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2007 Regulatory Report Changes

2007 Regulatory Report Changes. Kenneth P. Lamar Vice President Statistics Function. Overview. Fair Value Accounting Loans with Negative Amortization Defined Benefit Plans Loan Breakouts Credit Derivatives Revenue. Fair Value Changes (FAS 157 and FAS 159).

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2007 Regulatory Report Changes

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  1. 2007 Regulatory Report Changes Kenneth P. Lamar Vice President Statistics Function

  2. Overview • Fair Value Accounting • Loans with Negative Amortization • Defined Benefit Plans • Loan Breakouts • Credit Derivatives Revenue

  3. Fair Value Changes (FAS 157 and FAS 159) • FAS 157 and FAS 159 can be adopted early by banks and BHCs in the first quarter. • These standard can also be adopted on other regulatory reports (FR Y 11/FR 2314).

  4. Fair Value Option for Assets and Liabilities (FAS 159) • Allows BHC’s and other entities to choose to report certain financial assets and liabilities at fair value with the changes in fair value included in earnings • Three Key Points for Regulatory Reports • Assets and Liabilities cannot be moved to trading account unless they meet the definition of a trading asset/liability even if the FVO is applied. • The impact for the effect of a change in an institutions creditworthiness for liabilities will not impact regulatory capital. • Interest income/expense and the impact of the “mark” should be separated in the income state statement.

  5. Schedule HC-Q • Collects data, by major asset and liability category, on the amount of assets and liabilities to which fair value option has been applied • Separate disclosure of the amount of assets and liabilities whose fair value was estimated under level two and level three of the FASB’s fair value hierarchy

  6. Schedule HC-Q • Schedule HC-Q is reported when FAS 157 is adopted and: • The FVO is applied or • The reporter files a Trading Schedule (HC D)

  7. Schedule HC-Q • The main categories listed are: • Loans and leases • Trading Assets • Nontrading securities in the trading account • All other financial assets • Deposits Trading liabilities • All other financial liabilities • Loan commitments

  8. Schedule HC-Q

  9. Changes to Schedule HI • The net changes in fair value of financial instruments should be accounted for on the income statement based on instrument type • Additional memorandum item has been added to the breakout of other non-interest income for net changes in the fair values of financial instruments accounted for under fair value

  10. Deterioration of Banks Creditworthiness • The deterioration of a banks creditworthiness reduces the market price of debt • Thus, the reduction in debt prices reduces the fair value of debt and increases earnings • Gains and losses based on creditworthiness should be excluded from regulatory capital calculation

  11. Changes to Schedule HC-R • Additional item has been added to the regulatory capital schedule for the cumulative change in fair value of all financial liabilities accounted for under fair value option that is attributable to changes in the BHC’s own creditworthiness • This amount would be excluded from the BHC’s retained earnings for purposes of determining tier 1 capital

  12. FFIEC 031/041, FR Y-9C Changes Effective March 31, 2007 • Negative Amortization: In order to identify the exposure to negatively amortizing residential mortgage loans, • A new item will be added to Schedule RC-C, Part I, “Loans and Leases”, to capture the total amount of closed-end loans with negative amortization features secured by 1-4 family residential properties. • This items captures the book value (amortized cost) of these loans.

  13. FFIEC 031/041, FR Y-9C Changes Effective March 31, 2007 • Two new memorandum items will be added to Schedule RC-C for banks with a significant volume of negatively amortizing 1-4 family residential mortgage loans to capture: • The total maximum remaining amount of negative amortization contractually permitted on closed-end loans secured by 1-4 family residential properties. • This item captures the contractual amount of negative amortization not included in the book value. • The total amount of negative amortization on closed-end loans secured by 1-4 family residential properties that is included in the carrying amount of the loans. • This item captures the amount of negative amortization included in the book value.

  14. FFIEC 031/041, FR Y-9C Changes Effective March 31, 2007 • A new memorandum item will be added to Schedule RI, “Income Statement”, to capture non-cash income from negative amortization on closed-end loans secured by 1-4 family residential properties from banks with a significant volume of negatively amortizing 1-4 family residential mortgage loans.

  15. Overview of FASB Statement 158 • The FASB issued Statement No. 158 in September 2006, which amends FASB Statements No. 87, 88, 106 and 132(R) - only changes the accounting of single- employer defined benefit plan

  16. Overview of FASB Statement 158 • Statement requirements: • Recognize the funded status of a benefit plan • Difference between plan assets and the benefit obligation • Upon implementation adjust postretirement plan amounts • Recognize gains or losses, prior service costs or credits that have not been included in net periodic benefit cost of its plans • As components of ending balance of accumulated other comprehensive income (AOCI)

  17. Overview of FASB Statement 158 • Statement requirements: • Recognize in other comprehensive income (OCI) gains or losses and prior service costs or credits that occur during the period

  18. Overview of FASB Statement 158 • Statement requirements: • Measure defined benefit plan assets and obligations at fiscal year-end • Eliminates delayed recognition of events and transactions between measurement date and fiscal year end • Disclose additional information on benefit plans in the notesto financial statements

  19. Interim Regulatory Reporting Capital Guidance • FFIEC announced an interim decision that FASB No. 158 will not affect banking organizations’ regulatory capital • Exclude from regulatory capital amounts recorded in AOCI for the adoption and implementation

  20. Interim Regulatory Reporting Capital Guidance • Call and FR Y-9C reports • Excluded amounts should be reported in Regulatory Capital Schedule, “Less: Accumulated net gains (losses) on cash flow hedges” (Line 4) • If a net gain report as a positive value • If a net loss report as a negative value

  21. FFIEC 031/041, FR Y-9C ChangesEffective March 31, 2007 • Income from Annuity Sales, Investment Banking, Advisory, Brokerage and Underwriting • To better distinguish between banks noninterest income investment banking (dealer) activities and their sales (brokerage) activities • A new item will be added for “Fees and commissions from annuity sales:” • Existing item 5.d will be replaced by separate items “Fees and commissions from securities brokerage,” “Investment banking, advisory and underwriting fees and commissions,” Underwriting income from insurance and reinsurance activities” and “Income from other insurance activities.”

  22. FFIEC 031/041, FR Y-9C ChangesEffective March 31, 2007 • Income from Closed-End 1-4 Family Residential Mortgage Banking Activities • To capture the portion of a bank’s “Net servicing fees,” “Net securitization income,” and “Net gains (losses) on sales of loans and leases” earned during the quarter that is attributed to closed –end 1-4 family residential mortgage loans • A new item will be added to Schedule RC-P, for “Noninterest income from the sale, securitization, and servicing of closed-end 1-4 family residential mortgage loans.”

  23. FFIEC 031/041, FR Y-9C ChangesEffective March 31, 2007 • Revenues from Credit Derivatives and Related Exposures: To capture the portion of revenue from trading activity that is attributed to trading credit derivatives and credit cash instruments; • A new risk exposure category will be added to Schedule RI, Memoranda Item 8 for credit-related exposures (FR Y-9C HI, item 9) • A bank should report its net gains (losses) from trading cash instruments and derivative contracts that it manages as credit exposures. • Revenue from credit derivatives and credit cash instruments held for trading

  24. FFIEC 031/041, FR Y-9C ChangesEffective March 31, 2007 • Two new memorandum items will be added to Schedule RI • Banks must report the net gains (losses) on credit derivatives held for trading and those held outside the trading account.

  25. FFIEC 031/041, FR Y-9C ChangesEffective March 31, 2007 • Retail and Commercial Leases • Schedules RC-C, RC-N and RI-B, part I: To better distinguish between lease financing receivables for retail purposes and for commercial purposes • Change breakout of lease financing receivables from U.S. and Non-U.S. addressees to: • Leases to individuals for household, family, and other personal expenditures (i.e., consumer leases) and • All other leases.

  26. FFIEC 031/041, FR Y-9C Changes Effective March 31, 2007 and March 31, 2008 • Loan Breakouts (Schedules RC-C, Memoranda, RC-N, Memoranda, and RI-B, part I, Memoranda ): • Construction, Land Development, and Other Land Loans: To capture the portion of construction, land development and other loans that are 1-4 family residential construction loans; • Split into separate items for “1-4 family residential construction loans” and “Other construction loans and all land development and other land loans.” • Commitments to fund commercial bank loans on Schedule L will also be split as above.

  27. FFIEC 031/041, FR Y-9C Changes Effective March 31, 2007 and March 31, 2008 • Loans Secured by NonFarm Nonresidential Properties: To capture the portion of NonFarm Nonresidential Properties that is secured by owner occupied nonresidential properties; • Split into separate items for “loans secured by owner-occupied nonfarm nonresidential properties” and “loans secured by nonfarm nonresidential properties.

  28. FFIEC 031/041, FR Y-9C Changes Effective March 31, 2007 and March 31, 2008 • For FFIEC 031/041: Loan Breakout implementation either March 31, 2007 or March 31, 2008 • March 2007 implementation for banks • with $300 million or more in total assets or with foreign offices • without foreign offices with less than $300 million in assets whose total construction, multifamily, and nonfarm nonresidential real estate loans are greater than 150 percent of total equity capital • March 2008 implementation for banks • With less than $300 million in total assets and do not meet the 150 percent of total equity capital test

  29. The End

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