District Circular Letters
July 9, 1999
BANKING SUPERVISION AND REGULATION:
RISK-FOCUSED SUPERVISION
BRANCH CLOSINGS
To State Member Banks, Bank
Holding Companies, Edge Act Corporations,
U.S. Branches and Agencies of Foreign Banks,
and Others Concerned
in the Twelfth Federal Reserve District
Risk-Focused Supervision of Large Complex Banking Organizations:
SR 99-15 (SUP)
The Federal Reserve has issued the enclosed SR
99-15 (SUP), a guidance to supervisory staff and bankers
regarding overseeing large complex banking organizations during a time
of dramatic change in the financial system. The guidance emphasizes the
importance of assessing key risk-management processes and ongoing monitoring
of an institution's risk profile, as well as tailoring the supervision
program to an institution's principal business lines and risks. Key elements
of the program include designating a senior supervisor as the central
point of contact for each institution and establishing a dedicated supervisory
team with specialized skills and experience suited to each institution.
The approach recognizes that a small number of large and highly complex
institutions account for a growing share of total banking assets. These
institutions have moved into nontraditional activities including securities
underwriting and dealing, derivatives trading, and loan securitizing.
They are expanding their activities across both state and international
borders. Furthermore, ongoing advances in information technology have
increased the speed, complexity, and volume of financial transactions,
and thus have heightened the potential for swift changes in the risks
confronting these institutions.
Under the approach outlined in the letter, the supervisory team would
update its supervisory plan at least quarterly by reviewing a steady flow
of relevant information, including internal management reports, internal
and external audits, and publicly available information. In some cases,
regulators may have direct on-line access to management information. These
streamlined techniques, emphasizing oversight of institutions' internal
procedures for identifying and managing risk in contrast with traditional
point-in-time examinations, should reduce the cost and burden of regulation.
This approach considers an institution's performance and risk-management
in relation to the performance and procedures of its peers.
To minimize duplicative regulatory effort, the approach requires close
consultation with other domestic banking agencies, state insurance commissioners,
securities regulators, and foreign bank supervisors. The Federal Reserve
is developing an information system, the Banking Organization National
Desktop, to be introduced next year, to provide regulatory agencies a
user-friendly way of sharing information.
Capital Adequacy in Relation to Risk at Large and Complex Banking
Organizations: SR 99-18 (SUP)
The Federal Reserve has issued the enclosed SR
99-18 (SUP) emphasizing the growing need for large and complex
banking organizations to maintain strong internal processes to assure
that their capital is fully sufficient to support the underlying risks
they face as well as to meet minimum regulatory standards.
Capital adequacy is a critical element of a bank's safety and soundness.
With the growing scope and complexity of business activities and ongoing
financial innovation, simple ratios-including risk-based capital ratios-and
traditional rules of thumb no longer suffice in assessing the overall
capital adequacy of many banking organizations.
SR 99-18 (SUP) directs examiners to evaluate internal capital management
processes to judge whether they meaningfully tie the identification, monitoring,
and evaluation of risk to the determination of the institution's capital
needs. To support that evaluation, the letter describes the fundamental
elements of a sound and comprehensive internal capital adequacy analysis
and the key areas of risk it should encompass.
The letter grows in part from a recent supervisory review of internal
capital management processes at several large complex banking organizations.
This review suggested that these processes could be significantly improved,
in particular to become better integrated with internal risk measurement
and analysis. In providing guidance to examiners and supervisors, SR 99-18
(SUP) is also intended to encourage such banking organizations to strengthen
their risk measurement capabilities as well as to integrate these capabilities
more fully in evaluating their own capital adequacy.
The practices described in SR 99-18 (SUP) extend in some cases beyond
those currently followed by most large banking organizations. Examiners
should generally expect these institutions to make steady and meaningful
progress towards implementation of a comprehensive internal process for
assessing capital adequacy in relation to risk, rather than immediate
and full implementation. However, examiners should expect those banking
organizations actively involved in complex securitizations or other similar
transfers of risk to have in place or immediately implement a comprehensive
internal capital analysis that fully reflects all risks.
Joint Policy Statement Regarding Branch Closings (Docket
R-1036)
The Office of the Comptroller of the Currency, the Federal Reserve Board,
the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision
(the agencies) are revising their 1993 joint policy statement regarding
branch closings by insured depository institutions, effective June
29, 1999.
The action is intended to clarify the additional steps regarding notice
and consultation for proposed branch closings by interstate banks in low-
or moderate-income areas, and to clarify the status of automated teller
machines, relocations and consolidations, and branch closings in connection
with emergency acquisitions or assistance by the FDIC.
The revisions reflect the changes to section 42 of the FDI Act made by the
Interstate Act and the Regulatory Relief Act. The revised policy statement
incorporates the new procedure and provides for banks to inform customers
in affected areas of their ability to comment on a particular branch closing.
In addition, the agencies are clarifying that main offices, remote service
facilities, loan production offices, and insured branches of foreign banks
are not branches for purposes of section 42. The revisions also clarify
the section on allocation of customers to branches.
The law requires an insured depository institution to submit a notice of
any proposed branch closing to the appropriate federal banking agency no
later than ninety days prior to the date of the proposed branch closing.
The required notice must include a detailed statement of the reasons for
the decision to close the branch and statistical or other information in
support of such reasons. The law also requires an insured depository institution
to notify its customers of the proposed closing. The institution must mail
the notice to the customers of the branch proposed to be closed at least
ninety days prior to the proposed closing. The institution also must post
a notice to customers in a conspicuous manner on the premises of the branch
proposed to be closed at least thirty days prior to the proposed closing.
Copies
Copies of the Board's notice (Docket R-1036) are available from our Corporate
Services Department. To request copies to be sent via mail, please call
(415) 974-2748. To request copies to be sent via fax, please call (415)
974-3333, and specify document number 4126.
For Additional Information
For additional information regarding these matters, please contact our Banking
Supervision and Regulation Department, at (415) 974-3228 [for SR 99-15 (SUP)
and SR 99-18 (SUP)], and (415) 974-2966 [for the joint policy statement
regarding branch closings].
FEDERAL RESERVE BANK OF SAN FRANCISCO
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