Reserves rule to remain in force; use of deferred-tax assets limited.

WASHINGTON -- Federal regulators announced two long-awaited actions Monday regarding the capital treatment of loan-loss reserves and deferred tax assets.

Banks and thrifts will be able to continue including loan-loss reserves in Tier 2 capital, the agencies said. Regulators have been working on applying Financial Accounting Standard 114, accounting by creditors for impairment of a loan, to capital rules since May.

The second action limits the amount of deferred tax assets that can be used to meet capital requirements. FAS 109, accounting for income taxes, has been on the regulators' plates since February 1993.

While both actions were expected, industry representatives were relieved that the wait is over.

"It is nice to have the suspense ended," said Brian P. Smith, policy director at the Savings and Community Bankers of America.

Regulators tackled a third accounting regulation this month.

On Nov. 9, the agencies decided to allow banks to ignore, for capital purposes, changes in the value of certain securities that must be marked to market. FAS 115 requires banks to mark securities available for sale to market value.

The new rules were announced Monday by the Federal Financial Institutions Examination Council. FFIEC is the interagency group of federal banking formed in 1979 to maintain uniform regulatory standards.

The actions will not take effect until each agency formally approves them. Zane D. Blackburn, chief accountant at the Comptroller of the Currency's office, said he expects adoption by all agencies by yearend.

When FAS 114 came out in May, it was unclear whether reserves for impaired loans would be able to count towards Tier 2 capital. To qualify, reserves may not be designated for a particular impaired loan.

Regulators decided that bad debt reserves set up under FAS 114 are general loss reserves, and may continue to be included in Tier 2 capital, subject to a limit of 1.25% of assets.

FAS 114 also allows banks and thrifts two choices on recording interest income from impaired loans.

Institutions may continue to record interest income on the written-down balance or tO use the regulators' nonaccrual method. Banks, which had objected to keeping two sets of books for their troubled loans, applauded the move.

"That's a win for the industry," said Marti Sworobuk, the savings and community bankers group's program manager for financial management and accounting.

On FAS 109, regulators will continue to allow banks to carry forward losses and use them as a future, as well as past, tax shelter for regulatory capital purposes.

FAS 109 allows companies to carry tax-sheltering losses back three years and forward 10 years. But bank regulators are limiting banks to carry losses back three years and forward one year. The Office of Thrift Supervision is the only financial regulator which has already formally adopted that capital standard.

The council, on staff recommendation, also limited the allowable deferred tax assets to the lesser of 10% of Tier 1 capital or the amount banks can realize within one year.

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