[Federal Register Volume 62, Number 225 (Friday, November 21, 1997)]
[Notices]
[Pages 62310-62315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30560]


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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.

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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 risk-based 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

[[Page 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 
majority-owned 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 line-for-
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

[[Page 62312]]

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 risk-based capital charge. This is known as the ``low level 
recourse'' rule.
    The banking agencies proposed in May 1994 to adopt the low level 
recourse rule that 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 intermediate-term preferred stock that 
may be treated as part of Tier 2 capital to an amount not to exceed 50 
percent of Tier 1 capital. In addition, all maturing capital 
instruments must be discounted by 20 percent 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.

[[Page 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 government-
sponsored agency securities, are generally assigned to the 20 percent 
risk weight category.
    The OTS assigns privately-issued high-quality mortgage-related 
securities to the 20 percent risk weight category. These are, 
generally, privately-issued mortgage-backed securities with AA or 
better investment ratings.

B.11. Other Mortgage-Backed Securities

    The banking agencies and the OTS automatically assign to the 100 
percent risk weight category certain mortgage-backed securities, 
including interest-only strips, principal-only strips, and residuals. 
However, once the OTS' interest rate risk amendments to its risk-based 
capital standards take effect, stripped mortgage-backed securities will 
be reassigned to the 20 percent or 50 percent risk weight category, 
depending upon these securities' characteristics. Residuals will remain 
in the 100 percent risk weight category.

B.12. Junior Liens on One-to-Four Family Residential Properties

    In some cases, a bank may make two loans on a single residential 
property, one 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-to-value 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-to-value 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' 
risk-based 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 risk-weighted 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.

[[Page 62314]]

    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 risk-based 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 off-balance 
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

[[Page 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