The Federal Deposit Insurance Corporation (FDIC) has issued guidance to examiners regarding a new type of credit-linked note with speculative characteristics. The guidance describes the securities, identifies the risks of these instruments, and addresses the FDIC's supervisory policy for these investments.

The FDIC, in conjunction with other member agencies of the Federal Financial Institutions Examination Council (FFIEC), adopted a "Supervisory Policy Statement on Investment Securities and End-User Derivatives Activities" in 1998. This policy statement outlines sound practices for managing the risks of investment activities. The attached guidance emphasizes bank management's responsibilities under the policy statement when purchasing new types of securities.

Banks that invest in this new type of credit-linked note will be expected to have strong risk-management programs. Given their complexity and high level of risk, these securities may be unsuitable for most insured institutions. The guidance directs examiners to criticize these securities where appropriate. Further, banks may be cited for unsafe and unsound practices if their investment activities do not meet supervisory standards.

For more information, please contact your Division of Supervision Regional Office.

Michael J. Zamorski

Acting Director

Attachment: Division of Supervision Memorandum 

Distribution: FDIC-Supervised Banks (Commercial and Savings)

NOTE: Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room 100, Washington, DC 20434 (800-276-6003 or (703) 562-2200).