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FIL-127-04 Attachment Background

Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of Thrift Supervision

Interagency Statement on the Purchase and Risk Management of Life Insurance


Life insurance holdings can serve a number of appropriate business purposes. Because the cash flows from a BOLI policy are generally income tax-free if the institution holds the policy for its full term, BOLI can provide attractive tax-equivalent yields to help offset the rapidly rising cost of providing employee benefits. Over the past several years, however, a growing number of institutions have aggressively increased their holdings of BOLI. A number of institutions own life insurance with an aggregate cash surrender value (CSV) in excess of 25 percent of capital even though the agencies have previously identified this capital concentration threshold as the level that institutions should consider when establishing internal limits for their BOLI holdings. Some institutions have acquired BOLI as part of a "yield chasing" asset/liability management strategy in an attempt to increase earnings during the recent period of low interest rates and reduced loan demand. The agencies are concerned that some institutions have committed a significant amount of capital to BOLI without having an adequate understanding of the full array of risks it poses – especially risks that are difficult to measure, such as liquidity, transaction/operational, reputation, and compliance/legal risks. The agencies expect institutions to implement appropriate risk management processes including meaningful risk limits before implementing or adding to a BOLI program.

The guidance is organized as follows:

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