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District Circular Letters
January 22, 2002
BANKING SUPERVISION AND REGULATION:
BANK HOLDING COMPANY SUPERVISION
To State Member Banks,
Bank Holding Companies,
U.S. Branches and Agencies of Foreign Banks,
and Others Concerned,
in the Twelfth Federal Reserve District
Revisions to Bank Holding Company Supervision Procedures for Organizations
with Total Consolidated Assets of $5 Billion or Less (SR
02-01)
Overview
To further enhance its risk-focused supervision program, on January 1,
2002, the Federal Reserve implemented revised procedures for the supervision
of bank holding companies
with total consolidated assets of $5 billion or less. While these revisions
affect primarily holding companies with assets of less than $1 billion,
they also promote more effective use of targeted on-site reviews to fulfill
the requirements, when necessary, for full scope inspections of holding
companies with total consolidated assets of between $1 billion and $5
billion. In general, the revisions direct Federal Reserve Banks to use
surveillance and other information to focus attention and resources on
holding companies that warrant increased scrutiny.
Time frames and procedures in this letter set forth guidelines to foster
effective supervision of bank holding companies. If conditions warrant,
Federal Reserve Banks should consider additional steps to adequately assess
the potential impact of the holding company on the affiliated insured
depositories. The senior officer in charge of supervision has the responsibility
to ensure that bank holding company assessments accurately reflect the
condition of the holding company and its potential impact on the insured
depositories.
Background
In 1985, the Board adopted on-site bank holding company inspection frequency
standards that varied based upon the size, complexity, and financial condition
of the consolidated organization. In 1997, these guidelines
were revised with the implementation of a risk-focused supervision program
that permitted a more flexible approach to supervising holding companies,
including small shell bank holding companies. The revisions
outlined in this letter further refine the risk-focused approach and supersede
the relevant portions of the 1985 and 1997 inspection frequency guidelines
that pertain to bank holding companies with assets of $5 billion or less.
Revisions to Supervisory Procedures
The revisions to supervisory procedures are intended to promote a flexible
approach to supervising holding companies and are designed to enhance
the overall effectiveness and efficiency of the Federal Reserve's supervision
of these institutions. The key elements of the revisions are as follows:
Supervision of Companies with Total Consolidated Assets of $1 Billion
or Less
As specified below, an assessment of the financial condition of a company
in this size range and the assignment of ratings may be conducted off-site
utilizing available financial, supervisory, and other information. The
supervisory cycle will be determined by the examination frequency of the
lead depository institution.Surveillance results or other
relevant financial and supervisory information may prompt more frequent
reviews and reassignment or confirmation of ratings. Only complex companies
in this size category will be assigned a full holding company rating;
others will be assigned a management rating and a composite rating. All
assigned ratings should be communicated to the company, Board staff, and
appropriate state and federal regulatory authorities as soon as possible,
but generally no later than 90 days after receipt of the lead depository
institution examination report. In those cases where an on-site review
is required to assign the ratings, the findings of that review and the
assigned ratings should be communicated no later than 120 days after receipt
of the lead depository institution examination report.
Noncomplex holding companies with consolidated assets of less than
$1 billion and all subsidiary depository institutions have satisfactory
composite and management ratings, and where no material outstanding holding
company or consolidated issues are otherwise indicated: the Federal
Reserve Bank should assign only a composite rating and a management rating
to the company on the basis of the ratings of the lead depository institution.
Documentation requirements supporting the ratings will generally consist
of the examination reports for the insured depository institution subsidiaries
and a copy of the transmittal letter communicating the ratings to the
company. The ratings should be entered into the National Examination Database
(NED).
Noncomplex holding companies with consolidated assets of less than
$1 billion that have a subsidiary depository institution in less than
satisfactory condition, or with a less than satisfactory management rating,
or where a material supervisory issue is otherwise indicated: the
Federal Reserve Bank will conduct an off-site review of the organization
using surveillance results and relevant financial, supervisory, and other
information, including correspondence or other communications with bank
management and the primary bank supervisor. If the information obtained
off-site from these sources is not sufficient to determine the overall
financial condition of the holding company and to assign the composite
and management ratings, an on-site review should be conducted. Any on-site
review should be targeted to those areas where additional information
is needed to develop the management and composite ratings. Documentation
for the ratings and the off-site and/or on-site review should be proportional
with the risk of the company and the nature and scope of issues. At a
minimum, documentation will generally consist of the examination reports
for the insured depository institution subsidiaries, a copy of the transmittal
letter communicating the ratings to the company, information related to
relevant surveillance results, and memoranda supporting any on-site review
conducted. The ratings should be entered into NED, and a copy of the transmittal
letter communicating the ratings to the company should be forwarded to
the Board's Financial Analysis and Surveillance Section. A meeting between
Federal Reserve Bank staff and the board of directors to communicate findings
is not required, but should be conducted when supervisory concerns warrant
such action.
Complex holding companies with consolidated assets of less than $1
billion: the Federal Reserve Bank will conduct an off-site review
of the organization using surveillance results and relevant supervisory,
financial, and other information, including correspondence or other communication
with bank management and the primary bank supervisor or functional or
other regulator. If the information obtained off-site from these sources
is not sufficient for the Federal Reserve Bank to determine the overall
condition of the company and to assign a complete holding company rating,
an on-site review should be conducted. The on-site review should be targeted
to those areas where additional information or analysis is needed to develop
the complete holding company rating. Documentation for the ratings and
the off-site and/or on-site review should be commensurate with the risk
of the company and the nature and scope of issues. At a minimum, this
documentation will generally consist of the examination reports for the
insured depository institution subsidiaries, a copy of the transmittal
letter communicating the ratings to the company, information related to
relevant surveillance results, and memoranda supporting any on-site review
conducted. The ratings should be entered into NED, and a copy of the transmittal
letter communicating the ratings to the company should be forwarded to
the Board's Financial Analysis and Surveillance Section. A meeting between
Federal Reserve Bank staff and the board of directors to communicate findings
is not required, but should be conducted when supervisory concerns warrant
such action.
Supervision of Companies with Total Consolidated Assets Between $1Billion
and $5 Billion
A full scope inspection for this group may be satisfied with a targeted
or limited scope on-site review supplemented by other information sources.
All companies in this size range (whether deemed complex or noncomplex)
will be assigned a complete holding company rating. The timeframes in
which those ratings must be communicated to the company in writing remain
unchanged. Copies of the letter and inspection report communicating
findings should be sent to the Board's Financial Analysis and Surveillance
Section and to the appropriate federal and state regulatory authorities.
The inspection frequency guidelines for this population of companies also
remain unchanged. The scope and documentation requirements
for the inspections of these companies are governed by the Bank Holding
Company Supervision Manual and should continue to be tailored to the
risks--in particular, the risks posed by the holding company's operations
or activities to an insured depository institution subsidiary--and to
the company's compliance with applicable laws and regulations.
Surveillance
The surveillance program for small bank holding companies is a primary
tool for identifying between reviews any potentially significant changes
in the condition of these organizations and for targeting the work of
any on-site reviews. Quarterly surveillance screens focus on the identification
of potential parent company and nonbank issues that may adversely affect
affiliated insured depository institutions. In particular, the screens
address parent company cash flow, intercompany transactions, parent company
leverage, and consolidated capital ratios, where applicable. The surveillance
screens are periodically updated to reflect industry trends and issues
as well as changes in regulatory reporting requirements.
Upon the receipt and finalization of quarterly Y-9 data, Board surveillance
staff will provide to each Federal Reserve Bank results of the small bank
holding company surveillance screens, which will identify companies failing
key screening criteria. Federal Reserve Banks should evaluate this information
and take action, as appropriate, within 45 days of receipt. In doing so,
Federal Reserve Banks will determine whether the screen results reveal
that the holding company or its affiliates could pose or exacerbate a
material risk to an insured depository institution subsidiary. If the
screening reveals no basis for a significant concern, a short note to
files documenting this conclusion should be prepared and no further action
is required. If it is determined that the screen results reveal the potential
for material risk to an insured depository institution, Federal Reserve
Banks should take appropriate follow-up action within 90 days. Appropriate
actions include contacting the institution to obtain more information,
requesting from the institution a corrective action plan, implementing
heightened monitoring procedures, or scheduling an on-site review. In
most cases, follow-up action can be completed through off-site means.
Documentation supporting the action taken in these cases should be proportionate
with the level of concerns. Typically, a short memorandum posted in NED
will suffice. If an on-site review is recommended, the review should commence
within 90 days of the Federal Reserve Bank's notification of the surveillance
results, and the findings of the review should be communicated to the
company, Board staff, and appropriate state and federal regulatory authorities
within 120 days of that notification.
In addition to the surveillance monitoring screens, Board staff will
also provide Federal Reserve Banks with program support screens that are
designed to provide additional information to assist in the supervision
of small bank holding companies. One set of support screens identifies
companies that are classified as noncomplex, but which exhibit characteristics
of complex organizations. Federal Reserve Banks should evaluate any company
meeting those screens to determine whether its designation as noncomplex
should be changed and its supervision program modified accordingly. A
second set of support screens monitors compliance by financial holding
companies with the capital, managerial, and CRA standards set forth in
the Gramm-Leach-Bliley Act. Follow-up requirements for companies failing
those screens are outlined in previous guidance, set forth in SR letter
00-11.
Surveillance information is crucial to identifying potential issues between
reviews and in order to risk-focus on-site work. Accordingly, it is important
that Federal Reserve Banks continue to take steps to assure the accuracy
of the regulatory reports upon which the surveillance program is based.
In particular, System staff should follow-up promptly on identified inaccuracies.
Enforcement Actions
This program does not change the criteria or procedures for pursuing
formal or informal enforcement actions.
Implementation
The program discussed above should be implemented effective immediately.
This SR letter supersedes SR letter 97-27: "Risk-Focused Supervision Policy
for Small Shell Bank Holding Companies," and SR letter 98-29: "Small Shell
Bank Holding Company Surveillance Program," and partially supersedes SR
letter 93-04: "Adoption of Minimum Timing Standards for the Completion
of Examination and Inspection Reports," and SR letter 85-28: "Examination
Frequency and Communicating With Directors."
Additional Information
All circulars and documents are available on the Internet through the
Federal Reserve Bank of San Francisco's Internet site, at http://www.frbsf.org/banking/letters.
Paper copies of the Board's notice (SR
02-01) are available from our Corporate Services Department. To
request copies to be sent by mail, please call (415) 974-2060.
For additional information about this supervisory letter, please contact
our Banking Supervision and Regulation Department at (415) 974-2822.
FEDERAL RESERVE BANK OF SAN FRANCISCO
Superseded:
SR letter 97-27
SR letter 98-29
Partially superseded:
SR letter 85-28
SR letter 93-04
Notes:
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