62310 Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices

Internet audio broadcast page at <http:/

/www.fcc.gov/realaudio/>. The meeting

can also be heard via telephone, for a

fee, from National Narrowcast Network,

telephone (202) 966–2211 or fax (202)

966–1770; and from Conference Call

USA (available only outside the

Washington, DC metropolitan area),

telephone 1–800–962–0044. Audio and

video tapes of this meeting can be

purchased from Infocus, 341 Victory

Drive, Herndon, VA 20170, telephone

(703) 834–0100; fax number (703) 834–

0111.

Dated November 18, 1997.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 97–30850 Filed 11-19-97; 3:36 pm]

BILLING CODE 6712–01–F

FEDERAL DEPOSIT INSURANCE

CORPORATION

Differences in Capital and Accounting

Standards Among the Federal Banking

and Thrift Agencies; Report to

Congressional Committees

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Report to the Committee on

Banking and Financial Services of the

U.S. House of Representatives and to the

Committee on Banking, Housing, and

Urban Affairs of the United States

Senate Regarding Differences in Capital

and Accounting Standards Among the

Federal Banking and Thrift Agencies.

SUMMARY: This report has been prepared

by the FDIC pursuant to Section 37(c) of

the Federal Deposit Insurance Act (12

U.S.C 1831n(c)). Section 37(c) requires

each federal banking agency to report to

the Committee on Banking and

Financial Services of the House of

Representatives and to the Committee

on Banking, Housing, and Urban Affairs

of the Senate any differences between

any accounting or capital standard used

by such agency and any accounting or

capital standard used by any other such

agency. The report must also contain an

explanation of the reasons for any

discrepancy in such accounting and

capital standards and must be published

in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Robert F. Storch, Chief, Accounting

Section, Division of Supervision,

Federal Deposit Insurance Corporation,

550 17th Street, NW., Washington, D.C.

20429, telephone (202) 898-8906.

SUPPLEMENTARY INFORMATION: The text of

the report follows: Report to the

Committee on Banking and Financial

Services of the U.S. House of

Representatives and to the Committee

on Banking, Housing, and Urban Affairs

of the United States Senate Regarding

Differences in Capital and Accounting

Standards Among the Federal Banking

and Thrift Agencies.

A. Introduction

This report has been prepared by the

Federal Deposit Insurance Corporation

(FDIC) pursuant to Section 37(c) of the

Federal Deposit Insurance Act, which

requires the agency to submit a report to

specified Congressional Committee

describing any differences in regulatory

capital and accounting standards among

the federal banking and thrift agencies,

including an explanation of the reasons

for these differences. Section 37(c) also

requires the FDIC to publish this report

in the Federal Register. This report

covers differences existing during 1995

and 1996 and developments affecting

these differences.

The FDIC, the Board of Governors of

the Federal Reserve System (FRB), and

the Office of the Comptroller of the

Currency (OCC) (hereafter, the banking

agencies) have substantially similar

leverage and risk-based capital

standards. While the Office of Thrift

Supervision (OTS) employs a regulatory

capital framework that also includes

leverage and risk-based capital

requirements, it differs in several

respects from that of the banking

agencies. Nevertheless, the agencies

view the leverage and risk-based capital

requirements as minimum standards

and most institutions are expected to

operate with capital levels well above

the minimums, particularly those

institutions that are expanding or

experiencing unusual or high levels of

risk.

The banking agencies, under the

auspices of the Federal Financial

Institutions Examination Council

(FFIEC), have developed uniform

Reports of Condition and Income (Call

Reports) for all commercial banks and

FDIC-supervised savings banks. The

reporting standards followed by the

banking agencies through December 31,

1996, have been substantially consistent

with generally accepted accounting

principles (GAAP). In the limited

number of cases where the bank Call

Report standards differed from (GAAP),

the regulatory reporting requirements

were intended to be more conservative

than GAAP. The OTS requires each

savings association to file the Thrift

Financial Report (TFR), the reporting

standards for which are consistent with

GAAP. Thus, the reporting standards

applicable to the bank Call Report have

differed in some respect from the

reporting standards applicable to the

TFR.

On November 3, 1995, the FFIEC

announced that it had approved the

adoption of GAAP as the reporting basis

for the balance sheet, income statement,

and related schedules in the Call Report,

effective with the March 31, 1997,

report date. On December 31, 1996, the

FFIEC notified banks about the Call

Report revisions for 1997, including the

previously announced move to GAAP.

Adopting GAAP as the reporting basis

for recognition and measurement

purposes in the basic schedules of the

Call Report was designed to eliminate

existing differences between bank

regulatory reporting standards and

GAAP, thereby producing greater

consistency in the information collected

in bank Call Reports and general

purpose financial statements and

reducing regulatory burden. In addition,

the move to GAAP for Call Report

purposes in 1997 should for the most

part eliminate the differences in

accounting standards among the

agencies.

Section 303 of the Riegle Community

Development and Regulatory

Improvement Act (RCDRIA) of 1994 (12

U.S.C. 4803) requires the banking

agencies and the OTS to conduct a

systematic review of the regulations and

written policies in order to improve

efficiency, reduce unnecessary costs,

and eliminate inconsistencies. It also

directs the four agencies to work jointly

to make uniform all regulations and

guidelines implementing common

statutory or supervisory policies. The

results of these efforts must be

‘‘consistent with the principles of safety

and soundness, statutory law and

policy, and the public interest.’’ The

four agencies’ efforts to eliminate

existing differences among their

regulatory capital standards as part of

the Section 303 review are discussed in

the following section.

B. Differences in Capital Standards

Among the Federal Banking and Thrift

Agencies

B.1. Minimum Leverage Capital

The banking agencies have

established leverage capital standards

based upon the definition of tier 1 (or

core) capital contained in their riskbased capital standards. These

standards require the most highly-rated

banks (i.e., those with a composite

rating of ‘‘1’’ under the Uniform

Financial Institutions Rating System) to

maintain a minimum leverage capital

ratio of at least 3 percent if they are not

anticipating or experiencing any

significant growth and meet certain
Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices 62311

other conditions. All other banks must

maintain a minimum leverage capital

ratio that is at least 100 to 200 basis

points above this minimum (i.e., an

absolute minimum leverage ration of not

less than 4 percent).

The OTS has a 3 percent core capital

and a 1.5 percent tangible capital

leverage requirement for savings

associations. Consistent with the

requirements of the Financial

Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA), the

OTS has proposed revisions to its

leverage standards for savings

associations so that its minimum

leverage standard will be at least as

stringent as the revised leverage

standard that the OCC applies to

national banks. However, from a

practical standpoint, the 4 percent

leverage requirement to be ‘‘adequately

capitalized’’ under the OTS’ Prompt

Correction Action rule is the controlling

standard for savings associations.

As a result of the Section 303 review

of the four agencies’ regulatory capital

standards, the agencies are considering

adopting a uniform leverage

requirement that would subject

institutions rated a composite 1 under

the Uniform Financial Institutions

Rating System to a minimum 3 percent

leverage ratio and all other institutions

to a minimum 4 percent leverage ratio.

This change would simplify and

streamline the banking agencies’

leverage rules and would make all four

agencies’ rules in this area uniform. On

February 4, 1997, the FDIC Board of

Directors approved the publication for

public comment of a proposed

amendment to the FDIC’s leverage

capital standards that would implement

this change. This proposal is to be

published jointly with the other

agencies.

B.2. Interest Rate Risk

Section 305 of the Federal Deposit

Insurance Corporation Improvement Act

of 1991 (FDICIA) mandates that the

agencies’ risk-based capital standards

take adequate account of interest rate

risk. The banking agencies requested

comment in August 1992 and

September 1993 on proposals to

incorporate interest rate risk into their

risk-based capital standards. In August

1995, each of the banking agencies

amended its capital standards to

specifically include an assessment of a

bank’s interest rate risk, as measured by

its exposure to declines in the economic

value of its capital due to changes in

interest rates, in the evaluation of bank

capital adequacy. At the same time, the

banking agencies issued a proposed

joint policy statement describing the

process the agencies would use to

measure and assess the exposer of the

economic value of a bank’s capital. After

considering the comments on the

proposed policy statement, the banking

agencies issued a Joint Agency Policy

Statement on Interest Rate Risk in June

1996 which provides guidance on sound

practices for managing interest rate risk.

This policy statement does not establish

a standardized measure of interest rate

risk nor does it create an explicit capital

charge for interest create risk. Instead,

the policy statement identifies the

standards upon which the agencies will

evaluate the adequacy and effectiveness

of a bank’s interest rate risk

management.

In 1993, the OTS adopted a final rule

which adds an interest rate risk

component to its risk-based capital

standards. Under this rule, savings

associations with a greater than normal

interest rate exposure must take a

deduction from the total capital

available to meet their risk-based capital

requirement. The deduction is equal to

one half of the difference between the

institution’s actual measured exposure

and the normal level of exposure. The

OTS has partially implemented this rule

by formalizing the review of interest rate

risk; however, no deductions from

capital are being made. As described

above, the approach adopted by the

banking agencies differs from that of the

OTS.

B.3. Subsidiaries

The banking agencies generally

consolidate all significant majorityowned subsidiaries of the parent

organization for regulatory capital

purposes. The purpose of this practice

is to assure that capital requirements are

related to all of the risks to which the

bank ins exposed. For subsidiaries

which are not consolidated on a linefor-line basis, their balance sheets may

be consolidated on a pro-rata basis, bank

investments in such subsidiaries may be

deducted entirely form capital, or the

investments may be risk-weighted at

100 percent, depending upon the

circumstances. These options for

handling subsidiaries for purposes of

determining the capital adequacy of the

parent organization provide the banking

agencies with the flexibility necessary to

ensure that institutions maintain capital

levels that are commensurate with the

actual risks involved.

Under OTS capital guidelines, a

distinction, mandated by FIRREA, is

drawn between subsidiaries engaged in

activities that are permissible for

national banks and subsidiaries engaged

in ‘‘impermissible’’ activies for national

banks. For regulatory capital purposes,

subsidiaries of savings associations that

engage only in permissible activities are

consolidated on a line-for-line basis, if

majority-owned, and on a pro rata basis,

if ownership is between 5 percent and

50 percent. As a general rule,

investments in, and loans to,

subsidiaries that engage in

impermissible activities are deducted

when determing the capital adequacy of

the parent. However, for subsidiaries

which were engaged in impermissible

activities prior to April 12, 1989,

investments in, and loans to, such

subsidiaries that were outstanding as of

that date were grandfathered and were

phased out of capital over a five-year

transition period that expired on July 1,

1994. During this transition period,

investments in subsidiaries engaged in

impermissible activities which had not

been phased out of capital were

consolidated on a pro rata basis. The

phase-out provisions were amended by

the Housing and Community

Development Act of 1992 with respect

to impermissible and activities. The

OTS was permitted to extend the

transition period until July 1, 1996, on

a case-by-case basis if certain conditions

were met.

B.4. Intangible Assets

The banking agencies’ rules permit

purchased credit card relationships and

mortgage servicing rights to count

toward capital requirements, subject to

certain limits. Both forms of intangible

assets are in the aggregate limited to 50

percent of Tier 1 capital. In addition,

purchased credit card relationships

alone are restricted to no more than 25

percent of an institution’s Tier 1 capital.

Any mortgage servicing rights and

purchased credit card relationships that

exceed these limits, as well as all other

intangible assets such as goodwill and

core deposit intangibles, are deducted

from capital and assets in calculating an

institution’s Tier 1 capital.

In February 1994, the OTS issued a

final rule making its capital treatment of

intangible assets generally consistent

with the banking agencies’ rules.

However, the OTS rule grandfathers

preexisting core deposit intangibles up

to 25 percent of core capital and all

purchased mortgage servicing rights

acquired before February 1990.

B.5. Capital Requirements for Recourse

Arrangements

B.5.a. Leverage Capital

Requirements—Through December 31,

1996, the banking agencies required full

leverage capital charges on most assets

sold with recourse, even when the

recourse is limited. This included

transactions where the recourse arises
62312 Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices

because the seller, as servicer, must

absorb credit losses on the assets being

serviced. Two exceptions to this general

rule pertained to certain pools of first

lien one-to-four family residential

mortgages and to certain agricultural

mortgage loans. As required by Section

208 of the RCDRIA, an additional

exception took effect in 1995 for small

business loans and leases sold with

recourse by ‘‘qualified insured

depository institutions.’’ Banks had to

maintain leverage capital against most

assets sold with recourse because the

banking agencies’ regulatory reporting

rules that were in effect through

December 31, 1996, generally did not

permit assets sold with recourse to be

removed from a bank’s balance sheet

(see ‘‘Sales of Assets With Recourse’’ in

Section C.1. below for further details).

As a result, such assets continued to be

included in the asset base which was

used to calculate a bank’s leverage

capital ratio.

Because the regulatory reporting rules

for thrifts enable them to remove assets

sold with recourse from their balance

sheets when such transactions qualify as

sales under GAAP, the OTS capital rules

do not require thrifts to hold leverage

capital against such assets.

As a result of the adoption of GAAP

as the reporting basis for bank Call

Reports in 1997, banks will no longer be

precluded from removing assets

transferred with recourse from their

balance sheets if the transfers qualify for

sale treatment under GAAP. Thus, this

capital difference disappears in 1997.

B.5.b. Low Level Recourse

Transactions—The banking agencies

and the OTS generally require a full

risk-based capital charge against assets

sold with recourse. However, in the case

of assets sold with limited recourse, the

OTS has limited the capital charge to

the lesser of the amount of the recourse

or the actual amount of capital that

would otherwise be required against

that asset, i.e., the full effective riskbased capital charge. This is known as

the ‘‘low level recourse’’ rule.

The banking agencies proposed in

May 1994 to adopt the low level

recourse rule that the OTS already had

in place. Such action was mandated

four months later by Section 350 of the

RCDRIA. The FDIC adopted the low

level recourse rule in March 1995, and

the other banking agencies have taken

similar action. Hence, this difference in

capital standards has been eliminated.

B.5.c. Senior-Subordinated

Structures—Some securitized asset

arrangements involve the creation of

senior and subordinated classes of

securities. When a bank originates such

a transaction and retains the

subordinated interest, the banking

agencies require that capital be

maintained against the entire amount of

the asset pool. However, when a bank

acquires a subordinated interest in a

pool of assets that it did not own, the

banking agencies assign the investment

in the subordinated security to the 100

percent risk weight category.

In general, the OTS requires a thrift

that holds the subordinated interest in

a senior-subordinated structure to

maintain capital against the entire

amount of the underlying asset pool

regardless of whether the subordinated

interest has been retained or has been

purchased.

In May 1994, the banking agencies

proposed to require banking

organizations that purchase

subordinated interests which absorb the

first dollars of losses from the

underlying assets to hold capital against

the subordinated interest plus all more

senior interests. This proposal was part

of a larger proposal issued jointly by the

four agencies to address the risk-based

capital treatment of recourse and direct

credit substitutes (i.e., guarantees on a

third party’s assets). The four agencies

have considered the comments on the

entire proposal and have been

developing a revised proposal on

recourse and direct credit substitutes

that will also encompass the risk-based

capital treatment of asset securitization

transactions.

B.5.d. Recourse Servicing—The right

to service loans and other assets may be

retained when the assets are sold. This

right also may be acquired from another

entity. Regardless of whether servicing

rights are retained or acquired, recourse

is present whenever the servicer must

absorb credit losses on the assets being

serviced. The banking agencies and the

OTS require risk-based capital to be

maintained against the full amount of

assets upon which a selling institution,

as servicer, must absorb credit losses.

Additionally, the OTS applies a capital

charge to the full amount of assets being

serviced by a thrift that has purchased

the servicing from another party and is

required to absorb credit losses on the

assets being serviced.

The agencies’ aforementioned May

1994 proposal also would require

banking organizations that purchase

certain loan servicing rights which

provide loss protection to the owners of

the loans serviced to hold capital

against those loans. The treatment of

purchased recourse servicing is also

being addressed in the revised proposal

on recourse and direct credit substitutes

that the agencies are developing.

B.6. Collateralized Transactions

The FRB and the OCC have lowered

from 20 percent to zero percent the risk

weight accorded collaterialized claims

for which a positive margin of

protection is maintained on a daily basis

by cash on deposit in the institution or

by securities issued or guaranteed by the

U.S. Government or the central

governments of countries that are

members of the Organization of

Economic Cooperation and

Development (OECD).

The FDIC and the OTS still assign a

20 percent risk weight to claims

collateralized by cash on deposit in the

institution or by securities issued or

guaranteed by the U.S. Government or

OECD central governments.

As part of their Section 303 review of

capital standards, the banking and thrift

agencies issued a joint proposal in

August 1996 that would permit

collateralized claims that meet criteria

that are uniform among all four agencies

to be eligible for a zero percent risk

weight. In general, this proposal would

allow less capital to be held by

institutions supervised by the FDIC and

the OTS for transactions collateralized

by cash or U.S. or OECD government

securities. The proposal would

eliminate the differences among the

agencies regarding the capital treatment

of collateralized transactions.

B.7. Limitation on Subordinated Debt

and Limited-Life Preferred Stock

Consistent with the Basle Accord, the

banking agencies limit the amount of

subordinated debt and intermediateterm preferred stock that may be treated

as part of Tier 2 capital to an amount

not to exceed 50 percent of Tier 1

capital. In addition, all maturing capital

instruments must be discounted by 20

percent in each of the last five years

before maturity. The banking agencies

adopted this approach in order to

emphasize equity versus debt in the

assessment of capital adequacy.

The OTS has no limitation on the

ratio of maturing capital instruments as

part of Tier 2 capital. Also, for all

maturing instruments issued on or after

November 7, 1989 (those issued before

are grandfathered with respect to the

discounting requirement), thrifts have

the option of using either (a) the

discounting approach used by the

banking regulators, or (b) an approach

which allows for the full inclusion of all

such instruments provided that the

amount maturing in any one year does

not exceed 20 percent of the thrift’s total

capital.
Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices 62313

B.8. Presold Residential Construction

Loans

The four agencies assign a 50 percent

risk weight to loans that a builder has

obtained to finance the construction of

one-to-four family residential

properties. These properties must be

presold, and the lending relationships

must meet certain other criteria. The

OTS and OCC rules indicate that the

property must be presold before the

construction loan is made in order for

the loan to qualify for the 50 percent

risk weight. The FDIC and FRB permit

loans to builders for residential

construction to qualify for the 50

percent risk weight once the property is

presold, even if that event occurs after

the construction loan has been made.

As a result of the Section 303 review

of the four agencies’ regulatory capital

standards, the OTS and OCC are

considering adopting the treatment of

presold residential construction loans

followed by the FDIC and the FRB,

thereby making the agencies’ rules in

this area uniform. This would not

require an amendment of the FDIC’s

risk-based capital standards.

B.9. Nonresidential Construction and

Land Loans

The banking agencies assign loans for

nonresidential real estate development

and construction purposes to the 100

percent risk weight category. The OTS

generally assigns these loans to the same

100 percent risk category. However, if

the amount of the loan exceeds 80

percent of the fair value of the property,

the excess portion is deducted from

capital.

B.10. Privately-Issued Mortgage-Backed

Securities

The banking agencies, in general,

place privately-issued mortgage-backed

securities in either the 50 percent or 100

percent risk-weight category, depending

upon the appropriate risk category of

the underlying assets. However,

privately-issued mortgage-backed

securities, if collateralized by

government agency or governmentsponsored agency securities, are

generally assigned to the 20 percent risk

weight category.

The OTS assigns privately-issued

high-quality mortgage-related securities

to the 20 percent risk weight category.

These are, generally, privately-issued

mortgage-backed securities with AA or

better investment ratings.

B.11. Other Mortgage-Backed Securities

The banking agencies and the OTS

automatically assign to the 100 percent

risk weight category certain mortgagebacked securities, including interestonly strips, principal-only strips, and

residuals. However, once the OTS’

interest rate risk amendments to its riskbased capital standards take effect,

stripped mortgage-backed securities will

be reassigned to the 20 percent or 50

percent risk weight category, depending

upon these securities’ characteristics.

Residuals will remain in the 100 percent

risk weight category.

B.12. Junior Liens on One-to-Four

Family Residential Properties

In some cases, a bank may make two

loans on a single residential property,

one secured by a first lien, the other by

a second lien. In this situation, the FRB

and the OTS view both loans as a single

extension of credit secured by a first

lien and assign the combined loan

amount a 50 percent risk weight if this

amount represents a prudent loan-tovalue ratio. If the combined amount

exceeds a prudent loan-to-value ratio,

the loans are assigned to the 100 percent

risk weight category. The FDIC also

combines the first and second liens to

determine the appropriateness of the

loan-to-value ratio, but it applies the

risk weights differently than the FRB

and the OTS. If the combined loan

amount represents a prudent loan-tovalue ratio, the FDIC risk weights the

first lien at 50 percent and the second

lien at 100 percent; otherwise, both

liens are risk-weighted at 100 percent.

This combining of first and second liens

is intended to avoid possible

circumvention of the capital

requirement and to capture the risks

associated with the combined loans.

The OCC treats all first and second

liens separately. It assigns the loan

secured by the first lien to the 50

percent risk weight category and the

loan secured by the second lien to the

100 percent risk weight category.

As a result of the Section 303 review

of the four agencies’ regulatory capital

standards, the agencies are considering

adopting the OCC’s treatment of junior

liens on one-to-four family residential

properties in order to eliminate this

difference among the agencies’ riskbased capital guidelines. On February 4,

1997, the FDIC Board of Directors

approved the publication for public

comment of a proposed amendment to

the FDIC’S guidelines that would treat

first and junior liens separately with

qualifying first liens risk-weighted at 50

percent and all junior liens riskweighted at 100 percent. This

amendment, which is to be published

jointly with the other agencies, will

simplify the risk-based capital standards

and treat all junior liens consistently.

B.13. Mutual Funds

Rather than looking to a mutual

fund’s actual holdings, the banking

agencies assign all of a bank’s holdings

in a mutual fund to the risk category

appropriate to the highest risk asset that

a particular mutual fund is permitted to

hold under its operating rules. Thus, the

banking agencies take into account the

maximum degree of risk to which a

bank may be exposed when investing in

a mutual fund because the composition

and risk characteristics of its future

holdings cannot be known in advance.

In no case, however, may a risk-weight

of less than 20 percent be assigned to an

investment in a mutual fund.

The OTS applies a capital charge

appropriate to the riskiest asset that a

mutual fund is actually holding at a

particular time, but not less than 20

percent. In addition, both the OTS and

the OCC guidelines also permit, on a

case-by-case basis, investments in

mutual funds to be allocated on a pro

rata basis. However, the OTS and the

OCC apply the pro rata allocation

differently. While the OTS applies the

allocation based on the actual holdings

of the mutual fund, the OCC applies it

based on the highest amount of holdings

the fund is permitted to hold as set forth

in its prospectus.

The four agencies’ Section 303 review

of their regulatory capital standards has

led them to consider adopting the OCC’s

pro rata allocation alternative for risk

weighting investments in mutual funds,

thereby making their risk-based capital

rules in this area uniform. On February

4, 1997, the FDIC Board of Directors

approved the publication for public

comment of a proposed amendment to

the FDIC’s risk-based capital standards

that would allow banks to apply a pro

rata allocation of risk weights to a

mutual fund based on the limits set

forth in the prospectus. This proposal is

to be published jointly with the other

agencies.

B.14. ‘‘Covered Assets’’

The banking agencies 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.

B.15. Pledged Deposits and

Nonwithdrawable Accounts

Instruments such as pledged deposits,

nonwithdrawable accounts, Income

Capital Certificates, and Mutal Capital

Certificates do not exist in the banking

industry and are not addressed in the

capital guidelines of the three banking

agencies.
62314 Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices

The capital guidelines of the OTS

permit savings associations to include

pledged deposits and nonwithdrawable

accounts that meet OTS criteria, Income

Capital Certificates, and Mutal Capital

Certificates in capital.

B.16. Agricultural Loan Loss

Amortization

In the computation of regulatory

capital, those banks accepted into the

agricultural loan loss amortization

program pursuant to Title VIII of the

Competitive Equality Banking Act of

1987 may defer and amortize certain

losses related to agricultural lending

that were incurred on or before

December 31, 1991. These losses must

be amortized over seven years. The

unamortized portion of these losses is

included as an element of Tier 2 capital

under the banking agencies’ risk-based

capital standards.

Thrifts were not eligible to participate

in the agricultural loan loss

amortization program established by

this statute.

C. Differences in Reporting Standards

Among the Federal Banking and Thrift

Agencies

C.1. Sales of Assets with Recourse

In accordance with FASB Statement

No. 77, a transfer of receivables with

recourse before January 1, 1997, is

recognized as a sale if: (1) the transferor

surrenders control of the future

economic benefits, (2) the transferor’s

obligation under the recourse provisions

can be reasonably estimated, and (3) the

transferee cannot require repurchase of

the receivables except pursuant to the

recourse provisions.

Through December 31, 1996, the

practice of the banking agencies

generally has been to allow banks to

report transfers of receivables as sales

only when the transferring institution:

(1) retains no risk of loss from the assets

transferred and (2) has no obligation for

the payment of principal or interest on

the assets transferred. As a result, except

for the types of transfers noted below,

transfers of assets with recourse could

not normally be reported as sales on the

Call Report. However, this general rule

did not apply to the transfer of first lien

one-to-four family residential mortgage

loans and agricultural mortgage loans

under one of the government programs

(Government National Mortgage

Association, Federal National Mortgage

Association, Federal Home Loan

Mortgage Corporation, and Federal

Agricultural Mortgage Corporation).

Transfers of mortgages under these

programs were treated as sales for Call

Report purposes, provided the transfers

would be reported as sales under GAAP.

Furthermore, private transfers of first

lien one-to-four family residential

mortgages also were reported as sales if

the transferring institution retained only

an insignificant risk of loss on the assets

transferred. However, under the riskbased capital framework, transfers of

mortgage loans with recourse under the

government programs or in private

transfers that qualify as sales for Call

Report purposes are viewed as offbalance sheet items that are assigned a

100 percent credit conversion factor.

Thus, for risk-based capital purposes,

capital is generally required to be held

for the full amount outstanding of

mortgages sold with recourse in such

transactions, subject to the low-level

recourse rule discussed earlier in this

report.

Through year-end 1996, the OTS

accounting policy has been to follow

FASB Statement No. 77. However, in

the calculation of risk-based capital

under the OTS guidelines, assets sold

with recourse that have been removed

from the balance sheet in accordance

with Statement No. 77 are converted at

100 percent and also are subject to the

low-level recourse rule. This effectively

negates that sale treatment recognized

on a GAAP basis for risk-based capital

purposes, but not for leverage capital

purposes.

Another exception to the banking

agencies’ general rule for reporting

transfers with recourse applies to sales

of small business loans and leases with

recourse by ‘‘qualified insured

depository institutions.’’ Section 208 of

the RCDRIA specifies that the regulatory

reporting requirements applicable to

these recourse transactions must be

consistent with GAAP. Section 208 also

requires the banking agencies and the

OTS to adopt more favorable risk-based

capital requirements for these recourse

exposures than those described above.

During August and September 1995, the

FRB published a final rule and the

FDIC, the OCC, and the OTS published

interim rules (with requests for

comment) which implemented Section

208 in a uniform manner.

C.2. Futures and Forward Contracts

Through December 31, 1996, the

banking agencies have not, as a general

rule, permitted the deferral of losses on

futures and forward contracts used for

hedging purposes. All changes in

market value of futures and forward

contracts are reported in current period

income. The banking agencies adopted

this reporting standard prior to the

issuance of FASB Statement No. 80,

which permits hedge or deferral

accounting under certain circumstances.

Hedge accounting in accordance with

FASB Statement No. 80 is permitted by

the banking agencies only for futures

and forward contracts used in mortgage

banking operations.

The OTS practice is to follow GAAP

for futures and forward contracts. In

accordance with FASB Statement No.

80, when hedging criteria are satisfied,

the accounting for a contract is related

to the accounting for the hedged item.

Changes in the market value of the

contract are recognized in income when

the effects of related changes in the

price or interest rate of the hedged item

are recognized. Such reporting can

result in the deferral of losses which are

reflected as basis adjustments to assets

and liabilities on the balance sheet.

C.3. Excess Servicing Fees

As a general rule, through December

31, 1996, the banking agencies did not

follow GAAP for excess servicing fees,

but required a more conservative

treatment. For loan sales that occurred

prior to 1997, excess servicing arose

when loans were sold with servicing

retained and the stated servicing fee rate

exceeded a normal servicing fee rate.

Except for sales of pools of first lien

one-to-four family residential mortgages

for which the banking agencies’

approach was consistent with the

provisions of FASB Statement No. 65

that were in effect through year-end

1996, excess servicing fee income in

banks was to be reported as realized

over the life of the transferred asset.

In contrast, for loan sales that

occurred prior to 1997, the OTS allowed

the present value of the future excess

servicing fee to be treated as an

adjustment to the sales price for

purposes of recognizing gain or loss on

the sale. This approach was consistent

with the then applicable provisions of

FASB Statement No. 65.

C.4. Offsetting of Assets and Liabilities

FASB Interpretation No. 39,

‘‘Offsetting of Amounts Related to

Certain Contracts,’’ became effective in

1994. Interpretation No. 39 interprets

the longstanding accounting principle

that ‘‘the offsetting of assets and

liabilities in the balance sheet is

improper except where a right of setoff

exists.’’ Under Interpretation No. 39,

four conditions must be met in order to

demonstrate that a right of setoff exists.

Then, a debtor with ‘‘a valid right of

setoff may offset the related asset and

liability and report the net amount.’’

The banking agencies allow banks to

apply Interpretation No. 39 for Call

Report purposes solely as it relates to

on-balance sheet amounts associated

with off-balance sheet conditional and
Federal Register / Vol. 62, No. 225 / Friday, November 21, 1997 / Notices 62315

exchange contracts (e.g., forwards,

interest rate swaps, and options). Under

the Call Report instructions in effect

through December 31, 1996, the netting

of other assets and liabilities is not

permitted unless specifically required

by the instructions.

The OTS practice has been to follow

GAAP as it relates to offsetting in the

balance sheet.

C.5. Push Down Accounting

Push down accounting is the

establishment of a new accounting basis

for a depository institution in its

separate financial statements as a result

of a substantive change in control.

Under push down accounting, when a

depository institution is acquired, yet

retains its separate corporate existence,

the assets and liabilities of the acquired

institution are restated to their fair

values as of the acquisition date. These

values, including any goodwill, are

reflected in the separate financial

statements of the acquired institution as

well as in any consolidated financial

statements of the institution’s parent.

The banking agencies require push

down accounting when there is at least

a 95 percent change in ownership. This

approach is generally consistent with

accounting interpretations issued by the

staff of the Securities and Exchange

Commission.

The OTS requires push down

accounting when there is at least a 90

percent change in ownership.

C.6. Negative Goodwill

Under Accounting Principles Board

Opinion No. 16, ‘‘Business

Combinations,’’ negative goodwill arises

when the fair value of the net assets

acquired in a purchase business

combination exceeds the cost of the

acquisition and a portion of this excess

remains after the values otherwise

assignable to the acquired noncurrent

assets have been reduced to a zero

value.

The banking agencies require negative

goodwill to be reported as a liability on

the balance sheet and do not permit it

to be netted against goodwill that is

included as an asset. This ensures that

all goodwill assets are deducted in

regulatory capital calculations

consistent with the internationally

agreed-upon Basle Accord.

The OTS permits negative goodwill to

offset goodwill assets on the balance

sheet.

C.7. In-Substance Defeasance of Debt

In-substance defeasance involves a

debtor irrevocably placing risk-free

monetary assets in a trust established

solely for satisfying the debt. According

to FASB Statement No. 76, the liability

is considered extinguished for financial

reporting purposes if the possibility that

the debtor would be required to make

further payments on the debt, beyond

the funds placed in the trust, is remote.

With defeasance, the debt is netted

against the assets placed in the trust, a

gain or loss results in the current period,

and both the assets placed in the trust

and the liability are removed from the

balance sheet.

For Call Report purposes through

December 31, 1996, the banking

agencies did not permit banks to report

the defeasance of their liabilities in

accordance with Statement No. 76.

Instead, banks were to continue

reporting any defeased debt as a liability

and the securities contributed to the

trust as assets. No netting was

permitted, nor was any recognition of

gains or losses on the transaction

allowed. The banking agencies did not

adopt Statement No. 76 because of

uncertainty regarding the irrevocability

of trusts established for defeasance

purposes. Furthermore, defeasance

would not relieve the bank of its

contractual obligation to pay depositors

or other creditors. In June 1996, the

FASB issued a new accounting standard

(FASB Statement No. 125) that

supersedes Statement No. 76 for

defeasance transactions occurring after

1996, thereby bringing GAAP in line

with the Call Report treatment for these

transactions.

The OTS practice has been to follow

GAAP for defeasance transactions.

Dated at Washington, D.C., this 17th day of

November, 1997.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 97–30560 Filed 11–20–97; 8:45 am]

BILLING CODE 6714–01–M

FEDERAL LABOR RELATIONS

AUTHORITY

Notice of Opportunity to Submit

Amicus Curiae Briefs in an Unfair

Labor Practice Proceeding Pending

Before the Federal Labor Relations

Authority; FLRA Case No. WA–CA–

40743

AGENCY: Federal Labor Relations

Authority.

ACTION: Notice of the opportunity to file

amicus curiae briefs in a case pending

before the Federal Labor Relations

Authority. In the subject case, the

Authority is determining whether

section 2(d) of Executive Order 12871

constitutes an agency election to bargain

on matters set forth in section 7106(b)(1)

of the Federal Service LaborManagement Relations Statute (5 U.S.C.

7106(b)(1)), and whether such an

election can be enforced in Authority

unfair labor practice and subsequent

court review proceedings.

SUMMARY: The Federal Labor Relations

Authority provides an opportunity for

all interested persons to file briefs as

amici curiae on a significant issue

arising in a case pending before the

Authority. The issue is common to a

number of other cases also pending

before the Authority. The Authority is

considering the cases pursuant to its

responsibilities under the Federal

Service Labor-Management Relations

Statute, 5 U.S.C. 7101–7135 (1994 &

Supp. II 1996) (Statute). The issue

concerns an agency’s obligation to

negotiate on subjects set forth in section

7106(b)(1) of the Statute in light of the

provisions of sections 2(d) and 3 of

Executive Order 12871. Section 2(d) of

Executive Order 12871 provides in

relevant part that agency heads subject

to Chapter 71 of title 5, United States

Code shall ‘‘negotiate over the subjects

set forth in 5 U.S.C. 7106(b)(1), and

instruct subordinate officials to do the

same[.]’’ Section 3 of Executive Order

12871 provides in relevant part that it

‘‘is not intended to, and does not, create

any right to administrative or judicial

review, or any other right, substantive or

procedural, enforceable by a party

against the United States, [or] its

agencies * * * .’’

DATES: Briefs submitted in response to

this notice will be considered if

received by mail or personal delivery in

the Authority’s Case Control Office by 5

p.m. on Thursday, December 18, 1997.

Placing submissions in the mail by this

deadline will not be sufficient.

Extensions of time to submit briefs will

not be granted.

ADDRESSES: Mail or deliver briefs to

Peter Constantine, Director, Case

Control Office, Federal Labor Relations

Authority, 607 14th Street, NW., Room

415, Washington, D.C. 20424–0001.

FOR FURTHER INFORMATION CONTACT:

Peter Constantine, Director, Case

Control Office, Federal Labor Relations

Authority, (202) 482–6540.

SUPPLEMENTARY INFORMATION: The case

presenting the issue on which amicus

briefs are being solicited is before the

Authority on exceptions to a

recommended decision and order of an

Administrative Law Judge (Judge)

resolving unfair labor practice

allegations. The following summary is

offered.