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A T CIRCULAR NO A p ril 12, 1993 To All Depository Institutions in the Second Federal Reserve District, and Others Maintaining Sets of Board Regulations: E nclosed is a copy o f th e newly p rin te d R eg u latio n F p a m p h le t, "L im itations on In te rb a n k Liabilities," effective D e c e m b e r 19, 1992, of th e B o ard o f G o v e rn o rs o f th e F e d e ra l R e serv e System. This p a m p h le t will rep lace th e prev io u s p rin tin g o f this reg u la tio n from th e our C ircu lar N o. 10609, d a te d Ja n u ary 7, 1993. Register th at was issued w ith C irculars D ivision Federal FEDERAL RESERVE BANK OF NEW YORK NOTICE BOARD OF GOVERNORS’ SEMIANNUAL REGULATORY FLEXIBILITY AGENDA April 1, 1993 - October 1, 1993 The Semiannual Regulatory Flexibility Agenda provides information on those regulatory matters that the Board now has under consideration or anticipates considering over the next six months. It is divided into three parts: (1) regulatory matters that the Board may consider for public comment during the next six months; (2) matters that have been proposed and are under consideration; and (3) regulatory matters that the Board has completed or is not expected to consider further. A copy of the Agenda was mailed to those on our mailing list who have previously requested it. Copies will be mailed to others upon request (Tel. No. 212-720-5215 or 5216); single copies of any regulation or regulatory amendment can also be obtained at this Bank (33 Liberty Street), in the Issues Division area on the first floor. Circulars Division FEDERAL RESERVE BANK OF NEW YORK April 1992 Ref. Cir. No. AT10633 B o a rd o f G o v e rn o rs o f th e F e d e ra l R e serv e System Regulation F Limitations on Interbank Liabilities 12 CFR 206; effective December 19, 1992 Any inquiry relating to this regulation should be addressed to the Federal Reserve Bank o f the District in which the inquiry arises. February 1993 Contents Page Section 20 6.1— Authority, purpose, and sco p e....................................................... Section 20 6.2— D efin itions...................... Section 20 6.3— Prudential standards---(a ) G e n e r a l......................................... (b ) Standards for selecting corresponden ts............................. ( c ) Internal limits on e x p o s u r e ........ (d ) Review by board o f d irectors---Section 206.4— Credit exp osure.............. (a ) Limits on credit exposure............ (b ) Calculation o f credit exposure . . . ( c ) N etting........................................... (d ) E xclu sion s..................................... (e ) Credit exposure o f subsidiaries .. 1 1 1 1 2 2 2 2 2 3 3 3 3 Page 3 (f) Definitions.................................. Section 206.5—Capital levels of correspondents ................................... (a ) Adequately capitalized correspondents........................... (b ) Frequency of monitoring capital levels.......................................... (c ) Foreign banks............................. (d ) Reliance on information.............. (e ) Definitions................................... (f) Calculation of capital ratios........ Section 206.6—Waiver........................... Section 206.7—Transition provisions . . . 4 4 4 4 4 4 5 STATUTORY PROVISIONS............... 7 4 4 i Regulation F Limitations on Interbank Liabilities 12 C FR 206; effective December 19, 1992 SECTION 206.1—Authority, Purpose, and Scope Authority and purpose. (a ) This part (R egu lation F, 12 CFR 2 0 6 ) is issued by the Board o f Governors o f the Federal Reserve System (Board) to implement section 308 o f the Fed eral Deposit Insurance Corporation Improve ment A ct o f 1991 (act), Pub. L. 102-242. The purpose o f the regulation is to limit the risks that the failure o f a depository institution would pose to insured depository institutions. Scope. (b ) This regulation applies to all de pository institutions insured by the Federal Deposit Insurance Corporation. SECTION 206.2—Definitions A s used in this part, unless the context re quires otherwise: Bank (a ) means an insured depository insti tution, as defined in section 3 o f the Federal Deposit Insurance A ct (1 2 USC 1 8 13), and includes an insured national bank, state bank, District bank, or savings association, and an insured branch o f a foreign bank. Commonly controlled correspondent (b ) means a correspondent that is commonly con trolled with the bank and for which the bank is subject to liability under section 5 (e ) o f the Federal Deposit Insurance Act. A correspon dent is considered to be commonly controlled with the bank if— ( 1 ) 25 percent or more o f any class o f vot ing securities o f the bank and the corre spondent are owned, directly or indirectly, by the same depository institution or com pany; or ( 2 ) either the bank or the correspondent owns 25 percent or more o f any class of voting securities o f the other. Correspondent (c ) means a U.S. depository institution or a foreign bank, as defined in this part, to which a bank has exposure, but does not include a commonly controlled corre spondent. Exposure (d ) means the potential that an ob ligation will not be paid in a timely manner or in full. “Exposure” includes credit and liquid ity risks, including operational risks, related to intraday and interday transactions. Foreign bank (e ) means an institution that— ( 1 ) is organized under the laws o f a coun try other than the United States; ( 2 ) engages in the business o f banking; ( 3 ) is recognized as a bank by the bank supervisory or monetary authorities o f the country o f the bank’s organization; ( 4 ) receives deposits to a substantial extent in the regular course o f business; and ( 5 ) has the power to accept demand deposits. Primary federal supervisor (f) has the same meaning as the term “appropriate federal banking agency” in section 3 (q ) o f the Feder al Deposit Insurance A ct ( 1 2 USC 1 8 1 3 (q )). Total capital (g ) means the total of a bank’s tier 1 and tier 2 capital under the risk-based capital guidelines provided by the bank’s pri mary federal supervisor. For an insured branch o f a foreign bank organized under the laws o f a country that subscribes to the princi ples o f the Basle Capital Accord, “total capi tal” means total tier 1 and tier 2 capital as calculated under the standards o f that coun try. For an insured branch o f a foreign bank organized under the laws o f a country that does not subscribe to the principles o f the Ba sle Capital Accord, “total capital” means to tal tier 1 and tier 2 capital as calculated under the provisions o f the accord. U.S. depository institution (h ) means a bank, as defined in section 2 0 6 .2 (a ) o f this part, other than an insured branch o f a foreign bank. SECTION 206.3—Prudential Standards General. (a ) A bank shall establish and maintain written policies and procedures to prevent excessive exposure to any individual 1 § 206.3 correspondent in relation to the condition o f the correspondent. Standards for selecting correspondents. (b ) ( 1 ) A bank shall establish policies and pro cedures that take into account credit and liquidity risks, including operational risks, in selecting correspondents and terminating those relationships. ( 2 ) Where exposure to a correspondent is significant, the policies and procedures shall require periodic reviews o f the financial condition o f the correspondent and shall take into account any deterioration in the correspondent’s financial condition. Factors bearing on the financial condition o f the correspondent include the capital level o f the correspondent, level o f nonaccrual and past-due loans and leases, level o f earnings, and other factors affecting the financial con dition o f the correspondent. Where public information on the financial condition of the correspondent is available, a bank may base its review o f the financial condition of a correspondent on such information, and is not required to obtain nonpublic informa tion for its review.1 ( 3 ) A bank may rely on another party, such as a bank rating agency or the bank’s holding company, to assess the financial condition o f or select a correspondent, pro vided that the bank’s board o f directors has reviewed and approved the general assess ment or selection criteria used by that party. Internal limits on exposure. (c ) ( 1 ) Where the financial condition o f the correspondent and the form or maturity o f the exposure create a significant risk that payments will not be made in full or in a timely manner, a bank’s policies and proce dures shall limit the bank’s exposure to the correspondent, either by the establishment o f internal limits or by other means. Limits shall be consistent with the risk undertaken, considering the financial condition and the form and maturity of exposure to the corre spondent. Limits may be fixed as to amount or flexible, based on such factors as the 1 A bank will be required to obtain nonpublic informa tion for its review for those foreign banks for which there is no public source of financial information. 2 Regulation F monitoring o f exposure and the financial condition o f the correspondent. Different limits may be set for different forms o f ex posure, different products, and different maturities. ( 2 ) A bank shall structure transactions with a correspondent or monitor exposure to a correspondent, directly or through an other party, to ensure that its exposure or dinarily does not exceed the bank’s internal limits, including limits established for credit exposure, except for occasional excesses re sulting from unusual market disturbances, market movements favorable to the bank, increases in activity, operational problems, or other unusual circumstances. Generally, monitoring may be done on a retrospective basis. The level o f monitoring required de pends on— ( i) the extent to which exposure ap proaches the bank’s internal limits; (ii) the volatility o f the exposure; and (iii) the financial condition o f the correspondent. ( 3 ) A bank shall establish appropriate pro cedures to address excesses over its internal limits. Review by board of directors. (d ) The policies and procedures established under this section shall be reviewed and approved by the bank’s board o f directors at least annually. SECTION 206.4— Credit Exposure Limits on credit exposure. (a ) ( 1 ) The policies and procedures on expo sure established by a bank under section 2 0 6 .3 (c ) of this part shall limit a bank’s interday credit exposure to an individual correspondent to not more than 25 percent o f the bank’s total capital, unless the bank can demonstrate that its correspondent is at least adequately capitalized, as defined in section 2 0 6 .5 (a ) o f this part.2 ( 2 ) Where a bank is no longer able to dem onstrate that a correspondent is at least ad equately capitalized for the purposes o f sec 2 As used in this final rule, the term “adequately capital ized” is similar but not identical to the definition of that term as used for the purposes of the prompt-corrective-ac tion standards. Regulation F tion 2 0 6 .4 (a ) o f this part, including where the bank cannot obtain adequate informa tion concerning the capital ratios o f the cor respondent, the bank shall reduce its credit exposure to comply with the requirements o f section 2 0 6 .4 ( a ) ( 1 ) o f this part within 120 days after the date when the current Report o f Condition and Income or other relevant report normally would be available. Calculation of credit exposure. (b ) Except as provided in sections 2 0 6 .4 (c ) and (d ) o f this part, the credit exposure o f a bank to a correspondent shall consist o f the bank’s as sets and off-balance-sheet items that are subject to capital requirements under the capital adequacy guidelines o f the bank’s primary federal supervisor, and that involve claims on the correspondent or capital in struments issued by the correspondent. For this purpose, off-balance-sheet items shall be valued on the basis o f current exposure. The term “credit exposure” does not in clude exposure related to the settlement of transactions, intraday exposure, transac tions in an agency or similar capacity where losses will be passed back to the principal or other party, or other sources o f exposure that are not covered by the capital adequa cy guidelines. Netting. (c ) Transactions covered by netting agreements that are valid and enforceable un der all applicable laws may be netted in calcu lating credit exposure. Exclusions. (d ) A bank may exclude the fol lowing from the calculation o f credit exposure to a correspondent: ( 1 ) transactions, including reverse repur chase agreements, to the extent that the transactions are secured by government se curities or readily marketable collateral, as defined in paragraph ( f) o f this section, based on the current market value o f the collateral; ( 2 ) the proceeds o f checks and other cash items deposited in an account at a corre spondent that are not yet available for withdrawal; ( 3 ) quality assets, as defined in paragraph ( 0 o f this section, on which the correspon § 206.4 dent is secondarily liable, or obligations of the correspondent on which a creditworthy obligor in addition to the correspondent is available, including but not limited to— ( i) loans to third parties secured by stock or debt obligations o f the correspondent; (ii) loans to third parties purchased from the correspondent with recourse; (iii) loans or obligations o f third parties backed by standby letters o f credit issued by the correspondent; or (iv ) obligations o f the correspondent backed by standby letters o f credit issued by a creditworthy third party; ( 4 ) exposure that results from the merger with or acquisition o f another bank for one year after that merger or acquisition is con summated; and ( 5 ) the portion o f the bank’s exposure to the correspondent that is covered by federal deposit insurance. Credit exposure of subsidiaries. (e ) In calcu lating credit exposure to a correspondent un der this part, a bank shall include credit expo sure to the correspondent o f any entity that the bank is required to consolidate on its Re port o f Condition and Income or Thrift Fi nancial Report. Definitions. Government securities (f) A s used in this section: (1 ) means obliga tions of, or obligations fully guaranteed as to principal and interest by, the United States government or any department, agency, bureau, board, commission, or es tablishment o f the United States, or any corporation wholly owned, directly or indi rectly, by the United States. (2 ) means fi nancial instruments or bullion that may be sold in ordinary circumstances with reason able promptness at a fair market value de termined by quotations based on actual transactions on an auction or a similarly available daily bid- and ask-price market. (3 ) means an asset— ( i) that is not in a nonaccrual status; (ii) on which principal or interest is not more than 30 days past due; and (iii) whose terms have not been renego tiated or compromised due to the deterio Readily marketable collateral Quality asset 3 § 206.4 rating financial condition o f the addition al obligor; except that (iv ) an asset is not considered a “quality asset” if any other loans to the primary obligor on the asset have been classified as “substandard,” “doubtful,” or “loss,” or treated as “other loans specially men tioned” in the most recent report o f ex amination or inspection o f the bank or an affiliate prepared by either a federal or a state supervisory agency. Regulation F to the minimum leverage ratio required under paragraph ( a ) ( 3 ) o f this section. Reliance on information. (d ) A bank may rely on information as to the capital levels o f a correspondent obtained from the correspon dent, a bank rating agency, or other party that it reasonably believes to be accurate. Definitions. (e ) For the purposes o f this section: ( 1) means the ratio o f qualifying total capital to weighted risk assets. (2 ) means the ratio o f tier 1 capital to weighted-risk assets. (3 ) means the ratio o f tier 1 capital to average total consolidated assets, as calculated in accordance with the capital adequacy guidelines o f the correspondent’s primary federal supervisor. Total risk-based capital ratio Tier 1 risk-based capital ratio SECTION 206.5—Capital Levels of Correspondents Adequately capitalized correspondents. (a ) For the purpose o f this part, a correspondent is considered adequately capitalized if the cor respondent has— ( 1 ) a total risk-based capital ratio, as de fined in paragraph ( e ) ( 1 ) o f this section, of 8.0 percent or greater; ( 2 ) a Tier 1 risk-based capital ratio, as de fined in paragraph (e ) ( 2 ) o f this section, o f 4.0 percent or greater; and ( 3 ) a leverage ratio, as defined in para graph ( e ) ( 3 ) o f this section, o f 4.0 percent or greater. Frequency of monitoring capital levels. (b ) A bank shall obtain information to demonstrate that a correspondent is at least adequately capitalized on a quarterly basis, either from the most recently available Report o f Condi tion and Income, Thrift Financial Report, fi nancial statement, or bank rating report for the correspondent. For a foreign bank corre spondent for which quarterly financial state ments or reports are not available, a bank shall obtain such information on as frequent a basis as such information is available. Infor mation obtained directly from a correspon dent for the purpose of this section should be based on the most recently available Report of Condition and Income, Thrift Financial R e port, or financial statement o f the corre spondent. Foreign banks. (c ) A correspondent that is a foreign bank may be considered adequately capitalized under this section without regard 4 Leverage ratio Calculation of capital ratios. (f) ( i) For a correspondent that is a U.S. de pository institution, the ratios shall be calculated in accordance with the capital adequacy guidelines of the correspondent’s primary federal supervisor. (ii) For a correspondent that is a foreign bank organized in a country that has adopt ed the risk-based framework o f the Basle Capital Accord, the ratios shall be calculat ed in accordance with the capital adequacy guidelines o f the appropriate supervisory authority o f the country in which the corre spondent is chartered. (iii) For a correspondent that is a foreign bank organized in a country that has not adopted the risk-based framework o f the Basle Capital Accord, the ratios shall be calculated in accordance with the provi sions o f the Basle Capital Accord. SECTION 206.6—Waiver The Board may waive the application o f Sec tion 2 0 6 .4 (a ) o f this part to a bank if the pri mary federal supervisor o f the bank advises the Board that the bank is not reasonably able to obtain necessary services, including pay ment-related services and placement o f funds, without incurring exposure to a correspon Regulation F dent in excess of the otherwise applicable limit. SECTION 206.7—Transition Provisions (a ) Beginning on June 19, 1993, a bank shall comply with the prudential standards pre scribed under Section 206.3 of this part. § 206.7 (b ) Beginning on June 19, 1994, a bank shall comply with the limit on credit exposure to an individual correspondent required under Sec tion 206.4(a) of this part, but for a period of one year after this date the limit shall be 50 percent of the bank’s total capital. 5 Statutory Provisions Section 308 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (105 Stat. 2362) added a new section 23 to the Fed eral Reserve Act, effective December 19, 1992, and authorized the Board to ‘‘ rescribe reason p able transition rules to facilitate compliance with section 23 of the Federal Reserve Act. ” FEDERAL RESERVE ACT SECTION 23—Interbank Liabilities (a ) The purpose o f this section is to limit the risks that the failure o f a large depository in stitution (whether or not that institution is an insured depository institution) would pose to insured depository institutions. (b ) Aggregate limits on insured depository in stitutions' exposure to other depository institu tions. The Board shall, by regulation or order, prescribe standards that have the effect o f lim iting the risks posed by an insured depository institution’s exposure to any other depository institution. “Exposure” defined. (c ) ( 1 ) For purposes o f subsection (b ), an insured depository insti tution’s “exposure” to another depository institution means— (A ) all extensions of credit to the other depository institution, regardless o f name or description, including— ( i) all deposits at the other depository institution; (ii) all purchases o f securities or other assets from the other depository insti tution subject to an agreement to re purchase; and (iii) all guarantees, acceptances, or letters o f credit (including endorse ments or standby letters o f credit) on behalf o f the other depository institution; (B ) all purchases o f or investments in securities issued by the other depository institution; (C ) all securities issued by the other de pository institution accepted as collateral for an extension o f credit to any person; and ( D ) all similar transactions that the Board by regulation determines to be ex posure for purposes o f this section. ( 2 ) The Board may, at its discretion, by regulation or order, exempt transactions from the definition o f “exposure” if it finds the exemptions to be in the public interest and consistent with the purpose o f this section. ( 3 ) For purposes o f this section, any trans action by an insured depository institution with any person is a transaction with anoth er depository institution to the extent that the proceeds o f the transaction are used for the benefit of, or transferred to, that other depository institution. “Insured depository institution” defined. (d ) For purposes o f this section, the term “in sured depository institution” has the same meaning as in section 3 o f the Federal Deposit Insurance Act. Rulemaking authority; enforcement. (e ) The Board may issue such regulations and orders, including definitions consistent with this sec tion, as may be necessary to administer and carry out the purpose o f this section. The ap propriate Federal banking agency shall en force compliance with those regulations under section 8 o f the Federal Deposit Insurance Act. [12 USC 371b-2. As added by act of Dec. 19, 1991 (105 Stat. 2362).] 7
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