Report to the Congress Regarding the Differences in Capital and Accounting Standards Among the Federal Banking and Thrift Agencies

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 94-12]

Report to the Congress Regarding the Differences in Capital and

Accounting Standards Among the Federal Banking and Thrift Agencies

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Report to the Committee on Banking, Housing, and Urban Affairs

of the United States Senate and to the Committee on Banking, Finance

and Urban Affairs of the United States House of Representatives

regarding differences in capital and accounting standards among the

federal banking and thrift agencies.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) has

prepared this 1993 report as required by the Federal Deposit Insurance

Corporation Improvement Act of 1991 (FDICIA). FDICIA requires the OCC

to provide a report to Congress on any differences in capital standards

among the federal financial regulatory agencies. This notice is

intended to satisfy the FDICIA requirement that the report be published

in the Federal Register.

FOR FURTHER INFORMATION CONTACT:Roger Tufts, Senior Economic Advisor,

Office of the Chief National Bank Examiner, (202) 874-5070, or Ronald

Shimabukuro, Senior Attorney, Banking Operations and Assets Division,

(202) 874-4460, Office of the Comptroller of the Currency, 250 E Street

SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION: Section 121 of FDICIA, Pub. L. 102-242, 105

Stat. 2236 (December 19, 1991), requires each federal banking agency to

report annually to the Committee on Banking, Housing, and Urban Affairs

of the Senate and the Committee on Banking, Finance and Urban Affairs

of the House of Representatives on any differences between the capital

standards used by the OCC and the capital standards used by the other

financial institutions supervisory agencies. The text of that report is

provided as follows:

Differences in Capital and Accounting Standards Among the Federal

Banking and Thrift Agencies,\1\ Report to the Committee on Banking,

Housing, and Urban Affairs of the United States Senate and to the

Committee on Banking, Finance and Urban Affairs of the United States

House of Representatives, 1993

This annual report details the differences in the capital

requirements of the OCC, the Federal Reserve Board (FRB), the Federal

Deposit Insurance Corporation (FDIC) and the Office of Thrift

Supervision (OTS).\2\ This report is divided into three sections. The

first section briefly discusses recent efforts of the agencies to

promote more consistent capital standards; the second section discusses

the differences in the capital standards; and the third section

discusses the differences in accounting standards.

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\1\This report is made pursuant to section 121 of the Federal

Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) which

superseded section 1215 of the Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 (FIRREA).

\2\The OCC is the primary supervisor of national banks. Bank

holding companies and state-chartered banks that are members of the

Federal Reserve System are supervised by the FRB. State-chartered

nonmember banks are supervised by the FDIC. The OTS supervises

savings and loan associations.

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A. Recent Efforts of the Agencies

Representatives of each of the agencies meet regularly to discuss

capital and related accounting issues as part of an ongoing effort to

promote consistent interpretation and application of capital

requirements and to develop uniform capital standards. The agencies are

committed to achieve full uniformity in their capital and accounting

standards. During this past year, the banking agencies have been

extremely busy in these efforts. The agencies have issued several final

and proposed rules relating to:

Identifiable intangible assets.

Multifamily housing loans.

Interest rate risk.

Risks from concentrations of credit and nontraditional

activities.

Collateralized transactions.

Bilateral netting contracts.

Deferred tax assets (FAS 109).

Unrealized gains and losses on securities available for

sale (FAS 115).

In addition, the agencies issued changes to regulatory reporting

requirements for sales of other real estate owned (OREO) as part of the

initiative to implement the President's March 10, 1993, program to

improve the availability of credit to businesses and individuals. The

reporting change for OREO generally made the regulatory reporting

requirements consistent with generally accepted accounting principles.

B. Differences in Capital Standards Among the Federal Financial

Institution Regulatory Agencies

In 1989 the banking agencies and OTS adopted the risk-based capital

guidelines. The risk-based capital guidelines impose capital

requirements based on the credit risk profiles of the assets held by an

institution and provide a means to measure off-balance sheet risks. The

risk-based capital guidelines implement the Accord on International

Convergence of Capital Measurement and Capital Standards of July 1988,

as adopted by the Committee on Banking Regulation and Supervisory

Practice (Basle Accord). Under the risk-based capital guidelines bank

and thrift institutions are required to maintain total capital\3\ of at

least 8 percent of risk-weighted assets. The risk-based capital

requirements are the minimum capital requirements.

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\3\Total capital consists of Tier 1 capital plus Tier 2 capital

less required deductions. Tier 1 capital is defined to include

common stockholders' equity, noncumulative perpetual preferred stock

and related surplus, and minority interests in consolidated

subsidiaries. Tier 2 capital is generally defined to include the

allowance for loan and lease losses, up to 1.25% of risk weighted

assets, cumulative perpetual preferred stock and other qualifying

subordinated debt and hybrid capital instruments.

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Most institutions are expected to, and generally do, maintain

capital well above this minimum level.

In addition to the risk-based capital guidelines, the federal

banking agencies impose leverage capital requirements based on the

ratio of Tier 1 capital to total assets. The leverage capital

requirements work in conjunction with the risk-based capital guidelines

and impose minimum capital requirements regardless of the risk weights

assigned to the assets held by the institution.

Although the agencies have adopted common leverage capital

requirements and risk-based capital guidelines, there remain some

technical differences in language and interpretation of the capital

standards among the agencies. These minor differences are detailed

below.

1. Leverage Capital Requirements

Under the leverage capital requirements, highly-rated banks

(composite CAMEL rating of 1) must maintain a minimum leverage capital

ratio of 3 percent of Tier 1 capital to total assets. All other banks

must maintain an additional 100 to 200 basis points of Tier 1 capital

to total assets.

In addition to the leverage ratio requirements, thrift institutions

also must maintain a tangible equity ratio of 1.5 percent of total

assets. This additional tangible equity requirement is required by the

Financial Institution Reform, Recovery and Enforcement Act (FIRREA).

The OTS is currently amending its leverage ratio requirement to make it

more consistent with the leverage ratio requirements of the other

banking agencies. The only notable difference will be the definition of

core capital. While the definition of core capital will generally be

consistent with the definition of Tier 1 capital, certain adjustments,

such as supervisory goodwill,\4\ will result in some differences.

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\4\With respect to supervisory goodwill, it should be noted that

supervisory goodwill for thrifts will be phased out by the end of

1994.

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2. Equity Investments

In general, commercial banks are not permitted to invest in equity

securities, not are they generally permitted to engage in real estate

investment or development activities. To the extent that a bank is

permitted to hold equity securities (as with securities obtained in

connection with debts previously contracted), the risk-based capital

guidelines of the banking agencies require these investments to be

risk-weighted at 100 percent. However, on a case-by-case basis, the

banking agencies may require deduction of equity investments from the

capital of the parent bank or impose other requirements in order to

assess an appropriate capital charge above the minimum capital

requirements. The capital treatment of equity investments is also

discussed in the section on operating subsidiaries.

The OTS risk-based capital requirements require thrift institutions

to deduct equity investment from capital over a phased-in period ending

July 1, 1994. This phased-in period may be extended to July 1, 1996, by

the OTS on a case-by-case basis. In the interim, the portion of these

equity investments not deducted will be risk-weighted at 100 percent.

3. Assets subject to Guarantee Arrangements by the Federal Savings and

Loan Insurance Corporation (FLSIC)/Federal Deposit Insurance

Corporation

The risk-based capital guidelines of the banking agencies assign

assets subject to FLSIC or FDIC guarantees to the 20 percent risk-

weight category, the same category to which claims on depository

institutions and government-sponsored agencies are assigned. The OTS

assigns these assets to the zero percent risk weight category.

4. Limitation on Subordinated Debt and Limited-Life Preferred Stock

Consistent with the Basle Accord, the banking agencies limit the

amount of subordinated debt and limited-life preferred stock that may

be included in Tier 2 capital to 50 percent of Tier 1 capital. This

limitation is in addition to the overall limitation on Tier 2 capital

which restricts the amount of Tier 2 capital that may be included in

total capital to 100 percent of Tier 1 capital. In addition, the risk-

based capital guidelines of the banking agencies require that

subordinated debt and limited-life preferred stock by discounted 20

percent in each of the five years prior to maturity.

While subordinated debt and limited-life preferred stock do provide

some measure of protection to the FDIC insurance fund, neither are a

permanent source of funds. Moreover, subordinated debt cannot absorb

losses while the bank continues to operate as a going concern. This

limitation permits the inclusion of some subordinated debt and limited-

life preferred stock in capital, while assuring that permanent

stockholders' equity capital remains the predominant element in bank

regulatory capital.

The OTS risk-based capital guidelines do not contain any sublimit

on the total amount of limited-life instruments that may be included

within Tier 2 capital. In addition, the OTS allows thrift institutions

the option of either (1) discounting maturing capital instruments

(issued on or after November 7, 1989) by 20 percent a year over the

last five years of their term, or (2) including the full amount of such

instruments, provided that the amount maturing in any of the next seven

years does not exceed 20 percent of the total capital of the thrift

institution.

5. Subsidiaries

The banking agencies generally require that all significant

majority-owned subsidiaries be consolidated with the parent

organization for both regulatory reporting and capital purposes. This

requirement is consistent with the Basle Accord and is designed to

ensure that all risk exposures of the banking organization are taken

into account.

While significant majority-owned subsidiaries are generally

consolidated, in some instances the OCC does not require a bank to

consolidate certain subsidiaries. In these instances the bank's

investment in the subsidiary constitutes a capital investment in the

subsidiary. The OCC risk-based capital guidelines specifically provide

that capital investment in an unconsolidated banking or financial

subsidiary must be deducted from the total capital of the bank. In

addition, the OCC risk-based capital guidelines permit the OCC to

require the deduction of investment in other subsidiaries and

associated companies on a case-by-case basis.

Similarly, the FRB risk-based capital guidelines generally require

the deduction of investments in unconsolidated banking and finance

subsidiaries. With respect to the investment in other types of

unconsolidated subsidiaries (other than banking and finance

subsidiaries) or joint ventures and associated companies, the FRB does

retain flexibility in the capital treatment. The FRB may require the

investments in such subsidiaries (1) to be deducted, (2) to be

appropriately risk-weighted against the proportionate share of the

assets of the entity, (3) to be consolidated line-by-line with the

entity, or (4) otherwise to require the parent organization to maintain

capital above the minimum standard sufficient to compensate for any

risks associated with the investment.

In addition, the FRB risk-based capital guidelines also explicitly

permit the deduction of investments in certain subsidiaries that, while

consolidated for accounting purposes, are not consolidated for certain

specified supervisory or regulatory purposes. For example, the FRB

deducts investments in, and unsecured advances to, Section 20

securities subsidiaries from the capital of the parent bank holding

company. The FDIC accords similar treatment to securities subsidiaries

of state-chartered nonmember banks. Moreover, under the FDIC rules,

investments in, and extensions of credit to, certain mortgage banking

subsidiaries are also deducted in computing the capita of the parent

bank. Neither the OCC nor the FRB has a similar requirement with regard

to mortgage banking subsidiaries.

The deduction of investments in subsidiaries from the capital of

the parent bank is designed to ensure that the capital supporting the

subsidiary is not also used as the basis of further leveraging and

risk-taking by the parent bank. In deducting investments in, and

advances to, certain subsidiaries from the capital of the parent bank,

the banking agencies expect the parent bank to satisfy or exceed

minimum regulatory capital requirements without reliance on the capital

invested in the subsidiary. In assessing the overall capital adequacy

of the parent bank, the banking agencies may also consider the parent

bank's fully consolidated capital position.

Under OTS risk-based capital guidelines, a distinction is made

between subsidiaries engaged in activities permissible for national

banks and subsidiaries engaged in activities ``impermissible'' for

national banks. This distinction is mandated by the Financial

Institutions Reform, Recovery, and Enforcement Act of 1989.

Subsidiaries of thrift institutions that engage only in activities

permissible for national banks 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, including

loans, in subsidiaries that engage in impermissible activities are

deducted in determining the capital adequacy of the parent thrift

institution. The remaining assets (the percent of assets corresponding

to the nondeducted portion of the investment in the subsidiary) are

consolidated with the parent thrift. However, investments, including

loans, outstanding as of April 12, 1989, to subsidiaries that were

engaged in impermissible activities prior to that date are

grandfathered and will be phased-out of capital over a transition

period that expires on July 1, 1994. The transition period may be

extended to July 1, 1996, by the OTS on a case-by-case basis. During

this transition period, investments in subsidiaries engaged in

impermissible activities that have not been phased out of capital are

to be consolidated on a pro rata basis.

6. Qualifying Multifamily Mortgage Loans

Pursuant to Section 618(b) of the Resolution Trust Corporation

Refinancing, Restructuring, and Improvement Act of 1991 (RTCRRIA), the

banking agencies and OTS have amended their risk-based capital

guidelines to lower the risk weight of certain multifamily housing

loans, and securities backed by such loans, from 100 percent to 50

percent. Specifically, loans secured by multifamily residential

properties may qualify for a 50 percent risk weight subject to the

following conditions:

(1) The loan must be secured by a first mortgage on a multifamily

residential property consisting of five or more dwelling units;

(2) The original amortization of principal and interest must not

exceed 30 years;

(3) The original minimum maturity for repayment of principal must

not be less than seven years;

(4) All principal and interest payments must have been made on a

timely basis in accordance with the terms of the loan for at least one

year immediately preceding the risk weighting of the loan in the 50

percent risk weight category;

(5) The loan cannot be otherwise 90 days or more past due, or

carried in nonaccrual status;

(6) The loan must be in accordance with applicable lending limit

requirements and prudent underwriting standards; and

(7) If the rate of interest does not change over the term of the

loan, then the current loan amount must not exceed 80 percent of the

current value of the property, and in the most recent fiscal year, the

ratio of annual net operating income generated by the property to

annual debt service on the loan must not be less than 120 percent; or

(8) If the rate of interest changes over the term of the loan, then

the current loan amount must not exceed 75 percent of the current value

of the property, and in the most recent fiscal year, the ratio of

annual net operating income generated by the property to annual debt

service on the loan must not be less than 115 percent.

7. Goodwill

As required by FIRREA, the federal banking agencies do not allow

banks or FDIC-supervised savings banks to include goodwill as capital

for either risk-based capital guidelines or the leverage capital

requirements. Bank holding companies included goodwill acquired prior

to March 12, 1988, in Tier 1 for the purposes of the risk-based capital

guidelines (although not for leverage capital requirements) until the

end of 1992. After 1992, all goodwill must be deducted from bank

holding company capital.

As permitted by FIRREA, OTS allows ``qualifying supervisory

goodwill'' to be included as part of core capital through year-end

1994. After this date, thrift institutions must satisfy their minimum

core capital requirement without reliance on goodwill.

8. Nonresidential Construction and Land Loans

Under the risk-based capital guidelines of the banking agencies,

loans for real estate development and construction are assigned to the

100 percent risk-weight category. Reserves or charge-offs are required

for such loans when weaknesses or losses develop. The banking agencies

have no requirement for an automatic charge-off when the amount of a

loan exceeds the fair value of the property pledged as collateral for

the loan.

OTS generally also assigns these loans to the 100 percent risk

weight category. However, if the amount of the loan exceeds 80 percent

of the fair value of the property, that excess portion must be deducted

from capital in accordance with a phase-in rule which ends on July 1,

1994.

9. Mortgage-Backed Securities (MBS)

The risk-based capital guidelines of the banking agencies generally

assign a risk weight to privately-issued MBSs according to the

underlying assets, but in no case would it be assigned to the zero

percent risk-weight category. Privately-issued MBSs where the direct

underlying assets are mortgages, are generally assigned a risk weight

of 50 percent or 100 percent. Privately-issued MBSs that have

government agency or government-sponsored agency securities as their

direct underlying assets 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. However, these are

privately-issued MBSs with AA or better investment ratings from private

rating companies.

With respect to other MBSs, the federal banking agencies assign to

the 100 percent risk weight category certain MBSs, including interest-

only strips, residuals, and similar instruments that can absorb more

than their pro rata share of loss. The OCC, in conjunction with the

other banking agencies and the OTS, on January 10, 1992, issued more

specific guidance as to the types of ``high types'' MBSs that require a

100 percent risk weight.

10. Assets Sold With Recourse

In general, recourse is any risk of loss retained by an institution

when it sells an asset. Recourse arrangements allow the purchaser of an

aset to seek recovery against the originating institution that sold the

asset under the conditions in the agreement. Recovery may take various

forms, but usually permits the buyer to ``put,'' or resell, the asset

back to the selling institution or to obtain reimbursement from the

selling institution for the amount of the loss. A typical condition for

recourse would be if the asset ceases to perform satisfactorily.

Therefore, recourse provisions generally expose the originating

institution to loss associated with the asset.

Generally, under the risk-based capital guidelines of the banking

agencies, sales of assets involving any recourse must be reported as

financings, so that the assets are retained on the balance sheet of the

selling bank. This has the effect of requiring a full leverage and

risk-based capital charge whenever assets are sold with recourse,

including limited recourse.

The OCC has recently revised its risk-based capital guidelines to

clarify the definition of recourse and to permit a limited exception

for transactions involving the sale of certain mortgage loan pools

where the selling bank has retained only minimal recourse and generally

has provided for all potential losses.

The FRB generally applies a capital charge to any recourse

arrangement that is the equivalent of an off-balance sheet guarantee,

regardless of the nature of the transaction that gives rise to the

recourse obligation. As with the OCC, the FRB provides an exception for

pools of one-to four-family residential mortgages and for certain farm

mortgage loans. These recourse transactions are reported by the bank as

sales, removing them from leverage capital requirements. These

transactions, which are the equivalent of off-balance sheet guarantees,

involve the type of credit risk that is addressed by the risk-based

capital guidelines. However, some questions have been raised because of

the treatment afforded these transactions for the purposes of the

leverage capital requirements. The FRB has clarified its risk-based

capital guidelines to ensure that recourse sales involving residential

mortgages are to be taken into account for determining compliance with

risk-based capital requirements. The FDIC has also clarified their

risk-based capital guidelines on this issue in 1993.

In general, OTS also requires a full capital charge against assets

sold with recourse. However, for certain limited recourse arrangements,

OTS limits the capital charge to the lesser of the amount of recourse

or the actual amount of capital that would otherwise be required

against that asset, that is, the normal full capital charge.

At present the banking agencies do not provide for any special

treatment of securitized assets. Some securitized asset arrangements

may involve the issuance of senior and subordinated classes of

securities against pools of assets. When a bank originates such a

transaction by placing loans that it owns in a trust and retains any

portion of the subordinated securities, the banking agencies require

that capital be maintained against the entire amount of the asset pool.

Regardless of whether a bank acquires a subordinated or senior security

in a pool of assets that it did not originate, the banking agencies

assign both the investment in the subordinated piece or the senior

piece to the 100 percent risk-weight category. The banking agencies

review these instruments to determine if additional reserves, asset

write-downs, or capital are necessary to protect the bank.

The OTS requires that capital be maintained against the entire

amount of the asset pool in both of the situations described in the

preceding paragraph. Additionally, the OTS applies a capital charge to

the full amount of assets being serviced when the servicer is required

to absorb credit losses on the assets being serviced.

In 1990, under the auspices of the FFIEC, the banking agencies and

the OTS issued for public comment a fact finding paper pertaining to

the full range of issues relating to recourse arrangements. These

issues include the definition of ``recourse'' and the appropriate

reporting and capital treatments to be applied to recourse

arrangements, as well as so-called recourse servicing arrangements and

limited recourse. The objective of this effort was to develop in a

comprehensive and consistent fashion an appropriate and uniform

approach to recourse arrangements for capital adequacy, reporting, and

other regulatory purposes. The comments received were very extensive

and generally illustrated the complexity of the subject. In view of the

significance and complexity of this project, the FFIEC in December 1990

decided to narrow the scope of the initial phase of the recourse

project to credit-related recourse arrangements that involve limited

recourse or that support a third party's assets.

A recourse working group, composed of representatives from all four

agencies, presented a report and recommendations to the FFIEC in August

1992 and were directed to carry out a study of the impact of their

recommendations on depository institutions, financial markets, and

other affected parties. The interagency working group completed a study

in early 1993. As a result of that study, the interagency working group

has revised several of its recommendations to reflect market practice

especially for securitized assets. A joint interagency notice of

proposed rulemaking and advance notice of proposed rulemaking was

published in the Federal Register on May 25, 1994 (59 Fed. Reg. 27116).

11. Agricultural Loan Loss Amortization

In determining regulatory capital, those banks accepted into the

agricultural loan loss amortization program pursuant to Title VIII of

the Competitive Equality Banking Act of 1987 are permitted to defer and

amortize losses incurred on agricultural loans between January 1, 1984,

and December 31, 1991. The program also applies to losses incurred

between January 1, 1983, and December 31, 1991, as a result of

reappraisals and sales of agricultural and other real estate owned and

agricultural personal property. These losses must be fully amortized

over a period not to exceed seven years and, in any case, must be fully

amortized by year-end 1998. Thrift institutions are not eligible to

participate in the agricultural loan loss amortization program

established by this statute.

12. Treatment of Junior Liens on One- to Four-Family Properties

In some cases, a banking organization may make two loans secured by

a single piece of residential property--one loan secured by a first

lien, the other by a second lien. The OCC and OTS generally assign

first liens on one- to four-family properties to the 50 percent risk-

weight category. All second liens on residential property are assigned

to the 100 percent risk-weight category, regardless of whether the

institution also holds the first lien. The assignment of first lien

mortgages to the 50 percent risk-weight category is based upon the

requirement that banks will adhere to prudent underwriting standards

with respect to the maximum loan-to-value ratio, the borrower's paying

capacity and the long-term expectations for the real estate market in

which the bank is lending.

The FDIC similarly assigns all second liens to the 100 percent

risk-weight category. However, in determining the risk-weight of the

first lien, the FDIC considers the first and second liens together to

assess whether the first lien satisfies prudent underwriting standards.

When evaluated together, if the first and second liens are within the

prudent loan-to-value ratio and satisfy all other underwriting

standards, then the first lien will be assigned to the 50 percent risk-

weight category; otherwise, it will be assigned to the 100 percent risk

category.

The FRB and OTS consider the first and second liens as a single

loan, provided there are no intervening liens. Therefore, the total

amount of these transactions may be assigned to the 100 percent risk-

weight category, if, in the aggregate, the two loans exceeds a prudent

loan-to-value ratio and, therefore, do not qualify for the 50 percent

risk-weight category. This approach is intended to avoid possible

circumvention of the capital requirements and capture the risks

associated with the combined transactions. However, if the total amount

of the transaction does satisfy a prudent loan-to-value ratio and other

underwriting standards, then both the first and second liens may be

assigned to the 50 percent risk-weight category.

Although there are some technical differences in the methodology,

all the agencies have the same ability to adjust the capital

requirements of an individual bank to account for imprudent loans

secured by first liens on one- to four-family properties.

13. Pledged Deposits and Nonwithdrawable Accounts

The OTS capital guidelines permit thrift institutions to include in

capital certain pledged deposits and nonwithdrawal accounts that

satisfy specified OTS criteria. Income capital certificates and mutual

capital certificates held by OTS may also be included in capital by

thrift institutions. These instruments are not relevant to commercial

banks, and, therefore, they are not addressed in the risk-based capital

guidelines of the banking agencies.

14. Mutual Funds

The three banking agencies assign all of the holdings of a bank 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. The purposes of this is to take into account the

maximum degree of risk to which a bank may be exposed when investing in

a mutual fund in view of the fact that the future composition and risk

characteristics of the fund cannot be known in advance.

The OTS applies a capital charge based on the riskiest asset that

is actually held by the mutual fund at a particular time. In addition

the OTS guidelines also permit, on a case-by-case basis, investments in

mutual funds to be allocated on a pro rata basis dependent on the

actual composition of the fund.

15. Interest Rate Risk

The risk-based capital guidelines were designed primarily as a

broad measure of the relative credit risk of the assets. However, the

banking agencies and OTS are continuing their efforts to refine the

risk-based capital guidelines to take into account other noncredit

risks, including interest rate risk. The agencies are required to

consider interest rate risk, as well as the risk of concentrations of

credit and the risks of nontraditional activities, under Section 305 of

FDICIA.

The OTS has adopted an interest rate risk component to its risk-

based capital guidelines, which became effective on January 1, 1994.

Under this new rule, thrift institutions with an above normal level of

interest rate risk will be subject to a capital charge commensurate to

their risk exposure.

The banking agencies also are developing an interest rate risk

component. On September 14, 1993, the banking agencies published a

joint notice of proposed rulemaking in the Federal Register and are

currently in the process of drafting a final rule.

16. Concentrations of Credit and Nontraditional Activities

As required by Section 305 of FDICIA, the banking agencies and the

OTS published a joint proposal in the Federal Register on February 22,

1994. The proposed rule would amend the capital standards of the

banking agencies and the OTS by explicitly identifying concentration of

credit risk and certain risks arising from nontraditional activities as

important factors in assessing an institution's overall capital

adequacy. The banking agencies and the OTS are currently reviewing the

comment letters received and are drafting a final rule.

17. Collateralized Transactions

In December 1992, the FRB amended its risk-based capital guidelines

to lower the risk-weight on loans collateralized by cash or government

securities from 20 percent to zero percent. In August 1993, the OCC

issued a proposed rule that would similarly lower the risk-weight on

loans collateralized by cash or government securities from 20 percent

of zero percent for national banks. The OCC is currently drafting a

final rule. The FDIC and OTS are also considering this issue.

18. Deferred Tax Assets

On December 23, 1993, the OCC published in the Federal Register a

proposed rule on deferred tax assets. This proposal was developed

jointly by the banking agencies and the OTS in response to Financial

Accounting Standard (FAS) Number 109 which was adopted for regulatory

reporting purposes beginning January 1, 1993. The proposed rule would

amend the capital standards to limit the amount of certain deferred tax

assets that may be included in an institution's Tier 1 capital. The

other banking agencies and the OTS have issued or are considering

similar proposals. The OCC will be working with the other banking

agencies and the OTS in drafting a final rule.

19. Unrealized Gains and Losses on Securities Available for Sale

On April 18, 1994, the OCC published in the Federal Register a

proposed rule on unrealized gains and losses on securities available

for sale. This proposal was developed jointly by the banking agencies

and OTS in response to FAS 115, which was adopted for regulatory

reporting purposes beginning December 15, 1993. The proposed rule would

amend the definition of ``common stockholders' equity'' in the capital

guidelines to include both unrealized gains and losses on securities

available for sale. The other banking agencies and the OTS have issued

or are planning to issue similar proposals. The OCC will be working

with the other banking agencies and the OTS in drafting a final rule.

20. Bilateral Netting Contracts

The banking agencies and the OTS have been meeting to discuss an

amendment to the risk-based capital guideline to provide for the

recognition of bilateral netting contracts for the purpose of

determining the capital requirement for off-balance sheet rate

contracts. In May of 1994, the OCC and the FRB have issued a joint

proposed rule that generally would permit an institution to net

positive and negative mark-to-market values of interest rate and

foreign exchange rate contracts with a single counterparty if those

rate contracts are subject to qualifying bilateral netting contracts.

The OTS and the FDIC are considering the issuance of similar proposed

rules.

C. Interagency Differences in Accounting Principles

The OCC, as well as the other banking agencies, requires banks to

follow generally accepted accounting principles (GAAP), except when the

agency determines that a specific accounting standard under GAAP does

not meet the accounting objectives included in Section 121 of FDICIA.

In such cases, the use of accounting principles more stringent than

GAAP may be required. For the most part, the regulatory accounting

standards for all commercial banks, whether regulated by the OCC, the

FRB, or the FDIC, are prescribed in the Instructions to the Report of

Condition and Income (Call Report).

The Call Report instructions are established by the FFIEC and are

generally consistent with GAAP. Differences in interpretations between

the OCC and the other banking agencies may occur. However, such

differences are usually infrequent and involve immaterial or emerging

issues, which the FFIEC has not yet reviewed on a joint agency basis.

Under Section 121 of FDICIA, the federal banking agencies must

require financial institutions to use accounting principles ``no less

stringent than GAAP.'' The banking agencies believe that GAAP generally

satisfies the accounting objectives included in FDICIA Section 121.

However, as previously noted, in certain circumstances, accounting

principals more stringent than GAAP are required to satisfy accounting

objectives included in FDICIA.

The OTS requires each thrift institution to file the Thrift

Financial Report. That report is filed on a basis consistent with GAAP,

as it is applied by thrift institutions, which differs in a few

respects from GAAP as it is applied by banks.

These differences in accounting principles between the banks and

thrift institutions may cause differences in financial statement

presentation and in amounts of regulatory capital required to be

maintained by depository institutions.

The following summarizes the significant differences in accounting

standards between the Thrift Financial Report and the Call Report.

These differences generally arise because of either: (1) differences

between regulatory reporting standards and GAAP applicable to banks, or

(2) differences in GAAP applicable to banks and GAAP applicable to

thrift institutions.

1. Futures and Forward Contracts

Differences in this area result because the banking regulators

generally require future and forward contracts to be marked to market,

whereas thrift institutions may defer gains and losses resulting from

hedging activities. The banking agencies do not follow GAAP, but

require banks to report changes in the market value of futures and

forward contracts, even when used as hedges, in current income.

However, futures contracts used to hedge mortgage banking operations

are reported in accordance with GAAP. This issue will be reexamined as

part of an ongoing project on accounting for derivatives.

The OTS requires thrift institutions to follow GAAP to account for

futures contracts. Accordingly, when specified hedging criteria are

satisfied, the accounting for the futures contract is matched with the

accounting for the hedged item. Changes in the market value of the

futures contract are recognized in income when the income effects of

the hedged item are recognized. This reporting can result in the

deferral of both gains and losses. Although there is no specific GAAP

for forward contracts, the OTS applies these same principles to forward

contracts.

2. Push-Down Accounting

When a depository institution is acquired by a holding company in a

purchase transaction, the holding company is required to revalue all of

the assets and liabilities of the depository institution at fair value

at the time of acquisition. When push-down accounting is applied, the

same fair value adjustments recorded by the parent holding company are

also recorded at the depository institution level.

All of the agencies require the use of push-down accounting when

there has been a substantial change in the ownership of the

institution. However, differing standards have been applied to

determine when this substantial change has occurred.

The three banking agencies require push-down accounting when there

is at least a 95 percent change in ownership of the institution. This

approach is consistent with interpretations of the Securities and

Exchange Commission.

The OTS requires push-down accounting when there is at least a 90

percent change of ownership.

3. Excess Service Fees

Thrift institutions consider excess servicing fees in the

determination of the gain or loss on a loan sale, whereas banks

generally recognize the excess fee over the life of the loan.

The banking agencies require banks to follow GAAP for residential

first mortgage loans. This requires that when loans are sold with

servicing retained and the stated servicing fee is sufficiently higher

than a normal servicing fee, the sales price is adjusted to determine

the gain or loss from the sale. This allows additional gain recognition

at the time of sale and recognizes a normal servicing fee in each

subsequent year. This gain cannot exceed the gain assuming the loans

were sold with servicing released.

For all other loans, the banking agencies require that excess

servicing fees retained on loans sold be recognized over the

contractual life of the transferred assets.

The OTS follows GAAP in valuing all excessive service fees.

Therefore, the accounting stated above for sales of mortgage loans with

excess servicing at banking institutions would apply to all loan sales

with excess servicing at thrift institutions.

4. In-Substance Defeasance of Debt

The banking agencies do not permit banks to defease their

liabilities in accordance with FASB Statement Number 76, whereas thrift

institutions may eliminate defeased liabilities from the balance sheet.

The banking agencies report in-substance defeased debt as a

liability and the securities contributed to a trust as assets with no

recognition of any gain or loss on the transaction.

The OTS accounts for debt that has been in-substance defeased in

accordance with GAAP.

Therefore, when a debtor irrevocably places risk-free monetary

assets in a trust solely for satisfying the debt and the possibility

that the debtor will be required to make further payments is remote,

the debt is considered extinguished. The transfer can result in a gain

or loss in the current period.

5. Sales of Assets with Recourse

The banking agencies generally do not allow banks to report sales

of receivables if any risk of loss is retained. Thrift institutions

report sales when the risk of loss can be estimated in accordance with

FASB Statement Number 77.

The banking agencies generally 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, assets transferred with recourse are reported

as financings, not sales.

However, this rule does not apply to the transfer of mortgage loans

under certain government programs (GNMA, FNMA, etc.). Transfers of

mortgages under one of these programs are automatically treated as

sales. Furthermore, private transfers of pools of mortgages are also

reported as sales if the transferring institution does not retain more

than an insignificant risk of loss on the assets transferred.

The OTS follows GAAP to account for a transfer of all receivables

with recourse. A transfer of receivables with recourse is recognized as

a sale if: (1) the seller 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.

The FFIEC has a study under way involving the topic of transfers

with recourse. As part of this study, the staff of the OCC is reviewing

the reporting requirements for sales of assets with recourse. The

purpose of this study is to determine whether a reduction or

elimination of the differences between regulatory reporting

requirements and GAAP may be achieved in this area.

6. Negative Goodwill

The three banking agencies require that negative goodwill5 be

reported as a liability, and not netted against the goodwill asset.

---------------------------------------------------------------------------

\5\Negative goodwill typically is created when a bank purchases

assets for less than the determined fair value of the assets.

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The OTS permits negative goodwill to offset the goodwill assets

resulting from other acquisitions.

7. Offsetting of Amounts Related to Certain Contracts

FASB Interpretation Number 39 (FIN 39) became effective in 1994.

FIN 39 allows the offsetting of certain assets and liabilities on the

balance sheet (e.g., loans, deposits, etc.), as well as the netting of

assets and liabilities arising from off-balance sheet derivative

instruments, when four conditions are met. These conditions relate to

whether a valid right of offset exists. The three banking agencies are

planning to adopt FIN 39 sometime in 1994 solely for on-balance sheet

amounts arising from conditional and exchange contracts (e.g., interest

rate swaps, options, etc.). The Call Report's existing guidance, which

generally prohibits netting of assets and liabilities, will continue to

be followed in all other cases.

The OTS policy on netting of assets and liabilities is consistent

with GAAP and FIN 39.

8. Specific Valuation Allowance for and Charge-Offs of Troubled Loans

The banking agencies generally consider real estate loans that lack

acceptable cash flows or other repayment sources to be ``collateral

dependent.'' When the fair value of the collateral of such a loan has

declined below book value, the loan is reduced to fair value. This

approach is consistent with GAAP applicable to banks.

Prior to September 30, 1993, the OTS required specific valuation

allowances for troubled loans based on the net realizable value of the

collateral. Effective September 30, 1993, the OTS issued a revised

policy that requires a specific valuation allowance against, or partial

charge-off, of a loan when its book value exceeds its ``value,'' as

defined. The ``value'' is either the present value of the expected

future cash flows discounted at the loan's effective interest rate, the

observable market price, or the fair value of the collateral. This

revised policy, which is similar to the requirements of FASB Statement

No. 114, narrows the differences between banks and thrifts.

Dated: July 11, 1994.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 94-17435 Filed 7-18-94; 8:45 am]

BILLING CODE 4810-33-M