[Federal Register Volume 60, Number 125 (Thursday, June 29, 1995)]
[Notices]
[Pages 33803-33808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15930]
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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 as of December 31, 1994.
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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 annually
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.
[[Page 33804]]
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 as of December 31, 1994
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 annually submit a report to
specified Congressional Committees 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.
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 are substantially consistent with generally
accepted accounting principles (GAAP) as they are applied by banks. In
the limited number of cases where the bank Call Report standards are
different from GAAP, the regulatory reporting requirements are intended
to be more conservative then GAAP. The OTS requires each thrift
institution to file the Thrift Financial Report (TFR), which is
consistent with GAAP as it is applied by thrifts. However, the
reporting standards applicable to the TFR differ in some respects from
the reporting standards applicable to the bank Call Report.
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 CAMEL rating of ``1'')
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 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 ratio of not less than
4 percent).
The OTS has a 3 percent core capital and a 1.5 percent tangible
capital leverage requirement for thrift institutions. Consistent with
the requirements of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), the OTS has proposed revisions to its
leverage standard for thrift institutions so that its minimum leverage
standard will be at least as stringent as the revised leverage standard
that the OCC applies to national banks.
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. The agencies expect to issue another interest rate
risk proposal for public comment during 1995. The delay in completing a
final rule has been the result of difficulties in designing a
meaningful measurement system for interest rate risk and efforts to
seek international agreement on capital standards for this risk.
In 1993, the OTS adopted a final rule which adds an interest rate
risk component to its risk-based capital standards. Under this rule,
thrift institutions 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 deferred the September 30,
1994, effective date of its interest rate risk rule while the banking
agencies continue their work on an interest rate risk rule for banks.
The approach ultimately adopted by the banking agencies could differ
from that of the OTS.
B.3. Subsidiaries
The banking agencies consolidate all significant majority-owned
subsidiaries of the parent organization. The purpose of this practice
is to assure that capital requirements are related to all of the risks
to which the bank is 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 from capital, or the investments may be risk-
weighted at 100 percent, depending upon the circumstances. These
options, with respect to the consolidation or ``separate
capitalization'' of subsidiaries for the purpose of determining the
capital adequacy of the parent organization, provide the banking
agencies with the flexibility necessary to ensure that adequate capital
is being provided 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''
activities for national banks. Subsidiaries of thrift institutions 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 in determining 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
[[Page 33805]]
Development Act of 1992 with respect to impermissible subsidiaries that
are subject to this requirement solely by reason of their real estate
investments and activities. The OTS may extend the transition period
until July 1, 1996, on a case-by-case basis if certain conditions are
met.
B.4. Intangible Assets
The banking agencies' rules permit purchased credit card
relationships and purchased 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 core
capital. In addition, purchased credit card relationships alone are
restricted to no more than 25 percent of an institution's core capital.
Any purchased 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 core 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--The banking agencies require
full leverage capital charges on most assets sold with recourse, even
when the recourse is limited. This includes transactions where the
recourse arises because the seller, as servicer, must absorb credit
losses on the assets being serviced. The exceptions to this rule
pertain to certain pools of first lien one-to-four family residential
mortgages and to certain agricultural mortgage loans.
Banks must maintain leverage capital against most assets sold with
recourse because the banking agencies' regulatory reporting rules
generally do 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 continue to
be included in the asset base which is 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 for sales under GAAP, the OTS capital rules do not
require thrifts to hold leverage capital against such assets.
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 limits 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 OTS already has in place. Such action was mandated
four months later by Section 350 of the Riegle Community Development
and Regulatory Improvement Act of 1994 (RCDRIA). The FDIC adopted the
low level recourse rule on March 21, 1995, and the other banking
agencies have taken similar action.
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.
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 banking agencies' 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.
B.6. Collateralized Transactions
The FRB and the OCC have lowered from 20 percent to zero percent
the risk weight accorded collateralized 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 agencies 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 U.S. Government agencies or OECD
central governments. The FDIC staff is preparing a proposal that will
lower the risk weight for 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 each year of the 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. 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 33806]]
B.8. Presold Residential Construction Loans
The four agencies assign a 50 percent risk weight to loans to
builders to finance the construction of one-to-four family residential
properties that have been presold and meet certain other criteria.
However, 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.
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 loan secured by a first lien, the other by a second lien.
In this situation, if the total amount of the two loans exceeds a
prudent loan-to-value ratio, the FDIC and the FRB would not consider
the loan secured by the first lien to be eligible to receive a 50
percent risk weight. Instead, this loan would be assigned to the 100
percent risk weight category. In all cases, the FDIC would assign the
loan secured by the second lien to the 100 percent risk weight category
regardless of the aggregate loan-to-value ratio. This approach for
first liens is intended to avoid possible circumvention of the capital
requirement and to capture the risks associated with the combined
transactions.
The OCC and OTS generally assign 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.
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.
The OTS applies a capital charge appropriate to the riskiest asset
that a mutual fund is actually holding at a particular time. 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 in a manner consistent with the actual composition of the
mutual fund.
B.14. ``Covered Assets''
The banking agencies generally place assets subject to guarantee
arrangements by the FDIC or the 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 Mutual Capital Certificates do not
exist in the banking industry and are not addressed in the capital
guidelines of the three banking agencies.
The capital guidelines of OTS permit thrift institutions to include
pledged deposits and nonwithdrawable accounts that meet OTS criteria,
Income Capital Certificates, and Mutual 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 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.
The practice of the banking agencies is generally 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, virtually no transfers of assets
with recourse can be reported as sales. However, this rule does not
apply to the transfer of first lien one-to-four family residential
mortgage loans and agricultural mortgage loans under any 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 are treated as sales for Call
[[Page 33807]]
Report purposes, provided the transfers would be reported as sales
under GAAP. Furthermore, private transfers of first lien one-to-four
family residential mortgages are also reported as sales if the
transferring institution retains only an insignificant risk of loss on
the assets transferred. However, under the risk-based capital
framework, the seller's obligation under any recourse provision
resulting from transfers of mortgage loans under the government
programs or in private transfers that qualify as sales is viewed as an
off-balance sheet exposure that will be assigned a 100 percent credit
conversion factor. Thus, for risk-based capital purposes, capital is
generally required to be held for any recourse obligation associated
with such transactions.
The OTS accounting policy is to follow FASB Statement No. 77.
However, in the calculation of risk-based capital under OTS guidelines,
off-balance sheet recourse obligations are converted at 100 percent.
This effectively negates the sale treatment recognized on a GAAP basis
for risk-based capital purposes, but not for leverage capital purposes.
On May 25, 1994, the agencies issued for public comment a proposal
addressing certain aspects of the regulatory capital and reporting
treatment of assets sold with recourse. If finalized, the proposal
could reduce the differences between the bank regulatory reporting
requirements and GAAP in this area (which OTS follows) by allowing a
larger portion of asset transfers with recourse to be treated as sales
for Call Report purposes. In addition, the staffs of the four agencies
are working to implement Section 208 of the RCDRIA which mandates that
the regulatory reporting requirements applicable to transfers of small
business obligations with recourse by qualified insured depository
institutions to be consistent with GAAP.
C.2. Futures and Forward Contracts
The banking agencies, as a general rule, do not permit the deferral
of losses on futures and forward contracts whether or not they are 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 generally accepted accounting
principles 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 deferred
losses which would be reflected as assets on the balance sheet.
The FASB is working to develop a comprehensive hedge accounting
framework for all free-standing derivative instruments, including
futures and forward contracts and certain on-balance sheet instruments,
that can be applied consistently by all enterprises. The banking
agencies and the OTS are monitoring the progress of this project.
C.3. Excess Servicing Fees
As a general rule, the banking agencies do not follow GAAP for
excess servicing fees, but require a more conservative treatment.
Excess servicing arises when loans are sold with servicing retained and
the stated servicing fee rate is greater than a normal servicing fee
rate. With the exception of sales of pools of first lien one-to-four
family residential mortgages for which the banking agencies' approach
is consistent with FASB Statement No. 65, excess servicing fee income
in banks must be reported as realized over the life of the transferred
asset.
In contrast, the OTS allows 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 is
consistent with FASB Statement No. 65.
C.4. Specific Valuation Allowances for, and Charge-offs of, Troubled
Real Estate Loans not in Foreclosure
A troubled real estate loan is considered ``collateral dependent''
when the repayment of the debt will be provided solely by the
underlying real estate and there are no other available and reliable
sources of repayment.
For a troubled collateral dependent real estate loan, the banking
agencies generally treat any portion of the loan balance that exceeds
the amount that is adequately secured by the value of the collateral,
and that can clearly be identified as uncollectible, as a loss that
should be charged off. The banking agencies believe that this approach
accurately reflects the amount of recovery a financial institution is
likely to receive if it is forced to foreclose on the underlying
collateral. This banking agency approach is basically consistent with
GAAP as it has been applied by banks.
The most recent OTS policy has been to require a specific valuation
allowance against (or a partial charge-off of) a loan for the amount by
which the recorded investment in the loan (generally, its book value)
exceeds its ``value,'' as defined, when it is probable, based on
current information and events, that a thrift will be unable to collect
all amounts due (both principal and interest) on the loan. The
``value'' is either the present value of the expected future cash flows
on the loan discounted at the loan's effective interest rate, the
loan's observable market price, or the fair value of the collateral.
Previously, the OTS generally required specific valuation allowances
for troubled real estate loans based on the estimated net realizable
value of the collateral, an amount that normally exceeds fair value. By
revising its policy in 1993, OTS narrowed the accounting difference
between banks and thrifts. The revised OTS policy is somewhat similar
to the requirements of FASB Statement No. 114 on loan impairment, which
was issued in May 1993.
As all banks and thrifts adopt FASB Statement No. 114 during 1995,
this accounting difference will be eliminated. When Statement No. 114
is applied for regulatory reporting purposes, impairment of a
collateral dependent loan must be measured using the fair value of the
collateral.
C.5. 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. 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 exchange contracts (e.g., forwards,
interest rate swaps, and options). Under the Call Report instructions,
netting of other assets and liabilities is not
[[Page 33808]]
permitted unless specifically required by the instructions.
The OTS practice is to follow GAAP as it relates to offsetting in
the balance sheet.
C.6. 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.7. 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.8. In-Substance Defeasance of Debt
The banking agencies do not permit banks to report the defeasance
of their liabilities in accordance with FASB Statement No. 76.
Defeasance involves a debtor irrevocably placing risk-free monetary
assets in a trust established solely for satisfying the debt. In order
to qualify for this treatment, the possibility that the debtor will be
required to make further payments on the debt, beyond the funds placed
in the trust, must be 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. However, for Call Report
purposes, banks must continue to report defeased debt as a liability
and the securities contributed to the trust must continue to be
reported as assets. No netting is permitted, nor is any recognition of
gains or losses on the transaction allowed. The banking agencies have
not adopted FASB 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.
The OTS practice is to follow FASB Statement No. 76.
Dated at Washington, D.C., this 22nd day of June, 1995.
Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 95-15930 Filed 6-28-95; 8:45 am]
BILLING CODE 6714-01-P