[Federal Register Volume 79, Number 184 (Tuesday, September 23, 2014)]
[Notices]
[Pages 56856-56861]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-22593]
[[Page 56856]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
FEDERAL RESERVE SYSTEM
FEDERAL DEPOSIT INSURANCE CORPORATION
Joint Report: Differences in Accounting and Capital Standards
Among the Federal Banking Agencies as of December 31, 2013; Report to
Congressional Committees
AGENCY: Office of the Comptroller of the Currency (OCC), Treasury;
Board of Governors of the Federal Reserve System (Board); and Federal
Deposit Insurance Corporation (FDIC).
ACTION: Report to the Congressional Committees.
-----------------------------------------------------------------------
SUMMARY: The OCC, the Board, and the FDIC (collectively, the agencies)
have prepared this report pursuant to section 37(c) of the Federal
Deposit Insurance Act. Section 37(c) requires the agencies to jointly
submit an annual report to the Committee on Financial Services of the
U.S. House of Representatives and to the Committee on Banking, Housing,
and Urban Affairs of the U.S. Senate describing differences between the
accounting and capital standards used by the agencies. The report must
be published in the Federal Register.
FOR FURTHER INFORMATION CONTACT: OCC: Benjamin Pegg, Risk Specialist,
Capital Policy, (202) 649-7146, Office of the Comptroller of the
Currency, 400 7th Street SW., Washington, DC 20219.
Board: Sviatlana Phelan, Senior Financial Analyst, Capital and
Regulatory Policy, (202) 912-4306, Division of Banking Supervision and
Regulation, Board of Governors of the Federal Reserve System, 20th
Street and Constitution Avenue NW., Washington, DC 20551.
FDIC: David W. Riley, Senior Analyst (Capital Markets), (202) 898-
3728, Division of Risk Management Supervision, Federal Deposit
Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION: The text of the report follows:
Report to the Committee on Financial Services of the U.S. House of
Representatives and to the Committee on Banking, Housing, and Urban
Affairs of the U.S. Senate Regarding Differences in Accounting and
Capital Standards Among the Federal Banking Agencies
Introduction
The Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) must
jointly submit an annual report to the Committee on Financial Services
of the U.S. House of Representatives and the Committee on Banking,
Housing, and Urban Affairs of the U.S. Senate describing any
differences between the accounting and capital standards used by the
agencies.\1\ The report must be published in the Federal Register.
---------------------------------------------------------------------------
\1\ Prior to 2011, the Office of Thrift Supervision (OTS) joined
the agencies in submitting this annual report to Congress. Title III
of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law. 111-203, 124 Stat. 1376 (2010) (Dodd-Frank Act),
transferred the powers, authorities, rights, and duties of the OTS
to other federal banking agencies on July 21, 2011 (the transfer
date), and the OTS was abolished 90 days later. Under Title III, the
OCC assumed all functions of the OTS and the Director of the OTS
relating to federal savings associations, and thus the OCC has
responsibility for the ongoing supervision, examination, and
regulation of federal savings associations as of the transfer date.
Title III transferred all supervision, examination, and certain
regulatory functions of the OTS relating to state savings
associations to the FDIC and all functions relating to the
supervision of any savings and loan holding company and non-
depository institution subsidiaries of such holding companies to the
Board. Accordingly, this report is being submitted by the OCC,
Board, and FDIC.
---------------------------------------------------------------------------
The agencies are submitting this joint report, which covers
differences between their uses of accounting or capital standards
existing as of December 31, 2013, pursuant to section 37(c) of the
Federal Deposit Insurance Act (12 U.S.C. 1831n(c)), as amended. This
report covers 2012 and 2013 and describes capital differences similar
to those presented in previous reports.\2\
---------------------------------------------------------------------------
\2\ See, e.g., 77 FR 75259 (December 19, 2012).
---------------------------------------------------------------------------
Since the agencies filed their first reports on accounting and
capital differences in 1990, they have acted in concert to harmonize
their accounting and capital standards and eliminate as many
differences as possible. Section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994 (12 U.S.C. 4803)
also directs the 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.'' \3\ In recent years, the agencies have revised their
capital standards to harmonize their regulatory capital requirements in
a comprehensive manner and to align the amount of capital institutions
are required to hold more closely with the credit risks and certain
other risks to which they are exposed. These revisions have been made
in a uniform manner whenever possible to minimize interagency
differences. Although the differences in capital standards have
diminished over time significantly, a few differences remain, some of
which are statutorily mandated.
---------------------------------------------------------------------------
\3\ 12 U.S.C. 4803(a).
---------------------------------------------------------------------------
Several of the differences described in this report will be
resolved beginning in 2014, when revised capital rules take effect for
institutions subject to the advanced approaches risk-based capital
rules, and in 2015, when revised capital rules take effect for all
other institutions subject to those rules. In 2012, the agencies
published three notices of proposed rulemaking seeking public comment
on the implementation of the Basel III capital standards,\4\ a
standardized approach for risk weighting assets and off-balance sheet
exposures, as well as revisions to the agencies' advanced approaches
rules.\5\ The agencies adopted these proposals with some revisions and
published the revised capital rules in the Federal Register in 2013
(revised capital rules).\6\
---------------------------------------------------------------------------
\4\ See BCBS, ``Basel III: A Global Regulatory Framework for
More Resilient Banks and Banking Systems'' (December 2010),
available at www.bis.org/publ/bcbs189.htm.
\5\ See 77 FR 52792 (August 30, 2012).
\6\ The Board adopted the revised capital rules as final on July
2, 2013 (78 FR 62018 (October 11, 2013)); the OCC adopted the
revised capital rules as final on July 9, 2013 (78 FR 62018 (October
11, 2013)); and the FDIC adopted the revised capital rules on an
interim basis on July 9, 2013 (78 FR 55340 (September 10, 2013)).
---------------------------------------------------------------------------
In 2012, the agencies also revised their market risk capital rules
in a uniform manner to better capture positions subject to market risk,
reduce pro-cyclicality in market risk capital requirements, enhance
sensitivity to market risks, and increase transparency through enhanced
disclosures.\7\ In the revised capital rules, the agencies also
expanded the scope of the market risk capital rules to include savings
associations and incorporated the market risk rules into the revised
regulatory capital framework.\8\
---------------------------------------------------------------------------
\7\ See 77 FR 53060 (August 30, 2012).
\8\ See 78 FR 62018 (October 11, 2013) (OCC and FRB) and 78 FR
55340 (September 10, 2013) (FDIC).
---------------------------------------------------------------------------
In addition to the specific differences in capital standards noted
below, the
[[Page 56857]]
agencies may have differences in how they apply certain aspects of
their rules. These differences usually arise as a result of case-
specific inquiries that have been presented to only one agency. Agency
staffs seek to minimize these occurrences by coordinating responses to
the fullest extent reasonably practicable. Furthermore, while the
agencies work together to adopt and apply generally uniform capital
standards, there are wording differences in various provisions of the
agencies' standards that largely date back to each agency's separate
initial adoption of these standards prior to 1990.
In general, however, the agencies have substantially similar
capital adequacy standards.\9\ These standards are based on a common
regulatory framework that establishes minimum leverage and risk-based
capital ratios for depository institutions (banks and savings
associations).\10\ The agencies view the leverage and risk-based
capital requirements as minimum standards, and most institutions
generally 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.
---------------------------------------------------------------------------
\9\ The agencies' general risk-based capital rules are at 12 CFR
part 3 (national banks) and 12 CFR part 167.6 (federal savings
associations); 12 CFR parts 208 and 225, appendix A (state member
banks and bank holding companies, respectively); 12 CFR part 325,
appendix A (state nonmember banks); and 12 CFR part 390, subpart Z
(state savings associations).
\10\ 12 U.S.C. 1813(c).
---------------------------------------------------------------------------
The agencies note that, with respect to the advanced approaches
rules,\11\ there are virtually no differences across the agencies'
rules because the agencies adopted a joint rule establishing a common
advanced approaches framework in December 2007,\12\ with subsequent
joint revisions.\13\ Therefore, most of the risk-based capital
differences described below pertain to the agencies' Basel I-based
risk-based capital standards.\14\
---------------------------------------------------------------------------
\11\ Prior to issuance of the revised capital rules, the
agencies' advanced approaches rules were at 12 CFR part 3, appendix
C (national banks) and 12 CFR part 167, appendix C (federal savings
associations); 12 CFR part 208, appendix F, and 12 CFR part 225,
appendix G (state member banks and bank holding companies,
respectively); 12 CFR part 325, appendix D (state nonmember banks);
and 12 CFR part 390, subpart Z, appendix A (state savings
associations).
\12\ See 72 FR 69288 (December 7, 2007).
\13\ See 76 FR 37620 (June 28, 2011). See also revised capital
rules. Some minor differences remain in the application of the
advanced approaches rule to savings associations, as statutorily
mandated.
\14\ As mentioned, the revised capital rules eliminate a
majority of the non-statutory differences described in this report.
---------------------------------------------------------------------------
With respect to reporting standards, under the auspices of the
Federal Financial Institutions Examination Council (FFIEC), the
agencies have developed the uniform Consolidated Reports of Condition
and Income (Call Report) for all insured commercial banks and certain
state-chartered savings banks, as well as savings associations.\15\
---------------------------------------------------------------------------
\15\ Prior to 2012, the OTS required all OTS-supervised savings
associations to file the Thrift Financial Report (TFR). However, in
2011, the agencies adopted revisions to the reporting requirements
for savings associations, including a requirement to transition from
the quarterly TFR to the quarterly Call Report, effective 2012.
---------------------------------------------------------------------------
Differences in Capital Standards Among the Federal Banking Agencies
Financial Subsidiaries
The Gramm-Leach-Bliley Act (GLBA), also known as the Financial
Services Modernization Act of 1999, established the framework for
financial subsidiaries of banks.\16\ GLBA amended the Revised Statutes
to permit national banks to conduct certain expanded financial
activities through financial subsidiaries. Section 5136A of the Revised
Statutes (12 U.S.C. 24a) imposes a number of conditions and
requirements upon national banks that have financial subsidiaries,
including the regulatory capital treatment applicable to equity
investments in such subsidiaries. The statute requires that a national
bank deduct from assets and tangible equity the aggregate amount of its
equity investments in financial subsidiaries. The statute further
requires that the financial subsidiary's assets and liabilities not be
consolidated with those of the parent national bank for applicable
capital purposes.
---------------------------------------------------------------------------
\16\ A national bank that has a financial subsidiary must
satisfy a number of statutory requirements in addition to the
capital deduction and deconsolidation requirements described in the
text. The bank (and each of its depository institution affiliates)
must be well capitalized and well managed. Asset size restrictions
apply to the aggregate amount of the assets of the bank's financial
subsidiaries. Certain debt rating requirements apply, depending on
the size of the national bank. The national bank is required to
maintain policies and procedures to protect the bank from financial
and operational risks presented by the financial subsidiary. It is
also required to have policies and procedures to preserve the
corporate separateness of the financial subsidiary and the bank's
limited liability. Finally, transactions between the bank and its
financial subsidiary generally must comply with the Federal Reserve
Act (FRA) restrictions on affiliate transactions, and the financial
subsidiary is considered an affiliate of the bank for purposes of
the anti-tying provisions of the Bank Holding Company Act. See 12
U.S.C. 24a.
---------------------------------------------------------------------------
State member banks may have financial subsidiaries subject to the
same restrictions that apply to national banks.\17\ State nonmember
banks may also have financial subsidiaries, but they are subject only
to a subset of the statutory requirements that apply to national banks
and state member banks.\18\
---------------------------------------------------------------------------
\17\ See 12 U.S.C. 335 (state member banks are subject to the
``same conditions and limitations'' that apply to national banks
that hold financial subsidiaries).
\18\ The applicable statutory requirements for state nonmember
banks are as follows: The bank (and each of its insured depository
institution affiliates) must (1) be well capitalized, (2) comply
with the capital deduction and deconsolidation requirements, and (3)
satisfy the requirements for policies and procedures to protect the
bank from financial and operational risks and to preserve corporate
separateness and limited liability for the bank. In addition, the
statute requires that any transaction between the bank and a
subsidiary that would be classified as a financial subsidiary
generally shall be subject to the affiliate transactions
restrictions of the FRA. See 12 U.S.C. 1831w.
---------------------------------------------------------------------------
The agencies adopted final rules implementing their respective
provisions arising from section 121 of the GLBA for national banks in
March 2000, for state nonmember banks in January 2001, and for state
member banks in August 2001.\19\ The GLBA did not provide new authority
to savings associations to own, hold, or operate financial
subsidiaries, as defined, and thus the capital rules for savings
associations do not contain parallel provisions.
---------------------------------------------------------------------------
\19\ See 65 FR 12914 (March 10, 2000) (national banks); 66 FR
1018 (January 5, 2001) (state nonmember banks); 66 FR 42929 (August
16, 2001) (state member banks).
---------------------------------------------------------------------------
Non-financial Subsidiaries and Subordinate Organizations of Savings
Associations
Banks supervised by the agencies generally consolidate all
significant majority-owned subsidiaries other than financial
subsidiaries for regulatory capital purposes. For subsidiaries other
than financial subsidiaries that are not consolidated on a line-by-line
basis for financial reporting purposes, joint ventures, and associated
companies, the parent organization's investment in each such
subordinate organization is, for risk-based capital purposes, deducted
from capital or assigned to the 100 percent risk-weight category,
depending upon the circumstances. The Board's and the FDIC's rules also
permit banks to consolidate the investment on a pro rata basis under
appropriate circumstances.
The capital regulations for savings associations are different in
some respects because of statutory requirements. A statutorily mandated
distinction is drawn between subsidiaries, which generally are
majority-owned, that are engaged in activities that are permissible for
national banks, and those that are engaged in activities that are not
[[Page 56858]]
permissible for national banks.\20\ When subsidiaries engage in
activities that are not permissible for national banks,\21\ the parent
savings association must deduct the parent's investment in and
extensions of credit to these subsidiaries from the capital of the
parent organization. If a subsidiary's activities are permissible for a
national bank, that subsidiary's assets are generally consolidated with
those of the parent organization on a line-by-line basis in accordance
with generally accepted accounting principles. If a subordinate
organization, other than a subsidiary, engages in activities not
permissible for national banks, investments in and loans to that
organization generally are deducted from the savings association's
capital.\22\ If a subordinate organization engages solely in
permissible activities, depending on the nature and risk of the
activity, investments in and loans to that organization may be assigned
either to the 100 percent risk-weight category or deducted from
capital. The requirements for non-financial subsidiaries remain
unchanged under the revised capital rules.
---------------------------------------------------------------------------
\20\ See 12 U.S.C. 1464(t)(5).
\21\ Subsidiaries engaged in activities not permissible for
national banks are considered non-includable subsidiaries.
\22\ The definitions of subsidiary and subordinate organization
are provided in 12 CFR 159.2 (federal savings associations) and 12
CFR 390.251 (state savings associations).
---------------------------------------------------------------------------
Leverage Ratio Denominator
Banks supervised by the agencies use average total consolidated
assets to calculate the denominator of the leverage ratio. In contrast,
savings associations use quarter-end total consolidated assets. Under
the rules governing the reservation of authority for savings
associations, the OCC and the FDIC reserve the right to require federal
and state savings associations, respectively, to compute capital ratios
on the basis of average, rather than period-end, assets.
This capital difference has been eliminated under the revised
capital rules, which require all banks and savings associations to
calculate the denominator of the leverage ratio using average total
consolidated assets.
Collateralized Transactions
The general risk-based capital rules of the Board assign a zero
percent risk weight to claims collateralized by cash on deposit in the
institution or by securities issued or guaranteed by U.S. Government
agencies or the central governments of countries that are members of
the Organization for Economic Cooperation and Development (OECD),
provided there is daily mark-to-market of collateral and maintenance of
a positive margin of collateral. The OCC's rules with respect to
national banks incorporate similar conditions for such collateralized
claims eligible for a zero percent risk weight. However, while the
Board's general risk-based capital rules require such claims to be
fully collateralized, the OCC's rules governing national banks permit
partial collateralization.
Under the FDIC rules for state nonmember banks and the rules for
state and federal savings associations, portions of claims
collateralized by cash or by securities issued or guaranteed by OECD
central governments or U.S. Government agencies receive a 20 percent
risk weight. However, these institutions may assign a zero percent risk
weight to claims on certain qualifying securities firms that are
collateralized by cash on deposit in the institution or by securities
issued or guaranteed by the U.S. Government, U.S. Government agencies,
or other OECD central governments.
The revised capital rules eliminate this capital difference and
provide a common rule text to address capital requirements for
collateralized transactions, as well as exposures to sovereign and
public sector entities.
Noncumulative Perpetual Preferred Stock
Under the agencies' capital standards, noncumulative perpetual
preferred stock is a component of tier 1 capital. The capital standards
of the Board, the FDIC with respect to state nonmember banks, and the
OCC with respect to national banks, require noncumulative perpetual
preferred stock to give the issuer the option to waive the payment of
dividends and provide that waived dividends neither accumulate to
future periods nor represent a contingent claim on the issuer.
As a result of these requirements, under the risk-based capital
rules of the Board, the FDIC with respect to state nonmember banks, and
the OCC with respect to national banks, if a bank issues perpetual
preferred stock and is required to pay dividends in a form other than
cash (e.g., dividends in the form of stock, when cash dividends are not
or cannot be paid, and when the bank does not have the option to waive
or eliminate dividends), the perpetual preferred stock would not
qualify as noncumulative and, therefore, would not be included in tier
1 capital. Under the capital requirements applicable to savings
associations, a savings association may request supervisory approval to
treat perpetual preferred stock as noncumulative if it requires the
payment of dividends in the form of stock when cash dividends are not
paid.
This capital difference has been eliminated under the revised
capital rules which set forth revised eligibility criteria for
regulatory capital instruments. Perpetual preferred stock that requires
payment-in-kind (of dividends in the form of stock when cash dividends
are not paid) will not be includable in tier 1 capital under the
revised capital rules, subject to certain statutory exceptions.
Equity Securities of Government-sponsored Enterprises
The risk-based capital rules of the Board and the FDIC and the
capital regulations governing savings associations apply a 100 percent
risk weight to equity securities of government-sponsored enterprises
(GSEs).\23\ In contrast, the OCC's capital rules for national banks
apply a 20 percent risk weight to all GSE equity securities.
---------------------------------------------------------------------------
\23\ However, Federal Home Loan Bank stock held by banking
organizations as a condition of membership receives a 20 percent
risk weight.
---------------------------------------------------------------------------
This capital difference has been eliminated under the revised
capital rules, which assign a 20 percent risk weight to an equity
exposure to a Federal Home Loan Bank or the Federal Agricultural
Mortgage Corporation. In addition, the revised capital rules assign a
100 percent risk weight to preferred stock issued by a GSE. Other GSE
equity exposures receive a risk weight of no less than 100 percent or
are subject to deduction.
Conversion Factors for Off-balance Sheet Derivative Contracts
Under the agencies' general risk-based capital rules, the credit
equivalent amount of a derivative contract that is not subject to a
qualifying bilateral netting contract is equal to the sum of the
derivative contract's current credit exposure and potential future
credit exposure. The potential future exposure is estimated by
multiplying the notional principal amount of the contract by a credit
conversion factor that is based on the type and remaining maturity of a
derivative contract. The regulations of the Board, the FDIC with
respect to state nonmember banks, and the OCC with respect to national
banks provide a chart illustrating the applicable credit conversion
factors, as follows:
[[Page 56859]]
----------------------------------------------------------------------------------------------------------------
Precious
Interest rate Exchange rate Equity metals, Other
Remaining maturity (percent) and gold (percent) except gold commodities
(percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
One year or less................ 0.0 1.0 6.0 7.0 10.0
More than one year to five years 0.5 5.0 8.0 7.0 12.0
More than five years............ 1.5 7.5 10.0 8.0 15.0
----------------------------------------------------------------------------------------------------------------
In contrast, the regulations governing savings associations provide
a table of conversion factors that is less granular as to the types of
contracts to which it applies, as well as their remaining maturity, as
follows:
------------------------------------------------------------------------
Foreign
Interest exchange
Remaining maturity rate rate
contracts contracts
(percent) (percent)
------------------------------------------------------------------------
One year or less.............................. 0.0 1.0
Over one year................................. 0.5 5.0
------------------------------------------------------------------------
This capital difference has been eliminated under the revised
capital rules which require all banks and savings associations to use
an identical table of credit conversion factors to determine the
potential future exposure of a derivative contract.
Limitation on Subordinated Debt and Limited-Life Preferred Stock
The general risk-based capital rules of the Board, the FDIC with
respect to state nonmember banks, and the OCC with respect to national
banks limit the amount of subordinated debt and intermediate-term
preferred stock that may be recognized as tier 2 capital to 50 percent
of tier 1 capital. Such a restriction is not imposed on savings
associations; however, the agencies limit the amount of tier 2 capital
to 100 percent of tier 1 capital for all banks and savings
associations.
In addition, under the general risk-based capital rules of the
Board, the FDIC with respect to state nonmember banks, and the OCC with
respect to national banks, at the beginning of each of the last five
years of the life of a subordinated debt or limited-life preferred
stock instrument, the amount eligible for inclusion in tier 2 capital
is reduced by 20 percent of the original amount of that instrument (net
of redemptions). The regulations governing savings associations provide
the option of using either the discounting approach described above or
an approach that, during the last seven years of the instrument's life,
allows for the full inclusion of all such instruments provided that the
aggregate amount of such instruments maturing in any one year does not
exceed 20 percent of the savings association's total capital.
This capital difference has been eliminated under the revised
capital rules, which do not include the capital limits described above
with respect to subordinated debt and limited-life preferred stock.
Furthermore, the revised capital rules do not provide savings
associations with alternative methodologies for the gradual de-
recognition of subordinated debt and limited-life preferred stock from
regulatory capital. Under the revised capital rules, all banks and
savings associations must reduce the amount of an instrument eligible
for inclusion in tier 2 capital by 20 percent each year, at the
beginning of each of the last five years of the life of the instrument.
Tangible Capital Requirement
Under section 5(t)(2)(B) of the Home Owners' Loan Act (HOLA),
savings associations are required by statute to maintain tangible
capital in an amount not less than 1.5 percent of total assets.\24\
This particular statutory requirement does not apply to banks. However,
under the Prompt Corrective Action (PCA) framework, all insured
depository institutions are considered critically undercapitalized if
their tangible equity falls below 2 percent.\25\ Therefore, the 1.5
percent minimum tangible capital requirement for savings associations
is generally not a binding capital requirement given the more stringent
PCA critically undercapitalized threshold.
---------------------------------------------------------------------------
\24\ See 12 U.S.C. 1464(t)(1)(A)(ii) and (t)(2)(B).
\25\ See 12 U.S.C. 1831o(c)(3); see also 12 CFR 6.4, 12 CFR
165.4 (OCC); 12 CFR 208.45 (Board); 12 CFR 325.105, 12 CFR 390.455
(FDIC).
---------------------------------------------------------------------------
This capital difference has been addressed under the revised
capital rules, which are effective for all savings associations
beginning in 2015. The revised capital rules define tangible capital
for purposes of meeting the requirements of HOLA as the amount of tier
1 capital plus the amount of outstanding perpetual preferred stock
(including related surplus) not included in tier 1 capital, which
mirrors the definition of ``tangible equity.''
Market Risk Rule
In 1996, the Board, the FDIC with respect to state nonmember banks,
and the OCC with respect to national banks, adopted rules requiring
banks with significant exposure to market risk to measure and maintain
capital to support that risk.\26\ Since then, the agencies revised
their market risk rules in a uniform manner.\27\ However, the market
risk framework did not apply to savings associations, as they generally
did not engage in the threshold level of trading activity when the
market risk rule was adopted.
---------------------------------------------------------------------------
\26\ See 61 FR 47358 (September 6, 1996).
\27\ On August 30, 2012, the agencies published a revised market
risk final rule that: (1) Enhances the market risk rule's
sensitivity to risks that are not adequately captured under the
prior market risk rule, (2) increases transparency through enhanced
disclosures, and (3) does not rely on credit ratings, consistent
with section 939A of the Dodd-Frank Act. See 77 FR 53060 (August 30,
2012). On the same day, the agencies proposed a rule that would
subject federal and state savings associations to the market risk
rule. See 77 FR 52978 (August 30, 2012). This proposed rule was
finalized as part of the revised capital rules. See also 78 FR 62018
(October 11, 2013) (Board and the OCC); and 78 FR 55340 (September
10, 2013) (FDIC). Additional technical revisions to the market risk
rule were made by the Board after the revised capital rules were
finalized to ensure that the market risk rules align with the
revised capital rules that become effective on January 1, 2015 (78
FR 76521). During 2014, the language in the OCC's and FDIC's
respective market risk rules is slightly different than the language
in the Board's market risk rule with respect to certain exposures to
sovereigns and to securitizations, as well as with respect to
certain aspects of the definition of the covered position. The FDIC
and OCC did not make corresponding technical rule revisions to their
respective market risk rules; however, they interpret their rules to
align with the technical changes in the Board rule. See OCC Bulletin
2013-13 (May 10, 2013) (OCC). When the new market risk rule goes
into effect on January 1, 2015, all three agencies will have
substantively identical language in their respective market risk
rules.
---------------------------------------------------------------------------
This capital difference has been eliminated under the revised
capital rules, which expanded the scope of the market risk rule to
include state and federal savings associations beginning in 2015.
Pledged Deposits, Nonwithdrawable Accounts, and Certain Certificates
The capital regulations governing mutual savings associations
permit such institutions to include in tier 1 capital pledged deposits
and nonwithdrawable accounts to the extent that such
[[Page 56860]]
accounts or deposits have no fixed maturity date, cannot be withdrawn
at the option of the accountholder, and do not earn interest that
carries over to subsequent periods. The regulations also recognize as
tier 2 capital net worth certificates, mutual capital certificates, and
income capital certificates, so long as such instruments comply with
applicable regulations. The risk-based capital rules of the Board, the
FDIC with respect to state nonmember banks, and the OCC with respect to
national banks do not expressly address these instruments.
This capital difference has been eliminated under the revised
capital rules, which set forth substantially identical criteria across
the agencies' rules that a capital instrument must meet to be included
in a particular tier of capital. Mutual capital instruments may be
included in regulatory capital if they meet the specified regulatory
capital criteria.\28\
---------------------------------------------------------------------------
\28\ Subject to certain statutory exceptions, all legacy capital
instruments that do not satisfy the criteria for common equity,
additional tier 1, or tier 2 capital under the revised capital rules
must be phased-out of regulatory capital.
---------------------------------------------------------------------------
Assets Subject to FDIC or Federal Savings and Loan Insurance
Corporation Agreements
The general risk-based capital rules of the Board, the OCC for
national banks, and the FDIC for state nonmember banks generally place
assets subject to guarantee arrangements by the FDIC or the former
Federal Savings and Loan Insurance Corporation (FSLIC) in the 20
percent risk-weight category. The regulations governing savings
associations place these assets in the zero percent risk-weight
category, provided they are fully covered against capital loss and/or
by yield maintenance agreements initiated by the FSLIC, regardless of
any later successor agency such as the FDIC.
This capital difference was minimized in 2010 when the agencies
clarified that the FDIC loss-sharing agreements with acquirers of
assets from failed institutions are considered conditional guarantees
for risk-based capital purposes due to contractual conditions imposed
on the acquiring institution and that the guaranteed portion of assets
subject to an FDIC loss-sharing agreement may be assigned a 20 percent
risk weight.\29\ Any such assets reported by a savings association,
other than those meeting the requirements provided in 12 CFR
167.6(a)(1)(i)(F) (federal savings associations) and 12 CFR
390.466(a)(1)(i)(F) (state savings associations) may similarly receive
a 20 percent risk weight.
---------------------------------------------------------------------------
\29\ See OCC Bulletin 2010-10 (March 2, 2010), Risk Weight for
FDIC Claims and Guarantees (OCC); Supervision and Regulation Letter
(SR 10-4), Clarification of the Risk Weight for Claims on or
Guaranteed by the FDIC (Board); and Financial Institution Letter
(FIL-7-2010), Clarification of the Risk Weight for Claims on or
Guaranteed by the FDIC (FDIC).
---------------------------------------------------------------------------
This capital difference has been eliminated under the revised
capital rules, which assign a 20 percent risk weight to all assets
supported by a conditional guarantee of the U.S. government or a U.S.
government agency.
Risk Weight for Modified or Restructured 1-4 First Mortgage Home Loans
The agencies' general risk-based capital rules vary for 1-4 first
mortgage home loans that have been modified or restructured. In
general, to qualify for a 50 percent risk weight, under each agency's
rules, a first-lien mortgage loan must have been made in accordance
with prudent underwriting standards and not be 90 days or more past
due. However, each agency's rules also provide additional requirements
for the 50 percent risk-weight category that result in different
capital treatments. Accordingly, a 1-4 first mortgage home loan that
has been restructured receives a 100 percent risk weight under the
Board's rules and the OCC's rules for national banks. In contrast, the
FDIC's rules for state nonmember banks assign a 50 percent risk weight
to any modified home mortgage loan, so long as the loan, as modified,
is not 90 days or more past due or in nonaccrual status and meets other
applicable criteria for a 50 percent risk weight. The rules for state
and federal savings associations are nearly identical to the FDIC's
rules for state nonmember banks.
The agencies' rules are consistent with respect to loans modified
pursuant to the Home Affordable Mortgage Program (HAMP or Program)
implemented by the U.S. Department of the Treasury. In 2009, the
agencies together with the OTS adopted a final rule that allows banks
and savings associations to risk weight HAMP loans with the same risk
weight assigned to the loan prior to the modification so long as the
loan continues to meet other applicable prudential criteria.\30\
---------------------------------------------------------------------------
\30\ See 74 FR 31160 (June 30, 2009). However, consistent with
the OCC's and the Board's general risk-based capital rules, if a
mortgage loan becomes 90 days or more past due or carried in
nonaccrual status or is otherwise restructured after being modified
under the Program, the loan would be assigned a risk weight of 100
percent. Consistent with the FDIC's general risk-based capital
rules, if a mortgage loan is restructured after being modified under
the Program, the loan could be assigned a risk weight of 50 percent
provided the loan, as modified, is not 90 days or more past due or
in nonaccrual status and meets the other applicable criteria for a
50 percent risk weight. Consistent with the rules that apply to
savings associations, if a mortgage loan is restructured after being
modified under the Program, the loan could be assigned a risk weight
of 50 percent provided the loan, as modified, is not 90 days or more
past due and meets the other applicable criteria for a 50 percent
risk weight.
---------------------------------------------------------------------------
This capital difference has been eliminated under the revised
capital rules, which assign a 100 percent risk weight to all 1-4
mortgage loans that are modified or restructured, except for those
restructured under HAMP which may continue to receive a 50 percent risk
weight (provided they otherwise meet the prudential criteria for a 50
percent risk weight).
Requirements for the Zero Percent Credit Conversion Factor for
Unconditionally Cancellable Commitments
The agencies' general risk-based capital rules assign a zero
percent credit conversion factor (i.e., no risk-based capital
requirement) to unused portions of commitments (other than asset-backed
commercial paper conduits) that have an original maturity of one year
or less, or which are unconditionally cancellable at any time provided
a separate credit decision is made before each drawing under the
facility. Unused portions of retail credit card lines and related plans
are deemed to be short-term commitments if the bank, in accordance with
applicable law, has an unconditional option to cancel the credit card
at any time.
In addition, the rules of the OCC and the rules that apply to both
state and federal savings associations permit a zero percent credit
conversion factor for unconditionally cancellable commitments if the
bank has a contractual right to make, and in fact does make, an annual
or more frequent credit review based upon the borrower's current
financial condition to determine whether the lending facility should be
continued. This provision results in a capital difference among the
agencies' rules because it allows a national bank or savings
association to assign a zero percent credit conversion factor to such
commitments where the bank does not conduct a separate credit review
prior to each draw, but periodically (i.e., at least annually) reviews
the credit condition of the borrower.
[[Page 56861]]
This capital difference has been eliminated under the revised
capital rules which require all banks and savings associations to apply
a zero percent credit conversion factor to a commitment that is
unconditionally cancellable.
Dated: April 17, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, September 12, 2014.
Robert deV. Frierson,
Secretary of the Board.
Dated: April 17, 2014.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2014-22593 Filed 9-22-14; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P