised capital rules were 
finalized to ensure that the market risk rules align with the 
revised capital rules that become effective on January 1, 2015 (78 
FR 76521). During 2014, the language in the OCC's and FDIC's 
respective market risk rules is slightly different than the language 
in the Board's market risk rule with respect to certain exposures to 
sovereigns and to securitizations, as well as with respect to 
certain aspects of the definition of the covered position. The FDIC 
and OCC did not make corresponding technical rule revisions to their 
respective market risk rules; however, they interpret their rules to 
align with the technical changes in the Board rule. See OCC Bulletin 
2013-13 (May 10, 2013) (OCC). When the new market risk rule goes 
into effect on January 1, 2015, all three agencies will have 
substantively identical language in their respective market risk 
rules.
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    This capital difference has been eliminated under the revised 
capital rules, which expanded the scope of the market risk rule to 
include state and federal savings associations beginning in 2015.

Pledged Deposits, Nonwithdrawable Accounts, and Certain Certificates

    The capital regulations governing mutual savings associations 
permit such institutions to include in tier 1 capital pledged deposits 
and nonwithdrawable accounts to the extent that such

[[Page 56860]]

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 regulations also recognize as 
tier 2 capital net worth certificates, mutual capital certificates, and 
income capital certificates, so long as such instruments comply with 
applicable regulations. The risk-based capital rules of the Board, the 
FDIC with respect to state nonmember banks, and the OCC with respect to 
national banks do not expressly address these instruments.
    This capital difference has been eliminated under the revised 
capital rules, which set forth substantially identical criteria across 
the agencies' rules that a capital instrument must meet to be included 
in a particular tier of capital. Mutual capital instruments may be 
included in regulatory capital if they meet the specified regulatory 
capital criteria.\28\
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    \28\ Subject to certain statutory exceptions, all legacy capital 
instruments that do not satisfy the criteria for common equity, 
additional tier 1, or tier 2 capital under the revised capital rules 
must be phased-out of regulatory capital.
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Assets Subject to FDIC or Federal Savings and Loan Insurance 
Corporation Agreements

    The general risk-based capital rules of the Board, the OCC for 
national banks, and the FDIC for state nonmember banks generally place 
assets subject to guarantee arrangements by the FDIC or the former 
Federal Savings and Loan Insurance Corporation (FSLIC) in the 20 
percent risk-weight category. The regulations governing savings 
associations place these assets in the zero percent risk-weight 
category, provided they are fully covered against capital loss and/or 
by yield maintenance agreements initiated by the FSLIC, regardless of 
any later successor agency such as the FDIC.
    This capital difference was minimized in 2010 when the agencies 
clarified that the FDIC loss-sharing agreements with acquirers of 
assets from failed institutions are considered conditional guarantees 
for risk-based capital purposes due to contractual conditions imposed 
on the acquiring institution and that the guaranteed portion of assets 
subject to an FDIC loss-sharing agreement may be assigned a 20 percent 
risk weight.\29\ Any such assets reported by a savings association, 
other than those meeting the requirements provided in 12 CFR 
167.6(a)(1)(i)(F) (federal savings associations) and 12 CFR 
390.466(a)(1)(i)(F) (state savings associations) may similarly receive 
a 20 percent risk weight.
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    \29\ See OCC Bulletin 2010-10 (March 2, 2010), Risk Weight for 
FDIC Claims and Guarantees (OCC); Supervision and Regulation Letter 
(SR 10-4), Clarification of the Risk Weight for Claims on or 
Guaranteed by the FDIC (Board); and Financial Institution Letter 
(FIL-7-2010), Clarification of the Risk Weight for Claims on or 
Guaranteed by the FDIC (FDIC).
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    This capital difference has been eliminated under the revised 
capital rules, which assign a 20 percent risk weight to all assets 
supported by a conditional guarantee of the U.S. government or a U.S. 
government agency.

Risk Weight for Modified or Restructured 1-4 First Mortgage Home Loans

    The agencies' general risk-based capital rules vary for 1-4 first 
mortgage home loans that have been modified or restructured. In 
general, to qualify for a 50 percent risk weight, under each agency's 
rules, a first-lien mortgage loan must have been made in accordance 
with prudent underwriting standards and not be 90 days or more past 
due. However, each agency's rules also provide additional requirements 
for the 50 percent risk-weight category that result in different 
capital treatments. Accordingly, a 1-4 first mortgage home loan that 
has been restructured receives a 100 percent risk weight under the 
Board's rules and the OCC's rules for national banks. In contrast, the 
FDIC's rules for state nonmember banks assign a 50 percent risk weight 
to any modified home mortgage loan, so long as the loan, as modified, 
is not 90 days or more past due or in nonaccrual status and meets other 
applicable criteria for a 50 percent risk weight. The rules for state 
and federal savings associations are nearly identical to the FDIC's 
rules for state nonmember banks.
    The agencies' rules are consistent with respect to loans modified 
pursuant to the Home Affordable Mortgage Program (HAMP or Program) 
implemented by the U.S. Department of the Treasury. In 2009, the 
agencies together with the OTS adopted a final rule that allows banks 
and savings associations to risk weight HAMP loans with the same risk 
weight assigned to the loan prior to the modification so long as the 
loan continues to meet other applicable prudential criteria.\30\
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    \30\ See 74 FR 31160 (June 30, 2009). However, consistent with 
the OCC's and the Board's general risk-based capital rules, if a 
mortgage loan becomes 90 days or more past due or carried in 
nonaccrual status or is otherwise restructured after being modified 
under the Program, the loan would be assigned a risk weight of 100 
percent. Consistent with the FDIC's general risk-based capital 
rules, if a mortgage loan is restructured after being modified under 
the Program, the loan could be assigned a risk weight of 50 percent 
provided the loan, as modified, is not 90 days or more past due or 
in nonaccrual status and meets the other applicable criteria for a 
50 percent risk weight. Consistent with the rules that apply to 
savings associations, if a mortgage loan is restructured after being 
modified under the Program, the loan could be assigned a risk weight 
of 50 percent provided the loan, as modified, is not 90 days or more 
past due and meets the other applicable criteria for a 50 percent 
risk weight.
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    This capital difference has been eliminated under the revised 
capital rules, which assign a 100 percent risk weight to all 1-4 
mortgage loans that are modified or restructured, except for those 
restructured under HAMP which may continue to receive a 50 percent risk 
weight (provided they otherwise meet the prudential criteria for a 50 
percent risk weight).

Requirements for the Zero Percent Credit Conversion Factor for 
Unconditionally Cancellable Commitments

    The agencies' general risk-based capital rules assign a zero 
percent credit conversion factor (i.e., no risk-based capital 
requirement) to unused portions of commitments (other than asset-backed 
commercial paper conduits) that have an original maturity of one year 
or less, or which are unconditionally cancellable at any time provided 
a separate credit decision is made before each drawing under the 
facility. Unused portions of retail credit card lines and related plans 
are deemed to be short-term commitments if the bank, in accordance with 
applicable law, has an unconditional option to cancel the credit card 
at any time.
    In addition, the rules of the OCC and the rules that apply to both 
state and federal savings associations permit a zero percent credit 
conversion factor for unconditionally cancellable commitments if the 
bank has a contractual right to make, and in fact does make, an annual 
or more frequent credit review based upon the borrower's current 
financial condition to determine whether the lending facility should be 
continued. This provision results in a capital difference among the 
agencies' rules because it allows a national bank or savings 
association to assign a zero percent credit conversion factor to such 
commitments where the bank does not conduct a separate credit review 
prior to each draw, but periodically (i.e., at least annually) reviews 
the credit condition of the borrower.

[[Page 56861]]

    This capital difference has been eliminated under the revised 
capital rules which require all banks and savings associations to apply 
a zero percent credit conversion factor to a commitment that is 
unconditionally cancellable.

    Dated: April 17, 2014.
Thomas J. Curry,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, September 12, 2014.
Robert deV. Frierson,
Secretary of the Board.
    Dated: April 17, 2014.

    By order of the Board of Directors.

    Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2014-22593 Filed 9-22-14; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P