![]() |
![]() |
![]() |
![]() |
![]() |
Home > News & Events > Financial Institution Letters |
![]() |
|
![]() |
![]() |
Financial Institution Letters Office of the Comptroller of the Currency Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by Banks and Thrifts
1 This Joint Statement of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision (the Agencies) sets forth uniform supervisory standards on the classification of assets and appraisal of securities held by banks and thrifts.
I. The Classification of Assets in Bank and Thrift Examinations
II. The Appraisal of Securities in Bank and Thrift Examinations
Since investment quality debt securities do not exhibit weaknesses that justify an adverse classification rating, examiners will generally not classify them. However, published credit ratings occasionally lag demonstrated changes in credit quality and examiners may, in limited cases, classify a security notwithstanding an investment grade rating. Examiners may use such discretion, when justified by credit information the examiner believes is not reflected in the rating, to properly reflect the security's credit risk.
B. Sub-investment quality debt securities
In order to reflect asset quality properly, an examiner may in limited cases "pass" a debt security that is rated below investment quality. Examiners may use such discretion for example when the institution has an accurate and robust credit risk management framework and has demonstrated, based on recent, materially positive, credit information, that the security is the credit equivalent of investment grade.
C. Rating differences
D. Split/partially-rated securities
E. Non-rated debt securities
Some non-rated debt securities held in investment portfolios represent small exposures relative to capital, both individually and in aggregate. While institutions generally have the same supervisory requirements (as applicable to large holdings) to show that these holdings are the credit equivalent of investment grade at purchase, comprehensive credit analysis subsequent to purchase may be impractical and not cost effective. For such small individual exposures, institutions should continue to obtain and review available financial information, and assign risk ratings. Examiners may rely upon the bank's internal ratings when evaluating such holdings.
F. Foreign debt securities
G. Treatment of declines in fair value below amortized cost on debt securities
Any decline in fair value below amortized cost on defaulted debt securities will be classified as indicated in the table below. Apart from classification, for impairment write downs or charge offs on adversely classified debt securities, the existence of a payment default will generally be considered a presumptive indicator of "other than temporary" impairment.
H. Classification of Other Types of Securities
IV. Credit Risk Management Framework for Securities When an institution has developed an accurate, robust, and documented credit risk management framework to analyze its securities holdings, examiners may choose to depart from the General Guidelines in favor of individual asset review in determining whether to classify those holdings. A robust credit risk management framework entails appropriate pre-acquisition credit due diligence, by qualified staff that grades a security's credit risk based upon an analysis of the repayment capacity of the issuer and the structure and features of the security. It also involves the on-going monitoring of holdings to ensure that risk ratings are reviewed regularly and updated in a timely fashion when significant new information is received. The credit analysis of securities should vary based on the structural complexity of the security, the type of collateral, and external ratings. The credit risk management framework should reflect the size, complexity, quality, and risk characteristics of the securities portfolio, the risk appetite and policies of the institution, and the quality of its credit risk management staff, and should reflect changes to these factors over time. Policies and procedures should identify the extent of credit analysis and documentation required to satisfy sound credit risk management standards. 1 Revises examination procedures established in 1938 and revised July 15, 1949, and May 7, 1979. 2 As currently defined under GAAP, the fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices are the best evidence of fair value and must be used as the basis for measuring fair value, if available. 3 For sub-investment quality available-for-sale (AFS) debt securities with "temporary" impairment, amortized cost rather than the lower amount at which these securities are carried on the balance sheet, i.e., fair value, is classified Substandard. This classification is consistent with the regulatory capital treatment of AFS debt securities. Under GAAP, unrealized gains and losses on AFS debt securities are excluded from earnings and reported in a separate component of equity capital. In contrast, these unrealized gains and losses are excluded from regulatory capital. Accordingly, the amount classified Substandard on these AFS debt securities, i.e., amortized cost, also excludes the balance sheet adjustment for unrealized losses. |
|||||||||||||||||||||||||||||
![]() |
Last Updated 06/15/2004 | communications@fdic.gov |