Alert October 21, 2008

Banking Agencies Allow Banking Organizations that Incurred Losses on Fannie Mae/Freddie Mac Preferred Stock To Recognize them as Ordinary Losses for Regulatory Capital Purposes in 3rd Quarter of 2008

The federal banking agencies (the “Agencies”) will allow banks, bank holding companies and thrifts to recognize the effect of a tax change enacted in Section 301 of the Emergency Economic Stabilization Act of 2008 (the “EESA”) in their regulatory capital calculations for the third quarter of 2008.

Section 301 of the EESA allows banking organizations that incurred losses on Fannie Mae and Freddie Mac preferred stock to recognize them as ordinary rather than capital losses for regulatory capital purposes.  Because the EESA was not enacted until October 3, 2008, banking organizations would not have been able to take advantage of the new tax treatment until the fourth quarter.  Pursuant to the Agencies’ decision, however, banking organizations may recognize their Fannie Mae and Freddie Mac losses for regulatory capital purposes in the third quarter of 2008. 

The Agencies also plan to provide regulatory reporting instructions on the tax change to guide banking organizations on measuring regulatory capital in their regulatory capital reports for the third quarter of 2008.