Bank Holding Company Supervision Manual - United … 2010.13 Section 2010.13, “Supervision of Subsidiaries (Establishing Accounts for Foreign Govern-ments, Embassies, and Political

Bank Holding CompanySupervisionManual

Division of Supervision and Regulation

Prepared by:Division of Supervision and RegulationBoard of Governors of the Federal Reserve System

Send comments to:Director, Division of Supervision and Regulation

Copies of this manual may be obtained from:Printing and FulfillmentMail Stop K1-120Board of Governors of the Federal Reserve SystemWashington, D.C. 20551

For price information, please call 202-452-3245.

Bank Holding Company Supervision ManualSupplement 52September 2017

This supplement reflects decisions of the Boardof Governors, new and revised statutory andregulatory provisions, supervisory guidance, andinstructions that the Division of Supervision andRegulation has issued since the publication ofthe January 2017 supplement.

SUMMARY OF CHANGES

Section 2010.13

Section 2010.13, Supervision of Subsidiaries(Establishing Accounts for Foreign Govern-ments, Embassies, and Political Figures), wasupdated to provide additional guidance, whichwas conveyed in a 2011 interagency advisoryentitled, Guidance on Accepting Accounts fromForeign Embassies, Consulates and Missions.This interagency advisory provides informationto financial institutions providing account ser-vices to foreign missions in a manner that ful-fills the needs of those foreign governmentswhile complying with the provisions of theBank Secrecy Act. It advises that financial insti-tutions are expected to demonstrate the capacityto conduct appropriate risk assessments andimplement the requisite controls and oversightsystems to effectively manage the risk identifiedin these relationships with foreign missions. The2011 advisory also confirms that it is the finan-cial institutions decision to accept or reject aforeign mission account. See SR letter 11-6,Guidance on Accepting Accounts from For-eign Embassies, Consulates and Missions.

Section 4060.9

Section 4060.9, Consolidated Capital PlanningProcesses (Payment of Dividends, Stock Redemp-tions, and Stock Repurchases at Bank Holding

Companies), was updated to clarify that theguidance in the section does not apply to U.S.bank holding companies or intermediate holdingcompanies of foreign banking organizations with$50 billion or more in total consolidated assets.Capital planning guidance for the previouslymentioned firms is provided in SR letter 15-18,Federal Reserve Supervisory Assessment ofCapital Planning and Positions for LISCC Firmsand Large and Complex Firms (section 4063.0.1of this manual) and SR letter 15-19, FederalReserve Supervisory Assessment of Capital Plan-ning and Positions for Large and NoncomplexFirms (section 4065.0.1 of this manual). Inaddition, inactive guidance references in thissection have been updated.

Section 4069.0

This section, Dodd-Frank Act Company-RunStress Testing for Banking Organizations withTotal Consolidated Assets of $1050 Billion,was updated to address changes to the agenciesrules implementing Dodd-Frank Wall Street Re-form and Consumer Protection Act (Dodd-Frank Act) company-run stress testing disclo-sure requirements since the issuance ofSR letter 14-3, Supervisory Guidance on Dodd-Frank Act Company-Run Stress Testing forBanking Organizations with Total ConsolidatedAssets of More Than $10 Billion but Less Than$50 Billion. For more information on thechanges to the Boards stress testing rules, see80 Fed. Reg. 75419 (December 2, 2015).

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Bank Holding Company Supervision Manual Supplement 52September 2017

BHC Supervision Manual September 2017Page 2

Bank Holding Company Supervision ManualSupplement 51January 2017

This supplement reflects decisions of the Boardof Governors, new and revised statutory andregulatory provisions, supervisory guidance, andinstructions that the Division of Supervision andRegulation has issued since the publication ofthe July 2016 supplement.

SUMMARY OF CHANGES

Section 2126.5

Section 2126.5, Procedures for a Banking En-tity to Request an Extended Transition Periodfor Illiquid Funds, is a new section that pro-vides applicable banking entities with informa-tion on the procedures for submitting a requestfor an extended transition period for a hedgefund or private equity fund that qualifies as anilliquid fund pursuant to section 13 of the BankHolding Company Act of 1956 (BHC Act), alsoknown as the Volcker rule. Under the statute, abanking entity must apply to the Board for anextended transition period for an illiquid fundregardless of the banking entitys primary finan-cial regulatory agency. The term banking en-tity is defined by statute to include, with lim-ited exceptions: (i) any insured depositoryinstitution (IDI) (as defined in section 3 of theFederal Deposit Insurance Act (12 U.S.C. 1813));(ii) any company that controls an IDI (including

a bank holding company (BHC), savings andloan holding company (SLHC), and any othercompany that controls an insured depositoryinstitution but that is not a BHC or SLHC, suchas the parent company of an industrial loancompany); (iii) any company that is treated as aBHC for purposes of section 8(a) of the Interna-tional Banking Act of 1978 (for example, anyforeign bank operating a branch or agency in theUnited States); and (iv) any affiliate or subsidi-ary of any of the foregoing (for example, abrokerdealer subsidiary of a BHC). (Refer toSR-16-18.)

Section 3140.0

This section, Section 4(c)(8) of the BHC Act(Leasing Personal or Real Property), has beenrevised to include a brief summary of a June 10,2016, Board order (FRB Order no. 2016-07)that approved a notice by a foreign bank holdingcompany and its foreign wholly owned subsidi-ary bank to engage in permissible nonbankingactivities under section 4(c)(8) of the BHC Actand section 225.24 of the Boards Regulation Y.The nonbanking activities include railcar leas-ing and the provision of certain railcar fleetmanagement services pursuant to sections225.28(b)(3) and 225.21(a)(2) of Regulation Y.The corresponding table of Laws, Regulations,Interpretations, and Orders has been amended toinclude the order.

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Bank Holding Company Supervision Manual Supplement 51January 2017


Bank Holding Company Supervision ManualSupplement 50July 2016

This supplement reflects decisions of the Boardof Governors, new and revised statutory andregulatory provisions, supervisory guidance, andinstructions that the Division of Banking Super-vision and Regulation has issued since the pub-lication of the January 2016 supplement.

SUMMARY OF CHANGES

Section 1050.2

Section 1050.2, Guidance for the ConsolidatedSupervision of Regional Bank Holding Compa-nies, is revised (beginning at subsection1050.2.5) to include guidance for regional bank-ing organizations based on SR-16-4, Relyingon the Work of the Regulators of SubsidiaryInsured Depository Institution(s) of Bank Hold-ing Companies and Savings and Loan HoldingCompanies with Total Consolidated Assets ofLess than $50 Billion. The letter was issued bythe Federal Reserve to explain its expectationsfor its examiners reliance on the work of theregulators of insured depository institution sub-sidiaries of these holding companies. The letterpresents a tailored supervisory approach forregional banking organizations, which are definedas companies with total consolidated assets ofbetween $10 billion and $50 billion.

Section 4066.0

Section 4066.0, Consolidated (Funding andLiquidity Risk Management), is amended atsubsection 4066.0.2 to include Appendix B -Interagency Guidance on Funds Transfer Pric-ing Related to Funding and Contingent Liquid-ity Risks, issued March 1, 2016. The guidancewas issued to address weaknesses observed insome large financial institutions funds transferpricing practices related to funding risk (includ-ing interest rate and liquidity components) andcontingent liquidity risk. (Refer to SR-16-03and to the March 1, 2016, attachment to theinteragency guidance, Illustrative Funds Trans-fer Pricing Methodologies.)

Section 4070.1

Section 4070.1, Rating...Risk Management Pro-cesses and Internal Controls of BHCs... is par-tially superseded as the result of the issuance ofSR-16-11, Supervisory Guidance for Assess-ing Risk Management at Supervised Institutionswith Total Consolidated Assets Less than $50Billion. With the issuance of SR-16-11, SR-95-51 (section 4070.1) is applicable only tobank holding companies and state member bankshaving $50 billion or more in total assets.

Section 4071.0

Section 4071.0, Supervisory Guidance for As-sessing Risk Management at Supervised Institu-tions with Total Consolidated Assets Less than$50 Billion, is a new section that reaffirms theFederal Reserves long-standing supervisory ap-proach that emphasizes the importance of pru-dent risk management. This sections guidanceand SR-16-11, Supervisory Guidance for As-sessing Risk Management at Supervised Institu-tions with Total Consolidated Assets Less Than$50 Billion, outlines core risk categories andrisk-management principles. This supervisoryguidance reflects updates to, and partially super-sedes, SR-95-51, Rating the Adequacy of RiskManagement and Internal Controls at State Mem-ber Banks and Bank Holding Companies. Theguidance in SR-16-11 provides clarifications on,and distinguishes supervisory expectations for,the roles and responsibilities of the board ofdirectors and senior management. The risk-management expectations within this guidanceare applicable to all supervised institutions withtotal consolidated assets of less than $50 billion,including bank holding companies, state mem-ber banks, savings and loan holding companies,and foreign banking organizations with totalcombined U.S. assets of less than $50 billion.The guidance also applies to insurance and com-mercial savings and loan holding companieswith total consolidated assets of less than $50billion.

BHC Supervision Manual July 2016Page 1

Substantive changes that are included in SR-16-11 (when compared to SR-95-51) are:

1. Certain major risk categories are modified.a. Compliance risk is a separate core risk;b. Reputation risk is not considered a core

riskc. Risk definitions that are revised:

i. Operational risk is the risk resultingfrom inadequate or failed internal pro-cesses, people, and systems or fromexternal events.

ii. Market risk includes commodity pricesiii. Legal risk includes legal sanctions

2. The responsibilities of the board of directorsversus senior management are separated acrossall risk-management components.a. Senior management is responsible for risk

identification.b. Senior management is responsible for the

establishment and maintenance of effec-tive information systems.

c. Both the board of directors and seniormanagement are responsible for an effec-tive system of internal controls.

3. Additional risk-management concepts areincluded:a. Information systems should consist of a

consolidated and integrated view of risks.b. The board of directors should approve

significant policies to establish risk toler-ances for the institutions activities.

Section 5000.0

Section 5000.0, BHC Inspection Program (Gen-eral), is revised at subsection 5000.0.4.3.05 toprovide additional guidance on the supervisoryapproach to be used for holding companies withtotal consolidated assets of $10 billion or less.The guidance pertains to relying on the work ofinsured depository institution (IDI) regulatorsfor community banking organizations. Examin-ers are to rely substantially on the findings ofthe IDI regulator in evaluating the overall condi-tion of the holding company. Reserve Bankreviews are to evaluate the condition, perfor-mance, and prospects of a subsidiary IDI basedon the conclusion of the IDI regulator and arenot to duplicate the IDI regulators work. (Referto SR-16-4.)

Bank Holding Company Supervision Manual Supplement 50July 2016


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This supplement reflects decisions of the Boardof Governors, new and revised statutory andregulatory provisions, supervisory guidance, andinstructions that the Division of Banking Super-vision and Regulation has issued since the pub-lication of the July 2015 supplement.

SUMMARY OF CHANGES

Section 2060.1

Section 2060.1, Audit (Management Informa-tion Systems), is revised (beginning at subsec-tion 2060.1.8) to include an Overview and Ap-pendix AInteragency Advisory on ExternalAudits of Internationally Active U. S. FinancialInstitutions. The federal banking agencies1 (theagencies) issued the advisory to communicatetheir support for the principles and expectationsthat are set forth in Parts 1 and 2, respectively,of the Basle Committee on Banking Supervision(the BCBS) March 2014 guidance on Externalaudits of banks.

The agencies acknowledge that the existingstandards and practices in the United States arebroadly consistent with the BCBS external auditguidance. Because of the legal and regulatoryframework in the United Sates, certain differ-ences exist between the standards and practicesfollowed in the United States and the principlesand expectations in the BCBS external auditguidance. These differences are addressed inthis advisory, which also describes the agenciessupervisory expectations for U. S. financial insti-tutions within the scope of the advisory forincorporating the principles and expectations inthe BCBS external audit guidance into theirpractices. The advisory also outlines examinerresponsibilities related to these supervisory ex-pectations.

The BCBS external audit guidance is in-tended for internationally active banks, which,the agencies defined in the advisory (Refer toSR-16-2 and its attachment.)

Section 2093.0

Section 2093.0, Control and Ownership (Share-holder Protection Arrangements) is a new

section that discusses Federal Reserve supervi-sory concerns and issues regarding the establish-ment of arrangements by some bank and sav-ings and loan holding companies (collectively,holding companies) to protect the financialinvestments made by shareholders (collectively,shareholder protection arrangements). Therehas been an increase in interest by some holdingcompanies to benefit certain shareholders, en-hance short-term investor returns, and/or pro-vide a distinct disincentive for investors to ac-quire or increase ownership in a holdingcompanys common stock and other capitalinstruments. Such shareholder protection arrange-ments raise concerns because they could havenegative implications on a holding companyscapital or financial position, limit a holdingcompanys financial flexibility and capital rais-ing capacity, or otherwise impair a holding com-panys ability to raise additional capital in thefuture. These arrangements impede the abilityof a holding company to serve as a source ofstrength to its insured depository institutionssubsidiaries and are considered unsafe and un-sound. A holding company, regardless of itsasset size, should be aware that the FederalReserve may object to a shareholder protectionarrangement based on the facts and circum-stances and the features of the particular arrange-ment. Examples of shareholder protection ar-rangements that have raised supervisory issuesare discussed. (Refer to SR-15-15.)

Section 4061.0

Section 4061.0, Consolidated Capital (CapitalPlanning), is revised for amendments to Regu-lation Y, 12 C.F.R. 225.8 Capital Planning.The rule was amended to limit the ability of abank holding company with $50 billion or morein total consolidated assets to make capital dis-tributions under the rule if the bank holdingcompanys net capital issuances are less thanthe amount indicated in its capital plan. The tier1 common capital ratio requirement was removed,and certain mandatory capital action assump-tions were modified. (Refer to 79 Fed. Reg.64040 (October 27, 2014) and 80 Fed. Reg.75424 (December 2, 2015)).

1. The Board of Governors of the Federal Reserve System,

the Office of the Comptroller of the Currency, and the Federal

Deposit Insurance Corporation.


Section 4060.7

Section 4060.7, Consolidated Capital (Assess-ing Capital Adequacy and Risk at Large Bank-ing Organizations and Others with ComplexRisk Profiles) is deleted. The section was de-rived from SR-99-18, superseded by SR-15-18and SR-15-19, both issued on December 18,2015.

Section 4063.0

Section 4063.0, Federal Reserve SupervisoryAssessment of Capital Planning and Positionsfor LISCC Firms and Large and Complex Firms,is a new section consisting of Federal Reserveguidance that was issued to explain its expecta-tions for capital planning at Large InstitutionSupervision Coordinating Committee (LISCC)firms and large and complex bank holding com-panies and intermediate holding companies offoreign banking organizations. This guidance isconsistent with the broad supervisory expecta-tions set forth in SR-12-17/CA-12-14, Consoli-dated Supervision Framework for Large Finan-cial Institutions. It sets forth the FederalReserves core capital planning expectations forLISCC and large and complex firms. Severalappendices are included that detail supervisoryexpectations on a firms capital planning pro-cesses. The new guidance largely consolidatesthe Federal Reserves existing capital planningguidance.

The expectations for LISCC Firms and Largeand Complex Firms are higher than the expecta-tions for Large and Noncomplex Firms. Withinthe group of firms subject to this guidance, theFederal Reserve has significantly heightenedexpectations for the LISCC Firms. This guid-ance sets forth only minimum expectations, andLISCC Firms are consistently expected to exceedthose minimum standards and have the mostsophisticated, comprehensive, and robust capitalplanning practices for all of their portfolios andactivities. Refer to SR-15-18 and its attachment.

Section 4065.0

Section 4065.0, Federal Reserve SupervisoryAssessment of Capital Planning And Positions

for Large and Noncomplex Firms, The FederalReserves guidance explains its supervisory ex-pectations for capital planning at large and non-complex bank holding companies and interme-diate holding companies of foreign bankingorganizations, consistent with the broad supervi-sory expectations set forth in SR-12-17/CA-12-14, Consolidated Supervision Framework forLarge Financial Institutions. This guidance ap-plies to U.S. bank holding companies and inter-mediate holding companies of foreign bankingorganizations that have total consolidated assetsof at least $50 billion but less than $250 billion,have consolidated total on-balance sheet foreignexposure of less than $10 billion, and are nototherwise subject to the Federal Reserves LISICframework (referred to as a Large and Non-complex Firm). Refer to SR-15-19 and itsattachment.

Section 4080.0

Section 4080.0, Federal Reserve System BankHolding Company Surveillance Program, isrevised to discuss the Federal Reserves revisionof its safety-and-soundness surveillance pro-gram (the Surveillance Program) for top-tierbank holding companies and savings and loanholding companies (HCs). The revised programincludes a new early warning model for HCs,the Holding Company Statistical Assessmentof Bank Risk or HC-SABR model. It deploysrisk identification algorithms (Outlier Metrics)and other surveillance products to process finan-cial and economic data and generate forward-looking, actionable intelligence on HCs that willprovide examiners and other supervisory staffwith early signals by which to monitor risk-taking. Results are used to assess exposures,outlooks, and possible compliance shortcom-ings, with the goal of calibrating supervisoryresources to risk. The Surveillance Programsobjectives, structure, and maintenance are dis-cussed along with additional information on themetrics, procedures, and write-up requirementsused to monitor HCs. The program also distrib-utes surveillance results across the FederalReserves supervision function. (Refer toSR-15-16 and its attachment.)



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SUMMARY OF CHANGES

Section 2010.2

Section 2010.2, Supervision of Subsidiaries(Loan Administration and Lending Standards),is revised (subsection 2010.2.4.1.9) to remove afootnote reference to SR letter 02-16, Inter-agency Questions and Answers on Capital Treat-ment of Recourse, Direct Credit Substitutes andResidual Interests inAssetSecuritizations,whichis superseded by SR letter 15-6, InteragencyFrequently Asked Questions (FAQs) on the Regu-latory Capital Rule.

Section 2090.2

Section 2090.2, Control and Ownership (BHCFormations), has been revised to include theBoards April 9, 2015, approval of its SmallBank Holding Company and Savings and LoanHolding Company Policy Statement (effectiveMay 15, 2015). This policy statement expandsthe applicability of the former policy statementto include savings and loan holding companies(SLHCs). The policy applies to those bank hold-ing companies (BHCs) and certain SLHCs thathave consolidated assets of less than $1 billion.Previously, the policy only applied to BHCshaving consolidated assets of less than $500million.

Section 2128.03

Section 2128.03, Credit-Supported and Asset-Backed Commercial Paper (Risk Managementand Internal Controls) is revised (subsection

2128.03.3.3) to delete a footnote reference toSR letter 05-13 and its attachment, InteragencyGuidance on the Eligibility of Asset-BackedCommercial Paper Program Liquidity Facilitiesand the Resulting Risk-Based Capital Treat-ment, which is superseded by SR letter 15-6Interagency Frequently Asked Questions onthe Regulatory Capital Rule.

Section 2500.0

This section, Supervision of Savings and LoanHolding Companies was revised to include areference to SR letter 14-9, Incorporation ofFederal Reserve Policies into the Savings andLoan Holding Company Supervision Program,which provides a listing of supervisory guidancedocuments (SR letters) that were issued prior toJuly 21, 2011. The Federal Reserve has deter-mined that these SR letters are applicable tosavings and loan holding companies.

Section 3070.3

This section, Section 4(c)(8) of the BHC Act(Non-Traditional MortgagesAssociated Risks),is revised to delete a footnote reference to SRletter 02-16, Interagency Questions and An-swers on Capital Treatment of Recourse, DirectCredit Substitutes, and Residual Interests inAsset Securitizations, and its attachment, whichis superseded by SR letter 15-6 InteragencyFrequently Asked Questions on the RegulatoryCapital Rule. Refer to subsection 3070.3.2.5.Secondary Market Activity.

Section 3111.0

This section, Section 4(c)(8) of the BHC Act(Acquisition of Savings Associations) includes(subsection 3111.0.3) reference corrections tolisted Board orders that authorized the acquisi-tion of savings associations.


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SUMMARY OF CHANGES

Sections 1050.0, 1050.1, 1050.2, 3900.0,and 4070.0

These sections have been revised to refer toSR-12-17/CA-12/14, Consolidated SupervisionFramework for Large Financial Institutions,which superseded SR-99-15, Risk-Focused Su-pervision of Large Complex Banking Organiza-tions.

Section 2010.2

Section 2010.2, Supervision of Subsidiaries(Loan Administration and Lending Standards),is revised to include a new subsection 2010.2.6,Guidance on Private Student Loans with Gradu-ated Payment Terms of Origination. The guid-ance provides principles that financial institu-tions should consider in their policies andprocedures for originating these loans. Financialinstitutions should prudently underwrite theirprivate student loans in a manner consistentwith safe and sound lending practices. Financialinstitutions should also comply with all applica-ble federal and state consumer laws and regula-tions, including providing disclosures that clearlycommunicate the timing and the amount of pay-ments to facilitate borrower understanding ofloan terms and features. Refer to SR-15-2/CA-15-1.

Section 2124.0

This section was revised to include a footnotereference to SR-14-4, Examiner Loan Sam-pling Requirements for State Member Bank andCredit Extending Nonbank Subsidiaries of Bank-ing Organizations with $10$50 Billion in TotalConsolidated Assets. The guidance in SR-14-4clarifies the expectations for the assessment ofmaterial retail credit portfolios for these institu-tions. The guidance in SR-14-4 superseded SR-94-13, Loan Review Requirements for On-SiteExaminations, but only for these banking orga-nizations. (For the SR-14-4 guidance, refer tosubsection 2010.2.11, appendix I.)

Section 2124.01

This section, Risk-Focused Supervision forLarge Complex Banking Organizations, wasrevised to (1) include 10 additional risk-focusedSR letters to the listing in appendix A and(2) remove two inactive letters from this list.

Section 3110.0

This section, Section 4 (c)(8) of the BHC Act(Industrial Banking) was revised to amend thebeginning discussion and to include statutoryand regulatory citations and a current Boardorder reference within section 3110.0.4.

Section 3111.0

This section, Section 4(c)(8) of the BHC Act(Acquisition of Savings Associations) was re-vised to include a Dodd-Frank Act provisionpertaining to a bank holding companys applica-tion to acquire an insured depository institutionwhen it is located in a home state other than thehome state of the bank holding company. Seesubsection 3111.0.2.5. In addition, subsection3111.0.3 lists additional Board orders that haveauthorized the acquisition of savings associa-tions.

Section 4069.0

This new section, Dodd-Frank Act CompanyRun Stress Testing for Banking Organizationswith Total Consolidated Assets of $1050 Bil-lion, provides guidance on the supervisoryexpectations for the Dodd-Frank Wall StreetReform and Consumer Protection Act stress testpractices for these companies and offers addi-tional details about methodologies that shouldbe employed. Refer to SR-14-3 and the 2014interagency Supervisory Guidance on Imple-menting Dodd-Frank Act Company-Run StressTests for Banking Organizations with Total Con-solidated Assets of More Than $10 Billion butLess than $50 Billion (see 79 Fed. Reg. 14153,March 13, 2014).


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SUMMARY OF CHANGES

Section 2010.2

The section, Supervision of Subsidiaries (LoanAdministration and Lending Standards), is re-vised to include Appendix I Examiner LoanSampling Requirements For Credit-ExtendingNonbank Subsidiaries of BHCs with $10-50Billion in Total Consolidated Assets. The sub-section sets forth the loan sampling expectationsthat apply to the Federal Reserves inspection ofcredit-extending nonbank subsidiaries of bankholding companies (BHCs). Examiners will alsohave the flexibility, depending upon the struc-ture and size of a nonbank subsidiary, to utilizethe guidance so that its applicable to a smallerBHC with credit-extending nonbank subsidi-aries having total assets below $10 billion. Referto SR-14-4 and its attachment.

Section 2020.1

This section, Intercompany Transactions (Trans-actions Between Member Banks and Their Af-filiates Sections 23A and 23B of the FederalReserve Act) is revised to discuss statutoryamendments to these sections of the FederalReserve Act resulting from the Dodd-Frank Act.One amendment involved the definition of anaffiliate, with regard to an investment fundwhen an insured depository institution (IDI) orone of its affiliates is an investment adviser.Also, the definition of covered transactionswas revised to include the credit exposure result-ing for derivative and securities lending andborrowing transactions between the IDI and itsaffiliates. In addition, the Dodd- Frank Actremoved the quantitative 10 percent exemptionlimit between financial subsidiaries of an IDI.The retained earnings of a financial subsidiaryare to be included as part of the IDIs invest-ment. The amendments were effective on July21, 2012. (See sections 608(a)(1)(A),608(a)(1)(B), and 609(a) of the Dodd-FrankAct.) A few additional or revised inspectionobjectives and procedures are included.

Section 2070.0

This revised section, Taxes (Consolidated TaxFiling) includes a June 13, 2014, InteragencyAddendum to the 1998 Interagency PolicyStatement on Income Tax Allocation in a Hold-ing Company Structure (Addendum). The fed-eral banking agencies1 (Agencies) announcedthe Addendums issuance to ensure that insureddepository institutions (IDIs) in a consolidatedgroup maintain an appropriate relationship re-garding the payment of taxes and treatment oftax refunds. The Addendum is to ensure that taxallocation agreements expressly acknowledge anagency relationship between a holding com-pany2 and its IDI subsidiary to protect the IDIsownership rights in tax refunds. State memberbanks and holding companies should implementthe guidance as soon as reasonably possible,which the Agencies expect would not be laterthan October 31, 2014. The Addendum clarifiesand supplements but does not replace the 1998Interagency Policy Statement. (Refer to SR-14-6and its attachment.)

Section 2124.05

This section, Consolidated Supervision Frame-work for Large Financial Institutions is revisedto include Appendix B Managing ForeignExchange Settlement Risks for Physically SettledSecurities. (See SR-13-24 and its February2013 attachment.) This guidance sets forth sevenprinciples or guidelines for managing foreignexchange transaction settlement risks. The Fed-eral Reserve supports these principles as part ofits continuing effort to promote the global finan-cial systems ability to withstand severe marketdisruptions. Institutions covered by SR-13-24should apply the seven guidelines to their for-eign exchange activities with the stated clarifica-tions regarding application of the guidance inthe United States.

1. The Board of Governors of the Federal Reserve System,

Federal Deposit Insurance Corporation, and the Office of the

Comptroller of the Currency.

2. For the purpose of this guidance, the term, holding

company refers to a bank holding company or a savings and

loan holding company.


Section 3070.0

This revised section, Section 4(c)(8) of theBHC Act (Mortgage Banking), includes a briefdiscussion of the December 13, 2013, Inter-agency Statement on Supervisory Approach forQualified and Non-Qualified Mortgage Loansthat was issued to clarify the safety-and-soundness expectations and Community Rein-vestment Act (CRA) considerations for regu-lated institutions engaged in residential mortgagelending. The section references the ConsumerFinancial Protection Bureaus (CFPB) Ability-to-Repay and Qualified Mortgage Standards Rulethat was issued on January 10, 2013 (effectiveon January 10, 2014). Institutions may issuequalified mortgages or non-qualified mortgages,based on their business strategies and risk appe-tites. Refer to SR-13-20 and its attachment.

Section 4080.1

This section, Surveillance Program for SmallHolding Companies, is modified to reflectchanges to the small holding company surveil-lance program. The surveillance program forholding companies under $1 billion in total con-solidated assets includes both BHCs and SLHCs.(Refer to SR-13-21.)

Section 5000.0

This section, BHC Inspection Program (Gen-eral) is revised to include supervisory guidance

on the periodic on- and off-site inspections thatassess the safety and soundness of supervisedBHCs and SLHCs (referred to as holding com-panies). The guidance updates the minimuminspection frequency and scope requirementsfor supervised holding companies with totalconsolidated assets of $10 billion or less to

conform inspection frequency and scope re-quirements for SLHCs with total consolidatedassets of $10 billion or less to those applicableto BHCs of the same size;

clarify the scoping requirements for targetedinspections conducted at BHCs and SLHCswith total consolidated assets between $1 bil-lion and $10 billion; and

modify the requirement for targeted inspec-tions for 3, 4, and 5-rated BHCs withtotal consolidated assets between $1 billionand $10 billion.

Except for the addition of SLHCs, the inspec-tion scope and frequency expectations for hold-ing companies with less than $1 billion in totalconsolidated assets have not changed.

These frequency and scope requirements varydepending on whether a holding company hasbeen designated complex, with more compli-cated holding companies subject to more fre-quent and in-depth review. If needed for super-visory purposes, Reserve Banks may inspect aholding company with greater frequency andscope than described in this guidance. (Refer toSR-13-21 and its attachment.)



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SUMMARY OF CHANGES

Section 2010.2

The section, Supervision of Subsidiaries (LoanAdministration and Lending Standards), isrevised to supplement the March 23, 2013,Interagency Guidance on Leveraged Lendingwith inspection objectives, inspection proce-dures, and an internal control questionnaire forleveraged lending. The section provides guid-ance about the risk-management expectationsfor leveraged loans as well as examiner guid-ance for the review of such loans. Refer toSR-13-3 and its attachment.

Section 2020.1

This section, IntercompanyTransactions (Trans-actions Between Member Banks and TheirAffiliatesSections 23A and 23B of the Fed-eral Reserve Act) is revised to indicate thatviolations of sections 23A and 23B of the Fed-eral Reserve Act or Regulation W should bebrought to managements attention. They maybe discussed in the inspection report as OtherMatters and referred to the banks primarysupervisor. In this regard, there are some revisedinspection objectives and inspection procedures.

Section 2060.05

This section consists of the 2003 interagencyguidance, Policy Statement on the InternalAudit Function and its Outsourcing. The sec-tion includes new and revised inspection objec-tives and inspection procedures for both the2003 guidance and the January 23, 2013, Fed-eral Reserve policy statement that supplementsthe 2003 interagency guidance. Refer to SR-03-5 and SR 13-1/CA 13-1 and section 2060.07.

Section 2124.05

This section, Consolidated Supervision Frame-work for Large Financial Institutions, includesan appendix, the December 20, 2013, guidanceof SR-13-23, Risk Transfer ConsiderationsWhen Assessing Capital AdequacySupplemental Guidance on Consolidated Super-vision Framework for Large Financial Institu-tions (Refer to SR-12-17/CA-12-14). Theadditional guidance centers on how certain risktransfer transactions affect assessments of capi-tal adequacy at large financial institutions. Itprovides clarification on supervisory expecta-tions when assessing a firms capital adequacyin certain circumstances when the risk-basedcapital framework may not fully capture theresidual risks of a transaction.

Section 2124.3

This new section, Managing Outsourcing Riskconsists of the December 5, 2013, Federal ReserveGuidance on Managing Outsourcing Riskthat was issued to assist financial institutions1 inunderstanding and managing the risks associ-ated with outsourcing a bank activity to a ser-vice provider to perform that activity. The guid-ance addresses the characteristics, governance,and operational effectiveness of a financial insti-tutions service provider risk- management pro-gram for outsourced activities beyond tradi-tional core bank processing and informationtechnology services. The guidance applies to allservice provider relationships regardless of thetype of activity that is outsourced. See SR-13-19/CA-13-21 and its attachment.

Section 5010.15

This section, Procedures for Inspection ReportPreparationViolations is revised to provideclarifying instructions on the reporting of viola-tions or apparent violations in the inspectionreport. The Violations section or page shouldinclude all BHC and nonbank subsidiary viola-

1. For purposes of this guidance, financial institutions

refers to state member banks, bank and savings and loan

holding companies (including their nonbank subsidiaries),

and U.S. operations of foreign banking organizations.


tions of the Federal Reserve Act (the act), Regu-lation Y, and other applicable statutes and regu-lations. Section 23A and 23B violations of theact should only be included if they have beencited by the primary regulator of the subsidiary

banks. If the banks primary regulator has notcited a violation of Section 23A and 23B of theact, apparent violations should be noted in theOther Matters section or page of the inspec-tion report.

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SUMMARY OF CHANGES

Section 2010.2

The Supervision of Subsidiaries (Loan Admin-istration and Lending Standards) section isrevised to include the 2013 leveraged lendingguidance, which replaced the 2001 InteragencyGuidance on Leveraged Financing. This guid-ance describes expectations for the sound riskmanagement of leveraged lending activities,including why institutions need to develop

Transactions structured to reflect a sound busi-ness premise, an appropriate capital structure,and reasonable cash flow and balance sheetleverage;

A definition of leveraged lending that facili-tates consistent application across all businesslines;

Well-defined underwriting standards that,among other things, define acceptable lever-age levels and describe amortization expecta-tions for senior and subordinate debt;

A credit limit and concentration frameworkconsistent with the institutions risk appetite;

Sound management information systems thatenable management to identify, aggregate, andmonitor leveraged exposures and comply withpolicy across all business lines;

Strong pipeline management policies and pro-cedures that, among other things, provide forreal-time information on exposures and limits,and exceptions to the timing of expected dis-tributions and approved hold levels; and

Guidelines for conducting periodic portfolioand pipeline stress tests to quantify the poten-tial impact of economic and market condi-tions on the institutions asset quality, earn-ings, liquidity, and capital.

This guidance should be consistent with thesize and risk profile of an institutions lever-aged activities relative to its assets, earnings,liquidity, and capital. Institutions that originateor sponsor leveraged transactions shouldconsider the entire guidance. See SR-13-3 andits attachment.

Section 2060.07

This new section, Supplemental Policy State-ment on the Internal Audit Function and itsOutsourcing, consists of the January 23, 2013,Federal Reserve policy statement that supple-ments the 2003 interagency guidance, which isin section 2060.05 of this manual. (See SR-13-1/CA-13-1.)

Section 2500.0

This section on Supervision of Savings andLoan Holding Companies was revised to clarifythe manner in which Federal Reserve examinerscommunicate supervisory findings to bankingorganizations and institutions supervised by theFederal Reserve. It discusses the examiners useof the standardized terms, Matters RequiringImmediate Attention and Matters RequiringAttention. (Refer to SR-13-13/CA-13-10 andits attachment.)

Section 5000.0

This section, BHC Inspection ProgramGeneral, is updated to discuss the FederalReserves adoption of a flexible, letter-formatreport in lieu of the standard, longer-form re-port. The report communicates the findings ofon-site safety-and-soundness inspections of com-munity banking organizations1 that result incomposite supervisory ratings of 4 or 5.Examiners may use the letter-format report pro-vided that all mandatory and any applicableoptional information is included in the report.(See SR-13-10.)

The section also clarifies the manner in whichFederal Reserve examiners communicatesupervisory findings to banking organizationsand institutions supervised by the FederalReserve. The guidance discusses the FederalReserves use of standard language forexamination/inspection findings with regard toMatters Requiring Immediate Attention(MRIAs) and Matters Requiring Attention(MRAs), reaffirming their definitions, includ-

1. Community banking organizations include state mem-ber banks, bank holding companies, and savings and loanholding companies with assets of $10 billion or less.


ing their use by safety-and-soundness andconsumer compliance examiners when com-municating supervisory findings to bankingorganizations. The use of the term, Observa-tions is discontinued. (Refer to SR-13-13/CA-13-10 and its attachment.)

The section, in addition, is revised to furtherclarify the 60-calendar-days completion stan-dard for examination and inspection reports forcommunity banking organizations, clarifyingthe close date for examinations or inspec-tions. (See SR-13-14.)

Section 5010.1

The Procedures for Inspection Report Prepara-tion (General Instructions...) section has beenrevised to include a new subsection that applies

to community holding companies rated compos-ite 4 or 5, for which the Federal Reservehas adopted a flexible, letter-format report inlieu of the standard, longer-form report. (Referto SR-13-10.)

Section 5010.4

This section, Procedures for Inspection ReportPreparation (Core Page 1-Examiners Com-ments; Matters Requiring Special Board Atten-tion), was amended to incorporate a referenceto the guidance found in SR-13-13/CA-13-10,Communication of Supervisory Findings,which clarified the Federal Reserves use ofstandardized terminology and definitions forMRIAs and MRAs.

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SUMMARY OF CHANGES

Section 2010.0

The Supervision of Subsidiaries sectionincludes a revision of the Federal Deposit Insur-ance Act (FDIA) to require bank holding com-panies (BHCs) and savings and loan holdingcompanies to act as a source of strength to theirdepository institution subsidiaries. See section38A of the FDIA and section 616(d) of theDodd-Frank Act.

Section 2050.0

This section on Extensions of Credit to BHCOfficials was revised for amendments to theFederal Reserve Act (FRA) regarding insiderlending. The definition of extension of creditwas revised to include an insured depositoryinstitution (IDI)s credit exposure to a personarising from a derivatives transaction, repur-chase agreement, reverse repurchase agreement,securities lending transaction, or securities bor-rowing transaction. See the FRA, section22(h)(9)(D)(i), as amended by the Dodd-FrankAct, section 614(a).

The FDIA was amended to prohibit the pur-chase or sale of assets between an IDI and anexecutive officer, director, or principal share-holder of the IDI and any related interest of suchperson unless the transaction is on market terms.In addition, if the asset purchase or sale repre-sents more than 10 percent of the IDIs capitalstock and surplus, the transaction must be ap-proved by the majority of the board of directorsof the IDI who do not have an interest in thetransaction. See the Dodd-Frank Act, section615(1).

Section 2110.0

This section is updated for the various types offormal supervisory actionscorrective actions(i.e., cease and desist orders (including placinglimits on the activities or functions of an IDI orinstitution-affiliated party)), written agreements,suspensions (also removals and prohibitions),nonbankactivity terminations,violationsofordersand written agreements, civil-money penalties(revised penalty amounts), etc.

The cease-and-desist order discussion hasbeen expanded to include what an order mayrequire from a BHC or person, and it provides adiscussion of the nature of affirmative actionsby a BHC or person that may need to be taken torestore a BHC to a safe and sound condition.The prohibition and removal discussion hasbeen expanded to detail what entities or indi-viduals that the Board may take action against.It also discusses the prohibition against anyindividual that has been convicted of a crimeinvolving dishonesty, breach of trust, or moneylaundering from serving, participating in, orowning or controlling a BHC, bank or nonbanksubsidiary, or any affiliate thereof without theprior approval of the Federal Deposit InsuranceCorporation (FDIC), or in certain cases, theBoard of Governors of the Federal Reserve Sys-tem. The discussion on indemnifications andpayments includes a detailed discussion of theprovisions of section 18(k) of the FDIA and theFDICs regulation on indemnification agree-ments and payments. The definition of a prohib-ited indemnification payment is included.

Section 2124.05

Effective January 2013, this new section pro-vides the Consolidated Supervision Frame-work for Large Financial Institutions, whichsupersedes the guidance found in inactive SR-99-15, Risk-Focused Supervision of Large Com-plex Banking Organizations (former manualsection 2124.04). On December 17, 2012, theFederal Reserve set forth a new framework forthe consolidated supervision of large financialinstitutions. The framework strengthens tradi-tional microprudential supervision and regula-tion to enhance the safety and soundness ofindividual firms. In addition, it incorporatesmacroprudential considerations to reduce poten-


tial threats to the stability of the financial systemand to provide insights into financial markettrends. The consolidated supervision frameworkhas two primary objectives:

Enhancing resiliency of a firm to lower theprobability of its failure or inability to serveas a financial intermediary.

Each firm is expected to ensure that the con-solidated organization (or the combined U.S.operations in the case of foreign banking orga-nizations) and its core business lines can sur-vive under a broad range of internal or exter-nal stresses. This requires financial resilienceby providing sufficient capital and liquidity,and operational resilience to maintain effec-tive corporate governance, risk management,and recovery planning.

Reducing the impact on the financial systemand the broader economy in the event of afirms failure or material weakness.

Each firm is expected to ensure the sustain-ability of its critical operations and bankingoffices1 under a broad range of internal orexternal stresses. This requires, among otherthings, effective resolution planning that ad-dresses the complexity and the interconnectiv-ity of the firms operations.

The framework is being implemented in amulti-stage approach. (See SR-12-17 / CA-12-14)

Section 2126.1

This section, Investment Securities and End-User Derivatives Activities, was amended to

state that depository institutions can no longerrely solely on reports from external credit report-ing agencies when making a determination as tothe quality and permissibility of an investmentin accordance with the Office of the Controllers(OCCs) Rule (12 C.F.R. 1).

Section 2126.2

This is a new section on Investing in SecuritiesWithout Reliance on Ratings of Nationally Rec-ognized Statistical Rating Organizations(NRSROs). State member banks were advisedon November 15, 2012, that, effective January1, 2013, they may no longer rely solely on creditratings issued by NRSROs (i.e., external creditratings) to determine whether a particular secu-rity is an investment security that is permis-sible for investment. Under the regulations ofthe OCCs rule (12 C.F.R. 1), securities mayqualify for investment by national banks only ifthey are determined by the bank to be invest-ment grade and not predominantly speculativein nature.2 (See SR-12-15 and its attachment,OCC Guidance on Due Diligence Require-ments in Determining Whether Securities areEligible for Investment.) Institutions may per-form due diligence by maintaining and updatinginternal credit-rating reports and assessments,which can be supplemented by reports fromexternal credit-rating services.

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1. Banking offices are defined as U.S. depository institu-tion subsidiaries, as well as the U.S. branches and agencies offoreign banking organizations.

2. Under the FRA (12 USC 335) and the Federal ReservesRegulation H (12 C.F.R. 208.21), state member banks aresubject to the same limitations and conditions with respect tothe purchasing, selling, underwriting, and holding of invest-ment securities and stock as national banks under the NationalBanking Act (12 U.S.C. 24 (Seventh)). When investing insecurities, state member banks must comply with the provi-sions of the National Banking Act and the OCC regulations in12 C.F.R. 1. In addition to this federal requirement, a statemember bank may purchase, sell, underwrite, or hold securi-ties and stock only to the extent permitted under applicablestate law.



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SUMMARY OF CHANGES

Section 1040.0

The section, Bank Holding Company Exami-nationandInspectionAuthority,hasbeen revisedto discuss the Federal Reserves (FR) currentauthority to conduct bank holding company(BHC) inspections under section 5(c) of theBHC Act (12 U.S.C. 1844(c) and 12 U.S.C.5361(a)(c)). The section also is revised toinclude provisions of the Dodd-Frank Wall StreetReform and Consumer Protection Act of 2010(Dodd-Frank Act). The Dodd-Frank Act removesthe enforcement provisions of section 10A ofthe BHC Act that limited the FRs rulemakingand enforcement authority over functionally regu-lated subsidiaries. Previously, the FR was onlyable to take enforcement actions against a func-tionally regulated subsidiary when its actionsposed a threat to the safety and soundness of adepository institution affiliate.

The FR, to the fullest extent possible, is torely on reports of examination of any subsidiarydepository institution or functionally regulatedsubsidiary made by the primary financial regula-tory agency. Also, the FR should notify, consult,and work with the primary financial regulatoryagency for examination activities, informationrequests, and required reporting while avoidingduplication and increased burden on the institu-tion. With regard to its supervision of a nonbankfinancial company, the FR is to rely on (1) reportsand other supervisory information provided toother federal and state regulatory agencies,(2) externally audited financial statements,(3) information that is otherwise available fromfederal and state regulatory agencies, and(4) information that is required to be reportedpublicly.

Section 2065.5

This new section, ALLL Estimation Practicesfor Loans Secured by Junior Liens, providesthe January 31, 2012, Interagency SupervisoryGuidance on Allowance for Loan and LeaseLosses Estimation Practices for Loans and Linesof Credit Secured by Junior Liens on 14 Fam-ily Residential Properties. Institutions shouldconsider all credit-quality indicators for junior-lien loans and lines of credit (collectively, juniorliens). Generally, this information should includethe delinquency status of senior liens associatedwith the institutions junior liens and whetherthe senior liens have been modified. Institutionsshould ensure that during the allowance for loanand lease losses estimation process sufficientinformation is gathered to adequately assess theprobable loss incurred within junior-lienportfolios.

Institutions with significant holdings of juniorliens should gather and analyze data on theassociated senior-lien loans they own or service.When an institution does not own or service theassociated senior-lien loans, it should use rea-sonably available tools to determine the pay-ment status of the senior-lien loans. Such toolsinclude obtaining credit reports or data fromthird-party services to assist in matching aninstitutions junior liens with its associated seniorliens. Inspection objectives and procedures areprovided. See SR-12-3 and its attachment.

Section 3000.0

This section, Introduction to BHC Nonbankingand FHC Activities was revised for an amend-ment made under section 604(e) of the Dodd-Frank Act (see section 4(j)(2)(A) of the BHCAct or 12 U.S.C. 1843(j)(2)(A)). The Board isrequired to apply a balancing test in connec-tion with a notice filed by a BHC to engage in anonbanking activity. The Board must considerwhether the performance of the activity by thecompany can reasonably be expected to pro-duce benefits to the public, such as greater con-venience, increased competition or gains in effi-ciency that outweigh possible adverse effects,such as undue concentration of resources,decreased or unfair competition, conflicts ofinterest, or unsound banking practices. Theamendment added another adverse factor to


considerwhether the performance of the non-bank activity by a BHC would pose a risk to thestability of the U.S. banking or financial system.

Section 3032.0

This new section presents the Federal ReservesApril 5, 2012, policy statement, Policy State-ment on Rental of Residential Other Real EstateOwned (OREO) Properties. The policy state-ment reminds banking organizations and exam-iners that the Federal Reserves regulations andpolicies permit the rental of OREO properties aspart of an orderly disposition strategy withinstatutory and regulatory limits. Banking organi-zations may rent one- to four-family residentialOREO properties without having to demonstratecontinuous active marketing of the properties,provided that suitable policies and proceduresare followed.

The policy statement describes key risk-management considerations for banking organi-zations that engage in the rental of residentialOREO. The policy statement also establishesspecific supervisory expectations for bankingorganizations that undertake large-scale residen-tial OREO rentals, which generally encom-passes 50 properties or more available for rent.See SR-12-5/CA-12-3 and its attachment. Alsosee SR-12-10/CA-12-9, Questions and Answersfor Federal Reserve-Regulated Institutions Re-lated to the Management of Other Real EstateOwned (OREO).

Section 3980.0

This new section, Establishment of an Interme-diate Holding Company, discusses the Boardsauthority under section 167 of the Dodd-FrankAct (12 U.S.C. 5667). If a nonbank financialcompany supervised by the FR conducts activi-ties other than those determined to be financialin nature or incidental thereto under section 4(k)of the BHC Act (12 U.S.C. 1843(k)), the Boardis authorized to require the company to establishand conduct all or a portion of those activitiesthat are financial in nature or incidental theretoin or through an intermediate holding company.The intermediate holding company must beestablished in accordance with the Boards regu-lation no later than 90 days (or other longerappropriate time) after the date on which theBoard notifies the nonbank financial companyof the determination.

The Board must require a nonbank financialcompany to establish an intermediate holdingcompany, if it makes a determination that theestablishment of such an intermediate holdingcompany is necessary to

appropriately supervise activities that are deter-mined to be financial in nature or incidentalthereto; or

ensure that supervision by the Board does notextend to the commercial activities of thenonbank financial company.

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This supplement reflects decisions of the Boardof Governors, new and revised statutory andregulatory provisions, and new and revisedsupervisory guidance and instructions issued bythe Division of Banking Supervision and Regu-lation since the publication of the July 2011supplement.

SUMMARY OF CHANGES

Section 2500.0

This new section, Supervision of Savings andLoan Holding Companies describes the super-visory approach for savings and loan holdingcompanies (SLHCs) the Board will use duringthe first supervisory cycle.1 The condition, per-formance,andactivitiesofSLHCswillbeassessedon a consolidated basis in a manner that isconsistent with the Boards established risk-based supervisory approach for bank holdingcompanies (BHCs). For specific informationabout the supervisory approach during the first

supervisory cycle for holding companies of vary-ing size and complexity, see SR-11-11 and itsattachments.

Section 4061.0

This new section on Consolidated Capital (Capi-tal Planning) summarizes amendments to Regu-lation Y that require BHCs with $50 billion ormore (large BHCs) of total consolidated assetsto develop and submit annual capital plans tothe Federal Reserve. These BHCs are requiredto obtain approval from the Federal Reserveunder certain circumstances before making acapital distribution. The section generally dis-cusses significant provisions of the rulesamendments.

The large U.S. BHCs should have crediblecapital plans that show sufficient capital to lendto households and businesses, even under ad-verse conditions. Each year, boards of directorsof large BHCs will be required to review andapprove the capital plans before submitting themto the Federal Reserve. The rule was effectiveon December 30, 2011. See the Boards Novem-ber 22, 2011, press release, 76 Fed. Reg. 74631(December 1, 2011), and 12 C.F.R. 225.8.

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1. The first supervisory cycle for an SLHC is the period oftime between July 21, 2011, and the close of the first requiredinspection.


ForewordSection 1000.0

The Bank Holding Company SupervisionManual has been prepared by Federal Reservesupervision personnel to provide guidance toexaminers as they conduct on-site inspections ofbank holding companies (BHCs) and their non-bank subsidiaries. The manual is a compilationof formalized procedures and Board supervisorypolicies that supervision and inspection person-nel should follow. The manual includes newconcepts and keeps pace with the ever-changingindustry. An integral part of the Federal Reservesoverall program to supervise banking organiza-tions operating under a holding company struc-ture, the manual enhances the staffs ability toimplement the Boards inspection and monitor-ing efforts.

The manual is designed to provide guidanceto examination and supervision personnel.Itshould not be considered a legal reference.Questions concerning the applicability of andcompliance with federal laws and regulationsshould be referred to appropriate legal counsel.

The Federal Reserve System conducts riskassessments and a full-scope inspection pro-gram for BHCs. At a minimum, full-scopeinspections should include sufficient proceduresto reach an informed judgment on the assignedratings for the factors included in the bank hold-ing company RFI/C(D) rating system. The pro-cedures of a full-scope inspection focus in parton assessing the types and extent of risks towhich a BHC and its subsidiaries are exposed.Some of these types of risks include credit,market, liquidity, operational, legal, and reputa-tional risks. Inspections also focus on evaluatingthe organizations policies and procedures foridentifying, managing, and controlling such riskexposures and on determining whether the man-agement and directors are actively involved inthe oversight of the organizations risk-management program. To determine whetherthe organizations policies and procedures forrisk management are fully effective and beingfollowed, inspections or reviews also generallyinclude transaction and compliance testing

The inspection process commences with apreliminary risk assessment. The risk assess-ment highlights the strengths and weaknesses ofthe holding company and is the basis for deter-mining the procedures to be conducted duringan inspection. Risk assessments identify theorganizations principal business activities andthe types and quantities of risks associated withthe activities (including those conducted off-balance-sheet). The quality of management andthe control of risks are factored into the initial

risk profile of the holding company. Sources ofinformation for the risk assessment include priorbank and BHC inspection reports and workpa-pers, surveillance program reports, and regula-tory reports. In addition, other relevant supervi-sory materials derived from within the FederalReserve System or other federal and state bank-ing supervisors, as well as from other respon-sible regulatory agencies (for example, theSecurities and Exchange Commission and stateinsurance authorities) are used. Other sourcesfor the risk assessment may include the bankingorganizations publicly available reports, suchas annual and other periodic reports and infor-mational releases; strategic plans and budgets;internal management reports; information pack-ages for the board of directors; correspondence;the board of directors executive and audit com-mittee minutes; internal audit workpapers andreports; and stock-analysis reports. The activi-ties, transactions, and identified areas havingthe most significant risks, inadequate risk-management processes, or rudimentary internalcontrols will represent the banking organiza-tions highest risks. The risk-assessment processculminates in a formalized and structured super-visory strategy, which examination staff willfollow when conducting an inspection.

The banking organizations highest risks areexpected to undergo the most rigorous scrutiny,analysis, and transaction testing by examinersand supervisors. Transaction testing is a reliableand essential inspection technique for assessingthe banking organizations condition and verify-ing its adherence to internal policies, proce-dures, and controls. Transaction testing alone,however, is not sufficient for ensuring safe andsound operations in a highly dynamic bankingenvironment. The changing nature of financialinstruments and markets allows institutions torapidly reposition their portfolio risk exposures.To ensure that banking organizations have sys-tems in place to identify, measure, monitor, andcontrol their changing risk exposures, inspec-tions further focus on evaluating the bankingorganizations risk-managementprocesses.Theserisk-management evaluations determine theextent to which the banking organizations man-agement processes can be relied on.

The full-scope inspection may be conductedat a point in time or through a series of targetedor limited-scope reviews conducted on an ongo-ing or continuous basis for the largest and most


complex banking organizations. Irrespective ofthe duration of the inspection, planned supervi-sory activities should be coordinated well inadvance with other responsible bank, thrift, andfunctional regulators in order to avoid duplica-tion of effort and to minimize burden on thebanking organization. Supervisory findings ofinspections should be communicated to the bank-ing organizations management or boards ofdirectors, as well as to the banking organiza-tions other bank supervisors and functionalregulators, when relevant.

An inspection also measures the financialstrength of a BHC or financial holding company(FHC) and focuses on financial indices of boththe consolidated entity and its component parts.In addition to the analysis of risk, the otherprincipal indices appraised are quality of assets,earnings, capital adequacy, cash flow and liquid-ity, and the competency of management. Aninspection or supervisory program should alsoassess the banking organizations program fortransactions between insured subsidiaries andaffiliates. The basic objective of this assessmentis to determine the impact or consequences oftransactions between the parent holding com-pany or its nonbanking subsidiaries and theinsured subsidiaries. Of particular importance iswhether intercompany transactions result in adiversion of income (or income opportunity)

away from a federally insured subsidiary to aholding company affiliate.

The competency of BHC management in over-seeing the banking organizations businessactivities, risk management, and financial condi-tion is also evaluated. The FHC and BHCinspection process provides a vehicle for a com-prehensive assessment of the effectiveness ofmanagement, resulting in a more open andinformed dialogue between management andrepresentatives of the Federal Reserve.

In summary, the inspection process is intendedto increase the flow of information to the Fed-eral Reserve System concerning the soundnessof FHCs and BHCs. This information will per-mit the Federal Reserve to encourage soundbanking practices and to take appropriate super-visory action when warranted.

This manual is updated periodically to reflectcurrent supervisory policy and procedures andchanging practices within the industry. Themanual is also available on the Boards publicweb site at www.federalreserve.gov/boarddocs/supmanual/. We solicit the input and contribu-tion of all supervisory staff and others in refin-ing and modifying its contents. Please addressall correspondence to the Director of BankingSupervision and Regulation, Board of Gover-nors of the Federal Reserve System, Washing-ton, DC 20551.

Foreword 1000.0


General Table of ContentsBank Holding Company Supervision Manual 1010.0

This general table of contents lists the major section heads for each part of the manual:

1000 Foreword, Contents, Preface, Use of the Manual2000 Supervisory Policy and Issues3000 Nonbanking Activities4000 Financial Analysis5000 BHC Inspection Program6000 Alphabetical Subject Index

A detailed table of contents, which lists the subheads within each major section, precedes parts2000 through 5000.

Tabs Sections Title

1000 FOREWORD, CONTENTS, PREFACE,MANUAL USE

1000.0 Foreword

1010.0 Table of Contents

1020.0 Preface

1030.0 Use of the Manual

1040.0 Bank Holding Company Examination and InspectionAuthority

1050.0 Consolidated Supervision of Bank Holding Companiesand the Combined U.S. Operations of Foreign BankingOrganizations

1050.1 Guidance for the Consolidated Supervision of DomesticBank Holding Companies that are Large ComplexBanking Organizations

1050.2 Guidance for the Consolidated Supervision of RegionalBank Holding Companies

2000 SUPERVISORY POLICY AND ISSUES

2000.0 Introduction to Topics for Supervisory Review

2010.0 Supervision of Subsidiaries

2010.1 Funding Policies

2010.2 Loan Administration

2010.3 Investments

2010.4 Consolidated Planning Process


Tabs Sections Title

2010.5 Environmental Liability

2010.6 Financial Institution Subsidiary Retail Salesof Nondeposit Investment Products

2010.7 Reserved

2010.8 Sharing of Facilities and Staff by BankingOrganizations

2010.9 Required Absences from Sensitive Positions

2010.10 Internal Loan Review

2010.11 Private-Banking Functions and Activities

2010.12 Fees Involving Investments of Fiduciary Assets inMutual Funds and Potential Conflicts Interest

2010.13 Establishing Accounts for Foreign GovernmentsEmbassies, and Political Figures

2020.0 Intercompany TransactionsIntroduction

2020.1 Intercompany Transactions Between AffiliatesSections 23A and 23B of the Federal Reserve Act

2020.2 Loan ParticipationsIntercompany Transactions

2020.3 Sale and Transfer of Assets

2020.4 Compensating Balances

2020.5 Dividends

2020.6 Management and Service Fees

2020.7 Transfer of Low-Quality Loans or Other Assets

2020.8 Reserved

2020.9 Split-Dollar Life Insurance

2030.0 Grandfather RightsRetention and Expansion ofActivities

2040.0 Commitments to the Federal Reserve

2050.0 Extensions of Credit to BHC Officials

2060.0 Management Information Systems

General Table of Contents Section 1010.0


Tabs Sections Title

2060.05 Policy Statement on the Internal Audit Functionand Its Outsourcing

2060.07 Supplemental Policy Statement on the Internal AuditFunction and Its Outsourcing

2060.1 Audit

2060.2 Budget

2060.3 Records and Statements

2060.4 Structure and Reporting

2060.5 Insurance

2065.1 Accounting, Reporting, and Disclosure IssuesNonaccrual Loans and Restructured Debt

2065.2 Determining an Adequate Level for the Allowance forLoan and Lease Losses

2065.3 Maintenance of an Adequate Allowance for Loan and LeaseLosses

2065.4 ALLL Methodologies and Documentation

2065.5 ALLL Estimation Practices for Loans Secured byJunior Liens

2068.0 Sound Incentive Compensation Policies

2070.0 TaxesConsolidated Tax Filing

2080.0 FundingIntroduction

2080.05 Bank Holding Company Funding and Liquidity

2080.1 Commercial Paper and Other Short-Term UninsuredDebt Obligations and Securities

2080.2 Long-Term Debt

2080.3 Equity

2080.4 Retention of Earnings

2080.5 Pension Funding and Employee Stock Option Plans

2080.6 Bank Holding Company Funding from Sweep Accounts

2090.0 Control and OwnershipGeneral



Tabs Sections Title

2090.05 Qualified Family Partnerships

2090.1 Change in Control

2090.2 BHC Formations

2090.3 Treasury Stock Redemptions

2090.4 Policy Statements on Equity Investments in Banksand BHCs

2090.5 Acquisitions of Bank Shares Through FiduciaryAccounts

2090.6 Divestiture Control Determinants

2090.7 Nonbank Banks

2090.8 Liability for Commonly Controlled DepositoryInstitutions

2091.02092.0

Reserved

2093.0 Control and OwnershipShareholder Protection Arrangements

2100.0 International Banking Activities

2110.0 Formal Corrective Actions

2120.0 Foreign Corrupt Practices Act and Federal ElectionCampaign Act

2122.0 Internal Credit-Risk Ratings at Large BankingOrganizations

2124.0 Risk-Focused Safety-and-Soundness Inspections

2124.01 Risk-Focused Supervisory Framework for LargeComplex Banking Organizations

2124.022124.04

Reserved

2124.05 Consolidated Supervision Framework for LargeFinancial Institutions

2124.07 Compliance Risk-Management Programs and Oversightat Large Banking Organizations with ComplexCompliance Profiles

2124.1 Assessment of Information Technology in Risk-Focused Supervision



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2124.2 Reserved

2124.3 Managing Outsourcing Risk

2124.4 Information Security Standards

2124.5 Identity Theft Red Flags and Address Discrepancies

2125.0 Trading Activities of Banking OrganizationsRisk Management and Internal Controls

2126.0 Model Risk Management

2126.1 Investment Securities and End-User DerivativesActivities

2126.2 Investing in Securities without Reliance on Ratingsof Nationally Recognized Statistical RatingOrganizations

2126.3 Counterparty Credit Risk Management Systems

2126.5 Procedures for a Banking Entity to Request an ExtendedTransition Period for Illiquid Funds

2127.0 Interest-Rate RiskRisk Management and InternalControls

2128.0 Structured NotesRisk Management and Internal Controls

2128.01 Reserved

2128.02 Asset Securitization

2128.03 Credit-Supported and Asset-Backed Commercial Paper

2128.04 Implicit Recourse Provided to Asset Securitizations

2128.05 Securitization Covenants Linked to Supervisory Actionsor Thresholds

2128.06 Valuation of Retained Interests and Risk Managementof Securitization Activities

2128.07 Reserved

2128.08 Subprime Lending

2128.09 Elevated-Risk Complex Structured Finance Activities

2129.0 Credit DerivativesRisk Management and InternalControls



Tabs Sections Title

2129.05 Risk and Capital ManagementSecondary-MarketCredit Activities

2130.0 Futures, Forward, and Option Contracts

2140.0 Securities Lending

2150.0 Repurchase Transactions

2160.0 Recognition and Control of Exposure to Risk

2170.0 Purchase and Sale of Loans Guaranteed by the U.S.Government

2175.0 Sale of Uninsured Annuities

2178.0 Support of Bank-Affiliated Investment Funds

2180.0 Securities Activities in Overseas Markets

2187.0 Violations of Federal Reserve Margin RegulationsResulting from Free-Riding Schemes

2220.3 Note Issuance and Revolving Underwriting Credit Facilities

2231.0 Real Estate Appraisals and Evaluations

2240.0 Guidelines for the Review and Classification ofTroubled Real Estate Loans

2241.0 Retail-Credit Classification

2250.0 Domestic and Other Reports to Be Submittedto the Federal Reserve

2260.0 Venture Capital

2500.0 Supervision of Savings and Loan Holding Companies

3000 NONBANKING ACTIVITIES

3000.0 Introduction to BHC Nonbanking and FHC Activities

3001.0 Section 2(c) of the BHC ActSavings Bank Subsidiariesof BHCs Engaging in Nonbanking Activities

3005.0 Section 2(c)(2)(F) of the BHC ActCredit Card BankExemption from the Definition of a Bank

3010.0 Section 4(c)(i) and (ii) of the BHC ActExemptionsfrom Prohibitions on Acquiring Nonbank Interests



Tabs Sections Title

3020.0 Section 4(c)(1) of the BHC ActInvestment in CompaniesWhose Activities Are Incidental to Banking

3030.0 Section 4(c)(2) and (3) of the BHC ActAcquisitionof DPC Shares, Assets, or, Real Estate

3032.0 Rental of Other Real Estate Owned Residential Property

3040.0 Section 4(c)(4) of the BHC ActInterests inNonbanking Organizations

3050.0 Section 4(c)(5) of the BHC ActInvestments UnderSection 5136 of the Revised Statutes

3060.0 Section 4(c)(6) and (7) of the BHC ActOwnershipof Shares in Any Nonbank Company of5 Percent or Less

3070.0 Section 4(c)(8) of the BHC ActMortgage Banking

3070.3 Non-Traditional MortgagesAssociated Risks

3071.0 Section 4(c)(8) of the BHC ActMortgage BankingDerivative Commitments to Originate and SellMortgage Loans

3072.0 Section 4(c)(8) of the BHC ActActivities Related toExtending Credit

3072.8 Real Estate Settlement Services

3073.0 Section 4(c)(8) of the BHC ActEducation-FinancingActivities

3080.0 Section 4(c)(8) of the BHC ActServicing Loans

3084.0 Section 4(c)(8) of the BHC ActAsset-Management,Asset-Servicing, and Collection Activities

3090.0 Section 4(c)(8) of the BHC ActReceivables

3090.1 Factoring

3090.2 Accounts Receivable Financing

3100.0 Section 4(c)(8) of the BHC ActConsumer Finance

3104.0 Section 4(c)(8) of the BHC ActAcquiring Debt in Default

3105.0 Section 4(c)(8) of the BHC ActCredit Card Authorizationand Lost/Stolen Credit Card Reporting Services

3107.0 Section 4(c)(8) of the BHC ActStand-Alone InventoryInspection Services


BHC Supervision Manual January 2017Page 6.1

Tabs Sections Title

3110.0 Section 4(c)(8) of the BHC ActIndustrial Banking

3111.0 Section 4(c)(8) of the BHC ActAcquisitionof Savings Associations

3120.0 Section 4(c)(8) of the BHC ActTrust Services

3130.0 Section 4(c)(8) of the BHC ActGeneral Financialand Investment Advisory Activities

3130.1 Investment or Financial Advisers

3130.2 Reserved

3130.3 Advice on Mergers and Similar Corporate Structurings,Capital Structurings, and Financing Transactions


BHC Supervision M

Bank Holding Company Supervision Manual - United … 2010.13 Section 2010.13, “Supervision of Subsidiaries (Establishing Accounts for Foreign Govern-ments, Embassies, and Political

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