TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
Existing examination procedures, consistent with the
International Lending Supervision Act, require a specified
writedown or Allocated Transfer Risk Reserve (ATRR) on those
assets deemed by the regulatory agencies to have been
significantly impaired by protracted transfer risk problems. For
asset quality rating purposes, the Commercial Bank Manual
procedures call for the residual portion of Value Impaired
exposure, net of an ATRR or charge-off, to be treated the same as
for doubtful loans (ie. weighted at 50%), for the purpose of
assessing a bank's weighted classified asset ratio.
Since this act was passed in 1983, the agencies have
mandated writedowns which have resulted in the majority of the
exposure being either written-off or reserved against for nearly
all Value Impaired assets. Consequently, a reevaluation of the
asset quality computation described above for the residual Value
Impaired exposure is warranted. For asset quality rating
purposes, examiners should weight the residual portion of any
Value Impaired exposure at 20 percent. Although this is the same
weighting used for substandard loans, the residual exposure still
remains Value Impaired for examination and classification
purposes. The Transfer Risk section of the Commercial Bank
Manual will be revised to reflect this change in procedure. For
institutions that are not required to have an ATRR, in
determining weighted classifications for Value Impaired credits,
the ATRR portion is to be weighted at 100 percent and the
residual amount at 20 percent.
If you have any questions on the above, please contact
Michael Martinson (x3640) or Joe Sciortino (x2294).
Associate Director
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