Full text of Federal Reserve Bank of New York Circulars : Disclosure of Individual Components of Supervisory Rating Systems to Management and Boards of Directors

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L IB E R T Y S T R E E T

N E W Y O R K , N.Y. 1 0 0 4 5 - 0 0 0 1
TE L E P H O N E 212 7 2 0 - 6 3 7 5
F A C S IM IL E 2 1 2 7 2 0 - 8 7 4 2
C h e s t e r B. F e l d b e r g
E x e c u t iv e V ic e Pr e s i d e n t

To A ll S ta te M e m b e r B an ks a n d T ru st C om pan ies, B a n k H o ld in g C om pan ies, B ra n ch es a n d
A g e n c ie s o f F o reig n B anks, E d g e a n d A g re e m e n t C o rp o ra tio n s, a n d O th ers
C on cern ed, in th e S e c o n d F e d e ra l R eserve D is tr ic t:

Subject: Disclosure of Individual Components of Supervisory Rating
Systems to Management and Boards of Directors
Beginning January 1, 1997, Federal Reserve examination and inspection reports will
include the numeric and alphabetic component ratings that we assign under the various
supervisory rating systems that we use. This will be a change more of form than o f substance,
as it has been for some time our general practice to ensure, in effect, that all supervisory
conclusions covering each area of focus are clearly communicated, following each examination
or inspection, to senior management and boards of directors. However, we have tended to
employ verbal descriptions rather than the ratings p e r se. The intended disclosure practices
are detailed in the enclosed copy of a Federal Reserve Board staff letter dated November 15,
1996.
This more explicit disclosure of component ratings to institutions examined by the
Federal Reserve, as well as by other bank supervisory authorities, is being undertaken in
response to the growing number of recent statutory and regulatory initiatives — such as the
federal Economic Growth and Regulatory Paperwork Reduction Act and the FFIEC-proposed
CAMELS rating system — that create certain specific links between an examined institution's
component ratings and the supervisory or regulatory treatment that it can expect to receive.
Questions concerning the disclosure of component ratings may be directed at this Bank
to any member of your relationship management team in our Bank Supervision Group.
Sincerely,

Enclosure




BOARD OF GOVERNORS
OF THE.

FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
DIVISION OF BANKING
SUPERVISION ANO REGULATION

SR 96-26 (SUP)
November 15, 1996

TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
S U B JE C T:

Provision of Individual Components of Supervisory Rating Systems to
Management and Boards of Directors

It is a longstanding policy of the Federal Reserve to discuss fully and clearly in
examination and inspection reports, and in meetings with senior management and boards of
directors, supervisory issues, problems, or concerns relating to the institutions under the
System’s supervision. It has also generally been Federal Reserve practice for some time to
provide to senior management and directors the single word descriptions corresponding to the
numeric component ratings assigned under the Uniform Financial Institutions Rating System
(CAMEL). In an effort to further strengthen communication with supervised institutions,
beginning January 1, 1997, the Federal Reserve will provide the numeric and alphabetic
component ratings assigned under various supervisory rating systems to senior management
and directors. Building upon existing practice, this step is intended to better focus
management attention on possible areas of weakness and the need for timely corrective
actions. This step is also consistent with a recent recommendation from the FFIEC regarding
disclosure of the numeric component ratings assigned under CAMEL.
Each Reserve Bank should direct its examiners to begin disclosing component
ratings as soon as possible, but no later than January 1,1997, in summary sections of
examination/inspection reports and directors’ summaries, as necessary, and in meetings with
senior management and directors. This directive applies to the following rating systems:




•

CAMEL (state member banks);

•

BOPEC (bank holding companies);

•

CAMEO (Edge and agreement corporations and overseas subsidiaries
of U.S. banks);

•

ROCA (U.S. branches and agencies of foreign banking organizations);

•

the Uniform Interagency Trust Rating System; and

•

the Uniform interagency Rating System for Data Processing Operations

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It also applies to the alphabetic component ratings assigned to management under the
BOPEC rating system and to the alphabetic components assigned under the Transfer Agent
rating system. General guidance on the disclosure of composite and component ratings in
examination and inspection reports is attached to this SR letter.
In the context of the exit meeting, the examiner should discuss key overall
examination findings, including composite and component numeric ratings. Consistent with
current practice, ratings are subject to a review by Reserve Bank supervisory officials, and
final ratings should be included in the examination or inspection report. In disclosing
composite and component ratings, the examiner-in-charge should remind management that
the ratings assigned are a part of the findings of the examination or inspection and are
privileged and confidential under applicable law. If composite and component ratings are
changed between examinations and inspections as a result of off-site analysis, management
and directors should be informed of the change.
Reserve Banks should inform state banking authorities in their districts of the
decision to disclose component ratings and should explain the reasons for this change in
Federal Reserve procedures prior to beginning disclosure of component ratings. Component
ratings assigned under AEP arrangements by state agencies should be treated by the
Reserve Banks in a manner that is consistent with the state’s policy regarding disclosure.
The guidance included in this SR letter is to be applied going forward,
consistent with the approach taken by the other banking agencies. In general, component
ratings assigned in the past should be treated in accordance with the policy prevailing at the
time.
A copy of this letter should be provided to each institution supervised by the
Federal Reserve. If there are any questions relating to the disclosure of component ratings,
please contact Connie Powell, Supervisory Financial Analyst, at (202-452-3506), or Kevin
Bertsch, Supervisory Financial Analyst, at (202-452-5265).

Richard Spillenkothen
Director
Attachment
Cross references:
SR 88-37, "Disclosure of Numeric Composite Examination and Inspection Ratings to
Examined/lnspected Institutions"
SR 90-21, "Rating System for International Exams"
SR 91-21, "EDP Interagency Examination, Scheduling and Distribution Policy"
SR 95-22, "Enhanced Framework for Supervising the U.S. Operations of Foreign Banking
Organizations"




SR 95-51, "Rating the Adequacy of Risk Management Processes and Internal Controls at
State Member Banks and Bank Holding Companies"
SR 96-10, "Risk-focused Fiduciary Examinations"
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Guidance on Disclosure of Composite and Component Ratings
in Examination and Inspection Reports
Page one of the report should list the composite rating for the current
examination or inspection and for the two previous examinations or inspections at the top of
the page as outlined below for bank examinations.
Uniform Financial Institutions Rating System

Exam Date:
Composite
Rating:

Cur. Exam
09-03-9X

Prior Exam
10-19-9Y

Prior Exam
10-22-9Z

2

2

2

2
2
2
2
2

n/a
n/a
n/a
n/a
n/a

n/a
n/a
n/a
n/a
n/a

Component
Ratings:
Capital
Asset Quality
Management
Earnings
Liquidity

This listing should be followed by the uniform definition of the assigned
composite rating. The uniform definitions of the component ratings assigned need not be
included in reports; however, they should be made available to management and directors
upon request.
When combined examination/inspection report formats are used, similar
matrices for each composite and component rating assigned should be included in the report.
Numenc and alphabetic component ratings should also be included on the
pages of reports that discuss findings related to the components. For example, for bank
examination reports, the numeric component rating assigned to capital should appear on the
capital page of the report.
In the case of examinations of independent data processing servicers and
financial institutions that provide servicing to other insured financial institutions, examination
reports are sometimes provided not only to the examined data processing servicers but also
to the institutions that receive servicing from these servicers. Accordingly, in these cases, the
composite and component ratings assigned under the Uniform Interagency Rating System for
Data Processing Operations should be provided to senior management and directors in the
transmittal letter accompanying the examination report rather than in the open section of the
examination report.1

1 Additional guidance on the disclosure of composite and component ratings for
examinations of information systems will be issued by the FFIEC in the near future.