|
| TO THE |
OFFICER IN CHARGE OF SUPERVISION AT
EACH FEDERAL RESERVE BANK |
| SUBJECT: |
Revisions to Bank Holding Company Supervision Procedures for Organizations with Total Consolidated Assets of $5 Billion or Less |
Overview
To further enhance its risk-focused supervision program, on
January 1, 2002, the Federal Reserve implemented
revised procedures for the supervision of bank holding
companies1 with total consolidated
assets of $5 billion or less. While these revisions
principally affect supervision of holding companies with
assets of less than $1 billion, they also promote more
effective use of targeted on-site reviews to fulfill the
requirements, when necessary, for the full scope
inspections of holding companies with total consolidated
assets of between $1 billion and $5 billion.
In general, the revisions direct Reserve Banks to use
surveillance and other information to focus attention and
resources on holding companies that warrant increased
scrutiny.
Each Reserve Bank should implement internal procedures
consistent with the parameters outlined in this letter.
Time frames and procedures in this letter set forth guidelines
to foster effective supervision of bank holding companies.
If conditions warrant, Reserve Banks should consider whatever
further steps are necessary to adequately assess the potential
impact of the holding company on the affiliated insured
depositories. The senior officer in charge of supervision
has the responsibility to ensure that bank holding company
assessments accurately reflect the condition of the holding
company and its potential impact on the insured depositories.
Background
In 1985, the Board adopted on-site bank holding company
inspection frequency standards that varied based upon the size,
complexity, and financial condition of the consolidated
organization.2 In 1997, these
guidelines were revised with the implementation of a risk-focused
supervision program that permitted a more flexible approach to
supervising holding companies, including small shell bank holding
companies.3 The revisions outlined in
this letter further refine the risk-focused approach and
supersede the relevant portions of the 1985 and 1997 inspection
frequency guidelines that pertain to bank holding companies with
assets of $5 billion or less.
Revisions to Supervisory Procedures
The revisions to supervisory procedures are intended to promote
a flexible approach to supervising holding companies, and are
designed to enhance the overall effectiveness and efficiency of
the Federal Reserve's supervisory efforts for these
institutions. The key elements of the revisions are as
follows:
Supervision of companies with total consolidated assets of
$1 billion or less
As specified below, an assessment of the financial condition of
a company in this size range and the assignment of ratings may
be conducted off-site utilizing available financial,
supervisory, and other information. The supervisory cycle
will be determined by the examination frequency of the lead
depository institution.4 Surveillance results or
other relevant financial and supervisory information may prompt
more frequent reviews and reassignment or confirmation of
ratings. Only complex companies5 in this size category will be
assigned a full holding company rating; others will be assigned
only a management rating and a composite rating. All
ratings assigned should be communicated to the company, Board
staff, and appropriate state and federal regulatory authorities
as soon as possible, but generally no later than 90 days
after receipt of the lead depository institution examination
report. In those cases where an on-site review is required
to assign the ratings, the findings of that review and the
assigned ratings should be communicated no later than
120 days after receipt of the lead depository institution
examination report.
For noncomplex holding companies with consolidated assets of
less than $1 billion where all subsidiary depository
institutions have satisfactory composite and management ratings,
and where no material outstanding holding company or consolidated
issues are otherwise indicated, the Reserve Bank should
assign only a composite rating and a management rating to the
company on the basis of the ratings of the lead depository
institution. Documentation requirements supporting the
ratings will generally consist of the examination reports for
the insured depository institution subsidiaries and a copy of
the transmittal letter communicating the ratings to the
company. The ratings should be entered into the National
Examination Database (NED).
For noncomplex holding companies with consolidated assets of
less than $1 billion that have a subsidiary depository
institution in less than satisfactory condition, or with a less
than satisfactory management rating, or where a material
supervisory issue is otherwise indicated, the Reserve Bank
will conduct an off-site review of the organization using
surveillance results and relevant financial, supervisory, and
other information, including correspondence or other
communications with bank management and the primary bank
supervisor. If the information obtained off-site from
these sources is not sufficient to determine the overall
financial condition of the holding company and to assign the
composite and management ratings, an on-site review should be
conducted. Any on-site review should be targeted, as
appropriate, to those areas where additional information is
needed to develop the management and composite ratings.
Documentation for the ratings and the off-site and/or on-site
review should be commensurate with the risk of the company and
the nature and scope of issues. At a minimum, documentation
will generally consist of the examination reports for the
insured depository institution subsidiaries, a copy of the
transmittal letter communicating the ratings to the company,
information related to relevant surveillance results, and
memoranda supporting any on-site review conducted. The
ratings should be entered into NED, and a copy of the transmittal
letter communicating the ratings to the company should be
forwarded to the Board's Financial Analysis and Surveillance
Section. A meeting between Reserve Bank staff and the
board of directors to communicate findings is not required, but
should be conducted when supervisory concerns warrant such
action.
For complex holding companies with consolidated assets of less
than $1 billion, the Reserve Bank will conduct an
off-site review of the organization using surveillance results and
relevant supervisory, financial, and other information, including
correspondence or other communication with bank management and the
primary bank supervisor or functional or other regulator. If
the information obtained off-site from these sources is not
sufficient for the Reserve Bank to determine the overall condition
of the company and to assign a complete holding company rating,6 an on-site
review should be conducted. The on-site review should be
targeted, as appropriate, to those areas where additional
information or analysis is needed to develop the complete holding
company rating. Documentation for the ratings and the
off-site and/or on-site review should be commensurate with the
risk of the company and the nature and scope of issues. At a
minimum, this documentation will generally consist of the
examination reports for the insured depository institution
subsidiaries, a copy of the transmittal letter communicating the
ratings to the company, information related to relevant
surveillance results, and memoranda supporting any on-site review
conducted. The ratings should be entered into NED, and a
copy of the transmittal letter communicating the ratings to the
company should be forwarded to the Board's Financial Analysis and
Surveillance Section. A meeting between Reserve Bank staff
and the board of directors to communicate findings is not required,
but should be conducted when supervisory concerns warrant such
action.
Supervision of companies with total consolidated assets of
between $1 - $5 billion
A full scope inspection for this population of companies may be
satisfied when appropriate with a targeted or limited scope
on-site review supplemented by other information sources.
All companies in this size range (whether deemed complex or
noncomplex) will be assigned a complete holding company
rating. The timeframes in which those ratings must be
communicated to the company in writing remain unchanged.7 Copies of
the letter and inspection report communicating findings should be
sent to the Board's Financial Analysis and Surveillance Section
and to the appropriate federal and state regulatory
authorities. The inspection frequency guidelines for this
population of companies also remain unchanged.8 The scope
and documentation requirements for the inspections of these
companies are governed by the Bank Holding Company Supervision
Manual and should continue to be tailored to the risks -- in
particular, the risks posed by the holding company's operations or
activities to an insured depository institution subsidiary -- and
to the company's compliance with applicable laws and
regulations.
Surveillance
The surveillance program for small bank holding companies is a
primary tool for identifying between reviews potentially
significant changes in the condition of these organizations and for
targeting the work of any on-site reviews. Quarterly
surveillance screens focus on the identification of potential
parent company and nonbank issues that may adversely affect
affiliated insured depository institutions. In particular,
the screens address parent company cash flow, intercompany
transactions, parent company leverage, and consolidated capital
ratios, where applicable. The surveillance screens are
periodically updated to reflect industry trends and issues as well
as changes in regulatory reporting requirements.
Upon the receipt and finalization of quarterly Y-9 data,
Board surveillance staff will provide to each Reserve Bank results
of the small bank holding company surveillance screens, which will
identify companies failing key screening criteria. Reserve
Banks should evaluate this information and take action, as
appropriate, within 45 days of receipt. In doing so,
Reserve Banks will determine whether the screen results reveal that
the holding company or its affiliates could pose or exacerbate a
material risk to an insured depository institution
subsidiary. If the screen results reveal no basis for a
significant concern, a short note to files documenting this
conclusion should be prepared and no further action is
required. If it is determined that the screen results reveal
the potential for material risk to an insured depository
institution, Reserve Banks should take appropriate follow-up
action within 90 days, such as contacting the institution to
obtain more information, requesting from the institution a
corrective action plan, implementing heightened monitoring
procedures, or scheduling an on-site review. In most cases,
follow-up action can be completed through off-site means.
Documentation supporting the action taken in these cases should be
commensurate with the level of concerns. Typically, a short
memorandum posted in NED will suffice. If an on-site review
is recommended, the review should commence within 90 days of
the Reserve Bank's notification of the surveillance results,
and the findings of the review should be communicated to the
company, Board staff, and appropriate state and federal regulatory
authorities within 120 days of that notification.
In addition to the surveillance monitoring screens, Board staff
will also provide Reserve Banks with program support screens that
are designed to provide additional information to assist in the
supervision of small bank holding companies. One set of
support screens identifies companies that are classified as
noncomplex, but which exhibit characteristics of complex
organizations. Reserve Banks should evaluate any company
meeting those screens to determine whether its designation as
noncomplex should be changed and its supervision program modified
accordingly. A second set of support screens monitors
compliance by financial holding companies with the capital,
managerial, and CRA standards set forth in the
Gramm-Leach-Bliley Act. Follow-up requirements for
companies failing those screens are outlined in previous guidance,
set forth in SR letter 00-11.
Surveillance information is crucial to identifying potential
issues between reviews and in order to risk-focus on-site
work. Accordingly, it is important that Reserve Banks
continue to take steps to assure the accuracy of the regulatory
reports upon which the surveillance program is based. In
particular, System staff should follow-up promptly on identified
inaccuracies.
Enforcement Actions
This program does not change the criteria or procedures for
pursuing formal or informal enforcement actions.
Implementation
The program discussed above should be implemented effective
immediately. This SR letter supersedes
SR letter 97-27: "Risk-Focused Supervision Policy
for Small Shell Bank Holding Companies," and
SR letter 98-29: "Small Shell Bank Holding
Company Surveillance Program," and partially supersedes
SR letter 93-04: "Adoption
of Minimum Timing Standards for the Completion of Examination and
Inspection Reports," and SR letter 85-28:
"Examination Frequency and Communicating With
Directors."
Questions or comments concerning this letter should be directed to
Molly S. Wassom, Associate Director, at 202/452-2305;
Tom Keady, Manager, Community Banking Organizations, at
202/728-5885; or Kevin Bertsch, Manager, Financial Analysis
and Surveillance Section, at 202/452-5265.
Richard Spillenkothen
Director
| Superseded: |
SR letter 97-27
SR letter 98-29 |
| |
| Partially superseded: |
SR letter 85-28
SR letter
93-04 |
Note:
All financial holding companies are bank holding companies;
hence, those with consolidated assets of $5 billion or
less are covered by these revisions. Return to text
Refer to the Federal Reserve Regulatory
Service (FRRS) 3-1531 (S-2483,
October 7, 1985, as revised by S-2563,
May 20, 1994). Return to text
Refer to FRRS 3-1532.5 (S-2587,
November 3, 1997). Return to text
The lead depository institution is generally the largest
depository institution subsidiary. However, a Reserve Bank
may, based on the facts and circumstances of a particular
holding company, designate another depository institution as
the lead. Return to text
The determination of whether a holding company is "complex"
versus "noncomplex" is made at least annually on a
case-by-case basis taking into account and weighing a number
of considerations, such as: the size and structure of the
holding company; the extent of intercompany transactions
between insured depository institution subsidiaries and the
holding company or uninsured subsidiaries of the holding
company; the nature and scale of any nonbank activities,
including whether the activities are subject to review by
another regulator and the extent to which the holding company
is conducting Gramm-Leach-Bliley authorized activities
(e.g., insurance, securities, merchant banking); whether
risk management processes for the holding company are
consolidated; and whether the holding company has material
debt outstanding to the public. Return to text
The complete holding company rating would include a composite
rating as well as all of the component ratings. Return to text
Ratings must be communicated to the company within
60 days from the completion of the inspection; however,
Reserve Banks are encouraged to adopt an internal target of
45 days for the processing and mailing of reports for
companies rated "3", "4", or "5". See SR letter 93-4. Return to text
For complex holding companies with assets between $1 billion
and $5 billion, a full scope inspection (which may, under
this program, include a targeted review for the on-site
portion) is required at least once annually, after which the
complete rating is assigned. For noncomplex holding
companies with assets between $1 billion and $5 billion, an
inspection, which may be targeted or limited in scope, is
required at least once every two years, after which a
complete rating is assigned. For both complex and noncomplex
companies in this size group that are rated composite "3",
"4", or "5", one full scope inspection - which under this
program may include a targeted review for the on-site
portion - plus one limited scope inspection must be conducted
at least annually. Return to text
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