OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
SUPERVISION AND REGULATION
June 24, 1999
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OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 |
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| DIVISION OF BANKING SUPERVISION AND REGULATION |
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| SR 99-17 (SUP) June 24, 1999 |
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TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
This SR letter sets forth procedures to be followed in the assignment of supervisory ratings under risk-focused and continuous supervision processes, and the entering of those ratings into the National Examination Data System (NED).1 The procedures pertain to supervisory rating systems for bank holding companies (BOPEC), state member banks (CAMELS), U.S. branches and agencies of foreign banking organizations (ROCA), and Edge and agreement corporations, overseas subsidiaries of U.S. banks, and U.S. nonbank subsidiaries of foreign banking organizations (CAMEO). This letter also introduces certain other procedures that are intended to enhance the risk-focused supervision program.
Revising Supervisory Ratings
Supervisory ratings should be revised whenever there is strong evidence that the financial condition or risk profile of an institution has significantly changed.2 In a risk-focused and continuous supervision environment, supervisory ratings should be viewed as a continuum, rather than a point-in-time assessment of an institution's financial condition. It is important that supervisory ratings reflect a current assessment of an institution's financial condition and risk profile, as the ratings can affect risk-based deposit insurance premiums, statutory and regulatory requirements, including applications and the prompt corrective action provisions of the Federal Deposit Insurance Act, and supervisory reporting and examination requirements, as well as other factors. While supervisory ratings are most frequently revised as a result of on-site supervisory activities, other sources of information reviewed off-site may also indicate the need for a rating change.3
In addition, when a component of one of the supervisory rating systems is changed, the Reserve Bank must also reaffirm or revise the other component ratings and the composite rating, based upon available information at that time. The factors contributing to a change in the rating of a selected component can affect one or more of the other components in the rating system, as well as the composite rating. Accordingly, if there is a compelling reason to change a selected component rating, all of the other components in the supervisory rating system must be either reaffirmed or revised. As applicable for bank holding companies and state member banks, the risk management rating must also be reaffirmed or revised when a CAMELS or BOPEC rating is changed.4
Any change to a component or composite rating and the rationale for that change must be communicated in writing via a letter or report to the board of directors of the affected institution (or to the senior U.S. management official in the case of a U.S. branch, agency, office, or nonbank subsidiary of a foreign bank) and to the appropriate state and federal supervisory agencies. When ratings are revised between scheduled Federal Reserve examinations and inspections, the revised rating should be entered into NED as either an examination or inspection supervisory event, with a "supervisory assessment activity" scope.
Ratings Assigned by State Supervisory Agencies Under the Alternate Examination Program
Under the Alternate Examination Program (AEP), certain mutually agreed upon state member banks are examined in alternate years by a state supervisory agency, in lieu of an examination conducted by the Federal Reserve. Reserve Banks should continue to review all state examination reports on banks included in the AEP. A Reserve Bank should only assign a separate CAMELS rating if there is disagreement with the rating assigned by the state supervisory agency that conducted the examination.5 In the event that a rating disparity exists, the rating assigned by the Reserve Bank and the rationale for that rating must be communicated to the board of directors of the affected institution and to the appropriate state and federal supervisory agencies.
The rating assigned by the state supervisory agency that conducted the examination should be entered into NED as a full-scope examination. A different rating assigned by the Reserve Bank in connection with the AEP examination should be recorded in NED as an "examination" event with a "supervisory assessment activity" scope. The Federal Reserve rating will serve as the basis for determining compliance with relevant statutes and regulations, and for the conduct of supervisory responsibilities, including supervisory and enforcement activities, the frequency of inspection/examination activity, and general surveillance activity.
Joint Examination Guidelines
The Nationwide State/Federal Supervisory Agreement, dated November 14, 1996, which addresses the supervision of multi-state banking organizations, established guidelines for the conduct of joint examinations. Under the terms of the Agreement, the participating state and federal supervisory agencies should make every effort to resolve significant differences that arise during a joint examination. If differences cannot be resolved, the Agreement permits each supervisory agency to take action, independent of the other, in the fulfillment of its own statutory and supervisory responsibilities.
An examination should be considered a joint examination only if the participating supervisory agencies agree on the component and composite ratings to be assigned. If the Federal Reserve and the state supervisory agency disagree on the ratings to be assigned, the examination should be termed "concurrent," and should be recorded as such in NED. In these instances, both the Federal Reserve rating and the state supervisory agency rating should be entered into NED. In the event that an examination changes from "joint" to "concurrent" in the course of the examination, the examining Reserve Bank must assign a separate supervisory rating and issue a separate report of examination. The Federal Reserve rating will serve as the basis for determining compliance with relevant statutes and regulations, and for the conduct of its supervisory responsibilities, including supervisory and enforcement activities, the frequency of inspection/examination activity, and general surveillance activity.
Recording Certain Risk Assessment Data in NED
SR letter 97-24 introduced the Federal Reserve's framework for risk-focused supervision of large complex institutions. As directed in the SR letter, the risk-focused supervision process requires the development of a risk assessment for all large and complex banking organizations. The risk assessment includes the assignment of level and direction ratings for the organization's overall risk and each of the six risk categories (credit, market, liquidity, operational, legal, and reputational). To ensure that this information is readily available to the supervisory community, each Reserve Bank is required to enter into NED the current risk assessment level and direction ratings for each supervised large complex banking organization in its District.
Reserve Banks should also update this information whenever there is a change to a risk level or direction rating. In the NED application, the risk assessment level and direction ratings are captured as a supervisory event with "start" and "end" dates, similar to an inspection or examination.
Recording Planned Supervisory Activities in NED
An effective risk-focused and continuous supervision process requires close coordination among the Federal Reserve System and other state and federal supervisory agencies. To facilitate such coordination, Reserve Banks should enter schedule information into NED for all inspections, examinations, and enforcement actions. This information should be entered into NED as soon as it becomes available, such as in the course of preparing the inspection/examination program, or no later than the date upon which the entry letter is transmitted to the targeted institution.
The availability of this information in an automated form will enable the users of NED (Federal Reserve System and other state and federal supervisory agencies) to better coordinate supervisory activities and, thus, reduce the regulatory burden on supervised institutions. In addition, the entry of this information into NED will be required before related supervisory documents, such as inspection/examination reports and enforcement actions, can be entered into the central document and text repository, which is currently being developed.
Collection of Classified Asset Data for the Top 50 Banking Organizations
SR letter 96-8 requires Reserve Banks to collect quarterly internal classified asset data for the Top 50 banking organizations, and to provide this information to Board staff. Reserve Banks should continue to collect the classified asset information on a quarterly basis. However, effective immediately, quarterly, internal classified asset data should be entered into NED, as soon as it becomes available, in lieu of transmitting it directly to Board staff. All internal classified asset data for the Top 50 bank holding companies should be entered into NED no later than 45 days after quarter-end. This data should be entered into NED as an "inspection" with a "supervisory assessment activity" scope. Because NED requires "open," "close," "financial as of," and "disposition" dates to complete the data entry, the appropriate quarter-end date for the classified asset data should be used for each of these NED entries. For example, the open, close, financial as of, and disposition dates for year-end 1998 classified asset data would each be December 31, 1998. Reserve Banks should continue to submit other Top 50 risk management reports to Board staff, in accordance with the instructions set forth in SR letter 96-8.
If you have any questions concerning the policy and procedural changes discussed in this SR letter, please contact Kwayne Jennings, Supervisory Financial Analyst, at (202) 452-3088; Nick Kalambokidis, Manager, at (202) 452-3830;or Joel Shapiro, Manager, at (202) 452-2056.
Deputy Director
Notes: 1. Version 2.1 of NED, which was released in February 1999, contains enhancements to accommodate several matters described in this SR letter. Please refer to the NED processing guide and NIC letter 99-06 for additional procedural information related to these matters. Return to text 2. This SR letter supersedes SR letter 92-31, which suspended the practice of revising CAMELS ratings for state member banks between examinations. Return to text 3. For example, significant change in financial condition may be evident from some combination of reports of examination conducted by other agencies, meetings or other communication with management of the institution, published financial reports or press releases, status reports submitted by the institution as required by an enforcement action, and information generated by ongoing surveillance activities. Return to text 4. Pursuant to the guidelines set forth in SR letter 97-27, the assignment of a separate risk management rating is not required for small shell bank holding companies. Return to text 5. This SR letter supersedes SR letter 81-710, which required Reserve Banks to assign separate CAMELS ratings with respect to all AEP examinations. Return to text
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SR letters | 1999
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