No material differences in accounting, capital standards – just technical ones, regulators tell Congress

There are no material differences in accounting and capital standards applicable to the insured depository institutions they regulate and supervise, but there are some technical deviations, the federal banking agencies will say in their annual report to Congress, expected to be published early next week.

In filings with the Federal Register Friday, the banking agencies (the Federal Deposit Insurance Corp. [FDIC], the Federal Reserve, and the Office of the Comptroller of the Currency [OCC]) said in their joint report to congressional committees about differences in accounting and capital standards as of Dec. 31, 2019, that there are, indeed, no material differences in the accounting and capital standards. However, they said, there are some technical differences among capital standards in their rules. Those include:

  • Definitions: Differences that exist generally serve to accommodate the different needs of the institutions that each agency charters, regulates, and/or supervises. For example, the agencies’ capital rules have differing definitions of a pre-sold construction loan.
  • Capital components, eligibility criteria for regulatory capital instruments: All three agencies’ capital rules require that, for an instrument to qualify as common equity tier 1 or additional tier 1 capital, cash dividend payments be paid out of net income and retained earnings. However, the Federal Reserve Board’s capital rule also allows cash dividend payments to be paid out of related surplus. “In addition, both the Board’s capital rule and the FDIC’s capital rule include an additional sentence noting that institutions regulated by each agency are subject to restrictions independent of the capital rule on paying dividends out of surplus and/or that would result in a reduction of capital stock,” the report states.
  • Capital deductions: The report points out a technical difference exists between the FDIC’s capital rule and the OCC’s and Federal Reserve’s capital rules with regard to an explicit requirement for deduction of examiner-identified losses. The agencies require their examiners to determine whether their respective supervised institutions have appropriately identified losses, the agencies said. The FDIC’s capital rule, however, explicitly requires FDIC-supervised institutions to deduct identified losses from common equity tier 1 capital elements, to the extent that the institutions’ common equity tier 1 capital would have been reduced if the appropriate accounting entries had been recorded. “Generally, identified losses are those items that an examiner determines to be chargeable against income, capital, or general valuation allowances,” the report states.
  • Savings association subsidiaries: Special statutory requirements for the agencies’ capital treatment of a savings association’s investment in or credit to its subsidiaries as compared with the capital treatment of such transactions between other types of institutions and their subsidiaries, the agencies said. “Specifically, the Home Owners’ Loan Act (HOLA) distinguishes between subsidiaries of savings associations engaged in activities that are permissible for national banks and those engaged in activities that are not permissible for national banks.”
  • Enhanced Supplementary Leverage Ratio: The report notes that the rule text establishing the scope of application for the enhanced supplementary leverage ratio differs among the agencies. The Federal Reserve, the report notes, applies the enhanced supplementary leverage ratio standards to bank holding companies identified as global systemically important (GSIB) bank holding companies and those bank holding companies’ Fed-supervised institution subsidiaries. The OCC and the FDIC, on the other hand the report notes, apply enhanced supplementary leverage ratio standards to the institution subsidiaries under their supervisory jurisdiction of a top-tier bank holding company that has more than $700 billion in total assets or more than $10 trillion in assets under custody. “The distinction is of little practical consequence at this time because the set of bank holding companies identified by each agency’s regulations is the same,” the report states.

Joint Report: Differences in Accounting and Capital Standards Among the Federal Banking Agencies as of December 31, 2019; Report to Congressional Committees