Full text of Federal Reserve Bank of New York Circulars : 10667. Safety and Soundness Standards

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FEDERAL RESERVE BANK
OF NEW YORK

No. 10667 ~|
November 29, 1993 J
[ Circular

SAFETY AND SOUNDNESS STANDARDS
Interagency Notice of Proposed Rulemaking
Comments D ue January 3, 1994
To All State Member Banks, Bank Holding
Companies, and Branches and Agencies of
Foreign Banks, in the Second Federal Reserve District:

The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, and the Board of Governors of the Federal Reserve System have issued joint proposals prescribing
safety and soundness standards for insured depository institutions and their holding companies, as required by section
132 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
Following is the text of the statement by the Board of Governors announcing the proposal:
The Federal Reserve Board has requested public comment on an interagency notice of proposed rulemaking prescrib­
ing safety and soundness standards required by section 132 of the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA).
Comments should be received by January 3, 1994.
Section 132 of FDICIA requires each of the Federal banking agencies to prescribe safety and soundness standards
for the insured depository institutions or depository institution holding companies that it regulates. The proposed rule pre­
scribes standards specific enough to identify emerging operational and managerial problems and to require submission
of a compliance plan before those problems become serious. The proposed standards generally establish the end that proper
operations and management should achieve, while leaving the means to each institution.
The agencies sought comment on methods to meet the requirements of section 132 through an advance notice of
proposed rulemaking in July of 1992. The current proposal incorporates suggestions received in response to that advance
notice, including the suggestion that the agencies prescribe general standards rather than specific item-by-item require­
ments.
The Board initially approved the publication of a notice of proposed rulemaking under section 132 on April 21, 1993.
Publication of the notice was delayed in order to reach interagency agreement.

Enclosed — for member banks, bank holding companies, and branches and agencies of foreign banks in this
District — is an excerpt from the Federal Register of November 18, containing the interagency notice of proposed
rulemaking, together with the text of the proposed amendments to Regulation H, Regulation Y, and the Rules of
Practice for Hearings of the Board of Governors. Additional, single copies of the enclosure may be obtained at this
Bank (33 Liberty Street) from the Issues Division on the first floor, or by calling the Circulars Division (Tel. No.
212-7 2 0 -5 2 1 5 or 5216).
Comments on the proposal should be submitted by January 3, 1994, and may be sent to the Board, as indicated
in the notice, or to our Domestic Banking Department.




W

illiam J.

M cD o n o u g h ,
President.

60802_________________________________________________________________________________________________ •

______________________________________________________ ___

Proposed Rules

Federal Register
V ol. 5 8 , N o. 2 2 1
T h u rsd a y , N o vem b er 1 8 , 1 9 9 3

This section of the FEDERAL REG ISTER
contains notices to the public of the proposed
issuance of rides and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate In the
rule making prior to the adoption of toe fined
rules.

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
120F R Part30
[D ocket No. 9 3 -1 7 ]

FEDERAL RESERVE SYSTEM

significant deterioration in the financial
condition of the institution or holding
company. Public comment is invited on
all aspects of this proposal.
DATES: Written comments must be
received on or before January 3,1994.
ADDRESSES: Interested parties are
invited to submit written comments to
any or all of the agencies. All comments
will be shared among the agencies.
OCC: Communications Division, 250
E Street SW., Washington, DC 20219,
attention: Docket No. 93-17. Comments
will be available for public inspection
and photocopying at the same location
on business days between 9 a.m. and 5
p.m .

B oard: Comments, which should refer
to Docket No. R-0766, may be mailed to
Mr. WiHiam Wiles, Secretary, Board of
[D ocket No. R -0 76 6 ]
Governors of the Federal Reserve
System, 20th Street and Constitution
FEDERAL DEPOSIT INSURANCE
Avenue NW., Washington, DC 20551.
CORPORATION
Comments addressed to Mr. Wiles may
also be delivered to the Board's mail
12 CFR Parts 303,308, and 364
room between 8:45 a.m. and 5:15 p.m.,
and to the security control room outside
RJN 3064-A B 13
of those hours. Both the mail room and
DEPARTMENT OF THE TREASURY
control room are accessible from the
courtyard entrance on 20th Street
Office of Thrift Supervision
between Constitution Avenue and C
Street, NW. Comments may be
12 CFR Part 570
inspected in room MP-500 between 9
a.m. and 5 p.m., except as provided in
[O TS 9 3 -1 0 1 ]
§ 261.8 of the Board’s Rules Regarding
RtN 1550-AA54
Availability of Information, 12 CFR
261.8.
Standards for Safety and Soundness
FD IC: Hoyle L. Robinson, Executive
Secretary, Attention: Room F-402,
AGENCIES: Office of the Comptroller of
Federal Deposit Insurance Corporation,
the Currency, Treasury; Board of
550 17th Street, NW., Washington, DC
Governors of the Federal Reserve
System; Federal Deposit Insurance
20429. Comments may be handCorporation; and Office of Thrift
delivered to room F—4 0 0 ,1776 F Street,
NW., Washington, DC, on business days
Supervision, Treasury.
between 8:30 a.m. and 5 p.m. [FAX
ACTION: Notice of proposed rulemaking.
number (202)898-3838]. Comments will
SUMMARY: The Office of the Comptroller
be available for inspection and
of the Currency (OCC), the Board of
photocopying in room 7118, 550 17th
Governors of the Federal Reserve
Street, NW., Washington, DC 20429,
System (Board), the Federal Deposit
between 9 a.m. and 4:30 p.m. on
Insurance Corporation (FDIC), and the
business days.
Office of Thrift Supervision (OTS)
O TS: Comments should be directed to
(collectively “the agencies”) solicit
Director, Information Services Division,
Public Affairs, Office of Thrift
comments on all aspects of proposed
safety and soundness standards required Supervision, 1700 G Street NW.,
to be prescribed by regulation pursuant
Washington, DC 20552, Attention:
to section 39 of the Federal Deposit
Docket No. 93-101. These submissions
Insurance Act (FDI A ct)). The standards may be hand delivered to 1700 G Street,
are intended to enable the agencies to
NW., from 9 a.m. to 5 p.m. on business
days; they may be sent by facsimile
address problems at banks, thrifts, and
transmission to FAX number (202) 906depository institution holding
companies before the problems cause
7755. Submissions must be received by

12 CFR Parts 208,225, and 263

[Enc. Cir. No. 10667]




5 p.m. on the day they are due in order
to be considered by the OTS. Late-filed,
misaddressed, or misidentified
submissions will not be considered in
this rulemaking. Comments will be
available for inspection at 1700 G Street
NW., from 1 p.m. until 4 p.m. on
business days. Visitors will be escorted
to and from the Public Reference Room
at established intervals.
FOR FURTHER INFORMATION CONTACT:

OCC: Emily R. McNaughton, National
Bank Examiner (202/874-5170), Office
of the Chief National Bank Examiner;
David Thede, Senior Attorney, Bank
Operations and Assets Division (202/
874—4460), Office of the Comptroller of
the Currency, 250 E Street, SW.,
Washington, DC 20219.
B oard: David Wright, Supervisory
Financial Analyst (202/728-5854),
Division of Banking Supervision and
Regulation; Scott G. Alvarez, Associate
General Counsel (202/452-3583),
Gregory A. Baer, Senior Attorney (202/
452-3236), Legal Division, Board of
Governors of the Federal Reserve
System. For the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), Dorothea Thompson (202/4523544), Board of Governors of the Federal
Reserve System, 20th and C Streets,
NW., Washington, DC 20551.
FD IC: Robert W. Walsh, Examination
Specialist (202/898-6911) or Michael D.
Jenkins, Examination Specialist (202/
898-6896), Division of Supervision; Lisa
M. Stanley, Senior Counsel (202/8987494), Jeffrey M. Kopchik, Counsel
(compensation standards) (202/8983872), or Nancy L. Alper, Counsel
(enforcement) (202/898-3720), Legal
Division, Federal Deposit Insurance
Corporation, 550 17th Street, NW.,
Washington, DC 20429.
O TS: Robert Fishman, Senior Program
Manager (202/906-5672), Deirdre
Kvartunas, Program Analyst (202/9067933), Policy Office, Cheryl Martin,
Regional Coordinator (202/906-7869),
Regional Operations; Kevin Corcoran,
Assistant Chief Counsel for Business
Transactions (202/906-6962), Ten M.
Valocchi, Counsel (Banking and
Finance) (202/906-7299), Chief
Counsel’s Office, Office of Thrift
Supervision, 1700 G Street, NW.,
Washington, DC 20552.

Federal Register / Vol. 58, No. 221 / Thursday, November 18, 1993 / Proposed Rules
SU PPLEM EN TA RY INFORMATION:

I. Statutory Framework
S e c tio n 1 3 2 o f th e F e d e r a l D ep o sit
In s u ra n c e C o rp o ra tio n Im p ro v e m e n t A c t
(FD IC IA ), P u b lic L a w 1 0 2 - 2 4 2 , a d d e d a
n e w s e c tio n 3 9 to th e FD I A c t (1 2 U .S .C .
1 8 3 1 p - l ) w h ic h re q u ire s e a c h a g e n c y to
p re s crib e b y re g u la tio n c e rta in safety
a n d s o u n d n e ss s ta n d a rd s fo r th e in su re d
d e p o sito ry in stitu tio n s a n d d e p o sito ry
in stitu tio n h o ld in g c o m p a n ie s fo r w h ich
it is th e p rim a ry F e d e r a l re g u la to r.
S e ctio n 3 9 w a s s u b se q u e n tly a m e n d e d
in th e c o m p e n s a tio n a re a b y s e c tio n 9 5 6
of th e H o u sin g a n d C o m m u n ity
D e v e lo p m e n t A c t o f 1 9 9 2 , P u b lic L aw
1 0 2 -5 5 0 .
T h re e ty p e s o f s ta n d a rd s m u st be
p re s crib e d : (1) O p e ra tio n a l an d
m a n a g e ria l; (2) a s se t q u a lity a n d
e a rn in g s; a n d (3) c o m p e n s a tio n . S to ck
v a lu a tio n s ta n d a rd s m u s t b e p re s crib e d
to th e e x te n t feasib le.
S e c tio n 3 9 (a ) re q u ire s th e a g e n c ie s to
p re s crib e b y re g u la tio n o p e ra tio n a l an d
m a n a g e ria l s ta n d a rd s re la tin g to : (1 )
In te rn a l c o n tr o ls , in fo rm a tio n s y s te m s,
a n d in te rn a l a u d it s y s te m s, in
a c c o r d a n c e w ith s e c tio n 3 6 o f th e FD I
A c t (1 2 U .S .C . 1 8 3 1 m ) ; (2 ) lo an
d o c u m e n ta tio n ; (3) c re d it u n d e rw ritin g ;
(4) in te re st ra te e x p o s u r e ; (5 ) a sse t
g ro w th ; a n d (6) c o m p e n s a tio n , fees, an d
b e n e fits, in a c c o r d a n c e w ith s u b se c tio n
(c) o f s e c tio n 3 9 .
S e c tio n 3 9 (b ) re q u ire s th e a g e n c ie s to
p re s crib e b y re g u la tio n s ta n d a rd s
sp e c ify in g : (1 ) A m a x im u m ra tio o f
c la ss ifie d a s s e ts to c a p ita l; (2 ) m in im u m
e a rn in g s s u fficie n t to ab so rb lo sse s
w ith o u t im p a irin g c a p ita l; a n d (3 ) to th e
e x te n t feasib le, a m in im u m ra tio o f
m a rk e t v a lu e to b o o k v a lu e for p u b licly
tra d e d s h a re s o f in stitu tio n s a n d h o ld in g
c o m p a n ie s.
If an a g e n c y d e te rm in e s th a t an
in stitu tio n o r h o ld in g c o m p a n y fails to
m e e t a n y s ta n d a rd p re s crib e d u n d e r
s e c tio n s 3 9 (a ) o r 3 9 (b ), th e in stitu tio n or
c o m p a n y m u s t su b m it to th e a g e n c y an
a c c e p ta b le p la n to a c h ie v e c o m p lia n c e
w ith th e sta n d a rd . In th e e v e n t th a t an
in stitu tio n o r c o m p a n y fails to su b m it
an a c c e p ta b le p la n w ith in th e tim e
a llo w e d b y th e a g e n c y o r fails in a n y
m a te ria l r e s p e c t to im p le m e n t an
a c c e p te d p la n , th e a g e n c y m u s t, b y
o rd e r, re q u ire th e in s titu tio n o r
c o m p a n y to c o r r e c t th e d e fic ie n c y . T h e
a g e n c y m a y , a n d in s o m e c a s e s m u s t,
ta k e o th e r s u p e rv is o ry a c tio n s u n til th e
d e fic ie n c y h a s b e e n c o rr e c te d .
S e c tio n 3 9 (c ) re q u ire s th e a g e n c ie s to
p re s c r ib e b y re g u la tio n s ta n d a rd s
p ro h ib itin g a s an u n s a fe a n d u n s o u n d
p r a c tic e e x c e s s iv e c o m p e n s a tio n o r
c o m p e n s a tio n th a t c o u ld re s u lt in a
m a te ria l fin a n cia l lo ss to an in stitu tio n .




T h is s u b se c tio n a lso req u ire s th a t th e
a g e n c ie s p re s crib e s ta n d a rd s s p e cify in g
w h e n c o m p e n s a tio n is e x c e s s iv e .

II. Advance Notice of Proposed
Rulemaking
In Ju ly 1 9 9 2 , th e a g e n c ie s p u b lish e d
in th e Federal Register an a d v a n c e
n o tic e o f p ro p o s e d ru le m a k in g (A N P R )
re q u e stin g p u b lic c o m m e n ts o n all
a s p e c ts o f th e sa fe ty a n d s o u n d n e ss
s ta n d a rd s to be p re s crib e d p u rsu a n t to
s e c tio n 3 9 o f th e FD I A ct. S ee 5 7 F R
3 1 3 3 6 , Ju ly 1 5 , 1 9 9 2 . In a d d itio n , for
e a c h safety a n d s o u n d n e ss s ta n d a rd , th e
A N P R re q u e ste d c o m m e n t o n s p e c ific
q u e stio n s ask ed b y th e a g e n cie s.
T h e a g e n c ie s r e c e iv e d o v e r 4 0 0
c o m m e n t le tte rs in re s p o n se to th e
A N P R , th o u g h s o m e le tte rs w e re
su b m itte d to m o re th a n o n e a g e n c y . T h e
m a jo rity o f c o m m e n ts w e re re c e iv e d
from in su re d d e p o sito ry in stitu tio n s.
W ith r e s p e c t to e a c h o f th e th re e
p rin c ip a l a re a s in w h ic h re g u la to ry
s ta n d a rd s m u s t b e p re s crib e d ,
c o m m e n te r s s tro n g ly re c o m m e n d e d th a t
th e a g e n c ie s a d o p t g e n e ra l ra th e r th a n
s p e c ific sta n d a rd s in o r d e r to a v o id
re g u la to ry m ic ro m a n a g e m e n t o f th e
b an k in g a n d th rift in d u strie s.
T h e c o m m e n ts a re d is c u s s e d in
fu rth e r d e ta il b e lo w in th e d e s c rip tio n
o f th e p ro p o s e d ru le.

III. Proposed Rule
A. Sum m ary and Purpose
In e n a ctin g s e c tio n 3 9 , C o n g ress
so u g h t to p ro te c t th e d e p o sit in s u ra n c e
fu n d s. S e c tio n 3 9 re q u ire s th e a g e n c ie s
to id e n tify an d a d d re ss p ro b le m s at
in stitu tio n s o r h o ld in g c o m p a n ie s b efo re
c a p ita l b e c o m e s im p a ire d . T h e a g e n c ie s
h a v e p ro p o s e d s ta n d a rd s u n d e r s e c tio n
3 9 th a t th e y b e lie v e s e rv e th is e n d
w ith o u t d ic ta tin g h o w in s titu tio n s a re to
b e m a n a g e d a n d o p e ra te d . T h e p ro p o s e d
s ta n d a rd s a re s p e c ific e n o u g h to id e n tify
e m erg in g safety an d so u n d n e ss
p ro b le m s a n d req u ire su b m issio n o f a
c o m p lia n c e p la n b efo re th o s e p ro b le m s
b e c o m e s e rio u s ; h o w e v e r, th e s ta n d a rd s
d o n o t sp e c ify e a c h o p e ra tio n a l a n d
m a n a g e ria l p ro c e d u r e an in stitu tio n
m u s t h a v e in p la ce . W h e re p o ssib le , th e
s ta n d a rd s e s ta b lis h th e e n d s th a t p ro p e r
o p e ra tio n s an d m a n a g e m e n t sh all
a c h ie v e , w h ile le a v in g th e m e a n s to
e a c h in stitu tio n . W h e re th e a g e n c ie s d o
e sta b lish fe a tu re s th a t an in s titu tio n ’s
sy s te m s m u s t in c lu d e , th e se featu res a re
o f a b a s ic ty p e .
T h e p ro p o s e d s ta n d a rd s d o n o t
re p re s e n t a c h a n g e in th e a g e n c ie s ’
p o lic ie s ; ra th e r, th e se s ta n d a rd s
re p re s e n t th e fu n d a m e n ta l s ta n d a rd s
u s e d b y th e a g e n c ie s to a s se s s th e
o p e ra tio n a l a n d m a n a g e ria l q u a lity o f an

60803

in stitu tio n . T h u s , u n d e r th e p ro p o s e d
re g u la tio n s , th e a g e n c ie s b e lie v e th a t
w e ll-m a n a g e d in stitu tio n s g e n e ra lly
s h o u ld n o t fin d it n e c e s s a r y to a m e n d
th e ir o p e ra tio n s in o r d e r to c o m p ly w ith
th e o p e ra tio n a l an d m an a g e ria l
sta n d a rd s. T h e a g e n c ie s re q u e st
c o m m e n t on w h e th e r th e p ro p o s e d
s ta n d a rd s w o u ld re q u ire in s titu tio n s to
a m e n d th e ir o p e ra tio n s in o r d e r to
c o m p ly .
T h e a g e n c ie s e x p e c t th a t v io la tio n s o f
th e s ta n d a rd s p ro m u lg a te d p u rsu a n t to
s e c tio n 3 9 g e n e ra lly w ill b e d e te c te d
d u rin g e x a m in a tio n s an d in s p e c tio n s o f
in s titu tio n s a n d c o m p a n ie s . V io la tio n s
o f th e e a rn in g s s ta n d a rd (a n d , for O T S ,
th e c la ss ifie d a s s e ts to to ta l c a p ita l
ra tio ), h o w e v e r, m a y b e d e te cte d a s a
re s u lt o f th e s u b m issio n o f a re p o rt o f
c o n d itio n o r th rift fin a n cia l re p o r t o r
th ro u g h o ff-site m o n ito rin g o f th e
in stitu tio n o r c o m p a n y .

B. E ffect on E xisting A uthority
C o m p lia n c e w ith th e s ta n d a rd s
re q u ire d b y s e c tio n 3 9 w o u ld n ot
p re c lu d e a fin d in g th a t an in stitu tio n is
e n g ag ed in an u n sa fe o r u n s o u n d
p r a c tic e o r is in an u n sa fe o r u n s o u n d
c o n d itio n . A c c o r d in g ly , s u p e rv is o r}’
a c tio n m a y b e ta k e n a g a in st an
in stitu tio n o r c o m p a n y th a t h a s n o t b een
c ite d for a d e fic ie n c y u n d e r s e c tio n 3 9 .
C o n v e rs e ly , failu re to c o m p ly w ith th e
safety a n d s o u n d n e ss s ta n d a rd s
e s ta b lis h e d p u rsu a n t to s e c tio n 3 9
(e x c e p t fo r th e s ta n d a rd p ro h ib itin g
p a y m e n t o f e x c e s s iv e c o m p e n s a tio n )
w o u ld n o t n e c e s s a r ily c o n s titu te an
u n sa fe o r u n s o u n d p r a c tic e . A n a g e n c y
m a y re q u e st s u b m is sio n o f a p la n to
a c h ie v e c o m p lia n c e p u r s u a n t to s e c tio n
3 9 w ith o u t tak in g a n y a d d itio n a l
s u p e rv iso ry o r e n fo r c e m e n t a c tio n .
C. O perational and M anagerial
Standards
T h e p ro p o s e d o p e ra tio n a l a n d
m a n a g e ria l s ta n d a rd s a d d re ss an
in s titu tio n ’s g e n e ra l p r a c tic e s . T h e
a g e n c ie s b e lie v e th a t s e c tio n 3 9 a llo w s
th e a g e n c ie s to e v a lu a te a n in s titu tio n ’s
o v e ra ll p r a c tic e s in o r d e r to d e te rm in e
w h e th e r th o s e p r a c tic e s a re s o u n d in
p rin c ip le a n d w h e th e r p ro c e d u r e s a re in
p la c e to e n s u re th a t th e y a re a p p lie d in
th e n o rm a l c o u rs e o f b u s in e s s . T h u s , for
e x a m p le , in th e a re a s o f c r e d it
u n d e rw r itin g o r lo a n d o c u m e n ta tio n , an
in s titu tio n w o u ld n o t fail o n e o f th e se
s ta n d a rd s m e re ly b e c a u s e i t h a d failed
to d o c u m e n t o n e lo a n p ro p e rly o r h a d
u s e d p o o r u n d e rw ritin g s ta n d a rd s in
m a k in g a sin g le lo a n . In ste a d , th e
a g e n c ie s w o u ld c o n s id e r e a c h
in s titu tio n ’s p e rfo rm a n c e in th e
ag g reg ate.

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Federal Register / Vol. 5.8, No. 221 / Thursday, November 18, 1993 / Proposed Rules

R e co g n iz in g th a t s m a lle r in stitu tio n s
m a y re q u ire le ss s o p h is tic a te d s y s te m s
a n d p ra c tic e s g iv e n th e re la tiv e ly
lim ite d ty p e s o f a c tiv itie s in w h ic h th e y
en g ag e, th e p ro p o s a l s ta te s th a t in te rn a l
c o n tro ls a n d in fo rm a tio n s y s te m s,
in te rn a l a u d it s y s te m s, a n d c re d it
u n d e rw ritin g p ra c tic e s sh a ll be
a p p ro p ria te to th e siz e o f th e in stitu tio n
a n d th e n a tu re a n d s c o p e o f its
a c tiv itie s. T h e p ro p o s a l a lso sta te s th at
an in stitu tio n sh a ll m a n a g e its in te re st
ra te risk in a m a n n e r th a t is a p p ro p ria te
to th e s iz e o f th e in stitu tio n an d th e
c o m p le x ity o f its a s se ts a n d liab ilities.
1 . In te rn a l C o n tro ls , In fo rm a tio n
S y s te m s , a n d In te rn a l A u d it S y s te m s
T h e A N P R so u g h t c o m m e n t on th e
a p p ro p ria te le v e l o f s p e c ific ity for
s ta n d a rd s g o v e rn in g in te rn a l c o n tro ls ,
in fo rm a tio n s y s te m s, a n d in te rn a l a u d it
sy s te m s. C o m m e n te rs s tro n g ly p re fe rre d
th a t s ta n d a rd s in th is a re a be g e n e ra l, in
o rd e r to e n a b le e a c h in stitu tio n to
c o m p ly w ith th e s ta n d a rd s b y u sin g
c o n tro l s y s te m s th a t a re ta ilo re d to its
in d iv id u a l o p e ra tin g e n v iro n m e n t. T h e
p ro p o s e d s ta n d a rd s d e sc rib e th e
fu n ctio n s th a t a d e q u a te in te rn a l c o n tro ls
a n d in fo rm a tio n s y s te m s m u st be ab le to
p e rfo rm .
S e c tio n 3 9 (a )(1 )(A ) re q u ire s th e
a g e n c ie s to p re s c r ib e s ta n d a rd s re la tin g
to in te rn a l c o n tro ls , in fo rm a tio n
s y s te m s, a n d in te rn a l a u d it s y s te m s in
a c c o r d a n c e w ith s e c tio n 3 6 o f th e FD I
A c t (1 2 U .S .C . 1 8 3 1 m ). S e c tio n 3 6
re q u ire s c e rta in in s titu tio n s ’
m a n a g e m e n t to su b m it to th e a g e n c ie s
a n d to a n y S ta te b an k o r S ta te th rift
s u p e rv iso r an a n n u a l re p o rt c o n ta in in g
a s ta te m e n t o f m a n a g e m e n t’s
re s p o n sib ility fo r e s ta b lis h in g a n d
m a in ta in in g an a d e q u a te in te rn a l
c o n tro l s tru c tu re a n d p ro c e d u r e s for
fin a n cia l re p o rtin g . S e c tio n 3 6 a lso
re q u ire s th e in d e p e n d e n t p u b lic
a c c o u n ta n t for c e rta in in s titu tio n s to
a tte st to , a n d re p o rt s e p a r a te ly on ,
m a n a g e m e n t’s a s s e rtio n s in th e in te rn a l
c o n tro l re p o r t in a c c o r d a n c e w ith
g e n e ra lly a c c e p te d s ta n d a rd s for
a tte sta tio n e n g a g e m e n ts.
T h e a g e n c ie s a re p ro p o s in g to
p re s crib e th e fu n c tio n s th a t a d e q u a te
in te rn a l c o n tr o ls a n d in fo rm a tio n
sy s te m s m u s t b e a b le to p e rfo rm , ra th e r
th a n p ro v id in g ty p e s o f c o n tro ls o r
sy s te m s th a t m u s t b e p re s e n t in e v e ry
c a se . T h u s , fo r e x a m p le , in te rn a l
c o n tro ls m u s t p ro v id e fo r e ffe ctiv e risk
a s s e s s m e n t, th o u g h e a c h in stitu tio n m a y
e sta b lish its o w n ty p e o f c o n tro ls to
m e e t th is re q u ire m e n t. S im ila rly , e a c h
in stitu tio n m u s t h a v e an o rg a n iz a tio n a l
s tru c tu re th a t e s ta b lis h e s c le a r lin e s o f
a u th o rity a n d re s p o n s ib ility for
m o n ito rin g a d h e r e n c e to p re s c r ib e d




p o lic ie s , th o u g h th e in stitu tio n is free to
c h o o s e its o w n o r g a n iz a tio n a l s tru c tu re .
T h e p ro p o s e d re g u la tio n s a d d re ss
in te rn a l a u d it s y s te m s s e p a ra te ly . In th is
a re a , th e a g e n c ie s b elie v e th a t th e re are
n e c e s s a r y c o m p o n e n ts o f an ad e q u a te
in te rn a l a u d it s y ste m . T h e p ro p o se d
re g u la tio n s re q u ire th a t an in s titu tio n ’s
in te rn a l a u d it s y ste m : (1 ) P ro v id e for
th o s e p e rfo rm in g in te rn a l a u d its to be
q u alified a n d in d e p e n d e n t; (2) in clu d e
te s tin g an d re v ie w o f in te rn a l c o n tro ls
an d in fo rm a tio n s y s te m s; (3) a d e q u a te ly
d o c u m e n t th e te s ts p e rfo rm e d an d th e ir
fin d in g s, as w e ll a s a n y c o rr e c tiv e
a c tio n s tak en as a re su lt o f th e a u d it;
a n d (4) p ro v id e for th e re su lts o f th e
a u d it to be re v ie w e d an d a c te d u p o n by
m a n a g e m e n t.
T h e a g e n c ie s a re a w a re th a t m an y
in stitu tio n s u se d a ta p ro c e s s in g s e rv ic e
o r g a n iz a tio n s to e x e c u te an d re c o r d
tra n s a c tio n s , m a in ta in re la te d re c o rd s
an d p ro c e s s re la te d d ata. T h e
d e te rm in a tio n o f w h e th e r an
in s titu tio n ’s in d e p e n d e n t a u d ito r n e e d s
to re v ie w a s e rv ic e o r g a n iz a tio n ’s
o p e ra tio n s , as th e y re la te to th e
in s titu tio n ’s in te rn a l c o n tro ls , s h o u ld be
m a d e in a c c o r d a n c e w ith g e n e ra lly
a c c e p te d a u d itin g s ta n d a rd s.
2.

L o a n D o c u m e n ta tio n

Commenters were strongly opposed to
any item-by-item listing of requirements
for loan documentation, favoring
general standards instead. Commenters
also felt that the standards had to be
sufficiently general to allow for different
treatment according to loan type and
amount.
T h e p ro p o s e d re g u la tio n s d o n ot
s p e c ify in d e ta il w h a t lo an
d o c u m e n ta tio n m u s t c o n ta in . In ste a d ,
th e y sp e c ify w h a t lo a n d o c u m e n ta tio n
m u st en a b le an in stitu tio n to do. T h u s,
d o c u m e n ta tio n p r a c tic e s at an
in stitu tio n w ill n o t b e e v a lu a te d a g ain st
a c h e c k lis t o f re q u ire m e n ts b u t in ste a d
w ill b e e v a lu a te d b a se d on w h e th e r
th e y : (1 ) E n a b le th e in stitu tio n to m ak e
an in fo rm e d le n d in g d e cis io n an d to
a s se s s risk a s n e c e s s a r y o n an o n g o in g
b a sis ; (2 ) id e n tify th e p u rp o se o f th e
lo a n a n d th e s o u rc e o f re p a y m e n t, an d
a s se s s th e a b ility o f th e b o rro w e r to
re p a y th e in d e b te d n e s s in a tim e ly
m a n n e r; (3 ) e n s u re th a t a n y c la im
a g a in s t a b o rr o w e r is leg ally e n fo rce a b le ;
(4 ) d e m o n s tra te a p p ro p ria te
a d m in is tra tio n a n d m o n ito rin g o f a lo a n ;
a n d (5) tak e a c c o u n t o f th e siz e an d
c o m p le x ity o f a lo a n . T h e a g e n c ie s
b e lie v e th a t th e p ro p o s e d re g u la tio n s
p ro v id e a s ta n d a rd a g a in st w h ic h
c o m p lia n c e c a n b e m e a s u re d , w h ile at
th e s a m e tim e a llo w in g fo r d ifferin g
a p p r o a c h e s to lo a n d o c u m e n ta tio n .

O n M a rc h 3 0 , 1 9 9 3 , th e a g e n cie s
issu e d a jo in t p o lic y s ta te m e n t re g a rd in g
d o c u m e n ta tio n o f s m a ll an d m e d iu m ­
siz e d b u s in e s s an d farm lo a n s. U n d e r
th a t p o lic y sta te m e n t, w e ll-m a n a g e d ,
w e ll o r a d e q u a te ly c a p ita liz e d
in stitu tio n s a re a llo w e d to esta b lish a
" b a s k e t” of sm a ll an d m e d iu m -siz e d
b u s in e s s a n d farm lo a n s th at w ill n ot be
su b je ct to e x a m in e r c ritic is m b a se d on
d o c u m e n ta tio n . U n d e r th e p ro p o se d
safety a n d s o u n d n e ss re g u la tio n , th e
in te ra g e n c y p o lic y sta te m e n t w o u ld
c o n tin u e to a p p ly . T h e O T S h a s
a m e n d e d its c u r re n t lo an
d o c u m e n ta tio n re g u la tio n to c o n fo rm to
th e in te ra g e n c y p o lic y sta te m e n t.
T h e O T S ’s c u r re n t lo a n
d o c u m e n ta tio n re g u la tio n at 1 2 C F R
5 6 3 . 1 7 0 (c )(1 )—(7 ) e s ta b lis h e s d e ta ile d
lo an d o c u m e n ta tio n re q u ire m e n ts th a t
m a y n o t b e n e c e s s a r y in lig h t o f th e
s ta n d a rd s p ro p o s e d in th is ru le m a k in g .
T h e O T S s p e c ific a lly re q u e sts c o m m e n t
o n c h a n g e s to th e lo a n d o c u m e n ta tio n
ru le th a t w o u ld b e a p p r o p ria te to
e lim in a te u n n e c e s s a rily d e ta ile d a n d
b u r d e n s o m e re g u la to ry re q u ire m e n ts.
3. C re d it U n d e rw ritin g
C o m m e n te rs o v e rw h e lm in g ly fav o red
g e n e ra l c r e d it u n d e rw ritin g s ta n d a rd s
ra th e r th a n an ite m -b y -ite m listin g o f
re q u ire m e n ts th a t m u s t b e m e t for e a c h
e x te n s io n o f c re d it.
In th e p ro p o s a l, th e a g e n c ie s h a v e
e s ta b lis h e d th e g e n e ra l p a ra m e te r s of
safe an d s o u n d c r e d it u n d e rw ritin g
p ra c tic e s . T h e s ta n d a rd s w o u ld re q u ire
e a c h in stitu tio n to e s ta b lis h an d
m a in ta in p ru d e n t c r e d it u n d e rw ritin g
p r a c tic e s th a t: (1 ) A re c o m m e n s u ra te
w ith th e ty p e s o f lo a n s th e in stitu tio n
w ill m a k e a n d c o n s id e r th e te rm s a n d
c o n d itio n s u n d e r w h ic h th e y w ill be
m a d e ; (2 ) c o n s id e r th e n a tu re o f th e
m a rk e ts in w h ic h lo a n s w ill b e m a d e ;
(3 ) p ro v id e fo r c o n s id e ra tio n , p rio r to
c re d it c o m m itm e n t, o f th e b o r r o w e r ’s
o v e ra ll fin a n c ia l c o n d itio n a n d
re s o u rc e s , th e fin a n c ia l re s p o n sib ility of
a n y g u a ra n to r, th e n a tu re a n d v a lu e o f
a n y u n d e rly in g c o lla te ra l, a n d th e
b o r r o w e r ’s c h a r a c te r a n d w illin g n e s s to
re p a y a s a g re e d ; (4 ) e s ta b lis h a sy ste m
o f in d e p e n d e n t, o n g o in g c re d it re v ie w
w ith a p p r o p ria te c o m m u n ic a tio n to
m a n a g e m e n t a n d to th e b o a rd o f
d ire c to rs ; (5 ) tak e a d e q u a te a c c o u n t o f
c o n c e n tr a tio n o f c r e d it risk ; a n d (6) a re
a p p r o p ria te to th e s iz e o f th e in stitu tio n
a n d th e n a tu r e a n d s c o p e o f its
a c tiv itie s .
4 . In te re st R a te E x p o s u r e
S e v e ra l c o m m e n te r s su g g e ste d th a t
th e s ta n d a rd fo r in te re s t ra te e x p o s u r e
fo cu s o n an in s titu tio n ’s m a n a g e m e n t
s y s te m fo r c o n tro llin g in te re st ra te

Federal Register / Vol. 58, No. 221 / Thursday, November 18, 1993 / Proposed Rules
exposure. Commenters generally
opposed any absolute limit on interest
rate exposure under section 39, with
some noting that section 305 of FDICIA
already addresses that issue. Many
commenters argued that the financial
condition of the institution should be
considered in the standards, with better
capitalized institutions allowed to take
greater risk. Some commenters also felt
that smaller institutions should be
allowed to take greater risk, as they pose
a lesser risk to the deposit insurance
funds and do not have the resources for
sophisticated systems to manage interest
rate risk.
Recognizing that many smaller
institutions do not need a sophisticated
system for quantifying interest rate risk,
the agencies have not proposed to
require such systems in all cases.
Rather, institutions would be required
to manage interest rate risk in a manner
that is appropriate to the size of the
institution and the complexity of its
assets and liabilities. Larger institutions
that are exposed to significant interest
rate risk would be expected to maintain
a more formal system for the
measurement and management of such
risk. Under section 305 of FDICIA,
which requires amendment of the riskbased capital standards to take account
of interest rate risk, some institutions
may be required to quantify interest rate
risk.

growth; (2) any increase in credit risk or
interest rate risk as a result of growth;
and (3) the effect of growth on the
institution’s capital. Asset growth by an
institution would be evaluated against
the institution’s plan.

6. Compensation, Fees and Benefits
Subsection (a) of section 39 requires
the agencies to establish operational and
managerial standards relating to
compensation, fees and benefits. This
mandate is distinguishable from that of
subsection (c) of section 39, which
requires the agencies to prohibit as an
unsafe and unsound practice any
compensation that is excessive or could
lead to a material financial loss to an
institution.
The proposed regulations would
require that each institution maintain
safeguards to prevent the payment of
compensation, fees, or benefits that are
excessive or could lead to material
financial loss. Because section 39(a)
provides that operational and
managerial standards in the
compensation area are to be prescribed
in accordance with section 39(c), the
agencies’ proposed operational and
managerial standard is tailored to
prevent the payment of compensation,
fees, and benefits prohibited under
section 39(c). The agencies do not
believe that it would be appropriate to
define how institutions are to set
compensation. Instead, the proposal
5. Asset Growth
would require that the method selected
be designed to prevent payment of
A large number of commenters asked
that the agencies rely on current policies compensation, fees, or benefits that are
and regulations regarding asset growth
excessive or could lead to material
and on existing capital standards. The
financial loss.
commenters also strongly supported
D. A sset Quality, Earnings, and Stock
reliance on existing laws and
Valuation Standards
regulations regarding asset growth
Section 39(b) requires the agencies to
through merger. The agencies
establish a maximum ratio of classified
considered existing policies and
assets to capital, to require minimum
regulations in drafting the proposed
earnings sufficient to absorb losses
regulations.
without impairing capital, and to
The agencies have not proposed a
establish, to the extent feasible, a
quantitative limit on asset growth. A
minimum ratio of market to book value.
quantitative limit for all institutions
These quantitative standards are
regardless of size and financial
somewhat different from the operational
condition would be overly restrictive
and managerial standards because they
and inconsistent with safety and
soundness. Further, the agencies do not are designed to detect a deterioration in
the overall financial condition of an
believe that it would be feasible to
institution or holding company rather
establish a separate quantitative limit
than the existence of operational or
for each distinguishable class of
institution. Moreover, asset growth does managerial deficiencies. Specifically,
these standards are meant to alert
not necessarily cause safety and
soundness problems; rather, unplanned institutions and the agencies to
or poorly managed asset growth is cause developing conditions that warrant
submission of a compliance plan to the
for concern.
Under the proposal, an institution
appropriate agency for evaluation. The
would be required to base its asset
proposed quantitative standards are
growth on a plan that reflects
meant to supplement, rather than
consideration of (1) the source, volatility replace, the detailed analyses of these
and use of the funds that support asset
areas that occur during the examination.




60805

Therefore, institutions that meet these
standards may still be advised at the
end of an examination that earnings or
asset quality are not adequate and that
problems need to be addressed.
1. Maximum Ratio of Classified Assets
to Capital
In the ANPR, the agencies sought
comment on various aspects of the
maximum ratio of classified assets to
capital required by section 39, including
what types of capital should be
included in the ratio and whether
classified assets should be weighted for
purposes of calculating the ratio.
Commenters strongly favored use of
existing measures so as to reduce
complexity. Some commenters also
favored weighting the classified assets
according to their probability of loss.
With regard to the denominator of the
ratio, commenters stressed that the
allowance for loan and lease losses,
which is currently excluded from tier 1
capital (core capital for OTS), should be
included in order to capture capital set
aside for losses inherent in the loan
portfolio.
The agencies are proposing a
maximum ratio whose numerator
includes all classified assets on a nonweighted basis and whose denominator
includes total capital plus any
allowance for loan and lease losses
(general valuation allowance for thrifts)
otherwise excluded from total capital.
The required maximum ratio would be
1.0. Although the agencies are
proposing a maximum ratio of 1.0, the
agencies have considered other ratios
including 0.50 and 0.75. The agencies
are particularly interested in receiving
comment on the appropriate maximum
ratio.
Under this proposed ratio, the
numerator should include only assets
classified as substandard and doubtful.
Assets classified as loss are considered
only to the extent that related losses
have not been recognized.
The agencies have decided not to
propose a weighted measure of
classified assets. In trials of ratios using
both weighted and non-weighted
classified assets, the agencies found that
substantially the same institutions were
identified under each approach.
Because both approaches yield similar
results, the agencies have proposed the
simpler, non-weighted ratio, which
should be less burdensome for
institutions to calculate and monitor.
However, the agencies seek comment on
the relative accuracy of the two
measures.
_The agencies emphasize that section
39(b) requires the agencies to prescribe
a m axim um ratio of classified assets to

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Federal Register / Vol. 58, No. 221 / Thursday, November 18, 1993 / Proposed Rules

necessarily indicative of an institution’s
condition.
A requirement that an institution
submit a compliance plan if it fails to
meet the ratio would also not be
feasible. A publidy traded institution or
holding company does not have dired
control over the market’s evaluation of
3. Minimum Ratio of Market Value to
its stock’s value. This is especially true
Book Value
for distressed institutions or holding
In the ANPR, the agencies requested
companies that may not be able in the
comment on whether a minimum ratio
short run to persuade investors to bid
of market value to book value for
higher for shares or to purchase newly
publicly traded institutions was
issued stock. Moreover, in an attempt to
feasible. The commenters concluded in
gain compliance, some institutions
overwhelming numbers that such a
might take "quick fix” actions such as
minimum ratio was not feasible, setting
asset sales that could erode the
forth a variety of practical and
institution’s long-term value.
theoretical problems with such a ratio.
The agencies believe that
Clearly, a minimum market value to
implementation of a minimum market
book value ratio is technically possible,
value to book value ratio could have
but the agencies do not believe that
unintended consequences that could
technical possibility is what Congress
adually reduce the safety and
had in mind in directing the agendes to soundness of the banking and thrift
establish such a ratio “if feasible.”
industries.
Accordingly, the agendes view the
• Such a ratio might be considered a
statutory language as a directive to
“penalty” and therefore discourage
consider
whether
adoption
of
such
a
2. Minimum Earnings Standard
mutual institutions from converting to a
ratio is a reasonable means to advance
In the ANPR, the agencies sought
stock form of ownership and discourage
the
objectives
sought
by
Congress.
comment on various aspects of the
dosely held institutions from exposing
In light of the comments and their
minimum earnings standard required by
their stock to the public market. This
own experience, and for the reasons set
section 39, including the appropriate
would give non-public companies a
forth below, the agendes believe that
measure for earnings and the time
perceived advantage over public
establishing a minimum market value to companies because they would not have
period for determining whether
minimum earnings have been achieved. book value ratio for publicly traded
to meet the minimum ratio.
institutions is not a feasible means to
Commenters suggested various
• Market speculators might take
the
end
desired
by
Congress:
Identifying
definitions of “earnings,” including
advantage of the standard by short
problems
at
insured
depository
average return on equity, earnings or
selling distressed company stocks,
institutions and holding companies in
losses prior to taxes, retained earnings,
espedally
those with thinner markets.
their early stages and correcting such
and net income after dividends. There
Market manipulators could attempt to
problems
through
a
compliance
plan.
was no consensus on a time period for
push an institution’s stock price below
Therefore, no such ratio is included in
. measuring earnings, and
the regulatory standard and expect the
the
proposed
regulations.
recommendations included one, two,
The agencies believe that a market-to- market to respond by pushing the price
three and five year periods.
down even further, to the speculator’s
book ratio would not be an
The proposed standard requires that
advantage.
The agencies believe such
operationally reliable indicator of safety
an institution continue to meet
speculative
actions could adversely
and soundness. In the long run, the
minimum capital standards assuming
affect an institution’s safety and
market
value
of
an
institution
or
holding
that any losses experienced over the
soundness by limiting its access to
past four quarters were to continue over company is dependent on financial
liquidity and the capital markets.
the next four quarters. Specifically, if an condition and performance. However, in
• A sharp decline in the stock market
institution has an aggregate net loss over the short run, market value may also be
might cause numerous institutions to
affeded by fadors unrelated to the
the past four quarters, the institution’s
fail to meet the standard, which could
institution’s or holding company’s
capital ratios would be recalculated
hinder institutions from providing
condition and performance. These
under the assumption that those losses
liquidity to the market when it was
indude the attractiveness of institution
will continue over the next four
needed.
or holding company stocks relative to
quarters.
During examinations and off-site
other competitors and industries; the
The agencies believe that this
performance of the general stock market; monitoring of publicly traded
standard would identify institutions
industry conditions; random
institutions, the agencies currently
that are currently operating above
fluctuations; an institution’s perceived
consider stock price changes, market
minimum capital standards but whose
potential for takeover; merger,
price to book value ratios, bond ratings
earnings are not sufficient to avoid
and other indicators of the market’s
acquisition or other rumors;
impairing capital. The agencies also
international fadors; weakness in the
assessment of an institution’s
believe that this standard is relatively
performance. Although the agencies
dollar, or the regional economic
simple to calculate and administer.
outlook. Thus, a safe and sound
believe that a minimum market to book
The agendas recognize that some
ratio is not feasible to implement as a
institution could well be found in
institutions may not meet this standard
due to accounting losses that are one­
regulatory standard, they will continue
violation of a minimum market-to-book
time events unlikely to recur, such as
to consider these factors.
ratio as a result of fadors that are not
capital. Because it is a maximum ratio,
institutions should generally strive to
operate at ratios well below the
maximum ratio. Regardless of the ratio
adopted by the agencies, the agencies
will continue to exercise supervisory
judgment and to require corrective
action through existing supervisory and
enforcement means, as appropriate.
The agencies further emphasize that
this ratio is only one of many factors
considered in determining the overall
financial condition of an institution.
Thus, the agencies may require an
institution to take steps to reduce its
ratio of classified assets to capital even
though the institution is operating with
a ratio that is less than the maximum
ratio that is ultimately required in the
agencies' final regulations. In order to
clarify this point, the proposed standard
expressly preserves the agencies’
existing authority to require an
institution to maintain a ratio of
classified assets to capital that is less
than the maximum required under
section 39.




charges to earnings for retiree health
benefits. In such instances, an
institution’s compliance plan could
consist of an explanation of the
circumstances surrounding the event,
and in general no further action would
be required.

Federal Register / Vol. 58, No. 221 / Thursday, November 18, 1993 / Proposed Rules
E. Com pensation That Is E xcessiv e or
That Could Lead to M aterial Financial
Loss

Commenters strongly supported the
use of the factors set forth in section
39(c) as the sole standard in defining
excessive compensation. Commenters
felt that regulations specifying in more
detail when compensation would be
considered excessive would constitute
micro-management of an institution’s
management practices. The agencies
have relied upon the statutory language
in formulatiiig the standard under this
section.
Under the proposal, compensation
would be considered excessive if it were
unreasonable or disproportionate to the
services actually performed by the
individual being compensated. In
making that determination, the agencies
will consider all relevant factors,
including those set out in section
39(c)—(1) the compensation history of
the individual and other individuals
with comparable expertise at the
institution, (2) the financial condition of
the institution, (3) comparable
compensation practices at comparable
institutions, and (4) any connection
between the individual and any
wrongdoing at the institution.
F. Coverage o f H olding Com panies

Section 39(a) requires the appropriate
Federal banking agency to establish
operational and managerial standards
for depository institution holding
companies as well as depository
institutions. Section 39(b) requires that
a maximum ratio of classified assets to
capital, minimum earnings sufficient to
avoid impairing capital, and a minimum
ratio of market to book value (to the
extent feasible) be prescribed for
depository institution holding
companies. Section 39(c), governing
compensation, does not apply to
holding companies, and commenters
strongly opposed the establishment of
compensation standards for depository
institution holding companies.
1. Bank Holding Companies
As the appropriate Federal banking
agency for bank holding companies, the
Board is proposing regulations to-apply
section 39 (a) and (b) to those
companies. First, the Board is proposing
to require that each bank holding
company ensure that each of its
subsidiary insured depository
institutions is in compliance with the
applicable safety and soundness
standards adopted pursuant to section
39. Second, rather than adopt a separate
set of operational and managerial
standards for bank holding companies,




the Board’s proposal applies to bank
holding companies the same standards
regarding internal controls, information
systems, internal audit systems, interest
rate exposure, asset growth, and
compensation, fees, and benefits that it
is proposing to apply to state member
banks. In doing so, the Board is
proposing to apply such standards only
when relevant to the operations of the
holding company and thereby avoid
imposing an unnecessary burden on
small and shell bank-holding
companies.
Two of the operational and
managerial standards required to be
established by section 39(a)—those
regarding credit underwriting and loan
documentation—may not apply to all
bank holding companies. The Board’s
proposed regulation makes clear that if
a bank holding company does not
extend credit at the holding company
level, then the credit underwriting and
loan documentation standards are not
applicable to the holding company, and
the holding company will not be
expected to have practices or policies in
these areas.
For the same reason that the agencies
have determined that establishing a
maximum ratio of market value to book
value for depository institutions would
not be feasible, the Board believes that
such a ratio would not be feasible for
bank holding companies. The Board is
proposing to apply the same maximum
ratio of total classified assets to total
capital and the requirement of
minimum earnings sufficient to avoid
impairing capital to both bank holding
companies and state member banks. For
purposes of calculation of those ratios,
the Board will examine a bank holding
company on a consolidated basis. The
Board believes that applying those ratios
only at the holding company level could
paint a false picture of the safety and
soundness of the holding company and
create perverse financial incentives,
such as an incentive to leave classified
assets at an insured depository
institution rather than upstreaming
them to the holding company, where the
deposit insurance fund is not at risk.
Bank holding companies with less
than $150 million in assets that meet the
requirements of the Federal Reserve’s
reporting exemption do not report
consolidated capital or earnings figures.
Thus, applying to these companies the
standards for minimum earnings and
maximum classified assets applicable to
insured depository institutions would
require the imposition of consolidated
reporting. In order to avoid imposing
such a significant reporting burden on
these companies, and because, in the
case of small bank holding companies,

60807

substantially all of the consolidated
institution’s classified assets and
earnings are derived from their
subsidiary institutions, the Board is
proposing a different standard for them:
if any subsidiary depository institution
of a bank holding company with less
than $150 million in assets is in
violation of the quantitative standards,
then the bank holding company will be
found to be in violation. The Board
believes that this standard would
identify bank holding companies with
insufficient earnings or an excess of
classified assets.
In applying section 39 to bank
holding companies, the Board does not
propose to apply safety and soundness
standards to the non-U.S. operations of
bank holding companies that are foreign
banks, companies that own foreign
banks, or non-U.S. subsidiaries of
foreign banks. The operations Of foreign
banks would be covered by the
proposed rule to the extent that they are
conducted through a U.S.-incorporated
company that owns an insured bank.
The Board seeks comment on this issue.
2. Savings and Loan Holding Companies
As the appropriate Federal banking
agency for savings and loan holding
companies, the OTS is proposing
regulations for savings and loan holding
companies that focus on savings and
loan holding company activities most
likely to cause losses at a holding
company’s subsidiary savings
association.
In the view of the OTS, the safety and
soundness standards developed for
savings and loan holding companies
under section 39 should be consistent
with the current statutory framework
that defines savings and loan holding
company regulation. Many of the areas
listed in section 39, while readily
applicable to depository institutions,
have no meaningful applicability to
savings and loan holding companies.
For example, neither the Savings and
Loan Holding Company Act (SLHCA)
nor any other statute has ever
established a framework for capital
requirements for savings and loan
holding companies. Nor is there a
legislative framework to subject the
assets of savings and loan holding ,
companies to classification or to
regulate the loan documentation, credit
underwriting, interest rate risk exposure
or asset growth of savings and loan
holding companies.
Given the ability of savings and loan
holding companies to conduct a broader
range of activities than bank holding
companies, such standards would be
impractical, if not impossible, to apply
and would not effectively focus on

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Federal Register / Vol. 58, No. 221 / Thursday, November 18, 1993 / Proposed Rules

reducing risk to the deposit insurance
funds.
The OTS is proposing that each
savings and loan holding company
shall: (1) Ensure that transactions and
relationships between the holding
company and its subsidiary savings
association satisfy applicable fiduciary
standards and do not have a detrimental
effect on the savings association’s safe
and sound operation; (2) not engage in
any activity, or cause its subsidiary
savings association to engage in any
activity, that might create a serious risk
that the liabilities of the holding
company and its other affiliates may be
imposed on the savings association; (3)
not take any action that would impede
the ability of its subsidiary savings
association to comply with the
requirements of section 39 or fully
implement any safety and soundness
compliance plan required of the savings
association; and (4) take any corporate
actions necessary to enable the
subsidiary savings association to take
actions required by a safety and
soundness compliance plan.
The OTS believes these standards are
consistent with the objectives of section
39 and the statutory framework for
savings and loan holding company
regulation, and further the goal of
resolving problems of insured
depository institutions at the lowest
possible long-term loss to the deposit
insurance funds. Commenters are
specifically requested to address
whether other standards, consistent
with the requirements of section 39,
would better accomplish these goals.
G. P rocedures fo r Subm ission o f
C om pliance Plans and Issu an ce o f
O rders

Section 39(e) of the FDI Act requires
that the agencies establish deadlines for
submission and review of compliance
plans. The deadlines must provide
institutions and companies with
reasonable time to submit compliance
plans in the event that a deficiency is
detected under the operational and
managerial standards or asset quality
and earnings standards. The deadlines
must also require the agencies to act on
such plans expeditiously. The proposed
regulations provide for an institution or
company to file a compliance plan
within 30 days of such plan being
requested by the appropriate Federal
banking agency, although the agency
may extend or shorten the time for
filing. The agency would then generally
have 30 days to review the plan. The
proposed regulations provide that a
compliance plan under section 39 may,
with the permission e l the agency, be
part of a capital restoration plan




submitted pursuant to section 38 of the
FDI Act (prompt corrective action), a
cease-and-desist order entered into
pursuant to section 8 of the FDI Act, a
formal or informal agreement, or a
response to a report of examination or
report of inspection.
In the event that an institution or
company fails to submit an acceptable
compliance plan or fails in any material
respect to implement an accepted
compliance plan within the time
allowed by the agency, section 39
provides that the agency must order the
institution or company to correct the
deficiency and may: (1) Restrict asset
growth; (2) require the institution or
company to increase its ratio of tangible
equity to assets; (3) restrict the rates of
interest that the institution or company
may pay; or (4) take any other action
that would better carry out the purpose
of prompt corrective action. In certain
cases, the agency is required to take one
or more actions.* Orders issued
pursuant to section 39 are enforceable
under section 8 of the FDI Act.
Section 39 does not provide for any
prior notice or administrative review of
an agency order. However, given the
potential effect of such an order on the
institution or company subject to the
order, the agencies are proposing to give
the institutions and companies prior
notice of, and an opportunity to respond
to, a proposed order.
The proposed procedures are
modelled after those adopted by the
agencies for issuance of prompt
corrective action directives pursuant to
section 38 of the FDI Act. Under the
proposed procedures, the appropriate
agency generally must provide written
notice to an institution or company
prior to issuing an order. The notice
would describe the action contemplated
by the agency. The institution or
company would then be provided at
least 14 calendar days to submit written
arguments and evidence in response to
the proposed order. Failure to file a
timely response would constitute
consent to issuance of the order and a
waiver of the opportunity to appeal. The
agency would consider the submission
>One such case where section 39 requires
supervisory action is where the institution has,
during the prior 16-month period, experienced
extraordinary growth, as defined by the appropriate
agency. The Board, the OGC, and the FDIC are
proposing a regulatory definition of extraordinary
growth, while the OTS expects to rely on existing
guidance. The OTS* Regulatory Bulletin 3 a -1
"Policy Statement on Growth for Insured
Institutions" states that the OTS determines
whether an institution has undergone excessive
growth cm the basis of the institution’s management
and asset quality, capital adequacy, Interest rate risk
profile and operating controls and procedures.

in determining whether to issue the
order.
Under the proposed rules, the
agencies would reserve the right to issue
orders that are effective immediately. In
these cases, the institution would have
an opportunity to seek modification or
rescission of the order on an expedited
basis. An institution or company that
appeals an immediately effective order
would bo required to file a written
appeal within 14 calendar days of
receiving the notice, and the agency
would be required to consider the
appeal within 60 days of its receipt.
The agencies intend to establish
appropriate delegations in accordance
with their own procedures. In
connection with this proposal, the FDIC
is proposing to revise its regulation
governing delegations of authority.
H . O ther Issues

I. Implementation at Holding Company
Level
The ANPR sought comment on the
extent to which a multi-bank or thrift
holding company may establish safety
and soundness standards for its
subsidiary institutions so long as the
standards are affirmed by the boards of
the subsidiary institutions. Almost all of
the commenters responding to this
question supported the procedure based
on the reasoning that such a procedure
would allow, but not require, the
holding company to establish some or
all of the required standards at the
holding company level, thereby creating
uniformity when desired and avoiding
duplication among subsidiary
institutions.
Commenters also suggested allowing a
bank holding company to implement
section 39 at the bank holding company
level in exchange for an enforceable
commitment to serve as a source of
strength for its depository institution
subsidiaries and a reaffirmation of the
liability of each of its subsidiary
depository institutions pursuant to
section 5(e) of the FDI Act.
Under the proposed regulation, a
holding company could establish
policies and practices for the entire
organization, with each of the
subsidiary depository institutions
affirming those policies and practices.
Furthermore, once a safety and
soundness deficiency is detected at an
institution—particularly with regard to
asset quality and earnings standards—
an acceptable compliance plan
submitted or affirmed by the institution
could include a commitment by the
institution’s holding company to take
action to ensure that the deficiency is
remedied.

Federal Register / Vol. 58, No. 221 / Thursday, November 18, 1993 / Proposed Rules
Some commenters also suggested that
a bank holding company be allowed to
implement, and be held responsible for,
the practices and policies that comply
with the standards prescribed under
section 39. The agencies note that under
such a scenario the primary regulator of
the depository institution would still be
required to review and act on any
compliance plan. The agencies seek
comment on how a holding company
might ensure, and be held responsible
for, compliance with the standards in
section 39—in particular, what parts of
section 39 could be covered ana how
compliance could be monitored and
enforced.
2. Incorporation by Reference
The ANPR also sought comment on
the issue of whether existing guidelines,
opinions, advisories and other literature
should be incorporated into certain
operational and managerial standards.
Commenters were divided on the extent
to which existing guidance should be
incorporated. In establishing standards
in the proposed regulations, the
agencies have reviewed existing
guidance as well as the comments. The
proposal does not incorporate existing
guidance by reference, as the agencies
believe that subsequent changes to
existing guidance would then require
notice and comment, greatly
complicating the administration of that
guidance. However, the agencies will
use existing and future supplemental
supervisory guidance in this area where
appropriate. The agencies have also
proposed in their operational and
managerial standards that institutions
ensure compliance with applicable laws
and regulations.
3. Recordkeeping and Reporting
The agencies request comment on
whether the proposed standards, if
adopted, would increase the
recordkeeping or reporting requirements
imposed on depository institutions and
depository institution holding
companies by the agencies.
IV. Regulatory Flexibility Act
Each agency has concluded after
reviewing its proposed regulation that
the regulation, if adopted, will not
impose a significant economic hardship
on small institutions. The proposal does
not necessitate the development of
sophisticated recordkeeping or reporting
systems by small institutions; nor will
small institutions need to seek out the
expertise of specialized accountants,
lawyers, or managers in order to comply
with the regulations. The agencies
therefore hereby certify pursuant to
section 605(a) of the Regulatory




Flexibility Act (5 U.S.C. 605) that the
proposal, if adopted, will not have a
significant economic impact on a
substantial number of small entities
within the meaning of the Regulatory
Flexibility Act (5 U.S.C. 601 et. seq .).
V. Executive Order 12866
The OCC and the OTS have
determined that their final regulations
do not constitute “significant regulatory
actions.”
List of Subjects
OCC
12 CFR Part 3 0

Administrative practice and
procedure, National banks, Reporting
and recordkeeping requirements, Safety
and soundness.
B oard
12 CFR Part 2 0 8

Accounting, Agriculture, Banks,
Banking, Confidential business
information, Currency, Reporting and
recordkeeping requirements, Securities.
12 CFR Part 2 2 5

Administrative practice and
procedure, Banks, Banking, Holding
companies, Reporting and
recordkeeping requirements, Securities.
12 CFR Part 2 6 3

Administrative practice and
procedure.
FD IC
12 CFR Part 303

Administrative practice and
procedure, Authority delegations
(Government agencies), Bank deposit
insurance, Banks, Banking, Reporting
and recordkeeping requirements,
Savings associations.
12 CFR Part 30 8

Administrative practice and
procedure, Claims, Equal access to
justice, Lawyers, Penalties.
12 CFR Part 364

Banks, Banking, Safety and
soundness.
OTS
12 CFR Part 5 7 0

Accounting, Administrative practices
and procedures, Bank deposit
insurance, Holding companies,
Reporting and recordkeeping
requirements, Savings associations,
Safety and soundness.

60809







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Federal Register / Vol. 58, No. 221 / Thursday, November 18, 1993 / Proposed Rules




Federal Reserve System
12 CFR Chapter II

For the reasons outlined in the
preamble, the Board proposes to amend
12 CFR parts 208, 225, and 263 as set
forth below:
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)

1. The authority citation for 12 CFR
part 208 is revised to read as follows:
A u th o rity : 12 U.S.C. 36, 248 (a) and (c),
321-338, 461, 481-486, 601, and 611,1814,
1823(j), 18310, 1831p-l, 3906-3909, 3310,
3331-3351; 15 U.S.C. 78b, 78o-4(c)(5), 78q,
78q—1, 78w, 781(b), 781(i), and 1781(g).
2. A new Subpart D, comprising
§§ 208.60 through 208.64, is added to
part 208 to read as follows:
S u b p a rt D—S afety an d S o u n d n ess S ta n d a rd s
Sec.

§ 208.60 Authority, purpose, scope and
preservation of existing authority.
§ 208.61 Definitions.
§ 208.62 Operational and managerial
standards.
§ 208.63 Asset quality and earnings
standards.
§ 208.64 Prohibition on compensation that
constitutes an unsafe and unsound
practice.
Subpart D— Safety and Soundness
Standards
§ 208.60 A u th o rity, purpose, scope and
preservation o f e xistin g au th o rity.

(a) A uthority. This part is issued by
the Board pursuant to section 39 of the
Federal Deposit Insurance Act (FDI Act)
(12 U.S.C. 1831p-l) as added by section
132 of the Federal Deposit Insurance
Corporation Improvement Act of 1991
(FDICLA) (Pub. L. 102-242,105 Stat.
2236 (1991)), and as amended by section
956 of the Housing and Community
Development Act of 1992 (Pub. L. 102550,106 Stat. 3895 (1992)).
(b) P urpose and sco p e. This part
establishes operational, managerial,

Federal Register / Vol. 58, No. 221 / Thursday, November IQ, 1993 / Proposed Rules

60813

(5) Take account of the size and
complexity of a loan; and
(6) Ensure compliance with
applicable laws and regulations.
(d) Credit underw riting. A State
member bank shall establish and
maintain prudent credit underwriting
practices that:
(1) Are commensurate with the types
of loans the bank will make and
consider the terms and conditions under
which they will be made;
(2) Consider the nature of the markets
in which loans will be made;
(3) Provide for consideration, prior to
credit commitment, of the borrower’s
overall financial condition and
resources, the financial responsibility of
any guarantor, the nature and value of
any underlying collateral, and the
borrower’s character and willingness to
repay as agreed;
(4) Establish a system of independent,
establishes clear lines of authority and
$208.61 D efinitions.
ongoing credit review with appropriate
responsibility
for
monitoring
adherence
(a) In gen eral. For purposes of this
communication to management and to
to prescribed policies;
part, except as modified in this section
the board of directors;
(2) Effective risk assessment;
or unless the context otherwise requires,
(5) Take adequate account of
(3) Timely and accurate financial,
the terms used have the same meanings
concentration
of credit risk;
operational and regulatory reports;
as set forth in sections 3 and 39 of the
46)
Are
appropriate
to the size of the
(4) Adequate procedures to safeguard
FDI Act (12 U.S.C. 1813 and 1831p-l).
bank and the nature and scope of its
and manage assets; and
(b) C lassified assets means assets
activities; and
(5) Compliance with applicable laws
classified, in the most recent Federal
(7) Ensure compliance with
and regulations.
examination or State examination that is
applicable laws and regulations.
(b) Internal audit system . A state
acceptable to the Board pursuant to
(e) Interest rate exp o su re. A State
member bank shall have an internal
section 10(d)(3) of the FDI Act, as
member bank shall:
audit system that is appropriate to the
substandard or doubtful and assets
(1) Manage interest rate risk in a
size of the bank and the nature and
classified as loss to the extent the loss
scope of its activities, and that provides manner that is appropriate to the size of
amount has not been deducted from
the bank and the complexity of its assets
for:
total capital or allowance.
and liabilities;
(1) Independence and objectivity;
(c) C om pensation means all direct
(2) Provide for periodic reporting to
(2) Qualified persons to perform
and indirect payments or benefits, both
management and the board of directors
internal audits;
cash and non-cash, granted to or for the
regarding interest rate risk; and
(3) Adequate testing and review of
benefit of any executive officer,
(3) Ensure compliance with
interna] controls and information
employee, director, or principal
applicable laws and regulations.
systems;
shareholder, including but not limited
(f) A sset grow th. A State member
(4) Adequate documentation of audit
to payments or benefits derived from an tests and findings and any corrective
bank’s asset growth shall be based on a
employment contract, compensation or
plan that:
actions;
benefit agreement, fee arrangement,
(1) Reflects consideration of:
(5) Verification and review of
perquisite, stock option plan,
(1) The source, volatility and use of
management actions to address
postemployment benefit, or other
the funds that support asset growth;
identified weaknesses; and
(6) Review by the bank’s audit
compensatory arrangement.
(ii) Any increase in credit risk or
(d) D irector shall nave the meaning
committee or board of directors of the
interest rate risk as a result of growth;
described in 12 CFR 215.2(c).
effectiveness of the internal audit
and
(e) E xecutiv e o fficer shall have the
system.
(iii) The effect of growth on the bank’s
meaning described in 12 CFR 215.2(d).
(c) Loan docum entation. A State
capital; and
(f) In eligible allow ance means any
member bank shall establish and
(2) Ensures compliance with
allowance for loan and lease losses not
maintain loan documentation practices
applicable laws and regulations.
eligible for inclusion in total capital for
that:
(jg) C om pensation, fe e s a n d benefits.
purposes of the calculation of risk-based
(1) Enable the bank to make an
State member bank shall maintain
capital under 12 CFR part 208, appendix informed lending decision and to assess safeguards to prevent the payment of
risk as necessary on an ongoing basis;
A.
compensation, fees and benefits that art
(g) N et in co m e o r loss means net
(2) Identify the purpose of a loan and
excessive or could lead to material
income or net loss as reported in the
the source of repayment, and assess the
financial loss to the bank, in accordance
quarterly report of condition.
ability of the borrower to repay the
with § 208.64 of this part.
(h) P rincipal sh a reh o ld er shall have
indebtedness in a timely manner;
$ 208.63 Asset quality and earnings
the meaning described in 12 CFR
(3) Ensure that any claim against a
standards.
215.2(j).
borrower is legally enforceable;
(i) T ier 1 capital means the amount of
(4) Demonstrate appropriate
(a)
M axim um ratio o f cla ssified asset
Tier 1 capital as defined in 12 CFR part
administration and monitoring of a loan; to capital—(1) In gen era l. A State

asset quality and earnings standards for 208, appendix A, and as reported in the
most recent quarterly report of
all state member banks, and standards
condition.
that prohibit as an unsafe and unsound
(j) Total assets means the amount of
practice the payment of compensation
total assets as defined in 12 CFR part
that is excessive or could lead to
208, appendix A, and as reported in the
material financial loss to a bank. These
most recent quarterly report of
standards are designed to identify
potential safety and soundness concerns condition.
(k) Total capital means the amount of
and ensure that action is taken to
address those concerns before they pose total capital as defined in 12 CFR part
208, appendix A, as reported in the
a risk to the deposit insurance funds.
(c)
Preservation o f existing authority. most recent quarterly report of
condition.
Neither section 39 nor this subpart in
any way limits the authority of the
$ 208.62 Operational and managerial
Board to address unsafe or unsound
standards.
practices, violations of law, unsafe or
(a) Internal controls and inform ation
unsound conditions, or other practices.
system s. A State member bank shall
Action under section 39 and this
have internal controls and information
subpart may be taken independently of,
systems that are appropriate to the size
in conjunction with, or in addition to
of the bank and the nature and scope of
any other enforcement action available
its activities, and that provide for:
to the Board.
(l) An organizational structure that




60814

Federal Register / VoL 58, No. 221 / Thursday, November 18, 1993 / Proposed Rules

(7)
Any other factors the Board
member bank shall maintain a ratio of
classified assets to total capital and
determines to be relevant
ineligible allowances that is no greater
(b) Com pensation lea d in g to m aterial
than 1.0.
fin a n cia l loss. Compensation that could
(2)
Preservation o f authority. Nothing lead to material financial loss to a State
in section 39 or this part shall limit the
member bank is prohibited as an unsafe
authority of the Board to require a bank
and unsound practice.
to maintain a ratio of classified assets to
(c) Preservation o f existin g authority.
total capital and ineligible allowances
N o t h i n g in this section shall limit the
that is less than 1.0.
authority of the FDIC under section
(b)
Minimum earnings sufficient to 38(i)(2)(F) of the FDI Act (12 U.S.C.
absorb losses without im pairing capital. 1831o(i)(2)(F)) and part 325 of this title.
A State member bank shall have
minimum earnings sufficient to absorb
PART 225—BANK HOLDING
losses without impairing capital. A State COMPANIES AND CHANGE IN BANK
member bank has minimum earnings
CONTROL (REGULATION Y)
sufficient to absorb losses without
1. The authority citation for 12 CFR
impairing capital if:
part 225 is revised to read as follows:
(1) The bank is in com pliance with
the minimum capital requirements
Authority: 12 U.S.C. 1817(jMl3), 1818,
established in 12 CFR part 208,
1831i, 1831p-l, 1843(c)(8), 1844(b), 1972(1),
appendix A; and
3106, 3108, 3907,3909, 3310, and 33313351.
(2) The bank would, if its net income
or loss over the last four quarters
2. A new Subpart I, comprising
continued over the next four quarters,
§ 225.81, is added to part 225 to read as
remain in compliance with minimum
follows:
capital requirements. For purposes of
Subpart I—Safety and Soundness
calculating whether a bank would
Standards
remain in com pliance with minimum
capital requirements under this
Sec.
paragraph (b)(2), the Board will deduct
§ 225.81 Safety and soundness standards.
the dollar amount of any net loss
Subpart I—Safety and Soundness
experienced by the bank over the most
recent four quarters from the bank's Tier Standards
1 capital and total assets and calculate
§ 225.81 Safety and soundness standards.
the bank’s capital ratios.
§208.64 Prohibition on compensation that
constitutes an unsafe and unsound
practice.
(а) Excessive com pensation. Excessive
compensation is prohibited as an unsafe
and unsound practice. Compensation
shall be considered excessive when the
amounts paid are unreasonable or
disproportionate to the services
performed by an executive officer,
employee, director, or principal
shareholder, considering the following:
(1) The combined value of all cash
and non-cash benefits provided to the
individual;
(2) The compensation history of the
individual and other individuals with
comparable expertise at the bank;
(3) The financial condition of the
bank;
(4) Comparable compensation
practices at comparable institutions,
based upon such factors as asset size,
geographic location, and the com plexity
of the loan portfolio or other assets;
(5) For postemployment benefits, the
projected total cost and benefit to the
bank;
(б) Any connection between the
individual and any fraudulent act or
omission, breach of trust or fiduciary
duty, or insider abuse with regard to the
bank; and




(a) O bligation to en su re co m p lia n ce. If
a safety and soundness deficiency is
detected pursuant to section 39 of the
FDI Act at one of its subsidiary insured
depository institutions, a bank holding
company shall ensure that the
subsidiary insured depository
institution returns to compliance with
the safety and soundness standards.
(b) A pplicability o f operational and
m anagerial standards to h olding
com panies —(1) In general. The

standards for safety and soundness
regarding internal controls, information
systems, internal audit systems, interest
rate exposure, asset growth, and
compensation, fees, and benefits
prescribed pursuant to section 39(a) of
the FDI Act for state member banks and
§ 208.62 of this chapter shall apply to a
bank holding company in the same
manner and to the same extent as a State
member bank.
(2)
Standards relating to credits. The
standards for safety and soundness
regarding credit underwriting and loan
documentation prescribed pursuant to
section 39(a) of the FDI Act for State
member banks pursuant to §§ 208.62 (c)
and (d) of this chapter shall apply to a
bank holding company in the same
manner as a State member bank to die
extent that the holding company

engages hi credit underwriting at the
holding company level.
(3)
Standards for asset quality and
earnings— (i) Applicability. Except as
provided in paragraph (b)(3)(iii) of this
section, the maximum ratio of total
classified assets to total capital and the
requirement of m in im u m earn in g s
sufficient to avoid impairing capital
prescribed pursuant to section 39(a) of
the FDI Act for State member banks and
§§ 208.63 (a) and (b) of this chapter shall
apply to a bank holding company in the
same manner and to the extent as a State
member bank.
(ii) M easurem ent. For purposes of
paragraph (b)(3)(i) of this section, total
classified assets, total capital, Tier 1
capital, and net income (loss) shall be
measured cm a consolidated basis.
(iii) Standard fo r bank holding
com panies with assets under $150
million. For a bank holding company
with assets of less than $150 million:
(A) Asset quality. The holding
company shall be found to have
exceeded the maximum ratio of —
classified assets to capital if any of its
subsidiary depository institutions
exceeds the maximum ratio of classified
assets to capital applicable to that
institution; and
(B) Earnings. The holding company
shall be found to have violated the
requirement of minimum earnings
sufficient to avoid impairing capital if
any of its subsidiary depository
institutions is in violation of the
minimum earnings requirement
applicable to that institution.
(c)
Procedures fo r correcting a
deficiency. In taking any action under .
section 39 that is within the Board’s
discretion to take in connection with a
bank holding company, the Board shall
follow the procedures for requesting a
safety and soundness com pliance plan,
ordering correction of a safety and
soundness deficiency, and taking
corrective action based on the failure to
submit and implement a compliance
plan that are prescribed under subpart
I of part 263 of this chapter.
PA RT 2 6 3 — R U L E S O F PRA CTIC E FO R
HEARIN GS

1. The authority citation for 12 CFR
part 263 is revised to read as follows:

Authority: 5 U.S.C. 504; 12 U.S.C. 248,
324, 504, 505,18170), 1818,1828(c), 18310,
1831p-l, 1847(b), 1847(d), 1884(b),
1972(2)(F), 3105, 3107,3108,3907,3909; 15
U.S.G 21, 78o-4,78o-5, and 78u-2.
2. A new Subpart I, comprising
§§ 263.300 through 263.305, is added to
part 263 to read as follows:

Federal Register / Vol. 58, No. 221 / Thursday, November 18, 1993 / Proposed Rules
Subpart I—Submission and Review of
Safety and Soundness Compliance Plans
and issuance of Orders to Correct Safety
and Soundness Deficiencies

60815

bank commenced operations or
experienced a change in control within
the previous 24-month period, or the
bank experienced extraordinary growth
Sec.
during the previous 18-month period.
263.300 Scope.
(2)
Extraordinary grow th. For
§ 263.303 Filing of safety and soundness
263.301 Purpose.
purposes of paragraph (d)(1) of this
compliance plan.
263.302 Determination of failure to meet
section, extraordinary grow th means an
safety and soundness standard and
(a) S ch ed u le fo r filin g co m plia nce
increase in assets of more than 7.5
request for compliance plan.
plan —(1) In gen era l. A State member
percent during any calendar quarter
263.303 Filing of safety and soundness
bank or bank holding company shall file within the 18-month period preceding
compliance plan.
a written safety and soundness
the issuance of a request for submission
263.304 Issuance of orders to correct
compliance plan with the Board within
of a compliance plan, by a bank that is
deficiencies and to take or refrain from
30 calendar days of receiving a request
taking other actions.
not well capitalized for purposes of
for a plan pursuant to § 263.302(b) of
263.305 Enforcement of orders.
section 38 of the FDI Act. For purposes
this part, unless the Board notifies the
of calculating an increase in assets,
Subpart I—Submission and Review of bank or bank holding company in
assets acquired through merger or
Safety and Soundness Compliance
writing that the plan is to be filed
acquisition approved pursuant to the
Plans and issuance of Orders to
within a different period.
Bank Holding Company Act, Bank
Correct Safety and Soundness
(2)
O ther pla ns. If a State member
Merger Act, National Bank Act, or
Deficiencies
bank or bank holding company is
Federal Reserve Act will be excluded.
obligated to file, or is currently
(e)
A m end m en t o f co m p lia n ce p la n . A
§263.300 Scope.
operating under, a capital restoration
State
member
bank or bank holding
The rules and procedures set forth in
plan submitted pursuant to section 38 of company that has filed an approved
this subpart apply to State member
the FDI Act, a cease-and-desist order
banks and bank holding companies that entered into pursuant to section 8 of the compliance plan may, after prior written
notice to and approval by the Board,
are subjectto the provisions of section
FDI Act, a formal or informal agreement, amend the plan to reflect a change in
39 of the FDI Act.
or a response to a report of examination circumstance. Until such time as a
or report of inspection, it may, with the
§263.301 Purpose.
proposed amendment has been
approved, the bank or bank holding
Section 39 of the FDI Act requires the permission of the Board, submit a
company shall implement the
Board to establish safety and soundness compliance plan under this section as
part of that plan, order, agreement, or
compliance plan as previously
standards. Pursuant to section 39, a
response, subject to the deadline
approved.
bank or company must submit a
provided in paragraph (a)(1) of this
compliance plan if it violates a safety
§ 263.304 Issuance of orders to correct
section.
and soundness standard under section
deficiencies and to take or refrain from
(b) Contents o f p la n. The compliance
39(a) or (b). An enforceable order under
taking other actions.
plan
shall
include
a
description
of
the
section 8 may be issued if, after being
(a)
N otice o f in ten t to issu e o rder— (1)
steps the State member bank or bank
notified that it is in violation of a safety
In gen era l. The Board shall provide a
holding
company
will
take
to
correct
the
and soundness standard prescribed
bank or bank holding company prior
deficiency and the time within which
under section 39, a bank or company
written notice of the Board’s intention
those
steps
will
be
taken.
fails to submit an acceptable compliance
to issue an order requiring such bank or
(c)
R eview o f safety a n d so u nd ness
plan or fails in any material respect to
bank holding company to correct a
co m plia nce pla ns. Within 30 days after
implement an accepted plan. This
safety and soundness deficiency or to
receiving a safety and soundness
subpart establishes procedures for
compliance plan under this *ubpart, the take or refrain from taking other actions
requesting submission of a compliance
Board shall provide written notice to the pursuant to section 39 of the FDI Act.
plan and issuing enforceable orders
The bank or bank holding company
bank
or bank holding company of
pursuant to section 39.
shall have such time to respond to a
whether the plan has been approved or
proposed order as provided by the
seek additional information from the
§ 263.302 Determination of failure to meet
safety and soundness standard and request bank or bank holding company
Board under paragraph (c) of this
for compliance plan.
section.
regarding the plan. The Board may
(2)
Im m ediate issu a n ce o f fin a l order.
(a)
D eterm ination. The Board may, extend the time within which notice
If the Board finds it necessary in order
based upon an examination, inspection, regarding approval of a plan will be
to carry out the purposes of section 39
or any other information that becomes
provided.
of the FDI Act, the Board may, without
(d) F a ilu re to subm it or im p lem ent a
available to the Board, determine that a
providing the notice prescribed in
co m plia nce pla n —
bank or bank holding company has
(1)
S upervisory a ctions. If a State
paragraph (a)(1) of this section, issue an
failed to satisfy the safety and
soundness standards set out in part 208, member bank or bank holding company order requiring a bank or bank holding
company immediately to take actions to
subpart D, and part 225, subpart I of this fails to submit an acceptable plan
within the time specified by die Board
correct a safety and soundness
chapter.
or fails in any material respect to
(d)
R equest fo r co m p lia n ce p la n . If the
deficiency or to take or refrain from
implement a compliance plan, then the
Board determines that a State member
taking other actions pursuant to section
bank or bank holding company has
39. A State member bank or bank
Board shall, by order, require the bank
or bank holding company to correct the
failed a safety and soundness standard
holding company that is subject to such
pursuant to paragraph (a) of this section, deficiency and may take further actions
an immediately effective order may
the Board shall request by letter or
provided in section 39(e)(2)(B) of the
submit a written appeal of the order to
through a report of examination or
the Board. Such an appeal must be
FDI Act. Pursuant to section 39(e)(3) of
report of inspection the submission of a the FDI Act, the Board may also be
received by the Board within 14
calendar days of the issuance of the
compliance plan, and the bank or bank
required to take certain actions if the




holding company shall be deemed to
have notice of the deficiency three days
after mailing of the letter by the Board
or delivery of the report of examination
or report of inspection.

60816

Federal Register / Vol. 58, No. 221 / Thursday. November 18, 1993 / Proposed Rules

order, unless the Board permits a longer constitute consent to the issuance of the
order.
period. The Board shall consider any
(f) Request fo r m odification o r
such appeal, if filed in a timely matter,
rescission o f order. Any bank or bank
within 60 days of receiving the appeal.
During such period of review, the order holding company that is subject to an
order under this subpart may, upon a
shall remain in effect unless the Board,
change in circumstances, request in
in its sole discretion, stays the
writing that the Board reconsider the
effectiveness ofthe order.
terms of the order, and may propose that
(b) Contents o f notice. A notice of
intention to issue an order shall include: the order be rescinded or modified.
Unless otherwise ordered by the Board,
(1) A statement of the safety and
the order shall continue in place while
soundness deficiency or deficiencies
that have been identified at the bank or ' such request is pending before the
Board.
bank holding company:
(2) A description of any restrictions,
§263.305 Enforcem ent o f orders.
prohibitions, or affirmative actions that
(a) Ju dicial rem edies. Whenever a
the Board proposes to impose or require;
State member bank or bank holding
(3) The proposed date when such
company fails to comply with an order
restrictions or prohibitions would be
issued under section 39, the Board may
effective or the proposed date for
seek enforcement of the order in the
completion of any required action; and
appropriate United States district court
(4) The date by which the bank or
- pursuant to section 8(i)(l) of the FDI
bank holding company subject to the
Act
order may file with the Board a written
(b) A dm inistrative rem ed ies. Pursuant
response to the notice.
to section 8(i)(2)(A) of the FDI Act, the
(c) R esponse to n otice —(1) Tim e fo r
Board may assess a civil money penalty
response. A bank or bank holding
against any State member bank or bank
company may file a written response to
holding company that violates or
a notice of intent to issue an order
within the time period set by the Board. otherwise fails to comply with any final
Such a response must be received by the order issued under section 39 and
Board within 14 calendar days from the against any institution-affiliated party
who participates in such violation or
date of the notice unless the Board
noncompliance.
determines that a different period is
(c) O ther en forcem en t action. In
appropriate in light of the safety and
addition to the actions described in
soundness of the bank or other relevant
paragraphs (a) and (b) of this section,
circumstances.
(2) Content o f resp on se. The response the Board may seek enforcement of the
provisions of section 39 or this part
should include:
through any other judicial or
(i) An explanation why the action
administrative proceeding authorized by
proposed by the Board is not an
appropriate exercise of discretion under law.
section 39;
Dated: November 4,1993.
(ii) Any recommended modification
W illiam W. Wiles,
of the proposed order; and
Secretary to the Board of Governors of the
(iii) Any other relevant information,
Federal Reserve System.
mitigating circumstances,
documentation, or other evidence in
support of the position of the bank or
bank holding company regarding the
proposed order.
(a)
Consideration o f resp on se. After
considering the response, the Board
may:
(1) Issue the order as proposed or in
modified form;
(2) Determine not to issue the order
and so notify the bank or bank holding
company; or
(3) Seek additional information or
clarification of the response from the
bank or bank holding company, or any
other relevant source.
(e)
F a ilu re to file resp on se. Failure by
a bank or bank holding company to file
with the Board, within the specified
time period, a written response to a
proposed order shall constitute a waiver
of the opportunity to respond and shall