Expanded Examination Cycle for Certain Small Insured Institutions

SUMMARY: The Board of Governors of the Federal Reserve System (Board),

the Office of the Comptroller of the Currency (OCC), the Federal

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

Supervision (OTS) (collectively, the Agencies) are adopting as a final

rule their joint interim rule implementing section 306 of the Riegle

Community Development and Regulatory Improvement Act of 1994 (CDRI) and

section 2221 of the Economic Growth and Regulatory Paperwork Reduction

Act of 1996 (EGRPRA). Together, section 306 of CDRI and section 2221 of

EGRPRA authorize the Agencies to increase the asset size of certain

financial institutions that may be examined once in every 18-month

period, rather than once in every 12-month period, from $100 million to

a revised limit of $250 million. This final rule makes certain

institutions that have $250 million or less in assets eligible for the

18-month examination schedule.

EFFECTIVE DATE: April 2, 1998.

FOR FURTHER INFORMATION CONTACT: OCC: Lawrence W. Morris, National Bank

Examiner, Examination Process (202) 874-4915; Ronald Schneck, Director,

Special Supervision, (202) 874-4450; or Mark Tenhundfeld, Assistant

Director, Legislative and Regulatory Activities, (202) 874-5090.

Board: Molly Wassom, Deputy Associate Director, (202) 452-2305, or

William H. Tiernay, Senior Financial Analyst, (202) 872-7579, Division

of Banking Supervision and Regulation. For the hearing impaired only,

Telecommunication Device for the Deaf (TDD), Diane Jenkins (202) 452-

3544.

FDIC: Mark A. Mellon, Counsel, Regulation and Legislation section

(202) 898-3854, Legal Division, or Robert W. Walsh, Manager, Planning

and Program Development section (202) 898-6911, Division of

Supervision, Federal Deposit Insurance Corporation, 550 17th Street,

N.W., Washington, D.C. 20429.

OTS: Scott M. Albinson, Special Assistant to the Executive

Director, Supervision, (202) 906-7984; or Ellen J. Sazzman, Counsel

(Banking and Finance), Regulations and Legislation Division, Office of

the Chief Counsel, (202) 906-7133.

SUPPLEMENTARY INFORMATION:

Background

Section 10(d) of the Federal Deposit Insurance Act (the FDI Act),

1 which was added by section 111 of the Federal Deposit

Insurance Corporation Improvement Act of 1991 (FDICIA), 2

requires that each appropriate Federal banking agency conduct a full-

scope, on-site examination at least once during each 12-month period of

every insured depository institution that the agency supervises.

However, section 10(d) permits the Agencies to examine certain small

insured depository institutions once during every 18-month period. As

initially established by FDICIA, section 10(d) required an institution

to have $100 million or less in total assets and its composite

condition must have been found to be outstanding (rated 1 under the

Uniform Financial Institutions Rating System (UFIRS)) at its most

recent examination in order to qualify for an extended exam cycle. In

addition, a qualifying institution (a) must not have undergone a change

in control during the previous 12-month period in which a full-scope

examination otherwise would have been required by section 10 of the FDI

Act; (b) be well capitalized; and (c) be found by the appropriate

agency to be well managed.

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\1\ Section 10(d) of the FDI Act is codified at 12 U.S.C.

1820(d).

\2\ Pub. L. 102-242, 105 Stat. 2236.

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Section 306 of CDRI, which was enacted into law in

1994,3 made several amendments to section 10(d) that, taken

together, expand the availability of the 18-month examination cycle to

a larger number of small institutions. First, section 306 of CDRI

increased to $250 million the asset size of institutions rated

outstanding (UFIRS 1) that could be examined on an 18-month cycle.

Second, section 306 added a provision permitting an 18-month cycle for

institutions rated satisfactory (UFIRS 2) at their most recent

examination, provided they did not exceed $100 million in total assets.

Third, section 306 authorized the Agencies to increase this $100

million threshold to $175 million beginning on September 23, 1996, if

the Agencies first determined that the increased amount is consistent

with the principles of safety and soundness for insured depository

institutions. Finally, section 306 required that, to qualify for the

expanded examination cycle, an insured institution must not be subject

to a formal enforcement proceeding or order. The remaining provisions

of section 10(d) of the FDI Act were unchanged.

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\3\ Pub. L. 103-325, 108 Stat. 2160.

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Section 2221 of EGRPRA 4 further amended section 10(d)

of the FDI Act. Pursuant to section 2221, the Agencies were authorized

to increase to $250 million the maximum asset size of UFIRS 2-rated

institutions eligible for examination on an 18-month cycle. EGRPRA also

made the expanded examination cycle available to qualified Federal

branches and agencies of foreign banks. The International Banking Act

of 1978 (the IBA),5 as amended by the Foreign Bank

Supervision Enhancement Act of 1991,6 requires an

examination of each U.S. branch or agency of a foreign bank once during

each 12-month period. Section 2214 of EGRPRA 7 amended the

IBA to provide, among other things, that each Federal or State branch

or agency of a foreign bank will be subject to on-site examination by

the appropriate Federal or State banking agency as frequently as would

a national or state bank, respectively. Consequently, U.S. branches or

agencies of foreign banks are eligible for the 18-month cycle provided

that they meet the qualifying criteria outlined above.

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\4\ Pub. L. 104-208, 110 Stat. 3009 (section 2221 is codified at

12 U.S.C. 1820(d)(10)).

\5\ Pub. L. 95-369, 92 Stat. 607 (codified at 12 U.S.C. 3101, et

seq.).

\6\ Pub. L. 102-242, 105 Stat. 2286, 2291, 2304 (amending, inter

alia, 12 U.S.C. 3105(c)(1)(C)).

\7\ Section 2214(a)(3) of EGRPRA is codified at 12 U.S.C.

3105(c)(1)(C).

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In 1997, the Federal banking agencies issued a joint rule that was

immediately

[[Page 16379]]

effective upon the date of publication implementing section 306 of CDRI

and section 2221 of EGRPRA. See 62 FR 6449 (Feb. 12, 1997). The interim

rule was published with a request for public comment. As discussed in

greater detail below, the public comments generally favored adoption of

the expanded examination cycle rule as set forth in the interim rule.

Accordingly, the Agencies hereby adopt the interim rule with only minor

stylistic changes.

Comments Received

In response to the interim rule request for comment, the Agencies

received a total of 16 comments, including six from banking

institutions, six from Federal Reserve Banks, and four from trade

associations. Most agreed that the expansion of the 18-month

examination cycle should be applied to UFIRS 1-and 2-rated domestic

institutions with assets of $250 million or less. Commenters favoring

the proposed changes agreed that the application of an 18-month cycle

would reduce regulatory burden on smaller, well run institutions that

do not pose significant supervisory concerns. Commenters also noted

that the rule is consistent with the Agencies' respective approaches to

performance-based regulation and supervision.

One commenter suggested that a financial institution with a UFIRS

rating of 1 or 2 should be allowed to elect either a 12-month or an 18-

month exam cycle, and that each examination should cover, among other

things, compliance issues and an examination of the financial

institution's fiduciary and data processing operations. In response,

the Agencies note that the examination cycle adopted in the interim

rule and finalized by this rulemaking creates the generally applicable

schedule. The primary regulator will have the option, however, to

examine an institution as frequently as the regulator deems

appropriate. The Agencies believe that this approach is an efficient

and effective use of both financial institution and examiner resources.

Should a financial institution wish to discuss particular issues with

its primary regulator at a time other than when an examination is

ongoing, the financial institution is encouraged to contact its

regulator for assistance at any time.

Final Rule

Based upon further deliberations by the Agencies and the comments

received, the Agencies are adopting the interim rule in final form,

with only minor stylistic changes. Pursuant to the final rule, a

domestic national or state financial institution will be eligible for

an 18-month examination schedule if the institution: (1) has total

assets of $250 million or less; (2) is well capitalized as defined in

section 38(b)(1)(A) of the FDI Act (12 U.S.C. 1831o(b)(1)(A)); (3) is

well managed; (4) received a UFIRS rating of 1 or 2 at its most recent

examination; (5) is not subject to a formal enforcement proceeding or

order; and (6) has not undergone a change in control during the

previous 12-month period.

The Agencies have determined that increasing the size limitation of

UFIRS 2-rated institutions that are eligible for an 18-month cycle is

consistent with the safety and soundness of insured depository

institutions. A longer examination cycle permits the Agencies to focus

their resources on those segments of the banking and thrift industry

that present the most immediate supervisory concern, while

concomitantly reducing the regulatory burden on smaller, well run

institutions that do not pose an equivalent level of supervisory

concern. In lieu of the more frequent annual examinations that would

otherwise be conducted for these institutions, the agencies rely upon

off-site monitoring tools to identify potential problems in smaller,

well managed institutions that present low levels of risk. Moreover,

neither the statute nor the regulation limits, and the Agencies

therefore retain, the authority to examine an insured depository

institution more frequently. The Agencies that supervise state-

chartered insured institutions also recognize that flexibility must be

made available in the implementation of this regulation to accommodate

requirements for annual examinations by various states.

The FDIC, Board, and OCC, which have jurisdiction over U.S.

branches and agencies of foreign banks, are reviewing the issue of how

to apply the qualifying criteria to these entities. Upon development of

a method under which the 18-month examination cycle qualifying criteria

can be applied to Federal branches and agencies, a separate rule will

be issued for comment.

Effective Date of Final Rule

The Agencies have determined that there is good cause to dispense

with a 30-day delayed effective date pursuant to 5 U.S.C. 553(d)(3).

The expanded exam cycle was immediately effective upon publication of

the interim rule in February, 1997. This final rule adopts the interim

rule without any substantive change. While the Agencies invited

interested parties to comment on the rule at that time, each agency

already has implemented the expanded exam cycle, and insured depository

institutions already have been complying with the new rule for

approximately a year. Accordingly, depository institutions will not

require any additional time to adjust their policies or practices in

order to comply with the rule. Delaying the effective date simply would

create confusion on the part of the banking industry concerning the

applicability of the expanded exam cycle during the time between

publication and some later effective date.

The Agencies also have determined, for the reasons stated in the

preceding paragraph, that good cause exists to adopt an effective date

that is before the first day of the calendar quarter that begins on or

after the date on which the regulation is published, as would otherwise

be required by section 302 of the CDRI.

Regulatory Flexibility Act

The Regulatory Flexibility Act (the Act) (5 U.S.C. 601-612) does

not apply to a rulemaking where a general notice of proposed rulemaking

is not required, as is the case with the 18-month examination cycle

rulemaking. See 5 U.S.C. 603 and 604. Accordingly, the Act's

requirements relating to an initial and final regulatory flexibility

analysis are not applicable.

Even if the Act were to apply, the final rule will not have a

significant economic impact on a substantial number of small entities.

The final rule will reduce regulatory burdens on eligible banks and

thrifts with assets of $250 million or less. In addition, those

depository institutions that are not eligible for the exemption from

the statutorily prescribed 12-month examination cycle are not adversely

affected by the final rule.

Small Business Regulatory Enforcement Fairness Act

Title II of the Small Business Regulatory Enforcement Fairness Act

of 1996 (SBREFA) \8\ provides generally for agencies to report rules to

Congress and the General Accounting Office (GAO) for review. The

reporting requirement is triggered when a Federal agency issues a final

rule. The Agencies will file the appropriate reports with Congress and

the GAO as required by SBREFA. The Office of Management and Budget has

determined that the uniform rule promulgated by the Agencies does not

constitute a ``major rule'' as defined by SBREFA.

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\8\ Pub. L. 104-121.

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[[Page 16380]]

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

3506), the Agencies have determined that no collections of information

pursuant to the Paperwork Reduction Act are contained in this final

rule.

OCC and OTS Executive Order 12866 Statement

The OCC and OTS each independently has determined that this final

rule is not a significant regulatory action under Executive Order

12866.

OCC and OTS Unfunded Mandates Act of 1995 Statement

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.

104-4, 109 Stat. 48 (March 22, 1995) (Unfunded Mandates Act), requires

that an agency prepare a budgetary impact statement before promulgating

a rule that includes a Federal mandate that may result in the

expenditure by state, local, and tribal governments, in the aggregate,

or by the private sector, of $100 million or more in any one year. If a

budgetary impact statement is required, section 205 of the Unfunded

Mandates Act also requires an agency to identify and consider a

reasonable number of regulatory alternatives before promulgating a

rule. Because the OCC and OTS have each independently determined that

this final rule will not result in expenditures by state, local, and

tribal governments, in the aggregate, or by the private sector, of more

than $100 million in any one year, the OCC and OTS have not prepared a

budgetary impact statement or specifically addressed the regulatory

alternatives considered. As discussed in the preamble, this final rule

will have the effect of reducing regulatory burden on certain

institutions.

List of Subjects

12 CFR Part 4

Banks, banking, Freedom of information, Organization and functions

(Government agencies), Reporting and recordkeeping requirements.

12 CFR Part 208

Accounting, Agriculture, Banks, banking, Confidential business

information, Crime, Currency, Federal Reserve System, Flood insurance,

Mortgages, Reporting and recordkeeping requirements, Safety and

soundness, Securities.

12 CFR Part 337

Banks, banking, Reporting and recordkeeping requirements,

Securities.

12 CFR Part 563

Accounting, Advertising, Conflicts of interest, Corporate

opportunity, Crime, Currency, Investments, Reporting and recordkeeping

requirements, Savings associations, Securities, Surety bonds.

Office of the Comptroller of the Currency

12 CFR CHAPTER I

Authority and Issuance

For the reasons set forth in the joint preamble, part 4 of chapter

I of title 12 of the Code of Federal Regulations is amended as follows:

PART 4--ORGANIZATION AND FUNCTIONS, AVAILABILITY AND RELEASE OF

INFORMATION, CONTRACTING OUTREACH PROGRAM

1. The authority citation for part 4 continues to read as follows:

Authority: 12 U.S.C. 93a. Subpart A also issued under 5 U.S.C.

552; 12 U.S.C. 481, 1820(d). Subpart B also issued under 5 U.S.C.

552; E.O. 12600 (3 CFR, 1987 Comp., p. 235). Subpart C also issued

under 5 U.S.C. 301, 552; 12 U.S.C. 481, 482, 1821(o), 1821(t); 18

U.S.C. 641, 1905, 1906; 31 U.S.C. 9701. Subpart D also issued under

12 U.S.C. 1833e.

2. In Subpart A, Sec. 4.6 is revised to read as follows:

Sec. 4.6 Frequency of examination.

(a) General. The OCC examines national banks pursuant to authority

conferred by 12 U.S.C. 481 and the requirements of 12 U.S.C. 1820(d).

The OCC is required to conduct a full-scope, on-site examination of

every national bank at least once during each 12-month period.

(b) 18-month rule for certain small institutions. The OCC may

conduct a full-scope, on-site examination of a national bank at least

once during each 18-month period, rather than each 12-month period as

provided in paragraph (a) of this section, if the following conditions

are satisfied:

(1) The bank has total assets of $250 million or less;

(2) The bank is well capitalized as defined in part 6 of this

chapter;

(3) At the most recent examination, the OCC found the bank to be

well managed;

(4) At the most recent examination, the OCC assigned the bank a

composite rating of 1 or 2 under the Uniform Financial Institutions

Rating System (copies are available at the addresses specified in

Sec. 4.14);

(5) The bank currently is not subject to a formal enforcement

proceeding or order by the FDIC, OCC, or Federal Reserve System; and

(6) No person acquired control of the bank during the preceding 12-

month period in which a full-scope, on-site examination would have been

required but for this section.

(c) Authority to conduct more frequent examinations. This section

does not limit the authority of the OCC to examine any national bank as

frequently as the agency deems necessary.

Dated: February 25, 1998.

Eugene A. Ludwig,

Comptroller of the Currency.

Federal Reserve System

12 CFR CHAPTER II

Authority and Issuance

For the reasons set forth in the joint preamble, the Board amends

part 208 of chapter II of title 12 of the Code of Federal Regulations

as follows:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL

RESERVE SYSTEM (REGULATION H)

1. The authority citation for part 208 continues to read as

follows:

Authority: 12 U.S.C. 24, 36, 92(a), 93(a), 248(a), 248(c), 321-

338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),

1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1835(a), 1882,

2901-2907, 3105, 3310,3331-3351, and 3906-3909; 15 U.S.C. 78b,

781(b), 781(g), 781(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C.

5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 4128.

2. In Subpart A, Sec. 208.26 is revised to read as follows:

Sec. 208.26 Frequency of examination.

(a) General. The Federal Reserve examines insured member banks

pursuant to authority conferred by 12 U.S.C. 325 and the requirements

of 12 U.S.C. 1820(d). The Federal Reserve is required to conduct a

full-scope, on-site examination of every insured member bank at least

once during each 12-month period.

(b) 18-month rule for certain small institutions. The Federal

Reserve may conduct a full-scope, on-site examination of an insured

member bank at least once during each 18-month period, rather than each

12-month period as provided in paragraph (a) of this section, if the

following conditions are satisfied:

(1) The bank has total assets of $250 million or less;

(2) The bank is well capitalized as defined in subpart B of this

part (Sec. 208.33);

(3) At the most recent examination conducted by either the Federal

Reserve

[[Page 16381]]

or applicable State banking agency, the Federal Reserve found the bank

to be well managed;

(4) At the most recent examination conducted by either the Federal

Reserve or applicable State banking agency, the Federal Reserve

assigned the bank a composite rating of 1 or 2 under the Uniform

Financial Institutions Rating System (copies are available at the

address specified in Sec. 216.6 of this chapter);

(5) The bank currently is not subject to a formal enforcement

proceeding or order by the FDIC, OCC, or Federal Reserve System; and

(6) No person acquired control of the bank during the preceding 12-

month period in which a full-scope, on-site examination would have been

required but for this section.

(c) Authority to conduct more frequent examinations. This section

does not limit the authority of the Federal Reserve to examine any

insured member bank as frequently as the agency deems necessary.

By order of the Board of Governors of the Federal Reserve

System, March 27, 1998.

Jennifer J. Johnson,

Deputy Secretary of the Board.

Federal Deposit Insurance Corporation

12 CFR CHAPTER III

Authority and Issuance

For the reasons set forth in the joint preamble, the Board of

Directors of the FDIC amends part 337 of chapter III of title 12 of the

Code of Federal Regulations as follows:

PART 337--UNSAFE AND UNSOUND BANKING PRACTICES

1. The authority citation for part 337 continues to read as

follows:

Authority: 12 U.S.C. 375a(4), 375b, 1816, 1818(a), 1818(b),

1819, 1820(d)(10), 1821(f), 1828(j)(2), 1831f, 1831f-1.

2. Section 337.12 is revised to read as follows:

Sec. 337.12 Frequency of examination.

(a) General. The Federal Deposit Insurance Corporation examines

insured state nonmember banks pursuant to authority conferred by

section 10 of the Federal Deposit Insurance Act (12 U.S.C. 1820). The

FDIC is required to conduct a full-scope, on-site examination of every

insured state nonmember bank at least once during each 12-month period.

(b) 18-month rule for certain small institutions. The FDIC may

conduct a full-scope, on-site examination of an insured state nonmember

bank at least once during each 18-month period, rather than each 12-

month period as provided in paragraph (a) of this section, if the

following conditions are satisfied:

(1) The bank has total assets of $250 million or less;

(2) The bank is well capitalized as defined in Sec. 325.103(b)(1)

of this chapter;

(3) At the most recent FDIC or applicable State banking agency

examination, the FDIC found the bank to be well managed;

(4) At the most recent FDIC or applicable State banking agency

examination, the FDIC assigned the insured state nonmember bank a

composite rating of 1 or 2 under the Uniform Financial Institutions

Rating System (copies are available at the addresses specified in

Sec. 309.4 of this chapter);

(5) The bank currently is not subject to a formal enforcement

proceeding or order by the FDIC, OCC, or Federal Reserve System; and

(6) No person acquired control of the bank during the preceding 12-

month period in which a full-scope, on-site examination would have been

required but for this section.

(c) Authority to conduct more frequent examinations. This section

does not limit the authority of the FDIC to examine any insured state

nonmember bank as frequently as the agency deems necessary.

By order of the Board of Directors.

Dated at Washington, DC, this 24th day of March 1998.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Office of Thrift Supervision

12 CFR CHAPTER V

Authority and Issuance

For the reasons set forth in the joint preamble, the OTS amends

part 563 of Chapter V of title 12 of the Code of Federal Regulations as

follows:

PART 563--OPERATIONS

1. The authority citation for part 563 continues read as follows:

Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,

1817, 1820, 1828, 3806; 42 U.S.C. 4106.

2. Section 563.171 is revised to read as follows:

Sec. 563.171 Frequency of examination.

(a) General. The OTS examines savings associations pursuant to

authority conferred by 12 U.S.C. 1463 and the requirements of 12 U.S.C.

1820(d). The OTS is required to conduct a full-scope, on-site

examination of every savings association at least once during each 12-

month period.

(b) 18-month rule for certain small institutions. The OTS may

conduct a full-scope, on-site examination of a savings association at

least once during each 18-month period, rather than each 12-month

period as provided in paragraph (a) of this section, if the following

conditions are satisfied:

(1) The savings association has total assets of $250 million or

less;

(2) The savings association is well capitalized as defined in

Sec. 565.4 of this chapter;

(3) At its most recent examination, the OTS found the savings

association to be well managed;

(4) At its most recent examination, the OTS assigned the savings

association a composite rating of 1 or 2, as defined in Sec. 516.3(c)

of this chapter;

(5) The savings association currently is not subject to a formal

enforcement proceeding or order; and

(6) No person acquired control of the savings association during

the preceding 12-month period in which a full-scope, on-site

examination would have been required but for this section.

(c) Authority to conduct more frequent examinations. This section

does not limit the authority of the OTS to examine any savings

association as frequently as the agency deems necessary.

Dated: February 10, 1998.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 98-8605 Filed 4-1-98; 8:45 am]

BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P