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/ Comparing Policies And Procedures
/I Of The Three Federal Bank Regulatory
; Agencies

~ without
mending

and similarities
among the agencies
drawing any conclusions
or recomany changes.

This report is a followup
to a 1977 GAO
~ study of bank supervision and addresses specific interests of the Chairman, Senate Com;i;te;
on Banking,
Housing
and Urban

III I
108985

GGD-79-27

MARCH 29,1979

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COMPTROLLER

GENERAL
WASHINGTON.

OF
DC.

THE

UNITED

STATES

2Q?t4#

B-114831
B-118535
B-168904

The Honorable
William
Proxmire
Chairman,
Committee
on Banking,
Housing and Urban Affairs
United
States
Senate
Dear Mr.

533um787-a

Chairman:

This report
compares selected
policies
and procedures
of the three
Federal
bank regulatory
agencies--the
Federal/
the Federal
Reserve System,L-Y+
Deposit
Insurance
Corporation",/
The
and the Office
of the Comptroller
of the Currency.
report
is informational
and makes no conclusions
or
recommendations.
Our review
was made to followup
on recommendations
we made in our 1977 report
entitled
"Federal
Supervision
of State and National
Banks" (OCG-77-l),
and in response
to interests
indicated
by the Senate Committee
on Banking,
Housing and Urban Affairs.
The review
was completed
pursuant to the Federal
Banking Agency Audit
Act, 1978 (31 U.S.
C. 67).
Since our prior
study,
the three
agencies
have initiated a number of actions
affecting
their
regulation
and
there has been coorsupervision
of banks.
In some areas,
dination
in adopting
common procedures.
In other
areas,
the agencies
still
differ
in the way they carry
out their
responsibilities.
We have tried
to highlight
the similarities
and differences
in the agencies'
approaches
to ComIt should
be noted,
however,
that
mittee
interest
areas.
many of the areas discussed
are quite
complex and have
been studied
for years by experts
in the financial
field.
Many of the subjects
deserve
separate
indepth
reviews
before
appropriate
conclusions
and recommendations
can be
reached.
Using our new legislative
authority,.we
intend
in the future
to give many of these matters
the time
and effort
deserved.

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B-114831
B-118535
B-168904

The three agencies
have reviewed
and commented on
a draft
of this
report.
To expedite
processing,
we
obtained
informal
comments from the agencies’
representatives,
and to the extent
possible,
incorporated
these
into the final
report.
The agent ies I written
responses
are presented
in their
entirety
in the appendixes
to
the report.
As arranged
with your office,
unless you publicly
announce
its contents
earlier,
we plan no further
distribution
of this
report
until
seven days from the
date of the report.
At that time we will
send copies
to the Senate Committee
on Governmental
Affairs,
the
House Committee
on Banking,
Finance
and Urban Affairs,
Copies
and the House Committee
on Government
Operations.
will’be
sent to the three
Federal
bank regulatory
agencies
as well.

Comptroller
General
of the United
States

, ,.

COMPARINGPOLICIES AND
PROCEDURES
OF THE THREE
FEDERALBANK REGULATORY
AGENCIES

COMPTROLLERGENERAL'S
REPORTTO THE SENATE
COtWITTEE ON BArJKING,
HOUSINGAND URBANAFFAIRS
DIGEST
------

each of the three Federal
In most instances,
bank regulatory
agencies--the
Federal Deposit
Insurance Corporation,
the Federal Reserve
System, and the Office of the Comptroller
its own proof the Currency --establishes
cedures for carrying
out its wide range of
The degree of consistency
responsibilities.
in the approaches used by the agencies
'
depends on many factors,
including
management's
philosophy
and pertinent
Federal or State
laws.
/ 'G
exist in the agencies'
(1 Although differences
policies
and procedures,
there is also some
uniformity
and evidence of increased interagency cooperation
in the last 2 years./
GAO discusses the following
areas in this report:
,/“,
Bank regulation
c/I1
,/
--approving
charters,
membership, ?I'
and mergers:
insurance,
-j
--permissible
business activities
1“
i%
..
f
--single
borrower lending limits:
and
--conflict

of interest

-,I3

Bank supervision

-YFcow

ate

--frequency

of commercial

--assessing

capital

--assessing
assets,

the quality

Upon removal,
should be noted

the report
hereon.

examinations,

adequacy,
of a bank's

GGD-79-z7

shared

--assessing
--evaluating

country

--reviewing

standby

--communicating
with
board
of directors,

national

credits,

risk,
letters
the

of
bank’s

--identifying
special

banks
supervisory

needing
attention,

--issuing

cease

desist

(3)

Consumer

(4j

Travel

and

compliance

credit,

and

orders.

examinations.

policies.

/ The two main areas
of responsibility
are
regulation
--the
process
of interpreting
banking
legislation
and issuing
rules---the
process
of
monitoring,
and supervision
examining
and ensuring
compliance
with
sound practices
and laws./
REGULATIQN
Zhe Comptroller
of the Currency
is responbanks.
sible
for
chartering
all
national
The Federal
Reserve
grants
membership
The Federal
to State-chartered
banks.
Deposit
Insurance
Corporation
approves
deposit
insurance
for
State
banks which
are not members
of the Federal
Reserve
System.
All
three
agencies,
as part
of their
regulatory
role,
act upon merger
requests
from
the banks
they
regulate.
When weighing
applications,
they
consider
the bank’s
financial
history
its
capital
structure,
and condition,
earnings
prospects,
management,
and the
The agencies’
needs
of the community.
policies
for. evaluating
these
factors
are
therefore,
it is difficult
to
flexible:
without
extensive
study,
the degree
assess,
of consistency
among the agencies
in
approving
applications.

In addition
to agencies'
chartering,
membership,
insurance,
and merger application
approval
processes,
Committee
interests
in
tne agencies'
regulation
of banks included
permissible
bank business
activities,
bank
employee conduct,
bank lending
limits
to a single
borrower,
and bank policy
on disposition
of credit
life
insurance
sales commissions.
The Comptroller
of
as the chartering
agency
the Currency,
some
for national
banks, has established
rules
and regulations
that apply to all
While some Federal
laws
national
banks.
apply to State-chartered
banks, GAO was told
that each State generally
establishes
rules
and regulations
for State-chartered,
Feuerally
insured
member and nonmember
The Federal
Reserve and the
banks.
Federal
Deposit
Insurance
Corporation
require
State member and nonmember
insured
banks to comply
with the various
State
rules
and regulations
and applicable
Federal
laws.
SUPERVISIOti
Bank examination
is the agencies'
primary
supervisory
tool for evaluating
the condition
of banks and their
compliance
with applicable
The agencies'
laws,
regulations,
and rules.
policies
for bank examination
are influenced
by the number and size of banks the agency
supervises,
the agency's
concept
of examination,
and the agency's
personnel
resources.
In the areas of Committee
interest
that
relate
to the commercial
examination
process-- frequency
of examinations,
capital
asset quality,
country
risk
adequacy,

Tear Sheet

iii

assessments,
shared national
credits,
standby
letters
of credit,
and meetings
with bank directors--the
agencies
have
uniform
systems
in effect
for two areas
and there
is similarity
in a third.
Uniform
procedures
have been developed
for evaluating
shared national
credits
and the country
risk portion
of
foreign
loans.
The agencies
have
a common approach
for treating
banks’
standby
letters
of credit.
The agencies’
policies
for the frequency
of bank examination
are conceptually
similar,
but are different
in selection
critype of examination,
teria,
time frames,
Also,
and management discretion
allowed.
agencies’
policies
on meeting
with the
bank’s
board of directors
are different.
Two important
and complex areas of the commercial
examination
process
which we reviewed
are the assessment
of capital
adequacy and
The agencies
consider
these
asset quality.
important
areas in evaluating
a bank’s
overOnly the Federal
Reserve has
all condition.
numerical
standards
to assist
their
examiners in making consistent
evaluations
of
capital
adequacy and asset quality,
and all
three
agencies
depend heavily
on examiner
judgment.
Ban,ks requiring
special
, supervisory
attention
The three agencies
classify
banks according
to the magnitude
of problems
disclosed
through
their
examination
and monitoring
Banks with severe adverse
conprocesses.
ditions
receive
additional
monitoring
and
The three agencies
adopted
a
supervision.
uniform
interagency
bank rating
system in
The system is based on an evaluMay 1378.
ation
of five critical
dimensions
of a bank’s
operations
reflecting,
in a comprehensive

fashion,
an institution’s
financial
condition,
compliance
with banking
regulations
and overall
operating
soundness.
and statutes,
The three agencies
use the system to identify
banks needing
special
supervisory
attention.
Zor the Federal
Reserve and the Comptroller
this
includes
identifying
of the Currency,
The Federal
Deposit
all problem
banks.
Insurance
Corporation
uses the system only
to identify
supervisory
problem banks and is
testing
the system for use in identifying
It continues
to use
financial
problem
banks.
traditional
methods for identifying
financial
problem
banks until
the testing
is completed.
The agencies’
policies
on the use of formal
administrative
actions,
such as cease and
are generally
more formalized
desist
orders,
and aggressive
than they were 2 years ago.
The Comptroller
and, more recently,
the Federal Reserve require
that an administrative
action
be considered
for all supervisory
concern and problem
bank situations
identified
The policies
by the uniform
bank rating
system.
of the Federal
Deposit
Insurance
Corporation
state
that whenever a nonmember insured
bank
is designated
as a financial
problem bank,
a recommendation
must be made with respect
These policies
to formal
administrative
action.
do not apply to supervisory
problem
banks.
CONSUMER COMPLIANCE EXAMINATIONS
The agencies
have identified
consumer compliance
as a separate
examination
area and are devoting
more time and staff
to examining
this
aspect
of banks’
operations.
Each of the three
agencies
reviews
similar
bank documents
and
procedures
during
its examinations.
As an example of joint
cooperation,
the
three
agencies,
in conjunction
with the
Federal
Home Loan Bank Board,
recently
coordinated
and issued joint
regulations
implementing
the Community Reinvestment

TearSheet

for
Act.

They also established
uniform
examination
procedures
for reviewing
the banks’
compliThe act
ance with the law and regulation.
was written
to encourage
banks to help meet
the credit
needs of their
communities,
and
moderate-income
neighborincluding
lowhoods, consistent
with safe and sound operations
of such banks.
THAVEL POLICIES
There are differences
in the agencies’
For example,
the Federal
travel
policies.
Deposit
Insurance
Corporation
and the Comptroller
generally
disallow
first
class
air travel
The Federal
arrangements
for all employees.
Reserve generally
disallows
first-class
air
travel
for most employees;
however,
15 office
and division
directors
are allowed
to travel
but, CA0 was told,
are,encouragec
first
class,
to use coach.
The Federal
Reserve and the
Comptroller
do not pay for the travel
of spouses
unless
the employee is being permanently
relocated.
The Federal
Deposit
Insurance
Corporation
makes
one exception
to this
in that it pays for the
travel
costs of spouses accompanying
employees
who attend
periodic
regional
conferences.
AGENCY COMMENTS
The three agencies
have reviewed
and commented
To expedite
processing,
on a draft
of this
report.
comments
from the agenGAO obtained
informal
ties'
representatives
and, to the extent
incorporated
these into the final
possible,
report.

Contents
-------Page
i

DIGEST
CHAPTER
1

INTRODUCTION
Scope of review

1
1

BANK REGULATION
Approving charters,
membership, insurance,
and mergers
Permissible
business activities
Commissions from credit
life insurance
sales
Single borrower lending limits
Conflict
of interest

3
8
9
11
13

BANK SUPERVISION
Frequency of commercial examinations
Assessing capital
adequacy
Assessing the quality
of a bank's assets
Uniform review of shared national
credits
Evaluating
country risk
Standby letters
of credit
Communicating with the bank's board of
directors
Identification
of banks needing special
supervisory
attention
Cease and desist orders

16
17
19
23
28
30
33

CONSUMER
COMPLIANCEEXAMINATIOKS
Truth-in-Lending
Act
Fair Housing Act
Community Reinvestment Act

43
43
44
46

TRAVEL POLICIES
First class travel
Travel of employees'
Travel allowances--a

47
47
47
48

spouses
summary

33
35
39

Paqe
APPENDIX
I

III

Letter
dated February
the Chairman,
Federal
the General Accounting

16, 1979, from
Reserve Board,
Office

Letter
dated February
21, 1979,
the Comptroller
of the Currency,
General
Accounting
Office

from
to the

Letter
dated February
26, 1979, from
the Director,
Bank Supervision,
Federal
Deposit
Insurance
Corporation,
to the
General Accounting
Office
ABBREVIATIONS

FDIC

Federal

Deposit

Insurance

FRS

Federal

Reserve

System

occ

Office
of
Currency

SNC

Shared

UIBRS

Uniform

the Comptroller

national
Interagency

Corporation

the

credit
Bank Rating

System

CHAPTER 1
INTRODUCTION
The three Federal
bank regulatory
agencies--the
Federal
Deposit
Insurance
Corporation
(FDIC),
the Federal
of the Comptroller
Reserve System (FRS), and the Office
a wide range of responsibilof the Currency
(OCC) --have
ities
for bank regulation
(the process
of interpreting
banking
legislation
and issuing
rules
and regulations
for the banks) and bank supervision
(the process
of
and ensuring
compliance
with
monitoring,
examining,
safe and sound banking
practices
and applicable
laws).
In most instances,
each agency establishes
its own procedures
for carrying
out its responsibilities.
The
degree of consistency
in the approaches
used by the
agencies
depends on many factors,
including
management's
philosophy
and pertinent
Federal
or State laws.
In 13'17, we completed
a study of the effectiveness
of State
and national
bank supervision
by the three
regulatory
agencies.
In several
instances,
we pointed
out that the agencies'
procedures
for regulating
and supervising
banks were different
and recommended
Since the comcloser
coordination
among the agencies.
pletion
of our study,
the three agencies
have revised
some of their
policies
and coordinated
some existing
and new procedures.
However,
there are still
differences
either
generally
or specifically,
among the agencies,
in how they carry
out their
regulatory
and supervisory
responsibilities.
This report
presents
a comparison
of selected
agency policies
and procedures,
many of
which were discussed
in our 1977 report,
and highlights
similarities,
differences,
and coordination
among the
agencies
for each area.
SCOPE OF REVIEW
Our evaluation
was completed
as a general
followup
to our 1977 study and addresses
selected
,aspects
of the
____
_..-_; .
primarilyyon
specifi'c
three
agencies-'.
ageratf.gd
i,nt.er.es.ts,- shownby
the Senate Committee
on Banking,
Housing and Urban Affairs.
We reviewed
applicable
laws,
regulations,
procedures,
and policies
and talked
with responsible
agency
officials
to determine
the agencies'
policies,

the similarities
and differences
in these policies,
and
the degree of coordination
among the agencies
on these
We did not review
State laws during
our audit,
matters.
so that references
to State laws in this
report
are
based on statements
made by the agencies’
represenWe performed
our evaluation
at the Headquartatives.
ters of PDIC, FRS, and OCC in Washington,
D.C., between
The areas we reviewed
repreOctober
and December 1978.
sent only a portion
of the multifaceted
aspects
of the
three regulatory
agencies
and the comments on policy
similarities,
differences,
and coordination
do not
necessarily
reflect
the agencies
operations
as a whole.
Further,
the general
nature
of the audit
precludes
us
from making conclusions
or recommendations
on specific
subjects
or specifically
to the agencies.

CHAPTER 2
BANK REGULATION
The three Federal
bank regulatory
agencies
affect
the structure
and operation
of commercial
banks by granting
national
bank charters,
FRS memberships,
FDIC insurance,
and by approving
applications
to establish
bank holding
companies,
new branches,
and other
bank structural
changes.
governingpe.r.m&sible.b~,king
Requlations
activities
and.~ ..-.
the
conduct
bank
business
are based
__-_~ -..- _-.-+----.
-.----...-..-_. of __
laws.
on -a 'combination
of-State
and Federal
__-APPROVING CHARTERS, MEMBERSHIP,
INSURANCE, AND MERGERS
OCC considers
applications
for national
bank charters:
FRS considers
applications
for FRS membership
by Stateapplications
for
chartered
banks; and FDIC considers
deposit
insurance
from State-chartered
banks that are
not members of FRS.
Each of the agencies
also has responsibility
for approving
merger applications
for the banks
it regulates.
OCC must certify
that the criteria
for
deposit
insurance
are met before
it grants
a national
charter,
and FRS certifies
that a State bank meets the
criteria
for deposit
insurance
before
it grants
membership in the FRS. Although
some differences
exist
in
the management process
and the factors
considered
by
each agency when reviewing
applications,
the basic factors
considered
are essentially
the same./These
factors,
as established
by the Federal
Deposit
Insurance
Act
(12 U.S.C.
1816),
are:
--The

bank's

--Its

capital

--Its

future

--The

general

financial

history

and condition.

structure.
earnings
character

--Its
convenience
to serve.

prospects.
of

its

to and needs

management.
of

the

community

--The
the

consistency
purpose
of

of
the

its corporate
act.

powers

with

In the case of mergers,
section
18 of the act requires
that
the agencies
also consider
whether
such a merger would have
anticompetitive
or monopolistic
effects.
Agency policies
provide
little
indication
of exact criteria
or specific
weight
given to any of the above factors,
and judgment
This makes it difficult
necessarily
plays a large
role.
to determine,
without
extensive
study,
how much consistency
The steps the three
really
exists
among the agencies.
agencies
normally
follow
to process
a request
for charter,
membership,
insurance,
or merger are shown in the chart
depending
on the condition
below.
There can be exceptions,
Some areas where
of a bank or bank holding
company.
the agent ies ’ policies
or procedures
differ
are discussed
following
the chart.

Review

P~O&SCL

Por

Charters,

Off ice
recsivhq
aepl.ica
t ion

rrrmbershipo,

Inmurence

And

lerqers

Anolysi5

binary
e---- review

Prsl

and

Decision
__-.----

r l commtndet
-___
.-.----- ton
eraainrr
tlcld
neqional
director+
&/Division
of bank

Board

Of
review

supatvi8Ion

PRS

District
bank

“‘~~~~~~,----d

r.serve

rirltl

Application

z/it

Flclrl

FHS, Headquarters
merger
and mesbership

z/The

_?/Mergec

cxeniner
adrinis~rator

~/Regional
-

the Division
Fi)IC,
makibg
process
on

district

rcscrve

applications

bank

board
of
Cp”ctC”CJCS

iun

OCC

i/nt

and

A/supcrvir.tnn
requlat

bank

PRS

eraminer

otvir,ion

of
merger

Systems

~ansqeacnt

Pield

examiner

Rcqlonal
adrcinietcator
ncryer
an*lyst/econamist’
2//Rank
orgnniration
and
structure
Official

l nd Financial.5tatistics

also

has

input

the

decision

applications.

and the Regional
applications.
bank

go directly

authorized
to

Office

Res,carch

approve

OCC Headquarters

may
an

their

application

where

the reviewing
oLficla1
is the
~~/Por
mecgec’applications,
the revicving
oC.fIcfals
are
Pot &hatter
applicationa,
(1)Director.
Bank
OrgJniXJtiOn
Jt-d
Structure,
and
(2)Epecutive
Assistant
to the Senior
Deputy
Comptroller

submit

they

3f
receive

nirector,
thl*
for

Bank

Policy.

ovn

individuel

certain
a

rccommendatfOn

conditions

are

ptelirinery

Orqaniiation

Wt.

review.
and

Structure.

Coaptcoller
or
designated
deputy
mtnptroller

When considering
an application
for merger,
the act
requires
the agencies
to request
reports
on any competitive
factors
from the Attorney
General’s
Office
and the
other
two banking
agencies.
The agencies
assign a classification
of the effects
on competition
on the basis of
an evaluation
of these factors.
The classifications
used
by the agencies
differ
as shown below:
FDIC
No signif icant
effect
Adverse
Substantially
adverse
Monopoly

Not adverse
Slightly
adverse
Adverse
Substantially
adverse
Monopoly

Since we did not review
applications,
we do not
classification
categories
and uniform
consideration
agencies.
FRS membership

and merger

Beneficial
effect
No adverse
effect
Not substantially
adverse
Substantially
adverse

a sample of processed
merger
know whether
these different
adversely
affected
consistent
of the applications
by the
process

The FRS process
for considering
applications
for
membership
and merger differs
from the process
used by the
other
two agencies
in that the Board allows
individual
Federal Reserve banks to approve membership
and merger applications.
The other
two agencies
retain
sole approval
authority
at their
headquarters--the
Comptroller
of the
IndiCurrency
at OCC and the Board of Directors
at FDIC.
vidual
Federal
Reserve banks cannot rule in all cases,
but
For
can approve applications
within
certain
limitations.
mergers,
some of these are:
--If

the banks do not have off ices in the same market,
the bank to be acquired
must have no more than $25
million
in total
deposits
or control
no more than
15 percent
of total
market deposits.

--If

the banks compete
ing bank can control
total
market deposits.

in the same market,
the
no more than 10 percent

--Neither
bank is the dominant
organization
State and the resulting
bank can control
than 15 percent
of total
State deposits.

resultof

in the
no more

Applications
with circumstances
exceeding
these limitations
In those
must be forwarded
to the Board for decision.
cases where a Federal
Reserve bank rules
on an application
the application
must be reviewed
for membership
or merger,
by the Division
of Bank Supervision
and Regulation
at
Any application
that
FRS headquarters
before
approval.
the Federal
Reserve bank cannot or does not want to
rule on goes to the Reserve Board.
Minimum

capital

requirements

Minimum capital
requirements
bank charter
or FRS membership
are
U.S.C.
51 as follows:

for obtaining
spelled
out
Minimum

Population

a national
in 12

capital

$ 50,000

Up to 6,000
Greater
than 6,000 but
less than 50,000
Greater
than 50,000

$100,000
$200,000
(with
certain
exceptions
where
State law permits capital
of
$100,000
or less)

As a general
rule,
however,
OCC will
not grant
a charter
and FRS will
not approve
a membership
with capital
of less than $1.0 to $1.5 million.
FDIC does not
have statutory
capital
limitations
but, as a matter
of
policy,
requires
a minimum capital
structure
of $250,000.
Board of director
and shareholder
ratification--merqers

approval

In all cases a majority
of the board of directors
each participating
bank must approve proposed
national
bank merger agreements.
FDIC and FRS follow
the State

requirements
for shareholder’s
ratification
of the merger,
since the banks they regulate
are subject
to State law
Generally,
national
banking
law requires
requirements.
that shareholders
controlling
at least
two-thirds
of
each bank’s
outstanding
shares of stock ratify
all merger
If State law requires
more than two-thirds
transactions.
the
State
requirement
must
be met before
approval
approval,
is given.
PERMISSIBLE
----I

BUSINESS ACTIVITIES

‘/State and Federal
laws and the respective
State and
Federal
chartering
authorities
generally
determine
the type
of business
activities
in which commercial
banks may engage./National
banking
law (12 U.S.C.
24) provides
that
national
banks are formed for the purpose
of carrying
on the business
of banking
and sets forth
their
basic
FRS and FDIC officials
advised
us that
corporate
powers.
most States
have similar
provisions
in the statutes
which
The question
authorize
the chartering
of State banks.
of what is “the business
of banking”
has been the subject
For purposes
of differences
of opinion
and controversy.
of this
report
we have limited
our discussion
to those
activities
or services
which can readily
be distinguished
from the traditional
banking
functions,
such as loaning
money and receiving
deposits.
There are numerous Federal
statutes
that apply to the
statute
prohiFederal
regulation
of banks.
For example,
bits
banks from operating
or participating
in lotteries.
This restriction
applies
to all banks supervised
by
law also prohibits
national
FDIC, FRS, and OCC. Federal
and State member banks from keeping more than 10 percent
of unimpaired
capital
and surplus
in a nonmember bank.
This restriction
applies
to all banks supervised
by
FRS and OCC. Other Federal
statutes
apply to only one
such as 12 U.S.C.
92, which provides
of the agencies,
that national
banks may act as insurance
agents and
real estate
brokers
if the bank is located
and doing
business
in an area with a population
of 5,000 or less.
OCC has issued
interpretative
As a chartering
agency,
rulings
on the permissibility
of various
banking
practices.
For example,
national
banks may
either
--issue
credit
cards,
subsidiary
corporation;

directly

or through

--act

agent in warehousing
and other loans;

gages

and servicing

of mort-

--assist
its customers
in preparing
their
tax
either
gratuitously
or for reasonable
fees,
not serve as an expert
tax consultant:
--make

charitable

--invest,
projects:
--maintain
--act

with

contributions;
limitations,

and operate

as payroll

--provide

returns,
but may

a postal

issuer

messenger

in community

for

service

substation;

customers;
to customers:

--designate
bonded agents to sell
the
orders
at nonDanking
outlets;
and
--use data processing
perform
authorized

development

bank's

money

equipment
and technology
to
services
for itself
and others.

OCC recently
requested
national
of travel
agencies
by May 1981.

banks

to divest

themselves

For State-chartered
banks which are supervised
by FRS
and FDIC, we were advised
that the State chartering
agency
generally
determines
permissible
banking
activities.
Because of the limited
time available
for completing
our
survey,
we did not obtain
information
from State agencies
regarding
their
policies
on permissible
activities.
We
were advised
by FDIC and FRS that States
generally
allow
and prohibit
the same banking
activities
as those discussed
However, FRS said State member banks
for national
banks.
generally
may not
--assist

customers

--operate

a postal

in preparing

their

tax

returns

substation.

COKMISSIONS FROM CREDIT
LIFE INSURArJCE SALES
Most
insurance
borrowers

banks offer
credit
life,
health,
and accident
life
insurance")
to
(referred
to as "credit
If the borrower
at the time a loan is made.
9

dies or is disabled
before
the loan is repaid,
this
insurance will
pay off the loan.
In this way, the insurance
protects
the interest
of both the bank and the borrower.
Where credit
life
insurance
is sold for a fee (rather
than provided
free as at some credit
unions),
the income
In some cases,
derived
by the bank can be substantial.
the income earned is paid to the bank and in other
cases,
is paid to the officers,
directors,
and controlling
stockholders
or their
personally
owned insurance
agencies.
The
bank regulatory
agencies’
policies
are different
on how
this
income should be handled.

The Comptroller‘s
Office
has adopted
a regulation
(12 CFR part 2) which prohibits
officers,
directors,
and
significant
stockholders
of national
banks from personally
profiting
on the sale of credit
life
insurance.
The regulation,
declares
that retention
of this
income
by insiders
is an “unsafe
and unsound banking
practice,”
as
that term is used in the Financial
Institutions
Supervisory
In general,
the regulation
Act of 1966, 12 U.S.C.
1818(b).
places on the bank the responsibility
to sell
credit
life
insurance
in such a way as to prevent
insiders
from benefiting.
Where State laws prohibit
banks from holding
the Comptroller’s
regulation
an insurance
agent I s 1 icense,
requires
that the bank must seek an alternative
means of
selling
the insurance
so that
insiders
do not personally
profit.
FDIC
FDIC’s present
policy
states
that,
while
each case
should be analyzed
on its own merits
and in accordance
with
laws and regulations
of the State
in which the bank is
located,
normally
a bank must be reimbursed
for the value
and personnel
used in the
of the bank space, equipment,
the bank directors
sale of credit
life
insurance.
Also,
and shareholders
have to be fully
informed
of the credit
life
insurance
operations
on the bank’s
premises,
the
The bank’s
board
funds received,
and bank’ resources
used.
determines
how much income will
be reimbursed
to the
bank.
An FDIC committee
has studied
existing
policies
and is in the process
of recommending
revisions.

FRS
In September
1977, the FRS Division
of Banking Supervision
and Regulation
completed
a study on the credit
life
insurance
commissions
question.
The study outlined
in
detail
the controversy
surrounding
the subject,
including
a number of pros and cons. The study group recommended that
the FRS Board formulate
a stance
in opposition
to diverting
the income from the bank, stating
diversion
of such revenue
from the bank is deemed to be an unsafe and unsound banking
prtlct ice.
To date FRS has not issued a policy
statenent
on
but does encourage
the banks to at least
the question,
recoup the costs associated
with insurance
operations
(as
in FDIC's
existing
policy).

Federal
and State laws limit
the amount of funds that
The
a commercial
bank can lend to a single
borrower.
Federal
law for OCC-regulated
national
banks prohibits
a bank from lending
more than 10 percent
of its unimpaired
The State laws,
capital
and surplus
to a single
borrower.
with which FDIC and FRS require
State member and nonmember
insured
banks to comply,
provide
various
limitations.
had
According
to FRS, as of September
30, 1975, 14 States
a lo-percent
limitation;
15, a 15-percent
limitation;
16,
a 20-percent
limitation;
and 4, a 25-percent
limitation.
based its limitation
on total
assets--One State,
Vermont,
1 percent
of total
assets
or $60,000,
whichever
was greater.
Additionally,
certain
Federal
laws limit
State and national
member banks'
lending
for selected
types of loans--for
example,
loans secured
by stocks
and bonds and loans to
member bank affiliates.
The lending
limitation
to a single
borrower
may differ
on the basis of definitions
of a single
borrower,
unimpaired
and what constitutes
a loan.
For
capital
and surplus,
example,
depending
on whether
such items like
letters
of
guarantees,
acceptances,
loan commitments,
or
credit,
overdrafts
are defined
as loans affects
the determination
According
to the agencies'
of the lending
limitation.
officials,
for purposes
of.single
borrower
lending
limitations,
a loan does not generally
occur until
funds have
Therefore,
a commitment
of funds without
been disbursed.
disburse.neflt
for both national
and State banks generally
3ne exception
is the stan;lby
would not constitute
a loan.
letter
of credit
(discussed
on p. 33) which is considered
a loan.
11

With respect
to what constitutes
a single
borrower,
Federal
law defines
a single
borrower
on the basis of the
When assessing
the lending
limits
to
entity
involved.
partnerships
or associations,
national
banks should consider
the obligations
of the several
members comprising
In lending
to corporations,
a bank should conthe whole.
sider
the obligations
of all subsidiaries
which the corporation
owns or in which it controls
a majority
interest.
State laws vary on this matter,
but a majority
of the
States
have specific
provisions
for aggregating
loans
Federal
statute
(12
to partnerships
and corporations.
U.S.C. 84) is silent
on the definition
of a single
borrower
in terms of whether
it includes
only an individual
or whether
it also includes
his/her
family.
OCC has issued
interpretative
rulings,
and its examiners
Generally,
borrowers
are guided by legal
precedent.
are considered
a single
entity
on the basis of the use
We do
of the funds and/or
the source of repayment.
not know how this
is defined
by the various
States.
OCC’s interpretation
of Federal
statute
on lending limitations
cites
unimpaired
capital
and surplus
as a basis for determining
the percentage
limitations.
Unimpaired
surplus
is defined
as
--SO percent
--subordinated

reserve
notes

for

possible

loan

losses,

and debentures,

--surplus,
--undivided

profits,

and

--reserve
for contingencies
and other
capital
reserves
(excluding
accrued dividends
on preferred
stock).
According
to FRS documents,
times they cite
only capital
determining
the limitations
such items as capital
notes
profits.
We did not obtain
tions
of unimpaired
surplus.

State laws vary in that someand surplus
as a basis
for
and in other
cases they include
and debentures,
and undivided
from the States
their
defini-

CONFLICT OF INTEREST
/

The three agencies
are responsible
for assuring
that
their
employees
do not become involved
in situations
where
the employee's
private
interests
and personal
activities
conflict
with the duties
of his/her
public
employment
responsibilities./
In general,
the three agencies
advise
their
employees
that they
--should
not accept anything
promise
their
positions;

of value

that

--should
not engage in outside
employment
interfere
with the performance
of their
duties;
--should

not

use their

public

office

--should
not have financial
interest
financial
transactions
that might
duties
or responsibilities;
and

for

might

com-

that might
official
personal

gain;

in, or deal in
conflict
with their
*

--should
abide by general
standards
of conduct
such
paying debts on time and not engaging
in criminal,
or immoral conduct.
dishonest,
OCC examiners
are prohibited
by law from accepting
loans or gratuities
from the banks they examine,
or from
any person connected
with such bank.
OCC has, by administrative
directive,
extended
this prohibition
to all OCC
Under this
employees
having direct
contact
with banks.
directive,
examiners
and affected
employees
are prohibited
from owning securities
of a national
bank and
are required
to disclose
any relationships
to employees
of banks or relationships
with any organizations
having
or other
contracts
with OCC. This
SUPPlY, consulting,
directive
also applies
to family
members of the employee's
household.
FK3 examiners
cannot borrow from State or national
member banks or bank holding
company bank or nonbank
affiliates.
They must disclose
any relationships
to employees
of banks and may not examine banks employing
FDIC examiners,
regional
counsels,
and execurelatives.
tive personnel
cannot accept loans or gratuities
from
banks directly
supervised
by FDIC.

Each of the three agencies requires
that its employees
submit annual statements of their interests
and any potential conflicting
arrangeinents.
FRS requires
statements to
be filed by headquarters'
professional
employees GS-13 and
above in designated positions
and by all examiners, assistant examiners, and certain
others at the Federal Reserve
Banks.
FDIC keys the filing
of annual statenents
to the
employee's job.
They require the following
personnel to
file statements:
professional
employees GS-13 and above,
commissioned bank examiners GS-11 and above, assessment
procurement personnel
auditors
GS-11 and above, certain
Any FDIC employee,
GS-9 and above, and all attorneys.
regardless
of grade, must disclose
any interest
which
with job responsibilities.
relates
to or may conflict
OCC requires
statements to be filed by all bank examiners
and by those professional
employees listed
in Appendix A
to the Treasury Standards oE Conduct.
The statements submitted to FDIC and OCC by their
employees are assumed to be accurate and complete.
If
subsequently
found otherwise,
the penalties
include,
among
other things,
termination
of employment.
The FRS review
process for headquarters'
personnel is more aggressive
in
that its employees' financial
interests
are cross-checked
against bank holding lists,
bank subsidiaries,
Dunn and
Bradstreet,
and other computer listings.
We issued three separate reports in 1977 on the financial disclosure
systems in each of the three bank regulatory
agencies.
We reported that (1) the agencies had inadequate
criteria
for establishing
who should file disclosure
statements, (2) the statements themselves did not require sufficient information
to guard against potential
conflicts
of
interest,
and (3) the procedures for processing
and reviewing statements to determine employee conflicts
of interest
needed further
development.
The agencies generally
agreed with our conclusions
and recommendations.
A followup review in 1978 showed
that the agencies had implemented most of our recommendations.
The agencies also have a supervisory
responsibility
for assuring the safety and soundness of banking institutions,
including
safeguards against certain
bank employee
conflict
of interest
situations.
The agencies emphasize
to their examiners the importance of identifying
and discouraging favorable
insider
transactions
by bank officers
and directors.
14

In a booklet
published
on the duties
and liabilities
of directors
of national
banks, OCC states
that directors
and principal
officers
of national
banks are responsible
for maintaining
a standard
of conduct
which avoids personal
benefit
not shared with other
stockholders
of the bank.
The booklet
cites
various
situations
that directors
and
The OCC examiners
handbook also
officers
should avoid.
OCC requires
bank directors
and prinlists
limitations.
cipal
officers
to maintain
disclosure
statements
of their
business
interests
and borrowing
in their
banks for
examination
purposes.
The examiners
of all three agencies
review
the financial
holdings
and loans of all bank officers
and directors
and their
interests
and ask for a list
of the officers’
affiliations.
Also,
the examiners
review
insider
transaction
situations
listed
in the minutes
of board meetings.
FDIC regulations
set specific
requirements
for nonmember
insured
banks to, among other things,
maintain
certain
information
on insider
transactions
to facilitate
Banks supervised
examiner
identification
and review.
by FRS and OCC are directed
by law to limit
loans to bank
officers,
prohibit
special
interest
rates on loans to
insiders,
and under certain
circumstances
prohibit
interRecent
legislation
sets
statutory
locking
directorates.
requirements
and limitations
in this
area for all three
agencies.

CHAPTER 3
BANK SUPERVISION
The bank examination
is the agencies’
primary
tool
The Federal
banking
agencies
for bank supervision.
conduct
several
different
types of bank examinations.
Separate
examinations
are made of banks’
commercial
compliance
with consumer protection
laws
departments,
electronic
data processing
systems,
and regulations,
trust
departments,
international
branch operations,
bank holding
companies,
affiliates,
and subsidiaries.
resources
are devoted
to examining
Most of the agencies’
commercial
departments
of banks, primarily
to determine
the soundness
of the banks and their
compliance
with
applicable
laws and regulations.
the agencies
have authority
for
With few exceptions,
This
differs
from
establishing
their
examination
policies.
their
regulatory
authority
in which State and Federal
laws
often
apply.
Each agency establishes
its own examination
policies
and procedures
on the basis of what it perceives
is necessary
to assure bank soundness
and compliance
with
Factors
that influence
these policies
are
applicable
laws.
the number and size of banks the agency supervises,
the
agency’s
concept
of examination,
and the agency’s
personnel
resources.
The agencies’
examination
procedures
and policies differ
in some areas and are common in others.
With regard
to the Committee's
areas of concern
that
we noted the following.
relate
to the examination
process,
The basic
guidelines
for rating
capital
adequacy and evaluating
and rating
asset quality
are the same; however,
there
are some differences
in the agencies’
implementation
of
The agencies ’ policies
differ
in how
these guidelines.
frequently
they examine banks; on when they meet with the
and under what circumstances
banks’
boards of directors;
they will
consider
issuing
formal
administrative
actions,
Through the Interagency
such as cease and desist
orders.
common policies
have been developed
Supervisory
Committee,
for evaluating
foreign
loan country
risk and shared
the agencies
have consistnational
credits.
Additionally,
ent policies
on the treatment
of standby
letters
of credit.

FREQUENCYOF COMMERCIALEXAMINATIONS
Each agency's policy is to examine problem banks more
frequently
and extensively
than nonproblem banks.
However,
the specific
guidelines
used by each agency differ
in
selectioll
criteria,
time frames, type of examination,
and
management discretion
allowed.
For example, FDIC and OCC
require that all banks be examined onsite within an 18-month
period, while the FRS requires examinations
of all banks
within a 12-month time frame.
OCC requires that problem
banks be examined at least twice annually,
while FDIC
requires
annual
examination
of problem banks.
The FRS
policy provides for flexibility,
but generally
requires
an examination
of problem banks every 6 months.
Also, the
frequency of examination
by regulatory
agencies for the
State-chartered
banks supervised
by FDIC and FRS is
increased by the State banking agencies'
additional
separate
examinations.
FDTC
In January 1979, FDIC modified its policy on the frequency of its two types of commercial examinations--the
full-scope
examination
and modified examination
(curtailment in scope and report of examination).
The policy
provides a diEferent
frequency for examination depending
on the extent to which the bank presents either supervisory or financial
problems.
Banks supervised
by FDIC and
classified
as "Presenting
Financial
Risk" (problem banks)
are to receive at least one full-scope
examination by FDIC
every 12 months.
Additional
examinations
or visitations
of such banks may be made if deemed necessary by the
regional
director.
Banks classified
as "Presenting
Supervisory
Concern"
are to receive at least one full-scope
examination by FDIC
Banks classified
as "not presenting
Finanevery 18 months.
cial Risk or Supervisory
Concern" are to receive either a
full-scope
or modified examination
by FDIC at least once in
each 18-month period.
We were told that modified examinations would be used as much as possible
in these instances.
Banks supervised
by FDIC are also subject to examination by State examiners.
In several States, FDIC has
arrangements for conducting
examinations
jointly
with State
examiners.
In three States, FDIC and State examiners complete examinations
on an alternating
basis.
The frequency

of State examinations
differs
from State to State and does
FDIC
not always coincide with FDIC's frequency policies.
coordinates
examination
scheduling
with State banking
authorities.
FRS
The FRS policy on frequency of bank examinations
provides that all State member banks will generally
have a
However,
full-scope
examination
at least once annually.
banks considered
clearly
free of unsatisfactory
practices
and historically
demonstrating
prudent management may
receive a limited-scope
or modified examination
every other
Banks demonstrayear in lieu of a full-scope
examination.
ting severe problems will be examined more than once a year
as deemed necessary by the district
Federal Reserve bank.
FRS encourages its districts
to examine problem banks every
6 months.
FRS, we were told, performs examinations
jointly
with State examiners in more than half of the States where
they examine banks.
FRS examination
cycles may differ
or
coincide with State examinations
depending on the State,
but efforts
are made to coordinate
examination planning.

Of the three bank regulatory
agencies, only OCC has a
which requires a particular
examination
frequency --at least three examinations
of all national
banks
every 2 years. However, because of resource limitations,
additional
regulatory
responsibility,
and a change in
examination
approach, OCC has not conducted onsite examinations
of all national
banks this frequently.
In
the past, OCC has maintained
this frequency as the goal
for onsite examination
of national
banks, with regions
informally
setting
their own priorities
to attain
this goal.
statute

Beginning in 1979, OCC implemented a new national
policy.
The policy provides that all banks requiring
special supervisory
attention
(see p. 37) and all
banks of supervisory
concern will be examined at least
twice annually,
including
at least one full-scope
examination
for special supervisory
attention
banks; all other
banks with assets of $100 million
or more will be examined
banks will
once annually as well; and all other national
be examined once every 18 months.
The latter
two
categories
may receive
either a general (full-scope)
or
specialized
(modified)
examination
on the basis of judgment
of and resources available
to the regional
administrator.

Using this policy,
each year OCC will
banks accounting
for about 85 percent
bank assets.

examine those
of all national

ASSESSINGCAPITAL ADEQUACY
A critical
area of banking for regulators
to judge is
the adequacy of a bank's capital
funds to absorb unforeseen
The question
losses and permit it to continue operations.
of capital
and how much is enough is a complex issue that
The
has been discussed by experts for a number of years.
agencies would like to establish
more formalized
guidelines
for assessing capital
adequacy and continue to study the
matter.
Decisions reached on capital
adequacy, according
must be the proper ones because of the
to one official,
complexity
of the issue and the potential
impact.
there is no common definition
among the
Currently,
agencies of what constitutes
adequate capital
or a common
The three agencies,
standard of how it should be measured.
as adequate if it is
in broad terms, define capital
sufficient
to (1) support the volume, type, and character
of the business presently
conducted;
(2) provide for
the possibilities
of loss inherent therein;
and (3) permit the bank to continue to meet the reasonable credit
Capital should be sufrequirements
of the area served.
ficient
to absorb shrinkage in asset value and other
losses that may be incurred;
and should be adequate
to permit the bank to operate as a viable institution,
capable of responsibly
moving funds and providing
related
services while protecting
against unanticipated
adversity.
Given the lack of specificity
on what constitutes
adeit is understandable
that the agencies'
quate bank capital,
guidelines
for analyzing
and measuring a bank’s capital
The three agencies
position
similarly
lack specificity.
believe that many factors must be considered
in assessing
the adequacy of capital
and that it is not feasible
to
employ a totally
objective
weighting
system and reflect
in
a formula all the important
factors which must be considered.
The agencies believe that the measurement of some
of the factors
that must be considered
is necessarily
imprecise and requires an element of subjective
judgment.
While all three agencies use ratios for the initial
screening of a bank's capital
position,
FRS currently
places more emphasis on a ratio in its decisionmaking
process than does OCC or FDIC. FRS examiners are guided
by ratio standards of capital
in relation
to a bank's
total assets less assets not subject
risk assets: i.e.,
19

to some risk,
such as cash and U.S. Government
bonds.
FRS examiners
have the flexibility
to deviate
from the
ratio
standards
if,
in their
judgment,
other
subjective
factors
justify
a different
rating.
It should be emphasized
that even if the methods used
by the agencies
to analyze
capital
differ,
it does not
that
the level
of capital
funds
necessarily
follow
required
by the different
regulators
for similar
banks
under their
jurisdiction
would necessarily
differ.
Agency officials
stated
that they would like
to establish more formalized
guidelines
for capital
adequacy,
but
question
the wisdom and capability
of achieving
such
a goal.
They said any standards
would have to continue
to allow the examiner
flexibility
to apply his judgment
to the individual
situation.
An FDIC-initiated
study,
with input from FRS and OCC, is currently
addressing
the capital
adequacy question.
The agencies
have attempted
to uniformly
rate capital adequacy through
the establishment
of the Uniform
Interagency Bank Rating
System
(UIBRS) , which is a common system
adopted by the three agencies
to rate banks (see p. 35).
Capital
adequacy is one of five
factors
considered
in
the rating
system.
It is rated
from 1 to 5 as follows:
--A

1 or 2 rating

--A

3 rating

--A

4 or 5 rating

All

three

reflects

adequate

below-average
reflects

inadequate

capital.
capital

adequacy.

capital.

agencies
rate capital
in accordance
with
various
factors
are considered
However,
and individual
examiner
judgment
plays
by the agencies,
The current
procedures
a large
role in assigning
a rating.
used by the three agencies
to assess capital
and the basis
for their
capital
ratings
follow.
As shown, existing
guidance
generally
provides
for subjective
judgment
in
determining
adequate
capital.
this

system.

FDIC
FDIC examination
policies
direct
that “to evaluate
there are several
important
factors
that
capital
adequacy,
must be weighed and judged”:

Management--its
ability,
and record of management,
soundness
of its policies.

attentiveness,
together
with

Assets-- the general
and diversification
attention
to assets

earnings
Earnings --the
tion's
dividend
policy.

trend should
Deposit
Trends --an upward deposit
be compensated
with capital,
the potential
volatility
of deposit
structure.adds
another
dimension
of a different
character
to the analysis.

Fiduciary
Business --the
volume and nature
such business
is significant
in determining
capital
needs.

Local Characteristics--the
general
type of
the stability
and diversification
clientele,
of local
industries
or agriculture,
and the
competitive
situation
are important
considerations.

character,
of assets,
adversely
capacity

integrity,
the

quality,
liquidity,
giving
special
classified.
and the

institu-

FDIC advises
that ratios,
although
usable
as first
approxiare not conclusive
and always must be integrated
mations,
with all other pertinent
factors.
FRS
with the implementation
In March 1978, in conjunction
of UIBRS, FRS issued new test guidelines
to be used for
Once the test phase is comassessing
capital
adequacy.
pleted,
the agency plans to fully
implement
guidelines
The principal
ratio
is
to use for measuring
capital.
which the FRS instructions
state
the risk
asset ratio,
is an objective
measure of the amount of shrinkage
that
The risk
can be absorbed
by a bank's
capital
structure.
asset ratio
equals the gross capital
funds divided
by
risk
assets.
Risk assets-are
defined
as total
assets
plus reserve
for possible
loan losses,
less cash funds
due from banks and U.S. Government
instruments.

Additionally,
FRS states
that the capital
rating
should generally
equal or exceed the quality
of assets
The quality
of assets
rating
is to be considered
rating.
because the risk asset ratio
does not distinguish
the
degree of risk associated
with differing
asset structures;
the quality
of assets. rating
does.
The risk asset ratio
was established
to provide
a
However, FRS did not intend
that
basic consistency.
Rather,
full
a rating
be issued solely
on this basis.
consideration
should be given to all the pivotal
factors
FRS examiners
must
that determine
the need for capital.
consider
other pivotal
factors
as well,
such as those
listed
for FDIC and OCC.

OCC instructions
state
that the following
factors
must be considered
when evaluating
capital,
but emphasize
that additional
factors
may be considered
depending
Factors
that must be considered
are
on the situation.
the
--quality

of management,

--liquidity,
--asset

quality,

--history

of earnings

--quality

and character

--deposit

structure,

--quality

of operating

--capacity
needs.

and their

retention,

of ownership;

procedures,

to meet present

and future

and
financial

OCC states
that capital
ratios
are useful
in plotting
trends
and in comparing
a bank with its peer group,
but that there
is no appropriate
formula
or ratio
to measure the adequacy
Of some key issues
in capital
adequacy,
such as quality
of
management.

22
.-

ASSESSING

THE QUALITY

OF A BANK’S

ASSETS

The appraisal
of a bank’s
assets
constitutes
an important
phase of a bank examination
and consumes
a large
part
of the time
required
to complete
the entire
examination.
The quality
of a bank’s
assets
has a direct
and indirect
effect
on many aspects
of banking
and bank supervision.
It
is an important
element
to be considered
in assessing
the
overall
soundness
of a specific
bank and the collective
It
is considered
when
soundness
of the banking
system.
appraising
the adequacy
of the bank’s
loan
reserve
and reflects
on the quality
of
accounts
and capital,
bank management
and bank policy.
An indepth
analysis
of the procedures
used by the
banking
agencies
to examine
and analyze
the many facets
of bank assets
is beyond
the scope of this
survey.
This
report
, however,
does discuss
some of the considerations
assessment
of asset
quality
involved
in the agencies’
and points
out some of the differences
in the approaches
Following
is a general
disused by the three
agencies.
cussion
of two types
of assets
which
are the principal
assets
that
regulators
must be concerned
with
in terms
of assessing
their
current
value.
Loans
The examiners
do not evaluate
the quality
of all
loans
the examiners
review
in a bank’s
portfolio.
Generally,
all
past
due loans,
all
previously
classified
loans,
and
a sample
of all
other
loans.
None of the agencies
project
the total
amount
of banks’
classified
loans
on the basis
of
evaluation
of selected
loans.
At all
three
agencies
there
-is a loo-percent
review
of all
loans
where
the total
amount
to one individual
or a single
business
entity
exceeds
a certain
minimum
level.
FDIC and FRS do not have agencywide
guidelines
on
loan
sampl ing select
ions.
FDIC and FRS regional
offices
and the examiner-in-charge
have responsibility
for determining loan
sample
selection
criteria
including
any dollar
cutoff
to be used.
We were told
that
examiners
normally
consider
the size
of the bank,
the bank’s
loan
totals,
the
amount
of classified
loans
found
in the previous
examination,
and the quality
of the bank’s
management
in determining the sample.
FRS examiners
will
generally
include,
loans
representing
1 to 2 percent
of
in their
samples,
capital.
The exact
cutoff
will
vary,
dependinq
on the
bank and examiner
judgment.
23

The OCC approach
to evaluating
loans is a structured
agencywide
program based on the examiner’s
evaluation
of a
and internal
and external
audit.
bank’s
internal
controls,
On the basis of these evaluations,
a statistical
table
identifies
the appropriate
dollar
cutoff
for large
loans
and a sample size for all other
loans to be selected
The OCC approach
was established
to
by the examiner.
provide
the agency with a higher
confidence
level
for
its asset quality
assessment
and an evaluation
of the
In addition
to the
quality
of the bank’s
lending
process.
loans selected
through
its cutoff
and sample,
OCC reviews
all bank-identified,
past due and criticized
loans;
all
The OCC examination
and insider
transactions.
nonaccruals;
approach
includes
both
small and large
loans.
The agencies
use similar
classifications
to characterize
loans that are considered
to have varying
degrees
Criticized
loans are divided
into the
of credit
risk.
following
four categories
with each category
portraying
an
increasing
degree of risk.
.

--Other

loans

especially

mentioned.

--Substandard.
--Doubtful.
--Loss.
The three banking
agencies’
definitions
of the above
categories
of loan classification
are essentially
the
same.
The definitions
are very broad and only
intended
to
Accuprovide
a general
framework
for classifying
loans.
rate classification
of loans will
largely
depend on credit
appraisal
proficiency
of the examiner
and the exercise
of
other loans especially
menGenerally,
sound judgment.
tioned
are considered
as a potential
risk,
while
the latter
three
categories
represent
an established
risk.
four

While the preceding
statement
is true for most types
of loans,
the three agencies
adopted a uniform
policy
on classification
of delinquent
consumer installment
which is being
held
The policy,
loans in November 1978.
in abeyance pending
public
comment, provides
that credit
and/or
overdraft
credit
will
check credit,
card loans,
be treated
the same as consumer installment
loans.

Securities
Federal
and State laws place limitations
and restrictions
on banks owning stocks
and bonds.
Generally,
banks
are prohibited
from owning stocks,
but there are a few
exceptions.
Gne of the objectives
of a bank examination
is to
determine
the overall
quality
of the investment
portfolio
and how that quality
relates
to the soundness
of the bank.
It is not feasible,
in this
report,
to cover all aspects
However,
the
of examining
a bank's
investment
account.
following
brief
discussion
will
point
out a few of the
factors
that are considered
when determining
the quality
of securities.
'The bank examiner,
for all three agencies,
generally
reviews
all of the bank's
investment
securities
for quaand pricing
information.
lity,
liquidity,
The amount of
adaitional
securities
analysis
varies
by agency.
As in
the case of loans,
OCC reviews
a sample of securities
on the basis of the examiner's
evaluation
of internal
controls
and internal
and external
audit.
FDIC and FRS
examiners
generally
analyze
all securities
not issued
or backed by the Federal
Government.
For securities
selected
for review,
the examiners
of all three agencies
use basically
the same analytical
approach.
In evaluating
the quality
of the security,
the examiner may use data published
by rating
services,
such as
Standard
& Poor's
Bond Guide or Moody's Bond Record.
If
the security
is not listed
in a rating
service
publication
the examiner
may attempt
to obtain
information
from dealers
in the security
or may make his/her
own analysis.
When GCC
examiners
must make their
own analyses,
they may use information
required
by regulation
to be in the bank's
file.
The OCC handbook contains
a grading
sheet to assist
the
examiner
in determining
the quality
of the investment.
The examiner
rates the bonds in one of three categories-investment
quality,
speculative,
or defaulted--on
the basis of their
credit
quality.
Investment
quality
bonds are those includes
in the four highest
investment
grades by Standard
& Poor or Moody,
if the bonds are
listed,
and unrated
securities
of equivalent
quality
and soundness.
Bonds with a lower ratirg
are classified
as speculative
or defaulted
issues.

For bonds classified
as speculative
or defaulted
issues,
the examiner
must determine
the market value of the security
Market price
of the
so that the asset can be classified.
security
may be obtained
from published
quotations,
dealers,
or other
sources.
The examiner
may test the prices
by applying a formula
in which the annual yield
for the security
is
compared with yields
afforded
for similar
type investments.
Each agency classifies
the value of market depreciation
the
same for these securities,
but they differ
on the remaining
book value as shown in the chart
below.
%encies’
Classif
ication --- of
-Speculative
and Defaulted
Securities_
ency-

Speculativeissues
Rema in ing
Market
book
value
depreciation _I_

Defaulted
-

Market
depreciation

issues
Rema in ing
book
value

FDIC

Doubtful

Substandard

Loss

Substandard

FRS

Doubtful

Varies
by
district,
may be substandard
or
not classif ied

Loss

Varies
by
district,
may be substandard
or
not classif ied

occ

Doubtful

Substandard

LOSS

Doubtful

The three agencies
are revising
the policy
for classifying
defaulted
municipal
general
obligation
securities
to
allow the market
for the securities
to settle
before
making
a classification.
A uniform
policy
is expected
in the near
future.
Agencies’
--thequality
---

procedures
for rati%
---of
bank
assets
__---

the three Federal
bank regulaAs previously
discussed,
tory agencies
adopted UIBRS in May 1978 for rating
the condition
and soundness
of the banks.
One of the five
critical
dimensions
of bank operations
rated by UIBRS is asset quality.

The uniform
rating
system provides
the agencies
a common scale for rating
asset quality
on the basis of (1) the
distribution,
and degree of risk of classified
level,
assets,
(2) the level
and composition
of nonaccrual
and
reduced rate assets,
(3) the adequacy of valuation
reserves,
and (4) the demonstrated
ability
to administer
and collect
problem
credits.
The rating
framework,
which is set out
in very general
terms,
is as follows:
Asset

Ratinq

quality

1 and 2

Situations
involving
a minimal level
of supervisory
conSound portfolios
with
cern.
the level
and severity
of
classifications
of a 2 rating
generally
exceeding
those of
a 1 rating.

Situations
involving
an appreciable
degree of concern.

4 and 5

Represent
increasingly
more
severe asset problems;
rating 5 represents
an imminent
threat
to bank viability.

a
only FRS has established
Of the three agencies,
quantitative
guideline
to implement
the UIBRS rating
of
which are still
being
The FRS guidelines,
asset quality.
contain
established
ratio
parameters
for determintested,
Weights
are
ing the rating
to be assigned
asset quality.
ascribed
to the three principal
classifications
of risk
The weighted
that examiners
used to assign
asset ratings.
classifications
are then compared to gross capital
funds
The value of classified
assets
to determine
the rating.
is determined
by using weights
of 20 percent
for substandard loans,
50 percent
for doubtful
loans,
and 100 percent
if the total
value of the
Generally,
for loss loans.
weighted
classified
assets
is less than 5 percent
of gross
the bank's
asset quality
is rated 1; less
capital
funds,
than 15 percent,
2; less than 30, 3; less than 50, 4; and
Examiners
have the
anything
in excess of 50 percent,
5.
flexibility
to alter
ratings
based on other
factors
considered.

FDIC and OCC, like
FRS, use UIBRS to compile
ratHowever,
the two agenings on the bank’s
asset quality.
cies have no established
specific
or numerical
guides
to
assist
the examiners
in equating
the volume of classified
assets
to a particular
rating.

UNIFORM REVIEW OF SHARED NATIONAL CREDITS
The examiner’s
assessment
of a bank’s
loan quality
includes
evaluating
large
loans that are shared by more
called
shared national
crethan one bank.
These loans,
amount of $20 million
or
dits
(SNC), are of an original
more and (1) shared from inception
by two or more banks
under a formal
lending
agreement
or (2) sold,
in part,
to one or more banks with the purchasing
bank assuming
SNCs can be
its pro-rata
share of the credit
risk.
shared by any combination
of State and/or
national
banks.
Before
1975, each agency evaluated
the portion
of an
SNC controlled
by a bank it regulated
during
the course of
the regular
examination.
This created
problems
with consistency
because there were instances
where portions
of the
same loan were rated differently
during
the examination
of
the participating
banks.
In 1975, OCC began a program of conducting
separate
examinations
of large
shared credits
once a year where the
lead bank was a national
bank or at the national
bank
with the largest
share of the credit
where the lead bank
The purpose
of the program was to provide
was a State bank.
a uniform
treatment
of the same loan among the participaA three-person
team of OCC examiners
reviewed
ting banks.
This single
each SNC and voted on the quality
of the loan.
evaluation
was incorporated
into the regular
examination
reports
of all participating
national
banks when the bank
thereby
eliminating
multiple
was subsequently
examined,
The other
two agencies
continued
reviews
of the same loan.
to review their
participating
banks separately
at each
regular
examination.
When we made a study of the Federal
supervision
of
State
and national
banks in 1976, we found that the classification
of risk
assigned
by the FRS and FDIC examiners,
when the State-chartered
participating
banks were examined,
often
did not agree with the OCC-assigned
rating
on the
basis
of OCC’s SNC examination
at the lead bank.

In December
1976,
FDIC changed
its
policy
and advised
its
regional
directors
to begin
using
OCC’s SNC classifications
when examining
a participating
State
nonmember
bank.
the three
regulatory
agencies
agreed
to a uniform
In 1977,
interagency
approach
for evaluating
SNCs.
Examination
___-._----

Erocess

a team of examiners
evaluate
Under
the uniform
system,
SNCs on the basis
of the same factors
as any other
loan:
risk,
collateral,
borrower’s
character
and financial
posiNo set formulas
or
tion,
and likelihood
of repayment.
specific
standards
determine
quality,
and each examiner’s
judgment
is an important
element
in the evaluation
process.
The teams
are staffed
with
examiners
from the three
If
a national
bank is the lead bank,
regulatory
agencies.
the team will
consist
of four
members--three
OCC members
(one from
the home region
and two from other
regions)
and
If the lead
bank is a State
member bank,
one FDIC member.
the examination
team will
consist
of from
three
to six members,
including
examiners
from
the district
Reserve
bank,
one FDIC team member,
and,
in some instances,,
participating
No State
nonmember
banks
are the lead
bank
State
examiners.
for
an SNC.
Each team member has one vote
in the overall
process,
The
and the majo, ity
votes
determine
the uniform
rating.
team leader
or examiner-in-charge
reports
the agreed-to
rating-not classif
ied,
substandard,
doubtful,
loss,
or
moderates
the team discussion
of the
especially
mentioned;
loan;
conducts
the rating
process
on each loan;
and documents
the justification
for
classified
loans.
From approximately
the beqinning
of Hay through
the
the examination
teams
are assembled
end of June each vear,
Each agency
distributes
a copy of
and the SNCs examined.
a list
of all
reviewed
loans
the uniform
classifications,
and their
status,
and a list
of its
participating
banks
to
In addition,
the writeups
of cr itiits
regional
offices.
cized
loans
are sent
to each sharing
bank under
the organiThe
classifications
assigned
under
zation’s
jurisdiction.
the SNC review
are incorporated
into
the regular
examination
of the participating
banks
when the bank is examined
and prevails
until
the next
uniform
classification
examination.

OCC and FDIC examination
personnel
are assigned
by the
national
headquarters
from a list
of examiners
obtained
from
each regional
off ice.
The responsible
district
Reserve bank
assigns
FRS personnel
to its examination
teams,
OCC jointly
examines SNCs only at national
banks which
serve as the lead banks for five
or more SNCs. National
banks with four or less SNCs are examined by regional
perSince
FRS does not have a similar
limitation.
sonnel.
FRS evaluation
teams are from the district
in which the
the costs of sending
a team to evaluate
bank is located,
one or two SNCs may not be as great
as it would be for
OCC, which assigns
two of the three members from out of
the region.
Reassessment

shared

national

credits

Lead banks are encouraged
to inform
the appropriate
Reserve bank or the OCC Chief National
Bank Examiner
of
any significant
change affecting
a shared credit,
whether
adverse
or favorable,
which occurs
subsequent
to the review
If a bank believes
a reassessof the loan by the SNC team.
it is urged to furnish
pertinent
finanment is warranted,
cial
or related
data demonstrating
that a substantial
FRS or OCC may initiate
a request
change has taken place.
The
for reassessment
if they obtain
this
information.
decision
to conduct
a reassessment
is made by the district
Reserve bank or the OCC headquarters
in Washington.
Reassessments
are made, to the extent
possible,
at the
district
Reserve bank or OCC headquarters
using inforIf the magnitude
and commation provided
by the bank.
plexity
of the change warrants
a visit,
a team, preferably
the original
review
team, will
visit
the bank.
EVALUATING COUNTRY RISK
in addition
to the traditional
International
lending,
credit
risk
inherent
in any extension
of credit,
involves
This includes
the risks
of political
or
country
risk.
nationalization
or expropriation,
governsocial
upheaval,
ment repudiation
of external
debts,
exchange controls,
or foreign
exchange shortfalls
that might make it impossible
for a country
to meet external
obligations
on time.
In November 1978, the three ‘Federal
bank regulatory
agencies announced adoption
of a joint
approach
for evaluating
U.S. banks’
country
risk exposure
in foreign
markets.
The approach
was developed
to encourage
diversification
The first
evaluations
of a bank’s
international
lending.
under the joint
approach
began in February
1979.
30

The procedures
for evaluating
country
risk,
which had
been used before
the adoption
of the joint
approach,
differed at each of the three agencies.
At FDIC the examinerin-charge,
when examining
each State nonmember bank, was to
associated
with the loans including
counconsider
all risk
try risk.
Within
FRS, two approaches
were taken.
The New
York Federal
Reserve Bank used an ad hoc committee
of senior examiners
to evaluate
the country
risks
and assign a
general
classification
to loans.
~11 loans to those countries
and their
businesses
received
the classif
ication,
unless
the borrower’s
ability
to obtain
the repayment
currency
was independent
of the country’s
stability
A loan in
or the loans were made in the local
currency.
a local
currency
was judged according
to the borrower’s
At the other Federal
Reserve banks,
financial
condition.
foreign
loans were evaluated
individually.
This approach
led to inconsistent
classifications
within
FRS.
OCC, as part of its evaluation
process,
used a comEach quarter , senior
for evaluating
country
risk.
international
examiners
from headquarters
and the Chicago,
New York,
and San Francisco
offices
met to evaluate
the risk
involved
in and assign classifications
to loans to certain
The loans classified
included
those for which the
countries.
borrowers’s
ability
to obtain
the appropriate
repayment
The committee
classified
these
currency
was questionable.
loans by using information
from major banks’
research
The classidepartments
and available
Government
sources.
fications
arrived
at by the committee
were then used
throughout
OCC for loans to these countries.
mittee

Our 1977 report
pointed
out the inconsistency
in classifications
of loans by FRS and OCC and recommended that
the agencies
develop
and use a single
approach
to classify
loans subject
to country
risk.
A new uniform

procedure

In February
1979, the three
implemented
a new uniform
system
ing a bank’s
exposure
to country
the country
risk
aspect
process,
separately
evaluated
by a joint
country
basis and is reported
in
report
of examination.

bank regulatory
agencies
for evaluating
and reportUnlike
the old
risk.
of foreign
lending
is
committee
on an individual
a separate
section
of the

The committee,
known as the Interagency
Country
sure Review Committee
(three
members from each bank
has four primary
functions:
latory
agency),

Exporegu-

Review and judge economic conditions
where loans are made by U.S. banks.

in countries

Determine
the level
at which
to a country
in relationship
ital
should be commented on.

Determine
when credits
should be classified
due to an interruption
in payment or when the
interruption
is imminent.

Prepare
foreign

a bank's
exposure
to the bank's
cap-

commentaries
on developments
in
countries
for use by examiners.

the nine-member
As now planned,
summarize
conditions
in foreign
such factors
year r considering
--country

debt

service

--country
stability;

population

--country

social

committee
countries
as

will
review
three times

and
a

capability;
and political

and political

and economic
conditions;

and

such as bank and other government
--other
factors,
past performance,
and economic
funding
sources,
trends.
Examiners
are responsible
for determining
the value of
a bank's
loans by foreign
country
and for commenting
on
Concentrations
will
be
country
exposure
concentrations.
determined
by relating
the Committee's
condition
statements
The examiner
to the bank's
foreign
lending
and its capital.
will
report
concentrations
as a separate
item (not part of
an overall
loan rating)
on the examination
report.
The concentration
of a bank's
loans will
not have an
The loan
impact on the evaluation
of an individual
loan.
will
be reviewed
in accordance
with traditional
standards
of credit
analysis.

as in the past,
will
also assess a bank
ability
to analyze
and monitor
country
risk
Examiners will include
in
in its international
lending.
their
reports
an evaluation
of a bank’s procedures
for
monitoring
and controlling
exposure to country
risk,
the bank’s
system
for establishing
lending limits,
and
the bank’s method for analyzing
country
risk.
Examiners,

management’s

STANDBY LETTERS OF CREDIT
Unlike
other
forms of bank commitments,
a standby
letter
of credit
is usually
payable
by the bank against
a simple statement
of default
or nonperformance
on
Because the risks
assumed
the part of the bank’s
customer.
by the issuing
bank are similar
to those in making a
direct
loan,
standby
letters
of credit
are treated
by all three regulatory
agencies
in a manner similar
The credit
is assessed on
to that of a regular
loan.
the basis of the purpose of the credit,
the collateral,
and the borrower’s
capacity
and repayment
ability.
Standby
letters
of credit
are aggregated
with all other
credits
in the overall
analysis
of asset quality.
COMMUNICATING WITH THE BANK’S
BOARD OF DIRECTORS
The bank’s
board of directors
is responsible
for the
The regulatory
agencies
have taken
management of a bank.
the position
that the directors
of a bank may delegate
responsibility
for day-to-day
operations
of a bank to offithey cannot delegate
their
cers and employees.
However,
responsibility
for the consequences
of unsound or imprudent
policies
and practices
whether
the situation
involves
investing,
protecting
against
internal
fraud,
lend’ing,
The directorate
is responor any other banking
activity.
sible
to its depositors
and shareholders
for safeguarding
their
interests
through
the lawful,
informed,
efficient,
The agencies’
and able administration
of the institution.
bank examination
process
serves
an important
function
by providing
bank directors
with an independent
assessment
of their
performance.

The results
of examinations
are presented
to the bank's
board in written
and verbal
form.
The procedure
employed
by each agency in transmitting
the written
results
of bank
The criteria
for verbally
communiexaminations
is similar.
cating
the results
to the board differ
by agency.
At the conclusion
of a bank examination,
all three
agencies
provide
the bank's
board of directors
with a
The report
begins by
written
report
of the examination.
summarizing
the examiner's
findings
and conclusions,
highlighting
the bank deficiencies,
and suggesting
needed
improvements.
The body of the report
discusses,
in detail,
Our review of
the various
aspects
of the examination.
a small number of examination
reports
showed that the
reports
of each agency generally
cover the same matters-capital,
loans,
earnings,
liabilities,
etc.--but
that
OCC reports
include
more narrative
comments and analyses
Examiners
from all three
than do FDIC and FRS reports.
agencies
prepare
a confidential
addendum to the report
presenting
observations
and notations
of questionable
matters.
A recent
FDIC instruction
cautions
examiners
not to include
unsubstantiated
comments in the confidential
The confidential
section
of the
section
of the report.
report
is not presented
to bank management.
In addition
to providing
banks with written
examination reports,
each agency also meets with the banks'
board
FDIC examiners
normally
meet with the board
of directors.
of directors
or an appropriate
committee
of the board at
each full-scope
examination
or when any examination
identiIf
a
nonmember
fies a bank as being of supervisory
concern.
insured
bank is designated
a financial
problem,
the FDIC
regional
director
or his designated
representative
will
FRS meets with
meet with the bank's
board of directors.
the bank's
board of directors
of all money center
banks
Both FDIC and FRS may meet with
and all problem banks.
the board of directors
of any bank whenever
they believe
FRS believes
that
its examinthat a meeting
is necessary.
ers'
time and the bank board's
time is not well spent
An FDIC official
discussing
routine
examination
matters.
told us that FDIC, in the past,
had a policy
of meeting
with the board of directors'
of every bank at each examinafter
some experience
with this
ation.
We were told that,
policy,
it was discontinued
at the request
of the banking
community.

34
..,
j

.1
0 ',1
/,_'
-;.'

>j . .
2
: -,

'.
.

It is OCC's policy
to meet with the board of directors
of every national
bank at least
once each calendar
year.
Normally,
the meetings
are to be convened in conjunction
with a regular
examination
of the bank.
The quality
or
size of the bank is not a consideration
in OCC's policy.
The objective
of these meetings
is to foster
a working
relationship
with the group of officials
directly
responsible
for the affairs
of the banks.
OCC believes
a
continuing
dialogue
with all directors,
including
those
of banks without
problems,
is an important
aspect of its
supervisory
function.
Contrary
to its policy,
we were
told that OCC has not met with the boards of all banks
in the last year,
primarily
because examinations
have
not been performed
as frequently
as was planned
under
the policy
(see p. 18).
The policy
on meeting
with the
board of directors
is being changed to coincide
with OCC's
new frequency
policy
so that examiners
will
meet with the
board of directors
after
every examination.
IDENTIFICATION
OF BANKS NEEDING
SPECIAL SUPERVISORY ATTENTIOq
Primarily
through
the commercial
examination
process,
the agencies
identify
specific
bank problems
that need
correction.
These problems
may be brought
to the attention
of bank management during
the course of the examination,
in
the examination
report
itself,
and/or
through
meetings
with
the bank's
board of directors.
The agencies'
field
offices
have primary
responsibility
for bringing
problems
to the
attention
of bank management and for monitoring
the actions
taken by the banks to correct
their
problems.
When the problems
are of major significance
and magnitude,
the agencies
identify
these banks as requiring
special
supervisory
attention
(problem
banks) and provide
additional
monitoring
and supervision
at the agencies'
headquarters
and field
offices.
Our 1977 report
pointed
out that the
agencies
used different
criteria
to identify
banks needing
extra
attention
and, as a result,
some banks were probably
receiving
more attention
than they needed,
and some less.
We recommended that the three agencies
develop
uniform
criteria
for identifying
problem
banks.
In response
to this
recommendation,
the three agencies,
through
the work of the Interagency
Supervisory
Committee
adopted UIBRS.
The system,
adopted
in May 1978,
is being used by all three agencies
to identify
banks
which need special
supervisory
attention--FRS
and OCC
for all supervisory
concern
and problem
banks and FDIC
35

FDIC is still
testing
the
for supervisory
problem banks.
new system for use in identifying
financial
problem banks
and continues
to follow procedures
in effect prior to
adoption of the uniform system until
the testing
is
completed.
On the basis of the implementation
of UIBRS, there is
no assurance that banks with similar
conditions
will be
The written
document on
rated similarly
by each agency.
the new jointly
adopted rating system describes
the factors
It also
to be considered
in assigning
ratings
to banks.
states that banks assigned a composite rating of 4 or 5
should receive close or constant supervisory
attention.
However, it does not include enough detail
about the rating
to be assigned to each factor or how the rating of each
factor should have an impact on the composite rating for
the bank to assure consistency
in implementing
the system.
In our opinion,
the Director,
Division
of Banking
FRS, placed UIBRS in proper
Supervision
and Regulation,
perspective
in a memorandum transmitting
the system framework, together with implementing guidelines,
to the offices
in charge of examination
at each Federal Reserve bank. He
stated that
"* * *This document [UIBRS] describes
the
general framework for a uniform approach
to rating banks while according each agency
latitude
in setting
performance guidelines
for evaluating
individual
banks under their
* * * The attached Implementing
supervision.
Guidelines
have been drafted for use by the
Reserve Banks in implementing UIBRS for rating
It should be noted, howstate member banks.
ever, that while the general framework for
rating banks has been accepted uniformly
by
the three agencies, the attached Implementing
Guidelines
are not necessarily
identical
to
those that will be put into use by the
Comptroller
of the Currency and the FDIC in
rating banks under their supervision."
The rating system is based on an evaluation
of five
critical
factors of bank operations
that are intended to
reflect
the bank's financial
condition,
compliance with
banking laws and regulations,
and overall
operating
soundness.
The factors
are:
--Adequacy

of the bank's

capital.
36

--Quality

of the bank's

assets.

--Ability
of the bank's management and effectiveness of its administration.
--Quantity

and quality

of the bank's

earnings.

--Capacity
of the bank to meet the demand for payment
of its obligations
(liquidity).
Each factor is rated on a scale of 1 through 5 in
Each bank is
descending order of performance quality.
accorded a summary or composite rating of the five performance dimensions.
The composite rating is also based
on a scale of 1 through 5 and the ratings are assigned
The lack
in ascending order of supervisory
concern.
of consistent
implementation
guidelines
and the flexibility built
into the system raise questions
as to the
true uniformity
of the system and any policies
resulting
from it.
For example, capital
adequacy, as pointed
out earlier
in this report,
depends on examiners'
judgment
for a rating,
not on specific
set guidelines
followed
The composite rating,
reflecting
by all three agencies.
the overall
condition
of the bank, is based on individual
But the system
ratings
like the one for capital
adequacy.
also allows the agencies to consider factors
other than
the five principal
rating dimensions in assigning
a
composite rating.
The significance
of uniform criteria
for rating problem banks is shown below in that problem banks receive
A lack of conconsiderably
more supervisory
attention.
sistent
criteria
for rating and identifying
problem
banks among the agencies raises questions
about the
consistent
identification
and additional
monitoring
of banks experiencing
serious financial
or supervisory
difficulties.
OCC

OCC uses UIBRS to identify
banks requiring
special
Banks are classified
according to
supervisory
attention.
Banks with a composite
the severity
of their
problems.
rating of 5 are classified
as critical,
I-rated
banks are
classified
serious,
and 3-rated banks are classified
close
supervision.
The first
step of the identification
process
begins with the examiner who is required to submit a special
projects
memorandum in those cases where it becomes apparent
that significant
adverse changes in a bank have occurred to
37

indicate
that additional
supervisory
attention
may be
Upon receipt
of the report
of examination
and
necessary.
the examiner's
special
projects
memorandum, the regional
administrator
evaluates
these documents,
assigns
the composand
submits
this
information
to
the
Special
ite rating,
Projects
Division
along
with a summary of the problems
and a statement
of the suggested
corrective
action
OCC
should
take with regard to the bank.
Special
Projects
must
concur with the rating
and the suggested
supervisory
action.
directly
and indirectly,
monitors
the
Special
Projects,
action
taken to correct
the problems.
FDIC
FDIC uses UIBRS to identify
banks with supervisory
It is testing
the use of UIBRS to identify
problems.
financial
problem
banks but, pending
the outcome of the
methods for
testing
phase, continues
to use traditional
identifying
financial
problem banks. These methods include
both objective
parameters
and subjective
judgment.
The
process
of identifying
and monitoring
financial
problem
banks is presented
below.
When an examination
of any insured
bank reveals
financial
problems
which are deemed by the regional
director
to
warrant
assignment
of a formal
problem designation
(1)
serious
problem-potential
payoff,
(2) serious
problem,
or
the regional
office
must submit a
(3) other problems,
The
memorandum citing
the problem
to FDIC headquarters.
memorandum should
identify
the nature
of the problem,
any corrective
action
taken or recommended,
and a general
statement
outlining
the history
of the bank.
recommendations
for problem desigRegional
directors'
nation
are reviewed
by FDIC's Problem Bank Section
to establish
concurrence
or nonconcurrence
with recommended designaFinal
authority
for
tions
and related
corrective
measures.
classification
rests with FDIC headquarters.
Once a bank is designated
as a serious
problempotential
payoff
bank or serious
problem
bank, the regional
director
must provide
the Director
of FDIC's Bank Supervision Division
with quarterly.
updated
analyses
of the bank's
status.
An updated analysis
of banks classified
as other
The Bank Superproblems
is to be provided
semiannually.
vision
Division
and its Problem Bank Section
maintain
updated
files
on all banks receiving
problem designations.
The regional
office
is responsible
for the direct
monitoring
and supervision
of problem-designated
banks.
38

F2S
The FRS classification
of problem banks is based on
UIBRS.
FRS officially
adopted this
as a basis for
identification
in January
1979.
Composite
3 banks are
identified
as requiring
more than normal supervision--banks
which could become problem
banks if not properly
supervised.
Banks rated composite
4 and 5 clearly
warrant
special
superAll 3-, 4-, and 5-rated
banks are sepavisory
attention.
rately
identified
to FRS headquarters
and monitored
by the
Financial
Institutions
Supervision
section
of the Division
Specific
actions
performed
by the
of Bank Supervision.
section
include
reviewing
examination
reports,
tracking
and maintaining
contact
with district
corrective
actions,
bank managers on problem
situations.
’

CEASE AND DESIST ORDERS
When the supervisory
agencies
identify
problems
at
banks,
they can take several
actions
to encourage
or force
The principal
statutory
banks to correct
the problems.
power provided
to the regulators
to force
banks to correct
adverse
conditions
is the authority
to initiate
cease and
desist
proceedings
against
the bank, under the Financial
Institutions
Supervisory
Act of 1966 (12 U.S.C.
1818(b)).
A cease and desist
order,
as the name implies,
directs
the bank to cease the current
practice
and correct
the condition.
A cease and desist
order can be issued when a bank
--has
engaged
practices;

or is

engaging

in unsafe

or unsound

--has violated
or is violating
tion,
written
agreement
with
condition
imposed in writing
connection
with the granting
other
request;
or

a law, rule,
regulathe agencies,
or any
by the agencies
in
of any application
or

--is

above.

about

to do either

the

Cease and desist
orders
have traditionally
been used by
supervisory
agencies
as a last
resort,
following
the use
of various
less formal
actions
to correct
banks’
problems.
The bank regulatory
agencies
were granted
cease and desist
use of the authority
authority
in 1966, but made little
prior
to the mid-seventies.

In our 1977 report,
we concluded
that
(1) the three
agencies
could have used their
formal
enforcement
powers,
including
cease and desist
action,
more than they did to
correct
problems
and (2) written
guidelines
should be
developed
to assist
agency officials
in identifying
the
types and magnitude
of problems
that formal
actions
could
appropriately
correct.
Since the study,
the agencies
have
generally
increased
their
use of cease and desist
proceedand have developed
written
guidelines
to assist
their
ings,
officials
in deciding
when the proceeding
should be used.
FRS and OCC guidelines
are more specific
as to when an
administrative
action
should be taken.

occ
OCC's policies
and procedures
for formal
and informal
administrative
actions
are set forth
in a memorandum dated
of the Currency
to
January
18, 1978, from the Comptroller
all regional
administrators.
It is OCC's policy
to take
formal
administrative
action,
either
a cease and desist
on all banks rated 4 or 5 under
order or an agreement,
UIBRS; however,
formal
action
may be waived in appropriate
circumstances.
The policy
statement
does not define
when
the formal
administrative
action
should be a cease and desist
order or when it should be a written
agreement,
nor does it
define
under what circumstances
formal
action
may be waived.
An OCC official
told us that in the absence of serious
insider
abuse or a grossly
deficient
financial
condition,
OCC will
proceed with formal
enforcement
action
through
use
of a written
agreement
authorized
by the cease and desist
statute,
12 U.S.C.
1818(b).
An agreement
between a bank and
the Comptroller
can bind the bank to remedial
action
which
may be unavailable
through
resort
to other
formal
means,
Additionsuch as litigated
cease and desist
proceedings.
written
agreements
have
the
added
benefit
of
being
ally,
effective
immediately
upon execution
by the parties,
thus
avoiding
the delay and expense attendant
to the contested
Written
agreements
between OCC
cease and desist
process.
and banks contain
basically
the same remedial
provisions
as
are found in cease and desist
orders
issued by the agency.
Violation
of a written
agreement
is grounds,
in and of
for the agency to issue a cease and desist
order.
itself,
In virtually
every case where a written
agreement
is sought,
OCC is prepared
to initiate
cease and desist
proceedings
if the involved
bank refuses
to enter
into the agreement.

For all banks with an overall
rating
of 3 under UIBRS,
the OCC policy
is that formal
administrative
action
is to
be considered.
If formal
administrative
action
is consida memorandum of understanding
between
ered inappropriate,
the regional
administrator
and the bank is to be executed.
The memorandum of understanding
should be used in those
cases where the regional
administrator
believes
the problems have been adequately
discussed
with the bank management and board of directors
and that the bank, in good
faith,
will
move to eliminate
the problems.
The memorandum of understanding
is similar
to the formal written
agreement,
but is considered
by OCC to be less
formal.
A principal
difference
in the two documents
is that
the memorandum of understanding
is between the regional
administrator
and the bank, while
the written
agreement
is between the Comptroller
of the Currency
and the bank.
Formal and informal
administrative
actions
for banks with
an overall
rating
of 1 or 2 is not precluded
by the OCC
policy.
In 1978, OCC issued 98 administrative
actions--24
memorandums of understanding,
50 written
agreements,
and
Also,
two civil
actions
were
24 cease and desist
orders.
issued
in conjunction
with investigations
under the Securities
and Exchange Act of 1934.
This compared to 33 administrative
actions
taken in 1976 at the time of our last
study,
7 of which were cease and desist
orders.
FDIC
FDIC policies
and procedures
provide
guidance
on
the types of activities
warranting
a cease and desist
order,
but do not spell
out at what point
the problem becomes signiTheir policies
state
ficant
enough to warrant
such action.
that whenever a nonmember insured
bank is designated
as
a financial
problem bank, a recommendation
must be made
with respect
to formal
administrative
action
under section
The agency does not have a policy
of
8 of the FDIC Act.
issuing
formal
administrative
actions
to banks with overall
ratings
of 3, 4, or 5.
unsafe

FDIC has provided
examiners
with general
and unsound practices,
su.ch as:
--Management
whose policies
and practices
mental
to the bank and jeopardize
the
deposits.

guidelines
are detrisafety
of its

--Total
adjusted capital
quate in relationship
the bank's assets.

and reserves which are inadeto the kind and quality
of

--A serious lack of liquidity,
especially
the bank's assets and deposit structure.

in view of
.

guidance on when these variHowever, there is no explicit
ous characteristics
become significant
enough to warrant
Essentially
all banks have proba cease and desist order.
lems of some kind, so the question of magnitude becomes
The judgment of the examiner, the regional
very important.
director
and the managers at FDIC headquarters,
therefore,
play an important
role in the process.
FDIC has increased its use of
Since our 1977 report,
cease and desist orders but attempts to use other mechanisms to cooperatively
resolve bank problems before issuing
a cease and desist order.
FDIC-initiated
cease and desist
orders numbered 29 in 1976, 52 in 1977, and 37 in 1978.
FRS
In a policy statement issued January 8, 1979, FRS
sets out the following
guidelines
for initiating
adminisWith few exceptions , .a memorandum of undertrative
action.
standing between the district
Reserve bank and the rated
The memorandum
bank is required for all composite 3 banks.
represents
a good faith understanding
between the bank's
directorate
and the Reserve bank and does not require the
Composite 4 and 5 banks will be
Reserve Board's approval.
presumed to warrant formal supervisory
action--a
written
agreement or a cease and desist order, for example--unless
specific
circumstances
argue strongly
to the contrary.
In 1978, FRS initiated
25 formal
bank holding companies and 12 against
to 29 formal actions-- 24 against bank
5 against banks --in 1976 when we last
statistics.

actions--l3
against
This compared
banks.
holding companies and
reviewed FRS

CHAPTER4
CONSUMER
COMPLIANCEEXAMINATIONS
In addition
to
banks and acting to
latory
agencies are
banks are complying
Nation’s
consumers.

determining
the financial
condition
of
ensure their soundness, the three regualso responsible
for assuring that
with laws to inform and protect the

Each banking agency must ensure that the banks it
supervises
comply with various consumer credit and civil
rights
laws, such as the Truth-In-Lending
Act, the Equal
Credit Opportunity
Act, the Fair Housing Act, and the ComTo carry out this responsibility,
munity Reinvestment Act.
the three agencies have established
separate consumer compliance examination
programs, coordinated
with consumer
affairs
groups, and, in some instances,
established
uniform
interagency
examination procedures.
Because of the broad nature of the consumer compliance
area, we selected several compliance examination
areas and
compared the agencies'
policies
and procedures.
On
the surface,
it seems that the agencies are generally
following
the same procedures.
However, a thorough review
of the implementation
of the various agencies'
procedures
is necessary before we can make any meaningful
evaluation
of the area.
On the basis of our limited
discussions,
there are indications
that the consumer area is receiving
much more individual
and coordinated
attention
than it has
in the past.
TRUTH-IN-LENDING ACT
The Truth-In-Lending
Act requires banks to disclose
credit
and leasing terms to consumers so they can more readily compare terms and avoid the uninformed use of credit
and leasing.
The agencies are responsible
for determining
For example, does the
if banks are complying with the law.
bank have adequate policies
and procedures to implement
the law and is it complying with.these
policies
and procedures, are the required disclosures
being made to customers,
and are disclosed
costs and annual percentage rates being
computed accurately?
Some of the specific
procedures used
by the examiners of the three agencies to make their determinations
include:

--Obtaining
and reviewing copies of disclosure
ments and loan files
for each type of credit

stateoffered.

--Performing
specific
verification
procedures to ensure
that disclosed
costs are accurately
calculated.
--Obtaining
and reviewing copies of account agreements,
periodic
billing
statements,
and form letters
used
to handle billing
error inquiries
and/or consumer
complaints.
--Reviewing
with appropriate
management (1) internal
control
exceptions,
(2) deficiencies
or discrepancies found in performing
examination
and verificaand (3) violations
of law in policy
tion procedures,
and practice.
All of the agencies have prescribed
statistical
sampling instructions
for its examiners to use in selecting
a sample size.
Examiners are required
to cite all violations and are given training
and guidance in determining
what constitutes
a problem 'or at what point a problem
Problem identification
can differ
becomes significant.
with an individual
examiner.
In December 1978, the three
with the Federal Home Loan Bank
announced
Union Administration,
guidelines
for enforcing
of the
Common guidelines
for the Equal
been proposed and are now being
cies.

agencies,
in conjunction
Board and the National
Credit
the adoption of uniform
Truth-in-Lending
Act.
Credit Opportunity
Act have
coordinated
among the agen-

FAIR HOUSINGACT
The purpose of the Fair Housing Act, Title VIII of the
banks from denying
Civil Rights Act of 1968, is to prohibit
a mortgage or home improvement loan to anyone for reasons
This
of race, color,
religion,
sex, or national
origin.
includes loans for the purpose of purchasing,
constructing,
Like the
improving,
repairing,
or maintaining
a dwelling.
Equal Credit Opportunity
Act, which is more comprehensive
and prohibits
discrimination
with respect to all forms of
credit,
the Fair Housing Act prohibits
discrimination
in
the fixing
of the amount; interest
rate; duration;

or other
terms,
such as application
and collection
procedures.
Unlike
the Equal Credit
Opportunity
Act, however,
the Fair Housing Act does not cover discrimination
on the
The bank regulatory
agenbasis of marital
status
or age.
cies are responsible
for examining
bank compliance
of Housing
with the Fair Housing Act, but the Department
and Urban Development
has primary
regulatory
and enforcement responsibility.
determine
if banks are complyThe agencies ’ examiners
For example,
is the bank fairly
adminising with the law.
and enforcement
procedures;
tering
application,
collection,
is the bank’s
board of directors
aware of and fulfilling
their
responsibilities
under the law; and are decisions
to reject
applications
for loans based on economic factors
and uniformly
applied?
The various
agencies
include
--reviewing
since the

examination
such things

procedures
as:

used by the

any past or pending
fair
housing
date of the last
examination,

three

complaints

--verifying
that the bank includes
a statement
nondiscriminatory
practices
in all advertising
real estate
loans,

its
of

--reviewing
indications

home mortgage
disclosure
information
for
of discriminatory
policies
or practices,

--comparing
portfolio
community,

the demographic
distribution
with the demographics
of
and

the

of the
bank’s

loan
local

--reviewing
with management (1) the adequacy of written
policy
and internal
controls,
(2) deficiencies
or
discrepancies
in loan application
criteria,
(3)
deficiencies
in personnel’s
knowledge
of the act,
(4) violations
of law in policy
and practices,
and
(5) suggestions
for correction
of policies
and
practices.
All

of the

steps

are

not

followed

by all

three

agencies.

FRS recommends judgmental
sampling,
For case sampling,
FDIC advises
examiners
to randomly
sample,
and OCC instructs
examiners
to do both random and judgmental
sampling
dependJudgmental
sampling
emphasizes
the
ing on the situation.
45

review of files
involving
probable discrimination
situaas opposed to random sampling, which would give
tions,
Examiners establish
the
equal weight to all bank files.
sample size on the basis of individual
bank circumstances
While
and in conjunction
with prescribed
instructions.
there are provisions
for reporting
violations,
the
agencies provide little
guidance on how the bank should
be rated overall.
COMMUNITYREINVESTMENTACT
In November 1978, the three bank regulatory
agencies,
in concert with the Federal Home Loan Bank Board, issued
a joint regulation
and uniform examination
procedures to
implement and examine compliance with the Community ReinThe Act requires the four agencies, consisvestment Act.
tent with safe and sound operations,
to encourage the
institutions
they regulate to help meet the credit needs
of the institution's
entire community, including
low- and
moderate-income
neighborho.ods.
The agencies worked jointly
to establish
uniform guideThe examinalines and examination
procedures for the act.
tion procedures are aimed at determining
compliance with
the act and its implementing
regulations
and at assessing
records of providing
local credit serthe institutions'
vices.
which are the same for the four
The procedures,
agencies, include reviewing the minutes of directors'
meetings: analyzing
reviewing the community
public files:
reinvestment
statement adopted by the institution;
and
analyzing
the institution's
policies,
procedures,
and
operating
practices.
The provisions
of the act apply uniformly
to the agenis allowed in administering
cies: however, some flexibility
the act due to the varying makeup of the financial
instituIt is not clear at this time
tions the agencies regulate.
how many differences
this will create among the agencies.
When the joint procedures were adopted in November 1978,
there were no individual
agency supplemental
instructions.
The agencies are working together
to evaluate the progress
of the program.

CHAPTER 5
TRAVEL POLICIES
Employees
of all three agencies
travel
in the performance of their
duties.
The amount of expenses and the type
Two speciof authorized
travel
allowed
differ
by agency.
fic areas of interest
to the Senate Banking Committee
are
reimbursement
for first
class travel
and travel
costs of
spouses accompanying
agency officials
on official
business.
A summary of other travel
allowance
policies
is presented
in chart
form at the end of the section.
.
FIRST CLASS TRAVEL
FDIC and OCC policies
geierally
disallow
first
class
and FRS headquarters
policy
travel
for all employees,
specifically
limits
those employees
below the division
director
level.
each
FRS
district
has its own travel
Also,
policies.
FDIC and OCC travel
policies
state that
all
employees
should normally
use less than first-class
travel
Exceptions
are maqe
when traveling
on official
business.
if space is not available
in coach accommodations
in time
to carry
out the purpose of the travel
or if for reasons
of health
or physical
condition,
first
class accommodations
are warranted.
OCC also submits
a semiannual
report
to
the Treasury
Department
on the use of first
class travel.
FRS travel
policies
state
that employees
are authorized
to use only coach fares but are encouraged
to use discount
fares
when feasible.
The travel
policies
allow division
directors
and their
equivalents
to travel
first
class
at
their
discretion,
and staff
members traveling
with board
members or division
directors
may be allowed
first
class
travel
if board business
is to be discussed
during
the
flight.
FRS requests
division
directors
to use coach
accommodations
when accompanied
by staff
members.
In
addition,
we were told most division
directors
use coach
when traveling
alone.
TRAVEL OF EMPLOYEES' $POUSES
G
The agencies'
travel.policies
do not generally
allow
reimbursement
for the travel
of spouses except when the
employee has a permanent
change of duty station.
However,
an FDIC official
told us that FDIC allows
spouses to

travel with employees at agency expense for regional
conThe agency justifies
ferences held once every 18 months.
An OCC
this expense by citing
improved personnel morale.
official
told us that OCC allowed spouses to travel
to
regional
conferences
in the past, but has since changed
this policy.
FRS has never allowed this type of expense.
regulations
allow travel expenses for
All three agencies'
an employee's spouse and dependents when an employee
changes his or her duty station.
TRAVEL ALLOWANCES--ASUMMARY
The following
chart shows a comparison of the travel
allowances for FDIC, FRS, and OCC, indicating
the differences and similarities
in the allowances for the agencies.
As can be seen for these eight areas, there are a number
of differences
among the agencies.
/

Comoarison
Travel

duty

Lodging

and

subsistence

allowance
(when
lodging
not
obtained)

mileage
ot

for

CCC,

PRS,

and

PDIC

PRS

duty

Household
allowance

Laximum
of $750
for
travel
within
U.S.;
up to $1.5511
for
travel
to Alaska
and
overseas

l4aximur
not
out-of-pocket

Lodging
1/
day subs&tence

Lodging

plus

allowance

$0.17

$16

FDIC

per

exceed
expected
reimbursables

Maximu
$75u
for
travel
rithin U.S.;
from $SuU to $l,ilUO
for
travel
to Alaska
and
overseas

per

day

Transportation
sistence
(l-day
than
10 hours,
p.m.,
cost
of
incurred)

Commuting

Change

Allowances

travel:

Advance

Car

Travel

occ

allowances:
Normal

plus
$8 subtravel,
more
home after
6
dinner
is

plus

516

per

Transportation
per diem
(travel

and up
must

hours
6 hours

a.m.

mile

Lodging
plus
subsistence

subs%itence

more;

beginning
terminating

to
be

$16

Transportation

per
diem
(period
or
more

than

before
after

6
u p.m.1

goods

weight

for

purchase

Sale

home

ll,l~i.lO
family,

with
immediate
lbs.
without

lbs.

5,000

Actual
expenses
not
lu percent
of actual
price
and 5 percent
chase
price

weight

limit

Not

weight

Miscellaneous
allowance

52uo:

additional

expenses

lodging
cost
(unless
otherwise
lodging
costs.
of the
rlembers

are

$16

than

not to exceed
approved).

documented
weeks

Board
are
of field

allowance

for

allowed
per
examination
system

522

per

diem
staff

transferees

that

day
is

Subsistence

in lieu
allowed
may

area

for

expenses

exceeding
(limit
written
as

Same

ll,U30
may be
application)

lbs.
net
extended

OCC

pur-

Employees
same as normal
duty
travel:
dependents
allowed
l/2
per diem
rate
employee

expense

ordinary

Actual
the

sale

Lodging
and subsistence
employee
and
dependents

l/Stanaard
day

j/Relocation

exceed

ary,
not to exceed
a OS-13
employee

room.

exceeding

not

Same

upon

L/Members

and

day

station:

Reimbursement

and

per

$35
1U hours
than
6 hours
beginning
6 a.m. or terminating
8 p.m.1

before
after

Same

S2u

Employees
travel;
3/4 per

same as
dependents
diem
rate

salary

weeks

S?>O

salof

and in designated
established
on

subsistence

necessary
not

exceed

S4uO;

additional
may be
maximum
stated
expenses

high
cost
a sliaing

not

000

not

Employees
same as normal
travel;
dependents
allowed
3/4
of per diem
rate
of
employee

area,
scale

exceed

transportation
$12,

normal
duty
allowed
of employee

excluding

lodging
from
516

$42

and

per

income

$21

not to
to $lY

plus

exceed
$34
depending

actual

diem/subsistence
tax

reimbursements.

per
on

Cost Of
Of $35.

duty

documented

approved,

APPENDIX I

. ..a.._

BOARD

OF GOVERNORS
OFTHE

FEDERAL

RESERVE
WA5HINGTON.

February
Mr. Allen E. Voss
Director
General Government Division
United States General Accounting
Washington, D. C. 20548

SYSTEM

0. C.

2U5.51

16, 1979

Office

Dear Mr. Voss:
We appreciate
the opportunity
to review the General Accounting
Office's
report entitled
"A Comparison of Selected Policies
and Procedures
It is our understanding
of the Three Federal Bank Regulatory Agencies."
that the report was designed as a follow-up
to certain recommendations
contained in the GAO's 1977 study of Federal bank supervision,
as well as
to pursue specific
areas of interest
expressed by members of the Senate
We also understand that,
Committee on Banking, Housing and Urban Affairs.
the scope of the report was limited
in order to expedite your effort,
to written
policies
and procedures and informal discussions with headquarters officials.
The information
contained in the report confirms that numerous
substantive
steps have been taken by the Federal Reserve, together with
the Office of the Comptroller
of the Currency and the Federal Deposit
to coordinate more closely their supervisory
Insurance Corporation,
policies
and thus ensure greater equity and efficiency
in the Federal
supervision
of commercial banks. Action has been taken on all of the
substantive
recosnnendations made by the GAO in its initial
report,
and
uniform agreements on a number of important supervisory
policies
have
The following
represent
some of the
been worked out among the agencies.
more notable areas where uniform interagency
positions
have been adopted
and/or are presently
being considered:
1)

a system for rating connnercial banks and
identifying
those requiring
more than normal
supervision;

a system for evaluating
large national
credits
held by more than on participating
bank;

an approach for reviewing and commenting on the
country risk element of commercial bank lending;

APPENDIX

Mr.

Allen

APPENDIX

E. Voss

-2-

a set of regulations
and examination
procedures
for ensuring
compliance with the Commnity Reinvestment

Act;

procedures

for the implementation
of the Financial
Regulatory and Interest
Rate Control
Act

Institutions
of

1978;

procedures
aspects
of

for
the

a proposal
instalment
couuaent ;

for a method of classifying
loans,
soon to be issued

the implementation
of the
International
Ranking Act

the supervisory
treatment
held by banks,
including
obligation
bonds ;

for

supervisory
of 1978;

consumer
public

of investment
securities
defaulted
municipal
general

interagency
training,
including
that relating
to
the Community Reinvestment
Act and to international
banking
and other specialized
examination
procedures;
systems for rating
trust
data processing
service

departments
centers;

a common definition
of what constitutes
tion of credit
warranting
comment in
examination
report ; and
minimum standards
exchange operations

for
I

internal

controls

and electronic

the

a concentrabank

for

foreign

As this
list
clearly
demonstrates,
considerable
voluntary
efforts
to achieve
uniformity
in appropriate
areas have been made and
Moreover,
continue
to be made by all
of the Federal
regulatory
agencies.
we believe
that the Federal
Financial
Institutions
Examination
Council
to be established
next month in accordance
with recent
legislation
will
provide
the vehicle
for even greater
coordination
among the agencies.

APPENDIX I

Mr. Allen

E. Voss

APPENDIX I

-3-

With regard to the report's
mention of agencies' travel
policies,
it should be noted that a recently
issued change in Board
policy calls for the use of less-than-first-class
accmdations
for
all Board personnel.
On behalf of the Federal Reserve, I want to thank you for the
opportunity
to conuaent on the GAO report and for the professional
manner
in which your entire staff conducted itself
during the study.

APPENDIX II

Comptroller of the Currency
Admtnistrator
of National Banks
Washington,

February

D. C. 20219

21, 1979

Mr. Allen R. Voss
Director
General Government Division
U.S. General Accounting Office
Washington,
D.C.
20548
Dear Mr. Voss:
This is to inform you that we have reviewed your draft of a proposed report,
"A Comparison of Selected Policies
and Procedures of
the Three Bank Regulatory
Agencies."
We very much appreciated
the splendid attitude
and cooperation
of
Their
the GAO staff
in researching
and preparing
this report.
receptivity
to many of our comments and suggestions
prior to the
submission of the final
draft contributed
to a report which we,
believe is a generally
complete and accurate summary of the
various areas covered.
by reference
and for the record,
the
We do wish to incorporate,
enclosed OCC February 1979 response to GAO's 1977 report entitled
This response contains
"Federal Supervision
of our Nation's
Banks."
OCC views on many of the same matters
which are the subject of the
report mentioned above.
One further
comment is warranted.
Page 50 of the draft
report
states 'I...
there is no assurance that banks with similar
conditions
would be rated similarly
by each agency
even if all
the agencies
A further
stateused the system for identifying
problem banks."
ment concludes that this is caused by the absence of firm and
strict
guidelines
for considering
the various
factors
that go into
determining
the composite rating,
therefore,
there is heavy
subjectivity
in arriving
at that composite rating.
Although these statements
are essentially
correct,
we do not believe
OCC's previous
they represent
a significant
weakness to the system.
rating
system
indeed utiiized
strict
guidelines
tied primarily
to

APPtNDrX

APPEWDIX II

-2asset quality.
We abandoned that system when it became apparent
to us that there was a clear need to recognize the many quantitative
along with asset quality,
that must be
and qualitative
factors,
evaluated
to establish
an appropriate
rating
for a bank.
We,
rely primarily
on the professional
judgment of our
therefore,
examiners and administrators,
rather than on a numerical
formula,
to weigh all the objective
and subjective
factors
which must be
taken into account in determining
the final composite rating.
While this system necessarily
involves
more subjective
judgment
and results
at times
in differing
opinions among the agencies
as to what a proper rating
might be, we feel it is far superior
to the previous system
in detecting
problem situations.
The
differences
in ratings
among the agencies actually
have served
to focus on the reasons for divergent
ratings,
thus strengthening
the system and evaluation
process.
Should you have further
questions
are available
to discuss them.

John G. Heimann
Comptroller
of the Currency

Enclosure

on this

matter,

my staff

and I

APPENDIX 11:

APPENDIX II

Comptroller of the Currency
Administrator
of National Banks
Washington,

D C. 20219

February

21, 1979

Mr. Allen R. Voss
Director
General Government Division
U.S. General Accounting Office
Washington,
D.C.
20548
Dear

Mr. Voss:

An early request from the GAO group assigned to the Office of the
Comptroller
of the Currency was that we furnish
a report on the
status of implementing
recommendations
contained
in the January
1977 GAO Study, "Federal Supervision
of State and National
Banks".
Enclosed you will
find our response to this request.
We feel that
the OCC has made great strides
in implementing
GAO's recommendations,
with a resulting
improvement in our practices
and procedures
and
interagency
cooperation.
Should you have further
questions
are available
to discuss them.
Very truly

Comptroller

on this

matter,

my staff

yours,

of the Currency

Enclosure

and I

i..,

APPENDIX II

Recommendation

APPENDIX II

(2-21)
--

we recommend that the Comptroller
of the Currency
Accordingly,
(1) develop more definitive
criteria
for evaluating
charter
applications
and (2) thoroughly
document the decision-making
process,
including
an identification
by reviewers
of each factor
as favorable or unfavorable.
Response
The OCC generally
agrees with GAO and is now in the process
implementing
a majority
of this recommendation.

The courts have uniformly
found the documentation
of the charter
application
decision-making
process adequate for judicial
review
However, as was indicated
purposes.
in a previous
response,
under
present procedures
(which were revised and publicly
announced
November 1976), we are continuously
striving
for more thorough
documentation.
Moreover,
in a letter
to the applicants,
the OCC
summarizes the reasons for an application's
disapproval.
The OCC is now considering
a proposal
in which applicants
would
be informed of shortcomings
in'their
application
prior
to a decision by the OCC. Thus, they would be able to correct
problems
Such a prowhich might otherwise
lead to a negative
decision.
cedure would require
that applicants
be informed that the ultimate
decision
on an application
rests with the Comptroller
or his designee.
Staff review and recommendation
would continue
as a portion
of the
basis for the decision.
Present procedures
do allow for a conditional
approval of an application
which contains
deficiencies
in
areas that can be controlled
or corrected
(e.g.,
capital
deficiency,
excessive
investment
in fixed assets,
incompetent
management).
GAO also recommends that the OCC develop more definitive
standards
The OCC agrees with that recomin evaluating
charter
applications.
mendation and has instituted
a task force to review that and other
matters.
However, it should be noted that there are difficulties
in developing
such criteria
(see OCC's response set forth
in
Appendix I, page I-5).
The OCC is not aware of any state chartering
authority
which has specific
standards
or guidelines
for the charterinc,
of banks.
Although it may be possible
to develop such standards,
experience
suggests they might be so broad as to require
chartering
of unqualified
applicants
or so narrow as to exclude qualified
applicants.

APPENDIX II

APPEHDIX II

-2Recommendation

(4-7)

we recommend that the Board of Directors,
FDIC, the Board
Therefore,
of Governors,
FRS, and the Comptroller
of the Currency establish
scheduling
policies
and procedures
which would avoid the setting
of
examination
patterns.
Response
The OCC believes
that each agency should have the flexibility
to determine the utility
of establishing
scheduling
policies
and procedures.
In our response dated January 14, 1977, we stated:
"!iistorically,
the
OCC has viewed surprise
as an important
element of an examination.
I-lowever, a primary
feature
of our new examination
approach entails
the
pre-examination
analysis
wherein the examiner will
determine
the
adequacy of internal
control
and audit activity.
The OCC feels that the
best deterrent
for fraud is not periodic
unannounced visits
by examiners
SUk
rather
the existence
of sound bank policy,
procedure,
internal
The element of surcontrol
and audit activity
on a continuing
basis.
prise is necessary only in those cases where such factors
are suspect."
The revised examination
approach employed by the OCC encompasses a review
The OCC has,
of the present
as well as the past operation
of a bank.
therefore,
deemphasized the surprise
*element in examinations
except
where there are reservations
about management integrity
or when there
are plans to perform procedures
of an auditing
nature.
The OCC has
recently
revised
its examination
priorities
to achieve the most efficient
use of our limited
resources.
Legislative
attempts
to obtain flexibility
in scheduling
of examinations
continue.
If that flexibility
is forthcoming,
examination
scheduling
will
probably
take the form outlined
in Recommendation 4-S.
The first
part of that program would be a general comprehensive
examination
covering
every area of banking activity.
That examination
would include
an indepth analysis
of each bank's system of operations
with the intent
of
strengthening
the system to prevent unforeseen
situations.
A strong systemof
operation
will
protect
the bank against
fraud and
thus reduce the need for surprise
examinations.
Subsequent examinations
in a cycle are specialized,
with scope and timing dictated
by the results
of the general examination.
Should the general examination
reveal that
a bank's system of operation
is weak, the next specialized
examination
performing
certain
may be on a surprise
basis and include
the examiners
auditing
functions.
With the timing and scope of specialized
examinations
determined
on an individual
bank basis,
the probability
of establishing
examination
patterns is greatly
reduced.
Further,periodic
review of each
bank's system of operations
between examinations
offsets
the risks of a
pattern
of examinations.

APPENDIX II

-3-

Recommendation

(4-8)

We recommend that the Board of Directors,
FDIC and the Board of
fRS adopt flexible
policies
for examination
frequency
which
Governors,
would allow th@m to concentrate
their
efforts'
on banks with significant
problems.
We recommend that the Congress amend the National
Bank Act to allow
the Comptroller
of the Currency to examine national
banks at his/her
discretion.
Response
OCC housekeeping
legiSThe OCC concurs with the GAO recommendation.
lation,
included
as part of the FIRA package in the last Congress,
would have amended 12 USC 481 to allow the OCC to examine every national
This portion
of the legislation
bank as often as it deemed necessary.
Further
attempts will
be made this
failed
to reach a floor
vote.
Spring to amend the code.
it is proposed that the OCC
If the appropriate
legislation
is enacted,
would complete one on-site
examination
per year of all banks rated 1 and
two on-site
examinations
per
2 with assets greater
than $100 million,
year of all banks rated 3, 4 and 5, and one on-site
examination
per
18 month period or' banks rated 1 and 2 with assets less than $100
million.
Practically,
because of staffing
limitations
externally
imposed, this is the present
examination
cycle.

APPENDIX II

- 4-

Recommendation

(J-29)

We recommend that the Board of Governors,
of the Currency develop and use a single
of loans subject
to country
risk.

FRS and the Comptroller
approach to the classification

Resnonse
The OCC agrees

with

GAO and the recommendation

has been implemented.

Sinc2 J,lly 1974, a committee of OCC examiners from the major Cnited
States financial
centers
and from the Washington headquarters
has
banks to foreign
public
met quarterly
to evaluate
credits
by national
The
sector borrowers
and, when n2cessary,
determine
risk criticisms.
committee's
decisions
are applied uniformly
to all national
banks.
Zxaminers for the Federal Reserve Bank of New York have employ2d a similar
The
technique
for member banks in the Second Federal Reserve District.
remaining Federal Reserce Districts
do not have a formal approach to
country
risk evaluation.
The interagency
Snpervisory
Committee has formed a Task Force for International
Supervisory
?latters.
After several months of discussion
and
slanning
that task force formulated
a proposal
for an Interagency
Country
The proposed committee has been approved
Exposure Review Committee.
by the Interagency
Supervisory
Committee and will
begin functioning
in
early 1979.
composed of three representatives
from
This committee,
each of the three federal
bank regulatory
agencias,
will
meet at least
semi-annually
to evaluate
credits
by United States commercial banks to
foreign
public sector borrowers
and, when necessary,
to determine
risk
criticisms.
The committee will
also determine
procedures
for evaluating
levels
of concentration
of country
exposure within
the banks and, where
necessary,
will
define comments on such concentrations.
The committee's
actions/decisions
will
be applied uniformly
to all national,
stat2
member, and state non-member banks.

APPENDIX II

-5-

Recommendation

(4-30)

We recommend
that
the Board of Governors,
FRS, and the Comptroller
of the Currency
implement
procedures
whereby
major
foreign
branches
and subsidiaries,
including
subsidiaries
of Edge Act corporations,
examined
periodically
and whenever
adequate
information
about their
activities
is not available
at the home office.
Also,
we recommend
that
of the Currency
exchange
conducting
examinations

the Board of Governors,
each others'
examiners'
in foreign
countries.

are

FRS, and the Comptroller
to cut expenses
when

Response
The

@CC agrees

with

both

recommendations.

Adequate
information
about the activities
of foreign
branches
and
subsidiaries
of national
banks is usually
available
at, or can be
in order
to further
provided
to, each bank's
head office.
However,
substantiate
the condition
of the overseas
activities
of national
banks,
the
OCC has been conducting
on-site
examinations
of their
overseas
branches
since
1968.
With the exception
of "secrecy"
countries,
all
major,
and many
Examination
lesser,
overseas
branch
locations
are visited
regularly.
sites
are chosen on the basis
of their
relative
importance
to the condition
of the total
bank and their
accessibility
to OCC examiners.
Information
on activities
in "secrecy"
countries
is obtained
from the bank and
further
substantiated
by the bank's
independent
internal,
and sometimes
external,
auditors.
Direct
negotiations
have also taken place
with
representatives
of the bank supervisory
departments
in "secrecylt
countries
in an attempt
to obtain
direct
access
to information
and conducting
of
on-site
examinations
in those
locations.
For seY:eral
of the major
national
banks operating
extensive
and diver:iC?lJ
overseas
locations
sified
overseas
operations,
examiners
must visit
Such visits
to conduct
examinations
of those banks'
overseas
activities.
Those
are part
of our normal
examination
policies
and procedures.
examinations
of decentralized
management
locations
encom.pass a review
of
all
branches,
subsidiaries
and affiliates
of each bank within
the
s:ecific
geographic
responsibility
of the overseas
center.
Ne agree that
the exchange
of examiners
for overseas
examinations
Reser-re System would
'be beneficial
both
between
the OCC and the Federal
because
of the potential
cost-savings
and because
of the exchange
of
ideas
and procedures
that would
occur between
examiners
from both agencies.
In the past,
there
have been a limited
number of joint
examinations
of
overseas
affiliates
of national
banks in which
the t:so agencies
participated.
The InternationaL
E?gaminations
Division
of the OCC is current::/
working
with
the Division
of Banking
Supervision
and Regulation
of the
Federal
Iieserve
Svstem
to coordinate
exaF.inations
involving
foroiyn
aff iliates
of national
ban?<s.
~11 such examinations
in London Curing
AlthonTh
the OCC is willing
1979 will
involve
some coordinated
efforts.

APPENDIX II

-6-

to expand that

exchange,

some legal

barriers

remain.

Federal Reserve examiners are authorized
to conduct examinations
of
overseas branches and affiliates
of National
banks, since all National
banks are member banks.
Presently,
however, Yational
Bank Examiners
are not legally
authorized
to examine overseas branches or affiliates
of state member banks.
However , a section
of the Financial
Institutions
Regulatory
Act not considered
during the last session of Congress
proposed to amend 12 USC 481 to include:
"The Comptroller
of the
upon the request of the Board of Governors of the Federal
Currency,
to assign examiners appointed
under this
Reserve System, is authorized
section
to examine foreign
operations
of state member banks."
We
assume this item will be conside red during
this session of Congress.

APPENDIX II

Racomndations

APPENDXX II

(7-25

& 26)

We recommend that the Comptroller
of the Currency invite
the FDIC and
the FRS to jointly
review and evaluate
its new examination
approach.
Further,
we recommend that in the event of a favorable
assessment of
the new process,
the Board of Directors,
FDIC and the Board of
Governors,
FRS revise their
examihation
processes
to incorporate
the
features
of the OCC's new examination
approach.
Additionally,
we recommend that the Board of Directors,
FDIC, the
Board of Governors,
FRS, and the Comptroller
of the Currency jointly
staff
a group to analyze shared national
credits
at state and national
lead banks under Federal supervision
and that the three agencies use
the uniform classification
of these loans when they examine the participating
banks.
We also recommend that the Board of Directors,
FDIC, the Board of
Governors,
FRS, and the Comptroller
of the Currency work together
in
refining
their
monitoring
systems and their
approach to consumer credit
compliance examinations.
Response
Substantial
The OCC agrees with all three recommendations.
has been made toward implementing
each recommendation.

progress

The OCC response dated January 14, 1977, explaine?
that our Office
had.
made a nresentation
to the FDIC and the FRS in November 1976 and that
the Acting Comptroller
had recommended to the Interagency
Coordinatinq
Co.mmittee that a permanent staff
group be formed for the purpose of
reviewing
and analyzing
the OCC's approach to examination.
The FDIC
and the FRB have adopted the OCC's EDP examination
procedures.
Through the Interagency
Supervisory
Committee (ISC), several
facts of
the OCC's revised examination
process have been adopted by the FRS and the
FDIC.
We believe
the Federal Financial
Institutions
Examination
Council will
make additional
progress
toward establishing
uniform examination
standards
and guidelines.
At a recent ISC-EDP subcommittee
meeting,
a proposal
was made to issue an interagency
examination
procedures
manual which would
be followed
by the OCC, FDIC, FRB, FHLBB, and NCUA. Those agencies
issued implementation
guidelines
for interagency
EDP examination
scheduling
and report
distribution
on May 31, 1979.
With respect
to shared national
credits,
the FDIC and the FRS have ;oineC
the OCC in conducting
a joing annual review of shared national
credits
at state and national
lead banks.
While consiZerable
progress
has been made toward the integration
of a
uniform early warning system, this task will be one of the top priority
Examination
Council.
objectives
of the Federal Financial
Institutions
The OCC has previously
informed
GAO of several meetings among the agencies
at which the National
Bank Surveillance
System was explained
and technical

APPENDIX If

APPENDIX II
-8-

information

was offered.

1n our January 1977 response to comments concerning
consumer credit
compliance examinations,
we explained
that we were actively
engaged
in implementing
revised examination
procedures
in that area and were
working closely
with the FRS, FDIC, XCUA and the Department of
Housing and Urban Development in refining
the process.
Since then the' OCC has worked with the FDIC and FRS in refining
monitoring
systems and the approach to consumer credit
compliance
examinations.
The three agencies have participated
in eight regional
consumer compliance workshops sponsored by -ABA. On January 12, 1977,
the OCC invited
the FDIC and FRS to participate
in meetings designed
to provide
a regular
exchange of information
about monitoring
systems.
Since Februarv 1977, the three agencies have met approximately
monthly
to gain famiiiarity
with each other's
systems, to discuss possible
modification
of each system and to discuss inclusion
of additional
data
items in the Reports of Condition
and Income.
In the area of consumer
credit
compliance examinations,
the OCC submitted
its handbook for
Consumer Examinations
to FDIC and FRS for comment prior
to publication.
The three aaencies have wor?ced together
in the development
and implemenIn October 1977,
tation
of joint
schools on consumer law and examination.
a joint
notice of proposed statement
of enforcement
policy
for truth-inlending was oublished
in the Federal Register.
The three agencies
issued identical
Guidelines
for Corrective
Action for Regulation
2 and
provided
identical
information
to their
respective
banks regarding
the
Fair Debt Collection
Practices
Act.
guideAlso, an issuance of idential
lines for Regulation
E has been proposed.

APPENDIX II

APPENDIX 11
- 9 -

Recommendation

(8-20)

We recommend that the Board of Directors,
FDIC, the Board of Governors,
FRS, and the Comptroller
of the Currency
establish
more aggressive
for using formal actions.
Written
criteria
should be developed
policies
to identify
the types and magnitude of problems that formal actions
appropriately
could correct.
Response
The OCC agrees with this recommendation
and has implemented its own
Examining Circular
policies
and procedures
for administrative
actions.
NO.
160 dated August 12, 1977, established
written
criteria
for formal
action on all banks with
composite
ratings
of "4" or "5".
On
January 18, 1978, the Comptroller,
in a memorandum to all Regional
Administrators,
further
defined and clarified
the enforcement
policy
In addition
to announcing
previously
stated in that examining
circular.
the policy,
the memorandum contains
procedures
to be followed
by
and Washington personnel
in considering
examiners,
regional
offices,
and taking
formal action.
The OCC policy
is tied to the uniform rating
system utilized
by the
three bank regulatory
agencies.
Under the policy,
all banks rated "4"
or "5" are to be subject
to formal action.
Banks rated "3" must be
considered
for formal action and, if no formal
action
is taken, a
"Yemorandum of Understanding"
is expected.
Further,
if a Memorandum
of Understanding
is not considered
necessary
for a bank rated "3", the
regional
office
involved
must outline
the reasons such action
is
considered
inappropriate
and must propose alternative
supervisory
action,
Some actions
seeking the concurrence
of the Special Projects
Division.
continue
to be taken on banks rated "1" and "2".

APPENDKXII

APPENDIX II
::

- 10 -

Recommendation

(8-47)

We recommend that the Board of Directors,
FRS, and the Comptroller
of the Currency
identifying
problem banks.

FDIC, the Board of Governors,
develog uniform criteria
for

Response
A uniform rating
system for commercial banks was implemented in !4ay 1978.
Additionally,
uniform ratings
systems for trust
departments
and data
processing
operations
were adopted in September and Zlovember of 1978
,
respectively.

!:."
,g-

APPidDIX II

APPENDIX II
- 11 -

Recommendation

(lo-61

We recommend that where feasible
the Comptroller
of the Currency:
Board of Directors,
FDIC; and Board of Governors,
FRS; combine
their
examiner schools and standardize
their
curricula.
Response
The OCC agrees with this
progress
toward
achieving

recommendation
this objective.

and has made significant

training
coordination
subcommittee
was established
the ISC to determine
areas in which examiner schools and
The first
area identistandardized
curricula
would be practical.
fied was consumer affairs.
A one-week consumer affairs
school was
held by the agencies in June 1977, for management level personnel.
The school emphasized consumer laws from a policy
rather
than exam-ination
procedures
viewpoint.

An interagency

under

A management level trust
program was held the week of December 12,
1977.
The purpose of that school was to provide participants
with
the opportunity
and information
to develop their
own ideas concerning examination
practices
and procedures
consistent
with current
developments
in the trust
business.
In addition,
representatives
of the FRB, FDIC, NCUA and state banking commission attended
the OCC's Bank Fraud Training
Program in
September 1978.
The subcommittee
is also conducting
an analysis
of each agency's
training
programs to identify
other areas suitable
for joint
training
such as EDP and International.
In addition,
enrollment
in existing
agency programs has been made available
to the other
financial
agencies.
Representatives
of the FRB/FDIC/OCC are evaluating
properties
suitable for use as a joint
training
center.
Choices presently
include
building
new space: purchasing
an existing
facility,
leasing comor using college
or university
space.
The subcommitmercial
space:
tee also is looking
into joint
training
in connection
with the
Community Reinvestment
Act.
,Joint
training
involving
OCC, FDIC, FRB, FHLBB, and NCUA is one of
the responsibilities
assigned to the Federal Financial
Institutions
After
it is established
on March 10, 1979, it
Examination
Council.
will
assume many of the projects
listed
above.

APPENDIX II

APPENDIX II
- 12 -

Recommendation

(lo-101

We recommend that the Board of Governors,
FRS (1) establish
full-time
training
office
to operate its examiner training
and (2) carry
out the revision
of examiner schoo3 curricula
it has recognized
as needed for sometime.

a
program
which

We also recommend that the Comptroller
of the Currency,
Board of
Directors,
FDIC, and the Board of Governors,
FRS, increase
their
training
in EDP, law and accouting
as desired by their
examiners.
Response
As indicated
The OCC agrees with these recommendations.
mendation 10-6
uniform training
will
be the resnonsibility
Federal Financial
Institutions
Examination
Council.

in Recomof the

The OCC has developed a one-week Electronic
Data Processing
for examining personnel.
The school introduced
participants
internal
countrols,
and audit procedures.

school
to EDP,

Instruction
in law and accounting
has been developed for first-year
examiners to include:
overview of banking laws, regulations
and
interpretive
rulings,
generally
accepted accounting
principles,
and
As each area of instruction
is developed for
financial
reporting.
future
programs,
applicable
laws and accounting
principles
will
be
included.
In addition,
OCC now trains
staff
attorneys
in all levels
of bank examiner continuing
education
curricula.
A specialized
program for consumer affairs
laws has been implemented.
The purpose of this school is to train
assistant
national
bank examiners
Examiners responsible
for consumer
in consumer lending and related
laws.
affairs
examinations
must complete this program.
A specialized
Securities
Exchange Commission review was held in
The review included
January 1978 for all National
Trust Examiners.
regulating
trading
in investments.

laws

A continuing
program has been implemented
to provide
specialized
training
in handling
and investigating
bank .fraud cases.
The program is aimed
at providing
a well-trained
group of national
bank examiners to handle
supervisory
staff
such cases.
However, it has been attended by various
and personnel
from other federal
and state agencies.

APPENDIX II

APPENDIX II
- 13 -

Recommendation

(11-E)

We recommend that either
(1) of the Board of
FRS; and the Comptroller
Board of Governors,
establish
a more effective
mechanism for the
their
forces in undertaking
significant
new
the bank supervisory
process or in attacking
problems or (2) the Congress enact legislation
anism for more effective
coordination.

Directors,
FDIC; the
of the Currency jointly
three agencies to combine
initiatives
to improve
and resolving
common
to establish
a mech-

Response
The OCC agrees with this recommendation
and notes that it supported
the newly passed legislation
mandating the Federal Financial
Institutions
Examination
Council which will
implement GAO's recommendations
through
a more formal structure.
This matter was addressed fully
in testimony
by Comptroller
Xeirnann
on September 16, 1977, before the Committee on Banking, Housing and
The Interagency
Supervisory
Urban Affairs,
United States Senate.
Committee,
a subcommittee
of the Interagency
Coordinating
Corrtmittee,
was established
in February 1977.
Substanti1.e
progress
has already
been made in several
areas commented on in the GAO study.
Through the ISC, interagency
agreements on the following
matters
have been reached and implemented:
1) a uniform bank rating
system,
3) a shared national
credit
2) uniform consumer examination
training,
program 4) a uniform,
interagency
approach ts evaluation
and risk
criticisms
to foreign
public
sector credits,
5) a uniform
approach to
concentrations
of credit,
6) a uniform approach to non-accrual
laons,
7) a uniform trust
denartment
rating
system, 8) re-rision
of the 1939
accord on classification
of investment
securities,
9) a uniform policy
10) a uniform policy
on diversion
on upstreaming
deferred
tax liability,
of income through management fees, 11) joint
or rotated
examinations
12) uniform interagency
rating
system Of
of data processing
centers,
data processing
centers,
13) uniform approach to classification
of
delinquent
instalnent
loans, 14) minimum EFT guidelines,
15) C.RA examination
procedures,
16) uniform recordkeeping
and confirmation
requirements for securities
transactions,
17) improper,/illegal
payments
Areas
examination
procedures,
and 18) trust
department
annual report.
presently
being studied
include:
1) training
program coordination,
2) uniform disclosure
policies
on administrative
actions
and examination
reports,
31 b,ank sales of bank holding
company commercial paper, 4)
remote disbursement/zero
balance accounts,
5) capital
adequacy, 5)
interagency
EDP manual, 7) SBA loans, 8) establishment
of standards
for
documentation,
accounting
and auditing
of foreign
exchange operations
and, 9) supervision
of foreign
bank holding
companies.

APPENDIX III
-.

APPENDIX 11X
..- .----

p+jL (q

L-.-.-i

FEDERAL DEPOSIT INSURANCE

- -----__

CDRPDRATtDN,

Wtthin~ton.

O.C. 20428

-A

OFFlCEOFOlRECTOR.OIVISIONOFSANKSUPERVISION

February

26,

1979

Mr. Allen
R. Voss, Director
General
Government
Division
United
States
General
Accounting
Washington,
D.C.
20548
Dear

Mr.

Office

Voea:

the
Members of my staff
have met and discussed
with member8 of your staff
“A Comparison
of Selected
recent
draft
of a proposed
GAO report
entitled:
of the Three Bank Regulatory
Agencies.v
Members of my
Policies
and Procedures
staff
discussed
our differences
with portions
of the initial
draft
of the
report
and agreed with your staff
representatives
informally
to certain
changes.
We trust
that
all of our suggested
changes will
be incorporated
in
the final
report.
We appreciate
the opportunity
to review
and discuss
the
draft
report
with members of your staff.
Sincerely,

John

Director

(23100)

Early

..
..*

Single copies of GAO reports are available
free of charge. Requests (except by Members
of Congress) for additional quantities should
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Full text of GAO Reports & Testimonies : Comparing Policies and Procedures of the Three Federal Bank Regulatory Agencies : Report to the Senate Committee on Banking, Housing and Urban Affairs

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