[Federal Register Volume 60, Number 131 (Monday, July 10, 1995)]
[Proposed Rules]
[Pages 35688-35690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16564]
Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 /
Proposed Rules
[[Page 35688]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 30
[Docket No. 95-15]
FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Docket No. R-0766]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 364
RIN 3064-AB13
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 570
[No. 95-114]
RIN 1550-AA54
Interagency Guidelines Establishing Standards for Safety and
Soundness
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; and Office of Thrift Supervision, Treasury.
ACTION: Proposed guidelines.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board of Governors), the
Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift
Supervision (OTS) (collectively, the agencies) are proposing asset
quality and earnings standards to be added to the Interagency
Guidelines Establishing Standards for Safety and Soundness (Guidelines)
adopted pursuant to section 39 of the Federal Deposit Insurance Act
(FDI Act) and appearing as an appendix to each of the agencies'
standard for safety and soundness final rule published elsewhere in
this separate part of the Federal Register. The agencies may require an
insured depository institution to file a compliance plan for failure to
meet these asset quality and earnings standards when adopted in final
form.
DATES: Comments must be submitted by August 24, 1995.
ADDRESSES: Interested parties are invited to submit written comments to
any or all of the agencies. All comments will be shared among the
agencies.
OCC: Communications Division, 250 E Street, SW., Washington, DC
20219, attention: Docket No. 95-15. Comments will be available for
public inspection and photocopying at the same location on business
days between 9 a.m. and 5 p.m.
Board of Governors: Comments, which should refer to Docket No. R-
0766, may be mailed to Mr. William Wiles, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551. Comments addressed to Mr. Wiles may also be
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and
to the security control room outside of those hours. Both the mail room
and control room are accessible from the courtyard entrance on 20th
Street between Constitution Avenue and C Street, NW. Comments may be
inspected in room MP-500 between 9 a.m. and 5 p.m., except as provided
in Sec. 261.8 of the Board's Rules Regarding Availability of
Information, 12 CFR 261.8.
FDIC: Robert E. Feldman, Acting Executive Secretary, Attention:
Room F-402, Federal Deposit Insurance Corporation, 550 17th Street,
NW., Washington, DC 20429. Comments may be hand-delivered to room F-
400, 1776 F Street, NW., Washington, DC, on business days between 8:30
a.m. and 5 p.m. [FAX number (202) 898-3838]; Internet E-mail comments
@fdic.gov. Comments will be available for inspection and photocopying
in room 7118, 550 17th Street, NW., Washington, DC 20429, between 9
a.m. and 4:30 p.m. on business days.
OTS: Send comments to Chief, Dissemination Branch Records
Management and Information Policy, Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552, Attention Docket No. 95-114. These
submissions may be hand delivered to 1700 G Street, NW., from 9 a.m. to
5 p.m. on business days; they may be sent by facsimile transmission to
FAX number (202) 906-7755. Comments will be available for inspection at
1700 G Street, NW., from 1 p.m. until 4 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: OCC: Emily R. McNaughton, National
Bank Examiner (202/874-5170), Office of the Chief National Bank
Examiner; David Thede, Senior Attorney, (202/874-5210) Securities and
Corporate Practices Division, Office of the Comptroller of the
Currency, 250 E Street, SW., Washington, DC 20219.
Board of Governors: David Wright, Supervisory Financial Analyst
(202/728-5854), Division of Banking Supervision and Regulation; Scott
G. Alvarez, Associate General Counsel (202/452-3583), Gregory A. Baer,
Managing Senior Counsel (202/452-3236), Legal Division, Board of
Governors of the Federal Reserve System. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544), Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551.
FDIC: Robert W. Walsh, Manager, Planning and Program Development
(202/898-6911) or Michael D. Jenkins, Examination Specialist (202/898-
6896), Division of Supervision; Lisa M. Stanley, Senior Counsel (202/
898-7494), Legal Division, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429.
OTS: William Magrini, Project Manager (202/906-5744), Cathern
Smith, Regional Coordinator (202/906-6614), Supervision; Kevin
Corcoran, Assistant Chief Counsel (202/906-6962), Teri M. Valocchi,
Counsel (Banking and Finance) (202/906-7299), Chief Counsel's Office,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Framework
Section 132 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), added a new section 39 to the FDI Act
which required each Federal banking agency to establish by regulation
certain safety and soundness standards for the insured depository
institutions and depository institution holding companies for which it
was the primary Federal regulator. As enacted in FDICIA, section 39(b)
of the FDI Act required the agencies to establish standards by
regulation specifying a maximum ratio of classified assets to capital
and minimum earnings sufficient to absorb losses without impairing
capital.
On September 23, 1994 the Riegle Community Development and
Regulatory Improvement Act of 1994 (CDRI Act) was enacted. Section
318(a) of the CDRI Act eliminated the requirement that standards
prescribed under section 39 apply to depository institution holding
companies and replaced the requirement that the agencies establish
quantitative asset quality and earnings standards with a requirement
that the agencies establish standards, by regulation or by guideline,
relating to asset quality and earnings that the agencies determine to
be
[[Page 35689]]
appropriate. Pursuant to section 318 of the CDRI Act, these amendments
have the same effective date as section 39 of the FDI Act, as provided
in section 132(c) of FDICIA.
B. Agencies' Proposals
The agencies published a joint advance notice of proposed
rulemaking in the Federal Register. 57 FR 31336 (July 15, 1992). The
agencies received over 400 comment letters in response to the ANPR,
with some letters submitted to more than one agency. The agencies'
proposal requested comment on all aspects of the safety and soundness
standards required to be prescribed pursuant to section 39 of the FDI
Act, as enacted in FDICIA. Commenters strongly recommended that the
agencies adopt general rather than specific standards. The agencies
published a joint notice of proposed rulemaking in the Federal Register
on November 18, 1993, 59 FR 60802. The agencies proposed quantitative
asset quality and earnings standards in accordance with the statutory
mandate set forth in FDICIA.
C. Final Rule and Interagency Guidelines Establishing Standards for
Safety and Soundness
Each of the agencies has adopted a final rule (Final Rule) and
Interagency Guidelines Establishing Standards for Safety and Soundness
(Guidelines). The agencies' Final Rule establishes deadlines for
submission and review of safety and soundness compliance plans which
may be required for failure to meet one or more of the safety and
soundness standards adopted in the Guidelines. The agencies' Final Rule
and Guidelines are published elsewhere in this separate part of the
Federal Register. The Guidelines will appear as appendices to each of
the agencies' Final Rule.1
\1\ For the OCC, these Guidelines appear as Appendix A to Part
30; for the Board of Governors, these Guidelines appear as Appendix
D to Part 208; for the FDIC, these Guidelines appear as Appendix A
to Part 364; and for the OTS, these Guidelines appear as Appendix A
to Part 570.
If adopted in final form, the agencies intend to incorporate these
asset quality and earnings standards into the Guidelines. Thus, if
adopted in final form, the agencies may require submission of a
compliance plan for failure to meet the asset quality and earnings
standards.
II. Request for Comment on Proposed Asset Quality and Earnings
Standards
As enacted in FDICIA, section 39(b) of the FDI Act required the
agencies to establish standards specifying a maximum ratio of
classified assets to capital and minimum earnings sufficient to absorb
losses without impairing capital. As amended by the CDRI Act, section
39(b) no longer requires the agencies to establish quantitative
standards. Instead, the agencies are required to establish such
standards relating to asset quality and earnings that the agencies
determine to be appropriate.
Although commenters generally found the agencies' proposed
quantitative standards acceptable, some commenters criticized the
proposed standards as inflexible and simplistic. While the agencies
believe that the standards as proposed are acceptable, they also
believe that more comprehensive standards in these areas, as allowed
under section 39(b), as amended, would be more useful and appropriate.
Therefore, the agencies are proposing new standards for asset quality
and earnings that emphasize monitoring, reporting and preventive or
corrective action appropriate to the size of the institution and the
nature and scope of its activities. These standards would be adopted by
guideline.
The agencies believe the proposed standards are more likely to aid
in the identification and resolution of emerging problems than setting
minimum or maximum ratios. The agencies intend to continue to perform
independent analyses that may include asset quality and earnings ratio
analysis and will focus on an institution's oversight, reporting and
corrective actions in these areas. The agencies believe that well-
managed institutions should not find it necessary to modify their
operations to comply with the proposed guidelines.
A. Standards Relating to Asset Quality
The agencies are proposing asset quality standards requiring
monitoring and reporting systems to identify emerging problems and
corrective actions to resolve them. The standards provide for
institutions to identify problem assets and estimate inherent losses.
Institutions would also be required to: (1) Consider the size and
potential risks of material concentrations of credit risk, (2) compare
the level of problem assets to the level of capital and establish
reserves sufficient to absorb anticipated losses on those and other
assets, (3) take appropriate corrective action to resolve problem
assets; and (4) provide periodic asset quality reports to the board of
directors to assess the level of asset risk.
The complexity and sophistication of an institution's monitoring,
reporting systems and corrective actions should be commensurate with
the size, nature and scope of the institution's operations. The
agencies believe that the proposed asset quality standards are
consistent with the practices of well-managed institutions and
represent the long-standing and established expectations of the
agencies.
B. Standards Relating to Earnings
The agencies are proposing earnings standards requiring monitoring
and reporting systems similar to the standards for asset quality. The
standards are intended to ensure prompt remedial actions to enhance
early identification and resolution of problems. The standards require
institutions to compare their earnings trends, relative to equity,
assets and other common benchmarks with their historical experience and
with their peers. The standards also provide that institutions should:
(1) evaluate the adequacy of earnings given the institution's size, and
complexity, and the risk profile of the institution's assets and
operations, (2) assess the source, volatility and sustainability of
earnings, (3) evaluate the effect of nonrecurring or extraordinary
income or expense, (4) take steps to ensure that earnings are
sufficient to maintain adequate capital and reserves after considering
asset quality and the institution's rate of growth, and (5) provide
periodic reports with enough information for management and the board
of directors to assess earnings performance.
As with the asset quality standards, the institution's monitoring,
reporting systems and corrective actions should be commensurate with
the size, nature and scope of the institution's operations. Once again,
the agencies believe that these earnings standards are consistent with
the practices of well-managed institutions and represent the long-
standing and established expectations of the agencies.
The agencies propose to add to the Interagency Guidelines
Establishing Standards for Safety and Soundness standards relating to
asset quality and earnings as set forth below. The agencies request
comment on all aspects of the proposed standards.
Regulatory Flexibility Act
Pursuant to Section 605(b) of the Regulatory Flexibility Act, the
agencies certify that the proposal will not have a significant economic
impact on a substantial number of small entities. Accordingly, a
regulatory flexibility analysis is not required. This proposal adds
asset quality and earnings standards to the Interagency Guidelines
[[Page 35690]]
Establishing Standards for Safety and Soundness.
Executive Order 12866
The OCC and the OTS have determined that this proposal is not a
``significant regulatory action'' for purposes of Executive Order
12866.
The proposed new paragraphs G and H of Section II of the
Interagency Guidelines Establishing Standards for Safety and Soundness
are as follows:
Asset Quality and Earnings Standards
G. Asset Quality. An insured depository institution should
establish and maintain a system to identify problem assets and prevent
deterioration in those assets in a manner commensurate with its size
and the nature and scope of its operations. The institution should:
1. Conduct periodic asset quality reviews to identify problem
assets and estimate the inherent losses in those assets;
2. Consider the size and potential risks of material asset
concentrations;
3. Compare problem asset totals to capital and establish reserves
that are sufficient to absorb estimated losses;
4. Take appropriate corrective action to resolve problem assets;
5. Provide periodic asset quality reports with adequate information
for management and the board of directors to assess the level of asset
quality risk.
H. Earnings. An insured depository institution should establish and
maintain a system to evaluate and monitor earnings and ensure that
earnings are sufficient to maintain adequate capital and reserves in a
manner commensurate with its size and the nature and scope of its
operations. The institution should:
1. Compare recent earnings trends relative to equity, assets or
other commonly used benchmarks to the institution's historical results
and those of its peers;
2. Evaluate the adequacy of earnings given the size, complexity and
risk profile of the institution's assets and operations;
3. Assess the source, volatility and sustainability of earnings;
4. Evaluate the effect of nonrecurring or extraordinary income or
expense;
5. Take steps to ensure that earnings are sufficient to maintain
adequate capital and reserves after considering the institution's asset
quality and growth rate; and
6. Provide periodic earnings reports with adequate information for
management and the board of directors to assess earnings performance.
Dated: April 13, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
By Order of the Board of Governors of the Federal Reserve
System, June 6, 1995.
William W. Wiles,
Secretary of the Board.
By order of the Board of Directors.
Dated at Washington, D.C., this 21st day of March, 1995.
Federal Deposit Insurance Corporation
Robert E. Feldman,
Deputy Executive Secretary.
Dated: May 25, 1995.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 95-16564 Filed 7-7-95; 8:45 am]
BILLING CODES: 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P