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July 1992


s s u


News and Views
for the
Eighth District


Introducing Supervisory Issues...
from the St. Louis Fed




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Federal Reserve Bank of St. Louis

This is the first edition of
Supervisory Issues - the
newsletter you requested!
:: When surveyed earlier this year,
nearly 5 percent of District
bank respondents asked for a
Federal Reserve publication
devoted to brief synopses and
analyses of supervisory and
regulatory matters. (See story
below for more survey results.)
Published bimonthly by the
St. Louis Fed's Division of
Banking Supervision and
Regulation, Supervisory Issues
will provide bankers with infor-

mation on proposed and final
regulations and policy guidelines. Included will be suggestions from Federal Reserve
examiners that should clarify
examination expectations.
We recognize the challenge
District banks face in understanding and achieving compliance with new statutes and
regulations mandated by Congress; we hope this newsletter
can help. In addition, we will
include analyses of trends in
District bank performance.

This issue is being
sent to banks and
bank holding companies who received
our earlier survey;
we welcome any
additions to our free
subscription list.

expanded telephone "hot line"
service. In addition, we are
investigating better ways to distribute critical information to
you in a timely manner. Your
survey responses provided
dents, regardless of charter or
e received a strong reregulator, lo_ok to the St. Louis
direction for the supervisory
sponse to the survey we
Fed for supervisory and regula- information program for the
sent to all banks and bank
tory guidance. And, most of you Eighth District.
holding companies in the
The survey also disclosed,
Eighth District earlier this year. asked for more guidance on
examination expectations and
however, that only 10 percent
Almost 30 percent of those
surveyed took the time to comregulatory compliance.
of respondents comment on
ment on ways we could imTo meet this request, our
proposed regulation changes.
prove communication of
Banking Supervision and
As an article later in this issue
Regulation Division will estab- indicates, Eighth District banks
supervisory and regulatory
information. ~ e were encourlish new or expanded programs are passing up opportunities to
aged to learn that most respon- to share information throughshare their concerns with the
dents read some or even all of
out the District. These proFederal Reserve and to affect
the material we provide. In
grams include this newsletter,
the supervisory policies with
addition, a majority of responwhich they must comply.
educational seminars, and an


Disclosure Requirements and Lending Limits:
Some Supervisory Guidance on Regulation 0


1====~-~ ~_ _


:~~~a:~:~~lation Obecame
effective on May
18, 1992. Given
the complexity of the changes
and the number of inquiries we
have received to date, we have
written this article to help
clarify some of the main points
of the revised regulation. Specific guidance on how these
changes will be viewed during
_ _\ examinations is also given.

New lending limits
With revisions to the Federal
Reserve's Regulation Onow in
effect, bank managers must ensure they comply with new disclosure requirements as well as
the aggregate lending limit to
insiders and the individual
limit now applicable to directors. For state non-member

banks, steps must also be taken
to ensure compliance with the
lending restrictions on loans to
executive officers, which previously applied only to state
member banks.
The aggregate lending limit
for loans to all insiders and
their related interests - 100
percent of the bank's unimpaired capital and surplus - is
the sum of total equity capital
and any valuation reserves of
the bank, as reported on the
most recent consolidated Report of Condition (outstanding
capital notes may also qualify
for inclusion). Banks with deposits of less than $100 million
may, under certain circumstances, adopt an aggregate
limit up to 200 percent of this
For loans to directors and
their related interests, Reg 0

loans Included in Aggregate lending Limit

Parent Company

Director Smith


adopted the same lending limit
that previously applied to
principal shareholders and
executive officers of member
banks- 15 percent of unimpaired capital and surplus for
unsecured loans and an additional 10 percent for secured
loans. If state lending limits
are more restrictive, however,
they must take precedence.
Bank examinations
will be the primary
method the Fed will
use to determine compliance with the new
lending limits.

Bank examinations will be
the primary method the Fed
will use to determine compliance with the new lending limits. The Report of Condition
will also likely be amended to
include loans to directors and
their related interests as part of
the total insider debt reported
on Schedule RC-M.
Examiners will first determine whether bank management has procedures in place
to monitor compliance with



Loans A-1 to Director Smith
andA-2 to the Parent
Company must both be
included in Bank A's
aggregate lending limit.
Loans B-1 and B-2, both to
directors, must be included
in Bank B's aggregate
lending limit. Loan P is not
included in any aggregate
Federal Reserve Bank of St. Louis




Director Jones

Loan B-2

Director Brown

the lending limits. The bank's
unimpaired capital and surplus
will then be calculated from
the most recent Report of Condition. The total amount of
outstanding credit to insiders
and the amount outstanding to
individual directors will be determined by reviewing agencyspecific forms which currently
request this information, such
as the Officer's Questionnaire
used by the Federal Reserve
Bank. This is the same method
currently used to determine
compliance with the lending
limits for executive officers and
principal shareholders.

In determining the aggregate
amount of credit that may be
extended to all insiders, extensions of credit that are exempt
from the individual loan limits,
such as credit secured by obligations of the United States,
should be included. Extensions
of credit to insiders of the bank
from a subsidiary of that bank
must also be included in both
the aggregate amount and individual loan limits.

Small Bank

For small banks that adopt a
higher aggregate lending limit,
the examination will also focus
on whether statutory requireWhen monitoring and
ments have been met. The
disclosing the total
.bank's board of directors must
first determine whether a
amount of insider
higher limit is consistent with
lending, certain extensafe and sound banking pracsions of credit must
tices based on the bank's expenot be overlooked.
riences with insiders and their
related interests.
When monitoring and disThe board must also deterclosing the total amount of
mine whether a higher limit is
insider lending, certain extennecessary to avoid constricting
sions of credit must not be
the availability of credit or
overlooked. Credit extended to
directors in that community.
parent holding companies and While the regulation is silent
non-bank affiliates as principal on exactly how to determine
shareholders must be included, this, factual support for the
although the Federal Reserve
finding is necessary. StateBoard has indicated it intends
ments from directors or other
to seek legislative relief on this
business leaders in the comissue.
munity are one method, as is
Loans to executive officers,
information about the amount
directors and principal shareof lending by the bank to its
holders at parent holding com- directors and related interests.
panies and subsidiaries of the
If the board of directors
parent company must also be
makes these findings and the
included in the total amount
bank meets all applicable capisince these individuals are detal requirements, a higher limit
fined as insiders of the bank.
may be adopted by board resoThe individual lending limit
lution for the one-year period
now applicable to directors
allowed by the Federal Reserve
must also be applied to extenBoard, ending May 18, 1993.
sions of credit from the bank to The resolution must include
directors of these institutions.
the facts and reasons support
Federal Reserve Bank of St. Louis

Eighth District Banks Eligible For Exemption
(as of March 31, 1992)

Banks < S1OOMM
75 percent of all Eighth District banks, a total of 914, report
deposits of less than $100 million, making them eligible for
the small bank exemption under the revised Regulation 0.

ing both of the findings above
and the amount of insider
lending as a percentage of the
bank's unimpaired capital and
surplus. After adoption, it must
be submitted to the bank's federal regulatory agency and the
Federal Reserve Board.
The board must determine whether a higher
limit is necessary to
avoid constricting the
availability of credit or
directors in that community.

Revised Reporting
Both executive officers and
directors of banks and bank
holding companies without
publicly traded stock must now
report annually to their institutions the outstanding amount
of any credit extended to them
that is secured by shares of the
bank or the bank holding company. Guidance from the Fed-

eral Reserve Board on the definition of publicly traded stock
is expected before year-end.
Managers of institutions in this
category should advise their
officers and directors of this
requirement and maintain
records from which examiners
can determine compliance.
Other than the above, only
executive officers are now
affected by additional reporting
requirements. For state nonmember banks, special reporting and documentation
provisions about their loans to
executive officers now apply; in
the past, they applied only to
state members. Additionally,
all banks need to ensure their
loan documents include a condition that extensions of credit
to executive officers will, at the
option of the member bank,
become due and payable if the
officer becomes indebted to
another bank in amounts exceeding the loan limits.

Your Comments Do Count
n a recent Eighth District survey, only 10.4
percent of the respondents indicated that they
routinely comment on
proposed regulation changes.
One of the primary reasons
cited for this apparent lack of
interest in the comment process
was "why bother, they don't listen anyway." The Federal
Reserve Board recently showed,
however, that it does listen, as
evidenced by a key change

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Tbe following proposals
implementing toe Federal Deposit Insurance
Corporation Improvement Act (FDIC/A) are
expected outfor public
comment in the coming months. Watch for
tbese opportunities to
have your comments
• Aproposal to require the
adoption of regulations for
real estate lending;
• The adoption of safety
and soundnes.s standards
for banks and BHCs in the
areas of operations; asset
quality, earnings, and
stock valuation; and compensation;

made when implementing the
revised Regulation 0.
The Board received 268 written comments on the proposed
changes to this regulation, primarily from community and
independent banks. Overwhelmingly, the commentors
requested that the Board raise
the lending limit to insiders
and their related interests up to
200 percent of the bank's
unimpaired capital and unimpaired surplus for banks with




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deposits less than $100 million.
The authority to exercise this
decision was granted under
FDICIA (Federal Deposit Insurance Corporation Improvement
Act of 1991).
Respondents argued that the
lower aggregate limit would
restrict them from serving the
credit needs of their directors
and the directors' related interests. This would force current
or prospective directors to
choose between being a director or a customer. In tum, a
small bank would be deprived
of either strong, informed lead, ~ ership or a valuable customer
/ ~ relationship.
As a direct result of these
, (#
, ~~ comments, the Board granted a
, I~I1 <;,/"
_ - ~~ one-year exception to the lend• - -~ ~ /
1<. ,1/
ing limit for small banks. The
d h h
Boar c ose t is one-year
exception to analyze the effects
of the lending limitation on the
ability of these banks to attract
qualified directors and serve
their credit needs.
Thus, the next time you are
asked to comment, please be
sure to give it serious thought
before passing up the opportunity to be heard.


• Proposed regulations
that provide a fonnat for
closer monitoring of
institutions and prompt
corrective action when an
institution begins to experience difficulty;




•The adoption of standard.5 for measurement of
interest rate risk.
Federal Reserve Bank of St. Louis

These Comments Just In ...
he proposed Regulation
DD, Truth in Savings, was
also recently sent out for comment. As of the end of the comment period on June 10, more
than 1,400 comments had been
received by the Federal Reserve


The topics most commonly
mentioned included disclosure
requirements for CDs which renew automatically, notification
requirements for adverse
changes to loan rates or terms,
and disclosure requirements for

The final regulation will be
published by September 19,
1992. More information on this
regulation will be distributed as
it becomes available.

Some Background
on District Banks
Aggregate banking assets
for the District's 1,238
banks as ofyear-end
1991 u·ere $145.3 billion
or about 4 percent ofthe
total US. banking assets.
District banks consist
primarily (79.5 percent)
ofsmall community
banks with less than $100
million in assets. Only 14
banks in our District have
total assets greater than
$1 billion.

District Bank Performance Up
in 1990 and 1991

he performance of Large Time Deposits vs. MMDAs
Eighth District
banks displayed
several positive
trends during 1990 14
and 1991. First, District banks
maintained stable income
streams while restructuring bal- 8
ance sheets. Second, these
earnings were not achieved at
the expense of reduced provi2
sion expense. Finally, District
banks experienced appreciable
12/89 3/90 6/90 9/90 12/90 3/91 6/91 9/91 12/91
asset growth of 10.5 percent
Large Time
which was surpassed by equity
the asset side, loan growth
overall coverage ratio exceedgrowth of 12.3 percent.
ining 100 percent by year-end.
Income remained stable over
The final significant positive
the two-year period while banks
trend over the past two years is
restructured both sides of the
Despite this repositioning,
that the Eighth District asset
balance sheet. During 1991, as
grew by 7.1 percent in
short-term interest rates
and an additional 3.4
declined, the liabilities side
percent in 1991. Asset growth
showed that bank deposit struc1990,
enhanced by the acquisitures
of deposits transferred to
deposits to shorter-term instruSecurities/Loan
commercial banks
ments such as MMDAs (money
thrift institutions in
Quarterly Dollar Change
market deposit accounts). On
period. In addition, the net ineach year. Of even greater imS(Billions)
terest margin remained stable.
portance is the fact that equity
Earnings stability was not
growth surpassed asset growth
achieved, however, by lowering by 180 basis points over the
the provision expense. Even
period. The increased equity
though the District experienced provides additional strength for
modest increases in both the
District banks.
In summary, District banks
and the level of loan losses, the entered 1992 better positioned
increases were accompanied by to maintain consistency in
earnings, manage nonpera marked increase in District
forming loans in their portfoloan loss reserves. During
-1 L - - - - - - - - - - - - - - - - - - = - _ _ J 1991 coverage of nonperlios and continue a pattern of
12/89 3/90 6/90 9/90 12/90 3/91 6/91 9/91 12/91
forming loans increased by
asset and equity growth.
16.6 percent, resulting in an
■ Loans
■ Securities
Federal Reserve Bank of St. Louis

Reducing The Regulatory Burden: An Update
ince the late 1970s,
the Federal Reserve
has had formal
programs in place to
review both regulatory and reporting requirements regularly to minimize
the burden on banks and holding companies. The current
interagency regulatory uniformity project announced April
23, 1992, placed renewed
emphasis on a dozen projects
already under way. Among
those areas now being addressed through Reserve Bank
and Federal Reserve Board
working groups include:

• coordinating examinations
and inspections with both
federal and state regulators,
• clarifying common approaches toward classifica
tions and accounting treat
ment of certain assets,
• developing application forms
common to federal regulators,
• limiting the frequency of call
report changes, and
• working toward a common
and pragmatic approach on
guidelines for the loan loss
We will keep you informed as
these groups progress.

Got a Question?
The Banking Supervision and
Regulation Division recently
mailed a phone listing of
whom to call when you have a
question to all banks and bank


Post Office Box 442
St. Louis, Missouri 63166

Supervisory Issues is published bimonthly by the Banking Supervision and Regulation Division of
the Federal Reserve Bank of St.
Louis. Views expres ed are not necessarily official opinions of the
Federal Reserve System or the Federal Reserve Bank of St. Louis.
Federal Reserve Bank of St. Louis

holding companies in the
Eighth District. If you would
like additional copies of the
phone card, please call Dawn
C. Ligibel at (314) 444-8909.