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FIL-79-96 Attachment

[Federal Register: August 27, 1996 (Volume 61, Number 167)]

[Rules and Regulations]

[Page 43948-43952]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]


 

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DEPARTMENT OF THE TREASURY


 

Office of the Comptroller of the Currency


 

12 CFR Part 30


 

[Docket No. 96-19]

RIN 1557-AB17


 

FEDERAL RESERVE SYSTEM


 

12 CFR Part 208


 

[Docket No. R-0766]


 

FEDERAL DEPOSIT INSURANCE CORPORATION


 

12 CFR Part 364


 

RIN 3064-AB13


 

DEPARTMENT OF THE TREASURY


 

Office of Thrift Supervision


 

12 CFR Part 570


 

[No. 96-53]

RIN 1550-AA97


 

 

Interagency Guidelines Establishing Standards for Safety and

Soundness


 

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of

Governors of the Federal Reserve System; Federal Deposit Insurance

Corporation; and Office of Thrift Supervision, Treasury.


 

ACTION: Final guidelines.


 

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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board

of Governors of the Federal Reserve System (Board of Governors), the

Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift

Supervision (OTS) (collectively, the agencies) are amending the

Interagency Guidelines Establishing Standards for Safety and Soundness

(Guidelines) to include asset quality and earnings standards. The

Guidelines were adopted pursuant to section 39 of the Federal Deposit

Insurance Act (FDI Act).


 

EFFECTIVE DATE: October 1, 1996.


 

FOR FURTHER INFORMATION CONTACT: OCC: Emily R. McNaughton, National

Bank Examiner (202/874-5170), Office of the Chief National Bank

Examiner; David Thede, Senior Attorney (202/874-5210), Securities and

Corporate Practices Division; or Mark Tenhundfeld, Senior Attorney

(202/874-5090), Legislative and Regulatory Activities Division, Office

of the Comptroller of the Currency, 250 E Street, SW, Washington, DC

20219.

Board of Governors: David Wright, Project Manager (202/728-5854),

Division of Banking Supervision and Regulation; Gregory A. Baer,

Managing Senior Counsel (202/452-3236), Legal Division, Board of

Governors of the Federal Reserve System. For the hearing impaired only,

Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/

452-3544), Board of Governors of the Federal Reserve System, 20th and C

Streets, NW, Washington, DC 20551.

FDIC: Robert W. Walsh, Manager, Planning and Program Development

(202/898-6911) or Michael D. Jenkins, Examination Specialist (202/898-

6896), Division of Supervision; or Susan vandenToorn, Counsel (202/898-

8707), or Nancy L. Alper, Counsel (202/736-0828), Legal Division,

Federal Deposit Insurance Corporation, 550 17th Street, NW, Washington,

DC 20429.

OTS: William Magrini, Senior Project Manager (202/906-5744),

Supervision Policy; or Kevin Corcoran, Assistant Chief Counsel (202/

906-6962), or Teri M. Valocchi, Counsel (Banking and Finance) (202/906-

7299), Chief Counsel's Office, Office of Thrift Supervision, 1700 G

Street, NW, Washington, DC 20552.


 

SUPPLEMENTARY INFORMATION:


 

I. Background


 

A. Statutory Framework


 

Section 132 of the Federal Deposit Insurance Corporation

Improvement Act of 1991 (FDICIA), Pub. L. 102-242, amended the Federal

Deposit Insurance Act (FDI Act) by adding a new section (section 39,

codified at 12 U.S.C. 1831p-1) that requires each Federal banking

agency to establish by regulation certain safety and soundness

standards for the insured depository institutions and depository

institution holding companies for which it is the primary Federal

regulator. As enacted in FDICIA, section 39(b) of the FDI Act required

the agencies to establish standards by regulation specifying a maximum

ratio of classified assets to capital and minimum earnings sufficient

to absorb losses without impairing capital.

Section 318(a) of the Riegle Community Development and Regulatory

Improvement Act of 1994


 

[[Page 43949]]


 

(CDRIA), Pub. L. 103-325, which was enacted on September 23, 1994,

eliminated the application of section 39 to depository institution

holding companies and replaced the requirement that the agencies

``specify'' quantitative asset quality and earnings standards with a

requirement that the agencies prescribe standards, by regulation or by

guideline, relating to asset quality and earnings that the agencies

determine to be appropriate.


 

B. Agencies' Proposals


 

The agencies published a joint notice of proposed rulemaking in the

Federal Register on November 18, 1993 (59 FR 60802) that solicited

comment on specific standards that would govern numerous facets of a

depository institution's operations, including quantitative standards

governing a depository institution's asset quality and earnings. On

July 10, 1995 (60 FR 35674), the agencies adopted: (1) final guidelines

in all areas except asset quality and earnings; and (2) a final rule

establishing deadlines for submission and review of safety and

soundness compliance plans which may be required for failure to meet

one or more of the safety and soundness standards adopted in the

Guidelines.1 On the same day (60 FR 35688), the agencies also

proposed revised guidelines concerning asset quality and earnings

standards to address problems noted by many commenters with the

quantitative standards. The primary concern of these commenters was

that it was impossible to design quantitative standards that would be

appropriate for every regulated institution. Because the CDRIA

clarified that quantitative standards were not required, the agencies

proposed to replace the quantitative standards with more comprehensive

qualitative standards that emphasize monitoring, reporting, and

preventive or corrective action appropriate to the size of the

institution and the nature and scope of its activities.

---------------------------------------------------------------------------


 

\1\ For the OCC, these Guidelines appear as Appendix A to part

30; for the Board of Governors, these Guidelines appear as Appendix

D to part 208; for the FDIC, these Guidelines appear as Appendix A

to part 364; and for the OTS, these Guidelines appear as Appendix A

to part 570.

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The proposed asset quality standards required an institution to

identify problem assets and estimate inherent losses. The proposal also

required an institution to: (1) consider the size and potential risks

of material concentrations of credit risk; (2) compare the level of

problem assets to the level of capital and establish reserves

sufficient to absorb anticipated losses on those and other assets; (3)

take appropriate corrective action to resolve problem assets; and (4)

provide periodic asset quality reports to the board of directors to

assess the level of asset risk. The proposal noted that the complexity

and sophistication of an institution's monitoring, reporting systems,

and corrective actions should be commensurate with the size, nature,

and scope of the institution's operations.

The agencies proposed earnings standards requiring monitoring and

reporting systems similar to those required in the standards for asset

quality. The proposed earnings standards were intended to enhance early

identification and resolution of problems. The standards required an

institution to compare its earnings trends, relative to equity, assets,

and other common benchmarks, with its historical experience and with

the earnings trends of its peers. The proposed standards also provided

that an institution should: (1) evaluate the adequacy of earnings given

the institution's size, and complexity, and the risk profile of the

institution's assets and operations; (2) assess the source, volatility,

and sustainability of earnings; (3) evaluate the effect of nonrecurring

or extraordinary income or expense; (4) take steps to ensure that

earnings are sufficient to maintain adequate capital and reserves after

considering asset quality and the institution's rate of growth; and (5)

provide periodic reports with adequate information for management and

the board of directors to assess earnings performance.


 

II. Discussion of Comments


 

The agencies received a total of 31 2 comments, some of which

were sent to more than one agency. Commenters were overwhelmingly

supportive of the proposal, particularly its reliance on qualitative

and flexible standards in lieu of the quantitative standards originally

proposed. Commenters noted that the more flexible guidelines embodied

in the second proposed rule built upon a depository institution's own

procedures for monitoring, reporting, and taking action with respect to

asset quality and earnings conditions. Commenters agreed that well run

institutions would not have to alter their practices in order to comply

with the proposed standards.

---------------------------------------------------------------------------


 

\2\ The Board of Governors received 14 comments, while the OCC,

FDIC, and OTS received 8, 6, and 3, respectively.

---------------------------------------------------------------------------


 

Some commenters suggested amendments to the proposal. One commenter

asked the agencies to clarify how the proposed standards interact with

the examination process and the determination of CAMEL ratings. Another

commenter emphasized that institutions need flexibility in determining

earnings benchmarks and defining the appropriate peer group. A third

commenter suggested that the agencies eliminate the earnings standard

directing each institution to evaluate the effect of nonrecurring or

extraordinary income or expense. This commenter believed such an

evaluation was effectively required by the separate standard requiring

the institution to assess the source, volatility, and sustainability of

earnings. Finally, one commenter asked that institutions be given the

option of complying with quantitative standards.


 

III. Final Guidelines


 

The agencies are adopting the asset quality and earnings standards

substantially as proposed. These qualitative standards are sufficiently

flexible to permit an institution to adopt practices that are

consistent with safe and sound banking practices and that are

appropriate for the institution. Moreover, the standards are designed

to prompt a depository institution to take steps that will help

identify emerging problems in the institution.

The final rule makes two minor changes to the asset quality

standards. First, the order of the steps a depository institution is to

take is rearranged to reflect more accurately the appropriate sequence

of these steps. Second, the final rule deletes the word ``quality'' in

the standard requiring periodic asset reports (asset quality standard 6

in the final guidelines). This change was made to emphasize that the

report is to address each of the asset quality standards, as

appropriate, and not focus solely on problem assets. In response to the

comment about the redundant earnings standards, the final rule combines

the two standards concerning the nonrecurring income and sustainability

of income. The agencies agree that these standards need not be listed

separately, given the significant overlap in what they address. A

discussion of the remaining comments follows.

Impact on examinations and ratings. The guidelines will not change

the examination process or the determination of CAMEL ratings. These

guidelines represent the agencies' longstanding expectation regarding

an institution's management of asset quality and earnings, and, as

such, will not require a change in the agencies' examination procedures

or the determination of an institution's rating.

Definition of peer group. The agencies recognize that defining a

peer group


 

[[Page 43950]]


 

necessarily entails making decisions about which criteria to use. The

guidelines identify equity and asset data as two commonly used

benchmarks in defining a peer group and expressly state that an

institution may use other commonly used benchmarks. The agencies will

be flexible in permitting institutions to select criteria reasonably

designed to provide a meaningful peer group comparison.

Quantitative standards. The agencies have decided against returning

to quantitative standards in lieu of, or in addition to, the standards

proposed. The agencies believe the standards contained in the final

guidelines will encourage the adoption of practices that are consistent

with safe and sound banking practices and that are appropriate for a

given institution. Moreover, the agencies believe that these standards

will be more effective than quantitative standards would be in helping

identify emerging problems in a financial institution. However, even

though the agencies are not adopting quantitative standards, the

agencies will continue to analyze asset quality ratios and earnings

levels, and trends thereof, in assessing an institution.


 

IV. Regulatory Flexibility Act


 

Pursuant to section 605(b) of the Regulatory Flexibility Act, 5

U.S.C. 605(b), the agencies hereby certify that these guidelines will

not have a significant economic impact on a substantial number of small

entities. Accordingly, a regulatory flexibility analysis is not

required. As is explained more fully in the preamble to these

guidelines, the guidelines are designed to illustrate what the agencies

consider to be steps that are consistent with safe and sound banking

practices while preserving flexibility for an institution to adopt a

system that is appropriate for its circumstances.


 

V. Executive Order 12866


 

The OCC and OTS have determined that these final guidelines are not

significant regulatory actions for purposes of Executive Order 12866.


 

VI. OCC and OTS: Unfunded Mandates Reform Act of 1995 Statement


 

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.

104-4 (Unfunded Mandates Act) requires that an agency prepare a

budgetary impact statement before promulgating any rule likely to

result in a Federal mandate that may result in the expenditure by

State, local, and tribal governments, in the aggregate, or by the

private sector of $100 million or more in any one year. If a budgetary

impact statement is required, section 205 of the Unfunded Mandates Act

also requires an agency to identify and consider a reasonable number of

regulatory alternatives before promulgating a rule. The OCC and OTS

have determined that the final guidelines will not result in

expenditures by State, local, and tribal governments, or by the private

sector, of $100 million or more in any one year. Accordingly, the OCC

and the OTS have not prepared a budgetary impact statement or

specifically addressed any regulatory alternatives. As discussed in the

preamble, the final guidelines represent the standards applied by the

agencies in examining insured depository institutions, and, therefore,

represent no change in the agencies' policies and impose minimal new

Federal requirements.


 

List of Subjects


 

12 CFR Part 30


 

Administrative practice and procedure, National banks, Reporting

and recordkeeping requirements, Safety and soundness.


 

12 CFR Part 208


 

Accounting, Agriculture, Banks, banking, Confidential business

information, Crime, Currency, Federal Reserve System, Mortgages,

Reporting and recordkeeping requirements, Safety and soundness,

Securities.


 

12 CFR Part 364


 

Administrative practice and procedure, Bank deposit insurance,

Banks, banking, Reporting and recordkeeping requirements, Safety and

soundness.


 

12 CFR Part 570


 

Accounting, Administrative practices and procedures, Bank deposit

insurance, Holding companies, Reporting and recordkeeping requirements,

Savings associations, Safety and soundness.


 

Office of the Comptroller of the Currency


 

12 CFR CHAPTER I


 

Authority and Issuance


 

For the reasons set forth in the joint preamble, part 30 of chapter

I of title 12 of the Code of Federal Regulations is amended as follows:


 

PART 30--SAFETY AND SOUNDNESS STANDARDS


 

1. The authority citation for part 30 is revised to read as

follows:


 

Authority: 12 U.S.C. 93a, 1831p-1.


 

2. The table of contents of appendix A to part 30 is amended by

adding entries for II.G. and II.H. to read as follows:


 

Appendix A to Part 30--Interagency Guidelines Establishing

Standards for Safety and Soundness


 

Table of Contents


 

* * * * *

II. * * *

G. Asset quality.

H. Earnings.

* * * * *

3. Item II of appendix A to part 30 is amended by adding paragraphs

G and H to read as follows:

* * * * *


 

II. Operational and Managerial Standards


 

* * * * *

G. Asset quality. An insured depository institution should

establish and maintain a system that is commensurate with the

institution's size and the nature and scope of its operations to

identify problem assets and prevent deterioration in those assets. The

institution should:

1. Conduct periodic asset quality reviews to identify problem

assets;

2. Estimate the inherent losses in those assets and establish

reserves that are sufficient to absorb estimated losses;

3. Compare problem asset totals to capital;

4. Take appropriate corrective action to resolve problem assets;

5. Consider the size and potential risks of material asset

concentrations; and

6. Provide periodic asset reports with adequate information for

management and the board of directors to assess the level of asset

risk.

H. Earnings. An insured depository institution should establish and

maintain a system that is commensurate with the institution's size and

the nature and scope of its operations to evaluate and monitor earnings

and ensure that earnings are sufficient to maintain adequate capital

and reserves. The institution should:

1. Compare recent earnings trends relative to equity, assets, or

other commonly used benchmarks to the institution's historical results

and those of its peers;

2. Evaluate the adequacy of earnings given the size, complexity,

and risk profile of the institution's assets and operations;

3. Assess the source, volatility, and sustainability of earnings,

including the effect of nonrecurring or extraordinary income or

expense;

4. Take steps to ensure that earnings are sufficient to maintain

adequate


 

[[Page 43951]]


 

capital and reserves after considering the institution's asset quality

and growth rate; and

5. Provide periodic earnings reports with adequate information for

management and the board of directors to assess earnings performance.

* * * * *

Dated: May 21, 1996.

Eugene A. Ludwig,

Comptroller of the Currency.


 

Federal Reserve System


 

12 CFR CHAPTER II


 

Authority and Issuance


 

For the reasons set forth in the joint preamble, part 208 of

chapter II of title 12 of the Code of Federal Regulations is amended as

follows:


 

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL

RESERVE SYSTEM (REGULATION H)


 

1. The authority citation for part 208 continues to read as

follows:


 

Authority: 12 U.S.C. 36, 248 (a) and (c), 321-338, 461, 481,

486, 601, 611, 1814, 1823(j), 1831o, 1831p-1, 3906, 3909, 3310,

3331-3351, 15 U.S.C. 78b, 78o-4(c)(5), 78q, 78q-1, 78w, 781(b),

781(i), and 1781(g).


 

2. The table of contents of appendix D to part 208 is amended by

adding entries for II.G. and II.H. to read as follows:


 

Appendix D to Part 208--Interagency Guidelines Establishing Standards

for Safety and Soundness


 

Table of Contents


 

* * * * *

II. * * *

G. Asset quality.

H. Earnings.

* * * * *

3. Item II of appendix D to part 208 is amended by adding

paragraphs G and H to read as follows:

* * * * *


 

II. Operational and Managerial Standards


 

* * * * *

G. Asset quality. An insured depository institution should

establish and maintain a system that is commensurate with the

institution's size and the nature and scope of its operations to

identify problem assets and prevent deterioration in those assets. The

institution should:

1. Conduct periodic asset quality reviews to identify problem

assets;

2. Estimate the inherent losses in those assets and establish

reserves that are sufficient to absorb estimated losses;

3. Compare problem asset totals to capital;

4. Take appropriate corrective action to resolve problem assets;

5. Consider the size and potential risks of material asset

concentrations; and

6. Provide periodic asset reports with adequate information for

management and the board of directors to assess the level of asset

risk.

H. Earnings. An insured depository institution should establish and

maintain a system that is commensurate with the institution's size and

the nature and scope of its operations to evaluate and monitor earnings

and ensure that earnings are sufficient to maintain adequate capital

and reserves. The institution should:

1. Compare recent earnings trends relative to equity, assets, or

other commonly used benchmarks to the institution's historical results

and those of its peers;

2. Evaluate the adequacy of earnings given the size, complexity,

and risk profile of the institution's assets and operations;

3. Assess the source, volatility, and sustainability of earnings,

including the effect of nonrecurring or extraordinary income or

expense;

4. Take steps to ensure that earnings are sufficient to maintain

adequate capital and reserves after considering the institution's asset

quality and growth rate; and

5. Provide periodic earnings reports with adequate information for

management and the board of directors to assess earnings performance.

* * * * *

By order of the Board of Governors of the Federal Reserve

System, June 14th, 1996.

William W. Wiles,

Secretary of the Board.


 

Federal Deposit Insurance Corporation


 

12 CFR CHAPTER III


 

Authority and Issuance


 

For the reasons set forth in the joint preamble, part 364 of

chapter III of title 12 of the Code of Federal Regulations is amended

as follows:


 

PART 364--STANDARDS FOR SAFETY AND SOUNDNESS


 

1. The authority citation for part 364 continues to read as

follows:


 

Authority: 12 U.S.C. 1819 (Tenth), 1831p-1.


 

2. The table of contents of appendix A to part 364 is amended by

adding entries for II.G. and II.H. to read as follows:


 

Appendix A to Part 364--Interagency Guidelines Establishing Standards

for Safety and Soundness


 

Table of Contents


 

* * * * *

II. * * *

G. Asset quality.

H. Earnings.

* * * * *

3. Item II of appendix A to part 364 is amended by adding

paragraphs G and H to read as follows:

* * * * *


 

II. Operational and Managerial Standards


 

* * * * *

G. Asset quality. An insured depository institution should

establish and maintain a system that is commensurate with the

institution's size and the nature and scope of its operations to

identify problem assets and prevent deterioration in those assets. The

institution should:

1. Conduct periodic asset quality reviews to identify problem

assets;

2. Estimate the inherent losses in those assets and establish

reserves that are sufficient to absorb estimated losses;

3. Compare problem asset totals to capital;

4. Take appropriate corrective action to resolve problem assets;

5. Consider the size and potential risks of material asset

concentrations; and

6. Provide periodic asset reports with adequate information for

management and the board of directors to assess the level of asset

risk.

H. Earnings. An insured depository institution should establish and

maintain a system that is commensurate with the institution's size and

the nature and scope of its operations to evaluate and monitor earnings

and ensure that earnings are sufficient to maintain adequate capital

and reserves. The institution should:

1. Compare recent earnings trends relative to equity, assets, or

other commonly used benchmarks to the institution's historical results

and those of its peers;

2. Evaluate the adequacy of earnings given the size, complexity,

and risk profile of the institution's assets and operations;

3. Assess the source, volatility, and sustainability of earnings,

including the effect of nonrecurring or extraordinary income or

expense;

4. Take steps to ensure that earnings are sufficient to maintain

adequate capital and reserves after considering the institution's asset

quality and growth rate; and


 

[[Page 43952]]


 

5. Provide periodic earnings reports with adequate information for

management and the board of directors to assess earnings performance.

* * * * *

By order of the Board of Directors.


 

Dated at Washington, D.C. this 13th day of August 1996.


 

Federal Deposit Insurance Corporation.

Jerry L. Langley,

Executive Secretary.


 

Office of Thrift Supervision


 

12 CFR CHAPTER V


 

Authority and Issuance


 

For the reasons set forth in the joint preamble, part 570 of

chapter V of title 12 of the Code of Federal Regulations is amended as

follows:


 

PART 570--SUBMISSION AND REVIEW OF SAFETY AND SOUNDNESS COMPLIANCE

PLANS AND ISSUANCE OF ORDERS TO CORRECT SAFETY AND SOUNDNESS

DEFICIENCIES


 

1. The authority citation for part 570 continues to read as

follows:


 

Authority: 12 U.S.C. 1831p-1.


 

2. The table of contents of appendix A to part 570 is amended by

adding entries for II.G. and II.H. to read as follows:


 

Appendix A to Part 570--Interagency Guidelines Establishing

Standards for Safety and Soundness


 

Table of Contents


 

* * * * *

II. * * *

G. Asset quality.

H. Earnings.

* * * * *

3. Item II of appendix A to part 570 is amended by adding

paragraphs G and H to read as follows:

* * * * *


 

II. Operational and Managerial Standards


 

* * * * *

G. Asset quality. An insured depository institution should

establish and maintain a system that is commensurate with the

institution's size and the nature and scope of its operations to

identify problem assets and prevent deterioration in those assets. The

institution should:

1. Conduct periodic asset quality reviews to identify problem

assets;

2. Estimate the inherent losses in those assets and establish

reserves that are sufficient to absorb estimated losses;

3. Compare problem asset totals to capital;

4. Take appropriate corrective action to resolve problem assets;

5. Consider the size and potential risks of material asset

concentrations; and

6. Provide periodic asset reports with adequate information for

management and the board of directors to assess the level of asset

risk.

H. Earnings. An insured depository institution should establish and

maintain a system that is commensurate with the institution's size and

the nature and scope of its operations to evaluate and monitor earnings

and ensure that earnings are sufficient to maintain adequate capital

and reserves. The institution should:

1. Compare recent earnings trends relative to equity, assets, or

other commonly used benchmarks to the institution's historical results

and those of its peers;

2. Evaluate the adequacy of earnings given the size, complexity,

and risk profile of the institution's assets and operations;

3. Assess the source, volatility, and sustainability of earnings,

including the effect of nonrecurring or extraordinary income or

expense;

4. Take steps to ensure that earnings are sufficient to maintain

adequate capital and reserves after considering the institution's asset

quality and growth rate; and

5. Provide periodic earnings reports with adequate information for

management and the board of directors to assess earnings performance.

* * * * *

Dated: June 3, 1996.

John F. Downey,

Executive Director, Supervision.

[FR Doc. 96-21590 Filed 8-26-96; 8:45 am]

BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P

Last Updated: March 24, 2024