[Federal Register Volume 62, Number 12 (Friday, January 17, 1997)]
[Notices]
[Pages 2711-2717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1182]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[No. 97-3]
Capital and Accounting Standards
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Notice.
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SUMMARY: Pursuant to the reporting requirements of section 121 of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
we have submitted our report to the Chairman and ranking minority
member of the Committee on Banking, Housing and Urban Affairs of the
Senate and the Chairman and ranking minority member of the Committee on
Banking and Financial Services of the House of Representatives
identifying the differences between the capital and accounting
standards used by the office of Thrift Supervision (OTS) and the
capital and accounting standards used by the Office of the Comptroller
of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC)
and the Board of Governors of, the Federal Reserve System
(FRB)(collectively, the banking agencies).
[[Page 2712]]
Our report contains two attachments. Attachment I, ``Summary of
Differences in Capital Standards,'' identifies and explains the reasons
for differences in the OTS capital standards and those of the other
banking agencies. Attachment II, ``Summary of Differences in Accounting
Practices,'' identifies and explains the reasons for the major
differences between OTS and the other banking agencies in supervisory
reporting practices that affect their respective capital standards.
Despite some differences, the capital and accounting rules of OTS
generally parallel those of the banking agencies (collectively, the
``agencies''). Many of the differences result from either statutory
requirements (e.g., deduction of investment in subsidiaries engaged in
activities impermissible for national banks) or historical differences
between the banking and thrift industries (e.g., investment
authorities, mutual form of organization).
Moreover, the agencies continue to work together to minimize their
current differences and to ensure that the new rules and policies they
adopt are consistent and result in a uniform national banking policy.
The agencies frequently issue joint regulatory and policy documents in
working toward the general goal of interagency consistency set forth in
section 303 of the Reigle Community Development and Regulatory
Improvement Act of 1994 (CDRIA).
Today's report reflects differences as of September 30, 1996. It
indicates how these differences will be resolved, in accordance with
the agencies' Joint Report: Streamlining of Regulatory Requirements
(Sept. 23, 1996) (Joint Report).
Furthermore, the OTS requires that savings associations follow
generally accepted accounting principles (GAAP) for regulatory reports.
This complies with the requirement of section 121(a) of FDICIA that the
accounting principles applicable to reports or statements filed with
OTS be consistent with GAAP.
The OTS capital standards comply with the requirements of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA), including the general requirement that the capital standards
applicable to savings associations be no less stringent than those
applicable to national banks.
EFFECTIVE DATE: January 17, 1997.
FOR FURTHER INFORMATION CONTACT: John Connolly, Senior Program Manager
for Capital Policy, (202) 906-6465, Supervision Policy; or Timothy J.
Stier, Chief Accountant, (202) 906-5699, Accounting Policy,
Supervision, Office of Thrift Supervision, 1700 G Street, NW,
Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
Attachment I--Summary of Differences in Capital Standards
FDICIA requires a report to Congress on the differences in the
capital standards for banks and savings associations. Below is a
summary of the differences.
A. Major Differences
1. Interest-Rate Risk Component
Interest-Rate Risk Component: The OTS has adopted a final rule
incorporating an interest-rate risk component into its risk-based
capital requirements. Under the rule, institutions with an above-normal
level of interest-rate risk will be subject to a capital charge
commensurate with their risk exposure. Institutions have been
submitting their interest-risk data and receiving a report on their
interest-risk exposure under the OTS model from OTS staff since March
1991. This interest-rate risk analysis is considered so valuable by
savings associations that a considerable number of associations not
required to file reports do so voluntarily. Furthermore, the OTS
supervisory staff considers institutions' interest-rate risk exposure
in assessing institutions' capital adequacy and asset/liability
management. OTS has not yet implemented the requirement for
associations to deduct an interest-rate risk component in calculating
their risk-based capital.
The banking agencies also are implementing policies under which
they consider banks' interest-rate risk exposure in the examination
process. On August 2, 1995, the banking agencies published a joint
final rule in the Federal Register on interest-rate risk. See 60 FR
39490 (August 2, 1995). The final rule amends their capital adequacy
guidelines to clarify the authority of the banking agencies to include
in their evaluation of bank capital adequacy an assessment of banks'
exposure to declines in capital due to interest rate movements.
Concurrent with the publication of the final rule, the banking agencies
issued a joint policy statement for comment that describes the process
that the banking agencies will use to measure and assess the exposure
of a bank's economic value to changes in interest rates. See 60 FR
39495 (August 2, 1995).
The OTS interest-rate risk approach differs from that of the
banking agencies in important respects. The major differences are the
methodology and data used to measure interest rate exposure.
Reason for OTS Difference: Because interest-rate risk is a
significant risk to savings associations, OTS believes that it is
important to use a relatively sophisticated model to measure the
interest-rate risk exposure of individual institutions. OTS believes
that it is particularly important to use a model that is capable of
measuring the option component in mortgages and the effect of financial
derivatives on an institution's overall interest-rate-risk exposure. As
a consequence, OTS uses an option-based pricing model to measure
exposure and collects detailed financial data on a reporting form that
was designed to provide the financial data that OTS needs to measure
exposure.
2. Leverage Ratio Standard
The agencies use uniform leverage ratio standards for purposes of
the capital ratio thresholds used in defining the prompt corrective
action (PCA) categories under section 38 of the Federal Deposit
Insurance Act (FDIA). Institutions, other than CAMEL-1 rated
institutions, must satisfy a leverage ratio standard requiring
institutions to have Tier 1 (core) capital equal to four percent of
assets to be adequately capitalized for purposes of the prompt
corrective action system. The leverage ratio standard for CAMEL-1 rated
institutions only requires them to have Tier 1 (core) capital equal to
three percent of assets, although most CAMEL-1 rated institutions
exceed this requirement by a wide margin. The leverage ratio
requirements in the banking agencies' capital regulations mirror those
in their PCA regulations.
Although the OTS capital rule continues to contain a three percent
leverage ratio requirement, the four percent leverage ratio requirement
to be ``adequately capitalized'' for PCA purposes is, in effect, the
controlling standard for thrifts.
Reason for OTS Difference: Initial adoption of a three percent
leverage ratio requirement in the OTS capital rule in 1989 prior to
adoption of the banking agencies' current standard. As indicated in the
September 23 Joint Report, the agencies will be issuing a proposed rule
to make all of their leverage ratio regulations uniform.
3. Subsidiaries
Subsidiary (general): OTS defines a subsidiary as a five percent or
greater ownership interest in an entity. The OTS requires full
consolidation of any subsidiary with its parent association if the
subsidiary is consolidated for
[[Page 2713]]
reporting purposes consistent with generally accepted accounting
principles (GAAP) (except for subsidiaries engaged as principal in
activities impermissible for national banks, as described below). If an
association owns a five percent or greater interest, but does not have
control under GAAP, OTS requires pro-rata consolidation, as discussed
below.
The banking agencies generally follow the GAAP approach for the
definition and consolidation of subsidiaries, but do not require
consolidation of subsidiaries not exceeding certain ``de minimis''
thresholds. Subject to these exceptions, subsidiaries generally are
fully consolidated if the parent institution holds more than 50 percent
of the outstanding voting stock, or if the subsidiary is otherwise
controlled or capable of being controlled by the parent institution
(see exception for depository institutions).
The OTS, however, instead of applying, ``pro rata'' consolidation,
has decided to use its discretion under its capital rule to follow GAAP
and the banking agencies' approach in consolidating community
development subsidiaries and low-income housing tax credit limited
partnerships.
Reason for OTS Difference: Policy decision in 1989 based, in part,
on the wide array of subsidiaries that state-chartered associations had
previously been permitted to hold. In 1994, however, the OTS decided to
follow the consolidation approach of GAAP and the other Federal banking
agencies in consolidating community development subsidiaries. This
beneficial capital treatment avoids the requirement for associations to
deduct their investments in community development subsidiaries engaged
in activities that are permissible for subsidiaries of national banks,
but impermissible for national banks themselves. In June 1996, the OTS
proposed to define ``subsidiary'' for capital purposes generally in the
same manner as the banking agencies.
Subsidiaries (impermissible): FIRREA and the OTS capital rule
require the deduction from core capital of savings associations'
investments in and loans to subsidiaries that engage in activities not
permissible for national banks. Generally, any new investment after
April 13, 1989, in such nonincludable subsidiaries has had to be
deducted immediately. Furthermore, because all transition schedules for
grandfathered investments in nonincludable subsidiaries expired as of
June 30, 1996, all investments in nonincludable subsidiaries must be
deducted in computing core capital.
As of July 1, 1996, savings associations must deduct all
investments in, and extensions of credit to, nonincludable real estate
subsidiaries, consistent with the deduction requirement applicable to
other types of nonincludable subsidiaries since July 1, 1994.
The banking agencies may require the deduction of investments in
certain subsidiaries, generally on a case-by-case basis. For example,
the FRB deducts investments in, and unsecured advances to, Section 20
securities subsidiaries from a member bank's capital. The FDIC
similarly deducts investments in, and unsecured advances to, securities
subsidiaries and mortgage banking subsidiaries. The FDIC also exercises
similar authority over the subsidiaries of state nonmember banks
engaged in activities not permissible for national banks.
Reason for OTS Difference: The Home Owners' Loan Act, as amended by
FIRREA, requires associations to deduct investments in and loans to
subsidiaries engaged as principal in activities impermissible for
national banks. Generally, savings associations are required to deduct
the total amount of their investments in, and advances to, such
nonincludable subsidiaries.
The deduction of investments in subsidiaries from parent
associations' capital is designed to insulate associations' capital
from activities potentially riskier than those in which associations
are permitted to engage. The statutory standard for whether an activity
is risky is whether a national bank may engage in that activity, plus
certain other expressly permissible activities.
Subsidiaries (Permissible--Minority Ownership): The OTS capital
rule, as discussed above, requires the pro-rata consolidation of
subsidiaries where the association does not have control, as defined
under GAAP, but owns a five percent or greater ownership interest in
the subsidiary. The banking agencies generally require capital to be
held only against the investments in such subsidiaries but may, on a
case-by-case basis, deduct them from capital or consolidate them either
fully or on a pro-rata basis.
Reason for OTS Difference: Policy decision in 1989 to ensure ample
capital against the diverse assets then held by thrift subsidiaries,
particularly subsidiaries of certain state-chartered associations. The
proposed changes to the OTS's definition of subsidiary for capital
purposes will remove this difference.
Subsidiaries (Lower-tier Depository Institutions): Under OTS rules,
a depository institution subsidiary is automatically consolidated with
its parent association if the subsidiary was acquired prior to May 1,
1989. The parent association's investment in such subsidiaries is
automatically excluded from the parent association's capital if the
depository institution subsidiary was acquired on or after May 1, 1989,
unless it engages only in activities permissible for a national bank.
On a case-by-case basis, the OTS requires consolidation of lower-tier
depository institutions, if consolidation results in a higher capital
requirement than the exclusion requirement. For purposes of risk-based
capital, the banking agencies generally consolidate majority-owned
subsidiaries.
Reason for OTS Difference: The Home Owners' Loan Act, as amended by
FIRREA, requires associations to deduct investments in and loans to
subsidiaries, including depository institutions acquired after May 1,
1989, engaged as principal in activities impermissible for national
banks. OTS's policy addresses the need for both the parent and
subsidiary institutions to have adequate capital on a consolidated and
unconsolidated basis. It also ensures that OTS capital standards are at
least as stringent as those imposed on banks. (HOLA sections
5(t)(5)(A), (C), (E)) .
4. Equity Investments: Savings associations must deduct the amount
of their equity investments, as defined in the OTS capital rule, in
computing total capital used to satisfy their risk-based capital
requirements. The banking agencies allow only a limited range of equity
investments and place those investments in the 100 percent risk-weight
category, rather than requiring deduction.
In March 1993, OTS issued a final rule that provides parallel
treatment of equity investments for thrifts and national banks. Equity
investments of thrifts that are permissible for national banks
(primarily stock of Freddie Mac, stock of Fannie Mae and certain loans
with equity characteristics) are placed in the 100 percent risk-weight
category.
Reason for OTS Difference: OTS will continue to require the
deduction from capital of equity investments that are impermissible for
national banks. This approach is designed to insulate the institution
and the insurance fund from the risk of these investments. This policy
is intended to result in such investments being either divested or
``pushed down'' into subsidiaries, where savings associations can limit
their liability and attempt to attract partial market funding for the
subsidiaries. The OTS will address the safety and
[[Page 2714]]
soundness of equity investments of thrifts that are permissible for
national banks through the same capital and supervisory approach used
by the banking agencies.
5. 20 Percent Risk-Weight for High Quality Mortgage-backed
Securities: OTS includes agency securities (i.e., issued by Freddie Mac
or Fannie Mae) in the 20 percent risk-weight category. OTS also places
high-quality, private-issue, mortgage-related securities (i.e.,
eligible securities under the Secondary Mortgage Market Enhancement Act
(SMMEA)) in the 20 percent risk-weight category. These private-issue
mortgage-backed securities represent interests in residential or mixed-
use real estate and are rated in one of the two highest investment-
grade rating categories by a nationally recognized statistical rating
organization. Generally, the banking agencies place private-issue,
mortgage-backed securities in the 50 percent or 100 percent risk-weight
category.
Reason for OTS Difference: Policy decision to take the high credit
quality of these securities into account in risk-weighting these
securities.
6. Qualifying Multifamily Mortgage Loans: OTS and the banking
agencies have uniform rules placing multifamily loans satisfying the
criteria of section 618(b) of the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement Act of 1991 (RTC Act), in
the 50 percent risk-weight category.
The OTS, however, extended grandfathered treatment to multifamily
mortgage loans that were in the 50 percent risk-weight category under a
prior OTS rule in March 1994, when OTS adopted its rule implementing
section 618(b) of the RTC Act. Those low-risk, grandfathered
multifamily loans must continue to satisfy the criteria of the prior
OTS rule. Those criteria are that the loans are secured by multifamily
residential buildings with 5-36 units, have maximum 80 percent loan-to-
value ratios and maintain occupancy rates of at least 80 percent.
Reason for OTS Difference: The rules of the OTS and the banking
agencies are generally consistent. The OTS, however, decided to extend
grandfathered treatment to low-risk multifamily loans previously
qualifying for the 50 percent risk-weight category under the prior OTS
multifamily rule.
7. Intangible Assets and Mortgage Servicing Rights: The final rule
on the capital treatment of intangible assets adopted by the OTS
generally is consistent with the rules adopted by the banking agencies.
The OTS rule, however, contains a grandfathering provision and a
transition provision for purchased mortgage servicing rights included
in capital prior to adoption of the revised final rule.
The OTS rule also contains a grandfathering provision allowing
continued inclusion of core deposit premiums included in associations'
capital on the effective date of the final rule. These core deposit
premiums were previously included in capital pursuant to temporary OTS
guidance if an association's management determined that they passed a
three-part test and the amount included did not exceed 25 percent of
core capital. The new rule requires the deduction of nongrandfathered
core deposit premiums from capital.
In August 1995, the OTS also issued a joint rule with the other
banking agencies adopting uniform interim capital treatment of
originated mortgage servicing rights. The Financial Accounting
Standards Board required originated mortgage servicing rights to be
capitalized in accordance with prescribed valuation criteria by
adopting Statement of Financial Accounting Standard No. 122,
``Accounting for Mortgage Servicing Rights'', in May 1995. The joint
interim rule generally applies the same treatment to originated
mortgage servicing rights that the agencies previously applied to
purchased mortgage servicing rights. This capital treatment includes a
50 percent of Tier 1 capital limit and valuation at the lower of 90
percent of fair market value or 100 percent of amortized book value.
Reason for OTS Difference: The treatment of intangible assets and
mortgage servicing rights under the capital rules of OTS and the
banking agencies are generally uniform. The OTS, however, decided to
allow associations to continue to include purchased mortgage servicing
rights and core deposit premiums in capital computations if the
specific assets had previously been included in associations' capital
under prior OTS rule or policy.
8. Recourse Arrangements
Assets Sold with Recourse (Nonmortgage): If a savings association
makes a GAAP sale of nonmortgage assets with recourse, the OTS (i)
treats the transaction as a sale for purpose of reporting and leverage
ratio computation and (ii) requires capital to be held against the
total amount of the loans sold with recourse in calculating the
association's risk-based capital requirement. Despite being a GAAP
sale, the banking agencies treat the transaction as a financing. This
means that the original assets are considered still on the books, along
with the proceeds received, in computing the leverage and risk-based
assets.
Reason for OTS Difference: OTS follows GAAP in determining whether
a transaction is a sale for reporting purposes and in computing
associations' leverage ratio capital requirements. The OTS policy also
ensures that the economic risk to associations from sales with recourse
is captured in determining associations' risk-based capital
requirements.
Assets Sold with Recourse (Mortgages--Private Transactions): If a
savings association sells mortgage assets with recourse to private
entities and the transaction is treated as a sale under GAAP, OTS
follows the same policy as it follows regarding sales of nonmortgage
assets. Under this policy, OTS (i) treats the transaction as a sale and
(ii) requires capital to be held against the total amount of loans sold
with recourse in calculating the association's risk-based capital
requirement.
A bank that sells pools of residential mortgages to private
entities with recourse generally is required to hold the full amount of
capital against the mortgages sold, as well as the proceeds received,
regardless of the amount of recourse retained and the treatment of the
transactions for regulatory reporting purposes.
The rules of the FRB and OCC, however, provide that no capital is
required against pools of 1- to 4-family mortgages sold to private
entities with ``insignificant recourse'' (i.e., less than expected
losses) for which a specific noncapital reserve or liability account is
established and maintained for the maximum amount of possible loss
under the recourse provision.
If ``significant'' recourse is retained, the transaction is not
reported as a sale and the assets remain on the balance sheet. Capital
is required to be held against the on-balance sheet amount of the
assets. The FDIC follows this approach for all sales with recourse; the
FDIC has not adopted an ``insignificant recourse'' policy.
Reason for OTS Difference: OTS follows GAAP in determining whether
a transaction is a sale for reporting purposes and in computing
associations' leverage ratio capital requirement. The OTS policy also
ensures that the economic risk to associations from sales with recourse
will be captured in determining their risk-based capital requirements.
The banking agencies' application of their limited recourse provisions
for computing banks' risk-based capital requirements has affected the
[[Page 2715]]
significance of the ``insignificant recourse'' provisions of the FRB
and OCC.
Assets Sold with Recourse (Limited Recourse): In accordance with
section 350 of the Riegle Community Development and Regulatory
Improvement Act of 1994, the banking agencies adopted a low-level
recourse rule. The OTS adopted its low-level recourse provision in
1989. The remaining difference regarding such sales with recourse is
that the OTS follows GAAP in according sales treatment to those
transactions for reporting and leverage computation purposes. The
banking agencies generally do not accord sales treatment to sales with
low-level recourse and continue to treat the transaction as a financing
in computing banks' leverage ratio requirements, subject to the
``insignificant recourse'' provisions of the FRB and OCC.
Reason for OTS Difference: The agencies, low-level recourse
provisions, in accordance with section 350 of the Riegle Act, limit an
institution's capital requirement to its maximum contractual liability
under its recourse obligation. The difference between OTS and the
banking agencies for reporting and leverage ratio purposes is caused by
the OTS decision to follow GAAP in determining whether to accord sales
treatment.
Recourse Servicing: Where savings associations are responsible for
credit losses on loans they service, OTS requires capital against the
amount of the underlying loans consistent with the recourse policy set
forth above. Although savings associations do not own the underlying
assets, they have a contingent liability and are subject to losses on
those loans. OTS requires associations to hold capital against the
underlying loans posing economic risk for the associations. The banking
agencies do not assess capital on the underlying loans but only on the
value of the servicing rights.
Reason for OTS difference: Policy decision to assess capital on
underlying loans to buffer associations from the risk of loss on such
loans.
9. Purchased Subordinated Securities: The OTS risk-based capital
standard requires associations to hold capital against the amount of
their subordinated securities and any more senior securities. It does
not matter whether the subordinated securities were acquired from
others or result from the securitization of loans they originated.
Associations' risk-based capital requirements are limited, however, by
the low-level recourse provision.
Banks are only required to hold capital against the amount of more
senior securities if the institution originated and sold the underlying
loans. The banking agencies do not require banks to hold capital
against securities senior to acquired subordinated securities if a bank
acquired the securities in the market from third parties.
Reason for OTS Difference: Policy decision to ensure appropriate
capital against risk of these assets. Whether institutions create
subordinated securities or purchase subordinated securities, the risks
are similar.
10. Consequences of Failure to Meet Capital Standards: The PCA
provisions of FDICIA impose a stringent regulatory regimen on thrifts
and banks failing their capital requirements. The PCA provisions of
section 131 of FDICIA establish five regulatory categories, with the
distinctions primarily based on institutions' capital ratios. Section
131 imposes various sanctions and restrictions on institutions in the
lower three PCA categories, while other regulations (brokered deposits
and the risk-based premium rules of the FDIC) provide preferential
treatment to the well-capitalized institutions. The agencies issued a
joint preamble and parallel rules implementing PCA.
Savings associations are also subject to additional restrictions
and requirements under the HOLA, as enacted in FIRREA. The OTS will
continue to apply these provisions to savings associations, but is
coordinating their implementation with the PCA provisions to the extent
possible. The HOLA provisions do not apply to banks.
Reason for OTS Difference: The agencies have adopted uniform rules
implementing the PCA provisions of FDICIA. The HOLA, however, continues
to impose additional restrictions on savings associations (HOLA section
5(t) (6)).
11. Collateralized Transactions
Since December 1994, the agencies have had three different rules
for the capital treatment of transactions that are supported by
qualifying collateral. The FDIC's and OTS's risk-based capital
standards provide that the portion of a transaction collateralized by
cash on deposit in the lending institution or by the market value of
central government securities of countries that are members of the
Organization for Economic Cooperation and Development (OECD securities)
may be assigned to the 20 percent risk-weight category. The FRB's
general rule is like the FDIC's and OTS's rule, but with a limited
exception. The exception is that transactions fully collateralized with
cash or OECD securities marked-to-market daily with positive collateral
margin maintained. The OCC's rule permits the portion of a transaction
that is collateralized with a positive margin by cash or OECD
securities, which must be marked-to-market daily, to receive a zero
percent risk-weighting.
Reason for OTS Difference: The OTS and FDIC regulations on
collateralized transactions have not been changed since 1989. The FRB
and OCC revised their regulations in different ways in 1992 and 1994,
respectively. As indicated in the September 23 Joint Report, consistent
with section 303 of the Riegle Act, in August, 1996, the agencies
jointly proposed a uniform approach to the capital treatment of
collateralized transactions. Under the proposed approach, designated
portions of claims are included in the zero percent risk-weight
category if the institution marks the designated portion to market
daily and requires the obligor to adjust the amount of underlying
collateral to maintain a positive daily margin on the designated
portion of the claim.
B. Minor Differences
1. 1.5 Percent Tangible Capital Requirement: OTS has an explicit
1.5 percent tangible capital requirement; the bank regulators do not.
Reason for OTS Difference: FIRREA required OTS to establish a
tangible capital requirement of at least 1.5 percen of assets. (HOLA
5(t)(2)(B)).
2. Collateralized Mortgage Obligations (CMO) Tranches: In its final
interest-rate risk rule, OTS eliminated the placement of stripped
securities and certain collateralized mortgage obligations in the 100
percent risk-weight category because of their interest-rate risk
sensitivity. The OTS interest-rate risk model evaluates the interest-
rate risk stemming from these assets. The OTS examination and
supervisory staffs consider associations, interest-rate risk exposure,
along with aspects of associations, capital position, in determining
the associations, capital adequacy under the CAMEL system. Residual
securities remain in the 100 percent risk-weight category because of
their degree of credit risk and other risks.
The banking agencies vary in their approach: OCC has stated that
any CMO tranche absorbing more than its pro-rata share of the risk of
losing principal is risk-weighted at 100 percent (others generally at
20 percent); FRB has stated that any CMO tranche absorbing more than
its pro-rata share of loss is risk-weighted at 100 percent (others
[[Page 2716]]
generally at 20 percent); FDIC undertakes a case-by-case review.
Reason for OTS Difference: Policy decision to address the interest-
rate risk of CMOs through the OTS interest-rate risk rule, model and
supervisory oversight. Policy determination that dealing with these
securities in this way made continued risk-weighting for credit risk in
the 100 percent risk-weight category unwarranted. The degree of credit
risk and other risks to which residual securities expose associations
warrant their continued risk-weighting in the 100 percent risk-weight
category.
3. Pledged Deposits/Nonwithdrawable Accounts: OTS includes these
instruments as core capital for mutual associations if they meet the
same requirements as non-cumulative perpetual preferred stock. If they
do not meet the requirements for inclusion in core capital, OTS
includes them as supplementary capital provided they meet the standards
for preferred stock or subordinated debt. The banking agencies do not
address this issue because these instruments represent the capital of
mutual associations legally restricted from issuing equity securities
(i.e., their depositor members are their owners). Banks generally are
not organized in mutual form.
Reason for OTS Difference: Policy decision to treat these
instruments the same as the equity instruments of corporate thrifts
because they provide the same protection as equity to the mutual
associations and the deposit insurance fund.
4. Qualifying Single Family Mortgage Loans: In order to be placed
in the 50 percent risk-weight category, OTS requires that mortgages
have no more than an 80 percent loan-to-value (LTV) ratio (unless they
have private mortgage insurance (PMI) bringing the LTV ratio down to 80
percent). The banking agencies require ``prudent, conservative''
underwriting without specific LTV ratio requirements.
Reason for OTS Difference: Policy decision to make explicit what
OTS believes is generally ``prudent and conservative''; the banking
agencies generally include a similar LTV standard in their examiner
guidance.
5. Loans to Individual Purchasers for the Construction of Their
Homes: OTS and OCC place these assets in the 50 percent risk-weight
category. The FRB and FDIC may treat them as construction loans (100
percent) or as mortgage loans (50 percent) depending on their
characteristics.
Reason for OTS Difference: Policy decision to include such loans in
standard treatment of 1-4 family mortgage loans, as does the OCC. As
indicated in the September 23 Joint Report, the agencies expect to
issue a proposal to make their regulations uniform in this area.
6. Holding of First and Second Liens on Home Mortgages by the Same
Institution: The FRB and OTS generally treat first and second liens
held by the same institution as single loans if there are no
intervening liens. The OCC generally places second liens in the 100
percent risk-weight category. The FDIC combines first and second liens
in evaluating whether the first lien is prudently underwritten, but
places all second liens in the 100 percent risk-weight category.
Reason for OTS Difference: Policy decision generally to treat two
extensions of credit to the same individual and secured by the same 1-4
family residence the same as a single extension of credit. The combined
credit should be placed in the appropriate risk-weight depending on
whether the combined credit meets the other criteria for a qualifying
mortgage loan. As indicated in the September 23 Joint Report, the
agencies expect to issue a proposal to make their regulations uniform
in this area.
7. Rules on Maturing Capital Instruments (MCI): OTS and the banking
agencies use different rules to determine how much of MCI counts toward
capital. OTS (i) grandfathers issuances of MCI issued on or before
November 7, 1989 (which was the date of the rule change) and (ii)
allows two options for issuances of MCI after November 7, 1989 (a) the
bank rule (five year amortization) or (b) a limit of 20 percent of
total capital maturing in any one year for instruments within seven
years of maturity.
The banking agencies require use of the straight five-year
approach.
Reason for OTS Difference: Policy decision to minimize unnecessary
disincentives for issuance of subordinated debt and to avoid unduly
penalizing pre-FIRREA issuances of MCI.
8. Limitation on Subordinated Debt: The banking agencies limit
subordinated debt to 50 percent of core capital. OTS has no limit on
the amount of subordinated debt that can count as supplementary
capital.
Reason for OTS Difference: Policy decision to encourage issuance of
supplementary capital.
9. Nonresidential Construction and Land Loans: OTS requires the
amount of these loans above an 80 percent LTV ratio to be deducted from
total capital (with a five year phase-in). The banking agencies place
the whole loan amount in the 100 percent risk-weight category.
Reason for OTS Difference: Policy decision to ensure appropriate
capital against risk of these assets. OTS experience indicates that
high-LTV ratio land loans and nonresidential construction loans present
particularly high levels of risk.
10. FSLIC/FDIC-covered Assets: OTS places these assets in the zero
percent risk-weight category. The banking agencies generally place
these assets in the 20 percent risk-weight category.
Reason for OTS Difference: Policy decision to recognize OTS Capital
and Accounting Standards that these assets have never resulted in
losses and that these government guaranteed obligations are supported
by a ``backup'' call on the United States Treasury.
11. Mutual Funds: In general, OTS establishes the risk weighting
for mutual funds on the asset with the highest capital requirement
actually held by the mutual fund. The banking agencies base their
capital charge on the highest risk-weighted asset that is a permissible
investment by the mutual fund. The 20 percent risk-weight category is
the lowest risk-weight category in which associations may place mutual
fund investments.
OTS allows, on a case-by-case basis, ``pro-rata'' risk-weighting of
investments in mutual funds, based on the assets of the mutual fund
(i.e., if 90 percent of a mutual fund's assets are 20 percent risk-
weight assets and 10 percent are 100 percent risk-weight assets, we may
allow 90 percent of the investment in 20 percent risk-weight category
and 10 percent in the 100 percent risk-weight category). The OCC
permits national banks to pro-rate mutual fund investments between
risk-weight categories based on the maximum amount of different types
of assets that mutual funds may hold in accordance with their
prospectuses. The FDIC and FRB do not allow banks to pro-rate mutual
fund investments between risk-weight categories.
Reason for OTS Difference: Policy decision to ensure appropriate
capital against the risk of these assets. OTS believes that allowing
institutions to pro-rate their investments and focus on ``actual''
assets ensures that savings associations hold capital in an amount
essentially equivalent to that required if they directly held the
assets in which the mutual fund invested. However, as indicated in the
September 23 Joint Report, the agencies expect to issue a proposal in
the near future to make their regulations uniform in this area.
12. Capital Requirement on Holding Companies: FRB applies the risk-
based
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capital requirements to bank holding companies; OTS does not apply them
to thrift holding companies.
Reason for OTS Difference: OTS policy decision to not impose
capital requirements on corporate entities because they do not pose a
risk to the deposit insurance fund.
13. Agricultural Loan Losses: The banking agencies, due to a
statutory requirement, allow such losses to be deferred (and,
effectively, allow these losses to be ``included'' in supplementary
capital). OTS does not allow such losses to be deferred or included in
assets or capital.
Reason for OTS Difference: OTS has no statutory requirement to
allow such deferred losses in assets or capital.
14. Income Capital Certificates (ICCS) and Mutual Capital
Certificates (MCCs): OTS allows inclusion in supplementary capital.
Because these items do not exist in the banking industry, the banking
agencies do not address them.
Reason for OTS Difference: ICCs/MCCs are counted as supplementary
capital due to their being functionally equivalent to net worth
certificates (which are required, by statute, to be included in
capital).
Attachment II--Summary of Differences in Accounting Practices
Differences by each agency in accounting or supervisory reporting
practices may cause differences in amounts of regulatory capital
maintained by depository institutions. These differences are the result
of an evolutionary process that primarily reflects historical agency
philosophy and industry trends.
The OTS follows generally accepted accounting principles for
regulatory reporting purposes. The other banking agencies require banks
to follow certain prescribed regulatory accounting principles (RAP)
instead of GAAP for reporting purposes. The banking agencies, however,
are contemplating moving toward GAAP reporting in 1997, which will
eliminate most remaining differences between the reporting of OTS and
the other banking agencies.
A summary of these differences is presented below.
1. Futures and Forward Contracts
OTS practice is to follow generally accepted accounting principles.
In accordance with SFAS 80, when hedging criteria are satisfied, the
accounting for the futures contract shall be related to the accounting
for the hedged item. Changes in the market value of the futures
contract are recognized in income when the effects of related changes
in the price or interest rate of the hedged item are recognized. Such
reporting can result in deferred gains and losses in accordance with
GAAP.
The banking agencies do not follow GAAP, but report changes in the
market value of futures contracts even when used as hedges in the
current period's income statement. However, futures contracts used to
hedge mortgage banking operations are reported in accordance with GAAP.
2. Excess Service Fees
OTS practice is to follow GAAP in valuing excess service fees. When
loans are sold with servicing retained and the stated servicing fee
rate differs materially from a normal servicing fee rate, the sales
price should be adjusted in determining the gain or loss from the sale
of the loans. This provides for the recognition of a normal fee in each
subsequent year that servicing continues on the loans. The gain
recorded at the date of sale cannot be larger than the gain assuming
the loans were sold servicing released. The subsequent valuation of the
excess servicing is adjusted based upon anticipated prepayment rates
and interest rates.
The banking agencies follow GAAP for residential mortgage loan
pools. For all other types of loans, the banking agencies do not follow
GAAP. In those cases they require that excess servicing fees retained
on loans sold be reported as realized over the contractual life of the
transferred asset.
3. In-Substance Defeasance of Debt
OTS practice is to follow GAAP. In accordance with SFAS 76, when a
debtor irrevocably places risk-free monetary assets in a trust solely
to satisfy the debt and the possibility that the debtor will be
required to make further payments is remote, the debt is considered
extinguished. The transfer can result in a gain or loss in the current
period.
The banking agencies do not follow GAAP. The banking agencies
continue to report the defeased debt as a liability and the securities
contributed to the trust as assets with no recognition of any gain or
loss on the transaction.
4. Sales of Assets with Recourse
OTS practice is to follow GAAP. A transfer of receivables with
recourse is recognized as a sale under GAAP if (i) the transferor
surrenders control of the future economic benefits, (ii) the
transferor's obligation under the recourse provisions can be reasonably
estimated, and (iii) the transferee cannot require repurchase of the
receivables except pursuant to the recourse provisions.
However, in the calculation of OTS risk-based capital, certain off-
balance sheet conversions are performed that result in capital being
required for the risk retained. See further discussion of capital
differences with respect to this item in Attachment I, Capital
Differences.
The practice of the banking agencies is generally to report
transfers of receivables with recourse as sales only when the
transferring institution (i) retains no risk of loss from the assets
transferred and (ii) has no obligation for the payment of principal or
interest on the assets transferred. As a result, assets transferred
with recourse are reported as financings, not as sales.
However, this general rule does not apply to the transfer of
mortgage loans under one of the government programs of the Government
National Mortgage Association, Freddie Mac or Fannie Mae. Transfers of
mortgages under one of these programs are automatically treated as
sales. Furthermore, the OCC and FRB provide for the treatment of
private transfers of mortgages as sales if the transferring institution
does not retain a significant risk of loss on the assets transferred.
5. Negative Goodwill
OTS practice is to follow GAAP for reporting purposes. OTS permits
negative goodwill to offset goodwill reported as an asset. The banking
agencies require that negative goodwill be reported as a liability, and
not be netted against goodwill assets.
6. Push-Down Accounting
OTS practice is to follow GAAP. OTS requires push-down accounting
when there is at least a 90 percent change in ownership. Push-down
accounting generally applies the fair value concepts of purchase
accounting in the context of a holding company's acquisition of a
company to be held as a separate subsidiary or combined with an
existing subsidiary.
The banking agencies require push-down accounting when there is at
least a 95 percent change in ownership.
Dated: January 6, 1997.
By the Office of Thrift Supervision.
Nicolas P. Retsinas,
Director.
[FR Doc. 97-1182 Filed 1-16-97; 8:45 am]
BILLING CODE 6720-01-P
