View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal R eserve Bank
OF DALLAS
ROBERT

D. M c T E E R , J R .

DALLA S, TE XAS

p r e s id e n t
AND

C H IE F E X E C U T IV E

O F F IC E R

AUgUSt 15, 1995

7 5 2 65 -5 9 0 6

Notice 95-76

TO:

The Chief Executive Officer of each
member bank and bank holding company
in the Eleventh Federal Reserve District

SUBJECT
Interim Rule and Request for
Comment on Capital Adequacy Guidelines
DETAILS
The Board of Governors of the Federal Reserve System, along with the other
banking agencies, has amended the capital adequacy guidelines for banks, bank holding
companies, and savings associations to treat originated mortgage servicing rights
(OMSRs) the same as purchased mortgage servicing rights (PMSRs) for regulatory
capital purposes.'
The agencies developed the interim final rule in response to the Financial
Accounting Standards Board’s issuance of Statement No. 122, “Accounting for Mortgage
Servicing Rights.” Statement No. 122 eliminates the accounting distinction between
OMSRs and PMSRs by requiring OMSRs to be capitalized as balance sheet assets, a
treatment previously required for PMSRs only.
The agencies are requesting comment on the interim final rule, which
became effective August 1, 1995. The Board must receive comments by October 2, 1995.
Please address comments to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C.
20551. All comments should refer to Docket No. R-0887.

ATTACHMENT
A copy of the Board’s notice as it appears on pages 39226-33, Vol.60,No.
147, of the Federal Register dated August 1, 1995, is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333 -4460; E l Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston
Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastale (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

MORE INFORMATION
For more information, please contact Dorsey Davis at (214) 922-6051. For
additional copies of this Bank’s notice, please contact the Public Affairs Department at
(214) 922-5254.
Sincerely yours,

Tuesday
August 1, 1995

Part IV
Department of the Treasury
Office of the Comptroller of the Currency

Federal Reserve System,
Federal Deposit Insurance
Corporation
Department of the Treasury
Office of Thrift Supervision
12 CFR Part 3, et al.
Capital; Risk-Based Capital Guidelines;
Capital Adequacy Guidelines; Capital
Maintenance; Final Rule

39226

Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Parts 3 and 6
(Docket No. 95-18]
RIN1557-AB14

FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Docket No. R-0887]

FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 325
RIN 3064-AB61

DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 565 and 567
[Docket No. 95-140]
RIN 1550-AA84

Capital; Risk-Based Capital
Guidelines; Capital Adequacy
Guidelines; Capital Maintenance
AGENCIES: Office of the Comptroller of

the Currency (OCC), Department of the
Treasury; Board of Governors of the
Federal Reserve System (FRB); Federal
Deposit Insurance Corporation (FDIC);
Office of Thrift Supervision (OTS),
Department of the Treasury.
ACTION: Joint interim rule with request
for comments.
SUMMARY: The OCC, FRB, FDIC, and

OTS (the Agencies) are amending their
capital adequacy standards for banks,
bank holding companies, and savings
associations (banking organizations) to
treat originated mortgage servicing
rights (OMSRs) the same as purchased
mortgage servicing rights (PMSRs) for
regulatory capital purposes. The interim
capital rule was developed in response
to the Financial Accounting Standards
Board’s issuance of Statement No. 122,
“Accounting for Mortgage Servicing
Rights,” which eliminates the
accounting distinction between OMSRs
and PMSRs by requiring OMSRs to be
capitalized as balance sheet assets, a
treatment previously required only for
PMSRs. Under the interim rule, both
OMSRs and PMSRs are “included in”
(i.e., not deducted from) regulatory
capital when determining Tier 1 (core)
capital for purposes of the Agencies’
risk-based and leverage capital
standards, and when calculating

tangible equity for purposes of prompt
corrective action, subject to the
regulatory capital limitations that
previously applied only to PMSRs.
Thus, the effect of the interim rule is to
permit OMSRs in regulatory capital,
subject to certain limitations.
DATES: The interim rule is effective
August 1,1995. Comments must be
received by October 2,1995.
ADDRESSES: Commenters should
respond to their primary federal
regulator. All comments will be shared
among all of the Agencies.
OCC: Written comments should be
submitted to Docket No. 95-18,
Communications Division, Ninth Floor,
Office of the Comptroller of the
Currency, 250 E Street SW.,
Washington, DC 20219, Attention:
Karen Carter. Comments will be
available for inspection and
photocopying at that address.
FRB: Comments should refer to
Docket No. R -0887, and may be mailed
to William W. Wiles, Secretary, Board of'
Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue NW., Washington, DC 20551.
Comments also may be delivered to
Room B -2222 of the Eccles Building
between 8:45 a.m. and 5:15 p.m.
weekdays, or to the guard station in the
Eccles Building courtyard on 20th Street
NW. (between Constitution Avenue and
C Street) at any time. Comments
received will be available for inspection
in Room M P-500 of the Martin Building
between 9:00 a.m. and 5:00 p.m.
weekdays, except as provided in 12 CFR
261.8 of the Board’s rules regarding
availability of information.
FDIC: Written comments shall be
addressed to Office of the Executive
Secretary, Federal Deposit Insurance
Corporation, 550 17th Street NW.,
Washington, DC 20429. Comments may
be hand delivered to Room F—
402,1776
F Street NW., Washington, DC 20429, on
business days between 8:30 a.m. and
5:00 p.m. (Fax number: (202) 898-3838;
Internet address: comments@fdic.gov)
Comments will be available for
inspection at the FDIC’s Reading Room,
Room 7118, 550 17th Street NW.,
Washington, DC, between 9:00 a.m. and
4:30 p.m. on business days.
OTS: Send comments to Chief,
Dissemination Branch, Records
Management and Information Policy,
Office of Thrift Supervision, 1700 G
Street, N.W., Washington, D.C. 20552,
Attention Docket No. 95-140. These
submissions may be hand-delivered to
1700 G Street, N.W. between 9 a.m. and
5 p.m. on business days; they may be
sent by facsimile transmission to FAX
Number (202) 906-7755. Comments will

be available for inspection at 1700 G
Street, N.W., from 1:00 p.m. until 4:00
p.m. on business days.
FOR FURTHER INFORMATION CONTACT:

OCC: Christine A. Smith, Esq.,
Professional Accounting Fellow, (202/
874-5180), Roger Tufts, Senior
Economic Advisor, (202/874-5070),
Office of the Chief National Bank
Examiner; Mitchell Stengel, Financial
Economist, (202/874-5431), Risk
Analysis Division; Ronald
Shimabukuro, Senior Attorney, or P.
Moni SenGupta, Attorney, (202/874—
5090), Legislative and Regulatory
Activities Division, Washington, D.C.
20219.
FRB: Arthur W. Lindo, Supervisory
Financial Analyst, (202/452-2695) or
Thomas R. Boemio, Supervisory
Financial Analyst, (202/452-2982),
Division of Banking Supervision and
Regulation. For the hearing impaired
only, Telecommunication Device for the
Deaf (TDD), Dorothea Thompson (202)
452-3544, Board of Governors of the
Federal Reserve System, 20th and C
Streets, N.W., Washington, D.C. 20551.
FDIC: For supervisory issues, Stephen
G. Pfeifer, Examination Specialist, (202/
898—
8904), Accounting Section,
Division of Supervision; for legal issues,
Jules E. Bernard, Counsel, (202/8983731), Legal Division.
OTS: John F. Connolly, Senior
Program Manager for Capital Policy,
(202/906-6465), or Timothy J. Stier,
Assistant Chief Accountant, (202/9065699), Supervision; Deborah Dakin,
Assistant Chief Counsel, (202/9066445), Regulations and Legislation
Division, Office of the Chief Counsel,
Office of Thrift Supervision, 1700 G
Street, N.W., Washington, D.C. 20552.
SUPPLEMENTARY INFORMATION:

Background
Mortgage servicing rights are the
contractual obligations undertaken by
an institution to provide servicing for
mortgage loans owned by others,
typically for a fee. Originated mortgage
servicing rights (OMSRs) generally
represent the servicing rights acquired
when an institution originates mortgage
loans and subsequently sells the loans
but retains the servicing rights.
Purchased mortgage servicing rights
(PMSRs) are mortgage servicing rights
that have been purchased from other
parties.
In May 1995, the Financial
Accounting Standards Board (FASB)
issued Statement of Financial
Accounting Standards No. 122 (FAS
122), “Accounting for Mortgage
Servicing Rights.” FAS 122 eliminates
the accounting distinction between

Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / Rules and Regulations
OMSRs and PMSRs and the need for
companies engaged in mortgage banking
to sell OMSRs in order to realize their
value for financial statement purposes.
FAS 122 specifies that capitalized
mortgage servicing rights are to be
treated as a single type of asset,
regardless of how these rights were
acquired. As a result, upon an
institution’s adoption of FAS 122, both
OMSRs and PMSRs must be capitalized
as balance sheet assets, a treatment
previously permitted only for PMSRs.
Both types of mortgage servicing rights
may be reported in the same balance
sheet asset category. Thus, on a
prospective basis, under generally
accepted accounting principles (GAAP),
there generally will no longer be any
significant accounting distinction
between OMSRs and PMSRs for
reporting, valuation, or disclosure
purposes.
Prior to the issuance of FAS 122,
GAAP referred to PMSRs as intangible
assets. FAS 122 eliminates the reference
to PMSRs as intangible assets but does
not characterize mortgage servicing
rights as either intangible or tangible
assets. FAS 122 indicates th ii no
characterization of mortgage servicing
rights as either intangible or tangible
assets is necessary because similar
characterizations are not made for most
other assets. However, FAS 122 also
indicates that the elimination of the
intangible asset reference does not
imply that mortgage servicing rights are
tangible assets.
FAS 122 requires that mortgage
servicing rights be considered impaired
whenever their fair value is less than
their amortized cost. A valuation
allowance is required for the amount of
any impairment, which must be
measured by stratifying mortgage
servicing rights based on one or more of
the predominant risk characteristics of
the underlying loans. These
characteristics may include loan type,
size, note rate, date of origination, term
and geographic location.
FAS 122 is effective for financial
statements prepared in accordance with
GAAP for fiscal years beginning after
December 15,1995, although FASB
encourages earlier application. On June
2 1,1995, the Federal Financial
Institutions Examination Council
(FFIEC) announced that banks must
adopt FAS 122 for purposes of the
Reports of Condition and Income (Call
Report) as of the same effective date and
with earlier application permitted to the
extent allowable in this accounting
standard. The OTS requires savings
associations to follow GAAP for
regulatory reporting and, thus, FAS
122’s effective date provisions are also

applicable for Thrift Financial Report
purposes.1
Interim Amendments to the Capital
Adequacy Guidelines
Banking organizations adopting FAS
122 early could reflect OMSRs on their
regulatory reports as soon as June 30,
1995.2 In view of this implementation
schedule, the Agencies are now
adopting an interim rule that is effective
immediately in order to give banking
organizations that adopt FAS 122 early
direction on the regulatory capital
treatment of OMSRs.
Under the interim rule, for risk-based
and leverage capital purposes, mortgage
servicing rights, including both PMSRs
and OMSRs 3, and purchased credit card
relationships (PCCRs) may be included
in capital only to the extent that, in the
aggregate, they do not exceed 50 percent
of Tier 1 (core) capital.4 For purposes of
calculating Tier 1 (core) capital, all
mortgage servicing rights are valued—as
PMSRs previously were— at the lesser of
90 percent of fair market value or 100
percent of their book value (net of any
valuation allowance). In addition, under
the interim rule, the amount of mortgage
servicing rights that may be included in
1 C o m m e rc ia l ban k s a re re q u ire d to file q u a rte rly
C o n s o lid a te d R e p o rts o f C o n d itio n a n d In co m e (Call
R e p o rts) a n d s h o u ld re p o rt O M S R s a n d P M S R s in
S c h e d u le RC-M (M e m o ra n d a ), ite m 6 .a ., “ M ortgage
s e rv ic in g rig h ts” a n d in S c h e d u le R C (B a la n c e
S h e e t), ite m 1 0 , “ In tan gib le a s s e ts .” B a n k h old in g
c o m p a n ie s w ith to ta l c o n s o lid a te d a s s e ts o f $ 1 5 0
m illio n o r m o re file q u a rte rly C o n so lid a te d
F in a n c ia l S ta te m e n ts for B a n k H o ld in g C o m p a n ie s
(F R Y - 9 C re p o rts) w ith th e F e d e ra l R e se rv e , an d
s h o u ld re p o rt O M SR s a n d P M S R s in S c h e d u le H C—
C o n s o lid a te d B a la n c e S h e e t, item 1 0 .a ., “ M ortgage
s e rv ic in g rig h ts .” S a v in g s A s s o c ia tio n s a re re q u ire d
to file q u a rte rly T h rift F in a n c ia l R e p o rts a n d s h o u ld
re p o rt c a p ita liz e d O M SR s a n d P M S R s o n T h rift
F in a n c ia l R ep ort S c h e d u le SC , lin e 6 4 0 , w h ic h is
c u r r e n tly lab eled “ p u rc h a s e d lo a n s e rv ic in g r ig h ts .”
2 B a n k in g o rg a n iz a tio n s th a t d o n o t a d o p t F A S
1 2 2 e a rly m a y n ot ca p ita liz e O M SR s in 1 9 9 5 a n d
w o u ld not re fle ct th e a s s e t o n th e ir re g u la to ry
re p o rts. In th e in te rim , s u c h in s titu tio n s s h o u ld
c o n tin u e to re p o rt P M S R s in a c c o r d a n c e w ith th e
e x istin g C all R e p o rt a n d T h rift F in a n c ia l R ep ort
in s tru c tio n s u n til th e y a d o p t F A S 1 2 2 in 1 9 9 6 .
3 D ue to th e 5 0 p e rc e n t o f T ie r 1 (co re ) ca p ita l
lim ita tio n , it is p o ssib le th a t a t le a st so m e o f th e
O M SR s a n in stitu tio n re p o rts a s b a la n c e sh eet
a s s e ts for C all R e p o rt a n d T h rift F in a n c ia l R ep ort
p u rp o se s m a y b e re q u ire d to be d e d u cte d in
c o m p u tin g re g u la to ry c a p ita l u n d e r th is in te rim
ru le . F o r p u rp o se s o f d e te rm in in g th e a m o u n t o f
a n y O M SR s th at w o u ld be d e d u cte d (o r d isa llo w e d )
u n d e r th is 5 0 p e rc e n t o f T ie r 1 (c o re ) ca p ita l
lim ita tio n , in s titu tio n s m a y c h o o s e to re d u c e th e ir
o th e rw is e d is a llo w e d O M SR s b y th e a m o u n t o f a n y
a s s o c ia te d d eferred ta x lia b ility . A n y s u c h d eferred
ta x lia b ility u se d in th is m a n n e r w o u ld n ot be
a v a ila b le for th e in s titu tio n to u se in d e te rm in in g
th e a m o u n t o f a n y net d eferred ta x a s s e ts th at m a y
b e in c lu d e d in T ie r 1 (co re ) c a p ita l for risk -b ased
a n d le v e ra g e c a p ita l p u rp o se s.
4 T h e 2 5 p e rc e n t o f T ie r 1 (co re ) c a p ita l su b lim it
o n P C C R s is not affe cte d by th is ru le m a k in g . In
a d d itio n , all o th e r in tan gib le a s s e ts c o n tin u e to be
fu lly d e d u cte d from c a p ita l.

39227

tangible equity for purposes of prompt
corrective action is the same as that
permitted in Tier 1 (core) capital.
The Agencies are adopting this
interim rule because they believe that
the risk characteristics of OMSRs are
similar to those of PMSRs. In view of
the subjectivity and uncertainty
surrounding the valuation of PMSRs
and the consequent risks resulting from
a high concentration of these assets, the
Agencies previously decided to limit the
amount of PMSRs that an institution
could include in regulatory capital.
Therefore, the Agencies believe that it is
consistent to limit OMSRs in the same
manner as PMSRs, pending.a review of
the comments received on this interim
rule and the Agencies’ resulting
determination of the appropriate capital
treatment of mortgage servicing rights.
This interim capital rule is consistent
with the recommendations provided on
June 2 1 ,1995, to the Agencies by the
FFIEC’s Task Force on Supervision.
The Agencies are seeking comment on
all aspects of this interim rule. The
Agencies also request specific comment
on the following:
(1) For regulatory capital purposes,
the Agencies have considered PMSRs as
intangible assets. This determination
was based, in part, on the prior GAAP
characterization of this asset. FAS 122
indicates indifference toward any
characterization of mortgage servicing
rights (both PMSRs and OMSRs) as
intangible or tangible assets.
(a) Should mortgage servicing rights
be viewed as intangible assets for
regulatory capital purposes?
(b) If mortgage servicing rights are
considered to be intangible assets for
regulatory capital purposes, should they
continue to be subject to the regulatory
capital limitations previously applied
only to PMSRs?
(c) If mortgage servicing rights are
considered to be tangible assets for
regulatory capital purposes, what
regulatory capital limitations, if any,
should apply?
(2) How should any deferred tax
liability associated with PMSRs and
OMSRs be treated when calculating a
regulatory capital limit?
(3) When an institution originates
mortgage loans and swaps them for
mortgage-backed securities, including
agency guaranteed mortgage-backed
securities, FAS 122 requires the
institution to attribute a separate cost
basis to the loan and servicing right
components of such mortgage-backed
securities. What is the appropriate
regulatory capital treatment of mortgage
servicing rights that are associated with
mortgage-backed securities that are

39228

Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / Rules and Regulations

acquired in swap transactions and
included in an institution’s assets?
Regulatory Flexibility Act Analysis
The Agencies do not believe that the
adoption of their interim rule will have
a significant economic impact on a
substantial number of small business
entities (in this case, small banking
organizations), in accordance with the
spirit and purposes of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.).
Because of the pre-FAS 122 accounting
treatment of OMSRs, no banking
organizations—large or small—currently
carry any OMSRs, which are the subject
of the interim lule, as assets on their
balance sheets or include them in
capital. The Agencies’ interim rule, in
combination with the requirement that
institutions adopt FAS 122 for
regulatory reporting purposes, allows
banking organizations to increase their
regulatory capital by including OMSRs
in assets and Tier 1 (core) capital. This
interim rale would only affect those
banking organizations that originate and
subsequently sell or securitize mortgage
loans but retain the servicing rights. In
addition, FAS 122 is to be applied
prospectively. As a result, OMSRs will
only need to be capitalized for those
transactions that occur after the date as
of which an institution adopts FAS 122.
Moreover, because the risk-based and
leverage capital guidelines generally do
not apply to bank holding companies
with consolidated assets of less than
$150 million, this proposal will not
affect such companies.
OCC and OTS Executive Order 12866
Statement
The Comptroller of the Currency and
the Director of the OTS have determined
that the interim rule described in this
notice is not a significant regulatory
action under Executive Order 12866.
Accordingly, a regulatory impact
analysis is not required.
Paperwork Reduction Act and
Regulatory Burden
The Agencies have determined that
thic interim rule will not increase the
regulatory paperwork burden of banking
organizations pursuant to the provisions
of the Paperwork Reduction Act (44
U.S.C. 3501 et seq.).
Section 302 of the Riegle Community
Development and Regulatory
Improvement Act of 1994 (Pub. L. 1 0 3 325, 108 Stat. 2160) provides that the
federal banking agencies must consider
the administrative burdens and benefits
of any new regulation that imposes
additional requirements on insured
depository institutions. The Agencies
have found that their interim rule does

not impose any additional reporting or
recordkeeping burdens. Section 302 also
requires such a rule to take effect on the
first day of the calendar quarter
following final publication of the rule,
unless the agency, for good cause,
determines an earlier effective date is
appropriate. The Agencies have decided
that their interim rule should be
effective immediately because it
provides institutions with information
on the regulatory capital treatment for
OMSRs that may begin to be reported on
the June 30 ,1 9 9 5 Call Report and Thrift
Financial Report.

alternatives before promulgating a rule.
As discussed in the preamble, this
interim rule, in conjunction with FAS
122, permits OMSRs to be capitalized as
balance sheet items, a treatment that
was previously only permitted for
PMSRs. Under the interim rule, OMSRs
will be included in calculating Tier 1
(core) capital for risk-based capital and
leverage capital standards subject to the
same constraints that are imposed on
PMSRs. Thus, no additional cost of $100
million or more, to State, local, or tribal
governments or to the private sector will
result from this rule. Accordingly, the
OCC and the OTS have not prepared a
budgetary impact statement nor
specifically addressed any regulatory
alternatives.

Administrative Procedure Act
Pursuant to section 553 of the
Administrative Procedure Act, 5 U.S.C.
553, the Agencies find good cause for
List of Subjects
issuing this interim rule in advance of
the receipt of comments from interested
12 CFR Part 3
parties and for waiving the 30-day delay
Administrative practice and
of effectiveness provisions of the
procedure, Capital, National banks,
Administrative Procedures Act. This
Reporting and recordkeeping
“good cause” determination is based
requirements, Risk.
upon institutions’ immediate need to
know how to treat OMSRs in computing 12 CFR Part 6
regulatory capital. This guidance is
Capital, National banks.
necessary because the Financial
Accounting Standards Board, on May
12 CFR Part 208
12, 1995, revised the treatment of
Accounting, Agriculture, Banks,
OMSRs under generally accepted
banking, Confidential business
accounting principles by adopting
information, Crime, Currency, Federal
Statement of Financial Accounting
Reserve System, Flood insurance,
Standard No. 122 (FAS 122),
Mortgages, Reporting and recordkeeping
“Accounting for Mortgage Servicing
Rights,” which institutions may adopt
•requirements, Securities.
beginning in reports prepared as of June
12 CFR Part 225
30,1995. Under FAS 122, OMSRs will
be capitalized and included in assets
Administrative practice and
with corresponding increases to an
procedure, Banks, banking, Federal
institution’s capital base. Prior to the
Reserve System, Holding companies,
issuance of FAS 122, OMSRs were not
Reporting and recordkeeping
capitalized and not recorded on the
requirements, Securities.
balance sheet. This interim rule allows
12 CFR Part 325
institutions that early adopt FAS 122 in
their June 30 ,1 9 9 5 , regulatory reports to
Bank deposit insurance, Banks,
include OMSRs in assets and regulatory banking, Capital adequacy, Reporting
and recordkeeping requirements,
capital, subject to certain limitations.
Savings associations, State nonmember
OCC and OTS Unfunded Mandates Act
banks.
Statement
12 CFR Part 565
Section 202 of the Unfunded
Mandates Reform Act of 1995, Public
Administrative practice and
Law 104— (Unfunded Mandates Act)
4
procedure, Capital, Savings
(signed into law on March 22,1995)
associations.
requires that an agency prepare a
12 CFR Part 567
budgetary impact statement before
promulgating a rule that includes a
Capital, Reporting and recordkeeping
Federal mandate that may result in
requirements, Savings associations.
expenditure by State, local and tribal
Authority and Issuance
governments, in the aggregate, or by the
private sector, of $100 million or more
Office o f the Comptroller o f the
in any one year. If a budgetary impact
Currency
statement is required, section 205 of the
12 CFR Chapter I
Unfunded Mandates Act also requires
an agency to identify and consider a
For the reasons set out in the joint
reasonable number of regulatory
preamble, the Office of the Comptroller

Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / Rules and Regulations
of the Currency amends 12 CFR chapter
I 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, 1 6 1 ,1 8 1 8 ,
1828(n), 1828 note, 1831n note, 1 835, 3907,
and 3909.

2. In part 3, paragraph (c)(2) of § 3.100
is revised to read as follows:
§3.100

*

Capital and surplus.

*
*

*
*

*

*

*

(2) Mortgage servicing rights;
*
*
*
*
3. In appendix A to part 3, paragraph
(c)(13) of section 1 is revised to read as
follows:
*

Appendix A to Part 3 —Risk-Based
Capital Guidelines
Section 1. Purpose, Applicability o f
G uidelines, a n d Definitions

*

*

*

*

*

(c) * * *
(13) Intangible assets include mortgage
servicing rights, purchased credit card
relationships (servicing rights), goodwill,
favorable leaseholds, and core deposit value.

*

*
*
*
*
4. In appendix A to part 3, paragraphs
(c) introductory text, (c)(1), and (c)(3) of
section 2 are revised to read as follows:
*
*
*
*
*
Section 2. C om ponents o f Capital

*

*

*

*

*

(c) D eductions From Capital. The following
items are deducted from the appropriate
portion of a national bank’s capital base
when calculating its risk-based capital ratio:
(1) D eductions from Tier 1 capital. The
following items are deducted from Tier 1
capital before the Tier 2 portion of the
calculation is made:
(1) All goodwill subject to the transition
rules contained in section 4(a)(1) (ii) of this
appendix A;
(ii) Other intangible assets, excep t as
provided in section 2(c)(2) of this appendix
A; and
(iii) Deferred tax assets, excep t as provided
in section 2(c)(3) of this appendix A , that are
dependent upon future taxable incom e,
which exceed the lesser of either:
(A) The amount of deferred tax assets that
the bank could reasonably exp ect to realize
within one year of the quarter-end Call
Report, based on its estim ate of future taxable
income for that year; or
(B) 10% of Tier 1 capital, net of goodwill
and all intangible assets other than mortgage
servicing rights and purchased credit card
relationships, and before any disallowed
deferred tax assets are deducted.
(2) Qualifying intangible assets. Subject to
the following conditions, mortgage servicing
6 [R eserv ed ].

rights (originated and purchased) and
purchased credit card relationships need not
be deducted from Tier 1 capital:
(i) The total of all intangible assets which
are included in Tier 1 capital is limited to 50
percent of Tier 1 capital, of which no more
than 25 percent of Tier 1 capital can consist
of purchased credit card relationships.
Calculation of these limitations m ust be
based on Tier 1 capital net of goodwill and
other disallowed intangible assets.
(ii) Each intangible asset w hich is included
in Tier 1 capital must be valued at the lesser
of:
(A) 90 percent of the fair market value of
the intangible asset, determined in
accordance with section 2(c)(2)(iii) of this
appendix A; or
(B) 100 percent of the remaining
unamortized book value of the intangible
asset, determined at least quarterly in
accordance with the instructions of the Call
Report.
(iii) Banks shall determine the current fair
market value of each intangible asset
included in Tier 1 capital at le&st quarterly.
The quarterly determination of the current
fair market value of the intangible asset must
include adjustments for any significant
changes in original valuation assumptions,
including changes in prepaym ent estimates.
In determining the current fair market value
of the intangible asset, the bank shall apply
an appropriate market discount rate to the
expected net cash flows of the intangible
asset.

*

*

*

*

*

PART 6— PROMPT CORRECTIVE
ACTION
1. The authority citation for part 6 continues to read as follows:
Authority: 12 U.S.C. 93a, 18310.

2. In subpart A to part 6, paragraph (g)
of § 6.2 is revised to read as follows:
§6.2

*

Definitions.

*

*

*

*

(g) Tangible equity means the amount
of Tier 1 capital elements in the OCC’s
Risk-Based Capital Guidelines
(appendix A to part 3 of this chapter)
plus the amount c f outstanding
cumulative perpetual preferred stock
(including related surplus) minus all
intangible assets except mortgage
servicing rights to the extent permitted
in Tier 1 capital under section 2(c) in
appendix A to part 3 of this chapter.
*
*
*
*
*
Dated: July 2 1 ,1 9 9 5 .
Eugene A. Ludwig,
Comptroller o f the Currency.

F ed eral R eserve System
12 CFR C hapter II
For the reasons outlined in the joint
preamble, the Board of Governors of the
Federal Reserve System amends 12 CFR
Chapter II as set forth below.

39229

PART 208—MEMBERSHIP OF STATE
BANKSNG INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)
1. The authority citation for part 208
is revised to read as follows:
Authority: 12 U.S.C. 36, 248(a), 248(c),
3 2 1 -3 3 8 , 3 7 ld , 4 6 1 , 4 8 1 - 4 8 6 , 6 0 1 , 6 1 1 ,1 8 1 4 ,
1823(j), 1828(o), 18310, 1 8 3 1 p -l , 3 1 0 5 , 3310,
3 3 3 1 -3 3 5 1 and 3 9 0 6 -3 9 0 9 ; 15 U.S.C. 78b,
781(b), 781(g), 78l(i), 78o—
4(c) (5), 78q, 7 8 q 1, and 78w ; 31 U.S.C. 5 318; 42 U.S.C. 40 1 2 a ,
4104a, 4104b , 4 1 0 6 , and 4128.

2. In § 208.31, paragraph (f) is revised
to read as follows:
§ 208.31

*

Definitions.

*

*
*
*
(f) Tangible equity means the amount
of core capital elements in the Board’s
Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
(Appendix A to this part), plus the
amount of outstanding cumulative
perpetual preferred stock (including
related surplus), minus all intangible
assets except mortgage servicing rights
to the extent that the Board determines
that mortgage servicing rights may be
included in calculating the bank’s tier 1
capital.
*
*
*
*
*
3. Appendix A to part 208 is amended
by revising section II.B.l.b. to read as
follows:
Appendix A to Part 208—Capital
Adequacy Guidelines for State Member
Banks: Risk-Based Measure
*
*
*
*
*
2|

*

*

B

*

*

*

I

*

*

*

*

b. O ther intangible assets, i. The only types
of identifiable intangible assets that may be
included in, that is, not deducted from, a
bank’s capital are readily marketable
mortgage servicing rights and purchased
credit card relationships, provided that, in
the aggregate, the total am ount of these assets
included in capital does not exceed 50
percent of tier 1 capital. Purchased credit
card relationships are subject to a separate
sublimit of 25 percent of tier 1 cap ital.14
ii.
For purposes of calculating these
limitations on mortgage servicing rights and
purchased credit card relationships, tier 1
capital is defined as the sum of core capital
14 A m o u n ts o f m o rtg a g e s e r v ic in g r ig h ts an d
p u rc h a s e d c r e d it c a r d r e la tio n s h ip s in e x c e s s o f
th e s e lim ita tio n s , a s w e ll a s a ll o th e r id en tifiab le
in tan gib le a s s e ts , in c lu d in g c o r e d e p o sit in tan g ib lec
a n d fav o rab le le a se h o ld s, a r e to be d e d u c te d from
a b a n k ’s c o r e c a p ita l e le m e n ts in d e te rm in in g tie r
1 c a p ita l. H o w e v e r, id e n tifia b le in ta n g ib le a s s e ts
(o th e r th a n m o rtg a g e s e r v ic in g rig h ts a n d p u rc h a s e d
c re d it c a r d re la tio n s h ip s ) a c q u ir e d o n o r b efo re
F e b ru a ry 1 9 , 1 9 9 2 , g e n e ra lly w ill n o t b e d e d u c te d
from c a p ita l for s u p e rv is o ry p u rp o se s , alth o u gh ' '
th e y w ill c o n tin u e to b e d e d u c te d for a p p lic a tio n s
p u rp o se s.

39230

Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / Rules and Regulations

elements, net of goodwill and all identifiable
intangible assets other than mortgage
servicing rights and purchased credit card
relationships, regardless of the date acquired.
This method of calculation could result in
mortgage servicing rights and purchased
credit card relationships being included in
capital in an amount greater than 50
percent— or in purchased credit card
relationships being included in an amount
greater than 25 percent—of the amount of tier
1 capital used to calculate an institution’s
capital ratios. In such instances, the Federal
Reserve may determine that a bank is
operating in an unsafe and unsound manner
because of over-reliance on intangible assets
in tier 1 capital.
iii. Banks must review the book value of all
intangible assets at least quarterly and make
adjustments to these values as necessary. The
fair market value of mortgage servicing rights
and purchased credit card relationships also
m ust be determined at least quarterly. The
fair market value generally shall be
determined by applying an appropriate
market discount rate to the expected future
net cash flows. This determination shall
include adjustments for any significant
changes in original valuation assumptions,
including changes in prepayment estimates
or account attrition rates.
iv. Examiners will review both the book
value and the fair market value assigned to
these assets, together with supporting
docum entation, during the examination
process. In addition, the Federal Reserve may
require, on a case-by-case basis, an
independent valuation of a bank’s intangible
assets.
v. The amount of mortgage servicing rights
and purchased credit card relationships that
a bank may include in capital shall be the
lesser of 90 percent of their fair market value,
as determined in accordance with this
section, or 100 percent of their book value,
as adjusted for capital purposes in
accordance with the instructions in the
com m ercial bank Consolidated Reports of
Condition and Income (Call Reports). If both
the application of the limits on mortgage
servicing rights and purchased credit card
relationships and the adjustment of the
balance sheet amount for these intangibles
w ould result in an amount being deducted
from capital, the bank would deduct only the
greater of the two amounts from its core
capital elements in determining tier 1 capital.
vi. The treatment of identifiable intangible
assets set forth in this section generally will
be used in the calculation of a bank’s capital
ratios for supervisory and applications
purposes. However, in making an overall
assessment of a bank’s capital adequacy for
applications purposes, the Board may, if it
deem s appropriate, take into account the
quality and composition of a bank’s capital,
together with the quality and value of its
tangible and intangible assets.
vii. Consistent with long-standing Board
policy, banks experiencing substantial
grow th, whether internally or by acquisition,
are expected to maintain strong capital
positions substantially above minimum
supervisory levels, without significant
reliance on intangible assets.
2 « * *

*

*

*

*

*

4. Appendix A to part 208 is amended
by revising section II.B.4. to read as
follows:
*
*
*
*
*

based capital guidelines contained in
A ppendix A of this part will be used.2 As a
general m atter, average total consolidated
assets are defined as the quarterly average
total assets (defined net of the allowance for
II. * * *
loan and lease losses) reported on the bank’s
B. * * *
Reports of Condition and Income (Call
4. D eferred tax assets. The amount of
Reports), less goodwill; amounts of mortgage
deferred tax assets that are dependent upon
servicing rights and purchased credit card
future taxable income, net of the valuation
relationships that, in the aggregate, are in
allow ance for deferred tax assets, that may be
excess of 50 percent of tier 1 capital; amounts
included in, that is, not deducted from, a
of purchased credit card relationships in
bank’s capital may not exceed the lesser of:
excess of 25 percent of tier 1 capital; all other
(i) the amount of these deferred tax assets
intangible assets; any investments in
that the bank is expected to realize within
subsidiaries or associated com panies that the
one year of the calendar quarter-end date,
Federal Reserve determines should be
based on its projections of future taxable
deducted from tier 1 capital; and deferred tax
incom e for that year,20 or (ii) 10 percent of
assets that are dependent upon future taxable
tier 1 capital. The reported amount of
incom e, net of their valuation allow ance, in
deferred tax assets, net of any valuation
* excess of the limitation set forth in section
allow ance for deferred tax assets, in excess of II.B.4 of this Appendix A.3
*
*
*
*
*
the lesser of these two amounts is to be
deducted from a bank’s core capital elements
in determining tier 1 capital. For purposes of
PART 225— BANK HOLDING
calculating the 10 percent limitation, tier 1
COMPANIES AND CHANGE IN BANK
capital is defined as the sum of core capital
CONTROL (REGULATION Y)
elements, net of goodwill and all identifiable
intangible assets other than mortgage
1. The authority citation for part 225
servicing rights and purchased credit card
continues to read as follows:
relationships, before any disallowed deferred
Authority: 12 U.S.C. 1817(j)(13), 1818,
tax assets are deducted. There generally is no
1828(o), 1831i, 1 8 3 1 p -l , 1843(c)(8), 1844(b),
lim it in tier 1 capital on the amount of
1972(1), 3106, 3108, 3310, 3 3 3 1 -3 3 5 1 , 3907,
deferred tax assets that can be realized from
and 3909.
taxes paid in prior carryback years or from
future reversals of existing taxable temporary
differences, but, for banks that have a parent,
this may not exceed the amount the bank
could reasonably expect its parent to refund.

*

*
*
*
*
5. Appendix B to part 208 is amended
by revising section Il.b. to read as
follows:
Appendix B to Part 208— Capital
Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
*
*
*
*
*
II. * * *
b. A bank’s tier 1 leverage ratio is
calculated by dividing its tier 1 capital (the
num erator of the ratio) by its average total
consolidated assets (the denominator of the
ratio). The ratio will also be calculated using
period-end assets whenever necessary, on a
case-by-case basis. For the purpose of this
leverage ratio, the definition of tier 1 capital
for year-end 1992 as set forth in the risk20 T o d e te rm in e th e a m o u n t o f e x p e c te d d eferred
t a x a s s e ts r e a liz a b le in th e n e x t 12 m o n th s , an
in s titu tio n s h o u ld a ssu m e th a t all e x istin g
te m p o ra ry d iffe re n ce s fully re v e rs e a s o f th e re p o rt
d ate. P ro je c te d fu tu re ta x a b le in c o m e s h o u ld not
in c lu d e n e t o p e ra tin g lo ss ca rry fo rw a rd s to be u sed
d u rin g th a t y e a r o r th e a m o u n t o f e x istin g
te m p o ra ry d iffe re n ce s a b an k e x p e c ts to re v e rse
w ith in th e y e a r . S u c h p ro je c tio n s s h o u ld in c lu d e
th e e s tim a te d effect o f ta x p la n n in g s tra te g ie s th at
th e o rg a n iz a tio n e x p e c ts to im p le m e n t to re a liz e net
o p e ra tin g lo s se s o r ta x c re d it ca rry fo rw a rd s that
w o u ld o th e rw is e e x p ir e d u rin g th e y e a r. In stitu tio n s
d o n o t h a v e to p re p a re a n ew 1 2 m o n th p ro je c tio n
e a c h q u a rte r. R a th e r, o n in te rim re p o rt d ates,
in s titu tio n s m a y u se th e fu ture ta x a b le in co m e
p ro je c tio n s for th e ir c u rre n t fisca l y e a r, a d ju ste d for
a n y s ig n ific a n t c h a n g e s th at h a v e o c c u r r e d or are
e x p e c te d to o c c u r.

2. Appendix A to part 225 is amended
by revising section II.B.l.b. to read as
follows:
Appendix A to Part 225— Capital
Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
*
*
*
*
*
II. * * *
B. * * *
I

* *

*

b. O ther intangible assets, i. The only types
of identifiable intangible assets that may be
included in, that is, not deducted from, a
organization’s capital are readily marketable
mortgage servicing rights and purchased
credit card relationships, provided that, in
the aggregate, the total amount of these assets
included in capital does not exceed 50
percent of tier 1 capital. Purchased credit
card relationships are subject to a separate
sublimit of 25 percent of tier 1 capital.15
2 A t th e en d o f 1 9 9 2 , tie r 1 c a p ita l for state
m e m b e r b a n k s in c lu d e s c o m m o n e q u ity , m in o rity
in te re s t in th e e q u ity a c c o u n ts o f c o n s o lid a te d
su b s id ia rie s , a n d q u alify in g n o n cu m u la tiv e
p e rp e tu a l p re fe rre d sto ck . In a d d itio n , as a g en eral
m a tte r, t ie r 1 c a p ita l e x c lu d e s g o o d w ill; a m o u n ts o f
m o rtg a g e s e rv ic in g rig h ts a n d p u rc h a s e d c re d it c a rd
r e la tio n s h ip s th a t, in th e a ggregate, e x c e e d 5 0
p e r c e n t o f tie r 1 c a p ita l; a m o u n ts o f p u rc h a s e d
c r e d it c a r d re la tio n s h ip s th a t e x c e e d 2 5 p e rc e n t o f
tie r 1 c a p ita l; a ll o th e r in tan gib le a s s e ts ; an d
d e fe rre d ta x a s s e ts th a t a re d e p e n d e n t u p o n future
ta x a b le in c o m e , n e t o f th e ir v a lu a tio n a llo w a n c e , in
e x c e s s o f c e r ta in lim ita tio n s. T h e F e d e ra l R eserve
m a y e x c lu d e c e rta in in v e s tm e n ts in su b s id ia rie s or
a s s o c ia te d c o m p a n ie s a s a p p ro p ria te .
3 D e d u c tio n s from tie r 1 c a p ita l a n d o th er
a d ju s tm e n ts a r e d is cu ss e d m o re fu lly in s e c tio n II.B .
in A p p e n d ix A o f th is p art.
15
A m o u n ts o f m ortg age s e rv ic in g rig h ts an d
p u r c h a s e d c re d it ca rd re la tio n s h ip s in e x c e s s o f

Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / Rules and Regulations
ii. For purposes of calculating these
limitations on mortgage servicing rights and
purchased credit card relationships, tier 1
capital is defined as the sum of core capital
elements, net of goodwill and all identifiable
intangible assets other than mortgage
servicing rights and purchased credit card
relationships, regardless of the date acquired.
This method of calculation could result in
mortgage servicing rights and purchased
credit card relationships being included in
capital in an amount greater than 50
percent— or in purchased credit card
relationships being included in an amount
greater than 25 percent— of the amount of tier
1 capital used to calculate an institution’s
capital ratios. In such instances, the Federal
Reserve may determine that an organization
is operating in an unsafe and unsound
manner because of overreliance on intangible
assets in tier 1 capital.
iii. Bank holding companies m ust review
the book value of all intangible assets at least
quarterly and make adjustments to these
values as necessary. The fair market value of
mortgage servicing rights and purchased
credit card relationships also must be
determined at least quarterly. The fair market
value generally shall be determ ined by
applying an appropriate market discount rate
to the expected future net cash flows. This
determination shall include adjustments for
any significant changes in original valuation
assumptions, including changes in
prepayment estimates or account attrition
rates.
iv. Exam iners will review both the book
value and the fair market value assigned to
these assets, together with supporting
docum entation, during the inspection
process. In addition, the Federal Reserve may
require, on a case-by-case basis, an
independent valuation of an organization’s
intangible assets.
v. The amount of mortgage servicing rights
and purchased credit card relationships that
a bank holding company may include in
capital shall be the lesser of 90 percent of
their fair m arket value, as determined in
accordance with this section, or 10 0 percent
of their book value, as adjusted for capital
purposes in accordance w ith the instructions
to the Consolidated Financial Statements for
Bank Holding Companies (FR Y -9 C Report).
If both the application of the limits on
mortgage servicing rights and purchased
credit card relationships and the adjustment
of the balance sheet amount for these
intangibles would result in an amount being
deducted from capital, the bank holding
company would deduct only the greater of
the two amounts from its core capital
elements in determining tier 1 capital.
vi. The treatment of identifiable intangible
assets set forth in this section generally will
th ese lim ita tio n s , a s w e ll a s a ll o th e r id en tifiab le
in tan gib le a s s e ts , in clu d in g c o r e d e p o sit in tan gib les
a n d favorab le le a se h o ld s, a re to be d e d u c te d from
a n o rg a n iz a tio n ’s c o r e c a p ita l e le m e n ts in
d e te rm in in g tie r 1 c a p ita l. H o w e v e r, id e n tifia b le
in tan gib le a s s e ts (o th e r th a n m o rtg a g e s e rv ic in g
rig h ts a n d p u r c h a s e d c re d it c a r d re la tio n sh ip s)
acq u ired o n o r b efore F e b ru a ry 1 9 , 1 9 9 2 , ge n e ra lly
w ill not b e d e d u c te d from c a p ita l for s u p e rv iso ry
p u rp o ses, alth o u g h th e y w ill c o n tin u e to be
d ed u cted for a p p lic a tio n s p u rp o se s .

be used in the calculation of a bank holding
com pany’s capital ratios for supervisory and
applications purposes. However, in making
an overall assessment of an organization’s
capital adequacy for applications purposes,
the Board may, if it deems appropriate, take
into account the quality and com position of
an organization’s capital, together with the
quality and value of its tangible and
intangible assets.
vii. Consistent with long-standing Board
policy, banking organizations experiencing
substantial growth, w hether internally or by
acquisition, are expected to m aintain strong
capital positions substantially above
minimum supervisory levels, without
significant reliance on intangible assets.
2

*

*

*

*

*

*

*

*

3. Appendix A to Part 225 is amended
by revising section II.B.4. to read as
follows:
*
*
*
*
*
II. * * *
B. * * *
4. D eferred tax assets. The amount of
deferred tax assets that are dependent upon
future taxable income, net of the valuation
allowance for deferred tax assets, that may be
included in, that is, not deducted from, a
banking organization’s capital m ay not
exceed the lesser of: (i) the am ount of these
deferred tax assets that the banking
organization is expected to realize within one
year of the calendar quarter-end date, based
on its projections of fiiture taxable incom e for
that year,23 or (ii) 10 percent of tier 1 capital.
The reported amount of deferred tax assets,
net of any valuation allow ance for deferred
tax assets, in excess of the lesser of these two
amounts is to be deducted from a banking
organization’s core capital elem ents in
determining tier 1 capital. For purposes of
calculating the 10 percent limitation, tier 1
capital is defined as the sum of core capital
elements, net of goodwill and all identifiable
intangible assets other than mortgage
servicing rights and purchased credit card
relationships, before any disallowed deferred
tax assets are deducted. There generally is no
limit in tier 1 capital on the amount of
deferred tax assets that can be realized from
taxes paid in prior carryback years or from
future reversals of existing taxable temporary
differences.

*

*

*

*

*

23 T o d e te rm in e th e a m o u n t o f e x p e c te d d eferred
ta x a s s e ts re a liz a b le in th e n e x t 1 2 m o n th s , a n
in stitu tio n s h o u ld a ssu m e th a t all e x istin g
te m p o ra ry d iffe re n ce s fu lly re v e rs e a s o f th e re p o rt
d ate. P ro je c te d fu tu re ta x a b le in c o m e s h o u ld n o t
in c lu d e n e t o p e ra tin g loss c a rry fo rw a rd s to b e u sed
du rin g th a t y e a r o r th e a m o u n t o f e x istin g
te m p o ra ry d iffe re n ce s a b an k h o ld in g c o m p a n y
e x p e c ts to re v e rs e w ith in th e y e a r. S u c h p ro je c tio n s
s h o u ld in c lu d e th e e s tim a te d e ffe ct o f t a x p la n n in g
stra te g ie s th a t th e o rg a n iz a tio n e x p e c ts to
im p le m e n t to re a liz e net o p e ra tin g lo s se s o r t a x
c re d it c a rry fo rw a rd s th a t w o u ld o th e rw is e e x p ire
d u rin g th e y e a r. I n s titu tio n s d o n o t h a v e to p re p a re
a n ew 1 2 m o n th p ro je c tio n e a c h q u a rte r. R a th e r, on
in te rim re p o rt d a te s , in s titu tio n s m a y u s e th e fu ture
ta x a b le in c o m e p ro je c tio n s for th e ir c u r r e n t fiscal
y e a r, a d ju s te d for a n y s ig n ific a n t c h a n g e s th a t h a v e
o c c u r r e d o r a r e e x p e c te d to o c c u r .

39 231

4.
Appendix D to part 225 is amended
by revising section Il.b. to read as
follows:
Appendix D to Part 225—Capital
Adequacy Guidelines for Bank Holding
Companies: Tier 1 Leverage Measure
*
*
*
*
*
II. * * *
b. A banking organization’s tier 1 leverage
ratio is calculated by dividing its tier 1
capital (the numerator of the ratio) by its
average total consolidated assets (the
denominator of the ratio). The ratio will also
be calculated using period-end assets
whenever necessary, on a case-by-case basis.
For the purpose of this leverage ratio, the
definition of tier 1 capital for year-end 1992
as set forth in the risk-based capital
guidelines contained in Appendix A of this
part will be used.3 As a general matter,
average total consolidated assets are defined
as the quarterly average total assets (defined
net of the allow ance for loan and lease losses)
reported on the organization’s Consolidated
Financial Statements (FR Y -9 C Report), less
goodwill; amounts of mortgage servicing
rights and.purchased credit card
relationships that, in the aggregate, are in
excess of 50 percent of tier 1 capital; amounts
of purchased credit card relationships in
excess of 25 percent of tier 1 capital; all other
intangible assets; any investments in
subsidiaries or associated companies that the
Federal Reserve determines should be
deducted from tier 1 capital; and deferred tax
assets that are dependent upon future taxable
income, net o f their valuation allow ance, in
excess of the limitation set forth in section
II.B.4 of this Appendix A .4

*

*

*

*

*

By order of the Board of Governors of the
Federal Reserve System, July 26, 1995

William W. Wiles,
Secretary o f the Board.

F ed eral D eposit Insu ran ce Corporation
12 CFR C hapter III
For the reasons outlined in the joint
preamble, the Board of Directors of the
Federal Deposit Insurance Corporation
amends 12 CFR chapter III as set forth
below.
3 A t th e e n d o f 1 9 9 2 , tie r 1 c a p ita l for b an k in g
o rg a n iz a tio n s in c lu d e s c o m m o n e q u ity , m in o rity
in te re st in th e e q u ity a c c o u n ts o f c o n s o lid a te d
su b sid ia rie s, q u a lify in g n o n c u m u la tiv e p e rp e tu a l
p re fe rre d s to ck , a n d q u a lify in g c u m u la tiv e
p erp e tu a l p re fe rre d sto ck . (C u m u la tiv e p e rp e tu a l
p re fe rre d sto ck is lim ite d to 2 5 p e r c e n t o f tie r 1
c a p ita l.) In a d d itio n , a s a g e n e ra l m a tte r , t ie r 1
c a p ita l e x c lu d e s g o o d w ill; a m o u n ts o f m o rtg ag e
s e rv ic in g rig h ts a n d p u r c h a s e d c r e d it c a rd
r e la tio n s h ip s th a t, in th e ag g re g a te , e x c e e d 5 0
p e rce n t o f tie r 1 c a p ita l; a m o u n ts o f p u r c h a s e d
c re d it c a rd r e la tio n s h ip s th a t e x c e e d 2 5 p e r c e n t of
tie r 1 c a p ita l; a ll o th e r in ta n g ib le a s s e ts ; a n d
d eferred ta x a sse ts th a t a re d e p e n d e n t u p o n fu ture
ta x a b le in c o m e , n e t o f th e ir v a lu a tio n a l lo w a n c e , in
e x c e s s o f c e r ta in lim ita tio n s . T h e F e d e ra l R e se rv e
m a y e x c lu d e c e r ta in in v e s tm e n ts in s u b s id ia rie s o r
a s s o c ia te d c o m p a n ie s a s a p p ro p ria te .
4 D e d u ctio n s from tie r 1 c a p ita l a n d o th e r
a d ju stm e n ts a re d is c u s s e d m o re fu lly in s e c tio n II.B .
in A p p e n d ix A o f th is p art.

39232

Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / Rules and Regulations

2. In § 325.2, paragraph (n) is
amended by removing the word
“purchased” each place it appears and
paragraph (s) is revised to read as
follows:

SUBCHAPTER D— REGULATIONS
APPLICABLE TO ALL SAVINGS
ASSOCIATIONS

PART 565— PROMPT CORRECTIVE
ACTION

(2) Deductions from core capital, (i)
Intangible assets, as defined in
§ 567.l(m ) of this part, are deducted
from assets and capital in computing
core capital, except as otherwise
provided by § 567.12 of this part.
(ii) Mortgage servicing rights (both
originated and purchased) that are not
includable in tangible and core capital
pursuant to § 567.12 of this part are
deducted from assets and capital in
computing core capital.
*
*
*
*
*
4. Section 567.6 is amended by
revising paragraphs (a)(l)(iv)(L) and
(a)(l)(iv)(M) to read as follows:

§325.2

1. The authority citation for part 565
continues to read as follows:

§ 567.6 Risk-based capital credit riskweight categories.

PART 325—CAPITAL MAINTENANCE
1. The authority citation for part 325
continues to read as follows:
A uthority: 12 U.S.C. 1815(a), 1815(b),
1 8 1 6 ,1818(a), 1818(b), 1818(c), 1818(t),
1819(Tenth), 1828(c), 1828(d), 1828(i),
1828(n), 1828(o), 18310, 3907, 3909, 4 808;
Pub. L. 1 0 2 - 2 3 3 ,1 0 5 Stat. 1 7 6 1 ,1 7 8 9 , 1790
(12 U.S.C. 1831n note); Pub. L. 1 0 2 -2 4 2 , 105
Stat. 2 236, 2 3 5 5 , 2 3 86 (12 U.S.C. 1828 note).

*

*

Definitions.

*

*

*

(s) Tangible equity means the amount
of core capital elements as defined in
Section I. A .I. of the FDIC’s Statement of
Policy on Risk-Based Capital (appendix
A to this Part 325), plus the amount of
outstanding cumulative perpetual
preferred stock (including related
surplus), minus all intangible assets
except mortgage servicing rights to the
extent that the FDIC determines
pursuant to § 325.5(f) of this part that
mortgage servicing rights may be
included in calculating the bank’s Tier
1 capital.
*
*
*
*
*
§ 325.5

[Amended]

3. Section 325.5 is amended by
removing the words “purchased
mortgage servicing rights” and adding,
in their place, the words “mortgage
servicing rights” in paragraphs (f),
(g)(2)(i)(B), and (g)(5).
Appendix A to Part 325 [Amended]
4. In Appendix A to part 325, remove
the words “purchased mortgage
servicing rights” in footnote 2 to “Table
I—Definition of Qualifying Capital” and
add, in their place, the words “mortgage
servicing rights”
Appendix B to Part 325 [Amended]
5. In Appendix B to part 325, section
IV.A.:
a. Remove the words “purchased
mortgage servicing rights” and add, in
their place, the words “mortgage
servicing rights” each place they appear
in footnote 1 and in the last sentence of
the last paragraph; and
b. Remove the words “purchased
servicing intangibles” and add, in their
place, the words “servicing intangibles”
in the last sentence of the last
paragraph.
By order of the Board of Directors.
Dated at W ashington, DC, this 21st day of
July, 1995.

Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.

O ffice o f Thrift Supervision
12 CFR C h ap ter V
For the reasons outlined in the joint
preamble, the Office of Thrift
Supervision hereby amends 12 CFR
chapter V as set forth below.

(a) * * *

A uthority: 12 U.S.C. 1831o.

2. Section 565.2 is amended by
revising paragraph (f) to read as follows:
§ 565.2

Definitions

*

*
*
*
*
(f) T angible equity means the amount
of a savings association’s core capital as
defined in part 567 of this subchapter
plus the amount of its outstanding
cumulative perpetual preferred stock
(including related surplus), minus
intangible assets as defined in
§ 567.l(m ) of this subchapter and
mortgage servicing rights not includable
in core capital pursuant to § 567.12 of
this subchapter.
*
*
*
*
*
PART 567— CAPITAL
1. The authority citation for part 567
continues to read as follows:
A uthority: 12.U .S.C . 1462, 1462a, 1463,
1464, 1467a, 1 8 2 8 (note).

2. Section 567.1 is amended by
revising paragraph (m) to read as
follows:
§567.1

Definitions.

*

*
*
*
*
(m) Intan gible assets. The term
intangible assets means assets referred
to as intangible assets in authoritative
literature on generally accepted
accounting principles. These intangible
assets include, but are not limited to,
goodwill, favorable leaseholds, core
deposit premiums and purchased credit
card relationships. Mortgage servicing
rights (either originated or purchased)
are not intangible assets under this
definition.
*
*
*
*
*
3. Section 567.5 is amended by
revising paragraphs (a)(2) heading,
(a)(2)(i) and (a)(2)(ii) to read as follows:
§ 567.5

Components of capital.

(a) * * *

(1 ) * * *

(iv)
* * *
(L) Mortgage servicing rights and
intangible assets includable in core
capital pursuant to § 567.12 of this part;
(M) Excess servicing receivables;
*
*
*
*
*
5. Section 567.9 is amended by
revising paragraph (c)(1) to read as
follows:
§ 567.9

*

Tangible capital requirement.

*
(c ) *

*
*

*

*

*

(1) Intangible assets, as defined in
§ 567.l(m ) of this part, and mortgage
servicing rights (purchased or
originated) not includable in core and
tangible capital pursuant to § 567.12 of
this part.
*
*
*
*
*
6. Section 567.12 is amended by
revising the section heading and
paragraphs (a) through (f) to read as
follows:
§ 567.12 Qualifying intangible assets and
mortgage servicing rights.

(a) Scope. This section prescribes the
maximum amount of qualifying
intangible assets, as defined in
§ 567.1(m) of this part, and mortgage
servicing rights that savings associations
may include in calculating tangible and
core capital.
(b) Definition. Qualifying intangible

assets and mortgage servicing rights
means purchased credit card
relationships and mortgage servicing
rights (both originated and purchased).
Mortgage servicing rights (both
originated and purchased) may be
included (that is, not deducted) in
computing core and tangible capital.
Purchased credit card relationships may
be included in computing core capital,
but must be deducted in computing
tangible capital. These qualifying
intangible assets and mortgage servicing

Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / Rules and Regulations
rights may be included in capital only
in accordance with the limitations and
restrictions set forth in this section.
Intangible assets, as defined in
§ 567.l(m ) of this part, other than
purchased credit card relationships and
core deposit intangibles grandfathered
by paragraph (g)(3) of this section, must
be deducted in computing tangible and
core capital.
(c) M arket valuations. The OTS
reserves the authority to require any
savings association to perform an
independent market valuation of
qualifying intangible assets and
mortgage servicing rights on a case-bycase basis or through the issuance of
policy guidance. An independent
market valuation, if required, shall be
conducted in accordance with any
policy guidance issued by the OTS. A
required valuation shall include
adjustments for any significant changes
in original valuation assumptions,
including changes in prepayment
estimates or attrition rates. The
valuation shall determine the current
fair market value of the qualifying
intangible assets and mortgage servicing
rights by applying an appropriate
market discount rate to the net cash
flows expected to be generated from the
qualifying intangible assets and
mortgage servicing rights. This
independent market valuation may be
conducted by an independent valuation
expert evaluating the reasonableness of
the internal calculations and

assumptions used by the association in
conducting its internal analysis. The
association shall calculate an estimated
fair market value for the qualifying
intangible assets and mortgage servicing
rights at least quarterly regardless of
whether an independent valuation
expert is required to perform an
independent market valuation.
(d) V alue lim itation. For purposes of
calculating core capital under this part
(but not for financial statement
purposes), qualifying intangible assets
and mortgage servicing rights must be
valued at the lesser of:
(1) 90 percent of their fair market
value determined in accordance with
paragraph (c) of this section; or
(2) 100 percent of their remaining
unamortized book value determined in
accordance with the instructions for the
Thrift Financial Report.
(e) Core ca p ita l lim itation.— (1)
Aggregate lim it. The maximum
aggregate amount of qualifying
intangible assets and mortgage servicing
rights that may be included in core
capital shall be limited to the lesser of:
(1) 50 percent of the amount of core
capital computed before the deduction
of any disallowed qualifying intangible
assets or mortgage servicing rights; or
(ii) The amount of qualifying
intangible assets and mortgage servicing
rights determined in accordance with
paragraph (d) of this section.
(2) R eduction by d eferred tax liability.
Associations may elect to reduce the
amount of their disallowed (i.e., not

39233

includable in capital) originated
mortgage servicing rights exceeding the
50 percent aggregate limit by the
amount of any associated deferred tax
liability.
(3) Sublim it fo r p u rch ased credit card
relation ships. In addition to the
aggregate limitation on qualifying
intangible assets and mortgage servicing
rights set forth in paragraph (e)(1) of this
section, a sublimit shall apply to
purchased credit card relationships. The
maximum allowable amount of
purchased credit card relationships
shall be limited to the lesser of:
(i) 25 percent of the amount of core
capital computed before the deduction
of any disallowed qualifying intangible
assets or mortgage servicing rights; or
(ii) the amount of purchased credit
card relationships determined in
accordance with paragraph (d) of this
section.
(f)
Tangible ca p ita l lim itation. The
maximum amount of mortgage servicing
rights that may be included in tangible
capital shall be the same amount
includable in core capital in accordance
with the limitations set by paragraph
(e)(1) of this section.
*
*
*
*
*
Dated: July 25, 1995.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
A cting Director.
[FR Doc. 9 5 - 1 8 7 7 2 Filed 7 - 3 1 -9 5 ; 8:45 am)
BILLING CODES 4810-33-P , 6210-01-P, 6714-01-P,
6720-01-P


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102