Federal Register / Vol. 60, No. 28 / Friday, February 10, 1995 / Rules and Regulations 7903

certifies that this rule will not have a

significant economic impact upon a

substantial number of small entities.

The amendments apply to all NRC and

Agreement State licensees. Because

these amendments reduce burden, they

are considered to have no adverse

economic impact on any large or small

entities.

Backfit Analysis

Because 10 CFR part 20 applies to all

NRC licensees, any changes to this part

must be evaluated to determine if these

changes constitute backfitting for reactor

licensees such that the provisions of 10

CFR 50.109 apply. The following

discussion addresses that evaluation.

The 10 CFR 50.109 definition of

‘‘Backfit’’ includes any modification of

the procedures required to operate a

facility resulting from an amended

provision in the Commission’s rules.

Because this rule will permit but not

require nuclear power reactor licensees

to modify their procedures regarding the

frequency of respiratory medical

examinations, the NRC staff believes

that the change does not constitute a

backfit. In addition, the effect of these

changes is to increase flexibility and

reduce the frequency at which medical

examinations for respiratory use are

required. It is estimated that this rule

change will save the nuclear power

industry and other NRC and State

licensees several million dollars per

year with no adverse impact on worker

health and safety.

Some minor changes in procedures or

license conditions will be necessary if a

more flexible frequency of examination

is adopted. However, the costs will be

offset by the savings in reduced

frequency of examination. Thus, the

NRC believes that the modifications are

not backfits. No comments were

received on this issue during the public

comment period for the proposed rule.

List of Subjects 10 CFR Part 20

Byproduct material, Criminal

penalties, Licensed material, Nuclear

materials, Nuclear power plants and

reactors, Occupational safety and

health, Packaging and containers,

Radiation protection, Reporting and

recordkeeping requirements, Source

material, Special nuclear material,

Waste treatment and disposal.

For the reasons set out in the

preamble and under the authority of the

Atomic Energy Act of 1954, as amended;

the Energy Reorganization Act of 1974,

as amended; and 5 U.S.C. 552 and 553;

the NRC is adopting the following

amendments to 10 CFR part 20.

PART 20—STANDARDS FOR

PROTECTION AGAINST RADIATION

1. The authority citation for part 20

continues to read as follows:

Authority: Secs. 53, 63, 65, 81, 103, 104,

161, 182, 186, 68 Stat. 930, 933, 935, 936,

937, 948, 953, 955, as amended, (42 U.S.C.

2073, 2093, 2095, 2111, 2133, 2134, 2201,

2232, 2236, 2282); sec. 201, as amended, 202,

206, 88 Stat. 1242, as amended, 1244, 1246

(42 U.S.C. 5841, 5842, 5846).

2. In § 20.1703, the introductory text

of paragraphs (a) and (a)(3) is restated

and paragraph (a)(3)(v) is revised to read

as follows:

§ 20.1703 Use of individual respiratory

protection equipment.

(a) If the licensee uses respiratory

protection equipment to limit intakes

pursuant to § 20.1702—

* * * * *

(3) The licensee shall implement and

maintain a respiratory protection

program that includes—

* * * * *

(v) Determination by a physician prior

to the initial fitting of respirators, and

either every 12 months thereafter or

periodically at a frequency determined

by a physician, that the individual user

is medically fit to use the respiratory

protection equipment.

* * * * *

Dated at Rockville, Maryland, this 1st day

of February 1995.

For the Nuclear Regulatory Commission.

James M. Taylor,

Executive Director for Operations.

[FR Doc. 95–3372 Filed 2–9–95; 8:45 am]

BILLING CODE 7590–01–P

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket No. 95–02]

RIN 1557–AB14

Capital Adequacy: Deferred Tax Assets

AGENCIES: Office of the Comptroller of

the Currency, Treasury.

ACTION: Final rule.

SUMMARY: The Office of the Comptroller

of the Currency (OCC) is amending its

capital adequacy rules with respect to

deferred tax assets. This final rule limits

the amount of certain deferred tax assets

that a bank may include in Tier 1 capital

for risk-based capital and leverage

capital purposes.

The OCC, in consultation with the

Board of Governors of the Federal

Reserve System (FRB), the Federal

Deposit Insurance Corporation (FDIC),

and the Office of the Thrift Supervision

(OTS) (banking agencies), developed

this final rule in response to the

Financial Accounting Standards Board’s

(FASB) issuance of Statement of

Financial Accounting Standards No.

109, ‘‘Accounting for Income Taxes’’

(FAS 109), in February 1992. The

banking agencies adopted the provisions

of FAS 109 for reporting in quarterly

Consolidated Reports of Condition and

Income (Call Reports) beginning January

1, 1993. This reporting change increased

the amount of net deferred tax assets

that a bank may record on its balance

sheet. This final rule will ensure that

national banks do not place excessive

reliance on deferred tax assets to satisfy

the minimum capital adequacy

requirements.

EFFECTIVE DATE: April 1, 1995.

FOR FURTHER INFORMATION CONTACT:

Thomas G. Rees, Professional

Accounting Fellow, Office of the Chief

National Bank Examiner, (202) 874–

5180; Eugene W. Green, Deputy Chief

Accountant, Office of the Chief National

Bank Examiner, (202) 874–5180; Roger

Tufts, Senior Economic Advisor, Office

of the Chief National Bank Examiner,

(202) 874–5070; Ronald Shimabukuro,

Senior Attorney, Legislative and

Regulatory Activities Division, (202)

874–5090, Office of the Comptroller of

the Currency, Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

Background

In February 1992, the FASB issued

FAS 109. FAS 109 provides guidance on

how to account for income taxes,

including deferred tax assets, and was

effective for fiscal years beginning on or

after December 15, 1992. FAS 109

generally allows a bank to report certain

deferred tax assets it could not

previously recognize, which has the

effect of increasing bank capital levels.

Consequently, the OCC and the other

banking agencies were concerned about

the impact of the change on the

financial institutions they regulate,

especially regarding their reported

capital levels.

FAS 109—Deferred tax assets are

assets that reflect, for financial reporting

purposes, the benefits of certain aspects

of tax laws and rules. Under FAS 109,

a bank reports deferred tax assets that

arise from: (1) Tax carryforwards, and

(2) deductible temporary differences.

Tax carryforwards are deductions or

credits that a bank cannot use for

current tax purposes, but may carry

forward to reduce taxable income or

income taxes payable in a future period
7904 Federal Register / Vol. 60, No. 28 / Friday, February 10, 1995 / Rules and Regulations

or periods. For example, when a bank’s

tax deductions exceed its tax revenues,

the result is a net operating loss. Such

losses may be used to recover taxes paid

in prior years (the carryback period) or

may be carried forward to reduce a

bank’s taxable income in a future

period. The situation is similar for some

tax credits that a bank cannot use in the

current tax period. The bank will realize

the benefit of deferred tax assets arising

from tax carryforwards if it generates

sufficient taxable income in the

permissible carryforward period.

Temporary differences arise when a

bank records financial events or

transactions in one period on the bank’s

books and recognizes them in another

period, or periods, on its tax return.

There are two types of temporary

differences—deductible and taxable.

Deductible temporary differences

reduce a bank’s future taxable income.

When a bank records an addition to its

allowance for loan and lease losses, it

records that amount as an expense on its

books. However, the bank may be

unable to take the tax deductions for

such losses until it charges off the loans

and realizes the losses. The chargeoffs

typically occur in subsequent periods.

Thus, a bank creates a deferred tax asset

when it adds an amount to the

allowance on the books, but charges it

off in a future period.

Taxable temporary differences

produce additional taxable income in

future periods. For example, a bank may

depreciate its bank building using an

accelerated depreciation method on its

tax return but may use a straight-line

method when recording depreciation on

its books. As a result, the bank’s tax

depreciation will be less than its book

depreciation in certain future periods.

This taxable temporary difference will

cause the bank to have higher taxable

income in those future periods.

A bank may only realize deferred tax

assets arising from deductible temporary

differences by: (1) Recovering taxes paid

in prior years, (2) offsetting taxable

temporary differences, or (3) earning

sufficient future taxable income.

Consequently, if deferred tax assets arise

from deductible temporary differences

and exceed the amount of recoverable

taxes paid in prior years plus offsetting

taxable temporary differences, the bank

will only realize such deferred tax assets

if it generates sufficient taxable income

in the carryforward period. Hereafter,

these deferred tax assets, and deferred

tax assets arising from tax

carryforwards, will be called ‘‘deferred

tax assets that are dependent upon

future taxable income.’’

FAS 109 allows a bank to record

deferred tax assets that are dependent

upon future taxable income. However,

the bank must establish a reserve to

adjust the recorded deferred tax asset to

the amount that it is more likely than

not (i.e., likelihood of more than 50

percent) to realize. A bank assesses the

probability of realization based on its

prospects of earning taxable income in

the future. The statutory carryforward

period of 15 years provides a limit on

the amount of the assessment.

Supervisory Concerns Regarding

Deferred Tax Assets

Before adoption of FAS 109,

regulatory policy generally limited the

recognition of net deferred tax assets to

the bank’s potential tax carryback

amount. In other words, a bank could

only record an asset to the extent it

potentially could file for a tax refund if

all book and tax timing differences

reversed at the report date.

Because FAS 109 allows a bank to

record a greater amount of deferred tax

assets than under previous policy, the

OCC and the other banking agencies

were concerned about the effect of the

accounting standard on bank capital

adequacy. Specifically, the OCC was

concerned that FAS 109 would allow

banks to include excessive amounts of

deferred tax assets that are dependent

upon future taxable income as part of

regulatory capital.

Whether a bank can realize such

assets depends on whether it generates

enough taxable income during the

carryforward period. As new products

evolve and market conditions change, a

bank’s current financial condition and

outlook for future income can change

rapidly. Such changes make predicting

future taxable income more difficult.

For many banks, including sound and

well-managed banks, the judgment

about the likelihood that the bank will

realize deferred tax assets that are

dependent upon future taxable income

is highly subjective. Inaccurate

estimates could cause a bank to

overstate its deferred tax assets and its

capital position. Therefore, allowing

banks to recognize significant amounts

of assets based on subjective estimates

could pose a risk to the deposit

insurance funds.

Additionally, the OCC is concerned

about the effect of these changes on a

bank that is experiencing financial

difficulty. Such banks often have net

operating loss carryforwards. As a

result, these troubled institutions

potentially could record deferred tax

assets under FAS 109, even though their

realistic prospects for generating

sufficient future taxable income are

uncertain. As a troubled bank’s

condition deteriorates, it is less likely to

realize the financial benefit of deferred

tax assets that are dependent upon

future taxable income. In such

instances, FAS 109 generally requires

the bank to reduce its recorded net

deferred tax asset by increasing the

asset’s valuation allowance. The result

is a charge to earnings that will reduce

the bank’s regulatory capital at precisely

the time it needs capital the most.

To address these concerns, on August

3, 1992, under the auspices of the

Federal Financial Institutions

Examination Council (FFIEC), the OCC,

along with the other banking agencies

requested public comment (57 FR

34135) on alternative approaches for the

regulatory capital and reporting

treatment of deferred tax assets. Based

on the comments received, the FFIEC

agreed to adopt FAS 109 for regulatory

reporting effective January 1, 1993.

After discussing the comments and

suggestions received, the OCC and the

other banking agencies remained

concerned about the impact of deferred

tax assets that are dependent upon

future taxable income on regulatory

capital. The OCC believes that many

financially sound banks will have net

deferred tax assets arising from

deductible temporary differences that

exceed their taxable temporary

differences and the bank’s carryback

potential. Since many of these deferred

tax assets will be realized, the OCC

agreed that banks should recognize

some amount of these assets in

regulatory capital. The OCC and the

other banking agencies concluded they

could adequately address their

supervisory concerns by placing a limit

on the amount of such assets that a bank

could include in regulatory capital. This

approach maintained consistency

between generally accepted accounting

principles (GAAP) and regulatory

reporting.

Proposed Rule—In December 1993,

the OCC issued a proposed rule to

amend its capital adequacy rules with

respect to deferred tax assets (58 FR

68065, December 23, 1993). The FRB (58

FR 8007, February 11, 1993), and the

FDIC ( 58 FR 26701, May 5, 1993)

published similar proposed rules.

The OCC proposed to limit the

amount of deferred tax assets that are

dependent upon future taxable income

that a bank may include in regulatory

capital to the lesser of:

(1) The amount of deferred tax assets

expected to be realized within one year

of the quarter-end report date, based on

a bank’s projection of future taxable

income (exclusive of tax carryforwards

and reversals of existing temporary

differences) for that year, including the

effect of tax-planning strategies
Federal Register / Vol. 60, No. 28 / Friday, February 10, 1995 / Rules and Regulations 7905

expected to be implemented during that

year, or

(2) 10 percent of Tier 1 capital net of

goodwill and other disallowed

intangible assets.

Banks have been calculating and

reporting the amount of ‘‘Deferred tax

assets disallowed for regulatory capital

purposes’’ in the Call Reports since

March 31, 1993.

Comments Received on the Proposed

Rule—The comment period for the

OCC’s proposed rule closed on January

24, 1994. The OCC received a total of 17

comments on the proposed rule. The

commenters consisted of 13 banks, three

trade groups, and one public accounting

firm.

All but one commenter expressed

opposition to some portion or all of the

proposed rule. Eleven of the

commenters indicated that a limit on

the amount of deferred tax assets

included in regulatory capital was

unnecessary. However, six commenters

agreed that some form of limit on

deferred tax assets was appropriate.

The primary concern of the

commenters is that the adoption of a

deferred tax limit could increase

regulatory burden because regulatory

capital policy would be more restrictive

than GAAP. Several commenters

indicated that no limit on deferred tax

assets is necessary because FAS 109

only permits the reporting of deferred

tax assets that have a better than 50%

probability of being realized. Other

commenters indicated that the proposed

one year limit was too restrictive

because there is a 15-year carryforward

period in which a bank could realize the

deferred tax assets.

After carefully considering the

comments, the OCC believes that a limit

on deferred tax assets is necessary.

Estimates of future taxable income are

very subjective. If a bank does not

realize these estimates, the bank

insurance fund is exposed to losses

because bank capital would be

overstated. Moreover, unlike certain

types of intangible assets that a bank can

include in regulatory capital at a higher

allowable percentage, a bank cannot sell

deferred tax assets.

The GAAP standard allows a bank to

record deferred tax assets that they may

not realize for up to 15 years. The OCC

believes that allowing deferred tax

assets to constitute a significant portion

of a bank’s capital is inappropriate,

since deferred tax assets may have only

a slightly better than 50% possibility of

realization. Furthermore, other than the

likelihood of realization, there is no

specific limit under GAAP on the

amount of deferred tax assets that a

bank can record. Without a limit on

deferred tax assets, a bank could include

significant amounts of deferred tax

assets in capital.

In addition, the OCC believes that

GAAP should guide rather than

establish regulatory capital policy.

When formulating GAAP, the

accounting policy makers do not

consider the safety and soundness

objectives of the capital standards

applicable to banks. Therefore,

differences between the GAAP and

regulatory capital definitions are

justified.

Final Rule

The OCC believes that since banks

can only realize deferred tax assets that

are dependent upon future taxable

income when they achieve positive

taxable earnings, a limit based on

estimated future earnings is rational. In

general, a bank’s projections up to 12

months into the future are reliable.

However, the OCC believes the

reliability of such projections decreases

significantly for periods further in the

future. Therefore, having a one year

cutoff reduces the risk of a bank

misstating its deferred tax assets

because its estimate of future income is

inaccurate. Furthermore, the one year

cutoff increases the likelihood of a bank

achieving the earnings required to

realize the recorded deferred tax asset.

The OCC believes that this final rule

will ensure that such deferred tax assets

do not make up an unduly large portion

of a bank’s regulatory capital base. The

upper limit of 10 percent of Tier 1

capital provides a ‘‘backstop’’ that

addresses this concern. This

requirement also reduces the risk that

an overly optimistic estimate of future

taxable income will cause the bank to

significantly misstate the deferred tax

asset.

The OCC believes that the

combination of the one year future

income approach and the 10% of Tier

1 capital approach will provide an

effective and efficient limit on deferred

tax assets. Consequently, under the final

rule, the amount of deferred tax assets

that are dependent upon future taxable

income that a bank may include in its

regulatory capital is limited to the lesser

of:

(1) The amount of deferred tax assets

the institution expects to realize within

one year of the quarter-end report date,

based on its projection of future taxable

income (exclusive of tax carryforwards

and reversal of existing temporary

differences for that year), or

(2) 10 percent of Tier 1 capital, net of

goodwill and all identifiable intangible

assets other than purchased mortgage

servicing rights and purchased credit

card relationships, and before any

disallowed deferred tax assets are

deducted.

Banks should note that under this

final rule there is no limit on deferred

tax assets that a bank can realize from

taxes paid in prior carryback years and

from reversals of existing taxable

temporary differences. In addition, to

determine the limit on deferred tax

assets, a bank should assume that all

temporary differences fully reverse as of

the report date. Also, estimates of future

taxable income should include the effect

of tax planning strategies the bank is

planning to implement within one year

of the quarter-end report date to realize

net operating loss or tax credit

carryforwards that will otherwise expire

during the year. With respect to the Call

Reports, banks will continue to report

deferred tax assets according to GAAP.

The OCC believes that the limit on

deferred tax assets will pose little or no

additional burden on banks. Banks

already follow FAS 109 for Call Report

purposes and already are making

projections of taxable income.

Additionally, the OCC has revised the

10 percent Tier 1 capital calculation to

be more straightforward and less

burdensome. Under the proposed rule,

the 10 percent of Tier 1 capital

calculation is based on Tier 1 capital net

of goodwill and other disallowed

intangible assets. As proposed, the 10

percent of Tier 1 capital calculation

would have required banks to first

determine the amount of disallowed

intangible assets. After consideration of

this matter, the OCC believes that this

additional computation is not necessary.

Consequently, the final rule requires

that the 10 percent of Tier 1 capital

calculation be based on Tier 1 capital

net of goodwill and all identifiable

intangible assets other than purchased

mortgage servicing rights and purchased

credit card relationships, and before any

disallowed deferred tax assets are

deducted. While this calculation may

result in a slightly higher Tier 1 capital

base, the OCC believes that this

calculation is simpler and imposes less

burden on banks.

In response to the comments received,

the OCC has decided to incorporate the

following additional provisions to

reduce the regulatory burden of this

final rule.

Method of Estimating Future

Income—In Banking Bulletin 93–15,

Supplement 1 (BB 93–15), the OCC

specified a method of estimating future

taxable income. BB 93–15 provided a

specific method for treating originating

and reversing tax timing differences in

the calculation of one year’s future

taxable income. Several commenters
7906 Federal Register / Vol. 60, No. 28 / Friday, February 10, 1995 / Rules and Regulations

stated that other less restrictive methods

of estimating future taxable income,

which are acceptable under GAAP,

should also be allowed.

After considering these comments, the

OCC concluded that banks may

calculate one year’s future taxable

income based on either the specific

method in BB 93–15 or another

reasonable method that is consistent

with GAAP. Since banks routinely make

their own projections of future taxable

income and have this information

readily available, this modification

reduces regulatory burden.

Gross-up of Intangibles—FAS 109

requires a bank to record higher

amounts of intangible assets acquired in

nontaxable purchase business

combinations than they would record

under previous GAAP for the same

transaction. The OCC capital adequacy

rules require banks to deduct certain

intangible assets from regulatory capital.

Consequently, under FAS 109, a bank

acquiring such assets would reflect a

lower amount of regulatory capital after

deducting these disallowed intangibles

than it would have under previous

accounting standards even though there

is no additional risk to capital.

Several commenters indicated that the

OCC should not require banks to deduct

the additional amounts of identifiable

intangible assets required by FAS 109.

The OCC agrees with these commenters.

Since the higher intangible amounts

occur simply because of an accounting

rule change, the higher amounts do not

present additional risk to capital.

Therefore, because the increased value

of the intangible assets pose no

additional risk to capital adequacy, this

final rule permits a bank to net the

deferred tax liability associated with a

disallowed intangible asset against that

intangible asset in the calculation of its

limit on deferred tax assets.

Under this approach, a bank would

only deduct the net amount of the

disallowed intangible from Tier 1

capital. Netting is not allowed against

purchased mortgage servicing rights and

purchased credit card receivables since

a bank deducts these assets for capital

adequacy purposes only if they exceed

specified limits on intangible assets.

Consequently, this final rule results in

the same treatment for intangibles

resulting from purchase business

combinations as under previous GAAP.

However, to ensure this benefit is not

double counted, a deferred tax liability

netted in this manner could not also be

netted against deferred tax assets when

determining the amount of deferred tax

assets that are dependent upon future

taxable income.

Leveraged Leases—Similar to the

‘‘gross up of intangibles’’ issue, the OCC

agrees with one commenter who

recommended that the final rule include

a specific provision relating to the

accounting treatment for leveraged

leases. The commenter noted the

valuation of a leveraged lease acquired

in a purchase business combination

gives recognition to the estimated future

tax effect of the remaining cash flows of

the lease. Therefore, any future tax

liabilities related to acquired leveraged

leases are included in the valuation of

the leveraged leases and are not shown

on the balance sheet as deferred taxes

payable. This artificially increases the

amount of deferred tax assets for

institutions that acquire a leveraged

lease portfolio. The commenter

suggested that banks treat the future

taxes payable included in the valuation

of a leverage lease portfolio as a

reversing taxable temporary difference

available to support the recognition of

deferred tax assets.

Although this situation will not affect

many banks, the OCC agrees with this

commenter. Accordingly, when

applying the limit on deferred tax

assets, a bank may use the deferred tax

liabilities embedded in the carrying

value of a leveraged lease to reduce the

amount of deferred tax assets subject to

the limit.

Tax Jurisdictions—In a response to

the proposed rule, a commenter

suggested that a bank calculate one

overall limit on deferred tax assets to

cover all tax jurisdictions in which the

bank operates. This provision would

reduce burden on large banks that

operate in numerous jurisdictions

because they would not need to

separately calculate a limit on deferred

tax assets for each jurisdiction. FAS 109

already requires a jurisdiction-byjurisdiction approach. The OCC agrees

with the commenter that the separate

tax jurisdiction requirement in the

overall limit on deferred tax assets is

unnecessary. Therefore, to reduce

regulatory burden, a bank may calculate

one overall limit on deferred tax assets

that covers all tax jurisdictions in which

the bank operates.

Timing—A bank may use the future

taxable income projections for its closest

fiscal year (adjusted for any significant

changes that have occurred or are

expected to occur) when applying the

limit on deferred tax assets at a report

date other than year-end. Therefore, a

bank will not have to prepare a new

projection each quarter. Several

commenters requested this treatment

because it reduces the frequency that a

bank is required to revise their estimate

of future taxable income.

Except for these provisions, banks

should follow FAS 109 in determining

regulatory capital. Net deferred tax

assets included in bank Call Reports

under FAS 109, that exceed the limit on

deferred tax assets, should be deducted

from Tier 1 capital. Banks should also

deduct the amount of disallowed

deferred tax assets from both total assets

and from risk-weighted assets in

determining their leverage capital and

risk-based capital ratios. Deferred tax

assets included in risk-based capital

continue to have a risk weight of 100%.

Other Considerations

Separate Entity Method—Consistent

with the policy of applying GAAP

individually to banks of a holding

company, each subsidiary bank must

determine its limit on deferred tax

assets separately from the holding

company. Under this ‘‘separate entity

method,’’ a subsidiary of a holding

company is treated as a separate

taxpayer, and its tax provision is

calculated on this basis.

In some cases, a bank’s holding

company may not have the financial

capability to reimburse the bank for tax

benefits derived from the bank’s

carryback of net operating losses or tax

credits. In these cases, the amount of

carryback potential the bank may

consider in calculating the limit on

deferred tax assets is limited to the

amount which it could reasonably

expect to have refunded by its parent.

Several commenters suggested that

the OCC eliminate the separate entity

approach because GAAP does not

require it and because the approach

ignores Federal tax law and binding

intercompany tax settlement

agreements. The OCC considered these

comments. However, the banking

agencies generally require banks to file

regulatory reports using a separate

entity approach, and consistency

between the reports would be reduced

if the OCC permitted a bank to use other

methods for calculating deferred tax

assets. Therefore, the OCC decided that

banks must continue to report and

calculate the limit on deferred tax assets

under the separate entity method.

Tax Effects of Financial Accounting

Standard 115 (FAS 115)—The OCC,

along with the other banking agencies,

adopted Statement of Financial

Accounting Standards No. 115,

‘‘Accounting for Certain Investments in

Debt and Equity Securities’’ (FAS 115),

for regulatory reporting purposes

effective January 1, 1994. FAS 115

requires net unrealized holding gains

and losses on available-for-sale

securities to be recorded net of taxes.

Consequently, when a bank recognizes
Federal Register / Vol. 60, No. 28 / Friday, February 10, 1995 / Rules and Regulations 7907

the FAS 115 unrealized holding gains

and losses on available-for-sale

securities in financial reports, it also

must include any deferred tax effects of

these unrealized gains and losses in its

determination of the deferred tax asset.

For example, if a bank has an

unrealized gain in the available-for-sale

portfolio, it must record a deferred tax

liability for the taxes that would be due

if they sold the assets and realized the

gain. On the other hand, if a bank has

an unrealized loss in the available-forsale portfolio, the bank should include

the tax benefits from realizing that loss

when it records its deferred tax asset.

The OCC and the other banking

agencies recently agreed that banks

should exclude the net unrealized

holding gains and losses on availablefor-sale debt securities from regulatory

capital calculations. Therefore, it would

be consistent to exclude the deferred tax

assets and liabilities relating to the FAS

115 gains and losses on available-forsale debt securities in the calculation of

the allowable amount of deferred tax

assets for regulatory capital.

It has been argued that failure to

eliminate these FAS 115 deferred tax

effects would cause a bank to overstate

or understate the amount of deferred tax

assets disallowed for regulatory capital

purposes. For example, a bank with a

net unrealized loss in its available-forsale account would report a related

deferred tax asset in its Call Report. If

the bank does not remove the deferred

tax asset relating to the net unrealized

loss, and has net deferred tax assets that

exceed the allowable amount stipulated

in this final rule, the bank will overstate

the amount of deferred tax assets that it

must deduct from regulatory capital.

Conversely, if the bank has a net

unrealized gain on available-for-sale

securities, and does not remove its

deferred tax effect, the calculation of the

limit on deferred tax assets will

understate the amount of deferred tax

assets the bank must deduct from

regulatory capital.

The OCC believes that identifying and

removing the deferred tax components

that specifically relate to FAS 115 may

be very complicated, and in some

situations may place significant burden

on banks. Therefore, the OCC has

decided to allow, but not require, banks

to eliminate the FAS 115 deferred tax

items before calculating the limit on

deferred tax assets. Consequently, a

bank that does not want to deal with the

complexity of the adjustment can

reduce its implementation burden. On

the other hand, a bank that wants to

achieve greater precision may make

such adjustments. Whether or not a

bank chooses to adjust for the FAS 115

deferred tax effects, it must apply that

approach consistently in future

calculations of the limit on deferred tax

assets.

Regulatory Flexibility Act

Pursuant to section 605(b) of the

Regulatory Flexibility Act, it is hereby

certified that this regulation will not

have a significant economic impact on

a substantial number of small entities.

Accordingly, a regulatory flexibility

analysis is not required. When

considered with the change in the

reporting of deferred tax assets in the

Call Report, this final rule permits banks

to include more deferred tax assets in

regulatory capital than under previous

policy. However, this change will not

significantly impact banks of any size.

Executive Order 12866

The OCC has determined that this

final rule is not a significant regulatory

action under Executive Order 12866.

List of Subjects in 12 CFR Part 3

Administrative practice and

procedure, National banks, Reporting

and recordkeeping requirements.

Authority and Issuance

For the reasons set out in the

preamble, part 3 of title 12, chapter I, of

the Code of Federal Regulations is

amended as set forth below.

PART 3—MINIMUM CAPITAL RATIOS;

ISSUANCE OF DIRECTIVES

1. The authority citation for part 3

continues to read as follows:

Authority: 12 U.S.C. 93a, 161, 1818, 1828(n),

1828 note, 1831n note, 3907, and 3909.

2. Paragraph (a) of § 3.2 is revised to

read as follows:

§ 3.2 Definitions.

* * * * *

(a) Adjusted total assets means the

average total assets figure required to be

computed for and stated in a bank’s

most recent quarterly Consolidated

Report of Condition and Income (Call

Report) minus end-of-quarter intangible

assets and deferred tax assets that are

deducted from Tier 1 capital. The OCC

reserves the right to require a bank to

compute and maintain its capital ratios

on the basis of actual, rather than

average, total assets when necessary to

carry out the purposes of this part.

* * * * *

3. In appendix A to part 3, section 1,

paragraphs (c)(9) through (c)(29) are

redesignated as paragraphs (c)(10)

through (c)(30) and a new paragraph

(c)(9) is added to read as follows:

Appendix A to Part 3—Risk-Based

Capital Guidelines

Section 1. Purpose, Applicability of

Guidelines, and Definitions.

* * * * *

(c) * * *

(9) Deferred tax assets means the tax

consequences attributable to tax

carryforwards and deductible temporary

differences. Tax carryforwards are

deductions or credits that cannot be used for

tax purposes during the current period, but

can be carried forward to reduce taxable

income or taxes payable in a future period or

periods. Temporary differences are financial

events or transactions that are recognized in

one period for financial statement purposes,

but are recognized in another period or

periods for income tax purposes. Deductible

temporary differences are temporary

differences that result in a reduction of

taxable income in a future period or periods.

* * * * *

4. In appendix A to part 3, section 2,

paragraph (c)(1) is revised, a new paragraph

heading is added to paragraph (c)(2),

paragraph (c)(3) is redesignated as paragraph

(c)(4) and a heading is added to newly

designated paragraph (c)(4) and the

introductory text is revised, and a new

paragraph (c)(3) is added, to read as follows:

* * * * *

Section 2. Components of Capital.

* * * * *

(c) * * *

(1) Deductions from Tier 1 capital. The

following items are deducted from Tier 1

capital before the Tier 2 portion of the

calculation is made:

(i) All goodwill subject to the transition

rules contained in section 4(a)(1)(ii) of this

appendix A;

(ii) Other intangible assets, except as

provided in section 2(c)(2) of this appendix

A; and

(iii) Deferred tax assets, except as provided

in section 2(c)(3) of this appendix A, that are

dependent upon future taxable income,

which exceed thelesser of either:

(A) The amount of deferred tax assets that

the bank could reasonably expect to realize

within one year of the quarter-end call report,

based on its estimate of future taxable income

for that year; or

(B) 10% of Tier 1 capital, net of goodwill

and all intangible assets other than

purchased mortgage servicing rights and

purchased credit card relationships, and

before any disallowed deferred tax assets are

deducted.

(2) Qualifying intangible assets. * * *

(3) Deferred tax assets—(i) Net unrealized

gains and losses on available-for-sale

securities. Before calculating the amount of

deferred tax assets subject to the limit in

section 2(c)(1)(iii) of this appendix A, a bank

may eliminate the deferred tax effects of any

net unrealized holding gains and losses on

available-for-sale debt securities. Banks

report these net unrealized holding gains and

losses in their Call Reports as a separate

component of equity capital, but exclude

them from the definition of common

stockholders’ equity for regulatory capital
7908 Federal Register / Vol. 60, No. 28 / Friday, February 10, 1995 / Rules and Regulations

purposes. A bank that adopts a policy to

deduct these amounts must apply that

approach consistently in all future

calculations of the amount of disallowed

deferred tax assets under section 2(c)(1)(iii)

of this appendix A.

(ii) Consolidated groups. The amount of

deferred tax assets that a bank can realize

from taxes paid in prior carryback years and

from reversals of existing taxable temporary

differences generally would not be deducted

from capital. However, for a bank that is a

member of a consolidated group (for tax

purposes), the amount of carryback potential

a bank may consider in calculating the limit

on deferred tax assets under section

2(c)(1)(iii) of this appendix A, may not

exceed the amount that the bank could

reasonably expect to have refunded by its

parent holding company.

(iii) Nontaxable Purchase Business

Combination. In calculating the amount of

net deferred tax assets under section

2(c)(1)(iii) of this appendix A, a deferred tax

liability that is specifically associated with

an intangible asset (other than purchased

mortgage servicing rights and purchased

credit card relationships) due to a nontaxable

purchase business combination may be

netted against that intangible asset. Only the

net amount of the intangible asset must be

deducted from Tier 1 capital. Deferred tax

liabilities netted in this manner cannot also

be netted against deferred tax assets when

determining the amount of net deferred tax

assets that are dependent upon future taxable

income.

(iv) Estimated future taxable income.

Estimated future taxable income does not

include net operating loss carryforwards to

be used during that year or the amount of

existing temporary differences expected to

reverse within the year. A bank may use

future taxable income projections for their

closest fiscal year, provided it adjusts the

projections for any significant changes that

occur or that it expects to occur. Such

projections must include the estimated effect

of tax planning strategies that the bank

expects to implement to realize net operating

losses or tax credit carryforwards that will

otherwise expire during the year.

(4) Deductions from total capital. The

following items are deducted from total

capital:

* * * * *

Dated: February 3, 1995.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 95–3364 Filed 2–9–95; 8:45 am]

BILLING CODE 4810–33–P

DEPARTMENT OF DEFENSE

Defense Mapping Agency

32 CFR part 320

[DMA Instruction 5400.11]

Privacy Program

AGENCY: Defense Mapping Agency,

DOD.

ACTION: Final rule.

SUMMARY: The Defense Mapping Agency

is amending its Privacy Act Regulation

by removing three exemption rules,

updating request for information

procedures, and the list of

organizational addressees.

EFFECTIVE DATE: February 3, 1995.

FOR FURTHER INFORMATION CONTACT: Ms.

Helen Sharetts-Sullivan at (703) 285-

9315.

SUPPLEMENTARY INFORMATION: Executive

Order 12866. The Director,

Administration and Management, Office

of the Secretary of Defense has

determined that this Privacy Act rule for

the Department of Defense does not

constitute ‘significant regulatory action’.

Analysis of the rule indicates that it

does not have an annual effect on the

economy of $100 million or more; does

not create a serious inconsistency or

otherwise interfere with an action taken

or planned by another agency; does not

materially alter the budgetary impact of

entitlements, grants, user fees, or loan

programs or the rights and obligations of

recipients thereof; does not raise novel

legal or policy issues arising out of legal

mandates, the President’s priorities, or

the principles set forth in Executive

Order 12866 (1993).

Regulatory Flexibility Act of 1980. The

Director, Administration and

Management, Office of the Secretary of

Defense certifies that this Privacy Act

rule for the Department of Defense does

not have significant economic impact on

a substantial number of small entities

because it is concerned only with the

administration of Privacy Act systems of

records within the Department of

Defense.

Paperwork Reduction Act. The

Director, Administration and

Management, Office of the Secretary of

Defense certifies that this Privacy Act

rule for the Department of Defense

imposes no information requirements

beyond the Department of Defense and

that the information collected within

the Department of Defense is necessary

and consistent with 5 U.S.C. 552a,

known as the Privacy Act of 1974.

List of Subjects in 32 CFR Part 320

Privacy

For reasons set forth in the Preamble,

32 CFR part 320 is amended as follows:

PART 320 - DEFENSE MAPPING

AGENCY (DMA) PRIVACY PROGRAM

1. The authority citation for 32 CFR part

320 continues to read as follows:

Authority: Pub. L. 93–579, 88 Stat 1896 (5

U.S.C. 552a).

2. The heading of 32 CFR part 320 is

revised to read as set forth above.

3. Section 320.3 is amended by revising

paragraph (b), introductory text,

paragraph (c), introductory text,

paragraph (c)(2), and (e) to read as

follows;

§ 320.3 Procedures for requests for

information pertaining to individual records

in a record system.

* * * * *

(b) Any individual requesting such

information in person may present

himself at HQ DMA or at the principal

office of the DMA Component or Staff

Office (please refer to the DMA address

list at paragraph (e) of this section)

thought to maintain the record in

question and shall provide:

* * * * *

(c) Any individual requesting such

information by mail shall address his

request to the Director, Defense

Mapping Agency, or to the Director of

the DMA Component or Staff Office

(refer to paragraph (e) of this section)

thought to maintain the record in

question and shall include in such

request the following:

* * * * *

(2) A notarized statement or unsworn

declaration in accordance with 28

U.S.C. 1746 to verify his identify, if, in

the opinion of the DMA custodian of the

record, the sensitivity of the material

involved warrants.

* * * * *

(e) HQ DMA and Component address

list:

(1) Director, ATTN: GCI St A–7,

Defense Mapping Agency, 8613 Lee

Highway, Fairfax, VA 22031–2137.

(2) DMA Aerospace Center, 3200

South Second Street, St. Louis, MO

63118–3399.

(3) DMA Hydrographic/Topographic

Center, 4600 Sangamore Road,

Bethesda, MD 20816–5003.

(4) DMA Combat Support Center,

6001 MacArthur Boulevard, Bethesda,

MD 20816–5501.

(5) DMA Reston Center, 12310

Sunrise Valley Drive, Reston, VA

22091–3414.

(6) DMA Systems Center, 4600

Sangamore Road, Bethesda, MD 20816–

5003.

(7) Comptroller, St A–4, Defense

Mapping Agency, 8613 Lee Highway,

Fairfax, VA 22031–2137.

(8) Deputy Director for Human

Resources, St A–8, Defense Mapping

Agency, 8613 Lee Highway, Fairfax, VA

22031–2137.

(9) Deputy Director for International

Programs, St A–20, Defense Mapping

Agency, 8613 Lee Highway, Fairfax, VA

22031–2137.