[Federal Register Volume 83, Number 218 (Friday, November 9, 2018)]
[Notices]
[Pages 56081-56085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24496]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1631]
Application of the RFI/C(D) Rating System to Savings and Loan
Holding Companies
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Notice.
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SUMMARY: The Board has determined that it will apply the RFI/C(D)
rating system to certain savings and loan holding companies (SLHCs).
This is the same supervisory rating system that the Board currently
applies to bank holding companies (BHCs). SLHCs that are engaged in
significant commercial or insurance activities will continue to receive
indicative supervisory ratings. SLHCs with $100 billion or more in
assets will receive ratings under the RFI/C(D) rating system until the
Board applies the Large Financial Institution Rating System to them.
DATES: The application of the supervisory rating system to SLHCs is
effective February 1, 2019.
FOR FURTHER INFORMATION CONTACT: T. Kirk Odegard, Assistant Director
and Chief of Staff, Policy Implementation and Effectiveness, (202) 530-
6225, Karen Caplan, Assistant Director, (202) 452-2710, Angela Knight-
Davis, Manager, (202) 475-6679, Division of Banking Supervision and
Regulation; or Benjamin McDonough, Assistant General Counsel, (202)
452-2036, Keisha Patrick, Senior Counsel, (202) 452-3559, Laura Bain,
Senior Attorney, (202) 736-5546, Trevor Feigleson, Senior Attorney,
(202) 452-3274, Legal Division, Board of Governors of the Federal
Reserve System, 20th and C Streets NW, Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Summary of Comments
III. Applying the RFI Rating System to Certain SLHCS
IV. Implementation
V. Regulatory Analysis
I. Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) transferred responsibility for the supervision of
SLHCs from the Office of Thrift Supervision (OTS) to the Federal
Reserve in July 2011.\1\ Since 2011, the Board has applied the RFI/C(D)
rating system (commonly referred to as the ``RFI rating system'') \2\
to SLHCs on an ``indicative'' basis as a way of providing feedback to
SLHCs regarding supervisory expectations while Federal Reserve staff
and SLHCs each became familiar with the newly established statutory
framework for supervision. Federal Reserve supervisory staff have
assigned to each SLHC an ``indicative rating,'' which describes how the
SLHC would be rated under the RFI rating system if applied to the
company. These indicative ratings
[[Page 56082]]
have not carried any supervisory or regulatory consequences.\3\
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\1\ 12 U.S.C. 5412(b)(1).
\2\ Under the RFI rating system, BHCs generally are assigned
individual component ratings for risk management (R), financial
condition (F), and impact (I) of nondepository entities on
subsidiary depository institutions. The risk management component is
supported by individual subcomponent ratings for board and senior
management oversight; policies, procedures, and limits; risk
monitoring and management and information systems; and internal
controls. The financial condition rating is supported by individual
subcomponent ratings for capital adequacy, asset quality, earnings,
and liquidity. An additional component rating is assigned to
generally reflect the condition of any depository institution
subsidiaries (D), as determined by the primary supervisor(s) of
those subsidiaries. An overall composite rating (C) is assigned
based on an overall evaluation of a BHC's managerial and financial
condition and an assessment of potential future risk to its
subsidiary depository institution(s). A simplified version of the
RFI rating system that includes only the risk management component
and a composite rating is applied to noncomplex BHCs with assets of
$3 billion or less. See infra note 16.
\3\ All SLHCs that have been inspected have received at least
one indicative rating.
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Prior to the transfer of supervisory responsibility for SLHCs, the
OTS assigned supervisory ratings for SLHCs under the CORE rating
system.\4\ The CORE rating system and the RFI rating system
substantially overlapped and generally included assessments of the same
set of financial and non-financial factors and provided a summary
evaluation of each holding company's condition.
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\4\ See 72 FR 72442 (December 20, 2007). Under the CORE rating
system, SLHCs generally were assigned individual component ratings
for capital (C), organizational structure (O), risk management (R),
and earnings (E), as well as a composite rating that reflected an
overall assessment of the holding company as reflected by
consolidated risk management and financial strength.
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The Board did not adopt the CORE rating system upon taking over
supervision of SLHCs. Instead, because the vast majority of SLHCs face
similar risks and engage largely in the same activities as BHCs, the
Board sought to apply the same RFI rating system to SLHCs as the Board
currently applies to BHCs to promote consistency.
After completing a number of supervisory cycles in which the RFI
rating system has been applied to SLHCs on an indicative basis, the
Board evaluated the information gained from that process, taking into
account the differences between SLHCs engaged in traditional banking
activities and those engaged in significant commercial or insurance
activities. Experience with this process over the past seven years
indicates that the RFI rating system is an effective approach to
communicating supervisory expectations to most SLHCs. On December 13,
2016, the Board published a notice in the Federal Register requesting
comment on a proposal (proposal) to fully apply the RFI rating system
to all SLHCs except those that are excluded from the definition of
``covered savings and loan holding company'' \5\ in section 217.2 of
the Board's Regulation Q.\6\
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\5\ 12 CFR 217.2. Section 217.2 excludes the following SLHCs
from the definition of ``covered savings and loan holding company'':
(1) A top-tier SLHC that is (i) an institution that meets the
requirements of section 10(c)(9)(C) of the Home Owners' Loan Act (12
U.S.C. 1467a(c)(9)(C)) and (ii) as of June 30 of the previous
calendar year, derived 50 percent or more of its total consolidated
assets or 50 percent of its total revenues on an enterprise-wide
basis (as calculated under GAAP) from activities that are not
financial in nature under section 4(k) of the Bank Holding Company
Act of 1956 (12 U.S.C. 1843(k)); (2) a top-tier SLHC that is an
insurance company; or (3) a top-tier SLHC that, as of June 30 of the
previous calendar year, held 25 percent or more of its total
consolidated assets in subsidiaries that are insurance underwriting
companies (other than assets associated with insurance for credit
risk).
\6\ 81 FR 89941 (December 13, 2016).
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II. Summary of Comments
The comment period on the proposal closed on February 13, 2017. The
Board received one comment from the Insurance Coalition,\7\ which
expressed support for continuing to apply the RFI rating system on an
indicative basis to insurance SLHCs. The commenter also generally
supported the Board's proposed approach for assessing capital adequacy
for SLHCs receiving indicative ratings, but suggested that such
assessment also should explicitly consider (i) the unique risks in the
insurance business model, (ii) an insurance SLHC's compliance with
State capital rules, and (iii) the policyholder protection mandate. The
commenter also requested that the Board delay imposing a formal rating
system on insurance SLHCs until the insurance capital rules have been
finalized, and that the rating system be tailored to the insurance
business model and reflect the State regulatory capital framework. The
commenter requested that this same approach be applied for insurers
that have been designated systemically important financial institutions
by the Financial Stability Oversight Council (FSOC) for supervision by
the Federal Reserve.
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\7\ The Insurance Coalition is a group of federally supervised
insurance companies and interested parties.
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In response to this comment and consistent with the proposal, the
Board has determined that it will continue to apply the RFI rating
system to insurance SLHCs on an indicative basis. In response to the
commenter's request that the assessment of the capital adequacy for
insurance SLHCs receiving indicative ratings should consider certain
factors, the Board clarifies that its assessment of insurance SLHCs has
taken and will continue to take into account (i) the unique risks in
the insurance business model, (ii) an insurance SLHC's compliance with
State capital rules, and (iii) the policyholder protection mandate. The
commenter's other suggestions pertain to factors that would be
considered in the development of any future rating system applicable to
insurance SLHCs and any insurance companies that the FSOC has
determined should be supervised by the Board.
III. Applying the RFI Rating System to Certain SLHCs
After reviewing the comment on the proposal, the Board has
determined that it will apply the RFI rating system to every SLHC that
is depository in nature.\8\ SLHCs that are engaged in significant
insurance or commercial activities will continue to receive indicative
ratings under the RFI rating system. SLHCs that are depository in
nature and have $100 billion or more in total consolidated assets will
be rated under the RFI rating system only until the Board applies the
new rating system for large financial institutions (LFI rating system)
to them, which the Board is adopting concurrently through a separate
rulemaking and is described below.
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\8\ The RFI rating system will apply to every SLHC except an
SLHC that is not a ``covered savings and loan holding company'' in
section 217.2 of the Board's Regulation Q. 12 CFR 217.2.
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Specifically, the Board will continue to assign indicative ratings
under the RFI rating system to (i) SLHCs that derive 50 percent or more
of their total consolidated assets or total revenues from activities
that are not financial in nature under section 4(k) of the Bank Holding
Company Act of 1956, as amended (12 U.S.C. 1843(k)) (commercial SLHCs),
and (ii) SLHCs that are insurance companies or that hold 25 percent or
more of their total consolidated assets in subsidiaries that are
insurance companies (insurance SLHCs). The Board will continue to
review whether a modified version of the RFI rating system or some
other supervisory rating system is appropriate for commercial or
insurance SLHCs on a permanent basis.
Subsequent to the closing of the public comment period, on August
17, 2017, the Board invited public comment on a separate notice of
proposed rulemaking to adopt the LFI rating system,\9\ a supervisory
ratings
[[Page 56083]]
framework designed in part to align with the supervisory programs and
practices that the Federal Reserve implemented for large financial
institutions following the 2007-2009 financial crisis. The LFI rating
system would have applied to, among other entities, BHCs and non-
insurance, non-commercial SLHCs with total consolidated assets of $50
billion or more, and U.S. intermediate holding companies (IHCs) of
foreign banking organizations (FBOs) established under Regulation
YY.\10\
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\9\ 82 FR 39049 (August 17, 2017). Under the proposed LFI rating
system, each large financial institution would have been assigned
ratings for three separate components: Capital Planning and
Positions; Liquidity Risk Management and Positions; and Governance
and Controls. The ratings would have been assigned using a four-
point non-numeric scale (Satisfactory/Satisfactory Watch, Deficient-
1, and Deficient-2). A firm would need a ``Satisfactory'' or
``Satisfactory Watch'' rating for each of the three component
ratings to be considered ``well managed.'' The proposal would not
have included the assignment of a standalone composite rating or any
subcomponent ratings.
\10\ 12 CFR 252.153.
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In its final rulemaking regarding the LFI framework, which the
Board is adopting concurrently with this notice, the Board has modified
the scope of application of the LFI rating system to take into
consideration statutory changes resulting from the enactment of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA) on May 24, 2018.\11\ Section 401 of EGRRCPA amended section
165 of the Dodd-Frank Act to raise the $50 billion minimum asset
threshold for general application of enhanced prudential standards.\12\
Immediately on the date of enactment, BHCs with total consolidated
assets of less than $100 billion were no longer subject to these
standards. Accordingly, the final LFI rating system applies to BHCs and
non-insurance, non-commercial SLHCs with total consolidated assets of
$100 billion or more, and to all U.S. IHCs of FBOs. The Board will
assign ratings to SLHCs with $100 billion or more in total consolidated
assets under the final LFI rating system beginning in early 2020.
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\11\ Pub. L. 115-174, 132 Stat. 1296-1368 (2018).
\12\ EGRRCPA Sec. 401.
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However, along with all other depository SLHCs, the RFI rating
system will apply to SLHCs with $100 billion or more in total
consolidated assets beginning on February 1, 2019. Once the Board
applies the LFI rating system to SLHCs with $100 billion or more in
total consolidated assets in early 2020, the Board will cease to use
the RFI rating system to assign ratings to such large SLHCs. The Board
believes it is important to assign ratings to all depository SLHCs at
this time in order to promote consistent supervision and treatment of
BHCs and SLHCs.
All components of the RFI rating system (i.e., risk management,
financial condition, and potential impact of the parent company and
nondepository subsidiaries on subsidiary depository institution(s))
will apply to SLHCs that are depository in nature.\13\ Likewise, the
depository institution rating, which generally mirrors the primary
regulator's assessment of the subsidiary depository institution(s),
will apply. A numeric rating of 1 indicates the highest rating,
strongest performance and practices, and least degree of supervisory
concern; a numeric rating of 5 indicates the lowest rating, weakest
performance, and the highest degree of supervisory concern.
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\13\ Consistent with the approach for BHCs, when assigning a
rating to an SLHC, supervisory staff will take into account a
company's size, complexity, and financial condition. For example, a
noncomplex SLHC with total assets less than $3 billion will not be
assigned all subcomponent ratings; rather, only a risk management
component rating and composite rating generally will be assigned.
These will equate, respectively, to the management component and
composite rating under the CAMELS rating system for depository
institutions, as assigned to the SLHC's subsidiary savings
association by its primary regulator.
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The financial condition component of the RFI rating includes a
subcomponent that represents an assessment of capital adequacy.
Compliance with minimum regulatory capital requirements is part of a
broader qualitative and quantitative assessment of an SLHC's capital
adequacy. As of January 1, 2015, certain SLHCs became subject to
minimum capital requirements and overall capital adequacy
standards.\14\ For SLHCs subject to minimum regulatory capital
requirements, assessment of the SLHC's compliance with those
requirements will be one element of a broader qualitative and
quantitative assessment of capital adequacy.\15\
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\14\ See 78 FR 62018, 62028 (October 11, 2013) (outlining the
timeframe for implementation of Regulation Q for SLHCs and others).
\15\ See Sections 4060 and 4061 of the Bank Holding Company
Supervision Manual; Supervision and Regulation Letter 15-19
(December 18, 2015), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1519.htm; Supervision and Regulation Letter
15-6 (April 6, 2015), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1506.htm; Supervision and Regulation Letter
09-04 (February 24, 2009, revised December 21, 2015), available at
http://www.federalreserve.gov/boarddocs/srletters/2009/sr0904.htm.
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Noncomplex SLHCs that are subject to the Board's Small Bank Holding
Company and Savings and Loan Holding Company Policy Statement
(Regulation Y, appendix C) (Policy Statement) \16\ will be assigned an
abbreviated version of the RFI rating system consistent with the
Board's practice for BHCs outlined in SR letter 13-21.\17\ An offsite
review of the SLHC will be conducted upon receipt of the lead
depository institution's report of examination. The supervisory cycle
will be determined by the examination frequency of the lead depository
institution and the SLHC will be assigned only a risk management rating
and a composite rating.
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\16\ 12 CFR part 225, Appendix C. The Board issued an interim
final rule raising the asset size threshold for determining
applicability of the Policy Statement from $1 billion to $3 billion
of total consolidated assets. See 83 FR 44195 (August 30, 2018).
\17\ Supervision and Regulation Letter 13-21 (December 17,
2013), available at https://www.federalreserve.gov/bankinforeg/srletters/sr1321.htm. Shortly after adoption of this notice, Board
staff expects to update Supervision and Regulation Letter 13-21 to
modify inspection frequency and scope of expectations for holding
companies with total consolidated assets between $1 billion and $3
billion to align with the Policy Statement's revised asset size
threshold. See supra note 16.
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Finally, elements of the RFI rating system that are codified in the
Board's Bank Holding Company Supervision Manual \18\ will be revised to
describe the application of the RFI rating system to certain SLHCs that
are depository in nature.\19\
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\18\ Available at http://www.federalreserve.gov/boarddocs/supmanual/supervision_bhc.htm.
\19\ See Supervision and Regulation Letter 04-18 (December 6,
2014), available at http://www.federalreserve.gov/boarddocs/srletters/2004/sr0418.htm.
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Assessment of Capital Adequacy and Supervisory Guidance for SLHCs That
Receive Indicative Ratings
For SLHCs that continue to receive an indicative rating under the
RFI rating system, examiners will consider the risks inherent in the
SLHC's activities and the ability of capital to absorb unanticipated
losses, provide a base for growth, and support the level and
composition of the parent company and subsidiaries' debt in the
evaluation of the SLHC's capital adequacy. As discussed above in
Supplementary Information Section II, for insurance SLHCs that receive
an indicative rating, examiners will consider the unique risks in the
insurance business model, an insurance SLHC's compliance with State
capital rules, and the policyholder protection mandate.
In 2013, Board staff published several supervisory letters
extending the use of the RFI rating system for, and assignment of,
indicative ratings to SLHCs and extending the scope and frequency
requirements for supervised holding companies with total consolidated
assets of $10 billion or less to SLHCs. Commercial SLHCs and insurance
SLHCs may refer to these letters for staff-level guidance on the use of
indicative ratings until such time as the Board adopts final guidance
on the application of a rating system tailored to these SLHCs.
[[Page 56084]]
IV. Implementation
The Board will begin to apply the RFI rating system on February 1,
2019 to all non-insurance and non-commercial SLHCs, including for any
inspections commencing after that date. Federal Reserve staff will use
the RFI rating system to assign ratings to non-commercial, non-
insurance SLHCs with $100 billion or more in total consolidated assets
in 2019, and assign ratings to such SLHCs using the new LFI rating
system beginning in early 2020. As noted, commercial SLHCs and
insurance SLHCs will continue to receive RFI ratings on an indicative
basis. The Federal Reserve's numeric ratings for SLHCs, which are
confidential supervisory information, will be disclosed on a
confidential basis, in accordance with current disclosure
practices.\20\ Under no circumstances should an SLHC or any of its
directors, officers, or employees disclose or make public any of the
ratings.
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\20\ 12 CFR 261.20.
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V. Regulatory Analysis
Paperwork Reduction Act
There is no collection of information required by this notice that
would be subject to the Paperwork Reduction Act of 1995, 44 U.S.C. 3501
et seq.
Regulatory Flexibility Analysis
The Regulatory Flexibility Act (RFA) requires that an agency
publish an initial regulatory flexibility analysis (IRFA) in connection
with a proposed rule or certify that the proposed rule will not have a
significant economic impact on a substantial number of small
entities.\21\ An IRFA was included in the proposal to fully apply the
RFI rating system to SLHCs that are not insurance or commercial
SLHCs.\22\ In the IRFA, the Board requested comment on the effect of
the proposal on small entities and on any significant alternatives that
would reduce the regulatory burden on small entities. The Board did not
receive any comments on the IRFA.
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\21\ 5 U.S.C. 601 et seq.
\22\ 81 FR 89941 (December 13, 2016).
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The RFA requires an agency to prepare a final regulatory
flexibility analysis (FRFA) unless the agency certifies that the rule
will not, if promulgated, have a significant economic impact on a
substantial number of small entities. The FRFA must contain: (1) A
statement of the need for, and objectives of, the rule; (2) a statement
of the significant issues raised by the public comments in response to
the IRFA, a statement of the agency's assessment of such issues, and a
statement of any changes made in the proposed rule as a result of such
comments; (3) the response of the agency to any comments filed by the
Chief Counsel for Advocacy of the Small Business Administration in
response to the proposed rule, and a detailed statement of any changes
made to the proposed rule in the final rule as a result of the
comments; (4) a description of an estimate of the number of small
entities to which the rule will apply or an explanation of why no such
estimate is available; (5) a description of the projected reporting,
recordkeeping and other compliance requirements of the rule, including
an estimate of the classes of small entities which will be subject to
the requirement and type of professional skills necessary for
preparation of the report or record; and (6) a description of the steps
the agency has taken to minimize the significant economic impact on
small entities, including a statement for selecting or rejecting the
other significant alternatives to the rule considered by the agency. In
accordance with section 604 of the RFA, the Board has reviewed the
final rule.
Under regulations issued by the Small Business Administration, a
small entity includes an SLHC with assets of $550 million or less.\23\
Based on data as of September 11, 2018, there are approximately 132
SLHCs that have total domestic assets of $550 million or less and are
therefore considered small entities for purposes of the RFA. The final
rule applies to all non-insurance and non-commercial SLHCs. Based on
the Board's analysis, and for the reasons stated below, the Board
believes the final rule will not have a significant economic impact on
a substantial number of small entities.
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\23\ See 13 CFR 121.201. Effective July 14, 2014, the Small
Business Administration revised the size standards for banking
organizations to $550 million in assets from $500 million in assets.
79 FR 33647 (June 12, 2014).
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1. Statement of the need for, and objectives of, the application of
the final rule.
As discussed, the Board is fully applying the RFI rating system to
non-insurance and non-commercial SLHCs to further the Board's goal of
ensuring that holding companies that control depository institutions
are subject to consistent standards and supervisory programs. After a
seven-year adjustment period in which the Board assigned RFI ratings to
SLHCs on an indicative basis, the Board has determined that the RFI
rating system is an effective approach to communicating supervisory
expectations to all non-insurance and non-commercial SLHCs.
2. Significant issues raised by the public comments in response to
the IRFA, a statement of the Board's assessment of such issues, and a
statement of any changes made in the rule as a result of such comments.
As noted above, the Board did not receive any comments on the IRFA
and only received one responsive comment on the proposal. The comment
did not raise any issues regarding the application of the RFI rating
system to small entities. Instead, the comment expressed support for
continuing to apply the RFI rating system on an indicative basis to
insurance SLHCs and requested the Board consider certain issues in
developing any future rating system that may be applied to insurance
SLHCs and to insurance companies that the FSOC has determined should be
supervised by the Federal Reserve. Accordingly, no changes were made as
a result of public comments.
3. Response to any comments filed by the Chief Counsel for Advocacy
of the Small Business Administration in response to the proposed rule,
and detailed statement of any changes made to the proposed rule in the
final rule as a result of the comments.
The Chief Counsel for Advocacy of the Small Business Administration
did not file any comments in response to the proposal.
4. Description and estimate of the number of small entities to
which the rule will apply.
The application of the RFI rating system to non-insurance and non-
commercial SLHCs will apply to approximately 191 SLHCs, of which only
132 SLHCs have $550 million or less in total consolidated assets.
Moreover, as discussed, noncomplex SLHCs under $3 billion will be
assigned an abbreviated version of the RFI rating system consistent
with the Board's practice for BHCs outlined in SR 13-21.
5. Description of the projected reporting, recordkeeping and other
compliance requirements of the rule, including an estimate of small
entities which will be subject to the requirement and the type of
professional skills necessary for preparation of the report or record.
The application of the RFI rating system does not impose any
recordkeeping, reporting, or compliance requirements.
6. Description of the steps taken to minimize the economic impact
on small entities, including a statement for selecting or rejecting the
other significant alternatives to the rule considered by the agency.
As noted, noncomplex SLHCs under $3 billion will be assigned an
[[Page 56085]]
abbreviated version of the RFI rating system consistent with the
Board's practice for BHCs outlined in SR 13-21. An offsite review of
the SLHC will be conducted upon receipt of the lead depository
institution's report of examination. The supervisory cycle will be
determined by the examination frequency of the lead depository
institution and the SLHC will be assigned only a risk management rating
and a composite rating.
Moreover, SLHCs have been subject to the RFI rating system on
indicative basis for the past seven years, which has provided SLHCs the
opportunity to adjust to the RFI rating system. The full application of
the RFI rating system to small non-commercial and non-insurance SLHCs
will not create any new economic impact on small entities.
In light of the foregoing, the Board does not believe that this
final rule will have a significant economic impact on any small
entities and therefore believes that there are no significant
alternatives that would reduce the economic impact on small entities.
By order of the Board of Governors of the Federal Reserve
System, November 2, 2018.
Ann Misback,
Secretary of the Board.
[FR Doc. 2018-24496 Filed 11-8-18; 8:45 am]
BILLING CODE 6210-01-P