[Federal Register Volume 76, Number 78 (Friday, April 22, 2011)]
[Proposed Rules]
[Pages 22662-22665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-9588]
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FEDERAL RESERVE BOARD
12 CFR Chapter II
[Docket No. OP-1416]
Notice of Intent To Apply Certain Supervisory Guidance to Savings
and Loan Holding Companies
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of intent and request for comments.
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SUMMARY: The Board of Governors of the Federal Reserve System
(``Board'') invites comment on its intention to apply certain elements
of its consolidated supervisory program currently applicable to bank
holding companies to savings and loan holding companies (``SLHCs'')
after assuming supervisory responsibility for SLHCs in July 2011. The
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
transfers supervisory functions related to SLHCs and their non-
depository subsidiaries to the Board on July 21, 2011.
DATES: Comments must be submitted on or before May 23, 2011.
ADDRESSES: You may submit comments 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.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include docket
number in the subject line of the message.
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.
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 electronically or in
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.
FOR FURTHER INFORMATION CONTACT: Kathleen O'Day, Deputy General
Counsel, (202-452-3786), or Amanda K. Allexon, Counsel, (202) 452-3818,
Legal Division; Anna Lee Hewko, Assistant Director, (202) 530-6260, T.
Kirk Odegard, Manager, (202) 530-6225, or Kristin B. Bryant,
Supervisory Financial Analyst, (202) 452-3670, Division of Banking
Supervision and Regulation, Board of Governors of the Federal Reserve
System, 20th and C Streets, NW., Washington, DC 20551.
Telecommunications Device for the Deaf (TDD) users may contact (202-
263-4869).
SUPPLEMENTARY INFORMATION:
Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010
[[Page 22663]]
(the ``Dodd-Frank Act'') was enacted into law on July 21, 2010. Title
III of the Dodd-Frank Act abolishes the Office of Thrift Supervision
(``OTS'') effective July 21, 2011, and transfers supervisory functions
(including rulemaking) related to SLHCs and their non-depository
subsidiaries to the Board. The Board will become responsible for the
supervision of SLHCs beginning July 21, 2011(``transfer date'').
The Board believes that it is important that any company that owns
and operates a depository institution be held to appropriate standards
of capitalization, liquidity, and risk management consistent with the
principles of safety and soundness. As a result, it is the Board's
intention, to the greatest extent possible taking into account any
unique characteristics of SLHCs and the requirements of the Home Owners
Loan Act (``HOLA''), to assess the condition, performance, and
activities of SLHCs on a consolidated risk-based basis in a manner that
is consistent with the Board's established approach regarding bank
holding company (``BHC'') supervision. As with BHCs, our objective will
be to ensure that the SLHC and its nondepository subsidiaries are
effectively supervised and can serve as a source of strength for, and
do not threaten the soundness of, its subsidiary depository
institutions.
The Board has identified three elements of its current supervisory
program that are particularly critical to the effective evaluation of
the consolidated condition of holding companies: (i) The Board's
consolidated supervision program for large and regional holding
companies; (ii) the Board's supervisory program for small, noncomplex
holding companies; and (iii) the Board's holding company rating system.
The Board believes that these programs aid in the effective supervision
of BHCs and that they would be equally effective for the supervision of
SLHCs.
It is the Board's intention that, after the transfer date, the
Board will issue formal guidance or notices of proposed rulemaking, as
appropriate, taking into consideration any comments received on this
notice, to apply the supervisory program in place for BHCs to SLHCs to
the fullest extent possible taking into account the unique
characteristics of SLHCs and the requirements of HOLA in order to
ensure continuous and effective supervision of SLHCs. By this notice,
the Board seeks to inform interested persons, including SLHCs, about
the Board's approach to supervision and invites comment on its intended
approach in order to help identify issues and matters that may require
special attention.
Consolidated Supervision
Consistent with its responsibilities under the Bank Holding Company
Act, the Gramm-Leach-Bliley Act, and the Dodd-Frank Act, the Board
supervises BHCs on a consolidated and enterprise-wide basis.\1\ The
consolidated supervision program, which applies primarily to large and
regional BHCs, is aimed at understanding and assessing the BHC on a
consolidated basis. The program is applied in a risk-focused manner,
and supervisory activities (continuous monitoring,\2\ discovery
reviews,\3\ and testing) vary across portfolios of institutions based
on size, complexity, and risk. The framework provides for coordination
by the Federal Reserve System with, and reliance on the assessments by,
bank and functional regulators of BHC subsidiaries. The consolidated
supervision program is not only central to the Board's assessment of
risk to individual banking organizations and their depository
institution subsidiaries, but also to the Board's assessment of the
stability of the broader financial system.
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\1\ The Board's consolidated supervision program is set forth in
SR letter 08-9/CA letter 08-12, ``Consolidated Supervision of Bank
Holding Companies and the Combined U.S. Operations of Foreign
Banking Organizations'' (SR 08-9). This guidance is currently being
reviewed pursuant to changes in the Board's supervisory
responsibilities as set forth in the Dodd-Frank Act, including those
that apply to the supervision of SLHCs.
\2\ ``Continuous monitoring activities'' are supervisory
activities primarily designed to develop and maintain an
understanding of the organization, its risk profile, and associated
policies and practices. These activities also provide information
that is used to assess inherent risks and internal control
processes. Such activities include meetings with banking
organization management; analysis of management information systems
and other internal and external information; review of internal and
external audit findings; and other efforts to coordinate with, and
utilize the work of, other relevant supervisors and functional
regulators (including analysis of reports filed with or prepared by
these supervisors or regulators, or appropriate self-regulatory
organizations, as well as related surveillance results).
\3\ A discovery review is an examination/inspection activity
designed to improve the understanding of a particular business
activity or control process, for purposes such as addressing a
knowledge gap that was identified during the risk assessment
process.
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The Board believes that applying the BHC consolidated supervision
program to SLHCs is essential to executing its supervisory
responsibilities under the Dodd-Frank Act and is consistent with the
authorities provided by HOLA. While the Board's BHC consolidated
supervision program has some similarities to the current supervisory
program employed by the OTS, the Board nevertheless believes that the
Board's consolidated supervision program may entail more intensive
supervisory activities than under current OTS practice, at least for
some SLHCs. For example, the Board's consolidated supervision of SLHCs
may entail more rigorous review of internal control functions and
consolidated liquidity, as well as the conduct of discovery reviews of
specific activities. In addition, the Board's supervisory program may
entail heightened review of the activities of nonbank subsidiaries
(consistent with applicable law and regulation) and may entail greater
continuous supervisory monitoring of larger SLHCs. Nevertheless, the
Board does not believe that application of its BHC consolidated
supervision program to SLHCs would require any specific action on the
part of SLHCs prior to the transfer date or cause undue burden on an
ongoing basis.
The Board intends to integrate each SLHC into existing programs
that align institutions with various supervisory portfolios (e.g.,
community banking organizations, regional banking organizations, and
large banking organizations) based on their size and complexity. Each
portfolio has a supervisory program tailored to the type of institution
supervised. The applicable consolidated supervision program is
explained in SR 08-9.
Small, Noncomplex Holding Companies
Consistent with a risk-focused approach to supervision, both the
Board and OTS have tailored specific supervisory programs for holding
companies that are viewed as posing a relatively low level of risk to
depository institution subsidiaries and to the financial system. The
OTS currently classifies low-risk or noncomplex SLHCs (irrespective of
size and as determined by supervisory staff on a case-by-case basis) as
``Category I'' and subjects these SLHCs to abbreviated, limited-scope
onsite examinations.
Similarly, the Board has a program for BHCs with total consolidated
assets of $1 billion or less (``small shell BHCs'').\4\ For noncomplex
\5\ small shell BHCs
[[Page 22664]]
where all subsidiary depository institutions have satisfactory
composite and management ratings, and where no material outstanding
holding company or consolidated issues are otherwise indicated, a
Reserve Bank generally assigns only a composite rating and a management
rating to the BHC and bases those ratings on the ratings of the lead
depository institution (i.e., no onsite work is typically undertaken).
For complex small shell BHCs, and for noncomplex small shell BHCs that
do not meet the additional conditions noted in the previous sentence, a
Reserve Bank generally conducts an offsite review, with targeted onsite
review as necessary.\6\
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\4\ See SR letter 02-1, ``Revisions to Bank Holding Company
Supervision Procedures for Organizations with Total Consolidated
Assets of $5 Billion or Less'' (SR 02-1). See also Federal Reserve
Regulatory Service (FRRS) 3-1531 (S-2483, October 7, 1985, as
revised by S-2563, May 20, 1994) and FRRS 3-1532.5 (S-2587, November
3, 1997). SR 02-1 also sets forth procedures for BHCs with total
consolidated assets of between $1-$5 billion, but these institutions
are not considered to be small shell BHCs.
\5\ The determination of whether a holding company is
``complex'' versus ``noncomplex'' is made at least annually on a
case-by-case basis taking into account and weighing a number of
considerations, such as: The size and structure of the holding
company; the extent of intercompany transactions between insured
depository institution subsidiaries and the holding company or
uninsured subsidiaries of the holding company; the nature and scale
of any nonbank activities, including whether the activities are
subject to review by another regulator and the extent to which the
holding company is conducting Gramm-Leach-Bliley authorized
activities (e.g., insurance, securities, merchant banking); whether
risk management processes for the holding company are consolidated;
and whether the holding company has material debt outstanding to the
public.
\6\ Targeted inspection activities typically focus intensively
on one or two activities.
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For a noncomplex BHC with total consolidated assets between $1-$10
billion and a satisfactory composite rating, a limited-scope \7\ onsite
inspection is required every two years (in the case of BHCs with assets
between $1-$5 billion, a targeted inspection is acceptable as well).
For a complex BHC with total consolidated assets between $5-$10 billion
and a satisfactory composite rating, a full-scope onsite inspection is
required annually (in the case of BHCs with assets between $1-$5
billion, this requirement may be satisfied with a limited-scope or
targeted review for the onsite portion of the inspection, supplemented
by other information sources).
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\7\ A limited-scope inspection typically reviews all areas of
activity covered by a full-scope inspection, but less intensively.
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For a noncomplex BHC with total consolidated assets between $1-$10
billion and a less-than-satisfactory composite rating, irrespective of
complexity, at least one full-scope onsite inspection and one limited-
scope or targeted inspection are required annually. In the case of BHCs
with assets between $1-$5 billion, the requirement for an annual full-
scope inspection may be satisfied with a limited-scope or targeted
inspection for the onsite portion, supplemented by other inspection
sources.
For all BHCs with total consolidated assets greater than $1 billion
(i.e., those that are not considered small shell BHCs), complete
ratings are assigned in conjunction with inspection activities.
Moreover, additional limited-scope or targeted inspection activities
may be conducted as needed.\8\
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\8\ Requirements for BHCs with special characteristics (e.g.,
those that are formed to acquire an existing bank, have undergone a
change in control, or are de novo and have been organized to acquire
a de novo bank) may differ from the guidelines described here. See
section 5000 of the Federal Reserve Board's Bank Holding Company
Supervision Manual.
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Once Board supervisory staff has become familiar with the structure
and financial condition of SLHCs, the Board intends to apply the
program for small shell BHCs as set forth in SR 02-1 and supporting
documents to SLHCs that meet the same criteria. A Reserve Bank will
determine whether an SLHC with assets of $1 billion or less is complex
or noncomplex, and will tailor its supervision as appropriate. For a
number of small, noncomplex SLHCs, this may have the effect of reducing
burden as onsite examinations/inspections will no longer be required.
Holding Company Rating System
The Board and OTS (together, the ``agencies'') have developed
rating systems for supervised institutions to provide an assessment of
financial and nonfinancial factors based on the findings from
examination and inspection activities, as well as to ensure uniform
treatment across institutions. Both agencies use a 1-to-5 rating scale,
with 1 indicating the highest rating and least degree of supervisory
concern, and 5 indicating the lowest rating and highest degree of
supervisory concern. These ratings are nonpublic supervisory
information and, as such, are shared with the institution being rated
but are otherwise generally confidential.
The OTS rating system for SLHCs is known as ``CORE.'' \9\ The
Board's rating system for BHCs is known as ``RFI/C(D)'' \10\ (commonly
referred to as ``RFI''). Given the similarities between the CORE and
RFI rating systems, and the general goal of rationalizing supervisory
processes for all institutions, the Board is considering transitioning
SLHCs to the RFI rating system as the Board conducts its own
independent supervisory assessment of the condition of the SLHC after
the transfer date. The Board does not anticipate that any existing CORE
ratings will be converted to RFI ratings until such a review is
conducted.
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\9\ See Holding Companies Handbook, Office of Thrift
Supervision, March 2009. See also OTS CEO Letter 266 (December 20,
2007) and 72 FR 72442 (2007).
\10\ See Board Supervision and Regulation (SR) letter 04-18,
``Bank Holding Company Rating System,'' and 69 FR 70444 (2004).
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Based on analyses of the CORE and RFI rating systems by the
agencies, the Board believes there is substantial overlap between the
two rating systems. However, there are some areas where the CORE and
RFI rating systems differ. Under the CORE rating system, SLHCs
generally are assigned individual component ratings \11\ for capital
(C), organizational structure (O), risk management (R), and earnings
(E), as well as a composite rating that reflects an overall assessment
of the holding company enterprise as reflected by consolidated risk
management and consolidated financial strength.
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\11\ The OTS does not require individual component ratings to be
assigned to noncomplex and low-risk holding companies.
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Under the RFI rating system, BHCs generally are assigned individual
component ratings \12\ for risk management (R), financial condition
(F), and impact (I) of nondepository entities on subsidiary depository
institutions. The risk management rating is supported by individual
subcomponent ratings for board and senior management oversight;
policies, procedures, and limits; risk monitoring and management and
information systems; and internal controls. The financial condition
rating is supported by individual subcomponent ratings for capital
adequacy, asset quality, earnings, and liquidity. An additional
component rating is assigned to generally reflect the condition of any
depository institution subsidiaries (D), as determined by the primary
supervisor(s) of those subsidiaries. An overall composite rating (C) is
assigned based on an overall evaluation of a BHC's managerial and
financial condition and an assessment of potential future risk to its
subsidiary depository institution(s).
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\12\ A simplified version of the rating system that includes
only the risk management component and a composite rating is applied
to noncomplex BHCs with assets of $1 billion or less.
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A primary difference between the two rating systems is that, unlike
the RFI rating system, the CORE rating system does not explicitly take
account of asset quality.\13\ Asset quality is one of a number of
elements that is taken into account in assigning a composite BHC
rating. However, the Board does not believe that assigning a rating for
asset quality is likely to result in material changes to composite
ratings because, under CORE, a review of asset quality is
[[Page 22665]]
subsumed into other rating elements (it is taken into account
indirectly in assessing the capital and earnings components).
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\13\ Although liquidity is not rated separately under the CORE
system, it is nevertheless taken into account in both the
organizational structure and earnings components.
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Additionally, as discussed in more detail below, in contrast to
BHCs, SLHCs currently are not subject to regulatory capital
requirements. As one element of its overall assessment of capital
adequacy, the (F) component of the RFI rating system does take into
account regulatory capital requirements for BHCs. The (C) component of
the CORE rating system takes into consideration both a qualitative and
quantitative supervisory capital assessment that can be found in OTS
guidance. With the exception of the regulatory capital requirement for
BHCs, the methods used by the agencies to determine capital adequacy
for purposes of establishing a supervisory rating are similar. Until
such time as consolidated capital standards for SLHCs are finalized by
the Board, the Board anticipates that it will assess SLHC capital using
supervisory quantitative and qualitative methods similar to those
currently employed by the OTS.
The Board notes that changes to the RFI rating system guidance and
policies may be necessary to accommodate SLHCs and differences in their
statutory and regulatory framework. The Board is reviewing this
guidance to determine where adjustments may be necessary.
The Board is seeking comment on all aspects of this approach.
Specifically, the Board requests comment with regard to:
1. The burden of these potential modifications to supervisory
activities on SLHCs; and
2. Whether there are any unique characteristics, risks, or specific
activities of SLHCs that should be taken into account when evaluating
which supervisory program should be applied to SLHCs and what changes
would be required to accommodate these unique characteristics.
Capital Adequacy
One material difference between the OTS and Board supervisory
programs for holding companies is the assessment of capital adequacy.
Currently, SLHCs are not subject to minimum regulatory capital ratio
requirements. The OTS instead applies both a qualitative and
quantitative supervisory capital assessment to SLHCs that is based in
guidance.
Section 171 of the Dodd-Frank Act requires that BHCs and SLHCs be
subject to minimum leverage and risk-based capital requirements that
are not less than the generally applicable leverage and risk-based
capital requirements applied to depository institutions.\14\ Small BHCs
that are subject to the Small Bank Holding Company Policy Statement
(Appendix C of 12 CFR part 225) are exempt from these requirements.
Section 171 of the Act did not expressly provide a similar exemption
for small SLHCs.
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\14\ Under section 171 of the Dodd-Frank Act, the ``generally
applicable'' leverage and risk-based capital requirements are those
established by the appropriate Federal banking agencies to apply to
insured depository institutions under prompt corrective action
regulations implementing section 38 of the Federal Deposit Insurance
Act.
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Pursuant to the Dodd-Frank Act and the Basel Committee on Banking
Supervision's ``Basel III: A global regulatory framework for more
resilient banks and banking systems'' report (``Basel III''),\15\ the
Board, together with the other Federal banking agencies, is reviewing
consolidated capital requirements for all depository institutions and
their holding companies. The Board is considering applying to SLHCs the
same consolidated risk-based and leverage capital requirements as BHCs
to the extent reasonable and feasible taking into consideration the
unique characteristics of SLHCs and the requirements of HOLA. The
Board, together with the other Federal banking agencies, expects to
issue a notice of proposed rulemaking in 2011 that will outline how
Basel III-based requirements will be implemented for all institutions,
including any relevant provisions needed to comply with the Dodd-Frank
Act. It is expected that the Basel III notice of proposed rulemaking
also would address any proposed application of Basel III-based
requirements to SLHCs. The Board expects that final rules establishing
Basel III-based capital requirements would be finalized in 2012 and
implementation would start in 2013, in accordance with the
international agreement. The Board invites SLHCs to monitor and
participate in the Basel III capital rulemaking process.
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\15\ The Basel III text can be found at: http://www.bis.org/publ/bcbs189.htm.
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Although the Board believes it is important for SLHCs generally to
be subject to the same consolidated leverage and risk-based capital
requirements as BHCs, it recognizes that SLHCs have traditionally been
permitted to engage in a broad range of nonbanking activities that were
not contemplated when the general leverage and risk-based capital
requirements for BHCs were developed. The Board is seeking specific
comment with respect to any unique characteristics, risks, or specific
activities of SLHCs the Board should take into consideration when
developing consolidated capital requirements for SLHCs based on Basel
III. What specific provisions, consistent with the Dodd-Frank Act,
should be incorporated in the proposed rule in order to address such
unique characteristics, risks, and/or specific activities?
Additionally, the Board is seeking comment on the following:
3. What instruments that are currently includable in SLHCs'
regulatory capital would be either excluded from regulatory capital or
more strictly limited under Basel III? 3(a) How prevalent is the
issuance of such instruments? Please comment on the appropriateness of
the Basel III transitional arrangements for non-qualifying regulatory
capital instruments. Provide specific examples and data to support any
proposed alternative treatment.
4. Are the proposed Basel III-based transition periods appropriate
for SLHCs and, if not, what alternative transition periods would be
appropriate and why?
Finally, the Board is seeking specific comment with respect to what
methods the Board should consider implementing for assessing capital
adequacy for SLHCs during the period between the transfer date and
implementation of consolidated capital standards for SLHCs. The Board
also anticipates providing additional notice or issuing specific formal
guidance or rules with regard to supervisory capital assessment after
the transfer date and providing further opportunity for comment.
By order of the Board of Governors of the Federal Reserve
System, April 15, 2011.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 2011-9588 Filed 4-21-11; 8:45 am]
BILLING CODE 6210-01-P