Capital and Accounting Standards

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[No. 97-3]

Capital and Accounting Standards

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice.

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SUMMARY: Pursuant to the reporting requirements of section 121 of the

Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),

we have submitted our report to the Chairman and ranking minority

member of the Committee on Banking, Housing and Urban Affairs of the

Senate and the Chairman and ranking minority member of the Committee on

Banking and Financial Services of the House of Representatives

identifying the differences between the capital and accounting

standards used by the office of Thrift Supervision (OTS) and the

capital and accounting standards used by the Office of the Comptroller

of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC)

and the Board of Governors of, the Federal Reserve System

(FRB)(collectively, the banking agencies).

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Our report contains two attachments. Attachment I, ``Summary of

Differences in Capital Standards,'' identifies and explains the reasons

for differences in the OTS capital standards and those of the other

banking agencies. Attachment II, ``Summary of Differences in Accounting

Practices,'' identifies and explains the reasons for the major

differences between OTS and the other banking agencies in supervisory

reporting practices that affect their respective capital standards.

Despite some differences, the capital and accounting rules of OTS

generally parallel those of the banking agencies (collectively, the

``agencies''). Many of the differences result from either statutory

requirements (e.g., deduction of investment in subsidiaries engaged in

activities impermissible for national banks) or historical differences

between the banking and thrift industries (e.g., investment

authorities, mutual form of organization).

Moreover, the agencies continue to work together to minimize their

current differences and to ensure that the new rules and policies they

adopt are consistent and result in a uniform national banking policy.

The agencies frequently issue joint regulatory and policy documents in

working toward the general goal of interagency consistency set forth in

section 303 of the Reigle Community Development and Regulatory

Improvement Act of 1994 (CDRIA).

Today's report reflects differences as of September 30, 1996. It

indicates how these differences will be resolved, in accordance with

the agencies' Joint Report: Streamlining of Regulatory Requirements

(Sept. 23, 1996) (Joint Report).

Furthermore, the OTS requires that savings associations follow

generally accepted accounting principles (GAAP) for regulatory reports.

This complies with the requirement of section 121(a) of FDICIA that the

accounting principles applicable to reports or statements filed with

OTS be consistent with GAAP.

The OTS capital standards comply with the requirements of the

Financial Institutions Reform, Recovery, and Enforcement Act of 1989

(FIRREA), including the general requirement that the capital standards

applicable to savings associations be no less stringent than those

applicable to national banks.

EFFECTIVE DATE: January 17, 1997.

FOR FURTHER INFORMATION CONTACT: John Connolly, Senior Program Manager

for Capital Policy, (202) 906-6465, Supervision Policy; or Timothy J.

Stier, Chief Accountant, (202) 906-5699, Accounting Policy,

Supervision, Office of Thrift Supervision, 1700 G Street, NW,

Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Attachment I--Summary of Differences in Capital Standards

FDICIA requires a report to Congress on the differences in the

capital standards for banks and savings associations. Below is a

summary of the differences.

A. Major Differences

1. Interest-Rate Risk Component

Interest-Rate Risk Component: The OTS has adopted a final rule

incorporating an interest-rate risk component into its risk-based

capital requirements. Under the rule, institutions with an above-normal

level of interest-rate risk will be subject to a capital charge

commensurate with their risk exposure. Institutions have been

submitting their interest-risk data and receiving a report on their

interest-risk exposure under the OTS model from OTS staff since March

1991. This interest-rate risk analysis is considered so valuable by

savings associations that a considerable number of associations not

required to file reports do so voluntarily. Furthermore, the OTS

supervisory staff considers institutions' interest-rate risk exposure

in assessing institutions' capital adequacy and asset/liability

management. OTS has not yet implemented the requirement for

associations to deduct an interest-rate risk component in calculating

their risk-based capital.

The banking agencies also are implementing policies under which

they consider banks' interest-rate risk exposure in the examination

process. On August 2, 1995, the banking agencies published a joint

final rule in the Federal Register on interest-rate risk. See 60 FR

39490 (August 2, 1995). The final rule amends their capital adequacy

guidelines to clarify the authority of the banking agencies to include

in their evaluation of bank capital adequacy an assessment of banks'

exposure to declines in capital due to interest rate movements.

Concurrent with the publication of the final rule, the banking agencies

issued a joint policy statement for comment that describes the process

that the banking agencies will use to measure and assess the exposure

of a bank's economic value to changes in interest rates. See 60 FR

39495 (August 2, 1995).

The OTS interest-rate risk approach differs from that of the

banking agencies in important respects. The major differences are the

methodology and data used to measure interest rate exposure.

Reason for OTS Difference: Because interest-rate risk is a

significant risk to savings associations, OTS believes that it is

important to use a relatively sophisticated model to measure the

interest-rate risk exposure of individual institutions. OTS believes

that it is particularly important to use a model that is capable of

measuring the option component in mortgages and the effect of financial

derivatives on an institution's overall interest-rate-risk exposure. As

a consequence, OTS uses an option-based pricing model to measure

exposure and collects detailed financial data on a reporting form that

was designed to provide the financial data that OTS needs to measure

exposure.

2. Leverage Ratio Standard

The agencies use uniform leverage ratio standards for purposes of

the capital ratio thresholds used in defining the prompt corrective

action (PCA) categories under section 38 of the Federal Deposit

Insurance Act (FDIA). Institutions, other than CAMEL-1 rated

institutions, must satisfy a leverage ratio standard requiring

institutions to have Tier 1 (core) capital equal to four percent of

assets to be adequately capitalized for purposes of the prompt

corrective action system. The leverage ratio standard for CAMEL-1 rated

institutions only requires them to have Tier 1 (core) capital equal to

three percent of assets, although most CAMEL-1 rated institutions

exceed this requirement by a wide margin. The leverage ratio

requirements in the banking agencies' capital regulations mirror those

in their PCA regulations.

Although the OTS capital rule continues to contain a three percent

leverage ratio requirement, the four percent leverage ratio requirement

to be ``adequately capitalized'' for PCA purposes is, in effect, the

controlling standard for thrifts.

Reason for OTS Difference: Initial adoption of a three percent

leverage ratio requirement in the OTS capital rule in 1989 prior to

adoption of the banking agencies' current standard. As indicated in the

September 23 Joint Report, the agencies will be issuing a proposed rule

to make all of their leverage ratio regulations uniform.

3. Subsidiaries

Subsidiary (general): OTS defines a subsidiary as a five percent or

greater ownership interest in an entity. The OTS requires full

consolidation of any subsidiary with its parent association if the

subsidiary is consolidated for

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reporting purposes consistent with generally accepted accounting

principles (GAAP) (except for subsidiaries engaged as principal in

activities impermissible for national banks, as described below). If an

association owns a five percent or greater interest, but does not have

control under GAAP, OTS requires pro-rata consolidation, as discussed

below.

The banking agencies generally follow the GAAP approach for the

definition and consolidation of subsidiaries, but do not require

consolidation of subsidiaries not exceeding certain ``de minimis''

thresholds. Subject to these exceptions, subsidiaries generally are

fully consolidated if the parent institution holds more than 50 percent

of the outstanding voting stock, or if the subsidiary is otherwise

controlled or capable of being controlled by the parent institution

(see exception for depository institutions).

The OTS, however, instead of applying, ``pro rata'' consolidation,

has decided to use its discretion under its capital rule to follow GAAP

and the banking agencies' approach in consolidating community

development subsidiaries and low-income housing tax credit limited

partnerships.

Reason for OTS Difference: Policy decision in 1989 based, in part,

on the wide array of subsidiaries that state-chartered associations had

previously been permitted to hold. In 1994, however, the OTS decided to

follow the consolidation approach of GAAP and the other Federal banking

agencies in consolidating community development subsidiaries. This

beneficial capital treatment avoids the requirement for associations to

deduct their investments in community development subsidiaries engaged

in activities that are permissible for subsidiaries of national banks,

but impermissible for national banks themselves. In June 1996, the OTS

proposed to define ``subsidiary'' for capital purposes generally in the

same manner as the banking agencies.

Subsidiaries (impermissible): FIRREA and the OTS capital rule

require the deduction from core capital of savings associations'

investments in and loans to subsidiaries that engage in activities not

permissible for national banks. Generally, any new investment after

April 13, 1989, in such nonincludable subsidiaries has had to be

deducted immediately. Furthermore, because all transition schedules for

grandfathered investments in nonincludable subsidiaries expired as of

June 30, 1996, all investments in nonincludable subsidiaries must be

deducted in computing core capital.

As of July 1, 1996, savings associations must deduct all

investments in, and extensions of credit to, nonincludable real estate

subsidiaries, consistent with the deduction requirement applicable to

other types of nonincludable subsidiaries since July 1, 1994.

The banking agencies may require the deduction of investments in

certain subsidiaries, generally on a case-by-case basis. For example,

the FRB deducts investments in, and unsecured advances to, Section 20

securities subsidiaries from a member bank's capital. The FDIC

similarly deducts investments in, and unsecured advances to, securities

subsidiaries and mortgage banking subsidiaries. The FDIC also exercises

similar authority over the subsidiaries of state nonmember banks

engaged in activities not permissible for national banks.

Reason for OTS Difference: The Home Owners' Loan Act, as amended by

FIRREA, requires associations to deduct investments in and loans to

subsidiaries engaged as principal in activities impermissible for

national banks. Generally, savings associations are required to deduct

the total amount of their investments in, and advances to, such

nonincludable subsidiaries.

The deduction of investments in subsidiaries from parent

associations' capital is designed to insulate associations' capital

from activities potentially riskier than those in which associations

are permitted to engage. The statutory standard for whether an activity

is risky is whether a national bank may engage in that activity, plus

certain other expressly permissible activities.

Subsidiaries (Permissible--Minority Ownership): The OTS capital

rule, as discussed above, requires the pro-rata consolidation of

subsidiaries where the association does not have control, as defined

under GAAP, but owns a five percent or greater ownership interest in

the subsidiary. The banking agencies generally require capital to be

held only against the investments in such subsidiaries but may, on a

case-by-case basis, deduct them from capital or consolidate them either

fully or on a pro-rata basis.

Reason for OTS Difference: Policy decision in 1989 to ensure ample

capital against the diverse assets then held by thrift subsidiaries,

particularly subsidiaries of certain state-chartered associations. The

proposed changes to the OTS's definition of subsidiary for capital

purposes will remove this difference.

Subsidiaries (Lower-tier Depository Institutions): Under OTS rules,

a depository institution subsidiary is automatically consolidated with

its parent association if the subsidiary was acquired prior to May 1,

1989. The parent association's investment in such subsidiaries is

automatically excluded from the parent association's capital if the

depository institution subsidiary was acquired on or after May 1, 1989,

unless it engages only in activities permissible for a national bank.

On a case-by-case basis, the OTS requires consolidation of lower-tier

depository institutions, if consolidation results in a higher capital

requirement than the exclusion requirement. For purposes of risk-based

capital, the banking agencies generally consolidate majority-owned

subsidiaries.

Reason for OTS Difference: The Home Owners' Loan Act, as amended by

FIRREA, requires associations to deduct investments in and loans to

subsidiaries, including depository institutions acquired after May 1,

1989, engaged as principal in activities impermissible for national

banks. OTS's policy addresses the need for both the parent and

subsidiary institutions to have adequate capital on a consolidated and

unconsolidated basis. It also ensures that OTS capital standards are at

least as stringent as those imposed on banks. (HOLA sections

5(t)(5)(A), (C), (E)) .

4. Equity Investments: Savings associations must deduct the amount

of their equity investments, as defined in the OTS capital rule, in

computing total capital used to satisfy their risk-based capital

requirements. The banking agencies allow only a limited range of equity

investments and place those investments in the 100 percent risk-weight

category, rather than requiring deduction.

In March 1993, OTS issued a final rule that provides parallel

treatment of equity investments for thrifts and national banks. Equity

investments of thrifts that are permissible for national banks

(primarily stock of Freddie Mac, stock of Fannie Mae and certain loans

with equity characteristics) are placed in the 100 percent risk-weight

category.

Reason for OTS Difference: OTS will continue to require the

deduction from capital of equity investments that are impermissible for

national banks. This approach is designed to insulate the institution

and the insurance fund from the risk of these investments. This policy

is intended to result in such investments being either divested or

``pushed down'' into subsidiaries, where savings associations can limit

their liability and attempt to attract partial market funding for the

subsidiaries. The OTS will address the safety and

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soundness of equity investments of thrifts that are permissible for

national banks through the same capital and supervisory approach used

by the banking agencies.

5. 20 Percent Risk-Weight for High Quality Mortgage-backed

Securities: OTS includes agency securities (i.e., issued by Freddie Mac

or Fannie Mae) in the 20 percent risk-weight category. OTS also places

high-quality, private-issue, mortgage-related securities (i.e.,

eligible securities under the Secondary Mortgage Market Enhancement Act

(SMMEA)) in the 20 percent risk-weight category. These private-issue

mortgage-backed securities represent interests in residential or mixed-

use real estate and are rated in one of the two highest investment-

grade rating categories by a nationally recognized statistical rating

organization. Generally, the banking agencies place private-issue,

mortgage-backed securities in the 50 percent or 100 percent risk-weight

category.

Reason for OTS Difference: Policy decision to take the high credit

quality of these securities into account in risk-weighting these

securities.

6. Qualifying Multifamily Mortgage Loans: OTS and the banking

agencies have uniform rules placing multifamily loans satisfying the

criteria of section 618(b) of the Resolution Trust Corporation

Refinancing, Restructuring, and Improvement Act of 1991 (RTC Act), in

the 50 percent risk-weight category.

The OTS, however, extended grandfathered treatment to multifamily

mortgage loans that were in the 50 percent risk-weight category under a

prior OTS rule in March 1994, when OTS adopted its rule implementing

section 618(b) of the RTC Act. Those low-risk, grandfathered

multifamily loans must continue to satisfy the criteria of the prior

OTS rule. Those criteria are that the loans are secured by multifamily

residential buildings with 5-36 units, have maximum 80 percent loan-to-

value ratios and maintain occupancy rates of at least 80 percent.

Reason for OTS Difference: The rules of the OTS and the banking

agencies are generally consistent. The OTS, however, decided to extend

grandfathered treatment to low-risk multifamily loans previously

qualifying for the 50 percent risk-weight category under the prior OTS

multifamily rule.

7. Intangible Assets and Mortgage Servicing Rights: The final rule

on the capital treatment of intangible assets adopted by the OTS

generally is consistent with the rules adopted by the banking agencies.

The OTS rule, however, contains a grandfathering provision and a

transition provision for purchased mortgage servicing rights included

in capital prior to adoption of the revised final rule.

The OTS rule also contains a grandfathering provision allowing

continued inclusion of core deposit premiums included in associations'

capital on the effective date of the final rule. These core deposit

premiums were previously included in capital pursuant to temporary OTS

guidance if an association's management determined that they passed a

three-part test and the amount included did not exceed 25 percent of

core capital. The new rule requires the deduction of nongrandfathered

core deposit premiums from capital.

In August 1995, the OTS also issued a joint rule with the other

banking agencies adopting uniform interim capital treatment of

originated mortgage servicing rights. The Financial Accounting

Standards Board required originated mortgage servicing rights to be

capitalized in accordance with prescribed valuation criteria by

adopting Statement of Financial Accounting Standard No. 122,

``Accounting for Mortgage Servicing Rights'', in May 1995. The joint

interim rule generally applies the same treatment to originated

mortgage servicing rights that the agencies previously applied to

purchased mortgage servicing rights. This capital treatment includes a

50 percent of Tier 1 capital limit and valuation at the lower of 90

percent of fair market value or 100 percent of amortized book value.

Reason for OTS Difference: The treatment of intangible assets and

mortgage servicing rights under the capital rules of OTS and the

banking agencies are generally uniform. The OTS, however, decided to

allow associations to continue to include purchased mortgage servicing

rights and core deposit premiums in capital computations if the

specific assets had previously been included in associations' capital

under prior OTS rule or policy.

8. Recourse Arrangements

Assets Sold with Recourse (Nonmortgage): If a savings association

makes a GAAP sale of nonmortgage assets with recourse, the OTS (i)

treats the transaction as a sale for purpose of reporting and leverage

ratio computation and (ii) requires capital to be held against the

total amount of the loans sold with recourse in calculating the

association's risk-based capital requirement. Despite being a GAAP

sale, the banking agencies treat the transaction as a financing. This

means that the original assets are considered still on the books, along

with the proceeds received, in computing the leverage and risk-based

assets.

Reason for OTS Difference: OTS follows GAAP in determining whether

a transaction is a sale for reporting purposes and in computing

associations' leverage ratio capital requirements. The OTS policy also

ensures that the economic risk to associations from sales with recourse

is captured in determining associations' risk-based capital

requirements.

Assets Sold with Recourse (Mortgages--Private Transactions): If a

savings association sells mortgage assets with recourse to private

entities and the transaction is treated as a sale under GAAP, OTS

follows the same policy as it follows regarding sales of nonmortgage

assets. Under this policy, OTS (i) treats the transaction as a sale and

(ii) requires capital to be held against the total amount of loans sold

with recourse in calculating the association's risk-based capital

requirement.

A bank that sells pools of residential mortgages to private

entities with recourse generally is required to hold the full amount of

capital against the mortgages sold, as well as the proceeds received,

regardless of the amount of recourse retained and the treatment of the

transactions for regulatory reporting purposes.

The rules of the FRB and OCC, however, provide that no capital is

required against pools of 1- to 4-family mortgages sold to private

entities with ``insignificant recourse'' (i.e., less than expected

losses) for which a specific noncapital reserve or liability account is

established and maintained for the maximum amount of possible loss

under the recourse provision.

If ``significant'' recourse is retained, the transaction is not

reported as a sale and the assets remain on the balance sheet. Capital

is required to be held against the on-balance sheet amount of the

assets. The FDIC follows this approach for all sales with recourse; the

FDIC has not adopted an ``insignificant recourse'' policy.

Reason for OTS Difference: OTS follows GAAP in determining whether

a transaction is a sale for reporting purposes and in computing

associations' leverage ratio capital requirement. The OTS policy also

ensures that the economic risk to associations from sales with recourse

will be captured in determining their risk-based capital requirements.

The banking agencies' application of their limited recourse provisions

for computing banks' risk-based capital requirements has affected the

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significance of the ``insignificant recourse'' provisions of the FRB

and OCC.

Assets Sold with Recourse (Limited Recourse): In accordance with

section 350 of the Riegle Community Development and Regulatory

Improvement Act of 1994, the banking agencies adopted a low-level

recourse rule. The OTS adopted its low-level recourse provision in

1989. The remaining difference regarding such sales with recourse is

that the OTS follows GAAP in according sales treatment to those

transactions for reporting and leverage computation purposes. The

banking agencies generally do not accord sales treatment to sales with

low-level recourse and continue to treat the transaction as a financing

in computing banks' leverage ratio requirements, subject to the

``insignificant recourse'' provisions of the FRB and OCC.

Reason for OTS Difference: The agencies, low-level recourse

provisions, in accordance with section 350 of the Riegle Act, limit an

institution's capital requirement to its maximum contractual liability

under its recourse obligation. The difference between OTS and the

banking agencies for reporting and leverage ratio purposes is caused by

the OTS decision to follow GAAP in determining whether to accord sales

treatment.

Recourse Servicing: Where savings associations are responsible for

credit losses on loans they service, OTS requires capital against the

amount of the underlying loans consistent with the recourse policy set

forth above. Although savings associations do not own the underlying

assets, they have a contingent liability and are subject to losses on

those loans. OTS requires associations to hold capital against the

underlying loans posing economic risk for the associations. The banking

agencies do not assess capital on the underlying loans but only on the

value of the servicing rights.

Reason for OTS difference: Policy decision to assess capital on

underlying loans to buffer associations from the risk of loss on such

loans.

9. Purchased Subordinated Securities: The OTS risk-based capital

standard requires associations to hold capital against the amount of

their subordinated securities and any more senior securities. It does

not matter whether the subordinated securities were acquired from

others or result from the securitization of loans they originated.

Associations' risk-based capital requirements are limited, however, by

the low-level recourse provision.

Banks are only required to hold capital against the amount of more

senior securities if the institution originated and sold the underlying

loans. The banking agencies do not require banks to hold capital

against securities senior to acquired subordinated securities if a bank

acquired the securities in the market from third parties.

Reason for OTS Difference: Policy decision to ensure appropriate

capital against risk of these assets. Whether institutions create

subordinated securities or purchase subordinated securities, the risks

are similar.

10. Consequences of Failure to Meet Capital Standards: The PCA

provisions of FDICIA impose a stringent regulatory regimen on thrifts

and banks failing their capital requirements. The PCA provisions of

section 131 of FDICIA establish five regulatory categories, with the

distinctions primarily based on institutions' capital ratios. Section

131 imposes various sanctions and restrictions on institutions in the

lower three PCA categories, while other regulations (brokered deposits

and the risk-based premium rules of the FDIC) provide preferential

treatment to the well-capitalized institutions. The agencies issued a

joint preamble and parallel rules implementing PCA.

Savings associations are also subject to additional restrictions

and requirements under the HOLA, as enacted in FIRREA. The OTS will

continue to apply these provisions to savings associations, but is

coordinating their implementation with the PCA provisions to the extent

possible. The HOLA provisions do not apply to banks.

Reason for OTS Difference: The agencies have adopted uniform rules

implementing the PCA provisions of FDICIA. The HOLA, however, continues

to impose additional restrictions on savings associations (HOLA section

5(t) (6)).

11. Collateralized Transactions

Since December 1994, the agencies have had three different rules

for the capital treatment of transactions that are supported by

qualifying collateral. The FDIC's and OTS's risk-based capital

standards provide that the portion of a transaction collateralized by

cash on deposit in the lending institution or by the market value of

central government securities of countries that are members of the

Organization for Economic Cooperation and Development (OECD securities)

may be assigned to the 20 percent risk-weight category. The FRB's

general rule is like the FDIC's and OTS's rule, but with a limited

exception. The exception is that transactions fully collateralized with

cash or OECD securities marked-to-market daily with positive collateral

margin maintained. The OCC's rule permits the portion of a transaction

that is collateralized with a positive margin by cash or OECD

securities, which must be marked-to-market daily, to receive a zero

percent risk-weighting.

Reason for OTS Difference: The OTS and FDIC regulations on

collateralized transactions have not been changed since 1989. The FRB

and OCC revised their regulations in different ways in 1992 and 1994,

respectively. As indicated in the September 23 Joint Report, consistent

with section 303 of the Riegle Act, in August, 1996, the agencies

jointly proposed a uniform approach to the capital treatment of

collateralized transactions. Under the proposed approach, designated

portions of claims are included in the zero percent risk-weight

category if the institution marks the designated portion to market

daily and requires the obligor to adjust the amount of underlying

collateral to maintain a positive daily margin on the designated

portion of the claim.

B. Minor Differences

1. 1.5 Percent Tangible Capital Requirement: OTS has an explicit

1.5 percent tangible capital requirement; the bank regulators do not.

Reason for OTS Difference: FIRREA required OTS to establish a

tangible capital requirement of at least 1.5 percen of assets. (HOLA

5(t)(2)(B)).

2. Collateralized Mortgage Obligations (CMO) Tranches: In its final

interest-rate risk rule, OTS eliminated the placement of stripped

securities and certain collateralized mortgage obligations in the 100

percent risk-weight category because of their interest-rate risk

sensitivity. The OTS interest-rate risk model evaluates the interest-

rate risk stemming from these assets. The OTS examination and

supervisory staffs consider associations, interest-rate risk exposure,

along with aspects of associations, capital position, in determining

the associations, capital adequacy under the CAMEL system. Residual

securities remain in the 100 percent risk-weight category because of

their degree of credit risk and other risks.

The banking agencies vary in their approach: OCC has stated that

any CMO tranche absorbing more than its pro-rata share of the risk of

losing principal is risk-weighted at 100 percent (others generally at

20 percent); FRB has stated that any CMO tranche absorbing more than

its pro-rata share of loss is risk-weighted at 100 percent (others

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generally at 20 percent); FDIC undertakes a case-by-case review.

Reason for OTS Difference: Policy decision to address the interest-

rate risk of CMOs through the OTS interest-rate risk rule, model and

supervisory oversight. Policy determination that dealing with these

securities in this way made continued risk-weighting for credit risk in

the 100 percent risk-weight category unwarranted. The degree of credit

risk and other risks to which residual securities expose associations

warrant their continued risk-weighting in the 100 percent risk-weight

category.

3. Pledged Deposits/Nonwithdrawable Accounts: OTS includes these

instruments as core capital for mutual associations if they meet the

same requirements as non-cumulative perpetual preferred stock. If they

do not meet the requirements for inclusion in core capital, OTS

includes them as supplementary capital provided they meet the standards

for preferred stock or subordinated debt. The banking agencies do not

address this issue because these instruments represent the capital of

mutual associations legally restricted from issuing equity securities

(i.e., their depositor members are their owners). Banks generally are

not organized in mutual form.

Reason for OTS Difference: Policy decision to treat these

instruments the same as the equity instruments of corporate thrifts

because they provide the same protection as equity to the mutual

associations and the deposit insurance fund.

4. Qualifying Single Family Mortgage Loans: In order to be placed

in the 50 percent risk-weight category, OTS requires that mortgages

have no more than an 80 percent loan-to-value (LTV) ratio (unless they

have private mortgage insurance (PMI) bringing the LTV ratio down to 80

percent). The banking agencies require ``prudent, conservative''

underwriting without specific LTV ratio requirements.

Reason for OTS Difference: Policy decision to make explicit what

OTS believes is generally ``prudent and conservative''; the banking

agencies generally include a similar LTV standard in their examiner

guidance.

5. Loans to Individual Purchasers for the Construction of Their

Homes: OTS and OCC place these assets in the 50 percent risk-weight

category. The FRB and FDIC may treat them as construction loans (100

percent) or as mortgage loans (50 percent) depending on their

characteristics.

Reason for OTS Difference: Policy decision to include such loans in

standard treatment of 1-4 family mortgage loans, as does the OCC. As

indicated in the September 23 Joint Report, the agencies expect to

issue a proposal to make their regulations uniform in this area.

6. Holding of First and Second Liens on Home Mortgages by the Same

Institution: The FRB and OTS generally treat first and second liens

held by the same institution as single loans if there are no

intervening liens. The OCC generally places second liens in the 100

percent risk-weight category. The FDIC combines first and second liens

in evaluating whether the first lien is prudently underwritten, but

places all second liens in the 100 percent risk-weight category.

Reason for OTS Difference: Policy decision generally to treat two

extensions of credit to the same individual and secured by the same 1-4

family residence the same as a single extension of credit. The combined

credit should be placed in the appropriate risk-weight depending on

whether the combined credit meets the other criteria for a qualifying

mortgage loan. As indicated in the September 23 Joint Report, the

agencies expect to issue a proposal to make their regulations uniform

in this area.

7. Rules on Maturing Capital Instruments (MCI): OTS and the banking

agencies use different rules to determine how much of MCI counts toward

capital. OTS (i) grandfathers issuances of MCI issued on or before

November 7, 1989 (which was the date of the rule change) and (ii)

allows two options for issuances of MCI after November 7, 1989 (a) the

bank rule (five year amortization) or (b) a limit of 20 percent of

total capital maturing in any one year for instruments within seven

years of maturity.

The banking agencies require use of the straight five-year

approach.

Reason for OTS Difference: Policy decision to minimize unnecessary

disincentives for issuance of subordinated debt and to avoid unduly

penalizing pre-FIRREA issuances of MCI.

8. Limitation on Subordinated Debt: The banking agencies limit

subordinated debt to 50 percent of core capital. OTS has no limit on

the amount of subordinated debt that can count as supplementary

capital.

Reason for OTS Difference: Policy decision to encourage issuance of

supplementary capital.

9. Nonresidential Construction and Land Loans: OTS requires the

amount of these loans above an 80 percent LTV ratio to be deducted from

total capital (with a five year phase-in). The banking agencies place

the whole loan amount in the 100 percent risk-weight category.

Reason for OTS Difference: Policy decision to ensure appropriate

capital against risk of these assets. OTS experience indicates that

high-LTV ratio land loans and nonresidential construction loans present

particularly high levels of risk.

10. FSLIC/FDIC-covered Assets: OTS places these assets in the zero

percent risk-weight category. The banking agencies generally place

these assets in the 20 percent risk-weight category.

Reason for OTS Difference: Policy decision to recognize OTS Capital

and Accounting Standards that these assets have never resulted in

losses and that these government guaranteed obligations are supported

by a ``backup'' call on the United States Treasury.

11. Mutual Funds: In general, OTS establishes the risk weighting

for mutual funds on the asset with the highest capital requirement

actually held by the mutual fund. The banking agencies base their

capital charge on the highest risk-weighted asset that is a permissible

investment by the mutual fund. The 20 percent risk-weight category is

the lowest risk-weight category in which associations may place mutual

fund investments.

OTS allows, on a case-by-case basis, ``pro-rata'' risk-weighting of

investments in mutual funds, based on the assets of the mutual fund

(i.e., if 90 percent of a mutual fund's assets are 20 percent risk-

weight assets and 10 percent are 100 percent risk-weight assets, we may

allow 90 percent of the investment in 20 percent risk-weight category

and 10 percent in the 100 percent risk-weight category). The OCC

permits national banks to pro-rate mutual fund investments between

risk-weight categories based on the maximum amount of different types

of assets that mutual funds may hold in accordance with their

prospectuses. The FDIC and FRB do not allow banks to pro-rate mutual

fund investments between risk-weight categories.

Reason for OTS Difference: Policy decision to ensure appropriate

capital against the risk of these assets. OTS believes that allowing

institutions to pro-rate their investments and focus on ``actual''

assets ensures that savings associations hold capital in an amount

essentially equivalent to that required if they directly held the

assets in which the mutual fund invested. However, as indicated in the

September 23 Joint Report, the agencies expect to issue a proposal in

the near future to make their regulations uniform in this area.

12. Capital Requirement on Holding Companies: FRB applies the risk-

based

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capital requirements to bank holding companies; OTS does not apply them

to thrift holding companies.

Reason for OTS Difference: OTS policy decision to not impose

capital requirements on corporate entities because they do not pose a

risk to the deposit insurance fund.

13. Agricultural Loan Losses: The banking agencies, due to a

statutory requirement, allow such losses to be deferred (and,

effectively, allow these losses to be ``included'' in supplementary

capital). OTS does not allow such losses to be deferred or included in

assets or capital.

Reason for OTS Difference: OTS has no statutory requirement to

allow such deferred losses in assets or capital.

14. Income Capital Certificates (ICCS) and Mutual Capital

Certificates (MCCs): OTS allows inclusion in supplementary capital.

Because these items do not exist in the banking industry, the banking

agencies do not address them.

Reason for OTS Difference: ICCs/MCCs are counted as supplementary

capital due to their being functionally equivalent to net worth

certificates (which are required, by statute, to be included in

capital).

Attachment II--Summary of Differences in Accounting Practices

Differences by each agency in accounting or supervisory reporting

practices may cause differences in amounts of regulatory capital

maintained by depository institutions. These differences are the result

of an evolutionary process that primarily reflects historical agency

philosophy and industry trends.

The OTS follows generally accepted accounting principles for

regulatory reporting purposes. The other banking agencies require banks

to follow certain prescribed regulatory accounting principles (RAP)

instead of GAAP for reporting purposes. The banking agencies, however,

are contemplating moving toward GAAP reporting in 1997, which will

eliminate most remaining differences between the reporting of OTS and

the other banking agencies.

A summary of these differences is presented below.

1. Futures and Forward Contracts

OTS practice is to follow generally accepted accounting principles.

In accordance with SFAS 80, when hedging criteria are satisfied, the

accounting for the futures contract shall be related to the accounting

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

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 gains and losses in accordance with

GAAP.

The banking agencies do not follow GAAP, but report changes in the

market value of futures contracts even when used as hedges in the

current period's income statement. However, futures contracts used to

hedge mortgage banking operations are reported in accordance with GAAP.

2. Excess Service Fees

OTS practice is to follow GAAP in valuing excess service fees. When

loans are sold with servicing retained and the stated servicing fee

rate differs materially from a normal servicing fee rate, the sales

price should be adjusted in determining the gain or loss from the sale

of the loans. This provides for the recognition of a normal fee in each

subsequent year that servicing continues on the loans. The gain

recorded at the date of sale cannot be larger than the gain assuming

the loans were sold servicing released. The subsequent valuation of the

excess servicing is adjusted based upon anticipated prepayment rates

and interest rates.

The banking agencies follow GAAP for residential mortgage loan

pools. For all other types of loans, the banking agencies do not follow

GAAP. In those cases they require that excess servicing fees retained

on loans sold be reported as realized over the contractual life of the

transferred asset.

3. In-Substance Defeasance of Debt

OTS practice is to follow GAAP. In accordance with SFAS 76, when a

debtor irrevocably places risk-free monetary assets in a trust solely

to satisfy 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.

The banking agencies do not follow GAAP. The banking agencies

continue to report the defeased debt as a liability and the securities

contributed to the trust as assets with no recognition of any gain or

loss on the transaction.

4. Sales of Assets with Recourse

OTS practice is to follow GAAP. A transfer of receivables with

recourse is recognized as a sale under GAAP if (i) the transferor

surrenders control of the future economic benefits, (ii) the

transferor's obligation under the recourse provisions can be reasonably

estimated, and (iii) the transferee cannot require repurchase of the

receivables except pursuant to the recourse provisions.

However, in the calculation of OTS risk-based capital, certain off-

balance sheet conversions are performed that result in capital being

required for the risk retained. See further discussion of capital

differences with respect to this item in Attachment I, Capital

Differences.

The practice of the banking agencies is generally to report

transfers of receivables with recourse as sales only when the

transferring institution (i) retains no risk of loss from the assets

transferred and (ii) 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 as sales.

However, this general rule does not apply to the transfer of

mortgage loans under one of the government programs of the Government

National Mortgage Association, Freddie Mac or Fannie Mae. Transfers of

mortgages under one of these programs are automatically treated as

sales. Furthermore, the OCC and FRB provide for the treatment of

private transfers of mortgages as sales if the transferring institution

does not retain a significant risk of loss on the assets transferred.

5. Negative Goodwill

OTS practice is to follow GAAP for reporting purposes. OTS permits

negative goodwill to offset goodwill reported as an asset. The banking

agencies require that negative goodwill be reported as a liability, and

not be netted against goodwill assets.

6. Push-Down Accounting

OTS practice is to follow GAAP. OTS requires push-down accounting

when there is at least a 90 percent change in ownership. Push-down

accounting generally applies the fair value concepts of purchase

accounting in the context of a holding company's acquisition of a

company to be held as a separate subsidiary or combined with an

existing subsidiary.

The banking agencies require push-down accounting when there is at

least a 95 percent change in ownership.

Dated: January 6, 1997.

By the Office of Thrift Supervision.

Nicolas P. Retsinas,

Director.

[FR Doc. 97-1182 Filed 1-16-97; 8:45 am]

BILLING CODE 6720-01-P