BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 95-12 (SUP)
March 13, 1995
TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
SUBJECT: Revisions to Guidance for the Preparation of the Bank Holding Company Inspection and Bank Examination Reports and for the Preparation and Issuance of Director's Summaries of Examination/Inspection Findings
This letter implements changes to guidance for preparing the Bank Holding Company Inspection and Bank Examination Reports and in the requirements for the issuance of Director's Summaries of Examination and Inspection Findings. These changes, which are effective immediately, are the outgrowth of work done by the Task Force of the Supervision Efficiency Enhancement Project.
Guidance on the preparation of the Bank Holding Company Inspection Report (and of certain pages of the Bank Examination Report) is changed as follows:
- The inspection report that is sent to a bank holding company, henceforth, will be composed of a Core Section and an Appendix Section. The Core Section is to provide a clear and concise discussion of the conclusions and recommendations of the examiner. The Appendix Section must include financial statements for the organization. In addition, examiners have the discretion to complete any of the remaining standard report pages and insert selected pages in either the Core Section or the Appendix Section, depending on the circumstances of each inspection. The part of the inspection report prepared for the Federal Reserve's internal use remains unchanged in format and content (confidential report pages A through D).
- There will no longer be different report formats for large and small bank holding companies. Examiners may use their discretion as described above to structure reports to fit the circumstances of any inspected company, large or small.
- The page previously entitled "Examiner's Comments" is now entitled "Examiner's Comments and Matters Requiring Special Board Attention." This page should be used to present all assessments and conclusions that are significant and specify matters that require the attention of the bank holding company's board of directors. This page should be written so that it may, with minor modification, also serve as the full text for the Summary of Inspection Findings presented to the board of directors of the holding company should that prove necessary.
In parallel fashion, the two pages of the standard interagency Bank Examination Report entitled "Examination Conclusions and Comments" and "Matters Requiring Board Attention" should be prepared so that they are not duplicative and may easily be integrated should the issuance of a Summary Report to the board of directors of the bank prove necessary.
- Henceforth, financial write-ups will only be required for bank subsidiaries that hold ten percent or more of a bank holding company's consolidated assets and for any bank subsidiary evidencing material financial deficiencies or other characteristics that should be brought to the attention of the bank holding company's board of directors1.
- Company-prepared financial statements may be used instead of standardized Federal Reserve financial statement report pages, if, in the judgment of the examiner, they are suitably detailed, clear, and accurate.
- A new page entitled "Treasury Activities / Capital Markets" must be included in inspection reports prepared for Bank Holding Companies that have significant exposure in the capital markets. At the conclusion of a six-month field testing period, Reserve Banks should forward to Board staff designated below any recommended changes as to the page's format and use. Field testing can commence immediately.
Guidance on the issuance to members of the boards of directors of troubled banks and bank holding companies of Summaries of Examination and Inspection Findings is changed as follows:
- As noted above, the text of the "Examiner's Comments and Matters Requiring Special Board Attention" page will be prepared so that it can be used to serve as the full text for the Director's Summary of Inspection Findings with only minor formatting changes.
The standard interagency Bank Examination Report specifies separate pages for "Matters Requiring Board Attention" and "Examination Conclusions and Comments." Nonetheless, these pages should be prepared so that they are not duplicative and may be easily integrated should it prove necessary to issue a Director's Summary of Examination Findings.
- SR 85-28 is amended to specify that Director's Summaries need not be issued to board members of organizations assigned BOPEC composite ratings of 3 or 4 in cases in which such Summaries were issued at the conclusion of a prior inspection or examination and the organization has been taking appropriate steps to correct identified deficiencies. Examiners, of course, in these as in all other cases, may decide to issue Summaries to board members when they deem that that will prove constructive in resolving potential or actual problems of the company.
These changes should also be adopted where appropriate in preparing a combined Commercial Bank Examination and Bank Holding Company Inspection Report. The guidance set forth in SR 94-46 is amended to incorporate this change in instruction.
Revisions to Guidance for Preparation of the Bank Holding Company Inspection Report (and of Certain Pages of the Bank Examination Report)
The revisions in the Bank Holding Company Inspection Report have been made to facilitate the preparation of a more streamlined report, one that provides boards of directors and management with clearly and concisely stated presentations of examiner's significant findings and recommendations. To that end, examiners are required only to include in the Core Section a relatively small number of report pages and, in the Appendix Section, only financial statements for the organization. At the same time, examiners are given the discretion to decide whether to include other standard pages in a report and whether that inclusion should be either in the Core or the Appendix Section. This choice should be made on the basis of whether the content of the page will highlight a significant finding of the inspection (in which case it should be included in the Core Section) or will provide support for comments being offered in the Core Section (in which case it should ordinarily be placed in the Appendix ection). Given the discretion being accorded examiners to tailor reports to convey accurately inspection findings, reports prepared for large and small companies alike should be prepared to achieve that objective, and there is no longer a need to have different standard report formats for companies of different sizes.
An important objective of this reformatting is to avoid excessive length in the report, particularly in the open section, that can result from the inclusion of comments that may provide directors and management with information of marginal importance or from repetition of findings and conclusions on different pages of the report2. In addition, the objective is to produce an understandable and readable report. It is important to reemphasize that achievement of that objective will require, in addition to the reformatting of the report, that examiners determine precisely what should be conveyed to boards of directors and management in their reports and then present that information in clear and concise language.
Exhibit 1 presents a listing of the standard pages of the reformatted report. As can be seen, there are but six pages listed as mandatory for the Core Section, three of those being the Report Cover, the Table of Contents, and the Scope and Abbreviations page. The page entitled "Examiner's Comments and Matters Requiring Special Board Attention," which is to follow the Table of Contents page, is to provide a clear, succinct, and self-contained discussion of the examiner's significant findings, conclusions, and recommendations. It should be prepared so that it fulfills requirements specified for Director's Summaries of Inspection Findings in SR 85-28 and can also serve as the full text of the Director's Summary, if such a summary is to be provided to the company's board of directors. The Analysis of Financial Factors is also required and has long been included in the Core Section of inspection reports for obvious reasons. Finally, the Audit Program page is required. This page has been included in the core to emphasize the importance assigned to the maintenance by bank holding companies of comprehensive and effective internal controls.
A required Appendix Section is to contain comparative balance sheet and income statements for the parent company and for the consolidated organization. These pages may be prepared by examiners in accordance with past requirements. Alternatively, these required pages may be financial statements prepared by the company, if, in the judgment of the examiner, they are suitably detailed, clear, and accurate. If the company-prepared financial statements meet that criteria, examiners are encouraged to use them, in part, because that will enable the examiner to avoid the tedious work of transcribing numbers to a financial statement page. In addition, company-prepared statements, if acceptable to the examiner, are to be preferred, because they are in a form that the company has selected for its use and with which its board of directors is familiar.
As summarized earlier, the pages listed as optional are to be selected by the examiner for inclusion in the report when that will enable the examiner to convey significant findings in the Core Section or to support the discussion in the Core Section with an Appendix page. This list contains some pages that previous guidance required be included in the Core Section, as well as pages that previously were designated as optional Supporting Report Pages. In addition, a new page, entitled "Treasury Activities/Capital Markets" has been added to this list to respond to the growing importance of capital and derivative market activities for many banking organizations3. (As noted above, this page--the contents of which are detailed in exhibit 2--should be field tested for six months at organizations at which such activities are significant.) This page should be placed either in the Core Section or the Appendix Section, depending on the importance of the activity to the organization and the examiners's discussion objectives. The report page poses questions that the examiner should respond to when completing this page. The System's Trading Activities Manual and sections 2125.0 and 2128.0 of the Bank Holding Company Supervision Manual provide guidance for answering the questions presented on the report page (see also SR 93-69 and SR 94-45). At the conclusion of the field testing period, Reserve Banks should forward any comments on the page to Kevin Bertsch at Mail Stop 174.
All of the revisions discussed above are designed to sharply focus the inspection report on matters that require board attention and to reduce the work burden on examiners. The use of optional pages, for instance, permits the presentation of all information that the examiner believes should be brought to the attention of the board of directors and management in a clear and non-repetitive way. The determination that write-ups of individual bank subsidiaries can be limited to those bank subsidiaries that hold over ten percent of a company's total consolidated assets and/or to those bank subsidiaries that have significant problems also fosters the objective of presenting only relevant information. In addition, limiting the write-up requirement in this way will reduce the work burden on examiners without affecting the overall risk assessment presentation in the inspection report.
Director's Summaries of Examination/Inspection Findings
With regard to the Director's Summary Report on Inspection Findings, it is believed that using the text of the "Examiner's Comments and Matters Requiring Special Board Attention" page for this Summary Report will reduce the work of examiners without impairing the quality of the report. A similar reduction in work burden should also be achieved in the case of Director's Summaries of Examination Findings when the two pages of the standard interagency Bank Examination Report entitled "Examination Conclusions and Comments" and "Matters Requiring Board Attention" are prepared so that they are not duplicative and may be easily integrated should the issuance of a Summary prove necessary.
The decision not to require the issuance of a Director's Summary Report when a 3- or 4-rated bank holding company or state member bank has previously received such a report and has been responding to a Reserve Bank's directives (and possibly to informal or formal enforcement actions) is based on the view that the Director's Summary should be reserved for situations in which it is most effective. In particular, these Director's Summaries should be issued when a bank holding company or state member bank is assigned a composite rating of 5 and in other cases when there is a need to (a) underscore the gravity of a situation, or (b) to enlist an appropriate response by directors, or both.
For your reference, several sections of the Bank Holding Company Supervision Manual have been revised to incorporate these changes and are attached. The revised sections, and other related editorial adjustments, will be included in the printed June 1995 revision supplement.
Questions regarding these revisions should be directed to Harry Moore at (202/452-3493) or Kevin Bertsch at (202/452-5265).
EXHIBIT #1 TRANSMITTED ELECTRONICALLY BELOW EXHIBIT #2 MAY BE OBTAINED FROM FEDERAL RESERVE BANK
Cross References: SR 94-46 (FIS), August 17, 1994
SR 94-45 (FIS), August 5, 1994
SR 93-69 (FIS), December 20, 1993
SR 90-13 (FIS), August 17, 1994
SR 85-37 (FIS), December 24, 1985
SR 85-28 (FIS), October 7, 1985
AD 94-77 (FIS), October 11, 1994
Supersedes: SR 85-37 (FIS), December 24, 1985
AD 89-13 (FIS), March 24, 1989
Selection of Report Pages
Sections to be provided to Bank Holding Company
- Required "Core" Section (All BHCs)
- Standard Report Cover
- Table of Contents
- Examiner's Comments and Matters Requiring Special Board Attention
- Scope and Abbreviations
- Analysis of Financial Factors
- Audit Program
- Required Appendix Section
(Use of company-prepared financial statements is optional, but encouraged.)
- Parent Company Comparative Balance Sheet
- Parent Company Comparative Statement of Income and Expense
- Consolidated Comparative Balance Sheet (if applicable)
- Consolidated Comparative Statement of Income and Expense (if applicable)
- Optional Pages to Include in Core or Appendix
- History and Structure
- Organization Chart
- Policies and Supervision
- Violations (must be included in core if any violations are identified during the inspection)
- Other Matters
- Other Supervisory Issues
- Parent Company Cash Flow Statement
- Parent Company Liquidity Position
- Parent Company and Nonbank Classifications
- Statement of Changes in Stockholders' Equity
- Contingent Liabilities and Schedule of Balance Sheet Accounts Not Detailed Elsewhere
- Investment in and Advances to Subsidiaries
- Income from Subsidiaries (fiscal and interim)
- Bank Subsidiary
- Bank Subsidiary Examination Information
- Capital Structure (lead bank subsidiary)
- Consolidated Capital Structure
- Classified Assets and Capital Ratios of Subsidiary Banks (multi)
- Summary of Consolidated Criticized Assets
- Nonbank Subsidiaries
- Nonbank Subsidiary Financial Statements
- Commercial Paper
- Lines of Credit
- Commercial Paper/Lines of Credit (questions)
- Interest Rate Sensitivity (consolidated)
- Extensions of Credit to Bank Holding Company Officials and Their Related Interests and Investments In and Loans on Stock or Obligations of Their Related Interests
- Fidelity and Other Indemnity Insurance
- Treasury Activities/Capital Markets (new page)
- Section for Internal Federal Reserve Use
- Principal Officers and Directors
- Condition of Bank Holding Company
- Liquidity and Debt Information
- Administrative Matters
1. In determining the subsidiary banks that require write-ups, examiners should be mindful of the effect that the cross guarantee provisions of FIRREA can have on non-troubled bank subsidiaries. Return to text
2. While brevity is an important goal of this reformatting, examiners should note that, when an enforcement action is contemplated, the inspection report must fully support the proposed provisions of the enforcement document. Return to text
3. In banking organizations with national or state nonmember lead banks and where capital markets activities are conducted exclusively at the subsidiary bank, examiners should coordinate the collection of the information included on this page with the lead bank supervisory agency. Return to text
SR letters | 1995