Citicorp Faces Revision In Key Capital Ratios

Didn't Account Properly for Some Mortgages

NEW YORK -- Citicorp, which has been furiously scrambling to boost capital, evidently is overstating its capital ratios because it has not properly accounted for some $36 billion in mortgage assets.

On March 31, Citicorp reported that its Tier 1, or core, capital was equal to 4.45% of risk-weighted assets, well above the 3.625% requirement. However, the company failed to count as much as $36 billion in mortgages sold with recourse. Had those been accounted for properly, the Tier 1 ratio actually would have been about 4.16%, according to calculations by the American Banker.

While that ratio would have been above the 3.625% minimum, it is barely over the 4% minimum that takes effect at the end of 1992.

Equity Didn't Measure Up

Had Citicorp wanted to maintain the 4.45% first-quarter ratio it reported while holding the same amount of assets, it would have needed some $800 million in additional common or preferred equity.

Data needed to make the same calculations for second-quarter results were not available, but the seeming error may increase the pressure on Citicorp to sell assets, raise equity, or both.

A spokeswoman for Citicorp declined to say whether the company is currently in compliance with Federal Reserve rules, but said, "We are expecting to be in full compliance by the end of 1992."

William Taylor, the Federal Reserve's director of banking supervision, last week said 22 unidentified bank holding companies and three state-chartered banks were not taking recourse mortgages into account when calculating their capital needs, and therefore were underestimating their capital needs.

Mr. Taylor said the Fed would investigate to determine if they had deliberately exploited ambiguous rules or were genuinely confused.

The Fed voted to clarify the rules, citing concern that "a substantial volume of credit risk stemming from mortgage recourse sales would not be backed by capital."

Regulatory sources said banks making inadvertent errors would probably be allowed to phase in the assets over several quarters. But banks that deliberately evaded the rules will have to come into compliance immediately.

50% Risk Weighting

Under new rules that set capital standards based on the riskiness of assets, banks are supposed to give mortgages sold with recourse a 50% risk weighting. That means banks currently must keep capital equal to 3.625% of such assets.

When financial institutions sell mortgages to the secondary market, they sometimes agree to remain partially liable if the mortgage sours.

By offering these recourse arrangements, sellers may get a better price for the loans or find a buyer for loans that can't be sold to the federal mortgage agencies.

Under the risk-based capital rules, sellers are required to hold capital against the face value of the mortgage, even if they are liable for only a portion of potential losses.

Citicopr singlehandedly accounts for 55% of the banking industry's mortgage sales with recourse, which totaled $68.4 billion in outstanding loans on March 31.

It reported $37.9 billion in mortgage loans sold with recourse as of March 31, the latest date for which statistics are available.

But according to its so-called Y-9 quarterly report filed with the Federal Reserve, it included less than $2 billion of the assets when calculating its risk-based assets.

For the remaining $36 billion in mortgages assets, the bank should have set aside as much as $1.3 billion in capital, half of which would have to have been common or preferred equity.

Shift in Policy

Many banks have been genuinely confused about the capital requirements associated with recourse mortgage loans. Under old capital rules, such assets were in certain instances accorded more generous treatment than other types of assets.

What's more, banks count recourse transactions as sales on their balance sheets. But regulators say they are off-balance-sheet financing arrangements -- not sales -- under the risk-based capital rules, and thus are subject to capital requirements.

Citicorp, which has taken big hits on its real estate portfolio, has been struggling to raise capital. The bank made two private placements of convertible preferred stock this year but had to pay punishingly high rates.

Citicorp is not the only bank to fail to allocate sufficient capital to its recourse mortgage loans. Bank of Boston Corp., for one, undercounted recourse mortgage loans in its risk-based assets as recently as the first quarter, according to Peter Manning, chief financial officer and treasurer.

But Bank of Boston changed its procedures after bringing up the issue with regulators, and is now including its recourse mortgage loans in its risk-weighted assets. "In the June 30 call report, we are going to count these mortgages as though we own them for capital purposes," Mr. Manning said.

Some other banks with large portfolios or recourse mortgage loans said they have included those loans in their risk-weighted assets since the risk-based capital rules took effect. First Bank System Inc., Meridian Bancorp, and Chase Manhattan Corp. officials said their banks have been accounting for recourse mortgage loans as if they were on the banks' balance sheets, as the rules require.

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