[Federal Register Volume 85, Number 134 (Monday, July 13, 2020)]
[Notices]
[Pages 42069-42071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14991]


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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, 2019; 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 for insured 
depository institutions. Section 37(c) requires that this report be 
published in the Federal Register. The agencies have not identified any 
material differences among the agencies' accounting and capital 
standards applicable to the insured depository institutions they 
regulate and supervise.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Andrew Tschirhart, Risk Expert, Capital Policy, (202) 649-
6370, Office of the Comptroller of the Currency, 400 7th Street SW, 
Washington, DC 20219.
    Board: Juan Climent, Manager, Capital and Regulatory Policy, (202) 
872-7526, and Donald Gabbai, Lead Financial Institution Policy Analyst, 
(202) 452-3358, 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, Richard Smith, Capital Policy Analyst, Capital Policy Section, 
(202) 898-6931, 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)(1). 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 December 31, 2019, applicable to 
institutions.\2\ In recent years, the

[[Page 42070]]

agencies have acted together to harmonize their accounting and capital 
standards and eliminate as many differences as possible. As of December 
31, 2019, the agencies have not identified any material differences 
among the agencies' accounting standards applicable to institutions.
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    \2\ Although not required under section 37(c), this report 
includes descriptions of certain of the Board's capital standards 
applicable to depository institution holding companies where such 
descriptions are relevant to the discussion of capital standards 
applicable to institutions.
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    In 2013, the agencies revised the risk-based and leverage capital 
rules for institutions (capital rules),\3\ which harmonized the 
agencies' capital rules in a comprehensive manner.\4\ Since 2013, the 
agencies have revised the capital rules on several occasions, further 
reducing the number of differences in the agencies' capital rules.\5\ 
Today, 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. No new material differences were identified in the 
capital standards applicable to institutions in this report compared to 
the previous report submitted by the agencies pursuant to section 
37(c).
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    \3\ 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. See 12 CFR 217.1(c).
    \4\ 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.
    \5\ See e.g., 84 FR 35234 (July 22, 2019). The OCC and FDIC 
revised their capital rules to conform with language in the Board's 
capital rule related to the qualification criteria for additional 
tier 1 capital instruments and the definition of corporate 
exposures. As a result, these differences, which were included in 
the previous report submitted by the agencies pursuant to section 
37(c), have been eliminated.
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Differences in Accounting Standards Among the Federal Banking Agencies

    As of December 31, 2019, the agencies have not identified any 
material differences among themselves in the accounting standards 
applicable to institutions.

Differences in Capital Standards Among the Federal Banking Agencies

    The following are the remaining technical differences 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 it supervises, 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 needs of the institutions that each agency 
charters, regulates, and/or supervises.
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    \7\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 
(FDIC).
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    The agencies' capital rules have differing definitions of a pre-
sold construction loan. The capital rules of 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.'' \8\ 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 
Consolidated Reports of Condition and Income (Call Report).\9\ 
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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    \8\ 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC).
    \9\ 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 some textual 
differences among the agencies' capital rules. All three agencies' 
capital rules require that, for an instrument to qualify as common 
equity tier 1 or additional tier 1 capital, cash dividend payments be 
paid out of net income and retained earnings, but the Board's capital 
rule also allows cash dividend payments to be paid out of related 
surplus.\10\ In addition, both the Board's capital rule and the FDIC's 
capital rule include an additional sentence noting that institutions 
regulated by each agency are subject to restrictions independent of the 
capital rule on paying dividends out of surplus and/or that would 
result in a reduction of capital stock.\11\ These additional sentences 
do not create differences in substance between the agencies' capital 
standards, but rather note that restrictions apply under separate 
regulations. The provision in the Board's capital rule that allows 
dividends to be paid out of related surplus is a difference in 
substance among the agencies' capital rules. However, due to the 
restrictions on institutions regulated by the Board in separate 
regulations, this additional language in the Board's rule has a 
practical impact only on bank holding companies and savings and loan 
holding companies and is not a difference as applied to institutions. 
As a result, the agencies apply the criteria for determining 
eligibility of regulatory capital instruments in a manner that ensures 
consistent outcomes for institutions.
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    \10\ 12 CFR 217.20(b)(1)(v) and 217.20(c)(1)(viii) (Board).
    \11\ See 12 CFR 217.20(b)(1)(v) and 217.20(c)(1)(viii) (Board); 
12 CFR 324.20(b)(1)(v) and 324.20(c)(1)(viii) (FDIC). Although not 
referenced in the capital rule, the OCC has similar restrictions on 
dividends; see 12 CFR 5.55 and 12 CFR 5.63.
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    In addition, the Board's capital rule includes a requirement that a 
bank holding company or a savings and loan holding company must obtain 
prior approval before redeeming regulatory capital instruments.\12\ 
This requirement applies only to a bank holding company or a savings 
and loan holding company and is, therefore, not included in the OCC and 
FDIC capital rules. However, all three agencies require institutions to 
obtain prior approval before redeeming regulatory capital 
instruments.\13\ The additional provision in the Board's rule, 
therefore, only has a practical impact on bank holding companies and 
savings and loan holding companies and is not a difference as applied 
to institutions.
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    \12\ 12 CFR 217.20(f).
    \13\ See 12 CFR 5.46, 5.47, 5.55, and 5.56 (OCC); 12 CFR 208.5 
(Board); 12 CFR 303.241 and 12 CFR 390.345 (incorporated into 12 CFR 
303.241, effective Feb. 20, 2020 (85 FR 3232 (Jan. 21, 2020))) 
(FDIC).
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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.

[[Page 42071]]

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 institutions' common 
equity tier 1 capital would have been reduced if the appropriate 
accounting entries had been recorded.\14\ Generally, identified losses 
are those items that an examiner determines to be chargeable against 
income, capital, or general valuation allowances.
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    \14\ 12 CFR 324.22(a)(9).
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    For example, identified losses may include, among other items, 
assets 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.\15\ When 
subsidiaries of a savings association are engaged in activities that 
are not permissible for national banks,\16\ 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.\17\ 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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    \15\ See 12 U.S.C. 1464(t)(5).
    \16\ Subsidiaries engaged in activities not permissible for 
national banks are considered non-includable subsidiaries.
    \17\ 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.\18\ The capital rules of the OCC and the FDIC 
include a requirement that savings associations maintain a tangible 
capital ratio of 1.5 percent.\19\ 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.\20\ Generally 
speaking, the appropriate federal banking agency must appoint a 
receiver within 90 days after an institution becomes critically 
undercapitalized.\21\
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    \18\ See 12 U.S.C. 1464(t)(1)(A)(ii) and (t)(2)(B).
    \19\ 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.
    \20\ 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).
    \21\ 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 took effect beginning on January 1, 2018.\22\ 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.\23\ The rule text establishing the scope of 
application for the enhanced supplementary leverage ratio differs among 
the agencies. 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.\24\ 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.\25\ The distinction is of little practical 
consequence at this time because the set of bank holding companies 
identified by each agency's regulations is the same.
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    \22\ See 79 FR 24528 (May 1, 2014).
    \23\ 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).
    \24\ See 80 FR 49082 (August 14, 2015).
    \25\ See 12 CFR 6.4(c)(1)(iv)(B) (OCC); 12 CFR 324.403(b)(1)(v) 
(FDIC).

Brian P. Brooks,
Acting Comptroller of the Currency.

    Board of Governors of the Federal Reserve System.
Ann E. Misback,
Secretary of the Board.

Federal Deposit Insurance Corporation.

    Dated at Washington, DC, on or about July 2, 2020.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2020-14991 Filed 7-10-20; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P