Interagency Guidelines Establishing Standards for Safety and Soundness

SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board

of Governors of the Federal Reserve System (Board of Governors), the

Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift

Supervision (OTS) (collectively, the agencies) are proposing asset

quality and earnings standards to be added to the Interagency

Guidelines Establishing Standards for Safety and Soundness (Guidelines)

adopted pursuant to section 39 of the Federal Deposit Insurance Act

(FDI Act) and appearing as an appendix to each of the agencies'

standard for safety and soundness final rule published elsewhere in

this separate part of the Federal Register. The agencies may require an

insured depository institution to file a compliance plan for failure to

meet these asset quality and earnings standards when adopted in final

form.

DATES: Comments must be submitted by August 24, 1995.

ADDRESSES: Interested parties are invited to submit written comments to

any or all of the agencies. All comments will be shared among the

agencies.

OCC: Communications Division, 250 E Street, SW., Washington, DC

20219, attention: Docket No. 95-15. Comments will be available for

public inspection and photocopying at the same location on business

days between 9 a.m. and 5 p.m.

Board of Governors: Comments, which should refer to Docket No. R-

0766, may be mailed to Mr. William Wiles, Secretary, Board of Governors

of the Federal Reserve System, 20th Street and Constitution Avenue,

NW., Washington, DC 20551. Comments addressed to Mr. Wiles may also be

delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and

to the security control room outside of those hours. Both the mail room

and control room are accessible from the courtyard entrance on 20th

Street between Constitution Avenue and C Street, NW. Comments may be

inspected in room MP-500 between 9 a.m. and 5 p.m., except as provided

in Sec. 261.8 of the Board's Rules Regarding Availability of

Information, 12 CFR 261.8.

FDIC: Robert E. Feldman, Acting Executive Secretary, Attention:

Room F-402, Federal Deposit Insurance Corporation, 550 17th Street,

NW., Washington, DC 20429. Comments may be hand-delivered to room F-

400, 1776 F Street, NW., Washington, DC, on business days between 8:30

a.m. and 5 p.m. [FAX number (202) 898-3838]; Internet E-mail comments

@fdic.gov. Comments will be available for inspection and photocopying

in room 7118, 550 17th Street, NW., Washington, DC 20429, between 9

a.m. and 4:30 p.m. on business days.

OTS: Send comments to Chief, Dissemination Branch Records

Management and Information Policy, Office of Thrift Supervision, 1700 G

Street, NW., Washington, DC 20552, Attention Docket No. 95-114. These

submissions may be hand delivered to 1700 G Street, NW., from 9 a.m. to

5 p.m. on business days; they may be sent by facsimile transmission to

FAX number (202) 906-7755. Comments will be available for inspection at

1700 G Street, NW., from 1 p.m. until 4 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: OCC: Emily R. McNaughton, National

Bank Examiner (202/874-5170), Office of the Chief National Bank

Examiner; David Thede, Senior Attorney, (202/874-5210) Securities and

Corporate Practices Division, Office of the Comptroller of the

Currency, 250 E Street, SW., Washington, DC 20219.

Board of Governors: David Wright, Supervisory Financial Analyst

(202/728-5854), Division of Banking Supervision and Regulation; Scott

G. Alvarez, Associate General Counsel (202/452-3583), Gregory A. Baer,

Managing Senior Counsel (202/452-3236), Legal Division, Board of

Governors of the Federal Reserve System. For the hearing impaired only,

Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/

452-3544), Board of Governors of the Federal Reserve System, 20th and C

Streets, NW., Washington, DC 20551.

FDIC: Robert W. Walsh, Manager, Planning and Program Development

(202/898-6911) or Michael D. Jenkins, Examination Specialist (202/898-

6896), Division of Supervision; Lisa M. Stanley, Senior Counsel (202/

898-7494), Legal Division, Federal Deposit Insurance Corporation, 550

17th Street, NW., Washington, DC 20429.

OTS: William Magrini, Project Manager (202/906-5744), Cathern

Smith, Regional Coordinator (202/906-6614), Supervision; Kevin

Corcoran, Assistant Chief Counsel (202/906-6962), Teri M. Valocchi,

Counsel (Banking and Finance) (202/906-7299), Chief Counsel's Office,

Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory Framework

Section 132 of the Federal Deposit Insurance Corporation

Improvement Act of 1991 (FDICIA), added a new section 39 to the FDI Act

which required each Federal banking agency to establish by regulation

certain safety and soundness standards for the insured depository

institutions and depository institution holding companies for which it

was the primary Federal regulator. As enacted in FDICIA, section 39(b)

of the FDI Act required the agencies to establish standards by

regulation specifying a maximum ratio of classified assets to capital

and minimum earnings sufficient to absorb losses without impairing

capital.

On September 23, 1994 the Riegle Community Development and

Regulatory Improvement Act of 1994 (CDRI Act) was enacted. Section

318(a) of the CDRI Act eliminated the requirement that standards

prescribed under section 39 apply to depository institution holding

companies and replaced the requirement that the agencies establish

quantitative asset quality and earnings standards with a requirement

that the agencies establish standards, by regulation or by guideline,

relating to asset quality and earnings that the agencies determine to

be

[[Page 35689]]

appropriate. Pursuant to section 318 of the CDRI Act, these amendments

have the same effective date as section 39 of the FDI Act, as provided

in section 132(c) of FDICIA.

B. Agencies' Proposals

The agencies published a joint advance notice of proposed

rulemaking in the Federal Register. 57 FR 31336 (July 15, 1992). The

agencies received over 400 comment letters in response to the ANPR,

with some letters submitted to more than one agency. The agencies'

proposal requested comment on all aspects of the safety and soundness

standards required to be prescribed pursuant to section 39 of the FDI

Act, as enacted in FDICIA. Commenters strongly recommended that the

agencies adopt general rather than specific standards. The agencies

published a joint notice of proposed rulemaking in the Federal Register

on November 18, 1993, 59 FR 60802. The agencies proposed quantitative

asset quality and earnings standards in accordance with the statutory

mandate set forth in FDICIA.

C. Final Rule and Interagency Guidelines Establishing Standards for

Safety and Soundness

Each of the agencies has adopted a final rule (Final Rule) and

Interagency Guidelines Establishing Standards for Safety and Soundness

(Guidelines). The agencies' Final Rule establishes deadlines for

submission and review of safety and soundness compliance plans which

may be required for failure to meet one or more of the safety and

soundness standards adopted in the Guidelines. The agencies' Final Rule

and Guidelines are published elsewhere in this separate part of the

Federal Register. The Guidelines will appear as appendices to each of

the agencies' Final Rule.1

\1\ For the OCC, these Guidelines appear as Appendix A to Part

30; for the Board of Governors, these Guidelines appear as Appendix

D to Part 208; for the FDIC, these Guidelines appear as Appendix A

to Part 364; and for the OTS, these Guidelines appear as Appendix A

to Part 570.

If adopted in final form, the agencies intend to incorporate these

asset quality and earnings standards into the Guidelines. Thus, if

adopted in final form, the agencies may require submission of a

compliance plan for failure to meet the asset quality and earnings

standards.

II. Request for Comment on Proposed Asset Quality and Earnings

Standards

As enacted in FDICIA, section 39(b) of the FDI Act required the

agencies to establish standards specifying a maximum ratio of

classified assets to capital and minimum earnings sufficient to absorb

losses without impairing capital. As amended by the CDRI Act, section

39(b) no longer requires the agencies to establish quantitative

standards. Instead, the agencies are required to establish such

standards relating to asset quality and earnings that the agencies

determine to be appropriate.

Although commenters generally found the agencies' proposed

quantitative standards acceptable, some commenters criticized the

proposed standards as inflexible and simplistic. While the agencies

believe that the standards as proposed are acceptable, they also

believe that more comprehensive standards in these areas, as allowed

under section 39(b), as amended, would be more useful and appropriate.

Therefore, the agencies are proposing new standards for asset quality

and earnings that emphasize monitoring, reporting and preventive or

corrective action appropriate to the size of the institution and the

nature and scope of its activities. These standards would be adopted by

guideline.

The agencies believe the proposed standards are more likely to aid

in the identification and resolution of emerging problems than setting

minimum or maximum ratios. The agencies intend to continue to perform

independent analyses that may include asset quality and earnings ratio

analysis and will focus on an institution's oversight, reporting and

corrective actions in these areas. The agencies believe that well-

managed institutions should not find it necessary to modify their

operations to comply with the proposed guidelines.

A. Standards Relating to Asset Quality

The agencies are proposing asset quality standards requiring

monitoring and reporting systems to identify emerging problems and

corrective actions to resolve them. The standards provide for

institutions to identify problem assets and estimate inherent losses.

Institutions would also be required to: (1) Consider the size and

potential risks of material concentrations of credit risk, (2) compare

the level of problem assets to the level of capital and establish

reserves sufficient to absorb anticipated losses on those and other

assets, (3) take appropriate corrective action to resolve problem

assets; and (4) provide periodic asset quality reports to the board of

directors to assess the level of asset risk.

The complexity and sophistication of an institution's monitoring,

reporting systems and corrective actions should be commensurate with

the size, nature and scope of the institution's operations. The

agencies believe that the proposed asset quality standards are

consistent with the practices of well-managed institutions and

represent the long-standing and established expectations of the

agencies.

B. Standards Relating to Earnings

The agencies are proposing earnings standards requiring monitoring

and reporting systems similar to the standards for asset quality. The

standards are intended to ensure prompt remedial actions to enhance

early identification and resolution of problems. The standards require

institutions to compare their earnings trends, relative to equity,

assets and other common benchmarks with their historical experience and

with their peers. The standards also provide that institutions should:

(1) evaluate the adequacy of earnings given the institution's size, and

complexity, and the risk profile of the institution's assets and

operations, (2) assess the source, volatility and sustainability of

earnings, (3) evaluate the effect of nonrecurring or extraordinary

income or expense, (4) take steps to ensure that earnings are

sufficient to maintain adequate capital and reserves after considering

asset quality and the institution's rate of growth, and (5) provide

periodic reports with enough information for management and the board

of directors to assess earnings performance.

As with the asset quality standards, the institution's monitoring,

reporting systems and corrective actions should be commensurate with

the size, nature and scope of the institution's operations. Once again,

the agencies believe that these earnings standards are consistent with

the practices of well-managed institutions and represent the long-

standing and established expectations of the agencies.

The agencies propose to add to the Interagency Guidelines

Establishing Standards for Safety and Soundness standards relating to

asset quality and earnings as set forth below. The agencies request

comment on all aspects of the proposed standards.

Regulatory Flexibility Act

Pursuant to Section 605(b) of the Regulatory Flexibility Act, the

agencies certify that the proposal will not have a significant economic

impact on a substantial number of small entities. Accordingly, a

regulatory flexibility analysis is not required. This proposal adds

asset quality and earnings standards to the Interagency Guidelines

[[Page 35690]]

Establishing Standards for Safety and Soundness.

Executive Order 12866

The OCC and the OTS have determined that this proposal is not a

``significant regulatory action'' for purposes of Executive Order

12866.

The proposed new paragraphs G and H of Section II of the

Interagency Guidelines Establishing Standards for Safety and Soundness

are as follows:

Asset Quality and Earnings Standards

G. Asset Quality. An insured depository institution should

establish and maintain a system to identify problem assets and prevent

deterioration in those assets in a manner commensurate with its size

and the nature and scope of its operations. The institution should:

1. Conduct periodic asset quality reviews to identify problem

assets and estimate the inherent losses in those assets;

2. Consider the size and potential risks of material asset

concentrations;

3. Compare problem asset totals to capital and establish reserves

that are sufficient to absorb estimated losses;

4. Take appropriate corrective action to resolve problem assets;

5. Provide periodic asset quality reports with adequate information

for management and the board of directors to assess the level of asset

quality risk.

H. Earnings. An insured depository institution should establish and

maintain a system to evaluate and monitor earnings and ensure that

earnings are sufficient to maintain adequate capital and reserves in a

manner commensurate with its size and the nature and scope of its

operations. The institution should:

1. Compare recent earnings trends relative to equity, assets or

other commonly used benchmarks to the institution's historical results

and those of its peers;

2. Evaluate the adequacy of earnings given the size, complexity and

risk profile of the institution's assets and operations;

3. Assess the source, volatility and sustainability of earnings;

4. Evaluate the effect of nonrecurring or extraordinary income or

expense;

5. Take steps to ensure that earnings are sufficient to maintain

adequate capital and reserves after considering the institution's asset

quality and growth rate; and

6. Provide periodic earnings reports with adequate information for

management and the board of directors to assess earnings performance.

Dated: April 13, 1995.

Eugene A. Ludwig,

Comptroller of the Currency.

By Order of the Board of Governors of the Federal Reserve

System, June 6, 1995.

William W. Wiles,

Secretary of the Board.

By order of the Board of Directors.

Dated at Washington, D.C., this 21st day of March, 1995.

Federal Deposit Insurance Corporation

Robert E. Feldman,

Deputy Executive Secretary.

Dated: May 25, 1995.

By the Office of Thrift Supervision.

Jonathan L. Fiechter,

Acting Director.

[FR Doc. 95-16564 Filed 7-7-95; 8:45 am]

BILLING CODES: 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P