Comptroller of the Currency
Administrator of National Banks

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (agencies) are seeking comment on a Notice of Proposed Rulemaking (NPR) that would permit a banking organization to reduce the amount of goodwill it must deduct from its regulatory tier 1 capital by the amount of any deferred tax liability associated with that goodwill.

SUMMARY

Under existing regulatory capital rules, a bank must deduct certain assets from tier 1 capital, which is used to determine the bank’s leverage and risk-based capital ratios. A bank is permitted to net any associated deferred tax liability against some of those assets prior to deduction from tier 1 capital. Included among those assets that a bank may deduct net of associated deferred tax liabilities are certain intangible assets arising from a nontaxable business combination. Such netting generally is not permitted for goodwill and other intangible assets arising from a taxable business combination, in which case the full or gross carrying amount of the asset must be deducted from tier 1 capital.

The NPR proposes to permit the amount of goodwill arising from a taxable business combination that must be deducted from tier 1 capital to be reduced by any associated deferred tax liability. This change would permit a banking organization to effectively reduce its regulatory capital deduction for goodwill to an amount equal to the maximum regulatory capital deduction that could occur as a result of the goodwill becoming completely impaired or derecognized. However, a banking organization that reduces the amount of goodwill deducted from tier 1 capital by the amount of the associated deferred tax liability would not be permitted to net this deferred tax liability against deferred tax assets when determining regulatory capital limitations on deferred tax assets. The agencies believe that this treatment would appropriately reflect a banking organization’s maximum exposure to loss if the goodwill becomes impaired or is derecognized under GAAP.

The NPR was published in the Federal Register on September 30, 2008. Comments on the proposal are due on or before October 30.

FURTHER INFORMATION

You may direct questions or comments to Paul Podgorski, Risk Expert, Capital Policy Division, at (202) 874-4755; Ron Shimabukuro, Special Counsel; or Jean Campbell, Senior Attorney, Legislative and Regulatory Activities Division, at (202) 874-5090.