Seal of the Board of Governors of the Federal Reserve System

WASHINGTON, D. C.  20551


SR 93-19 (FIS)
April 13, 1993


SUBJECT: Supplemental Guidance for the Inspection of Nonbank Subsidiaries of Bank Holding Companies

                        The purpose of this letter is to supplement the guidance regarding the conduct of bank holding company inspections outlined in SR 85-28, effective January 1, 1986, as it relates to the supervision of nonbank subsidiaries.  Specifically, this letter establishes 1) the requirement for a written risk assessment of all nonbank activities of bank holding companies, 2) criteria for required on-site inspections of nonbank subsidiaries, and 3) standards for off-site review of nonbank activities.

Risk Assessment of Nonbank Activities

                        For each bank holding company with nonbank activities, examiners should prepare a written "risk assessment" of each active nonbank subsidiary addressing the financial and managerial concerns outlined below.1 This assessment should be performed with the same frequency required for full scope inspections.  The purpose of this assessment is to identify subsidiaries with a risk profile that warrants an on-site presence, even if the subsidiary does not meet the minimum criteria set forth below under the section "On-site Reviews of Nonbank Subsidiaries." In formulating this assessment, the examiner should consider all available sources of information including, but not limited to:

  • findings, scope and recency of previous inspections;
  • ongoing monitoring efforts of surveillance and financial analysis units;
  • information received through first day letters or other pre-inspection communications;
  • regulatory reports and published financial information; and,
  • reports of internal and external auditors.

                        The risk assessment should address each nonbank subsidiary's funding risk, earnings exposure, operational risks, asset quality, capital adequacy, contingent liabilities and other off-balance sheet exposures, management information systems and controls, transactions with affiliates, growth in assets, and the quality of oversight provided by the management of the bank holding company and nonbank subsidiary.  Examiners are expected to document their assessment of the overall risk posed by each nonbank subsidiary in the inspection workpapers and to summarize their assessment of nonbank activities in bank holding company inspection reports.

On-Site Reviews of Nonbank Subsidiaries

                         Notwithstanding the risk assessment performed for all nonbank activities, an on-site review is required for the following nonbank subsidiaries2:

  • Any individual subsidiary that meets either of the following two significance criteria or that is otherwise deemed by the Reserve Bank to have a significant impact on the bank holding company's condition or performance:3

    • The subsidiary has total assets which equal 10 percent or more of the bank holding company's consolidated Tier 1 capital; or

    • The subsidiary's total operating revenue equals 10 percent or more of the bank holding company's consolidated total operating revenue.4

  • Nonbank subsidiaries that are issuing debt to unaffiliated parties or that are relying to a significant degree upon affiliated banks for funding. Significant is defined as debt which exceeds the lesser of $10 million or 5 percent of the bank holding company's consolidated Tier 1 capital.  

  • Those mortgage banking subsidiaries and other nonbank subsidiaries involved in asset securitization, and all nonbank subsidiaries that generate assets and sell them to affiliated parties.  Examiners involved in the on-site review of these subsidiaries should consider the appropriate examination guidelines for asset securitization (e.g., set forth in SR 90-16, dated May 25, 1990, on asset securitization activities and in SR 91-2, dated January 31, 1991, on collateralized mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs)).

  • Consistent with existing examination guidelines, all Section 20 subsidiaries should be subject to annual on-site review. SR 90-8, February 27, 1990, presented extensive examination guidelines which have been substantially updated and incorporated in the last two revisions of the Bank Holding Company Supervision Manual.

  • All nonbank subsidiaries that provide derivative instruments for sale or a service to unaffiliated parties.

                        Furthermore, for each credit-extending nonbank subsidiary that meets the above on-site review criteria, examiners are to review sufficient credit files through either judgmental or attribute sampling to assess the adequacy and accuracy of internal risk identification systems.  

Off-site Review of Nonbank Activities

                        Reserve Banks should review reports submitted to the Federal Reserve to monitor the condition and performance of significant nonbank subsidiaries between inspections.  FR Y reports on individual and combined nonbank subsidiaries should be used for this purpose and, when available, financial statements on nonbank activities that are included with the FR Y-6 annual reports of bank holding companies should also be reviewed.5 When warranted by a deterioration in the condition and performance of nonbank subsidiaries, the significance of the nonbank subsidiaries (including those selected for on-site review as discussed above), or other reasons, Reserve Banks should require bank holding companies to submit additional information (e.g., balance sheets, income statements, and schedules on nonperforming assets and off-balance sheet activities) obtained from a company's internal systems.   Furthermore, on an exception basis, Reserve Banks will be expected to obtain information from a bank holding company's internal systems on the off-balance sheet exposures of nonbank subsidiaries and monitor the risks posed by these exposures when considered significant.

                        Situations which the Reserve Bank identifies as warranting material departure from these procedures should be discussed with Board staff.  Should you have any questions, please contact either Howard Amer (ext. 2958), for multinational organizations or Jack Jennings (ext. 3053), for regional and community organizations.

Stephen C. Schemering
Deputy Director

Cross Reference:    SR 85-28


1.   The assessment of nonbank activities in large, complex organizations may be focused on an intermediate tier company with oversight responsibility for multiple nonbank subsidiaries.  Return to text

2.   The on-site review for these nonbank subsidiaries should be performed with the same frequency as required for a full scope inspection, but may be performed as a targeted review which is not concurrent with the full scope inspection.  Return to text

3.   Generally, examiners would not be required to conduct an on-site review of those nonbank subsidiaries that hold premises that are necessary for the operation of the banks or other affiliates.  Furthermore, these criteria are not intended to include nonbank subsidiaries that have been subject to recent on-site review by another federal or state banking agency in accordance with interagency agreements or Reserve Bank agreements with state banking supervisors (e.g., Interagency EDP Examination, Scheduling, and Distribution Policy).  These criteria also should not limit Reserve Bank flexibility in coordinating supervisory efforts with functional regulators at the federal or state level.  Return to text

4.   For bank holding companies, "total operating revenue" is the sum of total interest income and total noninterest income (before extraordinary items).  Return to text

5.   For example, combined financial statements of nonbank subsidiaries are submitted to the Board quarterly on form FR Y-11Q, and annually by type of nonbank subsidiary on form FR Y-11AS when the following criteria are met:

  • The bank holding company has total consolidated assets of $1 billion or more; or

  • The bank holding company has total consolidated assets of $150 million or more but less than $1 billion and meets one or more of the following conditions:
    • the assets of the bank holding company's nonbank subsidiaries make up 5 percent or more of the bank holding company's total consolidated assets;

    • the net income of the bank holding company's nonbank subsidiaries make up 5 percent or more of the bank holding company's total consolidated net income;

    • the bank holding company's investments in and/or loans and advances to nonbank subsidiaries exceed 5 percent of the bank holding company's total consolidated equity capital.

Annual reports of selected financial data for individual nonbank subsidiaries are also submitted to the Board on form FR Y-11I.   Section 20 subsidiaries submit quarterly financial statements to the Board on FR Y-20.  Return to text

SR letters | 1993