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Federal Reserve Bank OF DALLAS ROBERT D. M C T E E R , J R . P R E S ID E N T AND C H IE F E X E C U T IV E O F F IC E R September 30, 1996 DALLAS, TEXAS 75265-5906 Notice 96-92 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Adoption of Final Interagency Guidelines on Safety and Soundness Standards DETAILS The Board of Governors of the Federal Reserve System, along with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, have issued final interagency guidelines prescribing safety and soundness standards for asset quality and earnings. The guidelines are effective October 1, 1996. The guidelines prescribe that insured depository institutions establish and maintain systems that are commensurate with the institution’s size and the nature and scope of its operations to • identify problem assets and prevent deterioration in those assets and • evaluate and monitor earnings and ensure that earnings are sufficient to m aintain adequate capital and reserves. ATTACHMENT A copy of the Board’s notice as it appears on pages 43948-52, Vol. 61, No. 167, of the Federal Register dated August 27, 1996, is attached. MORE INFORMATION For more information, please contact Basil Asaro at (214) 922-6066. For additional copies of this Bank’s notice, please contact the Public Affairs D epartm ent at (214) 922-5254. Sincerely yours, 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) 43948 Federal Register / Vol. 61, No. 167 / Tuesday, August 27, 1996 / Rules and Regulations DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 30 [Docket No. 9 6 -1 9 ] RIN 1557-A B 17 FEDERAL RESERVE SYSTEM 12 CFR Part 208 [Docket No. R -0766] FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 364 RIN 3064-A B 13 DEPARTMENT OF THE TREASURY Office of Thrift Supervision 12 CFR Part 570 [No. 96-53] RIN 1550-AA97 Interagency Guidelines Establishing Standards for Safety and Soundness Office of th e C om ptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal D eposit Insurance Corporation; and Office of Thrift Supervision, Treasury. ACTION: Final guidelines. AGENCIES: The Office of th e Com ptroller of the Currency (OCC), the Board of Governors of th e Federal Reserve System (Board of Governors), the Federal D eposit Insurance Corporation (FDIC), and th e Office of Thrift Supervision (OTS) (collectively, the agencies) are am ending th e Interagency G uidelines E stablishing S tandards for Safety and S ou nd ness (Guidelines) to include asset quality a n d earnings standards. The G uidelines were adopted pu rsu an t to section 39 of th e Federal Deposit Insurance A ct (FDI Act). EFFECTIVE DATE: October 1,1996. SUMMARY: FOR FURTHER INFORMATION CONTACT: OCC: Emily R. M cN aughton, National Bank E xam iner (202/874-5170), Office of the Chief N ational Bank Examiner; David Thede, S enior A ttorney (202/8745210), Securities an d Corporate Practices D ivision; or M ark T enhundfeld, S enior A ttorney (202/ 874-5090), Legislative a n d Regulatory A ctivities Division, Office of the Com ptroller of th e C urrency, 250 E Street, SW, W ashington, DC 20219. Board o f Governors: David Wright, Project M anager (202/728-5854), Division of Banking Supervision and Regulation; Gregory A. Baer, Managing Senior C ounsel (202/452-3236), Legal Division, Board of G overnors of the Federal Reserve System. For th e hearing im paired only, T elecom m unication Device for th e Deaf (TDD), Dorothea Thom pson (202/452—3544), Board of Governors of th e Federal Reserve System, 20th an d C Streets, NW, W ashington, DC 20551. FDIC: Robert W. W alsh, Manager, Planning a n d P rogram D evelopm ent (202/898-6911) or M ichael D. Jenkins, E xam ination Specialist (202/898-6896), D ivision of Supervision; or Susan vand en T oo m , C ounsel (202/898-8707), or N ancy L. A lper, C ounsel (202/7360828), Legal Division, Federal Deposit Insurance Corporation, 550 17th Street, NW, W ashington, DC 20429. OTS: W illiam M agrini, S enior Project M anager (202/906-5744), Supervision Policy; or K evin Corcoran, A ssistant Chief Counsel (202/906-6962), or Teri M. Valocchi, C ounsel (Banking and Finance) (202/906-7299), Chief C ounsel’s Office, Office of Thrift S upervision, 1700 G Street, NW, W ashington, DC 20552. SUPPLEMENTARY INFORMATION: I. Background A . S ta tu to ry Fram ew ork Section 132 of the Federal Deposit Insurance C orporation Im provem ent Act of 1991 (FDICIA), Pub. L. 102-242, am ended th e Federal D eposit Insurance A ct (FDI Act) by ad d in g a n ew section (section 39, codified at 12 U.S.C. 18 31p1) th at requires each Federal banking agency to establish by regulation certain safety a n d so u n d n ess stan dard s for the insu red depository institu tio n s a nd depository in stitu tio n h o lding com panies for w h ich it is th e primary Federal regulator. As enacted in FDICIA, section 39(b) of th e FDI A ct required the agencies to establish stand ards by regulation specifying a m axim um ratio of classified assets to capital and m inim um earnings sufficient to absorb losses w ith ou t im pairing capital. Section 318(a) of th e Riegle C om m unity D evelopm ent and Regulatory Im provem ent A ct of 1994 Federal Register / Vol. 61, No. 167 / Tuesday, August 27, 1996 / Rules and Regulations (CDRIA), Pub. L. 103-325, w h ich was enacted on Septem ber 23 ,19 94 , elim inated the application of section 39 to depository institution ho lding com panies and replaced the requirem ent that th e agencies “ specify” quantitative asset quality a n d earnings standards w ith a requirem ent th at the agencies prescribe standards, by regulation or by guideline, relating to asset quality and earnings that the agencies determ ine to be appropriate. B. A gencies' Proposals The agencies p ub lish ed a joint notice of proposed rulem aking in th e Federal Register on N ovember 18 ,1993 (59 FR 60802) that solicited co m m ent on specific standards that w o u ld govern num erous facets of a depository in stitu tion ’s operations, in cluding quantitative standards governing a depository in stitu tio n ’s asset quality and earnings. On July 10, 1995 (60 FR 35674), th e agencies adopted: (1) final guidelines in all areas except asset quality a n d earnings; an d (2) a final rule establishing deadlines for subm ission and review of safety and soundness com pliance p lans w h ich m ay be required for failure to m eet one or more of the safety and so u n dn ess standards adopted in the G u id elines.1 O n the same day (60 FR 35688), the agencies also proposed revised guidelines concerning asset quality and earnings standards to address problem s noted by m any com m enters w ith the quantitative standards. The prim ary concern of these com m enters was that it w as im possible to design quantitative standards that w ould be appropriate for every regulated institution. Because the CDRIA clarified that quantitative standards were not required, the agencies proposed to replace the quantitative standards w ith more com prehensive qualitative standards that em phasize m onitoring, reporting, and preventive or corrective action appropriate to the size of the institution and the n atu re a nd scope of its activities. The proposed asset quality standards required an institution to identify problem assets and estim ate inherent losses. The proposal also required an institution to: (1) co n sid er th e size and potential risks of m aterial concentrations of credit risk; (2) com pare the level of problem assets to the level of capital and establish reserves sufficient to absorb anticipated 1 For the OCC, these G uidelin es a p p e a r as A p pendix A to p art 30; for th e B oard o f Governors, these G uidelines a p p ea r as A p p e n d ix D to part 208; for the FDIC, these G uidelines a p p e a r as A ppendix A to part 364; a n d for the OTS, th ese G uidelines app ea r as A p p e n d ix A to part 570. losses on those an d other assets; (3) take appropriate corrective action to resolve problem assets; and (4) provide periodic asset quality reports to the b oard of directors to assess the level of asset risk. The proposal noted that the com plexity and sophistication of an in stitu tio n ’s m onitoring, reporting Systems, and corrective actions should be com m ensurate w ith the size, nature, and scope of the in stitu tio n ’s operations. T ne agencies proposed earnings standards requiring m onitoring and reporting system s sim ilar to those required in the standards for asset quality. T he p roposed earnings standards w ere in tend ed to enhance early identification an d resolution of problems. The standards requ ired an institution to com pare its earnings trends, relative to equity, assets, and other com m on benchm arks, w ith its historical experience and w ith the earnings trends of its peers. T he proposed standards also pro vided that an institution should: (1) evaluate the adequacy of earnings given th e institution ’s size, and com plexity, and the risk profile of the in stitu tio n ’s assets and operations; (2) assess th e source, volatility, and sustainability of earnings; (3) evaluate th e effect of n on recurring or extraordinary incom e or expense; (4) take steps to ensure that earnings are sufficient to m aintain adequate capital and reserves after considering asset quality an d the in stitu tio n ’s rate of growth; and (5) provide periodic reports w ith adequate inform ation for m anagem ent a n d the board of directors to assess earnings perform ance. 43949 determ ination of CAMEL ratings. A nother com m enter e m phasized that institutions need flexibility in determ ining earnings bench m ark s and defining th e appropriate peer group. A third com m enter suggested that the agencies elim inate the earnings standard directing each institution to evaluate the effect of n onrecurring or extraordinary income or expense. T his com m enter believed su ch an evaluation was effectively required by the separate standard requiring the institutio n to assess the source, volatility, and sustainability of earnings. Finally, one com m enter asked that in stitu tio n s be given the option of com plying w ith quantitative standards. III. Final Guidelines The agencies are adopting the asset quality and earnings standards substantially as proposed. These qualitative standards are sufficiently flexible to perm it an institu tion to adopt practices that are consistent w ith safe and sound banking practices an d that are appropriate for the institution. Moreover, th e stan dard s are designed to prom pt a depository in stitutio n to take steps that w ill h elp identify emerging problem s in the institution. T he final rule makes tw o m in or changes to th e asset quality standards. First, th e order of th e steps a depository institution is to take is rearranged to reflect m ore accurately th e appropriate sequence of these steps. Second, the final rule deletes the w ord “ qu ality ” in the standard requiring periodic asset reports (asset quality stan d ard 6 in the final guidelines). T his change w as m ade to em phasize th at the report is to II. Discussion o f Comments address each of the asset quality The agencies received a total of 3 1 2 standards, as appropriate, and not focus com m ents, some of w h ich w ere sent to solely on problem assets. In response to m ore than one agency. Com m enters the com m ent about the re d u n d a n t were overw helm ingly supp ortive of the earnings standards, the final rule proposal, particularly its reliance on com bines the tw o standards concerning qualitative and flexible stand ards in lieu the nonrecurring incom e and of the quantitative standards originally sustainability of income. T he agencies proposed. Com m enters noted that the agree that these standards n eed not be m ore flexible guidelines em bodied in listed separately, given th e significant the second proposed rule b u ilt u po n a depository in stitu tio n ’s ow n procedures overlap in w h at they address. A discussion of the rem aining com m ents for monitoring, reporting, and taking follows. action w ith respect to asset quality and Im p a ct on exa m in a tio n s a n d ratings. earnings conditions. Com m enters agreed The guidelines wiil not change the that w ell run in stitutio ns w o u ld not exam ination process or the have to alter th eir practices in order to determ ination of CAMEL ratings. These com ply w ith the prop osed standards. guidelines represent th e agencies’ Some com m enters suggested longstanding expectation regarding an am endm ents to the proposal. O ne in stitu tio n ’s m anagem ent of asset com m enter asked the agencies to clarify quality and earnings, and, as such, will how the proposed standards interact not require a change in th e agencies’ w ith the exam ination process and the exam ination procedures or the determ ination of an in stitu tio n ’s rating. 2 The Board of G overnors received 14 com m ents, D efinition o f peer group. T he agencies w hile the OCC, FDIC, a n d OTS received 8, 6, and recognize that defining a peer group 3, respectively. 43950 Federal Register / Vol. 61, No. 167 / Tuesday, August 27, 1996 / Rules and Regulations necessarily entails m aking decisions about w h ich criteria to use. The guidelines identify equity and asset data as tw o com m only used b enchm arks in defining a peer group and expressly state that an institution m ay use other com m only u sed benchm arks. The agencies w ill be flexible in perm itting institutio ns to select criteria reasonably designed to provide a m eaningful peer group comparison. Q uantitative standards. The agencies have decided against returning to quantitative standards in lieu of, or in ad d itio n to, the standards proposed. The agencies believe the standards con tain ed in the final guidelines w ill encourage the ado ption of practices that are consistent w ith safe and sound banking practices and that are appropriate for a given institution. M oreover, the agencies believe that these standards w ill be m ore effective than quantitative standards w ou ld be in h elp in g identify emerging problem s in a financial institution. However, even though the agencies are not adopting quantitative standards, the agencies w ill con tinu e to analyze asset quality ratios and earnings levels, and trend s thereof, in assessing an institution. IV. Regulatory Flexibility Act P ursuant to section 605(b) of the Regulator}' Flexibility Act, 5 U.S.C. 605(b), the agencies hereby certify that these guidelines w ill not have a significant econom ic im pact on a substantial n um ber of sm all entities. A ccordingly, a regulatory flexibility analysis is n o t required. As is explained m ore fully in the pream ble to these guidelines, the guidelines are designed to illustrate w hat the agencies consider to be steps th at are consistent w ith safe an d sound banking practices w hile preserving flexibility for an institution to ado pt a system that is appropriate for its circumstances. V. Executive Order 12866 The OCC and OTS have determ ined that these final guidelines are not significant regulatory actions for p urposes of Executive O rder 12866. VI. OCC and OTS: Unfunded Mandates Reform Act o f 1995 Statement Section 202 of the U nfunded M andates Reform Act of 1995, Pub. L. 1 0 4-4 (Unfunded M andates Act) requires that an agency prepare a budgetary im pact statem ent before prom ulgating any rule likely to result in a F ederal m andate that m ay result in the expend itu re by State, local, an d tribal governm ents, in th e aggregate, or by the private sector of $100 m illion or more in any one year. If a budgetary im pact statem ent is required, section 205 of the U n fu nd ed M andates Act also requires an agency to identify an d co nsider a reasonable nu m ber of regulatory alternatives before prom ulgating a rule. T he OCC and OTS have d eterm in ed that th e final guidelines w ill n o t resu lt in exp end itures by State, local, an d tribal governm ents, or by the private sector, of $100 m illion or m ore in any one year. A ccordingly, the OCC an d the OTS have not prepared a budgetary im pact statem ent or specifically add ressed any regulatory alternatives. As discussed in the preamble, the final guidelines represent the standards ap p lied by the agencies in exam ining insu red depository institutions, and, therefore, rep resent no change in the agencies’ policies and im pose m inim al new Federal requirem ents. List o f Subjects 12 CFR Part 30 A dm inistrative practice an d procedure, N ational banks, Reporting an d recordkeeping requirem ents, Safety and soundness. 12 CFR Part 208 A ccounting, A griculture, Banks, banking, Confidential b u sin ess inform ation, Crime, Currency, Federal Reserve System, Mortgages, Reporting an d recordkeeping requirem ents, Safety an d soundness, Securities. 12 CFR Part 364 A dm inistrative practice and procedure, Bank deposit insurance, Banks, banking, Reporting and recordkeeping requirem ents, Safety and soundness. 12 CFR Part 570 A ccounting, A dm inistrative practices a n d procedures, Bank deposit insurance, Holding com panies, Reporting and recordkeeping requirem ents, Savings associations, Safety an d soundness. Office of the Comptroller of the Currency 12 CFR CHAPTER I Authority and Issuance For the reasons set forth in the joint pream ble, part 30 of ch ap ter I of title 12 of the Code of Federal Regulations is am en d e d as follows: PART 30—SAFETY AND SOUNDNESS STANDARDS 1. T he authority citation for p art 30 is revised to read as follows: Authority: 12 U.S.C. 93a, 1831p-l. 2. T he table of contents of ap p e n d ix A to part 30 is a m en ded by adding entries for II.G. and II.H. to read as follows: A ppendix A to Part 30—Interagency Guidelines Establishing Standards for Safety and Soundness Table of Contents * * JJ * * * * * * G. Asset quality. H. Earnings. * * * * * 3. Item II of appendix A to part 30 is am en ded by adding paragraphs G a n d H to read as follows: * * * * * II. Operational and Managerial Standards * * * * * G. A sse t quality. An insu red depository institution sh ou ld establish and m aintain a system that is com m ensurate w ith the in stitu tio n ’s size an d the nature and scope of its operations to identify problem assets an d prevent deterioration in those assets. T he institution should: I. C onduct periodic asset quality review s to identify problem assets; 2. Estim ate th e inh erent losses in tho se assets an d establish reserves that are sufficient to absorb estim ated losses; 3. Com pare problem asset totals to capital; 4. Take appropriate corrective action to resolve problem assets; 5. Consider the size and potential risks of m aterial asset concentrations; and 6. Provide periodic asset reports w ith adequate inform ation for m anagem ent an d the board of directors to assess the level of asset risk. H. Earnings. A n in sured depository in stitu tio n should establish and m aintain a system that is com m ensurate w ith the in stitu tio n ’s size a n d the nature a n d scope of its operations to evaluate a n d m o nito r earnings a n d ensure that earnings are sufficient to m aintain adequate capital and reserves. The in stitu tio n should: I. Com pare recent earnings trends relative to equity, assets, or other com m only u sed b enchm arks to the in stitu tio n ’s historical results and those of its peers; 2. Evaluate the adequacy of earnings given th e size, com plexity, a n d risk profile of th e in stitu tio n ’s assets and operations; 3. Assess the source, volatility, and sustainability of earnings, in cluding the effect of nonrecurring or extraordinary incom e or expense; 4. Take steps to ensure that earnings are sufficient to m aintain adequate Federal Register / Vol. 61, No. 167 / Tuesday, August 27, 1996 / Rules and Regulations capital and reserves after considering the in stitu tio n ’s asset quality and grow th rate; and 5. Provide periodic earnings reports w ith adequate inform ation for m anagem ent a nd the board of directors to assess earnings performance. * * * * * Dated: May 21, 1996. Eugene A. Ludwig, Comptroller of the Currency. Federal Reserve System 12 CFR CHAPTER H Authority and Issuance For th e reasons set forth in the joint pream ble, part 208 of chapter II of title 12 of th e Code of Federal Regulations is am ended as follows: PART 208—MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 1. T he authority citation for part 208 continues to read as follows: Authority: 12 U.S.C. 36, 248 (a) and (c), 321-338, 461, 481, 486, 601, 611, 1814, 1823(j), 18310, 1831p—1, 3906, 3909, 3310, 3331-3351,15 U.S.C. 78b, 78o-4(c)(5), 78q, 78q—1, 78w, 781(b), 781(i), and 1781(g). 2. T he table of contents of ap pend ix D to part 208 is am ended by adding entries for II.G. and II.H. to read as follows: Appendix D to Part 208—Interagency Guidelines Establishing Standards for Safety and Soundness Table of Contents * * JJ * * * * * * G. A sset quality. H. Earnings. * * * * * 3. Item II of appendix D to part 208 is am en ded by adding paragraphs G and H to read as follows: * * * * * 3. Com pare problem asset totals to capital; 4. Take appropriate corrective action to resolve problem assets; 5. C onsider the size and potential risks of m aterial asset concentrations; and 6. Provide periodic asset reports w ith adequate inform ation for m anagem ent an d the board of directors to assess the level of asset risk. H. Earnings. An insured depository institutio n should establish and m aintain a system that is com m ensurate w ith th e in stitu tio n ’s size an d the nature and scope of its operations to evaluate a n d m onitol- earnings and ensure that earnings are sufficient to m aintain adequate capital and reserves. The institu tion should: I. Com pare recent earnings trends relative to equity, assets, or other com m only used benchm arks to the in stitu tio n ’s historical results and those of its peers; 2. Evaluate the adequacy of earnings given th e size, com plexity, and risk profile of the in stitu tio n ’s assets and operations; 3. Assess the source, volatility, and sustainability of earnings, including the effect of nonrecurring or extraordinary incom e or expense; 4. Take steps to en sure th at earnings are sufficient to m aintain adequate capital an d reserves after considering the in stitu tio n ’s asset quality and grow th rate; and 5. Provide periodic earnings reports w ith adequate inform ation for m anagem ent and the board of directors to assess earnings performance. * * * * * By order of the Board of Governors of the Federal Reserve System, June 14th, 1996. William W. Wiles, Secretory o f the Board. Federal Deposit Insurance Corporation 12 CFR CHAPTER m Authority and Issuance II. Operational and Managerial Standards * * * * * G. A sse t quality. An insured depository institution sh ou ld establish and m aintain a system that is com m ensurate w ith the in stitu tio n ’s size and the nature and scope of its operations to identify problem assets and prevent deterioration in those assets. The institution should: I. Conduct periodic asset quality review s to identify problem assets; 2. Estimate the inherent losses in those assets and establish reserves that are sufficient to absorb estim ated losses; For the reasons set forth in the joint pream ble, part 364 of ch apter III of title 12 of th e Code of Federal Regulations is am en ded as follows: PART 364—STANDARDS FOR SAFETY AND SOUNDNESS 1. T he authority citation for part 364 con tinu es to read as follows: Authority: 12 U.S.C. 1819 (Tenth), 1831p1. 2. T he table of contents of ap pen dix A to part 364 is am ended by adding entries for II.G. and II.H. to read as follows: 43951 A ppendix A to Part 364— Interagency G uidelines Establishing Standards for Safety and Soundness Table of Contents * * * * * II. * * * G. Asset quality. H. Earnings. * * * * * 3. Item II of app endix A to part 364 is am end ed by adding paragraphs G and H to read as follows: * * * * * II. Operational and Managerial Standards * * * * * G. A sse t quality. An insured depository institution should establish and m aintain a system that is com m ensurate w ith the in stitu tio n ’s size and the nature and scope of its operations to identify problem assets and prevent deterioration in those assets. T he institution should: I. Conduct periodic asset quality review s to identify problem assets; 2. Estimate the inh erent losses in those assets and establish reserves that are sufficient to absorb estim ated losses; 3. Com pare problem asset totals to capital; 4. Take appropriate corrective-action to resolve problem assets; 5. C onsider the size an d potential risks of m aterial asset concentrations; and 6. Provide periodic asset reports w ith adequate information for m anagem ent and the board of directors to assess the level of asset risk. H. Earnings. An insured depository institutio n should establish and m aintain a system that is com m ensurate w ith th e institu tion ’s size an d the nature and scope of its operations to evaluate and m onitor earnings and ensure that earnings are sufficient to m aintain adequate capital and reserves. The institutio n should: I. Com pare recent earnings trends relative to equity, assets, or other com m only used benchm arks to the in stitu tio n ’s historical results and those of its peers; 2. Evaluate the adequacy of earnings given the size, com plexity, and risk profile of th e institutio n’s assets and operations; 3. Assess the source, volatility, and sustainability of earnings, including the effect of nonrecurring or extraordinary incom e or expense; 4. Take steps to ensure that earnings are sufficient to m aintain adequate capital and reserves after considering the in stitu tio n ’s asset quality and grow th rate; and 43952 Federal Register / Vol. 61, No. 167 / Tuesday, August 27, 1996 / Rules and Regulations 5. Provide periodic earnings reports w ith adequate inform ation for m anagem ent a n d the board of directors to assess earnings performance. * * * * * By order of the Board of Directors. Dated at Washington, D.C. this 13th day of August 1996. Federal Deposit Insurance Corporation. Jerry L. Langley, Executive Secretary. Office of Thrift Supervision 12 CFR CHAPTER V Authority and Issuance For the reasons set forth in the joint pream ble, part 570 of chapter V of title 12 of th e Code of Federal Regulations is am ended as follows: PART 570—SUBMISSION AND REVIEW OF SAFETY AND SOUNDNESS COMPLIANCE PLANS AND ISSUANCE OF ORDERS TO CORRECT SAFETY AND SOUNDNESS DEFICIENCIES 1. T he authority citation for p art 570 continues to read as follows: Authority: 12 U.S.C. 1831p-l. 2. T he table of contents of ap pend ix A to part 570 is am ended by adding entries for II.G. an d II.H. to read as follows: Appendix A to Part 570—Interagency Guidelines Establishing Standards for Safety and Soundness Table of Contents * * JJ * * * 5. C onsider th e size and potential risks of m aterial asset concentrations; and 6. Provide periodic asset reports w ith adequate inform ation for m anagem ent and the board of directors to assess the level of asset risk. H. Earnings. A n insured depository institution sh o u ld establish and m aintain a system that is com m ensurate w ith th e in stitu tio n ’s size an d th e nature and scope of its operations to evaluate and m onitor earnings a n d en sure that earnings are sufficient to m aintain adequate capital an d reserves. The institution should: I. Com pare recent earnings trends relative to equity, assets, or other com m only u sed benchm arks to the in stitu tio n ’s historical results and those of its peers; 2. Evaluate th e adequacy of earnings given the size, com plexity, and risk profile of th e in stitu tio n ’s assets and operations; 3. A ssess the source, volatility, and sustainability of earnings, including the effect of no nrecurring or extraordinary incom e or expense; 4. Take steps to ensure that earnings are sufficient to m aintain adequate capital and reserves after considering the in stitu tio n ’s asset quality and growth rate; and 5. Provide period ic earnings reports w ith adequate inform ation for m anagem ent and the board of directors to assess earnings perform ance. * * * * G. Asset quality. H. Earnings. * * * * * 3. Item II of ap pend ix A to part 570 is am end ed by adding paragraphs G and H to read as follows: * * * * * II. Operational and Managerial Standards * * * * * G. A sset quality. An insured depository in stitutio n should establish and m aintain a system that is com m ensurate w ith the in stitu tio n ’s size an d th e nature and scope of its operations to identify problem assets and prevent deterioration in those assets. The institutio n should: I. Conduct periodic asset quality review s to identify problem assets; 2. Estimate the in heren t losses in those assets an d establish reserves that are sufficient to absorb estim ated losses; 3. Com pare problem asset totals to capital; 4. Take ap propriate corrective action to resolve problem assets; * * * * Dated: June 3,1996. John F. Downey, Executive Director, Supervision. [FR Doc. 96-21590 Filed 8-26-96: 8:45 am] BILLING CODE 4810 -33 -P , 6210-01-P , 6714-01-P , 6720-01 -P
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