Recent Developments Affecting Depository Institutions by Benjamin B. Christopher and Valentine V. Craig
REGULATORY AGENCY ACTIONS Inter-Agency Actions
The federal bank and thrift regulatory agencies are engaging in
joint or coordinated efforts in a number of regulatory areas that
are mentioned specifically in this issue of the Review. These
joint initiatives concern capital adequacy for derivatives;
interest-rate risk; retail sales of nondeposit investment products;
"suspicious activity" reporting; and regulatory relief in
Risk-Based Capital: Derivatives
The federal banking agencies the Office of the Comptroller of the
Currency (OCC), the Federal Reserve Board (FRB), and the Federal
Deposit Insurance Corporation (FDIC) amended, effective October
1, 1995, risk-based capital standards for banks and bank holding
companies to implement a revision to the Basle Accord. The Accord
established a risk-based capital framework for assessing capital
adequacy, implemented by the U. S. banking agencies in 1989. Under
this framework, off-balance-sheet transactions were incorporated
into the risk-based structure by converting each item into a
credit-equivalent amount that was assigned to the appropriate
credit-risk category according to the obligor or counterparty, or
if relevant, the guarantor or the nature of the collateral.
The credit-equivalent amount of an off-balance-sheet
interest-rate or exchange-rate contract was determined by
adding together the current replacement cost (current exposure)
of the contract and an estimate of the possible increase in
the future replacement cost (potential future exposure) in view of
the volatility of the current exposure of the contract. The
maximum risk category for rate contracts is 50 percent.
The effects of this final rule are: a) long-dated
interest-rate and exchange-rate contracts are subject to higher
conversion factors and new conversion factors are set forth that
specifically apply to derivative contracts related to equities,
precious metals, and other commodities; b) institutions are
permitted to recognize a reduction in potential future credit
exposure for transactions subject to qualifying bilateral
netting arrangements; and c) derivative contracts related to
equities, precious metals and other commodities may be
recognized in bilateral netting arrangements for risk-based
FR, 9/5/95, p. 46170; FIL-59-95, FDIC, 9/8/95.
Additionally, the Bank for International Settlements, in July 1996,
released a draft proposal to require derivatives dealers worldwide
to record the notional and replacement cost of all derivative
contracts. Public comment is due by September 30, 1996, with
reporting expected to begin on December 31, 1997.
AB, July 19, 1996.
Capital Standards For Interest-Rate Risk
The OCC, the FRB, and the FDIC issued a final rule, effective
September 1, 1995, implementing the FDICIA provision requiring
banking agencies to revise risk-based capital standards to take
adequate account of interest-rate risk. The final rule amended
capital standards to specify that the banking agencies include in
their evaluations of a bank's capital adequacy an assessment of the
exposure to declines in the economic value of the bank's capital
due to changes in interest rates.
Subsequently, in May 1996, the three regulatory agencies approved
a scaled-back approach for considering bank interest-rate risk.
The agencies adopted guidelines that advised bank directors to
establish interest-rate-risk limits, to appoint officials to
oversee policy, and to monitor management compliance. The agencies
will continue to consider interest-rate risk when setting a bank's
capital requirement, but agreed to examine each bank
individually rather than apply a standardized interest-rate
model across-the-board. The joint policy statement on
interest-rate risk became effective on June 26, 1996.
FR, 8/2/95, pp. 39490, 39495; AB, 5/24/96; FR, 6/26/96,
pp.33166; AB, 7/17/96.
Retail Sales of Nondeposit Investment Products
The FDIC, the FRB, the OCC and the Office of Thrift Supervision
(OTS) issued joint interpretations of their Inter-Agency Statement,
released on February 15, 1994, on retail sales of mutual funds and
other nondeposit investment products by federally insured financial
institutions (see this Review, Winter 1995, p. 31). The
interpretations give the inter-agency position regarding
abbreviated disclosures and clarify instances where it is not
necessary to provide disclosures.
There are limited situations in which the disclosure guidelines
need not apply or where a shorter logo format may be used in
radio broadcasts of 30 seconds or less, electronic signs, and other
signs (such as banners and posters) used only as location
indicators. Third-party vendors not affiliated with the depository
institution need not make the Inter-Agency Statement disclosures on
nondeposit investment product confirmations and in account
statements that may incidentally, with a valid business purpose,
contain the name of the depository institution. The
interpretations state that with respect to shorter logo format
disclosures that can be used in visual media, such as
television broadcasts, ATM screens, and signs, the text of an
acceptable logo format disclosure would include the statements "Not
FDIC Insured," "No Bank Guarantee," and "May Lose Value," which
would be boxed, set in bold face type, and displayed conspicuously.
FIL-61-95, FDIC, 9/13/95; with "Joint
Interpretations of the Inter-Agency Statement," and
response letter to the American Bankers Association, 9/12/95.
On May 5, 1996, the FDIC issued the results of a nationwide survey
it funded of approximately 1,200 FDIC-insured institutions to
determine their compliance with inter-agency guidelines on the sale
of uninsured investment products. The survey found that banks were
more likely to make required disclosures in face-to-face
discussions than over the phone. Required disclosures were
also found to be made more frequently by investment personnel
who were members of the National Association of Securities Dealers
(NASD) or employed by third-party affiliates than by investment
representatives affiliated with an internal banking group.
Survey of Nondeposit Investment Sales at
FDIC-Insured Institutions, prepared by Market Trends, 5/5/96.
Suspicious Activity Reports (SARs)
The Financial Crimes Enforcement Network (FinCEN) of the Department
of the Treasury and the federal financial institutions' supervisory
agencies issued new regulations requiring centralized filing with
FinCEN of reports of suspicious transactions under the Bank Secrecy
Act (BSA). A uniform "Suspicious Activity Report" (SAR) is to be
used to report suspicious transactions and known or suspected
criminal violations. Essentially the same rule was issued or is
being issued by the five federal supervisory agencies for
The regulation raises the mandatory reporting thresholds for
criminal offenses and reducing bank reporting burdens. For the
reporting of known or suspected criminal activity when a bank has
a substantial basis for identifying a non-insider suspect, the
reporting threshold based on asset involvement is raised from the
existing $1,000 to $5,000; where the bank has no substantial basis
for identifying a suspect, the reporting threshold rises from the
existing $5,000 to $25,000. Banks may file the referral form in
several ways: they may submit an original form, a photocopy, or
they may file by magnetic means, such as by computer disk. The
regulatory agencies are also developing computer software to assist
banks in preparing and filing the reports.
FR, 9/14/95, p. 47719; FIL-71-95, FDIC, 10/16/95;
Comptroller of the Currency, News Release, OCC, NR96-12, 2/5/96.
The designation of a single government recipient of all depository
institution suspicious transaction reports is required under the
Riegle Community Development and Regulatory Improvement Act of
1994. Previously, banks reported violations or suspected
violations to their primary federal regulators and several law
enforcement agencies using non-uniform criminal referral forms.
They also filed currency transaction reports (CTRs) for
transactions in currency of more than $10,000.
FR, 9/7/95, p. 46556; BBR, 9/11, p. 377; CEO Memo 53,
Record keeping For Funds Transfers
The FRB and the Department of the Treasury jointly proposed
amendments to their rules requiring enhanced Record keeping on
certain wire transfers by financial institutions in accordance with
the Bank Secrecy Act. The proposed amendments were made to conform
the meanings of the definitions of international funds transfer to
the Uniform Commercial Code.
In January, the FRB and the Department of the Treasury adopted a
final rule that required each domestic financial institution
involved in a wire transfer to collect and retain certain
information depending upon the type of financial institution, its
role in the transfer, the amount of the transfer, and the
relationship of the parties to the transaction. The rule exempted
wire transfers below $3,000. The effective date was to have been
January 1996, but postponements delayed the new Record keeping rules
until May 1996.
FinCEN reports that electronic wire transfer systems move funds
between financial institutions and handle a daily volume in excess
of 500,000 transactions, moving more than $2 trillion around the
world each day. Wire transfers have provided money launderers with
an efficient and secure method of transferring huge sums of money
over a very short period of time. Because wire transfer messages
often are sent through several banks and wire transfer systems,
launderers have been able to confuse the money trail and make it
difficult for law enforcement to trace the criminal proceeds.
FR, 1/3/95, pp. 220, 231; 8/24, pp. 44144, 44146; Press
Release, FRB, 12/22/94; 8/18/95; BBR, 8/28/94, p. 330; AB, 3/21/96.
Bank Lending to Areas Subject to Floods
The OCC, the FRB, the FDIC, the OTS and the National Credit
Union Administration (NCUA) are amending regulations regarding
loans in areas having special flood hazards to implement the
provisions of the National Flood Insurance Reform Act of 1994.
Among the proposed amendments are new escrow requirements a
lending institution that requires the escrow of taxes, property
insurance premiums, fees or other charges must require the escrow
of flood insurance premiums; explicit authority for lenders and
servicers to "force-place" flood insurance under certain
circumstances; and a requirement that lending institutions notify
purchasers or lessees if the property securing the loan is located
in a special flood hazard area (SFHA).
Additionally, the proposal requires each agency to assess
compliance with the National Flood Insurance Program when examining
the institutions it supervises, and to use a new standard form
developed by the Federal Emergency Management Agency for
recording whether a security property for a given loan is
located in an SFHA.
FR, 10/18/95, p. 53962; PR-57-95, FDIC, 9/26/95.
Federal Financial Institutions Examination Council Appraisal Regulation
The inter-agency Federal Financial Institutions Examination Council
(FFIEC) is soliciting comment on how it should implement a section
of Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, which was amended by the Riegle Community
Development and Regulatory Improvement Act of 1994. The amendment
added the requirements that: a) state appraiser certifying or
licensing agencies are not to impose excessive fees or burdensome
requirements for temporary practice; and b) the states are
encouraged to develop reciprocity agreements that readily authorize
appraisers who are licensed or certified in one state, and who are
in good standing, to perform appraisals in other states.
Since January 1, 1993, Title XI, as amended, has required all
federally regulated financial institutions to use state-licensed or
certified real-estate appraisers, as appropriate, to perform
appraisals in federally related transactions. In response to the
Title, each state, territory and the District of Columbia has
established a regulatory program for certifying, licensing and
supervising real-estate appraisers.
Press Release, Appraisal Subcommittee, FFIEC, 9/8/95; FR,
9/12, p. 47365.
GAAP Approved For Call Reports
The FFIEC adopted the generally accepted accounting principles
(GAAP) as the reporting basis for the balance sheet, income
statement, and related schedules in the bank Reports of Condition
and Income (Call Report), effective with the March 1997 report
date. Adoption of GAAP as the reporting basis will eliminate
existing differences between bank regulatory reporting standards
and GAAP, among which are the accounting treatment of assets sold
with recourse, futures, forwards, and option contracts. The
reporting basis being adopted already is used for savings
association Thrift Financial Reports and Federal Reserve bank
holding company FR Y Reports, and is consistent with the objectives
of Section 307 of the Riegle Community Development and Regulatory
Improvement Act of 1994, which requires the federal banking
agencies to develop a single form for the filing of core
information by banks, savings associations, and bank holding
The FFIEC believes that adopting GAAP will reduce reporting burden
as well as any confusion on the part of users about differences in
the reporting principles governing regulatory reports and financial
statements. GAAP does not require the disclosure of all of the
information needed by federal banking agencies and does not address
all of the agencies' supervisory concerns, thus institutions would
still have to report, in supplemental schedules and items, some
information needed for supervisory and other purposes. The Council
and the agencies will continue when necessary to issue specific
reporting guidance that falls within the range of acceptable
practice under GAAP (for example, as is currently the case for the
allowance for loan and lease losses), and each agency will retain
existing authority to require an institution to report a
transaction in regulatory reports in accordance with the agency's
interpretation of GAAP.
Press Release, FFIEC, 11/3/95.
Mortgage Lending Reports
The FFIEC made available the reports of 1994 mortgage lending
activity in metropolitan statistical areas (MSAs) for public
inspection at a central depository in each MSA, and the
agency headquarters. The reports, which are available
almost two months earlier than last year, include individual
disclosure statements and aggregate data for each MSA. They
reflect the lending activity of the more than 9,800 lending
institutions covered by the Home Mortgage Disclosure
Act (HMDA) that reported data for 1994 to member agencies of the
FFIEC and to the Department of Housing and Urban Development. The
reports contain data about loan originations, loan purchases, and
applications that did not result in a loan. Also, they give
information about the race or national origin, gender, and annual
income of the applicants or borrowers. For most loans relating to
property located in MSAs, the reports identify the geographic
location, usually by Census tract.
Data from the HMDA reports released in July indicated that the
number of conventional home purchase loans went up 54.7 percent for
blacks and 42.0 percent for Hispanics since 1993.
Press Release, FFIEC, 9/1/95.
Proposed Revisions to CAMEL Rating System
The FFIEC proposed revisions to its Uniform Financial Institutions
Rating System (commonly referred to as the CAMEL rating system) on
July 9, 1996. Comments are due by September 16, 1996. The proposed
changes include clarifying the component rating descriptions;
addition of a sixth component to address market risk; and increased
emphasis on risk management.
FIL-56-96; 7/24/96; FR, 7/18/96; p. 37472.
Risks to Computer Systems in the New Millenium
The FFIEC issued a statement on July 12, 1996, alerting financial
institutions to the need to address risks involving their computer
systems as the industry enters the new century. Examiners will
review each institution's 2000 plan during regular supervisory
reviews. The risks arise from the programming code in existing
computer systems that may cause the system to function improperly
due to the two digit year field containing "00."
Federal Deposit Insurance Corporation Assessments
The FDIC Board of Directors voted on August 8, 1995, to reduce
significantly the deposit insurance premiums paid by most banks but
to keep existing assessment rates intact for savings associations.
Under the new rate structure, the best-rated institutions insured
by the Bank Insurance Fund (BIF) would pay four cents per $100 of
domestic deposits, down from 23 cents per $100. The weakest
institutions would continue to pay 31 cents per $100.
The FDIC announced in September 1995, that the BIF was fully
recapitalized and that it would refund to banks insurance
overpayments for the period of June through September. The
FDIC estimated the aggregate BIF assessment refund at $1.49
billion, plus $19.9 million in interest.
PR-50-95, FDIC, 8/89/95; PR-54, 9/5.
On September 26 1995, the FDIC amended its regulation on
assessments to delay the regular payment date for the first
quarterly payment for the first semiannual period from December 30
of the prior year to January 2 (or the first business day
thereafter). At the same time, insured institutions were given the
option of making the first payment on December 30 (or the prior
business day). The FDIC's purpose in making these changes was to
relieve certain institutions of the regulatory burden of having to
make an extra assessment payment in 1995, while also affording
flexibility to other institutions to make such a payment if they so
The amendments approved in late September 1995, also give insured
institutions the option of paying double the amount of any
quarterly payment, when the payment is made on a payment date
(regular or alternate) that comes before the start of the quarter
to which the payment pertains on the March, June, September, and
December payment dates.
The interest rate to be applied to under payments and overpayments
of assessments is replaced with a new, more sensitive rate derived
from the 3-month Treasury bill discount rate. Rates set under the
prior standard have rapidly become obsolete in volatile
The timetable for announcing the semiannual assessment rate
schedule is shortened from 45 days to 15 days prior to the invoice
date. This change enables the FDIC to use the most up-to-date
information available for computing assessments, thereby
benefitting both the agency and the depository institutions. The
rule is effective September 29, 1995, except some amendments are
effective October 30, 1995.
FR, 9/29/95, p. 50400; 8/10, p. 40776; FIL-67-95, FDIC,
The FDIC Board of Directors voted on May 14, 1996, to maintain the
existing assessment rates on deposits by the BIF and the SAIF for
the second semiannual assessment period of 1996. Insured
institutions will continue to pay annual assessment rates of from
zero to $.27 per $100 of BIF-assessable deposits, subject to a
quarterly minimum of $500. Based upon year-end 1995 data, it is
expected that these rates will result in an average annual BIF rate
of approximately $.0029 per $100 of deposits and annual revenues of
about $72 million. The BIF reserve ratio was 1.30 percent as of
December 31, 1995.
Institutions insured by the Savings Association Insurance Fund
(SAIF) will continue paying premiums on a risk-related basis of
between $.23 per $100 to $.31 per $100 of assessable deposits. It
is expected that these rates will result in an average annual SAIF
rate of approximately $.234 per $100 in assessable deposits.
SAIF-insured institutions will continue to pay higher rates than
BIF-insured banks because the SAIF remains seriously
undercapitalized. At December 31, 1995, the SAIF had reserves of
approximately $3.4 billion and is not expected to reach the minimum
reserve level of 1.25 percent until the year 2002, given the
current circumstances and reasonably optimistic assumptions.
PR-70-95, FDIC, 11/14/95; FIL-40-96, 6/11/96.
Thrifts Allowed to Transfer Deposits to Affiliates
The FDIC has decided that thrifts may transfer deposits to newly
chartered bank affiliates, if the deposit shift is initiated by the
depositor. This decision will allow thrifts to take advantage of
cheaper deposit insurance available to banks. The FDIC ruling is
expected to accelerate the outflow of funds from the thrift
industry, thereby reducing the FICO payment base.
Assessments For Oakar Institutions
On July 3, 1996, the FDIC proposed to amend its assessment
regulations regarding the so-called Oakar institutions
institutions that belong to one insurance fund, but hold deposits
that are treated as insured by another insurance fund. The changes
would affect particularly calculations of the Adjusted Attributable
Deposit Amount (AADA). The AADA is used to determine the
allocation of an Oakar institution's deposits between the BIF and
The proposed amendments are intended to eliminate anomalies in the
assessment of these institutions' deposits. One amendment would
change the AADA adjustment for an institution's overall deposit
growth. The FDIC has found that the current treatment of deposit
sales for Oakar institutions has resulted in an increase in the
total amount of primary fund deposits reported and assessed and a
decrease in the total amount of secondary fund deposits reported.
The proposed rule would correct this anomaly for all deposit sale
transactions occurring after June 30, 1996; and would adjust the
AADA for growth or shrinkage on a quarterly basis. The FDIC is
also proposing to eliminate the requirement that Oakar institutions
submit growth worksheets to adjust the AADAs. Finally, public
comment is requested on two options for allocating funds to the BIF
or the SAIF at the time of deposit sales. One option would treat
deposit sales by Oakar institutions as sales of primary fund
deposits only (unless the deposits sold exceeded the amount of
primary fund deposits available); the second alternative would
treat the deposits as a pro rata blend of the institutions' primary
and secondary fund deposits.
FIL-54-96, 7/19/96; FR,3/3/96, p. 34751.
BIF and SAIF First-Quarter 1996 Financial Highlights
The BIF earned $295 million in net income in the first quarter
of 1996, significantly below the $1.3 billion earned the same
period a year earlier. The decrease is primarily due to the
reduction in premium rates. The fund's estimated liability for
anticipated failures decreased to $240 million from $279 million at
year-end 1995. The fund balance at the end of the quarter was
$25.748 billion. One BIF-insured bank failed during the quarter.
The SAIF earned $292 million in net income in the first quarter of
1996, $13 million more than it earned in the same quarter a year
earlier. Net assessment revenue came to $251 million through the
first quarter of 1996 after payments of $393 million to service
Financing Corporation (FICO) obligations. The fund balance at the
end of the quarter rose to $3.650 billion.
Federal Deposit Insurance Corporation, First-Quarter
1996 Financial Results, Bank Insurance Fund, 3/31/96.
The FDIC adopted an interim rule and requested comments to
implement Section 208 of the Riegle Community Development and
Regulatory Improvement Act of 1994 which provides that a qualifying
insured depository institution that transfers small-business loans
and leases on personal property with recourse need include only the
amount of retained recourse in its risk-weighted assets when
calculating its capital ratios if certain conditions are met. The
transaction must be treated as a sale under GAAP; and the
transferring institution must establish a non-capital reserve
sufficient to meet the reasonably estimated liability under the
recourse arrangements. A qualifying institution is one that is
well-capitalized or, with the approval of the appropriate
federal banking agency, adequately capitalized. For these
institutions, the rule, which is effective August 31, 1995, will
result in lower capital requirements for affected loans and leases.
PR-52-95, FDIC, 8/25/95; FR, 8/31, p. 45606; p. 45612
(FRB notice); p. 45618 (OTS notice).
Final Rules on Golden Parachutes, Internal Audits and Foreign Bank Deposits
The FDIC issued a final rule, effective April 1, 1996, prohibiting
with certain exceptions golden parachute payments to executives of
troubled holding companies, banks and thrifts. Exceptions to the
prohibition include payments to qualified pension and
retirement plans. The rule provides guidance on what
constitutes legitimate payments. The new rule also limits
holding companies or FDIC-insured institutions from paying the
legal expenses or liabilities of their employees or directors who
are subject to enforcement proceedings.
PR-8-96, FDIC, 2/6/96; BBR, 2/12/96, pp. 205-206.
Court Supports Agency on Cross-Guaranty
The U.S. Court of Appeals for the Second Circuit upheld the FDIC's
power, granted to the agency by FIRREA in 1989, to charge losses
from a bank failure to another bank in the same corporate
organization (Meriden Trust and Safe Deposit Co. v. FDIC). It
rejected claims that such action amounts to an unconstitutional
taking under the Fifth Amendment. In 1994, a federal claims court
judge held that the agency's use of the cross-guaranty
power might be a violation of the takings clause
(Branch v. U.S.).
BBR, 8/14/95, p. 308.
On July 24, 1996, First Coastal Corporation of Westbrook,
Maine, paid the FDIC $9.75 million to settle a
cross-guaranty assessment levied against its subsidiary, Coastal
Savings Bank of Portland, Maine, in 1993.
FDIC, PR-55-96. 7/24/96.
Court Rules Government Breached Contracts With
On July 1, 1996, the U. S. Supreme Court ruled in the United States
v. Winstar Corp., No 95-865, that Congress erred in changing
industry accounting rules concerning supervisory goodwill in 1989.
The plaintiffs were Glendale Federal Bank of California, and two
since-closed thrift companies, Statesman Savings Holding
Corporation and Winstar Corporation, who acquired weak savings
institutions at the government's behest in the 1980s and in return
were given assurances that the supervisory goodwill created in the
transactions could be counted as capital and written off
over time. The regulators subsequently refused to honor the
agreements that they claimed were repudiated under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989
The Federal Circuit Court of Appeals had previously ruled that the
government violated contracts with the three plaintiffs. In this
most recent ruling, the U.S. Supreme Court concluded that "it would
have been madness" for the institutions to have taken over the weak
institutions if they had known that the government could cancel the
current accounting "gimmicks" at its will. The Court ruled that
the government was liable for damages, and sent the case back to a
lower court to determine those amounts. Breach-of-contract suits
have been filed by at least one hundred thrifts.
BBR, 9/11/95, p. 403; AB, 8/31, p. 1, AB, 7/26/96, WSJ,
7/2/96, NYT, 7/2/96.
Subsequent to the Supreme Court ruling, the FDIC took steps to
appear as plaintiff in two cases involving supervisory goodwill
pending in the U.S. Court of Federal Claims, and is investigating
other cases with possible goodwill claims to determine whether it
will become a plaintiff. In these cases, the FDIC is acting as a
receiver for the failed institutions.
FDIC, PR-56-96, 7/24/96, AB, 7/26/96.
D'Oench Duhme Doctrine Rulings
The U.S. Court of Appeals for the District of Columbia ruled in
August 1995, that the FDIC might use the D'Oench Duhme doctrine to
void secret agreements that would cause a loss in a failed bank's
assets, but could not use it as a protection against fraud claims.
In this case, an investor in a bankrupt Florida resort sued the
developers and Southeastern Bank, charging that the bank secretly
controlled the development and was responsible for fraudulent
statements about the project's financial condition.
In another recent case, the U. S. Court of Appeals for Atlanta
found that Congress did not eliminate the D'Oench Duhme doctrine in
passing the thrift bailout law in 1989. In this case, the 11th
Circuit Court concurred with a May 1996, FDIC ruling that the
D'Oench Duhme doctrine prevented a car dealership from suing for
breach of contract against Southeast Bank of Florida.
The D'Oench Duhme doctrine began with a 1942 Supreme Court decision
and legislation enacted in 1950. It required that the FDIC
recognize only written agreements by banks that subsequently fail
and was intended to force bankers to put agreements in writing so
that examiners could more accurately evaluate an
institution's financial condition.
AB, 8/9/95, p. 2; 5/31/96, p. 2.
Court Rules Examination Reports Accessible During
The U.S. Court of Appeals for the Sixth Circuit, rejecting an
attempt by Bankers Trust Company to shield its examination results,
ruled that parties to a lawsuit can seek examination reports from
banks during the discovery process. As a result of the decision,
which affects banks in Ohio, Michigan, Kentucky and Tennessee, a
litigant can ask the bank for a report directly, and if refused can
ask the trial judge to order the bank to comply. The judge must
first give the regulator a chance to object. Previously, a
litigant's request for an examination report had to be made through
the bank's regulator, and if refused, which usually occurred in
respect to the examiner's subjective comments, the plaintiff
could seek compliance through the court.
AB, 8/10/95, p. 3.
Improvement in Real-Estate Markets Reported
The FDIC's July 1996 Survey of Real Estate Trends reported
continued improvements in both commercial and residential
real-estate markets during the second quarter of 1996. The latest
results represented the second consecutive quarter of reported
improvements and were the most positive in over a year.
The quarterly survey asks field personnel from all federal bank and
thrift regulatory agencies about developments during the prior
three months in their local real-estate markets. The survey
reflected positive trends in market activity in many areas of the
nation, with the Northeast and the West reporting the most gains.
The proportion of respondents seeing better market conditions in
the South and the Midwest remained the same or declined following
reports in April of significant progress.
The national composite index, summarizing assessments of
real-estate markets, edged up to 68 in July from 67 in April.
Values above 50 indicate that more examiners and asset managers at
federal bank and thrift regulatory agencies thought conditions were
improving than declining. The July report represents the second
consecutive increase in the summary index from its recent low of 60
in January. Although the gains reported in the last three months
were not as strong as those observed in the February-April period,
the July composite index is the highest reading in two years.
Survey respondents reported continued confidence in the residential
markets. Forty-five percent observed better conditions in their
local housing markets the same proportion reported previously.
However, those noting worsening conditions in July fell to eight
percent. The national summary index for residential markets inched
up to 69 from 68 in April, with a substantial boost from gains in
the West, where 66 percent of the respondents reported better
housing conditions, up from 54 in April.
Overall assessments of commercial real-estate trends continued to
be positive as well. An increasing proportion of survey
participants observed improving conditions (38 percent) while
reports of worsening conditions were very few (one percent).
As a result, the composite index for commercial markets rose to
68 in July from 66 in April.
Survey of Real Estate Trends, July 1996.
Online Press Release Service Via Internet
The FDIC has established an online subscription service that
allows subscribers to receive over the Internet and World Wide
Web press releases and copies of key Congressional testimony
and major speeches by agency officials. The new service will send
the material directly to subscribers via e-mail. Released
materials will continue to be available via fax modem, postal
service mail and from information racks in FDIC buildings.
PR-59-95, FDIC, 10/4.
Disclosure of Information
The FDIC revised the procedures used by the public in requesting
records under the Freedom of Information Act (FOIA) and the Freedom
of Information Reform Act (FOIRA). Among its provisions, the final
rule sets forth the conditions under which exempt records may be
disclosed to third parties, including such conditions as are
necessary to protect the confidentiality of the records. The
rule contains procedures by which the agency would charge
appropriate fees as required under FOIRA and guidelines established
by the Office of Management and Budget. The FOIRA significantly
amended the fee provisions of FOIA by establishing classes of FOIA
requesters and a framework under which fees could be charged to the
individual categories of requesters.
FR, 7/6/95, p. 35148; 11/30, p. 61465.
New FDIC Board Member
Former Mississippi Banking Commissioner Joseph H. Neely was sworn
in as a member of the five-person FDIC Board on January 29, 1996.
As Mississippi's Banking Commissioner, a position he occupied since
1992, Mr. Neely served as the primary regulator and supervisor of
state-chartered banking and thrift institutions. He was also
responsible for supervising state-chartered credit unions and
consumer finance companies. Additionally, Mr. Neely served on the
faculty of the Mississippi School of Banking from 1993 to 1995.
PR-6-96, FDIC, 1/29/96.
On July 16, 1996, the FDIC issued an opinion on whether federal
deposit insurance applied to stored-value cards. Stored-value
cards look like a credit card or ATM card and store electronic
value on either a magnetic stripe or a computer chip, and can be
used to pay for purchases. The FDIC concluded that in most cases
stored-value cards are not protected by deposit insurance.
However, if the funds represented by the card were maintained
in the customer's own account, rather than a single
pool, deposit insurance would apply. The FDIC scheduled a
hearing for September 12, 1996, on stored-value
cards, Internet banking and other electronic payment
FDIC PR-52-96, 7/16/96; PR-53-96, 7/16/96.
FDIC Review of Regulations
The FDIC is conducting a systematic review of its regulations and
policies to identify and revise regulations that might be
inefficient, cause unnecessary burden, or contain outmoded,
duplicative or inconsistent provisions. In one action, the FDIC
issued an inter-agency proposal to remove inconsistencies in
the way regulators assign risk-based capital requirements to
certain loans and other collateralized transactions. The
agency also proposed that publicly traded FDIC-supervised banks
use Securities and Exchange Commission (SEC) rules for
registration of securities and reporting instead of separate but
similar FDIC rules. Final action was also taken eliminating
outmoded policies on the submission of quarterly Reports of
Condition and Income and the advertising of Negotiable Order of
Withdrawal (NOW) accounts.
FDIC, PR-44-96, 6/17/96; FIL-48-96, 7/12/96; FR,
7/3/96, p. 34814.
Resolution Trust Corporation Thrift Depositor Protection Oversight Board Will Continue
The Thrift Depositor Protection Oversight Board (TDPOB) continues
in operation following termination of the Resolution Trust
Corporation (RTC) on December 31, 1995. It is responsible for
preparing final reports on the resolution of the thrift crisis and
for overseeing the Resolution Funding Corporation, which between
1989 and 1991 issued long-term bonds to finance the resolution.
The Board's membership will be reduced to three the Secretary of
the Treasury, Chairman of the Federal Reserve Board, and Secretary
of the Department of Housing and Urban Development.
AB, 12/6/95, p. 2.
Last RTC Auction
At its eighth and final national auction, the RTC sold performing
and nonperforming loans with a book value of $577 million. It
recovered $404 million on the sale, approximately 70 percent of
book value. The three-day auction was held in Kansas City
beginning December 13, 1995.
National Mortgage News, 1/2/96, pg. 3.
Final Cost of Thrift Bailout
The GAO reported that the thrift cleanup cost the taxpayer $160.1
billion in direct costs or $480.9 billion, if interest costs are
included. Direct costs consist of $87.9 billion spent by the RTC;
$64.7 billion spent by the FSLIC; and $7.5 billion in tax breaks to
acquirers of ailing institutions. Interest costs consist of $111.8
billion of interest expenses on two bond issues, and $209 billion
in interest computed on Congressional appropriations. Interest
costs are not generally counted in government allocations.
The New York Times. 7/13/96; WSJ, 7/15/96; The
Washington Post, 7/13/96.
Federal Reserve Board Derivatives Transaction Standards
The Federal Reserve Bank of New York and five securities industry
groups released final transaction standards for derivatives market
participants. The standards cover such issues as the definition of
a participant, a client's reliance on a dealer's advice,
confidentiality, valuation, distribution of the standards,
information, and disputes, but do not include any provision for
dealers to determine a client's suitability for a particular
BBR, 8/28/95, p. 329.
International Operations of Banks
The FRB proposed to amend its Regulation K to provide additional
general consent authority for de novo investments in foreign
countries by U.S. banking organizations that are strongly
capitalized and well-managed. Banks meeting these requirements
would be permitted to make certain investments without the need for
prior approval or review. In order to strike a reasonable balance
between reduced regulatory burden and continued FRB oversight,
limits would be imposed on the total amount of general consent
investments that may be made in a year. In addition, certain
investments or activities would not be eligible for the expanded
authority. Investors making use of the expanded authority would be
required to provide the FRB with a post-investment notice. The
Board's proposal is part of an overall review of the
FR, 9/25/95, p. 49350; Press Release, FRB, 9/22.
Proposed Amendments to Leasing Regulation
The FRB proposed amendments to its Regulation M, implementing the
Consumer Leasing Act, which was enacted into law in 1976 as an
amendment to the Truth in Lending Act (TILA). Generally, the CLA
applies to consumer leases of personal property such as automobiles
and furniture involving $25,000 or less, and a term of more than
four months. Among the disclosures required of lessors are the
amount of the initial charges to be paid, a payment schedule, the
responsibilities for maintaining the leased property, and the
liability for terminating a lease early. Among the proposed
amendments are: additional disclosure requirements about early
termination charges; disclosure of the gross costs of leases, the
residual value, and the estimated lease charge; and, pursuant to a
statutory change, new advertising provisions for radio and
The Board also proposed changes to the official staff commentary on
Press Release, FRB, 9/13/95; FR, 9/20, pp. 48752,
48769; BBR, 9/18, p. 438.
Investment Advisory Powers Expanded
The FRB granted authority for Credit Suisse of Zurich to provide
discretionary portfolio management services for futures and options
on nonfinancial commodities. The service, to be provided through
a New York-based subsidiary, will be limited to institutional
customers who specifically request it. The FRB said the approved
activity is similar to other investment advisory services that bank
holding company affiliates provide.
AB, 7/7/95, p.2.
Banks Permitted to Purchase Education Finance Firm
The FRB granted approval for four North Carolina-based bank holding
companies to purchase the shares of a company that will provide
services to North Carolina and other state governments in programs
to assist parents in financing higher education for
their children. Among the firm's activities will be
developing and managing an education savings and loan plan,
designing and providing software, providing marketing materials,
and training state employees.
BBR, 10/2/95, p. 532.
Changes in Fedwire Access Policy
The FRB has modified its Fedwire third-party access policy to
clarify its applicability and to reduce the administrative burden
of several provisions. Some depository institutions have entered
into arrangements under which a third party provides operating
facilities for their Fedwire services; under such arrangements, the
third party's actions may result in a debit to the institution's
reserve or clearing account at a Federal Reserve Bank. The policy
provides important safeguards to both depository institutions
participating in third-party access arrangements and to the Reserve
Banks. Among other things, the policy requires depository
institutions to impose prudent controls over Fedwire funds
transfers and book-entry securities transfers initiated, received,
or otherwise processed on their behalf by a third-party service
provider. These policy modifications are on an interim basis
pending the completion of a broader review of supervisory policies
that should be applicable to outsourcing arrangements. The changes
become effective August 10, 1995; existing Fedwire
third-party arrangements should be in compliance by March
Press Release, FRB, 8/10/95.
Access to Automated Clearing House Service
The FRB is requesting comment on the benefits and costs of adopting
a policy to control access to the Federal Reserve Banks' automated
clearing house (ACH) service by entities other than the depository
institution whose Federal Reserve account will be debited. The
controls would apply to ACH credit transactions sent by third-party
processors (service providers) and respondent depository
institutions directly to a Reserve Bank or a private ACH
operator that exchanges transactions with a Federal Reserve Bank.
Controlling access to the ACH service will help to ensure the
safety and soundness of the ACH system.
The FRB is requesting comment on the specific provisions of
the proposed policy and the cost and operational impact of
providing risk-monitoring capabilities for controlling access to
the Federal Reserve Banks' ACH service. The risk-monitoring
capabilities are intended to permit the depository institutions
that are responsible for funding ACH credit transactions to control
the potential credit risk and reduce the risk of fraud created by
their customers and respondent depository institutions. The
proposed policy provisions and monitoring alternatives do not
cover ACH debit transactions.
Press Release, FRB, 8/10/95; FR, 8/15, p. 42413.
Survey of Consumer Finances
The FRB is sponsoring a statistical study of household finances
that will provide information on the economic condition of a broad
array of American families. The study, which is undertaken every
three years, is being conducted by the National Opinion Research
Center at the University of Chicago through November 1995.
Participants in the study are chosen at random using a scientific
sampling procedure in 100 areas across the U.S. Participation is
voluntary. Summary results will be published in the Federal
Press Release, FRB, 8/7/95.
Mortgage Loan Software Program
The FRB announced the availability, free of charge, to member banks
of a computer software program designed to serve as an analytic
tool for financial institutions in offering affordable mortgage
loans to low- and moderate-income applicants. The software
program, entitled "Partners" can determine within seconds if
potential home buyers can qualify, mathematically, for a home
purchase loan, given the underwriting criteria and financial
information provided. In addition to determining loan eligibility,
"Partners" offers loan amortization schedules, equity build-up
calculations, and secondary market analysis. The program also can
be utilized by community groups, government agencies, and other
community development practitioners who offer home purchase
Press Release, FRB, 10/19/95.
Regulatory Review Timetable
The FRB published a schedule for review of its major regulations,
policy statements, and regulatory guidances as required under
Section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994. Section 303 requires that each federal
banking agency review its regulations and written policies to
accomplish certain goals. These goals are to streamline and modify
regulations and policies to improve efficiency, reduce unnecessary
costs, and eliminate unwarranted constraints on credit
availability; to remove inconsistencies and outmoded and
duplicative requirements; and to work jointly with the other
federal banking agencies to make uniform all regulations and
guidelines implementing common statutory or supervisory
The FRB noted that it has undertaken over 20 separate measures
since the passage of Section 303 to reduce the burden and simplify
regulations, written policies and procedures. Additionally,
several proposals were out for comment which will further these
FR, 10/16/95, p. 53546.
Federal Reserve Board Appointments
President Clinton reappointed Federal Reserve Chairman Alan
Greenspan to his third four-year term as Federal Reserve Board
Chairman. White House Budget Director Alice M. Rivlin and
Washington University professor Laurence H. Meyer were also
nominated to fill the two remaining vacancies on the Board. John
P. LaWare left the Board in April of 1995 and Alan Blinder in
January of this year. All three individuals are economists.
BBR, 2/26/96, p. 291; AB, 2/26/96, p 1-2.
Office of the Comptroller of the Currency "Supervision by Risk" Program
The OCC is expanding, enhancing and standardizing the way examiners
evaluate risk in national banks. The agency has defined nine
specific categories of risk it will use in assessing risks in bank
activities. The program focuses on evaluating the quantity of risk
exposure in an institution and determining the quality of the
risk-management systems in place to control that risk. The nine
definitions, among which are credit risk, interest-rate risk,
liquidity risk, and price risk, will enable the agency to treat the
same risks consistently in all banks and across various products
and activities, and they clarify for bankers the kinds of risk the
OCC will be assessing in their institutions. Risk profiles
prepared for each bank will help focus examiner attention on the
most serious concerns within a bank and direct the agency's
resources to institutions where the need is greatest.
News Release, OCC, 9/26/95.
Examiner Guidance on Establishing Reserves
The OCC released a new Comptroller's Handbook section
"Allowance For Loan and Lease Losses" (ALLL). This new section
replaces the ALLL examination section that has been in effect
since 1992. It requires no changes in basic examination
objectives and procedures but consolidates a number of
ALLL-related materials and identifies specific categories
NR 96-75, OCC, 6/19/96.
Bank Examiner Guidance on Futures Brokerage
The OCC issued to its examiners guidance on derivatives that is
applicable to subsidiaries that operate as futures commission
merchants (FCM) registered with the Commodity Futures Trading
Commission. Among the several elements of the guidance are: a)
FCMs are expected to have a risk control unit that is
separate from the unit that trades in derivatives futures; b)
the independent risk control unit is to report to executive
management, the bank's board of directors or a designated
management committee, and is to communicate findings periodically
to senior management and the bank's board; and c) capital to
support risk exposures of the futures brokerage subsidiary should
reflect the level and complexity of the risk and not be limited to
meeting regulatory requirements. An FCM's compliance program
should include at least one designated compliance officer, and
include also standards for disclosure of risk to customers, and a
plan for ethics training for FCM employees.
News Release, OCC, 11/9/95.
Disclosure of Fair-Lending Self-Assessments
The OCC issued interim policy guidelines on banks' disclosure of
the results of fair-lending self-assessments, identifying two types
of self-assessments that national banks will not be routinely
required to report to the agency. The two types of assessments are
1) where a bank uses "testers" or "mystery shoppers" to pose as
loan applicants ("self test"); and 2) where the bank reviews actual
loan files or related information, internal policies and
procedures, training materials or audit reports and makes
assessments based on information about actual loan applicants
("self evaluation"). The OCC will generally not take enforcement
action against a national bank that discovers a fair-lending
violation through self-assessment, when the bank takes appropriate,
timely and complete corrective action in response. OCC examiners
will not require or request any information about a bank's self-
assessments, unless the agency has independently determined that
the bank has unlawfully discriminated and is using the results of
the self tests to defend itself.
Although the OCC will not take enforcement action in the situations
outlined above, the agency will make referrals to the Department of
Justice or notify the Department of Housing and Urban Development
as required by statute or executive order.
News Release, OCC, 9/28/95.
Risk-Based Capital Model
The OCC sent to all national banks a revised risk-based capital
(RBC) planning model that can assist bank management in the
calculation of, and planning for, supervisory capital. The revised
model augments the previous version by highlighting the calculation
of a bank's legal lending limit. The OCC notes that since the
initial shift to the RBC framework in 1989, the supervisory role of
the RBC has increased considerably. For example, the RBC ratio is
a principal trigger under prompt corrective action for regulatory
intervention into a bank's activities. It also is one of the two
variables used in the FDIC's approach to deposit insurance
premiums. In addition, the ratio is a component of other
supervisory policies and statutory requirements, such as those
relating to interbank liabilities, pass-through insurance, and
Bul. 95-62, OCC, 11/16/95.
Small Banks' Compliance Examinations
The OCC issued new streamlined examination procedures for assessing
small banks' compliance with fair-lending laws, the Home Mortgage
Disclosure Act, and a number of other banking-related consumer
protection laws. The new procedures, effective January 1, 1996,
apply to all community banks with total assets of less than $250
million and no regional or multinational affiliation, and under
certain circumstances, may be used in banks with total assets
of up to $1 billion.
News Release, OCC, 9/18/95.
Income From Sales of Credit Life Insurance
The OCC proposed to revise its regulation governing credit life
insurance to eliminate unnecessarily detailed provisions,
reorganize sections of the rule, and refocus the regulation
to areas of greatest safety-and-soundness concerns. The rule would
provide that directors, officers, employees, and shareholders
owning five percent or more of the bank's stock are not allowed to
retain commissions or otherwise profit from the sale of credit life
insurance to the bank's customers. Also, it would state for the
first time that bank officials and insiders who sell credit life
for personal profit are engaging in an unsafe and unsound banking
practice. Banks would not be permitted to structure incentive or
bonus programs in a way that creates incentives for bank officials
to make inappropriate recommendations or sales to bank customers.
Among other issues is whether dual employees who work for a bank
and a non-bank company should be treated like bank employees,
subject to the same limitations on bonuses and incentive
arrangements, when they sell credit life insurance to bank
FR, 9/13/95, p. 47498; AB, 9/14, p. 4; News Release,
Lease Financing Transactions
The OCC proposed to revise its regulation governing the personal
property lease financing transactions of national banks, under the
agency's Regulation Review Program. Comments are requested on
allowing banks to rely more on the residual value of leased
property, and less on the creditworthiness of the lessor, in
deciding whether to enter into a lease. Another issue is the time
period that banks have to dispose of property after the lease
FR, 9/6/95, p. 46246; News Release,
OCC, 9/6; AB, 9/6, p. 2.
Profits From Community Development Investments
The OCC finalized a rule allowing national banks to keep profits
from community development corporation and project investments.
Previously, banks were required to reinvest dividends and other
distributions received from community development investments into
other activities that promoted the public welfare. The OCC found
that this provision effectively discouraged investments in
these types of projects.
AB, 2/1/96. FR, 10/26/95, p. 54819.
Lending Bias Charges Settled
The U.S. Justice Department has gained settlements involving, for
the first time, charges of bias in a bank's overage practices, and
lending discrimination against Hispanics. Huntington Mortgage Co.,
a subsidiary of Huntington Bancshares Inc., agreed to pay $420,000
to settle charges that the company imposed higher up-front fees
(overages) on loans to black borrowers than it charged other
borrowers in the Cleveland area. Huntington denied past
wrong-doing, but agreed to continue to limit its overages to one
percent of the loan amount, and also it will make available all
loan applications to Justice annually for the next three
years. Security State Bank, Pecos, Texas, agreed to pay
$510,000 in damages and penalties to resolve charges that a loan
officer charged Hispanic borrowers higher interest rates on
consumer loans than white customers paid. Security State said the
officer involved in the charges has since left the bank, and that
it does not discriminate in lending activities. The referral to
Justice in the Huntington case resulted from an OCC fair-lending
examination in 1993; in the Security State case the referral was
made by the FRB from an examination by the Federal Reserve Bank of
AB, 10/19/95, p. 2.
Supreme Court Upholds Expanded Bank Insurance Powers
The U.S. Supreme Court ruled unanimously on March 26 in
Barnett Bank of Marion County, N.A. v. Nelson (USSupCt No. 94-1837)
that states must allow nationally-chartered banks to sell insurance
as permitted under federal law. In a ruling on a case brought by
Barnett Banks of Jacksonville against the state of Florida, the
justices ruled that Section 92 of the 1916 National Bank Act, which
allows banks in communities with less than 5,000 persons to sell
insurance, preempted a Florida statute barring bank insurance
activity. The ruling effectively voids bank insurance restrictions
in 15 states.
This Supreme Court decision upholds the 1986 interpretation by the
OCC that Section 92 of the National Bank Act authorized banks to
sell insurance through branches located in small towns. Since it
issued that interpretation, about 200 national banks have begun
selling insurance. While the ruling only applies to nationally
chartered banks, most states grant state-chartered banks the same
powers as national banks.
The justices did not decide who will regulate bank insurance sales
the OCC or state officials. Currently, legislation is pending in
the House that would require state regulation of bank insurance
sales and would prohibit the OCC from expanding bank insurance
powers for five years.
Subsequent to the Barnett decision, the Supreme Court refused to
hear an appeal from Kentucky's Insurance Commissioner, who had been
overturned in barring Owensboro National Bank from selling
insurance. The Court also overturned a Louisiana decision that
prevented a subsidiary of First National Bank of Benham from
AB, 3/27/96, 4/2/96; NYT, 3/27/96; WSJ,
The OCC is finishing guidelines for insurance sales by banks. The
guidelines cover where insurance can be sold; disclosures;
anti-tying regulations; use of customer information; handling of
complaints; director and manager oversight; applicability of state
law in appropriate sales recommendations; guidance on promotional
and sales literature; employee compensation; employee qualification
AB, 2/1/96, 6/19/96.
The OCC has allowed 59 national banks to branch into other states
since January 1994, under the authority of Section 30 of the
National Bank Act (the so-called "30-mile rule"), which allows
national banks to move their headquarters anywhere within a 30-mile
radius. In May 1996, the U. S. District Court for the Northern
District of Texas overturned an OCC decision to permit Commercial
National Bank of Texarkana, Arkansas, to branch into Texas under
the 30-mile rule. It ruled that the OCC, in relying on Section 30
of the Act, had ignored Section 36, which allows national banks
only the same branching rights as state banks. The OCC is
appealing the decision.
Thirteen states, including Arkansas, Colorado, Connecticut,
Delaware, Iowa, Maine, Massachusetts, Michigan, New Hampshire,
North Dakota, Oklahoma, Virginia, West Virginia; the District of
Columbia; and the Conference of State Bank Supervisors supported
Texas in its challenge.
Recent 30-mile rule approvals by the OCC include: The OCC granted
approval for Embry National Bank, Atlanta, to move its main office
across a county line under the 30-mile rule. The Community Bankers
Association of Georgia had argued that the federal law did not
apply and that the Embry branching decision violated state law and
would result in state banks with restrictive charters converting to
national charters. Some state banks in Georgia in recent years
have converted to thrift charters that have nearly unlimited
branching rights in the state. In February of 1995, it approved the
Bank Midwest of Kansas move to Missouri; in March 1995, it approved
the American National Bank and Trust move from Wisconsin to
Illinois, and the headquarters relocation of NationsBank from
Maryland to Virginia; and in January of 1996, it approved the
relocation of Society Bank of Michigan to Indiana. None of these
approvals will be affected by the Texas decision, but state banking
departments in Michigan and Connecticut are pursuing legal remedies
similar to the Texas case against the OCC.
AB 8/17/95, AB, 2/2/96, AB, 5/24/96, BBR, Vol. 66, No.
21, p. 948, 5/27/96, AB, 7/10/96.
Revisions to Regulations
The OCC has proposed and adopted revisions to its regulations to
further the goals of the Regulation Review Program by updating,
clarifying, reorganizing, and streamlining regulations where
appropriate to promote better and more efficient interaction
between the OCC and the banking industry and the public at large.
The intent is to eliminate unnecessary regulatory burdens that do
not contribute to the safety and soundness of national banks or to
accomplishing the OCC's other statutory responsibilities.
FR, 11/15/95, p. 57315.
Interpretive Rules Updated, Codified in Regulation: The OCC issued
a final regulation on February 9, codifying its interpretive
letters in a single ruling. The final rule affirms that national
banks may perform electronically all services that they are
otherwise authorized to perform; adds new provisions clarifying the
circumstances under which a main office or a branch office may be
used for lending activities; and clarifies and codifies current OCC
letters and case authority to include late fees, insufficient funds
fees, annual fees and cash advance fees as components of interest.
The final rule also clarifies rules regarding the lease or sharing
of excess space with non-financial businesses; permits national
banks to rely on corporate law, including state laws where the main
office is located or incorporated; and updates letter of credit
provisions. The OCC is continuing to study the issue of state
licenses for national banks operating under federal law, and its
prior rulings against this practice were therefore not codified in
the final rule.
News Release, OCC, NR 96-13, 2/9/96.
Security Devices and Procedures: The OCC is proposing to revise
its regulation on minimum security devices and procedures for
banks, reports of crimes and suspected crimes, and the Bank Secrecy
Act for compliance. This proposal implements the new inter-agency
suspicious activity referral process and updates and clarifies
various portions of the regulation.
FR, 7/3/95, p. 34476; p. 34481 (FRB notice).
International Banking: The agency is proposing to revise its
regulations governing the international operations of national
banks and the operation of foreign banks through federal branches
and federal agencies in the U.S. The proposal updates, streamlines
and consolidates various provisions and simplifies certain
requirements. The proposal implements a requirement of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
for reducing an existing exemption to the prohibition on the
acceptance by U.S. federal branches and agencies of foreign banks
of retail deposits under $100,000. The exemption that allows
acceptance of certain minimal ("de minimis") deposits up to five
percent of branch deposits would be reduced to one percent, which
is consistent with a similar FDIC proposal. A five-year phaseout
period would be applied to deposits held in existing five percent
de minimis accounts.
Real-Estate Lending and Appraisals: The OCC proposed to revise its
rules governing real-estate lending, in order to modernize and
clarify the real-estate lending rules and accomplish other
objectives of the Regulation Review Program.
FR, 7/5/95, p. 35353.
New Appeal Procedures Finalized: The OCC published its final rule
modifying and clarifying national bank appeal procedures to comply
with the requirements of the Riegle Community Development and
Regulatory Improvement Act of 1994, which requires that all federal
financial institution regulatory agencies establish an independent
appeals process. National banks may request reviews through their
immediate supervisory office or the OCC's ombudsman.
Appeals must be submitted in writing, and the supervisory office or
ombudsman has 45 calendar days to respond. Matters not subject to
appeal are the appointment of receivers and conservators;
preliminary exam conclusions; enforcement-related decisions;
Freedom of Information Act requests for agency records; and
rulemakings subject to the Administrative Procedures Act.
BBR, p. 294, 2/26/96.
Proposal Allowing Banks to Exceed Loan Limits to One
Borrower: The OCC has proposed that national banks be
allowed to exceed the limits on loans to one borrower if two
conditions are met. The loan must be secured by either personal
property or real estate; and extension of additional credit puts
the bank in a better position than foreclosing on the collateral.
The proposal was published in the Federal Register on July 17,
1996, with comments due by September 16.
AB, July 17, 1996.
New Bank Examinations Said to Reduce Regulatory Burden
In a survey of 725 community banks examined under the OCC's
streamlined examination procedures for noncomplex community
national banks, 83 percent of bankers said that the new
examinations reduced their regulatory burden from prior
examinations. Three-fourths or more of the surveyed banks examined
between October 1, 1994 and June 30, 1995, said that the time
required to prepare requested materials in support of the
examination was reduced, that the examiners took up less of the
bank's staff time with discussions, and that examiners were more
focused in their reviews.
In a separate survey of Minnesota and North Dakota national banks,
95 percent strongly agreed that the exam scope and goals were
clearly communicated prior to the exam, that the examination team
acted professionally and provided useful information, and that
their findings were clearly and effectively communicated at the
completion of the exam. In this survey, 93 percent strongly agreed
that examiners were responsive to bank needs over the past year
without placing undue burden on banks, 88 percent strongly agreed
that examiners presented accurate conclusions, their
recommendations for corrective action were reasonable, and
the report of examination was consistent with verbal discussions.
Also, 82 percent strongly agreed that examination information
requests were reasonable. The survey results are based on
responses by 56 banks out of a total of 62 that were sent
Press Release, OCC, 8/21/95.
Pilot Project For Bank Auditor/Examiner Cooperation
Comptroller of the Currency Eugene A. Ludwig announced plans for a
pilot program to test coordination of the respective review
activities of national bank examiners and certified public
accountants at ten large national banks. Once the banks are
identified, examiners and auditors involved in each bank will share
auditing and examination plans for the coming year. One possible
outcome might be identification of a specific risk area upon
which to focus and develop a plan for cooperation. The
program is intended to generate: a) better coordination of
procedures for reviewing common areas of concern to reduce
examination and audit time; and b) opportunities to share
information and data, which should assist in improving the
efficiency of examinations and audits and in eliminating
duplicative information requests.
News Release, OCC, 11/16/95.
Treasury Study of Consumer and Small-Business Credit
The Department of the Treasury requested comment on the processes,
and the effect of federal laws on those processes, by which credit
is made available for consumers and small businesses. The request
was issued pursuant to Section 330 of the Riegle Community
Development and Regulatory Improvement Act of 1994, which requires
the Treasury to conduct the study in consultation with the FRB, the
Small Business Administration, the Department of Housing and Urban
Development, OCC, OTS, FDIC, and NCUA, and submit a report to
Congress. The purpose of the study is to identify procedures and
federal laws that have the effect of reducing the availability of
credit to consumers or small businesses, increasing the level of
consumer inconvenience, cost, and time delays in connection with
the extension of consumer and small-business credit, and the
increasing costs and burdens on insured depository institutions,
insured credit unions, and other lenders.
FR, 8/22/95, p. 43647.
Pacific Northwest Flood Damages
The OCC is encouraging national banks to work with borrowers in the
Pacific Northwest affected by floods by extending loan repayment
terms, restucturing debt obligations, and easing loan documentation
or credit extension terms for new loans, consistent with prudent
banking policy. The OCC will also use expedited procedures to
approve temporary facilities for national banks with branches that
have been damaged by the flooding. The OCC district office in San
Francisco has been designated the contact point for national banks
in need of assistance.
OCC NR 96-15, 2/12/96.
Thrift Becomes National Bank
On July 18, 1996, the OCC approved an application by the $7.5
billion Minneapolis thrift, TCF Financial Corp., to create four
national banks to operate in the states of Minnesota, Illinois,
Wisconsin, and Michigan. TCF stated that the 23-cent difference
between the premiums charged by the BIF and the SAIF forced this
action. Six other thrifts have also applied to the OCC for bank
charters. The OCC decision followed an earlier decision by the
FDIC to allow thrifts to shift deposits out of the SAIF, if the
action was initiated by the customer.
AB, 7/19/96; FDIC PR-58-96, 7/31/96.
Office of Thrift Supervision Review of OTS-Calculated Interest-Rate Risk
The OTS adopted new procedures for eligible thrifts to request an
adjustment to their interest-rate-risk (IRR) component, as
calculated by the OTS, or calculate their IRR exposure using their
own computer models. An eligible institution may request an
adjustment to its capital requirement if it can demonstrate that
the accuracy of OTS' estimate of IRR exposure can be materially
improved through the use of more-refined data or more-appropriate
assumptions tailored to the specific institution. To be eligible,
an institution must show that imposition of the IRR capital
requirement as calculated by the OTS would cause the institution to
move to a lower prompt corrective action category. The OTS intends
to process requests for IRR adjustments within 75 calendar days
from the date of their receipt. To allow for the implementation
and evaluation of the new procedures, the OTS will delay invoking
its IRR rule requiring thrifts with above-normal IRR exposure to
adjust their regulatory capital requirement.
Thrift institutions with assets of more than $300 million, of which
there are currently approximately 500, are required to file
quarterly data with the OTS for calculation of their IRR exposure.
They represent about one-third of the OTS-regulated industry. Any
institution in this group that is well-capitalized may request to
use its own internal IRR model in place of the OTS model in
calculating its IRR capital requirement. An internal model must
meet certain standards; for example, the model must use reasonable
assumptions regarding future interest rates, prepayment rates for
assets, and attrition rates for liabilities. The OTS intends to
process such requests within 20 calendar days of their receipt.
For thrift institutions with assets of $300 million or less, filing
the quarterly IRR is voluntary. More than 85 percent of the
approximately 1,000 thrifts in this group are voluntary
NEWS, OTS, 8/23/95; Thrift Bulletin 67, 8/21/95.
The OTS adopted a rule that substitutes the term
"available-for-sale equity securities with readily determinable
market values" used in Statement of Financial Accounting Standard
No. 115 for the current reference to "marketable equity securities"
in the OTS definition of "common stockholders' equity." The OTS,
in consultation with the other federal banking agencies, decided
not to adopt its June 1994, proposal to include the SFAS No. 115
equity component in computing regulatory capital (see this Review,
Winter 1995, p. 47). Savings associations, however, must follow
this Standard for regulatory reporting purposes, as required by
statute. The decision leaves in effect the OTS' requirement that
nontrading debt securities be valued at amortized cost and
nontrading marketable equity securities be valued at the lower of
fair value or amortized cost for computing regulatory capital.
This decision is consistent with the recommendation of the Task
Force on Supervision of the FFIEC and the policies of the
FR, 8/15/95, p. 42025.
Policy on Independent Audits
The OTS provided the first detailed guidance on independent audits
since the agency revised its audit regulation in November 1994.
That regulation, designed to make audit rules for savings
associations more consistent with those for commercial banks, takes
into account an FDIC rule requiring annual independent audits for
thrifts and banks with assets of $500 million or more. OTS
retained authority to require an independent audit of any savings
association or thrift holding company, regardless of size, if an
audit is needed to address safety-and-soundness concerns.
Associations with an examination rating of CAMEL 3, 4, or 5 are
automatically required to obtain an independent audit.
Otherwise, associations can expect to get a written notice from OTS
when an independent audit is required for other
safety-and-soundness purposes. An institution with the above
ratings may request a waiver of the audit requirement. OTS will
consider granting a waiver if the audit is not likely to help solve
the problem that led to the poor rating. For those institutions
not required to have an annual independent audit, the practice is
encouraged by the OTS. Thrift holding companies must have an
annual independent audit if the holding company controls
subsidiaries that have aggregate consolidated assets of $500
million or more.
Regulatory Bulletin 32-1, OTS, 8/16/95; NEWS, 8/18/95.
Examination Performance Evaluated
The OTS surveyed the institutions it regulates to determine how
well the agency is living up to standards of service that it
adopted in September 1994, in response to the comments received
from thrift institution managers and directors on areas where the
OTS needed to improve the examination process. The agency scored
almost a 90-percent success rate in meeting most of its targets.
For example, 91 percent of surveyed institutions said the OTS had
met its goal of meeting with them at least semiannually between
examinations and making a supervisory team available to meet on an
as-needed basis. In other categories, 98 percent of surveyed
institutions agreed that OTS' examiner-in-charge scheduled a
meeting with the thrift's chief executive officer on the day the
examination commenced, and that meetings were held at least weekly
with institution personnel to convey findings and discuss concerns
as the examination progressed. The lowest score a 69-percent
success rate related to examination staff continuity from one
examination to the next. The OTS said the logistics of deploying
examiners and the location of thrifts and examiners will make it
hard to improve, but the agency will do its best to provide
greater staff continuity.
NEWS, OTS, 11/25/95.
Examination Strategies Revised
The OTS revised its examination strategy and work paper
documentation, pursuant to the Riegle Community Development and
Regulatory Improvement Act of 1994, to apply an 18-month cycle
to smaller insured institutions that: a) are not currently
subject to a formal enforcement proceeding or order by the OTS
or the FDIC; b) have a composite 1-CAMEL rating and total
assets of less than $250 million, or a composite 2-CAMEL rating
with total assets of $100 million or less; c) are well-capitalized;
d) have a management component rating of 1 or 2; e) have had no
change in control of the institution since completion of the last
full-scope examination; and f) have had a full-scope
safety-and-soundness examination or alternating state examination
report submitted since November 1, 1994. The OTS will continue to
conduct full-scope safety-and-soundness examinations in all other
institutions on a 12-month examination cycle. Full-scope, on-site
examinations conducted by state authorities may be accepted
on an alternating basis in lieu of an OTS examination when
such examinations meet OTS requirements.
The Preliminary Examination Response Kit (PERK), which is sent to
institutions prior to examinations, was revised in several respects
to reduce regulatory burden, update references, and eliminate
Regulatory Bulletin 32-2, OTS, 8/22/95.
Actions to Reduce Regulatory Burden
As part of an initiative to reduce regulatory burden and to
implement the Community Development and Regulatory Improvement Act
of 1994, the OTS proposed eliminating regulations that are
either outdated or duplicative, these constituting eight
percent of all OTS sections in the Code of Federal Regulations.
Among the regulations and policy statements the agency proposes to
eliminate are requirements for counter statements, which duplicate
information available elsewhere; unnecessary procedures for savings
withdrawal requests; and outdated limitations on the sale of
merchandise in connection with soliciting savings accounts. The
OTS expects to issue over the next year a series of proposals to
make significant burden-reducing changes in a number of key areas
of its regulations, including regulations governing lending,
subsidiaries, insurance, preemption, and adjustable mortgages.
NEWS, OTS, 8/28/95; FR, 8/28/95, p. 44442.
The OTS proposed streamlining the Thrift Financial Report (TFR),
including a 40-percent reduction in its content. The TFR is filed
quarterly by 1,500 savings-and-loan associations to report their
financial condition. As proposed, the consolidated report that
institutions presently file would be retained, but the separate
reports for the parent institution and subsidiaries would be
eliminated. Additionally, only data critical to meeting
supervisory needs or statutory mandates would be collected. The
proposed changes would also make the data more comparable to the
information contained in the commercial bank Call Report.
The agency would use the revised TFR beginning with the
June 1996, reporting cycle.
NEWS, OTS, 8/24/95; FR, 8/24, p. 44116.
The OTS is discontinuing an attorney letter that is used to obtain
certain information prior to the examinations of thrift
institutions. The OTS had been the only banking agency to use an
attorney letter. Essential information on foreclosures,
litigation, legal fees and documents and funds controlled by the
attorney will be obtained directly from the institution during the
examination process. The agency will continue to request
information on contingent liabilities, such as the feasibility of
settling law suits and the probable time of settlements, as part of
its pre-examination package, but directly from the
NEWS, OTS, 8/4/95.
On June 25, 1996, the OTS proposed a rule to update, shorten and
make more flexible the rules governing the charters and bylaws of
federal associations. The proposal seeks to reduce charter and
bylaw rules and policy statements on corporate governance from 33
to 24, a reduction of 27 percent. Comments are due by August
Transmittal 151, OTS, 7/9/96; FR, 6/25/96, pp. 32713 -
Electronic Banking Task Force
The OTS created an Electronic Banking Task Force, which will look
at "the whole range of electronic banking issues from the Internet
to smart cards," an official said, and will identify the risks to
financial institutions and to their customers. It is noted that
the first financial institution to offer banking services on the
Internet, Cardinal Bancshares, Inc., through its subsidiary,
Security First Network Bank, Pineville, Ky., received approval from
the OTS last May and began electronic operations on the Internet in
October. Customers can open new accounts and transact business
such as transferring funds between accounts and paying bills.
Cardinal was not required to ask the OTS for permission to operate
on the Internet, but did so as part of its application to set up
the new subsidiary, Security First. In approving the
application, the OTS stipulated that the thrift had to address
a number of electronic security issues.
NEWS, OTS, 11/20/95.
Assets of minority-owned federal savings banks and savings-and-loan
institutions rose 26 percent by $5.9 billion in 1995, according
to the OTS. This compares with a decline of 0.4 percent for all
1,437 federal savings banks and savings-and-loans in 1995. The OTS
attributes the rise to growth in consumer lending and
small-business lending in minority communities.
Courts Restrict OTS' Ability to Enforce Net-Worth
The Supreme Court refused to consider an OTS appeal of a U.S. Court
of Appeals decision restricting the OTS' ability to enforce
net-worth maintenance agreements against owners of thrifts. In
this case, United States vs. Rapaport, the U. S. Court of Appeals
for the District of Columbia ruled that the OTS could enforce
net-worth agreements against only those thrift owners who
recklessly disregarded the law or personally profited by
signing net-worth agreements.
National Credit Union Administration Field of Membership and Chartering Policy
The NCUA proposed amending its policies so that senior citizen and
retiree groups will be required to meet the same conditions as
other associational groups in order to qualify for a federal credit
union charter or addition to an existing charter. In determining
whether a group satisfies the normal common bond requirement, NCUA
will consider the totality of the circumstances, such as whether
the members pay dues, have voting rights, hold office, hold
meetings, whether there is interaction among members and whether
the group has its own bylaws.
Until the Board approves a final policy, it is continuing its
moratorium on FCUs adding self-created senior citizen/retiree
groups to their field of membership. The moratorium has no effect
on groups that are already in an FCU's field of membership and it
does not apply to the addition of senior citizens groups that have
the characteristics of an association.
The Board proposes that FCUs continue to be allowed to add
low-income groups formed solely for the purpose of seeking credit
FR, 10/4/95, p. 51936.
Investment and Deposit Activities
The NCUA proposed a rule that would add restrictions on some
securities that have been determined to be too risky for credit
unions, broaden authority in certain areas, and require that a
credit union's staff and board of directors fully understand the
potential risk characteristics of its investment options.
The agency has concluded that investment policies with well-defined
parameters and enhanced monitoring and reporting of investment
risks are needed to strengthen credit union investment-risk
management. The proposed rule recognizes that credit union
investment risk is largely interest-rate, rather than credit
(default) risk, and that a regulation designed to prohibit
particular securities can fail to reflect the changing financial
environment. The proposed rule allows a credit union to operate on
one of three levels. A credit union could invest in fully-insured
CDs and shares and deposits in corporate credit unions, and, if
limited to these investments, the institution would not have to
meet certain requirements, among which are conducting
collateralized mortgage obligations (CMO) testing, establishing a
trading policy and reporting on these activities, reporting monthly
on the fair value of each investment, and calculating the impact on
its portfolio of a 300-basis point parallel shift in interest
rates. At the next level, a credit union could invest in
potentially more-risky securities in an amount up to capital and
would have to comply with most of the proposed rule's policy and
reporting requirements, but not the 300-basis-point shift
analysis. Finally, at the most sophisticated level, a
credit union investing in potentially more-risky securities in
an amount exceeding capital would be subject to all of the policy
and the reporting requirements.
NCUA News, 11/16/95; FR, 11/29/95, p. 61219.
Incentive Pay For Lending Activities
To reduce regulatory burden, the NCUA is amending its regulations
to give member-elected credit union boards more flexibility to
determine compensation policies, including incentive pay, for
certain activities related to credit union lending. Currently, the
agency's rules prohibit officials and certain employees of
federally insured credit unions from receiving either incentive pay
or outside compensation for these activities. The final rule will
allow federal credit unions to pay: 1) to any employee, including
a senior management employee, an incentive or bonus based on the
overall financial performance of the credit union; and 2) to any
employee, except a senior management employee, an incentive based
on a loan made by the credit union, provided that the board of the
credit union has established written policies and internal controls
in connection with the incentive or bonus and monitors compliance
with them at least annually. In addition, a credit union's
volunteer officials and non-senior management employees, and family
members of officials and all employees, may receive compensation
from an outside party for a service or activity performed outside
the credit union, provided that neither the credit union nor the
official, employee, or family member has "steered" anyone to the
The NCUA reserves the right to take exception to any compensation
plan for safety-and-soundness reasons. The amendments are
effective October 4, 1995.
FR, 10/4/95, p. 51886.
Supervisory Committee Audits
The NCUA is proposing to amend its regulations governing credit
union supervisory committee audits and verifications to clarify
audit requirements in targeted risk areas. Most of the additional
requirements are not applicable to credit unions that do not employ
a compensated auditor. The expanded scope is intended to provide
credit unions an enhanced audit product in several areas, among
which are internal controls, cash, loans, related-party
transactions, and the detection and reporting of errors and
irregularities. The more definitive audit scope is designed to
address and to reduce confusion that occurs when the supervisory
committee and the compensated auditor agree that the audit
engagement will consist of less than the full scope of a
supervisory audit. For example, the supervisory committee may not
realize that it remains responsible for performing the additional
work needed to "fill the gaps" and produce a complete supervisory
audit. Credit unions that employ compensated auditors would be
required to memorialize the terms and conditions of the engagement
in a comprehensive engagement letter that would constitute an
Along with the existing requirement for a written audit report
would be a requirement for two additional written reports where
applicable: 1) a report of internal control exceptions or
reportable conditions noted, if any, and 2) a report of
irregularities or illegal acts noted during the audit, if any.
These requirements do not necessitate any additional work, as they
report information already obtained in the normal course of the
supervisory committee audit.
FR, 11/2/95, p. 55663.
Pursuant to Title XI of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, the NCUA amended parts of
its real-estate appraisal regulation that are concerned with
minimum appraisal standards, safety and soundness, unavailable
information, appraiser independence and other aspects. The aim was
to simplify compliance and reduce costs. For example, credit
unions will be permitted to use an appraisal that was prepared for
a different type of financial institution, including a mortgage
bank. The agency will continue to require credit unions to get
appraisals on any residential real-estate loan of more than
$100,000, while banking regulators have set a $250,000
FR, 10/4/95, p. 51889; AB, 10/5/95, p.8.
Truth in Savings
The NCUA extended the compliance date to January 1, 1997, in
respect to Part 707 of its regulations for nonautomated and
insufficiently automated credit unions that have assets of $2
million or less. The extension gives these credit unions continued
immunity from compliance until Congress has acted on its
contemplated regulatory relief initiatives, which might ultimately
exempt their compliance with TIS. The agency has twice before
extended the Part 707 compliance date for certain small,
underautomated credit unions. The compliance date for all other
credit unions remained January 1, 1995.
FR, 11/14/95, p. 57173; 8/3/94, p. 39425.
Management Interlock Rule Upheld
A U.S. district court in Virginia upheld an NCUA rule approved last
fall that prohibits shared management between the Credit Union
National Association (CUNA), which is the industry's largest trade
group, and corporate credit unions (see this Review, Spring 1995,
p. 44). The decision cited conflicts of interest and deference to
the NCUA's contention that such conflicts could threaten the safety
and soundness of the nation's credit union system. About half of
the 43 corporate credit unions across the country are affected by
the NCUA's rule.
AB, 10/2/95, p. 8.
Federal Housing Finance Board Affordable Housing Program
The Federal Housing Finance Board (FHFB) adopted a rule, effective
October 25, 1995, to authorize a Federal Home Loan Bank (Bank) to
set aside a portion of its Affordable Housing Program (AHP)
contribution to assist low- and moderate-income, first-time
home buyers to purchase homes. In addition, the final rule permits
a Bank to establish a home ownership set-aside program, with other
requirements, subject to prior approval of the Board.
Section 10 of the Federal Home Loan Bank Act requires each Bank to
establish a program to subsidize the interest rate on advances to
members of the Federal Home Loan Bank System engaged in lending for
long-term, low- and moderate-income, owner-occupied and affordable
rental housing at subsidized interest rates. The Board's
regulation requires each Bank to make a specified annual
contribution to fund its AHP. During each calendar year, each Bank
accepts applications for funds from its members during two of four
quarterly funding periods. AHP funds are awarded to applicants
through a competitive scoring process set forth in the AHP
FR, 9/25/95, p. 49327.
The FHFB reported that interest rates on conventional 30-year
fixed-rate mortgages increased in April 1996, to 8.05 percent, and
is higher than in any month since May 1995. Similarly, rates on
15-year fixed-rate loans increased to 7.77 percent in April, 23
basis points higher than in the previous month. Thirty-one
percent of conventional loans closed in May were
adjustable-rate loans, the highest percentage since last
The data were based on 12,839 reported loans from 245
lenders and excluded FHA-insured and
VA-guaranteed mortgages, refinancing loans, and
FHFB 96-28, 6/27/96.
STATE LEGISLATION AND REGULATION Interstate Banking/Branching
Alabama: A new law permits acquisitions of banks by out-of-state
banks or bank holding companies, effective September 29, 1995.
Interstate branching is allowed, effective March 31, 1997. Alabama
banks may establish and operate one or more branches in another
state. An out-of-state bank may branch into Alabama only by
acquiring a bank in the state that has operated for five or more
years. After entry, an out-of-state bank with branches in Alabama
may branch de novo or by acquisitions to the same extent that
in-state banks may branch. The bill also provides for
licensing, application and other requirements for foreign bank
branches, offices, or agencies operating in the state.
BBR, 8/28/95, p. 344.
California: Banks are permitted to branch through acquisitions
into California under a law enacted in response to the Riegle-Neal
Act. A bank must be at least five years old before it can be
acquired by an out-of-state banking organization.
BBR, 11/13/95, p. 795.
Illinois: An opt-in law permits state banks to establish
out-of-state branches, and out-of-state banks to branch in
Illinois, beginning June 1, 1997. State banks will be permitted to
merge with out-of-state banks; however, the law does not allow
direct branch acquisitions or de novo branching. Several
restrictions relating to the acquisition of Illinois banks by
out-of-state bank holding companies are eliminated. Among other
provisions, the state Commissioner of Banks is authorized to
examine branches of out-of-state banks and to participate in
reciprocal arrangements concerning examinations of banks. The law
sets no age limit on banks being acquired and allows banks to act
as agents for out-of-state affiliates.
BBR, 8/7/95, p. 262; Northwestern Financial
Review, 8/19/95, p. 15.
New Hampshire: The Governor signed opt-in legislation permitting
interstate branching, effective June 1, 1997, but not allowing de
novo branching or partial bank acquisitions. As permitted under
the Reigle-Neal Act, the law prohibits the interstate acquisition
of banks in the state that are less than five years old. A
20-percent cap on the portion of the market an institution may
control through an acquisition is retained.
BBR, 7/31/95, p. 209.
Wisconsin: A new law allows out-of-state banking organizations to
branch into the state by acquisition of existing banks and bank
holding companies, but not by de novo branching. Only banks
operating for five years or longer may be acquired by out-of-state
firms. Previously, only banking firms within a nine- state region
could acquire banks in Wisconsin.
BBR, 11/6/95, p. 757.
Nebraska: One bank has received regulatory approvals, and two
others have filed applications, to branch within the state by means
of creating a savings-and-loan charter and merging the proposed
office or offices into the bank. The state's law allows
banks to branch through the purchase of an existing bank that
is at least 18 months old, but not through de novo bank
Northwestern Financial Review, 8/5/95, p. 24.
Court Rulings on Fee and Service Charges
The U.S. Supreme Court ruled unanimously on June 3, 1996,
that national banks can charge any late-payment fees
permitted by their home state, regardless of the law of the state
where the cardholder lives. The ruling, Smiley v.
Citibank, upholds a 1995 ruling by the
California Supreme Court dismissing a suit against Citibank
by California residents charging that Citibank late fees were
illegal under California law. Citibank conducts its
credit-card operations from South Dakota, which has no cap
on late fees or other credit-card charges.
The U.S. Supreme Court ruling applies explicitly to nationally
chartered banks regulated by the OCC, but it is expected to be
applied to federally insured state-chartered banks as well.
Previous to this decision, the Comptroller of the Currency, the
state of Delaware, and the Colorado Supreme Court had ruled that
fees on credit cards represented interest and were therefore
allowable. A Pennsylvania superior court in 1994 and the New
Jersey Supreme Court in November 1995 had ruled
The California Supreme Court ruled that out-of-state
credit-card banks are not governed by the state's restrictions
on fee and service charges, because the National Bank Act gives
a bank's home state the power to impose these restrictions.
The ruling was based on the definition of "interest," which the
Court said includes late fees and all other money paid to the
AB, 9/6/95; 11/22/95; Federal Reserve Bank of
Philadelphia, Banking Legislation and Policy, Volume 14, Number
4, pp. 1-2; The New York Times, 6/4/96.
Connecticut: The Department of Insurance, in a partial settlement
of a lawsuit challenging state restrictions, gave approval for
Shawmut National Corp. to sell annuities throughout the state. The
state Attorney General said his office will propose legislation to
give state banks the same power. Under the settlement, Shawmut
agreed that all employees who sell annuities will apply for
licenses from the Department, and the state agreed that all
currently licensed employees will not need to reapply.
AB, 7/28/95, p.2.
Florida: A proposed rule provides guidelines for insurance agents
and deposit-taking financial institutions in the sale of annuities.
The rule would affect Florida-chartered banks, savings-and-loan
associations, and savings banks, and federally chartered
savings-and-loan associations and savings banks. National banks
already are permitted to sell annuities under federal law.
Consumer protections include a requirement that institutions
disclose orally, in writing, and with signs, that annuities are not
insured by the FDIC or the Securities Investor Protection Corp.
(SIPC), and are subject to investment risk. Sales could only be
made by a licensed insurance agent, and employees would not be
permitted to perform annuities services and banking services for a
customer at the same time.
BBR, 8/28/95, p. 341.
A state appeals court ruling that allows state-chartered banks to
engage in any activity permitted to national banks opens the way
for state banks to sell annuities in Florida. At least two
national banks have started selling annuities in the state
following the U.S. Supreme Court's ruling in January in the Valic
case, in which the Court upheld a decision of the OCC that selling
annuities is "incidental" to banking and a permissible activity
under the National Bank Act (see this Review, Spring 1995, p. 39).
AB, 8/25/95, p. 2.
Compliance Self-Testing Privilege
Illinois: Under a bill passed by the legislature, information
obtained or discovered by a bank or thrift in the course of
conducting an internal audit or review cannot be used as evidence
against the bank or thrift in a civil action. Documents that are
prepared in connection with a review conducted by a compliance
review committee would remain confidential and would not be
discoverable as evidence against a bank or thrift in any civil
action, other than a civil action initiated by a state or federal
Illinois Banker, 9/95, p. 17.
Illinois: A bill passed by the legislature, amending a 1979 law,
eliminates restrictions on the kinds of transactions and other
banking-related activities that may be carried out by customers
of financial institutions at various electronic funds transfer
facilities, and authorizes EFT networks to process deposits on an
interstate basis, consistent with the powers of brick-and-mortar
branches and with other laws applicable to financial institutions.
The revised law retains the right of the Banking Commissioner to
audit networks but the networks no longer would be required to make
quarterly and annual filings with the Commissioner.
Illinois Banker, 9/95, p. 25.
State Regulator Accredited
Kansas: The Conference of State Bank Supervisors has issued its
accreditation to the Office of the Bank Commissioner. The Office
supervises 323 state-chartered financial institutions with
assets of more than $14.8 billion, and over 80 trust
departments and independent trust companies. Thirty-four
state banking departments thus far have received CSBS
Bank News, July 1995, p. 45.
Examination Cycle Extended
New York: Effective January 1, 1996, the Banking
Superintendent is permitted to examine certain
state-chartered banks every 18 months, instead of once a
year. To be eligible for the longer cycle, a bank's total
assets must be less than $250 million, and the institution
must be well-capitalized and well-managed. These requirements
parallel the criteria for the longer cycle applicable to federally
examined banks under the Riegle Community Development and
Regulatory Improvement Act of 1994, except that the state law
applies also to safe deposit companies, uninsured limited-purpose
trust companies, and other uninsured entities holding state
BBR, 8/7/95, p. 263.
Feedback From Examinations
New York: The Banking Department has developed a follow-up
questionnaire by which banks can evaluate the examination process
and identify problems. The feedback will assist the Department
in monitoring the effectiveness of its communications with
state-chartered banks, the reasonableness of its examination
requests, and other aspects of the program.
AB, 8/16/95, p. 7.
Wisconsin: Government departments that regulate banking,
savings-and-loans, and securities will be transferred to a new
Department of Financial Institutions, beginning July 1, 1996.
Among other changes, the new Department will take over regulation
of mortgage banking, and will administer the Wisconsin Consumer
Act. The Department also will have certain administrative
responsibilities with respect to credit union regulation that
otherwise will remain in a separate Office. Savings on salary
costs alone from the consolidation are estimated at nearly
Northwestern Financial Review, 10/7/95, p. 36.
State Legislative Activity on Mergers
Kansas: The Kansas state legislature is considering legislation
authorizing the state to block bank mergers that would result in
the loss of jobs. Under the current bill, acquirers would be
required to file a statement with the Banking Ccommissioner
concerning likely job losses resulting from the merger. The
Commissioner would be empowered to block the merger if job loss
would be severe.
Mississippi: The legislature is considering a bill that would
provide tax credits to institutions that maintain banking jobs
following a merger.
Limits on Credit Union Membership
Utah: The Utah State Supreme Court reversed a lower court's
dismissal of a suit brought by the Utah Bankers Association against
the Credit Union Service Centers of Utah and Utah's Commissioner of
Financial Institutions. The suit sought to block credit unions
from having members from more than one county of the state. The
case has been remanded to District Court and will be refiled.
State Savings Bank Charter
Michigan: Michigan became the 30th state to create a state savings
bank charter. The new charter requires that at least 50 percent of
the institution's assets be concentrated in mortgage-related loans
and investments. The new charter will permit the state's 27
federally chartered savings institutions to continue to operate as
thrifts regardless of federal action, and removes the OTS as their
primary regulator. Those thrifts operating under the new charter
will have the state as their primary regulator with the FDIC as a
State Credit Union Deposit Insurance to End
Washington: The Washington Credit Union Share Guaranty
Association, a Washington state corporation providing deposit
insurance for 74 state credit unions, voted to dissolve the
insurance fund within the next three years. The affected credit
unions must submit applications to the National Credit Union
Administration for federal deposit insurance by the end of
BANK AND THRIFT PERFORMANCE Commercial Banks' Earnings in 1995
Insured commercial banks reported a record $48.8 billion in net
income for 1995, an increase of 9.4 percent over 1994's previous
record earnings of $44.6 billion. Fourth-quarter 1995 net
income was $12.1 billion, the second-highest quarterly net
income ever after third-quarter 1995 record net income of $13.8
billion. All but three percent of commercial banks reported
positive earnings in 1995, and 68 percent reported higher
earnings than in the previous year. Industry 1995 ROA
increased to 1.17 percent, a slight improvement over the 1.15
percent ROA reported in 1994. This was the third consecutive year
that the ratio exceeded one percent.
Contributing to the growth in earnings in 1995 were lower deposit
insurance premiums, made possible by the recapitalization of the
BIF. The higher earnings reflected the banks' emphasis on
expanding their loans, particularly home mortgage loans and other
loans to consumers, compared to other assets. The higher
proportion of loans has given support to average yields and net
Contributing to 1995 record earnings was a 5.2-percent increase in
net interest income over 1994 levels. The industry's 1995
seven-basis-point decline to 4.29 percent in net interest margins
was more than offset by a 7.7-percent increase in interest-
earning assets. Additionally, 1995 results showed an
increase in noninterest revenue of $6.2 billion over previous
year revenues, an 8.1-percent increase, resulting from strong 1995
growth in fee income. Securities sales also contributed $545
million in gains in 1995, a $1.1-billion increase over 1994 net
losses of $572 million.
Delinquency measures overall showed improvement. Noncurrent assets
and other real estate owned to assets fell to .85 percent in 1995
from a level of 1.01 percent in 1994. This represented the fourth
consecutive year of decline in this ratio. Noncurrent loans (more
than 90 days past due or not accruing interest) fell by 1.1 percent
and real estate owned fell by 36.6 percent in the fourth quarter of
1995 from fourth-quarter 1994 levels. Short-term delinquencies
(loans and leases 30-89 days past due) rose during the same period,
however, increasing 20.2 percent over fourth-quarter 1994 levels.
Net charge-offs increased 8.2 percent, and the provision for loan
losses increased 14.5 percent in the fourth quarter of 1995 over
fourth-quarter 1994 levels.
Banks' equity capital rose to 8.11 percent of total assets in 1995.
Total assets grew to $4,313 billion in the fourth quarter of 1995,
a 7.5-percent increase over the $4,011 billion in assets four
Six insured commercial banks failed in 1995, compared to 11 in
1994. The number of commercial banks on the FDIC's "Problem List"
for 1995 dropped to 144 institutions from 247 in 1994. Assets of
"problem" banks fell by $16 billion during the year, to $17 billion
FDIC-insured savings institutions earned $1.8 billion in the fourth
quarter of 1995, bringing full-year 1995 earnings to a record $7.6
billion. Net income for the quarter was $181 million higher than
in the fourth quarter of 1994. Full-year average return on assets
rose to .79 percent, the highest ratio since 1962. Profits were
$1.3 billion higher in 1995 than in 1994. Net interest margins
experienced their first quarterly increase since 1993, rising seven
basis points to 3.12 percent in the fourth quarter. Thrift
institutions' total assets increased by $1 billion during the
quarter, and in the 12-month period grew by a modest 1.7 percent.
The industry's equity capital as a percent of assets, 8.39 at
quarter end, was the highest since 1951. The number of "problem"
institutions in 1995 dropped by 22 to 49, and their assets declined
to $14 billion. The total number of insured savings associations
in operation fell by 31 to 2,029 in the fourth quarter, a loss of
5.7 percent during the 12-month period, and represented a
continuation of the downtrend beginning in 1990.
The FDIC Quarterly Banking Profile, Third Quarter, 1995
and Fourth Quarter, 1995.
First-Quarter 1996 Preliminary Earnings
Insured commercial banks reported net income of $12.0 billion in
the first quarter of 1996, an 8.2 percent increase over the first
quarter of 1995. This was the third consecutive quarter that net
earnings exceeded $12 billion. More than two-thirds of banks
reported higher earnings than a year ago. Higher net interest
income was primarily responsible for the increased earnings. Net
interest income rose $2.2 billion over levels a year earlier,
reflecting a significant increase in interest-earning assets over
the year. Higher noninterest revenues also contributed to the
strong earnings. The average return on assets was 1.12 percent for
the quarter. One negative, however, was that noncurrent loans rose
for only the second time in the last five years, increasing $659
million during the quarter.
Savings institutions reported net earnings of $2.5 billion in the
first quarter of 1996 and an annualized ROA of 1.01 percent. These
results represented the highest quarterly net income and ROA ever
reported by the industry, and the first time ROA has exceeded one
percent. However, exluding gains on the sale of branches and
securities, average ROA for the industry for the quarter declined
to 0.83 percent. This lower ratio still represents an improvement
over previous quarters. Net interest margins rose to 3.19 percent
from 3.12 percent the previous quarter, the second consecutive
quarterly increase in margins. Almost 80 percent of thrifts with
more than $1 billion in assets reported improved earnings over
earnings a year ago. Less than half (49 percent) of smaller
thrifts reported higher earnings.
The FDIC Quarterly Banking Profile, First Quarter,
Depository Institutions' Retail Fees Surveyed
Few cases were found of statistically significant nationwide
increases in fees in 1993-1994 for either banks or savings
associations, the FRB said in its fifth annual report to Congress
on retail fees and services of depository institutions. With
respect to individual services, the changes in the proportion of
institutions that charge a fee were about equally divided between
increases and decreases. The report was based on surveys of 1,050
institutions (650 banks and 400 savings associations) in 1994,
and 330 institutions in 1993. The fee and availability data
from surveyed institutions covered noninterest checking
accounts, NOW accounts, savings accounts, money orders
involving insufficient funds, overdrafts and automated teller
Among the changes detailed in the report, the average minimum
balance for the single-fee NOW account to avoid a monthly fee
required by banks increased from $971 to $1,055. The proportion of
savings associations offering no passbook accounts increased from
just under 18 percent to 20 percent. The nationwide proportion of
banks offering ATM services remained at approximately 70 percent,
while the proportion of savings associations offering the service
increased from 45 percent to 61 percent. The proportion of banks
charging an annual fee on credit cards increased from four percent
to 13 percent, while savings associations levying an annual charge
increased from nine percent to 18 percent.
The report found that in most cases the average fees charged by
out-of-state banks defined as banks headquartered or
owned by an organization headquartered in a state different
from that of the surveyed bank are significantly higher than
those charged by in-state banks. In some cases, however,
out-of-state banks require lower minimum balances to open some
types of accounts and are more likely to offer free checking. It
is noted that out-of-state banks tend to be larger than in-state
banks and are probably more concentrated in large urban areas,
where costs can be higher.
Annual Report to the Congress on Retail Fees and
Services of Depository Institutions, FRB, 9/95.
Consolidation in Banking
Recent banking consolidation in California, a state whose banking
structure is relatively free of restrictions on branching and other
artificial barriers, may be an indicator of the consolidation that
may eventually occur nationally after the elimination of these
barriers. The number of banks in California rose sharply in the
early 1980s and then remained relatively stable during the second
half of the decade and into the early 1990s, largely because of the
strong economy. But from mid-1990 through early 1993 the state
experienced a severe recession, which affected in particular the
smaller community banks in the southern part of the state. Fewer
new banks, more failures, and a number of voluntary mergers caused
the number of banks operating in California to fall from 516 at the
end of 1990 to 399 in 1994, or 23 percent. Banking offices in the
state, totaling 5,555 in 1991, declined by 20 percent to about
4,400 in the next two years.
Nationally, the number of banking institutions decreased from
approximately 15,000 in 1984 to 10,740 in 1994, a 29-percent
decline. There were failures during the period of about 1,300
banks, most of which were absorbed into other banking firms;
however, the decrease resulted mostly from other voluntary mergers
and acquisitions. The number of banks declined as the industry
adjusted to changing competitive conditions, and in response to a
changing regulatory environment including the liberalization of
state branching laws. The number of banking offices continued to
increase into the early 1990s. Over 65,500 banking offices were in
operation at the end of 1992, nearly 9,000 more than in 1984, and
the number per population unit was slightly higher in 1994 than ten
years earlier. It is suggested that the contraction of the thrift
industry, wherein from 1988 to 1993 the number of savings-and-loan
offices fell from about 26,000 to 16,000, may have temporarily
eased pressures on some banks to trim branch networks. Bank
employment nationally declined by about 6.3 percent between 1985
and 1995, during a time of rapid advances in bank services
The California experience suggests that if interstate branching
restrictions and other artificial barriers are eliminated, the
number of U.S. banking institutions could eventually be further
reduced by one-half or more; and demonstrates that substantial
reductions in bank offices across a state can occur over a
relatively short period of time, especially when large banks are
Weekly Letter, Federal Reserve Bank of San Francisco,
Boston Banks Increase Minority Lending
Since the publication of several reports dating from about six
years ago on banks' lending to minorities in the Boston area, there
have been significant improvements in mortgage lending to black
borrowers and to persons with low- and moderate-incomes, according
to a recent study by J. T. Campen. The share of black borrowers
grew from 16.2 percent of all loans in 1990 to 20.1 percent in
1993. For Hispanic borrowers, the increase in the share of total
loans was much less, from 5.1 percent to 5.7 percent. Denial rates
for blacks and Hispanics were each reduced by almost half between
1990 and 1993: blacks, from 32.7 percent to 17.5 percent; and
Hispanics, from 25.3 percent to 13.8 percent. Denial rate ratios
for blacks and Hispanics, to whites, in the Boston area dropped
from 2.00/1 to 1.49/1, and from 1.55/1 to 1.18/1, respectively.
The national black/white denial ratio in 1993 was 2.22/1, and the
Hispanic ratio, 1.64/1. Loans to low- and moderate-income
borrowers in the study area rose from 27.3 percent of all loans in
1990 to 38.9 percent in 1993.
Among other results, the study found that virtually all of the
increase in the mortgage lending to minority and low- and
moderate-income borrowers came from Boston's six largest banks. It
is noted that during the study period, the smaller banks in the
area lost substantial total market share due to bank failures and
intensified competition from the larger banks and unaffiliated
mortgage companies. The increased lending to low- and
moderate-income groups may have resulted in part, the report says,
from the prevailing economic conditions during the study period,
wherein housing prices fell, unemployment declined as the nation
and region recovered from recession, and interest rates for
30-year, fixed-rate mortgages fell to less than seven percent, the
lowest level in over 25 years. The improved performance, however,
by the large banks reflects their strong initiatives to increase
lending to under served borrowers and neighborhoods.
A Progress Report, Massachusetts Community and Banking
Council, July 1995, pp. 60-67.
Interstate Banking and Small-Business Lending
A recent report issued by the OCC is concerned with whether
subsidiaries of out-of-state bank holding companies (OSHCs)
will make fewer, possibly higher priced, small-business loans than
other banks. The study also examines whether smaller independent
banks are able to compete effectively against subsidiaries of
larger out-of-state and in-state holding company organizations in
this product line. Small-business lending levels, prices, and
margins for a sample of 1,377 banks located in Illinois, Kentucky,
and Montana are analyzed.
The volume of small-business lending by out-of-state bank holding
company subsidiaries was found to compare favorably with both
independent banks and in-state bank holding company subsidiaries.
Out-of-state holding company subsidiaries do not systematically
discourage small-business borrowing through their loan pricing.
Small-loan rates at OSHC bank subsidiaries generally are lower than
those at other types of banks. Although their marginal costs are
higher, OSHC subsidiaries appear to be willing to accept lower
margins on small commercial loans. The results also demonstrate
that independents do not appear to be at a competitive disadvantage
relative to OSHC subsidiaries, at least in this particular product
line. Their marginal loan costs are typically below, and their
margins typically exceed, those at either class of holding
Economic and Policy Analysis Working Paper 95-4, OCC,
Smaller Banks Less Affected in Banking Downturns
From 1990 to the end of 1994, a decline occurred in the number of
banking organizations in the U.S., from 12,385 to 7,998,
concentrated in the smaller banks. In 1980, there were over 12,200
banking firms in the U.S. having assets under $1.3 billion, and as
a group they controlled about one-third of the nation's banking
assets, while in 1994 the number of organizations of this size
(measured in 1980 dollars) had droppped to about 7,850 and their
asset share had fallen to 22 percent. In these trends there are
differences between regions, and in the regions that experienced
severe banking sector difficulties, small banks are seen to have
more successfully maintained their market share. In the
Eleventh Federal Reserve District which consists of
Texas, southern New Mexico, and northern Louisiana nearly
one-third of regional bank assets were controlled by
banking organizations with under $220 million in total assets (in
1980 dollars) in both 1980 and 1994.
As an indication of the smaller banks' ability to operate under
unfavorable economic conditions, the return on assets of
organizations with assets under $1.3 billion tended to remain above
that for large banks in all except four years of the 1980-94
period. In addition, the return on assets of large banks
has fluctuated more over time than it has for small banks. These
differences between small and large banks have been even greater in
the Eleventh District, and also in the First Federal Reserve
District (New England states) which experienced a severe regional
banking downturn following the collapse of its real-estate market
at the end of the 1980s.
Recent cycles in bank profitability have tended to mirror cycles in
asset quality, as measured by the troubled-asset ratio, ratio of
past-due loans, nonaccrual loans and other real estate owned to
gross assets. At the national level, from 1982 through 1994 the
troubled-asset ratio for small banks tended to remain below the
ratio for large banks. Moreover, the large banks' ratio exhibits
relatively wide fluctuations. These data support the impression
that banking downturns have tended to take a relatively more severe
toll on large banking organizations. And, more importantly, during
periods of banking difficulties, when the troubled-asset ratio for
large banks rose relatively to the ratio for small banks, declines
in small-bank market share slowed or stabilized. It appears that
large banks' relatively severe financial struggles mitigated the
downward trend in the small-bank market share. The relationship
between banking difficulties and small-bank market share observed
at the national level is even more pronounced at the regional
The article concludes that although the market share of small banks
might continue to decline, the relative stability of their
financial performance indicates that they should continue to
prosper and grow along with the larger organizations in a
dynamic banking economy.
Financial Industry Issues, Federal Reserve Bank of
Dallas, Second Quarter 1995.
Bank Card Delinquencies Rise
According to the American Bankers Association, 3.53 percent of
credit-card accounts were past due for two or more months during
the first quarter of 1996, the highest delinquency rate in 15
years, and preliminary second-quarter figures show a continuing
problem. According to preliminary results of an OCC survey of
large national banks, banks are responding by tightening
BBR, p. 1073, 6/17/96; WSJ, 7/24/96.
Derivatives Record Set
The OCC reported that banks engaged in $17.85 trillion in
derivative activity during the first quarter of 1996, a record
level. Trading revenues were approximately $2 billion, and credit
exposure declined $7 billion in the quarter. The notional amount
of derivatives rose $987 billion during the quarter. Derivative
activity continued to be concentrated in the largest banks.
OCC News Release, NR96-67, 6/10/96.
According to the 1995 Retail Banking Survey Report, a survey of 180
banks conducted by the American Bankers Association, the total
number of bank branches grew by over 1,200 in 1994. Only banks
with assets of $1 billion or more registered a decrease in the
number of branches per bank. The survey also reported a
significant increase in electronic banking services by small and
mid-size banks, with six percent of banks with less than $300
million in assets offering such services in 1994, compared to three
percent a year earlier.
Northwest Financial Review, p. 6, 1/27/96.
RECENT ARTICLES AND STUDIES Retail Banking Will Restructure
The study addresses the key factors, from a global perspective,
behind changes observed in retail banking that foretell extensive
restructuring of the industry. While many studies have concluded
that banking economies of scale eventually reach limits, this
report argues that retail banks will increasingly be susceptible to
scale economies in the future. These banks currently experience
scale economies in some activities, such as credit-card processing,
check processing, consumer-loan processing and statement
preparation. They are subject to diseconomies in numerous other
activities, for example, the banks' management costs as a
percentage of income appear to rise as their branch networks
increase in size. Also, unit management costs rise with increases
in their different types of products, and given that the numbers of
products offered by banks in many countries have been growing
rapidly, management costs have been rising disproportionately from
The report draws comparisons between the future of retail banking
and other industries, notably the airlines and communications
industries, in which in many cases the activities that formerly
were carried out by a single provider have been disaggregated to
numerous different providers. These disaggregated activities are
increasingly being performed in quasi-autonomous divisions of
single companies, or by independent subcontractors. The report
predicts similar trends in the retail banking industry.
Under the scenario for the traditional retail bank foreseen here,
these institutions will take on more of the appearance of a cluster
of businesses, in which the holding company makes "portfolio" type
decisions on such issues as whether to enter a new product area,
close down a business, or outsource. The new alignment of
activities is seen in the future role of branches. Reduced greatly
in numbers, they will cease their role as "minibanks," and will be
used mainly as gateway sales and counseling centers for upscale or
high-net-worth customers. They will support product cross-selling
to that minority of customers for which extensive cross-selling
can be profitable.
The Future of Retail Banking, A Global Perspective,
Deloitte Touche Tohmatsu International, 1995.
Changing Banking Activities and Regulatory Policies
This article by F. R. Edwards and F. S. Mishkin discusses how banks
have shifted from their "traditional" activities and more into
off-balance-sheet operations, and the implications for financial
stability and regulatory policies. Evidence of the decline in
traditional banking is found in the shrinkage in commercial banks'
share of funds provided to nonfinancial borrowers, from 35 percent
in 1974 to 22 percent at present, as well as the decline in their
share of total financial intermediary assets from approximately 40
percent in 1960-1980 to below 30 percent at year-end 1994.
Banks have experienced growing competition that has diminished
their cost advantage in acquiring funds, and also has undercut
their position in loan markets. They have adjusted to the
intensified market competition in part through attempting to
maintain their traditional lending activities, but in more-risky
types of lending. Examples include a higher percentage of their
funds going into commercial real-estate loans, and increased
lending for corporate takeovers and leveraged buyouts. As a
result, banks' loan-loss provisions relative to assets rose
substantially in the 1980s, peaking in 1987, and even in the strong
economy of 1994 had declined only to the level of the worst years
of the 1970s. A second way banks have sought to maintain profit
levels is through new, off-balance-sheet activities that are more
profitable than traditional activities.
The risk implications of banks' derivatives activities are
examined in this article. Large banks, in particular, have moved
aggressively to become worldwide dealers in over-the-counter
derivatives, such as swaps. Overall, the authors do not see the
risks from derivatives as so different from the other risks in
banking as to render inadequate the supervisory policies and
procedures that are available. Finally, banks should inform the
public of their risks from trading activities, both derivatives and
on-balance-sheet activities, and their ability to manage those
risks. Reference is made to a discussion paper issued in 1994 by
a committee of the G-10 Central Banks which recommended that
estimates of financial risk generated by firms' own internal
risk-management systems be adapted for public disclosure
"The Decline of Traditional Banking: Implications For
Financial Stability and Regulatory Policy," Economic Policy Review,
Federal Reserve Bank of New York, July 1995, pp. 27-45.
Multi-Office Bank Lending to Small Business
With federal legislation having been enacted in the fall of 1994
authorizing full interstate banking, William R. Keeton examines the
relationship between multi-office banking and small-business
lending in the Tenth Federal Reserve District. This District
includes: Colorado, Kansas, Missouri, Nebraska, New Mexico,
Oklahoma, and Wyoming. There are several suggested reasons why
large multi-office banks might lend less to small businesses than
other banks. First, they do not have to rely as heavily on small
borrowers to achieve a desired level and composition of commercial
lending. In addition, there are structural factors, such as the
fact that large multi-office organizations tend to give loan
officers less autonomy than their counterparts have in smaller
banks and are required to follow more rigid rules in lending, this
suggesting fewer loans being granted to small businesses. From
another viewpoint, multi-office banks might make more
small-business loans because their greater diversification and
access to open-market borrowing enable these institutions to invest
more of their funds in loans, in the aggregate and to small
businesses, and less in safe, liquid investments such as government
securities. Also, while previously existing restrictions on
geographic expansion may have confined larger banks mainly to urban
areas and making large loans, the relaxation of these limits on
expansion will result in these institutions entering more of the
smaller, rural markets and expanding their small-business lending.
A study of the Tenth District is of interest because these states
have recently lessened their geographic restrictions on bank
expansion. Since the mid-1980s all seven states have allowed
statewide branching, and also they have laws allowing entry in some
form by out-of-state holding companies. Because loan data
are not available by branch, the impact of branching on
small-business lending is examined by comparing the aggregate
loan-deposit ratio of the bank with the average loan-deposit
ratio of unit banks comparable to the branches. The data
indicate that a moderate degree of branching does not, but a high
degree of branching does, reduce small-business lending. In
respect to the multi-bank holding companies, the lead banks of
in-state firms tend to lend the same percent of deposits as
comparable independent banks, but the other banks in in-state and
out-of-state companies lend a smaller percent of deposits than
their peers, and the differences are greater for banks in
out-of-state companies. There are, it is noted, numerous
individual bank exceptions to these aggregate patterns.
The overall results of the analysis confirm the conclusions of
earlier surveys that multi-office banks tend to lend less to small
businesses than other banks. This finding does not suggest,
however, that multi-office banking should be curtailed. The
lending gap may, after a temporary period, be filled by other
banks, and also, any disadvantages may be outweighed by benefits.
For example, there is substantial evidence that multi-office
banking improves service to depositors and increases competition in
local markets. Multi-office banking also makes banks less
vulnerable to downturns in the local economy by helping them
diversify their loan portfolios. The article suggests, instead,
that regulators should follow policies to promote competition by
ensuring that multi-office banks do not dominate local markets by
absorbing smaller banks, and they should continue progress in
reducing regulatory burden, which tends to hurt small banks
more than large banks.
Economic Review, Federal Reserve Bank of Kansas City,
Second Quarter 1995, pp. 45-57.
Banks' Disclosure of Derivatives Activities
Banks' derivatives activities have become more apparent as
institutions are disclosing more information needed by the public
and regulators to make better judgments about companies' activities
in this area, according to this study by FRB staff of the 1993 and
1994 annual reports of the top ten U.S. bank dealers in
derivatives. The article summarizes the accounting
standards and recommendations of industry groups and regulators,
and reviews the improvements in qualitative and quantitative
disclosures since 1993. Approximately 600 banks were involved in
derivatives as of March 31, 1995, though the top 15 banks held more
than 95 percent of the derivatives contracts of the banking
In 1994, banks expanded their managements' discussion and analysis
of their derivatives activities and provided more quantitative
information about these activities than in 1993. The
experimentation encouraged by the FASB, regulators, and
industry groups is reflected in the diversity of methods
used by the top ten banks in presenting information about their
derivatives activities. Further improvements in disclosure should
be anticipated, including more extensive coordination in this area
with national supervisors from other countries.
Federal Reserve Bulletin, 9/95, pp. 817-831.