[Federal Register Volume 74, Number 185 (Friday, September 25, 2009)]
[Notices]
[Pages 48955-48959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-23208]
[[Page 48955]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
FEDERAL RESERVE SYSTEM
[Docket No. OP-1369]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC-2009-0013]
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket ID OTS-2009-20016]
Correspondent Concentration Risks
AGENCY: Federal Deposit Insurance Corporation (FDIC); Board of
Governors of the Federal Reserve System (the Board), Office of the
Comptroller of the Currency, Treasury (OCC); and Office of Thrift
Supervision, Treasury (OTS).
ACTION: Proposed guidance and request for comment.
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SUMMARY: The FDIC, Board, OCC, and OTS (the Agencies) request comment
on proposed guidance on correspondent concentration risks (Proposed
Guidance). The Proposed Guidance outlines the Agencies' expectations
for financial institutions with respect to identifying, monitoring, and
managing correspondent concentration risks between financial
institutions, and performing appropriate due diligence on all credit
exposures to and funding transactions with other financial
institutions. The Agencies expect financial institutions to identify,
monitor, and manage the totality of the institution's aggregate credit
and funding exposures to other institutions on a standalone basis, and
take into account exposures to other institutions' affiliates. In
addition, the institution should be aware of exposures of its
affiliates to other institutions and their affiliates.
DATES: Comments must be submitted on or before October 26, 2009.
ADDRESSES: Comments should be directed to:
FDIC: You may submit comments by any of the following methods:
Agency Web Site: http://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency Web
Site.
E-mail: [email protected]. Include ``Proposed Guidance on
Correspondent Concentration Risks'' in the subject line of the message.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m. (EST).
Public Inspection: All comments received will be posted without
change to http://www.fdic.gov/regulations/laws/federal including any
personal information provided. Comments may be inspected and
photocopied in the FDIC Public Information Center, 3501 North Fairfax
Drive, Room E-1002, Arlington, VA 22226, between 9 a.m. and 5 p.m.
(EST) on business days. Paper copies of public comments may be ordered
from the Public Information Center by telephone at (877) 275-3342 or
(703) 562-2200.
FRB: You may submit comments, identified by Docket No. [----------
----], by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
Public Inspection: All public comments are available from the
Board's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons.
Accordingly, your comments will not be edited to remove any identifying
or contact information. Public comments may also be viewed in
electronic or paper form in Room MP-500 of the Board's Martin Building
(20th and C Streets, NW) between 9 a.m. and 5 p.m. on weekdays.
OCC: You may submit comments by any of the following methods:
E-mail: [email protected].
Fax: (202) 874-5274.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 2-3, Washington, DC 20219.
Hand Delivery/Courier: 250 E Street, SW., Attn: Public
Information Room, Mail Stop 2-3, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2009-0013'' in your comment. In general, OCC will enter
all comments received into the docket without change, including any
business or personal information that you provide such as name and
address information, e-mail addresses, or phone numbers. Comments,
including attachments and other supporting materials, received are part
of the public record and subject to public disclosure. Do not enclose
any information in your comment or supporting materials that you
consider confidential or inappropriate for public disclosure.
You may review comments and other related materials by any of the
following methods:
Viewing Comments Personally: You may personally inspect and
photocopy comments at the OCC, 250 E Street, SW., Washington, DC. For
security reasons, the OCC requires that visitors make an appointment to
inspect comments. You may do so by calling (202) 874-4700. Upon
arrival, visitors will be required to present valid government-issued
photo identification and submit to security screening in order to
inspect and photocopy comments. You may also view or request available
background documents and project summaries using the methods described
above.
OTS: You may submit comments, identified by docket number ID OTS-
2009-XXXX, by any of the following methods:
E-mail: [email protected]. Please include ID
OTS-2009-XXXX [--------------] in the subject line of the message and
include your name and telephone number in the message.
Fax: (202) 906-6518.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: ID OTS-2009-XXXX.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: ID OTS-2009-
XXXX.
Instructions: All submissions received must include the agency name
and docket number for this notice. All comments received will be
entered into
[[Page 48956]]
the docket without change, including any personal information provided.
Comments including attachments and other supporting materials received
are part of the public record and subject to public disclosure. Do not
enclose any information in your comments or supporting materials that
you consider confidential or inappropriate for public disclosure.
Viewing Comments On-Site: You may inspect comments at the Public
Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
FOR FURTHER INFORMATION CONTACT:
FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division of
Supervision and Consumer Protection, (202) 898-3640; or Mark G.
Flanigan, Counsel, Legal Division, (202) 898-7426.
FRB: Barbara J. Bouchard, Associate Director, (202) 452-3072; or Craig
A. Luke, Supervisory Financial Analyst, Supervisory Guidance and
Procedures, 202-452-6409. For users of Telecommunications Device for
the Deaf (``TDD'') only, contact (202) 263-4869.
OCC: Fred D. Finke, Liaison, Midsize-Community Bank Supervision, (202)
874-4468; or Kurt S. Wilhelm, Director, Financial Markets Group, (202)
874-4479.
OTS: Lori J. Quigley, Managing Director, Supervision, (202) 906-6265;
or William J. Magrini, Senior Project Manager of Credit Policy, (202)
906-5744.
SUPPLEMENTARY INFORMATION:
I. Background
Concentration risks can occur in correspondent relationships when
an institution engages in a significant volume of activities with
another financial institution. A financial institution's relationship
with a correspondent may result in credit (asset) and funding
(liability) concentration risks.
Credit risk is the potential that an obligation will not be paid in
a timely manner or in full. Credit risk arises whenever an institution
advances or commits funds to another financial institution, as the
advancing institution's assets are at risk of loss if the recipient
institution fails. Some institutions conceivably could have a credit
concentration arising from the need to maintain large due from balances
with the correspondent to facilitate account clearing activities.
Funding risk arises when an institution depends heavily on the
liquidity provided by a limited number of other institutions to meet
its funding needs. Funding risk can create an immediate threat to an
institution's viability if the advancing entity suddenly reduces the
institution's access to liquid funds. Institutions might abruptly limit
the availability of liquid funding sources as part of a prudent program
for limiting credit exposure or as required by regulation when the
financial condition of either counterparty declines rapidly.
II. Proposed Guidance
The Agencies developed this Proposed Guidance to outline their
expectations for financial institutions with respect to identifying,
monitoring, and managing correspondent concentration risks between
financial institutions; and for performing appropriate due diligence on
all credit exposures to and funding transactions with other financial
institutions. Correspondent concentrations represent a lack of
diversification that adds a dimension of risk that management should
consider when formulating strategic plans and internal risk limits. The
Proposed Guidance focuses on the risks in credit and funding exposures
inherent in interbank activities and how those exposures should be
calculated.
The Agencies generally consider credit exposures arising from
direct and indirect obligations owed by individual borrowers, a small
interrelated group of individuals, or a single repayment source greater
than 25 percent of Tier 1 capital as concentrations. The Proposed
Guidance clarifies that to assist management in assessing how
significant economic events or abrupt deterioration in a
correspondent's risk profile might affect their financial condition,
institutions should identify the totality of the institution's
aggregate credit and funding exposure to other institutions on a
standalone basis, and take into account exposures to other
institutions' affiliates.\1\ In addition, the institution should be
aware of exposures of its affiliates to other institutions and their
affiliates.
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\1\ Institutions should monitor all direct or indirect
relationships with the other institution and its subsidiaries, any
parent bank holding companies of the other institution, and other
entities controlled by that parent company. An institution should
also take into account exposures of its own affiliates to the same
institution (including that same institution's affiliates), and how
those may affect the institution's exposure. While each institution
is responsible for monitoring its own credit and funding exposures,
bank holding companies with exposures in more than one entity should
be managing the organization's concentration risk on a consolidated
basis. In situations where there are no parent bank holding
companies, institutions should monitor all direct or indirect
relationships with that institution and its subsidiaries and any
other entities that are under common control.
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The credit exposure of the advancing institution and its
organization represents a funding exposure to the recipient
organization. While the Agencies have not established a liability
concentration threshold, the Agencies have seen instances where funding
exposures as low as 5 percent of an institution's total liabilities
have posed an elevated risk to the recipient. An example of how these
interbank correspondent risks can become concentrated is illustrated
below:
Respondent Institution (RI) has $500 million in total assets and is
Well Capitalized with $40 million (8 percent) of Tier 1 capital. RI
maintains $10 million in its due from account held at Correspondent
Bank (CB) and sold $20 million in unsecured overnight Federal funds to
CB. These relationships collectively result in RI having an aggregate
risk exposure of 75 percent of its Tier 1 capital to CB. CB, which has
$2 billion in total assets, $1.8 billion in total liabilities, and is
Well Capitalized with $200 million (10 percent) Tier 1 capital, has 20
respondent banks (RB) with the same credit exposures as RI. The 20 RBs'
$600 million aggregate relationship represents one-third (33 percent)
of CB's total liabilities. These relationships could create significant
funding risk for CB if three or more of the RBs withdraw their funds in
close proximity of each other.
These relationships also could threaten the viability of the 20
RBs. The loss of all or a significant portion of the RBs' due from
balances and the unsecured Federal funds sold to CB could deplete a
significant portion of their capital base, resulting in multiple
failures. The RBs' viability also could be jeopardized if CB, in turn,
had sold a significant portion of the Federal funds from the RBs to
another financial institution that abruptly failed. In addition, the
financial institutions that rely on CB for account clearing services
may find it difficult to quickly transfer processing services to
another provider.
Although these interbank exposures may comply with regulations
governing individual relationships, collectively they pose significant
correspondent concentration risks that need to be
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monitored and managed consistent with the institutions overall risk-
management policies and procedures. The following discussion summarizes
the major components of the Proposed Guidance.
Identifying Correspondent Concentrations
The Proposed Guidance details the Agencies' expectations that
institutions implement procedures for identifying correspondent
concentrations on a standalone basis, as well as taking into account
exposures to the other institution's affiliates. These procedures
should include all assets advanced or committed to another
organization, as these credit exposures are at risk of loss. The
Proposed Guidance specifies that institutions should calculate both
gross and net credit exposures. Exposures are reduced to net positions
to the extent they are secured by the net realizable proceeds from
readily marketable collateral.
Monitoring Correspondent Concentrations
The Board's Regulation F mandates that an institution's policies
and procedures must require periodic reviews of a correspondent's
financial condition and must take into account any deterioration in the
correspondent's financial condition.\2\ In monitoring correspondent
relationships, the Proposed Guidance details the Agencies' expectation
that institutions specify what information, ratios, and trends
management will review for each correspondent on an ongoing basis. The
Proposed Guidance also stresses that an institution's policies should
include procedures that ensure ongoing, timely reviews of correspondent
relationships, establish documentation requirements for the reviews,
and specify when relationships that meet or exceed internal criteria
are to be reported to the Board of Directors or the appropriate
management committee for an assessment of risk and risk reducing
strategies.
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\2\ 12 CFR Part 206. All depository institutions insured by the
FDIC are subject to the Board's Limitation on Interbank Liabilities
(Regulation F).
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Managing Correspondent Concentrations
The Proposed Guidance discusses an institution's obligation to
establish prudent correspondent concentration limits, as well as ranges
or tolerances for each factor being monitored, consistent with the
Board's Regulation F and sound banking practice. Prudent risk
management of correspondent concentrations should include procedures
for reducing concentrations that meet or exceed established limits,
ranges, or tolerances in an orderly manner over reasonable timeframes.
Contingency plans for managing risk when these limits, ranges, or
tolerances are met or exceeded, either on an individual or collective
basis, should provide for a variety of actions that can be considered
relative to changes in the correspondent's financial condition.\3\
Contingency plans should not rely on temporary deposit insurance
programs for mitigating concentration risk.
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\3\ Regulation F requires institutions' policies and procedures
to limit exposure to the correspondent, either by the establishment
of internal limits or by other means, when the correspondent's
financial condition and the form or maturity of the bank's exposure
create a significant risk that payment will not be made in full or
in a timely manner. Regulation F also requires institutions to
reduce credit exposure to below 25 percent of total capital within
120 days after the date when the current Report of Condition or
other relevant report normally would be available if the
correspondent is no longer at least adequately capitalized. More
information on Regulation F is available at: http://www.federalreserve.gov/bankinforeg/reglisting.htm.
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Performing Appropriate Due Diligence
The Proposed Guidance also reinforces the Agencies' ongoing
expectation that financial organizations with credit or funding
exposures to other financial organizations have effective risk
management programs for these credit and funding activities. Credit or
funding exposures may include, for example, due from bank accounts,
Federal funds sold as principal, direct or indirect loans (including
participations and syndications), and trust preferred securities,
subordinated debt, and stock purchases of the correspondent, its
holding company, or any affiliated entity. An institution that
maintains or contemplates entering into any credit or funding
transaction with another financial institution should have written
investment, lending, and funding policies and procedures, including
appropriate limits, that govern these activities. In addition, these
procedures should ensure the institution conducts an independent
analysis of credit transactions prior to committing to engage in the
transactions. The terms for all such credit and funding transactions
should strictly be on an arm's length basis, conform to sound
investment, lending, and funding practices, and avoid potential
conflicts of interest.
III. Request for Comment
The Agencies are requesting public comment on all aspects of the
Proposed Guidance. The Agencies also request comment on the
appropriateness of aggregating all credit and funding exposures that an
institution or its organization has advanced or committed to another
financial institution or its affiliated entities when calculating
concentrations. In particular, should some types of advances or
commitments be excluded?
The Agencies further request comment on the types of factors
institutions should consider when assessing correspondents' financial
condition. The Agencies also seek comment on the need to establish
internal limits as well as ranges or tolerances for each factor being
monitored. In addition, the Agencies request comment on the types of
actions that should be considered for contingency planning and the
timeframes for implementing those actions to ensure concentrations that
meet or exceed organizations' established internal limits, ranges, or
tolerances are reduced in an orderly manner. Finally, the Agencies seek
comment on whether there are operational issues the Agencies should
consider when finalizing the Proposed Guidance. For example, do
institutions anticipate that operational issues will arise in light of
the Board's policy to limit eligible institutions to participation in
one excess balance account (EBA)? \4\ If so, identify the issues that
could arise in managing correspondent concentration risks while subject
to the single EBA limitation.
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\4\ The Board recently amended its Regulation D (12 CFR Part
204) to authorize Federal Reserve Banks to offer EBAs to eligible
institutions. 74 FR 25620 (May 29, 2009). These accounts were
intended to permit eligible institutions to earn interest on their
excess balances without significantly disrupting established
business relationships with their correspondents. Under the terms of
the EBA account agreement, an eligible institution is permitted to
participate in one EBA at a Federal Reserve Bank. Each EBA
Participant, however, can choose each day whether to sell funds in
the Federal funds market through any number of correspondent
institutions, to place the funds at a Federal Reserve Bank through
their single EBA agent, or to select a combination of the two. As a
result, EBA Participants may maintain relationships with more than
one correspondent notwithstanding the fact that an EBA Participant
participates in only one EBA at a Reserve Bank.
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The text of the Proposed Guidance, entitled Correspondent
Concentration Risks, is as follows:
Correspondent Concentration Risks
A financial institution's relationship with a correspondent may
result in credit (asset) and funding (liability) concentrations. On the
asset side, a credit concentration represents a significant volume of
credit exposure that a financial institution has advanced or committed
to one entity or affiliated group. On the liability side, a funding
concentration exists when an institution
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depends on one or a small group of institutions for a disproportionate
share of its total funding. Correspondent concentrations represent a
lack of diversification, which adds a dimension of risk that management
should consider when formulating strategic plans and internal risk
limits.
The Agencies have generally considered credit exposures greater
than 25 percent of Tier 1 capital as concentrations. While the Agencies
have not established a liability concentration threshold, the Agencies
have seen instances where funding exposures as low as 5 percent of an
institution's total liabilities have posed an elevated liquidity risk
to the recipient institution. The Agencies expect financial
institutions to identify, monitor, and manage both asset and liability
correspondent concentrations and implement procedures to perform
appropriate due diligence on all credit exposures to and funding
transactions with other financial institutions.\1\
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\1\ The Agencies consist of the Federal Deposit Insurance
Corporation (FDIC), Board of Governors of the Federal Reserve System
(Board), Office of the Comptroller of the Currency, Treasury (OCC),
and Office of Thrift Supervision, Treasury (OTS) (collectively, the
Agencies).
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Identifying Correspondent Concentrations
Institutions should implement procedures for identifying
correspondent concentrations with other financial organizations.
Accordingly, an institution should have procedures that encompass the
totality of the institution's aggregate credit and funding exposures to
the other institution on a standalone basis, as well as taking into
account exposures to the other institution's affiliates. In addition,
the institution should be aware of exposures of its affiliates to the
other institution and its affiliates.\2\
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\2\ Institutions should monitor all direct or indirect
relationships with the other institution and its subsidiaries, any
parent bank holding companies of the other institution, and other
entities controlled by that parent company. An institution should
also take into account exposures of its own affiliates to the same
institution (including that same institution's affiliates), and how
those may affect the institution's exposure. While each institution
is responsible for monitoring its own credit and funding exposures,
bank holding companies with exposures in more than one entity should
be managing the organization's concentration risk on a consolidated
basis. In situations where there are no parent bank holding
companies, institutions should monitor all direct or indirect
relationships with that institution and its subsidiaries and any
other entities that are under common control.
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Credit Concentrations
Credit exposures can consist of a variety of assets. For example,
an institution (either a client bank or a correspondent) could have due
from bank accounts, Federal funds sold on a principal basis, and direct
or indirect loans to or investments in another institution, its holding
company, or an affiliated entity. These assets represent credit
exposures to the institution that advanced them, as they are at risk of
loss. The Agencies realize some exposures meet certain business needs
or purposes, such as a credit concentration arising from the need to
maintain large due from balances to facilitate accounting clearing
activities. In identifying credit concentrations, institutions should
aggregate all exposures, including, but not limited to:
Due from bank accounts (demand deposit accounts (DDA) and
certificates of deposit (CD)),
Federal funds sold on an as principal basis,
The over-collateralized amount on repurchase agreements,
The under-collateralized portion of reverse repurchase
agreements,
Current positive fair value on derivatives contracts,
Unrealized gains on unsettled securities transactions,
Direct or indirect loans to or for the benefit of the
correspondent, its holding company, or any affiliated entity, and
Investments, such as trust preferred securities,
subordinated debt, and stock purchases, in the correspondent, its
holding company, or any affiliated entity.
Funding Concentrations
Conversely, asset accounts such as those noted above represent
funding sources to the recipient institution or correspondent. The
primary risk of a funding concentration is that an institution will
have to replace those advances on short notice. This risk may be more
pronounced if the funds are credit sensitive, and the advancing
institution's financial condition has deteriorated.
The percentage of liabilities or other measurements that may
constitute a concentration of funding is likely to vary depending on
the type and maturity of the funding, and the structure of the
receiving institution's sources of funds. For example, a concentration
in overnight unsecured funding from one institution likely would
warrant a much lower concentration threshold than unsecured term
funding, assuming compliance with covenants and diversification with
short and long-term maturities. Similarly, assuming the same, term
funding in the form of senior or subordinated debt may not present a
funding concentration risk.
Calculating Credit and Funding Exposures
When identifying credit and funding exposures, institutions should
calculate both gross and net exposures. Exposures are reduced to net
positions to the extent they are secured by the net realizable proceeds
from readily marketable collateral. For example, $10 million in Federal
funds sold to a correspondent with $3 million secured by U.S. Treasury
notes represents a $10 million gross exposure, but a $7 million net
exposure after consideration of the pledged collateral.
Monitoring Correspondent Relationships
The Federal Reserve Board's Regulation F requires institutions to
establish and maintain written policies and procedures to prevent
excessive exposure to any individual correspondent in relation to the
correspondent's financial condition.\3\ In cases where an institution's
exposure to a correspondent is significant, Regulation F mandates that
an institution's policies and procedures must require periodic reviews
of the correspondent's financial condition and must take into account
any deterioration in the correspondent's financial condition.\4\
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\3\ 12 CFR part 206. All depository institutions insured by the
FDIC are subject to the Board's Limitations on Interbank Liabilities
(Regulation F).
\4\ 12 CFR 206.3.
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Regulation F provides that such monitoring efforts must take into
account the correspondent's capital level, level of nonaccrual and
past-due loans and leases, level of earnings, and other factors
affecting its financial condition. While not specified, these other
factors could include, but are not limited to:
Deteriorating trends in its capital base or asset quality.
Reaching certain target ratios established by management,
e.g., aggregate of nonaccrual and past due loans and leases as a
percentage of gross loans and leases.
Increasing level of other real estate owned.
Experiencing a downgrade in its credit rating, if publicly
traded.
Being placed under a public enforcement action.
In monitoring correspondent relationships for risk-management
purposes as well as for compliance with Regulation F, institutions
should specify what information, ratios, or trends will be reviewed for
each correspondent on an ongoing basis. Institutions' policies should
include procedures that ensure
[[Page 48959]]
ongoing, timely reviews of correspondent relationships. Such reviews
should be conducted on a quarterly basis at a minimum and more
frequently when appropriate. The procedures also should establish
documentation requirements for the reviews conducted. In addition, the
procedures should specify when relationships that meet or exceed
internal criteria are to be brought to the attention of the Board of
Directors or the appropriate management committee.
Managing Correspondent Concentrations
Pursuant to Regulation F, institutions should establish prudent
correspondent concentration limits, as well as ranges or tolerances for
each factor being monitored. Institutions should develop plans for
managing risk when these limits, ranges or tolerances are met or
exceeded, either on an individual or collective basis. Consistent with
the requirements of Regulation F, contingency plans should provide a
variety of actions that can be considered relative to changes in the
correspondent's financial condition.\5\
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\5\ Regulation F requires institutions' policies and procedures
to limit exposure to the correspondent, either by the establishment
of internal limits or by other means, when the correspondent's
financial condition and the form or maturity of the bank's exposure
create a significant risk that payment will not be made in full or
in a timely manner. Regulation F also requires institutions to
reduce credit exposure to below 25 percent of total capital within
120 days after the date when the current Report of Condition or
other relevant report normally would be available if the
correspondent is no longer at least Adequately Capitalized. More
information on Regulation F is available at: http://www.federalreserve.gov/bankinforeg/reglisting.htm.
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Contingency plans should not rely on temporary deposit insurance
programs for mitigating concentration risk. Prudent risk management of
correspondent concentrations should include procedures for reducing
exposures that meet or exceed established limits, ranges, or tolerances
in an orderly manner over reasonable timeframes. Such actions could
include, but are not limited to:
Reducing the volume of uncollateralized/uninsured funds.
Transferring excess funds to other financial institutions
rather than the correspondent after conducting appropriate reviews of
their financial condition.
Requiring the correspondent to serve as agent rather than
as principal for Federal funds sold.
Establishing limits on asset and liability purchases from
and investments in correspondents.
Specifying reasonable timeframes to meet targeted
reduction goals for different types of advances.
Examiners will review correspondent relationships during
examinations to ascertain whether an institution's policies and
procedures identify and monitor correspondent concentrations on an
organization-wide basis. Examiners also will review the adequacy and
reasonableness of institutions' contingency plans to manage
correspondent concentrations.
Performing Appropriate Due Diligence
The Agencies expect financial organizations that maintain credit
exposures in or provide funding to other financial organizations to
have effective risk management programs for these activities. For this
purpose, credit or funding exposures may include, but are not limited
to, due from bank accounts, Federal funds sold as principal, direct or
indirect loans (including participations and syndications), and trust
preferred securities, subordinated debt, and stock purchases of the
correspondent, its holding company, or any affiliated entity.
An institution that maintains or contemplates entering into any
credit or funding transactions with another financial institution
should have written investment, lending, and funding polices and
procedures, including appropriate limits, that govern these activities.
In addition, these procedures should ensure the institution conducts an
independent analysis of credit transactions prior to committing to
engage in the transactions. The terms for all such credit and funding
transactions should strictly be on an arm's length basis, conform to
sound investment, lending, and funding practices, and avoid potential
conflicts of interest.
This concludes the text of the Proposed Guidance.
Dated at Washington, DC, the 18th day of September 2009.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
By order of the Board of Governors of the Federal Reserve
System, September 18, 2009.
Jennifer J. Johnson,
Secretary of the Board.
Dated: September 8, 2009.
Office of the Comptroller of the Currency.
John C. Dugan,
Comptroller of the Currency.
Dated: September 17, 2009.
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. E9-23208 Filed 9-24-09; 8:45 am]
BILLING CODE 6714-01-P, 6210-01-P, 4810-33-P, 6720-01-P