[Federal Register Volume 83, Number 18 (Friday, January 26, 2018)]
[Notices]
[Pages 3867-3869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01434]


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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 September 30, 2017; 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 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 among the 
accounting and capital standards used by the agencies. Section 37(c) 
requires that this report be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Benjamin Pegg, Risk Expert, Capital Policy, (202) 649-7146, 
Office of the Comptroller of the Currency, 400 7th Street SW, 
Washington, DC 20219.
    Board: Elizabeth MacDonald, Manager, Capital and Regulatory Policy, 
(202) 475-6316, Division of Supervision and Regulation, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue NW, Washington, DC 20551.
    FDIC: Benedetto Bosco, Chief, Capital Policy Section, (202) 898-
6853, 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

    Under section 37(c) of the Federal Deposit Insurance Act (section 
37(c)), 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 that describes any 
differences among the accounting and capital standards established by 
the agencies for insured depository institutions (institutions).\1\
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    \1\ See 12 U.S.C. 1831n(c). This report must be published in the 
Federal Register. See 12 U.S.C. 1831n(c)(3).
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    In accordance with section 37(c), the agencies are submitting this 
joint report, which covers differences among their accounting or 
capital standards existing as of September 30, 2017, applicable to 
institutions. In recent years, the agencies have acted together to 
harmonize their accounting and capital standards and eliminate as many

[[Page 3868]]

differences as possible. As of September 30, 2017, the agencies have 
not identified any material differences among themselves in the 
accounting standards applicable to institutions.
    In 2013, the agencies revised the risk-based and leverage capital 
rules for institutions (capital rules),\2\ which harmonized the 
agencies' capital rules in a comprehensive manner.\3\ Only a few 
differences remain, which are statutorily mandated for certain 
categories of institutions or which reflect certain technical, 
generally nonmaterial differences among the agencies' capital rules.
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    \2\ See 78 FR 62018 (October 11, 2013) (final rule issued by the 
OCC and the Board); 78 FR 55340 (September 10, 2013) (interim final 
rule issued by the FDIC). The FDIC later issued its final rule in 79 
FR 20754 (April 14, 2014). The agencies' respective capital rules 
are at 12 CFR part 3 (OCC), 12 CFR part 217 (Board), and 12 CFR part 
324 (FDIC). These capital rules apply to institutions, as well as to 
certain bank holding companies, and savings and loan holding 
companies. 12 CFR 217.1(c).
    \3\ The capital rules reflect the scope of each agency's 
regulatory jurisdiction. For example, the Board's capital rule 
includes requirements related to bank holding companies, savings and 
loan holding companies, and state member banks, while the FDIC's 
capital rule includes provisions for state nonmember banks and state 
savings associations, and the OCC's capital rule includes provisions 
for national banks and federal savings associations.
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    As revised in 2013, the agencies' capital rules generally have 
increased the quantity and quality of regulatory capital. For example, 
these revised capital rules include a minimum common equity tier 1 
capital ratio of 4.5 percent, raise the minimum tier 1 capital ratio 
from 4 percent to 6 percent, and establish additional capital buffer 
amounts for institutions: The capital conservation buffer, and, for 
advanced approaches institutions,\4\ the countercyclical capital 
buffer. These revised capital rules also require all institutions to 
meet a 4 percent minimum leverage ratio measured as an institution's 
tier 1 capital to average total consolidated assets (generally 
applicable leverage ratio) and require advanced approaches institutions 
to meet a 3 percent minimum supplementary leverage ratio, measured as 
an institution's tier 1 capital to the sum of on- and off-balance sheet 
exposures (supplementary leverage ratio).\5\
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    \4\ Generally, these are institutions, bank holding companies, 
and savings and loan holding companies that are subject to the 
capital rules with total consolidated assets of $250 billion or more 
or total consolidated on-balance sheet foreign exposures of at least 
$10 billion.
    \5\ Under the auspices of the Federal Financial Institutions 
Examination Council, the agencies have developed the Consolidated 
Reports of Condition and Income, or ``Call Report,'' where 
institutions report their respective capital and leverage ratios.
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Differences in Capital Standards Among the Federal Banking Agencies

    Below are summaries of the technical differences remaining among 
the capital standards of the agencies' capital rules.\6\
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    \6\ Certain minor differences, such as terminology specific to 
each agency for the institutions that they supervise, are not 
included in this report.
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Definitions
    The agencies' capital rules largely contain the same 
definitions.\7\ The differences that exist generally serve to 
accommodate the different scope of jurisdiction of each agency. Set 
forth below are two definitional differences among the agencies. Each 
agency's definitional provisions provide that a ``corporate exposure is 
an exposure to a company that is not'' one of 11 separate other types 
of exposures.\8\ The Board's capital rule provides that two additional 
items are not corporate exposures: a policy loan and a separate 
account.\9\ Unlike the OCC's and FDIC's capital rules, the Board's 
capital rule covers bank holding companies and savings and loan holding 
companies, which may engage in insurance underwriting activities \10\ 
in which institutions cannot engage,\11\ and these additional items in 
the Board's capital rule are relevant for insurance underwriting 
activities. Thus, these additional items are only relevant to bank 
holding companies and savings and loan holding companies under the 
terms of the Board's capital rule.
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    \7\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 
(FDIC).
    \8\ Id.
    \9\ 12 CFR 217.2. The Board's rule separately defines policy 
loan and separate account. Id.
    \10\ 78 FR 62127 (October 11, 2013).
    \11\ See 12 U.S.C. 1831a.
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    The agencies' capital rules also have differing definitions of a 
pre-sold construction loan. All three agencies provide that a pre-sold 
construction loan means any ``one-to-four family residential 
construction loan to a builder that meets the requirements of section 
618(a)(1) or (2) of the Resolution Trust Corporation Refinancing, 
Restructuring, and Improvement Act of 1991 (12 U.S.C. 1831n), and, in 
addition to other criteria, the purchaser has not terminated the 
contract.'' \12\ The Board's definition provides further clarification 
that, if a purchaser has terminated the contract, the institution must 
immediately apply a 100 percent risk weight to the loan and report the 
revised risk weight in the next quarterly Call Report.\13\ Similarly, 
if the purchaser has terminated the contract, the OCC and FDIC capital 
rules would immediately disqualify the loan from receiving a 50 percent 
risk weight, and would apply a 100 percent risk weight to the loan. The 
change in risk weight would be reflected in the next quarterly Call 
Report. Thus, the minor wording difference between the agencies should 
have no practical consequence.
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    \12\ 12 CFR 3.2 (OCC), 12 CFR 217.2 (Board), 12 CFR 324.2 
(FDIC).
    \13\ 12 CFR 217.2.
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Capital Components and Eligibility Criteria for Regulatory Capital 
Instruments
    While the capital rules generally provide uniform eligibility 
criteria for regulatory capital instruments, there are two textual 
differences among the agencies' capital rules. First, the OCC's and 
FDIC's capital rules require that additional tier 1 capital instruments 
not be subject to a ``limit'' imposed by the contractual terms 
governing the instrument, while the Board's capital rule does not 
include this requirement.\14\ Second, only the Board's capital rule 
states that ``[s]tate member banks are subject to certain other legal 
restrictions on reductions in capital resulting from cash dividends, 
including out of the capital surplus account, under 12 U.S.C. 324 and 
12 CFR 208.5.'' \15\ The Board's capital rule also includes similar 
language relating to distributions on additional tier 1 capital 
instruments.\16\ However, the agencies apply the criteria for 
determining eligibility of regulatory capital instruments to ensure 
consistent outcomes.
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    \14\ 12 CFR 3.20 (OCC); 12 CFR 217.20 (Board); 12 CFR 324.20 
(FDIC).
    \15\ 12 CFR 217.20.
    \16\ Id.
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Capital Deductions
    There is a technical difference between the FDIC's capital rule and 
the OCC's and Board's capital rules with regard to an explicit 
requirement for deduction of examiner-identified losses. The agencies 
require their examiners to determine whether their respective 
supervised institutions have appropriately identified losses. The 
FDIC's capital rule, however, explicitly requires FDIC-supervised 
institutions to deduct identified losses from common equity tier 1 
capital elements, to the extent that the institution's common equity 
tier 1 capital would have been reduced if the appropriate accounting 
entries had been recorded.\17\ Generally, identified losses are those 
items that an examiner determines to be chargeable against income, 
capital, or general valuation allowances.
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    \17\ 12 CFR 324.22(a)(9).
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    For example, identified losses may include, among other items, 
assets

[[Page 3869]]

classified as loss, off-balance-sheet items classified as loss, any 
expenses that are necessary for the institution to record in order to 
replenish its general valuation allowances to an adequate level, and 
estimated losses on contingent liabilities. The Board and the OCC 
expect their supervised institutions to promptly recognize examiner-
identified losses, but the requirement is not explicit under their 
capital rules. Instead, the Board and the OCC apply their supervisory 
authorities to ensure that their supervised institutions charge off any 
identified losses.
Subsidiaries of Savings Associations
    There are special statutory requirements for the agencies' capital 
treatment of a savings association's investment in or credit to its 
subsidiaries as compared with the capital treatment of such 
transactions between other types of institutions and their 
subsidiaries. Specifically, the Home Owners' Loan Act (HOLA) 
distinguishes between subsidiaries of savings associations engaged in 
activities that are permissible for national banks and those engaged in 
activities that are not permissible for national banks.\18\ When 
subsidiaries of a savings association are engaged in activities that 
are not permissible for national banks,\19\ the parent savings 
association generally must deduct the parent's investment in and 
extensions of credit to these subsidiaries from the capital of the 
parent savings association. If a subsidiary of a savings association 
engages solely in activities permissible for national banks, no 
deduction is required and investments in and loans to that organization 
may be assigned the risk weight appropriate for the activity.\20\ As 
the appropriate federal banking agencies for federal and state savings 
associations, respectively, the OCC and the FDIC apply this capital 
treatment to those types of institutions. The Board's regulatory 
capital framework does not apply to savings associations and therefore 
does not include this requirement.
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    \18\ See 12 U.S.C. 1464(t)(5).
    \19\ Subsidiaries engaged in activities not permissible for 
national banks are considered non-includable subsidiaries.
    \20\ A deduction from capital is only required to the extent 
that the savings association's investment exceeds the generally 
applicable thresholds for deduction of investments in the capital of 
an unconsolidated financial institution.
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Tangible Capital Requirement
    Federal statutory law subjects savings associations to a specific 
tangible capital requirement but does not similarly do so with respect 
to banks. Under section 5(t)(2)(B) of HOLA, savings associations are 
required to maintain tangible capital in an amount not less than 1.5 
percent of total assets.\21\ The capital rules of the OCC and the FDIC 
include a requirement that covered savings associations maintain a 
tangible capital ratio of 1.5 percent.\22\ This statutory requirement 
does not apply to banks and, thus, there is no comparable regulatory 
provision for banks. The distinction is of little practical 
consequence, however, because under the Prompt Corrective Action (PCA) 
framework, all institutions are considered critically undercapitalized 
if their tangible equity falls below 2 percent of total assets.\23\ 
Generally speaking, the appropriate federal banking agency must appoint 
a receiver within 90 days after an institution becomes critically 
undercapitalized.\24\
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    \21\ See 12 U.S.C. 1464(t)(1)(A)(ii) and (t)(2)(B).
    \22\ See 12 CFR 3.10(a)(6) (OCC); 12 CFR 324.10(a)(6) (FDIC). 
The Board's regulatory capital framework does not apply to savings 
associations and, therefore, does not include this requirement.
    \23\ See 12 U.S.C. 1831o(c)(3); see also 12 CFR 6.4 (OCC); 12 
CFR 208.45 (Board); 12 CFR 324.403 (FDIC).
    \24\ 12 U.S.C. 1831o(h)(3)(A).
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Enhanced Supplementary Leverage Ratio
    The agencies adopted enhanced supplementary leverage ratio 
standards that take effect beginning on January 1, 2018.\25\ These 
standards require certain bank holding companies to exceed a 5 percent 
supplementary leverage ratio to avoid limitations on distributions and 
certain discretionary bonus payments and also require the subsidiary 
institutions of these bank holding companies to meet a 6 percent 
supplementary leverage ratio to be considered ``well capitalized'' 
under the PCA framework.\26\ The rule text establishing the scope of 
application for the enhanced supplementary leverage ratio differs among 
the agencies. However, the distinction is of little practical 
consequence at this time because the rules of each agency apply the 
enhanced supplementary leverage ratio to the same set of bank holding 
companies. The Board applies the enhanced supplementary leverage ratio 
standards to bank holding companies identified as global systemically 
important bank holding companies as defined in 12 CFR 217.2 and those 
bank holding companies' Board-supervised, institution subsidiaries.\27\ 
The OCC and the FDIC apply enhanced supplementary leverage ratio 
standards to the institution subsidiaries under their supervisory 
jurisdiction of a top-tier bank holding company that has more than $700 
billion in total assets or more than $10 trillion in assets under 
custody.\28\
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    \25\ See 79 FR 24528 (May 1, 2014).
    \26\ See 12 CFR 6.4(c)(1)(iv)(B) (OCC); 12 CFR 
208.43(b)(1)(iv)(B) (Board); 12 CFR 324.403(b)(1)(v) (FDIC).
    \27\ See 80 FR 49082 (August 14, 2015).
    \28\ See 12 CFR 6.4(c)(1)(iv)(B) (OCC); 12 CFR 324.403(b)(1)(v) 
(FDIC).

    Dated: January 11, 2018.
Grace E. Dailey,
Senior Deputy Comptroller and Chief, National Bank Examiner, Office of 
the Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System, January 11, 2018.
Ann E. Misback,
Secretary of the Board.

    Dated at Washington, DC, this 19th day of January 2018.

    By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2018-01434 Filed 1-25-18; 8:45 am]
 BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P