[Federal Register Volume 59, Number 137 (Tuesday, July 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17435]
[[Page Unknown]]
[Federal Register: July 19, 1994]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. 94-12]
Report to the Congress Regarding the Differences in Capital and
Accounting Standards Among the Federal Banking and Thrift Agencies
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Report to the Committee on Banking, Housing, and Urban Affairs
of the United States Senate and to the Committee on Banking, Finance
and Urban Affairs of the United States House of Representatives
regarding differences in capital and accounting standards among the
federal banking and thrift agencies.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) has
prepared this 1993 report as required by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA). FDICIA requires the OCC
to provide a report to Congress on any differences in capital standards
among the federal financial regulatory agencies. This notice is
intended to satisfy the FDICIA requirement that the report be published
in the Federal Register.
FOR FURTHER INFORMATION CONTACT:Roger Tufts, Senior Economic Advisor,
Office of the Chief National Bank Examiner, (202) 874-5070, or Ronald
Shimabukuro, Senior Attorney, Banking Operations and Assets Division,
(202) 874-4460, Office of the Comptroller of the Currency, 250 E Street
SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION: Section 121 of FDICIA, Pub. L. 102-242, 105
Stat. 2236 (December 19, 1991), requires each federal banking agency to
report annually to the Committee on Banking, Housing, and Urban Affairs
of the Senate and the Committee on Banking, Finance and Urban Affairs
of the House of Representatives on any differences between the capital
standards used by the OCC and the capital standards used by the other
financial institutions supervisory agencies. The text of that report is
provided as follows:
Differences in Capital and Accounting Standards Among the Federal
Banking and Thrift Agencies,\1\ Report to the Committee on Banking,
Housing, and Urban Affairs of the United States Senate and to the
Committee on Banking, Finance and Urban Affairs of the United States
House of Representatives, 1993
This annual report details the differences in the capital
requirements of the OCC, the Federal Reserve Board (FRB), the Federal
Deposit Insurance Corporation (FDIC) and the Office of Thrift
Supervision (OTS).\2\ This report is divided into three sections. The
first section briefly discusses recent efforts of the agencies to
promote more consistent capital standards; the second section discusses
the differences in the capital standards; and the third section
discusses the differences in accounting standards.
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\1\This report is made pursuant to section 121 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) which
superseded section 1215 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA).
\2\The OCC is the primary supervisor of national banks. Bank
holding companies and state-chartered banks that are members of the
Federal Reserve System are supervised by the FRB. State-chartered
nonmember banks are supervised by the FDIC. The OTS supervises
savings and loan associations.
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A. Recent Efforts of the Agencies
Representatives of each of the agencies meet regularly to discuss
capital and related accounting issues as part of an ongoing effort to
promote consistent interpretation and application of capital
requirements and to develop uniform capital standards. The agencies are
committed to achieve full uniformity in their capital and accounting
standards. During this past year, the banking agencies have been
extremely busy in these efforts. The agencies have issued several final
and proposed rules relating to:
Identifiable intangible assets.
Multifamily housing loans.
Interest rate risk.
Risks from concentrations of credit and nontraditional
activities.
Collateralized transactions.
Bilateral netting contracts.
Deferred tax assets (FAS 109).
Unrealized gains and losses on securities available for
sale (FAS 115).
In addition, the agencies issued changes to regulatory reporting
requirements for sales of other real estate owned (OREO) as part of the
initiative to implement the President's March 10, 1993, program to
improve the availability of credit to businesses and individuals. The
reporting change for OREO generally made the regulatory reporting
requirements consistent with generally accepted accounting principles.
B. Differences in Capital Standards Among the Federal Financial
Institution Regulatory Agencies
In 1989 the banking agencies and OTS adopted the risk-based capital
guidelines. The risk-based capital guidelines impose capital
requirements based on the credit risk profiles of the assets held by an
institution and provide a means to measure off-balance sheet risks. The
risk-based capital guidelines implement the Accord on International
Convergence of Capital Measurement and Capital Standards of July 1988,
as adopted by the Committee on Banking Regulation and Supervisory
Practice (Basle Accord). Under the risk-based capital guidelines bank
and thrift institutions are required to maintain total capital\3\ of at
least 8 percent of risk-weighted assets. The risk-based capital
requirements are the minimum capital requirements.
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\3\Total capital consists of Tier 1 capital plus Tier 2 capital
less required deductions. Tier 1 capital is defined to include
common stockholders' equity, noncumulative perpetual preferred stock
and related surplus, and minority interests in consolidated
subsidiaries. Tier 2 capital is generally defined to include the
allowance for loan and lease losses, up to 1.25% of risk weighted
assets, cumulative perpetual preferred stock and other qualifying
subordinated debt and hybrid capital instruments.
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Most institutions are expected to, and generally do, maintain
capital well above this minimum level.
In addition to the risk-based capital guidelines, the federal
banking agencies impose leverage capital requirements based on the
ratio of Tier 1 capital to total assets. The leverage capital
requirements work in conjunction with the risk-based capital guidelines
and impose minimum capital requirements regardless of the risk weights
assigned to the assets held by the institution.
Although the agencies have adopted common leverage capital
requirements and risk-based capital guidelines, there remain some
technical differences in language and interpretation of the capital
standards among the agencies. These minor differences are detailed
below.
1. Leverage Capital Requirements
Under the leverage capital requirements, highly-rated banks
(composite CAMEL rating of 1) must maintain a minimum leverage capital
ratio of 3 percent of Tier 1 capital to total assets. All other banks
must maintain an additional 100 to 200 basis points of Tier 1 capital
to total assets.
In addition to the leverage ratio requirements, thrift institutions
also must maintain a tangible equity ratio of 1.5 percent of total
assets. This additional tangible equity requirement is required by the
Financial Institution Reform, Recovery and Enforcement Act (FIRREA).
The OTS is currently amending its leverage ratio requirement to make it
more consistent with the leverage ratio requirements of the other
banking agencies. The only notable difference will be the definition of
core capital. While the definition of core capital will generally be
consistent with the definition of Tier 1 capital, certain adjustments,
such as supervisory goodwill,\4\ will result in some differences.
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\4\With respect to supervisory goodwill, it should be noted that
supervisory goodwill for thrifts will be phased out by the end of
1994.
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2. Equity Investments
In general, commercial banks are not permitted to invest in equity
securities, not are they generally permitted to engage in real estate
investment or development activities. To the extent that a bank is
permitted to hold equity securities (as with securities obtained in
connection with debts previously contracted), the risk-based capital
guidelines of the banking agencies require these investments to be
risk-weighted at 100 percent. However, on a case-by-case basis, the
banking agencies may require deduction of equity investments from the
capital of the parent bank or impose other requirements in order to
assess an appropriate capital charge above the minimum capital
requirements. The capital treatment of equity investments is also
discussed in the section on operating subsidiaries.
The OTS risk-based capital requirements require thrift institutions
to deduct equity investment from capital over a phased-in period ending
July 1, 1994. This phased-in period may be extended to July 1, 1996, by
the OTS on a case-by-case basis. In the interim, the portion of these
equity investments not deducted will be risk-weighted at 100 percent.
3. Assets subject to Guarantee Arrangements by the Federal Savings and
Loan Insurance Corporation (FLSIC)/Federal Deposit Insurance
Corporation
The risk-based capital guidelines of the banking agencies assign
assets subject to FLSIC or FDIC guarantees to the 20 percent risk-
weight category, the same category to which claims on depository
institutions and government-sponsored agencies are assigned. The OTS
assigns these assets to the zero percent risk weight category.
4. Limitation on Subordinated Debt and Limited-Life Preferred Stock
Consistent with the Basle Accord, the banking agencies limit the
amount of subordinated debt and limited-life preferred stock that may
be included in Tier 2 capital to 50 percent of Tier 1 capital. This
limitation is in addition to the overall limitation on Tier 2 capital
which restricts the amount of Tier 2 capital that may be included in
total capital to 100 percent of Tier 1 capital. In addition, the risk-
based capital guidelines of the banking agencies require that
subordinated debt and limited-life preferred stock by discounted 20
percent in each of the five years prior to maturity.
While subordinated debt and limited-life preferred stock do provide
some measure of protection to the FDIC insurance fund, neither are a
permanent source of funds. Moreover, subordinated debt cannot absorb
losses while the bank continues to operate as a going concern. This
limitation permits the inclusion of some subordinated debt and limited-
life preferred stock in capital, while assuring that permanent
stockholders' equity capital remains the predominant element in bank
regulatory capital.
The OTS risk-based capital guidelines do not contain any sublimit
on the total amount of limited-life instruments that may be included
within Tier 2 capital. In addition, the OTS allows thrift institutions
the option of either (1) discounting maturing capital instruments
(issued on or after November 7, 1989) by 20 percent a year over the
last five years of their term, or (2) including the full amount of such
instruments, provided that the amount maturing in any of the next seven
years does not exceed 20 percent of the total capital of the thrift
institution.
5. Subsidiaries
The banking agencies generally require that all significant
majority-owned subsidiaries be consolidated with the parent
organization for both regulatory reporting and capital purposes. This
requirement is consistent with the Basle Accord and is designed to
ensure that all risk exposures of the banking organization are taken
into account.
While significant majority-owned subsidiaries are generally
consolidated, in some instances the OCC does not require a bank to
consolidate certain subsidiaries. In these instances the bank's
investment in the subsidiary constitutes a capital investment in the
subsidiary. The OCC risk-based capital guidelines specifically provide
that capital investment in an unconsolidated banking or financial
subsidiary must be deducted from the total capital of the bank. In
addition, the OCC risk-based capital guidelines permit the OCC to
require the deduction of investment in other subsidiaries and
associated companies on a case-by-case basis.
Similarly, the FRB risk-based capital guidelines generally require
the deduction of investments in unconsolidated banking and finance
subsidiaries. With respect to the investment in other types of
unconsolidated subsidiaries (other than banking and finance
subsidiaries) or joint ventures and associated companies, the FRB does
retain flexibility in the capital treatment. The FRB may require the
investments in such subsidiaries (1) to be deducted, (2) to be
appropriately risk-weighted against the proportionate share of the
assets of the entity, (3) to be consolidated line-by-line with the
entity, or (4) otherwise to require the parent organization to maintain
capital above the minimum standard sufficient to compensate for any
risks associated with the investment.
In addition, the FRB risk-based capital guidelines also explicitly
permit the deduction of investments in certain subsidiaries that, while
consolidated for accounting purposes, are not consolidated for certain
specified supervisory or regulatory purposes. For example, the FRB
deducts investments in, and unsecured advances to, Section 20
securities subsidiaries from the capital of the parent bank holding
company. The FDIC accords similar treatment to securities subsidiaries
of state-chartered nonmember banks. Moreover, under the FDIC rules,
investments in, and extensions of credit to, certain mortgage banking
subsidiaries are also deducted in computing the capita of the parent
bank. Neither the OCC nor the FRB has a similar requirement with regard
to mortgage banking subsidiaries.
The deduction of investments in subsidiaries from the capital of
the parent bank 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 bank. In deducting investments in, and
advances to, certain subsidiaries from the capital of the parent bank,
the banking agencies expect the parent bank to satisfy or exceed
minimum regulatory capital requirements without reliance on the capital
invested in the subsidiary. In assessing the overall capital adequacy
of the parent bank, the banking agencies may also consider the parent
bank's fully consolidated capital position.
Under OTS risk-based capital guidelines, a distinction is made
between subsidiaries engaged in activities permissible for national
banks and subsidiaries engaged in activities ``impermissible'' for
national banks. This distinction is mandated by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989.
Subsidiaries of thrift institutions that engage only in activities
permissible for national banks are consolidated on a line-for-line
basis if majority-owned and on a pro rata basis if ownership is between
5 percent and 50 percent. As a general rule, investments, including
loans, in subsidiaries that engage in impermissible activities are
deducted in determining the capital adequacy of the parent thrift
institution. The remaining assets (the percent of assets corresponding
to the nondeducted portion of the investment in the subsidiary) are
consolidated with the parent thrift. However, investments, including
loans, outstanding as of April 12, 1989, to subsidiaries that were
engaged in impermissible activities prior to that date are
grandfathered and will be phased-out of capital over a transition
period that expires on July 1, 1994. The transition period may be
extended to July 1, 1996, by the OTS on a case-by-case basis. During
this transition period, investments in subsidiaries engaged in
impermissible activities that have not been phased out of capital are
to be consolidated on a pro rata basis.
6. Qualifying Multifamily Mortgage Loans
Pursuant to Section 618(b) of the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement Act of 1991 (RTCRRIA), the
banking agencies and OTS have amended their risk-based capital
guidelines to lower the risk weight of certain multifamily housing
loans, and securities backed by such loans, from 100 percent to 50
percent. Specifically, loans secured by multifamily residential
properties may qualify for a 50 percent risk weight subject to the
following conditions:
(1) The loan must be secured by a first mortgage on a multifamily
residential property consisting of five or more dwelling units;
(2) The original amortization of principal and interest must not
exceed 30 years;
(3) The original minimum maturity for repayment of principal must
not be less than seven years;
(4) All principal and interest payments must have been made on a
timely basis in accordance with the terms of the loan for at least one
year immediately preceding the risk weighting of the loan in the 50
percent risk weight category;
(5) The loan cannot be otherwise 90 days or more past due, or
carried in nonaccrual status;
(6) The loan must be in accordance with applicable lending limit
requirements and prudent underwriting standards; and
(7) If the rate of interest does not change over the term of the
loan, then the current loan amount must not exceed 80 percent of the
current value of the property, and in the most recent fiscal year, the
ratio of annual net operating income generated by the property to
annual debt service on the loan must not be less than 120 percent; or
(8) If the rate of interest changes over the term of the loan, then
the current loan amount must not exceed 75 percent of the current value
of the property, and in the most recent fiscal year, the ratio of
annual net operating income generated by the property to annual debt
service on the loan must not be less than 115 percent.
7. Goodwill
As required by FIRREA, the federal banking agencies do not allow
banks or FDIC-supervised savings banks to include goodwill as capital
for either risk-based capital guidelines or the leverage capital
requirements. Bank holding companies included goodwill acquired prior
to March 12, 1988, in Tier 1 for the purposes of the risk-based capital
guidelines (although not for leverage capital requirements) until the
end of 1992. After 1992, all goodwill must be deducted from bank
holding company capital.
As permitted by FIRREA, OTS allows ``qualifying supervisory
goodwill'' to be included as part of core capital through year-end
1994. After this date, thrift institutions must satisfy their minimum
core capital requirement without reliance on goodwill.
8. Nonresidential Construction and Land Loans
Under the risk-based capital guidelines of the banking agencies,
loans for real estate development and construction are assigned to the
100 percent risk-weight category. Reserves or charge-offs are required
for such loans when weaknesses or losses develop. The banking agencies
have no requirement for an automatic charge-off when the amount of a
loan exceeds the fair value of the property pledged as collateral for
the loan.
OTS generally also assigns these loans to the 100 percent risk
weight category. However, if the amount of the loan exceeds 80 percent
of the fair value of the property, that excess portion must be deducted
from capital in accordance with a phase-in rule which ends on July 1,
1994.
9. Mortgage-Backed Securities (MBS)
The risk-based capital guidelines of the banking agencies generally
assign a risk weight to privately-issued MBSs according to the
underlying assets, but in no case would it be assigned to the zero
percent risk-weight category. Privately-issued MBSs where the direct
underlying assets are mortgages, are generally assigned a risk weight
of 50 percent or 100 percent. Privately-issued MBSs that have
government agency or government-sponsored agency securities as their
direct underlying assets are generally assigned to the 20 percent risk-
weight category.
The OTS assigns privately-issued high quality mortgage-related
securities to the 20 percent risk-weight category. However, these are
privately-issued MBSs with AA or better investment ratings from private
rating companies.
With respect to other MBSs, the federal banking agencies assign to
the 100 percent risk weight category certain MBSs, including interest-
only strips, residuals, and similar instruments that can absorb more
than their pro rata share of loss. The OCC, in conjunction with the
other banking agencies and the OTS, on January 10, 1992, issued more
specific guidance as to the types of ``high types'' MBSs that require a
100 percent risk weight.
10. Assets Sold With Recourse
In general, recourse is any risk of loss retained by an institution
when it sells an asset. Recourse arrangements allow the purchaser of an
aset to seek recovery against the originating institution that sold the
asset under the conditions in the agreement. Recovery may take various
forms, but usually permits the buyer to ``put,'' or resell, the asset
back to the selling institution or to obtain reimbursement from the
selling institution for the amount of the loss. A typical condition for
recourse would be if the asset ceases to perform satisfactorily.
Therefore, recourse provisions generally expose the originating
institution to loss associated with the asset.
Generally, under the risk-based capital guidelines of the banking
agencies, sales of assets involving any recourse must be reported as
financings, so that the assets are retained on the balance sheet of the
selling bank. This has the effect of requiring a full leverage and
risk-based capital charge whenever assets are sold with recourse,
including limited recourse.
The OCC has recently revised its risk-based capital guidelines to
clarify the definition of recourse and to permit a limited exception
for transactions involving the sale of certain mortgage loan pools
where the selling bank has retained only minimal recourse and generally
has provided for all potential losses.
The FRB generally applies a capital charge to any recourse
arrangement that is the equivalent of an off-balance sheet guarantee,
regardless of the nature of the transaction that gives rise to the
recourse obligation. As with the OCC, the FRB provides an exception for
pools of one-to four-family residential mortgages and for certain farm
mortgage loans. These recourse transactions are reported by the bank as
sales, removing them from leverage capital requirements. These
transactions, which are the equivalent of off-balance sheet guarantees,
involve the type of credit risk that is addressed by the risk-based
capital guidelines. However, some questions have been raised because of
the treatment afforded these transactions for the purposes of the
leverage capital requirements. The FRB has clarified its risk-based
capital guidelines to ensure that recourse sales involving residential
mortgages are to be taken into account for determining compliance with
risk-based capital requirements. The FDIC has also clarified their
risk-based capital guidelines on this issue in 1993.
In general, OTS also requires a full capital charge against assets
sold with recourse. However, for certain limited recourse arrangements,
OTS limits the capital charge to the lesser of the amount of recourse
or the actual amount of capital that would otherwise be required
against that asset, that is, the normal full capital charge.
At present the banking agencies do not provide for any special
treatment of securitized assets. Some securitized asset arrangements
may involve the issuance of senior and subordinated classes of
securities against pools of assets. When a bank originates such a
transaction by placing loans that it owns in a trust and retains any
portion of the subordinated securities, the banking agencies require
that capital be maintained against the entire amount of the asset pool.
Regardless of whether a bank acquires a subordinated or senior security
in a pool of assets that it did not originate, the banking agencies
assign both the investment in the subordinated piece or the senior
piece to the 100 percent risk-weight category. The banking agencies
review these instruments to determine if additional reserves, asset
write-downs, or capital are necessary to protect the bank.
The OTS requires that capital be maintained against the entire
amount of the asset pool in both of the situations described in the
preceding paragraph. Additionally, the OTS applies a capital charge to
the full amount of assets being serviced when the servicer is required
to absorb credit losses on the assets being serviced.
In 1990, under the auspices of the FFIEC, the banking agencies and
the OTS issued for public comment a fact finding paper pertaining to
the full range of issues relating to recourse arrangements. These
issues include the definition of ``recourse'' and the appropriate
reporting and capital treatments to be applied to recourse
arrangements, as well as so-called recourse servicing arrangements and
limited recourse. The objective of this effort was to develop in a
comprehensive and consistent fashion an appropriate and uniform
approach to recourse arrangements for capital adequacy, reporting, and
other regulatory purposes. The comments received were very extensive
and generally illustrated the complexity of the subject. In view of the
significance and complexity of this project, the FFIEC in December 1990
decided to narrow the scope of the initial phase of the recourse
project to credit-related recourse arrangements that involve limited
recourse or that support a third party's assets.
A recourse working group, composed of representatives from all four
agencies, presented a report and recommendations to the FFIEC in August
1992 and were directed to carry out a study of the impact of their
recommendations on depository institutions, financial markets, and
other affected parties. The interagency working group completed a study
in early 1993. As a result of that study, the interagency working group
has revised several of its recommendations to reflect market practice
especially for securitized assets. A joint interagency notice of
proposed rulemaking and advance notice of proposed rulemaking was
published in the Federal Register on May 25, 1994 (59 Fed. Reg. 27116).
11. Agricultural Loan Loss Amortization
In determining regulatory capital, those banks accepted into the
agricultural loan loss amortization program pursuant to Title VIII of
the Competitive Equality Banking Act of 1987 are permitted to defer and
amortize losses incurred on agricultural loans between January 1, 1984,
and December 31, 1991. The program also applies to losses incurred
between January 1, 1983, and December 31, 1991, as a result of
reappraisals and sales of agricultural and other real estate owned and
agricultural personal property. These losses must be fully amortized
over a period not to exceed seven years and, in any case, must be fully
amortized by year-end 1998. Thrift institutions are not eligible to
participate in the agricultural loan loss amortization program
established by this statute.
12. Treatment of Junior Liens on One- to Four-Family Properties
In some cases, a banking organization may make two loans secured by
a single piece of residential property--one loan secured by a first
lien, the other by a second lien. The OCC and OTS generally assign
first liens on one- to four-family properties to the 50 percent risk-
weight category. All second liens on residential property are assigned
to the 100 percent risk-weight category, regardless of whether the
institution also holds the first lien. The assignment of first lien
mortgages to the 50 percent risk-weight category is based upon the
requirement that banks will adhere to prudent underwriting standards
with respect to the maximum loan-to-value ratio, the borrower's paying
capacity and the long-term expectations for the real estate market in
which the bank is lending.
The FDIC similarly assigns all second liens to the 100 percent
risk-weight category. However, in determining the risk-weight of the
first lien, the FDIC considers the first and second liens together to
assess whether the first lien satisfies prudent underwriting standards.
When evaluated together, if the first and second liens are within the
prudent loan-to-value ratio and satisfy all other underwriting
standards, then the first lien will be assigned to the 50 percent risk-
weight category; otherwise, it will be assigned to the 100 percent risk
category.
The FRB and OTS consider the first and second liens as a single
loan, provided there are no intervening liens. Therefore, the total
amount of these transactions may be assigned to the 100 percent risk-
weight category, if, in the aggregate, the two loans exceeds a prudent
loan-to-value ratio and, therefore, do not qualify for the 50 percent
risk-weight category. This approach is intended to avoid possible
circumvention of the capital requirements and capture the risks
associated with the combined transactions. However, if the total amount
of the transaction does satisfy a prudent loan-to-value ratio and other
underwriting standards, then both the first and second liens may be
assigned to the 50 percent risk-weight category.
Although there are some technical differences in the methodology,
all the agencies have the same ability to adjust the capital
requirements of an individual bank to account for imprudent loans
secured by first liens on one- to four-family properties.
13. Pledged Deposits and Nonwithdrawable Accounts
The OTS capital guidelines permit thrift institutions to include in
capital certain pledged deposits and nonwithdrawal accounts that
satisfy specified OTS criteria. Income capital certificates and mutual
capital certificates held by OTS may also be included in capital by
thrift institutions. These instruments are not relevant to commercial
banks, and, therefore, they are not addressed in the risk-based capital
guidelines of the banking agencies.
14. Mutual Funds
The three banking agencies assign all of the holdings of a bank in
a mutual fund to the risk category appropriate to the highest risk
asset that a particular mutual fund is permitted to hold under its
operating rules. The purposes of this is to take into account the
maximum degree of risk to which a bank may be exposed when investing in
a mutual fund in view of the fact that the future composition and risk
characteristics of the fund cannot be known in advance.
The OTS applies a capital charge based on the riskiest asset that
is actually held by the mutual fund at a particular time. In addition
the OTS guidelines also permit, on a case-by-case basis, investments in
mutual funds to be allocated on a pro rata basis dependent on the
actual composition of the fund.
15. Interest Rate Risk
The risk-based capital guidelines were designed primarily as a
broad measure of the relative credit risk of the assets. However, the
banking agencies and OTS are continuing their efforts to refine the
risk-based capital guidelines to take into account other noncredit
risks, including interest rate risk. The agencies are required to
consider interest rate risk, as well as the risk of concentrations of
credit and the risks of nontraditional activities, under Section 305 of
FDICIA.
The OTS has adopted an interest rate risk component to its risk-
based capital guidelines, which became effective on January 1, 1994.
Under this new rule, thrift institutions with an above normal level of
interest rate risk will be subject to a capital charge commensurate to
their risk exposure.
The banking agencies also are developing an interest rate risk
component. On September 14, 1993, the banking agencies published a
joint notice of proposed rulemaking in the Federal Register and are
currently in the process of drafting a final rule.
16. Concentrations of Credit and Nontraditional Activities
As required by Section 305 of FDICIA, the banking agencies and the
OTS published a joint proposal in the Federal Register on February 22,
1994. The proposed rule would amend the capital standards of the
banking agencies and the OTS by explicitly identifying concentration of
credit risk and certain risks arising from nontraditional activities as
important factors in assessing an institution's overall capital
adequacy. The banking agencies and the OTS are currently reviewing the
comment letters received and are drafting a final rule.
17. Collateralized Transactions
In December 1992, the FRB amended its risk-based capital guidelines
to lower the risk-weight on loans collateralized by cash or government
securities from 20 percent to zero percent. In August 1993, the OCC
issued a proposed rule that would similarly lower the risk-weight on
loans collateralized by cash or government securities from 20 percent
of zero percent for national banks. The OCC is currently drafting a
final rule. The FDIC and OTS are also considering this issue.
18. Deferred Tax Assets
On December 23, 1993, the OCC published in the Federal Register a
proposed rule on deferred tax assets. This proposal was developed
jointly by the banking agencies and the OTS in response to Financial
Accounting Standard (FAS) Number 109 which was adopted for regulatory
reporting purposes beginning January 1, 1993. The proposed rule would
amend the capital standards to limit the amount of certain deferred tax
assets that may be included in an institution's Tier 1 capital. The
other banking agencies and the OTS have issued or are considering
similar proposals. The OCC will be working with the other banking
agencies and the OTS in drafting a final rule.
19. Unrealized Gains and Losses on Securities Available for Sale
On April 18, 1994, the OCC published in the Federal Register a
proposed rule on unrealized gains and losses on securities available
for sale. This proposal was developed jointly by the banking agencies
and OTS in response to FAS 115, which was adopted for regulatory
reporting purposes beginning December 15, 1993. The proposed rule would
amend the definition of ``common stockholders' equity'' in the capital
guidelines to include both unrealized gains and losses on securities
available for sale. The other banking agencies and the OTS have issued
or are planning to issue similar proposals. The OCC will be working
with the other banking agencies and the OTS in drafting a final rule.
20. Bilateral Netting Contracts
The banking agencies and the OTS have been meeting to discuss an
amendment to the risk-based capital guideline to provide for the
recognition of bilateral netting contracts for the purpose of
determining the capital requirement for off-balance sheet rate
contracts. In May of 1994, the OCC and the FRB have issued a joint
proposed rule that generally would permit an institution to net
positive and negative mark-to-market values of interest rate and
foreign exchange rate contracts with a single counterparty if those
rate contracts are subject to qualifying bilateral netting contracts.
The OTS and the FDIC are considering the issuance of similar proposed
rules.
C. Interagency Differences in Accounting Principles
The OCC, as well as the other banking agencies, requires banks to
follow generally accepted accounting principles (GAAP), except when the
agency determines that a specific accounting standard under GAAP does
not meet the accounting objectives included in Section 121 of FDICIA.
In such cases, the use of accounting principles more stringent than
GAAP may be required. For the most part, the regulatory accounting
standards for all commercial banks, whether regulated by the OCC, the
FRB, or the FDIC, are prescribed in the Instructions to the Report of
Condition and Income (Call Report).
The Call Report instructions are established by the FFIEC and are
generally consistent with GAAP. Differences in interpretations between
the OCC and the other banking agencies may occur. However, such
differences are usually infrequent and involve immaterial or emerging
issues, which the FFIEC has not yet reviewed on a joint agency basis.
Under Section 121 of FDICIA, the federal banking agencies must
require financial institutions to use accounting principles ``no less
stringent than GAAP.'' The banking agencies believe that GAAP generally
satisfies the accounting objectives included in FDICIA Section 121.
However, as previously noted, in certain circumstances, accounting
principals more stringent than GAAP are required to satisfy accounting
objectives included in FDICIA.
The OTS requires each thrift institution to file the Thrift
Financial Report. That report is filed on a basis consistent with GAAP,
as it is applied by thrift institutions, which differs in a few
respects from GAAP as it is applied by banks.
These differences in accounting principles between the banks and
thrift institutions may cause differences in financial statement
presentation and in amounts of regulatory capital required to be
maintained by depository institutions.
The following summarizes the significant differences in accounting
standards between the Thrift Financial Report and the Call Report.
These differences generally arise because of either: (1) differences
between regulatory reporting standards and GAAP applicable to banks, or
(2) differences in GAAP applicable to banks and GAAP applicable to
thrift institutions.
1. Futures and Forward Contracts
Differences in this area result because the banking regulators
generally require future and forward contracts to be marked to market,
whereas thrift institutions may defer gains and losses resulting from
hedging activities. The banking agencies do not follow GAAP, but
require banks to report changes in the market value of futures and
forward contracts, even when used as hedges, in current income.
However, futures contracts used to hedge mortgage banking operations
are reported in accordance with GAAP. This issue will be reexamined as
part of an ongoing project on accounting for derivatives.
The OTS requires thrift institutions to follow GAAP to account for
futures contracts. Accordingly, when specified hedging criteria are
satisfied, the accounting for the futures contract is matched with the
accounting for the hedged item. Changes in the market value of the
futures contract are recognized in income when the income effects of
the hedged item are recognized. This reporting can result in the
deferral of both gains and losses. Although there is no specific GAAP
for forward contracts, the OTS applies these same principles to forward
contracts.
2. Push-Down Accounting
When a depository institution is acquired by a holding company in a
purchase transaction, the holding company is required to revalue all of
the assets and liabilities of the depository institution at fair value
at the time of acquisition. When push-down accounting is applied, the
same fair value adjustments recorded by the parent holding company are
also recorded at the depository institution level.
All of the agencies require the use of push-down accounting when
there has been a substantial change in the ownership of the
institution. However, differing standards have been applied to
determine when this substantial change has occurred.
The three banking agencies require push-down accounting when there
is at least a 95 percent change in ownership of the institution. This
approach is consistent with interpretations of the Securities and
Exchange Commission.
The OTS requires push-down accounting when there is at least a 90
percent change of ownership.
3. Excess Service Fees
Thrift institutions consider excess servicing fees in the
determination of the gain or loss on a loan sale, whereas banks
generally recognize the excess fee over the life of the loan.
The banking agencies require banks to follow GAAP for residential
first mortgage loans. This requires that when loans are sold with
servicing retained and the stated servicing fee is sufficiently higher
than a normal servicing fee, the sales price is adjusted to determine
the gain or loss from the sale. This allows additional gain recognition
at the time of sale and recognizes a normal servicing fee in each
subsequent year. This gain cannot exceed the gain assuming the loans
were sold with servicing released.
For all other loans, the banking agencies require that excess
servicing fees retained on loans sold be recognized over the
contractual life of the transferred assets.
The OTS follows GAAP in valuing all excessive service fees.
Therefore, the accounting stated above for sales of mortgage loans with
excess servicing at banking institutions would apply to all loan sales
with excess servicing at thrift institutions.
4. In-Substance Defeasance of Debt
The banking agencies do not permit banks to defease their
liabilities in accordance with FASB Statement Number 76, whereas thrift
institutions may eliminate defeased liabilities from the balance sheet.
The banking agencies report in-substance defeased debt as a
liability and the securities contributed to a trust as assets with no
recognition of any gain or loss on the transaction.
The OTS accounts for debt that has been in-substance defeased in
accordance with GAAP.
Therefore, 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.
5. Sales of Assets with Recourse
The banking agencies generally do not allow banks to report sales
of receivables if any risk of loss is retained. Thrift institutions
report sales when the risk of loss can be estimated in accordance with
FASB Statement Number 77.
The banking agencies generally allow banks to report transfers of
receivables as sales only when the transferring institution: (1)
retains no risk of loss from the assets transferred and (2) 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 rule does not apply to the transfer of mortgage loans
under certain government programs (GNMA, FNMA, etc.). Transfers of
mortgages under one of these programs are automatically treated as
sales. Furthermore, private transfers of pools of mortgages are also
reported as sales if the transferring institution does not retain more
than an insignificant risk of loss on the assets transferred.
The OTS follows GAAP to account for a transfer of all receivables
with recourse. A transfer of receivables with recourse is recognized as
a sale if: (1) the seller surrenders control of the future economic
benefits, (2) the transferor's obligation under the recourse provisions
can be reasonably estimated, and (3) the transferee cannot require
repurchase of the receivables except pursuant to the recourse
provisions.
The FFIEC has a study under way involving the topic of transfers
with recourse. As part of this study, the staff of the OCC is reviewing
the reporting requirements for sales of assets with recourse. The
purpose of this study is to determine whether a reduction or
elimination of the differences between regulatory reporting
requirements and GAAP may be achieved in this area.
6. Negative Goodwill
The three banking agencies require that negative goodwill5 be
reported as a liability, and not netted against the goodwill asset.
---------------------------------------------------------------------------
\5\Negative goodwill typically is created when a bank purchases
assets for less than the determined fair value of the assets.
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The OTS permits negative goodwill to offset the goodwill assets
resulting from other acquisitions.
7. Offsetting of Amounts Related to Certain Contracts
FASB Interpretation Number 39 (FIN 39) became effective in 1994.
FIN 39 allows the offsetting of certain assets and liabilities on the
balance sheet (e.g., loans, deposits, etc.), as well as the netting of
assets and liabilities arising from off-balance sheet derivative
instruments, when four conditions are met. These conditions relate to
whether a valid right of offset exists. The three banking agencies are
planning to adopt FIN 39 sometime in 1994 solely for on-balance sheet
amounts arising from conditional and exchange contracts (e.g., interest
rate swaps, options, etc.). The Call Report's existing guidance, which
generally prohibits netting of assets and liabilities, will continue to
be followed in all other cases.
The OTS policy on netting of assets and liabilities is consistent
with GAAP and FIN 39.
8. Specific Valuation Allowance for and Charge-Offs of Troubled Loans
The banking agencies generally consider real estate loans that lack
acceptable cash flows or other repayment sources to be ``collateral
dependent.'' When the fair value of the collateral of such a loan has
declined below book value, the loan is reduced to fair value. This
approach is consistent with GAAP applicable to banks.
Prior to September 30, 1993, the OTS required specific valuation
allowances for troubled loans based on the net realizable value of the
collateral. Effective September 30, 1993, the OTS issued a revised
policy that requires a specific valuation allowance against, or partial
charge-off, of 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, 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.
Dated: July 11, 1994.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 94-17435 Filed 7-18-94; 8:45 am]
BILLING CODE 4810-33-M
