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OCC BULLETIN 1999-1
To: Chief Executive Officers of all National Banks, Department and Division Heads, and all Examining Personnel

Description: Interim Guidance for National Banks

On December 29, 1998, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (agencies) issued interim guidance on the treatment of derivatives for regulatory reporting and capital purposes. The agencies took this action in response to changes in generally accepted accounting principles (GAAP) resulting from Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133).

FAS 133 requires institutions to record all derivatives on the balance sheet as assets or liabilities at their fair value. This statement significantly changes the accounting treatment of derivatives used for hedging purposes and for financial instruments with certain types of embedded derivatives. These new accounting requirements may affect the amount of a national bank's recorded assets, liabilities, and equity and corresponding regulatory capital levels. OCC Bulletin 98-45 contains a more detailed description of FAS 133 and its implications to national banks.

The impact of FAS 133 on bank capital requirements is still under review by the agencies. Pending completion of that review, however, the attached interagency guidance stipulates that upon adoption of FAS 133 banks should:

  • Exclude the gains or losses on cash flow hedges that are placed in a separate component of equity called "accumulated other comprehensive income" from Tier 1 capital
  • Calculate risk-weighted assets for derivatives according to the existing risk-based capital standards. In other words, the fact that an institution records a derivative on its balance sheet under FAS 133 will not change the way that derivative is risk-weighted for risk-based capital ratios. The amount to be included in risk-weighted assets will continue to be based on the credit equivalent amount of the derivative, not the on-balance-sheet fair value.
  • Include in risk-weighted assets both the host financial instrument and the credit equivalent amount of the derivative component of instruments with embedded derivatives.

In addition, until call reports are modified to include a separate line item for the accumulated net gains (losses) on cash flow hedges, national banks should report the gains or losses on cash flow hedges placed in a separate component of equity in the same call report line item currently used for "net unrealized holding gains (losses) on available-for-sale securities."

For more information, contact the Office of the Chief Accountant (202) 649-6280.

Kevin J. Bailey
Deputy Comptroller of Core Policy

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