[Federal Register Volume 59, Number 44 (Monday, March 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5049]
[[Page Unknown]]
[Federal Register: March 7, 1994]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[No. 94-17]
Capital and Accounting Standards; Annual Report to Congressional
Committees
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 annual 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, Finance and Urban Affairs 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 other Federal banking
agencies (Banking Agencies).
Our report contains two attachments. Attachment I, ``Summary of
Differences in Capital Standards,'' identifies and explains the reasons
for differences in the capital standards applied by OTS from those
capital standards applied by the Banking Agencies. Attachment II,
``Summary of Differences in Accounting Practices,'' identifies and
explains the reasons for the major differences between OTS and the
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 are a result of either statutory
requirements (e.g., goodwill) 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 the differences.
The capital standards of OTS comply with the statutory requirement
of the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA), which provides that OTS standards be no less stringent
than the standards applied to national banks.
FOR FURTHER INFORMATION CONTACT: Robert Pomeranz, Senior Accountant,
Accounting Policy, (202) 906-5650; John F. Connolly, Program Manager
for Capital Policy, (202) 906-6465; Policy, Office of Thrift
Supervision, 1700 G Street, NW., Washington, D.C. 20552.
SUPPLEMENTARY INFORMATION:
Attachment I
Summary of Differences in Capital Standards
FDICIA requires a report to Congress on the differences in the bank
and savings association capital standards. Below is a summary of the
differences.
A. Major Differences
1. Interest Rate Risk Component
Interest Rate Risk Component: OTS adopted an interest rate risk
component to its risk-based capital rule, which is effective January 1,
1994. Under the new rule, institutions with an above normal level of
interest rate risk will be subject to a capital charge commensurate
with their risk exposure. The Banking Agencies intend to adopt an
interest rate risk component in 1994. The interest rate risk component
adopted by OTS will differ from that which is expected to be adopted by
the Banking Agencies in important respects, namely, the methodology
used to measure interest rate exposure and the data used to measure
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. Core Capital
Core Capital Requirement: The leverage ratio requirements of the
Office of the Comptroller (``OCC''), the Federal Deposit Insurance
Corporation (``FDIC''), and the Board of Governors of the Federal
Reserve System (``FRB'') are tied to Tier 1 capital. These requirements
set the minimum leverage ratio rule requirement at 3 percent plus at
least 100 to 200 basis points (depending on the CAMEL ratings). The OTS
has proposed to adopt a leverage ratio rule conforming with the
leverage ratios of the other bank regulatory agencies.
During 1992, the Agencies adopted uniform prompt corrective action
regulations, as mandated by section 131 of FDICIA. These regulations
require the establishment of specific capital categories based on risk-
based capital ratio and leverage ratio measures. The Prompt Corrective
Action (``PCA'') rules of the Agencies, including the OTS, require
compliance with a 4 percent leverage ratio for associations to be in
the ``adequately capitalized'' category.
Goodwill: FIRREA requires ``qualifying supervisory goodwill'' to be
included in core capital under the OTS capital rule through December
31, 1994. The Banking Agencies, in general, do not allow goodwill to be
included in calculating core capital.
Reason for OTS Differences: FIRREA requires that the OTS capital
rule include a limited amount of qualifying supervisory goodwill in
core capital until December 31, 1994 (HOLA 5(t)(3)(A)).
3. Subsidiaries
Subsidiary (general): OTS defines a subsidiary as a 5 percent or
greater ownership interest in an entity. The OTS requires consolidation
of any subsidiary with the insured institution if the subsidiary is
considered to be controlled by the insured institution under generally
accepted accounting principles (``GAAP'') (except for those engaged in
activities impermissible for national banks, as described below). If an
association owns a 5 percent or greater interest, but does not have
control under GAAP, OTS requires pro-rata consolidation, as discussed
below. For the Banking Agencies, subsidiaries are generally
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).
Reason for OTS difference: Savings associations, particularly
state-chartered institutions, have in the past been allowed to invest
in a more expansive list of subsidiaries and equity investments than
national banks. OTS has adopted its more stringent policy of requiring
pro-rata consolidation of ownership interests of 5 percent or greater,
but not constituting GAAP control, because it better reflects the risk
that may be posed by such subsidiaries.
Subsidiaries (``impermissible''): FIRREA and the OTS capital rule
require the deduction from capital of investments in and loans to
subsidiaries that engage in activities not permissible for a national
bank. FIRREA originally provided for a five year phase-out of such
investments and loans that were made prior to April 13, 1989. In 1992,
the Director of OTS was given discretionary authority to extend the
phase-out period until mid-1996 for investments in certain real estate
subsidiaries provided the conditions contained in the statute are
satisfied. During the phase-out period, the percentage of assets
corresponding with the non-deducted portion of the assets is
consolidated. The Banking Agencies may require deduction on a case-by-
case basis.
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.
Reason for OTS difference: Although savings associations may own
subsidiaries that engage in activities that are prohibited for national
banks, the Home Owners' Loan Act (``HOLA'') requires the deduction of
investments and loans to such subsidiaries, in accordance with a
statutorily prescribed phase-out period. (HOLA 5(t)(5)).
The deduction of investments in subsidiaries from the parent's
capital is designed to ensure that the capital supporting the
subsidiary is not also used as the basis of further leveraging and
risk-taking by the parent association. In deducting investments in and
advances to certain subsidiaries from the parent association's capital,
the OTS expects the parent savings association to meet or exceed
minimum regulatory capital standards without reliance on the capital
invested in the particular subsidiary, consistent with FIRREA's
mandate.
The deduction of investments in and extensions of credit to
impermissible subsidiaries is consistent with, but more broadly
applicable than, the FRB's and FDIC's treatment of securities
subsidiaries and the FDIC's treatment of mortgage banking subsidiaries.
Consolidation of the remaining assets of the impermissible
subsidiaries is required to ensure that sufficient capital is held by
savings associations during the phase-out period.
Subsidiaries (``permissible--minority ownership''): The OTS rule
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 bank
regulators 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: OTS believes that its treatment is
appropriate and that sufficient capital should be held against the
risks of such investments. OTS believes associations are better
protected from the economic risk presented by their subsidiaries by
requiring capital to be held against the amount of the subsidiaries'
assets rather than only assessing an 8 percent capital charge against
an institution's investment in such nonconsolidated subsidiaries.
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
(except if it engages only in activities permissible for a national
bank, in which case it is consolidated). OTS requires consolidation of
lower-tier depository institutions, if consolidation results in a
higher capital requirement than the exclusion requirement. For purposes
of the risk-based capital regulations, the Banking Agencies generally
consolidate majority-owned banking and finance subsidiaries.
Reason for OTS Difference: OTS's policy addresses its concerns
about (i) ``double-leveraging'' of the parent association's capital and
(ii) incentives to minimally capitalize lower-tier depository
institutions. It also ensures that OTS capital standards are at least
as stringent as those imposed on banks. (HOLA 5(t)(5)(A),(C),(E)).
4. Equity Investments: OTS requires associations to deduct equity
investments from their capital over a five year transition period. Bank
regulators 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 (primarily stock of the Federal Home Loan
Mortgage Corporation (``FHLMC''), stock of the Federal National
Mortgage Association (``FNMA''), and certain loans with equity
characteristics) that are permissible for national banks would be
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 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 MBS: OTS includes agency
securities (i.e., issued by FNMA or FHLMC) 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 rating agency. Generally, the Banking Agencies
place private-issue MBS 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 Multi-family Mortgage Loans: OTS allows certain low-
risk multi-family mortgage loans (i.e., buildings with 5-36 units,
maximum 80 percent loan-to-value ratios and minimum 80 percent
occupancy rates) to qualify for the 50 percent risk-weight category.
The Banking Agencies currently place all multi-family mortgage loans in
the 100 percent risk-weight category.
OTS and the Banking Agencies are in the process of issuing final
rules to implement section 618(b) of the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement Act of 1991 (``RTC Act''),
by reducing the risk weight of multi-family mortgage loans meeting the
specified statutory and regulatory criteria to the 50 percent risk
weight.
The RTC Act requires OTS and the Banking Agencies to place multi-
family mortgage loans in the 50 percent risk weight category if they
meet the following criteria: (1) The loan is secured by a first lien,
(2) the ratio of the principal obligation to the appraised value of the
property, that is, the loan-to-value ratio, does not exceed 80 percent
(75 percent if the loan is based on a floating interest rate), (3) the
annual net operating income generated by the property (before debt
service) is not less than 120 percent of the annual debt service on the
loan (115 percent if the loan is based on a floating interest rate),
(4) the amortization of principal and interest occurs over a period of
not more than 30 years and the minimum maturity for repayment of
principal is not less than seven years, (5) all principal and interest
payments have been made on time for a period of not less than one year,
and (6) meets other prudential underwriting criteria imposed by the
Banking Agencies.
Reason for OTS Difference: Policy decision to assess a lower
capital charge on such loans and securities in accordance with the
requirement of Section 618(b). OTS is working with the Banking Agencies
to implement the statutory mandate on a uniform interagency basis.
7. Intangible Assets: 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 final 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 grandfather 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 includable 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.
Reason for OTS Difference: Policy decision to permit purchased
mortgage servicing rights and core deposit premiums to be included in
capital if they were previously included pursuant to OTS rule or
policy.
8. Recourse Arrangements
Assets Sold with Recourse (Non-Mortgage): If a savings association
sells non-mortgage assets with recourse (where the transaction is
treated as a sale under GAAP), OTS (i) considers it a sale, and (ii)
requires capital to be held against the total amount of the loans sold
with recourse through the use of the 100 percent off-balance sheet
conversion factor. If a bank sells a non-mortgage asset with recourse
(even when the transaction is treated as a sale under GAAP), it is not
considered a sale by the Banking Agencies.
Reason for OTS Difference: OTS follows GAAP in determining whether
a transaction is a sale. The OTS policy is designed to ensure that
sufficient capital is available to absorb the risk associated with the
recourse obligation.
Assets Sold with Recourse (Mortgages--Private Transactions): If
savings associations sell 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 non-mortgage
assets. Under this policy, OTS (i) considers the transaction a sale and
(ii) requires capital to be held under the risk-based capital
computations through the use of the 100 percent off-balance sheet
conversion factor.
Banks that sell pools of residential mortgages to private entities
with recourse generally are required to hold the full amount of capital
against the mortgages sold regardless of the amount of recourse
retained and the treatment of the transaction 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 non-capital 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: Policy decision to ensure appropriate
capital against risk of these assets. OTS, in general, follows GAAP in
determining whether a transaction is a sale. Regardless of ``sale''
treatment, OTS requires capital if savings associations are liable for
losses.
Assets Sold with Recourse (Limited Recourse): For risk-based
capital purposes only, the OTS limits the capital required on mortgage
and non-mortgage assets sold with recourse (that are treated as sales
under GAAP) to the lesser of (i) the maximum contractual liability
under the recourse arrangement or (ii) the ``normal'' capital charge on
the off-balance sheet assets.
Reason for OTS Difference: Policy decision to ensure appropriate
capital against risk of these assets, which is limited to an
association's maximum contractual liability under such arrangements.
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 amount of the servicing rights.
Reason for OTS difference: Policy decision to assess capital on
underlying loans to buffer associations from risk of loss on such
loans.
9. Purchased Subordinated Securities: Savings associations are
required to hold capital against the amount of subordinated securities
and all more senior securities regardless of whether the subordinated
securities were originated by the institution or purchased from other
parties. 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 did not originate and sell the underlying loans.
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
5(t)(6)).
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 requires OTS to establish a
tangible capital requirement of at least 1.5 percent of assets (HOLA
5(t)(2)(B)). 2.
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 interest rate risk sensitivity.
The interest rate risk component will address this risk directly. OTS
is keeping residual securities in the 100 percent risk-weight in light
of the risks associated with residual securities.
The Banking Agencies vary in their approach: OCC has stated that
any CMO tranche absorbing more than its pro-rata share of principal
loss risk 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
generally at 20 percent); FDIC undertakes a case-by-case review.
Reason for OTS Difference: Policy decision to address the interest
rate risk of these securities by imposing capital charge in accordance
with interest rate risk rule. The risks involved with residual
securities warrant their continued placement in the 100 percent risk
weight.
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 since these instruments do not exist in the banking
industry.
Reason for OTS Difference: Policy decision to treat items that
offer equivalent protection to the insurance fund and the institution
in the same way.
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 have indicated to OTS that they may use the 80 percent LTV
ratio in 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.
6. Holding of First and Second Liens on Home Mortgages by the Same
Institution: The FDIC, 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.
Reason for OTS Difference: Policy decision generally to treat
combined loans same as single loans. Second mortgages (depending on
their characteristics) should be placed in the 50 percent risk weight
if both loans are held by the same institution, there are no
intervening liens, and they meet the criteria for qualifying mortgage
loans.
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. Bank regulators use a five year amortization rule.
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. Non-residential 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 ensure appropriate
capital against risk of these assets. OTS notes 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. 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 Banking Agencies 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 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.
12. Capital Requirement on Holding Companies: FRB applies the risk-
based 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 that 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).
15. Restrictions on Hybrid Capital Instruments: The Banking
Agencies' capital rules contain certain restrictions on hybrid capital
instruments (priority of debt, etc.). OTS does not have these
restrictions in its capital rule (rather, they are elsewhere in OTS
regulations or policy statements).
Reason for OTS Difference: Policy decision to retain flexibility to
adapt to innovations in capital instruments. (There is no difference in
practice.)
Attachment II
Summary of Differences in Accounting Practices
Differences by each agency in accounting or supervisory reporting
practices may cause differences in the amount 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. A summary of these differences is
presented below.
1. Futures and Forward Contracts
OTS practice is to follow generally accepted accounting principles
(``GAAP''). In accordance with SFAS 80, when hedging criteria are
satisfied, the accounting for the futures contract is to 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 require that banks
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 Servicing Fees
OTS practice is to follow GAAP in valuing excess servicing 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 loans (including individual residential mortgage
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
for satisfying 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 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 sales.
However, this general rule does not apply to the transfer of
mortgage loans under one of the government programs: Government
National Mortgage Association, FNMA, and FHLMC. Transfers of mortgages
under one of these programs are automatically treated as sales.
Furthermore, private transfers of mortgages are also reported as sales
under the rules of the FRB and OCC if the transferring institution does
not retain a significant risk of loss on the assets transferred.
5. Negative Goodwill
OTS permits negative goodwill to offset goodwill reported as an
asset.
The Banking Agencies require that negative goodwill be reported as
a liability, not netted against goodwill assets.
6. Push-Down Accounting
OTS requires push-down accounting when there is at least a 90
percent change in ownership.
The Banking Agencies require push-down accounting when there is at
least a 95 percent change in ownership.
7. Offsetting of Amounts Related to Certain Contracts
OTS practice is to follow GAAP. It is a general accounting
principle that the offsetting of assets and liabilities in the balance
sheet is improper except where a right of setoff exists. FASB
Interpretation No. 39, ``Offsetting of Amounts Related to Certain
Contracts'' (FIN 39), effective in 1994, defines right of setoff and
specifies that four conditions must be met to net assets and
liabilities, as well as off-balance sheet instruments.
The three Banking Agencies are planning to adopt FIN 39 solely for
on-balance sheet items arising from off-balance sheet derivatives. The
Call Report's existing guidance generally prohibits netting of assets
and liabilities.
8. Specific Valuation Allowance for and Charge-offs of Troubled Loans
Prior to September 30, 1993, OTS required specific valuation
allowances or charge-offs for troubled loans based on the net
realizable value of the collateral. Effective September 30, 1993, OTS
issued a revised policy that requires charge-offs or specific valuation
allowances against a loan when its book value exceeds its ``value,'' as
defined. The ``value'' is either the present value of the expected
future cash flows discounted at the loan's effective interest rate, the
observable market price of the loan, or the fair value of the
collateral. This revised policy, which is similar to the requirements
of FASB Statement No. 114, narrows the differences between banks and
thrifts.
The Banking Agencies generally consider real estate loans, where
repayment is expected to come solely from the collateral that secures
the loan, to be ``collateral dependent.'' For such a loan, any portion
of the loan balance that is not adequately secured by the value of the
collateral, and that can be clearly identified as uncollectible, should
be charged off. This approach is consistent with GAAP applicable to
banks.
Dated: February 23, 1994.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-5049 Filed 3-4-94; 8:45 am]
BILLING CODE 6720-01-P
