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Federal Reserve Bank
of

Dallas

ROBERT D. McTEER, JR.
DALLAS, TEXAS
75265-5906

PRESIDENT
AND CHIEF EXECUTIVE OFFICER

December 8, 1997
Notice 97-115

TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

SUBJECT
Policy Statement on Payments System Risk;
Revised Policy for Risk-Focused Supervision of
Small Shell Bank Holding Companies
DETAILS
The Board of Governors of the Federal Reserve System has modified the daylight
overdraft measurement rules to accommodate an earlier afternoon presentment deadline for
checks drawn on local Federal Reserve Banks. The modification was effective November 14,
1997.
The Board has also announced a revised policy for risk-focused supervision of small
shell bank holding companies. Small shell bank holding companies are banking organizations
with less than $1 billion of consolidated assets that do not have debt outstanding to the public
and that do not engage in significant nonbank activities.
The new supervisory program supersedes the previous inspection frequency guide­
lines applicable to small shell organizations and permits a more flexible approach to supervising
these entities in a risk-focused environment. Implementation of the new program began Novem­
ber 30,1997.
ATTACHMENTS
A copy of the Board’s notice as it appears on pages 61127-28, Vol. 62, No. 220 of
the Federal Register dated November 14, 1997, is attached. Also attached is a copy of the
Board’s revised policy for risk-focused supervision.

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 regarding daylight overdrafts, please contact James Smith at
(214) 922-5585. For more information regarding risk-focused supervision of small shell bank
holding companies, please contact Basil Asaro at (214) 922-6066.
For additional copies of this Bank’s notice, contact the Public Affairs Department at
(214) 922-5254.
Sincerely yours,

Federal Register / Vol. 62, No. 220 / Friday, November 14, 1997 / Notices

61127

FEDERAL RESERVE SYSTEM
Docket No. R-0989
Policy Statement on Payments System
Risk; Modification to the Time Credits
are Posted to Federal Reserve
Accounts for Checks Drawn on Local
Federal Reserve Banks for Purposes of
Measuring Daylight Overdrafts
AGENCY: B oard of G overnors of the
F ed eral Reserve System .
ACTION: Policy Statem ent.

T he B oard h as m o d ifie d the
day light overdraft m e asu rem en t ru les to
acco m m odate an earlier aftern oon
p re se n tm e n t d ea d lin e for checks d raw n
on local F ed eral Reserve Banks.
EFFECTIVE DATE: N ovem ber 14, 1997.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

M yriam P ayne, S enior F in an cial
Services A n alyst (202/452-3219), or
Stacy Panigay, F in an c ial Services
A n aly st (202/452-2934), D ivision of
Reserve B ank O perations a n d P ay m ent
System s; for th e h earing im p aired only.
T eleco m m u n icatio n s D evice for the
Deaf, D iane Jenkins (202/452-3544).
SUPPLEMENTARY INFORMATION:

Background
W h en th e B oard m o d ified the
P aym ents System Risk R e duction
policies in 1992 (57 FR 47093, O ctober
14 ,1 9 9 2 ), it a d o p te d a set of “ p osting
ru le s ” w h ic h com p rise a sc h ed u le for
th e in tra d ay tim ing of debits a n d credits
to in stitu tio n s’ F ederal Reserve acco unts
for different types of p ay m en ts. W ith th e
im p lem en ta tio n of th e se ru les along
w ith th e im p o sitio n of fees for daylight
overdrafts, th e B oard w as in tereste d in
in d u c in g behavio ral changes to control
risk a n d in crease efficiency in th e
pay m en ts system . U n d er th e daylight
overdraft m e asu rem en t ru les th a t
becam e effective on O ctober 14, 1993,
d ep o sito ry in stitu tio n s th a t d ep o sit in
separately so rted cash letters Checks
D raw n on Local F ederal Reserve Banks

61128

Federal Register / Vol. 62, No. 220 / Friday, November 14, 1997 / Notices

(i.e., F ederal F u n d s checks), U.S.
T reasury Checks, P ostal M oney O rders,
an d U.S. Savings Bonds D epo sited
u n d e r the EZ-Clear Program by 4 p.m .
ET receive cre d it for th e se item s at 5
p.m . ET.

Analysis of Federal Funds Checks
Presentment Deadline
T he B oard believes th a t estab lishin g a
c o n siste n t p re se n tm e n t d e a d lin e for
F ederal F u n d s checks in all F ederal
Reserve d istricts w ill h elp red u c e the
ro u tin e use of F ederal F u n d s ch e ck s.1
F ederal F u n d s checks are an
in a p p ro p ria te m ean s of p ro viding
regular access to an in s titu tio n ’s F ederal
Reserve ac co u n t an d th e ir ro u tin e u se is
contrary to th e F ederal R eserve’s
strategy of p ro m o tin g efficient an d
effective m e th o d s of pay m en t. In alm ost
all cases w h ere F ederal F u n d s checks
are u se d as th e p ay m e n t in stru m en t, the
tran sa ctio n c o u ld h av e b ee n m ad e
th ro u g h a m ore secure a n d efficient
m eth o d , su ch as a fu nds transfer
netw ork. To d iscourage th e u se of
F ederal F u n d s checks a n d encourage
dep o sito ry in stitu tio n s ’ u se of m ore
efficient m ean s of p ay m ent, a 3 p.m .
local tim e p re se n tm e n t d e a d lin e for
F ederal F u n d s checks w ill be
im p lem en te d .

Policy Statement on Payments System
Risk
T he F ederal Reserve B oard has
ad o p te d th e follow ing changes to the
“ F ederal Reserve S ystem Policy
S tatem ent on P aym ents S ystem R isk,”
u n d e r th e h ea d in g “ I. F ed eral Reserve
P o lic y ” :

Modified Procedures for Measuring
Daylight Overdrafts
Post at 5:00 p.m . E astern Time:
• T reasu ry checks, postal m o n ey
orders, a n d EZ-Clear Savings B ond
red e m p tio n s in separately so rted
deposits. T hese item s m u st be dep o sited
by 4:00 p.m . E astern Time.
• Local F ed eral Reserve B ank checks.
T hese item s m u st b e p re se n te d before
3:00 p.m . E astern Time.
• P ro cessed m a n u a l letters of credit.
+/- S am e-day ACH transactio ns. T hese
tran sa ctio n s in c lu d e ACH re tu rn item s,
ch eck tru n c a tio n item s, a n d flexible
settle m e n t item s.
1Federal Funds checks are drafts drawn by a
depository institution against its account at a
Federal Reserve Bank. These funds represent
immediately available funds when presented for
payment, and thus, when used, the checks are most
often used to settle same-day securities
transactions, interbank transfers, international
transactions, real estate transactions, payments to
state and local governments, Federal Reserve Bank
transactions and for other situations where a bank
check is required for legal reasons.

Post after th e close of F ed w ire fu nds
tran sfer system :
+/- A ll o th er no n-F edw ire
tran saction s. T hese tran sactio n s in c lu d e
th e follow ing: local F ederal Reserve
B ank checks p re se n te d after 3:00 p.m .
E astern T im e b u t before 3:00 p.m . local
tim e; n o n c a sh collection; credits for
U.S. T reasury an d g ov ern m en t agency
definitive security in terest a n d
re d e m p tio n p ay m en ts if th e co u p o n s or
secu rities are received on or after th e
m atu rity date; T reasury T ax a n d Loan
(TT&L) calls; su b sc rip tio n s for SLGS;
cu rren c y a n d co in sh ip m en ts; sm alldo llar cre d it adju stm ents; all debit
adjustm ents; a n d sm all-dollar check
collections. D iscount w in d o w loans an d
rep ay m en ts are n o rm ally p o ste d after
th e close of F edw ire as w ell; how ever,
in u n u su a l circum stances a d isc o u n t
w in d o w loan m ay be p o ste d earlier in
th e day w ith re p a y m e n t 24 h o u rs later,
or a loan m ay be re p a id before it w o u ld
oth erw ise becom e due.
By o rd er of th e B oard of G overnors of
th e F ederal Reserve System , N ovem ber
7, 1997.
Jennifer J. Johnson,
D eputy Secretary of the Board.
[FR D oc. 9 7 - 2 9 9 6 2 F ile d 1 1 - 1 3 - 9 7 ; 8:45 am]
BILLING CODE 6210-01—
P

Attachment A

RISK-FOCUSED SUPERVISION POLICY
FOR SMALL SHELL BANK HOLDING COMPANIES

This policy sets forth a framework for applying risk-focused supervision
concepts to small shell bank holding companies (SSBHCs).1 It was developed in the
interest of increasing the effectiveness of Federal Reserve supervisory activities, while
enhancing interagency coordination and reducing regulatory burden on banking
organizations. In recent years, changes to statutory frequency requirements for bank
examinations, enhancements to off-site monitoring procedures, and the implementation
of risk-focused examination practices have made it possible to focus supervisory
activities more effectively on SSBHCs exhibiting the greatest degree of risk.
Accordingly, the Federal Reserve is adopting a risk-focused supervision program for
SSBHCs that tailors supervisory activities for these companies based on an
assessment of their reported condition and activities and the condition of their bank
subsidiaries. Based on these assessments, Reserve Banks will be required to develop
a strategy for addressing the supervisory issues related to each organization. For
companies where significant risk factors are present, Reserve Banks must consider a
range of supervisory responses, including informational requests and management
interviews, visitations or advisory visits, as well as on-site target and full-scope
inspection activities. The program is to be implemented as soon as practical, but
should be fully operational by November 30, 1997. With the implementation of this
program, the Board is rescinding for SSBHCs the bank holding company inspection
scope and frequency requirements of SR 85-28, “Examination Frequency and
Communicating with Directors.”
Risk Assessment Process
Under this program, Reserve Banks should perform a risk assessment for

1 Small shell bank holding companies are defined for the purpose of this program as those
companies with less than $1 billion in consolidated assets that do not have debt outstanding to
the public, and that do not engage in significant nonbank activities. A nonbank activity could be
considered significant based on the scope or type of activity. For example, credit extending
activities as well as investment and trading activities where the holding company acts as a
principal would generally be considered significant. The provision of services on a fee basis
such as the provision of data processing services to affiliated and/or unaffiliated banks or the
sale of instruments on an agency basis may also, in certain instances, be considered significant,
depending on the scale of the activity or other factors that may pose direct or indirect risk to the
holding company or any insured depository institution subsidiary.

2
each SSBHC at least once during each “supervisory cycle.” For each company, its
supervisory cycle will be determined by the examination frequency mandated for the
lead subsidiary bank. The purpose of this risk assessment is to determine whether the
risk profile of the SSBHC has weakened, the company is having an adverse effect on
the subsidiary bank(s), or there are violations of law or regulation warranting further
review. As described more fully below, where the risk assessment does notTaise
significant supervisory concerns, the assessment would serve as the basis for
assigning a final BOPEC rating for the company. The risk assessment should be
completed within 45 days of receipt of the lead bank’s full-scope examination report.
While risk assessments will be driven in most cases by the conclusions expressed in
the current examination reports for subsidiary banks, they should also incorporate
information from other sources available at the Reserve Bank, such as regulatory
financial reports, previous inspection reports, and surveillance reports. The preparation
of risk assessments should not routinely require requests for additional information from
the company. Risk assessments should include reviews of the following areas:
•

Financial condition of the parent company, including an evaluation
of debt levels and cash flow;

•

Financial condition of bank subsidiaries;

•

Consolidated analysis (if applicable);

•

Management, including any changes to senior management or
ownership;

•

Compliance with laws and regulations by the bank holding
company and bank subsidiaries, as well as compliance with
regulatory orders and other requirements imposed in connection
with the granting of any application or other request;

•

Intercompany and insider transactions as addressed by
examinations and financial reports; and

•

New activities and recent or planned acquisitions.

In the process of conducting the risk assessment Reserve Banks should
pay special attention to bank examination report findings pertaining to possible
violations of law or inappropriate transactions. In addition, changes in the
organizational structure, management, or ownership of the company should be
assessed to determine whether these may be cause for concern. The use of

3
automated analytical tools and screens to perform the required financial analysis will
normally suffice. When this review discloses no material supervisory concerns, the risk
assessment should be used to assign a final rating to the company.
Development of Supervisory Strategies
If no unusual supervisory issues or concerns are identified by the risk
assessment, no special follow-up with the company is necessary. However, all
companies should continue to be monitored under existing surveillance and monitoring
programs aimed at identifying significant changes in a company’s condition,
performance, or compliance profile that may prompt further review. Such changes may
include 1) a material decline in the earnings performance or capital position of a bank
subsidiary; 2) significant changes in management or ownership; 3) a large increase in
outstanding debt; 4) new or expanded activities that may pose additional risk; 5) rapid
growth; 6) questionable insider or intercompany transactions; 7) less than satisfactory
SEER or other performance factors for the subsidiary bank(s); or 8) information
suggesting less than satisfactory compliance with regulatory orders and other
requirements imposed in connection with the granting of any application or other
request. When these or other changes raise supervisory concerns, the risk assessment
should be updated using the methods discussed below.
When a risk assessment is prepared in conjunction with the review of an
examination report for a bank rated satisfactory or better, but supervisory concerns
such as those listed above preclude the immediate assignment of a satisfactory
BOPEC rating, a strategy for addressing those concerns must be developed and
documented as part of the risk assessment. The strategy would typically require
gathering additional information from the bank regulator or the company, either written
or verbal. Where supervisory concerns are not satisfactorily addressed through off-site
measures, a number of remedies should be considered, including visitations, targeted
reviews of internal processes and specific transactions, or broader inspections
encompassing a review of more significant financial and managerial issues, processes,
or reporting systems. The specific timing of these activities is not prescribed by this
policy; however, the on-site activity should be conducted as soon as possible following
the off-site review, given that it is required only in situations when supervisory concerns
have surfaced.

Strategies for Problem and Deteriorating Companies and Those with
Identified Management Weaknesses
A full-scope, on-site inspection should be conducted the first time that the
risk assessment preliminarily supports the assignment of a BOPEC rating of 3 or worse,
or a management rating of less than satisfactory. Typically, this would occur when a

4
significant subsidiary bank’s CAMELS composite or management component is
assigned a rating of 3, 4, or 5. In such a case, an inspection is deemed necessary to
ensure that sufficient information is available to develop an effective supervisory
strategy. The purpose of the inspection is: 1) to confirm the Reserve Bank’s
understanding of the SSBHC’s financial condition, activities, and management
oversight of the bank, as well as whether violations of law or regulation or inappropriate
intercompany transactions have occurred; 2) to determine the extent to which any of
these factors is having an adverse effect on the bank(s); 3) to identify steps the holding
company should take to strengthen its subsidiary bank(s); and 4) to assign a BOPEC
rating to the company. Based on these inspection results and information available
prior to the inspection, and in consultation with the bank’s federal and state supervisory
authority(ies), the Reserve Bank should develop a supervisory strategy for dealing with
the company.
In situations where the company and management are adversely affecting
the bank, the strategy should contemplate enforcement activities that are coordinated
with those of the bank’s federal or state regulator(s), a clear delineation of the actions
and reports expected of holding company management, and plans for additional
supervisory activities, either on-site or off-site. The Reserve Bank should designate a
primary contact responsible for monitoring the company’s condition and updating the
risk assessment and supervisory strategy.
In situations where the bank holding company is neither contributing to the
bank’s problems nor in a position to serve as a source of strength, a typical supervisory
strategy would be to maintain an open dialogue with the bank’s primary regulator(s) and
to review relevant regulatory reports.

Communicating Supervisory Findings
When a risk assessment discloses no supervisory concerns, or when an
existing 3, 4, or 5 BOPEC rating is reaffirmed through the risk assessment, a brief letter
detailing this overall conclusion and the SSBHC’s BOPEC rating should be forwarded to
the company. A prototype of such a letter is attached.
When more detailed off-site reviews are performed or on-site targets or
visitations are conducted, Reserve Banks may also communicate the scope of these
activities, relevant findings, and supervisory recommendations to the company in a
letter. Alternatively, the findings can be conveyed to the company in a more structured
report similar to the existing bank holding company inspection report. When full-scope
inspections are conducted, use of existing bank holding company report pages is
mandatory; however, the only pages required to be completed are the Examiner’s
Comments, Scope, Analysis of Financial Factors, and the confidential pages. The use

5
of any other page (including financial data pages) should be limited to situations where
its presentation is useful for supporting conclusions or recommendations.
With regard to correspondence and reports to satisfactorily rated
SSBHCs, it is generally appropriate for commissioned, non-officer personnel who are
designated as the primary contact or portfolio manager for such companies to have
signing authority. Reports and other official communications to problem and
deteriorating companies require an officer’s signature.

Discontinuation of Risk Management Ratings for SSBHCs
Effective January 1, 1997, the Uniform Financial Institutions Rating
System (CAMELS) was amended specifically to require the evaluation of risk
management systems both in the overall management rating and in the individual
financial components. By definition, financial and management activities at SSBHCs
are conducted in the subsidiary banks and the risk management process of the
company is essentially the same as that of the bank(s). Accordingly, no separate risk
management rating will be required of SSBHCs.

Newly Formed SSBHCs
Consistent with long-standing Federal Reserve policy, an initial full-scope,
on-site inspection of a newly formed SSBHC should be conducted within the first 12 to
18 months of operations. Thereafter, risk assessments should be performed in
accordance with this policy.

6

Attachment B
Prototype Letter to Communicate
Findings of a Risk Assessment
Board of Directors
[name and address of SSBHC]
Dear Members of the Board:
This Reserve Bank has conducted a review of [SSBHC] based primarily
on financial and other information regularly provided by your organization to the Federal
Reserve and other supervisory agencies, as well as the recent examination report for
[Bank], SSBHC’s subsidiary bank. The review was conducted by Examiner [EIC] and
disclosed no supervisory concerns [or, no concerns in addition to those previously
communicated to the institution],
[SSBHC] is assigned a composite BOPEC rating of [numerical rating],
based on a bank component rating of [numerical rating] and a parent company
component rating of [numerical rating]. Management is regarded as [rating]. The
ratings assigned to the bank holding company are part of the overall findings of this
review and are confidential. They should not be disclosed or made public.
If you have any questions or comments regarding the risk assessment, or
any regulatory matter concerning your organization, please contact [Reserve Bank
contact] of this Reserve Bank at [telephone number].
Sincerely yours,

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