[Federal Register: August 26, 2008 (Volume 73, Number 166)]
[
Notices]               
[Page 50326-50329]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26au08-66]                         

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DEPARTMENT OF THE TREASURY



Office of the Comptroller of the Currency



[Docket ID OCC-2008-0011]



FEDERAL RESERVE SYSTEM



FEDERAL DEPOSIT INSURANCE CORPORATION



DEPARTMENT OF THE TREASURY



Office of Thrift Supervision



[Docket OTS-2008-0006]



 
Joint Report: Differences in Accounting and Capital Standards 

Among the Federal Banking Agencies; Report to Congressional Committees



AGENCIES: Office of the Comptroller of the Currency (OCC), Treasury; 

Board of Governors of the Federal Reserve System (FRB); Federal Deposit 

Insurance Corporation (FDIC); and Office of Thrift Supervision (OTS), 

Treasury.



ACTION: Report to the Congressional Committees.



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SUMMARY: The OCC, the FRB, the FDIC, and the OTS (the agencies) have 

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

Insurance Act. Section 37(c) requires the agencies to jointly submit an 

annual report to the Committee on Financial Services of the United 

States House of Representatives and to the Committee on Banking, 

Housing, and Urban Affairs of the United States Senate describing 

differences between the capital and accounting standards used by the 

agencies. The report must be published in the Federal Register.



FOR FURTHER INFORMATION CONTACT:

    OCC: Paul Podgorski, Risk Expert, Capital Policy (202-874-4755), 

Office of the Comptroller of the Currency, 250 E Street, SW., 

Washington, DC 20219.

    FRB: John F. Connolly, Senior Project Manager (202-452-3621) or 

Brendan Burke, Senior Financial Analyst (202-452-2987), Division of 

Banking Supervision and Regulation, Board of Governors of the Federal 

Reserve System, 20th Street and Constitution Avenue, NW., Washington, 

DC 20551.

    FDIC: Robert F. Storch, Chief Accountant (202-898-8906), Division 

of Supervision and Consumer Protection, Federal Deposit Insurance 

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

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

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

Washington, DC 20552.



SUPPLEMENTARY INFORMATION: The text of the report follows:Report to the 

Committee on Financial Services of the United States House of 

Representatives and to the Committee on Banking, Housing, and Urban 

Affairs of the United States SenateRegarding Differences in Accounting 

andCapital Standards Among the Federal Banking Agencies



Introduction



    The Office of the Comptroller of the Currency (OCC), the Board of 

Governors of the Federal Reserve System (FRB), the Federal Deposit 

Insurance Corporation (FDIC), and the Office of Thrift Supervision 

(OTS) (``the federal banking agencies'' or ``the agencies'') must 

jointly submit an annual report to the Committee on Financial Services 

of the U.S. House of Representatives and the Committee on Banking, 

Housing, and Urban Affairs of the U.S. Senate describing differences 

between the accounting and capital standards used by the agencies. The 

report must be published in the Federal Register.

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

2007, is the sixth joint annual report on differences in accounting and 

capital standards to be submitted pursuant to section 37(c) of the 

Federal Deposit Insurance Act (12 U.S.C. 1831n(c)), as amended. Prior 

to the agencies' first joint annual report, section 37(c) required a 

separate report from each agency.

    Since the agencies filed their first reports on accounting and 

capital differences in 1990, the agencies have acted in concert to 

harmonize their accounting and capital standards and eliminate as many 

differences as possible. Section 303 of the Riegle Community 

Development and Regulatory Improvement Act of 1994 (12 U.S.C. 4803) 

also directed the agencies to work jointly to make uniform all 

regulations and guidelines implementing common statutory or supervisory 

policies. The results of



[[Page 50327]]



these efforts must be ``consistent with the principles of safety and 

soundness, statutory law and policy, and the public interest.'' In 

recent years, the agencies have revised their capital standards to 

address changes in credit and certain other risk exposures within the 

banking system and to align the amount of capital institutions are 

required to hold more closely with the credit risks and certain other 

risks to which they are exposed. These revisions have been made in a 

uniform manner whenever possible and practicable to minimize 

interagency differences.

    While the differences in capital standards have diminished over 

time, a few differences remain. Some of the remaining capital 

differences are statutorily mandated. Others were significant 

historically but now no longer affect in a measurable way, either 

individually or in the aggregate, institutions supervised by the 

federal banking agencies.

    In addition to the specific differences in capital standards noted 

below, the agencies may have differences in how they apply certain 

aspects of their rules. These differences usually arise as a result of 

case-specific inquiries that have only been presented to one agency. 

Agency staffs seek to minimize these occurrences by coordinating 

responses to the fullest extent reasonably practicable. Furthermore, 

while the agencies work together to adopt and apply generally uniform 

capital standards, there are wording differences in various provisions 

of the agencies' standards that largely date back to each agency's 

separate initial adoption of these standards before 1990.

    The federal banking agencies have substantially similar capital 

adequacy standards. These standards employ a common regulatory 

framework that establishes minimum leverage and risk-based capital 

ratios for all banking organizations (banks, bank holding companies, 

and savings associations). The agencies view the leverage and risk-

based capital requirements as minimum standards, and most institutions 

are expected to operate with capital levels well above the minimums, 

particularly those institutions that are expanding or experiencing 

unusual or high levels of risk.

    Furthermore, in December 2007, the federal banking agencies issued 

a new common risk-based capital adequacy framework, ``Risk-Based 

Capital Standards: Advanced Capital Adequacy Framework--Basel II'' \1\. 

The final rule requires some qualifying banking organizations, and 

permits other qualifying banking organizations, to use an advanced 

internal ratings-based approach to calculate regulatory credit risk 

capital requirements and advanced measurement approaches to calculate 

regulatory operational risk capital requirements. It describes the 

qualifying criteria for banking organizations required or seeking to 

operate under the new framework and the applicable risk-based capital 

requirements for banking organizations that operate under the 

framework. Because the agencies adopted a joint final rulemaking 

establishing a common framework, there are no differences among the 

agencies' Basel II rules. The risk-based capital differences described 

below have arisen under the agencies' Basel I-based risk-based capital 

standards.

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    \1\ 72 FR 69288, December 7, 2007.

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    The OCC, the FRB, and the FDIC, under the auspices of the Federal 

Financial Institutions Examination Council, have developed uniform 

Reports of Condition and Income (Call Reports) for all insured 

commercial banks and state-chartered savings banks. The OTS requires 

each OTS-supervised savings association to file the Thrift Financial 

Report (TFR). The reporting standards for recognition and measurement 

in the Call Reports and the TFR are consistent with U.S. generally 

accepted accounting principles (GAAP). Thus, there are no significant 

differences in regulatory accounting standards for regulatory reports 

filed with the federal banking agencies. Only one minor difference 

remains between the accounting standards of the OTS and those of the 

other federal banking agencies, and that difference relates to push-

down accounting, as more fully explained below.



Differences in Capital Standards Among the Federal Banking Agencies



Financial Subsidiaries



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

financial subsidiaries of banks.\2\ GLBA amends the National Bank Act 

to permit national banks to conduct certain expanded financial 

activities through financial subsidiaries. Section 121(a) of the GLBA 

(12 U.S.C. 24a) imposes a number of conditions and requirements upon 

national banks that have financial subsidiaries, including specifying 

the treatment that applies for regulatory capital purposes. The statute 

requires that a national bank deduct from assets and tangible equity 

the aggregate amount of its equity investments in financial 

subsidiaries. The statute further requires that the financial 

subsidiary's assets and liabilities not be consolidated with those of 

the parent national bank for applicable capital purposes.

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    \2\ A national bank that has a financial subsidiary must satisfy 

a number of statutory requirements in addition to the capital 

deduction and deconsolidation requirements described in the text. 

The bank (and each of its depository institution affiliates) must be 

well capitalized and well managed. Asset size restrictions apply to 

the aggregate amount of the assets of all of the bank's financial 

subsidiaries. Certain debt rating requirements apply, depending on 

the size of the national bank. The national bank is required to 

maintain policies and procedures to protect the bank from financial 

and operational risks presented by the financial subsidiary. It is 

also required to have policies and procedures to preserve the 

corporate separateness of the financial subsidiary and the bank's 

limited liability. Finally, transactions between the bank and its 

financial subsidiary generally must comply with the Federal Reserve 

Act's (FRA) restrictions on affiliate transactions and the financial 

subsidiary is considered an affiliate of the bank for purposes of 

the anti-tying provisions of the Bank Holding Company Act. See 12 

U.S.C. Section 5136A.

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    State member banks may have financial subsidiaries subject to all 

of the same restrictions that apply to national banks.\3\ State 

nonmember banks may also have financial subsidiaries, but they are 

subject only to a subset of the statutory requirements that apply to 

national banks and state member banks.\4\ Finally, national banks, 

state member banks, and state nonmember banks may not establish or 

acquire a financial subsidiary or commence a new activity in a 

financial subsidiary if the bank, or any of its insured depository 

institution affiliates, has received a less than satisfactory rating as 

of its most recent examination under the Community Reinvestment Act.\5\

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    \3\ See 12 U.S.C. Section 335 (state member banks subject to the 

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

that hold financial subsidiaries).

    \4\ The applicable statutory requirements for state nonmember 

banks are as follows. The bank (and each of its insured depository 

institution affiliates) must be well capitalized. The bank must 

comply with the capital deduction and deconsolidation requirements. 

It must also satisfy the requirements for policies and procedures to 

protect the bank from financial and operational risks and to 

preserve corporate separateness and limited liability for the bank. 

Further, transactions between the bank and a subsidiary that would 

be classified as a financial subsidiary generally are subject to the 

affiliate transactions restrictions of the FRA. See 12 U.S.C. 

Section 1831w.

    \5\ See 12 U.S.C. Section 1841(l)(2).

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    The OCC, the FDIC, and the FRB adopted final rules implementing 

their respective provisions of Section 121 of GLBA for national banks 

in March 2000, for state nonmember banks in January 2001, and for state 

member banks in August 2001. GLBA did not provide new authority to OTS-

supervised savings associations to own, hold, or



[[Page 50328]]



operate financial subsidiaries, as defined.



Subordinate Organizations Other Than Financial Subsidiaries



    Banks supervised by the OCC, the FRB, and the FDIC generally 

consolidate all significant majority-owned subsidiaries other than 

financial subsidiaries for regulatory capital purposes. For 

subsidiaries other than financial subsidiaries that are not 

consolidated on a line-for-line basis for financial reporting purposes, 

joint ventures, and associated companies, the parent banking 

organization's investment in each such subordinate organization is, for 

risk-based capital purposes, deducted from capital or assigned to the 

100 percent risk-weight category, depending upon the circumstances. The 

FRB's and the FDIC's rules also permit the banking organization to 

consolidate the investment on a pro rata basis in appropriate 

circumstances.

    Under the OTS's capital regulations, a statutorily mandated 

distinction is drawn between subsidiaries, which generally are 

majority-owned, that are engaged in activities that are permissible for 

national banks and those that are engaged in activities 

``impermissible'' for national banks. Where subsidiaries engage in 

activities that are impermissible for national banks, the OTS requires 

the deduction of the parent's investment in these subsidiaries from the 

parent's assets and capital. If a subsidiary's activities are 

permissible for a national bank, that subsidiary's assets are generally 

consolidated with those of the parent on a line-for-line basis. If a 

subordinate organization, other than a subsidiary, engages in 

impermissible activities, the OTS will generally deduct investments in 

and loans to that organization.\6\ If such a subordinate organization 

engages solely in permissible activities, the OTS may, depending upon 

the nature and risk of the activity, either assign investments in and 

loans to that organization to the 100 percent risk-weight category or 

require full deduction of the investments and loans.

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    \6\ See 12 CFR Section 559.2 for the OTS's definition of 

subordinate organization.

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Collateralized Transactions



    The FRB and the OCC assign a zero percent risk weight to claims 

collateralized by cash on deposit in the institution or by securities 

issued or guaranteed by the U.S. Government, U.S. Government agencies, 

or the central governments of other countries that are members of the 

Organization for Economic Cooperation and Development (OECD). The OCC 

and the FRB rules require the collateral to be marked to market daily 

and a positive margin of collateral protection to be maintained daily. 

The FRB requires qualifying claims to be fully collateralized, while 

the OCC rule permits partial collateralization.

    The FDIC and the OTS assign a zero percent risk weight to claims on 

qualifying securities firms that are collateralized by cash on deposit 

in the institution or by securities issued or guaranteed by the U.S. 

Government, U.S. Government agencies, or other OECD central 

governments. The FDIC and the OTS accord a 20 percent risk weight to 

such claims on other parties.



Noncumulative Perpetual Preferred Stock



    Under the federal banking agencies' capital standards, 

noncumulative perpetual preferred stock is a component of Tier 1 

capital. The capital standards of the OCC, the FRB, and the FDIC 

require noncumulative perpetual preferred stock to give the issuer the 

option to waive the payment of dividends and to provide that waived 

dividends neither accumulate to future periods nor represent a 

contingent claim on the issuer.

    As a result of these requirements, if a bank supervised by the OCC, 

the FRB, or the FDIC issues perpetual preferred stock and is required 

to pay dividends in a form other than cash, e.g., stock, when cash 

dividends are not or cannot be paid, the bank does not have the option 

to waive or eliminate dividends, and the stock would not qualify as 

noncumulative. If an OTS-supervised savings association issues 

perpetual preferred stock that requires the payment of dividends in the 

form of stock when cash dividends are not paid, the stock may, subject 

to supervisory approval, qualify as noncumulative.



Equity Securities of Government-Sponsored Enterprises



    The FRB, the FDIC, and the OTS apply a 100 percent risk weight to 

equity securities of government-sponsored enterprises (GSEs), other 

than the 20 percent risk weighting of Federal Home Loan Bank stock held 

by banking organizations as a condition of membership. The OCC applies 

a 20 percent risk weight to all GSE equity securities.



Limitation on Subordinated Debt and Limited-Life Preferred Stock



    The OCC, the FRB, and the FDIC limit the amount of subordinated 

debt and intermediate-term preferred stock that may be treated as part 

of Tier 2 capital to 50 percent of Tier 1 capital. The OTS does not 

prescribe such a restriction. The OTS does, however, limit the amount 

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

agencies.

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

FRB, and the FDIC, at the beginning of each of the last five years of 

the life of a subordinated debt or limited-life preferred stock 

instrument, the amount that is eligible for inclusion in Tier 2 capital 

is reduced by 20 percent of the original amount of that instrument (net 

of redemptions). The OTS provides thrifts the option of using either 

the discounting approach used by the other federal banking agencies, or 

an approach which, during the last seven years of the instrument's 

life, allows for the full inclusion of all such instruments, provided 

that the aggregate amount of such instruments maturing in any one year 

does not exceed 20 percent of the thrift's total capital.



Tangible Capital Requirement



    Savings associations supervised by the OTS, by statute, must 

satisfy a 1.5 percent minimum tangible capital requirement. Other 

subsequent statutory and regulatory changes, however, imposed higher 

capital standards rendering it unlikely, if not impossible, for the 1.5 

percent tangible capital requirement to function as a meaningful 

regulatory trigger. This statutory tangible capital requirement does 

not apply to institutions supervised by the OCC, the FRB, or the FDIC.



Market Risk Rules



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

banks and bank holding companies with significant exposure to market 

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

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

association engaged in the threshold level of trading activity 

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

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

an increasingly more significant risk factor to consider in the capital 

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

in proposing a revised market risk rule.\7\

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    \7\ 71 FR 55958 (September 25, 2006).

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Pledged Deposits, Nonwithdrawable Accounts, and Certain Certificates



    The OTS's capital regulations permit mutual savings associations to 

include



[[Page 50329]]



in Tier 1 capital pledged deposits and nonwithdrawable accounts to the 

extent that such accounts or deposits have no fixed maturity date, 

cannot be withdrawn at the option of the accountholder, and do not earn 

interest that carries over to subsequent periods. The OTS also permits 

the inclusion of net worth certificates, mutual capital certificates, 

and income capital certificates complying with applicable OTS 

regulations in savings associations' Tier 2 capital. In the aggregate, 

however, these deposits, accounts, and certificates are only a 

negligible amount, if any, of the Tier 1 or Tier 2 capital of OTS-

supervised savings associations. The OCC, the FRB, and the FDIC do not 

expressly address these instruments in their regulatory capital 

standards, and they generally are not recognized as Tier 1 or Tier 2 

capital components.



Covered Assets



    The OCC, the FRB, and the FDIC generally place assets subject to 

guarantee arrangements by the FDIC or the former Federal Savings and 

Loan Insurance Corporation in the 20 percent risk-weight category. The 

OTS places these ``covered assets'' in the zero percent risk-weight 

category. In the aggregate, the amount of covered assets in OTS-

supervised savings associations is negligible.



Differences in Accounting Standards Among the Federal Banking Agencies



Push-Down Accounting



    Push-down accounting is the establishment of a new accounting basis 

for a depository institution in its separate financial statements as a 

result of the institution becoming substantially wholly owned. Under 

push-down accounting, when a depository institution is acquired in a 

purchase, yet retains its separate corporate existence, the assets and 

liabilities of the acquired institution are restated to their fair 

values as of the acquisition date. These values, including any 

goodwill, are reflected in the separate financial statements of the 

acquired institution, as well as in any consolidated financial 

statements of the institution's parent.

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

accounting for regulatory reporting purposes when an institution's 

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

group of investors acting collaboratively. This approach is generally 

consistent with accounting interpretations issued by the staff of the 

Securities and Exchange Commission. The OTS requires the use of push-

down accounting when an institution's voting stock becomes at least 90 

percent owned by an investor or investor group.



    Dated: July 31, 2008.

John C. Dugan,

Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 

System. August 20, 2008.

Robert deV. Frierson,

Deputy Secretary of the Board.

    Dated at Washington, DC, this 18th day of August, 2008.



    Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

    Dated: July 24, 2008.



    By the Office of Thrift Supervision.

John M. Reich,

Director.

 [FR Doc. E8-19676 Filed 8-25-08; 8:45 am]

	

	
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