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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10609
January 7, 1993
"I
New Regulation F — L im itations on Interbank L iabilities
Effective December 19, 1992
To All Insured Depository Institutions, and Others
Concerned, in the Second Federal Reserve District:
The following is quoted from a statement issued by the Board of Governors of the Federal
Reserve System:
The Federal Reserve Board has issued in final form a new Regulation F, Limitations on Interbank
Liabilities. The final rule implements the interbank liability provisions under section 308 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
The final rule generally would require banks, savings associations, and branches of foreign banks
with deposits insured by the Federal Deposit Insurance Corporation (FDIC) to develop and implement
prudential policies and procedures to evaluate and control exposure to their correspondent banks.
The rule also establishes a regulatory limit that requires that a bank ordinarily limit its overnight
credit exposure to an individual correspondent that is less than “adequately capitalized” to not more than
25 percent of the exposed bank’s total capital. No express regulatory limits are provided for credit
exposure to correspondents that are at least “adequately capitalized,” although such exposure is subject
to prudential policies and procedures.
The final rule provides for an extended transition for implementation of the rule. The requirements
for prudential policies and procedures go into effect on June 19, 1993. The regulatory limit on credit
exposure to an individual correspondent is phased in, with the limit set at 50 percent of the exposed
bank’s capital for a one year period beginning on June 19, 1994, and reduced to 25 percent as of
June 19, 1995.
Enclosed — for all insured depository institutions and others who maintain sets of the Board’s
regulations — is the text of the new Regulation F, as published in the
of December
18, 1992. Additional, single copies may be obtained at this Bank (33 Liberty Street) from the Issues
Division on the first floor, or by calling our Circulars Division (Tel. No. 212-720-5215 or 5216).
Questions concerning the new regulation may be directed to our Domestic Banking Department
(Tel. No. 212-720-2181).
Federal Register
E.
G
erald
C
o r r ig a n
,
President.
Friday
December 18, 1992
Vol. 57, No. 244
Pp. 60086-60108 (Reg. F begins on p. 60106)
REGULATION F
LIMITATIONS ON INTERBANK LIABILITIES
Docket No. R-0769
------------------ —
[Enc. Cir. No. 10609]
Effective December 19, 1992
60086
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
FEDERAL RESERVE SYSTEM
12 CFR Part 206
[Regulation P; Docket No. R-0769]
Interbank Liabilities
Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
AGENCY:
The Board is publishing in
final a new Regulation F, Interbank
Liabilities. The final rule implements
section 308 of the Federal Deposit
Insurance Corporation Improvement Ai
of 1991 (FDICIA), which requires the
Board to prescribe standards to limit
risks posed by exposure of insured
depository institutions to other
depository institutions. The final rule
applies to banks, savings associations,
SUMMARY:
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
comment a proposed Regulation F,
Interbank Liabilities, to implement
section 308 of the Federal Deposit
Insurance Corporation Improvement Act
of 1991 (FDICIA). 57 FR 31974, July 20,
1992. Section 308, which added a new
section 23 to the Federal Reserve Act
(FRA), requires the Board to prescribe
standards, by regulation or order, that
will have the effect of limiting the risks
posed by an insured depository
institution’s exposure to another
depository institution.
Summary of the Proposed Rule
The Board’s proposed rule was
designed to ensure that banks adopt
prudent limits on credit and liquidity
risks in dealing with other depository
institutions. The proposed rule required
banks to establish limits on both credit
and settlement exposure to each
individual correspondent. The proposed
rule also established "benchmark”
guidelines on the overnight credit
exposure to individual correspondents
that ordinarily should not be exceeded.
The benchmark guidelines were stated
as percentages of the exposed bank’s
capital. The levels of overnight credit
exposure considered to be permissible
under the benchmarks were tiered based
on the capital of the correspondent with
which the bank is dealing, so that higher
levels of a bank’s capital may be
exposed to better capitalized
correspondents. The benchmark
guidelines under the proposed rule were
intended to establish the maximum
credit exposure that ordinarily would be
considered to be prudent with respect to
a correspondent with a particular level
of capital.
The benchmark guidelines, which
were based on a measure of credit
exposure that excluded certain
relatively low-risk transactions,
generally permitted a bank to have
credit exposure to an individual
FOR FURTHER INFORMATION CONTACT:
correspondent in an amount up to 25
Oliver Ireland, Associate General
percent of the exposed bank’s total
Counsel (202/452-3625), Lawranne
capital. For a correspondent that a bank
Stewart, Attorney (202/452-3513), or
could demonstrate is “adequately
Manley Williams-Stander, Legal
capitalized,” the bank could have credit
Assistant (202/452-5565), Legal
exposure under the proposed rule equal
Division; or Stephen Lovette, Manager
to 50 percent of the bank’s total capital,
(202/452-3622), or Derek L. Young,
but no more than 25 percent of the
Supervisory Financial Analyst (202/
bank’s capital could be exposed through
452-2960), Division of Banking
transactions with a term to maturity of
Supervision and Regulation, Board of
more than thirty days. No specific
Governors of the Federal Reserve
benchmark guideline was provided
System. For the hearing impaired only, under the proposed rule for credit
Telecommunications Device for the Deaf exposure to a correspondent that the
(TDD), Dorothea Thompson (202/452bank could demonstrate was “well
3544), Board of Governors of the Federal capitalized.”
Reserve System, 20th & C Streets, NW.,
Summary of Final Rule
Washington, DC 20551.
SUPPLEMENTARY INFORMATION: On July
The final rule continues to require
20,1992, the Board published for
that a bank adont internal policies and
and branches of foreign banks with
deposits insured by the Federal Deposit
Insurance Corporation (FDIC).
The final rule generally requires
insured banks, savings associations, and
branches of foreign banks, referred to
collectively as “banks,” to develop and
implement internal prudential policies
and procedures to evaluate and control
exposure to the depository institutions
with which they do business, referred to
as “correspondents.”
The rule also establishes a general
“limit” stated in terms of the exposed
bank’s capital, for overnight “credit
exposure” to an individual
correspondent, as defined by the rule.
Under the rule, a bank ordinarily should
limit its credit exposure to an individual
correspondent to an amount equal to not
more than 25 percent of the exposed
bank’s total capital, unless the bank can
demonstrate that its correspondent is at
least “adequately capitalized.” No limit
is specified by the rule for credit
exposure to correspondents that are at
least “adequately capitalized,” but a
bank is required to establish and follow
its own internal policies and procedures
with regard to exposure to all
correspondents, regardless of capital
level.
The final rule provides for a thirtymonth transition period after the
effective date for full implementation of
the rule. Banks must have in place the
internal policies and procedures
required by the rule on June 19,1993.
The regulatory limit on credit exposure
to correspondents that a bank cannot
demonstrate are at least “adequately
capitalized” will be phased in, with the
limit set at 50 percent of the exposed
bank’s capital for a one-year period
beginning on June 19,1994, and
reduced to 25 percent as of June 19,
1995.
EFFECTIVE DATE: December 19,1992.
60087
procedures to address exposure to
correspondents, and includes a
“regulatory limit” for exposure to
correspondents that are less than
adequately capitalized. As with the
proposed rule, “correspondent”
includes both domestically chartered
depository institutions that are federally
insured and foreign banks. The Board
has made several significant
modifications to the proposed rule,
however, in order to improve the
effectiveness of the rule and to reduce
burdens identified by the comments.
Prudential Standards
The final rule provides greater detail
concerning the prudential standards in
order to clarify the rule’s requirements
for internal policies and procedures to
identify and control risk. Under the
final rule, a bank is required to adopt
internal policies and procedures to
address die risk arising from exposure to
a correspondent, taking into account the
financial condition of the correspondent
and the size, form, and maturity of the
exposure. The final rule allows banks to
adopt flexible policies and procedures
to meet this requirement in order to
permit banks to allocate resources in a
manner that will result in real
reducdons in risk, while minimizing the
burden of compliance with the rule.
The final rule requires a bank to
maintain written policies and
procedures to prevent excessive
exposure to any individual
correspondent in relation to the
financial condition of the
correspondent. Under the final rule, a
bank’s board of directors must review
annually the bank’s policies and
procedures concerning correspondents,
but need not approve individual
correspondent relationships. The
policies and procedures adopted by the
board must provide for consideration of
credit and liquidity risks, including
operational risks, in establishing and
maintaining relationships with
correspondents. Where a bank’s
exposure to a correspondent is
significant, considering the size and
maturity of the exposure and the
condition of the correspondent, the
bank must periodically review the
financial condition of the
correspondent. The final rule does not
require periodic review of the financial
condition of all correspondents. For
example, the final rule does not require
periodic review of the financial
condition of a correspondent to which
the bank has only insignificant levels of
exposure, such as small balances
maintained for clearing purposes.
The final rule requires that a bank
take into account any deterioration in
60088
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
the condition of a correspondent in
evaluating the creditworthiness of the
correspondent, and lists other factors
that have a bearing on the financial
condition of the correspondent. A bank
may base its review of the financial
condition of a correspondent on
publicly available information, such as
call reports, Thrift Financial Reports,
Uniform Bank Performance Reports, or
annual reports.1 The final rule generally
does not require a bank to obtain non*
public information on which to base its
analysis of the financial condition of a
correspondent.*2
The final rule provides that a bank
may rely on another party, such as its
bank holding company, a bank rating
agency, or another correspondent, to
provide financial analysis of a
correspondent, as long as the bank has
reviewed the assessment criteria used
by that party. Additionally, a bank may
rely on its bank holding company to
select and monitor correspondents, or
on a correspondent, such as a bankers'
bank, to choose other correspondents
with which to place the bank’s federal
funds, as long as the bank has reviewed
and approved the selection criteria
used.
The final rule requires that a bank
establish internal limits on exposure
only where the financial condition of
the correspondent and the form or
maturity of the exposure create a
significant risk that payments will not
be made as contemplated. Limits must
be consistent with the risk undertaken,
but may be flexible, based on factors
such as the level of monitoring of the
exposure and the condition of the
correspondent. The final rule also
provides that a bank need not set one
overall limit on exposure to a
correspondent, but may instead set
separate limits for different forms of
exposure, products, or maturities.
The final rule provides that, for the
significant sources of exposure for
which internal limits are required, the
bank either should monitor its exposure
1 For significant correspondent banking
relationships, the Board believes that banks
generally have considerable non-public information
concerning their correspondents, such as
information on the quality o f management, general
folio com position, and sim ilar information. The
tation of d ie rule to financial analysis based on
publicly available information is intended to
recognise that access to non-public information is
not always available, and is not intended to
discourage the use of more extensive information,
where available.
* A bank is required to obtain non-public
information to evaluate a correspondent’s condition
only for those foreign banks for w hich no public
financial statem ents are available. In these lim ited
circum stances, the bank w ould need to obtain
financial information directly from the
correspondent
C
or structure transactions with the
correspondent in order to ensure that
the exposure ordinarily remains within
the internal limits established by the
bank.3 Where monitoring is used, the
final rule indicates that the appropriate
level of monitoring will depend on the
type and volatility of the exposure, on
the extent to which the exposure
approaches the bank’s internal limits,
and on the condition of the
correspondent. The final rule also
indicates that ex post monitoring
generally is sufficient.
Although the purpose of requiring
monitoring or structuring of transactions
to which limits apply is to ensure that
exposure generally remains within
established limits, the final rule
recognizes that occasional excesses over
limits may result from factors such as
unusual market disturbances, unusual
favorable market moves, or other
unusual increases in activity or
operational problems. The final rule
requires the bank to establish
appropriate procedures to address
excesses over internal limits.
The final rule continues to require
that a bank’s internal policies and
procedures address intraday exposure.
As with other exposure of longer
maturities, however, the final rule does
not necessarily require that limits be
established on intraday exposure. Such
limits would be required only if the size
of the intraday exposure and the
condition of the correspondent
indicated that there is a significant risk
that payments will not be made as
contemplated.
Limit on Credit Exposure to Certain
Correspondents
The final rule provides that a bank’s
internal policies and procedures should
limit overnight credit exposure to a
correspondent to 25 percent of the
exposed bank’s capital, unless the bank
can demonstrate tnat its correspondent
is at least "adequately capitalized,” as
defined by the rule. The final rule does
not specify limits for credit exposure to
adequately or well-capitalized
correspondents.4
The benchmark guideline included in
the proposed rule for exposure to
adequately capitalized correspondents
served largely as a transition from the
unrestricted exposure permitted for
well-capitalized correspondents to the
25 percent benchmark for
correspondents that are less than
adequately capitalized. The final rule
requires banks to take into account the
maturity of exposure and changes in the
financial condition of the correspondent
in establishing internal prudential limits
and monitoring, and therefore decreases
the need for formal limits on credit
exposure to adequately capitalized
correspondents. Additionally, because
existing exposure above the 25 percent
limit for credit exposure to a less than
adequately capitalized correspondent is
not "grandfathered” under the rule if
the correspondent slips below
adequately capitalized, the existence of
this limit will encourage banks to
shorten the maturity of exposure to
correspondents that are at risk of
dropping below the capital levels
required to be adequately capitalized.
This regulatory ‘Uimir ’ requires that a
bank’s internal policies and procedures
limit “credit exposure” to a
correspondent to 25 percent or less of
the exposed bank’s capital, unless the
bank can demonstrate that the
correspondent is at least "adequately
capitalized,” as defined in the rule. As
in the proposed rule, this limit should
be viewed as a maximum level for credit
exposure, rather than as a safe harbor.
Formal limits on credit exposure to such
a correspondent would not be necessary
where the banks’ policies and
procedures effectively limit credit
exposure to an amount below the 25
percent limit, such as where only small
balances are maintained with the
correspondent, or where the
correspondent has only been approved
for a limited relationship. Although in
many cases it will be necessary for a
bank to establish formal internal limits
to meet the regulatory limit, the
provisions of § 206.3 of the final rule
concerning excesses over internal limits
also apply to limits established for the
purpose of controlling "credit
exposure” under § 206.4 of this rule.
As in the proposed rule, the "credit
exposure” that is limited under the final
rule is based on the assets and offbalance sheet transactions against which
the bank must maintain capital under
the risk-based capital guidelines, with
the same exclusions of lower-risk
* A bank could m eet the requirements of the rule
by monitoring actual overall exposure, or by
establishing individual lin es for significant sources
of exposure, such as federal funds sales, and
establishing procedures to ensure that exposure
generally remained w ithin the established lines. A
bank could also m aintain lim its on exposure by
establishing lim its monitored by a correspondent,
such as for sales of federal funds through the
correapendent as agent
4 W hile the proposed rule referred to "benchmark
guidelines’’ to redact that the numerical lim its were
Internal lim its, are subject to exceptions noted in
subject to exceptions, the successor provision in
the final rale. Thus, the nature of this lim it is
final rale refers to “lim its” to reflect that this
"lim it” is an outside lim it on the bank’s own
substantially the sam e aa the benchmark guidelines
internal lim its. This lim it, as w ell as the bank’s
in the proposed rule.
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
transactions permitted. The final rule
clarifies that “credit exposure” does not
include settlement exposure,
transactions in which the bank acts as
agent, and other forms of exposure that
are not covered by the capital adequacy
guidelines.
Transition Provisions
To mitigate the need for a bank to
reduce exposure rapidly to a
correspondent whose capital has
slipped below the levels needed to be
considered adequately capitalized, the
final rule increases the transition period
for application of the 25 percent limit
on credit exposure to 120 days. The
longer transition period will avoid
undue disruptions in correspondent
relationships due to temporary declines
in capital ratios by allowing the
correspondent an opportunity to bring
its capital ratios back above the relevant
levels before the end of the next
quarterly report The extended period
will also provide the exposed bank more
time to implement any monitoring
required to demonstrate compliance
with the limit on credit exposure and to
adjust the maturities or level of its
exposure to the correspondent.
Initial Implementation Period
The proposed rule required that banks
have internal policies and procedures in
place by December 19,1992, with the
benchmark guidelines to be phased in
over a two-year period. The final rule
provides a transition period of six
months before the prudential standards
become effective, with the remaining
limit on credit exposure phased in over
a two-year period after that date. The
longer initial implementation period
will enable banks that have not made
credit assessments of their
correspondents to do so, and will
provide an opportunity for banks to
review and, where appropriate, improve
their monitoring procedures.
Additional moaifications to the
proposed rule are detailed in the
discussion below.
Summary of Comments
The Board received 321 comment
letters on the proposed rule. Two
hundred fourteen commenters opposed
the rule. Five commenters supported the
regulation's implementation of section
308. An additional seventeen
commenters offered qualified support
for the rule, urging the Board to modify
implementation to make it less
burdensome, by, for example,
eliminating the guidelines based on
capital. The others expressed no
opinion or offered detailed comments.
The comments included seventy-three
“form letters,” forty-one of which
focused on the effect of the proposed
rule on bankers’ banks and sixty-one of
which addressed the competition
between Federal Reserve Banks and
private sector correspondents. All of the
form letters were from small banks.5
The 321 commenters by category
included 233 commercial banks, 41
bank holding companies, 16 bankers’
banks, 13 trade associations, 5
clearinghouses, 6 savings associations, 1
Federal Home Loan Bank, and 6 others.
General Comments
Cost. One hundred fifty-one
commenters expressed concern over the
additional cost burden the proposed
rule would impose. The Board has
attempted to minimize costs to banks of
implementing the final rule, but some
costs are inherent in any new rule that
results in changes in bank practices.
Excessive regulation. One hundred
sixty-six commenters believed the
proposed rule created excessive
regulation. While the Board recognizes
the regulatory burden associated with
the new rule, the Board believes that the
provisions of the final rule are necessary
to carry out the intent of section 308.
Federal Reserve Bank and Federal
Home Loan Bank competition. One
hundred seventy-nine commenters
expressed concern that the proposed
rule would divert business from the
private sector to the Federal Reserve
Banks and Federal Home Loan Banks.
Two commenters suggested that the
Board reduce the competitive impact by
including Federal Reserve Banks in the
definition of correspondent. Another
commenter suggested the Board require
banks to conduct the same analysis of
Federal Reserve Banks that would be
required for a private correspondent.
Because exposure to a Federal Reserve
Bank or Federal Home Loan Bank poses
minimal risk to a respondent, the Board
does not believe that Federal Reserve
Banks and Federal Home Loan Banks
should be included in the definition of
correspondent in the final rule. To treat
Federal Reserve Banks and Federal
Home Loan Banks as correspondents
under the final rule would impose
unnecessary costs and burdens on
* For example: 30 commercial banks and bank
holding companies sent identical letters which
focused on competition from Federal Reserve
Banks; 19 bankers’ banks and their customers sent
an identical resolution on the effect of the proposed
rule on bankers’ banks and competition from
Federal Reserve Banks; 10 commercial banks,
customers and shareholders of a bankers’ bank, sent
identical letters concerning the proposal’s effect on
bankers’ banks; and 9 commercial banks sent
substantially similar letters on bankers' banks and
Reserve Bank competition.
60089
banks, with no appreciable reduction in
risk.
Five commenters proposed that the
Board rectify the competitive effect of
the rule by changing the private-sector
adjustment factor or the prices charged
for check collection.® The Board will
review the calculation of the privatesector adjustment factor to determine if
modifications are appropriate.
Disruption of the federal funds
market. Twenty-four commenters
expressed concern that the proposed
rule would disrupt the federal funds
market by preventing banks from selling
all of their federal funds to a single
correspondent, and stated that the need
to diversify federal funds sales among a
number of purchasers could result in
higher transaction costs. In addition,*
commenters expressed concern that the
need to evaluate the financial condition
of correspondents could lead banks that
are members of the Federal Home Loan
Banks to deposit funds in those banks
rather than selling them to
correspondents.
While the Board recognizes that there
may be some initial restructuring of the
channels for federal funds sales, the
Board does not believe that the
regulation will result in a material or
lasting disruption of the federal funds
market or to a material reduction in the
availability of federal funds. The federal
funds market is competitive, and the
Board believes that creditworthy
correspondents that are buyers of
federal funds will continue to be able to
fund profitable business utilizing this
market. The Board also believes that
modifications incorporated in the final
rule, including elimination of the
regulatory limit on credit exposure to
adequately capitalized correspondents,
will reduce the effect of the rule on the
federal funds market.
Availability of credit. Fifty-six
commenters asserted that the proposed
rule would exacerbate the “credit
crunch,” generally either because of
disruption in the federal funds markets
or because of diversion of funds to
Federal Reserve Banks or Federal Home
Loan Banks. Twenty-two of these
commenters claimed that this effect
would be particularly pronounced in
small communities. As discussed above,
the Board believes that the
modifications incorporated in the final
rule have significantly reduced the
"Two commenters noted that, in addition to the
cost of maintaining capital, correspondents
generally would have to bear the cost of
disseminating call reports in order to provide their
respondents with information on their capital
ratios, and that Reserve Banks would not have to
bear this cost
60090
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
likelihood of any reduction in the
availability of funds for lending.
Effect on the FDICfunds. Thirty-eight
commenters, nine of whom submitted a
substantially similar letter, expressed
concern that the proposed rule would
weaken the Federal Deposit Insurance
funds. Another commenter, however,
asserted that the proposed rule would
actually strengthen the funds. To the
degree that the proposed rule diverts
deposits, generally in the form of
compensating balances, from depository
institutions to Federal Reserve Banks or
Federal Home Loan Banks, it may
reduce FDIC insurance assessments.
However, the Board believes that the
overall effect of the final rule will be to
strengthen the funds by reducing losses.
Repeal. Forty-six commenters urged
the repeal of the statute and one
commenter asserted that similar limits
at the state level have failed. The power
to repeal the statute, however, rests with
the Congress rather than the Board.
Miscellaneous. Thirteen commenters
suggested that, as an alternative to
regulating respondents, the federal
regulators supervise the correspondent
banking business by restricting which
banks could engage in such business,
notifying respondents that do business
with unsound correspondents, setting
limits on the amount of exposure a
correspondent can accept, or
automatically transferring balances from
weak correspondents to strong ones and
notifying respondents later. Seven other
commenters noted that it is inefficient
for a thousand banks to monitor the
same correspondent, which is also being
monitored by a regulator. The Board
does not believe that it would be
appropriate to endorse specific
correspondents, as such a practice could
perpetuate the “too big to fail” concept
that section 308 was designed to
address.
One commenter urged the Board to
create a new instrument for Treasury
obligations for which the Federal
Reserve Banks would be the broker and
administrator. The Board does not
believe that the creation of such an
instrument is necessary, as the
government securities market is broad
and deep, offering many opportunities
for investment. Another commenter
suggested that the Board permit banks to
sell federal funds to Federal Reserve
Banks. The Board does not believe that
such a practice would be appropriate
because it would interfere with the
conduct of monetary policy.
Another commenter suggested that
the Board change Regulation D and the
FDIC insurance calculation to encourage
fee payment. The final rule increases the
incentives for respondents to
compensate correspondents by fees, and
the Board believes that the market will
make appropriate adjustments to this
change.
One commenter suggested that the
Board expand legal lending limits to
include off-balance sheet items. The
Board does not have the authority to
effect such a change, however, as these
limits are administered by the
Comptroller of the Currency under the
National Bank Act and by state banking
regulators under state law.
One commenter urged the Board to
tailor the rule to the strength of the
respondent on the assumption that wellcapitalized respondents would be
managed wisely. The final rule places
greater emphasis on a bank’s internal
policies and procedures.
Section-by-Section Comments
The section and paragraph numbers
in the headings refer to the numbering
of the proposed rule. Where a provision
has been renumbered or moved, the
appropriate cite in the final rule is
provided in brackets.
Section 206.2 Definitions
Section 206.2(a) Bank
The proposed rule defined “bank” as
an insured depository institution as
defined under section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813).
Banks covered by this definition must
control their exposure to correspondents
under this rule. The Board received
twenty-seven comments on this section.
Exclusion of Small Banks
Fourteen commenters proposed that
the Board exclude small or community
banks, defined by some commenters as
banks with assets under $1 billion, or
hold such banks to a more lenient
standard, especially in their
correspondents are well or adequately
capitalized. Another thirteen
commenters, nine of whom submitted a
substantially similar letter, asserted that
the current rule violated Congressional
intent, as Congress did not intend to
harm small banks with this regulation.
Section 308 states that the Board
should address the risk posed to an
insured depository institution by the
failure of another depository institution.
It does not restrict that mandate to risks
posed to large institutions. Section 308
is designed to limit bank failures
attributable to losses due to the failure
of a correspondent. An exemption for
small bank exposure to correspondents
would be contrary to this design, as the
failure of a correspondent would
continue to precipitate the failure of
small banks.
Coverage of Definition
One commenter urged that the Board
clarify that a nonbank credit card
company is excluded from the
definition of “bank.”
Nonbank credit card companies are not
considered to be banks for the purposes
of this rule. However, bank users of
credit card or other payment services
may, depending upon the terms of their
services, incur exposure to other banks
by virtue of use of such services.
The definition in the final rule has
been redrafted for clarity.
Section 206.2(b) Correspondent [Final
Rule—Section 206.2(c)]
The proposed rule defined
“correspondent” as a U.S. depository
institution or a foreign bank, as defined
in the proposed rule, to which a bank
had exposure. The Board received 134
comments on this section.
Exclusion of Bankers’ Banks
One hundred twenty-two commenters
urged exclusion of bankers’ banks from
the definition of correspondent. Fortyseven commenters, twenty-six of whom
submitted substantially similar letters,
argued that bankers’ banks pose no
systemic risk, either because the
bankers’ banks are themselves small, or
because they serve only small banks.
Thirteen commenters, nine of whom
submitted a substantially similar letter,
asserted that bankers’ banks reduce
systemic risk by providing alternative
correspondent services. Twenty-seven
commenters, eighteen of whom
submitted a substantially similar letter,
argued that a bankers’ bank may be less
risky because it is a local institution, it
is chartered to serve only banks, and its
board includes officers of its respondent
banks, who are therefore in a position to
monitor its financial condition more
closely.
Forty-six commenters, twenty-nine of
whom submitted a substantially similar
letter, pointed out that bankers’ banks
rely exclusively on interbank liabilities
and are thus uniquely vulnerable to the
interbank liability limits. Sixty-three
commenters, including twenty-eight
form letters and a number of bankers’
banks, argued that Congress did not
intend bankers’ banks to be targeted.
Many of these commenters concluded
that the rule should create special
provisions for bankers’ banks. Thirtytwo commenters, nine of whom
submitted a substantially similar letter,
argued that Congress recognized the
unique role of bankers’ banks in the
Depository Institutions Deregulation
and Monetary Control Act of 1980. One
commenter argued that it was unfair to
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
subject bankers’ banks to the rule when bankers’ banks could alter the market
central liquidity facilities, which
for correspondent services, possibly
provide services to credit unions, are
increasing risk as correspondent
not covered. Another commenter argued business moves to such special purpose
that bankers’ banks are not commercial banks. With regard to arguments that
banks and that the deserve the same
including bankers’ banks as
correspondents under the rule will force
treatment as Federal Reserve Banks.
Eleven commenters argued that bankers’ banks to obtain services from their
competitors, the Board notes that banks
banks should be excluded from the
scope of the rule because banks would often do business with competitors.
Sixteen commenters asserted that the
otherwise be forced to obtain
rule would result in a reduction in
correspondent services from their
deposits at bankers’ banks which, in
competitors.
In contrast, two commenters argued turn, would reduce the capacity of
that exclusion of bankers’ banks would bankers’ banks to provide “overline”
loan and participation arrangements and
unfairly restructure the market for
other correspondent services. The Board
correspondent services, and another
believes that the demand for these
commenter noted that exemptions for
services will provide incentives for
some providers of correspondent
banks to continue to do business with
services would erode competition.
The Board recognizes that bankers’
bankers’ banks rather than shifting to
banks are providing important services Federal Reserve Banks or Federal Home
to respondents and are meeting a market Loan Bands, which provide only limited
need, and that Congress has given
services.
Six commenters stated that the
special status to bankers’ banks in other
statutes'. Nonetheless, the Board does
proposed rule would preclude a
not believe that other legislation or the bankers’ bank from raising capital when
statutory language or legislative history it is most needed because banks could
not increase exposure to the bankers’
of section 308 demonstrate a
Congressional intent to exclude bankers’ bank through stock investments.
banks from the coverage of section 308. Although most bankers’ banks are well
Nor does the Board believe the Congress or adequately capitalized, the Board
intended for bankers’ banks to be
recognizes that the capital of bankers'
targeted by the rule. Accordingly, the
banks generally represents exposure of
final rule treats bankers’ banks no
the owner-customers of the bankers’
differently than other correspondents.
bank. The Board notes, however, that
The Board does not believe that
capital ratios may be increased by other
bankers’ banks will be unduly harmed means, such as by reducing certain
by being treated as correspondents
assets of the bankers’ bank.
under the rule. Bankers’ banks generally
are at least adequately capitalized and Restriction of Coverage to Large, Weak
Banks
there is no regulatory limit on credit
Fifty-nine commenters concerned
exposure to an adequately capitalized
with the regulatory burden imposed by
correspondent under the final rule.
the proposed rule urged that the rule
Although respondents will need to
obtain information on correspondents' focus exclusively on banks that might be
considered "too big to fail.” Thirty-five
capital ratios in order to demonstrate
of these commenters, twenty-eight of
that correspondents are at least
adequately capitalized, bankers’ banks whom submitted a substantially similar
can reduce this burden by providing the letter, suggested that the Congressional
intent was to focus on the risk caused
information to their respondents
by the failure of a large depository
directly. To the extent that bankers’
banks are concerned that the burden of institution, and that small banks were
meeting the requirements of the rule’s not to be affected by the regulation. In
prudential standards will cause banks to addition, thirty-five commenters, thirty
transfer business from a bankers’ bank of whom submitted a substantially
similar letter, urged the Board to exempt
to a Federal Reserve Bank or Federal
exposure to well-capitalized
Home Loan Bank, the Board believes
correspondents from the regulation or at
that the more extensive guidance
least to treat exposure to them no
provided in the language of the final
differently than exposure to a Federal
rule will reduce this effect
The Board believes that including
Reserve Bank.
Although the introductory language in
bankers’ banks within the scope of the
rule is appropriate. Bankers’ banks
section 308 refers to the failure of a large
depository institution, the text of the
represent a concentration of interbank
risk because they rely exclusively on
statute directs the Board to limit risks
posed by exposure to “any other
interbank liabilities and because their
assets subject them to the same risks as depository institution.” Further,
other banks. Further, an exception for
excluding exposure to small
60091
correspondents from the rule could
cause correspondent business to shift to
small correspondents, regardless of their
financial condition, thereby increasing
the risk that the failure of a small
correspondent would cause the failure
of other banks. Finally, entirely
excluding exposure to well-capitalized
correspondents could encourage banks
to take exposure to a well-capitalized
correspondent that may be excessive in
relation to the overall financial
condition of the correspondent. Thus,
the Board believes that the definition of
“correspondent” should not exclude
depository institutions on the basis of
size or capitalization.
Expansion of the Definition of
Correspondent
Nine commenters expressed concern
about competition in the correspondent
business from nonbanks and credit
unions. Three of these commenters
proposed that the definition of
correspondent encompass all providers
of correspondent services, including
nonbanks. One commenter pointed out
that Edge Act companies are not defined
as correspondents but are included as
subsidiaries.
The Board notes that the interbank
liability provisions of section 308
concern exposure to depository
institutions, not to financial service
providers generally. The definition of
"correspondent” in the proposed rule
was limited to institutions that receive
special treatment under the capital
adequacy guidelines, which provide
that claims against certain foreign banks
and federally insured domestic
depository institutions generally are
given a 20 percent risk weight.7
Furthermore, the Board does not believe
that nonbank providers of
correspondent services, including credit
unions, provide a full range of
correspondent services in competition
with traditional correspondents or that
risk to banks will increase materially
through migration to providers of
services that are not covered by the rule.
Finally, the failure of financial
institutions that are not insured by the
Federal Deposit Insurance Corporation
would not pose a threat to the Federal
Deposit Insurance funds through
invocation of “too big to fail.”
Final Rule
The definition of correspondent has
been amended to exclude commonly
controlled correspondents that are
subject to cross-guarantees under the
7 Claims against other types of financial
institutions generally are given a 100 percent risk
weighting under the capital adequacy guidelines.
60092
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
Federal Deposit Insurance Act. The
proposed rule excluded commonly
controlled correspondents from the
limits on credit exposure, but not from
the prudential standards. In the final
rule this exclusion has been extended to
the prudential standards for
consistency. This exclusion does not
affect the applicability of other statutory
provisions governing transactions with
affiliated institutions, such as section
23A of the Federal Reserve Act (12
U.S.C. 371c).
Section 206.2(c) Exposure [Final
Rule—Section 206.2(d)]
The proposed rule defined
“exposure” as the risk that payment to
complete a transaction will not be made
in a timely manner or that an obligation
will not be paid in full. The definition
further provided that “exposure”
includes the operational and liquidity
risks related to the settlement of
transactions and risk related to the
creditworthiness of a correspondent.
Both overnight and intraday exposure
were covered by the definition. The
proposed rule required exposure to be
monitored under the prudential
standards. The Board received twenty
comments on this section.
Scope of the Definition
Ten commenters urged that the scope
of the definition be restricted. Nine
commenters suggested that the
definition of exposure include only
significant exposure measured by the
amount at risk and the product line at
issue to a particular correspondent. Four
of these commenters suggested that the
Board provide guidance, such as that in
the payments system risk policy, as to
what constitutes significant exposure.
One commenter urged that the
definition exclude items covered by
FDIC insurance. Another commenter
suggested that the purchase and sale of
Treasury securities be excluded. One
commenter suggested that the Board
exclude settlement risk from the
definition of exposure. Another
commenter suggested that the
settlement risk in delivery-versuspayment systems be excluded. Two
commenters, clearinghouses, suggested
that the settlement risk attendant to a
clearing and settlement system that
includes settlement finality should be
excluded from the definition of
exposure because it is insignificant. One
commenter asked the Board to exclude
collateralized interest rate swaps from
the definition of exposure. Another
commenter questioned whether other
exposures like payroll, pending ATM,
and coin and currency settlements
should be included in exposure. One
commenter suggested that the definition condition of a .correspondent where the
of exposure distinguish exposure due to amount of the exposure is insignificant
capital market transactions from
and would not be required to limit
exposure due to correspondent banking exposure unless there is a significant
activity. In addition, four commenters risk that payment will not be made as
urged the exclusion of short-term
contemplated.
exposure. One commenter suggested
Another commenter requested
that the rule exclude all exposure with clarification of the terms "liquidity risk”
a maturity of less than 14 days, two
and “operational risk” used in the
others urged the exclusion of demand
definition of exposure. Liquidity risk is
deposits, and the fourth called for the
exclusion of federal funds transactions. the risk that payment will be delayed for
some period of time. For example, a
Three commenters expressed concern
bank is subject to the liquidity risk that
that regulators would unreasonably
a payment due from a failed
expand the definition.
The final rule excludes certain lower- correspondent will not be made on time;
risk transactions from the definition of the bank’s credit risk may be a lesser
"credit exposure,” which is the measure amount due to later distributions from
the correspondent’s receiver. Liquidity
of exposure subject to a specific
risk is included in the definition of
regulatory limit under the rule. The
general definition of "exposure” used in exposure in the final rule. Operational
the final rule, however, covers all types risk if the risk that operational problems
at a correspondent, such as computer
of transactions that create a risk of
nonpayment or delayed payment. The failure, may prevent it from making
Board believes that banks should
payments, thereby creating liquidity
consider all types of financial exposure risks for other banks, and is also
in establishing prudential policies and included in the definition of exposure
procedures. As discussed in the
in the final rule.
summary of the final rule, however, the
One commenter asked if
prudential standards in the final rule
correspondent
obligations that a bank
have been amended to clarify that a
holds
in
a
fiduciary
capacity are
bank is not required to treat all types of
exposure in the same manner, and that excluded. Because obligations held in a
fiduciary capacity do not expose the
a bank’s internal policies and
procedures may provide for differential bank itself to loss due to credit,
liquidity, or operational problems, such
treatment of exposure based on the
form, maturity, and size of the exposure, obligations are not included in the
definition of exposure.
as well as on the condition of the
correspondent.
One commenter argued that
depository institution equity securities
Clarification of the Definition
taken as collateral or in satisfaction of
Seven commenters found the
a debt should be excluded from the
definition of exposure too vague. Two definition of "exposure” because they
commenters sought clarification of the are not payment obligations. Such
definition of settlement risk. One
transactions are covered by the
commenter asked for clarification of
definition of "exposure,” in the final
how settlement risk relates to automated rule, as they create a credit risk to the
clearinghouse (ACH) transactions. One bank should the depository institution
commenter urged that exposure arising fail. The definition in the final rule has
out of credit card transactions should be been redrafted for clarity.
excluded from the definition of
exposure because a bank cannot control Section 206.2(d) Foreign Banks [Final
the banks to which it has this exposure. Rule—Section 206.2(e)]
In this regard, the Board notes that
The proposed rule defined a "foreign
exposure arising from the following
bank” as an institution that is organized
transactions generally is insignificant
under the laws of a country other than
because the exposed bank usually has
the United States, engages in the
prompt recourse to other parties or
business of banking, is recognized as a
because the amounts involved are not
significant: (1) A collecting bank’s risk bank by the bank supervisory or
monetary authorities of the country of
that a check will be returned, (2) an
the bank’s organization, receives
originating bank’s risk that an ACH
deposits to a substantial extent in the
debit transfer will be returned or its
regular course of business, and has the
settlement reversed, (3) a receiving
bank’s risk that settlement for an ACH power to accept demand deposits.
credit transfer will be reversed, or (4) a Foreign banks were included in the
credit card transaction. Under the final definition of correspondent in the
rule, a bank is not required to conduct proposed rule. The Board received
seven comments on this section.
periodic reviews of the financial
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
Exclusion of Foreign banks
Two commenters urged that the rule
exclude foreign banks because of the
cost and difficulty in obtaining
necessary information, such as capital
information, and because the proposed
rule would harm the competitiveness of
U.S. banks in foreign correspondent
markets. These commenters also argued
that foreign banks do not pose a risk to
the deposit insurance fund, or to the
U.S. banking system as a whole. An
additional two commenters, focusing on
the lack of current risk-based capital
ratio information and on the decreased
risk posed by foreign banks, suggested
that exposure to foreign banks be
excluded from application of the
benchmark guidelines and subjected
only to the prudential standards. Two
other commenters, however, strongly
supported the coverage of foreign banks
in the rule, arguing that exclusion
would grant such banks a competitive
advantage over domestic banks. One
commenter, a clearinghouse, noted that
its members were divided on this issue.
Foreign banks were included as
correspondents under the proposed rule
because failure to cover foreign banks
could encourage a migration of
correspondent and interbank business to
foreign banks irrespective of their
conditioh, thereby potentially
increasing risk to insured depository
institutions. Consequently, the Board
does not believe that foreign banks
should be excluded from coverage of the
limits on credit exposure or the
prudential standards. To address
problems with obtaining adequate
information concerning foreign banks,
however, the final rule provides greater
flexibility as to the timing and
frequency with which a bank must
obtain information on the capital levels
of its foreign bank correspondents.
Clarification of the Definition
Two commenters called for
recognition of the decreased risk posed
by a foreign central bank or a bank
guaranteed by a foreign government,
and perhaps even exclusion of these
institutions from coverage as
“correspondents” under this rule. The
definition of “foreign bank” is based on
the criteria used in the risk-based
capital guidelines. As those guidelines
exclude the central bank of a foreign
country, such institutions would be
excluded for the purposes of this rule as
well. The Board believes, however, that
banks guaranteed by foreign central
governments may pose risks and should
be included as correspondents for the
Durposes of this rule.
The definition remains unchanged in
the final rule.
Section 206.2(e) Primary Federal
Supervisor [Final Rule—Section
206.2(f)]
No comments were received on this
section, and the definition remains
unchanged in the final rule.
Section 206.2(f) Quality Asset [Final
Rule—Section 206.4(f)(3)]
The proposed rule defined a “quality
asset” as an asset that is not in a
nonaccrual status, on which principal or
interest is not more than thirty days past
due, and whose terms have not been
renegotiated or compromised due to the
deteriorating financial condition of the
primary obligor. Furthermore, under the
proposed rule an asset would not be
considered to be a “quality asset” if any
other loans to the primary obligor on the
asset have been classified as
"substandard,” “doubtful,” or "loss” or
treated as “other loans specially
mentioned” in the most recent report of
examination or inspection of the bank or
an affiliate prepared by either a federal
or a state supervisory agency. Under the
proposed rule, a transaction for which a
correspondent is only secondarily liable
could be excluded from a bank’s “credit
exposure” to the correspondent as long
as the transaction could be considered
a “quality asset.”
The Board received one comment,
which criticized this definition as too
restrictive. The commenter urged that
the definition include assets on which
principal or interest is not more that 90
days past due, as is the standard in SEC
Guide 3 Section III C.l. This SEC
standard is used for reporting and
disclosure purposes and does not
appear to be appropriate for the
purposes of this rule. The Board
believes that the proposed definition,
which was derived from section 23A of
the Federal Reserve Act (12 U.S.C.
371c), permits a more accurate measure
of actual credit exposure. In the final
rule the definition of “quality asset” has
been incorporated into the section
concerning “credit exposure” (§ 206.4).
Section 206.2(g) Subsidiary [Final
Rule—Section 206.4(e)]
Under the proposed rule, the term
“subsidiary” was given the same
meaning as that term under section 23A
of the Federal Reserve Act, and
therefore included any company in
which a bank owns or control 25
percent or more of any class of voting
securities. This definition in the final
rule has been modified and
incorporated into § 206.4, and is
60093
discussed below in the description of
comments on that section.
Section 206.2(i) Total Capital [Final
Rule—Section 206.2(g)]
The proposed rule defined total
capital as the total of a bank’s Tier 1 and
Tier 2 capital under the risk-based
capital guidelines provided by the
bank's primary federal supervisor. For
an insured branch of a foreign bank
organized under the laws of a country
that subscribes to the principles of the
Basle Capital Accord, “total capital”
means total Tier 1 and Tier 2 capital as
calculated under the standards of that
country. For an insured branch of a
foreign bank organized under the laws
of a country that does not subscribe to
the principles of the Basle Capital
Accord, “total capital” means total Tier
1 and Tier 2 capital as calculated under
the provisions of the Accord. The Board
received two comments on this section.
Two commenters requested
clarification that the benchmark
guidelines would be based on the total
capital of a foreign bank, rather than
only on the capital of the branch. The
limit on credit exposure of the insured
branch of a foreign bank is based on the
foreign bank’s total capital, as defined in
this section, not on the imputed capital
of the branch.
The definition remains unchanged in
the final rule.
Section 206.2(j) U.S. depository
Institution [Final Rule—Section
206.2(h)]
The proposed rule defined “U.S.
depository institution” as a federally
insured depository institution chartered
in the United States under federal or
state law, and included an insured
national bank, state bank, District bank,
or savings association, as those terms
are defined under section 3 of the
Federal Deposit Insurance Act (12
U.S.C. 1813), but did not include an
insured branch of a foreign bank. U.S.
depository institutions were included in
the definition of “correspondent” in the
proposed rule. The Board received eight
comments on this section, two of which
supported the definition as written.
Scope of the Definition
Three commenters urged the
inclusion of credit unions, asserting that
they poses risks to the financial system
through the large inter-institution
liabilities of credit union corporate
centrals. Credit unions do not offer a
full range of correspondent services to
FDIC-insured banks and are not insured
by the FDIC. Therefore, the Board does
not believe that exposure to credit
unions poses risks to insured banks and
80094
Federal Register / VoL 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
to the FDIC insurance funds of the type
that section 308 was designed to
address.
Clarification of the Definition
Three commenters suggested that the
final rule include specific language
excluding Federal Home Loan Banks.
The Board believes that the definition
excludes Federal Home Loan Banks and
that a specific exclusion for Federal
Home Loan Banks is unnecessary. The
definition in the final rule has been
redrafted for clarity.
Section 206.3 Prudential Standards
Section 206.3(a) Internal limits. [Final
Rule—Section 206.3(c))
The proposed rule required that a
bank establish and maintain policies
and procedures to limit exposure to the
correspondents with which it does
business. The rule further required that
banks establish and periodically review
and revise, as necessary, limits on
exposure to individual correspondents
based on an evaluation of the overall
financial condition and other factors
being on the creditworthiness of each
correspondent. Finally, it required that
a bank structure these limits to avoid
undue concentration of settlement or
credit risk with respect to any
individual correspondent. Most of the
comments received addressed the
prudential standards, and 110 of those
comments addressed § 206.3(a) on
internal limits.
Appropriateness of Internal Prudential
Standards
Twenty-four commenters agreed that
the prudential standards reflect prudent
banking and general industry practice,
and twenty-eight commenters indicated
that they had already established
prudential standards for interbank
exposure. Moreover, twenty-four
commenters suggested that this
provision, supplemented by
examination, be the heart of the
regulation. On the other hand, forty-two
commenters, including five who
Indicated that thev already conduct
similar prudential analyses, disagreed
with the Board’s approach to the
problem of interbank liabilities. These
commenters argued that the
examination process can adequately
address the problem, both because
adequate controls already exist in the
safety and soundness criteria and
because the examination and
consultativeprocess is superior to
regulation. These commenters
concluded, therefore, that the rule
would impose increased costs without
achieving a commensurate reduction in
risk. Three of these commenters
suggested that the Board conduct an
empirical study of the risks associated
witn interbank liabilities and the cost of
controlling those risks.
Thirty-two commenters offered
alternatives to the prudential standards.
Three suggested approval of
correspondent relationships by vote of
the bank’s board of directors. Eighteen
commenters, submitting an identical
letter, suggested that the prudential
standards require only that a bank
obtain information from its
correspondents once a year to
demonstrate that the correspondents
meet appropriate capital standards. One
commenter suggested that banks be
permitted to tier their prudential
standards in a similar fashion as the
capital guidelines. Six commenters
favored a simple statement that the risks
must be addressed, while another
suggested that the standard be the same
due diligence standard applied to any
loan. One commenter urged the Board to
require specific, detailed lending
policies, similar to those for highly
leveraged transactions, while another
commenter asserted that only on-site
examinations offer a true measure of
risk. One commenter suggested that the
rule require an annual review of capital,
management experience, and income
trends.
Implementation of the Requirement
Twelve commenters expressed a
desire for greater specificity regarding
the preparation and review of the
internal limits. Six requested specificity
as to the factors that a bank should
evaluate or argued that the factors be
limited. One commenter sought
clarification of whether internal
standards could ever be breached. Four
commenters indicated that respondents
may lack the expertise to analyze the
financial condition and risk of larger
correspondent banks, particularly where
the correspondent has significant offbalance sheet activities. Six commenters
expressed concern about the availability
of the information. One of these
commenters stated that correspondents
that compete on other fronts may be
unwilling to divulge non-public
information. One commenter asked
whether banks could rely on
information from correspondents. Two
commenters expressed concern that call
and audit reports do not address overall
conditions and operations, although
both are mentioned as factors in the
proposed rule. Five commenters
expressed concern that the proposed
rule failed to encourage banks to
improve continuously their risk
management programs and may
encourage banks to abandon a more
sophisticated system for one which
tracks the guidelines. One of those
commenters urged that the Board adopt
uniform examination guidelines that
reflect to the greatest degree possible
existing risk monitoring and control
practices.
Final Rule
The primary focus of the final rule is
on a bank's analysis of the
creditworthiness of its correspondents.
Many of the concerns raised by these
commenters are addressed by the more
extensive guidance in the final rule as
to the standards that a bank’s internal
policies and procedures would be
expected to meet. The final rule states
that internal procedures should be
directed at preventing excessive
exposure to a correspondent in relation
to the financial condition of the
correspondent, and allows banks to
adopt flexible policies and procedures
to meet this standard. The final rule
does not require the same procedures to
be used for all correspondents or all
types of exposure.
Under the final rule, a bank’s internal
policies and procedures must provide
for periodic reviews of a
correspondent’s financial condition
only where exposure to the
correspondents is significant. Periodic
review of the financial condition of
correspondents to which the bank has
only insignificant levels of exposure,
such as small balances maintained for
clearing purposes, would not be
required under the final rule. While the
bank’s board of directors would be
required to review the bank’s policies
and procedures concerning
correspondents on an annual basis, the
board would not be required to approve
individual correspondent relationships.
The final rule also does not require the
bank to obtain non-public information
on which to base its analysis of the
financial condition of a correspondent,
but permits use of publicly available
information, such as call reports,
Uniform Bank Performance Reports, and
annual reports.8
Additionally, the final rule requires
the establishment of internal limits only
where the financial condition of the
correspondent and the form or maturity
of the exposure create a significant risk
that payments will not be made as
contemplated. The rule does not require
a particular structure or method of
maintaining such limits, but permits the
bank flexibility to structure limits in a
* A bank would be required to obtain non-public
financial information only In the limited
circumstance* where no publicly available source
of information existed, such as for certain privately
owned foreign banks.
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
manner that will meet the needs of the
bank. For example, in appropriate
circumstances a bank may establish
limits for longer term exposure to a
correspondent, while not setting limits
for overnight or intraday exposure.
Clarification of the Requirement
Eight commenters inquired whether
the Board would permit a lead bank or
bank holding company to conduct the
prudential analysis for affiliated banks.
The final rule clarifies that a bank may
rely on its bank holding company, a
bank rating agency, or another party to
provide financial analysis of
correspondents or to select
correspondents, as long as the board of
directors of the bank has reviewed the
assessment or selection criteria used by
that party.
Section 206.3(b) Monitoring. [Final
Rule—§ 206.3(c)]
The proposed rule required that a
bank structure transactions with a
correspondent or monitor exposure to a
correspondent to ensure that its
exposure does not exceed its internal
limits established under § 206.3(a) and
that its credit exposure ordinarily not
exceed any applicable guidelines on
credit exposure specified in § 206.4. The
Board received 160 comments on this
section.
One hundred fourteen commenters,
thirty of whom submitted a
substantially similar letter, protested the
cost burden implicit in the monitoring
requirements. Sixteen commenters
argued that the costs of the monitoring
provisions of the proposed rule
outweigh the benefits. Fifty-nine
commenters argued that these costs will
be exacerbated if banks must spread
their correspondent business among a
number of banks. Two commenters
complained that the cost burden would
fall disproportionately. One asserted
that small community banks would bear
the brunt of it and another asserted it
would fall inequitably on the adequately
and well-capitalized banks of the
Midwest. Seven commenters pointed
out that even well-capitalized private
correspondents and respondents will
have to bear these costs.
Clarification of the Requirement
Six commenters requested
clarification as to whether the
requirement of the rule would be
satisfied by structuring relations so that
the limits are not exceeded, such as
through agency sales policies. Five
commenters urged the Board to consider
permitting a lead or parent bank in a
bank holding company to monitor
exposure for its affiliated banks. Two
commenters urged that the monitoring
requirements distinguish between
significant and insignificant exposure.
Another urged that the final rule permit
systems consistent with the institution’s
business, internal systems operations,
and personnel. Seven commenters
expressed concern that examiners might
unduly restrict the regulatory flexibility
that was designed to permit the use of
diverse existing monitoring and risk
control practices. They urged the Board
to adopt uniform examination
guidelines that would accommodate
existing systems. Two commenters
suggested as a model the guidelines for
self-assessments on payment system
risk.
Frequency of Monitoring
Twelve commenters argued that daily
monitoring is excessive if not
impossible. One commenter asserted
that a banker cannot know the balance
on a pass-through account. Two other
commenters stated that global
monitoring of outstanding exposures on
a daily basis in products such as interest
rate swaps, letters of credit, and other
transactions would be extremely
difficult, and that banks should be
permitted to use their prudential limits
as proxies for actual exposure where
these limits are below the benchmarks.
One commenter urged that the final rule
match the frequency of review with the
risk, while another urged the Board to
permit banks to monitor exposure in
arrears and take corrective action should
exposure exceed prearranged levels.
One commenter urged the Board to
permit banks to monitor weekly or
monthly averages. Two commenters
expressed approval of the proposed
rule’s acceptance of ex post monitoring.
Monitoring Overnight Exposure
Fourteen commenters urged the Board
to clarify the requirements for
monitoring overnight interbank
transactions and to consider eliminating
monitoring of these transactions. Four of
these commenters stated that the
likelihood of a bank failing solely on the
basis of its overnight exposure is very
remote, and two argued that market
factors weed out weak correspondent
banks. Five other commenters argued
that the regulatory burden on small
banks in monitoring and controlling
overnight interbank transactions is
unreasonable and costly, and could
force small banks to transfer their
business to Reserve Banks. Another
commenter urged the exclusion of
overnight federal funds sales from the
exposure that must be monitored as long
as the sales were made under a
preauthorized line to an approved list of
60095
correspondents, on the grounds that it
may be difficult to determine other
exposure to a correspondent at the time
of a federal funds transaction.
Monitoring Credit Exposure
Fifteen commenters addressed the
issue of monitoring credit exposure.
Five of these commenters urged that the
proposed rule’s acceptance of
occasional or inadvertent excesses be
maintained and broadened sufficiently
that small banks with unexpected large
deposits or late incoming wire transfers
be permitted to adjust their balances
within a day or two. Six commenters
expressed concern that the guidelines
would be viewed as rigid limits.
Another commenter asserted that the
proposed rule's acceptance of
occasional excesses would be where the
trouble spots would arise. Three other
commenters requested clarification as to
how often and under what
circumstances a bank may exceed the
guidelines. One commenter suggested
that the final rule grant banks time to
bring combined credit exposures due to
mergers or other acquisitions into
compliance with the benchmark
guidelines.9
Monitoring Intraday Exposure
Eleven commenters urged the Board
to eliminate any requirement for
intraday monitoring. Three of these
commenters stated that most banks, and
especially smaller banks, would find it
difficult or impossible to monitor and
manage intraday exposure. Another
commenter expressed concern that
banks’ attempts to limit intraday
exposure by delaying settlements
pending receipt of offsetting funds
could lead to system gridlock. Two
commenters argued that intraday
exposure was similar to cash items in
the process of collection and should be
excluded from the rule. Four additional
commenters sought clarification as to
whether daylight overdrafts would be
violations of the rule.
The Final Rule
The final rule allows a bank to adopt
monitoring policies and procedures that
are appropriate for the bank’s particular
situation. The final rule does not require
the establishment of limits or
monitoring for all sources of exposure to
all correspondents. The final rule
provides that, for the significant sources
of exposure for which internal limits are
required, a bank may either monitor
exposure or structure transactions to
"Other comments on monitoring credit exposure
are addressed in the discussion of the guidelines on
credit exposure.
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Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
ensure that internal limits generally are
Under the final rule, a bank's internal
not exceeded. A bank could accomplish olicies and procedures are required to
mit credit exposure to a less than
this either by monitoring actual overall
exposure, or by establishing individual adequately capitalized correspondent to
lines for significant sources of exposure, not more than 25 percent of the exposed
such as federal funds sales, and
bank’s capital. Therefore, these
establishing procedures to ensure that monitoring requirements for exposure
exposure generally remained within the would also apply to monitoring credit
exposure limits.
established lines. A bank could also
maintain limits on exposure by
Section 206.4 Guidelines for Credit
establishing limits with correspondents, Exposure
such as for federal funds sold on an
The proposed rule provided that, in
agency basis.
addition to the prudential limits on
Under the final rule, banks are not
exposure established by a bank under
expected to monitor exposure to
$ 206.3, a bank ordinarily would be
correspondents on a real-time basis.
expected to maintain credit exposure to
Monitoring generally may be done
an individual correspondent, as
retrospectively, and the required
calculated under § 206.5, within certain
frequency depends on the extent to
which exposure approaches the bank’s guidelines or limits unless the exposure
is to a commonly controlled insured
internal limits, on the volatility of the
depository institution, as provided in
exposure, and on the condition of the
paragraph (b) of that section. The
correspondent.
proposed guidelines or limits were
Although the purpose of requiring
monitoring or structuring of transactions structured as “benchmarks” that would
be considered prudent outside limits on
is to ensure that exposure generally
remains within established limits, the credit exposure and were not intended
to endorse levels of credit exposure that
final rule recognizes that occasional
otherwise would not be considered
excesses may occur. The final rule
prudent based on the condition and
provides that a bank should structure
operations of the correspondent. The
transactions or monitor exposure to a
correspondent to ensure that exposure Board received 112 comments
addressing this section specifically.
ordinarily does not exceed internal
limits, except far occasional excesses
Elimination of the Guidelines
resulting from factors such as unusual
market disturbances, market movements Forty-three commenters, primarily
large banks, opposed the requirement
favorable to the bank, operational
that banks adhere to these limits. Forty
problems, or increases in activity.
commenters argued that the Board
Unusual late incoming wires or
should eliminate the guidelines, and
unusually large cadi letters would be
three commenters urged that the
considered examples of the types of
guidelines be merged into the
activities that could lead to excesses
prudential standards to retain
over internal limits that would not be
responsibility in management for the
considered impermissible under the
safe and sound management of
final rule. The final rule requires the
exposure. One commenter proposed that
bank to establish appropriate
where banks have appropriate internal
procedures to address excesses over
prudential policies, they need not
internal limits.
With respect to intraday monitoring, demonstrate that they are within the
guidelines. Seven commenters argued
the Board recognizes that intraday
exposure may be difficult for a bank to that the proposed rule would require the
creation of a comprehensive system to
actively monitor and limit. Under the
monitor credit exposure, as measured by
final rule, intraday exposure, like
the rule, simply to demonstrate that
interday exposure, may be monitored
retrospectively. Further, where the risk credit exposure is substantially within
resulting from intraday exposure is low, the guidelines. Ten other commenters
taking into account the condition of the argued that the benchmarks are crudely
calibrated and that compliance with
correspondent and the size of the
exposure, specific limits and monitoring them would divert resources within
banks away from activities designed to
to those limits would not be required
achieve real reductions in risks. Eight
under the final rule.
other commenters stated that the
Additionally, to ease monitoring in
the case of mergers or acquisitions, the guidelines would create costly
final rule excludes exposure resulting inefficiencies and reduce interbank
from the merger or acquisition of a hank liquidity, as banks would reduce
exposure to an individual
from the calculation of “credit
exposure,” for the purposes of the limit correspondent solely to avoid
on credit exposure for one year after the monitoring costs. One commenter
merger or acquisition.
contended that the guidelines would, in
E
effect, penalize banks with existing
internal controls. One commenter
asserted that many banks lack the
information technology that would
permit on-line access to information on
credit exposure to a specific
correspondent, and that purchasing
such a system would cost $1 million.
Two commenters argued that it is
impossible to monitor and therefor to
limit global exposure daily.
The Level of the Guidelines
The board received fifty-seven
comments concerning the amount of
permissible exposure under the
guidelines, two of which specifically
endorsed the guidelines. Two
commenters urged that banks in a bank
holding company be permitted to
aggregate their credit exposure to
individual correspondents in measuring
compliance with the guidelines. One
commenter argued that the limits were
too high and suggested that they not
exceed the legal lending limits, which
are themselves too high in the opinion
of the commenter. The remainder of the
commenters argued that the guidelines
were too restrictive.
The commenters presented a number
of arguments for relaxing the guidelines.
Seventeen commenters noted that the
benchmarks could force a bank to
reduce its exposure to a well-managed,
adequately capitalized correspondent
while taking more exposure to other
correspondents that the bank may not
believe are as creditworthy. Eight
commenters stated that small banks*
federal funds sales can fluctuate
dramatically, making continuous
compliance costly and difficult. Six
commenters expressed concern that
cash letter fluctuations would make
compliance with the guidelines
difficult. Two commenters expressed
concern that the guidelines would make
it difficult to fund their correspondent
to cover payments system transactions.
One commenter argued that the
guidelines would force inexperienced
banks to engage in securities trading in
order to avoid federal funds sales.
Sixty-two commenters emphasized
the difficulty of diversifying
correspondent business in order to
comply with the guidelines. Fifty-nine
of these commenters focused on the
costs of establishing and maintaining
additional correspondent relationships,
and many argued that the expense of
diversification exceeds the reduction in
risk. Four commenters asserted that
mergers and acquisitions have reduced
the number of suitable correspondents.
One commenter argued that larger
correspondents were not interested in
providing services to smaller banks.
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
Five correspondents argued that
concentrating correspondent business is
beneficial because a close relationship
covering multiple services is important
and brings such benefits as preferred
customer status. One commenter argued
that only by concentrating its
correspondent business can a small
bank engage in a broad range of
transactions, such as settling trades in
Treasury bills in an amount large
enough to obtain the maximum yield.
Six other commenters argued that
concentrating correspondent business
may reduce systemic risk by facilitating
closer monitoring.
Eight commenters contended that
reducing exposure by selling federal
funds through an agent is more
expensive. Four commenters asserted
that reducing exposure by shifting from
compensating balances to fees reduces
profitability because compensating
balances often provide a higher return
than short-term investments. Another
commenter argued that fees created a
risk to the correspondent of
nonpayment.
Three commenters proposed
modifications to the guidelines. One
urged an exemption for well-managed
banks and two others suggested that the
tiers be altered to permit a minimum
percentage or dollar amount of
acceptable exposure without regard to
capitalization.
The Final Rule
The final rule places greater emphasis
on analysis of the creditworthiness of
correspondents and decreases the
emphasis on across-the-board limits.
The limit on credit exposure to
adequately capitalized correspondents
has been eliminated. The limit on credit
exposure to correspondents that a bank
cannot demonstrate are at least
adequately capitalized remains,
however. The Board believes that the
elimination of the limit for adequately
capitalized correspondents will
significantly reduce the problems
associated with the limits. Because
fewer correspondents would be subject
to the limits, monitoring to ensure
compliance should be less costly.
Additionally, because the remaining
limit on credit exposure would be
implemented as part of the bank's
normal policies and procedures, the
final rule permits a bank to choose to
implement the limit through structuring
of relationships or monitoring.
60097
Section 206.4(a)(1) Well-Capitalized dealing with an adequately capitalized
Correspondents [Final Rule—Included correspondent. Two other commenters
asserted that the burden of complying
With Adequately Capitalized
with the rule would lead respondents to
Correspondents Under Section
cease to do business with adequately
206.4(a)(1))
The proposed rule stated that, except capitalized banks. Three commenters
as otherwise provided in § 206.3, a bank argued that it would be very difficult for
need not limit its credit exposure to a banks to regain market share if they
drop, even temporarily, from well to
correspondent that the bank can
adequately capitalized. Two
demonstrate is well capitalized, as
suggested that the rule may
defined in $ 206.6 of the proposed rule. commenters
exacerbate systemic risk by restricting
The Board received three comments on credit
to a bank when that bank’s capital
this section, two of which strongly
declines by an arbitrary amount.
endorsed the rule as written.
Two commenters complained that, in
One commenter expressed concern
effect, the rule would force banks to
that regulators will restrict respondent's restrict their exposure to transactions
discretion in creating exposure to well- with maturities shorter than 30 days,
capitalized banks and that respondents, leading banks to concentrate bank
fearing that, will themselves restrict
funding in shorter maturities, rather
their exposure, reducing liquidity and than balancing short- and long-term
fragmenting correspondent
exposure. These commenters also
relationships. The final rule continues argued that the rule would force banks
to provide that, while prudential limits to buy securities, reducing liquidity and
to well-capitalized correspondents may exacerbating the credit crunch. In
be appropriate, these limits are not
addition, two commenters expressed
bounded by an express limit in the rule. concern that misunderstanding of the
purpose of the capital classifications
Section 206.4(a)(2) Adequately
could lead to a retreat from institutions
Capitalized Correspondents [Final
Rule—Included in Section 206.4(aX l)l that do not pose a risk to the banking
system or to their customers, but that do
The proposed rule provided that a
not meet the standards to be considered
bank ordinarily should limit its daily
“well capitalized.”
interday credit exposure to a
Proposed Changes
correspondent that the bank can
demonstrate is adequately capitalized,
Six commenters proposed changes to
as defined in $ 206.6 of the proposed
the guidelines concerning adequately
rule, to an amount equal to not more
capitalized banks. Two commenters
than 50 percent of the bank’s total
suggested that the 25 percent limit only
capital. The proposed rule also provided apply to exposures with a maturity of
that, for such a correspondent, the bank over 90 days. One suggested that die
ordinarily should limit its daily inter only restriction on banks dealing with
day credit exposure with a remaining
adequately capitalized correspondents
term to maturity of more than thirty
be a limit of 50 percent of capital on
days to an amount equal to not more
exposure with maturities of 90 days or
than 25 percent of the bank’s total
more. Two other commenters suggested
capital. Twenty-three commenters
that the exposure limit be increased to
specifically addressed this section.
100 percent of capital with a 50 percent
limit for 30 day maturities. Conversely,
Elimination of Limit
one commenter suggested that the Board
Eighteen commenters suggested that eliminate limits on credit exposure with
the final rule eliminate the distinction maturities longer than 30 days, asserting
between adequately and wellthat tracking exposure by maturity is
capitalized correspondents altogether. expensive, especially for small banks,
A number of banks argued that this
and that as a result banks will eliminate
provision would have an adverse effect exposure to adequately capitalized
on adequately capitalized banks or that banks.
the difference between adequately and
The Final Rule
well-capitalized banks was not
meaningful. One commenter argued that The final rule does not include a
the rule would interfere with an
regulatory limit on credit exposure to
adequately capitalized bank’s ability to adequately capitalized institutions. The
compete in international funding
Board believes that this change will
markets. Three commenters pointed out reduce monitoring costs and avoid
that, although the difference Detween a unwarranted reductions in the business
well-capitalized bank and ah adequately of adequately capitalized banks due to
capitalized bank is insignificant at the the implementation of section 308.
margin, the rule imposes a significant Elimination of this limit also reflects the
monitoring burden on respondents
difficulty in setting an appropriate
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Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
exposure limit that reflects the actual
credit and liquidity effects of a
correspondent’s failure in light of
prompt partial payment by the FDIC.
Further, the proposed limit on credit
exposure for adequately capitalized
correspondents served largely as a
transition from the unrestricted credit
exposure permitted for well-capitalized
correspondents to the 25 percent limit
for less than adequately capitalized
correspondents. The prudential
standards of the proposed final rule
have been modified to address this issue
more directly by emphasizing analysis
of the creditworthiness of a
correspondent and requiring a bank to
take into account any deterioration in
the financial condition of its
correspondent.
Finally, credit exposure in excess of
25 percent of the bank’s total capital
would not be “grandfathered” under the
proposed final rule, thus encouraging a
bank with significant credit exposure to
a correspondent that is in danger of
slipping below adequately capitalized to
limit the maturity of any credit exposure
in excess of the 25 percent guideline.
The final rule also reduces the need
for Arapid reduction in exposure to a
correspondent that has slipped below
adequately capitalized by extending the
transition provision to 120 days,
allowing the bank more time to evaluate
exposure and restructure activities.
Section 206.4(a)(3) Other
Correspondents [Final Rule—
Incorporated in Section 206.4(a)(1)]
The proposed rule provided that a
bank ordinarily should limit its daily
interday credit exposure to a
correspondent that the bank cannot
demonstrate is well or adequately
capitalized to an amount equal to not
more than 25 percent of the bank’s total
capital. The Board received nine
comments on this section, one of which
supported the regulation as written.
Tnree commenters proposed that the
rule increase permissible exposure to 50
percent of capital. One of these
commenters suggested that this increase
be contingent upon the respondent
conducting due diligence quarterly.
Another commenter argued that
restricting exposure to less than
adequately capitalized banks would
increase the likelihood of their failure.
Three commenters suggested that the
final rule be more stringent. Two
suggested that the rule prohibit any
uninsured exposure to a significantly or
critically undercapitalized
correspondent, and the other suggested
that the rule prevent significantly
undercapitalized banks from purchasing
federal funds or certificates of deposit
with maturities over seven days.
Finally, one commenter questioned why
the proposed rule did not distinguish
between undercapitalized, significantly
undercapitalized, and critically
undercapitalized banks.
As discussed above, the limit on
credit exposure to correspondents that a
bank cannot demonstrate are at least
adequately capitalized has been retained
in the final rule. Greater credit exposure
to such correspondents would generally
create undue risk to banks. However,
the Board does not believe that
additional guidelines to address more
significantly impaired correspondents
are warranted. Banks’ prudential
policies and procedures should address
exposure to particularly troubled
correspondents.
Section 206.4(b) Commonly Controlled
Insured Depository Institutions [Final
Rule—Section 206.2(b) and (c)J
The proposed rule provided that,
except for the general prudential
standards in § 206.3, a bank need not
limit its credit exposure to a
correspondent that is commonly
controlled with the bank and for which
the bank is subject to liability under
section 5(e) of the Federal Deposit
Insurance Act.
The proposed rule defined a
correspondent as commonly controlled
with the bank if 25 percent or more of
any class of voting securities of the bank
and the correspondent were owned,
directly or indirectly, by the same
depository institution or company; or,
either the bank or the correspondent
owns 25 percent or more of any class of
voting securities of the other. Exposure
to a commonly controlled depository
institution was excluded from the limits
on credit exposure because there is no
effective way for an insured bank to
limit its credit exposure to an FDICinsured depository institution that is
commonly controlled with the bank.
The cross-guarantee provisions of the
Federal Deposit Insurance Act make an
insured depository institution
potentially liable to the FDIC for losses
resulting from the failure of a commonly
controlled insured depository
institution. The Board received fourteen
comments on this section, three of
which supported the section as written.
Substantive Comments
Eleven commenters criticized the
exemption for commonly controlled
institutions. Eight of them, submitting a
substantially similar letter, argued that
this provision would permit big banks
to evade the purpose of the statute by
shifting funds among commonly
controlled institutions. Another
commenter argued that depositor risk is
measured by institutions and that risk to
the deposit insurance system is not
reduced because of bank consolidation.
The commenter questioned whether the
rule reflects a regulatory bias towards
consolidation. In contrast, two other
commenters argued that the Board
should exclude inter-affiliate
transactions from the rule entirely.
The provisions of the proposed^ rule
reflected the authority of the FDIC to
invoke cross-guarantees and thereby
override any efforts of a bank to limit
exposure to a commonly controlled
correspondent, as well as current inter
affiliate funding arrangements within
bank holding companies. Because of the
cross-guarantees, disruption of these
arrangements would not yield a
commensurate reduction in risk to the
FDIC insurance funds or to the banking
system. The Board believes that
exposure to commonly controlled
correspondents should not be covered
by either the limits on credit exposure
or the prudential standards provisions
of the final rule, as a bank cannot
effectively limit its exposure to such
correspondents under either provision.
However, the Board notes that section
23A(a)(4) of the Federal Reserve Act
would continue to apply to transactions
with affiliates, including commonly
controlled insured depository
institutions.
One commenter suggested that the
exclusion apply to banks that own
shares in bankers’ banks. The Board
does not believe that it is appropriate to
apply the exclusion to owners of a
bankers’ bank because the failure of the
bankers’ bank would not subject the
owners to the cross-guarantee
provisions of section 5(e) of the Federal
Deposit Insurance Act.
Drafting
Two commenters suggested that the
exception include banks subject to the
provisions of section 23A of the Holding
Company Act. This portion of the rule
reflects those banks subject to the crossguarantee provisions, which will cover
virtually all those covered by section
23A.
This provision has been retained in
the final rule but has been moved to the
definitions section with conforming
drafting changes.
Section 206.4(c) Exposure of
Subsidiaries [Final Rule—Section
206.4(e)]
The proposed rule provided that, in
calculating credit exposure to a
correspondent under this part, a bank
must include the credit exposure of the
bank's subsidiaries to the
Federal Register / VoL 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
correspondent. If the bank did not own a majority-owned subsidiary’s exposure
100 percent of the shares of the
would be included in the parent bank’s
subsidiary, the proposed rule required exposure calculation.
the bank's credit exposure to include a Section 206.4(d) Transition Provisions
pro rata portion of the subsidiary’s
[Final Rule—Section 206.4(a)(2)]
exposure, based on the percentage
ownership of the bank in the subsidiary. The proposed rule required that,
where a bank is no longer able to
The purpose of this section was to
capture the full exposure of a bank to a demonstrate that a correspondent is
correspondent. The Board received five adequately capitalized or well
capitalized for the purposes of
comments on this section.
§ 206.4(a)(1) or (2), including where the
Four commenters argued for
restricting the scope of the regulation to bank cannot obtain adequate
subsidiaries of which the bank owns a information concerning the capital
ratios of the correspondent, the bank
majority of the voting stock. Two
commenters argued that where a bank should reduce its credit exposure to the
owns only a minority position, it may be appropriate level under § 206.4(a)
unable to obtain daily exposure figures. within 30 days after the date when
Three commenters stated that the parent current call report or other relevant
financial data normally would be
bank is unlikely to have consolidated
available. The Board received fortysystems for calculating exposure for
minority-owned subsidiaries, and one seven comments on this section.
noted that the percentage ownership
Extension of the Transition Period
may not justify the expense to the
Forty-five commenters expressed
subsidiary of establishing an
concern about the increase in
information reporting system for the
monitoring requirements when a
shareholder bank. One of the
commenters argued a bank cannot cause correspondent drops from well to
adequately capitalized, the competitive
a subsidiary that the bank does not
control to reduce its exposure, and the impact on the correspondent, and
bank therefore could ensure compliance compliance burdens. These commenters
urged the Board to avoid overreaction to
with the limits only by selling its
interest in the subsidiary or by reducing temporary dips in capital and to extend
the transition period. Thirty of these
its own exposure to the counterparty.
Finally, three commenters argued that commenters, submitting a substantially
where the subsidiary is not included in similar letter, proposed that banks be
given one year to resume wellthe bank’s consolidated financial
capitalized status. Eight commenters
statements, but is only reported as an
investment, the parent’s exposure is not recommended transition periods
the subsidiary’s exposure but is limited ranging from 90 to 120 days. Four
commenters noted that a variety of
to the bank’s investment.
One commenter queried how the pro factors, such as regulatory changes,
rata portion should be determined if a increases in reserves, asset revaluation,
bank holds different classes of stock in or acquisitions, could cause a bank's
capitalization ratio to change abruptly
the subsidiary. This commenter
suggested that the provision only apply without necessarily signifying
to banks holding common stock because significantly increased risk. Another
the same credit exposure does not exist commenter argued that the proposed
rule, as written, would require a swift,
if the bank holds preferred stock, and
abrupt adjustment to temporary swings
proposed that where a bank holds a
in capital, resulting in a market bias for
different class of stock, it should be
permitted to use any reasonable method banks with capital less subject to
fluctuations. Five commenters argued
to calculate exposure.
In formulating the proposed rule, the that where the credit exposure consists
Board noted that banks may assume
of off-balance sheet items or instruments
obligations to support a subsidiary
with maturities of longer than 30 days,
beyond their actual investment.
judicious reductions in credit exposure
However, the Board has modified the
may not be possible within the rule’s
final rule to require a bank to include
time frame. Three others stated that
with the bank’s own credit exposure 100 delays in financial reporting, especially
percent of the credit exposure of any
where the respondent relies on a
subsidiary that the bank is required to
reporting service, may make compliance
consolidate on its Report of Condition with the transition provisions extremely
and Income or Thrift Financial Report. difficult.
One commenter inquired whether a
This provision generally captures the
credit exposure of any majority-owned respondent must adjust its exposure if
subsidiary of the bank. Under the final the correspondent provides assurances
that it will reacquire its former status
rule, therefore, none of a minorityowned subsidiary’s exposure ana all of within the next reporting period.
60099
The Board believes that a longer
transition period of at least a calendar
quarter will avoid undue disruptions in
correspondent relationship for
temporary declines in capital ratios by
allowing the correspondent an
opportunity to bring its capital ratios
back the relevant levels before the next
quarterly report. The extended period
will also provide the exposed bank more
time to implement any monitoring
required to demonstrate compliance
with the regulatory limit and to adjust
the maturities or level of exposure to the
correspondent. Accordingly, the final
rule would permit a bank 120 days to
reduce its credit exposure to a
correspondent.
If a bank has been relying on
information from call reports or from a
bank rating service for a correspondent’s
capital ratios, the 120-day period would
run from the date when the call report
or bank rating reflecting the
correspondent’s reduced capital ratios
was received, or from the date that the
information normally would be
received. If a bank has been relying on
information received from the
correspondent to demonstrate that the
correspondent is at least adequately
capitalized, and the correspondent is no
longer providing such information, the
120-day period would run from the date
when the bank ordinarily would have
received the information from the
correspondent.
Section 206.5 Credit Exposure [Final
Rule Consolidated in Section 206.4J
Section 206.5(a) Scope of Credit
Exposure [Final Rule—Section 206.4(b)]
The proposed rule defined the credit
exposure of a bank to a correspondent
as the bank’s assets and off-balance
sheet items that are subject to capital
requirements under the capital
adequacy guidelines of the bank’s
primary federal supervisor and that
involve claims on the correspondent.
The proposed rule excluded certain
relatively lower-risk items. In addition,
for the purposes of this section, the rule
provided that off-balance sheet items
were to be valued on the basis of current
exposure. Under the proposed rule,
"credit exposure’’ was subject to the
numerical benchmark guidelines or
limits. In addition to the comments
concerning the definition of exposure,
addressed in § 206.2(c) above, the Board
received ten comments on the definition
of credit exposure.
One commenter noted that credit
exposure is difficult to measure and
criticized the proposed rule’s emphasis
on it. The proposed final rule
deemphasizes credit exposure by
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Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
eliminating the regulatory limit on
credit exposure to adequately
capitalized correspondents. While most
of the commenters addressed the
specific exclusions from the calculation
of credit exposure, one commenter
expressed concern about the inclusion
of derivative instruments, such as
swaps, in the calculation of interbank
exposures, especially in light of the fact
that non-bank correspondents or parties
to derivative instruments are excluded.
This commenter argued that the rule
would drive the derivative business to
non-bank counter-parties, weakening
the safety protocols introduced into the
swaps and other derivative markets as a
result of bank participation in the
markets. The Board believes that banks
should have similar controls on credit
exposure to nonbanks as on credit
exposure to banks. However, exposure
to nonbanks was not addressed by the
statute. Further, the Board believes that
it is not appropriate to exclude credit
exposure from derivative instruments
from the rule, as it represents a
significant source of interbank exposure
in many cases.
One commenter argued that
depository institution equity securities
taken as collateral or in satisfaction of
a debt should be excluded from the
definition of “credit exposure” because
these instruments are not payment
obligations. Such transactions give rise
to a risk of loss if the correspondent
fails, and therefore are covered by the
definition of “credit exposure.” In some
circumstances, however, obligations
collateralized by bank stock may qualify
for exclusion under 206.4(d)(3) of the
final rule. Hie definition in the final
rule has been redrafted to clarify that
capital instruments issued by the
correspondent are included in the
definition of “credit exposure.”
Another commenter asked if the
calculation of “current replacement
value” for interest rate and foreign
exchange contracts means that banks
must make daily mark-to-market
calculations on a counterparty by
counterparty basis. The rule provides
that monitoring must be on a mark-tomarket basis. However, the marking
need only be done at the appropriate
monitoring intervals, which depend on
the factors listed in the revised
monitoring provision discussed above,
not daily. One commenter stated that it
has a sophisticated system which
measures fractional rather than mark-tomarket exposure, and inquired whether
it may use its own system rather than
the proposed rules. As noted above in
the discussion of monitoring, alternative
systems may be used where they will
effectively maintain exposure within the
prescribed limits.
Six commenters urged that settlement
exposure be specifically excluded for
the sake of clarity. Two commenters
urged that intraday exposure be
specifically excluded. One commenter
suggested that intraday exposure be
defined as exposure of less than 24
hours.
The proposed final rule has been
redrafted for greater clarity, specifying
that intraday or settlement exposure and
agented funds are not included in
“credit exposure.”
Section 206.5(b) Netting [Final Rule—
Section 206.4(c)]
The proposed rule provided that
transactions covered by netting
agreements that are valid and
enforceable under all applicable laws
may be netted in calculating exposure.
The Board received two comments on
this section.
One commenter urged the Board to
permit mutual correspondents to deduct
the reciprocal “due from” balances from
exposure limits because they reduce
exposure risk. Another commenter
requested that the Board clarify the
requirements that a bank “must have
reasoned legal opinions” that netting
contracts are valid and enforceable.
Under the final rule, the netting
provision remains unchanged.
Reciprocal "due from” balances that do
not result in legally binding netting do
not reduce credit risk to the same extent
as legally binding netting. Reasoned
legal opinions that netting contracts are
valid would include opinions of counsel
describing the legal reasoning that led to
the conclusions expressed in the
opinions.
Section 206.5(c) Exclusions [Final
Rule—Section 206.4(d)]
The proposed rule established four
exclusions to the scope of credit
exposure.
Section 206.5(c)(1) Secured
Transactions [Final Rule—Section
206.4(d)(1)]
The first exclusion involved
transations, including reverse
repurchase agreements, that are fully
secured by government securities or
readily marketable collateral having a
current market value equal to 100
percent of the credit exposure under the
transaction. For the purpose of this
exclusion, “government securities”
were defined as obligations of, or
obligations fully guaranteed as to
principal and interest by, the United
States government or any department,
agency, bureau, board, commission, or
establishment of the United States, or
any corporation wholly owned directly
or indirectly by the United States.
“Readily marketable collateral” means
financial instruments or bullion that
may be sold in ordinary circumstances
with reasonable promptness at a fair
market value determined by quotations
based on actual transactions on an
auction or a similarly available daily
bid- and ask-price market. Both of these
definitions were taken from the Office of
the Comptroller of the Currency’s
lending limits on national banks. The
Board received six comments on this
section.
Two commenters suggested that this
exception cover transactions to the
extent that they are secured. The final
rule has been redrafted to exclude
transactions to the extent that they are
secured.
Two other commenters suggested that
the definition of government securities
include those backed by the full faith
and credit of a state government as well.
The definition of government securities
has not been changed, but the Board
believes that most state securities would
be covered by the definition of “readily
marketable collateral.” Transactions
secured by these securities, therefore,
would be excluded from credit
exposure.
One commenter asked if letters of
credit guaranteed by the Export-Import
Bank of the United States would be
considered government securities. The
Board notes that, regardless of whether
guaranteed letters of credit would be
considered to be government securities,
such transactions generally would
qualify for exclusion from the
calculation of credit exposure provided
under § 206.4(d)(3) of the final rule (see
discussion under “Quality assets”).
Another commenter expressed
concern that the exclusion for
transactions secured by governmentbacked securities would lead to
increased investment in government
securities and decreased loans. The
Board recognizes that the rule could
encourage investment in government
securities, but investment in
government securities reflects lower
credit risk than many other transactions
and is consistent with the capital
guidelines.
Section 206.5(c)(2) Cash Items in the
Process of Collection (CIPC) [Final
Rule—Section 206.4(d)(2)]
The second exclusion from the
calculation of credit exposure covered
the proceeds of checks and other cash
items deposited in an account at a
correspondent that are not yet available
for withdrawal. The Board received nine
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
60101
greater, and a leverage ratio of 5.0
comments on this section, three of
secondarily liable or that result in
percent or greater. A correspondent
which supported the section as written. secondary exposure to the
Three commenters expressed concern correspondent, including loans to third would be considered “adequately
capitalized” if the correspondent has a
about the rule’s treatment of when a
parties secured by stock or debt
cash item becomes exposure. One asked obligations of the correspondent, loans total risk-based capital ratio of 8.0
percent or greater, a Tier 1 risk-based
if “due from” balances should be
to third parties purchased from the
measured by the actual available
correspondent with recourse, and loans capital ratio of 4.0 percent or greater,
balance as reported by the bank on its
or obligations of third parties backed by and a leverage ratio of 4.0 percent or
internal ledger balance. The final rule
stand-by letters of credit issued by the greater. As used in the proposed rule,
the terms “well capitalized” and
requires that such balances be measured correspondent. The Board received
“adequately capitalized” were similar
by the actual available balance. Two
three comments on this section.
but not identical to the definition of
trade associations commenting on the
One commenter expressed concern
those terms as used for the purposes of
rule stated that current correspondent
that the definition of “quality asset”
practice is to make funds available as
raises the possibility that a loan secured the prompt corrective action standards
early in the day as possible, causing
by the stock of a correspondent may lose under section 38 of the Federal Deposit
Insurance Act (12 U.S.C. 1831o)
respondents under the proposed rule to its status and be counted as exposure,
("prompt corrective action standards”).
incur a measurable exposure for a longer discouraging such loans. Another
period of time and perhaps before
commenter suggested that the rule give The proposed rule further provided that
a correspondent that is a foreign bank
collection of the underlying item has
an exposed bank at least 30 days to
may be considered “well capitalized” or
actually taken place. The Board notes
adjust to a decline in the quality of a
“adequately capitalized” under this
that the valuation of cash items in the
quality asset. The third commenter
process of collection that would not be argued that credit exposure backed by a section without regard to the minimum
leverage ratios required under
considered to be deposits by the FDIC, quality asset, such as a letter of credit,
acting as receiver of a failed bank, can
should be excluded from the definition subparagraphs (a)(l)(iii) and (a)(2)(iii) of
this section of the proposed rule. The
onlv be made after the fact. The Board
of credit exposure.
Board received 137 comments on this
In the final rule the exclusion for
believes, however, that the proposed
section.
quality assets has been broadened to
standard best approximates this value
include direct exposure to a
and has retained it in the final rule.
Criticism of the Emphasis on Capital
correspondent that is backed by a
Clarifi cation
Sixteen commenters disagreed with
creditworthy obligor as well as a
Six commenters asked what
correspondent’s secondary exposure on the Board’s approach to structuring the
comparable items are included in
a quality asset. Additionally, under the limits on credit exposure. Ten
“checks and other cash items.” One
final rule, the potential for excesses in commenters argued that the proposed
rule overemphasized capital relative to
commonter specifically suggested that
exposure is recognized and a bank is
credit card and debit card transaction be required to have appropriate procedures other creditworthiness indicators such
as liquidity, asset quality, earnings
covered by the exclusion. Two
to deal with such excesses.
strength, regional and product line
commenters urged that it exclude all
Section 206.5(c)(4) FDIC-Insured
portfolio diversity, and operating
cash items, since the associated risk
environment. These commenters
tends to be relatively short in duration. Amounts [Final Rule—Section
expressed concern that the proposed
While cash items that are not treated as 206.4(d)(5)]
rule could encourage banks to focus on
No
comments
were
received
on
this
“agency” transactions by the FDIC
clearly result, in credit risk and should section and it remains unchanged in the capitalization rather than on their own,
broader based, prudential systems for
final rule.
be included in credit exposure, the
Board believes that it is appropriate to Mergers and Acquisitions [Final Rule— analyzing correspondent credit or on the
efficiency or competitiveness of the
exclude from credit exposure any item Section 206.4(d)(4)]
correspondent’s payments and
that the FDIC treats as being collected in
processing systems. In addition, seven
As noted above, one commenter
an agency capacity rather than as a
suggested that banks be given time after commenters questioned the value of
deposit or claim. The Board does not
capital as an indicator of strength. One
a merger to bring exposure within the
believe, however, that the FDIC has
addressed whether the credit and debit guidelines for credit exposure. The final commenter pointed out that risk-based
rule excludes exposure that results from capital provides a numerical assessment
card transactions are collected in an
of subjective risks. Another commenter
a merger or acquisition of a bank from
agency capacity.
the definition of “credit exposure” for asserted that capital levels measured on
Miscellaneous
one year after the merger or acquisition. a daily or quarterly basis are notoriously
This exclusion gives banks one year to inaccurate. A third commenter argued
One commenter asked if the Board
that the limits on credit exposure
merge their systems for monitoring
would provide systems support in
should be based on the book value
accounting for settlement exposure and credit exposure.
rather than on the market value of a
cash items in the process of collection. Section 206.6 Capital Levels of
correspondent’s assets. A bank holding
The Board believes that this support is Correspondents [Final Rule—Section
company argued that inadequate loan
better provided by the market, and that 206.5]
loss provisions can lead to a
correspondents may provide such
The proposed rule provided that, for misrepresentation of a bank’s actual
support.
strength. Two commenters suggested
Tnis exclusion remains unchanged in the purpose of compliance with the
that if the proposed rule is seeking an
credit exposure guidelines, a
the final rule.
objective measure it should select one
correspondent would be considered
Section 206.5(c)(3) Quality Assets
“well capitalized” if the correspondent which is easy to measure and not
lFinal Rule—Section 206.4(d)(3)]
subject to frequent fluctuations. One
has a total risk-based capital ratio of
commenter suggested that, as an
The third exclusion covered “quality 10.0 percent or greater, a Tier 1 riskalternative, the guidelines be based on
assets” on which the correspondent is
based capital ratio of 6.0 percent or
60102
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
the financial markets. In contrast, two
commenters pointed out that the
advantage of using capital is that it will
encourage large banks that are not well
capitalized to strengthen their capital
position in order to maintain their
interbank business. The final rule has
been amended to de-emphasize the
capital of correspondents by removing
the limit on credit exposure to
adequately capitalized correspondents.
Monitoring Capital of Domestic Banks
Sixteen commenters argued that
gathering and analyzing data to the
extent required by .the rule is extremely
difficult and unfairly burdensome, and
that small banks lack the technical
capacity and resources to conduct this
analysis. Eight commenters objected to
the cost of monitoring capital. Another
commenter claimed that large banks
may resist giving capitalization
information to smaller banks seeking to
initiate a correspondent relationship.
Moreover, this commenter pointed out
that prompt corrective action rules
forbid advertizing capital levels. One
conHnaoier argued that without access
to its correspondent's examination
report, it would be unable to determine
if the correspondent was adequately
capitalized. Four commenters noted that
CAMEL ratings are confidential.
Nineteen commenters suggested that
regulatory agencies publish
capitalization ratings, lists of well and
adequately capitalized correspondents,
or exposure limits for particular
correspondents, domestic and foreign.
These commenters justified the request
by arguing that regulatory agencies have
access to the information and have the
capacity to make a more complete
evaluation of safety and soundness. One
commenter urged that the regulatory
authorities release the data they have
available. Five others urged that call
reports or financial reports be altered to
require banks to disclose capital
adequacy.
Four commenters expressed concern
that small banks will be unable to
analyze capitalization information from
a call report due to the length and
complexity of the document. Four
commenters urged that where federal
funds are sold on an agency basis, the
respondent should be able to rely on the
capitalization information supplied by
the agent. One commenter expressed
concern that although the regulation
only required a ratio analysis,
respondents will ask for quarterly call
reports. Moreover, seven commenters
complained of the cost of disseminating
this information. One of these
commenters, for example, noted that it
has 110 respondents to distribute the
report to. Two other commenters
expressed concern that the compliance
burden would increase the advantage
enjoyed by other financial service
providers. One commenter proposed
that the Board draft a model form with
only the essential information necessary
to comply with the rule.
Eight commenters urged the Board to
shift the burden from respondents to
correspondents. Two commenters
proposed that the rule require
correspondents to prepare uniform
disclosure reports ana to disclose
promptly any deterioration in
capitalization. Two other commenters
urged that the rule permit respondents
to base their credit assessment on a
correspondent's self-assessment of its
capital adequacy classification together
with any supporting information it may
provide. Twenty commenters, nineteen
of whom submitted a substantially
similar letter, urged the Board to permit
respondents to rely on a correspondent’s
annual documentation of its capital
levels. Thirty-four commenters
suggested that quarterly submissions
satisfy the requirement. One commenter
urged the Board to inform
correspondents that the financial
information provided to other banks is
subject to review by examiners and
should be consistent with the
information provided to regulators.
The Board recognizes that it is
currently difficult to obtain information
on the risk-based capital levels of a
correspondent. Under the final rule, this
task is somewhat simplified, as a bank
will be required to demonstrate only
that its correspondent’s capital ratios
qualify it as at least adequately
capitalized. While the call report for
correspondents that are not required to
file a complete Schedule RC-R currently
does not provide sufficient information
to calculate a correspondent’s precise
capital ratios, it can be relied on to
demonstrate that a correspondent is at
least adequately capitalized.10 Further,
the Board anticipates that most banks
will receive information on their
correspondent's capital ratios either
directly from the correspondents or
from a bank rating agency. Finally, the
10 Banka with assets of $1 billion or less generally
are required to complete only Part I of the Schedule,
which provides a rough estimate of risk-based
capital. A bank may assume that its correspondent
is at least adequately capitalized if the
correspondent has completed only Part I of
Schedule RC-R. For correspondents that file a
complete Schedule RC-R, the call report does
include sufficient information to calculate a
correspondent's risk-based capital. The Board
expects that further information to facilitate this
calculation will be made available prior to the
implementation of the regulatory limit on credit
exposure to less than adequately capitalized
correspondents.
Board notes that the standard used in
the rule is based solely on capital ratios
and does not require disclosure of
CAMEL ratings.
Five commenters asked for
clarification of permissible sources for
capitalization information. One claimed
that the most accurate information is
informal information and sought
acknowledgement of the validity of it as
a source. Another suggested that the
rule explicitly permit banks to rely on
call reports in determining
capitalization. Two commenters
requested that banks be permitted to
rely on call reports alone. Three
commenters asked the Board to describe
a publicly available information base.
The final rule does not limit a bank to
a single source of information for capital
ratios, but indicates that a bank may rely
on capital information obtained from a
correspondent, bank rating agency, or
other reliable source of information. The
bank may also rely on information
contained in the call report for this
purpose. While the Board recognizes
that informal information may be useful
in evaluating the overall condition of a
correspondent, such information is not
sufficient to justify the higher levels of
credit exposure permitted to adequately
or well-capitalized correspondents
under the rule. As stated in the
summary of the final rule, the rule does
not limit a bank to the use of publicly
available information, but merely
provides that a bank generally is not
required to obtain non-public
information.
Application of the Provision to Foreign
Banks
Thirteen commenters expressed
concern about the difficulty and cost of
monitoring capital levels of foreign
banks. One commenter noted that
disclosure of capital information varies
widely among foreign banks and
another noted that information is
difficult to obtain from the institution or
from secondary sources. One requested
that G-10 banks be required to provide
uniform information. Two other
commenters suggested that additional
flexibility be granted to U.S. banks
which deal with non-Basle banks
because of the added difficulty in
obtaining capital information. Two
commenters requested that the Board
develop a method to determine the
capital levels of foreign correspondents.
One commenter proposed that the
rule permit respondents to rely on
annual data if that is the best available.
Another commenter argued that it is
inequitable to require quarterly analysis
of the capital of U.S. banks while
permitting banks to analyze the
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
capitalization of foreign banks semi
suggest a lower level of credit exposure
annually because information on foreign to a correspondent, the bank should
banks is unavailable on a more frequent adhere to the lower level.
basis. A third commenter proposed that
Frequency of Monitoring
if information is not available at least
Twenty-six commenters sought
semi-annually, exposure to foreign
banks should be restricted to 25 percent. clarification of the frequency with
As in the proposed rule, the final rule which capital must be monitored and
the way it must be measured. Two
permits a foreign correspondent to be
commenters suggested that quarterly
considered "adequately capitalized”
without regard to the level of the foreign monitoring is too frequent and another
proposed that capital be monitored
bank’s leverage ratio. As indicated in
annually. Twenty-three commenters,
the supplementary information to the
proposed rule, the Board believes that nineteen of whom submitted a
substantially similar letter, urged that
this treatment of foreign banks is
capital be measured over a period of
consistent with the findings of the
Capital Equivalency Report submitted time, rather than at a point in time.
Three commenters urged that the
by the Board and the Department of
capitalization of a correspondent in a
Treasury to Congress earlier this year.
multibank holding company be based
The Board recognizes that public
on the capital of the bank holding
sources of information on risk-based
capital ratios may not be available for
company.
Under the final rule for domestic
many foreign bank correspondents. As
with domestic correspondents, however, correspondents, capital should be
monitored quarterly to pick up
the Board anticipates that in most
information based on the
instances the correspondent will
correspondent’s most recent call report,
provide the information to the banks
with which it does business. As foreign financial statement, or bank rating
report. For foreign bank correspondents,
banks do not necessarily prepare
monitoring frequency should be related
financial statements on a quarterly
to the frequency with which financial
basis, as domestic banks do, the final
rule would permit a bank to rely on the statements or other regular reports are
available. Although such information is
foreign bank correspondent’s most
available quarterly for some foreign
recent financial statements.
banks, for many foreign banks financial
Clarification of the Provision
statements generally will be available
Eight commenters quoted the
only on a semi-annual basis. Further,
supplementary information to the
quarterly monitoring of capital is only
proposed rule, which stated that banks required for correspondents to which a
should not rely on capitalization alone bank’s potential credit exposure is more
and that weakness in a correspondent’s than 25 percent of its own capital. If the
management, operations, or loan
internal systems of a bank ordinarily
portfolio might lead a bank to restrict its limit credit exposure to a correspondent
exposure below the permissible limits to less than 25 percent of the exposed
on credit exposure. These commenters bank’s capital, no monitoring of the
pointed out that these terms are
correspondent’s capital would be
subjective and that their interpretation necessary, although periodic reviews of
by the various federal bank regulators
the correspondent’s financial condition
may lead to substantial and unevenly
may be required under § 206.3(a)(2) if
enforced compliance burdens. Two of exposure to the correspondent is
these commenters added that it may be significant.
Six commenters expressed concerns
prohibitively expensive to judge any
about the timeliness of the required
potential “weakness” in a
information. Three noted substantial
correspondent and, as a result,
delays before generally published
respondents may shift their
reports become available and another
correspondent activities to the public
sector. One commenter suggested that to noted that this information is more
expensive if it is obtained before it is
facilitate compliance, the final rule
eliminate references which cut back on commercially available. Two
commenters requested guidelines on the
what is permissible under the
requisite freshness of this data. Because
guidelines and leave other
information in risk-based capital ratios
considerations for the prudential
is generally based on the call report, a
analysis section.
The Board continues to believe that
bank would be justified in relying on
the remaining limit on credit exposure the most recently available reports
should be viewed as a maximum level based on call report data. While there
for credit exposure rather than a safe
may be a significant lag in such data, the
harbor. To the extent that a bank’s
Board believes that where the
prudential policies and procedures
information in such reports is followed
60103
by the bank on a continuing basis, the
reports remain a useful monitor of
trends in the conditions of the
correspondent.
Definition of “Adequately Capitalized”
Several commenters criticized the
definition of “adequately capitalized.”
One suggested that the definition
include all banks with a leverage ratio
of 4 percent or greater and a total risk
based capital ratio in excess of 8
percent. One suggested it include all
banks with a tier 1 ratio of at least 5
percent. Another argued that the
definition of adequately capitalized is
unjustifiably more restrictive than the
definition in the prompt corrective
action standards and suggested that the
definition include correspondents with
a capital ratio of 3 percent and a 1
CAMEL rating. While acknowledging
that a bank cannot disclose its CAMEL
rating, the commenter suggested that it
could disclose if it is adequately
capitalized under this standard. Another
bank suggested that the leverage ratio be
excluded because it is not applied to
foreign banks. Commenters also
addressed the definition of “well
capitalized,” which has been deleted.
One commenter suggested that the rule
be written to state clearly the capital
requirements imposed upon
correspondents. Another commenter
supported the capital definitions.
Tne definition of adequately
capitalized in the proposed rule was
based on, but not identical to, the
definition used for prompt corrective
action. The difference between the
definitions is to enable banks to
determine, from publicly available
information, a correspondent’s capital
for the purpose of this rule. The Board
believes that it would be confusing to
make further changes in this rule’s
definition of "adequately capitalized”
and the definition in the final rule
remains unchanged.
Section 206.7 Waiver [Final Rule—
Section 206.6]
The proposed rule provided that the
Board may waive the application of
§ 206.4(a) to a bank if the primary
federal supervisor of the bank advises
the Board that the bank is not
reasonably able to obtain necessary
services, including payment-related
services and placement of funds,
without incurring exposure to a
correspondent in excess of otherwise
applicable limits. The Board received
three comments on this section.
Two commenters suggested that if the
guidelines are not relaxed, small rural
banks with seasonal cash flows should
receive waivers. As noted above, the
60104
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 J Rules and Regulations
proposed final rule would eliminate the
regulatory limit on credit exposure for
adequately capitalized banks,
substantially easing this constraint. To
the extent that seasonal cash flows
require rural banks to sell federal funds
or engage in other transactions in excess
of 25 percent of their capital, the Board
believes that they should deal with
banks that are adequately capitalized or
better or diversify their credit exposure.
Another commenter suggested that
the Board use its waiver authority
liberally when the exposure is of a
length or a type that extrication within
30 days is quite difficult. The Board
does not believe that this use of the
waiver authority is appropriate. The
waiver is designed for low capital banks
that need payment services and would
not be able to obtain them otherwiee.
Rather than liberalize the waiver
provisions, the Board has extended to
120 days the transition period for
compliance with the limit on credit
exposure to a correspondent that is less
than adequately capitalized. This
extension should permit banks to
reduce exposure judiciously to a bank
whose capital has been reduced. Under
the final rule, the waiver provision
remains unchanged.
Section 206.8 Record Retention
[Deleted in Final Rule]
The proposed rule required that banks
establish recordkeeping reasonably
designed to demonstrate compliance
with the provisions of §§ 206.3 and
206.4. The Board received forty-seven
letters that commented on this section
specifically and one hundred eight
letters that complained of excessive
paperwork generally.
Concerns With Cost Burdens
All of the forty-seven comments on
this section complained of the cost and
burden of these requirements. A trade
association pointed out that banks
already confront substantial compliance
and recordkeeping requirements and
that the requirements in the proposed
rule may exceed banks’ compliance
capacity and ability. Two commeniers
asserted that requiring documentation of
every closed transaction would
substantially increase compliance costs.
These com men tars stated that records of
closed transactions generally are not
retained. Rather, limits are set for
specific products and maturities, and
internal limits are monitored to ensure
they are not exceeded without specific
credit approval. The commenters
proposed that rather than requiring that
records of closed transactions be
available for review, the final rule
should focus on the adequacy of a
bank's establishment and monitoring of
limits, including any reported overages.
Clarification of the Requirement
Three commenters requested that the
final rule articulate what documentation
must be maintained on file, in what
format, and for how long, both to assist
banks in maintaining reasonable records
and to provide examiners with
guidelines to effect uniform
enforcement.
Proposals of Modification
Thirty-eight commenters offered
specific suggestions for reducing the
burden. Two commenters suggested that
the requirements should not apply to
exposure cov ered by FDIC insurance
and that the requirements should be
reduced far smaller amounts of
exposure regardless of the
correspondent’s capitalization. Another
commenter suggested an exception
when exposure is less than 25% of
capital.
Thirty-two commenters urged a
reduction in recordkeeping
requirements for respondents dealing
with well-capitalized banks. Thirty of
them sent an identical letter urging that
the recordkeeping requirement be the
same for a well-capitalized bank as it is
for a Federal Reserve Bank. One
commenter suggested that if a
respondent selects a well-capitalized
correspondent the recordkeeping
burden should be restricted to
maintaining on file the correspondent's
quarterly disclosure and certification of
its capitalization.
Other commenters urged a
generalized reduction in the burden.
One commenter suggested that the
prudential standards requirement be
limited to documenting an annual
review. Two commenters suggested that
the capital monitoring requirement be
satisfied by documentation of an annual
review of capital.
One commenter urged that the
requirement be eliminated altogether,
proposing that examiners rely on the
adequacy of the prudential policies and
that the burden bo on the examiners to
prove a violation of the regulation rather
then on banks to prove compliance.
Final Rule
The specific record retention
requirement has been deleted from the
final rule. Examiners will use examiner
guidance to determine compliance with
the rule.
Section 206.9 Transition Provisions
[Final Rule—Section 206.7]
The proposed rule provided that for a
period of one year beginning on
December 19,1992, a bank would be
required to comply with the prudential
standards required under § 206.3(a), and
under § 206.3(b) would be required to
structure transactions with a
correspondent or monitor exposure to a
correspondent to ensure that its
exposure did not exceed its internal
limits established under § 206.3(a).
During this period, the proposed rule
did not require the bank to meet the
guidelines for credit exposure
established under § 206.4 or monitor
credit exposure under $ 206.3(b).
The proposed rule further provided
that for a period of one year beginning
on December 19,1993, the overall
guideline for credit exposure to an
adequately capitalized .correspondent
contained in § 206.4{bXii) would be 100
percent of die bank’s total capital, with
the guideline for credit exposure having
a remaining term to maturity of more
than 30 days at 50 percent of the bank’s
capital. The proposed rule set the
interim guideline on credit exposure to
an individual correspondent contained
in § 206.4(a)(iii) at 50 percent of the
exposed institution’s total capital. This
section was designed to allow banks
adequate time to rearrange their
correspondent banking relationship to
meet the new requirements. The Board
received twelve comments on this
section, one of which supported the
provision as written and another of
which supported the idea of a transition
period.
Proposed Extension of the Transition
Period.
Nine commenters urged the Board to
extent the initial transition period, i.e.
the period before the prudential
guidelines become effective, to permit
banks to prepare new policies or review
and revise existing policies, to establish
procedures to monitor and control
interbank exposures, and to restructure
correspondent relationships. Two
commenters suggested that the proposed
implementation date would not allow
bank regulatory agencies sufficient time
to train examiners.
The Board believes that a longer
initial transition period will enable
banks that have not made credit
assessments of their correspondents to
do so and for banks to review and,
where appropriate, improve their
monitoring procedures. An extended
initial transition period also will enable
the Board to develop examination
guidelines related to the rule. Therefore,
the final rule provides for a six-month
transition period before the prudential
standards become effective, with the
regulatory limit on credit exposure
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
phased in over a two year period after
that date.
Competitive Analysis
The proposed rule included a
competitive impact analysis discussing
the effects of the proposed rule on the
ability of private sector correspondent
banks to compete effectively with the
Federal Reserve Banks in providing
similar services. The proposed rule did
not limit credit exposure of a bank to
Federal Reserve Banks or to 'V eil
capitalized” correspondents because
such exposure would not pose a risk to
the hank. However, the proposed rule
did impose three substantive
requirements on a bank’s exposure to a
well capitalized correspondent that are
not imposed on a bank’s exposure to a
Federal Reserve Bank, requiring a bank
to have internal policies and procedures
to limit exposure to a well capitalized
correspondent, to structure transactions
or monitor exposure to ensure that
exposure ordinarily remains within the
internal limits established, and to obtain
sufficient information to demonstrate
that the correspondent is well
capitalized. Additionally, for
adequately-capi talized correspondents,
the proposed rule required a bank to
limit overall credit exposure to an
amount aqua! to not more than 50
percent of the exposed bank’s capital,
and to limit credit exposure with a term
to maturity of greater than thirty days to
an amount equal to not more than 25
percent of the exposed bank’s capital.
The analysis included with the
proposed rule indicated that the rule
could have a direct and material adverse
effect on the ability of correspondents to
compete effectively with the Federal
Reserve Banks in providing payment
services, particularly in the area of
check collection. The analysis
concluded that this adverse effect was
due to the differing legal powers of the
Federal Reserve Banks. In assessing
whether the objective of the proposed
rule, to limit the risks that the failure of
a correspondent would pose to exposed
banks, could be reasonably achieved
with a lesser or no adverse Competitive
impact, the Board concluded that the
structure of the proposed rule
minimized any adverse competitive
effects on correspondents by not
imposing rigid limits on credit
exposure, by permitting higher levels of
credit exposure to correspondents with
higher capital levels, and by excluding
cash items in the process of collection
from the calculation of credit exposure
to a correspondent.
In light of comments received on the
proposed rule, however, the Board has
made a number of modifications to the
final rule to reduce further any adverse
competitive effect on private sector
correspondents. These modifications,
described in detail above, include
removing the limit on credit exposure to
adequately capitalized correspondents,
requiring internal limits on exposure to
a correspondent only where there is a
significant risk that payments will not
be made as contemplated, and requiring
monitoring or structuring of transactions
to remain within limits only where
limits are required by the final rule.
Additionally, the final rule affords a
longer initial implementation period in
order to provide banks adequate time to
review existing internal policies and
procedures. The Board believes that the
extended implementation period, along
with the other modifications to the final
rule, will reduce the likelihood that a
bank will conclude that it must transfer
activities to a Federal Reserve Bank.
While the Board recognizes that the
modifications to the final rule do not
completely remove the adverse
competitive effects of the rule, the Board
believes that the provisions of the final
rule are necessary to fulfill the statutory
objectives. Additionally, the Board will
consider whether modifications should
be made to the private-sector adjustment
factor (PSAF) used to calculate the
prices of Reserve Bank services to
address disparities in capital ratios
between the Reserve Banks and private
correspondents resulting from the rule.
6 0 105
significantly reduce the recordkeeping
and regulatory burden imposed by the
rule. The final rule places greater
emphasis on the general internal
policies and procedures of the bank, and
does not require internal limits for all
exposure to correspondents. The
proposed rule also had been clarified to
reduce the burden of monitoring such
exposure. Additionally, the limit on
credit exposure to adequately
capitalized correspondents has been
removed, significantly reducing the
regulatory burden on banks in
complying with the rule. This change
lessens the probability that a bank will
be required to diversify its exposure to
a correspondent as a result of the rule,
and eliminates the need for banks to
monitor credit exposure to an
adequately capitalized correspondent.
Although a bank will continue to be
required to monitor the capital levels of
correspondents to which it has
significant exposure, the final rule
clarifies that a bank may rely on
information obtained from its bank
holding company, correspondent, or
other party, significantly reducing the
burden of obtaining the information.
N otice o f Final Rule
A final rule is generally required to be
published at least thirty days prim to its
effective date. 5 U.S.C. 553(d). An
exception is provided, however, where
the agency has found good cause and
provided the basis for the finding in the
Regulatory Flexibility A nalysis
publication of the rule. 5 U.S.C.
Pursuant to section 603 of the
Regulatory Flexibility Act (Pub. L. 96- 553(d)(3). The final rule has been made
effective as of December 19,1992, in
354, U.S.C. 601 et seq.), the Board
order to comply with the requirements
published for comment an initial
regulatory flexibility analysis analyzing of section 308 of FDK2A, which
becomes effective on December 19,
the provisions of its proposed
1992. Further, although less than thirty
Regulation F. Section 604 of the
Regulatory Flexibility Act requires the days’ notice has been provided before
the effective date of the final rule, the
Board to publish a final regulatory
rule contains transition provisions for
flexibility analysis with the final rule
containing: (1) A statement of the need actual compliance with the provisions
of the regulation. Depository institutions
for, and objectives of, the rule; (2) a
covered by the rule will have six
summary of the issues raised by the
months after the effective date before
public comment in response to the
initial regulatory flexibility statement, a actual compliance with any of the
provisions of the rule is required. The
summary of the assessment of such
comments, and a statement of changes Board therefore finds that there is good
made in the proposed rule in response cause for the final rule to be made
to comments; (3) a description of each effective with less than a thirty-day
of the significant alternatives to the rule notice period.
consistent with the stated objectives of List o f Subjects in 12 CFR Kurt 206
applicable statutes and designed to
Banks, Banking, Interbank liability,
minimize any significant economic
impact of the rule on small entities, and Lending limits, Savings associations.
For the reasons set forth in the
a statement of why these alternatives
preamble, and pursuant to the Board’s
were rejected.
Each of these items are discussed in
authority under section 23 of the
detail in the Supplementary Information Federal Reserve Act, 12 U.S.C. 371b-2,
above. The Board believes that the
the Board is adding 12 CFR Part 206 to
modifications included in the final rule read as follows:
60106
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
PART 206— LIMITATIONS ON
INTERBANK LIABILITIES
Sec.
206.1 Authority, purpose, and scope.
206.2 Definitions.
206.3 Prudential standards.
206.4 Credit exposure.
206.5 Capital levels of correspondents.
206.6 Waiver.
206.7 Transition provisions.
Authority: Section 308 of Public Law 102242,105 Stat 2236,12 U.S.C. 371b-2.
$206.1 Authority, purpose, and scope.
(a) Authority and purpose. This part
(Regulation F, 12 CFR part 206) is
issued by the Board of Governors of the
Federal Reserve System (Board) to
implement section 308 of the Federal
Deposit Insurance Corporation
Improvements Act of 1991 (Act), 12
U.S.C. 371b-2. The purpose of this part
is to limit the risks that the failure of a
depository institution would pose to
insured depository institutions.
(b) Scope. This part applies to all
depository institutions insured by the
Federal Deposit Insurance Corporation.
$206.2 Definitions.
As used in this part, unless the
context requires otherwise:
(a) Bank means an insured depository
institution, as defined in section 3 of the
Federal Deposit Insurance Act (12
U.S.C. 1813), and includes an insured
national bank, state bank, District bank,
or savings association, and an insured
branch of a foreign bank.
(b) Commonly-controlled
correspondent means a correspondent
that is commonly controlled with the
bank and for which the bank is subject
to liability under section 5(e) of the
Federal Deposit Insurance Act. A
correspondent is considered to be
commonly controlled with the bank if:
(1) 25 percent or more of any class of
voting securities of the bank and the
correspondent are owned, directly or
indirectly, by the same depository
institution or company; or
(2) Either the bank or the
correspondent owns 25 percent or more
of any class of voting securities of the
other.
(c) Correspondent means a U.S.
depository institution or a foreign bank,
as defined in this part, to which a bank
has exposure, but does not include a
commonly controlled correspondent.
(d) Exposure means the potential that
an obligation will not be paid in a
timely manner or in full. “Exposure”
includes credit and liquidity risks,
including operational risks, related to
intraday and interday transactions.
(e) Foreign bank means an institution
that: (1) Is organized under the laws of
a country other then the United States;
(2) Engages in the business of
banking;
(3) Is recognized as a bank by the bank
supervisory or monetary authorities of
the country of the bank’s organization;
(4) Receives deposits to a substantial
extent in the regular course of business;
and
(5) Has the power to accept demand
deposits.
ff) Primary federal supervisor has the
same meaning as the term “appropriate
Federal banking agency” in section 3(q)
of the Federal Deposit Insurance Act (12
U.S.C. 1813(q)).
(g) Total capital means the total of a
bank’s Tier 1 and Tier 2 capital under
the risk-based capital guidelines
provided by the bank’s primary federal
supervisor. For an insured branch of a
foreign bank organized under the laws
of a country that subscribes to the
principles of the Basle Capital Accord,
“total capital” means total Tier 1 and
Tier 2 capital as calculated under the
standards of that country. For an
insured branch of a foreign bank
organized under the laws of a country
that does not subscribe to the principles
of the Basle Capital Accord, “total
capital” means total Tier 1 and Tier 2
capital as calculated under the
provisions of the Accord.
(h) U.S. depository institution means
a bank, as defined in § 206.2(a) of this
part, other than an insured branch of a
foreign bank.
$206.3 Prudential standards.
(a) General. A bank shall establish and
maintain written policies and
procedures to prevent excessive
exposure to any individual
correspondent in relation to the
condition of the correspondent.
(b) Standards for selecting
correspondents. (1) A bank shall
establish policies and procedures that
take into account credit and liquidity
risks, including operational risks, in
selecting correspondents and
terminating those relationships.
(2)
Where exposure to a
correspondent is significant, the policies
and procedures shall require periodic
reviews of the financial condition of the
correspondent and shall take into
account any deterioration in the
correspondent’s financial condition.
Factors bearing on the financial
condition of the correspondent include
the capital level of the correspondent,
level of nonaccrual and past due loans
and leases, level of earnings, and other
factors affecting the financial condition
of the correspondent. Where public
information on the financial condition
of the correspondent is available, a bank
may base its review of the financial
condition of a correspondent on such
information, and is not required to
obtain non-public information for its
review. However, for those foreign
banks for which there is no public
source of financial information, a bank
will be required to obtain information
for its review.
(3)
A bank may rely on another party,
such as a bank rating agency or the
bank’s holding company, to assess the
financial condition of or select a
correspondent, provided that the bank’s
board of directors has reviewed and
approved the general assessment or
selection criteria used by that party.
(c) Internal limits on exposure. (1)
Where the financial condition of the
correspondent and the form of maturity
of the exposure create a significant risk
that payments will not be made in full
or in a timely manner, a bank’s policies
and procedures shall limit the bank’s
exposure to the correspondent, either by
the establishment of internal limits or
by other means. Limits shall be
consistent with the risk undertaken,
considering the financial condition and
the form and maturity of exposure to the
correspondent. Limits may be fixed as to
amount of flexible, based on such
factors as the monitoring of exposure
and the financial condition of the
correspondent. Different limits may be
set for different forms of exposure,
different products, and different
maturities.
(2) A bank shall structure transactions
with a correspondent or monitor
exposure to a correspondent, directly or
through another party, to ensure that its
exposure ordinarily does not exceed the
bank’s internal limits, including limits
established for credit exposure, except
for occasional excesses resulting from
unusual market disturbances, market
movements favorable to the bank,
increases in activity, operational
problems, or other unusual
circumstances. Generally, monitoriilg
may be done on a retrospective basis.
The level of monitoring required
depends on:
(i) The extent to which exposure
approaches the bank’s internal limits;
(ii) The volatility of the exposure; and
(iii) The financial condition of the
correspondent.
(3) A bank shall establish appropriate
procedures to address excesses over its
internal limits.
(d) Review by board of directors. The
policies and procedures established
under this section shall be reviewed and
approved by the bank’s board of
directors at least annually.
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
(3) Quality assets, as defined in
(a) Limits on credit exposure. (1) The paragraph (f) of this section, on which
policies and procedures on exposure
the correspondent is secondarily liable,
established by a bank under § 206.3(c) of or obligations of the correspondent on
this part shall limit a bank’s interday
which a creditworthy obligor in
credit exposure to an individual
addition to the correspondent is
correspondent to not more than 25
available, including but not limited to:
percent of the bank’s total capital,
(i) Loans to third parties secured by
unless the bank can demonstrate that its stock or debt obligations of the
correspondent;
correspondent is at least adequately
capitalized, as defined in § 206.5(a) of
(ii) Loans to third parties purchased
this part.
from the correspondent with recourse;
(2)
Where a bank is no longer able to (iii) Loans or obligations of third
demonstrate that a correspondent is at parties backed by stand-by letters of
least adequately capitalized for the
credit issued by the correspondent; or
purposes of § 206.4(a) of this part,
(iv) Obligations of the correspondent
including where the bank cannot obtain backed by stand-by letters of credit
adequate information concerning the
issued by a creditworthy third party;
capital ratios of the correspondent, the
(4) exposure that results from the
bank shall reduce its credit exposure to merger with or acquisition of another
comply with the requirements of
bank for one year after that merger or
§ 206.4(a)(1) of this part within 120 days acquisition is consummated; and
after the date when the current Report
(5) The portion of the bank’s exposure
of Condition and In'come or other
to the correspondent that is covered by
relevant report normally would be
federal deposit insurance.
available.
(e) Credit exposure of subsidiaries. In
(b) Calculation of credit exposure.
calculating credit exposure to a
Except as provided in §§ 206.4 (c) and correspondent under this part, a bank
(d) or this part, the credit exposure of a shall include credit exposure to the
bank to a correspondent shall consist of correspondent of any entity that the
the bank’s assets and off-balance sheet bank is required to consolidate on its
items that are subject to capital
Report of Condition and Income or
requirements under tbi capital
Thrift Financial Report.
adequacy guidelines of the bank’s
(f) Definitions. As used in this section:
primary federal supervisor, and that
(1) Government securities means
involve claims on the correspondent or
obligations
of, or obligations fully
capital instruments issued by the
guaranteed
as to principal and interest
correspondent. For this purpose, offbalance sheet items shall be valued on by, the United States government or any
the basis of current exposure. The term department, agency, bureau, board,
commission, or establishment of the
“credit exposure” does not include
United States, or any corporation
exposure related to the settlement of
wholly
owned, directly or indirectly, by
transactions, intraday exposure,
the United States.
transactions in an agency or similar
(2) Readily marketable collateral
capacity where losses will be passed
back to the principal of other party, or means financial instruments or bullion
that may be sold in ordinary
other sources of exposure that are not
circumstances with reasonable
covered by the capital adequacy
promptness at a fair market value
guidelines.
(c) Netting. Transactions covered by determined by quotations based on
actual transactions on an auction or a
netting agreements that are valid and
similarly available daily bid- ask-price
enforceable under all applicable laws
market.
may be netted in calculating credit
(3) (i) Quality asset means an asset:
exposure.
(A) That is not in a nonaccrual status;
(d) Exclusions. A bank may exclude
(B) On which principal or interest is
the following from the calculation of
not more than thirty days past due; and
credit exposure to a correspondent:
(C) Whose terms have not been
(1) Transactions, including reverse
renegotiated or compromised due to the
repurchase agreements, to the extent
deteriorating financial conditions of the
that the transactions are secured by
additional obligor.
government securities or readily
(ii)
An asset is not considered a
marketable collateral, as defined in
“quality asset” if any other loans to the
paragraph (f) of this section, based on
primary obligor on the asset have been
the current market value of the
classified as “substandard,” “doubtful,”
collateral:
(2) The proceeds of checks and other or “loss,” or treated as “other loans
cash items deposited in an account at a specially mentioned” in the most recent
correspondent that are not yet available report of examination or inspection of
the bank or an affiliate prepared by
for withdrawal;
f 206.4 Credit exposure.
23
60107
either a federal or a state supervisory
agency.
1 206.5
Cepfari levels of conn p o n denta.
(a) Adequately capitalized
correspondents.1 For the purpose of this
part, a correspondent is considered
adequately capitalized if the
correspondent has:
(1) A total risk-based capital ratio, as
defined in paragraph (eXl) of this
section, of 8.0 percent or greater;
(2) A Tier 1 risk-based capital ratio, as
defined in paragraph (e)(2) of this
section, of 4.0 percent or greater; and
(3) A leverage ratio, as defined in
paragraph (e)(3) of this section, of 4.0
percent or greater.
(b) Frequency of monitoring capital
levels. A bank shall obtain information
to demonstrate that a correspondent is
at least adequately capitalized on a
quarterly basis, either from the most
recently available Report of Condition
and Income, Thrift Financial Report,
financial statement, or bank rating
report for the correspondent. For a
foreign bank correspondent for which
quarterly financial statements or reports
are not available, a bank shall obtain
such information on as frequent a basis
as such information is available.
Information obtained directly from a
correspondent for the purpose of this
section should be based on the most
recently available Report of Condition
and Income, Thrift Financial Report, or
financial statement of the
correspondent.
(c) Foreign banks. A correspondent
that is a foreign bank may be considered
adequately capitalized under this
section without regard to the minimum
leverage ratio required under paragraph
(a)(3) of this section.
(d) Reliance on information. A bank
may rely on information as to the capital
levels of a correspondent obtained from
the correspondent, a bank rating agency,
or other party that it reasonably believes
to be accurate.
(e) Definitions. For the purposes of
this section:
(1) Total risk-based capital ratio
means the ratio of qualifying total
capital to weighted risk assets.
(2) Tier 1 risk-based capital ratio
means the ratio of Tier 1 capital to
weighted risk assets.
(3) Leverage ratio means the ratio of
Tier 1 capital to average total
consolidated assets, as calculated in
accordance with the capital adequacy
1 As used In this part, the term “adequately
capitalized” is sim ilar but not identical to the
definition of that term as used for the purposes of
the prompt corrective action standards. See, e g. 12
CFR part 208, subpart B.
60108
Federal Register / Vol. 57, No. 244 / Friday, December 18, 1992 / Rules and Regulations
guidelines of the correspondent’s
primary federal supervisor.
(f]
Calculation of capital ratios, (i) For
a correspondent that is a U.S. depository
institution, the ratios shall be calculated'
in accordance with the capital adequacy
guidelines of the correspondent’s
primary federal supervisor.
(ii) For a correspondent that is a
foreign bank organized in a country that
has adopted the risk-based framework of
the Basle Capital Accord, the ratios shall
be calculated in accordance with the
capital adequacy guidelines of the
appropriate supervisory authority of the
country in which the correspondent is
chartered.
(iii) For a correspondent that is a
foreign bank organized in a country that
has not adopted the risk-based
framework of the Basle Capital Accord,
the ratios shall be calculated in
accordance with the provisions of the
Basle Capital Accord.
§206.6
Waiver.
The Board may waive the application
of § 206.4(a) of this part to a bank if the
primary Federal supervisor of the bank
advises the Board that the bank is not
reasonably able to obtain necessary
services, including payment-related
services and placement of funds,
without incurring exposure to a
correspondent in excess of the
otherwise applicable limit.
§ 206.7 Transition provisions.
(a) Beginning on June 19,1993, a bank
shall comply with die prudential
standards prescribed under § 206.3 of
this part.
(b) Beginning on June 19,1994, a bank
shall comply with the limit on credit
exposure to an individual
correspondent required under § 206.4(a)
of this part, but for a period of one year
after this date the limit shall be 50
percent of the bank’s total capital.
By order of the Board of Governors of the
Federal Reserve System, December 11,1992.
William W. Wiles,
Secretary of the Board.
IFR Doc. 92-30587 Filed 12-17-92; 8:45 ami
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