[Federal Register: April 2, 1998 (Volume 63, Number 63)]
[Rules and Regulations]
[Page 16377-16381]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02ap98-23]
[[Page 16377]]
_______________________________________________________________________
Part IX
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 4
Federal Reserve System
12 CFR Part 208
Federal Deposit Insurance Corporation
12 CFR Part 337
Department of the Treasury
Office of Thrift Supervision
12 CFR Part 563
_______________________________________________________________________
Expanded Examination Cycle for Certain Small Insured Institutions;
Final Rule
[[Page 16378]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 4
[Docket No. 97-02]
RIN 1557-AB56
FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Regulation H; Docket No. R-0957]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 337
RIN 3064-AB90
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 563
[Docket No. 98-12]
RIN 1550-AB02
Expanded Examination Cycle for Certain Small Insured Institutions
AGENCIES: Board of Governors of the Federal Reserve System, Office of
the Comptroller of the Currency, Federal Deposit Insurance Corporation,
and Office of Thrift Supervision.
ACTION: Final rule.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board),
the Office of the Comptroller of the Currency (OCC), the Federal
Deposit Insurance Corporation (FDIC), and the Office of Thrift
Supervision (OTS) (collectively, the Agencies) are adopting as a final
rule their joint interim rule implementing section 306 of the Riegle
Community Development and Regulatory Improvement Act of 1994 (CDRI) and
section 2221 of the Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (EGRPRA). Together, section 306 of CDRI and section 2221 of
EGRPRA authorize the Agencies to increase the asset size of certain
financial institutions that may be examined once in every 18-month
period, rather than once in every 12-month period, from $100 million to
a revised limit of $250 million. This final rule makes certain
institutions that have $250 million or less in assets eligible for the
18-month examination schedule.
EFFECTIVE DATE: April 2, 1998.
FOR FURTHER INFORMATION CONTACT: OCC: Lawrence W. Morris, National Bank
Examiner, Examination Process (202) 874-4915; Ronald Schneck, Director,
Special Supervision, (202) 874-4450; or Mark Tenhundfeld, Assistant
Director, Legislative and Regulatory Activities, (202) 874-5090.
Board: Molly Wassom, Deputy Associate Director, (202) 452-2305, or
William H. Tiernay, Senior Financial Analyst, (202) 872-7579, Division
of Banking Supervision and Regulation. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), Diane Jenkins (202) 452-
3544.
FDIC: Mark A. Mellon, Counsel, Regulation and Legislation section
(202) 898-3854, Legal Division, or Robert W. Walsh, Manager, Planning
and Program Development section (202) 898-6911, Division of
Supervision, Federal Deposit Insurance Corporation, 550 17th Street,
N.W., Washington, D.C. 20429.
OTS: Scott M. Albinson, Special Assistant to the Executive
Director, Supervision, (202) 906-7984; or Ellen J. Sazzman, Counsel
(Banking and Finance), Regulations and Legislation Division, Office of
the Chief Counsel, (202) 906-7133.
SUPPLEMENTARY INFORMATION:
Background
Section 10(d) of the Federal Deposit Insurance Act (the FDI Act),
1 which was added by section 111 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA), 2
requires that each appropriate Federal banking agency conduct a full-
scope, on-site examination at least once during each 12-month period of
every insured depository institution that the agency supervises.
However, section 10(d) permits the Agencies to examine certain small
insured depository institutions once during every 18-month period. As
initially established by FDICIA, section 10(d) required an institution
to have $100 million or less in total assets and its composite
condition must have been found to be outstanding (rated 1 under the
Uniform Financial Institutions Rating System (UFIRS)) at its most
recent examination in order to qualify for an extended exam cycle. In
addition, a qualifying institution (a) must not have undergone a change
in control during the previous 12-month period in which a full-scope
examination otherwise would have been required by section 10 of the FDI
Act; (b) be well capitalized; and (c) be found by the appropriate
agency to be well managed.
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\1\ Section 10(d) of the FDI Act is codified at 12 U.S.C.
1820(d).
\2\ Pub. L. 102-242, 105 Stat. 2236.
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Section 306 of CDRI, which was enacted into law in
1994,3 made several amendments to section 10(d) that, taken
together, expand the availability of the 18-month examination cycle to
a larger number of small institutions. First, section 306 of CDRI
increased to $250 million the asset size of institutions rated
outstanding (UFIRS 1) that could be examined on an 18-month cycle.
Second, section 306 added a provision permitting an 18-month cycle for
institutions rated satisfactory (UFIRS 2) at their most recent
examination, provided they did not exceed $100 million in total assets.
Third, section 306 authorized the Agencies to increase this $100
million threshold to $175 million beginning on September 23, 1996, if
the Agencies first determined that the increased amount is consistent
with the principles of safety and soundness for insured depository
institutions. Finally, section 306 required that, to qualify for the
expanded examination cycle, an insured institution must not be subject
to a formal enforcement proceeding or order. The remaining provisions
of section 10(d) of the FDI Act were unchanged.
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\3\ Pub. L. 103-325, 108 Stat. 2160.
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Section 2221 of EGRPRA 4 further amended section 10(d)
of the FDI Act. Pursuant to section 2221, the Agencies were authorized
to increase to $250 million the maximum asset size of UFIRS 2-rated
institutions eligible for examination on an 18-month cycle. EGRPRA also
made the expanded examination cycle available to qualified Federal
branches and agencies of foreign banks. The International Banking Act
of 1978 (the IBA),5 as amended by the Foreign Bank
Supervision Enhancement Act of 1991,6 requires an
examination of each U.S. branch or agency of a foreign bank once during
each 12-month period. Section 2214 of EGRPRA 7 amended the
IBA to provide, among other things, that each Federal or State branch
or agency of a foreign bank will be subject to on-site examination by
the appropriate Federal or State banking agency as frequently as would
a national or state bank, respectively. Consequently, U.S. branches or
agencies of foreign banks are eligible for the 18-month cycle provided
that they meet the qualifying criteria outlined above.
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\4\ Pub. L. 104-208, 110 Stat. 3009 (section 2221 is codified at
12 U.S.C. 1820(d)(10)).
\5\ Pub. L. 95-369, 92 Stat. 607 (codified at 12 U.S.C. 3101, et
seq.).
\6\ Pub. L. 102-242, 105 Stat. 2286, 2291, 2304 (amending, inter
alia, 12 U.S.C. 3105(c)(1)(C)).
\7\ Section 2214(a)(3) of EGRPRA is codified at 12 U.S.C.
3105(c)(1)(C).
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In 1997, the Federal banking agencies issued a joint rule that was
immediately
[[Page 16379]]
effective upon the date of publication implementing section 306 of CDRI
and section 2221 of EGRPRA. See 62 FR 6449 (Feb. 12, 1997). The interim
rule was published with a request for public comment. As discussed in
greater detail below, the public comments generally favored adoption of
the expanded examination cycle rule as set forth in the interim rule.
Accordingly, the Agencies hereby adopt the interim rule with only minor
stylistic changes.
Comments Received
In response to the interim rule request for comment, the Agencies
received a total of 16 comments, including six from banking
institutions, six from Federal Reserve Banks, and four from trade
associations. Most agreed that the expansion of the 18-month
examination cycle should be applied to UFIRS 1-and 2-rated domestic
institutions with assets of $250 million or less. Commenters favoring
the proposed changes agreed that the application of an 18-month cycle
would reduce regulatory burden on smaller, well run institutions that
do not pose significant supervisory concerns. Commenters also noted
that the rule is consistent with the Agencies' respective approaches to
performance-based regulation and supervision.
One commenter suggested that a financial institution with a UFIRS
rating of 1 or 2 should be allowed to elect either a 12-month or an 18-
month exam cycle, and that each examination should cover, among other
things, compliance issues and an examination of the financial
institution's fiduciary and data processing operations. In response,
the Agencies note that the examination cycle adopted in the interim
rule and finalized by this rulemaking creates the generally applicable
schedule. The primary regulator will have the option, however, to
examine an institution as frequently as the regulator deems
appropriate. The Agencies believe that this approach is an efficient
and effective use of both financial institution and examiner resources.
Should a financial institution wish to discuss particular issues with
its primary regulator at a time other than when an examination is
ongoing, the financial institution is encouraged to contact its
regulator for assistance at any time.
Final Rule
Based upon further deliberations by the Agencies and the comments
received, the Agencies are adopting the interim rule in final form,
with only minor stylistic changes. Pursuant to the final rule, a
domestic national or state financial institution will be eligible for
an 18-month examination schedule if the institution: (1) has total
assets of $250 million or less; (2) is well capitalized as defined in
section 38(b)(1)(A) of the FDI Act (12 U.S.C. 1831o(b)(1)(A)); (3) is
well managed; (4) received a UFIRS rating of 1 or 2 at its most recent
examination; (5) is not subject to a formal enforcement proceeding or
order; and (6) has not undergone a change in control during the
previous 12-month period.
The Agencies have determined that increasing the size limitation of
UFIRS 2-rated institutions that are eligible for an 18-month cycle is
consistent with the safety and soundness of insured depository
institutions. A longer examination cycle permits the Agencies to focus
their resources on those segments of the banking and thrift industry
that present the most immediate supervisory concern, while
concomitantly reducing the regulatory burden on smaller, well run
institutions that do not pose an equivalent level of supervisory
concern. In lieu of the more frequent annual examinations that would
otherwise be conducted for these institutions, the agencies rely upon
off-site monitoring tools to identify potential problems in smaller,
well managed institutions that present low levels of risk. Moreover,
neither the statute nor the regulation limits, and the Agencies
therefore retain, the authority to examine an insured depository
institution more frequently. The Agencies that supervise state-
chartered insured institutions also recognize that flexibility must be
made available in the implementation of this regulation to accommodate
requirements for annual examinations by various states.
The FDIC, Board, and OCC, which have jurisdiction over U.S.
branches and agencies of foreign banks, are reviewing the issue of how
to apply the qualifying criteria to these entities. Upon development of
a method under which the 18-month examination cycle qualifying criteria
can be applied to Federal branches and agencies, a separate rule will
be issued for comment.
Effective Date of Final Rule
The Agencies have determined that there is good cause to dispense
with a 30-day delayed effective date pursuant to 5 U.S.C. 553(d)(3).
The expanded exam cycle was immediately effective upon publication of
the interim rule in February, 1997. This final rule adopts the interim
rule without any substantive change. While the Agencies invited
interested parties to comment on the rule at that time, each agency
already has implemented the expanded exam cycle, and insured depository
institutions already have been complying with the new rule for
approximately a year. Accordingly, depository institutions will not
require any additional time to adjust their policies or practices in
order to comply with the rule. Delaying the effective date simply would
create confusion on the part of the banking industry concerning the
applicability of the expanded exam cycle during the time between
publication and some later effective date.
The Agencies also have determined, for the reasons stated in the
preceding paragraph, that good cause exists to adopt an effective date
that is before the first day of the calendar quarter that begins on or
after the date on which the regulation is published, as would otherwise
be required by section 302 of the CDRI.
Regulatory Flexibility Act
The Regulatory Flexibility Act (the Act) (5 U.S.C. 601-612) does
not apply to a rulemaking where a general notice of proposed rulemaking
is not required, as is the case with the 18-month examination cycle
rulemaking. See 5 U.S.C. 603 and 604. Accordingly, the Act's
requirements relating to an initial and final regulatory flexibility
analysis are not applicable.
Even if the Act were to apply, the final rule will not have a
significant economic impact on a substantial number of small entities.
The final rule will reduce regulatory burdens on eligible banks and
thrifts with assets of $250 million or less. In addition, those
depository institutions that are not eligible for the exemption from
the statutorily prescribed 12-month examination cycle are not adversely
affected by the final rule.
Small Business Regulatory Enforcement Fairness Act
Title II of the Small Business Regulatory Enforcement Fairness Act
of 1996 (SBREFA) \8\ provides generally for agencies to report rules to
Congress and the General Accounting Office (GAO) for review. The
reporting requirement is triggered when a Federal agency issues a final
rule. The Agencies will file the appropriate reports with Congress and
the GAO as required by SBREFA. The Office of Management and Budget has
determined that the uniform rule promulgated by the Agencies does not
constitute a ``major rule'' as defined by SBREFA.
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\8\ Pub. L. 104-121.
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[[Page 16380]]
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506), the Agencies have determined that no collections of information
pursuant to the Paperwork Reduction Act are contained in this final
rule.
OCC and OTS Executive Order 12866 Statement
The OCC and OTS each independently has determined that this final
rule is not a significant regulatory action under Executive Order
12866.
OCC and OTS Unfunded Mandates Act of 1995 Statement
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4, 109 Stat. 48 (March 22, 1995) (Unfunded Mandates Act), requires
that an agency prepare a budgetary impact statement before promulgating
a rule that includes a Federal mandate that may result in the
expenditure by state, local, and tribal governments, in the aggregate,
or by the private sector, of $100 million or more in any one year. If a
budgetary impact statement is required, section 205 of the Unfunded
Mandates Act also requires an agency to identify and consider a
reasonable number of regulatory alternatives before promulgating a
rule. Because the OCC and OTS have each independently determined that
this final rule will not result in expenditures by state, local, and
tribal governments, in the aggregate, or by the private sector, of more
than $100 million in any one year, the OCC and OTS have not prepared a
budgetary impact statement or specifically addressed the regulatory
alternatives considered. As discussed in the preamble, this final rule
will have the effect of reducing regulatory burden on certain
institutions.
List of Subjects
12 CFR Part 4
Banks, banking, Freedom of information, Organization and functions
(Government agencies), Reporting and recordkeeping requirements.
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Flood insurance,
Mortgages, Reporting and recordkeeping requirements, Safety and
soundness, Securities.
12 CFR Part 337
Banks, banking, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 563
Accounting, Advertising, Conflicts of interest, Corporate
opportunity, Crime, Currency, Investments, Reporting and recordkeeping
requirements, Savings associations, Securities, Surety bonds.
Office of the Comptroller of the Currency
12 CFR CHAPTER I
Authority and Issuance
For the reasons set forth in the joint preamble, part 4 of chapter
I of title 12 of the Code of Federal Regulations is amended as follows:
PART 4--ORGANIZATION AND FUNCTIONS, AVAILABILITY AND RELEASE OF
INFORMATION, CONTRACTING OUTREACH PROGRAM
1. The authority citation for part 4 continues to read as follows:
Authority: 12 U.S.C. 93a. Subpart A also issued under 5 U.S.C.
552; 12 U.S.C. 481, 1820(d). Subpart B also issued under 5 U.S.C.
552; E.O. 12600 (3 CFR, 1987 Comp., p. 235). Subpart C also issued
under 5 U.S.C. 301, 552; 12 U.S.C. 481, 482, 1821(o), 1821(t); 18
U.S.C. 641, 1905, 1906; 31 U.S.C. 9701. Subpart D also issued under
12 U.S.C. 1833e.
2. In Subpart A, Sec. 4.6 is revised to read as follows:
Sec. 4.6 Frequency of examination.
(a) General. The OCC examines national banks pursuant to authority
conferred by 12 U.S.C. 481 and the requirements of 12 U.S.C. 1820(d).
The OCC is required to conduct a full-scope, on-site examination of
every national bank at least once during each 12-month period.
(b) 18-month rule for certain small institutions. The OCC may
conduct a full-scope, on-site examination of a national bank at least
once during each 18-month period, rather than each 12-month period as
provided in paragraph (a) of this section, if the following conditions
are satisfied:
(1) The bank has total assets of $250 million or less;
(2) The bank is well capitalized as defined in part 6 of this
chapter;
(3) At the most recent examination, the OCC found the bank to be
well managed;
(4) At the most recent examination, the OCC assigned the bank a
composite rating of 1 or 2 under the Uniform Financial Institutions
Rating System (copies are available at the addresses specified in
Sec. 4.14);
(5) The bank currently is not subject to a formal enforcement
proceeding or order by the FDIC, OCC, or Federal Reserve System; and
(6) No person acquired control of the bank during the preceding 12-
month period in which a full-scope, on-site examination would have been
required but for this section.
(c) Authority to conduct more frequent examinations. This section
does not limit the authority of the OCC to examine any national bank as
frequently as the agency deems necessary.
Dated: February 25, 1998.
Eugene A. Ludwig,
Comptroller of the Currency.
Federal Reserve System
12 CFR CHAPTER II
Authority and Issuance
For the reasons set forth in the joint preamble, the Board amends
part 208 of chapter II of title 12 of the Code of Federal Regulations
as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 continues to read as
follows:
Authority: 12 U.S.C. 24, 36, 92(a), 93(a), 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),
1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1835(a), 1882,
2901-2907, 3105, 3310,3331-3351, and 3906-3909; 15 U.S.C. 78b,
781(b), 781(g), 781(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C.
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 4128.
2. In Subpart A, Sec. 208.26 is revised to read as follows:
Sec. 208.26 Frequency of examination.
(a) General. The Federal Reserve examines insured member banks
pursuant to authority conferred by 12 U.S.C. 325 and the requirements
of 12 U.S.C. 1820(d). The Federal Reserve is required to conduct a
full-scope, on-site examination of every insured member bank at least
once during each 12-month period.
(b) 18-month rule for certain small institutions. The Federal
Reserve may conduct a full-scope, on-site examination of an insured
member bank at least once during each 18-month period, rather than each
12-month period as provided in paragraph (a) of this section, if the
following conditions are satisfied:
(1) The bank has total assets of $250 million or less;
(2) The bank is well capitalized as defined in subpart B of this
part (Sec. 208.33);
(3) At the most recent examination conducted by either the Federal
Reserve
[[Page 16381]]
or applicable State banking agency, the Federal Reserve found the bank
to be well managed;
(4) At the most recent examination conducted by either the Federal
Reserve or applicable State banking agency, the Federal Reserve
assigned the bank a composite rating of 1 or 2 under the Uniform
Financial Institutions Rating System (copies are available at the
address specified in Sec. 216.6 of this chapter);
(5) The bank currently is not subject to a formal enforcement
proceeding or order by the FDIC, OCC, or Federal Reserve System; and
(6) No person acquired control of the bank during the preceding 12-
month period in which a full-scope, on-site examination would have been
required but for this section.
(c) Authority to conduct more frequent examinations. This section
does not limit the authority of the Federal Reserve to examine any
insured member bank as frequently as the agency deems necessary.
By order of the Board of Governors of the Federal Reserve
System, March 27, 1998.
Jennifer J. Johnson,
Deputy Secretary of the Board.
Federal Deposit Insurance Corporation
12 CFR CHAPTER III
Authority and Issuance
For the reasons set forth in the joint preamble, the Board of
Directors of the FDIC amends part 337 of chapter III of title 12 of the
Code of Federal Regulations as follows:
PART 337--UNSAFE AND UNSOUND BANKING PRACTICES
1. The authority citation for part 337 continues to read as
follows:
Authority: 12 U.S.C. 375a(4), 375b, 1816, 1818(a), 1818(b),
1819, 1820(d)(10), 1821(f), 1828(j)(2), 1831f, 1831f-1.
2. Section 337.12 is revised to read as follows:
Sec. 337.12 Frequency of examination.
(a) General. The Federal Deposit Insurance Corporation examines
insured state nonmember banks pursuant to authority conferred by
section 10 of the Federal Deposit Insurance Act (12 U.S.C. 1820). The
FDIC is required to conduct a full-scope, on-site examination of every
insured state nonmember bank at least once during each 12-month period.
(b) 18-month rule for certain small institutions. The FDIC may
conduct a full-scope, on-site examination of an insured state nonmember
bank at least once during each 18-month period, rather than each 12-
month period as provided in paragraph (a) of this section, if the
following conditions are satisfied:
(1) The bank has total assets of $250 million or less;
(2) The bank is well capitalized as defined in Sec. 325.103(b)(1)
of this chapter;
(3) At the most recent FDIC or applicable State banking agency
examination, the FDIC found the bank to be well managed;
(4) At the most recent FDIC or applicable State banking agency
examination, the FDIC assigned the insured state nonmember bank a
composite rating of 1 or 2 under the Uniform Financial Institutions
Rating System (copies are available at the addresses specified in
Sec. 309.4 of this chapter);
(5) The bank currently is not subject to a formal enforcement
proceeding or order by the FDIC, OCC, or Federal Reserve System; and
(6) No person acquired control of the bank during the preceding 12-
month period in which a full-scope, on-site examination would have been
required but for this section.
(c) Authority to conduct more frequent examinations. This section
does not limit the authority of the FDIC to examine any insured state
nonmember bank as frequently as the agency deems necessary.
By order of the Board of Directors.
Dated at Washington, DC, this 24th day of March 1998.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Office of Thrift Supervision
12 CFR CHAPTER V
Authority and Issuance
For the reasons set forth in the joint preamble, the OTS amends
part 563 of Chapter V of title 12 of the Code of Federal Regulations as
follows:
PART 563--OPERATIONS
1. The authority citation for part 563 continues read as follows:
Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,
1817, 1820, 1828, 3806; 42 U.S.C. 4106.
2. Section 563.171 is revised to read as follows:
Sec. 563.171 Frequency of examination.
(a) General. The OTS examines savings associations pursuant to
authority conferred by 12 U.S.C. 1463 and the requirements of 12 U.S.C.
1820(d). The OTS is required to conduct a full-scope, on-site
examination of every savings association at least once during each 12-
month period.
(b) 18-month rule for certain small institutions. The OTS may
conduct a full-scope, on-site examination of a savings association at
least once during each 18-month period, rather than each 12-month
period as provided in paragraph (a) of this section, if the following
conditions are satisfied:
(1) The savings association has total assets of $250 million or
less;
(2) The savings association is well capitalized as defined in
Sec. 565.4 of this chapter;
(3) At its most recent examination, the OTS found the savings
association to be well managed;
(4) At its most recent examination, the OTS assigned the savings
association a composite rating of 1 or 2, as defined in Sec. 516.3(c)
of this chapter;
(5) The savings association currently is not subject to a formal
enforcement proceeding or order; and
(6) No person acquired control of the savings association during
the preceding 12-month period in which a full-scope, on-site
examination would have been required but for this section.
(c) Authority to conduct more frequent examinations. This section
does not limit the authority of the OTS to examine any savings
association as frequently as the agency deems necessary.
Dated: February 10, 1998.
By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-8605 Filed 4-1-98; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P
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