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FEDERAL RESERVE BANK OF DALLAS
Station K, Dallas, Texas 7 5 2 2 2

Circular No. 84-3
January 13, 1984

TO:

The financial institution addressed in the Eleventh
Federal Reserve District

ATTENTION:

Chief Executive Officer

SUBJECT:

Policy statement regarding the examination treatment
of international loans

SUMMARY:

The
Federal Deposit Insurance Corporation, the
Comptroller of the Currency, and Federal Reserve
Board have issued a joint policy statement on the
examination treatment of international loans.
The
statement describes both changes in examination
procedures and plans for special reserves.

ATTACHMENTS:

Joint press release and interagency statement

MORE INFORMATION:

Legal Department, Extension 6171
State
member
banks
and
William C. Reddick, Jr. or
Extension 6274

ADDITIONAL COPIES:

edge corporations Marvin
C.
McCoy,

Public Affairs Department, Extension 6289

Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-442-7140
(intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above.

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

joint News Release

Comptroller of the Currency________
Federal Deposit Insurance Corporation
Federal Reserve Board

For immediate release

December 15, 1983

A policy statement on the examination treatment of international loans
was issued today by the Federal Deposit Insurance Corporation, the Comptroller
of the Currency and the Federal Reserve Board.
The agencies are in the process of implementing the International Lending
Supervision Act of 1983, enacted last November 30, which sets forth a number of
steps that regulators and banks must take to strengthen international lending
procedures.
The statement is being issued at this time since some provisions of the
Act may have an effect on year-end reports that banks may have to prepare before
the final regulations are in place.
A copy of the statement is attached.

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FEDERAL DEPOSIT INSURANCE CORPORATION
OFFICE OF THE COMPTROLLER OF THE CURRENCY
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

December 15, 1983

INTERAGENCY STATEMENT ON EXAMINATION TREATMENT
OF INTERNATIONAL LOANS

The International Lending Supervision Act of 1983 was enacted on
November 30, 1983. This law sets forth a number of steps that the regulators and
the banks must take to strengthen international lending procedures. The agencies
are in the process of implementing the requirements of the statute, including, in
appropriate circumstances, the drafting of regulations. At this time, however, the
agencies wish to bring two matters to your attention since they may have an effect
on year-end reports that may need to be prepared before final regulations are in
place: first, a description of changes that are being made by the agencies in the
examination categories for identifying credits that have been adversely affected by
transfer risk problems; and, secondly, the agencies' plans for establishment of
special reserves for assets whose value has been impaired by, among other things,
protracted debt service problems.

Changes in Examination Procedures
The agencies have agreed to implement, with certain refinements, plans
described in April of this year to introduce new uniform examination categories for
identifying credits that have been adversely affected by transfer risk problems.
The changes include new definitions for transfer risk classifications which are

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provided in an Attachment. In addition, a new category called "Other Transfer
Risk Problems," will be used to highlight credits which do not warrant
classification. It will include all or a portion of credits to a country that is not
complying with its external debt service obligations, but is taking positive steps to
restore debt service through economic adjustment measures, generally as part of
an IMF program. It will also be used to recognize situations in which there has
been an improvement in recent debt service performance such that the country
credits no longer warrant transfer risk classification, but still deserve special
attention by bank management. Similarly, prompt recognition will be given to
further improvement in debt service performance by removing country credits
from this category.
As has been the practice, credits which have been classified due to
transfer risk problems will be combined with commercial loan classifications used
by the agencies in the evaluation of a bank's asset quality and other measures of
financial soundness. Credits which have been placed in the "Other Transfer Risk
Problems" category are not regarded as classified assets. Rather, exposures in
this category will be considered by examiners as a judgmental factor in their
general assessment of a bank’s asset quality and the adequacy of its reserves and
capital. This is similar to consideration given to such factors as concentrations in
the portfolio, the level and composition of nonaccruing or reduced rate assets, and
management's demonstrated ability to administer and collect problem credits.
In implementing the provisions of the International Lending Supervision
Act of 1983 the agencies recognize the importance to the stability of both the
international banking system and world economy of providing continued
international flows of bank credit in the periods ahead, especially to countries
implementing IMF-approved economic adjustment programs designed to correct the
countries' economic difficulties in an orderly manner. Such new flows under

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appropriate circumstances may strengthen the functioning of the adjustment
process, help to improve the quality of outstanding credit, and thus may be
consistent with the objectives of the program of improved supervision of
international lending that is outlined in this statement.

Reserving Requirements
The agencies believe responsibility for recognizing and accounting for
deterioration in the value of a bank's assets, including a deterioration due to
transfer risk problems, rests, in the first instance, with the management of a bank
and its auditors. The banking agencies also have a responsibility to assure that
banks are following reasonable and prudent policies in this regard and that
necessary adjustments are being made, in a consistent fashion. To assure that this
is done, the banking agencies, pursuant to the International Lending Supervision
Act, will require U. S. banks to establish "Allocated Transfer Risk Reserves"
("ATRR") against certain assets whose value has been found by the agencies to
have been significantly impaired by protracted transfer risk problems. It will be
proposed that the ATRR be applied to those international assets that have been
classified for transfer risk reasons as "Value Impaired" as a result of regular
reviews of country credits in accordance with examination procedures established
jointly by the agencies. The minimum ATRR amounts will be determined jointly by
the agencies on a regular basis. As is customary, this examination information will
be conveyed directly to affected U. S. banks by their primary Federal supervisor.
In accordance with the International Lending Supervision Act, the
agencies are publishing for comment a proposed regulation on the establishment of
the ATRR. It is anticipated that a final regulation will be adopted in January 198^.
In these circumstances, banks are encouraged to give consideration to the

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current plans and judgments of the agencies in preparing financial statements for
the period ending December 31, 1983. The reserve must be established by a charge
against income and will not be considered as capital by the agencies. No ATRR
provisions will be required if the bank has already written down the credits or
charged off the requisite amounts. While the agencies do not expect these new
reserves to have a material impact on aggregate 1983 bank earnings, the effect
could vary from bank to bank.
In implementing the reserving provisions, the agencies wish to
emphasize that the responsibility of bank managements and their auditors to
recognize and provide adequately for any significant deterioration in the value of
their assets, including international loans, is in no way lessened. In this regard,
the agencies encourage banks to continue to bolster general reserve and capital
positions against the risks involved in international lending.

DESIGNATIONS APPLIED TO CREDITS ADVERSELY AFFECTED BY TRANSFER RISK

CLASSIFICATION CATEGORIES

I.

Substandard
This category applies when:
1.

A country is not complying with its external service obligations, as
evidenced by arrearages, forced restructuring, or rollovers; and

2.

3.

II.

The country is not in the process of adopting an IMF or other suitable
economic adjustment program, or is not adequately adhering to such a
program; or
The country and its bank creditors have not negotiated a viable
rescheduling and are unlikely to do so in the near future.

Value Impaired
This category applies when:
1.

A country has protracted arrearages, as indicated by more than one of
the following:
o
o

the country has not complied with IMF programs (and there is no
immediate prospect for compliance);

o

the country has not

o

III.

the country has not

fully paid its interest for six months;

the country shows no definite prospects for an orderly restoration
of debt service in the near future.

met rescheduling terms for over one year;

Loss
This category applies when the loan is considered uncollectible and of such
little value that its continuance as a bankable asset is not warranted.
An example would be an outright statement by a country which repudiates
obligations to banks, the IMF, or other lenders.

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NON-CLASSIFIED CREDITS WARRANTING ATTENTION

I.

Other Transfer Risk Problems
This category applies when:
1.

A country is not complying with its external debt service obligations, as
evidenced by arrearages, forced restructuring, or rollovers;
However, the country is taking positive actions to restore debt service
through economic adjustment measures, generally as part of an IMF
program.

2.

A country is meetings its debt obligations, but non-compliance appears
imminent.

3.

A country has been classified previously, but recent debt service
performance indicates classification no longer is warranted. For
instance, the country is complying with the terms of IMF and
rescheduling programs. However, sustained resumption of orderly debt
service needs to be demonstrated.

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