BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 92-2 (FIS)
February 10, 1992
TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
SUBJECT: Treatment of Value Impaired Classifications for Asset Quality Purposes
Existing examination procedures, consistent with the International Lending Supervision Act, require a specified writedown or Allocated Transfer Risk Reserve (ATRR) on those assets deemed by the regulatory agencies to have been significantly impaired by protracted transfer risk problems. For asset quality rating purposes, the Commercial Bank Manual procedures call for the residual portion of Value Impaired exposure, net of an ATRR or charge-off, to be treated the same as for doubtful loans (ie. weighted at 50%), for the purpose of assessing a bank's weighted classified asset ratio.
Since this act was passed in 1983, the agencies have mandated writedowns which have resulted in the majority of the exposure being either written-off or reserved against for nearly all Value Impaired assets. Consequently, a reevaluation of the asset quality computation described above for the residual Value Impaired exposure is warranted. For asset quality rating purposes, examiners should weight the residual portion of any Value Impaired exposure at 20 percent. Although this is the same weighting used for substandard loans, the residual exposure still remains Value Impaired for examination and classification purposes. The Transfer Risk section of the Commercial Bank Manual will be revised to reflect this change in procedure. For institutions that are not required to have an ATRR, in determining weighted classifications for Value Impaired credits, the ATRR portion is to be weighted at 100 percent and the residual amount at 20 percent.
If you have any questions on the above, please contact Michael Martinson (x3640) or Joe Sciortino (x2294).
William A. Ryback
SR letters | 1992