[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