OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
SUPERVISION AND REGULATION
October 1, 1998
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OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 |
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| DIVISION OF BANKING SUPERVISION AND REGULATION |
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| SR 98-28 (SUP) October 1, 1998 |
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TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
This SR letter establishes revised criteria for conducting safety and soundness and trust examinations of insured depository institutions that are either (1) seeking to become state member banks; or (2) merging into state member banks.
Federal Reserve policy, previously articulated in SR letter 95-30, generally has been to conduct a safety and soundness examination of any national or state nonmember bank seeking to convert to state membership status, as well as of a bank proposing to be merged into an existing state member bank. The policy set forth in SR letter 95-30, however, allowed for targeted examinations to be conducted in lieu of full scope examinations if certain criteria were met, and for waivers of the policy requirements in certain situations. With respect to trust examinations, Federal Reserve policy, articulated in SR letter 86-39, has been to examine the trust activities of state chartered banks or trust companies before membership is granted.
The implementation of a risk-focused approach to examinations, as well as the streamlining of filing requirements by insured depository institutions seeking to become state member banks, has necessitated changes to the policy of conducting routine pre-membership or pre-merger examinations.
Effective immediately, pre-membership examinations of state nonmember banks, national banks, and savings associations seeking to convert to state membership status will not be required if the bank or savings association seeking membership meets the criteria for "eligible bank", as set forth in section 208.2(e) of the Board's Regulation H.1 Additionally, examinations of state nonmember banks, national banks, and savings associations seeking to merge into a state member bank will not be required so long as the state member bank, on an existing and pro forma basis, will meet the criteria for "eligible bank."
For those insured depository institutions that are not subject to a pre-membership or pre-merger examination under this policy statement, risk assessments and supervisory strategies should be completed no later than 30 days after the conversion or merger. To the extent issues or concerns arise, targeted or, if warranted, full scope examinations of the converted or merged institution should be conducted as soon as possible after the conversion or merger. With respect to a state member bank that was formerly a savings association or that acquired a savings association, the risk assessment and supervisory strategy should pay particular attention to activities conducted by a service corporation subsidiary that may not be permissible for a state member bank.
Pre-membership or pre-merger examinations should generally be conducted for an insured depository institution that does not meet the criteria for "eligible bank", as noted above. Consistent with a risk-focused approach, such examinations can be targeted, as appropriate, to the identified area(s) of weakness. The Reserve Bank, may, however, in its discretion, waive the examination requirement if it is determined that conducting an examination would be inconsistent with a risk-focused approach and/or would be unlikely to provide information that would assist materially in evaluating the statutory and regulatory factors that the Federal Reserve is required to consider in acting on the membership or merger application.2 In determining to waive an examination under this policy, the Reserve Bank should prepare and maintain documentation supporting its decision.
In all circumstances, it remains the responsibility of each Reserve Bank to ensure that the examination frequency timeframes established by Federal Reserve policy and Section 111 of FDICIA are adhered to. When the statutory deadline for an examination of an insured depository institution seeking membership is approaching, or has passed, a Federal Reserve examination of the institution should be conducted as soon as is practical after the institution becomes a state member.
This policy statement supercedes SR letter 95-30, Waiver of Pre-Merger and Pre-Membership Examinations for National and State Nonmember Banks. However, this SR letter does not replace SR letter 86-39, Frequency and Scope of Specialized Examinations, but only modifies that portion of the letter pertaining to pre-membership trust examinations. For questions regarding this policy, please contact Molly S. Wassom, Deputy Associate Director, at (202) 452-2305, or Tom Keady, Manager, at (202) 728-5885.
Director
Footnotes 1. “Eligible bank” is defined to mean a member bank that: (1) is well capitalized as defined in Subpart D; (2) has a composite CAMELS rating of 1 or 2; (3) has a CRA rating of “outstanding” or “satisfactory”; (4) has a compliance rating of 1 or 2; and (5) has no major unresolved supervisory issues outstanding, as determined by the Board or appropriate Federal Reserve Bank in its discretion. Less than satisfactory progress toward Year 2000 compliance, as evidenced by a rating of “needs improvement” or “unsatisfactory” would generally be considered a major unresolved supervisory issue. Similarly, a major unresolved supervisory issue could arise from significant trust or fiduciary activities that are found to be conducted in a less than satisfactory manner. Return to text 2. Since membership in the Federal Reserve System does not confer deposit insurance, the CRA does not, by its terms, apply to membership applications. Nevertheless, a less than satisfactory CRA rating, especially if it reflects a chronic record of weak CRA performance, would presumably reflect poorly upon the abilities of management of the institution. Consequently, a determination as to whether or not to conduct a pre-membership CRA examination should be based upon a risk-focused assessment of the issues involved, with an institution’s CRA performance being only one of the factors considered from a risk-focused perspective. Return to text
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SR letters | 1998
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