Federal Deposit
Insurance Corporation

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2007-0009]

FEDERAL RESERVE SYSTEM

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[No. 2007-14]

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

(OTS), Treasury.

ACTION: Report to the congressional committees.

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

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

Insurance Act. 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 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 F. Connolly, Senior 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 Accountant (202-898-8906), Division

of Supervision and Consumer Protection, Federal Deposit Insurance

Corporation, 550 17th Street, NW., Washington, DC 20429.

OTS: Christine A. Smith, Project Manager (202-906-5740),

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 the agencies. The

report must be published in the Federal Register.

This report, which covers differences existing as of December 31,

2006, is the fifth 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 and

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 directed 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.'' In recent years, 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 interagency differences.

While the differences in capital standards have diminished over

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 this regard, the OTS plans to eliminate

two such de minimis differences during 2007 that have been fully

discussed in previous joint annual reports ((i) covered assets and (ii)

pledged deposits, nonwithdrawable accounts, and certain certificates),

and these differences have been excluded from this annual report.

In addition to the specific differences in capital standards 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 capital

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 Federal

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

[[Page 20179]]

the TFR are consistent with U.S. 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

Financial Subsidiaries

The Gramm-Leach-Bliley Act (GLBA) establishes the framework for

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.

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\1\ A national bank that has a financial subsidiary must satisfy

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

U.S.C. Section 5136A.

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State member banks may have financial subsidiaries subject to all

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\

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\2\ See 12 U.S.C. Section 335 (state member banks subject to the

``same conditions and limitations'' that apply to national banks

that hold financial subsidiaries).

\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.

Section 1831w.

\4\ See 12 U.S.C. Section 1841(l)(2).

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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-

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

involved.

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

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 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.

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\5\ See 12 CFR Section 559.2 for the OTS's definition of

subordinate organization.

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Collateralized Transactions

The FRB and the OCC assign a zero 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 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 claims on

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.

[[Page 20180]]

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 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.

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 restriction. The OTS does, however, limit the amount

of Tier 2 capital to 100 percent of Tier 1 capital, as do the other

agencies.

In addition, for banking organizations supervised by the OCC, the

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.

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.

Market Risk Rules

In 1996, the OCC, the FRB, and the FDIC adopted rules requiring

banks and bank holding companies with significant exposure to market

risk to measure and maintain capital to support that risk. The OTS did

not adopt a market risk rule because no OTS-supervised savings

association engaged in the threshold level of trading activity

addressed by the other agencies' rules. As the nature of many savings

associations' activities has changed since 1996, market risk has become

an increasingly more significant risk factor to consider in the capital

management process. Accordingly, the OTS has joined the other agencies

in proposing a revised market risk rule.\6\

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\6\ 71 FR 55958 (September 25, 2006).

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Differences in Accounting Standards Among the Federal Banking 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 the institution becoming substantially wholly owned. 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 parent.

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

accounting for regulatory reporting purposes when an institution's

voting stock becomes at least 95 percent owned by an investor or a

group of investors acting collaboratively. 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 an institution's voting stock becomes at least 90

percent owned by an investor or investor group.

Dated: April 9, 2007.

John C. Dugan,

Comptroller of the Currency.

By order of the Board of Governors of the Federal Reserve

System, April 9, 2007.

Jennifer J. Johnson,

Secretary of the Board.

Dated at Washington, DC, this 11th day of April, 2007.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Dated: April 16, 2007.

By the Office of Thrift Supervision.

John M. Reich,

Director.

[FR Doc. 07-1986 Filed 4-20-07; 8:45 am]

BILLING CODE 4810-33-P