View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal R eserve Bank
OF DALLAS
T O N Y J . SALVA G G IO
F IR S T V IC E P R E S ID E N T

February 4, 1994

D A LLAS, TEXAS
75265-590 6

Notice 94-16

TO:

The Chief Operating Officer of
each financial institution in the
Eleventh Federal Reserve District
SUBJECT
Modifications to the Payments System
Risk Reduction Program
DETAILS

As part of its payments system risk reduction program, the Board is
adopting modifications to its Policy Statement on Payments System Risk.
Specifically, the Board is modifying in two ways the procedures that deposi­
tory institutions must use if they choose to complete a self-assessment to
establish a daylight overdraft net debit cap.
First, effective for self-assessments performed on or after January
1, 1995, depository institutions must evaluate their operating controls and
contingency procedures in addition to the three existing components of the
self-assessment (creditworthiness, intraday funds management and control, and
customer credit policies and controls).
Second, depository institutions will use a "Creditworthiness Matrix"
to determine their overall creditworthiness rating, except in certain limited
circumstances.
In addition to these two changes to the self-assessment
procedures, the Board is eliminating the requirement that branches and
agencies of foreign banks provide information on U.S. funding capability and
discount window eligible collateral for use in determining their daylight
overdraft net debit caps.
ATTACHMENT

A copy of the Bo a r d ’s notice (Federal Reserve System Docket No.
R-0806) is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

MORE INFORMATION
For more information, please contact Donna Gonzalez at (214)
922-5584 or James Smith at (214) 922-5585.
For additional copies of this
B a n k ’s notice, please contact the Public Affairs Department at (214) 922-5254.
Sincerely,

FEDERAL RESERVE SYSTEM
Docket No. R-0806
Modifications to the Payments System Risk Reduction Program;
Self-Assessment Procedures, Caps for U.S. Branches
and Agencies of Foreign Banks

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Policy Statement.

SUMMARY:

As part of its payments system risk reduction program,

the Board is adopting modifications to its Policy Statement on
Payments System Risk.

Specifically, the Board is modifying in

two ways the procedures that depository institutions must use if
they choose to complete a self-assessment to establish a daylight
overdraft net debit cap.

First, effective for self-assessments

performed on or after January 1, 1995, depository institutions
must evaluate their operating controls and contingency procedures
in addition to the three existing components of the selfassessment

(creditworthiness, intraday funds management and

control, and customer credit policies and controls).

Second,

depository institutions will use a "Creditworthiness Matrix" to
determine their overall creditworthiness rating, except in
certain limited circumstances.

In addition to these two changes

to the self-assessment procedures, the Board is eliminating the
requirement that branches and agencies of foreign banks provide
information on U.S. funding capability and discount window
eligible collateral for use in determining their daylight
overdraft net debit caps.

2

-

DATES:

-

Effective April 14, 1994.

FOR FURTHER INFORMATION CONTACT:

Jeffrey C. Marquardt, Assistant

Director (202/452-2360) , Paul Bettge, Manager (202/452-3174) ,
Division of Reserve Bank Operations and Payment Systems; for the
hearing impaired only:

Telecommunications Device for the Deaf,

Dorothea Thompson (202/4 52-3 544).

SUPPLEMENTARY INFORMATION:
Background
The Board's Payments System Risk policy requires that
institutions incurring daylight overdrafts in their Federal
Reserve accounts establish a maximum limit, or net debit cap, on
overdrafts incurred in those accounts.

In August 1993, the Board

requested comment on three proposals to modify the procedures for
establishing net debit caps.

The Board received 16 public

comments on the proposals.
Self-Assessment Procedures
Under the Board's policy, an institution's net debit
cap (for a single day and on average over a two-week reserve
maintenance period)

is based on its cap category.

The cap

categories that permit relatively higher use of intraday credit
are the Average, Above Average, and High cap categories.

An

institution that wishes to establish a cap in one of these
categories must complete an assessment of its creditworthiness,
intraday funds management and control, and customer credit
policies and controls.

-

3

-

Operating controls and contingency proce d ur es .

The Board requested comment on the addition of a
fourth component to the self-assessment procedures to cover
operating controls and contingency procedures, with a proposed
effective date of January 1, 1995.

Nine commenters viewed

favorably the Board's proposal to require the assessment of
operating controls and contingency procedures.

These commenters

did not indicate that the proposal would substantially increase
regulatory burden.

Two of these commenters suggested a later

implementation date for the additional assessment component,
however.

One other commenter opposed the additional component as

being duplicative of other bank regulatory requirements, while
two commenters felt that the additional component would be
burdensome for smaller institutions.
In the Board's view, it is important that any
institution that wishes to use a relatively higher amount of
Federal Reserve intraday credit perform an assessment of its
operating controls and contingency procedures relating to its
payments activity.

Furthermore, the assessment itself consists

of eight straightforward questions about the institution's
operations and should not pose a bur de n to c om pl e te .

Institutions

whose operating controls and contingency procedures are not
currently adequate to meet the criteria in the self-assessment
procedures should not incur overdrafts greater than those
permitted by a de minimis cap, which permits a lower amount of

-

4

-

overdrafts without the requirement of a self-assessment, until
they upgrade their procedures to meet such criteria.
The Board is therefore adopting the fourth component to
the self-assessment procedures as proposed to cover operating
controls and contingency procedures for assessments performed on
or after January 1, 1995.

Depository institutions may elect to

include the additional component in assessments performed prior
to that date, however.
Creditworthiness Matrix

In an attempt to reduce the burden on institutions
electing to undertake an assessment, the Board proposed a
simplified approach to assessing creditworthiness.

Under the new

methodology, an institution's prompt corrective action capital
category and its supervisory rating are combined into a single
rating for the creditworthiness component of the self-assessment
using a Creditworthiness Matrix, which is shown below.
The Board believes that it is appropriate, in nearly
all circumstances,

for depository institutions to use the Matrix

to determine their creditworthiness rating.

In certain limited

circumstances, however, institutions will be permitted to perform
a full assessment of creditworthiness.

(Procedures for

completing the full assessment of creditworthiness are included
in the Guide to the Federal Reserve's Payments System Risk
Policy, which is available from any Reserve Bank.)

For example,

an institution whose condition has changed significantly since
its last examination, or that possesses additional substantive

-

5

-

information regarding its financial condition, may be permitted
to justify a different rating based on a full creditworthiness
assessment.

In all cases, the Reserve Banks retain the

responsibility for reviewing caps and determining appropriate cap
levels.
Creditworthiness Matrix
Supervisory Composite Rating
Capital Level

Strong

Satisfactory

Fair

Well Capitalized

Excellent

Very Good

Adequate

Adequately Capitalized

Very Good

Very Good

Adequate

Undercapitalized

***

***

Below Standard

*** Institutions that fall into this category should perform a full assessment
of creditworthiness.
Note: Institutions that fall into categories not shown in the Matrix would
receive a Below Standard rating.

U.S. branches and agencies of foreign banks located in
countries that adhere to the Basle Capital Accord are treated in
the same manner as U.S.-based banks, with supervisory ratings of
the U.S. branches or agencies used in conjunction with the
capital category of the parent bank.

The resulting

creditworthiness rating for the U.S. branch or agency is
conditioned on the overall creditworthiness of the entire foreign
banking organization, however.

In addition, foreign banks from

countries that have not subscribed to the Basle Capital Accord

-

6

-

must perform a full assessment of creditworthiness in order to
determine their net debit cap.
In August 1993, the Board requested public comment on
the use of the Creditworthiness Matrix.

Eleven commenters

specifically addressed the changes in the methodology for the
assessment of creditworthiness.

Nine commenters expressed

support for the Board's proposal to streamline the selfassessment process through the use of the new Creditworthiness
Matrix and indicated that the new procedures would reduce
regulatory burden.

Of these, however, five commenters felt that

depository institutions should be permitted the option of
completing the full assessment of creditworthiness.
Two commenters did not support the Creditworthiness
Matrix method, but suggested that its use be optional.

The

Institute of International Bankers, an association representing
foreign banks, opposed any mandatory use of the Matrix as it
would result in lower caps for many branches and agencies of
foreign banks.
In the Board's view, the benefits of the
Creditworthiness Matrix approach, namely a streamlined selfassessment process and increased objectivity of the
creditworthiness ratings across institutions, mitigates
objections to standardized usage of the Matrix.

As institutions

adopting caps in the Average, Above Average, and High categories
may be permitted to incur overdrafts greater than their capital,
it is particularly important that these caps be appropriate given

-

institutions'

7

-

financial strength as measured by objective

regulatory criteria.

While some institutions, including a number

of foreign banks, will likely adopt lower caps as a result of
using the Creditworthiness Matrix, analysis of these
institutions' recent daylight overdraft activity indicates that
these caps should not be unduly constraining.
The Board is, therefore, adopting the modifications as
proposed to the creditworthiness component of the self-assessment
procedures, effective April 14, 1994.

For self-assessments

performed on or after that date, including those performed as
part of the annual cap renewal process, depository institutions
will be required to use the Creditworthiness Matrix in all but
certain limited circumstances.

If appropriate, depository

institutions may, at their option, use the Creditworthiness
Matrix in completing self-assessments prior to that date.
Net Debit Caps for Branches and Agencies of Foreign Banks
The determination of net debit caps for foreign banks
is based on essentially the same procedures as those for U.S.
institutions.

However, for foreign banks, the Federal Reserve

has also required evidence of an institution's U.S. funding
capability and discount window eligible collateral.

The dollar

amount of an institution's net debit cap could be reduced (below
its cap multiple times its capital) based on these amounts.
Experience with U.S. funding capability and collateral
data has shown that, in order to collect these data with
sufficient precision and frequency, a significant regulatory

-

burden is imposed.

In addition,

8

-

it is unlikely that these data

accurately measure a foreign bank's ability to raise funds at
times when rapid access to money markets may be necessary.

As a

result, the Board proposed to discontinue reporting of
information on U.S. funding capability and discount window
eligible collateral by branches and agencies of foreign banks fo:
use in determining daylight overdraft net debit caps.
Only two commenters mentioned the proposal to
discontinue reporting of this information by foreign banks.
Institute of International Bankers supported the proposal.

The
One

U.S. commercial bank opposed the proposal, based on the rationale,
that supervisory ratings used in determining net debit caps for
foreign banks are not comparable to those for U.S. institutions.
In the Board's view, the proposed requirement that
creditworthiness ratings of branches and agencies of foreign
banks be conditioned on the overall creditworthiness of the
entire foreign banking organization should help alleviate such
concerns.

The Board is therefore adopting the proposed

modification to the method for establishing caps for branches and
agencies of foreign banks, effective April 14, 1994.
Guide to the Federal Reserve's Payments System Risk Policy
In order to facilitate public comment on the August
1993 proposals, the Board provided depository institutions with a
draft version of the Guide to the Federal Reserve's Payments
System Risk Policy.

This document is intended to provide a

thorough description of the procedures to be used in conducting a

-

self-assessment.

9

-

Once issued in final form, the Guide to the

Federal Reserve's Payments System Risk Policy will supersede
previously issued versions of the Users' Guide to the Payments
System Risk Policy.

The Federal Reserve has also issued a new

summary document, entitled Overview of the Federal Reserve's
Payments System Risk Policy, which describes the requirements of
the policy for institutions that incur minimal daylight
overdrafts.

The Board is also modifying the text of the Policy

Statement on Payment System Risk to include appropriate
references to these two new documents.

Federal Reserve System Policy Statement on Payments System Risk
The Board is amending its "Federal Reserve System Policy
Statement on Payments System Risk" under the heading "I. Federal
Reserve Policy" by replacing the last three sentences of the
Introduction, part

(C)(2) under the headings "C. Capital" and "2.

U.S. Agencies and Branches of Foreign Banks," and the first
paragraph of part

(D)(1) under the headings "D. Net Debit Caps"

and "1. Cap Set Through Self-Assessment" as set forth below:

Introduction
*

*

*

*

*

To assist depository institutions in implementing the Board's
policies, the Federal Reserve has prepared two documents, the
Overview of the Federal Reserve's Payments System Risk Policy and
the Guide to the Federal Reserve's Payments System Risk Policy,

-

10

-

which are available from any Reserve Bank.

The Overview of the

Federal Reserve's Payments System Risk Policy provides a summary
of the Board's policy on payments system risk, including daylight
overdraft net debit caps and fees.

The Overview is intended for

use by institutions that incur only small and infrequent daylight
overdrafts.

The Guide to the Federal Reserve's Payments System

Risk Policy explains in detail how the policies apply to various
types of institutions and includes procedures for completing a
self-assessment and filing a cap resolution, as well as
information on other aspects of the payments system risk policy.
★

1.C.
2.

★

★

★

★

Capital
U.S. Agencies and Branches of Foreign Banks.
For U.S. agencies and branches of foreign banks, net

debit caps on daylight overdrafts in Federal Reserve accounts are
calculated by applying the cap multiples for each cap category to
consolidated "U.S. capital equivalency."4
For a foreign bank whose home-country supervisor
adheres to the Basle Capital Accord, U.S. capital equivalency is
equal to the greater of 10 percent of worldwide capital or 5
percent of the total liabilities of each agency or branch,
including acceptances, but excluding accrued expenses and amounts
due and other liabilities to offices, branches, and subsidiaries
4
The term "U.S. capital equivalency" is used in this
context to refer to the particular capital measure used to
calculate daylight overdraft net debit caps, and does not
necessarily represent an appropriate capital measure for
supervisory or other purposes.

-

of the foreign bank.

11

-

In the absence of contrary information, the

Reserve Banks presume that all banks chartered in G-10 countries
meet the acceptable prudential capital and supervisory standards
and will consider any bank chartered in any other nation that
adopts the Basle Capital Accord (or requires capital at least as
great and in the same form as called for by the Accord) eligible
for the Reserve Banks' review for meeting acceptable prudential
capital and supervisory standards.
For all other foreign banks, U.S. capital equivalency
is measured as the greater of (1) the sum of the amount of
capital

(but not surplus) that would be required of a national

bank being organized at each agency or branch location, or (2)
the sum of 5 percent of the total liabilities of each agency or
branch, including acceptances, but excluding accrued expenses and
amounts due and other liabilities to offices, branches, and
subsidiaries of the foreign bank.
In addition, any foreign bank may incur daylight
overdrafts above its net debit cap up to a maximum amount equal
to its cap multiple times 10 percent of its worldwide capital,
provided that any overdrafts above its net debit cap are
collateralized.

This policy offers all foreign banks, under

terms that reasonably limit Reserve Bank risk, a level of
overdrafts based on the same proportion of worldwide capital.
Consequently, banks chartered in countries that follow the Basle
Accord and whose net debit cap is based on 10 percent of
worldwide capital are not permitted to incur overdrafts above

-

their net debit cap.

12

-

All other foreign banks may incur

overdrafts to the same extent as banks from Basle Accord
countries, that is, up to their cap multiple times 10 percent of
their worldwide capital, provided that sufficient collateral is
posted for any overdrafts in excess of their net debit cap.

In

addition, foreign banks may elect to collateralize all or a
portion of their overdrafts related to book-entry securities
activity.
★

★

★

★

★

I.D. Net Debit Caps
1.

Cap Set Through Self-Assessment
In order to establish a net debit cap category of

Average, Above Average, or High, an institution must perform a
self-assessment of its own creditworthiness,

intraday funds

management and control, customer credit policies and controls,
and, effective January 1, 1995, operating controls and
contingency procedures.5

The assessment of creditworthiness

should be based on the institution's supervisory rating and
Prompt Corrective Action capital category.

An institution may be

permitted to perform a full assessment of its creditworthiness in

5
This assessment should be done on an individual
institution basis, treating as separate entities each commercial
bank, each Edge corporation (and its branches), each thrift
institution, etc. An exception is made in the case of U.S.
agencies and branches of foreign banks.
Because these entities
have no existence separate from the foreign bank, all the U.S.
offices of foreign banks (excluding U.S. chartered bank
subsidiaries and U.S. chartered Edge subsidiaries) should be
treated as a consolidated family relying on the foreign bank's
capital.

13

certain limited circumstances, for example,

if its condition has

changed significantly since its last examination, or if it
possesses additional substantive information regarding its
financial condition.

Additionally, U.S. branches and agencies of

foreign banks based in countries that do not adhere to the Basle
Capital Accord are required to perform a full assessment of
creditworthiness to determine their ratings for the
creditworthiness component.

An institution performing a self-

assessment must also evaluate its intraday funds management
procedures and its procedures for evaluating the financial
condition of and establishing intraday credit limits for its
customers.

Finally, the institution must evaluate its operating

controls and contingency procedures to determine if' they are
sufficient to prevent losses due to fraud or system failures.
The Guide to the Federal Reserve's Payments System Risk Policy,
available from any Reserve Bank, includes a detailed explanation
of the steps that should be taken by a depository institution in
performing a self-assessment to establish a net debit cap.
*

*

*

*

*

By order of the Board of Governors of the Federal Reserve
System, January 13, 1994

William W. Wiles,
Secretary of the Board.
[FR Doc. 94-00000 Filed 00-00-94; 8:45 am]
BILLING CODE 6210-01-P

FEDERAL RESERVE BANK OF DALLAS
P.O. BOX 655906
DALLAS, TX 75265-5906


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102