[Federal Register Volume 86, Number 220 (Thursday, November 18, 2021)]
[Notices]
[Pages 64475-64477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25159]


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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, 2021; 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 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) 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 (institutions).\1\ 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.
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    \1\ 12 U.S.C. 1831n(c)(1) and 12 U.S.C. 1831n(c)(3).

FOR FURTHER INFORMATION CONTACT: 
    OCC: Andrew Tschirhart, Risk Expert, Capital and Regulatory Policy, 
(202) 649-6370, Rima Kundnani, Counsel, Chief Counsel's Office, (202) 
649-5490, Office of the Comptroller of the Currency, 400 7th Street SW, 
Washington, DC 20219.
    Board: Andrew Willis, Manager, (202) 912-4323, Jennifer McClean, 
Senior Financial Institution Policy Analyst II, (202) 785-6033, 
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, (703) 245-
0778, Richard Smith, Capital Policy Analyst, Capital Policy Section, 
(703) 254-0782, 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

    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, 2021, applicable to 
institutions.\2\ In recent years, the agencies have acted together to 
harmonize their accounting and capital standards and eliminate as many 
differences as possible. As of September 30, 2021, 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 
rule for institutions (capital rule),\3\ which harmonized the agencies' 
capital rule in

[[Page 64476]]

a comprehensive manner.\4\ Since 2013, the agencies have revised the 
capital rule on several occasions, further reducing the number of 
differences in the agencies' capital rule.\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 rule. 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 rule is 
at 12 CFR part 3 (OCC), 12 CFR part 217 (Board), and 12 CFR part 324 
(FDIC). The capital rule applies 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 rule reflects 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 rule 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 
previous reports submitted by the agencies pursuant to section 
37(c), have been eliminated.
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Differences in the Standards Among the Federal Banking Agencies

Differences in Accounting Standards

    As of September 30, 2021, the agencies have not identified any 
material differences among themselves in the accounting standards 
applicable to institutions.

Differences in Capital Standards

    The following are the remaining technical differences among the 
capital standards of the agencies' capital rule.\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 rule largely contains 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 rule has differing definitions of a pre-sold 
construction loan. The capital rule of all three agencies provides 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 rule 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 rule generally provides uniform eligibility 
criteria for regulatory capital instruments, there are some textual 
differences among the agencies' capital rule. The capital rule of each 
of the three agencies requires 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.
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    \10\ 12 CFR 217.20(b)(1)(v) and 217.20(c)(1)(viii) (Board).
    \11\ 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; 12 CFR 5.55 and 12 CFR 5.63. Certain restrictions on the 
payment of dividends that apply under separate regulations, and 
therefore not discussed in this report, are different among the 
agencies. Compare 12 CFR 208.5 (Board) and 12 CFR 5.64 (OCC) with 12 
CFR 303.241 (FDIC).
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    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 rule. 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. The agencies apply the 
criteria for determining eligibility of regulatory capital instruments 
in a manner that ensures consistent outcomes for institutions.
    In addition, the Board's capital rule includes a requirement that a 
Board-regulated institution \12\ must obtain prior approval before 
redeeming regulatory capital instruments.\13\ This requirement 
effectively 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 rule. All three agencies require institutions to obtain 
prior approval before redeeming regulatory capital instruments in other 
regulations.\14\ The additional provision in the Board's capital 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\ Board-regulated institution means a state member bank, bank 
holding company, or savings and loan holding company. See 12 CFR 
217.2.
    \13\ 12 CFR 217.20(f); see also 12 CFR 217.20(b)(1)(iii).
    \14\ See 12 CFR 5.46, 5.47, 5.55, and 5.56 (OCC); 12 CFR 208.5 
(Board); 12 CFR 303.241 (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 rule with regards 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 institutions' common equity 
tier 1 capital would have been reduced if the appropriate accounting 
entries had been recorded.\15\ Generally, identified losses are those 
items that an examiner determines to be chargeable against income, 
capital, or general valuation allowances.
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    \15\ 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

[[Page 64477]]

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 rule. 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.\16\
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    \16\ 12 U.S.C. 1464(t)(5).
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    When subsidiaries of a savings association are engaged in 
activities that are not permissible for national banks,\17\ 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.\18\ 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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    \17\ Subsidiaries engaged in activities not permissible for 
national banks are considered non-includable subsidiaries.
    \18\ 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.\19\ The capital rule of the OCC and the FDIC 
includes a requirement that savings associations maintain a tangible 
capital ratio of 1.5 percent.\20\ 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.\21\ Generally 
speaking, the appropriate federal banking agency must appoint a 
receiver within 90 days after an institution becomes critically 
undercapitalized.\22\
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    \19\ 12 U.S.C. 1464(t)(1)(A)(ii) and (t)(2)(B).
    \20\ 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.
    \21\ 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).
    \22\ 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.\23\ 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.\24\ The rule text establishing the scope of 
application for the enhanced supplementary leverage ratio differs among 
the agencies. The Board and the FDIC apply the enhanced supplementary 
leverage ratio standards for institutions based on parent bank holding 
companies being identified as global systemically important bank 
holding companies as defined in 12 CFR 217.2.\25\ The OCC applies 
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.\26\
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    \23\ See 79 FR 24528 (May 1, 2014).
    \24\ 12 CFR 6.4(b)(1)(i)(D)(2) (OCC); 12 CFR 208.43(b)(1)(iv)(B) 
(Board); 12 CFR 324.403(b)(1)(v) (FDIC).
    \25\ 12 CFR 208.43(b)(1)(iv)(B) (Board); 12 CFR 
324.403(b)(1)(ii) (FDIC).
    \26\ 12 CFR 6.4(b)(1)(i)(D)(2) (OCC).

Michael J. Hsu,
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 November 8, 2021.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2021-25159 Filed 11-17-21; 8:45 am]
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