[Federal Register Volume 59, Number 13 (Thursday, January 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1315]


[[Page Unknown]]

[Federal Register: January 20, 1994]


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FEDERAL RESERVE SYSTEM
[Docket No. R-0806]

 

Modifications to the Payments System Risk Reduction Program; 
Self-Assessment Procedures, Caps for U.S. Branches and Agencies of 
Foreign Banks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Policy statement.

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SUMMARY: As part of its payments system risk reduction program, the 
Board is adopting modifications to its Policy Statement on Payments 
System Risk. Specifically, the Board is modifying in two ways the 
procedures that depository institutions must use if they choose to 
complete a self-assessment to establish a daylight overdraft net debit 
cap. First, effective for self-assessments performed on or after 
January 1, 1995, depository institutions must evaluate their operating 
controls and contingency procedures in addition to the three existing 
components of the self-assessment (creditworthiness, intraday funds 
management and control, and customer credit policies and controls). 
Second, depository institutions will use a ``Creditworthiness Matrix'' 
to determine their overall creditworthiness rating, except in certain 
limited circumstances. In addition to these two changes to the self-
assessment procedures, the Board is eliminating the requirement that 
branches and agencies of foreign banks provide information on U.S. 
funding capability and discount window eligible collateral for use in 
determining their daylight overdraft net debit caps.

DATES: Effective April 14, 1994.

FOR FURTHER INFORMATION CONTACT: Jeffrey C. Marquardt, Assistant 
Director (202/452-2360), Paul Bettge, Manager (202/452-3174), Division 
of Reserve Bank Operations and Payment Systems; for the hearing 
impaired only: Telecommunications Device for the Deaf, Dorothea 
Thompson (202/452-3544).

SUPPLEMENTARY INFORMATION:

Background

    The Board's Payments System Risk policy requires that institutions 
incurring daylight overdrafts in their Federal Reserve accounts 
establish a maximum limit, or net debit cap, on overdrafts incurred in 
those accounts. In August 1993, the Board requested comment on three 
proposals to modify the procedures for establishing net debit caps. The 
Board received 16 public comments on the proposals.

Self-Assessment Procedures

    Under the Board's policy, an institution's net debit cap (for a 
single day and on average over a two-week reserve maintenance period) 
is based on its cap category. The cap categories that permit relatively 
higher use of intraday credit are the Average, Above Average, and High 
cap categories. An institution that wishes to establish a cap in one of 
these categories must complete an assessment of its creditworthiness, 
intraday funds management and control, and customer credit policies and 
controls.
Operating Controls and Contingency Procedures
    The Board requested comment on the addition of a fourth component 
to the self-assessment procedures to cover operating controls and 
contingency procedures, with a proposed effective date of January 1, 
1995. Nine commenters viewed favorably the Board's proposal to require 
the assessment of operating controls and contingency procedures. These 
commenters did not indicate that the proposal would substantially 
increase regulatory burden. Two of these commenters suggested a later 
implementation date for the additional assessment component, however. 
One other commenter opposed the additional component as being 
duplicative of other bank regulatory requirements, while two commenters 
felt that the additional component would be burdensome for smaller 
institutions.
    In the Board's view, it is important that any institution that 
wishes to use a relatively higher amount of Federal Reserve intraday 
credit perform an assessment of its operating controls and contingency 
procedures relating to its payments activity. Furthermore, the 
assessment itself consists of eight straightforward questions about the 
institution's operations and should pose a burden to complete. 
Institutions whose operating controls and contingency procedures are 
not currently adequate to meet the criteria in the self-assessment 
procedures should not incur overdrafts greater than those permitted by 
a de minimis cap, which permits a lower amount of overdrafts without 
the requirement of a self-assessment, until they upgrade their 
procedures to meet such criteria.
    The Board is therefore adopting the fourth component to the self-
assessment procedures as proposed to cover operating controls and 
contingency procedures for assessments performed on or after January 1, 
1995. Depository institutions may elect to include the additional 
component in assessments performed prior to that date, however.
Creditworthiness Matrix
    In an attempt to reduce the burden on institutions electing to 
undertake an assessment, the Board proposed a simplified approach to 
assessing creditworthiness. Under the new methodology, an institution's 
prompt corrective action capital category and its supervisory rating 
are combined into a single rating for the creditworthiness component of 
the self-assessment using a Creditworthiness Matrix, which is shown 
below.
    The Board believes that it is appropriate, in nearly all 
circumstances, for depository institutions to use the Matrix to 
determine their creditworthiness rating. In certain limited 
circumstances, however, institutions will be permitted to perform a 
full assessment of creditworthiness. (Procedures for completing the 
full assessment of creditworthiness are included in the Guide to the 
Federal Reserve's Payments System Risk Policy, which is available from 
any Reserve Bank.) For example, an institution whose condition has 
changed significantly since its last examination, or that possesses 
additional substantive information regarding its financial condition, 
may be permitted to justify a different rating based on a full 
creditworthiness assessment. In all cases, the Reserve Banks retain the 
responsibility for reviewing caps and determining appropriate cap 
levels. 

                        Creditworthiness Matrix                         
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                               Supervisory composite rating             
  Capital level   ------------------------------------------------------
                        Strong          Satisfactory          Fair      
------------------------------------------------------------------------
Well Capitalized.  Excellent........  Very Good.......  Adequate        
Adequately         Very Good........  Very Good.......  Adequate        
 Capitalized.                                                           
Undercapitalized.  (***)              (***)             Below Standard. 
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***Institutions that fall into this category should perform a full      
  assessment of creditworthiness.                                       
                                                                        
Note: Institutions that fall into categories not shown in the Matrix    
  would receive a Below Standard rating.                                


    U.S. branches and agencies of foreign banks located in countries 
that adhere to the Basle Capital Accord are treated in the same manner 
as U.S.-based banks, with supervisory ratings of the U.S. branches or 
agencies used in conjunction with the capital category of the parent 
bank. The resulting creditworthiness rating for the U.S. branch or 
agency is conditioned on the overall creditworthiness of the entire 
foreign banking organization, however. In addition, foreign banks from 
countries that have not subscribed to the Basle Capital Accord must 
perform a full assessment of creditworthiness in order to determine 
their net debit cap.
    In August 1993, the Board requested public comment on the use of 
the Creditworthiness Matrix. Eleven commenters specifically addressed 
the changes in the methodology for the assessment of creditworthiness. 
Nine commenters expressed support for the Board's proposal to 
streamline the self-assessment process through the use of the new 
Creditworthiness Matrix and indicated that the new procedures would 
reduce regulatory burden. Of these, however, five commenters felt that 
depository institutions should be permitted the option of completing 
the full assessment of creditworthiness.
    Two commenters did not support the Creditworthiness Matrix method, 
but suggested that its use be optional. The Institute of International 
Bankers, an association representing foreign banks, opposed any 
mandatory use of the Matrix as it would result in lower caps for many 
branches and agencies of foreign banks.
    In the Board's view, the benefits of the Creditworthiness Matrix 
approach, namely a streamlined self-assessment process and increased 
objectivity of the creditworthiness ratings across institutions, 
mitigates objections to standardized usage of the Matrix. As 
institutions adopting caps in the Average, Above Average, and High 
categories may be permitted to incur overdrafts greater than their 
capital, it is particularly important that these caps be appropriate 
given institutions' financial strength as measured by objective 
regulatory criteria. While some institutions, including a number of 
foreign banks, will likely adopt lower caps as a result of using the 
Creditworthiness Matrix, analysis of these institutions' recent 
daylight overdraft activity indicates that these caps should not be 
unduly constraining.
    The Board is, therefore, adopting the modifications as proposed to 
the creditworthiness component of the self-assessment procedures, 
effective April 14, 1994. For self-assessments performed on or after 
that date, including those performed as part of the annual cap renewal 
process, depository institutions will be required to use the 
Creditworthiness Matrix in all but certain limited circumstances. If 
appropriate, depository institutions may, at their option, use the 
Creditworthiness Matrix in completing self-assessments prior to that 
date.

Net Debit Caps for Branches and Agencies of Foreign Banks

    The determination of net debit caps for foreign banks is based on 
essentially the same procedures as those for U.S. institutions. 
However, for foreign banks, the Federal Reserve has also required 
evidence of an institution's U.S. funding capability and discount 
window eligible collateral. The dollar amount of an institution's net 
debit cap could be reduced (below its cap multiple times its capital) 
based on these amounts.
    Experience with U.S. funding capability and collateral data has 
shown that, in order to collect these data with sufficient precision 
and frequency, a significant regulatory burden is imposed. In addition, 
it is unlikely that these data accurately measure a foreign bank's 
ability to raise funds at times when rapid access to money markets may 
be necessary. As a result, the Board proposed to discontinue reporting 
of information on U.S. funding capability and discount window eligible 
collateral by branches and agencies of foreign banks for use in 
determining daylight overdraft net debit caps.
    Only two commenters mentioned the proposal to discontinue reporting 
of this information by foreign banks. The Institute of International 
Bankers supported the proposal. One U.S. commercial bank opposed the 
proposal, based on the rationale that supervisory ratings used in 
determining net debit caps for foreign banks are not comparable to 
those for U.S. institutions. In the Board's view, the proposed 
requirement that creditworthiness ratings of branches and agencies of 
foreign banks be conditioned on the overall creditworthiness of the 
entire foreign banking organization should help alleviate such 
concerns. The Board is therefore adopting the proposed modification to 
the method for establishing caps for branches and agencies of foreign 
banks, effective April 14, 1994.

Guide to the Federal Reserve's Payments System Risk Policy

    In order to facilitate public comment on the August 1993 proposals, 
the Board provided depository institutions with a draft version of the 
Guide to the Federal Reserve's Payments System Risk Policy. This 
document is intended to provide a thorough description of the 
procedures to be used in conducting a self-assessment. Once issued in 
final form, the Guide to the Federal Reserve's Payments System Risk 
Policy will supersede previously issued versions of the Users' Guide to 
the Payments System Risk Policy. The Federal Reserve has also issued a 
new summary document, entitled Overview of the Federal Reserve's 
Payments System Risk Policy, which describes the requirements of the 
policy for institutions that incur minimal daylight overdrafts. The 
Board is also modifying the text of the Policy Statement on Payment 
System Risk to include appropriate references to these two new 
documents.

Federal Reserve System Policy Statement on Payments System Risk

    The Board is amending its ``Federal Reserve System Policy Statement 
on Payments System Risk'' under the heading ``I. Federal Reserve 
Policy'' by replacing the last three sentences of the Introduction, 
part (C)(2) under the headings ``C. Capital'' and ``2. U.S. Agencies 
and Branches of Foreign Banks,'' and the first paragraph of part (D)(1) 
under the headings ``D. Net Debit Caps'' and ``1. Cap Set Through Self-
Assessment'' as set forth below:

Introduction

* * * * *
    To assist depository institutions in implementing the Board's 
policies, the Federal Reserve has prepared two documents, the Overview 
of the Federal Reserve's Payments System Risk Policy and the Guide to 
the Federal Reserve's Payments System Risk Policy, which are available 
from any Reserve Bank. The Overview of the Federal Reserve's Payments 
System Risk Policy provides a summary of the Board's policy on payments 
system risk, including daylight overdraft net debit caps and fees. The 
Overview is intended for use by institutions that incur only small and 
infrequent daylight overdrafts. The Guide to the Federal Reserve's 
Payments System Risk Policy explains in detail how the policies apply 
to various types of institutions and includes procedures for completing 
a self-assessment and filing a cap resolution, as well as information 
on other aspects of the payments system risk policy.
* * * * *

I.C. Capital

2. U.S. Agencies and Branches of Foreign Banks

    For U.S. agencies and branches of foreign banks, net debit caps on 
daylight overdrafts in Federal Reserve accounts are calculated by 
applying the cap multiples for each cap category to consolidated ``U.S. 
capital equivalency.''4
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    \4\The term ``U.S. capital equivalency'' is used in this context 
to refer to the particular capital measure used to calculate 
daylight overdraft net debit caps, and does not necessarily 
represent an appropriate capital measure for supervisory or other 
purposes.
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    For a foreign bank whose home-country supervisor adheres to the 
Basle Capital Accord, U.S. capital equivalency is equal to the greater 
of 10 percent of worldwide capital or 5 percent of the total 
liabilities of each agency or branch, including acceptances, but 
excluding accrued expenses and amounts due and other liabilities to 
offices, branches, and subsidiaries of the foreign bank. In the absence 
of contrary information, the Reserve Banks presume that all banks 
chartered in G-10 countries meet the acceptable prudential capital and 
supervisory standards and will consider any bank chartered in any other 
nation that adopts the Basle Capital Accord (or requires capital at 
least as great and in the same form as called for by the Accord) 
eligible for the Reserve Banks' review for meeting acceptable 
prudential capital and supervisory standards.
    For all other foreign banks, U.S. capital equivalency is measured 
as the greater of (1) the sum of the amount of capital (but not 
surplus) that would be required of a national bank being organized at 
each agency or branch location, or (2) the sum of 5 percent of the 
total liabilities of each agency or branch, including acceptances, but 
excluding accrued expenses and amounts due and other liabilities to 
offices, branches, and subsidiaries of the foreign bank.
    In addition, any foreign bank may incur daylight overdrafts above 
its net debit cap up to a maximum amount equal to its cap multiple 
times 10 percent of its worldwide capital, provided that any overdrafts 
above its net debit cap are collateralized. This policy offers all 
foreign banks, under terms that reasonably limit Reserve Bank risk, a 
level of overdrafts based on the same proportion of worldwide capital. 
Consequently, banks chartered in countries that follow the Basle Accord 
and whose net debit cap is based on 10 percent of worldwide capital are 
not permitted to incur overdrafts above their net debit cap. All other 
foreign banks may incur overdrafts to the same extent as banks from 
Basle Accord countries, that is, up to their cap multiple times 10 
percent of their worldwide capital, provided that sufficient collateral 
is posted for any overdrafts in excess of their net debit cap. In 
addition, foreign banks may elect to collateralize all or a portion of 
their overdrafts related to book-entry securities activity.
* * * * *

I.D. Net Debit Caps

1. Cap Set Through Self-Assessment

    In order to establish a net debit cap category of Average, Above 
Average, or High, an institution must perform a self-assessment of its 
own creditworthiness, intraday funds management and control, customer 
credit policies and controls, and, effective January 1, 1995, operating 
controls and contingency procedures.5 The assessment of 
creditworthiness should be based on the institution's supervisory 
rating and Prompt Corrective Action capital category. An institution 
may be permitted to perform a full assessment of its creditworthiness 
in certain limited circumstances, for example, if its condition has 
changed significantly since its last examination, or if it possesses 
additional substantive information regarding its financial condition. 
Additionally, U.S. branches and agencies of foreign banks based in 
countries that do not adhere to the Basle Capital Accord are required 
to perform a full assessment of creditworthiness to determine their 
ratings for the creditworthiness component. An institution performing a 
self-assessment must also evaluate its intraday funds management 
procedures and its procedures for evaluating the financial condition of 
and establishing intraday credit limits for its customers. Finally, the 
institution must evaluate its operating controls and contingency 
procedures to determine if they are sufficient to prevent losses due to 
fraud or system failures. The Guide to the Federal Reserve's Payments 
System Risk Policy, available from any Reserve Bank, includes a 
detailed explanation of the steps that should be taken by a depository 
institution in performing a self-assessment to establish a net debit 
cap.
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    \5\This assessment should be done on an individual institution 
basis, treating as separate entities each commercial bank, each Edge 
corporation (and its branches), each thrift institution, etc. An 
exception is made in the case of U.S. agencies and branches of 
foreign banks. Because these entities have no existence separate 
from the foreign bank, all the U.S. offices of foreign banks 
(excluding U.S. chartered bank subsidiaries and U.S. chartered Edge 
subsidiaries) should be treated as a consolidated family relying on 
the foreign bank's capital.
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* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, January 13, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-1315 Filed 1-19-94; 8:45 am]
BILLING CODE 6210-01-P