[Federal Register Volume 59, Number 13 (Thursday, January 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1315]
[[Page Unknown]]
[Federal Register: January 20, 1994]
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FEDERAL RESERVE SYSTEM
[Docket No. R-0806]
Modifications to the Payments System Risk Reduction Program;
Self-Assessment Procedures, Caps for U.S. Branches and Agencies of
Foreign Banks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Policy statement.
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SUMMARY: As part of its payments system risk reduction program, the
Board is adopting modifications to its Policy Statement on Payments
System Risk. Specifically, the Board is modifying in two ways the
procedures that depository institutions must use if they choose to
complete a self-assessment to establish a daylight overdraft net debit
cap. First, effective for self-assessments performed on or after
January 1, 1995, depository institutions must evaluate their operating
controls and contingency procedures in addition to the three existing
components of the self-assessment (creditworthiness, intraday funds
management and control, and customer credit policies and controls).
Second, depository institutions will use a ``Creditworthiness Matrix''
to determine their overall creditworthiness rating, except in certain
limited circumstances. In addition to these two changes to the self-
assessment procedures, the Board is eliminating the requirement that
branches and agencies of foreign banks provide information on U.S.
funding capability and discount window eligible collateral for use in
determining their daylight overdraft net debit caps.
DATES: Effective April 14, 1994.
FOR FURTHER INFORMATION CONTACT: Jeffrey C. Marquardt, Assistant
Director (202/452-2360), Paul Bettge, Manager (202/452-3174), Division
of Reserve Bank Operations and Payment Systems; for the hearing
impaired only: Telecommunications Device for the Deaf, Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
Background
The Board's Payments System Risk policy requires that institutions
incurring daylight overdrafts in their Federal Reserve accounts
establish a maximum limit, or net debit cap, on overdrafts incurred in
those accounts. In August 1993, the Board requested comment on three
proposals to modify the procedures for establishing net debit caps. The
Board received 16 public comments on the proposals.
Self-Assessment Procedures
Under the Board's policy, an institution's net debit cap (for a
single day and on average over a two-week reserve maintenance period)
is based on its cap category. The cap categories that permit relatively
higher use of intraday credit are the Average, Above Average, and High
cap categories. An institution that wishes to establish a cap in one of
these categories must complete an assessment of its creditworthiness,
intraday funds management and control, and customer credit policies and
controls.
Operating Controls and Contingency Procedures
The Board requested comment on the addition of a fourth component
to the self-assessment procedures to cover operating controls and
contingency procedures, with a proposed effective date of January 1,
1995. Nine commenters viewed favorably the Board's proposal to require
the assessment of operating controls and contingency procedures. These
commenters did not indicate that the proposal would substantially
increase regulatory burden. Two of these commenters suggested a later
implementation date for the additional assessment component, however.
One other commenter opposed the additional component as being
duplicative of other bank regulatory requirements, while two commenters
felt that the additional component would be burdensome for smaller
institutions.
In the Board's view, it is important that any institution that
wishes to use a relatively higher amount of Federal Reserve intraday
credit perform an assessment of its operating controls and contingency
procedures relating to its payments activity. Furthermore, the
assessment itself consists of eight straightforward questions about the
institution's operations and should pose a burden to complete.
Institutions whose operating controls and contingency procedures are
not currently adequate to meet the criteria in the self-assessment
procedures should not incur overdrafts greater than those permitted by
a de minimis cap, which permits a lower amount of overdrafts without
the requirement of a self-assessment, until they upgrade their
procedures to meet such criteria.
The Board is therefore adopting the fourth component to the self-
assessment procedures as proposed to cover operating controls and
contingency procedures for assessments performed on or after January 1,
1995. Depository institutions may elect to include the additional
component in assessments performed prior to that date, however.
Creditworthiness Matrix
In an attempt to reduce the burden on institutions electing to
undertake an assessment, the Board proposed a simplified approach to
assessing creditworthiness. Under the new methodology, an institution's
prompt corrective action capital category and its supervisory rating
are combined into a single rating for the creditworthiness component of
the self-assessment using a Creditworthiness Matrix, which is shown
below.
The Board believes that it is appropriate, in nearly all
circumstances, for depository institutions to use the Matrix to
determine their creditworthiness rating. In certain limited
circumstances, however, institutions will be permitted to perform a
full assessment of creditworthiness. (Procedures for completing the
full assessment of creditworthiness are included in the Guide to the
Federal Reserve's Payments System Risk Policy, which is available from
any Reserve Bank.) For example, an institution whose condition has
changed significantly since its last examination, or that possesses
additional substantive information regarding its financial condition,
may be permitted to justify a different rating based on a full
creditworthiness assessment. In all cases, the Reserve Banks retain the
responsibility for reviewing caps and determining appropriate cap
levels.
Creditworthiness Matrix
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Supervisory composite rating
Capital level ------------------------------------------------------
Strong Satisfactory Fair
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Well Capitalized. Excellent........ Very Good....... Adequate
Adequately Very Good........ Very Good....... Adequate
Capitalized.
Undercapitalized. (***) (***) Below Standard.
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***Institutions that fall into this category should perform a full
assessment of creditworthiness.
Note: Institutions that fall into categories not shown in the Matrix
would receive a Below Standard rating.
U.S. branches and agencies of foreign banks located in countries
that adhere to the Basle Capital Accord are treated in the same manner
as U.S.-based banks, with supervisory ratings of the U.S. branches or
agencies used in conjunction with the capital category of the parent
bank. The resulting creditworthiness rating for the U.S. branch or
agency is conditioned on the overall creditworthiness of the entire
foreign banking organization, however. In addition, foreign banks from
countries that have not subscribed to the Basle Capital Accord must
perform a full assessment of creditworthiness in order to determine
their net debit cap.
In August 1993, the Board requested public comment on the use of
the Creditworthiness Matrix. Eleven commenters specifically addressed
the changes in the methodology for the assessment of creditworthiness.
Nine commenters expressed support for the Board's proposal to
streamline the self-assessment process through the use of the new
Creditworthiness Matrix and indicated that the new procedures would
reduce regulatory burden. Of these, however, five commenters felt that
depository institutions should be permitted the option of completing
the full assessment of creditworthiness.
Two commenters did not support the Creditworthiness Matrix method,
but suggested that its use be optional. The Institute of International
Bankers, an association representing foreign banks, opposed any
mandatory use of the Matrix as it would result in lower caps for many
branches and agencies of foreign banks.
In the Board's view, the benefits of the Creditworthiness Matrix
approach, namely a streamlined self-assessment process and increased
objectivity of the creditworthiness ratings across institutions,
mitigates objections to standardized usage of the Matrix. As
institutions adopting caps in the Average, Above Average, and High
categories may be permitted to incur overdrafts greater than their
capital, it is particularly important that these caps be appropriate
given institutions' financial strength as measured by objective
regulatory criteria. While some institutions, including a number of
foreign banks, will likely adopt lower caps as a result of using the
Creditworthiness Matrix, analysis of these institutions' recent
daylight overdraft activity indicates that these caps should not be
unduly constraining.
The Board is, therefore, adopting the modifications as proposed to
the creditworthiness component of the self-assessment procedures,
effective April 14, 1994. For self-assessments performed on or after
that date, including those performed as part of the annual cap renewal
process, depository institutions will be required to use the
Creditworthiness Matrix in all but certain limited circumstances. If
appropriate, depository institutions may, at their option, use the
Creditworthiness Matrix in completing self-assessments prior to that
date.
Net Debit Caps for Branches and Agencies of Foreign Banks
The determination of net debit caps for foreign banks is based on
essentially the same procedures as those for U.S. institutions.
However, for foreign banks, the Federal Reserve has also required
evidence of an institution's U.S. funding capability and discount
window eligible collateral. The dollar amount of an institution's net
debit cap could be reduced (below its cap multiple times its capital)
based on these amounts.
Experience with U.S. funding capability and collateral data has
shown that, in order to collect these data with sufficient precision
and frequency, a significant regulatory burden is imposed. In addition,
it is unlikely that these data accurately measure a foreign bank's
ability to raise funds at times when rapid access to money markets may
be necessary. As a result, the Board proposed to discontinue reporting
of information on U.S. funding capability and discount window eligible
collateral by branches and agencies of foreign banks for use in
determining daylight overdraft net debit caps.
Only two commenters mentioned the proposal to discontinue reporting
of this information by foreign banks. The Institute of International
Bankers supported the proposal. One U.S. commercial bank opposed the
proposal, based on the rationale that supervisory ratings used in
determining net debit caps for foreign banks are not comparable to
those for U.S. institutions. In the Board's view, the proposed
requirement that creditworthiness ratings of branches and agencies of
foreign banks be conditioned on the overall creditworthiness of the
entire foreign banking organization should help alleviate such
concerns. The Board is therefore adopting the proposed modification to
the method for establishing caps for branches and agencies of foreign
banks, effective April 14, 1994.
Guide to the Federal Reserve's Payments System Risk Policy
In order to facilitate public comment on the August 1993 proposals,
the Board provided depository institutions with a draft version of the
Guide to the Federal Reserve's Payments System Risk Policy. This
document is intended to provide a thorough description of the
procedures to be used in conducting a self-assessment. Once issued in
final form, the Guide to the Federal Reserve's Payments System Risk
Policy will supersede previously issued versions of the Users' Guide to
the Payments System Risk Policy. The Federal Reserve has also issued a
new summary document, entitled Overview of the Federal Reserve's
Payments System Risk Policy, which describes the requirements of the
policy for institutions that incur minimal daylight overdrafts. The
Board is also modifying the text of the Policy Statement on Payment
System Risk to include appropriate references to these two new
documents.
Federal Reserve System Policy Statement on Payments System Risk
The Board is amending its ``Federal Reserve System Policy Statement
on Payments System Risk'' under the heading ``I. Federal Reserve
Policy'' by replacing the last three sentences of the Introduction,
part (C)(2) under the headings ``C. Capital'' and ``2. U.S. Agencies
and Branches of Foreign Banks,'' and the first paragraph of part (D)(1)
under the headings ``D. Net Debit Caps'' and ``1. Cap Set Through Self-
Assessment'' as set forth below:
Introduction
* * * * *
To assist depository institutions in implementing the Board's
policies, the Federal Reserve has prepared two documents, the Overview
of the Federal Reserve's Payments System Risk Policy and the Guide to
the Federal Reserve's Payments System Risk Policy, which are available
from any Reserve Bank. The Overview of the Federal Reserve's Payments
System Risk Policy provides a summary of the Board's policy on payments
system risk, including daylight overdraft net debit caps and fees. The
Overview is intended for use by institutions that incur only small and
infrequent daylight overdrafts. The Guide to the Federal Reserve's
Payments System Risk Policy explains in detail how the policies apply
to various types of institutions and includes procedures for completing
a self-assessment and filing a cap resolution, as well as information
on other aspects of the payments system risk policy.
* * * * *
I.C. Capital
2. U.S. Agencies and Branches of Foreign Banks
For U.S. agencies and branches of foreign banks, net debit caps on
daylight overdrafts in Federal Reserve accounts are calculated by
applying the cap multiples for each cap category to consolidated ``U.S.
capital equivalency.''4
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\4\The term ``U.S. capital equivalency'' is used in this context
to refer to the particular capital measure used to calculate
daylight overdraft net debit caps, and does not necessarily
represent an appropriate capital measure for supervisory or other
purposes.
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For a foreign bank whose home-country supervisor adheres to the
Basle Capital Accord, U.S. capital equivalency is equal to the greater
of 10 percent of worldwide capital or 5 percent of the total
liabilities of each agency or branch, including acceptances, but
excluding accrued expenses and amounts due and other liabilities to
offices, branches, and subsidiaries of the foreign bank. In the absence
of contrary information, the Reserve Banks presume that all banks
chartered in G-10 countries meet the acceptable prudential capital and
supervisory standards and will consider any bank chartered in any other
nation that adopts the Basle Capital Accord (or requires capital at
least as great and in the same form as called for by the Accord)
eligible for the Reserve Banks' review for meeting acceptable
prudential capital and supervisory standards.
For all other foreign banks, U.S. capital equivalency is measured
as the greater of (1) the sum of the amount of capital (but not
surplus) that would be required of a national bank being organized at
each agency or branch location, or (2) the sum of 5 percent of the
total liabilities of each agency or branch, including acceptances, but
excluding accrued expenses and amounts due and other liabilities to
offices, branches, and subsidiaries of the foreign bank.
In addition, any foreign bank may incur daylight overdrafts above
its net debit cap up to a maximum amount equal to its cap multiple
times 10 percent of its worldwide capital, provided that any overdrafts
above its net debit cap are collateralized. This policy offers all
foreign banks, under terms that reasonably limit Reserve Bank risk, a
level of overdrafts based on the same proportion of worldwide capital.
Consequently, banks chartered in countries that follow the Basle Accord
and whose net debit cap is based on 10 percent of worldwide capital are
not permitted to incur overdrafts above their net debit cap. All other
foreign banks may incur overdrafts to the same extent as banks from
Basle Accord countries, that is, up to their cap multiple times 10
percent of their worldwide capital, provided that sufficient collateral
is posted for any overdrafts in excess of their net debit cap. In
addition, foreign banks may elect to collateralize all or a portion of
their overdrafts related to book-entry securities activity.
* * * * *
I.D. Net Debit Caps
1. Cap Set Through Self-Assessment
In order to establish a net debit cap category of Average, Above
Average, or High, an institution must perform a self-assessment of its
own creditworthiness, intraday funds management and control, customer
credit policies and controls, and, effective January 1, 1995, operating
controls and contingency procedures.5 The assessment of
creditworthiness should be based on the institution's supervisory
rating and Prompt Corrective Action capital category. An institution
may be permitted to perform a full assessment of its creditworthiness
in certain limited circumstances, for example, if its condition has
changed significantly since its last examination, or if it possesses
additional substantive information regarding its financial condition.
Additionally, U.S. branches and agencies of foreign banks based in
countries that do not adhere to the Basle Capital Accord are required
to perform a full assessment of creditworthiness to determine their
ratings for the creditworthiness component. An institution performing a
self-assessment must also evaluate its intraday funds management
procedures and its procedures for evaluating the financial condition of
and establishing intraday credit limits for its customers. Finally, the
institution must evaluate its operating controls and contingency
procedures to determine if they are sufficient to prevent losses due to
fraud or system failures. The Guide to the Federal Reserve's Payments
System Risk Policy, available from any Reserve Bank, includes a
detailed explanation of the steps that should be taken by a depository
institution in performing a self-assessment to establish a net debit
cap.
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\5\This assessment should be done on an individual institution
basis, treating as separate entities each commercial bank, each Edge
corporation (and its branches), each thrift institution, etc. An
exception is made in the case of U.S. agencies and branches of
foreign banks. Because these entities have no existence separate
from the foreign bank, all the U.S. offices of foreign banks
(excluding U.S. chartered bank subsidiaries and U.S. chartered Edge
subsidiaries) should be treated as a consolidated family relying on
the foreign bank's capital.
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* * * * *
By order of the Board of Governors of the Federal Reserve
System, January 13, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-1315 Filed 1-19-94; 8:45 am]
BILLING CODE 6210-01-P
