FDIC Federal Register Citations
[Federal Register: March 25, 2005 (Volume 70, Number 57)]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
Joint Report: Differences in Accounting and Capital Standards
Among the Federal Banking 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 accounting and capital standards among the federal
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 United States House of Representatives and to the Committee on
Banking, Housing, and Urban Affairs of the United States Senate
describing differences between the capital and accounting standards
used by the Agencies. The report must be published in the Federal
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 F. Connolly, Senior Supervisory Financial Analyst
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 Accountant (202-898-8906),
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
(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
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 the agencies. The report must
be published in the Federal Register.
This report, which covers differences existing as of December
2004, is the third 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 the agencies' first joint annual report, Section 37(c) required a
separate report from each agency.
Since the agencies filed their first reports on accounting
capital differences in 1990, the agencies have acted in concert to
harmonize their accounting and capital standards and eliminate as many
differences as possible. Section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994 (12 U.S.C. 4803)
also 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.'' During the past decade, the agencies have revised
their capital standards to address changes in credit and certain other
risk exposures within the banking system and to align the amount of
capital institutions are
required to hold more closely with the credit risks and certain other
risks to which they are exposed. These revisions have been made in a
uniform manner whenever possible and practicable to minimize
While the differences in capital standards have diminished
time, a few differences remain. Some of the remaining capital
differences are statutorily mandated. Others 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. In addition to the specific differences noted
below, the agencies may have differences in how they apply certain
aspects of their rules. These differences usually arise as a result of
case-specific inquiries that have only been presented to one agency.
Agency staffs seek to minimize these occurrences by coordinating
responses to the fullest extent reasonably practicable.
The federal banking agencies have substantially similar
adequacy standards. These standards employ a common regulatory
framework that establishes minimum leverage and risk-based capital
ratios for all banking organizations (banks, bank holding companies,
and savings associations). The agencies view the leverage and risk-
based capital 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
Financial Institutions Examination Council, have developed uniform
Reports of Condition and Income (Call Reports) for all insured
commercial banks and state-chartered 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 Reports 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
The Gramm-Leach-Bliley Act (GLBA) establishes the framework
financial subsidiaries of banks.\1\ GLBA amends the National Bank 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.
\1\ A national bank that has a financial subsidiary must
a number of statutory requirements in addition to the capital
deduction and deconsolidation requirements described in the text.
The bank (and each of its depository institution affiliates) must be
well capitalized and well managed. Asset size restrictions apply to
the aggregate amount of assets of all of the bank's financial
subsidiaries. Certain debt rating requirements apply, depending on
the size of the national bank. The national bank is required to
maintain policies and procedures to protect the bank from financial
and operational risks presented by the financial subsidiary. It is
also required to have policies and procedures to preserve the
corporate separateness of the financial subsidiary and the bank's
limited liability. Finally, transactions between the bank and its
financial subsidiary generally must comply with the Federal Reserve
Act's (FRA) restrictions on affiliate transactions and the financial
subsidiary is considered an affiliate of the bank for purposes of
the anti-tying provisions of the Bank Holding Company Act. See 12
State member banks may have financial subsidiaries subject to
of the same restrictions that apply to national banks.\2\ State
nonmember banks may also have financial subsidiaries, but they are
subject only to a subset of the statutory requirements that apply to
national banks and state member banks.\3\ Finally, national banks,
state member banks, and state nonmember banks may not establish or
acquire a financial subsidiary or commence a new activity in a
financial subsidiary if the bank, or any of its insured depository
institution affiliates, has received a less than satisfactory rating as
of its most recent examination under the Community Reinvestment Act.\4\
\2\ See 12 U.S.C. 335 (state member banks subject to the
conditions and limitations'' that apply to national banks that hold
\3\ The applicable statutory requirements for state nonmember
banks are as follows. The bank (and each of its insured depository
institution affiliates) must be well capitalized. The bank must
comply with the capital deduction and deconsolidation requirements.
It must also satisfy the requirements for policies and procedures to
protect the bank from financial and operational risks and to
preserve corporate separateness and limited liability for the bank.
Further, transactions between the bank and a subsidiary that would
be classified as a financial subsidiary generally are subject to the
affiliate transactions restrictions of the FRA. See 12 U.S.C. 1831w.
\4\ See 12 U.S.C. 1841(l)(2).
The OCC, the FDIC, and the FRB adopted final rules
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-
supervised savings associations to own, hold, or operate financial
subsidiaries, as defined.
Subordinate Organizations Other Than Financial Subsidiaries
Banks supervised by the OCC, the FRB, and the FDIC generally
consolidate all significant majority-owned subsidiaries other than
financial subsidiaries for regulatory capital purposes. This practice
assures that capital requirements are related to the aggregate credit
(and, where applicable, market) risks to which the banking organization
is exposed. For subsidiaries other than financial 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 subordinate organization is, for
risk-based capital purposes, deducted from capital or assigned to the
100 percent risk-weight category, depending upon the circumstances. The
FRB's and the FDIC's rules also permit the banking organization to
consolidate the investment on a pro rata basis in appropriate
circumstances. 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
Under the OTS's capital regulations, a statutorily mandated
distinction is drawn between subsidiaries, which generally are
majority-owned, that are engaged in activities that are permissible for
national banks and those that are engaged in activities
``impermissible'' for national banks. Where subsidiaries engage in
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 that organization.\5\ If such a subordinate organization
engages solely in permissible activities, the OTS may, depending upon
the nature and risk of the activity, either assign investments in and
loans to that organization to the 100 percent risk-weight category or
require full deduction of the investments and loans.
\5\ See 12 CFR 559.2 for the OTS's definition of subordinate
The FRB and the OCC assign a zero percent risk weight to
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 for Economic Cooperation and Development (OECD). 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 zero percent risk weight to
qualifying securities firms that are 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. The FDIC and the OTS accord a 20 percent risk weight to
such claims on other parties.
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.
As a result of these requirements, if a bank supervised by
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
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.
Limitation on Subordinated Debt and Limited-Life Preferred Stock
The OCC, the FRB, and the FDIC limit the amount of
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 restriction. The OTS does, however, limit the amount
of Tier 2 capital to 100 percent of Tier 1 capital, as do the other
In addition, for banking organizations supervised by the OCC,
FRB, and the FDIC, at the beginning of each of the last five years of
the life of a subordinated debt or limited-life preferred stock
instrument, the amount that is eligible for inclusion in Tier 2 capital
is reduced by 20 percent of the original amount of that instrument (net
of redemptions). 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 instrument's
life, allows for the full inclusion of all such instruments, provided
that the aggregate amount of such instruments 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
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. In the
aggregate, however, these deposits, accounts, and certificates are only
a negligible amount of the Tier 1 capital of OTS-supervised savings
associations. 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.
The OCC, the FRB, and the FDIC generally place assets subject
guarantee arrangements by the FDIC or the former Federal Savings and
Loan Insurance Corporation in the 20 percent risk-weight category. The
OTS places these ``covered assets'' in the zero percent risk-weight
Tangible Capital Requirement
Savings associations supervised by the OTS, by statute, must
satisfy a 1.5 percent minimum tangible capital requirement. Other
subsequent statutory and regulatory changes, however, imposed higher
capital standards 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.
Differences in Accounting Standards Among the Federal Banking Agencies
Push-down accounting is the establishment of a new accounting
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 acquired in a purchase, 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 at least a
95 percent 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 at least a 90 percent change in ownership.
Dated: March 15, 2005.
Julie L. Williams,
Acting Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, March 17, 2005.
Jennifer J. Johnson,
Secretary of the Board.
Dated in Washington, DC, this 14th day of March, 2005.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Dated: March 14, 2005.
By the Office of Thrift Supervision.
[FR Doc. 05-5931 Filed 3-24-05; 8:45 am]