Bank Holding Company
Supervision Manual
January 2009 Update
The January 2009 update to the Bank Holding Company Supervision Manual has been published (supplement no. 35). The manual comprises the Federal Reserve System’s regulatory, supervisory, and inspection guidance for bank holding companies (BHCs). The new supplement includes guidance on the following subjects:
- Consolidated Supervision of BHCs. The new sections 1050.0, 1050.1, and 1050.2 provide a comprehensive discussion of the Federal Reserve’s program on the consolidated supervision of BHCs. Section 1050.0, “Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of Foreign Banking Organizations,” provides a discussion of the principal areas of focus and the Federal Reserve’s expectations for its staff in applying consistent supervisory practices and assessments for the consolidated supervision of activities across organizations with similar activities and risks. This section, and SR letter 08-9 or CA letter 08-12 and its attachments, outline specific expectations for Federal Reserve staff for understanding and assessing a number of areas including: primary governance functions and risk controls, material business lines and nonbank operations, financial condition, capital adequacy, funding and liquidity management, and other key activities and risks at banking organizations. The guidance highlights the supervisory attention that should be paid to risk management systems and internal controls used by BHCs and foreign banking organizations. It reiterates the importance of coordination with, and reliance on, the work of other relevant primary supervisors and functional regulators. Section 1050.1, “Guidance on the Consolidated Supervision of Domestic Bank Holding Companies that are Large Complex Banking Organizations,” details the program for large complex BHCs, and section 1050.2, “Guidance for the Consolidated Supervision of Regional Bank Holding Companies,” provides the program for regional banking organizations.
- Compliance Risk Management. The new section 2124.07, “Compliance Risk-Management Programs and Oversight at Large Banking Organizations with Complex Compliance Profiles,” sets forth the Board’s guidance and expectations for the management and oversight of compliance risk at larger, more complex banking organizations. The guidance endorses the Basel principles outlined in “Compliance and the compliance function in banks.” Also, the guidance clarifies supervisory expectations regarding certain compliance risk-management and oversight matters including (1) organizations that should implement a firmwide approach to compliance risk management and oversight; (2) independence of compliance staff; (3) compliance monitoring and testing; and (4) the responsibilities of boards of directors and senior management regarding compliance risk management and oversight. (See SR letter 08-8 or CA letter 08-11, dated October 9, 2008.)
- Control and Ownership. Section 2090.4, “Control and Ownership (Policy Statement on Equity Investments in Banks and BHCs)," has been revised to include the Board’s September 22, 2008, policy statement on this subject. This policy statement provides additional guidance on the Board's position regarding minority equity investments in banks and BHCs that generally do not constitute "control" for purposes of the Bank Holding Company Act, and it supplements the Board’s 1982 “Policy Statement on Nonvoting Equity Investments by BHCs.” The 2008 policy statement provides the Board’s views on some of the specific approaches to avoiding control with respect to (1) director representation; (2) total voting and nonvoting equity investments in a banking organization; (3) consultations with management by a minority investor; and (4) other indicia of control, such as business relationships and covenants. (See the Board’s September 22, 2008, press release.)
- Identity Theft Red Flags and Address Discrepancies. This new section 2124.5 discusses the November 9, 2007, adoption of interagency rules, ‘‘Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit Transactions Act of 2003’’ (sections 115 and 315 of the Fair and Accurate Credit Transactions Act of 2003 (the FACT Act)), and guidelines (Appendix A) issued by the federal financial institution regulatory agencies and the Federal Trade Commission (FTC). (See 72 Federal Register 63718 63775, November 9, 2007.) Under the FACT Act, BHCs and their nonbank subsidiaries are subject to the FTC’s regulations. These regulations require financial institutions or creditors that offer or maintain one or more “covered accounts” to develop and implement a written Identity Theft Prevention Program. The rules and guidelines address the (1) duties of users of credit reports regarding address discrepancies; (2) duties regarding the detection, prevention, and mitigation of identity theft (implementation of an Identity Theft Prevention Program); and (3) duties of credit and debit card issuers to validate notifications of changes of address under certain circumstances. The new section focuses on an institution’s safety and soundness (in particular, item 2 above). The joint final rules and guidelines were effective on January 1, 2008. The date for mandatory compliance with the rules was November 1, 2008. (See SR letter 08-7 or CA letter 08-10, dated October 10, 2008, and its interagency attachments.) Safety and soundness-focused inspection objectives and inspection procedures are provided.
- Country Risk. This section 4090.0 has been revised to update the definitions of “country risk” and “transfer risk” so they coincide with their definitions in SR letter 08-12, “Revisions to the Guide to the Interagency Country Exposure Review Committee (ICERC) Process.” The section also discusses the November 2008 changes to the ICERC country rating process, the main feature of which is the rating of countries only when they are in default. The Federal Reserve and the other banking agencies also have eliminated the rating categories of Other Transfer Risk Problems, Weak, Moderately Strong, and Strong. (See SR letter 08-12, dated November 25, 2008, and its attachments.)
A more detailed summary of changes is included with the update package. The public may obtain the manual and the updates (including pricing information) from Publications Fulfillment, N-127, Board of Governors of the Federal Reserve System, 20th and C Streets, N.W., Washington, DC 20551; telephone (202) 452-3244; or send a facsimile to (202) 728-5886.