Differences in Capital and Accounting Standards Among the Federal
Banking and Thrift Agencies; Report to Congressional Committees
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Report to the Committee on Banking and Financial Services of
the U.S. 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: This report has been prepared by the FDIC pursuant to Section
37(c) of the Federal Deposit Insurance Act (12 U.S.C 1831n(c)). Section
37(c) requires each federal banking agency to report to the Committee
on Banking and Financial Services of the House of Representatives and
to the Committee on Banking, Housing, and Urban Affairs of the Senate
any differences between any accounting or capital standard used by such
agency and any accounting or capital standard used by any other such
agency. The report must also contain an explanation of the reasons for
any discrepancy in such accounting and capital standards and must be
published in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Robert F. Storch, Chief, Accounting Section, Division of Supervision,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, D.C. 20429, telephone (202) 898-8906.
SUPPLEMENTARY INFORMATION: The text of the report follows: Report to
the Committee on Banking and Financial Services of the U.S. 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.
This report has been prepared by the Federal Deposit Insurance
Corporation (FDIC) pursuant to Section 37(c) of the Federal Deposit
Insurance Act, which requires the agency to submit a report to
specified Congressional Committee describing any differences in
regulatory capital and accounting standards among the federal banking
and thrift agencies, including an explanation of the reasons for these
differences. Section 37(c) also requires the FDIC to publish this
report in the Federal Register. This report covers differences existing
during 1995 and 1996 and developments affecting these differences.
The FDIC, the Board of Governors of the Federal Reserve System
(FRB), and the Office of the Comptroller of the Currency (OCC)
(hereafter, the banking agencies) have substantially similar leverage
and risk-based capital standards. While the Office of Thrift
Supervision (OTS) employs a regulatory capital framework that also
includes leverage and risk-based capital requirements, it differs in
several respects from that of the banking agencies. Nevertheless, 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 banking agencies, under the auspices of the Federal Financial
Institutions Examination Council (FFIEC), have developed uniform
Reports of Condition and Income (Call Reports) for all commercial banks
and FDIC-supervised savings banks. The reporting standards followed by
the banking agencies through December 31, 1996, have been substantially
consistent with generally accepted accounting principles (GAAP). In the
limited number of cases where the bank Call Report standards differed
from (GAAP), the regulatory reporting requirements were intended to be
more conservative than GAAP. The OTS requires each savings association
to file the Thrift Financial Report (TFR), the reporting standards for
which are consistent with GAAP. Thus, the reporting standards
applicable to the bank Call Report have differed in some respect from
the reporting standards applicable to the TFR.
On November 3, 1995, the FFIEC announced that it had approved the
adoption of GAAP as the reporting basis for the balance sheet, income
statement, and related schedules in the Call Report, effective with the
March 31, 1997, report date. On December 31, 1996, the FFIEC notified
banks about the Call Report revisions for 1997, including the
previously announced move to GAAP. Adopting GAAP as the reporting basis
for recognition and measurement purposes in the basic schedules of the
Call Report was designed to eliminate existing differences between bank
regulatory reporting standards and GAAP, thereby producing greater
consistency in the information collected in bank Call Reports and
general purpose financial statements and reducing regulatory burden. In
addition, the move to GAAP for Call Report purposes in 1997 should for
the most part eliminate the differences in accounting standards among
Section 303 of the Riegle Community Development and Regulatory
Improvement Act (RCDRIA) of 1994 (12 U.S.C. 4803) requires the banking
agencies and the OTS to conduct a systematic review of the regulations
and written policies in order to improve efficiency, reduce unnecessary
costs, and eliminate inconsistencies. It also directs the four 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.'' The
four agencies' efforts to eliminate existing differences among their
regulatory capital standards as part of the Section 303 review are
discussed in the following section.
B. Differences in Capital Standards Among the Federal Banking and
B.1. Minimum Leverage Capital
The banking agencies have established leverage capital standards
based upon the definition of tier 1 (or core) capital contained in
their risk-based capital standards. These standards require the most
highly-rated banks (i.e., those with a composite rating of ``1'' under
the Uniform Financial Institutions Rating System) to maintain a minimum
leverage capital ratio of at least 3 percent if they are not
anticipating or experiencing any significant growth and meet certain
other conditions. All other banks must maintain a minimum leverage
capital ratio that is at least 100 to 200 basis points above this
minimum (i.e., an absolute minimum leverage ration of not less than 4
The OTS has a 3 percent core capital and a 1.5 percent tangible
capital leverage requirement for savings associations. Consistent with
the requirements of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), the OTS has proposed revisions to its
leverage standards for savings associations so that its minimum
leverage standard will be at least as stringent as the revised leverage
standard that the OCC applies to national banks. However, from a
practical standpoint, the 4 percent leverage requirement to be
``adequately capitalized'' under the OTS' Prompt Correction Action rule
is the controlling standard for savings associations.
As a result of the Section 303 review of the four agencies'
regulatory capital standards, the agencies are considering adopting a
uniform leverage requirement that would subject institutions rated a
composite 1 under the Uniform Financial Institutions Rating System to a
minimum 3 percent leverage ratio and all other institutions to a
minimum 4 percent leverage ratio. This change would simplify and
streamline the banking agencies' leverage rules and would make all four
agencies' rules in this area uniform. On February 4, 1997, the FDIC
Board of Directors approved the publication for public comment of a
proposed amendment to the FDIC's leverage capital standards that would
implement this change. This proposal is to be published jointly with
the other agencies.
B.2. Interest Rate Risk
Section 305 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) mandates that the agencies' risk-based
capital standards take adequate account of interest rate risk. The
banking agencies requested comment in August 1992 and September 1993 on
proposals to incorporate interest rate risk into their risk-based
capital standards. In August 1995, each of the banking agencies amended
its capital standards to specifically include an assessment of a bank'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 the
evaluation of bank capital adequacy. At the same time, the banking
agencies issued a proposed joint policy statement describing the
process the agencies would use to measure and assess the exposer of the
economic value of a bank's capital. After considering the comments on
the proposed policy statement, the banking agencies issued a Joint
Agency Policy Statement on Interest Rate Risk in June 1996 which
provides guidance on sound practices for managing interest rate risk.
This policy statement does not establish a standardized measure of
interest rate risk nor does it create an explicit capital charge for
interest create risk. Instead, the policy statement identifies the
standards upon which the agencies will evaluate the adequacy and
effectiveness of a bank's interest rate risk management.
In 1993, the OTS adopted a final rule which adds an interest rate
risk component to its risk-based capital standards. Under this rule,
savings associations with a greater than normal interest rate exposure
must take a deduction from the total capital available to meet their
risk-based capital requirement. The deduction is equal to one half of
the difference between the institution's actual measured exposure and
the normal level of exposure. The OTS has partially implemented this
rule by formalizing the review of interest rate risk; however, no
deductions from capital are being made. As described above, the
approach adopted by the banking agencies differs from that of the OTS.
The banking agencies generally consolidate all significant
majority-owned subsidiaries of the parent organization for regulatory
capital purposes. The purpose of this practice is to assure that
capital requirements are related to all of the risks to which the bank
ins exposed. For subsidiaries which are not consolidated on a line-for-
line basis, their balance sheets may be consolidated on a pro-rata
basis, bank investments in such subsidiaries may be deducted entirely
form capital, or the investments may be risk-weighted at 100 percent,
depending upon the circumstances. These options for handling
subsidiaries for purposes of determining the capital adequacy of the
parent organization provide the banking agencies with the flexibility
necessary to ensure that institutions maintain capital levels that are
commensurate with the actual risks involved.
Under OTS capital guidelines, a distinction, mandated by FIRREA, is
drawn between subsidiaries engaged in activities that are permissible
for national banks and subsidiaries engaged in ``impermissible''
activies for national banks. For regulatory capital purposes,
subsidiaries of savings associations that engage only in permissible
activities are consolidated on a line-for-line basis, if majority-
owned, and on a pro rata basis, if ownership is between 5 percent and
50 percent. As a general rule, investments in, and loans to,
subsidiaries that engage in impermissible activities are deducted when
determing the capital adequacy of the parent. However, for subsidiaries
which were engaged in impermissible activities prior to April 12, 1989,
investments in, and loans to, such subsidiaries that were outstanding
as of that date were grandfathered and were phased out of capital over
a five-year transition period that expired on July 1, 1994. During this
transition period, investments in subsidiaries engaged in impermissible
activities which had not been phased out of capital were consolidated
on a pro rata basis. The phase-out provisions were amended by the
Housing and Community Development Act of 1992 with respect to
impermissible and activities. The OTS was permitted to extend the
transition period until July 1, 1996, on a case-by-case basis if
certain conditions were met.
B.4. Intangible Assets
The banking agencies' rules permit purchased credit card
relationships and mortgage servicing rights to count toward capital
requirements, subject to certain limits. Both forms of intangible
assets are in the aggregate limited to 50 percent of Tier 1 capital. In
addition, purchased credit card relationships alone are restricted to
no more than 25 percent of an institution's Tier 1 capital. Any
mortgage servicing rights and purchased credit card relationships that
exceed these 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.
In February 1994, the OTS issued a final rule making its capital
treatment of intangible assets generally consistent with the banking
agencies' rules. However, the OTS rule grandfathers preexisting core
deposit intangibles up to 25 percent of core capital and all purchased
mortgage servicing rights acquired before February 1990.
B.5. Capital Requirements for Recourse Arrangements
B.5.a. Leverage Capital Requirements--Through December 31, 1996,
the banking agencies required full leverage capital charges on most
assets sold with recourse, even when the recourse is limited. This
included transactions where the recourse arises
because the seller, as servicer, must absorb credit losses on the
assets being serviced. Two exceptions to this general rule pertained to
certain pools of first lien one-to-four family residential mortgages
and to certain agricultural mortgage loans. As required by Section 208
of the RCDRIA, an additional exception took effect in 1995 for small
business loans and leases sold with recourse by ``qualified insured
depository institutions.'' Banks had to maintain leverage capital
against most assets sold with recourse because the banking agencies'
regulatory reporting rules that were in effect through December 31,
1996, generally did not permit assets sold with recourse to be removed
from a bank's balance sheet (see ``Sales of Assets With Recourse'' in
Section C.1. below for further details). As a result, such assets
continued to be included in the asset base which was used to calculate
a bank's leverage capital ratio.
Because the regulatory reporting rules for thrifts enable them to
remove assets sold with recourse from their balance sheets when such
transactions qualify as sales under GAAP, the OTS capital rules do not
require thrifts to hold leverage capital against such assets.
As a result of the adoption of GAAP as the reporting basis for bank
Call Reports in 1997, banks will no longer be precluded from removing
assets transferred with recourse from their balance sheets if the
transfers qualify for sale treatment under GAAP. Thus, this capital
difference disappears in 1997.
B.5.b. Low Level Recourse Transactions--The banking agencies and
the OTS generally require a full risk-based capital charge against
assets sold with recourse. However, in the case of assets sold with
limited recourse, the OTS has limited the capital charge to the lesser
of the amount of the recourse or the actual amount of capital that
would otherwise be required against that asset, i.e., the full
effective risk-based capital charge. This is known as the ``low level
The banking agencies proposed in May 1994 to adopt the low level
recourse rule that the OTS already had in place. Such action was
mandated four months later by Section 350 of the RCDRIA. The FDIC
adopted the low level recourse rule in March 1995, and the other
banking agencies have taken similar action. Hence, this difference in
capital standards has been eliminated.
B.5.c. Senior-Subordinated Structures--Some securitized asset
arrangements involve the creation of senior and subordinated classes of
securities. When a bank originates such a transaction and retains the
subordinated interest, the banking agencies require that capital be
maintained against the entire amount of the asset pool. However, when a
bank acquires a subordinated interest in a pool of assets that it did
not own, the banking agencies assign the investment in the subordinated
security to the 100 percent risk weight category.
In general, the OTS requires a thrift that holds the subordinated
interest in a senior-subordinated structure to maintain capital against
the entire amount of the underlying asset pool regardless of whether
the subordinated interest has been retained or has been purchased.
In May 1994, the banking agencies proposed to require banking
organizations that purchase subordinated interests which absorb the
first dollars of losses from the underlying assets to hold capital
against the subordinated interest plus all more senior interests. This
proposal was part of a larger proposal issued jointly by the four
agencies to address the risk-based capital treatment of recourse and
direct credit substitutes (i.e., guarantees on a third party's assets).
The four agencies have considered the comments on the entire proposal
and have been developing a revised proposal on recourse and direct
credit substitutes that will also encompass the risk-based capital
treatment of asset securitization transactions.
B.5.d. Recourse Servicing--The right to service loans and other
assets may be retained when the assets are sold. This right also may be
acquired from another entity. Regardless of whether servicing rights
are retained or acquired, recourse is present whenever the servicer
must absorb credit losses on the assets being serviced. The banking
agencies and the OTS require risk-based capital to be maintained
against the full amount of assets upon which a selling institution, as
servicer, must absorb credit losses. Additionally, the OTS applies a
capital charge to the full amount of assets being serviced by a thrift
that has purchased the servicing from another party and is required to
absorb credit losses on the assets being serviced.
The agencies' aforementioned May 1994 proposal also would require
banking organizations that purchase certain loan servicing rights which
provide loss protection to the owners of the loans serviced to hold
capital against those loans. The treatment of purchased recourse
servicing is also being addressed in the revised proposal on recourse
and direct credit substitutes that the agencies are developing.
B.6. Collateralized Transactions
The FRB and the OCC have lowered from 20 percent to zero percent
the risk weight accorded collaterialized claims for which a positive
margin of protection is maintained on a daily basis by cash on deposit
in the institution or by securities issued or guaranteed by the U.S.
Government or the central governments of countries that are members of
the Organization of Economic Cooperation and Development (OECD).
The FDIC and the OTS still 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 or OECD central
As part of their Section 303 review of capital standards, the
banking and thrift agencies issued a joint proposal in August 1996 that
would permit collateralized claims that meet criteria that are uniform
among all four agencies to be eligible for a zero percent risk weight.
In general, this proposal would allow less capital to be held by
institutions supervised by the FDIC and the OTS for transactions
collateralized by cash or U.S. or OECD government securities. The
proposal would eliminate the differences among the agencies regarding
the capital treatment of collateralized transactions.
B.7. Limitation on Subordinated Debt and Limited-Life Preferred
Consistent with the Basle Accord, the banking agencies limit the
amount of subordinated debt and intermediate-term preferred stock that
may be treated as part of Tier 2 capital to an amount not to exceed 50
percent of Tier 1 capital. In addition, all maturing capital
instruments must be discounted by 20 percent in each of the last five
years before maturity. The banking agencies adopted this approach in
order to emphasize equity versus debt in the assessment of capital
The OTS has no limitation on the ratio of maturing capital
instruments as part of Tier 2 capital. Also, for all maturing
instruments issued on or after November 7, 1989 (those issued before
are grandfathered with respect to the discounting requirement), thrifts
have the option of using either (a) the discounting approach used by
the banking regulators, or (b) an approach which 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.
B.8. Presold Residential Construction Loans
The four agencies assign a 50 percent risk weight to loans that a
builder has obtained to finance the construction of one-to-four family
residential properties. These properties must be presold, and the
lending relationships must meet certain other criteria. The OTS and OCC
rules indicate that the property must be presold before the
construction loan is made in order for the loan to qualify for the 50
percent risk weight. The FDIC and FRB permit loans to builders for
residential construction to qualify for the 50 percent risk weight once
the property is presold, even if that event occurs after the
construction loan has been made.
As a result of the Section 303 review of the four agencies'
regulatory capital standards, the OTS and OCC are considering adopting
the treatment of presold residential construction loans followed by the
FDIC and the FRB, thereby making the agencies' rules in this area
uniform. This would not require an amendment of the FDIC's risk-based
B.9. Nonresidential Construction and Land Loans
The banking agencies assign loans for nonresidential real estate
development and construction purposes to the 100 percent risk weight
category. The OTS generally assigns these loans to the same 100 percent
risk category. However, if the amount of the loan exceeds 80 percent of
the fair value of the property, the excess portion is deducted from
B.10. Privately-Issued Mortgage-Backed Securities
The banking agencies, in general, place privately-issued mortgage-
backed securities in either the 50 percent or 100 percent risk-weight
category, depending upon the appropriate risk category of the
underlying assets. However, privately-issued mortgage-backed
securities, if collateralized by government agency or government-
sponsored agency securities, are generally assigned to the 20 percent
risk weight category.
The OTS assigns privately-issued high-quality mortgage-related
securities to the 20 percent risk weight category. These are,
generally, privately-issued mortgage-backed securities with AA or
better investment ratings.
B.11. Other Mortgage-Backed Securities
The banking agencies and the OTS automatically assign to the 100
percent risk weight category certain mortgage-backed securities,
including interest-only strips, principal-only strips, and residuals.
However, once the OTS' interest rate risk amendments to its risk-based
capital standards take effect, stripped mortgage-backed securities will
be reassigned to the 20 percent or 50 percent risk weight category,
depending upon these securities' characteristics. Residuals will remain
in the 100 percent risk weight category.
B.12. Junior Liens on One-to-Four Family Residential Properties
In some cases, a bank may make two loans on a single residential
property, one secured by a first lien, the other by a second lien. In
this situation, the FRB and the OTS view both loans as a single
extension of credit secured by a first lien and assign the combined
loan amount a 50 percent risk weight if this amount represents a
prudent loan-to-value ratio. If the combined amount exceeds a prudent
loan-to-value ratio, the loans are assigned to the 100 percent risk
weight category. The FDIC also combines the first and second liens to
determine the appropriateness of the loan-to-value ratio, but it
applies the risk weights differently than the FRB and the OTS. If the
combined loan amount represents a prudent loan-to-value ratio, the FDIC
risk weights the first lien at 50 percent and the second lien at 100
percent; otherwise, both liens are risk-weighted at 100 percent. This
combining of first and second liens is intended to avoid possible
circumvention of the capital requirement and to capture the risks
associated with the combined loans.
The OCC treats all first and second liens separately. It assigns
the loan secured by the first lien to the 50 percent risk weight
category and the loan secured by the second lien to the 100 percent
risk weight category.
As a result of the Section 303 review of the four agencies'
regulatory capital standards, the agencies are considering adopting the
OCC's treatment of junior liens on one-to-four family residential
properties in order to eliminate this difference among the agencies'
risk-based capital guidelines. On February 4, 1997, the FDIC Board of
Directors approved the publication for public comment of a proposed
amendment to the FDIC'S guidelines that would treat first and junior
liens separately with qualifying first liens risk-weighted at 50
percent and all junior liens risk-weighted at 100 percent. This
amendment, which is to be published jointly with the other agencies,
will simplify the risk-based capital standards and treat all junior
B.13. Mutual Funds
Rather than looking to a mutual fund's actual holdings, the banking
agencies assign all of a bank's holdings in a mutual fund to the risk
category appropriate to the highest risk asset that a particular mutual
fund is permitted to hold under its operating rules. Thus, the banking
agencies take into account the maximum degree of risk to which a bank
may be exposed when investing in a mutual fund because the composition
and risk characteristics of its future holdings cannot be known in
advance. In no case, however, may a risk-weight of less than 20 percent
be assigned to an investment in a mutual fund.
The OTS applies a capital charge appropriate to the riskiest asset
that a mutual fund is actually holding at a particular time, but not
less than 20 percent. In addition, both the OTS and the OCC guidelines
also permit, on a case-by-case basis, investments in mutual funds to be
allocated on a pro rata basis. However, the OTS and the OCC apply the
pro rata allocation differently. While the OTS applies the allocation
based on the actual holdings of the mutual fund, the OCC applies it
based on the highest amount of holdings the fund is permitted to hold
as set forth in its prospectus.
The four agencies' Section 303 review of their regulatory capital
standards has led them to consider adopting the OCC's pro rata
allocation alternative for risk weighting investments in mutual funds,
thereby making their risk-based capital rules in this area uniform. On
February 4, 1997, the FDIC Board of Directors approved the publication
for public comment of a proposed amendment to the FDIC's risk-based
capital standards that would allow banks to apply a pro rata allocation
of risk weights to a mutual fund based on the limits set forth in the
prospectus. This proposal is to be published jointly with the other
B.14. ``Covered Assets''
The banking agencies 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 these ``covered assets'' in the zero percent risk-weight
B.15. Pledged Deposits and Nonwithdrawable Accounts
Instruments such as pledged deposits, nonwithdrawable accounts,
Income Capital Certificates, and Mutal Capital Certificates do not
exist in the banking industry and are not addressed in the capital
guidelines of the three banking agencies.
The capital guidelines of the OTS permit savings associations to
include pledged deposits and nonwithdrawable accounts that meet OTS
criteria, Income Capital Certificates, and Mutal Capital Certificates
B.16. Agricultural Loan Loss Amortization
In the computation of regulatory capital, those banks accepted into
the agricultural loan loss amortization program pursuant to Title VIII
of the Competitive Equality Banking Act of 1987 may defer and amortize
certain losses related to agricultural lending that were incurred on or
before December 31, 1991. These losses must be amortized over seven
years. The unamortized portion of these losses is included as an
element of Tier 2 capital under the banking agencies' risk-based
Thrifts were not eligible to participate in the agricultural loan
loss amortization program established by this statute.
C. Differences in Reporting Standards Among the Federal Banking and
C.1. Sales of Assets with Recourse
In accordance with FASB Statement No. 77, a transfer of receivables
with recourse before January 1, 1997, is recognized as a sale if: (1)
the transferor surrenders control of the future economic benefits, (2)
the transferor's obligation under the recourse provisions can be
reasonably estimated, and (3) the transferee cannot require repurchase
of the receivables except pursuant to the recourse provisions.
Through December 31, 1996, the practice of the banking agencies
generally has been to allow banks to report transfers of receivables as
sales only when the transferring institution: (1) retains no risk of
loss from the assets transferred and (2) has no obligation for the
payment of principal or interest on the assets transferred. As a
result, except for the types of transfers noted below, transfers of
assets with recourse could not normally be reported as sales on the
Call Report. However, this general rule did not apply to the transfer
of first lien one-to-four family residential mortgage loans and
agricultural mortgage loans under one of the government programs
(Government National Mortgage Association, Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation, and Federal
Agricultural Mortgage Corporation). Transfers of mortgages under these
programs were treated as sales for Call Report purposes, provided the
transfers would be reported as sales under GAAP. Furthermore, private
transfers of first lien one-to-four family residential mortgages also
were reported as sales if the transferring institution retained only an
insignificant risk of loss on the assets transferred. However, under
the risk-based capital framework, transfers of mortgage loans with
recourse under the government programs or in private transfers that
qualify as sales for Call Report purposes are viewed as off-balance
sheet items that are assigned a 100 percent credit conversion factor.
Thus, for risk-based capital purposes, capital is generally required to
be held for the full amount outstanding of mortgages sold with recourse
in such transactions, subject to the low-level recourse rule discussed
earlier in this report.
Through year-end 1996, the OTS accounting policy has been to follow
FASB Statement No. 77. However, in the calculation of risk-based
capital under the OTS guidelines, assets sold with recourse that have
been removed from the balance sheet in accordance with Statement No. 77
are converted at 100 percent and also are subject to the low-level
recourse rule. This effectively negates that sale treatment recognized
on a GAAP basis for risk-based capital purposes, but not for leverage
Another exception to the banking agencies' general rule for
reporting transfers with recourse applies to sales of small business
loans and leases with recourse by ``qualified insured depository
institutions.'' Section 208 of the RCDRIA specifies that the regulatory
reporting requirements applicable to these recourse transactions must
be consistent with GAAP. Section 208 also requires the banking agencies
and the OTS to adopt more favorable risk-based capital requirements for
these recourse exposures than those described above. During August and
September 1995, the FRB published a final rule and the FDIC, the OCC,
and the OTS published interim rules (with requests for comment) which
implemented Section 208 in a uniform manner.
C.2. Futures and Forward Contracts
Through December 31, 1996, the banking agencies have not, as a
general rule, permitted the deferral of losses on futures and forward
contracts used for hedging purposes. All changes in market value of
futures and forward contracts are reported in current period income.
The banking agencies adopted this reporting standard prior to the
issuance of FASB Statement No. 80, which permits hedge or deferral
accounting under certain circumstances. Hedge accounting in accordance
with FASB Statement No. 80 is permitted by the banking agencies only
for futures and forward contracts used in mortgage banking operations.
The OTS practice is to follow GAAP for futures and forward
contracts. In accordance with FASB Statement No. 80, when hedging
criteria are satisfied, the accounting for a contract is related to the
accounting for the hedged item. Changes in the market value of the
contract are recognized in income when the effects of related changes
in the price or interest rate of the hedged item are recognized. Such
reporting can result in the deferral of losses which are reflected as
basis adjustments to assets and liabilities on the balance sheet.
C.3. Excess Servicing Fees
As a general rule, through December 31, 1996, the banking agencies
did not follow GAAP for excess servicing fees, but required a more
conservative treatment. For loan sales that occurred prior to 1997,
excess servicing arose when loans were sold with servicing retained and
the stated servicing fee rate exceeded a normal servicing fee rate.
Except for sales of pools of first lien one-to-four family residential
mortgages for which the banking agencies' approach was consistent with
the provisions of FASB Statement No. 65 that were in effect through
year-end 1996, excess servicing fee income in banks was to be reported
as realized over the life of the transferred asset.
In contrast, for loan sales that occurred prior to 1997, the OTS
allowed the present value of the future excess servicing fee to be
treated as an adjustment to the sales price for purposes of recognizing
gain or loss on the sale. This approach was consistent with the then
applicable provisions of FASB Statement No. 65.
C.4. Offsetting of Assets and Liabilities
FASB Interpretation No. 39, ``Offsetting of Amounts Related to
Certain Contracts,'' became effective in 1994. Interpretation No. 39
interprets the longstanding accounting principle that ``the offsetting
of assets and liabilities in the balance sheet is improper except where
a right of setoff exists.'' Under Interpretation No. 39, four
conditions must be met in order to demonstrate that a right of setoff
exists. Then, a debtor with ``a valid right of setoff may offset the
related asset and liability and report the net amount.'' The banking
agencies allow banks to apply Interpretation No. 39 for Call Report
purposes solely as it relates to on-balance sheet amounts associated
with off-balance sheet conditional and
exchange contracts (e.g., forwards, interest rate swaps, and options).
Under the Call Report instructions in effect through December 31, 1996,
the netting of other assets and liabilities is not permitted unless
specifically required by the instructions.
The OTS practice has been to follow GAAP as it relates to
offsetting in the balance sheet.
C.5. 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 acquired, 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 banking agencies require push down accounting 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 push down accounting when there is at least a 90
percent change in ownership.
C.6. Negative Goodwill
Under Accounting Principles Board Opinion No. 16, ``Business
Combinations,'' negative goodwill arises when the fair value of the net
assets acquired in a purchase business combination exceeds the cost of
the acquisition and a portion of this excess remains after the values
otherwise assignable to the acquired noncurrent assets have been
reduced to a zero value.
The banking agencies require negative goodwill to be reported as a
liability on the balance sheet and do not permit it to be netted
against goodwill that is included as an asset. This ensures that all
goodwill assets are deducted in regulatory capital calculations
consistent with the internationally agreed-upon Basle Accord.
The OTS permits negative goodwill to offset goodwill assets on the
C.7. In-Substance Defeasance of Debt
In-substance defeasance involves a debtor irrevocably placing risk-
free monetary assets in a trust established solely for satisfying the
debt. According to FASB Statement No. 76, the liability is considered
extinguished for financial reporting purposes if the possibility that
the debtor would be required to make further payments on the debt,
beyond the funds placed in the trust, is remote. With defeasance, the
debt is netted against the assets placed in the trust, a gain or loss
results in the current period, and both the assets placed in the trust
and the liability are removed from the balance sheet.
For Call Report purposes through December 31, 1996, the banking
agencies did not permit banks to report the defeasance of their
liabilities in accordance with Statement No. 76. Instead, banks were to
continue reporting any defeased debt as a liability and the securities
contributed to the trust as assets. No netting was permitted, nor was
any recognition of gains or losses on the transaction allowed. The
banking agencies did not adopt Statement No. 76 because of uncertainty
regarding the irrevocability of trusts established for defeasance
purposes. Furthermore, defeasance would not relieve the bank of its
contractual obligation to pay depositors or other creditors. In June
1996, the FASB issued a new accounting standard (FASB Statement No.
125) that supersedes Statement No. 76 for defeasance transactions
occurring after 1996, thereby bringing GAAP in line with the Call
Report treatment for these transactions.
The OTS practice has been to follow GAAP for defeasance
Dated at Washington, D.C., this 17th day of November, 1997.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
[FR Doc. 97-30560 Filed 11-20-97; 8:45 am]
BILLING CODE 6714-01-M