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Table of Contents5000 BHC Inspection Program

Sections Subsections Title

5000.0 BHC Inspection Program—General

5000.0.1 Inspection Reporting Program5000.0.2 Policy for Frequency and Scope of Inspections for

BHCs5000.0.3 Frequency and Scope of Inspection of the Largest BHCs5000.0.4 Inspection-Frequency Requirements5000.0.4.1 BHCs with No Identified Problems or Special Characteristics5000.0.4.2 BHCs Requiring Special Supervisory Attention5000.0.4.3 Supervision Procedures for BHCs with Total Consolidated

Assets of $10 Billion or Less5000.0.4.3.1 Frequency and Scope of Inspections of Holding Companies

with Total Consolidated Assets Between $1 Billion and$10 Billion

5000.0.4.3.2 Frequency and Scope of Review of Holding Companieswith Less Than $1 Billion in Total Consolidated Assets

5000.0.4.4 BHCs with Special Characteristics5000.0.4.5 Inspection of Nonbank Subsidiaries of BHCs5000.0.4.5.1 On-Site Reviews of Nonbank Subsidiaries5000.0.4.5.2 Off-Site Review of Nonbank Activities5000.0.4.6 Rating Assignments for Complex and Noncomplex Holding

Companies with Total Consolidated Assets of Less Than$1 Billion

5000.0.4.6.1 Rating Assignments for Complex Holding Companies withTotal Consolidated Assets of Less Than $1 Billion

5000.0.4.6.2 Rating Assignments for Noncomplex Holding Companieswith Total Consolidated Assets of Less than $1 Billion

5000.0.4.6.3 Rating Assignments for Holding Companies with TotalConsolidated Assets Between $1 Billion and $10 Billion

5000.0.5 BHCs Exempt from the Prohibitions of Section 4of the BHC Act

5000.0.6 Multi-Tier BHC Inspections5000.0.6.1 Population of Second-Tiers Suitable for On-Site

Inspection5000.0.6.2 Frequency Guidelines for Second-Tier BHCs over

$5 Billion5000.0.6.3 Frequency Guidelines for Second-Tier BHCs Rated 3,

4, or 55000.0.6.4 Second-Tier Shell BHCs5000.0.7 Classification of Assets Involving Out-of-District

Nonbank Subsidiaries5000.0.8 Interagency Inspection/Examination Agreements5000.0.8.1 Interagency Coordination of BHC Inspections and

Subsidiary Bank Examinations5000.0.8.2 Interagency Agreement to Conduct Concurrent

Examinations of Certain BHCs and Their LeadBank Subsidiaries

5000.0.8.3 Interagency Policy Statement on ExaminationCoordination

5000.0.8.3.1 Primary Supervisory and Coordination Responsibility

BHC Supervision Manual July 2014


5000.0.8.3.2 Overview of Examination Coordination andImplementation Guidelines

5000.0.8.3.3 Coordinating the Planning, Timing, and Scopeof Examinations and Inspections

5000.0.8.3.4 Interagency Review of Bank, Nonbank, and Parent-Company Activities

5000.0.8.3.5 Joint Meetings Between Regulators and Bankor BHC Management

5000.0.8.3.6 Significant Differences in Agencies’ Findings,Conclusions, and Recommendations

5000.0.8.3.7 Inspection and Examination Reports5000.0.8.3.8 Coordinating Information Requests5000.0.8.3.9 Coordinating Enforcement Actions5000.0.8.3.10 State Banking Departments5000.0.9 Policy for Communicating Problems of Supervisory

Concern to Management and Boards of Directors5000.0.9.1 Introduction5000.0.9.2 Meetings with Directors5000.0.9.2.1 Criteria for Conducting Meetings5000.0.9.3 Communication of Supervisory Findings5000.0.9.3.1 Matters Requiring Immediate Attention5000.0.9.3.2 Matters Requiring Attention5000.0.9.3.3 Supervisory Considerations5000.0.9.4 Summary of BHC Inspection Findings5000.0.10 Summary to Directors of Inspection Findings5000.0.11 Completion Standard for Examination and Inspection

Reports5000.0.12 Combined Examination/Inspection Report for BHCs with

Lead State Member Banks

5010.0 Procedures for Inspection Report Preparation—Inspection Report References

5010.1 General Instructions to FR 1225

5010.1.1 Core Section5010.1.2 Appendix Section5010.1.3 Optional Pages to Be Included in the Core or

Appendix Sections5010.1.4 Confidential Section for All Inspection Reports5010.1.5 General Comments for All Report Pages5010.1.6 Format For Safety-and-Soundness Reports of Inspection for

Community Holding Companies Rated Composite ‘‘4’’or ‘‘5’’

5010.1.6.1 Letter-Format Report of Inspection Content5010.1.6.2 Communication of Supervisory Findings

5010.2 Cover

5010.3 Page i—Table of Contents

5010.4 Core Page 1—Examiner’s Comments and MattersRequiring Special Board Attention

Table of Contents 5000 BHC Inspection Program



5010.4.1 Summary of Examiner’s Findings

5010.5 Core Page 2—Scope of Inspection and Abbreviations

5010.6 Core —Analysis of Financial Factors

5010.6.1 Parent Company5010.6.2 Bank Subsidiaries5010.6.3 Nonbank Subsidiaries5010.6.4 Consolidated5010.6.5 General Instructions

5010.7 Core Page 4—Audit Program

5010.8 Appendix Page 5—Parent Company ComparativeBalance Sheet

5010.9 Appendix Page 6—Comparative Statement of Incomeand Expenses (Parent)

5010.10 Appendix Page 7—Consolidated Classified andSpecial-Mention Assets

5010.10.1 Classification of Assets5010.10.1.1 Substandard Assets5010.10.1.1.1 Substandard Classification—Guidelines for an Asset

When a Substantial Portion Has Been Charged Off5010.10.1.2 Doubtful Assets5010.10.1.3 Loss Assets5010.10.2 Appraisal of Securities in Bank Examinations5010.10.2.1 Investment-Quality Debt Securities5010.10.2.2 Sub-Invesment-Quality Debt Securities5010.10.2.3 Rating Differences5010.10.2.4 Split or Partially Rated Securities5010.10.2.5 Nonrated Debt Securities5010.10.2.6 Foreign Debt Securities5010.10.2.7 Treatment of Declines in Fair Value Below Amortized

Cost on Debt Securities5010.10.2.8 Classification of Other Types of Securities5010.10.3 Summary Table of General Debt Security Classification

Guidelines5010.10.4 Credit-Risk-Management Framework for Securities

5010.11 Appendix Page 8—Consolidated Comparative BalanceSheet

5010.12 Appendix Page 9—Comparative ConsolidatedStatement of Income and Expenses

5010.13 Capital Structure


BHC Supervision Manual July 2013Page 3


5010.13.1 BHCs with Consolidated Assets of $150 Million orMore (Core Page 10—Consolidated CapitalStructure (FR 1225))

5010.13.2 Worksheets5010.13.3 BHCs with Less Than $150 Million in Consolidated

Assets (Page—Capital Structure (Lead Bank orOther Bank Subsidiary (FR 1241))

5010.14 Page—Policies and Supervision

5010.14.1 Questions to Be Addressed on the Policies andSupervision Report Page

5010.14.1.1 Level of Control and Supervision Exercised overSubsidiaries

5010.14.1.2 Loans and Investments of Subsidiaries5010.14.1.3 Funds Management and the Adequacy of Existing

Policies5010.14.1.4 Loan Participations among Subsidiaries5010.14.1.5 Dividends and Fees from Subsidiaries5010.14.1.6 Risk Evaluation and Control5010.14.1.7 Management Information Systems5010.14.1.8 Internal Loan Review5010.14.2 Discussion and Appraisal of Other Parent Company

Policies

5010.15 Page—Violations

5010.16 Page—Other Matters

5010.17 Page—Classified Assets and Capital Ratios ofSubsidiary Banks

5010.18 Page—Organization Chart

5010.19 Page—History and Structure

5010.20 Page—Investment in and Advances to Subsidiaries

5010.20.1 Investment in and Advances to Subsidiaries5010.20.2 Investment in and Advances to Subsidiaries

(continued)5010.21 Page—Commercial Paper (Parent)

5010.22 Page—Lines of Credit (Parent)

5010.23 Page—Questions on Commercial Paper and Lines ofCredit

5010.23.1 Appendix A—Commercial-Paper Ratings

5010.24 Page—Contingent Liabilities and Other Accounts




5010.25 Page—Statement of Changes in Stockholders’ Equity(Parent)

5010.26 Page—Income from Subsidiaries

5010.27 Page—Cash Flow Statement (Parent)

5010.28 Page—Parent Company Liquidity Position

5010.29 Page—Classified Parent Company and NonbankAssets

5010.30 Page—Bank Subsidiaries

5010.31 Page—Nonbank Subsidiary

5010.32 Page—Nonbank Subsidiary Financial Statements

5010.33 Page—Fidelity and Other Indemnity Insurance

5010.34 Reserved for Future Use

5010.35 Page—Other Supervisory Issues

5010.35.1 Intercompany Transaction (Question 1)5010.35.2 Compensating Balances (Question 2)5010.35.3 Intercorporate Income Tax Practices (Question 3)5010.35.4 Tie-In Arrangements (Question 4)5010.35.5 Insider Transactions (Question 5)5010.35.6 Litigation (Question 6)5010.35.7 Insurance Program (Question 7)5010.35.8 Audit Program (Question 8)5010.35.9 Credit Quality Review Program (Question 9)5010.35.10 Supervisory Reports (Question 10)5010.35.11 Outstanding Commitments to The Board of

Governors (Question 12)

5010.36 Page—Extensions of Credit to BHC Officials . . .

5010.37 Interest Rate Sensitivity—Assets and Liabilities

5010.38 Treasury Activities/Capital Markets

5010.39 Reserved for Future Use

5010.40 Confidential Page A—Principal Officers and Directors

5010.41 Confidential Page B—Condition of BHC

5010.42 Confidential Page C—Liquidity and Debt Information

5010.43 Confidential Page D—Administrative and Other Matters




5020.1 Page—Bank Subsidiary (FR 1241)

5020.2 Page—Other Supervisory Issues (FR 1241)

5020.2.1 Level of Control and Supervision Exercised overSubsidiaries (Question 1)

5020.2.2 Dividends from Subsidiaries (Question 2)5020.2.3 Representations Made in Applications to the Board

(Question 3)5020.2.4 Compensating Balances (Question 4)5020.2.5 Management and Other Services Performed for

Subsidiaries (Question 5)5020.2.6 Intercompany Transactions (Question 6)5020.2.7 Insider Transactions (Question 7)5020.2.8 Tax Allocation (Question 8)5020.2.9 Use of Subsidiary Bank Personnel, or Assets to Sell

Credit-Related Life Insurance to the Bank’sCustomers (Question 9)

5020.2.10 Tie-In Arrangements (Question 10)5020.2.11 Litigation (Question 11)5020.2.12 Insurance Program (Question 12)5020.2.13 Audit Program (Question 13)5020.2.14 Internal Loan Review (Question 14)5020.2.15 Accuracy and Timeliness of Reports (Question 15)5020.2.16 Outstanding Commitments to the Board of Governors

(Question 17)5020.2.17 Other Matters Having a Detrimental Impact

(Question 18)

5030.0 Procedures for Inspection Report Preparation—BHC Inspection Report Forms

5040.0 Procedures for ‘‘Limited-Scope’’ Inspection ReportPreparation—General Instructions—FR 1427

5040.0.1 Objectives5040.0.2 Implementation Guidelines5040.0.2.1 Required Report Pages5040.0.2.2 Exception Limited-Scope Report Pages5040.0.2.2.1 Reasoning for Including ‘‘E’’ Pages5040.0.2.3 Optional Limited-Scope Report Pages5040.0.3 Limited-Scope Inspection Procedures5040.0.4 Limited-Scope Inspection Report Cover (FR 1427)

5050.0 Procedures for ‘‘Targeted’’ Inspection ReportPreparation—General Instructions

5050.0.1 Objectives of a Targeted Inspection5050.0.2 Targeted Inspection Report Cover (FR 1428)

5052.0 Targeted MIS Inspection5052.0.1 Relevancy and Use of MIS




5052.0.2 Internal Controls over MIS Integrity5052.0.3 MIS Architecture and Planning5052.0.4 Inspection Objectives5052.0.5 Inspection Procedures

5060.0 Portions of Bank Holding Company InspectionsConducted in Federal Reserve Bank Office

5060.0.1 Conducting Inspection Activities in Reserve BankOffices

5060.0.2 Off- and On-Site BHC Inspection Procedures—Appendix 1

5060.0.2.1 Activities That Can Be Completed in the Office5060.0.2.2 BHC Inspection Activities That Should Be Conducted

On-Site5060.0.2.3 Sample Information Request for a Bank Holding

Company5060.0.3 Procedures for Implementing Off-Site Inspections for

Certain Shell BHCs—Appendix 25060.0.3.1 General Procedures for Off-Site Inspections



BHC Inspection Program(General) Section 5000.0

WHAT’S NEW IN THIS REVISEDSECTION

Effective July 2016, this section is revised toprovide additional guidance on the supervisoryapproach to the supervision of holding compa-nies with total consolidated assets of $10 billionor less. The section includes guidance pertain-ing to relying on the work of insured depositoryinstitution (IDI) regulators for community bank-ing organizations (CBOs). Examiners are to relysubstantially on the findings of the IDI regulatorin evaluating the overall condition of the hold-ing company. Reserve Bank reviews are to evalu-ate the condition, performance, and prospects ofa subsidiary IDI based on the conclusion of theIDI regulator and are not to duplicate the IDIregulator’s work. (Refer to SR -16-4.)

Effective July 2014, this section was revised toinclude supervisory guidance on the periodicon- and off-site inspections for assessing thesafety and soundness of supervised bank hold-ing companies and savings and loan holdingcompanies (referred to as holding companies).(Refer to SR-13-21.) The guidance updates theminimum inspection frequency and scope require-ments for supervised holding companies withtotal consolidated assets of $10 billion or less to

• conform inspection frequency and scope re-quirements for savings and loan holding com-panies (SLHCs) with total consolidated assetsof $10 billion or less to those applicable tobank holding companies of the same size;

• clarify the scoping requirements for targetedinspections conducted at bank holding compa-nies and SLHCs with total consolidated assetsbetween $1 billion and $10 billion; and

• modify the requirement for targeted inspec-tions for “3,” “4,” and “5”-rated bank hold-ing companies with total consolidated assetsbetween $1 billion and $10 billion.

Except for the addition of SLHCs, the inspec-tion scope and frequency expectations for hold-ing companies with less than $1 billion in totalconsolidated assets have not changed.

These frequency and scope requirements varydepending on whether a holding company hasbeen designated “complex,” with more compli-cated holding companies subject to more fre-quent and in-depth review. If needed for supervi-sory purposes, Reserve Banks may inspect aholding company with greater frequency andscope than described in this guidance.

5000.0.1 INSPECTION REPORTINGPROGRAM

The BHC inspection report is intended to effec-tively communicate the result of inspectionswithout compromising the integrity of inspec-tion and reporting procedures. The inspectionreport serves the needs of several distinct audi-ences: the BHC (its directors, executive man-agement, and line management), the FederalReserve Board, the Federal Reserve Bank, andother banking organization regulators (state bank-ing agencies, the OCC, and the FDIC). Theinspection report should serve as an effectiveand efficient vehicle for communicating conclu-sions, concerns, and recommendations to theprincipal audience—the BHC’s board ofdirectors—without sacrificing to any great extentthe needs of the other users. The inspectionreporting program operates on the condition thatinspection workpapers can be obtained forimmediate review by Federal Reserve Bank orFederal Reserve Board staff, when requested.

The presentation within the inspection reportis intended to be concise and direct, with theinformation needed by all audiences found inthe core section. The core section contains thereport pages, which consist of the ‘‘Examiner’sComments and Other Matters Requiring SpecialBoard Attention,’’ ‘‘Scope,’’ ‘‘Structure andAbbreviations,’’ and ‘‘Analysis of Financial Fac-tors,’’ as well as an analysis of asset quality andoff-balance-sheet risk and certain other requiredfinancial statements and schedules. Supportingschedules are required and added to the coresection when an area of concern or a problem isaddressed in the report.

One standardized BHC inspection report for-mat, FR 1225, has been designed to meet thedesired objectives of the full-scope report for allorganizations, regardless of the structure andcomplexity of the BHC under inspection. A fewreport pages, designated FR 1241, may be usedfor BHCs that have less than $150 million inassets. These pages are ‘‘Parent Company andNonbankAssetsSubject toClassification,’’ ‘‘BankSubsidiary,’’ ‘‘Capital Structure,’’ and ‘‘OtherSupervisory Issues.’’ The latter two report pagesare for the lead bank or other comparable banksubsidiary.

This part of the manual presents policy andprocedures for the inspection process, the col-lection and presentation of data, and the prepara-


tion of the resulting analyses in the inspectionreport. Section 5010.0 corresponds directly toeach page of the report (FR 1225). Sections5020.0 and 5030.0 provide instructions for lim-ited and targeted inspections.

On each report page, instructions are gener-ally organized to state what information is to bepresented on the page, the objectives for theinformation to be presented, the potential sourceof the information, and how the information isto be presented in the report. Also, the instruc-tions mention other report areas that are affectedby information reported on the page.

The examiner is reminded that the instruc-tions in sections 5010, 5020, and 5030 are onlya starting point. As such, the instructions focusprincipally on the collection of information andthe presentation in the report of inspection find-ings. When working on specific functional aspectsof the inspection, the examiner should also referto the appropriate subject heading in this manual.

5000.0.2 POLICY FOR FREQUENCYAND SCOPE OF INSPECTIONS FORBHCs

On October 7, 1985, the Board announced itspolicy, effective January 1, 1986, to increase thefrequency of inspections of BHCs.1 The policy

objectives are to (1) help prevent the development of problems at banking institutions and(2) make more effective the Federal Reserve’sability to identify and resolve problems thatdevelop nonetheless. In general, the policy pro-vides that—

1. the largest and most complex BHCs will beinspected at least annually,

2. the largest BHCs, and those with significantproblems, will be inspected semiannually,and

3. as an exception to the general rule, smallholding companies with no known problemswill be reviewed on a more limited basis.

Federal Reserve Banks are to intensify their in-volvement in the inspection of large organiza-tions and those with significant problems. Inthe case of smaller organizations, greater reli-ance is to be placed on state examinations orinspections. If a state lacks the resources toconduct inspections in accordance with thespecifications of the policy or is unwilling todo so, or, in the case of holding companies,lacks authority, the Federal Reserve will con-duct the examinations or inspections to theextent needed to meet the specifications. Inaddition, if a BHC or its state member banksubsidiary indicates its wish to be examined orinspected by its Federal Reserve Bank, thatwish should be honored.

1. All financial holding companies are BHCs; hence, thesupervisory guidance in this section applies to financial hold-ing companies as well as BHCs.

5000.0.3 FREQUENCY AND SCOPE OF INSPECTIONS OF THE LARGEST BHCs

Rating

Asset size

$10 billion and over

1 or 2 Full-scope required annually.1 Additional limited-scope or targeted presumed annually.

3 Full-scope required annually. One limited-scope or targeted also required annually.

4 or 5 Full-scope required annually. One limited-scope or targeted also required annually.

Source: Board policy statement, October 7, 1985.Special Characteristics:

1. BHCs formed to acquire going concerns: inspection tobe conducted between the 6th and 18th months of operation,or within 36 months under specific condition, or waived ifunder $50 mm with specific conditions.

Notes:1. A full-scope inspection covers all areas of interest to the

Federal Reserve in depth.

2. A limited-scope inspection will review all areas of activ-ity covered by a full-scope inspection, but less intensively.

3. Targeted inspections will focus intensively on one ortwo activities.

4. A complex BHC is defined as one with material credit-extending nonbank subsidiaries or debt outstanding to thegeneral public.

5. A noncomplex BHC is without credit-extending subsid-iaries and without public debt.

BHC Inspection Program (General) 5000.0


5000.0.4 INSPECTION-FREQUENCYREQUIREMENTS

5000.0.4.1 BHCs with No IdentifiedProblems or Special Characteristics

Multinational bank holding companies and allothers with consolidated assets over $10 billionare to receive a full-scope inspection annually,which should be coordinated with the examina-tion of the lead bank to the extent possible.Although the inspection of the holding companyand the examination of the lead bank need notbe commenced simultaneously, they should over-lap and rely on financial statements as of thesame date, if possible, to facilitate the analysisand presentation of findings to management anddirectors. A limited-scope or targeted inspectionof these companies is also to be conductedbetween the annual full-scope inspections; theprecise timing will be determined by off-sitesurveillance reports and opportunities to coordi-nate with the examination of the lead bank.The requirement for a limited-scope or targetedinspection may be waived by the Reserve Bankif, on the basis of the findings of the last full-scope inspection and of the surveillance system,the institution is judged to be in satisfactorycondition.

Complex BHCs (defined as companies withnonbank subsidiaries that extend a materialamount of credit or companies whose parent hasa material amount of debt outstanding to thegeneral public) with consolidated assets of $15billion or more receive a full-scope inspectionannually. These inspections should be con-ducted, to the extent possible, in coordinationwith the examination of the lead bank. AllBHCs in this size group should be subject toadditional limited-scope or targeted inspectionswhen the Reserve Bank has information thatsuggests the institution may be developing sig-nificant problems.

5000.0.4.2 BHCs Requiring SpecialSupervisory Attention

The inspection frequency of BHCs requiringspecial supervisory attention is to be determinedby both the size and complexity of the organiza-tion. The most intensive frequency requirementsare directed at BHCs rated RFI/C(D) composite3, 4, or 5, or whose lead bank subsidiary hasbeen rated CAMELS composite 3, 4, or 5. AllBHCs so rated and with consolidated assets ofmore than $10 billion are to receive an annualfull-scope inspection and a limited-scope or tar-

geted inspection during the interval betweenfull-scope inspections.

5000.0.4.3 Supervision Procedures forBHCs and SLHCs with TotalConsolidated Assets of $10 Billion orLess

The Federal Reserve relies on periodic on- andoff-site inspections to assess the safety andsoundness of supervised bank holding compa-nies and savings and loan holding companies(hereafter referred to as holding companies).The minimum inspection frequency and scoperequirements for supervised holding companieswith total consolidated assets of $10 billion orless are designed to

• conform inspection frequency and scope re-quirements for savings and loan holding com-panies (SLHCs) with total consolidated assetsof $10 billion or less to those applicable tobank holding companies of the same size;

• clarify the scoping requirements for targetedinspections conducted at bank holding compa-nies and SLHCs with total consolidated assetsbetween $1 billion and $10 billion; and

• modify the requirement for targeted inspec-tions for “3,” “4,” and “5”-rated bank holdingcompanies with total consolidated assetsbetween $1 billion and $10 billion.

With the exception of the addition of SLHCs,the inspection scope and frequency expectationsfor holding companies with less than $1 billionin total consolidated assets have not changed.

These frequency and scope requirements varydepending on whether a holding company hasbeen designated “complex,” with more compli-cated holding companies subject to more fre-quent and in-depth review. If needed for super-visory purposes, Reserve Banks may inspect aholding company with greater frequency andscope than described in this guidance. Refer toSR-13-21, “Inspection Frequency and ScopeRequirements for Bank Holding Companies andSavings and Loan Holding Companies withTotal Consolidated Assets of $10 Billion orLess.”

Definition of “Complex” Holding Companies.The determination of whether a holding com-pany is “complex” should be made at leastannually by the responsible Reserve Bank.



Utilizing surveillance screens and other infor-mation obtained through supervisory or applica-tions processes, Reserve Banks should updatethe complexity designation of a company as itsactivities or condition changes. The determina-tion of a holding company’s complexity shouldtake into account a number of factors. Thesefactors include the size and structure of thecompany; the extent of intercompany transac-tions between insured depository institution sub-sidiaries and the holding company or uninsuredsubsidiaries of the holding company; the risk,scale, and complexity of activities of any nonde-pository subsidiaries;2 and the degree of lever-age at the holding company, including the extentof its debt outstanding to the public. Companiesshould also be designated “complex” if materialrisk-management processes for the holding com-pany and its affiliates are consolidated at theparent company.

Supervision and Surveillance Approach. Thefrequency and scope of on- and off-site inspec-tions should be adjusted based on the results ofexaminations of a company’s depository institu-tion subsidiaries and off-site quarterly surveil-lance. Whether the inspection is conducted on-or off-site will depend on the level and nature ofthe risks involved, the holding company’s abil-ity to manage those risks, and the ReserveBank’s ability to acquire the necessary informa-tion to analyze the activity off-site. If informa-tion obtained off-site is not sufficient for theReserve Bank to determine the condition orassess the activity of the company to assign arating, the Reserve Bank should conduct anon-site inspection (full-scope or targeted, asappropriate).

To facilitate prompt follow-up on changes ina company’s performance and condition, theFederal Reserve maintains distinct surveillanceprograms for small holding companies (less than$1 billion in total consolidated assets) and allother holding companies. Surveillance screensfor holding companies with $1 billion or morein total consolidated assets focus on identifyingthose companies reporting financial results thatseem to be inconsistent with their current super-visory ratings, as well as activities conductedoutside of depository institution subsidiaries.For small holding companies, quarterly surveil-

lance screens focus on the identification of po-tential parent company and nondepository sub-sidiary issues that may adversely affect affiliateddepository institutions. In particular, these screensaddress parent company cash flow, intercom-pany transactions, parent company leverage, andconsolidated capital ratios, when applicable.Screens also assist in maintaining up-to-datecomplexity designations and are updated peri-odically to reflect industry trends and conditionsas well as changes in regulatory reporting require-ments.

5000.0.4.3.05 Relying on the Work of IDIRegulators for Community BankingOrganizations (CBOs)

The Federal Reserve’s approach to the supervi-sion of holding companies with total consoli-dated assets of $10 billion or less is primarilydescribed in SR-13-21. Reserve Banks, in thevast majority of cases, conduct abbreviated off-site reviews of small, noncomplex holding com-panies with total consolidated assets of up to $1billion upon receipt of examination reports fromthe IDI regulator of the lead subsidiary IDI.These Reserve Bank reviews assess activitiesconducted outside of the subsidiary IDI and relysubstantially on the findings of the IDI regulatorto evaluate the overall condition of the holdingcompany.

For larger CBO holding companies, ReserveBanks conduct point-in-time on- or off-sitereviews that are coordinated with, or closelyfollow, on-site examinations of the lead subsidi-ary IDI by its IDI regulator. The Reserve Bankreviews of larger CBO holding companies aretargeted toward assessing parent company andnonbank activities and their potential effect onthe safety and soundness of the subsidiary IDI.The Reserve Bank evaluates the condition, per-formance, and prospects of the subsidiary IDIbased on the conclusions of the IDI regulatorand does not duplicate the work of the otherregulator. (Refer to SR-16-4.)

5000.0.4.3.1 Frequency and Scope ofInspections of Holding Companies withTotal Consolidated Assets between$1 Billion and $10 Billion

Complex holding companies in satisfactory con-dition are inspected at least once per calendaryear, while noncomplex holding companies maybe inspected every other year. The ReserveBanks should attempt to conduct inspections ofholding companies between $1 billion and$10 billion in total consolidated assets shortly

2. For SLHCs, consideration should be given to whetherthe holding company is a grandfathered unitary savings andloan holding company, and if so, the type and extent of theactivities in which the company engages.



after the examination of the lead depositoryinstitution subsidiary3 is completed. Holdingcompanies between $1 billion and $10 billion intotal consolidated assets are assigned a completeRFI/CD rating (component ratings, subcompo-nent ratings, and a composite rating) regardlessof their complexity.4

Depending on their condition and complexity,holding companies in this category will receivefull-scope inspections or targeted inspections.At a minimum, a full-scope inspection shouldinclude sufficient procedures to reach an in-formed judgment regarding the assigned ratingsfor the factors addressed by the RFI/CD ratingsystem, evaluating the organization’s methodsof managing and controlling its risk exposures,and ascertaining whether management and direc-tors fully understand and are actively monitor-ing the organization’s exposure to those risks.

A targeted inspection is designed to focusintensively on one or more specific areas, activi-ties, or problems relating to a holding company.Targeted inspections of holding companies withtotal consolidated assets between $1 billion and$10 billion should focus primarily on parentcompany leverage, parent company cash flow,nondepository subsidiaries, consolidated capital(when applicable), and intercompany transac-tions. Targeted inspections may also cover otherapplicable areas, such as deficient risk-management practices at the holding company.

In addition, because compliance with lawsand regulations is a statutory factor that must beconsidered as part of any supervisory review ofan application or notice by the holding com-pany, it is important that Reserve Bank staffensure that compliance with relevant laws andregulations, including any commitments pro-vided by a holding company in connection withan application or notice, is evaluated and ad-dressed in written inspection reports.

5000.0.4.3.2 Complex HoldingCompanies

• If a complex holding company is rated com-posite “1” or “2,” a full-scope, on-site in-

spection is required annually.• The following apply for a complex holding

company rated composite “3,” “4,” or “5”:— A full-scope, on-site inspection is re-

quired annually.— If the primary supervisor has conducted

an interim examination or changed therating at the lead depository institution,Reserve Bank staff should conduct anadditional targeted inspection and updatethe rating if necessary. The targeted inspec-tion may be conducted off-site and shouldstart within 60 days of receiving the exami-nation report for the lead depository insti-tution.

• Additional follow-up, including interim inspec-tions between regular full-scope, on-site inspec-tions, may be required in response to off-sitesurveillance program results.

5000.0.4.3.3 Noncomplex HoldingCompanies

• If a noncomplex holding company is ratedcomposite “1” or “2,” an off-site targetedinspection is required every two years.

• The following apply for a noncomplex hold-ing company rated composite “3,” “4,” or “5”:— A full-scope, off-site inspection is re-

quired annually.— If the primary supervisor has conducted

an interim examination or changed therating at the lead depository institution,Reserve Bank staff should conduct anadditional targeted inspection and updatethe rating if necessary. This targeted in-spection may be conducted off-site andshould start within 60 days of receivingthe examination report for the lead deposi-tory institution.

• Additional follow-up, including interim inspec-tions between regular full-scope inspections,may be required in response to off-site surveil-lance program results.

5000.0.4.3.4 Frequency and Scope ofReview of Holding Companies with LessThan $1 Billion in Total ConsolidatedAssets

The supervisory cycle for these holding compa-nies is determined by the examination frequencyof the lead depository institution. Complex com-

3. The lead depository institution is generally the largestdepository institution subsidiary. However, a Reserve Bankmay, based on the facts and circumstances of a particularholding company, designate another depository institution asthe lead.

4. See section 4080.0 and SR-04-18, “Bank Holding Com-pany Rating System.” For SLHCs, see section 2500.0 andSR-11-11 /CA letter 11-5, “Supervision of Savings and LoanHolding Companies (SLHCs),” and SR-13-8 /CA letter 13-5,“Extension of the Use of Indicative Ratings for Savings andLoan Holding Companies,” concerning indicative ratings ofSLHCs.



panies in this size category are assigned a com-plete RFI/CD rating; others are assigned only arisk-management rating and a composite rating.All ratings assigned should be promptly enteredinto the National Examination Database (NED)and communicated to the company, Board staff,and appropriate state and federal regulatoryauthorities as soon as possible, but generally nolater than 90 days after receipt of the leaddepository institution examination report.

Although off-site review of small holdingcompanies will be appropriate in many cases, insome instances it may be necessary to conductan on-site review, as discussed below. In thosecases when an on-site review is required, thefindings of that review and the assigned ratingsshould be communicated to the company nolater than 120 days after receipt of the leaddepository institution examination report. Docu-mentation for the ratings and off-site or on-sitereviews will generally consist of the examina-tion reports for the depository institution subsid-iaries, a copy of the transmittal letter communi-cating the ratings to the company, informationrelated to relevant System surveillance results,and memoranda supporting any on-site reviewconducted. A meeting between Reserve Bankstaff and the company’s board of directors tocommunicate findings is not required, but shouldbe conducted when warranted by supervisoryconcerns.

5000.0.4.3.4.1 Complex Holding Companies

• An off-site review should be conducted uponreceipt of the lead depository institution exami-nation report or an updated rating from theprimary supervisor using surveillance resultsand relevant supervisory and financial infor-mation. If the information obtained off site is

not sufficient for the Reserve Bank to deter-mine the overall condition of the companyand to assign a complete RFI/CD rating, theReserve Bank should conduct an on-site reviewof the company.

• Any on-site review should be targeted at thoseareas where additional information or analysisis needed to assign a complete supervisoryrating.

5000.0.4.3.4.2 Noncomplex HoldingCompanies

• If all subsidiary depository institutions have amanagement component rating and a compos-ite supervisory rating of “1” or “2” and nomaterial holding company issues are other-wise indicated, the Reserve Bank should as-sign only a composite rating and risk manage-ment rating to the holding company based onthe ratings of the lead depository institution.

• If one or more subsidiary depository institu-tions have a management component rating ora composite supervisory rating of “3,” “4,” or“5” or a material holding company issue isotherwise indicated, an off-site review is re-quired upon receipt of the lead depositoryinstitution examination report or an updatedrating from the primary supervisor using sur-veillance results and relevant supervisory andfinancial information. If the information ob-tained off-site is not sufficient for the ReserveBank to determine the overall condition of thecompany and to assign a risk-managementrating and a composite rating, an on-site reviewshould be conducted.

• Any on-site review should be targeted, asappropriate, at those areas where additionalinformation or analysis is needed to developthe risk-management and composite ratings.



Small Holding Company Inspection Scope and Frequency1

Asset Size $1–$10 Billion Less than $1 Billion

Complexity2 Complex Noncomplex Complex Noncomplex

Type of Rating Complete holding company rating Complete holding company rating Complete holding company rating Risk-management rating and composite ratings only

Sco

pe

and

Fre

qu

ency

3

Rating of1 or 2

Full scope on-site inspection isrequired annually. Additionalfollow-up, including interiminspections between regularfull-scope, on-site inspections, inresponse to off-site surveillanceprogram results.

Off-site targeted inspection isrequired every two years.Additional follow-up, includinginterim inspections between regularfull-scope inspections, in responseto off-site surveillance programresults.

Off-site review should be conductedupon receipt of the lead DI examreport or an updated rating from theprimary supervisor usingsurveillance results and relevantsupervisory and financialinformation. If the informationobtained off site is not sufficient forthe Reserve Bank to determine theoverall condition of the companyand to assign a complete RFI/CDrating, the Reserve Bank shouldconduct an on-site review of thecompany. Any on-site reviewshould be targeted at those areaswhere additional information oranalysis is needed to assign acomplete supervisory rating.

If all subsidiary DIs have a management componentrating and a composite supervisory rating of “1” or“2” and no material holding company issues areotherwise indicated, the Reserve Bank should assignonly a composite rating and risk management ratingto the holding company based on the ratings of thelead DI.

Rating of3, 4, or 5

Full scope on-site inspection isrequired annually. If the primarysupervisor has conducted an interimexamination or changed the ratingat the lead depository institution(DI), the Reserve Bank shouldconduct an additional targetedinspection and update the rating ifnecessary. The targeted inspectionmay be conducted off site andshould start within 60 days ofreceiving the examination report forthe lead DI. Additional follow-up,including interim inspectionsbetween regular full-scope, on-siteinspections, in response to off-sitesurveillance program results.

Full-scope off-site inspection isrequired annually. If the primarysupervisor has conducted an interimexamination or changed the ratingat the lead DI, the Reserve Bankstaff should conduct an additionaltargeted inspection and update therating if necessary. This targetedinspection may be conducted offsite and should start within 60 daysof receiving the examination reportfor the lead DI. Additionalfollow-up, including interiminspections between regular full-scope inspections, in response tooff-site surveillance program results.

If one or more subsidiary DIs have a managementcomponent rating or a composite supervisory ratingof “3,” “4,” or “5” or a material holding companyissue is otherwise indicated, an off-site review isrequired upon receipt of the lead DI exam report oran updated rating from the primary supervisor usingsurveillance results and relevant supervisory andfinancial information. If the information obtainedoff-site is not sufficient for the Reserve Bank todetermine the overall condition of the company andto assign a risk management rating and a compositerating, an on-site review should be conducted.On-site reviews should be targeted at those areaswhere additional information or analysis is needed todevelop the risk management and composite ratings.

Rep

ort

Req

uir

emen

ts

Rating of1 or 2

Standard inspection report format as noted in Section 5010.1, “Proceduresfor Inspection Report Preparation,” in the Bank Holding CompanySupervision Manual

Off-site or on-site reviews will generally consist of the exam reports for the insured DIsubsidiaries, a copy of the transmittal letter communicating the ratings to the company,info. related to relevant surveillance results, and a memo supporting any on-site reviewconducted

Rating of3, 4, or 5

Letter-format report of inspection may be prepared as indicated in SR13-10, “Format for Safety-and- Soundness Reports of Examination andInspection for Community State Member Banks and Holding CompaniesRated Composite ‘4’ or ‘5’.”

1. The scope and frequency guidelines listed above are applicable to bank holding companies and savings and loan holding companies.

2. Complexity factors include the size and structure of the company; the extent of intercompany transactions between insured depository institution subsidiaries and the holding company or

uninsured subsidiaries of the holding company; the risk, scale and complexity of activities of any nondepository subsidiaries; and the degree of leverage at the holding company, including the

extent of its debt outstanding to the public. For other factors, see SR-13-21.

3. Full-scope inspection covers all areas of interest to the Federal Reserve in depth; targeted inspections will focus intensely on one or two activites. See the Bank Holding Company

Supervision Manual Section 5050.0, “Procedures for ’Targeted’ Inspection Report Preparation,” for more information.

BH

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50

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20

14

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5000.0.4.4 BHCs with SpecialCharacteristics

BHCs formed to acquire an existing bank are tobe inspected to determine their compliance withFederal Reserve regulations and the extent towhich they have fulfilled commitments the Boardof Governors required of the organization inapproving its application. Such inspections shouldbe conducted between the 6th and 18th monthafter the acquisition; their scope is to be deter-mined by the Reserve Bank. If informationavailable to the Reserve Bank (the most recentexamination of the bank, the most recent FRY-6 and FR Y-9 reports from the holding com-pany, and other pertinent information) indicatesthat (1) the condition of the bank and BHC issatisfactory, (2) the BHC is fulfilling its commit-ments to the Board of Governors, and (3) theratio of the parent’s debt to its proportionateinterest in the book value of the subsidiary bank(or banks) is less than 75 percent, then, at theReserve Bank’s discretion, the inspection maybe delayed as long as 36 months after the forma-tion. Moreover, the requirement for an inspec-tion may be waived in the case of a BHC whosebank subsidiary has less than $50 million intotal assets if, in the Reserve Bank’s judgment,(1) the holding company’s financial condition issatisfactory and its commitments to the Boardof Governors are being fulfilled and (2) the ratioof the holding company’s debt to its proportion-ate interest in the book value of the subsidiarybank (or banks) is less than 75 percent.

BHCs that have undergone a change in con-trol and de novo BHCs organized to acquire denovo banks are to receive a full-scope inspec-tion within 12 months following the change incontrol or formation. A limited-scope or tar-geted inspection may be conducted in lieu of thefull-scope inspection if, in the Reserve Bank’sjudgment, the financial condition of the holdingcompany appears satisfactory.

When BHCs fail the surveillance screen orwhen other information suggests the companyhas experienced an adverse development, anin-depth, off-site review will be made to deter-mine the need for a limited-scope or targetedinspection.

5000.0.4.5 Inspection of NonbankSubsidiaries of BHCs

The instructions in this subsection are intendedto supplement the guidance in the Board’s pol-icy statement regarding the frequency and scopeof inspections for BHCs, as set forth above andincluded with SR-85-28 (October 7, 1985). (Seesections 4030.0.2, 5010.6.3, and 5010.31; andSR-93-19 (April 13, 1993).

5000.0.4.5.1 On-Site Reviews of NonbankSubsidiaries

Notwithstanding the risk assessment that is tobe performed for each nonbank subsidiary (seesection 4030.2), an on-site review is requiredfor the following nonbank subsidiaries: 5

1. Any individual subsidiary that meets eitherof the following two significance criteriaor that is otherwise deemed by the ReserveBank to have a significant impact on theBHC’s condition or performance: 6

• The subsidiary has total assets equal to10 percent or more of the bank holdingcompany’s consolidated tier 1 capital.

• The subsidiary’s total operating revenueequals 10 percent or more of the BHC’sconsolidated total operating revenue.7

2. Nonbank subsidiaries that are issuing debt tounaffiliated parties or relying to a significantdegree on affiliated banks for funding. ‘‘Sig-nificant’’ is defined as debt that exceeds thelesser of $10 million or 5 percent of theBHC’s consolidated tier 1 capital.

3. Those mortgage banking subsidiaries andother nonbank subsidiaries involved in assetsecuritization, and all nonbank subsidiariesthat generate assets and sell them to affili-ated parties. Examiners involved in the on-sitereview of these subsidiaries should consider

5. The on-site review for these nonbank subsidiaries should

be performed with the same frequency as required for a

full-scope inspection but may be performed as a targeted

review that is not concurrent with the full-scope inspection.

6. Generally, examiners would not be required to conduct

an on-site review of those nonbank subsidiaries that hold

premises that are necessary for the operation of the banks or

other affiliates. Furthermore, these criteria are not intended to

include nonbank subsidiaries that have been subject to recent

on-site review by another federal or state banking agency in

accordance with interagency agreements or Reserve Bank

agreements with state banking supervisors (for example, the

Interagency EDP Examination, Scheduling, and Distribution

Policy). These criteria also should not limit Reserve Bank

flexibility in coordinating supervisory efforts with functional

regulators at the federal or state level.

7. For BHCs, ‘‘total operating revenue’’ is the sum of total

interest income and total noninterest income (before extraor-

dinary items).



the appropriate examination guidelines forasset securitization, for example, those setforth in SR-90-16 (May 25, 1990). (See sec-tion 2128.02.)

4. All nonbank subsidiaries that broker or dealin derivative instruments, as a principal oragent, to unaffiliated parties.

Furthermore, for each credit-extending nonbanksubsidiary that meets the above on-site reviewcriteria, examiners are to review sufficient creditfiles through either judgmental or attribute sam-pling to assess the adequacy and accuracy ofinternal risk-identification systems.

5000.0.4.5.2 Off-Site Review of NonbankActivities

Reserve Banks should review reports submittedto the Federal Reserve to monitor the conditionand performance of significant nonbank sub-sidiaries between inspections. FR Y-series reportson individual and combined nonbank subsidi-aries should be used for this purpose and, whenavailable, financial statements on nonbankactivities that are included with the FR Y-6annual reports of BHCs should also be reviewed.8

When warranted by (1) a deterioration in thecondition and performance of nonbank subsidi-aries, (2) the significance of the nonbank subsid-iaries (including those selected for on-site reviewas discussed above), or (3) other reasons, ReserveBanks should require BHCs to submit addi-tional information (for example, balance sheets,income statements, and schedules on nonper-forming assets and off-balance-sheet activities)obtained from a company’s internal systems.Furthermore, on an exception basis, ReserveBanks will be expected to obtain, from a BHC’sinternal systems, information on the off-balance-sheet exposures of nonbank subsidiaries. When

exposures are considered significant, ReserveBanks will be expected to monitor the risksposed by these exposures. If the Reserve Bankdetermines that a situation warrants materialdeparture from these procedures, it should bediscussed with Board staff.

5000.0.4.6 Rating Assignments forComplex and Noncomplex HoldingCompanies with Total ConsolidatedAssets of Less Than $1 Billion

The documentation for the ratings and the off-site or on-site review for both complex andnoncomplex companies with total consolidatedassets of less than $1 billion should be commen-surate with the risk of the company and thenature and scope of issues. At a minimum, thisdocumentation will generally consist of theexamination reports for the insured depositoryinstitution subsidiaries, a copy of the transmittalletter communicating the ratings to the com-pany, information related to relevant surveil-lance results, and memoranda supporting anyon-site review conducted. All ratings assignedshould be communicated to the company, Boardstaff, and appropriate state and federal regula-tory authorities as soon as possible, but gener-ally no later than 90 days after receipt of thelead depository institution examination report.If an on-site review is required to assign theratings, the findings of that review and theassigned ratings should be communicated nolater than 120 days after receipt of the leaddepository institution examination report. Theratings should be entered into the NationalExamination Data (NED) system.

5000.0.4.6.1 Rating Assignments forComplex Holding Companies with TotalConsolidated Assets of Less Than$1 Billion

The Reserve Bank will assign a complete hold-ing company rating, using surveillance resultsand relevant supervisory, financial, and otherinformation, including correspondence or othercommunication with bank management and theprimary bank supervisor or functional or otherregulator.9 If the information obtained off-sitefrom these sources is not sufficient for the

8. Top-tier BHCs file the FR Y-11 report quarterly for each

individual nonbank subsidiary that is owned or controlled by

a BHC that files the FR Y-9C and if the nonbank subsidiary

has (1) total assets of $1 billion or more, or (2) total off-

balance sheet activity of $5 billion or more, or (3) equity

capital of at least 5 percent of the consolidated equity capital

of the top-tier BHC, or (4) operating revenue of at least

5 percent of consolidated operating revenue of the top-tier

BHC. Top-tier BHCs file the FR Y-11 annually for each

individual nonbank subsidiary (that does not meet the criteria

for filing quarterly) with total assets of $500 million or more

but less than $1 billion. Top-tier BHCs file the FR Y-11S

report annually for each individual nonbank subsidiary (that

does not meet the criteria for filing quarterly) with assets of at

least $250 million but less than $500 million, or with total

assets greater than 1 percent of the total consolidated assets of

the top-tier organization. Participation is mandatory. Section

20 subsidiaries submit quarterly financial statements to the

Board on the FR Y-20 report.

9. The complete holding company rating would include a

composite rating as well as all of the component ratings.



Reserve Bank to determine the overall conditionof the company and assign a complete holdingcompany rating, the information must be derivedfrom an on-site review.

5000.0.4.6.2 Rating Assignments forNoncomplex Holding Companies withTotal Consolidated Assets of Less Than$1 Billion

For noncomplex holding companies with totalconsolidated assets of less than $1 billion, whereall subsidiary depository institutions have satis-factory composite and risk-management ratingsand no material outstanding holding companyor consolidated issues are otherwise indicated,the Reserve Bank should assign only a compos-ite rating and a risk-management rating to thecompany on the basis of the ratings of the leaddepository institution. For those holding compa-nies in this asset group that have a subsidiarydepository institution in less-than-satisfactorycondition, or with a less than satisfactory risk-management rating, or where a material supervi-sory issue is otherwise indicated, the ReserveBank will conduct its off-site review of theorganization using surveillance results and rel-evant financial, supervisory, and other informa-tion, including correspondence or other commu-nications with bank management and the primarybank supervisor. Any on-site review should betargeted, as appropriate, to those areas whereadditional information is needed to develop themanagement and composite ratings.

5000.0.4.6.3 Rating Assignments forHolding Companies with TotalConsolidated Assets Between $1 Billionand $10 Billion

All companies with total consolidated assetsbetween $1 billion and $10 billion (whetherdeemed complex or noncomplex) must be as-signed a complete holding company rating. Thecomplete holding company rating would includea composite rating as well as all of the compo-nent ratings.

5000.0.5 BHCs EXEMPT FROM THEPROHIBITIONS OF SECTION 4 OFTHE BHC ACT

BHCs exempt from the prohibitions of section 4of the Bank Holding Company Act of 1956, asamended, as a result of any of the followingexemptions will not be subject to any requiredperiodic inspection:

1. section 4(a)(2)—permanent grandfather rights2. section 4(c)(i)—labor, agricultural, or horti-

cultural organization3. section 4(c)(ii)—85 percent family-owned4. section 4(c)(12)—irrevocable declaration to

cease to be a BHC5. section 4(d)—hardship exemption

However, the Reserve Bank should continue tomonitor the financial condition of such holdingcompanies and should conduct inspections when-ever there is any indication of a potential prob-lem in a subsidiary bank.

5000.0.6 MULTI-TIER BHCINSPECTIONS

The Federal Reserve has had longstanding super-visory guidance addressing the coordination ofsupervisory activities among the Reserve Banks.For banking organizations that operate in morethan one district, it is particularly important that(1) all relevant and significant supervisory find-ings are assessed and weighed when the consoli-dated banking organization is being evaluatedand (2) a consistent and coordinated supervisorymessage is communicated to the organization.

Many mult-tier BHC structures exist in whichthe top-tier and second-tier institutions (as wellas other lower-level tiers) are in different Fed-eral Reserve Districts. The System has longoperated under the principle that there is oneresponsible Reserve Bank for each fully consoli-dated banking organization (i.e., each top-tierconsolidated banking organization). For domes-tic banking organizations, the responsible ReserveBank typically will be the district where thehead office of the top-tier organization is locatedand its overall strategic direction is establishedand overseen. For foreign banking organiza-tions, the RRB typically will be the districtwhere the Federal Reserve has the most directinvolvement in the conduct of day-to-day super-vision of the U.S. banking operations of theorganization. The RRB is accountable for allaspects of supervision of the fully consolidatedbanking organization, including all subsidiaries



and affiliates (domestic, foreign, and Edge cor-porations) of the organization for which theFederal Reserve has supervisory oversight re-sponsibility. (See SR-05-27/CA-05-11 and sec-tion 2124.01.2)

5000.0.6.1 Population of Second-TiersSuitable for On-Site Inspection

A second-tier holding company (and other lowertiers) that (1) has assets greater than $5 billion,(2) irrespective of size, has a financial conditiondeemed in need of special supervisory attention(BHC or lead bank rated 3, 4, or 5), or (3) isprone to insider or abusive practices would usu-ally warrant an on-site inspection, the prepara-tion of an inspection report, the assignment of arating, and a presentation of findings to manage-ment, as well as the board of directors if theboard includes any ‘‘outside directors.’’ To theextent possible, the inspection should be coordi-nated with that of the top-tier parent holdingcompany.

5000.0.6.2 Frequency Guidelines forSecond-Tier BHCs over $5 Billion

It is assumed that a second-tier BHC will be sub-ject to inspection-frequency guidelines that per-tain to the top-tier on a consolidated basis.Although top-tier companies greater than $10billion in assets may be subject to a secondon-site presence annually, these guidelines arenot intended to require a second annual pres-ence for the second-tier company.

5000.0.6.3 Frequency Guidelines forSecond-Tier BHCs Rated 3, 4, or 5

When a second-tier holding company requiresspecial supervisory attention or is prone to insideror abusive practices, the responsible ReserveBank may conclude that the second-tier holdingcompany warrants inspection at least as fre-quently or more frequently than the top-tierholding company. Under such circumstances, itwould be appropriate for the second-tier holdingcompany to receive a second presence annually,despite the fact that the top-tier holding com-pany may be inspected less frequently. ProblemBHCs acquired as ‘‘debts previously con-tracted’’ need not be inspected any more fre-quently than the top-tier company.

5000.0.6.4 Second-Tier Shell BHCs

To the extent that the second-tier holding com-pany is strictly a shell without outside directorsand no substantive policymaking authority, andto the extent that the records necessary to reviewits operations and condition are available at thelocation of the top-tier holding company, theinspection of the second-tier need not be doneon-site, but may be done at the top-tier parentlocation. In either case, if an inspection is con-ducted, a rating should be assigned to the second-tier holding company.

5000.0.7 CLASSIFICATION OFASSETS INVOLVING OUT-OF-DISTRICT NONBANK SUBSIDIARIES

The classification of assets involving out-of-District nonbank subsidiaries should be per-formed at the office of the parent company bythe RRB when sufficient information is avail-able or could be made available upon request. Inadopting the inspection-frequency requirementsfor selected BHCs (see above), the Board recog-nized that inspection of nonbank subsidiariesand classification of nonbank assets were anessential part of the inspection process. How-ever, an on-site inspection of out-of-Districtnonbank subsidiaries should not be done rou-tinely by the RRB. If the RRB concludes thatinformation necessary to classify assets is avail-able only on-site, or if problems or other mate-rial circumstances lead to the conclusion that anon-site inspection is required, the RRB is encour-aged to arrange for the local Reserve Bank toundertake on its behalf the inspection or othersupervisory activities to take advantage of oppor-tunities to enhance supervisory effectiveness orefficiency. When other Reserve Bank Districtsconduct supervisory activities for the RRB, sub-stantial reliance should be placed on the conclu-sions and ratings recommended by the partici-pating Reserve Bank Districts.

5000.0.8 INTERAGENCY INSPECTIONOR EXAMINATION AGREEMENTS

To ensure continuing close coordination andconsistency in the examination and supervisionof banking organizations, the three federal bankregulatory agencies (that is, the Federal ReserveSystem, OCC, and FDIC) have adopted two



policies intended to enhance the interagencysupervision of BHCs and their bank and non-bank subsidiaries.

5000.0.8.1 Interagency Coordination ofBHC Inspections and Subsidiary BankExaminations

The first policy was adopted in conjunction withthe Federal Financial Institutions ExaminationCouncil (FFIEC) and addresses large and prob-lem holding companies and holding companieswith deteriorating financial conditions. The pol-icy requires the agencies to coordinate the BHCinspection and the examination of the lead banksubsidiary for—

1. any BHC with consolidated assets in excessof $10 billion;

2. any BHC or BHC subsidiary lead bank ratedcomposite 4 or 5 (the two lowest rating cate-gories) under the RFI/C(D) bank holdingcompany rating system or the Uniform Rat-ing System for banks; and

3. any BHC or BHC subsidiary lead bank ratedcomposite 3 (the middle of the rating catego-ries) whose financial condition appears tohave worsened significantly since the lastinspection or examination.

It is recognized that substantial problemscould develop for a holding company as a resultof serious difficulties in significant subsidiarybanks other than its largest bank, and the policyas adopted affords the agencies the flexibility toconduct coordinated examinations when anybank, regardless of size, has problems warrant-ing supervisory concern. In implementing thisaspect of the policy, the agencies will conductcoordinated examinations when any significantbank subsidiary is rated 4 or 5, or when thefinancial condition of any other subsidiary causesserious concern about that subsidiary’s impacton the condition of the holding company or anyother banking affiliate.

5000.0.8.2 Interagency Agreement toConduct Concurrent Examinations ofCertain BHCs and Their Lead BankSubsidiaries

The second policy implements a program toconduct an annual concurrent examination by

the Federal Reserve and the OCC or FDIC ofholding companies with consolidated assetsgreater than $1 billion and their lead bank sub-sidiaries. The major provisions of this programare as follows:

1. The agencies will conduct concurrentexaminations of certain BHCs and their leadbank subsidiaries, as well as any other sub-sidiary or subsidiaries as appropriate. Con-current examinations are defined as the per-formance of certain on-site examinationactivities by examiners from the agencieson a simultaneous or coordinated basis toenhance cooperation, minimize potential du-plication, and reduce burden on bankinginstitutions. Concurrence does not necessar-ily require coincidence of beginning andclosing dates of bank and holding companyexaminations. The geographical location ofthe lead bank shall determine the districtbank and regional office responsible forcoordination of examination logistics of allinvolved subsidiaries.

2. The banking organizations to which thisprogram will apply will be mutually agreedupon by the director of the Division ofBanking Supervision and Regulation (FRS)and the senior deputy comptroller for banksupervision (OCC) for holding companieswith lead national bank subsidiaries, andby the director of the Division of BankingSupervision and Regulation (FRS) and thedirector of the Division of Bank Supervi-sion (FDIC) for holding companies withlead state-chartered nonmember bank sub-sidiaries. These banking organizations willbe specified in a list prepared jointly by theFRS and OCC for holding companies withlead national banks, and by the FRS andFDIC for holding companies with lead state-chartered nonmember banks.

3. In general, this program will apply to hold-ing companies whose lead bank subsidi-aries are national or state-chartered non-member banks and whose consolidatedholding company assets are equal to orexceed $1 billion. However, the programmay be applied to other holding companiesupon the agreement of the FRS, OCC, andFDIC.

4. In general, banking organizations includedin the program will be examined annually,although each agency reserves the right notto participate in an examination due toresource constraints or other supervisoryimperatives.

5. The agencies will mutually agree on the



division and sharing of work assignmentsand routines for concurrently examining theholding company and the bank, with thegoal of minimizing unnecessary overlap,duplication, and burden on the bankingorganization. In general, the division ofexamination duties will be based on thelocus of primary statutory examination andsupervisory responsibility but will recog-nize that in some areas the agencies havecommon supervisory interests and needs forinformation.

6. Findings, conclusions, recommendations,reports, and transmittal letters pertaining toexaminations of the holding company orsubsidiaries included in the program shouldbe provided to or discussed with the districtbank and regional office of the other agencyresponsible for coordination of the concur-rent examinations before being forwardedto management or directors of the holdingcompany or bank (or banks).

7. Each district bank and regional officereceiving examination information from theother agency should promptly inform theother agency of any major findings, conclu-sions, or recommendations with respect towhich the receiving agency substantiallydisagrees.

8. Before forwarding examination results tomanagement or directors, every effort shouldbe made to resolve significant differencesbetween the district bank and regional officeconcerning major examination findings, con-clusions, and recommendations.

9. Significantdifferences that cannotbe resolvedby examiners or officials at the regionaloffice-district level should be referred to thedirector of the Division of Banking Supervi-sion and Regulation (FRS) and the seniordeputy comptroller for bank supervision(OCC) for ultimate resolution, in the caseof a holding company and its lead nationalbank. Cases that involve significant differ-ences at the regional office-district levelwith regard to a holding company and itslead state-chartered nonmember bank willbe referred to the director of the Division ofBanking Supervision and Regulation (FRS)and the Director of the Division of BankSupervision (FDIC) for ultimate resolution.If major differences cannot be resolved, theagencies may proceed with the transmissionof examination findings and conclusions tomanagement, according to each agency’sexisting procedures.

10. Reasonable efforts should be made by theagencies to hold joint or combined final

interviews and meetings with the manage-ment or directors of the holding companyand the bank subsidiaries to discuss signifi-cant supervisory issues involving examina-tion results. In the ordinary course, thedistrict bank (FRS) would initiate meetingswith the holding company, and the regionaloffices (OCC and FDIC) would initiate meet-ings with the national or state-charterednonmember bank subsidiaries, respectively.If such meetings are not appropriate or fea-sible, each agency should inform the otheragency in advance of any plans to meetwith management or directors of the hold-ing company or bank to discuss significantsupervisory matters, and the other agencyshould be given the opportunity to attendsuch meetings or send a representative. Ifthe other agency does not attend or send arepresentative, significant results of the meet-ings should be transmitted to that agency.

11. This agreement is intended to fostercooperation and is not meant by the exclu-sion of other arrangements to preclude otherreasonable efforts or cooperative arrange-ments to strengthen interagency coordina-tion and consistency.

12. Nothing in this agreement precludes orprohibits the agencies from examining anyentity for which the agency has statutoryexamination authority, or from taking timelysupervisory action against any entity forwhich the agency has statutory supervisoryauthority.

5000.0.8.3 Interagency Policy Statementon Examination Coordination

On June 10, 1993, an interagency policy state-ment was developed to strengthen coordinationand cooperation among the federal banking agen-cies responsible for examining and supervisingdepository institutions and their holding compa-nies, thus minimizing the disruptions and bur-dens associated with the examination process.The policy expands on existing interagencyagreements. (See SR-93-30.)

5000.0.8.3.1 Primary Supervisory andCoordination Responsibility

Examinations or inspections of a particular legalentity are to be conducted by the federalregulatory agency that has primary supervisory



authority for that entity. In carrying out itssupervisory responsibilities for a particular entitywithin a banking organization, each regulatoryagency, to the extent possible, is to rely onexaminations or inspections conducted by theprimary regulator of the affiliate, therebyavoiding unnecessary duplication and unneces-sary disruption of the banking organization. Incertain situations, however, it may be necessaryfor a regulatory agency other than the entity’sprimary supervisory authority to participate inthe examination or inspection in order to fulfill itsregulatory responsibilities.

Primary supervisory authority and coordina-tion responsibilities are organized as follows:

OCC national banks, federal savings asso-ciations

FDIC state nonmember banks, state savingsassociations

FRB parent BHCs, nonbank subsidiaries ofBHCs, the consolidated BHC, FHCs,SLHCs, and state member banks

The primary federal regulator is responsible forscheduling, staffing, and setting the scope ofsupervisory activities, including coordinatingformal and informal administrative actions, asnecessary. In fulfilling these responsibilities, theprimary regulatory agency is to consult closelywith the other appropriate agencies when thereis need for coordination.

5000.0.8.3.2 Overview of ExaminationCoordination and ImplementationGuidelines

The agencies are to make every effort to coor-dinate the examinations and the inspections ofbanking organizations. Coordinated examina-tions and inspections may not be practical in allcases because of resource constraints, seriousscheduling conflicts, or geographic consider-ations; however, particular emphasis will beplaced on coordinating examinations andinspections of banking organizations with over$10 billion in consolidated assets and thosebanking organizations (generally, with assetsin excess of $1 billion) that exhibit financialweaknesses.

5000.0.8.3.3 Coordinating the Planning,Timing, and Scope of Examinations andInspections

When multiple regulators have authority over alegal entity, representatives from the appropriatesupervisory offices should, if necessary, meetquarterly to discuss supervisory strategies forspecific banking organizations. They should meetat least annually to review and establish exami-nation and inspection schedules, to plan for thenext year, and to consider the need for coordina-tion in the following areas:

1. sharing the strategy and scope of eachexamination or inspection

2. determining if agencies other than the pri-mary regulator of a particular entity shouldparticipate in the examination or inspectionof that entity

3. determining whether a consolidated requestletter should be prepared to avoid duplicativeinformation requests

4. sharing workpapers and resultant findingsand conclusions from prior examinations andinspections

5. other areas as necessary

5000.0.8.3.4 Interagency Review of Bank,Nonbank, and Parent-Company Activities

Certain functions and procedures—such asinternal audit, credit review, and the proceduresfor determining the allowance for loan and leaselosses—transcend the boundaries that distin-guish legal entities. Such functions and pro-cedures may be located at the bank or holdingcompany level. The primary regulator of thedepository institution and the holding companyboth may have supervisory responsibility toassess such functions. In these cases, coordi-nated and concurrent examinations or inspec-tions should be conducted to avoid duplicativereviews and unnecessary disruption.

The primary regulator of the entity beingexamined or inspected should take the lead in acoordinated examination or inspection, unlessthere is an agreement that another agency willserve as the lead agency. The responsibilities ofthe lead agency, in consultation with otherappropriate agencies, include developing thescope of the examination or inspection anddetermining the staff requirements. The leadagency will also coordinate scheduling of theexamination or inspection and the presentationof examination or inspection findings to theappropriate management.



5000.0.8.3.5 Joint Meetings BetweenRegulators and Bank or BHCManagement

At the conclusion of examinations or inspec-tions conducted under the guidelines, the agen-cies should coordinate and plan joint meetingswith the board of directors to discuss the findingsand conclusions. The agencies will coordinateresponsibility as outlined in the guidelines.

5000.0.8.3.6 Significant Differencesin Agencies’ Findings, Conclusions,and Recommendations

Before examination or inspection results areforwarded to management or boards of direc-tors, every effort should be made to resolve anysignificant differences in major findings, conclu-sions, and recommendations. These differencesshould be resolved by examiners or officials atthe regional level within 10 business days ofidentification. If the regional offices cannotresolve the matter, it should be referred to thenational level, where it will be resolved within areasonable time frame.

5000.0.8.3.7 Inspection and ExaminationReports

The primary regulator should prepare the formalreport of examination or inspection covering theentity for which it is the primary federal regula-tor. The primary regulator will also prepare thereport when it serves as the lead agency. Thereport should be addressed and transmitted tothe directors of the entity for which the regula-tor is the primary federal supervisory authority.The report may also be sent to the directors ofother entities that have a need for the informa-tion. The agencies may agree, if necessary andappropriate, to prepare a joint report.

5000.0.8.3.8 Coordinating InformationRequests

Any request for information to be obtained froman entity for supervisory purposes should nor-mally be made through the entity’s primaryregulator. The primary regulator should alsoshare relevant supervisory information with theother appropriate regulatory agencies.

5000.0.8.3.9 Coordinating EnforcementActions

When one or more regulatory agencies are con-templating an enforcement action, the agenciesshould consider initiating a joint enforcementaction to address and correct deficiencies withina banking organization. At a minimum, eachagency considering enforcement action shouldinform the other agencies. This provisionreaffirms the existing interagency enforcementagreement.

5000.0.8.3.10 State Banking Departments

The agencies will endeavor to coordinate withstate banking departments, when appropriateand feasible.

5000.0.9 POLICY FORCOMMUNICATING PROBLEMS OFSUPERVISORY CONCERN TOMANAGEMENT AND BOARDS OFDIRECTORS

5000.0.9.1 Introduction

On October 7, 1985, the Board announceda second policy to strengthen and formalizepractices for communicating the findings ofexaminations or inspections to management andboards of directors and to set out guidelines forsuch meetings. The policy—

1. establishes specific criteria for determiningwhich examination findings require follow-upmeetings with boards of directors and setsout guidelines for such meetings,

2. requires that, in addition to providing a com-plete examination or inspection report tothe bank or BHC, a written summary offindings be sent to the bank or BHC fordistribution to each director, and

3. requires that senior Reserve Bank officialsbecome more involved in presenting exami-nation findings to boards of directors.

The policy was effective immediately, with ini-tial implementation on January 1, 1986.



5000.0.9.2 Meetings with Directors

The decision to hold a meeting with the boardof directors at the conclusion of a state memberbank examination or a BHC inspection is to bedetermined on the basis of the organization’sfinancial condition, its size, the type ofexamination or inspection conducted, and otherfactors that, in the judgment of the ReserveBank, indicate the need for a meeting. To theextent possible, meetings with the boards ofdirectors of state member banks should includerepresentatives of the state banking depart-ment. When appropriate, meetings with theboards of BHCs may be held jointly with themeeting of the lead bank subsidiary’s board ofdirectors and the bank’s primary federal or statebank supervisor.

5000.0.9.2.1 Criteria for ConductingMeetings

5000.0.9.2.1.1 Condition

For those BHCs with consolidated assets of$1 billion or more, a meeting with the board ofdirectors is to be held at the conclusion of anyfull-scope inspection in which a BHC is ratedcomposite 4 or 5. A meeting between ReserveBank staff and the board of directors to commu-nicate findings is not required for—

1. complex holding companies with consoli-dated assets of less than $1 billion; and

2. noncomplex holding companies with con-solidated assets of less than $1 billion thathave a subsidiary depository institution inless-than-satisfactory condition, or with aless-than-satisfactory risk-management rat-ing, or where a material supervisory issue isotherwise indicated.

However, a meeting should be conducted betweenReserve Bank staff and the board of directors tocommunicate findings when supervisory con-cerns warrant such action.

Except for the above situation, meetings arerequired if an organization is rated composite 3and its condition appears to be deteriorating orhas shown little improvement since the previousexamination or inspection in which it receiveda composite 3 rating.10 A meeting should also

be held with all these organizations follow-ing a limited-scope or targeted examination orinspection, if deemed appropriate and desirableby the Reserve Bank. (See SR-95-19.)

5000.0.9.2.1.2 Size

A meeting will be required at the conclusion ofa full-scope examination or inspection of allmultinational organizations and major regionalorganizations with assets in excess of $5 billion.Reserve Banks are also encouraged to conductsuch meetings at the conclusion of a full-scopeexamination or inspection of regional institu-tions with assets of $1 billion or more.

5000.0.9.2.1.3 Guidelines for Meetings

Meetings with boards of directors will have tobe tailored to meet the needs of each specificsituation. In general, meetings with the fullboard are preferred, but in certain cases theReserve Bank may determine that a meetingwith a committee of the board of directors, suchas the executive or audit committee, will serveadequately. In all cases, however, the writtensummary of examination or inspection findingsis to be provided to each member of an organi-zation’s board of directors.

For BHCs with consolidated assets of $1 bil-lion or more, the Reserve Bank’s presentation tothe board should ordinarily be chaired by aReserve Bank official, with the examination staffin attendance. The larger the organization or themore serious its problem, the more senior theFederal Reserve official should be.

Reserve Bank presidents are expected tobecome directly involved in the supervision ofmultinational organizations and regional institu-tions with more than $5 billion in assets thathave been rated composite 3, 4, or 5. ReserveBanks have the discretion to determine the cir-cumstances under which the participation ofReserve Bank presidents is appropriate and nec-essary. It may be necessary for the ReserveBank president to meet with the board of direc-tors and become involved in other ways; theprecise nature of involvement will depend onthe situation.

A meeting with the board of directors shouldinclude a formal, structured presentation con-taining a clear statement that an institution is

10. Reserve Banks also are encouraged to hold a meetingat the conclusion of a full-scope inspection (1) for an organi-

zation with assets of $1 billion or more rated composite 2 if its

condition appears to be deteriorating and (2) for an organiza-

tion rated composite 3, even if showing some improvement.



considered a ‘‘problem’’ institution11 or is aboutto become a problem institution if existing con-ditions deteriorate. The use of slides, othervisual aids, and hard-copy handouts is encour-aged. Information should also be presented onfinancial trends and peer-group comparisons.The presentation should make clear the natureof problems uncovered, such as—

1. deficiencies in capital, asset quality, earn-ings, or liquidity;

2. violations of law;3. inadequacies in policies, practices, and

reporting systems necessary for the properadministration of the organization;

4. the lack of well-documented lending, collec-tion, investment, and liability-managementpolicies;

5. the failure of management to address previ-ously discussed deficiencies;

6. the lack of reporting systems sufficient tokeep senior management and the board ofdirectors fully informed; and

7. the failure of the board of directors to partici-pate in the active management of theorganization.

For BHCs with consolidated assets of lessthan $500 million, the Reserve Banks, effectiveMarch 30, 1995 (SR-95-19), were provided thediscretion to have senior supervision or exami-nation staff represent the Reserve Bank in meet-ings with the directors of banks and BHCs.Conference calls with directors may be made inplace of on-site meetings for these BHCs whenconsidered appropriate and if an on-site meetingwas held following the previous inspection.

5000.0.9.3 Communication ofSupervisory Findings

Communication of supervisory findings to theorganization’s board of directors is an importantpart of the supervision of a banking organiza-tion. While the board itself may not directlyundertake the work to remediate supervisoryfindings as senior management is responsiblefor the organization’s day-to-day operations, itis nevertheless important that the board be madeaware of significant supervisory issues and ulti-mately be accountable for the safety and sound-ness and assurance of compliance with applica-

ble laws and regulations of the organization.Depending upon the size and complexity of

the organization, supervisory findings are com-municated in writing through formal examina-tion or inspection reports, reports summarizingthe results of targeted reviews, a roll-up of thosereviews into a comprehensive report, any othersupervisory communication, or some combina-tion thereof. These written communications (re-ferred to collectively as ‘‘reports’’) are generallydirected to the board of directors, or an executive-level committee of the board,12 as appropriate.In turn, the board of directors (or executive-level committee of the board) typically willdirect the organization’s management to takecorrective action and will provide managementwith appropriate oversight, including approvalsof proposed management actions as necessary.(Refer to SR-13-13/CA-13-10)

To be effective, the communication of super-visory findings must be (1) written in clear andconcise language, (2) prioritized based upondegree of importance, and (3) focused on anysignificant matters that require attention.

Reserve Banks must formally communicateMRIAs and MRAs resulting from any supervi-sory activity to the organization in these writtenreports. In order to promote an understanding ofthese terms, examiners should include defini-tions of MRIAs and MRAs in all supervisorydocuments communicating supervisory find-ings.13 When included in a safety-and-soundnessexamination or inspection report, MRIAs andMRAs should be listed in the ‘‘Matters Requir-ing Attention’’ section. In the case of findingsfromconsumercomplianceexaminations,MRIAsand MRAs should be reflected in the ‘‘Execu-tive Summary and Examination Ratings’’ sec-tion of the consumer affairs report of examina-tion. Only outstanding MRIAs and MRAs arerequired to be discussed in the report; however,examiners have discretion to discuss closedMRIAs and MRAs in the report if such discus-sion would be meaningful.

For large banking organizations, an annualroll-up report summarizes the significant find-

11. As has been long-standing Federal Reserve practice,

the exact composite or component ratings assigned in the

examination or inspection are not to be disclosed to persons

other than the directors or senior management. (See section

4070.0.9.)

12. An executive-level committee of the board (such as,

the audit committee or risk committee) typically meets regu-

larly, keeps minutes of those meetings, and is accountable to

and routinely reports to the board of directors.

13. In a safety-and-soundness report, these definitions could

be included on the ‘‘Scope’’ page, in an appendix, or as a

footnote on the ‘‘Matters Requiring Attention’’ section. In a

consumer compliance report, these definitions could be included

on the ‘‘Executive Summary and Examination Ratings’’ sec-

tion.



ings, based on outstanding MRIAs or MRAs,included in the reports of targeted reviews orother supervisory activities conducted duringthe supervisory cycle. These findings may begrouped by major supervisory issues, ratingcomponents, risks, or themes. This informationshould enable the banking organization’s boardof directors and any executive-level committeeof the board to understand the substance andstatus of outstanding MRIAs or MRAs andfocus their attention on the most critical andtime-sensitive issues.

Communications tobankingorganizationscon-cerning safety-and-soundness or consumer com-pliance MRIAs or MRAs must specify a time-frame within which the banking organizationmust complete the corrective actions. In certaincircumstances, examiners may require the bank-ing organization to submit an action plan thatidentifies remedial actions to be completed withinspecified timeframes. Action plans withintermediate- and long-term timeframes thatspan more than one supervisory or examinationcycle with regard to safety-and-soundness mat-ters, or a 12-month period with regard to con-sumer compliance issues, should include interimprogress targets. Both safety-and-soundness andconsumer protection or compliance consider-ations will remain a priority in determiningwhether the organization’s timeframes to cor-rect the matter are reasonable.

Matters Requiring Immediate Attention

MRIAs arising from an examination, inspection,or any other supervisory activity are matters ofsignificant importance and urgency that the Fed-eral Reserve requires banking organizations toaddress immediately and include (1) mattersthat have the potential to pose significant risk tothe safety and soundness of the banking organi-zation; (2) matters that represent significant non-compliance with applicable laws or regulations;(3) repeat criticisms that have escalated in impor-tance due to insufficient attention or inaction bythe banking organization; and (4) in the case ofconsumer compliance examinations, matters thathave the potential to cause significant consumerharm. An MRIA will remain an open issue untilresolution and examiners confirm the bankingorganization’s corrective actions.

Required Language. Federal Reserve examinersare expected to use the standardized language

below to communicate MRIAs to the board ofdirectors (or executive-level committee of theboard):

• ‘‘The board of directors (or executive-levelcommittee of the board), or banking organiza-tion is required to immediately . . . .’’

Timeframe. The expected timeframe for a bank-ing organization to address MRIAs is generallyshort, and may be ‘‘immediate,’’ in the case ofheightened safety-and-soundness or consumercompliance risk. For MRIAs that are necessaryto preserve or restore the viability of a bankingorganization, the timeframe should take intoaccount any potential losses to the Federal De-posit Insurance Corporation’s Deposit InsuranceFund, including the possibility that a delay inaction will increase the potential for loss or thecost of resolution.

Organization Response. Following its review ofMRIAs discussed in the report, the bankingorganization’s board of directors is required torespond to the Reserve Bank in writing regard-ing corrective action taken or planned alongwith a commitment to corresponding time-frames.

Supervisory Follow-up. The Reserve Bank mustfollow up on MRIAs to assess progress andverify satisfactory completion. The timeframefor follow-up should correspond with the time-frame specified for the action being required,and should be appropriate for the severity of thematter requiring the corrective action. The meansof follow-up may vary depending upon thenature and severity of the matter requiring theaction. Follow-up may take the form of a subse-quent examination, a targeted review, or anyother supervisory activity deemed suitable forevaluating the issue at hand.

In some cases, when follow-up indicates theorganization’s corrective action has not beensatisfactory, the initiation of additional formalor informal investigation or enforcement actionmay be necessary. In such cases, examinersshould consult with enforcement staff.14 In allinstances, examiners are expected to exercisejudgment as to the supervisory activities bestsuited for evaluating a particular issue. Oncefollow-up is completed, examiners are expected

14. Such consultation should be made in accordance with

existing guidance to Reserve Bank supervisory staff on the

processing of enforcement actions, which provides that rec-

ommendations concerning formal enforcement actions should

be submitted simultaneously to both the Board’s Legal Divi-

sion and Division of Banking Supervision and Regulation.



to clearly and fully document the rationale fortheir decision to close any issue. Examiners arealso expected to communicate in writing theresults of their work and findings to the bankingorganization.

Matters Requiring Attention (MRAs)

MRAs constitute matters that are important andthat the Federal Reserve is expecting a bankingorganization to address over a reasonable periodof time, but when the timing need not be “imme-diate.” While issues giving rise to MRAs mustbe addressed to ensure the banking organizationoperates in a safe-and-sound and compliant man-ner, the threat to safety and soundness is lessimmediate than with issues giving rise to MRIAs.Likewise, consumer compliance concerns thatrequire less immediate resolution should becommunicated as an MRA. An MRA typicallywill remain an open issue until resolution andconfirmation by examiners that the bankingorganization has taken corrective action. If abanking organization does not adequately ad-dress an MRA in a timely manner, examinersmay elevate an MRA to an MRIA. Similarly, achange in circumstances, environment, or strat-egy can also lead to an MRA becoming anMRIA. The key distinction between MRIAs andMRAs is the nature and severity of mattersrequiring corrective action, as well as the imme-diacy with which the banking organization mustbegin and complete corrective actions.

Required Language. Federal Reserve examinersare expected to use the standardized languagebelow to communicate MRAs to the board ofdirectors (or executive-level committee of theboard):

• ‘‘The board of directors (or executive-levelcommittee of the board), or banking organiza-tion is required to . . . .’’

Timeframe. Communications to banking organi-zations about MRAs must specify a timeframewithin which the corrective action is expected tobe completed. The timeframe, at least initially,may require estimation because the bankingorganization may first need to complete prelimi-nary planning to establish the timeframe forinitiating and completing the corrective action.The timeframes for MRAs are likely to becomemore precise over time as planning evolves andcircumstances make the completion of the MRAsmore urgent. Timeframes that span more thanone examination cycle for safety-and-soundness

issues or that exceed 12 months for consumercompliance issues should include appropriateinterim progress reports.

Organization Response. Following its review ofthe report, the banking organization’s board ofdirectors is required to provide a written responseto the Reserve Bank regarding its plan, prog-ress, and resolution of the MRA.

Supervisory Follow-up. The Reserve Bank mustfollow-up on MRAs to assess progress andverify satisfactory completion. The timeframefor follow-up should correspond with the time-frame during which actions are to be completed.For intermediate- or long-term corrective actionsfor MRAs, Reserve Bank follow-up may consistof assessing the organization’s progress to ad-dress the MRAs, whether satisfactory or unsatis-factory, and noting whether the initial estimatedtimeframe continues to be reasonable or war-rants adjustment.

The means of supervisory follow-up mayvary based upon the nature and severity of thematter for which corrective action is expected.Follow-up may take the form of a subsequentexamination, targeted review, continuous moni-toring, reliance on validation work conductedby an internal audit function,15 reliance on theresults of examinations conducted by other su-pervisors, or any other supervisory activitydeemed suitable for evaluating the issue at hand.

In some cases, when follow-up indicates theorganization’s corrective action has not beensatisfactory, the initiation of additional formalor informal investigation or enforcement actionmay be necessary. In all instances, examinersare expected to exercise judgment regarding thesupervisory activities best suited for evaluatinga particular issue. Once follow-up is complete,examiners are expected to clearly and fullydocument the rationale for their decision toclose any issue. Examiners also are expected tocommunicate in writing the results of their workand findings to the organization.

15. Examiners may choose to rely on the work of internal

audit when internal audit’s overall function and related pro-

cesses are effective, as discussed in SR-13-1/CA-13-1, ‘‘Supple-

mental Policy Statement on the Internal Audit Function and

Its Outsourcing.’’ When relying on internal audit to follow-up

on MRAs, examiners are expected to review the relevant

work papers and, when necessary, meet with internal audit

staff who documented the resolution of the issue.



Supervisory Considerations

The volume of MRIAs and MRAs should beone of the many considerations in assigning asupervisory rating to a banking organization.The presence of a large number of MRIAs orMRAs may indicate that additional formal orinformal investigation may be necessary or thatthe initiation of a formal or informal enforce-ment action may be warranted.

Irrespective of the number of MRIAs or MRAs,in some cases, additional formal or informalinvestigation may be necessary or the initiationof a formal or informal enforcement action maybe warranted based on the severity of the issues,the repeat nature of issues, lack of responsive-ness of management, violations of law, insiderabuse, fraud, or other material deficiency. In anyof these cases, examiners should consult withthe Board’s enforcement staff in the Legal Divi-sion and the Division of Banking Supervisionand Regulation.

5000.0.9.4 Summary of BHC InspectionFindings

In the following situations, the Federal ReserveBanks will provide special written reports sum-marizing the results of the inspection findings toBHCs (see SR-85-28):

1. An organization is rated composite 3, 4, or 5(except for organizations rated composite 3or 4 when a written summary report wasprovided on a preceding inspection (see SR-95-12); when the organization has been tak-ing actions to comply fully with the provi-sions of that report; and when, in theexaminer’s judgment, no good purpose wouldbe served by issuing another summaryreport).

2. An organization is rated composite 1 or 2 butis showing signs of a significant deteriorationin condition or an apparent violation of law.

Examiners in these and other cases may decideto issue summaries to board members when thesummaries will prove constructive in resolvingpotential or actual problems.

The inspection report page, ‘‘Examiner’s Com-ments and Other Matters Requiring Special BoardAttention,’’ may serve as the full text of thesummary report to directors and should be writ-ten with that purpose in mind. The discussion onthe page (and thus in the summary report)should focus on identified problems of the orga-nization rather than its strengths. Problems shouldbe presented in a succinct and unmistakablyclear manner. The types of actions to be takenby the directors and management to addressthese problems should be specifically noted.Institutions rated 4 or 5 are to be told they are‘‘problem’’ institutions that warrant ‘‘specialsupervisory attention.’’ Institutions rated 3 are tobe informed that their condition is not satisfac-tory, that they are subject to more-than-normalsupervision, and that they may become ‘‘prob-lems’’ if their weaknesses are not addressedadequately.

The summary report will be sent directly tothe banking organization’s management for theirdistribution to each director. The transmittal let-ter to the banking organization is to state thatthe report is a summary of identified problemsand contemplated supervisory actions and is torequest that management distribute the report toeach director. The letter is to state further thateach director should read the report, sign theintroductory statement attesting to having readthe report, and return the report to management.Management is to keep on file copies of thestatements signed by the directors but is todestroy all but a file copy of the summariesthemselves.

To provide the directors with prior notice ofthe deficiencies to be discussed, the directors’summary report is to be completed and distrib-uted before any Reserve Bank meeting with theboard of directors. Reserve Banks should alsomake every effort to distribute the completeexamination or inspection report to managementbefore meeting with directors.



5000.0.10 SUMMARY TO DIRECTORS OF INSPECTION FINDINGS

SUMMARY TO DIRECTORS

OF INSPECTION FINDINGS

Prepared by theFederal Reserve Bank

For the Board of Directors of

Inspection Conducted As of

This summary is the property of the Board of Governors of the Federal Reserve System and is furnished to members of the board of

directors of the bank holding company inspected for their confidential use. The report is strictly privileged and confidential under

applicable law, and the Board of Governors has forbidden its disclosure in any manner without its permission. Under no circumstances

should the holding company, or any of its directors, officers, or employees disclose or make public in any manner the report or any

portion thereof. In reviewing this summary, it should be kept in mind that an inspection is not the same as an audit report.

THIS SUMMARY SHOULD BE HELD IN STRICTEST CONFIDENCE



5000.0.10 SUMMARY TO DIRECTORS OF INSPECTION FINDINGS—Continued

Summary Signature Page

The attached summary of an inspection ofcompleted on , has been prepared to assistmembers of the board of directors of the bank holding company in fulfilling theirfiduciary responsibilities. As a member of the board you are urged to review thissummary and the inspection report as soon as possible.

As an elected member of the holding company’s board of directors, youhave a duty to ensure that the organization is operated in a safe and soundmanner. You may be held liable for losses caused by your failure to superviseproperly the affairs of the holding company. It is suggested that you review oneor more of the publications that explain the functional and legal responsibilities ofa director.

Congress has placed great emphasis on the role of holding companydirectors and officers by passing legislation allowing regulatory authorities to use‘‘cease and desist’’ actions against individuals, to assess civil money penalties,and even to remove an officer or director demonstrating willful or continuingdisregard for safety and soundness considerations.

This summary is the property of the Board of Governors of the FederalReserve System and is furnished to members of the board of directors of thebank holding company inspected for their confidential use. The report is strictlyprivileged and confidential under applicable law, and the Board of Governors hasforbidden its disclosure in any manner without its permission. Under no circum-stances should the holding company, or any of its directors, officers, or employ-ees disclose or make public in any manner the report or any portion thereof. Inreviewing this summary, it should be kept in mind that an inspection is not thesame as an audit report. After reviewing this summary, please sign below andreturn this entire document to the bank holding company.

I have received and read the attached summary of the inspectionof by the Federal Reserve Bank ofconducted as of .

S/director

Date



5000.0.10 SUMMARY TO DIRECTORS OF INSPECTION FINDINGS—Continued

Summary of Inspection Findings



5000.0.11 COMPLETION STANDARDFOR EXAMINATION ANDINSPECTION REPORTS

Safety and soundness examination and inspec-tion reports for community banking organiza-tions issued by the Federal Reserve should becompleted and sent to the supervised institutionwithin a maximum of 60 calendar days follow-ing the ‘‘close date’’ of the examination.16 Thesestandards apply to formal examination and in-spection reports for institutions supervised bythe Federal Reserve with $10 billion or less intotal consolidated assets including state memberbanks, bank holding companies, savings andloan holding companies, Edge Act and agree-ment corporations, U.S. branches and agenciesof foreign banks, and foreign subsidiaries andbranches of U.S. banks.17 For institutions ratedcomposite ‘‘3,’’ ‘‘4,’’ or ‘‘5,’’ Reserve Banks areencouraged to adopt an internal target of 45calendar days from the close date for sendingthe reports.

The ‘‘close date’’ of an on-site examinationand inspection is defined as the last date that theexamination team is physically on-site at theinstitution. For examinations and inspections forwhich all or a portion of the work is performedoff-site, the ‘‘close date’’ is defined as the earlierof the following dates: (1) the date when theanalysis (including loan file review) is com-pleted and ready for the examiner-in-charge’sreview or (2) the date when the preliminary exitmeeting is held with management, which can beconducted either on-site or off-site by confer-ence call.

Further, to ensure that findings are communi-cated to a supervised institution in a timelymanner, Reserve Banks should ensure thatthe duration between the start18 of anexamination/inspection to the completion anddelivery of an examination/inspection reportdoes not exceed 90 days. In cases when reportsare subject to statutory requirements for other

state or federal agency review, such as by theConsumer Financial Protection Bureau(CFPB),19 Reserve Banks may exceed the guide-lines included in SR-13-14 at the discretion ofsenior management. However, deviations fromthese guidelines are expected to be rare. At thediscretion of senior Reserve Bank management,additional exemptions from this 90-day guide-line may be considered for examinations thatare conducted simultaneously on multiple affili-ated banks or examinations of larger complexcommunity banking organizations, such as thosethat have total assets in excess of $2 billion thatrequire additional time on-site to review special-ized or complex business lines.

In addition, as stated in SR-13-14, findingsand conclusions delivered to a supervised insti-tution at the close date and exit meetings forexaminations and inspections must be consis-tently documented in workpapers.20 At a mini-mum, documentation should include

1) a list of attendees at the meetings;2) a description of significant examination and

inspection findings discussed, including pre-liminary ratings; and

3) a summary of the bank management’s viewson the findings and, if applicable, the viewsof the board of directors.

To the extent conclusions in the final reportdiffer from those discussed at the close date andexit meetings, Reserve Bank examiners andsupervisory staff should communicate the rea-sons for the differences to the supervised institu-tion and document these discussions in theirworkpapers. (See SR-13-14.)

16. This completion standard gives recognition to the con-

tinuous monitoring and roll-up supervisory process for larger

organizations having consolidated assets in excess of $10 bil-

lion.

17. Bank and savings and loan holding companies with

total consolidated assets of $1 billion or less are subject to a

separate program that has different requirements for the issu-

ance of reports of inspection.

18. The start date is the date that Reserve Bank examiners

and supervisory staff commence the examination and inspec-

tion work, excluding pre-exam visitations and preparation.

19. See sections 1022, 1024, and 1025 of the Dodd-Frank

Wall Street Reform and Consumer Protection Act. For more

information on the coordination of supervisory activities with

the CFPB, see also the ‘‘Memorandum of Understanding on

Supervisory Coordination’’ and the June 4, 2012, joint press

release at www.federalreserve.gov/newsevents/press/bcreg/

20120604a.htm.

20. In some cases, Reserve Bank examiners or supervisory

staff may conduct a pre-exit meeting with the institution’s

management at the close date of the examination or inspec-

tion. Representatives from the on-site examination or inspec-

tion team may also hold a final exit meeting with the institu-

tion after vetting examination or inspection findings with the

responsible Reserve Bank officer(s). An ‘‘exit meeting’’ is

defined as an examiner’s meeting with the institution’s man-

agement or management and board of directors to communi-

cate preliminary supervisory findings and conclusions.



5000.0.12 COMBINEDEXAMINATION/INSPECTION REPORTFOR BHCs WITH LEAD STATEMEMBER BANKS

Reserve Banks are permitted, under the circum-stances and procedures specified in SR-94-46,to issue a combined report for a BHC and itslead state member bank subsidiary. A lettershould be sent to the qualified holding compa-nies that explains their option of receiving acombined report. The combined report may beissued when—

1. a BHC’s lead bank subsidiary is a state mem-ber bank,21 and

2. the holding company’s board of directorsformally approves, by board resolution, acombined report being released to its leadstate member bank subsidiary.

A combined examination/inspection reportformat is attached to SR-94-46. At a minimum,a combined report will contain all examinationreport pages required by the interagency bankexamination report instructions as well as infor-mation on the parent holding company, its bankand nonbank subsidiaries, and the consolidatedBHC organization. For detailed information onrequired and optional report pages, see section6000 of the Commercial Bank ExaminationManual and sections 5010.0 to 5010.43 of thismanual.

Separate examination and inspection Super-visory Information System (SIS) entries arerequired for each combined report. The com-bined report’s cover page is to be green, mustprovide BHC and Bank RSSD 22 numbers, andmust clearly indicate that the report is a com-bined report.

21. In cases in which the company has more than one state

member bank, separate examination reports should be pre-

pared for all other state member bank subsidiaries.

22. Research, Statistics, Supervision and Regulation, and

Discount and Credit (RSSD)



Procedures for Inspection Report Preparation(Inspection Report References) Section 5010.0

Manual ReportSection PageNo. No. Report Page Title

FR 1225:

5010.2 Cover5010.3 i. Table of Contents5010.4 1. Examiner’s Comments and Matters Requiring Special Board Attention5010.5 2. Scope and Abbreviations of Inspection5010.6 3. Analysis of Financial Factors5010.7 4. Audit Program5010.8 5. Parent Company Comparative Balance Sheet5010.9 6. Parent Company Comparative Statement of Income and Expenses5010.10 7. Summary of Consolidated Classified and Special Mention Assets, and

Other Transfer Risk Problems5010.11 8. Consolidated Comparative Balance Sheet5010.12 9. Comparative Consolidated Statement of Income and Expenses5010.13 Consolidated Capital Structure5010.14 Policies and Supervision5010.15 Violations5010.16 Other Matters5010.17 Classified Assets and Capital Ratios of Subsidiary Banks5010.18 Organization Chart5010.19 History and Structure5010.20 Investment in and Advances to Subsidiaries5010.21 Commercial Paper5010.22 Lines of Credit5010.23 Commercial Paper/Lines of Credit (including questions)5010.24 Contingent Liabilities and Schedule of Balance-Sheet Accounts Not

Detailed Elsewhere (Parent)5010.25 Statement of Changes in Stockholder’s Equity5010.26 Income from Subsidiaries (Fiscal and Interim)5010.27 Cash Flow Statement (Parent) (including questions)1

5010.28 Parent Company Liquidity Position5010.29 Parent Company and Nonbank Assets Subject to Classification5010.30 Bank Subsidiaries5010.31 Nonbank Subsidiaries5010.32 Nonbank Subsidiary Financial Statements5010.33 Fidelity and Other Indemnity Insurance5010.34 (Reserved for future use)5010.35 Other Supervisory Issues5010.36 Extensions of Credit to Bank Holding Company Officials and Their

Related Interests and Investments in and Loans on Stock orObligations of Their Related Interests

5010.37 Interest Rate Sensitivity—Assets and Liabilities5010.38 Treasury Activities/Capital Markets5010.40 A Principal Officers and Directors5010.41 B Condition of the Bank Holding Company5010.42 C Liquidity and Debt Information5010.43 D Administrative and Other Matters

1. This page is required to be included in the inspectionreport for bank holding companies with consolidated assets inexcess of $1 billion or those companies that have substantivefixed charges or debt outstanding, as well as selected others atthe option of the Reserve Bank.

BHC Supervision Manual June 1995Page 1

Manual ReportSection PageNo. No. Report Page Title

FR 1241:

5010.13 Capital Structure (lead bank subsidiary)5020.1 Bank Subsidiary5020.2 Other Supervisory Issues

Procedures for Inspection Report Preparation (Inspection Report References) 5010.0


Procedures for Inspection Report Preparation(General Instructions to FR 1225) Section 5010.1


This section was revised to include a new sub-section regarding community holding compa-nies rated composite ‘4’ or ‘5,’ which discussesthe Federal Reserve’s adoption of a flexible,letter-format report in lieu of the standard,longer-form report. (Refer to SR-13-10.)

The full-scope report is designed to be used asa minimum standard in reporting the results of abank holding company inspection. The reportto be provided to the bank holding companyconsists of a core section and an appen-dix section, the latter consisting of certainrequired financial statements. Supporting sched-ules are added to the core or appendix sec-tions when an area of concern or problem isaddressed. Such schedules provide detailedinformation relevant to a particular activity area.

The core section contains a table of contents,a summary of the scope of the inspection, and apage that presents the examiner’s comments anddiscusses matters requiring special Board atten-tion. The core section should also contain ananalysis of financial factors, including an assess-ment of the quality of assets and a completeanalysis of thebankholdingcompany’sRFI/C(D)components. Specifically, the core section ismade up of the pages described in the followingsubsections.

5010.1.1 CORE SECTION

The inspection report format contains the fol-lowing pages in the core section:

Pageno. Page title

Standard Report Coveri. Table of Contents1. Examiner’s Comments and Matters

Requiring Special Board Attention2. Scope of Inspection and Abbreviations3. Analysis of Financial Factors4. Audit Program

5010.1.2 APPENDIX SECTION

The appendix section will consist of a manda-tory section that presents the following financialstatements for the organization:

1. Parent Company Comparative Balance Sheet2. Parent Company Comparative Statement of

Income and Expenses3. Consolidated Comparative Balance Sheet4. Consolidated Comparative Statement of

Income and Expenses

Bank holding company inspections should beconducted as of the latest fiscal quarter. Allfinancial statements should be presented as ofthe most recent calendar quarter. The dollaramounts are reported in thousands.

Financial statements prepared by the bankholding company may be used to meet theappendix requirements, provided the statementsare prepared in accordance with generallyaccepted accounting principles and are, in theexaminer’s judgment, suitably detailed, clear,and accurate. Any adjustments to any financialstatements made by the examiner should befootnoted. Any other supporting schedules orvisual aids (for example, graphs or charts) canbe included in the core section to communicateor support the examiner’s findings. Percentagesshould be rounded to the nearest tenth of 1 per-cent, unless finer detail is necessary.

5010.1.3 OPTIONAL PAGES TO BEINCLUDED IN THE CORE ORAPPENDIX SECTIONS

Supporting Report Pages for AllInspections

The listed optional supporting report pages areto provide support to the core or appendix sec-tion of the report.1 They will normally be

1. ‘‘Supporting report pages’’ refers to information gath-ered in essentially the same format as when the page is beingprepared by the examiner for inclusion in the report. How-ever, certain supporting information may not provide suffi-cient value to address an area of concern in the report butshould be retained in workpaper form to provide evidentialmatter for the inspection report. For example, the Statementof Changes in Stockholders’ Equity may be summarized in anaudit report or may be included with the company’s auditedannual financial statements. The examiner would review the


sequenced as listed below. If a problem area iscited within the core section, the respectivetyped supporting report pages need to be includedto support the critical comments. The optionalsupporting pages listed are to be included by theexaminer in the report when they convey signifi-cant findings in the core section or when theysupport the discussion in the core section withan appendix page. If appropriate standardizedreport pages do not exist to address a particulararea of concern, the relevant analytical supportcan be included on the ‘‘Other Matters’’ page aspart of the inspection report. Any or all support-ing report pages and workpapers should beavailable to be forwarded immediately to Boardstaff, if requested.

The designated optional supporting reportpages are—

Policies and SupervisionSummary of Consolidated-Classified and

Special-Mention Assets, and OtherTransfer-Risk Problems

Consolidated Capital StructureCapital Structure (lead bank subsidiary)Treasury Activities/Capital MarketsViolationsOther MattersClassified Assets and Capital Ratios of

Subsidiary Banks2

Organization ChartHistory and StructureInvestment in and Advances to SubsidiariesCommercial Paper (Parent)Lines of Credit (Parent)Commercial Paper/Lines of Credit (Parent)

(including questions)Contingent Liabilities and Schedule of

Balance-Sheet Accounts Not DetailedElsewhere (Parent)

Statement of Changes in Stockholders’ EquityIncome from Subsidiaries (Fiscal and

Interim)Cash Flow Statement (Parent) (including

questions)3

Parent Company Liquidity PositionParent Company and Nonbank Assets Subject

to ClassificationBank SubsidiariesNonbank SubsidiariesNonbank Subsidiary Financial StatementsFidelity and Other Indemnity InsuranceOther Supervisory IssuesExtensions of Credit to Bank Holding

Company Officials and Their RelatedInterests and Investments in and Loanson Stock or Obligations of Their RelatedInterests

Interest Rate Sensitivity—Assets andLiabilities

In addition to the FR 1225 report pages, a fewreplacement report pages are designated asFR 1241 pages. The following pages weredesigned to be used for smaller bank holdingcompanies having less than $150 million inassets:

Capital Structure (lead bank subsidiary)Bank SubsidiaryOther Supervisory Issues

5010.1.4 CONFIDENTIAL SECTIONFOR ALL INSPECTION REPORTS

The confidential section for bank holding com-pany inspection reports is reserved for confiden-tial comments that will be limited to staff of theFederal Reserve System. The confidential sec-tion of the inspection report will consist of thefollowing pages:

Page Page title

A. Principal Officers and DirectorsB. Condition of the Bank Holding CompanyC. Liquidity and Debt InformationD. Administrative and Other Matters

Discussion in the confidential section shouldbe kept to a minimum. As much information aspossible should be incorporated in other sec-tions of the report that are available to the bankholding company. The complete analysis of theholding company organization (that is, bankholding company RFI/C(D) components) is toappear in the front of the report on the ‘‘Analysisof Financial Factors’’ page. The informationreported on the confidential pages should beprinted on yellow paper.

statement to conclude whether the information is reliable andcomplete and that it agrees with the respective balancesreported in the inspection report. A photocopy of the informa-tion could be used to provide evidence of the examiner’sreview, including any related notes.

2. Included if assets are classified or written up as required.3. This page is required to be included in the inspection

report for bank holding companies with consolidated assets inexcess of $1 billion or those companies that have substantivefixed charges or debt outstanding, as well as select otherorganizations at the option of the Reserve Bank.

Procedures for Inspection Report Preparation (General Instructions to FR 1225) 5010.1


5010.1.5 GENERAL COMMENTS FORALL REPORT PAGES

The specified format of the report pages shouldbe used whenever possible, but when flexibilityis necessary, additions and limited deletions canbe made. Examiners are required to include inthe core section only a relatively small numberof report pages and, in the appendix section,only financial statements for the organization.These pages will normally be sequenced aslisted previously. At the same time, examinershave the discretion to decide whether to includeother standard pages in a report and whether toinclude them in the core or the appendix sec-tions. This choice should be made on the basisof whether the content of the page will highlighta significant inspection finding (in which case,the finding should be included in the core sec-tion) or whether the content will provide sup-port for comments offered in the core section (inwhich case, the finding should ordinarily beplaced in the appendix section).4 Given the dis-cretion being accorded examiners to tailor reportsto accurately convey inspection findings, reportsprepared for large and small companies alikeshould be prepared to achieve that objective.

Another important objective is to avoidexcessive length in the report, particularly in theopen section. Including comments that may pro-vide directors and management with informa-tion of marginal importance or including infor-mation that repeats findings and conclusionsfrom different pages of the report diverts thereader’s attention from the areas of concern thatmust be corrected.5 In addition, reports shouldbe understandable and readable. A further objec-tive is for examiners to determine precisely whatshould be conveyed in their reports to boards ofdirectors and management and then to presentthat information in clear and concise language.

All reports are to be on 81⁄2- by 11-inch paperand bound on the left margin. Responses toquestions should be provided below the lastquestion in the section or, if necessary, on anadditional page. Do not repeat the question inthe response. Indicate the question number inthe response.

All credit-extending nonbank subsidiaries willbe subject to asset classification. The examinershould recommend that management maintain a

loan-loss reserve that is adequate tooffset 100per-cent of assets classified loss and still have abalance sufficient to absorb normal unidentified,unanticipated future losses from operations. Theexaminer and BHC management should con-sider the guidance provided in section 2065.2 onthe determination of an adequate level for theallowance for loan and lease losses. Examinersshould also review the organization’s loan-losshistory to determine trends and to help evaluatethe adequacy of the existing reserve.

5010.1.6 FORMAT FORSAFETY-AND-SOUNDNESS REPORTSOF INSPECTION FOR COMMUNITYHOLDING COMPANIES RATEDCOMPOSITE ‘‘4’’ OR ‘‘5’’

The Federal Reserve has adopted a flexible,letter-format report in lieu of the standard, longer-form report for communicating the findings ofon-site inspections of community banking orga-nizations6 that result in composite supervisoryratings of ‘‘4’’ or ‘‘5.’’ Examiners may use aletter-format report for inspections of commu-nity banking organizations rated ‘‘4’’ or ‘‘5,’’provided all mandatory and any applicable op-tional information is in the report. Refer toSR-13-10.

Examiners are to continue to follow the reportguidance provided in SR-01-19, ‘‘Reports ofExamination of Community Banking Organiza-tions,’’ for full-scope examinations of commu-nity banking organizations rated ‘‘1,’’ ‘‘2,’’ or‘‘3.’’7 That guidance provides for some flexibil-ity in the structuring of the examination reportsso long as all mandatory and applicable optionalcontent is covered. Examiners have flexibility inwriting the narrative portion of reports.

5010.1.6.1 Letter-Format Report ofInspection Content

Similarly, a letter-format report of inspectionprepared in support of on-site bank and savingsand loan holding company8 inspections that

4. If a problem area is cited within the core section, inclu-sion of the listed and typed supporting report pages will benecessary to support the critical comments.

5. While brevity is an important goal, examiners shouldnote that, when an enforcement action is contemplated, theinspection report must fully support the proposed provisionsof the enforcement document.

6. Community banking organizations are those bank hold-ing companies and savings and loan holding companies withassets of $10 billion or less.

7. The flexible letter-format may also be used on targetexaminations of 3-rated community banking organizations, asapplicable.

8. See SR-11-11 /CA-11-5, ‘‘Supervision of Savings and



result in a rating of ‘‘4’’ or ‘‘5’’ should betailored to each company and should fully addressthe areas typically covered in the core section ofthe standard inspection report format.9 Theseareas include

• scope of the inspection,• matters requiring board attention,• analysis of consolidated, parent company, non-

bank and bank subsidiary financial factors,and

• conclusions regarding the internal and exter-nal audit program.

In addition, any applicable areas that aredescribed as optional pages in the standardreport of inspection instructions and are neces-sary to support examiners’ findings should beincluded.

5010.1.6.2 Communication ofSupervisory Findings

The letter-format reports must notify a bankingorganization and its board of the organization’ssupervisory rating and the confidential nature ofthe letter. The letter-format report should alsoset forth the deadline by which the organizationmust reply to the Reserve Bank, including theorganization’s plans to address any matters re-quiring immediate attention or matters requiringattention that are noted in the report.

Loan Holding Companies (SLHCs),’’and SR-13-8 /CA-13-5,‘‘Extension of the Use of Indicative Ratings for Savings andLoan Holding Companies,’’ concerning indicative ratings ofSLHCs.

9. See section 5010.0, ‘‘Procedures for Inspection ReportPreparation (Inspection Report References),’’ which is a list-ing of report pages and instructions available for inclusion ina report.



Procedures for Inspection Report Preparation(Cover) Section 5010.2

The official name, location, and the RSSD IDnumber of the bank holding company beinginspected is to be provided. Also provide thedates the inspection commenced and concludedas well as the inspection date. The coverincludes a notice that its content is strictlyconfidential.

The cover must include the official seal of theBoard of Governors of the Federal Reserve Sys-

tem. It may also include the names and seals ofthe Reserve Bank and the state bank supervisoryagency that participated in the inspection as partof a cooperative inspection agreement. The covermust also include a reference to the Board’s rulepertaining to confidential supervisory informa-tion made available to supervised financial insti-tutions and financial institution supervisory agen-cies, which is 12 C.F.R. 261.20.


FR 1225–Cover

(Revised 7/08)

REPORT OFBANK HOLDING COMPANY

INSPECTION

Name:

Location:

RSSD ID Number:

Inspection Commenced:

Inspection Concluded:

Inspection Date:

THIS REPORT OF INSPECTION IS STRICTLY CONFIDENTIAL

This report has been prepared by an examiner selected or approved

by the Board of Governors of the Federal Reserve System. The report

is the property of the Board of Governors and is furnished to directors

and management for their confidential use. The report is strictly

privileged and confidential under applicable law, and the Board of

Governors has forbidden its disclosure in any manner without its

permission, except in limited circumstances specified in the law (12

USC 1817(a) and 1831m) and in the regulations of the Board of

Governors (12 CFR 261.20). Under no circumstances should the

directors, officers, employees, trustees or independent auditors dis-

close or make public this report or any portion thereof except in

accordance with applicable law and the regulations of the Board of

Governors. Any unauthorized disclosure of the report may subject

the person or persons disclosing or receiving such information to the

penalties of Section 641 of the U.S. Criminal Code (18 USC 641).

Each director or trustee, in keeping with his or her responsibilities,

should become fully informed regarding the contents of this report.

In making this review, it should be noted that this report is not an

audit, and should not be considered as such.

FEDERAL RESERVE BANK OF

Procedures for Inspection Report Preparation (Cover) 5010.2


Procedures for Inspection Report Preparation(Page i—Table of Contents) Section 5010.3

The table of contents indicates the report pagesincluded in the report and the sequential num-bering of pages within the report. All pre-numbered Core Section inspection report pagesare included in each table of contents along withany other supporting report pages. Supportingreport pages will be numbered sequentially inFR 1225, starting with page number ‘‘11’’.If included, individual subsidiaries may be

listed with their respective page numbers, orthey may be grouped such as ‘‘Nonbank Subsid-iaries’’ with a page reference such as ‘‘26–26c’’to indicate the number of such subsidiaries. Atthe bottom of the page, insert the commence-ment date of the previous inspection followedby the date of the financial statements inparentheses.

BHC Supervision Manual December 1992Page 1

Procedures for Inspection Report Preparation (Core Page 1—Examiner’sComments; Matters Requiring Special Board Attention) Section 5010.4


Effective July 2013, this section was revised toincorporate and reference the revised guidancefound in SR-13-13/CA-13-10,‘‘Supervisory Con-siderations for the Communication of Supervi-sory Findings,’’ which may involve the prepara-tion of this inspection report page or section(continuous flow reporting). To improve the con-sistency and clarity of written communications,Federal Reserve staff is to use the prescribedstandardized terminology and definitions, to dif-ferentiate among (1) Matters Requiring Immedi-ateAttention,and (2)MattersRequiringAttention.

5010.4.1 SUMMARY OF EXAMINER’SFINDINGS

The report page or section (continuous flowreporting) is to include a summary of the exam-iner’s findings relating to—

1. violations,2. criticisms,3. special comments,4. matters requiring special board attention, and5. recommendations.

In addition, it will include the RFI/C(D) compo-nent ratings (see SR-04-18 and section4070.0.2.3). Component ratings for the currentinspection and the two prior inspections will bereported at the top of the page, as illustratedbelow (see SR-96-26).

Bank Holding Company RFI/C(D) RatingSystem

Inspectionrating for:

Currentinspection

Priorinspection

Priorinspection

Date: 09-03-X7 10-19-X6 8-22-X5

[R]iskman-

agement 2 2 2

[F]inancialcondition 2

[I]mpact 2

[C]ompositerating 2 2 2

[D]epositoryinstitu-

tion(s) 2

This listing should be followed by the uni-form definition of the assigned ratings. The uni-form definitions of the component and subcom-ponent ratings assigned need not be included inreports; however, they should be made availableto management and directors upon request.

When a combined examination/inspectionreport format is used, similar matrices for eachcomponent and subcomponent rating assignedshould be included in the report. Numeric rat-ings should also be included on the pages ofreports that discuss findings related to the com-ponents and subcomponents.

The purpose of the report page or section is tocommunicate to the holding company’s board ofdirectors and its management the examiner’sviews on the overall condition of the company,significant problems that have been identified inthe inspection, and actions the company’s boardof directors and management need to take tocorrect the company’s problems and strengthenits condition. The comments should summarizeonly material concerns, criticisms, analyses, orviolations, referring the reader to an appropriateoptional report page for additional detail. Theuse of subcaptions to identify and separate theareas subject to comment is encouraged.

The comments are generally written on anexception basis. Avoid laudatory comments. Theexaminer may, however, comment on improve-ments initiated by management.

Items suitable for discussion within the


‘‘Examiner’s Comments and Matters RequiringSpecial Board Attention’’ report page include,but are not limited to—

1. policies and supervision of subsidiaries,2. earnings,3. cash flow or liquidity,4. level of classified assets,5. adequacy of capital,6. borrowings,7. condition of subsidiaries,8. violations of the Bank Holding Company

Act and Regulation Y,9. violations of section 23A or section 23B of

the Federal Reserve Act and the Board’sRegulation W and other statutes,

10. fees and dividends being paid to the parentby subsidiaries,

11. audit function, and12. information that serves as an alternative to

issuing a separate Summary to Directors ofInspection Findings.

Any substantive recommendations containedelsewhere in the inspection report should bepresented briefly in the core page ‘‘Examiner’sComments and Matters Requiring Special BoardAttention.’’ A summary comment relative to theadequacy of the BHC’s oversight of its subsidi-aries may be provided. Any comments that referspecifically or indirectly to details presentedelsewhere in the report should be consistentwith that information. All inspection report pagesentitled ‘‘Examiner’s Comments and MattersRequiring Special Board Attention’’ will bewritten to accomplish these objectives: give anoverall assessment of the condition of the com-pany, discuss significant problems, and specifyneeded corrective action. See the subsection5000.0.9.3 on the ‘‘Communication of Supervi-sory Findings.’’ To achieve consistency and clar-ity in written communications, Federal Reservestaff is to use prescribed standardized terminol-

ogy and definitions, to differentiate among(1) Matters Requiring Immediate Attention(MRIAs), and (2) Matters Requiring Attention(MRAs). (See also SR-13-13/CA-13-10.)

The Matters Requiring Board Attention reportpage or section should label the comments thereinas being either MRIAs or MRAs. As a generalrule, examiners should expect fewer MRIAs orMRAs in stronger organizations than in weakerones. However, the presence of MRIAs or MRAsdoes not preclude a strong or satisfactory rating.For example, while correction of any violationof law is essential, the presence of inadvertentviolations that do not expose the organization tosignificant risk (such as insufficient FederalReserve stock shortly after a capital injection ora technical exception) would not preclude astrong rating if all other factors supported thatrating. Conversely, the presence of a large num-ber of inspection findings that give rise to MRIAsor MRAs that represent a threat to the safety andsoundness of the organization or that signify anelevated consumer compliance risk exposurewould generally preclude a satisfactory ratingand may require consideration of an enforce-ment action. For institutions between these ex-tremes, examiners should determine the impactof MRIAs and MRAs on ratings and assess theneed for an enforcement action by consideringthe severity of these weaknesses and their rela-tive importance in light of all the factors influ-encing the assessment of the organization. TheFederal Reserve examiner’s use of this commonterminology is designed to enhance the focusand efficiency of communicating supervisoryexpectations and overseeing their implementa-tion.

In cases of composite ratings of 3, 4, and 5,the text of this page will also be used for thesummary report. The signature of the examiner-in-charge should appear below the comments.

Procedures for Inspection Report Preparation (Core Page 1—Examiner’s Comments; Matters Requiring Special Board Attention) 5010.4


Procedures for Inspection Report Preparation (Core Page 2—Scope of Inspection and Abbreviations) Section 5010.5

The scope of the inspection describes generallythe coverage parameters of the inspection. Whendetermining the scope of the inspection, theexaminer must consider the Board’s policy state-ment on the examination and inspection of statemember banks and bank holding companies(October 7, 1985, S-2493). See sections 5000.0.7to 5000.0.9.

The scope generally includes a presentationof the following:

• the purpose for the inspection• which subsidiaries were inspected on-site and

which were done from the parent’s location• the depth of inspection coverage1

• an identification of the peer group(s) and thebank holding companies used for comparisonwith thebankholdingcompanybeing inspected

• the source of information regarding theadministration of policies and the supervisionover subsidiaries

• comments as to the extent examiners relied oninternal classification systems or classifica-tions of other bank regulatory agencies

• the senior officers with whom the overallinspection findings were discussed

• the sources upon which the examiner basedhis conclusions and/or recommendations

The opening paragraph of the scope shouldinclude authority under which the inspectionwas conducted (section 5(c) of the Bank Hold-ing Company Act of 1956, as amended), andmay include the dates the inspection com-menced and closed, and the date(s) of financialstatements used as the basis for the inspection.

In brief paragraphs, the examiner should alsoindicate what minute books were read, whichnonbank subsidiaries were examined, what sizeloans were reviewed in credit-extending subsid-iaries, with whom corporate policies were dis-cussed, and to what extent banking subsidiarieswere reviewed.

The report page will also include explana-tions of abbreviations used in the report. Gener-ally, abbreviations familiar to the BHC shouldbe used. However, efforts should be made toincorporate at least a part of the name into theabbreviation as opposed to relying strictly oninitials which tend to become confusing. Also, itis desirable that abbreviations of bank subsidi-aries include the word ‘‘bank’’ to distinguishthem from the parent company and/or nonbanksubsidiaries with similar names.

1. This includes a statement as to the percentage of loansreviewed in each credit-extending nonbank subsidiary, with-out consideration to statistical sampling or any form ofextrapolation. The ratio will include loans actually reviewedby Federal Reserve examiners divided by total loans in eachnonbank subsidiary. When different categories of loans arehoused in a nonbank subsidiary, it may be relevant to providea breakdown by percentage of loans reviewed for each cate-gory of loans, further segregated by current and delinquentcategories. See SR-90-26.


Procedures for Inspection Report Preparation(Core Page 3—Analysis of Financial Factors) Section 5010.6

The ‘‘Analysis of Financial Factors’’ page pre-sents a complete financial analysis of the com-ponents (nonconfidential bank holding companyRFI/C(D) comments) of the holdingcompany—parent, bank subsidiaries, nonbanksubsidiaries, and consolidated (as applicable).The page is supported and followed by parentand consolidated financial statements, informa-tion on consolidated asset quality, and consoli-dated capital ratios. See the 4000 sections forspecific information on analyzing financialfactors.

The analysis serves the informational needsof both senior management of the holding com-pany and the supervisory authorities by present-ing positive and negative factors affecting thecondition of the major components and the con-solidated company. The analysis helps to iden-tify problems or potential problems and mea-sures the holding company’s ability to be asource of financial strength to its subsidiaries.Therefore, the ‘‘Analysis of Financial Factors’’page is considered one of the most importantparts of the report.

The information for the analysis is availablefrom discussions with management; financial-statement data within the report; published state-ments, such as the SEC Form 10-K; and unpub-lished information that is sometimes availablefrom the officer in charge of finance, the trea-surer, or the comptroller.

5010.6.1 PARENT COMPANY

For the parent company, present an analysis ofeach of the financial factors in narrative form.Tables may be used to support the narrativeanalysis.

The analysis of the parent should include adiscussion of the following: debt structure (withindications of how debt proceeds are used),debt/equity ratios (with comparisons to previousyears), sufficiency of cash flow, sources andstability of income, interest coverage, dividend-payout ratios, classifications of parent companyassets, changes in dividend policy, comparisonsof the actual levels and results to the respectivepeer group, and a conclusion about whether theholding company is considered to be a source offinancial strength to its subsidiaries.

Within the analysis of the parent, the exam-iner should also include comments on whetherdividend payments to stockholders have beenreasonable, considering the parent’s leveragedposition, debt servicing, cash flow, and capital

needs. The examiner should describe how divi-dend policy is formulated and what the policyis. See the Board’s policy on cash-dividendpayments in section 2020.5.1.

Dividends paid by subsidiaries, both bankand nonbank, to the parent company are themeans by which a cash return is realized on theinvestment in subsidiaries, thus enabling theparent to pay dividends to its shareholders andto meet its debt-service requirements and otherobligations. The examiner will need to concludeand discuss in the report whether dividendassessments of any subsidiary are excessive.The examiner can draw conclusions aboutexcessive dividends from discussions with man-agement about dividend policies and from infor-mation that may be contained elsewhere in thereport, such as—

1. peer-group averages,2. the condition and capitalization of each

subsidiary,3. the type of subsidiary (credit-extending sub-

sidiaries need more capitalization than ser-vice subsidiaries),

4. the bank holding company’s reasons forextracting proportionately more or less fromeach subsidiary,

5. past policy and payments, and6. compliance with regulatory policy and

guidelines.

5010.6.2 BANK SUBSIDIARIES

A summary write-up should be prepared foreach bank subsidiary comprising 10 or morepercent of the bank holding company’s consoli-dated assets or for bank subsidiaries evidencingmaterial financial deficiencies or other charac-teristics that should be brought to the attentionof the bank holding company’s board of direc-tors.1 These write-ups should summarize note-worthy examiner comments from the open sec-tion of the latest reports of examination of thesubsidiary bank(s) and should comment on anyactions taken to correct significant weaknessesor violations. The summary should also includean analysis of the level and trend of earnings

1. In determining the subsidiary banks that require write-ups, examiners should be mindful of the effect that the cross-guarantee provisions of FIRREA can have on nontroubledbank subsidiaries.


and classified assets and of the adequacy ofcapital (for example, tier 1, total capital, andleverage ratios).

For the other bank subsidiaries, the examinershould provide an overall summary that includesthe number of subsidiaries, by composite rating;an overall analysis of the level and trend ofearnings; classified assets; capital (that is, capi-tal adequacy); and any other financial-analysisindicators.

5010.6.3 NONBANK SUBSIDIARIES

The examiner should present an analysis of thecondition and an analysis of the risk assessmentof nonbank subsidiaries. The analyses presentedwithin this report page should support the Icomponent of the RFI/C(D) rating without mak-ing the reader refer to other report pages.

Because of the number of nonbank subsidi-aries a bank holding company may have, it maynot be possible or reasonable to discuss thecondition, risk assessment, and impact of eachnonbank subsidiary on the BHC’s banking andother depository institution subsidiaries. Theanalysis presented on this page should, there-fore, be based on the combined performance ofthe nonbanking activities. However, if the com-pany has significant or troubled credit-extendingnonbank subsidiaries, individual analyses of eachof these subsidiaries should be included.

The analysis of nonbank subsidiaries shouldinclude information on these subsidiaries’ fi nan-cial condition, including the level, trend, andquality of earnings; composition of the loanportfolio; level and trend of classified, past-due,and nonperforming assets; and adequacy of theloan-loss reserve, capital, financial managementof debt-to-equity ratios, and funds management.The combined risk assessment should addressthe funding risk, earnings exposure, operationalrisks, asset quality, capital adequacy, contingentliabilities and other off-balance-sheet exposures,management information systems and controls,transactions with affiliates, growth in assets, andthe quality of oversight provided by the manage-ment of the bank holding company and nonbanksubsidiary. (See SR-93-19.) Conclude with ageneral statement on the condition and overallrisk assessment of the nonbank subsidiaries.

5010.6.4 CONSOLIDATED

Present an analysis of the consolidated balancesheet, including levels and trends of debt; theadequacy of capital (tier 1, total capital, andleverage ratios); growth in loans, assets, andliabilities; and peer-group comparisons. Alsopresent an analysis of the consolidated earningstrends, asset quality, and the adequacy of valua-tion reserves. Such analysis should include com-ments on performance results based on net inter-est margins, return on average assets, return onaverage equity, factors influencing earnings, andpeer-group comparisons. Include a statement onthe condition of the company, including its reli-ance on interest-sensitive funds and its ability toborrow additional short- or long-term funds orto issue new capital stock.

5010.6.5 GENERAL INSTRUCTIONS

The examiner should make certain that—

1. the figures and comments related to the par-ent are consistent with the various parentcompany financial statements;

2. the analysis of bank subsidiaries is consistentwith data included on the ‘‘ Bank Subsidi-aries’’ and the ‘‘ Classified Assets and CapitalRatios of Subsidiary Banks’’ pages;

3. the analysis of nonbank subsidiaries is con-sistent with data on the ‘‘ Nonbank Subsidi-ary,’’ ‘‘ Nonbank Subsidiary Financial State-ments,’’ and ‘‘ Nonbank Company AssetsSubject to Classification’’ report pages;

4. the consolidated analysis is consistent withinformation presented throughout the report,primarily with the consolidated financial state-ments and the unaffiliated borrowings on the‘‘ Liquidity and Debt Information’’ confiden-tial page C;

5. all names are the same as those on the‘‘ Scope and Abbreviations’’ core page 2, the‘‘ Organization Chart’’ page, and other reportpages and tables; and

6. all debt figures agree with the unaffiliatedborrowings of the ‘‘ Liquidity and Debt Infor-mation’’ confidential page C.

Procedures for Inspection Report Preparation (Core Page 3—Analysis of Financial Factors) 5010.6


Procedures for Inspection Report Preparation(Core Page 4—Audit Program) Section 5010.7

This page presents the adequacy of the internalaudit program, the effectiveness and quality ofthe overall audit program, and the BHC’s rela-tionship with its external auditor. See section2060.1 for related information.

The examiner’s review of the BHC’s internalaudit program will establish whether the pro-gram is adequate to effectively audit the BHC’soperations regularly. It will also help determinewhether the audit function provides the directorswith sufficient information on the corporation’sconditions and operations. The review will allowthe examiner to determine the external auditor’srole and relationship with the internal auditor.

The information on the audit program is avail-able from the auditor, audit committee, the auditstaff, and the internal audit reports. Informationon the external auditor should be available fromthe management letter, the internal auditor, andthe audit committee minutes.

Comments on the internal audit program mayinclude an appraisal of the effectiveness of theprogram at meeting the frequency guidelines forauditing subsidiaries, information on the recipi-ents of audit reports, and the party to whom theauditor is responsible. The examiner’s com-ments on the external auditor may include thename of the firm, the scope of the audit, thedegree of interface with the internal auditors,any ‘‘qualified opinion’’ submitted by the inde-pendent auditors in certifying the most recentyears’ financial statements, and any pertinentcomments regarding relations with the directors’audit committee. The comments should con-clude with an appraisal of the quality and effec-tiveness of the overall audit program.

The following is a list of suggested questionsfor the internal auditor in developing commentsfor this section:

5010.7.1 INTERNAL AUDITOR

1. How is the audit staff organized? To whomdo they report?

2. What are the educational backgrounds andexperience of the staff?

3. What is the size of the staff and the lengthof time that most of the staff have been in audit?Is the staff large enough to meet the functionalrequirements of the job under the guidance andleadership of the auditor? Is the departmentused as a training ground for other departments?

4. What is the schedule for the audit of bank-ing and nonbanking subsidiaries and for particu-lar departments therein?

5. Are copies of audit programs and reportsavailable for the Federal Reserve’s review?

6. Are audit programs coordinated with andworkpapers reviewed by outside accountants?

7. Are qualified EDP auditors on the staff?Althoughmore information isobtained through

interviews with the auditor, as opposed toreceiving responses to written questions, thesequestions represent a general framework onwhich the conversation may develop.

5010.7.2 EXTERNAL AUDITORS

1. Have independent public accountantsaudited the bank holding company’s consoli-dated financial statements for the FR Y-6 annualreport if the BHC’s consolidated assets exceed$500 million or more?

2. Does the external auditor work with theinternal auditor in establishing the scope andfrequency of audits?

3. In addition to performing some of thebasic functions of the internal auditor, did theexternal auditor review the internal auditing pro-gram to assess its scope and adequacy?

4. When the BHC does not have sufficientearnings to employ an internal audit staff, yetthe complexities of the organization necessitatethe need for an audit, has an external auditorbeen engaged for this purpose?

5. Does the external auditor have the abilityto conduct surprise audits and sufficient flexibil-ity for establishing the scope of the audits and inmaking recommendations on internal controlchanges?

6. Have the BHC’s insured depository insti-tutions furnished their independent auditors withthe required call reports, memorandums ofunderstanding, written agreements, and otherdesignated supervisory information required bysection 7(a) of the FDIC Act (see section2060.1.1)?

The comments detailed on this report must beconsistent with summarized comments on thePolicies and Supervision page and the OtherSupervisory Issues page (item 8). Any notewor-thy deficiencies in the audit program may beincluded on the Examiner’s Comments and Mat-ters Requiring Special Board Attention, corepage 1, at the examiner’s discretion.


Procedures for Inspection Report Preparation (Appendix Page 5—Parent Company Comparative Balance Sheet)Section 5010.8

The comparative balance sheet presents the com-position of the parent company’s balance sheetas to assets, liabilities, and capital and should berepresentative of the functions and activities ofthe company. The comparative balance sheetallows the reader to compare changes in accountson a line-by-line basis from one period to an-other. It aids and gives written support to thefinancial analysis.The parent company balance sheets may be

requested in the officer’s questionnaire or maybe obtained from the accounting department.Fiscal statements can also be found in the mostrecent SEC Form 10-K and the FR Y-6 andY-9 LP.The detail on the most recent balance sheet

accounts should be reconciled to subsidiaryledgers or a detailed trial balance. The state-ments should be adjusted to reflect generallyaccepted accounting principles. Adjustmentsshould be footnoted. The statements should bepresented in four columns with two interims andtwo fiscals except for year-end inspections whenonly two fiscals are required. The presentationshould be (from left to right) current interimperiod, prior interim period, current fiscal, andprior fiscal. The statement may be formattedlike the FR Y-9 LP.The parent company comparative balance

sheet should have specific detail or schedulessupporting balance-sheet accounts and amountsas follows.1. Show investments in and advances to

subsidiaries as separate accounts, with separatesubtotals for banks and nonbanks.2. Provide supplementary schedules on the

‘‘Contingent Liabilities and Schedule ofBalance-Sheet Accounts Not Detailed Else-where (Parent)’’ page showing a breakdown ofaccounts not detailed in the report, such as mar-ketable securities, CDs, and other investmentswhenconsideredappropriate orwhen theaccountexceeds 25 percent of total footings.2. Break out goodwill and other intangibles

from ‘‘Other Assets’’ or ‘‘Investments in Sub-sidiaries,’’ and detail on the ‘‘Contingent Liabili-ties and Schedule of Balance-Sheet AccountsNot Detailed Elsewhere (Parent)’’ page.3. Break out ‘‘other real estate owned’’ from

‘‘Other Assets,’’ and detail on the ‘‘ContingentLiabilities and Schedule of Balance-SheetAccounts Not Detailed Elsewhere (Parent)’’page.

4. ‘‘Other Assets’’ and ‘‘Other Liabilities’’should be broken down and detailed on the‘‘Contingent Liabilities and Schedule ofBalance-Sheet Accounts Not Detailed Else-where (Parent)’’ page if any item in the accountis considered significant.5. Mandatory convertible debt instruments

should be shown separate from subordinatedcapital notes and debentures and detailed on theunaffiliated borrowings on the ‘‘Liquidity andDebt Information’’ confidential page ‘‘C.’’6. Stockholder’s equity should contain the

following categories, as applicable: commonstock, perpetual preferred stock, limited life pre-ferred stock, capital surplus, retained earnings(undivided profits), reserves for contingenciesand other capital reserves. Limited life preferredstock should be shown separate from stockhold-ers’ equity. For all capital stock issues indicatein a footnote the par value and the number ofsharesauthorizedandoutstanding foreachperiod.If there is more than one type of stock, indicatethe voting rights, preferential dividend rights,and conversion rights, where applicable.The examiner should make certain that the—1. investments in subsidiaries equals the

investments detailed on the ‘‘Investment in andAdvances to Subsidiaries’’ page,2. advances to subsidiaries equals advances

detailed on the ‘‘Investment in and Advances toSubsidiaries’’ page,3. commercial paper total equals the com-

mercial paper totals detailed on the CommercialPaper (Parent) page and the ‘‘Liquidity and DebtInformation’’ confidential page ‘‘C,’’4. totalofshort-termand long-termdebtequals

the same totals for unaffiliated borrowings onthe ‘‘Liquidity and Debt Information’’ confiden-tial page ‘‘C,’’5. ‘‘Other Assets’’ and any other accounts

detailedon the ‘‘ContingentLiabilitiesandSched-ule of Balance-Sheet Accounts Not DetailedElsewhere (Parent)’’ page reconciles to the cor-responding items on the page (the ‘‘ContingentLiabilities and Schedule of Balance-SheetAccounts Not Detailed Elsewhere (Parent)’’page may show only significant items in thecategories without totals), and6. parent’s equity accounts equal those on

the ‘‘Statement of Changes in Stockholder’sEquity’’ and on the ‘‘Consolidated ComparativeBalance Sheet’’ page.


Inspection Report Preparation (Appendix Page 6—ComparativeStatement of Income and Expenses (Parent)) Section 5010.9

The comparative income statement presentsincome of the parent available to satisfy ex-pense requirements. It also can be an indicatorof the structure of services and activities pro-vided at the parent level.The purpose of the statement is to

determine—

• the levels and types of intercompany income,• that the sources of external income are consis-tent with authorized activities,

• the changes in corporate policy via changes inintercompany income, and

• that the types and levels of the parent’sexpenses are appropriate for the parent’sactivities.

All statements of income and expenses shouldbe requested in the officer’s questionnaire. Fiscalinformation can be found in the holding compa-ny’s annual report to shareholders, FR Y-6,and/or SEC Form 10-K. Interim results are gen-erally requested from the corporation’s account-ing or comptroller department.Two interims and two fiscals should be pre-

sented unless the inspection is as of fiscal year-end, when only two fiscals are required. Thereport page should show all significant catego-ries of operating income and expense. A supple-mentary schedule should be provided breakingdown any category of other income or expense

that equals or exceeds 25 percent of its respec-tive total.If possible, insurance commission income is

to be shown net of premiums collected, and,when available, commissions should be brokendown to show those directly related to creditextended within the bank holding companyorganization. The various income componentsfrom internal and external sources need to bedetailed separately to allow cross checking withthe ‘‘Income from Subsidiaries’’ pages.Equity in undistributed earnings of subsidi-

aries should be listed below net operating incometo derive ‘‘net income.’’ Where applicable, showseparately the equity in undistributed earningsof subsidiary banks and nonbanks.The examiner should make certain that—

• dividends, interest, management, and servicefees and equity in undistributed earnings ofsubsidiaries equal the totals on the ‘‘Incomefrom Subsidiaries’’ pages and

• net income equals the amounts reported onthe ‘‘Statement of Changes in Stockholders’Equity (Parent)’’ and ‘‘Comparative State-ment of Income and Expense (Consolidated)’’pages. In those cases where the figures do notagree, the difference should should be foot-noted and detail should be provided for thedifference.


Inspection Report Preparation (Appendix Page 7—ConsolidatedClassified & Special-Mention Assets) Section 5010.10

Classified assets and off-balance-sheet transac-tions are summarized by organizational level,whether at the parent company, banking subsid-iaries, or nonbank subsidiaries, and comparedwith valuation reserves established to absorbknown and potential losses. For banking subsid-iaries, the classified items are derived from themost recent federal and state examinations forthe individual bank subsidiaries.

Report the classification, reserve, noncurrent,and loan/lease-level ratios as detailed on thereport page. The ratio of consolidated classifiedassets to tier 1 capital should be included. The‘‘continued’’ page should contain commentsregarding the sources of information and meth-ods used by the examiner for determining con-solidated asset quality.

For the parent company, the classificationtotals should be broken down into the majorasset categories (for example, ‘‘Loans,’’ ‘‘OtherReal Estate,’’ and ‘‘Other Assets’’). The leadbank subsidiary’s classification should be bro-ken out along with any other bank that hasclassified assets representing 20 percent or moreof total consolidated classified assets. The assetsof a nonbank credit-extending subsidiary shouldbe broken out if the nonbank subsidiary hadclassifications greater than 5 percent of consoli-dated classified assets or other large problemcredits or classified assets.

There may be occasions when one or moresubsidiary banks may not have been subject toan asset-quality review by a bank supervisoryagency within the last two years, which impedesthe bank holding company examiner frommaking an accurate judgment on the com-pany’s asset quality. The examiner may acceptthe internal criticized assets of the bank holdingcompany only if the internal system was testedby the examiner and deemed to be valid. Gen-erally, such testings should be conducted asnecessary in order to make an informed judg-ment on consolidated asset quality. Commentsshould be provided about whether the examinerwas able to rely on information depicting assetquality or that such information was notavailable.

Classification totals of off-balance-sheet trans-actions, if any, should be broken out separatelyand summarized for each level of the organiza-tion (parent company, bank subsidiaries, andnonbank subsidiaries).

The source for reporting classified asset totalsshould be stated (FRB, OCC, FDIC, internaloperations, or internal audit review) along withthe respective as-of date. As an alternative, clas-

sified asset totals may be listed for individualbank and nonbank subsidiaries. The purpose ofpreparing this summary is to—

1. determine the amount and degree of risk andpotential loss associated with on- and off-balance-sheet transactions and activities (Thisis accomplished by summarizing the amountof classified assets and losses and otherpotential losses that may result from on- andoff-balance-sheet activities, including off-balance-sheet risk at the consolidated orga-nizational level, as well as the generalcomposition of such potential losses at theparent company, bank subsidiaries, or non-bank subsidiaries);

2. analyze ratio trends in consolidated assetquality for the current and previous twoinspections;

3. determine the extent to which such classifiedassets and off-balance-sheet risk influencethe overall financial condition of the consoli-dated organization;

4. determine the adequacy of reserves (Thepage alerts management about the need forincreasing the valuation reserve accounts);

5. disclose problem assets and off-balance-sheettransactions requiring management’sattention;

6. show in summary form all classifications andcriticisms assigned by examiners in deter-mining asset quality and the adequacy ofrespective reserves; and

7. aid in the identification of existing and poten-tial problems in the banks that may have anoverall effect on the bank holding company.

The information for the report page is derivedfrom two other completed pages or workpapers,‘‘Parent Company and Nonbank Assets Subjectto Classification’’ and ‘‘Classified Assets andCapital Ratios of Subsidiary Banks.’’ Theinformation is obtained by determining thecollectibility or forced-sale value of assets orpotential losses that may arise from certainon- and off-balance-sheet transactions. Forbanks, the information is to be generatedfrom bank examination reports that are availableat the Reserve Bank. (The holding companymay have copies of the open sections of thereports.)

Investments in and advances to bank andnonbank credit-extending subsidiaries by the

BHC Supervision Manual January 2013Page 1

parent are not to be classified. The examinermay, however, classify the parent’s investmentsin and advances to non-credit-extending non-bank subsidiaries. For additional information onclassifying an investment to a non-credit-extending subsidiary, see section 4070.0.

The use of abbreviations for the subsidiarieswithin narrative comments, as presented on the‘‘Scope and Abbreviations’’ core page 2, is per-missible. The examiner may comment on andanalyze lending policies, documentation, collec-tion procedures, and past-due volume in theaggregate. Such comments should be consistentwith comments in other report pages andworkpapers.

The examiner should provide comments onthe adequacy of the valuation reserves and anyrecommendations to management to provide foradditional loan-loss provisions. The examinershould also recommend that management main-tain a level of loan-loss reserves that is adequateto offset 100 percent of assets classified loss andstill have a balance sufficient to absorb normalunidentified, unanticipated future losses fromoperations.

Weighted classified assets includes 100 per-cent of loss, 50 percent of doubtful, 20 percentof substandard, and, when applicable, valueimpaired (net of adjusted transfer-risk reserve).It is appropriate to comment on weighted classi-fied assets on the ‘‘Analysis of Financial Fac-tors’’ core page 3.

Noncurrent loans and leases refers to theend-of-period dollar amount of loans and lease-financing receivables past due 90 days or moreand still accruing, plus those carried in nonac-crual status, as reported for each loan category.This report page should not be included inthe core section of the report for one-bank hold-ingcompanies.For thosebankholdingcompanies,the examiner will include the classifications onthe ‘‘Parent Company and Nonbank Assets Sub-ject to Classification’’ and the ‘‘Bank Subsidi-aries’’ report pages when assets are classified orwritten up as required.

The examiner should make certain that theaggregate classifications and reserve amountsagree with those reported for the parent, thebanking subsidiaries, and the nonbank subsidi-aries on the ‘‘Parent Company and NonbankAssets Subject to Classification’’ and the ‘‘Clas-sified Assets and Capital Ratios of SubsidiaryBanks’’ pages or workpapers. If classificationsare discussed on the ‘‘Examiner’s Comments

and Matters Requiring Special Board Atten-tion’’ page, the totals should be confirmed.

5010.10.1 CLASSIFICATION OFASSETS

The Uniform Agreement on the Classification ofAssets and Appraisal of Securities Held byBanks and Thrifts1 (the uniform agreement), asrevised June 15, 2004, sets forth the definitionsof the classification categories and the specificexamination procedures and information that areto be used for classifying bank assets, includingsecurities. (See SR-04-9.) The revised uniformagreement amends the examination proceduresthat were established in 1938 and then revisedand issued on July 15, 1949, and May 7, 1979.The uniform agreement’s classification of loansremains unchanged from the 1979 revision. Theclassification categories are designated as Sub-standard, Doubtful, and Loss. The June 15,2004, uniform agreement changes the classifica-tion standards applied to banks’ (and bank hold-ing companies’) holdings of debt securities by—

1. eliminating the automatic classification ofsub-investment-grade debt securities when abanking organization has developed an accu-rate, robust, and documented credit-risk man-agement framework to analyze its securitiesholdings;

2. conforming the uniform agreement to currentgenerally accepted accounting principles bybasing the recognition of depreciation on allavailable-for-sale securities on the bank’sdetermination as to whether the impairmentof the underlying securities is ‘‘temporary’’or ‘‘other than temporary’’;

3. eliminating the preferential treatment givento defaulted municipal securities;

4. clarifying how examiners should addresssecurities that have two or more differentratings, split or partially rated securities, andnonrated debt securities;

5. identifying when examiners may diverge fromconforming their ratings to those of the rat-ing agencies; and

6. addressing the treatment of Interagency Coun-try Exposure Review Committee ratings.

The uniform agreement’s classification catego-ries also apply to the classification of assets held

1. The statement was issued by the Board of Governors ofthe Federal Reserve System, the Office of the Comptroller ofthe Currency, the Federal Deposit Insurance Corporation, andthe Office of Thrift Supervision (the agencies).

Inspection Report Preparation (Appendix Page 7—Consolidated Classified & Special-Mention Assets) 5010.10


by the subsidiaries of banks and bank holdingcompanies. Although the classification catego-ries for bank and bank holding company assetsand assets held by their subsidiaries are thesame, the classification standards may be diffi-cult to apply to the classification of certainsubsidiary assets because of differences in thenature and risk characteristics of the assets.Despite the differences that may exist betweenassets held directly by a bank or bank holdingcompany and those held by its subsidiaries, thestandards for classifying investment securitiesare to be applied directly to securities held by abank or bank holding company and itssubsidiaries.

5010.10.1.1 Substandard Assets

A substandard asset is inadequately protected bythe current sound worth and paying capacity ofthe obligor or the collateral pledged, if any.Assets so classified must have a well-definedweakness or weaknesses that jeopardize theliquidation of the debt. They are characterizedby the distinct possibility that the bank willsustain some loss if the deficiencies are notcorrected.

5010.10.1.1.1 SubstandardClassification—Guidelines for an AssetWhen a Substantial Portion Has BeenCharged Off

In some cases, credit-extending subsidiaries withloans to financially troubled borrowers havecharged off substantial portions of these credits.Consistent with long-standing supervisory prac-tice, the evaluation of each extension of creditshould be based on the fundamentals of theparticular credit. That is, the evaluation of eachcredit should be based on the borrower’s (or thecollateral’s) current and stabilized cash flow,earning and debt-service capacity, financial per-formance, net worth, guarantees, and futureprospects and on other factors relevant to theborrower’s ability to service and retire its debt.

Based on the consideration of all relevantfinancial factors, the evaluation may indicatethat a credit has well-defined weaknesses thatjeopardize repayment in full but that a portionof the loan may be reasonably assured of repay-ment. When a charge-off has been taken in asufficient amount so that the remaining recordedbalance of the loan is being serviced (based onreliable sources of cash flow) and is reasonablyassured of repayment, this remaining recorded

balance would generally be classified no moreseverely than substandard.2 Consistent with long-standing classification guidelines, a Substandardclassification of the remaining recorded balancewould only be appropriate when well-definedweaknesses continue to be present in the credit.For example, when the remaining recorded bal-ance of an asset is secured by readily market-able collateral, the portion that is secured by thiscollateral would generally not be classified. (SeeSR-91-18.) This approach would generally beappropriate when an organization maintains suf-ficient controls over its lending function andmaintains adequate current documentation tosupport the credit analysis of the loan. Thisclassification approach could not be used forloans for which the loss exposure cannot bereasonably determined, for example, loans col-lateralized by properties subject to environmentalhazards. This approach would also not be justi-fied when sources of repayment are consideredunreliable.

5010.10.1.2 Doubtful Assets

An asset classified Doubtful has all the weak-nesses inherent in one classified Substandard.However, it has the added characteristic that theweaknesses make collection or liquidation infull, on the basis of currently existing facts,conditions, and values, highly questionable andimprobable.

5010.10.1.3 Loss Assets

Assets classified Loss are considered uncollect-ible and of such little value that their continu-ance as bankable assets is not warranted. Thisclassification does not mean that the asset hasabsolutely no recovery or salvage value, butrather that it is not practical or desirable to deferwriting off this basically worthless asset eventhough partial recovery may be effected in thefuture. Amounts classified Loss should bepromptly charged off.

2. The accrual/nonaccrual status of the loan must continueto be determined in accordance with the glossary to thecurrent Call Report or bank holding company reportinginstructions. Thus, while these partially charged-off loans mayqualify for nonaccrual treatment, cash-basis recognition ofincome will be appropriate when the criteria specified in thereport guidance are met.



5010.10.2 APPRAISAL OFSECURITIES IN BANKEXAMINATIONS

In an effort to streamline the examination pro-cess and achieve as much consistency as pos-sible, examiners can use the published ratingsprovided by nationally recognized statistical rat-ings organizations (NRSROs) and other creditquality assessment information as a proxy forthe supervisory classification definitions. Exam-iners may, however, assign a more- or less-severe classification for an individual security,depending on a review of applicable facts andcircumstances.

5010.10.2.1 Investment-Quality DebtSecurities

Investment-quality debt securities are market-able obligations in which the investment charac-teristics are not distinctly or predominantly specu-lative. This group generally includes investmentsecurities in the four highest rating categoriesprovided by NRSROs and includes unrated debtsecurities of equivalent quality.

Because investment-quality debt securities donot exhibit weaknesses that justify an adverseclassification rating, examiners will generallynot classify them. However, published creditratings occasionally lag demonstrated changesin credit quality and examiners may, in limitedcases, classify a security notwithstanding aninvestment-grade rating. Examiners may usesuch discretion, when justified by credit infor-mation the examiner believes is not reflected inthe rating, to properly reflect the security’scredit risk.

5010.10.2.2 Sub-Investment-Quality DebtSecurities

Sub-investment-quality debt securities are thosein which the investment characteristics are dis-tinctly or predominantly speculative. This groupgenerally includes debt securities, includinghybrid equity instruments (for example, trustpreferred securities), in grades below the fourhighest rating categories; unrated debt securitiesof equivalent quality; and defaulted debtsecurities.

To reflect asset quality properly, an examinermay in limited cases ‘‘pass’’ a debt security that

is rated below investment quality. Examinersmay use such discretion when, for example, theinstitution has an accurate and robust credit-risk-management framework and has demonstrated,based on recent, materially positive credit infor-mation, that the security is the credit equivalentof investment grade.

5010.10.2.3 Rating Differences

Some debt securities may have investment-quality ratings by one (or more) rating agenciesand sub-investment-quality ratings by others.Examiners will generally classify such securi-ties, particularly when the most recently assignedrating is not investment quality. However, anexaminer has discretion to ‘‘pass’’ a debt secu-rity with both investment-quality and sub-investment-quality ratings. The examiner mayuse that discretion if, for example, the institu-tion has demonstrated through its documentedcredit analysis that the security is the creditequivalent of investment grade.

5010.10.2.4 Split or Partially RatedSecurities.

Some individual debt securities have ratings forprincipal but not interest. The absence of arating for interest typically reflects uncertaintyregarding the source and amount of interest theinvestor will receive. Because of the speculativenature of the interest component, examiners willgenerally classify such securities, regardless ofthe rating for the principal.

5010.10.2.5 Nonrated Debt Securities

The agencies expect institutions holding indi-vidually large nonrated debt security exposures,or having significant aggregate exposures fromsmall individual holdings, to demonstrate thatthey have made prudent pre-acquisition creditdecisions and have effective, risk-based stan-dards for the ongoing assessment of credit risk.Examiners will review the institution’s programfor monitoring and measuring the credit risk ofsuch holdings and, if the assessment process isconsidered acceptable, generally will rely onthose assessments during the examination pro-cess. If an institution has not established inde-pendent risk-based standards and a satisfactoryprocess to assess the quality of such exposures,examiners may classify such securities, includ-ing those of a credit quality deemed to be theequivalentof subinvestmentgrade, asappropriate.



Some nonrated debt securities held in invest-ment portfolios represent small exposures rela-tive to capital, both individually and in aggre-gate. While institutions generally have the samesupervisory requirements (as applicable to largeholdings) to show that these holdings are thecredit equivalent of investment grade at pur-chase, comprehensive credit analysis subsequentto purchase may be impractical and not costeffective. For such small individual exposures,institutions should continue to obtain and reviewavailable financial information, and assign riskratings. Examiners may rely on the bank’s inter-nal ratings when evaluating such holdings.

5010.10.2.6 Foreign Debt Securities

The Interagency Country Exposure Review Com-mittee (ICERC) assigns transfer-risk ratings forcross-border exposures. Examiners should usethe guidelines in this uniform agreement ratherthan ICERC transfer-risk ratings in assigningsecurity classifications, except when the ICERCratings result in a more severe classification.

5010.10.2.7 Treatment of Declines in FairValue Below Amortized Cost on DebtSecurities

Under generally accepted accounting principles(GAAP), an institution must assess whether adecline in fair value3 below the amortized cost

of a security is a ‘‘temporary’’ or an ‘‘other-than-temporary’’ impairment. When the declinein fair value on an individual security represents‘‘other-than-temporary’’ impairment, the costbasis of the security must be written down tofair value, thereby establishing a new cost basisfor the security, and the amount of the write-down must be reflected in current-period earn-ings. If an institution’s process for assessingimpairment is considered acceptable, examinersmay use those assessments in determining theappropriate classification of declines in fair valuebelowamortizedcoston individualdebt securities.

Any decline in fair value below amortizedcost on defaulted debt securities will be classi-fied as indicated in the table below (section5010.10.3). Apart from classification, forimpairment write-downs or charge-offs onadversely classified debt securities, the exist-ence of a payment default will generally beconsidered a presumptive indicator of ‘‘other-than- temporary’’ impairment.

5010.10.2.8 Classification of Other Typesof Securities

Some investments, such as certain equity hold-ings or securities with equity-like risk and returnprofiles, have highly speculative performancecharacteristics. Examiners should generally clas-sify such holdings based on an assessment ofthe applicable facts and circumstances.

3. As currently defined under GAAP, the fair value of anasset is the amount at which that asset could be bought or soldin a current transaction between willing parties, that is, otherthan in a forced or liquidation sale. Quoted market prices arethe best evidence of fair value and must be used as the basisfor measuring fair value, if available.



5010.10.3 SUMMARY TABLE OF GENERAL DEBT SECURITYCLASSIFICATION GUIDELINES

The following table outlines the uniform classification approach the agencies will generally usewhen assessing credit quality in debt securities portfolios:

Type of security Classification

Substandard Doubtful Loss

Investment-quality debt securities with‘‘temporary’’ impairment

— — —

Investment-quality debt securities with‘‘other-than-temporary’’ impairment

— — Impairment

Sub-investment-quality debt securitieswith ‘‘temporary’’ impairment 1

Amortizedcost

— —

Sub-investment-quality debt securitieswith ‘‘other-than-temporary’’ impair-ment, including defaulted debtsecurities

Fairvalue

— Impairment

Note. Impairment is the amount by which amortized costexceeds fair value.

1. For sub-investment-quality available-for-sale (AFS) debtsecurities with ‘‘temporary’’ impairment, amortized cost ratherthan the lower amount at which these securities are carried onthe balance sheet, i.e., fair value, is classified Substandard.This classification is consistent with the regulatory capitaltreatment of AFS debt securities. Under GAAP, unrealized

gains and losses on AFS debt securities are excluded fromearnings and reported in a separate component of equitycapital. In contrast, these unrealized gains and losses areexcluded from regulatory capital. Accordingly, the amountclassified Substandard on these AFS debt securities, i.e.,amortized cost, also excludes the balance-sheet adjustment forunrealized losses.

The general debt security classification guide-lines do not apply to private debt and equityholdings in a small business investment com-pany or an Edge Act corporation. The uniformagreement does not apply to securities held intrading accounts, provided the institution dem-onstrates through its trading activity a short-term holding period or holds the security as ahedge for a customer’s valid derivative contract.

5010.10.4 CREDIT-RISK-MANAGEMENT FRAMEWORKFOR SECURITIES

When an institution has developed an accurate,robust, and documented credit-risk-managementframework to analyze its securities holdings,examiners may choose to depart from the abovegeneral debt security classification guidelines infavor of individual asset review in determiningwhether to classify those holdings. A robustcredit-risk-management framework entails

appropriate pre-acquisition credit due diligenceby qualified staff that grades a security’s creditrisk based on an analysis of the repaymentcapacity of the issuer and the structure andfeatures of the security. It also involves theongoing monitoring of holdings to ensure thatrisk ratings are reviewed regularly and updatedin a timely fashion when significant new infor-mation is received.

The credit analysis of securities should varybased on the structural complexity of the secu-rity, the type of collateral, and external ratings.The credit-risk-management framework shouldreflect the size, complexity, quality, and riskcharacteristics of the securities portfolio; therisk appetite and policies of the institution; andthe quality of its credit-risk-management staff,and should reflect changes to these factors overtime. Policies and procedures should identifythe extent of credit analysis and documentationrequired to satisfy sound credit-risk-management standards.



Procedures for Inspection Report Preparation (Appendix Page 8—Consolidated Comparative Balance Sheet) Section 5010.11

This Core report page is to present the consoli-dated balance sheet as of the financial statementdate, the comparable date for the previous year,and the last two fiscal year-end statements.When the inspection is conducted at fiscal year-end, only two fiscal year-end statements need bepresented. The comparative statement allowsthe reader to analyze any changes in asset, liabil-ity, and capital structure and to determine thecondition of the consolidated organization onthe specified dates.The financial statements should be requested

in the officer’s questionnaire. Fiscal financialstatements can also be obtained from theFR Y-6, FR Y-9, the SEC Form 10-K, andpublished reports to shareholders.The balance sheets should be presented in

columnar form with the current interim first,prior interim period, current fiscal and priorfiscal. They may be formatted like the FR Y-9.In preparing the comparative balance sheet,

the following should be done.1. Gross loans should be shown and then

netted of unearned discount and reserve for loanlosses.2. Federal funds sold and securities pur-

chased under resale agreements may be shownas one amount or separately, depending on howthe company prepares its statements. Similartreatment should be given to federal funds pur-chased and securities sold under repurchaseagreements on the liability side.

3. Total deposits should be broken downor footnoted to show interest-bearing andnoninterest-bearing deposits in domestic andforeign offices.4. Mandatory convertible debt instruments

should be shown separate from subordinatedcapital notes and debentures and detailed on the‘‘Liquidity and Debt Information’’ ConfidentialPage ‘‘C.’’5. Stockholder’s equity should be detailed

using the following categories, as applicable:common stock, perpetual preferred stock, capi-tal surplus, retained earnings (undivided prof-its), and reserves for contingencies and othercapital reserves.The amount of total consolidated debt should

agree with unaffiliated debt for the current pe-riod on the ‘‘Liquidity and Debt Information’’Confidential page ‘‘C.’’ Any exceptions shouldbe footnoted.Equity capital should agree with the indi-

vidual components shown on the ‘‘Statement ofChanges in Stockholders’ Equity (Parent)’’ pagefor the respective periods and with stockhold-ers’ equity on the ‘‘Parent Company Compara-tive Balance Sheet’’ Core page 5. Any excep-tions should be footnoted.Figures used in the analysis on the ‘‘Analysis

of Financial Factors’’ Core page 3 and the‘‘Capital Structure (Consolidated)’’ pages shouldagree with this statement.


Inspection Report Preparation (Appendix Page 9—ComparativeConsolidated Statement of Income and Expenses)Section 5010.12

This report page is to present aconsolidatedstatement of income and expense as of the finan-cial statement date, the comparable date for theprevious year, and the last two fiscal year-endstatements. When the inspection is conducted atfiscal year-end, only two fiscal year-end incomeand expense statements need be presented. Thestatement aids the reader in an analysis of corpo-rate earnings performance on a consolidatedbasis and provides the ability to further analyzechanges in income and expense accounts fromone period to another.Statements of income and expenses should be

requested in the officer’s questionnaire. State-ments for fiscal periods can also be obtainedfrom the FR Y-6, FR Y-9, the SEC Form 10-Kand published reports to stockholders.The statement of income and expenses should

be presented in columnar form with the currentinterim first, prior interim period, current fiscal,

and prior fiscal. They may be formatted like theFR Y-9.Any detail available that breaks down ‘‘inter-

est income’’ for the most recent fiscal year intocomponents should be presented either on thestatement as a footnote or on a supplementalpage, the ‘‘Comparative Statement of Incomeand Expenses (Consolidated)’’ page, if consid-ered appropriate by the examiner.Provisions for loan losses should be shown

asa line itemandnotgrouped in ‘‘otherexpenses.’’‘‘Other income’’ and ‘‘other expenses’’ shouldbe broken down to provide additional detail atthe discretion of the examiner.Net income should normally agree with net

income of the parent on the ‘‘Comparative State-ment of Income and Expenses (Parent)’’ pageand the ‘‘Statement of Changes in Stockholders’Equity (Parent)’’ page. Footnote differences.


Procedures for Inspection Report Preparation(Capital Structure) Section 5010.13

The risk-based capital guidelines apply on aconsolidated basis to bank holding companieswith consolidated assets of $150 million ormore. For these BHCs, the designated FR 1225report page will be used. For BHCs with con-solidated assets of less than $150 million, therisk-based capital guidelines apply on a bank-only basis unless (a) the parent holding com-pany is engaged in nonbank activity involvingsignificant leverage (e.g. engaged in significantoff-balance sheet activity); or (b) the parentcompany has a significant amount of outstand-ing debt that is held by the general public. ForBHC with total assets of less than $150 millionthe Capital Structure (FR 1241) report page isused.

5010.13.1 BHCS WITHCONSOLIDATED ASSETS OF$150 MILLION OR MORE—[CORE PAGE 10—CONSOLIDATEDCAPITAL STRUCTURE (FR 1225)]

The consolidated capital structure report pagesummarizes the various components of the BHCrisk-based capital ratios. Two report pages areprovided to allow for risk-based capital compu-tations during transition and at year-end 1992for final implementation. The pages provide thevarious limitations for the respective compo-nents of Tier 1 and Tier 2 capital. For bothreport pages, the first page summarizes ‘‘TotalQualifying Capital’’ comprised of Tier 1 andTier 2 capital, adjusted for investments inunconsolidated financing subsidiaries and recip-rocal holdings of capital.Tier 1 capital consists of permanent core cap-

ital elements (common equity, noncumulativeperpetual preferred stock, a limited amount ofcumulative perpetual preferred stock, andminority interest in the equity of consolidatedsubsidiaries). Tier 1 capital is derived by sub-tracting goodwill from the sum of Tier 1 capitalelements.Tier 2 capital consists of: (a) a limited amount

of the allowance for loan and lease losses;(b) auction rate perpetual preferred stock plusany cumulative perpetual preferred stockexceeding its Tier 1 limitation; (c) perpetualdebt, mandatory convertible securities, and otherhybrid capital instruments; (d) long-term perpet-ual preferred stock; and (e) limited amounts ofterm subordinated debt, intermediate-term pre-ferred stock, andunsecured long-termdebt issuedprior to March 12, 1988.For Tier 2 capital, the amount of mandatory

convertible securities that have the proceeds ofcommon or perpetual preferred stock dedicatedto retire or redeem them should be treated asterm subordinated debt subject to the estab-lished limit of 50 percent of Tier 1 capital.Mandatory convertible securities, net of the per-petual preferred or common stock dedicated toredeem or retire the issues, are included withinTier 2 on an unlimited basis. Tier 2 capital maynot exceed Tier 1 capital.Investments in unconsolidated financial sub-

sidiaries and reciprocal holdings of capital aresubtracted from the combined total of Tier 1 andTier 2 capital to determine the amount of totalqualifying capital.Core page 10–1 provides a summary of risk

weighted on- and off-balance sheet assets, ad-justed (reduced) for the excess of the allowancefor loan and lease losses not included in Tier 2capital and the allocated transfer risk reserve(ATRR). In addition, it provides a comparativepeer and historical summary of risk-based capi-tal ratios, growth rates, and dividend payoutratios.Core page 10–2 provides a summary com-

ments section to discuss any pertinent aspects ofthe institution’s capital structure not evidentfrom the schedule.The information on the capital structure page

will give support to the examiner’s evaluationof the bank holding company’s capital ade-quacy. The most convenient method to obtainthe information is to request it in the officer’squestionnaire, or through direct contact with theaccounting department.The amounts on the risk-based capital sched-

ules should be shown as of the same date as the‘‘Consolidated Comparative Balance Sheet’’ ofthe inspection report. Refer to the Risk-basedCapital Guidelines in Appendix A of RegulationY and Manual sections 4060.3 and 4060.4 for adiscussion of the Capital Adequacy Guidelinesand the minimum risk-based capital and lever-age ratios for BHCs.Use the instructions and guidance found on

the report page and worksheets. When complet-ing the supplementary capital section, insert theaggregate amount of each component in thespace provided. If more than one issue of aparticular Tier 2 capital component is outstand-ing, a range of rates should be shown in theappropriate space, giving the lowest and thehighest rates paid.


Commentsunder theRisk-basedCapital sched-ule should include:

• Any unusual terms and conditions relatingto issues of supplementary capital that theexaminer feels should be mentioned;

• An indication ofwhether a subsidiary bank’sequity represents the proceeds from theissuance of parent debt (double leverage);

• A presentation or description of risk-basedcapital components for statutory purposesif there is a violation for which the statutorydefinition is relevant.

• A situation whereby the levels of risk war-rant significantly higher risk-based capitalratios than the minimums.

The amounts of Tier 1 and Tier 2 used in thisanalysis of consolidated risk-based capital onthe ‘‘Analysis of Financial Factors’’ page shouldbe consistent with the amounts on this page.

5010.13.2 WORKSHEETS

In addition to the report pages, BHC Risk-BasedCapital Calculation Worksheets have beendeveloped for examiner use with year-end 1992final implementation. The worksheets are to be

retained with the examiner’s workpapers. If thebhc generated data was validated by the exam-iner and accepted to support or partially substi-tute for the computation of the elements, itshould also be retained with the worksheets.The worksheets provide more detail as to thecomposition of core capital elements and sup-plementary capital elements. In addition, thefootnotes provide more detailed explanations ofthe various components than are found on theactual report pages.

5010.13.3 BHCS WITH LESS THAN$150 MILLION IN CONSOLIDATEDASSETS—[PAGE—CAPITALSTRUCTURE (LEAD BANK OROTHER BANK SUBSIDIARY(FR 1241)]

The FR 1241 report page is used primarily forthe lead bank. Report pages have been devel-oped for year-end 1992 final implementation.The report pages are nearly identical to thoseused for state member bank examinations(FR 1460). If there is no one lead bank, thereport pages should be prepared for each com-parable lead bank.

Procedures for Inspection Report Preparation (Capital Structure) 5010.13


Procedures for Inspection Report Preparation(Page—Policies and Supervision) Section 5010.14

This report page provides a summary of thepolicies formulated by the board of directors bywhich active management supervises holdingcompany operations. The objective is to deter-mine whether there are adequate formal policiesdevelopedand supervised, either directly throughthe board of directors, or by a delegation of theauthority, for the parent company and its subsid-iaries. Another objective is to evaluate manage-ment’s performance in carrying out those poli-cies for the entire organization. These policiesaid in giving insight into the operations of theholding company. The policies should ensurethat all statutory and regulatory requirementsare met and that proper controls (managementinformation systems) are in place to minimizerisk. Examiners should encourage BHCs todevelop formal written policies on all itemspresented.The report page is to provide an analysis of

the adequacy of supervision exercised by theholding company over its subsidiaries, and poli-cies concerning intercompany relationships.Alsoincluded is a discussion of deficiencies in thepolicy-making process, any noncompliance withexisting policies, and the plans for correctingany deficiencies.In the officer’s questionnaire, the examiner

may request some of the information pertainingto policies. Insight into policies may also begained by reviewing the holding company’sannual reports to stockholders and through dis-cussions with management. If the holding com-pany does not have any formal written policies,the organization’s operating procedures shouldbe discussed with officers responsible for thevarious areas.Compliance with policies may be determined

by reviewing recent internal and external auditreports, recent bank examinations, and discus-sions with management at the subsidiary level,and by conducting tests to determine the extentof compliance with policies. Discussions withmanagement are necessary to obtain a thoroughunderstanding of management and supervisorypractices, policy-development techniques, thedegree to which management information is uti-lized to monitor subsidiaries, and overall man-agement philosophy.The policies should be summarized as suc-

cinctly as possible in narrative form. If the hold-ing company has no formal policies the exam-inermay use an introductory statement indicatingthat comments were derived from discussionswith senior management. Absence of any for-mal policies may require the examiner to make

a recommendation on the ‘‘Examiner’s Com-ments’’ Core page 1 that the holding companystrongly consider the establishment of formalwritten policies in order to supervise its subsidi-aries more effectively.This report page should address existing poli-

cies and the level of control and supervisionexercised over subsidiaries. How effectivelypolicies are carried out should be shown in therespective sections of the report. Where policiesresult in violations of law or regulation, com-ments should be made on the ‘‘Examiner’sComments’’ Core page 1 and detailed on the‘‘Violations’’ page. If any policy is consideredinconsistent with safe and sound banking prac-tices, the matter should be presented on Corepage 1 and detailed elsewhere in the report.Comments on policies that are on other pages

in the report should be consistent with thisreport page. Those comments and report pagesare:1. Dividends and fees from subsidiaries—on

the ‘‘Statement of Changes in Stockholder’sEquity,’’ ‘‘Income from Subsidiaries,’’ and the‘‘Cash Flow Statement (Parent)’’ pages.2. Dividends paid to shareholders—on the

‘‘Statement ofChanges inStockholder’sEquity,’’and the ‘‘Cash Flow Statement (Parent).’’3. Budgeting and tax planning—on the

‘‘Other Supervisory Issues’’ page.4. Internal audit—on the ‘‘Audit Program’’

page.5. Insider transactions—on the ‘‘Extensions

of Credit to BHC Officials’’ page.

5010.14.1 QUESTIONS TO BEADDRESSED ON THE POLICIES ANDSUPERVISION REPORT PAGE

5010.14.1.1 Level of Control andSupervision Exercised over Subsidiaries

1. Do subsidiaries operate autonomously?What is the degree of overlap between BHC andbank management?2. Who sets major policies of the corpora-

tion?3. How does the holding company monitor

the operations of its subsidiaries (reports, direc-tors, etc.)?4. Are the subsidiaries involved in formulat-

ing the holding company’s budget and tax plan-


ning? How is the holding company’s budgetdeveloped and at what corporate level is incometax planning coordinated?5. Describe the intermediate and long-term

strategic planning process and whether the sub-sidiaries are integrated into a consolidated plan-ning process. Does the consolidated plan includetheminimumelementsdiscussed insection2010.4of this manual? Is the plan effective and is itconsistently applied?6. How is the internal audit of subsidiaries

performed?

• Does an audit team audit each subsidiaryon a periodic basis?

• What is the frequency of the audit cycle?• To whom does the audit department report?• Is there an audit committee of directors?

7. Is the control and supervision of subsidi-aries deficient?

5010.14.1.2 Loans and Investments ofSubsidiaries (See sections 2010.2 and2010.3.)

1. Does the parent company’s policies ad-dress the minimum elements of a lending policyas listed and described in section 2010.2 of thismanual?2. Does each subsidiary have its own loan

policy or does the holding company establishpolicy for all subsidiaries? Are lending policiesconsidered adequate and is there generalcompliance?3. Does each subsidiary handle its own in-

vestment portfolio or are investments managedat the holding company level? Are investmentpolicies adequate and is there general compli-ance? Are investment-authorization proceduresadequately detailed to prevent circumvention ofinvestment-policy directives?4. Does the holding company have a credit

review team or is credit review handled by eachsubsidiary?5. Does the BHC have a policy establishing

limits on consolidated concentrations of credit?

5010.14.1.3 Funds Management and theAdequacy of Existing Policies (Seesection 2010.1.)

1. Does the parent-company managementhave policies in place to prevent funding prac-

tices that put at risk the welfare of the subsidiarybanks or the consolidated organization?2. Does the parent company maintain for

itself and its subsidiaries policies that provideguidance and controls for funding practices?3. To what extent do the subsidiaries follow

the funding policies and how effective are theyin reducing risk to the entire organization?4. At a minimum, do the parent company’s

funding policies address:a. Capitalization levels for bank subsidi-

aries, the nonbank subsidiaries, and the con-solidated organization as to whether the policyfor:

• Bank and consolidated capital are consis-tent with the Board’s capital adequacyguidelines;

• Nonbank capital includes maintaining thecapital level at industry standards;

• The holding company specifies thedesired range of capital for each entity,and the measures that should be taken inthe event that capital falls below thatlevel;

• The parent company specifies the degreeof double leverage that it is willing toaccept;

• Each entity specifies the method for cal-culating dividends?

b. Asset/liability management includinginterest rate sensitivity matching, maturitymatching, and the use of interest rate futuresand forwards and other financial derivativeinstruments?

c. How nonbank subsidiaries fund theiractivities?

5010.14.1.4 Loan Participations AmongSubsidiaries (See sections 2010.2 and2020.2.)

1. Under what circumstances are loansparticipated?2. Who determines the type of loans that may

be participated? Does the BHC have policies inthat regard? Are credit standards included in thelending policy for purchased loan participationsand does the policy require complete loandocumentation.3. Does the lending policy place limits on the

amount of loans purchased from any one sourceand does it place an aggregate limit on suchloans?4. Are low-quality loans allowed to be

participated?

Procedures for Inspection Report Preparation (Page—Policies and Supervision) 5010.14


5010.14.1.5 Dividends and Fees FromSubsidiaries

1. What is the policy for assessing dividendsfrom subsidiaries?2. Does the policy take into account statutory

and regulatory restrictions on bank dividends aswell as subsidiary asset quality, earnings, theability to service debt and growth prospects?3. What is the policy for determining fees

charged to subsidiaries in relation to manage-ment and other services rendered?4. Are service fee arrangements supported by

contracts and are the subsidiaries actuallyreceiving the services?5. Are the fees charged to subsidiaries rea-

sonable and justifiable in relation to the fairmarket value of the services provided? If nomarket exists for the services provided, are feesbased on their cost plus a reasonable profit? Hasthe BHC directly or indirectly through othersubsidiaries burdened its banking subsidiarieswith excessive fees or unreimbursed charges tofund its debt service, dividend payments or sup-port of other subsidiaries?

5010.14.1.6 Risk Evaluation and Control

1. Has the bank holding company formalizedpolicies and procedures in identifying, evaluat-ing, and controlling risk?2. What has management done to limit its

risk exposure in relationship to the amount ofthe organization’s capital, or earnings?3. Do audit procedures include a determina-

tion as to whether management’s risk evaluationand control procedures are being followed asprescribed?4. Has the bank holding company taken steps

to identify and control its exposure to lossesresulting from contingent liabilities and off-balance sheet activities such as standby lettersof credit, interest rate swaps, foreign exchangecontracts, currency swaps, options, securitieslending and borrowing, insider transactions, andcommitments to lend?

5010.14.1.7 Management InformationSystems

1. How effective and timely are the parentcompany’s policies and procedures with respectto its management information systems as to:

• Audit• Budget• Reporting• Insurance

2. Does the board of directors receivesufficient information about key areas of itsoperations?

5010.14.1.8 Internal Loan Review

1. Is an internal loan review program in exist-ence for bank and/or nonbank subsidiaries? Ifno program exists, does the size and complexityof the organization warrant implementation of aformal process?2. Will the internal loan review procedures

adequately identifydeteriorations incredits, loansthat do not comply with written loan policiesand loans with technical exceptions in a timelymanner?3. Is the loan review function independent of

the loan approval function, with written findingsreported to a board committee or senior man-agement committee not directly involved inlending?4. Are the quality and size of the internal

loan review staff sufficient in relation to theorganization’s size and complexity?5. Are the scope and frequency of the loan

review procedures adequate?

5010.14.2 DISCUSSION ANDAPPRAISAL OF OTHER PARENTCOMPANY POLICIES

Another parent company policy that should bediscussed and appraised, in addition to thoselisted on the ‘‘Policies and Supervision’’ page isthe Consolidated Planning Process whereby thesubsidiaries are integrated into a consolidatedplan. See Manual section 2010.4.

Procedures for Inspection Report Preparation (Page—Policies and Supervision) 5010.14


Procedures for Inspection Report Preparation(Page—Violations) Section 5010.15


This section has been revised to provide clarify-ing instructions on the reporting of violations orapparent violations in the inspection report. The‘‘Violations’’ section or page should include allBHC and nonbank subsidiary violations of theFederal Reserve Act (the act), Regulation Y, andother applicable statutes and regulations. Sec-tion 23A and 23B violations of the act shouldonly be included if they have been cited by theprimary regulator of the subsidiary banks. If thebank’s primary regulator has not cited a viola-tion of Section 23A and 23B of the act, apparentviolations should be noted in the ‘‘Other Mat-ters’’ page of the inspection report.

This report page or section is used to presentinformation on all violations discussed in theinspection report. The objective of the reportpage is to bring violations to the attention of theboard of directors for corrective action and toalert the supervisory agencies to the need forsupervisory attention.

The information reported should center onviolations by the holding company uncoveredduring the course of the inspection and thosethat are discovered through a review of reportsfiled with supervisory authorities. Informationon violations by the subsidiary bank(s) in itsdealings with the holding company or affiliatesmay be obtained from the most recent bankexamination reports or uncovered during theholding company inspection.

This page should include all BHC and non-bank subsidiary violations of the Act, Regula-tion Y, and other applicable statutes and regula-tions. Section 23A and 23B violations of theFederal Reserve Act should only be included ifthey have been cited by the primary regulator ofthe subsidiary banks. If the bank’s primary regu-lator has not cited a violation of Section 23Aand 23B of the Federal Reserve Act, apparentviolations should be noted in the ‘‘Other Mat-ters’’ page of the inspection report. A complete

write-up is necessary if the violation is notdetailed on another page (including the date ofthe violation or transaction, a description of thetransaction or act, the reason for the violation,the amount of the transaction, and the amount ofany potential or actual loss). When the informa-tion is presented elsewhere, a brief summaryand a reference to that page is sufficient.

Violations of the holding company should bepresented first, followed by the nonbank subsid-iaries and then bank subsidiaries. Bank viola-tions not involving the holding company or non-bank subsidiaries should not be detailed here.

If violations of sections 23A and 23B of theFederal Reserve Act (transactions with holdingcompany affiliates) are disclosed in a subsidiarybank’s examination report, comments should belimited to a brief summary on the ‘‘Violations’’page with a reference to the intercompany trans-action(s) under ‘‘Other Supervisory Issues.’’ Thislatter page will contain additional detail on theviolation. (Note: only bank subsidiaries can becited for the violations of sections 23A and 23Bof the Federal Reserve Act, with the BHC beingcited if the violation has been cited by thebank’s primary regulator and resulted from hold-ing company or nonbank subsidiary actions).The examiner may also criticize management inthe ‘‘Examiner’s Comments and Matters Requir-ing Special Board Attention’’ page of the inspec-tion report for causing the bank to be in viola-tion of sections 23A and 23B provisions.

Apparent violations should be presented onthe ‘‘Other Matters’’ page, and may be pre-sented on the ‘‘Examiner’s Comments and Mat-ters Requiring Special Board Attention’’ page ifconsidered appropriate by the examiner. Viola-tions will be reviewed on a case by case basisfor possible follow-up administrative action(s).

Violations must be presented in brief on the‘‘Examiner’s Comments and Matters RequiringSpecial Board Attention’’ page referring thereader elsewhere for detail. The examiner shouldensure that information contained on these relatedpages is consistent.


Procedures for Inspection Report Preparation(Page—Other Matters) Section 5010.16

This page presents nonconfidential informationor issues which would not be suitable for pre-sentation on any other page in the report. BHCplans may be discussed here in order to antici-pate any regulatory or supervisory consider-ations.Apparentviolations are also presentedhere and may be referred to on ‘‘Examiner’sComments’’ page or on other report pages at theexaminer’s discretion. BHC plans for futureactivities may be presented.The information might be derived from min-

utes of the corporation and/or subsidiaries, dis-cussions with management, and examiner obser-vations during the inspection.Other information that may be summarized

can include:

1. Corporate plans (debt or equity issues,acquisitions, sale of assets). Be certain manage-ment has no objection to the reference to theseplans. Otherwise, present such information onpage C;2. Any unfunded pension liabilities;3. Overall condition of corporate records;

and4. Any other comments deemed appropriate

by the examiner and not noted elsewhere in thereport.Any reference that involves dollar amounts,

ratios, or other information contained in sched-ules or comments elsewhere in the report shouldbe cross-checked.


Procedures for Inspection Report Preparation (Page—ClassifiedAssets and Capital Ratios of Subsidiary Banks) Section 5010.17

This report page provides a summary of assetclassifications and capital ratios as of the mostrecent federal and state examinations for theindividual bank subsidiaries. The objective ofthe page is to aid in the identification of existingor potential problems in the banks which mayhave an overall effect on the holding company.

The information is to be derived from bankexamination reports which are available at theReserve Bank. (The holding company may havecopies of the open sections of the reports.)

The banks are to be listed in the same order asthey appear on the Organization Chart or Invest-ments in and Advances to Subsidiaries reportpages. Total assets or total average assets shouldbe shown as presented in the examination report.Do not adjust total assets by adding back valua-tion reserves.

For bank holding companies, tier 1 capitalincludes common equity and qualifying cumula-tive and noncumulative perpetual preferred stock,less goodwill and other designated intangibleassets. Common stockholders equity includescommon stock; related surplus; and retainedearnings, including capital reserves and adjust-ments for the cumulative effect of foreign-currency translation, net of any treasury stock,less net unrealized holding losses on available-for-sale equity securities with readily determin-able fair values.

Qualifying cumulative perpetual preferredstock is limited within tier 1 to 25 percent ofthe common stockholders equity and minorityinterest. Total capital includes tier 1 plus tier 2capital.

Weighted classified assets includes 100 per-cent of loss, 50 percent of doubtful, and 20 per-cent of substandard and value-impaired (whenapplicable), net of allocated transfer risk reserves(ATRR).1 It is appropriate to comment onweighted classified assets on the Analysis ofFinancial Factors page.

When determining supervisory asset-qualityratings (the [A]sset rating in ‘‘CAMELS’’) forthe BHC’s subsidiary banks, an asset-qualityratio is used based on a comparison of weightedclassified assets to tier 1 capital (as defined forleverage purposes) plus the allowance for loan

and lease losses. Examiners should use this ratioand the accompanying benchmarks in conjunc-tion with all the other factors normally evalu-ated when assessing asset quality for eachinstitution.

The allowance for loan and lease losses isdefined as the bank’s total ALLL. The ALLL isnot subject to the 1.25 percent limitation onsupplementary capital elements for this calcula-tion (that is, all of the ALLL is included in thedenominator of the ratio).

The ratio of these assets to tier 1 capital plusthe allowance for loan and lease losses is thencompared to the existing asset-quality bench-mark table to determine the asset-quality rating.

Asset-Quality Table

Asset-Rating Asset-Quality RatioRanges

1 under 5%2 5% to 15%3 15% to 30%4 30% to 50%5 over 50%

Examiners should use the asset-quality tableandotherpertinent factors, including loanpolicies,credit administration, portfolio concentrations,and past-due levels, to determine the final asset-quality rating. While individual bank ratios maychange slightly, depending on the amount ofcumulative preferred stock, mandatory convert-ible debt, and other supplementary elements, thechange in the ratio itself should not result in achange in the bank’s asset-quality rating.

This page should not be prepared for one-bank holding companies. The examiner mayshow this data on the Bank Subsidiaries page.However, the examiner may use this page toreflect successive examination data for severalyears to indicate trends. The examination datesshould be cross-checked to those shown on theBank Subsidiaries page.

1. See SR-92-2 regarding the treatment of value-impairedclassifications for asset-quality purposes.


Procedures for Inspection Report Preparation(Page—Organization Chart) Section 5010.18

This report page presents an organization chart,giving a schematic description of the structureof the organization, the intercompany relation-ships and the degree of control of subsidiaries.An organization chart provided by the hold-

ing company for various regulatory filings maybe used, with revisions made for new or di-vested subsidiaries. The information requiredbelow may simply be added to the existingchart.The organization chart may be pictorial (box

format) or linear (listing format). The parentshould be presented at the head of the page.Banks should be presented individually in thesame area. Nonbanks should be presented indi-vidually in the same area (if possible).Each subsidiary should be shown by its offi-

cial name; however, there is no need to indicatethe address unless necessary to distinguish iden-tity. Subsidiaries of banks and second tier non-bank subsidiaries may be omitted or shown atthe examiner’s discretion. Abbreviated chartsshould be so footnoted.Abbreviations used throughout the report

should be presented on the ‘‘Structure andAbbreviations’’ Report page and also on the

bottom of this page or following the chart. Gen-erally, abbreviations familiar to the BHC shouldbe used. However, efforts should be made toincorporate at least a part of the name into theabbreviation as opposed to relying strictly oninitials which tend to become confusing. Also, itis desirable that abbreviations of bank subsidi-aries include the word ‘‘Bank’’ to distinguishthem from the parent company and/or nonbanksubsidiaries with similar names.Indicate the percentage of ownership to the

nearest tenth of one percent and include direc-tors’ qualifying shares. Where all, or nearly allof the subsidiaries are wholly-owned, detail theexceptions and provide a footnote to the effectthat unless shown, ownership is 100 percent.The names and/or abbreviations shown on the

organization chart are to be consistently usedthroughout the report (for example, the ‘‘Incomefrom Subsidiaries,’’ ‘‘Investment in and Ad-vances to Subsidiaries,’’ and the ‘‘Nonbank Sub-sidiary’’ and the ‘‘Bank Subsidiary’’ pages).Where applicable, the order established on

this page should be used in all tables of thereport.


Procedures for Inspection Report Preparation(Page—History and Structure) Section 5010.19

The report page provides an abbreviated historyof the organization including name changes,acquisitions, mergers, reorganizations and dives-titures. The objective is:1. To present the chronological development

of the bank holding company.2. To list nonbank activities engaged in by

the parent company and its subsidiaries.3. To provide a measure of size relative to

competing institutions.The information that is included in this report

page may be obtained from documents filedwith the Federal Reserve System. For lines 1through 3, refer to reports filed with the FRBsuch as the registration statement and FR Y–6.In response to item 3, one bank holding compa-nies formed before December 31, 1970, firstbecame subject to the Act on December 31,1970, with the passage of the 1970 Amend-ments to the Act. A multibank company formedbetween 1956 and December 31, 1970, becamesubject to the Act on the date of controlling itssecond subsidiary bank. All BHCs formed afterDecember 31, 1970, became subject to the Act

on the date of controlling their first bank subsid-iary. For response to item 4, history is availablein applications to FRB and in public documentssuch as annual reports to stockholders and SECForm 10-K. For additional information contactthe corporate secretary.Comments responding to item 4 are to be in

narrative and/or list form and should include:1. The present number of banking subsidi-

aries, the percent of State deposits on an aggre-gate basis and size ranking in the State. For amoney-center holding company, also provide itsranking on a national basis.2. The date and outline of any acquisitions,

mergers, reorganizations, or name changes.3. A list and brief description of activities in

which the nonbanking subsidiaries are engaged.4. A discussion of any permanent or limited

grandfather rights, and any plans for divestmentof shares or termination of nonbank activities.The activities shown on this page should be

consistent with those shown on the nonbanksubsidiary pages.


Procedures for Inspection Report Preparation (Page—Investment in and Advances to Subsidiaries) Section 5010.20

5010.20.1 INVESTMENT IN ANDADVANCES TO SUBSIDIARIES

This schedule details the parent’s financial rela-tionships with its subsidiaries. It will be used tosupport comments or analyses in other sectionsof the report, or to clarify answers to the ques-tions on the continued page, ‘‘Investment Inetc.—continued.’’The objectives of the report page are:1. To determine the percent of the parent’s

assets comprised of investments in and advancesto each subsidiary.2. To help determine the dependency of sub-

sidiaries on advances from parent.The parent’s investments in and advances to

each subsidiary are usually detailed in ledgersmaintained by the accounting department. Eachsubsidiary is listed individually beginning withbanks, providing subtotals for banks and non-banking subsidiaries.The investment in each subsidiary is to include

any related unamortized goodwill. Provide a‘‘total’’ in the ‘‘investment’’ column. From thistotal subtract the aggregate unamortized good-will in all subsidiaries and detail the ‘‘goodwill’’on the ‘‘Contingent Liabilities’’ page.Totals for investments and advances should

agree with the ‘‘Comparative Balance Sheet’’page. The Parent’s investment should be equalto its proportionate interest in each subsidiary’sequity as presented in financial statements onthe ‘‘Nonbank Subsidiary Financial Statementand Condition’’ and the ‘‘Bank Subsidiaries’’pages plus any unamortized goodwill. Parent’sadvances should also equal ‘‘loans from parent’’as detailed on the ‘‘Nonbank Subsidiary Finan-cial Statement and Condition’’ and the ‘‘BankSubsidiaries’’ pages.

5010.20.2 INVESTMENT IN ANDADVANCES TO SUBSIDIARIES(continued)

For this continuation page, the answers to ques-tions 1 through 6 provide information on thefunding of subsidiaries.The objectives of each question are as

follows:Question 1—To determine the amount of

goodwill in the investment in each subsidiary.Question 2—To determine if the parent ‘‘for-

gave’’ the indebtedness of any of its subsidiarieswhich might indicate an inability to service itsdebt properly or other financial difficulties in thesubsidiary.Question 3—To determine the extent of the

parent’s borrowings invested as equity since thelast inspection. The subsidiary’s enlarged capi-tal base might provide additional debt capacity.Question 4—To determine if the advances are

on a preferential rate basis, to help in analyzingthe subsidiary’s earnings proficiency.Question 5—To determine if there is any

difficulty in the subsidiary regarding its abilityto service its debt properly.Question 6—To determine if the parent lends

its credit and debt capacity to its subsidiary andto aid in the analysis of the parent’s contingentliabilities.The answers to all questions should be veri-

fied against company records and discussed withthe comptroller, the treasurer or the finance offi-cer. Details on some questions can come fromcompany’s latest SEC Form 10-K or the annualreport to stockholders. All questions shouldbe answered; if not applicable, so state. It is notnecessary to repeat the questionwhen answering.Any guarantees should also be included as

contingent liabilities.


Procedures for Inspection Report Preparation(Page—Commercial Paper (Parent)) Section 5010.21

Commercial paper is a source of funds for theparent and its subsidiaries. This schedule pre-sents the maturity and placement of commercialpaper in use in the parent’s operations and/or forback-up to the commercial paper. The page isrequired if the parent issues commercial paper.The objectives of this report page are:1. To summarize the extent of the parent’s

use of commercial paper and its ability to con-tinue the use of this funding tool.2. To help determine the overall liquidity

position of the parent company.3. To determine the volatility of commercial

paper issued, including average turnover rate.4. To determine whether any subsidiary bank

is providing compensating balances for the bene-fit of the parent or nonbank affiliate.

The informationrequired in thescheduleshouldbe requested in the officer’s questionnaire or canbe obtained from the accounting or treasurer’sdepartments and verified with the general ledger.If at all possible, the data should be as of thefinancial statement date. (An alternate date isacceptable for the Maturity Schedule but shouldbe specified.) The schedule should also be pre-pared for each nonbanking subsidiary whichissues its own commercial paper.The total commercial paper should equal

amounts on ‘‘Parent Company Comparative Bal-ance Sheet’’ (Core Page 5) and the confidential‘‘Liquidity andDebt Information’’ pageC, unlessan alternate date is used.


Procedures for Inspection Report Preparation(Page—Lines of Credit (Parent)) Section 5010.22

Lines of credit are a source of funds for theparent and its subsidiaries. This schedule pre-sents the lines of credit available for the parent’soperations and/or for back-up to commercialpaper.The purpose of the report page is to be able to

determine the degree of use of the lines of creditand the availability of these lines to back-upcommercial paper borrowings. It is also intendedto help determine the overall liquidity positionof the parent company.The informationrequired in thescheduleshould

be requested in the officer’s questionnaire or canbe obtained from the accounting or treasurer’sdepartments and verified with the general ledger.If at all possible, the data should be as of thefinancial statement date.The exact names and locations of line banks

should be shown in the ‘‘Lines of Credit’’ sec-tion and totals calculated for the dollar amount

columns. If a BHC has an extensive number ofline banks, the detail for each line of credit maybe eliminated at the discretion of the examinerwith aggregate amounts and ranges included inthe appropriate columns. In this instance, thetotal number of line banks involved and a gen-eral commentas togeographicdistributionshouldbe included.If any subsidiary bank maintains compensat-

ing balances on behalf of the parent, the exam-iner should place an asterisk in the column anddetermine that the bank is compensated so thatit does not incur a loss of income. Any resultingloss of income should be commented upon. SeeManual sections 2020.4 and 2080.1.The total lines of credit in use should equal

amounts reported on ‘‘Parent Company Com-parative Balance Sheet’’ (Core page 5) and theconfidential ‘‘Liquidity and Debt Information’’page C.


Procedures for Inspection Report Preparation (Page—Questionson Commercial Paper and Lines of Credit) Section 5010.23

The answers to questions 1 through 13 shouldprovide information about the quality of thecommercial paper and the procedures for itsissuance. They should also discuss fundinginvolving the issuance of commercial paperbacked by lines of credit. Examiners shouldrefer to sections 2080.05 and 2080.1 beforecompleting this report page.

The purpose of the report page is—

1. to determine the quality of commercial paperand to appraise the company’s ability to raiseadditional funds in the marketplace;

2. to determine how the proceeds from com-mercial paper sales will be used;

3. to decide whether the use of commercialpaper is in keeping with statutory require-ments and regulatory requirements such asthose of the Securities and Exchange Com-mission (SEC);

4. to determine whether the use of commercialpaper satisfies liquidity needs (see section2080.1);

5. to determine if policies in the commercial-paper funding system are safe and sound;

6. to determine if backup sources of funds areavailable and adequate to meet the liquidityneeds of the parent; and

7. to address the examiner’s concerns aboutcommercial paper policies, controls, and mar-keting methods.

The information needed to complete this reportpage is usually available from the holding com-pany’s investment or funds-management depart-ment. It may also be obtained through discus-sions held with management responsible for theholding company’s funding program. The infor-mation may also be available from rating agen-cies and in contractual agreements with lendingbanks.

Question 1 asks for any changes in the com-mercial paper rating that may show a changingfinancial condition. See appendix A of this sec-tion, which lists rating indicators used by com-mercial paper rating companies. Determine thecause for any change in the rating.

Bank holding companies with lower creditratings may issue commercial paper by obtain-ing credit enhancements. Such credit supportmay be obtained from letters of credit (LOCpaper) or a surety bond issued by an insurancecompany having a high credit rating (calledcredit-supported commercial paper). Bank hold-ing company commercial paper with a lower

credit rating can also be backed by other high-quality assets serving as collateral (called asset-backed commercial paper), thus allowing thebank holding company to enter the market asan issuer. (See section 2128.03 for inspectionguidance about such commercial paperenhancements.)

Question 1 further instructs the examiner toreport the range of current rates paid on allcommercial paper. By presenting the range ofcurrent rates paid on different maturities of com-mercial paper, the examiner can compare ratespaid with those of the bank holding company’speers. This will aid in determining the ‘‘market-place’s’’ impression of the company’s condi-tion, as reflected by the rates the company mustpay to attract funds.

The yields on commercial paper track thoseof other money market instruments. Like U.S.Treasury bills, a commercial paper instrument isa discount instrument. Because of exposure tocredit risk, the yields on commercial paper areusually higher than those of U.S. Treasury bills.As in the case of Treasury bills, interest oncommercial paper is computed on a 360-dayyear. Treasury bills, in contrast to commercialpaper, are exempt from state and local taxes andare more liquid than commercial paper.

When responding to question 2, if any subsid-iary sells commercial paper for its own use orfor the parent, indicate why the bank holdingcompany chooses to structure its funding in thisway. For example, a commercial finance non-bank subsidiary of a bank holding company wasauthorized by the Board to underwrite (pur-chase) and deal in (resell or place with institu-tional investors) commercial paper as agent forthe issuers (see section 3600.21.1). A section 20subsidiary also can underwrite and deal in, oract as riskless principal in the placement of,commercial paper, if authorized by the Board byorder.

A parent company could issue commercialpaper directly or through a broker. The exam-iner therefore needs to be aware of the differ-ence between direct paper and dealer paper.Direct paper is sold by the issuing firm directlyto investors without using a securities dealer oran intermediary. Direct-paper issuers generallyrequire continuous funds and therefore find itmore cost-effective to establish their own salesforce to sell their commercial paper directly toinvestors. In the case ofdealer-placed commer-


cial paper, the issuer uses the services of asecurities firm to sell its commercial paper.

If the subsidiary’s name is similar to theparent’s, note whether an investor can tell, by itsname or through other means, that the issue isassociated with the parent.

With regard to question 3, the commercialpaper specimen should clearly state that it is notan FDIC-insured obligation of any bank subsid-iary. (See section 2080.1.)

The minimum round lot in commercial papertransactions is usually $100,000, although someissuers sell commercial paper in denominationsas low as $25,000. With regard to question 4,bank holding companies generally should notsell commercial paper in denominations ofless than $25,000. This is to ensure that thecommercial paper instrument is suitable forinvestment by sophisticated investors as op-posed to the general public. Commercial paperinvestors are typically institutional investors.

Rollover of commercial paper proceeds onmaturity is common. The SEC has stated thatobligations that are payable on demand or haveprovisions for automatic rollover do not satisfythe nine-month (270 days) maturity standard.SEC staff, however, has issued no-action lettersfor commercial paper master-note agreements.1These agreements allow eligible investors tomake daily purchases and withdrawals (subjectto a $25,000 minimum) as long as the maturityof the note and each investor’s interest therein

do not exceed nine months. Such master-noteagreements may allow prepayment by the issuerany time, or upon demand of the investor.

Commercial paper and commercial papermaster-note agreements can result in a potentialsource of funding mismatch from the use ofwhat is commonly called ‘‘ deposit sweeps.’’This practice is based upon an agreement with asubsidiary bank’s deposit customers (typicallycorporate accounts). Such agreements allow thesecustomers to reinvest amounts in their depositaccounts above a designated level in overnightobligations of the parent bank holding company.

In view of the extremely short-term maturityof these sweep arrangements, banking organiza-tions should be advised to exercise great carewhen investing the proceeds. Appropriate usesof the proceeds of such deposit-sweep arrange-ments are limited to short-term bank obliga-tions, short-term U.S. government securities, orother highly liquid, readily marketable,investment-grade assets that can be disposed ofwith minimal loss of principal. (See also sec-tions 2080.05 and 2080.1 when reviewing com-mercial paper activities.)

Concerning question 5, investing in the bankholding company’s commercial paper by a sub-sidiary bank’s trust department is generallyregarded as self-dealing and a violation of trustregulations, absent express written authority andthe consent of all of the trust’s beneficiaries.Bank holding company examiners finding suchtrust department holdings should discuss thematter in detail with Reserve Bank trust examin-ers or the Board’s Trust Activities Section, Divi-sion of Banking Supervision and Regulation.

In response to question 6, the examiner shouldindicate the use of the proceeds and whethersuch use is considered long-term or short-term.(See also sections 2080.05 and 2080.1.)

Question 7, on concentration of holdings, isintended to aid in determining if any party canexert influence on the bank holding companydue to its commercial paper holdings. If anyindividual, organization, or industry holds morethan 10 percent of the commercial paper, indi-cate if the holder(s) exerts any influence on thebank holding company’s management.

In response to question 8, if there is anyindication of difficulty in refinancing commer-cial paper at maturity, discuss this in significantdetail. Indicate the reasons for the difficulty, theproblems it poses for management, and manage-ment’s plans to rectify those problems. This is aparticularly sensitive issue because of the finan-cial exposure that could be created by an inabil-ity to refinance.

1. A master note is a negotiated agreement or contract(negotiated as to size, maturity, and price) between a borrowerand investor that permits the investor to place cash, up to astated amount, with the borrower over a designated period oftime. Such unsecured credit agreements (no note is actuallyissued, only an agreement is signed at the beginning of thearrangement) are limited to borrowers with the highest creditratings and large investment institutions.

Master notes have characteristics similar to those ofa revolving-credit arrangement. The outstanding amountallowed may vary daily but is limited by a stated cap imposedby the issuer. Investors in such agreements control the amountinvested in the note on the basis of the amount of surplus cashthat is on hand. Either party can terminate the agreement withonly 24 hours’ notice. In reality, it is a longer-term fundingvehicle because the parties generally are interested in main-taining a long-term relationship.

Unlike commercial paper, master notes are indirectly acces-sible to a wider array of investors. Investment firms groupinvestments from small investors with investments made by afew large institutional investors and place the funds in masternotes. The master note, unlike commercial paper, avoids thetask of writing daily individual tickets for each customer.Disadvantages of the master note are the potential for dailyvariation in the amount invested and the potential for suddenredemption.

Inspection Report Preparation (Page—Commercial Paper and Lines of Credit) 5010.23


Question 9 is intended to aid in determiningthe degree to which the bank holding companycan rely on its line banks. Lines that have notbeen confirmed in writing or for which no con-tractual obligation exists are less certain to beavailable than those that are confirmed andcontractual.

As question 10 implies, lines of credit areoften specifically established solely to back upcommercial paper borrowings. Such linesimpart a measure of security to the bank holdingcompany. Evaluate the adequacy of the totalamount of these lines in relation to the volumeof outstanding commercial paper.

In asking about systematic rotation, question11 is intended to help the examiner determine ifthe bank holding company routinely uses theproceeds from a line of credit to pay off another,and whether the bank holding company has everbeen in an aggregate nonborrowing position

during a given year. If the bank holding com-pany routinely and continuously relies on itsability to repay its lines with other line borrow-ings, discuss the potential effects on the bankholding company’s ability to service its debtproperly.

Question 12 asks for information on recipro-cal lines that reveals the relationship betweenthe lender and the bank holding company. Aline’s reciprocity may have a bearing on thedegree to which the borrower may rely on thelender.

Question 13 is intended to help the examinerevaluate the relationship between the parent andits nonbank subsidiary. In those cases in which asubsidiary is authorized to borrow directly onthe parent’s lines, the examiner should evaluatethe parent’s internal controls and managementinformation systems for supervising the subsid-iary’s borrowings.

5010.23.1 APPENDIX A—COMMERCIAL PAPER RATINGS

Rating Notations by Commercial Paper Rating Companies*(Highest- to Lowest-Quality Rating)

Rating Company†

Standardand Poor’s Moody’s Duff and

Phelps Fitch

Investment grade:

A-1/A1+ Prime-1 Duff-1 F-1/F-1+(P-1) (D 1−/1/1+)

A-2 Prime-2 Duff-2 F-2(P-2) (D-2)

A-3 Prime-3 Duff-3 F-3(P-3) (D-3)

Non–investment grade:

B NP Duff-4 F-S(Not prime) (D-4)

C(Doubtful)

In default:

D Duff-5 D(D-5)

* The definition of ratings varies by rating agency.†This list of rating companies is for the examiner’s infor-

mation only. The list is not an endorsement of these compa-nies by the Federal Reserve.

Inspection Report Preparation (Page—Commercial Paper and Lines of Credit) 5010.23


Procedures for Inspection Report Preparation (Page—Contingent Liabilities and Other Accounts) Section 5010.24

Listed on this page are any material assets andliabilities (actual and contingent) not detailed onthe parent company’s balance sheet or otherschedules in the report. Contingencies includeguarantees, lease or loan commitments, lettersof credit, interest rate swaps, futures and for-wards transactions and pending litigation.The purpose of this report page is:1. To determine the extent of the parent’s

potential obligations and the related strain on itsfinancial capacity resulting from contingencies.2. Todetermine thequality of ‘‘OtherAssets.’’

These assets are subject to evaluation and classi-fication, if appropriate. ‘‘Other Assets’’ is some-times found to include assets acquired in viola-tion of section 4 of the Act (particularly section4(c)(2)).3. To detail ‘‘Other Liabilities’’ which may

indicate external funding relationships other-wise not presented.The information should be derived directly

from the BHC’s financial statements and theboard of directors’ and executive committee’s

minutes. Management should be asked to verifyand explain any contingent liabilities. A reviewof all ‘‘Other Assets’’ and ‘‘Other Liabilities’’ inthe general ledger and subsidiary ledgers shouldbe conducted and analyzed for appropriate typesand amounts of accounts. Suspense accountsshould be aged, particularly if shown as a netamount.If there are no contingent liabilities state

‘‘None reported.’’ Normally only items appear-ing on the balance sheet as of inspection datewill be listed. If prior periods’ items are listed,columns with dates corresponding to those onthe balance sheet should be used.Refer to Manual section 5010.8 for guidelines

on presentation of details of ‘‘Other Assets’’ or‘‘Other Liabilities.’’The parent’s guarantees on the ‘‘Investment

In and Advances To Subsidiaries’’ page shouldbe included as contingent liabilities. ‘‘OtherAssets’’ and ‘‘Other Liabilities’’ totals shouldreconcile to the line items on the ‘‘Parent Com-pany Comparative Balance Sheet’’ page.


Procedures for Inspection Report Preparation (Page—Statementof Changes in Stockholders’ Equity (Parent)) Section 5010.25

The reconciliation of capital accounts provides asummary of transactions which have causedchanges in each of the equity accounts for theperiods indicated. There should be no chargesagainst paid-in capital that are properly charge-able to income.The report page is used to record and analyze

changes in stockholders’ equity and to deter-mine the effects on the financial condition of theholding company.The information should be requested in the

officer’s questionnaire. Sources for prior periodsinclude the FR Y–6, FR Y–9 LP, the annual andquarterly reports tostockholders,previous reportsof inspection and the SEC Form 10-K. Currentperiod changes can be obtained from the corpo-ration’s accounting or comptroller’s department.The presentation should begin with the last

two fiscal years and include the most recentyear-to-date interim. The column heading ‘‘Cap-ital Stock’’ can include common and preferred

stock. However, it is necessary to distinguishthe type and amount which can be accomplishedby using (C) and (P), for common and preferred,beside the amounts. An appropriate legend canbe inserted in the column heading.Net income reported should agree with that

reported on the ‘‘Comparative Statement ofIncome and Expenses (Parent)’’ and the ‘‘Com-parative Statement of Income and Expenses(Consolidated)’’ pages. If net income reportedon this page does not agree with the income on aconsolidated basis (i.e. differences caused byminority interests), include a footnote to explainthe reason for the differences.Balancesat year-endand interimperiod should

agree with accounts on the ‘‘Parent CompanyComparative Balance Sheet’’ and the ‘‘Compar-ative Statement of Income and Expense (Con-solidated)’’ pages. Footnote and explain anydifferences.


Procedures for Inspection Report Preparation(Page—Income from Subsidiaries) Section 5010.26

These ‘‘Interim’’ and ‘‘Fiscal’’ pages can beused when the parent receives income frommore than one subsidiary, or where it is neededto support comments or analyses in other sec-tions of the report. Both the ‘‘Interim’’ and‘‘Fiscal’’ pages should be included in the reportwhen this situation is applicable. From the dataon these two pages, the examiner is able toanalyze the contribution to overall earningsmadeby each of the subsidiaries. The schedule alsoreflects the extent of the parent’s upstreamingincome from its subsidiaries.The purpose of these report pages is:1. To determine the relative share of the indi-

vidual subsidiary’s contribution to the holdingcompany operation;2. To analyze the dividend payout ratio and

to compare payouts between subsidiaries;3. To determine the proportion of each sub-

sidiary’s income paid to the parent as fees; and4. To determine the degree of interest cover-

age on advances to subsidiaries.For the interim and fiscal periods, some

items can be obtained from the parent’s incomestatement and from theBHC’sworkpapers show-

ing eliminations on the consolidating incomestatement. Additional information can be ob-tained from the holding company’s accountingdepartment or comptroller.

The banks should be presented first, thennonbanks. Subtotals should be provided.

The dividend payout ratio is calculated bydividing total dividends by net income aftertaxes and securities transactions. Show an aver-age payout ratio for banks and nonbanks,respectively, and an overall payout ratio. Do notshow negative percentages.5. Fees as a percentage of the subsidiary’s

operating income is calculated using total oper-ating income before expenses. No subtotals forbanks and nonbanks are required.

Equity in undistributed earnings, dividends,interest and total fees should equal that reportedfor each period on the ‘‘Comparative Statementof Income and Expenses (Parent)’’ page. Forwholly-owned subsidiaries, the sum of the‘‘Equity in Undistributed Earnings’’ and ‘‘Divi-dends’’ columns should equal its net income forthe related period.


Procedures for Inspection Report Preparation(Page—Cash Flow Statement (Parent)) Section 5010.27

The analysis is performed and the statement iscompleted for BHCs with consolidated assets inexcess of $1 billion, or when substantial fixedcharges exist or debt is outstanding, whenrequired by the Reserve Bank. This statementindicates the results of the parent’s managementof its cash position and identifies major sourcesof working capital and areas of disbursement.The statement also presents the cash earnings ofthe parent company. The cited ratios measurethe parent company’s ability to meet its fixedobligations and the ability of the residual earn-ings to cover common stock dividends. Whencombined with an analysis of the parent compa-ny’s cash income sources from subsidiaries, itserves as a partial basis for determining theparent company’s debt servicing capacity, andthus an assessment of its leverage. In addition,projected cash flow information aids in the anal-ysis of the BHC’s ability to properly service itsdebt.Only items affecting cash should be shown.

The ‘‘Next Fiscal Year’’ column completionis optional at the examiner’s discretion if theinspection occurs early in the current year(i.e. the inspection is in January 19X6 and thuswould require the data through the end of19x7).The objective of the report page is:1. To determine the ability of the parent to

manage its cash position and operate withindebt service and funding requirements;2. To measure the parent’s ability to meet its

fixed obligations and its dependency on bor-rowed funds to meet its cash needs;3. To determine if the parent company’s div-

idends to stockholders are covered by residualcash earnings;4. Toanalyzeanycashflowtransactionswhich

may adversely affect the financial stability ofthe parent;5. To discuss parent company deficit cash

flows provided by its own operations.6. To discuss any parent company borrow-

ings needed to sustain dividend payments toshareholders;7. To discuss the scope for increasing cash

flow to the parent company; and8. To discuss steps management has taken, or

plans to take, to restore adequate cash earningscoverage for fixed charges and dividend pay-ments, and whether such plans should be com-mensurate with the maintenance of adequateloan loss reserves and Tier 1 capital levels in thebank and major nonbank subsidiaries.The information may be requested in the

officer’s questionnaire and a copy of the‘‘Cash Flow Statement (Parent)’’ page may beincluded with the questionnaire.To complete the page refer to the holding

company’s cash receipts and disbursements jour-nal and its general ledger and income state-ment(s). Also refer to any cash flow and incomeprojections prepared by the organization.The statement should be verified and recon-

ciled, to the extent possible, to the BHC’s pub-lished statements. Any additional items not pro-vided for in the preprinted statement can beseparately listed in an appropriate space.Anydividendsconsideredunreasonableshould

be discussed in the comments section. Divi-dends paid with funds derived from new bor-rowings should be discussed in detail.Any significant cash flow transactions should

be discussed. Refer to section 4010 for exam-ples of such transactions.If shortfalls exist, discuss on the ‘‘Cash Flow

Statement (Parent)’’ page. For example, if theparent has a deficit cash flow provided by itsown operations (as is often the case), discusshow the parent offsets (or plans to offset) thedeficit. If the question is not applicable, state‘‘NA.’’If the BHC must incur additional debt in

order to sustain its dividend payments to share-holders, discuss this in detail on the ‘‘Cash FlowStatement (Parent)’’ page.To the extent that the accrual method of

accounting is used, income and expense itemsshould agree with the figures on the ‘‘Compara-tive Statement of Income and Expenses (Par-ent),’’ and between balance sheet periods, the‘‘Statement of Changes in Stockholder’s Equity(Parent)’’ pages and the ‘‘Income from Subsidi-aries’’ for the fiscal year are as follows:1. Dividends, and management and service

fees from subsidiaries should agree with thoseon the ‘‘Comparative Statement of Income andExpenses (Parent)’’ and the ‘‘Income from Sub-sidiaries’’ pages;2. Interest income should agree with the

amounts reported on the ‘‘Comparative State-ment of Income and Expenses (Parent)’’ and the‘‘Income from Subsidiaries’’ pages;3. Interest expense should agree with the

amounts reported on the ‘‘Comparative State-ment of Income and Expenses (Parent)’’ page;4. Salaries and employee benefits should be

the same as those reported on the ‘‘Comparative


Statement of Income and Expenses (Parent)’’page; and5. Dividend payments made by the parent

should agree with those reported on the ‘‘State-ment of Changes in Stockholder’s Equity (Par-ent)’’ page.Other increases and decreases in cash which

should agree with changes in balance sheetitems on the ‘‘Parent Company ComparativeBalance Sheet’’ page are:1. Increases in borrowed funds;2. Decreases or increases in advances to sub-

sidiaries; and3. Debt retirement or reductions.

Procedures for Inspection Report Preparation (Page—Cash Flow Statement (Parent)) 5010.27


Procedures for Inspection Report Preparation(Page—Parent Company Liquidity Position) Section 5010.28

The Parent Company Liquidity Position page isprepared for bank holding companies with con-solidated assets in excess of $1 billion and thosewith substantial debt outstanding, as well asselect others at the option of the Reserve Bank.The report schedule provides a structured analy-sis of all assets and liabilities within predeter-mined remainingmaturity categories. The sched-ule is designed to place emphasis on remainingmaturing assets and liabilities of less than oneyear.When the schedule is initially completed,

the examiner is provided with an indication ofwhether the parent company has an adequatecushion of short-term liquid assets within the0 to 30 days and the 0 to 90 days categories tocover short-term liabilities, or whether a patternof short-term funding gaps exist. Followingadjustments, if any, to maturing assets orliabilities, the resulting schedule sets forth aframework for observing funding mismatches,thus serving as tool for assessing the parentcompany’s overall liquidity position.A net positive gap is expected in the 0 to

30 days category to show the parent’s ability toride out a temporary market disarray. Similarly,a cumulative positive position is expected in the0 to 90 days categories, despite any deficiencywithin the first 0 to 30 days category. A failureto satisfy those conditions requires the examinerto address the deficiency within the ‘‘Examin-er’s Comments’’ page. Results of the analysisare to be discussed in the parent company sec-tion on the ‘‘Analysis of Financial Factors’’ pagein the inspection report.The report schedule is prepared:1. To determine whether the bank holding

company is avoiding funding strategies thatcould undermine public confidence in the liquid-ity or stability of their banks; and2. To evaluate the holding company’s ability

to meet its maturing obligations, covert its assetswithminimal loss,obtaincash fromothersources,or roll over or issue new debt obligations;3. To determine whether the level of the par-

ent’s liquid assets is sufficient to cover its short-term obligations;4. To analyze the contractual maturity struc-

ture of its assets and liabilities and to estimatethe underlying liquidity of the parent company’sliabilities and assets, giving particular attentionto interest bearing deposits in and advances tosubsidiaries (Note: Parent company advances tosubsidiariesshouldbeconsideredareliablesourceof liquidity only to the extent that they fundassets of high quality that can be readily con-

verted to cash);5. To identify funding surpluses or deficits

for specific maturity intervals;6. To provide an analytical framework for

observing funding mismatches in assessing theparent company’s overall liquidity position;7. To provide an analytical tool and a basis

for discussion of parent company liquidity withmanagement; and8. To provide a basis for developing or eval-

uating existing parent company contingencyplans, including any reliable unused back-uplines of credit. (Note: In the event that maturingliquid assets are not sufficient to satisfy short-term obligations, primarily in the 0 to 90 dayscategories, and the parent company has no con-tingency plan to cover mismatches (shortfalls)in the under 1 year categories, the parent com-pany must be requested to develop such contin-gency plans that must include standby facilitiesthat will be reliable during times of financialstress. For those BHCs with less than satisfac-tory parent or consolidated supervisory ratings(3 or worse), or any BHC subject to seriousliquidity or funding pressures, those BHC’smust include in their contingency plan specificplans to reduce or eliminate entirely their out-standing short-term obligations.)The information for the schedule should be

obtained from the parent company’s balancesheet for the contractual maturing amounts ofassets and liabilities, and slot the amounts intothe five maturity categories depicted.While analyzing the contractual maturities of

the assets and liabilities, the examiner mustconsider the underlying liquidity of the parent’sintercompany advances and deposits and theextent to which they fund high quality assetsthat can be readily converted into cash.The examiner should refer to the Manual’s

funding sections 2080.0 to 2080.6 and sections4010.0 to 4010.2 that address parent companycash flow and liquidity.The report page data should be entered as of

the inspection report financial statement date.The examiner may, at his or her option, incorpo-rate the schedule into the inspection report tosubstantiate or clarify particular judgements.Assets should be recorded net of any allowance(contra asset) accounts.The examiner should assess the contractual

maturity structure of the parent company’s bal-ance sheet by preparing the schedule according


to the parent’s maturing assets and liabilities.The scheduled can be adjusted to better appraisethe parent company’s liquidity position by ana-lyzing interest bearing deposits with bank sub-sidiaries and advances to subsidiaries. The‘‘Other Assets’’ may be sub-categorized withinthe additional space provided. The completedschedule may be used as a basis of discussingparent company liquidity with management. Theexaminer should comment on the findings onthe ‘‘Analysis of Financial Factors’’ page in theinspection report (whether or not the schedule isincluded in the report).

The total of each asset account should equalthe respective assets as listed on the ‘‘ParentCompany Comparative Balance Sheet’’ for theinspection report financial statement date, net ofany separately listed allowance or contra assetaccount balances or any adjustments for marketvaluations. The total of each liability accountshould equal the respective liabilities as listedon the ‘‘Parent Company Comparative BalanceSheet’’ as of the inspection report financial state-ment date.

Procedures for Inspection Report Preparation (Page—Parent Company Liquidity Position)5010.28


Procedures for Inspection Report Preparation (Page—ClassifiedParent Company and Nonbank Assets) Section 5010.29

This report page is included in all reports whenassets are classified and written up. For inspec-tions of bank holding companies with less than$150 million in total assets, it is to be includedin the Core section of the report. The informa-tion reported represents analyses and conclu-sions for the classification of the parent’s assetsand identifies all of the nonbank subsidiary’sclassified assets. Refer to the instructions for the‘‘Summary of Consolidated Classified and Spe-cial Mention Assets,’’ Core page 7, for a discus-sion of classification standards.

The purpose of the report page is to—

• determine the risk involved in the parent’sactivities,

• determine the adequacy of reserves,• disclose problem assets requiring manage-

ment’s attention, and• aid in the analysis of the condition of the

nonbank subsidiary(ies).

The information is obtained by an evaluationof the parent’s assets and the assets of nonbanksubsidiaries. For nonbank company assets, theinformation is obtained through examining theloan and lease portfolios, and reviewing creditfiles, loan reviews, past-due lists, credit analy-ses, and watch lists prepared by the holdingcompany.

Any asset classified doubtful or loss requiresa write-up unless the amount is insignificant tothe company’s operations. Where asset reviewsare undertaken, the examiner should note atwhich entities the asset reviews were performed,and their level of coverage. Any classified assetthat is challenged by management also requiresa write-up.

Loan write-ups may extend across the entirepage. At a minimum, show the total amount of

extension of credit booked by the parent, nameof debtor, name of guarantors, collateral, amountof classification in appropriate category, dateoriginated, maturity, purpose, and where deemednecessary, a short write-up giving the reason forthe classification. Also identify any participa-tion with a subsidiary, including the subsidiary’sname and amount held by the subsidiary.

Nonbank loans classified substandard may belisted alphabetically with no write-up required,unless the holding company management dis-agrees with the classification. For other nonbankassets classified substandard, some minimumcomment is necessary. For example, the exam-iner may make one general comment concern-ing the deficiencies of several credits or otherassets listed.

Any nonbank subsidiary loan classified doubt-ful or loss, where the amount classified exceedsthe lesser of $100,000 or 5 percent of the subsi-diary’s total assets, should include a brief write-upstating the reason(s) for classification. However,at the discretion of the examiner, any doubtfulor loss classification may be the subject of awrite-up.

In the case of nonbank subsidiaries such asconsumer finance companies where there arerelatively small amounts and a large volume ofaccounts involved, the use of ‘‘bulk classifica-tion’’ by degree of delinquency may be moredesirable than listing each loan individually.The examiner may provide write-ups on anyclassified nonbank subsidiary asset deemedappropriate.

The classification totals should agree with‘‘Examiner’s Comments,’’ and/or ‘‘Analysis ofFinancial Factors’’ pages. Any major asset prob-lems may be discussed on the ‘‘Examiner’sComments’’ or ‘‘Analysis of Financial Factors’’pages and should be cross checked.


Procedures for Inspection Report Preparation(Page—Bank Subsidiaries) Section 5010.30

This FR 1225 report page or section (continuousflow reporting basis) presents consolidated finan-cial statement data (a condensed balance sheetand income data) for the lead bank and anyother subsidiary bank or banks (that is, subsidi-ary banks that have consolidated assets of$500 million or more) or for those bank subsid-iaries that exhibit conditions warranting specialsupervisory attention (that is, rated composite 3,4, or 5 under the Uniform Interagency BankRating System). The summary of the examiner’scomments and other important data extractedfrom the latest report of examination are incor-porated into the analysis of the bank componentof the RFI/C(D) rating (see section 4070.0) onthe ‘‘Analysis of Financial Factors’’ page orsection. The summary is incorporated when abank subsidiary comprises 10 or more percentof consolidated assets and/or when a bank sub-sidiary evidences material financial deficienciesor other characteristics that should be brought tothe attention of the bank holding company’sboard of directors, including noted bank viola-tions.1 As banking assets make up the majorityof the assets of the holding company, the condi-tion of the larger banks and special supervisoryattention banks may have a significant impacton the condition of the consolidated organization.

The financial statements should be requestedin the officer’s questionnaire. Balance-sheet andincome data can be obtained from the reports ofcondition, income, and dividends of the subsidi-ary banks.

Provide a condensed balance sheet as of the

inspection date and a statement of income. Theincome data should be presented in a compara-tive columnar format and should include totaloperating revenue, total operating expenses, netoperating income, applicable income taxes, netsecurities gains or losses, and net income. Thebalance-sheet and income data, while con-densed, should provide detail to permit analysisof earnings and capital. Where any past orpotential problems exist, the examiner mayinclude more detailed statements to supportcomments presented.

All pages should bear the same ‘‘Bank Sub-sidiaries’’ page number, except that the numbershould be suffixed with a 21, 22, 23, etc., toreflect the subsequent ‘‘BankSubsidiaries’’pages.

The following items should be checked tomake certain that—

1. advances from the parent company agreewith the ‘‘Investment in and Advances to Sub-sidiaries’’ page;

2. the holding company’s proportionate shareof the capital accounts reconciles with theinvestment shown on the ‘‘Investment in andAdvances to Subsidiaries’’ page;

3. external (unaffiliated) debt shown agreeswith that on the ‘‘Unaffiliated Borrowings’’ page;

4. net income reconciles with the sum ofequity in undistributed earnings and dividendson the ‘‘Income from Subsidiaries’’ pages, inproportion to the holding company’s percentageof ownership; and

5. any relevant comments made on the ‘‘BankSubsidiaries’’ pages agree with Core page 1,‘‘Examiner’s Comments and Matters RequiringSpecial Board Attention.’’

1. In determining the subsidiary banks that require write-ups, examiners should be mindful of the effect that cross-guarantee provisions of can have on nontroubled bank subsid-iaries.


Procedures for Inspection Report Preparation(Page—Nonbank Subsidiary) Section 5010.31

For each direct nonbank subsidiary (and its sig-nificant subsidiaries not consolidated in its state-ments), a summary is to be provided of itshistory, activities, classifications, and risk expo-sure. Nonbank subsidiary pages consist of ‘‘Non-bank Subsidiary,’’ ‘‘Nonbank Subsidiary Finan-cial Statements,’’ and ‘‘Nonbank Assets Subjectto Classification.’’ Each subsidiary should bepresented as a ‘‘unit.’’ Successive subsidiariesshould be sequentially presented (for example,18a, 18b, etc.). The information provided on thereport page should aid in the determination ofpermissibility of activities and locations, and theevaluation of the subsidiary’s asset quality.

1. Provide the proper name of the organiza-tion, location, date of approval, date of acquisi-tion or establishment, date activity commenced,statutory authority, and approved branch officelocations should be obtained from Reserve Bankrecords, presented, and verified with the holdingcompany’s records. Note the date of approvalfor each activity and office, if applicable.

2. For going concerns acquired by the bankholding company, state the date acquired. Forde novo subsidiaries, state the date established .

3. For de novo subsidiaries, state the dateactivity commenced. Indicate if the BHC hasreceived approval for any de novo activity thathas not yet been commenced. Identify any ap-proved activity for which authority has expired.

4. Number 6 refers to the exemptive provi-sion (statutory authority) of the Bank HoldingCompany Act relied upon to continue to engagein the activity. If section 4(c)(8) of the act isindicated, also provide the corresponding refer-ence to section 225.25(b) of Regulation Y toindicate the specific activities.

5. Provide the city and state location for eachbranch; however, if the subsidiary has a greatnumber of branches (for example, a consumerfinance subsidiary), the examiner may presentonly the number of offices located in each stateor foreign location.

6. For the history and description section,

summarize the activities in which the companyis engaged and discuss how it has expanded itsoperations (de novo or by acquisition). Discussany violations that may have been uncovered.

7. Prepare a written risk assessment of eachactive nonbank subsidiary, addressing the finan-cial and managerial concerns outlined below.1This assessment is to identify subsidiaries witha risk profile that warrants an on-site presence.In formulating this assessment, the examinershould consider all available sources of informa-tion including, but not limited to—

• findings, scope, and recency of previousinspections;

• ongoing monitoring efforts of surveillance andfinancial-analysis units;

• information received through first-day lettersor other pre-inspection communications;

• regulatory reports and published financialinformation; and

• reports of internal and external auditors.

The risk assessment should address each non-bank subsidiary’s funding risk, earnings expo-sure, operational risks, asset quality, capitaladequacy, contingent liabilities and other off-balance-sheet exposures, management informa-tion systems and controls, transactions withaffiliates, growth in assets, and the quality ofoversight provided by the management of thebank holding company and nonbank subsidiary.Examiners are expected to document theirassessment of the overall risk posed by eachnonbank subsidiary on this report page or equiva-lent inspection workpaper. See SR-93-19.

The examiner should make certain that theclassifications and valuation reserves summa-rized for the nonbank subsidiaries agree withtotals on either the ‘‘Summary of ConsolidatedClassified and Special Mention Assets’’ page orthe ‘‘Parent Company and Nonbank Assets Sub-ject to Classification’’ page.

1. The assessment of nonbank activities in large, complexorganizations may be focused on an intermediate-tier com-pany with oversight responsibility for multiple nonbanksubsidiaries.


Procedures for Inspection Report Preparation (Page—NonbankSubsidiary Financial Statements) Section 5010.32

This page presents a condensed statement ofcondition for credit extending and special super-visory attention nonbank subsidiaries (and othersat the examiner’s discretion) as of the inspectiondate, and income data for the latest fiscal yearand the year-to-date. The purpose of the reportpage is to aid in the analysis of the condition ofeach nonbank subsidiary and in the analysis ofits effect on the consolidated company. Thepage is completed for all credit extending sub-sidiaries and may be completed for any othersubsidiary deemed appropriate.Financial statements should be requested in

the officer’s questionnaire. In the case of largersubsidiaries other financial information may beobtained from the F.R. Y–6, the SEC Form10-K, published reports to stockholders andreports filed with professional associations.Details relevant to the financial statements canbefoundbyreviewingvariousaccountingrecords.The balance sheet should be structured to

provide sufficient detail for meaningful analysis,including specifics on valuation reserves and

stockholders’ equity. Income data should alsobe provided for the latest fiscal year plus theyear to date (i.e., total revenue, net operatingincome, net income, rates of return). Provide acondensed income statement for the year to dateif considered necessary.The examiner should ascertain that:1. Advances from the parent agree with the

‘‘Investment in and Advances to Subsidiaries’’page;2. Theholdingcompany’sproportionate share

of the capital accounts reconcile to the invest-ment shown on the ‘‘Investment in and Advancesto Subsidiaries’’ page;3. External debt reported agrees with the in-

formation reported on the ‘‘Liquidity and Debt’’Confidential page ‘‘C’’; and that4. Net income reconciles with equity in un-

distributed earnings and dividends paid on the‘‘Income from Subsidiaries’’ pages, in propor-tion to the holding company’s percentage ofownership.


Procedures for Inspection Report Preparation (Page—Fidelity and Other Indemnity Insurance) Section 5010.33

This page presents the fidelity and other indem-nity insurance coverage of the holding companyand its subsidiaries. Refer to section 2060.5 forrelated information. The report page is used toprovide a summary as to whether:1. The parent and nonbank subsidiaries have

been insured against the potential for significantlosses by maintaining proper and sufficientinsurance;2. A comprehensive review of the insurance

program is conducted periodically by manage-ment and at least annually by the board ofdirectors and entered into the minutes;3. A determination can be made as to which

entity(ies) is responsible for paying the premi-ums and if the manner in which such paymentsare allocated is equitable among the affiliatesthat receive the coverage benefits; and4. Procedures are in place to assure that

claims are filed promptly.The information on insurance coverage is

usually available from an ‘‘insurance officer’’and from a review of insurance policies duringthe inspection. The examiner should conduct areview of insurance coverage with the ‘‘insur-ance officer.’’ In summarizing results, the exam-iner should indicate if any nonbank subsidiary iscovered under a separate policy or if it is notcovered. Also, it should be stated whether thepolicy is maintained by the bank and whetherthe BHC and nonbanks are covered by thebank’s policy. The method used to allocate thecost of insurance to the subsidiaries should alsobe provided.The comments detailed on the report page

should be consistent with summarized com-ments on the ‘‘Policies and Supervision’’ pageand the ‘‘Other Supervisory Issues’’ page,item 7, if included in the report. Any note-worthy deficiencies in the insurance programmay be included on the ‘‘Examiner’s Com-ments’’ page at the examiner’s discretion.


Procedures for Inspection Report Preparation(Reserved for Future Use) Section 5010.34


Procedures for Inspection Report Preparation(Page—Other Supervisory Issues) Section 5010.35

This report page consists of topics dealing withlitigation and commitments, the supervisoryreports, intercompany transactions and othertopics of supervisory concern.

The report page includes questions that areworded to evoke a ‘‘yes’’ response, or if thereare no problems in a particular area, a ‘‘no’’response. If there are any deviations therefrom,responses are required. Positive responses as toeither the adequacy of the insurance or auditprograms should only be accompanied by areference to the appropriate inspection reportpage that addresses the topic. For additionalguidance on answering the questions on thisinspection report page refer to the ‘‘OtherSupervisory Issues’’ FR 1241 report pageinstructions.

5010.35.1 INTERCOMPANYTRANSACTIONS (QUESTIONS 1)

This question inquires as to the existence ofsignificant intercompany transactions or diver-sions of bank income subject to adverse com-ments. This question guides the examiner whendocumenting the review of compliance withBoard policy, statutes and regulations regard-ing various kinds of intercompany transactions.

For information on diversion of bank income,review management and service fees chargedthe bank and any compensating balancesmaintained by the bank on behalf of affiliatesindicated on the ‘‘Comparative Statement ofIncome and Expenses (Parent)’’ and the ‘‘Com-mercial Paper (Parent)’’ pages, respectively.Comments on section 23A considerations maybe found by a review of bank examinationreports. The examiner may refer to Manual2020.6 (management and service fees) forinstructions on examining for diversions of bankincome. For information on examining for 23Aand 23B violations, see Manual section 2020.1(transactions between affiliates) and the otherManual intercompany transactions sections2020.2–2020.7.

Violations of section 23A and 23B of theFederal Reserve Act and section 106(b) of the1970 Amendments to the Bank Holding Com-pany Act may be summarized as ‘‘Examiner’sComments and Matters Requiring Special BoardAttention’’ or listed as ‘‘Other Matters’’ or ifappropriate as ‘‘Violations’’ with the readerreferred to these pages for more detail. If theexaminer includes comments concerning otherintercompany transactions on Core page 1,

‘‘Examiner’s Comments,’’ the information shouldbe cross-checked.

5010.35.2 COMPENSATINGBALANCES (QUESTION 2)

If a subsidiary bank is not adequately compen-sated for maintaining compensating balances atanother institution for debt advances to the hold-ing company, provide:

1. The average collected and book balance orthe range of the balance;

2. Any arrangement whereby the loan or lineof credit agreement between the creditor bankand parent contains a requirement to maintain acorrespondent account; and

3. Comments as to whether the subsidiarybank is reimbursed for maintaining the compen-sating balance.

Refer to Manual section 2020.4 (compensat-ing balances).

5010.35.3 INTERCORPORATEINCOME TAX PRACTICES(QUESTION 3)

Information on intercorporate tax practices maybe obtained from the accounting or comptrol-ler’s department. Manual section 2070.0 (taxes)may be referred to for information on examin-ing intercorporate tax transactions which includesthe Board’s intercorporate tax policy statementof September 20, 1978.

In addition to the above references, examin-ers should be aware that whenever there is aconsolidated income tax return filed, it is impor-tant that a formal tax agreement exists betweenthe parent and each subsidiary (approved byeach board of directors). Examiners shouldencourage management to prepare such an agree-ment if not already in place.

Board policy states that taxes paid by a sub-sidiary bank to its parent should not be in excessof what the bank would pay if it filed on aseparate entity basis. However, certain adjust-ments, in particular the allocation of tax benefitsin a consolidated return, may result in higherpayments than would have been made had thebank been unaffiliated (i.e., the surtax exemp-tion must be allocated between organizationsfiling a consolidated return whereas an entity


filing alone could use the entire exemption). TheBoard normally would regard such adjustments(that result in amounts in excess of filing alone)as acceptable. The Board does not wish to pre-scribe the tax accounting methods to be used byBHCs. However, the Board does require thatthose methods employed give bank subsidiariesequitable treatment.

The examiner should comment whenever anyof the following has occurred:

1. A subsidiary has been required to maketax payments to its parent that significantly pre-ceded the date the consolidated tax paymentsare paid to IRS. (In general, ‘‘significantly’’means not in excess of five business days.)

2. A subsidiary bank is due a tax refund dueto a fiscal net loss on a taxable basis (or due toother tax credits) and the parent has not refundedto the bank taxes paid by the bank to the parentin previous tax periods.

3. The subsidiary bank has passed up de-ferred income tax liabilities to the parent alongwith an equivalent amount of cash or earningasset. Such transactions must be reversed by areinstatement of the deferred tax on the books ofthe bank, along with the transfer by the parentof an equivalent amount of cash or appropriateearning asset.

5010.35.4 TIE-IN ARRANGEMENTS(QUESTION 4)

As for tie-in arrangements, see Manual section3500.0 (tie-in considerations). This Manual sec-tion provides information on examining forimpermissible tie-in arrangements. Informationon tie-in arrangements is available from BHCand nonbank subsidiary management and mayalso be found by reviewing standard lendingagreements and manuals.

5010.35.5 INSIDER TRANSACTIONS(QUESTION 5)

Consider:1. The policy in regard to extensions of credit

by a bank holding company or its nonbanksubsidiaries to the BHC officials (executive offi-cers, directors or ‘‘more than 10 percent’’ share-holders) or the BHC officials’ interests in theorganization;

2. Prohibitions on bank extensions of creditcontained in the Financial Institutions Regula-

tory and Interest Rate Control Act of 1978; and3. Whether the bank holding company has a

conflict of interest statement or business ethicspolicy that has been distributed to employees.

If there are insider transactions subject tocomment, list the parent and nonbank sub-sidiary extensions of credit to BHC officials.Also, comment on the compensation to the of-ficials. See Manual sections 2050.0, 2110.0, and5010.36.

5010.35.6 LITIGATION(QUESTION 6)

A ‘‘yes’’ response to this question would requirea summary of any litigation involving the parentbank holding company and the bank and non-bank subsidiaries, which could have a signifi-cant effect on the holding company. The pur-pose of this question is to aid the examiner inthe analysis of the financial condition of theholding company by determining if any pendinglitigation poses a threat to the financial condi-tion of the BHC.

Any information on law suits should berequested in the officer’s questionnaire. Infor-mation on litigation which may have a signifi-cant impact on the company is often included inthe published annual report to stockholders or inthe SEC Form 10-K.

Comments on litigation should be presentedin narrative form summarizing the details of thelawsuit, including, if possible, the opinion of theholding company’s counsel as to the possibleoutcome of the suit. Generally, include onlysuits representing more than 10 percent of theholding company’s stockholders’ equity capital.Discussion of immaterial litigation should beavoided.

Any litigation which may have a significanteffect on the bank holding company may besummarized on the Examiner’s Comments, Corepage 1, at the discretion of the examiner. Also,any litigation which, in the opinion of manage-ment or counsel, is expected to result in a sig-nificant liability should be noted on the ‘‘Contin-gent Liabilities (Parent)’’ page.

5010.35.7 INSURANCE PROGRAM(QUESTION 7)

See Manual sections 2060.5 and 5010.33.

Procedures for Inspection Report Preparation (Page—Other Supervisory Issues) 5010.35


5010.35.8 AUDIT PROGRAM(QUESTION 8)

A negative response to this question will resultfrom application of the inspection instructionsfound in Manual sections 2060.1 and 5010.34.Comments responding to this question shouldbe confined to briefly summarizing any auditprogram deficiencies and should reference anydetailed information provided on other reportpages.

5010.35.9 CREDIT QUALITY REVIEWPROGRAM (QUESTION 9)

This question refers to the examiner’s review ofthe BHC’s internal loan review program. Anegative response would result from the exam-iner’s use of the inspection instructions andprocedures found in Manual section 2060.6.

5010.35.10 SUPERVISORY REPORTS(QUESTION 10)

A ‘‘yes’’ response with regard to this topicwould result in providing information on thetimeliness and accuracy of the bank holdingcompany’s submittal of required reports, suchas the FR Y–6, Y–8 and the Y–9’s to theReserve Banks. If the bank holding company isconsistently late in filing its reports or if thereare repeated discrepancies that need correction,it could be indicative of operational deficienciesor a lack of managerial direction within thebank holding company.

Information on the timeliness and accuracy ofreports must be obtained from the Reserve Bank

unit handling the reports and by verifying selecteditems to corporate records. If reports are rou-tinely filed late or inaccurately, the reason andthe measures the bank holding company may betaking to eliminate the problem should be statedon this inspection report page.

5010.35.11 OUTSTANDINGCOMMITMENTS TO THE BOARD OFGOVERNORS (QUESTION 12)

This question reminds the examiner to appraisethe bank holding company’s compliance in ful-filling commitments made to the Board or theReserve Bank. Thus, if there are any commit-ments outstanding which the holding companyhas made to the Board or the Reserve Bank,appropriate comments should be provided onthe page.

Each Federal Reserve Bank is required toreport to the Board’s Division of BankingSupervision and Regulation on a semi-annualbasis the status of unfulfilled commitments. Theexaminer should review this Reserve Bank reportbefore beginning the inspection.

Commitments should be summarized present-ing the nature of the commitment, the date thecommitment was made, and, if applicable, thetime frame in which it must be fulfilled. If thetime frame has expired, or if an extension isdeemed necessary to fulfill the commitment,details must be presented. The examiner maychoose to make a reference to the unfulfilledcommitment on the ‘‘Examiner’s Comments’’Core page 1, if considered appropriate.

Procedures for Inspection Report Preparation (Page—Other Supervisory Issues) 5010.35


Procedures for Inspection Report Preparation (Page—Extensions of Credit to BHC Officials . . .) Section 5010.36

The Financial Institutions Regulatory and Inter-est RateControl Act of 1978 (FIRA), as amendedby FDICIA, accompanied by the Board’s com-plimentary Regulation O, governsbank exten-sions of credit to insiders. With the passage ofFDICIA and the complementary revision ofRegulation O, there is the possibility that therewill be an increase in the volume of parentcompany and nonbank subsidiary extensions ofcredit to BHC officials and their related inter-ests. The report page presents information onparent companyandnonbankextensionsof creditto insiders, as well as parent company and non-bank subsidiary investments in and loans onstock or obligations of BHC officials’ relatedinterests. Examiners must reference Manual sec-tion 2050.0 to complete this page.This report page is intended to identify exten-

sions of credit to BHC officials so that thosecredits may be reviewed for propriety and com-pliance with the policies of the BHC and Man-ualsection2050.0.AlthoughRegulationOappliesonly to bank extensions of credit, for BHCinspection purposes, definitions contained inRegulation O shall be used by System examin-ers in order to provide a uniform, comparableapproach to reviewing extensions of credit toBHC officials.The information requested on the report page

should be requested in the officer’s question-naire. Other sources may include the annualreport to shareholders, the FR Y–6 and filingswith the Securities and Exchange Commission.BHC examiners should review Manual sec-

tion 2050.0 and Regulation O, and should befamiliar with the definitions contained in theregulation. Examiners are asked to identify suchcredits for in-depth reviewandanalysis.AlthoughRegulation O applies specifically to extensionsof credit by banks, and not the parent or non-bank subsidiaries, examiners may criticize aBHC’s or nonbank subsidiary’s direct exten-sions of credit to BHC officials or their relatedinterests as an unsound practice or may criticizea specific loan for credit reasons.Such exten-sions of credit are not to be cited as violations ofRegulation O.DuringaBHCinspection,BHCofficialsshould

be made aware that information necessary forthe completion of this page is being collected toevaluate practices, policies, or particular credits,but that FIRA and Regulation O apply exclu-sively to bank extensions of credit.Section 215.4 of Regulation O entitled ‘‘Gen-

eral Prohibitions’’ sets forth various restrictionson bank extensions of credit to BHC officials. In

general, if the BHC examiner reviewing BHCand nonbank subsidiary direct extensions ofcredit to BHC officials and their related interestsconcludes, after consultation with counsel forthe Reserve Bank, that the extension of creditwould not have been in compliance with section215.4 had it been a bank extension of credit, theexaminer may conclude that it is appropriate tocriticize the practice or the loan. If it is con-cluded that the BHC or nonbank subsidiaryextended the loan in order to circumvent therestrictions on bank extensions of credit, com-ments to that effect should be incorporated ontothe ‘‘Other Supervisory Issues’’ page or a ‘‘Con-tinued’’ page. Such comments may be also sum-marized on page 1, ‘‘Examiner’s Comments’’,at the discretion of the examiner based on thedegree of materiality, severity and impact.Specifically, section 215.4 of Regulation O

(in part) requires bank extensions of credit toBHC officials not to be on preferential terms,not to have more than the normal risk of repay-ment, and over certain dollar amounts to beapproved by the bank’s directors. In addition, itrequires bank extensions of credit to executiveofficers, principal shareholders, and their relatedinterests not to exceed the bank’s legal lendinglimit to any such individual and his/her relatedinterests.In reviewing BHC and nonbank extensions of

credit to ‘‘related interests,’’ note that a relatedinterest is defined in section 215.2(k) of Regula-tion O as ‘‘a company that is controlled by aperson . . .’’ The definition of ‘‘company’’ forpurposes of Regulation O specifically excludesany ‘‘insured bank.’’ However, for purposes ofcompleting these report pages, and evaluatingthe propriety of BHC and nonbank extensionsof credit to (and investments in) ‘‘related inter-ests’’ of BHC officials, ‘‘related interests’’ shallinclude ‘‘banks.’’ Therefore, a BHC or nonbankdirect extension of credit to (or investment in) aBHC official’s ‘‘related interest’’ that is itself abank (other than a subsidiary bank of the subjectBHC), should be reported.For purposes of this page, ‘‘direct’’ exten-

sions of credit represent obligations of the BHCofficial or related interest, alone or as co-makerwhile an ‘‘indirect’’ extension of credit includesa BHC official’s or a related interest’s endorse-ment or guarantee of an extension of credit to athird party, and obligation’s to the BHC offi-cial’s immediate family (spouse, all minor chil-


dren, and all children, including adults, residingin the individual’s home). BHC and nonbankextensions of credit to a BHC official whoserves in two or more capacities, i.e., directorand executive officer, should only be presentedonce.In completing the ‘‘Schedule,’’ the examiner

may select the cut-off amount used to determinewhich items are listed individually based onmateriality. However, any extension of credit(or group of credits) to an individual BHC offi-cial and his/her related interests that would haveexceeded the subsidiary bank’s lending limithad it been made by the bank, should be listedindividually. (In multibank holding companies,use the banks’ aggregate lending limit.)

In listing ‘‘Terms’’ within the ‘‘Schedule,’’include at a minimum interest rate and date ofmaturity. ‘‘Comments’’ are intended to include abrief description of any collateral, endorse-ments, the purpose of the loan, the nature of theborrower’s relationship to the lender if not self-evident, and status of repayment if delinquent orclassified.Identify the source and cost of funds used by

the BHC to extend the loan. Any adverse affectto the BHCs net income should be commentedon.Extensions of credit should be consistent with

policies summarized on the ‘‘Policies andSupervision’’ page. Otherwise, additional com-ments might be warranted.

Inspection Report Preparation (Page—Extensions of Credit to BHC Officials) 5010.36


Procedures of Inspection Report Preparation (Page—InterestRate Sensitivity—Assets and Liabilities) Section 5010.37

The purpose of this report page is to present abrief analysis of the interest sensitivity of assetsand liabilities on the inspection date and tofurther support the analysis in the form of ratiossimilar to a current ratio and a net workingcapital to total assets ratio. Positive or negativegaps within maturity buckets are gathered in theform of cumulative gap totals. The analysis canbe prepared for each level of the organization.Such an analysis is designed to determine

whether maturing interest sensitive assets matchmaturing interest sensitive liabilities on a 1 to 1basis within specified maturity ranges and on acumulative basis over time.The information for the report page can be

gathered from financial management maturityanalyses and interest sensitivity reports preparedby the bank holding company’s management. Alimitedamountofmaturity informationon interestsensitive assets and liabilities may be obtainedfrom Bank Call Reports, Bank Holding Com-pany Y reports, Bank Performance Reports, andBHC Performance Reports, and can be used ifthe inspection ‘‘as of’’ date is the same as thedate of these reports.

From information collected, list interest sensi-tive asset totals and liability totals within thematurity buckets provided for the consolidatedentity. The maturity ranges may be adjusted toor expanded to coincide with interest rate sensi-tivity reports generated by the bank holdingcompany management.Next, subtract the liability totals from the

asset totals to get the ‘‘Gap’’ totals. For eachmaturity range beyond 91 days, add the nextrepricing interval ‘‘Gap’’ total to the previous‘‘Cumulative Gap’’ totals to obtain the repricinginterval’s cumulative gap.To determine the ratio of interest sensitive

assets to interest-sensitive liabilities, use the cu-mulative gap for the denominator. Extend thepercent out to at least two decimal places.Provide narrative analysis for any maturity

period or cumulative negative or positive gappositions, stating what measures will be takenby management to address any adverse gappositions.


Procedures for Inspection Report Preparation(Page—Treasury Activities/Capital Markets) Section 5010.38

This report page presents generalized questionsfor the examiner to answer on treasury activitiesand capital markets. This page must be includedin inspection reports prepared for bank holdingcompanies that have significant exposure in thecapital markets. Specific guidance can be foundin section 2125.0, in the Federal ReserveSystem’s Trading Activities Manual, and inSR-93-69, December 20, 1993. Procedures for

inspecting and preparing the written analysisshould be based on this supervisory guidance.In banking organizations with national or statenonmember lead banks and where capital mar-kets activities are conducted exclusively at thesubsidiary bank, examiners should coordinatethe collection of the information included onthis page with the lead bank supervisory agency.


Procedures for Inspection Report Preparation (ConfidentialPage A—Principal Officers and Directors) Section 5010.40

The purpose of this report page is to identifydirectors and principal officers and determinethe level of participation and responsibility inthe affairs of the holding company, and to iden-tify outside relationships in order to determineconflicts of interest. The page contains the namesof the principal officers of the company andtheir position with other subsidiaries. This pagealso presents the names of directors, the numberof years they have served in that capacity, theiryear of birth (to possibly assess management’splans for succession), regularity of their atten-dance at directors’ meetings, and principal out-side employment. Note if any director is also adirector of a Federal Reserve Bank or branch.The directors and principal officers’ fees,

compensation and other benefits information isalso to be obtained and retained in the work-papers. If desired by the Reserve Bank, suchsalary, bonus, benefits, and other remunerationinformation may be included on this page.Criticism of directors’ fees should be carefullyconsidered.The directors’ ownership information (i.e.

address of each director and the number ofshares owned) is also to be obtained and mayalso be reported or retained in the workpapers.If the holding company has an advisory board orhonorary directors, the data on these personsmay be included on the report page at the exam-iner’s discretion.All information on principal officers and

directors such as year of birth, responsibilityand compensation, etc. should be requested intheofficer’squestionnaire.Attendancedatashouldbe available from the board of directors’ min-utes. Such information may also be contained inreports to shareholders, FR Y–6, proxy state-ments and SEC filings.The directors and principal officers should be

listed alphabetically with their city and State ofresidence indented immediately below theirnames. If appropriate for mailing purposes, showeach director’s mailing address.The principal officers and directors are to be

listed in order of rank, and alphabetically whereofficers have identical titles. For directors andprincipal officers, membership on principal com-

mittees of the board should be coded and placedimmediately after the name on the same line(i.e., E = Executive, A = Audit). If a director hasbeen elected since the last inspection, the date ofelection should be shown immediately after hisname. For example:

John Smith elected 4-1-x1

The officer and director positions held withsubsidiaries should be kept as brief as possible,utilizing abbreviations established on the ‘‘Struc-ture and Abbreviations’’ Core Page 3. List onlymajor positions if routinely assigned to staff ofall subsidiaries.A brief summary of benefits provided to offi-

cers and employees (i.e., pension plans, life andhealth insurance) may be presented at the bot-tom. Such information can assist in determiningwhether the principal officers appear to be ade-quately or overly compensated.Special financial arrangements for specific

officers may also be noted. Such arrangementswould include salary contracts, unusual bonuses,fees or expense allowances, stock options,deferred compensation, and exclusive use ofreal estate, automobiles and airplanes.When indicating occupation or principal busi-

ness affiliation of directors, use concise, descrip-tive designations instead of general notationssuch as ‘‘merchant’’ or ‘‘industrialist.’’ If thedirector is an officer or principal in a firm, showalso the nature of the business in parentheses(e.g., law firm, CPA, pharmaceutical manufac-turer, etc.).The examiner should verify that the director-

ship is in compliance with Regulation L or Rand that the number of directors is consistentwith the corporations’ bylaws. The examinershould also indicate the regular schedule ofdirectors’ meetings at the bottom of the reportpage to provide the Reserve Bank withinformation needed to plan attendance at boardmeetings.Examiners should be careful to use the same

names and titles of officers when referring to theindividuals elsewhere in the report.


Procedures for Inspection Report Preparation (ConfidentialPage B—Condition of Bank Holding Company) Section 5010.41

In general, this report page or section (continu-ous flow reporting basis) presents pertinent infor-mation that is deemed confidential by the ReserveBank and available to regulatory authorities.The report page or section is used to discuss andassess, confidentially, the going-concernoperating results and the prospects for resolvingany problems or areas of concern. The reportpage or section should be also used to discusscompliance problems relating to statutory, regu-latory, or administrative provisions cited withinthe core or other open sections of the report. Thepotential for any improvement or weakening ineconomic conditions should also be discussed tothe extent they have a bearing on earningspotential.

The specific information to be provided onthe report page or section is—

1. information on the organization’s near-future financial prospects, giving particular con-sideration to debt servicing and the likelihood ofimproving any current problems;

2. an assessment of holding company man-agement as to the experience and qualificationsof principal personnel when relative to theassessment, and a listing of subsidiary bankratings, effective examination dates, and typeand scope of examinations;

3. the examiner’s concise assessment of man-agement’s oversight of the BHC’s policies andsupervision of subsidiaries with respect to thelevel of control and supervision exercised oversubsidiaries (see sections 2010.0 to 2010.13)should be discussed. (An evaluation of the bankholding company’s recognition and control ofexposure to risk should also be provided (seesection 2160.0) as well as an evaluation of man-agement information systems (MIS) based onthe guidance found in sections 2060.01 through2060.4.);

4. a discussion of the reasons for the compo-nent ratings and overall RFI/C(D) rating assigned(see section 4070.0);

5. an analysis of chain banking organiza-tional structure (The examiner must determinewhether the BHC is a member of a chain bank-

ing organization. A chain banking organizationmay be defined generally as a collection ofindependent banking organizations that are con-trolled by the same individual, family, or agroup of individuals closely associated in theirbusiness dealings.);

6. a listing of individuals or groups that con-trol more than 5 percent of the BHC’s outstand-ing stock (Discuss any significant changes inownership. A review of ownership is to include

a determination as to whether an individual orgroup of shareholders exercise significant influ-ence over the BHC. It should also include adiscussion of fiduciary holdings of the parentcompany’s stock and convertible debt of theBHC’s subsidiaries.);

7. a presentation of confidential informationrelating to the components of the BHC ratingsystem, avoiding repetition by cross-referencingreport pages in the open section; and

8. examiners’ comments on any other super-visory concerns or aspects of the BHC’s condi-tion warranting confidential treatment. Com-ments on any violation and/or a BHC’s unsafeand unsound practice should be included withany recommendations for Federal Reserveadministrative action. Any plans of the holdingcompany that are considered to be of a confiden-tial nature should also be discussed.

Financial-analysis comments on the bank hold-ing company organization (that is, RFI/C(D)components, not the ratings) that are not of aconfidential nature are to be discussed on theAnalysis of Financial Factors core page 3.

The date and type of examination and assignedrating can be obtained directly from the latestexamination report of each subsidiary bank. Theother information is to be derived from discus-sions with senior management.

The information pertaining to ratings(CAMELS) and ratios of the banks is to bepresented in columnar form with the bankslisted as they appear on the organization chart.Also include any comment on the bank(s) deemedto warrant confidential treatment.

The examiner is expected to review and usethe examination ratings of the other federalagencies where appropriate; however, if sub-stantive differences of opinion exist as to thebank’s composite rating, adjustments to the rat-ing may be made and footnoted accordingly.

The examiner should make certain that thebank names or abbreviations are consistent withthe organization chart and other tables in theinspection report. Any ratios or comments usedin the rating analysis should be checked to cor-responding areas in the open section.


Procedures for Inspection Report Preparation (ConfidentialPage C—Liquidity and Debt Information) Section 5010.42

This page provides a ‘‘snapshot’’ picture of theparent company’s short-term gap position as itrelates to the amount of commercial paper com-pared to net short-term GAP within repricingmaturity categories and also the cumulativeGAP position within the maturity buckets. Thepage provides summary information of aggre-gate data from the ‘‘Commercial Paper (Par-ent),’’ ‘‘Parent Company Liquidity Position’’and the ‘‘Unaffiliated Borrowings’’ pages orworkpapers.The lower portion of the schedule provides

details on unaffiliated borrowings such as theamount and types of external indebtedness ofthe parent and its subsidiaries. Informationregarding various debt covenants such as crossdefault clauses, collateral information and nega-tive covenants can be included.The purpose of the page is to aid in evaluat-

ing the company’s ability to service its debt andto operate within the constraints of debt restric-tive covenants. It also aids in evaluating theappropriateness of the uses of the proceeds ofthe organization’s borrowings.Information for the source report pages or

workpapers required for an analysis of parentcompany liquidity, commercial paper and othershort-term debt, and long-term unaffiliated bor-rowings should be requested in the officer’squestionnaire or can be obtained from the BHC’saccounting department. Totals should be broughtforth from the ‘‘Commercial Paper (Parent)’’and the ‘‘Parent Company Liquidity Position’’pages or workpapers, or reconciled to thegeneral ledger. Footnotes to financial statementsin published reports contain much of thisinformation.For the commercial paper information, derive

the totals from the total column on the ‘‘Com-mercial Paper (Parent)’’ report page, combiningthe totals for over 91 days maturity. Commercialpaper maturity totals should be presented as aline item showing the aggregate outstandingbalancenettedbyanyamountheldbysubsidiaries.

For the ‘‘Long-term Debt’’ portion of thereport page, present unaffiliated long-term bor-rowings in tabular form for (a) the parent,(b) each nonbank subsidiary, and (c) the banksubsidiaries (combined).For the parent company and each nonbank

subsidiary, show the borrower, lender, descrip-tion of the debt, original amount, originationdate, interest rate, maturity date, present out-standing balance, any significant repayment pro-visions, collateral, use of proceeds, majorrestrictive covenants and any requirements forcompensating balances. In addition, mandatoryconvertible debt instruments of the parent shouldbe identified and the conversion provisionsdetailed. In the case of large bank holding com-panies that have an extensive number of debtissues, detail for each issue may be eliminated atthe discretion of the examiner so long as aggre-gates for similar issues are shown along withranges for rates and maturities and summaryinformation regarding the other terms of thedebt.For the ‘‘Net GAP’’ and ‘‘Net Cumulative

GAP’’ use the respective total amounts (‘‘NetPosition’’ and ‘‘Cumulative Excess Deficien-cy)’’ on the ‘‘Parent Company Liquidity Posi-tion’’ report page. Bank mortgage indebtednessmay be aggregated at the discretion of the exam-iner, showing amounts only without other detail.Capitalized lease obligations may be included inthat total. For all other bank borrowings, includ-ing debentures issued to unaffiliated sources,provide complete detail.Debt amounts on this page should agree with

those shown for the ‘‘Parent Company Compar-ative Balance Sheet’’ for Core Page 5, the‘‘Bank Subsidiaries’’, the ‘‘Nonbank SubsidiaryFinancial Statements’’ pages or workpapers, andthe ‘‘Consolidated Comparative Balance Sheet’’Core page 8 (when adjusted to net intercompanyborrowings).


Procedures for Inspection Report Preparation (ConfidentialPage D—Administrative and Other Matters) Section 5010.43

This report page summarizes the examinerparticipants and their total workdays devoted tothe inspectionandprovidesclarificationoncheck-list items where appropriate. Other commentsshould be directed to planning arrangementsaffecting the scope of the inspection. When non-bank subsidiaries are inspected, describe theextent of the review of the records. The exam-iner should cite any special problems encoun-tered which would aid future inspections. Rec-ommendations, suggestions, and informationneeded to conduct the next inspection shouldalso be included for the next Examiner-in-Charge.Information regarding planning is limited to

the on-site planning of the work to be per-formed. Comments should be of a professionalnature and should be strictly devoted to provid-ing information that can be used in planning andperforming an inspection (location and access tospecific BHC records, inspection control prob-lems, availability of facilities for staff, key offi-cer and director contacts, information pertaining

to the Internal Audit Committee members, inter-nal and external auditors, and etc.)Information pertaining to the access to, and

the storage of, workpapers and any personalinformation such as lodging, travel arrange-ments and geographical directions should beconfined to the workpapers. Comments notdirectly related to the on-site conducting of theinspection should be avoided.The purpose of the confidential report page is

to present pertinent information to be used onlyby regulatory authorities. The page is reservedto summarize internal information derived fromReserve Bank inspection staff that would not beaddressed in other confidential report pages. Theinformation reported on this page may also bederived from discussions with senior bank man-agement, workpapers, accounting records, boardof directors’ minutes, and etc.Bank names or abbreviations should be con-

sistent with the organization chart and othertables in the inspection report.


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