Alert December 23, 2008

Federal Banking Agencies Finalize Rule Permitting Banking Organizations to Deduct Goodwill Net of Associated Deferred Tax Liabilities from Regulatory Capital

The FRB, FDIC, OCC and OTS (the “Agencies”) issued a final rule (the “Rule”) under which banks, bank holding companies and savings associations (“Banking Organizations”) may 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’ previous 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.  The Agencies did not, however, adopt the proposed change that would have extended the new capital treatment to any deferred tax liability associated with other intangible assets acquired in a taxable business combination.  The Rule is effective 30 days after its publication in the Federal Register, but Banking Organizations may elect to apply the Rule for purposes of the regulatory reporting period ending on December 31, 2008.