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TO:
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CHIEF EXECUTIVE OFFICER
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SUBJECT:
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Final Rule on Regulatory Capital
Treatment of
Unrealized Holding Gains and Losses Under FASB 115
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The FDIC Board of Directors has approved a final
rule that clarifies the regulatory capital treatment for net unrealized holding
gains and losses on "available-for-sale" securities. A copy of the final rule is
attached.
FASB 115 -- Statement No. 115 of the
Financial Accounting Standards Board ("Accounting for Certain Investments in
Debt and Equity Securities") -- requires banks to recognize, as a separate
component of stockholders' equity, the amount of net unrealized holding
gains and losses on securities that are deemed to be available-for-sale.
Securities are generally carried in the available-for-sale category when a
bank does not have the positive intent and ability to hold the securities to
maturity, yet does not intend to trade them actively as part of a trading
account.
Under the instructions for
preparing the Consolidated Reports of Condition and Income (Call
Reports), banks are required to follow FASB 115 for regulatory
reporting purposes. However, for regulatory capital purposes, the
FDIC has decided not to proceed with its earlier proposal (see
FIL-1-94, dated January 4, 1994), which would have required
unrealized gains and losses on all available-for-sale securities
(debt as well as equity) to be included in determining Tier 1
capital. This proposed treatment of unrealized gains and losses
could have resulted in greater volatility in bank regulatory capital
levels. Instead, the FDIC has adopted only technical wording changes
to conform the language in its leverage and risk-based capital rules
to the terminology used in FASB 115.
Under this final rule, net
unrealized holding losses on available-for-sale equity
securities (but not debt securities) with readily
determinable fair values will be included (i.e., deducted)
when calculating Tier 1 capital. All other unrealized
holding gains and losses on available-for-sale securities
are excluded from the definition of Tier 1 capital. The
extent of any unrealized appreciation or depreciation on
securities, however, will continue to be one of the factors
FDIC examiners consider in their overall qualitative
assessment of an institution's capital adequacy.
This regulatory
capital treatment is consistent with final rules
that are being adopted by the other federal banking
agencies for the depository institutions they
supervise. It is also consistent with the interim
regulatory capital guidance issued jointly by the
FDIC, the Federal Reserve Board and the Office of
the Comptroller of the Currency on December 21, 1993
(see FIL-91-93), and with the treatment recommended
to the federal banking agencies by the Federal
Financial Institutions Examination Council's Task
Force on Supervision on November 10, 1994.
The FDIC's
final rule will become effective on January
27, 1995. See the enclosed Federal Register
notice for a detailed explanation of this
rule. For more information, contact
Examination Specialist Stephen G. Pfeifer or
Section Chief Robert F. Storch, both in the
Division of Supervision's Accounting Section
(202-898-8914).
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Stanley J. Poling
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Director
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Attachment:
Federal
Register
Distribution:
FDIC-Supervised Banks
(Commercial and Savings)
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