BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551 DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 94-25 (FIS)
April 18, 1994
TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
SUBJECT: Interim Revision to the Supervisory Policy Statement on Securities Activities
On April 15, 1994, the Federal Financial Institutions Examination Council (FFIEC) approved an interim revision (Attachment 1) to its Supervisory Policy Statement on Securities Activities, which was issued by the Federal Reserve as an attachment to SR 92-1. This interim revision is intended to conform the policy statement with Financial Accounting Standards Board Statement Number 115 "Accounting for Certain Investments in Debt and Equity Securities" (FASB 115). FASB 115, which was issued in May 1993, significantly changed the accounting treatment for certain investment securities and establishes three categories of securities: held-to-maturity, trading, and available-for-sale.
Existing references in the policy statement to securities held for investment, for trading, and for sale and the accounting treatment for each category have been revised to conform to the terminology and accounting treatment set forth in FASB 115. Furthermore, consistent with FASB 115, the interim revision should enable banks in appropriate circumstances to hold "nonhigh-risk" mortgage securities in the held-to-maturity category.1
The revised interim policy removes a provision stating that nonhigh-risk mortgage securities that later become high-risk must be reported as held-for-sale (available-for-sale under FASB 115) or trading assets and instructs examiners to consider any unrecognized net depreciation in held-to-maturity high-risk securities when they evaluate the adequacy of an institution's capital. In addition, the revision clarifies that divestiture of high-risk securities should generally be required by an examiner only in those cases where continued ownership of the securities would pose an undue risk to the safety and soundness of the bank.
This interim revision addresses certain portions of the policy statement that are of immediate concern and is to be incorporated into a revision of the entire supervisory policy statement now underway. Banking organizations should follow the interim revised guidance pending completion of the revised supervisory policy statement.
A copy of the interim revision should be sent immediately to each officer, examiner, and other professional involved in the supervision of state member banks at your Reserve Bank and should also be sent immediately to each state member bank in your District along with the cover letter included in Attachment 2.
If you have any questions on the interim revision to the policy statement, call Charles Holm at (202) 452-3502 or John Frech at (202) 452-2275.
Frederick M. Struble
Associate Director
ATTACHMENT 1 CAN BE OBTAINED FROM FEDERAL RESERVE BANK
ATTACHMENT 2 TRANSMITTED ELECTRONICALLY BELOW
Attachment 2
[TO THE CHIEF EXECUTIVE OFFICER OF EACH
STATE MEMBER BANK IN YOUR DISTRICT]
On April 15, 1994, the Federal Financial Institutions Examination Council (FFIEC) approved an interim revision (Attachment 1) to its Supervisory Policy Statement on Securities Activities. This interim revision is intended to conform the policy statement with Financial Accounting Standards Board Statement Number 115 "Accounting for Certain Investments in Debt and Equity Securities" (FASB 115). FASB 115, which was issued in May 1993, significantly changed the accounting treatment for certain investment securities and establishes three categories of securities: held-to-maturity, trading, and available-for-sale.
Existing references in the policy statement to securities held for investment, for trading, and for sale and the accounting treatment for each category have been revised to conform to the terminology and accounting treatment set forth in FASB 115. Furthermore, consistent with FASB 115, the interim revision should enable banks in appropriate circumstances to hold "nonhigh-risk" mortgage securities in the held-to-maturity category.2
The revised interim policy removes a provision stating that nonhigh-risk mortgage securities that later become high-risk must be reported as held-for-sale (available-for-sale under FASB 115) or trading assets and instructs examiners to consider any unrecognized net depreciation in held-to-maturity high-risk securities when they evaluate the adequacy of an institution's capital. In addition, the revision clarifies that divestiture of high-risk securities should generally be required by an examiner only in those cases where continued ownership of the securities would pose an undue risk to the safety and soundness of the bank.
This interim revision addresses certain portions of the policy statement that are of immediate concern and is to be incorporated into a revision of the entire supervisory policy statement now underway. Banking organizations should follow the interim revised guidance pending completion of the revised supervisory policy statement.
Footnotes
1. The policy statement defines "high-risk mortgage securities" as those collateralized mortgage obligations (CMOs), real estate mortgage investment conduits (REMICs), and similar instruments that have more risk than a 30-year "benchmark" mortgage-backed pass-through security. Other mortgage securities are deemed to be nonhigh-risk. Return to text
2. The policy statement defines "high-risk mortgage securities" as those collateralized mortgage obligations (CMOs), real estate mortgage investment conduits (REMICs), and similar instruments that have more risk than a 30-year "benchmark" mortgage-backed pass-through security. Other mortgage securities are deemed to be nonhigh-risk. Return to text