Alert October 07, 2008

Federal Banking Agencies Propose Rule that Would Permit Banking Organizations to Deduct Goodwill Net of Associated Deferred Tax Liabilities from Regulatory Capital

The FRB, FDIC, OCC and OTS (the “Agencies”) issued a joint notice of proposed rulemaking (the “NPR”) under which banks, banking holding companies and savings associations (“Banking Organizations”) would be able to reduce the amount of goodwill that a Banking Organization must deduct from Tier 1 capital by the amount of any deferred tax liability associated with that goodwill.  Under the Agencies’ current regulatory capital rules, Banking Organizations may net the value of associated deferred tax liabilities from many assets, but such netting is generally not permitted for goodwill or other intangible assets arising from a taxable business combination.

The Agencies said that the change proposed in the NPR would “permit a [B]anking [O]rganization to effectively reduce its regulatory capital deduction from goodwill to an amount equal to the maximum regulatory capital reduction that could occur as a result of the goodwill becoming completely impaired or derecognized.”  The Agencies requested comments on all aspects of the NPR, including: (1) the impact that the NPR could have on a Banking Organization’s regulatory capital ratios; and (2) whether the Agencies should consider similar treatment for intangible assets, other than goodwill, that are currently required to be fully deducted by a Banking Organization from its Tier 1 capital.  Comments are due no later than October 30, 2008.