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Federal R eserve Bank OF DALLAS W IL L IA M H. W ALLACE May 6, 1987 DALLAS, TEXAS 75222 FIRST V IC E PR ES ID EN T AND C H IE F O PER ATING O FFIC ER Circular 87-33 TO: The Chief Executive Officer of all member banks, bank holding companies and others concerned in the Eleventh Federal Reserve District SUBJECT Policy statement on the responsibility of bank holding companies to act as sources of financial and managerial strength to their subsidiary banks DETAILS The Board of Governors of the Federal Reserve System has adopted a policy statement on the responsibility of bank holding companies to act as sources of financial and managerial strength to their subsidiary banks. This statement reiterates in detail a general policy which has been expressed on numerous occasions in accordance with authority that is provided under the Bank Holding Company Act and the enforcement provisions of the Federal Deposit Insurance Act. The policy statement is effective immediately. However, the Board of Governors will accept comment, for review by the Board, through July 1, 1987. Comments should be addressed to Mr. William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. All correspondence should refer to Docket No. R-0602 and must be received by July 1, 1987. ATTACHMENTS The material as published in the Federal Register is attached. MORE INFORMATION For further information, please contact Robert D. Hankins at (214) 651-6120. Sincerely yours, For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800) 527-9200 (interstate). This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL RESERVE SYSTEM 12 CFR Part 261 (Docket No. R-0602) POLICY STATEMENT ON THE RESPONSIBILITY OF BANK HOLDING COMPANIES TO ACT AS SOURCES OF STRENGTH TO THEIR SUBSIDIARY BANKS AGENCY: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM. ACTION: POLICY STATEMENT SUMMARY: Pursuant companies under Deposit to its authority the Insurance Supervision Act, Bank Act, Holding and holding their companies banks to provide should by Act, bank the International the Board of Governors subsidiary resources regulate Company the System issues a reaffirmation of bank to its act as standing holding Federal Lending of the Federal Reserve long-standing policy sources ready to of strength use that to available adequate capital funds to subsidiary banks during periods of financial stress or adversity. EFFECTIVE DATE: April 24, 1987. Comments must be received by July 1, 1987. ADDRESS: policy include the Interested parties may submit comments concerning the statement reference Secretary, System, 20th for the to Docket No. R-0602 and should be mailed to Board and of Board's Governors Constitution 20551 or delivered to the guard review. of Avenue, station the N.W., Comments Federal should Reserve Washington, D.C. in the Eccles Building - 2 Courtyard on 20th and C Street, Street N.W.) N.W. (between Constitution Comments may be inspected in Room B-1122 between 8:45 a.m. and 5:15 p.m. weekdays, except section 261.6(a) Information. (12 C.F.R. Director, Regulation, Associate (202) (202) Stephen C. Schemering, Deputy 452-2433? or Banking Richard Division of 452-2594? or Dorothea Thompson (202) or for 452-3544, situations where notwithstanding bank holding policy to a has been In order to and impaired o n l y . Earnestine Hill Board of Governors of the 20551. has become threatened of Deputy Supervision ("TDD"), Board availability company. subsidiary companies, bank the that bank The and Spillenkothen, the hearing Federal Reserve System, Washington D.C. INFORMATION: Supervision Banking Telecommunications Device for the Deaf SUPPLEMENTAL in §261.6(a)). Division of Director, Regulation, as provided of the Board's Rules Regarding Availability of FOR FURTHER INFORMATION CONTACT: Associate Avenue with resources assure aware to that of failure its the parent Board's holding companies serve as sources of strength banks the Board is fully understood by bank holding believes it appropriate to issue a general policy statement reaffirming and articulating these principles, and failing confirming situations. the This Supreme First that court Lincolnwood the long-standing in its The Board applies policy decision C o r p . , 439 incorporated explicitly S 2 2 5 .4(a )(1). policy U.S. in 234 has in been Board bank recognized of Governors (1978), and has by v. been in the Board's Regulation Y, 12 C.F.R. invites interested parties to comment - 3 on this policy and intends to review the Policy Statement in light of such comments. POLICY STATEMENT ON THE RESPONSIBILITY OF BANK HOLDING COMPANIES TO ACT AS SOURCES OF STRENGTH TO THEIR SUBSIDIARY BANKS A the Federal holding as fundamental Reserve's companies sources subsidiary and of long-standing supervision is that bank financial banks. It and is and regulation holding companies managerial the principle underlying policy of should strength of the bank to Board their that serving as a source of strength to its subsidiary banks, holding to company should provide during adequate periods of stand capital ready to use available funds financial to stress its or and maintain the financial flexibility and capital-raising to obtain additional resources for assisting its in a bank resources subsidiary adversity serve banks should capacity subsidiary banks in a manner consistent with the provisions of this policy statement. Since the enactment of the Bank Holding Company Act 1956, the Board has formally stated on numerous occasions that a bank holding company should act managerial Court strength recognized in in to its the as a source of financial subsidiary banks. 1978 First As Lincolnwood and the Supreme decision, - 4 Congress has expressly endorsed that a holding company must the Board's institutions."!./ pronouncements over the decision, principle years has Regulation Y since 1983. view serve as a "source of strength to subsidiary financial this long-standing and In addition the been 1978 Supreme incorporated In particular, to frequent Court explicitly in Section 225.4(a)(1) of Regulation Y provides that: A bank holding company shall serve as a source of financial and managerial strength to its subsidiary banks and shall not conduct its operations in an unsafe or unsound manner. The provided based bank level important by a bank upon the holding that institution public holding fact that, that can in in acquiring the critical institutions reflects part, from issue federally the support a commercial bank, a the ownership of insured deposits The existence of the an and has federal important governmental concerns regarding fiduciary as in certain benefits at the corporate access to Federal Reserve credit. "safety net" interest company to its subsidiary banks is company derives result, policy responsibilities custodians of depositors' of depository funds and their strategic role within our economy as operators of the payments 2./ Board of Governors v. First Lincolnwood 234, 252 (1978), citing S. Rep. No. 95-323, Sess. 11 (1977). C o r p . , 439 U.S. 95th Cong., 1st - 5 system and impartial providers of credit. advantages flowing bank holding from companies the ownership Thus, of a have an obligation in seeking the commercial bank, to serve as sources of strength and support to their subsidiary banks. An important determinant of a strength is the adequacy of its capital a buffer in for times considered adequate individual banking promotes the safety expansion element insurance For fund these capital limits to the to be critical organizations of and to banking and growing the exposure of losses reasons, of in the banking of a strong cushion also provides to absorb losses reasonable the institutions. organizations financial Capital confidence as an essential deposit base. to maintain A strong capital federal banking helps supports organizations the strain, funds, and economy. banking financial of depositors' system, individual bank's experienced by Board has long to the soundness of the safety and stability of the banking and financial system. Accordingly, holding company subsidiary holding bank it should is not the withhold in a weakened company is in bank under or a position bank holding company's failure subsidiary Board's these policy financial failing that support condition to provide the to assist a from a when the support. a troubled or circumstances bank A failing would generally be viewed as an unsafe and unsound banking practice or a violation of Regulation prepared to Y take or both. Where supervisory necessary, action to the Board require such is - 6 assistance. unusual the Finally, and the Board recognizes that there may be limited circumstances where flexible application of principles necessary, set the and forth Board in this may policy from statement time to time might be identify situations that may justify exceptions to the policy. This principles noted, in statement of supervision it builds banking Reserve is laws both, policies to bank, action will particularly issuance as and long-standing practices. subsidiary bank(s), generally such a be A already a of resources holding company on failure will cease-and-desist authorized bank holding including considered a violation if appropriate to the bank of and to provide appropriate assistance Consequently, as its obligation to serve as a source banking practice or available rather, new Federal its unsound regulation; regulations of failing establish and to meet or to reflected co mp a n y ’s failure unwillingness and meant on public policy considerations as supervisory strength not under a banking a troubled an unsafe Regulation and Y, or are on hand or are reasonable generally order to an result or other law and in basis. the enforcement as deemed appropriate under the circumstances. (signed) Barbara Lowrey Barbara R. Lowrey Associate Secretary of the Board