Alert September 16, 2008

Federal Banking Agencies Propose Rule Reducing Goodwill Deduction

The four federal banking agencies proposed to amend their capital rules to reduce the amount of goodwill that a bank must deduct from tier 1 capital in taxable transactions.  The proposal notes that currently in such transactions deferred tax assets are not permitted to be netted against goodwill and other intangible assets before goodwill is deducted from tier 1 capital.  As a result, the full or gross carrying amount of goodwill is deducted.

In response to industry request, however, the proposal would permit a bank to reduce the amount of goodwill it must deduct from tier 1 capital by the amount of any deferred tax liability associated with that goodwill.  This would permit a bank to reduce its regulatory capital deduction for goodwill to an amount equal to the maximum regulatory capital reduction that could result from the goodwill being completely impaired.  In other words, the amount of the tier 1 capital in such circumstances would be increased by the amount of the deferred tax liability recognized with respect to the goodwill.  The proposal also seeks industry comment as to whether the agencies should permit any additional intangible assets to be deducted from tier 1 capital net of associated deferred tax liabilities.  Comments on the proposal are due 30 days after its publication in the Federal Register.