Comments from more than 200 sources were virtually unanimous in advising bank and thrift regulators to permit current recognition of deferred tax assets for regulatory reporting. Some, however, including the Federal Reserve Bank of Dallas, said the deferred tax assets should not be used to determine whether an institution is critically undercapitalized under section 131 of the Federal Deposit Insurance Corporation Improvement Act.

One of the biggest sources of deferred tax assets is mortgage lending.

At issue is whether Statement of Financial Accounting Standards 109, issued by the Financial Accounting Standards Board in February, should apply to regulatory reporting. Statement 109 permits current recognition of deferred tax assets if they are "more likely than not" ultimately to be realized. The replaced a previous standard requiring "the assurance of realization beyond any reasonable doubt," which typically was interpreted to require a probability of at least 95%.

The regulators are concerned about the impact of SFAS 109 on capital reported by financial institutions. If use of the new standard had the effect of increasing net income, it could also produce an equal increase in capital. The regulators are concerned that current reporting of tax benefits to come in the future should not be used to improve an institution's regulatory capital position.

The four bank and thrift regulators, working through the Federal Financial Institutions Examination Council, sought comment on four alternative methods of handling deferred tax assets for regulatory purposes:

*Adopt Statement 109.

*Adopt most aspects of Statement 109 but limit them to the amount of taxes previously paid that are potentially recoverable the carryback of net operating losses or unrealized tax credits. The staffs of the regulatory agencies favored this approach.

*Adopt Statement 109, but continue to apply Accounting Principles Board (predecessor of FASB) Opinion 11, which generally does not permit the reporting of deferred tax assets arising from net operating loss carryforwards.

* Adopt 109, but with a computation of regulatory capital that reduces the contribution of deferred tax assets by any amount in excess of what could immediately be recovered by a carryback.

As for concern that banks and thrifts wills how profits based on deferred tax benefits that they later cannot take, many of those commenting noted that SFAS 109 has a conservative standard for current recognition.

The FASB pronouncement "already contains a requirement that any deferred tax asset be accompanied by a valuation allowance to reduce the amount of the asset booked to the amount that satisfies the ~probable' standard for recognition, i.e. more likely than not, a greater than 50% chance to be realized, "said the Savings and Community Bankers of America.

The SCBA said it would not object and "would strongly support the denial of deferred tax benefits to capital adequacy calculations for institution that, on a pro forma basis without such assets, would lie below the critical capital level."

The American Bankers Association said creating a different accounting standard for regulatory reporting of deferred tax assets than that required under generally accepted accounting principles conflicts with the study under way at FFIEC to determine ways to reduce unnecessary regulatory burden on bank.

The ABA also said such disparity could result in making banks uncompetitive with non-bank institutions. It cited the example of American Express adopting Statement 109 retroactive to last Jan. 1, which resulted in an increase in tangible equity. "Since American Express is an active competitor of U.S. commercial banks in many markets, this increase in tangible equity will provide it with a competitive advantage, unless commercial banks are afforded similar treatment for capital purposes," the ABA said.

The Federal Reserve Bank of Richmond favored the fourth alternative while the Atlanta Fed appeared willing to accept that or the second. The Chicago Fed favored adoption of statement 109, but would limit it to the banks that have paid taxes in the previous three years that are potentially recoverable through the carryback of net operating losses. The Dallas Fed favored adoption Statement 109, but said net deferred tax assets should not be used to determine whether an institution should be classified as critically undercapitalized under section 131 of FDICIA.

The California League of Savings Institutions challenged the regulators' argument that if an institution experiences unexpected financial difficulties, the resulting reduction in the net deferred tax asset will accelerate the decline in capital.

The Financial Institutions Accounting Committee noted the regulators said if FFIEC doesn't accept full adoption of SFAS 109, it should adopt the fourth alternative in the proposed regulation. "FIAC believes any limitation should be effected only as an adjustment to Tier 1 capital ratio purposes and not for regulatory reporting purposes," the panel said.

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