The Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision (the “agencies”) have jointly issued for comment a proposed rule that would revise the treatment of goodwill under the existing regulatory capital rules. The proposed change would effectively reduce the amount of goodwill that certain banks, savings associations and bank holding companies must deduct from tier 1 (core) capital.
Under the existing regulatory capital rules, the associated deferred tax liability against certain assets that are required to be deducted from capital may be netted against the asset prior to deduction. Such assets include certain intangible assets arising from nontaxable business combinations. However, the existing rules do not permit netting for goodwill and other intangible assets arising from taxable business combinations.
The agencies are proposing 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. That would increase an affected organization’s tier 1 capital. The agencies have concluded that such treatment would appropriately reflect the organization’s maximum exposure to loss if the goodwill becomes impaired or derecognized under GAAP. However, an 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 limits on deferred tax assets.
The agencies indicated that they are considering whether they should extend the proposed treatment for goodwill to other intangible assets acquired in a taxable business combination that are not deductible from tier 1 capital net of associated tax liabilities and comment is also requested on that possibility.
The proposed rule is subject to a 30 day comment period from the date of publication in the Federal Register.