Differences in Capital and Accounting Standards Among the Federal Banking and Thrift Agencies; Report to Congressional Committees

FEDERAL DEPOSIT INSURANCE CORPORATION

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 as of December 31, 1994.

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

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 annually

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.

[[Page 33804]]

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 as of December 31, 1994

A. Introduction

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 annually submit a report to

specified Congressional Committees 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.

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 are substantially consistent with generally

accepted accounting principles (GAAP) as they are applied by banks. In

the limited number of cases where the bank Call Report standards are

different from GAAP, the regulatory reporting requirements are intended

to be more conservative then GAAP. The OTS requires each thrift

institution to file the Thrift Financial Report (TFR), which is

consistent with GAAP as it is applied by thrifts. However, the

reporting standards applicable to the TFR differ in some respects from

the reporting standards applicable to the bank Call Report.

B. Differences in Capital Standards Among the Federal Banking and

Thrift Agencies

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 CAMEL rating of ``1'')

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 ratio of not less than

4 percent).

The OTS has a 3 percent core capital and a 1.5 percent tangible

capital leverage requirement for thrift institutions. Consistent with

the requirements of the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA), the OTS has proposed revisions to its

leverage standard for thrift institutions so that its minimum leverage

standard will be at least as stringent as the revised leverage standard

that the OCC applies to national banks.

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. The agencies expect to issue another interest rate

risk proposal for public comment during 1995. The delay in completing a

final rule has been the result of difficulties in designing a

meaningful measurement system for interest rate risk and efforts to

seek international agreement on capital standards for this risk.

In 1993, the OTS adopted a final rule which adds an interest rate

risk component to its risk-based capital standards. Under this rule,

thrift institutions 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 deferred the September 30,

1994, effective date of its interest rate risk rule while the banking

agencies continue their work on an interest rate risk rule for banks.

The approach ultimately adopted by the banking agencies could differ

from that of the OTS.

B.3. Subsidiaries

The banking agencies consolidate all significant majority-owned

subsidiaries of the parent organization. The purpose of this practice

is to assure that capital requirements are related to all of the risks

to which the bank is 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 from capital, or the investments may be risk-

weighted at 100 percent, depending upon the circumstances. These

options, with respect to the consolidation or ``separate

capitalization'' of subsidiaries for the purpose of determining the

capital adequacy of the parent organization, provide the banking

agencies with the flexibility necessary to ensure that adequate capital

is being provided 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''

activities for national banks. Subsidiaries of thrift institutions 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 in determining 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

[[Page 33805]]

Development Act of 1992 with respect to impermissible subsidiaries that

are subject to this requirement solely by reason of their real estate

investments and activities. The OTS may extend the transition period

until July 1, 1996, on a case-by-case basis if certain conditions are

met.

B.4. Intangible Assets

The banking agencies' rules permit purchased credit card

relationships and purchased 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 core

capital. In addition, purchased credit card relationships alone are

restricted to no more than 25 percent of an institution's core capital.

Any purchased 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 core 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--The banking agencies require

full leverage capital charges on most assets sold with recourse, even

when the recourse is limited. This includes transactions where the

recourse arises because the seller, as servicer, must absorb credit

losses on the assets being serviced. The exceptions to this rule

pertain to certain pools of first lien one-to-four family residential

mortgages and to certain agricultural mortgage loans.

Banks must maintain leverage capital against most assets sold with

recourse because the banking agencies' regulatory reporting rules

generally do 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 continue to

be included in the asset base which is 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 for sales under GAAP, the OTS capital rules do not

require thrifts to hold leverage capital against such assets.

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 limits 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 recourse''

rule.

The banking agencies proposed in May 1994 to adopt the low level

recourse rule that OTS already has in place. Such action was mandated

four months later by Section 350 of the Riegle Community Development

and Regulatory Improvement Act of 1994 (RCDRIA). The FDIC adopted the

low level recourse rule on March 21, 1995, and the other banking

agencies have taken similar action.

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.

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 banking agencies' 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.

B.6. Collateralized Transactions

The FRB and the OCC have lowered from 20 percent to zero percent

the risk weight accorded collateralized 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 agencies 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 U.S. Government agencies or OECD

central governments. The FDIC staff is preparing a proposal that will

lower the risk weight for collateralized transactions.

B.7. Limitation on Subordinated Debt and Limited Life Preferred Stock

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 each year of the five

years before maturity. The banking agencies adopted this approach in

order to emphasize equity versus debt in the assessment of capital

adequacy.

The OTS has no limitation on the ratio of maturing capital

instruments as part of Tier 2. 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.

[[Page 33806]]

B.8. Presold Residential Construction Loans

The four agencies assign a 50 percent risk weight to loans to

builders to finance the construction of one-to-four family residential

properties that have been presold and meet certain other criteria.

However, 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.

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

capital.

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 loan secured by a first lien, the other by a second lien.

In this situation, if the total amount of the two loans exceeds a

prudent loan-to-value ratio, the FDIC and the FRB would not consider

the loan secured by the first lien to be eligible to receive a 50

percent risk weight. Instead, this loan would be assigned to the 100

percent risk weight category. In all cases, the FDIC would assign the

loan secured by the second lien to the 100 percent risk weight category

regardless of the aggregate loan-to-value ratio. This approach for

first liens is intended to avoid possible circumvention of the capital

requirement and to capture the risks associated with the combined

transactions.

The OCC and OTS generally assign 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.

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.

The OTS applies a capital charge appropriate to the riskiest asset

that a mutual fund is actually holding at a particular time. 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 in a manner consistent with the actual composition of the

mutual fund.

B.14. ``Covered Assets''

The banking agencies generally place assets subject to guarantee

arrangements by the FDIC or the 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 category.

B.15. Pledged Deposits and Nonwithdrawable Accounts

Instruments such as pledged deposits, nonwithdrawable accounts,

Income Capital Certificates, and Mutual 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 OTS permit thrift institutions to include

pledged deposits and nonwithdrawable accounts that meet OTS criteria,

Income Capital Certificates, and Mutual Capital Certificates in

capital.

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

capital standards.

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

Thrift Agencies

C.1. Sales of Assets with Recourse

In accordance with FASB Statement No. 77, a transfer of receivables

with recourse 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.

The practice of the banking agencies is generally 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, virtually no transfers of assets

with recourse can be reported as sales. However, this rule does not

apply to the transfer of first lien one-to-four family residential

mortgage loans and agricultural mortgage loans under any 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 are treated as sales for Call

[[Page 33807]]

Report purposes, provided the transfers would be reported as sales

under GAAP. Furthermore, private transfers of first lien one-to-four

family residential mortgages are also reported as sales if the

transferring institution retains only an insignificant risk of loss on

the assets transferred. However, under the risk-based capital

framework, the seller's obligation under any recourse provision

resulting from transfers of mortgage loans under the government

programs or in private transfers that qualify as sales is viewed as an

off-balance sheet exposure that will be assigned a 100 percent credit

conversion factor. Thus, for risk-based capital purposes, capital is

generally required to be held for any recourse obligation associated

with such transactions.

The OTS accounting policy is to follow FASB Statement No. 77.

However, in the calculation of risk-based capital under OTS guidelines,

off-balance sheet recourse obligations are converted at 100 percent.

This effectively negates the sale treatment recognized on a GAAP basis

for risk-based capital purposes, but not for leverage capital purposes.

On May 25, 1994, the agencies issued for public comment a proposal

addressing certain aspects of the regulatory capital and reporting

treatment of assets sold with recourse. If finalized, the proposal

could reduce the differences between the bank regulatory reporting

requirements and GAAP in this area (which OTS follows) by allowing a

larger portion of asset transfers with recourse to be treated as sales

for Call Report purposes. In addition, the staffs of the four agencies

are working to implement Section 208 of the RCDRIA which mandates that

the regulatory reporting requirements applicable to transfers of small

business obligations with recourse by qualified insured depository

institutions to be consistent with GAAP.

C.2. Futures and Forward Contracts

The banking agencies, as a general rule, do not permit the deferral

of losses on futures and forward contracts whether or not they are 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 generally accepted accounting

principles 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 deferred

losses which would be reflected as assets on the balance sheet.

The FASB is working to develop a comprehensive hedge accounting

framework for all free-standing derivative instruments, including

futures and forward contracts and certain on-balance sheet instruments,

that can be applied consistently by all enterprises. The banking

agencies and the OTS are monitoring the progress of this project.

C.3. Excess Servicing Fees

As a general rule, the banking agencies do not follow GAAP for

excess servicing fees, but require a more conservative treatment.

Excess servicing arises when loans are sold with servicing retained and

the stated servicing fee rate is greater than a normal servicing fee

rate. With the exception of sales of pools of first lien one-to-four

family residential mortgages for which the banking agencies' approach

is consistent with FASB Statement No. 65, excess servicing fee income

in banks must be reported as realized over the life of the transferred

asset.

In contrast, the OTS allows 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 is

consistent with FASB Statement No. 65.

C.4. Specific Valuation Allowances for, and Charge-offs of, Troubled

Real Estate Loans not in Foreclosure

A troubled real estate loan is considered ``collateral dependent''

when the repayment of the debt will be provided solely by the

underlying real estate and there are no other available and reliable

sources of repayment.

For a troubled collateral dependent real estate loan, the banking

agencies generally treat any portion of the loan balance that exceeds

the amount that is adequately secured by the value of the collateral,

and that can clearly be identified as uncollectible, as a loss that

should be charged off. The banking agencies believe that this approach

accurately reflects the amount of recovery a financial institution is

likely to receive if it is forced to foreclose on the underlying

collateral. This banking agency approach is basically consistent with

GAAP as it has been applied by banks.

The most recent OTS policy has been to require a specific valuation

allowance against (or a partial charge-off of) a loan for the amount by

which the recorded investment in the loan (generally, its book value)

exceeds its ``value,'' as defined, when it is probable, based on

current information and events, that a thrift will be unable to collect

all amounts due (both principal and interest) on the loan. The

``value'' is either the present value of the expected future cash flows

on the loan discounted at the loan's effective interest rate, the

loan's observable market price, or the fair value of the collateral.

Previously, the OTS generally required specific valuation allowances

for troubled real estate loans based on the estimated net realizable

value of the collateral, an amount that normally exceeds fair value. By

revising its policy in 1993, OTS narrowed the accounting difference

between banks and thrifts. The revised OTS policy is somewhat similar

to the requirements of FASB Statement No. 114 on loan impairment, which

was issued in May 1993.

As all banks and thrifts adopt FASB Statement No. 114 during 1995,

this accounting difference will be eliminated. When Statement No. 114

is applied for regulatory reporting purposes, impairment of a

collateral dependent loan must be measured using the fair value of the

collateral.

C.5. 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. 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,

netting of other assets and liabilities is not

[[Page 33808]]

permitted unless specifically required by the instructions.

The OTS practice is to follow GAAP as it relates to offsetting in

the balance sheet.

C.6. 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.7. 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

balance sheet.

C.8. In-Substance Defeasance of Debt

The banking agencies do not permit banks to report the defeasance

of their liabilities in accordance with FASB Statement No. 76.

Defeasance involves a debtor irrevocably placing risk-free monetary

assets in a trust established solely for satisfying the debt. In order

to qualify for this treatment, the possibility that the debtor will be

required to make further payments on the debt, beyond the funds placed

in the trust, must be 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. However, for Call Report

purposes, banks must continue to report defeased debt as a liability

and the securities contributed to the trust must continue to be

reported as assets. No netting is permitted, nor is any recognition of

gains or losses on the transaction allowed. The banking agencies have

not adopted FASB 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.

The OTS practice is to follow FASB Statement No. 76.

Dated at Washington, D.C., this 22nd day of June, 1995.

Federal Deposit Insurance Corporation.

Jerry L. Langley,

Executive Secretary.

[FR Doc. 95-15930 Filed 6-28-95; 8:45 am]

BILLING CODE 6714-01-P