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Federal R eserve Bank OF DALLAS ROBERT D. M c T E E R , J R . P R E S ID E N T July 21, 1995 A N D C H IE F E X E C U T IV E O F F IC E R DALLAS , TEX AS 7 5 2 6 5 -5 9 0 6 Notice 95-71 TO: The Chief Executive Officer of each m em ber bank and others concerned in the Eleventh Federal Reserve District SUBJECT Final Guidelines and Rule on Interagency Safety and Soundness Standards; Request for Comment on Proposed Guidelines for Asset Quality and Earnings DETAILS The Board of Governors of the Federal Reserve System has issued final guidelines and a final rule regarding safety and soundness standards for state member banks as required by Section 132 of the Federal Deposit Insurance Corporation Improve m ent Act. The final guidelines and final rule reflect amendments pursuant to the Reigle Community Development and Regulatory Improvement Act of 1994 (Community Development Act), which authorized the agencies to prescribe safety and soundness stan dards by regulation or guideline and eliminated holding companies from the scope of Section 132. The guidelines take into account public comments and set forth broad, principle-based standards that establish the objectives that proper operations and managem ent should achieve, while leaving the methods for achieving those objectives to each institution. The final rule establishes deadlines for submission and review of safety and soundness compliance plans that the agencies may require for insured depositories that fail to m eet the guidelines. The Board is also issuing proposed guidelines for safety and soundness stan dards relating to asset quality and earnings. As amended by the Community Develop ment Act, Section 132 no longer requires the agencies to prescribe quantitative standards in these areas, but rather, requires the agencies to prescribe standards they deem appropriate. The agencies are, therefore, proposing asset quality and earnings standards, in guideline form, that emphasize monitoring, reporting, and preventive or corrective action. F o r additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank o f Dallas: Dallas Office (800) 333 -4460; E l 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) The Board initially approved the final rule, final guidelines, and proposed guidelines on February 2, 1995; however, publication was delayed to reach interagency agreement. The Board must receive comments by August 24, 1995. Comments should be addressed to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551. All comments should refer to Docket No. R-0766. ATTACHMENT A copy of the Board’s notice as it appears on pages 35674-90, Vol. 60, No. 131, of the Federal Register dated July 10, 1995, 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, FEDERAL RESERVE BANK OF DALLAS NOTICE 95-71 Final Guidelines and Rule on Interagency Safety and Soundness Standards; Request for Comment on Proposed Guidelines for Asset Quality and Earnings 35674 Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12CFR Part 30 [Docket No. 95-15] FEDERAL RESERVE SYSTEM 12 CFR Parts 208 and 263 [Docket No. R-0766] FEDERAL DEPOSIT INSURANCE CORPORATION In November 1993, the agencies published in the Federal Register a joint notice of proposed rulemaking prescribing standards for safety and soundness, including standards for asset quality and earnings. The agencies are proposing revised asset quality and earnings standards. A document requesting com m ent on these standards is published elsew here in this separate part of the Federal Register. The agencies intend to add asset quality and earnings standards to the Guidelines after public com m ents are considered and final standards are adopted. EFFECTIVE DATE: August 9, 1995. 12 CFR Parts 303, 308 and 364 FOR FURTHER INFORMATION CONTACT: RIN 3064-AB 13 OCC: Em ily R. McNaughton, National Bank Exam iner (202/ 874-5170), Office of the C hief N ational Bank Exam iner; David Thede, Senior Attorney (202/ 8745210), Securities and Corporate Practices D ivision, Office of the Comptroller of the Currency, 250 E Street, SW ., W ashington, DC 20219. B o a r d o f G ov ern ors: David Wright, Supervisory Fin ancial Analyst (202/ 7 2 8 -5 8 5 4 ), Division of Banking Supervision and Regulation; Scott G. Alvarez, A ssociate General Counsel (202/ 452-3583), Gregory A. Baer, Managing Senior Counsel (202/4523236), Legal D ivision, Board of Governors of the Federal Reserve System. For the hearing impaired on ly, Telecom m unication Device for the Deaf (TDD), Dorothea Thom pson (202/4523544), Board o f Governors of the Federal Reserve System , 20th and C Streets NW., W ashington, DC 20551. FDIC: Robert W. W alsh, Manager, Planning and Program Development (202/ 898-6911) or M ichael D. Jenkins, Exam ination Specialist (202/ 898-6896), Division of Supervision; Lisa M. Stanley, Senior Counsel (202/ 898-7494) or Nancy L. Alper, Counsel (202/8983720), Legal D ivision, Federal Deposit Insurance Corporation, 550 17th Street NW., W ashington, DC 20429. OTS: W illiam Magrini, Project Manager (202/ 906-5744), Policy Office, Cathern Sm ith, Regional Coordinator (202/ 906-6614), Regional Operations; Kevin Corcoran, Assistant Chief Counsel (202/ 906-6962), Teri M. V alocchi, Counsel (Banking and Finance) (202/ 9 0 6 -7 2 9 9 ), C hief Counsel’s Office, Office of Thrift Supervision, 1700 G Street NW., W ashington, DC 20552. DEPARTMENT OF THE TREASURY Office of Thrift Supervision 12 CFR Part 570 [No. 95-113] RIN 1550-AA54 Standards for Safety and Soundness AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; and Office of Thrift Supervision, Treasury. ACTION: Final rule. SUMMARY: As required by section 132 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the O ffice of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board o f Governors), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) (collectively, the agencies) have adopted a final rule establishing deadlines for subm ission and review of safety and soundness com pliance plans. The agencies may require com pliance plans to be filed by an insured depository institution for failure to meet the safety and soundness standards prescribed by guideline pursuant to section 39 of the Federal Deposit Insurance Act (FDI Act). In conjunction with this final rule, the agencies have adopted Interagency Guidelines Establishing Standards for Safety and Soundness (Guidelines). The Guidelines w ill appear as an appendix to each of the agencies’ final rule. The agencies view the final rule and Guidelines as a realistic balance between the objectives of section 132 of FDICIA and avoiding overly burdensome regulation. SUPPLEMENTARY INFORMATION: I. Background A. S tatu tory F ra m ew o rk Section 132 of the Federal Deposit Insurance Corporation Improvement Act o f 1991 (FDICIA), Pub. L. 1 0 2 -2 4 2 , added a new section 39 to the FDI Act (12 U.S.C. 1 8 3 1 p -l) w hich required each Federal banking agency to establish by regulation certain safety and soundness standards for the insured depository institutions and depository institution holding com panies for w hich it was the primary Federal regulator. That portion of section 39 that addresses com pensation was subsequently amended by section 956 of the Housing and Community Development A ct of 1992, Pub. L. 1 0 2 -5 5 0 . On Septem ber 2 3 ,1 9 9 4 , the Riegle Community Development and Regulatory Improvement Act of 1994 (CDRI Act), Pub. L. 1 0 3 -3 2 5 , was enacted. Section 318 of the CDRI Act further amended section 39 of the FDI Act; (1) To authorize the agencies to establish safety and soundness standards by regulation o r by guideline for all insured depository institutions; (2) to give the agencies greater flexibility in prescribing asset quality and earnings standards; and (3) to elim inate the requirement that standards prescribed under section 39 apply to depository institution holding com panies. Pursuant to section 318 of the CDRI Act, these amendments have the same effective date as section 39 of the FDI A ct, as provided in section 132(c) of FDICIA. Section 39(a) requires the agencies to establish operational and managerial standards relating to: (1) Internal controls, inform ation 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) com pensation, fees, and benefits, in accordance w ith subsection (c) of section 39 of the FDI Act. Section 39(b) requires the agencies to establish standards relating to asset quality, earnings, and stock valuation that the agencies determ ine to be appropriate. Section 39(c) requires the agencies to establish standards prohibiting as an unsafe and unsound practice any com pensatory arrangement that would provide an executive officer, employee, director, or principal shareholder of the institution w ith excessive com pensation, 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 com pensation is excessive. If an agency determines that an institution fails to meet any standard established by reg u lation under subsection (a) or (b) of section 39, the institution m u st Submit to the agency an acceptable plan to achieve com pliance with the standard. Under the CDRI Act Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations amendment to section 39, if an agency determ ines that an institution fails to meet any standard established by g u id e lin e under subsection (a) or (b) of section 39, the agency m a y require the institution to submit to the agency an acceptable plan to achieve com pliance with the standard. W here an agency requires subm ission of a plan to achieve com pliance with the standards, if the institution fails to submit an acceptable plan w ithin the tim e allowed by the agency or fails in any material respect to im plem ent 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. after those adopted by the agencies for issuance of prompt corrective action directives pursuant to section 38 of the FDI Act. The agencies expect that noncom pliance with the standards adopted pursuant to section 39 generally w ill be detected during exam inations of institutions. Under the final rule, an institution must file a com pliance plan w ithin 30 days o f a request to do so from the institution’s primary Federal regulator. An agency may extend or shorten that tim e, if necessary. The agency then generally has 30 days to review the plan. Several com m enters requested an extension, from 30 days to 60 days or more, of the tim e period w ithin w hich an institution must file a com pliance plan after receiving a request from the B. A g e n c ie s ’ P ro p o sa ls agency to do so. The agencies’ proposal On July 1 5 ,1 9 9 2 , the agencies allowed the agencies to require that a published a joint advance notice of com pliance plan be filed w ithin 30 days proposed rulemaking (ANPR) in the or w ithin a tim e period specified by the Federal Register, 57 FR 31336, for a 60agencies. The agencies believe that this day comment period. The agencies provision provides sufficient flexibility received over 400 com m ent letters in to extend the tim e period where response to the ANPR, w ith some letters appropriate or necessary. Accordingly, submitted to more than one agency. the agencies have decided not to extend Commenters strongly recommended that the time period w ithin w hich an the agencies propose general rather than institution must generally file a specific standards in order to avoid com pliance plan. Although section 39 does not provide for any prior n otice or regulatory micromanagement. On November 1 8 ,1 9 9 3 , the agencies administrative review of an agency published a joint notice o f proposed order, the agencies’ final rule provides rulemaking in the Federal Register, 59 for prior notice of, and an opportunity FR 60802, for a 45-day com ment period. to respond to, a proposed order. A few com m enters requested that the Based on com ments received in agencies extend from 14 to 60 days or response to the ANPR, the agencies more the tim e period w ithin w hich an proposed general standards designed to institution must respond to the agency’s identify emerging safety and soundness notice of intent to issue an order problems in depository institutions. requiring the institution to correct a II. The Final Rule safety and soundness deficiency or to Although section 39 of the FDI Act, as take or refrain from taking other actions. am endedhy the CDRI A ct, allows the Under the agencies’ proposal, the agencies to establish safety and agencies could determ ine that a soundness standards by regulation o r by different tim e period was appropriate in guideline, section 39(e) of the FDI Act light of the safety and soundness of the continues to require the agencies to institution or other relevant establish deadlines for subm ission and considerations. The agencies have review of com pliance plans by decided to adopt the tim e period set regulation. For this reason, although the forth in the proposal because the agencies have established safety and agencies believe that tim e period carries soundness standards by guideline, the out the purpose of section 39 to agencies have established deadlines and facilitate early identification and procedures for subm ission and review correction of safety and soundness of com pliance plans by regulation. deficiencies. The agencies’ final rule adopts the A com pliance plan may, w ith the procedures proposed for submission of perm ission of the agency, be part of a com pliance plans and issuance of capital restoration plan submitted orders, except that, under the final rule, pursuant to section 38 o f the FDI Act the agencies are authorized, rather than (prompt corrective action) (12 U.S.C. required, to request a com pliance plan 1831p), a cease-and-desist order entered for failure to satisfy the safety and into pursuant to section 8 of the FDI Act soundness standards set out in the (12 U.S.C. 1818), a formal or informal Guidelines. The procedures for issuing agreement, or a response to a report of orders in the final rule are modelled examination. 35675 In conjunction with this rulemaking, the FDIC has amended part 303 of its regulations regarding delegations of authority to act on com pliance plans under section 39. III. Interagency Guidelines Establishing Standards for Safety and Soundness The agencies have adopted Interagency Guidelines Establishing Standards for Safety and Soundness (Guidelines) pursuant to section 39 of the FDI Act. By adopting the standards as guidelines, the agencies retain the authority to require an institution to submit an acceptable com pliance plan as w ell as the flexibility to pursue other more appropriate or effective courses of action given the specific circum stances and severity of an institution’s noncom pliance with one or more standards. Failure to subm it or adhere to a com pliance plan w ill subject an institution to the sanctions under section 39. The agencies expect to request a com pliance plan from an institution whose failure to meet one or more of the standards is of such severity that it could threaten the safe and sound operation of the institution. The agencies may elect to rely on an existing plan or enforcem ent action to ensure that an institution achieves com pliance with the Guidelines, rather than requiring the subm ission of a separate safety and soundness com pliance plan. The Guidelines set out tne safety and soundness standards that the agencies w ill use to identify and address problems at institutions before capital becom es impaired. The agencies believe that the standards adopted in the Guidelines serve this end without dictating how institutions must be managed and operated. Adoption of these Guidelines is consistent with the overwhelming majority of com m enters’ recom m endations that the standards established under section 39 be general and flexible in nature. The agencies have decided to use the flexibility provided by the CDRI A ct to propose new asset quality and earnings standards w hich the agencies believe are more appropriate. Therefore, the agencies have not included these standards in the final Guidelines, but are seeking comment on these standards elsewhere in this separate part of the Federal Register. The agencies intend to add revised asset quality and earnings standards to the Guidelines after com ments are considered and final standards are adopted. A. H old in g C o m p a n y C ov erag e Section 318 of the CDRI Act elim inates the requirement that the 35676 Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations standards established pursuant to section 39 apply to depository institution holding com panies. The Conference Report for the CDRI Act states, “The Conferees intend these requirem ents to apply only to the depository institu tions.” H.R. Conf. Rep. No. 6 5 2 ,103rd Cong., 2d Sess. 175 (1994). Accordingly, the Guidelines do not apply to holding com panies. B. O p eration al a n d M an ag erial S ta n d a rd s The agencies’ proposed operational and managerial standards did n ot specify each procedure an institution must have in place. Instead, the proposed standards established the objectives that proper operations and management oversight should achieve, w hile leaving the methods for achieving those objectives to each institution. The proposed standards represented the fundamental standards in use by the agencies to assess the operational and managerial quality of an institution. The standards did not represent a change in any of the agencies’ policies. The majority of com m enters believed that the proposed standards were sufficiently flexible and general in nature. Commenters generally viewed the standards as a realistic balance betw een the mandates of section 39 and the objective of avoiding overly burdensome regulation. Many com menters believed that the standards would ensure that decision-making responsibility resides with management o f the institution. A few com menters expressed concern that the agencies’ exam ination process would, in effect, require specific standards, and they asked that more specific guidance be provided to examiners to ensure consistent interpretation o f the standards. The agencies acknowledge the importance of consistent interpretation of the Guidelines and are considering issuing guidance to their exam ination staffs. In response to the agencies’ proposals, many com menters recommended that the agencies adopt standards that would apply according to an institution’s asset size. The agencies recognize that smaller, less com plex institutions may require less sophisticated systems and practices. Therefore, the standards for internal controls and information systems, internal audit systems, and credit underwriting state that these standards must be appropriate to the size of the institution and the nature and scope of its activities. In addition, the agencies’ standard for interest rate exposure states that an institution must manage its interest rate risk in a manner appropriate to the size of the institution and the com plexity o f its assets and liabilities. The agencies specifically requested com m ent on whether the proposed standards would require institutions to modify their operations. W hile many com menters encouraged the agencies to exempt certain institutions from the standards based on asset size or capital category, the m ajority of com menters did not believe that the proposed standards would require institutions to modify their operations in order to com ply. The agencies believe that wellmanaged institutions generally should not find it necessary to modify their operations in order to com ply with the operational and managerial standards in the Guidelines. The standards adopted by the agencies are based in large measure upon the standards proposed by the agencies. In determ ining whether an institution satisfies the standards, the agencies intend to consider an institution’s overall practices and performance so that an institution would not fail one o f the standards due to an isolated error or inconsistency. 1. Compliance W ith Laws and Regulations The agencies’ proposed standards for internal controls and information systems, loan docum entation, credit underwriting, interest rate exposure and asset growth included a requirem ent for com pliance w ith law s and regulations. Several com m enters believed that this requirem ent was redundant and unnecessary sin ce all institutions must com ply with applicable laws and regulations and violation of a law or regulation may subject an institution to appropriate supervisory and enforcem ent action. The agencies believe that the express requirement to ensure com pliance w ith applicable laws and regulations is a necessary standard for internal controls and information systems, but agree that repeating the requirem ent in the other standards is unnecessary. A ccordingly, the requirem ent to ensure com pliance with applicable laws and regulations has been deleted from the standards for loan documentation, credit underwriting, interest rate exposure and asset growth. 2. Internal Controls, Information System s, and Internal Audit Systems The agencies’ proposed standards for internal controls and information systems were designed to enable each institution to com ply by using control systems tailored to its individual operating environm ent. The majority of com menters favored these standards. Some accounting and auditing firm com menters recom m ended that the agencies incorporate into the standards the guidelines prepared by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in “ Internal Control: An Integrated Framework” . The agencies believe that the proposed internal control standards are consistent with the COSO framework for the structure of control systems. Therefore, using the COSO framework in developing and evaluating a system of internal controls is one way an institution could meet the standards proposed by the agencies. The agencies’ proposal addressed internal audit systems separately. Internal audit systems are important to the ongoing m onitoring of the effectiveness of the design and execution o f any system of internal controls. The proposal required each institution to have an internal audit system that provided for adequate testing and review o f internal controls and information systems among other provisions. Commenters criticized the requirem ent for an internal audit system because it seemed to imply that either a full-tim e internal auditor and staff or outside consultants would be necessary to perform an internal audit. Several com menters believed that the costs involved could not be justified for many sm aller institutions. The proposed audit standard did not explicitly require an internal audit function. The agencies believe it is management’s responsibility to consider carefully the level o f audit activity that will provide effective monitoring of the internal control system after taking into account the audit system ’s costs and benefits. For many banking organizations that have reached a certain size or com plexity of operations, the benefits derived from an independent internal audit function more than outweigh its cost. However, for certain sm aller institutions w ith few employees and less com plex operations, the costs may outweigh these benefits. Several com m enters recommended that the agencies clarify how an institution, especially a small institution w ithout an internal auditor, can ensure that its internal audit system provides for the “independence and objectivity” o f those performing internal audits. The agencies believe that this standard can be met by ensuring that the person conducting the review, whether the auditor and/or another employee, is independent from the function under review and is able to report findings directly to the board of directors or to a designated directors’ audit committee. The Guidelines adopted by the agencies clarify the appropriate role of a system Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations of independent reviews in an internal audit system. A few com m enters noted that the proposed standard providing for “verification and review of management actions to address identified w eaknesses” seemed unnecessarily broad and potentially burdensom e if the standard was interpreted to mean that every weakness, including minor, technical weaknesses, had to be specifically addressed by management in a report to the board of directors. To clarify this standard and to ensure that m anagement’s attention is focused on areas o f concern, the agencies have changed “identified w eaknesses” to “material w eaknesses” . The agencies are aware that many institutions use data processing service organizations to execute and record _ transactions, m aintain related records and process related data. The determ ination o f whether an institution’s independent auditor needs to review a service organization’s operations, as they relate to the institution’s internal controls, should be made in accordance w ith generally accepted auditing standards. 3. Loan Documentation The agencies’ proposal specified what an institu tion’s loan documentation practices must enable the institution to do, instead of specifying an item-byitem listing of loan documentation requirem ents.1 An overwhelming majority of commenters strongly favored general loan documentation standards. Commenters believed that the proposed standards were sufficiently general to allow for different treatment according to loan type and amount. In response to numerous com ments, the agencies wish to em phasize that in evaluating an institution’s loan documentation practices, they do not expect an institution to obtain an opinion of legal counsel for the purpose of demonstrating that a claim against a borrower is legally enforceable. Rather, an institution must establish loan documentation practices that provide for proper recording or perfection of the security interest. The Guidelines adopt the agencies’ standards on loan documentation as proposed. The agencies believe that the loan documentation standards provide a gauge against w hich com pliance can be measured, while at the same time allowing for differing approaches to loan documentation. Under the Interagency Policy Statem ent Regarding Documentation of Sm all and Medium-sized B usiness and Farm Loans, (March 3 0 ,1 9 9 3 ), wellmanaged, w ell- or adequately capitalized institutions are permitted to establish a “basket” of sm all- and medium-sized business and farm loans that w ill not be subject to exam iner criticism based on documentation. The agencies’ Guidelines do not affect the application of this interagency policy statement. 4. Credit Underwriting The agencies’ proposed standards for credit underwriting established general parameters of safe and sound credit underwriting practices. Commenters overwhelm ingly favored general credit underwriting standards rather than a detailed listing of requirem ents that must be met for each extension of credit. Based on the com ments received, the agencies have adopted the credit underwriting standards as proposed, in guideline form. 5. Interest Rate Exposure The agencies proposed to require an institution to manage interest rate risk in a m anner appropriate to the size of the institution and the com plexity of its assets and liabilities and to provide for periodic reporting to management and the board o f directors regarding interest rate risk. A majority of com menters supported this standard. Based on these com m ents, the agencies’ Guidelines adopt this standard without change. Section 305 o f FDICIA requires amendment of the agencies’ risk-based capital standards to take account of interest rate risk. The final regulation im plem enting section 305 may require some institutions to quantify interest rate risk.2 6. Asset Growth The agencies’ proposal required an institution to base its asset growth on a plan that fully considered the source of the institution’s growth, the risks presented by such growth, and the effect of growth on the institu tion’s capital. Commenters overwhelmingly favored this approach rather than a quantitative lim it on asset growth w hich the com m enters believed would be overly restrictive and inconsistent w ith safety and soundness. The agencies do not believe that asset growth necessarily causes safety and soundness problems. The agencies, however, do find that 1 T he cu rren t regulation establishin g detailed loan 2 T h e O T S regulation im plem enting section 305 docum entation requirem ents at 12 CFR 5 63.170(c) requires add itional capital from in stitution s that rem ains in effect for all savings association s have “above norm al” interest rate risk. See 5 8 F R regulated by the O TS. 4 5 2 9 9 (August 3 1 ,1 9 9 3 ). 35677 unplanned or poorly managed asset growth can be a cause for concern. Based on the com ments received, the agencies’ Guidelines adopt the asset growth standard as proposed. The agencies w ill evaluate asset growth against an institution’s overall strategic plan for growth. 7. Compensation, Fees and Benefits Section 39(a) requires the agencies to establish operational and managerial standards relating to com pensation, fees and benefits. As noted in the agencies’ proposal, this mandate is distinguishable from that of section 39(c), w hich requires the agencies to prohibit as an unsafe and unsound practice any com pensation that is excessive or that could lead to material financial loss to an institution. The agencies’ proposal required each institution to m aintain safeguards to prevent the payment of com pensation, fees, or benefits that are excessive or that could lead to material financial loss. A majority of commenters supported the agencies’ proposed rules, although many commenters recomm ended that the rules exempt healthy institutions from the com pensation standards. Section 39 does not allow for any exem ptions from this standard. Moreover, the agencies do not believe that exemptions are necessary in view of the flexibility of this standard. For these reasons and based on the comments received, the agencies’ Guidelines incorporate the proposed operational and managerial standards relating to com pensation, fees and benefits without change. C. S ta n d a rd s R elatin g to S to c k V alu ation The agencies believe that establishing stock valuation standards for publicly traded institutions is not appropriate. As indicated in the agencies’ proposal, in the long run the market value of an organization is dependent on an institu tion’s financial condition and performance, but over shorter and more operationally relevant time horizons, market value is also affected by factors such as the attractiveness o f financial institution stocks relative to other com petitors and industries, the performance of the general stock market, industry conditions and random fluctuations. Therefore, over any practical period of time, institutions do not have direct control over the m arketplace’s evaluation of their stock’s value. An additional consideration is the appropriateness of applying a standard that affects only a subset of banking and thrift organizations and 35678 Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations could operate to discourage depository institutions from becom ing publicly traded. The agencies intend to continue their existing policy of augmenting their overall exam inations and ongoing m onitoring o f publicly-traded institutions through the review of stock price changes, market price to book value ratios, bond ratings and other indicators o f the market’s assessment of an institu tion’s performance. To the extent that an institution’s market to book ratio appears to significantly contradict the agencies’ assessm ent of its condition, the agencies intend to continue to scrutinize carefully such institutions for developing problems. D. P roh ib ition on C o m p en sa tio n T h at is E x c ess iv e o r T h at C ou ld L e a d to M aterial F in a n c ia l L oss Section 39(c) of the FDI Act, as amended by the CDRI Act, continues to require the agencies to establish standards (1) prohibiting as an unsafe and unsound practice the payment of excessive com pensation or com pensation that could lead to material financial loss to an institution; and (2) specifying when com pensation, fees, or benefits are excessive. The agencies’ joint proposal relied upon the statutory language in formulating the standards required under section 39(c). Commenters strongly supported the use o f the factors set forth in section 39(c) as the sole standard in defining excessive com pensation. Commenters believed that more detailed standards would constitute micro-management of an institution’s management practices. Accordingly, the agencies’ Guidelines include the com pensation standards as proposed. In the Guidelines, as under the proposal, com pensation is considered excessive i f it is unreasonable or disproportionate to the services actually performed by the executive officer, employee, director, or principal shareholder being compensated. In making that determ ination, the agencies w ill consider all relevant factors, including those set out in section 39(c). E. E ffe c t on A g en c ie s’ Existing A u th ority Com pliance with the standards set out in the Guidelines does not preclude the agencies from finding that an institution is engaged in an unsafe and unsound practice or is in an unsafe and unsound condition. Conversely, failure to com ply with the standards set out in the Guidelines does not necessarily constitute an unsafe or unsound practice or an unsafe and unsound condition, except for failure to com ply with the standard prohibiting payment of excessive com pensation or com pensation that could lead to material financial loss. The agencies may take supervisory action against an institution that has not been requested to submit a safety and soundness com pliance plan. In addition, the agencies may request subm ission of a com pliance plan without taking any other supervisory or enforcem ent action. IV. Regulatory Flexibility Act The agencies have concluded that the final rule w ill not impose a significant econom ic hardship on small institutions. The rule establishes deadlines for submission and review of com pliance plans requested by the agencies of any insured depository institution w hich fails to m eet the standards adopted by the agencies in the Interagency Guidelines Establishing Standards for Safety and Soundness. The impact of the final rule on small institutions should be proportionate to its im pact on larger institutions. Accordingly, pursuant to section 605(b) of the Regulatory Flexibility A ct, 5 U.S.C. 605(b), the agencies hereby certify that the final rule w ill not have a significant econom ic im pact on a substantial number of small entities. V. OCC and OTS: Unfunded Mandates Reform A ct of 1995 Statement Section 202 of the Unfunded M andates Reform Act of 1995, Pub. L. 1 0 4 -4 (Unfunded Mandates Act) (signed into law on March 22, 1995) requires that an agency prepare a budgetary impact statement before promulgating a rule that includes a Federal mandate that may result in expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 m illion or more in any one year. If a budgetary impact statement is required, section 205 of the Unfunded M andates A ct also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. As discussed in the preamble, the final rule establishes deadlines and procedures for subm ission and review of safety and soundness plans and establishes standards for safety and soundness, as prescribed by section 132 o f the Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. 1 0 2 242. The standards represent the fundamental standards in use by the agencies, represent no change in the agencies’ policies and impose m inim al new Federal requirements. Thus, no additional costs to State, local or tribal governments or to the private sector of $100 m illion or more in any one year result from this rule. Accordingly, the OCC and OTS have not prepared a budgetary im pact statement nor specifically addressed any regulatory alternatives. VI. Effective Date The agencies have determined that pursuant to section 302 of the Riegle Community Development and Regulatory Improvement Act of 1994 (CDRI), Pub. L. 104—4, there is good cause for the final rule on safety and soundness to be effective 30 days after publication in the Federal Register. The im plem entation of this final regulation has been delayed because o f changes required due to changes in the statute. CDRI amended 12 U.S.C. 1 8 31p -l to allow the agencies to im plem ent the standards for safety and soundness by guideline rather than regulation. Under the guidelines the agencies may require an institution that fails to meet the standards to file a com pliance plan. However, that action would be taken on a case-by-case basis after adequate notice to the institution. Therefore, the agencies believe that further delay is unnecessary. VII. Executive Order 12866 The OCC and the O TS have determ ined that this final rule is not a “ significant regulatory action” for purposes of Executive Order 12866. Text of Final Common Rule The text of the agencies’ final common rule appears below: A p p en d ix____ to P art _ _ —Interagency Guidelines Establishing Standards for Safety and Soundness Table of Contents I. Introduction A. Preservation o f existing authority. B. D efinitions. II. Operational and Managerial Standards A. Internal controls and inform ation systems. B . Internal audit system. C. Loan docum entation. D. Credit underwriting. E. Interest rate exposure. F. A sset growth. G. [Reserved], H. [Reserved], I. Com pensation, fees and benefits. III. Prohibition on Compensation That Constitutes an Unsafe and Unsound Practice A. Excessive com pensation. B. Com pensation leading to m aterial financial loss. Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations I. Introduction i. Section 39 o f the Federal Deposit Insurance A c t 1 (FDI Act) requires each Federal banking agency (collectively, the agencies) to establish certain safety and soundness standards by regulation or by guideline for all insured depository institutions. Under section 39, the agencies m ust establish three types o f standards: (1) Operational and m anagerial standards; (2) com pensation standards; and (3) such standards relating to asset quality, earnings, and stock valuation as they determ ine to be appropriate. ii. Section 39(a) requires the agencies to establish operational and managerial standards relating to: (1) Internal controls, inform ation system s and internal audit system s, in accordance w ith section 36 o f the FDI A ct (12 U.S.C. 1831m ); (2) loan docum entation; (3) credit underw riting; (4) interest rate exposure; (5) asset growth; and (6) com pensation, fees, and benefits, in accordance w ith subsection (c) o f section 39. Sectio n 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 com pensatory arrangement that would provide any executive officer, em ployee, director, or principal shareholder of the institution w ith excessive com pensation, fees or benefits and any com pensatory arrangem ent that could lead to m aterial financial loss to an institution. Section 39(c) also requires that the agencies establish standards that specify w hen com pensation is excessive. iv. If an agency determ ines that an institution fails to m eet any standard established by guideline under subsection (a) or (b) of section 39, the agency may require the institution to subm it to the agency an acceptable plan to achieve com pliance with the standard. In the event that an institution fails to submit an acceptable plan w ithin the tim e allowed by the agency or fails in any m aterial respect to im plem ent an accepted plan, the agency m ust, by order, require the institution to correct the deficiency. The agency may, and in some cases m ust, take other supervisory actions u n til the deficiency has been corrected. v. The agencies have adopted am endments to their rules and regulations to establish d eadlines for subm ission and review of com pliance plans.2 1 Section 39 o f the Federal D eposit Insurance A ct (12 U .S.C. 1831p —1) was added by section 132 of the Fed eral D eposit In suran ce Corporation Im provem ent A ct o f 1991 (FDICIA), Pub. L. 1 0 2 2 4 2 ,1 0 5 Stat. 2 2 3 6 (1991), and am ended by section 9 5 6 o f the Housing and C om m unity D evelopm ent A ct o f 1992, Pub. L. 1 0 2 - 5 5 0 ,1 0 6 Stat. 3895 (1992) and section 318 o f the Riegle Com m unity D evelopm ent and Regulatory Im provem ent A ct o f 19 9 4 , Pub. L. 1 0 3 - 3 2 5 ,1 0 8 Stat. 2 1 6 0 (1994). 2 F or the O ffice o f the Com ptroller o f the Currency, these regulations appear at 12 CFR Part 30: for the Board o f Governors o f the Federal Reserve System , these regulations appear at 12 CFR Part 263; for the Fed eral D eposit Insurance Corporation, these regulations appear at 12 CFR Part 308, subpart R, and for th e O ffice o f Thrift vi. The follow ing G uidelines set out the safety and soundness standards that the agencies use to identify and address problem s at insured depository institutions before capital becom es im paired. The agencies believe that the standards adopted in these G uidelines serve this end w ithout d ictating how institutions m ust 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 funds. A. Preservation o f Existing Authority N either section 39 nor these G uidelines in any wray lim its the authority o f the agencies to address unsafe or unsound practices, violations o f law, unsafe or unsound conditions, or other practices. A ction under section 39 and these G uidelines m ay be taken independently of, in co nju n ctio n w ith, or in addition to any other enforcem ent action available to the agencies. Nothing in these G uidelines lim its the authority o f the FDIC pursuant to section 38(i)(2)(F) o f the FDI Act (12 U.S.C. 1831(o)) and Part 325 o f T itle 12 o f the Code of Federal Regulations. B. Definitions 1. In general. For purposes o f these G uidelines, except as m odified in the G uidelines or "unless the context otherw ise requires, the terms used have the same m eanings as set forth in sections 3 and 39 of the FDI A ct (12 U.S.C. 1813 and 1 8 3 1 p -l). 2. Board o f directors, in the case o f a statelicensed insured branch o f a foreign bank and in the case o f a federal branch o f a foreign bank, m eans the managing official in charge o f the insured foreign branch. 3. Compensation m eans all direct and indirect paym ents or benefits, both cash and non-cash, granted to or for the benefit o f any executive officer, em ployee, director, or principal shareholder, including but not lim ited to paym ents or benefits derived from an em ploym ent contract, com pensation or benefit agreement, fee arrangem ent, perquisite, stock option plan, postem ploym ent benefit, or other com pensatory arrangement. 4. D/rector shall have the m eaning described in 12 CFR 2 1 5 .2 (c).3 5. Executive officer shall have the m eaning described in 12 CFR 215.2(d ).4 6. Principal shareholder shall have the m eaning described in 12 CFR 2 15 .2 (/) . '■ II. Operational and Managerial Standards Internal controls and information systems. An institution should have internal A. controls and inform ation system s that are appropriate to the size of the institution and the nature, scope and risk o f its activities and that provide for: 1. A n organizational structure that establishes clear lines o f authority and Supervision , these regulations appear at 12 CFR Part 570. 3 In applying these d efin itio n s for savings a ssociatio n s, pursuant to 12 U .S.C . 146 4 , savings association s sh all use the term s “ savings associatio n ” and "in su red savings asso cia tio n ” in p lace o f the term s "m em ber b an k ” and “ insured b an k ”. 4 See footnote 3 in section I.B .4 . o f th is appendix. 5 See footnote 3 in section I.B .4 . o f th is appendix. 35679 responsibility for m onitoring adherence to established policies; 2. Effective risk assessm ent; 3. Tim ely and accurate financial, • operational and regulatory reports; 4. Adequate procedures to safeguard and m anage assets; and 5. Com pliance w ith applicable laws and regulations. B. Internal audit system. An institution should have an internal audit system that is appropriate to the size o f the institution and the nature and scope of its activities and that provides for: 1. Adequate m onitoring of the system of internal controls through an internal audit function. For an institution w hose size, com plexity or scope o f operations does not w arrant a full scale internal audit function, a system of independent review s o f key internal controls may be used; 2. Independence and objectivity; 3. Qualified persons; 4. Adequate testing and review of inform ation system s; 5. Adequate docum entation o f tests and findings and any corrective actions; 6. Verification and review of management actions to address m aterial w eaknesses; and 7. Review by the institu tion’s audit com m ittee or board o f directors of the effectiveness o f the internal audit systems. C. Loan documentation. An institution should establish and m aintain loan docum entation practices that: 1. Enable the institution to m ake an inform ed lending decision and to assess risk, as necessary, on an ongoing basis; 2. Identify the purpose o f a loan and the source o f repaym ent, and assess the ability of the borrower to repay the indebtedness in a tim ely manner; 3. Ensure that any claim against a borrower is legally enforceable; 4. Demonstrate appropriate adm inistration and m onitoring of a loan; and 5. Take account of the size and com plexity o f a loan. D. Credit underwriting. An institution should establish and m aintain prudent credit underw riting practices that: 1. Are com m ensurate w ith the types of loans the institution w ill m ake and consider the terms and conditions under w hich they w ill be made; 2. Consider the nature o f the markets in w hich loans w ill be made; 3. Provide for consideration, prior to credit com m itm ent, o f the borrow er’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value o f any underlying collateral, and the borrow er’s character and w illingness to repay as agreed; 4. Establish a system o f independent, ongoing credit review and appropriate com m unication to m anagem ent and to the board o f directors; 5. Take adequate account o f concentration o f credit risk; and 6. Are appropriate to the size o f the institution and the nature and scope o f its activities. E. Interest rate exposure. A n institution should: 1. Manage interest rate risk in a m anner that is appropriate to the size o f the 35680 Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations institution and the com plexity o f its assets and liab ilities; and 2. Provide for periodic reporting to m anagem ent and the board o f directors regarding interest rate risk w ith adequate inform ation for m anagem ent and the board of directors to assess the level of risk. F. Asset growth. An institu tion’s asset growth should be prudent and consider: 1. The source, volatility and use o f the funds that support asset growth; 2. Any increase in credit risk or interest rate risk as a result o f growth; and 3. The effect o f growth on the institu tion’s capital. G. [Reserved]. H. [Reserved]. I. Compensation, fe e s and benefits. An institution should m aintain safeguards to prevent the paym ent o f com pensation, fees, and benefits that are excessive or that could lead to m aterial financial loss to the institution. III. Prohibition on Com pensation That Constitutes an Unsafe and Unsound Practice A. Excessive Compensation Excessive com pensation is prohibited as an unsafe and unsound practice. Com pensation shall be considered excessive w hen am ounts paid are unreasonable or disproportionate to the services performed by an executive officer, em ployee, director, or principal shareholder, considering the follow ing: 1. T he com bined value o f all cash and non cash benefits provided to the individual; 2. T he com pensation history o f the individual and other individuals w ith com parable expertise at the institution; 3. T he fin ancial condition o f the institution; 4. Com parable com pensation practices at com parable institutions, based upon such factors as asset size, geographic location, and the com plexity o f the loan portfolio or other assets; 5. For postem ploym ent benefits, the projected total cost and benefit to the institution; 6. Any conn ection betw een the individual and any fraudulent act or om ission, breach o f trust or fiduciary duty, or insider abuse w ith regard to the institution; and 7. Any other factors the agencies determ ines to be relevant. B. Compensation Leading to Material Financial Loss Com pensation that could lead to material financial loss to an institution is prohibited as an unsafe and unsound practice. and recordkeeping requirem ents, Safety and soundness. Board 12 CFR P art 2 0 8 A ccounting, Agriculture, Banks, banking, Confidential business information, Crime, Currency, Federal Reserve System , Mortgages, Reporting and recordkeeping requirem ents, Safety and soundness, Securities. 12 CFR P art 2 6 3 Adm inistrative practice and procedure, Claim s, Crime, Equal A ccess to ju stice. Federal Reserve System, Lawyers, Penalties. FDIC The agency specific adoption o f the final com mon rule, w hich appears at the end of the com mon preamble, appears below. List of Subjects OCC 12 CFR P art 3 0 Adm inistrative practice and procedure, National banks, Reporting Adm inistrative practice and procedure, Authority delegations (Government agencies), Bank deposit insurance, Banks, banking, Reporting and recordkeeping requirem ents, Savings associations. 12 CFR P art 3 0 8 Adm inistrative practice and procedure, Claim s, Crime, Equal access to ju stice, Investigations, Lawyers, Penalties. 12 CFR P art 364 Adm inistrative practice and procedure, Bank deposit insurance, Banks, banking, Reporting and recordkeeping requirem ents, Safety and soundness. OTS 12 CFR P art 5 7 0 A ccounting, Adm inistrative practices and procedures, Bank deposit insurance, Holding com panies, Reporting and recordkeeping requirem ents, Savings associations, Safety and soundness. OFFICE OF THE COMPTROLLER OF THE CURRENCY 12 CFR Chapter I For the reasons set forth in the preamble, chapter I of title 12 of the Code of Federal Regulations is amended as follows: 1. A new part 30 is added to read as follows: PART 30—SAFETY AND SOUNDNESS STANDARDS Sec. 30.1 30.2 D eterm ination and notification o f failure to m eet safety and soundness standard and request for com pliance plan. 30.4 F ilin g o f safety and soundness com pliance plan. 30.5 Issuance o f orders to correct d eficien cies and to take or refrain from taking other actions. 30.6 Enforcem ent of orders. Authority: 12 U.S.C. 1 8 3 1 p - l. §30.1 Scope. Purpose. Scope. The rules and procedures set forth in this part apply to national banks and federal branches of foreign banks, that are subject to the provisions of section 39 o f the Federal Deposit Insurance Act (section 39) (12 U.S.C. 1 8 3 1 p -l). § 30.2 12 CFR P art 303 Authority and Issuance Adoption of Final Common Rule 30.3 Purpose. Section 39 of'the FDI Act, 12 U.S.C. 1 8 3 1 p -l, requires the Office of the Comptroller o f the Currency (OCC) to establish safety and soundness standards. Pursuant to section 39, a bank may be required to submit a com pliance plan if it is not in com pliance w ith a safety and soundness standard prescribed by guideline under section 39(a) or (b). An enforceable order under section 8 of the FDI Act, 12 U.S.C. 1818(b), may be issued if, after being notified that it is in violation of a safety and soundness standard prescribed under section 39, the bank fails to submit an acceptable com pliance plan or fails in any material respect to im plem ent an accepted plan. This part establishes procedures for requiring subm ission o f a com pliance plan and issuing an enforceable order pursuant to section 39. The Interagency Guidelines Establishing Standards for Safety and Soundness are set forth in appendix A to this part. § 30.3 Determination and notification of failure to meet safety and soundness gtandard and request for compliance plan. (a) D eterm in ation . The OCC may, based upon an exam ination, inspection, or any other information that becom es available to the OCC, determ ine that a bank has failed to satisfy the safety and soundness standards contained in the Interagency Guidelines Establishing Standards for Safety and Soundness set forth in A ppendix A to this part. (b) R eq u es t f o r c o m p lia n c e p la n . If the OCC determ ines that a bank has failed a safety and soundness standard pursuant to paragraph (a) of this section, the OCC may request, by letter or through a report of exam ination, the subm ission of a com pliance plan and the bank shall be deemed to have notice of the deficiency three days after m ailing of the letter by the OCC or delivery of the report of exam ination. Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations § 30.4 Filing of safety and soundness compliance plan. (a) S c h e d u le f o r filin g c o m p lia n c e p la n — (1) In g en eral. A bank shall file a w ritten safety and soundness com pliance plan with the OCC within 30 days of receiving a request for a com pliance plan pursuant to § 30.3(b) unless the OCC notifies the bank in writing that the plan is to be filed w ithin a different period. (2) O ther p la n s. If a bank is obligated to file, or is currently operating under, a capital restoration plan submitted pursuant to section 38 o f the FDI Act (12 U.S.C. 1831o), a cease-and-desist order entered into pursuant to section 8 of the FDI Act (12 U.S.C. 1818(b)), a formal or informal agreement, or a response to a report of exam ination or report of inspection, it may, w ith the permission of the OCC, submit a com pliance plan under this section as part of that plan, order, agreement, or response, subject to the deadline provided in paragraph (a) of this section. (b) C ontents o f p la n . The com pliance plan shall include a description of the steps the bank w ill take to correct the deficiency and the tim e w ithin w hich those steps w ill be taken. (c) R ev iew o f s a fe ty a n d so u n d n ess c o m p lia n c e p la n s. W ithin 30 days after receiving a safety and soundness com pliance plan under this part, the OCC shall provide written notice to the bank of whether the plan has been approved or seek additional information from the bank regarding the plan. The OCC may extend the tim e within w hich notice regarding approval of a plan will be provided. (d) F a ilu re to su b m it o r im p le m en t a c o m p lia n c e p la n — (1) S u p erv isory action s. If a bank fails to submit an acceptable plan within the time specified by the OCC or fails in any material respect to im plem ent a com pliance plan, then the OCC shall, by order, require the bank to correct the deficiency and may take further actions provided in section 39(e)(2)(B). Pursuant to section 39(e)(3), the OCC may be required to take certain actions if the bank com menced operations or experienced a change in control within the previous 24-m onth period, or the bank experienced extraordinary growth during the previous 18-m onth period. (2) Extraordinary' grow th. For purposes of paragraph (d)(1) of this section, extraordinary growth means an increase in assets of more than 7.5 percent during any quarter within the 18-month period preceding the issuance of a request for subm ission of a com pliance plan, by a bank that is not w ell capitalized for purposes of section 38 of the FDI Act. For purposes of 35681 (c) R esp o n s e to n o tic e — (1) T im e fo r calculating an increase in assets, assets re sp o n se. A bank may file a written acquired through merger or acquisition response to a notice o f intent to issue an approved pursuant to the Bank Merger order within the time period set by the A ct (12 U.S.C. 1828(c)) w ill be OCC. Such a response must be received excluded. (e) A m en d m en t o f c o m p lia n c e p la n . Aby the OCC within 14 calendar days bank that has filed an approved from the date of the notice unless the com pliance plan may, after prior written OCC determines that a different period notice to and approval by the OCC, is appropriate in light of the safety and amend the plan to reflect a change in soundness of the bank or other relevant circum stance. U ntil such tim e as a circum stances. (2) C on ten t o f r e sp o n se. The response proposed amendment has been should include: approved, the bank shall implement the (i) An explanation why the action com pliance plan as previously proposed by the OCC is not an approved. appropriate exercise of discretion under § 30.5 Issuance of orders to correct section 3 9 ; deficiencies and to take or refrain from (ii) Any recomm ended m odification taking other actions. of the proposed order; and (a) N otice o f in ten t to is su e o rd e r—(1) (iii) Any other relevant information, In g en era l. The OCC shall provide a mitigating circum stances, bank prior written notice of the OCC’s docum entation, or other evidence in intention to issue an order requiring the support of the position of the bank bank to correct a safety and soundness regarding the proposed order. deficiency or to take or refrain from (d) A g en cy c o n sid era tio n o f resp o n se. taking other actions pursuant to section After considering the response, the OCC 39 of the FDI Act. The bank shall have may: such tim e to respond to a proposed (1) Issue the order as proposed or in order as provided by the OCC under m odified form; paragraph (c) of this section. (2) Determine not to issue the order (2) Im m e d ia te is s u a n c e o f fi n a l order. and so notify the bank; or If the OCC finds it necessary in order to (3) Seek additional information or carry out the purposes of section 39 of clarification of the response from the the FDI Act, the OCC may, without bank, or any other relevant source. providing the notice prescribed in (e) F a ilu re to fi l e r e sp o n se. Failure by paragraph (a)(1) o f this section, issue an a bank to file w ith the OCC, within the order requiring a bank im m ediately to specified tim e period, a written take actions to correct a safety and response to a proposed order shall soundness deficiency or take or refrain constitute a waiver o f the opportunity to from taking other actions pursuant to respond and shall constitute consent to section 39. A bank that is subject to the issuance of the order. such an im m ediately effective order (f) R eq u est f o r m o d ific a tio n o r may submit a written appeal of the resc issio n o f order. Any bank that is order to the OCC. Such an appeal must subject to an order under this part may, be received by the OCC within 14 upon a change in circum stances, request calendar days of the issuance of the in writing that the OCC reconsider the order, unless the OCC permits a longer terms of the order, and may propose that period. The OCC shall consider any the order be rescinded or modified. such appeal, if filed in a tim ely matter, Unless otherwise ordered bv the OCC, w ithin 60 days o f receiving the appeal. the order shall continue in place while During such period of review, the order such request is pending before the OCC. shall remain in effect unless the OCC, in § 30.6 Enforcement of orders. its sole discretion, stays the (a) J u d ic ia l re m ed ies. W henever a effectiveness o f the order. bank fails to com ply w ith an order (b) C on ten t o f n o tice. A notice of issued under section 3 9 , the OCC may intent to issue an order shall include: seek enforcem ent of the order in the (1) A statement of the safety and appropriate United States district court soundness deficiency or deficiencies pursuant to section 8 (i)(l) of the FDI that have been identified at the bank; Act. (2) A description of any restrictions, (b) F a ilu re to c o m p ly with order. prohibitions, or affirmative actions that Pursuant to section 8(i)(2)(A) of the FDI the OCC proposes to impose or require; A ct, the OCC may assess a civil money (3) The proposed date when such penalty against any bank that violates or restrictions or prohibitions would be otherwise fails to com ply with any final effective or the proposed date for order issued under section 3 9 and com pletion of any required action; and against any institution-affiliated party (4) The date by w hich the bank subject to the order may file with the who participates in such violation or OCC a written response to the notice. noncom pliance. 35682 Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations (c) O ther e n fo r c e m e n t a ctio n . In addition to the actions described in paragraphs (a) and (b) o f this section, the OCC may seek enforcem ent o f the provisions of section 39 or this part through any other judicial or administrative proceeding authorized by law. 2. A new appendix A is added to part 30 as set forth at the end of the common preamble: Appendix A to Part 30— Interagency Guidelines Establishing Standards for Safety and Soundness Dated: A pril 1 3 ,1 9 9 5 . Eugene A. Ludwig, Comptroller o f the Currency. FEDERAL RESERVE SYSTEM 12 CFR Chapter II For the reasons outlined in the preamble, the Board hereby amends 12 CFR parts 208 and 263 as set forth below: PART 208—MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 1. The authority citation for 12 CFR Part 208 is revised to read as follows: Authority: 12 U.S.C. 36, 248(a) and (c), 3 2 1 -3 3 8 , 46 1 , 48 1 , 4 8 6 , 6 0 1 , and 611, 1814, 1823(j), 18310, 1 8 3 1 p - l, 3 9 06, 3 9 09, 3310, 3 3 3 1 -3 3 5 1 ; 15 U.S.C. 78b, 78o-^ (c)(5), 78q, 78q—1, 78w , 781(b), 781(i), and 1781(g). 2. A new subpart D, com prising § 208.60, is added to part 208 to read as follows: Subpart D—Standards for Safety and Soundness § 208.60 Standards for safety and soundness. The Interagency Guidelines Establishing Standards for Safety and Soundness prescribed pursuant to section 39 of the Federal Deposit Insurance Act (12 U.S.C. 1 8 3 1 p -l), as set forth as appendix D to this part apply to all state member banks. 3. A new appendix D is added to part 208 as set forth at the end o f the common preamble: Appendix D to Part 208— Interagency Guidelines Establishing Standards for Safety and Soundness PART 263— RULES OF PRACTICE FOR HEARINGS 1. The authority citation for 12 CFR Part 263 is revised to read as follows: Authority: 5 U.S.C. 504; 12 U.S.C. 248, 324, 504, 505, 1817(j), 1 8 1 8 , 1828(c), 18310, 1831p —1, 1847(b), 1847(d), 1884(b), 1972(2)(F), 3105, 3 107, 3 108, 3907, 3909; 15 U.S.C. 21, 7 8 o -4 , 7 8 o -5 , and 7 8 u -2 . 2. A new subpart I, com prising §§ 263.300 through 2 6 3 .3 0 5 , is added to part 263 to read as follows: Subpart I— Submission and Review of Safety and Soundness Compliance Plans and Issuance of Orders To Correct Safety and Soundness Deficiencies Sec. 2 63.300 Scope. 263.301 Purpose. 263.302 Determ ination and notification of failure to m eet safety and soundness standard and request for com pliance plan. 263.303 Filing of safety and soundness com pliance plan. 263.304 Issuance o f orders to correct deficiencies and to take or refrain from taking other actions. 263.305 Enforcem ent o f orders. Subpart I— Submission and Review of Safety and Soundness Compliance Plans and Issuance of Orders To Correct Safety and Soundness Deficiencies § 263.300 Scope. The rules and procedures set forth in this subpart apply to State member banks that are subject to the provisions of section 39 of the Federal Deposit Insurance Act (section 39) (12 U.S.C. 1 8 3 1 p -l). §263.301 Purpose. Section 39 of the FDI Act requires the Board to establish safety and soundness standards. Pursuant to section 39, a bank may be required to submit a com pliance plan if it is not in com pliance with a safety and soundness standard established by guideline under section 39(a) or (b). An enforceable order under section 8 may be issued if, after being notified that it is in violation of a safety and soundness standard established under section 39, the bank fails to submit an acceptable com pliance plan or fails in any material respect to implement an accepted plan. This subpart establishes procedures for requiring subm ission o f a com pliance plan and issuing an enforceable order pursuant to section 39. § 263.302 Determination and notification of failure to meet safety and soundness standard and request for compliance plan. (a) D eterm in ation . The Board may, based upon an exam ination, inspection, or any other information that becom es available to the Board, determ ine that a bank has failed to satisfy the safety and soundness standards contained in the Interagency Guidelines Establishing Standards for Safety and Soundness set out in appendix D to part 208 of this chapter. (b) R eq u est f o r c o m p lia n c e p la n . If the Board determ ines that a State member bank has failed a safety and soundness standard pursuant to paragraph (a) of this section, the Board may request, by letter or through a report of exam ination, the subm ission of a com pliance plan, and the bank shall be deemed to have notice of the request three days after m ailing o f the letter by the Board or delivery of the report of exam ination. § 263.303 Filing of safety and soundness compliance plan. (a) S c h e d u le f o r filin g c o m p lia n c e p la n — (1) In g en era l. A State member bank shall file a written safety and soundness com pliance plan with the Board w ithin 30 days o f receiving a request for a com pliance plan pursuant to § 263.302(b), unless the Board notifies the bank in writing that the plan is to be filed w ithin a different period. (2) O ther p la n s. If a State member bank is obligated to file, or is currently operating under, a capital restoration plan submitted pursuant to section 38 of the FDI Act (12 U.S.C. 1831o), a ceaseand-desist order entered into pursuant to section 8 of the FDI A ct, a formal or informal agreement, or a response to a report of exam ination or report of inspection, it may, w ith the permission of the Board, submit a com pliance plan under this section as part of that plan, order, agreement, or response, subject to the deadline provided in paragraph (a)(1) of this section. (b) C on ten ts o f p la n . The com pliance plan shall include a description of the steps the State member bank w ill take to correct the deficiency and the time within w hich those steps w ill be taken. (c) R ev iew o f s a fe ty a n d so u n d n ess c o m p lia n c e p la n s. W ithin 30 days after receiving a safety and soundness com pliance plan under this subpart, the Board shall provide w ritten notice to the bank of whether the plan has been approved or seek additional information from the bank regarding the plan. The Board may extend the tim e within w hich notice regarding approval of a plan w ill be provided. (d) F a ilu re to su b m it o r im p le m en t a c o m p lia n c e p la n . (1) S u p erv isory actio n s. If a State member bank fails to submit an acceptable plan w ithin the tim e specified by the Board or fails in any material respect to im plem ent a com pliance plan, then the Board shall, by order, require the bank to correct the deficiency and may take further actions Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations provided in section 39(e)(2)(B). shall remain in effect unless the Board, Pursuant to section 39(e)(3), the Board in its sole discretion, stays the may be required to take certain actions effectiveness of the order. (b) C on ten ts o f n o tice. A notice of if the bank com m enced operations or intent to issue an order shall include: experienced a change in control within (1) A statement of the safety and the previous 24-m onth period, or the soundness deficiency or deficiencies bank experienced extraordinary growth that have been identified at the bank; during the previous 18-m onth period. (2) A description o f any restrictions, (2) E x traord in ary g row th. For prohibitions, or affirmative actions that purposes of paragraph (d)(1) of this the Board proposes to impose or require; section, ex traord in a ry grow th means an (3) The proposed date when such increase in assets of more than 7.5 restrictions or prohibitions would be percent during any quarter within the 18-m onth period preceding the issuance effective or the proposed date for com pletion of any required action; and of a request for subm ission of a (4) The date by w hich the bank com pliance plan, by a bank that is not subject to the order may file w ith the w ell capitalized for purposes of section Board a written response to the notice. 38 of the FDI Act. For purposes of (c) R esp o n s e to n o tic e— (1) T im e f o r calculating an increase in assets, assets re s p o n s e . A bank may file a written acquired through merger or acquisition response to a notice of intent to issue an approved pursuant to the Bank Merger order within the tim e period set by the Act (12 U.S.C. 1828(c)) w ill be Board. Such a response must be excluded. received by the Board w ithin 14 (e) A m en d m en t o f c o m p lia n c e p la n . A calendar days from the date of the State member bank that has filed an notice unless the Board determ ines that approved com pliance plan may, after a different period is appropriate in light prior written notice to and approval by of the safety and soundness o f the bank the Board, amend the plan to reflect a or other relevant circum stances. change in circum stance. U ntil such time (2) C on ten ts o f r e sp o n se. The as a proposed amendment has been response should include: approved, the bank shall im plem ent the (i) An explanation why the action com pliance plan as previously proposed by the Board is not an approved. appropriate exercise of discretion under section 39; § 263.304 Issuance of orders to correct (ii) Any recommended m odification deficiencies and to take or refrain from o f the proposed order; and taking other actions. (iii) Any other relevant information, (a) N o tice o f in ten t to is s u e o rd e r—(1) mitigating circum stances, In g en era l. The Board shall provide a docum entation, or other evidence in bank prior written notice of the Board’s support of the position of the bank intention to issue an order requiring the regarding the proposed order. bank to correct a safety and soundness (d) A g en cy co n sid era tio n o f resp o n se. deficiency or to take or refrain from After considering the response, the taking other actions pursuant to section Board may: 39 o f the FDI Act. The bank shall have (1) Issue the order as proposed or in such time to respond to a proposed modified form; order as provided by the Board under (2) Determine not to issue the order paragraph (c) of this section. and so notify the bank; or (2) Im m e d ia te is s u a n c e o f fi n a l order. (3) Seek additional inform ation or If the Board finds it necessary in order clarification of the response from the to carry out the purposes of section 39 bank, or any other relevant source. o f the FDI Act, the Board may, without (e) F a ilu re to f i l e r e sp o n se. Failure by providing the notice prescribed in a bank to file with the Board, w ithin the paragraph (a)(1) of this section, issue an specified tim e period, a written order requiring a bank im m ediately to response to a proposed order shall take actions to correct a safety and constitute a waiver of the opportunity to soundness deficiency or take or refrain respond and shall constitute consent to from taking other actions pursuant to the issuance of the order. section 39. A State member bank that is (f) R eq u est f o r m o d ific a tio n o r subject to such an im m ediately effective r e sc is sio n o f ord er. Any bank that is order may submit a written appeal of subject to an order under this subpart the order to the Board. Such an appeal may, upon a change in circum stances, must be received by the Board w ithin 14 request in writing that the Board calendar days of the issuance of the reconsider the terms of the order, and order, unless the Board permits a longer may propose that the order be rescinded period. The Board shall consider any or modified. Unless otherwise ordered such appeal, if filed in a tim ely matter, by the Board, the order shall continue within 60 days of receiving the appeal. in place while such request is pending During such period of review , the order before the Board. § 263.305 35683 Enforcement of orders. (a) Ju d ic ia l re m ed ies. W henever a State member bank fails to com ply with an order issued under section 39, the Board may seek enforcem ent of the order in the appropriate United States district court pursuant to section 8(i)(l) of the FDI Act. (b) F a ilu re to c o m p ly with ord er. Pursuant to section 8(i)(2)(A) o f the FDI Act, the Board may assess a civil money penalty against any State member bank that violates or otherwise fails to com ply with any final order issued under section 39 and against any institution-affiliated party who participates in such violation or noncom pliance. (c) O ther en fo rc em en t a ction . In addition to the actions described in paragraphs (a) and (b) of this section, the Board may seek enforcem ent of the provisions o f section 39 or this part through any other judicial or administrative proceeding authorized by law. By Order o f the Board of Governors o f the Federal Reserve System , June 6, 1995. W illiam W. Wiles, Secretary o f the Board. FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Chapter III For the reasons set forth in the preamble, the Board of Directors of the Federal Deposit Insurance Corporation hereby amends chapter III of title 12 of the Code of Federal Regulations as follows: PART 303—APPLICATIONS, REQUESTS, SUBMITTALS, DELEGATIONS OF AUTHORITY, AND NOTICES REQUIRED TO BE FILED BY STATUTE OR REGULATION 1. The authority citation for part 303 is revised to read as follows: Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1 8 1 7(j), 1818, 1819 (Seventh and Tenth), 1 8 2 8 ,1831e, 1831o, 1 8 3 1 p - l; 15 U.S.C. 1607. 2. In § 303.9, a new paragraph (o) is added to read as follows: § 303.9 Delegation of authority to act on certain enforcement matters. * * * * * (o) C o m p lia n c e p la n s u n d er sectio n 39 o f th e A ct (stan d a rd s f o r s a fe ty a n d so u n d n ess) a n d p art 3 0 8 o f this c h a p ter. (1) Authority is delegated to the Director, and where confirm ed in writing by the Director, to an associate director, or to the appropriate regional director or deputy regional director, to accept, to reject, to require new or 35684 Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations revised com pliance plans or to make any other determ inations w ith respect to the im plem entation of com pliance plans pursuant to subpart R o f part 308 of this chapter. (2) Authority is delegated to the Director, and where confirm ed in writing by the Director, to an associate director, to: (i) Issue notices of intent to issue an order requiring the bank to correct a safety and soundness deficiency or to take or refrain from taking other actions pursuant to section 39 o f the Act (12 U.S.C. 1 8 3 1 p -l) and in accordance with the requirem ents contained in § 308.304(a)(1) of this chapter; (ii) Issue an order requiring the bank im m ediately to correct a safety and soundness deficiency or to take or refrain from taking other actions pursuant to section 39 of the Act (12 U.S.C. 1 8 3 1 p -l) and in accordance with the requirem ents contained in § 308.304(a)(2) o f this chapter; and (iii) A ct on requests for m odification or rescission of an order. (3) The authority delegated under paragraph (o )(l) of this section shall be exercised only upon the concurrent certification by the Associate General Counsel for Compliance and Enforcem ent, or in cases where a regional director or deputy regional director accepts, rejects or requires new or revised com pliance plans or makes any other determ inations w ith respect to com pliance plans, by the appropriate regional counsel, that the action taken is not inconsistent with the Act. (4) The authority delegated under paragraph (o)(2) of this section shall be exercised only upon the concurrent certification by the Associate General Counsel for Compliance and Enforcem ent that the allegations contained in the notice of intent, if proven, constitute a basis for the issuance of a final order pursuant to section 39 of the Act or that the issuance of a final order is not inconsistent with section 39 o f the Act or that the stipulated section 39 order is not inconsistent with section 39 and is an order w hich has become final for purposes of enforcem ent pursuant to the Act. PART 308— RULES OF PRACTICE AND PROCEDURE 3. The authority citation for part 308 is revised to read as follows: Authority: 5 U.S.C. 504, 5 5 4 -5 5 7 ; 12 U .S.C. 1815(e), 1817(a) and 1818(j), 1818, 1828(j), 1 8 2 9 ,1 8 3 1 i, 1831o, 1 8 3 1 p - l ; 15 U.S.C. 781(h), 78(m), 78n(a), 78n(c), 78n(d), 78n(f), 78(o), 78 o -4 (c)(5), 78(p), 78(q), 7 8 q 1, 78s. 4. A new subpart R, com prising §§ 308.300 through 308.305, is added to part 308 to read as follows: Subpart R—Submission and Review of Safety and Soundness Com pliance Plans and Issuance of O rders To Correct Safety and Soundness Deficiencies Sec. 3 0 8 .3 0 0 Scope. 308.301 Purpose. 3 0 8.302 D eterm ination and notification of failure to m eet a safety and soundness standard and request for com pliance plan. 308.303 F ilin g of safety and soundness com pliance plan. 308.304 Issuance of orders to correct d eficien cies and to take or refrain from taking other actions. 308.305 Enforcem ent of orders. Subpart R—Submission and Review of Safety and Soundness Compliance Plans and Issuance of Orders To Correct Safety and Soundness Deficiencies § 308.300 Scope. The rules and procedures set forth in this subpart apply to insured state nonmem ber banks and to state-licensed insured branches of foreign banks, that are subject to the provisions o f section 39 of the Federal Deposit Insurance Act (section 39) (12 U.S.C. 1 8 3 1 p -l). §308.301 Purpose. Section 39 o f the FDI A ct requires the FDIC to establish safety and soundness standards. Pursuant to section 39, a bank may be required to subm it a com pliance plan if it is not in com pliance w ith a safety and soundness standard established by guideline under section 39(a) or (b). An enforceable order under section 8 of the FDI Act may be issued if, after being notified that it is in violation of a safety and soundness standard established under section 39, the bank fails to submit an acceptable com pliance plan or fails in any material respect to im plem ent an accepted plan. This subpart establishes procedures for requiring subm ission of a com pliance plan and issuing an enforceable order pursuant to section 39. §308.302 Determination and notification of failure to meet a safety and soundness standard and request for com pliance plan. (a) D eterm in ation . The FDIC may, based upon an exam ination, inspection, or any other information that becom es available to the FDIC, determ ine that a bank has failed to satisfy the safety and soundness standards set out in part 364 of this chapter and in the Interagency Guidelines Establishing Standards for Safety and Soundness set forth in appendix A to part 3 6 4 .of this chapter. (b) R eq u es t f o r c o m p lia n c e p la n . If the FDIC determ ines that a bank has failed a safety and soundness standard pursuant to paragraph (a) o f this section, the FDIC may request, by letter or through a report of exam ination, the subm ission o f a com pliance plan and the bank shall be deemed to have notice o f the request three days after m ailing of the letter by the FDIC or delivery o f the report o f exam ination. § 308.303 Filing of safety and soundness com pliance plan. (a) S c h e d u le f o r filin g c o m p lia n c e p la n — (1) In g en era l. A bank shall file a w ritten safety and soundness com pliance plan w ith the FDIC within 30 days of receiving a request for a com pliance plan pursuant to § 308.302(b), unless the FDIC notifies the bank in writing that the plan is to be filed w ithin a different period. (2) O th er p la n s . If a bank is obligated to file, or is currently operating under, a capital restoration plan submitted pursuant to section 38 of the FDI Act (12 U.S.C. 1831o), a cease-and-desist order entered into pursuant to section 8 of the FDI Act, a formal or informal agreement, or a response to a report of exam ination or report o f inspection, it may, w ith the perm ission of the FDIC, subm it acom pliance plan under this section as part of that plan, order, agreement, or response, subject to the deadline provided in paragraph (a)(1) o f this section. (b) C on ten ts o f p la n . The com pliance plan shall include a description of the steps the bank w ill take to correct the d eficiency and the tim e within w hich those steps w ill be taken. (c) R ev iew o f s a fe ty a n d so u n d n ess c o m p lia n c e p la n s . W ithin 30 days after receiving a safety and soundness com pliance plan under this subpart, the FDIC shall provide written notice to the bank of whether the plan has been approved or seek additional information from the bank regarding the plan. The FDIC may extend the time w ithin which notice regarding approval of a plan will be provided. (d) F a ilu re to su b m it o r im p le m e n t a c o m p lia n c e p la n — (1) S u p erv isory a ctio n s. If a bank fails to subm it an acceptable plan within the time specified by the FDIC or fails in any material respect to im plem ent a com pliance plan, then the FDIC shall, by order, require the bank to correct the deficiency and may take further actions provided in section 39(e)(2)(B). Pursuant to section 39(e)(3), the FDIC may be required to take certain actions if the bank com m enced operations or experienced a change in control within the previous 24-m onth period, or the Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations bank experienced extraordinary growth (1) A statement of the safety and during the previous 18-m onth period. soundness deficiency or deficiencies that have been identified at the bank; (2) E x traord in a ry grow th. For (2) A description of any restrictions, purposes o f paragraph (d)(1) o f this prohibitions, or affirmative actions that section, extraordinary growth means an the FDIC proposes to impose or require; increase in assets of more than 7.5 (3) The proposed date when such percent during any quarter w ithin the 18-m onth period preceding the issuance restrictions or prohibitions would be effective or the proposed date for of a request for submission of a com pletion o f any required action; and com pliance plan, by a bank that is not (4) The date by w hich the bank w ell capitalized for purposes o f section subject to the order may file w ith the 38 of the FDI Act. For purposes of FDIC a written response to the notice. calculating an increase in assets, assets (c) R esp o n s e to n o tic e— (1) T im e f o r acquired through merger or acquisition r e sp o n se. A bank may file a written approved pursuant to the Bank Merger response to a notice of intent to issue an Act (12 U.S.C. 1828(c)) w ill be order w ithin the tim e period set by the excluded. (e) A m en d m en t o f c o m p lia n c e p la n . AFDIC. Such a response must be received by the FDIC within 14 calendar days bank that has filed an approved com pliance plan may, after prior written from the date of the notice unless the FDIC determ ines that a different period notice to and approval by the FDIC, is appropriate in light of the safety and amend the plan to reflect a change in soundness of the bank or other relevant circum stance. Until such tim e as a circum stances. proposed amendment has been (2) C on ten ts o f re s p o n s e . The approved, the bank shall im plem ent the response should include: com pliance plan as previously (i) An explanation why the action approved. proposed by the FDIC is not an appropriate exercise o f discretion under § 308.304 Issuance of orders to correct deficiencies and to take or refrain from section 3 9 ; taking other actions. (ii) Any recommended m odification (a) N o tic e o f in ten t to is su e o rd e r— .(1) o f the proposed order; and (iii) Any other relevant inform ation, In g en era l. The FDIC shall provide a mitigating circum stances, bank prior written notice of the FDIC’s documentation, or other evidence in intention to issue an order requiring the support o f the position of the bank bank to correct a safety and soundness regarding the proposed order. deficiency or to take or refrain from (d) A g en cy co n sid era tio n o f resp o n se. taking other actions pursuant to section After considering the response, the FDIC 39 of the FDI Act. The bank shall have may: such tim e to respond to a proposed (1) Issue the order as proposed or in order as provided by the FDIC under modified form; paragraph (c) of this section. (2) Determine not to issue the order (2) Im m e d ia te is s u a n c e o f fi n a l order. and so notify the bank; or If the FDIC finds it necessary in order (3) Seek additional information or to carry out the purposes of section 39 clarification o f the response from the of the FDI A ct, the FDIC may, without bank, or any other relevant source. providing the notice prescribed in (e) F a ilu re to f i le r e sp o n se. Failure by paragraph (a)(1) o f this section, issue an a bank to file with the FDIC, w ithin the order requiring a bank im m ediately to specified tim e period, a written take actions to correct a safety and response to a proposed order shall soundness deficiency or take or refrain constitute a waiver of the opportunity to from taking other actions pursuant to respond and shall constitute consent to section 39. A bank that is subject to the issuance of the order. such an immediately effective order (f) R eq u est f o r m o d ific a tio n o r may submit a written appeal of the r esc issio n o f order. Any bank that is order to the FDIC. Such an appeal must subject to an order under this subpart be received by the FDIC w ithin 14 may, upon a change in circum stances, calendar days of the issuance o f the request in writing that the FDIC order, unless the FDIC permits a longer reconsider the terms of the order, and period. The FDIC shall consider any may propose that the order be rescinded such appeal, if filed in a tim ely matter, or modified. Unless otherwise ordered within 60 days of receiving the appeal. by the FDIC, the order shall continue in During such period of review, the order place w hile such request is pending shall rem ain in effect unless the FDIC, before the FDIC. in its sole discretion, stays the effectiveness of the order. § 308.305 Enforcement of orders. (b) C on ten ts o f n o tice. A notice of (a) Ju d ic ia l re m ed ies. W henever a intent to issue an order shall include: bank fails to com ply with an order 35685 issued under section 39, the FDIC may seek enforcem ent of the order in the appropriate United States district court pursuant to section 8 (i)(l) of the FDI Act. (b) F a ilu re to co m p ly with ord er. Fursuant to section 8(i)(2)(A) of the FDI Act, the FDIC may assess a civil money penalty against any bank that violates or otherwise fails to com ply with any final order issued under section 39 and against any institution-affiliated party who participates in such violation or noncom pliance. (c) O th er en fo rc em en t action . In addition to the actions described in paragraphs (a) and (b) of this section, the FDIC may seek enforcem ent of the provisions o f section 39 or this part through any other judicial or administrative proceeding authorized by law. 5. A new part 364 is added to read as follows: PART 364— STANDARDS FOR SAFETY AND SOUNDNESS Sec. 3 64.100 Purpose. 364.101 Standards for safety and soundness. A uthority: 12 U.S.C. 1819(Ten th), 1 8 3 1 p 1. §364.100 Purpose. Section 39 of the Federa1 Deposit Insurance A ct requires the Federal Deposit Insurance Corporation to establish safety and soundness standards. Pursuant to section 39, this part establishes safety and soundness standards by guideline. §364.101 Standards for safety and soundness. The Interagency Guidelines Establishing Standards for Safety and Soundness prescribed pursuant to section 39 of the Federal Deposit Insurance Act (12 U.S.C. 1 8 3 1 p -l), as set forth as appendix A to this part apply to all insured state nonmember banks and to state-licensed insured branches of foreign banks, that are subject to the provisions of section 39 of the Federal Deposit Insurance Act. 6. A new appendix A is added to part 364 as set forth at the end of the common preamble: Appendix A to Part 364— Interagency Guidelines Establishing Standards for Safety and Soundness By order o f the Board o f Directors. Dated at W ashington, DC, this 21st day of M arch, 1995. 35686 Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations Federal Deposit Insurance Corporation. This part establishes procedures for subm ission and review of safety and soundness com pliance plans and for Deputy Executive Secretary. issuance and review of orders pursuant to section 39. Interagency Guidelines OFFICE OF THRIFT SUPERVISION Establishing Standards for Safety and Soundness pursuant to section 39 of the 12 CFR Chapter V FDI Act are set forth in A ppendix A to For the reasons set out in the this part. preamble, chapter V of title 12 of the (c) S c o p e. T h is part and the Code of Federal Regulations is amended Interagency G uidelines Establishing as follows: Standards for Safety and Soundness in 1. A new part 570 is added to read as Appendix A to this part im plem ent the provisions of section 39 o f the FDI Act follows: as they apply to savings associations. PART 570—SUBMISSION AND REVIEW (d) P reserv ation o f ex istin g au thority. OF SAFETY AND SOUNDNESS Neither section 39 of the FDI Act nor COMPLIANCE PLANS AND ISSUANCE this part in any way lim its the authority OF ORDERS TO CORRECT SAFETY of the O TS under any other provision of AND SOUNDNESS DEFICIENCIES law to take supervisory actions to address unsafe or unsound practices, Sec. violations o f law, unsafe or unsound 570.1 A uthority, purpose, scope and preservation o f existing authority. conditions, or other practices. Action 5 70.2 D eterm ination and notification o f under section 39 and this part may be failure to m eet safety and soundness taken independently of, in conjunction standards and request for com pliance with, or in addition to any other plan. enforcem ent action available to the 5 70.3 Filing o f safety and soundness OTS. “Robert E. Feldm an, com pliance plan. 5 70.4 Issuance o f orders to correct d eficiencies and to take or refrain from taking other actions. 5 70.5 Enforcem ent o f orders. Authority: 12 U .S.C . 1 8 3 1 p - l. § 570.1 Authority, purpose, scope and preservation of existing authority. (a) A u thority. This part and the Guidelines in Appendix A to this part are issued by the O TS pursuant to section 39 (section 39) of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1 8 3 1 p -l) as added by section 132 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) (Pub. L. 1 0 2 -2 4 2 , 105 Stat. 2236 (1991)), and as amended by section 956 of the Housing and Community Development Act o f 1992 (Pub. L. 1 0 2 550, 106 Stat. 3895 (1992)), and as amended by section 318 of the Community Development Banking Act of 1994 (Pub. L. 1 0 3 -3 2 5 ,1 0 8 Stat. 2160 (1994)). (b) P u rp ose. Section 39 of the FDI Act requires the O TS to establish safety and soundness standards. Pursuant to section 39, a savings association may be required to submit a com pliance plan if it is not in com pliance w ith a safety and soundness standard established by guideline under section 39 (a) or (b). An enforceable order under section 8 of the FDI Act may be issued if, after being notified that it is in violation of a safety and soundness standard prescribed under section 39, the savings association fails to submit an acceptable com pliance plan or fails in any material respect to im plem ent an accepted plan. § 570.2 Determination and notification of failure to meet safety and soundness standards and request for compliance plan. (a) D eterm in ation o f fa ilu r e to m e e t sa fety a n d s o u n d n e ss sta n d a rd . The O TS may, based upon an exam ination, inspection, or any other information that becom es available to the O TS, determine that a savings association has failed to satisfy the safety and soundness standards contained in the Interagency G uidelines Establishing Standards for Safety and Soundness as set forth in Appendix A to this part. (b) R eq u est f o r c o m p lia n c e p la n . If the O TS determ ines that a savings association has failed to m eet a safety and soundness standard pursuant to paragraph (a) o f this section, the O TS may request by letter or through a report of exam ination, the subm ission of a com pliance plan. The savings association shall be deemed to have notice of the request three days after m ailing or delivery of the letter or report of exam ination by the O TS. § 570.3 Filing of safety and soundness compliance plan. (a) S c h e d u le f o r filin g c o m p lia n c e p la n — (1) In g en e ra l. A savings association shall file a written safety and soundness com pliance plan with the O TS w ithin 30 days of receiving a request for a com pliance plan pursuant to § 570.2(b), unless the O TS notifies the savings association in writing that the plan is to be filed w ithin a different period. (2) O ther p la n s . If a savings association is obligated to file, or is currently operating under, a capital restoration plan submitted pursuant to section 38 of the FDI A ct (12 U.S.C. 1831o), a cease-and-desist order entered into pursuant to section 8 o f the FDI Act, a formal or inform al agreement, or a response to a report of exam ination, it may, w ith the perm ission of the O TS, submit a com pliance plan under this section as part o f that plan, order, agreement, or response, subject to the deadline provided in paragraph (a)(1) of this section. (b) C on ten ts o f p la n . T he com pliance plan shall include a description of the steps the savings association w ill take to correct the d eficiency and the time within w hich those steps w ill be taken. (c) R ev iew o f s a fe ty a n d so u n d n ess c o m p lia n c e p la n s . W ithin 30 days after receiving a safety and soundness com pliance plan under this subpart, the O TS shall provide written notice to the savings association o f whether the plan has been approved or seek additional information from the savings association regarding the plan. The O TS may extend the time w ithin w hich notice regarding approval of a plan w ill be provided. (d) F a ilu re to su b m it o r-im p lem en t a c o m p lia n c e p la n . If a savings association fails to submit an acceptable plan within the tim e specified by the O TS or fails in any m aterial respect to im plem ent a com pliance plan, then the O TS shall, by order, require the savings association to correct the deficiency and may take further actions provided in section 39(e)(2)(B) o f the FDI Act. Pursuant to section 39(e)(3), the OTS may be required to take certain actions if the savings association com menced operations or experienced a change in control w ithin the previous 24-month period, or the savings association experienced extraordinary growth during the previous 18-m onth period. (e) A m en d m en t o f c o m p lia n c e p la n . A savings association that has filed an approved com pliance plan may, after prior written notice to and approval by the O TS, amend the plan to reflect a change in circum stance. U ntil such time as a proposed amendment has been approved, the savings association shall im plem ent the com pliance plan as previously approved. § 570.4 Issuance of orders to correct deficiencies and to take or refrain from taking other actions. (a) N o tice o f in ten t to is s u e o r d e r —(1) In g en era l. The O TS shall provide a savings association prior written notice of the O T S ’s intention to issue an order requiring the savings association to correct a safety and soundness deficiency or to take or refrain from taking other actions pursuant to section Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Rules and Regulations 39 of the FDI Act. The savings association shall have such time to respond to a proposed order as provided by the O TS under paragraph (c) of this section. (2) I m m e d ia te is su a n c e o f fi n a l order. If the O TS finds it necessary in order to carry out the purposes of section 39 of the FDI A ct, the O TS may, without providing the notice prescribed in paragraph (a)(1) o f this section, issue an order requiring a savings association im m ediately to take actions to correct a safety and soundness deficiency or to take or refrain from taking other actions pursuant to section 39. A savings association that is subject to such an im m ediately effective order may submit a written appeal o f the order to the OTS. Such an appeal must be received by the O TS w ithin 14 calendar days o f the issuance of the order, unless the OTS permits a longer period. The O TS shall consider any such appeal, if filed in a tim ely m anner, w ithin 60 days of receiving the appeal. During such period of review , the order shall remain in effect unless the O TS, in its sole discretion, stays the effectiveness o f the order. (b) C on ten ts o f n o tice. A notice of intent to issue an order shall include: (1) A statement of the safety and soundness deficiency or deficiencies that have been identified at the savings association; (2) A description of any restrictions, prohibitions, or affirmative actions that the O TS proposes to impose or require; (3) The proposed date when such restrictions or prohibitions would be effective or the proposed date for com pletion o f any required action; and (4) The date by w hich the savings association subject to the order may file with the O TS a written response to the notice. (c) R e s p o n s e to n o tice— (1) T im e f o r resp o n se. A savings association may file 35687 a written response to a notice of intent order, and may propose that the order to issue an order w ithin the tim e period be rescinded or modified. Unless set by the O TS. Such a response must otherwise ordered by the O TS, the order be received by the O TS within 14 shall continue in place while such calendar days from the date of the request is pending before the OTS. notice unless the O TS determ ines that a different period is appropriate in light of § 570.5 Enforcement of orders. the safety and soundness of the savings (a) fu d ic ia l r e m e d ie s . W henever a association or other relevant savings association fails to com ply with circum stances. an order issued under section 39 of the (2) C on ten ts o f resp o n se. The FDI Act, the O TS may seek enforcem ent response should include: of the order in the appropriate United (i) An explanation why the action States district court pursuant to section proposed by the O TS is not an 8 (i)(l) of the FDI Act. appropriate exercise of discretion under (b) A d m in istra tiv e re m ed ies. Pursuant section 39 of the FDI Act; to section 8(i)(2)(A) of the FDI A ct, the (ii) Any recomm ended m odification O TS may assess a civil money penalty o f the proposed order; and against any savings association that (iii) Any other relevant information, violates or otherwise fails to comply mitigating circum stances, with any final order issued under documentation, or other evidence in support o f the position o f the savings section 39 and against any savings association regarding the proposed association-affiliated party who participates in such violation or order. (d) O TS c o n sid era tio n o f r e sp o n se. noncom pliance. After considering the response, the O TS (c) O ther en fo r c e m e n t action . In may: addition to the actions described in (1) Issue the order as proposed or in paragraphs (a) and (b) of this section, modified form; the O TS may seek enforcem ent o f the (2) Determine not to issue the order provisions o f section 39 of the FDI Act and so notify the savings association; or or this part through any other judicial or (3) Seek additional information or administrative proceeding authorized by clarification o f the response from the law. savings association, or any other 2. A new appendix A is added to part relevant source. (e) F a ilu re to f i l e resp o n se. Failure by 5 7 0 as set forth at the end of the a savings association to file w ith the common preamble: O TS, w ithin the specified tim e period, Appendix A to Part 570—Interagency a written response to a proposed order Guidelines Establishing Standards for shall constitute a waiver of the Safety and Soundness opportunity to respond and shall constitute consent to the issuance o f the Dated: May 25, 1995. order. By the O ffice o f T hrift Supervision. (f) R eq u est f o r m o d ific a tio n o r Jonathan L. Fiechter, resc issio n o f o rd er. Any savings association that is subject to an order Acting Director. under this subpart may, upon a change (FR Doc. 9 5 -1 6 5 6 3 Filed 7 - 7 - 9 5 ; 8:45 am] in circum stances, request in writing that BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; the O TS reconsider the terms of the 6720-01-P 35688 Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Proposed Rules DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 30 [Docket No. 95-15] FEDERAL RESERVE SYSTEM 12 CFR Part 208 [Docket No. R-0766] FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 364 RIN 3064-AB 13 DEPARTMENT OF THE TREASURY Office of Thrift Supervision 12 CFR Part 570 [No. 95-114] RIN 1550-AA54 Interagency Guidelines Establishing Standards for Safety and Soundness AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System ; Federal Deposit Insurance Corporation; and Office o f Thrift Supervision, Treasury. ACTION: Proposed guidelines. SUMMARY: The Office o f the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board of Governors), the Federal Deposit Insurance Corporation (FDIC), and the Office of T h rift Supervision (OTS) (collectively, the agencies) are proposing asset quality and earnings standards to be added to the Interagency G uidelines Establishing Standards for Safety and Soundness (Guidelines) adopted pursuant to section 39 of the Federal Deposit Insurance Act (FDI Act) and appearing as an appendix to each of the agencies’ standard for safety and soundness final rule published elsew here in this separate part of the Federal Register. The agencies may require an insured depository institution to file a com pliance plan for failure to meet these asset quality and earnings standards when adopted in final form. DATES: Comments must be submitted by August 24, 1995. ADDRESSES: Interested parties are invited to submit written com ments to any or all of the agencies. A ll comments w ill be shared among the agencies. 72.8-5854), Division of Banking OCC: Com m unications D ivision, 250 Supervision and Regulation; Scott G E Street, SW ., W ashington, DC 20219, Alvarez, A ssociate General Counsel attention: Docket No. 9 5 -1 5 . Comments (202/ 452-3583), Gregory A. Baer, w ill be available for public inspection Managing Senior Counsel (202/ 452and photocopying at the same location 3236), Legal Division, Board of on business days betw een 9 a.m. and 5 Governors of the Federal Reserve p.m. System. For the hearing im paired only, B o a r d o f G ov ern ors: Comments, Telecom m unication Device for the Deaf w hich should refer to Docket No. R (TDD), Dorothea Thom pson (202/45207 6 6 , may be m ailed to Mr. W illiam 3544), Board of Governors o f the Federal W iles, Secretary, Board o f Governors of Reserve System , 20th and C Streets, the Federal Reserve System , 20th Street NW., W ashington, DC 2 0551. and Constitution Avenue, NW., FDIC: Robert W. W alsh, Manager, W ashington, DC 20551. Comments Planning and Program Development addressed to Mr. W iles may also be (202/ 898-6911) or M ichael D. Jenkins, delivered to the Board’s m ail room Exam ination Specialist (202/ 898-6896), between 8:45 a.m. and 5:15 p.m., and to Division o f Supervision; Lisa M. the security control room outside of Stanley, Senior Counsel (202/898those hours. Both the m ail room and 7494), Legal Division, Federal Deposit control room are accessible from the Insurance Corporation, 550 17th Street, courtyard entrance on 20th Street NW., W ashington, DC 20429. betw een Constitution Avenue and C O T S : W illiam M agrini, Project Street, NW. Comments may be Manager (202/ 906-5744), Cathern inspected in room M P -5 0 0 between 9 Sm ith, Regional Coordinator (202/906a.m. and 5 p.m., except as provided in 6614), Supervision; Kevin Corcoran, § 261.8 of the Board’s Rules Regarding Assistant C hief Counsel (202/ 906-6962), A vailability o f Information, 12 CFR Teri M. V alocchi, Counsel (Banking and 261.8. Finance) (202/ 906-7299), C hief FDIC: Robert E. Feldm an, Acting Executive Secretary, Attention: Room F - C ounsel’s O ffice, O ffice of Thrift Supervision, 1700 G Street, NW., 402, Federal Deposit Insurance W ashington, DC 20552. Corporation, 550 17th Street, NW., W ashington, DC 20429. Comments may SUPPLEMENTARY INFORMATION: be hand-delivered to room F - 4 0 0 , 1776' I. Background F Street, NW., W ashington, DC, on A. S tatu tory F ra m ew o rk business days betw een 8:30 a.m. and 5 p.m. [FAX number (202) 898—3838]; Section 132 of the Federal Deposit Internet E-mail com m ents @fdic.gov. Insurance Corporation Improvement Act Comments w ill be available for o f 1991 (FDICIA), added a new section inspection and photocopying in room 39 to the FDI A ct w hich required each 7118, 550 17th Street, NW., W ashington, Federal banking agency to establish by DC 20429, betw een 9 a.m. and 4:30 p.m. regulation certain safety and soundness on business days. standards for the insured depository O TS: Send com m ents to Chief, institutions and depository institution Dissem ination Branch Records holding com panies for w hich it was the Management and Inform ation Policy, primary Federal regulator. As enacted in Office of Thrift Supervision, 1700 G FDICIA, section 39(b) o f the FDI Act Street, NW., W ashington, DC 20552, required the agencies to establish Attention Docket No. 9 5 -1 1 4 . These standards by regulation specifying a subm issions may be hand delivered to maximum ratio of classified assets to 1700 G Street, NW., from 9 a.m. to 5 capital and m inimum earnings p.m. on business days; they may be sent sufficient to absorb losses without by facsim ile transm ission to FA X im pairing capital. number (202) 9 0 6 -7 7 5 5 . Comments will On Septem ber 23, 1994 the Riegle be available for inspection at 1700 G Community Development and Street, NW., from 1 p.m. until 4 p.m. on Regulatory Improvement A ct of 1994 business days. (CDRI Act) was enacted. Section 318(a) of the CDRI Act elim inated the FOR FURTHER INFORMATION CONTACT: requirem ent that standards prescribed OCC: Emily R. M cNaughton, National under section 39 apply to depository Bank Exam iner (202/874—5170), Office institution holding com panies and of the C hief National Bank Exam iner; replaced the requirem ent that the David Thede, Senior Attorney, (202/ agencies establish quantitative asset 8 7 4 -5 2 1 0 ) Securities and Corporate quality and earnings standards with a Practices Division, O ffice of the requirem ent that the agencies establish Comptroller o f the Currency, 250 E standards, by regulation o r by guideline, Street, SW ., W ashington, DC 20219. relating to asset quality and earnings B o a r d o f G ov ern ors: David Wright, that the agencies determ ine to be Supervisory Financial Analyst (202/ Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Proposed Rules appropriate. Pursuant to section 318 of the CDRI Act, these amendments have the same effective date as section 39 of the FDI Act, as provided in section 132(c) o f FDICIA. B. A g e n c ie s ’ P ro p o sa ls The agencies published a joint advance notice of proposed rulemaking in the Federal Register. 57 FR 31336 (July 15, 1992). The agencies received over 400 com ment letters in response to the ANPR, with some letters submitted to more than one agency. The agencies’ proposal requested comment on all aspects of the safety and soundness standards required to be prescribed pursuant to section 39 of the FDI Act, as enacted in FDICIA. Commenters strongly recommended that the agencies adopt general rather than specific standards. The agencies published a joint notice of proposed rulemaking in the Federal Register on November 18, 1993, 59 FR 60802. The agencies proposed quantitative asset quality and earnings standards in accordance with the statutory mandate set forth in FDICIA. C. F in a l R u le a n d In terag en cy G u id elin es E stablish in g S ta n d a rd s f o r S a fe ty a n d S ou n d n ess Each o f the agencies has adopted a final rule (Final Rule) and Interagency Guidelines Establishing Standards for Safety and Soundness (Guidelines). The agencies’ Final Rule establishes deadlines for subm ission and review of safety and soundness com pliance plans w hich may be required for failure to meet one or more of the safety and soundness standards adopted in the Guidelines. The agencies’ Final Rule and Guidelines are published elsewhere in this separate part of the Federal Register. The Guidelines w ill appear as appendices to each of the agencies’ Final R u le.1 If adopted in final form, the agencies intend to incorporate these asset quality and earnings standards into the Guidelines. Thus, if adopted in final form, the agencies may require subm ission o f a com pliance plan for failure to meet the asset quality and earnings standards. II. Request for Comment on Proposed Asset Q uality and Earnings Standards As enacted in FDICIA, section 39(b) of the FDI Act required the agencies to establish standards specifying a 1F or the OCC, these G uidelines appear as A ppendix A to Part 30; for the Board o f Governors, these G uidelin es appear as A pp en dix D to Part 208; for the FDIC, th ese G uidelines appear as A ppendix A to Part 3 6 4 ; and for the O T S, th ese G uidelines appear as A pp endix A to Part 570. m axim um ratio o f classified assets to capital and m inimum earnings sufficient to absorb losses without im pairing capital. As amended by the CDRI A ct, section 39(b) no longer requires the agencies to establish quantitative standards. Instead, the agencies are required to establish such standards relating to asset quality and earnings that the agencies determine to be appropriate. Although commenters generally found the agencies’ proposed quantitative standards acceptable, some com m enters criticized the proposed standards as inflexible and sim plistic. W hile the agencies believe that the standards as proposed are acceptable, they also believe that more com prehensive standards in these areas, as allow ed under section 39(b), as amended, would be more useful and appropriate. Therefore, the agencies are proposing new standards for asset quality and earnings that emphasize monitoring, reporting and preventive or corrective action appropriate to the size of the institution and the nature and scope of its activities. These standards would be adopted by guideline. The agencies believe the proposed standards are more likely to aid in the id en tification and resolution of emerging problems than setting m inim um or maximum ratios. The agencies intend to continue to perform independent analyses that may include asset quality and earnings ratio analysis and w ill focus on an institution’s oversight, reporting and corrective actions in these areas. The agencies believe that well-managed institutions should not find it necessary to modify their operations to com ply with the proposed guidelines. A. S ta n d a r d s R elatin g to A sset Q uality The agencies are proposing asset quality standards requiring monitoring and reporting systems to identify emerging problems and corrective actions to resolve them. The standards provide for institutions to identify problem assets and estimate inherent losses. Institutions would also be required to: (1) Consider the size and potential risks of material concentrations of credit risk, (2) com pare the level of problem assets to the level of capital and establish reserves sufficient to absorb anticipated losses on those and other assets, (3) take appropriate corrective action to resolve problem assets; and (4) provide periodic asset quality reports to the board of directors to assess the level of asset risk. The com plexity and sophistication of an institu tion’s monitoring, reporting system s and corrective actions should 35689 be com mensurate w ith the size, nature and scope of the institution’s operations. The agencies believe that the proposed asset quality standards are consistent w ith the practices of wellmanaged institutions and represent the long-standing and established expectations of the agencies. B. S ta n d a r d s R elatin g to E arnings The agencies are proposing earnings standards requiring monitoring and reporting systems sim ilar to the standards for asset quality. The standards are intended to ensure prompt rem edial actions to enhance early identification and resolution of problems. The standards require institutions to compare their earnings trends, relative to equity, assets and other com m on benchm arks with their historical experience and with their peers. The standards also provide that institutions should: (1) evaluate the adequacy of earnings given the institu tion’s size, and com plexity, and the risk profile of the institution’s assets and operations, (2) assess the source, volatility and sustainability of earnings (3) evaluate 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 asset quality and the institution’s rate of growth, and (5) provide periodic reports with enough information for management and the board of directors to assess earnings performance. As w ith the asset quality standards, the institution’s monitoring, reporting systems and corrective actions should be com m ensurate with the size, nature and scope o f the institution’s operations. Once again, the agencies believe that these earnings standards are consistent with the practices of wellmanaged institutions and represent the long-standing and established expectations of the agencies. The agencies propose to add to the Interagency Guidelines Establishing Standards for Safety and Soundness standards relating to asset quality and earnings as set forth below. The agencies request comment on all aspects o f the proposed standards. Regulatory Flexibility Act Pursuant to Section 605(b) of the Regulatory Flexibility Act, the agencies certify that the proposal w ill not have a significant econom ic impact on a substantial number of small entities. A ccordingly, a regulatory flexibility analysis is not required. This proposal adds asset quality and earnings standards to the Interagency Guidelines 35690 Federal Register / Vol. 60, No. 131 / Monday, July 10, i9 9 5 / Proposed Rules Establishing Standards for Safety and Soundness. Executive Order 12866 T he OCC and the O TS have determ ined that this proposal is not a “ significant regulatory action” for purposes o f Executive Order 12866. The proposed new paragraphs G and H of Section II of the Interagency G uidelines Establishing Standards for Safety and Soundness are as follows: Asset Quality and Earnings Standards G. A sset Quality. An insured depository institution should establish and m aintain a system to identify problem assets and prevent deterioration in those assets in a manner com m ensurate with its size and the nature and scope of its operations. The institution should: 1. Conduct periodic asset quality reviews to identify problem assets and estim ate the inherent losses in those assets; 2. Consider the size and potential risks of material asset concentrations; 3. Compare problem asset totals to capital and establish reserves that are sufficient to absorb estimated losses; 4. Take appropriate corrective action to resolve problem assets; 5. Provide periodic asset quality reports w ith adequate information for management and the board o f directors to assess the level of asset quality risk. H. E arnings. An insured depository institution should establish and m aintain a system to evaluate and m onitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves in a m anner com mensurate w ith its size and the nature and scope of its operations. T he institution should: I . Compare recent earnings trends relative to equity, assets or other com m only used benchm arks to the institu tion’s historical results and those of its peers; 2. Evaluate the adequacy of earnings given the size, com plexity and risk profile of the institution’s assets and operations; 3. Assess the source, volatility and sustainability of earnings; 4. Evaluate the effect of nonrecurring or extraordinary income or expense; 5. Take steps to ensure that earnings are sufficient to m aintain adequate capital and reserves after considering the institu tion’s asset quality and growth rate; and 6. Provide periodic earnings reports w ith adequate information for management and the board of directors to assess earnings performance. Dated: A pril 1 3 ,1 9 9 5 . Eugene A . Ludwig, Comptroller o f the Currency. By O rder o f the Board of Governors o f the Federal R eserve System , June 6 ,1 9 9 5 . W illiam W . W iles, Secretary o f the Board. By order o f the Board o f Directors. Dated at W ashington, D.C., this 21st day of M arch, 1995. Federal D eposit Insurance Corporation Robert E. Feldm an, Deputy Executive Secretary. Dated: M ay 2 5 ,1 9 9 5 . By the O ffice o f T hrift Supervision. Jonathan L. Fiechter, Acting Director. [FR Doc. 9 5 - 1 6 5 6 4 F iled 7 - 7 - 9 5 ; 8:45 am] BILLING CODES: 4 8 1 0 -3 3 -P ; 6 2 1 0 -0 1 -P ; 6 7 1 4 -0 1 -P ; 6 7 2 0 -0 1 -P
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