Updates to the Expanded Examination Cycle for Certain State Member Banks and U.S. Branches and Agencies of Foreign Banking Organizations

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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION

AND REGULATION

SR 18-7

October 1, 2018

Updated January 23, 2019

Note: On December 28, 2018, the Board published in the Federal Register final rules that

adopted without change interim final rules published on August 29, 2018. Like the interim final

rules, the final rules were published jointly with the Office of the Comptroller of the Currency

and the Federal Deposit Insurance Corporation, both of which adopted similar changes to their

respective regulations. For the final rules, see 83 Fed. Reg. 67033 (December 28, 2018),

available at https://www.govinfo.gov/content/pkg/FR-2018-12-28/pdf/2018-28267.pdf.

TO THE OFFICER IN CHARGE OF SUPERVISION

AT EACH FEDERAL RESERVE BANK

SUBJECT: Updates to the Expanded Examination Cycle for Certain State Member Banks

and U.S. Branches and Agencies of Foreign Banking Organizations

Applicability to Community Banking Organizations: This guidance applies to certain state

member banks and U.S. branches and agencies of foreign banks with less than $3 billion in total

assets meeting the criteria described in the letter.

The Federal Reserve is issuing this letter to provide an update on recent changes to the

criteria for state member banks (SMB) and U.S. branches and agencies of foreign banks to be

eligible for an expanded examination cycle of 18 months (as opposed to 12 months)

U.S. branches and agencies of foreign banks with less than $3 billion in total

assets meeting the criteria described in the letter.

The Federal Reserve is issuing this letter to provide an update on recent changes to the

criteria for state member banks (SMB) and U.S. branches and agencies of foreign banks to be

eligible for an expanded examination cycle of 18 months (as opposed to 12 months).

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

appropriate federal banking agency for an insured depository institution (IDI) to conduct a full-

scope, on-site examination at least once every 12 months, but permits a longer cycle—at least

once every 18 months—for IDIs that meet certain criteria, including the requirement that the IDI

must have total assets below a specified size limit.1 Section 210 of the Economic Growth,

Regulatory Relief, and Consumer Protection Act (EGRRCPA) amends section 10(d) of the FDI

Act to increase from $1 billion to $3 billion the total asset threshold below which an IDI may

qualify for the 18-month examination cycle.

1 12 U.S.C. 1820(d).

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On August 29, 2018, the Board published in the Federal Register an interim final rule

that amended Regulation H to raise the asset threshold for an SMB to be eligible for the

18-month examination cycle from less than $1 billion in total assets to the new statutory

maximum, which is less than $3 billion in total assets.2 The interim final rule also made parallel

changes to Regulation K, which governs the on-site examination cycle for Board-supervised U.S.

branches and agencies of foreign banks, consistent with section 7(c)(1)(C) of the International

Banking Act of 1978.3 The interim final rule was made effective August 29, 2018, and was

published jointly with the Office of the Comptroller of the Currency (OCC) and the Federal

Deposit Insurance Corporation (FDIC), both of which adopted similar changes to their

regulations

Board-supervised U.S.

branches and agencies of foreign banks, consistent with section 7(c)(1)(C) of the International

Banking Act of 1978.3 The interim final rule was made effective August 29, 2018, and was

published jointly with the Office of the Comptroller of the Currency (OCC) and the Federal

Deposit Insurance Corporation (FDIC), both of which adopted similar changes to their

regulations.

Accordingly, a SMB with less than $3 billion in total assets may be eligible for an

18-month examination cycle if it satisfies the following criteria:

1) The SMB is well capitalized;

2) At the most recent Federal Reserve or applicable state banking agency examination,4

the Federal Reserve assigned a management component rating of “1” or “2” and a

CAMELS composite rating of “1” or “2;”5

3) The SMB is currently not subject to a formal enforcement proceeding or order by the

Federal Reserve or the FDIC; and

4) 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 the 18-

month examination cycle eligibility provision.6

A U.S. branch or agency of a foreign bank with less than $3 billion in total assets may be

eligible for an 18-month on-site examination cycle if it received, at its most recent examination,

a composite condition rating of “1” or “2” under the supervisory rating system7 and it satisfies

the following criteria:

1) Either: (a) the foreign bank’s most recently reported tier 1 and total risk-based capital

ratios are at least 6 percent and 10 percent, respectively, on a consolidated basis; or

ble for an 18-month on-site examination cycle if it received, at its most recent examination,

a composite condition rating of “1” or “2” under the supervisory rating system7 and it satisfies

the following criteria:

1) Either: (a) the foreign bank’s most recently reported tier 1 and total risk-based capital

ratios are at least 6 percent and 10 percent, respectively, on a consolidated basis; or

(b) the branch or agency has maintained on a daily basis, over the past three quarters,

eligible assets in an amount not less than 108 percent of the preceding quarter’s

average third-party liabilities (determined consistent with applicable federal and state

2 See 83 Fed. Reg. 43961 (August 29, 2018), available at https://www.govinfo.gov/content/pkg/FR-2018-08-

29/pdf/2018-18685.pdf.

3 12 U.S.C. 3105(c)(1)(C).

4 The Board is permitted to conduct on-site examinations of SMBs on alternating 12-month or 18-month periods

with the institution’s State supervisor, if the Board determines that the alternating examination conducted by the

State carries out the purposes of section 10(d) of the FDI Act. 12 U.S.C. 1820(d)(3).

5 For more information on safety-and-soundness examination ratings, see SR letter 96-38, “Uniform Financial

Institutions Rating System.”

6 12 CFR 208.64.

7 For more information on the ratings system for U.S. branches and agencies of foreign banks, see SR letter 00-14,

“Enhancements to the Interagency Program for Supervising the U.S. Operations of Foreign Banking Organizations.”

. 1820(d)(3).

5 For more information on safety-and-soundness examination ratings, see SR letter 96-38, “Uniform Financial

Institutions Rating System.”

6 12 CFR 208.64.

7 For more information on the ratings system for U.S. branches and agencies of foreign banks, see SR letter 00-14,

“Enhancements to the Interagency Program for Supervising the U.S. Operations of Foreign Banking Organizations.”

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law) and sufficient liquidity is currently available to meet its obligations to third

parties;

2) The branch or agency is not subject to a formal enforcement action or order by the

Board, FDIC, or OCC; and

3) The branch or agency has not experienced a change in control during the preceding

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

but for the 18-month examination cycle eligibility provision.8

The Federal Reserve may consider additional factors when determining the eligibility of a

U.S. branch or agency of a foreign bank for an 18-month on-site examination cycle, including

whether (1) any of the individual components of the supervisory rating system of a branch or

agency of a foreign bank is rated “3” or worse; (2) the results of any off-site surveillance indicate

a deterioration in the condition of the branch or agency; (3) the size, relative importance, and role

of a particular branch or agency in the context of the foreign bank’s entire U.S. operations

otherwise necessitate an annual examination; and (4) the condition of the foreign bank gives rise

to such a need.9

Implementation

The expanded 18-month examination cycle eligibility for SMBs and the U.S. branches

and agencies of foreign banks that have total assets of less than $3 billion and that meet the other

criteria of 12 CFR 208.64 or 211.26(c), as appropriate, was made effective August 29, 2018, the

date of publication in the Federal Register. The Federal Reserve maintains the authority to

examine SMBs and the U.S

he expanded 18-month examination cycle eligibility for SMBs and the U.S. branches

and agencies of foreign banks that have total assets of less than $3 billion and that meet the other

criteria of 12 CFR 208.64 or 211.26(c), as appropriate, was made effective August 29, 2018, the

date of publication in the Federal Register. The Federal Reserve maintains the authority to

examine SMBs and the U.S. branches and agencies of foreign banks more frequently as

necessary or appropriate, and Reserve Banks should exercise this authority as necessary or

appropriate.

The Federal Reserve is required to complete a Bank Secrecy Act (BSA)/anti-money

laundering (AML) compliance program review at each safety-and-soundness examination

conducted at a SMB or U.S. branch or agency of a foreign bank, which is typically every

12 months.10 However, Reserve Banks should conduct a BSA/AML compliance program review

every 18 months at each SMB or U.S. branch or agency of a foreign bank that is eligible for and

is examined on the extended 18-month examination cycle.

Reserve Banks are asked to distribute this letter to SMBs and Board-supervised U.S.

branches and agencies of foreign banks that are within the scope of this guidance, as well as to

appropriate supervisory and examination staff. Questions regarding this letter should be directed

to the following staff in the Board’s Division of Supervision and Regulation: Jonathan Rono,

Manager, at (202) 721-4568; and Alex Kobulsky, Supervisory Financial Analyst, at (202) 452-

2031. In addition, questions may be sent via the Board’s public website.11

8 12 CFR 211.26(c).

9 12 CFR 211.26(c)(2)(ii).

10 12 U.S.C. 1818(s)(2) and 12 U.S.C. 1818(b)(4).

11 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.

an Rono,

Manager, at (202) 721-4568; and Alex Kobulsky, Supervisory Financial Analyst, at (202) 452-

2031. In addition, questions may be sent via the Board’s public website.11

8 12 CFR 211.26(c).

9 12 CFR 211.26(c)(2)(ii).

10 12 U.S.C. 1818(s)(2) and 12 U.S.C. 1818(b)(4).

11 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.

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Michael S. Gibson

Director

Cross references to:

• SR letter 00-14, “Enhancements to the Interagency Program for Supervising the U.S.

Operations of Foreign Banking Organizations”

• SR letter 96-38, “Uniform Financial Institutions Rating System”

Supersedes:

•

SR letter 17-2, “Updates to the Expanded Examination Cycle for Certain State Member

Banks and U.S. Branches and Agencies of Foreign Banking Organizations”