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2000 - Rules and Regulations
Appendix A to Part 364Interagency Guidelines Establishing
Standards for Safety and Soundness
I. Introduction.
A. Preservation of existing authority.
B. Definitions.
II. Operational and Managerial Standards.
A. Internal controls and information systems.
B. Internal audit system.
C. Loan documentation.
D. Credit underwriting.
E. Interest rate exposure.
F. Asset growth.
G. Asset quality.
H. Earnings.
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I. Compensation, fees and benefits.
III. Prohibition on Compensation That Constitutes an Unsafe
and Unsound Practice.
A. Excessive compensation.
B. Compensation leading to material financial loss.
I. Introduction
i. Section 39 of the Federal Deposit Insurance
Act 1
(FDI Act) requires each Federal banking agency (collectively, the
agencies) to establish certain safety and soundness standards by
regulation or by guidelines for all insured depository institutions.
Under section 39, the agencies must establish three types of standards:
(1) Operational and managerial standards; (2) compensation standards;
and (3) such standards relating to asset quality, earnings, and stock
valuation as they determine to be appropriate.
ii. Section 39(a) requires the agencies to establish operational
and managerial standards relating to: (1) Internal controls,
information systems and internal audit systems, in accordance with
section 36 of the FDI Act (12 U.S.C.
1831m); (2) loan documentation; (3) credit underwriting; (4)
interest rate exposure; (5) asset growth; and (6) compensation, fees,
and benefits, in accordance with subsection (c) of section 39. Section
39(b) requires the agencies to establish standards relating to asset
quality, earnings, and stock valuation that the agencies determine to
be appropriate.
iii. Section 39(c) requires the agencies to establish standards
prohibiting as an unsafe and unsound practice any compensatory
arrangement that would provide any executive officer, employee,
director, or principal shareholder of the institution with excessive
compensation, fees or benefits and any compensatory arrangement that
could lead to material financial loss to an institution. Section 39(c)
also requires that the agencies establish standards that specify when
compensation is excessive.
iv. If an agency determines that an institution fails to meet any
standard established by guidelines under subsection (a) or (b) of
section 39, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standard. In
the event that an institution fails to submit an acceptable plan within
the time allowed by the agency or fails in any material respect to
implement an accepted plan, the agency must, by order, require the
institution to correct the deficiency. The agency may, and in some
cases must, take other supervisory actions until the deficiency has
been corrected.
v. The agencies have adopted amendments to their rules and
regulations to establish deadlines for submission and review of
compliance plans. 2
vi. The following Guidelines set out the safety and soundness
standards that the agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. The
agencies believe that the standards adopted in these Guidelines serve
this end without dictating how institutions must be managed and
operated. These standards are designed to identify potential safety and
soundness concerns and ensure that action is taken to address those
concerns before they pose a risk to the Deposit Insurance Fund.
A. Preservation of Existing Authority
Neither section 39 nor these Guidelines in any way limits the
authority of the agencies to address unsafe or unsound practices,
violations of law, unsafe or unsound conditions, or other practices.
Action under section 39 and these Guidelines may be taken independently
of, in conjunction with, or in addition to any other enforcement action
available to the agencies. Nothing in these Guidelines limits the
authority of the FDIC pursuant to section 38(i)(2)(F) of the FDI Act
(12 U.S.C. 1831(o)) and
Part 325 of Title 12 of the
Code of Federal Regulations.
{{4-28-06 p.3167}}
B. Definitions
1. In general. For purposes of these
Guidelines, except as modified in the Guidelines or unless the context
otherwise requires, the terms used have the same meanings as set forth
in sections 3 and 39 of the FDI Act (12
U.S.C. 1813 and
1831p--1).
2. Board of directors, in the case of a state-licensed
insured branch of a foreign bank and in the case of a federal branch of
a foreign bank, means the managing official in charge of the insured
foreign branch.
3. Compensation means all direct and indirect payments
or benefits, both cash and non-cash, granted to or for the benefit of
any executive officer, employee, director, or principal shareholder,
including but not limited to payments or benefits derived from an
employment contract, compensation or benefit agreement, fee
arrangement, perquisite, stock option plan, postemployment benefit, or
other compensatory arrangement.
4. Director shall have the meaning described in
12 CFR
215.2(c). 3
5. Executive officer shall have the meaning described
in 12 CFR 215.2(d). 4
6. Principal shareholder shall have the meaning
described in 12 CFR
215.2(l+2p). 5
II. Operational and Managerial Standards
A. Internal controls and information systems. An
institution should have internal controls and information systems that
are appropriate to the size of the institution and the nature, scope
and risk of its activities and that provide for:
1. An organizational structure that establishes clear lines of
authority and responsibility for monitoring adherence to established
policies;
2. Effective risk assessment;
3. Timely and accurate financial, operational and regulatory
reports;
4. Adequate procedures to safeguard and manage assets; and
5. Compliance with applicable laws and regulations.
B. Internal audit system. An institution should have an
internal audit system that is appropriate to the size of the
institution and the nature and scope of its activities and that
provides for:
1. Adequate monitoring of the system of internal controls through
an internal audit function. For an institution whose size, complexity
or scope of operations does not warrant a full scale internal audit
function, a system of independent reviews of key internal controls may
be used;
2. Independence and objectivity;
3. Qualified persons;
4. Adequate testing and review of information systems;
5. Adequate documentation of tests and findings and any
corrective actions;
6. Verification and review of management actions to address
material weaknesses; and
7. Review by the institution's audit committee or board of
directors of the effectiveness of the internal audit systems.
C. Loan documentation. An institution should establish
and maintain loan documentation practices that:
1. Enable the institution to make an informed lending decision
and to assess risk, as necessary, on an ongoing basis;
2. Identify the purpose of a loan and the source of repayment,
and assess the ability of the borrower to repay the indebtedness in a
timely manner;
3. Ensure that any claim against a borrower is legally
enforceable;
4. Demonstrate appropriate administration and monitoring of a
loan; and
5. Take account of the size and complexity of a
loan.
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D. Credit underwriting. An institution should establish
and maintain prudent credit underwriting practices that:
1. Are commensurate with the types of loans the institution will
make and consider the terms and conditions under which they will be
made;
2. Consider the nature of the markets in which loans will be
made;
3. Provide for consideration, prior to credit commitment, of the
borrower's overall financial condition and resources, the financial
responsibility of any guarantor, the nature and value of any underlying
collateral, and the borrower's character and willingness to repay as
agreed;
4. Establish a system of independent, ongoing credit review and
appropriate communication to management and to the board of directors;
5. Take adequate account of concentration of credit risk; and
6. Are appropriate to the size of the institution and the nature
and scope of its activities.
E. Interest rate exposure. An institution should:
1. Manage interest rate risk in a manner that is appropriate to
the size of the institution and the complexity of its assets and
liabilities; and
2. Provide for periodic reporting to management and the board of
directors regarding interest rate risk with adequate information for
management and the board of directors to assess the level of risk.
F. Asset growth. An institution's asset growth should be
prudent and consider:
1. The source, volatility and use of the funds that support asset
growth;
2. Any increase in credit risk or interest rate risk as a result
of growth; and
3. The effect of growth on the institution's capital.
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.
I. Compensation, fees and benefits. An institution
should maintain safeguards to prevent the payment of compensation,
fees, and benefits that are excessive or that could lead to material
financial loss to the institution.
{{4-28-06 p.3169}}
III. Prohibition on Compensation That Constitutes an Unsafe and
Unsound Practice
A. Excessive Compensation
Excessive compensation is prohibited as an unsafe and unsound
practice. Compensation shall be considered excessive when amounts paid
are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholder,
considering the following:
1. The combined value of all cash and noncash benefits provided
to the individual;
2. The compensation history of the individual and other
individuals with comparable expertise at the institution;
3. The financial condition of the institution;
4. Comparable compensation practices at comparable institutions,
based upon such factors as asset size, geographic location, and the
complexity of the loan portfolio or other assets;
5. For postemployment benefits, the projected total cost and
benefit to the institution;
6. Any connection between the individual and any fraudulent act
or omission, breach of trust or fiduciary duty, or insider abuse with
regard to the institution; and
7. Any other factors the agencies determine to be relevant.
B. Compensation Leading to Material Financial Loss
Compensation that could lead to material financial loss to an
institution is prohibited as an unsafe and unsound practice.
[Codified to 12 C.F.R. Part 364, Appendix A]
[Appendix A added at 60 Fed. Reg. 35685, July 10, 1995,
effective August 9, 1995; amended at 61 Fed. Reg. 43948, August 27,
1996, effective October 1, 1996; 71 Fed. Reg. 20527, April 21,
2006]
1Section 39 of the Federal Deposit Insurance Act
(12 U.S.C. 1831p--1) was
added by section 132 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), Pub. L. 102--242, 105 Stat. 2236
(1991), and amended by section 956 of the Housing and Community
Development Act of 1992, Pub. L. 102--550, 106 Stat. 3895 (1992) and
section 318 of the Riegle Community Development and Regulatory
Improvement Act of 1994, Pub. L. 103--325, 108 Stat. 2160 (1994). Go Back to Text
2For the Office of the Comptroller of the Currency, these
regulations appear at 12 CFR Part 30; for the Board of Governors of the
Federal Reserve System, these regulations appear at 12 CFR Part 263;
for the Federal Deposit Insurance Corporation, these regulations appear
at 12 CFR Part 308, subpart
R, and for the Office of Thrift Supervision, these regulations appear
at 12 CFR Part 570. Go Back to Text
3In applying these definitions for savings associations,
pursuant to 12 U.S.C. 1464, savings associations shall use the terms
"savings association" and "insured savings association" in
place of the terms "member bank" and "insured bank". Go Back to Text
4See footnote 3 in section I.B.4. of this appendix. Go Back to Text
5See footnote 3 in section I.B.4. of this appendix. Go Back to Text
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