Joint Report: Differences in Accounting and Capital Standards Among the Federal Banking Agencies; Report to Congressional Committees, 50326-50329 [E8-19676]

Download as PDF sroberts on PROD1PC76 with NOTICES 50326 Federal Register / Vol. 73, No. 166 / Tuesday, August 26, 2008 / Notices displays a currently valid OMB control number. Comments concerning the accuracy of the burden estimate(s) and any suggestions for reducing the burden should be directed to the person listed in the FOR FURTHER INFORMATION CONTACT section below. FOR FURTHER INFORMATION CONTACT: Leslie Haney, Leslie.Haney@fcc.gov, (202) 418–1002. SUPPLEMENTARY INFORMATION: OMB Control Number: 3060–0207. OMB Approval Date: August 8, 2008. Expiration Date: August 31, 2011. Title: Part 11—Emergency Alert System. Form No.: Not applicable. Estimated Annual Burden: 3,533,196 responses; 0.0227035 hours per response; 80,216 hours total per year. Obligation to Respond: Mandatory (47 CFR Part 11). Nature and Extent of Confidentiality: There is no need for confidentiality. Needs and Uses: In the Second Report and Order and Further Notice of Proposed Rulemaking in EB Docket No. 04–296, FCC 07–109, the Commission adopts rules that require states to file new EAS plans with the Commission under certain circumstances, expand the number of private entities covered by EAS, and impose new obligations on private entities. The rules require EAS participants to maintain and keep immediately-available a copy of the EAS operating handbook at normal duty positions or EAS equipment locations; requires state and local EAS plans to be reviewed and approved by the Chief, Public Safety and Homeland Security Bureau prior to implementation; requires manufacturers to include instructions and information on the proper installation, operation and programming of an EAS Encoder, EAS Decoder, or combined unit and a list of all State and county FIPS numbers with each unit sold or marketed in the U.S.; require appropriate logs be kept regarding EAS testing and EAS Decoder malfunctions; allow all EAS participants to submit a written request to the FCC asking to be a Non-Participating National source; require communications common carriers participating in the national level EAS and rendering free service to file semiannual reports on the free service; require entities wishing to voluntarily participate in the national level EAS to submit a written request to the FCC; require written agreements between broadcast stations and cable or wireless cable systems on election not to interrupt EAS messages; require a waiver request be made to the FCC if EAS sources cannot be received and VerDate Aug<31>2005 00:53 Aug 26, 2008 Jkt 214001 alternate arrangements cannot be made; impose a disclosure requirement on SDARS licensees or DBS providers that are not able to transmit state and local EAS messages; and require logging of various events and tests. Federal Communications Commission. Marlene H. Dortch, Secretary. [FR Doc. E8–19656 Filed 8–25–08; 8:45 am] BILLING CODE 6712–01–P DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 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. DEPARTMENT OF THE TREASURY 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 Office of Thrift Supervision Introduction [Docket ID OCC–2008–0011] FEDERAL RESERVE SYSTEM FEDERAL DEPOSIT INSURANCE CORPORATION [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. 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– PO 00000 Frm 00028 Fmt 4703 Sfmt 4703 SUPPLEMENTARY INFORMATION: 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 C:\FR\FM\26AUN1.SGM 26AUN1 sroberts on PROD1PC76 with NOTICES Federal Register / Vol. 73, No. 166 / Tuesday, August 26, 2008 / Notices 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 riskbased capital ratios for all banking organizations (banks, bank holding companies, and savings associations). The agencies view the leverage and riskbased 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 1 72 FR 69288, December 7, 2007. VerDate Aug<31>2005 00:53 Aug 26, 2008 Jkt 214001 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 riskbased 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 riskbased capital standards. 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 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 PO 00000 Frm 00029 Fmt 4703 Sfmt 4703 50327 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. 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 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 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. 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). C:\FR\FM\26AUN1.SGM 26AUN1 50328 Federal Register / Vol. 73, No. 166 / Tuesday, August 26, 2008 / Notices operate financial subsidiaries, as defined. sroberts on PROD1PC76 with NOTICES 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 riskweight category or require full deduction of the investments and loans. 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 6 See 12 CFR Section 559.2 for the OTS’s definition of subordinate organization. VerDate Aug<31>2005 00:53 Aug 26, 2008 Jkt 214001 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 GovernmentSponsored Enterprises The FRB, the FDIC, and the OTS apply a 100 percent risk weight to equity securities of governmentsponsored 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 PO 00000 Frm 00030 Fmt 4703 Sfmt 4703 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 OTSsupervised 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 Pledged Deposits, Nonwithdrawable Accounts, and Certain Certificates The OTS’s capital regulations permit mutual savings associations to include 7 71 C:\FR\FM\26AUN1.SGM FR 55958 (September 25, 2006). 26AUN1 Federal Register / Vol. 73, No. 166 / Tuesday, August 26, 2008 / Notices 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 OTSsupervised 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. 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] BILLING CODES 4810–33–P (25%), 6210–01–P (25%), 6714–01–P (25%), 6720–01–P (25%) 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 sroberts on PROD1PC76 with NOTICES 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 00:53 Aug 26, 2008 Jkt 214001 Government in the Sunshine; Meeting Notice Board of Governors of the Federal Reserve System. AGENCY HOLDING THE MEETING: 11:30 a.m., Tuesday, September 2, 2008. TIME AND DATE: Marriner S. Eccles Federal Reserve Board Building, 20th and C Streets, NW., Washington, DC 20551. PLACE: Push-Down Accounting VerDate Aug<31>2005 FEDERAL RESERVE SYSTEM STATUS: Closed. MATTERS TO BE CONSIDERED: 1. Personnel actions (appointments, promotions, assignments, reassignments, and salary actions) involving individual Federal Reserve System employees. 2. Any items carried forward from a previously announced meeting. FOR FURTHER INFORMATION CONTACT: Michelle Smith, Director, or Dave Skidmore, Assistant to the Board, Office of Board Members at 202–452–2955. You may call 202–452–3206 beginning at approximately 5 p.m. two business days before the meeting for a recorded announcement of bank and bank holding company applications scheduled for the meeting; or you may contact the Board’s Web site at https:// www.federalreserve.gov for an electronic announcement that not only lists applications, but also indicates procedural and other information about the meeting. SUPPLEMENTARY INFORMATION: PO 00000 Frm 00031 Fmt 4703 Sfmt 4703 50329 Dated: August 22, 2008. Robert deV. Frierson, Deputy Secretary of the Board. [FR Doc. E8–19908 Filed 8–22–08; 4:15 pm] BILLING CODE 6210–01–P GENERAL SERVICES ADMINISTRATION Multiple Award Schedule Advisory Panel; Notification of Public Advisory Panel Meetings U.S. General Services Administration (GSA). ACTION: Notice. AGENCY: SUMMARY: The U.S. General Services Administration (GSA) Multiple Award Schedule Advisory Panel (MAS Panel), a Federal Advisory Committee, will hold public meetings on the following dates: Friday, September 19, 2008; Monday, September 22, 2008; Monday, October 6, 2008; and Monday, October 27, 2008. GSA utilizes the MAS program to establish long-term Governmentwide contracts with responsible firms to provide Federal, State, and local government customers with access to a wide variety of commercial supplies (products) and services. The MAS Panel was established to develop advice and recommendations on MAS program pricing policies, provisions, and procedures in the context of current commercial pricing practices. For the next 3 to 4 meetings, the Panel plans to focus on developing recommendations for MAS program pricing provisions for the acquisition of (1) professional services; (2) products; (3) total solutions which consist of professional services and products; and (4) non professional services. In developing the recommendations, the Panel will, at a minimum, address these 5 questions for each of the 4 types of acquisitions envisioned above: (1) Where does competition take place?; (2) If competition takes place primarily at the task/delivery order level, does a fair and reasonable price determination at the MAS contract level really matter?; (3) If the Panel consensus is that competition is at the task order level, are the methods that GSA uses to determine fair and reasonable prices and maintain the price/discount relationship with the basis of award customer(s) adequate?; (4) If the current policy is not adequate, what are the recommendations to improve the policy/guidance; and (5) If fair and reasonable price determination at the MAS contract level is not beneficial and the fair and reasonable price determination is to be determined only C:\FR\FM\26AUN1.SGM 26AUN1

Agencies

[Federal Register Volume 73, Number 166 (Tuesday, August 26, 2008)]
[Notices]
[Pages 50326-50329]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-19676]


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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.

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

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.
---------------------------------------------------------------------------

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

    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]
BILLING CODES 4810-33-P (25%), 6210-01-P (25%), 6714-01-P (25%), 6720-
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