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F ederal Reserve Ba nk
DALLAS, TEXAS

of

Dallas

75222
C ircular No. 79-89
May 17, 1979

UNIFORM STATEMENT ON CLASSIFICATION OF BANK
ASSETS AND APPRAISAL OF SECURITIES IN BANK EXAMINATIONS

TO ALL STATE MEMBER BANKS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
In conjunction with the Comptroller of the C urrency, the Federal
Deposit Insurance Corporation, and the Conference of State Bank Supervisors,
the Board of Governors of the Federal Reserve System has issued a revised
statement on classification of bank assets and appraisal of securities in bank
examinations, including amended rules for assessing bank holdings of munic­
ipal general obligations.
Enclosed is a copy of the press release and the revised Uniform
Agreement on the Classification of Assets and Appraisal of Securities Held by
Banks. Any questions should be directed to Urziah Anderson or M arvin C.
McCoy of our Bank Supervision and Regulations Department, Ext. 6274.
Sincerely yours,
Robert H. Boykin
First Vice President
Enclosure

Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank:
1-800-492-4403 (intrastate) and 1-800-527-4970 (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________________
CONFERENCE OF STATE BANK SUPERVISORS

For immediate release

May 7, 1979

A revised statement on classification of bank assets and appraisal
of securities in bank examinations, including amended rules for assessing
bank holdings of municipal general obligations, was issued today by State and
Federal bank supervisors.
The statement is a revision of the Uniform Agreement on the
Classification of Assets and Appraisal of Securities Held by Banks issued in
1938 and revised in 1949.

The statement was issued jointly by the Comptroller

of the Currency, the Federal Deposit Insurance Corporation and the Federal
Reserve Board and the Conference of State Bank Supervisors.
The revision clarifies definitions and eliminates practices duplicated
elsewhere.

It provides expanded definitions of "Substandard," "Doubtful" and

"Loss" categories used for criticizing bank assets.
The revised Agreement sets forth guidelines for examiners to follow
in distinguishing investment quality from sub-investment quality securities
in bank portfolios, and restates guidelines for examiners to use in computing
a bank's net sound capital.
The revised Uniform Agreement provides an exception to the general
rules for appraisal and classification of municipal general obligation
securities in bank portfolios (obligations of states, cities, counties or

(OVER)

-2 -

other political divisions that have general taxing authority).

The revised

Agreement establishes these rules:
--When municipal general obligations are not in default, but
are regarded as being of sub-investment quality, they are
to be classified as substandard assets of the bank.
— In the event of a default of a municipal general
obligation, the book value of the securities in
default are to be classified as doubtful until the
issuer has taken budgetary, tax or other actions
to cure the default or until the market for the
defaulted securities has stabilized.
The regula­
tors will review the market for the defaulted
securities periodically.
Upon determination that
a functioning market has been re-established, the
book value of the securities in excess of market
value will be classified as a loss to the holder.
Previously, any excess of beok value above market value of a defaulted
municipal general obligation was recognized as a loss at the time of the default
and was eliminated from the bank's reported assets.

Experience has shown,

however, that general obligation municipal securities have generally not been
disavowed and principal amounts have ultimately been paid.
The revised Uniform Agreement is attached.

# # # # # # # # # #

UNIFORM AGREEMENT ON THE CLASSIFICATION OF ASSETS AND
APPRAISAL OF SECURITIES HELD BY BANKS 1/

Joint Statement of the Office of the Comptroller of the Currency,
the Federal Deposit Insurance Corporation, the Board of
Governors of the Federal Reserve System
and the Conference of State Bank Supervisors

THE CLASSIFICATION OF ASSETS IN BANK EXAMINATIONS
Classification units are designated as "Substandard," "Doubtful," and "Loss."
A Substandard asset is inadequately protected by the current sound worth and
paying capacity of the obligor or of the collateral pledged, if any. Assets
so classified must have a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt. They are characterized by the distinct possibility
that the bank will sustain some loss if the deficiencies are not corrected. An
asset classified Doubtful has all the weaknesses inherent in one classified Sub­
standard with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable. Assets classified Loss are considered
uncollectible and of such little value that their continuance as bankable assets
is not warranted.
This classification does not mean that the asset has absolutely
no recovery or salvage value, but rather it is not practical or desirable to defer
writing off this basically worthless asset even though partial recovery may be
effected in the future.
Fifty percent of the total of "Doubtful" and all of "Loss" will be deducted in
computing the net sound capital of the bank. Amounts classified "Loss" should
be promptly charged off.
THE APPRAISAL OF SECURITIES IN BANK EXAMINATIONS
Investment quality securities are marketable obligations in which the investment
characteristics are not distinctly or predominantly speculative.
This group
generally includes investment securities in the four highest rating grades and
unrated securities of equivalent quality. Neither market appreciation nor depre­
ciation in these securities will be taken into account in figuring net sound
capital of the bank.
This policy is intended to apply to recognized sound invest­
ment practices of banks and not to those situations where the portfolio requires
special treatment by a supervisory agency.
Sub-investment quality securities are those in which the
are distinctly or predominantly speculative.
This group
ties in grades below the four highest grades and unrated
quality, defaulted securities and sub-investment quality

investment characteristics
generally includes securi­
securities of equivalent
stocks.

Securities in grades below the four highest rating grades and unrated securities
of equivalent value will be valued at market price and the depreciation will be
classified Doubtful; remaining book value will be classified Substandard. Depre­
ciation in defaulted securities and sub-investment quality stocks will generally
be classified Loss; remaining book value will be classified Substandard.

1/ Revises examination procedures established in 1938 and revised July 15, 1949.

- 2-

An exception to the above will be made in the case of municipal general obligations
which are backed by the credit and taxing power of the issuer.
The entire book value
of sub-investment quality municipal general obligations, which are not in default,
will be classified Substandard.— / In the event of a default of a municipal general
obligation, a period of time is usually necessary to permit the market for these
defaulted securities to stabilize or for the issuer to put in place budgetary, tax
or other actions that may eliminate the default, or otherwise improve the post-default
value of the securities.
The market for the defaulted securities will be periodically
reviewed by the regulatory authorities.
Upon a determination that a functioning market
has been reestablished, depreciation on defaulted municipal general obligations will
be classified as Loss. During such interim, the book value;of all defaulted municipal
general obligation securities will be classified Doubtful.— 7

1/and 2/ The above exceptions will not apply in those instances where the supervisory
authorities determine that there is no likelihood that the municipality will be able
ultimately to repay or satisfactorily restructure its obligations.