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AOCI Opt-out Election Process

AOCI Opt-out Election Process

February 18, 2015

Authored by: Robert Klingler

In connection with the effectiveness of BASEL III, most banks are required to decide whether to elect to opt-out of the inclusion of Accumulated Other Comprehensive Income (“AOCI”) in their Common Equity Tier 1 Capital.  All non-advanced approaches institutions (i.e.  banks less than $250 billion in total assets with less than $10 billion in on-balance sheet foreign exposure) will need to indicate whether they are making the AOCI opt-out in their March 31, 2015 Call Reports.  This is a one-time election and generally irrevocable, except in the limited cases of subsequent mergers between institutions with different elections.

As a reminder, AOCI includes such items as unrealized gains and losses on certain securities.

For institutions that opt out, most AOCI items will not be included in the calculation of Common Equity Tier 1 Capital (and thus Tier 1 Capital generally). In other words, most AOCI items will be treated, for regulatory capital purposes, in the same manner in which they were prior to BASEL III.  (Unrealized gains and losses on available-for-sale debt securities will continue to be excluded from regulatory capital; unrealized losses on available-for-sale equity securities will continue to be recognized in regulatory capital; and up to 45% of unrealized gains on available-for-sale equity securities will continue to be recognized in Tier 2 capital.)

For institutions that do not opt out, most AOCI items will be included in the calculation of Common Equity Tier 1 Capital (and thus Tier 1 Capital generally).  (Unrealized gains and losses on available-for-sale debt and equity securities will be recognized in Common Equity Tier 1 Capital.)

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Revised Call Report for Transaction Account Guarantee

On December 11, 2008, the Federal Financial Institutions Examination Council issued revised instructions for Call and Thrift Financial Reports applicable to participants in the TLGP Transaction Account Guarantee.

Participating institutions will be required to report the amount and number of its noninterest-bearing transaction accounts (including IOLTA accounts and certain NOW accounts) with balances in excess of $250,000.  In calculating the figures, the bank or thrift is permitted, but not required, to exclude accounts or amounts that are otherwise insured under the FDIC’s pass-through insurance rules.  The FDIC will use the reported amounts to calculate the 10 basis point assessment for participation in the Transaction Account Guarantee.  As a result, it will likely be in the interest of reporting institutions to determine the amount in the accounts that is otherwise insured.  The instructions note that the amounts must be fully supported in the institution’s workpapers.

The FFIEC also noted that the Call and Thrift Financial Reports have otherwise not been modified to reflect the temporary increase in deposit insurance to $250,000.  As a result, institutions should continue to report the amount and number of deposit accounts (other than retirement accounts) of (a) $100,000 or less and (b) more than $100,000.  In addition, when reporting estimated uninsured deposits, institutions should continue to calculate the amount of uninsured deposits based on the deposit insurance limits of $250,000 for retirement deposit accounts and $100,000 for all other accounts.

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