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Federal Reserve Bank
OF DALLAS
ROBERT
D. M c T E E R , J R .
P R E S ID E N T
AND
C H IE F E X E C U T IV E
O F F IC E R
August 12, 1991
d a lla s ,te x a s
75222
Noti c e 91-72
TO:
The Chief Executive Officer of each
m e m b e r bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Request for Additional Comment on Policy on Securities
Activities; Withdrawal of Proposal Related to Nonaccrual Loans
DETAILS
The Federal Financial Institutions Examination Council (FFIEC) has
requested additional comments on a proposed supervisory policy statement on
securities activities.
The proposed Supervisory Policy Statement on Selection
of Securities Dealers, Securities Portfolio Policies and Strategies and
Unsuitable Investment Practices, and Stripped M o r t g a g e - B a n k Securities,
Certain CMO Tranches, Residuals, and Zero-Coupon Bonds was issued for public
comment on January 3, 1991 (our Notice 91-05).
As a result of comments
received, the FFIEC is seeking additional comments on two aspects of Section
III of the proposed policy:
•
whet h e r the proposed quantitative criteria for
d e t ermining high-risk mortgage securities e f f e c t i v e
ly d i stinguishes those products from all other
m o rtgage derivative products; and,
•
the impact of the proposed reporting treatment
required for high-risk mortgage securities.
The FFIEC must receive comments by S e p t ember 1, 1991.
Comments
should
be addressed to Robert J.
Lawrence, Executive Secretary,
Federal
Financial Institutions Examination Council, 1776 G Street, N.W., Suite 850B,
Washington, D.C. 20006.
On March 18, 1991, the FFIEC requested public comment
(our Notice
91-26)
on a proposal relating to
the return of nonaccrual loanswith partial
charge-offs of principal to accrual status without first recovering the
partial c h a r g e - o f f or becoming fully current in accordance with the c o n t r a c
tual loan terms.
In light of comments received on this proposal, the proposal
has been withdrawn.
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
- 2 -
A T TACHMENTS
A t tached is a copy of the F F I E C ’s notice requesting comment on the
proposed policy statement on securities activities.
The notice also appears
on pages 37095-99, Vol. 56, No. 149, of the Federal Register dated August 2,
1991.
Also attached is a copy of the F F I E C ’s press release with d r a w i n g the
proposal relating to nonaccrual loans; however, the text of the Federal
Register referred to in the press release is not attached.
MORE INFORMATION
For further information, please contact at the Board of Governors of
the Federal Reserve System, Rhoger H. Pugh, Manager, Policy Development (202)
728-5883, or Charles H. Holm, Supervisory Financial Analyst, (202) 452-3502,
Division of Banking Supervision and Regulation; at the Federal Deposit
Insurance Corporation, Sharon K. Lee, Capital Markets Specialist (202) 8986789, or Robert F. Storch, Chief, Accounting Section (202) 898-8906, Division
of Supervision; at the National Credit Union Association, Charles Felker (202)
682-9640; at the Office of the Comptroller of the Currency, Owen Carney,
Senior Advi s o r for Investment Securities, or Jamie Newell, Senior Capital
Markets Advi s o r (202) 874-5070; and, at the Office of Thrift Supervision, John
M. Freeh, Senior Accountant, Accounting Policy (202) 906-5649, or J. Douglas
Gordon, Senior Financial Economist (202) 906-5728.
For additional copies of this B a n k ’s notice, please contact the
Public Affairs Department at (214) 651-6289.
Sincerely yours,
FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL
Supervisory Policy Statement on Securities Activities
Agency: Federal Financial Institutions Examination Council.
Action: Request for Comment.
Summary: The five member agencies of the Federal Financial
Institutions Examination Council (the "FFIEC"), which include
the Board of Governors of the Federal Reserve System ("FRB"),
the Federal Deposit Insurance Corporation ("FDIC"),
the
National Credit Union Administration ("NCUA"), the Office of
the Comptroller of the Currency ("OCC"), and the Office of
Thrift Supervision ("OTS")
(collectively,
the "Agencies"), are
seeking additional public comment on Section III of the
proposed supervisory policy statement that was initially
published for public comment on January 3, 1991 (56 Federal
Register 263).
As now proposed, Section III defines
"high-risk mortgage securities" and specifies that such
securities are not suitable investment portfolio holdings for
depository institutions.
High-risk mortgage securities may
only be acquired to reduce an institution's interest rate risk
FFIEC Policy Statement
26-Jul-1991
Page: 2
and must be reported in the trading account at market value or
as assets held for sale at the lower of cost or market value.
Examiners will seek the orderly divestiture of high-risk
mortgage securities that do not reduce interest rate risk.
Other products with risk characteristics similar to high-risk
mortgage securities may be subject to the same supervisory
treatment.
In addition, Section III further provides that
disproportionately large holdings of long-term zero-coupon
bonds are considered an imprudent investment practice.
Such
holdings will be subject to criticism by examiners who may
seek their orderly disposal.
Date:
Comments must be received by [insert date 30 days from
the date of publication in the Federal Register.]
Addresses:
Comments should be directed to Robert J. Lawrence,
Executive Secretary,
Federal Financial Institutions
Examination Council,
1776 G Street, NW, Suite 850B,
Washington, D.C. 20006.
For Further Information Contact:
At the FRB : Rhoger H Pugh,
Manager, Policy Development, Division of Banking Supervision
and Regulation (202) 728-5883; Charles H. Holm, Supervisory
Financial Analyst, Division of Banking Supervision and
Regulation (202) 452-3502.
At the FDIC: Sharon K. Lee,
FFIEC Policy Statement
26-Jul-1991
Page: 3
Capital Markets Specialist, Division of Supervision (202)
898-6789; Robert F. Storch, Chief, Accounting Section,
Division of Supervision (202) 898-8906.
Felker (202) 682-9640.
At the NCUA: Charles
At the OCC: Owen Carney, Senior
Advisor for Investment Securities (202) 874-5070; Jamie
Newell, Senior Capital Markets Advisor (202) 874-5070.
At the
O T S : John M. Freeh, Senior Accountant, Accounting Policy (202)
906-5649; J. Douglas Gordon, Senior Financial Economist (202)
906-5728.
Supplementary Information:
On January 3, 1991, the Federal
Financial Institutions Examination Council issued for public
comment a proposed Supervisory Policy Statement concerning the
Selection of Securities Dealers, Securities Portfolio Policies
and Strategies and Unsuitable Investment Practices, and
Stripped Mortgage-Backed Securities, Certain CMO Tranches,
Residuals, and Zero-Coupon Bonds.
Under Section III of this
proposal, stripped mortgage-backed securities,
residuals, and
"high-risk CMO tranches" were subject to the same supervisory
treatment.
However, many commenters indicated that the
definition of high risk CMO tranches in Section III of the
proposal was too vague.
These commenters indicated that the
definition should include specific quantitative criteria in
FFIEC Policy Statement
26-Jul-1991
Page: 4
order to more precisely differentiate high risk CMO tranches
from those with less risk.
In consideration of the public
comments on the January proposal, the FFIEC is now proposing
to define "high-risk mortgage securities" in a quantitative
manner.
products,
This definition will apply to all mortgage derivative
including Collateralized Mortgage Obligations
("CMOs"), Real Estate Mortgage Investment Conduits ("REMICs"),
CMO and REMIC residuals, and Stripped Mortgage-Backed
Securities ("SMBSs").
In addition, other aspects of Section
III have been changed from the January proposal.
Although the FFIEC invites comments on all aspects of Section
III as it is now proposed,
the FFIEC requests comment on the
following specific issues relating to Section III.
(1)
Whether the quantitative criteria proposed for
determining high-risk mortgage securities in Section III
effectively distinguishes "high-risk" mortgage derivative
products from all other mortgage derivative products.
possible, commenters should provide estimates (with
supporting data) of the portion of the existing CMO and
REMIC products that will fall within the high-risk
definition.
If
FFIEC Policy Statement
(2)
26-Jul-1991
Page: 5
The impact of the reporting treatment set forth in
Section III for high-risk mortgage securities.
The text of the proposed Section III of the Supervisory Policy
follows.
FFIEC Policy Statement
26-Jul-1991
Page: 6
SUPERVISORY POLICY STATEMENT ON SECURITIES ACTIVITIES
SECTION III: MORTGAGE DERIVATIVE PRODUCTS, OTHER ASSET BACKED
PRODUCTS, AND ZERO-COUPON BONDS
Summary
Mortgage derivative products include Collateralized Mortgage
Obligations ("CMOs"), Real Estate Mortgage Investment Conduits
("REMICs"), CMO and REMIC residuals, and Stripped
Mortgage-Backed Securities
("SMBSs").
The cash flows from the
mortgages underlying these securities are redirected to create
two or more classes with different maturity or risk
characteristics designed to meet a variety of investor needs
and preferences.
However, many mortgage derivative products
exhibit considerably more price volatility than standard
mortgages or ordinary mortgage pass-through securities and can
therefore expose investors to significant risk of loss if they
are not managed in a safe and sound manner.
This price
volatility is caused in part by these mortgage derivative
products'
substantial prepayment risk and average life
variability.
In addition, because these products are complex,
a high degree of technical expertise is required to understand
how their prices and cash flows may behave under various
FFIEC Policy Statement
interest rate and prepayment expectations.
26-Jul-1991
Page: 7
Moreover, because
the secondary market for most of these products is relatively
thin, they may be difficult to liquidate should the need
arise.
Finally,
there is additional uncertainty because new variants
of these instruments continue to be introduced and their price
performance under varying market and economic conditions has
not been tested.
A general principle underlying this section is that mortgage
derivative products possessing average life or price
volatility in excess of a standard fixed rate 30-year
mortgage-backed pass-through security are "high-risk mortgage
securities" and are not suitable investments for depository
institutions.
All high-risk mortgage securities, as defined
in detail below, held by depository institutions must be
carried in the institutions' trading account or as assets held
for sale.
Institutions that hold mortgage derivative products
FFIEC Policy Statement
26-Jul-1991
Page: 8
that meet the definition of a high-risk mortgage security must
do so to reduce interest rate risk in accordance with safe and
sound practices.1
Furthermore, depository institutions that
purchase high-risk mortgage securities must demonstrate that
they understand and are effectively managing the risks
associated with these instruments.
Levels of activity
involving high-risk mortgage securities should be reasonably
related to an institution's capital, capacity to absorb
losses, and level of in-house management sophistication and
expertise.
Appropriate managerial and financial controls must
be in place and the institution must have the ability to use
analytical modeling techniques to monitor and prudently adjust
its holdings of high-risk mortgage securities in an
environment of changing price and maturity expectations.
1 .Notwithstanding the provisions of this supervisory policy requiring
the use of high-risk mortgage securities to reduce interest rate
risk, this supervisory policy is not meant to preclude an institution
with strong capital and earnings and adequate liquidity that has a
closely supervised trading department from acquiring high-risk
mortgage securities for trading purposes.
The trading department
must operate in conformance with well-developed policies, procedures,
and internal controls, including detailed plans prescribing specific
position limits and control arrangements for enforcing these limits.
FFIEC Policy Statement
26-Jul-1991
Page: 9
Prior to taking a position in any high-risk mortgage security,
an institution should evaluate the risk exposure resulting
therefrom to ensure that the position will lead to a reduction
in the institution's overall interest rate risk.
An
institution should also consider the liquidity and price
volatility of these products prior to purchasing them.
Circumstances in which the purchase or retention of high-risk
securities is deemed by the appropriate federal regulatory
authority to be contrary to safe and sound practices for
depository institutions will result in criticism by examiners,
who may require the orderly divestiture of high-risk mortgage
securities.
Securities and other products, whether carried on or off the
balance sheet, having risk characteristics similar to
high-risk mortgage securities may be subject to the same
supervisory treatment as high-risk mortgage securities.
Long-term zero coupon bonds also exhibit significant price
volatility and may expose an institution to considerable risk.
Disproportionately large holdings of these instruments may be
considered an imprudent investment practice, which will be
FFIEC Policy Statement
26-Jul-1991
Page: 10
subject to criticism by examiners.
In such instances,
examiners may seek the orderly disposal of such securities.
Assets slated for disposal are reported as assets held for
sale at the lower of cost or market value.
Overview of the Securities
A.
SMBSs consist of two classes of securities with each class
receiving a different portion of the monthly interest and
principal cash flows from the underlying mortgage-backed
securities ("MBS").
In its purest form, an MBS is converted
into an interest-only ("10") strip, where the investor
receives all of the interest cash flows and none of the
principal, and a principal-only ("PO") strip, where the
investor receives all of the principal cash flows and none of
the interest.
IOs and POs have highly volatile price characteristics based,
in part, on the prepayment variability of the underlying
mortgages and consequently on the maturity of the stripped
securities.
Therefore,
IOs and POs will nearly always meet
the definition of high risk in this policy.
From a market perspective,
IOs and POs have relatively wide
bid/ask spreads compared to mortgage-backed securities.
This
decreases the effectiveness of SMBSs as interest rate risk
FFIEC Policy Statement
26-Jul-1991
Page: 11
reduction tools because interest rates and prepayments need to
change by a significant amount before the price at which the
security can be sold (i.e., the bid price) will exceed the
price at which the security was purchased (i.e., the ask
price) .
B.
CMOs and REMICs, hereafter called CMOs, have been
developed in response to investor concerns regarding the
uncertainty of cash flows associated with the prepayment
option of the underlying mortgagor.
A CMO can be
collateralized directly by mortgages, but more
often is
collateralized by MBSs issued or guaranteed by GNMA, FNMA
FHLMC and held in trust for CMO investors.
or
In contrast to
MBSs in which cash flow is received pro rata by all security
holders, the principal cash flow from the mortgages underlying
a CMO is segmented and paid in accordance with a predetermined
priority to investors holding various CMO tranches (but not
necessarily to those holding certain residuals).
By
allocating the principal cash flows from the underlying
collateral among the separate CMO tranches, different classes
of bonds are created, each with its own stated maturity,
estimated average life, coupon rate, and unique prepayment
risk characteristics.
Notwithstanding the importance of the
CMO structure to an evaluation of the timing and amount of
cash flows, it is equally essential to understand the coupon
FFIEC Policy Statement
26-Jul-1991
Page: 12
rates on the mortgages underlying the CMO to assess the
prepayment sensitivity of the CMO tranches.
C.
Residuals are claims on any excess cash flows from a CMO
issue or other asset-backed security remaining after the
payments due to the holders of the other classes and after
trust administrative expenses have been met.
The economic
value of a residual is a function of the present value of the
anticipated excess cash flows under assumed prepayment speeds
based upon the underlying collateral of the CMO.
These cash
flows are highly sensitive to prepayments and existing levels
of market interest rates; and the mortgages underlying the CMO
must be understood in order to assess this sensitivity.
Accordingly, most residuals meet the definition of high-risk
in this policy.
Other factors affecting the market value of
residuals include a lack of liquidity and a wide bid-ask price
spread.
D.
Zero-coupon,
"stripped" and certain Original Issue
Discount ("OID") securities are priced at large discounts to
their face value prior to maturity and exhibit significant
price volatility.
"Stripped" securities are the interest or
principal portions of U.S. Government obligations (which are
separated and sold to depository institutions in the form of
FFIEC Policy Statement
26-Jul-1991
Page: 13
stripped coupons or stripped bonds (principal)),
such proprietary products
STRIPS, and
as CATs or TIGRs. Also, deep
discount OID bonds have been issued by a number of municipal
entities.
Definition of "High-Risk Mortgage Security"
In general, any mortgage derivative product (including a CMO
floating rate debt class) that exhibits greater price
volatility than a standard fixed rate thirty-year
mortgage-backed pass-through security will be deemed to be
high risk.
For purposes of this policy statement, a
"high-risk mortgage security" is defined as any mortgage
derivative product that at the time of purchase, or at a
subsequent testing date, meets at least one of the following
three tests.
Once a mortgage derivative product is defined to
be high risk, the product
will be considered as high-risk
long as it is held by the
institution.
(1)
Average Life Test.
as
The mortgage derivative product has
an expected weighted average life greater than 8.0 years.
(2)
Average Life Sensitivity Test.
The expected weighted
average life of the mortgage derivative product:
FFIEC Policy Statement
a.
26-Jul-1991
Page: 14
extends by more than 4.0 years, assuming an
immediate and sustained parallel shift in the yield
curve of plus 300 basis points, or
b.
shortens by more than 5.0 years, assuming an
immediate and sustained parallel shift in the yield
curve of minus 300 basis points.
(3)
Price Sensitivity Test .
The estimated change in the
price of the mortgage derivative product is more than 16
percent, due to an immediate and sustained parallel shift
in the yield curve of plus or minus 300 basis points.
For purposes of determining whether a particular mortgage
derivative product meets any of the above tests, all of the
underlying assumptions including prepayment assumptions for
the underlying collateral must be reasonable.
Examiners will
review all of the underlying assumptions used by the
institution.
For example,
if an institution's prepayment
assumptions differ significantly from the median prepayment
assumptions of several major dealers as selected by examiners,
the examiners may use their own prepayment assumptions in
determining if a particular mortgage derivative product is
high risk.
FFIEC Policy Statement
26-Jul-1991
Page: 15
The federal financial institution regulatory agencies will
monitor the changes in the level of interest rates and market
innovations.
The above tests may be adjusted in the event of
a significant movement in market interest rates or to fairly
measure the risk characteristics of new mortgage-backed
products.
Furthermore, each federal financial institution
regulatory agency reserves the right to take such action as it
deems appropriate to avoid evasion of the standards set forth
in this policy statement,
including the definition of high
risk mortgage security.
Generally, a CMO floating-rate debt class bearing a rate that,
at the time of purchase and each subsequent testing date,
is
125 basis points or more below the contractual cap on the
instrument is not subject to the average life and average life
sensitivity tests described above.
For purposes of this
policy statement, a CMO floating-rate debt class is a debt
class whose rate adjusts at least annually on a one-for-one
basis with the debt class's index.
The index must be a
conventional, widely-used market interest rate index such as
LIBOR.
This exception does not apply to inverse floating rate
debt classes.
A mortgage derivative product that does not meet any of the
FFIEC Policy Statement
26-Jul-1991
Page: 16
above tests will generally not be considered a high-risk
mortgage security.
However, any mortgage derivative product
(including a CMO floating rate debt class) that,
in an
examiner's judgment, exhibits greater price volatility than a
standard fixed rate 30-year mortgage-backed pass-through
security will be deemed to be high risk.
Supervisory Policy
Mortgage Derivative Products
Prior to purchase, a depository institution must determine
whether a mortgage derivative product that it is considering
acquiring is high-risk, as defined above.
An institution may
only acquire a high-risk mortgage derivative product to reduce
its overall interest rate risk.
(See footnote 4 regarding the
use of high-risk mortgage derivative products as trading
assets. )
An institution that has acquired high-risk mortgage securities
in order to reduce interest rate risk needs to actively manage
its holdings of these securities because of their substantial
prepayment and average life variability.
Such active
management implies that the institution does not have both the
intent and ability to hold high-risk mortgage securities for
FFIEC Policy Statement
long-term investment purposes.
26-Jul-1991
Page: 17
Accordingly, high-risk
mortgage securities that are being used to reduce interest
rate risk should not be reported as investments at amortized
cost, but must be reported as trading assets at market value
or as held-for-sale assets at the lower of cost or market
value.
Examiners will seek the orderly divestiture of high-risk
mortgage securities that do not reduce interest rate risk.
These securities must be reported as held-for-sale assets
at
the lower of cost or market value until their disposition.
Mortgage derivative products that do not meet the definition
of high-risk mortgage securities at the time of purchase
should be reported as investments, held-for-sale assets, or
trading assets, as appropriate.
A mortgage derivative product
that was not a high-risk mortgage security when it was
purchased as an investment may later fall into the high-risk
category.
Institutions must ascertain from a source
independent of the party from whom the product was purchased
and document, no less frequently than annually, that any
nonhigh-risk mortgage derivative products that are held for
investment remain outside the high-risk category.
Such
documentation will be subject to examiner review.
If a
mortgage derivative product that was not a high-risk mortgage
FFIEC Policy Statement
26-Jul-1991
Page: 18
security when it was purchased as an investment later meets
the high-risk definition,
it normally must be redesignated as
held for sale.
An institution that owns or plans to acquire high-risk
mortgage securities must have a monitoring and reporting
system in place that provides the documentation necessary to
evaluate the expected and actual performance of such
securities.
The institution must use this system to conduct
and document an analysis that shows, prior to purchase, that
the proposed acquisition of a high-risk mortgage security will
reduce the institution's overall interest rate risk.
Subsequent to purchase, the institution must evaluate and
document at least quarterly whether this high-risk mortgage
security has actually reduced interest rate risk.
The institution's analyses performed prior to purchase and
subsequently thereafter must be fully documented and will be
subject to examiner review.
This review will include an
analysis of all assumptions used by management regarding the
interest rate risk associated with the institution's assets,
liabilities and off-balance sheet positions.
Analyses
performed and records constructed to justify purchases on a
post-acquisition basis are unacceptable and will be subject to
examiner criticism.
Reliance on analyses and documentation
FFIEC Policy Statement
26-Jul-1991
Page: 19
obtained from a securities dealer or other outside party
without internal analyses by the institution are also
unacceptable and reliance on such third-party analyses will be
subject to examiner criticism.
Management should also maintain documentation demonstrating
that it took reasonable steps to assure that the prices paid
for high-risk mortgage securities represented fair market
value.
Generally, price quotes should be obtained from at
least two brokers prior to executing a trade.
If, because of
the unique or proprietary nature of the transaction or
product, or for other legitimate reasons, bids cannot be
obtained from more than one broker, management should document
the reasons for not obtaining such quotes.
In addition, a depository institution that owns high-risk
mortgage securities must demonstrate that it has established
the following:
(1)
A board-approved portfolio policy which addresses the
goals and objectives the institution expects to achieve
through its securities activities,
including interest
rate risk reduction objectives with respect to high-risk
mortgage securities;
FFIEC Policy Statement
(2)
26-Jul-1991
Page: 20
Limits on the amounts of funds that may be committed to
these high-risk mortgage securities;
(3)
Specific financial officer responsibility for and
authority over securities activities involving high-risk
mortgage securities;
(4)
Adequate information systems;
(5)
Procedures for periodic evaluation of high-risk mortgage
securities and their actual performance in reducing
interest rate risk; and
(6)
Appropriate internal controls.
The board of directors, or an appropriate committee thereof,
and the institution's senior management should regularly (at
least quarterly)
review all high-risk mortgage securities to
determine whether these instruments are adequately satisfying
the interest rate risk reduction objectives set forth in the
portfolio policy.
The depository institution's senior
management should be fully knowledgeable about the risks
associated with prepayments and their subsequent impact on its
high-risk mortgage securities.
FFIEC Policy Statement
26-Jul-1991
Page: 21
Failure to report high-risk mortgage securities in accordance
with the above policy, or failure to maintain adequate
documentation demonstrating that the product was intended to
reduce the institution's interest rate risk, will be viewed as
an unsafe and unsound practice.
Purchases of high-risk mortgage securities prior to the date
of this supervisory policy statement generally will be
reviewed in accordance with previously-existing supervisory
policies.
Other Zero-Coupon, Stripped or Original Issue Discount (OID)
Products
Although considered free from credit risk if issued directly
by the U.S. Government, longer maturities of zero coupon,
stripped, and deep discount OID products (generally,
maturities exceeding ten years from the date of purchase) have
displayed extreme price volatility.
Therefore,
disproportionately large long-maturity holdings of these
instruments,
in relation to the total investment portfolio or
total capital of the depository institution, are considered an
imprudent investment practice.
Such holdings will be subject
to criticism by examiners who may seek the orderly disposal of
some or all of these securities.
Securities slated for
disposal must be reported as held-for-sale assets at the lower
of cost or market value until their disposition.
FFIEC Policy Statement
26-Jul-1991
Page: 22
Other Considerations
Depository institutions should exercise extreme caution with
respect to high-risk mortgage securities (as defined above)
and securities with similar characteristics,
brand names and labels.
unfamiliar instrument,
irrespective of
Before purchasing any new or
senior management should at a minimum
produce internally a detailed analysis of the security in
order to understand the performance characteristics, price
volatility, and potential hazards inherent in owning the
security under various interest rate scenarios.
A prospectus
supplement that fully details the cash flows covering each of
the securities held by the institution should be obtained and
analyzed prior to purchase and retained for examiner review.
Securities and other products (whether carried on or off the
balance sheet) with characteristics similar to those of
high-risk mortgage securities and long-maturity zero-coupon
products described in this supervisory policy may be treated
in the same manner by the financial regulatory agencies.
FFIEC Policy Statement
Several states have adopted, or are considering,
26-Jul-1991
Page: 23
regulations
that prohibit state-chartered banks from purchasing
interest-only strips or other securities discussed above.
Accordingly,
state-chartered institutions should consult with
their state regulator concerning the permissibility of these
purchases.
Dated:
Signed:
____________________________________
Robert J. Lawrence
Executive Secretary
Federal Financial Institutions Examination Council
Federal Financial Institutions Examination Council
■it
1776 G Street, N W , Suite 850B • W ashington, D C 20006 . (202) 357-0177 . FAX (202) 357-0191
Press Release
For immediate release
On
March
18,
July 30, 1991
1991,
under
the
Forces on Supervision and Reports of
Institutions Examination Council
auspices
of
the Federal
(FFIEC),
the
the
Task
Financial
four
federal
regulators of banks and thrift institutions published in the
Federal Register a request for public comment on a proposal
relating to nonaccrual loans.
The proposal would establish
criteria under which a federally supervised bank or savings
association,
for purposes
Income (Call Reports)
of
the Reports
or the Thrift Financial Report
would be permitted to return nonaccrual
charge-offs
of
of Condition
principal
to
accrual
and
(TFR),
loans with partial
status
without
first
recovering the partial charge-off or becoming fully current
in accordance with the contractual loan terms.
The agencies have reviewed the comment letters received
during the comment period that ended on May
2,
1991.
The
majority of commenters expressed concerns about consistency
with generally accepted accounting principles
number
of
commenters
expressed
concern
(GAAP), and a
that differences
Board of G overn ors o f the Federal Reserve System , Federal D ep o sit Insurance C orporation, N atio n a l Credit U n io n A dm inistration
O ffice of the C om ptroller o f the C urrency, O ffice o f Thrift Supervision
between
area
regulatory
of
reporting
loans
difficulties
to
would
requirements
borrowers
likely
be
and GAAP
experiencing
viewed
the
financial
negatively
analysts and other market participants.
in
by
bank
(While noting these
concerns, the agencies also observed that, in some respects,
where
the
proposal
differed
from
GAAP
--
such
as
in
the
areas of loss recognition and disclosure -- the proposal was
more
conservative
longstanding
minimize
than
practice,
differences
GAAP.)
the
At
the
agencies
between
same
have
time,
as
attempted
regulatory
a
to
reporting
requirements and GAAP.
The
agencies
have
also
noted
that
certain
clarifications presented in their March 1, 1991 joint agency
policy
statements
provided
a
number
of
the
potential
benefits that would have been provided by the proposal.
clarifications are consistent with GAAP.
cash-basis
recognition
of
interest
loans,
restoration
of
formally
the
accrual status,
loans
that
They addressed the
income
on
nonaccrual
restructured
loans
to
and the disclosure of formally restructured
yield
clarifications
The
also
a
market
suggested
rate
of
enhanced
interest.
The
disclosures
of
important characteristics of nonaccrual loans.
Furthermore,
(FASB)
and
Accountants
attempt to
the
the Financial
American
(AICPA)
have
Accounting Standards
Institute
of
Certified
projects
underway
Public
which
develop guidance on the recognition of
Board
will
interest
income
and
loan
losses
financial difficulties.
on
loans
The
to borrowers
staffs of
the
experiencing
agencies
intend
to work with the FASB and the AICPA to attempt to develop a
consistent and objective reporting framework in this area.
In
light
decided that
with the
the
of
these
considerations,
the proposal
supervisory
will
and
agencies
should be withdrawn.
joint agency policy statements
agencies
the
continue
their
reporting
In keeping
of March 1,
efforts
policies
for
have
to
1991,
clarify
depository
institutions.
The reasons for withdrawal by the agencies are further
discussed in the
"summary"
and "supplementary information"
sections of the attached draft Federal Register notice that
is being
separately published.
The attached draft Federal
Register notice also presents a summary of the comments that
the agencies received on the proposal.
#
#
#
@FedFRASER