[Federal Register: February 5, 2003 (Volume 68, Number 24)]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
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
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
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.
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
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
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
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.
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
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.
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
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
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
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,
Dated: January 24, 2003.
By the Office of Thrift Supervision.
James E. Gilleran,
[FR Doc. 03-2780 Filed 2-4-03; 8:45 am]
BILLING CODE 4810-33, 6210-01, 6714-01 and 6720-01-P