FDIC Federal Register Citations

[Federal Register: February 5, 2003 (Volume 68, Number 24)]

[Notices]

[Page 5976-5979]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr05fe03-182]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 03-03]

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[No. 2003-03]

Joint Report: Differences in Accounting Standards Among the

Federal Banking and Thrift Agencies; Report to Congressional Committees

AGENCIES: Office of the Comptroller of the Currency (OCC), Treasury;

Board of Governors of the Federal Reserve System (Board); Federal

Deposit Insurance Corporation (FDIC); and Office of Thrift Supervision

(OTS), Treasury.

ACTION: Report to the Committee on Financial Services of the United

States House of Representatives and to the Committee on Banking,

Housing, and Urban Affairs of the United States Senate regarding

differences in capital and accounting standards among the federal

banking and thrift agencies.

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SUMMARY: The OCC, Board, FDIC, and OTS (the agencies) have prepared

this report pursuant to section 37(c) of the Federal Deposit Insurance

Act (12 U.S.C. 1831n(c)). Section 37(c) requires the Agencies to

jointly submit an annual report to the Committee on Financial Services

of the House of Representatives and to the Committee on Banking,

Housing, and Urban Affairs of the Senate describing differences between

the accounting and capital standards used by the agencies. The report

must be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

OCC: Nancy Hunt, Risk Expert (202-874-4923), Office of the

Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.

Board: John Connolly, Supervisory Financial Analyst (202-452-3621),

Division of Banking Supervision and Regulation, Board of Governors of

the Federal Reserve System, 20th Street and Constitution Avenue, NW.,

Washington, DC 20551.

FDIC: Robert F. Storch, Chief, Accounting and Securities Disclosure

Section (202-898-8906), Division of Supervision and Consumer

Protection, Federal Deposit Insurance Corporation, 550 17th Street,

NW., Washington, DC 20429.

OTS: Michael D. Solomon, Senior Program Manager for Capital Policy

(202-906-5654), Supervision Policy, Office of Thrift Supervision, 1700

G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION: The text of the report follows:

Report to the Committee on Financial Services of the United States

House of Representatives and to the Committee on Banking, Housing, and

Urban Affairs of the United States Senate Regarding Differences in

Accounting and Capital Standards Among the Federal Banking Agencies

Introduction

The Office of the Comptroller of the Currency (OCC), the Board of

Governors of the Federal Reserve System (FRB), the Federal Deposit

Insurance Corporation (FDIC), and the Office of Thrift Supervision

(OTS) (the Federal banking agencies or the agencies) must jointly

submit an annual report to the Committee on Financial Services of the

U.S. House of Representatives and the Committee on Banking, Housing,

and Urban Affairs of the U.S. Senate describing differences between the

accounting and capital standards used by and among the agencies. The

report must be published in the Federal Register. This report covers

differences existing as of December 31, 2002.

This is the first joint annual report on differences in accounting

and capital standards to be submitted pursuant to Section 37(c) of the

Federal Deposit Insurance Act (12 U.S.C. 1831n(c)), as amended. Prior

to this report, each agency reported separately.

Section 303 of the Riegle Community Development and Regulatory

Improvement Act of 1994 (12 U.S.C. 4803) in part directs the agencies

to work jointly to make uniform all regulations and guidelines

implementing common statutory or supervisory policies. The results of

these efforts must be ``consistent with the principles of safety and

soundness, statutory law and policy, and the public interest.''

Since the agencies filed their first reports under this reporting

requirement in 1991, the agencies have acted in concert on numerous

occasions to modify their accounting and capital standards and to

harmonize the four sets of standards so as to eliminate as many

differences as possible. In particular, the agencies have revised their

capital standards to address changes in credit and certain other risk

exposures within the banking system, thereby rendering the amount of

capital institutions are required to hold generally more commensurate

with the credit risk and certain other risks to which they are exposed.

Some of the few remaining capital differences are statutorily mandated.

Some were significant historically but now no longer affect in a

measurable way, either individually or in the aggregate, institutions

supervised by the Federal banking agencies.

As a result, the Federal banking agencies now have substantially

similar leverage and risk-based capital standards. These standards

employ a common regulatory framework that establishes minimum capital

adequacy ratios for all banking organizations (banks, bank holding

companies and savings associations). In 1989, all four agencies adopted

risk-based capital frameworks that were based upon the international

capital accord (the Basel Accord) developed by the Basel Committee on

Banking Regulations and Supervisory Practices (Basel

[[Page 5977]]

Supervisors' Committee) and endorsed by the central bank governors of

the G-10 countries. The agencies view the risk-based capital and

leverage requirements as minimum standards, and most institutions are

expected to operate with capital levels well above the minimums,

particularly those institutions that are expanding or experiencing

unusual or high levels of risk.

The OCC, the FRB, and the FDIC, under the auspices of the Federal

Financial Institutions Examination Council (FFIEC), have developed

uniform Reports of Condition and Income (Call Reports) for all insured

commercial banks and FDIC-supervised savings banks. The OTS requires

each OTS-supervised savings association to file the Thrift Financial

Report (TFR). The reporting standards for recognition and measurement

in the Call Report and the TFR are consistent with generally accepted

accounting principles (GAAP). Thus, there are no significant

differences in regulatory accounting standards for regulatory reports

filed with the Federal banking agencies. Only one minor difference

remains between the accounting standards of the OTS and those of the

other Federal banking agencies, and that difference relates to push-

down accounting, as more fully explained below.

Differences in Capital Standards Among the Federal Banking Agencies

Subordinate Organizations Other Than Financial Subsidiaries

Banks supervised by the OCC, the FRB, and the FDIC generally

consolidate all significant majority-owned subsidiaries, including

banking and finance subsidiaries, of the parent banking organization

for regulatory capital purposes. This practice assures that capital

requirements are related to the risks to which the banking organization

is exposed. When banking and finance subsidiaries are not consolidated

for financial reporting purposes under GAAP, the aggregate amount of

investments in such subsidiaries is deducted from a bank's total

capital.

For other subsidiaries that are not consolidated on a line-for-line

basis for financial reporting purposes, joint ventures, and associated

companies, the parent banking organization's investment in each such

entity may be treated in any of three ways for risk-based capital

purposes, depending upon the circumstances: the entity's balance sheet

may be consolidated on a pro-rata basis, the banking organization's

investment in the entity may be deducted entirely from capital, or the

banking organization's investment in the entity may be assigned to the

100 percent risk-weight category. These options for handling

unconsolidated subsidiaries, joint ventures, and associated companies

for purposes of determining the capital adequacy of the parent banking

organization provide the agencies with the flexibility necessary to

ensure that institutions maintain capital levels that are commensurate

with the actual risks involved.

Under the OTS' capital regulations, a statutorily mandated

distinction is drawn between subsidiaries (majority-owned) engaged in

activities that are permissible for national banks and subsidiaries

engaged in ``impermissible'' activities for national banks. Where

subsidiaries engage in activities that are impermissible for national

banks, the OTS requires the deduction of the parent's investment in

these subsidiaries from the parent's assets and capital. If a

subsidiary's activities are permissible for a national bank, that

subsidiary's assets are generally consolidated with those of the parent

on a line-for-line basis. If a subordinate organization, other than a

subsidiary, engages in impermissible activities, the OTS will generally

deduct investments in and loans to such organization. If a subordinate

organization, other than a subsidiary, engages solely in permissible

activities, the OTS may, depending upon the nature and risk of the

activity, either assign investments in and loans to such organizations

to the 100 percent risk-weight category or require full deduction of

the investments and loans.

Financial Subsidiaries

The Gramm-Leach-Bliley Act (GLBA) amends the National Banking Act

to permit national banks to conduct certain expanded financial

activities through financial subsidiaries. Section 121(a) of the GLBA

(12 U.S.C. 24a) imposes a number of conditions and requirements upon

national banks that have financial subsidiaries, including specifying

the treatment that applies for regulatory capital purposes. The statute

requires that a national bank deduct from assets and tangible equity

the aggregate amount of its equity investments in financial

subsidiaries. The statute further requires that the financial

subsidiary's assets and liabilities not be consolidated with those of

the parent national bank for applicable capital purposes.

GLBA also amends the Federal Deposit Insurance Act to provide that

an insured State bank is, among other limitations, subject to the

capital deduction and deconsolidation requirements that apply to a

national bank if the State bank holds an interest in a subsidiary that

engages as principal in activities that would only be permissible for a

national bank to conduct through a financial subsidiary. Under section

121(d) of GLBA (12 U.S.C. 1831w), a State bank that holds an interest

in any financial subsidiary--whether conducting activities as a

principal or agent--must comply with all of the same conditions that

apply to a national bank, including the capital deduction and

deconsolidation requirement. The OCC, the FDIC, and the FRB adopted

final rules implementing their respective provisions of section 121 of

GLBA for national banks in March 2000, for state nonmember banks in

January 2001, and for state member banks in August 2001. GLBA did not

provide new authority to OTS-regulated institutions to own, hold or

operate financial subsidiaries, as defined.

Nonfinancial Equity Investments

Under final rules jointly published by the OCC, the FRB, and the

FDIC, on January 25, 2002 (67 FR 3783), subject to certain exceptions,

covered equity investments in nonfinancial companies are subject to a

Tier 1 capital charge (for both risk-based and leverage capital

purposes) that increases in steps as the banking organization's level

of concentration in equity investments increases. The GLBA authorizes

financial holding companies, which are bank holding companies granted

expanded investment and activity authority by the GLBA, to acquire or

control shares, assets, or ownership interests of any nonfinancial

company as part of a bona fide underwriting, or merchant or investment

banking activity. Banks and bank holding companies supervised by the

OCC, the FDIC, or the FRB also have authority, which predated GLBA, to

make limited equity investments in nonfinancial companies under various

other legal authorities.

OTS-regulated holding companies grandfathered by GLBA have no

statutory limits on their investments. Nongrandfathered holding

companies may make equity investments in nonfinancial companies of the

type authorized for financial holding companies (e.g., bona fide

underwriting or merchant or investment banking activity). The OTS does

not prescribe specific capital regulations for OTS-regulated holding

companies.

[[Page 5978]]

Collateralized Transactions

The FRB and the OCC assign a zero percent risk weight to certain

claims collateralized by cash on deposit in the institution or by

securities issued or guaranteed by the U.S. government, U.S. government

agencies, or the central governments of other countries that are

members of the Organization of Economic Cooperation and Development

(OECD). To qualify for the zero percent risk weight, the OCC and the

FRB rules require the collateral to be marked-to-market daily and a

positive margin of collateral protection to be maintained daily. The

FRB requires qualifying claims to be fully collateralized, while the

OCC rule permits partial collateralization.

The FDIC and the OTS assign a 20 percent risk weight to claims

collateralized by cash on deposit in the institution or by securities

issued or guaranteed by the U.S. government, U.S. government agencies,

or other OECD central governments.

In a final interagency rule assigning a 20 percent risk weight to

certain claims on qualifying securities firms, which was published in

the Federal Register on April 9, 2002, (67 FR 16971), the FDIC and the

OTS conformed their rules to assign a zero percent risk weight to

certain collateralized claims on qualifying securities firms that are

marked to market daily and have a positive margin of collateral. The

rule became effective July 1, 2002. The actions taken by the FDIC and

the OTS in adopting the April 9, 2002, rule for claims on qualifying

securities firms eliminates a portion of the capital difference

regarding collateralized transactions between these agencies and the

OCC and the FRB.

Noncumulative Perpetual Preferred Stock

Under the Federal banking agencies' capital standards,

noncumulative perpetual preferred stock is a component of Tier 1

capital. The capital standards of the OCC, the FRB, and the FDIC

require noncumulative perpetual preferred stock to give the issuer the

option to waive the payment of dividends and to provide that waived

dividends neither accumulate to future periods nor represent a

contingent claim on the issuer.

The practical effect of these requirements is that if a bank

supervised by the OCC, the FRB, or the FDIC issues perpetual preferred

stock and is required to pay dividends in a form other than cash--e.g.,

stock--when cash dividends are not or cannot be paid, the bank does not

have the option to waive or eliminate dividends and the stock would not

qualify as noncumulative. If an OTS-supervised savings association

issues perpetual preferred stock that requires the payment of dividends

in the form of stock when cash dividends are not paid, the stock may,

subject to supervisory approval, qualify as noncumulative.

Equity Securities of Government-Sponsored Enterprises

The FRB, the FDIC, and the OTS apply a 100 percent risk weight to

equity securities of government-sponsored enterprises (GSEs), other

than the 20 percent risk weighting of Federal Home Loan Bank stock held

by banking organizations as a condition of membership. The OCC applies

a 20 percent risk weight to all GSE equity securities. This difference

arises because the OCC's risk-based capital standards specify that

``securities'' of GSEs, which includes both debt and equity securities,

qualify for the 20 percent risk weight. In contrast, the risk-based

capital standards of the FRB, the FDIC, and the OTS apply a 20 percent

risk weight only to debt claims on these companies.

Limitation on Subordinated Debt and Limited-Life Preferred Stock

The OCC, the FRB, and the FDIC limit the amount of subordinated

debt and intermediate-term preferred stock that may be treated as part

of Tier 2 capital to 50 percent of Tier 1 capital. The OTS does not

prescribe such a limit. In addition, for banking organizations

supervised by the OCC, the FRB, and the FDIC, these maturing

instruments must be discounted by 20 percent in each of the last five

years before maturity. The OTS provides thrifts the option of using

either the discounting approach used by the other Federal banking

agencies, or an approach which, during the last seven years of the

maturing instrument's life, allows for the full inclusion of all such

instruments, provided that the amount maturing in any one year does not

exceed 20 percent of the thrift's total capital.

Pledged Deposits, Nonwithdrawable Accounts, and Certain Certificates

The OTS capital regulations permit mutual savings associations to

include in Tier 1 capital pledged deposits and nonwithdrawable accounts

to the extent that such accounts or deposits have no fixed maturity

date, cannot be withdrawn at the option of the accountholder, and do

not earn interest that carries over to subsequent periods. The OTS also

permits the inclusion of net worth certificates, mutual capital

certificates, and income capital certificates complying with applicable

OTS regulations in savings associations' Tier 2 capital. The OCC, the

FRB, and the FDIC do not expressly address these instruments in their

regulatory capital standards, and they generally are not recognized as

Tier 1 or Tier 2 capital components.

Servicing Assets and Intangible Assets

The Federal banking agencies' capital rules permit servicing assets

and purchased credit card relationships to be included in assets (i.e.,

not be deducted), subject to certain limits. The aggregate regulatory

capital limit on these two categories of assets is 100 percent of Tier

1 capital. However, within this overall limit, nonmortgage servicing

assets are combined with purchased credit card relationships and this

combined amount is limited to no more than 25 percent of an

institution's Tier 1 capital. Before applying these Tier 1 capital

limits, mortgage servicing assets, nonmortgage servicing assets, and

purchased credit card relationships are each valued at the lesser of 90

percent of their fair value or 100 percent of their book value (net of

any valuation allowances).

A recent statutory change permits the agencies to eliminate this 10

percent fair value discount from their capital standards if the

agencies determine that such assets can be valued at 100 percent of

their book value consistent with safety and soundness. The agencies are

considering how best to make such a determination. Any servicing assets

and purchased credit card relationships that exceed the relevant

limits, as well as all other intangible assets such as goodwill and

core deposit intangibles, are deducted from capital and assets in

calculating an institution's Tier 1 capital.

Although the Federal banking agencies' regulatory capital treatment

of servicing assets and intangible assets is fundamentally the same,

the OTS' capital rules contain one difference that, with the passage of

time, continues to lose significance. Under its rules, the OTS has

grandfathered, i.e., does not deduct from regulatory capital, core

deposit intangibles acquired before February 1994 up to 25 percent of

Tier 1 capital.

Covered Assets

The OCC, the FRB, and the FDIC generally place assets subject to

guarantee arrangements by the FDIC or the former Federal Savings and

Loan Insurance Corporation in the 20 percent risk weight category. The

OTS places

[[Page 5979]]

these ``covered assets'' in the zero percent risk-weight category.

Tangible Capital Requirement

Savings associations supervised by the OTS, by statute, must

satisfy a 1.5 percent minimum tangible capital requirement. However,

subsequent statutory and regulatory changes have imposed higher capital

standards on savings associations, rendering it unlikely, if not

impossible, for the 1.5 percent tangible capital requirement to

function as a meaningful regulatory trigger. This statutory tangible

capital requirement does not apply to institutions supervised by the

OCC, the FRB, or the FDIC.

Interest Rate Risk

The OCC, the FRB, and the FDIC specifically include in their

evaluation of capital adequacy an assessment of a banking

organization's interest rate risk, as measured by its exposure to

declines in the economic value of its capital due to changes in

interest rates. In addition, these three agencies have provided

guidance on sound practices for managing interest rate risk and on the

standards that they use to evaluate the adequacy and effectiveness of a

banking organization's interest rate risk management.

Historically, the OTS employed an explicit interest rate risk

component in its capital rule, as distinct from the other banking

agencies. In 2002 the OTS eliminated this explicit requirement from its

standards in light of other supervisory tools that are currently

available to measure and control interest rate risk. The OTS, like the

other banking agencies, has provided written guidance on sound

practices for managing interest rate risk, and directs examiners to

take into account interest rate risk when assessing capital adequacy.

The OTS' final rule brought its regulatory capital treatment of

interest rate risk into line with the approach followed by the other

Federal banking agencies, thereby formally eliminating a capital

difference between the OTS and the other agencies.

Differences in Accounting Standards Among the Federal Banking and

Thrift Agencies

Push-Down Accounting

Push-down accounting is the establishment of a new accounting basis

for a depository institution in its separate financial statements as a

result of a substantive change in control. Under push-down accounting,

when a depository institution is purchased by another organization yet

retains its separate corporate existence, the assets and liabilities of

the acquired institution are restated to their fair values as of the

acquisition date. These values, including any goodwill, are reflected

in the separate financial statements of the acquired institution, as

well as in any consolidated financial statements of the institution's

parent.

The OCC, the FRB, and the FDIC require the use of push-down

accounting for regulatory reporting purposes when there is a 95 percent

or greater change in ownership. This approach is generally consistent

with accounting interpretations issued by the staff of the Securities

and Exchange Commission. The OTS requires the use of push-down

accounting when there is a 90 percent or greater change in ownership.

Dated: January 29, 2003.

John D. Hawke, Jr.,

Comptroller of the Currency.

Dated: January 28, 2003.

By order of the Board of Governors of the Federal Reserve System.

Jennifer J. Johnson,

Secretary of the Board.

Dated in Washington, DC this 29th day of January, 2003.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Dated: January 24, 2003.

By the Office of Thrift Supervision.

James E. Gilleran,

Director.

[FR Doc. 03-2780 Filed 2-4-03; 8:45 am]

BILLING CODE 4810-33, 6210-01, 6714-01 and 6720-01-P