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FEDERAL RESERVE BAMK OF IV1EW YORK [ Circular N o. 9935 1 October 22, 1985 NEW PO L IC IES ON SUPERVISION O F STATE M EM BER BANKS AND BANK H O LD IN G COM PANIES — G reater Frequency of Federal Reserve Exam inations and Inspections — Com m unicating Problem s of Supervisory Concern To All State Member Banks and Bank Holding Companies in the Second Federal Reserve District: Following is the text of a statement issued by the Board of Governors of the Federal Reserve System: The Federal Reserve Board has announced two policies to strengthen Reserve Bank supervision of State member banks and bank holding companies. The policies generally increase the frequency of Federal Reserve examinations of State member banks and inspec tions of bank holding companies and strengthen the procedures for reporting deficiencies to bank management and boards of directors. The Board’s action was taken in light of developments and trends within the banking system over the past several years. The policies announced are aimed at two broad supervisory areas: — The early identification of problems in banking organizations through more frequent and in-depth on-site exami nations; — The correction of weaknesses through more frequent and clearer communications between bank supervisors and boards of directors. In addition, the Board has identified the following areas in which steps to strengthen the supervisory process are being considered and where action will be taken if appropriate and necessary . These areas are: — T h e p r e v e n t i o n o f s u p e r v i s o r y p r o b l e m s in b a n k in g o r g a n i z a t i o n s t h r o u g h t i g h t e n e d p r u d e n t i a l s t a n d a r d s ; — Improved coordination and cooperation with other Federal and State banking departments, and; — Strengthened examination staffs and improved examiner training programs. The first policy announced provides for a general increase in the frequency of examinations of State member banks and inspections of bank holding companies. In general the policy provides that: — Bank organizations for which the Federal Reserve is primary supervisor will be examined or inspected at least annually; — The largest organizations and those with significant problems will be examined or inspected semi-annually; — As an exception to the general rule, small “shell” holding companies with no known problems and low levels of debt relative to the book value of their subsidiary bank’s stock are to be inspected on a more limited basis. (OVER) The second policy strengthens and formalizes current practices for communicating the findings of examinations and inspections to bank management and boards of directors when significant problems exist. This policy: — Establishes specific criteria for determining which examination findings require follow-up meetings with boards of directors and sets out guidelines for such meetings; — Requires that, in addition to providing a complete examination or inspection report to the bank or bank holding company, a written summary of findings be sent to the bank or bank holding company for distribution to each director; — Requires that senior Reserve Bank officials become more involved in presenting examination findings to boards of directors. The policies are effective immediately, with initial implementation expected January 1, 1986. Enclosed, for State member banks and bank holding companies in this District, is the text of a letter from the Board of Governors on this matter, together with the text of the policy statements. Additional copies will be fur nished upon request directed to our Circulars Division (Tel. No. 212-791-5216). Questions on this matter may be directed to Gerald P. Minehan, Assistant Chief Examiner (Tel. No. 212-791-5881). E. G erald C o r r ig a n , President. BOARD OF G O V ER N O RS OF THE FEDERAL RESERVE SYSTEM W A S H IN G TO N , D. C. 20551 ADDRESS OTFICIAL CORRESPONDENCE TOTHE QOAHO TO? THE PRESIDENTS OF ALL FEDERAL RESERVE BANKS AND THE OFFICERS IN CHARGE OF BRANCHES The Board of Governors has approved two new policies for Federal Reserve Banks to follow in supervising state member banks and bank holding companies (see Attachments A and and B) . The first sets down guidelines that increase the required fre quency of examinations of state member banks and of inspections of bank holding companies, except for certain relatively small bank holding companies,, The policy also calls for the Federal Reserve Banks to increase their involvement in examinations/ inspections of larger organizations and weaker organizations and to place greater reliance on state banking agencies for the examination/ inspection of smaller, healthy organizations, to the extent the states are willing to assume and have the resources to take on these responsibilities. The second policy, designed to formalize and strengthen longstanding practice, provides instructions for communicating the findings of examinations/inspections to the management and boards of directors of organizations with significant problems. The policy requires Reserve Bank officials to meet with the management and directors of organizations when an examination or inspection has revealed that the organization has significant problems• The policy also requires Reserve Banks to provide each member of the board of directors of such organizations with a summary report of the examination/inspection findings= Specifi cations for the form and general control of these reports are outlined in the policy0 Both policies have common objectives? (a) to help pre vent the development of or intensification of problems at banking organizations,0 and (b) to enhance the effectiveness of the Federal Reserve in identifying and dealing with problems that develop nonethelesso [Enc. Cir. No. 9935] - 2 - Impl©mentation of these policies is targeted to commence no later than January 1, 1986„ Due to the potential impact on staff resources in certain Districts* however the Board recognises that some time m a y 'be required before complete implementation of the examination/inspection frequency policy is obtained» „ The attached policy statement on frequency of examina= tions of state member banks and inspections of bank holding companics supersedes outstanding Federal Reserve System statements of policy pertaining to this specific subject contained in parts of FoRoRoSo 3=1531 (8=2441) and FoRoR. So 3=1532 (S=2444)0 Simi= larly* the attached policy statement on communicating examination/ inspection findings to management and directors supersedes the pertinent parts of Supervision and Regulation letters 75=288 and 79=512 o Sincerely yours* (signed) William Wo Wiles William W<> Wiles Secretary At t ac hment A POLI CY FOR FREQUENCY AND SCOPE OF EXAMI NATI ONS OF STATE MEMBER BANKS AND I NS P E C TI ONS OF BANK HOLDING COMPANI ES T h i s p o l i c y c a l l s f o r a g e n e r a l i n c r e a s e i n t he f r e quenc y of e x a m i n a t i o n s of s t a t e member banks and i n s p e c t i o n s of bank h o l d i n g c o m p a n i e s 0 The o b j e c t i v e s s o u g h t are ( a) t o he l p p r e v e n t t he de v e l opme nt of p r o b l e ms at b a n k i n g i n s t i t u t i o n s and ( b) to make more e f f e c t i v e t he F e d e r a l R e s e r v e ° s a b i l i t y to i d e n t i f y and r e s o l v e p r ob l e ms t h a t d e v e l o p n o n e t h e l e s s 0 The p o l i c y r e q u i r e s t h a t , i n g e n e r a l D b a n k i n g o r g a n i z a t i o n s f o r whi ch t he F e d e r a l R e s e r v e i s p r i ma r y s u p e r v i s o r a r e t o be e x a m i n e d / i n s p e c t e d at l e a s t a n n u a l 1 y 9 wi t h t h e l a r g e s t of such o r g a n i z a t i o n s and t h o s e wi t h s i g n i f i c a n t p r ob l e ms t o be e x a m i n e d / i n s p e c t e d s e m i - a n n u a l l y 0 As an e x c e p t i o n t o t h e g e n e r a l r u l e s s mal l ““s h e l l 00 h o l d i n g c o mp a n i e s wi t h no known pr obl ems and l ow l e v e l s of debt r e l a t i v e t o t he book v a l u e of t h e i r s u b s i d i a r y b ank ° s s t o c k may be i n s p e c t e d on a much more l i m i t e d b a s i s 0 T a b l e s p r e s e n t i n g t h e s e f r e q u e n c y and s c o p e r e q u i r e m e n t s ar e attached 0 F e d e r a l R e s e r v e Banks a r e t o i n t e n s i f y t h e i r i n v o l v e ment i n t h e e x a m i n a t i o n / i n s p e c t i o n of l a r g e o r g a n i z a t i o n s and t h o s e wi t h s i g n i f i c a n t pr obl e ms o G r e a t e r r e l i a n c e i s to be p l a c e d on s t a t e e x a m i n a t i o n s / i n s p e c t i o n s i n t he c a s e of s m a H e r organizationso I f a s t a t e l a c k s t he r e s o u r c e s t o c o n d u c t e x am i n at i o n s / i n s p e c t i o n s i n a c c o r d a n c e wi t h t he s p e c i f i c a t i o n s of t h i s p o l i c y or i s u n w i l l i n g to do s o 3 o r s i n t he c a s e of h o l d i n g c o mp a n i e s s l a c k s a u t h o r i t y 9 the Federal Reserve Banks w i l l conduct t h e e x a m i n a t i o n s / i n s p e c t i o n s t o t he e x t e n t needed t o meet t he s p e c i f i c a t i o n s o 1/ I n a d d i t i o n s i f a s t a t e member bank or bank h o l d i n g company T n d i c a t e s i t s wi s h t o be e x a m i n e d / i n s p e c t e d by i t s F e d e r a l R e s e r v e B a n k s t h a t wi s h s h o u l d be honor edo iy I t i s s u g g e s t e d t h a t R e s e r v e Bank s w i l l need t o e x e r c i s e some f l e x i b i l i t y when i mp l e me n t i n g t he e x a m i n a t i o n r e q u i r e me n t s i n o r d e r t o a c h i e v e o p e r a t i o n a l e f f i c i e n c i e s and a p p r o p r i a t e c o o r d i n a t i o n wi t h s t a t e b a n k i n g d e p a r t m e n t s 0 -2- REQUIREMENTS FOR STATE MEMBER BANK EXAMINATIONS No I d e n t i f i e d Problems or Special Characteristics M u l t i n a t i o n a l s t a t e member banks and a l l ot her s wi t h asset s g r e a t e r than $10 b i l l i o n w i l l be s u b j e c t t o a f u l l - s c o p e exami nat i on annual ly,, In a d d i t i o n , a l i m i t e d - s c o p e or t a r g e t e d e x a m i n a t i o n ^ / should be scheduled a n n u a l l y f o r each of these bankSo I f , however, a bank8s f i n a n c i a l c o n d i t i o n i s judged t o be c l e a r l y s a t i s f a c t o r y - - b a s e d on i t s l a s t f u l l - s c o p e examinations, t he f i n d i n g s of the Federal R e s e r v e d s u r v e i l l a n c e system^/ and o t h e r sources of i n f o r m a t i o n - - t h e Reserve Bank may waive the l i m i t e d scope or t a r g e t e d examination,, Each of the r e q u i r e d exami nat i ons should be conducted by the Federal Reserve Bank i n d e p e n d e n t l y or j o i n t l y w i t h the s t a t e ; these banks should no l o n g e r be examined under an A l t e r n a t e Year Exami nati on Program (AEP)„ Banks wi t h t o t a l assets between $500 m i l l i o n and $10 b i l l i o n w i l l be s u b j e c t t o an annual f u l l - s c o p e exami nat i on t o be conducted e i t h e r by the Federal Reserve Bank i n de pe nd en t l y or j o i n t l y wi t h the s t a t e , or by t he s t a t e alone on an e v e r y - o t h e r year basi s under an AEP0 L i mi t ed - s c op e or t a r g e t e d e x a m i n a t i o n s , between annual f u l l - s c o p e e x a mi n a t i o n s , are t o be conduct ed, i f deemed necessary by the Reserve Bank0 Banks w i t h assets between $100 m i l l i o n and $500 m i l l i o n must al so be examined a n n u a l l y on a f u l l - s c o p e basis,, Such exami nat i ons by the s t a t e in two out of every t h r e e years w i l l be acce pt a bl e under an AEPC A d d i t i o n a l l i m i t e d - s c o p e or t a r g e t ed exami nat i ons w i l l be conducted when deemed necessary by the Reserve Bank,, \J A l i m i t e d - s c o p e exami nat i on w i l l revi ew a l l areas of a c t i v i t y covered by a f u l l - s c o p e e x a mi n a t i o n , but l ess i n t e n s i v e l y , . Targeted exami nat i ons w i l l focus i n t e n s i v e l y on one or two act i v i t i e s o 2/ Refers t o the Federal F i n a n c i a l I n s t i t u t i o n s Exami nati on Council approved Uniform Bank S u r v e i l l a n c e Screen f o r use by the bank r e g u l a t o r y agencies t o i d e n t i f y on an e a r l y warning basi s those banks i n need of s p e c i a l s u p e r v i s o r y a t t e n t i on o =3 = Banks wi t h assets of l ess than $100 m i l l i o n are al so t o be sub j e c t t o an annual f u l l - s c o p e examination,, I t w i l l be accept abl e f o r the Reserve Bank t o l i m i t i t s i nvol vement in such exami nat i ons t o once every f ou r y e a r s , i f the s t a t e conducts annual exami nat i ons under an AEP i n t he ot h e r t h r e e y e a r s D A d d i t i o n a l 1i mi t e d - s c o p e or t a r g e t e d exami nat i ons w i l l be conducted when deemed necessary by the Reserve Banko Banks Re qui r i ng Special Supervi sor y A t t e n t i o n Banks r e c e i v i n g a CAMEL composite r a t i n g of 4 or 5 on an exami nat i on must be examined on a t wi c e - a = y e a r basi s t h e r e a f t e r u n t i l the problem i s r e s o l v e d ; at l e a s t one of these two must be a f u l l - s c o p e e x a m i n a t i o n 0 I f a bank has t o t a l assets in excess of $500 mi 11i on 9 both exami nat i ons must be conducted by i t s Federal Reserve Bank, i n d e p e n d e n t l y or j o i n t l y wi t h the s t a t e 0 I f a bank has t o t a l assets of l ess than $500 m i l l i o n , an exami nat i on conducted i n d e p e n d e n t l y by the s t a t e on an every o t h e r - t i m e basis w i l l be acceptable,, A l l banks rat ed a CAMEL composite 3 on t h e i r l a s t exami n a t i o n are t o have an annual f u l l - s c o p e exami nat i on conducted by the Federal Reserve, i n de p e n d e n t l y or j o i n t l y wi t h the s t a t e 0 In a d d i t i o n , a 1i mi t e d - s c o p e or t a r g e t e d exami nat i on of composite 3 - r at ed banks wi t h t o t a l assets g r e a t e r than $500 m i l l i o n must be conducted d u r i n g the year by t he Federal Reserve, i ndependent l y or j o i n t l y wi t h the state,, Banks With Special Characteristics St at e c h a r t e r e d banks a p pl y i n g f o r membership in the Federal Reserve System are t o r ecei ve a f u l l - sc ope exami nat i on by the Federal Reserve bef ore membership i s granted,, Particular a t t e n t i o n i s to be given in these exami nat i ons t o t he q u a l i t y of assets and the adequacy of c a p i t a l „ S i m i l a r l y , a f u l l - s c o p e examination by the Federal Reserve, i n dependent 1y or j o i n t l y wi t h the s t a t e , w i l l be r eq ui r ed w i t h i n 12 months f o l l o w i n g (1) the f or mat i o n of a de novo s t a t e member bank or (2) the change in c o n t r o l of a s t a t e member bank„ Banks which in the judgment of t he Reserve Bank f a i l the s u r v e i l l a n c e screen or which the Reserve Bank, on the basis of ot her i n f o r m a t i o n , has reason t o b e l i e v e may have s i g n i f i c a n t probl ems, are t o r ec e i v e an i n - d e p t h , o f f - s i t e revi ew t o determine whether an o n - s i t e exami nat i on should be conducted by t he Federal Reserve, i ndependent l y or j o i n t l y w i t h the s t a t e . ]_/ CAMEL r e f e r s t o the r a t i n g system used by t he f ed e r a l super v i s o r y agencies t o assess the f i n a n c i a l c o n d i t i o n of commer c i a l banks ( F 0R 0RoSo 3 - 1 5 7 5 ) 0 REQUIREMENTS FOR BANK HOLDING COMPANY INSPECTIONS Bank Holding Companies y i t h No I d e n t i f i e d Problems or Special C h a r a c t e r i s t i c s M u l t i n a t i o n a l bank h o l d i n g companies and a l l ot her s w i t h c o n s o l i d a t e d assets over $10 b i l l i o n are t o r e c e i v e a f u l l scope i n s p e c t i o n a n n u a l l y t o be c o o r di na t e d wi t h the exami nat i on of t he lead bank t o the e xt e nt possi bl e., Al though the i n s p e c t i o n of the h o l d i n g company and the exami nat i on of the lead bank need not be commenced s i m u l t a n e o u s l y 9 t hey should ov er l ap and r e l y on f i n a n c i a l st at ement s as of t he same dat e, i f p o s s i b l e 9 in or der t o f a c i l i t a t e the a n a l y s i s and t he p r e s e n t a t i o n of f i n d i n g s t o management and d i r e c t o r s 0 A l i m i t e d scope or t a r g e t e d i n s p e c t i o n of these companies i s al so t o be conducted between the annual f u l l - s c o p e i n s p e c t i o n s 9 the p r e c i s e t i m i n g t o be determined by o f f - s i t e s u r v e i l l a n c e r e p o r t s and by o p p o r t u n i t i e s t o c o o r d i n a t e wi t h the exami nat i on of t he lead bank0 The requi rement f o r a l i m i t e d - s c o p e or t a r g e t e d i n s p e c t i o n may be waived by the Reserve Bank i f 9 on the basis of t he f i n d i n g s of the l a s t f u l l - s c o p e i n s p e c t i o n and of the s u r v e i l l a n c e syst em9 the i n s t i t u t i o n i s judged t o be i n s a t i s f a c t o r y c ond i t i o n o Complex bank ho l d i n g companies ( d e f i n e d as companies wi t h nonbank s u b s i d i a r i e s t h a t extend a m a t e r i a l amount of c r e d i t or companies whose parent has a m a t e r i a l amount of debt o u t s t a n d i ng t o the general p u b l i c ) wi t h c o n s o l i d a t e d asset s between $500 m i l l i o n and $10 b i l l i o n r ec e i v e a f u l l - s c o p e i n s p e c t i o n annual ly., Noncomplex '“s h e l l 10 o r g a n i z a t i o n s in t h i s s i z e group are t o r e c e i v e a l i m i t e d - s c o p e i n s p e c t i o n every two y e a r s Q These i n s p e c t i o n s should be eonduet ed9 t o the e x t e n t possi bl e,, i n c o o r d i n a t i o n w i t h the exami nat i on of the lead bank0 A l l bank h o l d i n g companies i n t h i s si ze group should be s u b j e c t t o a d d i t i o n a l l i m i t e d - s c o p e or t a r g e t e d i n s p e c t i o n s when the Reserve Bank has i n f o r m a t i o n t h a t suggests the i n s t i t u t i o n may be devel opi ng s i g n i f i c a n t problems,, Complex bank ho l d i n g companies w i t h c o n s o l i d a t e d assets between $150 m i l l i o n and $500 m i l l i o n are t o r e c e i v e an annual f u l l - s c o p e inspection., Noncomplex s h e l l bank h o l d i n g companies i n t h i s si ze group are t o r e c e i v e a l i m i t e d - s c o p e i n s p e c t i o n on a once in t hr e e year basis,, I n s p e c t i o n frequency f o r bank h o l d i n g companies w i t h c o n s o l i d a t e d asset s of l ess than $150 m i l l i o n i s t o be determined by t h e i r s t r u c t u r a l c h a r a c t e r i s t i c s and t h e i r debt l evel s , , Com pl ex bank h o l d i n g companies are t o r e c e i v e a f u l l - s c o p e i n s p e c t i o n every o t h e r y e a r „ Noncomplex s h e l l companies w i t h parent debt exceeding the book value of the st ock of the company“ s bank 5 ( or banks) should be i nspect ed every ot h er year „ These i n s p e c t i o n s may be e i t h e r f u l l - s c o p e , , 1i mi t e d - s c o p e or t a r g e t e d as deemed appr opr i a t e „ Woncomplex s h e l l companies ( wi t h c o n s o l i d a t e d assets l ess than $150 m i l l i o n ) wi t h a r a t i o of parent debt t o the book value of the st ock of the company8s bank (or banks) of l ess than 100 percent w i l l be i nspect ed on a sample b a s i s : a 20 percent sample w i l l be drawn o f companies w i t h a r a t i o between 75 t o 100 per cent f o r i n s p e c t i o n each y e a r ; a 10 percent sample w i l l be drawn of companies w i t h a r a t i o below 75 percent f o r i n s p e c t i o n each y e a r 0 These i n s p e c t i o n s may be e i t h e r f u l l - s c o p e , l i m i t e d scope or t a r g e t e d as deemed ne c e s s a r y 0 ( W0TEs Companies t h a t r ec ei ved a BOPEC^/ composite r a t i n g of 3, 4, or 5 or f a i l e d a s u r v e i l l a n c e screen w i l l not be i n c l u d e d i n the p o p u l a t i o n from which samples are t o be drawn and should be i n spe ct e d in accordance w i t h the frequency requi rement s set f o r t h be l o w0) In a d d i t i o n t o the above i n s p e c t i o n r e q u i r e m e n t s , i n the case of companies wi t h l ess than $150 m i l l i o n i n c o n s o l i d a t e d a s s e t s , pri mary f e d e r a l and s t a t e bank s u p e r v i s o r s are t o be asked t o r evi ew, d u r i n g t h e i r exami nat i on of a bank, any s i g n i f i c a n t d e a l i n g s between the bank and the h o l d i n g company and to r ep o r t such f i n d i n g s along w i t h any o t h e r r e l e v a n t i n f o r m a t i o n on t he heal t h of the o r g a n i z a t i o n t o the Federal Reserve,, (A s h o r t form w i l l be pr ovi ded t o make such r e p o r t s t o t he Federal Reserve,,) The Federal Reserve Banks w i l l revi ew t h i s and o t h er i n f o r m a t i o n t o determine whether an i n s p e c t i o n of the h o l d i n g company should be conducted,, F u r t h e r , the Federal Reserve w i l l be prepared t o i n s p e c t any of t hese small bank h o l d i n g companies--as wel l as any l a r g e r ho l d i n g company--at the request of the bank' s pri mary supervi sor o Bank Holding Companies Re qui r i ng Special Supe r vi sor y A t t e n t i o n I n s p e c t i o n frequency of bank ho l d i n g companies r e q u i r ing s p e c i a l s u p e r v i s o r y a t t e n t i o n i s t o be determi ned by both the si z e and c o mp l e x i t y of the o r g a n i z a t i o n 0 The most i n t e n s i v e f requency r equi rement s are d i r e c t e d at bank h o l d i n g companies r at ed B0PEC composite 4 or 5, or whose lead bank s u b s i d i a r y has been rat ed CAMEL composite 4 or 5„ A l l bank h o l d i n g companies so rat ed wi t h c o n s o l i d a t e d assets over $500 m i l l i o n are t o r ec ei v e an annual f u l l - s c o p e i n s p e c t i o n and a l i m i t e d - s c o p e or t a r g e t ed i n s p e c t i o n d u r i n g the i n t e r v a l between f u l l - s c o p e i nspe ct i on s , , The same requi rement s apply t o complex bank h o l d i n g companies w i t h assets between $150 m i l l i o n and $500 m i l l i o n 0 To the ex t e n t p o s s i b l e , i n s p e c t i o n s of these 4 and 5 rat ed bank hol di ng U B0PEC r e f e r s t o the Federal Reserve' s r a t i n g system f o r bank ho l d i n g companies ( F 0R e R o S 0 4 - 8 6 5 ) Q 6 companies are t o be co o r d i n a t e d wi t h the exami nat i on of the lead bank s u b s i d i a r y 0 Noncomplex bank h o l d i n g companies wi t h assets of $500 m i l l i o n or less are t o r e c e i v e an annual i n s p e c t i o n whose scope may be determined by the Reserve Bank based upon the na t ur e of the companies' problems,,^/ Complex h o l d i n g companies wi t h assets under $150 m i l l i o n are t o recei ve a f u l l - s c o p e i nspect ion a n n u a l l y 0 Bank h o l d i n g companies rat ed composite 3 w i t h c o n s o l i dated assets over $500 m i l l i o n are s u b j e c t t o the same r equi rement s as those rated 4 or 5 0 Bank h o l d i n g companies w i t h co n s o l i d a t e d asset s between $150 m i l l i o n and $500 m i l l i o n w i t h complex s t r u c t u r e s are t o r ece i ve an annual f u l l - s c o p e i n s p e c t i o n ; t hose w i t h noncomplex s t r u c t u r e s are t o r ecei ve an annual i nspect i on, , the scope of which i s t o be determined by the Reserve Bank0 Complex bank ho l d i n g companies with assets under $150 million should receive a full-scope i n s p e c t i o n a n n u a l l y ; noncomplex bank ho l d i n g companies wi t h asset s l ess than $150 m i l l i o n are t o be i nspect ed every ot h er year„ The t ype of i n s p e c t i o n f o r these small noncomplex companies may be determined by the Reserve BankoV Bank Holding Companies w i t h Speci al Characteristics Bank h o l d i n g companies formed t o ac q ui r e an e x i s t i n g bank are t o be i nspect ed to det ermi ne t h e i r compl i ance wi t h Federal Reserve r e g u l a t i o n and the e x t e n t to which they have f u l f i l l e d commitments the Board of Governors r e q u i r e d of the o r g a n i z a t i o n i n approvi ng i t s a p p l i c a t i o n , , Such i n s p e c t i o n s shoul d be conducted between the 6th and 18th month a f t e r the a c q u i s i t i o n ; t h e i r scope i s t o be determined by the Reserve Banko I f i n f o r m a t i o n a v a i l a b l e t o t he Reserve Ba nk- - t he most r ecent exami nat i on of the banks the most recent FR Y-6 and FR Y-9 r e p o r t s from the ho l d i n g company and o t h er p e r t i n e n t i n f o r m a t i o n - i n d i c a t e t h a t (a) the c o n d i t i o n of t he bank and bank ho l d i n g company i s s a t i s f a c t o r y s (b) the bank ho l d i n g company i s f u l f i l l i n g i t s commitments t o the Board of Gover norss and (c) t he r a t i o of t he p a r e n t ' s debt t o the book value of the s u b s i d i a r y bank ( or banks) i s l ess than 75 percent then,, at the Reserve Bank's d i s c r e t i o n the i n s p e c t i o n may be delayed as long as 36 months a f t e r the f ormat i on, , Moreover*, the requi rement f o r an i n s p e c t i o n may be V Reserve Banks’ may9 under a p p r o p r i a t e ci rcumst ances , e n l i s t t he a s s i s t a n c e of the pri mary bank r e g u l a t o r i n conduct i ng these i nspect i ons, , 7 waived in' the case of a bank h o l d i n g company whose bank subsi dar y has l ess than $50 m i l l i o n i n t o t a l a s s e t s 8 i f i n the Reserve Bank’ s judgments (a) the ho l d i n g company’ s f i n a n c i a l c o n d i t i o n i s s a t i s f a c t o r y c and i t s commitments t o the Board of Governors are being f u l f i l l e d , and (b) the r a t i o of the h o l d i n g company’ s debt t o the book val ue of the s u b s i d i a r y bank (or banks) i s l ess than 75 percento Bank h o l d i n g companies t h a t have undergone a change in c o n t r o l and de novo bank h o l d i n g companies organi zed t o ac qui r e de novo bankss are t o r ecei ve a f u l l - s c o p e i n s p e c t i o n w i t h i n 12 months f o l l o w i n g the change in c o n t r o l or f o r m a t i o n c A l i m i t e d scope or t a r g e t e d i n s p e c t i o n may be conducted i n l i e u of t he f u l l scope inspecti ons, i f , in the judgment of the Reserve Banks, the f i n a n c i a l c o n d i t i o n of the h o l d i n g company appears s a t i s f a c t o r y 0 In t hose cases where bank ho l d i n g companies f a i l the s u r v e i l l a n c e screen or where o t h e r i n f o r m a t i o n suggests the company has experi enced an adverse developments, an i n - d e p t h o f f s i t e revi ew w i l l be made t o det ermi ne t he need f o r a l i m i t e d scope or t a r g e t e d i nspect i on, , TABLE 1 FREQUENCY AND SCOPE OF EXAMINATIONS OF STATE MEMBER BANKS Asset S iz e Rati ng $10 b i l l i o n + 1 or 2 F u ll- s c o p e required a nnually (FR or J o i n t ) „ Lim ited-scop e or ta rgeted presumed a n n u a lly (FR or J o in t)o 3 4 or 5 $500 mm - $10 b i l l i o n F u ll-sc o p e required annually (FRS J o in t or AEP on b a s is of every other year)o Lim ited-scope or targeted when neededo F u ll-sc o p e requi red a nnually (FR or J o i n t ) » Annual lim ited -sco pe or targeted a ls o required (FR or J o i n t ). Exam requi red every s i x months2 one must be f u l l - s c o p e s one may be lim ite d -sco p e or targetedo (Both must be FR or J o in to ) $100 mm - $500 mm F u ll-s c o p e required annually (FRSJ o in t or AEP on b a s is o f every three y e a r s)o L im itedscope or targeted when neededo Less than $100 mm F u ll-s c o p e required annually (FR0J o in t or AEP on b a s is o f every four y e a rs)o L im itedscope or targeted when neededo F u ll-sc o p e requi red annually (FR or J o i n t ) . Limited-■ scope or targeted when needed• Exam required every s i x months one must be f u ll- s c o p e s one may be lim ite d -■ scope or targetedo (At l e a s t one must be FR or J o in to ) Sp e cia l C h a r a c t e r i s t i c s : lo New member banks: f u l l - s c o p e FR exam required before membership gr a n te d 0 2 o Change in control or de novo member bank: full-scope exam (FR or Joint) required within 12 months. 3o Banks th at f a i l s u r v e i lla n c e screen or fo r which other s i g n i f i c a n t adverse inform ation i s received: trig g e rs i n “depth9 o f f - s i t e review to determine need f o r examination to be conducted by FR or j o i n t l y with state,. Notes: lo A f u l l - s c o p e examination covers a l l areas of in t e r e s t to the Federal Reserve in depth; a lim ite d -sc o p e examination w i l l review a l l areas o f a c t i v i t y covered by a f u l l - s c o p e examinations but l e s s in t e n s i v e ly ; targeted examinations w i l l focus i n t e n s i v e l y on one or two a c t i v i t i e S o 2 0 The A lte r n a te - y e a r Examination Program (AEP) provides fo r Federal Reserve and s t a t e examinations o f s t a t e member banks on a lt e r n a t i n g p e r i o d s » 3o J o in t examinations are conducted by the Federal Reserve and the s t a t e 8 sim u lta n e o u sly s with one j o i n t report being prepared„ TABLE 2 FREQUENCY AND SCOPE OF INSPECTIONS OF BANK HOLDING COMPANIES Asset Size Rating $10 b i l l i o n + 1 or 2 Full-scope required annually® Additional 1imited-scope or targeted presumed annual1y ® $500 mm to $10 b i l l i o n Complex Full-scope re quired annually Limited-scope or targeted when needed® Noncomplex Limited-scope required every two years® Additional lim ite d scope or targeted when needed® $150 mm - !1500 mm Complex Ful1-scope requi red annually® 3 Full-scope required annually® One limited-scope or targeted also required annually® 4 or 5 Full-scope requi red annually; one limited-scope or targeted also required annually® Noncomplex Limitedscope requi red every 3 years® Inspection requi red annually, may be lim ite d scope or targeted® Inspection requi red annually® Less than $150 mm See Note #4 Noncomplex Complex Full-scope required every other year® Ful1-scope inspection requi red annually. Full-scope inspection requi red annually® See Note #3 Inspection requi red every other year® Inspection requi red annually® Special C haracteristics: 1. BHCs formed to acquire going concerns: inspection to be conducted between the 6th and 18th month of operation; or w ithin 36 months under specific conditions; or waived i f under $50 mm with specific conditions,, 2® Change in control or de novo BHCs: inspection required w ithin 12 months,, 3o BHCs that f a il surveillance screen or for which other s ig n ific a n t adverse information is received: triggers in depth o f f - s i t e review to evaluate need fo r limited-scope or targeted inspection,, Notes: lo A full-scope inspection covers a ll areas of interest to the Federal Reserve in depth; a limited-scope inspection w i l l review a ll areas of a c tiv ity covered by a full-scope inspection^ but less intensively; targeted inspections w ill focus intensively on one or two activities® 2o A complex BHC is defined as one with material credit-extending nonbank subsidiaries or debt outstanding to the general public® A noncomplex BHC is one without material credit-extending subsidiaries and public debt. 3o The frequency of inspection of noncomplex “ s h e ll00 BHCs that are rated BOPEC 1 or 2 is based upon the ra tio of parent debt to the book value of the bankfis stock: a) i f over 100 percent—inspect every other year; b) i f 75-100 percent—inspect a 20 percent sample each year; c) less than 75 percent—inspect a 10 percent sample each year® 4® For small noncomplex BHC°s2 Reserve Banks should explore the p o s s ib ility , under appropriate circumstancess of e n lis tin g the assistance of the primary bank regulator in conducting the inspection® Attachment B POLICY FOR COMMUNICATING PROBLEMS OF SUPERVISORY CONCERN TO MANAGEMENT AND BOARDS OF DIRECTORS Previ ousl y, , Federal Reserve examiners and o t h e r design rsated personnel have held a meeting wi t h a banking o r g a n i z a t i o n ' s management and board of d i r e c t o r s a f t e r an exami nat i on or i n s p e c t i o n i f i t i s a l a r g e o r g a n i z a t i o n or i f the e x a m i n a t i o n / i n s p e c t i o n r eveal ed t h a t the o r g a n i z a t i o n had s i g n i f i c a n t problems,. In a d d i t i o n s a copy of the e x a mi n a t i o n / i n s p e c t i o n f i n d i n g s has been provi ded t o every bank examined and bank hol di ng company i nspect ed f o r review by i t s management and members of i t s b o a r d 0 That p o l i c y i s now being mo d i f i e d f o r the purpose of f o r m a l i z i n g and s t r e n g t h ening t hese t r a d i t i o n a l Federal Reserve p r a c t i c e s f o r communicating t he f i n d i n g s of examinations and i n s p e c t i o n s t o t he management and boards of d i r e c t o r s of banking o r g a n i z a t i o n s 0 The new p o l i c y e s t a b l i s h e s s p e c i f i c c r i t e r i a f o r d e t e r m i n i ng which e x a m i n a t i o n / i n s p e c t i o n f i n d i n g s r e q u i r e f o l l o w - u p meetings wi t h boards of d i r e c t o r s and present s g u i d e l i n e s f o r t he conduct of these me e t i n g s 0 I t al so i n t r o d u c e s the requi r ement s t h a t a w r i t t e n summary of exami nat i on f i n d i n g s — separat e from the complete exami nat i on or i n s p e c t i o n r e p o r t — be d i s t r i b u t e d t o each d i r e c t o r and t h a t s e n i o r Reserve Bank o f f i c i a l s become more i n v o l v e d i n communicating and p r e s e n t i n g e x a m i n a t i o n / i n s p e c t i o n f i n d i n g s t o the boards of d i r e c t o r s 0 I t i s i nt ended t h a t these i n i t i a t i v e s w i l l ensure t h a t each d i r e c t o r of a s t a t e member bank or a bank ho l d i n g company consi dered t o be a "probl em" o r g a n i z a t i o n or i d e n t i f i e d as having a s i g n i f i c a n t weaknessB w i l l c l e a r l y understand the nat ure and dimension of t h e i r o r g a n i z a t i o n ' s problems and the r e s p o n s i b i l i t i e s of i t s board of d i r e c t o r s t o c o r r e c t them o MEETINGS WITH DIRECTORS The d e c i s i o n t o hold a meeting wi t h the board of d i r e c t o r s at the concl usi on of a s t a t e member bank exami nat i on or a bank h o l d i n g company i n s p e c t i o n i s t o be determined on the basi s of the o r g a n i z a t i o n ' s f i n a n c i a l c o n d i t i o n s i t s s i z e s the t ype of e x a m i n a t i o n / i n s p e c t i o n conducted and o t h e r f a c t o r s w h i c h 9 i n the judgment of t he Reserve Banks i n d i c a t e t he need f o r such a meeting,, To the ex t e n t p o s s i b l e s meetings w i t h the boards of d i r e c t o r s of s t a t e member banks shoul d i n c l u d e r e p r e s e n t a t i v e s of the s t a t e banking department,, Where a p p r o p r i a t es meetings wi t h t he boards of bank ho l d i n g companies may be held j o i n t l y wi t h t he meeting of the lead bank s u b s i d i a r y ' s board of d i r e c t o r s and t he bank' s pr i mar y f e d e r a l or s t a t e bank super vi sor , , » 2 C r i t e r i a For Conducting Heetings Condi t i on A meeting wi t h t he board of d i r e c t o r s 1s t o be held at the con cl u si o n of any f u l l - s c o p e examination or i n s p e c t i o n i n which a s t a t e member bank i s rat ed CAHEL composite 4 or 5 or a bank h o l d i n g company i s rat ed BOPEC composite 4 or 5 0 Such meetings are al so r e q u i r e d i f an o r g a n i z a t i o n 1s r at ed composi te 3 and i t s c o n d i t i o n appears t o be d e t e r i o r a t i n g or has shown l i t t l e improvement si nce a pr e v i o us e x a m i n a t i o n / i n s p e c t i o n i n which i t r e c e i v e d a composite 3 r a t i n g 0 A meeting shoul d al so be hel d wi t h a l l these o r g a n i z a t i o n s f o l l o w i n g a 1i m i t e d - s c o p e or t a r g e t e d e x a m i n a t i o n / i n s p e c t i o n s i f deemed a p p r o p r i a t e and d e s i r a b l e by t he Reserve Bank0 Si ze A meeting w i l l be r e q u i r e d at the con c l u s i o n of a f u l l scope e x a m i n a t i o n / i n s p e c t i o n of a l l m u l t i n a t i o n a l o r g a n i z a t i o n s and major r e g i o n a l o r g a n i z a t i o n s wi t h assets i n excess of $5 b i l l i o n o Reserve Banks al so are encouraged t o conduct such meetings at t he con cl u si o n of a f u l 1-scope e x a mi n a t i o n / inspection of r e g i o n a l i n s t i t u t i o n s wi t h assets i n excess of $1 b i 11i on o Gui d el i n es f o r Meetings I t i s understood t h a t meetings w i t h boards of d i r e c t o r s w i l l have t o be t a i l o r e d t o meet the needs of each s p e c i f i c s i t u a t i o n Q In g e n e r a l 2 meetings w i t h the f u l l board are t o be pr ef e r r e d s but in c e r t a i n cases t he Reserve Bank may det ermi ne t h a t a meeting wi t h a committee of t he board o f d i r e c t o r s s such as e x e c u t i v e or a u d i t commi t t eess w i l l serve a d e q u a t e l y 0 In a l l caseSs however9 t he w r i t t e n summary of e x a m i n a t i o n / i n s p e c t i o n f i n d i n g s i s t o be provi ded t o each member of an o r g a n i z a t i o n ' s board of di r e c t o r s 0 1/ Reserve Banks al so are encouraged t o hold a meeting at t he c o n c l u s i o n of a f u l l - s c o p e e x a m i n a t i o n / i n s p e c t i o n of an o r g a n i z a t i o n wi th' assets g r e a t e r than $500 m i l l i o n r at ed composite Z0 i f i t s c o n d i t i o n appears t o be d e t e r i o r a t i n g and those rat ed composite 3 even i f showing some iraprovemento 3 - The Reserve Bank8s p r e s e n t a t i o n t o the board should o r d i n a r i l y be c hai r ed by a Reserve Bank o f f i c i a l s wi t h the exami nat i on s t a f f in attendance,, The l a r g e r the o r g a n i z a t i o n or more s e r i o u s i t s pr obl em9 t he more s e n i o r should be the Federal Reserve o f f i c i a l . In g e n e r a l 9 Reserve Bank p r e s i d e n t s are expected t o become d i r e c t l y i n v o l v e d i n the s u p e r v i s i o n of m u l t i n a t i o n a l o r g a n i z a t i o n s and r e g i o n a l i n s t i t u t i o n s w i t h over $5 b i l l i o n i n assets t h a t have been rat ed composite 3 9 4 or 5 0 The p r e s i d e n t o r d i n a r i l y w i l l meet wi t h the board of d i r e c t o r s and may become i n v o l v e d i n ot h er ways9 the p r e c i s e nat ure of which to depend on the s i t u a t i o n 0 A meeting wi t h the board o f d i r e c t o r s should i n c l u d e a f o r m a l 9 s t r u c t u r e d p r e s e n t a t i o n c o n t a i n i n g a c l e a r statement t h a t an i n s t i t u t i o n i s consi dered a “ problem" i n s t i t u t i o n 1/ or about t o become a problem i n s t i t u t i o n i f e x i s t i n g c o n d i t i o n s deteriorate,, Use of sl i des, , o t h er v i s u a l a i d s , and hard copy handouts are encouraged,, I n f o r m a t i o n should al so be presented on f i n a n c i a l t r e n d s and peer group compar i sons0 The p r e s e n t a t i o n should make c l e a r the nat ure of problems uncovered, such as: 1/ 0 D e f i c i e n c i e s in c a p i t a l , asset q u a l i t y 9 e a r n i n g s , or l i q u i d i t y ; 0 V i o l a t i o n s of law; 0 Inadequacies i n p o l i c i e s , , p r a c t i c e s and r e p o r t i n g systems necessary f o r the proper a d m i n i s t r a t i o n of the o r g a n i z a t i o n ; 0 Lack of wel l documented l e n d i n g , c o l l e c t i o n s , and l i a b i l i t y management p o l i c i e s ; 0 F a i l u r e of management i n addressing p r e v i o u s l y di scussed d e f i ci enci e s ; 0 Lack of r e p o r t i n g systems s u f f i c i e n t t o keep s e n i o r management and the board of d i r e c t o r s f u l l y i n f o r med ; ° F a i l u r e of t he board of d i r e c t o r s t o p a r t i c i p a t e i n the a c t i v e management of the organ i zat 1on«, invest ment As has been long st andi ng Federal Reserve p r a c t i c e 9 the exact numeric r a t i n g assigned i n t he e x a m i n a t i o n / i n s p e c t i o n i s not t o be di scl osed,, - 4 SUMMARY OF EXAMINATION FINDINGS The Federal Reserve Banks w i l l begin p r o v i d i n g w r i t t e n r e p o r t s t o the d i r e c t o r s summarizing the e x a m i n a t i o n / i n s p e c t i o n f i n d i n g s f o r a l l o r g a n i z a t i o n s rat ed composite 3 2 4 or 5„ and f o r those rat ed composite 1 or 2 showing signs of a s i g n i f i c a n t d e t e r i o r a t i o n in c o n d i t i o n or apparent v i o l a t i o n s o f l a w 0 The summary r e p o r t t o the d i r e c t o r s is intended t o complement the complete r e p o r t of e x a m i n a t i o n / i n s p e c t i o n f i n d i n g s prepared f o r use by bank management and the d i r e c t o r s of an o r g a n i z a t i o n 0 The summary r e p o r t i s t o focus on i d e n t i f i e d problems — r a t her than on the s t r e n g t h of the o r g a n i z a t i o n - - a n d present them i n a manner t h a t i s s u c c i n c t and unmi st akeabl y c l e a r 0 In a l l cases the types of a c t i o n s t o be taken by the d i r e c t o r s and management t o address these problems should be s p e c i f i c a l l y noted,, I n s t i t u t i o n s rated 4 or 5 are t o be t o l d t hey are " p r o b l e m” i n s t i t u t i o n s t h a t warrant " s p e c i a l s u p e r v i s o r y a t t e n t i o n 0" I n s t i t u t i o n s rat ed 3 are t o be informed t h a t t h e i r c o n d i t i o n i s not s a t i s f a c t o r y „ t h a t t hey are s u b j e c t t o more than normal s u p e r v i s i o n s and t h a t t hey may become "probl ems" i f t h e i r weaknesses are not addressed adequately,, A summary r e p o r t should al so be prepared when s i g n i f i c a n t weaknesses a re uncovered i n the e x a m i n a t i o n / i n s p e c t i o n of 2 - r at e d i n s t i t u t i o n s * The organization, style and content of the directors summary r e p o r t is al so t o be u t i l i z e d f o r the summary of t he exa mi n ee s comments on page one of the complete ex a mi n at i o n/ i n s p e c t i o n r e p o r t 0 The summary r ep o r t shoul d al so emphasize the r e s p o n s i b i l i t i e s of the d i r e c t o r s t o ensure t h a t c o r r e c t i v e a c t i o n s are taken t o address a l l d e f i c i e n c i e s noted as present ed i n a s e c t i o n e n t i t l e d " Mat t er s Re qui r i ng Board A t t e n t i o n , , " The summary r e p o r t w i l l be sent d i r e c t l y t o the banking o r g a n i z a t i o n ’ s management f o r t h e i r d i s t r i b u t i o n t o each d i r e c t o r , , The t r a n s m i t t a l l e t t e r t o the banking o r g a n i z a t i o n i s t o s t a t e t h a t the r e p o r t i s a summary of i d e n t i f i e d problems and c o n te n t p l a t ed s u p e r v i s o r y a c t i o n s and t o request t h a t management d i s t r i b u t e the r e p o r t t o each d i r e c t o r 0 The l e t t e r i s t o s t a t e f u r t h e r t h a t each d i r e c t o r should read the report , , sign the i n t r o duc t or y statement a t t e s t i n g t o having read t he report , , and r et u r n the r ep o r t t o management,, Management i s t o keep on f i l e copies of the st at ement s signed by the d i r e c t o r s but i s t o de s t r o y a l l but a f i l e copy of the summaries t h e msel ve s0 I t i s e s s e n t i a l t h a t the d i r e c t o r s summary r e p o r t be completed and d i s t r i b u t e d bef or e any Reserve Bank meeting wi t h the board of d i r e c t o r s in or der t o pr ovi de the d i r e c t o r s wi t h p r i o r n o t i c e of the d e f i c i e n c i e s t o be discussed,, Reserve Banks should also make every e f f o r t t o d i s t r i b u t e the complete ex a m i n a t i o n / i n s p e c t i o n r ep o r t t o management p r i o r t o meeting wi t h di r e c t o r s .
@FedFRASER