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STATEMENT ON
J
REGULATORY AND SUPERVISORY APPROACHES
RELATING TO FOREIGN LENDING BY U. S. BANKS
PRESENTED TO
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
BY
§
r
WILLIAM M. ISAAC
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION
9:50 a.m.
Monday, Apr il 11, 1983 /
Room 538, Dirksen Senate Office B u i l d i n g
Mr. Chairman, I am pleased to have an opportunity to present the
F D I C ' s views on S. 502, the In te r n a t i o n a l
Lending Reform Act of 1983
and on the r e g u l a ti o n of foreign lending a c t i v i t i e s of American banks.
On February 17, 1983, I appeared before the Subcommittee on
In te r na t io na l
Finance and Monetary P o l ic y to d i s c u s s the int er n a tio n a l
and domestic i m p l ic a t io n s of U.S. commercial
governments and c or p or a ti on s.
bank lending to foreign
The Subcommittee members made i t cl e a r
they believed we should make some changes in our p o l i c i e s and pr a c t ic e s
in order to impose some d i s c i p l i n e on the i nt ern ati on al
lending
a c t i v i t i e s of our banks to avoid a recurrence of the curr ent dilemma.
We concur in that view.
The only real que sti on s are how much r e s t r a i n t
i s required and how w i l l the d i s c i p l i n e be imposed.
We are of the
view - - fo r a v a r i e t y of reasons which we dis cu ss ed that day - - that
the greater marketplace d i s c i p l i n e must be brought to bear on bank
risk -ta k i ng.
As I t e s t i f i e d on February 17, we feel th at until
market
p a r t i c i p a n t s , such as large depos ito rs and other major funds s u p p l i e r s ,
come to understand th a t t h e i r p o s i t i o n i s not 100% protected by the
Federal
will
government in the case of a large bank, marketplace d i s c i p l i n e
be inadequate.
We w i l l soon submit a study to Congress which
o u t l i n e s our proposals for changing the manner in which we handle
bank f a i l u r e s .
po sa ls ,
integral
While I w i l l
not dwell on the s p e c i f i c s of those pro
I would report to you here that we cons ide r those plans an
part of any program to impose market d i s c i p l i n e .
2
-
With respect to in t e r n a t io n a l
banks, there are several
regulation.
lending a c t i v i t i e s of American
areas in which we are prepared to act by
With one exception, country lending l i m i t s , they track
c l o s e l y the t h r u s t of S. 502.
They inv olve d i s c l o s u r e of foreign
exposures, accounting for fees, and the establishment of prudential
reserves a g a in st c e r t a in foreign debts.
DISCLOSURE REQUIREMENTS
At present, c e r ta in banks are required to report semiannually on
t h e i r foreign lend ing a c t i v i t i e s .
This repo rt , the Country Exposure
Lending Survey, i s used by r e g u l a t o r s to track lending pa tterns of
American banks.
Two problems e x i s t in t h i s system.
are not reported in a timely enough manner.
F i r s t , the data
We are working on a
proposal to increase the r e p o rt in g of these data to q u a r t e r l y in an
e f f o r t to el iminate t h i s problem.
The second, and perhaps more important, drawback of the system
i s that none of the information we c o l l e c t i s a v a i l a b l e to the public
on an in d iv id ua l
bank b a s i s .
I f the market i s to a s s i s t us in imposing
d i s c i p l i n e , i t must have timely information.
on a proposal
We, th er ef o re , are working
to make ce r ta in of the information in the Country Lending
Survey p u b l i c l y a v a i l a b l e .
In general, we are t h i n k i n g along the l i n e s
of making a v a i l a b l e information on bank exposures to co u nt r ie s where
those exposures exceed a s p e c i f i e d percentage of a bank's total
a s s e ts .
This is not too d i s s i m i l a r from the SEC 's r epo rt ing req ui rements,
except that we would not l i m i t the d i s c l o s u r e to those c o u n tr ie s
3
experiencing " l i q u i d i t y problems."
By r e q u i r i n g banks to report
exposures in a l l co u nt ri e s where the exposures exceed one percent of
total
as s e ts , we would allow the marketplace to judge the extent and
nature of the r i s k in a ba nk 's int ern ati on al
loan p o r t f o l i o .
FEE INCOME
The level
of in t e rn a ti on a l
lending and increased incidence of
r e sc hed uli ng s over the past two years has provided many banks with
su b st an t ia l
income in the form of front-end fees.
Those fees are
often taken int o income in the period a loan i s made, p r o v id in g a
boost to current e ar nin gs .
A more r e a l i s t i c
approach, p a r t i c u l a r l y
for rescheduled debt, would have that portion of the fee used to
increase the y i e l d on the loan taken into income over the l i f e of
the loan.
We propose that a l l such fees not i d e n t i f i a b l e as reim
bursement for out-o f-p oc ke t a d m in is tr a ti v e co st s be amortized over
the l i f e of the loan.
Th is would discourage banks from o r i g i n a t i n g
or rescheduling loans merely to boost current earnings or s u s t a i n
past e ar nin gs l e v e l s .
PRUDENTIAL RESERVES
The t h i r d area of concern r e la te s to how problem foreign loans
are c ar ri ed on the ba nk 's books.
the r e g u l a t o r s '
There has been much c r i t i c i s m of
f a i l u r e to force banks to write down in t e rn a ti o n a l
loans which appear marginal to many ob servers.
A very v a l i d qu estion
4
a r i s e s as to whether t h e i r f a i l u r e to do so r e s u l t s in a m i s r e p r e
se nt at io n of the banks' true c o n di ti o n.
full
I t seems obvious that the
c o l l e c t i o n of c e r ta in foreign loans i s in s e r i o u s doubt, and we
believe prudential
Our proposal
reserves for those loans should be e s t a b l is h e d .
i s that such reserves be es ta b li s h e d out of the income
stream, and we intend to require them.
Moreover, these reserves w i l l
not be included in our d e f i n i t i o n of ca p ita l
for purposes of cap ital
adequacy c a l c u l a t i o n s , as is the t r a d i t i o n a l
reserve for bad debts.
LENDING LIMITS
We have given a great deal
of thought to the notion of country
lending l i m i t s and have concluded they would be h i g h l y i n a p p r o p r i a t e .
Lending l i m i t s based on objective c r i t e r i a are l i k e l y to be too r i g i d .
Such l i m i t s would f a i l to d i s t i n g u i s h between c o u n tr ie s capable of
c a r r y i n g s u b s t a n t ia l
debt without s i g n i f i c a n t r i s k and co u nt ri es where
smaller amounts of debt pose great’ r i s k .
Limit s based on sub je c tiv e
c r i t e r i a that change over time are l i k e l y to have abrupt e f f e c t s on
c r e d i t flows, imply a degree of f o r e s ig h t on the part of r e g u l a t o r s
that may be u n r e a l i s t i c , and be d i f f i c u l t to administer while avoiding
p o l i t i c a l c om p li c at io ns .
F i n a l l y , in view of the already s u b s ta n t i a l
exposures in many banks, a program of lending l i m i t s would need a very
long t r a n s i t i o n period that would tend to v i t i a t e i t s c r e d i b i l i t y .
DIVERSIFICATION RESERVES
An ad dit io nal area we at the FDIC are e x p l o r i n g i s that of
d i v e r s i f i c a t i o n reserves - - t h a t
i s , r e q u ir in g banks to in effect
5
maintain higher eq uity c a p it a l
p o s i t i o n s when those banks choose to
concentrate t h e i r foreign lending a c t i v i t i e s .
We understand a b i l l
has been drafted th at would require a minimum ca pi tal
banks.
Although we would have several
s ug ge sti o ns
base for all
for improvements
in the b i l l , we would s t r o n g l y object to banks being s i n g l e d out from
other very s i m i l a r , insured f i n a n c i a l
i n s t i t u t i o n s - - in p a r t i c u l a r ,
sav in g s and loan a s s o c i a t i o n s - - we are i n t e r e s t e d in the concept of
a minimum ca pi tal
standard.
Such a requirement would add s i g n i f i c a n c e
to mandated d i v e r s i f i c a t i o n re se r v e s , since amounts taken from cap ital
to e s t a b l i s h our reserve presumably would have to be replaced i f the
st a t u t o r y minimum were v io l a t e d .
Thank you Mr. Chairman and members of the Committee. I w i l l
pleased to respond to any qu e sti on s you may have.
be
April
7,
1 983
The Honorable Jake Garn
Chairman
C o m m i t t e e on Banking, Housing
and Urban Affairs
United States Senate
W a s h i n g t o n , D. C.
20510
D e a r C h a i r m a n G a rn:
As y o u know, the b a n k r e g u l a t o r s h a v e b e e n w o r k i n g
t o g e t h e r to r e v i e w t h e r e g u l a t o r y f r a m e w o r k and s u p e r v i s o r y
a p p r o a c h e s r e l a t i n g to f o r e i g n l e n d i n g b y U. S. b a n k s .
En
c l o s e d p l e a s e find a J o i n t M e m o r a n d u m o n i n t e r n a t i o n a l l e n d i n g
w h i c h s u m m a r i z e s o u r p r o p o s a l s on the sub j e c t .
A l o n g w i t h the
J o i n t M e m o r a n d u m are f o u r a p p e n d i c e s c o v e r i n g som e t o p i c s in
greater d e t a i l .
W e appre c i a t e the o p p o r t u n i t y for pub l i c d i s c u s s i o n
w h i c h C o n g r e s s i o n a l h e a r i n g s on this s u b j e c t p r o v i d e , and we
l o o k f o r w a r d to any f u r t h e r c o n s i d e r a t i o n t h a t the C o n g r e s s and
other interested parties put forward.
We ap p r e c i a t e the
u r g e n c y of a c t i o n in t his a r e a in c o n n e c t i o n w i t h t h e I M F l e g i s
lat i o n , a n d w e will, of c o u r s e , c o n t i n u e to w o r k w i t h y o u in
t h e e f f o r t to i m p r o v e p u b l i c p o l i c i e s o n f o r e i g n l e n d i n g b y
U . S . banks.
Sincerely
C.
T.
Conover
Enclosures
Paul
A.
Volcker
April 7, 1983
Joint Memorandum
Subject:
Program for Improved Supervision and Regulation
of Intemationnal Lending
In recent years, the banking systems in the United States and
abroad have extended large amounts of credit to foreign borrowers, including
foreign governments.
As a result of strained economic conditions worldwide,
a number of countries, particularly in Latin America, have simultaneously
experienced reduced foreign exchange earnings and external financing
problems, thus helping to precipitate problems in servicing debt burdens
built up over a number of years.
As part of the necessary readjustment,
many of the major borrowers have adopted economic stabilization programs
approved by the IMF and involving, in addition to important domestic
measures, both the restructuring of existing bank credits and the extension
of a limited amount of new credit.
This situation has raised concern that
there should be in place strengthened supervisory and regulatory practices
aimed at avoiding excessive concentrations of credit in foreign countries.
In response to these problems, the federal bank regulators have
reviewed a number of suggestions for strengthening supervision and
regulation of United States depository institutions engaged in foreign
lending.
Some foreign lending (e.g., that to private companies abroad)
includes elements of credit risk analogous to domestic lending
elements
relating to the capacity and willingness of borrowers to generate resources
from operations to repay debts.
Lending to foreign governments (i.e.,
"sovereign lending"), while not entirely free of credit risk, is not subject
to the same "market test" of potential insolvency.
However, all foreign
lending must take account of risks not present in domestic private or public
lending, that is "transfer risk."
Thus, overall "country exposure" is also
a relevant concept for assessing the risks involved in foreign lending.
"Transfer risk" means the possibility that a borrower may not be
able to maintain debt servicing in the currency in which the debt is to be
paid because of a lack of foreign exchange.
A bank's "country exposure" is
defined as all cross-border and cross-currency claims and contingent claims
on residents of the country, plus other credits guaranteed by residents of
the country, less credits guaranteed by residents of other countries and net
local currency assets of the bank's offices in the country.
As result of our review of the supervision and regulation of
foreign lending, a five^oint program has been developed.
The objective of
the program is to encourage prudent private decision-making in foreign
lending that appropriately recognizes the risks while permitting the
exercise of lender discretion in the funding of creditworthy borrowers both
here and abroad.
The proposed procedures reinforce two of the basic
principles of sound banking —
diversification of risk and maintenance of
adequate financial strength to deal with unexpected contingencies.
The
program will help assure earlier recognition of potential international
payments problems, encourage orderly responses to these problems, and
provide for stronger reserves to meet adverse conditions when they
infrequently, but inevitably, arise.
The five-point program consists of the following elements:
1.
Strengthening of the existing program of country risk
examination and evaluation;
2.
Increased disclosure of banks' country exposures;
3.
A system of special reserves;
4.
Supervisory rules for accounting for fees; and
5.
Strengthening international cooperation with foreign banking
regulators and through the International Monetary Fund.
-3-
The program constitutes an integrated package —
elements alone could accomplish the intended objectives.
summarizes the principal aspects of the five points.
none of the
This memorandum
Separate appendices
have been attached providing elaboration for seme of them.
This program has been designed to create incentives for prudent
lending but without establishing arbitrary obstacles to international
capital movements or preventing the continuation of credit flows to
credit-worthy borrowers.
Depending upon particular circumstances, continued
capital flows to basically credit-worthy countries in current strained
economic conditions remains appropriate —
especially in the context of
IMF-approved economic stabilization programs —
in order to encourage
appropriate adjustment by borrowers to their problems, to maintain their
capacity to service their outstanding debt, and therefore to preserve the
integrity of existing bank assets.
These considerations are, of course, not
unique to international lending, but the scale of the lending to particular
foreign borrowers means that broader considerations of the stability of the
international financial and economic system are at stake as well; this fact
is reflected in the role of the IMF and other official lending.
The
five-point program set forth in looking toward the future is designed to
recognize these circumstances.
1.
Strengthening of Country Risk Examination and Evaluation
As a first step, the federal banking regulators intend to
strengthen their present program of country risk examination and evaluation
basically established in its present form in 1979.
Our review of the
operation of this system indicates that increases in banks* country exposure
have not in all cases been brought to the attention of high level management
as explicitly and forcefully as they probably should have been.
This
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procedure can be made more effective by establishing clearer guidelines for
examiners in formulating exposure warnings and for assuring that these
warnings are considered at the policy-making level within bank management.
Its more effective use should help to avoid risk concentration and to
increase risk diversification.
As a separate part of country risk examination and evaluation, the
federal banking regulators will also analyze a bank's capital adequacy in
relationship to the level of diversification of the bank's international
portfolio.
Those institutions with relatively large concentrations of
credit in particular countries will be expected to maintain generally higher
overall capital ratios than those institutions that are well diversified.
As part of this process, the banking regulators will further develop, as a
reference point, standards for country exposure concentration as it relates
to capital adequacy.
Because banks vary in their current capital positions
and other elements of risk exposure, the implications for the capital
adequacy of any particular bank would have to be evaluated on a case-by-case
basis.
In general, the characteristics of a bank's country exposure will
be considered a factor to be weighed in the application of the capital
adequacy guidelines used by the federal banking agencies.
Thus,
recommendations on capital levels as a function of country exposure
concentrations will form an integral part of the overall supervision and
regulation process.
In accordance with their recommendations in this
regard, the banking regulators will expect appropriate corrective action as
necessary to conform to safe and sound banking practices, taking full
account of the need for flexibility in seme circumstances for responding to
needs for additional credit as part of well-considered adjustment programs.
-5-
Additional details on the federal bank regulators* development of
procedures to strengthen the supervision of country risk are contained in
Appendix A.
2.
Additional Disclosure
Experience suggests that the identification of increased country
exposure and transfer risk based on a subjective analysis of economic
factors, particularly in cases of larger countries, may not always take
place at a sufficiently early stage so as to make adjustment in banks*
lending feasible without jeopardizing service of existing debts or, indeed,
disruptions of the financial system more generally.
subjective risk evaluation may aggravate the problem.
Disclosure triggered by
However, more routine
disclosure, centered around the concept of concentration, may strengthen
other approaches, helping to bring appropriate marketplace discipline to
bear on lending decisions.
Depositors and investors, through their individual decisions, will
have the information to assess better the prudence of foreign lending and
require greater risk diversification and adequate reserves as the condition
for their increased deposits and investments in banks' equity and other
securities.
Banks will need to be prepared to defend policies leading to
large and concentrated country exposure as a consequence of their continuing
reporting requirements, and indeed considerable movement has been made in
that direction by some institutions.
made more uniform.
The best current practice should be
To that end, individual banks should make public
disclosure of all concentrations of country exposure that are material.
Another step toward better analysis of developing trends in
international lending is more frequent and earlier availability of aggregate
data.
To this end, reports on material country exposure should be submitted
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to the banking supervisors quarterly, instead of semiannually as at present.
In this connection, the banking supervisors will require that the reports be
submitted more promptly than in the past so that the aggregate information
on lending by U.S. banks can be made available to the public on a more
current basis.
Additional details on the proposed reporting and disclosure
requirements are contained in Appendix B.
3.
Special Reserves
Another incentive for risk diversification and increased financial
strength can be created through establishment of a system of provisioning
against certain country exposures.
When a borrower has been unable to
service its debts over a protracted period of time, whether or not that
borrower is a sovereign, it is appropriate to recognize the risks and the
diminshed quality of the assets represented by these loans.
Indeed, to the
extent interest has not been paid, that by itself diminishes the value of
the underlying asset.
It is prudent that the lending institutions establish specific
provisions against such assets in order to reflect more accurately the cur
rent condition of the asset.
Although seme banks now make reserve provi
sions for such purposes, this approach should be more systematic.
Such
provisions would be deducted from current earnings and, to the extent re
quired by regulation, would not be included in capital for regulatory and
accounting purposes.
The prospective requirement for reserving, with its
attendant bottom-line earnings impact, should act as a cautionary element
when the initial decision to lend is being made.
Such reserve provisions
would not apply to lending to a country where the terms of any restructuring
of debt were being met, where interest payments were being made and where
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the borrowing country is complying with the terms of an IMF-approved stabi
lization program.
Appendix C contains additional details on the proposed reserve
provisioning for credits to countries with severe and protracted debt
servicing problems.
4.
Accounting For Fees
Ihis program element would establish rules for accounting for fees
charged in connection with international lending.
Some concern has been
expressed that so-called front-end fees, when taken into income in the
quarter or year in which they are charged, provide an added incentive to
seek out international loans in order to boost earnings immediately and,
once this has occurred, to sustain past earnings levels.
The general
practice in the industry is, apparently, to treat a portion of these loan
fees —
that part which is paid to all participating lenders —
as interest
to be taken into earnings over the maturity of the credit and the remainder
—
syndication fees —
as current income.
However, specific practice
apparently varies, and the more conservative practices may not prevail
generally.
Therefore, it would be desirable to assure uniform rules so that
artifical incentives are not created for foreign lending.
To this end, the
regulators are prepared to establish rules to require that front-end fees be
treated as interest except when they are identifiable as reimbursement of
direct costs.
Appendix D contains an analysis of accounting for fees on syndi
cated international credits and an explanation of the proposed guidelines
for such fees.
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5.
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International Cooperation
Present problems in foreign lending are international in scope,
and an effective program for limiting the potential scope for such problems
in the future must be coordinated with bank supervisors abroad and with the
activities and operations of the International Monetary Fund.
Coordination with overseas bank supervisors can help to avoid
competitive inequalities, to assure equal treatment of lenders and
borrowers, and to reinforce the effectiveness of U.S. programs.
The bank
regulatory agencies will seek understandings with foreign bank authorities
to help achieve the objectives of risk diversification and strengthened
financial condition that we have set for ourselves.
Similarly, the IMF can play a major role, particularly with
borrowers, in avoiding situations involving excessive build-ups of credit,
especially short-term credit.
We intend to work in the following areas to
improve information flows and to ensure a more effective IMF surveillance
process:
1.
In its consultations with member governments on their economic
policies, the Fund should intensify its examination of the trend and volume
of external indebtedness of private and public borrowers in the member
country and comment to the country and in its reports to the Executive Board
on such borrowing from the viewpoint of its contribution to the economic
stability of the borrower.
The IMF might also consider the extent or form
that these comments might be made available to the international banking
community and the public.
2.
As part of any member's stabilization program approved by the
IMF, the Fund should place limits on public sector external short- and
long-term borrowing? and
-9-
3.
As a part of its Annual Report, and at such times as it may
consider desirable, the Fund should publish information on the trend and
volume of international lending in the aggregate as it affects the economic
situation of lenders, borrowers and the smooth functioning of the
international financial system.
Consideration of Lending Limits
The foregoing program does not include the establishment of
country lending limits.
It was concluded that lending limits based upon
objective criteria are likely to be too rigid.
Such limits would fail to
distinguish between countries capable of carrying substantial debt without
significant transfer risk and countries where smaller amounts of debt still
raise large transfer risk problems.
On the other hand, lending limits based
on subjective judgments that change over time are likely to have capricious
and abrupt effects on flows of credit, imply a degree of foresight on the
part of the regulators that may not be realistic, and be difficult to
administer fairly while avoiding political complications.
Finally, in view
of the substantial exposures already incurred, a program of lending limits
would not be workable except with a very long transition period that would
tend to vitiate its credibility.
The problem that is before the international financial community
today is one of maintaining a reasonable flow of international credit to
allow time for orderly adjustment.
As for the future, as levels of exposure
decrease over time, the program of intensified regulatory surveillance and
evalution of country exposures, additional disclosure, special reserves,
rules for fee accounting, and improved international cooperation should
prove sufficient to deal with build-ups of concentrations of international
credit that might threaten a sound banking system.
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Implementation Authority
The bank regulatory agencies' authority to define and prevent
unsafe and unsound banking practices under their enabling statutes and the
Financial Institutions Supervisory Act of 1966 could be used to implement
the program outlined above insofar as they, require regulatory action.
A
number of similar measures have been taken in the past utilizing this
authority and the courts have generally sustained the banking agency
actions.
To be effective, the banking agencies must demonstrate a clear
link between the established prudential practice and the safety and
soundness of depository institutions —
a relationship that past experience
indicates can be established in the area of international lending.
In view
of the existence of this authority it would not be desirable to establish
rigid or inconsistent legislative rules that could limit the ability of the
banking regulators to adapt the program as they gain experience with its
implementation and could have the unwarranted and unintended effect of
discouraging the international lending necessary to support world trade and
economic recovery.
A PPEN D IX A
PRO PO SED REVISIONS TO EXA M IN A TIO N P R O CE D U R E S TO STRENGTHEN
SUPERVISION O F C O U N T R Y RISK
In 1979, the bank regulatory agencies put in place new examination
procedures for supervising country risk in U . S. bank portfolios. In retrospect, it is
clear that these procedures did not have sufficient impact to temper adequately
the buildup of concentrations of credit to foreign countries that were potentially
vulnerable to external debt service problems. The proposed changes are designed
to integrate more fully country risk considerations into the examiners' overall
rating of the condition of a bank, to identify problem credits at an earlier stage, to
include more specifically transfer risk in the analysis of the adequacy of a bank's
capital, and to improve the presentation to a bank's management and directors of
concerns of the banking agencies about large concentrations of country exposure.
Changes would be made along the following lines:
(1)
New categories will be employed for identifying credits
that are not
performing because of a country's debt service problems.
categories
will
replace
the
traditional
classification
These
categories
originally designed for evaluating commercial risk, but also currently
used for transfer risk, and would more clearly reflect the types of
problems that arise due to transfer risk.
(2)
Credits in these new categories will be factored into the agencies'
evaluation of a bank's asset quality and other measures of financial
soundness.
(3)
Examiners will be required, under guidelines to be developed, to
highlight certain large concentrations of credit in the examination
report and in. communications with the bank's directors.
(4)
Concentrations of country exposure subject to comment will be
factored into the evaluation of a bank's capital adequacy.
Banks with
large concentrations of country exposure will be expected to have extra
capital to support those exposures.
(5)
Bank managements will be expected to make systematic reports to
their boards of directors on country exposures and country conditions.
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New Categories for Reflecting Credits Adversely Affected by Transfer Risk
The traditional categories that were originally designed for evaluating
commercial risk, i.e ., substandard and doubtful,
evaluating transfer risk.
have not proved suitable for
The following categories are designed to reflect more
closely the types of problems that arise due to transfer risk.
The new categories and the definitions for each are:
Loss — Indebtedness considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted—for example,
repudiated
debt. Such indebtedness shall be charged off and no longer be carried on the
books of the bank.
Reservable
—
This
classification
would
apply
demonstrated protracted debt service problems.
when
a
country
had
Evidence to that effe ct
would include such factors as (a) full interest payments on indebtedness to
banks had not been made for more than six months, (b) the terms of
restructured indebtedness had not been met for over one year, (c) IMF or
other suitable adjustment programs had not been complied with and there is
no immediate prospect for such compliance, or (d) no definite prospects exist
for the orderly restoration of debt service in the near future.
Debt Service Impaired — This classification would apply when (a) a country
has been unable to meet its external debt service obligations and it has not
yet adopted viable policies for restoring its debt service capabilities (or is not
in the process of doing so), but is generally making required interest
payments, (b) there is no evidence that the country will be able to negotiate a
successful rescheduling with its creditors in the near future, and (c) the
country has not adopted an IMF or other suitable economic adjustment
program or is not adhering adequately to such a program.
-3Other Changes in Supervisory Procedures
The other changes under active consideration to strengthen supervisory
procedures on international lending are: (1) the incorporation into a bank’s asset
quality rating of credits that fall within the categories just described; (2) the more
forceful conveyance in examination reports of concentrations of exposure; and of
credits
to
countries
currently
experiencing
liquidity
difficulties
that
have
adjustment programs in place; and (3) the inclusion of concentrations of country
exposure in the assessment of capital adequacy.
Implementation of these changes is complex and requires consideration
of many technical factors.
Details of these changes, including the criteria to be
employed and the guidelines to be followed, are as a result still being developed
and refined by the banking agencies.
In addition, supervisory policies are being
developed to insure that boards of directors are adequately reviewing and more
fully supervising the international lending policies and decisions of their banks.
APPENDIX B
REPORTING AND PROPOSED DISCLOSURE OF COUNTRY EXPOSURE
Reporting
The federal banking agencies have required U.S. banks since 1977 to file a
Country Exposure Report semi-annually for federal supervisory purposes.
This report,
which is published in aggregate, has proved to be very useful both for the bank super
visors and the banks themselves.
Other countries have used it as a model for their own
consolidated reporting systems for the country exposure of their banks.
The growth of
international lending and the increased number of short-term international liquidity
problems suggests the desirability of more frequent reporting for supervisory purposes.
Therefore, the federal banking agencies propose to require U.S. banks to file the
Country Exposure Report quarterly rather than semi-annually, and on a tighter time
J h e d u l e than is now required.
The aggregate data would continue to be published by the
supervisors.
Disclosure
Disclosures of concentration of country exposure in U.S. banks need to be
more uniform, complete and timely.
To this end, the Country Exposure Report (FFIEC
Form 009) would be amended to include a disclosure section which the agencies would
make available on request.
country risk.
The disclosure section would indicate concentrations of
A sample form is attached.
Country exposures exceeding one percent
of bank’s total assets would be profiled to detail risk.
The profile would show
exposure on a gross basis and adjusted for third-country guarantees and would show
the exposure by sector and maturities.
Country exposures between three quarters
and one percent of a bank’s total assets would also be indicated, but not profiled.
'tachment
REPORT OP CONCENTRATIONS OF TRANSFER RISK
(Tiiis report Is being collected for public disclosure purposes and will be made available to the public upon request)
A.
Exposures Exceeding One Percent of Total Assets
Country
Credit outstanding
after mandated adjustments
for transfers of exposure
(D
Credit outstanding
before adjustments
(2)
Distribution of outstandings reported in col. 2
Maturing in
less more
than
than
To
one
one
To
public
TO
year year
sector others
banks
(7)
(6)
(5)
(4)
(3)
Exposure Between Three-»quarters of One Percent and One Percent of Total Assets
Total number
of
countries
Credit outstanding
after mandated adjustments
for transfers of exposure
Li3t Individual Countries
Total commitments
to provide#
credit« after
adjustments for
guarantees
(0)
general instructions f o r report o f concentrations of transfer risk
A.
Exposures Exceeding One Percent of Total Assets
The data required for this section must be submitted for each
country where "credit outstanding after mandated adjustments
for transfers of exposure/' exceed 1 percent of a bank's total
assets as of the reporting date.
B.
Col 1 -
Credit outstanding after mandated adjustments for
transfer of exposure. Report: the sum of the
following columns frcm the Country Exposure Report
("CER")--Cols • 4-8 + 10-11 + 12 + (18-19 provided
greater than 0 ).
Col
Col
Col
Col
Col
Col
Col
Col 4 of CER
Col 1 of CER
Col 2 of CER
Col 3 of CER
Col 5 of CER
Sum of Cols. 6, 7, & 8 of CER
Cols. 14 + 15-16 + 17 of CER
2
3
4
5
6
7
8
-
Exposures Between Three-Quarters of One Percent and One Percent
of Total Assets
Show in this section the total number of countries in which the
bank's "credit outstanding in each country after mandated
adjustments for transfers of exposure", as computed above,
range between three-quarters of one percent and one percent of
total assets as of the reporting date. Also show the aggregate
airount of all credit to those countries. Finally, list the
names of each country.
A PPEN D IX C
PROPO SED R ESER V E PROVISIONING F O R CR ED ITS TO CO U N TR IES
WITH SEV E R E A N D P R O T R A CT ED DEBT SER VICIN G PROBLEM S
BACKGROUND
As part of the review of their procedures for supervising transfer risk in
U . S. banks, the bank regulatory agencies have examined the methods used by banks
to account for loans to countries with severe and protracted external payments
problems. In the opinion of the agencies, present procedures do not always reflect
the reduced quality of the credits to such countries and there is no uniformity
among banks in their accounting for these credits.
Under current procedures, banks are required to review their credits to
determine whether all or parts of particular loans should be declared "loss" and
charged o ff or whether additional provisions should be made to the allowance for
possible loan losses in light of such credits.
This process has not worked well for
credits that have been adversely affected due to country risk.
In part, this has
been because countries, unlike companies, do not declare bankruptcy and there are
no established liquidation procedures to provide a valuation basis for such credits.
Although some banks have made special provisions to the allowance for possible
loan losses because of such credits, the treatment among banks has been uneven,
indicating the need for a more systematic approach.
Even though credits to a country, absent repudiation, are not "loss" in
the traditional sense, transfer risk problems can seriously impair the liquidity and
earning power of an asset. Indeed, to the extent interest has not been paid that, by
itself, diminishes the value of the underlying asset. The bank regulatory agencies
believe that when the servicing of bank credits has been adversely affected over a
protracted period of time due to a country's inability or unwillingness to service its
international debts, the net carrying value of the affected assets should be adjusted
in a bank's financial statements through charges to earnings and balance sheet
provisions.
-
2-
Since present procedures seem inadequate in this regard, the agencies
propose to require banks to make special allocated provisions against certain assets
that are found to be severely affected by transfer risk problems.
The ’’allocated
transfer risk provisions” (ATRP) would be separate from the general allowance for
loan losses and would not be regarded as capital by the agencies.
would be established by a provision against income.
The reserves
In the alternative, a bank
would have the option to write o ff all or part of the loans that are subject to the
special reserves and, consequently, reduce the amount of special provisions and
reserve balances that would otherwise be required.
In connection with consideration of the special allocated provision
proposal, the bank regulatory agencies also reviewed the agreement in 1978 for the
examination of transfer risk in U . S. banks. This agreement created an interagency
committee, the Interagency Country Exposure Review Committee ("IC E R C ”), to
determine when assets should be classified due to transfer risk, and it provided
guidelines to be followed in making those determinations. Experience in applying
the procedures indicates a need to clarify and revise the categories and definitions
used to identify credits adversely affected by transfer risk. The designation of
assets experiencing debt service problems as "substandard” and "doubtful" will^no
longer be used in characterizing credit problems due to transfer risk.
designations to be used include a category termed "reservable."
New
A "reservable"
categorization would trigger the requirement for the ATRP.
An example of the proposed changes in the call report to implement
these procedures is attached (Attachment A).
added to the balance sheet.
A new "provision" item would be
The amount of the reserve item would be deducted
from "gross loans" to arrive at "net loans."
The reserve would be created by a
charge ("provision") against income.
PROPOSED P R O C E D U R E S F O R PROVISIONS O N CR ED ITS TO CO U N T R IES
C A T E G O R IZ E D A S "R ESER VA B LE"
(1)
The new category "reservable" adopted by the banking agencies is
defined as follows:
A "reservable" categorization is warranted when a
country has demonstrated protracted debt service problems.
Evidence
to that e ffe ct would include such factors as (a) full interest payments
on indebtedness to banks had not been made for more than six months,
(b) the terms of restructured indebtedness had not been met for over
one year, (c) IMF or other suitable adjustment programs had not been
complied with and there is no immediate prospect for such compliance,
or (d) no definite prospects exist for the orderly restoration of debt
service in the near future.
An Allocated Transfer Risk Provision ("ATRP") is required for assets
categorized as "reservable." The provisions are to be established by a
charge to earnings.
The ATRP is to be separate from the general
Allowance for Possible Loan Losses and will not be included as part of
the bank's capital funds.
No A TR P provisions are required if the bank has already written down
the credit by the requisite amount.
Senior executives of the O C C , FR B and F D IC will jointly determine the
amount and timing of the provisions after reviewing the report of the
IC E R C on the "reservable” categorization.
normally be 10 percent.
The initial provision will
The transfer risk will be reviewed annually.
Depending on the circumstances, additional reserves may be required.
Additional provisions, if warranted, will normally be in 15 percent
increments.
The ATR P may be reversed when a credit is no longer categorized as
being adversely affected by transfer risk.
Any payment of interest on credits categorized "reservable" should be
applied to reduce principal (or credited to ATRP) and not credited to
income.
The amount of the mandated ATRP may be reduced by the
amount of any interest previously applied to principal.
pcmestic and Foreign Consolidated Report of Condition of
ATIAOÎCNT A
I • •» *!
at ciri'.e of Imniness on .. ..
.
•
..
...
. I
, __ __
| Ca'.h i«vi *lui* fmm «l-poMtmy im Mtlilt km i *. (I nun r.i.lii’iliil** C. iin«n R, Column A)
2 U.S. Treasury sedulities............................................................
I « II»
co»
j
lU n l
jr)
f}«llAr Amount tn Tlmnuixlt
Uit
Mil
Thou
3. Obligations of other U.S. Government agencies and corporations................
4. Obligations of Staten arvf political subdivisions in the UniterTStates . . .*................
5. Other bonds, notes, and debentures....................................................
6. Federal Reserve stock and corporate stock................................................
7. Trading account securities.............. '............................. % ........... .....................
8. Federal funds sold and securities purchased under agreements to resell in domestic offices of bank and
of its Edge and Agreement subsidiaries .
..................................
9. a. Loans, Total (excluding unearned income) (From Schedule A, item 10, Column A)
h. Less: allowance lot possible loan losses . ........................................
L e ss:
A llo c a t e d T r a n s fe r R is k P r o v is io n
c. Loans, N e t............... .................................................
10. Lease financing receivables............................ •.........................
11. Bank premises, furniture and fixtures, and other assets representing bank prem ises........
12. Real estate owned other than bank premises.............. ....................
13.
14.
15.
16.
Investments in unconsolidated subsidiaries and associated com panies....................
Customers' liability to this bank on acceptanccs.outstanding..............................
Other assets' (From Schedule G, item 3 )....................................................
TO TAL A S S E T S (sum of items 1 thru 1 5 1 .................. .............................................
'ITEMS 17 T H R O U G H 24.a(2). R E F E R O N L Y TO D E P O S IT S IN D O M E S T IC O F F IC E S OF T H E B A N K
17. Demand deposits of individuals, partnerships, and corporations (From Schedule F, item 1e. Column A)
18. Time and savings deposits of individuals, partnerships, and corporations
(From Schedule F. item 1e, Columns B and C ).......................................... .........................
19- Deposits of United States Government (From Schedule F, item 2, Column*4f^B & £)
.....
20. Deposits of States and political subdivisions in the United States (From Schedule F, item 3. Columns A & B & C)
j£- Deposits of foreign governments and official institutions (From Schedule F. item 4. Columns A & B & C ) ........
0 Deposits of commercial banks (From Schedule F, items 5 & 6, Columns A & B & C)
23. Certified and officers' checks (From Schedule F.item 7, Column A ) ..................................................
24. a. T O T A L D E P O S IT S IN D O M E S T IC O F F IC E S (sum of items.17 thru 23)............
(1) . Total demand deposits (From Schedule F, item 8, Column A ) ...................
(2) . Total time and savings deposits (From Schedule F, item 8, Columns B & C) . . .
b. T O T A L D E P O S IT S IN F O R E IG N O F F IC E S A N D E D G E A N D A G R E E M E N T
S U B S ID IA R IE S (Schedule F/F, item 8) ....................................................
c. T O T A L D E P O S IT S (sum of items 24a and 2 4 b )........ ................ ’.................
25. Federal funds purchased and securities sold under agreements to repurchase in domestic offices of bank
and of its Edge and Agreement subsidiaries.............. .............................................
26. a. Interest-hearing demand notes (note balances) issued to the U.S. Treasury..................................
b. Other liabilities for borrowed money................................................................
27. Mortgage indebtedness auditability for capitalized le a se s............................................................
28. Bank's liability on acceptances executed and outstanding............................................................
29. Other liabilities (From Schedule H, item 4 ) - ..................................................................................
pO. TOTAL L IA B IL IT IE S (excluding subordinated notes and debentures) (sum of items 24c thru 2 9 ) ..........
31._ Subordinated notes and debentures................ ...............................................................
[32. I’mfrr rr»*| »(ork
a. No. shams outstanding
(par value)
33. Common stock
a. No. shares authorized
b. No. shares outstanding
34. Sui p lu s................................................
P5. UiulivitliMl p r o f it s .......................................................... .... .
pfi. IV vuvr h*r contingencies and nthci capital reserves. . ; ........................
(par value)
P7- TOTAL E Q U IT Y C A P IT A L (sum of items 32 thru 36) ............................
y t e p T A i L IA B IL IT IE S A N D E Q U IT Y C A P IT A L (sum of items 30.31 and 37)
f ’^^m ounts outstanding as of report date:
all). Standby letters of credit, total.............. .. . . ; .................... •. . ,
(a)
(b)
. To U.S. addressees (domicile). . .......... ........... ........... ........... ...........
. To non-U.S. addressees (domicile).. ...........................
a(2). Amount of standby letters of credit in Memo item 1a(1) conveyed to others through participations
b. FRASER
Time certificates of deposit in denominations of $100,000 or more in domestic offir»* (inrli.rtnrf
Digitized for
17.
•
,|i| m v l o M ) H U . .
• m o n i li*iH>
__________ _ 10.
ATTACHMEOT A
¡ection A - Sources and Disposilion of Income
Oollar A m ou n t in Thousands
1. O PER A TIN G IN C O M E :
a. Interest nnd fees on lo a n s................................................ • .................................................
b. Interest on balances with depository institutions ....................................... ............ ..
c. Income on Federal funds sold and securities purchased under agreements to resell in domestic offices of
the hank and of its Edge and Agreement subsidiaries.......... .....................................................
d. Interest on U.S. Treasury securities................................................... .....................................
e. Interest on obligations of other U.S. Government agencies and corporations...................................
f. interest on obligations of States and political subdivisions in the U.S............................. .
Interest on other bonds, notes, and debentures.........................................................................
h. Dividends on s t o c k ............................................................................. .............................
i. Income from lease financing........ .......................................................................................
j. Income from fiduciary activities...........................................................................................
k. Service charges on deposit accounts in domestic o ffic e s ............ ................................................
l. Other service charges, commissions, and fees................ ........................ ..................................
m. Other operating income (from Section D, item 4 ) ................................... j....................................
n. T O T A L O P E R A T IN G IN C O M E (sum of items la thru ..................................................................
g.
2. O PER A TIN G E X P E N S E S .
a. Salaries and employee benefits..................... ......................................................................
b Interest on time certificates of deposit of $100.000 or more issued.by domestic o ffice s....................
c. Intercut on deposits in foreign o ffic e s............................................ * ....................................
d. Interest on other deposits............................................................. ................. .
e. Expense of Fedetai funds purchased and securities sold under a g r e e t o repurchase in domestic
offices of the bank and of its Edge and Agreement subsidiaries...................................................
^
1 (i) interest on demand notes (note balances) issued to the U.S. Treasury.........................
PP
(2) Interest on other borrowed money
c|. Interest on subordinated notes and debentures . .
h. (1) Occupancy expense of bank premises. Gross.
(2) Less: Rental income.
(3) Occupancy expense of bank premises, Net
i. Furniture and equipment expense.
j. Provision for possible loan losses (from Section C. item 4).
P r o v is io n f o r A llo c a t e d T r a n s f e r R ic h
k. Other operating expenses (from Section E, item 3)
I T O T A L O P E R A T IN G E X P E N S E S (sum of items 2a thru 2k).
3. INCOME B E F O R E IN CO M E T A X E S A N D S E C U R IT IE S G A IN S O R L O SSE S (item Inminus2l)
4. A PPLIC A BLE IN CO M E T A X E S
5. INCOME B E F O R E S E C U R IT IE S G A IN S O R L O S S E S (item 3 minus 4)
6. a. S E C U R IT IE S G A IN S (losses). G R O SS
b. A P P L IC A B L E IN C O M E T A X E S
c. S E C U R IT IE S G A IN S (losses), NET
7. NLT IN C O M E (item 5 plus or minus 6c)
.. o n _____________ j____________________
/7. INCOME HI-FO RE CX T H A O H U IN A R Y 11 CMS.
8. E X T R A O R D IN A R Y ITEM S. N E T OF T A X E F F E C T (From Section F. Item 2c)
9. NET IN CO M E (item 7 plus or minus 8)
http://fraser.stlouisfed.org/
Federal
i Reserve Bank of St. Louis
APPENDIX D
PROPOSED SUPERVISORY GUIDELINES FOR ACCOUNTING FOR FEES ON
SYNDICATED INTERNATIONAL CREDITS
A.
Description of types of fees and recent practices
In addition to the stated interest on international syndicated—^
loans (including stated interest adjustments for late payments), banks often
require payment of certain fees in connection with these credits.
These
fees are identified by a variety of terms, and are intended for a variety of
purposes:
for example, a flat fee added specifically to increase the yield
of the loan; a fee designed to cover costs associated with syndicating a
loan (e.g., for structuring and negotiating a loan package, underwriting a
syndicated loan,
advising the borrower); a fee to cover
the costs of
committing funds on the prescribed terms for a fixed period of time; or a
fee for serving as agent in administering a syndicated credit.
In addition,
banks frequently provide in the loan agreement that the managing bank(s) is
to
be
reimbursed
for
all
out-of-pocket
expenses
incidental
to
the
arrangement of a credit facility, as well as collection or enforcement
costs.
(A glossary of terminology and description of the principal fees
associated with the extension of international credits by commercial banks
is attached.)
A survey of a sample of international syndicated loan agreements,
concluded between 1978 and 1983, for borrowers in those countries recently
experiencing balance of payments difficulties indicates the following:
1/ "Syndication" is the process of arranging a Multi-bank Credit Facility
and is characterized by the formation of a Management Group, assumption of
"Underwriting Commitments" and participation of various Lending Banks.
-
—
1/4
2-
Over this period, commitment fees have ranged generally between
to 1/2 percent on
availability period.
the
undrawn
amounts of
the
loan
during
the
Agency fees have varied for example from $7,500 per
year to $300,000, with the variations perhaps
complexity of the loans.
Practically all
the
related to the size and
agreements
surveyed
had
detailed provisions relating to reimbursement of expenses.
—
The stated interest rates on the loans surveyed by-and-large
ranged around 1% to 1-5/8% above LIBOR, with only a few notable exceptions.
—
Management and other front-end fees were unstated in the loan
documents in the majority of cases, with the fees established by a side
agreement.
It is not clear the extent to which these fees are disclosed to
other participants in the syndicate.
Where the front-end fees were stated,
they ranged from 3/4% to 1-1/2%.
B.
Current accounting rules and practices applicable to nonrefundable
fees
We understand that there are differences in the manner
banks
loans.
account for the nonrefundable
fees associated with
in which
international
The major difference is the extent to which the fees are amortized
over the life of the loan, as an adjustment to the interest yield on the
loan, or instead are taken into income at the time the fees are received.
Currently, neither generally accepted accounting principles nor regulatory
policy definitively specify the manner
should be recognized.
in which fee income to the bank
-3Existing guidance on the timing of recognition of revenues
provided
in ’Accounting
Concepts
and
Principles
Accounting
Principles
Board
(APB)
Underlying
Statement No.
Financial
is
4, Basic
Statements
of
Business Enterprises that states the following realization principles
Revenue from services rendered is recognized under this
principle when services have been performed and are
billable.
Revenue from permitting others to use
enterprise resources, such as interest# rent# and
royalties is also governed by the realization principle.
Revenue of this type is recognized as time passes or as
the resources are used.
Thus,
under
these
accounting
principles,
each
activity
for
which
nonrefundable fees are received must be analyzed to consider whether the
activity provides services and constitutes a separate earning process or is
an integral part of the entity's central operations.
The American
Institute of Certified Public Accountants
Industry Audit Guide, Audits of Banks ("Bank Audit Guide")
(AICPA)
(1983) at pages
52-55, provides very general guidance as to accounting recognition of fees.
As to commitment fees, the Bank Audit Guide in part states:
"Banks have recorded income from commitment fees in a variety of
ways including recognition:
(a) in full when received.
(b) when the commitment period has expired or the loan has
been drawn down.
(c) ratably over the commitment period.
(d) ratably over the combined commitment and loan period.
"The accounting for recognition of income from commitment fees
should be based on the nature and substance of the transactions.
However, a bank's method of accounting should ensure that any
income that represents an adjustment to the interest yield is
deferred until the loan is drawn down and then amortized over the
expected life of the loan in relation to the outstanding balance.
"Fees representing compensation for a binding commitment or for
rendering a service in issuing the commitment should be deferred
and amortized over the commitment period using the straight-line
method."
-4The Guide does not directly address questions of front-end fees in
syndicated
international
credits,
but discusses
"origination
fees” as
follows:
"Banks also receive fees for originating loans in-house.
The
normal origination fee (generally referred to as points) is
essentially a reimbursement for the expenses of the underwriting
process, that is, processing the loan application, reviewing legal
title to the collateral, obtaining appraisals, and other
procedures.
Origination fees, to the extent they are a
reimbursement for such costs, should be recognized as income at the
time of loan closing.
Loan origination fees that are not
reimbursements of such costs should be amortized to income over the
expected loan period by application of the interest method."
Thus,
existing
accounting
principles
allow
exercise of discretion and so disparity in practice
for
a
substantial
for accounting
for
front-end and other fees associated with syndicated international credits.
Indeed, the accounting profession has recognized that clearer guidance is
needed with respect to accounting for
nonrefundable
fees
institutions on all forms of credits.
The AICPA has,
by financial
for this reason,«
formed a task force to prepare an issues paper addressing the diversity in
accounting practice.
The study has been underway for several months and no
recommendations have as yet been made.
C.
Proposed
supervisory
guidelines
for
accounting
for
fees
on
syndicated international credits
There has developed an increased use of fees to cover a number of
different purposes
syndicated credits.
including
additions
to
the
yield
of
international
In view of the present diversity in accounting practice
as to those fees among banks, and paucity of definitive guidance as to the
appropriate accounting for the wide range of fees that has developed, the
federal bank regulatory agencies consider that to achieve conformity and
uniformity in accounting
established
for
fees
the
following
guidelines
should
be
-5PROPOSED GUIDELINES
1.
Front-end fees in most instances represent an adjustment to the
interest yield and shall be deferred until the loan is issued, and then
amortized over the expected life of the loan in relation to the outstanding
loan balance using the interest method.
Front-end fees, or the portion
thereof, that are identifiable as reimbursement of direct costs shall be
recognized as income at the time of the loan closing or restructuring.
2.
Fees for guaranteeing the funding of a loan (i.e., commitment
fees) shall be recognized as revenue over the combined commitment and loan
period.
Reimbursement
of
any
direct
recognized as income at closing.
loan
processing
costs
will
be
Then the straight line method, based on
the combined life of the commitment and loan period, shall be applied to the
remaining fee to recognize income during the commitment period.
When the
loan is disbursed, the interest method shall be applied to the balance of
the fee to recognize income over the life of the loan.
.If the loan in fact
is not funded, unamortized commitment fees will be recognized as income at
the end of the commitment period.
3.
Agency fees and advisory fees should be recorded as income when
received to the extent they represent reimbursements
for
identifiable,
direct costs, otherwise they should be amortized over the expected period of
the loan.
COMMENTARY
A.
In a syndicated credit, it is often difficult to determine what
share of the front-end fees represent a reimbursement of direct costs of the
Managing Bank(s) and what share represents an adjustment to tKe interest
-
yield.
6-
A reasonable presumption is that a Managing Bank should recognize a
portion of the fee as an adjustment to interest yield based upon the other
Participating Banks’ share of the fee.
consider
Hence,
it may be appropriate to
*/
the portion equal to the largest of any Participating Bank's—
share of the front-end fee as an interest yield adjustment.
The balance of
a Managing Bank's share of a front-end fee, or some portion thereof, may be
considered as reimbursement of direct costs if such costs are identifiable.
B.
Proposed Guideline #2 reflects a presumption that commitment
fees often embody three elements —
reimbursement of direct processing
costs, remuneration from services in making commitments
of risk of adverse changes
(such as assumption
in market interest rates over the commitment
period), and a component that represents a yield adjustment.
Determining
the amount of each component may be difficult.
When the separate components
of the
the
fees
cannot
reasonably be
identified,
foregoing
guideline
provides a reasonable solution for recognizing the total fees over
the
combined commitment and expected loan period, and is the approach currently
recommended in the Bank Audit Guide.
The guideline also presumes that it is
difficult to determine at the outset of a loan whether the loan in fact will
need to be funded.
Accordingly, a commitment fee should be accounted for
over the combined life unless the loan is not actually funded.
*/ a "Participating Bank" is not included in the Management Group for the
credit nor does it assume any underwriting risk, i.e., the bank does not
commit to lending obligations in excess of the amount it intends to lend in
the transaction.
Glossary of Fees
1.
Bank(s).
*Front End Fee:
A flat fee paid by the Borrower to the Lending
The fee is generally expressed as a percentage of the amount of
the Credit Facility and is paid on the signing or disbursement dates of the
Credit Facility.
This fee is also sometimes referred to as a commission,
financing fee, or flat fee.
a.
Management Fee:
The portion of the Front End Fee which is
distributed to Lending Banks
(in a Multi-bank Credit Facility)
in
differing amounts depending on their roles in the transaction (i.e.
Managing
Bank,
"Underwriting
participation amount.
Bank,"
Participant,
alternatives
accomplish
different
and
Managing Banks normally receive a larger
share of the Front End Fee than do Participants.
numerous
etc.)
for
payment
structure
and
of
the
There
Management
pricing
Fee
objectives.
are
to
The
Management Fee normally represents an interest yield paid in fee
form and, in the case of Multi-bank Credit facilities, frequently
includes an element of compensation for additional service provided
or "underwriting risk" assumed.
b.
Praecipuum:
The portion of the Front End Fee which is
distributed to one or more of the Lending Banks
Banks)
in a Multi-bank Credit Facility.
Front
End
Fee
disproportioniate
serves
as
share of
compensation
the
(generally Managing
This allocation of the
for
responsibility
handling
for
Credit Facility or assuming an underwriting risk.
a
arranging
a
c.
JPoolt
The residual amount resulting from the payment of
Participating Banks in Multi-bank Credit Facilities of a less than
full share of the Front End Fee.
not exceed the Praecipuum,
The Pool amount, which may or may
is normally apportioned among Managing
Banks on some preagreed upon formula and
represents a form of
compensation for the additional service provided by the Managing
Bank(s) during the arrangement of the transaction.
2.
Borrower
and
Agency Fee :
is
An annual fee paid to the Agent Bank by the
normally
intended
to
reimburse
the
Agent
Bank
for
out-of-pocket expenses incurred in the performance of its administrative
duties.
Such expenses normally include telex, telephone, postage, printing,
and travel.
The amount of Agency Fee is generally fixed at the time of the
signing of the Credit Agreement and varies in amount depending upon the
number of Lending Banks participating in the Credit Facility, the complexity
of the transaction and the frequency of communication with the Lending Banks.
3.
Commitment
Fee:
This
fee
is paid
by
the
Borrower
and
compensates Lending Banks for legally committing to lend to a Borrower at
agreed upon terms and conditions at some future time.
referred to as a Reservation Fee.
This fee is sometimes
This annual fee is customarily expressed
as a percentage of the unused commitment from the Lending Bank and
is
normally paid quarterly in arrears.
4.
Advisory Fee;
A fee paid by a Borrower to compensate a bank(s)
for a specific advisory service provided in relation to a transaction, such
as a complex project loan.
The advice may relate to the structure of the
transaction or its arrangement and execution.
in the loan agreement
This fee often is not listed
-3-
5.
Expense Reimbursement:
It is customary for a Borrower
reimburse banks active in arranging multi-bank or direct
(i.e. one-bank)
Credit Facilities for out-of-pocket expenses incidental to the arrangement
of
such
facility.
telecommunications»
Normally
travel
and
these
other
expenses
expenses
include
incurred
legal»
during
the
arrangement of the Credit Facility and collection or enforcement costs.
to
@FedFRASER