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For Release to Morning Newspapers of Monday, June 27, 1938. 6/25/38. REVISION OF PROCEDURE IN BANK EXAMINATIONS AS AGREED TO BY THE SECRETARY OF THE TREASURY, THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, THE DIRECTORS OF THE FEDERAL DEPOSIT INSURANCE CORPORATION, AND THE COMPTROLLER OF TEE CURRENCY. The Classification of Loans in Bank Examinations The present captions of the classification units, namely, "Slow," "Doubtful," and "Loss" are to be abandoned; The classification units hereafterwill be designated numerically and the following definitions thereof will be printed in sxanination reports: I. Loans or portions thereof the repayment of which appears assured. These loans are not classified in the examination report. II. Loans or portions thereof which appear to involve a substantial and unreasonable degree of risk to the bank by reason of an unfavorable record or other unsatisfactory characteristics noted in the examiner's concents. There exists in such loans the possibility of future loss to the bank unless they receive the careful and continued attention of the bank's management. No loan is so classified if ultimate repayment seems reasonably assured in view of the sound net worth of the maker or endorser, his earning capacity and character, or the protection of collateral or other security of sound intrinsic value. III. Loans or portions thereof the ultimate collection of which is doubtful and in which a substantial loss is probable but not yet definitely ascertainable in amount. Loans so classified should receive the vigorous attention of the management with a view to salvaging whatever value may remain. IV. Loans or portions thereof regarded by tho examiner for rer,sons set forth in his comments as uncollectible and as estimated losses. Amounts so classified should be promptly charged off. Present practice will be continued under which the totals of II, Hit and IV above are included in tho recapitulation or summary of examiners1 classifications. Fifty per cent of the total of III above and all of IV above will be deducted in computing the net sound capital of the bank. The Appraisal of Bonds in "Bank Examinations Neither appreciation nor depreciation in Group I securities will "bo shown in the report. Neither will be taken into account in figuring net sound capital of the bank. Group I securities are marketable obligations in which the investment characteristics are not distinctly or predominantly speculative. This group includes general market obligations in the four highest grades and unrated securities of equivalent value. The securities in Group II will be valued at the average market price for eighteen months just preceding examination and fifty per cent of the net depreciation will "be deducted in computing the net sound capital* Group II securities are those in which the investment characteristics arc distinctly or predominantly speculative. Thin group includes general market obligations in grades below the four highest, and unrated securities of equivalent value. Present practice will be continued undor which net depreciation in the securities in Group III and Group IV are classified as loss. Group III securities: Securities in default. Group IV securities: Stocks. Present practice will be continued under which premiums on securities purchased at a premium must be amortized. Present practice of listing all securities and showing their book value will be continued. The Treatment of Securities Profits in Banlc Examinations Until losses have "been written off and adequate reserves established, the use of profits from the sale of securities for any purpose other than those, will not be approved. Present practice will be continued undar which estimated losses must be charged off. Present practice will be continued under which the establishment and maintenance of adequate reserves, including reserves against the securities account, are encouraged. Present practice will be continued under which speculation in securities is criticised and penalized. T C The Treatment of Securities Profits in Bank Examinations Until losses have been written off and adequate reserves established, the use of profitc from the sale of securities for any purpose other than those, will not be approved* Present practice vail bo continued under which estimated losses must be charged off. Present practice v/ill "DO continued under which the establishment and maintenance of adequate reserves, including reserves against the securities account, are encouraged. Present practice will be continued under which speculation in securities is criticised and penalized. The Classification of Loans in Bank Examinations The present captions of the classification units, namely, "Slow," "Doubtful," and "Loss" are to be abandoned; The classification units hereafter will be designated numerically and the following definitions thereof will be printed in examination reports: I, Loans or portions thereof the repayment of which appears reasonably assured. These loans are not classified in the examination report, II, Loans or portions thereof which appear to involve a substantial and unreasonable degree of risk to the bank by reason of certain unfavorable trends and other unsatisfactory characteristics noted in the examiner's comments. There exists in such loans the possibility of future loss to the bank unless they receive the careful and continued attention of the bank's management. No loan is so classified if ultimate repayment seems reasonably assured in view of the sound net worth of the maker or endorser, his earning capacity and character, or the protection of collateral or other security of sound intrinsic value. III, Loans or portions thereof the ultimate collection of which is doubtful and in which a substantial lose is probable but not yet definitely ascertainable in amount. Loans so classified should receive the vigorous attention of the management with a view to salvaging whatever value may remain. IV, Loans or portions thereof regarded by the examiner for reasons set forth in his comments as uncollectible and as estimated losses. Amounts so classified should be promptly charged off. Present practice will be continued under which the totals of II, III, and IV above are included in the recapitulation or summary of examiners' classifications. Present practice will be continued under which the totals of III and IV above are deducted in computing the net sound capital of the bank. The Appraisal of Bonds in Bank Examinations Heither appreciation nor depreciation in Group I securities (except the fourth grade of general market obligations) will "be shown in the report. Neither will "be taken into account in figuring net sound capital of the "bank. Net depreciation in the securities in Group II and in the fourth grade of general market obligations will "be deducted in computing the net sound capital of the bank. Present practice will be continued under which depreciation in the securities in Group III and Group IV defaulted issues and stocks — are classified as loss. Present practice will be continued under which premiums on securities purchased at a premium must be amortized. Present practice of listing and pricing all securities will be continued. The Treatment of Securities Profits in Bank Examinations Until losses have boon written off and adequate reserves established, the use of profits from the sale of securities for any purpose other than those, will net be approved. Present practice v.dll be continued under which estimated losses must be charged off. Present practice will bo continued under which the establishment and maintenance of adequate reserves, including reserves against the securities account, are encouraged* Present practice will be continued under which speculation in securities is criticised and penalized*
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