Publication of the November 2001 update to the Commercial Bank Examination Manual - Announcements - Brief Article

Federal Reserve Bulletin, Dec, 2001

The November 2001 update to the Commercial Bank Examination Manual, Supplement No. 15, has been published and is now available. The Manual comprises the Federal Reserve System's state member bank supervisory and examination guidance. The new supplement includes the following subjects:

1. Gramm-Leach-Bliley Act (GLB Act) Investment Authorizations for Municipal Revenue Bonds. Effective March 13, 2000, well-capitalized state member banks were authorized by the GLB Act to deal in, underwrite, purchase, and sell municipal revenue bonds without any limitations relative to the bank's capital. Municipal revenue bonds are therefore treated as the equivalent of type I securities for well-capitalized member banks. (See Supervision and Regulation Letter [SR Letter] 01-13.)

2. FFIEC Interagency Policy Statement on the Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions. The policy statement, issued on July 2, 2001, is briefly summarized. It clarifies the agencies' expectations for the documentation that supports the allowance for loan and lease losses (ALLL) methodology. The statement supplements existing guidance and emphasizes the need for appropriate ALLL policies and procedures, including an effective loan-review system. The statement provides examples of appropriate supporting documentation as well as illustrations on how to implement the guidance. (See SR Letter 01-17.)

3. Interagency Guidance on Leveraged Financing. This federal bank supervisory guidance was issued on April 9, 2001, emphasizing the sound risk management of leveraged-financing practices by depository institutions. It focuses on risk rating of leveraged-finance loans and how the imputed value of a business (enterprise value) should be evaluated in the risk-rating process. Sound valuation methodologies must be used in addition to ongoing stress testing and monitoring of those values. (See SR Letter 01-9.)

4. Final Rule for Financial Subsidiaries. The Board approved the final rule for financial subsidiaries of state member banks on August 13, 2001. The final rule clarifies that a financial subsidiary includes any of its direct or indirect subsidiaries. State member banks may continue to establish operations subsidiaries as previously permitted, without complying with the requirements of the rule for financial subsidiaries.

5. Final Rules, Exemptions, and Interpretations Involving Sections 23A and 23B of the Federal Reserve Act. Several new interim and final rules, exemptions, and interpretations are discussed that pertain to the limitations of sections 23A and 23B of the Federal Reserve Act. Certain limited transactions with affiliates are discussed, such as transactions involving derivatives, intraday extensions of credit, and transactions involving depository institution loans of which the proceeds are used to purchase securities or assets through or from depository institution affiliates.

6. Standards for Safeguarding Customer Information. The federal banking agencies jointly issued guidelines establishing standards for safeguarding customer information, which became effective July 1, 2001. The guidelines implemented sections 501 and 505 of the GLB Act. The standards pertain to administrative, technical, and physical safeguards for customer records and information. Institutions are required to establish a written information security program to assess and control the risks to customer information that is appropriate for the institution's size, complexity, nature, and the scope of its operations. (See SR Letter 01-15.)

7. Electronic Banking Examination Guidance. New examination guidance has been developed to aid in the supervisory review of electronic banking activities. For each safety-and-soundness examination, examiners should determine the extent to which an on-site review of electronic banking activities is necessary based on the scope and significance of the activities relative to the size of and sophistication of the institution. In general, examiners should review electronic banking activities when these services are newly implemented or when an institution is conducting novel activities that may pose a heightened risk.

A more detailed summary of changes is included with the update package. The Manual and updates, including pricing information, are available from Publications Services, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551 (or charge by facsimile: 202-728-5886). The Manual is also available on the Board's web site: www.federalreserve.gov/boarddocs/supmanual/.>

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