The Federal Reserve Board has decided to revise it risk-based capital rules dealing with identifiable intangible assets as a component of Tier 1 capital to more closely conform to the policies of other banking regulators. The changes specify that purchased mortgage servicing rights may account for up to 50% of Tier 1 capital.
The agency adopted a regulation Dec. 9 allowing bank holding companies and state member banks to count such intangible assets as core deposits toward primary capital only if they acquired such assets before Feb. 1 9, 1992 The Fed also acted to move its capital policies dealing with identifiable intangible assets more closely to that of other regulators by saying institutions would no longer be allowed to include core deposits included in the calculation of an institution's capital ratios for application purposes.
The change does not affect the treatment of purchased mortgage servicing rights and purchased credit card receivables, which are allowed to be counted as a component of primary capital to a limited extent by all regulators. However, the agency will now limit the level of PMSRs and PCCRs to 50% of primary capital. PCCRs would be subject to a separate sublimit of 25% of core capital.
Formerly, there was no limit on the level of these assets as part of primary capital. The agency would evaluate the appropriate level of intangible assets in core capital on a case-by-case basis.
The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, for example, fully deduct all intangibles other than PMSRs from Tier I capital. The FDIC allows intangibles to account for up to 5096 of core capital, while the OCC allows PMSRs to count for only up to 25% of core capital, though a pending proposed regulation would increase that to 50%. The OTS Permits PMSRs to be included up to 50% of core capital and limits other qualifying intangibles to 25% of core capital. The Fed previously had no set limit on the amount of core capital that could be accounted for by intangible assets, including PMSRs, but it subjected those in excess of 25% to particularly close scrutiny.
Under the final rule, the amount of PMSRs and PCCRs a banking institution may include in capital cannot exceed the less of 90% of the fair market value of these assets or 100% of their book value.
The final rule is somewhat more flexible than the one proposed by the agency earlier this year. For example, the proposed rule would have limited of these assets includable in capital to not more than 90% of their original purchase price.
"As noted by several commenters, this requirement would impose a recordkeeping burden that would provide little supervisory benefit in light of the other proposed valuation requirements," Fed staffers said.
Institutions will be required to determine the fair market value and review the book value of their PMSRs and PCCRs at least quarterly under the regulation. The Fed's rule differs from those of the FDIC and OTS in that it does not require institutions to obtain an annual independent valuation for these assets. But the agency said it will reserve the right on a case-by-case basis to require an institution to obtain independent valuations of intangible assets includable in capital. The Fed staffers said that they understand the OTS and OCC intend to change their rules to make them more closely resemble the Fed's policy on the issue.
The Fed took up the matter because the Basel Accord on capital does not address the treatment of identifiable intangible assets, giving U.S. regulators discretion in specifying how these assets will be treated for capital purposes.
But the U.S. federal banking agencies all have different rules for evaluating the level ofidentifiable intangible assets they recognize as a component of primary capital, and they are seeking as a matter of general policy to make their rules uniform.