The federal banking and thrift regulatory agencies announced that they would allow banks, bank holding companies, and thrifts to recognize the effect of the tax change enacted in Section 301 of the Emergency Economic Stabilization Act of 2008 (EESA) in their third quarter 2008 regulatory capital calculations.

Section 301 of EESA provides tax relief to banking organizations that have suffered losses on certain holdings of Fannie Mae and Freddie Mac preferred stock by changing the character of these losses from capital to ordinary for federal income tax purposes.

However, because the EESA was not enacted until Oct. 3, banking organizations will not be able to recognize the tax effects of the ordinary losses resulting from Section 301 in financial statements prepared in accordance with generally accepted accounting principles (GAAP) until the fourth quarter of 2008.

The agencies’ decision to deviate from GAAP will allow banking organizations to recognize the economic benefits of the change in the tax treatment of losses on Fannie Mae and Freddie Mac preferred stock in the third quarter of 2008 for regulatory capital purposes.

The agencies also said they plan to provide regulatory reporting instructions to banking organizations describing how the effect of the tax change enacted in Section 301 should be reflected in the measurement of regulatory capital in their reports for September 30, 2008.

This change means that the tax benefit associated with the loss on Fannie Mae and Freddie Mac holdings will be recognized in the same calendar quarter that the loss occurred. The American Bankers Association noted that this is a “logical” way to treat the loss.