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Federal Reserve Bank
OF DALLAS
ROBERT
D. M c T E E R , J R .
P R E S ID E N T
A N D C HIE F E X E C U T IV E O F F IC E R
DALLAS, TEXAS 7 5 2 2 2
February 23, 1993
Notice 93-28
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Request for Comment on Proposed
Amendments to Capital Adequacy Guidelines
DETAILS
The Federal Reserve Board has requested public comment on proposed
amendments to its capital adequacy guidelines for state member banks and bank
holding companies to establish a limitation on the amount of certain deferred
tax assets that may be included in the Tier 1 capital calculation for riskbased and leverage capital purposes.
The proposed amendments would provide that
1)
deferred tax assets that are dependent on an institution’s
future taxable income would be limited for regulatory capital
purposes to the amount that can be realized within one year of a
quarter-end report date or ten percent of Tier 1 capital,
whichever is less; and,
2)
no limit for regulatory capital purposes would be placed on
deferred tax assets that can be realized from taxes paid in
prior carry-back years.
The proposed amendments were developed by the Board consistent with
recommendations made by the Federal Financial Institutions Examination Council
for federally supervised banks and thrift institutions in response to the
Financial Accounting Standard Board Statement No. 109, "Accounting for Income
Taxes" (FASB 109), which must be adopted no later than the first quarter of
1993, or the beginning of the institution’s first fiscal year thereafter, if
later.
The Board must receive comments by March 5, 1993. Comments should
be addressed 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-0795.
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; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
-
2
-
ATTACHMENT
A copy of the Board’s notice (Federal Reserve System Docket No.
R-0795) is attached.
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,
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulation H, Regulation Y; Docket No. R-0795]
Capital; Capital Adequacy Guidelines
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Proposed revisions to capital adequacy guidelines.
SUMMARY:
The Board of Governors of the Federal Reserve System
(Board, Federal Reserve or FRB) is proposing to amend its capital
adequacy
companies
guidelines
to
for
establish
state
a
member
limitation
banks
on the
and
bank
holding
amount of
certain
deferred tax assets that may be included in (that is, not deducted
from) the Tier 1 capital calculation for risk-based and leverage
capital purposes.
Under the proposal, deferred tax assets that
can be realized through carrybacks to taxes paid on income earned
in prior periods generally would not be subject to limitation for
regulatory capital purposes.
On the other hand,
deferred tax
assets that can only be realized if an institution earns taxable
income
in the
purposes
to
future would be
the
amount
that
limited
the
for regulatory
institution
is
capital
projected
realize within one year of the quarter-end report date —
based on
the institution's projection of taxable income for that year —
10 percent of Tier 1 capital, whichever is less.
to
or
Deferred tax
assets in excess of these limitations would be deducted from Tier
1 capital and from assets for purposes of calculating both the
risk-based and leverage capital ratios.
The capital proposal was
developed on a consistent basis by the Board, the Federal Deposit
Insurance Corporation (FDIC), the Office of the Comptroller of the
Currency
(OCC),
and
the
Office
of
Thrift
Supervision
(OTS)
(hereafter, the "federal banking agencies" or the "agencies") in
response to the Financial Accounting
Standards
Board's
(FASB)
issuance of Statement No. 109, "Accounting for Income Taxes" (FASB
109)
in February 1992.
adopted
This FASB accounting standard must be
by state member
banks
and bank holding
companies
for
regulatory reporting and financial reporting purposes no later
than the first quarter of 1993, or the beginning of their first
fiscal year thereafter, if later.
DATES: Comments on the proposed revisions to the Federal Reserve
Board's
risk-based
and
leverage
capital
guidelines
should
be
submitted on or before March 6, 1993.
ADDRESSES: Comments on the Federal Reserve Board's proposal, which
should refer to Docket No. R-0795 may be mailed to Mr. William W.
Wiles, Secretary, Board ofGovernors of the Federal Reserve System,
20th
Street
and
Constitution
Avenues,
N.W., Washington,
D.C.
20551; or delivered to Room B-2223, Eccles Building, between 8:45
a.m. and 5:15 p.m. weekdays.
B-1122
between
provided
in
9:00
section
a.m.
Comments may be inspected in Room
and
261.8
5:00
of
the
p.m.
weekdays,
Board's
except
Rules
as
Regarding
Availability of Information, 12 CFR 261.8.
FOR
FURTHER
INFORMATION
CONTACT:
Charles
H.
Holm,
Project
3
Manager,
(202)
452-3502;
John M.
Freeh,
Analyst,
(202)
452-2275;
Nancy
Analyst,
(202)
452-3059,
Regulatory
J.
Supervisory Financial
Rawlings,
Reporting
Issues Section;
Barbara J.
Bouchard,
(202) 452-3072,
Policy Development Section,
Supervision and Regulation,
Reserve System.
Senior
and
Financial
Accounting
Senior Financial Analyst,
Division of Banking
Board of Governors
of the Federal
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,
NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
1. Background
Characteristics of Deferred Tax Assets
Deferred
tax
assets
are
assets
that
reflect,
for
financial reporting purposes, benefits of certain aspects of the
tax laws.
Deferred tax assets may arise because of specific
limitations under tax laws of different tax jurisdictions that
require that certain net operating losses
purposes,
expenses exceed revenues)
(i.e.. when,
or tax credits
for tax
be carried
forward if they cannot be used to recover taxes previously paid.
These "tax carryforwards"
are realized only if the institution
generates sufficient future taxable income during the carryforward
period.
Deferred tax assets may also arise from the tax effects of
certain
events
that
have
been
recognized
in
one
period
for
financial statement purposes but will result in deductible amounts
in a future period for tax purposes,
i.e.. the tax effects of
"deductible temporary differences".
For example, many depository
institutions and bank holding companies may report higher income
to
taxing
authorities
reports1 because
their
than
they
loan
loss
reflect
in
provisions
their
are
regulatory
expensed
for
reporting purposes but are not deducted for tax purposes until the
loans are charged off.
Deferred tax assets arising from an organization's
deductible temporary differences may or may not exceed the amount
of taxes previously paid that the organization could recover if
the differences fully reversed at the report date.
deferred
tax
assets
may
theoretically
recovered from taxes previously paid.
be
Some of these
"carried
back"
and
On the other hand, when
such deferred tax assets exceed such previously paid tax amounts,
they will be realized only if there is sufficient future taxable
income during the carryforward period.2
FASB 109
In February 1992,
the FASB issued Statement No.
109,
which supersedes Accounting Principles Board Opinion No. 11 (APB
11) and FASB Statement No. 96.
FASB 109 provides guidance on many
aspects of accounting for income taxes, including the accounting
for deferred tax assets.
FASB 109 potentially allows some state
1 State member banks are required to file quarterly
Consolidated Reports of Condition and Income (Call Reports) with
the Federal Reserve.
Bank holding companies with total
consolidated assets of $150 million or more file Consolidated
Financial Statements for Bank Holding Companies (FR Y-9C reports)
on a quarterly basis with the Federal Reserve.
2 Hereafter, such deferred tax assets and deferred tax assets
arising from tax carryforwards are referred to as "deferred tax
assets that are dependent upon future taxable income."
member banks and bank holding companies to record significantly
higher
deferred
tax
assets
than
previously
generally accepted accounting principles
permitted
under
(GAAP) and the federal
banking agencies' prior reporting policies.
Unlike the general
practice under previous standards, FASB 109 permits the reporting
of deferred tax assets that are dependent upon future taxable
income.3
However,
FASB
1‘09
requires
the
establishment
of
a
valuation allowance to reduce the net deferred tax asset to an
amount that
is more
likely than not
(i.e. . a greater than 50
percent likelihood) to be realized.
FASB 109 is effective for fiscal years beginning on or
after December 15, 1992, but early adoption of this standard was
encouraged by the FASB.
The adoption of this standard could
result in the reporting of additional deferred tax assets in Call
Reports
and
FR
Y-9C
reports
that
would
directly
increase
an
institution's undivided profits (retained earnings) and thus its
Tier 1 capital.
3
Prior supervisory policies of the OCC and FDIC, as set
forth in Banking Circular 202 and Bank letter BL-36-8 5,
respectively, limited the reporting of deferred tax assets in the
regulatory reports filed by national banks and insured state
nonmember banks to the amount of taxes previously paid which are
potentially available through carryback of net operating losses.
As such, the OCC and FDIC did not permit the reporting of deferred
tax assets that are dependent upon future taxable income in the
Call Reports filed by national and insured state nonmember banks.
The FRB and OTS did not issue policies explicitly addressing the
recognition of deferred tax assets.
Consequently, state member
banks and savings institutions were able to report deferred tax
assets in accordance with GAAP.
Prior to FASB 109, GAAP, as set
forth in APB 11 and FASB 96, also for the most part did not permit
the reporting of deferred tax assets that are dependent upon
future taxable income.
6
Concerns Regarding Deferred Tax Assets That Are Dependent Upon
Future Taxable Income
Certain
regulatory
concerns
exist
with
respect
to
including in capital deferred tax assets that are dependent upon
future taxable
whether
income
a
income.
banking
during
Realization of such assets depends on
organization
the
has
carryforward
sufficient
period.
future
Since
a
taxable
banking
organization that is in a net operating loss carryforward position
is often experiencing financial difficulties,
its prospects for
generating sufficient taxable income in the future are uncertain.
In
addition,
the
condition
of
and
future
prospects
for
an
organization often can and do change very rapidly in the banking
environment.
This raises concerns about the realizability of
deferred tax assets that are dependent upon future taxable income,
even when an organization appears on the surface to be sound and
well-managed.
Thus,
for many organizations,
assets may not be realized and,
will
be
a
high
degree
of
such deferred tax
for other organizations,
subjectivity
in
there
determining
the
realizability of this asset.
In
addition,
as
an
organization's
condition
deteriorates, it is less likely that deferred tax assets that are
dependent upon future taxable income will be realized.
Therefore,
the organization would be expected under FASB 109 to reduce its
deferred tax assets through increases to the asset's valuation
allowance.
Additions
to
this
allowance
would
reduce
the
organization's regulatory capital at precisely the time it needs
capital support the most.
Thus, the reporting of deferred tax
7
assets that are dependent upon future taxable income raises, for
safety and soundness reasons, a supervisory concern.
Moreover,
acquired
banking
net
operating
organization
loss
can be
carryforwards
severely
limited
of
to the
acquirer when an acquisition or change in control occurs.
acquisition is structured as a taxable asset purchase,
operating
loss
carryforwards
are
generally
an
If an
the net
extinguished.
In
addition, if an acquisition or change in control qualifies as a
tax-free reorganization, a strict limitation (Section 382 of the
Internal Revenue Code)
net
operating
loss
on the use of the acquired institution's
carryforwards
generally
applies.
This
limitation is based on the value of the acquired institution at
the time of its acquisition, and thus the potential value of a net
operating loss carryforward to a prospective purchaser tends to
decline as the institution's financial condition weakens.
Because of these concerns,
in March 1992, the Federal
Reserve and the other federal banking agencies issued separate
letters
to
expressing
the
banking
concerns
organizations
about
FASB
109
under
and
their
stated
supervision
that
banking
organizations should not adopt FASB 109 for regulatory reporting
purposes
until
the
agencies
had
determined
the
appropriate
regulatory reporting and capital treatment.4
FFIEC Request For Comment
4
OTS's letter indicated that savings associations could
adopt the provisions of FASB 109, except that any deferred tax
asset could not exceed what was allowed to be reported under APB
11 or FASB 96.
8
On August 3, 1992, the agencies, under the auspices of the
Federal
Financial
Institutions
Examination
Council
(FFIEC),
requested public comment on various regulatory reporting and capital
treatments for deferred tax assets of depository institutions (57 FR
34135).
while
In the comment request, the agency staffs indicated that,
no
final
decision would
be made
until
all
comments
were
received, their preference would be to limit the amount of deferred
tax assets
that could be reported to the amount
that
could be
recovered through the carryback of losses against taxes previously
paid (hereafter referred to as the "carryback approach"). Under the
carryback approach,
depository institutions'
deferred tax assets
that are dependent upon future taxable income could not be reported
as assets for regulatory reporting purposes and,
thus,
would be
excluded from regulatory capital.
The FFIEC received 198 comment letters in response to its
request for comment,
companies.
primarily from banks,
thrifts,
and holding
The vast majority of the commenters indicated that they
believe that strong reasons exist for adopting FASB 109 for both
regulatory
reporting
and
capital
purposes.
These
commenters
generally asserted that deferred tax assets that are dependent upon
future taxable income are valuable assets for many institutions and
that
FASB
109
provides
sufficient
criteria
for measuring
these
assets and for distinguishing those institutions that will be able
to realize these assets from those that will not.
commenters
indicated
that,
under
the
Furthermore, the
carryback
approach,
the
agencies were effectively proposing a liquidation value approach to
deferred tax assets and that such an approach is inconsistent with
9
the
going
concern
concept
used
for
measuring
other
assets
and
liabilities.
Commenters
significantly
in
organizations
will
also
the
noted
last
have
a
that
several
tax
laws
have
changed
and
many
banking
years,
longer carryforward
period
(i.e.. 15
years) than they now have to absorb all losses beginning in 1994.
(For
these
organizations,
attributable
commenters
future
to
bad
the
debts
is
indicated there
carryforwards
carryforward
now
five
is a greater
will
ultimately
period
years.)
for
losses
Thus,
these
likelihood that
be
realized.
in the
Moreover,
commenters indicated that, as a result of changes in tax laws that
require some banking organizations to deduct charge-offs,
than provisions
for
loan
losses,
for tax purposes,
rather
even strong
banking organizations may have large amounts of deferred tax assets
that are dependent upon future taxable income.
Commenters
also
expressed
concern
that
the
carryback
approach could create a difference between the deferred tax assets
reported
in
GAAP
financial
statements
and
regulatory
reports,
thereby creating an additional reporting burden for institutions.
Commenters
compete
also
questioned
equally with
other
whether
banking
financial
organizations
services
companies
could
if the
carryback approach were imposed.
Some commenters indicated that, if the agencies did limit
deferred tax assets,
they should permit the recognition of some
deferred tax assets that are dependent upon future taxable income
and should set the limitation for capital purposes rather than for
reporting purposes.
10
II.
Proposal
The
Federal
Reserve
and
the
other
agencies
remain
concerned about the realizability and characteristics of deferred
tax assets that are dependent upon future taxable income.
On the
other hand, the agencies believe that many of the comments received
in response to the FFIEC request for comment have merit.
In this
regard, some relatively strong organizations have large amounts of
deferred tax assets that are dependent upon future taxable income.
Such deferred tax assets could not be reported under the carryback
approach.
Yet there is a high likelihood in some cases that such
assets will
be
realized.
recognition
of
some
Thus,
amounts
of
the
agencies
deferred
tax
believe
that
the
assets
that
are
dependent upon future taxable income is appropriate.
the
agencies
believe
that
their
supervisory
Furthermore,
concerns
regarding
deferred tax assets can be adequately addressed by setting forth a
limitation
through
the
reporting instructions.
capital
standards
rather
than
through
Such an approach would not result in a
difference between GAAP and regulatory reporting requirements.
Therefore,
received,
after careful consideration of the comments
the FFIEC decided that banks and savings associations
should adopt FASB 109 for reporting purposes in Call Reports and
Thrift Financial Reports
1993
(TFRs) beginning in the first quarter of
(or the beginning of their first fiscal year thereafter,
later).
if
Furthermore, the Board decided that bank holding companies
should adopt FASB 109 in FR Y-9C Reports at the same time.
The
reporting,
FFIEC,
in
reaching
its
decision
on
regulatory
also recommended that each of the federal banking and
11
thrift
regulatory
standards
to
dependent
upon
agencies
limit the
future
should
amount
of
taxable
amend
its
deferred
income
that
regulatory
tax
can
assets
be
capital
that
included
are
in
regulatory capital to the lesser of:
(1)
the amount of deferred tax assets that is expected to be
realized within one year of the quarter-end date,5 based
on an organization's projections of future taxable income
(exclusive of tax carryforwards and reversals of existing
temporary differences) for that year.
Such projections
should include the estimated effect of tax planning
strategies that the organization expects to implement to
realize tax carryforwards that will otherwise expire
during the year, or
(2)
10 percent of Tier 1 capital.
When the recorded amount of deferred tax assets that are dependent
upon
future taxable
income,
net
of the valuation
allowance
for
deferred tax assets, exceeds this limitation, the excess amount is
to be deducted from Tier 1 capital and from assets in regulatory
capital calculations.6
Deferred tax assets which can be realized
5 For purposes of determining the limit in (1) above, the
Board proposes that state member banks and bank holding companies
should assume that all temporary differences fully reverse at the
report date.
Other than this provision, the one-year cutoff for
projections of future taxable income, and the inclusion of an
organization's
tax planning
strategies
as
part
of
those
projections, state member banks and bank holding companies should
adhere to FASB 109 when determining this limit.
Consistent with
FASB 109 and the separate entity method discussed later in this
proposal, the Board proposes to permit the netting of deferred tax
liabilities and assets for a particular tax-paying component of a
state member bank or bank holding company and within a particular
tax jurisdiction. Netting of deferred tax assets and liabilities
attributable to different tax-paying components of a state member
bank or bank holding company or to different tax jurisdictions
would not be permitted.
6 With respect to the regulatory capital limitation, a
transition provision applies to deferred tax assets reported as of
September 30, 1992, under APB 11 or FASB 96.
For some state
member banks and bank holding companies, such reported deferred
tax assets may be in excess of the amount otherwise includable in
12
from taxes paid in prior carryback years and from future reversals
of existing taxable temporary differences would generally not be
limited.
The Board is proposing to adopt the recommendation of the
FFIEC
in
full,
as
summarized
immediately
above.7
consistent with the recommendations of the FFIEC,
Furthermore,
FASB 109,
and
longstanding policy of the Board and the other agencies, the Board
is proposing
that
the
capital
limit
should
be
determined
separate entity basis for each state member bank.8
on a
However,
in
some cases, a state member bank's holding company may not have the
financial capability to reimburse the institution for tax benefits
derived from the institution's carryback of net operating losses or
tax credits.
In these cases, the amount of carryback potential the
bank may consider in calculating the capital limit on deferred tax
assets
should
be
limited
to
the
lesser
amount
reasonably expect to have refunded by its parent.
companies generally would determine the
which
it
could
Bank holding
limit on a consolidated
regulatory capital under this proposal. The amount of this excess
deferred tax asset would be includable in capital subject to the
following phase-out provisions. For these purposes, the amount of
this excess deferred tax asset must be amortized each period on a
straight-line basis and must be fully amortized within two years.
Furthermore, such excess deferred tax assets are subject to
previously-existing rules and supervisory policy,
including
periodic evaluation as to realization and as to their contribution
to the banking organization's ability to absorb losses.
7 Under the Board's risk-based capital guidelines, all
deferred tax assets included in capital would continue to be
assigned a risk weight of 100 percent.
8 Under the separate entity method, a bank (together with its
consolidated subsidiaries) that is a subsidiary of a holding
company is treated as a separate taxpayer rather than as part of
the consolidated group of which it is a member.
13
basis.
Consistent
with
FASB
109,
the
limit
would
determined on a tax jurisdiction-by-jurisdiction basis.
also
be
A limit for
one jurisdiction (e.g.. the United States) in excess of the reported
amount of deferred tax assets for that jurisdiction should not be
used
to
effectively
increase the
limit
for other
jurisdictions
(e.g.. the state in which the organization is chartered).
The agencies plan to issue additional regulatory reporting
guidance on FASB 109 in the first quarter of 1993.
The amount of
deferred tax assets that organizations report in their regulatory
reports and use to meet capital requirements will be subject to
review by examiners.
The proposed capital limitation is intended to balance the
Board's concerns about deferred tax assets that are dependent upon
future taxable income against the fact that such assets will,
many cases, be realized.
in
The proposed approach generally permits
full inclusion of deferred tax assets potentially recoverable from
carrybacks, since there is a high likelihood that such amounts will
be realized.
In addition, the proposed approach also includes those
deferred tax assets that are dependent upon future taxable income,
if any, that can be recovered from projected taxable income during
the next year.
The Board is proposing to
future taxable income to one year because,
believes
that
many
organizations
are
limit projections of
in general,
able
to
make
the Board
reasonable
projections of taxable income for the following twelve month period
and then achieve their projected results.
However, the reliability
of these projections and the ability to actually achieve them tends
14
to decrease significantly beyond that time period.
Deferred tax
assets that are dependent upon future taxable income are further
limited to 10 percent of Tier 1 capital, since the Board believes
such assets should not comprise a large portion of an organization's
capital base given the uncertainty of realization associated with
these assets and the difficulty in selling these assets apart from
the organization.
Questions for Comment
While the Board is seeking public comment on all aspects
of its proposal on the capital treatment of deferred tax assets, it
seeks specific comment on the following questions.
1)
Under previous GAAP as set forth in Accounting Principles
Board Opinion No. 16, "Business Combinations,"
the
reported
value
of
an asset
(other
(APB 16)
than goodwill)
acquired in a purchase business combination is adjusted
for the tax effect of the difference between the market or
appraised value of the asset and its tax basis.
FASB 109
changes this treatment by requiring that this tax effect
be recorded separately in a deferred tax account.
This
change in treatment could cause a large increase in the
reported amount of certain identifiable intangible assets,
such as core deposit intangibles, which are deducted for
purposes of computing regulatory capital.
increases
deducted
ratios?
in
such
identifiable
for purposes
of
Should these
intangible
computing
assets
regulatory
be
capital
Are there any other provisions of FASB 109 which
15
the agencies should consider for purposes of applying a
different
regulatory
capital
treatment
than
has
been
proposed above?
2)
The Board is interested in receiving comments on ways of
reducing
the
potential
proposal
and
example,
is a limitation based on projections of future
requests
taxable
income
simpler
to base
assets
without
taxable
burden
comments
difficult
to
a capital
such
on
this
as
of
with
this
matter.
implement?
limitation
consideration
income,
associated
Would
For
it
on deferred
future
projections
permitting
only
be
tax
of
healthy
organizations to include in capital deferred tax assets
that are dependent upon future taxable income up to a
specified percentage of Tier 1 capital
percent)?
simpler
Would there be any other method that would be
to
administer
while
recognizing
concerns about deferred tax assets?
the
(e.g. . 5 or 10
limitation,
as
proposed,
separate entity method.
would
Also,
be
the
Board's
for example,
based
on
the
Would another method be more
appropriate for determining the limitation on deferred tax
assets and for tax-sharing agreements in general?
3)
The proposal would require tax planning strategies to be
included
taxable
as
part
income
for
of
an
the
institution's
next
year.
projections
Furthermore,
of
the
proposal would require organizations to assume that all
temporary differences fully reverse at the report date.
In addition, the proposal would permit grandfathering of
16
amounts previously reported if they were in excess of the
proposed
limitation,
amortized
on
a
provided
straight
the
line
excess
basis
over
amounts
two
are
years.
Comment is specifically requested on the appropriateness
of these provisions.
III.
Regulatory Flexibility Act Analysis
The Board does not believe that the adoption of
this
proposal
would
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 sea.).
In this
regard, the vast majority of small banking organizations currently
have very limited amounts of net deferred tax assets, which are the
subject
of
structures.
with
the
this
proposal,
as
a
component
of
their
capital
Furthermore, adoption of this proposal, in combination
recent
adoption
of
FASB
109
for
regulatory
reporting
purposes, will allow many organizations to increase the amount of
deferred
tax
addition,
assets
they
include
in
regulatory
capital.
In
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.
IV.
Paperwork Reduction Act
The following information about paperwork relates only to
Federal Reserve ("FR”) reports, which are approved by the Federal
17
Reserve
Board
under
delegated
authority
from
the
Office
of
Management and Budget.
The proposed amendments to the Capital Adequacy Guidelines
would require one additional line item to Schedule HC-I, Part I, of
the Consolidated Financial Statements for Bank Holding Companies
With Total Consolidated Assets of $150 Million or More or With More
Than One Subsidiary Bank
item,
Memorandum
disallowed
for
item
(FR Y-9C; OMB No.
8,
regulatory
would
be
capital
titled
7100-0128) .
"Deferred
purposes."
The new
tax
The
assets
proposed
additional item will be reviewed by the Federal Reserve Board under
delegated authority from the Office of Management and Budget after
consideration of comments received during the public comment period.
Comments on the proposed additional item should be submitted to the
Federal Reserve under procedures described earlier in this notice.
Description of Affected Report
Report Title:
Consolidated Financial Statements for Bank
Holding Companies With Total Consolidated
Assets of $150 Million or More, or With More
Than One Subsidiary Bank.
This report is filed by all bank holding companies that have total
consolidated assets of $150 million or more and by all multibank
holding companies regardless of size.
companies are
The following bank holding
exempt from filing the FR Y-9C,
unless the Board
specifically requires an exempt company to file the report:
holding companies that are subsidiaries
bank
of another bank holding
company and have total consolidated assets of less than $1 billion;
bank holding companies that have been granted a hardship exemption
18
by the Board under section 4(d) of the Bank Holding Company Act; and
foreign banking organizations as defined by 211.23(b) of Regulation
Agency Form Number: FR Y 9-C
OMB Docket Number: 7100-0128
Frequency: Quarterly
Reporters: Bank Holding Companies
Annual Reporting Hours: 148,054
Estimated Average Hours per Response: Range from 5 to 1,250
Number of Respondents: 1,598
Small businesses are affected.
Federal Reserve Board
List of Subjects
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information,
Currency,
Federal
Reserve
System,
Reporting
and
recordkeeping requirements, Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve
System,
Holding
companies,
Reporting
and
recordkeeping
requirements, Securities.
For the reasons set forth in the preamble, the Board
is proposing to amend 12 CFR Parts 208 and 225 as follows:
PART 208 - MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
1.
The authority citation for Part 208 is revised to read as
follows:
AUTHORITY:
12 U.S.C.
321-338, 248(a), 248(c), 461, 481-486, 601,
19
and 611;
12 U.S.C.
1814 and 1823(j);
12 U.S.C.
3105;
12 U.S.C.
3906-3909; 15 U.S.C. 78b, 781(b), 781(g), 781(i), 78o-4(c) (5), 78q,
78q-l, and 78w; 12 U.S.C. 36; 12 U.S.C. 3310 and 3331-3351.
Appendix A - [Amended]
2.
Appendix A to Part 208
is amended by adding paragraph
II.B.(iv) to read as follows:
II.
DEFINITION OF QUALIFYING CAPITAL FOR THE RISK BASED CAPITAL
RATIO.
■kick**
A.
***
B.
***
( i)
***
(ii)
***
(iii)
***
(iv)
from
the
sum
of
Deferred tax assets - portions are deducted
core
capital
elements
in
accordance
with
section II.B.4. of this appendix.
3.
Appendix A to Part 208 is amended by revising footnote 19
in paragraph II.B.3.;
adding
paragraph
by moving footnote designator 20; by
II.B.4.;
and
by
adding
footnote
20
paragraph II.B.4. to read as follows:
II.
DEFINITION OF QUALIFYING CAPITAL FOR THE RISK BASED CAPITAL
in
20
RATIO.
*****
A.
***
B.
***
1.
***
2.
***
3
.
***19
Deductions of holdings of capital securities
also would not be made in the case of interstate "stake
out"
investments
that
comply
with
the
Board's
Policy
Statement on Nonvoting Equity Investments, 12 CFR 225.143
(Federal Reserve Regulatory Service 4-172.1; 68 Federal
Reserve Bulletin 413
(1982)).
In addition, holdings of
capital instruments issued by other banking organizations
but taken in satisfaction of debts previously contracted
would be exempt from any deduction from capital.
The
Board intends to monitor nonreciprocal holdings of other
banking organizations' capital instruments and to provide
information on such holdings to the Basle Supervisors'
Committee as called for under the Basle capital framework.
4.
Deferred 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 bank's
capital may not exceed the lesser of:
(a) the amount of
these deferred tax assets that the bank is expected to
realize within one year of the quarter-end date, based on
21
its
projections
year,20
or
(b)
of
10
future
percent
taxable
of
Tier
income
1
for
that
capital.
For
purposes of calculating this limitation, Tier 1 capital is
defined
as the
sum
of
core
capital
elements,
net
of
goodwill and all identifiable intangible assets other than
purchased mortgage servicing rights and purchased credit
card relationships.
The recorded amount of such deferred
tax assets, net of any valuation allowance for deferred
tax assets, in excess of this limitation is to be deducted
from a bank's core capital elements in determining Tier 1
capital.
The amount of deferred tax assets that can be
realized from taxes paid in prior carryback years and from
future reversals of existing taxable temporary differences
generally would not be deducted from capital.
regardless
of
the
above
limitations,
However,
the/ amount
of
carryback potential a bank may consider in calculating the
capital limit on deferred tax assets may not exceed the
amount which it could reasonably expect to have refunded
by its parent.
Appendix B - [Amended]
20
Projected future taxable income should not include net
operating loss carryforwards to be used during that year or the
amount of existing temporary differences a bank expects to reverse
within the year.
Such projections should include the estimated
effect of tax planning strategies that the organization expects to
implement to realize tax carryforwards that will otherwise expire
during the year.
22
4.
Appendix B to Part 208 is amended by revising the last two
sentences in footnote 2 and by revising the last sentence of
the second paragraph in section II., to read as follows:
II.
THE TIER 1 LEVERAGE RATIO
*****
2
At the end of 1992, Tier 1 capital for state member banks
includes
accounts
common
of
equity,
minority
consolidated
interest
subsidiaries,
noncumulative perpetual preferred stock.
in
and
the
equity
qualifying
In addition,
as a
general matter, Tier 1 capital excludes goodwill; amounts of
purchased mortgage servicing rights and purchased credit card
relationships that, in the aggregate, exceed 50 percent of Tier
1 capital; amounts of purchased credit card relationships that
exceed
25 percent
of Tier
1 capital;
all
other
intangible
assets; and deferred tax assets that are dependent upon future
taxable income, net of their valuation allowance, in excess of
certain limitations.
investments
in
The Federal Reserve may exclude certain
subsidiaries
or
associated
companies
as
appropriate.
***As a general matter, average total consolidated assets are
defined as the quarterly average total assets (defined net of
the allowance for loan and lease losses) reported on the bank's
Reports of Condition and Income ("Call Report"), less goodwill;
amounts of purchased mortgage servicing rights and purchased
credit card relationships that, in the aggregate, are in excess
23
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
of
their
valuation allowance, in excess of the limitation set forth in
section II.B.4.3
*****
PART 225 - BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
1. The authority citation for Part 225 continues to read as
follows:
AUTHORITY:
12
U.S.C.
1817(j)
(13),
1818,
183li,
1843(c)
(8),
1844(b), 3106, 3108, 3907, 3909, 3310, and 3331-3351.
Appendix A - [Amended]
2.
Appendix A
to
Part
225
is
amended
by
adding
paragraph
II.B . (iv) to
read as follows:
*****
3
Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B. of Appendix A of this Part.
24
II.
DEFINITION OF QUALIFYING CAPITAL FOR THE RISK BASED CAPITAL
RATIO
*****
A.
***
B.
***
(i)
***
(ii)
***
(iii)
***
(iv)
Deferred
tax
assets
-
portions
are
deducted from the sum of core capital elements in
accordance with section II.B.4. of this appendix.
3.
Appendix A to Part 225 is amended by revising footnote 22
in paragraph II.B.3.;
adding
paragraph
by moving footnote designator
II.B.4.;
and
by
adding
footnote
23; by
23
in
paragraph II.B.4. to read as follows:
*****
II.
DEFINITION OF QUALIFYING CAPITAL FOR THE RISK-BASED CAPITAL
RATIO
*****
A.
***
B.
***
1.
***
2.
***
3
.
***22
Deductions of holdings of capital securities
also would not be made in the case of interstate "stake
out"
investments
that
comply
with
the
Board's
Policy
25
Statement on Nonvoting Equity Investments, 12 CFR 225.143
(Federal Reserve Regulatory Service 4-172.1;
Reserve Bulletin 413
(1982)).
68 Federal
In addition, holdings of
capital instruments issued by other banking organizations
but taken in satisfaction of debts previously contracted
would be exempt from any deduction from capital.
The
Board intends to monitor nonreciprocal holdings of other
banking organizations' capital instruments and to provide
information on such holdings to the Basle Supervisors'
Committee as called for under the Basle capital framework.
4.
Deferred 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 b£ included in, that is, not deducted from, a bank
holding company's capital may not exceed the lesser of:
(a) the amount of these deferred tax assets that the bank
holding company is expected to realize within one year of
the quarter-end date, based on its projections of future
taxable
income
Tier
capital.
1
for that
For
year,23 or
purposes
of
(b)
10 percent
calculating
of
this
limitation, Tier 1 capital is defined as the sum of core
capital elements,
net of goodwill and all identifiable
23 Projected future taxable income should not include net
operating loss carryforwards to be used during that year or the
amount of existing temporary differences a bank holding company
expects to reverse within the year.
Such projections should
include the estimated effect of tax planning strategies that the
organization expects to implement to realize tax carryforwards
that will otherwise expire during the year.
26
intangible assets other than purchased mortgage servicing
rights
and
purchased
credit
card
relationships.
The
recorded amount of such deferred tax assets, net of any
valuation allowance for deferred tax assets, in excess of
this limitation is to be deducted from a bank holding
company's
core capital
elements
in determining Tier
1
capital.
The amount of deferred tax assets that can be
realized from taxes paid in prior carryback years and from
future reversals of existing taxable temporary differences
generally would not be deducted from capital.
Appendix D - [Amended]
4.
Appendix D to Part 225 is amended by revising the last two
sentences in footnote 3 and by revising the last sentence of
the second paragraph in section II., to read as follows:
*****
II.
THE TIER 1 LEVERAGE RATIO
*****
3
At
the
companies
end
of
includes
1992,
Tier
1 capital
common equity,
for
minority
interest
eguity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock.
bank
holding
in the
and qualifying
In addition,
as a
general matter, Tier 1 capital excludes goodwill; amounts of
purchased mortgage servicing rights and purchased credit card
relationships that, in the aggregate, exceed 50 percent of Tier
1 capital; amounts of purchased credit card relationships that
exceed
25 percent
of Tier
1 capital;
all
other
intangible
assets; and deferred tax assets that are dependent upon future
27
taxable income, net of their valuation allowance, in excess of
certain limitations.
investments
in
The Federal Reserve may exclude certain
subsidiaries
or
associated
companies
as
appropriate.
***As a general matter, average total consolidated assets are
defined as the guarterly average total assets (defined net of
the
allowance
for
loan
and
lease
losses)
reported
on
the
banking organization's Consolidated Financial Statement ("FR Y9C
Report"), less
goodwill;
amounts
of
purchased
mortgage
servicing rights and purchased credit card relationships that,
in the
capital;
aggregate,
amounts
are
in excess
of
50
of purchased credit
percent
of
Tier
card relationships
1
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 of their valuation allowance,
in
excess of the limitation set forth in section II.B.4.4
*****
Board of Governors of the Federal Reserve System, February 1,
1993.
(signed William W. Wiles
William W. Wiles
Secretary of the Board
4
Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B. of Appendix A to this Part.
FEDERAL RESERVE BANK OF DALLAS
P.O. BOX 655906
DALLAS, TX 75265-5906
@FedFRASER