Publication Of The December 2000 Update To The Bank Holding Company Supervision Manual

Federal Reserve Bulletin, Feb, 2001

The December 2000 update to the Bank Holding Company Supervision Manual, Supplement No. 19, has been published and is now available. The Manual comprises the Federal Reserve System's bank holding company (BHC) supervisory and inspection guidance. The supplement includes new or revised supervisory information and examiner guidance on the following topics:

1. The Statutory Authority, Focus, and Scope of BHC Inspections. The Gramm--Leach--Bliley (GLB Act), which amended section 5(c) of the BHC Act, sets forth the statutory authority, focus, and scope of BHC inspections. The GLB Act provides specific supervisory guidance pertaining to the breadth of BHC inspections, as well as inspections of their subsidiaries. The focus of inspections will be on preserving the safety and soundness of the holding company's affiliated depository institutions.

2. The GLB Act's revisions to Section 23A of the Federal Reserve Act (transactions between affiliates). The GLB Act expanded the coverage of section 23A by including transactions between banks and their financial subsidiaries and by providing a definition of financial subsidiary. With respect to transactions between a bank and an individual financial subsidiary of the bank, the GLB Act provides that the 10 percent limit on covered transactions does not apply. The GLB Act also created a rebuttable presumption that a company or shareholder controls another company if the company or shareholder directly or indirectly owns or controls 15 percent or more of the equity capital of the other company as a portfolio company.

3. The Revised June 2000 Uniform Retail-Credit Classification and Account-Management Policy (revised policy). The revised policy supersedes the February 1999 policy and provides for the following:

* Stressing the need for institutions to adopt and adhere to prudential internal standards on the number and frequency of extensions, deferrals, rewrites, and renewals of closed-end loans they grant

* Limiting re-aging of open-end accounts that participate in a debt counseling or workout program, following receipt of at least three consecutive minimum monthly payments, or an equivalent cumulative amount

* A current assessment of value to be made no later than 180 days past the contractual due date for loans secured by real estate (any loan balance exceeding the property's value, less selling costs, is to be classified as a loss and charged off)

* A clarification that collateralized loans due to be charged off under the policy can be written down to the collateral's value, less cost to sell, instead of being entirely charged off

* A clarification that payments received after the applicable charge-off threshold, but before the end of the month in which the charge-off threshold is triggered, may be considered when determining if a charge-off remains appropriate.

While the terms of the revised policy apply only to federally insured depository institutions, they are broadly applicable to BHCs, particularly their consumer finance nonbank subsidiaries and other credit-extending financial affiliates. Examiners are advised to consider the methodology used for aging retail loans. The contractual method of loan aging is emphasized as the more accurate and preferred methodology for aging retail loans. See Supervision and Regulation (SR) Letter 00-8. (SR Letters are the Federal Reserve's primary means of communicating key policy directives to its examiners, supervisory staff, and the banking industry. SR Letters can be viewed on the Board's Internet site: www.federalreserve.gov/boarddocs/srletters.)

4. Financial Holding Companies (FHCs). Information is provided on the focus and scope of the Federal Reserve System's supervisory framework for FHCs. Under the GLB Act, the Federal Reserve has supervisory oversight authority and responsibility for BHCs, including BHCs that operate as FHCs. The GLB Act streamlined the Federal Reserve's supervision of BHCs and provided parameters for working with primary depository institution regulators and other functional regulators (such as those responsible for supervising activities involving insurance, securities, and commodities).

The GLB Act designates the Federal Reserve as the umbrella supervisor of FHCs. In carrying out its supervisory oversight role, the Federal Reserve will maintain a supervisory focus that is concentrated on a consolidated or group-wide analysis of the organization. The Federal Reserve will thus identify and evaluate the significant risks in the diversified holding company, assessing how these risks could affect the safety and soundness and viability of its affiliated depository institutions. The Federal Reserve will also emphasize analysis of the consolidated financial condition of FHCs and the risks associated with engaging in a broad range of financial activities, since those risks can cut across the organization's legal entities and business lines. See SR Letter 00-13.

5. Risk Assessments for Small Shell Bank Holding Companies (SSBHCs). As announced in SR Letter 00-15, risk assessments for small SSBHCs are now due within sixty days of receipt of the lead bank's full-scope examination report, instead of forty-five days (as stated previously in SR Letter 97-27 and the Board's S-Letter 2587).