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.
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.