Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C.  20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 07-8
May 11, 2007

TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
SUBJECT:  Expanded Examination Cycle for Certain Financial Institutions

Summary

On April 3, 2007, the Federal Reserve Board (Board), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) jointly issued interim rules implementing section 605 of the Financial Services Regulatory Relief Act of 2006 (FSRRA), and Public Law No. 109-473. The rules are effective on April 10, 2007. The Federal Register notice is attached.

The rules permit insured depository institutions that have less than $500 million in total assets and that meet certain other criteria to qualify for an 18-month (rather than a 12-month) on-site examination cycle. Prior to enactment of FSRRA, only insured depository institutions with less than $250 million in total assets were eligible for an 18-month on-site examination cycle. The Board, FDIC, and OCC are making parallel changes to their regulations governing the on-site examination cycle for U.S. branches and agencies of foreign banks, consistent with section 7(c)(1)(C) of the International Banking Act of 1978 (IBA), as amended.1  In addition to implementing the changes in the examination amendments, the agencies are clarifying when a small insured depository institution is considered “well managed” for purposes of qualifying for an 18-month examination cycle.

Discussion

The Board has exercised its authority under Section 10(d) of the FDI Act,2  as amended by FSRRA, to permit an insured state member bank with total assets of more than $250 million, but less than $500 million, to qualify for an 18-month examination cycle if the bank’s composite condition was found to be outstanding or good (CAMELS composite 1 or 2) at its most recent examination and it meets the other conditions of Section 208.64(b) of Regulation H.3  Similarly, in light of the amendments made to section 10(d) of the FDI Act, U.S. branches and agencies of foreign banks with total assets of less than $500 million also may qualify for an 18-month examination cycle if the foreign bank office’s composite condition under the ROCA supervisory rating system was found to be outstanding or good (composite 1 or 2) at its most recent examination and it meets the other conditions of Section 211.26(c)(2) of Regulation K.4

The Agencies also have modified their rules to specify, consistent with current practice, that a small insured depository institution meets the statutory “well managed” criteria for an 18-month cycle if the institution, besides having a CAMELS composite rating of 1 or 2, also received a rating of 1 or 2 for the management component of the CAMELS rating at its most recent examination. This modification will provide additional transparency to the Agencies’ rules and clarify how the Agencies interpret and apply the “well managed” requirement in section 10(d).5 This interpretation is consistent with the definition of “well managed” that the Agencies currently apply in other circumstances.

Reserve Banks should incorporate the longer examination cycles into their examination activities immediately for insured state member banks and U.S. branches and agencies of foreign banks with total assets of less than $500 million that meet the other criteria of Sections 208.64(b) or 211.26(c)(2), as appropriate. The Federal Reserve continues to have the authority to examine state member banks and U.S. branches and agencies of foreign banks as frequently as deemed necessary, and Reserve Banks should exercise this authority in appropriate cases.

Questions about this rulemaking may be directed to Barbara Bouchard, Deputy Associate Director (202) 452-2629; Mary Frances Monroe, Manager (202) 452-5231; or Stanley Rediger, Supervisory Financial Analyst (202) 452-2629, Supervisory and Risk Policy; or Nancy Perkins, Assistant Director (202) 973-5006 or Jinai Holmes, Supervisory Financial Analyst (202) 452-2834, Quality Assurance.

Roger T. Cole
Director


Attachment:  Federal Register notice (79 KB PDF  |  Text )


Notes:
  1. See 12 U.S.C. 3015(c).  Return to text
  2. See 12 U.S.C. 1820(d).  Return to text
  3. See 12 CFR 208.64(b). A state member bank meets the other conditions of Section 208.64(b) if (i) it is well capitalized, as defined in 12 C.F.R. 208.43; (ii) at the most recent examination conducted by either the Federal Reserve or applicable state banking agency, the Federal Reserve found the bank to be well managed; (iii) the bank currently is not subject to a formal enforcement proceeding or order by the FDIC, OCC, or Federal Reserve; and (iv) no person acquired control of the bank during the preceding 12-month period in which a full-scope, on-site examination would have been required but for the provisions of 12 C.F.R. 208.64(b).  Return to text
  4. See 12 U.S.C. § 3105(c)(1)(C) and 12 CFR 211.26(c)(2). A branch or agency of a foreign bank meets the other criteria of 12 C.F.R. 211.26(c)(2) if (i) either, (A) the foreign bank’s most recently reported capital adequacy position consists of, or is equivalent to, Tier 1 and total risk-based capital ratios of at least 6 percent and 10 percent, respectively, on a consolidated basis, or (B) the branch or agency maintains, on a daily basis, over the past three quarters, eligible assets (determined consistent with applicable federal and state law) in an amount not less than 108 percent of the preceding quarter’s average third party liabilities and sufficient liquidity is currently available to meet its obligations to third parties; (ii) it is not subject to a formal enforcement action or order by the Board, FDIC, or the OCC; and (iii) it has not experienced a change in control during the preceding 12-month period in which a full-scope, on-site examination would have been required but for 12 C.F.R. 211.26(c). Moreover, in determining the eligibility of a branch or agency of a foreign bank for an extended examination cycle, the following additional factors, among others, may be considered:  (i) whether any of the individual components of the ROCA supervisory rating of a branch or agency of the foreign bank is rated “3” or worse; (ii) whether the results of any off-site surveillance indicate a deterioration in the condition of the office; (iii) whether the size, relative importance, and role of a particular office when reviewed in the context of the foreign bank’s entire U.S. operations otherwise necessitate an annual examination; and (iv) whether the condition of the foreign bank gives rise to such a need.  Return to text
  5. The agencies’ rules relating to the examination cycle for foreign bank offices already permit the appropriate agency to consider, among other things, whether the office received a “3” or lower rating for any of the individual ROCA components (including risk management) in determining whether the office should qualify for an 18-month examination cycle. See 12 CFR 211.26(c)(2)(ii) (Board), 4.7(b)(2)(i) (OCC), and 347.211(b)(2)(i) (FDIC).  Return to text


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