The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
/4., -, July 1992 UPERVISORY I s s u E Supervisory News and Views for the Eighth District s Introducing Supervisory Issues... from the St. Louis Fed .....-- - . -- . "- -·? -=- - ---- .I.-- - ~ =--- ..-. • - ~t :~ - ~ ,/ Survey Respondents Request More Repulatory Guidance https://fraser.stlouisfed.org 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 W Disclosure Requirements and Lending Limits: Some Supervisory Guidance on Regulation 0 R 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 amount. For loans to directors and their related interests, Reg 0 loans Included in Aggregate lending Limit Parent Company 1--I Director Smith I 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 NI I c( § 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 limit. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I I I j1 I I BANKA Director Jones BANKB 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 Exemption 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Eighth District Banks Eligible For Exemption (as of March 31, 1992) Banks < S1OOMM 7S% 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 Requirements 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 -.......... I Upco•ln9 Opportullltles toco..... 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 beard • 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 _ \. ' ~ .. .. , A, ~ ; -~ ~ ~'; _, . ' ~~~ ~ ~~ ~ ,_ _._. ___ ~ \ \ ,.>,r--.J,r.•--,.,, / re l c"' 1 ~ ~ , --, "~ · ' ,~~ ~ ~ ~ ~/~~~ ' 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. 1/ 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; 7 _ - •The adoption of standard.5 for measurement of interest rate risk. https://fraser.stlouisfed.org 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 Board. T 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 advertising. The final regulation will be published by September 19, 1992. More information on this regulation will be distributed as it becomes available. BANK PERFORMANCE 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 Billions banks displayed 16 several positive ~ trends during 1990 14 12 and 1991. First, District banks ......... maintained stable income 10 streams while restructuring bal- 8 ance sheets. Second, these 6 earnings were not achieved at 4 the expense of reduced provi2 sion expense. Finally, District 0 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 MMDAs which was surpassed by equity the asset side, loan growth overall coverage ratio exceedgrowth of 12.3 percent. slowed to .71 percent while ining 100 percent by year-end. Income remained stable over vestment securities grew by The final significant positive the two-year period while banks 13.7 percent. (See charts.) 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 earnings remained stable. base grew by 7.1 percent in short-term interest rates Even though net earnings 1990 and an additional 3.4 declined, the liabilities side peaked in the third quarter of percent in 1991. Asset growth showed that bank deposit struc1990, the ROM (return on avwas enhanced by the acquisitures moved from larger time Investment erage assets) only declined by a tion of deposits transferred to deposits to shorter-term instruSecurities/Loan maximum of 10 basis points District commercial banks ments such as MMDAs (money Growth throughout the two-year from failed 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 1.5 though the District experienced provides additional strength for modest increases in both the District banks. level of nonperforming loans In summary, District banks 0.5 and the level of loan losses, the entered 1992 better positioned 0 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 https://fraser.stlouisfed.org 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 reserve. 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. https://fraser.stlouisfed.org 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. FIRST-CLASS MAIL U.S. POSTAGE PAID ST. LOUIS, MO PERMIT NO. 444
@FedFRASER