FDIC BOARD ADOPTS AMENDMENT TO PLACE CAPITAL LIMIT ON DEFERRED TAX ASSETS
FOR IMMEDIATE RELEASE
The Board of Directors of the FDIC today amended its capital standards
to establish a limit on the amount of deferred tax assets an
FDIC-supervised bank may include in Tier 1 capital for risk-based and
leverage capital purposes.
Deferred tax assets that can only be realized if a bank earns
sufficient taxable income in the future will be limited for regulatory
capital purposes. However, deferred tax assets that can be realized
through carrybacks to taxes paid on income earned in the past generally
will not be subject to limits on regulatory capital.
The limit is the lesser of the amount that the bank is expected to
realize within one year of the most recent calendar quarter-end date, based on the institution's projection of taxable income for that year, or ten percent of Tier 1 capital. Deferred tax assets in excess of this limit will be deducted from a bank's Tier 1 capital and from its assets when calculating the risk-based and leverage capital ratios. The effective date for this final rule is April 1, 1995.
The regulatory capital limit for deferred tax assets was developed by
federal banking regulators in response to Financial Accounting Standards
Board Statement No. 109. This accounting standard generally allows
institutions to report higher amounts of deferred tax assets than permitted under previous generally accepted accounting principles (GAAP) and prior regulatory reporting policies.
Because of supervisory concerns about the realizability of deferred
tax assets that depend on future taxable income, the banking agencies
considered how deferred tax assets should be treated for regulatory
reporting and capital purposes. The regulators worked under the auspices of the Federal Financial Institutions Examination Council (FFIEC). The FFIEC decided in December 1992 that banks and savings associations should report deferred taxes in their regulatory reports in accordance with FASB 109. At the same time, however, the FFIEC also recommended that the banking agencies amend their regulatory capital standards to limit the amount of deferred tax assets that depend on future taxable income that can be included in regulatory capital.
In response, the FDIC issued a proposed rule in May 1993 to place a
regulatory capital limit on deferred tax assets. The FDIC's final rule
retains the proposed limit, but certain technical aspects have been
modified or clarified to lessen the regulatory burden. This final rule is
consistent with a November 1994 recommendation by the FFIEC's Task Force on Supervision.
The capital limitation is intended to balance the FDIC's concerns
about deferred tax assets that depend on future taxable income against the
fact that such assets will, in many cases, be realized. The limitation
also ensures that FDIC-supervised banks do not place excessive reliance on
deferred tax assets to satisfy the minimum capital standards.